Nobel Learning Communities, Inc. F3Q10 (Qtr End 03/27/10) Earnings Call Transcript

May. 5.10 | About: Nobel Learning (NLCI)

Nobel Learning Communities, Inc. (NASDAQ:NLCI)

F3Q10 (Qtr End 03/27/10) Earnings Call Transcript

May 5, 2010 5:00 pm ET

Executives

Tom Frank – SVP & CFO

George Bernstein – President & CEO

Lee Bohs – SVP of Corporate Development

Analysts

Jon Braatz – Kansas City Capital

Mark Mandell – Convergent Fund Management

Operator

Good day, everyone, and welcome to the Nobel Learning Communities Conference. As a reminder, today’s conference is being recorded. And at this time I would like to turn things over to Tom Frank, Chief Financial Officer. Please go ahead.

Tom Frank

Except for historical information discussed today, the information in this conference call consists of forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties are discussed in the Company’s filing with the SEC, and listeners are encouraged to read the risk factors therein.

These statements are based only on management’s knowledge and expectations on the date of this call. The Company undertakes no obligation to update any forward-looking statements made during this call to reflect events or circumstances that may arise after this call.

During this conference call, the Company will present financial information both in accordance with United States Generally Accepted Accounting Principles and also on a non-GAAP basis, including EBITDA and adjusted EBITDA, which is a non-GAAP financial measure. Please refer to the financial summary in the Company’s press release for information reconciling non-GAAP financial measures to comparable GAAP financial measures.

George, you may proceed.

George Bernstein

Good afternoon, everyone, and welcome to the Nobel Learning Communities third quarter fiscal year 2010 conference call. I am George Bernstein, President and CEO of Nobel Learning, and I am joined on our call this afternoon by Tom Frank, Senior Vice President and Chief Financial Officer, and Lee Bohs, Senior Vice President of Corporate Development.

During our prepared remarks this afternoon I’d like to provide you with some highlights on our quarter and update you on the momentum we’ve built coming through the tail end of the economic downturn. Tom will then present a more detailed review of our financial performance.

Nobel Learning reported earnings of $1.2 million, or $0.11 per fully diluted share for the third quarter of fiscal 2010, including a $0.01 per share charge for discontinued operations. For the first time in Company history, quarterly revenues exceeded $60 million, with third quarter revenues of $60.2 million.

Compared to the third quarter of last year, revenues grew 5.7% this quarter, a sequential acceleration in our growth rate from 5% for the second quarter. We’ve now grown revenue in 20 of the last 21 quarters.

On a cash flow basis, third quarter adjusted EBITDA was $5.5 million, while over the trailing 12 months ending with the March quarter, we’ve generated $17.8 million of adjusted EBITDA. Given our improving momentum, we believe this represents the bottom of the trough of our trailing 12 months EBITDA and that we will see improvement beginning in the fourth quarter of fiscal 2010. Let me repeat that, we believe our trailing 12-month EBITDA is unlikely to fall below the current quarter’s trailing 12-month $17.8 million.

During the economic downturn we experienced significant erosion in our comparable school enrollments. That trend appears to have shifted as we are now gaining students at an accelerating rate on a year-over-year basis. During the third quarter, the year-over-year improvement in net enrollment was materially better than in the second quarter. As a result, for the second consecutive quarter, comparable school year-over-year revenue improved on a sequential basis. In the third quarter comp school revenue was down 3.9%, a 90 basis point improvement compared to the second quarter. This sequential improvement was actually somewhat better, down only 2.5% when you remove the effect of a tuition increase implemented at the start of the fiscal 2009 third quarter.

Considering we are now beginning to lap some weak year-ago enrollments, we are very encouraged by our progress and the opportunity for even better performance, going forward. Our comparable school enrollment increase in the March quarter was driven by both cylinders of our enrollment engine: a reduction in student withdrawals and an increase in new starts.

Keep in mind that comparable school enrollment is a cumulative effect of the prior 12 months and withdrawals. The biggest impact on comparable school enrollment occurred during the September 209 back-to-school enrollment period when we most acutely felt the impact of the deteriorating economy and rising unemployment. So, even with the progress we achieved this year, total enrollments remain off our peaks of fiscal 2008.

Steady comparable school enrollment gains show our momentum has clearly shifted. In addition to solid net enrollment gains, enquiries for our school programs are improving nicely for both near term and next fall enrollments. In addition to the energy level behind our growth initiatives, we are applying equal effort to efficiency and productivity enhancements that will improve the leverage in our model. Our objective is to improve our operating leverage so that future returns from given levels of school occupancy are greater than those previously achieved at the same occupancy levels.

