Perdoceo Education Corporation (PRDO) Q3 2018 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Career Education Third Quarter 2018 Earnings Conference Call. [Operator Instructions]. And please note that today's event is being recorded. I would now like to turn the conference over to Sam Gibbons of Investor Relations. Please go ahead.

Thank you, William. Good afternoon, everyone, and thank you for joining us. With me on the call today is Todd Nelson, President and Chief Executive Officer; and Ashish Ghia, Senior Vice President and Chief Financial Officer. 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 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 the reconciliation of the GAAP and 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, everyone, and thank you for joining us on today's call. We are pleased with the third quarter operating results, which I will cover shortly. Ashish will then provide more details around the financials and outlook before I provide some closing thoughts at the end of the call. For the quarter, we reported net income of $14.9 million or $0.21 per diluted share, while adjusted earnings, which include certain nonrecurring and significant noncash items were $0.25 per diluted share. Student enrollment at AIU and CTU continue to experience organic growth, which we believe is positively impacted by the organic investments made and operating efficiencies achieved in our student-serving processes and supported by consistent levels of prospective student interest for our programs. University Group total student enrollments increased 5.8% as compared to the third quarter of last year, and new student enrollments were up approximately 39%. The latter is a result of the organic growth at both AIU and CTU as well as the academic calendar redesign at AIU. Overall, we are continuing to meet our goal of sustainable responsible growth and are pleased with the operating and enrollment trends for the quarter. At CTU, new student enrollments grew 9% for the quarter, reflecting continued growth. The University has continued to increase its focus on employee training and development while streamlining its admissions and organizational structure to better serve our students. Prospective students interest and encouraging -- is encouraging, and we continue to experience solid execution within CTUs, Illinois and Arizona admissions and advising centers. CTU's admissions and advising centers in Arizona has now been fully operational for about a year. As employee tenure continues to further improve, and they gain training and experience, we expect to see incremental operating efficiencies from the team. Corporate partnerships have also meaningfully contributed to the new student enrollment growth at CTU, and the University continues to make strides in expanding its corporate partnership network. Based on the overall success of the Arizona center and supported by consistent levels of prospective student interest for our programs. CTU had also increased staffing at its admissions and advisory center in Illinois. Please note that the third quarter was the last quarter to benefit from increased staffing at CTU's Arizona and Illinois center that positively impacted year-over-year enrollment trend comparability. But as a result of improved execution across our operating processes, we still expect CTU to experience another quarter of new student enrollment growth in the fourth quarter versus the prior year. Total student enrollment at CTU increased 2.8% versus the prior year, with growth primarily driven by the momentum in new student enrollment. The student inquiry and application processes are the strongest they've been in years, and are supported by CTU's continued focus to improve learning experiences and engagement, which we believe will further enhance student retention and academic outcomes. Students are now assigned to their advising teams based on their academic characteristics and problem of study. On a weekly basis, advisers review each step of the process involved in building a rapport and relationship with students in order to better engage them in their academic studies. Finally, our predictive analytics tool is going live in the fourth quarter -- the fourth quarter. The tool is intended to better help us reach the right student at the right time with the right solution, which we expect will increase overall course completion for each student. Let me spend a minute to comment on corporate partnerships that have meaningfully contributed to new student enrollment growth at CTU. We're very proud of the fact that several Fortune 100 companies in telecommunications, health care and food industries have enlisted CTU for their employees' education. These corporate partnerships have provided us with an opportunity to educate students that are not easily accessible through our standard marketing. While students who enroll through these corporate partnerships are awarded higher tuition grants from the university to offset their tuition costs. These students have typically lower application and support cost and are more likely to start class and continuing their programs. As we make progress and continue to add corporate partners, these students will become a bigger part of our student population. Students associated with these corporate partners tend to be more