Educate, Inc. Announces Strong Second Quarter Results and Raises
Full Year Financial Guidance BALTIMORE, July 28
/PRNewswire-FirstCall/ -- Educate, Inc. (NASDAQ:EEEE), a pre-K
through 12 education services company delivering industry leading
tutoring as well as high quality supplemental education programs to
families and schools, today reported financial results for the six
and three-month periods ended June 30, 2005. Financial Highlights
For The Six-Month Period Ended June 30, 2005 (excluding other
financing costs): - Revenues increased 19% to $201.3 million. -
Learning Center same territory revenue growth was 5% during the
period. - Operating income, as adjusted, increased 21% to $33.2
million (an increase of 73% after including certain non-cash stock
compensation expenses incurred in 2004). - Operating margins, as
adjusted, increased from 16.2% to 16.5%. - EPS from continuing
operations, as adjusted, were $0.42, an increase of 17% from $0.36
in 2004 (or $0.40 per share, an increase of 186% over the $0.14 per
share in 2004, including certain non-cash stock compensation and
other financing costs). See Tables 1 and 2 for a reconciliation of
EPS, operating income and operating margins, each as adjusted.
Financial Highlights For The Quarter Ended June 30, 2005 (excluding
other financing costs): - Revenues increased 18% to $103.1 million.
- Learning Center same territory revenue growth was 5% during the
second quarter. - Operating income, as adjusted, increased 18% to
$19.5 million (an increase of 139% including certain non-cash stock
compensation expense in 2004). - Operating margins, as adjusted,
remained constant at 18.9%. - EPS from continuing operations, as
adjusted, were $0.25 as compared to $0.22 for the second quarter of
2004. Including other financing costs in both periods and certain
non-cash stock compensation in 2004, EPS from continuing operations
were $0.23 as compared to $0.01 in the second quarter of 2004. "We
are pleased to report strong financial results and continued
success in our strategy of expanding revenues through addressing
consumer needs with more convenient access to our services and
programs," stated Chris Hoehn-Saric, Educate, Inc. Chairman and
Chief Executive Officer. "Along with continued growth in the
current period and raising full year 2005 guidance, we are excited
by the fact that we have already delivered over two thirds of our
expected full year net income and have funded investments in the
Sylvan Online integration, the launch of Catapult Online and the
acquisition of strategic Learning Center territories that will
position us extremely well for growth in 2006 and beyond." Business
Overview: Six-Month Results Revenues for the six-month period
increased 19% over the same period in 2004 to $201.3 million driven
primarily by growth in the consumer (Learning Center) business
segment. Operating income for the six-month period increased 21% to
$33.2 million as compared to the as adjusted first half of 2004.
Operating income, as adjusted, excludes certain non-cash stock
compensation in 2004. The Company believes this non-GAAP financial
measure allows for a better comparison of operating results because
the 2005 period had no similar expenses. See Table 1 for a
reconciliation of income from continuing operations, as reported to
operating income, as adjusted. This six-month period represents an
important season for the Educate business as it is the peak period
for marketing and enrollments in the consumer business and it is
also the primary period of delivery of services to the school
market. Growth in revenues and operating income was primarily
driven by the expansion of the Learning Center network by 41
territories over the past year, same territory revenue growth of
5%, acquisition and integration of Hooked on Phonics in the
consumer business, expansion of No Child Left Behind (NCLB)
services and investment of free cash flows generated by the
business into the acquisition of 56 franchise territories over the
past year. Quarterly Results Revenues for the second quarter were
$103.1 million, an increase of 18% over the same period in 2004.
Operating income was $19.5 million, an increase of 18% over the
operating income, as adjusted, for the three months ended June 30,
2004. Consistent with the six-month results, these increases were
driven by growth in the consumer (Learning Center) business
segment. Learning Center segment revenues were $66.7 million for
the quarter, up 34% from the second quarter of 2004. The Company's
strategy of growing average revenue per territory by partnering
with franchisees to apply best operating practices and the
strategic acquisition of franchise territories drove performance
during the quarter. Same territory revenue growth was 5% in the
second quarter of 2005. Additionally, 15 new franchise territories
were opened throughout the network during the quarter. The Company
also acquired 16 franchise territories during the second quarter of
2005. However, since nine of the territory acquisitions occurred in
the latter half of June the revenue impact was limited for the
period. Improved customer convenience is a focus of management
addressed through opening additional locations within existing
territories and the integration of Sylvan Online into the Learning
Center network. As of the close of the quarter, Sylvan Online was
being offered by more than one third of the network territories.
