LEARNING TECHNOLOGIES GROUP: a specialist tech plc and growth by acquisition

Learning Technologies Group PLC - LON:LTG

The technology sector is going through a significant boom reminiscent of the dotcom days.  Earnings are strong and even growing exponentially at Apple, Amazon, ASOS, Facebook, AirBnB and the like.  Key for each of these companies has been providing products in demand from a large pool of global users.  Each company has gone on to monetise its user base in models which suit its own particular needs - Facebook through advertising, AirBnB through harnessing users' own spare and required capacity.  Learning Technologies Group has identified a significant global user - the employee - and seeks to monetise this base by offering employer's solutions which help with compliance training and corporate knowledge retention.  The solutions are designed to aid efficiency savings, productivity increases and, fundamentally for all state institutions (and certain private institutions) - industry standard compliance training.  Please note, this report is not advocating LTG will be the next Uber or Rightmove.

I discovered Learning Technologies Group when researching UK tech companies with growing global sales.  LTG Plc has been listed on AIM since 2013. The Directorship has experience with both publicly listed companies and the learning technologoies subsector.

Background on LTG Plc

Originally listed in June 2011 on AIM as “In Deed” Plc operated by a chairman who had previously been involved with Rightmove.  In Deed was a conveyancing web service much like Rightmove or Zoopla.  The strength of competition meant In Deed never established itself resulting in significant operational losses.

In Deed was forced to dispose of key assets to stay afloat. The disposal also meant the company ceased to be a company with operational income, it had to be re-categorised on AIM instead as an investment operation. 

The next step for In Deed was finding an investment opportunity, but given the company had no income the opportunity would have to take the form of a “Reverse Takeover” as prescribed in AIM Rules 14 to 16.  The takeover duly arrived in November 2013 with Epic Group Ltd acting as protagonist.

Epic was originally created in 1989 and had experienced mergers and demergers in its time.  The most recent demerger allowed the current LTG Chairman and CEO the opportunity to take Epic down a specialised technologies path which they felt was under-served.  Epic performed well in its latest version as a private limited company and was set to expand aggressively.  Achieving its corporate goals required financing and the Board were of the opinion a public listing was the next logical step.  As for the deal:

• In Deed received £16.3 million as consideration (£15m in share issue and £1.3m cash from Epic)
• The combined group of Epic and In Deed relisted as “Learning Technologies Group” on 8 November 2013 at a launch price of £0.09
• Executive roles passed to former Epic directors
• LTG released it first Final Results in April 2014 showing strong revenue, margins and growth

The Learning Technologies Market

Learning technology has been around since computers, with a significant leap coming with the advent of the CD-ROM.  The practical implication?  The Encyclopedia Brittanica was made a relic - 30 dense leatherback books which once gave households both knowledge and prestige, replaced by a shiny disc.

A January 2017 study by Accuray Research suggested the current global E-learning market was worth circa$300 billion and would grow by 7.2% (CAGR - compound annual growth rate) to c$325 billion by 2025.  Of that, LTG estimates its target "global adult workplace E-learning market" is worth c$170 billion.  The Chairman in his Final Results December 2015 statement asserted this specific market group is growing at 23% (CAGR) - a faster rate than the overall global E-learning sector.

The market has grown with technology.  Increased connectivity, compatibility  of operating systems and the sheer speed of advances has opened up possibilities everywhere in the tech sector - from devices to operating, from social media to broadcast entertainment.  The same is true of the E-learning subsector.  Cloud advances have made it easier to not just share but also interact.  The average smart phone is now littered with applications (Apps) – as the saying goes “there’s an App for everything”.  Indeed LTG have their own App called GoMo which is available for you to download on your own smartphone – but more on that later.

LTG Market Strategy

The Board’s aim at the outset of its 2013 reverse takeover of In Deed was to consolidate the fragmented learning technologies sector, integrating companies and departments into a cohesive group generating in excess of £50 million income.  This was to be achieved both organically and through an aggressive expansion-through-acquisition policy.  Rather than interpreting Boardroom statements, here is the CEO on corporate strategy:

“LTG’s aim is to create a group of market-leading businesses providing complementary services in the fast growing learning technologies sector to form an international business of size and scale that is able to meet the demanding expectations of corporate and government customers.  This strategy is being delivered through a mixture of the best in class acquisitions that will help us create a comprehensive e-learning solution … as well as targeted investment in internally generated intellectual property …”

The LTG Board has stayed focused on to its goals.  Nearly £90 million spent on five global acquisitions within the span of three financial years demonstrates intent and urgency.  The company currently has offices in Zurich, Rio de Janeiro and New York though global presence is about to significantly increase.  The author has yet to discover a Plc with the same specialisation in E-learning as LTG.  The closest contemporaries are Access Intelligence Plc, Redcentric Plc and Adept4 Plc who all cater to corporate SaaS and IaaS (Infrastructure as a Service) clients with specialist requirements.

