Perdoceo Education Corp (PRDO) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the third quarter 2007 Career Education earnings conference call. My name is Amanda, and I'll be your operator 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. If at any time during the call you require assistance, please press star-zero and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Karen King. Please proceed, ma'am.

Thank you. Good morning, everyone, and thank you for joining us on our third 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, Michael Graham, 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.

I want to apologize for the delay on the call this morning. We were dialed in, and the conference center dropped our call. Following a brief presentation by management, the call will be open for analyst 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 yesterday's press release and 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 third 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 our 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 or changed circumstances or for any other reason.

Now, let me turn the call over to Gary McCullough.

Thanks, Karen. Good morning, and thank you for joining us on our third quarter earnings call. The third quarter has continued to reflect our company's transition. We have reason to be optimistic, yet we are realistic about the significant work we have yet to do.

During the third quarter, our key metrics continue to improve. New student starts in our continuing operations for the quarter were up to 11% versus prior year, and we experienced a year-over-year growth in new student starts in each segment, except colleges. In addition, October starts were up 14% versus 2006. Population in continuing schools has continued to climb and was up 8% in the third quarter versus 2006. This is our highest population growth level since early 2006. We also continued to see improvements in conversions, show rates and retention.

Despite the progress I described on the metrics, our profit margins continue to be below expectations. We have committed to take the necessary actions to improve margins and we expect to show improvement in 2008. Our focus in the near-term will be the continuous addressing of fundamental issues and laying the groundwork for long-term success. We've made good progress since our last call in a number of areas that I'll spend a few moments discussing. More specifically, I'll review progress we've made in the areas of accreditation, legal and organizational leadership. I'll also briefly address the status of our discontinued operations, which have been held for sale.

First, a special committee on the Commission on Colleges of SACS completed scheduled visits to four AIU visits on October 17. At the conclusion of the visits, the special committee informed AIU that its final report to SACS will contain no further recommendations for further corrective actions. This was a terrific outcome for AIU and for our company at this stage. However, it's important to note that the Commission on Colleges is not required to accept the conclusions of the special committee, and this is not in any way constitute a final determination on the probationary status of AIU. We remain hopeful that we'll receive a positive decision from the Commission on Colleges at its annual business session in December. Meanwhile, we'll ensure the learning improvements at AIU continue to be reflective in our operations.

We've continued to put legal issues behind us. Here are a few things that have transpired since our last call. In August, we were informed by the Civil Division of the U.S. Department of Justice that it was closing its review with no action taken against the company or any of our schools. We have now reached an agreement that was mentioned last quarter. It settles three lawsuits against some of our schools in Southern California. You may recall that we fully reserved for this settlement in the second quarter. While we have denied all the plaintiffs' allegations, we believe we made the right decision in settling these matters to avoid the time and expense associated with defending the suits. We've also made progress on securities litigation involving the company. As you may recall, the district court has consistently dismissed the plaintiffs' complaints in the consolidated security litigation against CEC. The plaintiffs have appealed the dismissal. We recently reached an agreement that settled the plaintiffs' claims to spare the time and expense of further litigation and to continue to put these matters behind us. In addition, we recently received news that the last of our four shareholder derivative suits has been dismissed and the matters have been terminated.

Last month, our board of directors have voted to dissolve the special committee that was formed in 2004 to conduct an internal investigation of allegations of Securities Law violations. As we previously disclosed, the special committee did not find support for the claims at CEC or its senior management engage in Securities Law violations. We are pleased with the progress we have made in resolving our legal issues, and our goal is to put these issues behind us for the long-term.

Now, let me briefly turn to our current discontinued operations. As noted in our 10-Q, for the past several months, we have been working with an interested buyer to finalize a sales agreement that would make sense for both parties. Unfortunately, despite our best efforts, we could not find a suitable arrangement that would be both physically responsible and also serve the needs and interests of our students, faculty and staff. During the fourth quarter, we'll be considering alternatives for the disposition of these 11 schools, including the continued operation of certain schools, conversion of one or more of our core brands, teach-outs, or the eventual sale of individual schools. We'll carefully examine these alternatives over the next 30 to 60 days to ensure a decision that will be most beneficial to all of our stakeholders.

Now, let me turn to our organization leadership. Last quarter, I indicated I was in the process of recruiting to fill several positions reporting to me. Since then, we have announced the addition of three seasoned professionals to our executive leadership team. They are already fully immersed in their work and they're helping us identify and address significant issues that will make us stronger going forward. I also expect to name a new General Counsel during the fourth quarter.

Meanwhile, I am pleased that the following individuals have joined our team. Len Mariani, our new Chief Marketing and Admissions Officer, with his expertise in marketing and sales operations, and is an experienced general manager and business strategist. Tom Budlong, our Senior Vice President in Organizational Effectiveness and Administration, has over two decades of experience in domestic and international human resources and organizational design and behavior.

Now, I would like to introduce you to another new member of our executive leadership team, Mike Graham, our Executive Vice President and Chief Financial Officer. Mike has experience and proven success in a number of private and publicly-traded companies. His expertise in business transactions, mergers and acquisitions and establishing efficiencies in large organizations are already proving beneficial to our organization. Mike?

Thanks, Gary. I'm really excited about being part of the Career Education team, and I'm glad that I had the opportunity to participate in the renewal of our company.

