Perdoceo Education Corporation (PRDO) Q1 2013 Earnings Report, Transcript and Summary

And welcome to the Career Education Corporation First Quarter 2013 Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. And I will now turn the call over to Matt Tschanz. You may begin.

Thank you, Vanessa. Good morning, everyone, and thank you for joining us on our first quarter 2013 earnings call. With me on the call this morning are Scott Steffey, our President and Chief Executive Officer; and Colleen O'Sullivan, our Senior 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 the Investor Relations section of our website at careered.com. A replay of this call will be available on our site. You can also contact our Investor Relations department at (847) 585-3899. Before I turn the call over to Scott, let me remind you that yesterday's press release and remarks made today by our executives may include forward-looking statements as defined in Section 21E of the Securities Exchange Act. These statements are based on information currently available to us and 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 annual report on Form 10-K for the year ended December 31, 2012, and our 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. In addition, the remarks today may refer to non-GAAP financial measures, which are intended to supplement, but not substitute, for the most directly comparable GAAP measures. Our press release, which contains financial and other quantitative information to be discussed today is available within the Investor Relations section of our website at careered.com. Now let me turn the call over to Scott Steffey.

Thanks, Matt. Good morning, and thank you for joining us. I'm pleased to be participating in my first quarterly earnings call as President and Chief Executive Officer of Career Education. Today, I would like to share with you some thoughts on 4 topics that are core to our business. First, from a macro perspective, where I see both our sector and Career Education. Second, I would like to offer some early observations on what I believe are the company's key ingredients and tools for success. Third, I will discuss some highlights and trends from Q1. Fourth, and finally, I will provide an update on our rightsizing and reengineering efforts. Following my comments, Colleen O'Sullivan, Senior Vice President, Chief Financial Officer, will provide additional detail and color on first quarter results. We will then be happy to take your questions. First, let me say that it's both a privilege and a great opportunity to lead this company at such a pivotal time for Career Education and the entire private sector education industry. I've been fortunate over the past 2 decades to be directly engaged in the national dialogue on education, while serving diverse leadership roles across the sector. I had the opportunity to serve as Vice Chancellor for the State University of New York at a time when SUNY was the largest unified postsecondary system in the United States. Later, I served as Executive Vice President and Chief Operating Officer at Strayer Education during a period of extraordinary academic and institutional growth. Throughout the course of my career, I have also counseled and partnered with both nonprofit and private sector educators, as well as with individuals and institutions seeking to invest in higher education. I have a sense of urgency in addressing the challenges and opportunities that lie ahead, and I am singularly focused on repositioning the company in order to deliver high quality educational experiences for our students, along with positive returns for our investors. As a result of my diverse experience and exposure, I have a strong passion and drive for education, a long history and commitment with delivering it with academic excellence and innovation. As I said before, I also bring to my new role at Career Education a clear sense of urgency in taking on the challenges and opportunities that lie ahead. From a macro perspective, overall, the education industry continues to work its way through a period of significant change. High unemployment rates, low economic growth, minimal job creation and the targeted reregulation of certain aspects of the industry in the U.S. have caused a severe contraction of the proprietary sector. Further, a more price-sensitive student continues to test the value proposition of a postsecondary education. Having said that, let me share, from a macro perspective, some reasons why I'm optimistic about the efficacy of private sector education as well as the future prospects of this company. One, the employee skills gap is real, and it's pervasive in the U.S. and abroad. Two, the earnings divide between those with degrees or credentials, and those without continues to widen. Three, there's low educational attainment in the populations and geographies we serve. Four, there's reduced government spending to traditional schools in the geographies we serve. In short, the macro drivers that were driving the industry 10 years ago are still apparent. They have retarded a bit going through a great recession, but they are still very much in place. What this tells me is that the need for high-quality, career-focused adult education is clear, and a degree remains an essential ingredient to a more prosperous future for the populations we serve. Students increasingly hail from nontraditional backgrounds. And given the educational flexibility required by these groups of individuals, traditional postsecondary academic institutions are often ill-equipped to address their needs. Not only do community colleges, public universities and even private institutions often lack the necessary dexterity, but many are now feeling the strain of shrinking resources. Meanwhile, the value of an education, whether in the form of a bachelors, associates, vocational degree, specialized certificate, license or employer-sponsored training continues to increase. Private sector education continues to be uniquely positioned to play the critical role in meeting this national and international need. Career Education will be a valued and vital contributor in preparing these learners for tomorrow's dynamic workforce. Now let me share some reasons for my optimism about the company. I believe we have the right tools and ingredients