Blackboard Is Losing Customers, but What Does It Mean?

After Blackboard’s recent earnings announcement and conference call, Jim Farmer and I had a chat about what we learned. One thing that struck us both was that Blackboard’s total number of LMS license customers is declining. Jim, being handy with Excel, put this chart together:

There is a clear long-term trend toward reduced number of total LMS licenses. Furthermore, Blackboard reported a slight decline (by three licenses, compared with a gain of 45 licenses in the same quarter of the previous year) of Enterprise licenses from last quarter to this quarter. At the same time, they are still hitting their revenue and profit numbers, and they have not guided analyst expectations lower. So what’s really going on here?

As is often the case when analyzing the data from publicly traded companies, the answers aren’t entirely clear. I have some thoughts, though, which I’m happy to share. Before I do, I want to thank Blackboard Vice President, Investor Relations & Global Treasury Michael Stanton, who was as helpful and forthcoming as he is legally allowed to be under SEC regulations in answering follow-up questions that I sent to him on the topic.

What’s In the Numbers?

The first thing to understand is that the Enterprise license numbers include all WebCT licenses–both Vista and CE. According to Mr. Stanton, Blackboard hasn’t lost a single Vista customer since the acquisition. So any downward pressure on the Enterprise license numbers would be from losses of either Blackboard Enterprise or WebCT CE customers.

Update: I received an email from Mr. Stanton clarifying that when he said they “hadn’t lost a single WebCT Vista customer” he was referring only to the previous quarter. They may have lost “one or two” Vista customers since the acquisition in February 2006, says Stanton.

And since Blackboard’s dip in Enterprise licenses didn’t seem to hurt it’s revenues, we can guess that the majority of the decline was due to loss of WebCT CE customers. (This is just a guess based on what little we know; there are lots of details we don’t know about Blackboard’s revenue mix that could mask a larger loss of Blackboard Enterprise licenses.)

The big loss appears to be unambiguously in Blackboard Basic licenses. One factor that theoretically might have contributed to this loss is consolidation of Basic licenses under a consortial Enterprise license. In this case, the loss of a license wouldn’t equal the loss of a customer. But according to Mr. Stanton, the number of Basic license losses due to consortial consolidation in the last year was “immaterial” because Blackboard currently only supports a very small number of consortial licenses. So it looks like the drop in Basic licenses really does represent a loss of customers.

What Does It Mean?

There is no evidence at this time that Blackboard is losing its most lucrative Blackboard Enterprise or Vista customers. And to a certain extent, the loss of the lower-end customers could actually be beneficial to Blackboard’s financials. As we have pointed out previously on e-Literate, Blackboard’s explicit business strategy has been to increase their average revenues per-customer. I don’t know what their per-customer revenues are today, but anecdotal evidence suggests that it is well above the $30K that it was in October of 2005. Since every customer represents expenses as well as income, losing the lower-revenue customers in favor of a smaller number of high-revenue customers is a fairly common business strategy (although I emphasize that I have never heard anyone at Blackboard say that they are no longer interested in the lower end of the market).

Update: An e-Literate reader sent the following slide, which is apparently from a Blackboard investor briefing in 2006:

So at this point, there is nothing in their financials that provides strong reason to believe that Blackboard won’t continue to hit their projections, which are fairly robust.

However, there are two factors that this analysis doesn’t capture. The first is the loss of growth opportunity as customers who are upgrading from Blackboard Basic move onto other platforms rather than upgrading to Blackboard Enterprise. LSU’s recent move to Moodle is an example; they had both Blackboard Basic and a home-grown LMS on-campus. The fact that they chose to move rather than upgrade suggests that the approving noises in the investment community about Blackboard’s advantage as a so-called “monopoly” may be overstated. Second, we know that university sales cycles are long, and that transitions tend to happen in the middle of the year, when most students are on break and when most contracts come up for renewal. And our visibility into who is looking to replace their system (whether it’s Blackboard or any other system) is pretty low. So the numbers could take a dramatic turn (up or down) mid-2008.