Learning Tree International Inc

OTC:LTRE

Earnings Call Transcript 2018-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Learning Tree International First Quarter 2018 Earnings Conference Call. My name is Lisa, I'll be the operator. [Operator Instructions]

I would now like to turn the conference over to your host for today, David Asai, Chief Financial Officer at Learning Tree International Inc. Please proceed.

[David Asai, executive]

Thank you, Lisa. Good afternoon, everybody. For your convenience, the text of today's prepared remarks will be posted in the Investor Relations section of our website. Go to www.learningtree.com/investor. I'm David Asai, Chief Financial Officer of Learning Tree International. I am joined today by Richard Spires, our Chief Executive Officer; and Magnus Nylund, our Chief Operating Officer. First, I will read the disclaimer on forward-looking statements and then discuss our performance in our first quarter of fiscal year 2018, which ended December 29, 2017. Richard Spires will provide forward-looking information about our second quarter fiscal year 2018 and our expectations for the remainder of fiscal year 2018. After those remarks, we'll open the floor for questions and discussion. As a reminder, there are statements in this presentation that are not historical facts and are forward-looking statements within the meaning of the federal securities laws. These forward-looking statements, including the second quarter 2018 financial performance guidance and any expectations for the second quarter or full year 2018 are based on management's current expectations, assumptions, available information and beliefs concerning future developments and their potential effects on Learning Tree. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of Learning Tree. There can be no assurance that future developments affecting Learning Tree will be the same as those anticipated. Learning Tree cautions readers that a number of important factors could cause actual results to differ materially from those expressed in or implied or projected by such forward-looking statements. Investors should not put undue reliance on these forward-looking statements since they are based on key assumptions about risks -- about future risks and uncertainties. Some of the factors discussed in our annual report on Form 10-K as well as in our other reports filed with the SEC that could affect us, include risks associated with our ability to continue as a going concern, ability to reverse our trend declining year-over-year revenues and negative cash flow from operations and to maintain sufficient liquidity; ability to obtain additional liquidity in amounts and on terms acceptable to the company; ability to successfully implement our new strategies, including achieving our cost-reduction goals; competition; international operations including currency fluctuations; attracting and retaining qualified personnel; intellectual property, including having to defend potential infringement claims; implementation of partnerships with third-party providers of courses and/or course materials; efficient delivery and scheduling of our courses; technology development; new technology introduction; maintaining Cyber Security; the timely development, introduction and customer acceptance of our courses and other products; the fact that a majority of our outstanding common stock is beneficially owned by our chairman and his spouse; change in economic and market conditions; and adverse weather conditions, strikes, acts of war, terrorism or -- and other external events.

Learning Tree is not undertaking any obligation to revise or update forward-looking statements contained herein to reflect future events, developments or changed circumstances after the date of this presentation, unless otherwise required by law. In order to help the reader assess the factors and risks of our business that could cause actual results to differ materially from those expressed in the forward-looking statements, please read our 2017 annual report on Form 10-K, including Item 1A Risk Factors, which is filed with the SEC and is available at the SEC's website, SEC -- www.sec.gov as well as our other filings with the SEC. We follow a 52 or 53-week fiscal year. This means that our year-end and quarter-end dates are on the Friday, nearest the end of the calendar quarter. This method is used to better align our external financial reporting with the way we operate our business. The first quarter of fiscal years 2018 and 2017 were both comprised of 13 weeks. In our first quarter of fiscal 2018, our revenues of $17.2 million were 7.3% lower than our revenues of $18.6 million in the first quarter of fiscal 2017. This principally resulted from an 8.9% decrease in the average revenue per participant, partially offset by a 1.8% increase in the number of participants when compared to the first quarter of fiscal 2017. The decrease in the average revenue per participant was caused primarily by lower average revenue from the implementation of periodic pricing promotions and strategies, partially offset by changes in foreign exchange rates, which positively impacted revenues by 2.3%. Overall, during our first quarter of fiscal 2018, we trained 13,613 course participants compared to 13,374 course participants in the first quarter of fiscal 2017. Cost of revenues was 52.9% of revenues in the first quarter of fiscal 2018 compared to 57.1% in the first quarter of fiscal 2017. And accordingly, our gross profit percentage was 47.1% in the first quarter of fiscal 2018 compared to 42.9% in the first quarter of the prior year. The change in cost of revenues, as a percentage of revenues in fiscal 2018, primarily reflects the 8.9% decrease in average revenue per participant that was offset by a 15.6% decrease in cost per participant. The decrease in cost per participant is primarily the result of a 14.1% decrease in the cost of revenues and a 1.8% increase in participants. The decrease in cost of revenues reflects the impact of our continuing cost-reduction program, including lower real estate costs due to renegotiated leases for smaller space, ed-select ed-centers and closure of select anywhere centers. Changes in foreign exchange rates do not materially affect our gross profit percentage since exchange rate changes affect our cost of revenues by approximately the same percentage as they affect our revenues. During the first quarter of fiscal 2018, course development expense decreased by $0.1 million to $0.7 million compared to $0.8 million in the first quarter of fiscal 2017. Course development expenses were 4.1% of revenues in the first quarter of fiscal 2018, the same as in the prior year's first quarter.

