CAMBIUM LEARNING GROUP INC ABCD
January 20, 2015 - 1:39pm EST by
majic06
2015 2016
Price: 1.90 EPS - -
Shares Out. (in M): 45 P/E - -
Market Cap (in M): 85 P/FCF - -
Net Debt (in M): 125 EBIT 0 0
TEV: 205 TEV/EBIT - -

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  • Private Equity (PE)
  • Personal Account Idea
  • Education
  • Negative Sentiment
  • Revenue Transition
  • Micro Cap
  • Sum Of The Parts (SOTP)
  • Hidden Assets
  • Rollup
  • M&A Catalyst
 

Description

PITCH

I believe an investment in ABCD offers limited to no downside and can be worth as much as $6-7 in 24 months or a 200%+ return.  The crux of my investment thesis centers around a fast growing 100% internet/subscription division that is being masked by legacy print products in a different division suffering secular declines.  

BACKGROUND

Cambium Learning has been written up before on VIC.  I strongly suggest you read the previous writeup and all the messages if you are interested in this idea.  It will give you a good sense of history.  I'm not saying this because I don't want to write a history of the company; I'm saying it because the messages really give you a feel of how much fatigue there is and how it has basically been left for dead.

That said, for those too lazy, let me give you the cliff note version:  UGLY.  Very, very, ugly.  

This idea is for PA's only or funds that are so small only your grandma Wilma is an LP.  Of the 45M shares outstanding, 32M are controlled by a private equity fund called VSS (more on that later).  My guess is of the 13M left, the vast majority are in a drawer somewhere either forgotten or buried deep in tears from years of agony.  This thing trades 100,000 shares on a major news day and other than that we're talking 5-10k shares if you happen to be around when a program wants to sell them to you.  I know this because I've been accumulating it for almost 1.5 years now.  I view the position as a PE and plan on exiting when the sponsor exists.  It's a double digit position in my portfolio and my strongest conviction idea.  My average price is around the current price.

What is Cambium Learning?  You can get all the details in the previous post and thread but, in short, it's an education roll up that has gone through a hellish 10 years.  About 4 years ago VSS (Private Equity) merged their company, Cambium, with a public company called Voyager.  Together they had about $200M in revs and $50M in EBITDA and it turned out to be big a value trap.  About 80% of the revs were print based and depended on large, one off contracts from states to make the quarter/year.  The stock and the business collapsed and the largest most valuable part of the business, Voyager and Sopris (now just called VSL as it's been merged into one division), is declining at 15-20% a year and likely worth little though there is definitely a chance the business can convert it's print business into a digital business albeit at a much smaller revenue base than it was years ago.  

Today, Cambium is a vastly different company than it was even a few years ago but nobody would notice if they just looked at the financials.  Revenue in 2012 and 2013 was about flat at $150M and in 2014 should be $140-$145M, so three full years of flattish revs.  EBITDA went from low 20's in '12 to $30M in '13 and should do about the same in '14.  Given the $125M in net debt at 10% interest (which is due in early 2017 and trades at par) and with ~$19M in Cap Ex, there is no free cash flow (before the deferred revenue growth addback - more on that later).  Given a market cap of about $85M (45M shares of about a $1.90 stock), what is there to like about this business that can't grow revenues w/ stagnant EBITDA and no free cash flow? 

I've been following (and have owned) Cambium for years.  You can see I've commented on it numerous times in the previous thread.  It has never been a big position.  In fact, as recently as a couple years ago I just noticed I posted I took it from a 2% position to 1%.  I didn't get excited about Cambium until the company bought back a large block of stock (a few percent of the company) from the 2nd largest outside shareholder at $2.35 when the stock price was $1.35.  Why would anyone do this?  Well, I can tell you after spending every day since then (about 15 months) buying, it's impossible to get a large chunk in the open market, let alone anything that size.  Still, why pay such a ridiculous premium for a block when you can do a tender?  I don't have the answer except I'm certain the company and VSS wasn't giving a gift to a friend - the seller was Wells Fargo.

First, I'm going to present the investment opportunity and after I'm going to discuss the unique circumstances of VSS.  For the purposes of this writeup I'm going to assume that Q4 is over and it's similar to the first three quarters of 2014 from a trajectory standpoint.  This is actually conservative because Q2 and Q3 (really Q3) are the most important quarters of the business giving the school buying cycle and Q3 was really spectacular after a pretty lousy Q1 and Q2.  I'm only doing this to paint a big picture investment thesis and it's easier to do it on an annual basis given we're done with this year though we won't get the numbers till early March.

Cambium today is 4 units, all operating independently with separate management teams in different states.  They share some overhead functions that consist of accounting, legal, human resources, public company, CEO/CFO etc, and that is $14M a year.  I will discuss this more later but it's important.  The 4 divisions are:

VSL the legacy print business that is in a material decline that they are trying to convert to digital.  

Learning A-Z, a 100% online subscription based business that is my entire investment thesis 

ExploreLearning, a 100% online subscription based business that is pretty cool but not my investment thesis

Kurzweil, a rounding error that's immaterial and I value at 0 (that's cash flow positive) and I won't mention again.

Cambium reports order volume, along obviously with revenues, as a forward looking metric.  I find it much more important than actual reported revenues especially given that today most of the order volume is "12 months" forward looking not multi year, though a small minority is.  

This is how I look at the value proposition in Cambium:

Today, you are paying about $210M in EV for the company, 125 debt/85 equity.  At a $300M EV, the equity is more than a double.  At a $400M EV, the equity is almost a quadruple.  What are the odds we get to either of those?  What are the odds we suffer losses at the $205M level?  I believe the odds of losses are extremely low and the odds of $300M EV in 12 months are likely and the odds of $400M are >50%.  All of this hinges on one division:   Learning A-Z (LAZ).  

LEARNING A-Z 

"Learning A-Z is a preK-6 educational resource company specializing in online delivery of leveled readers and other supplementary curriculum. Founded in 2002 to help teachers differentiate instruction and meet the unique needs of all students, Learning A-Z’s resources are currently used in over two thirds of the elementary schools in the United States and in 177 countries worldwide.  Winner of more than 15 industry awards in 2013 alone, Learning A-Z’s subscription-based websites provide online supplemental books, lessons, assessments, and other instructional resources for individual classrooms, schools, and districts. These solutions include: Reading A-Z, Raz-Kids, Science A-Z, Writing A-Z, Vocabulary A-Z, Headsprout Early Reading and Headsprout Comprehension."

Learning A-Z is the shit.  This business is exploding and went from being completely immaterial to Cambium in 2009 to the vast majority of the value of the business today.  The crux of the business is a ~$100 per classroom, annual cost, for it's main product Reading A-Z.  Teachers love it and I've included some links to message board posts I've found about it at the bottom of this writeup.  I have not data mined my research; I found only 1 baddish review out of maybe 50 messages.  Some teachers pay for it out of pocket they like it so much.  Amazingly, all of LAZ's growth has been organic.  They did a tiny $5M acquisition in 2013 that was immaterial; besides that all organic.

Before 2013, the company didn't break out Learning A-Z's revenues or segment EBITDA.  Instead, they consolidated them with ExploreLearning (EL).  From a variety of sources, I've been able to piece together revenues and/or order growth since 2009 and it's unbelievable.  

First, the last presentation the company has ever given can be found here:

http://cambiumlearning.investorroom.com/download/Barclays+March+2012+FINAL.pdf

It's from 3 years ago.  Since then, the entire management team has been fired (more on that later). LAZ was a tiny part of the business there but on page 19 you can see it says the two technology divisions of the company (LAZ and EL) each grew 24% in 2011 in orders.  This means that 2012 Revenue growth was very strong, somewhere in the mid 20's.  In the 2013 K they decided to break all the divisions out and actually gave LAZ revenue growth for '12 and '13.  

'12 26M

'13 33.4M

'14 42M estimated minimum 

Segment EBITDA margin has been amazing too.  

'12 14.7M

'13 19.1M

'14 23M estimated minimum

The business has been ramping cap ex and will do 5.5M in Cap Ex this year.  It is also ramping opex is a big way and management has noted in it's 2014 K that margins will come down as they hire though this year margins did not come down much.  

