Investor call - Martin E. Kenney's prepared statement
Good morning, everyone. I have a few prepared statements that I think will be
helpful as we review the financial results for the fourth quarter-- and for the
full year ended December 31, 2001. Also in attendance with me today are Bob
Lynch, WRC's COO and Rick Nota, WRC's VP, Finance.
Before getting into the specifics of our financial results, I would like to
spend a moment commenting on the current competitive and economic environment.
U.S K-12 education marketplace impacted by economic recession
As you all probably know, the K-12 education marketplace has been impacted by
the economic recession in the United States. The harsh new constraints on
education spending resulting from cutbacks in state education budgets have
created a difficult and challenging marketplace. While WRC should benefit
significantly from several provisions in the recently passed "No Child Left
Behind Act" - most of this funding will probably not be available until late
2002 and more likely 2003. The movement towards increased school accountability
- - coupled with the difficult funding environment - will lead schools to look for
complete solutions. It is becoming increasingly difficult - and expensive - for
schools to assemble all of their curriculum and assessment needs on a piece meal
basis. This should prove to be a favorable trend for WRC.
Economic uncertainty is driving stronger support for more established brands.
Schools want the comfort of knowing the companies they do business with today
will be around to support them tomorrow. Again, in the long run - these
converging trends should significantly benefit our company. WRC is at the
forefront of the movement for school accountability - the overriding issue
facing school administrators is how to improve their school's performance on
high stakes tests. The "No Child Left Behind Act" increases both the frequency
and stakes of these tests. We believe we are poised to benefit greatly over the
next several years since we are strategically positioned to both diagnose and
remediate areas of weakness at the child, classroom, school and district level.
AGS and Compass are poised to serve the test diagnostic and preparedness market
as well as teacher training and assessment. Weekly Reader, Gareth Stevens and
our other brands should benefit from dollars earmarked for early childhood
reading and supplemental education.
As those of you who follow our industry know, companies in the supplemental
education space have begun to alter their product offerings to address this
changing education environment. Other supplemental educational publishers have
moved to extend their relatively static business models into learning networks
through areas of new focus - including teacher training, testing and assessment,
and personalization among other things. Creating that link between traditional
print-based instruction and the new wave of electronic and Internet capabilities
however, has proven more difficult than expected - our competitors are finding
it especially difficult balancing the expansion of their product offerings with
the earnings pressure to maintain a low cost operation. Consequently, no one
player has emerged as a true leader in linking basal publishing to a high value
complementary online learning network. Most of our competitors have much more
size and financial clout than WRC Media. In spite of this - we believe our new
initiative - KnowledgePoint Network - will uniquely position WRC to ultimately
lead the online delivery of supplemental education materials. KnowledgePoint
Network is a comprehensive, research based, ubiquitous delivery platform that is
based on proven content and assessment under trusted brands. WRC has amassed
several thousand hours of electronic curriculum content, which has been
pre-purposed for measurable gains. Perhaps most importantly, our Internet
solution is scaleable to the needs of the marketplace and our customers.
As you will see, we continue to perform well in all four of our core business
units and we believe if we continue to focus on our strategic objectives-- and
continue to serve our customers well with quality products and strong brand
names, WRC will continue to effectively compete in this market sector.
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Fourth Quarter Financial Review
Consolidated Results
WRC Media's consolidated revenue for the fourth quarter showed a significant
increase of $9.0 million or nearly 15% to $70.3 million versus $61.3 million for
the same period in 2000. Consolidated core revenue was also up substantially
over the same period of last year by $9.6 million or 16%. For the full year of
2001, WRC Media's consolidated revenue of $231.5 million exceeded prior year by
5.8% with consolidated core revenue up 8.2% versus to 2000.
Our results for the fourth quarter are particularly impressive in light of a
marketplace that was impacted by an economic recession in the United States, the
events of September 11th and more specifically, a generally turbulent
educational publishing environment. I am also pleased with our overall
performance for the full year of 2001, with solid growth in all of our core
businesses- given that each of WRC Media's market segments were impacted by the
economic slowdown.
Fourth Quarter Unit Results
At AGS(R), sales increased $1.1 million, or 10.8%, to $11.5 million for the
fourth quarter of 2001 from $10.4 million for the same period in 2000, primarily
due to higher sales of curriculum products related to a new Florida textbook
adoption and to a lesser extent, sales attributable to the recently completed
Lindy acquisition.
At Weekly Reader, sales of $18.8 million for the fourth quarter of 2001 were
$1.1 million or 6.5% greater than the same period in 2000 primarily driven by
its entrance into a new distribution channel. The Weekly Reader Book Club was
sold for the first time on the QVC television network over one day in November
2001. Sales through QVC exceeded all expectations- with Weekly Reader selling
more than $1.4 million in high quality books.
