Perdoceo Education Corporation (PRDO) Q4 2015 Earnings Report, Transcript and Summary

Good day, and welcome to the Career Education Corp. Fourth Quarter 2015 Earnings Conference Call. All participants will be in a 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, Investor Relations. Please go ahead.

Thank you, Laura. Good afternoon 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. This conference call is being webcast live within the Investor Relations section at careered.com. A webcast replay will also be available on our site. And you can always contact the Alpha IR Group for Investor Relations support at 312-445-2870. Let me remind you that this afternoon’s earnings release and remarks made today include forward-looking statements as defined in Section 21E of the Securities Exchange Act. These statements are based on assumptions made by, and 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 in 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, 2015, which was filed this afternoon, 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 are available within the Investor Relations section at careered.com. These materials contain financial and other information relevant to today's discussion, including key assumptions upon which certain forward-looking statements are based and a reconciliation of the GAAP to non-GAAP measures. So with that, I would like to turn the call over to Todd Nelson. Todd?

Thank you, Sam and thanks to everyone for joining us on the call today. Before I get into the highlights of our fourth quarter results, I'd like to take a few minutes to reflect back on the progress we made during 2015. To enable the company to focus on improving student retention and outcomes, and in the process create a framework to improve the long-term financial stability and success of the company amidst some difficult challenges across our industry. Many of the improvements we made were in response to changing dynamics within the industry. And in some cases, we are forced to make some difficult decisions in order to protect the long-term interests of our organization. During May 2015 we began the process of divesting, or teaching out, the entirety of our former career college segment, with several – consisting of several well-regarded career-focused programs that were not able to stay competitive amidst the challenges of a changing regulatory environment. We made significant staffing adjustments to right-size our corporate structure in line with these impacts. And we've also made considerable progress reducing the obligations of our real estate footprint to help us offset some of the inherent cash costs that are associated with those teach-outs. As the year progressed we began to re-focus our resources on our University Group of institutions, consisting of CTU and AIU. We believe the combination of these two institutions represents a strong platform within online education. And we've worked to improve the strength of the faculty, programs and resources at these universities with the goal of producing better student retention and outcomes with improved financial stability and long-term prospects for growth and success. We believe in the value of education, and that the demand for post-secondary education will continue to be positive. CTU and AIU serve an important need in education for hard-working people looking to improve their skill sets and provide better lives for themselves and their families by expanding their opportunities. They are both award-winning universities with well-respected brand names and multiple areas of study that provide us with a foundation and competitive position to build upon in the future. So 2015 truly was a transition year for our company. And I like to thank all of our shareholders who have supported us through what I know has been a challenging process from a financial performance perspective. We know there have been a lot of changes across the organization. But the positive news is that the table is set for 2016 and beyond. And we're looking forward to more stability in our financial and operating performance. Most importantly, the decision to teach-out our remaining culinary and career colleges should drive greater stability in our performance and will thus allow us to allocate more time and resources through our mission of improving student retention and outcomes at our universities. As I've mentioned, we have a strong foundation that is already producing solid results for students. But we still need to invest time, intellectual capital and dollars to help CTU and AIU achieve their full potential. The team we have in place is doing an excellent job across our organization to help us meet our goals. And we're executing either in line or ahead of schedule on our plans. Now I'll get into the review of the fourth-quarter highlights and share some recent achievements our universities have made over the course of the past few months. Total enrollments were essentially flat year-over-year, the University revenue increased roughly 8% or just over 4% when adjusting for changes in the prior-year made to our revenue recognition for withdrawn students. Our solid performance was primarily driven by total enrollment growth at CTU during the quarter. We are especially proud of this performance, given the context of some broader industry trends we’ve been seeing, which we believe is an affirmation of our strategy. University Group's operating income increased 37% or 30% when adjusting for changes in the prior-year for withdrawn