Perdoceo Education Corp (PRDO) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, the Company has asked me to read the following Safe Harbor passage before the conference. Statements made which CEC or its representatives on this call that are not historical facts are forward-looking statements within meaning of Safe Harbor provision of the Private Securities and Litigation Reform Act of 1995. Such statements are based on information currently available us to and involve risks and uncertainties that could cause our actual results in 2004 to differ materially from those expressed and/or implied by these statements.

These risks and uncertainties include but are not limited to costs and difficulties related to the integration of acquired businesses, risks related to our ability to comply with and the impact of changes in legislation and regulations that affect our ability to participate in student financial aid programs, costs, risks and effects of legal and administrative proceedings and governmental regulations. Future financial and operational results, competition, general economic conditions, ability to manage and continue growth, and other risk factors related to our industry and business as detailed in our annual report on form 10-K for the year ended December 31, 2003. And from time to time in our reports filed with the Securities and Exchange Commission. CEC assumes no obligation to update its forward-looking statements.

With that let me welcome to you to the Career Education second-quarter 2004 earnings conference call. My name is Carlo and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. At which time participants may press star 1 on their phone to submit a question.

If at any time during this call you require assistance, feel free to press star followed by 0 and a coordinator will be happy to assist you. It is now my pleasure to turn this presentation over to your host for today's call, Mr. Jack Larson, Chairman, President, and Chief Executive Officer. Please proceed, sir.

Good morning, everybody. With me today are Pat Pesch, CFO and Nick Fluge, President of the Online Education Group. We are pleased to share our results for the second-quarter 2004. We once again produced record financial results in the second quarter. Our 26th consecutive quarter of record revenues and earnings.

Second-quarter 2004 revenue was up 60% from the same period last year and net income was up 103% from last year's second quarter. Second quarter starts were up 61%, and the July student population is expected to be up 31% to approximately 81,000. Career Education achieves these results for 3 primary reasons: Number 1, above all, we put our students first in everything that we do.

This means offering a high-quality education product in career fields with attractive long-term potential and also providing exceptional customer service. Number 2, we pursue a multi-pronged growth strategy encompassing both internal and external growth. Our strategy includes Datum Curricula. This is a rapidly growing presence in health education, new programs and program transplants, advanced degrees, online education, new campus start-ups, international expansion and acquisitions.

Number 3, we focus on profitable growth. Our internal targets are structured to grow margins and profits as well as the top line. Pursuing growth opportunities with the satisfactory return on investment provides the resources to fund the infrastructure improvements to successfully manage our growth.

Let me touch on a few highlights from the quarter that emphasize these points. Leads produced by our marketing effort increased more than 100% over the prior year topping 1.2 million in the second quarter. Book futures for June were up 41% over June of 2003.

The growing interest in our schools demonstrates that we are offering programs that appeal to career-oriented students. That we know how to reach them effectively with the compelling message through a number of channels such as TV, Internet, direct mail, print, and high school programs. In our online education group, the ramp-up of our Colorado Technical University or CTU Online is exceeding our expectations for leads, enrollment, starts and population. In fact CTU is growing faster than AIU Online did at a similar stage in its development.

AIU Online has become widely recognized as one of the leaders in distance education, continuing their participation in the U.S. Department of Education's Distance Education Demonstration Program. With regard to academic degrees, Career Education now offers 55 bachelor degree programs up from 31 last year.

In fact, we now offer more bachelor degrees than associate degrees, and we also offer master degrees through some University division campuses and our Online Education Group. Career Education is further enhancing academic experience through a number of initiatives. For example, we now provide training in instructional delivery to the 5000 faculty members in our colleges, schools and universities groups through 3 methods: Online courses, on-site workshops and on campus faculty resource centers. And Career Education continues as Educator of the Year Award recognizing exceptional on campus faculty member.

Our online group has an unique faculty development program, as well as a recognition program. Last week, we announced the appointment of Dr. Alan [Dremer] to the position of Chief Academic Officer for AIU online. Dr. [Dremer] holds a Ph.D. from the University of Chicago and an MBA from Wharton School.

He also was a National Security Fellow at Harvard University where he won the Harvard College Undergraduate Teaching Award. Before joining AIU, Dr. [Dremer] assisting major private and public universities in developing and implementing e-learning capabilities. Our career services department work hard to bring students and employers together in the most effective and efficient ways possible. For example, Career Education has formed a partnership with EmployOn and we've rolled out their service to all of our schools in the second quarter.

Some of these will be also rolled out at a number of our colleges in the third quarter. This service enabled our Career Services representatives to search 150 career-related websites automatically, mining for career opportunities that are of interest to our students. Previously Career Services that route, had to manually comb the top career websites.

So the addition of EmployOn significantly improves their effectiveness. With regard to our infrastructure, Career Education's investment in industry leading information technology systems, it continues to produce results, both in terms of enhancing the student experience and in terms of improving the efficiency and effectiveness of the organization. For example, there are student portals. Students now have online access to critical information such as class schedules, faculty contact information, campus information and financial aid information.

