Executives
Nicole Rowe – VP
Michael Perik – President & CEO
Steve Richards – COO and CFO
Analysts
Jerry Herman – Stifel Nicolaus
Adam Fischer – Burnham
James Maher – Think Equity
The Princeton Review, Inc. (REVU) Q3 2008 Earnings Call Transcript November 6, 2008 4:30 PM ET
Operator
Good day everyone and welcome to The Princeton Review Incorporated third quarter earnings conference call and web cast. (Operator instructions) At this time I would like to turn the conference over to Nicole Rowe. Please go ahead.
Nicole Rowe
Thank you operator. Good afternoon everyone. Today The Princeton Review issued a press release reporting financial results for its third quarter ended September 30, 2008. If you have not received a copy of the release you can access it on the company’s website at www.PrincetonReview.com or you may contact Harriet Brand at 212-874-8282 extension 1091.
Before we begin, please note that all statements made by the company’s management during the conference call that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by words such as believe, intend, expect, may, could, would, will, should, plan, project, contemplate, anticipate or similar statements. Because these statements reflect The Princeton Review's current views concerning future events these forward-looking statements are subject to risks and uncertainties. The Princeton Review's actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors which are described under the caption Risk Factors in The Princeton Review’s most recent Form 10-K and 10-Q filed with the Securities and Exchange Commission. The Princeton Review undertakes no obligation to update publicly any forward-looking statements during this conference call.
Now I will turn the call over to the company’s Chief Executive Officer, Michael Perik.
Michael Perik
Thank you Nicole and good afternoon. Earlier today The Princeton Review announced the financial results for the third quarter of 2008. Steve Richards, our Chief Operating Office and Chief Financial Officer, will walk everyone through the results in a moment but I like to provide you some insights into the progress we have made here in the turnaround of The Princeton Review.
This is my sixth conference call as the Chief Executive Officer. Regular listeners will know that I usually begin by reiterating our core management’s team core objectives.
From the day this team assumed responsibility for the business we believe that the best way to build shareholder value was to focus on our core test prep business and our SES tutoring business.
Hand in glove with this new focus was a plan to cut corporate and capital spending while at the same time stabilizing our K-12 Services business. While today I’m announcing a decision that we made in late December, which is to divest ourselves of the K-12 business. Earlier today we signed a memorandum of understanding with a potential buyer of the K-12 assets. We haven’t completed all the negotiations and therefore we won’t be making additional comments at this time expect to say that we expect to close the sale in the fourth quarter. As a result of this decision our financial results today show the K-12 business as a discontinued operation.
I’ve always had a tremendous respect for the talented team in the K-12 business, which is lead by Kevin Howell. In fact I was introduced to The Princeton Review through a partnership with K-12 business 6 years ago. But as fine as the product is it became clear to us that that the asset would better flourish in the hands of the company totally dedicated to the K-12 space. The decision to exit this business was to simplify The Princeton Review operations and over the next year will result in much lower corporate overheads. And Steve Richards will expand on this point as part of his comments.
With the K-12 decision behind us I believe our third quarter results show that we’re moving in the right direction in all the major initiatives which we committed to our shareholders when we assumed responsibility for the business last summer.
For example, when you look at the test prep division’s results you see a marked improvement in our margins both at the gross and the operating profit lines, see top line growth fueled by two very successful acquisitions which were part of our over $60 million investment in the repurchase of all our US franchises.
Progress in our turnaround is perhaps best understood when you look at our cash flows from operations. In the first nine months of 2008, we threw off north of $10 million in cash and that is after paying out $9 million of restructuring related payments that will obviously not be recurring in 2009.
2008 has been about putting our house in order and proving that The Princeton Review can generate cash and maintain profitable operations. 2009 is going to be about growth. And I like to share with you some of the initiatives we have launched to build the platform for profitable growth. At the beginning of this year we undertook a detailed study of the markets in which we compete to gain both the intelligence and knowledge to support the right investments that will yield solid growth for our shareholders in 2009 and beyond.
