Educate loss is tied to Sylvan

$8.5 million in red ink reported as tutoring business struggles

October 27, 2006|By Hanah Cho | Hanah Cho,sun reporter

Educate Inc., the Baltimore-based operator of Sylvan tutoring centers, reported yesterday an $8.5 million loss in the third quarter, its largest quarterly loss since the company became public two years ago.

Educate is considering a buyout proposal to take the company private. Last month, Educate's top management and others offered $8 a share, or about $344 million. Executives said the process is continuing and made no further comments during a conference call with analysts yesterday.

Educate stock dropped 2.5 percent, or 20 cents, to close yesterday at $7.76 on the Nasdaq stock market.

Educate was born in 2003 through a complicated breakup of Sylvan Learning Systems Inc. Sylvan Learning sold its prekindergarten-through-12th-grade tutoring businesses to focus on higher education. It changed its name to Laureate Education Inc., and the tutoring businesses became Educate.

Educate's third-quarter loss reflects the company's challenges in turning around its struggling tutoring business. In the fourth quarter of 2005, Educate posted a $4.7 million loss, the first major stumble for the company since it went public in 2004.

Company executives attributed their latest results to challenges at its corporate-owned Sylvan tutoring centers, higher expenses and a decline in product sales.

The loss of $8.5 million, or 20 cents a share, in the three months that ended Sept. 30 contrasted with a profit of $2.7 million, or 6 cents a share, in the corresponding period last year.

Revenue rose 4 percent to $81.3 million in the traditionally weak third quarter, up from $78.5 million a year ago, but tutoring center same-territory sales declined 9 percent in the quarter.

The company said the drop in same-territory revenue resulted primarily from a 5 percent decline in customer inquiries and students enrolling in tutoring programs for a shorter period of time.

Those factors offset the modest increase in new student enrollment, said R. Christopher Hoehn-Saric, Educate's chief executive officer and chairman.

Those issues were especially prevalent at corporate-owned locations with inexperienced center directors, Hoehn-Saric said, noting that extra training is being provided to those employees.

"Performance in our corporate learning centers remains a challenging area and will not likely improve until next year's new enrollment cycle beginning in January," he said.

In the past year, Educate has been struggling to integrate dozens of franchised tutoring centers bought by the company, resulting in higher costs. The company has more than 1,000 franchise and corporate-owned centers.

Expenses for the Sylvan tutoring centers rose 21 percent in the third quarter, to $62.7 million from $51.7 million in the year-ago period. Those expenses included increased costs for operating more corporate-owned centers, developing tutoring programs and developing and marketing educational products.

Most recently, Educate has been expanding its consumer-products business, including selling the well-known infomercial brand Hooked on Phonics directly to consumers.

Despite positive initial sales of Hooked on Phonics in the retail market, executives said the company has experienced operational and distribution delays. Hoehn-Saric said products are reaching retail shelves more slowly than expected.

Moreover, product sales to franchise tutoring centers declined in the quarter because the company released fewer new curriculums.

Hoehn-Saric said the company's long-term growth prospects and consumer demand for tutoring services remain strong.

Nonetheless, some analysts say market forces are affecting Educate's business.

Robert L. Craig, an analyst at Stifel, Nicolaus & Co., wrote in a research report yesterday that "consumer spending pressures are also a contributing factor given the absolute high price of the company's programs, the reduced willingness of consumers to utilize third-party financing alternatives and shorter length of stay."

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