The student portal also provides many self-service capabilities such as online payment, which not only makes the campus more efficient, but also makes it more convenient for the student. Our faculty portal now provides online attendance tracking and monitoring for the majority of our student population. This enables administrators to promote retention by identifying at risk students in a timely way.

We also made additional improvements in the second quarter to [ELLEN] our online enrollment website. This site automatically - - or automates the entire students admission process through the online interview, application, and financial aid steps. It gives the student an easier and faster way to apply at all of our colleges, schools and universities.

35% of all of our brick and mortar applications are now processed through the online site. We also have a similar product for our online group that is doing very well. And in May, our online education group, along with the Career Education management team hosted a 2 day virtual management conference that connected over 3,000 Career Education employees from 80 locations all around the world. Here, our investment in an industry-leading technology infrastructure enabled us to host a virtual event to share best practices while saving thousands of hours of productivity by eliminating travel and down time. At this time, I would like to turn the call over to Pat Pesch, our CFO.

Thanks, Jack. As Jack indicated, second quarter 2004 revenue was 40.5 million, up 60% from 256.1 million for the same period last year. Online revenue was $93 million, an increase of 186% from 32.6 million in the prior year. Second quarter 2004 net income was 39.7 million or 38 cents per diluted share up 103% from last year's second-quarter net income of $19.6 million or 20 cents per diluted share after adjusting for the 2-for-1 stock split that was effected in August 2003.

Same-school revenue growth was approximately 39%. Same-school population growth is expected to be approximately 11.5% as of July 31. Organic growth is expected to be approximately 14% as of July 31. Operating margins were 16.1%, up 350 basis points from 12.6% in last year's second quarter.

This overall increase was driven by the significant increase in Online Education Group revenue which operates at substantially higher margins than our college, schools and universities groups. Our CSU margins were down 70 basis points versus last year's second quarter, primarily due to the lower operating margins of the former Whitman Schools which were not included in the prior year's results. On a same-school basis, CSU margins were up approximately 100 basis points despite higher bad debt expense and higher occupancy costs associated with numerous campus expansions and relocations.

Including in our operating expenses for the first 6 months of 2004, our approximately $3 million of legal expenses associated with class-action litigation, the SEC investigation, and related matters. This is in addition, to approximately $1 million recorded in the fourth-quarter 2003. The majority of the current year costs were provided for in the second quarter of 2004. Accounts Receivable day sales outstanding were 25 days at June 30, 2004.

This represents an 8-day decrease from the quarterly DSOs of June 30, 2003 of 33 days. Bad debt expense was 5.1% of total revenue for the quarter ended June 30, 2004 compared with 3.9% for the quarter ended June 30, 2003, and 4.9% for the quarter ended March 31, 2004. This increase in bad debt expense from last quarter was 20 basis points. We continue to believe that our - - that our bad debt expense will improve over time at a modest and gradual rate.

Now I would like to talk for a moment about campus start-ups. We had budgeted expenses in capital spending associated with opening 9 start-up schools, 7 of which we have scheduled to open in 2004. New AIU schools in San Antonio and Dallas were scheduled to open this month.

These 2 schools are now expected to open in 2005 pending accreditation approval from the Southern Association of Colleges and Schools. We had already budgeted the start-up costs for the 2 AIU campuses in 2004, and even though we will not receive any revenues in 2004, this will not materially impact our financial results for the remainder of the year. Our other start-up schools budgeted for this year are on schedule.

The International Academy of Design and Technology, Las Vegas, had starts in April and July, and Le Cordon Bleu Miami had starts in May and July. And the International Academy of Design and Technology Nashville had a start in July. All 3 of these schools are ahead of our initial recruitment and enrollment projections.

The new International academy of Design and Technology Campuses in Sacramento and Seattle are expected to start in the fourth quarter of 2004. The remaining 2 schools that have start-up costs budgeted in the latter part of 2004 are expected to start in early 2005. Next I'll provide our guidance for the full-year and third quarter. We expect full year 2004 revenues to be approximately 1.69 billion to 1.71 billion and full-year 2004 earnings per share to be approximately $1.81.

We expect the online education group's full-year 2000 revenues included in the proceeding amounts to be approximately $345 million. We expect third-quarter 2004 revenues to be approximately 418 million to 423 million and third-quarter 2004 earnings per share to be approximately 38 cents. We expect weighted average shares outstanding to be approximately 106 million for third quarter 2004. I will now turn it back over to Jack.

Thanks, Pat. Before we go to Q&A, I want to spend a moment discussing several recent developments relating to Career Education. The first is the SEC investigation. As we stated in our June 22 press release, the SEC has notified the Company that it is conducting a formal investigation of Career Education, and we have been cooperating with the SEC. I can provide no more information at this time.

