Perdoceo Education Corporation (PRDO) Q2 2011 Earnings Report, Transcript and Summary

Welcome to the Career Education Corporation Second Quarter 2011 Earnings Conference Call. My name is Christine, and I will be your operator for today's conference. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Jason Friesen, Senior Vice President of Finance and Investor Relations. You may begin.

Thank you, Christine. Good morning, everyone, and thank you for joining us on our second quarter 2011 earnings call. With me on the call this morning are Gary McCullough, our President and Chief Executive Officer; and Mike Graham, our Executive Vice President and Chief Financial Officer. Following remarks made by management, the call will be open for analysts and investor questions. This conference call is being webcast live within our Investor Relations section of our website at careered.com. A replay will also be available on our site. If we don't get to your question during the call, please call our Investor Relations department at (847) 585-3899. Now before I turn the call over to Gary, let me remind you the yesterday's press release and remarks made today by our executives may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on information currently available to us it involve risks and uncertainties that could cause our actual future results, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements. These risks and uncertainties include, but are not limited to, those factors identified in our quarterly earnings release, our annual report on Form 10-K for the year ended December 31, 2010, and our quarterly and other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, we undertake no obligation to update those risk factors or to publicly announce the results of any of these forward-looking statements to reflect future events, developments or changed circumstances or for any other reason. Now let me turn the call over to Gary McCullough.

Thank you, Jason. Good morning, everyone. As always, we appreciate you joining us on this call and your interest in our company. As Jason indicated, I'm joined on the call by Mike Graham, our Executive Vice President and Chief Financial Officer. When my opening remarks are concluded, I'll turn the call over to Mike, who'll provide more details on our second quarter performance. Our second quarter was busy and challenging. Our teams continue to take action to ensure the effective delivery of our near-term business goals and objectives while also evolving their strategies and business models so that our institutions will continue to provide high-quality education and effectively compete as we move forward. I'll discuss a few of the actions we've taken with you today, but first, I'll recap our results from the quarter. During the second quarter, revenue decreased 6% versus the second quarter of 2010. We earned operating income of $83 million. Our operating profit margin was 16.6%, a 170 basis point decrease versus the second quarter last year. Student population was approximately 102,000, down roughly 3% from the second quarter of 2010. And new student starts for the second quarter of 2011 were down 14% versus 2010 with new student interest down across every all of our domestic institutions. These results were achieved in a challenging period marked by lower student demand, negative sector publicity and the impact of new rules. As I mentioned, our teams continue to take actions to evolve the strategies and business models. For example, in the past 2 months, the Student Orientation and Academic Readiness program, or SOAR, was implemented at both AIU and CTU. We believe this program will have a positive effect for prospective new students who, otherwise, may not be well prepared for success in our online institutions. SOAR will actively identify students who may not be prepared for the rigor of college studies by having first-time college students begin by taking a 5-week college-level success course. Students withdrawn or who fail the course are not charged tuition. We expected and are seeing a negative impact on new student starts as a result of SOAR. However, I continue to believe strongly that this is the right thing to do and that we'll see retention improve in the future. We gained a number of important state and accreditor approvals for Culinary's new certificate program, and rolled out the program in nearly all of our schools during the quarter. The new model will more strategically position the Cordon Bleu schools, between other private-sector institutions that charge higher tuition and community colleges with lower tuition levels. While it's still early, once the programs are put in place, we do see improvement in conversion rates relative to year-to-date trends and we anticipate this more positive conversion rate will continue into the third quarter. Our segment leaders and marketing teams have also responded to changes in the macroeconomic environment, where historical marketing techniques have proven to be less affected. In doing so, they developed and are testing new market approaches. This includes new brand advertising for each of our key institutions which is intended to build greater institutional awareness. In addition, we're employing new social media approaches to stimulate interest in greater communication with current and prospective students. Further, the teams are using refined student criteria and new models to optimize marketing new strategies and tactics to better identify prospective students most likely to matriculate and succeed in our programs. Our teams continually assess investment opportunities and seek to determine the organizations best use of capital. For example, after careful analysis of the current student population, coupled with an expiring real estate lease, the CTU team determined its north Kansas City location was no longer viable as a CTU ground campus location and made a difficult decision to teach it out. We have no plans to teach-out any of CTU's other campuses. Over the next few years, the CTU team will remain focused on fulfilling its educational commitment to current students in the Kansas City area. I want to make clear this decision in no way reflects the quality of student focus education services provided by the faculty and staff at the North Kansas City campus. Instead, this was a strategic decision, and CTU will continue to serve markets with greater demand for high-quality post-secondary education. With these and other initiatives, I'm confident we're taking the right actions so our institutions can deliver an increasingly high-quality education for our students and responsibly grow as we compete in today's dynamic environment. But despite what I view as very good work by our teams to do the right things in the right way, we've recently uncovered a situation that goes against what we stand for as a company, and I want to give you some background on that matter. The company recently identified improper practices at certain Health Education segment schools related to the determination of placement rates. The discovery came as part of the efforts being undertaken by our company with respect to the information request CEC and a number of other companies received from the New York Attorney General in May. Upon a receipt of the New York Attorney General's subpoena, consistent with strong, effective corporate governance, we engaged outside legal counsel of Dewey & LeBoeuf to help coordinate our response. When our management team identified improper practices, the Board of Directors directed Dewey & LeBoeuf to undertake an independent investigation around these practices. I can assure you the independent investigation will be thorough. Once it's completed, the company will undertake any remedial measures we conclude are needed to ensure our people understand and execute in accordance with our well-defined and often-stated expectations. While the instances of improper practices discovery relate to certain Health Education segment campuses, the board and I have asked independent legal counsel to also review placement rate practices at all of our domestic schools. The results of the investigation will be reported that New York Attorney General and to other relevant accrediting and governmental bodies as appropriate. For me, as the leader of our company, these findings I described are very, very disappointing. The actions of the few people have let down others who worked hard and responsibly every day on behalf of our students. As you may know, I spent a few years in the U.S. Army as an officer, and my father spent 30 years in the Army. And when I was young, he taught me a collection of words that I later found out are part of the cadet prayer at West Point. The idea behind them is simple, but profound, I think. And that is that, “One should,” and I quote, "Choose the harder right instead of the easier wrong." In this case, it appears some people in our company didn't do that. This type of behavior is not what CEC is all about and given that, we'll redouble our efforts to ensure that every single one of our employees acts with the utmost of integrity, on behalf of, and in support of our students. With that, I'll turn the call over to Mike.

