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EPAX > SEC Filings for EPAX > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for AMBASSADORS GROUP INC

Form 10-Q for AMBASSADORS GROUP INC


6-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933,as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements may appear throughout this report, including without limitation, statements in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "future," "opportunity," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. For a detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, please refer to Item 1A Risk Factors disclosure in our Annual Report on Form 10-K filed on March 12, 2012. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Introduction

Ambassadors Group, Inc. is a socially conscious education company primarily engaged in organizing and promoting worldwide educational travel programs for students through a direct to consumer revenue model. We operate student travel programs primarily using the People to People brand under a long-term exclusive license agreement. We have been traveling students on People to People programs for over 50 years and with over 500,000 alumni. We believe that our association with that brand and our own 45 years of experience in the educational travel industry give us both a strong awareness in the market and a high level of credibility.

Our core program offering is an international destination trip for U.S. students in the 11 to 17 year old age group ("Student Ambassadors Program"). We also offer domestic destination travel programs for U.S. students and international students from over 60 countries focused on leadership and education ("Student Leadership Program"). During 2011, we began to expand our in-bound travel programs by establishing a Beijing office traveling Chinese students on U.S. destination trips ("People to People - China").

In addition to our People to People student programs, we operate professional travel programs for adults under the People to People brand ("Citizen Ambassadors Program") and a student travel operation under the Discovery Student Adventures brand ("DSA"). Our DSA program is associated with Discovery Student Education and operates through a teacher recruited revenue model. Lastly, we operate BookRags (www.bookrags.com), an education oriented research website which provides study guides, lesson plans and other educational resources to students and teachers. The site attracts students and teachers each month to its millions of pages of content, which includes internally developed material, licensed material, and user-generated content.

As further discussed below, our operating results depend on the number of travelers that attend our programs ("travelers" or "delegates"), the fees we are able to charge for each traveler ("gross revenue"), and the direct costs associated with the traveler's itinerary including airfare, hotel charges, meal costs, event and location fees, chaperone costs, tour manager fees, and the cost of in-country travel ("cost of sales"). Our business is highly seasonal and the second quarter is typically our highest period for gross revenue and cost of sales activity. The majority of sales and marketing expenses are incurred in the third and fourth quarters of the year to attract delegates, while the associated revenue is generally recognized in the second and third quarter of the following fiscal year.

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Executive Summary

Our strategy is to maintain our high quality and unique out-of-classroom educational experiences while increasing our volume of business through multi-channel marketing. In order to grow the business, our operating plans include the following: further integrating digital and social marketing into our approach, introducing new conversion channels while refining existing ones; building and preserving high quality customer relationships; and introducing new educational travel programs and experiences independently and through strategic alliances.

We completed another summer travel season in August, having traveled just over 21,000 delegates through September 30, 2012 compared to 23,437 delegates during the first nine months of 2011. This represents a 10 percent decline year-over-year, primarily driven by fewer delegates traveled from our core product, Student Ambassadors Programs. Given this known decline, during 2012 we have actively implemented cost savings initiatives that have reduced our total operating expenses by $5.3 million, or 12 percent, compared to the first nine months of 2011. Net income increased $1.0 million, or 10 percent, to $11.8 million during the first nine months of 2012 compared to $10.8 million in the prior year period. With our peak travel season concluded, we are focused on delivering delegates for our 2013 travel season for all travel products.

Thus far into our fall marketing campaign, we are experiencing a reduction in anticipated 2013 travelers of approximately nine percent. While we are seeing signs of recovery in our non-core products, Student Leadership Programs and Discovery Student Adventures, our current 15 percent decline in Student Ambassador enrollments is driving the overall aggregate decline. We are experiencing a faster than expected decline in the performance of the stand-alone mail component of our integrated marketing strategy. In addition, while our in-person information meetings remain our strongest conversion channel and deliverer of student travelers, attendance, and the number of enrollments through this channel are down year-over-year.

We are taking steps to address this downward trend through the development of new conversion channels and are implementing additional marketing initiatives to confront the gap created against our 2013 enrollment expectations. To augment our existing campaign efforts, we are making adjustments to the balance of the 2013 campaign in an effort to counter the impact of the declining meeting attendance and recapture enrollments. We are accelerating our efforts to pilot alternative conversion channels to address consumers' desire for on-demand engagement. We have implemented market-specific coordination of direct mail and digital advertising, and are rolling out these digital initiatives to additional key markets for the remainder of our campaign. Concurrently, we are re-addressing our cost structure to further align our expenses with anticipated revenue levels.

We are adjusting to the realities of our marketplace and plan to continue to evolve our multi-channel sales and marketing strategies to adapt to the needs and behaviors of our target audience. We plan to continue to refine our integrated multi-channel strategy with a heavier emphasis on digital reinforcement of the direct mail component. We believe we need to make multiple touch points available while our consumers are researching their decision to travel moving them toward the point of sale, which we anticipate will ultimately translate to stronger conversion for our programs.