The second is the accreditation. As we announced in our July 2 press release, the Southern Association of Colleges or Schools or SACC has placed AIU on warning a status with the expectation that AIU provide additional information on several compliance matters by September 22 of this year. Separately,[WASC] the accrediting group for Brooks College has placed Brooks College on probation and required the College to provide a progress report on certain matters by October 15, 2004.

I'd like to provide some clarity about what accreditation is and why we pursue it. Accreditation is a voluntary process under which academic institutions undergo review by peer organizations. Accreditation by a accrediting agency recognized by the U.S. Department of Education is required for an institution to be certified to participate in the Title IV fund program. The focus is primarily on academic matters. Operations and financial performance are assessed in the context of ensuring the institution has the resources to perform its educational mission.

Action by an accrediting body at one CEC school does not affect other CEC schools. It is important to note that the goal of the process is not to deny accreditation but rather to improve the school. We fully support this goal and work with the accrediting bodies to ensure that our schools meet their requirements. Accordingly, we are working with SACC and [WASC].

We have said that we expect to satisfactorily address the matters at AAU and Brooks College within the time specified by the accrediting body. The third area I want to discuss today is pending litigation. Career Education has continued to and will continue to face litigation. The natural reaction of us at Career Education is to respond publicly and defend the Company. However, this is neither productive nor a good use of our time.

Therefore, with few exceptions, Career Education will refrain commenting publicly on litigation pending against us. Instead, we will defend ourselves vigorously in court where allegations must be substantiated. In recent weeks we have received a number of inquiries asking us to comment on possible regulatory and investigative actions involving the Company.

We believe that it would be inappropriate to provide continuous updates on such actions or to speculate about inquiries that we neither control nor have sufficient knowledge about to comment in any meaningful way. We will, however, continue to periodically provide updates on significant events concerning our Company as warranted. We did so last month concerning the change in status of the SEC inquiry and again earlier this month concerning certain accreditation matters. Let me close by saying that we here at Career Education remain focused first and foremost on working hard to serve our students. That remains our top priority.

By remaining focused and providing students with high-quality education product and curricula, matched to long-term economic trends, we intend to continue to build a world-class education Company, continue to grow, and continue to provide outstanding shareholder value. With that, let us take questions please. Operator we'll now take questions.

[Caller instructions.] Sir, our first question is from Mark Marostica with Piper Jaffray.

Thank you. Hey, I was wondering if you could comment on the persistence rate that was achieved in the quarter relative to the year-over-year period and the prior quarter?

You know, as it pertains to retention, we have not given specific numbers on that in the past. I mean, I will tell you that, you know, most of our students are taking a full-time schedule, and that, of course, puts a lot of demands on students' time. Our history we have more longer programs than we ever had before. And as always, students are certainly, you know, faced other challenges in their - - you know, in their personal lives also. So it is an area of opportunity for us, and we've - - we are doing a number of things as we move forward here to ensure that we can retain more of our students.

Mark, this is Pat, as Jack mentioned that we don't provide that information. We do provide a measure of retention in the 10-K on an annual basis, and that information is there. And without providing some specific information, you know, we - - our retention levels, you know, in the current period were a little bit below our initial expectations. But, you know, we are actively looking at that area and really looking to find ways to provide the service to our students to improve that.

I guess as follow-up to that point, Pat, any specific reasons for that that you might highlight?

No, I think Jack really kind of highlighted the areas. There was nothing new in terms of the type of reasons that students cited, and they tend to be a fairly lengthy list relating to personal reasons to financial reasons and others.

Okay. Thanks, I will turn it over.

Sir, your next question is from Brad Safalow with J.P. Morgan.

Hi, good morning.

Hi.

I would appreciate the color on the legal costs up until this point for the year. Then looking at - - obviously you have had some more activity in the last couple of weeks really. How should we think about potential legal costs implied in your guidance for the third quarter and the remainder of the year?

Well, Brad, this is Pat. Let me suggest this. I mean, clearly in - - you know, imbedded in our guidance, some overall provision or assumption for a continuing level of legal costs that are, let's say a higher - - certainly higher than what we have experienced in the more distant past. However, we are somewhat reluctant to provide, you know, really a forecast of that number. As Jack indicated, you know, we really don't have a certain level of information or basis for knowing what matters might be brought in front of us. We certainly expect a continuing level of costs associated with continuing to comply with and work on the matters that are in front of us today. And I really kind of laid out that we - - you know, we've got the various class-action litigation, which I believe most of you are aware of. The SEC investigation, and, you know, related matters. So we would expect a continuing level of costs associated with that, but, you know, frankly, a precise estimate of that is a little bit difficult given the information that is available to us currently. I think if you look at the guidance, you can certainly see we have made some modifications to our revenue expectations, given some specific information with respect to margin expectations, growth in our online revenue which does carry a higher operating margin than our CSU group. And basically if you look at our guidance from last quarter, plus the overperformance versus our guidance for the second quarter: We essentially raised our guidance for the year by approximately a penny. So that increase in guidance reflects expected improvement in the overall operating results, offset somewhat by higher expected legal costs.

