Cambium Learning Group, Inc. (NASDAQ:ABCD) Q4 2017 Results Earnings Conference Call March 7, 2018 9:00 AM ET
Scott McWhorter - General Counsel and Corporate Secretary
John Campbell - Chief Executive Officer
Barbara Benson - Chief Financial Officer
Good day, ladies and gentlemen. And welcome to Cambium Learning Group Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session, and instructions will be given at that time. [Operator Instructions]
As a reminder, this conference call is being recorded. I would now like to turn the conference over to Scott McWhorter of Cambium’s General Counsel, please begin.
Thank you. And welcome everyone to Cambium Learning Group’s fourth quarter 2017 earnings conference call. I am Scott McWhorter, Cambium’s General Counsel. With me today are John Campbell, Cambium Learning’s Chief Executive Officer; and Barbara Benson, Chief Financial Officer.
Statements made on this call including those during the question-and-answer session may contain forward-looking statements that are subject to risks and uncertainties. Please refer to the Safe Harbor statement included in today’s press release, as well as Cambium Learning Group’s periodic filings with the SEC for a complete discussion of the risks and uncertainties that could cause actual results to differ materially from those expressed today.
We will be discussing certain non-GAAP financial results, including adjusted EBITDA and cash income. The press release and Form 10-Q issued earlier today contain a reconciliation of these non-GAAP financial measures to the most comparable GAAP measures.
Because of the high percentage of amortization expense, deferred revenue and other non-cash non-operational items in our reported GAAP income, we report these non-GAAP measures as key performance metrics. Management believes these metrics help portray the underlying trajectory of the business and give you a view of operations from management’s perspective since these are the metrics used internally to assess performance.
Now it is my pleasure to turn the call over to John Campbell.
Thanks Scott. Good morning, everyone, and thank you for joining us today. Cambium Learning Group ended 2017 with a solid fourth quarter performance delivering full year bookings, adjusted EBTIDA and cash income growth in line with our most recent expectations.
Technology enabled SaaS Solutions represented 79% of our total bookings mix and at yearend up from 73% in 2016 driven by double digit growth of our digital solutions at Learning A-Z and ExploreLearning as well as the LANGUAGE! Live product at Voyager Sopris Learning’s.
As our digital solution performed at higher rates of profitability than our legacy print solutions this top line growth and mixed change is evolving our business model, further expanding our margins and cash flow delivery.
These results demonstrate our continued focus on increasing cash generation and a long term value of the company. Now let’s look at our segments performance. Learning A-Z the standard bearer of our digital solution strategy grew 2017 bookings 10% on 14% growth in the fourth quarter with all solutions growing year-over-year.
As demand for digital solutions in school districts, both in the U.S. and around the world remains healthy, and as the solutions that we provide are cost-effective and drive student’s success, we believe our long-term potential to grow our technology enabled SaaS solutions remains robust.
In the past two years, we delivered double-digit growth but at rates lower than our original forecast, therefore in the fourth quarter, we under took a diagnostic exercise to formulate steps to accelerate our growth rate going forward, both to ensure we are capturing all the market share we can and to ensure we are delivering reliable and optimized value to all of our shared stakeholders.
The largest sources of headwind included external factor life such as the lengthening of some sales cycle and the timing of certain districts funding that cost purchases to slide to later quarters. But we also uncovered some opportunities to make certain process and sales training improvements and some opportunities to drive continued strong renewal rates. What we did not find in this exercise was much in terms of competitive loss of opportunity, either in new sales or renewals. This in our view reaffirms the strength of our strong market position and our product development capability, particularly with SaaS Solutions which are continually evolving.
Learning A-Z was recently awarded a 2017 Tech & Learning Award of Excellence for its Raz-Plus product in the new products category honored as an education technology product that breaks new ground and adds significant enhancements to existing offerings. This is a true honor because the winners are chosen by educator judges and acknowledges Raz-Plus as serving the need it was designed to serve. The teacher who must meet each child at his or her level and the student striving to become proficient in all critical domains of literacy.
