You are on page 1of 5

SmartClassNewModelFAQ Introduction: Attheinitialphaseofthedevelopmentoftheproduct,Educomphadtoprovidefinancingtoits customerstobuySmartClasstocreateamarketentrystrategywhichmadeiteasyforour customerstobuyourproduct.NowWith2200+schoolsSmartClassisanacceptedproductand thepaceofgrowthisincreasing.Underthecurrentcapitalintensivemodel,itwouldstrain EducompsbalancesheettotakeadvantageoflargegrowthopportunitiesinSmartClass,hence theneedtolookforalternativefinancingstrategies.Wehaveearliertriedoperatingleaseand financingfromourcomputervendorswhichisexpensiveandtheamountavailableislimited. FurtherastheSmartClassbusinessincreaseditspenetration,Educompalsohadtomanage logisticsissuesinservicingthelastmileandtoensurebetterefficienciesitwasrequiredto outsourcethenoncoreactivitiessuchasinstallationandmaintenancetocompaniesthatcould focusexclusivelyonlastmileservicing,sothatEducompcouldfocusonthehighvalueaddand IPactivities.

es. NewSmartClasssalesModel: InthenewSmartClassbusinessmodelEducompwillsell,bothhardwareandcontentasa packagetoathirdpartyvendor.Thevendorwillinstalltheequipmentintheschoolsandalso provideservicesofinstallation,commissioning,maintenanceandservicingthecustomer.The vendorwillsecuritizethe5yearreceivablesfromtheschoolsfromaconsortiumofbanksand payEducomptowardsthehardwareandcontent.Thecontractwiththeschoolwillbea tripartiteagreementwhichlaysdowntheresponsibilitiesofEducompandthevendor. Assumingthatthetripartitecontractwiththeschoolisworth$100,EducompwillselltheHW+ Contentpackagefor$75.Thevendorwillsecuritizeits$100receivablefromtheschoolfrom thebankandreceiveapprox.$5460whichisthediscountedvalueofthereceivablesandthe samewillbepaidtoEducompupfront.$25willberetainedbythevendortomeetitsobligation tothebank,anditscostofservicing,operatingandmaintenance.Thevendorwillbeleftwitha profitof$4afterdischargingitsobligations.Thisisinlinewiththeprofitabilityofsystem integratorsanddependingontheefficiencyofthevendorthisprofitmayincrease. Accountingpolicy: Aspertheapplicableaccountingstandardsthecontentandthehardwarecanberecognized upfrontbeinganonrefundablesale.Theonlydifferencecomesinwhenexistingcontractsare transferredandsecuritizedasthehardwareintheexistingcontractsisalreadycapitalizedinthe fixedassetsandwhenwearetransferringthehardwareitwillberemovedfromthegrossblock andwillbecomeabalancesheetitem(cash)whileincaseofthesalemodelofnewcontracts, thehardwarewillbepartofincomefromoperation.Sinceourcontentisanonrefundablesale butwehaveaneconomicobligation(notlegalobligation)toprovideupdateswearerecognizing 50%contentincurrentyear&balancesubsequentyear(s).Inthenewmodeltootheschoolis lockedinfor5yearsasbefore,whatwehavechangedistherecoveryofcashandcapexupfront alongwithaportionofcontentrevenues.

TheChartsbelowshowtheimpactofthemodelonEducomprevenuesandprofits: RevenuesBOOTmodelTotalrevenueof100dividedover5years,equally:
60 50 40 30 20 20 10 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 20 20 20 20

RevenuesNEWmodelTotalrevenueof75forEducomp,and25tothevendor:
60 50 40 30 20 10 0 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 0 0 22.5 52.5

Comments:Revenuevisibilityincreasesandismoreinlinewiththeactualorderbookingfor Educomp.Intheoldmodeltherevenuewaslaggingcapexandrecognitionwaslaggingorder fulfillment. PretaxprofitsBOOTModel(abouta35%pretaxmargin):


25 20 15 10 5 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 7 7 7 7 7

Pretaxprofits=NEWmodel:
25 20.5 20 15 10 5 0 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 0 0 20.5

Note:TotalprofitsforEducomphaveincreasedfrom35to41,whichispositive. ImpactonCashFlow: IncomingCashflowintheBOOTModel:


60 50 40 30 20 20 10 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 20 20 20 20

IncomingCashflowintheNEWmodel:
60 50 40 30 20 10 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 4.2 4.2 4.2 4.2 58.2

Note:Incomingcashflowhasalsoimprovedwhichisapositive.Cashflowinyear1is3xearlier cashflow.

