Moody’s Downgrades Blackboard Debt, Focuses On Learn Ultra Delivery

In Spring 2015 Moody’s affirmed their B2 rating for Blackboard’s nearly $1.4 billion in debt as part of the company’s acquisition of Schoolwires, with a negative outlook for the ratings (meaning there was risk of a further downgrade). Three weeks ago, that downgrade took place.

(“Moody’s”) downgraded Blackboard Inc.’s Corporate Family Rating (“CFR”) by two notches to Caa1, from B2, as well as its Probability of Default Rating, to Caa1-PD, from B2-PD. Moody’s also downgraded Blackboard’s $135 million first-lien revolving credit facility and $920 million (remaining balance) first-lien term loan to B3, from B1, and its $378 million second-lien notes to Caa3, from Caa1. Moody’s also changed Blackboard’s outlook to stable, from negative.

Put in regular terminology, the previous B2 rating indicated that Blackboard1 had “the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitments.” But with the new Caa1 rating, Blackboard “is currently vulnerable, and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments.”

The rationale for the downgrade is that Blackboard holds a very high amount of debt (now more than $1.4 billion) relative to its earnings, and revenue growth is not coming from its core markets.

Blackboard’s core North American Higher Education (“NAHE”) and K-12 units, representing 56% of total revenue, continue to show weakening top line results, suggesting that the success of its new Ultra user interface is still uncertain. Blackboard’s international segment, also weak, has shown modest stabilization of late. Only the campus enablement segment, consisting of recently acquired educational community communications and transaction processing services and representing a quarter of Blackboard’s revenues, has shown healthy, reliable revenue growth. Some ratings support is provided by Blackboard’s high level of revenue visibility, with three quarters of 2017 revenues coming from recurring products and services, and underpinned by its 90% renewal rates in 2017. Both of these measures, however, represent declines from prior years.

The turnaround is stalling, and the credit cards are maxed out. Blackboard has continued to cut costs, including “late-year layoffs”, and Moody’s expects “overall revenues to be flat to down slightly in 2018 as competitors have stifled market share gains”.

While this is not good news for Blackboard, the ratings action does give the ed tech community additional insight into the operations and health of the company. Blackboard total revenues are between $700 – $720 million, with earnings (EBITDA, adjusted by Moody’s) between $160 – $180 million.

And in the rationale for the ratings comes specific commentary on Learn Ultra.

Software renewals have been weaker than expected in the NAHE [North American Higher Ed] segment, as the company strives to sell its latest learning management system (“LMS”) software enhancement, Ultra, into a crowded and very competitive marketplace. Given operating seasonality tied to the academic year, the behind-schedule launch of Ultra, in mid-2016, meant that measurable revenue and EBITDA [Earnings before interest, tax, depreciation and amortization] contributions from it began to be realized only in the 2017 academic year. There are indications that Ultra is gaining traction relative to Canvas and Desire2Learn, and Moody’s believes the packaging of Ultra with transaction- and payment-processing services may support its competitive positioning. But the success of Ultra is far from certain, and the threat from existing and possibly new competitors remains high as barriers to entry, specifically for web-based software, are relatively low. Meanwhile Blackboard, with a brand new CFO, is focusing its research, sales and marketing, and product development resources in an effort to ensure Ultra’s future.

We have covered the 2014 announcement and ongoing fate of Learn Ultra here at e-Literate, and claiming a “launch of Ultra, in mid-2016” is generous at best. At that point there were educator previews with no ability for institutional adoptions. Fall 2017 is the closest to what I would say is an actual launch. As of a January, 2018 meeting Michael and I had with Blackboard’s management team, they claimed dozens of schools actively piloting Learn Ultra2, and their flagship customer University of Phoenix is beginning rollout of the LMS starting this month.

What is going well at Blackboard is the movement to a SaaS (software as a service, aka ‘the cloud’) model for the LMS – for both the traditional experience and Ultra experience. As of January there were 284 schools on Learn SaaS and 49 others in migration. In a purchase-only report, Moody’s acknowledged this strength and noted the investment that Blackboard is making in this area (more than $50 m expected in 2018).

While the company has shown good progress in migrating its legacy Learn customers onto the appropriate SaaS-based platform from which those customers may choose, in turn, to migrate to Ultra, Blackboard’s efforts to make those transitions smooth for its customers have entailed elevated capital expenditures, which will likely continue through 2019, cutting into free cash flow.

Put this all together, and 2018 is the year that Blackboard needs to transition from ‘wait until Learn Ultra is ready’ to ‘Learn Ultra had better lead to increased sales’.  I have been impressed with the new management team’s transparent approach to dealing with analysts, and with their honest approach to understanding the problems they need to solve. But the company needs to deliver, and this is shaping up to be a newsworthy year for Blackboard, for good or ill. There’s a lot to watch here.