As Gary indicated, we are making steady progress, and we believe we are reaching important inflection points as shown in many trends underlying key areas of our business. We are encouraged by the continuing improvement in our operating metrics. Key improvements this quarter include our new student starts, both for the third quarter and for October, showed double-digit growth. Our population has steadily inclined each quarter and has reached high single-digit growth, a level which we last experienced in early 2006. We've continued to see improvements in our retention rate, and we have achieved a reduction in student acquisition costs, driven by improved conversion and show rates, along with modest reductions in advertising and admission spending. We are making progress on our strategy and putting pending litigation behind us. Finally, we are pleased with the performance of our acquisition of Instituto Marangoni and the pace and development of 2007 start-ups, including Kitchen Academy in Sacramento, the Academy in San Antonio, the Academy in Sacramento and Le Cordon Bleu in Dallas. While we recognize that we still face many challenges, we are aggressively addressing each challenge and are optimistic about our potential for continued improvement in the upcoming quarters.

Now, let me provide you with some details on our third quarter results. The third quarter 2007 revenue of $404 million was down 5.6% from third quarter of 2006. This is an improvement in trend versus a 10.5 decrease in the second quarter of 2007. While we are experiencing an overall decline in consolidated revenue, due primarily to population declines in our AIU brand and our Colleges segment, our growth in overall starts and population is beginning to have a meaningful impact in improving our overall financial performance. For our Online business, student revenue for the third quarter decreased 16.7% from the prior year, which is less than the decline of 24.5% in the second quarter of 2007. While AIU Online continues to have a significant negative impact on year-over-year comparisons, the relative overall decline in our online revenue is diminishing each quarter as a result of the significant growth at CTU Online. CTU Online currently accounts for over 40% of the revenue and over 40% of the operating profit of our total Online business. AIU's Online population decreased 8% this quarter versus 11% in the second quarter of 2007. AIU Online revenue was down 27% versus 33% in the second quarter. CTU Online population increased 39%, consistent with the second quarter growth rate, and CTU Online revenue was up 3% versus down 5% in the second quarter of 2007. Finally, campus-based revenue was up 0.6%, which compares to a decline of 1.2% in the second quarter.

Our revenue decline has had a significant impact on our operating profits. Consolidated income from continuing operations was $23.9 million during the third quarter of 2007, down from $38.4 million during the third quarter of 2006. The most significant factor in declining profitability continues to be the impact of probation at AIU. AIU operating profits fell approximately $20 million from the third quarter of 2006. Our operating profit margin percentage for the third quarter was 5.9% versus 9% for the third quarter of 2006. Operating profit margin in the third quarter of 2007 includes a $2.9 million operating loss from our Marangoni acquisition. Similar to many of our on-ground campuses, Marangoni experiences a seasonal decline in student start activity in the summer and holds a minimum amount of classes in July and August, while most of their fixed costs remain. Marangoni experienced very strong October starts, and we continue to be pleased with the performance of these schools. We expect to report an operating profit starting in the fourth quarter of 2007.

Consistent with our strategy to enter new markets and our announcement last January that the DOE restrictions were lifted, our start-up activities have intensified. And we incurred $4.5 million of start-up activity losses versus $2.4 million in the third quarter of 2006. Adjusting for these two noncomparable items would have resulted in an operating margin of 7.7% for the quarter. The University segment's fully online platforms operating profit margin declined at 20.2% during the third quarter of 2007, down from 26.7 in the third quarter of 2006. AIU Online operating profit was 20.1%, down from 33% in the third quarter of 2006. CTU Online operating profit was 20.3%, up from 14.9% in the third quarter of 2006. While CTU population is experiencing significant growth, it has historically lagged in profitability to AIU due to its lower-paced program and increasing number of associate degree students. As the introduction of CTU's 2+2 Associate and Bachelor Program began in early 2006, students have not yet had an opportunity to complete their first two years of school. Starting in mid-2008, the first cohort of students will complete their associate program and will have the opportunity to continue their education by matriculating into our two-year bachelor program, which is at a higher tuition rate than our associate degree program and a relatively minor cost per start. We have been successfully utilizing a 2+2 model at AIU Online for many years, with approximately 50% of the students in AIU's associate program continuing on to pursue their bachelor's degree.

Finally, the decrease in operating profit margins of these factors I just discussed were offset, in part, by decrease in our bad debt percentages, as a percentage of revenue. Bad debt declined 140 basis points from the third quarter 2006.

As Gary mentioned, we have concluded our negotiations regarding our schools held for sale. Let me provide you a little more information regarding these properties.

Our results from discontinued operations, which includes the 11 schools and campuses held for sale at September 30, 2007, was a loss of $4.3 million for the third quarter of 2007, compared to a loss of $6.3 million in 2006. Last November, when we announced our decision to divest these schools, we indicated that we intended to conclude negotiations within a year. For the past several months, we've been working hard with the highest potential buyer to finalize a transaction that made sense for both parties. As we have noted in the past, the significant excess capacity and associated real estate investment within these schools was a substantive issue in our decision to attempt to sell these schools. The indications of value for the schools and the real estate aspects of the deal were not sufficient in providing an acceptable financial solution for the company, nor in ensuring the best potential outcome for our students. We could not find a suitable arrangement that would be beneficial for all stakeholders involved versus other available alternatives. We have been examining several alternatives for these 11 schools, as Gary discussed, including continued operation of certain schools, conversion to alternative brands, teach-outs, or sale of individual schools. We intend to conclude our decision process for each school by the end of the year. As a result of the decision not to enter into a disadvantageous sale, beginning in the fourth quarter, these schools will now be part of continuing operations and the financial results for the schools will be included in the continuing operations. All prior periods beginning in the fourth quarter will be restated to reflect the schools as part of continuing operations.