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At World Almanac Education Group, fourth quarter core revenue increased by $2.1
million, or 12%, to $19.8 million from $17.7 million for the same period in
2000, primarily driven by continued strength of The World Almanac books
division, the Facts On File News Services (FOFNS) division and improvement in
sales at our Gareth Stevens division. Sales of The World Almanac books division
in the fourth quarter were $4.7 million, nearly 18% greater than the same period
in 2000, despite being up against the highly successful 2001 edition of a year
ago. At FOFNS, the fourth quarter of 2001 revenue of $2.2 million was 22%
greater than the fourth quarter of 2000 driven by significant growth at the
division's FACTS.com Internet news service. For the fourth quarter of 2001,
revenue from World Almanac's FACTS.com website - the web authority of fully
integrated, highly respected research and reference materials - grew an
impressive 41% compared to the same period in 2000. For the full year of 2001,
FACTS.com revenues of $3.6 million grew nearly 90% from $1.9 million in 2000. In
addition, sales of children's library books at World Almanac's Gareth Stevens
division which were soft in the first half of 2001, grew to $5.4 million in the
fourth quarter, representing a nearly a 15% increase compared to the same period
a year ago.
At CompassLearning(TM), total revenue significantly increased by $4.8 million,
or 32%, to $19.7 million for the fourth quarter of 2001 from $14.9 million for
the same period last year. Core revenue for the fourth quarter, excluding the
planned attrition of hardware sales, also increased $4.8 million, or 33%, to
$19.3 million from $14.5 million for the same period in 2000. This growth was
driven by sales of new software, which in the fourth quarter increased by $3.1
million - or nearly 35% to $11.8 million from $8.7 million for the same period
in 2000. Revenue from professional development services increased $1.5 million
or nearly 60% in fourth quarter compared to the same period a year ago. The
growth in professional development revenues is directly attributable to the
growth in new software sales.
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WRC Media Inc.'s consolidated EBITDA (excluding unrestricted subsidiaries)
appreciably increased by $2.6 million or 14.9% to $19.9 million for the fourth
quarter of 2001 from $ 17.3 million for the same period a year ago driven by the
increase in revenue.
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Full Year Results
As previously mentioned, WRC Media's consolidated revenue for the year ended
December 31, 2001 of $231.5 million exceeded the prior year by 5.8%. Core
revenue (excluding de-emphasized non-core business lines of hardware sales at
CompassLearning and Funk & Wagnalls Yearbook sales at World Almanac) increased
$17.1 million, or 8.2%, to $226.4 million from $209.3 million for the same
period in 2000. Operating income before amortization expense rose to $50.8
million versus $47.4 million in 2000, a 7.2% increase.
Each of the WRC Media operating units posted year-over-year core revenue growth.
The biggest gain in core revenue took place at WRC's CompassLearning(TM) unit.
CompassLearning(TM) core revenues were $8.1 million or 14.1% greater than the
same period in the prior year primarily as a result of $7.4 million or 22.8%
increase in new software revenue and $1.0 million or 9.2% increase in
professional development revenue.
WRC Media consolidated EBITDA (before unrestricted subsidiaries) for the year
ended December 31, 2001 of $56.2 million was significantly ahead of prior year
by $5.3 million or 10.5%. The improved profitability compared to prior year was
primarily driven by increased sales of CompassLearning(TM)'s software and
ongoing rationalization of the business. Overall, WRC's EBITDA margins improved
form 23.25% in 2000, to 24.30% in 2001.
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Balance Sheet Review
As of December 31, 2001, WRC Media Inc.'s cash balance was $8.9 million (which
included $2.8 million of cash restricted to fund WRC Media's unrestricted
subsidiary and its investment in ThinkBox Inc.) and consolidated debt was $279.7
million. During the year ended December 31, 2001, WRC Media Inc. made scheduled
principal payments of $4.6 million on its senior credit facilities and as of
December 31, 2001, there were no outstanding advances under our revolving credit
facility. Capital expenditures (including prepublication costs) for the year
ended December 31, 2001 were $11.2 million.
Net Free cash flow was $7.3 million ahead of budget and consolidated debt of
$279.7 million was $9.0 million under budget- primarily as a result of:
o Higher EBITDA;
o Effective working capital management-- combined with
o Lower interest expense.
