Perdoceo Education Corp (PRDO) 2005 Q1 法說會逐字稿

At this time, I would like to read the Safe Harbor statement. Statements made by CEC or its representatives on this call that are not historical facts are forward-looking statements within the meaning of the Safe Harbor provisions of the Security -- Private Securities Litigation Reform Act of 1995. Such statements are based on information currently available to us and involve risks and uncertainties that could cause our actual growth, results, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements.

These risks and uncertainties, the outcome of which could materially and adversely affect our financial condition and operations, include, but are not limited to -- 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 aide programs; costs, risks and affects of legal and administrative proceedings and investigations of governmental regulations, including the pending Securities and Exchange Commission and Justice Department investigations. and class action, derivatives, Qui-Tam, and other lawsuits; cost and potential impact of findings by the Special Committee of our Board of Directors that is investigating the allegations of securities laws violations against CEC; risks related to our ability to comply with the crediting agency requirements, or obtain a crediting agency approvals; costs and difficulties related to the integration of acquired businesses; future and financial operational results; competition; general economic conditions; ability to manage and continue growth; and other risk factors relating to our industry and business as detailed in our annual report on Form 10-K for the year ended December 31st, 2004. And from time to time in our other reports filed with the SEC. We disclaim any responsibility to update these forward looking statements.

I would now like to turn the presentation over to Jack Larson, Chairman, President and Chief Executive Officer.

Good afternoon, everybody. And thank you for taking part in our 2005 first quarter earnings call. With me today are Pat Pesch, CFO, and Steve Fireng, President of our Online Education Group. We would like to discuss several important items on the call today, including our continued strong financial performance during the quarter, which I will briefly overview before Pat Pesch, our CFO -- until he provides more details later on the call; operational performance at the divisional level; progress at our Gibbs College operation; introduction of our new General Counsel; an update on the status of the work by the Special Committee of our Board; and the status of certain pending litigation.

We are pleased to share with you our continued strong financial results for the 2005 first quarter. The solid revenue earnings growth we experienced in the quarter was further backed with strong margin improvement, exceptional operational performance, and our Online Educational Group. In the first quarter, revenue grew 29% to 512 million from 397 million for the same period last year. Income from continuing operations rose 60% to $0.59 a share compared to $0.37 a share for the 2005 first quarter.

We continue to experience positive trends in lead generation. We ended the quarter by generating 1.7 million leads, representing a 39% increase from last year's first quarter. We have also been please with the mix of our lead generation and our ability to obtain leads at a reasonable cost. We are experiencing increases in costs for the Online Education Group, leads in the 15 to 20% range, and CSU lead cost increases in the 5 to 10% range. In fact, we look to our overall Company cost per lead. A favorable mix resulted in a slight decline on a per-lead basis when compared to the year-ago quarter.

CSU retention, it continues to improve and stabilize over the prior year. We believe this is a result of the initiatives we implemented during the '04, such as a success survey and the retention symposium we mentioned on the last call. Both of these programs have been extremely successful in bringing the focus to the student and his and her needs.

Moving to our operations in the CSU Group, we are well positioned geographically and through a focused commitment and investment in our schools. Our facilities have never looked better. We are reducing our receivables and retention has improved versus prior year. Internet portals for faculty and students continue to be enhanced, improving communication, as well as strengthening the learning process. By remaining focused on our students, we are able to consistently strive to provide the highest quality education in our classroom, which is demonstrated by the numerous accomplishments of our faculty and our students.

Our Culinary division continues to win top awards and honors, for example, many chef instructors from Pennsylvania Culinary Institute were awarded top honors at the recent Pennsylvania restaurant show. Two Atlanta Culinary Academy students were chosen as externs at the French Laundry, one of the nation's most esteemed restaurants.

Our department chair for one of our healthcare schools in Sanford-Brown Institute in St. Charles, recently won the prestigious award for Teacher of the Year by the Missouri Association of Private Schools and Colleges. Our start up division has been active and continues to plan to open approximately three to four additional startup schools during the year.

The Gibbs division continues to experience financial difficulty, which is associated with the significantly decreased student population. Poor execution at the schools resulted in poor conversion of leads, weak student retention, high receivable levels and corresponding increases in bad debt for this group of schools throughout '04. New student starts in January and April within the Gibbs division continued to be weak. However, we have recognized these issues and have implemented numerous initiatives to improve the performance of the division.

On our last earnings call we discussed changes in management at both the divisional and school level. New management members in coordination with corporate personnel are making much needed changes. We are in the midst of rebuilding and retraining our admission staff. We have strengthened our efforts to work with students on their financing needs, while building an improved discipline in receivables management and cash collections. We have upgraded many of our facilities and are listening to what our students need.

