Perdoceo Education Corporation (PRDO) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Third Quarter 2017 Career Education Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Sam Gibbons. Please go ahead.

Thanks Phil. Good afternoon everyone and thank you for joining us. With me on the call today is Todd Nelson, President and Chief Executive Officer; Ashish Ghia, Vice President and Interim Chief Financial Officer. This conference call is being web cast live within the Investor Relations section at careered.com. A web cast 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 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, 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 a 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?

Thank you, Sam. Good afternoon and thank you for joining us. I will begin today's call by reviewing the third quarter results that came in ahead of our expectations, as well as the operating progress we have made at our universities. Then Ashish will review the financial results and outlook in more detail, before I provide some final closing remarks. During the third quarter, we continue to experience better than expected enrollment trends in operating performance within our ongoing operations, and are on track, to close 2017 ahead of our initial expectations. For the remainder of today's discussion, ongoing operations will represent University Group and Corporate. As evidenced by our third quarter results, the underlying theme of sustainable and responsible growth is gaining momentum. This is primarily driven by the technology initiatives and student support investments we have committed to and executed upon throughout the year. Moreover, the responsible completion of our teach-out campuses will further free-up incremental resources for the future, to progressively ramp up our investments in technology and student initiatives, that are showing positive impacts on student retention, outcomes and experiences. For the quarter, total enrollments within University Group, increased 2.5% as compared to the prior year, and new student enrollments were up 5.8% for the quarter as compared to the prior year quarter, which represents the highest increase in the past 10 quarters. At CTU, total enrollment increased by 0.9%, but new enrollment growth of 10.9%, represented the highest increase in 11 quarters. CTU experienced double digit new enrollment growth, primarily driven by our focus on and investments in, student support operations. We believe this growth at CTU is a testament to the positive impacts of the improvements and investments we have made in student support operations, both before and after they have become enrolled in one of our programs. Execution within our admissions operations, enhanced training and coaching, as well as increased tenure of our admissions personnel, has driven higher efficiency within our enrollment onboarding processes. Technology too has been an important enabler, that is helping drive better student engagement, early in the decision process. Lastly, our Phoenix Admissions and Advisory Center was fully operational in the third quarter, and contributed to the year-over-year improvement in new enrollments. Previously, we have highlighted the initiatives and investments that have positively impacted retention, to-date, which has more than offset declines in new enrollment. Student retention continues to trend at the improved levels we experienced last year. Most recently, we established advisor accountability for students based on their degree and program of study and promoted increased interaction and dialog between advisors and faculty. Initiatives like these have supported stronger retention and student engagement trends. And that's a result of consistently strong retention and engagement, is to see more students graduate, which is a positive sign that we are meeting our objectives of improving student outcomes. However, this dynamic makes it critical for us to focus on addressing and serving the demand from our prospective students. The Phoenix center is one such example of an investment that will help serve prospective demand. At AIU, total enrollments increased 5.7% for the third quarter as compared to the prior year, with the increase primarily driven by our student support initiatives throughout the year. Revenue for the quarter was up 3.3% versus the prior year quarter. Our AIU admissions and advising center in Phoenix became fully operational at the end of the third quarter. We expect to see positive impacts in future quarters from this investment, as increased resources to serve prospective students, should support our objective of sustainable and responsible growth. We are also proud to announce a new specialization in AIU's Bachelor of Administration Degree program during the third quarter. Developed by AIU and Le Cordon Bleu North America, the new Le Cordon Bleu Hospitality Management Specialization, is a business degree that is designed to provide an education in core business foundations and the development of competencies applicable in a hospitality management setting. We also just recently introduced a new faculty mobile app at both of our universities. This new app provides informative dashboards, ability to complete tasks on the go, and enhanced outreach and communication capabilities, that we believe will make student interactions easier and more effective. Overall, we are pleased with the academic and operating progress at our universities, and are now expecting new and total student enrollment growth at both the universities in the fourth quarter of 2017. This expectation is primarily driven by our ongoing initiatives and investments in student support operations, including our Phoenix center, as well as the academic calendar we design at AIU. Building upon the success of our initiatives and investments, we will continue to innovate, invest in new technology and appropriately staff student support operations, that we believe will further enhance sustainable and responsible growth at our universities. Finally, turning to our teach-out campuses; teach-out results continue to attract better than expectations, due to stronger than expected retention, as well as ongoing optimization of our lease related costs. The Culinary Arts campuses completed their teach-out in September, providing approximately 8,500 students who were enrolled as of January 2015, with an opportunity to complete their programs of study. As a result of the completion of the majority of the teach-outs, we had significantly lowered the remaining number of students involved in the teach-out strategy. For context, we will have only approximately 80 students remaining to be taught out at the end of 2017. We are firmly committed to continue providing each of these students with an opportunity to complete their program of study. Lastly, our teams are also continuing to work diligently, to further optimize real estate obligations associated with these teach-out campuses. Now, I will hand the call over to Ashish for a more detailed review around our results, balance sheet and outlook. Ashish?

