Credit Suisse/First Boston and UBS Warburg Media Conferences
December 6, 2000
The presentations at this meeting contain certain forward-looking statements that are based largely on the Company's current expectations. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking statements. For more information about these forward-looking statements and related risks, please refer to the section titled "Forward-looking Statements" in Part 1 of the Company's Annual Report on Form 10-K and the section titled "Risk Factors" under "Shareholder Information" on the Company’s website, www.washpostco.com.
Remarks by Jonathan Grayer [Slide
1]
One of the challenges of running an education company within our large media and broadcasting corporation is that it is hard to explain and make visible what is so attractive about our company, and that is what we are going to try to do today by making it understandable and taking it apart and putting it back together.
And one side note, because of time constraints, I have had to cut all of my jokes out of the presentation, and I am sure you know how funny the test prep industry really is.
[Slide 2]
I will start with our mission statement because I think, and I hope, that when you are done hearing about our story, all of our moves or most of our moves in the last couple of years reflect an adherence to this as our core operating position. It is simply that, "Kaplan helps individuals achieve their education and career goals. We build futures one success story at a time." Our test prep business, our postsecondary business, our online businesses, our business called SCORE!, for kids, all operate under this guiding principle. We try to do it at a fair return to shareholders while growing our revenue base and helping a lot of kids and adults do well in life.
[Slide 3]
What does that mean on the revenue side? How big is Kaplan? Well, you will see we have grown nicely on the top line. As a point of note, the current management team took over Kaplan in the beginning of 1992. From '92 to '97, we grew from $75 million to $117 million. In doing that, we put together a lot of the infrastructure that we have used to drive the growth that you see. We have gone from $117 over this period. We will do $355 million in revenue this year.
The green box shows that we will recognize $55 million from our newest acquisition, Quest Education, of Quest's much larger revenue base during the year 2000. Quest is the postsecondary chain of schools we bought out of the public market. That is our by-year revenue, and I am going to now take you through what makes up that revenue and why we think we have such a good hand going forward.
[Slide 4]
Kaplan has five operating units: Test Prep and Admissions which is the business you know us for, the one that Stanley Kaplan founded 63 years ago; SCORE! Learning, our business for kids; Kaplan Professional, our businesses that serve the corporate and professional marketplaces; The Kaplan Colleges, our online distance businesses; and Quest Education, our newest addition which is a chain of postsecondary schools serving Allied Health and IT education needs for adults.
[Slide 5]
Test Prep and Admissions, in our sixty-third year, is still viewed as the core business of our company, the one that our brand is most recognized for, but at the end of this presentation, you will see we have moved well beyond it.
[Slide 6]
We have four distribution channels: our centers, our online site, our publishing assets, and our business into schools. I will first look at each one of them.
[Slide 7]
We have nearly 200 centers in the U.S. and abroad. We operate at 35-percent center margins with fully allocated regional management expenses, and if you know anything about the retail business, those are quite healthy.
We have more than 3 million alumni who have taken a course. Hopefully, some of you are in this room.
[Slide 8]
We have centers abroad, and we have a big business serving international students and professionals in English instruction and university preparation. We offer housing for those who come here. We offer sponsorship services. We have 11 U.S.-based English language centers and 34 licensees operating abroad.
[Slide 9]
Our online site is the largest provider of online test prep. We will do over $2 million in revenue this year, recognizing students who never came to a center. More importantly, this is the backbone of our center's management system now. Many students are never contacting a center director to sign up for a course to get the material to pay for a course. It is all happening online, and that improves margin. So, interestingly, our dot-com site is in the short term the greatest economic value to shareholders, and is improving the margins of our center business by taking out the need for telemarketers and processing paperwork.
We do have big plans for the learning online, and as I said, we are currently, by far, the largest provider of online test prep.
[Slide 10]
Our publishing business has been a big success in the last couple of years. We have more than a hundred titles in book stores. We didn't have a business 8 years ago. We are a strong third and nipping at the number-two player. We publish guides with our sister company, Newsweek, that you will see on newsstands, and we dominate the software business. We have 72-percent market share, according to the latest PC data. The top reselling shrink-wrap software titles in test preparation are ours. This is a business that obviously is questionable in the long run, but we are dominating that retail shelf.
