CODY’s Education Inc

Moat: 1/5

Understandability: 2/5

Balance Sheet Health: 3/5

A provider of digital learning solutions for K-12 education, focusing on core curriculum and supplemental instruction.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

CODY’s Education Inc. (CODY), formerly known as Voyager Sopris Learning, is a K-12 education technology company that offers a blend of core curriculum, supplemental resources, and professional development services. Their solutions are primarily digital, focusing on personalized learning and data-driven insights for both educators and students. They aim to combine high-quality curriculum with tools that make learning more engaging and effective.

CODY’s revenue comes primarily from curriculum sales (both digital and print), supplemental materials, and professional learning services.

Industry and Competitive Landscape:

The K-12 education market is highly competitive, with a mix of established publishers and tech startups vying for market share.

Large Publishers: Companies like Houghton Mifflin Harcourt and McGraw Hill offer comprehensive, broad curriculums, and while they are transitioning to digital, they still have large scale traditional print operations which they have to maintain.
Smaller Digital Publishers: Startups such as Learning Without Tears, Newsela and Khan Academy offer niche digital content.
EdTech Platforms: Competitors also include a range of tech-forward educational platforms that offer learning management systems and digital learning resources.

The trends are as follows:

Digital Transformation: There is a huge shift to digital learning resources.
Personalization: There is a demand for personalized learning approaches.
Data-Driven Insights: The focus is growing on data to track student progress and improve teaching.

What Makes CODY Different:

CODY differentiates itself through its blend of a core curriculum with a focus on using technology to provide personalized learning. However, they are far smaller than companies they compete against and have far less of an established moat. Their strategic advantage seems to be their focus on special needs students and their services for struggling schools.

Key differences include:

Focus on specific student needs.
Technology integrations to make the process streamlined.

Financial Analysis:

Revenues: While CODY is growing at a reasonable pace (14% on a yoy basis in the latest Q1 2024 report) their revenue growth is tied to a complex set of sales cycles that is hard to predict. Their revenues have increased from $362.7 Million in 2020 to around $410.3 Million in 2023, an increase of about 13% in total (but has large variations year over year).
In their latest earnings call, management acknowledged some issues with sales pipelines but they expect it to even out over the year as their main sales season is in the summer.
Profit Margins: CODY has a reasonable gross profit margin, but that has been declining because of increased cost of product sales. Their operating margins are slim, and they are not profitable on a GAAP basis. There also has been some variation in their margins. It will take them some time to get to profitability, so these numbers need to improve significantly, though their adjusted EBITDA margin has improved significantly from 11.2% in 2020 to around 18% in 2023.
Cash flow: They are still not cash flow positive, which makes them reliant on the availability of additional credit.
Capital Spending: Capital expenditures are typically around 30 Million dollars a year which is a significant chunk of their income.
Guidance: The management has provided guidance of 7.4% to 10.4% revenue growth for full year 2024 and reaffirmed their expectation of 20% adjusted EBITDA margin for full year 2025, as well as maintaining an operating cash flow breakeven point.
Debt: While they have high debt, it is not exorbitant enough to put them at the risk of bankruptcy. They currently have around $1.2 billion in long-term debt. They are working to increase cash flow and to refinance debt in order to lower interest expenses.

In their latest earnings report, they expect their interest expense to drop significantly in future quarters because of their refinancing efforts.
Liquidity: As of their latest quarter, they have about $70 million in cash and cash equivalents, and have access to a $100 million revolver for any unexpected liquidity issues.

Moat Analysis:

CODYY’s economic moat is very weak, which is why I have given it a rating of 1 out of 5. They have some intangible assets which are limited, because of their weak brand presence, as well as a lack of recurring revenue. The switching costs are very low, as customers can switch to other digital providers easily, but even worse, a lot of their content is not integrated and easily swappable with their competitions’. This makes it easier for educational institutions to switch to other alternatives, or use them only on a test basis without large commitments.

Intangible Assets: Some brand awareness, but this is not a well-known company and it lacks significant brand recognition in many areas.
Switching Costs: Some switching costs exist for integrated software, but this is generally limited.
Network Economics: No network economics exist for this company.
Cost Advantage: There is no clear cost advantage with this company, and they tend to operate on very low margins.

Risks to the Moat and Business Resilience:

Competition: Intense competition could continue to pressure their margins and reduce their profit potential.
Technology Disruption: Rapid technological changes in education technology could make their current offerings less relevant, requiring them to continually invest in R&D.
Execution Risk: Management has to follow through on the promise that the company is making improvements in operational efficiency. They also need to be able to effectively navigate a rapidly changing educational market and build a brand.
Financial Instability: Lack of profitability and free cash flow makes them dependent on future credit offerings.
Regulatory Changes: Changes in government funding or regulations could greatly affect the company’s profitability.
Economic Downturn: School budgets can get cut if the economy is not doing well.

Despite all the problems, their focus on digital resources and personalization, positions them to grow their revenues over time. However, they will have to show that they can navigate these challenges effectively in order to become more of a force in the market.

Understandability:

CODY’s business model, while straightforward in its purpose—providing educational content—is quite complex in execution. While they provide a necessary product, they rely on many factors and require constant innovation and improvement to succeed. Their business model is understandable, but the way the business is executed makes it difficult to keep track of all the necessary factors at play, so it gets a rating of 2 out of 5.

Balance Sheet Health:

CODY’s balance sheet is neither great nor terrible, which is why it gets a 3 out of 5 rating. They have a decent amount of assets, and their current liquidity is good. However, they have high debt, which limits their options. Also, there are some large uncertainties relating to their deferred tax assets, and how that will eventually reflect on their bottom line.

Key Points: * High debt of about 1.2 billion dollars (but with no near term maturities). * Still not making consistent earnings. * Decent working capital.

Recent Concerns and Controversies:

Sales cycles: As discussed before, management acknowledged some issues with sales pipelines, and this is an important area to keep watch of.
Profitability: The lack of profitability is another major problem that needs to be addressed, because they are relying on outside funding, which may dry up in difficult times.
Goodwill: There is about 2 billion in goodwill on the balance sheet.

Conclusion:

Cody is a business that is playing in a space where there is potential for enormous growth, because of the increasing use of technology in the education space. However, the business is struggling with profitability, and their current moat is severely limited. However, they have a management team that is willing to be honest about their problems, and are taking efforts to fix them. While there are a lot of hurdles that the company has to clear, they are on the right path for long-term success if they can execute their plans well.