Perdoceo Education Corp (PRDO) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Career Education Corporation third quarter earnings release conference call. My name is Mike and I will be your coordinator for today. [OPERATOR INSTRUCTIONS]

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 Provision of the 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 aid programs, costs, and risks, and affects of legal and administrative proceedings, and investigations, and governmental regulations including the pending Securities and Exchange Commission and Justice Department investigations and class action derivative and other lawsuits.

Risks related to our ability to comply with accrediting agency requirements or obtain accrediting agency approvals, costs and difficulties related to the integration of acquired businesses. Risks related to our ability to manage and to continue growth, future financial and operational results, risks related to competition, general economic conditions and other risk factors relating to our industry and business, as detailed in our Annual Report on Form 10K for the year ended December 31, 2004 and from time-to-time and other reports filed with the SEC. We disclaim any responsibility to update or revise these forward-looking statements. I would now like to turn the presentation to Jack Larson, Chairman, President and CEO.

Good afternoon, everybody and thank you for taking part in our 2005, third quarter earnings call. I will provide an overview this afternoon followed by Steve Fireng, President of our Online Education Group. We'll discuss our online business and some exciting new initiatives and Pat Pesch our Chief Financial Officer. I'm also joined this afternoon by our Chief Legal Officer, Janice Block.

My key discussion points are as follows. Our solid financial performance during the quarter, operational performance that OEG and CSU, the introduction of our third online class form, discussion on our highbred learning model, progress of our Chefs.com launch, an update on corporate governance matters. Let me first discuss our strong financial results. Revenue grew 14% to 497 million from 436 million for the '04 third quarter. Margins increased to 16.8%, a 90 basis point improvement from the same period last year. Earnings per share grew to $0.53 a share from $0.40 a share for the '04 third quarter, out performing company guidance of $0.50 to $0.52. Consolidated population reached an all-time high of 107,300, October 31st, '05. Our Online Education Group is clearly a leader in post secondary higher education. There is growing demand in both AIU and CTU for our quality education programs. Lead flow is extremely strong mainly Internet driven. We have effective lead cost management with costs remaining flat quarter over quarter.

Our online population hit an all-time high. The population increased 53% year-over-year. As of October 31st, '05, we had just over 32,000 online students up from 20,900 students at the end of October '04. I believe this demonstrates credibility of our programs to our students, employers, and the great technology that we have to operate 24/7, 365. Partnerships have been key to our online success. Both our military and corporate partnerships continue to grow. Military population remains at approximately 25%, the total online population. Corporate partnerships have expanded greatly. We now work with 50% of the Fortune 500, up from just 30% last quarter.

Our online brands, give us a competitive advantage. We have a superior array of products and options for online students. AIU is our highly accelerated option, appeals to students looking to obtain a degree within 13 month time frame. CTU is more traditional in length with degree programs offered in the 15 month time frame. Both options are extremely attractive to students who are looking for a shorter term, full length program.

We started discussing a third brand last year, one that would target a new audience of potential students. We are pleased to announce we are adding another option to our portfolio of offerings The third brand is Stone Cliff College Online, a division of Colorado Technical University which will offer associate degrees starting in the first quarter of '06. Stone Cliff is a non accelerated option for students who prefer a slower pace to their education. Steve Fireng will provide greater detail regarding this exciting new brand.

Now let me discuss the college's schools and university's group better known as brick-and-mortar. The third quarter was one of progress as well as challenges. The improved economy has had an impact on our growth providing students work alternatives to education. Negative press surrounding several of our schools has had a material impact on those specific campuses that were highlighted. As a result, we are seeing a decline in population year-over-year as well as a decline in start growth.

We continue to believe our five-point program is the key to our future success. This will set the stage for on ground growth in 2006. I'm now going to review with you our five-point plan which I discussed with you last quarter. Let me give you an update of what those five points were. We reviewed with you the selling premise or a more targeted message. We surveyed over 600 potential students to determine what is important in making a decision and choosing a college for different programs. The other one was to improve the lead conversion rates, third was to improve show rates. The fourth was to improve student retention, and the fifth was improvement in margins.

Now for an update on each one of these five points. First one is the selling premise. We determined the main concept in the selling premise was love what you do for a living. We have implemented this concept now in many of our ads. Our two primary sources of leads, TV and Internet, both showed improvement year-over-year. Number two, lead conversion rates. We're seeing a modest improvement lead conversion trends from quarter to quarter, a clear indicator we're making progress. We attribute this to better rep selection, centralized rep training, faster workage of our leads, and improved rep retention. Number three, let me talk about the show rate. Our show rate continues to be a challenge. Excluding the impact of seasonality our show rate trend remains flat. We believe as a result of our discipline we have put behind our 16 points, save our student effort, we will see progress in the future. Number four, student retention. Our retention improved once again this quarter compared with the same period last year. We attribute this to to tutoring programs, career success survey, student advising, course evaluations, and part-time jobs. And then number five, on gross margin. And that was to improve our gross margin. The gross margin was very strong.

We implemented during the quarter a very firm control program our expense control program in many areas of our company. One of the things that we did is we did reduce that spending in rep staffing levels in the third quarter to focus on margin improvement. We believe that we may have cut back too far as evidence by our strong margins. Our plan is to increase our levels of spending in the fourth quarter, both in advertising as well as admissions. We believe we have a winning formula. Our improvement strategy is simple. The increase in marketing spending coupled with our execution of the five point plan can produce mid single-digit growth in our on ground business in 2006.

