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Tutoring Giant Regroups as Stock Price Sags

By Catherine Gewertz — February 28, 2006 4 min read
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Educate Inc., a national tutoring provider, has reorganized key aspects of its management after suffering significant losses in the last quarter of 2005, company officials announced.

View Educate Inc.'s 2005 financial results.

The fourth-quarter results decreased its stock price. On Feb. 22, shares were trading at $8.61, down about 50 percent from the preceding 52-week high of $17.11 a share. The Baltimore-based company, the parent of Sylvan Learning Centers, disclosed its financial news in a Feb. 16 conference call with industry analysts.

Educate announced in October that it planned to sell its Education Station division, which contracts with school districts to provide free tutoring to students under the federal No Child Left Behind Act. (“Educate Inc. Puts Division Up for Sale,” Dec. 7, 2005.)

One analyst said Educate’s fourth-quarter performance was unlikely to affect the sale of Education Station. The parent company did not release separate fourth-quarter 2005 figures for Education Station.

According to the company, Educate Inc.’s operating income—the amount left after deducting operating expenses from revenues—fell from $7.75 million in the three months ending on Dec. 31, 2004, to $437,000 in the comparable period of 2005, a drop of 94 percent.

Total revenues for the quarter were up 22 percent over the previous year’s final quarter, to $76.6 million, but fourth-quarter revenues from tutoring centers open 13 months or longer declined 4 percent from the same period last year.

Educate Inc.’s chairman and chief executive officer, R. Christopher Hoehn-Saric, said he was optimistic that a host of changes would boost the company’s performance in 2006, but that he was disappointed with its late-2005 results.

“We certainly could have done a better job and should have done a better job,” he said during the conference call, according to a recording of the session posted on the company’s Web site.

‘Can’t Do Everything’

One of the reasons for Educate’s performance was the unexpectedly high cost of buying back franchised Sylvan tutoring centers, including such expenses as retraining staff members, relocating centers, and increasing advertising, Kevin Shaffer, the company’s chief financial officer, said during the conference call.

The company says it has been repurchasing the centers as part of its strategy to concentrate on its core area: the consumer market. It bought 78 Sylvan Learning Centers in 2005. By the end of the year, Educate had 245 company-owned and 876 franchisee-owned centers.

Business Plan

As the parent company of various tutoring-related businesses, Educate Inc. wants to spin off its main division providing No Child Left Behind services and focus on direct sales to families.

*Click image to see the full chart.

BRIC ARCHIVE

SOURCE: Educate Inc.

The company bought the Hooked on Phonics learning program in January of last year. It is marketing that collection of literacy and math products and an expanded line of other tutoring products through retail outlets.

The company’s main NCLB-tutoring operation, Education Station, has grown from serving fewer than 3,000 students four years ago to more than 30,000 students last year in 70 school districts.

Company officials have said they decided to sell Education Station because the substantial investment required to produce financial growth in that division—which is only a small part of its overall business—did not mesh well with the company’s focus on serving consumers directly.

“Its more of a fit issue. You can’t do everything,” Jeffrey Cohen, the president of Catapult Learning, the division that oversees NCLB tutoring, said in a December interview.

Educate will continue to provide NCLB tutoring—to fewer students—through its Catapult Online service, which students can access via computer, and its Ace it! program, which provides tutoring in small groups at some Sylvan Learning Center locations, said company spokeswoman Sandy Baird.

Weathering the Storm

Mr. Shaffer said Hurricane Katrina cost Educate not only in lost contracts, valued at more than $2.5 million, but also because the company compensated full-time employees while they relocated after that Gulf Coast storm.

Another source of difficulty for Educate has been a slow response to changing customer-inquiry patterns, Mr. Hoehn-Saric said. The bulk of the inquiries about Educate’s programs come as phone calls in response to television advertising, and call centers are staffed to handle those calls immediately, he said.

The company has seen a steep rise in the portion of inquiries arriving through the Internet, but until recently had not shifted its staffing to manage that volume, Mr. Hoehn-Saric said. As a result, those inquiries often went unanswered for 24 to 48 hours, a pattern that lost potential customers, he said.

“As a company, we haven’t moved as quickly as we should have to change our selling and customer-service process,” he said. Educate is retraining and redeploying its staff to better respond to Internet inquiries, he said. It also replaced the president of Sylvan Learning Centers, and hired a new director of contact-center operations.

Mr. Hoehn-Saric said the company is seeking to bolster its business among both lower-income and higher-income consumers than those it is now serving.

Trace Urdan, who follows Educate Inc. as a senior analyst with Robert W. Baird & Co., a Milwaukee-based investment bank, said the company is seeing the end of a quick-growth phase in which it “couldn’t open up centers fast enough.”

“What you see in their results is effectively saturation of that target market” of families who earn about $50,000 per year and are willing and able to spend $2,000 to $4,000 for tutoring for their children, he said.

“This has now become a mature retail concept that is likely to move up and down with the economy, but the phase of hyper-growth has ended,” Mr. Urdan said. “Now the new phase of growth for them is to go down market, [to] help those parents who can only spend $500 to tutor.”

Staff Writer Rhea R. Borja contributed to this report.
A version of this article appeared in the March 01, 2006 edition of Education Week as Tutoring Giant Regroups as Stock Price Sags

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