Perdoceo Education Corp (PRDO) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Career Education earnings conference call. My name is Marsha, and I will be your coordinator for today's call. At this time all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. John Springer, Senior Vice President of Finance and Investor Relations. Please, proceed, sir.

Thank you, Marsha. Good morning, everyone, and thank you for joining us on our first quarter 2009 earnings conference call. With me on the call are Gary McCullough, our President and Chief Executive Officer, and Mike Graham, our Chief Financial Officer. Following remarks by management, we will be open for analysts and investor questions.

Because of the technical difficulties we experienced, we will try to leave the call open to answer all of your questions. This conference call is being web cast live on the investor relation section of our Web site at www.careerED.com.

Please note there a number of items impacting year-over-year comparability for first quarter which were detailed in a table within yesterday's quarterly earnings press release. Unless otherwise noted, the financial measures discussed today will exclude these items. In addition, in order to facilitate comparisons previously communicated against our 2010- milestones, we will be referring to our performance, excluding the transitional segment comprised of eight schools currently in teach out. The results of the transitional segment can also be found in yesterday's press release.

Now before I turn the call over to Gary, let me remind you that yesterday's press release and remarks 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 financial 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, 2008, and our quarterly and 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. We appreciate you joining us on this call as we discuss results from the first quarter 2009. When my prepared remarks are concluded, as John indicated, I will turn the call over to Mike Graham, our Executive Vice President and Chief Financial Officer, who will provide more detail on our first quarter results.

Overall, I continue to be proud of the progress we have made in the past two years. And I am encouraged by most elements of our performance in the first quarter. Excluding transitional schools and significant items, we achieved 11% student population growth, 22% operating income growth, and a 210 basis point increase in operating margins. As I mentioned on our earnings call last quarter, much of the heavy lifting of our organizational transformation has shown progress, and although not complete, we have now turned our attention to insuring we're able to generate meaningful and consistent growth across the Company. On most measures, our first quarter performance marked another step forward towards achieving this goal.

However, first quarter student starts in our university segment were unacceptable, given the strength of the overall market, as well as our lead flow and availability. I will address this issue and what we're doing about it later in my remarks.

First, let me turn to the progress we have made in the quarter across other areas of our organization. We continue to grow in areas delivering strong results and positive outcomes, and nowhere is this more evident than in our health education schools. Health continued to build a solid foundation that has been created with another record performance in the first quarter. Overall, our health SVU delivered 25% start growth, 24% growth in student population, 17% growth in revenue, more than double the level of operating income versus the first quarter of 2008, and operating margins were 20%, compared to 9% in the first quarter of 2008.

These results are gratifying and show the progress of the transformation of the health segment. In light of that progress, I want to remind you that we're focusing our startup efforts on adding new health schools for the balance of 2009 and into 2010. One method we have used to quicken the pace of expansion is to convert the existing underutilized space within both our transitional and existing schools, with a market related data supports doing so. By doing this, we can increase the pace implementation and reduce the overall cost of expansion. This model has worked well for us.

Recall in the second quarter of 2008, we converted two transitional schools, one in Vienna, Virginia, and the other in Melville, New York, into health schools, and the results have been strong. Combined student population in these schools is 26% higher than last year's first quarter. The schools also achieved 16% operating margins in the first quarter of 2009. A significant turn-around from negative 18% margins for the same period of 2008.

Consistent with this, we determined that another location, Gibbs Boston, has favorable market dynamics for a health school. It was converted in the first quarter of this year. We continue to experience growth in international. The international schools performed in line with our expectations in the first quarter, was 19% growth in student population. However, the revenue and operating earnings performance was dampened by the stronger US dollar.

We also took important steps towards our goal of rebuilding population in our culinary and art and design schools. Our culinary SVU has excelled at evolving its model to meet the changing needs of our students. As you may recall, culinary was the most affected segment following the changes in the private lending environment in the spring of 2008. In response, the culinary team conceived and implemented a series of initiatives that modified and introduced new student payment plans, that adjusted the size of our organization for the current student population, with clear metrics on how they will staff as population rebounds. And further, the team provided more flexible curriculum options, including the addition of an extended 21 month program, which I discussed on previous calls. The culinary team's work and preparation in 2008 has begun to pay dividends.

On our fourth quarter call, we indicated our confidence that these initiatives would lead to an increase in student starts in the first quarter, the first step in rebuilding the student population and regaining fixed cost leverage. And that's exactly what happened. In the first quarter, culinary delivered 13% growth in student starts in the quarter, while continuing to improve on their already high levels of student retention. Now I don't want to downplay this result. Keep in mind that the first quarter of 2008, we had broader access to third party student funding.

So while student population was down 4% in the quarter versus 2008, the student start performance in the first quarter is solid progress, and it is an indication of what we expect to continue as we move through the remainder of the year. Our initial estimates of our second quarter start are that we will be up at least 25%, over 2008. Needless to say, I am pleased with the work that Bryan Williams and his team has done to rebuild our momentum in the culinary organization following a very challenging 2008.

In art and design, we have applied the same approach as we did in culinary. In last quarter's call, I discussed a curriculum alignment initiative which we expected to be complete in the second half of 2009. This initiative is slightly ahead of schedule. It will enable credit to transfer more easily across our schools, enhancing flexible learning opportunities for our students.

