Blackboard’s (NASDAQ:BBBB) conference calls provide a good window into the company. Michael Chasen [CEO] gave a good presentation at the beginning of the most recent call (2/6/07) which reported the results of fiscal year 2006. It's worth a listen to get a sense of his overall view and strategies. The sense of focus comes across clearly. The overall impression I left with is that this company knows where it is at present, knows where it wants to go, and knows how to get there.
As a result of the WebCT acquisition, the company has a huge footprint in the market. The principal focus for 2007 will be centered around up-selling and cross-selling in the higher education market, particularly with regard to WebCT clients. New products, like Outcomes Assessment, are designed to function in the WebCT environment. There are large cross-selling opportunities in this regard.
As of the end of 2006, the company has 3,462 clients broken down as follows:
1906 U.S. higher ed 988 international 405 U.S. K-12 163 other (publishers, corporations, government entities)
The renewal rate is 91% and the potential market is huge, given the fact that there are some 30,000 academic institutions world-wide.
They are very excited about the Outcomes system and with good reason in my view. I have seen first-hand both sides of the reaccreditation process. My institution is in the midst of this process and we are all too aware of the heavy emphasis being placed by the Department of Education and the regional accrediting agencies on outcomes assessment. In addition, I am currently serving on a committee of one of the regional accrediting agencies which is evaluating the accreditation status of a college within its purview. From this perspective as well, I see the heavy emphasis being placed on outcomes assessment. This is fact of life for all colleges and universities and there is no way to avoid it. The company seems to be well aware of the potential for its Outcomes product. The product allows for detailed reporting and data analysis and is aimed at assisting institutions in managing their reaccreditation process. It comes with premium pricing.
In response to a question, it was noted that the Outcomes product is appropriate for K-12 as well as higher ed. This is an important point, since the assessment craze definitely affects K-12 as well.
The patent pledge has been well-received by clients. I think the company was afraid of alienating its clients over this patent business. In order to reassure them and prevent a backlash, they issued the pledge which basically put in writing a policy the company had previously stated informally. The reaction of clients to the pledge has been very positive. All in all, I get the impression that the pledge was a deft PR ploy to assuage any fears the clients might have concerning the nature of the company and the way it does business.
Some interesting guidance was given. They guided for 18% revenue growth in 2007 and a gross margin in the range 70-75%. They guided for an increase in CFFO in the range 250-280%, and expect capex to be 8% of revenue. The dollar figure given for expected 2007 CFFO is 55M-60M.
Needless to say, there were several questions related to the expected increase in CFFO in the range 250-280%. It was noted that 2006 was negatively impacted by 3 factors:
1. Merger costs
2. $4M for a one-time license fee for technology in one of their products.
3. $3M late payment by an international client. This client usually pays in late December. This year, the payment was not received until the beginning of January.
They seemed quite confident of the CFFO guidance for 2007. They expect 2007 stock-based compensation to be 13M.
This was an interesting and informative call, and it provides a nice snapshot of a company which is in the process of significantly strengthening its already dominant position in its market.
Based on the company's guidance, we can make a few observations concerning valuation:
1. 2006 revenue was 183.1M. An 18% growth in revenue would put 2007 revenue at 216.1M
2. With capex expected to come in at 8% of revenue, this would put 2007 capex at 17.3M
3. 2007 CFFO is expected to be in the range 55M-60M. This would put 2007 free cash flow [FCF] in the range 37.7M - 42.7M
4. The current market cap is 951.1M. With 30.8M in cash and 23.4M in debt, this gives an enterprise value [EV] of 943.7M
Thus the forward EV/FCF multiple is in the range 22 – 25.
Disclosure: Author is long BBBB