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Washington Post's Kaplan unit sees new enrollments sink 47 percent in 4th quarter

By Steven Mufson
Washington Post Staff Writer
Wednesday, February 23, 2011; 9:57 PM

The Washington Post Co.'s Kaplan education division reported Wednesday a 47 percent plunge in new enrollments for its higher-education programs in the fourth quarter of last year as the company introduced a new program to respond to criticism of its marketing tactics.

The drop in new enrollments signaled the start of what the company concedes will be a difficult period as Kaplan, the engine of The Post Co.'s earnings, adopts measures to mend its reputation and comply with tighter Education Department regulations.

Overall, The Washington Post Co. reported a fourth-quarter profit of $79 million, down 3 percent from $81.7 million in the same quarter of 2009. Revenue was $1.2 billion, rounding off to the same as the year before.

After the announcement, The Post's stock tumbled $25.83 a share, down nearly 6 percent to $414.55.

Thanks to $405 million in share buybacks that reduced the number of shares outstanding by more than 10 percent during the course of the year, the diluted net income per share of common stock rose 8 percent to $9.42 in the fourth quarter of 2010.

The company benefited from strong earnings at its television broadcasting division, lower expenses at its newspaper division and last year's sale of the money-losing Newsweek magazine, which in 2009 was still a drag on the company's finances.

But the cable television division saw higher costs. At the flagship Washington Post newspaper, circulation sank and print advertising fell 12 percent in the fourth quarter from the year before. That $10.6 million decline was not offset by the 13 percent, or $4 million, increase in combined online revenue from the paper's Web site and Slate.

For the full year, The Post Co. chalked up earnings of $277.2 million, or $31.04 a share, up from $91.8 million, or $9.78 a share, in 2009. Revenue rose 8 percent to $4.7 billion.

Much of that was due to the newspaper's recovery from heavy losses in early 2009. For the full year, without counting depreciation or one-time pension and early-retirement costs, the newspaper division earned $10.5 million, compared with $71.8 million in losses during 2009.

Despite recent public criticism, Kaplan remained The Post Co.'s biggest area of business. For all of 2010, education revenue amounted to $2.9 billion, up 10 percent from 2009 and equal to 61 percent of the company's revenue. Kaplan's operating income amounted to $330.9 million, up 70 percent from 2009.

But in the fourth quarter, the explosive growth at Kaplan showed signs of leveling off or reversing. Kaplan had operating income of $64.9 million during the last three months of 2010, down 18 percent from the year before, on revenue of $699.8 million, down 1 percent from a year earlier.

The number of students enrolled in the online Kaplan University and at Kaplan higher-education campuses fell to 96,701 by Dec. 31, down 8 percent from a year earlier. That trend could continue, warned Ariel Sokol, an education industry analyst at Swiss bank UBS, because new enrollments are a "leading indicator."

Part of the reason was the phasing in of the "Kaplan Commitment," a program that allows higher-education students to withdraw from courses after a month without paying tuition. No reason is required. The program applies to students who feel misled about courses, who do not have enough time, or who simply feel the courses are not right for them. The program is also designed to improve the track record of Kaplan students for repaying government loans and finding good jobs, two areas in which the Education Department is seeking improvement.

The earnings report Wednesday gave a first glimpse of the effect of the program. The company said 28 percent of eligible students left before the deadline, though The Post Co. said a majority of them left because of "dismissal" by Kaplan. It reiterated that if the program had been in effect for all of 2010, it would have resulted in the loss of $140 million in revenue, much of that coming directly off the company's bottom line.

The Post Co. said it hopes the money-back program will attract new students and improve the retention of students for other courses, but the company also said it was too soon to tell whether that would turn out to be the case.

Other for-profit education companies have also reported large drops in new enrollments, but Kaplan's was among the biggest.

The Kaplan higher-education area, which includes more than 70 campuses and online programs, saw a 12 percent drop in operating income because of lower average enrollment, the implementation of the new Kaplan Commitment program, severance costs resulting from shrinking its workforce and increased regulatory compliance costs.

In its original area of business, preparing students for standardized tests, Kaplan struggled against competitors during the fourth quarter. Kaplan said that it would reorganize to cope with the migration of students to online offerings and that it reduced the number of leased test prep centers, leading to $10.4 million in costs in 2010.

Kaplan's international professional training and postsecondary businesses also stalled in the fourth quarter, with profit sliding 10 percent because of weak operating results in Australia and Asia.

At The Post Co.'s flagship paper, performance improved but many trends remained negative. Daily circulation for 2010 averaged 550,900, down 7.5 percent from the 2009 average; Sunday circulation averaged 763,100, a slide of 8.2 percent.

Comparisons with the previous year were made difficult because of the company's fiscal-year accounting, which resulted in a 13-week fourth quarter in 2010 compared with a 14-week quarter at the end of 2009. But general, classified and retail advertising at the newspaper all declined, even after the different-length periods were taken into account, the company said.

Still, the newspaper division - which also includes Express, the Gazette newspapers, a Spanish-language paper and a small newspaper in Washington state - showed a $19.9 million profit in the fourth quarter, up from $3.2 million, thanks to cuts in payroll, depreciation and other expense reductions, and a 15 percent drop in newsprint costs as lower consumption more than offset higher newsprint prices.

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