Raz-Plus also recently won a learning magazine 2018 Teachers Choice award for the Classroom. We have fine tuned some of our processes but our missions for Learning A-Z for 2018 has not changed. We provide stellar, literacy focused resources that blend traditional teacher led instruction with online resources that make teachers more effective and efficient.
Learning A-Z has now achieved IMS Global conformance certification for its products on the OneRoster version 1.0 and version 1.1 CSV standards, a critically important interoperability milestone that will enable us to deliver our award-winning literacy resources to students everywhere. We expect strong growth from Learning A-Z in 2018.
Before I move on from Learning A-Z, I’d like to lastly mention that during the fourth quarter of last year, co-founder Bob Hall who grew Learning A-Z from an idea into a market leader, stepped down to an advisory role where he will continue to help us by providing his vision about what teachers and students need to make academic progress a reality. We appointed Patrick Marcotte as President of the division to succeed Bob.
Patrick was most recently Vice President of Research & Development and came to us through the Headsprout acquisition, He is a strong leader in evidence-based and structural design, software to service, educational policy and customer focused product development having worked directly on implementations with several large U.S. school districts. We look to Patrick to carry on Bob’s passionate and dedicated leadership and find new ways to expand Learning A-Z’s business.
Let us move now onto ExploreLearning. This segment grew 2017 bookings 19% on an increase of 21% in the fourth quarter, with both Gizmos and Reflex product lines growing double-digit and showing strong momentum all year.
During the quarter, we completed our acquisition of IS3D, LLC. This start up developed Cogent Education award winning, Interactive Cases which are dynamic online experiences that allow students to simulate real-world STEM activities by playing the role of a professional tasked with solving a real-world problem.
These immersive simulations are similar to Gizmos math and science simulations and helps students fully engage to master difficult concepts by authentically solving problems. In addition to terrific resources and technology to help STEM students, IS3D brought us tremendous development talent. We expect the integrated product to begin contributing to revenue in 2019.
ExploreLearning was once again made one of the best places to work in Virginia. We are honored to be recognized again as our ability to attract and retain top talent is key to delivering innovative solutions that make a difference for students, and we maintain a supportive work environment in order to do so.
ExploreLearning had a fantastic year in 2017 and we expect that momentum to carry into 2018 and provide strong bookings growth and the opportunity for even more students to have success in math and science.
At Voyager Sopris Learning 2017 bookings declined 16% on 90% decline for the fourth quarter. LANGUAGE! Live is segment’s digital flagship and high efficacy, adolescent intervention solution gained momentum and grew 20% for the year although legacy print and transactional solutions drove an overall decline.
We believe the intervention marketplace is growing as more students fall behind. Voyager Sopris Learning’s valuable resources and solutions then improve the trajectory of students lives is enabling us to reposition this division’s role in this space offering tremendous opportunity for growth.
We recently launched a blended version of our letters professional development course of study that prepares educators for the challenging work of teaching literacy. The highly effective letter solution has been an important component of Voyager Sopris Learning brand leadership in the intervention space, and our customers and employees are very excited about the launch of this newer and more flexible version.
Based on the successful momentum of LANGUAGE! Live and the warm reception to the new letters launch, we believe the market is very responsive right now to blended solutions, but we have continued to see buying cycles for the intervention products that tend to be longer than in mainstream technology segment.
As strategy is to support continued growth of strategic product lines on the cost structure size to afford us the time and flexibility, we need to build momentum on more impactful technology enabled solutions that are the future growth and profitability expansion as we generate profit streams from remaining legacy products. We are focused on diligently cultivating increased profitability as we reverse the bookings trend overtime.
In 2017, for Cambium Learning Group as a whole, we generated cash income growth on expanding margins as we delivered on the promise of our increasingly technology enabled SaaS business model and digital solutions approached 80% of our volume. We evaluated our forecasting discipline and refined our go-to-market strategy to drive stronger, sustained growth going forward. We expect topline growth, careful expense management and continued investments in development, marketing and sales will drive incremental expansion in our cash income, adjusted EBITDA and cash flow. We will fine tune this as we progress toward the back-to-school season.