Historically, the company is focused its product offerings on the higher priced test prep classroom and tutoring products. Even before the economic climate changed we saw the potential to increase our addressable market in test prep. We believe this can be accomplished in several ways. First, we are increasing our emphasis on institutional business where both Federal and state funding increasingly is assisting students with college readiness.
Secondly, we’re started to expand our offerings to address the market that will spend less on their preparatory needs than the $1000 in the traditional Princeton Review classroom model. We have a new product that is in the market place now called Princeton Review Essentials, which is often sold in the $600 range.
Finally, this company will be putting a greater emphasis on online products, striking of course from an investment point of view, the right balance between the short and long-term opportunities and the demand for in quality of our offerings.
We believe that the recent economic downturn ironically may turn out to be a small boon to our business. Many people are looking to expand their educational background and head back to college for a graduate degree. Several graduate schools are reporting a rise in applications and increases in attendance at informational sessions. At the same time, registrations with the G-Net [ph] the number of students taking the (inaudible) exam are also increasing. And I should also point out that the SAT scores are often used as determinant in calculating financial aid levels and that is giving many students an added incentive to make sure they perform well on these tests.
At The Princeton Review we’re focusing on how to turn these trends into growth for us in 2009. One leading indicator for our business is obviously enrollments. Between 2004 and 2008 The Princeton Review has had essentially flat retail enrollment. In fact in 2008 there were down slightly as we cutback schedules as part of our margin improvement efforts. In the last few weeks, we have been tracking enrollment trends for our 2009 turns. We’re very encouraged by early results which seem to support renewed enrollment growth for next year and should translate into retail test prep revenue growth in 2009.
Speaking of growth let me turn now to SES. During the first half of 2008 we concentrated our growth plans in the SES business on the major geographic markets, where we have a historically been successful. That effort has provided us with market shares in the 15% range in these major markets and has given us the confidence and the scale to replicate our formula and offerings in new markets this fall.
For the 2008-2009 school year, we have identified several new markets for expansion including states such Ohio, New Jersey, and Virginia to mention a few. This expansion should yield good revenue growth for us in 2008. In fact, we are currently we are in 78 school districts across 15 states as compared to 16 districts across 15 states at this time last year.
Obviously the marketing and student acquisition costs for this expansion are incurred in the fall sessions of the school year and profits primarily increase in the spring sessions. The real dividends from our expansion won’t be totally clear to shareholders until the first and third quarters of 2009 but our SES business has had a very, very successful fall enrollment season. And we’re having increasing confidence in this segment of our business and its growth prospects.
When we assumed responsibility for The Princeton Review in 2007, our central thesis was that if we could focus on our core tutoring businesses, cut corporate costs, and reduce capital expenditures, we could show shareholders that The Princeton Review can generate significant cash flow. More than any other metric we believe that this one best reflects the health of our business. And if you use that metric we’ve had a good 2008 and we’re poised to have a better 2009.
Now I will turn the call discussion over to Steve Richards.
Steve Richards
Thank you Michael and good afternoon everyone. I plan to summarize why we believe our actions to date confirm our ability to turn around the business and then provide some insight into the financial results for the quarter.
As Michael mentioned, we have decided to dispose our K-12 business in the near term. That decision results in our classifying the K-12 business as a discontinued operation in the third quarter. As a result our comments will be limited to continued operations of the company. Our corporate costs have continued the downward trend from the second quarter and we believe that the disposition of the K-12 business provides us with opportunities for additional reductions in overhead costs in 2009.
In our third quarter, consolidated revenues increased by 31% to $34.7 million from $26.5 million in 2007. Gross profit increased by 47% to $23.6 million from $16.0 million in 2007 and income from operations increased to $1.3 million from a loss of $6.4 million last year. Our test prep revenues increased by $7.5 million in the third quarter or 28.5%. Substantially all of the test prep revenue increases are attributable to the acquisitions of our southern California franchisees in Test Services, Inc. or as we refer to them Southern Cal and TSI.