As we continue to transition our business to a multi-channel approach, we believe it is important to right-size our balance sheet and return capital to shareholders while we continue to focus on our core business to position the Company for long-term success. With the financial flexibility we believe our balance sheet affords, the Board of Directors has approved approximately $2.7 million in additional share repurchases to augment the existing approximately $13.5 million authorization. In addition, a $0.50 per share special dividend was approved that is scheduled to be paid on or prior to November 22, 2012 to shareholders of record as of November 6, 2012. In aggregate, we plan to distribute approximately $25.0 million in capital back to shareholders.

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Results of Operations

Consolidated financial results for the three and nine months ended September 30,
2012 and 2011 were as follows (in thousands):

                                       Three Months Ended September 30,
                          2012               2011             $ Change           % Change
Total revenue        $        22,432   $          26,742   $       (4,310)           -16%
Cost of goods sold             3,391               3,491             (100)            -3%
Gross margin                  19,041              23,251           (4,210)           -18%
  Selling and                 11,289              11,872             (583)            -5%
marketing expenses
General and
administrative
expenses                       3,522               3,924             (402)           -10%
Operating income               4,230               7,455           (3,225)           -43%
Other income                     593                 324               269            83%
Income before income           4,823               7,779           (2,956)           -38%
tax benfit
(provision)
Income tax benefit               662             (1,727)             2,389          -138%
(provision)
Net income           $         5,485   $           6,052   $         (567)            -9%



                                       Nine Months Ended September 30,
                          2012               2011             $ Change           % Change
Total revenue        $        56,703   $          64,461   $       (7,758)           -12%
Cost of goods sold             6,593               7,319             (726)           -10%
Gross margin                  50,110              57,142           (7,032)           -12%
  Selling and                 26,459              31,406           (4,947)           -16%
marketing expenses
General and
administrative
expenses                      12,113              12,427             (314)            -3%
Operating income              11,538              13,309           (1,771)           -13%
Other income                   1,449               1,246               203            16%
Income before income          12,987              14,555           (1,568)           -11%
tax provision
Income tax provision         (1,210)             (3,801)             2,591           -68%
Net income           $        11,777   $          10,754   $         1,023            10%

During the three months ended September 30, 2012, we traveled 8,300 delegates compared to 9,855 during the third quarter of 2011. During the nine months ended September 30, 2012, we traveled 21,089 delegates compared to 23,437 delegates traveled during the same period in 2011. Overall, our gross revenue decreased during the three and nine months ended September 30, 2012 compared to the same periods in 2011, primarily due to the decrease in delegates traveled from our core Student Ambassadors Program. This expected decline in travel revenue was partially offset by an increase in revenue from BookRags during the first nine months of 2012 compared to the same period in 2011 reflecting increased content sales.

Associated with the decrease in delegates traveled, gross margin decreased $4.2 million and $7.0 million, respectively, during the third quarter and first nine months of 2012 compared to 2011. Gross margin as a percentage of gross revenues declined to 35.5 percent during the third quarter of 2012 compared to 38.0 percent during the third quarter of 2011, primarily due to higher airfare expense associated with rising fuel costs and higher foreign exchange rates year-over-year increasing our land vendor payments. For those same reasons, gross margin as a percentage of gross revenue during the first nine months of 2012 was 36.4 percent compared to 38.0 percent during the first nine months of 2011.

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The continuation of several cost cutting initiatives reduced operating expenses by $1.0 million and $5.3 million, respectively, during the third quarter and first nine months of 2012 compared to those same periods in 2011. In line with our strategy to reduce overall operating expenses to maximize profitability, these reductions consisted mainly of lower marketing expenses related to selected travel campaigns and reduced personnel costs associated with a reduction in staffing. In addition, we experienced lower legal expenses related to the SEC investigation that has now been closed, offset by costs incurred related to the previously disclosed proxy contest.

Other income increased $0.3 million and $0.2 million during the third quarter and first nine months of 2012 compared to the same periods in 2011, due primarily to realized gains from the sale of municipal bonds. The prior year nine-month period included a $0.2 million gain as a result of the de-designation of derivative contracts after exiting foreign currency positions following the tsunami in Japan.

We record income tax provisions using an effective income tax rate applied to pre-tax income for the three and nine months ended September 30, 2012 and 2011, respectively. The difference from our statutory rate of 34 percent and the decrease in our effective tax rate during both 2012 and 2011 is primarily due to the impact of tax exempt interest income earned during the periods in relation to net income. During the third quarter of 2012, we recorded an income tax benefit in relation to expected net income for 2012 due to an increase in the ratio of income from tax-exempt securities compared to net income before taxes.

In spite of the decline in delegate counts, our cost cutting initiatives discussed above helped increase profitability in the first nine months of 2012 compared to the same period in 2011. As a result, net income increased $1.0 million in the nine months ended September 30, 2012, compared to the same periods in 2011. The decrease in third quarter net income in 2012 compared to the same period in 2011 is primarily due to a 17 percent decline in travel-related revenue and an increase in air and land costs, offset by a decrease of $1.0 million, or six percent, in total operating expenses as well as a $2.4 million positive variance in income tax (benefit) provision.

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