for success. Let me identify some of those for you. One, we are testing several paradigm shifting solutions to the current postsecondary framework that will enhance company outcomes and propel success across operating divisions, not the least of which is the continued cultural adoption of our students-first policy, which insures our primary focus is on the success of our learners from which all other objectives flow. Second, further differentiating our university brands to serve distinct student segments. Third, driving leadership and innovation with our personalized learning, powered by adaptive learning technology and teaching methodology that we have introduced in our expanding across our domestic institutions. Fourth, improving the quality of our efforts and success in attracting, enrolling and retaining students. Fifth, advancing the process of retooling and expanding our programs, rationalizing our geographies, increasing operating efficiency and consolidating brands among our Career Schools. Sixth, expanding and growing our successful international business. Many of these institutions are leader in their respective fields, and all are associated with an elite tier, which confers prestige on the entire group. Seventh, rightsizing and reengineering the domestic organization. And eighth, our disciplined process for teaching out our Transitional Schools with a student-centered approach. In looking at how these tools and ingredients can come together to form progress, I would like to point to a few highlights in Q1. First, our financial results for the quarter were in line with our internal projections. We also saw progress from management initiatives and positive trends in each of our segments. Our university saw a marked improvement in retention in the first quarter. We were recognized for our continued leadership in serving military and veteran students, as Military Times rated both AIU and CTU among the best business schools for veterans, with CTU being ranked as the #1 online institution for veteran students. Three, our Career Schools -- Le Cordon Bleu, health and design and technology are trending positive on both placement and retention rates year-over-year. Culinary continues to improve the relative mix of students enrolled in its associate degree programs, which was reintroduced just last year. Our international institutions continue to perform well, increasing starts, revenues and operating income in the quarter and are strategically well-positioned for market expansion. Furthermore, during the quarter, our international group continued to integrate the operations of ESC Chambéry, another elite selective admissions business school in the French Alps, incorporating it into our Paris-based INSEEC Group of schools. We also expanded the use of adaptive learning technology at AIU and CTU as part of our personalized learning platform. The initial signs are promising in terms of how this will advance the science of learning and teaching to the benefit of our students and faculty. We are in full rollout within the University segment. Our Career Schools also have begun piloting adaptive learning, as we continue to increase the scale and scope of this personalized learning technology, leading others in the industry. Now we have more than 8,000 students, who have taken at least one adaptive learning course, spanning subjects such as Math, English, History and Business. Our Transitional Schools performed in line with projections. These schools continue to meet their commitment to students, while in teach-out, and retention rates increased from a year-ago quarter. Lastly and very importantly, we're in the late stages of finalizing our plans to rightsize and reengineer the domestic side of the company, which also is essential to rebuilding and redefining the culture of the company. Let me elaborate a little bit more about these efforts to rightsize and reengineer the organization. As a result of an intense 6-week operational review, we have established some critical initiatives for this fiscal year, with full year benefits in 2014. I believe that nothing is more important for the near-term turnaround in growth prospects at Career Education than rightsizing and reengineering the organization. It is the process by which we will drive operational efficiency, streamline the organization and rebuild our culture. We are laser-focused on these combined initiatives to rightsize the company for the duration of 2013 and beyond. It is foundational to our success that we execute and leverage these efforts to do the following: realign the existing infrastructure with current and expected student population levels; improve the efficiency of our business systems, procedures, processes; and rebuild our culture and create an organization focused on academic excellence for the students we serve; integrity and professionalism for the workplace we create; and operational efficiency across our domestic footprint. We believe the goals we have set for ourselves are achievable if we execute as an organization and will result in a material financial impact in 2013 and beyond. Our targets are clear and the return will be significant. We expect to achieve permanent cost reductions of $25 million or more for 2013. We expect to implement the rightsizing and reengineering processes in the second half of this year with the majority of actions completed before year-end. In conclusion, while our first quarter financial results generally reflect the year-over-year declines being experienced across much of the sector, I see signs of progress and I've tried to share many of them with you today. We're continuing to make progress on our legal matters as well, and I'm optimistic we'll get those issues behind us. We also are doing the right things in terms of operational execution in a variety of areas, and seeing positive trends as a result. In my first month with the company, it has only reinforced my belief that we have assets that can perform well, strategies to reposition us and processes and plans that will rightsize and reengineer the organization and rebuild our culture for success. Thank you. I will turn it over to Colleen to discuss further details on our results for the first quarter. I look forward to answering your questions at the conclusion of her remarks.