For those schools that we will convert formats to one of our core brands, these results will be part of the relevant operating segment for the new business. In the case of a teach-out, the depreciation of fixed assets would be accelerated over a shortened life, which would be the length of the teach-out period. For the 11 schools available for sale, the remaining net book value of fixed assets is approximately $37 million. If all schools were to be taught out, this remaining net book value would be depreciated over teach-out period, which is typically around 18 months. In addition, at the end of the teach-out period, the present value of all future rent expense would be immediately recognized in the month of completion, or perhaps earlier, if we exit a portion of the space prior to the completion of the teach-out. The recognition of this expense would be reduced by our anticipated sublet rental income. As we have stated throughout the past year, the estimated present value lease commitments before sublet income across all 11 schools is approximately $100 million.

Let me wrap up with some comments on the lending environment, our repurchase program, and our strong balance sheet. We all realize that the subprime market issues have effected all subprime borrowing, as well as credit markets across the country, in one way or another. To date, we do not believe our business has experienced any significant impacts. We are still able to offer our students many lending alternatives, and continue to work with our existing lenders and evaluate potential new lenders to make sure we are offering the best possible options for our students. We are carefully monitoring each of our third-party lenders for changes in their credit underwriting standards.

Turning to our repurchase program, during the third quarter, the company repurchased approximately 905,000 shares for approximately $24 million at an average price of $26.86. From the inception of the buyback program through September 30, the company has repurchased 15.6 million shares for approximately $516 million, and has remaining authorization, as of September 30, for approximately $285 million. While we historically have purchased shares throughout a quarter, we felt it was not appropriate early in the third quarter for the company to be active in the market, given our knowledge of hiring several new senior leaders during the quarter. As such, our purchases were made in September. We continue to be committed to investing our capital for the highest return for shareholders and will inform you quarter-by-quarter of our repurchase activity.

Also during the third quarter, we completed a favorable renewal of our existing bank credit agreement. The new five-year agreement provides us with up to $275 million of available debt at a cost below our previous agreement. Quarterly DSOs were 15 days, as of the end of the September, an increase of three days from the prior year. The increase is primarily due to our internal processing and student loans rather than a change in payment patterns. With the exception of two schools, the financial aid process at all of our domestic schools and campuses has been transitioned to essentialize loan processing center. As part of the centralization process, we've added more thorough reviews of our federal drawdowns, and we have also experienced slight but normal learning curve transitional delays.

To wrap it up, capital expenditures decreased to $12.8 million, or 2.9% of total revenue, including discontinued operations for the quarter, down from 16.9 million during the third quarter of 2006. Due to the renewal of start-up campus activity, we expect some increase for the full year 2007 and into 2008.

With that, I'll turn it back to Gary.

Thanks, Mike.

Last quarter, I indicated that we were working for a process that would yield a five-year plan. We shared that plan with our board of directors very recently and are working to incorporate their feedback and ideas. By design, our process focused on clearly understanding our current businesses, their issues and their potential. There are a few things that emerged from our planning that I would like to share at this point.

With regard to growing our core institution, we continue to believe there is strength in the diversity of our business mix. We believe culinary arts, allied health, art and design, and the key subject areas at AIU and CTU continue to represent robust opportunities. That said, we are working to ensure that our schools offer curriculum that is consistent with the mission of the institution, and that we do not dilute the brand with add-on programs that have little or nothing to do with the focus of the institution. We're also taking a hard look at programs that are not cost-effective. And further, I expect over time that we will reduce the number of brands in our portfolio.

Several of our divisions have begun work to review and sharpen their brands. For example, AIU has undergone a significant transformation as an institution as the result of implementing the SACS recommendations. The institution is better for it and will reposition the brand early next year pending its successful outcome in December. Consistent with AIU's brand positioning, we must focus time and resources on reversing the decline in its 100% online programs. We'll also continue to build on the success of IADT Online, which launched during the third quarter. And of course, we'll continue to roll out hybrid programs to our on-ground institutions.

We've also looked at individual school performance, and in a number of cases, we were dissatisfied with what we saw. Simply put, we were unable to meaningfully differentiate ourselves, and where we cannot generate minimum acceptable business results, we'll evaluate the ongoing state of a school in our portfolio.

As we review the business, we saw opportunities to improve both our academic and operations areas. For example, the company has historically invested in technology and IT infrastructure. We've identified a number of ways in which systems can aid us in improving institutional compliance in student interface. During the quarter, though, we also initiated an IT governance process that will enable us to prioritize the most important projects rather than fund virtually any project initiated in the organization. We're also evaluating on how better to leverage many corporate functions that should be shared across our institutions. Len, Tom and Mike have already identified opportunities to work collaboratively and to better leverage our Marketing, Communications, Procurement and HR systems.

Now, with regard to entering new markets. On last quarter's call, I talked about new markets, and I've had several follow-up questions since then about our intentions. I want to be clear that our focus in the near-term is on optimizing our current business and on organic growth. With regard to growing organically, in our best year prior to 2007, we opened just four schools. In 2008, we expect to open six schools, with the Le Cordon Bleu, Boston opening in the second quarter. In addition, even as we rationalize our academic programs, we anticipate launching 60 new programs in 2008 to keep our institutions fresh. We believe that this level of growth within our core brands will add value and is fully supportable as we continue to address our fundamentals.

