ReEducational trip to RM

(By Richard Holway 6.00pm 8th June 09)
Last week I went on a school trip to see RM in Abingdon. I met my old friends John Leighfield (Chairman) and Mike Greig (CFO) together with Terry Sweeney (CEO). One of the reasons for the invitation to visit was that RM wanted to ‘put us right’ over some of our recent reporting. (For our 11th May report on their interim results Click here)

I went with an open mind and, I have to admit, I changed my views.

I first visited RM (or Research Machines as it was then called) back in the 1990s when my main argument with Mike Fischer (RM’s founder) at the time was why they continued to build their own PCs. Why didn’t they just concentrate on educational software?

15 years on RM still builds and supplies hardware. Most of it now is third-party; like the partnership they have with Asus for their netbooks (41,000 sold). But this ‘Commodity hardware’ has slipped from a clear majority of RM’s revenues to c35% of revenues in FY08.

Educational software has been a huge disappointment to me (and I suspect RM too) You may remember the bust-up several years ago with the BBC who had intended to enter this market with ‘free’ software. I don’t think the market has ever recovered. UK curriculum software was just 4% of RM’s revenue in FY08 (was 12% in FY07)

If I stopped there, you would get the image of a company in terminal decline. But you would be so wrong!

The three areas which are really motoring for RM now are:

- long-term contracts where RM takes over the build and then on-going support of educational installations. This is now 18% of revenues. They have had much success with the BFS programme (12 BFS contracts won to-date out of the 33 awarded; more than any other single supplier) with many more prospects in the pipeline.

- Education Resources which now represent 12% of RM’s revenues from nothing in FY07. An example of this is RM’s deal with Tesco for the new combined sports/computers for school scheme.

- International. We have long been suggesting that RM should move outside their UK stronghold. Obama has put great emphasis on education in his stimulus programme and, this time. RM wants to play. Hence the acquisition of Computrac (Learning Technologies) in the US in nov 08 for £5m. International revenues represented 12% of RM’s revenues in H1 FY09.

On my Abingdon visit, I was taken into the REAL Centre at Abingdon and was able to interact with (OK, play with!) all the stuff that RM now supplies. The Special needs terminals that allow handicapped kids to type with their eyes (I tried it and it really works). The build and programme your own robot (great fun!). The video and recording studios. And, of course, the fantastic range of whiteboards that are now standard equipment in today’s classrooms.

It is the Education Resources part that really worried us. What is a SITS company doing selling furniture and art? That's why we were rather critical about RM’s recent purchase of Isis Concepts (see RM – No, not the comfy chair) RM made the point that this wasn’t ‘comfy chairs’ at all (although you can judge that for yourself if you look at the Isis website) – it was the high tech stuff needed to enable classes to be equipped to utilise all the other high tech stuff that RM supplies – particularly in their BFS contracts. For example, I was really impressed by the modular units designed so that pupils could use and store their Asus netbooks. Or the interactive whiteboard units that could adjusted for use by pupils of all heights including those in wheelchairs.

RM needs to ensure that it doesn't replace one low-margin commodity business (hardware) with another (furniture and other resources). Their challenge now is to get the new business mix reflected in improved financial performance and therefore shareprice. It will not be an easy ride – transformations like this never are; particularly during a period when public sector spend will be under close scrutiny. But we, genuinely, wish them well.