Perdoceo Education Corporation (PRDO) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Career Education Corp., Third-Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Sam Gibbons. Please go ahead.

Thank you, Amy. Good morning everyone and thank you for joining us. With me on the call today is Todd Nelson, President and Chief Executive Officer, Dave Rawden, Interim Chief Financial Officer; and Ashish Ghia, Vice President of Finance. Following today's prepared remarks the call will be open for analyst questions. This conference call is being webcast live within the Investor Relations section at careered.com and webcast replay will also be available on our site. You can also always contact the Alpha IR Group for Investor Relations support at 312-445-2870. Let me remind you that this morning's earnings release and remarks made today include forward-looking statements as defined in Section 21 E of the Securities Exchange Act. These statements are based on information currently available to Career Education and involve risks and uncertainties that could cause actual future results, performance and business prospects and opportunities to differ materially from those expressed or implied by these statements. These risks and uncertainties include but are not limited to those factors identified in Career Education's Annual Report on Form 10 K for the year ended December 31, 2014, and other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, the company undertakes no obligation to update those factors, or any forward-looking statements to reflect future events, developments, or changed circumstances, or for any other reason. In addition today's remarks refer to non-GAAP financial measures which are intended to supplement but not substitute for the most directly comparable GAAP measures. The earnings release and slide presentation which accompanies today's call and which contain financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures are available within the Investor Relations section a careered.com. So with that, I would like to Todd Nelson. Todd?