We are poised and ready to execute well and to deliver strong, financial results in 2018. Looking beyond 2018, as digital solutions comprise an excess of 80% of our bookings, we expect the investments we are making in Learning A-Z and ExploreLearning as well as the continued strategic progress of Voyager Sopris Learning to fuel topline growth and make our business model incrementally more profitable and cash flow generative.
Cambium Learning’s mission is to leverage technology to create solutions that are personalized, adaptive, scalable and designed to achieve results in the classroom that can change the trajectory of student’s lives. We are committed to accelerating the returns we deliver, while championing our core principles. Every learner has untapped potential, teachers matter and are the foundation of education and data instruction and practice are the keys to success in the classroom and beyond.
Now I will turn the call over to Barbara for a review of the financials. Barbara?
Thanks, John, and good morning, everyone. In 2017, we made further progress on our strategic objectives, grew out top line, expanded our profitability and strengthened our balance sheet. I’ll quickly recap the financial results starting with bookings.
Companywide bookings in 2017 grew 2% to $164.4 million in line with our most recent guidance with Learning A-Z growing 10% to $80.8 million, ExploreLearning growing 19% to $31 million and Voyager Sopris Learning declining 16% to $52.6 million. That’s the 2017 booking mix by segment of 49% Learning A-Z, 19% ExploreLearning and 32% Voyager Sopris Learning.
Companywide technology enabled products made up 79% of the bookings mix in 2017 compared to 73% in 2016. And specific to Voyager Sopris Learning where we sell both technology and print products, our digital products made up 34% of books in 2017 compared to 30% in 2016. In 2017 we grew adjusted EBITDA $6.2 million, a 14% to $49 million, an EBITDA margin expanded 288 basis points to 31%.
The adjusted EBITDA improvement was driven by GAAP revenue growth of 4% which exceeded our bookings growth rate due to the impact of recognition of bookings from prior years.
The GAAP revenue growth came from our higher margin segments; Learning A-Z and ExploreLearning and we coupled the positive shift in product mix with effective cost management.
Excluding the non-cash goodwill impairment charge, costs and expenses were flattish in 2017 compared to 2016, with the benefit of costs rightsizing activities at Voyager Sopris Learning offset by planned investments in development, marketing and sales at Learning A-Z and ExploreLearning.
Cash income grew from $31.8 million in 2016 to $36.1 million in 2017, a 13% increase. And cash income margin expanded 229 basis points to 22%. Like adjusted EBITDA the year-over-year cash income expansion is attributable to the top-line growth at the higher margin Learning A-Z and ExploreLearning segments and solid cost management.
Our cash income also achieved additional leverage from lower CapEx spending in 2017, also part of the cost reduction plans for Voyager Sopris Learning. We had several charges which are excluded from our adjusted EBITDA and cash income non-GAAP measures.
Last quarter we discussed the restructuring completed in the fourth quarter in response to the continued decline in the bookings at the Voyager Sopris Learning segment. In total, we eliminated 34 positions and expect an annualized run rate cash savings of approximately 3.5 million as of Voyager Sopris Learning segment.
Due to the timing of the restructuring activities we benefited from approximately $0.6 million of the annualized run rate cash savings in 2017. Total restructuring expense included in 2017 results is $1.4 million. Note that results for prior 2016 also included restructuring costs which were $1.1 million.
Second, we recorded a goodwill impairment charge in the fourth quarter of 2017 of $4.3 million. The impairment was related to the Kurzweil Education business which is now fully integrated in the Voyager Sopris Learning segment.
The subscription Kurzweil Education product is growing modestly, but the goodwill associated with the Kurzweil Education business dates back to 2007 and these products are just not part of our primarily strategic focus.
Third, in October we made a voluntary payment of the remaining $9.6 million of principal of the Term Loan B of the senior security credit facility. In December we made an additional voluntary payment to the Term Loan A of $11 million for a total $20.6 million of voluntary prepayments in the fourth quarter.
Net income for 2017 includes a loss on extinguishment of debt of $0.4 million related to these repayments. Results for prior year also include a loss on extinguishment of debt totaling $0.7 million related to Term Loan prepayments in 2016.