Similar to culinary, we have completed the development of a customized internal payment program that will increase use of the Title 4 funding. These changes will enhance student satisfaction. So entering the second quarter, art and design has the additional flexibility that culinary began offering in the first quarter. We expect these changes to aid in delivering similar success as we move through the remainder of the year.

With the progress we saw in the first quarter, I am satisfied that in culinary and art and design, we are at or close to the goal of generating meaningful and consistent levels of growth. University results on the first quarter were improved. Revenue was up 7% driven by higher student population. Student population was up nearly 12% in the quarter.

Operating margins expanded nearly 6 full points from 14.5% in the first quarter of 2008, to 20.1% in the first quarter of 2009. All that said, I am not satisfied with the overall performance in our university group, where results have been inconsistent. New student starts grew only 2% in the quarter which, frankly, I view as unacceptable, especially when you consider the current tailwinds in the industry. The work underway in our university organization is aimed at delivering sustainable and predictable growth at AIU and CTU. And driving toward that end, we're addressing a variety of areas including brand strategy, curriculum development, advertising and media effectiveness, and admissions operations.

We have made strides in addressing identified issues in each of these areas. However, in the area of admissions operations, where we are fundamentally transforming the admissions process, we lost focus in the first quarter on day-to-day execution and we failed to capitalize on opportunities to drive higher student start growth. In broad terms, starting students is a four-step process for us. It involves student lead, or inquiry generation, effectively managing those student inquiries, admissions counseling to aid students in enrollment, and effectively managing show rates of enrolled students and retaining them once they have started the program.

In university, we made improvements to our admission methods have which resulted in driving down our cost for students start from an industry high $5,300 in 2006, to $4,400 at the end of 2008. Our peer qualifier model, in which we interface with potential students and then transfer them to admission representatives from our universities continued to work well during the quarter. However, a breakdown occurred in transfers from our peer qualifier group to the school admissions teams, because the school admission teams were not staffed sufficiently to advise and convert potential students. And I remind you, these are students that in call calls with our peer qualifiers have expressed interest in going to one of our universities. Obviously, we encounter challenges in transforming these important functions.

Candidly, I am disappointed that I have to spend time on this call as I have in previous calls, addressing failures in execution, and implementation. The process is complex and has taken a bit longer to implement the changes than we anticipated, and it's also been complicated by slow adoption of new processes in some parts of the organization, and to some degree, a lack of decisive leadership in others. Recognizing this, several key leadership changes have been made within the university group.

Both AIU and CTU hired experienced senior level operating leaders in the fourth quarter. And we have enhanced our AIU admissions organization by replacing senior admissions operations leaders, and we are working to enhance admissions representative training to improve efficiencies and to improve conversion rates. The issues we have identified in the admissions operations, including the recruiting and training of admissions representatives, will take some time to fix. In the second quarter in university, we expect to deliver double digit start growth, and our goal is to do the same for the balance of the year.

As I have said before, despite the progress, I am not yet satisfied with our ability to generate meaningful growth consistently across our entire portfolio, but we're getting closer. But we still have work to do.

Now turning to the government and regulatory environment which has recently gained heightened attention, what is important from our perspective that is we're well positioned to deal with any potential changes that may come from the current administration. Our cohort default rates remain low vs. the for-profit industry average and did not deteriorate significantly in the past year. We have no significant 9010 issues, and we have experience in direct lending and we have the capability to readily switch all institutions to direct lending if need be, with no anticipated operational disruption.

With that said, I will now turn the call over to Mike who will provide more detail on the financial results of the quarter.

Thanks, Gary. Let me begin with the more detailed overview of the first quarter results, and then spend some time commenting on our student payment programs, and cash flow. As you review the results for the first quarter, please take note that there are a number of items impacting year-over-year comparability for the first quarter, which are detailed on the table within last night's press release and are available on our Web site, www.careerED. com under the investor relations tab.

Unless otherwise noted, my discussion of our earnings and results during the remainder of this call will exclude the following significant items. For the first quarter 2009, within operating income was a $7.8 million pretax charge, or $0.06 a share associated with vacated facilities within the transitional school segment. Throughout 2009, as we vacate real estate in the transitional segment as the student population decreases, we will recognize the future lease obligations offset by our estimated sublease income.

In the first quarter 2008, there were severance and stay bonus charges of $10.5 million or $0.08 a share. $7.2 million of which was within transitional school segment, $1.5 million of which was in the corporate segment, and approximately $1.8 million recorded across health, university, culinary arts and art and design segments. There was also in 2008, a $2.2 million impairment charge, or $0.02 a share for transitional school segment.

And finally, there was a $4.7 million gain from the termination of the profit sharing agreement with AU Dubai which was reported as share of affiliates earnings within other income and expense in 2008.

Now, on to the first quarter results. Total revenue was $437 million in the first quarter, down 3% from the first quarter of last year. Excluding our schools within the transitional school segment, which are currently being taught out, total revenue increased by 1%. Operating income, excluding transitional and the significant items, was $52.6 million in the first quarter, up 22%. For the university segment, first quarter revenue for 2009 was $189.8 million, 7% higher than last year. Operating income was $38.1 million, which is 49% higher than last year's first quarter. Operating margin was 20.1% of the quarter, again, up 560 basis points from last year's first quarter.

Revenue for AIU was $98 million, up 3% from the first quarter 2008, reflecting a 7% increase in student population, partially offset by lower revenue per student, associated with unfavorable foreign currency impacts within our AIU London campus. AIU operating profit in the quarter was $20.5 million, as compared to $7 million in last year's first quarter.