Next let me speak to about the Hybrid educational model. This is an exciting opportunity for our on ground students. The Hybrid model is aimed at our on-campus students providing them with additional flexibility to their ground education. We begin marketing our Hybrid offerings at both our AIU and CTU schools by the first quarter of '06 and other schools will follow next year also. The Hybrid model will combine 50% on ground and 50% online learning. Students will have the opportunity to take their first courses on ground to assimilate to their campus environment followed by a period of online learning. They will complete their education and graduate at their on ground campus.

The next subject I want to touch with you is our Chefs.com which we launched. Our new addition to this group announced the launch of their first venture, Chefs.com in mid October. Chefs.com is the first in a series of new offerings in related areas of expertise to us. We also plan to add many other subjects in the future. Chefs.com has been a terrific -- has seen terrific interest in its first month of operation. In the 31 days of October, Chefs.com received over one million unique visitors. This is in the early stages but we have been very encouraged by what we have experienced. We do expect to do more subject sites in the future. This purpose of these sites is to drive large volume of traffic to sell products and advertising sales. The other thing, of course, that we have mentioned is in the future we also expect to enter the pure digital market [INAUDIBLE].

Next let me talk to you about corporate governess update. We are actively interviewing for two additional board members, as we have indicated previously. We have solicited input from a variety of sources. The nominating and governess committee is actively involved in the selection process as well as the full board. We have narrowed down our candidates to a selected few and we hope to have both board members in place by the end of the year. Now I'd like to introduce Steve Fireng and he will talk to you about some of the Online Education Group issues. Steve?

Thanks, Jack. The Online Education Group continues to perform extremely well and I believe we are in better position today than we've ever been in our history. Our revenue and earnings were up dramatically during the third quarter. We achieved quarterly revenues of $169 million, up 62% over last year. The operating profit of 62 million, up 52% over last year's third quarter. Our operating margin continues to be strong at 37% of revenue despite fewer revenue earning days in the quarter.

We continue to see increased demand at both our AIU and CTU online platforms as evidenced by our year-to-date generation of several million leads. We now offer 46 programs in concentrations to more than 32,000 full-time students. Our cost per lead continues to remain stable and our conversion rates for September were at the highest they've been in the past six months. Since OEG's beginning our strategic plan has been to identify brands that target different student markets. For some time now, we have discussed our investment to a third more slower pace platform.

As Jack mentioned we are excited to announce the launch of Stone Cliff College Online, a division of Colorado Technical University. Stone Cliff College Online is OEG's first entry into the part-time online learning market. We will offer four concentrations in business and criminal justice and expect to market in the fourth quarter and start students in early February '06. The brand will reach an entirely different set of students due to its slower pace with students obtaining an associate degree in 30 months compared to 13 months at AIU online. We expect that this option will attract younger students who want a slower pace program the corporate military students who have lower annual tuition reimbursement and the international student. The program cost of $21,000 for tuition, books, and fees reflects our strong belief in the value of the education as our students will have the same access to our high-end virtual campus and student services as AIU and CTU Online.

As for expected margins, we will approach this third brand with the focus on driving overall top line growth while achieving marketing efficiencies and maximizing retention. With the addition of Stone Cliff College Online, our students will now have the option of three unique program offerings with distinct marketing plans and specialized rep forces. We expect to recirculate unsold leads of those students who are not interested in accelerated degree but who clearly interested in our Online Educational learning model and our students services.

Our new part-time option should provide students with more financial flexibility in funding their education. We have previously discussed our retention programs and I wanted to provide you an update with our efforts there. As stated, we lowered our student adviser ratio and modified class scheduling for our associate level students. Just recently we develop a predictive model using 20 distinct student characteristics to identify at risk students before they even start school. We implemented this approach in our recent October starts and early into our tasks, we are seeing positive results. Retention continues to remain a priority for all of us and I am pleased with the recent improvements.

Before I turn it over to Pat, I wanted to tell you about a recent student survey taken at both AIU and CTU Online. We're pleased to see that more than 90% of the students that responded said they would recommend our university to a friend. We are proud of the student testimonial because it underscores the quality and value of our online education experience. Now I'd like to turn it over Pat Pesch.

Thanks, Steve. Before I begin I'd like to mention for those of you who might not be aware that we filed our 10Q prior to the call in effort to provide additional insight into the quarterly activity reviewed on this call. Next, let me highlight some of the financial information that Jack discussed. Second quarter revenue was 497.5 million, a 14% increase from the same period last year as restated. The increase was primarily due to an increase in population and higher revenue per student with those increases dominated by the growth and our online business. Revenue was at the low end of our previous guidance due to continued weak new student starts in our CSU groups. Our operating margins increased approximately 90 basis points from last year's second quarter. This increase was driven by a larger proportion of our revenue being attributable to our higher margin online business. This margin improvement along with the increase in revenue contributed to an increase in net income in earnings per share of 32%. Cash generation continued to be strong. Continued to be strong during the quarter.

As many of you know, in August 2005 our board of directors authorized the use of up to 300 million for the repurchase of shares of our outstanding common stock. During the third quarter, we repurchased approximately 5.3 million shares of our common stock for approximately $200.2 million, or at an average price of approximately $37.97 per share. In accordance with the stock repurchase program we are authorized to use up to an additional $99.8 million to repurchase additional shares of our outstanding common stock. Our stock repurchases during the quarter decrease third quarter 2004 diluted weighted average shares outstanding by approximately 2.5 million shares, and increase third quarter 2005 diluted net income by approximately $0.01.

