Perdoceo Education Corp (PRDO) 2009 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the fourth quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. John Springer. Mr. Springer, you may begin.

Thank you, John. Good morning everyone, and thank you for joining us on our fourth quarter 2009 earnings call. With me on the call this afternoon are Gary McCullough, our President and Chief Executive Officer, and Michael Graham, our Chief Financial Officer. Following remarks made by Management, the call will be open for analyst and investor questions. This conference is being webcast live on the Investor Relations section of our website at careered.com. A replay of the call will also be available on our site. Let me remind you that today'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 future 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 releases, 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 securities laws, we undertake no obligation up 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. Please note that in the fourth quarter, we completed the teach-out of six campuses that had been reported within our Transitional segment. Accordingly, the results of operations for these six campuses are now reported within discontinued operations. Retested quarterly financials for 2008 and 2009 for continuing operations on this new basis have been provided as an appendix in this afternoon's release. In addition, the financial and operating results for the fourth quarter and full year 2009 and 2008 include significant items that impact the year-over-year comparability. As a result, unless otherwise noted, the operating and financial measures discussed on this call will reflect results from continuing operations, excluding these significant items. A reconciliation of the non-GAAP discussion to our announced GAAP results can be found as an exhibit in last night's news release, which is also available on our website under Investor Relations tab. Finally, as a reminder, we will be hosting an Analyst and Investor Day tomorrow, February 18, stating at approximately 1 PM. Presentation materials and a live webcast will be available, and can be accessed by visiting the Investor Relations section of our website. With that out of way, now let me turn the call over to Gary McCullough.

Thanks, John. Good afternoon everyone and thank you for joining us on this afternoon's call. In keeping with the way we've historically handled these calls, I'm going to start with a brief overview of our fourth quarter and full year 2009 results. When my remarks are concluded, I'll turn the call over to Mike Graham, Executive Vice President and Chief Financial Officer, who will provide more detail. I want to take a couple of minutes and provide a bit of perspective as we enter 2010. After all, we have been through a lot as an organization over the last three years. In that time, we have made great strides in a repositioning the Company for sustainable growth and we've overcome a number of challenges along the way. This has required a number of changes across our organization. Changes that have impacted each and every one of our institutions. However, one thing hasn't changed. That is the unwavering commitment of each one of our nearly 13,000 employees toward our purpose of changing lives through education. In 2009 alone, we enhanced the lives of more than 116,000 students. And last year, we graduated over 47,000 students, the highest number of graduates in one year and our Company's history.

By this time next year, we will have graduated more than 500,000 students since the Company's founding. As I approach my third anniversary with the Company, I can tell you this a legacy that makes me proud and makes each one of our employees proud. Shortly after I arrived a few years ago, we developed and adopted a set of core values by which we would strive to operate. The first two state that we will be student centered and employee focused. When the going gets tough, some organizations and their leaders develop a kind of situational amnesia and forget their values. Other organizations, like the Company we have worked closely to mold over the past three years, hold their values more closely. It's our employee-focused approach that has enabled us to reduce voluntary employee turnover by 68% since 2007. And it is our collective student-centered approach, coupled with the adaptability that we have shown as an organization, that are behind the strong financial performance we are reporting today.

Now let me turn to our results. In the fourth quarter, student population grew 21%, to over 116,000 students, marking our seventh consecutive quarter of accelerating the student population growth. Our primary objective in 2009 was to generate consistent growth across our core institutions. And in the fourth quarter, AIU, CTU, Health Education, Culinary Arts and International all experienced double-digit growth in student population. This broad-based acceleration in population growth drove another meaningful improvement in our financial performance. In the fourth quarter, revenue grew by 19%. Operating income was $97 million, and grew over 95% from the fourth quarter of 2008. Operating margins expanded by 740 basis points to 19.1%. And earnings per share from continuing operations increased 80%. On last quarter's call, I mentioned that on a full-year basis we were on target in 2009 to hit the low end of our 2010 operating income milestone range of $225 million to $270 million. Due to continued strong performance in the fourth quarter, our operating income for 2009 was $252 million, right at the midpoint of the 2010 milestone we communicated in the first quarter of 2008.