The Company was also successful in growing the revenues from its
Hooked on Phonics education programs in the period by expanding the
number of retailers purchasing the programs. Learning Center
operating profit for the quarter was $19.2 million, a 29% increase
over the same period in 2004. Operating profit growth was driven by
revenue growth partially mitigated by a 1% operating margin
decrease due to the shift in the network mix of franchise and
company-owned territories. Catapult Learning segment revenues were
$36.4 million during the quarter, a 3% decrease compared with the
same period in 2004. Segment revenues reflected NCLB growth offset
by certain non-recurring 2004 summer school services and a shortage
of available therapists to staff special needs services in the
current quarter. NCLB revenue growth of 16% for the quarter was
limited by the earlier start of service delivery in the current
school year. On a full school year basis, NCLB revenues for school
year 2004/2005 of $33.8 million were 37% greater than $24.6 million
in revenues for the prior school year. The quarter also bore the
costs of the expanded Catapult Online pilot program which delivers
NCLB instruction in the convenience of each student's home.
Catapult operating profit for the quarter was negatively impacted
by the earlier start of NCLB programs in the school year, the
expenses of completing a greater number of programs at the end of
the school year and expenses incurred to operate the NCLB online
pilot. Corporate expenses increased 9% to $3.7 million during the
second quarter of 2005 as compared to the same period in 2004.
Non-operating expenses before other financing costs, primarily
interest, were $1.9 million for the quarter, a 27% decrease from
the second quarter of 2004. The decline in interest expense was
primarily due to lower levels of debt and lower borrowing costs
during the period as compared to the same period in 2004. During
the second quarter of 2005, the Company refinanced its term loan
facility and wrote-off unamortized financing costs of $1.5 million
($0.9 million net of the related tax benefit) incurred in
connection with previous financing agreements, which is included in
other financing costs. Third Quarter and Full-Year 2005 Outlook:
The Company's current expectations for the third quarter and fiscal
year 2005 are as follows: - The Company anticipates total revenues
to be between $78 and $82 million for the third quarter and between
$365 and $375 million for the full year. - Operating income, as
adjusted, is expected to be between $9 and $10 million for the
third quarter and between $49 and $51 million for the full year. -
Diluted earnings per share, as adjusted, is expected to be between
$0.10 and $0.12 per share for the third quarter and full year
expectations have increased to between $0.59 and $0.61 per share.
Learning Center Outlook: - Total revenues are expected to be
between $68 and $70 million for the third quarter and between $247
and $253 million for the full year 2005. - Revenue growth is
expected to result from the combination of same territory revenue
growth (currently projected at 5% to 6% for the full year 2005),
opening additional territories and acquisition of territories from
franchisees. During the second half of the year, the Company
expects to add 15 to 20 new territories in the system and acquire 5
to 10 territories from franchisees. - Operating margins for the
third quarter are expected to be between 25% and 26% and full year
margins are expected to be between 23% and 24%. These expected
margins include Sylvan Online and Hooked on Phonics results as well
as the effect of acquiring additional territories from franchisees.
Since the operating income from the acquired territories is similar
to the royalty income from franchisees in the year of acquisition,
but the revenue increases substantially, Sylvan Learning Center
margins decline by approximately 1% for every 15 territories
acquired. Catapult Learning Outlook: - Total revenues are expected
to be between $10 and $12 million for the third quarter of 2005 and
between $118 and $122 million for the full year 2005. - Operating
margins are projected to be a loss of between (35%) and (45%) for
the third quarter when school is out of session, and between 6% and
7% for the full year 2005. Corporate Services Outlook: - Corporate
expenses are expected to be approximately $4.0 million for the
third quarter and between $16.5 and $17.0 million for the full year
2005. - Non-operating expenses before other financing costs,
primarily interest, are expected to be approximately $2 million for
the third quarter of 2005 and between $7.0 and $7.5 million for the
full year. - The Company's effective income tax rate is expected to
be 38%. This rate is subject to change based on the ultimate source
of the Company's revenue and income; however, the 2005 cash tax
rates are expected to be less than 20%, primarily as a result of
goodwill amortization deductions reported in income tax returns. -
Fully diluted shares outstanding are expected to be in the 44.1 to
44.2 million range for 2005. Educate management will host a
conference call to review these results at 10:00 AM (EDT) today,
July 28, 2005. Interested parties may listen to the webcast by
accessing http://www.educate-inc.com/ and clicking on Investor
Relations on the Internet or by dialing 1-800-818-5264
(International 1-913- 981-4910) access code 3654292. The call will
also be available through replay on the Educate website through
August 4, 2005. About Educate, Inc. Educate, Inc. (NASDAQ:EEEE) is
a leading pre-K-12 education services company delivering education
services and products to students and their families. It has a
portfolio of highly acclaimed brands including Sylvan Learning
Centers, North America's largest and most trusted network of
tutoring centers, providing supplemental, remedial and enrichment
instruction; Hooked on Phonics, delivering highly regarded early
reading, math and study skills programs; and Catapult Learning, a
leading provider of educational services to public and non-public
schools. More information on Educate, Inc. can be found at
http://www.educate-inc.com/. Forward-looking Statements This
release includes information that could constitute forward-looking
statements made pursuant to the safe harbor provision of the
Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve risks and uncertainties.