Thank you, Sam and thanks to everyone for joining us on the call. As of today, I have officially been on the job here at Career Education for 12 weeks. And I thought I would start out today's discussion with a few key things that I've learned. First I would like to start out with a few comments about the staff and faculty we have here. I've spent much of the last 12 weeks meeting and working with the talent we have here and I've been remarkably impressed with what I've seen so far. As our investors know, our team has been through a lot in terms of restructuring and cost containment over the last few weeks. Throughout that process we have kept a focus on our students, and prioritized their needs, in many cases over their own personal and professional needs. I'm very excited about the talent we have throughout our company, and I'm energized by the opportunity we have long-term here to help them shift a career at a small organization to one that grows responsibly through its focus on student outcomes, quality and retention. I've also had a chance to spend a great deal of time analyzing each of our education systems. As all of you know this industry is undergoing a significant transformation. There will be those who will succeed and those who won't. One of the things that really attracted me to Career Education was the quality and brand names of our two award-winning universities. Both institutions are respected and have multiple areas of study and with more than 90% of our student population completing their course work online we believe we have a tremendous foundation and competitive position to build upon as we move forward. I would like to take a few moments to tell you about some of the recent achievements our universities have made over the course of the past few months. As some of you may know, AIU launched an intellipath driven MBA in 2014. We believe that this is the first MBA program in the US driven by adaptive learning technology. Along those same lines, AIU's Master's of Education Degree in Elementary and Secondary Education are now among the few MED programs to integrate adaptive learning throughout the entire curriculum. And AIU's MED program was among the first fully online programs to be accredited by the Teacher Education Accreditation Council. We are proud of these milestones as they highlight the strength of our institutions and as we have articulated in the past we are encouraged by the fact that our two university platforms should not be significantly impacted by the Gainful Employment Regulations. These are all good examples of why we feel strongly that our university platform is positioned to succeed in the future. As I've been learning more about the strength of our universities, I have been very impressed by the strength of our relationships with our employer partners who look to our university platforms to address skills gaps within their workforce. The strength of our university offerings is really evidenced by the growing number of corporations with whom we've developed partnerships that provide us opportunities to fill the unmet employments needs. And we are proud of the fact that we are able to help their future employees become more qualified, and better prepared at levels they need to be successful. As we have talked about before, our corporate partnerships are much more focused on quality as opposed to quantity, which is why both CTU and AIU continue to work diligently with our corporate partners about ways that can routinely engage and articulate the value of our educational services to their key employees. We now have relationships with more than 300 corporate accounts with an employee base north of 5 million employees. Our priorities are to focus on further strengthening our existing relationships to help drive enrollment across the University Group and continue searching for local communities to identify additional high-quality organizations who stand to benefit from partnering with us. I'm looking forward to meeting more of our employer partners as we close out 2015 so we can build even stronger relationships with them in the future. Taking a step back, I want to make sure I've had an adequate opportunity to embrace the strategy that we've been talking about with all of you the last two quarters. As most of you know, I've been in the industry for over 20 years. I've seen numerous highs and lows during that period. While the industry has some self-inflicted wounds, the reality is and in particular CTU and AIU serve an important need in education for what are oftentimes non-traditional learners. These are hard working people looking to increase their skills and provide better lives for themselves and their families by expanding their opportunities. So what we have done through the divestiture and teach-outs of our Career colleges is put Career Education and in a better position where we believe there is the greatest need for high quality education. Through these divestitures and teach-outs, we will be able to better prioritize our resources on the expansion of our university institutions. Further, our offerings at both CTU and AIU are better aligned with the regulatory framework that will govern this industry for the long-term as we prioritize our student outcomes, student retention, and experiences. I am fully committed to the strategy that this team has put together, and I'm looking forward to executing against our goals moving forward. The early success of these strategic initiatives can be clearly seen in today's results. Dave we will walk you through more specifics on the numbers, but I wanted to highlight a few key components. First, revenue in the University group increased 3%. When adjusted for changes related to accounting for withdrawn students. The University Group experienced relatively flat to modest revenue and total enrollment growth during the quarter, despite two consecutive quarters of reduction and advertising expenses versus the prior year. Strengthening the effectiveness of our marketing strategies is an important part of our plan to become a best-in-class operator within our industry. So we are glad to see signs of progress toward this goal during the quarter. These performance improvements coupled with our significant cost reduction efforts helped lead to an increase of over 200% in operating income as we generated over $20 million for the third quarter 2015. We also continued to make progress with our transitional schools as adjusted EBITDA for the transitional group and discontinued operations was negative $13.4 million for the third quarter of 2015, compared to negative $36.9 million in the period last year. This significant improvement in reducing the use of cash from the transitional group and discontinued operations clearly demonstrates our team's ability to execute upon its plan to drive expense reductions. We do intend to reinvest a portion of our cost savings in technology enhancements and other program improvements to help drive improvements in student experience, student retention, and outcomes in the future. One example of those types of investments was the rollout of our mobile application across the CTU platform during the third quarter. The combined impact of all the improvements I just discussed helped us drive our first third quarter with positive operating cash flow in three years. We generated $5.6 million in operating cash flow during the quarter. Keep in mind that future cash flows are subject to typical seasonal trends. We may see variability in some of these performance metrics, including our cash balance, but the impact of our strategic actions is clearly evident in the third quarter results, and we should remain on a similar path as we progress through the next few years. Dave will talk to you more about our cash expectations, which now include the impact of exclusive discussions we have entered into with one buyer for our Le Cordon Bleu campuses. But now I would like to take a minute to quickly address a leadership change we executed a few weeks back. With our future direction focused on our University platform it became clear to me that we need strong leadership to direct CTU and AIU to enhance student outcomes. Andrew Hurst has been doing an excellent job at CTU and has a tremendous background in our industry. In addition to maintaining his responsibilities as the President of the Institution we have taken the opportunity to name him Senior Vice President in alignment with our new leadership structure. At AIU we need stronger depth in terms of historical experience in the online education arena. With that in mind we opportunistically approached John Kline and are thrilled that he has agreed to join our team in the position of Senior Vice President AIU. Many of you already know John as an industry pioneer in online education. John's credentials include nearly 20 years of leadership positions at Apollo Group, Nelnet and Educational Management Corporation. He has led several teams that supported the consolidation and development of online programs and has a strong track record of driving performance improvements within the organizations he has served. We are looking forward to the contributions that both John and Andrew will bring to the leadership team here. With that, I will turn the time over to Dave to provide more information about the third quarter results. Dave?

