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First LBO in For-Profit Education

Posted on Monday, Mar 6th 2006

WSJ Reports that Providence Equity Partners and Goldman Sachs are about to purchase Education Management Corp. (Nasdaq: EDMC) for $3.4 billion.

Education Management runs 72 primary campuses across the U.S. and Canada, training its 72,000 enrolled students in fields such as fashion, psychology and Web-site design. It also runs a small but growing operation providing online instruction.

Market leader Apollo Group (Nasdaq: APOL) did 2005 revenue of $2.3 billion on a total enrollment of 315,000 students, while rival Career Education Corp. had revenue of $2 billion and 104,000 students. In the fiscal year ended June 30, 2005, Education Management had net income of $101.6 million, or $1.35 a share, on revenue of $1.02 billion, and ranks third in the for-profit education market.

Apollo operates the famous University of Phoenix chain of educational campuses, and has recently had some hiccups, including the resignation of its long-time CEO Todd Nelson. The stock slid to a 52-week low of $47.27. It is rising again, today, on speculation that other Private Equity deals might happen in the for-profit education sector, and APOL ranks at the top of that list.

Another interesting company waiting in the wings to go public soon is Capella Online University. The fast-growing company operates Capella University, an online university that offers undergraduate and graduate degree programs in business, organization and management, education, psychology, human services, and information technology. More than 13,000 students are enrolled in the school, which employs about 740 faculty members. Students seeking doctoral degrees account for 47% of enrollment. Nearly 70% of revenues are from federal student financial aid programs.

Federal financial aid, in fact, is boosting the entire sector, from primary education (Sylvan via NCLB) to higher education (Capella, Apollo, etc.).

It amazes me that Silicon Valley doesn’t aggressively play in this sector!

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Mango Diplomacy

Posted on Saturday, Mar 4th 2006

In my sixteen years in the United States, I have very seldom bought mangoes. They just don’t cut it, when I compare them with the ones I grew up eating.

My family owns mango groves in a small village just at the outskirts of Calcutta, called Bishtupur, in Rajarhat. My grandfather was a connoisseur, and developed many species of mangoes that were products of his own experiments, and even named one of them, a miniature version, after an ancestor.

The harbinger of the mango season, usually, were splendid norwestor storms. The sky would get pitch dark, and a welcome thunder shower would arrive to soothe us from the terrible heat that preceeded. At the end of the storm, we would run downstairs, to collect the not-yet-ripe-but-still-delicious green mangoes, that would have fallen from the two trees on the property.

My earliest memories of summer vacation go back to the mid seventies, when an old bullock-cart driver would bring huge baskets of mangoes from the village, to our Elgin Road homestead in the heart of Calcutta. They traveled all night, and arrived at the stroke of dawn. Eager with anticipation, I would wake up and run downstairs, to have a look. I would then spend the afternoon chatting with the driver, sitting on his cart. The oppressive tropical sun made it impossible to travel during the day, so he would normally travel at night.

Upstairs, all the women of the house – my grandmother, my mother, my aunts – were busy sorting and cleaning the mangoes, and sending some over to each of the relatives’ houses.

During those days, we ate mangoes all day. Mango sorbet, mango juice, creme mango, sliced mango, diced mango … Oh, how we indulged … The entire household.

My cousin, Ronti, during those afternoons, also, swallowed about 20 lichees a day.

Now that President Bush is going to allow Indian mangoes to be imported into the US, I must say, I feel both delighted and nostalgic for that time and the taste that I have missed sorely.

Rise, Fall, Rise Again

Posted on Friday, Mar 3rd 2006

Remember the Optical Communication bubble of the late nineties? Hundreds of companies got funded, until that market collapsed?

However, before the collapse, Finisar, founded in 1996, was one company that went public and made beaucoup d’argent for everyone around the table. Stock price hit a high of $61.67 in 2000, on an annual profitable revenue of $67 Million.

Then came the crash. In 2003, stock price collapsed to 42 cents, even though revenue was a decent $166 Million. Profitability, however, was a huge issue, and the company lost $620 Million that year.

Fast forward to 2006. Great turn-around story … pretty cool reading!

Needham & Company reports:

Finisar delivered a blowout fiscal Q3, with strong qoq revenue growth, which when combined with a sequential improvement in margins, resulted in a huge surge in profitability. This one-quarter surge in profitability has been more than three years in the making, when Finisar took the controversial steps of acquiring an offshore facility, designing its own ASICs, and buying its own fab and laser supplier. These steps have enabled Finisar to maintain performance, reliability, and service, resulting in steady gains in market share. We are raising estimates, our rating to Strong Buy, and our TP to $6.

