[ABCD] Cambium Learning Group 2012 Third Quarter Earnings Call
Thursday, November 8, 2012
5:00 PM Eastern Due Friday 5pmET
Shannan Overbeck; Cambium Learning Group, Inc.; Head of Public Relations
Ron Klausner; Cambium Learning Group, Inc.; CEO
Brad Almond; CPA Cambium Learning Group, Inc.; CFO
Vernon Johnson; Cambium Learning Group, Inc.; President, Voyager
Andrew Finkelstein; Barclays; Analyst
A.J. Guido; Golden Tree; Analyst
David Sagalov; Jefferies; Analyst
Sean Sawler; Redwood; Analyst
Operator: Good afternoon, and welcome to the Cambium Learning Groups 2012 Third Quarter Earnings
Conference Call. (Operator instructions) After todays presentation, there will be an opportunity
to ask questions. (Operator instructions) Please note this event is being recorded.
I would now like to turn the conference over to Shannan Overbeck. Please go ahead.
Shannan Overbeck: Thank you, Operator. My name is Shannan Overbeck, and Im head of Cambium
Learning Groups Public Relations Department. On the call today is Ron Klausner, our Chief
Executive Officer, and Brad Almond, Chief Financial Officer. In addition, our Voyager Learning
President, Vernon Johnson, is on the call and will be available for question and answer.
Before we begin, I have a few comments regarding the information we are providing today. Please
note that some statements made on todays call are forward-looking in nature and are based upon
assumptions and subject to risks and uncertainties. The risks and uncertainties associated with
these statements could cause Cambium Learning Groups actual performance to differ materially from
those reflected in statements made today. Examples of these assumptions and risks are described in
our previous filings with the SEC and on our Form 10-Q to be filed shortly. Cambium Learning Group
does not undertake any duty to update the statements whether as a result of new information, future
events, or otherwise.
On todays call, EBITDA, adjusted EBITDA, and adjusted net revenues will be presented, and it
should be noted that these measures will differ from those offered on the GAAP financial statements
provided in our Form 10-Q.
These are non-GAAP financial measures that the Company believes will provide useful information to
investors because they reflect underlying performance of the Company and provide investors with a
view of the Companys operations from Managements perspective. These measures are used frequently
by Management in the operation of the business.
Reconciliations of these figures to GAAP are included in our press release schedule, which can be
found on our corporate website, CambiumLearning.com and our Form 10-Q to be filed with the SEC.
Following todays prepared statements we will take questions. A transcript and webcast of todays
call will also be available on the Companys corporate website.
Let me now turn the call over to Ron.
Ron Klausner: Thank you, Shannan, and thanks for joining us today. On todays call I will provide
details on the Companys 2012 third quarter performance. I will then turn the call over to Brad,
who will share information on our 2012 third quarter financial results. I will discuss, one,
Company performance, two, migration to technology, three, successes and achievements.
Company performance, overall, third quarter order volume for the Company was down 10% compared to
the same period of 2011, with year-to-date order volume down 16%. Q3 Sopris learnings order volume
was down 19% compared to third quarter 2011, with year-to-date down 22%.
Cambium Learning Technologies was up 6% in the third quarter, with the year-to-date order volume
down 3%, and Voyager Learning was down 15% in the third quarter, with year-to-date order volume
Voyager, Sopris, and Kurzweil products continued to struggle, but we are seeing positive
developments in other areas of the Company, especially Learning A-Z. LAZ, triggered by the student
directed learning site, Raz-Kids, grew 28% for the quarter and in October our year-to-date orders
exceeded all of the full year of 2011. Through October year-to-date ExploreLearnings is favorable
by 8% versus prior year, while Cambium Learning Technologies is flat. As a Company LAZ and EL
represent over one-fourth of our business, with technology now representing 46% of our sales.
Our relatively new turnaround education services business continues to grow and is forecast to be
over $8 million this year. We expect continued growth in 2013 from education services based, in
part, on our student success. We are one of the few companies that have had turnaround school
success as demonstrated in Milwaukee and Providence.
