Perdoceo Education Corp (PRDO) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Career Education earnings conference call. My name is Shaquille, I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Ms. Karen King. Please proceed, ma'am.

Thank you. Good afternoon, everyone, and thank you for joining us on our first quarter 2007 earnings call today. I am Karen King, Vice President Investor Relations, and with me today are Gary McCullough, our President and Chief Executive Officer, Pat Pesch, Chief Financial Officer, Steve Fireng, Group President for our university, academy and college segments, and Paul Ryan, Group President for our culinary and health education segments.

Following a brief presentation by management, the call will be open for analysts and investor questions. This conference call is being webcast live on the Investor Relations section of our website at careered.com. The replay will also be available on our site. If we are unable to answer your questions, during the call please call our Investor Relations department at (847) 585-3899. Before I turn the call over to Gary, let me remind you that today's press release and the presentations made by our executives may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are based on information currently available to us and involve risks and uncertainties that could cause our actual results, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements. These risks and uncertainties include, but are not limited to, those factors identified in our first quarter earnings release, and in our annual report on Form 10-K for the year ended December 31, 2006, and from time to time in other filings with the Securities and Exchange Commission.

Except as expressly required by securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of these forward-looking statements to reflect future events, developments, change of circumstances or for any other reason. Now let me turn the call over to Gary McCullough.

Thank you, Karen. Good afternoon. Thank you for joining us on the call today. I'm pleased to be here on my first call as the President and Chief Executive Officer of Career Education Corporation. And I am pleased to have this opportunity to share with you some of my initial thoughts and observations since joining the company just 60 days ago.

I'll spend the first few minutes discussing my observations and then I'll be followed by Pat Pesch who will take you our through the first quarter results. After that we'll take your questions. As you might imagine, I have spent much of the last two months getting to know the company and learning more about our industry. I've spent my time asking questions in meetings with the management team and our employees at our corporate offices, and with the employees, faculty, staff and students at the numerous schools I have visited. Perhaps more important than asking questions, I have listened to them.

The individuals I've spoken with have offered a wealth of information and insight about what's working here and what's not about where we believe we can create operating leverage and where we are lacking. I've also worked to understand the many initiatives in which the company is engaged, both internally and externally.

Now inferring through all that I've learned, I've come back to two things I can tell you without a doubt. First, I'm really excited to be here. I'm probably more excited today than I was when I accepted the position. And second, I believe we have good upside potential.

I found here an organization comprised of passionate people who are working really hard to deliver on our company's primary mission of educating our students for careers. We have a strong portfolio of brands and I'm convinced that the challenges that we face and those that we're indeed addressing at the moment will make us better going forward. I'm encouraged by the excellent progress we've made over the last quarter in resolving some significant legal and regulatory issues.

Two legal matters that have been pending against the company were dismissed with prejudice during the first quarter. The (inaudible) securities class action and an experience shareholder driven action. Also, as we noted in the press release recently, the Department of Justice closed its grand jury investigation of the company and declined prosecution.

Two weeks ago we announced that after the California bureau for post secondary vocational education completed a full qualitative review of the Brooks Institute of Photography, the school received an unconditional five-year license renewal. AIU continues to make substantial progress in addressing the remaining concerns of the southern association of colleges and schools, or SACS.

AIU's administration, faculty and staff and the board are working with experienced industry consultants for additional perspective. We're also working with our SACS liaison as close as possible to ensure we're addressing the remaining issues. In my initial weeks in the company I introduced myself to a number of creditors including SACS. My aim is very simple, to develop and maintain an open, consistent and productive dialogue with each of them.

When organizations are confronted with the types of challenges Career Education has faced, one of their tendencies is to initiate a large number of activities simultaneously, sometimes too many. I believe this is the case in our company. At this point, it's extremely important for us to be selective and deliberate about the actions we pursue.

