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The Day Ahead: Can investors learn to love DigitalThink?

Online learning service has high hopes for its IPO

DigitalThink, which provides online learning courses and services, is hoping that investors will learn to love e-learning and its initial public offering of 4.4 million shares. But so far e-learning stocks have turned in some average grades.

The list of related online learning companies that have underwhelmed the market is long. In fact, many online learning companies have changed their name to get a stock boost. For example, Click2learn.com, the company formerly known as Asymetrix, has rebounded lately, but still has hefty losses. SmartForce used to be known as CBT Systems and Fatbrain.com, which offers IT education resources as one of its businesses, used to be Computer Literacy.

Aside from name changes, it has also become a fragmented market with the likes of SkillSoft, which had a so-so IPO itself, Learning Tree and McGraw Hill.

"Education hasn't been a good area," said Randall Roth, an analyst with Renaissance Capital. "The market has thumbed its nose at it. The main problem is it's a crowded field."

With that backdrop, along comes DigitalThink. The company is expected to price this week between $10 and $12 (£6.20 and £7.40) with CS First Boston as the lead underwriter. However, San Francisco-based DigitalThink might warrant some attention because it has more than 200 customers and 180 online courses in the technology, financial services, healthcare and telecommunications industries. Customers include Adobe, Deutsche Bank, Hewlett-Packard, KPMG, Lawson Software, Sun Microsystems and Texas Instruments.

DigitalThink also has more than one revenue stream. According to Roth, the company brings in revenue from registrations and a consulting service. It has also enlisted resellers, but hasn't received any material revenue from the effort.

The company's revenue growth has been strong for the last three quarters. For the quarter ending 30 June 1999, sales were $1.17m (£725,000). For the quarter ending 30 September, sales jumped to $2.13m (£1.32m). For the quarter ending 31 December, sales hit $3.17m (£1.96m). The company has an accumulated deficit of $34.1m (£21.1m) through to 31 December.

Although DigitalThink has ramped its revenue, the company is highly dependent on one customer, KPMG, which accounted for $2.2m (£1.36m) of the company's December quarter sales. That dependence on one customer is a risk, said Roth. Other risks include competition, acceptance of online learning and high labour costs. DigitalThink has distinguished itself by hiring tutors for its online courses. The tutors are likely to be a long-term benefit, but won't push DigitalThink into the black, said Roth.

However, DigitalThink is doing something right. The company landed Tenet Healthcare as a customer in January and expects to recognise revenue over two years. DigitalThink will deliver at least 500 hours of courses and Tenet will invest $4m (£2.5m) in the company at the IPO. But don't expect big stock gains initially. "The momentum for e-learning is mixed," said Roth. "Consolidation would help and companies have to show the efficacy of their programs."

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