[Slide 11]
Our final distribution channel is schools. Legislative initiatives are leading to money being made available to underprivileged kids for SAT prep and statewide assessment services. In 2000, we anticipate operating in 600 schools, and we expect to grow that dramatically over the years. The Hayden bill in California has made about $12 million available just for SAT in schools.
[Slide 12]
Let's look at little bit at the metrics and why we are so proud of what we have done here. We are the first major company to offer test prep online. We lead by a long way anyone other than the test maker itself in providing computerized tests. We estimate that we will give 775,000 computer tests in 2000. This is a huge competitive advantage because simulating the test experience can only be done in a computer lab like the ones we have, and if tests like the CPA which recently announced that it was going computer come online, we should have big opportunities there.
We are by far the largest provider of LSAT and MCAT prep. Those are the tests for law school and medical school.
[Slide 13]
We have over 90-percent market share among medical board course-takers for U.S. and international students. We are a large provider in general of allied health education, as you will see later.
On English language, our revenue is growing 20 percent a year. This is in a business that is seeing a lot of failed attempts to grow large. We are optimistic about our ability to do it slowly. It is a tough business with all kinds of issues around currency fluctuations, but we had a very good year this year. In addition we served more than 50 percent of the market of dental professionals.
[Slide 14]
In 1999, we did $151 million. In 2000, we will do $165 million. We are finishing very strong. Six of the last 7 months have been up more than 10 percent as we continue to grind in the center-based business. The beginning of the year had very low test figures because people were staying in their jobs longer and not going to graduate school, but we are finishing the year with the wind at our backs.
[Slide 15]
SCORE! is our business for kids. This is a picture of our Advantage Program at one of our centers. Kids come because they want to, not because their parents are making them.
[Slide 16]
We have three divisions in SCORE! Learning: our educational centers; SCORE! Prep which is an in-home tutoring business; and eSCORE.com, our online efforts.
[Slide 17]
We have 142 centers in 2000. We are going to slow down a little in 2001. We have been opening up almost 40 a year because we are going to be working on pricing and enhancing the offering, but we should resume opening up a lot of centers after that. We are not going to franchise this business. We are very comfortable with the long-term returns and we like operating it.
We have had 40,000 students in 1999. We will have 60,000 this year, and we will go to 75,000 in 2001. These are students in families that have deep relationships with us. We have two programs, the Advantage Program which you saw, which is based on an 8 to 1 coaching model, coach to students. Sixty percent of those students come in testing at or above grade level. They come in because they want to learn more, and they enjoy the process of interacting with a coach. The training business is like the Sylvan model of helping kids who are a little behind catch up.
[Slide 18]
SCORE! is a different type of learning place, and if you've ever been there, you know what I mean. If you stand at a center in California, where the centers have been open the longest, at 2:30, you will watch kids run to get a seat at a SCORE! computer. It's fun. It's energetic. We use an adaptive media curriculum, and our coaches are recruited from the top schools.
Before the Internet bubble emerged, we were one of the largest employers at Stanford. We hired 42 Stanford grads in 1996. We have since gone elsewhere. Recent times will probably see us return. We have very talented young people coming to work in our centers, and that's a big part of why SCORE! has been successful.
[Slide 19]
Here's the center model, which we have really not shown to a group like this before. Centers become cash flow positive at about 225 students. Our mature centers are averaging about 300 students. A center breaks even, fully allocated costs in about 14 months. The overhead for the SCORE! centers is $8 million.
If you do the math around those metrics, you'll see that we can build quite a large business at 300 or 400 centers, which is what our goal is.
[Slide 20]
SCORE! Prep is a high-touch in-home one-on-one tutoring business. It serves middle and high school students. We bought it as a very small business and we've grown it in two years to $4.5 million. Next year it should turn profitable and grow substantially above that.
[Slide 21]
eSCORE.com is our website that helps parents and kids make their way in educational services. We have 110,000 registered members. We recently launched our first online tutoring effort.
Like Tom Might at Cable ONE, I am spending a lot of time making sure we get the model right, that it is leverageable, and that it makes money on a variable basis before we launch a broad set of services. And that will be happening over the next year or two, but our brand continues to grow. Where we operate, SCORE! is well known. It is well known by families and the kids, and that should lead to a very profitable business when technology and especially voice-over IT technology gets stronger.
