Perdoceo Education Corporation (PRDO) Q2 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the Second Quarter 2017 Career Education Earnings Conference Call. [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, Bryan. Good morning, everyone and thank you for joining us. With me on the call today is Todd Nelson, President and Chief Executive Officer; A.J. Cederoth, Vice - Senior Vice President and 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. Let me remind you that this morning'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, 2016 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 accompany 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 at careered.com. So with that, I'd like to turn the call over to Todd Nelson. Todd?

Thanks, Sam. Good morning, everyone and thank you for joining us. I'll begin today's call by reviewing our second quarter highlights and then A.J. will take you through the financials before I provide some final closing remarks. Overall, we experienced better-than-expected operating efficiencies across all of our segments as well as positive total enrollment trends within our university segments, with enrollment increasing 3.2% as compared to the prior year. We're positioned well to serve the demand that we're experiencing and are pleased to report second quarter operating results which were ahead of our expectations. Second quarter 2017 operating income for the University Group and Corporate which for the rest of this script will be referred to as ongoing operations, was $23.3 million compared to $31 million for the second quarter of 2016. Adjusted operating income which excludes certain items not considered reflective of underlying operating performance, was $25.9 million compared to $33.8 million for the prior year quarter. On our last call, we discussed several drivers which were expected to impact second quarter 2017 adjusted operating income for ongoing operations as compared to 2016. These drivers included the impact of the calendar redesign at AIU which shifted earning days into the second half of 2017; our investments related to the admissions and advising center in Phoenix; and the timing of certain second quarter operating expenses compared to 2016. Although these results were aligned with our expectations, second quarter adjusted operating income for ongoing operations was approximately $4 million or 18% higher than the upper end of our outlook range of $20 million to $22 million provided last quarter. These favorable results were primarily driven by better-than-expected enrollment trends within our University Group, marketing efficiencies and timing of certain operating expenses. Early indicators of demand and operating performance at our admissions and advising center in Phoenix are positive. As of the end of June, CTU's center is fully staffed. AIU's center is operational but is not expected to be fully staffed until sometime during the first quarter. These centers have significantly augmented our capabilities to serve the demand that we're experiencing from prospective students and bolstering our transition to a period of sustainable and responsible growth. Within our University Group, total enrollments increased 3.2%. We have continued to refine and improve our operating and academic processes to enhance student experiences both before and after they are enrolled in our programs. Our investments in technology and student support operations has provided us with an academic platform that we believe serves and educates our students well while continuing to increase the value proposition of our universities. At AIU, total enrollment increased 11.5% for the second quarter as compared to the prior year. Overall, we remain pleased with the progress we're making with new and total student enrollments. As we have discussed, the economic calendar redesign that occurred at the end of last year is causing variability in quarterly performance. This redesign was one of our strategic initiatives intended to improve student retention and engagement by scheduling session starts and breaks that generally align better with students' lives. But this has impacted the timing of our start calendar and numbers of earning days in any given quarter. During the second quarter, AIU had 7 less earning days or 77 days as compared to 84 days in the second quarter of 2016 which impacted the revenue earned in the quarter as compared to the prior year. This will mostly reverse itself in the third quarter and we therefore expect AIU's revenue to be higher in the third quarter versus the prior year. We believe a better way to measure normalized performance at AIU will be on a multiple quarter basis. New enrollments for the third quarter will be lower versus the prior year, but then the fourth quarter should be ahead of the prior year such that on a combined basis, the second half is expected to show new student - new enrollment growth versus the prior year. In addition to the impact of the academic calendar redesign, fourth quarter new enrollments is expected to be positively impacted by our admissions and advising center in Phoenix as well as the full rollout of our graduate team model at AIU that was completed in June. As a reminder, the graduate team model personalizes student-facing services in financial aid, admissions and advising by providing enhanced continuity to support personnel throughout the students' life cycle at our universities. We believe this structure helps increase accountability and ultimately improves student - overall student experiences and engagement. At CTU, total enrollments at the end of the quarter declined slightly by less than 1%. Over the past few quarters, we have invested time and resources in our student onboarding process that have shown positive results. As these operating changes work through our universities, we will see some quarter-over quarter variability but remain confident in our overall strategy of sustainable and responsible growth. As previously mentioned, our Phoenix center is now fully staffed at CTU and early indicators of demand and operating performance are positive. The team is now focused on serving the demand we're experiencing and helping each prospective student pursue their academic and professional goals. Given these factors, we expect CTU to have positive new student enrollment growth for the third quarter versus the prior year quarter. Now let me discuss some of the additional operational and academic progress we've made during the quarter. As just mentioned, beginning in June, AIU has completely moved to a graduate team model which, over the past few months, has demonstrated a positive impact on key operating metrics, such as new enrollments and student retention. AIU continues to redesign course content and sequencing based on new learnings from each completed session, with the goal of building student confidence and competencies early in their programs. Both universities have invested in student-serving functions and increased document collection and counseling efforts to support our students' financial preparation for school. Our mobile platform continues to evolve. Students can now view their financial aid status, upload required documents and receive push notifications for document submission and assignment reminders. We also plan to release a new faculty mobile application that will provide new faculty dashboards and increased outreach capabilities for at-risk students. We believe these efforts have improved overall experience and engagement, encouraging students to stay in class and to pursue their goals. Overall, our enrollments are expected to trend positively in the second half of the year and we're positioned well to serve the demand from prospective students. We remain confident in the full year outlook we provided last quarter and are progressing well towards the goal of sustainable and responsible growth. Finally, turning to our teach-out campuses. We remain on track to complete the teach-outs of our culinary schools by the end of September. To put it in perspective, since our strategic announcements in early 2015 related to our Career Schools, we have taught out or divested 43 campuses and will only have 8 campuses remaining after September 30, 2017 which will complete their teach-out at varying dates through 2018. Student retention is better than estimated across most teach-out schools and we've been able to realize significant operating efficiencies due to strong focus and personnel management, all while serving and educating our students. We continue to optimize our real estate obligations associated with these campuses and are encouraged by the progress we have made on that front. As a result of these facts, we're reducing, in other words, improving, the range of expected losses for the full year outlook by $5 million. Now I'll hand the call over to A.J. to review some of our more details of our financials, balance sheet and outlook. A.J.?

