Perdoceo Education Corp (PRDO) 2008 Q4 法說會逐字稿

Good day, Ladies and Gentlemen. Welcome to the Career Education fourth quarter 2008 earnings Conference Call. My name is Mary and I will be your coordinator for today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. John Springer, Senior Vice President, Finance and Investor Relations. Please proceed.

Thank you, Mary. Good morning, everyone. And thank you for joining us on our fourth quarter 2008 earnings call. With me on the call this morning are Gary McCullough, our President and Chief Executive Officer, and Mike Graham, our Chief Financial Officer. 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 question during the call please call our Investor Relations department at 847-585-3899.

Please note that there are a number of items impacting year-over-year comparability for both the fourth quarter and full year 2008 which were detailed in a table within last night's press release. Unless otherwise noted, the financial measures discussed today will exclude these items. In addition, to facilitate comparisons against our previously communicated 2010 milestones, in some cases we will be referring to our performance excluding the transitional segment, which is comprised of nine schools currently in teach-out. The results of the transitional segment can also be found in last night's press release. Now before I turn the call over to Gary, let me remind you that yesterday'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 quarterly earnings release, our Annual Report on Form 10-K for the year-ended December 31, 2007, and our quarterly and other earnings -- other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, we undertake no obligation to update those risk 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, John, and good morning everyone. Once again, thank you for joining us on this call as we discuss our fourth quarter and fiscal 2008 results. I want to start this morning by providing my perspective on the 2008 fiscal year and then discuss some areas of focus for 2009. I'll then turn the call over to Mike Graham who will provide more detail on the fourth quarter results.

Overall I'm pleased with our performance in 2008 as an organization. We knew 2008 would be a challenge as the year began. As is well documented, the Company was in the midst of ongoing deterioration in operational and financial performance brought on by significant legal, regulatory and accreditation issues, as well as a highly decentralized and inefficient organization structure. As a result, businesses representing over 60% of our enrollment base were not growing and were in a multi-year decline.

In 2008, we took decisive action to arrest those declines. Our leadership team built a multi-year business plan designed to address fundamental operational issues that will position the organization for improved growth in 2010. Despite the significant challenge we face because of the impact of a rapidly changing student lending market, I believe our team responded well and we've been executing against our plan. Our plan is focused on increasing organizational effectiveness and efficiency by simplifying and gaining scale through shared services to drive common processes across the Company. We have also proactively addressed high cost areas and profit drains.

During 2008 we took a number of significant steps. We restructured and reorganized to eliminate redundancy, and we realigned our incentive compensation programs to encourage collaboration in the attainment of important companywide goals. We began the process of teaching out 14 schools. These schools represented our most unprofitable operations, accounting for over $70 million in a run rate operating losses. With five teach-outs already completed, we are progressing ahead of plan and at least eight of the nine remaining teach-outs are expected to be completed by the end of 2009. We also attacked our largest fixed cost component by exiting more than half a million square feet of excess real estate. We worked at all levels of the organization to align around the shared vision, values, and performance principals. We believe our efforts increased employee engagement. Importantly, we reduced turnover at admissions by 20% and overall Company turnover by 15% in 2008.

In a response to reductions in private lending alternatives, we implemented an internal student lending plan. We took a measured approach as we implemented the program to insure we learn and could make refinements as we move into 2009. In short, 2008 was a foundational year and we took great strides towards achieving the 2010 goals we communicated last March. At that time, we said in 2010 we would deliver operating income of between $225 million and $270 million. We said we would increase operating margins to the low to midteens, that we would generate free cash flow of $195 million to $225 million, and that we would grow our population by 6% to 8% per year.

To judge our progress against those milestones it's important to look at 2008 performance excluding the transitional segment and one-time items as these will no longer be reported within the results of continuing operations in 2010. On that basis, in 2008, we delivered $144 million of operating income, 9% operating margins, $158 million of free cash flow, and 7% population growth. By these measures we're well on our way towards achieving the milestones we set out for 2010. Importantly in 2008 we exceeded our internal operating plan for the first time in several years. Setting a plan, executing that plan, and then delivering on it as a team is important as it shows the organization that collectively we can accomplish what we set out to do. But despite our progress I'm not satisfied with our ability to generate meaningful growth consistently across our entire portfolio.

Several institutions or segments in our portfolio, namely International, CTU, and Health were performing well into 2008. They continued their strong performances during the year. In 2007, those segments represented about 40% of our student population. Combined, in 2008, International, CTU, and Health grew student population by 15%. They grow operating income by $34 million or almost 50% higher than 2007. And collectively, they expanded operating margins by 370 basis points. They now represent half of our student population. In International strong local teams have continued to strengthen and differentiate in INSEEC and Istituto Marangoni. CTU benefited from the continued growth of the military channel and the two-plus-two program. In fact, in 2008, CTU was once again selected by the Council of College and Military Educators as one of the best providers of education to U.S. military personnel.

Our Health education SVU has been a real success story. Its progress is instructive of what we are working to do in other parts of our organization. Health is centralized as an operating model and has consistently developed new programs to meet changing market demands. In 2008, the Health SVU accelerated population and revenue growth for the third consecutive year. It ended the year with 10% operating margins, which is a 300 basis point improvement over 2007, and an 860 basis point improvement since 2005. Importantly, that growth has been achieved without the benefit of new locations demonstrating the value proposition of the curriculum. As we move forward, our first priority is to insure that we continue to resource each of these growing businesses.

In 2009, we've committed to an accelerated startup plan as well targeting seven to ten new startups by the end of the year. As I indicated, Health, International and CTU educate about half of our students. Culinary, Art and Design, AIU College and Briarcliffe College educate the other 50% of our students, and continuing to improve their results is a clear priority in 2009. In 2008, the biggest negative impact to our profit was in our Culinary and Art and Design segments where tightening lending markets added an additional challenge to businesses that were already under pressure.