These initiatives are helping to improve the lead conversion, retention and bad debt at our good schools. Employee -- and also the employee retention within the Gibbs division is down significantly year-over-year. As a result of improved cash collection, we have seen improvement in our bad debt and DSO's. We are now on a steady downward trend. While improvements are underway, a full financial recovery is going to take time. We will continue to update you on our progress. We believe that we are taking the right steps and expect to see a positive impact on the Gibbs Division from these initiatives in the longer term.

In the Online division, we have had tremendous success with some of our program offerings. We recently started a BBA and MBA concentration in organizational psychology at AIU, and a BS in software and engineering at CTU. Both have been very successful programs. OEG's Education Partner Program continues to grow. OEG achieved a milestone at 500 education partners in Q1, including significant relationships to various branches of the U.S. Military.

As we mentioned on our previous quarterly call, we expect modest population growth from January 31st, to April 30th. This is due to three graduations, as well as normal attrition, coupled with only two starts during this period at AIU Online. However, we anticipate their May 1st start will be more than a few thousand students. We continue to firmly believe that OEG represents a significant long-term growth opportunity.

I would like to mention a recently-announced management change at the Company. Janice Block has joined our senior management team as Senior Vice President and General Counsel and reports directly to me. Janice most recently served as partner in the law firm of Greenberg Traurig, and served for several years on the Central Regional Counsel for Microsoft Corporation. She brings to us with more than 17 years of legal experience in such areas as litigation, regulatory compliance, corporate law, intellectual property. We are fortunate to have someone of this caliber on our team.

Regarding a legal area, I would like to provide a brief update on a few legal matters. As previously reported, our Board of Directors formed a Special Committee to conduct an independent investigation of allegations of Security laws violations against us. The special committee has informed us that it intends to make a report of its findings and any proposed recommendations to our Board of Directors within one to two weeks.

Regarding the Securities class action suit, I would like to recap a few historical dates to provide perspective on the timeline of events that have occurred. The consolidated complaint was originally filed in June of '04. On February 11th, '05, our motion to dismiss the suit was granted without prejudice. The Court granted plaintiffs the right to file an amended complaint, which they did on April 1st, '05. We are preparing a motion to dismiss the amended complaint, which we expect to file by May 20th.

Speaking on behalf of myself, the entire management team, the Board of Directors, please let me re-emphasize with you that Career Education Corporation is dedicated to being an industry leader on all fronts, including the area of compliance. Our efforts in establishing a world class compliance organization are ongoing. We have recruited and hired full-time directors of clients for most of our campuses. We have created a Corporate Compliance Policy Board to serve as point of contact for compliance issues as a forum for consideration of new compliance initiatives, the procedures and policies.

Our Company's focus on compliance has been clearly articulated by senior management, and permeates throughout our entire organization. One of the areas that this has manifested is in the corporate governance. Our Board and management team have implemented numerous corporate governance enhancements over the last several years, including the adoption of the corporate governance guidelines in October of '04. We feel very strongly about corporate governance, and have been active in addressing our policies. We will have more to say about this at our annual stockholders meeting on May 20th.

Let me wrap up by saying that we appreciate your continued support and look forward to sharing with you updates on our progress and our success. With that, I'd like to hand it over to Pat Pesch.

Thank you, Jack. Just reviewing some of the things Jack highlighted in terms of financial performance. First quarter revenue 512 million, that was a 29% increase from the same period last year as restated. The increase is due primarily to higher student population and higher average revenue per student, with those increases dominated by the strength of our Online Education business.

Our operating margins increased approximately 330 basis points from last year's first quarter. This strong margin improvement, along with continued strong revenue growth, generated first quarter net income growth of 45% and earnings per share growth of 43%. Income from continuing operations grew 60%. Cash generation continued strong. Cash from operations was 112 million versus 90 million in the first quarter of last year.

We have continued to focus our efforts on those activities and business decisions which will enable us to place the Company's operations on the best foundation possible. And that will enable us to continue to grow our bottom-line performance at strong levels during 2005 and in the years ahead. For instance, we have looked at school profitability and decided to teach out certain campuses where the prospects for strong profitability were limited. We have done so while maintaining the interest of our students in mind and have developed responsible plans to fulfill our commitment to students affected.

We also have looked at student financing options and our impact on our working capital needs and operating costs. This has prompted us to continually improve our lending and cash collection practices. Philosophically, we have approached this area as Fed Chairman Greenspan has approached fighting inflation with interest rate increases, in spite of its adverse impact on economic growth.

The need to maintain discipline over our credit and collection policies has adversely affected our growth, but we believe that it will ultimately result in better bottom-line growth through margin improvement and reduced costs associated with attrition. You can clearly see the affect of these efforts in our receivables and bad debt trends.

Accounts receivable day sales outstanding of 13 days compares favorably to last year's first quarter DSO's of 23 days and was down sequentially from the fourth quarter DSO's of 17 days. This strong decrease in receivables helped drive a reduction in bad debt as a percentage of revenue to 3.4% versus 5% in last year's first quarter.

