Perdoceo Education Corporation (PRDO) Q4 2017 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Career Education Corporation’s Fourth Quarter 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 of Finance and Interim Chief Financial Officer. This conference call is being webcast 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, 2017 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?

Thanks, Sam. Good afternoon, everyone, and thank you for joining us on today’s call. I will begin by reviewing the fourth quarter and full-year results which came in ahead of our expectations. Ashish will then review the financial results and 2018 outlook in more detail, before I provide some final closing remarks. Let me also point out that, for the remainder of today’s discussion, references to ongoing operation represent results from the University Group and Corporate. We executed well against our objective of sustainable and responsible growth as demonstrated by our fourth quarter and full-year operating results and metrics, which are better than the prior year. Our initiatives and investments in student serving processes and operations were able to effectively serve the prospective student interest at our universities. For the quarter just ended, total enrollments within University Group, increased by 3.3% as compared to the prior year, and new student enrollments grew 15.4% as compared to the prior year quarter. Both AIU and CTU contributed to this growth. At CTU, total enrollments increased by 0.9%, and new enrollment increased by 7.4%, a second consecutive quarter of new enrollment growth. This growth has been supported by our initiatives and investments in student serving processes and operations, which are intended to improve student experiences, both before and after they are enrolled in our programs. We believe that the positive enrollment growth is a testament to the impacts of these initiatives and investments. Throughout the year, we have continued to invest in our admissions and advising functions to increase retention and help student outcomes -- help students complete their intended field of study. We expect this trend of improving student retention and academic outcomes to continue into 2018 and believe that consistently stronger attention over time will result in higher graduation rates. As a result, it’s important for us to invest in admissions and advising resources, as well as use innovative technology to effectively address and meet the demands of prospective students. CTU’s Phoenix admissions and advising center is one such investment. And we’re pleased to share that during the first quarter of 2018, we expect CTU to experience positive new enrollment growth versus the prior year quarter, primarily driven by these initiatives and investments. This expected growth would represent a third consecutive quarter of new enrollment growth of CTU. At AIU, new enrollments increased by 27.2% for the quarter as compared to the prior year quarter, and positively impacted total enrollments, which increased 7.7% as of the end of the quarter, representing AIU’s third consecutive quarter of total enrollment growth. These increases were primarily driven by student support initiatives and investments including AIU’s admissions and advising center in Phoenix as well as the academic calendar redesign, which positively impacted the number of enrollment days during the quarter versus the prior year. AIU has further increased the focus on advisor calls for students in their first and second sessions, as those sessions represent a meaningful transition phase for students who are acclimating to their programs of study. Additionally, a revised learning management system was launched in the fourth quarter that offers our students more streamline experience, making it easier for them to navigate course content by providing a step by step road map for completing all other activities. Overall, AIU has now experienced two consecutive years of new enrollment growth. I’m not only pleased with the turnaround and stabilization efforts that started two years ago but also excited about AIU’s future prospects. I do want to take a minute and point out an underlying characteristic of AIU’s ongoing performance. The academic calendar redesign will cause variability in quarterly new enrollment trends due to the varying number of enrollment days in any given quarter. For instance, we expect new student enrollments to decrease approximately 40% in the first quarter of 2018 as compared to the prior year quarter. However, we expect decrease to be more than offset by growth in new student enrollments in the second and third quarters of 2018, such that on a rolling three-quarter basis we expect new student enrollments to reflect growth. Our universities have continued to focus on refining and executing on operational changes while undertaking several new initiatives and investments. With the overall goal of improving student experiences, we revised our admissions and advising operating models, which we believe has improved accountability and coordination between the functions ultimately benefiting our students. There is now more accountability at the advisor and manager levels to encourage and enhance student engagement. Turnover within our admissions function continues to be at multiyear lows due to several initiatives such as stronger staff training and development. This has enhanced the overall quality of service for our students and has elevated their on-boarding and orientation experience as they prepare to start school. Our investments in facility and advising resulted in an approximately 10% increase in staffing during 2017 and resulted in increased communication dialog between the two groups, which