Total operating expenses were 12% lower, driven by lower academics and admissions expenses, resulting in operating margin of 20.9%. Revenue for CTU was $83.1 million, up 14% from last year's first quarter, as 18% higher student populations more than offset a modest decline in revenue per student related to lower credit loads. CTU operating profit was $17.8 million in the first quarter. Up 5% vs. last year. Operating margin was 21.4%, down 200 basis points, reflecting incremental investment in lead related advertising spend.

First quarter 2009 revenue for culinary was $75.3 million. Down 14% from first quarter 2008. Reflecting a 4% reduction in student population. Culinary arts experienced a $.6 million operating loss during the quarter. Our health education segment had another strong quarter, with first quarter revenue of $67.4 million, up 17% from the first quarter, 2008. Driven by a 24% increase in student population, and a 25% increase in student starts. Operating income was with $13.5 million in the first quarter. As compared to $5.3 million in operating income in the first quarter 2008. The strong revenue growth drove fixed cost leverage, resulting in an 11% increase in operating margins to 20%.

Please note that approximately 230 basis points of this improvement related to the reduction of legal expenses, where insurance carriers reimbursed us for legal expenses incurred in previous years. As we move forward, we will begin to ramp up the investment start-up campuses as Gary discussed and as we discussed in previous calls, and we estimate we will generate approximately $15 million to $20 million of operating losses for the year in health, weighted towards the third and fourth quarters. Due to the size of this initiative, we will continue to disclose the net operating loss in start-ups as part of the quarterly earnings call so you can clearly separate the impact from the ongoing operational performance.

Art and design revenue was $63.8 million in the first quarter. Down 10% from the first quarter 2008. Reflecting a 2% reduction in student population and 6% lower student starts. These are in line with the rates of decline experienced in the fourth quarter. Operating income was $7.4 million, down 32% from first quarter 2008.

As Gary noted, the curriculum alignment is ahead of schedule and will result in a shift in student start dates as we add more frequent student starts to our annual calendar. The net result will be a shift, from Q4 of 2009 to Q2 of 2009 of approximately 600 to 700 student starts. Exclusive of this shift, our current forecast for the second quarter indicates that our starts will be double digit increase over last year for art and design.

First quarter 2009 revenue for international segment was $34.5 million. Flat from the first quarter of last year. Reflecting an increase in student population of 19%, offset by the impact of the stronger dollar. International's operating income was $11.4 million in the first quarter vs. $12.8 million in last year's first quarter, with a foreign exchange impact of $1.9 million.

Now let me update you on our student payment programs. The total balances outstanding on our internal payment program as of March 31, 2009, were approximately $24 million, compared to $20 million at the end of 2008. Overall, we have strong process in place for addressing student payment plans and the balances remain very manageable relative to free cash flow of our company. Bad debt expense as a percentage of revenue was 2.3%. Down 20 basis points from last year's first quarter. As both university and health benefited from the July 2008 Pell and Stafford increases which more than offset increases in culinary and art and design, driven by higher levels of usage of our internal student payment plans vs. third party funding in the prior year.

Our overall student receivable collection efforts remain strong with their annualized DSO of 13 days, improved slightly from 14 days a year ago. Again, our operating cash flow remains very strong while funding student payment plans, operating losses experienced in our teachout schools, and the cash portion of previous year's charges associated with organizational reductions, and real estate rationalization. Additionally, our balance sheet remains solid with $500 million of cash and investments and no outstanding debt.

Capital expenditures were $14.9 million or 3% of revenue in the quarter. We anticipate capital expenditures closer to 4% of revenue as we move through the year as we invest in the start-up schools. Free cash flow defined as cash flow from operations less capital expenditures was $33.8 million in the first quarter.

Turning to our share repurchase program, during the first quarter 2009, we repurchased 1.7 million shares for approximately $40 million at an average price of $22.83 per share. From the inception of the buy-back program in July of 2005 through March 31, 2009, the Company has repurchased 20.9 million shares for approximately $645 million, and we have remaining authorization from the board of directors as of March 31 of approximately $156 million.

Finally, we continue to rationalize our traditional real estate portfolio. We anticipate the 2009 overall charge to be between $80 million and $100 million, consistent with our previous disclosures. In May, we're finalizing a favorable economic from transaction to remove approximately 100,000 square feet of real estate from one campus. Relieving us of a $48 million future lease obligation for a cash payment of $15 million. This will result in a Q2 2009 in the transitional segment of approximately $15 million, again, part of the $80 million to $100 million range that I just stated.

With that, we would like to open up the call for your questions.

(Operator Instructions). Questions will be taken in the order received. Please limit your questions to one per person to allow for all participants to participate. If there is time left, we will take follow-up. Your first question comes from the line of Bob Craig from Stifel Nicolaus, please proceed.

Good morning, everybody.

Good morning, Bob.

Gary, I was just wondering if you could provide a little bit more detail on that breakdown that you mentioned occurred between the transfers from the peer qualifier to the admissions teams. And also, too, you indicated the latter not staffed sufficiently. I take it that means you will be building staff as we go forward here.

Sure. Let me step back and even go in the last quarter, and before. We have been on previous calls and we were asked as we moved through the year whether we had a sufficient number of admissions reps. At the time we were working through, if you recall, some issues related to peer that we got under control and addressed. While we were working through that -- those issues, we were also working to improve our rep productivity so, we could do a better job of insuring and making sure reps understood what was expected of them moving forward.

