Cloud-based education software provider 3P Learning Ltd (ASX: 3PL) released a trading update to the market this morning. Previously 3P shares were battered by a trading update in November, where growth was slower than the market was expecting, followed by the departure of the CEO and uninspiring half-year accounts.
Today's trading update reveals that conditions have materially worsened for the company, and shares have fallen 25% in trade today. Here's what you need to know:
- Revenue growth now expected to be between 7% and 9% (was up 25% at the half-year)
- Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) expected to be between $11.5 million and $12.5 million, slightly less than double the half-year result
- Sales growth in the Europe, Middle East, and Africa (EMEA) region is expected to be 26%, while Americas sales growth is expected to be 37%
- ANZ sales are 'stable' (I read this as "flat") and secondary school retention is less than expected
- New CEO Rebekah Flaherty to commence on 1 June 2016 (today)
- One-off exceptional items of $2.1 million associated with restructuring costs, the acquisition of Learnosity, and departure of the CEO
So What?
The biggest takeaway for me was the fact that trading conditions have significantly worsened in the second half. Management also noted that competition has intensified, which suggests that 3P's product is under threat from similar software. Additionally, lower upsell than expected and lower secondary retention rates across the ANZ region were an item of concern. An update to the secondary software user interface is intended to rectify the latter issue.
In isolation none of the above threats is particularly concerning. However, greater competition, lower sales, less upsell, and lower retention rates in some parts of the market together suggest that 3P doesn't have much of an advantage over the competition.
Today's prices are hard to justify for a company growing revenues in the high-single digits and 3P could find itself looking for more cash if it continues to experience cash outflows. Yet should the new CEO lead a recovery, there is room for upside in today's prices.