we believe has positively impacted student retention due to more personalized and relevant interaction. Increased investments and focused execution within our admissions and advising functions have improved overall student engagement as students prepare to begin their education. Simultaneously, focus on faculty training, increased student engagement and use of technology to educate and engage with our students have continued to enhance student experiences after they begin school, which we believe results in improved retention. AIU is fully transitioned to a graduate team model while CTU is in the process of aligning to a similar student-oriented operating structure. Recall that the graduate team model structure personalizes student-facing services and financial aid admissions and advising, and we believe this structure helps increase accountability and ultimately improves overall student experiences and retention. Technology is also a key focus for us, and we leverage it as an enabler and differentiator when it comes to student on-boarding, retention and learning processes. Let me discuss a few technology initiative investments that we have prioritized. First, we continue to expand our award-winning adaptive learning platform beyond just our general education courses and believe this is helping students increase their learning and enhanced academic outcomes. Second retention has been a key focus of our organization, and in 2018, we will make an investment in retention analytics tool at CTU that uses predictive modeling to provide the right type of coaching and service to each student in the most relevant and timely fashion, a proactive versus reactive approach. Third, we continue to expand and invest in our mobile capabilities. Adoption amongst our students has grown progressively through 2017 with the majority of our students now subscribed to our mobile platform. New futures were regularly added into 2017 and in the fourth quarter our universities launched the faculty mobile application. This feature gives faculty the ability to access learning materials, assignments and the class roster all through their mobile application, while also making it easier to communicate and send reminders and messages to their students. Overall, we remain pleased with the academic and operating progress at our universities and are entering 2018 with positive momentum in key operating metrics and trends which should support our outlook of growth in 2018 and beyond. We’ll continue to innovate and invest in new technology while appropriately staffing student support operations in ways which we believe will further support sustainable and responsible growth at our universities. Finally, I’ll provide a brief comment on our teach-outs. As of the end of 2017, we had less than a 100 students remaining to complete their education at our teach-out campuses. Our teams are concerning to work diligently to further optimize the remaining real estate obligations associated with these teach-out campuses, and our teach-out strategy remains largely complete. Most importantly, the completion of our teach-out campuses frees up incremental resources to allocate towards investments and technology and student initiatives intended to further our objectives of achieving responsible growth and improving student experiences, retention and academic outcomes. Now, with that, 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 2017 operating results, and discuss our balance sheet, and finally conclude with our 2018 outlook before handing the call back to Todd for his closing comments. For the quarter just ended, total enrollments within the University Group grew by 3.3%, supported by new enrollment growth of 15.4%, as compared to the prior year quarter. This trend was primarily driven by our student serving initiatives and investments including the Phoenix admissions and advising center as well as improvement in overall retention trends. Also contributing to the quarterly enrollment growth was the academic calendar redesign at AIU. Fourth quarter University Group revenue increased by 5% to $142.4 million as compared to the prior year quarter, driven by various operating initiatives that contributed to the growth in new and total enrollments. For the full-year, revenue increased 1.3% to $569.6 million versus the prior year. Operating income from ongoing operations was $25.5 million in the fourth quarter and $95.5 million for the full-year, which compares to an operating loss of $17.9 million and an operating income of $44.7 million, respectively in the prior year periods. The improvement in operating performance benefited from continued efficiency in our marketing costs as well as improving enrollment trends. Also, recall that the prior year quarter included a legal settlement of $32 million. Adjusted operating income for ongoing operations was $28.1 million, in the fourth quarter and $105.9 million for the full-year, which reflects growth of approximately 67% and 19%, respectively as compared to the prior year periods. These favorable results were driven by improved retention, growth in new enrollment trends and efficiencies within our ongoing operating structure. Moving to our teach-outs. As expected, operating losses declined to $14.8 million in the fourth quarter of 2017, which represents an improvement of more than 60% as compared to an operating loss of $38.1 million in the prior year quarter. For the full-year, operating loss was $61.4 million an improvement of approximately 20% as compared to the prior year. These improvements are primarily driven by reduced expenses as these campuses wind down their operations. Now, let me address our balance sheet. We ended the year with $180.1 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. This