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Education Technology Q2 2019

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Education Technology Q2 2019 Capstone Headwaters EDUCATION TECHNOLOGY Q2 2019 TABLE OF CONTENTS MERGER & ACQUISTION OVERVIEW M&A Overview Following a year of unprecedented merger and acquisition (M&A) volume, the Top Public Players Education Technology (EdTech) industry has kept pace with 2018 activity with 57 deals announced or closed in the US and Canada year-to-date. Notable Transactions Select Transactions Private equity groups (PEGs) remain very active buyers and have accounted for Public Company Data 54% of deal volume to-date. In a take-private transaction, leading human capital management (HCM) solutions providerTheUltimateSoftwareGroup, Firm Transactions in Market Inc. (formerly NASDAQ:ULTI) was acquired in April by a group of investment Firm Track Record firms. The deal closed for $11 billion at 9.5x revenue, representing a 32% premium over Ultimate’s 30-day average stock price ending February 1. Public companies have also been active buyers as they utilize M&A to access new customers, services, and geographies. Notably, higher education services CONTRIBUTORS provider Bridgepoint Education, Inc. (formerly NYSE:BPI) changed its name to Zovio as part of its strategy to redefine itself as an EdTech company and Jacob Voorhees transferred its listing to the Nasdaq (ZVO). Already in 2019, Zovio has acquired Managing Director, online teaching platform Tutorme.Com Inc. (April, $4.8 million) and software Head of Education Practice, development school Fullstack Academy (April, $47.9 million). Head of Global M&A 617-619-3323 Strong M&A activity is expected to continue as technology becomes integralto [email protected] all aspects of education. Additionally, funding in US EdTech reached a record high of $1.4 billion in 2018, according to EdSurge, and the coming of age of David Michaels these start-up companies is expected to help drive consolidation.1 Managing Director, Head of Technology, Media & M&A Activity: Education Technology Telecom Practice 150 858-926-5950 129 [email protected] 100 84 80 68 Shawn Keenan 58 52 57 Director 50 813-467-9947 [email protected] 0 Number of Transactions 2014 2015 2016 2017 2018 YTD 2018 YTD 2019 Year-to-date ended May 20 Source: Capital IQ, Pitchbook, FactSet, and Capstone Headwaters Research 3 www.capstoneheadwaters.com June 2019 Education Technology | Q2 2019 TOP PUBLIC PLAYERS REVENUE BY SEGMENT Chegg’s sales increased 26% year-over-year Chegg, Inc. (NYSE:CHGG) (YOY) to $321 million in 2018. Its Services segment has accounted for a growing share of revenue, expanding from 51% to 79% ($253.9 million) of revenue between 2016 and 2018, according to the Annual Report.2 These services include 21.0% study, writing, tutoring, and math tools which students pay to access. Services Conversely, Chegg’s Required Materials segment, which includes the rentalandsaleofprintandonlinetextbooks,shrankfrom49%to21% Required Materials ($67.1 million) of net revenues from 2016 to 2018. Chegg cited its 79.0% partnership with Ingram Book Group LLC as a reason for the decrease in its Required Materials segment since it now receives a commission on textbook sales rather than the total. Growth Strategy: Chegg spent ~46% of annual operating expenses on R&D and will continue to invest in technology which offers personalized solutions and drives student engagement. In 2018, Chegg acquired content library provider StudyBlue, Inc. (July, $20.8 million) and AI-enhanced platform WriteLab, Inc. (May, $15 million). Instructure’s YOY sales increased 30% to Instructure, Inc. (NYSE:INST) $209.5millionin2018with19%ofrevenue generated outside the US, according to Company filings.3 Revenue drivers have remained consistent, with Subscription and 10.0% Support driving 90% and Services and Other the remaining 10%. Instructure spent 28% of operating expenses on R&D and 47% on Services & Other Sales and Marketing as it sought to expand internationally. Subscription & Growth Strategy: Instructure’s forward-looking initiatives include Support gaining new customers in the underserved Cloud-Based Learning and 90.0% Assessment Performance Application market. Instructure sees the greatest opportunity for this in the Corporate market, where, unlike the Higher Education market, legacy systems are not in place and, unlike K-12 market, they are ready to adopt learning management systems. The Company will also seek to maximize existing customer channels by offering new applications and services. Tylerreportedarevenueincreaseof11% Tyler Technologies (NYSE:TYL) YOY to $935 million in 2018.4 Maintenance drove 41% ($384.3 million) of revenue and Subscriptions 23.6% ($221 million). 