When Archipelago Learning Inc. goes public this week, investors will weigh the strong growth in the educational programs provider's products against shrinking budgets at public K-12 schools.
The Dallas company, which provides Web-based educational testing and study aids to students in kindergarten through 12th grade, will start trading later this week in an IPO worth as much as $106.3 million, or more if underwriters exercise their overallotment options.
Archipelago's primary focus on students in elementary and middle schools is a unique investment opportunity in the online education sector, which is "getting quite crowded," according to Scott Sweet of IPOBoutique. It's the third education services IPO this year. The other two focused on college students, as do most publicly traded education companies.
However, shares of similar online learning-tools companies that sell to K-12 students, such as K12 Inc., have been choppy this fall. Cash-strapped state and local governments are cutting funding to Archipelago's biggest customers, public schools. They may continue to do so as the weak economy hits tax revenue.
"If there are going to be continued cutbacks, that does represent a potential problem," said IPOfinancial president David Menlow.
However, Sweet said that Archipelago's subscription growth so far this year has been "exponential" despite the cuts in school budgets. He said testing programs like Archipelago's, which are geared toward individual states' educational standards tests, may be one of the last offerings schools cut from their budgets.
In its SEC filing, Archipelago said it believes it can grow as more of the 118,000 K-12 schools in the country emphasize student testing and teacher accountability in accord with the federal government's No Child Left Behind Act.
In the nine months ended Sept. 30, Archipelago earned $6.9 million, compared with $1 million for all of 2008 and $2.9 million in 2007. Sales rose 46 percent from the first three quarters of last year to $32.7 million.
Nearly 21,000 schools have subscriptions to Archipelago's core Study Island products. So far in 2009, student enrollments have slowed significantly from the prior two years. Sales to existing customers, however, are up strongly.
The company is looking for growth beyond its core primary school customers. Archipelago launched its "Northstar Learning" unit in April for post-secondary students and is pushing into the high school market, which made up only 10 percent of its service revenue last year. High-school products are typically pricier, Archipelago said.
Archipelago expects the offering to price between $15 and $17. The company projects net proceeds of $42.7 million, which it intends to use for general corporate purposes.
Archipelago is selling half of the offering's shares itself, according to a regulatory filing, and existing stockholders are offering the rest, including Provident Equity and the company's two founders. Underwriters Bank of America Merrill Lynch, William Blair and three other banks have the option of purchasing another 937,000 shares from the selling stockholders.
Archipelago does not anticipate offering any dividends on common shares. Shares will trade on the Nasdaq under the symbol "ARCL."
The company's private equity backers, Providence Equity Partners, were part of a consortium of private equity investors that took public Education Management Corp., which offers college degrees and certificates, in October.