Thanks, Todd and good morning everyone. I will start first with the third quarter University results then I will discuss the results of our transitional group and discontinued operations. Then after that I will briefly review some of the consolidated results and provide an overview of our liquidity and balance sheet. I ask that you please turn to slide 5. All percentage variances I mentioned will be in comparisons to the prior year quarter unless otherwise noted. Total revenue for the University Group of $136.1 million was up 1.4% year-over-year driven by a modest increase in total enrollment. As Todd mentioned, after adjusting for the accounting of the student withdraws revenue was up approximately 3% year-over-year. Operating income was $20.3 million, up 212.3% over the prior year period as operating margins expanded 10.1% to 14.9%. This was driven by the slight increase in revenues and continued execution of various cost control initiatives across the organization. Year-over-year operating margin improvement should continue for the remainder of the year, although I also remind you that quarterly margins are impacted by seasonality and marketing spending. Our first and third quarters tend to be our highest advertising expense quarters. In the third quarter advertising expenses were $46.2 million and this compares to $50.4 million in Q3 of last year. Adjusted EBITDA for the University Group and corporate increased 157.6% to $16.6 million during the third quarter, driven by increased revenue and continued cost reduction initiatives. Total student enrollment within our University Group of 31,400 students was up slightly compared to the prior year quarter. New student enrollments for the University Group were 8,450, a decrease of 3.5% as compared to the prior quarter. Primarily, due to the declining enrollments at AIU. And as a reminder, during the prior year quarter AIU returned to television advertising for the first time in several years. CTU's third quarter revenue increased 3.7% to $85.4 million, as total enrollments increased to 20,600 students, or up 4% compared to the prior year quarter. Operating income at CTU was $18.6 million, which is up 74% from last year as operating margins expanded 8.8% to 21.8%. AIU's revenue was $50.7 million during the period, down 2.3% over the prior year quarter. AIU produced operating income of $1.7 million during the third quarter, and this compares to a loss of $4.2 million in the third quarter of 2014, and it is a result of our teams continued execution against cost control initiatives. Now this represents the second consecutive quarter of positive operating income from AIU after nearly two years of losses. I would now like to turn to our traditional and discontinued operations. Adjusted EBITDA for the Transitional Group and discontinued operation which includes the results of our formally reported career college segment, and our LCB campuses which are held for sale improved to a negative $13.4 million in Q3, compared to a negative $36.9 million in the prior year quarter. The improvement was primarily the result of favorable comparisons resulting from the wind down of previous operations. Looking at taxes, as we've discussed on prior calls, given that the company remains in a three-year cumulative loss position we are not yet in a position to benefit from our current year losses. And as such, our tax rate is expected to be close to 0%. We also continued to carry a significant valuation allowance. At the end of 2014 our valuation allowance was $150.4 million. Capital expenditures in the third quarter were $2.9 million, which is down from $3.5 million during the same period last year, which is primarily the result of ongoing teach-outs. Let's now discuss our financial position and liquidity. As of September 30, 2015, the company had cash, cash equivalents, restricted credit, short term and long term investments, inclusive of discontinued operations of $206.8 million compared to $258.3 million at the end of the third quarter last year and $204.1 million in Q2 of 2015. Net cash flow provided by operating activities for the quarter improved to $5.6 million and this compares to a net cash used of $19.9 million for the same quarter last year. This was primarily the result of year-over-year cost reductions and modest revenue growth that Todd discussed earlier. I now ask that you please turn to slide 6. As Todd, mentioned we are making some adjustments to our forward cash projections based on the ongoing discussions we are having in exclusivity with a buyer for LCB. At this point in time we continue to expect to end 2015 with approximately $190 million in total cash, cash equivalents, restricted cash, and short-term and long-term investments excluding the timing impacts of any outstanding checks, deposits or other transfers. The impacts of any LCB transaction on our balance sheet will occur during fiscal year 2016. As most of you are unaware, our the decision to teach-out or divest our career colleges and LCB campuses will result in a more streamlined organization focused on significant market opportunities while complying with the dynamic regulatory environment and serving our students effectively. Based on our current negotiations for our LCB campuses and with an eye on balancing the needs of our students with the economics of this decision we now expect two changes in our initial assumptions. First we expect to make a payment for the divestiture of LCB. And second we expect that the deal will not close until early 2016. Primarily as a result of that payment and the delayed timing, we now expect to close fiscal year 2016, with cash, cash equivalents of less than $190 million, including short and long-term investments, and excluding the timing impacts of any outstanding checks, deposits and other transfers. Our lenders are aware of the ongoing negotiations, and we are currently in dialogue with them to amend or extend our existing arrangement that will incorporate the impact of this transaction. As we look forward now we expect the adjusted EBITDA from our Transitional and discontinued operations to be in the range of negative $85 million to $90 million for fiscal year 2015. And this represents a slight improvement upon our prior guidance. In fiscal years 2016, 2017, 2018 we are now projecting adjusted EBITDA from our Transitional and discontinued operations of approximately negative $90 million, approximately negative $70 million, and approximately negative $45 million respectively. These assumptions incorporated into these estimates I have just discussed can be viewed on Slide 7 in today's earnings slide presentation. If assumptions are changed, it could have a material adverse impact on our future cash balances. I will now turn the call back to Todd to offer some quick closing remarks. Todd?