The idea was to marry that learning op as we came into the first quarter. So coming into the first quarter we expected to do two things. One was, to spend for leads to grow the business. A second one was to ramp up our number of reps with new expectations around what they should be producing on a per rep basis.

We had very, very solid lead flow. Double digit lead flow come in. That wasn't the issue. Demand was strong. They were well handled in our peer qualifier model. And when unfortunately, we could not staff up enough to handle adequately the lead flow that came out of peer into the universities.

And so it was something in my judgment should have been foreseen. We saw that that was an issue as we ended January. Unfortunately when you commit to buying leads, you do that a bit in advance and we couldn't turn off the lead flow fast enough to sink it up. We saw slightly higher marketing spending and increase in costs and we were not able to adequately deal with all the leads we had. Had we been fully staffed, we would have been in double digit growth.

So you are now fully staffed.

I will not say we're fully staffed. We have staffed up but we are still hiring.

Thanks.

Thank you.

And your next question comes from the line of Brandon Dobell from William Blair, please proceed.

Hi, guys. I want to focus on the internal lending for a second. Need to be well below our expectation. I want to get a sense of how much that is being driven by just extra opportunity or more -- a better look into what is available from Federal or state sources, or is it just through the program changes in culinary have been faster to pick up and therefore more impactful on that private lending number. And if you can relate that, Mike, over to how should we think about bad debt. Is it sustainable down here or what are you doing to keep it so low, thanks.

Sure. Lots of parts to that question. In terms of the bad debt, let's start with the student lending levels. As we have talked about in previous calls, given the amount of third party funding we had from Sallie Mae and reliance on private loans, it has been a moving target to try to forecast and give you some estimates of where the balance sheet will be. We are very happy with our underwriting criteria, our approval process is very strong. We have had no disruption from third party lenders since a year ago and the large disruption in the marketplace.

Our 21-month program in culinary has allowed more access to Title 4. Our new art and design program where we lessen the credit loans and extend the program out, also gives more access to Title 4 loans under Stafford. Our student success programs have been working very well.

So everything we see, has been -- that we're giving full access to students that need it and are committed to their success, and I would look at it more as one, estimate issues on our part in a very cloudy environment. I take it as a very good number that we're not turning away students and we're starting students that have the desire. They still have third party sources.

From a bad debt standpoint, we're very pleased as we talked about last quarter, that our cohort default rate did not move materially. We were up about 70 to 80 basis points year-over-year in cohort default rates. We attribute that to good outcomes for our students, obviously. We attribute that to centralized collections processing and a very, very talented student finance team that the Company has hired and is working with.

And again, I think the student success process that we're working with, our retention has been up across all businesses this year. We're in a very good position. I think the bad debt we continue to accrue bad debt under internal payment plans with a 48% rate that we talked about. But in health and university, Stafford has helped, Pell has helped, and our students are paying back the loans on a very regular basis. We're very pleased with the environment we see for our internal payment plans.

Okay. Thanks a lot.

Thank you, Brandon.

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

Thanks so much. Just a real quick follow-up on the peer qualifier. Is that in place at other schools as well, and are you adequately staffed at the other schools to handle that?

The peer qualifier model has been primarily intended to be used in the university business. It does have application across the other institutions but again, we work to make it work in university. Each of the other schools, I think as you can tell from our results, are adequately staffed for the demand that they are seeing.

They are slightly different in culinary, and art and design. Actually culinary and health to some degree, because they are much more local in terms of how they draw. We have driven culinary to be much more local. As you recall, a year ago we were recruiting nationally and we were -- therefore people were dialing in that way. We tried to move away from that because we found people incurred significant costs when they moved across the country to go to one of our schools.

So it is primarily in university, and the peer qualifier itself is working fine. Our challenge right now is simply staffing up with adequately trained reps to manage the strong lead flow that we have.

Okay. Great. And as a follow-up, I'm not sure if you commented on retention in the different schools. If you could do that I would appreciate it.

Sure, in a nutshell, I'll have Mike give you the numbers, but in a nutshell, our retention is up across the board.

Yes, we traditionally haven't disclosed the retention numbers by school or by segment, but we saw across the board -- again, retention in every one of our segments was up quarter over quarter vs. last year, and retention was improved sequentially Q4 to Q1 as well. To the nature of about 100 basis point improvement in retention overall as a company from last year's first quarter.

Okay, great, thanks so much.

You're welcome, thank you.

And our next question comes the from the line of Amy Junker from Robert Baird, please proceed.

Good morning, thank you so much. Gary, could you talk -- last quarter you mentioned that the HLC was coming to visit AIU in March. I guess to look at the new programs. Can you let us know how that went and when you expect, if you haven't already, to launch those new programs?

Sure. The HLC visited AIU in early March. I was a participant in part of those meetings. What I can tell you is, that the feedback that we got back was good feedback. We're still in the process with HLC, the final report has gone to the higher learning commission of NCA.

We expect a decision from them between now and early June. They are scheduled to meet in early June. And there is nothing that we have heard that would indicate that we should be worried. Except at the end of the day, we still have to wait for them to make their final decision. We have -- as I indicated before, we have a number of new programs, that we have ready to go but we can not put those in for approval until we have actually received the final approval from the Higher Learning Commission.

Once that is done, we're poised and ready to go, we would expect that we get them in and that relatively soon, but again, they will work on the time that they choose to, but soon after that we will be in position to introduce new programs at AIU.