Sure. And if I could ask another question on the Online Education Group. The total enrollment at 17,600. Assuming that - - I want to make sure this is correct. That you had 2 intakes during the quarter at AIU, is that correct?

That's correct. We had between April 30 and July 31 being the 2 days at which we reported - - report populations we had 2 starts for AIU online.

I guess with that in mind, based on my back of the envelope calculation. I know you don't disclose this in granular detail, you about it appears that starts for online were up perhaps as much as 50% sequentially if you look per intake. Can you comment in general just on the overall start activity at online.

The overall start activity Online Education Group line is absolutely up period over period. As you mentioned we haven't specific start data broken down by the business units, but absolutely the start activity is up. We also experienced a significantly higher level of graduations in the period, and that really is just a flow-through of the large increase in population we had last year at this time and given the length of those-programs.

Just one last question on online. Any chance you will provide us with CTU Online enrollments?

No, not at this time. I think we tried to provide - - we know some of the information is out there. We provide as much information as we can. And we did specifically point out the same-school population growth, and as you know currently the CTU Online population is not included in the same-school numbers. It will be next quarter.

Fair enough. I will turn it over. Thanks

Ladies and gentlemen, as a reminder, due to time constraints, participants can only ask one question at a time. Sir, your next question is from Eric Sledgister from First Boston.

Hi good morning, it's Eric filling in for Greg. I believe there was an organic growth metric discussed on the call. Can you discuss how you define that metric and maybe how it relates to the past several quarters?

In terms of how we define that, it is basically - - it adds in addition to the same-school growth, it adds in the impact of our start-up campuses. So it is non - - basically nonacquired growth on top of same-school revenue growth. And, you know, this is really the first time we are providing it. We would expect to provide some information on that prospectively. I don't have any historical information to offer now.

Okay. And you mentioned that lead-flow has been strong. Has the investigation at all affected your ability to convert those leads?

Well, there are 2 very separate issues. I mean when people inquire to any of our colleges, schools, Universities, whether brick and mortar or on-site, I think the student is responding to a given type of marketing program. And, you know, our lead flow, I will tell you has been very, very strong in both groups, and so I guess I would say there is probably no correlation there that has affected, you know, lead flow.

Okay. Thanks.

Okay.

Your next question is from Gary Bisbee with Lehman Brothers.

Thanks. Just wondered given all the regulatory and legal things that have been happening with the Company recently, does that preclude from you doing future acquisitions or at least in the near term make you less likely to do significant size deal at this point?

Well, I mean not necessarily. You know, when we look at deals or consider deals require mean, they are - - you know, you have got to be kind of opportunistic in terms of what you are looking at. You know, we consider a lot of things, I guess, as we acquire something, and we always have done that, so, you know, I don't think that it necessarily stops us from going forward with any type of, you know, acquisitions.

Okay. And just one follow-up, if I could, given the fairly large amount of insider sales over the past year by executives and directors. I wondered if you have given any thought or consideration to personal purchases, you know, by you guys or your Board of Directors as a show of confidence in, you know, the Company's outlook.

You know, that's certainly something under consideration. You know, we don't want to, you discount that. It is something that has been discussed. I think obviously, in the current situation, that would probably be somewhat difficult to do, but it doesn't preclude us perhaps later on from doing it.

Yeah, I guess Gary, directly, I would say, you know, our counsel has advised us either for insiders or for the Company itself, that it would be inappropriate to purchase shares, you know, at this point in time. But as Jack mentioned, you know, with respect to at least some of the senior officers, we are very open to the possibility of making purchases of shares if that trading window were to open up for us in the future.

Okay. Thanks a lot.

Sir, your next question is from Howard Block from Bank of America.

Thank you, good morning, everybody.

Good morning.

Pat, do you know what the allowance for doubtful accounts was at March 31?

Yeah, the allowance for doubtful accounts?

Right. It was disclosed in this quarter's press release but it wasn't in the last quarter's and maybe I missed it in the Q but I didn't see it in there either.

No. What we really did - - we provided the information this time. We have gotten a number of inquiries from folks about providing that information on an interim basis. Normally we have only provided that information at the end of individual - - at year-end as part of, kind of the full disclosures of an annual statement. We added that in this quarter in response to those inquiries. I don't have that information to provide right now as to the end of the first quarter.

Okay. Can I use this public forum to have you guys perhaps dispel a rumor? Is John [Coover] still with Career Education?

John [Coover] is no longer employed with the Company.

Do you know when he left?

When he left?

Yeah.

Approximately a week and a half ago, I think.

Okay. Do you know what the details are in the current liabilities, beyond the deferred revenue number? Can you share any of the balances in those accounts?

Well, I mean, normally we would not provide at kind of that level of detail until we filed the Q. If there's a specific question there, I may be able to respond to it.

Okay. Well, just in terms of, like, the 3 accounts you have beyond deferred tuition revenue and current are accrued liabilities and other accounts payable and current long-term debt and the long-term debt number is pretty small. So, you know, the 2 numbers that they left - - accounts payable was 26 million at the end of the first quarter and I'm just wondering what it might be at the end of the second.