In addition, we completed the teach-outs of six institutions within our Transitional segment in the fourth quarter. The teach-out process is largely complete. Only AIU Los Angeles remains within the Transitional segment. The decision we made in 2008 to teach out these campuses was very difficult, but it was the right thing to do for the Company. The process was long, challenging and expensive. However, we elected to teach out the schools because it was also the right thing to do for our students. We provided them the opportunity to complete their education with us, rather than simply closing the doors and walking away. I would like to extend a public thank you to educators and administrators involved in this process over the last two years. They conducted themselves professionally and they exemplified our commitment to being student centered.

Now let me turn to the highlights of the quarter by segment. Health Education continued a strong track record of growth with a 32% increase in the student population. In the fourth quarter, we furthered our ground expansion strategy by opening four new health campuses, bringing the total number of new health campuses opened in 2009 to seven. In 2009, we continued to expand geographically by adding to our East Coast footprint to the conversion of two transitional schools, one in Boston, Massachusetts, and one in Farmington, Connecticut, and through the opening of a new campus in Orlando, Florida. We also opened our first Health Education campuses in Michigan, with one in Dearborn and another in Grand Rapids. And we began to expand further west with the addition of campuses in Phoenix, Arizona and San Antonio, Texas. The seven new health campuses openings represent a 29% increase in the number of health locations in 2009 and provide a strong platform for future growth. Within the University segment, student population grew 23% in the fourth quarter, while new student start growth accelerated to 23%. Over the last 18 months, we made a number of significant business operations changes. Those changes enhanced our effectiveness and efficiency. I said on last quarter's call, we expect a continued strong new student interest. And in the fourth quarter, new student start growth improved to 14% in AIU, and 30% in CTU. Additionally, on last quarter's call I indicated we would maintain higher rates of advertising investment as we exited the year. Based on visibility into the first couple of months of the year, we expect the first quarter new student start growth to continue to accelerate at both AIU and CTU, giving us good momentum as we start 2010.

Now let me update you on the status of AIU in the Higher Learning Commission or HLC. The HLC has completed its advisory visit, and AIU has been advised that the visiting term will report to the Higher Learning Commission in the first quarter. Meanwhile, AIU is continuing to prepare for the focused visit, which has yet to be scheduled. Beginning this month, AIU has completed and introduced the new credit hour structure for its higher level bachelors and masters degree programs. That process has been underway for quite some time. The new student structure is in place for all new students as of the February student start, and is also available to existing online students if they so choose. I want to re-emphasize something that AIU has said before. AIU has always been, and will continue to be, committed to offering educational opportunities that are in accord with the best practices of American higher education. As investors, you can read the press releases and the public statements. But what you don't see is the effort and the tireless commitment of Steve Tober, AIU's Chief Executive Officer, and the AIU team. 2009 was a challenging year at AIU on a number of fronts. I would like to thank the entire team for their hard work and dedication in navigating these challenges while also delivering on AIU's commitments to its students in magnificent fashion. AIU's new student enrollment numbers and improved business fundamentals are tangible results of their team work.

Within Culinary Arts, student population grew 31% in the fourth quarter, up from 21% growth in the third quarter of 2009. This was due in part to the new 21-month program, in which over 20% of our culinary student population is now enrolled. Last month, we transitioned the Le Cordon Bleu name at almost all of our campuses nationwide. As I said last fall, this will give us a more unified brand presence and allow for greater marketing and communications efficiency. Within International, we ended the year with another double-digit increase in student population. This was a testament to the quality and strength of our INSEEC and Marangoni institutions in their markets. And in 2009, we made investments at each institution to ensure sufficient capacity exists to accommodate their continued growth. One area that remains a work in progress as we begin the year, is Art and Design. We made important changes to align calendars and curriculum across these institutions, which helped stabilize the student population. In 2009 we grew operating margins to 13.8%. However, it's clear that we have got more work to do to position Art and Design for future growth. We will talk moe about Art and Design tomorrow. Overall, I continue to be proud of the progress we have made as an organization. We reached our original 2010 milestone objectives one year early, and we have positive momentum as we begin this year. Now let me turn the call over to Mike who will provide you with more detail on our financial results.

