The 300 Club

If you think there’s money in teaching English to people who don’t speak the language, you’re right.

Of the $56 billion-plus that was reportedly spent worldwide on language learning in 2013, a big chunk was spent learning English.

In fact, the number of people who now want to do so is estimated to top two billion.

So, yes, there’s money to be made — particularly in combining educational content with technology for the efficient delivery of learning products and programs.

One such company that’s risen to the challenge is Canadian junior penny stock Lingo Media Corp. (TSXV─LM).

A Toronto-based Canadian small-cap stock specializing in both on-line and print-based education products, Lingo has focused entirely on demand for learning English abroad.

For many years the company has operated a business unit that co-publishes textbook programs in China — a unit with free cash flow of about $1.5 million in 2014.

But the company realized it could serve a much bigger market through an on-line digital library. And, in thinking it could, Lingo obviously wasn’t alone.

For example, edtech, or educational technology — the use of technology to teach language — is a sub-sector that’s fast outpacing the growth of bricks-and-mortar education with its classrooms and print-based products.

So, to serve this growing market, Lingo created a second business unit.

Not only did the company buy a big, award-winning content library, one with very sound courses, but it has since spent time developing and improving it.

And because it’s much easier to adapt an existing platform to serve this function than to build a new one, the company, to help roll the platform out, made two other acquisitions.

Then, to improve the platform and user interface, Lingo inked a strategic alliance with a software outfit that specializes in language learning technology.

The proprietary software and content, now available, enables users in any country to use diversified content to learn English.

Put another way, content can be matched to the cultural traits of a particular region, or to the specific needs of a corporate client.

For example, air traffic controllers in, say, Asia, would want to ensure the English they learn is precise and clear.

By contrast, elementary school teachers would want to be taught English that would be appropriate for students in grades one to six.

Potential new clients for Lingo include government agencies, corporations, universities and school boards.

Lingo’s business model mimics that of other software-as-service companies.

Recurring revenue key to Canadian small-cap stock’s growth

Not only does Lingo get a licence fee when each new client accesses the program, but it gets recurring licence fees after that.

Of course, Lingo also earns income by retaining content ownership of the new programs it creates in its digital library, a library that now boasts thousands of lessons.

Moreover, by making only minor adjustments, those lessons can be offered in any country.

Admittedly, integrating new acquisitions as part of a turnaround strategy can always be risky.

But to make it less so, Lingo has partnered with a top-tier software development team.

The company has also enlarged its editorial crew to include people with the skills necessary to develop content, as well as react quickly to the needs of its clients.

In addition, to help develop its products, Lingo boasts relationships with external contractors.

And rather than open permanent offices in each country in which it does business, the company gives its distributors incentives to sell its products.

For a small-cap stock like Lingo, such flexibility is key in keeping costs down, while continuing to deliver the services clients want.

It also gives it the necessary pricing advantage to keep the company out in front of bigger rivals in the same sector.

Indeed, with its software and services, Lingo can generate very high margins, putting it in a position to grow earnings rapidly as it adds new clients.

Moreover, by being nimble, the company has the advantage of continually adapting — and, improving — both content and technology that’s growing rapidly.

For its first quarter, Lingo posted revenue of $651,630 — a 176 per cent increase year over year.

The company also swung to a net profit of $225,430 from a net loss of $52,870 for the similar period in 2014.

In addition, Lingo saw comprehensive income swing to a positive $146,600 from a negative $181,570.

Stronger numbers likely for this small-cap growth stock

But because its legacy publishing business fuels seasonal strength in the second and fourth quarters, investors could see even stronger numbers for the rest of 2015.

With 30 million shares outstanding, Lingo’s market value is only about $7 million.

Lingo’s priority is not only to win new contracts that will fuel revenue, earnings and cash flow, but to pay off debt and finish the year with a clean balance sheet.

In the meantime, the company remains profitable. And its business model is easy to understand, as well as one that should fuel rapid growth.

For speculative investors, small-cap growth stocks with low debt, but high profit margins, tend to offer greater potential for market gains.

Indeed, with Lingo’s peers now trading as high as 15 times earnings, there’s obviously plenty of upside potential to keep Lingo on your list of Canadian penny stocks to watch.