Well - - you mean our Q will be due in about, you know, a week and a half. We will have the full disclosure at that point.

Okay. And the last thing is, obviously we calculated same-school growth less favorably than you did, and I am sure we just aren't privy to the detail because I think we calculated around -- excluding online I think at about 8%. I am sorry. I think the number you have was 11.5%, is that --?

That's correct. I will probably throw in a couple of factors. One thing in terms of you making that estimate. You would have probably had to make some assumption with respect to the population in the former Whitman Schools. I will tell that you there is a seasonality to the population there. And that population at Whitman while up substantially on a year-over-year basis was down sequentially. So and that's reflecting a level of seasonality. I think that is something you need to consider in any estimates that you would make. In addition, you really need to make the actual calculation. You need to make some assumption with respect to what you believe the CTU Online population is, and that population did grow strongly sequentially from the April to July. We've declined to provide the specific information on that. We have said, for instance, when we made the Whitman acquisition we would provide that information basically separately until it entered the same-school calculations. It's consistent with what we've done in the past. We have not normally broken out those numbers for individual acquisitions. We have made exceptions with respect to [EduTrac] Or the AIU acquisition and Whitman because of their size.

Okay. Very helpful. Thank you.

Sir, your next question is from Sarah [Gubins] with Merrill Lynch.

Hi, good morning. 2 very quick questions. The first is, I am wondering if you are still planning to launch a third platform online later this year or next year and what the plans for that are? And then the second question is just wondering if you are seeing either any particular strengths or any weaknesses in particular areas, either by degree program or by type of program offering.

All right, let me ask Nick to maybe talk about the third platform and then we will come back and answer your last question.

You bet. You know our plan is still to offer a third platform in Q1. At the very latest probably April of Q2, but hopefully in Q1 we have a lot of discussions on that. We are looking for a lot of opportunities we have. And we think it's going to create some tremendous success in the future. As you heard earlier, CTU is really ramping up dramatically. We feel really good about that and we think a third platform can also do very, very well, so we are looking forward to that.

And, Sarah, this is Pat. I would ad in our guidance does contemplate investment in rolling out that platform toward the end of this year.

Okay.

In terms of different programs and I guess the question is kind of, you know, what students are interested in. We, this year have put in a lot of new programs. The second quarter was a good quarter for us in terms of the numbers of new offering that we have. And you know, people seem to be attracted to, you know, enrolling and things that have bachelor degree associated with them. You know, different types of medical programs, whether it is diploma or associate degree, you know, the - - some of the IT areas are doing well. Certainly the web areas and people continue to really want to get into the culinary fields.

Great, thank you very much.

All right.

Once again, ladies and gentlemen, due to time constraints, one question per person, please. Our next question is from Kelly Flynn with UBS.

Hi, guys, this is Brian for Kelly.

Okay.

I just had a quick clarifying question. Is - - I understand that the CTU Online enrollments are included in the new school enrollment. Are they also included in the online education group enrollments?

Yes, they are.

Okay. So they are included in both places. Okay.

Well, I am not sure what you mean by "both places."

Sorry --

First when we're talking about enrollment, I think we're talking about - - the terminology we use is "population."

Right.

They - - you know, we disclosed the total population, and we disclosed - - included in that total population the online education group population. They are included in the online education group population.

But the Whitman enrollments are in the included in new schools but the CTU Online enrollments would be?

Well let's put it this way. Whitman is now included in same-school comparison. Online population for CTU is not in the same school of comparison.

Okay. And just a quick follow-up question. Can you tell us - - I mean I think we talked about this once before, but in terms of receivables, I mean, have you guys participated in selling receivables or factoring receivables and sort of what you think about that as a concept?

We have not in any meaningful way engaged in any activity to sell receivables in bulk, if you will. We have - - we certainly use collection agencies and - - but we have never done anything of any substance in terms of selling a block of receivables.

Okay. And finally, in terms of the same-school enrollment growth, it was perhaps a little bit weaker than we would expect. Is there anything that you can point us to as to why the on-ground campuses might have been a little bit weak?

Well, the one thing I did point out in my comments is that our retention level was somewhat below our expectations.

Okay. So this is probably the source of it. Okay, thanks, guys.

Thank you.

Sir, your next question is from Matt Litfin with William Blair & Company.

Good morning. I wonder if you can share with us some of your enrollment goals for Online Education Group? Do you see a similar number of net new enrollments per quarter going forward as we saw here in the 2Q? Or was there some seasonality that occurred in the quarter?

Well Matt, I guess I would take that one. I would just say that in Q2, it is our Spring period primarily, but July brought us our biggest start to date. So we are very confident of sound numbers moving into the future. And I think as we have always stated, we expect to continue to grow online for years to come. And I think that is going to be the source of many students, a large amount of revenue and profit, and also wonderful student outcome. So we still remain very confident about the outlook Online Education Group -- Online Education Group line On online education.