To get a better picture of how fast LAZ is growing, I found a LinkedIn profile from the head of marketing talking about the growth from 2009 to 2013.  Note, these numbers do not match the above (they are more aggressive - not in % growth, those are right) but in the amount of volume.  He claims the business did $40M in sales in FY '13 but as you can see above, it didn't.  I'm guessing it's just a communication error; maybe he's talking about order volume which is all internally they care about.  

"Developed strategy and executed tactical program for inside, field, international, and distribution rep teams, resulting in overall revenue growth of 150% over five years; YOY growth of 9% in FY09 ($16M), 26% in FY10 ($20.1M), 25% in FY11 ($25.1M), 24% in FY12 ($31M), and 29% in FY13 ($40M)"

https://www.linkedin.com/in/jjorgenson

(NOTE: I emailed CFO about this LinkedIn data and she wouldn't comment and he has since changed his profile to remove the numbers and changed it to order volume from revenues)

Guess what's even more exciting?  The business is accelerating.  Order volume in the most important quarter, Q3, grew 43% which took YTD order volume to 33%.  In 2013 order volume was 28% and we know in 2011 it was 24%.  More importantly, it's reasonable to assume 2015 revenues will grow by about 30% given most of the Q3 order volume will fall into 2015 (the vast majority is 12 month contracts).  Truthfully, I have no idea what the addressable market is for LAZ.  They have many products but by far the vast majority of revs are the Reading A-Z product and RAZ kids.  If they are already in 2/3 of schools (not classrooms), could growth slow down?  I suppose though given we are on year 4 now of >25% growth and it's only accelerating it doesn't seem like the law of large numbers is about to kick in.  Also, given their huge footprint, it makes it easier to sell new products into the channel which is what I'm sure they are doing.

2015 Revenues should be $55M and EBITDA should be 28-30M.  There are 3 important factors that need to be added to these numbers:  Shared services, Cap Ex, and deferred revenue growth.  

Cap Ex is easy; it's $5-$6M and while a lot (all?) is growth cap ex we should include it because I'm going to put a high multiple on the fully loaded number.  Deferred revenue growth is really important because all acquisitions in this space have been bought on "cash income" multiples which is basically EBITDA - Capex + change in deferred revs.  To put it simply, looking at trailing "cash income" is kind of like looking at forward EBITDA - CapEx although that would be a bit lower.  Since LAZ is growing 30+% and has grown at least 25% for the last 4 years, it's reasonable to assume that 2015 order volume will be at least 25%.  If it is, growth in deferred revenue in LAZ should be at least $10 Million.  Finally, we have the hardest input:  Shared Services.  This one is really tough because you could argue that if all the other division in Cambium are 0's then LAZ should have to take the entire burden of $14M.  This is simply not true as all 3 are solidly cash flow positive and EL is growing (we'll get to that later).  I believe that if Plato Learning or a similar like company were to acquire LAZ, they would be able to roll it into their platform and there would be minimal incremental costs in these "shared services".  This also assumes there wouldn't be a single dollar in synergy in the business before shared services.  That being said; to be conservative; I'm going to knock LAZ for $5M of the $14M in corporate shared services.  I think this is a worst case scenario in a sale and would still assign some of the synergy value to the buyer.  If Cambium were to buy a new division like LAZ, I don't believe they would take on a lot of new costs in HR/Legal/Finance so it seems appropriate to assume Plato wouldn't either.

So where does that get us at year end 2015?

55M in revs; EBITDA of 28-30 (we'll use 29M).  29 - 5.5M capex + 10M in deferred rev growth -5M in shared services  = 28.5M in "cash income".  This is basically what LAZ will generate in pretax cash flow, all in, in 2015.

COMPS

There have been 3 major public acquisitions in this space since 2009.  Plato Learning was acquired by Thomas Bravo; Archipelago Learning (AL) was then acquired by Bravo/Plato; and Renaissance Learning (RL) was acquired by Permira and then sold again in 2014 to Hellmen.

I'm going to focus on AL and RL for comp purposes because Plato was during financial crisis and was very small and was a platform purchase for Bravo, thus had no synergies.  It was also cash flow neutral. 

AL is my favorite comp for LAZ.  It was acquired for an EV of $310M.  It's 100% subscription like LAZ.  At the time of acquisition, the company stopped growing.  It was growing at double digits but it's very hard to figure out the exact organic growth because they acquired a company for $87M 18 months earlier that masks comparable results.

http://globenewswire.com/news-release/2010/06/10/422895/193977/en/Archipelago-Learning-Acquires-Educationcity-Ltd.html

Interestingly, the $87M acquisition was done at an order volume multiple of 5x and an EBITDA multiple of 17!.  Bottom line is AL was acquired for ~10-12x 'cash income' for a company where growth had just stalled.  It was also acquired at 4x trailing orders and 4.25x trailing revenues.  The revenue number is important because that helps normalize would LAZ could look like as a standalone company (with no platform synergies to a buyer) since it's hard to know what EBITDA margins would be given the cloudiness of "shared services".  

See here for the last full year results of AL:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aEO7QIMA0qJo

Cash EBITDA for Q4 was down significantly y/y and for the full year was 30.6M vs. 32.5M a year earlier; and this doesn't take into account capex of 3M.

Orders were 79 vs 71M (taken from the K).  Both of these aren't organic because of the $87M acquisition.

Renaissance Learning was acquired twice and both times at multiples greater than AL.  

http://www.forbes.com/sites/alexkonrad/2014/03/13/renaissance-learning-acquired-for-1b/

RL was acquired for $1.1B in 2014 which was 5.65x trailing ORDERS, 6.66x trailing revs, and 11.8x trailing cash ebitda.  Cap ex is low and immaterial so this is similar to cash income for LAZ.  Note, change in deferred revenue cash flow is a huge part of the RL story and the PE buyer focused on it in their pitch book to bondholders to finance the deal.  

"Orders and Cash EBITDA CAGR of 10% and 18%, respectively, from 2009-2013"

"Purchase price represents an 11.8x multiple of FY 2013 Cash EBITDA of $93.5mm(1)"

LAZ is growing faster than both EL and RL and appears to be leaner with higher EBITDA margins even adjusted for shared services.  There is no customer concentration risk and the orders don't appear to be lumpy (or particularly large) in any one quarter/year given the steady 25-30% growth every year for 4 years.  It's hard for me to see how LAZ is not worth at least 4x trailing sales and more likely 5x trailing sales given the two comps above.  Further, I think it's worth at least 10x cash income and as much as 13-14x cash income given the growth but will use 10-12x cash income for my range.  

This values LAZ at the end of 2015 at $220-$275M on a rev basis and $285M to $342M on a cash income basis.  Let's call it $250M to $300M and just use $275M for simplicity.  Note if you use similar numbers to RL you get values higher than the top end of both of those ranges.

A buyer at $275M using $130M debt would have the following characteristics assuming 8% debt:  

$24M EBITDA assuming $5M in shared costs; $19M in pretax/preinterest assuming D&A shield is same as ongoing capex; $8.5M in pretax after interest shield; = $5.52M in Net Income on $145M Equity investment for a P/E of under 30 (growing rapidly); more importantly cash flow would be $5.52M (NI) + 10M in deferred rev growth  = $15.52M in free cash flow post cap ex on a $145M equity investment for a FCF yield of over 10% that would grow incredibly rapidly in the following 12 months.  In short, it passes the sniff test.  $275M is not too much for this asset at year end 2015.  Assuming order growth can continue in 2015/2016 at 20+%, "cash income" should go up by a rapid amount annually as EBITDA goes up over $5-$7M y/y plus the huge change in deferred revenue growth "growth" of 2M ($10M turns into $12M w/ 20% growth so $2M more incrementally).  In short, you see $8M in cash income growth w/ a 10x multiple adds $80M in value 12 months further out (end of 2016) which would make LAZ worth $355M.  

LAZ is worth $275M at year end 2015; $355M at 2016 year end.

By year end 2015 and year end 2016, given the large deferred revenue source of cash, net debt will fall to $110M and then $100M, worst case scenerio. I actually think it could approach $80-$90 million by year end 2016.  It could be even lower if VSL is turned around, which I'll get to later.  But let's use $100M as net debt year end 2016.  