Thanks, Gary. As Gary shared during the quarter, the company generated revenue of $497 million, a decrease of 6% versus the second quarter of 2010. Our operating margin decreased to 16.6% which is a 170 basis point decline from last year's second quarter due primarily to the impact of the lower new student starts and student populations across most of our domestic institutions. Overall new student starts were down 14% from last year, while student population declined 3% versus second quarter of 2010. Our revenues were impacted not only by lower population, but also due a slight reduction in the average credit load per student across several of our institutions. Our results of the second quarter also include the impact of a $2.5 million noncash impairment charge for accreditation rights. One of our goals over the past several years has been to simplify our business and increase the consistency across our operations where it makes sense. We continue to grow our usage of more consistent shared services across our company; move to a single-leading IT platforms to support our students, and schools and in a similar move towards consistency, we made the decision to move primarily to one national creditor for those institutions that are nationally accredited. This decision led to a change in how the company had previously accounted for its accreditation rights, which resulted an impairment in the second quarter, and will also result in an additional $3.1 million in amortization expense, which we recognized over the remainder of 2011. Overall, during the quarter, we continue to experience the impact of more challenging comparables, the softening of new student interest in terms of new student leads and the rate at which new students enter and enroll in our institutions. We believe this overall market softness continues to be the result of a number of factors including the weak economic environment, the impact of the new program integrity rules, including misrepresentation, and incentive compensation, overall negative publicity in our sector and increased competition for prospective students. Let me turn to the business results by segment. Revenue for AIU was $98 million for the quarter, down 18% in the second quarter 2010. New student starts for the quarter were down 24% as we've continued to experience the impact of the more challenging comparables in the overall market softness. AIU has continued to reduce its advertising spend levels and to focus its efforts in marketing on the most promising and qualified new student leads from its historically best sources. Six-month advertising spending during the first half of 2011 was 14% lower than the comparable 6-month period before. AIU's decision to reduce advertising spend was partially responsible for the institution's year-over-year decrease and new student starts. As a result of a lower spending and the overall negative environment, new student interest in the forms of leads for AIU was down 27% versus prior year. Our new student interest enrollment conversion has declined slightly from first quarter levels and will likely remain fluid as the sector continues to transition in the coming quarters. In June, as Gary said, AIU also implemented its SOAR program for new online undergraduate students. Based on the June cohort, our first cohort, just over 1/3 of the June undergraduate students did not have previous college experience and therefore participated in the SOAR class. For this cohort, approximately 55% of our students who took the class received a passing grade. As a reminder, our third quarter new student start metrics will be impacted by those students that did not receive the passing grades in the June cohort as well as the starts for the July and August SOAR cohorts. With the rollout of the new SOAR program, we anticipate future period retention rates should improve. Operating profit for AIU in the second quarter was $26 million. Our operating margin was 26.9%, down 640 basis points in the prior year. Revenue per student for the quarter declined slightly, driven by lower average credit hours as a result of the increased flexibility to the credit hour structure we implemented last year. In addition, we said in the past that we'd update you on any further developments related to AIU's program review conducted by the Department of Education in late 2009. At this point, we have nothing further to report and we'll update you on our next earnings call if there are any further developments. Last, we're pleased to share that in June, the Higher Learning Commission granted AIU new program approval for its bachelors and masters degrees in accounting. For CTU, revenue decreased 2% versus the second quarter 2010 to $112 million. New student starts in the quarter were down 18% as we overlapped strong prior year performance and experienced market softness and new student interest during this year. As a result of the softness, we reduced advertising spending by 4% in the current quarter versus 2010. The 6-month advertising spending during the first half of 2011 was 3% lower than the comparable period for CTU. CTU's operating profit was $34 million in the second quarter, with operating margin increasing 200 basis points over last year to 30.3%. Our SOAR course was implemented at CTU in July, the third quarter and the first cohort has not yet completed its class. We'll provide additional details related to SOAR program for CTU in our next earnings call. In addition during June, we rolled out our downloadable CTU iPad application that enables students with user credentials to complete their coursework, watch multimedia content, interact with other with students and instructors, as well as check the grades and assignments all through the device. This application was previously rolled out for AIU students in April. Year-to-date, nearly 20% of our online university students have downloaded our applications. We'll continue to leverage this technology as a point of differentiation and provide student access to customizable educational delivery systems best suited to their individual learning styles. Finally, as you recall during June 2010, the OIG's Audit Services division commenced the compliance audit covering July 2009 to June 2010 related to the administration of Title IV funds. The OIG conducted an exit conference with CTU's management on June 29 and at that time indicated that CTU should expect to receive a draft report sometime in August or September of 2011 setting forth the OIG's findings. Upon receipt of the report, CTU have an opportunity to respond in writing. The final report and CTU's response will then be sent to the Department of Education’s office of federal student aid to determine what action, if any, is warranted. We'll update you on the next earnings call of any further developments. Turning to Culinary