In both groups the momentum and you are know, the people's willingness to kind of understand, you know online and the credibility that it has. You know, we see the demand at a very brisk rate.

And Matt, I would point out when we do look at the revenue line, I would kind of remind everyone as to the earning days revenue earnings days per quarter for the AIU part of the equation. Colorado Tech online is very evenly loaded over the year in terms of the number of revenue days, but, you know, the second quarter was for AIU the highest number of revenue days that we'll experience this year at 84 days. That number of day also drop off to 78 days in the third quarter, and to 72 in the fourth quarter. That does not mean we expect an absolute drop in revenue but that does have a moderating impact on growth that we would expect in the revenue just because of those limitations in earning days.

That's helpful. And just a quick follow-up for Nick. You mentioned the word "sound", would you consider a couple thousand net new online education group enrollments per quarter, would you consider that to be sound or does it need to be more or less than that to meet your definition there?

You know, I probably wouldn't talk about specific numbers here, Matt, but I would say that you've seen us over the last 3 years. We started from 0 students or 12 students in our first start literally just over 3 years ago, and today we are reporting population of 17,600. And so for us "sound" generally means some pretty good things for people. I don't know if I want to get into it further than that, but as you know, we generally deliver on our numbers. We are confident of the future, and, you know, our goal is to be the biggest and the best in the industry.

And, Matt, I would point out, we have mentioned with respect to online, because, you know, we really don't categorize that as a mature business unit yet. That we have maintained a conservative slant to the guidance that we have provided on those numbers.

Okay. Great, thanks very much.

Sir, your next question is from Trace Urdan with Think Equity.

Good morning. Pat, I'm wondering if you could give us a little more color regarding the sword of on-going collections process and in terms of the increase in the bad debt in the quarter, is there any change in your policy for recognizing bad debt that is included in that? Is this simply sort of the gradual process of looking into every single account and making it a determination? The fact that the DSOs came down, is that - - would you characterize that as a reflection of your on-going collection efforts? Can you just give us a little bit insight of how into sort of how that process is going?

Sure. Let me start. We have made no change in accounting policy or methodology per se in the bad debt expense or in the calculation of the allowance for uncollectible accounts. We did you know, we did continue - - I guess what I would call an "improved level of cash collection," maintaining the DSO year-over-year decrease at 8 days. That was equal to the improvement that we showed last year - - last quarter on a year-over-year basis. You know one of the things that certainly contributed to the numbers in the quarter, retention is always, you know, an influence on the bad debt levels, and as I said before, we continue to believe that we've undertaken the right kind of changes in our collection process, in our credit-granting authority, and believe that those changes that we have made will absolutely prove to the Company's benefit over the long term.

Okay. And do you feel very confident that you know, that you sort of have got 100% handle on all the outstanding accounts that are out there? Are there any of which you are still kind of exploring?

When we talk about a handle on 100% of the accounts, you know, we do not go through a process of judgmentally evaluating collectability on individual accounts. I think similar to most businesses that would extend credit to a consumer-type account, we've got large numbers of relatively small, individual accounts. We have a fairly systematic-type approach to calculating bad debts and the reserve requirements. So there isn't per se a customer by customer evaluation. You know, we don't take into account for for John Doe whether or not we think he or she is a better credit risk than someone with a similar credit profile, similar in an objective fashion. It is not a subjective process in terms of the mechanics.

Sir, your next question comes from Mark Hughes with SunTrust Robinson Humphrey.

Thank you very much. The online profitability, how much of the difference in margin this quarter is investment in programs and infrastructure in the new platform as opposed to higher marketing and advertising.

Nick, why why don't you give that a little flavor the Pat, maybe you can talk a little bit about the specifics.

Sure, I apologize. We absolutely are investing to some degree in our new recruitment center in Portland which we started up recently. So that is a bit of investment. We also are - - will as we move into the future invest in a third platform to some degree. We feel our profit margins are very substantial and we can do that out of those and will still have very sound numbers at the end of the year. We feel that our marketing expenses are still very much in line with where they've been over the last several years. So we feel really good about our cost per lead, about our acquisition costs and so on as we move into the future. I think those are still somewhat static. Obviously as we move into new population levels and continue to increase everything we are doing, there is the possibility we can spend a little more. But those continue to remain really, really strong. I think some of the best in the industry. Pat, anything to that?

Yeah, I will probably just add a little bit. When we look at some of last year's margins, I think - - Mark, I think part of the question is kind of the year-over-year comparison.

Right.

And also comparison to kind of the - - even the tail-end of last year. And I think part of what you saw from us in the margins last year is we certainly we early in the year kind of hit an inflection point of - - you know, of profitability in terms of a significant increase in revenue levels, if you will. We basically reached a critical mass level. And we were really in a position this year where we are making a much more conscious effort in terms of spending for growth. And Nick mentioned the Portland platform as being one. And we have taken on additional facilities to grow CTU Online. And there is the one factor that Nick really kind of speaks with comparability over time. The one thing that is really not comparable period over period is the CTU population. We really have ramped up the CTU effort a lot. That is ahead of schedule from a growth perspective and a profitability perspective relative to AIU as we launch that effort. But the CTU effort is clearly dilutive to the overall online education group margins at this point.