The franchises we purchased in 2008 represent approximately 30% revenue growth to our 2007 revenue base. Gross profits in the test prep division increased by $7.3 million in the quarter to $23.4 million from $16.2 million in 2007. The gross margin increase of $5.6 million resulted from the franchise acquisitions with the balance coming from improved classroom management and profitable enrollment.
As we have consistently mentioned in 2008 we have been concentrating on improving our classroom management practices, which could result in some minor lost enrollment revenue in the short term while improving the gross margins of the business.
The third-quarter for the SES businesses is seasonally the slowest quarter of the year. The revenue in the quarter represents final cleanup of academic contracts ending in May and June of this year.
Selling, general and administrative expenses in the third quarter of 2008 before restructuring charges were $21.7 million compared to $21.4 million in 2007. The 2008 expense includes $2.5 million in expenses associated with the TSI and Southern California acquisitions and approximately $900,000 of costs associated with the expansion into new SES markets. After considering these increases in selling and administrative costs the historical reduction in expenses are attributable to cost reduction activities implemented over the last 12 months.
Selling, general and administrative expenses in the quarter broken down by division are comprised of test prep expenses of $15.1 million, SES costs of $2.6 million, and corporate expenses of $4 million.
For the nine months ended September 30, 2008, consolidated revenues increased by 28.9% to $104.5 million from $81.1 million in 2007. Gross profit increased by $16.9 million or 34% to $67.5 million from $50.5 million in the comparable period in 2007.
Income from operations increased to $3.1 million in 2008 from a loss of $9.1 million in 2007, an improvement of $12.2 million.
Test prep revenues for the nine months increased by $13 million or 18% to $85.5 million from $72.4 million in 2007. In 2008 test prep revenues include $12.8 million from the acquisition of TSI in southern California offset by $2.8 million in franchise fee revenue profited through these franchise acquisitions. The balance of the increase in test prep revenue is from organic tutoring and institutional revenue growth.
Gross profit in the test prep division has increased to $57 million from $45.6 million in 2007. Gross margin improved to 67% from 63% in 2007. Improvements in gross profits and gross margins and improved costs in classroom management as previously mentioned.
The SES business has increased revenues by $10.4 million for the nine months of 2008 or 120% to $19.1 million from $8.7 million. The increase came from greater student enrollment in our existing markets in Europe, Chicago, and Florida as well as approximately $3.7 million in new markets for 2008 mostly in New England. Gross profit for the SES division increased to $10.5 million a $5.5 million increase from $4.9 million in 2007.
Gross margin decreased to 55% from 57% last year. Selling, general, and administrative expenses before restructuring costs for the nine months have increased $3.6 million to $62.1 million from $58.5 million in 2007. Selling, general, and administrative costs from the acquisition of TSI in Southern California represent $4.7 million. Costs associated with achieving substantial growth in the SES business also had increased selling and administrative costs of $3.5 million.
2008 also included incremental costs attributable to stock option accounting of $1.4 million over last year. After these increases the remaining cost of the company is decreasing as a result of the ongoing cost reduction activities.
Earnings before interest, taxes, depreciation or EBITDA was $6.5 million in the first nine months of 2008 compared to a negative $5.8 million last year, an improvement of $12.3 million.
Our guidance for the reminder of the year needs to be slightly modified to reflect the accounting treatment of the discontinued K-12 division. The discontinued operation charges also included impairment charge for the difference between the carrying amount and the historical investment in the K-12 division and our estimated proceeds on the disposal.
For the full year, we expect revenue from continuing operations to increase approximately 23% to 26% and EBITDA to be in a range of 5% to 7%. The current EBITDA projections include approximately $400,000 of overhead previously allocated to the K-12 division under generally accepted accounting principles that cannot be allocated to discontinued operations – that must be allocated to discontinued operations.
Looking to 2009, we believe we will reduce the residual overhead costs relating to the K-12 business and be in a position to achieve our longer term goal of delivering 12% to 15% EBITDA as early as next year.