Outlook
We will continue to strive for above market growth in both core revenues and
EBITDA in 2002. For the full year of 2002 we are forecasting for revenue and
EBITDA growth in the high single digits. In the first half of 2002 we expect
modest growth in consolidated revenues and EBITDA based on the continuance of
the national economic recession and its impact on state and local funding which
is an impediment in the marketplace. We continue to make sound prudent
investments in all of our businesses, which will diminish our EBITDA growth in
the short run--in the first and second quarters of 2002. While our competitors
capitalize much of their investment costs under the accounting convention of
capitalization of prepublication costs--we limit our use of this accounting rule
to development of our off level textbooks, which have long product life cycles
of 5 - 10 years. As such, most of our overall investment dollars are expensed
through the income statement as incurred. Our spring of 2002 educational
publishing efforts will focus on increasing our investment in supplemental
materials (including books for school libraries), reading improvement materials,
classroom magazines and reference materials. We expect this investment to payoff
in the second half of 2002 coinciding with the new school year. Our efforts in
the reading improvement market have considerable promise, in our view. Our new
Literacy for Success product is an intermediate reading solution and will be an
extension of our K-3 reading solution and incorporate content from AGS,
CompassLearning and Weekly Reader. [content includes AGS' GRADE, Compass
Learning's C-PAS, CompassLearning Reading, CompassLearning Language Arts and
Weekly Reader Galaxy] The market for reading improvement is extensive and will
benefit from passage of the new education act.
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At AGS, 2002 product releases include:
1. Nine textbook revisions (including 4 Math textbooks, 4 English and
Reading textbooks and a U.S. Gov't Spanish textbook revision)
2. The full year launch of GRADE--AGS's GROUP READING ASSESSMENT AND
DIAGNOSTIC EVALUATION which was released in the 2nd half of 2001 as
well as
3. The full year launch of our Performance Power software (which we
acquired through the Lindy acquisition).
As a result of this significant pipeline of new products, we believe AGS is on
track to achieve their financial goals and objectives.
At Compass, our direct sales force now numbers 60; up from 53 at the end of
2000, and our 2002 Plan calls for a 25% increase in sales representatives during
2002. The Compass pipeline remains robust. The uncertainty of the economy and
its continuing impact on state funding has increased the risk that schools may
become more hesitant in purchasing our products until they know more precisely
what their 2002-2003 school budgets are and how their state funding allocations
for the upcoming school year will be affected as a result of any cutbacks in
funding. However, it is our strategy to capitalize on this changing marketplace
and buyer uncertainty by providing a product and service solution, both web and
server delivered - that is scalable to the customer's needs - and able to
capture all levels of available funding. Second, we are developing a
comprehensive state wide model proposal - for electronic and print delivery -
both to prepare students for "high stakes" tests and insure corrective
instruction for all early readers. If successful, this will provide a
significant revenue stream, plus an ongoing trail of opportunity within our
installed schools base.
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The strategic focus in 2002 at World Almanac will be to grow our direct sales
channels through increased catalog product selection and expansion of our
telemarketing and inside sales operations. Another major focus by World Almanac
will be continuing our major web growth initiative through expansion of our Web
reference offerings and digitizing/loading Facts On File News Archives. At
Gareth Stevens, the launch of the new Weekly Reader library imprint should
contribute to our overall growth plans.
At Weekly Reader, we have an enhanced 2002 circulation strategy to reverse the
minimal decline in circulation Weekly Reader has experienced over the last few
years. This strategy will emphasize increased mailings and improved mailing list
segmentation tactics rather than past years focus on premium discounts. We have
developed a multi-pronged strategy to focus on dealing with the highly
competitive periodicals market, including testing an inside sales effort and
exploring bulk sales opportunities. Early indications of these efforts are very
positive. In addition, our strategy includes a continued focus on Weekly
Reader's ancillary businesses - licensing and custom publishing. Weekly Reader
licensing revenue more than tripled this year - increasing to approximately $3.4
million versus $950 thousand a year ago. We believe Weekly Reader can continue
this impressive growth through new licensing opportunities in 2002, including
expansion of our relationship with the QVC network. In 2001 we essentially sold
the Weekly Reader Book Club over one day on QVC in November 2001 - in 2002 we
are increasing our exposure on QVC - to include the kickoff of Weekly Reader's
100th anniversary celebration in the spring as well as continuing the fall
promotion. Weekly Reader's custom publishing subsidiary - Lifetime Learning may
have a challenging year as we are seeing signs of continued weakness in its 2002
pipeline resulting from the advertising recession in the marketplace.
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In summary, while the continued economic recession concerns us greatly, I am
very pleased with our momentum created in the fourth quarter of 2001 with 16%
core revenue growth and nearly 15% EBITDA growth. I am cautiously optimistic
about our prospects for 2002--and I fully expect the investments we are making
in the first half of 2002 will payoff in terms of significant growth of the top
line and bottom line in the second half of 2002 similar to the growth trend we
experienced in 2001. I continue to believe that WRC is on the right track. While
the current economic outlook is for a relatively slow recovery in the United
States, we are looking forward to continued solid growth in both revenues and
EBITDA in all of our core businesses in 2002.
This concludes our prepared remarks. We'll now open this up for questions, and
provide any additional information you may need.
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