)
Sydney-headquartered Kip McGrath Education Centres (ASX: KME) has pulled the plug on a fast-growing but ultimately loss-making US business it acquired in 2021, announcing an exit from the market and an asset write-off of $5 million.
In 2021 the tutoring group's then-CEO Storm McGrath was upbeat about a deal to acquire Texas-based Tutorfly, whose founders were able to deliver on two ambitious revenue growth targets within a matter of months to secure cash and share-based incentives.
Kip McGrath Education Centres forked out approximately US$2.1 million in total for the business, although the returns to its founders would have been higher if not for a 45 per cent decline in KME shares since the deal was struck.
Compared to early goals under Kip McGrath ownership for Tutorfly's revenue to hit US$20,000 ($31,000) per month, annualised revenue rose almost 10-fold to hit $3.4 million in FY24 - a figure that was triple the result in FY23, and partly driven by preferred supplier status for government funded school-based programs in a number of US states.
At the group's annual general meeting (AGM) presentation in November last year it was lamented that despite its preferred status in many markets, it was still not performing to the level expected with Kip McGrath working hard to "grow this business within a challenging US government funding environment".
"Further progress is required in the next six months to prove the value the company sees in this potentially valuable platform," Kip McGrath's chairman Damian Banks said at the time.
The group estimates Tutorfly's operating losses will be about $1.4 million this year, prompting it to bite the bullet and cease funding the business.
Banks, who is acting as an executive chair following the departure of Storm McGrath from the CEO role last month after 19 years in the position, says Tutorfly has not proven to have a sustainable business model.
"Today we are announcing an underlying FY25 trading update as well as a number of non-recurring charges to be taken during the half," says Banks, who leads the company until Goodstart Early Learning COO Melinda Smith assumes the leadership in the second half of 2025.
"We are also announcing that we will cease funding and will therefore exit from the USA operations of Tutorfly and closure of our Frisco tutoring centre effective 27 June 2025.
"The expansion of the Kip McGrath business into the USA has proved to be uneconomic and likely to remain so even if persevered with by the company."
The Kip McGrath board has decided against investing further capital given the weight of operating losses, with Banks expressing gratitude "for the support of the students, parents, schools and our staff who have partnered with us".
"As a consequence of this decision the USA operations will be reported as a discontinued business and our investment and deferred tax assets will be either fully impaired or written off. In addition, we will recognise the exit costs as part of the discontinued business," Banks says.
"Finally, the company having transferred its registered office from Newcastle to Sydney, will recognise the vacated Newcastle premises as an onerous lease, outside of the underlying results presented," he adds.
As a result of the $5 million USA business write-off, a discontinued USA EBITDA and exit costs of $2 million, a $200,000 onerous lease charge for Newcastle, and $500,000 in CEO changeover costs, statutory earnings will go down from $8.1-8.5 million to $400,000-800,000.
At the upper end of this guidance, earnings would decline by 88 per cent year-on-year. The company’s unreserved cash balance as at 31 May 2025 stood at $4.7 million with no bank debt.
Investors appear to have wanted this decision for a long time with a 19 per cent spike in shares this morning to $0.50 - their highest level so far this year.
)
