Learning Tree International Inc

OTC:LTRE

Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon, ladies and gentlemen, and thank you very much for joining today's Learning Tree Second Quarter 2018 Earnings Call. At this moment all participants are in listen-only and then later we will have a question-and-answer session. [Operator Instructions]

And next, I will turn the call over to Mr. David Asai, Chief Financial Officer at the Learning Tree. Go ahead, please.

[David Asai, CFO]

Thank you, Bart. For everyone's convenience, the text of today's prepared remarks will be posted to the Investor Relations section of our website. Go to www.learningtree.com/investor.

Good afternoon, 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 on our second quarter of fiscal year 2018, which ended March 30, 2018. Richard Spires will provide forward-looking information about our third quarter fiscal year 2018 and our expectations for the remainder of this fiscal year. 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 third quarter of 2018 financial performance guidance and any expectations for the third 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 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 of declining year-over-year revenues and negative cash flows 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; ability to identify and execute upon strategic options for the company; 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 material; efficient delivery and scheduling of our courses; technology development; new technology introduction; maintaining Cyber Security; the timely development, introduction and customer expectance 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 or terrorism, and other external events.

Learning Tree has not undertaken 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 risk in our business that could cause actual results to different 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 internet site, 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. Second quarter of fiscal years 2018 and 2017 were both comprised of 13 weeks.

In the second quarter of fiscal 2018, our revenues of $13.6 million were 15.4% lower than our revenues of $16.1 million in the second quarter of fiscal 2017. This principally resulted from a 13.3% decrease in the number of participants and a 2.4% decrease in the average revenue per participant, when compared to the second quarter of fiscal 2017.

The decrease in the number of course participants is the result of lower enrollment through the U.S. government sectors stemming from the U.S. federal budget uncertainties and from the Easter holiday occurring in our second quarter for fiscal year 2018 compared to occurring in the third quarter for fiscal 2017. The week before and the week after Easter is historically a weaker period of course enrollments.

The decrease in the average revenue per participant was caused primarily by continued pricing initiatives put in place to attract additional customers and was partially offset by changes in foreign exchange rates, primarily in the United Kingdom, which positively impacted revenues by approximately 3.4% quarter-over-quarter. Overall, during our second quarter of fiscal 2018, we trained 10,724 course participants compared to 12,368 course participants in the second quarter of fiscal 2017.

Cost of revenues was 61.1% of revenues in the second quarter of fiscal 2018 compared to 59.9% in the second quarter of fiscal 2017, and accordingly, our gross profit percentage was 38.9% in the second quarter of fiscal 2018 compared to 40.1% in the second quarter of the prior year. The change in cost of revenues as a percentage of revenues in fiscal 2018 primarily reflects a 2.4% decrease in average revenue per participant that was partially offset by a 0.5% decrease in cost per participant. The decrease in cost per participant is primarily the result of a 13.7% decrease in the cost of revenues and a 13.3% decrease in participants. The decrease in cost of revenues reflects the impact of our continuing cost-reduction program.

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 second quarter of fiscal 2018, course development expense decreased by $0.2 million to $0.6 million compared to $0.8 million in the second quarter of fiscal 2017. Course development expenses were 4.6% of revenues in the second quarter of fiscal 2018 compared to 4.7% in the prior year's second quarter.

Our library of instructor-led courses numbered 335 course titles at the end of our second quarter of fiscal 2018 compared to 304 course titles at the end of the second quarter of fiscal 2017.

In the second quarter of fiscal 2018, our sales and marketing expense decreased by $0.2 million, to $3.3 million from $3.5 million in the second 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 second quarter of the prior year.

General and administrative expense during the second quarter of fiscal 2018 was $3.7 million compared to $3.9 million in the second quarter of fiscal 2017. The decrease was primarily due to the results of our ongoing cost-reduction program.

We previously determined that our Reston, Virginia facility with surplus classroom space and in March 2017, we reevaluated the estimated cash flows from sublease rentals and operating expenses of our outstanding restructuring liability. As a result, we recorded an additional $0.4 million noncash restructuring charge in our second quarter of fiscal year 2017. We did not record any restructuring charge in the second quarter of fiscal 2018.

In the second quarter of fiscal 2018, we recorded loss from operations of $2.3 million compared to a loss from operations of $2.1 million, which included the $0.4 million restructuring charge for the second quarter of fiscal 2017. During the second quarter of fiscal year 2018, we had other expense of less than $0.1 million compared to other expense of $0.1 million in the second quarter of fiscal year 2017, primarily from net foreign exchange losses.