For Q4 we expect CLG orders growth versus prior year. The ability to deliver a favorable variance
and the extent of the favorable variance is highly dependent on large agreements. We are trying to
close a number of large agreements in our pipeline, including nine over $1 million, with two over
New capabilities, our focus continues to be developing digital capabilities that mitigate big
issues. In early 2013 we will roll-out a scoring tool that was developed by one of the more
prestigious data and analytical education entities. The scoring tool predicts the likelihood of
success by a potential teacher and will be used by school districts to help them determine the best
candidates for their hiring pool. The research is clear, teachers have the greatest impact on
efficacy and by increasing the quality of teacher acquisition learning will increase. The tool
correlates skills, knowledge, attitude, and experience with teacher effectiveness. For the most
part today, school principals and HR directors use intuitive kinds of judgments as opposed to
quantitative predictive assessments used in many other industries.
We will also introduce a completely updated pre-case solution developed by renowned early childhood
expert, Dr. Vicki Gibson, and will be rolling out LANGUAGE! Live, a blended learning model with
half of the instructional time conducted in a student directed eLearning environment and the other
half led by the classroom teacher. This adaptive capability integrates peer-to-peer learning and
social networking aspects to maximize student engagement and skill mastery. Targeting students in
grades six to 12, reading below a sixth grade level, the solution is designed to elevate student
reading levels two grade levels within one year.
We continue to make progress on Reflex, which enables students to have instant recall of the four
mathematical operations. Reflex, released in April 2011, will do close to $2 million this year.
Reflex is the first productization of ExploreLearnings NSF funded research on how games can serve
as new kinds of sensors. These sensors enable new types of pedagogically relevant behaviors to be
data mined, monitored, and analyzed.
Embedding these sensors within a series of interactive experiences across an online learning
environment enables detailed progress monitoring to scale to large student populations. In a
similar way that Big Data analysis of online shopping behavior has revolutionized online retail, or
Money Ball has revolutionized the evaluation of baseball talent to increase the odds for winning,
the rich data collected by these sensors is used to drive optimal conditions for learning.
Successes and achievements, we are a Company that continues to focus on efficacy. Our largest
customer, Los Angeles, realized the best growth for special education students among the largest 15
school districts in California and significantly outperformed the State as demonstrated by
Californias academic performance indicator, which measures academic performance and growth. As
documented by the court appointed independent monitor, LAs SPED students have had seven years in a
row of continuous improvement. This coincides with when LA contracted with Cambium Voyager as
their primary intervention provider.
In addition to student successes, organizations and peer industry groups continue to recognize our
programs for educational excellence. Recently five Cambium online programs ExploreLearning
Gizmos, ExploreLearning Reflex, VmathLive, Ticket to Read, and firefly were winners in the
17th Annual 2012 Education Software Review Awards, EDDIES. The EDDIES honor content
rich innovative programs and websites that enrich classroom curriculum and significantly improve
Brad Almond: Thanks, Ron.
There are four key areas Ill cover on this call. First is order volume and revenue change
year-on-year. Second is gross margin. Third, EBITDA levels. And, fourth, cash and liquidity. As
it relates to these areas and where possible Ill provide some comments on the outlook for the full
year or at least where we are midway through the fourth quarter.
First is the order volume and revenue. While we declined in Q3 in both of these areas relative to
prior year, the decline we experienced was much less than the recent trends of Q1 and Q2.
Stabilizing the topline of the business is a series of steps we must take, and Q3 was an indication
that we were moving in the right direction.
As Ron has commented on the order volume, which is a leading indicator of revenue, I will focus on
revenue, itself. Revenue for the first three months ending September 30th was down 13%
versus prior year. The revenue decline was greater than the order volume decline, which was 10%
due to increased deferred revenue attributed to a shift towards greater technology and services and
late quarter shipments that did not meet all requirements of GAAP revenue recognition. In total we
have several million in shipments in late Q3, for which we were not able to recognize revenue until
Regarding the fourth quarter, we expect Q4 to have a higher order volume than Q4 2011. The
magnitude of this improvement is challenging to predict due to some sizable transactions that are
in the pipeline. These possible sizable transactions have advanced slower than expected, but
remain viable and possible for Q4 closure. While there are many days left in the quarter, its
worth noting that Q4 order volume through yesterday was up over 10% versus the same time period in
the fourth quarter of 2011. This Q4 10% increase has also been obtained without any reliance on
sizable transactions so far in the quarter.
