Insight on valuation - E-Finance - Web conferencing service industry - Statistical Data Included

Valuation is the topic we get the most questions on: What metrics do we use? How did we arrive at that target price? Valuation is an art not a science. There's no exact formula. You have to asssess many factors to determine fair valuation for an industry, a sector, or a company--the top-down approach. We think the best valuation metrics are earnings or cash flow. Sometimes, other metrics are used depending on the situation, such as no earnings or poor industry fundamentals. Such metrics include total enterprise value, net asset value, discounted cash flow, and revenue multiples.

The key to valuation is finding a common ground between all of the companies in a universe for the purpose of a fair evaluation. Typically, we work our way up the income statement until we find common ground to compare all of the companies in a particular sector. In the end, valuation is only one person's opinion and can differ from individual to individual; hence, the efficient market theory as all opinions are aggregated. A look at the collaboration sector should provide some insight into how valuation can differ within a sector.

Currently, the collaboration sector is top on the minds of most portfolio managers as the 9.11 tragedy has cut business travel and prompted the use of Web and phone conferencing. "Training in the Post-Terrorism Era on page 24.

Centra, Genesys, Raindance, and WebEx are expected to benefit, so expect strong stock performance and greater valuations based on earnings upside. With strong industry and sector dynamics, the market and analysts must then focus on individual companies and their business models to gauge appropriate valuation--such as, client base, competitive positioning, sales channel, pricing power, reoccurring revenue stream, margins, and management. In the collaboration sector, there are three business models: phone conferencing, integrated phone and Web, and Web-conferencing. The traditional phone model has the lowest margins and least pricing power compared with Web-conferencing, which has the highest margins and best pricing power.

Regarding valuation metrics on individual companies, WebEx and Centra have the highest multiple based on product offering and positioning (Web-based); growth opportunity; pricing power; margins; and, most important, confidence in path to profitability. Traditional teleconferencing companies such as Genesys and Act Teleconferencing, who have modest Web offerings, have received lower valuation due to price-cutting among competitors and subsequently lower margins. Raindance, an integrated solution provider, finds itself in the middle in terms of valuation as it continues to improve margins closer to the Web pure-plays.

Web-conferencing companies have gross margins in the range of 75 to 80 percent and expectations of rapid bottom-line growth, whereas more traditional providers generate margins of 50 to 60 percent and moderate EPS growth. Those strong metrics enable Web providers such as WebEx to trade at a premium total enterprise value (TEV) to EBITDA multiple range of 30x to 45x versus the traditional audio providers, which trade at TEV/EBITDA multiple range of 5x to 10x. We use TEV to EBITDA to make an apples-to-apples comparison of all of the providers, which in several cases don't have earnings now or won't in the near future.

December performance for the corporate sector was extremely positive, rising 7.1 percent versus the S&P 500 and NASDAQ, which rose 0.7 percent and 2.1 percent. Since October, the group is up almost 54 percent off its bottom following the 9.11 sell-off That strong performance is due to stocks being extremely oversold (cheap) heading into October because of the poor economic environment after 9.11. Investors with patience and foresight are positioning their portfolios in anticipation of an economic recovery in the back half of 2002.

Corporate training stocks are a great way to leverage an economic recovery as businesses rekindle training projects because of rising confidence within the economy, so expect an improved earnings outlook for training vendors. In December, the content stocks led the group with a 16.5 percent increase; Prosoft Training was up almost 44 percent. The infrastructure stocks continued their strong performance, with Click2learn up 18 percent after raising almost $10 million in capital for growth purposes. The collaboration sector moved up slightly-1.3 percent.

The momentum behind the group continues to wane due to the lofty valuation of the group as a whole. These stocks will have to provide strong earnings outlooks for 2002 and 2003 to justify current valuation.

Peter L. Martin, CFA, is a senior vice president with Jefferies & Co., San Francisco. He follows various segments within the knowledge services industry which are broadly categorized under e-learning and traditional education and training.

