E-FINANCE - Statistical Data Included

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

Second quarter earnings will offer tremendous insight. Yes or no?

In the July column, we concluded that the U.S. corporate e-sector had bottomed but economic pressure still loomed overhead, limiting upside performance until better visibility materialized. The performance of the corporate sector has indeed reflected our thesis, rising nearly 30 percent over the past three months but down roughly 10 percent over the past 30 days (as of this writing). The NASDAQ is up almost 15 percent in three months and down more than 5 percent during June.

Outperformance continues to be led by collaboration companies WebEx and Centra. Both firms offer compelling cost savings and business communication efficiencies that have accelerated their adoption rates. Centra is up 254 percent YTD and WebEx is up 216 percent in the past 90 days.

As second quarter earnings are released, we will receive greater insight into how the U.S. economy is affecting the sales cycle. Key indicators include backlog, deferred revenue, accounts receivable, revenue mix, gross margins, and cash flow from operations. Each metric should give an indication of whether training budgets are strengthening or purchase orders are being reduced or deferred. Second quarter earnings reports are likely to provide greater positive visibility to the back half of 2001, which could generate the basis for price performance improvement over the first half of the year (down 10 percent). If earnings reports lack strong positive indicators, we would expect the group to trade down as portfolio managers wait on the sidelines for the risk-reward ratio to improve.

Another factor within the risk-reward decision that portfolio managers must evaluate is the European market for e-learning. When several of the e-learning companies went public in 1999 and 2000, they touted Europe as being the next big marker for their expansion, as Europe is thought to be 12 to 14 months behind the United States in adoption time. Our research shows that Europe poses significant risk. We believe several factors will impact the adoption of online corporate training systems in Europe. These factors include localization, Internet access, cultural barriers, data security, learning modality, and government support--not to mention the possibility that the current economic pressure in the United States could affect Europe by year-end.

Because of those factors, we believe market estimates by the major consulting groups for the adoption of elearning platforms in Europe have been overstated. Although many providers, most notably Saba, have had tremendous success on a one-off basis, the overall impression we've garnered from our research is that things are going to be tougher than expected due to the above issues. Germany and France in particular have employee data protection rules and cultural issues regarding the "time and place" to learn. Other countries lack the communications build-out to offer reliable Internet access, and most European corporations don't have intranets.

Although English is the language of technology, it often doesn't translate well outside of the tech environment into the educational world. For example, the European Union has 15 member states with 11 official languages and the IAA has 30 countries and 33 official languages. Most foreign accounts will require 2-bit and 1 6-byte architecture by an LMS provider, which is currently offered only by a select group of vendors.

Last, Europeans are hesitant to use "universal approaches that originate in America." Culturally, there's a pushback to the adoption of U.S. business practices. In our opinion, the LMS providers will continue to concentrate on English-speaking countries until the issues I described mitigate. That will make bids more competitive.

We believe several of the issues affecting the European market will be tough to overcome and will limit the growth rate of the e-learning industry and its providers. However, European adoption of e-learning is important and shouldn't be overlooked as a business or an investment. We'll continue to monitor the European market as data becomes available. Watch second quarter earnings reports closely for positive or negative signs of the e-market's next move.

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 a-learning and traditional education and training.