Debt 100M.  Equity 85M (today).  If the EV is worth $275M the equity is a 2 bagger at $3.90/share.  At $355M the equity is worth $255M or $5.66/share.  

But that's not all!  We have 2 more divisions of ABCD worth a significant amount of money.  

OTHER DIVISIONS

ExploreLearning is a small division that did $16M in revs in 2013, up 14%.  2014 has not been as strong.  Order volume will be flat and revs up a few percent.  This is all online, all digital, all subscription based.  It did $5M in EBITDA in 2013, up a bit from 2012, and will do essentially the same in 2014 as they ramp opex for growth.  Cap Ex is about $2M.  Again, this is all before shared services.  I have no idea what this division is worth.  Some shareholders I speak to think it's worth $75M.  I value it at $50M which I feel fairly confident about.  In 2 years I think this could be worth $75M but I'd like to see growth in 2015 before I assign that number.  Let's stick with $50M.

Last but not least is the problem child, VSL.  This is declining rapidly and is still half the revs of the entire company.  They have spent 10s of millions trying to transition this business to technology based and while making some progress, it takes a long time.  This business is cash flow positive; did $17M in 2013 EBITDA (which was actually up do to cost cutting and higher margin tech revenues) but will fall to ~$14M in 2014.  Cap ex is $8.5M as they are spending a lot for technology solutions netting out $5M in cash flow before shared services.  I have no idea what to value this business.  It's probably worth no more than $25M now but they have spent that much on new products in the last 2-3 years alone.  What will the revenue base bottom out at?  When will it show growth again?  It might take 3-4 years.  But even if revs bottom at 25-30M (from 70M today and $150M a few years ago); that base will be all tech/subscription and worth something.  Let's use $25M.

That's $75M in value for EL and VSL, on today's numbers.  With 45M shares outstanding that's worth $1.50+ alone in incremental value to my price target on LAZ.  

In short, as long as you can somehow got to $200M in total value, today, you will not lose money on this investment.  If you can get to $280M you will get a double; $360M a triple.  I think you get to $355 (LAZ at end of 2016) + $75M for EL and VSL = quadruple.  And I don't think I'm being aggressive w/ my numbers.  

Now I know you're saying, majic, all of this predicates on hedge fund math pretending like the $14M in shared services turns into $5M.  What would the company look like as a going concern?  Well first, they have a tax shield that will last for years so I will assume no taxes.  Second, I will assume they refinance the debt for 8% w/ $120M outstanding.  Finally, I will assume that VSL and EL contribute $7M in FCF, combined, before shared services - which I think is really conservative.  What do we get?

LAZ $29M EBITDA - 14M shared services - 9.6M interest - 5.5M LAZ Capex + 10M deferred rev growth (low) + 7M FCF from EL and VSL = 17M in FCF to equity for 2015 on 80M market cap, growing rapidly.  On an EV basis; 26.6M in free cash flow on 205M EV.  Cheap.

What's the exit?  

To be kind, VSL has not done very well as a private equity firm.  They haven't raised a buyout fund since before the 08 crisis and Cambium is their largest position in that fund.  It's estimated their total cost in Cambium is $175M which puts their break-even on the position at $5.50.  The fund is in year 9 and will expire at the end of 2015.

https://www.pehub.com/2014/01/vss-considers-options-for-aging-fourth-fund/

They have 2, one year extensions they can use so they basically have till end of 2017 as the absolutely drop dead date.  Additionally, Cambium's debt is due early 2017 and needs to be refinanced.  The company has been buying back debt privately this year taking gross debt outstanding from $175 to $145 in the last 12 months.  The debt trades at par and I'm not worried about them being able to refinance.  I think they are just waiting for a few good quarters before hitting the market.  Q1 and Q2 in 2014 were pretty awful so the comp is rather easy; I could see them refinance sometime next summer.  

VSL owns over 70% of the company and needs $5.50 for break-even.  If I was them, I wouldn't be a seller today given the leverage in the business and the inflection point LAZ is about to hit.  If the numbers pan out and they start shopping the company end of 2016/early 2017, they very well could get $6-$8+ a share and salvage a terrible investment that will have taken over 10 years to basically break-even.  

The CEO of Cambium, John Campbell, seems like a smart no-nonsense guy.  He had been running the division at Cambium that had LAZ and EL in it since 2009 before he took over as CEO in 2013 when the board ousted the entire management team and promoted internal people to run the company.  

https://www.linkedin.com/in/johncampbell

They haven't held a conference call in 2 years and obviously have no analyst coverage.  He has upside on 500,000 in the money options.  I really like that he was in charge (at an executive level, remember LAZ and EL have their own management teams) of the only divisions that now matter in the company.  I think he has made the right moves since taking over as CEO.

MISCELLANEOUS 

I've been tracking job listings for the last few months and the have only gone up.  Interestingly, they are now hiring for VSL which I haven't seen before.

My notes on Job postings:

26 jobs oct 28

32 jobs nov 11

33 jobs dec 16

35 jobs 20 at LAZ dec 18’ 

38 jobs -; 20 LAZ - Jan 8

39 jobs jan 12

42 jobs jan 16 23 at LAZ

They also posted a new job last week that's interesting:

http://www.cambiumlearningtechnologies.com/careers/LAZ/vl-00002297.php

LINKS TO LEARNING A-Z REVIEWS 

http://www.proteacher.net/discussions/showthread.php?t=389400

http://www.proteacher.net/discussions/showthread.php?t=490040

 

http://www.proteacher.net/discussions/showthread.php?t=450523

http://www.proteacher.net/search.php?cx=partner-pub-4522087508143238%3Ajlkaeymlw29&cof=FORID%3A10&ie=ISO-8859-1&q=%22reading+a-z%22&sa=Search&siteurl=www.proteacher.net%2Fdiscussions%2Fshowthread.php%3Ft%3D389400&ref=&ss=1118j407466j6

https://www.google.com/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=reading%20a-z%20review

RISKS

Lots of risks but the biggest are obvious:  LAZ stops growing or declines.  The PE firm is forced to sell the company at a poor price due to time pressures.  The bond market implodes before they can refinance their debt.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

A sale of the company in 12 to 36 months.

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    Description

    PITCH

    I believe an investment in ABCD offers limited to no downside and can be worth as much as $6-7 in 24 months or a 200%+ return.  The crux of my investment thesis centers around a fast growing 100% internet/subscription division that is being masked by legacy print products in a different division suffering secular declines.  

    BACKGROUND

    Cambium Learning has been written up before on VIC.  I strongly suggest you read the previous writeup and all the messages if you are interested in this idea.  It will give you a good sense of history.  I'm not saying this because I don't want to write a history of the company; I'm saying it because the messages really give you a feel of how much fatigue there is and how it has basically been left for dead.

    That said, for those too lazy, let me give you the cliff note version:  UGLY.  Very, very, ugly.  

    This idea is for PA's only or funds that are so small only your grandma Wilma is an LP.  Of the 45M shares outstanding, 32M are controlled by a private equity fund called VSS (more on that later).  My guess is of the 13M left, the vast majority are in a drawer somewhere either forgotten or buried deep in tears from years of agony.  This thing trades 100,000 shares on a major news day and other than that we're talking 5-10k shares if you happen to be around when a program wants to sell them to you.  I know this because I've been accumulating it for almost 1.5 years now.  I view the position as a PE and plan on exiting when the sponsor exists.  It's a double digit position in my portfolio and my strongest conviction idea.  My average price is around the current price.

    What is Cambium Learning?  You can get all the details in the previous post and thread but, in short, it's an education roll up that has gone through a hellish 10 years.  About 4 years ago VSS (Private Equity) merged their company, Cambium, with a public company called Voyager.  Together they had about $200M in revs and $50M in EBITDA and it turned out to be big a value trap.  About 80% of the revs were print based and depended on large, one off contracts from states to make the quarter/year.  The stock and the business collapsed and the largest most valuable part of the business, Voyager and Sopris (now just called VSL as it's been merged into one division), is declining at 15-20% a year and likely worth little though there is definitely a chance the business can convert it's print business into a digital business albeit at a much smaller revenue base than it was years ago.  