Thanks Gary. As you review our results for the fourth quarter and the full year 2009, let me again remind you that in the fourth quarter we completed the teach-out of the six campuses that had been reported within the transitional segments. The results of operations for these six campuses, including a non-cash charge of $44.1 million, which is our estimate of the aggregate remaining real estate lease obligation which will be paid over next nine years, are now reported within discontinued operations. Discontinued operations also reflects the results of operations for the campus that had ceased operations or that were sold prior to the fourth quarter of 2009. This is the culmination of the closure process for these schools, which had experienced over $200 million of operating losses in the past five years. As Gary mentioned earlier, the AIU Los Angeles campus now remains the only school operating within the transitional segment. Also, as you review our results, there are a number of items impacting our year-over-year comparability, for the fourth quarter the full year 2009, which are highlighted in the table in the press release and available on our website careered.com under the Investor Relations tab.

For the fourth quarter of 2009, GAAP operating income of $97 million included unused space charges of $14.3 million or $0.11 per share. $5.3 million of this charge was in our Transitional segment, $3 million was in our AIU segment or our University segment and the remainder across the business units, $2.2 million, or $0.02 per share benefit, resulting from the finalization of our estimated annual incentive plan payout due to our operating plan over performance, which we discussed in the third quarter. The reversal of $2 million is spread similarly to the details we gave you in our third quarter for the original charge. And finally, a $12 million, or $0.09 per share benefit, related to a payment we received for the termination of certain insurance policies. That is reported within the corporate segment. For the fourth quarter 2008, the items were a $1.9 million, or $0.01 per share charge for unused space; severance and [stay] bonuses of $1.5 million, or $0.01 per share; and $3.6 million, or $0.03 per share in charges, related to legal settlements. Unless otherwise noted, my discussion of our earnings and the results during the remainder of this call will exclude these items.

Now, onto our results. In the fourth quarter of 2009, our revenue was $507.8 million, an increase of 19% over the prior year quarter. Operating margins improved to 19.1% in the quarter, representing a 580 basis point improvement over last year's fourth quarter. For the full year of 2009, revenue increased 11%, and full-year operating margin 13.7%, the highest level of operating margin since 2005. Now let me review the segments. In University, fourth quarter revenue was $216.5 million, an increase of 22% from last year, driven by 23% growth in both student population and new student starts. Operating income was $58.4 million in the quarter, an increase of 35%, from last year's fourth quarter, as operating margins expanded by 260 basis points from last year's 27%, the seventh consecutive quarter of operating margin improvement. As Gary mentioned earlier, we continued to have strong new student interest in the fourth quarter, and invested additional advertising dollars accordingly. While this higher rate of advertising investment dampened the rate of margin growth in the the fourth quarter, we expect this investment to provide another sequential increase in new student start growth for both AIU and CTU in the first quarter of 2010. Revenue for AIU was $99.8 million, an increase of 14% from the fourth quarter of 2008, reflecting a 15% increase in student population and a 14% increase in new student starts. AIU operating profit in the quarter was $23.9 million, up 28% versus last year's fourth quarter, resulting in operating margins of 23.9%. CTU finished the year with another strong quarter, with revenue of $105.5 million, up 33% from the fourth quarter of 2008, reflecting a 29% increase in student population and a 30% in new student starts. Operating profit at CTU was $31.7 million in the fourth quarter, up 39% versus last year. Operating margin was 30%, up 130 basis points over the prior year.

