Brian Beckwith – President and CEO
Mike DeMarco – EVP and CFO
Peoples Educational Holdings, Inc. (OTC:PEDH) F2Q2011 Earnings Call Transcript January 7, 2011 11:00 AM ET
Good day ladies and gentlemen and thank you for standing by. Welcome to Peoples Educational Holdings Earnings Conference Call. My name is Nualia and I'll be your operator today.
During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you'll be invited to participate in a question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded.
Before we begin, the Company has asked me to read the following statements. Today's presentation by management contains forward-looking statements within the meaning of Securities Exchange Act of 1934. These forward-looking statements represent the company's present expectations or beliefs concerning the future events. The company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated today.
These risk factors include changes in general economic conditions, local and state levels of educational spending, changes in demand from customers, variation in the mix of products sold, the impact of competitive products and pricing, and the company's ability to respond to rapidly changing technologies. Further information on these risk factors is included in the company's filings with the Securities and Exchange Commission.
I would now like to hand the call over to the host for today's call, Brian Beckwith. Please proceed.
Good morning. I'm Brian Beckwith, President and CEO of Peoples Educational Holdings. Welcome to our fiscal year 2011 second quarter earnings conference call. I'll begin with a brief overview, and Mike DeMarco, our Chief Financial Officer, will discuss our financial results in more detail.
Our second fiscal quarter ended November 30, 2010 was challenging due to the continued state and local budget pressures. Net revenue for the quarter was $6.2 million, a decrease of 15.7% from the same period in the prior year. For the six months ended November 30, 2010, revenue was $19.3 million, a decrease of 12.5% from the prior year. Despite the decline of revenue, however, we continued to manage the business well.
Free cash flow was strong at $2.2 million and our bank debt declined by $2.3 million from our year-end May 31, 2010. We continue to carefully manage our operating expenses, given the fiscal environment, while investing in new products for future growth.
A significant advance in the US K-12 educational space is the introduction of Common Core State Standards, which I'll refer to as the Common or Common Core Standards, CCSS, spearheaded by the NGO, which is the National Governors Organization, and the CCSSO, which is The Council of Chief State School Officers.
As of the latest count, 43 states in the District of Columbia have approved the Common Core Standards for use within their states, starting as early as the current school year, with others expected to follow.
However, state assessments based on these standards are not expected to be implemented until the 2014-2015 school year. In the meantime, the existing state taxes will remain in place in most states. At this stage, Texas, Virginia and Alaska have announced that they will not adopt the CCSS, while Minnesota has announced that they will adopt only the English Language Arts standards.
States have the option under the Common Core Standards to add up to 15% in additional state-specific standards. Of the ten states for which we publish state-specific materials; two, Texas and Virginia, have stated that they will continue with unique standards and five additional states have indicated that they will add states specificity to the Common Core Standards. As a result, we anticipate a relatively small impact on our ability to deliver state-specific products in the major states where we deem it to be economically efficient.
On the other hand, the introduction of Common Standards offers us the opportunity to expand rapidly into states where we have not had a significant presence to-date. Most of these are smaller states and will not require state-specific additions. Yet, we believe they will collectively represent close to 50% of the K-12 U.S. student population.
We’re currently in the process of creating CCSS print and Internet-delivered product, which leverages our strong standards orientation. Our first print work-texts focusing on the CCSS are now being launched into all states with Common Core Standards. During the current or fiscal third quarter, we’ll launch new versions of our Internet-delivered assessment and practice products, Assess and Practice Path, also centered on the CCSS.
These products will also be launched into all Common Core Standard states. In addition, we recently launched a national Algebra 1 supplemental work-text and we’re raising the profile of the national versions of our skills-based focused instruction products.
In addition, with these national product launches, we’ve reorganized our outside sales force and have expanded it to cover all 50 states. This is an important move on the part of the company. This will give us a significant expansion in our sales capabilities, both for our proprietary products as well as for helping to drive strategic partnerships and acquisitions, which may require national sales capability.
As part of our sell-through organization, we now have a total of seven company technology specialists and sales people, focused solely on the sales and support of digital products.
In addition to content expansion, we’re working to enable the delivery of our products in a variety of technology platforms, including interactive whiteboards, teacher handheld devices and iPads. We’re also working to enable student handheld clicker devices, which lend themselves well for the class-wide assessment and practice.
We continue to pursue potential partnerships and add-on acquisitions, with the focus on integrated intervention programs, involving a digital component, and Internet-delivered SaaS or Subscription-as-a-Service, supplemental instructional programs in reading, math, science, and social studies.
As a part of our efforts to strengthen our internal development capabilities, we were pleased to name Michael Urban to the new role of Chief Development Officer in November. Michael is a respected and innovative leader in the educational technology market.
In this role, he'll spearhead strategic development and positioning of the company’s expanding line of print and digital educational products. Reporting directly to me, Michael brings to the company nearly two decades of leadership in the development of instructional and assessment products and platforms, with an emphasis on digital standards-based learning.
