By Arlene Weintraub
Since President George W. Bush announced a sweeping plan to improve the nation's schools, John Kernan has been embarrassed to admit he voted for Al Gore. That's because Bush's plan could directly benefit Kernan's publicly held e-learning company, Lightspan Inc. "Bush wants the government to pay for every state to test every kid every year," says Kernan, Lightspan's founder and CEO. "This President is going to be good for Lightspan."
Why does Kernan think his San Diego-based Lightspan is in the sweet spot? Two years ago, the company branched out from its main business, making educational games for the Sony PlayStation, and started offering Internet programs that prepare students for standardized math and reading tests. Even without the Bush push, sales shot up to $99.1 million in the year ending Jan. 31, 2001, from $16.9 million the previous year.
But there are liabilities as well. As has been the case with other Internet plays, Lightspan's sales spurt came with heavy spending, including acquisitions. It reported a net loss of $32 million last year, after a loss of $55.7 million the previous year, largely because of expenses for product development and sales and marketing. The company's stock has dropped 91% from a year ago, to below $2. Another concern: Textbook publishers like Pearson Education are moving aggressively into e-learning. That doesn't daunt Kernan. "We're going to be a thorn in their side," he says of competitors.
Lightspan's three new Net products could help sharpen that thorn. The company's own team has developed Lightspan Network, an online portal where K-8 teachers and students can access lesson plans, encyclopedias, and activities all tailored to their state's specific curriculums. Added to that are two recent acquisitions: Academic Systems, an Internet-based college-prep course in math and English that Lightspan bought in late 1999 for 7.2 million shares of preferred stock, and eduTest.com, a Virginia company that Lightspan acquired last year for $15.7 million in cash and stock.
EduTest provides practice versions of standardized tests given periodically in public schools. Students take the tests on the Net and receive grades immediately, plus feedback on what they got right and wrong so they know the areas they have to work on. Teachers and administrators also have access to the scores on the site. "EduTest helps teachers identify where problems exist," Kernan says.
Once problem areas are known, educators can turn to the company's original offering -- Achieve Now -- to help students improve their scores. Achieve Now is a collection of interactive games featuring colorful cartoon characters with dogs teaching grammar, and turtles coaching phonetics. "It's particularly effective with children who have trouble focusing," says Kimberly Hosea, a fourth-grade teacher at Walker Elementary in Savannah, Tenn. "It allows them to work at their own pace, and the kids are excited."
The combination of new and old products give the company's sales team a one-two punch. And they're starting to score with high-profile signings for the new lineup. Last June, New York City's Board of Education signed onto the Lightspan Network -- a deal worth $2.5 million over three years. And in January, Lightspan won a three-year, $1 million contract for Academic Systems from a group of Dallas community colleges. Plus, more than 910 school districts nationwide -- among them 30% of the largest districts -- use Achieve Now.
Whether Lightspan has enough of a headstart to put real distance between itself and competitors remains to be seen. Textbook publisher Pearson Education, for instance, launched a series of online educational and testing sites last year. It's only a matter of time before the other leading textbook publishers -- Houghton Mifflin, Scholastic, and The McGraw-Hill Companies (which also publishes BusinessWeek) -- increase their presence in e-learning, predicts Brandon Dobell, an analyst for Credit Suisse First Boston.
"Could these old-line companies dominate? It wouldn't surprise me," Dobell says. "Relationships go very far in education, and those relationships are not easy to replicate."
As the offline leaders make their big pushes into online education, Lightspan could become an acquisition target. But Dobell says its cash-burn rate of $9 million to $11 million a quarter may be too high for most publishers to stomach. "Lightspan has a good reputation and good products, but they spend a lot of money and that makes them less attractive," he points out.
With that in mind, Kernan is focusing on belt-tightening. He closed the Santa Monica office in February, which should save $2.5 million a year. And because new products are in place, he expects to be able to cut the company's development costs, though he won't say by how much. Nor will he project when Lightspan might turn a profit. But the silence makes investors skittish. "If cash-burn falls to $6 million or so a quarter, the company will be fine for a couple of years," Dobell says. "But we don't know when it will turn a profit, and that's really a problem."
Kernan isn't concerned. Lightspan has $78 million in cash -- and education-minded President Bush. His new plan even proposes financial rewards for school districts that show significant improvements in students' test scores. "Kids need to get up to speed," Kernan says. Nevertheless, if he wants Lightspan to graduate, he'll have to work fast to improve the company's grade in one crucial subject: profitability.
Arlene Weintraub is a correspondent for BusinessWeek in Los Angeles