In Culinary our response was rapid. We reduced excess real estate capacity and headcount where we had the opportunity. We implemented our internal student payment program and coupled it with additional on-campus resources to insure successful student progress. Our actions have helped stabilize the population in the latter part of 2008. In January, we began offering a new extended 21-month Culinary program which allows students access to an additional year -- an additional academic year of Title 4 funds, thereby reducing their reliance on private loans. This decelerated program also allows students to work during their course of study to offset expenses. The 21-month program combined with the experience we've gained dealing with students of varying credit profiles and the selective use of grants has given us new insights into changes necessary to regrow the population in 2009. Our results in Culinary are increasingly positive and in the first quarter we expect Culinary to deliver strong year-over-year [start] growth.

Art and Design which face similar issues as Culinary in 2008 is not as far along in their response, but they are making good progress. Our internal student payment program has helped to mitigate the declines in student population. However, variations in curriculum and calendars that trace to a more diverse mix of institutions have made crafting a broad consistent response more challenging. To address this variation, in 2008 we began a curriculum alignment initiative which we expect to be implemented in the second half of 2009. By aligning curriculums, we can enable centralized program development, facilitate transfer of credit across institutions, and allow for a greater blend of learning opportunities, positioning the business for more sustainable population growth in 2010.

Finally, we talked a lot about AIU throughout the year, and I think the best way to characterize 2008 for AIU was as a year of stabilization. The year brought a number of successes and insights. External research conducted in the first half of the year confirmed that AIU's student satisfaction is among the highest in the industry. The team transitioned to a new admissions model that is delivering higher levels of admissions productivity and has also resulted in lower employee turnover. And AIU's population grew by 6%, and while modest, it's the first year-over-year growth at AIU since 2005.

As a result in the fourth quarter of 2008, AIU nearly tripled operating income as compared to year ago levels, and in 2008 AIU also expanded its operating margins. While I believe AIU is back on a solid foundation, its growth rates lag the market 2008. So returning AIU to more competitive growth rates is one of our primary focus areas in 2009. While I believe AIU will continue to improve, there's still more work to be done. New programs will be important to the ongoing turnaround of the University, and to some degree AIU has been caught in new program limbo. During its two year SACS probation, AIU was unable to launch or significantly modify its academic programs. As you know, AIU, with the approval of its governing board, has applied for accreditation with the Higher Learning Commission of the North Central Association. While that process is under way, AIU is once again unable to introduce new programs or significantly modify current ones. I believe the results are admirable in light of this ongoing disadvantage.

Again, let me say I'm proud of what we've accomplished as an organization in 2008. We exceeded our own internal 2008 earnings goals and we've begun to position our organization for future success. But from a business point of view, half of our business is performing well and growing, and we're taking the necessary actions to stabilize the operating and financial performance of AIU, Culinary and Art and Design. And our focus on 2009 is to insure that we turn these three businesses to sustainable growth while continuing to invest in the areas of our business that are working well. We came a long way during the last year and I'm excited about where we are and the opportunities that lay in front of us. With that I'll turn the call over to Mike, who will provide more detail on the financial results for the fourth quarter.

Thanks, Gary. Let me begin with a more detailed overview of the fourth quarter results and then spend some more time commenting on our student payment programs and our strong cash flows. As you review our results for the fourth quarter and for the full year, please take note of the following items. First, there are a number of items impacting year-over-year comparability for both the fourth quarter and for the full year, which are detailed in a table within last night's press release and are available on our website CareerEd.com under the Investor Relations tab.

Unless otherwise noted, my discussion on our earnings and results during the remainder of this call will exclude the following significant items. First, for the fourth quarter of 2008, within operating income, there were $1.6 million in severance charges, for headcount reduction actions in the Art and Design and corporate segments. There were $1.9 million in non-cash charges related to excess space and reduction in space requirements. Those were primarily in the Art and Design and Culinary Arts segments. And there was $3.6 million in legal settlements within the Culinary Arts segment for settlement of an ongoing contract dispute. In total, this is $7.1 million of significant items in the 2008 quarter which represents $0.05 per diluted share.

Second, in the fourth quarter of 2007, there was $6.5 million in legal settlements, in the Health education settlements, and $28.2 million in non-cash impairment charges of which $1.7 million was in Health, and the remainder in the transitional segments. The total impact of these 2007 significant items was $34.7 million or $0.24 per diluted share.

Additionally in the fourth quarter of 2008 we completed the teach-outs in three schools. IADT Pittsburgh, Gibbs in Piscataway, and Brooks College Long Beach all of which have been classified in our transitional segment during the first three quarters of 2008. The financial results of these schools, including a $4.6 million non-cash charge for remaining lease obligations, are now reflected within discontinued operations. Our press release issued last night included quarterly statements of operations for 2008 and for 2007 on this basis, so you can adjust your models accordingly for this move to discontinued operations.

Now on to the fourth quarter results. Total GAAP revenue was $431.8 million in the fourth quarter, down 5% from fourth quarter of last year. Excluding our schools within transitional segments, which are currently being taught out, total revenue decreased about 1%, primarily related to schools most heavily impacted by the destructions in the student lending markets. We reported fourth quarter earnings per share from continuing operations of $0.38 in the fourth quarter, including the $0.05 of non-comparable items in the quarter. The progress we made in 2008 may not be readily apparent from our comparative statements of operations due to the number of significant charges we have taken during the year as we restructure the Company and taught out the unprofitable Schools.

Let me highlight several important points. First, we've reduced our cost per start from $5,300 in 2006 down to $4,400 per start in 2008, a 17% reduction. Despite the challenges in student lending, we've increased our overall population across the Company by 7% in the last year. We improved our retention, our show rates and our conversion rates of new student interest in the fourth quarter versus prior year, and we've now experienced three consecutive quarters of operating margin improvement in AIU online and six consecutive quarters of operating margin growth for CTU online.