As we begin to execute our plans, I continue to be confident that there's tremendous opportunity in the market and significant untapped value in our current portfolio. We intend to pass that value on behalf of all of our stakeholders. With that, we'll take your questions.

Ladies and gentlemen, [OPERATOR INSTRUCTIONS]

Your first question is from the line of Amy Junker with Robert Baird. Please proceed.

Good morning. I guess just a quick question on--first, Gary, some of the replacements that you've made. You talked about the three adds that you did at the executive level. Have you also made some replacements maybe more at the mid-level area? Is there more turnover additions we can expect? And in the face of all of that, how would you kind of describe the morale?

Amy, thanks for your question. We have not, or I have not made changes deeper in the organization. There's an ordinary turnover that we've seen in our organization. As I said on previous calls, we're working to reduce turnover. I will tell you that coming through the planning process that we've come through gave me an opportunity to really see some of our younger leaders in action, and we've got strength in the lower levels. But we also have areas, I think, of opportunity to continue to strengthen the lower levels. And so, we'll work at that over the next couple of quarters.

Thanks. And just one other, if I could, and then I'll pass it over. Just on the schools that are up for sale that you're looking at. I guess, you know, if --and maybe it's too early to discuss this, but you know, I guess--what gives you the confidence that it might make sense at this point to continue some of those campuses, where 12 months ago, you know, the decision was made to put those up for sale? Has something changed? Have you seen improvement in any of those schools? Or what's your thought process there?

It's a fair question. I wasn't here 12 months ago. I can tell you, though, that the team in place that has been managing that business has done a terrific job. As you can imagine, it's going to be very, very difficult to be up for sale, yet have to run the organization. I think they've done a tremendous job.

Mike described also his commentary, the fact that our losses this quarter were less than they were before. And there's a mixed bag in that group of schools. There are some that are performing, you know, reasonably well and that we believe still can be turned, but there are some that really have deeper losses. And I think we owe it to the team on the ground that's been working them to look closely at the work that they have done, determine which ones can continue to be viable and which ones can't, and make that decision pretty expeditiously.

Great. Thank you.

Thank you.

Your next question comes from the line of Mark Marostica with Piper Jaffray. Please proceed.

Thanks and good morning. I wanted to first ask about the Culinary business. I noticed the start growth decelerated quite a bit in the quarter, and I was hoping to get a little more color as to that dynamic.

Well, we have seen, when you look year-over-year, culinary margins, particularly, as Gary and Mike both have mentioned, it's impacted in the third quarter by some start-up activity. In addition, as I mentioned last quarter, there's one school in Culinary that is dragging down the overall financial performance of the division when we look at that.

We recently appointed a veteran culinary president from within our own system. She has a proven track record, and she's just been appointed to that school. And clearly, you know, she's focused on an execution of a well-defined turnaround plan at that one school. I would also mention that, in the third quarter, we also took a one-time expense of a million dollars that was related to our Le Cordon Bleu licensing fee. And in the agreement, when we hit a certain student population benchmark in our Hospitality and Restaurant program, it triggered a payout to Le Cordon Bleu that, fortunately, we exceeded that number in the third quarter to have to make that one-time payout. When you factor in the start-up cost, the one-time Le Cordon Bleu program fee and when you look at the one underperforming school, the remaining schools are performing at a much higher level.

The start trend--you know, we have seen, I think, positive starts in all of the schools. As I mentioned, one school is significantly dragging us down.

Great. Thanks for the color on that, Paul. One follow-up question, unrelated to Culinary perhaps, is the admissions head count reductions that you talked about in the press release. I don't think you mentioned it on the call, but could you give us a sense for how many individuals were cut and what your target level of admissions head count will be and what it is at today?

Mark, this is Steve. I'll give you a little bit of just broad--on the admissions. One of the things we've undertaken, we've talked a little bit on the calls is to really change the admissions structure. There's been--you know, different people have called. We have a peer process at CTU, where we've changed the job from making a lot of calls to maybe having a group that makes a lot of calls and does live transfers to the admissions advisors. So, although the number of reps could decline, the overall process is changed to give those inquiries or those live transfers to admissions people, so they don't have to spend 60% of their time making calls. So, really, the change is really a structural, deliberate change due to a change in our admissions structure.

Okay, great. And can you give us some sense as to what your current admissions head count is today and what your target head count in admissions is and over what time period?

Currently, we have approximately 2,400 admissions reps throughout the system, not only in this but in all the businesses. As Len Mariani works through his new programs, we will continue to address what the optimal level is, but we feel very comfortable right now at 2,400 reps.

Okay. Fair enough. Thank you.

Your next question comes from the line of Jerry Herman. Please proceed, sir.

Thanks. Good morning, everybody.

Hey, Mike, I just wanted to give clarification on the mechanics of the fourth quarter and how it relates to the discontinued operations. As I understand it, you guys will pull those schools back in, make decisions on what to do with them. On a go-forward basis, you will have some amortization of D&A, which should run 18 months or whatever--$2 million a month, and then the present value of the lease liability will be recorded as a one-time?

I'm not sure if it would be a nonrecurring-type charge. It would be recorded in the individual month that the school went dark. So, not all teach-outs would be 18 months, so it wouldn't be discreet necessarily to one quarter. But each time a teach-out is completed, you would recognize that liability in the month that we complete the teach-out. Or if we do subdivide that space, bring that space dark and put it on the market and don't use that space, there is a possibility you would recognize that a little bit in advance of the end of the teach-out period.

And the way that we'll see that is based on your commentary, as opposed to a specific line item in any individual quarter?