Great, thanks.

You're welcome, thank you.

And our next question comes from the line of Kevin Doherty from Banc of America- Merrill Lynch. Please proceed.

Thanks guys. I want to see if you can just revisit your 2010 targets for the low-to-mid teens operating margin. It seems like with the revenue lagging here, might make that little more difficult. And I know you seen some areas of costs like marketing and bad debt come in a little lighter than some of the original expectations. But just kind of thinking if the revenue continues to lag over the next year, what else are you doing on the cost side that could be an offset there.

Sure. On the 2010 milestones that we laid out at the end of 2007 we talked about last quarter quarter, we made our plan for 2008. We're on our plan for 200, and we believe we will be within range of operating earnings for 2010. Revenue, in university group is trailing. That estimate, revenue in health is exceeding that estimate. Revenue international is exceeding that estimate. And we feel very encouraged by the early revival here of culinary art and design, when you look at the Sallie Mae issues that hit us, that those revenue trend are better.

Revenue maybe short of that ultimate target that we're looking at, and we acknowledge that. Bad debt we feel is an opportunity based on the trends that we're seeing. Admissions and cost per start -- again, we targeted the cost per start number in the guidance we gave you somewhere around $4,400 by the end of 2010, maybe tracking as lows a $4100.

Remember, we achieved that at the end of 2008. We anticipate that cost per start as we fix the admission model, we will continue to see that benefit. So I think from a mix standpoint and a cost standpoint, we don't anticipate any large cost programs, that need to help u., I think the growth is here for us as we continue to grow the model and gain operating leverage that will drive us towards that 2010 milestone. And obviously, we do owe you an update of that 2010 milestone towards the end of this year or as we get into 2010 with our most current thinking.

Okay. And just as a follow-up, could you just talk about pricing opportunities across the portfolio. I think you put through up to 10% increase in university. Could you just confirm that, and did that have any impact at all on the start trends in university?

That is a good question. First of all, when we think about pricing what we do is -- on an ongoing basis in our business as we look at where we are vs. relevant competitors in the market place. And we make moves only if we believe that there is a reason to do so or that there is pricing opportunity.

And we did make changes in the university business, we went up slightly, in some case up to 10%. It was not an across the board increase. It was selective in the way that we approached it. We did do that. I will tell you that based upon our lead flow, the interest that was expressed, in our university business, I don't attribute the start growth to a pricing issue. I attribute it to the executional issue we have with regard to admissions reps.

Okay. Thanks, guys.

And our next question comes from the line of Gary Bisbee from Barclays Capital. Please proceed.

Good morning,.

Hi, Gary.

I guess as I look back over the last six or nine months so, you cut the admission rep head count at university 20% because peer was going to make it more efficient, and now it sounds like you have cut a bit too much and are aggressively staffing up. As I try to think about the trend in university or online margins, is it fair to say that maybe the last two quarters it was a bit higher than it is going to be as you try to balance more rapid growth with profitability, just because of the higher level of head count you're probably going to need?

Hard to give that you kind of guidance by quarter. What we can say is that, again, we are staffing up to are the lead flow that we have. An interesting statistic, if you look at year-over-year in the first quarter to last year, our rep productivity, define that as enrollments divided by reps, is up about 26%. Not only was it an efficiency play in terms of cost but it was an effectiveness play that having the two-step process of the inquiry rep and then the experienced counseling rep, was to drive better conversion rate and better starts. And I think if you look at that productivity in spite of a very difficult first quarter in terms of operational, that productivity is there.

So I think -- what our goal would be is to add reps at a lower rate than the lead flow going forward, and to get that leverage of the peer model as we work through the operational difficulties experienced in the first quarter.

Okay. And --

Gary, let me just add one thing to what Mike said. We felt it was necessary to address the way that we were managing the admissions process. As you recall, with our previous process, we had the highest cost per start in the industry. We had higher turnover, and we managed to lower our turnover rates.

We had -- admissions results on a per rep basis that weren't satisfactory and weren't in line in many cases with what we would see as we benchmarked around the industry. And so we did try to do a number of things all at once. The peer model itself is -- the peer part of things is working, as Mike indicated, our productivity on a per person basis from an admissions point of view is up rather dramatically. Assuming we can replicate that, our goal to add back, but add back more productive admissions reps than did ones we had taken out of the organization.

That is helpful thanks. If I could just sneak one other question in. The culinary business. It sounds like you're doing a great with new starts with the lengthened program. But given the -- as you move more of those kids in and the revenue in any quarter is a lot lower on that program, it seems to me that revenue probably could decrease from this quarter as we move forward. At least for another quarter or two.

Are there cost cuts left there, such that the business can remain break-even or be profitable, or are we likely to have maybe another quarter or two of losses in that business before you cycle out the shorter term higher revenue per quarter students in that program. Thank you.

Sure. From a business standpoint and a leadership standpoint, the business today, very, very good job of taking out the variable costs. And they adjusted the variable costs and staffing models to the population that we saw. At the same time as you know, culinary is a very expensive fixed cost model. The cost of the kitchens and extensive real estate that the Company invested in the past, makes the operating leverage highly dependent on the population.

You also have the 21 month program which is going to dampen the RPS as we extend out the program teach out to 15 months and extend more to the 21 months. We don't give guidance on a quarterly basis and margin guidance on a quarterly basis for any of the business units. But I think the important thing for culinary is stabilized base, good model in terms of population, in terms of cost structure going forward. Build a population with a 13% -- the start you saw in the first quarter, 13% and a lease-plus 25% start in the second quarter. Regain the population, and over time, hopefully, the bad debt expense we have in there at 48% hopefully will turn to be conservative once we get some experience on that and will grow back the business and bring it back to some really strong profitability levels.