students, compared to the fourth quarter of last year, driven by the stronger enrollment and revenue, and our improved operating structure. Adjusted EBITDA for University and Corporate was up 28% compared to the fourth quarter of last year, and represents the highest adjusted EBITDA for the past eight quarters for The University Group and Corporate. Additionally consolidated adjusted EBITDA, which also includes our transitionary, culinary arts and discontinued operations was positive for a second consecutive quarter. Stepping away from the financial highlights, I'd like also like to provide an update on some of the recent achievements our University Group has made in recent months, as both of been the recipient of several awards and have also introduced some promising new programs. We're always proud of these achievements as they highlight the strength of our institutions and provide examples of why we feel that our University platform is positioned to succeed in the future. U.S. News and World Reports Best Online Programs rankings recently listed AIU among the top programs in multiple categories for 2016. AIU's online bachelors degree program was number 30, or in the top 10% of the programs evaluated. It ranked number 28 among top online bachelors programs for veterans, and was ranked one of the top online MBA and Master of Education programs. AIU also received E-Learnings Best of 2015 award for its intellipath adaptive learning platform, and was recently named as one Victory Media's Military-Friendly Schools for the seventh year in a row. Victory Media provides ratings for colleges and companies looking to get their education and employment opportunities in front of their audiences. It also was named a top school in Military Advanced Education and Transitions Guide to Colleges and Universities for the ninth year in a row. At CTU we recently received a Distance Education Innovation Award from the National University Technology Network, also known as NUTN, which recognized CTU's adaptive learning platform as providing an innovative, personalized learning plan for its Masters of Business Administration students. NUTN is a networking and professional development organization for innovative leaders in the advancement of learning and technology. CTU also received the Instructional Technology Council's 2015 award for Outstanding E-Learning programs. And it was ranked by U.S. and World Report as one of the best online programs and best online programs for veterans. We also introduced some promising new programs during 2015, including four new degree programs across the University platform in the areas of education and business administration for AIU, and nursing and healthcare management for CTU. We see strong opportunities for institutions to provide value to students seeking new career opportunities in these fields. We're very proud of the caliber and quality of our University Group. And these awards and achievements are a testament to the hard work of our faculty and staff, and their commitment to improving student retention and outcomes at both institutions. As we've mentioned on previous calls, we've been investing in technology enhancements and other program improvements to help drive improvements in student retention and outcomes in the future. As an example, we rolled out our mobile application across the CTU platform during the third quarter of 2015. CTU's mobile app was selected as one of the six finalists in the world for innovation of education during the 2015 Annual Global Mobile Awards. On the coattails of that success, we rolled out a mobile app at AIU during the fourth quarter and have received encouraging feedback. Thus far we believe the service is contributing to improved student experiences. We also continue to expand our intellipath offerings, which in our adaptive learning – which is our adaptive learning tool. In 2015, we doubled the number of intellipath courses we offer, and we intend to continue expanding these offerings in the future. Before I hand the call off to Dave, I'd like to take a few minutes to discuss our goals and priorities for 2016. Our top priority is to continue to improve the market position of our universities by continuing to strengthen the breadth of program offerings, faculty and technology with the goal of driving strong student retention and outcomes. I’ve already mentioned some highlights of these initiatives that were evident during the fourth quarter. And we’re looking forward to more progress in this in regard to the year ahead. We’re also focused on strengthening our relationship with employer partners, which is an important part of our mission to improve student outcomes. In addition to growing the number of our corporate partnerships, we’re also focused on quality. And both CTU and AIU continue to work diligently with the corporate partners to identify ways that can engage and articulate the value of our educational services to their employees. In 2016, we’ll be focused on strengthening the further and further leveraging our existing relationships to help drive enrollments across the University Group. The last aspect of our strategy for success in 2016 is to responsibly manage and teach-out of our remaining transitional and culinary arts campuses to provide those students with the attention and resources they need to be successful in their chosen field of study. Our teach-out efforts remain on schedule. With that, I'll turn it over to Dave to provide more information about our fourth quarter results. Dave?