Thank you, Todd. Today, I will start with a review of our results from ongoing operations, and then, briefly discuss the teach-outs, which are now substantially complete. Finally, I will review our balance sheet and the outlook for the year, before handing the call back to Todd for his closing comments. In the third quarter, total enrollments within the University Group grew by 2.5%, supported by new enrollment growth of 5.8% during the quarter, as compared to the prior year quarter. This trend represents the highest new enrollment increase in the past 10 quarters, and was primarily driven by our Phoenix Admissions and Advising Center for CTU. Third quarter University Group revenue of $141.5 million, was an increase of 1.4% year-over-year, primarily driven by the growth in total enrollments, as well as the number of earning days in the quarter at AIU. Operating income from ongoing operations was $23.6 million as compared to $16.2 million in the prior year quarter, an increase of 45.9%, while operating margins increased to 16.7% as compared to 11.6% in the prior year quarter. This performance, was primarily driven by continued efficiency in our marketing costs, timing of various operating expenses, as well as improving enrollment trends. Adjusted operating income for ongoing operations was $26.2 million, which was better than the high end of our outlook range of $22 million to $24 million, primarily driven by better than expected retention and new enrollment trends, that positively impacted revenue. Moving to our teach-out campuses; during the quarter, we completed the teach-out of our Culinary Arts Campuses, providing approximately 8,500 students with an opportunity to complete their programs of study. As expected, operating losses increased to $19.1 million in the third quarter of 2017 as compared to $16.9 million in the prior year quarter, while the adjusted operating losses increased to $10.8 million for the quarter, from $9.3 million in the third quarter of 2016. As Todd mentioned, by the end of the year, we will have approximately 80 students remaining within our teach-out campuses. Now, I will spend a few minutes reviewing our balance sheet. We ended the quarter with $175.9 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. This represents an increase of $3.9 million over the second quarter of 2017, with the increase primarily driven by improved operating performance within ongoing operations. Net cash provided by operations was $5.1 million during the quarter, as compared to cash provided of $9.7 million during the prior year quarter. The decrease in cash provided by operations versus the prior year, was primarily driven by increased operating losses at our teach-out campuses and payments related to their contractual lease obligations. As previously mentioned, we have been focused on optimizing our lease obligations associated with these campuses. Lease obligations have been a large component of our cost structure and cash usage. We have reduced these obligations for our teach-out campuses, by securing sub-lease arrangements, as well as entering into early termination or lease buy-out arrangements, which in some cases, require an initial cash outlay. We will continue to be opportunistic in this area, with the ultimate goal of further reducing our obligations and the corresponding cash burn. Capital expenditures for the quarter were $1.3 million, consistent with the same period last year. Now to the outlook; slide 3 to 5 of the attached presentation will provide some details around our outlook for the year, as well as our expected cash balances at the end of the year. Beginning on slide 3, we are anticipating a range of $100 million to $105 million in adjusted operating income from ongoing operations for the full year 2017. Our traditional back-to-school season has begun and we are off to a good start, with new enrollment growth expected at both universities for the fourth quarter. As discussed, the Culinary Arts and transitional group continue to track ahead of our expectations, and as a result, we have reduced the anticipated losses for the teach-outs, to a range of $40 million to $45 million from our previous range of $45 million to $55 million. Accordingly, we have also increased our expectations for 2017 year-end cash balances, and we now expect those balances to be in a range of $160 million to $165 million, up from our previous range of $155 million to $160 million. On slide 4, we have provided additional information regarding our expectations for second half of the year for ongoing operations. We expect adjusted operating income to range between $48 million to $53 million in the second half of 2017, which is an increase of approximately 40% as compared to 2016 performance. This also implies, that we are expecting our fourth quarter adjusted operating income for ongoing operations to be in the range of $22 million to $27 million, as compared to $16.9 million in the fourth quarter of last year. On slide 5, we have provided an updated summary of the key assumptions contained within our outlook. I would also like to remind everyone, that there may be some variability in our quarterly results, driven by the timing of our operating expenses and the varying impacts from our initiatives, including the ongoing impacts of the calendar we designed at AIU. But overall, we are confident in the long term prospects of our two universities. Finally, as we have done in the past, the last few slides in our presentation provides reconciliations of GAAP to non-GAAP items. With that, I will turn the call back over to Todd, for his closing comments. Todd?

Thank you, Ashish. In summary, we are nearing the end of a successful 2017, during which the University Group performance consistently tracked ahead of our expectations, and our teach-out strategy is nearly complete. Operational improvements made within student support operations, redesign of our core structure and content, investments in technology and new admissions in advising centers in Phoenix, are all contributing to better student engagement, and we feel confident in the long term academic potential and value proposition of both universities. In 2018, many of our priorities remain the same, as we continue to position the business for sustainable and responsible growth, driven by our focus on enhancing student retention outcomes and experiences. We will continue to enhance and grow our student support operations, and remain focused on improving our overall education quality and execution across the student lifecycle. We plan to further invest in our faculty and technology, such as intellipath and mobile applications that will help us deliver content in the most efficient and effective manner possible, and as we grow our cash position, we will continue making responsible growth investments in our universities, that should ultimately benefit our students. Thank you again for joining us today, and we will now open the call for any analyst questions.

Well again, thank you for joining us for this quarter. We appreciate your support, and we do look forward to talking with you again next quarter. Thank you.

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