represents an increase of $4.2 million over the third quarter of 2017, with the increase primarily driven by improvement in the ongoing operating performance. Net cash provided by operations was $7.3 million during the quarter, as compared to cash used of $9.8 million during the prior year quarter. The increase in cash provided by operations was primarily driven by substantial completion of the teach-outs and improved efficiency of ongoing operations. For the full-year, net cash used was $21.8 million as compared to net cash provided of $6.5 million in the prior year with the increase in cash usage for the current year primarily attributable to the $32 million of legal settlement payments made during the first quarter of 2017. As previously discussed, we have been focused on optimizing our lease obligations associated with the teach-out campuses. These lease obligations have been a large component of our cost structure and cash usage. We have been pleased with the progress made over the last few years in reducing these obligations by securing sublease arrangements, as well as entering into early termination or lease buyout arrangements, which in some cases, did require an initial cash outlay. Our 2018 remaining lease liabilities will be approximately 50% below our 2017 levels, driven by our previous optimization efforts or a natural lease explorations. While we continue to be opportunistic in this area, with the ultimate goal of further reducing our obligations, incremental savings from hereon may be immaterial. While on the balance sheet, let me spend a few minutes on income taxes. For the year-ended 2017, we recorded a tax provision of $67.1 million which included a $52.7 million charge for the revaluation of net deferred tax assets and net state unrecognized tax positions as a result of the comprehensive tax legislation, known as the Tax Cuts and Jobs Act. This resulted in an effective tax rate of a 185.2% for the year. Effective January 1, 2018, the corporate federal income tax rate is reduced between 21% as compared to 35% in the prior year. Also, at the end of 2017, we had $215 million of federal net operating loss carry-forwards which will be used in future years to offset federal taxable income effectively reducing any related tax payments. Finally, capital expenditures were $2.9 million in the fourth quarter and $6.3 million for the full-year. This compares to a $0.8 million and $4.1 million in the respective prior year periods with the increases reflecting selective growth investments in our universities including our new admissions and advising centers in Phoenix. Before I continue to 2018’s outlook, let me review our ‘17 actual performance in context with our outlook for the year. We experienced better than expected growth in total enrollments and efficiencies within our advertising spend that drove over ongoing operating performance for ‘17. We also managed our teach-outs and lease obligations in an effective, efficient and responsible manner, significantly reducing our expected operating losses for the teach-outs. As a result, full-year 2017 adjusted operating income for ongoing operations was $105.9 million, above the high end of our outlook range of 100 to $105 million, while the adjusted operating losses for our teach-out campuses came in at $39 million and were significantly better than our outlook range of 50 to $60 million in adjusted operating losses. Primarily driven by these operating results, the year-end cash balances of the $180.1 million were also ahead of our outlook. The Company is executing well against its objective of sustainable and responsible growth. The improved performance and efficiency of our operations is allowing us to further invest in student surveying functions within our two universities, helping us create better experiences and academic outcomes for our students. With that in mind, let me provide some color around 2018’s outlook. Slides three and four of the presentation will provide some details around our outlook for the current year. We expect total Company adjusted operating income to be in the range of $99 million to $106 million, which represents an approximate 50% increase from prior year levels with continued growth into 2019. Further, adjusted operating income from ongoing operations is expected to be in the range of 110 to $115 million. We expect year-end cash balances to be in the range of $220 million to $225 million at December 31, 2018 with continued growth anticipated in 2019. Let me also point out that due to the continued decreases in our balance sheet obligation associated with our teach-out campuses, we now expect more of our operating income dollars to result in operating cash flows versus the prior years. Slides three and four also provide some additional information regarding our expectations for the first quarter 2018. We expect adjusted operating income from ongoing operations to be in the range of $26 million to $27 million, and the total Company adjusted operating income to be in the range of $22 million to $24 million. On slide four, we have provided an estimated range of $9 million to $11 million of adjusted operating losses for 2018, related to our teach-out campuses. As Todd mentioned, we had less than 100 students at the end of 2017, remaining at our teach-out campuses, who are scheduled to complete their programs in 2018. On slide six, we have provided a summary of 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 impact of the calendar redesign at AIU. Finally, as we have done in the past, slides seven through nine, in our presentation, provide reconciliations of GAAP to non-GAAP items. With that, I will turn the call back over to Todd, for his closing comments. Todd?