The K-12 market continues to evolve in response to state and federal initiatives, as well as the technological innovation. There is a growing trend towards incorporating student progress as determined by a variety of assessments and to teacher and administrator evaluations.
Given our ability through assessment and strong instruction to create and implement the Personal Prescriptive Path, or P3 for each student and thereby improved individual student performance, we feel we’re well positioned to prosper in the coming years.
I'll now turn it over to Mike to discuss our financials in more detail. Mike?
Brian, thank you. The K-12 supplemental market continues to be impacted by state and local budget cuts and schools are reacting to the budgetary pressures by delaying, in some cases reducing or not placing orders for supplemental materials. These circumstances have had an adverse impact on our revenue for the quarter and the six months year-to-date.
Total revenue for the second quarter, three months ending November 30, was $6.2 million, which represented a year-over-year decline of $1.1 million. Test Preparation, Assessment and Instruction product line revenue was $4 million compared to $4.9 million in the prior year. College Preparation revenue was $1.8 million compared to $2 million last year. And lastly, our Literacy revenue was $371,000 compared to $405,000 in the prior year.
Cost of revenue, as a percentage of revenue, for the quarter was 59.1%, up from 55.5% in the prior year.
Cost of revenue consists of two components, direct costs and prepublication costs amortization. Direct costs, which consists of product costs for our print products, Web hosting fees for our digital products, royalties, warehousing and shipment costs was 39% of revenue compared to 37.3% in the prior year. The year-over-year fluctuation is primarily due to the product revenue mix.
Prepublication costs include expenses associated with producing new products. These costs are capitalized and are amortized depending upon the product over a three- or five-year period.
For the quarter, we amortized $1.2 million of prepublication costs, which was 7% lower than the prior year. This decline is a result of lower product development expenditures over the past several years due to operational efficiencies.
Selling and marketing expenses for the quarter were $2.3 million, a decline of 7% from the prior year. As a percentage of revenue, the expense increased from 34.2% to 37.8% due to the lower revenues and increased costs as we continue to add to our digital sales infrastructure.
General and administrative expenses for the period were $1 million, representing a year-over-year decrease of 9%.
Net loss for the quarter was $581,000 compared to $303,000 in the prior year. Net loss per common share was $0.13 compared to $0.07 in the prior year.
The results for the six months ending November 30 are as follows. Total revenue was $19.3 million, a year-over-year decline of $2.8 million. Testing, Assessment and Instruction revenue was $9.1 million compared to $11.2 million last year.
College Preparation revenue was $9 million, a decline of $630,000 from the prior year and Literacy revenue was $1.2 million, a year-over-year decline of $47,000.
Cost of revenue as a percentage of revenue for the six-month period was 60.1%, up from 58.4% in the prior year. Within cost of revenue, a direct cost increase from 46% of revenue in the prior year to 47% in the current period due to product mix. And prepublication cost amortization was $2.5 million, down 7% from the prior year.
Selling and marketing expenses for the six-month period was $4.6 million, a decline of 5%. As a percentage of revenue, the expense increased from 21.7% to 23.6%, primarily due to the year-over-year revenue decline. General and administrative expenses declined 6% from the prior year to $2.2 million.
Net income for the six-month period was $471,000, a decline of $687,000 from the prior year. Non-GAAP net income, which excludes non-recurring costs and adjusted for the difference between prepublication expenditures and amortization, was $115,000 compared to $1.9 million in the prior year.
The decline is primarily due to the difference in net income between the two years and the $1.6 million year-over-year increase in product development expenditures as a result of the timing of our development schedule this year. However, we are projecting the full year product development expenditures to be in line with the prior-year expenditures of $4.8 million.
Free cash flow for the period continues to be strong at $2.2 million. The year-over-year decline of $3.1 million is due to the timing of the product development expenditures and the $1.5 million decline in net cash provided by operations, which is primarily the year-over-year fluctuation in net income and deferred taxes.
Bank debt at November 30, 2010 was $8.3 million, a decline of $2.3 million from our year end May 31. Brian?
Thanks Mike. I’d like to close our prepared remarks with a comment about our outlook for the remainder of fiscal year 2011. Based on our six months year-to-date results and our forecast for the balance of the year, we are adjusting our full-year guidance. We expect revenue to be between $34 million and $35 million, net income of $250,000 to $500,000, or $0.06 to $0.11 per basic share, non-GAAP net income to be between $500,000 and $1 million, or $0.11 to $0.22 per basic share, and positive free cash flow to range between $1.5 million and $2.5 million.
Thank you for listening to our prepared remarks. We'd now like to open it up for questions if any from our listening audience.
(Operator instructions) At this moment, there are no questions in the queue. I'd like to hand the call over for closing remarks.
Okay. Thank you for your participation today. We appreciate your support and your continued interest in Peoples Education. Have a good day.
Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Have a great day.
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