Becker reassures Sylvan investors

Education company to get out of money-losing ventures

stock rises 7%

October 25, 2002|By Andrew Ratner | Andrew Ratner,SUN STAFF

"Learning knows no boundaries," goes a new slogan of Sylvan Learning Systems Inc., but the Baltimore-based company has realized that investors' patience does.

In a quarterly-earnings conference call with Wall Street analysts yesterday, Douglas L. Becker, the company's chairman and chief executive officer, said the company understands that substantial losses in a venture-investment subsidiary have pulled its stock to a seven-year low this month.

Sylvan and other investors created a $400 million fund two years ago to invest in new education and technology companies, but the portfolio, which was supposed to be an engine of growth for the education-services company, has become a lead weight.

The company, which made a name for itself in after-school tutoring and, more recently, in international higher education, announced that it is meeting with financial advisers to plan a way to restructure itself so that it can absorb or sell its stake in experimental companies.

Sylvan won't acquire start-ups, it said.

Investors responded favorably, pushing the shares up $1.03, or 7 percent, to close at $14.89 yesterday on the Nasdaq stock market.

"What you heard on this call was Doug Becker at his best," said Trace Urdan, an education analyst for ThinkEquity Partners in San Francisco. "It was a very convincing, sincere expression that said, `We understand. We hear you and we're working on the problem.' What would have sent the stock in the other direction was if they had said there is no problem or tried to ignore it. It played very well."

Sincere expressions aside, the company's numbers for the quarter that ended Sept. 30 reflected the ventures' negative effect.

Sylvan lost $5.7 million in the third quarter after earning $11.6 million in the comparable period last year. The loss was almost all related to the ventures' subsidiary, which lost $5.4 million in the quarter, compared with a rare $4.8 million gain for the corresponding period a year ago.

The loss per share was 14 cents in the quarter after a 22-cent gain a year earlier.

Excluding ventures' losses, earnings per share rose 16 cents, up from 13 cents a year ago.

Revenue was up 19 percent, to $124.5 million from $104.9 million in the third quarter of last year.

Analysts said the company's retreat on ventures was bolstered by strong results from its various education businesses.

The tutoring centers reported that profits were up 38 percent in the quarter. That was fueled by 19 percent sales growth for centers in business longer than a year, a figure Becker said he found surprising.

He attributed it to the success of a loan program run by Sallie Mae that has been more effective than the customer-financing plans the company used to offer itself. The average customer using the new financing spends about $3,500 for Sylvan tutoring, about $1,000 more than other customers because they can spread the payments over a longer period.

Sylvan also reported gains at its international universities. New-student enrollment was 29 percent higher than in last year's third quarter. Marketing strategies that have been successful at Sylvan campuses in Mexico and Chile will be adapted for its four other schools in Europe, executives said.

The company took a $2 million after-tax charge, on top of an $11 million charge last quarter, on the sale to a group of investors of its failing English-language tutoring chain in Spain. The buyers included the businessmen who sold Sylvan the centers in the first place.

In guidance for the fourth quarter, the company said it expected earnings of 33 cents to 35 cents a share, excluding ventures' losses, and revenue of $149 million to $160 million, up from $133 million in the comparable period last year.

Analysts said that met their expectations.

"I give this company a lot of credit. It's not that they have resolved all the issues, but at least they addressed them," said Jeffrey M. Silber, an analyst with Gerard Klauer Mattison in New York. "They've shown the Street they are listening."

Nevertheless, the company's future course is murkier than it was several months ago.

Becker told analysts he regrets having announced plans in February to spin off the international universities as a separate stock, something it has not done and might not do because of the weakened market for new offerings.

"There are substantial tax trade-offs and regulatory tradeoffs that are making us think about other approaches. I shouldn't have talked about it until we were absolutely ready to go," said Becker, the only Sylvan executive to speak to the analysts besides the chief financial officer to emphasize the company's new focus away from ventures.

The company also can't buy back its own shares, a technique it used to fortify its stock price in the past. Attorneys advised that it would constitute insider trading as long as Sylvan is exploring restructuring its venture subsidiary.

The company started Sylvan Ventures with Apollo Management LP and others at the height of Wall Street's interest in technology stocks. Sylvan had invested $263 million in the portfolio as of last month.

Becker repeated yesterday that losses from Sylvan Ventures will disappear in 2004, but he acknowledged that investors are demanding a speedier fix.

"The mood is clearly against ventures and pro forma accounting," Becker said in a phone interview afterward. He was referring to the method of accounting that excuses one-time losses, but that was frowned upon after major corporate scandals came to light this year.

"We would clearly like to be out of the venture business and out of the need to do pro forma accounting," he said. "Everything else I would like to do has to go on hold while I investigate whether there is a way to fix ventures."

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