Thanks, Ashish. 2017 has been a successful year for the Company as we continue to execute against our objectives of increasing growth as well as improving retention and academic outcomes. I’m very pleased with the progress we have made since 2014, improving from an operating loss of approximately $140 million to our outlook for operating profit of $84 million to $91 million for 2018. Throughout this process, our students remain our focus and priority. None of this would have been possible within the support, dedication and commitments of our students, our employees and faculty and our stock holders. 2018 represents a shift in the operating model of the Company as we complete our transition from teach-outs and restructurings, to investments, technology advancement and student initiatives. Going forward, we will continue to take a measured approach to balance our objectives of effective and efficient student services with our financial and operating commitment. Operational improvements made within student support operations, redesign of our course structure and content, investments in technology, and new admissions and advising centers in Phoenix are all contributing to better student engagement and responsible for growth. Our University Group performance is tracking in line with our expectations and we remain confident in the long-term potential and the academic value proposition of both universities. Thank you again for joining us today. And we will now open the call for any analyst questions.

[Operator Instructions] The first question comes from Peter Appert with Piper Jaffray. Please go ahead.

Thank you. So, Todd, the start number is very impressive. Any particular areas in terms of programmatic areas of strength that you would call out?

I’m sorry, Peter. What was the last part of your question?

Just trying to understand what’s driving the start improvement in terms of programmatic areas, new program…

Programmatic, that’s what it is. Yes. I mean, the good news is, is that I think this has really been a several-year process to improve the overall effectiveness of our advertising and then from that, going forward, our ability to improve the admissions process. And I think you combine that with continuing to invest in the programs themselves, I think that again allowed us to take advantage of the opportunities in the market. So, again, I think going forward, we’re encouraged by the demand. I think we have the right people in place to execute on that. And again, so, we’re quite optimistic about what we’re seeing going forward.

So, new program introductions were not really a part of the story in terms of driving the start inflection?

Well, again, I would just say this that although new programs tend to be small in size initially, we continue to have a robust product development process. But, I don’t -- I would really call out one particular program that’s had a big contribution. But, I will say going forward that we continue to be very-focused on new program development. And again -- and those build over time as you know, you get some momentum. But this year’s growth, I wouldn’t really attribute to any -- meaningful amount of that growth contributed to any -- was contributed by any one program, new program.

Can you talk, Todd, a little bit about your priorities for capital use, cash flow use, given that you are so far along now in the turnaround process and the cash balance is obviously higher than expected?

Sure, a good question. The first and foremost is, based on your earlier question, we continue to see good demand. And as a result, I think investing in that front end part of the business is our number one objective. And so, we would go right to again the Phoenix student advisement centers have been our main focus and we continue to be this year. We also, as I said earlier, we want to continue to devote money to resources, to program development as well as our belief is that technology not only is an enabler but it also enhances the learning experience and the differentiation that we hope will allow us to continue to gain -- not just again grow but to gain market share because we really do think we have the right teaching, learning model, the right technology in the classroom. So, I have to say, those are the short-term investments. I think beyond that, we would obviously be -- and are looking at very carefully the best way to deploy the capital and that would hopefully support the objectives of our shareholders as well.

So, is M&A a significant or n increasing focused then on a go forward basis?

I think that we should -- I think, it’s responsible for us to look at those opportunities. But again, will they support our overall strategy which is that consistent and responsible growth, and again focusing on high quality of programs and area of the market where again you feel you can benefit those students. But, I mean, I’d say, we certainly wouldn’t want to say no, but again, if it would add to and support our overall long-term strategy, I think, it’s very responsible for us to look at those things. Yes.

And then, just couple of questions for Ashish. Specific guidance around the tax rate for ‘18, can you help us with that? And then thoughts on capital spending in ‘18?

Sure. Let me go through the capital expenditures. Typically, I would say capital expenditures will range between 1% to 2% of revenues. So, that’s very good range to look at. As far as the tax rate goes, as you know, we have -- the new tax rate is 21%, plus we add some state taxes. So, a safe rate for next year would be anywhere between 26% to 30%.

Which seems little bit high actually relative to what we’re hearing from some other companies. Is there anything -- and I guess, it doesn’t really matter since with the NOLs you are actually from a cash standpoint not really paying any tax, is that correct?

Yes. That is correct for now because we do have $215 million of NOL. However, keep in mind there is some new changes around stock compensation. So, that’s inside, if you look at this year, that costs us 3 percentage points in our tax rate. So, I’m just taking all that into account and giving you a number. But, basically, that should be the range.

Okay. And then, Ashish, the teach-out losses then go to zero in 2019, or is there still some residual expense in 2019 from leases et cetera?

Materially very little. I mean, there might be some ongoing leases like some utilities and that kind of stuff but materially they should be down, they should be all out.

[Operator Instructions] Okay. This concludes our question and answer session. I would like to turn the conference back over to Todd Nelson for any closing remarks.

Well, again, as I said earlier, we appreciate you joining us for the call. And we do look forward to our call next quarter. Thank you, again.

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