So let's turn to the operating segments. For the University segment fourth quarter 2008 revenue was $177 million. 2% higher than last year. Operating income was $43.1 million which is 63% higher than last year's fourth quarter. Operating margin was 24.4% in the quarter, up 900 basis points from last years fourth quarter, driven by expense reductions. Revenue for AIU was at $87.4 million, flat with the fourth quarter of 2007. A 7% increase in population was offset by a decline in revenue per student driven by changes in degree mix. AIU operating profit in the quarter was $18.5 million as compared to 6.6 million in last year's fourth quarter. Total operating expenses were 15% lower, again driven by lower academics and admissions expenses resulting in operating margin of 21.2%. Revenue for CTU was $79.6 million, up 9% from the fourth quarter of 2007 as a 16% growth in our population more than offset a slight decline in revenue per student again related to shifts in degrees. Fourth quarter starts growth of 21% and the population growth of 16% shows the benefit from the two-plus-two program and the starts as the students have now matriculated into the bachelor's degree programs. As we enter 2009, remember we have anniversaried the two-plus-two shift and our starts will be more in line with population growth.

We also believe the fourth quarter starts may have pulled forward some of the potential Q1 2009 starts as a tuition increase went into effect on January 1, 2009 for CTU. CTU operating profit was $23 million in the fourth quarter, up 25% versus last year with an increase in operating margin from lower admissions expenses and a fixed cost leverage. Also in university, revenue for Briarcliffe College was $10 million, down 18% from the fourth quarter 2007, reducing the overall reported University segment growth. Operating income of $1.7 million was slightly --, almost unchanged from the year before.

Fourth quarter 2008 revenue for Culinary was $77.3 million, down 18% from the fourth quarter 2007, reflecting a 12% reduction in population. As a reminder, the year-over-year starts comparison for Culinary Arts is impacted by the timing shift of our traditional Fall start which occurred in the third quarter of 2008 compared to the fourth quarter in 2007. This timing impact resulted in 1,100 fewer starts in the 2008 fourth quarter, and excluding this timing impact starts were down 12%. Excluding the significant items I mentioned in my opening remarks, Culinary Arts operating income would have been $3.7 million with an operating margin of 4.8%.

As Gary mentioned, our Health Education segment had a strong finish to the year, with fourth quarter 2008 revenue for the segment of $64.4 million up 19% from the fourth quarter of 2007 driven by a 20% increase in population and a 21% increase in starts. Operating income was $10.4 million in the fourth quarter, almost double the $5.4 million in operating income in the fourth quarter 2007, excluding the significant charges. Strong revenue growth drove fixed cost leverage resulting in a 600 basis point increase in operating margin to a record 16.1%.

Art and Design revenue was $67.5 million in the fourth quarter, down 8% from the fourth quarter of 2007, reflecting a 5% reduction in population and 9% lower starts, in line with the rates of decline experienced in the third quarter. Operating income was $11 million after adjusting for the significant items mentioned earlier, down 21% from the fourth quarter of 2007 as the lower revenue more than offset a 4% reduction in total operating expenses year-over-year.

Our fourth quarter 2008 revenue in the International segment was $35.7 million up 10% -- excuse me, up 10% from the fourth quarter last year. Impacting the year-over-year comparability in International revenue in the quarter was unfavorable foreign currency impact of approximately $1.9 million versus the prior year. Starts were up 8%, contributing to a 10% increase in population versus the fourth quarter of 2007. The International segment's operating income was $8.1 million in the fourth quarter, versus $9.4 million in last year's fourth quarter, reflecting timing of certain administration expenses which we do not expect to recur in the first quarter 2009, and also slightly unfavorable currency impacts. Most importantly, full year operating income was up 45% from 2007 and operating margin expanded by 160 basis points.

Now let me update you again on our internal student payment programs. The total balances outstanding on our internal payment program as of December 31, 2008, were approximately $20 million. In 2009, we expect an increase in originating volume related to a modest expansion of our underwriting criteria beginning in the early part of 2009. This, along with annualizing the impact of our existing payment programs, results in an estimated additional balance sheet use in 2009 within a range of $30 million to $50 million. All these amounts are before the allowance for doubtful accounts.

In general, we are pleased with our internal lending programs and internal payment programs, as we are experiencing strong levels of retention and success for students who have utilized our plans. We've gained important experience in the past year and we're finding ways to continue to expand our payment programs when paired with institutional activities that better help students succeed in completing their educational programs.

Our overall student receivable collection efforts remain strong. Our annualized DSO was 15 days, up slightly from 14 days at the end of 2007. And while they are still being finalized, our initial or preliminary 2007 cohort default rates do not reflect a material change or material increase over 2006. Excluding our transitional schools, our final cohort default rate for 2006 was 8.2% and our preliminary 2007 rate was 9.1%.

Our operating cash flow remains very strong despite the reduced revenue due to the student loan market contraction, operating losses experienced in our teach-out schools, and the cash portion of charges associated with the organizational reductions and the real estate rationalization. Additionally, our balance sheet remains solid with $509 million of cash and investments and no outstanding debt as we pay down all remaining borrowing under our revolver in the fourth quarter. For the year, we produced $186.7 million of operating cash flow. Capital Expenditures for the year were $53.9 million or 3.2% of revenue. Free cash flow, which we define as cash flow from operations less capital expenditures, were $132.9 million for the year.

Gary noted that we are on plan through 2008 against our previously communicated 2010 goals. Again, in judging our progress against those milestones for 2010, we need to exclude the one-time items as well as our transitional segment and discontinued operations. And on that basis, we delivered $145 million in operating income and slightly higher free cash flow than that in 2008. We are well on our way to our 2010 milestone objectives of $225 million to $270 million in operating income and $195 million to $235 million in free cash flow.

After the internal investments of capital expenditures, student payment plans, and the new campus startups, it remains our intention to return cash to shareholders within our share repurchase program. In the past three quarters we have not repurchased shares due to concerns by the Company's Board of Directors, regarding changing control provisions in the Company's share-based compensation plans. We expect the change of control concern will be resolved in the first quarter of 2009. With our largest shareholder owning 17.7% of our shares outstanding as of 12-31-2008, we can repurchase up to 10 million shares without increasing the shareholder's ownership to 20%. With that, we'll now open up the lines to your questions.