    Today, Cambium is a vastly different company than it was even a few years ago but nobody would notice if they just looked at the financials.  Revenue in 2012 and 2013 was about flat at $150M and in 2014 should be $140-$145M, so three full years of flattish revs.  EBITDA went from low 20's in '12 to $30M in '13 and should do about the same in '14.  Given the $125M in net debt at 10% interest (which is due in early 2017 and trades at par) and with ~$19M in Cap Ex, there is no free cash flow (before the deferred revenue growth addback - more on that later).  Given a market cap of about $85M (45M shares of about a $1.90 stock), what is there to like about this business that can't grow revenues w/ stagnant EBITDA and no free cash flow? 

    I've been following (and have owned) Cambium for years.  You can see I've commented on it numerous times in the previous thread.  It has never been a big position.  In fact, as recently as a couple years ago I just noticed I posted I took it from a 2% position to 1%.  I didn't get excited about Cambium until the company bought back a large block of stock (a few percent of the company) from the 2nd largest outside shareholder at $2.35 when the stock price was $1.35.  Why would anyone do this?  Well, I can tell you after spending every day since then (about 15 months) buying, it's impossible to get a large chunk in the open market, let alone anything that size.  Still, why pay such a ridiculous premium for a block when you can do a tender?  I don't have the answer except I'm certain the company and VSS wasn't giving a gift to a friend - the seller was Wells Fargo.

    First, I'm going to present the investment opportunity and after I'm going to discuss the unique circumstances of VSS.  For the purposes of this writeup I'm going to assume that Q4 is over and it's similar to the first three quarters of 2014 from a trajectory standpoint.  This is actually conservative because Q2 and Q3 (really Q3) are the most important quarters of the business giving the school buying cycle and Q3 was really spectacular after a pretty lousy Q1 and Q2.  I'm only doing this to paint a big picture investment thesis and it's easier to do it on an annual basis given we're done with this year though we won't get the numbers till early March.

    Cambium today is 4 units, all operating independently with separate management teams in different states.  They share some overhead functions that consist of accounting, legal, human resources, public company, CEO/CFO etc, and that is $14M a year.  I will discuss this more later but it's important.  The 4 divisions are:

    VSL the legacy print business that is in a material decline that they are trying to convert to digital.  

    Learning A-Z, a 100% online subscription based business that is my entire investment thesis 

    ExploreLearning, a 100% online subscription based business that is pretty cool but not my investment thesis

    Kurzweil, a rounding error that's immaterial and I value at 0 (that's cash flow positive) and I won't mention again.

    Cambium reports order volume, along obviously with revenues, as a forward looking metric.  I find it much more important than actual reported revenues especially given that today most of the order volume is "12 months" forward looking not multi year, though a small minority is.  

    This is how I look at the value proposition in Cambium:

    Today, you are paying about $210M in EV for the company, 125 debt/85 equity.  At a $300M EV, the equity is more than a double.  At a $400M EV, the equity is almost a quadruple.  What are the odds we get to either of those?  What are the odds we suffer losses at the $205M level?  I believe the odds of losses are extremely low and the odds of $300M EV in 12 months are likely and the odds of $400M are >50%.  All of this hinges on one division:   Learning A-Z (LAZ).  

    LEARNING A-Z 

    "Learning A-Z is a preK-6 educational resource company specializing in online delivery of leveled readers and other supplementary curriculum. Founded in 2002 to help teachers differentiate instruction and meet the unique needs of all students, Learning A-Z’s resources are currently used in over two thirds of the elementary schools in the United States and in 177 countries worldwide.  Winner of more than 15 industry awards in 2013 alone, Learning A-Z’s subscription-based websites provide online supplemental books, lessons, assessments, and other instructional resources for individual classrooms, schools, and districts. These solutions include: Reading A-Z, Raz-Kids, Science A-Z, Writing A-Z, Vocabulary A-Z, Headsprout Early Reading and Headsprout Comprehension."

    Learning A-Z is the shit.  This business is exploding and went from being completely immaterial to Cambium in 2009 to the vast majority of the value of the business today.  The crux of the business is a ~$100 per classroom, annual cost, for it's main product Reading A-Z.  Teachers love it and I've included some links to message board posts I've found about it at the bottom of this writeup.  I have not data mined my research; I found only 1 baddish review out of maybe 50 messages.  Some teachers pay for it out of pocket they like it so much.  Amazingly, all of LAZ's growth has been organic.  They did a tiny $5M acquisition in 2013 that was immaterial; besides that all organic.

    Before 2013, the company didn't break out Learning A-Z's revenues or segment EBITDA.  Instead, they consolidated them with ExploreLearning (EL).  From a variety of sources, I've been able to piece together revenues and/or order growth since 2009 and it's unbelievable.  

    First, the last presentation the company has ever given can be found here:

    http://cambiumlearning.investorroom.com/download/Barclays+March+2012+FINAL.pdf

    It's from 3 years ago.  Since then, the entire management team has been fired (more on that later). LAZ was a tiny part of the business there but on page 19 you can see it says the two technology divisions of the company (LAZ and EL) each grew 24% in 2011 in orders.  This means that 2012 Revenue growth was very strong, somewhere in the mid 20's.  In the 2013 K they decided to break all the divisions out and actually gave LAZ revenue growth for '12 and '13.  

    '12 26M

    '13 33.4M

    '14 42M estimated minimum 

    Segment EBITDA margin has been amazing too.  

    '12 14.7M

    '13 19.1M

    '14 23M estimated minimum

    The business has been ramping cap ex and will do 5.5M in Cap Ex this year.  It is also ramping opex is a big way and management has noted in it's 2014 K that margins will come down as they hire though this year margins did not come down much.  

    To get a better picture of how fast LAZ is growing, I found a LinkedIn profile from the head of marketing talking about the growth from 2009 to 2013.  Note, these numbers do not match the above (they are more aggressive - not in % growth, those are right) but in the amount of volume.  He claims the business did $40M in sales in FY '13 but as you can see above, it didn't.  I'm guessing it's just a communication error; maybe he's talking about order volume which is all internally they care about.  

    "Developed strategy and executed tactical program for inside, field, international, and distribution rep teams, resulting in overall revenue growth of 150% over five years; YOY growth of 9% in FY09 ($16M), 26% in FY10 ($20.1M), 25% in FY11 ($25.1M), 24% in FY12 ($31M), and 29% in FY13 ($40M)"

    https://www.linkedin.com/in/jjorgenson

    (NOTE: I emailed CFO about this LinkedIn data and she wouldn't comment and he has since changed his profile to remove the numbers and changed it to order volume from revenues)

    Guess what's even more exciting?  The business is accelerating.  Order volume in the most important quarter, Q3, grew 43% which took YTD order volume to 33%.  In 2013 order volume was 28% and we know in 2011 it was 24%.  More importantly, it's reasonable to assume 2015 revenues will grow by about 30% given most of the Q3 order volume will fall into 2015 (the vast majority is 12 month contracts).  Truthfully, I have no idea what the addressable market is for LAZ.  They have many products but by far the vast majority of revs are the Reading A-Z product and RAZ kids.  If they are already in 2/3 of schools (not classrooms), could growth slow down?  I suppose though given we are on year 4 now of >25% growth and it's only accelerating it doesn't seem like the law of large numbers is about to kick in.  Also, given their huge footprint, it makes it easier to sell new products into the channel which is what I'm sure they are doing.

    2015 Revenues should be $55M and EBITDA should be 28-30M.  There are 3 important factors that need to be added to these numbers:  Shared services, Cap Ex, and deferred revenue growth.  

    Cap Ex is easy; it's $5-$6M and while a lot (all?) is growth cap ex we should include it because I'm going to put a high multiple on the fully loaded number.  Deferred revenue growth is really important because all acquisitions in this space have been bought on "cash income" multiples which is basically EBITDA - Capex + change in deferred revs.  To put it simply, looking at trailing "cash income" is kind of like looking at forward EBITDA - CapEx although that would be a bit lower.  Since LAZ is growing 30+% and has grown at least 25% for the last 4 years, it's reasonable to assume that 2015 order volume will be at least 25%.  If it is, growth in deferred revenue in LAZ should be at least $10 Million.  Finally, we have the hardest input:  Shared Services.  This one is really tough because you could argue that if all the other division in Cambium are 0's then LAZ should have to take the entire burden of $14M.  This is simply not true as all 3 are solidly cash flow positive and EL is growing (we'll get to that later).  I believe that if Plato Learning or a similar like company were to acquire LAZ, they would be able to roll it into their platform and there would be minimal incremental costs in these "shared services".  This also assumes there wouldn't be a single dollar in synergy in the business before shared services.  That being said; to be conservative; I'm going to knock LAZ for $5M of the $14M in corporate shared services.  I think this is a worst case scenario in a sale and would still assign some of the synergy value to the buyer.  If Cambium were to buy a new division like LAZ, I don't believe they would take on a lot of new costs in HR/Legal/Finance so it seems appropriate to assume Plato wouldn't either.