Thanks for your attention and now I will turn the call back to Michael for his closing remarks and then we will answer any questions you may have.
Michael Perik
Thank you Steve. I just have one small correction to my earlier remarks. My general counsel pointed out when I am talking about when the decision was made to sell K-12 I had said late December and I had obviously meant to say the month of September.
Our financial results highlight what I believe the significant progress that we have made in the turnaround of The Princeton Review. We have completed the purchase of all of your US based franchises including Pittsburg, and we have increased revenues in our core businesses and reduced our corporate expenses. We’re pleased with the revenue and margin performances of the test prep services and supplementary educational services divisions in this past quarter and we believe that our increased focus and resource deployment in support of those businesses after the divestiture of K-12 will yield improvements if the cash generating capabilities of our core operations in 2009.
With that I like to open the call for questions.
Question-and-Answer Session
Operator
(Operator instructions) And we will take our first question from Jerry Herman with Stifel Nicolaus.
Jerry Herman – Stifel Nicolaus
Hi, good afternoon everybody. Hi guys.
Michael Perik
Hi Jerry.
Jerry Herman – Stifel Nicolaus
Question about the divestiture. Just wanted to explore in a little bit detail the rationale for what and in particular sort of what impact that has on the – I will call it the earnings power of the company. I know at one point there was a hope that that would become a profitable business, you know, with acceptable EBITDA margins, help us with that if you would?
Michael Perik
Well, we believe that this can divestiture actually will enhance the earning power of this company in 2009 and beyond. When we looked at the trajectory of our test prep business and we looked at the trajectory of our SES business both of which are operating in an environment that I don’t think is materially affected by the conditions of the economy in 2009 and beyond. Our concern with respect to the K-12 business was that it may not perform as well as those other two divisions both from a growth and a profitability perspective. When we matched that reality with the – with what we’ve seen in the corporate overhead that are associated with supporting that business it became very clear to us that we (inaudible) I think the math is kind of outlined here about our EBITDA guidance and expectations for next year. We believe that we can bring those corporate overheads down even more significantly without that business in. And in essence replace a large part of the profitability of that business by simply reducing our costs and if you frame it in that context for ourselves and our board that became a little bit of a no-brainer.
Jerry Herman – Stifel Nicolaus
Can you realize that the value of that business probably going to fluctuate with the AR there but can you help us in terms of what sort of proceeds you might expect from that divestiture, maybe I should ask it this way, what is the current carrying value of that business?
Steve Richards
Well we have taken – in this quarter we have taken a $6.3 million charge to reduce the carrying value of the assets from the historical cost basis, which would reduce the carrying value about, which will reduce the carrying of the business – fairly substantially and that particular number as Michael had pointed out it is not necessary an evaluation of the agreement or the potential agreement (inaudible) will end up today, but it is a matter of assessing the fair value of the assets in our portfolios. This is an impairment charge rather than it being a charge in adjustment to represent what the purchase price of the value of this might be, because we don’t have a final agreement yet.
Jerry Herman – Stifel Nicolaus
Right. Okay, I guess I’m trying to determine if those proceeds would be at all material and would allow some measurable reinvestment into the core business.
Steve Richards
The proceeds from the sale of any business in our portfolio or any asset transaction and the liquidation of any asset in our portfolio would actually enhance our ability to invest back into our company, but I think I would like to point out as Michael said when you look at our first nine months of activity and if you were to adjust for the non-recurring items that existed in the residual from the restructures in 2007, the core business is retained between the test prep and the SES, which can actually generate approximately $19 million in cash on an ongoing basis, which is a substantial amount of cash that could individually be invested back into the business for growth. And any proceeds in the sale of something for us would actually be reinvested either back into the business to reduce debt.
Jerry Herman – Stifel Nicolaus
Okay, can we – do you guys – can you guys offer any balance sheet metrics at this point?
Steve Richards
Sure.