(Operator Instructions) Our first question comes from the line of Jerry Herman from Stifel Nicolaus.

Thanks, good morning everybody, hi, guys.

Hi, Jerry.

Mike, I wonder if you could help us with regard to the restructuring charges. How they hit each of the individual line items in the P&L, educational services, G&A, and so on and so fourth just to give some guidance with regard to '09 modeling?

Sure. If you look at the charges, the $7.1 million of charges this year, for the most those are all within the general administrative line.

How about the full year numbers, Mike?

I don't have -- we'll talk later, I'll give you some information later. I don't have the full year detail in front of me in terms of each line item by each segment, because I'd imagine you'd want it by segment as well.

That would be helpful.

I'll just follow-up on that one for you.

Okay, and then maybe directionally can you talk a little bit more specifically about the segments, you guys did a good job in the Investor Day talking about where your goals will be for 2010. Could -- Gary, could you reference directionally where those trends are for '09? I guess you enter '09 with some pretty good momentum in Online and Healthcare. I guess one question would be how bad should it get in Culinary and how much deterioration might there be in Art and Design?

Jerry, I'll probably answer this more broadly than you're looking for. I will tell you that our focus continues to be on driving revenue growth and start growth in our online business, we clearly think that's an area of focus as we move forward in the Company, we've got to make that happen. When you look at Health, we intend to continue to expand in our Healthcare business. Our startup efforts are primarily focused in our Healthcare business based upon our geographic presence and the opportunities we think we see available in the marketplace. When you look at what's happening in our Culinary business, we continue to like Culinary. It's been a good business over the course of the years. As we said early in the year, when the student lending issues began to happen, it affords us the opportunity to look at our student base, make the appropriate changes to grow the business in the future. We're executing against that right now.

As I said in my opening remarks, we expect that will see strong start growth year-over-year in our Culinary business here in the first quarter. And that's important because we're actually going up against a period in time a year ago where we had ample lending available to students, and so I think what they have done in our Culinary business is more than just admirable, it's been heroic in moving the business forward and we believe that business will grow as we move through 2009. As I also said in our Art and Design business has been a bit more of a challenge, because we start with a much more diverse mix of schools. We are working much more forcefully -- going forward to align those schools to go forward. But I think that will continue to be an area of challenge for us in 2009 as we move forward. And International will just continue to push forward although we've got solid plans. So when we laid out things back in March, we talk about those segments of the business. It's been much more of a challenge based upon some of the things that happened beginning around the time we had our Investor Day in Culinary and Art and Design. I think Culinary has made progress and we'll begin to see a turn, but we've got more work to do in Art and Design.

And I think it's not our intention obviously to give '09 guidance and we do stand behind the 2010 milestones. I think as you look through the P&L from a trajectory standpoint, we're at the lower end of our range on the revenue side based on some of the issues we've experienced in Art and Design. If you look at our cost per start and our advertising, we're well on the way and probably ahead of the numbers that we gave you there. Our bad debt has probably ramped up slower because of the use of the lending programs, and our good default ratios on CDRs and other things, less than we thought. And we're ramping up our startup activity. We have committed to ramp up startups in 2009. We think it's the right thing to do with our cash because the paybacks are great. That will hurt 2009 a bit obviously as we open up more startups, but that will help benefit 2010.

That's great. And one just last one if I can. As we look at 2009, the biggest restructuring charges will really be the lease exits. I guess what I'm trying to determine is there any material restructuring actions that are going to happen in '09 that will in fact result in meaningful charges above and beyond the lease exit write-offs you guys have -- ?

Sure. I think as you look at the charges we traditionally have talked about, the three buckets are severance, legal settlements, and real estate. Real estate, we will have the significant charge, we've talked about it being $80 million to $100 million at the past in the end of '09. It will come in different quarters as we teach-out the schools, obviously. We're still looking and we're still being aggressive in the real estate market to exit other real estate. It's a very difficult market for sublet, however landlords are very eager with our ability to use cash to buy out obligations, cash today for landlords versus a 10 year flow in the future can be very appealing from a discount standpoint. So on a disciplined basis, if we see opportunities to remove real estate we'll do so. Legal settlements, we never comment on legal activities. Settlements do occur if it's in the best interest of the Company to put things behind us, so I can't give you guidance there. From a severance standpoint, we have no large severance plans for 2009. We have a great team of people here and we've done a good job of getting our costs down, and we've right-sized the business to the revenue stream and our focus now has turned on growing the business versus taking out more additional costs out.

Thanks guys. I'll turn it over.

You have a question from Sarah Gubins, Bank of America, Merrill Lynch.

Hi, thank you, good morning.

Good morning, Sarah.

AIU online really had a significant rebound on profitability on a year-over-year basis. Could you give more details around this? And also do you view the fourth quarter rate as a sustainable rate or is that more seasonal?

I would definitely point you to a seasonal impact in the fourth quarter on AIU as we always have, advertising expenditures given the holidays tend to be reduced in the fourth quarter, so we do have a seasonal pattern that does expand some of the margins in the fourth quarter. The University has done a phenomenal job in its cost structure. In terms of admissions expense we continue to experience our peer model being successful going to the qualifier model with the initial call and then the experienced rep on the back end of the call. That has resulted across-the-board in about a 20% reduction in reps on the University businesses including AIU. Our academic expense has been aligned to the population, which is a very good trend. And there's a little bit of improvement in some of the occupancy expense but not much more, so hopefully that gives you a little color. But there is seasonality to it, but as we now have better visibility on the revenue and its population starts to pick up we're trying to stabilize out that margin, and we had three quarters in a row of margin improvement, which we are proud of.

Okay, thanks. Could you give an update on the size of your enrollment rep force, how productivity has been trending there, and is that now -- is that organization now at the right size or do you need to return to growing it to deal with increased lead flow?