I have begun a process with our management team to develop and clarify our mission, objectives and strategic choices for the company. Each strategy will yield specific action plans and key metrics by which we will measure success. While I don't have a defined strategy to share with you today, I'll tell you that much of our discussion is centered on several critical areas of focus for our company.

They include improvements in our academic and operational effectiveness, growth of our key educational institutions and entering new markets, and growth in development of our people, with an emphasis on reducing costly employee turnover. As part of my arrival when he was serving as interim CEO, Bob Dowdell made several organizational changes aimed at increasing our academic and operational effectiveness.

Bob's objectives were to reduce unnecessary organizational duplication and to return certain decisions to our schools, closer to where our students are. I think he did the right thing. Bob made hard calls that were needed to be made, including a reduction in force earlier this year. Those tough actions have enabled our leadership team to focus on operationalizing the changes, and frankly, to move forward.

That said, I expect I'll make additional changes with an eye on insuring we deliver high quality academic outcomes in an effective, efficient and fully compliant manner. We're taking a hard look at the company's historic growth strategies. The company enjoyed phenomenal growth over the course of the year, but we recognized the market's changed. Traditional schools are becoming more innovative and their approach with education and student needs and demographics are changing.

We continue to believe, however, that our schools are well suited to serve a gap in the market that's not served by traditional nonprofit schools. One of the things that attracted me to Career Education is a strong multibrand portfolio of schools. To grow each of them effectively, we must better understand the relevant strength of each brand in each school for greater clarity of positioning and for better brand consistency.

Many of our schools have unique competitive advantages, but in some cases, we've not done a good job of articulating and really differentiating those advantages. So we're taking the time to critically evaluate our school brands, determine which of them warrants investment for either domestic or international growth and expansion. Another area that has gotten my attention and will continue to receive it is our ability to attract and retain talent, both at our schools and our corporate offices.

I've been out to a number of schools so far and I've been very favorably impressed with the people I've met in my initial weeks at the company, again, whether it's at the school or corporate headquarters. Given some of our issues and the uncertainty that's faced the company, we've lost good people. I'm told that by people who are still at the organization. Our turnover has been too high in some areas and we need to understand and address the root causes for that.

Further, our employees have told me we've got to do a better job in developing stronger, more effective training and retention programs. Improved employee engagement and satisfaction are critical for providing value to our students and strength to our long-term success, so we'll spend our time making sure we've got our house in order on this front. I've been here about 60 days and I firmly believe that we've got the fundamentals for success. When I speak to you next quarter, I won't be giving you a redefined strategy that has some magic bullet.

I don't believe there is such a thing. I'm convinced that the issues that we're faced with can be addressed with good, fundamental blocking and tackling. Our mission is solid. We've got good people. In fact, we've got very good people. We offer high quality programs and we believe as a leadership team that there are a number of opportunities for growth.

Meeting the expectations of our multiple stake holders really will be about focus and strong execution, and that's what we as a leadership team, and what I'm driving in the organization, that's what we'll focus on. With that, thank you for your time. Pat Pesch will take you through our quarter results and then we'll take your questions.

Thank you, Gary. I would like to start by mentioning that during the first quarter and continuing through April, we have seen a number of encouraging trends in our operating metrics, which I would like to share with you. First, we have continued to evaluate lead sources and have made selective reductions in lead generation to reduce unproductive leads. Combining this with moderate reductions in admissions staffing level has resulted in small year-over-year reductions in advertising and admissions spending.

More importantly, this has helped produce improvements in lead conversion rates and rep productivity. These factors, coupled with show rates that are up significantly on a year-over-year basis, has resulted in an improving trend in start activity. First quarter brick and mortar start activity was almost flat with the prior year and online start declines moderated from fourth quarter levels. April starts were about 12% higher than the prior year, with increases in both brick and mortar and online starts.

