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October 4, 2012 7:40 pm
For a company that makes its money by selling educational devices for school classrooms, Promethean World has been on the receiving end of a few harsh lessons of late.
Since joining the London Stock Exchange in 2010 with a market capitalisation of £400m, the maker of interactive whiteboards and iPad-like handheld classroom devices has become a high-profile victim of the economic downturn.
Investors have seen shares in the Blackburn-based group lose more than 90 per cent of their value since flotation, with Promethean’s market capitalisation dwindling to £35m after Thursday’s share price decline.
Promethean’s full-year revenues are expected to be more than a third lower than their 2010 peak of £235m, as cuts to US school budgets at both district and state levels bite into sales.
“The company has failed to grasp just how bad things are,” says Alex Jarvis at Peel Hunt, who repeated her “sell” recommendation on the shares. “It’s own take on the market has been seriously wrong.”
As well as producing computer-like whiteboards, Promethean’s technology replaces the need for pens and paper by producing handheld devices with a touchscreen interface.
The devices allow teachers to monitor the work of each student in real time, immediately aggregating the results and displaying them back to the class.
While more than 70 per cent of UK classrooms use interactive whiteboards, the rate of penetration into US classrooms is about 40 per cent, making the country the primary target for Promethean’s growth plans.
But with teachers’ salaries and infrastructure maintenance taking priority over purchases of interactive whiteboards – some of which retail for as much as £3,000 each – Promethean’s sales hinge on the strength of education budgets.
This is especially the case in North America, where Promethean earns more than half of its revenues. Economic malaise has kept the global market for school interactive whiteboards relatively flat since 2010 at £750m a year, according to Futuresource, the consultancy.
Promethean is the second-largest group in the sector with a market share of about a quarter, behind Canadian rival Smart Technologies with 45 per cent.
With profit growth of 60 per cent in the year before flotation, Promethean was one of the star pupils among UK companies that came to market in 2010 – a group that included fashion chain SuperGroup, grocery delivery service Ocado, and EMIS, the healthcare software provider.
While Ocado, SuperGroup and Promethean have struggled, EMIS has proved to be top of the class among the four, with its shares almost tripling from their float price of 320p.
Subscribers to Promethean’s initial public offering were mostly institutional investors, who shrugged off educational budgetary concerns and focused on the general trend of interactive whiteboards replacing chalkboards in schools.
At the float, Apax Partners, the private equity group, sold most of its 25 per cent stake in a nine-day roadshow that resulted in an oversubscription for Promethean’s shares.
“At its IPO, Promethean painted a rosy picture of its long-term outlook but, with hindsight, it was wildly optimistic given what was coming down the line in terms of budget cuts,” says Ian Spence, analyst at Megabuyte.
Furthermore, Promethean is reliant on regular big-ticket purchases of its technology in schools rather than recurring revenue from after-sales services.
Compounding this is Promethean’s myopic forward sales visibility of only two to three weeks.
In spite of the repeated profit warnings and gloomy outlook, few analysts are predicting Promethean’s demise. Instead, as Peel Hunt’s Ms Jarvis says, the company “has to cut its cost base right down because its revenues are in such decline”.
Promethean has put on a brave face, pointing out that its programme to cut its cost base by a quarter is ahead of schedule.
“Over the longer term, the impact of interactive learning technology is proven and this, coupled with the development of our integrated software and hardware strategy, means that Promethean remains well positioned to benefit when market conditions improve,” the group says.
However, with US education budgets unlikely to improve in the near future, and analysts forecasting underlying losses for the next two years, Promethean’s learning curve before any recovery appears steep.
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