While we cant simply extrapolate the results so far in Q4 for the full quarter and assume thats
where well end up, its a positive start to the quarter and its our expectation that sales volume
for the fourth quarter should exceed prior year. Unfortunately, the fourth quarters performance
will not come into focus until mid and possibly even late December.
As I conclude my remarks on revenue its worth noting that the Companys deferred revenue,
combining both long and short term, has a balance of $50 million with $45 million expected to be
recognized as revenue in the next 12 months. The $50 million total balance is an increase over
about 15% over the balance a year ago. As the Company stabilizes the order volume and continues to
build its deferred revenue future revenue should become more predictable.
The second area is gross margin. Gross margin year-to-date through September on a GAAP basis is
48% versus 53% in 2011 for the same nine-month period. On an adjusted basis, which removes
depreciation, amortization, but includes our shipping costs, the 2012 gross margin is 65% compared
to 67% in 2011. Earlier in the year the gap between 2012 and 2011 had been greater, but we have
continued to close the gap through more technology sales and efficiency gains, offset by some
higher costs associated with increased professional service engagements.
The third area that I will focus on is adjusted EBITDA. In adjusted EBITDA we start with EBITDA,
itself, and remove the impact for the nonoperating restructuring and reengineering costs in 2012.
In Q3 we had positive adjusted EBITDA of $13 million, that brings us year-to-date to $17 million of
adjusted EBITDA. And perhaps most relevant is the trailing 12-month adjusted EBITDA, which is $22
Based on the expectations for fourth quarter order volume, that I explained earlier, we expect that
the $22 million of adjusted EBITDA will be the floor for the full year 2012, and depending on the
level of success in the fourth quarter, particularly with some reliance on securing some level of
these sizable transactions in the pipeline that we have discussed, we have the opportunity to
improve upon the $22 million in the fourth quarter for 2012.
Ill comment briefly on spending. Our efforts to reduce costs through reducing resources in
declining areas and through reengineering efforts have begun producing benefits in 2012. The
actions we have taken in 2012 will result in an annual spending reduction of approximately $11
million. We expect to realize about a half of that in 2012.
Savings realized to date in these areas have been used to fuel the current and expected growth
areas of the Company. Throughout 2012 we have reallocated these savings and increased overall
spending levels in R&D, as well as sales and marketing. In R&D the increased spending has been
aimed at Learning A-Z and in digitizing content in Voyager and Sopris. In sales and marketing we
have increased spending in Learning A-Z and ExploreLearning.
This financial reshaping of the Company will continue into 2013, in both the magnitude of the
savings and the use of these savings. On the magnitude we remain committed to reaching the
annualized goal of $15 million in total reductions. On the use of these savings the focus will
stay on investing in growth areas, but the decision ahead for 2013 is the amount of the annualized
savings that we intend to reinvest versus the amount we will make to improve the bottom line.
As we complete our 2013 budgeting process we will determine that balance between EBITDA improvement
and reinvestment, but it is clear that we will specifically target more savings for EBITDA
improvement in 2013.
The fourth and final area is cash and liquidity. We are in the historically cash building period
of the year of our business. On the balance sheet as of September 30th, 2012 we had
cash of $35 million. As of today our bank cash balance is $47 million. Our expectation is that we
will further add to the current cash balance between now and the end of the year. The extent of
that addition is based on the level of sales we achieve and, more importantly, the timing of those
While we have never drawn on our revolving credit facility, we continue to comply with its
covenants and we have that available for added liquidity should the need arise. Operationally
speaking, there is no foreseeable need to draw upon it.
Ill summarize my comments and then Ill turn it over to the Operator for questions. We knew it
would be a tough year and stated as much on our earnings call ending 2011. The key question that
has been on peoples minds is when would we stabilize the topline? So Q3 was a step in the right
direction, not the magnitude that we would have liked, but a step nonetheless.