Fiscal 3Q revenues were $93.5 million, above guidance of $88 to $93 million, up 8% qoq and 28% yoy. Organic growth of 20% is expected for F06. Pro-forma gross margins grew more than 6 points qoq, and pro-forma operating margins of 10.7% are well on their way towards the 15% targeted for 2HFY07. GAAP and pro-forma EPS were $0.03, far ahead of our breakeven estimate and guidance of $0.00-$0.01.

We are raising fiscal 2006 revenue and EPS estimates sharply to $362 million and $0.03 from $353 million and ($0.01.) We are raising fiscal 2007 revenue and EPS estimates to $434 million and $0.16 from $413 million and $0.08.

Doubling price target to $6. Our $6 target is based on 25x our unpublished fiscal 2007 EPS estimate of $0.22.

Finisar is the first of our optical communication universe companies to return to sustainable profitability. We are raising our rating to Strong Buy based on our confidence in our estimates, as supported by the strong performance in Q3 and the steady improvement in margins expected in F2007.

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Dassault Acquires MatrixOne

Posted on Thursday, Mar 2nd 2006

MatrixOne has been wanting to get acquired for quite a while. Finally, it has happened.

MatrixOne, the provider of product lifecycle management (PLM) tools, is being acquired by France’s Dassault Systems in a cash deal valued at roughly $408 million. More coverage here and here.

The basis for the deal, besides consolidation, is Dassault’s motivation to diversify in segments other than Aerospace and Automotive, their main strongholds, as well as the fact that PLM is a higher growth market than CAD, Dassault’s mainstay.

MatrixOne has been in a very tight spot for a number of years, trying to be Switzerland in an industry, that is, by and large, driven by deep CAD intergation (a la ProE+Windchill from PTC). This announcement is an absolutely splendid news for them, because now they CAN align with a deep-pocket CAD vendor, and access IBM Global Services as a powerful sales channel. IBM GS is Dassault’s primary SI channel, and is an enourmously effective one for an industry like PLM that depends heavily on third party integrators.

Frankly, I don’t think you can be successful being Switzerland in the CAD industry, which is why I have questioned Adobe’s strategy around 3D Acrobat and suggested that Adobe starts to align with Autodesk’s enemy camp.

MatrixOne has lost money every year for the last 10 years, except in 2001 they made a small profit. Revenues have stagnated and hovered around the $100M-$120M range for 5 years, causing a great deal of investor anxiety. What happened today, in form of an exit into Dassault, should have happened long back: i.e. alignment with a CAD vendor.

Meanwhile, they experimented with EDA, by acquiring Synchronicity, which was a decent strategic diversification initiative. Dassault’s interest in Electro-Mechanical will find good vibes in this area.

Bottomline: a long overdue acquisition. Glad it has happened.

RTL Hand-off & Predictive Prototyping

Posted on Sunday, Feb 26th 2006

I don’t recall exactly when Gary Smith, Chief EDA Analyst at Gartner coined the phrase Silicon Virtual Prototyping (SVP). It has been a while.

Many EDA industry insiders believe accurate SVP and RTL Hand-off to be the holy grail in the increasingly complex and expensive IC Design process. The hypothesis is, if you can find errors, including architecture level issues with a design early on in the design cycle, you can fix them early too. Degrees of freedom are high in the early stages of design, whereas after Synthesis, and even more so after Layout, fixing fundamental design problems becomes exceedingly difficult and expensive.

Predicated upon this premise, Tommy Eng was one of the first to launch a company, Tera Systems. There have been other players like InTime and Atrenta, and several ASIC vendors embraced the notion of RTL Hand-off as the preferred means of receiving design specs, including IBM. Almost all the structured ASIC vendors also embraced the methodology, although at this point, the industry at large is still using Netlist Handoff, as the preferred methodology, not RTL Hand-off.

The approach for estimating very large chips that Tera came up with, was to create a high-level abstraction of functional building blocks (adders, multiplexers, etc.), analyze and optimize those blocks, establish the constraints, and then prototype the full chip by applying those constraints at that higher level of abstraction. All aspects of design can be put through the same treatment: Timing, Power, Signal Integrity, Testability, and Physical, the last being one of the toughest to estimate.

I had asked industry veteran Ron Rohrer, once: “Why is it so difficult to deliver an RTL prototyping solution?” Ron identified the key issue that has killed many attempts at solving the same problem. “Accuracy”, he replied.

Indeed, the moment you have to estimate a design, the accuracy of the estimate becomes a hairy issue.

There are still other brand new startups taking a crack at the same problem, and some are walking the funding circuits. It remains to be seen who else gets how far.