We are also pleased with the progress of our strategic initiatives. The Laurel Springs School, our K-12 college prep online educational platform is now fully integrated, meeting expectations and providing significant contribution to our revenue, gross profit, and EBITDA. Since taking ownership, we’ve been heavily engaged in developing opportunities to leverage Laurel Springs School curriculum into new growth markets such as our program to introduce online learning in Korea. There is strong international demand for a degree from a U.S. high school with quality accreditation where the degree is widely recognized at the U.S. university level. We believe this model has substantial international opportunities and we are involved in several discussions, which we hope to be able to announce over the next few months.

Before making a few concluding remarks, let me turn the call over to Tom who will take you through our financial results in more detail.

Tom Frank

Thanks, George, and good afternoon, everyone. I will now provide a little more detail around our performance in the quarter. Remember, as I go through our current results, we have reclassified certain prior year results, specifically underperforming schools closed in prior fiscal years are now classified as discontinued operations in all reported periods. In addition, a reconciliation of GAAP to certain non-GAAP financial measures is included in our press release.

We reported third quarter 2010 revenues of $60.2 million, up 5.7% compared to revenues of $56.9 million in the third quarter a year ago. This was a record for the Company and is the first time in the Company history quarterly revenues exceeded $60 million. As George pointed out earlier, our sequential quarterly increase in enrollment led to a 90 basis point improvement in comparable school revenue during the third quarter, with comparable school revenue down just 3.9% for the quarter as compared to the same group of schools for the third quarter of fiscal 2009. This improvement was muted by the impact of 1.4% tuition increase implemented in the third quarter of fiscal 2009, which was not repeated this year. Without this tuition increase, adjusted comparable school revenue was down only 2.5%, a strong 230 basis point improvement over the second quarter.

We believe comparable school revenue performance in enrollment has turned the corner as this is the first time since 2007 that we have seen comparable school enrollment improvement sequentially for two straight quarters.

Redeveloped schools and acquired schools added $6.5 million of revenue this quarter. $2.2 million of this is attributable to our K-12 college prep online learning school, Laurel Springs. We operated 184 schools at the end of the third quarter of 2010 compared to 180 schools at the end of the third quarter last year.

During the third quarter we opened one new school. Overall personnel cost for the third quarter were $28.8 million, up 5.9% from $27.2 million in the comparable year-earlier period. As a proportion of revenue, personnel costs were 47.8% this year, up slightly from 47.7% reported last year. Consolidated personnel costs were up primarily due to the relatively higher level of personnel costs at newly developed schools and the addition of Laurel Springs. Overall, third quarter new school performance this year was better than last year as we have slowed the new school pipeline. In addition, this quarter our new schools are more seasoned than the comparable third quarter 2009 vintage.

Comparable school personnel costs are up as a percent of revenue this quarter. Comparable school personnel costs were 48.3% of revenue in the third quarter this year, up 100 basis points from 47.3% in last year’s third quarter as we maintained state required student-teacher ratios in our preschools despite lower year-over-year total enrollment levels.

Overall school operating costs, which consists of several significant variable cost items such as repairs, maintenance, food, and bad debt costs, were higher in the third quarter in total, and as a percent of revenue as compared to the third quarter if fiscal 2009. School operating costs increased to 13.3% of revenue as compared to 12.4% of revenue during the third quarter of fiscal 2009. The increase as a percent of revenue was primarily driven by comparable schools as school operating costs were impacted by additional snow removal, food, and bad debt costs in the third quarter of fiscal 2009 – for 2010.

The largest of these increases was for snow removal as we had record snowfalls in a number of schools in the east. Food cost increases are primarily result of improvements to our offerings as we continue to add more healthy whole foods.

Consolidated school gross profit for the third quarter of fiscal 2010 was $8.4 million, or 13.9% of revenue, down from $8.7 million, or 15.3% of revenue in the third quarter of fiscal 2009. Overall margins were down due to a 23.6% decrease in comparable school margins, which is a function of lower comparable school revenue. This offset improvements in acquired and new school margins and a significant contribution from Laurel Springs.