Now the mid-quarter Q4 volume is up 10% versus prior year, and indications for all of Q4 are at
least flat to prior year with expectations that we will exceed prior year. We expect the current
trailing 12-month EBITDA of $22 million is the floor for the full year and we have an opportunity
of improving upon it in Q4.
And, lastly, we are seeing the cash balances build back from their midyear low points and expect to
increase upon the $47 million in cash we have in the bank today by the end of the year.
And, with that, Id like to turn the call over to the Operator for questions.
Operator: (Operator Instructions)
And our first question is from David Sagalov of Jefferies.
David Sagalov: Hi, guys. Thanks for taking the questions.
Ron Klausner: Hey, how are you doing?
David Sagalov: Im well, thanks. I just wanted to ask a little bit more about kind of if you can
just describe the type of orders in the pipeline and kind of timing on when you think those are
going to come and translate into revenue, and any color you can give around that just so we can try
to figure out what the beginning of next year is going to look like?
Ron Klausner: Vernon, you want to handle that?
Vernon Johnson: Yes, and you can help, as well. We actually are tracking our pipeline on a daily
basis, and we just completed business health reviews with every territory and every region
throughout the country, so we have really good visibility of what is in the pipeline and when we
expect to have close on deals.
We expect, as Brad had said, that probably late November, first week or so of December will be the
largest order volume for quarter four. Things seem to be pushing a little bit later just because
of budget of districts, but we have good visibility of what we think we can close yet this year.
In quarter one of next year, 2013, our pipeline is already building as compared to last year, were
probably about five or six times the pipeline that we had coming into 2012. So throughout this
year we started with a very lean pipe, weve been building very solidly through this quarter. This
quarter is probably going to have excess pipeline compared to what well end up closing, and some
of that will float into quarter one of next year, increasing that by a little bit more. So were
looking at a good finish here in four, and certainly in terms of quarter one were building,
working hard to build our pipeline so we have a good quarter one of next year.
Ron Klausner: And let me build on that a little bit. So to Vernons point on the health reviews,
on as an adjective, top 25 opportunities, the sales producer would know who needs to approve by
when, do we need a Board approval, is it scheduled on the Board docket or not? And so that gives
us more specificity and more clarity around likelihood for a success or not on each of those,
again, about top 25 deals.
David Sagalov: Got it. And the orders that are in the book today, that you commented on earlier
in the call, is the expectation that those will be start to fill in the late fourth quarter or
are those going to be first half of next year revenue type numbers?
Brad Almond: Its a mix, but most of them will fill this year. Anything thats a subscription
base, which is where a lot of our higher growth is, theyll recognize ratably over theyll start
to hit this quarter and recognize ratably over the year. But I think the key to those theres
really nothing different about the Q4 sales weve made versus sales wed make in any given quarter.
David Sagalov: Got it, great. Thanks for the color, guys.
Ron Klausner: Youre welcome. Thank you.
Operator: And the next question is from Sean Sawler of Redwood.
Sean Sawler: Thanks for taking the time, guys. The first question is on the balance sheet,
accounts receivable at $33 million is much higher at where you ended it last year at $13 million.
Maybe you could talk about where that number is relative to historical standards, and do you expect
to get down to the low to mid-teens at the end of the year?
Brad Almond: Its a little higher than we would have expected it would be in June given Im
sorry, end of September given the order volume. And what that is attributed to is we really
started to see the pickup in the business in the September timeframe, so September picked up, we
did very well in September. Those items sat in accounts receivable, that resulted in a lower cash
balance than I would have expected in the end of September at $35 million, but also represents why
todays cash balance is actually $47 million. So weve begun collecting those. And, yes, we would
normally expect to end in the low teens at the end of the year, but this year could be an anomaly
depending on the success in these sizable transactions and when theyre closed.
Sean Sawler: Got it. Okay, great. And then the cost savings that you talked about, the $12
million, when you said you expect half of it to hit in 2012 was that mostly in the third and fourth
quarter, and is that half on a run rate basis or maybe you could kind of talk about the timing of
those cost savings and when you expect to experience the rest of them next year?