persistent in their pursuit of long-term learning, which we believe will result in higher lifetime value per student. Overall CTU is on the path of substantial, sustainable and responsible growth, and we're pleased with the progress and operational enhancements made to support and engage our students as they complete their fellow study. Now turning to AIU. I wanted to take a moment to recognize the hard work of our AIU faculty and staff in connection with a comprehensive evaluation of AIU by its accreditor HLC this year. HLC found that AIU continue to meet HLC's criteria of accreditation and we're very pleased with this outcome and look forward to AIU's next scheduled reaffirmation review in the 2023-2024 time frame. Total student enrollments for AIU increased by 11.7% and new student enrollments increased by 96.8% versus the prior year quarter. Contributing to this enrollment growth is the admissions and advising center in Arizona, which continues to improve its execution around the student increase and application processes. Additionally, the new student enrollment growth benefited from the increase in approximately 60% more enrollment base for the quarter, which were a result of the academic calendar redesign. Recall that, in general, enrollment days attributable to any given quarter are the available 8 days during which a perspective student can apply to start school in that quarter. Despite quarterly variability, momentum in key operating metrics continues to progress with overall performance and the underlying metrics trending positively as compared to the prior year. Year-to-date, new student enrollments at AIU are up 6.6% versus the prior year-to-date and revenue is up 2.4% for the first 9 months of this year. AIU also continues to make incremental investments across its admissions and advisory centers, primarily in Arizona. In fact, staffing at AIU's center is up approximately 15% versus the prior year. The personalized graduate team model is fully rolled out with cross-functional student support between admissions, advising and financial aid groups. The teams focus is aimed at improving student engagement prior to the start of their education and continuing through their academic program. With particular emphasis on the important on-boarding phase and first academic term as the students adjust to their academic program. A team of three staff members from advising, admissions and financial aid, now work directly with each new student creating a student service atmosphere and encouraging quality interactions. Of course, these have been designed to accommodate skill development holistically in the first 8 courses, which we believe will support incremental and progressive learning. A new learner-centric model has also recently been introduced that has resulted in an increased number of courses that utilize our intellipath technology, which we believe promote stronger learning. The graduate team model provides for a shared accountability between admissions, advising and financial aid. This when combined with our continued enhancement, of course, sequencing and design as well as technology investments should improve student engagement and experiences. We believe this will continue to benefit AIU and we're expecting revenue to, again, grow in the fourth quarter as compared to the prior year. Overall, we remain pleased with AIU's progress as it strides to deliver outstanding academic experience that prepares and support students through graduation. Both universities have experienced sustainable and responsible growth over the past few quarters. These trends have provided reaffirmation around our overall strategy of prioritizing student serving processes and operations, while giving us the necessary financial and operating confidence to continue investing in our universities. Keep in mind as new student enrollments have grown and our admissions and advising personnel work with these students to improve the learning experience and academic outcomes, we believe this should lead to further improvement in retention trends for the future. With that in mind, please note that our student -- new student enrollment growth has not fully manifested into total student enrollment growth. This process usually takes a few quarters as we continue to further enhance retention and academic outcomes. A quick update on our mobile initiative. Both universities have fully implemented a two way messaging platform within the mobile application to support effective and efficient student outreach and communication, with advising admissions and financial aid personnel. Initial reactions to the platform are very positive. Our students and staff are increasingly using the messenger due to its ease and simplicity. Over 85% of our population is now on the mobile application and, approximately, 40% of them have used the messenger application. As a result, our staff is now able to reach and advise students that they would not have, otherwise, been able to reach easily. We believe this will ultimately have a positive impact on the overall student retention and academic outcomes. We're pleased with the operating progress at both our universities and expect this positive momentum to continue into 2019. Now I'll hand the call over to Ashish for a more detailed review of our results, balance sheet and outlook. Ashish?

