|Shares Out. (in M):||45||P/E||-||-|
|Market Cap (in $M):||85||P/FCF||-||-|
|Net Debt (in $M):||125||EBIT||0||0|
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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.
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 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:
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.
'14 42M estimated minimum
Segment EBITDA margin has been amazing too.
'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)"
(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.
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.
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:
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.
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.
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.
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.
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.
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:
LINKS TO LEARNING A-Z REVIEWS
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.
A sale of the company in 12 to 36 months.
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