I thought I would show you a look at SCORE!'s brand by running a brief commercial that ran during the year.
[Slide 22]
MR. GRAYER: One thing about SCORE! is that kids have lots of energy for what they like, and all you have to do is make sure that learning is one of those things and that is what we try to do at our centers, and when we do it, we see dramatic results in the performance of kids.
[Slide 23] Pearson recently bought a small stake in SCORE!, put $10 million in. We've got premium placement for eSCORE.com on the Learning Network which is on the front portal of AOL's Education Channel, and we are co-developing adaptive technology to better serve our students going forward.
[Slide 24]
SCORE!'s revenue in 1999 was $25 million. This year, we will do about $42 million. It is the first time we haven't doubled since we bought the company, but we expect to continue to grow the company dramatically. It is a wonderful place. My daughter, who just turned six, is just starting, and I waited until then, and, hopefully, you will get a chance to experience it if you have your own children.
[Slide 25]
Our professional business serves professionals and corporate buyers. We have a number of companies. We just announced yesterday that we bought the other player in high-end IT training for law firms and finance firms. That company is called Speer. Our combined company is now Perfect Access Speer. Kaplan Professional also includes Dearborn, the largest provider of securities and insurance training; Schweser which dominates the CFA market; Self Test which is a big provider of pre-test testing; and our Real Estate Education Company.
[Slide 26]
We have a basic approach that we have borrowed from our test prep business. We assess needs. We provide a variety of media curriculum to help someone meet those needs, and then we help track the performance of both the students and the corporation who cares about how she or he is doing. That is how we approach this business, and that is our take on all the companies that we own.
[Slide 27]
We offer real estate, financial service, insurance and information technology content under the brands that I just described.
[Slide 28]
We have market leadership in all the firms that we own. We are the leading provider in securities licensing training for financial services professionals under Dearborn.
We have the largest selection of online insurance and securities for continuing education courses, which has become a big issue in the insurance industry, and we are the largest provider of CFA training, which is increasingly becoming the degree that matters most.
[Slide 29]
We are the largest provider of real estate education materials to real estate schools and associations. We are the top provider of software education and training for legal professionals, and we just consolidated that position even more, and we are the leading provider for practice tests for technical certification with 75,000 candidates using our software before they take the actual test. That is a treasure trove of opportunity for us, both at Kaplan and BrassRing as we have these longstanding relationships with IT professionals.
[Slide 30]
In 1999, we recognized $59 million of revenue. On a pro forma basis, that would have been $70 million. This year, we will do $80 million, but most importantly, we have staffed this unit with top-flight management, and we expect it to grow dramatically. In fact, on a revenue basis, I think you will see the most growth from this division over the next year or two.
[Slide 31]
The Kaplan Colleges is our exciting distance education group. It has a variety of efforts within it. It is one that has gotten a lot of press, and, clearly, it is one that has driven a lot of interest in the IPO market as Digital Think and University of Phoenix have gotten big valuations based on the businesses that we're in here.
[Slide 32]
We have three units: Kaplan College, which is an NCA-accredited institution offering post-secondary degrees, associate and bachelor degrees; the College for Professional Studies, which is DETC accredited and which offers certificates for professionals who are trying to advance their careers; and Concord University School of Law, which you might have read about, which is the first online law school also accredited by DETC.
[Slide 33]
All of our offerings center around the concept of learning to earn. That is the business that we are in. We are helping adults--through education--get better jobs that they enjoy more, that they are paid more money for. We offer bachelor, associate, certificate, and diploma programs in the fields of business, IT, law, nursing, and paralegal studies. We are very focused on education that helps people do better in life, back to our mission statement. So we are not competing with the Harvards and Stanfords of the world right now.
[Slide 34]
Why is online learning such a big business opportunity? Well, it removes geographic boundaries. Obviously, if you live in Montana, it is hard to get to a law school. Concord is filling that need. It offers flexibility and convenience. You can work when you want. What we have learned from looking at our online records is we have a lot of insomniacs in this country. A lot of people work in the middle of the night, and that is impossible to do if you can't access content on line, and it expands access.