Thank you, Todd. I will start with a review of our third quarter results and then discuss our balance sheet and outlook before handing the call back to Todd for his closing remarks. All comparisons are versus the comparative prior year period unless otherwise stated. For the quarter just ended, total company operating income was $19.3 million, an improvement of approximately 325% as compared to operating income of $4.5 million. Adjusted operating income, which exclude certain nonrecurring and significant noncash items is more indicative of the underlying operating performance. This measure came in at $25.8 million for the quarter, an improvement of approximately 67% as compared to $15.5 million. Net income for the quarter was $14.9 million. Diluted EPS was $0.21 per share, while adjusted EPS, which, again, is more indicative of the underlying operating performance was $0.25 per share. Let me quickly discuss 2 of the adjusting items for the quarter, restructuring severance and unused space charges. Included in the quarter was approximately $1.9 million of severance charges related to the process reengineering of our University Group primarily with a nonstudent-serving operation. As an educational institution, we regularly evaluate and analyze ways to improve operations and redistribute resources to serve our students in the most efficient manner. A substantial portion of these operating efficiencies have been committed for reinvestments in student-serving processes. We also recorded $2.3 million of noncash charges to adjust sublease and other assumptions made in conjunction with previously recorded unused space charges related to close campuses. But more importantly, please note that these unused space charges are initially recorded with certain assumptions and, periodically, adjusted under specific accounting rules, but are typically noncash in the period they are recorded. As such, these do not impact our 2018 ending cash outlook, which remains unchanged from the prior quarter, nor our expectations for improved 2019 cash balances. Third quarter University Group revenue increased by 2.9% to $145.6 million as compared to the prior year. Both universities contributed to this revenue growth primarily driven by positive momentum in student enrollment trends. Revenues at CTU increased $1.8 million or 2%, while AIU revenues increased by $2.4 million or 4.7%. Third quarter University Group and corporate operating income was $23 million. Absent nonrecurring and significant noncash charges adjusted operating income was $27.2 million for the quarter, approximately $1 million higher than the prior year quarter. Driving this performance was revenue growth at both universities, partially offset by investments in student-serving operations at our Illinois and Arizona centers and ongoing technology investments. Also a portion of the improvement was driven by timing of student operating expenses as compared to the prior year quarter. Moving to enrollment. Total student enrollments at CTU grew by 2.8% supported by new enrollment growth of 9%. Continued investments in our student-serving operations progressed with our corporate partnerships and ongoing technology investments contributed to this positive performance. Driven by these initiatives, we expect CTU to again experience new student enrollment growth for the fourth quarter. Total student enrollments at AIU increased 11.7%, while new student enrollments increased 96.8% for the quarter, bringing the year-to-date growth in new student enrollments to 6.6%. With the lead, this year-to-date improvement is supported by our investments in our admissions and advising center in Arizona as well as improved execution within their graduate team structure. I would also like to note that the upcoming fourth quarter will again be impacted by the calendar-driven variability at AIU, with new student enrollments expected to significantly decline, followed by significant growth in the first quarter of 2019, which we expect will more than offset the decline from the fourth quarter of 2018. Also recall and note that the calendar-driven variability in quarterly enrollment trends does not materially impact quarterly revenue trends, which are still primarily driven by our underlying long-term operating performance and the number of revenue earning days during the quarter. Thus despite quarterly variability in new student enrollments, we expect AIU to experience revenue growth both in the fourth quarter and for the full year 2018. Finally, teach-outs. There are 2 campuses and approximately 10 students remaining within this segment. We reported an operating loss of $3.7 million in the third quarter, which reflects an improvement of approximately $15.4 million as compared to an operating loss of $19.1 million in the prior year quarter. We expect this teach-outs to be fully completed by year-end. Now let me spend a few minutes reviewing our balance sheet. We ended the quarter with $193 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 approximately $13 million over year-end 2017 and was primarily driven by positive cash flows from our university operations offset by cash outflows related to operating losses and lease obligations for our teach-out campuses and payment associated with legal settlements. As previously noted, we expect to see further improvement in our operating cash flows and the strength of our balance sheet due to completion of the teach-outs. Net cash provided by operations was $3.5 million during the quarter as compared to cash provided of $5.1 million during the prior year. Included in the current quarter cash flow from operations are payments of approximately $13.1 million related to previously recorded legal settlements. Capital expenditures were $1.2 million in the third quarter compared to $1.3 million in the prior year. For the full year, we continue to foresee capital expenditures in the range of 1% to 2% of revenues. We recorded a provision for income taxes of $5.1 million. This resulted in an effective tax rate of 25.2% for the quarter. The current quarter and year-to-date effective tax rates have benefited from release of tax reserves, the tax effect of stock-based compensation and adjustments to increase the state deferred tax asset. We expect a full year tax rate for 2018 to be between 22% to 24%. Please note, absent the benefits I just mentioned about, the full year tax rate would approximately be 26% to 27%. As a reminder, specifically, as it relates to 2018, we do not expect to pay any federal income taxes due to the $215 million of federal net operating loss carryforwards that existed as of December 31, 2017. Let's now take a look at our outlook for the year. As you can see on Slide 3 of the presentation, we expect total company adjusted operating income to now be in the range of $101 million to $106 million, which represents an approximate 50% increase from prior year levels with continued growth into 2019. Our expectations for year-end cash balance remain in the range of the $215 million to $220 million. As a reminder, due to the significant decreases in our obligations associated with our teach-out campuses, we expect more of our operating income dollars to result in positive operating cash flows, and we continue to anticipate growth in our cash balances for 2019. With this expected cash generation, let me quickly touch upon our strategy around capital allocation. We are focused on building a strong balance sheet, while prudently investing in organic growth projects. As we further build our cash balances, we will also evaluate inorganic strategies, including acquisitions of high-quality educational institutions and programs, while further emphasizing organic student-serving investments at our universities, all while still maintaining adequate liquidity. Ultimately, our goal is to deploy resources in the most effective and efficient manner that we believe will lead to increased shareholder value. Slide 4, provides a summary of key assumptions contained within our outlook. Please keep in mind that we expect some variability in our quarterly results-driven by the timing of our operating expenses and the varying impacts from initiatives, including the ongoing impacts of the academic calendar redesign at AIU. With that, I will turn the call back over to Todd for his closing remarks. Todd?