Thank you.

Thank you.

And our next question comes from the line of Kelly Flynn from Credit Suisse, please proceed.

Thanks. Couple of questions. First, I wanted to know how the concept of counter cyclicality in the health care area impacts your decisions about adding schools. Meaning, are we investing here in capacity at the peak of the market, and how do you think about that, thanks.

We don't believe that to be the case. When we look at our healthcare business, we have certain -- we have current schools that we have managed well, they are operating basically at capacity. And in some cases we have capped programs, because while the demand is there from students we don't see the ability to make sure those students have a place to go to get their practical experience.

So where that is the case, we have intentionally capped our own programs. So we look at geographic expansion as the best way to continue to grow health. We look at demands in the market place. Each geographic decision we make is based on a great number of factors that we put in, for each city, for each location of the city in terms of demand, and the ability to place students and so on and so forth. So at least for the foreseeable future, based on the data we have at this point time, we think we're good to go. If we see things cap out, if we see demand that begins to fall, we will take a look at our plan, and make the appropriate adjustments, but for the foreseeable future we don't see that.

The important point that Gary said it is not an expansion of capacity in current schools. It is expansion in a new market where the externship sites are strong and where our product quality will be well received.

Additionally we're doing it, we think on a strategic basis of using existing real estate, in either other segment schools or other transitional schools to lessen the cost to the Company of overcapacity, if for some reason that happens. But we believe fully in the outcomes and tying the market to the externship sites that we will gain.

Could I add a couple more on healthcare. You addressed these somewhat before but I am a bit confused. One, the revenue per student on healthcare, why was that down year-over-year. And two, what is the impact on margins of those investments you laid out related to capacity, meaning, can you give usa sense of how margins will trend in healthcare this year in your view, even after those incremental expenses. Thanks.

Sure. I will give you a couple data points so you can build your model. The revenue per student is driven primarily by mix. We have higher end programs, we've seen demand for some of the lower end programs, that from a mix standpoint the population has increased by school has driven the RPS down slightly. If you look at the margin structure, I don't want do comment on a model or give you guidance but obviously there is no revenue associated with that $15 million to $20 million that we spoke to.

We had a very good quarter if you normalize out the number that we gave you in terms of the legal expenses, the $1.5 million, over 200 basis points. I think if you take that out of your model, and look at the current quarter, plus some improvement as population grows, that is the sustainable level for health over the year. Is the first quarter less the adjustment for legal expenses with growing population and more operating leverage.

So that is the sustainable level of expansion or the sustainable level of margin?

I think it is a sustainable level of margin, as you add the population and the starts that we had, the plus 25 start in the existing footprint, you will gain a lot of operating leverage. Remember, that start came on January, so that you don't have the revenue. You have the revenue throughout the rest of the year for that increased start in population over last year, so you will gain the operating leverage.

Capacity-wise, it is a school-by-school decision as to whether there is more expansion capacity with the current footprint or not.

Okay, so you're basically saying even with adding capacity you think you can hold the margins?

I don't want to build a model but I think what I am saying is the first quarter, take out the first quarter legal expense, I think there is some margin expansion in the business for the remainder of the year given the high start and high population we have in the first quarter.

Okay thanks.

If you separate out start ups.

But I am saying -- I am still confused. Are you Xing out the impact of the star up expenses or are you saying net of those, your comments --

No, as start of the comment, if you take out the startups separately from the base business. Take out the startups of $15 million to $20 million with little revenue. Model the base business, X the legal charge with the growing population and high start to get some margin expansion.

Okay. Thank you.

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

Just to wrap up the revenue per student discussion, I think you guys have kind of addressed each segment, but I want to make sure I understand. On the art and design, Gary, you made reference to making changes to allow for more Title 4. Are you basically doing the same thing that you did in culinary and offering a longer term program, and is that what is driving down revenue per student in that segment?

There are a couple of things we're doing in the art and design business. One is, we try to marry up calendars. And that in effect will increase the number of starts we have on an annual basis. In some cases, we are lengthening the programs a bit to allow students greater access to the government funding, yes.

I think in the quarter you also see a reduction of credit loans by the students. So most of the curriculum enhancement and changes will come second quarter forward. In this current quarter, I think it is more given the lending environment in the last year, you see a credit load reduction.

You also have to look at the mix between -- in that segment art and design, you have the colleges, and you have the art and design business as well as a small online business within that. So the mix shift is hard to discern across all those organizations.

Okay, so when you say course load reduction, that is meaning that students are looking for ways to bring their out of pocket costs down?

Right.

Okay. And then, reduction in the international side, is that a -- is it strictly a currency issue?

Okay. It is -- yes, the growth on the revenue side the growth and the population was plus 19. If you look at the Euro, your comparison is about 154 last year to 130. So almost the entire change to flatten out the revenue is FX.

Okay. Fair enough. And then Gary, I wanted to cycle back. You made some comments in your prepared remarks about more senior level management changes that you have made around the university business, and you guys had both retention bonuses and severance payments in the quarter. Can you elaborate a little bit more about what changes have taken place over the last -- I guess, two quarters from a management perspective, and how you're thinking about how your management is sort of set up at the moment?

