Analyst Research

ReadCloud (ASX:RCL) – Enhancing the student experience with eLearning solutions

September 25, 2019

ReadCloud (ASX:RCL) – Enhancing the student experience with eLearning solutions

ReadCloud recently reported its second consecutive year of 100% plus revenue growth as well as generating a maiden operating profit (underlying EBITDA) in the second half of FY 2019. ReadCloud has built a strong position in the emerging eLearning space and is rapidly building penetration in secondary schools. I recently caught up with CFO, Luke Murphy to find out more

COMPANY DATA

Date of ReportASXPricePrice TargetAnalyst Recommendation
25/09/19RCL$0.40N/AN/A
Date of Report25/09/19ASXRCL
Price$0.40Price TargetN/A
Analyst RecommendationN/A
Sector: Technology52-Week Range: $0.22- 0.48
Industry: Software - ApplicationMarket Cap: $38.67 million

Source: Commsec

What do I think?

ReadCloud’s value proposition, which is based on a delivering a complete eLearning experience for secondary schools and VET institutions appears to have been validated. The next step is commercial validation of the business model, which appears to be well underway.

I like that the company has built a complete solution with multiple revenue streams and multiple routes to market. This provides enormous flexibility whilst balancing the risks in building scale. With relatively little competition in digital textbooks and other learning materials, the company is very well placed to ride the growth curve as schools and VET institutions transition away from hardcopy content. Nonetheless, competition will stiffen as this transition occurs and the hardcopy incumbents also address this market. The key challenge I see, is to quickly expand market penetration and to build much larger scale as protection against increasing competition. With $5 million in cash reserves and close to breakthrough full year profitability at the EBITDA level, ReadCloud appears to be well resourced to address this challenge.

The share price has performed well since bottoming out at around 25 cents in March. At the current level of 40 cents, the valuation is not excessive and there would appear to be plenty of upside should the company sustain its recent growth profile.

 

What do you do?

ReadCloud has developed a platform that enables and facilitates eLearning in educational environments through the management of digital content. The company is also a leading supplier of digital format textbooks to secondary schools and is a producer of Vocational Education and Training (VET) content.

Through the 2019 school year, the company has supplied over 250 schools around Australia directly and indirectly through reseller channels. Multiple revenue streams are generated primarily through margins on the sale of eBooks to schools and training institutions and via a usage fee for access to its platform.

Its differentiator and technology advantages are the interactive and collaborative features of the platform. Textbooks and other digital eLearning content are accessed via an app which enables students and teachers to communicate with each other via notes and messages and through which videos, weblinks and other content can be shared. In this way, the learning experience may be considerably enhanced with the delivery of a broader context than is otherwise available with a simple textbook.

 

What is the business case?

Technology has had a profound impact on leaning in schools for some time although the traditional hard copy textbook remains a central feature of the student experience. But this is changing as publishers are increasingly making their books available in pdf and other digital formats. Nonetheless, many schools, especially in the state sector and notably in Victoria, are still locked into paper based textbooks, although this is changing.

The market opportunity is large with about 2,700 secondary schools in Australia with some 1.6 million students and over 4,000 training providers with over 4 million students in VET courses.

Due to the cost advantages compared with paper and the much greater interactive and collaborative opportunities in learning, the conversion to digital is almost inevitable, although this may take some time. Accordingly, increasing penetration of the secondary schools market for digital content will be the key source of growth for ReadCloud over the next few years

 

What have you achieved?

Whilst successful development of its platform and associated apps was a fundamental achievement, ReadCloud has concluded a range of agreements which provides its business model with substance and a stronger value proposition as well as with multiple routes to market.

Firstly, and most importantly, it has secured digital content distribution arrangements with 25 of the world’s leading publishers including Oxford University Press, Jacaranda, Macmillan, Penguin Random House, Hachette and Harper Collins. This enables the company to market a complete textbook solution to schools in digital format which incorporates its technology platform. In this way, ReadCloud captures the full value benefits of the proposition and integrates its platform with the digital content, making for a “sticky” commercial relationship.

In 2018, Australian Institute of Education and Training (AIET) was acquired which opens up a route to market through VET courses in secondary schools. AIET is a registered training organisation (RTO) which develops and provides courses to secondary schools which are accredited under its RTO licence. At the moment, there is little crossover between AIET’s nearly 160 school clients and ReadCloud’s own school clients so there is considerable cross-selling potential.

Thirdly, a three year exclusive Strategic Distribution Agreement has been reached with Australian Training Products (ATP) committing to use ReadCloud as its digital content encryption and eReading delivery platform for its customer base of over 1,000 RTO’s in Australia and overseas. ATP provides a range of bespoke learning resources for Australian and international customers across VET, university and commercial sectors covering a broad range of industries. This is a key opportunity where ReadCloud has the potential to generate considerable revenue from its IP.

 

Financial Overview

ReadCloud successfully built momentum during FY 2019 with very strong growth recorded in key indicators including a 115% increase in the number of direct school clients and a 48% increase in the number of school clients via resellers.  This growth contributed to a 67% in eBook revenue and together with a maiden contribution from AIET sales revenue increased by 145%. AIET contributed to results from 1 October, and its profit contribution was the major factor in the company achieving a positive underlying EBITDA in the second half of the year.

Momentum is building, albeit off a low base and accordingly, operating costs are also rising due to the demands of increasing scale, especially in sales and marketing.

One of the key competitive advantages of being a seller of eBooks is that there is no inventory. Accordingly, the main operating asset on the balance sheet is receivables. However, as at 30 June the bulk of the $8.0 million in assets was represented by cash (($3.1 million) and intangibles ($4.3 million). The principal liability was contingent consideration for the acquisition of AIET ($1.8 million)

Since the end of the financial year, a further $2 million has been raised via a placement which will significantly boots cash resources and funding capabilities going forward.

A full year contribution from AIET (9 mths in FY 2019) and new school clients secured in FY 2019 is likely to boost revenue to over $7 million (+~50%) with the possibility of reaching $8 million with further school wins and contributions from other initiatives. Given that AIET is profitable and the company achieved positive EBITDA in the second half of FY 2019, it is likely that ReadCloud will achieve a maiden operating profit (EBITDA) in FY 2020 although this will depend on its growth spending, especially marketing and business development.

 

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