General and administrative expense for the third quarter was $5.9 million, up from $4.3 million last year. The increase primarily reflects the addition of Laurel Springs School overhead. Excluding the impact of Laurel Springs, G&A as a percent of revenue increased slightly as we continue to incur costs for our defense of the Department of Justice suit complaints of practices in certain schools related to the Americans with Disabilities Act. In the quarter, we incurred approximately $250,000 related to this lawsuit.

Interest expense in the third quarter was $495,000, up from a year-ago due to higher debt levels from acquisitions made during this fiscal year, and somewhat higher interest rates.

Fiscal third quarter 2010 net income was $1.2 million, or $0.11 per fully diluted share compared to third quarter 2009 net income of $2.3 million, or $0.22 per fully diluted share. There is a $0.01 per share cost of discontinued operations in this year’s results. In addition, DoJ related costs discussed in G&A impacted earnings by $0.01 per share.

We had a strong financial position and continued to generate positive cash flow. For the quarter, adjusted EBITDA was $5.5 million compared to $6.9 million a year ago. For the trailing 12 months adjusted EBITDA was $17.8 million. This should be the lowest point in our trailing 12 month EBITDA metric as we expect fourth quarter fiscal 2010 enrollments and financial performance to improve over the fourth quarter of fiscal 2009. We believe the efficiencies achieved in our school operations will enabled us to exceed historical comparable quarterly EBITDA levels as enrollment performance in coming quarters continues to improve.

Therefore, let me repeat what I’ve just said. This quarter marks the lowest point in our trailing 12 month EBITDA metric for this foreseeable future. As of the end of the third quarter we had about $25.5 million of net debt and we remain less than 1.5 times leveraged compared to trailing 12 month EBITDA. This provides us with more than sufficient liquidity to execute our growth strategy. Availability in our line of credit is currently above $45 million with a term through June, 2013.

I will now turn it back to George.

George Bernstein

Thanks, Tom. During the recent economic downturn, we have continued to significantly invest in building an educational platform with enduring long term value. Our willingness to invest in our educational programs has been consistently rewarded with occupancy levels at or above industry average and are important factors in our recent enrollment gains.

In our preschool programs this year we have added classroom observational reports and student assessment reports for our parents. In our K+ schools, the investment has been even greater. This year alone, we’ve added online assessment programs for reading and online assessment programs for math. We’ve added personalized learning programs and plans for every student and our Giving Without Walls program, which focuses on student directed social entrepreneurship projects from kindergarten through 8th grade.

Since the start of the school year, when our enrollments were severely influenced by the rising tide of unemployment that had been building over the previous 12 months, our enrollments have been recovering. While still in a challenging economy, all signs are that the recovery is likely to continue its gradual improvement. We believe our new investments have helped us close the enrollment gap that was quite large at the beginning of the school and fiscal year.

Our education and operating teams continue to strengthen our educational offerings, strategically expand into new markets, and improve our operating efficiency to achieve the long term vision we’ve articulated. With signs that unemployment may have peaked, we are optimistic we will benefit from a market that is on the mend.

As always, let me say thanks to our more than 4,700 educators who are part of Nobel Learning Communities. I’d like to thank our teachers and Principals for their fabulous efforts and thank our investors for their continued support. Thank you for this time on the call. We’ll now take questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question will come from Jon Braatz with Kansas City Capital.

Jon Braatz – Kansas City Capital

Good morning, guys. Good afternoon, excuse me.

George Bernstein

Hi, Jon.

Jon Braatz – Kansas City Capital

George, can you revisit the tuition increase last year, in the third quarter you increased tuition 1.4%, you don’t typically do that mid-year. What was the reason for that?

George Bernstein

Let me go back a little further than that. In the beginning of last fiscal year, which would have been July 2008, right Tom?

Jon Braatz – Kansas City Capital

Right.

Tom Frank

That’s correct. Yes.

Jon Braatz – Kansas City Capital

2008. We took approximately a 3% tuition increase. That is our normal operating procedure, July of every year, we take an increase and the increase obviously depends on demand, market conditions, the economy, et cetera.

In January of 2009, in the middle of that fiscal year, we took a tuition increase of approximately 1.4%, which we do not normally take, and which we did not do again this year.

Jon Braatz – Kansas City Capital

Okay, so –

George Bernstein

So, if you look at the third quarter numbers compared to – the revenue last year, last year’s revenue has a tuition increase built into it that was not done this year.

Jon Braatz – Kansas City Capital

Right. So, effectively, year-over-year your tuition is still up, but not 3%?