I would also like to provide some updated guidance for 2005. This guidance reflects an increase in Online revenue, partially offset by a decline in CS revenue from our prior guidance due to lower than expected CSU population. The CSU population was affected by a weak April start period, due in part to the stricter credit practices that have already addressed, as well as below historical show rates that we have seen for enrolled students.

However, our 2005 guidance continues to show strong growth in our business. Specifically, we expect full-year 2000 revenue to be approximately $2.125 billion and full-year 2005 earnings per share to be approximately $2.29. I should note that this $2.29 earnings per share is a net income number, or in other words is after giving affect to losses on discontinued operations. We expect the Online Education Group's full-year 2005 revenues, included in the preceding amount, to be approximately $650 million.

We expect second quarter 2000 revenues to be approximately 510 million and second quarter 2005 earnings per share to be approximately $0.47. We expect weighted average shares outstanding to be approximately 106 million for the second quarter.

I would also like to mention a few other pieces of information that should be helpful in your evaluation of our performance. As Jack mentioned earlier, lead costs for CSU and the OEG Groups have stayed under control. In addition, I would like to add that advertising costs, as a percentage of revenue, are up only 10 basis points on a year-over-year basis.

CSU population was flat on a year-over-year basis. Same school growth reflected a decline of approximately 1%, but an increase of 4% excluding the Gibbs division, which is -- which as Jack described earlier, is going through significant changes. We have included additional information in the exhibits, the press release, including full detailed quarterly income statements for the last two years to more completely show the impact of last quarter's revenue restatement for externships. We have also included detailed information on the AIU and CTU Online start and graduation calendars as well to help you understand changes in the Online population from one reporting period to the next.

With that I'll turn it back over to Jack.

At this time we'll be glad to take questions.

Ladies and gentlemen, at this time we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS] And your first question comes from the line of Greg Cappelli from Credit Suisse First Boston. Please go ahead.

Thanks, Jack and Pat. It is Greg and Steve.

Yes, hi.

Hi. I guess the first question, Jack, in terms of Gibbs, the issues that you're going through there, give us an idea of -- you said it is not going to happen overnight. It is going to take some time. What inning are we in? Is this third, fourth? Or seventh, eighth? I guess it wouldn't be the latter, but where do you think more specifically, I guess in terms of a time frame, we are for the complete turn around for Gibbs?

There is a number of Gibbs schools, obviously, so when we talk about Gibbs it is not just one entity, I mean in that sense, we refer to it as that, but there are a number of locations as we all know. And I can just tell you I personally have visited a number of the schools, I plan on visiting a number more here in a short time period. We've met with -- we've changed the management out at a number of the schools. And we really looked at the things that we can do in the short term, we've -- are looking at putting in some new testimonial ads, we've put in a special call center to increase activities.

We've got some favorable things when you look at the things like television leads and Internet, the cost per lead. So we know that there is a demand out there. We are still trying to change some of the schools from school to college. We have some very good news. When you look at some of the retention numbers and the number of those things. Certainly with employees, we've also really looked at that. We retained a lot of the key people.

So I guess I would say that it is evolving. I have been encouraged by some of the things that I have seen. I think this it's just going to be a school-by-school reaction. We've got a chance here with the upcoming summer starts to have an impact both with the high school market as well as our general market that we know has a lot of interest in our various programs.

Okay. So I guess you would expect -- you would hope to see -- I'm thinking about when you'll see student growth there again. Is that something like a year out from now, or is it just too early to tell at this point?

Well, I think it's a bit early, I would hate to give it an exact time period. I hope that we see some positive things at a number of the campuses this year, and I think we'll see more next year. And I think when we take this as a total in the, let's say within a year, I think that we will see some very positive areas of opportunity.

Okay. Just one more quick one on offline. When I just think about it from an industry perspective, we have seen some other companies in the space just with enrollment growth offline a little bit weaker than I think the Street was expecting. But Online continues to be very strong for some of those companies as well, just as it is for you guys. Is there anything, Jack, that you can put your finger on from an industry perspective?

Is it tougher right now just in general aside from some of the specific issues you have had in getting people to start college? Is there anything to did with the economy? Is there anything else that you would say, look, obviously not having as much a problem getting Online, but is there just a general shift now from what you thought might have occurred in offline versus Online?

We know from our lead flow there are still lots of people that are interested in the programs. There is a lot of strength there because the message is very powerful. And I think a lot of it is certainly working with students to fulfill their dream to start school and helping them with -- whether it be funding or part-time jobs or moving to a new locations. I think we are very encouraged by some of the programs that we've put in to really help students with that. We certainly have put in a number of them and we really strengthened the effort in those areas.