Arts. Revenue decreased 10% to $83 million on 17% growth in new student starts and a 9% overall increase in student population. Please note that this includes an additional start in the second quarter of 2011 that didn't occur last year and will now occur in the third quarter of 2011. On a comparable basis, new student starts would be down 4% at the low end of our expectation. However, in the latter part of the quarter, once the new certificate program was in place, we did experience an improvement in our conversion rate relative to year-to-date trends. We anticipate this year-to-date with its improved conversion rate will continue the third quarter. Culinary Arts second quarter operating income is $13 million with operating margin of 15.8%, a 240 basis point increase from last year's second quarter. Bad debt for Culinary as a percentage revenue was 5.8% in the quarter, tracking lower than its high single-digits range we have provided previous in this year. Revenue for Health Education was $110 million, up 2% for the second quarter of 2010. Health Education student population increased by 2% over the second quarter of last year, while new student starts decreased 8%. If you exclude the Health start ups, our student population was flat versus the prior year and new student starts were down 10% excluding startups in the second quarter of 2010. For the second quarter of 2011, operating income is $3 million or 3% of revenue which includes $3 million in operating losses from the startup campuses. Our startup campuses in the second quarter 2010 operated at approximately breakeven. Excluding our start-up schools, operating margin for Health Education would have been 5.8%. Health margins are down versus prior year as a result of lower enrollment, causing higher academic expense on lower class sizes, the impairment expense related to the accreditation rights and higher acquisition costs due both to general marketing increases and changes in our marketing mix. Finally, as we discussed last quarter, no Career Education Corp. institution violated the 90-10 Rule in 2010. However, some of our health institutions were close to the 90% threshold. As a result of the July 1 [indiscernible] reclassification, we'll continue to closely monitor the 90-10 levels across all our domestic institutions. Revenue for Art & Design was $57 million, down 9% for the second quarter of 2010. New student starts during the quarter were down 41% compared to last year and student population ended 14% lower. Operating margins were 13.5%, 230 basis points better than the second quarter of 2010. We're in the final stages of our design and relaunch of the Art & Design business model and our preliminary view indicates most of these programs may not be materially affected by new gainful employment regulations. The team is currently working to ensure the future model provides quality outcomes for our students, achieves sustainable long-term performance and offers distinct advantages versus similar competitive institutions. Finally for international, our revenues increased 25% in the second quarter, reflecting a 32% increase in student population. Operating income was $5 million in the second quarter, with operating margins 14.4%. Let me update you on the financial position. As of June 30, 2011, the company had cash, cash equivalent and short-term investments of $389 million. Our cash flow from operations for the 3 months ended June 30, 2011, was approximately $55 million. Capital expenditures in the first half of the year increased to $48 million or 4.6% of revenue from $43 million last year, primarily due to the investment in our new campus support center. During the second quarter, the company repurchased 1.8 million shares of our common stock for approximately $40 million dollars. As of June 30, 2011, the company had remaining share repurchase authorization of $160 million. Our earnings per share for the first half of 2011 was $1.69 per share versus $1.46 per share in the first half earlier. Our tax rate for the first half of 2011 was a 34.8% versus 33.4% in 2010. Recall that in 2010, EPS was positively impacted by a $4.2 million tax benefit. Our estimated full year tax rate for 2011 will be between 35% and 36%. So as I closed my section, we continue to believe as we previously shared that substantially all our academic partners within AIU, CTU and our Sanford-Brown institutions meet the recently published gainful employment metrics. In addition, our Culinary business has implemented changes in business model as we previously discussed. And lastly, our International business remains unaffected by the new rule. Within our diversified model, we believe that some of the current programs of Art & Design may be a risk in other rules. However, the redesign will help many programs comply. Our teams are finalizing those action plans based on the publication of the new rules. We intend to share the details of the business model with you once they're finalized. Finally, longer-term visibility regarding growth trends remains difficult and we anticipate the recent market trends will continue in the third and fourth quarters. These trends including the softness in new student interest, enrollment conversion rates have been experienced on most of our domestic institutions, and again, we believe related to the economic environment, the regulations and the negative sector publicity. Our third quarter metrics will include the full impact of SOAR on both AIU and CTU. We'll also continue to monitor the business impact of the new program integrity rules that went in place on July 1, including last day of attendance, satisfactory academic progress and misrepresentation, as we finalize contracts of many of our lead aggregator partners. As you know, as a matter of policy, we do not provide annual guidance. During last year's fourth quarter conference call, we did lay out certain milestones for the full year 2011 to help investors create a model for our financial performance. Those milestones were that we expected operating margins to be approximately 14% to 16%. Based on our first half performance and combined with the trends we expected to see in the second half and excluding the $6 million of noncash charges for the accreditation consolidation and any onetime charges, if any, in the second half of the year, we estimate we’ll end the year at the low end of the range or slightly below 14% operating margin for the year 2011. From a revenue perspective, we expect 2011 revenues declined between 7% and 10% versus 2010. In addition, over the last couple of years, we have provided longer-term milestones to assist you in understanding our perspective view of the business. Having just completed the second quarter of 2011, we believe it's too early to provide milestones beyond the current fiscal year. I'll turn the call back to Gary.