Thanks, Scott. Good morning, everyone. Let me first start by reminding you of a few items included in the press release and the Form 10-Q we issued last night. In the first quarter, we recognized a $6.7 million or $0.10 per share loss related to the pending sale of our AIU institution in London, England. And in the first quarter of last year, we received $19 million or $0.18 per share of proceeds from the settlement of certain insurance contracts. Excluding these items, loss per share for the quarter is $0.13 as compared to earnings per share of $0.60 in the first quarter of 2012. In addition, during the quarter, we completed the teach-out of SBC Hazelwood, which had been reported in our Transitional segment. The results of operations for SBC Hazelwood are now reported in discontinued operations. We have included recasted quarterly information for 2012 in the press release, so you can update your models accordingly. Now let me provide an overview of financial performance for the quarter. Revenue was $340 million, a decrease of 21% versus the prior year. Operating loss was $18 million, driven by declining enrollments across our domestic institutions. Overall, new student starts, excluding Transitional, were down 18% from last year, while student population declined 16% versus the first quarter of 2012. Turning to the financial results by operating segment. First, the University Education Group, which includes our predominantly-online institutions, American InterContinental University and Colorado Technical University. As Scott shared, there remains a large and growing need for postsecondary education in this country. However, the current state of the economy and uncertainty surrounding job prospects continues to impact many students' decision to return to school. In the first quarter, new student starts declined 31% and 20% in AIU and CTU, respectively. While these operating metrics are disappointing from a year-over-year comparison standpoint, please note that the metrics are being impacted by our Readiness Opportunity programs. As discussed on prior earnings calls, the goal of our Readiness Opportunity period is to identify students who may not be prepared for the rigor of college studies and allows them to leave the institution prior to incurring any debts. We continue to believe this practice aligns with our student-first philosophy. Excluding the impact of these programs, new student starts were down 22% and 10%, respectively. Further, we have consistently experienced retention improvements at both AIU and CTU and anticipate this trend will continue throughout 2013. For the first quarter, AIU revenue of $66 million was down 26% versus the first quarter of 2012. Student population during the quarter decreased 18% compared to the first quarter of last year and revenue per student experienced pressure due to lower average credit loads. Revenue for CTU of $90 million was down 6% versus the first quarter of 2012 as a 9% reduction in student population offset modest increases in revenue per student. Operating margins in AIU and CTU were 4.7% and 17.6%, respectively. Over the past 2 years, management has kept the institution's variable expense structure in line with declines in student population. However, as the rate of these declines has accelerated, each has experienced negative operating leverage primarily due to intake and occupancy costs. The University Education Group continues to refine the processes by which it attracts, engages and enrolls prospective students. While lead to enrollment metrics remain challenged, the organization is pleased with recent advisor productivity improvements. Management has also assessed its existing geographical footprint to ensure its ground campuses are optimally located to fully enhance the entity's mission to serve students. The recently-completed disposition of AIU's London campus is the result of this effort. In 2012, AIU London contributed $12 million in revenue and $4 million in operating losses. Now moving to the Career Schools Education Group. Our career-focused schools continue to be the subject of much focus as the team aggressively pursues a turnaround in performance, reestablishes its value proposition for students and employers, and progresses towards one comprehensive career college strategy. In the first quarter, revenue of $114 million decreased 28%, reflecting an 11% decline in new student starts and 30% lower student population levels versus the prior year. Together, these institutions reported an operating loss of $31 million during the first quarter. Despite these financial headwinds, progress has begun to enhance critical operational and academic processes across the education group. While still early, we are pleased by the recent improvement in both enrollment advisor productivity and student retention rates. Additionally, we anticipate further improvements, as the impact of intake initiatives, new programs and reengineering efforts begin to take hold. Next, our International Education Group continues to perform well. In the first