Although the Company believes that the expectations reflected in
such forward-looking statements are based on reasonable
assumptions, the Company's actual results could differ materially
from those described in the forward-looking statements. The
following factors might cause such a difference: the development
and expansion of the Sylvan Learning Center franchise system;
changes in the relationships among Sylvan Learning Center and its
franchisees; the Company's ability to effectively manage business
growth; increased competition from other educational service
providers; changes in laws and government policies and programs;
changes in the acceptance of the Company's services by
institutional customers and consumers; changes in customer
relationships; the seasonality of operating results; global
economic conditions, including interest and currency rate
fluctuations, and inflation rates. Additional information regarding
these and other risk factors and uncertainties are set forth from
time to time in the Company's filings with the Securities and
Exchange Commission, available for viewing on the Company's website
http://www.educate-inc.com/. (To access this information on the
Company's website, click on "Investor Relations" and then "SEC
Filings".) All forward-looking statements are based on information
available to the Company on the date of this Release. The Company
undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise. Educate Inc. & Subsidiaries
Consolidated Detailed Statements of Income Three and Six Months
Ended June 30, 2005 Three Months Ended June 30, (Dollar amounts in
thousands, except $ % per share data) 2005 2004 Variance Variance
Revenues Franchise Services $13,891 $12,716 $1,175 9% Company-Owned
centers 44,603 29,845 14,758 49% European 8,167 7,353 814 11% Total
Learning Center 66,661 49,914 16,747 34% School Services 25,193
27,673 (2,480) -9% NCLB 11,197 9,665 1,532 16% Total Catapult
36,390 37,338 (948) -3% Total Revenues 103,051 87,252 15,799 18%
Expenses Learning Centers 47,486 35,066 12,420 35% Catapult 32,441
32,347 94 0% Total Segment Operating Costs 79,927 67,413 12,514 19%
Corporate Expenses 3,526 3,298 228 7% Non-Cash stock compensation
expense 148 8,401 (8,253) -98% Operating Income 19,450 8,140 11,310
139% Non-Operating Items Interest expense, net (1,853) (2,533) 680
27% Foreign exchange gains (losses) 2 (6) 8 133% Other financing
costs (1,506) (4,842) 3,336 69% Total Non-Operating (3,357) (7,381)
4,024 55% Income Before Income Taxes 16,093 759 15,334 >200%
Income Tax Expense (6,115) (288) (5,827)200% Loss from discontinued
operations, net of tax - (958) 958 100% Net Income (Loss) $9,978
$(487) $10,465 >200% Weighted Average Shares - Diluted (1)
44,010 38,608 5,402 14% Diluted Earnings (loss) Per Share (1) $0.23
$(0.01) $0.24 >200% Diluted Earnings Per Share From Continuing
Operations (1) $0.23 $0.01 $0.22 >200% Diluted Earning Per Share
From Continuing Operations, as adjusted (1),(2) $0.25 $0.22 $0.03
14% Segment Operating Margin Learning Center 29% 30% -1% Catapult
Learning 11% 13% -2% Six Months Ended June 30, (Dollar amounts in
thousands, except $ % per share data) 2005 2004 Variance Variance
Revenues Franchise Services $26,828 $24,445 $2,383 10%
Company-Owned centers 80,298 54,588 25,710 47% European 16,342
14,268 2,074 15% Total Learning Center 123,468 93,301 30,167 32%
School Services 50,237 54,777 (4,540) -8% NCLB 27,601 21,368 6,233
29% Total Catapult 77,838 76,145 1,693 2% Total Revenues 201,306
169,446 31,860 19% Expenses Learning Centers 93,146 68,988 24,158
35% Catapult 67,217 65,713 1,504 2% Total Segment Operating Costs
160,363 134,701 25,662 19% Corporate Expenses 7,426 7,166 260 4%