Greg, this is Pat. In my comments I also made reference to a decline in our show rate versus historical levels. And just to define that a little bit, it is a matter of students who have, one, expressed an interest in the school, secondly, have enrolled in school. But then have -- the show rate reflect how many of those enrolled students actually begin class. And we have seen a decline there. On the one hand the students are expressing a strong interest, but there seems to be some difference in what we're seeing in terms of students actually pulling the trigger to attend. We believe, at least for us, part of that difference from historical levels does have to do with some stricter credit standards. But we don't think that fully explains it.

And I think there is some seasonality out there also, frankly. I think what you will find in some of our campuses, not all, is perhaps students that are a bit younger and they are trying to start school usually as a more traditional time, which is the summer or the fall.

Jack, just one more quick one. Are you expecting to actually see offline decline going forward over the next couple quarters or to maintain flat and maybe bounce back.

We are very encouraged by the lead flow. We are very encouraged by book futures, and I think those areas are two areas that I always look at as really kind of looking forward to see what the potential might be in the future.

Greg, I would also remind you on that front that there are some seasonal changes in population associated with summer attendance. In particular within our French schools where they basically go dark in the summer. So I think you have to -- we're not expecting something out of the ordinary in terms of seasonal trends, but there is a seasonal trend there.

Okay. Thanks a lot.

All right, Greg, thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Richard close of Jefferies & Company. Please go ahead.

Yes, just a couple quick questions. If you could just sort of give us a background on how lead flow typically progresses throughout a school year? You said I think you had 1.6 million in leads so far this year?

Right. Correct. I mean, every one of our campuses and entities does a very detailed budget if you will. They put together where they think that they should spend their dollars, and what are some of the historical good areas that they have been able to generate leads that would be Internet or direct mail or newspaper, et cetera, television. And then they go about executing the plan on kind of a month in, month out basis. Certainly there is lots of evaluation that takes place every single month to kind of analyze where those leads are coming from, and then of course, those are then -- the various admissions departments work with those leads to turn them into enrollments and then of course starts.

Richard, most of our lead activity would kind of roll on more or less a quarterly basis in terms of lead generation into a next start, with the exception our high school lead generation is more focused in the end of the calendar year and early in the calendar year as high school students are really making their choices about school. So that lead flow is clearly -- has more of an annual cycle to it as opposed to kind of the adult student who has a shorter cycle.

Although let me just stress this. We have thousands of students right now that are signed up to come out at some later dates. And this is pretty typical every year where you will enroll these students , three, four, five, six, maybe nine months in advance or longer. These people are waiting for that opportunity. Many of our students, of course, that make us unique in our brick and mortar is they are moving from long distances, they are moving from out of town. We're used to working a variety of leads from a variety of places and having people travel many miles to come to or campuses or they elect to take it on an Online basis, which that does extremely we in generating leads, and of course, most of their leads are Internet, as of course, our brick and mortars are also.

I have two quick follow-ups and then jump off. I was wondering with respect to the on-ground versus Online, if you think you're maybe pricing yourself out of the market? And that's leading to maybe the softness or just slow down in population there. Just a comment on that. And then, Jack, I think you mentioned something on employee retention at Gibbs and maybe if you could just give us a brief update on employee retention throughout the whole system. Thanks a lot.

Sure. On the employee retention area, of course, we have many more hundreds of employees than what we had last year at this time. So their businesses have grown, their startup campuses, their Online, just other various campuses that we have we, of course, have gone out and hired people. We have also continuously worked at training people and making sure that we show them that there is a career path, et cetera. And we have found that this has been the best way to try and retain people. We have found this formula has been very successful at many of our campuses. So that's something that we are very, very happy with.

Looking at the cost of our programs, and I'd ask Pat to comment on this also. We have a variety of different financing opportunities that we've used throughout time from third parties, of course, there's student loans that people are eligible for. Many students take dollars out of their pocket and pay for their education, which is very typical of most students in general. And we continue every day to work with students, both our incoming students, as well as the students that are in school to help them with their education. The education costs for many families can be very high in many ways, but I think we have found that people are willing to certainly make that sacrifice.

I guess with respect to affordability, one, yes, in certain of our programs we certainly think we offer a premium product and have priced it accordingly, with our culinary programs as an example. But in terms of the affordability, what we're finding with students is the issues usually are not about, in terms of someone making a decision to come to school, are not about a 4 or 5% price increase. It is more a matter of whether or not they have the appropriate credit standing to really be approved for non-Title 4 financing. And it tends to be a yes or no kind of decision as opposed to yes, but they are a few hundred dollars short because of a price increase.

Okay. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] And your next question comes from the line of Mr. Howard Block of Banc of America Securities. Please go ahead, sir.

Thank you, operator. Good afternoon, everybody. Pat and Jack, obviously doing a real nice job with controlling expenses, but I just had some questions and some of it is just speaking clarity on the enrollment numbers. What was the same store number? You said it was up, did you say, 4% if you exclude Gibbs?

