Educational software provider 3P Learning Ltd (ASX: 3PL) endured a difficult 2016 thanks to disappointing sales growth, rising costs and a change of leadership. However, its shares rose more than 10% today as the company released its annual results which showed it beat the profit guidance provided to the market in June. Here are some of the key details:
- Revenue up 11.3% to $49.3 million
- Net profit after tax (NPAT) down 11.1% to $3.6 million
- Underlying core earnings before interest, tax, depreciation and amortisation (EBITDA) down 20.7% to $13.3 million (June 2016 guidance $11.5 million to $12.5 million)
- Underlying NPAT down 50.7% to $5.3 million
- 6.2% license growth to 5.7 million
Revenue improved in each of the company's three core markets of Australia and New Zealand (ANZ), Europe and the Middle East (EMEA) and the Americas. ANZ was responsible for 62% of group revenue and experienced 2% growth, EMEA contributed 26% of revenue and saw 23% growth, and the Americas represented 12% of revenue and grew 33%. Both EMEA and the Americas were assisted by favourable currency moves during the year.
Future growth is more likely to come from EMEA and the Americas rather than the mature ANZ division, but average revenue per user is significantly lower in these markets. EMEA delivered a 46% improvement in EBITDA to $6.7 million for 2016 but losses in the Americas grew as the company elected to invest heavily in the region, increasing headcount from 39 to 56.
3P Learning chooses to capitalise rather than expense its software development costs which totalled $10.1 million for the year. The company noted in its report that,
"…this level of investment is expected to continue (for the company) to remain competitive."
Therefore, it could be argued that this "investment" is in fact a cost of doing business and if the company were to expense it instead, then underlying NPAT becomes $1.8 million for 2016. This is because the company's depreciation and amortisation charge was much lower at $5.1 million for the year.
Although 3P Learning has a few different products aimed at improving students' maths, reading, spelling and science knowledge, 75% of revenue is derived from its Mathletics software. Such a high level of dependence on a single product represents a significant risk. Its second most successful offering is Reading Eggs which contributes 14% of revenue but the company does not own the intellectual property for this product.
During the year the company acquired a 40% share in Learnosity, a provider of online assessment tools which 3P Learnings uses for its own products. $49 million might seem like a lot to pay for 40% of a company which generated revenue of $12.5 million and NPAT of $1.3 million in 2016. However, active users increased ten-fold from 1.6 million to 15.6 million and revenue rose 52% during the period.
Despite a disappointing year, 3P Learning still grew subscriber numbers by 6% and experienced strong growth in its overseas businesses. The company looks reasonably priced compared to other software as a service companies (SaaS) listed on the ASX given it has little net debt and a market capitalisation of $117.3 million.