Tom Frank

But it’s up by (inaudible)

George Bernstein

Yes, it’s up –

Tom Frank

1.6%

Jon Braatz – Kansas City Capital

1.6%

Tom Frank

1.5%-1.6%

George Bernstein

Sounds like, yes.

Tom Frank

Somewhere in that range.

Jon Braatz – Kansas City Capital

Okay, alright, alright.

George Bernstein

For the third quarter.

Tom Frank

For the third quarter.

Jon Braatz – Kansas City Capital

For the third quarter and for the fourth quarter?

George Bernstein

And for the fourth quarter, right. First and second quarters it was up like 3% and for the third and fourth it will be like 1.6%.

Tom Frank

That’s right.

Jon Braatz – Kansas City Capital

Okay, okay, very good. And then secondly any preliminary thought as you approach July of 2010, what your tuition increases might be or not be?

George Bernstein

The reason I am having trouble answering that is because we have piecemeal put our tuition increases out to some of our schools depending on the market, and depending on when their re-enrollment is, but we haven’t publicly stated what the roll up is for the Company. So, I am not going to give you that information because we just haven’t put it out there, but I will tell you that my sense is that we are going to be – I am sorry, I am looking at Tom.

Tom Frank

I am going to say, we are doing some.

George Bernstein

Yes, we are taking an increase.

Jon Braatz – Kansas City Capital

Yes.

George Bernstein

My sense is it is going to be probably less aggressive than we were this year because we do have some enrollment momentum and we want to make sure that we don’t stop it.

Jon Braatz – Kansas City Capital

Right, okay. Tom, you completed the Laurel acquisition in the second quarter, it was there for the full second quarter.

Tom Frank

Correct.

Jon Braatz – Kansas City Capital

And your interest expense jumped from $315,000 to about $500,000 in the third quarter from the second quarter. Why was that?

Tom Frank

I am sorry. Yes, I mean as you may or may not want to know, we did have an amendment to the credit agreement in early January, which was in the third quarter.

Jon Braatz – Kansas City Capital

Okay.

Tom Frank

So, the rates went up about probably roughly 120 basis points on average.

Jon Braatz – Kansas City Capital

Okay, okay, I missed that. Okay, alright I’ll get off and get back into queue. Thank you.

Tom Frank

Yes.

Operator

(Operator instructions) And we’ll go to Mark Mandell with Convergent Fund Management.

Mark Mandell – Convergent Fund Management

Hi, George, hi guys.

George Bernstein

Hi, Mark.

Mark Mandell – Convergent Fund Management

Congratulations on the quarter. George, can you tell me what you guys are doing to differentiate Laurel Springs and how you think that this opportunity can capture share and what expertise you are bringing to Laurel Springs that they didn’t have prior to your acquisition?

George Bernstein

Okay, let’s see. Well, I am just making a note, so I remember what you asked. Let me start with the differentiation piece. Laurel Springs will continue to be focused on being a higher-end college prep program, which differentiates it from the majority of – from almost all of the large players in the online K-12 segment. We are very focused on the college prep market and so for instance for our summer school campaign we have positioned ourselves with guidance counselors not as a credit recovery summer school program, but as a get-ahead summer school program so that for instance we will not allow a student to take a course – to take a summer school course that may be a shortened version of a course which is typically what credit recovery are. If it’s the initial time that they take that course that is giving us some significant credibility and legitimacy with guidance counselors. It’s really kind of a hedges and ledges and kind of small boutique positioning.

We are also working internationally to differentiate our offering again by being a higher end college prep whose students not only get into excellent U.S. colleges and universities, but quite frankly whose students are very well known throughout the international community because 40% of our students are lead athletes and entertainers. So, it’s all private pay, it’s not in the public virtual charter school business. And again we are trying to really establish credibility both with international schools and with guidance counselors throughout the U.S. that it is, that they are quality courses.

In terms of the expertise that we bring, I don’t know, some people might argue that we don’t bring any, what I really think that we bring quite frankly is we are very good at operation, at efficiencies, at – I think the thing that we are most talented at is taking ideas and concepts, which are entrepreneurial and which are fabulous concepts and institutionalizing them for growth so that we make sure that we have the systems and processes in place that we can handle the growth without losing sight of what made that product a great product to begin with. In addition, we have hired resources from the outside to bring in, to add – we do bring the – we bring cash. So we have added resources, for instance, a Director of Online Education who comes out of a very expansive online education business, who can help us understand not only how to develop and manage curriculum, but how to do it efficiently, how to professionally – do professional development for the teachers, because classroom teaching is so different than teaching in an online system. So, I really think that the biggest issue for us is really the issue of systemizing procedure, putting the procedures in place so that we can support the growth and making – and I guess the other thing is to – that we’ve brought here is that project management skills. And in a business like this where you have a lot of technology based requirements in the business, you really need to have those project management skills. So, I hope we’ll bring in some marketing, I mean –

Mark Mandell – Convergent Fund Management

Absolutely.