That's correct. I said we were down 1% total. Total CSU. Total brick and mortar.

Right.

Down 1%. Up 4% excluding Gibbs.

Okay. And then on the -- on the Online, it looks like AIU experienced a sequential decline and I know that you mentioned there is a start that I guess was on Sunday, May 1st?

Yes.

So you started school on Sunday? And those students are not included in the AIU numbers you reported?

That is correct.

No, they are not.

If we include the people who started the school on Sunday, would you have shown a sequential increase in AIU?

One, we have not broken out AIU and CCU, but we showed up kind of modestly for Online from January to April. We would have been up substantially higher including that start. I think the primary issue, you have year-over-year growth, but there is also a mismatch in the timing. We had one additional graduation, we had a graduation that occurred before the end of April. The, call it the replacement start didn't occur until that May 1st.

Okay. Just to -- I'll wrap up in respect to the operator's guidance. But can you perhaps calculate the attrition rate for us? Because I know that on the sale side we tend to miscalculate these things apparently. What would you say the attrition rate is and then compare it to last year's same calculations.

The attrition rate for the on-line business, the attrition is up on a year-over-year basis. As you know, Howard, we normally only provided specific attritions on an annual basis and we will continue to do that.

So but just on a consolidated basis, as of today, just generally how is attrition year-over-year?

On a consolidated basis, it is down. It is up in CSU. It is improved in CSU. Declined in the Online business.

Great, thank you.

[OPERATOR INSTRUCTIONS] And your next question comes from the line of Gary Bisbee of Lehman Brothers. Please go ahead, sir.

Yes, thanks. I guess the question on the CSU enrollments, you said excluding Gibbs for a minute that you had 4% same school growth. That appears to be a slow down from last quarter and certainly from the growth rates we have grown to expect last year. Are similar factors that are impacting Gibbs impacting the rest of the schools? Or can you give us some color there? And then the second part of the question is what is a realistic expectation through the remainder of 2005? For either ex-Gibbs or all-in CSU enrollment growth?

Yes. Once again, I think we look at the lead. There is good lead flow there. I think we have got to convert those obviously into enrollments and then start -- I think a big part of what we want to do is try and get those leads as quick as we can and to people's hands so we can serve the customers. Whether it is television or whether it comes in on the Internet, we find that the faster it worked with those people the better off we are in terms of helping them make a decision. So I mean that's something we feel very good about.

Our book future is still pretty healthy for some of our future classes. I mean, that's a positive. No impact there. And there's certain -- the fact that it indicated there is some seasonality to it. The younger students tend to want to go to school in the summer and fall, and we have a lot of those students. Frankly, they are already enrolled and ready to start school here in our upcoming starts.

And, Gary, I would suggest if you look at -- if you look at the revenue guidance on a year-over-year basis, we have given you kind of the split through the break down really between total revenue and Online you can back in, of course to the CSU. It does imply revenue growth for the rest of the year that's comparable to what -- within CSU that is comparable to what we experienced in the first quarter. So I think you can really look at some reasonable estimates of what is baked into our guidance from that data.

Okay. And if I can sneak one follow-up in. In terms of this weaker show rate than you expected, are you able to disaggregate where those leads came from? In other words, people who agreed to show up, who started as an Internet lead, were they a lot less likely to show up? Or was this happening across all media sources? Thanks.

We are able to disaggregate that in terms of looking at those rates. And the different media historically show it different rates, if you will. So the decline we saw on the show rate was not limited to one lead source.

Okay. Thank you.

And your next question comes from the line of Matt Liftin of William Blair & Company. Please go ahead, sir.

Good afternoon, Jack and Pat. Looks like you were just referencing, Pat, 10% revenue growth guidance implied for this year and ground based. Just digging a little deeper on that, what is your assumption there for enrollment growth? Kind of getting back to Greg -- Greg Cappelli's original question, which is the ground based enrollment assumption. Do you -- what I am trying to get at is, do you have to have something heroic happen at Gibbs in order to meet 10% revenue growth guidance in ground based? Or is this simply just a continuation of the trends you are seeing and you have got some sort of mix shift flowing through that I'm not totally aware of there.

We are not expecting -- there is no expectation for -- for some type of miracle turn around within the Gibbs population base. But, the decline that we've experienced in the population there is clearly a factor in expecting some modest growth in the CSU business this year.

Okay. And just if I might, acquisitions, how far up is that on your priority list now and would you favor domestic or international as you've done your homework on some more international acquisitions.

Sure, yes, no, that's a great question. There is a lot of acquisitions that are potential out there. We have always been very picky, of course, in the domestic area. And we continue to look at various things. But it has to fit in with our strategic plans. I would tell you on the international perspective we have looked a lot there. I mean there is some very good potential acquisitions over there. And we've got experience in that area. I think we have shown that we can operate bases of operation internationally, and it is something that we would not -- I mean, that we would look forward to perhaps doing in the future.

