Cambium Learning Group (NASDAQ:ABCD)
Q1 2018 Earnings Conference Call
May. 14, 2018 9:00 a.m. ET
- Prepared Remarks
- Call Participants
[Operator instructions] Good day, ladies and gentlemen, and welcome to the Cambium Learning Group Inc. 1Q 2018 earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn your call over to Scott McWhorter, general counsel and corporate secretary of Cambium Learning Group. Sir, you may begin.
Scott McWhorter -- General Counsel and Secretary
Thank you. And welcome everyone to Cambium Learning Group's first-quarter 2018 earnings conference call. I am Scott McWhorter, Cambium's general counsel. With me today are John Campbell, Cambium Learning's chief executive officer, and Barbara Benson, chief financial officer.
Statements made on this call, including those during the question-and-answer session, may contain forward-looking statements that are subject to risks and uncertainties. Please refer to the safe harbor statement included in today's press release as well as Cambium Learning Group's periodic filings with the SEC for a complete discussion of the risks and uncertainties that could cause actual results to differ materially from those expressed today. We will be discussing certain non-GAAP financial results, including adjusted EBITDA and cash income. The press release and Form 10-Q issued earlier today contain a reconciliation of these non-GAAP financial measures to the most comparable GAAP measures.
Because of the high percentage of amortization expense, deferred revenue, and other noncash nonoperational items in our reported GAAP income, we report these non-GAAP measures as key performance metrics. Management believes these metrics help portray the underlying trajectory of the business and give you a view of operations from management's perspective, since these are the metrics used internally to assess performance. Lastly, as announced in our press release this morning, Cambium Learning Group has initiated a review of strategic alternatives to maximize shareholder value. Such strategic alternatives could include a sale of the company or a sale of a division or divisions thereof, a strategic merger, a business combination, or continuing as a stand-alone entity executing on its business plan.
The company has not set a definitive timetable for completion of its review of strategic alternatives, and there can be no assurances that the process will result in any transaction being announced or completed in the future. The company does not intend to make any further announcement related to its review unless and until its board of directors has approved a specific transaction or otherwise determined that further disclosure is appropriate. As such, management will not comment on this process in today's prepared remarks, and as noted in the first-quarter 2018 press release we issued this morning, will not conduct a question-and-answer session today. Now, it is my pleasure to turn the call over to John Campbell.
John Campbell -- Chief Executive Officer
Thanks, Scott. Good morning, everyone, and thank you for joining us today. I want to thank you for your flexibility with respect to the rescheduling of this call from Friday, and I hope it was not too much of an inconvenience as my voice is much better today. I will begin by discussing our first-quarter performance by segment and then turn it over to Barbara, who will walk you through the financials.
I will then come back and give you an overview of the VKidz acquisition that we announced today. Cambium Learning Group is off to a solid start to the year, delivering growth in bookings, revenue, and cash income compared to last year. While the first quarter of any year is not an indicator of full-year performance, as it is low volume compared to the important back-to-school selling season, we are executing well on building our full-year sales pipeline, and our strategic development, marketing and sales initiatives and are reaffirming our 2018 outlook. Let's look at our segments' performance.
First-quarter bookings for Learning A-Z, the standard-bearer of our digital solution strategy, decreased slightly compared to prior-year first quarter, a result of the timing of orders. We expect another year of strong growth at Learning A-Z, as demand for digital solutions in school districts, both in the U.S. and internationally, remains strong and as the solutions that we provide have proven to drive student success. From a development standpoint, our focus remains on making continuous enhancements to our product suite, including new content and ongoing functionality enhancements to empower teachers and make personalized learning easier.
Learning A-Z's stellar, literacy-focused SaaS solutions are well-positioned competitively, particularly with the IMS Global Conformance certification on the OneRoster v1.0 and v1.1 CSV standards we achieved in the first quarter, and we expect these higher-margin bookings and revenue to continue to grow and contribute meaningfully to our profitability and cash flow. Our ExploreLearning segment grew first-quarter bookings 10%, continuing the strong momentum we have seen in this segment over the past couple of years. On the development side at ExploreLearning, our focus this year is to continue to add to our Gizmos library and integrate the talented Cogent team, who joined us as part of the IS3D acquisition and integrate the Cogent immersive cases into our STEM offerings. We are also continuing our work on the new [Inaudible] product that is slated for release in 2019.