Non-Cash stock compensation expense 297 8,401 (8,104) -96%
Operating Income 33,220 19,178 14,042 73% Non-Operating Items
Interest expense, net (3,651) (5,736) 2,085 36% Foreign exchange
gains (losses) 116 (10) 126 >200% Other financing costs (1,506)
(4,842) 3,336 69% Total Non-Operating (5,041) (10,588) 5,547 52%
Income Before Income Taxes 28,179 8,590 19,589 >200% Income Tax
Expense (10,708) (3,264) (7,444)200% Loss from discontinued
operations, net of tax - (1,721) 1,721 100% Net Income (Loss)
$17,471 3,605 $13,866 >200% Weighted Average Shares - Diluted
(1) 44,016 37,972 6,044 16% Diluted Earnings (loss) Per Share (1)
$0.40 $0.09 $0.31 >200% Diluted Earnings Per Share From
Continuing Operations (1) $0.40 $0.14 $0.26 186% Diluted Earning
Per Share From Continuing Operations, as adjusted (1),(2) $0.42
$0.36 $0.06 17% Segment Operating Margin Learning Center 25% 26%
-1% Catapult Learning 14% 14% 0% (1) All share and per share
amounts have been adjusted to give retroactive effect to a 1.00 for
1.25 reverse stock split effected on September 20, 2004. (2)
Diluted earnings per share from continuing operations, as adjusted
exclude the net of tax effect of non-recurring non-cash stock
compensation expense and other financing costs for the three and
six month periods ended June 30, 2004 and 2005. Management believes
this non-GAAP financial measure allows for a better comparison of
earnings per share (EPS) for the periods presented. See table 2 for
reconciliation of income from continuing operations, as reported to
income from continuing operations, as adjusted and the diluted per
share amounts. Three Three Six Six Months Months Months Months
Ended Ended Ended Ended June 30, June 30, June 30, June 30,
Business Metrics 2005 2004 2005 2004 Learning Center Same Territory
Revenue Growth (3) 5% 5% 5% 4% June 30, December 31, June 30,
Number of Territories 2005 2004 2004 Franchise 735 738 750
Company-owned 144 111 88 Total 879 849 838 June 30, December 31,
June 30, Number of Sylvan Learning Centers 2005 2004 2004 Franchise
889 896 898 Company-owned 214 163 141 Total 1,103 1,059 1,039 June
30, December 31, Balance Sheet Data: 2005 2004 Cash and cash
equivalents $14,681 $14,592 Working capital 11,551 10,802 Total
assets 437,511 381,382 Total long term debt 140,942 120,411 (3)
"Same Territory" amounts, include the results of territories for
the identical months for each period presented in the comparison,
commencing with the 13th full month the territory has been
operating. Same territory growth is presented as the aggregate
Educate revenue growth for franchise and company-owned territories,
during the period. A territory reflects the geographically
specified area where an operator controls rights to provision of
services under the Sylvan franchise agreement. Consolidated
Summarized Statements of Income Three Months Ended June 30, $ %
(Dollar amounts in thousands) 2005 2004 Variance Variance Revenues
Company-Owned Centers $51,443 $36,096 $15,347 43% Franchise
Services 15,218 13,818 1,400 10% Total Learning Center 66,661
49,914 16,747 34% Total Catapult Learning 36,390 37,338 (948) -3%
Total Revenues 103,051 87,252 15,799 18% Expenses Instructional and
franchise operations costs 70,006 59,305 10,701 18% Marketing and
Advertising 8,369 6,642 1,727 26% Depreciation and amortization
1,954 1,858 96 5% General and Administrative expenses 3,124 2,906
218 8% Non-cash stock compensation expense 148 8,401 (8,253) -98%
Total costs and expenses 83,601 79,112 4,489 6% Operating Income
19,450 8,140 11,310 139% Total Non-Operating (3,357) (7,381) 4,024
55% Income Before Income Taxes 16,093 759 15,334 >200% Income
Tax Expense (6,115) (288) (5,827)200% Loss from discontinued
