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Learning Tree International, Inc. (NASDAQ:LTRE)

Q1 2014 Results Earnings Conference Call

February 13, 2014 / 8:00 A.M. E.T.

Executives

David Asai – CFO

Max Shevitz – President

Analyst

William Meyers – Miller Asset Management

Operator

Good day, ladies and gentlemen, and welcome to the Learning Tree International first-quarter 2014

earnings conference call. My name is Brittany, and I will be the operator for today. (Operator Instructions)

At this time, I would now like to turn the presentation over to your host for today, David Asai. Please proceed, sir.

David Asai^ Thank you, Brittany. For your convenience, we have posted the text of today's prepared remarks in the Investor Relations section of our website. Go to www.learningtree.com/investor.

Good afternoon. I am David Asai, Chief Financial Officer of Learning Tree International.

First I will read the disclaimer on forward-looking statements and then discuss our performance in our first quarter of fiscal year 2014, which ended January 3, 2014. Max Shevitz, our President, will then provide some forward-looking information about our second quarter of fiscal 2014. After those remarks, we'll open the floor for questions and discussion.

As a reminder, except for historical statements, the matters addressed in this conference call are forward-looking statements. Please do not put undue reliance on these forward-looking statements, since they are based on key assumptions about future risks and uncertainties

Although we believe that our assumptions are reasonable, inevitably some will prove to be incorrect. As a result, our actual future results can be expected to differ from those discussed in this call, and those differences may be material. We are not undertaking any obligation to update forward-looking statements.

To help you assess the major risks in our business, we have identified many, but not all, of them in Item 1A of our 2013 Form 10-K. Please read these risk factors carefully. Some of the factors discussed in our 2013 Form 10-K that could affect us include risks associated with changing economic and market conditions; the timely development, introduction, and customer acceptance of our courses; competition; international operations, including currency fluctuations; technology development and new technology introduction; efficient delivery and scheduling of our courses; adverse weather conditions, strikes, acts of war or terrorism and other external events; attracting and retaining qualified personnel; reliance on key vendors for technical services and support and continued uncertainty over the U S government's ability to resolve its budgetary issues and avoid further disruptions such as government shutdowns and debt ceiling limits.

Now let me summarize our results of operations from our first quarter of fiscal year 2014 as compared to our first quarter of fiscal 2013. Revenues in our first quarter of fiscal 2014 were $32 million compared to revenues of $33.3 million. Gross profit declined to 45.8% of revenues, from 50.7%.

We reduced operating expenses by $4.5 million. Operating expenses were 42.8% of revenues compared to 54.8% of revenues for 2013.

Net income totaled $700,000 compared to net loss of $1.4 million. And income per share on a diluted basis was $0.06, compared to a loss per share of $0.11.

In addition, the following are key balance sheet items as of January 3, 2014 compared to September 27, 2013. Cash and cash equivalents increased to $27.8 million compared to $26.6 million. ?Net working capital – current assets minus current liabilities – increased to $3.3 million compared to $1.7 million.

Now, let's discuss our first quarter results in more detail. First, I would like to remind everyone that we follow a 52- or 53-week fiscal year. This means that our year-end and quarter-end dates are on the Friday nearest the end of the calendar quarter. This method is used in order to better align our external financial reporting with the way we operate our business. Since all courses have a duration of five days or less, and all courses begin and end within the same calendar week, under the 52- or 53-week fiscal year method all revenues and related direct costs for each course event are recognized in the week and the fiscal quarter in which the event takes place.

Our fiscal year 2014 will end on October 3, 2014 and will comprise 53 weeks. In addition, the number of weeks in each quarter for fiscal year 2014 will vary. The first quarter of fiscal 2014, which ended January 3, 2014, had 14 weeks. The second quarter will have 12 weeks, and the third quarter of fiscal 2014 will have 13 weeks, and the fourth quarter of fiscal 2014 will have 14 weeks.