Yes, I think we are -- we have now stabilized our admissions reps somewhere around 2000 for the least three quarters. That's down about 18% to 20% from this period last year. The peer model started last year in the fourth quarter, so we've now anniversaried it, so I don't anticipate in the first quarter 2009 we'll see any more reduction from the peer model. That said our lead flow is very good right now, and we are in the position of adding reps. The peer model -- we did the conversion of peer second, third quarter we learned a lot, we staffed up to do the peer and as we see the lead flow in the first quarter we are adding reps to handle the lead flow and to help the University performance.

So Sarah, this is Gary. I just want to reiterate what Mike said. Last year over a couple of calls, we were asked whether we thought we might have cut too far. The fact of the matter is that we weren't as efficient coming through the year and as effectively as we needed to be, so we felt like it was appropriate to make those changes. We stabilized the model. We understand what we're doing now. We've realigned jobs and expectation and based upon that we feel comfortable and began to add back because we want to make sure those adds are all productive for us moving forward.

Okay, thanks. And then just last question. Could you give us an update on job placement trends for your graduates?

Yes. We obviously think that this is an issue that we've got to be concerned about as an industry, and not just here at Career Education given what's going on in the macro environment. To date we haven't seen significant changes in demand for our graduates, but it's something we're keeping an eye on. We continue to experience our strongest placements in our Culinary business, where job placements are in excess of 90% in most cases. But again, it's a challenge that we foresee that might be out there and we'll stay tuned to it. We have -- and across most of our schools begun to invest in personnel to help from a placement and student success point of view, we'll continue to make that investment because we think it's necessary going forward.

Okay, thanks very much.

Thank you.

We have a question from Brandon Dobell, William Blair.

Hi, thanks. First on the numbers side, the quarter's G&A expenses on a dollar basis, is that a decent run rate or a starting point to think about how we should look at the quarters in 2009 or was there anything from an extraordinary seasonal perspective? And I know Mike talked about AIU profitability, but overall G&A, are those dollars about how we should think about the business right now?

In terms of a model I would look at taking the one-time items out that we disclosed to you. I would also, to Sarah's point, make sure that from a seasonality standpoint of advertising that that's thought through, again we're seeing more lead volume and we're seeing more advertising dollars put to work and more reps as we go into the beginning of next year. So that will have an impact. You have the normal inflation. We've annualized out our bonus so we do have an increase in our expense in 2008 versus 2007, because the Company made their numbers for the first time since 2005 and we paid our bonuses. So that is normalized out and we expect that full bonus accrual to be there in 2009. So I would think about those as you do some modeling.

Okay, that's helpful. Over in AIU, from a new program perspective, any sense of timing-wise when you guys are going to get back to normal operations rolling out new programs, and then another thing the fits and starts with opportunities to do so. But should we think about a big wave of new opportunities this year or is it going to be a 2010 timeframe before you to really get a chance to spread your wings?

I'd like to be able to say I know it's the exact timing on when AIU will receive its accreditation, but we don't know that. Again we're moving through the process. There's a visit that's scheduled in early March and the Higher Learning Commission is meeting, I believe, in June and beyond that, so but we have no guarantees on what the timing might be. So as I said earlier, we're caught in limbo, but from a macro point of view, across the Company, we introduced about 70 or so new programs in 2008. As I look at our pipeline today we have about 90 or so in the pipeline. And AIU has its fair share or more than its fair share of the things that are in the pipeline. So we do expect that when we finally are in the clear from an accreditation point of view, we'll make those applications so we're prepared to go. But that's the best I can tell you because there's no guarantees on timing. Ideally we'll see this happen in 2009, that we're certainly doing everything we can to make that happen. The team is working pretty dramatically to make sure that they have everything that the Commission is looking for to go forward.

Okay. And kind of in line with that, as you think about growth in AIU online, I know -- let's call it relatively slow compared to the overall, your peer group, maybe. Is part of the issue the inability to open new programs or are you guys taking it easy there to kind of make sure the business is operating efficiently before you kind of let the growth accelerate? I'm just trying to get a feel for what the trajectory there should look like relative to what else we're seeing in the overall economy and from your peers in the online space.

AIU online is part of AIU as a more macro institution. They are not separate, so the same issues we have with regard to new programs exist there as they do in the on-ground space. So we believe we have been hampered by our inability to create new programs, and to introduce new programs. When you think about what goes on in the marketplace, students search, things change over the course of time, and AIU has been in effect hindered for about three years, in introducing new things. And so we've got a situation where the programs frankly are not as robust as we want them to be. And so we don't have any governors on growth except some that have been imposed based upon the situation, and we'll ramp it up as quickly as we can. And again I'd step back and say given the handcuffs the University has been operating under, I think they've done a pretty terrific job.

That's fair. Final question for you on cohort default rates. I'm assuming you guys have the draft data in hand. Any color on where you're coming out? And I guess a larger question, if there are any significant movements in the different schools' CDRs, does that impact how you guys think about running those business either from a bad debt reserve perspective or from retention perspective? what do you do if you see a cohort default rate move dramatically one way or another? But in particular I want to get a sense of where you're coming out for those CDRs now.

From our standpoint, we've had three years in a row of declining CDRs, improving CDRs, so we were really pleased by that. A lot of that was the efforts made here to centralize collections and also the lending criteria that we used in our own work. As I disclosed in the call we had a 90 basis point worsening in the CDRs from about 8.2 to 9.1 excluding transitional. Honestly, I'm pretty pleased with that. Given the economy and given the environment, it shows well for what we've done. I do have in hand our range. Our range is not materially changed from last year. We have nothing anywhere near 25% consistent with last year. It reinforces our need that as we lend off our balance sheet, if you want to call it lending as we do payment plans, that as we continue to focus on student success and couple it up with the students that really want their education and are really graduating and getting placed, and we've done it well, we're having very good cohort default rate experience. So 90 basis points in this economy, we're very pleased with that.