[Slide 35]
Our strategy is to help people advance their careers, use technology to develop learning-centric education in communities. We are fond of saying that in fourth grade, you don't remember your textbook, you remember your teacher. Our online efforts are no different than that. Technology is not the driver of profitability. The ability to use technology to create a community is, and we are going to offer accredited degrees and certificate programs as high-price points. We are not in the course business. We are in the program business, and we are looking to average north of $5,000 per program.
[Slide 36]
Here is a quick example of an associate in management degree offered through the Kaplan College School of Business. It is NCA-accredited, which is the highest level of accreditation a post-secondary institution can have. It is instructor-led, meaning it is interaction online with an instructor. It costs $18,000 for 90 credit hours, and you can go full or part time.
[Slide 37]
Concord Law School, the first law school only online. We are the second largest part-time law school in the country. This year, we had 700 students enrolled at $5,200 a year. We hope to grow by at least that amount next year and to finish next year as one of the largest law schools in the country.
[Slide 38]
All this added up to $11 million of revenue in 2000, and we are expecting dramatic growth out of our distance learning business and profitable growth in the coming years.
[Slide 39]
This slide shows a picture of Hamilton College in Iowa, an important and big school within Quest.
[Slide 40]
Acquired in July of 2000, Quest is a leading provider of post-secondary education. We currently have 14,000 students in 34 schools in 13 states. We offer bachelor and associates degrees, diploma programs in allied health, IT, and business administration.
[Slide 41]
This is a map of our schools. It looks sort of like our cable map, but it offers an exciting look at what we can do with the assets.
[Slide 42]
How are we going to grow it? Well, obviously we can offer new courses. Thirty percent of our schools still don't have IT programs in it. Quest was founded as an allied health education school.
We are going to enter new markets. We only have 34 schools. We are operating in 13 states and can expand within those states and offer programs in more states, and, obviously, we are adding online offerings to further expand access.
I will also add that Quest does better in recessionary times. These people return to education to improve their station for when the better times come. So Quest performance over the last couple of years, which has been very good, has been, again in what are not ideal market conditions.
Our test prep business, while not as dramatically similar, is directionally the same. So, if we do, in fact, experience some bumpy times ahead, that will be good for our two biggest units.
[Slide 43]
Quest revenue in 2000 was $128 million. As I noted earlier, we recognized $55 million of it because we closed at the end of July.
BrassRing is largely owned by Kaplan. The Washington Post Company owns 42 percent. The Tribune Company owns 27 percent, Gannett 23 percent. The venture capitalist, Accel, owns 8 percent.
The key issue for BrassRing is to be the best out there, and companies go to us because they know what they want. They just need to find the people who have those skills. The company has a number of major clients including companies such as GE, Cisco Systems, and Intel. All English-speaking resumes at GE go to BrassRing Systems to be scanned into a searchable database and then sent through the Internet back to the hiring manager's desktop. It is a very exciting place to be, and now we are trying to leverage that desktop position. We are growing at a rate of 30 percent a year.
[Slide 48]
Here is the pie graph of Kaplan's revenue. It does not include BrassRing. When I started giving these presentations, Test Prep and Admissions made up all of that pie, and we had some hopes that were slivers. As you see here, for 2000, it makes up less than half. Test Prep is still our largest division. As time evolves, we expect to grow Test Prep at 10 to 15 percent a year. Our company will grow faster, and Test Prep's percentage will shrink. It defines our brand, but we have lots of exciting places to take Kaplan, and we expect Kaplan to be a very good place to invest in the coming years.
[Slide 49]
I will finish by laying out how we think about our company and why it is so exciting. We really span the age spectrum, lifelong learning. We have divisions in every age market from SCORE! at the youngest age groups. Kaplan has prep for high school and folks in their twenties; Quest for folks in their twenties and early thirties; Kaplan College for the education needs of people as they get older and have more demands on their time; and Kaplan Professional to help corporations like the ones you work for, and the professionals that work in them, do better.
That assortment of assets really allows us to attack and offer programs in any growing market segment in the education industry, and we think that will bode us well for offering good returns to our shareholders.
[Slide 50]
Thank you.
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President and CEO
Kaplan, Inc.