Thanks, Ashish. In summary, we continue to execute well against our strategy to drive sustainable, responsible growth, while also making appropriate long-term investments in our universities. The education industry remains one of the largest sectors of our economy and postsecondary student enrollments are expected to see modest growth over the next few years. Key takeaways as we wrap up 2018 include, student interest for our programs remains encouraging driving incremental investments throughout the year to support and serve that interest. We believe these student-serving investments support new student enrollment growth, which fully support -- which further support our total student enrollments as we continue to focus on retention and academic outcomes. We believe our universities are aligned favorably with long-term postsecondary education trends, and we believe our programs should continue to represent compelling value to prospective students, as we continue to make technology enhancements across our organization. We expect to close the year on a good note and should have positive momentum entering into 2019 that will enable us to be strategic with respect to future capital allocation decisions. We feel good about the strength of our organization are continually striving to build a leadership position in postsecondary education. Thanks again for joining us today, and we will now open the call for any analyst questions.

[Operator Instructions]. And today' first question will be Peter Appert with Piper Jaffray.

This is Kevin Estok, in for Peter Appert. My first question actually is regarding your pricing strategies at AIU and CTU. I was wondering if -- so revenue decreased at both, and I guess, I was wondering if you could discuss the trend that we should expect going forward?

Well, again, revenues are affected a lot by the degree mix, and it also is affected by the number of students that are coming in as a result of corporate partnership, so that may cause some variability. The good news though as you see new student enrollment trends continues to go on the right direction. We also see, as you know, there is a lag for several quarters where you start to see total enrollment growth coming as well. And so, although, again, it's very difficult to predict that mix. We'll continue to manage that going forward to make sure that we're kind of providing that balance of growth versus the investment that's supporting the demand we're seeing.

And my second question is actually regarding cohort default rates. So this year, there was a bit of an uptick of both schools, both at AIU and CTU. And they're also a bit relatively high compared to industry peers. I was just wondering, if you could discuss, how you plan of reducing the CDR? And then, how much of a focus it is for management?

Sure. Well, and as you know, as you mentioned, the cohort default rate that is reported the final is for 2015, which is a very delayed effect, as you know, of the actual where we are today. And I would say that, again, it was based somewhat on the amount of focus and resources devoted in the past to bring that down from when you get your initial rates. But what we have done is renewed the emphasis. Our feeling is that this -- we should see in future years that coming down is certainly our focus. But, again, I think that it's a result of the work that's been done a while ago. And, obviously, since I've been here there's been a big shift in -- not really a big shift, but certainly a shift in priority to make sure that we have that going in the right direction, and feel confident that it will go in that direction.

[Operator Instructions]. And our next question will be Greg Pendy with Sidoti.

I guess, the first one -- I apologize if I missed it. But I think you said the new students at AIU, it would be down -- you're expecting it to be down in the fourth quarter, is that sequentially or year-over-year?

Year-over-year.

Year-over-year.

Yes. As we've said, we -- yes, then we also then see Q1 of '19 because again if this calendar redesign will be up significantly, and again it will more than offset what you see that downside in Q4.

Okay. Got it. And then just on the capital allocation you kind of mentioned potentially looking at acquisitions, can you just kind of comment, I guess, just overall how you -- right now you're running two different separate universities AIU and CTU. Is that kind of how you would continue to look at the strategy of a third as a separate university? And then these synergies would be more on the back-end processing side?

That's a really good question. And as we look at this, we see what we feel like that we're good at. I think we're good at managing quality universities and improving what we would consider the front-end process, but also the back office services. And at the same time, again, our expertise in delivering high-quality online education is, again, something we think we can deploy across other institutions. And so, obviously, we've seen that with CTU, and now with AIU, as things are improving there. And the ability to add and, again, be very selective, but adding high-quality institutions that would prefer to pursue regionally accredited institutions that are in possibly degree areas, whether it'd be different degree programs or a different part of the market that may be complementary to what we currently offer. Again, that's certainly not mandatory, but that's certainly something that would be part of that strategy. But, again, we are constantly seeing positive opportunities that are coming across, but in a very prudent way. We're very selective and careful, but again using and capitalizing on this infrastructure and expertise we have to look at some other partners to improve their operation and produce some additional growth and opportunity for students.

And this will conclude our question-and-answer session. I would like to turn the conference back over to Todd Nelson for any closing remarks.

Again, we want to thank you for taking the time to join us this evening. And we really look forward to talking with you as we close up the fiscal year next quarter. Thank you very much.

Thank you.

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