It is a difficult, important problem. One of the last few BIG opportunities remaining in EDA, around which, perhaps, a reasonably large $100 Million company can be built, because no matter what, the solution is so incredibly valuable, that customers WILL pay for it.

Steve Jobs Could NOT Care Less. He Should.

Posted on Saturday, Feb 25th 2006

Apple’s Intel Era Seen Set To Launch. Apple could be adding versions of its Mac Mini and iBook laptop with Intel chips next week.

What is Steve Jobs after? We know that he is after the iPod loving teenagers. But to win the big battle in PC market share, he absolutely needs to turn his attention to the enterprise, and sink his teeth into a killer app that aligns with Apple’s core competency.

Question: What category of applications leverages the MAC Operating System’s over-riding winning value proposition?
Answer: Graphics.

Apple already has a strong presence in the Creative Professionals segment, where Adobe’s Suite, as well as Apple’s own, have been a great success.

There is, however, the MUCH bigger CAD market, which Apple should think about as its next beachhead into the enterprise.

CAD applications are heavy, especially 3D CAD, involving intensive graphics maneuvering. Today, the global Mechanical Design (MCAD) + Product LifeCycle Management (PLM) space is well above $10 Billion. Steve should strike alliances with Dassault, PTC and UGS, and position Apple in this segment. Autodesk is already aligned with Microsoft. It has always been. Apple’s opportunity is to align with the other CAD giants.

This would create pull for a lot of Intel-MACs. After all, the killer app that established Windows, was Microsoft Office. Where is Apple’s killer app for the enterprise?

Technorati: Valuation Without Revenue?

Posted on Thursday, Feb 23rd 2006

Here is a great article by Dave Winer: How much has been invested in RSS? Besides the large company driven investment cited in the article (Microsoft, Yahoo, …), it also cites examples like venture investments in Technorati, Feedburner, Newsgator, Pheedo, etc.

Let’s take the example of Technorati. It’s Alexa traffic ranking is quite high (561 today), and it is the unquestionable center of the Blogosphere. The obvious revenue model of Google AdSense generates some money. The question is, does it generate enough?

Skype has recently proved that Valuation Without Revenue a la Hotmail, is alive and well. Will Technorati be able to follow suit?

According to Dave Winer’s calculations, more than $8 Billion has been invested in the RSS and Blog eco-system. However, as both Skype and Hotmail have proved in the past, these were businesses without business models.

In the Web 2.0 era, it appeared in the beginning that investors were gun-shy about such businesses. There was much talk about “fundamentals”.

Are we shifting gears again, and getting carried away on the wings, this time, of RSS?

There are proven models in the advertising industry, one of the most important of which is Segmentation. Advertisers like to advertise to demographics and psychographics that are likely to buy their products. Today, Yahoo is a portfolio of haphazardly organized content and services which don’t clearly align with segments desired by advertisers. Neither, for that matter, is Google. For sure, not Technorati.

For the moment, due to lack of viable alternatives, Google and Yahoo continue to reign supreme in online advertising. The rise of MySpace, however, is not going unnoticed by Madison Avenue.

Technorati, especially, needs to ask itself the question: What is my segmentation strategy, around which I can offer my advertisers a compelling marketing vehicle?

The answer is the secret to monetizing their enormous and invaluable traffic momentum.

CNet Also On The Block

Posted on Wednesday, Feb 22nd 2006

Content deals are hot.

I wrote about iVillage earlier. CNet is also an acquisition target. Rafat Ali reports that CNET Networks has hired investment banker Zander Lurie from J.P. Morgan Chase & Co. Lurie, who advised Internet companies on M&A at J.P. Morgan, will be a senior VP for strategy and development at CNET.

Let’s take a look at CNet’s financials.

They did ~$350 Million in revenues in 2005, a decent 120% growth over 2004. Since 2004, they have also started being profitable. Things have certainly started looking up.

To build this company, however, has been an uphill task. Between 1995 and 2003, CNet lost $2.5 Billion. 1998 and 1999 were profitable years, and at the height of the boom, they made a net profit of $417 Million in 1998. But the most severe downturn years ’00 – ’02 have been terribly challenging.

Stock Price has been a dizzying roller-coaster ride, with an all-time high of $79.88 in 1999, to a frightening 60 cents in 2002.

At the moment, CNet has a good $2 Billion market cap, and a stable mid-teens stock price. With a premium, a deal price will probably amount to about $2.5 Billion.

Today’s content businesses, I am sure, will have it a lot easier. However, CNet and iVillage are pioneers of the pure content business model. They deserve a lot of applause for sticking it out.