    So where does that get us at year end 2015?

    55M in revs; EBITDA of 28-30 (we'll use 29M).  29 - 5.5M capex + 10M in deferred rev growth -5M in shared services  = 28.5M in "cash income".  This is basically what LAZ will generate in pretax cash flow, all in, in 2015.

    COMPS

    There have been 3 major public acquisitions in this space since 2009.  Plato Learning was acquired by Thomas Bravo; Archipelago Learning (AL) was then acquired by Bravo/Plato; and Renaissance Learning (RL) was acquired by Permira and then sold again in 2014 to Hellmen.

    I'm going to focus on AL and RL for comp purposes because Plato was during financial crisis and was very small and was a platform purchase for Bravo, thus had no synergies.  It was also cash flow neutral. 

    AL is my favorite comp for LAZ.  It was acquired for an EV of $310M.  It's 100% subscription like LAZ.  At the time of acquisition, the company stopped growing.  It was growing at double digits but it's very hard to figure out the exact organic growth because they acquired a company for $87M 18 months earlier that masks comparable results.

    http://globenewswire.com/news-release/2010/06/10/422895/193977/en/Archipelago-Learning-Acquires-Educationcity-Ltd.html

    Interestingly, the $87M acquisition was done at an order volume multiple of 5x and an EBITDA multiple of 17!.  Bottom line is AL was acquired for ~10-12x 'cash income' for a company where growth had just stalled.  It was also acquired at 4x trailing orders and 4.25x trailing revenues.  The revenue number is important because that helps normalize would LAZ could look like as a standalone company (with no platform synergies to a buyer) since it's hard to know what EBITDA margins would be given the cloudiness of "shared services".  

    See here for the last full year results of AL:

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aEO7QIMA0qJo

    Cash EBITDA for Q4 was down significantly y/y and for the full year was 30.6M vs. 32.5M a year earlier; and this doesn't take into account capex of 3M.

    Orders were 79 vs 71M (taken from the K).  Both of these aren't organic because of the $87M acquisition.

    Renaissance Learning was acquired twice and both times at multiples greater than AL.  

    http://www.forbes.com/sites/alexkonrad/2014/03/13/renaissance-learning-acquired-for-1b/

    RL was acquired for $1.1B in 2014 which was 5.65x trailing ORDERS, 6.66x trailing revs, and 11.8x trailing cash ebitda.  Cap ex is low and immaterial so this is similar to cash income for LAZ.  Note, change in deferred revenue cash flow is a huge part of the RL story and the PE buyer focused on it in their pitch book to bondholders to finance the deal.  

    "Orders and Cash EBITDA CAGR of 10% and 18%, respectively, from 2009-2013"

    "Purchase price represents an 11.8x multiple of FY 2013 Cash EBITDA of $93.5mm(1)"

    LAZ is growing faster than both EL and RL and appears to be leaner with higher EBITDA margins even adjusted for shared services.  There is no customer concentration risk and the orders don't appear to be lumpy (or particularly large) in any one quarter/year given the steady 25-30% growth every year for 4 years.  It's hard for me to see how LAZ is not worth at least 4x trailing sales and more likely 5x trailing sales given the two comps above.  Further, I think it's worth at least 10x cash income and as much as 13-14x cash income given the growth but will use 10-12x cash income for my range.  

    This values LAZ at the end of 2015 at $220-$275M on a rev basis and $285M to $342M on a cash income basis.  Let's call it $250M to $300M and just use $275M for simplicity.  Note if you use similar numbers to RL you get values higher than the top end of both of those ranges.

    A buyer at $275M using $130M debt would have the following characteristics assuming 8% debt:  

    $24M EBITDA assuming $5M in shared costs; $19M in pretax/preinterest assuming D&A shield is same as ongoing capex; $8.5M in pretax after interest shield; = $5.52M in Net Income on $145M Equity investment for a P/E of under 30 (growing rapidly); more importantly cash flow would be $5.52M (NI) + 10M in deferred rev growth  = $15.52M in free cash flow post cap ex on a $145M equity investment for a FCF yield of over 10% that would grow incredibly rapidly in the following 12 months.  In short, it passes the sniff test.  $275M is not too much for this asset at year end 2015.  Assuming order growth can continue in 2015/2016 at 20+%, "cash income" should go up by a rapid amount annually as EBITDA goes up over $5-$7M y/y plus the huge change in deferred revenue growth "growth" of 2M ($10M turns into $12M w/ 20% growth so $2M more incrementally).  In short, you see $8M in cash income growth w/ a 10x multiple adds $80M in value 12 months further out (end of 2016) which would make LAZ worth $355M.  

    LAZ is worth $275M at year end 2015; $355M at 2016 year end.

    By year end 2015 and year end 2016, given the large deferred revenue source of cash, net debt will fall to $110M and then $100M, worst case scenerio. I actually think it could approach $80-$90 million by year end 2016.  It could be even lower if VSL is turned around, which I'll get to later.  But let's use $100M as net debt year end 2016.  

    Debt 100M.  Equity 85M (today).  If the EV is worth $275M the equity is a 2 bagger at $3.90/share.  At $355M the equity is worth $255M or $5.66/share.  

    But that's not all!  We have 2 more divisions of ABCD worth a significant amount of money.  

    OTHER DIVISIONS

    ExploreLearning is a small division that did $16M in revs in 2013, up 14%.  2014 has not been as strong.  Order volume will be flat and revs up a few percent.  This is all online, all digital, all subscription based.  It did $5M in EBITDA in 2013, up a bit from 2012, and will do essentially the same in 2014 as they ramp opex for growth.  Cap Ex is about $2M.  Again, this is all before shared services.  I have no idea what this division is worth.  Some shareholders I speak to think it's worth $75M.  I value it at $50M which I feel fairly confident about.  In 2 years I think this could be worth $75M but I'd like to see growth in 2015 before I assign that number.  Let's stick with $50M.

    Last but not least is the problem child, VSL.  This is declining rapidly and is still half the revs of the entire company.  They have spent 10s of millions trying to transition this business to technology based and while making some progress, it takes a long time.  This business is cash flow positive; did $17M in 2013 EBITDA (which was actually up do to cost cutting and higher margin tech revenues) but will fall to ~$14M in 2014.  Cap ex is $8.5M as they are spending a lot for technology solutions netting out $5M in cash flow before shared services.  I have no idea what to value this business.  It's probably worth no more than $25M now but they have spent that much on new products in the last 2-3 years alone.  What will the revenue base bottom out at?  When will it show growth again?  It might take 3-4 years.  But even if revs bottom at 25-30M (from 70M today and $150M a few years ago); that base will be all tech/subscription and worth something.  Let's use $25M.

    That's $75M in value for EL and VSL, on today's numbers.  With 45M shares outstanding that's worth $1.50+ alone in incremental value to my price target on LAZ.  

    In short, as long as you can somehow got to $200M in total value, today, you will not lose money on this investment.  If you can get to $280M you will get a double; $360M a triple.  I think you get to $355 (LAZ at end of 2016) + $75M for EL and VSL = quadruple.  And I don't think I'm being aggressive w/ my numbers.  

    Now I know you're saying, majic, all of this predicates on hedge fund math pretending like the $14M in shared services turns into $5M.  What would the company look like as a going concern?  Well first, they have a tax shield that will last for years so I will assume no taxes.  Second, I will assume they refinance the debt for 8% w/ $120M outstanding.  Finally, I will assume that VSL and EL contribute $7M in FCF, combined, before shared services - which I think is really conservative.  What do we get?

