Interactive Buyside Equity Research

March 31st, 2014

AMBASSADORS GROUP Thesis Overview

Ambassadors Group (AG) is a leading provider of education travel. At a market cap of $65MM, the street is valuing the travel business at about $30MM. That may not seem too cheap given the level of business they are doing today and the fact that they are just about breakeven. But the company is now all hands on deck to right the ship. We are initiating AG with a $10 target price as detailed in the attached report.

Stock Rating Catalyst Category Price Target Price (4/1/14): $3.85 Upside/(Downside): 160% Ticker: EPAX Exchange: NASDAQ Industry: Travel Trading Stats ($USD millions) Market Cap: $65 Enterprise Value: $42 Price / Book: 3.3x PEG Ratio: 3.0x Dividend Yield: 0% Price / 2014E EPS: N/A Price / 2015E EPS: 30x EV / 2014E EBITDA: 5.2x EV / 2015E EBITDA: 3.8x
Source: Company filings, Wall Street Consensus

BUY Value $10.00

Price Performance 52 Week range: $3.17 - 5.50 Analyst Details IB Username: JUDYR2K Employer: Juniper Investment Co Job Title: Portfolio Manager Analyst Disclosure EPAX Position Held: Yes

Interactive Buyside Equity Research

March 31st, 2014

Company Overview
Ambassadors Group (AG) is a leading provider of education travel. The company was founded in 1967. It originally operated as Ambassadors Education Group, a wholly owned subsidiary of Ambassadors International, Inc, until 2/02, at which time Ambassadors Group was spun off through a stock dividend to Internationals shareholders. It then started trading under the t icker EPAX. The company has 2 reporting segments: 1. 2. Ambassador Programs: this provides educational travel services through multiple itineraries within 4 travel program types. BookRags a website that is a source of online book summaries, critical essays, study guides, lesson plans and film summaries.

AG has traveled people for 50 years and has over 500,000 alumni. They offer both domestic U.S. as well as international destinations including Europe, Australia, China, Japan, South Africa, India, Costa Rica, and Antarctica. The programs operate using the People to People brand, which has strong brand awareness in the student travel industry. People to People is a private, non-profit organization dedicated to the promotion of world peace through cultural exchange. It was founded by President Eisenhower in 1956. AG licenses from their name and the exclusive right to develop and conduct programs for grade school through high school students. This agreement expires in 2020 with the potential to renew. The company has numerous programs: 1. Student Ambassador Programs: This is AGs flagship program, and travels over 80% of their delegates. This provides educational opportunities for students aged 11 17 to travel overseas to learn about history, government, economy and culture. They market these programs through a combination of direct mail, social media, digital lead generation, and local in-person informational meetings. Delegates travel for 14 23 days during the summer. Each delegation consists of 30 40 students and several teachers, and is accompanied by local guides in each country. AG contracts with local program coordinators to run the day to day program. Leadership Programs: AG provides domestic travel experiences (primarily to DC, NY Boston, CA) to U.S. and foreign students (from over 50 countries). These are 5 10 day programs throughout the year. AG directly operates all aspects of these domestic programs. Citizen Ambassador Programs: These programs provide adult professionals with common interests (i.e., nurses), the opportunity to travel abroad to exchange ideas with foreign citizens who have similar backgrounds. Discovery Student Adventures: AG started this program in 09 as a teacher recruited student travel program. They have an exclusive license from Discovery Education. These trips are focused on international adventure and scientific exploration. Trips are 7 16 days long and take place in spring and summer. AG recently decided to close the Discovery Operations as it has not proved financially viable.

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The company also has a small internet division. BookRags: This was acquired in 2008 and claims to be the largest selection of book summaries online. The site attracts student and teachers to its content which includes internally developed material, licensed material, user-generated content and other third party content. The website has over 3.3MM unique visitors/month. Most of BookRags revenues are earned from Sep. June. AG offers academic accreditation through their Washington School of World Studies. This allows some students to earn academic credit through participation in their travel programs. The company has always focused on high-quality, differentiated educational travel programs. The company has industry leading safety profile scores and high net promoter (customer satisfaction) scores. The company tries to build strong relationships with parents and children through a high touch customer service model throughout the pre- and post-travel experience. They recognize the importance of alumni relations.

Interactive Buyside Equity Research

March 31st, 2014

Market Overview
The U.S. student youth travel market is $14B. There are 30MM kids in their target age range and 10MM kids in their target demographic. Travel is consistently ranked in the top 3 desires among children. The average household income of attendees is $75 - $80,000, although ranges from $50 - $200,000. The competitive arena can be segmented by basic and premium travel as well as domestic and international. AG is one of the top premium offerings, as well as the only public pure play in the space. The other premium businesses include Where There be Dragons, Rustic Pathways and Putney/National Geographic. AG travels multiples of students compared to these others. A few of the other large players include World Strides, which mostly runs trip to Washington DC accompanied by teachers, and EF, which runs shorter, teacher-sponsored, low cost trips abroad.

