Blackboard, Inc. Analysis, Part 1: Software Licenses

This is a guest post by Jim Farmer.

As the dominant supplier of learning system software, Blackboard Inc. is “mission critical” to colleges and universities in the U.S. It has been more than two years since Blackboard completed the acquisition of WebCT. Reviewing Blackboard’s performance may provide some insight.

Context

On 12 October 2005 Blackboard announced it would acquire WebCT; its largest competitor in higher education. [1] In a briefing to analysts, Blackboard described the effects of the merger. Blackboard CEO Michael Chasen reported Blackboard had revenue of US$111.4 million in Fiscal year 2004 and WebCT had US$38.4 million. Blackboard had 2,229 clients; WebCT 1,480. Blackboard’s license renewal rate was 90+% and WebCT’s about 88%. [2] Blackboard successfully argued the merged company would not be dominate if the broader software market for training and primary and secondary education—corporate and government training and K-12—was used for comparison. The merger was approved by the U.S. Department of Justice and completed 28 February 2006. [3]

Blackboard also considered Desire2Learn and ANGEL Learning competitors.[4]
Data on the merged companies appeared in Blackboard’s public financial records beginning with the first quarter in 2006. This analysis begins from March 31, 2006, the last day of the calendar quarter. [5]

This analysis, based on public documents prepared by Blackboard Inc, focuses on the learning systems marketed by Blackboard. They include the basic learning system and the enterprise learning system. Blackboard has several product lines, most related to the learning system in some way.

In the 12 October 2005 analysts’ briefing Blackboard identified numerous “cross sell” and “up-sell” opportunities. These included upgrades from basic to enterprise system and cross-selling Blackboard products to current clients. Moving from basic to enterprise system—“up-selling”— increases revenue per client and total revenue.

The WebCT learning system was considered an enterprise product and included in the published counts beginning with March 31, 2006. At the end of 2007, Blackboard counted 5,227 clients including estimated numbers of licenses for the subsequently acquired NTI Group. The NTI acquisition was completed on January 31, 2008. Updated clients counts have not been included in subsequent quarterly earning reports.

Market Segment	Number	Share
U.S. Higher Education	2,082	39.8%
International Tertiary Education	932	17.8%
U.S. Primary and Secondary	1,707	32.7%
Commercial, corporate and government	506	9.7%
Total Clients, December 2007	5,227

Blackboard Inc. has several licensed software systems.

Product	Description
Learning System	Web-based software system that offers industry leading course management. [7]
Community System	enables educational institutions to support formal and informal communities online in an easy, efficient and secure manner. The Blackboard Community System also provides a one-stop academic gateway to facilitate better service to all constituencies. [8]
Content System	[Makes] it easier to manage learning content, digital assets and e-Portfolios in an enterprise learning environment. [9]
Outcomes System	enables the planning, measuring and improving of outcomes and providesa comprehensive set of instruments for student and program assessment [10]
Portfolio (now included in the Content System)	allows students and faculty members to collect, store and package milestones and proof-points of their academic, creative, or professional progress.
Transaction System	helps address numerous challenges by enabling millions of commerce and access transactions on campuses every year. [11]
Connect (NTI)	the Connect‑ED service for Higher Education offers a bundled set of emergency, community outreach, and survey notification tools [12]

Blackboard has other software products that incorporate several of these systems, supplement these systems, or facilitate the use of non-Blackboard systems.

Learning Systems Licenses

The March 2008 license counts are given in Table 3.

License Type	Number
Basic	886
Enterprise	2,335
Hosted Services	571
Total	3,792

Although the total number declines because of the decline in basic licenses this does not imply the associated revenue declined. Those licensing the Basic System could (1) migrate to the Enterprise license and, according to Blackboard officials, many did, (2) could have migrated to Managed Hosting, or (3) discontinued use of the product.

According to CEO Michael Chasen, Blackboard’s current renewal rate is 92%–four percent more than WebCT and two percent more than Blackboard in October 2005. Analysis of Educause survey data for 2002-2004 reveals: “The average course management system has been installed for 3.8 years and 13% expect to replace it within three years.” “Analysis of the data shows institutions are [in 2004] changing their course management systems sooner than expected replacement.” 4% planned replacement each year while 13% were replacing the course management system. Because Blackboard has the largest number of licenses, if rates for all are equal, then Blackboard when dominant will lose licenses until equilibrium is established at a lower number—the same number as any other supplier.

