Sector financial performance:

This company, a provider of technology-based educational system and software for public schools’ management, academic support, curriculum, and other service, has been grouped into online education system &software sector in education industry.

There are many uncertainties in school enrollments and mix of enrollment among school districts. It seemed that, while the growth in enrollment of schools had been positive, it generally presented a downward trend between 2015 and 2017 as indicated by some of typical companies’ data. And during the same period of time the revenue of companies has been significantly impacted by the deceasing enrollment while increased funding of education partially offset the decrease in enrollment.  However, things seem to have changed in 2018 as indicated by large increase in enrollment of schools and revenue based on some typical company’s data.

We saw an improved gross margin (36%) for a typical company who focus mainly on public school management system and services. The typical SG&A as percentage of sales of companies in this sector is around 32% and, correspondingly, the typical operating margin is around 3%.

According to our analysis, the typical companies’ enterprise price/cash flow ratio is about 42 with a debt/asset ratio of 0%.

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Company performance:

The majority of this company’s revenue comes from its online system products for public schools, the performance of which depends heavily on enrollment of school. Data indicate that the enrollment of its public school clients fluctuated and presented a downward trend in the past several years. However, the enrollment jumped by about 5% in 2018.

The fiscal 2018 compared with 2017(ended 20180630)

Revenue of public school system products increased by about 6.4% primarily due to the increase of 4.8% in schools’ enrollment and increase in funding. Revenue of non-management software products decreased by about 16% due to decrease in enrollment of those schools.

The first three months of fiscal 2018 compared with same period of 2017

Revenue of public school system products increased by about 2.1% primarily due to the increase of 2.4% in schools’ enrollment and increase in funding. Revenue of non-management software products decreased by about 11% due to decrease in enrollment of those schools.

Fiscal Year 2017 compared with 2016

Revenue of public school system products increased by about 2.3% primarily due to the increase of 0.8% in schools’ enrollment and increase in funding. Revenue of non-management software products increased by about 10% due to primarily expanded service.

Fiscal Year 2016 compared with 2015

Revenue of public school system products decreased about 12% primarily due to the decrease of 10% in schools’ enrollments. Revenue of non-management software products increased about 10%.

Its gross margin went up by about 100 basis points to about 37% in 2017 since 2014 primarily due to the decrease in amortization in publishing rights offset by increase in products costs due to sales mix. During the same time, its SG&A as percentage of sales has also increased by about 100 basis points and its operating margin thus went flat at 2% in 2017(based on 12 months trailing data).  In 2018, gross margin was down to about 35.5% due to increased personnel expenses. However, due to improved SG&A% as a result of expense cutting, we still see an improved operating margin in 2018(3%).

Stock price

This stock currently has a companies’ stock price/cash flow ratio of 42 ($18). We think that its stock is being relatively slightly undervalued considering its recent increase in school’s enrollment while the relative high price/cash flow ratio and uncertainty in revenue of its core products.