If you look -- excuse me, the AIU profitability, what would the picture be there?

Oh, it's -- it's comfortably --

Several percent higher.

Yes.

And I guess I would say that, in fact, as we do ramp up CTU we are seeing, again, very good success in terms of our moving into a very, very close if not beyond a profitable state. We haven't talked about that again. But as we expand that revenue base, and we have done that very successfully, it will tend to dilute a bit the overall margins until we expand that even further, and we expect to see that in the not-too-distant future.

Folks once again, we must stress 1 question per person. The next question from Richard Close from Jeffries & Company.

Yes, good morning. Jack and Pat, I was wondering if you could comment on details with marketing and advertising expense trends? Maybe the growth in the quarter and as a percentage of revenue and how that compares historically?

All right, let me just give you a little bit of an overview. Pat can get into some of the details here. We have been very pleased with our overall, you know, advertising efforts. I think it shows that people are very responsive to the message. We have tried a number of, you know, new methods of reaching people which we do every quarter. And we have had a lot of success out there with some internet initiatives, you know, television things, some new things that we have done and other forms of our advertising. And you know, we have not seen anything that's you know, that is out of line with what we hadn't planned or budgeted. But I think the lead flow has been very, very healthy.

In addition, you know, I guess I would point out, and it shows up in the general and administration line or the G&A line on the income statement that, you know, we really have experienced you are know, a similar level of costs as a percentage of revenue in our advertising and admissions area. It certainly varies by school. There are differences in terms of where we are investing, say, disproportionately in things like the former Whitman Schools, but, you know, on an overall basis, we are holding kind of in good stead to historical levels.

Sir, your next question comes from Jeff Silber with Harris Nesbit.

Good morning, if we turn our clock I guess about 7, 8 months ago when we had the initial allegations from Gibbs Montclair and Brooks Institute of Photography. If I remember you put in a whistle blower structure in place. I'm, wondering since then, since we've had some other allegations and some accreditation issues, what changes have you made to make sure things like that don't happen in the future? Thanks.

Well, I mean, we put in the whistle blower hotline, if you will, and I think that serves a number of purposes. Certainly you want to hear about serious issues immediately if there are any. But it also allows people to kind of, you know blow off steam, I guess, if they need to a little bit. It falls into kind of 3 areas. There's, you know, areas that we are certainly concerned if anybody is doing anything out there they shouldn't be doing. And I think this does give us kind of an early warning system to be able to deal, you know, with that as appropriate. Keep in mind we are a large system, over 10,000 employees, and certainly we serve many, many tens of thousands of students. So you want to make sure that you have the, you know, an early warning system like that if need be.

And I would just add quickly, Jeff, for instance, on the whistleblower hotline that we put in, we do have a Company intranet, and the home page on the intranet site has had on it since - - for some period of time now, a little notice on the opening page reminding people of the existence of that line and their responsibilities to use that. Also, Jack mentioned in his opening comments a virtual management conference that we had in the spring of this year that some 3,000 employees participated in. The theme we had for that conference was what we call "our words of wisdom," which is kind of a series of kind of guiding principles for the Company that we operate on. And that was the theme, and that was talked about - - included in there are things like the student comes first in making sure that student services is a priority, notions of be ethical, share good news and bad news. So we tried to kind of promote the basic notion that, yes, we are an aggressive growth-oriented company, but no one should confuse those notions with any notion that we expect people to get there through inappropriate means. So we have absolutely reinforced those messages with our employees.

Sir, your next question is from Bob Craig with Legg Mason.

Good morning, everybody. Just to clarify a point on the attrition side, the increase in attrition, is that at all concentrated? Or is there any discernible pattern to that, and would you attribute any of it to the impact from any negative publicity? Or could you speculate on what other factors may be behind that, the economy or cinching down on students paying their bills and so on.

Sure. No, I don't think there is any correlation frankly. We periodically do surveys of our students and we try certainly and do an exit interview with them if they have decided to discontinue their educational studies. A lot of these students do end up coming back and we call them re-enters. But, no, I think clearly our students by and large take a full-time load and it is very demanding on their schedules. We find that students are taking these full-time loads. They are very dedicated. They are very - - you know, they put the needed time in to get the education that they need. You know, we have a lot of - - you know, a lot more longer programs than we ever had out there. We described kind of - - we got more bachelor degrees now than we do associate degrees. And I think sometimes that - - certainly there is a longer time frame that students have to complete their education. And then there is the normal stuff that, you know, occurs in people's lives, anywhere from, you know, employment situations or financial situations. And we try to be extremely responsive to those types of things, setting up different methods and procedures to try to help students. And certain times of year are a little bit more challenging to retain students than other times of year. I think people sometime, you know, frankly like to take the summer off as an example or as they lead into the summer from let's say June. But we feel comfortable with the services that we provide students and our ability to retain students overall.

