By Phil Hill
Over the past two weeks Blackboard had another round of layoffs, likely due to the company missing financial targets. While one estimate places the number at roughly 200, from what I have heard the number is closer to 90 – 100 people let go. I asked the company for commentary on the layoffs and associated reorganization. By email they declined to comment on the number of employees let go but added this comment:
These changes included the elimination of select positions across the company. We deeply appreciate the contributions made by the affected employees and are supporting them in their transition.
This is not the first layoff at Blackboard since they were taken private in 2011; rather this is the latest in a series of cuts that have gone well beyond “trimming the fat”. Posts on thelayoff.com and glassdoor paint a picture of high attrition due to routine layoffs and many staff leaving by their own choice. We have written on several of these events here at e-Literate. 90 here, 100 there, 74 . . . it adds up, especially when combined with staff departures.
To get another view into the company downsizing, consider that Blackboard recently signed a lease that will trim its corporate headquarters by 37%:
Founded in a Dupont Circle row house in 1997, Blackboard, which has occupied 111,895 square feet at 650 Massachusetts Ave. since 2008, will move into Ogilvy Public Relations Wordwide’s former space on the eighth through 10th floors [70,482 square feet] beginning in December 2015.
This follows a recent move in its Reston, Virginia facility that cuts its office space there by over 50%.
In an ironic turn of events, the new headquarters move will put the company into the same building it occupied before 2008, and their neighbors in the building will include former CEO Michael Chasen’s SocialRadar and CBE provider FlatWorld.
Why More Layoffs When US Market Share Finally Stabilizes?
Earlier this week I shared a post on the current state of the US higher education LMS market – Blackboard’s core market – and noted that the company has at least for now “stopped its well-documented losses in US higher ed and has even risen in the past year”. Blackboard is also seeing real growth in international markets for both Learn and Moodle Solutions. So why would they have to resort to more layoffs? I believe the answer lies in the nature of their private equity ownership and the necessary efforts to manage the associated debt as foretold by Michael in 2011:
The most fundamental fact you need to know about companies like Providence is that they use large amounts of debt to purchase other companies. Blackboard, as a publicly traded company, has lots of people who own little pieces of it in the form of stock shares. Some of those stock shares have been purchased with borrowed money, but a lot of them have been purchased with cash. It’s the stock market’s system of aggregating a large number of buyers with smaller amounts of cash that enables companies to get the cash they need to grow big quickly. When a private equity firm like Providence purchases a publicly traded company like Blackboard, they do so by essentially taking out a giant mortgage to buy up all the shares that are floating around in the market.
Why does this matter? It matters because giant mortgages come with giant mortgage payments. Private equity firms are able to get very good interest rates, but even a low interest rate on the purchase of a $1.5 billion company adds up to something substantial. There is a cost structure that is inherent in these deals, and that structure puts some constraints on what the new owners can do with the company.
In February of this year Blackboard acquired Schoolwires for $92 million, of which $85 million was in the form of new debt. This led Moody’s to revisit their rating on Blackboard’s corporate debt in February, reaffirming their B2 rating on corporate family, but changing their outlook to negative. This essentially means that Moody’s believes it more likely that they will have to downgrade Blackboard’s debt rating in the near future. In March they reaffirmed this position, and in April Moody’s put out a summary credit opinion (this document requires purchase). The following notes are pulled from these three documents.
- Estimated revenue for 2015 is $685 million, compared to $481 million for the last 12 months when they were public (July 1, 2010 through June 30, 2011) and $630 million in 2013 (estimated by Moody’s).
- However, revenues are “stagnating … over the past several quarters, after good growth in prior years”.
- Total ratable (public) debt of $1.3 billion.
- Estimated EBITDA (earnings before interest, taxes, depreciation & amortization) of $170 million based on adjusted debt/EBITDA ratio of 7.8, compared to estimated EBITDA of $120 million in 2011 [Note: some estimates place the expected EBITDA to be $180 – $190 million for 2015].
- K-12 revenue is approximately $88 million (15% of total), and it is falling by 4-6% per year.
- “Adequate” liquidity as of March 31, 2015, based on $32 million cash, expected $30 free cash flow per year, and availability of $100 million revolving debt.
- The rating “could be upgraded if the company were to demonstrate meaningful revenue growth, if free- cash-flow-to-debt reaches double-digit percentages, and adjusted debt-to-EBITDA were to fall to 4.5 times on a sustained basis.”
- The rating “could be downgraded if the company fails to show progress in reducing debt-to-EBITDA toward 7.0 times, liquidity declines materially, or the company pursues further acquisitions that add to financial leverage.”
For the purposes of both selling the company (which is often driven by EBITDA ratios) and for avoiding debt rating problems, Blackboard is highly motivated to improve earnings. They are not growing in K-12, their overall revenues are stagnating, so the best option is to cut costs. My answer to the question of ‘why layoffs now when market share finally improves’ is ‘the need to manage debt ratios’.