Great. Thanks a lot.

Our next question comes from Gary Bisbee, Barclays Capital.

Hi, good morning guys. Nice job, especially on the cost side of things.

Good morning, Gary.

Let me ask my first question on that. I understand the reps down year-over-year and the improving efficiency as well. Can you give us a sense for what other things are benefiting the University segment on the cost side? I was sort of amazed that with basically $4 million sequential from the third quarter revenue growth you had $15 million or $16 million improvement in profit. So clearly, costs dropped a lot just in the quarter, not just year-over-year. Was a lot of that the marketing and the lower reps, or what else is going there?

I think you have a combination of a lot of things. You have the lower reps, you've done a good job on faculty and academic costs, we no longer have recourse in that number. It's gone to bad debt, but our recourse use in that business was not significant. We are experiencing, as most other people are experiencing, from a lead cost standpoint for media a reduction. Our aggregator costs are also slightly softer but not as material as we are in media and we're more indexed towards aggregators, so that's not going to have as big of an impact. We've just done a great job as institutions, as CTU and AIU as institutions. They've just done a wonderful job acknowledging where they are in population and acknowledging where they are in cost, and making sure the organization cost structure is aligned to the revenue stream. And I can't point to anything more but just give credit to those institutions for doing a really good job this year.

Okay, and then understanding this is usually the seasonal high point for margins, how should we think about the ability to get margin improvement in this business over the next couple quarters? I assume it probably wouldn't be as large in basis points in absolute increase, but are you very confident that the potential for substantial margin gain in University in '09 is there?

I think for University what the focus now is shifting back to a growth platform. As Gary said, we've talked about ramping up the reps coming into the first quarter. We have the new programs that are going to go through CTU and hopefully through the AIU process. The model is wonderful on a fixed cost basis as you add population. So again, I think it's less about focusing on cost reductions and cost containment than it is making smart investments in advertising and in reps, and gaining the population back. CTU population year-over-year, the huge increase and AIU population up. So the starts don't tell you the whole story. The population tells you the whole story, which includes retention and it includes starts, and the populations are growing.

Okay, and then just on the Healthcare business, you said most of those new startups would be in that. Can you give us any sense for what type of costs you'd expect? Are we still like a million dollars a campus type of thing? How much we should think about maybe CapEx rising based on those, and any sense when in the year you'll have those new schools open? Thanks.

A lot there. The CapEx, we have done startups in the past, so within our CapEx number of 3.2% of revenue startups have been accounted for on a capital basis, the ramp up that we're adding would not bring CapEx over 4% of revenues. So within that 3% to 4% of revenue on CapEx you're there. In terms of quarters, we have had -- it will be more measured. We've had startups in the pipeline. We're accelerating startups. If you want to try to model some of the hidden next year as we go through, take a look at the press release where we give a schedule of the existing startups and you can see the average drain on profitability the startups have to model out what a large number would be.

Okay, so evenly spread throughout the year, is that a reasonable assumption to use at this point?

Well in terms of evenly spread I'd say the openings will be more back half loaded, and because the openings will be back half loaded the revenue stream will not be until 2010, so you'll see the cost impact in '09.

Great.

Thank you from a buildout standpoint you have the occupancy, but the real cost comes when you staff up the admission side, the advertising side right before opening.

Great. Thanks.

Our next question comes from the line of Jeff Silber from BMO Capital Markets.

Thanks so much. Just a quick follow-up on the startups for this year. Are these all in new locations? Are you doing any co-locations with existing campuses maybe in some of your other segments? Is that something you're thinking about?

Yes, both. For the most part, I'd say we're looking at new locations in Health. There are some areas where we have underutilized space and we've assessed those markets to determine whether it makes sense to locate into them, and where it does make sense we'll take advantage of the space as long as it works from a student point of view. So it's both, with probably a slight edge given to new locations based upon the marketplace.

Okay, great. And more of a modeling question. Do you see in 2009 on a quarterly basis any difference in terms of starts by some of the different schools that are in existence like we just saw with Culinary in this past quarter? Anything we should be aware of?

Well, I would obviously you need to be aware of Sally Mae recourse going away at the end of March 31. Last -- in 2007 we still had access to recourse funds and we anniversary that out starting the first of April. I would look at that. I would also look at the summertime dip that we experienced last year in our University business because of our peer model. So we did have a shortfall in starts in the second quarter and into the beginning of third because of the conversion of peer which would not be, so that would anniversary out.

Sorry, I was referring to just the calendar issue in Culinary, how last year it was 3Q -- the fall start was in Q3 as opposed to Q4 last year. Anything like that coming up in '09?

I believe the Culinary will go back to the '07 calendar, so you'll see the same kind of reversing shift here in 2009.

And anything else in other segments we need to be aware about?

Nothing specific I can think of now.

Okay, great. And sorry to go back to the cohort default rate question, but since you have the detail in front of you, are there any schools we need to know about that broke the 10% threshold in '07 that were not there in '06?

I'm not prepared to talk about that right now, because we're still in a challenge standpoint so we still have challenges to go back to the department on what they are. There were no big shifts in our model from a school basis. There was no change in trend or any dramatic shifts, but I'm not prepared to go OPID by OPID.

And then just one other numbers question. You mentioned in terms of the one-time charges the severance charge was broken out between Art and Design and Corporate, and the lease exit design between Art and Design and Culinary, if I remember correctly. Can you just give us the numbers, how they fell off by segment?

On the real estate charge, about three quarters of it was Art and Design and a quarter of it was Culinary. From a severance standpoint, the bulk of the severance was in Art and Design.

Okay, great. Thanks so much.

Our next question comes from the line of Gordon [Lasik] from Robert Baird.

Hi, guys. Can you give a quick update on the private lending environment, if you see any changes on the last couple months? And an extension of that is -- I think I heard you say that you're expanding your underwriting criteria for your internal loans. I guess what gives you the confidence to do that going forward? I mean, are you seeing changes within the student base that you're lending to currently?