Group Portfolio

LEO

The maiden product of the LTG portfolio was created by merging Epic Ltd with the newly acquired Line Communications in July 2014 for £9 million.  Line brought with it clients including KPMG and Xerox.  Since its merger, LEO has taken on accounts including the Open University and most recently a significant contract with the UK Civil Service.  It is the “shopfloor” brand for state-affiliated institutions and multinationals whose Learning Management Systems (LMS) require dedicated team and bespoke “Software as a Service” (SaaS).

GoMo

A self-authoring tool (the customer creates their own content) available to use as an App on most any smartphone.  Clients (including L’Oreal, O2 and British Airways) can sign up to the platform instantly with a free trial period available for those who want to test the waters before a potential subscription purchase.  GoMo has three price bands:

• Small business:  £100 per calendar month
• Medium-size business:  £300 pcm
• Enterprise level: tailored service and price

At its core, GoMo is an interactive service which allows the customer to transmit and monitor employee training information.  GoMo has harnessed the benefits of smartphones for increased connectivity and content.  The tag line for those concerned about operating and coding is “if you can use a web browser, you can create content on GoMo”:

• No coding required, client chooses from templates
• Current content can be easily uploaded in a variety of formats including PDF, video, audio, MS Office and more
• Integrated with social media, website and existing LMS
• Employees can access information from smartphone or web portal
• Operator can set different levels of access for diverse teams
• Client can monitor training compliance progress

Preloaded

Preloaded is a BAFTA winning studio specialising in “games with purpose”.  LTG acquired Preloaded in May 2014 for a consideration of £1.6 million cash and £610,000 in share issue with an additional performance related consideration of £430,000 payable over 2018 and 2019. 

The acquisition was a step in enhancing User Experience (UX) of all LTG products.  This does not prevent the studio from forging its own creative paths.  One of its headline solo projects is E-learning games for the Samsung Gear VR (virtual reality) headset.

Eukelia

Eukelia is a specialist provider of governance, risk and compliance to the financial sector.  Its acquisition by LTG was a step towards vertical integration into a new market.  The exchange occurred in July 2015 for £6.8 million cash and £1.5 million in share issue with a potential for up to £3.5 million based on performance, £1.9 million of which LTG has in contingency.

Since its acquisition and until the end of the previous financial year in December 2015 (five months), Eukelia had contributed £2.5 million in revenue and £400,000 in pre-tax profits.  In the full 12 calendar months of 2016, Eukelia generated a total of £6.2 million and £900,000 pre-tax profit.

Rustici

The “global leader” in digital learning interoperability and SCORM (Sharable Content Object Refernce Model).  For those of a certain era – imagine the Dewey Decimal System, but for a global online library.

LTG acquired US-based Rustici Software in January 2016 for $20 million cash and $6 million in share issue.  Given the numerous acquisitions LTG had already completed, it made sense to acquire an asset that allows the departments to communicate effectively with each other and the wider E-learning community.

In financial year December 2015 Rustici is estimated to have earned $6.6 million in revenue and EBITDA of $2.7 million.

Net Dimensions

In its own words, Net Dimensions provides “talent management solutions for highly regulated industries”.  It offers a similar SaaS product to LEO but, as the tagline suggests, the target market is highly specialised.  Through offices in Europe, Australia, Far East with operation headquarters in Conneticut, Net Dimensions has access to a global E-learning market.  Net Dimensions also runs a speicalised Healthcare office out of Atlanta, Georgia and generates income in US dollars.

Listed on AIM, NETD was trading close to 30p in October 2016 when LTG’s proposed takeover was first announced.  The deal values NETD at 100p a share with the acquisition scheduled to be completed by March end.  NETD shares are currently trading at c98p

NETD posted significant losses in recent years (2013: $4.95m, 2014: $5.15m) though the loss in the financial year December 2015 did close to $2.08 million with profitability expected in FY 2016.  But NETD still had a balance sheet laden with $17 million in accumulated losses and nearly in $12 million in creditors and deferred revenue, The share price halved when interim results were announced in July 2016 (from 58.5p on 22nd July to 32.5 on 2nd August), presenting LTG with its opportunity. 

