"EEEE" is both the ticker symbol for tutoring and supplemental education specialist Educate (NASDAQ:EEEE) and the sound that investors made when they saw earnings come out last week. In place of the $0.05 that analysts had expected was a loss of $0.04 per share. In place of a roughly $12 stock and over $500 million in market cap was an $8.50 stock and a $360 million market cap.
At the risk of stating the obvious, it was a very disappointing quarter. Revenue rose 22%, but same-territory revenue growth in the Learning Center business was actually down 4%, and growth in the Catapult Learning business (which provides services to schools) was just 2%.
At least part of the good news/bad news story on Educate is that this is a business with relatively high fixed operating costs and considerable operating leverage. When same-center growth is strong, the company can produce good incremental profits, but when sales lag, profitably gets chewed up. Accordingly, the company produced less than half a million in operating income this quarter, versus nearly $8 million last year.
In the wake of this disappointment and two straight poor quarters in terms of inquiries, management is instituting some changes. Some of the changes relate to management and staffing, but the company is also looking to pay more attention to customer needs and make sure they're getting the appropriate package of services. Given how expensive these programs can be, that's not a bad idea. And the fact that company-owned centers produce considerably higher per-student revenue might suggest that the company has pushed sales a little too hard in the past.
Change is good, but it comes with risk. Educate is trying to change things up going into its two busiest quarters of the year, and as we've seen with Zale (NYSE:ZLC), changing things in the busiest part of the year can be tricky.
Although Educate has been walloped pretty good, its Sylvan Learning Center and Hooked on Phonics brands are still well known and compare well relative to other supplemental education companies like Kaplan (owned by Washington Post (NYSE:WPO)) and Princeton Review (NASDAQ:REVU). This mess could take time to fix, though, so risk-averse investors shouldn't be in a big hurry to pile into this one.
More Fool for thought:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