                                              Price       52 Week
Company                       Rating  Ticker  Price       High
eLeaming
Centra Software Ince          NR      CTRA    $16.99      $17.31
Vcampus Corp                  NR      VCMP    $1.58       $10.38
Skillsoft Corp                NR      SKIL    $34.25      $38.94
insightful Corp               NR      IFUL    $2.70       $3.25
Itc Learning Corp             NR      ITCC    $0.25       $2.22
Webex Inc                     NR      WEBX    $26.66      $58.00
Wiley (john) & Sons -cl A     NR      JW.A    $23.65      $26.00
Rwd Tecnologies Inc           NR      RWDT    $3.20       $8.75
Harcourt General Inc          NR      H       $58.19      $62.81
Zi Corp                       NR      ZICA    $7.45       $9.44
Saba Software Ince            Buy     SABA    $16.41      $38.81
Smartforce Pub Ltd -sp Adr    Buy     SMTF    $35.23      $57.25
Adobe Systems lnc             NR      ADBE    $47.00      $87.31
Docent Inc                    NR      DCNT    $10.00      $27.13
Raindance Communications Inc  NR      FNDC    $1.44       $12.75
Eloquent Inc                  NR      ELOQ    $1.23       $9.63
Intranet Solutions Inc        NR      INRS    $38.05      $64.00
Hearme                        NR      HEAR    $0.41       $9.25
Polycom Inc                   NR      PLCM    $23.09      $72.25
Innodata Corp                 NR      INOD    $3.08       $9.25
Interwoven Inc                NR      IWOV    $1 6.90     $68.47
Vignette Corp                 NR      VIGN    $8.87       $54.13
Learn2.com Inc                NR      LTWO    $0.20       $3.13
Mentergy Ltd                  NR      MNTE    $1.00       $20.50
Digitalthink Inc              NR      DTHK    $7.02       $60.00
Macromedia Inc                NR      MACR    $18.00      $120.88
Documentum Inc                NR      DCTM    $12.92      $63.88
Click2Learn Inc               Hold    CLKS    $1.62       $20.38
Prosofttraining.com inc       Hold    POSO    $1.25       $18.50
Corporate eLearning Average
Traditional
Airs Corp/wa                  NR      ARSC    $2.60       $4.50
New Horizons Worldwide Inc    NR      NEWH    $14.94      $25.88
Learining Tree Intl Inc       NR      LTRE    $22.96      $78.88
Provant Inc                   Hold    FOVT    $1.80       $9.00
Corporate Traditiona Ave                      110,202
Total Corporate Average                       695,603
Indices
Russell 2000                                  $512.47     $545.71
S&p 500 Composite                             $1,225.1 1  $1,530.01
Nasdaq Composite index                        $2,161.67   $4,289.06
                                         Mkt       3-Mon Avg
Company                       Low        Cap (mm)  Trdg Vol
eLeaming
Centra Software Ince          $2.75      $341.6    568,712
Vcampus Corp                  $0.38      #16.9     10,665
Skillsoft Corp                $10.13     $452.1    94,703
insightful Corp               $1.25      $29.2     33,043
Itc Learning Corp             $0.15      $0.9      2,003
Webex Inc                     $5.06      $958.7    467,246
Wiley (john) & Sons -cl A     $17.90     $1,135.5  44,657
Rwd Tecnologies Inc           $2.35      $48.9     18,812
Harcourt General Inc          $49.80     $3,214.5  508,157
Zi Corp                       $3.13      $266.9    66,478
Saba Software Ince            $3.56      $632.2    482,094
Smartforce Pub Ltd -sp Adr    $18.13     $1,726.7  728,752
Adobe Systems lnc             $24.56     11,274.9  4,299,44
Docent Inc                    $2.75      $277.4    267,871
Raindance Communications Inc  $0.94      $59.3     159,311
Eloquent Inc                  $0.50      $22.5     88,468
Intranet Solutions Inc        $14.75     $722.8    553,208
Hearme                        $0.25      $11.5     175,492
Polycom Inc                   $10.75     $1,670.3  1,451,54
Innodata Corp                 $1.88      $70.3     252,232
Interwoven Inc                $5.84      $1,812.8  3,844,08
Vignette Corp                 $3.63      $2,102.6  5,316,10
Learn2.com Inc                $0.16      $10.06    175,591
Mentergy Ltd                  $0.80      $8.2      30,654
Digitalthink Inc              $5.34      $200.6    263,095
Macromedia Inc                $13.38     $1,012.4  1,378,19
Documentum Inc                $5.88      $464.0    779,291
Click2Learn Inc               $1.00      $30.8     105,502
Prosofttraining.com inc       $1.10      $26.8     348,695
Corporate eLearning Average              $986.3    776,348
Traditional
Airs Corp/wa                  $1.10      $29.4
New Horizons Worldwide Inc    $11.00     $139.1    47,951
Learining Tree Intl Inc       $14.50     $443.0    302,229
Provant Inc                   $1.72      $39.1     46,877
Corporate Traditiona Ave                 $162.7    110,202
Total Corporate Average                  $886.4    695,603
Indices
Russell 2000                  $419.70
S&p 500 Composite             $1,081.19
Nasdaq Composite index        $1,619.58
1-Mo.  3-Mo.  6-Mo.   12-Mo.   YTD
-9.7   121.7  299.1    48.3   254.1
-10.5  49.3   105.3   -82.1   82.5
 9.0   63.6    73.1   152.3   80.0
25.9   89.2    61.2    4.9    70.7
15.0    4.5    48.4   -88.5   27.8
29.0   216.2   33.5     NA    23.5
 7.9   25.9    7.1     -7.1    7.8
-24.7  -6.9    4.5    -13.2    4.5
 0.9    3.1    1.9     3.9     1.8
 2.9   12.9    -2.4   -20.0   -9.6
-3.8   97.2    -9.4   -29.8   -10.8
 8.3   47.9   -12.8   -34.3   -13.4
 4.8   37.9   -24.0   -24.9   -19.5
-22.1  70.6   -23.4     NA    -24.5
-13.1  -16.0   -8.4     NA    -28.0
56.3   66.7   -1 6.7  -86.1   -31.0
-16.3  45.3   -38.3    -2.3   -34.8
-38.5  -20.0  -36.0   -92.0   -36.0
-30.2  44.4   -38.7   -59.3   -37.5
-52.8  -35.8  -33.0    59.0   -39.5
-18.0  63.9   -53.1   -25.2   -46.6
-13.7  31.2   -55.9   -83.1   -52.4
-32.1  -13.1  -66.2   -90.8   -53.2
-51.4  -47.3  -55.5   -94.9   -55.5
-34.8  -26.5  -67.9   -85.2   -66.6
-30.8  12.7   -72.2   -82.2   -72.0
-24.5  -3.3   -78.5   -68.3   -75.2
 0.0   13.3   -82.9   -90.7   -82.6
-53.3  -84.7  -91.4   -92.9   -90.6
-11.0  29.8    -8.0   -37.9   -11.3
68.8   108.0   51.3   -11.5   46.0
-22.8  -9.1    -02    -24.7    0.7
-8.2   12.0   -52.0   -62.0   -53.5
-33.3  -70.0  -59.4   -65.3   -58.0
 1.1   10.2   -15.1   -40.9   -16.2
-9.6   27.4    -8.9   -38.3   -11.9
-1.1   13.7    1.8     -3.5    4.0
-4.0    6.3    -8.1   -15.7   -7.1
-5.6   14.6   -16.9   -46.1   -14.0