While NETD has been a loss making operation for some time, most important in the LTG eyes is c$25 million earnings in 2015.  The revenue and access to new markets is a huge leap forward for the company.  At an estimated £53.6m, it is LTG’s biggest acquisition yet. £46.5 million is to be raised from a share issue, with the Chairman and Bank (Barclays) providing overdrafts for the balance.  This also rescues NETD from potentially dire difficulties and places the operation into a position from which it can derive benefit.  In working alongside LEO and Rustici, Net Dimensions can realise tangible financial and creative gains.

Watershed Collaboration and Future Acquisitions

LTG acquired a 27.3% stake in Watershed for a £3 million investment as part of the Rustici acquisition.  The Board will be watching developments at Watershed closely – if they see revenue and market growth expect a quick move to incorporate the company into the LTG family.

The Board sees further opportunities in the employee training-rich market sectors of retail, media and pharmaceutical.

LTG Revenues

Recent acquisitions of Net Dimensions and Rustici will not contribute to this year’s income statement while less than half of Eukelia’s income was attributable to the 2016 LTG P&L.  Based on the interim report, LTG is on target for approximately £24 million in FY December 2016. Should that be the case (or, if the Chairman is accurate, more than £24m), then an additional £30 million income from the aforementioned newly-acquired trio would put LTG in a strong position to deliver on - and better - its goal of £50 million turnover in the current financial year (Dec 2017).

The Board has adopted a minimal dividend policy, choosing to use capital for acquisition rather than shareholder income.  LTG’s revenue growth and margin improvements give shareholders confidence the 0.005% dividend yield will be compensated by share price movement.  As a note, while the average investor will earn negligible yields, institutional investors (with discounted share issues) Liontrust Fund LLP and Hargreave Hale Ltd will earn in excess of £120,000.  The Chairman and CEO will each earn in excess of £500,000 from the dividend.

The 2015 balance sheet showed £25 million in net assets with £1.4 million profit from £19.9 million income. The £7.3 million cash reserves more than covers the £6.1 million current liabilities. 

A key area for LTG has been revenue from North America.  While income has grown, recent acquisitions should significantly increase LTG market share.  Based on 2015 earnings, LTG can reasonably expect Rustici and Net Dimensions to deliver earnings in the region of $30 million.

Share Price/Market News Correlation

Historically, investors have not always reacted to positive interim and final results.  There will be several factors to this, high among the list being LTG is still relatively new to AIM investors.  After two solid financial reports and regular news-making acquisitions, LTG may well now be on investors’ radar.  The 10% share price bounce after the last Interim Results in September 2016 certainly seems to suggest as much.

Investors take greatest interest when new contracts or acquisitions are announced.  A 50% LTG share price increase in December 2015 can largely be attributed to a new contract with the UK Civil Service.  The 25% increase in Q1 2016 came after the Rustici and Watershed acquisition announcements.  The same is true of the recent Net Dimensions acquisition. 

The most significant recent market update came in January 2017 from the Board stating LTG has strong cash flow and expects profits for FY Dec 2016 to be ahead of expectations.  The announcement resulted in a 27% LTG share price bounce with final results to be announced in early April.

On the Horizon

On a macro level, Brexit negotiations are looming large for LSE companies.  The LTG Board maintains any headwinds will have minimal impact on the Company.  There is logic in the assertion: while much of FY December 2015 income came from the UK, recent LTG acquisitions derive income in US dollars and will potentially more than double December 2015 earnings by December 2017.  It seems LTG will be one of the companies which benefits from sterling weakness.

LTG is on course to achieve its £50 million turnover goal in the current financial year (December 2017).  While there may be pause for consolidation, the Board harbours ambitions of greater expansions – further acquisitions and share issues are likely to crop up.  The Board has previously found value in its acquisitions while ensuring they fit within and, further enhance the Group portfolio.

Final Thoughts

Given the Board's desire to grow revenue and expand to new markets and its history of aggressively pursuing goals, the LTG trend in acquisitions, especially in the United States, should be expected to continue.  The current weakness of sterling which is forecast to continue for some time, is a boon to LTG's US expansion and resulting revenues.  The Board can utilise the benefit to either increase market share (competitive pricing) or reward shareholders (profits and dividends).  It is certainly better to have the choice.

Too much expansion in too short a time can cause logistical headaches and leadership vacuums.  That acquisitions retain and grow income after takeover is a testament to the LTG management responsible for integrating the new entities into LTG operations.

All market factors being neutral and LTG continuing its current proportional revenue growth, the addition of revenues from Net Dimensions, Rustici and Eukelia puts LTG on course to more than double FY December 2016's expected £26 million turnover and exceed its £50 million turnover target in the current financial year.  Management have been proactive in trimming margins as witnessed in EBITDA improvements.  The future looks promising for LTG.