Jerry Herman – Stifel Nicolaus
Maybe cash that –
Steve Richards
Sure. Cash is around $23.5 million. Current assets are approximately $43 million. Receivables are at the lowest level as it is the time of year when it is seasonally low for accounts receivable. Total current liabilities are approximately $38 million of which $18 million is deferred revenue. So your current liabilities are only $20 million. Our long-term debt is $18.5 million the majority of that is $20 million used to purchase the Southern California acquisition, and shareholders’ equity is $47 million. Just as a comparison to last year’s shareholders’ equity of $12 million it increased as a result of the – the shares issued for the acquisition of the TSI in Southern California. Working capital, current assets are about $17 million more because of improved collection, low inventory balances, improved collections – higher inventory balances and sorry. Improved collections, essentially from improved collections. Our payables are down to $1 million and I am talking about increased expenses.
Jerry Herman – Stifel Nicolaus
Okay great. It sounds like the SES business is doing pretty well. Can you as we look at its potential into more seasonally important periods is there anything that you can offer with regard to the amount of business that has been contracted or some other form of measurement on what we would expect out of that business over the next 12 months.
Steve Richards
Yes, to this degree at this point in the year you have a very – you have very good visibility on the growth of your – on actually who your enrollments are. We probably could go into our system and name every kid that we’re tutoring right now. And that business if you looked at it in a school year right now, it would be well north of $40 million in a school year and so if you keep that trajectory going into the balance of the year and continue through the balance of 2009 and continued to expand into other markets, this SES business has very significant ability to continue if not at its 100% historical growth rate at exceptionally high growth rates.
Jerry Herman – Stifel Nicolaus
Okay, great. And then with regard to further cost reduction opportunities, guys you mentioned certainly sort of the accounting treatment and what requires you to keep $400,000 worth of overhead as part of the organization today, but can you talk either in terms of dollars, percentages, G&A or headcount in terms of what you think the opportunities might be for next year?
Michael Perik
Sure. I won’t give dollars and percentage and things like that but I will talk about the categories and the buckets where opportunities exist. From a headcount perspective, there is less headcount reductions that will come about in the future because of all the activities we have done year-to-date we’re actually cut the organization down to a headcount that actually is probably appropriate for the size of the business. We have that headcount and the people where we need them. Increasing the people in the place where we’re in the field of selling or working in our sites. Less people in the back office and overheads supporting those facilities. As – when you do these kinds of things and look at the headcount we have reduced obviously our presence in New York City has decreased. So we have some opportunity to reduce some real estate costs and requirements in New York City and reduce footprint in New York. It does not mean we will be leaving New York. We definitely will maintain a presence in this city. But we plan to reduce – we have the opportunity to reduce that presence in a variety of different fashions because we’re in two buildings at the moment.
With respect to technology and infrastructure support process obviously the business of K-12 where you have an online assessment platform distributing millions of tests a year, we have the opportunity to review some of our – reduce some of our infrastructure and technology overhead related costs prospectively as well. And that is where the big areas will become (inaudible) direct support cost of this transaction indicates (inaudible).
Jerry Herman – Stifel Nicolaus
Okay, great. I will turn over at this point.
Michael Perik
Thank you.
Operator
(Operator instructions) We will go next to Adam Fischer of Burnham.
Adam Fischer – Burnham
Hi, how are you.
Michael Perik
Hi Adam.
Adam Fischer – Burnham
So if I’m understanding you correctly are you generated after – before restructuring charges about $19 million in cash flow this year from two – from SES and K-12, is that right?
Steve Richards
That is – well overall as a company, overall as a company.
Adam Fischer – Burnham
Okay.
Michael Perik
Cash flow from operations after you adjust for restructuring you are correct.
Adam Fischer – Burnham
What does it look like for Q4 as SES ramps up are you –
Michael Perik
One of the things you have got to recognize about SES from a – while we are starting to provide services and their revenue comes in usually you get very little cash of that, if you go back historically and look at our fourth quarter last year, you know, you got a lot going in that quarter but it didn’t generate that much cash. Then it comes in significantly in the January, February, March, April, May period that is a when you start getting the big checks out of the school districts. We did a little calculation on I think it might have been Chicago or one of these districts where we started first. That is a pretty good payer but it will be like the first week of January, we will start getting the big checks and –
Adam Fischer – Burnham
On K-12 on the casual basis, sorry not – test prep on a casual basis in the fourth quarter?