Improved start performance, along with continuing year-over-year improvements in student retention, has resulted in a stabilization of student population levels. While the cumulative losses of volume and our AIU online operation will continue to be a significant drag on year-over-year comparisons in profitability for at least a few quarters, this stabilization of population and growth in starts is critical. It positions us for renewed growth in revenue, which can ultimately restore operating leverage and significantly stronger profitability in the future. Now let me provide a few details on the first quarter.

First quarter 2007 revenue of $424 million was down 12.5% from first quarter 2006. Online student revenue for the first quarter decreased 28.8%, 137 million versus 193 million in the prior year quarter. This compares to a decline of 22.8% in the fourth quarter. Campus-based revenue was off slightly, about 1.7%, 287 million versus 292 million, but this was a 3% reduction if adjusted for our January acquisition of Istituto Marangoni.

This compares to a decline of 3.8% in the fourth quarter. Operating profit margins percentage was 11.4% during the first quarter 2007 compared to 20.6% during the first quarter 2006. Three of our operating segments showed margin declines from 1% to 6%, primarily driven by lower revenue, and two segments showed improvements of 2% or more. The university segment, which represents about 40% of continuing operations revenue declined by 15 percentage points.

The decrease in the overall operating profit margin percentage was primarily due to the following factors. First, an unfavorable student population mix change resulting in disproportionately larger revenue declines in our university segment, which has historically produced the highest operating profit margin percentages. Next, the 15% decrease, which I just mentioned in the operating profit margin percentage generated by our university segment, this was driven by decreased revenue, increased administrative expenses, and the disproportionate national growth of CTU online, which has a lower operating profit margin percentage than AIU online.

Also, we have price decreases in our AIU online associate degree program and a larger concentration of associate degree students within both AIU and CTU online. Some specific numbers for university group performance, for the full online operations, income from operations declined to $34.4 million during the first quarter of 2007 from 77.2 million during the first quarter of 2006. In addition to these factors, we also increased occupancy, we experienced increased occupancy expense and other fixed costs as a percentage of revenue due to declines in revenue, which was the primary driver in the non-university segment schools, which had margin decline.

The adverse impact on operating profit margins or the factors discussed above was offset in part by a decrease in bad debt expense as a percentage of revenue. Bad debt remained under 2% for the first quarter of 2007, a decline of 90 basis points from the first quarter of 2006 from 1.8% in 2007, from 2.7% in 2006. We have maintained a high level of discipline around flexible financing options, and extended payment plans offered to students, as demonstrated by a continuing low level of receivables. DSOs were at 11 days at March 31, the same as the prior year.

Every division, with the exception of culinary and health, showed a decline in bad debt as a percentage of revenue. Culinary and health both maintained an increase of less than 1 percentage point. As previously announced, we acquired Istituto Marangoni in January for $39.6 million. First quarter revenue for the acquired company was approximately $3.7 million and while operating income was slightly positive, the acquisition was modestly dilutive to first quarter earnings.

While first year results will be significantly influenced by various required purchase accounting factors, we expect the acquisition to be accretive by year two of ownership. With respect to discontinued operations, discontinued ops had a loss of 4.6 million for the first quarter of 2007 associated with 13 schools and campuses currently held for sale. The sale profits for these schools is progressing well, with several firms currently engaged in due diligence. Preliminary indications of interest have been reviewed in conjunction with our periodic evaluation of the carrying value of these campuses.

We made no adjustment to their carrying value during the first quarter. During the first quarter of 2007, the company repurchased 1.6 million shares of its stock for approximately $50 million, or at an average price of $30.42. From inception of the buyback program through March 31, 2007, the company has repurchased 12.4 million shares for approximately $416 million and has remaining authorization as of March 31 of approximately $84 million. We expect to discuss increased authorization with our board of directors in the coming months.

Capital expenditures decreased to $16.8 million, or 3.7% of total revenue, including discontinued ops during the first quarter of 2007 from 17.5 million during the first quarter of 2006. We expect some increase for the full 2007 calendar year due to the renewal of start-up campus activity. I would also like to note that we have already filed our first quarter 10-Q, which has additional details on the quarter. Some of those details, which may interest you are as follows.