I'd also like to provide some updated guidance for the fourth quarter. And would point out that no acquisitions are contemplated by these forward-looking statements. We expect fourth quarter 2004 revenue to be approximately 522 to $532 million and fourth quarter 2005 earnings per share to be approximately $0.66 to to $0.69 per share. The guidance -- this guidance represents an increase of 6 to 8% for prior year 2004 revenues of 491 million at an increase of 10 to 15% from prior year earnings per share of $0.60. We expect the Online Education Group's fourth quarter 2005 revenues included in the previous numbers to be approximately $170 million. We expect fourth quarter 2005 operating profit margin to be fairly flat with the prior year.

An expected year-over-year decline in CSU revenue will significantly impact the seasonal increase we have traditionally seen in CSU operating margins from the third to the fourth quarter and result in a year-over-year decline in CSU margins. While we do expect margins to be higher in the fourth quarter, than in the third, a less than traditional sequential increase in revenue will limit this operating margin increase for CSU. This should be offset on a consolidated basis by a higher proportion of our business being in the Online Education Group segment which had significantly higher margins.

Another factor limiting our fourth quarter margins will be the cost of launching our new online brand, Stone Cliff College. While advertising admissions staff will be added, we expect no revenue from this launch in the fourth quarter. However, we do expect that this investment will significantly enhance our online business in the future. Also, as Jack mentioned, we will be looking at some increased advertising and admissions spending in our CSU segment to accelerate the start growth. We expect diluted weighted average shares outstanding to be approximately 101 million shares for the fourth quarter of 2005. And we expect our 2005 effective income tax rate to be approximately 38.25%. With that, I'll turn back over to Jack.

We will now take questions at this time.

[OPERATOR INSTRUCTIONS] And the first question comes from a line of Greg Cappelli with CSFB. Please proceed.

Good afternoon, guys.

Howdy.

My first question is on Stone Cliff. Is this sort of your, I guess your reply to the Axia offering it looks an awful like -- sounds an awful lot like that from Apollo and on that note they've been dealing for the past year with the average revenue per student falling because that's where good deal of their leads are coming in now. I'm just wondering if you're thinking about that in terms of your revenue as well as your average revenue per student going forward.

All right. There's a couple in answer to that I just want to give you kind of the broad thought here and answer and then Steve Fireng I know has some comments on it and Pat does too. Let me just say that we've always tried to really be very mindful of what the market wants out there. I think we've found that there's a certain segment that wants that really accelerated program. We've also found there's some students want the more traditional program like CTU, AIU courses accelerated and after really looking at the market and surveys and stuff, there's a market out there that is also looking for a slower pace product and that's really the market that we think that will do extremely well in with this program. So, Steve, maybe a few comments and Pat maybe you could talk about the pricing.

Yes, Greg. This has been on the drawing board really since last year and we really have done some pretty in depth surveys in terms of what the market is looking for. We've done a lot of analysis on attrition rates of what kind of impact and kind of modifying our program. So this has certainly been on the drawing board for a long time. We really feel like this is -- this could can give us tremendous incremental growth we've talked about a decelerating model for a few years about if we ever found the right opportunity we would actually kind of put it in their but put it at the right time. So I really feel like this gives us incremental growth. And we will be mindful of obviously margins. I think there are some with acquisition costs and retention but obviously I think we're dedicated to growing this market.

Okay. Just a couple quick thoughts as Steve mentioned, clearly I don't believe that this in response to Apollo's offering but much more a matter of rounding out the total offerings that we provide. We previously have had nothing really to provide opportunity to someone seeking a part-time pace to their education. So this is a very natural extension of our offering. In terms of pricing, we think the pricing -- Steve mentioned $21,000 for an associate's degree. I believe that is really at a price point higher than some of what would be offered by -- call it competing programs and we think that we have the quality and our platform to support that premium price. Also, I would point out, really this is an opportunity I think to get more out of the leads that we're generating to get more out of activity that we're currently engaged in because as I said right now we're really selling a kind of limited array of products given the breadth that the market may demand. Funding at an overall basis we can expect it to improve our profitability.

Could I just ask, Steve, is it the case where you already are getting a lot of leads for this type of an offering which you have not been able to offer at this point? I mean, will you be sourcing leads you already have?

Yes. We have a plan with inquiries, that were some unsold inquiries and also people that possibly had to cancel their enrollment due to the speed or because it just didn't fit that program. So absolutely we'll be able to capitalize what we've already spent.

Keep in mind we get millions of leads and again after looking at what the market wants it gives us that third area of opportunity. It's accelerated, traditional and now we have this slower pace so it should work out extremely well.

Okay, just one more if I could. I guess, Jack, the outlook for Gibbs, where do you see that in terms of the plan -- where it stands as far as the turnaround and are you considering any other options for Gibbs going forward?

Well, certainly we've seen some nice improvements that it gives here over this last time period. When you start considering some of the other progress that was made with retention and show rates in areas like that, certainly we want more students. So I guess to that end we'll look towards maybe more shorter programs, perhaps some certificates in there that could add a dimension. We have an opportunity next year obviously to do more of a high school area which has been a -- traditionally a pretty good market for Gibbs we look at beefing that up and I think that will give us some good results next year. So we're optimistic about next year. We've learned some lessons this year and I think we've also put in place some better programs in terms of some of the disciplines that Gibbs needed to go forward.

One last one for Pat. Pat, you bought some of bad debt in the quarter and where we might see that go going forward?

