Is it Time to Enroll at eCollege (ECLG)?

By David Harper | March 16, 2007 AAA

eCollege (Nasdaq: ECLG) said earlier this week that they won't file their annual report on time.

If the market punishes them for this non-event, eCollege is certainly worth a look.

Double-digit organic growth in the underlying business is supported by a solid renewal base, but this is still a risky stock -- the prospective price-to-earnings (P/E) ratio is high and, alas, hard to figure.

Going forward, trailing reported earnings will shift from negative to low.

Adding to the opacity, eCollege is trying to unload Datamark, a company it bought for almost $70 million less than four years ago. (They can't file on time because they can't consolidate Datamark, now it's on the chopping block).

eCollege is a neglected elearning play, but most elearning plays are neglected because Blackboard (Nasdaq: BBBB) basks in all of the spotlight glory.

eCollege's bread-and-butter is course management systems (CMS) for distance learning. They sign fewer contracts, but the contract values are higher than Blackboard's. They likely compete more directly with privately-held Desire2Learn.

Software is hosted by eCollege, which allows for high operating leverage and a very scalable business model. This is, therefore, a vertical application of the trendy software as a service (SaaS) model, although eCollege is more like (NYSE: CRM) with its compelling on-demand model and less like a traditional ASP (i.e., which are associated with limited customization and dual license/host fees).


Elearning as a sector offers few pure public plays. But there is room for more than one winner in the sector because demand will surely soar. SkillSoft (Nasdaq: SKIL) serves corporations. Blackboard's primary customers are large campuses and public school districts, so there is competitive overlap, but it's not all head-to-head: eCollege caters primarily to the ultra high-growth distance learning market.

When management says international market potential is huge, that's actually true. Distance learning is a quick way for a developing country to cultivate knowledge workers; the traditional campus system is slow and expensive.

For just the eLearning division (without Datamark), eCollege grew revenue 28% percent (quarter over quarter) while profit and income leapt from low reported bases. The business is great because they essentially share in a percentage of their customers' revenue -- when a customer-school collects tuition, a small part of the tuition goes to paying eCollege for each student in the system.

The eLearning sector will expand, and within it, CMS producers will probably grow faster than other sub-segments. For international schools, there ought to be greater motivation to deploy elearning. But on the demand side, it's going to be really strong: students are increasingly older, time-starved adults without time to visit campus, they are mobile, they expect internet content, and schools will need to compete for their attention on the web.

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