Great. Thank you.

Thank you.

And your next question comes from the line of Mr. Jeff Silber of Harris Nesbitt. Please go ahead.

Thanks a lot. This is I guess a big picture kind of question. We're kind of seeing somewhat diversion trends between your CSU business and your OEG business. Have you thought of potentially doing some sort of transaction to maybe unlock the value of OEG, for example, something like what Apollo Group did with the University of Phoenix Online?

We certainly understand the potential to do so, understand the possibility of that transaction. We're also very mindful of the fact that Apollo after a period of time decided to kind of relock the value or kind of pull that back in. So -- so certainly the question is out there, but we would like to look at that, not only from a short-term perspective, but long-term as well, and what does it ultimately provide to our shareholders.

Yes, from a long-term perspective right now, we don't have an intention of separating the two businesses.

And just a real quick follow-up. You had given out the same school enrollment growth number for CSU of 4%. The same school enrollment growth number for the entire Company, what was that? I guess that equates to the 19.5% you reported last quarter?

If you look at the total growth, the difference between total and same schools is only about a point. Because they're a limited number, there's no acquisitions in the mix. It is just a few start ups.

So just the campuses you opened up last year?

Yes.

And roughly how many were there?

Four?

Okay, fantastic. Thanks a lot.

And your next question comes from the line of Mr. Mark Hughes of SunTrust. Please go ahead, sir.

Thank you very much. Jack, you had suggested that the May start was more than a few thousand students. I assume that's -- more than a few would be 4,000 or 5,000 or something like that?

We didn't specify and typically we don't release that -- those numbers at this time. I was just trying to give people kind of a flavor of the type of size that it might be.

Right. So a few would be at least three and more than a few is four, that is not bad reasoning?

Well, it is probably splitting hairs a little bit. Let's just say that I will stand by the remarks that I made. So it is going to be a bigger number.

Very good. Thanks.

Thank you.

Your next question comes from the line of Ms. Sara Gubins of Merrill Lynch. Please go ahead, ma'am.

Thank you very much. Getting back to the show rate, did you see any variation by either the level of degree program that the students were planning to enter or by the type of program in terms of the discipline?

Could you say the question one more time? I'm sorry.

I'm sorry. Can you hear me?

Yes, we can hear you fine, just trying to --.

I'm wondering if there's any -- I guess I'm wondering what trends are by both degree programs and by discipline? And specifically, within that, I'm wondering when you look at the lower than expected show rates whether or not there was any distinction, either by type of degree program that the students had enrolled in, or by the discipline that they were planning on going into.

We haven't really tracked that currently, but I will tell you we have moved more towards longer programs, Bachelor/Associate degrees, if you will. Sometimes this could play a bit of a part in that where there is a bigger commitment on a student's part. We feel very good about that because students tend to stay in school longer. There is more revenue there. It fulfills one of their dreams, which is to have a degree whether it be an Associate, a Bachelor's or Masters degree, et cetera. So we try and look at all of our businesses kind of on an independent basis like that.

Okay. And then by type of program are you seeing any variation in terms of either in general by enrollment growth or in terms of the show rate.

Not at this time.

Okay. Thank you.

Okay. Thank you.

And your next question comes from the line of Corey Greendale from First Analysis. Please go ahead.

Hi, Good afternoon. So it sounds like the ad spending is fairly under control. We sort of look at that in the context of the CSU population. Probably the growth there is slowing somewhat. Is increasing the ad spending one of the levers that you might pull to offset that and why and why not?

I think increasing the spending is always something that would allow you to promote a higher level of activity, clearly. But increasing the ad spending alone by itself doesn't get you there. An increase in ads, you're spending more leads, you need more admissions reps to service those leads, and that wouldn't necessarily have a favorable impact on things like conversion and the show rate. So it certainly is a possibility to generate more activity. But it is not a -- it is not an automatic solution.

Look, I mean, it is always a great feeling to figure that if you wanted to get more people interested in your program that you can go out and spend more dollars at reasonable rates and get more people that might be interested in various programs. We try and be very judicious about that. We look at it on kind of an A to Z basis, that it's a matter of generating leads, having the representatives in the right places. We do a lot of stuff that has become efficient in the past years by Online enrollments and other types of activities. So there are a number of things that we could look at in the future and we will kind of consider everything that might be possible.

One real quick follow-up, does the guidance assume some sort of reasonable level of ongoing spending on the legal cost?

Yes, it presumes -- we have a menu of litigation to deal with now as we disclose in our filings. We expect to continue to spend dollars associated with that activity.

Great. Thanks very much.

And your next question comes from the line of Mr. Mark Marostica of Piper Jaffray. Please go ahead, sir.