The change for the first and second quarters will mainly impact expenses as there is no change in the number of available training weeks as compared to the same quarters of fiscal year 2013 due to the Christmas and New Year holidays. The additional training week for fiscal year 2014 will occur in our fourth quarter. Every quarter of fiscal year 2013 was comprised of 13 weeks.

Revenues for our first quarter of fiscal 2014 was $32 million, were 3.8% lower than our revenues of $33.3 million in the same quarter of fiscal 2013. This principally resulted from a 7.8% decrease in the number of participants that was partially offset by a 3.5% increase in the average revenue per participant when compared to the same quarter of the prior fiscal year.

Overall, during our first quarter of fiscal 2014, we trained a total of 17,698 course participants, compared to 19,189 course participants in our same quarter last year. Compared to the first quarter of fiscal 2013, during our first quarter of fiscal 2014 attendee-days of IT training decreased by 6.3% to 38,123 from 40,688. Attendee-days of management training decreased by 9.5% to 24,586 from 27,165. And therefore total attendee-days of training were 62,709, a decrease of 7.6% from 67,853 in the first quarter of fiscal 2013.

The decrease in the number of participants was primarily due to a decline in the number of courses delivered onsite at client locations, and the elimination of participants attending under a special, more-heavily discounted passport program, which started in our fourth quarter of fiscal 2012 and largely ended June 30, 2013. The elimination of these discounted passport sales and the favorable shift in mix between higher priced courses at our education center and courses delivered onsite at client locations largely accounts for the increase in average revenue per participant.

Revenues from customers who purchased courses under our US government General Service Administration contract schedules were $1.2 million lower for the first quarter of fiscal year 2014 compared to the first quarter of fiscal year 2013.

Changes in foreign exchange rates did not materially impact revenue quarter over quarter.

Next, I'll discuss our operations in our first quarter of fiscal 2014 and how they compare with our same quarter of fiscal 2013.

During our first quarter of fiscal 2014, we presented 1,492 events, a 3.3% decrease from the 1,543 events conducted during the same period in fiscal 2013.

Cost of revenue was 54.2% of revenues in our first quarter of fiscal 2014 compared to 49.3% in our first quarter of fiscal 2013, and our gross profit percentage, accordingly, was 45.8% compared to 50.7% in our prior year first quarter.

The change in cost of revenues as a percentage of revenues in our first quarter of fiscal 2014 primarily reflects a 5.6% increase in cost per participant that was partially offset by the 3.5% increase in revenue per participant. The increase in the cost per participant was driven primarily by the apportionment of the fixed costs related to our education centers over a lower participant base and a 4.6% reduction in the average number of participants per course.

Costs of revenues for the first quarter of fiscal year 2013 were negatively impacted by $400,000 in costs related to Hurricane Sandy.

Changes in foreign exchange rates do not materially affect our gross profit percentage, since exchange rate changes affect our costs of revenues by approximately the same percentage as they affect our revenues.

During our first quarter of fiscal 2014, we reduced our course development expense by $200,000 to $1.9 million compared to $2.1 million in the same quarter of fiscal 2013. Course development expense was 6.0% of revenues in our first quarter of 2014 compared to 6.3% in the same quarter of fiscal 2013.

In our first quarter of fiscal 2014, we introduced six new management course titles, and we retired two IT course titles and five management course titles. As a result, our library of instructor-led courses included a total of 182 titles at the end of our first quarter of fiscal 2014 compared with 193 titles at the same point a year earlier. At the end of our first quarter of fiscal 2014, we had 121 IT titles in our course library, compared with 120 IT titles at the end of our first quarter of fiscal 2013. Our library included 61 management titles at the end of our first quarter of 2014, compared to 73 a year earlier.

In our first quarter of fiscal 2014, we reduced our sales and marketing expense by $1.6 million to $6.2 million from $7.8 million in the same quarter last year. The reduction was primarily achieved through a reduction in direct marketing costs and a decrease in personnel expenses as a result of reduced staffing levels.