Interest expense was $4.8 million in 2017. $2.3 million lower than the $7.2 million reported in 2016 as a result of the voluntary principal payments and ongoing scheduled quarterly amortization payments.
Lastly, at year end we determined that it was appropriate to release most of the valuation allowance that was recorded on our deferred tax assets including our NOL, which resulted in a very large tax benefit for 2017.
Concurrently, we reduced the value of our deferred tax asset to reflect the recently implemented lower corporate tax rate. These significant changes along with normal current year tax activity resulted in a net tax benefit in 2017 of $29.3 million. 2016 tax expense was $0.3 million primarily related to state taxes.
Underlying all this, we demonstrated solid income improvement from our reduction to interest expense burden and our bookings growth in mix shift to higher margin digital solutions which have consistently increase GAAP revenues and core operating results.
Cash and cash equivalents at year end 2017 are $8.5 million. Cash provided by operations was $49.2 million in 2017 compared to $44.5 million in 2016 reflecting the higher operational results and lower cash interest.
Investing activities included cash paid for ExploreLearning’s acquisitions of IS3D, LLC completed in early November. We ended the year with $48.5 million of principal outstanding on our term loan after making scheduled amortization payments of $7 million and voluntary prepayment of $20.6 million. Our net debt to adjusted EBITDA ratio was below one time at the end of 2017.
I’ll move now to the 2018 outlook. As John discuss we are setting an initial expectation for company-wide bookings growth at a higher percentage number [ph] we saw in 2017, driven by continued strong growth at Learning A-Z and ExploreLearning. At Voyager Sopris Learning the momentum of the LANGUAGE! Live solution which grew 20% in 2017 is likely to carry into similar growth in 2018.
We see this part [ph] is having a strong runway given demand for intervention solutions and it has gained enough traction to become a meaningful part of bookings. It was 18% of Voyager Sopris Learning bookings in 2017. Bookings at this segment will also be impacted by the pace of decline of the legacy solutions which is less predictable.
On the cost side, we are focused this upcoming year on making investments to create long-term sustainable growth for our digital SaaS solutions. We’ll invest in several initiatives in product enhancements at Learning A-Z. An ExploreLearning will include integration of the Cogent Education content and functionality into the ExploreLearning Gizmos product line.
Although the existing Cogent Education content is currently available for sale on a standalone basis, these standalone sales are not our focus and are not expected to be material, and therefore the acquisition is not expected to provide meaningful bookings until the release of the integrated product in 2019.
Therefore the integration cost will impact the 2018 ExploreLearning cash income margins by roughly 500 basis points. Most of these costs will be included in CapEx. Company-wide capital expenditures in 2018 are expected to be roughly consistent with 2017 including the Cogent Education integration work.
Taking these investments into consideration along with the cost savings we’ll realized from the recent Voyager Sopris Learning restructuring, we expect expansion of our cash income margin in 2018 driven by continued strong growth in our higher margin segments.
We expect cash paid for interest in 2018 to be in the neighborhood of $3 million, total interest expense will be around $0.5 million higher than that including the non-cash amortization of debt issuance costs and upfront fees.
Because we release the valuation allowance on our deferred tax assets, at the end of 2017 we will have a more normal tax expense effective rate starting in 2018. With the 21% new corporate rate, plus the ongoing state tax burden I estimate that effective rates to be between 24% and 27%.
For cash taxes we expect to utilize our net operating losses to offset U.S. federal taxable income in 2018. When we file our 2017 tax return later this year, we expect to use approximately $16.3 million of our federal NOLs leaving us with the remaining $63.6 million of NOLs and to pay a small amount of U.S. Federal alternative minimum tax in 2018 along with state taxes.
Consistent with the seasonal nature of business we expect to use cash and borrow on our revolver in the first and second quarters and to grow cash and pay down the revolver in the third and fourth quarters. Our required debt principle payments in 2018 are $6 million. Absent another year of cash during the year we expect to be substantially debt free by the end of 2018.
With that, I’d like to move on to our Q&A session.
Well thanks again everyone for joining us on the call today. We look forward to reporting our first quarter results on our next call. Have a great day.
Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Everyone have a good day.