Blackboard's licensed software targets both the academic and the commerce needs of colleges as well as grades K-12, allowing the whole educational experience to be conducted online. Although I first wrote about this stock last October at $27 and it has jumped 50% since then, this is a strong secular growth story that should be recognized and respected. While Blackboard reported a list of 3,462 clients at the end of 2006, there is somewhere around 87,000 schools in the U.S. and countless more schools around the globe, all of which are potential Blackboard customers.
There are only a handful of software companies that I believe have good longterm prospects, and Blackboard is one of them. Its shares have been hitting all time highs and finally pulled back some 6.6% Friday after the company said it will sell $150 million in convertible senior notes due 2027. The company said it would use about $19.4 million of the proceeds to repay debt under its senior secured term loan facility. The rest of the proceeds will go towards general corporate purposes, which could include possible acquisitions.
The stock is now back to where it was after it jumped some 18% on better-than-expected first quarter earnings at the beginning of May. Trading of the stock has historically been volatile but it seems to have found a bid below as the positive forward guidance and the winning of several new customers have helped it shrug off recent broad-market selloffs and analyst downgrades. I would like to start a position slightly below these levels and build a position in the mid-30s, if possible. The second quarter should be a good time to accumulate shares as this quarter might be a bit soft, or at least lack new customer sign-ups that acts as catalysts. Schools tend to upgrade their IT and software at the end of summer, before the fall semester, although the sign-up of several community colleges reported on June 6th suggests year-round schools may sign-up with Blackboard at any time. Potentials for revenue growth include not only the majority of schools who don't currently use Blackboard, but also being able to sell additional products to schools already on Blackboard's client list.
Digital Revolution - Virtual Classrooms
Depending on when you last sat in a classroom, learning was probably a real bore and definitely a real hassle. Typewriters. Still remember those? Having to retype reports with just one wrong letter (no backspace button!) or having to spend 8 of your 4 years in college researching in the library? There were a lot of inefficiencies with the whole learning process, and it wasn’t just in college but K-12 as well. I’m sure you can think of a lot of other things you wish you could’ve changed about your learning experience.
When I graduated almost a year ago, we were already downloading homework assignments, doing quizzes online, and having magazines and books at our fingertips rather than in the catacombs of the library basement. However, I went to an engineering college where professors were all very comfortable with writing codes for their own websites where students could download assignments. Schools are now experimenting with putting student’s work online and, taking a cue from eBay (NASDAQ:EBAY), allowing rating and feedback of their work so they have a digital portfolio to show employers or grad school admissions. Some universities and adult schools have all lectures viewable online or downloadable to MP3 players. I experienced Blackboard's platform firsthand for my graduate courses at USC, where the whole class is done via the internet with students all over the world.
Positive Demand Environment
Each of the educational features I mentioned above are simple enough on their own. When you try to combine everything and make sure they work between professors, teachers, students, and administration, etc, it gets a bit more complicated. For example, one of the greatest features of my college’s library website is the ability to search for any book from the region, and to get it even if it is physically at another library. Even better is how a lot of journals are online now so one doesn't have to go to the library and spend dime and dime copying the pages needed. Also, for adult schools or night schools where one wants to access reports, research, class notes, and other information online, a simple, standard format would be ideal. I believe such adult schools, including the Distance Education Network for my graduate courses at USC, will drive the demand for the virtual classrooms that Blackboard provides. As people's lives get busier and business professionals work in a global environment, major universities should move into the online educational space as well, to accommodate the challenging schedule of professionals and to accept students all over the globe. Yes, high education is a business, so features such as flexible education will attract much more qualified students and corporate educational programs.
Now that we’re all being thrown into the digital electronic age of computers, cell phones, PDAs and Blackberries, information, and thus education, has become a lot simpler. While a lot of schools have been working on accommodating the needs of instructors and students, colleges' IT departments spend a lot of time attending to daily issues such as manually adding student accounts or monitoring school network security. College IT departments have neither the resource nor the time to develop full-scale platforms such as those that Blackboard provides. As for grades K-12, the IT department, if present, basically consists of some student club working on it as a hobby. Even as society is quickly becoming tech savvy, it is impossible to expect the wide demographic of teachers and professors to be proficient enough with the computer to mash together their own educational platform, including maybe a podcast or digital submissions.
Teachers want and need to focus on lesson planning, teaching, and getting to know their students, not figuring out how to convert assignments to PDF files and making sure all the students have access to it. Even if teachers have the knowhow, the school's network security and servers often inhibit, rather than help, bringing classes online. I believe schools will turn to Blackboard to streamline all these aspects of education. It will make it much easier on their students as well as the teachers and professors, who can easily post assignments from home, make modifications to assignments, check in on student’s progress, and evaluate student performance.
Positive Competition Environment - Niche Market in Software
Operating in the virtual world of computers, the software industry is extremely competitive and can have drastic change in an instant. Unlike physical products from detergents to high-tech chips, software can emerge like magic as long as someone can write the code for it. So, even recent high-fliers like Omniture (OMTR) do not seem that appealing to me because web traffic monitoring systems have been around as far back as I can remember, at least since I first started web design more ten years ago. These have nothing proprietary and are a dime a dozen. Blackboard, however, found a niche market and has become the dominant name that schools go to, causing some start-up competitions to go belly-up and acquiring what was its main competition, WebCT (which I used for a course or two as an undergrad). While full software platforms such as SAP have been innovating business for years, virtually none such solutions exist for education.
Even today, many college campuses use a hodgepodge of windows and linux applications to do one task or the other, or ancient webmail that's years behind Google's (NASDAQ:GOOG) GMail. While the functions Blackboard provides are pretty common and nothing spectacular (I was less than impressed when I used the system), bringing together all these functions in a user-friendly manner that both students and teachers can easily use is the greatest value for schools. For the same reason as corporations using platforms like SAP to outsource their IT department, schools will turn to Blackboard as their technological backbone so schools can focus on their business - education.
Google, Possible Kicker?
As if Blackboard by itself isn’t great enough, it recently got a partnership with Google.
As a Google partner, Blackboard is launching a series of efforts to enhance search capabilities for students and faculty at thousands of academic institutions around the globe.
Google’s partnership should give Blackboard more credibility, as well as provide Blackboard with all the technological resources Google has at its disposal. After some pondering, I feel Blackboard would be the bigger winner, especially from an investing standpoint. Note that Blackboard is a midget compared to Google, so the partnership will add much more value for Blackboard than for Google. I believe Google sees education, especially higher education, as the next area to dominate since higher education is a cash machine, regardless of economic conditions (actually, the trend seems to be that people go back to school during harsh hiring conditions in order to earn advanced degrees.) This view seems right and Blackboard might be Google's way in.
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