Thanks, Todd and good afternoon everyone. I’ll start first with the fourth quarter University results. Then I'll discuss the results for our Transitional group, Culinary Arts and Discontinued Operations. After that, I'll briefly review some of the consolidated results. And then provide an overview of our liquidity and balance sheet. All percentage variances I mentioned will be comparisons to the prior year quarter, unless otherwise noted. Total revenue for University Group of $137.4 million, was up 8.2% year-over-year, primarily driven by a 4.4% increase in total enrollments at CTU. After adjusting for the accounting of student withdrawals, revenue was up approximately 4.2% year-over-year. Total University Group operating income increased nearly 37% to $31.5 million from $23.1 million in the prior-year period or approximately 30% when adjusted for the accounting of student withdrawals. This was primarily driven by the increase in revenues. Adjusted EBITDA for the University Group and Corporate increased 28.4% to $29.7 million during the fourth quarter driven by increased revenue and our transformation initiatives. As Todd mentioned, this is our second quarter in a row of positive adjusted EBITDA for the consolidated entity, but I would continue to remind investors that quarterly margins are impacted by seasonality and marketing spend, amongst other things. Our first and third quarters tend to be our highest advertising expense quarters. In the fourth quarter advertising expenses for our University Group were $33.4 million compared to $36.7 million in Q4 last year. Total student enrollment within our University Group of 31,900 students, was roughly flat compared to the prior-year quarter. New student enrollments for the University Group were 8,760, a decrease of 3.1% as compared to the prior-year quarter, primarily due to the decline in enrollments at AIU. Revenue is primarily driven by total student enrollments and therefore is a more relevant indicator than new student enrollments. As a result, we believe that trends in total student enrollments are a more accurate reflection of our ongoing focus on student retention and outcomes. CTU’s fourth quarter revenue increased 11.3% to $91.5 million, as total enrollments increased 4.4% compared to the prior-year. Operating income at CTU was $30 million, up 28.5% from last year, as operating margins expanded 440 bps to 32.8%. AIU’s revenue was $45.9 million during the period, up 2.5% over the prior-year quarter, despite the reduced enrollments. AIU produced operating income of $1.5 million during the fourth quarter, compared to a loss of $0.3 million in the fourth quarter of 2014. As a result of our team's continued execution against our transformation initiatives. Adjusted EBITDA for the Transitional Group, Culinary Arts and Discontinued Operations, which includes the results of our formerly reported career college segment and our LCB campuses which we recently announced are now in teach-out was negative $20.9 million in Q4, compared to a negative $20.5 million in the prior-year quarter. The roughly flat performance reflects the impacts of restructuring costs for the LCD and career college teach-outs announced this year offset with the wind-down of our previously announced Transitional campuses. Taking a look at taxes, we recorded a total tax benefit for the quarter of $146.5 million. As a result of the decision made during the fourth quarter to teach-out the LCB campuses coupled with the previous teach-out decisions and projections for taxable income, the company determined that a majority of the deferred tax asset balances were recoverable and released approximately $109.8 million of the valuation allowance previously recorded against these assets. This release was included in the tax benefit recorded for the quarter. Let's now discuss our financial position and liquidity. As of December 31, 2015 the company had cash, cash equivalents, restricted cash and available-for-sale short-term and long-term investments, net of borrowings of $201 million compared to $237 million at the end of the fourth quarter last year and $206.8 million in Q3 of 2015. This cash position provides us with the liquidity to focus on student retention and outcomes at our University institutions while continuing to execute our teach-outs. Capital expenditures in the fourth quarter were $3.8 million, compared to $2.6 million, during the same period last year. Net cash used in operating activities for the quarter was a negative $0.7 million compared to net cash used of a negative $17.5 million for the same quarter last year. Net cash used by operating activities for the full year 2015 was a negative $21.7 million, as compared to a cash usage of a negative $118.6 million in 2014. This was primarily the result of year-over-year cost reductions and revenue growth. Our preliminary calculation of our financial responsibility ratio, or FRR, for the year ended December 31, 2015 was 1.7. If you turn to Pages 5 and 6 of our supplemental materials, you'll see our updated outlook and key transformation assumptions. It's worth commenting that the outlook would not have materially changed from our prior quarter's discussion, except that we have now – our outlook now incorporates the impact of LCB and teach-out. Overall we remain on track with our anticipated cost savings by 2018, as a result of our transformation efforts announced in May. After increasing by approximately $25 million in 2015, our adjusted EBITDA from University and Corporate is expected to stay relatively flat in 2016 as compared to 2015, as we continue to invest in technology and adapt to the changing regulatory environment. And then increase modestly in 2017 and 2018 as we start realizing the full impacts of our transformation initiatives. This contribution will provide us with the ability to focus on improving student retention and outcomes. As compared to 2015, we expect negative adjusted EBITDA from our Transitional, Culinary Arts and Discontinued Operations to improve slightly in 2016. But due to the completion of the LCB teach-outs, will worsen in 2017. As a reminder, losses from our teach-out campuses typically peak in the final months of their completion. Starting in 2018, negative adjusted EBITDA from Transitional, Culinary Arts and Discontinued Operations will begin to improve. Again, the adjustments from prior estimates are primarily due to the addition of Culinary Arts, who's teach-out is expected to be complete by the end of 2017, but will create some fluctuations in the short-term financial performance. The impact on our expected cash position has also been updated on Slide 5, which for purposes of my comments today include cash, cash equivalents, restricted cash and available-for-sale short-term and long-term investments, net of borrowings. We now expect to end 2016 with balances between $150 million to $160 million. Operating losses driven by the teach-out of LCB campuses and the balance sheet obligations associated with the teach-out campuses are the primary drivers of the reduction in our cash and investment balances as compared to 2015. We expect those balances to be approximately $140 million to $150 million at the end of 2017, as a negative impact of the LCB teach-out peaks. Once we exit 2017, we expect to start generating cash in 2018. Again, I'd like to point to the assumptions incorporated entity estimates I have just discussed that can be viewed on Slide 6, in today’s earnings slide presentations. As we continue to manage our performance over the coming year and as a result of the teach-out of our LCB and career college campuses, we may modify how we present our adjusted EBITDA in the future in order to provide information that we believe is useful to understanding performance of our operations. I'll now turn the call to Todd for some quick closing remarks. Todd?

Thank you, Dave. In closing, 2015 was a transition year for the company and we are off and running in 2016, which if we continue to perform as expected is shaping up to be a good year. We're focused on improving the strength of our University Group, responsibly managing the remaining teach-out of our Transitional group and Culinary Arts campuses, and strengthening our balance sheet in the long-term interest of our students and shareholders. We believe we have the right platform to be successful in the education of our students and in the creation of value for shareholders. I'm very excited about the talent we have throughout our company, as well as the opportunity we have for long-term to grow responsibly through focus on student retention and outcomes. With that, I'll now turn the call over to the operator for analyst questions. Operator?

I’m showing no questions at this time, I would like to turn the conference back to you Todd Nelson for any closing remarks.

Okay. Thank you and again for your continued support of Career Education, and we're looking forward to speaking with you again next quarter. Thank you.

The conference is now concluded, thank you for attending today’s presentation. You may now disconnect.