Brad Almond: Correct, so weve made reductions that will yield annual savings to date of $11
million, and we have realized, we expect to realize about half of those this year. And, yes, they
are backend loaded to Q3 and Q4, to a lesser degree in Q2, but the most substantial reductions we
made were in the July timeframe. So were beginning to see them now and, as I talked about in my
comments, this year weve elected to reinvest a significant portion of those back into the business
into mainly R&D efforts, digitizing content, and our growth areas.
And also on the call I followed up with commentary of next year, when we expect to fully realize
all $11 million of the savings. We have a strategic decision to make in terms of how much of that
we reinvest and how much of that we allow to book to the bottom line as EBITDA improvement, but we
expect to realize $11 million in full next year.
Sean Sawler: Okay, great. And I just have one last question. On your Q2 call you gave guidance,
and I guess it wasnt guidance, it was you said that if in Q3 and Q4 of 2012 if you were to win
and Im forgetting the amount, X amount of big contracts EBITDA
Ron Klausner: $25 million.
Sean Sawler: yes, all right. So $25 million of contracts, EBITDA in the back half of the year
would be higher than the back half of the previous year in 2011. Is that guidance still intact or
and maybe can you talk about where you are on that $25 million number?
Brad Almond: Sure. So lets start with the reference of that were at a little over $22 million
EBITDA trailing 12-month through Q3. And the comment I made on this call is to try to break this
down a little bit for you, is that if we remain flat in our order volume that would be essentially
our floor EBITDA, were essentially keeping spending relatively flat. And if we continue to stay
above last years order volume and do better than prior year we would actually start adding back to
that $22 million.
Now the magnitude of it is whether or not we get to the $25 million that we talked about on the
last call would be whether or not we secure a certain portion of these sizable deals. So I think
the way you should think about it is we think $22 million is the floor, ability to build back on
that number to get back to $25 million or north of $25 million depending on some success in these
bigger deals were still working on for this year.
So the statement essentially remains the same. I think the only thing thats changed is the
non-sizable transaction piece of our business has actually improved, and Im seeing some EBITDA
improvements simply from that smaller deal run rate or the non-sizable deal run rate and,
therefore, the sizable deals will have a more positive impact if were able to get some of them.
Sean Sawler: Understood. Well, thanks a lot and congrats on starting to stabilize the business.
Ron Klausner: Thanks.
Operator: And the next question will come from A.J. Guido of Golden Tree.
A.J. Guido: Hey, guys. Thanks for taking my questions. Can you repeat what you said about
Learning A-Z and ExploreLearning? You gave some order volume numbers, I dont know if they were
exactly the same, but you said up 28% third quarter for LAZ?
Ron Klausner: LAZ, yes, LAZ grew 28% in the quarter, and in October exceeds, year-to-date, exceeds
all of 2011.
A.J. Guido: For the fourth quarter 2011?
Ron Klausner: No, no, so October year-to-date we exceed all of 2011 for Learning A-Z.
A.J. Guido: Okay.
Ron Klausner: And ExploreLearning at the end of October is up 8% year-to-date versus the same
period in the prior year.
A.J. Guido: What was that for the third quarter?
Ron Klausner: For who?
A.J. Guido: EL, ExploreLearning, sorry?
Ron Klausner: I didnt share it, did we, EL for third quarter?
Brad Almond: The EL, ExploreLearning was relatively flat at the end of Q3, and then they had quite
a few sizable transactions that literally flipped from the last week of Q3 into the early week of
Q4. And so now where we are year-to-date were back on track with where we thought wed be for
ExploreLearning and growing, but at through Q3 we had a little bit of a delay and then its
caught itself back up through October.
Ron Klausner: So Q3 is a flat, by the end of October or even now were close to double digits
A.J. Guido: On EL, alone?
Ron Klausner: EL alone, correct.