    LAZ $29M EBITDA - 14M shared services - 9.6M interest - 5.5M LAZ Capex + 10M deferred rev growth (low) + 7M FCF from EL and VSL = 17M in FCF to equity for 2015 on 80M market cap, growing rapidly.  On an EV basis; 26.6M in free cash flow on 205M EV.  Cheap.

    What's the exit?  

    To be kind, VSL has not done very well as a private equity firm.  They haven't raised a buyout fund since before the 08 crisis and Cambium is their largest position in that fund.  It's estimated their total cost in Cambium is $175M which puts their break-even on the position at $5.50.  The fund is in year 9 and will expire at the end of 2015.

    https://www.pehub.com/2014/01/vss-considers-options-for-aging-fourth-fund/

    They have 2, one year extensions they can use so they basically have till end of 2017 as the absolutely drop dead date.  Additionally, Cambium's debt is due early 2017 and needs to be refinanced.  The company has been buying back debt privately this year taking gross debt outstanding from $175 to $145 in the last 12 months.  The debt trades at par and I'm not worried about them being able to refinance.  I think they are just waiting for a few good quarters before hitting the market.  Q1 and Q2 in 2014 were pretty awful so the comp is rather easy; I could see them refinance sometime next summer.  

    VSL owns over 70% of the company and needs $5.50 for break-even.  If I was them, I wouldn't be a seller today given the leverage in the business and the inflection point LAZ is about to hit.  If the numbers pan out and they start shopping the company end of 2016/early 2017, they very well could get $6-$8+ a share and salvage a terrible investment that will have taken over 10 years to basically break-even.  

    The CEO of Cambium, John Campbell, seems like a smart no-nonsense guy.  He had been running the division at Cambium that had LAZ and EL in it since 2009 before he took over as CEO in 2013 when the board ousted the entire management team and promoted internal people to run the company.  

    https://www.linkedin.com/in/johncampbell

    They haven't held a conference call in 2 years and obviously have no analyst coverage.  He has upside on 500,000 in the money options.  I really like that he was in charge (at an executive level, remember LAZ and EL have their own management teams) of the only divisions that now matter in the company.  I think he has made the right moves since taking over as CEO.

    MISCELLANEOUS 

    I've been tracking job listings for the last few months and the have only gone up.  Interestingly, they are now hiring for VSL which I haven't seen before.

    My notes on Job postings:

    26 jobs oct 28

    32 jobs nov 11

    33 jobs dec 16

    35 jobs 20 at LAZ dec 18’ 

    38 jobs -; 20 LAZ - Jan 8

    39 jobs jan 12

    42 jobs jan 16 23 at LAZ

    They also posted a new job last week that's interesting:

    http://www.cambiumlearningtechnologies.com/careers/LAZ/vl-00002297.php

    LINKS TO LEARNING A-Z REVIEWS 

    http://www.proteacher.net/discussions/showthread.php?t=389400

    http://www.proteacher.net/discussions/showthread.php?t=490040

     

    http://www.proteacher.net/discussions/showthread.php?t=450523

    http://www.proteacher.net/search.php?cx=partner-pub-4522087508143238%3Ajlkaeymlw29&cof=FORID%3A10&ie=ISO-8859-1&q=%22reading+a-z%22&sa=Search&siteurl=www.proteacher.net%2Fdiscussions%2Fshowthread.php%3Ft%3D389400&ref=&ss=1118j407466j6

    https://www.google.com/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=reading%20a-z%20review

    RISKS

    Lots of risks but the biggest are obvious:  LAZ stops growing or declines.  The PE firm is forced to sell the company at a poor price due to time pressures.  The bond market implodes before they can refinance their debt.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    A sale of the company in 12 to 36 months.

    Messages


    Subjectpainful - but finally working
    Entry01/26/2015 12:23 PM
    Membermrsox977

    As many on these boards know, I wrote this name up ages ago at higher prices and it has been a disaster.  We stuck with it and were even adding below two dollars late last year.  Thank you for the great write-up.  We believe that the time for this stock to perform has finally come.


    SubjectRe: VSL President Retiring
    Entry01/26/2015 06:07 PM
    Membermrsox977

    The word is that he had health issues - nothing related to the business.


    SubjectRe: Re: Re: VSL President Retiring
    Entry01/26/2015 06:26 PM
    Membermrsox977

    Understood.  Just wanted to add the health element for the VIC conspiracy theorists that come up with all kinds of reasons for resignations :)


    SubjectABCD Q4 Results
    Entry03/17/2015 06:42 PM
    Membermajic06

    Pretty much as expected.  LAZ grew orders 25% for total 2014 growth of 30%.  Reminder, quarterly numbers are lumpy.  In Q1 and Q2 LAZ grew orders at 24% and ~10%, respectively, before growing at 42% in Q3.  

    Adj EBITDA was up strong y/y but I am much more focused on order growth and where the business will be in a couple years.  The company did a great job detailing all their plans in their press release but the most interesting data point is the expect (hope?) that VSL will return to growth in 2016.  Further, they expect 2015 orders to be 70% digital.  

    All of my numbers in the writeup still stand for LAZ (EBITDA will be $31M in 2015 most likely vs the $29M I estimated but Cap Ex will be $2M higher too).  

    They also bought back the rest of their authorization in Q4 for $1.67 a share (nice purchase!)

    Today the EV is $250M.  Under every metric I use, I see limited downside at this level.  Adj EBITDA will be in mid 30's most likely in 2015.  FCF given the strong deferred revenue levels, after they refinance the debt for 8% or better, more than supports the equity today.  I get to at least a $10M number or 15x for a company in the midst of a major transformation and about to turn to growth.  Also, this accounts of no synergies to a buyer that could remove as much as $10M from corporate overhead.

    If we look out to 2016, what could we see?  The company is forecasting slight order growth in 2015 and a return to growth at VSL in 2016.  Assuming LAZ grows even 15% in 2016 the total company should grow high single digits in 2016 and I would expect revenues of minimum of $150M with 80+% being technology based.

    You can go through my writeup to see takeout multiples but I think a very fair metric would be 10x EBITDA (accounting for no deferred revenue cash flow or corporate overhead synergies).  Assuming a 30% EBITDA margin which seems fair given how much of the company will be tech based, thats an EV of $450M or $360-$370M in equity which is $8 a share.  This would also be 3x sales which would be well below the 4-5x takeout multiples cited in my writeup.  I consider this math all the base case as it has LAZ growth slowing to 15% from 25-30% and has no value for corporate overhead synergies.  

    In the upside scenario, can easily get to $10 a share.  In the "bad" scenario I go back to my writeup where I do sum of the parts and I think you can easily get to $250M in total value from LAZ, EL, and VSL.  Valuing LAZ at just $175M is just 6X 2015 segment EBITDA.  I think the business is probably worth 12x at year end which = $350M + $75-$100M for VSL and EL and you get the same $450M EV.

    Only way to lose money from here, in my opinion, is if LAZ orders slow to single digits and then decline in 2016 AND VSL does not get turned around.


    SubjectRe: seriously, this is really cheap
    Entry05/18/2015 10:04 AM
    Membermrsox977

    we agree and have been adding.  this story has taken forever to play out, but it feels like a corner has finally been turned, with a little help from the industry multiples too, of course.


    SubjectRe: Re: Re: Re: Re: Re: Re: news?
    Entry07/06/2015 08:26 PM
    Membermrsox977

    to think that I posted the original write-up in 2010 when the market cap was the same as is it now...!


    SubjectRe: 2016 math - 10% FCF yield at inflection point for growth
    Entry12/15/2015 01:28 PM
    Membermpk391

    magic-  I think the valuation metrics you cite are begging for a growth forecast (or some M&A comps).

    In my worst case scenario, where the major engine of growth - Learning A-Z - slows to 10% bookings growth in 2017, I see FCF to the enterprise (= cash net income less taxes) growing ~24% yoy in 2018.  That's the worst-case growth that a strategic acquirer will be looking at in 2017.  Paying 9.1x EV/2016E cash net income today (or 7.2x after $10m of merger synergies) seems cheap to me.

    I doubt Learning A-Z growth slows down to 10%, considering the history of Learning A-Z bookings growth

     


    SubjectNOL
    Entry12/15/2015 01:40 PM
    Membermpk391

    majic-  small point, but I think $1/share for the NOL is too high.  By year-end 2016, I think all but the ~$27m of restricted NOLs (annual useage limited to $7.1m/year) will be used up. 