Michael Perik
This period has always been the quieter period, the fourth quarter for that and then it starts to pick up significantly in the New Year.
Adam Fischer – Burnham
Mike, I am not sure, I think I understood you correctly, which is that you believe your EBITDA next year without K-12 will be the same as it would have with K-12 because of the cost cuts. Is that what I took – did I understand you correctly?
Michael Perik
Well what we said is we gave – what we did is we gave some preliminary guidance today what we think 2009 will look like with the disposal of K-12. We have never previously said what 2009 guidance would be for EBITDA for the company. When Michael discussed some of the thoughts and the guidance we went through with respect to the decision to sell the K-12 or keep the K-12 when you look at it, we think through the combination of investment in test rep and SES business, the growth we see in the SES business, opportunities for expanding SES in selected markets and aggressively go after some of the (inaudible) in the market where we can increase our addressable market we can achieve greater EBITDA growth without K-12 than we can with it.
Adam Fischer – Burnham
Okay, go ahead.
Adam Fischer – Burnham
Will you give an update maybe on some of the intuitional opportunities and where we stand there?
Steve Richards
Yes, I mentioned in my remarks that when we look at the opportunity to grow our business in test prep next year, institution is among our top 3 priorities. We have been very interested in this market where if I look at what is happening across the education market you see a lot of declines in textbook publishing, supplemental materials, and that sort of thing, but where I have seen investment is in college readiness. We are talking to one significant state right now and we are talking to a number of municipalities and they are very interested in improving their college readiness programs and that is for a variety of reasons, part of it is long-term economic development for some of these states and part of it just as in one significant community in the Midwest that has a lot of feet on the street that we are bidding on. One of their issues is that a lot of the their students are not doing well in the standardized test and it is hurting their ability to get placed even in their world-class state university system and it is hurting their ability to get sort of financial aid that they feel that they need because SAT scores determine financial aid. So, there seems to be a focus even in this tough economic environment on college readiness and test prep programs. We were pleased with the pipeline that is building in our test prep institutional business. We have added a couple of more dedicated sales people to that area and we believe that that probably will – I am quite confident it will outpace the retail growth in 2009.
Adam Fischer – Burnham
Okay, what are revenue trends in Q4, generally, historically what have they been relative to Q3? I figure it is smaller quarter than Q3.
Steve Richards
Just give me a second. We’re looking that up. If you have another question Adam while we’re looking that up, we can maybe deal with it.
Adam Fischer – Burnham
Well, I guess I’m trying to wrap my mind around kind of you know, what ’09 could look like on a revenue basis?
Steve Richards
What ’09 could look like on a revenue basis?
Adam Fischer – Burnham
Exactly, so if we did $105 million in the trailing 9 months and it didn’t include all of the two acquisitions and then Q4 comes in around 30, you know, what we are really looking at some are significantly higher than $150. Is that how I should be thinking about it?
Steve Richards
For next year.
Adam Fischer – Burnham
Yes.
Steve Richards
Well let me describe the revenue trends when you look at the seasonality of the business in the test prep. First is your biggest quarter is obviously Q3 which is about 30% of your base for the year. Your fourth quarters usually could be anyway 20% to 22% of your full year revenues of 25% will hit in Q2 and the balance of it will be in the first quarter of the year.
Adam Fischer – Burnham
Okay.
Steve Richards
So if you’re looking at –
Adam Fischer – Burnham
So, how are you thinking about growth for ’09?
Steve Richards
We are – we probably have three elements to it that I will ask – the part of which we probably won’t be as specific on but we are going to get a good amount of growth just out of the full year of the acquisition.