operations, net of tax - (958) 958 100% Net Income (Loss) $9,978
$(487) $10,465 >200% Six Months Ended June 30, $ % (Dollar
amounts in thousands) 2005 2004 Variance Variance Revenues
Company-Owned Centers $93,903 $66,649 $27,254 41% Franchise
Services 29,565 26,652 2,913 11% Total Learning Center 123,468
93,301 30,167 32% Total Catapult Learning 77,838 76,145 1,693 2%
Total Revenues 201,306 169,446 31,860 19% Expenses Instructional
and franchise operations costs 140,395 118,234 22,161 19% Marketing
and Advertising 16,742 13,606 3,136 23% Depreciation and
amortization 4,036 3,644 392 11% General and Administrative
expenses 6,616 6,383 233 4% Non-cash stock compensation expense 297
8,401 (8,104) -96% Total costs and expenses 168,086 150,268 17,818
12% Operating Income 33,220 19,178 14,042 73% Total Non-Operating
(5,041) (10,588) 5,547 52% Income Before Income Taxes 28,179 8,590
19,589 >200% Income Tax Expense (10,708) (3,264) (7,444)200%
Loss from discontinued operations, net of tax - (1,721) 1,721 100%
Net Income (Loss) $17,471 $3,605 $13,866 >200% Table 1 Three
Months Ended June 30, $ % (Dollar amounts in thousands) 2005 2004
Variance Variance Income from Continuing Operations, as reported
$9,978 $471 $9,507 >200% Add: Income tax expense 6,115 288 5,827
>200% Add: total non-operating expense 3,357 7,381 (4,024) -55%
Operating Income, as reported 19,450 8,140 11,310 139% Add:
Non-cash stock compensation expense(non-recurring)(4) - 8,314
(8,314) -100% Operating Income, as adjusted $19,450 $16,454 $2,996
18% Six Months Ended June 30, $ % (Dollar amounts in thousands)
2005 2004 Variance Variance Income from Continuing Operations, as
reported $17,471 $5,326 $12,145 >200% Add: Income tax expense
10,708 3,264 7,444 >200% Add: total non-operating expense 5,041
10,588 (5,547) -52% Operating Income, as reported 33,220 19,178
14,042 73% Add: Non-cash stock compensation
expense(non-recurring)(4) - 8,314 (8,314) -100% Operating Income,
as adjusted $33,220 $27,492 $5,728 21% Table 2 Three Months Ended
June 30, (Dollar amounts in thousands, except $ % per share data)
2005 2004 Variance Variance Income from Continuing Operations, as
reported $9,978 $471 $9,507 >200% Add: Other financing costs
1,506 4,842 (3,336) -69% Add: Non-cash stock compensation
expense(non-recurring)(4) - 8,314 (8,314) -100% Tax impact of items
added back above (572) (4,999) 4,427 89% Income from Continuing
Operations, as adjusted $10,912 $8,628 $2,284 26% Weighted Average
Shares Diluted (1) 44,010 38,608 5,402 14% Diluted Earnings per
share from Continuing Operations, - as adjusted (1),(2) $0.25 $0.22
$0.03 14% Six Months Ended June 30, (Dollar amounts in thousands,
except $ % per share data) 2005 2004 Variance Variance Income from
Continuing Operations, as reported $17,471 $5,326 $12,145 >200%
Add: Other financing costs 1,506 4,842 (3,336) -69% Add: Non-cash
stock compensation expense(non-recurring)(4) - 8,314 (8,314) -100%
Tax impact of items added back above (572) (4,999) 4,427 89% Income
from Continuing Operations, as adjusted $18,405 $13,483 $4,922 37%
Weighted Average Shares Diluted (1) 44,016 37,972 6,044 16% Diluted
Earnings per share from Continuing Operations, as adjusted (1),(2)
$0.42 $0.36 $0.06 17% (4) The non-cash stock compensation expense
added back includes the one-time charges associated with stock
compensation granted in 2004 that vested immediately. Excluded from
the add back are recurring expenses that are recognized over a
specified vesting period. Web sit: http://www.educate-inc.com
DATASOURCE: Educate, Inc. CONTACT: Tim Lordan of Educate, Inc.,
+1-410-843-8000
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