Bad debt in the quarter was about 4.6%, which compared to about 5.4 the prior year, about 4.3% in the prior sequential quarter in the second quarter. I think with where we are at right now, I mean that's the general range that I expect us to be operating in in the near term. As I've mentioned before, we've seen the bulk of the improvement that we're seen in a year-over-year basis has been improvement in the CSU segment and that's been offset somewhat by increases in the online business and we talked about that last quarter as being somewhat driven by higher attrition in our associate programs in with our less experienced students. So really don't see anything fundamentally changed from last quarter.

Great, thank you, guys.

All right, thanks.

[OPERATOR INSTRUCTIONS] And the next question comes from the line of Chris Gutek. Please proceed.

Thank you. Question on the advertising [INAUDIBLE] you guys had the descending was below -- below normal to some extent in Q3 and you'd ramp that back up in Q4. Could you put some numbers around that, Pat, in terms of what was the benefit in the quarter for Q3 what the increase will be in Q4?

Sure. I guess the way I would look at it. When we look at it on a year-over-year basis, it really wasn't a matter of spending, of spending less relative to revenue. We kind of held the line in the spending relative to -- and in particularly in the brick-and-mortar segment, relative to amounts we spent last year. So when you kind of combined it, admissions and advertising spending, we are within ten basis points of last year's spending as a percentage of revenue. But with a slight drop in revenue, what we're really looking at here is decline in the population, we're looking at maybe terms of striking a balance between growth and profitability here that we really need to do to reaccelerate some growth in our brick-and-mortar business is spend a little bit more, not flat with the prior year. And so that's why as we look into the fourth quarter that's why we're looking at adjusting the spending and we think sacrificing a little bit on the margin in the quarter will make sense in terms of the overall, improving the overall growth prospects for brick-and-mortar business.

Just as a follow-up to that, I actually [INAUDIBLE] that you're investing in infrastructure as well as advertising and marketing as a new initiatives, now Stone Cliff and also Chefs.com. Could you put some numbers around what that investment is marketing and in total for those new offerings Q4 maybe looking into '06 as well?

Well, at this point I would just say in terms of the Chefs.com launch, we're not talking about major spending at this point in time. Certainly as the Chefs.com platform itself becomes a little more mature as we learn a little bit more they start generating some revenue, will have a -- better frame of reference from which to make decisions on increasing the spending but right now, those aren't particularly large numbers particularly on a quarter basis. In terms of the Stone Cliff offerings, we will roll that out fairly aggressively between Stone Cliff and just overall growth in our online business, we would be looking at increasing our rep force somewhere on the order of 200 reps in the fourth quarter of this year and that is a substantial increase. Of course, we'll be looking at adding alongside that the lead generation for those reps to work. And naturally with any large investment in those activities in a short period of time you've got basic dynamics of training in getting those people up to speed and developing some strong productivity in them. So it certainly will have a substantive effect in terms of costs in the fourth quarter, but we firmly believe it is a strong investment for us to be making.

Thanks, Pat.

You're welcome.

And the next question comes from the line of Richard Close with Jefferies & Co. Please proceed.

Great. Jack and Pat, I was wondering if you could just -- if we look at the bricks and mortar excluding Gibbs, is there any commentary with respect to maybe the other brands and their relation to maybe the softness and starts and maybe if you could comment on any impact on graduations are having on total population? Are you seeing more people come out through graduations and is that impacting?

Just kind of a broad base. We've kind of mentioned the schools that had some of the really negative press. Those tends to be the schools that get pretty hard with the -- negativity of that press. It does certainly affect the business. I think a lot of our other groups are progressing along. There is a strain, certainly, in our international area. We were very pleased with that. I think there's some good strains coming out of some of the Whitman Group, we made that up, awhile back with medical and CTU. A lot of different start ups and culianries have done well, so it's kind of a case by case basis and there's a lot of I guess revitalization out there. I think that as we went out there we just had to maybe shift some of our marketing dollars to different modes of advertising and it was kind of making sure that we are putting dollars into those schools that are going to succeed versus the schools that might have a few additional challenges right now.

Okay, and then as a follow-up to that then, do you think the show rate issue in talking about the show rate, do you think that is -- you're company's specific or grand specific or something that is going on in the industry because we've heard several companies during this earnings reporting season talk about softer show rates?

On the whole show rate thing, I think in this day and age there's certainly lots of choices out there for people but I would say it's probably an industry wide thing. I think that students have choices. I think with the economy kind of competing with the different elements, I know that discipline that we've had to put into our process to make sure that we have a lot of different touch points that we were working with our students from day one. We've kind of strengthened the interaction with our reps and other people within the school have, and making sure there's kind of a really good stitch in plan because I think if you don't do that, I think students a lot of times will move different directions. So we've been pleased with that. I think it is starting to have an effect as I had mentioned. I think that we'll see good progress in the future but it takes a lot of hard work.

And this is Pat. And I think renewed discipline and focus on some of the efforts to really optimize the show rate, we think when the overall environment improves, that we will be very well positioned to take advantage of that with improved training of our reps and improved discipline in the process.

And I guess one final and then I'll turn it over. With respect to the contraction in the bricks and mortar, would you attribute any of that related to just maybe you guys getting a little bit more tougher in terms of -- I think you mentioned last quarter shopping, more your reps and all that. Attention to maybe taking some of the grayness out of recruiting and self inflicted I guess decline in population.

Let me touch on one piece of that and I know Jack will add a couple thoughts. I think one area of that we've -- it is self-inflicted one area that we clearly had an impact on is really with respect to credit policies. So clearly there's been a stronger filter through the past year in terms of credit quality and how we looked at students packaging status before they start school. So that's clearly had an impact both on conversion rates as well as show rates. And at the same time we don't look at that as necessarily being a negative for the business over the long haul or in terms of looking at profitability versus top line.