Our library of instructor-led courses numbered 331 course titles at the end of our first quarter of fiscal 2018 compared to 326 course titles at the end of the first quarter of fiscal 2017. The first quarter of fiscal 2018, our sales and marketing expense decreased by $0.4 million to $3.2 million from $3.6 million in the first quarter of fiscal 2017. The decrease was primarily due to decreases in direct marketing costs and personnel expenses as part of our continuing cost-reduction program when compared to the first quarter of the prior year. General and administrative expense during the first quarter of fiscal 2018 was $3.6 million compared to $4.1 million in the first quarter of fiscal 2017. The decrease was primarily due to results of our ongoing cost-reduction program. As a result of changes in estimates related to real estate tax escalations, we recorded an additional noncash restructuring charge of $0.1 million related to our Reston, Virginia facility in the first quarter of fiscal 2018.

In addition, we negotiated an early termination of our lease for the Toronto education center and paid surrender and brokerage fees of $0.2 million, which was recorded as additional restructuring charges in the first quarter of fiscal 2018. We did not record any restructuring charge in the first quarter of fiscal 2017. In the first quarter of fiscal 2018, we recorded income from operations of $0.3 million, which includes -- which is after the $0.3 million in restructuring charges compared to a loss from operations of $0.5 million in the first quarter of fiscal 2017. During the first quarter of fiscal 2018, we had other expense of less than $0.1 million compared to other income of $0.2 million in the first quarter of fiscal year 2017, primarily from net foreign exchange losses for the first quarter of fiscal year 2018 and net foreign exchange gains for the first quarter of 2017. We recorded an income tax benefit for the first quarter of fiscal 2018 of less than $0.1 million as a result of releasing the U.S. valuation allowance attributable to minimum tax credit carryforwards, which is now refundable under the new tax law. The tax provision for the first quarter of fiscal year 2017 was less than $0.1 million and was primarily related to state income taxes and the income tax expense of the company's foreign subsidiaries. Net income for the first quarter of fiscal 2018 was $0.4 million, which includes $0.3 million restructuring charge compared to a net loss of $0.4 million in the first quarter of fiscal 2017. As of the first quarter of fiscal year 2018, which ended December 29, 2017, we reported an accumulated deficit of $17.1 million compared to $17.4 million at the end of fiscal year 2017. We have also reported positive cash flow from operations for the 3 months ended December 29, 2017.