Sure. Let me just -- I will turn it to Gary for the color on the management team. But just from the stay bonus and severance, remember that was a 2008 charge and that was related to the transitional segments. So last year in the transitional segments as we went through the closure process, we took the charge as we put things into transition, and stay bonuses for the transitional team to stay through educating the last student.

Okay, so neither of those payments were related to ongoing business. Those were strictly related to the transitional businesses?

In last year in the university group, in the first quarter, there was a severance process. We did reduce headcount last year as we disclosed on the call for the university group at AIU, coming out of probation. But there were no stay bonuses last year in the university group. The stay bonuses were solely related to transitional.

I'm sorry, Mike, one more time. I want to make sure I understand. I was asking about the first quarter of 2009.

First quarter of 2009, the only charge in first quarter of 2009 is the $7 million charge for vacated real estate in Gibbs. There is no charge in 2008 -- 2009 related to --

Okay. All right. Thank you.

Sure.

Let me just talk on a macro basis about changes that have been made in the university business. And I step back by saying one of my observations when I came to the Company was that in other of our competitors that have been successful in the space, they have done a terrific job of marrying together a strong academic leadership with strong operational leadership.

I looked at that, looked at some of our leadership and felt like we needed more operational focus and more operational leadership. And that became evident as we moved through the last part of last year into the quarter. And so at both AIU and CTU we brought people in who had operational experience and admissions in some other companies or industries to help us from a operational point of view because we could foresee that we had challenges. We saw it was evident as we came through last year. So, we brought new people in.

What we have tried to do is marry up people who have been long time employees of our company who do a terrific job with people who have come from some other places. And I would say that as I look at it, some of the folks who had -- are long-standing employees in some cases don't know what they don't know, so they get different perspective from people that come in. New people come in, don't know what they don't know about this business. They get great perspective from people who have been here for awhile. We're working through that operationally.

So, we have made changes but we did not, to your point, make changes that resulted in charges taken in the first quarter.

Okay. And then just to be sure I understand you , I think you specifically referred to some additional chief -- or maybe more than one chief in the university business. Can you just speak specifically to

I don't think you heard that correctly. I don't recall saying chief anything.

That is my word but I thought I heard you say that you added management to that -- in the fourth quarter.

What I said was we added at AIU and CTU experienced senior operating leaders in the fourth quarter. I said we enhanced our AIU admissions organization by replacing senior admissions operations leaders and we're working to enhance admissions representative training to improve their efficiencies and improve their conversion rates. I quote myself in saying that, not hiding from anything. We had to bring more talent in and marry it up against our current talent.

The point of my question there is to wonder whether some of that transition might also help explain the execution issues in the quarter, if you were making those many changes to the way that things were being run over there.

Hard to give you a definitive yes or no. I think, clearly, we have a number of moving parts. When you have a number of moving parts, you want to minimize them as quickly as you can, and I think we're working to do that. But we knew that we needed additional talent and we went out and sought that talent. And I believe that talent over time will make a difference in our business.

Okay, I will let you move on.

Fair questions, thank you.

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

Actually, it's Mark Zgutowicz for Marostica. Just a few follow-up questions on online. Hoping you could quantify the remaining headcount that is needed in admissions and what is the current base.

I don't think we have ever given out an actual headcount. We grew our admission staff about 5% in the first quarter. We grew it about 5% here in the past month of April alone. Our goal it to bring in admission staff, slightly below the lead level based on the higher productivity.

Okay, but those that you're looking at bringing on vs. how many you have, can you give it maybe in percentage terms as to how many you have added in terms of capacity you need and what you have left. Just the incremental.

Well, again in terms of capacity, I don't know how -- how to respond to that. Again, 5% growth in the gross number in the first quarter. 5% growth in April, in the one month of April, we are still ramping reps as we go through May and June. And then we obviously calibrate with turnover, the appropriate rep level based on the productivity levels of peer to the lead flows as we go forward on a monthly basis.

Okay, and terms of rep turnover at each brand, can you comment on that.

Sure, turnover continues to improve. Both in AIU and CTU quarter over quarter from last year and quarter over quarter sequentially from fourth to first. Yes, the turnover was reduced. Remember, we did have larger turnover numbers last year as we converted to the peer model. But again, quarter over quarter and sequential quarter, turnover reduced.

In the quarter what did show rates look like.

We don't provide show rates, but across the organization, in every one of our segments, show rates were improved.

And online as well?

Online as well.

Okay. And then, how are April starts tracking they want.

I think we gave you guidance on the quarter that we are looking for double digit start growth in university, we're looking for double digit start growth in art and design in the second quarter. And we're looking for plus 25 growth in culinary. Again, monthly start trends don't mean a lot because you do have calendar shifts so, you can't look at it monthly basis. On quarterly basis, start dates do normalize out.

One final question, on the rep productivity number that you quoted. What reps are you counting in that number, and how did that productivity compare to Q4.

If you -- if you compare the productivity to quarter, the first quarter productivity was much higher than the Q4 productivity. Again, similar to a 20% improvement in the -- from Q4 to Q1, similar to the improvement Q1 last year to Q1 this year. The calculation is simply gross enrolls divided by reps across the business.

Is there a certain tenure of reps that you use in that calc?

That calc is just headcount numbers.

Great, thank you very much.

And our next question comes from the line of Cory Greendale from First Analysis, please proceed.

Hi, Good morning,.

Hi, Cory.

