3P Learning has eneterd into a scheme of arrangement with IXL Learning, whereby IXL will acquire all of 3PL's shares at a cash consideration of $1.35 each (a 23% premium to the last closing price).

That's at an EV/EBITDA multiple of ~11, or a P/S of ~3.

This requires shareholder and court approval, but if passed will likely happen late this year.

(if you're a shareholder, you don't need to do anything now and details will be mailed out in October).

For a business that has struggled in recent years, and whose recent turnaround efforts have yet to be realised, it's probably a good deal for shareholders.

Indeed, FY20 results were also released, and showed flat revenue with a 70% drop in net profits due to increased staff levels and resourcing.

While the business was expected to improve in most regions -- especially the Middle East due to a recent deal -- the Americas is still proving challenging. And this was their most important market for growth opportunities.

A bird in the hand is better than two in the bush.

Details of acquisition here

Results here

3P Learning has signed a $10m deal with a National Ministry of Education in the middle east. That's pretty decent -- around 20% of what they generated in FY19.

The majority of that will be earned in FY21 -- but will also involve additional delivery costs. Management said only that the deal is "expected to make a positive EBITDA contribtion".

It's only a 12 month contract, but has the potential to be renewed and expanded.

Additionally, 3PL said that the covid situation in North America was delaying purchase decisions from schools.

So American revenue growth will be "more moderate" this year, and with a lower EBITDA margin.

Which is interesting, you might have expected remote schooling requirements to be a positive for 3PL and in fact, on the 23rd April, they said that they had seen no interuption from the virus and in fact had seen an increase in demand.

They did also warn that earnings would be lower overall for the full year due to a change in product mix and increased costs.

You can read today's ASX announcement here

23/4/20

3PL says it has seen no interuptions to sales, marketing and product development as a result of COVID-19, and has seen an increase in demand.

That being said, full year results will be moderated by the sales mix (presumably a higher proportion of 3rd party software that they get less margin on), and the timing of revenue recognition and sales/wages (the former being unable to be recognised until used, the later has to be recognised immediately).

3PL expects full second half revenue and EBITDA to show growth compared to the prior corresponding period, although full year EBITDA will be down due to revenue and cost recognition factors (although they didnt specify the quantum).

3PL expects positive operating cash flow and an increase to the cash balance at year's end.

Retention rates have showed an improvement -- even before the impact of COVID-19.

The US is only just entering its key sellling period, but due to the nature of the outbreak there, it is difficult to assess the outlook at this time.

You can read the full update here. 

3PL's Chief Financial Officer has resigned just 16 months into the new role.

Could be for any number of legitimate reasons, but often doesnt bode well..

3PL saw a 4% decrease in revenue for the first half, and the company dropped from a $2m profit in the previous first half, to a $1.9m loss this half.

Impacting the results were previously advised (and since rectified) changes to sales commission structure, and increased costs associated with growth initiatives.

Having completed their restructure at the end of last year, there are some green shoots such as modest growth in Licenses, ARR and retention in the main APAC segment.

Although costs have increased, management say the cost structure is now largely set and there is capacity to sustain a much larger customer base.

Still too early for me to be buy, but remain interested by the recurring and stcky revenue stream, strong balance sheet and US prospects. If they can return to even modest growth, shares could be considered good value.

For the full year, management said that FY20 EBITDA will be down compared to FY19, but that second half revenue and EBITDA would be up relative to the previous corresponding period.

Results presentation is here

Some competitors I've found listed below (far from comprehensive -- please add any you think ive missed). Appears to be a very fragmented market, with a variety of niche offerings. 

Blake Learning -- have the rights to reading eggs and Mathseeds and exclusivity in some jurisdictions (3PL has a reseller agreement).

DreamBox -- Washington based, privately held Math tutoring software with >250 employees. founded 2004

Edmentum -- Texas based, seems more focused on assesement and tracking, but also has online study content.

Amplify -- privately held, New York based. Creates K–8 core and supplemental curriculum, assessment, and intervention programs.  Its 2018 revenue was US$125 million and it now serves nearly 4 million students.

Blackboard -- Washington based, and (according to wikipedia) more than half of K–12 districts in the United States use its products and services. It has a much broader product set that appears to be themed around viirtual classrooms. Held by private equity it has 3,000 employees. 

A developer of education software for k-12 students. Many parents will be familiar with the key products such as Mathletics and Reading Eggs.

The past couple years have seen shares drop by roughly half, as the company underwent a strategic plan to reinvigorate and expand the software set and build out marketing and sales resources and expanding further into global markets. At the end of 2019, they are now focused on "profitable sales growth".

Hopefully that's true, as they really need to address the decline in total license numbers across all geographies -- in total license numbers are down 16% in the past 2 years (!). I'm not yet sure of the competitive environment, but the company aportions some blame to the sunsetting of old products, the cessation of selling license bands and a changed commission model.

62% of sales come from APC region, 22% from EMEA and 16% from North America. Mathletics represents ~75% of revenue

More than 90% of revenue is recurring in nature, and the company has an 87% retention rate. 

The business is profitable, generating free cash flow, has zero debt and ~$25m in cash.

Costs have been essentially flat over the past 2 years.

At the current price (88c), shares are on a PE of ~21.

Though this still leaves 3PL with a modest growth premium, it's likely cheap if they do manage to once again gain traction. Offshore markets certainly offer big potential, and the digital education "revolution" should be good for the industry as a whole. As a parent of two primary aged kids, I can attest to how sticky and generally well-regarded their core products are (by the parents, teachers and kids alike). With new products set to hit the market (and being able to leverage the existing customer base), this will also hopefully provide another avenue for growth.

On the other hand, though i've yet to do a proper competitor analysis, I expect there to be a lot of tough and increasing competition in this space. Gross margins are noticeably lower in offshore markets and could come under further pressure. Sales decisions for Schools and education agencies are slow and bureaucratic, and the bulk of revenue still comes from one product set.

Not yet ready to take a position, but will be very interested if we see a return to growth in license numbers and revenue. Keen to hear any insights from others.