quarter, revenue increased 16% to $50 million. Let me remind you, the year-over-year comparison is impacted by our fiscal 2012 acquisitions of Luxury Attitude and the French business school, ESC Chambéry. Excluding this impact, international revenues would have been up 7% as a result of higher student population and moderate increases in revenue per student. New student starts for the quarter increased 46% versus prior year. However, the year-over-year start comparison is impacted by one additional start versus the prior year. On a comparable basis, new student starts would have been up 22%. Operating income for the quarter was $13 million, remaining relatively flat to prior year due to sustained investments in programmatic accreditation and blended learning curriculum. As Scott discussed, we are in the process of developing and implementing a business model and cost structure that is aligned with lower student enrollment and the closing of selected campuses. These efforts will address all aspects of our domestic business and include changes associated with lower student pop volumes, as well as fundamental business model changes that will allow us to be more profitable as revenues stabilize and grow in the future. We are doing so with an eye towards standardization and simplification of the way we operate, while maintaining the quality of education we provide our students. We've retained AlixPartners to work with us in this process. Over the past several months, working with a variety of teams in all areas of our company, we have developed a comprehensive improvement agenda that has the buy-in and commitment of our management team. In the near term, the most significant asset impact will be realized through our cost reductions, thereby improving margins. These measures, in turn, will help stabilize our operations and provide support for our growth initiative. The most significant areas of focus include: strategic sourcing and procurement of third-party, vendor-supplied services to reduce the cost of outside services; improving productivity across business processes to eliminate low-value work; leverage technology to reduce manual labor and increase spans of control across certain functions; prioritizing service levels to reduce cost, while servicing highest priority needs; in certain areas, possible outsourcing of commodity activities to low-cost providers. As Scott said earlier, as we look to rightsize our cost structure, we are being extremely conscious to ensure that we do not compromise our commitment to service excellence. We are partnering with AlixPartners to assist in the implementation of the redesigned work streams, and we are leveraging their expertise in the various processes we are looking to standardize and simplify. We are moving aggressively to strengthen our business and financial performance. Some of our improvement initiatives have already been executed. The remainder are in process and are expected to be completed in Q3 and Q4 of this year. As Scott mentioned, the impact of these initiatives is expected to reduce operating expenses by $25 million or more in 2013. Please note that these reductions are on top of the $45 million to $55 million in annualized operating expense savings announced during the fourth quarter of 2012. Moving to our Transitional Schools segment. As Scott mentioned, we remain focused on fulfilling the commitments to students within these campuses as they complete their course of study. For the first quarter, these institutions have operated on budget and in line with our teach-out schedule. We also continue to identify opportunities to reduce any remaining gross lease obligations. Our expectation remains that this segment will incur operating losses between $70 million and $80 million for the year, excluding the impact of remaining lease obligation charges and other unusual items. Before I open the call for questions, let me update you on our financial position and liquidity. As of March 31, 2013, the company had cash, cash equivalents and short-term investments of $299 million. Cash flow from operations for the 3 months ended March 31, 2013, was a $14 million net usage of cash, with capital expenditures in the quarter of $4 million or 1.2% of revenue. Additionally, during the first quarter, we repaid the full $80 million borrowing against our existing credit facility. As we execute on our strategic imperatives, we expect there will be continued pressure on our domestic operating cash flow in the short term. However, we do anticipate that we will be able to satisfy the cash requirements associated with, among other things, our working capital needs, capital expenditures and lease commitments through at least the next 12 months, primarily with cash generated by operations and existing cash balances. We continue to monitor the operating performance of the business closely, and as discussed, are in the process of implementing initiatives to further improve the financial profile of the company. And so with that, operator, let's open up the call for questions.