Thanks, Mike. In a moment, we'll open the call to questions. I know some of you will want to ask more about the investigation regarding the termination of placement rates. I hope you can understand and appreciate that it would be inappropriate for us to discuss the matter in great detail given it's an ongoing investigation, and we're still early on in that investigation. After the investigation is completed, we'll update the New York Attorney General's office and relevant accrediting and governmental bodies as appropriate. With that, operator, please begin the Q&A session.

[Operator Instructions] The first question comes from Bob Craig from Stifel, Nicolaus. Robert Craig - Stifel, Nicolaus & Co., Inc.: Gary, I heard your comments just now on the placement situation, but I'll just ask a question on that if I could. How many OPE IDs are involved here. I think you have, what, 9 OPE IDs in the Healthcare segment?

That's correct. Bob, I would love to answer your question, but we're still working through the investigation, so I could give you something that we know at this point in time, but it will be inclusive as it's still pretty early in the process. So I'd ask that as we go along, we'll update you at the appropriate point in time. Robert Craig - Stifel, Nicolaus & Co., Inc.: Okay. Have you curtailed any further expansion plans in the Healthcare segment because of this issue?

Not at this point. We are working through a plan at the point in time, but final decisions around what we will do depends upon what we ultimately find. So we work through a plan of action. Our Board of Directors is involved in the discussion. We will talk with them about implications when we have the data that allow us to make the right call for the business. Robert Craig - Stifel, Nicolaus & Co., Inc.: Okay, and one last one and I'll turn it over. For starts, the starts declined to be similar in the third and fourth quarter to what you experienced in the first half. Obviously, the international side really contributes pretty heavily in the second half of the year. So what you're looking for then would be continued deterioration from SOAR and other sources in the domestic operations. Is that fair?

Bob, this is Mike. I would look at it across the businesses again. AIU and CTU, you will have the information on SOAR that'll be in the starts and we gave you some idea about the size of the cohort as well as the drop rate. Culinary, we did a comparable basis. We did have the start this year but noncomparable, so that'll cause the Culinary trends in the third quarter to look different on the comparable basis.

Your next question comes from Sara Gubins from Bank of America Merrill Lynch.

Just first, 2 regulatory related questions. The first is, so you're consolidating accreditors for your nationally accredited schools. Does that mean that you're going down to one OPE ID for all of them? Or is it just moving over to one accrediting body, and can you talk about why you're doing that?

Again, we are moving at one accreditor which would include going to one OPE ID for the similarly accredited schools. The reason we're doing that is primarily for simplicity of the business. We have very complicated OPE ID structure, new program approval process with the DOE. New program approval process across the different regulators. That, plus the number of program accreditors, we believe is in the best interest of the company to continue to go to simpler, consistent processes to reduce variability.

And just -- I'm thinking about this currently, does that mean that you would have some Sanford-Brown institutions and some Cordon Bleu under the same OPE ID?

Correct. As well as Art & Design.

Okay. Could you talk about any changes you're seeing to recruiter productivity based on changes in incentive compensation?

Sure. We've seen a couple of different factors. We've seen that our conversion rates have been down in terms of the new student interest turning in to enrollments. Part of that maybe due to the incentive compensation plans, part of it also may be due to obviously to the environmental they're in. We also has seen an increase in our turnover of admissions reps in the past quarter, about 500 basis point increase in turnover that may be attributable to the economy, maybe attributable to the changes in the compensation program. That said, the level of commentary or dissatisfaction expressed across our reps has been very low.

Sara, the only thing I'd add to that, as Mike said, the changes are still relatively new. And so it's kind of difficult at this point in time to parse reasons for things that we're seeing, but we'll keep an eye on it as we go forward.

Okay and then just one clarification question about your start expectations in the second half of the year. Your comparisons get much easier in the second half versus the first, because starts -- the growth rates have begun to slow down a lot as you look at the second half of 2010. Does the comment suggest that we should still see mid-teens start declines in the second half of the year? That's what you're expecting?

Again, we're not going to give specific guidance on the number. I think Bob's question was accurate in terms of the trend and how to look at some of the comparables. The comparables are easier, which will make the comparison different. It may make the trend worse versus this quarter based on just the normal comparables that you're looking at for the previous year.

The next question comes from Jeff Silber from BMO Capital Markets.

I just wanted to focus specifically on a couple of your divisions. First is on the Culinary Arts program. I know that the trends in revenue per student have been shifting dramatically because of the shift to the certificate program from the associate program. When do you think that those will start to improve or at least getting less worse?

A lot of it depends on where the associate degree program ends up. During the quarter, we've seen an increase in our attrition in our associate degrees as people have either left the institution base on the new model or are moving over to the certificate over time. We'll cycle out that through 2012. The last starts for the associate program are here, were here in the first quarter, towards the fourth quarter and the associate program, being a 21-month program, that'll cycle out through 2012. So RPS trends will continue through next year.

And roughly, what is the mix between associates and certificates right now on Culinary?

Again, we'll have to take a look at that. Right now it's heavier on the associate, lighter in the certificate but it's hard because the mix isn’t -- is critical, because of the new starts all coming in to the certificate, distorts the relative number on a comparable basis.

Shifting gears to Health Education side, you talked about the fairly steep decline in margins. Is that something we should expect going forward? And given some of the start-up costs, do you think this unit will be able to maintain profitability for the rest of the year?