You would not see it as a line item within the P&L, but it would be clearly disclosed in the press release and clearly be disclosed in the 10-Q. As we go forward, we would probably look at a press release schedule to make sure that the details are fully laid out for you.

Okay, great. And in light of that, I guess you guys have lost maybe, the discontinued absolute loss of maybe a dime on a year-to-date basis. In light of what I would expect to be some increased dilution from pulling those back in, how does that impact your opening program for '08? It sounds like you're actually getting more aggressive and accepting an even higher level of start-up losses in '08. Is that true?

I think that we intend to continue to open new locations. Our start-up activity has intensified and will continue because we see a lot of growth opportunities in our five core brands. The business has been running for the last year and the last several years, obviously the Gibbs portfolio. And we've been able to run that with the management team. So, I don't think the Gibbs management team gets distracted by the start-up activities. And we can fully execute the plan to move these schools, either in a teach-out sale, change the format, or continue to operate them without big distractions to our start-up program.

Then just one last follow-up, I'll turn it over. The margins in the Online business. You know, it was good to see that CTU showed some progress here. AIU, hopefully, the prospect's better. Can we have reasonable confidence at this juncture that the online margins have troughed?

Yes, I mean, just--yes, you noted on the CTU margins, we're very pleased with the progress. We talked about that during the last call, you know, that we felt like with the increased population that we're going to soon start seeing the margins, and we've obviously had a better cost per start in our revenue per student, particularly on those associate degree has continued. You know, in terms of AIU, you know, we have a couple different dynamics going on there. Obviously, we've somewhat stabilized the population, although we are still seeing an increased number as a percentage in our associate degree population. So, while we lowered the price in our anniversary, we have seen an increase of our percentage of our students in the associate degree. So, in Q3 of '06, we had 44% in associate degree, and this quarter, we had approximately 55% of our associate degree. So, we do have that dynamic.

The other, you know -- we'll continue kind of working post-SACS pending a successful outcome. We'll continue kind of spending those dollars to rebrand. We don't feel like we have to spend significantly more money in the marketing side because we feel like there'll be some positive with leave conversions, although there could be some spending early in the year to kind of relaunch the brand. So, really, that is dependent on how fast AIU can rebuild that population.

Great. Thanks. I'll turn it over.

Thank you, Jerry.

Your next question comes from the line of Jeff Silber with BMO Capital Market. Please proceed, sir.

Thanks so much. I wanted to clarify the data you just gave to Jerry. The 55% and the 44%, that's your associates as a percentage of your AIU online population or your total online population?

That's total AIU online population.

And do you have the same data for the total online population?

I actually have -- I'll give you the CTU online population. We have 60% of our population at CTU as associate degree, 30% is bachelor's degree and 10% is master's degree at CTU online.

Okay, great. That's helpful. That's all I needed.

Going back to an earlier comment in the introduction about that conversion show rate and retention improving, I was wondering if you can just get a little bit of color around that, and if possible, some quantification of that, as well, and what you're doing to improve those metrics.

Let me start with just some stats for you, and then I'll let my partners here talk about the steps they are taking. Show rate, we have improved our show rate by about 500 basis points from last year's third quarter, and we've stabilized our show rate from this year's second quarter. So, we're in good position there. Our retention rates are down from middle of last year by about 200 basis points, and we've also stabilized retention rate from second quarter to third quarter. So, [our matches] have improved and they have been sustained.

Yes, this is Steve. I'll give you a couple.

Certainly, the change in our admissions process has helped our overall student acquisition cost, you know, so we really feel like we'll be able to optimize in that admissions process. As Len evaluates the admissions process throughout the company, could be rolled out more broadly right now. It's really defined at CTU Online, but it's been a huge impact.

In terms of the show rate, you know, a lot of it has to do with pricing and also target marketing to making sure that we're going after some pricings, obviously, better packaging. We're packaged stronger at the start date, which when you have a higher package start, you're going to obviously get better retention for those students. And then the other thing is really beginning to target more of the bachelor's and master's degree students, you know, from our targeting vendors. Obviously, kind of pushing our associate degree and moving them up to bachelor's and master's degrees, as well, has had an impact.

Okay. And then, shifting back to AIU Online. Assuming you get a clean bill of health from SACS, I know you haven't detailed exactly what you plan on doing in terms of marketing or rebranding. But can you give us maybe some examples of some of the things you're thinking of in order to get that program back on the right track?

Well, I'll give you--you know, the first really thing is just we have very, very strong outcomes at AIU. If you look at retention rates, student satisfaction--so some of the metrics--so really putting those metrics out there for the prospective students to show that, boy, when you go to AIU, there's strong outcomes with the students.

The second thing is really targeting where our local ground campuses are and rebuild the image. As you've seen our local AIU ground campuses have been probably extremely hit by this probation, and we have a strategy where we'll do some branding TV type of advertising. We're going to be very visible in PR campaigns locally, and really zero in on those local markets. And then, we'll broaden that out more of on a national basis as we kind of rebuild and reposition the AIU brand.

Great. If I could sneak one more in just on the tax rate. It was a little bit lower than we had thought. If you could just tell us why and what we should be looking for in the fourth quarter. Thanks.

Sure. Tax accounting, you need to book to an annualized rate. The annualized rate now at the end of the third quarter is 34.5, and we anticipate that will be our annual rate for the year. During the year, we've been booking based on an estimate of our pretax income, which has a combination of tax-free income from investments and also lower tax income from foreign entities. As the third quarter ended and as we took a look at our accounting, we believe that given that some of our operating earning has fallen and our foreign earnings have increased, we'll have more of a blend as a lower rate, and we've made the cumulative judgment here in the fourth quarter.