I would say that we've just strengthened, the way we certainly have approached the business. The daily shopping things the better selection process, the centralized training. Areas of opportunity like that. We're selling very sophisticated programs. I think it's an audience that has lots of different choices out there, by and large people are looking at spending 15,000, 15 to 20,000 an academic year and I'd just think as we have changed as a system we have a lot more advanced degree programs and other types of things. There's a lot of benefits to these but I think it really just says that you have to be at the top of your game in every single area to be able to compete in these markets.

Okay, thank you very much.

All right.

And the next question comes from the line of Gary Bisbee with Lehman Brothers Please proceed.

Hi guys. I guess my question is -- Jack you said that after your comment about the CSU business that you thought you'd done things to set the stage for positive growth in '06 and can you give us some sense as to how you're comfortable with that? It sounds like maybe you're optimistic some of the things are working but we haven't seen a lot of positive, positive data points yet. And then secondly, incorporated in that statement are you still sticking to what you said last quarter which is that you think you can generate 20% earnings per share growth in the next couple years.

Yes, let me comment on that. I feel our five-point plan does gives us the ability to put our resources and our people and those issues that kind of shared where we were with various elements of that but I think we see some improvement with our conversion rate. That's a good sign that things are working. I kind a highlighted why some of those things we're better selection, centralized training, things of that nature. On our show rate even though that was flat, if you look at that there's been some improvement that many of our schools and we know what they're capable of if they implement this stuff in a very specific way. So at the 16 point step process, if you will, and we do know that that does have a very positive impact. I think as we go into the new year we kind of have a new beginning only in the sense that a lot of our close upstarts which would be in the January and the April areas of the first and second quarter, most of those people enroll a short time prior to that start and you can have much more of an impact on them in terms of getting the package, their ability to show and just other types of things that we feel that we can affect the various show rates on. So we're very optimistic about that. We've got our five legs of the stool out there as we refer to them but they're our marketing initiatives, that we bring in our leads that we kind of make sure that those go into then our representatives that are specifically trained in those areas and I guess that's another area of opportunity for us, that we found that by making sure that we did have these various elements whether it be people that just deal with local students, people that deal with just high school students, out of state students, the Internet student and then the fifth would be international student. So from that standpoint I think there's a lot of data points there that have given us a fair amount of optimism that we are making headway.

Gary, to your question on the common [INAUDIBLE] time of about 20% earnings growth, I think there's a couple things certainly that we would look at. One, we continue to expect strong growth from our online business. Certainly in terms of renewing some growth in the population in the revenue for CSU while we are not providing guidance for 2006 at this time, I think you could expect from us next year that the notion of kind of getting back to some growth in the population is not going to be evenly loaded over the course of the year. That there'll be some gradual rebuilding. I think when you look at this quarter if you crank through the numbers that are available, you would see that there was a stabilized level in terms of the year-over-year trends and growth or decline in the CSU population and certainly, we're seeing -- I hate to always exclude things but X Gibbs and X a few of the campuses that we had particular publicity issues at that were strongly affected there, were in a net positive growth position with the other campuses. Not a large net positive but something that's encouraging to us that we're at a point of some stability and we can get that turned around during 2006.

Another data point to kind of look at, too, is the fact on our -- kind of selling premise the whole opportunity to generate leads. I mean within our very targeted message we are finding that we can generate a good lead flow in our various lead categories whether it be TV or Internet. Some of the print areas, et cetera and that's very good too at very reasonable rates. And then certainly our student retention has improved nicely here and the recent times and we are very pleased with that.

Thank you. And our next question comes from the line of Trace Urdan with Robert W Baird. Please proceed.

Hey, good afternoon. I'd like to go back to Gibbs a little bit if we could, and I'm wondering if first of all you've seen Gibbs bottom in terms of the pace of the declines particularly given that I think this is the first quarter were you really have an easier comp to look at. And then I'm wondering if you could review with us, maybe, some of the steps specifically that you feel that you've taken at Gibbs to affect a turnaround and maybe are there others that you're considering that you haven't yet taken?

Well, I think starting with the leaders in the school I think we have very seasoned presidents. This is a very excellent group. In the process they've made sure that they have a good senior staff. We've added a number of new programs at Gibbs over the last six to nine months and we'll have more in the future. I think the other thing that we found, too, is that we have kind of stabilized the whole retention area. We're very pleased with some of the things we're doing in the financial area, the bad debt area. That's improved dramatically and we've gotten some pockets of really good news out of some of the markets that have had higher show rates then what we've seen in the past. So I think that as we move ahead here were optimistic about that, we'll be much more aggressive in the high school next year and I think with this may be confidence if we can look at the show right kind of a new through [INAUDIBLE]we understand now some of the steps that are necessary to take to insure the students show up for school.

In just in terms of stability, of profitability within the group, one thing that I said much earlier in the year was that it would even given some evidence of improvement, if this would be a slow turnaround from a financial standpoint that we we would have to -- we would not recover anywhere near as quickly as we decline and so, we are seeing some stabilization. In terms of kind of the easier comps, I would tell you October was not really what I'd consider the first true easy come or more favorable comp. That would probably be more the January 31 population.

Thank you. And our next question comes from the line of Mark Marostica with Piper Jaffray, please proceed.

Thank you. My first question relates to your curriculum mix and whether or not you've seen any trends along the lines of your various sources of students by curriculum category relative to the CSU population trends.