Thank you, Dave. I truly believe we have the right long-term platform to be successful in the education of our students and in the creation of value for our shareholders in the future. We have a well positioned organization and a strong leadership team whose transition efforts will free up even more capital for us to invest in the core University platform moving forward. With that I will now turn the time over on the call to the operator for your questions. Operator?

Thank you. [Operator Instructions] Our first question is from Corey Greendale at First Analysis.

Good morning.

Good morning Corey.

How are you?

Good.

Good. So I just wanted to start with a couple of questions on Slide 6. So I understand that a cash payment is going to be involved with the LCB sale. I was hoping you might be able to give some specificity on the magnitude of that, and obviously the guidance for 2016 cash of less than 190 million. There's a lot of room between 190 million and 0, so if you could give us some sense of what you think the low might be?

Well as we said, we are progressing in the discussions with one Le Cordon Bleu buyer at this point in time. And we made that decision based on several different potential buyers. We looked at one who we thought was a quality organization because we are obviously very – it's very important for us to maintain the good solid brand and also for our students going forward. So in that regard, again, although it is a little premature to talk about any of the things that are specific about the amounts and ranges, there will be a payment made. We certainly feel that we have the capability of handling whatever that would be.

Yes. And maybe you cannot say. Where I am going is, I think some people have been focused on the fact that the stock trade is not that far above cash. So I am just trying to get a sense of what the cash low point might be for people that look at that?

Yes. Again, we would love to be able to give a little more direction on that, but again, since we are in the middle that process it is difficult to do it. You know, again, it is – but it is something that I think if you look at the organization, the value of the organization, again we feel very comfortable that our ability to exercise and execute on our strategy going forward it allows us to do that.

Okay. I understand. And then I was hoping you could clarify. I though I understood this, but I am not sure. The third line of the table on slide six, the total CEC operating margin, does that include the transitional schools?

Yes it does.

Okay. So in so far as, I think it's a small change, but 2016 I think you had said you expected mid-single digits. Now it's low to mid. Can you just talk a little bit about what might've changed in your assumptions there?

That's correct.

That is right. As we take a look going forward we are modifying it just slightly to say low to mid rather than just pure mid.

And the big driver of the change as we have highlighted in footnote three, is now it includes the timing impact of the LCB transaction that we now expect to close in early 2016, which is the biggest driver of that change.

Correct.

Okay. And then just with the ongoing business can you talk about the start trends looked very good for University last quarter; looked a little less positive this quarter. Talk about what is going on there and is it just market volatility or anything particular you would point to?