I can't comment on the absolute numbers, but as you model I would look at the accreditation charge which was about $2.1 million in the quarter, the bulk of which was on health. That increased amortization of $3 million will hit the Health segment. Our start-up efforts, we've got the 4 start-ups that we have right now, so those will continue to hurt the profitability a bit. The key for us is to make sure that we can calibrate our metrically-driven costs, such as academics or class sizes, without jeopardizing the academic quality that we have. So we're going to look carefully at the deleveraging to see what variable costs may come out of the system versus what may stay. But I think acquisition cost and the marketing cost that we're seeing are going to continue through the third and fourth quarter.

And then just a quick numbers question, what should be forecasting for capital spending for the remainder of the year?

We don't have any material changes in capital spending, so I think it continues to be somewhere around 3.5% of revenue.

The next question comes from Gary Bisbee from Barclays Capital.

I'd like to start just by jeering in on the margins at AIU and CTU. Starts have been falling but the margins have hung in there like a champ, and those divisions now look like to be about 60% of your profits. But is it a reasonable expectation that you have a lot more variable cost there and you can maintain attractive margins even if you base further declines? Or should we expect that those really start to get pretty severely hit as starts continue to weaken, as you have cost for the SOAR program but fewer revenues coming in there?

I think you're going to see the deleveraging continue to occur on the business, remember? Because we don't occupancy expense which is a fixed cost and brings about 12% of our revenue on the ground schools. That doesn't affect AIU and CTU so you do have more variable cost structure. The metrically driven models that the online institutions follow in terms of admissions marketing are very tuned to new student starts and new population levels, and we've been very effective at adjusting those variable costs. That said, as population continues to fall, we will start to see more deleverage going forward. The difference between AIU and CTU is primarily on the revenue per students where it had the deceleration, the shift of the bachelor's program hitting AIU that doesn't hit CTUs, so you see the difference in the amount of deleverage that's occurring. But I think in the second half of the year, we'll be experiencing more deleveraging on AIU and CTU as populations decrease.

And then, I think you were early relative to much of the industry in seeing that the effectiveness of some of your advertising was falling and deciding to either reduce spend or shift spend around starting last fall, maybe it's even earlier. But do you have any sense how much the lower spend in absolute terms has hurt inquiry flows versus all the other industry factors that we've all been following and you’ve cited?

We don't have a reliable way of estimating what's contributing to those factors, so you're correct in that we have, as we noted, the less effectiveness of our advertising spend we have reduced it and as I indicated in my remarks, we began to look at new ways to reach our potential targets students and some of those efforts are in progress right now.

And then just one last one, I know you've done an awful lot doing more shared services and reducing costs and you’ve done a great job over the last, say, 2 years on that. Is there a lot of opportunity left or are we cycling through the benefit of a lot of the real hard action you've already taken? I'm just trying to think, if we think out over, like, the next 18 months and you probably got more regulatory spend; are there still places you can pull cost out of the business?

This is Mike. I would say that we have done the bulk of the shared services work. There's still more we can do from a consistency standpoint but the large gains are gone. But on a smaller basis, we continue to see opportunities across the organization. We've been pretty good about looking at our fixed cost structure as the populations have changed, and we haven't been reluctant reduce cost. If you remember, early in the year, we did take a severance charge and we did reduce cost, to save us $25 million to $30 million, some of which you're seeing through the margins of this quarter and should hopefully continue to help us through the remainder of the year. So we won't be shy about taking costs out, but I think the bulk of the shared services savings have been realized.

The next question comes from Brandon Dobell from William Blair & Company. Brandon Dobell - William Blair & Company L.L.C.: Maybe following up on Gary's question a little bit on with the AIU and CTU from a marketing perspective, we’ve heard a number of company's talk about changing the mix dramatically or looking at really reallocating spend between Internet leads and traditional media. Maybe some more color there on how dramatic some of the changes that you're making are? Or if they're not dramatic, maybe a little better idea of what you guys are doing to get better leads with the same spend.

Well, I'll give you a sense for some of the types of activities we're engaged in right now, and Michael will talk about percentages in just a second. From a branding perspective, we have a number of branding efforts underway with all of our institutions with the exception of Art & Design, and theirs is still in development at this point in time. All of the branding work that we've done, Brandon, has been primarily based on proprietary segmentation work that we've done over the course of the last 12 to 18 months that have really helped us better understand how we would differentiate our institutions from one another and how we position them in the marketplace relative to competitors as well. The work has all been tested, when I say the work, I mean the advertising that we're doing the self end, the positioning work have all been tested quantitatively by some methodology. For example, in the case of our advertising, our consumer advertising, in most cases, we’ve used ARS [ph] testing which provides us insight as to how strong the campaigns would be relative to a large base of thousands of commercials that [indiscernible] and tested over the course of time. So in Health, we've launched a campaign in mid-July and updated our TV, our print, our web materials. Still too early to talk about the results there. In Culinary, we launched in May with new digital materials primarily the webpages and banners. We also have some TV that we'll all get into the mix that we're still working through, how to do that in a way that's responsible for the business. At CTU, we launched test in late May. In that particular situation, we have test cells and we have control cells. And after only a couple of months, all the early indicators are very strong. Branded search is up. Organic search is promising. Again, we're trying to bring leads into our sites in a way that's more responsible than simply buying them from lead aggregators. AIU has also updated all of its digital assets. And so we're working right now on doing more things that are viral going into the Q3. So again, all the metrics on the things that we're testing look positive. We believe in testing to make sure that before we launch things on a national basis, we know what to expect for the expenditure that we will put out. Like other companies in the industry, we're all working with social media types of activities. We've put a lot of grassroots effort into our social media across all of our business units. One issue with social media, as you might know, is that it's very, very difficult to measure the actual impact but where we’re working with things like Facebook or LinkedIn, those types of things, we've seen positive responses from all the things that we're doing on the business. And the engagement that we're seeing both from our current students and from potential new students as we engage in conversation about why our institutions are right, is all up. So again, all positive things, but still early in the process. Mike, you want to talk about numbers?