A.J. Guido: Okay, so I mean you feel good about both those business lines? I mean those have been
trending really well, but you dont really they continue to grow kind of in where you want them,
Ron Klausner: Continue to grow, continue to diversify, as far as the products continue to
diversify, as far as geography very high retention rates, feel very good about those businesses,
very, very loyal customers.
Brad Almond: We would not expect ExploreLearning to be anything less than a double-digit growth
company for the year.
Ron Klausner: And thats LAZ and EL, by the way.
A.J. Guido: Okay, just two more, if I may? Brad, you made a comment regarding the 10% order
volume kind of this time, for this quarter versus last year, up until this point. Were there any
large deals in the second half of the fourth quarter 11 last year? I mean looking at the numbers
I dont think there were, that would kind of be a difficult comp for the rest of this quarter, or
you know what Im saying? Like from November 7th of 2011 to December 31st of
2011 were there any large deals that would make it a difficult comp for this year that would kind
of erase the 10% order volume you have so far?
Brad Almond: Very little, there was one deal that was just under or at $1 million, but other than
that it was all medium to smaller sized deals, as we would typically expect in Q4. The only
quarter that weve had in recent history in a Q4 that was abnormally full of big deals was 2010,
but 2011 was very, very routine, so to speak. And, as I mentioned, where we are year-to-date today
is devoid of these sizable transactions, both in this year and in prior years, weve got a nice
pure 10% up comparable number year-on-year right now.
A.J. Guido: Right, and with expectation of or not expectation, with possibility of one or two
larger deals coming through. Can you, Ron, I was probably doing other things when you talked about
it, but on the pipeline in the beginning you mentioned a $9 million deal and then maybe a couple
for $5 million, can you just go through that again for me and maybe provide a little more color?
Ron Klausner: Sure. There are nine $1 million deals, and there are two within that nine that are
over $5 million deals.
A.J. Guido: And the expectation on those is if you close them that would be by the end of the
fourth quarter, assuming that it goes through or not?
Ron Klausner: Well, some it is conceivable that some will leak, but right now we are doing a
full court press to try to get closure. To be clear, these nine deals did not just start October
1st, most of these deals weve been working all year long and we have advanced these
processes, some look more likely than others, but theyre really large, theyre high profile, very
visible accounts. We need the appropriate levels of approval, including Board approval. So were
not banking on them, but we feel relatively positive.
A.J. Guido: Okay, so I guess the question is, Brad, when you look at the 10% where you are now you
would actually take some declines in the second half of this quarter to get back to flat, is that
the way to think about it or not really?
Brad Almond: Obviously, if we were to end the quarter flat we would decline in the back half of
the quarter relative to where we are today. So were trying to look at this on a step at a time,
and a conservative approach says we at least expect to be flat, that allows us to fall back a
little bit if things go south on us, but weve actually built-up a nice little cushion for
ourselves, at least halfway through the quarter. But our expectation is that we will actually do
better than flat.
A.J. Guido: Yes.
Brad Almond: And then, as you mentioned, with some success in these sizable deals that we would do
better than that even.
A.J. Guido: Okay, thanks, guys. No more questions.
Ron Klausner: Thank you, A.J.
A.J. Guido: Thanks.
Operator: (Operator Instructions)
And our next question will come from Andrew Finkelstein of Barclays.
Andrew Finkelstein: Hey, guys.
Ron Klausner: Hi, Andrew.
Andrew Finkelstein: Hey, a couple questions. One, its obviously great at Learning A-Z and
ExploreLearning, sounds like theyre doing really well. Just wanted to come back to Kurzweil and
IntelliTools, which really seem like theyre struggling. I think in the press release maybe it
said that theyre mostly being offset by declines in those two product lines, so I was wondering if
you could give us a little more color there? Id like to start with that.
Brad Almond: They have been the performance this year so far in KI has looked similar to
Voyager. It has been an area thats been under a lot more pressure, obviously, than Learning A-Z
and ExploreLearning. But Ill at least give you one positive item, which is that KI at least early
on in Q4 is having at least some resurgence. KI through the midway point of Q4 is actually up 30%
over prior year. So KI obviously had some ARRA funded success in 2011, and as we worked ourselves
through that and that period ended, were at least starting to see some better comparables, at
least through Q4 so far.