Yes. Let me just kind of throw -- I mean that's kind of an evolving thing, we'd obviously had a very large [INAUDIBLE]star here but in the CSU area, as you look at that, we've kind of posted some of these before but I'll update some of these. Now, at CSU about 46% of our students earn an associate degree. A very nice mix, bachelors and masters and doctorates about 33%, and certificates at 21% and we know there's more opportunities in the bachelor's and master's area. Certainly some of our students because that's all they really desire or that's the type of program they're taking with the certificate, there's opportunities there and then if you look at kind of business studies, which continues to be our largest segment and that could be anywhere from Secretarial Science to MBAs to criminal justice and things of that nature. Well, not masters of education that's in a different group but visual communications is our next largest and design technologies, Interior design, fashion design, fashion merchandising, things like game design. Culinary arts has come up a bit and we're -- that's -- we're the largest in the world in that area and I think there's still a very strong demand, certainly for the culinary arts. In fact, it's -- I would tell you it's one of our biggest demand areas. Health education is certainly a large part of the U.S. economy is geared in that area and we've been pleased that year-over-year with some of the schools this last fall and what they've done with that. And then certainly information technology is part of what we also do we've got some very excellent programs out there.

Jack, most of the areas have not moved around more than a point or two over the last, over the last couple quarters. So there clearly are some differences in the growth rate but not dramatic differences.

Okay, fair enough, and then I was looking to see if I could get an update on the DOE program review, and then secondly, relative to the accreditation of AIU and the [INAUDIBLE] visit. What we should expect as we head into the December time frame. Thanks.

All right. Very good. Let me ask Janice Block to comment on that area if I could.

Yes, Mark. We also have filed our 10Q with the SEC. So the information you're asking about, you can find in there. With respect to the Department of Education, as you know, we previously disclosed that we got a letter in June of 2005 asking for some additional information and putting a prohibition on additional acquisitions and location our organization. We've met with the DOE we continue to work with them. So far we provided them everything they've asked for on our end and we are awaiting a response.

And then let me ask Steve Fireng to comment on SACS because which is kind of a work in progress, obviously.

Yes, I'd say before we had our special committee visit at our -- a few of our selected campuses, we just submitted our response to SACS and they -- the SACS commission will meet in the first part of December and again, we have a great relationship with SACS. We have really build a great partnership and we just for their discussion in the first part of December.

Thank you.

Thank you and our next question comes from the line of Jeff Silber with Harris Nesbitt, please proceed.

Thank you very much. Kind of a quick question about your Hybrid program. I'm just wondering have you decided to install that because you have some existing students at CSU request that or is it just something you've done in terms of surveys, and also where we're those enrollees and revenues be booked? Would that be CSU, OEG, or would there be a third-line item?

Let me start with the last part and then maybe Steve could address things a little further. We would book that within the CSU segment. So these students will basically be campused based students. And the only thing that we would report in he CSU segment -- I'm sorry, in the Online Education Group segment will be 100% online students. Steve's working with our -- Steve Fireng is working with our CSU group in terms of adapting our platform to make sure we can provide a quality delivery in this Hybrid model and maybe he could talk a little bit about that.

Yes. We've obviously done many surveys and market research in the markets where our -- especially our adult learners who are looking for different, different ways to learn. They're looking for convenience and we found that this is just the way to be able to offer them the same type of education, and given a convenience and the good news with the online, we have the platform and we have kind of the infrastructure to be able to kind of with this Hybrid rollout. So there are students that certainly have inquired about the school that's that the option they're looking for and I think now we're able to deliver on those options.

Okay, great. And then I just had a couple quick numbers questions Did you disclose same school enrollment growth?

We did not include same school population growth as we like to describe it, but I certainly can talk about that. The total numbers are not very -- because of the prohibition on the new campus start ups, there's not really much difference; about a one percentage point between total and same school growth. I could tell you, again I alluded to this earlier on a same school basis, at Gibbs we're about flat year-over-year.

Okay, great. And just one more quick one. In looking at the balance sheet, it looks like deferred rent went up pretty dramatically. I was wondering if you could tell us why.

Deferred rent, there's a couple of things in there and the 10Q has some description there but basically, with a lot of the build outs and everything we've done, we've got significant dollars provided by landlords in terms of tenant improvement allowances and essentially those are kind of grossed up in lease hold improvements in deferred rent and also in numbers -- we have expanded facilities quite a bit over the last year and so part of what is building up in there is the difference between GAAP rent expense and cash rent expense. With the GAAP expense being significantly higher than the actual cash expense and so it's kind of an normalized build up between the cash and book expense.

Okay, great. Thanks, a lot.

And the next question comes from the line of Mark Hughes with SunTrust, please proceed.

All right, thank you. How many leads did you generate in the quarter?

We're going to have to look that up here very quickly. Okay. That was my only question. Okay.

And the next question comes from the line of Sarah Gubbins with Merrill Lynch, please proceed.

Let me answer that question real fast on the lead thing. It's a little over 1.7 million, in fact it's almost 1.8. That's combining CSU and OEG together, okay, please proceed.

All right, thanks. First a quick question. Are you seeing more part-time students coming on ground?

That's a good, good question. We, for a long time certainly really focused our efforts on the full-time student and I think that's always been beneficial to us in a lot of ways and we've kind of geared a lot of programs and in fact, the huge majority of our population was full-time but we've looked at the opportunity that what we can we do to perhaps encourage students to go on maybe a part-time basis. Get as many, certainly full-time which we feel there's an abundance of numbers of students out there, but there are some opportunities on a small percentage to open it up to help students take part-time programs at the online schools. And that is something that we are encouraging a little bit more.