At December 29, 2017, our capital resources consisted of cash and cash equivalents of $5.1 million, the same amount we had at the end of the year ended September 29, 2017. We have established a $3 million line of credit with Action Capital Corporation. The line is secured by our U.S. operations accounts receivable and is subject to limitations based on the amounts of available accounts receivable. There have been no borrowings to date on this line of credit. While we have and will continue to take steps to stabilize revenues and decrease our operating cost on a year-over-year basis for fiscal year 2018, unless we are able to improve our liquidity in the future, there continues to be substantial doubt about the company's ability to continue as a going concern. Our registered independent public accounting firm's report issued on our audited financial statements for the year ended September 29, 2017, included an explanatory paragraph expressing substantial doubt in the company's ability to continue as a going concern. I will now turn the call over to Richard Spires, our Chief Executive Officer, to address our projections for the second quarter of fiscal year 2018 and our expectations for the full year 2018.

[Richard Spires, executive]

Thank you, David. Let me first cover our projections for the second quarter of fiscal 2018. Because we currently conduct approximately 43% of our business in currencies other than US dollars, fluctuations in exchange rates will affect revenues and expenses when translated into dollars. If the exchange rates of February 1, 2018, remain constant for the remainder of our second quarter of fiscal 2018, we would expect changes in foreign exchange rates to favorably affect revenues by approximately 5.2% in our second quarter compared to our same quarter of fiscal 2017. For our second quarter of fiscal 2018, we currently expect revenues of between $14.2 million and $15.2 million, compared to revenues of $16.1 million in our second quarter of fiscal 2017. We expect the gross profit percentage in our second quarter of fiscal 2018 are between 40.3% and 41.3% compared to 40.1% in our second quarter of fiscal 2017. We expect overall operating expenses for our second quarter of fiscal 2018 to be between $7.3 million and $7.7 million compared to $8.5 million in the same quarter a year earlier. Operating expenses for the second quarter of fiscal 2017 included a $0.4 million restructuring charge. As a result of above factors, we expect to have a second quarter operating loss of between $1 million and $2 million compared with an operating loss of $2.1 million in our second quarter of fiscal 2017, which also includes the $0.4 million restructuring charge. We expect second quarter other expense net to be less than $0.1 million compared to other expense of $0.1 million in our second quarter of fiscal 2017. Overall, for our second quarter of fiscal 2018, we expect to report a pretax results loss of between $1 million and $2.1 million compared to a pretax loss of $2.2 million in our second quarter of fiscal 2017. Let me comment that our second quarter of the fiscal year is, from a financial perspective, typically our lowest performing quarter based on seasonality and the buying patterns of some of our major clients. In the second quarter 2018, our business with the U.S. federal government is down significantly in bookings, in particular for public course attendance. We currently attribute this decline principally to the ongoing continuing resolutions of Congress that are currently funding the federal government and the uncertainty regarding fiscal 2018 government funding. We are continuing to seek ways to drive operating efficiencies and lower our cost structure in the second quarter of fiscal 2018 to preserve and improve our capital resources in the near term. Looking beyond the second quarter, we are not making any specific forecast for the third or fourth quarters of 2018 at this time. But early indications, as of today, are positive in terms of the level of future booked business we have received that will be executed in the remainder of fiscal 2018. For the full fiscal year 2018, it is our objective for the company to continue to improve profitability and achieve a positive income from operations. While achieving profitability is one objective, it is also our objective to return this company to growth in which our revenues, when compared to quarter's performance to the same quarter the previous year, is once again growing. We're not currently projecting such revenue growth for fiscal year 2018, but we continue to strive to position the company to achieve this revenue growth. Although we are and will continue to work diligently to accomplish our goals and objectives, there is no assurance that we'll achieve them and if so by the expected timing of the end of fiscal year 2018. I also note that due to the recent history of year-over-year declines in revenue and the current liquidity position of the company, there are significant risks that we will not accomplish enough of our goals to achieve positive cash flows in the near term. So now we'd like to open the floor for your questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Nelson Obus.

[Nelson Obus, analyst]

The -- I'm just curious about the going concern issue. Is that something that's determined on a year -- on an annual basis? Or could it be reversed with the filings of the Q?

[David Asai, executive]

Nelson, this is David Asai. In terms of the opinion from our outside auditors, they only put their opinion out annually. We review our status in terms of a going concern every quarter and if we are able to demonstrate that we feel that we're not a going -- that the going concern should be lifted, we could put that information in the 10-Q, but their opinion would not change until the end of fiscal year 2018 when they do a full audit again.

