Executives
Brian T. Beckwith – President & Chief Executive Officer
Michael L. DeMarco – Chief Financial Officer
Peoples Educational Holdings, Inc. (PEDH) F1Q 2012 Earnings Call October 6, 2011 11:00 AM ET
Operator
Good day, ladies and gentlemen, and thank you for standing by. Welcome to Peoples Educational Holdings’ Earnings Conference Call. My name is Shikwana and I’ll be your operator today. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded.
Before we begin, the company has asked me to read the following statement. Today’s presentation by management contains forward-looking statements within the meaning of the Securities Exchange Act of 1934. These forward-looking statements represent the company’s present expectations or beliefs concerning future events. The company cautions that such statements are necessarily based on certain assumptions which are subject to risks and uncertainties, which could cause 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, variations 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 Mr. Brian Beckwith. Please proceed, sir.
Brian T. Beckwith
Good morning. I’m Brian Beckwith, President and CEO of Peoples Educational Holdings. Welcome to our fiscal year 2012 first 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.
Net revenue for the quarter ending August 31st, 2011, was $12.1 million, a decrease of 8% from the same period in the prior year. The decline was a result of two major factors. First, our testing assessment and instruction product group revenue decreased $587,000 on a year-over-year basis primarily because of a decline in revenue in the state of Texas.
Secondly, revenue from our Literacy group was off significantly compared to prior year. I will comment more specifically on these areas in a moment. Our net income for the quarter was $0.9 million or $0.20 per basic share compared to $1.1 million or $0.24 per basic share in the prior year.
Our non-GAAP net income was $1.2 million or $0.27 per share compared to $0.9 million or $0.21 per share in the prior period. As indicated, our TAI revenue decreased primarily due to the decline in Texas.
Texas has implemented new standards and is in the midst of a change to new tests. While the changeover has significantly affected our revenues in Texas in the short-term, we believe that the New Star assessments coupled with the new upcoming high school end-of-course assessments required for graduation will create significant growth opportunities for us.
We are currently in the process of releasing new and revised product for Texas and expect revenue to rebound over the next three quarters. Texas is the second largest state and it has historically been one of our strongest states, with strong brand recognition and a highly capable sales team.
Our Literacy product group represents the smallest of our three product groups. These Literacy products are developed by other publishers. Revenue for this group was $447,000, compared to the prior year, due to a decline in a number of large opportunities, but last year we are funded primarily with ARRA funds.
We are currently pursuing additional funding opportunities; including the recently released $180 million federal Striving Readers Comprehensive Literacy Program. We are also positioning this product and packages that align well with the goal to the common core standards that are beginning to be implemented in most states.
Our College Preparation product group was relatively flat, compared to prior year; and we are beginning to see pockets of growth in both print and digital versions of these products. These are primarily college level texts, e-books and class management systems that we sell into the high school space, as exclusive distributors for two college publishers. We also developed proprietary supplemental materials for this market. We are pleased to see stabilization in this market and believe that there continues to be opportunities for future growth.
The overall market for K-12 instruction materials has been extremely challenging over the past few years due to the decline in state and local funding. While the state and local fiscal environments are still difficult, there are signs that state finances are beginning to stabilize.
According to the National Association of State Budget Officers, 13 states and the District of Columbia have reported shortfalls in their 2011 budgets. In fiscal year 2010 by contrast, 45 states experienced shortfalls relative to their original budgets. Two key states, California and New Jersey have experienced surpluses that were unanticipated. On the downside, Texas has experienced revenue challenges that began later in the economic cycle than was the case in most states.
While we don’t believe the turnaround will be fast, we are pleased to see signs of stabilization in many of our markets, and modest growth in state funding and states such as California and New Jersey.
We are focused on the eventual change over in most states to the Common Core State Standards over the next few years. We released our first CCSS instructional products earlier in the calendar year and have now seen sales in 23 states. We continue to be encouraged by the favorable market response to these products. This expands our presence beyond the 10 core states that we previously were focused on.
Also, the enhanced rigor of the CCSS relative to existing state standards creates a favorable environment for our products, which are in design to improve student mastery. We are also enthused about the recent release of our new digital products, Measuring Up Insight and Measuring Up My Quest.