I mean, the lending environment remains difficult for our students, as you know. We continue -- we have not had a change in any of our lender pools, either in the (inaudible) or private loan standpoint since last year -- first quarter of 2008. So our lending base for our students in the options remain steady. I'm not sure that we've seen a lot of help to the lending community from (inaudible) or any of the other programs, we haven't seen any changes that way. From our standpoint we've learned a lot. We've learned a lot in eight months or nine months of underwriting. We've learned of putting students success coordinators in the school and pairing those up to make sure the student is doing well, that their academic progress is on, that they are working, that their living arrangements are well taken care of. We've done a great job of pairing that up, and because of that we've always said we'll use our balance sheet around student success.

It wasn't strictly about economics, and as these people become seasoned in the schools, as we rollout student successes to places like at Art and Design from where it started in Culinary, as we rollout the program in 21 months versus 15 months, it helps us in Culinary to have more confident about student success. And also just from a trend standpoint, we've looked at other things like using more grants to a student or looking to make sure that from a calendar standpoint and other institutions that we're maximizing the use of Title 4. We're just becoming much better internally with our systems and our people about finding better answers that work with the students. So it was a pretty big shock to the system, as you can imagine nine months ago, losing all of Sally Mae's recourse lending which cost us, we think as we said before, somewhere between $75 million and $90 million of revenue. That said, our revenue year-over-year was flat, so we've done a good job recovering. But it took us some time to be very careful not to go backwards on CDRs and everything we've done from a payment plan standpoint.

I just want to reiterate what Mike said. What we work to do is pair up our lending with the ability and the school to support the student so they can stay and graduate and move on and get a job. What we're not doing is panicking at this point in time and opening up the bank here to anybody that comes in the door. We were very measured in the way we got going in this. We stepped back, thought about what we've learned, we've shared that learning across the business so people really understand what's going on, and we want to replicate those things that are working and other parts of our business. And so we will continue to be measured in our approach, but based upon what we've learned, we believe that we could open up just a bit more. And that will give us more learning and will make the adjustments some time in 2009 if it's warranted to do that.

Thanks a lot for that color.

Our next question comes from the line of Trace Urdan, Signal Hill.

Hi, good morning. Gary, I'd like to kind of go back and maybe push back a little bit on this question of University business really being held up by new program introductions. Because I'm not sure that intuitively I really get that. You guys have a pretty wide range of program offerings between AIU and CTU, and there are plenty of competitors that are putting up stronger growth off of a more narrow base of programs. So maybe you could address that a little bit and then speak to whether there's anything else that needs to be tackled in order to accelerate the growth in University.

Sure. Trace, I'd like to make draw the distinction between University and AIU and CTU. Because when you step back, if you take a look at CTU, which has been consistently introducing new programs, making the changes they need to make, that business has grown, I think, quite nicely and in line with what you see in the broader market. In fact, if you take a look at the numbers I think we're in double digit growth -- significant double digit growth of 16% to 17% in online, and we're growing at 15% on ground at CTU.

Conversely, AIU has been hindered both from a reputational point of view and from a programmatic point of view. And we have done a lot to change things in the business and they've had to absorb a number of shocks as we look at the business. And so AIU, we believe, based upon the data, has been hindered and this is both quantitative and qualitative data that we speak from. So rather than to talk about University, I'd ask that you think about it as AIU and CTU. CTU we want to keep driving the heck out of, they are doing a great job. AIU has pent-up programmatic demand that we can't get approved at this point in time, and we believe that will help drive things. Having been in a number of businesses, when my product got stale it was more difficult to make -- to have people make --to buy, to purchase, when they had other alternatives that seemed better in the marketplace. And I believe that's where we are.

Okay. Anything more specific that you can point to in terms of what -- I mean I just don't really intuitively understand what that means. I mean I get conceptually this idea that the products could be stale, but I'm just not sure in looking at your list of program offerings where you feel like there's something that you don't have in the marketplace that other people have. That's the place where I'm just not getting it.

Trace, I don't think this is a question of do we have a certain program of study across the board. I think the question becomes underneath that, are the classes as up-to-date and as robust as we would like them to be, reflecting new learnings and changes in the marketplace? And I would say the information we're getting back from our teams internally is they believe as we shop, as we look at other competitors, as we get feedback from prospective students, that our programs in some cases are not as up-to-date or don't appear to be as up-to-date as some of the competitive offerings that are out there. So rather than -- I'm not going to give much more color than that except that we've been pretty attuned to our admissions folks who talk to us about objections they see in the marketplace, and to what we're seeing in the overall marketplace.

Okay. I'll leave that alone.

Okay. Again, all I'd ask you to do is think about this not as University, but think about it as two very large institutions that are starting from different places.

Okay, well it's probably a larger discussion I don't want to have it here on the call.

I'm sure we'll have it at some point in the future.

The other thing I wanted to ask about, Gary, is you did a pretty great job when you came in of really taking a hard look at all of your assets and the schools that you had, and obviously we're in a different place now. And I'm wondering if you have some kind of an ongoing program of examining schools, specific campuses, schools, if you can tell us that you're looking at these things annually or quarterly to determine whether you need to pull any bigger levers here as you look forward. And I guess -- I don't want to be coy, I guess I'm thinking in terms of Art and Design. How much more do you invest in Art and Design before you feel like there's -- you need to make a bigger change there?

Let me talk about it from a macro point of view, and then I'll come back without probably giving you all of the nurturing you want on the question on Art and Design. We look at our businesses both in the whole and by individual campus. One of the things that we did this year for the first time is we said to our campus Presidents and to the campuses that we would, on a quarterly basis, rank them on a number of different dimensions. It's revenue, it's starts, it's retention, it's a number of different things -- that we would rank them top to bottom and that we would help them understand how they are doing, and that we would reward them top to bottom based upon their rankings at the end of the year. And so for the first time ever we've done that.