Now for Culinary Arts, revenue increased 18%, to $91.1 million, on a 31% increase in student population. Culinary Arts operating income was $15.4 million in the fourth quarter, as operating margins expanded to 16.9%. As you might recall, this fourth quarter was the first full quarter benefiting from the elimination of royalty payments as a result of the purchase of the Le Cordon Bleu North American rights in September. This added 500 basis points of margin in this quarter. Health education finished the year with a 29% increase in revenue, driven by a 32% increase in student population, Operating income was $16.1 million in the fourth quarter. And operating margins were 18.8%, which included $5.3 million in losses in the quarter from the seven start-up campuses. Fourth quarter 2009 for our International segment, the revenue was $45.1 million, up 26% from last year's fourth quarter, including approximately $2.1 million of benefit from foreign currency. International operating income was $8.9 million in the fourth quarter, and this operating income included a $3 million pretax charge to correct prior period accounting errors. Excluding this charge, operating margins would have been 26.4% in the fourth quarter, up 370 basis points from the same period last year. Art and Design revenue increased 3% in the quarter as student population was essentially flat to last year. Operating income was $12.7 million in the fourth quarter as compared to $10.9 million in last year's fourth quarter.

Let me update you on our financial position. The Company continues to have only modest use of our internal student payment plans. With total balances as of December 31, 2009 of approximately $44 million, up $7 million sequentially from the third quarter and $22 million higher than last year. Total bad debt expense as a percentage of revenue was 3.5% for the quarter, and our annualized DSO was 17 days or just slightly higher than the 16 days a year ago. And while they are still being finalized and subject to challenge, our preliminary 2008 two-year [cohort default] rates do not reflect a dramatic change or a large increase over 2007. In total, our final two-year cohort default rate for 2007 was 8.9%, and our preliminary 2008 rate was 10%. Turning now to cash flow, for the 12 months ended December 31, 2009, our operating cash flow was $288.3 million. Capital expenditures were $74.1 million or 4% of revenue. And free cash flow, defined as cash flow from operations less capital expenditures, was $214.2 million for the 12 months ended December 31, 2009. That cash flow was up $132.8 million from last year.

Under our stock repurchase program, during the fourth quarter of 2009 the Company repurchased approximately 800,000 shares of our common stock for approximately $75 million at an average price of $26.54 per share. During the year 2009, the Company repurchased approximately nine million shares of its stock for approximately $200 million, which is essentially all of 2009's free cash flow at average price of $22.23 per share. And in January of 2010, the Company purchased an additional 1.7 million shares, under a [Ten B-5] plan for approximately $40 million. So as of January 31, 2010, the Company had approximately $155.5 million of authority available, which, together with the additional authorization of $250 million approved yesterday by our Board of Directors, brings the total amount [now] available for repurchases to $405.5 million. This additional authorization reflects the Company's confidence in our strong cash flow generation, and the ability to return cash to shareholders as our institutions continue growing in 2010. As John said, I want to again remind everyone that we will have an Investor and Analyst day tomorrow, February 18, and we'll broadcast the event live via webcast for those that cannot attend in person. We will have the presentation materials available on the Investor Relations section of our website, and the webcast event will start at approximately 1 PM Eastern Time. And now, let me turn it over to Gary for a couple of quick comments before we open it up to your questions.

Thanks, Mike. Before we move to the question-and-answer portion of our call I want to do what a number of my peers in the sector have done, and say a few words about the recently completed negotiated rule making process engaged in by the Department of Education and a variety of other parties. I do this recognizing there is little I can add that most of you haven't already heard. We had members of team in Washington for each of the sessions, and we have a dedicated team studying each of the proposed rules. Like others in our sector, we see two areas where significantly more work needs to be done -- incentive compensation and gainful employment. I think it's important to reinforce several things. We are still early in the process. There is still time before the Department of Education publishes proposed rules for comment. The final rules won't be in effect until at least July of 2011. The rules, as proposed, are complex and may be difficult to implement. Our Company fully supports doing what is in the best long-term interest of students. Accordingly, we will do -- we'll use whatever means is necessary to share our ideas and our concerns with the department before they publish the proposed rules. As I said, we have an internal team studying the proposals. Once the ideas proposed are -- as the complex draft rules are better understood, we will be open with you regarding any potential business impact we see.

