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9486 in the collection
Boost Your Score
by Susan Adams
Princeton Review somehow has managed to lose money even in a test-crazed era. Is the company finally growing up?
Sitting in his office on the Upper West Side of Manhattan, John Katzman is contrite. He admits that the test-preparation company he founded 26 years ago, Princeton Review, has not exactly thrived lately. "We're a very talented minor league team," he explains, fixing an earnest gaze upon his visitor. "But when we reached the major league, we found we couldn't hit the curves."
Katzman has got that right. Princeton Review sits in the sweet spot of America's obsession with testing. It sells testing materials to schools prepping kids under the No Child Left Behind Act, and offers SAT test classes and tutoring for prospective college students. Yet Princeton Review's shares have languished around $6 for the past three years, and losses doubled to $10 million on sales of $141 million in 2006.
Meanwhile, the test-prep division of its main competitor, Kaplan, is (per educated guesses) generating handsome profits on revenues of $575 million for its parent, Washington Post Co.
Now Katzman himself is getting some tutoring. In July he stepped down from the top job in favor of a new chief executive, Michael Perik, 50, who had been running Houghton Mifflin's successful K--12 assessment business. Bain Capital Ventures is pumping $40 million into Princeton Review, and another private equity outfit, Prides Capital, is kicking in an additional $20 million. It looks like Katzman, 48, and his company are finally ready to grow up.
Katzman started prepping kids for the SAT in 1981 after graduating from Princeton University and working a short stint in software development at Manufacturers Hanover Trust Bank. The child of a prosperous Manhattan family (Katzman's grandfather invented the electric vaporizer), Katzman began by coaching kids at his parents' kitchen table. At the time, test prep was dominated by Kaplan, which had been around since 1938.
Katzman had a cynical sales pitch, insisting the SAT measured nothing but a student's ability to take it. "The SAT remains a piece of crap and in some ways may be worse than it used to be," he pronounces. Katzman's tactic: game the test. Find tricks, strategies, and shortcuts to hike kids' scores. Review instructors, for instance, urge kids to eliminate wrong answers rather than solve problems. For the vocabulary portion Katzman and colleague Adam Robinson performed a statistical analysis of past tests and honed a list of only 200 words to drill kids. By contrast, Katzman says, Kaplan drilled on 6,000 vocabulary words. Princeton Review says that its prep courses raise kids' SAT scores by, on average, 200 points (a perfect score is 2400).
Princeton Review flourished at first, its irreverent, youthful image helping to attract students. Katzman found he could get away with charging more than Kaplan. In 1987 a Kaplan course cost $450, while a Review course was $595. By that year, relying on a franchising strategy, the Review was operating in 35 cities and racking up $12 million in revenues, to Kaplan's $45 million. In 2001 Princeton Review sold 20% of its stock in a $59 million public offering.
That same year the No Child Left Behind law passed, requiring public schools to test students at least once a year, from grade three on. School districts started mandating an increasing number of multiple-choice tests, or assessments, that measure student progress throughout the year. This meant work for companies that could produce these tests and offer a way for kids, parents and schools to view the results online.
But Katzman ended up flunking this business. It proved much tougher to make money putting together multiple-choice assessments specifically tailored to a locality's curriculum, as opposed to staging one-size-fits-all prep courses. The Review was dealing with bureaucracies like the New York City Department of Education and the Los Angeles Unified School District, a far cry from affluent parents eager to write checks that might buy an Ivy League admission. Earlier this year New York City dumped the Review's assessment contract after four years in favor of a five-year $80 million deal with CTB/McGraw-Hill and Scantron.
Katzman also had high hopes for college admissions services. The Review paid $12 million for a company called Embark, which provided software for students to fill out their college applications online. But top schools weren't willing to pay to reach students, and the students who were the Review's customers didn't want to be pestered by the kinds of schools that were willing to pay. The Review finally sold Embark earlier this year for $7 million.
Meanwhile, the payroll became bloated, partly as a result of Katzman's reluctance to let people go. (The upside was an ultrafriendly atmosphere that spawned countless romances and upward of 100 weddings, including Katzman's own.)
By mid-2006 Katzman realized he needed help. He had met Michael Perik in the mid-1990s when Perik's company bought a license to use Princeton Review's sat prep software. Canadian-born Perik had run one of the earliest educational software outfits, the Learning Co., which he'd sold to Mattel. He sold another online education company he started, Achievement Technologies, to Houghton Mifflin in 2006.
Perik brought along an infusion of cash from Bain, which agreed to buy a 19% stake in Princeton Review at roughly $6 a share. Prides Capital, which already owned Review shares, upped its stake to 14%. Perik is taking a salary of $1 a year, in exchange for the option to buy 4% of the company, or 1.7 million shares, at $4.69, the price of the shares when he took the job. Katzman retains 25%, and the title of chairman.
The prospect of fresh management has goosed the stock, which has nearly doubled since the deal was announced, to a recent $8.75. Perik has already fired 20 people who made up more than half the finance and legal departments and replaced the sales and business managers of the K--12 division with former colleagues from the Learning Co. and Houghton. Revenue in the first half of 2007 grew 14.5% to $76.6 million while earnings nosed into the black at $203,000.
Perik's target profit margin is the same for the assessment business as for test prep, 20% after tax. (Test prep accounts for 70% of the company's revenues, K--12 the rest.) His risky strategy: Instead of emphasizing customized assessment tests for particular school districts, he plans to deliver a more generic product. "We're going to focus on selling higher-margin services to middle America," he says.
Adam Robinson, who helped Katzman develop the original SAT shortcuts and vocabulary lists, has come back to reinvigorate test prep. That may help, but with Kaplan and new competitors like TestMasters in Los Angeles, it's not clear that Princeton Review can boost its 27% share of the SAT prep market or its smaller share of the market for other tests like the LSAT.
— Susan Adams
Forbes
2007-11-26
http://members.forbes.com/forbes/2007/1126/120.html
INDEX OF OUTRAGES
Pages: 380
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