Within our online revenue, revenue from online students is down 29% from the first quarter 2006. More specifically, AIU online revenue is down 38%, while CTU online revenue is down 5%. April population for online students is down approximately 3% from April 2006. AIU online population is down 18%. Colorado Tech online population is now up 26%.

Online operating profit margins are 25%, down 15% from the first quarter of 2006. AIU online is down approximately 15 percentage points and Colorado Tech online is down 9%. With that, I'll turn it back over to Gary.

We don't have any additional comments. We'll take the questions now.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Bob Craig with Stifel Nicolaus. Please proceed.

Good evening, everybody. And Gary, nice to talk to you by phone. Pat, just a quick question on some comments you made at the start of your comments, evaluating lead sources, some of the changes you made in the marketing side.

I was wondering if you could, one, provide a little bit more color on some of the, some of the changes that you made. And also, two, if you could provide any quantification of some of some of what you mentioned in terms of increasing conversion rates, better show rates, et cetera.

Sure. Well, this was not a kind of a brand new initiative, more of a culmination of some efforts that we have been looking at all of our lead sources and really sorting through to determine which ones do convert well, and which ones are cost effective in terms of student acquisition costs. So we just selectively cut some of those, some of those sources.

The end result, immediate conversions, are up about 11% on a year-over-year basis. Show rate activity is up in almost all of our divisions in the first quarter, varying from a couple percentage points to, in some cases, almost double digits.

Okay. Thank you.

So, Bob, this is Steve. One thing you can do is to buy by enrollment costs, instead of sometimes buying by conversion rates, you go out and buy by enrollment costs, which gives you the best vendors that not necessarily just by what cost lead and what gives you the best value for buying for your inquiry.

So that's one of the major initiatives, as Pat was talking about.

Great. Thanks, guys. Okay.

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

Good afternoon, guys. Question on the April starts date you gave.

Looked like in the April '06 quarter, it was somewhere just over 50% of the total starts for the second quarter of last year. So is it safe to assume that that's a pretty good indicator of what you think, you're likely to do this quarter? I know, Pat, you went through fourth quarter was pretty bad. First quarter wasn't quite as bad and you're optimistic about April, but, you know, how likely is it that the full quarter's going to come out around that same trend?

Yes Sure. Well, the April starts our actual number, so not so much about feeling good about them. I mean they are what they are.

In terms of a barometer for the full quarter, most of the schools have the heavy starts in the first month of the quarter. Kind of exceptions to that are the culinary and healthcare schools generally have starts spaced throughout the quarter.

They have been performing well on the start front and we expect that to continue. The other areas within our online segment where there are more frequent starts, I'll let Steve comment on that.

Yes, we do have starts, a few starts in May and June, but I would say that they are tracking positively as our April trends for the online business.

Okay. Thanks.

And your next question comes from the line of Brandon Dobell with Credit Suisse. Please proceed.

Hi, thanks. Maybe a little more color on what you guys did or what you guys are doing in the university division in terms of persistence. Came in a lot better than what we had thought. Just trying to get a feel for what's going on there and how sustainable you think that is.

For retention, yes, I mean a couple major things, we adjusted our student advisor to student ratio at the very beginning, because we obviously, 60, 70% of our drops were occurring in the first term.

So that was a major adjustment. The second thing is obviously with our pricing, our packaging rates have been above 90% at start date, so majority of students that are starting school know how do it . Then the last one, and sometimes gets overlooked, is just sheer product knowledge for our admissions advisors. They understand putting out the expectation, so they are setting the students up for what they expect. And that's been a huge part of the retention

Okay. Thanks a lot.

And your next question comes from the line of Jennifer Childe with Bear Stearns. Please proceed.

Thanks.

We've heard a lot of detail about the turnaround strategies for the culinary and health segments. What about academy and colleges? It seems like they are worsening, at least from a start perspective.