Company Details
The average Student Ambassador Program trip costs $6,800. This yields the company about $2300 in gross profit per student. This segment has been about 70% of the companys business. Typically, the parents pay one third of the trip cost, the grandparents another third, and the student, through fundraising, makes up the difference. The student leadership trips cost about $2400. This segment is about 20% of the business. The expense and discretionary nature of these trips certainly had an impact during the financial crisis, recession, and subsequent slow growth economy. The companys business has been hit dramatically with still no sign of a pickup. Very simply, the company travelled over 50,000 delegates in 2007 and only 18,000 in 2013. The company was slow to reduce overhead and marketing expenses throughout this period and income was hit accordingly. That being said, AG has managed to stay cash positive, has a healthy balance sheet (although less so do to some nave moves) and has finally begun to make the dramatic changes needed to stabilize (and hopefully resume growth) in the business. Historically, AG used direct mail marketing to reach their target consumer. As the internet and digital revolution has taken hold, AG saw their marketing efforts become less and less effective. The consumer moved online and AG was late to follow. In the past few years, the company has dramatically revamped its marketing efforts. It moved a significant portion of its marketing budget to online. It has upgraded its technology platform to expand its digital capability and support a multi-channel effort. The company hired a new CMO, invested in lead and demand generation, and improved the web experience for enrollment and program information. It is more appropriately using online advertising, search and social media and webinars to attract and retain delegates. It is also expanding its enrollment and marketing period throughout the year. In addition, the company is aligning with new partners like the Boy Scouts. AG continues to focus on a direct to consumer model as opposed to a teacher recruitment model which many of their competitors use. AG is testing slightly shorter but lower priced trips to spur incremental demand. An ASP of $5700 seems to be the sweet spot, and over the next few years, we should see the average price gravitate to that. The company believes they can keep gross margin dollars per student constant by making a few changes to the itinerary. Most of the trips today run from June August. AG is starting to introduce more yearround travel, especially during spring break and Christmas break. These new trips are 7 day trips and cost under $5,000, with a $2300 gross margin. The business is very seasonal. Deposits come in starting in September and cash peaks in May. Analysts must differentiate between total cash and unencumbered/deployable cash. Deployable cash is defines as the sum of cash, cash equivalents, marketable securities and prepaid program costs and expenses less the sum of accounts payable, accrued expenses and other short-term liabilities and participant deposits. Deployable cash is free and available for future business opportunities. The company also maintains an unsecured revolving line of credit with Wells Fargo Bank which is unused. The company has about $22MM in unencumbered cash. This is down from a few years ago due to a ridiculous divided policy (including a one-time dividend of $8.8MM in 2012) and share buyback. The former management team misallocated precious capital at a time when the business was in total free fall.

Management
In 1995, Peter Uberoff bought the company and brought in Jeff Thomas to be the CEO. Jeff helped build the business in the early days, but was slow to adapt to the changing world after the financial crisis. Tony Dombrowik joined the company the end

Interactive Buyside Equity Research

March 31st, 2014

of 2010. Tony had a strong hotel/leisure background. His focus was to reduce costs and protect the business. He was limited in his abilities to make change given the policies of the old management. Under Jeffs watch, the company initiated a large stock buyback and generous dividend policy. This was occurring just as the business was collapsing. Through these years, the company attracted an activist fund, Lane Five Capital, who won 2 board seats. A second fund, Bandera Partners has an 18% stake and is just now getting a board seat. Jeff Thomas and Margaret Thomas, EVP both resigned in early 2013. Tony was names interim CEO and keeps that position still. He hopes to be named permanent CEO at some point. Under Tonys lead, the company eliminated the dividend, stopped buying back stock, and reduced operating expenses by $10MM+ to right size the business. Additionally, he has helped initiate the marketing, programming and strategic decisions that are driving the efforts today.

Overview of Catalysts / Key Value Drivers

Valuation
The company is best looked at on a sum of the parts basis. The company has $22MM of unencumbered cash. It also owns its headquarters building free and clear which is it trying to sell. The Spokane, WA market is still economically depressed, and there has not been any activity on the building. It is now listed for $11MM, but the price has already been lowered once, and it has been on the market for over a year. Say it is worth $8MM. The BookRags business is a nice website. It does about $4MM in revenues annually and is positive cash flow. That business is unrelated to the travel business and could easily be sold for $6MM. At a market cap of $65MM, the street is valuing the travel business at about $30MM. That may not seem too cheap given the level of business they are doing today and the fact that they are just about breakeven. But the company is now all hands on deck to right the ship. They are fully focused on reaching the students through the internet and social media and leveraging their existing level of spending. The economy is finally starting to improve. The company is also introducing lower priced trips and year round travel opportunity. I fully believe they will have some level of success. Operating expenses are still very high given how much the business has declined. The company needs to begin to grow to leverage this or there will have to be continued reduction in these costs. Yet, they dont need to get back to travelling 55,000+ students and doing over $100MM in revenue to make this stock more valuable. Over the next 5 years, if they can just attract another 10,000 students, at $2300 in gross profit per student, thats $23MM in incremental gross profit. Given that operating expenses should remain relatively flat, that yields about $.80 per share after taxes. If nothing else, it does make one start to think.

Interactive Buyside Equity Research

March 31st, 2014

Financial Overview
($ i n thous a nds )

FYI December 31: Net revenue, non-directly delivered programs Gross revenue, directly delivered programs Gross revenue, internet and advertising Total Revenue Growth % Cost of sales, directly delivered programs Cost of sales, internet and advertising Gross Profit Margin % Selling and marketing General and administrative Total operating expenses (excl misc charges) EBIT D&A EBITDA Margin % Balance Sheet Data Cash and cash equivalents Available-for-sale securities and other Participants' deposits Stockholders' equity

2012 44,837 9,008 4,207 $58,052

2013 36,752 10,468 3,975 $51,195 -11.8% 7,046 513 $43,636 85.2% 32,318 14,423 $46,741 (3,105) 5,368 $2,263 4.4%

6,107 554 $51,391 88.5% 34,845 16,224 $51,069 322 5,273 $5,595 9.6%

$6,150 $32,122 $25,735 $65,123

$9,473 $36,174 $26,362 $55,908