That's fair enough. Thanks again.

Your next question comes from the line of Sara Gubins with Merrill Lynch. Please proceed.

Hi, thank you. Good morning.

Good morning.

How indicative are the month of October student starts for the rest of the quarter? Is there anything that you think is either particularly low or high in those numbers?

I'm not sure I understand the question.

I guess what I'm wondering is the third quarter student starts came in a bit below the 14% growth that had been reported at the month of July. And, for example, university student start growth was well below, I think it was 21% in the month of July. So, I'm trying to understand, as I look at the student start growth that you reported in the month of October, how indicative you think that is for what we'll actually see for fourth quarter start growth?

Yes, I mean, you know, certainly, there's a couple different things going on. There is some seasonality to the overall, you know, business. You know, and also, bear in mind, you know, AIU in particular was really focused in on their SACS visit, was really focused in on readying themselves for the visit. And so, you know, obviously, the October start came the week before, a week of the visit when SACS was there. So, there is a driving force in the University group based on the timing of the SACS visit and the readiness of the SACS visit.

Okay. And then, in Health Education, I noticed that jumped up to almost 30% start growth in the month of October. Are you seeing any change in trends there, or is it sort of the same as what you've been seeing earlier in the year?

Well, I believe there's some seasonality there. Number one, that, you know, more importantly to me is we have a seasoned leadership team right now, both on the division level, as well as the school's. The issues that created problems for us in 2006, I really believe we're seeing some positive results of that, and that comes in really what I consider two areas. One is the leadership in our Admissions department is much more stable this year than we were in previous years, and our rep turnover is improved significantly. While we still have opportunities in both of those areas, I really believe that's the positive results that I'm seeing, you know, from the group relative to better show rates, better conversion rates, and obviously, better starts.

Thank you.

Just one more thing on the start-up-- I'm sorry. Like the [inaudible], you just give kind of--how about the UG group? You know, like the Academy, if you look at the Academy, one of the dynamics is they are moving to, versus having four starts a year, having eight starts a year, so sometimes you'll see -- you saw kind of the third quarter jump and, you know, the October start might have been a little bit down, but if you -- because they have moved to more starts, there is kind of a change in their start calendar versus kind of what they have done. I just wanted to make that clarification, give an example of the Academy, that could change the trend on an October start.

Great. Thank you.

Mike, can you talk a little bit about your expectations for revenue per student trends in online? I understand why it's been so negatively impacted through the course of this year. If you get off of probation for AIU, what's the expectation for what we'll see in terms of revenue per start, either declines or growth into next year?

I'll let Steve handle it in more detail. Obviously, coming off the probation will take some time to rebuild the population and renew the brand. And you don't have the same dynamic of, say, CTU with the 2+2 program and the different changes and the noise. So, the baseline program and the programs are strong. Steve, I'll give you a chance to give more color.

Yes. In AIU, one of the dynamics of AIU, pending a successful outcome, is offering new programs, especially at the bachelor's and master's and also revising programs. As you're aware, during this probation period, AIU has been unable to add any new programs or substantially change any of their current programs that they offer today. So, one of the strategies post-probation that AIU is going to be able to do is to be able to add some programs and really center in on those programs in the bachelor's and the master's degree level, so we can kind of leverage those profit at those two degree levels. So, that's a big change that AIU will be able to do post-probation.

Great, thanks. Then last quick question--what are your plans for price increases, or any update on recent price increases across the group?

Sarah, this is Gary. At this point we don't have price increases planned for 2008. We are going through our 2008 planning cycle, which will conclude during this quarter. We'll be looking for opportunities for pricing as they present themselves. We'll take them. But at this point, we haven't planned anything.

Great, thanks a lot.

You're welcome. Thank you.

Your next question comes from the line of Chris Shutler with William Blair and Company. Please proceed.

Hi, guys. Good morning.

Good morning.

First question is on the AIU price decrease that you put in last year. Just wondering if you could give us some rough sense of what kind of a decline in the average revenue per students we would have been talking about absent that price decrease.

So you're asking if we would have kept the same pricing, if we would have experienced any revenue decline keeping the same pricing?

Right. I guess I'm assuming, based on our calculations, we are figuring average revenue per student in university was down around 20% in the quarter. Would that have been low single-digits, high single-digits, or double-digits, if--

The only dynamic you would have had, and it's probably about--about 4 to 5% of our associate degree students take a part-time program. So, you would have some impact on just the part-time population if you didn't have just the price. You know, bear in mind also, though, you also have, you know, at AIU, as you know, less revenue days, which does have an impact on that. And you probably would not experience the increased retention that you would have got. So, that might have offset, you know, the RPS issues that you're experiencing.

Okay. So, the mixed-shift CTU is probably accounting for low single-digits in terms of the average revenue per student decline. Is that fair?

The part-time-- yes, the part-time option?

Yes.

Yes.

Okay. In terms of the schools and discontinued ops, is there any sort of opportunity in your view to collate--I'm sorry--colocate other schools, maybe Health or Culinary into these schools?

Yes, if there's an opportunity to do that, we'll be evaluating those opportunities during the quarter.

Okay. And, Gary, can you talk about Gibbs for a minute, just what kind of trends you're seeing at that school? I know the New York school is still going through some regulatory issues. But as you view that school, how is your opinion of all, from when you first arrived to now?