We recorded a tax provision for the second quarter of fiscal 2018 of less than $0.1 million compared to a provision of $0.2 million in our second quarter of fiscal year 2017. The provisions for both these quarters are primarily related to state income taxes, true-up of the estimates to actual returns filed and the income tax expense of the company's foreign subsidiaries.

Net loss for the second quarter of fiscal 2018 was $2.4 million compared to a net loss of $2.3 million, which included the $0.4 million restructuring charge for the second quarter of fiscal 2017.

As of the second quarter of fiscal year 2018, which ended March 30, 2018, we reported an accumulated deficit of $19.5 million compared to a deficit of $17.4 million at the end of fiscal year 2017. We have also reported negative cash flow from operations for the 6 months ended March 30, 2018. At March 30, 2018, our capital resources consisted of cash and cash equivalents of $4 million compared to cash and cash equivalents of $5.1 million at the year ended September 29, 2017.

We have entered into a $3 million financing agreement with Action Capital Corporation. The agreement is secured by our U.S. operation's accounts receivable and is subject to limitations based on the amounts of available accounts receivable. There have been no borrowings to date under this financing agreement.

While we have and will continue to take steps to stabilize revenues and decrease our operating costs 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 a 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. We recommend everyone read our second quarter Form 10-Q filed today with the SEC for additional information and details.

I will now turn the call over to Richard Spires, our Chief Executive officer, who will first comment on the second quarter performance and then address our projections for the third quarter of fiscal year 2018 and our expectations for the remainder of fiscal year 2018.

[Richard Spires, CEO]

Thank you, David. First, regarding our second quarter performance for fiscal year 2018, we did miss our guidance in terms of both revenue and operating income estimates. Factored into our guidance was an expectation that the United States federal government would resolve its budget issue for the government's fiscal year 2018 early in our second quarter. But Congress did ultimately pass an omnibus bill funding the government for the remainder of fiscal year 2018, that was signed by the president on March 23.

We believe the substantial delay to approve a 2018 federal budget had a significant negative impact on the business we conduct with the U.S. Federal Government. Perhaps due to the concern of our federal government shutdown during most of our second quarter, our commercial customers that serve the U.S. federal government also slowed their spending with us during the second quarter.

On a positive note, during the second quarter, we launched our first bundle training set of products, which blend different learning methods, including live, instructor-led training, on-demand training modules, coaching and mentoring offerings and in some cases, additional independent exercises. The intent is to provide attendees an immersive learning environment to rapidly gain mastery in a particular subject area.

Studies have shown the use of self-paced, on-demand training has very low retention rates, yet we recognize the explosive growth of such training. Learning Tree now offers on-demand training by itself or complemented with additional training modalities that support a learner to more rapidly gain practical and usable skills with the goal of enhancing job performance.

We expect to continue our efforts to innovate and broaden our offerings of such bundled training products in the near future, in order to meet existing and anticipated new customer end market demands.

I will now present projections of select future financial results of the company for the third quarter of fiscal 2018. These projections are estimates that have been developed based on information currently known to the company. Accordingly, as a reminder, these estimates of future financial results and the actual financial results and outcomes may be different, and such differences may be material.

Because we currently conduct approximately 45% of our business in currencies other than U.S. dollars, fluctuations in exchange rates will affect revenues and expenses when translated into dollars. If the exchange rates of May 1, 2018, remain constant for the remainder of our third quarter of fiscal 2018, we would expect changes in foreign currency - I'm sorry, exchanges in foreign exchange rates to favorably affect revenues by approximately 1.6% in our third quarter compared to the same quarter of fiscal 2017.

For our third quarter of fiscal 2018, we currently expect revenues of between $16.2 million and $17.2 million compared to revenues of $16.4 million in our third quarter of fiscal 2017. We expect a gross profit percentage in our third quarter of fiscal 2018 of between 45.6% and 46.6% compared to 41.6% in our third quarter of fiscal 2017. We expect overall operating expenses for our third quarter of fiscal 2018 to be between $7.4 million and $7.8 million compared to $7.4 million in the same quarter a year earlier.

As a result of the above factors, we expect to have a third quarter operating results of between a loss of $400,000 and a positive income of $600,000 compared with an operating loss of $500,000 in our third quarter of fiscal 2017.