The numbers haven't changed dramatically because most of the activities have happened during the year, and especially in the second quarter as we continue to adjust the marketing mix. So our reliance on aggregators versus traditional sources, the number haven't changed dramatically yet, because of the new activities, but they hope we will going forward.

One last thing I would say is with regard to aggregators is, given the incremental risk that we would assume and that they would assume coming into July, we have negotiated new contrast with all our lead aggregators and we have shifted to make sure that we're relying more on the primary lead aggregators and not some of the sub-aggregators that they sometimes utilize to bring leads. And so again, we want to make sure that we do that in a responsible way and that we minimize the risk for the company. Brandon Dobell - William Blair & Company L.L.C.: And you guys talked about retention within AIU and CTU in the past couple of quarters. Some of the early initiatives that you've got in place, are you happy with what they're doing to retention? Or you're seeing other factors outside of the industry kind of dampen some of those? I guess, I'm trying to get at what kind of expectations should we have the next several quarters as you’ll work through, not only increased graduations and kind of focus on different kind of students, but the internal efforts haw do all those 3 things converge in the back half of the year and the first part of '12?

Again, it's pretty early to tell. We've increased the number of student advisors. We put in the SOAR program. If you look across our company, we have experienced some increase in attrition over last year's second quarter. Again, I talked to the Culinary effort. If you look at our attrition trends during the second quarter, the best performance on attrition was at CTU. So the lowest attrition -- so part of the online efforts are working within the institution.

The next question comes from Amy Junker from Robert W. Baird. Amy Junker - Robert W. Baird & Co. Incorporated: I'm not sure if you can answer it and I understand if you can't. But just in trying to understand the placement rate issue, can you maybe just talk a little bit about what the roll is, and give us an understanding of what they were doing that was really improper? And it sounded, Gary, from your comments that this wasn't necessarily widespread but a couple of bad actors. If there's any commentary you can make there, it'd be appreciated.

Amy, I appreciate your understanding around what I can and cannot say at this point in time. What I'd say is this, it's primarily at this point in time in our Healthcare in some campuses in our healthcare group. We are working to understand it. I do not want to go into exactly what's going on because as we're in an ongoing investigation. I think it's important to keep that to ourselves for the moment because we're looking at all of our campuses. And if some of the practice that we've seen exists, we want to give ourselves a chance to see those before becoming public about them. Here's what I'll promise you. We have really good controls in place at this point in time. The challenge we have is that we've got people that didn't do the right thing, very simply. And so we will go back and we will deal with those people if the investigation indicates that they've done something bad or they've broken our rule; they will no longer have a place in our company. But when we can be public about what has happened, we will let people know and we will fix the issue. Amy Junker - Robert W. Baird & Co. Incorporated: And if I could just ask one other unrelated question, just with regards to new program approvals, have you noticed any slowdown or delays in getting new programs approved and any difference, perhaps, across segments or accrediting bodies?

Not at this point in time. At this point, we're still early in the process. We have a number of programs out for approval. Well, I can't say that we've seen a material slowdown at this point in time.

And also, just remember, we did a large change to our Culinary model with new programs and certificates, are we're pleased by both the internal team and the external responses that we got those programs in the place here in the second quarter. So we did see and get a lot of responses from accreditors to help us on that.

Your next question comes from David Warner from First Analysis.

It's Corey. Gary, I hope you might be able to answer just a couple of factual questions about placement dues, do your regionally accredited schools collect placement data and report that data to either students or to accreditors?

Yes, they do.

Okay. Is placement data collected at a campus level or is it done at more of a school chain level?

Placement is collected and reported from the campus level, but that's the answer to that question. So it's collected and reported at campus level.

And if I could take a step back from the issue, could you just talk more broadly, given that there has been such a focus on compliance at the company over the past few years. Can you speak more broadly about your efforts there? If you think there's anything you want to be doing differently, given that this issue came up? And I'll throw out one example about compliance, you mentioned in your marketing efforts that you're doing more with social media. How are you ensuring that no one from the company is saying anything that misrepresents in posting some social media, do they have to run anything they say past compliance before it's posted, or what do you do?

Let me just step back and say that we will make whatever we believe the appropriate changes should be based upon the investigation when it's completed. As you know, we're obviously disappointed by what has happened at the campus level. As I said, and I believe this to be the case, when you have rules in place, when you have procedures in place, unfortunately, they can be thwarted by people who aim to do that and who work together to do that. And so, we will work to make sure that our rules and procedures, if they need to be modified are clearer, although I can tell you that I believe that they were clear that people simply work to skirt the rules. With regard to what we do from a marketing point of view, we have put in a series of checks in the process so that what we post goes through an internal compliance process, both of our compliance group and our legal group before they are posted. As we put those rules on the plate, as you might imagine, there's been quite a tug-of-war sometime around the fact that we’re maybe making people go through those internal gates. But it is the appropriate thing to do, so we can be assured or more assured that the things that show up that represent our company are things that we intend to be there, which is why as we've gone through the renewal process with our lead aggregators, we've made the decision that we do not want to have third, fourth and fifth tier aggregators out there doing things that we can't control.