EduSmart: EduSmartServicesPLtd,thevendorhasbeenfoundedbyexemployeesofEducompwho understandourqualityanddeliverynorms.Educomphasfacilitatedthecreationofthemodel andseededthesame.Educomphasconceptualizedthemodelinpartnershipwithaconsortium ofbankstoderivemaximumbenefitforEducomp.Sincethisisthefirsttimesuchasmodelhas beenconceptualized,togivecomforttothefinancialinstitutions,wehavegivenacorp. guaranteeforthetimebeing.Weexpectthatoncethesecuritizationmodelisproventothe bank,thisguaranteecanbewithdrawn.ThematerialriskofrecoursetoEducomponthe guaranteeisminimalasthepastrecordofSmartClassshowsalmostzerodefaultsfromschools. Doesitmakethemodelmorecomplicated? No,themodelbecomesimplersincegoingforwardaninvestorneedstoonlyunderstandthe totalnumberofschoolssignedandtheaveragevalueoftheschoolcontracttoarriveatthe revenuenumber,thusourmodelwillbecomesimplerandeasiertounderstandandmodel.We willprovideguidanceatthestartoftheyearonthenumberofschoolswhichEducompwill implementwhichwillbeinlinewithcurrentpatternofseasonality. Willitmakeourquarterlyrevenuesmorevolatile? No,itwillnotmakequarterlyrevenuesmorevolatileasweintendtoguideabouttheextentof transferofoldcontracts.Onceallneworderstransitiontothenewmodelthevolatilitywillbe exactlythesameasearlier(i.e.Inlinewithseasonality).Onceweguidereasonablywell investorswouldknowwhattoexpect.TheSmartClasssalesengineisnowmatureenoughto predictwithareasonabledegreeofaccuracy. BenefitstoEducomp: a. Cashflowissignificantlyimproved b. ProfitabilityisimprovedatEBITlevelbyalmost9%duetotaxsavingstrategy c. Qualityofbalancesheetimprovesandcanbeusedforotheropportunities d. NoriskofequitydilutionduetoSmartClassfundingneeds e. Debtorsarereduced f. CreatesplatformforhugescaleupforSmartClassmodel Goingforwardwhattoexpect: Weexpecttoincreasethetotalnumberofschoolssignedonanannualbasisbyover100%due tothemassmodelforSmartClass,howeverthetotalnumberofclassroomsperschoolwillbein therangeof15andthefeeswillbeintherangeof120175perstudentaswepenetrateinto thesmallercitiesandtowns. SmartClasshasalotoffurtherheadroomtogrow;thecurrentmarketpenetrationislessthan 5%.Educompisinvestinginmorepeopleandadvertisingtoacceleratethedemand(e.grecent initiativewithSaatchiandSaatchi),withtheseinitiativesandSmartClasscatchingoninschools, itishardlylikelythatgrowthwilltaperoffeveninthe57yeartimeframesoanyfearsof SmartClassslowingdownandrevenuesfallinglikeacliffarehypothetical.

Conclusion: TheNewmodelwillincreaseprofitability,increasecashflow,reducedebtors,increase operationalefficiency,reducecosts,improvequalityofbalancesheetwithoutanyadditionalrisk toEducomp.Furtheritcreatesamodel/structureforustoraisemorecapitalfromfinancial institutionstofundourgrowthwithoutresortingtoequitydilution. Futuretaxplanning ThecompanyhasengagedBMRAdvisorstoconductacomprehensivetaxplanningreviewto savetaxinviewoftheincreasedprofitabilityofthenewmodel.