Yesterday morning Barnes & Noble Education, the owner of 743 college bookstores and related services, announced the acquisition of LMS provider LoudCloud Systems for $17.9 million in cash. LoudCloud provides a traditional LMS for general higher education and K-12 needs, and they are best known for their customer Grand Canyon University, a for-profit provider and partial investor. LoudCloud from the beginning touted a modular approach to learning management systems, and one of their key modules is LoudBooks, an "adaptive and social" eReader of digital course materials. More recently, LoudCloud entered the competency-based education (CBE) market by releasing FASTRAK, an LMS specifically designed for CBE programs.
According to LISTedTECH data, LoudCloud is used in a half dozen colleges and university accounts in the US, although these are mostly for-profits with multiple campuses.
I have long heard discussions that LoudCloud was looking for an exit, so the acquisition of the company is not a surprise, per se. But why Barnes & Noble Education? I think that timing of the announcement helps answer that question.
Barnes & Noble Education just announced their quarterly earnings, and it is not a pretty picture.
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Barnes & Noble Education Inc. BNED, -14.93% reported a third-quarter loss of $3.6 million, or 7 cents per share, versus a profit of $8.7 million, or 9 cents per share, for the same period last year. Sales for the quarter were $518.4 million, down from $521.6 million last year.
In the conference call CEO Max Roberts positioned the LoudCloud acquisition as a response to their needs in courseware, fighting off the flagging sales of campus stores.
As we look at sales for the quarter by merchandise category, our textbook sales declined 5.4% on a comparable basis, primarily due to the later Rush period and decreased enrollments in community colleges. Aggressive online marketplace pricing, digital direct courseware sales, OER content, along with students' reluctance to purchase textbooks, is providing some headwinds for course material sales. In order to combat these headwinds, we have successfully piloted our textbook price-matching program on multiple campuses this fall, and again during the Spring Rush.
While we believe sales and rental of the printed textbook has a long tail, our investment in Faculty Enlight, which is now being used by over 225,000 faculty for the adoption of publisher platform digital content, either for an individual student or on a class-subscription basis. Along with our investment in LoudCloud, will provide us the necessary platform and tools to effectively compete for digital courseware, OER content and services sales.
Later in the call Roberts elaborated on the acquisition.
LoudCloud will provide a foundational asset for digital product development, and also accelerates the development of our advanced learning platform. This acquisition provides us immediate access to advanced technology and a data analytics platform. The software is cloud-based, software-as-a-service offering, and is easily configured, and is scalable. LoudCloud was founded by Manoj Kutty, along with a talented team of technologists. LoudCloud has a compelling suite of products, including a multi-learning management system, courseware development and eReading, an analytics to support competency-based education, aimed at developing improved student outcomes and retention.
LoudCloud has an established revenue stream and a low-cost expense structure. Our immediate priority will be to use the LoudCloud platform to deliver content and courseware solutions to our and their existing clients. LoudCloud uses its software to capture and analyze key behavioral and performance metrics from students, enabling educators to monitor and improve outcomes, ultimately improving students' and institutional success.
My summary of this acquisition:
- This is a semi-distressed sale. LoudCloud Systems has raised $11 million in two rounds according to SEC documents, but they sell for $17.9 million. While the company has had some interesting products, they have never turned this into a growing market position in either traditional LMS markets or the CBE market - at least yet. CEO Manoj Kutty told me last year that their CBE play was a long-term approach not expected to produce significant revenue for several years.
- This company has confused me for years. I expected them to go further in the market than they have. The architecture and ideas in their platforms seem compelling, but they do not have a good track record of getting out of pilots and generating real sales.
- The primary rationale for the purchase is a pivot of sorts as Barnes & Noble addresses flagging sales of textbooks and the need to develop a Courseware and digital content strategy. This likely means that LoudBooks is the key technology Barnes & Noble needed. This is for internal company usage driving Barnes & Noble's evolving digital content strategy. What they call a "foundational asset for digital produce development".
- Beyond courseware, however, Barnes & Noble plans to continue operating LoudCloud as an LMS provider both for traditional markets and CBE markets. The open question is whether Barnes & Noble will invest in the LMS market, trying to accelerate LoudCloud's growth beyond usage at the handful of schools using the system currently.
"2016 is going to be an eventful year for the LMS" ® by @mfeldstein67
— Phil Hill (@PhilOnEdTech) February 19, 2016
Expect more market news soon.
Update: Clarified language on higher ed clients.
Update: Changed the total equity funding to $11 million instead of $15 million and changed source of data. Crunchbase had the data links correct but the data on round 1 was just plain wrong. I apologize for not catching this earlier.