Okay but you're not focused on it on ground?

Well, I think he meant the increase on the -- on campus schools, not online.

Okay.

Yes, campus. Yes, I'm sorry.

And then, second quick question. Can you talk about employee turnover overall and then for enrolment advisor specifically.

Sure. In overall, we've had improvement in our -- in the whole employee turnover. And that's something that we measure, we look at, we analyze, we talk about, we have different programs that we do to try and help that. We've also looked at improvements with the various recruiters and that's something that we know that we can make more headway on. So it really comes down to kind of a selection in hiring process and we feel that -- we really have a much better hiring process that we have and also the training really seems to make a big difference on whether people are able to make it. We've also looked at making sure that we've got programs out there for career pathing in which we know for this group of employees which is critical for all but especially for recruiters that they do want to know what their career path looks like.

Okay, sorry, just to make sure I understood.

The retention rates our turnover rates for our employees have been improved. Both overall and with admissions staff.

Great, that was my question, thanks very much.

And our next question comes from a line of Corey Greendale with First Analysis, please proceed.

Hi, good afternoon. Pat, I was hoping you might be able to give give a bit more detail on the cash flows and the reasons that the working capital was less of a contribution this year than year ago.

You know what I would really suggest, Corey, is if you can go directly to the Q, you'll see kind of on the balance sheet the differences laid out there, but essentially the primary differences are really in a couple of the -- couple major categories would be kind of other current assets which is kind of the flip side of this deferred rent question that Jeff Silber asked. It's kind of, in essence you've got some numbers in there in terms of cash receivable for landlord and reimbursement related to tenant improvement allowances. You've got some larger differences in receivables, the changes in the receivables on a year-over-year basis and also, in deferred tuition revenue. Those would be the biggest working capital components and we really had last year -- we had some very favorable movement in some of those categories and I'd indicated previously for instance on receivables that after getting receivables down to a certain level, that certainly generated cash, it was a strong improvement for us but would not really be able to be replicated in the future. We're just getting the receivables [INAUDIBLE] down to such a level that there wasn't much more opportunity to bring them down further. But the specific accounts you'll find in the Q. You've got an abbreviated statement of changes versus the 10K but the information really is still there in terms of looking at the detail balance sheet.

All right, I'll look there. Just a rather quick one. Is that calculated from the segment data? It looks like the online revenue per student was down about 5% year-over-year. Any idea what caused that?

I think the primary cause for that is mix change between CTU and AIU, it's not price decrease, per se, but more just that a larger proportion of the students are CTU students which are at a slower pace and therefore lower cost.

Thank you, sir. And our next question comes from the of line of Jerry Herman with Legg Mason, please proceed.

Thanks, good afternoon everybody. First question is a follow up on the SACS situation, maybe Steve you could chime in but to what degree does the report from SACS address online? I guess the concern being that any recommended changes would impact the growth or profitability of that business. Can you talk about that a bit?

Yes. Obviously AIU online is part of AIU but probably at this point couldn't comment on the direct comments that related to the findings or discussion with those reports.

I think again probably remember that the accrediting bodies are really addressing the institution on an overall basis and they view it as one and as we do and so the comments are made for the institution.

Okay. Maybe you can help us frame, or give us some clues on the margin impact of Gibbs in the quarter?

I guess when you kind of go through the numbers, the biggest factor can influencing the lack of growth really in the margins, we're down about 30 basis points with CSU margins year-over-year and it's not a lot different than last quarter that we've got occupancy costs and depreciation costs that in round numbers are about 200 basis points worse year-over-year. So you've got some other efficiencies that are partially offsetting those but it's really those true fixed costs and I would tell you, I guess I'd say a disproportionate share of that 200 basis points burden if you will, is associated with the Gibbs school because of significant decline they've had in population and revenue.

Okay, and just real quick last one. Jack, any thoughts on brand consolidation or divestitures, and with regards to the latter does the DOE condition, i.e. won't review change of control at all prohibit you from divesting anything at this point.

That's not a consideration right now to divest anything. There's probably a lot of different technical hoops that you'd have to go through. Obviously we've done a lot of acquisitions. So there's a lot of things that you'd have to do to sell something, I guess, but that's not something that we're considering at this time.

Thank you and the next question comes from the line of Howard Block with Banc of America Securities, please proceed.

Thank you, operator. Good afternoon, everybody. Pat, I was wondering if you could just help me explain a reconcile, the company objective to tighten credit standards with the increasing dependency on Sallie Mae, in terms of just the disbursement amount as well as maybe, again, help us think about how to align the growth in that dispersement amount with the growth in revenue. Should we look to say year-over-year, the 3Q dependency and how that's grown and it seems to be driving nearly half if not more the year-over-year change in revenue.

One, I guess I wouldn't characterize us as having a growing dependency there. In the 10Q that we filed, we do as we've done before and as I believe none of our other competitors do in terms of providing details on our funding both with respective to breakdown on Title 4 as well as break down on all sources for alternative funding. And I think when you look at those numbers on a year-over-year basis in terms of alternative loans in terms of recourse loans, there are not any substantial changes on a proportionate to our cash.

So if the amount grows sequentially and revenue, doesn't why isn't your dependency increasing?

Howard, if you -- let me look. I mean you're asking a question that doesn't seem to match up.

I'm just looking at the dispersed amount when it went from 65, to 74 million. The revenue didnn't change sequentially, so just trying to understand how much of the growth or the change in the company's revenue.

Well, one, if you're looking at revenue, revenues not reported on a cash basis.