George Bernstein

– marketing team.

Mark Mandell – Convergent Fund Management

At the end of the day, if you can – I would think you can bring the technology expertise and the branding to reach a much bigger pool of applicants to increase the growth rate.

George Bernstein

Yes, so for instance, not only is our marketing team working on Laurel Springs, but our – what resources we have in business development have been very, very focused on Laurel Springs and specifically on the international growth aspects.

Mark Mandell – Convergent Fund Management

Got it. Well, we look forward to seeing you the next time you are on the west coast.

George Bernstein

Yes, thank you.

Mark Mandell – Convergent Fund Management

Thank you, George.

Operator

(Operator instructions) We’ll take a followup question from Jon Braatz with Kansas City Capital.

Jon Braatz – Kansas City Capital

George, what are your plans for the next fiscal year in terms of may be new schools, not acquired schools, but new schools?

George Bernstein

Yes, new schools for next year are going to be very, very small. I believe right now on the development pipeline, in other words, for schools that we are going to build, probably just one, because as you are aware we shut down the development pipeline when the economy went downhill and at that time, we didn’t feel as though the real estate market had reacted to what was going on in the economy. So, we didn’t want to do new deals where the real estate market was still lagging behind what was going on with the economy. We are beginning to open up the development pipeline again, but obviously those schools are 18 to 24 months off. So for the upcoming fiscal year, we’ll be one new ground up development. I will however, mention that we have opportunities that we are looking at but we don’t have anything signed of schools that have either been built and no one moved into them. So, it’s quick if we like them. In addition to that, we have some landlords of existing preschools and elementary schools who are not particularly enamored with their current tenants, who we have been talking to in situations where were we may be able to take that over. But in terms of ground up you are talking about one.

Jon Braatz – Kansas City Capital

Okay. Then remind me, George, how many new schools did you have that opened this year, this fiscal year?

Lee Bohs

Hey, Jon, this is Lee Bohs. We’ve opened this fiscal year four new schools with three of them in the summer ’09 and then one this past January.

Jon Braatz – Kansas City Capital

Okay. So, you are going to have a net three difference –

Lee Bohs

Yes, net three difference with the one, right.

Jon Braatz – Kansas City Capital

And that’s going to save you few dollars.

George Bernstein

Well say it is some money. We are also trying to redirect as more we can. We can't count on the suburban sprawl and the residential markets where we could have two or three years ago –

Jon Braatz – Kansas City Capital

Yes, right.

George Bernstein

– and are looking at the pipeline. We are focused on more areas that are number two or have rooftops covered. So – but you are right we are going to have a net difference of about three for this fiscal year.

Jon Braatz – Kansas City Capital

Have you seen significant recovery in some of your worst markets like Las Vegas and California and I guess maybe Florida, although it might not be the case? Have you seen pretty good recovery in some of those markets in terms of enrollments?

George Bernstein

I would say it’s spotty. We’ve seen pretty good recovery in Southern California and kind of – Silicon Valley, but Sacramento remains very difficult. So California is spotty. Florida remains difficult. Las Vegas remains difficult on the preschool business, but actually improving on the K+ side of the business.

Jon Braatz – Kansas City Capital

Okay.

George Bernstein

North Carolina, Raleigh is improving, Charlotte is improving, but not – yes, it’s a very gradual improvement. It’s still a difficult market. So, it’s kind of spotty I would say.

Jon Braatz – Kansas City Capital

Have you seen any areas getting worse?

George Bernstein

I don’t think so, no.

Jon Braatz – Kansas City Capital

Okay, okay. Okay, alright, thanks, George.

George Bernstein

Yes.

Operator

And it appears to be all the questions we have today. I’ll turn the conference back to Mr. Bernstein.

George Bernstein

Well, I thank everybody for their time and we look forward to speaking to you at the next conference call at the end of the next quarter. Thank you.

Operator

Again, that does conclude our conference. We do thank you for joining us today.

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