On incentive compensation, our hope is that criteria will be established that are clear and consistent and that achieve a level playing field across the range of proprietary providers -- excuse me, [post] secondary providers. We believe our current practices are sound, as they are focused on positive student outcomes and graduation. We do not believe the elimination of safe harbors without the replacement -- without a replacement to provide some level of specificity is helpful. In fact doing so, we believe, would create an environment of increased ambiguity and may actually increase differences in practice due to interpretations of the statute from institution to institution. We will work cooperatively with other post-secondary institutions and with the department to help develop a solution that is clear, concise and student-outcome focused. Now as it relates to gainful employment, we understand the department's desire to ensure that students are protected. However, in addition to concerns about the department's authority to adopt such rules, we are deeply concerned that the analysis and the discussion of the impact of this proposed rule on students and on post-secondary education is incomplete. As proposed, we believe the gainful employment language is complex and flawed and it may have unintended consequences. If adopted, it could result in public policy that does more harm than good for those that the department intends to protect. We believe it could reduce access to higher education for a wide spectrum of students at a time of high unemployment, when many students are seeking to build and retool their skills to be more relevant in today's marketplace. Most at risk, are those who have historically underserved or not served at all by traditional colleges and universities. The proposed gainful employment rule could exacerbate already high [employment] of ethnic minorities and lower income working adults because the regulations would encourage career colleges to abandon these student cohorts.

Again, we will work with others in our sector to voice our concerns with the department. Meanwhile our internal teams will analyze in the coming weeks and months, the potential impacts based upon [a lot of the] interpretations of the proposed rule. As you know, this requires conducting analysis on a program basis. To put that into perspective, the proposed rule will require us to analyze moe than 1300 programs. While the proposed rules are not clear in general, it's apparent that our Culinary and our Art and Design programs would be more impacted than Health and University. So as I said, in keeping with our practice, we will be open and transparent with you at the appropriate time. I look forward to seeing many of you tomorrow at our Investor day. We will share our strategic initiatives and provide updated financial milestones. You will also hear about our plans for the next stage of our evolution, changes we believe will continue to make us even better at delivering and improving upon our purpose of providing life changing education. As today's call is focused primarily on our strong fourth quarter, I would appreciate your help in limiting your questions to our results. And we can discuss the broader issues tomorrow. With that, operator, I will ask that you open the call for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Bob Craig from Stifel Nicolaus. Please go ahead.

Good afternoon everybody.

Hi Bob.

Gary, just one question regarding the gainful employment issue. Have you guys computed or have handy graduate CDRs in areas like Culinary and Art and Design?

Yes we do, Mike is going to answer that question for you.

Okay, great.

Bob, we've got some visibility to the two-year rates. We've looked across our portfolio. Very encouraged -- other people have disclosed the same thing. Very encouraged. Our two-year default rate on Culinary is approximately 1.7% for those students who graduate. Overall, our culinary default rates probably dropped by about 60% overall as a Company when you look at the graduate-only rates.

That's helpful. Thanks. You mentioned a couple of times increased marketing spend. Could you take a little bit of a forward look into 2010 and what are your plans there? And then also deal with where you ended the year in terms of [RETFOR] size and turnover and productivity?

Sure. I won't give you too much on 2010 because we do intend to share some milestones with you. I'll remind your that this is the first year that we have really spent heavily in the fourth quarter, and so our run rate in the fourth quarter going into the first will be more normalized. You will get some view on that. I think going forward we will continue to see some savings. We didn't have the same savings that other people have had because our mix is heavier online and into internet sources than it is nontraditional media sources. In terms of the actual spend, year-over-year for advertising for the quarter was about $17 million higher than it was the year before.

Bob you asked a question about RETFOR size. We don't give out the numbers, as you know, but I will tell you we are up about 3% of the fourth quarter of 2009 versus the fourth quarter of 2008.