Impact of Ultra Timing
In the same email exchange with Blackboard I asked about the Ultra delays and their relationship to the layoffs, both as cause and effect.
Q. As we have reported on the negative effect of the delays in releasing Ultra, what are the risks that this round of layoffs will cause further delays to Learn Ultra? Do you still expect to have Learn Ultra available for pilot release at the end of the year and general release summer 2016?
A. We are extremely proud of Learn with our Ultra experience and it is being very well-received. We recently made the Ultra experience of Learn available in technical preview with a number of elegantly designed and fully responsive workflows to support students and instructors.
We have had about 1,000 users sign up for the technical preview and we have enabled the technical preview for our more than 50 customers on Learn SaaS. We’re also gearing up to open a Learn Ultra Trial site soon and plan to continue to build on this capability and be ready for pilots with a select set of customers at the beginning of 2016.
As Michael described, the Ultra user experience upgrades are more than a year late, and general availability for Learn Ultra (the new-look core LMS product) are now forecast for mid 2016. This means that revenue gains due to the company’s investment in Ultra, which Michael and I consider a significant and well-designed change based on cloud technology stack, are not likely to occur for another year. I note that Blackboard’s spokesman did not directly answer my question about the layoffs causing risks of further delays – it takes a lot of people to get a product line ready for full release, and all of the attrition at Blackboard has to have an effect.
Investment and Cost Cutting
Blackboard is caught between the need to invest and complete a product re-architecture that is highly complex and aggressive, and the financial requirements of highly-leveraged private equity ownership. The need to invest and the need to cut costs. While some people are looking at the potential sale as a new risk to evaluate, it is probably better to view the current financial situation Blackboard finds itself in as the result of the risk picked up by their previous sale in 2011 to private equity ownership.
Blackboard therefore finds itself in a tough situation. Assuming debt stays roughly constant, they would need to significantly increase earnings (on the order of another $10 – $15 million), and not pursue any new debt-financed acquisitions. If they acquire another company with enough size to help their finances in the short term, their credit rating would likely be downgraded. If they do not acquire, they have to rely on current products (not including Learn Ultra) to improve their bottom line. And note that 100 employees at a software firm, including benefits, costs more than $10 million per year. Can you imagine the credit repair that would be necessary should this go sour…
Given the company’s turnaround situation and these limitations, it is actually quite surprising how much Blackboard has achieved in getting rid of company silos, cutting headcount and costs, while simultaneously re-architecting a product line and supporting current customer configurations. The news that they are up for sale and resorting to further layoffs indicates to me that the company’s financials are much higher on the priority list as Providence looks for an exit.
Associated with the current round of layoffs, Blackboard has reversed some of its recent moves to centralize the company and is instead (re)building the product teams to have dedicated sales and marketing support. The Washington Post summarized the centralization strategy in January 2014:
Employees who were once divided among Blackboard’s individual products are now grouped based on the company’s target markets: higher education, K-12 education and international education.
Blackboard confirmed this move to focus more on product teams, including dedicated sales and market staff:
First, We have recently made some organizational changes that will simplify our operations, provide more accountability and focus on our products as well as help us deliver on our customers’ expanding needs. These changes are aligned with our annual goals and priorities and are designed to accelerate the business. Blackboard is dedicated to leading a transformation in education and to the success of our customers. These changes will not impact our ability to continue serving our customers in the manner to which they are accustomed or to do what is right for the education industry.
One specific area that is likely to benefit from the reorganization is Blackboard’s Moodle groups, as described in Phill Miller’s recent blog.
A few weeks ago, I blogged about the massive growth that Blackboard has seen in its Moodle client base. To further support this growth we have created a new, more focused team called Open Solutions for Moodle. Why?
In the past few months we have concluded three acquisitions in the Moodle space: Remote-Learner UK, X-Ray Analytics, and Nivel Siete. By bringing these companies together in a unified team, we are able to stop duplicating efforts and focus more on improving the experience for our clients and innovating on top of the Moodle platform.
Blackboard now has the largest team in the world working on Moodle, from developers and quality assurance people to graphic designers, support people and consultants, sales people, trainers and more. Bringing these teams together means that the Nivel Siete team in Bogota works seamlessly with the Remote-Learner UK team in England, the NetSpot team in Adelaide and the greater Moodlerooms team in Baltimore and throughout the world. The combination of these groups means that we can create a truly global community among our Moodle clients, not just focusing on Moodle but on everything that happens around it, from learning analytics or real time collaboration tools to accessibility and improving course design.
There is a lot of volatility in the LMS market – Blackboard’s situation, Moodle’s inflection point, Instructure’s impending IPO, and new learning platforms from CBE, courseware and adaptive software providers. It will be interesting to get updates from Blackboard at next week’s EDUCAUSE conference and to get a better sense of customer reactions to Learn Ultra, Learn 9.1 and Moodle Solutions."Why Is Blackboard Laying Off Staff Despite Improved Market Share Position?",