"Who in heaven's name is 'Laureate?' " you might ask. Good question. Before we get into how the company did this quarter, a few words on what it is are in order. LaureateEducation (NASDAQ:LAUR) is Sylvan Learning Systems, or rather, it was. Last year, the company previously known as Sylvan (shades of Prince?) spun off its eponymous division, the Sylvan Learning Centers, and sold them to a start-up that recently went public: Educate (NASDAQ:EEEE). What was left over after the spinoff was renamed Laureate Education so as to not confuse tender young (investing) minds.
And if you're now totally confused anyway, the people you want to sue for the resulting mental distress are both in bold in the paragraph above.
Now that that's out of the way, let's move on to the numbers. Laureate boosted its revenues by 37% in the third quarter compared with its year-ago results. Meanwhile, net profits per diluted share jumped 58% to $0.19. Over the first three quarters of 2004, revenues again rose 37%, but net profits went up just 26.5%.
There are two conclusions one could draw from these numbers. The first is that in its third quarter, Laureate became dramatically better at converting revenues into profits than it had been earlier this year. But that would be a mistake. Looking at the company's net margins gives you a better picture of what is going on. First, look at the net margins for Q3 2004 and Q3 2003: 6.4% and 5.1%, respectively. Next, the net margins for the first three quarters of 2004 and for 2003: 6.8% and 6.4%.
From these numbers, it's clear that the difference in earnings increases owes less to a difference in efficiency in creating profits between Q3 2004 and 2004 overall. It owes more to the fact that Q3 2003 was an exceptionally bad quarter for Laureate -- allowing a dramatic increase in earnings when Q3 2004 reverted to a more normal level of profitability.
But that's not what you really want to know, right? You want to know why net profits increased so much less than did revenues in the other two quarters. The answer: stock dilution. Yes, dear Fool. In this regard, Laureate more resembles high-tech serial diluters such as Lucent (NYSE:LU), EMC (NASDAQ:EMC), and JuniperNetworks (NASDAQ:JNPR) than it does its more conservative educating peers, Apollo (NASDAQ:APOL) and ITT (NYSE:ESI). From 2003 to 2004, the weighted average of Laureate's diluted share count jumped 16.6%. Hence, Laureate's lesson to investors: When we dilute outside shareholders by that amount, their per-share profitability is bound to suffer.
For more information on Laureate before it became Laureate, read:
Fool contributor Rich Smith owns no interest in any of the companies mentioned in this article.