Gary, I had a high-level management question for you. Given that it sounds like some of the issues at university were more execution on a segment basis, can you just give us kind of a high level download on to what degree decisions about sales marketing staffing are made at the segment level vs. corporate level, what corporate -- what corporate's role is in that decision and whether you're rethinking any of that, given some of these issues.

Sure first of all, I step back by and hope you understand that both AIU and CTU are regionally accredited institutions and how they operate really is handled at the institutional level. From a more macro point of view you, there are certain things that we're trying to make happen. Certain things we think is right to scale against. There are certain things that we want to plug the institutions into. We work with those regionally accredited institutions to provide that support to make that happen.

When I step back, part of my job obviously as the CEO is talent, talent management. We have business reviews on a consistent basis with the business. We ask very, very pointed questions on a monthly, if not more frequent, basis around how things are trending in the business that we see from a more macro point of view. And we coach and guide, but ultimately on an institutional basis, because of the regional accreditation, we let those institutions make the call on how they do things.

We are managing, from a shared service point of view with service agreements what happens on a centralized basis. So when you think about peer qualifier, that is something we manage from a corporate point of view, as a shared service, providing services to those institutions and we do manage to deal with that one.

I look at talent across the organization pretty continuously. We have installed a number of different programs, both for training and for assessing talent. And on a going basis, I will make determinations at very senior levels whether we have the right people or not and make the appropriate changes.

Okay. And also wanted to ask, and whether it is fair or not, I think investors tend to compare and contrast various public companies. And I said I think you said X the operational issues, you would have expected double digit start growth for the university. And my question is if you compare that with -- you have got at least one very large competitor that is showing north of 20% start growth.

I am wondering if you think kind of lower double digit is more the appropriate level and you would be managing to that level, or whether you think there is any way that you're at a competitive disadvantage, either because of residual issues from the probation or because you're not able to refresh your programs because of the pending accreditation change?

Sure. I guess I would step back and say that we have had one institution, as you know, and you just referred to it, that has been hindered or hampered because of its history. We're working through some of those. So as we think about in particular AIU and CTU, we would have expected double digit growth, with CTU being higher than AIU.

CTU has been competitive throughout the year and we would have expected them to be competitive as they have come into some things. We are hindered. We are working through some of those challenges, and we look forward to the time we will be able to introduce new programs into the mix for AIU. So reasonably, I would say on a combined basis we might have been a bit short of some of the folks that are out there, but we're making the progress that I would expect, aside from some of the operational issues that we had.

Okay, if I could squeeze one more in. Given -- as you know I have been talking about increasing scrutiny of larger institutions given at least corporate wide you're one of the largest out there, have you gotten any indication that the Department of ED intends to step up the number of program reviews or anything like that.

We have had no such indication.

Thank you very much.

Thank you.

And your next question comes from the line of Andrew Fones from UBS. Please proceed.

This is Jim for Andrew. I was wondering if you could talk about what you see in the graduate employment placement rates, given the tough employment environment, thanks.

Sure, we traditionally have not commented on placement rates, we're pleased with our placement rates we have had. Obviously, the economy will have difficulties for some career seekers to find their jobs. We're working hard to help them. We have increased our career services team. We have increased our career services teamed over 6% in the first quarter to help students find jobs.

Okay, thanks.

Thank you, Jim.

And our last question comes as a follow-up from the line of Gary Bisbee from Barclays Capital please proceed.

One quick one. Can you give us any sense what the start-up model looks like for the healthcare schools. I guess I am just trying to think about that $15 million to $20 million that you talked about. Is that a number that would likely drop year-over-year in 2010, or is there going to be similar type losses in the first half of 2010 likely. Thanks.

I think the start-up model is typically a 5 to 6 quarter break-even model between the time we start, identify real estate, make sure we have all the proper regulatory environment in line, begin staffing, advertising and buildout. The number we gave anticipates startups, some of which will open in 2009. Some of which that will open in 2010. We have commented in the past that our goal within our strategic plan is to open 4 to 6. We have now accelerated that plan.

I think as we go to 2010, we will continue to do startups we have and we will look carefully at what the pace should be in 2010. But now that we have shored up the foundation and we have a good growth basis here, I think as we understand more about our different segments and where to invest, it is a sound investment in health, and I think we will continue to look for new sites. Not expansion of capacity, but new sites as we go forward because the economics and the IRRs are very strong compared to other investment alternatives that we have.

Thank you.

Thank you.

And we have no further questions at this time. I would now like to turn the call back over to Mr. Gary McCullough, please proceed.

The work our team is doing is obviously difficult and challenging work. In some ways, it's like the example many of you have heard about where the crew is trying to change engines on the plane while the plane is still flying. We have successfully worked on some of the multiple engines that we have in this organization. Last quarter, our biggest engine sputtered and coughed a bit. When that happens, passengers on the plane want to make sure the pilot will reassure them and tell them the truth.

I am the pilot of our plane and I want to help you understand that our plane remains in the air and is flying. In many ways it is flying better than it has in the past. But it is not as fast and not as sleek as we have designed it to be. It will be -- we will continue to work at it. We have made meaningful progress in the first quarter towards our goal of consistent, sustainable long-term growth.

And we have got improvement opportunities to deal with in our online institutions. With that, as Mike said, we remain on track to meet our stated objectives for 2010 and we look forward to following up with you when we get together again on our next quarterly call. I thank you very much for your time this morning, and thank you for your interest in Career Education.

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