[Nelson Obus, analyst]

All right, fine. So obviously, the first battle shows a lot of progress, which is riding the shift from a liquidity situation and eliminating serious annual losses, which is really good to hear. But Richard, I'm just curious, in a bullet-point format, what are the sort of things that run through your mind when you think about going on the offensive and being able to put up revenue numbers that exceed trailing 12 months on a quarterly basis?

[Richard Spires, executive]

Yes, that's a great question, Nelson. And to your point, we -- when I first came onboard, very, very focused on cost containment and getting to the point where we were minimizing losses and making a profit although, obviously, second quarter isn't looking good in that regard. To your specific question, there are a number of things we're doing and I want to be a little careful here that we're doing, we also in a competitive environment, right? We're trying to do some things behind the scenes that we'll launch that we believe will put us in a good position. But a couple of things, one I want to point out and I said this publicly before, didn't highlight here that why our Public Course business continues to decline. We are actually growing our enterprise, what we traditionally call our on-site business where we do work that's more custom-related and we do work for large organizations, that's not based on running courses out of our public ed-centers. We're seeing a demand in more and more traction in that area, Nelson. And it's good, we're one of the few providers that can handle clients on a worldwide basis, to be able to handle their training needs and we're seeing more and more those kinds of opportunities come our way. So overall, that's a very positive development. The other thing that we're doing is, we're continuing to broaden our reach with partners so that we can be a more full-service provider for organizations. And it used to be that we have to say no to many proposals because we just didn't have the breadth of training that they were asking for. That's really no longer the case. We're working with enough partners now that if we can't provide it ourselves, we can turn to a partner in order to make sure that we can put in a responsive proposal to RFPs. The other thing that we're really doing is and this is where I'm not going to spend or say too much, but we're really looking at how do we reposition ourselves in the market. As you know, the rise of in-demand or on-demand e-learning has really changed this marketplace and it's not something that Learning Tree in past years responded well to. We're starting to change that. We're looking at partnerships, we're looking at doing more of our own content in any demand format. We're looking at coming out with blended learning solutions that bring together what, we believe, will be the best of both on-demand as well as instructor-led training as well as other types of exercises, coaching and mentoring. Bringing those together in a bundle and that we believe will position us well in the marketplace to compete against others that offer on-demand e-Learning solutions. So let me pause there, hopefully that gives you some insight.

[Nelson Obus, analyst]

No, that's good [indiscernible]. One last question. When you took over, I'm sure that when you looked at our bloated expense situation, you obviously put your finger on whole series of leases that were causing us damage. When you look at what's that, I mean how much is there to roll off that could help us in the cost-reduction arena?

[Richard Spires, executive]

Yes. I mean I didn't have -- I will certainly not take too much credit. I give credit to my colleagues here, both David and Magnus Nylund, our COO, who worked us very aggressively. We're really in a pretty good position except for 1 property. We have space over at the Reston town center here in Northern Virginia and we just have more space than we need, frankly. We have been able to sublease some of that space and we're aggressively trying to do more of that and find a solution. I would say that's the 1 property that we have in our portfolio that we're still trying to work hard to figure out a better approach than we have right now.

[Nelson Obus, analyst]

Okay. I look forward to seeing what happens when you stop being perpetually on the defensive, okay?

[Richard Spires, executive]

Hope to change that very soon. You're right.

[Operator]

The next question comes from the line of Oliver Richner with Osmium Partners.

[John Lewis, analyst]

John Lewis. I just had a couple of questions, really, I guess on the second half, you talk about some confidence in I guess at your pipeline, any more color you can give on why you feel like after some seasonality but what gives you confidence in, kind of, the second half pipeline?