Sure. I think you know a couple of things we want to point out here and that is despite I think what we see across the entire industry, we continue to see good strong demand for both CTU and AIU. I think that as I mentioned, though, the important part here is that CTU has been operating at a little bit stronger level. But I felt like our need to bring in somebody who has a lot of experience, especially in quality online education. And so our feeling is that we are well-positioned going forward to take advantage of the opportunities. It's hard to say to what extent. But right now we're feeling actually pretty good about our ability to in time, as we said although it is relatively flat to modest growth, our ability to eventually turn to responsible growth at both institutions.

Got it. I will turn it over. Thank you.

Thank you Corey.

The next question is from Jeff Silber at BMO Capital Markets.

Thank you so much. I just wanted to follow up on one of Corey's questions. If we were to exclude the impact of LCB, last quarter you had projected that cash would be relatively flat in 2016. Would the same assumption apply or has anything changed there again excluding any LCB divestiture?

No, that is correct.

Okay, so keep that the same. All right. Then just focusing on the quarter that you just reported, you mention that AIU starts were down because – or at least you implied that because of the three quarter 2014 pickup in TV advertising. Can you remind us how long that continued?

Yes. It was just for like a short period into the third quarter and it was a holdover from before. But it was the first time we had come back to the market in several years. So you've got a fairly large lump from the same amount of advertising spending.

So on a comparative basis going forward that should not be an issue. It only really impacted 3Q 2014 for the most part?

Yes. That's correct.

Okay, great. And then were there any one-time items in the third quarter?

Not really. No.

Other than the revenue recognition, which we called out. There is no one time items in third quarter.

Okay great. Once you get past the LCB divestiture if you could tell us maybe what you are thinking about your plans for your cash balance? Thanks.

Yes. Well, again at this point in time as you've seen with what we've talked about as far as this transformation that we have gone through and what you see happening with the University segment of our business. We are encouraged by their ability to generate cash. And our hope that as we get out through that two or three-year period that we will be in the position to be generating the cash that allows us to continue to invest in technology and enhancements and to take advantage of what we believe is a good market for university students. So we are actually feeling very optimistic about it.

Okay, great. Thanks so much.

[Operator Instructions] And our next question is from Peter Appert with Piper Jaffray & Company.

Good morning. Todd I was hoping you might give us a brief update on what you're seeing from a regulatory perspective? Any updates in terms of the various backs and forths you have had with the regulatory agencies, state investigations you know, et cetera, et cetera?

Yes, obviously the industry has had certainly a lot of change over the last several years. And we have not seen a lot of new things, other than the ones that you have reported on as those following the sector. Internally, we continue to feel that given focusing on the University business going forward, at least those things, the things like gainful employment and others that get a lot of attention that our two universities actually do quite well in that environment. So we look at that as positive. Obviously the political environment, I would say to expand on the regulatory environment right now is, a lot of that is focused on the upcoming election for next year. And as a result there seems to be a lot of positioning and posturing, but not really seeing anything at this point in time that is different you know than what is out there in the public.

Do you guys have the updated CDR numbers?

We do. We do. Is there anything in particular you would like to take a look at? There was only really one which was the LCB Austin location. But no other OPEs had [indiscernible] rates were over 30% except that one, and we are obviously, as you know you can submit information to be able to look at that to make sure that is adjusted correctly.

Do you have the totals for CTU and AIU convenient?

I don't. But we can get those to you.

Okay. Great. Thanks Todd. Oh and one more thing. So you mentioned on gainful employment you are feeling comfortable. I mean is there an expectation you might have to make some programmatic adjustments or pricing adjustments?

Not at this point. Obviously, I think we have – one of the things that has been impressive about being here at the Company is the amount of technical resources they have, the talented folks that analyze that. And at this point, Peter although it is difficult to be completely 100% sure, but you know we – at this point in time we feel comfortable that we have taken into account the impact of that on what we've said as far as where we think the business will be going forward. As we now it, I think there are unintended consequences of that regulation. But a lot of those really impact career colleges more so than the universities and the profile of students there.

Got it, thanks Todd.

Thank you. End of Q&A

This concludes our question-and-answer session. I would like to turn the conference back over to Todd Nelson for closing remarks.

Well, thank you again for joining us this early morning and your continued support of Career Education. We look forward to speaking with you again next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.