    SubjectRe: Re: Re: Re: NOL - mpk391
    Entry01/24/2016 03:11 PM
    Membermpk391

    thought I was the conservative one here, but I have $37M cash income in 2016, so I guess not.  by the way, I think taxes kick in midway thru 2018 (not 2017 which I said earlier)

    on another topic, I read thru the 2009 - 2012 conference calls the other day, and the main takeaway for me was just how dependent this business used to be on certain federal subsidies.  For example, Reading First used to be $50m of sales and is now gone.  This really hurt the Voyager biz (specifically Early Literacy Intervention).

    Does anyone know of a similarly tight relationship between any federal program and specific product line?

    yet another topic - does anyone expect a decrease in capex as a % of sales as this company completes its transition to "tech-enabled" stuff?  I guess I'm talking about VSL here, since the rest is already tech.

     


    SubjectQ4 Results; worth $8+ by year end
    Entry03/03/2016 10:31 AM
    Membermajic06
    Q4 was as expected.  Company bookings up 9% and LAZ bookings up 30%.
     
    2016:  LAZ will do $80M in bookings and $66-$67M in revs and $35M in Adj EBITDA. before corp expense.  LAZ is worth b/w 300 and 500M.  5x bookings = $400M.
     
    Company will do Low double digit bookings growth vs. 5.6% in 2015 and VSL will return to bookings growth for the first time in 7 years.  Learning A-Z will be more than 50% of company bookings in 2016.
     
    In 2015 did $36.7M in operating cash flow and 20M in Cap Ex for $16.7M in FCF vs. just $6M in 2014.
     
    In 2016, interest expense will decline by 7M+ so FCF will start at $24.7M.  Cap Ex will be 1.5M higher so $23.3M  Can't see how they don't come close to hitting my $30M # and probably beat it by a few million.   Don't need a lot of things to happen to get the $6.7M plus the cap ex is mostly growth cap ex and shouldn't really be dinged.
     
    $58M in deferred tax asset but still has full valuation allowance.  
     
    Hard to see how the whole company isn't worth an EV of $500M at year end; that's $450M net of tax asset.  Say LAZ worth $350M and EL+VSL worth $100M?!?!  More likely EL worth $75M or 3x sales or 10x Adjusted EBITDA and VSL worth $75M-$100M or 1x sales and 5x Adj EBITDA (turning around).  
     
    $14M in corporate overhead; half will go away or more w/ acquirer - I will capitalize the rest at 5x and knock them $75M.
     
    So LAZ 400M; EL 75M; VSL 75M; Tax Asset 55M Corp -75M = $530M EV - 70M year end debt  = $450M equity = $10 share.  Every 50M you want to knock LAZ take $1 off.  So $8/share if LAZ $300M.  Rest of my #s not aggressive especially if VSL turns around and grows.
     
    Today the stock is $4.50.  It's FCF yield on 2016 (not taxed) is 15% with leverage well under 2x at year end.
     
    It seems hard to see how you lose money at $4.50 and seems like we have a natural exit sometime between December 2016 and December 2017 when VSS exits given that's well over 10 years for their fund and position.  I think they want to wait for Q3 2016 before they market and might even wait for Q3 2017.  Hard to sell right when inflection is hitting, want at least a year of the new numebrs and growth to get a better multiple.  
     
     

    SubjectRe: Q4 Results; worth $8+ by year end
    Entry03/03/2016 11:04 AM
    Memberzzz007

    Not involved, but FWIW VSS is in massive internal disarray.  Partners (internal VSS partners, not LPs) are suing each other, lots of bad blood, fights over control.  Not really sure how this impacts liquidity event for ABCD but figured I'd mention it.


    SubjectRe: Re: Q4 Results; worth $8+ by year end
    Entry03/03/2016 11:15 AM
    Membermajic06

    Thanks for color.  I've always thought the firm was a mess but didn't know it was "CODE RED" mess.  They haven't made a new investment in years and haven't had money to invest in years.  It's just a baby sitting operation and a dead man walking firm.  

    ABCD is by far the single most important investment they have.  I do not know what the firm being in shambles means either but luckily the business is booming so I don't think they can mess it up besides not selling if things look to turn.


    SubjectRe: Re: VSS
    Entry03/10/2016 01:25 PM
    Membermajic06

    Never saw that Urban...that is the fund Cambium is in.  Interesting.  Yah, it would be seperate I think.


    SubjectRe: Re: Re: VSS
    Entry03/10/2016 04:17 PM
    Membermpk391

    Yes, the structured capital fund is seperate.  VSS is getting out of the buyout biz entirely and focusing on this structured credit stuff. 

    apparently the secondary market for PE is pretty frothy these days and I wonder if the ICG deal is as much about placating their LPs with an early liquidity option as it is about buying more time to exit their investments.  In any case, I've read that VSS was earlier considering trying to market Communications Partners IV in two pieces - one with ~$240m NAV that includes the 4 "good" investments (Cambium is by far the largest of these), and one with ~$40m NAV that includes the 5 "bad" investments. 

    I would imagine that VSS would rather wrap up CP IV sooner rather than later now that their whole focus has changed and also because I'd imagine their buyout team is pretty small these days.  Wishful thinking!


    Subjectrecent weakness
    Entry04/12/2016 04:35 PM
    MemberMason

    any thoughts as to why the stock has been weak recently despite the strong results over the last couple of quarters?  


    SubjectRe: Re: Re: recent weakness
    Entry04/12/2016 06:13 PM
    Membermajic06

    I'm sorry for your confusion and also sorry I didn't send you my updated model.  Why didn't you send me a year end bonus though?  Just kidding!

    Nothing has changed.  Those are my conservative price targets.  All the math is the same as post # 60.  Given I have 1/3 of my portfolio in this stock, I care more about the risk then the reward in risk/reward and I simply don't see how I lose money at $4, even if LAZ stops growing which is a ridiculous assumption.  The "bear" case would be it grows 10-15% this year (vs 20% guidance and 25-30% growth ever year for a decade) and then only grows 5-10% in 2017.  Even in that situation, I think the stock is worth $6+ by end of 2017 - even if no sale.

    I have not sold stock and have bought some in the last 2 months even though I don't post every buy on VIC which makes it seem like I'm pumping an illiquid stock.  I only posted today in response to a question.


    SubjectRe: Re: Re: Re: recent weakness
    Entry04/13/2016 09:28 AM
    MemberMason

    thanks for the update.  agree that the risk / reward here is pretty compelling.  


    SubjectRe: Re: Re: Re: Re: Re: recent weakness
    Entry04/14/2016 02:15 PM
    MemberMason

    I also bought from that dark pool seller yday.  volume was over 4x higher than normal on no news. given stock going straight up today, seems like that seller may be done.  who knows.  


    SubjectRe: Re: Re: Re: Re: Re: recent weakness
    Entry04/18/2016 05:07 PM
    Membermpk391

    I would argue that Cambium doesn't even need to show growth at VSL, just stability.  I modeled a 1% growth rate in bookings at VSL and slight deceleration at the other two segments (just being conservative) and still get ~20% EBITDA growth.

    This company screens terribly but that's about to change.  2016 should be the first year in forever that consolidated sales will show significant growth.  also interest expense gets cut in half starting 2q16.  could be a catalyst

    has anyone asked mgmt about a buyback?  so what if liquidity is already thin?  the PE holders can't really exit via the open market anyway.

     


    SubjectRe: Re: Q1
    Entry05/06/2016 12:10 PM
    Membermrsox977

    the stock is very cheap. Q1 is less than 14% of total revenue. They said on conference call that April numbers tracked their full year guidance or better.


