E-FINANCE - training companies' financial performance

Training & Development, Oct, 2001 by Peter L. Martin

Any chance of an economic recovery in 2001?

It is becoming readily apparent, according to our due diligence, that sales cycles are continuing to extend because of the economic environment. At the beginning of 2001, the sales cycle was three to six months on the good side. Today, it's eight to nine months and creeping further out thanks to stringent due diligence checks as clients try to wade through marketing hype and mistake-free demonstrations.

Channel checks indicate an environment reminiscent of seven to 10 years ago, which is disturbing considering that employee training and development are supposed to be viewed as mission critical as opposed to a cost center. Each coming week brings more negative earnings revisions by Fortune 2000 companies, which significantly affects the dollars available for training initiatives. We currently view training budgets as water holes on the Serengeti. Within that environment potential, revenue pools are drying up each day. We don't see relief until new training budgets are determined for 2002, and we'd assume those budgets will be tenuous in first quarter 2002, as companies get a feel for the direction of economic trends.

We see the biggest impact occurring on the ILD (instructor-led delivery) side of the business. Public players such as Learning Tree and New Horizons have revised revenue forecasts down from 20 percent to flat due to the tremendous slowdown in It spending. We've seen traditional training dollars move to e-learning initiatives in an attempt to cut costs and leverage education, training, and retention initiatives over a wider employee and customer base. Despite the long-term benefits of those implementations, they require considerable due diligence and capital. They also can be time-consuming and, in a lot of cases, offer limited near-term ROI. One area in which we're seen significant resilience is the collaboration space due to ease of use and immediate impact on corporate expense lines. We believe companies such as Centra and Webex should continue to benefit from the current environment, as well as from testimonials of their products.

E-learning infrastructure providers continue to find sales leads, but leads aren't turning into purchase orders. More often than not, eventual orders are significantly less committed than anticipated. With the current economic environment showing no indications of a turnaround, we believe corporate training companies will be negatively affected through the end of the year. We expect to see additional downward revenue revisions by the public companies and continued attrition in the private marketplace, especially in the high-end, enterprise-wide application segment. That should prompt continued consolidation of the vendor market, allowing the leaders to strengthen their content or infrastructure offerings to position themselves better for the eventual upswing in the market. Providers that offer subscription-based revenues as opposed to one-time perpetual license sales should weather the poor environment better due to the lower, price point and implementation time of a hosted ASP product.

The performance of our chosen corporate sector in August was severely affected by continued economic concerns as well as summer vacations on Wall Street, which create volatility due to poor trading liquidity. The corporate sector declined nearly 14 percent in August compared to the NASDAQ and Russell 2000, which were down 11 percent and 3.3 percent. SmartForce had the toughest public relations month as it tumbled over concerns regarding account retention and insider selling, despite making two strategic acquisitions to strengthen its platform and content offerings. Shares of Centra were affected by profit taking in August, after its strong performance over the past several months. Click2 Learn posted the only out performance as its first quarter beat expectations and solidified investor concerns regarding its balance sheet with a line of credit at Silicon Valley Bank. It's interesting to note that as of the end of August, only four stocks are up YTD in the Jefferies & Company corporate universe of 34 firms.

Peter L. Martin, CFA, is a senior vice president with Jefferies & Co., San Francisco. He follows various segments within the knowledge services industry which are broadly categorized under e-learning and traditional education and training.

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