And if I could just throw in one more question, so I think it's been a couple of quarters since you put in place the relative tuition price changes that CTU and AIU for associate in bachelor, can you talk about student reaction to that? Whether you're seeing any changes in mix as a result of those price differentials?

Well, I'm not sure we've seen many changes in mix, different than we talked about before. As we talked about in the first quarter, we aligned AIU and CTU's tuition levels to make sure that the student wasn’t encouraged to join the associate program versus the bachelors. And so we evened out the 2 of the cost per credit hour on those program. We have seen dramatic shift continuing into the bachelors program. On average, about 25% of our students last year at this time were in the bachelors program, and now about 40% are in the bachelors program with the associates going from a roughly 65% down to 20% -- or 65% down to 50%, I'm sorry.

Your next question comes from James Samford from Citigroup.

I just wanted to touch on the international side, it looks like it continues to be a strong year. I'm just wondering, have you seen anymore increase in competition? Obviously, there's been some acquisitions lately. And where are things in terms of valuations are getting stretchy on the international side right now?

Sure. Our international business is doing extremely well as you saw from our performance results. We had very differentiated institutions. Our Marangoni institution from a fashion design standpoint is a world leading brand. Our INSEEC institutions in France. Our Monaco institution, again, great strong brands with long histories and great recruitment from high schools of students that are high quality. So we have not seen any new competition enter these markets, these established schools. And we haven't seen a lot of different competitors threats besides from the traditional institutions. From a valuation standpoint, hard to say, we've looked at a lot of acquisitions as many of our competitors have probably done. And around the world, valuations are obviously much higher outside the United States than they are inside. That said, we haven't seen deals that would appeal to us from being accretive to our business and accretive to our shareholders and being a wise use for our capital over the last 6 months.

If I could touch on bad debt really quickly, it looks like it's particularly lower this quarter, certainly lower than our estimates. And it looks like you had negative bad debt at AIU. Just wondered if you could walk us through how we should be thinking about that trending? Was this more of a onetime nature type of quarter?

I think, if you look at -- there's 2 things happening within Art & Design and Culinary, because we dramatically curtailed the amount of student payment plans that we’re using the bad debt has been falling pretty sharply and will continue to fall on a comparable basis. From AIU, I think it's just a timing issue between the cash balance of the student's outstanding. We wouldn't anticipate seeing that type of negative response. I think on average, you'll see the online institutions ranging some place, on a normal basis, between 1% and 3% of revenues is bad debt.

The next question comes from Suzi Stein from Morgan Stanley.

Can you just give us a sense on how much you expect to spend on this internal investigation? And also, how will you communicate findings as you review placement practices at other schools? So if you find inconsistencies, and after your report to the Attorney General, is that something that would be worthy of an 8-K? Or should we expect that in future quarterly results?

To answer your question, Suzy, first let me say that we'll spend whatever is necessary to get to the bottom of the issue, and to put into place, the controls that are necessary, to make sure that we don't see this type of thing again, I'd start there. I don't know what the estimate will be, but we will obviously factor that one in as go forward. It depends on what we find what we will do next, again, we're very early in the process. What I'd say is that, we found the issue. We reported the issue. I think we've acted responsibly at this point in time in terms of engaging our board, engaging an independent party to look at the issues that we found. And with regard to how, we’ve reported out to both the New York Attorney General and to the relevant accrediting bodies. We will continue to do that. And when we have resolution and an action plan, what you can count on, is that we'll report it back out in a way that’s responsible, so you can understand what's happening here.

And then you touched on 90-10 but can you talk specifically about what you're doing to address this?

Again, from a 90-10 standpoint for 2010, we don't see a high degree of risk -- or 2011, excuse me. As we go in 2012, we have to carefully look at where the full year that Stafford plays, how it plays against each of the individual OPE ID numbers. We're looking at a variety of options. We've looked at different ways from grant programs to bring in more 10% money. We've looked at different price increases across the institution to drive more GAAP. We've obviously be moved away from using the balance sheet and asking the student to use more cash pay. We're looking at those as options along the way. So we'll see where it goes in 2012. We're conscious of it, we'll see what other options are available. 2011 from right now, it looks like we should be in an okay shape for 2011.

The next question comes from Ariel Sokol from UBS.

Gary, a very big picture question regarding the company, its programs in the context of the macroeconomic environment; I think it's been mentioned how the economy plays a role in some of the challenged enrollment growth or new starts declines. What are your thoughts about the institutions and programs were the U.S. economy to go double dip? Do you think that we'd see a pickup in demand or could business conditions potentially get worse for your institutions?

I'm not an economist, so I don't try to comment on double dips. But here's what I can tell you what we do, we look at fundamental demand in the marketplace for the programs that we teach. We review those programs on about a quarterly basis. Where we begin to see that the demand has slackened or that we're not meeting employers’ needs, we either eliminate programs or we make program modifications to ensure that we're teaching our students things that will be marketable and meaningful in the marketplace. Our goal here has been to have a process that allows us to do that in a way that's responsible no matter what happens with the macroeconomic environment. And so, we'll continue to do that. We'll roll with the punches and we'll make the appropriate changes, both the programs and to our company, based upon what we see is coming at us. But I really don't, at this point in time, can't give you an answer on what I see from a macroeconomic point of view.

That’s helpful and then from a marketing perspective, can you speak to customer acquisition costs or alternatively trends in the marketplace you're seeing in all your channels? Are you seeing potential reduction in certain channels, perhaps on the non-Internet lead aggregator side?