    SubjectRe: Q1
    Entry05/06/2016 03:17 PM
    Memberhkup881

    verbiage: "overall year-to-date bookings now higher than the same time in 2015. Learning A-Z in particular has now surpassed prior year same period bookings and is starting its projected growth trajectory for the year" so... yeah

     


    SubjectRe: Re: Re: Q1
    Entry05/10/2016 01:58 PM
    Membermpk391

    I agree Q1 weakness probably just noise.  in other news, VSS sealed the deal with ICG.  the new fund will have a 5 year term (not sure what possible extenstions there might be, if any)

    so no more guaranteed sale by YE17.  oh well.  over the years I've seen a lot of "hard" catalysts turn out to be not so hard after all.  but we do have strong non-cyclical earnings growth, which is the most reliable driver of share price appreciation in the long-run


    SubjectRe: Q2 review
    Entry08/11/2016 02:18 PM
    Membermrsox977

    We largely agree though think that ascribing no value to the tax asset is probably too conservative.  There has been a seller at the $4.80-$4.99 level that will eventually go away/be done.


    SubjectRe: Q2 review
    Entry08/12/2016 02:03 PM
    Memberstraw1023

    majic,

     

    Thanks for update.

     

    Not a first-order issue, but are you surprised that according to guidance, we are not going to see Adjusted EBITDA margin expansion? I would have thought that incremental revenue would have a significantly higher incremental EBITDA margin. There are lots of moving parts across the three businesses and in going back and forth between revenue and bookings, but given the bookings/revenue growth guidance, I had expected to see a bit of operating leverage.

     

    thanks


    SubjectRe: Re: Q2 review
    Entry08/12/2016 02:58 PM
    Membermajic06

    I'm a bit bummed we aren't seeing margin expansion but as long as it's a result of opex growth spending (rather than say affiliated marketing spend to buy revenues) I don't see it as a problem.  

    The company is still very much in the middle of a transition and as long as they grow orders this year and next - even without margin expansion we will make a lot of money.


    SubjectGreat Presentation/Q3
    Entry09/08/2016 11:27 AM
    Membermajic06

    First, sorry mpk391 I have no idea what makes LAZ work vs the competition.  Basically said so in my original writeup.  

    Management presented today and showed a real passion for the business.  If you own you should listen:

    http://wsw.com/webcast/dham11/abcd/

    CFO wouldn't comment on interim Q3 but basically re-iterated 2016 which means Q3 is coming along fine.  


    SubjectRe: Re: LA-Z
    Entry09/08/2016 02:02 PM
    Membermajic06

    hkp-

    i agree.  i don't think this is being run at all for a near term sale which is fine with me.  one thing i've noticed is that by year end 2017, i estimate they will still have near $40M of the tax asset left, worth 80 cents a share undiscounted.  they will get little to no value for that in a sale so it makes sense for them to continue turning around VSL, growing LAZ and EL, and using that tax asset up.

    at the end of the day, you're hoping the board listens to John when he tells them it's time to sell.  he is very incentivized as he owns 500k shares which is very material to his net worth.  he's not a long time corporate executive - this is his first time as a CEO.

    as i've said many times in this thread, i find it hard to see how we lose money at these levels and i can conservatively see $8+ by year end 2017 even if everything doesn't go perfectly as planned.

    if they do execute on VSL turnaround and LAZ continues to grow by 20%+ in 2017; 10+ is possible.


    Subjectrights plan
    Entry09/22/2016 05:44 PM
    Membermpk391

    forgive my ignorance, but does anyone understand why such a positive share price reaction to this announcement?  I've seen numerous companies adopt such plans but never before with such a reaction from the market.  could people be assuming mgmt did this after being approached by an acquirer?  if so why?  aren't these rights plans just "best practices" for any company with NOLs to protect?


    SubjectRe: Re: rights plan
    Entry09/23/2016 12:48 PM
    Membermajic06

    This is much ado about nothing.  I spoke to company and it's really just a preventive measure now that they will start to utilize the NOLs.  I guess the 50.1% turnover calculation looks through to the LPs so VSS's 70% stake had a bunch of turnover when they recap'd the fund this year.  There really isn't anything more to it than that.  

     

    Since VSS owns 70% there is no need to put in anti-takeover measures - they call the shots.


    Subjectmore color on rights plan
    Entry09/28/2016 10:37 AM
    Membermajic06

    Finally was able to read the WSJ PRO article on VSS's fund recap.  To read it click here:

    https://t.co/lyoGMPm7ND (yes yahoo search lol)

    and click the penews.com link about 4 or 5 down.

    Pretty interesting stuff.  Basically 2/3 of the LPs sold their stake.  Since VSS owns 70% of the company, that means over 40% of Cambium's outstanding shares traded that single day.  Now we clearly know why they put this plan in place as even 1 public shareholder filing at 5% could trip the 50% mark.  Hopefully this plan keeps the NOL in place till it gets utilized.  

    Also interesting is the new owner paid under $3 a share for ABCD.  They got the 3/31/15 price in May, 2016, and got a 10-15% discount.  So paid $2.75-$2.85 when the stock was trading $4.50.  Talk about a sweet deal.  This is good news for us I think as they will be receptive to selling the company at a fair valuation and not wait for homerun prices given what VSS's average price was (estimated $5.50-$6).  

    Still, I wouldn't expect a sale anytime soon.  If I was in charge I would continue to turn around VSL and use the NOL up first.  I would be surprised if they sold in 2017 and think 2018/2019 more likely unless someone comes knocking at their door.  Doesn't mean we won't have a transformative event before then though, whether it be a major acquisition to lever up the balance sheet or a one time dividend in late 2017.


    SubjectQ3 review
    Entry11/10/2016 11:06 AM
    Membermajic06

    $ABCD Q3 review


    Gonna keep this short. 

    LAZ: Q3 was good and I'm happy with it. That said, I'm disappointed with the guidance. Q4 will be lousy and it's not a specific quarter that bothers me but the full year # of 17%. In a year where they took price, actual order volume will be much less than the 25% they did in 2015. My 2017 #'s in LAZ are now 10-15% growth and that could end up being generous. 

    VSL is the biggest disapointment but there is not a lot of value assigned to this division. It was supposed to grow in 2016 and will decline 15%. Further, tech enabled products declined in Q3. I have written down the value of this division (more below).

    EL is doing great but is small. Won't waste my time on this. 

    Valuation: VSL worth $25 Million. EL worth $50 Million. Both conservative to me. 

    LAZ worth b/w 3 and 5x bookings. $75M in 2016 bookings. $225-$375M.  I think 3x is very conservative; can go through my original writeup to see comps.  This is a high margin, good business.

    $75M in year end net debt. Gets you equity of $225-$375M. $4.50 to $7.50. Also have to add $1 for NOL.

    So stock is not expensive by any means but will not go up until they show us they can grow LAZ >15% in 2017 or actually turn around VSL in 2017.

    They were supposed to do double digit bookings growth in 2016 company wide and will do 3%. It's disappointing. My 2017 bookings growth # is low single digits to using 10% for LAZ, -10% for VSL, and 15% for EL.

    Will still end 2017 with a cheap stock. $40M in net debt. 

    The exit has always been a sale. No idea when they decide to pursue one.  In the meantime it's generating 60+ cents in annual FCF as we wait.


    SubjectRe: Q3 review
    Entry11/10/2016 12:50 PM
    Membermrsox977

    Good thoughts.  We were also disappointed by the guidance but feel that the Company remains on the right track.  EL and LAZ are worth more than your conservative estimates and the stock is very cheap at these levels given the FCF.  We are very confident in Management as well.


    SubjectRe: Re: Q3 review
    Entry11/10/2016 01:12 PM
    Membermajic06

    The margin of safety is very strong at $5.  My concern is serious upside (to $10+) is limited unless and until they turn around VSL.

    I'm also concerned about organic (non price) LAZ growth in 2017.  If they surprise us, stock will work nicely.  If not, stock is fine - just not a lot of upside w/o a sale.  

    I still own of course and it's my largest position.

    John is fantastic but clearly misread 2016.  They missed March guidance by a large margin.  That said, I also have confidence in him and confidence in board selling company before it's too late (if that ever gets there).


    SubjectRe: Re: Re: Re: Q3 review
    Entry11/11/2016 12:01 PM
    Membermajic06

    No, I don't think it's the price increase.  It's my understanding the "net" effect of the price increase adjusted for discounts etc. is more like 3-5% not the 10%.  

    I think it's law of large #s.  Despite them touting low penetration, you have to think that it's getting up there.  

    The company is still very bullish on LAZ.  You can see by the large # of jobs they are advertising on website which has gone up huge in the last couple months.

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