[Graph omitted]

                                             Price     52 Week
Company                              Ticker    12/31       High

Infrastructure Software and Service

Click2learn.com                       CLKS     $3.00      $10.25
Docent                                DCNT     $3.17      $12.50
RWD Technologies                      RWDT     $2.59       $5.25
Saba Software Systems                 SABA     $5.22      $17.94
Vcampus Corp.                         VCMP     $0.44       $2.75

Average

Content Providers

DigitalThink                          DTHK     $10.80     $18.38
Dow Jones & Company                    DJ      $54.73     $64.30
FactSet Research Systems              FDS      $34.95     $47.49
John Wiley & Sons                     JWa      $23.03     $24.10
ProsoftTraining.com                   POSO      $0.98     $15.00
Skilisoft Corp.                       SKIL     $25.92     $38.94
SmartForce Public                     SMTF     $24.75     $46.56

Average

Collaboration and Communication

Act Teleconferencing                  ACTT      $7.65     $11.97
Centra Software                       CTRA      $8.00     $17.14
Eloquent                              ELDO      $0.63      $1.88
Genesys                               GNSY      $6.50     $15.29
Mentergy                             MNTED      $2.97     $18.00
Nuance Communications                 NUAN      $9.10     $58.38
Polycom                               PLCM     $34.07     $42.60
Raindance Communications              RNDC      $5.71      $7.40
Speechworks International             SPWX     $11.25     $56.00
WebEx                                 WEBX     $24.85     $37.87
Wire One Technologies                 WONE      $6.22     $10.22

Average

Content Management
Actuate Corp                          ACTU      $5.27     $24.13
Adobe Systems                         ADBE     $31.05     $62.00
Broadvision                           BVSN      $2.74     $18.50
Documentum                            DCTM     $21.72     $57.47
Imanage                               IMAN      $7.89      $8.50
Innodata                              INOD      $2.97      $9.25
Insightful Corporation                IFUL      $2.31      $4.44
Interwoven                            IWOV      $9.74     $38.63
Macromedia                            MACR     $17.80     $64.25
Stellent                              STEL     $29.56     $58.00
Vignette Corp.                        VIGN      $5.37     $19.50

Average

Instructor Led Training
Corporate Executive Board             EXBD     $36.70     $43.60
Learning Tree International           LTRE     $27.90     $59.75
New Horizons Worldwide                NEWH     $11.50     $18.70
Provant                               POVT      $0.55      $6.94

Average

Average Corporate Education
Companies

                                      52 Week       Mkt     3-Mon Avg
Company                               Low      Cap (mm)    Trdg Vol

Infrastructure Software and Service

Click2learn.com                       $1.00       $72.31    177,192
Docent                                $1.48      $133.82    292,286
RWD Technologies                      $1.70       $39.46     24,943
Saba Software Systems                 $1.52      $248.70    561,223
Vcampus Corp.                         $0.21        $6.29     35,283

Average                                          $100.12    218,186

Content Providers

DigitalThink                          $5.34      $433.66    238,943
Dow Jones & Company                  $43.05    $3,503 81    344,855
FactSet Research Systems             $17.80    $1,169.46    148,705
John Wiley & Sons                    $17.90    $1,140.28     44,486
ProsoftTraining.com                   $0.29       $23.49    145,215
Skilisoft Corp.                      $13.63      $422.55    190,977
SmartForce Public                    $13.40    $1,400.65  1,239,271

Average                                        $1,156.27    336,065

Collaboration and Communication

Act Teleconferencing                  $3.89       $65.94    117,398
Centra Software                       $3.44      $202.18    452,102
Eloquent                              $0.45       $12.28     52,082
Genesys                               $4.55      $174.20     29,698
Mentergy                              $0.92        $9.01     11,853
Nuance Communications                 $5.65      $299.22    534,686
Polycom                              $10.75    $3,066.10  2,745,297
Raindance Communications              $0.74      $272.59    944,871
Speechworks International             $4.10      $363.68    304,394
WebEx                                 $5.06      $977.33  1,622,964
Wire One Technologies                 $1.44      $156.24    435,032

Average                                          $508.98    664,580

Content Management
Actuate Corp                          $2.80      $317.21    773,251
Adobe Systems                        $22.20    $7,364.81  4,182,754
Broadvision                           $0.68      $778.28  6,405,635
Documentum                            $5.88      $831.42    695,851
Imanage                               $1.50      $185.88     91,188
Innodata                              $1.26       $63.57     49,926
Insightful Corporation                $1.25       $26.14     20,598
Interwoven                            $3.11    $1,016.25  2,729,539
Macromedia                           $11.30    $1,034.43  1,286,454
Stellent                             $13.24      $656.47    422,018
Vignette Corp.                        $3.08    $1,319.69  5,370,464

Average                                        $1,235.83  2,002,516

Instructor Led Training
Corporate Executive Board            $22.85    $1,277.71    448,652
Learning Tree International          $14.50      $528.43    141,089
New Horizons Worldwide                $8.30      $117.09     17,655
Provant                               $0.32       $11.71    103,042