Yes, other than the Gibbs business, would you be willing to highlight or would it be appropriate to highlight any other brands that may have impacted the show rate? Or is it fairly broad based across the CSU division? Thanks.

A lot of what we look at is every school is its own individual entity. And you kind of have to look at it in that way. Where you have to look at the performance of each school, there's going to be different things that effect the show rate. Some are very positive, by the way. Other times schools might have a challenge and there could be a variety of reasons for that. We try and kind of analyze all that stuff. And I think in the process there's some lessons learned there, but it kind of shows us in the future the types of things that we need to do to maybe better support students or services, et cetera.

Many of our campuses take students from the local area and sometimes those are a little easier to predict and work with, and perhaps campuses that maybe have students coming from many miles away. But, again, there is no exact predictor of those areas.

Would it be fair to say then that the idea that you've highlighted Gibbs here that there's is no one other brand that is pulling down the enrollment growth on a same store basis. That, in fact, it is fairly broad based? Is that a fair assumption?

It would be fair to say that there is no other brand that is kind of pulling down the numbers dramatically. As we've talked about in the past and as you people have been able to discern from the information we have put out with respect to curriculum and our population sorted by curriculum, not everything has grown at the same rate and that continues to be the case today and there continue to be school by school execution differences, but we do not see a pattern by brand, a negative pattern with any of the other brands that we offer.

Fair enough. One quick follow-up. Jack, you mentioned cost per lead had a slight decline year-over-year due to the appropriate management of mix of leads. Can you comment on what the change was in cost per start? Thanks, I'll turn it over.

Yes, we typically haven't given the exact start numbers. We have kind of broken down, of course, the -- our costs when it looks at advertising and admissions, as a percentage of our budgets, I think that we're pretty pleased with those.

Directionally though, was it up significantly or -- ?

If you look at costs per start, then you guys -- we do publish enough information, with respect to advertising costs and numbers of starts to make some calculations. The problem with doing that on a quarterly basis is you really have kind of a mismatch between when you spend your advertising dollars and when you get your starts. I would tell you that there's not been a dramatic change year-over-year for us, but costs are up. But again, that's one of the reasons I mentioned earlier that our advertising costs, just looking at pure dollars, advertising costs year-over-year as a percentage of revenue are up 10 basis points.

Right.

And there is no disproportionate change there between the OSU -- I'm sorry, CSU and the Online Group. Both groups experienced kind of modest change in their advertising costs as a percentage of revenue. And that is a reasonable proxy in terms of looking at the start costs.

Great thanks. I'll turn it over.

Okay. Thank you.

And your next question comes from the line of Mr. Jerry Herman of Legg Mason. Please go ahead, sir.

Thanks. Good afternoon, everybody. The first question is with regard to the Special Committee. Could you comment on what form that report will take? And will it be publicly disclosed, and if so, how?

Not at this time. We really don't have any comments on that. As I said, it should be put out here in the next week to two weeks.

It will be in writing though, Jack?

I am not sure exactly what form that is going to take.

And then sort of a long-term question if we can. Have you guys thought -- have you re-thought your long-term growth targets given the inputs we are hearing today, the slower on-ground, the potential additional teach-outs, and certainly the influence of Online on the positive side?

Jerry, I think in the comments that I made, I really said that we have looked very closely at what are the best decisions for us to make, and clearly indicated with respect to the decision to do teach-outs, that was clearly something that we were going to remove revenue from the system. I have indicated that very, knowingly making some changes in credit standards would adversely affect top-line growth. So I think very clearly we have made some decisions that are more focused around building bottom-line growth, and if the best way to do that is to take something off the top-line growth level, then that's what we're going to do.

I -- at the same time, this Company is still very much oriented toward overall revenue growth. We continue to invest heavily where the growth makes sense such as our Online business. And we have also mentioned other revenue streams that we would hope to develop in the future, such as those that Nick Fluge would be working on.

Look, we are still extremely excited about our brick and mortar operations. I don't think they have been better positioned. We have more locations. Geographically, I think we are set up in a very ideal way. I think that's part of our marketing success and being able to generate leads, get people to move long distances. Just the brand names that are out there.

And we're very excited about our culinary division. Medical continues to be just a tremendous opportunity for us. And as we look at what our other colleges and universities have done to add longer programs and Bachelor degrees, just the many programs that we added last year, I think that we are just in a great position to be able to implement our various strategies that were put out this last year.

Certainly Online has just -- it has been a great situation. That was a strategy we started a number of years ago. It certainly has materialized in a very, very dramatic way and stay tuned because I think it is going to get more dramatic as we go along. But, this is pretty much what we've committed to. We wanted to be a more efficient operation and a more efficient business. These are just business decisions that we've made to weed out some of the opportunities that perhaps we didn't see as being very good or very abundant. But I think that we're in a very excellent position in the history of our Company.

Thanks, guys.

Thank you.