Ron Klausner: Weve also migrated more to a SAS-based model, not fully migrated, so weve gone
from a perpetual to SAS that we think will be more predictable, web based as opposed to server
based. So market, biggest factor, second factor is model.
Andrew Finkelstein: Okay, great. And then on Voyager, just if you could talk more about it? I
think once you mentioned that you were working on a new more heavily digital version of the
product, but where do you see the product heading? And I dont know in the mix of the nine big
orders, I dont know how many of them are Voyager, but I would think thered be a few. But I dont
know if you could tell us just more about where you see that product heading, what you need to
maybe do to it to make further improvements there, or is it just the overall funding environment?
Ron Klausner: Well, theres no question it starts with the funding. The funding is a big issue.
Number two is, and Vernon alluded to this, I do in my judgment we had some execution issues last
year, did not have nearly as strong a pipeline, not as robust a pipeline. There is stress on large
intervention based capabilities for I hate to use the nomenclature tier two students.
So what do I mean by that? These are children that are at risk, but are not the special education
children in the most simplistic language. So its an area that has been a strong spot for us to
accelerate the learning of these kids that have been at risk, and in part because of funding
pressures, probably large part because of funding pressures, that market has a lot of stress on it,
not just by us or with us, but by others, as well.
What we are looking to do is more of the learning to become student directed learning, so not
eliminate the teacher, we believe the teacher is absolutely imperative for success. How do you
make the teacher effective? But instead of making it teacher led instruction being the primary
focus and the technology being more purposeful practice, were turning that model upside down, and
we believe that we will see growth and gain.
So part is execution, part is the capabilities and how we go to market with those capabilities. We
think were coming out with some pretty exciting capabilities. As I mentioned, the teacher
candidacy scoring model, there is going to be over these next three to five years because of the
Baby Boomers retiring record setting numbers of teachers that retire, the processes being used
today are very intuitive based. We think capabilities, like that, have white space and are
distinctive. So were trying to migrate our solutions without totally crashing earnings, and I
feel a lot better than I did eight months ago, but we clearly have a lot of work still to do.
Andrew Finkelstein: Is there a plan for Voyager to for a more digital version of it or a change
or an upgrade?
Ron Klausner: Oh, well, there is. I mean youve got to look at each of the capabilities. So
adolescent literacy, which is overwhelmingly dependent upon print based and teacher led, thats
what Language Live is striving to be. So, yes, we will continue to offer those teacher led, print
based capabilities, but over time we will look to migrate more and more to this blended learning
environment where mastery based eLearning of the child becomes a focal point. And thats something
we are doing in general. We just overhauled and enhanced our math capability, more of that math
capability is also digital assets.
Andrew Finkelstein: Okay, and then just go ahead?
Vernon Johnson: Im sorry, you did ask one other question, and I wanted to make sure we answered
it. All of the deals, the big deals that Ron was talking about, are Voyager deals.
Ron Klausner: Except one, Vernon. Eight of the nine are Voyager.
Vernon Johnson: Okay, okay.
Andrew Finkelstein: Okay, and then last, on that last quarterly conference call you said that $6
million of the $25 million was signed up, so it was sort of $19 million to go. I assume that from
the sound of the pipeline its still $19 million?
Ron Klausner: Its not $19 million, but its a number that we havent made many inroads on.
Andrew Finkelstein: Okay, and any more progress on the service side? I know there was some good
deals or progress on that side?
Ron Klausner: So services, theres two aspects of the service in our Company. One is this Ed
services for turnaround, where we expect to do north of $8 million, so very strong growth versus
prior year. We expect to continue to see an acceleration in 2013. And then we have the services
that go along with our product that are doing better than the product declination. So those
customers still value our ability to assist their teachers and assist their administrators in
deploying our programs or in just helping them how to go about teaching, how to teach reading, et
Andrew Finkelstein: Okay, and then just one last one for me, following up on the expense side I
guess maybe where I was expecting some more of the savings to come through and youre investing
again, I guess it sounds like clearly youre doing better into the fourth quarter, so has that been
the change where you guys have decided to put most of that, if not all I thought some of those
savings would come through second half, but the expense base is still higher than it was in
revenues, are generally still, you know, were still below where we were, is this sort of just the
new base of expenses per the revenues, you know, where we are right now?