Yes this is Steve. I'll take a couple of those. First of all, in the academy, in the fourth quarter, we did have an admissions advisor attrition issue. We lost too many admissions advisors in the fourth quarter.

Since then have been ramping up our admissions advisors and that was probably the major issue on the academy side. We also, in the academy side, just launched just a few days ago 100% online for IADT online, so it's 100% online. It was launched here in May, and May 1st to be exact, and we have some enrollments already. I'm really excited how that's going to leverage this brand really on a national scope, which is also going to lead to more hybrid options for our academy schools in the future. So, you know, there's a lot of opportunity and as we get the rep count to historic levels, I think we're going to see some improvements on the academies. The college side, I would say, as we've said before, is going to take a little bit longer to turn. All the schools are down.

Are a few of them that are significantly down year-over-year, and we feel very strong about the brands. We feel very good about the schools and they are best in class and some of the schools that we have, a couple initiatives we rolled out for colleges that I think will have an impact, we rolled out since April, one of the things is they have tuition rates similar to our culinary programs, very high tuitions, and we initially kind of expanded our extended payment programs for that division, allowing those schools to participate and so we can make the payments a little lower than they have had before.

We did select a few of the schools that rolled out some hybrid capabilities for general education, so we certainly have some expansion up there. And then each one has hired either a branding and/or public relation agency really to get out the stories that probably have been kind of limited to their region, try to get more of these stories.

And that school's, Brooks Institute of Photography, Harrington, Collins, just really good stories that they have, try to get those stories out there to leverage these great brands.

Okay, thanks.

And your next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed.

Thanks so much. I'm just trying to reconcile a couple data points on online.

If I heard you right, you said the online revenues were down about 29% year-over-year, but the online population in April was only down about 800 students. I know it's not exactly apples to apples, but did the mix shift to associate students and the price reduction there really drag revenue down so much even though the population wasn't really down that much?

Yes, Jeff, let me tell you one. I think, you know, in terms of looking at population and relating it to revenue, you should look at the January population versus the April population.

Your question is still completely valid, because the revenue was down more than the population and there you're spot on in terms of the associate degree population. We have had an increase in the associate degree population proportion nationally. On, a year-over-year basis, we, we put in a price decrease for AIU last summer, and so that has not anniversaried yet, so that's certainly showing up in the year-over-year comparison.

In addition, the Stonecliffe offerings within Colorado Tech have become significantly larger and so the revenue per student there is down on a year-over-year basis.

Okay, and a follow-up. You mentioned the pricing strategy. Can you tell us over the next few months, and I know it's probably not all set in stone yet, what is the different pricing strategy you have for the different schools?

Well, I, I would say at this point some of what we've done over the last couple quarters is we've taken a hard look at pricing across the system. We have selectively adjusted pricing where that was most significant was within the associate degree program within online. The other area that we really did something substantial was within Gibbs, and that, again, was selective. Gibbs, obviously, is part of the discontinued piece.

And Jeff, this is Steve. You know, one of the things we kind of stated earlier, obviously the associate degree, we've done a lot of studies on our bachelor's level and our master's, and they are just not as price sensitive at those levels.

So I think we have made the appropriate changes in the associate, you always evaluate your pricing based on your competition and your market and so forth we have ongoing. But I think for the most part, we've made the changes that need to be made.

Okay. Appreciate the color. Thanks.

And your next question comes from the line of Sarah Gubins with Merrill Lynch. Please proceed.

Hi, thank you. You mentioned that show rates improved significantly.

Can you talk a bit about what's driving that?

Well, I think there's a number of things that are influencing that. One, when we've talked before about kind of lead quality and convertibility of those leads it kind of works all the way through to kind of the show rate. The stronger the initial enrollment, the stronger the sources from which we're sourcing potential students really contributes to a better ability to bring those students through to actually starting school.