[Operator Instructions] Our first question comes from Jeff Silber with BMO Capital Markets.

Scott, you and Colleen talked about some of the potential changes, and I know it's still early. But it seems like most of the focus, at least in terms of the reengineering, is in the back office. Do you envision any changes, I guess, more on the student-facing side? Are students going to see anything that's going on with these impacts?

Some of it is on that side. Yes, we're doing some different things with admission officers in our Career Schools. We're also doing some different things with -- we've already implemented some things on the University side with regards to student interface with people managing them through the 21-day period. And so, yes, there will be some things that impact the student-facing side, but more of it is happening on the back-office side, you're right on that.

Okay. And just so I have the numbers correct. So the changes that you announced last year would have saved the company about $45 million to $50 million in operating expenses on a run rate. These new changes give you another $25 million. And should we just add that $25 million on top of the $45 million, $50 million to see, on an annualized basis, what all the changes might impact?

The $25 million is an addition to the $45 million, yes. The $25 million though isn't the annual run rate. The $25 million, most of that is going to be realized from actions taken in the third and fourth quarter. We've already taken some actions in the first quarter, and we have some teed up for the second that will go into that total $25 million, but the majority of that is Q3 and Q4.

Okay. So on an annualized basis -- I'm sorry if I'm confused, at the end of the day, when we get all these changes done, what kind of savings are we talking about?

For 2014, it's going to be a multiple of the $25 million.

Okay. All right. That's fair.

Because you're seeing most of the expenses' taking out that will result in the $25 million will happen in the third and fourth quarter.

Okay, great. Then just a couple of other numbers question. Were there any onetime items beside the ones that you called out on the loss of the sale of the London facility? Any other onetime items that occurred in the quarter that we need to be aware of?

Jeff, this is Colleen. No other significant onetime items in the quarter, as it impacts pretax income. As disclosed in our 10-Q, we did have one discrete item in the quarter in our tax rate. So that showed some profit -- some benefit -- increased benefit in our income tax rate.

And what kind of tax rate should we expect for the rest of the year?

You should see probably not so significantly different than what we've experienced this quarter. I think it's probably about a 200 basis point impact of the discrete item in Q1.

And I'm sorry, was that a positive or negative impact?

Positive impact.

Okay, great. And then your budget for capital spending for 2013?

We continue to be in the 3% to 4% range as far as capital expenditure expectations for the full year.

All right, great. And one final one. I'll jump back in the queue. What do you think the minimum cash balance you need is to run the business?

At this point, we haven't pinpointed a number. I think as both Scott and my comments have covered, we're, obviously, very focused on ensuring that we have liquidity in the company. And at this point, feel comfortable as we look out the next 12 months.

Yes, Jeff, we watch the liquidity of the company very, very closely, and we're monitoring it very well. We feel comfortable that we have -- we're moving in all of the right directions to have the liquidity we need at the end of the year to ensure that we have a positive 2014.

Our next question comes from Trace Urdan with Wells Fargo.

I was curious, first of all, about CTU and AIU, and whether, Scott, you've sort of endorsed the strategy that had been already announced in terms of bringing CTU kind of up market and making AIU a lower cost option for students. And if that's the case, what steps have you taken on the student-facing side to communicate those changes to the market?

We're still in the beginning stages of differentiating those brands. There's a lot of work that has taken place that hasn't been brought to market yet. There's a lot of research messaging, a variety of other things that have happened. We'll start to see the impact of that in -- a little bit in the second quarter, but more in the third quarter of this year, where we'll be in sort of full mode with implementing a lot of the differentiating factors between those 2 entities. And we'll start to get a clearer idea of the traction that we'll be able to generate on that. But we definitely have some progress to make there. AIU is a great example from the standpoint of how well we're communicating, what the all-in price is of that institution relative to other competitors and who have maybe a lower tuition price, but when you add up all the fees, et cetera, time involved to a degree and so forth, are actually higher-cost options. So we still have a good ways to go in terms of how we're interfacing with our students and explaining the value proposition of both of those entities to fully evaluate how well we're differentiating those brands.