We continue to expect full-year 2018 bookings growth at ExploreLearning as we reach more students who aim for success in math and science. At Voyager Sopris Learning, first-quarter bookings increased 12%, with solid growth in LANGUAGE! Live, the segment's digital flagship and high-efficacy adolescent intervention solution. We also experienced the positive timing tailwinds for legacy print and transactional solutions, especially as summer product. Our development focus for 2018 for Voyager Sopris Learning is to support LANGUAGE! Live's momentum and feed the segment's SaaS solutions with continuous enhancements and new capabilities every month while maintaining capital expenditures below last year's levels in order to maximize profitability.
The ComputED Gazette recently honored Cambium with 10 best educational software awards known as BESSIE Awards, more than any other contender, with eight for Learning A-Z and two for ExploreLearning. This is the fourth consecutive year that Cambium Learning has won multiple awards, which is critically important as a digital solution must reearn its place every year. In addition to teachers confirming that our solutions work in the classroom, these awards provide additional industry affirmation of our high-quality learning technologies. Now I will turn the call over to Barbara for a review of the financials and more detail on our outlook. Barbara?
Barbara Benson -- Chief Financial Officer
Thanks, John, and good morning, everyone. To frame the quarter, as John mentioned, our business is highly seasonal and the first quarter is our smallest. Q1 was 12% of full-year bookings last year and has been a similarly low percentage historically. Our bookings will ramp up through the year to peak in the third quarter, the period in which we generate the vast majority of our bookings and cash income for a given year.
Because of this, first-quarter results should not be considered necessarily indicative of full-year results or trending. With that said, let's walk through the Q1 numbers, starting with bookings. Companywide bookings for the first quarter of 2018 grew 4% to $19.9 million, with Learning A-Z bookings of $9.6 million, which was down slightly from prior-year first quarter by $0.3 million. We expect this as purely a result of timing, as we continue to forecast strong full-year growth.
ExploreLearning grew 10% to $3.2 million, continuing its strong momentum. And Voyager Sopris Learning grew 12% to $7.1 million on favorable timing of large orders, including summer school. GAAP net revenues for first quarter 2018 grew $0.6 million, or 2%, to $36.6 million. A large portion of GAAP revenues for the first quarter represents the revenue recognition tail of prior-year bookings.
Adjusted EBITDA for the first-quarter of 2018 was $8.9 million. Cost and expenses excluding depreciation and amortization were up around 3% quarter over quarter with planned investments in development, marketing, and sales at Learning A-Z and ExploreLearning to support full-year 2018 growth, partially offset by the benefit of cost rightsizing activities at Voyager Sopris Learning late last year. The higher pace of investments slightly exceeded the GAAP revenue growth, and adjusted EBITDA was down $0.1 million for the first quarter compared to last year. Capital expenditures were $4 million in first quarter 2018, lower than first quarter 2017 by approximately $0.5 million, with the decline driven by planned savings at the Voyager Sopris Learning segment and the slow ramp-up of capital expenditures at the other segments.
We continue to expect full-year 2018 capex to be roughly consistent with 2017. Cash income was a $10.6 million loss for the first-quarter of 2018, slightly better than the $10.8 million cash income loss for the first quarter of 2017 with the overall bookings growth mostly offset by planned investments in our growing product lines. It is normal for us to operate with a cash income loss in the first quarter due to seasonality. Net income was up slightly, $2.6 million in Q1 2018, compared to $2.5 million in Q1 2017.
Interest expense was $0.8 million in Q1 2018, compared to $1.2 million in Q1 2017, lower as a result of the ongoing reductions in debt from schedule as voluntary principal payments made in 2017. As we discussed on last quarter's call, we released most of the valuation allowance that was recorded on our deferred-tax assets including our NOL at the end of 2017. Because of this, we expect to have a more normal tax expense effective rate in 2018. We did, in fact, have a higher tax expense effective rate in first quarter 2018, but it was tempered by tax benefits related to stock option exercises by employees in the first quarter.
And as a result, Q1 2018 had a 15% tax expense effective rate. On last quarter's call I had estimated we would have a full-year tax expense effective rate between 24% and 27%, and this is still the case, although I think we'll be at the lower end of the range given first quarter. Moving to the balance sheet. Cash and cash-equivalents at March 31 were $4.5 million.