Steve also talked about a number of factors in terms of admissions rep knowledge, et cetera, and really just execution on that side. One of the other factors really on a year-over-year basis is also the financing options, and that does not mean just the extended payment plans that we've provided, but working out a few glitches that we had with some changes in our contract with Sallie Mae.

So we think all those things have contributed to stronger show rates.

And were show rates up across all of your segments?

The only segment that was down was the college segment. Every other one was up.

Okay, and then just last quick question. Any sense of when you would expect to close the sale of the 13 campuses?

It's a little bit, it's a little bit hard to say. As I indicated before, we do have potential buyers in active due diligence at this point.

We will be expecting over the next couple months that we'll be getting what I'll call concrete offers, specific commentary from them in terms of purchase and sale provisions such that we'll be able to evaluate them and really select kind of a winner, so to speak, and from there, the biggest issue from there till closing is going to be the various regulatory approvals that are needed. Our own experience on the buy side is transaction to transaction, we've seen everything go from a couple months to six months.

Okay. Thank you.

You're welcome.

As a reminder, please limit questions to one per person.

And your next question comes from the line of Kelly Flynn with UBS. Please proceed.

Thanks. Thanks. I know you don't want to give guidance, but I was hoping maybe you could give a little color at least on what you expect from university margins in the second quarter. I mean should we look for a similar deterioration, both in online and on ground, or any color you could give there?

In my earlier comments, I did indicate that we would expect for at least a few quarters there to be a significant drag on our year-over-year performance due to the online market.

Kelly, this is Steve.

Couple things just to kind of comment that things we put into place obviously with increased retention rates, better student start costs and decreasing some student start costs and decreasing some of the part-time students, one of the things we rolled this out, we probably had more part-time students that started school than we are today. And so when we first started kind of our associate degree, we did have more part-time. We've really put a lot of effort, in fact, we've probably had over 50% in the part-time starting few months ago.

Today, probably less than 15% are in a part-time. That will kind of take a little time to kind of push itself through. I think that's going to give us some opportunities going into the quarters that I talked about, a few quarters given some opportunity there and profitability.

Do you think it would be prudent to model kind of a similar deterioration for basis points, or

Well, I think in the near term, we've got to expect something similar.

Okay. Great. Could I throw in one more? You mentioned that you didn't end up taking a write-down related to discontinued operations. Maybe in the press release. But could you tell us what the carrying value is of those discontinued operations right now?

Yes, it's in the low-- it's just over $30 million. Comparable to what it was last quarter.

And there is, there is full detail in the10-Q. There's also a schedule attached to the press release. I have some specific information on the discontinued option.

And your next question comes from the line of Corey Greendale with First Analysis.

Please proceed.

Hi, good afternoon.

Hi, Corey.

Pat, I was hoping to connect the dots a little bit on the extension of credit. Last quarter I think you had said you were going to be more aggressive with that.

This quarter sounds like you were fairly conservative and how much you used that, so how you're looking at that initiative and what to expect in the future.

Yes, I think it's not a matter of aggressiveness and use or less aggressive or more aggressive. More my comments really kind of dealt with the diligence in managing that process.

It's a disciplined process. There's still a very specific requirement that incoming students need to meet to qualify. We're very closely monitoring in-school payment performance on these students. They are required to make payments while they are in school. There's no kind of completes or permanent deferral of payments till they are out of school.

So in this regard, we're just watching their performance very closely and essentially if students can't perform to the plan we won't allow them to stay in school. We've just been pleased with the results so far, so we're not so much scaling back on the initiative as we're being very mindful of the potential for an increase in receivables and bad debt.

Okay, thank you.

You're welcome.

And your next question comes from the line of Amy Junker with Robert W Baird.

Please proceed.

Hi, good afternoon. I was hoping you could update us more broadly on your hybrid program.

I know you touched on a couple of areas, but last quarter, Bob had commented that he was disappointed that it was not ramping up more quickly and I'm just wondering if you have some comments on that.