General and administrative expense during our first quarter of fiscal 2014 was $5.6 million, a $2.7 million decrease from the $8.3 million spent in our first quarter of fiscal 2013. The decrease was due primarily to $1.9 million of nonrecurring expenses incurred in the first quarter of fiscal year 2013 that included a restructuring charge related to the closure of our Los Angeles, California offices and costs incurred by a special committee of our Board of Directors to evaluate two proposed offers and any other expressions of interest to acquire the Company.

Lower salary and benefit costs from reduced staffing levels also materially contributed to the lower G&A expense in the first quarter of fiscal 2014 compared to the same quarter a year earlier.

In our first quarter of fiscal 2014, we recorded income from operations of $900,000, or 3.0% of revenues, compared to a loss from operations of $1.4 million, or negative 4.1% of revenues, in the same quarter of our fiscal 2013.

During our first quarter of both fiscal years 2014 and 2013, other expense was less than $100,000.

Pre-tax income in our first quarter of fiscal 2014 was $900,000 compared to a pre-tax loss of $1.4 million in our first quarter of fiscal 2013.

Our tax provision for the first quarter of fiscal 2014 was $200,000, compared to a provision of less than $100,000 in our first quarter of fiscal 2013. The tax provision for the first quarter of fiscal 2014 reflects estimates for foreign taxes and US state taxes.

Net income for our first quarter was $700,000, a 2.3% of revenues, compared to a net loss of $1.4 million, or negative 4.3% of revenues in our first quarter of fiscal 2013.

During our first quarter of fiscal year 2014, our cash and cash equivalents increased by $1.2 million to $27.8 million at January 3, 2014 from $26.6 million at September 27, 2013. This increase primarily resulted from cash provided by operations of $1.6 million, partially offset by capital expenditures of $400,000.

I will now turn the call over to Max Shevitz our President.

Max Shevitz

Thank you, David.

In developing our forward-looking outlook for our second quarter of fiscal 2014, in addition to our usual metrics, we have taken the following additional factors into consideration. Since the US government began sequestration in 2013, our US operations have experienced a substantial reduction in the amount of net bookings under our GSA contracts.

Combined with the impact of continued weak European economies, this has resulted in a decrease in our worldwide total net enrollments. In addition, the severe weather we have recently experienced at our East Coast education centers has negatively impacted both attendances at our courses in our second quarter of fiscal 2014 and new enrollments we've taken for the second quarter and future quarters.

With the introduction of our AnyWare Learning Centers, we have expanded our distribution channels for our courses in order to make attendance more convenient and cost effective for our customers. We have found that this enhancement of our delivery channels has resulted in a slightly shorter buying cycle. Our clients are shortening the average time from initial enrollment in a course to their actual attendance. This shorter buying cycle has somewhat reduced our visibility for future enrollments and has made forecasting future financial results somewhat more difficult.

Finally, our second quarter is historically the lowest revenue quarter of our fiscal year.

With all of this in mind, I will now discuss our guidance for the second quarter of fiscal 2014.

For our second quarter of fiscal 2014, we currently expect revenues of between $22.9 million and $24.4 million, compared to revenues of $26.9 million in our second quarter of fiscal 2013.

We expect a gross profit percentage in our second quarter of fiscal 2014 of between 34.1% and 35.3% compared to 44.8% in our second quarter of fiscal 2013.

We expect overall operating expenses for our second quarter of fiscal 2014 to be between $14.2 million and $15.0 million, compared to $15.9 million in the same quarter a year earlier.

As a result of the above factors, we expect to incur an operating loss of between $5.6 million and $7.2 million for our second quarter of fiscal 2014, compared with an operating loss of $3.8 million in our second quarter of fiscal 2013.

We expect second-quarter other expense, net, to be less than $100,000.

Overall, we expect to report pre-tax results for our second quarter of fiscal 2014 of between a loss of $5.5million and $7.3 million, compared with a pre-tax loss of $3.6 million in our second quarter of fiscal 2013.