During the first quarter of 2018, we paid $1.4 million of scheduled amortization payments and ended the quarter with $47.1 million outstanding on our term loan. In line with our historical seasonal pattern, we expect to use cash in the first half of the year and generate cash in the third and fourth quarters, and our revolving credit facility helps us manage the seasonal cash pattern. We borrowed $7 million on the revolver in the first quarter of 2018 and we have borrowed an additional $2 million today in the second quarter. Cash used in operations was $6.2 million in Q1 2018, compared to $5 million in Q1 2017, with the quarter-over-quarter comparison impacted by the return of cash in prior-year Q1 of $0.7 million from a certificate of deposit that was collateralizing a letter of credit and other working capital timing differences.
In summary, the results for first quarter 2018 were solid and tee us up nicely to deliver on our full-year 2018 outlook, which has not changed from the outlook we provided on the year-end call and includes companywide bookings growth at a higher percentage than what we saw in 2017, driven by continued strong growth of the Learning A-Z and ExploreLearning segments and Voyager Sopris Learning's LANGUAGE! Live solution, capital expenditures that are roughly the same as 2017, expansion of our cash income margin driven by continued strong growth in our higher-margin segments, and cash paid for interest in the neighborhood of $3 million. We also stated on our year-end call that absent another use of cash during the year, we expect to be substantially debt-free by the end of 2018. Our operational outlook hasn't changed and we continue to expect to generate enough cash during the year that would enable us to be substantially debt-free. Clearly, the acquisition of VKidz and our review of strategic alternatives represent other uses of cash and we will assess and quantify as the year progresses.
With that, I'll turn the call back to John.
John Campbell -- Chief Executive Officer
Thanks, Barbara. Let's move on to discuss the VKidz transaction. Today, we announced the dividend of an agreement to VKidz, a Florida-based edtech company that serves both school systems and homeschooling families with innovative, research-based educational products, all delivered digitally. VKidz offers Cambium Learning Group an exceptional strategic fit.
First, it puts us squarely in the homeschooling market, which is estimated to be an over $1.3 billion market that is growing every year. Founder John Edelson has built a premium marketing capability and a targeted delivery platform for homeschoolers, creating a strong, competitive position in this market. In addition to gaining the excellent Time4Learning homeschool curriculum, the acquisition also offers us another strong cross-selling opportunity for several of Cambium solutions. Second, VKidz brings three great institutional-focused SaaS solutions that we believe will benefit immediately from Cambium's mature marketing and sales infrastructure, both domestically and internationally.
VocabularySpellingCity is a game-based suite of study tools that develop strong vocabulary skills for students in grades three to five and that offer best practices for effective vocabulary instruction that save teachers time through automation. Last year, VKidz acquired WritingCity, a complete elementary writing program with detailed lesson plans based on the Writer's Workshop approach. Science4Us is a high-efficacy, complete, standards-based core science curriculum that delivers digital and real-world science experiences using the five Es -- engage, explore, explain, elaborate, and evaluate -- to K-2 students and allows busy teachers to deliver an exemplary science educational experience. The transaction is also a strong fit both financially and with our digital strategy.
It's a 100% SaaS company supporting our strategy of being the lean provider of state-of-the-art digital subscription solutions. VKidz has historically had strong double-digit top-line growth and strong margins, and we expect it to be immediately accretive. Total consideration includes the issuance of 6.7 million shares of Cambium Learning Group common stock to the sellers plus payment of outstanding VKidz debt at the time we close the transaction. We expect the transaction to be consummated after completion of our board of directors' review of strategic alternatives.
Cambium Learning's mission is to leverage technology to create solutions that are personalized, adaptive, scalable, and designed to achieve results in the classroom that can change the trajectory of students' lives. We are executing well heading into the back-to-school season this year and are reaffirming our 2018 outlook today. We expect top-line growth, careful expense management, and continued investments in development, marketing, and sales to drive incremental expansion in our cash income, adjusted EBITDA, and cash flow. We have built Cambium Learning into a leader in the K-12 digital solution space and are making investments today, both in terms of our SaaS solutions development, marketing, and sales and in terms of the accretive VKidz acquisition, that are designed to drive growth and create a more profitable and cash flow-generative business model long term.
At Cambium Learning, we believe that every learner has untapped potential, teachers are the foundation of education, and that data instruction and practice are the key to success in the classroom and beyond. This concludes our remarks. Thanks, again, to everyone for listening in our call today. We look forward to reporting our second-quarter results on our next call.
Have a great day.
Duration: 18 minutes
Scott McWhorter -- General Counsel and Secretary
John Campbell -- Chief Executive Officer
Barbara Benson -- Chief Financial Officer
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