We've seen across the board an increase in our acquisition cost, be it on a cost per lead basis or other metrics. Probably overall, our cost per lead for the quarter may have been up as much 10% to 15% across the board, however, that's hard to tell whether that's the cost increase or a shift increase from the different channels that we’ve used. So we're seeing pressure across the board on all our different costs. Probably within the regulatory environment as the aggregators are changing their models, that is probably -- it's just a hypothesis, it’s probably also listed all of our costs as they have more regulatory obligations.

The next question comes from Bob Wetenhall from RBC Capital Markets.

It's actually Tom Austin on for Bob Wetenhall. I may have missed it, but I just noticed that you guys said that seems like the number of credit hours were down among students. I was wondering if you could just get into the reasons for this? And maybe if that's a trend that you expect to continue or to reverse?

I don't know what to say what about the trend. But we definitely saw a reduction in credit load hours at AIU, as we spoke about because of the change in the programs. But also, just to cross all institutions, have seen a slight lowering of the average credit load of a student. You couple that with some of the trends in acquisition and new student starts and you also couple that with some other retention trends that we talked about, the students leaving. I think students are just, in general, decelerating a bit. And we've seen that across the institution driving a lower RPS.

Okay, so you just think that kids just don't want to take as many classes. Is there any specific reason behind it, do you think?

I don't know if there a specific reason, but we've seen that. But also, you have to look at all the different mixes of program changes we've done in Culinary, from associate to certificate; in Art & Design in redesigning our programs; the shift from associate to bachelor concentrations for the AIU and CTU students. So there's a lot of noise in what see. It's still hard to draw that conclusion, but at least the fact and the numbers show us that the average credit load is down slightly.

The next question comes from Mike Tarkan Arden from Friedman, Billings, Ramsey. Michael Tarkan - FBR Capital Markets & Co.: Just a quick one on capital, can you talk about how you're thinking about capital at this point, given that you're sitting around $300 million in cash or so? Are we going to look for buyback activity to accelerate or pick up in the back half of this year?

We can't comment specifically, but as you know, we have been buyers of our stock over the last 4 years, and the last 5 years since Gary and myself have been with company. We continue to deploy capital in the best way that we can, first and foremost, keep the balance sheet strong as we’ve always talked about. We are looking at acquisitions that might make sense. Our capital expenditures remain strong at about 3.5%. We're looking at our startups closely, based on the economy, based on the regulatory environment. At the end of the day, without using capital for those purposes, which are the foremost purposes, we will return it back to shareholders as we can. Michael Tarkan - FBR Capital Markets & Co.: And then just real quick, regarding Pell Grants, any potential impact from the elimination of interest subsidies for graduate students?

It's too early to tell, but it should be very small from what we can see.

The next question comes from Peter Appert from Piper Jaffray.

Any color you can offer on your thoughts around the changes in the business model for Arts & Design, in terms of specific things you're considering?

Again, give us some time to share it out with you. But I think, we're looking at it, making sure the program design is done right around the outcomes for the student. Make sure that we look on a selective basis of where testing is appropriate for students entering the programs. That we ensure the best most potentially successful students enter the programs. Looking at the optimal degree, is it an associate, is it a bachelors, is a masters, based on the program based on the outcome. Make sure we have a consistent message to the market around our brands and around our institutions. And then make sure we’re probably optimizing the use of our IADT online institution with our core ground campuses to get a great blended opportunity for the students more than what we done in the past. So those are probably some of the changes we're looking at.

And would pricing be a significant consideration, do you think?

I think tuition levels are always significantly when you look at meeting the past gainful employment without violating 90-10, so you have to thread that needle still. Within the rules, so we have to optimize between degree type, outcome, salary data and 90-10, where those tuition levels would have to fall.

And then is it possible, Gary, to give any time frame around the investigation?

Not at this point in time. We are, again, in process we're early on and we'll move as expeditiously as it make sense to move.

The final question today comes from Greg Karp from Chicago Tribune.

Regarding the misreporting issue. I can appreciate that as an ongoing investigation, but I was hoping you’d just provide some basic information such as, what exactly was misreported and how? Was it just a top line number for placement rates? Or did schools just lie about placement rates and use -- or did they, maybe, use fraud methods for calculating them?

Well, I understand that you would like me to comment in all those things, it would be inappropriate at this point in time given where we are in the investigation.

Maybe you can elaborate on how disappointing it must be, that this misreporting was about such a high-profile issue as placement rates.

I will make a quick comment and then this will be the end of our discussion, so let me do that. Let me reiterate the fact that I couldn't be more disappointed right now with what we found. It is not what we stand for as a leadership team, and I will tell you that the actions of a few people have tarnished what I believe has been really good work over the course of the last several years by the overwhelming majority of the employees that we have in this company. So again, I couldn't be more disappointed. When we found the issue as a team, we did the right thing by engaging external counsel, by engaging our Board of Directors and by launching an investigation, and further, by reporting it to, in this case, the New York Attorney General and the appropriate regulatory agencies that are out there. So it's our intent to do the right thing. I regret at this point in time that we can't provide you more details, but as I've at the outset of the call, it would be inappropriate to do that given that we're so early on in this process. I've tried to give you as much as I can give you at this point in time. When the investigation is complete, we'll report to the New York Attorney General, to the accreditors and as appropriate, to the folks who have been on this call. But until then, we'll go about our business of taking care of the issue at hand of making sure that all of our employees understand why, what has happened is wrong. And we'll go forward from there to run our company. So thank you very much for all of your questions and again for your interest in our company.

Thank you for participating in today's Career Education Corp. second quarter 2011 earnings conference call. This concludes the conference for today. You may all disconnect at this time.