Michael Perik
Right, I think our growth just because we gave 12% to 15% growth for next year, you can probably look at the same range as we provided guidance with the growth for the full year of 2008. So, let me say 23% to 26% for 2009, you are looking at the same sort of range, 23% to 26%, 27%.
Adam Fischer – Burnham
Revenue growth?
Michael Perik
Revenue growth for next year and producing a bottom line EBITDA in the 12% to 15% range off of that growth?
Adam Fischer – Burnham
Okay so if – okay no that is clear enough. Good. I appreciate it. Thanks a lot.
Operator
(Operator instructions) We will go to James Maher with Think Equity.
James Maher – Think Equity
Good afternoon everybody.
Michael Perik
Hi James.
James Maher – Think Equity
Just a question or a clarification, earlier I think I heard you say that from test prep in the quarter virtually all of the growth was due to the acquisitions. If I remember correctly we had organic growth of about 6% or 7% in the prior quarter. Am I correct in that and or – and if so what is different about this quarter?
Michael Perik
That is correct. That is what we did say. I think that when you look at the year we were very focused on improving our margins. There is an 800 basis point improvement in the test prep margins between this time last year and the year before. So this is a little bit of a question of at this time last year where we getting revenue growth but doing it in a way that wasn’t really that profitable to the business. And I think that maybe the big difference between the two, between the two quarters. While we were very focused in this quarter in making sure that we have – as we have been all year in making sure that we had good growth – gross margin improvement. So you have a significant improvement in the gross margin organically of the company in a period of time that would be one point then I would make. The second one –
James Maher – Think Equity
I am sorry Michael if I can interrupt you there, is that probably related somewhat to the scheduling optimization issue?
Michael Perik
That is exactly right.
James Maher – Think Equity
That makes sense.
Michael Perik
And there are lead times that go into this. By the time you see a piece of revenue reported in a quarter you could be 6 or 9 months earlier that that revenue was actually – that was actually booked. So, as we started the enrollment was booked. As we started to be much more sensitive to our classrooms schedule, remember we brought our classroom schedules down by north of 20% this year and that was necessary in order to improve our gross margins. Now in my remarks and I think this is really an important point to recognize, I have not in this conference, on any of my 6 previous conference calls ever made a comment about enrollment growth because I was – I wanted to understand what the overall the overlying trends were but as we look at 2009 and as I said in the conference call we have been very pleased with the enrollment growth that we have seen so far. So I’m seeing enrollment activity that started in the fall here in the late summer affecting our 2009 turns that when we are reporting our first and our second quarter next year I think investors will see that there is organic growth in the test prep business. And we’re at a point now we’re dealing with something that is statistically significant at this point and we would be dealing we’re not talking fragmentary information at this point, we sell in maybe 15% of our enrollments are even sold in this point in the year. So we have gotten the right revenue from 15% of what we will recognize in 2009.
James Maher – Think Equity
Okay, great. That is a very helpful. Second question in terms of just looking at the organization you have made obviously substantial changes in the time that you can reorganize if you will. How tightly integrated or how discrete perhaps is the K-12 business and how disruptive is what I am getting at, do you think this will to diverse these operations and keep going with the others especially given the fact that you have talked about how with the acquisitions you have brought into management from the franchisees?
Michael Perik
(inaudible) is a separate division. We have separate management. So, as a carve out actually it is a fairly easy thing to do. I mean the – it won’t be disruptive to our – it won’t be disruptive to our business and you know, this is something we have been contemplating for a period of time and obviously as we organize ourselves we had this in the back of our minds. So, this is not something that will be disruptive to our business. In fact it is quite the opposite. It will simplify our business almost immediately and it allows management to be very focused on the test prep and SES businesses.
James Maher – Think Equity
Okay, thank you.
Operator
And gentlemen we have no further questions at this time. I will turn the car back to you for any additional or closing remarks.
Michael Perik
Just thank you very much for everybody’s participation today. Thank you very much.
Operator
Thank you sir. That does conclude today’s conference call. Thank you for your participation. You may disconnect at this time.
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