Right. That's why I asked you to help me reconcile. How to align those two --

If you look on page 44 of the 10Q that we just filed, we have a sources of cash flows. And that is a cash basis. So that would align more of the relative proportion of cash that comes in the door. And just as a for instance, our total title for funding was -- and part of this their is also seasonality to it as a year-over-year basis for the quarter our Title 4 funding is flat with some decrease in grant money and increase in Stafford loans. Our nonrecourse loans which Sallie Mae is a large provider of are actually down a point and between Sallie Mae and Still Water recourse loans, those are basic -- those are flat on a year-over-year basis at 2.5%. And total cash collections are actually up a little bit proportionally that would be cash collected directly from students. So again, this table kind of lays it out. For the nine months and for the three months just ended in comparison to the prior years and those numbers are very stable proportionately.

Okay, I mean I don't want to belabor on the call but clearly its the amount dispersed is growing a lot faster than revenue is, but on that subject what is the event that's going to be in Philadelphia with Sallie Mae and you that maybe Janice can answer, the state senators -- some sort hearing next week? Yes, Howard. Actually it's not a hearing, it's an informational meeting that's primarily focused on interest rates that are charged within the state for private education loans. Not just at the Leigh Valley College which we own but across the state. So they're talking to a number of providers and colleges. Okay. And then the last question is, Jack, when you say that the lead generation was 1.8 million, is there -- how many leads do you buy in the quarter versus generate -- or are you using those synonymously?

The majority that's all it totaled but the majority of them are for our media sources you certainly have pockets in there that come from TDLs, referrals, you could have high school programs but by and large, there's certainly [INAUDIBLE]media leads.

Thank you and our next question comes the line of Kelly Flynn with UBS, please proceed.

Sorry, had it on mute. Thanks. A couple things. You guys mentioned that at CSU I guess in the 10Q the expenses, the G&A were down. Can you talk a little bit more about what you did there to get those down in is that decrease sustainable or is there anything in there that was other -- a reversal of a previous accrual or anything unsustainable we should keep in mind? And then I'll just throw in the second one on pricing. Looks like the revenue per average enrollment grew to just over 4% which was a little bit lower than I would've expected given the growth and online. Can you just address that? Is that the right way to look at it? And what's going on with pricing generally? Thanks.

Well, two things. One, first question bring that up again briefly for me.

Sure. To see the G&A at the on ground schools was down, I asked if that was -- what went on there what drove that down and was that decrease sustainable or were there any at one time reversals that we should keep in mind?

Sure. We already talked about this in that bad debt expense was down. We talked about some other things being up. We talked with the revenue down. We talked about in our marketing and admissions standing being limited that we watch the advertising and emissions staffing. So in terms of that being sustainable, absolutely. In terms of reversals or anything like that, we've got charges in there all the time in terms of accruals. That are being adjusted so I would say outside of normal adjustments to accruals, no.

Okay.

And then the second question again?

Yes, on pricing. Just revenue per average enrollment.

Pricing, I think the one thing to look at particularly with the online population becoming a larger proportion, we've always put out our population a month into the quarter following the quarter we're reporting. We've always done that as a means of providing kind of the best forward-looking information we could in terms of the revenue base for the quarter that we're in and not yet reported. That's always worked very well for --as a proxy of average earning population for our brick-and-mortar business because most of the starts in the brick-and-mortar schools occur within the first month of the quarter. It's a little bit different for online businesses we have more frequent starts throughout the quarter and so that once a quarter estimate that you looked at is not as strong a proxy for average earning population as it once was. So as you get that mix change there's going to be some mixed distortion in there aside from pure price increase.

Okay. And quickly, could you just tell us about what share count you're using for the guidance for Q4?

It's in the release. It's a 101 million shares.

Thank you and our next question comes from the line of Jennifer Childe with Bear Stearns, please proceed.

Hi, thanks. A couple questions. I'm still a little confused about the deferred rent issue. The increase was about 68 million year-over-year which seems rather high relative to your net PP&E, so is there some touch up involved there? And then second, I'm just curious why you haven't completed a more definite, or longer term agreement with Sallie Mae and do you expect significant changes to the program once that is signed? Thanks.

With respect to deferred rent I really answered the question and when Jeff asked, I don't have anything more I could add to that answer.

It just seems like a big percentage of your PP&E for your tenant improvements.

Well, I didn't say it was all PP&E, when you look at rent expense there's a table in the 10Q which lays out long-term contractual commitments which shows that our annual operating lease expense which is basically our facilities rent is in excess of a $100 million when you look at how the deferred rent GAAP provisions work, essentially if you have a fixed escalating provision in those rental arrangements, you have to straight line the rent, those leases are often 15 years in duration. So there could be a relatively large non-cash element to rent expense which at a point in time when you've added a lot of leases recently, can build up pretty quickly. And that's kind of the answer there.

Thank you, sir, and this concludes our question-and-answer session. I'd now like to turn the call back over to management for closing remarks.

Very good. Thank you. We've got a variety of very exciting new initiatives, we're making progress in many fronts. As demonstrated today as we discussed our strong growth and our AIU and CTU brands continued execution of our five-point program. The introduction of Stone Cliff, our third online brand aimed at students looking for slower paced program. Our Hybrid learning model. Our new initiatives group at Chefs.com, and of course our search for the two additional independent board members. I want to thank everybody for listing today. Thank you very much.

Ladies and gentlemen this concludes our presentation. Thank you for participation in today's conference. You may now disconnect and everyone have a good afternoon or good evening. Thank you very much