So when you describe implementing differentiated factors, are you speaking primarily of that student communication? And are we talking about just at the admissions officer level? Are we also talking about kind of marketing and advertising messages in the market?

Both, both.

Okay. Colleen, in the international, you mentioned there was one additional start in the quarter. Does that come at the expense of a different quarter during the year that we should be paying attention to?

No, it's a net add. Some new programs were introduced at the first quarter of this year at some of the institutions within our INSEEC Group.

Okay, very good. And then the last question I had was the adaptive learning changes that have been taking place, I'm wondering if that -- is that just a change in technique, or are you actually looking at the potential of reducing the amount of time it takes to complete a degree? And if the latter is the case, I'm wondering sort of how far HLC has been brought into the changes that you're making here? Is it something they had to approve ahead of time? Or is that not required here?

It's not required. It has nothing to do with the time involved in a degree. It is a -- it is both a technology, as well as a teaching methodology that gets into understanding what the core talents and knowledge base is of a student and teaching to their strengths as well as quantifying their weaknesses as to how you deliver the course content. And the results of that has been very promising. We've seen some very positive results, both from a survey standpoint -- I think the last briefing I got on that, I think 95% of our faculty and an overwhelming -- a similar number with regards to our students, were very positively impacted by their experience with adaptive learning, and it's showed some very positive results in terms of its impact on retention as well, so we're very excited about it.

And our next question comes from Bob Craig with Stifel, Nicolaus. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: Scott, congratulations on your appointment.

Thanks, Bob. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: If this question's been asked, I apologize. I was temporarily disconnected. But just expanding on Trace's question, I was wondering, Scott, if you could share your views on the pricing levels or pricing strategy of the organization, all in. You take a look across the various assets, are they -- are the programs adequately positioned in the market pricing-wise?

For right now, yes. Looking at our value proposition on a going-forward basis is something that everybody in the industry is having to do. And us, being in the right position for explaining the value proposition to a student is an important challenge for us just like it is everyone else. But from the standpoint of looking through this year, yes, for where we're trying to manage the company this year and into 2014, I'm comfortable with our pricing level. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And again, Colleen, if this has been asked, I apologize. But last quarter, you indicated that total population up 2% is the expectation. You did not say that this time around. Has that changed?

I did not say it, you're correct. At this point, we -- just to clarify, we said, I think, down 2%. And so we are comfortable with that being sort of in the range at this point in time.

We're in line with that right now.

And our final question comes from Corey Greendale with First Analysis.

This is actually David Warner for Corey. I was wondering if you could talk a little bit more in depth about your plans for brand consolidation -- whether, I guess, you endorse the previous statements around brands? How many that could actually come down to and sort of the timetable around that, or ...

In terms of brand consolidation on the Career College side, I'm not ready to go into detail of that right now. It's something that is of great importance to me as we start getting into our reengineering and repositioning efforts with the career college side. That's probably something I'll be in a better position to speak directly to in a couple of quarters.

Okay. And does it appear at this point that you may be able to close some of the Transitional campuses earlier than previously expected by maybe moving those students online or anything? Or, are those still closing according to your internal plan?

They're right on track with our internal plans. We are very aggressive in looking at a variety of different options we can realize to work ahead of our internal plan, online being part of it, as well as other things that we're exploring. The positive there is it is a large economic commitment, and it's performing very, very well.

Okay. And one final follow up. The $25 million of incremental savings you've mentioned, is any of that coming out of the Transitional segment?

No, it is not.

No.

And that was our final question. I will now turn the call back over to Scott Steffey, President and Chief Executive Officer, for final comments.

Yes. If any of you have any additional questions, please feel free to call our Investor Relations with any of those things. Otherwise, I look forward to speaking with you next quarter. Thanks very much.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.