Yes, this is Steve, Amy. How are you doing?

Good.

I guess I did comment on the IADT online, which for the academies launched just recently enrollments starting. That's going to certainly leverage, because as you have the 100% online, certainly hybrid courses are going to be available for the ground school. So that certainly gives us the opportunity there.

We did select some schools in the college division that offered in our Gen Ed program that we have been offering, so we expanded the marketing, expanded the admissions training to be able to offer up the program to these schools. The AIU and the CTU brands have already had some sort of hybrid offering. CTU in fact has had that since the existence of some sort of hybrid. AIU has kind of rolled out slower and slower over the last quarters, but really what they have done is they have marketed more, put that out in the program, we actually now have programs that have hybrid options in the total curriculum.

And so again, although we think it's important we really will continue just to target into the brand where it really makes the most sense, instead of just broadly putting out every school. There is some targeted brands and some targeted schools where we think hybrid will give that incremental opportunity.

Great, thanks.

And your next question comes from the line of Mark Marostica with Piper Jaffray.

Good afternoon, everyone.

Hi, Mark.

My question relates to what Jeff brought up earlier in terms of the online student population, but revenue per online student continues to be down pretty significantly.

I'm just wondering with AIU population being down I think you said 18% for April, when do we think that metric will start to stabilize?

Well, I think we would expect it to start stabilizing over the next quarter or two. When we look at the start history, it's really a year ago first quarter that we first started to experience the declines in start activity, and for instance, the January start of 2006 was still relatively strong, while it occurred after the AIU probation, it was pretty shortly after it, and for lack of a better description, the sales cycle leading up to that start was substantially complete by the time we started feeling any enrollment impacts from the probation. So we're now just really anniversarying that impact on starts.

And when you kind of combine that with the relatively short programs, or accelerated programs at AIU, we're really seeing the graduations from those year-ago starts and so now we're entering into a more manageable situation where starts are replacing grads.

One thing about AIU online is up sequential quarter to quarter. So hopefully that certainly sees some bottom out of AIU online start, or excuse me, population.

Yes, that is correct. Both within the AIU and CTU, their populations from January through April were up sequentially.

That was not the case a year ago.

As a follow-up, Pat, were the starts up sequentially for both as well?

They are closer to flat sequentially. There is some seasonality in the starts. January's usually a pretty strong time of year for people to start school. But we don't have a full quarter to make comparison to.

And your next question comes from the line of Suzie Stein with Morgan Stanley. Please proceed.

Hi. Can you quantify in any way the number of schools that you're looking to expand to and just give us some idea of what your CapEx plans are for the year? I mean is this more of an '08 issue, or should we be thinking about this towards the end of '07?

Yes, there will be some dollars in '07.

If you would like in the 10-Q, we kind of layout kind of the start activities, or the start-up school activities. We have started some academy schools up or will be starting, we started one and have another that will be starting up shortly in terms of first student starts. Most of the capital dollars associated with those were spent last year.

But we have two Le Cordon Bleu schools that we would expect to start towards the end of 2007 or early 2008. They will have capital dollars. We also have a couple kitchen academy schools we expect to start later in the year or early next year. Those will also have most of the capital spent during 2007. So there's really about five campuses that might have some meaningful capital spending associated with them this year.

Have you given a number for '07 for your forecast for CapEx?

We have not.

Okay. All right. Thank you.

You're welcome.

And your next question comes from the line of Trace Urdan with Signal Hill. Please proceed.

Hi, good afternoon. The performance of the culinary and the healthcare businesses have been striking in contrast to the rest of your businesses, and I think striking even in the context of what we can see from other companies operating in the healthcare market, particularly.

Wondering if you could speak to that and specifically, I guess a specific question I have maybe for Steve is that somebody who is more knowledgeable than I has suggested that one of the ways you get a very sharp and sudden turn in your new student starts is to bring students in without fully packaging them and I'm wondering if that was a factor over the last couple quarters in those businesses.