[David Asai, executive]

I'll make a couple of comments to you, John. So first, if you look historically at the business, our fourth quarter is always our strongest quarter for us. And normally, our third quarter is quite good as well. Last year, it was a bit, we think, of an anomaly. Our -- both our pipeline and our bookings right now look quite good for us in the third quarter, okay? That doesn't -- we're not trying to make projection about the third quarter right now, but we're seeing some good signs. We see a lot of pent-up demand in the federal government as well. A lot of customers there that can't buy right now because of the -- of them being under continuing resolution. Assuming that this budget impasse is resolved and they put a full year budget in place that we expect that we will see our sales in that particular sector rise considerably and that will ease things out. Another point about that is, we do serve because of our locations here in the Washington, D.C. area, we do serve a lot of companies that serve the federal government. So we've also seen a slowness in that particular segment of the market as well. So again, we're hopeful that once the budget impasses resolved for the federal government that will have a beneficial impact for the customers that serve the federal government. So overall, I think that's about as much as we can say right now regarding the third and fourth quarters.

[John Lewis, analyst]

Got it. Just on that -- I guess -- are you seeing any new customers come in? Or is it just rejuvenation of government contracts? And I think you announced a couple of contracts in the last year. I think one was with NATO, but any other large contract opportunities in the pipeline?

[David Asai, executive]

Being careful here, we have quite a few large contract opportunities. Some of them, a lot of them are renewals, but we continue to push hard to add new clients, because we recognize if we want to grow this business, there is, really, from a sales strategy, two main thrusts to that. For large clients that we do have, we're putting much more emphasis on positioning ourselves so that we can work beyond 1 area of a particular organization, so that we try to position ourselves in a solution-selling model to, if you will, penetrate other parts of an organization and build out that organization. And that's certainly a big thrust. But to your point, we're also aggressively trying to work to add new organizations, both government organizations as well as private sector organizations. And just in the last week, we've added here in North America, we've added 2 new clients that were brought to my attention as an example. One thing I might point out because it's hard to name names typically on the commercial side, but in government, we did win a contract vehicle in the state of Texas late last year that really allows us -- in fact, we're growing our revenue base in Texas but that contract vehicle has been used by 34 other states and by many other municipalities. So it's nice to have a contract vehicle like that, that when we -- when our state and local team calls on other organizations, we have a contract vehicle that can be used by other states and municipalities. And we're already finding some positive traction through that particular contract vehicle beyond just the state of Texas.

[John Lewis, analyst]

Got it. Two quick final questions. I guess 1, how far off are you from do you think from having a first suite including e-Learning solutions where you're really -- I guess just broadening your products? Do you think that's 6 months? A year? I don't that -- I just any kind of timeline and what do you think that will do to the company if you had a full suite? Do you think you're missing half the market today or 10% of the market? I don't know if you can give any color on that.

[David Asai, executive]

I don't want to name any percentages, but we're definitely missing parts of the market. That being said, we are and I'm not prepared to make a public announcement but we are in active discussions with a number of providers of on-demand content that we believe will help complement the content that we have instructor-led. We do some development, mainly custom development of on-demand content ourselves. We are looking at models that how we can more rapidly develop, take some of the great content we have that's instructor-led and turn it into on-demand content as well. So you can expect to see some announcements from us in the relatively near term as part of our blended learning solution that would be adding considerable on-demand content to our portfolio, John.

[John Lewis, analyst]

Okay. That's helpful, Richard. My last question is, given the recent filing of the amended 13-D on the Collins family and the retention of a adviser to look to sell its stake, can you give any idea of timing? Is that 30, 60, 90 days? How is that proceeding?

[David Asai, executive]

John, this is David. Again, the Collins' have hired their own adviser. They're communicating with the company as I think any purchaser of those shares would probably want to know what they're buying. So we are cooperating and discussing the company with them. Timing-wise, I mean, really, I think it depends on how fast or how hard they push it. It's really not that -- the sales of shares aren't within our control. So I don't think we can comment as to the timing.

[Operator]

There are no additional questions in the queue.

[Richard Spires, executive]

Okay. Well, thank you all for your attendance today.

[Operator]

Ladies and gentlemen, you may now disconnect. Have a wonderful day.

[Richard Spires, executive]

Thank you, Lisa.