We expect the third quarter other expense net to be less than $100,000 compared to other expense of $300,000 in our third quarter of fiscal 2017. Overall for the third quarter of fiscal 2018, we expect to report pretax results of between a loss of $500,000 and income - positive income of $600,000 compared to a pretax loss of $800,000 in our third quarter of fiscal 2017.

Regarding the full fiscal year 2018, it is still our objective for the company to continue and improve profitability and achieve a positive income from operations for the full fiscal year. While achieving profitability is one objective, it is also our objective to return this company to growth in which our revenues when comparing a quarter's performance to the same quarter the previous year is once again growing.

We are not currently projecting such revenue growth for the full 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 will 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.

We would now like to open the floor to questions.

[Operator]

Thank you. [Operator Instructions] Your first question is coming from John Lewis from Osmium Partners. Go ahead please.

[John Lewis, Osmium Partners]

Good afternoon Richard and David, how are you guys today?

[Richard Spires, CEO]

Doing well, John, thanks for calling in.

[John Lewis, Osmium Partners]

Good, good, absolutely. I guess just a couple of quick ones. Can you - you talked about a product you launched in the last quarter, can you talk a little bit more about - just give a little bit more color on why you think it's resonating in the marketplace and any other new products you have coming on in the current year?

[David Asai, CFO]

Sure, John. There is some idea of bundling training. We've seen more and more demand or requests in the recent past regarding - we're really known for our instructor-led training, both in-class and virtual, but we are seeing more and more requests for on-demand, self-paced learning and so we made a decision to both continue - and we have built some of those kinds of modules in the past, but not really at scale. So we will continue to do that, but we have also partnered with a number of other organizations to augment our training products.

And so we're launching these bundled training options in a number of areas. We started off in two areas; one in ITIL, in what we call the ITIL Foundation, which is the based training class for ITIL service management, and the other is in an area called CompTIA Security+, which is another certification obviously in the Cyber Security area. So then we started with them and we're going to be rolling out probably about another half a dozen or so of these kind of training bundles here in the next month or so, in a number of different areas.

It's early, but we're seeing that these kind of training bundles are ticking the interest of a number of our customers. And, oh, by the way, we're also seeing areas in which we're putting together custom training bundles, where we're putting together some on-demand training together with instructor-led training provided by ourselves, maybe augmenting them with some other coaching or mentoring services, perhaps some practice tests when you have to do - when you're looking at some kind of certifications, maybe even some other types of independent - what we call independent labs or exercises that augment the training environment.

And the whole notion here is that we want to differentiate ourselves. There are other players in the market that do strictly instructor-led, which we've been renowned for, of course, for many years. There are many in that have entered the market that are focused on the on-demand training.

We don't believe we can just go head-to-head with them on on-demand training given our situation, but we believe that by bringing these different types of modalities together, we can hit a sweet spot of the market that's really underserved right now. And we are seeing some demand for that and are actually putting this kind of bundled offering in more of our responses to RFPs and to customer requests.

[John Lewis, Osmium Partners]

That makes a lot of sense. I appreciate the color. Do you - what do you - what is the pricing for these bundles or how do you - do you charge? I'm just - if you can elaborate anything on pricing, that would be helpful?

[Magnus Nylund, COO and CIO]

Yes, hey, this is Magnus Nylund. So we have for the ITIL Foundation we have three options for the cheapest version, if you look like, which is an on-demand module together with an instructor-led review session is priced at $1,090. The traditional instructor-led course is $1,950, and then what we call the premium bundle, which includes both the on-demand, some other practice tests and the instructor-led course, is price at $2,450. So that gives you kind of an idea of what we're doing.

[John Lewis, Osmium Partners]

That's helpful. Do you have, Magnus or Richard, do you have any color on how - has your government business firmed up at all for Q3? Or is it still kind of murky?

[Richard Spires, CEO]

The federal government business has definitely picked up, John. I want to be careful. We've put out guidance today on our third quarter, and obviously those numbers include a rebound of our federal government business as to where we think it will be. We don't usually give out more specifics than what we provided. And I would say there is - I will leave you with this. There is a lot of sales activity right now in the federal government side of the business.

[John Lewis, Osmium Partners]

Got it, I appreciate it. I'll jump back into the queue and let other people ask questions.

[Richard Spires, CEO]

Thank you.

[Operator]

Thank you. [Operator Instructions] We have no further questions.

[Richard Spires, CEO]

Okay. Well, for those of you that were able to join us today, we really appreciate it and your continued interest in Learning Tree International. Good day.

[Operator]

Thank you. Ladies and gentlemen, you may now disconnect.