I'm sorry. Can you say that again? I can barely hear you.

Oh, I apologize. Can you hear me now?

Yes, that's better.

That's great. Just in terms of Gibbs, I'm just wondering if you can give us some sort of sense for how your thinking in that school has evolved from when you first arrived, Gary, to now.

I think Gibbs is a fantastic brand, and I thought that since before I even arrived. So, I start there. I think the question is or the issue is that we've had uneven performance across the business. And I think, again, the team that's been managing the business has done a good job of recognizing that, of making cost changes, of making programmatic changes.

What we're going to do at this point in time is sit down with the team, understand where they are, understand, you know, what else we could do there. We've been looking at a variety of markets where we'd like to open schools. You know, even in other programs like Healthcare or like Culinary, and some of the markets that Gibbs schools exist in, are markets that have come up as markets we would be interested in. And so, that's where we think there could be a viability in colocating. But, again, I'll look at the schools and I'll sit down with the team and look to go forward.

I think they have made operational improvements that are terrific, and we want to make sure that, before we do anything radical that we might regret over the long haul, that we really understand the story of Gibbs going forward. So, I've got an open mind as it relates to the brand, the disposition of the schools.

Okay, fair enough. And then, final question for Paul. Maybe you could just comment. Health obviously saw some nice increase in starts in the month of October. Just what are the key drivers of growth in that division? And how sustainable in your mind are they? And are you bumping up into any sort of capacity constraints at this point? Thanks.

First of all, I'm very pleased and proud of what this team has been able to accomplish. Our lead flow continues and consistently continues to be in our favor. The nice thing that I mentioned a moment ago was the stability that we have in our leadership, both at the school division and in our admissions areas, as well as our rep. That is a significant issue, when I think a school gets into trouble.

So, having stabilized that, I think the division team and the presidents at the schools have done a significant job in doing that. We, as we look forward and with our strategies, we will continue to put in some higher-end programs that obviously generates interest in the schools, that will, you know, continue to afford us the opportunity to, you know, grow these schools.

From a capacity standpoint, that's not really an issue. Maybe in one school--I'm trying to think off the top of my head--but not really. We have plenty of capacity in Healthcare, and that's a matter of scheduling, which the division team has worked with the schools this year to give us more efficiency. That's why we're seeing margin improvements from a standpoint of our academic expenses, because we've taken a lot of linear programs and moved them into more modular programs to give us the opportunity to have more space to put either new programs or expand the population which the school currently has.

And to the point of the management team, over 80% of the individual schools within that group experienced start growth in the month of October, which shows that it's not one school, it's across the board.

Okay, great. Thank you.

Thank you.

Ladies and gentlemen, management has requested that we limit your questions to one per caller. As a reminder, one per caller.

Your next question comes from Jennifer Childe with Bear Stearns. Please proceed.

Thanks. I felt like this has been asked a couple of times, but perhaps not answered directly. When do you expect revenue per student within the university segment to bottom?

You know, I think the really big bottom begins when we start beginning to see those--if you're talking about AIU, it's really two things. It's when those students that increase, the amount of associate degree students begin to graduate and begin to start going into the bachelor's degree students. And I would tell you that's in the first half of 2008, when those students begin to increase. So, really, the increase occurs when the associate degree growth starts moving into the bachelor's degree students.

And then, the reality of it is that we're working on a repositioning of the AIU brand. And although it's too early to tell how long that is going to take, in terms to turn that brand around, we have a lot of strategies in the first half of the year to reposition it, but we'll have to see how long it takes to rebuild that population.

Shouldn't you be getting more of a tailwind from the anniversarying of the tuition cuts?

You actually--you would if we wouldn't have had an increase as a percentage of our overall population in the associate degree. So, you anniversary out the current population, but the same time, your percentage of your overall population in the associate degree program was increasing at the same time. I mentioned, you know, going from 44% of our population to 55%. So, that increase in a percent of population is actually going to offset some of that benefit you would get by anniversarying it.

Okay. Maybe if I can just sneak in a related one.

Now that CTU and AIU margins online are essentially equivalent as CTU becomes a bigger part of the overall mix and presumably that margin expands, can we expect the overall online margin to improve?

Yes, I mean, yes. Our expectation is as CTU becomes a bigger mix--we've seen improvement at CTU online this quarter. We feel like we can continue to see improvement at CTU in the coming months. And as long as that trend continues, we expect it is, you will see an increase in margins in the Online businesses.

Jennifer, this is Gary. You're asking a very fair question. You know, we have seen the margin expansion of CTU. We expect that we'll be able to leverage that, continue to grow CTU. At the same time, we absolutely have to address the eroding margins that we've seen at AIU. And ideally, we'll see that begin to turn, as Steve mentioned, you know, as we get into the mid part of '08, when students matriculate into the bachelor's degree program.

So, it's a fair question. I would say if I was putting a date on it, I would tell you that I think it's the second quarter of '08, we'll really begin to see a turn as we go into mid-year.

Okay. Thanks a lot.

Good question. Thank you.

As a reminder, ladies and gentlemen, that is one question per caller.

Your next question comes from the line of Jeff Lee with Signal Hill. Please proceed, sir.

Hi, good morning. We've talked about the drivers for declines in average revenue at the University group. So, what's behind the declines in average revenue in the Culinary Colleges and Health Education segments? And then, when do you expect those drivers to dissipate?

I'm sorry?

Culinary, Health.