Average                                          $483.73    177,610

Average Corporate Education                      $782.17    881,365
Companies

                                                 Return (%)
Company                                 1-Mon      3-Mon     6-Mon

Infrastructure Software and Service

Click2learn.com                          17.6       15.4      85.2
Docent                                   46.1       53.1     -68.3
RWD Technologies                          7.5       35.6     -15.9
Saba Software Systems                    -9.2      163.6     -68.2
Vcampus Corp.                             4.8      -21.4     -72.2

Average                                  13.3       49.3     -27.9

Content Providers

DigitalThink                             28.3       39.7      53.8
Dow Jones & Company                       8.1       20.5      -8.3
FactSet Research Systems                 16.6       44.1      -2.1
John Wiley & Sons                        -0.7       10.3      -2.6
ProsoftTraining.com                      44.1       53.1     -21.6
Skilisoft Corp.                           8.4       62.2     -24.3
SmartForce Public                        11.0       51.3     -29.7

Average                                  16.5       40.2      -5.0

Collaboration and Communication

Act Teleconferencing                    -21.9       -7.8      22.4
Centra Software                          20.5       -6.5     -52.9
Eloquent                                  5.0      -28.4     -48.8
Genesys                                  15.0       -7.1     -37.3
Mentergy                                 -4.8      125.0     -25.8
Nuance Communications                    -6.6       40.0     -49.5
Polycom                                  -1.3       39.8      47.6
Raindance Communications                  5.4      164.4     296.5
Speechworks International                35.7      128.2     -28.3
WebEx                                   -22.6       17.0      -6.8
Wire One Technologies                   -10.0        1.8      15.2

Average                                   1.3       42.4      12.0

Content Management
Actuate Corp                             10.7       25.8     -44.8
Adobe Systems                            -3.2       29.5     -33.9
Broadvision                              -9.0      201.1     -45.2
Documentum                               14.9      165.2      68.1
Imanage                                  22.9       97.3     116.2
Innodata                                 -1.0       48.5      -3.6
Insightful Corporation                   -1.3       -2.9     -14.4
Interwoven                                8.5      152.3     -42.4
Macromedia                              -19.8       47.0      -1.1
Stellent                                 25.6      105.3     -22.3
Vignette Corp.                           -0.7       51.7     -39.5

Average                                   4.3       83.7      -5.7

Instructor Led Training
Corporate Executive Board                10.3       40.7     -12.6
Learning Tree International              16.4       37.4      21.5
New Horizons Worldwide                    5.7       -0.2     -23.0
Provant                                  -8.3       44.7     -69.4

Average                                   6.0       30.7     -20.9

Average Corporate Education               7.1       53.6      -5.0
Companies

                                     Return (%)
Company                              12-Mon    YTD

Infrastructure Software and Service

Click2learn.com                      -69.2
Docent                               -63.8
RWD Technologies                     -15.4
Saba Software Systems                -66.9
Vcampus Corp.                        -47.9

Average                              -52.6

Content Providers

DigitalThink                         -36.7
Dow Jones & Company                   -3.3
FactSet Research Systems              -5.7
John Wiley & Sons                      7.1
ProsoftTraining.com                  -91.9
Skilisoft Corp.                       38.2
SmartForce Public                    -34.1

Average                              -18.1

Collaboration and Communication

Act Teleconferencing                   7.4
Centra Software                      106.5
Eloquent                             -65.2
Genesys                                NA
Mentergy                             -62.9
Nuance Communications                -78.9
Polycom                                5.8
Raindance Communications             226.3
Speechworks International            -77.1
WebEx                                 19.0
Wire One Technologies                 36.3

Average                               11.7

Content Management
Actuate Corp                         -72.4
Adobe Systems                        -46.6
Broadvision                          -76.8
Documentum                           -56.3
Imanage                               72.9
Innodata                             -46.0
Insightful Corporation                44.9
Interwoven                           -70.5
Macromedia                           -70.7
Stellent                             -42.0
Vignette Corp.                       -70.2

Average                              -39.4

Instructor Led Training
Corporate Executive Board             -7.7
Learning Tree International          -43.6
New Horizons Worldwide               -17.1
Provant                              -87.2

Average                              -38.9

Average Corporate Education          -23.3

Companies

COPYRIGHT 2002 American Society for Training & Development, Inc.
COPYRIGHT 2002 Gale Group