Sir, your next question is from Fred McCrea with Thomas Weisel partners.

Good morning, gentlemen.

Good morning.

Quick question in terms of the same-school population growth. 11.5% this quarter. 11 last quarter what is the year-over-year comparison there? On the bricks and mortar side?

I am not sure I understand the question.

What was the percentage when you guys reported last year, Pat, on the same-school population growth, bricks and mortar?

That we reported last year?

Yeah, for this period.

I can't recall off the top of my head. We have been kind of in that low double digits level the last several quarters and actually we haven't really specifically reported a number. People have been able to, based on the information we have provided, essentially been able to kind of back into a number, but we haven't disclosed this specific number.

Okay. And then following up on the last question, in terms of the attrition, any specific program area or bricks and mortar versus online where you have seen a number higher than in other areas?

No, as Jack mentioned we had look at it on overall basis and I guess maybe a little more color on previous comments. There are no specific pockets, if you will. Certainly we have always - - as we always have some institutions or individual campuses do better than others. And we always try to look at those and model best practices to improve results overall. But, you know, no real patterns discernible in terms of geography or the curriculum offered or things like that.

Sir, your next question is from Corey Greendale with First Analysis.

Hey, good morning.

Good morning.

You have spoken a couple of times specifically about the strengths of the Colorado Tech online performance and you can back into the number with the information you provided. But I was just wondering if you could address specifically the strength of the AIU starts and the lead-flow for AIU? And whether you think that has hit a point where you are going to start to see more seasonality than you have in the past?

Well, let me have Nick, give a little bit of color to that. I'll just say that AIU has done extremely well and will continue to do well. We are real pleased with where it is. You know, there's a lot of new programs have been added. You know those haven't by any means hit any type of maturity. You know we are constantly trying different methods to, you know, hit different markets. And our confidence in their ability to grow is just extremely high. And I think they certainly has been the - - you know the lion's share of the growth with the whole online program. Nick, any flavor that you may give that?

Yeah, Corey I guess I would just say - - and we have the 2 universities combined but again AIU is quite larger than CTU. CTU has experienced great growth. But in our first half year, we have achieved over a million leads and last year we achieved under a million in the entire year. So that gives you the idea of the lead growth is very, very strong. We have similar percentage increases in enrollments and starts throughout both of our universities. At AIU online, we have 19 programs today or concentrations. We think we have a lot of vibrant programs that can attract a market that needs anytime, anyplace education. And as we always say, really there are people all over the world that need this flexibility of time and place. So we are really confident that we are going to continue great growth at AIU. But also new platforms we bring on will ramp up much quicker than will - - then where AIU did, and AIU, you know, certainly has impressed a lot of people, I would say. I would think CTU and the third platform we refer to for early next year will even do better.

Every day it really just strengthens the concept that online education gains, you know - - it has always had a lot of credibility, but it just seems like with every passing month, there is more credibility in students' minds and employers' minds and the technology has never been better. So we - - you know we continue to be able to, you know, meet the demands that the students have out there, and that's been very successful for us.

Sir, we have a question from Jennifer Childe with Bear Stearns.

Thanks. I will make it quick. Your full-year top-line guidance suggests a major uptick in enrollment growth by our calculation. Given the weaker retention levels and the fact that you are facing some large graduations in the balance of the year, what gives you confidence in that top-line guidance?

I guess we feel pretty comfortable with the top-line guidance in , you know - - when we look at kind of the trends that are implicit in that, in terms of same-school revenue growth levels and what is really laid out for growth prospectively, I guess I would say we feel comfortable with that. We think if you do - - and we do give you some segment data there in terms of the online group and the brick and mortar business. I think a level of analysis there in terms of revenue per student and things like that. You know we're you know we are absolutely comfortable with where the revenue numbers are.

What about in terms of the on-ground. You have had sequential decreases in enrollment for the past 2 quarters. Are you expecting that to turn in the balance of the year?

Well, if you look at the trends in the business historically, there always been essentially the bulk of the growth in the population really occurs in late summer and early fall. And in the rest of the year, you kind of tread water relative to the population level. One of the things that I think you have to look at in terms of the sequential change this past quarter is really the impact of our [INSEC] Group, our French group, essentially from April to July, those schools - - they basically go dark in the summer. We have in our other acquisitions managed to improve the level of year-round attendance. We think that would involve a major cultural shift in France, to have people working there and in school full-time during the summer. So we are not expecting to do that, but essentially, the full population of the [INSEC] schools leaves school and are not in our numbers as of July 31. That -- you know that is one of the biggest influences on this quarter. And we would expect that to be a recurring theme in future years. But I think the overall change in population has not been outside of historic norms when you factor in or when you remove the effective acquisitions from our past reported numbers.

All right, very good. That completes our roster of schedule then. And I appreciate everybody's time and thank you for participating in the call. Have a nice day.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation. And you may now disconnect.