We have determined that due to the establishment of a valuation allowance against deferred tax assets in the US, we will no longer be providing guidance on the next quarter's effective tax rate. This is due to the potential volatility of the effective tax rate as a result of the effect of the valuation allowance.

Because we conduct approximately half of our business in currency other than US dollars, fluctuations in exchange rates will affect revenues and expenses when translated into dollars. Since both revenues and expenses are generally denominated in our local subsidiaries' currency, changes in exchange rates that have an adverse effect on our foreign revenues are partially offset by a favorable effect on our foreign expenses.

We continue to monitor the economic indicators for North America and Europe. We are hopeful that the recent US government budget accord will have a positive impact on future net enrollments from our customers who purchase under our GSA Contract Schedule. We continue to invest in our business to better position Learning Tree to capitalize on improvements in the economies of North America and Europe, and we continue to work hard to generate more business and to reduce our costs in order to continue to improve our operating results.

And now we'd like to open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of William Meyers with Miller Asset Management. Please proceed.

William Meyers – Miller Asset Management

Hi. Thanks for taking my question. First, I'd like to know – your sales and marketing spend is down and that helped with the profits in the last quarter. I'm wondering if that's what we can look to going forward. And I'm also wondering if you're seeing any signs of decreased revenue because of decreased spend, and general color on that.

Max Shevitz

I'm sorry; could I catch your name again?

William Meyers – Miller Asset Management

Yes; William Meyers.

Max Shevitz

William, well, thank you for joining us. First question is can you expect sales and marketing spend to continue to be down. We went through a process in both sales and marketing over the past year of testing various strategies for marketing and examining the productivity of our sales force. Over the past year we've made a number of changes based upon the results of those tests and measurements and determined that we needed to make improvements in both areas. A number of those changes have been made.

We will make decisions going forward based upon what we believe will be happening in the marketplace as to how we need to change both the spend in marketing and on the sales force in response to what we would expect to be the return on that investment.

Typically in periods where we see the marketing expanding, we will then expand our expenditures in marketing and in the sales force to try to take advantage of the growth in the marketplace. In periods where we think the market's going to continue to be tight we keep our spending low in those areas, because we don't think that the return on the incremental spend would be worthwhile.

So it's hard at this point to predict more than probably a quarter out as to where we expect our expenditures in those areas to be, simply because we're waiting to see what's happening in the marketplace to determine how aggressive we should be in those spends.

I'm sorry; what was the second part of your question?

William Meyers – Miller Asset Management

Well, that was actually – really covered what I wanted to know about sales and marketing. So, if you don't mind, I would just like to ask a second question, which is you – enhanced distribution methods. Could you give us a little bit more color on that? And I am interested in whether you test pricing on that, whether some of the distribution methods would either be priced higher to get a higher margin, or be priced lower to try to get more unit sales.

Max Shevitz^ So the enhanced distribution methods that we've been discussing in past calls, obviously one has been, over the past few years, the expansion of our AnyWare delivery, our online live delivery of courses. And the second, more recent, has been an expansion into the AnyWare Learning Centers, where we have created an optimized environment where attendees can visit locally a center and attend via AnyWare in a much better environment than they might find either in work or at home to attend via AnyWare. We've seen positive response so far in our tests to both of these.

We have tested some pricing in those areas, but not a great deal at this point. More we've just been trying to prove the model, identify operational issues that we have to overcome, and prove the quality of services in those areas. Some of them are quite new, and so we're just trying to, let's say, prove the model before we get into more detailed testing of how can we adjust pricing, how can we present them in the marketplace, various variations that might cause us to take a different approach in the market.

William Meyers – Miller Asset Management

Okay. That's all for me. Thank you very much.

Operator

And there are no further questions in the queue at this time, sir.

David Asai

Well, Brittany, if there's no more questions you can end the call for us, please.

Operator

Ladies and gentlemen, that concludes the presentation for today's conference. You now all disconnect and have a wonderful day.

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