These products provide Internet-delivered formative assessment, highly engaging test practice and instruction relating specifically to the existing state standards in 10 states and to the CCSS as well for those schools and districts that are beginning to migrate to the new common standards.
These products were developed internally by our development services team and are being taken to market by our new team of digitally focused sales reps headed by our new national digital sales manager, as well as by our existing team of independent and company sales representatives.
We are excited by our new capabilities and feel that we are well prepared for future growth as the market moves increasingly towards the use of educational technology in the classroom.
I will now turn it over to Mike to discuss our financials in more detail. Mike?
Michael L. DeMarco
Thank you, Brian. Total revenue for the first quarter was $12.1 million, compared to $13.1 million in the prior year. Break out of our total revenue by product group was as follows: Test preparation assessment and instruction revenue was $4.5 million and a year-over-year decline of $587,000. College Preparation revenue was $7.1 million, which was flat with the prior year, and Literacy revenue was $403,000 compared to $850,000 in the prior year.
Cost of revenue as a percentage of revenue for the quarter was 63.0%, up from 60.5% last year. Cost of revenue consists of two components: direct costs and prepublication costs amortization. Direct costs which consists of product costs for our print product, web hosting fees for our digital products, royalties, warehousing and shipping costs was 51.6% of revenue, a year-over-year increase of 0.9 percentage points.
This fluctuation is due to product revenue mix, specifically the increase in College Preparation revenue as a percentage of total revenue. College Preparation revenue increased from 54.6% of total revenue in the prior year to 59.0% in the current year. The majority of College Preparation revenue comes from non-proprietary products, which have a substantially higher direct cost than our proprietary products.
Prepublication costs are expenditures associated with producing new products. These costs are capitalized and are amortized depending upon the product over a three or five-year period. We amortized $1.4 million of prepublication costs for the quarter, which was $73,000 higher than the prior year. As a percentage of revenue, the expense increased 1.5 percentage points to 11.3%.
Selling and marketing expense was $1.9 million, a decrease of 14.5% from the prior year. The expense as a percentage of revenue decreased from 17.0% to 15.8%. The decrease in the prior year is due to a reduction and commission expense as a result of lower revenue, a decline in sample expense, and the timing of various promotional campaigns.
General and administrative expenses were $1.1 million, a year-over-year decrease of 7.7%. The decrease is due to overall cost containment efforts.
Net income for the quarter was $871,000, compared to $1.1 million in the prior year. Net income per basic share was $0.20, compared to $0.24 last year. Non-GAAP net income, which is net income adjusted for non-recurring items and the difference between prepublication expenditures and amortization was $1.2 million, or $0.27 per share, compared to $940,000 or $0.21 per share in the prior year. The increase is primarily due to a $73,000 increase in prepublication cost amortization, and a $639,000 decrease in prepublication cost expenditures offset by $181,000 year-over-year decline in net income.
Free cash flow for the period was $1.1 million, compared to $2.8 million in the prior year. The decline in free cash flow is due to a $2.4 million decline in net cash provided by operations compared to the prior year offset by a $639,000 decline in cash expenditures for prepublication costs. The decline in net cash provided by operations is primarily due to the year-over-year decreases in accounts receivable and accounts payable, as a result of a change in customer billing process related to the sales of products from one of our College Preparation distributers. Brian?
Brian T. Beckwith
Thanks, Mike. For the remainder of fiscal 2012, despite the still difficult economy, we will continue to focus on improvements in net income, non-GAAP net income and free cash flow, while reducing our outstanding debt. We will continue to invest in the long-term growth strategies, particularly in the area of enhanced digital offerings and the common core standards, and we’ll continue to take steps necessary to minimize expenses and improve efficiencies given the economic climate.
We’re projecting full year revenue to be between $30 million and $32 million. Net income to be at a break-even level, non-GAAP income to be between $400,000 and $600,000, and free cash flow to be between $1.4 million and $1.6 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
(Operator Instructions) At this time gentlemen, I show that there are no audio questions.
Brian T. Beckwith
Okay. Thank you for your participation today. We appreciate your support and your continued interest in Peoples Education. Have a great day. Thank you.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect, and have a great day.
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