E-FINANCE - status of e-learning corporate sector - Brief Article - Statistical Data Included

The e-learning corporate sector: Has it bottomed?

That is the question echoing on Wall Street, around the water cooler and from investors. Some experts believe recent marker momentum may fade to retest the April bottom, but then rise again as technology stocks gain speed in the second half of the year. That growing confidence on the part of institutional investors is based, in part, on recent Federal Reserve rate cuts and the approval of President Bush's roughly $1.4 trillion tax cut.

From a historical perspective, the five 50-basis-point rate cuts by the Fed do have positive implications. Periods following such Fed easing have spurred strong market performance. Since 1980, Standard and Poor's 500-stock index has climbed almost 19 percent on average in the 12 months following interest-rate cuts, during which growth stocks, particularly in the technology sector, have excelled. It's important to note that the corporate sector of the Jefferies & Co. Knowledge Service group and, more specifically, the e-learning segment of that sector are tied to the economy and movements in technology stocks.

With the market correction, portfolio managers and CEOs reevaluated the impact of the Internet's power as a channel and of the industries that will benefit from the Internet the most. We believe those to be knowledge-based industries such as financial services, entertainment, health care, government, and education. Even though educational content delivered over the Web is somewhat impersonal, it has the best nearterm fundamentals and economics for companies to benefit from financially. The opportunity to digitize proprietary content for internal or external use by corporations or educational institutions is phenomenal.

All of the other industries mentioned have impediments to implementation and eventual success: Doctors often fight the release of medical information, governments are slow to implement and constrained by cost, financial services firms have security issues, and entertainment content is often commoditized.

In our view, education will be the first and most successful industry to capitalize on the Web. Online learning providers will play a critical role in the transformation of communication, delivery of information, and efficiency of business practices--which will have a tremendous long-term impact on economic growth. Studies by the Brookings Institution indicate that the Internet could add 0.4 percent to annual U.S. productivity over the next five years, an increase we believe will come mostly from knowledge management or e-learning initiatives.

Due to the huge expenditures on IT in preparation for Y2K and the follow-on software and hardware updates in 2000, budgets for CIOs have favored tangible benefits during these unsteady economic times. As projects are pared back, CIOs will concentrate on implementations with less than a one-to three-year payback period by way of cost reductions or productivity improvements.

E-learning initiatives meet those criteria because they provide a clear ROI and strengthen channel relationships and employee performance. It should be noted that in a recent study by ASTD, firms with an average investment of $1,595 per employee in training experienced 24 percent higher gross margins, 218 percent higher income per employee, and 26 percent higher price-to-book ratios. We are aware of

IT spending cuts and delays, which will affect long-term, visionary IT projects, but we remain optimistic that such cuts will have a minimal impact on knowledge services initiatives due to the mission-critical nature of online corporate training.

The fear and, in some cases, reality of corporate spending cuts during tough economic times provided the second leg down (August 2000 to March 2001) in terms of performance for the knowledge sector. The first leg down for this group from its February 2000 high was due to the burst of the Internet bubble. Recent strong performance is encouraging.

To answer the question, Has the e-learning corporate sector bottomed? We believe it has. Since January, we've been cautious on this group of companies due to the economy and negative investor psychology. We still believe a slowing economy looms overhead, but we could see a significant upside as several top providers reach operating breakeven in the third and fourth quarters of 2001. At that time, we would expect to see profit-raking in K-12 and higher education and a strong rotation into the corporate sector stocks.

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.

Peter Martin, author of the new T+D column on e-learning market news, used to be a newspaper boy. Coincidence?

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COPYRIGHT 2001 American Society for Training & Development, Inc.
COPYRIGHT 2001 Gale Group