Yes our success has not been in that direction at all. We expect our students to be packaged because capably if we don't know how they are paying, they are not going to stick around.

Okay.

And again, I think both the funding offers that we have in culinary and health, I think those, with these extended payment plans and the other options that they have, truly is what's made a difference in a lot of this growth here.

This is Gary McCullough.

One of the things I can tell you in having visiting other culinary schools in talking with some of the students, the reality is when they are faced with high payments during the course of their programs, it forces them to rethink what they are going to do. And our ability to have them have reasonable payments and not have to worry about them during the course of the program really has helped. That's the feedback I've gotten back from students on campus.

Okay, but if I could follow up that in the context of the healthcare specifically, you guys are seeing student starts on a pretty large base for Sanford Brown that really kind of blow away what anybody else is seeing with respect to healthcare. I'm wondering if it's not these other issues, you know, what do you attribute that to?

Well, this goes back. I can say a year ago we did change out some leadership on the division and I think that my managing director made a significant impact on that, but candidly what it was is a year or so ago both in culinary and health, we experienced a lot of rep turnover and a lot of admissions leadership turnover in those divisions and candidly, that has stabilized.

I'm very pleased and proud of what the division's been able to do to work with the schools on stabilizing that. There's no real magic bullet to it. The leads flow for the most part in the majority of the schools is excellent and it's really having the people available to work it, and candidly, we have the right programs. There's really been nothing different than stabilizing our rep force and having the ability for them to make their payments and start school. This is Pat.

One further little footnote there, certainly in any business you can do some things in the short-term to generate some volume. When you look at healthcare, we have now had kind of a period, significant period of substantial improvement in start activity. If we were pulling people in the door not properly packaged, we would probably see some fallout with respect to retention levels and in fact, the health division for the last couple quarters has enjoyed improvement in their retention levels.

Okay, thanks, Pat.

You're welcome.

And your final question comes from the line of Steven Barlow with Prudential Equity Group. Please proceed.

Thanks. I wondered if you could talk a little bit about your expenses here. They were down year-over-year in educational services and G&A.

Wonder how much is related to salaries, FTEs, how much to just looking at miscellaneous costs, I presume a little bit that you've had to reduce some of your teaching staff with some of the enrollment numbers, if you could just drill down a little bit for us, that would be great. Thanks.

Well, this is Pat. Just one, one quick thought first. I mean our Ed services line is actually up on a year-over-year basis. So I, I thought the question was why are they--

Yes, I was looking at proforma number here and mine looks like it's down, and I can check. That the general question still remains in terms of head counts, other, other expenses that you're looking at. Obviously that will be helpful for your operating leverage going forward, if those are in control or going down.

Well, certainly. I would tell you as you look at the Ed services line, this is something that varies across the divisions, across the segments and across individual schools, depending on what's happening in their student populations.

Certainly educational delivery with the shrinking population has the opportunity to be adjusted really just we do have a large proportion of adjunct faculty, which does provide us a little more variability or flexibility with respect to reducing those expenses. On the other hand, there are areas of the business where we've had increases in those costs associated with just general salary increases. We have had pieces of growth. We have had start-up campuses.

So we've had both reductions and additions in terms of the spending. Occupancy expenses, which are in the same line, have gone up modestly related to some of the obligations on their leases in terms of accelerating, accelerating costs there, but they are fairly flat on a year-over-year basis within the continuing ops.

Thanks very much.

You're welcome.

This concludes our Q&A session for today. I would now like to turn the call over to Mr. Gary McCullough for closing remarks. Please proceed.

I don't have anything significant to add to what we've talked about. I just want to thank you very much for joining us on the call.

Look forward to talking with you in the next quarter and we look forward to improving our results. Thank you.

Thank you for your attendance in today's conference. This concludes the presentation. You may now disconnect. Good day.