We've been very overt with our campus Presidents about where their campuses rank, why they are where they are and how that will impact them from a compensation point of view -- from a bonus point of view. So we've done that, and we'll continue to do that, and that is also instructive to help say there are some that are lagging, and we've got a focus on them to help make them better. And there are some that are really working well, what's working there that we can reapply across the board to the ones that are lagging. So it's an ongoing review. I will tell you at this point in time that based upon that our focus is not on taking more out from a teach-out point of view, but more helping the ones that are struggling become better. Because in most cases, when you look at where they are, they are struggling and they are on the margins, and we think we can improve them.

When I think about Art and Design, clearly, there are challenges of that business. So we're not asleep at the switch here in terms of looking at what's happening at the macro marketplace, understanding what's happening. Art and Design consists of colleges -- the old college division that we had which was a variety of schools that vary quite dramatically, and IADT, which is a bit more homogeneous. And so we tend to like homogeneity because you can drive things across the system and get more systemwide answers to things. And so as we look at them, just like I talked about University being bifurcated between AIU and CTU, and to some degree Briarcliffe, I think about colleges and I think about our IADT business. Where we can drive scale, we are tending to have a better outcome in our business. So we're looking to drive scale.

We're looking to move some of those colleges towards our academy model so we can improve across the board. I won't give you all the nurturing you're looking for. I will tell you that as we've come through the end of the year, we've looked at the business and we do have points of view about the things that we need to do to continue to shape our business going forward.

Could that striving for scale actually lead you into making acquisitions potentially?

Potentially.

Okay. Thank you.

Thank you, Trace.

We have a question from Mark Marostica from Piper Jaffray.

Hi, it's actually [Mark Skatovich]. I just had a follow-up to Trace's question there, maybe looking at AIU from a different perspective. If you look at sort of (inaudible) programs, and we're looking at growth at AIU, can you sustain the last couple quarters' run rate on a start growth basis for '09? And also could you also just mention how retention has been trending AIU?

From retention, the retention trend has been positive at AIU. The matriculation rate of the students from the associate degree to the bachelor's degree has stayed stable in AIU. We have seen no material shift. The starts -- we're not here to give guidance for 2009. We've been doing starts someplace below 10%. I think to Gary's point about the programs, the institution is working hard, and it's not just about programs. It's about the brand and the history and everything we've gone through at the business that just makes it a little bit more uphill. Again, pleased with 7% population growth, and I think going forward in the year is our intent to grow the business even further, but not ready to decide what we think a range of starts may be.

Fair enough. And then Q4 saw some stabilization on the cost of bed service on a year-over-year basis, it looks like for the first time in several quarters. Just curious why that is and why that was, and is that sustainable in '09?

On a comparable basis if you look at services from the P&L, remember you do have the transitional schools in from the previous year. So on a Company basis our educational services and facilities went from about $166 million down to $158 million. Remember you are teaching out schools, so within there we have about half that improvement is probably related to transitional. And also remember historically educational services facilities has taken the recourse fee. And the recourse fee of 25% of loan volume from Sally Mae in the past is no longer there from a quarterly standpoint year-over-year. So I'd argue that we've had inflation in educational services, we've had efficiencies driven from class size and from our organizations, the biggest year-over-year change in quarter was a combination of recourse and transitional.

Okay, and how much would you say recourse would have been? In a quarter? You said about half is transitional, and -- roughly speaking on the recourse?

I believe if you look at our recourse fees in the last year they range someplace between $15 million and $20 million for Sally Mae. You can go back to our 10-K from 12-31-'07 and find the exact number. There's no seasonality to that, so I'd look at the disclosure we made last year and divide it by four.

Okay, great. And just one last quick one. Regarding your 2010 op income guidance, is there an implied level of bad debt expense as a percent of revenue that you can share?

If you remember from our Investor Day back in March, we had implied a 4% bad debt rate across the Company in 2010 based on our lending programs. In the fourth quarter our bad debt expense was 2.6% across the Company, so we have 140 basis points room as we go into 2010.

Okay, great. Thanks very much.

Thank you.

We have a question from Kelly Flynn, Credit Suisse.

Hi, it's Patrick (inaudible) for Kelly. One quick clarification. Is the $30 million to $50 million of internal lending, is that incremental to the current $20 million balance, or is that the whole?

That would be incremental.

Okay. And secondly, can you give some big picture color on the Company's approach to balancing margins, and at the same time insuring the quality of the various programs and that the needs of students continue to be met? Some commentary there would be helpful. Thanks.

Yes. This is Gary. When I think about some of the issues that led to my arrival here in the Company, there were places where it wasn't clear that people saw the value in what we were doing. And so that's an issue for us. The communication that we have taken and the approach we've taken with our organization is to make sure they understand that quality must come first, that we must deliver to students what we promised them when they signed up for courses. So we have worked to balance our approach while we're taking costs out, we have reinvested back in the campuses or we have allowed that investment to happen.

We've worked to insure that we have people on campus who are working on student success. And so ultimately, I think that if we don't deliver on our value proposition, on what's expected of us, we won't have good calls in the future. And so our goal is to take out the inefficiency in our organization so we can spend back against our institutions and deliver quality and value to the students who sign up for our courses.

And another thing I would note is year-over-year, our total faculty count between full time and adjunct is unchanged from the end of '07 to the end of '08, As we have gone through and done structuring moves and rightsizing our organization, the number of faculty who deliver the quality on the front line is unchanged.

Thank you very much. I would now like to turn the call over to Gary McCullough for closing remarks.

Well again, I just want to reiterate that we're pleased with the progress we made in 2008. And with that said, we recognize we still have work that we've got to do. We'll continue to invest in those areas of our business that represent strength, and we'll continue to redouble our efforts to address those areas of the business that are currently underperforming to bring them up to an area that, both financially and from an outcomes point of view, we could be proud of. So with that said, I want to thank you all for joining us on our call. We appreciate your interest in our Company, and we'll look forward to talking with you soon.

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a great day.