Brad Almond: Its absolutely not the new base. So, again, weve made a strategic decision to take
the savings we had this year and reinvest them because we fundamentally believe that stabilizing
the topline is and was going to require this year some substantive investments in R&D and to a
lesser degree in sales and marketing. So we made those, and we wanted to make sure that we could
essentially fund them via the cuts we made, so we didnt simply have cost creep.
But now as we enter next year what I would say, on the comments on the call, now we have a decision
to make in terms of how much of those savings when fully realized do we allow to reinvest and how
many do we bank for bottom line improvement? And what I said on the call is that we do intend to
have more of those, significantly more of those shift to be a bottom line improvement versus all of
it going to reinvesting in other areas. So a long way to say we do expect to bring the cost base
down in 2013.
Ron Klausner: So some of the bets we made to go from more of a print based centric solution is
where we invested to go to more of eLearning centric solutions in 2012, and I absolutely support
Brads point that more of those reengineering savings will drop to the bottom line in 2013.
Andrew Finkelstein: Okay, great. Thanks, guys.
Ron Klausner: Thank you, Andrew.
Operator: And next we have a follow-up from A.J. Guido of Golden Tree.
A.J. Guido: Hey, guys. I just want to clarify something. Ron, the last question you got, Andrew
mentioned you guys said you had $6 million already in the bag, kind of in the third quarter, that
was mentioned on the last call. And I thought that was to the $25 million you needed. Now you
guys say youre at $22 million, and then
Ron Klausner: No, no, no, no.
A.J. Guido: Okay, what exactly
Ron Klausner: You want to handle the $22 million?
Brad Almond: Yes, let me try. First, we had $25 million in big deals that we were chasing in the
whole back half of the year, so lets not confuse that with the EBITDA numbers. We had won $6
million of them in Q3, many of them large service agreements, whereby we would see the revenue
recognized in Q4 and Q1 of next year, which tie that into my comment that we had revenue decline
slightly more than orders declined as we had some of that revenue deferred.
So $19 million left to go in big deals, sizable transactions that were chasing, and Ron outlined
that there is nine of them over a million dollars, with two of them more than that. So if you add
that up, $19 million left to go, its pretty close to that number, probably a little bit less in
total, some of those can come down a little bit.
But were still out there chasing roughly that same number of deals and the same deals for this
year. And should we be successful in all of those deals, and it would be unreasonable to expect
that we would, then EBITDA would substantially increase over the $22 million that were on a
trailing 12-month basis now.
Ron Klausner: So let me just make sure and build on that clearly, of the majority of these large
deals we have not closed them. Some have dropped out and the nine I have identified, most of those
were in Q3, as well, in the pipeline.
A.J. Guido: Okay, and, Brad, your comment was that it would be unreasonable or not unreasonable to
assume that you close all of them?
Ron Klausner: It would be virtually no probability that well close all nine. You can take to the
odds, unless you think you can predict every NFL score against the handicap this weekend, then
maybe its similar odds.
Brad Almond: Not to say were going to lose those deals, it would be unreasonable to expect that
all come to fruition this year. And theyre going to adjust, these deals are theyre moving
around, budgets are getting set, funding levels are being secured, they flux up, they flux down,
they move in and out of quarters. And, but its reasonable to expect well get some this quarter,
just the magnitude of them is not yet known.
A.J. Guido: Okay. Thank you. Thanks for clearing that up.
Ron Klausner: Thank you.
Operator: And this concludes our question and answer session. I would like to turn the conference
back over to Brad Almond for any closing remarks.
Brad Almond: Thank you, Operator. Just want to thank everybody for participating on todays call.
We look forward to updating you with our yearend results in the beginning of the new year. Thank
you very much.
Operator: The conference is now concluded. Thank you for attending todays presentation. You may