Sylvan parent's shares lose 25%


Shares of Baltimore-based Educate Inc., the company known for its Sylvan tutoring centers, tumbled 25 percent yesterday after executives announced a series of management and other changes in response to a $4.7 million loss in the fourth quarter.

Educate executives acknowledged yesterday that they failed to quickly respond to the changing behavior of their prospective customers, who increasingly are using the Internet to contact the company for kindergarten through 12th-grade tutoring services. They added that the disappointing earnings were a result of higher expenses and a slowing of the learning center business.

"Overall, during the last half of the year, we focused on the incorrect priorities and allowed the emphasis on customer service, sales and basic-execution tasks to take a back seat," said R. Christopher Hoehn-Saric, chairman and chief executive officer of Educate, in a conference call with analysts.

The news sent shares of Educate to a 52-week low, down $3.01 to $8.89. Merrill Lynch downgraded the stock yesterday to "sell" from "neutral."

Educate said its operating income dropped 94 percent in the three months that ended Dec. 31, to $437,000 from $7.75 million in the fourth-quarter of 2004. The company said expenses for the Sylvan tutoring centers increased $19 million - or 60 percent - over the fourth quarter of last year.

Those costs were related to the franchised tutoring centers that Educate recently repurchased. Such costs included turnover, retraining staff, advertising and possible relocation, the company said.

In the past year, Educate has been aggressively buying back franchised tutoring centers in hopes that it can reap more income. In 2005, the company acquired 78 tutoring centers. This year, the company plans to slow its franchise acquisitions as it focuses on improving operations at its existing centers.

While revenue rose 22 percent to $76.6 million, learning center same-territory sales declined 4 percent in the quarter. The loss of $4.7 million, or 11 cents per share, in the quarter was in contrast to a profit of $1.9 million, or 4 cents per share, in the corresponding period last year.

Despite spending more money to advertise on the Internet, the company acknowledged missteps in its efforts to convert Internet-based customer inquiries into student enrollment.

As opposed to telephone calls that got immediate attention, customers who submitted Web-based inquiries received automatic electronic responses and did not get a personal reply for 24 to 48 hours, Hoehn-Saric said. As a result, the company missed opportunities to gain customers.

"As we examined the entire sales process over the last 60 days, we identified it as a real weakness," Hoehn-Saric said. "The market was changing and as people interact with us in different ways, we need to readjust our sales process."

To that end, the company plans to increase and retrain its sales staff. Educate also plans to implement a customer satisfaction tracking system this quarter and provide expanded financing programs to increase sales.

Also yesterday, Educate said it made several personnel changes. Peter Cohen replaces Mary Foster as president of Sylvan tutoring centers. Foster has been named senior vice president of strategy. Cohen held the same position from 1996 to 2001.

Additionally, the company hired a new director for its contact center operation, which responds to customer inquiries. And two of five regional managers were replaced.

Another operational change includes developing new lower-priced programs for families who can't afford services at Sylvan learning centers.

Despite those changes, some analysts appeared doubtful about Educate's growth prospects for this year.

"We expect continued pressure on the shares as there are few catalysts near term and management needs to rebuild credibility," Merrill Lynch analyst Lauren Rich Fine wrote in her research report yesterday. Merrill Lynch owns 2 percent of Educate stock, or more than 958,000 shares.

Trace Urdan, a senior analyst at investment banker Robert W. Baird Co., pointed to larger market forces that may be in place.

"The elephant in the room is that they have reached a place within their target audience of upper-middle-class families who could afford to pay several thousands of dollars in tutoring, and they've gotten to a place where the market is fairly saturated," said Urdan, who, along with Robert W. Baird, does not own stock in the company.

In the past year, Educate has been repositioning its business around consumer services.

It bought the Hooked on Phonics brand and has begun selling products at national retail stores. Hoehn-Saric said the brand saw sales of about $20 million, which is expected to double this year.

In October, the company said it is selling the main piece of its No Child Left Behind business, which caters to troubled schools trying to improve student performance.

Educate posted 2005 revenue of $330 million, up from $273 million the previous year. Its operating income was $45.6 million, an increase of 20 percent from 2004.

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