During the August 6th Earnings Call, Chasen said: “Our renewal rate for the quarter was in line with where we ended 2007 at 92% and we expect that our renewal rate will remain strong throughout the remainder of 2008.[14, page 4] Another supplier has estimated the renewal rate for their learning system at 98%, [15]

An eight percent non-renewal means Blackboard would have to sell 258 licenses per year in order to maintain the current 3,221 active licenses.

Another way to view the growth in licenses is to compare the number each quarter to March 31, 2006. This change is shown in Figure 2.

Although Managed Hosted Services were offered before, data on the number of clients were first published for March 2007. The growth curve for hosted services was computed from that date.

The quarter-to-quarter change in number of software licenses each quarter is shown in Figure 3. The growth rate for enterprise licenses appears to be decreasing. This could be because of fewer basic licensees upgrading to enterprise licenses, saturation of the market, or marketing effectiveness. An analysis of Educause Survey data included in their annual reports by instructional media + magic, inc. reveals, “Blackboard Inc. is the dominant supplier of course management systems—76% of the responding colleges and universities. No other proprietary or open source system exceeds 5% of the market represented by the respondents. [13]

The change in Hosted Service clients Quarter-to-Quarter is shown in Figure 4. The rate has always been positive and highest before the beginning of the calendar and academic year.

Blackboard Product Lines

The same analytic approach can be used to compare learning systems to other Blackboard products. The results are shown in Figure 5. Pro forma counts from the NTI acquisition of Connect are available since March 2007. The Blackboard Outcomes System was introduced in the second quarter of 2007. The sharp increases in the sales of new products suggest “cross selling” a new product into the current client base has higher growth than Blackboard learning systems.

Computing the average quarter-to-quarter change—that is the compound growth rate—is summarized in Figure 6. From these data it appears new products have a higher growth rate than products introduced earlier. This may also be influenced by whether they complement another Blackboard product.

The data suggest that Blackboard’s strategy of acquiring market share—WebCT—and acquiring products—NTI Connect—does increase the number of licenses. Blackboard also has the opportunity to expand the customer base beyond higher education to K-12 and the training market. If so, the completion will be different and formidable.

Notes

[1] See the press release “Blackboard and WebCT Announce Agreement to Merge,” 12 October 2005.

[2] From Blackboard’s “WebCT Inc. Transaction Briefing,” October 12, 2005.

[3] See the press release “Blackboard Inc. Completes Merger With WebCT, Inc.,” 28 February 2006.

[4] From comparisons shown in Blackboard’s “e-Learning Competitive Landscape,” 20 October 2004.

[5] The primary documents for licenses used for this analysis were: “Estimated Client, License and Contract Value Metrics as of June 30, 2007,” 31 July 2007 (includes all 2006 quarters) and “Estimated License and Contract Value as of June 30, 2008, 6 August 2008. “Estimated Pro Forma License, Contract Value and Headcount Metrics as of March 31, 2006,” 8 May 2006, includes data for 2005, but was not used because comparable data from WebCT was not available.

[6] From “Estimated License and Contract Value as of June 30, 2006,” 8 May 2006, for the end of the fourth quarter 2007. License information for the two quarters in 2008 was given, but the client count was not updated.

[7] From “Blackboard Learning System (Release 6) Product Overview White Paper,” 1 August 2002. See also “Blackboard’s Role on the 21st Century Campus: Products and Services Overview,” 7 February 2007 for additional information.

[8] From the brochure ‘Blackboard Community System,”

[9] Descriptions of the Content and Portfolio systems were taken from Deborah Everhart, “Blackboard Content System Product Overview White Paper,” 23October 2003.

[10] From “Blackboard Outcomes System,” 17 January 2007.

[11] From “Blackboard Transaction System,” 19 December 2007.

[12] From the brochure “Connect-ED,” 12 January 2007. See also “Connect ‑ED® for Higher Education,” The NTI Group, 8 June 2007.

[13] James Farmer, “Software Trends in Higher Education: 2002-2004,” instructional media + magic inc., 27 November 2006.

[14] Quotations from the 6 August 2008 “Blackboard Inc. Q2 2008 Earnings Call” are either taken from the transcript provided by SeekingAlpha or notes taken from the recording by im+m staff. The page numbers refer to the transcript using large type—that is are more than the SeekingAlpha transcript as displayed by the typical Web browser.

[15] The source prefers to remain anonymous. Both Information Associations and SCT had renewal rates for their administrative software between 95 and 98%.