Investors have gotten used to Graham Holdings (NYSE:GHC) having most of its fortunes tied to its Kaplan educational segment, moving beyond its historical connection with the Washington Post. Coming into Wednesday's third-quarter financial report, Graham Holdings investors wanted to see if the company could reverse a substantial loss in last year's quarter, and the company succeeded in doing so thanks to the relative strength of the Kaplan unit. Nevertheless, there were some troubling signs that investors will want to keep a close eye on going forward. Let's take a closer look at the latest from Graham Holdings and whether it can build some positive momentum.
IMAGE SOURCE: KAPLAN TEST PREPARATION, A UNIT OF GRAHAM HOLDINGS.
Graham Holdings makes money despite falling revenue
Graham's third-quarter numbers were mixed but nevertheless encouraging. Revenue once again fell, sinking to $621.6 million, but the 3% decline was slower than the company has seen in past quarters. The much better news was that Graham made $33.1 million during the quarter, reversing a year-ago loss of almost $231 million, and that produced earnings of $5.90 per share.
Taking a closer look at Graham's financials, the first notable thing that appears is that extraordinary items more or less washed themselves out during the quarter. The company reported a $15 million writedown and $3.8 million in currency losses, but a deferred tax benefit of $8.3 million offset a portion of the two negative adjustments.
Once again, the Kaplan unit was most worthy of attention, and past trends continued to appear for the education division. Segment revenue sank by a fifth, but operating income of $16.3 million was instrumental in driving Graham forward. The biggest revenue declines came in the higher education area, where student enrollment continued to decline. However, improved management helped higher education bring in more than triple the operating income that it did during 2015's third quarter.
In terms of revenue, the test preparation business held up the best, with only a 6% decline. However, its operating income fell by nearly two-fifths, and Graham said that its students shifted more toward lower-priced programs, hurting profitability. The international sub-segment posted sales declines of 17% as operating income plunged by more than four-fifths.
Meanwhile, Graham's television broadcasting unit had very good results. Revenue jumped by a quarter to $112.4 million, and operating income climbed by nearly half. Graham noted that the Summer Olympics were largely responsible for the increases, and in addition to ad revenue from the quadrennial sporting event, political advertising and retransmission revenues also rose.
Finally, the other businesses segment enjoyed substantial gains in revenue, with sales climbing 75%. But the unit more than tripled its operating losses, with the company's SocialCode provider of social, mobile, and video marketing solutions posting considerable operating losses.
What's ahead for Graham Holdings?
The big question facing Graham Holdings is how well Kaplan will be able to hold up over time. At the higher education division, new student enrollment was down by a sixth during the third quarter, adding to a downward trend that has sent overall new enrollments down by a quarter so far during 2016. Total students at Kaplan University weighed in at just under 34,500, a fifth less than it was at the end of September 2015. The company also reported a decline in the number of enrollments toward associate's degrees, with those seeking bachelor's degrees or participating in certificate programs rising by roughly equal percentages.
Test-preparation enrollment has held up better, but even it showed some declines. So far in 2016, enrollments are down 1% when you exclude new-economy skills training. Moreover, the investments in broadening its offerings has hurt Kaplan Test Preparation's bottom line, and it will take time for new programs to prove themselves and start generating positive results.
Graham Holdings' stock didn't immediately react to the news in pre-market trading following the announcement, and its stock price has stayed in a relatively tight range throughout 2016. Graham will need to see Kaplan perform more consistently and strongly in order to reassure investors that the overall company can deliver faster growth in the long run.
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