An IPO That Knows Its ABCs

Shares of Blackboard (BBBB), a Washington, D.C., provider of education software, soared 43% to $20.01 Friday in their market debut. The stock climbed as high as $23.40 intraday, a 67% jump from the initial public offering price of $14. Blackboard's first-day return was surpassed this year only by Jed Oil (JDO), up 104% on April 5; Eyetech Pharmaceuticals (EYET), up 54% on Jan. 29; and Intersections (INTX), up 45% on April 29, according to Thomson Financial.

"This is certainly a positive reinforcement for those investors who have been on the fence as to whether technology is overrated as a potential investment," says David Menlow, president of IPOfinancial.com, a research firm in Millburn, N.J. "It says that investors are willing to jump into the deep end of the pool, provided they still have their lifejackets on."

The first-day performance of Blackboard's stock was the best by a tech IPO since the 43% rise of software company Kintera (KNTA) last December.

Blackboard's applications are targeted at colleges, universities and other education providers. The Blackboard Academic Suite provides an online extension of the classroom, enabling students to access syllabi and other classroom materials, including grade books and school calendars. The Blackboard Commerce Suite turns student identification cards into debit cards for purchasing food and textbooks. According to the company's filings with the Securities and Exchange Commission, more that 1,100 U.S. postsecondary institutions license one or more of Blackboard's applications.

For 2003 Blackboard posted a net loss of $11.5 million on $92.5 million in revenues, compared with 2002's net loss of $51.4 million on sales of $69.9 million. For the first quarter of 2004, it lost $1.8 million on sales of $25.2 million vs. a loss of $4.5 million on $20.2 million in revenues a year earlier. At the end of the first quarter, the company had $26 million in cash, but cash flow was negative $1.9 million.

Of the 5.5 million shares offered, Blackboard sold 3.65 million, while insiders sold the remaining 1.85 million. In addition, the company granted its underwriters an option to purchase up to an additional 825,000 shares to cover overallotments. After the IPO, management will own about 20% of the company.

IPOfinancial.com's Menlow says the market remains very nervous about IPOs — technology offerings in particular. But very few tech issues are going public without being profitable or nearly so — a welcome change from the late 1990s, he says. While tech offerings a few years ago dangled the promise of quicker gains than other issues, profitability was rarely on the table. Menlow says companies back then usually came to market because they needed more money fast after using up all of their private funding.

"This is a good market for identifying value, and investors seem to have stopped the unbridled enthusiasm of bidding up an IPO just for the fact that it's an IPO," says Menlow. "This is investors' reaction to the bubble bursting. Now, they do their homework and look at individual stocks rather than follow the pied piper that is the hot sector du jour."

Investors seem to be warming up to IPOs after a long hiatus, he says, based on the 75 total issues so far during the first half of this year. There were just 10 IPOs in the same period of 2003. Still, he says, it remains a buyers' market, so investors aren't scooping up every offering that comes along. That fact bodes well for the market's perception of Blackboard.

Quote:
"I don't know if this is a benchmark for the broader IPO market as a whole," says Menlow of IPOfinancial.com. "I would say this is a stepping stone of encouragement that other companies do have access to the capital markets. During the three-year period of slow growth in the quantity of IPOs, companies didn't say, 'We have enough money and don't need to come public.' There was probably a great need for money, but the capital markets have been harsher with which companies they will allow through the fine-mesh screen. It's not the all-clear for every company to come into the marketplace, but we're encouraged by this. The pace is continuing." (Menlow doesn't own shares of Blackboard; IPOfinancial.com doesn't do investment banking.)