Thank you, Todd. Let's start with the consolidated results. For the quarter, consolidated revenue was $146.2 million which was down 19.9% year-over-year, with the decline in revenue primarily attributed to the teach-out strategy in our Culinary Arts and Transitional Group as these schools progress towards teach-out completion. Consolidated operating income decreased by $8.2 million year-over-year to $9.1 million. The decline in year-over-year performance was expected and is primarily driven by the calendar redesign at AIU as the redesign had a significant impact on revenue for the quarter. As discussed previously, there were 7 or approximately 8% fewer earning days at AIU for the second quarter as compared to the prior year. Also contributing to the decline were the timing of certain operating expenses and the impact of the expenses associated with our new admissions and advising centers in Phoenix. We ended the quarter with $172.1 million of cash, cash equivalents, restricted cash and available-for-sale short term investments which will be referred to as cash balances for the remainder of today's discussion. Net cash provided by operations was $4.8 million during the quarter, driven by operating income. This compares to cash provided of $16.8 million during the prior year quarter. Capital expenditures for the quarter were $1.4 million. Moving to the results of the University Group and Corporate. Total enrollment in the University Group improved by 3.2% year-over-year. However, revenue declined by 3.5% year-over-year in the second quarter, primarily driven by fewer earning days for AIU which was mentioned earlier. Operating income was $23.3 million compared to $31 million in the prior year quarter, again, primarily driven by the decline in revenue. In the Culinary Arts and Transitional Group segments, revenue continued to decline year-over-year, in line with the progress of the teach-outs. Operating loss increased to $14.2 million in the second quarter of 2017 as compared to $13.8 million in the prior year quarter, while the adjusted operating loss increased to $11.2 million from $4.2 million in the second quarter of 2016. As a reminder, the Culinary Art campuses will complete their teach-outs during the third quarter which will significantly lower the number of students involved in the remaining teach-outs moving forward, thus reducing the impact the teach-out strategy will have on overall company results. On Slides 3 through 5, we've provided additional clarity around our outlook for the remainder of the year and into 2018. Beginning on Slide 3, you will see that our expected adjusted operating income for the University Group and Corporate to be in the range of $100 million to $105 million for 2017 which remains unchanged from our previous outlook and continues to reflect our expectations for growth versus the prior year. As Todd mentioned earlier, the Culinary Arts and Transitional segments continue to perform better than expected, driven by strong retention and management actions. As a result, we have reduced the anticipated loss - losses for these segments by $5 million. This improved performance will flow through into 2018 as well. The chart on Slide 3 has been updated to reflect our improved outlook for the teach-out schools. Building upon the improved outlook for the teach-out segments, we have tightened the range for ending cash balances. We now expect year-end cash balances of approximately $155 million to $160 million for the year ending December 31, 2017, compared to previous expectations of $150 million to $160 million. We continue to project increased ending cash balances for 2018. On Slide 4, we're providing additional information regarding the third quarter performance for the University Group and Corporate. We expect adjusted operating income to range between $22 million to $24 million and to be ahead of 2016 performance. We believe that continued focus on student-facing activities will contribute to year-over-year improvement. On Slide 5, we have provided a summary of the key assumptions contained within our outlook. Finally, as we've done in the past, the last few slides of our presentation provide reconciliations of GAAP to non-GAAP items. With that, I'll turn the call back over to Todd for closing remarks.

Thanks, A.J. In closing, we've completed the first half of 2017 with performance that was ahead of our expectation and we remain confident in our long term outlook. Enrollment trends for both the universities are expected to be positive. And for all of the reasons we've discussed today, we expect both total and new enrollment growth for the University Group for the second half of 2017. This growth expectations continue to give us confidence to make smart investments in student-serving areas as well as faculty and technology upgrades. And we will continue to analyze and evaluate additional growth investments as opportunities arise. Our teach-outs are on track for completion and we remain committed to providing every student with reasonable opportunity to complete their program of study. We have a strong cash position which improved during the second quarter and believe this will enable us to make further investments in our universities for the benefit of our students. Our transition from a period of teach-outs to what we believe will be a period of sustainable and responsible growth will provide the company with incremental opportunities to maximize value for all of our stakeholders. Throughout our objectives of enhancing student experiences, retention and outcomes will remain our top priority. Thank you again for joining us this morning. And we'll now open the call for any analyst questions.

[Operator Instructions]. We currently don't have any questions in the queue. So I'd like to turn the conference back over to Todd Nelson for any closing remarks.

We want to thank you again for joining us this morning and we do look 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.