"Surprise!" That should have been the headline on Thursday afternoon's press release from information technology (IT) training company Learning Tree (Nasdaq: LTRE ) . In the dismal world of IT training, this debt-free company said last August that revenue in the fourth quarter (which ended Sept. 30) would be higher than the previous year's fourth quarter. Well, surprise! It won't. And that's only the beginning.
With the preliminary numbers in, the company expects to report sales of $36.5 million, a 2.1% decrease from the same quarter last year. Even worse, Learning Tree's four years of consecutive declines in net income should continue, closing fiscal 2005 with an actual loss of over $1 million.
Despite the revenue decline, the company says good things happened during the quarter. Operating expense for the quarter, which may be as high as $18.6 million, will be below the $19 million forecast. Not exactly cause for revelry, is it? More importantly, for the first time since 2001, the company had back-to-back quarters with year-over-year increases in the number of attendees at its courses. Too bad that didn't translate into higher revenue; most of the attendee increases occurred in classes held at lower-revenue customer sites, rather than the company's own education centers, which hampered revenue gains.
In another blow to the fiscal year's bottom line, the company incurred $800,000 in one-time subleasing expenses at its U.K. Education Center, and $1.7 million in Sarbanes-Oxley compliance costs (which will likely be substantially lower in future years).
The conference call was a hoot, as Learning Tree continued its grousing about the costs of Sarbanes-Oxley compliance. The company specifically noted that this quarter's $1 million in compliance costs are approximately twice what it forecast in August. But during the compliance process, the company found a few material weaknesses in its processes and controls. In fact, Learning Tree will be restating results from all quarters starting with fiscal year 2001 through the third quarter of 2005. Surprise!
All these unwelcome surprises have fueled an 8% loss in the stock today and garnered it a listing as one of the biggest percentage decliners on the Nasdaq.
The company's first-quarter 2006 guesstimate (subject to future surprises) calls for revenue between $39.4 million and $39.9 million, compared to $39.8 million last year. That lackluster top-line performance is expected to produce net income between $1.7 million and $2.4 million, compared to $2.1 million in the year-ago quarter. This is also an unwelcome surprise, as analysts had expected Q1 net income to be $2.8 million.
Competitor SkillSoft (Nasdaq: SKIL ) is struggling, but at least it's beginning to stabilize after years of losses. New Horizons Worldwide is still acquiring IT training outfits, although it still has not produced a financial report for fiscal 2004 (or any period since). Needless to say, I would avoid all the stocks in this sector.
Instead of trying to find a winner in IT education, investors should consider a broader-based education company like Apollo Group (Nasdaq: APOL ) , which has consistent earnings and revenue growth, as well as a debt-free, cash-rich balance sheet. It's anything but surprising -- which, for some investors, might just come as a relief.
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