Princeton Review Bets On Online Learning | Framingham-based company needs recent acquisition to help it reach profitability
Since its founding in the early 1980s, the Princeton Review Co. of Framingham has been best known for helping students prepare for standardized tests like the SATs.
But with a string of annual losses in its recent history, the company has made a handful of major moves, including jumping into a whole new industry in hopes of righting the ship.
The company has dropped unprofitable portions of its business, has nearly doubled its size by buying up an online degree company named Penn Foster Education Group, and has inked a partnership with the AFL-CIO that could yield millions of new customers.
“It’s not an exaggeration to say that buying Penn Foster and developing the relationship with the National Labor College has completely changed the focus of the company moving forward in the coming years,” said James Maher, who tracks publicly-traded education companies for the San Francisco investment firm ThinkEquity. “It’s not the same Review anymore.”
Rough Patch
The Princeton Review’s traditional business model has struggled over the last decade.
In addition to test preparation services, it also had a K-12 in-school tutoring division and a supplemental education services division, which provided small group tutoring.
But during the past few years expenses have outpaced revenues, mostly in the divisions outside of test preparation, and the company has not turned an annual profit since 2003.
The struggles have been reflected in the company’s stock (traded under the symbol REVU), which has dropped in the past few years from $8.68 in September 2008 to recently hovering around $2 per share.
And while the Penn Foster acquisition is being touted as a bold move to reach profitability, it also comes at a cost. Princeton Review paid $170 million for Penn Foster, and its debt levels ballooned to $140 million at the end of last year. That’s more long-term debt than the company has had in the last five years combined.
Amongst all this change, there’s also been a shakeup at the top. Stephen Richards, the company’s former CFO and COO, left in June and was replaced by Christian Kasper, who formerly worked for AlixPartners LLP, a New York business advisory firm specializing in “urgent, high-impact situations,” the company noted in a June SEC filing.
In the last year-and-a-half, Princeton Review has made a handful of what Kasper called “transformative moves” in an effort to turn the tide.
In March 2009, the company announced the sale of the K-12 division to CORE Education and Consulting Solutions Inc. for $14.1 million. About a year later, in May 2010, the company announced it would close down the supplemental education services division and lay off about 60 employees.
And with the Penn Foster purchase it has entered into an entirely new industry of online instruction. While many analysts see it as a good move, it has its own challenges, too.
“This is a significantly larger market that is significantly more crowded,” said Maher of ThinkEquity.
One of the Princeton Review’s chief competitors in the online degree and test prep industry will be the Washington Post Co.’s education division, which includes Kaplan Test Preparation and Kaplan Higher Education.
Last year Kaplan made a $194 million profit on $2.6 billion in revenue. The Princeton Review is a much smaller business, reporting $143 million in revenue and a $12.4 million loss last year.
Digital Learning
But Princeton Review is attempting to grow its way into profitability, adding Penn Foster and signing a deal with the 13-million-member AFL-CIO labor union.
The deal gives labor union members a discount on Princeton Review products and classes and it creates a partnership between the National Labor College in Maryland and Penn Foster to create online courses.
The need to diversify revenue is not a new priority for Princeton Review. In a 2004 annual report recapping the financials from 2003, the last year Princeton Review turned a profit, the company said: “In order to sustain and increase profitability we will need to continue to grow the percentage of revenue we derive from these newer businesses, while effectively controlling costs.”
Since then, the company has been unable to do either.
As the company’s revenues have increased year-over-year, so have the expenses, and in many years at an even faster rate. Annual losses have been the norm, including a $28.7-million loss in 2007.
The problem, to some extent, is that certain portions of the business, including the K-12 and SES divisions, never quite lived up to expectations, according to Frank McEvoy, an analyst at Craig-Hallum Capital Group in Minnesota who follows Princeton Review.
“The test prep business has historically been the crown jewel of the company, but they’ve had other initiatives that, in general, have not been profitable or have held the company back from becoming profitable,” he said.
Kasper, the new CFO of the company, said he’s proud of recent moves the company has made and is confident about the new direction.
“When you look at our performance, the net income number does not give a whole or complete picture of the profitability in the way we look at it from a business standpoint,” he said. “The company has markedly improved its financial performance and positioning in the market.”
In the company’s most recent annual report, CEO Michael Perik told investors that the company has returned to profitability, if that is measured in terms of earnings before interest, taxes, depreciation and amortization (EBITDA).
Despite the company’s financial history, The Princeton Review still has a strong brand name and offers a service that is in demand, according to Nancy Federspiel, director of College Consulting Services in Bolton, which provides counseling for students and families applying to colleges.
In recent years, some smaller schools have begun to rely less heavily on standardized tests in the application process, but she said large schools, because of the sheer number of applications, still must rely on standardized tests, at least for the foreseeable future. And as long as standardized tests are used, there will be demand for the Princeton Review’s test prep services.
But she acknowledged that price is a problem.
“It’s expensive,” she said. “Everything in the college application world is expensive.”
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