And your next question comes from the line of Trace Urdan of Robert W. Baird. Please go ahead.

Afternoon. You all don't spend too much energy talking about blended programs, and I wondered if you could just sort of give us a sense of how that factors into the on-ground growth. Whether substantial use of on-line within on-ground or whether that perhaps represents an opportunity for on both the margin side and maybe even in enhancing the appeal of some of the on-ground programs?

Sure, that's a great question and probably all three of us want to talk about that. I'm going to ask Steve Fireng to talk about that a little bit in terms of some of the opportunities that we present to help the schools with some of their general ed courses. Steve, do you want to talk about that for a moment?

Yes. Obviously, we have a program, an internal program that we support several of our CC schools that we could take some of their general education courses, meaning their lower division courses. They actually have the opportunity to take those on an Online basis. So there are several schools that are participating in that program and several other schools that are kind of preparing to participate in that program. I think it does give us a tremendous opportunity to give the brick and mortar schools certainly an opportunity to grow that student base.

Just in looking at it, we certainly do see it as an opportunity and a strategy. I think that many of our students do take some type of blended version. We are looking at it as an opportunity for the future, and I guess I would ask to you stay tuned, because I think you will hear and see some very exciting things. Pat, I don't know if you have any final comments on that.

No. No.

Okay. Short and to the point. Thank you.

Thank you.

Thanks.

And your next question comes from the line of Mr. Chris Gutek of Morgan Stanley. Please go ahead, sir.

Regarding share repurchases, I believe on the last conference call you guys said you didn't see any particular legal impediments to beginning buying back stock. Is that still the case? And if so, it seems as if the Company is missing a good opportunity to buybacks in inexpensive shares. Is there still some hesitancy from a legal perspective?

Actually, I think we've indicated historically that we do continue to see legal impediments to a buyback on the shares. Frankly, given the cash levels that we have developed and given the price of the stock, we would see that as a potentially attractive opportunity, but we do not feel that it would be appropriate for us to make purchases at this time.

Any sense for what the potential catalyst would be, for example, the publication or release of the internal investigation? Would that alleviate that legal overhang or we still have to see more progress on some of the other issues before you think you can buy back stock?

I'm sorry, I can't really offer you anymore at this time other than what I have already said.

And a quick sort of related follow-up on that internal investigation, surprised based on the comments in the 10-K a couple months ago that we still haven't wrapped up that final report. Would it be correct for investors to assume that based on the fiduciary responsibility of the Board members that if anything material was found that that would be disclosed sooner rather than later as opposed to waiting until the i's are dotted and the t's are crossed?

The Company absolutely has recognized its obligations with respect to public reporting, and I believe that includes our Board members as well.

Okay. Great. Thank you.

And your next question comes from the line of miss Jennifer Childe of Bear Stearns. Please go ahead, ma'am.

Good afternoon. Do you expect bad debt to remain at these levels?

Well, we were -- I would say we were very pleased with the first quarter performance for bad debt. Part of what -- part of what drove that was -- was a significant decline in the receivables. On a go-forward basis, I'm not sure that we have enough reduction opportunity in the receivables to duplicate that affect in the next few quarters, although I do believe that the trend that we saw there in terms of improved year-over-year performance is very possible in the remaining quarters of this year. I would be a little bit reluctant to say that we could expect it at the level of improvement that we saw in the first quarter.

Okay. Thanks. And you could you give us an update on the status of the California situation? Thanks.

There is no real update on the status with California.

Okay. Thanks.

Thank you.

Your final question comes from the line of Kelly Flynn from UBS. Please go ahead, ma'am.

Thanks. Actually just a follow-up on the show rate issue, Pat. I think your comments just clarified that you -- your definition of enrollment includes students who haven't technically come to school. Could you just clarify how you do define an enrollment, both for revenue recognition purposes and for the purposes of drawing down the Title 4 funds from the Federal Government? Thanks.

We have -- for purposes of revenue recognition or drawing down Title 4 funds in enrollment is essentially a non-event. We know some of the others in the industry talk about enrollment synonymously with population. We do not. An enrollment for us means a perspective student has signed an enrollment agreement to start school at a future date, but they would not -- but that does not mean they would have started school. So those students are not counted in our population. We would have no revenue associated with them and we would not be drawing down Title 4 funds.

Okay. So even the population numbers that you report, you are saying would not fit the technical -- your definition of enrollment?

Our population is our active students in school.

Okay. All right. Thanks.

Ladies and gentlemen, this concludes the Q&A portion of the conference. I turn it back to management for closing remarks.

Very good, thank you. I really appreciate everybody's time today and questions. I want to let you know how proud I am of all of our many students and our over 16,000 employees. I think that we are positioned very well with both our brick and mortar, as well as our Online Group. And I thank you for your questions this afternoon. So thank you very much.

Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation. You may now disconnect. Have a good day.