Description

SkillSoft PLC provides large organizations with a suite of “e-learning tools” that are designed to improve learning and efficiency enterprise-wide. Getting quickly to the numbers, SKIL trades for about 10x FCF – and this is after their disappointing guidance. The timeliness of this idea pretty important due to the likelihood of a share buyback that should provide some much needed support for the stock. Friday’s move down to these levels was unjustified by any fundamentals and it is due for a short-term bounce. In the longer term – the next 12 to 18 months – it could and should rise significantly.

I have written up on SkillSoft in the past – at about this price. So I am not going to go into details about its operations much. Here is quick description. Founded in 1998, SkillSoft has about 2,000 course titles on business skills and another 2,000 course titles for Information Technology (IT) training. Additionally, through its Books24x7 segment, it now has over 6,000 e-books available on various topics covering software to business books.

To give you a sense of their size, SkillSoft has about 3,000 clients with over 5 million users in these organizations. For its fiscal year ending in January 2006, SkillSoft expects to have total revenues of about $200 million. Again, these numbers were very disappointing and the stock’s recent downturn reflects that for sure. SKIL was trading above $7.50 – only 4 months ago. One year ago it traded at over $13.50 per share.

A Tough Road

Over the past few years, it goes without saying that companies like SkillSoft have experienced a tough environment. Its customers have tightened up their spending plans and have yet to fully open their wallets again. This backdrop has made it difficult for SkillSoft to increase its revenues and is putting pressure on them from a pricing standpoint. I don’t necessarily expect this environment to change quickly, but if and when it does, SkillSoft’s stock will quickly rise. This is now much more of a stabilization situation – especially at these prices. I really like the risk/reward when the stock is in the low $3 range.

Why is patience justified?

Balance Sheet – SkillSoft has around $65 million in cash on its books and carries no debt. Further, , SkillSoft will make money in its fiscal year 2006 – building up its cash pile by about another $20 million. They should end the year with about $85m in cash – even after considering the final $15m for the 2002 class action lawsuit (based on the expectation that its insurance policy will reimburse them like last time)

Free Cash Flow - The stated guidance is for $8m to $13m in earnings in 2006 (ending Jan. ’06) but that is after knocking it down by $10m in amortization of intangibles and another non-cash tax provision of about $4.5m --- so it cash EPS for 2006 should look more like $22m-$25m or $0.20 to $0.24 per share. Note, this should closely approximate SKIL’s free cash flow numbers. Also, with its extreme operational leverage (its gross margins are about 85%-90%) – any sales momentum really juices the bottom line.

Value of NOLs - SkillSoft has about $350 million of NOLs. Primarily due to its merger with Smartforce in 2002, SkillSoft will now basically operate as an “almost tax-free” company for the next 10 years or so. The only catch is that they have to keep making money to fully take advantage of this benefit. It is always hard to value, but I estimate the NOLs are worth at least worth $50 million – on a present value basis. Because a good chunk of the $350m in NOLs were acquired, there is an annual limit on how much they can use to offset taxes in a given year. Nonetheless, they do have about $100m in NOLs that have no annual usage limit. These NOLs have value - $50m is my estimate of this value – to SKIL itself. An acquirer of SKIL may be able to utilize the NOLs much more quickly and could therefore be seen as even more valuable to them.

Share Buyback - Given that the company’s has (1) a 7 million share repurchase authorization in place and (2) its stock has plummeted in recent days to about $3 per share and (3) its blackout period ended on Friday – I think it is likely that the company will start repurchasing shares this week. This should provide some support and comfort to start accumulating shares at these levels.

A Very Cheap Stock

With these numbers, after netting out the $0.60 per share in cash and the approximately $0.50 in NOL estimated present value, SkillSoft’s stock is currently selling for only about $2.00 per share. This is about 10x its projected (and very dismal) free cash flow this year. Further, it sells for only about 1x projected sales. This stock is too cheap and its downside is very limited, in my view. It wouldn’t be surprising at all to see possible M&A activity on this stock if it sits here for too long.

I have owned SkillSoft in the past, purchasing it at about these levels a couple of years ago. As a company, their results have been disappointing – no question about it. As a stock though, when purchased at the right price, it has yielded wonderful returns. Once again in the low $3 range, I think it is really the right time to own SKIL once again.

Catalyst

Cash and NOL value of about $1.00 per share – no debt.
Free Cash Flow per share of about $0.20 – on lowered guidance.
10% FCF yield.
Share repurchases provide downside support.
Possible M&A activity.