I'm trying to frame the question. Could I have it again, please?

Yes, sure. Now, just this quarter average revenue for student declined at the Culinary division about 2%, declined about 3.4% at the Health Education group, and then, at the College group, they have it declining about 1%. What's behind those declines in average revenue per student?

The only thing that I -- I've got to go back and look at that, to be honest with you. I'm looking at Culinary. I have not had any mix changes or any of those things in my revenue per student. The only thing that could be bringing it down would be the Kitchen Academy group because of the start-ups that we've done. That is a little bit lower. It's a lower tuition so that does have a slight impact on the RPS. That's it from the Culinary.

Yes, on the College side, it's very simple. We've had a couple schools offer some part-time options for the students, although it's on a very limited scale. There is a shift because students' demands and students' desires have changed to offer up some part-time options, so some of the colleges have been able to use that part-time to assist in retaining students and recruiting students. So, that's really the smaller change. Although it's a small change, that's really the change for the College division.

And then, finally, from the Health standpoint, I think it's just more noise. I think we're down 2%. But if you look last quarter, in the second quarter, we were up about 1%, so given the number of schools, the population of different programs, it's probably just noise in the mix.

Okay, great. Thank you.

Thank you, Jeff.

Your next question comes from the line of Gary Bisbee with Lehman Brothers. Please proceed, sir.

Good morning, guys. You know, the question relates to the Online business, and you've talked about this mix to associate's degree, just across both AIU and CTU, I believe. I guess I'm trying to gauge how and why you're confident that you can have an improved mix back towards the more expensive and higher margin programs in bachelor and graduate. You know, when I look across all of the big for-profit companies, obviously we're seeing a massive mix shift that have followed associates that mirrors what you've seen. And I think we've seen that at other companies. It seems to me that the low-cost associate programs seems to be, for the industry, very much the easiest place to grow today. You know, how are you confident that's going to move back and help ultimately revenue per student margins?

Well, two things. First of all, we have experience in moving our associate degree to bachelor's degree students at AIU. We've done it since the inception. And as we've noted before, approximately 50% of our associate degree graduates continue on to their bachelor's degree program. And so, even though when that's fluctuate -- when the associate degree graduates have fluctuated up or down, that percentage has remained relatively flat.

We have put in the same strategies that we've put into AIU at CTU, and have a lot of confidence with the interest in talking to our current associate degree students at CTU, have a lot of confidence that we should, over time, have a similar percentage of associate degree graduates continuing on to bachelor's degree. So, we have a very successful track record at AIU.

Your final question comes from the line of Corey Greendale with First Analysis. Please proceed.

Hi, good morning.

Good morning.

Good morning.

I'm hoping this can pass for one question, but it's kind of a three-parter on the University segment.

The first part is on AIU online starts. Steve, this quarter, according to the Q, were down 11%, last quarter they were up 9%. Which of those more accurately reflects the direction of that business?

Well, I think it's -- you know, the overall. And as I've said before, the third quarter was really the focus. We were getting ready for our visit, and there was a lot of focus and emphasis in that. So, I think you kind of have to blend the two together to probably get more of an accurate over the kind of period of time.

Really, right now, it's focusing on resolving the final SACS recommendations, and--but bear in mind, we did have--we continue to see some increases with, in our October start for AIU, as well.

Okay. And on the University segment margins, first of all, is it fair to assume -- there's still a lower number of revenue-generating days at AIU, so revenue could still be down sequentially and margin could still be down sequentially there for that reason. Is that correct?

That's correct. I mean, as you look at our past history at AIU, you've seen the trend as the year progresses, and based on the number of revenue days, that revenue and profit will go down as the quarters progress throughout the year.

Okay. And on the on-ground side of the University segment, as I calculate it, that those are losing a fair amount of money. What's causing that and what are the prospects for getting that into the black, just the on-ground campuses?

Yes. There's kind of two different stories on the-- we'll talk about AIU first. They've been significantly impacted with their local reputation on the AIU ground side. And getting ready for SACS, they had a lot of work to do. They put a lot of focus and energy in resolving the SACS concerns. And as our recent result, they did a wonderful job in resolving based on the visit. So, really, the turn on the AIU side is rebuilding the reputation and the brand positioning locally for those AIU ground schools because you have it kind of across the board.

At CTU, you have kind of a mixed bag. You have two things going on--you have one, that we're really kind of pushing 100% online, even from the ground side, so you have kind of -- you have schools kind of talking about 100% online and hybrid and things like that. And then, we do have a couple schools that are doing very well. We have a couple schools that are not doing very well on the CTU ground side. So, really, it's focusing on those couple ground schools that are not doing as well as we would like them, need them to do.

Thank you.

Ladies and gentlemen, that concludes our question-and-answer session for today. At this time, I would now like to turn the call back over to Mr. Gary McCullough. Please proceed, sir.

Thank you, all, for participating on our call this morning. We appreciate your questions. I would just summarize by saying that we are working on building a strong foundation for the future of our company, and doing that is going to take patience, is going to take hard work. We'll need to collaborate more. We'll have to execute better than we have. And frankly, we'll have to change the way that we've [distortly] operated.

We're putting into place what I believe to be a strong, talented management team. We've got a clearer plan of action for the future, and we've got certainly the resources within our company necessary for us to achieve our potential. I wanted to say that. I want to thank you again for your time and your interest in our company. And with that, we'll conclude our call.

Ladies and gentlemen, thank you for your participation in today's conference. That concludes the presentation. You may now disconnect. Have a good day.