2.3% 2.5% Software Services Growth Strategy: With 29 consecutive quarters of double-digit growth and annual revenue approaching one billion, Tyler noted that 10.0% 20.5% Subscriptions healthy growth together with strategic acquisitions will be essential to Maintenance maintain robust expansion. Tyler made its largest acquisition in Software Licenses February with the purchase of business process management software provider MicroPact for $204.2 million or 2.9x revenue. In 2018, Tyler 23.6% &Royalties 41.1% made five acquisitions, with the marquee being its $150 million dollar Hardware & Other purchase of cloud-based software Socrata, Inc. in April. Tyler also Appraisal Services acquired SceneDoc, Inc. (December, $6.2 million), MobileEyes Security Canada,Inc.(October,$5.3million),CaseloadPRO,L.P.(August,$9.3 million), and Saga Data Security, LLC (April, $11.5 million). Source: Form 10-Ks 2 Education Technology | Q2 2019 NOTABLE TRANSACTIONS Nearpod Inc. acquires Flocabulary, Inc. (April 2019, Undisclosed) PE-backed Nearpod, a platform which enables teachers to sync lessons with students’ devices, has acquired hip-hop music learning tool Flocabulary for an undisclosed sum. Nearpod’s PE investors include Insight Partners, whose portfolio includes EdTech companies Achieve3000, BrightBytes, Udemy, JoyTunes, Chegg, and Turnitin. Acquires Brooklyn-based Flocabulary was founded in 2004 and is now a worldwide platform. Its videos and activities combine educational content with hip-hop music to improve student engagement and content mastery. Flocabulary will add 60 additional employees and will greatly enhance Nearpod’s support, training, product, engineering, and content teams. “With this acquisition and the talent pool that’s joining our team, we want to keep growing our product offering into new areas for underserved populations. We’re already discussing growth in areas such as vocational content with College & Career Readiness, special education, higher education and how we can serve international markets,” Nearpod CEO Guide Kovalskys told Forbes.5 Renaissance Learning Inc. acquires Freckle Education Inc. (March 2019, Undisclosed) Renaissance Learning, an assessment technology and school improvement programs provider backed by Francisco Partners Management, has acquired Freckle for an undisclosedsum. Acquires Freckle offers an education platform that differentiates what and how students learn based on real- time assessments. More than 700,000 teachers use Freckle for ~10 million students across the US and real-time progress can be tracked on an individual, class, school, or district level. The acquisition builds on Renaissance’s purchase of assessment program provider Early Learning Labs in April 2019 (deal terms undisclosed) and learning analytics tool myON in March 2018 (undisclosed). Renaissance will combine Freckle’s differentiated platform with its Star Math® K–12 assessment solution to uncover more data and improve teacher/student connections and outcomes. Kahoot! AS acquires Poio AS & WeWantToKnow AS (May 2019, $24.5 Million) Norwegian game-based learning platform Kahoot! AS (OTCNO:KAHOOT) has completed its first two acquisitions in May for $24.5 million. Following Disney Accelerator’s purchase of a 4% stake in Kahoot in 2017, the company is valued at more than $350 million. Kahoot projected aggressive revenue growth from $2.1 million to $53.2 million from 2018 to 2021, according to its company presentation.6 Acquires On May 15, Kahoot acquired Poio for $6.5 million. Poio is a Scandinavian reading application for children aged three to eight which claims to be the premier literacy application throughout Norway and Sweden. The English version of Poio is set to be launched in July 2019. On May 9, Kahoot acquired Norwegian mathematic learning application provider DragonBox for $18 million. Since founding in 2011, DragonBox has developed six educational games for children which & have been made available across the globe. ThecorecurriculumofferedthroughPoio and DragonBoxes’ reading and math learning applications are highly complementary to Kahoot’s game-based learning platform and will provide the company will new high-quality content to distribute to its existing channels. 3 Education Technology | Q2 2019 SELECT TRANSACTIONS Enterprise EV / LTM Date Target Acquirer Target Business Description Value (mm) Revenue EBITDA Renaissance Provides a platform for K-12 education that offers 05/20/19 Freckle Education Learning lessons and materials to teachers. --- Develops a mobile application that engages kids with 05/15/19 Poio Kahoot! written language. $6.5 - - TA Associates; Provides software management learnings for childcare 05/15/19 Kinderlime --- Procare Software and afterschool. 05/09/19 DragonBox Kahoot! Develops mobile educational games. $18.0 - - StoryBots Brand 05/09/19 Netflix Comprises an educational animated series. of JibJab Media --- 05/06/19
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