Thanks, guys. I will turn it over.

Our next question comes from Jeff Silber from BMO Capital Markets. Please go ahead.

Thanks so much. In your prepared remarks, you talked a little bit about the new credit hour structure. Can you just remind us exactly what that entails?

Sure. The credit hour structure that AIU has had in -- consistently for the past, I think, six or eight years was a nine-credit hour course structure. So there were some questions about how that translated on a couple -- how that translated and how it's compared to other institutions that [have] similar programs. What we have done is we've gone from the nine-credit hour course structure to a four-hour, a 4.5 hour credit hour structure so we've broken up the nine-hour credit course to [four] so it's [more comparable.] One of the reasons we did that frankly, and we've been working on it, was because we saw a transfer of credit issues It was an issue that had come up with some our students. Even before this began, it came up in the fall. We had been working on making the changes to that 4.5 hour credit load. It's just an easier transfer of credit situation.

So it really had nothing do with the whole [Negrev] process and credit hour definition?

No, this was something that had been identified as a student dissatisfier sometime ago. We were working on it. It has nothing to do with the things that happened recently.

Okay, great. And I know you wanted us to keep the discussion to the quarter. But since you did mention the HLC update, can you comment on the letter that the OIG sent regarding your AIU's reaccreditation and some of the issues involved there?

Give me more to go on there, Jeff.

I'm sorry. There was a letter, I think back in December, where the US Department of Education's Office of Inspector General was criticizing the HLC regarding their decision to re-accredit or accredit AIU when they switched accreditation.

Right.

And I guess the OIG was basically saying the HLC was somewhat deficient in that process. I don't know if you have any color on that or any insight on that.

I'd urge you to go back to the press release that AIU put out right on the heels of that. Candidly, that's an issue that exists between the Higher Learning Commission and the OIG of the Department of Education. And so at the end of the day, as I said in my prepared remarks, AIU stands by the way it operates and we will let them hash that out.

Okay, fair enough. Thanks so much.

Our next question comes from Sara Gubins from Bank of America. Please go ahead.

Hi, thank you. In your G&A expense, it was down sequentially quite a bit. And I'm wondering if there were a lot of administrative costs that were cut out there or if that is something that might be seasonal.

I think if you look back to the -- Are you talking third quarter to fourth quarter?

I am. Yes.

The biggest thing I would do, is I would go back and normalize the third quarter for the bonus that we spoke of last quarter. Last quarter we had in our normalization table, the bonus charge of approximately $20 million. I believe that if you normalize out, the sequential change is not as large.

Got it. Okay. And then quick a question gainful employment related. Have you been able to do any work to understand what the use of deferral and forbearance is by your graduates?

No, again, we are taking a comprehensive view of everything. We rae looking at every program, cohort default rates all the data we have. To the extent we have the data we will look at it, but we have just begun the progress program by program, and I don't have the data on deferments or forbearance by forbearance.

Okay. And then just last quick question. I'm trying to understand the dynamics of revenue per student trends in AIU and CTU. I think you had mentioned in particular and online that tuition had increased -- you had done tuition increases. If I remember correctly, it was around 10% in total. And yet we don't see that in the revenue per student. So if you could just discuss the dynamics there that would be helpful.

Sure, I think we will spend more tomorrow. A couple of things to consider. One, we've talked historically about a mix shift. And if you look at it, we continue to have mix shift towards associate but it is moderating. We indicated we did take a price increase last year in January between 0% and 10%. Remember, we did also ay that that price increase was only for new starts and was not for the existing cohorts. So that will also take a little bit more time to get through the process on an RPS basis. I think what you are seeing is the deceleration of the RPS and now starting to increase RPS quarter over quarter for both AIU and CTU especially as we enter 2010.

Okay, thank you.

Thank you, Sara.

Our next question comes from Gary Bisbee from Barclays Capital. Please go ahead.

Hi guys. Good afternoon. I guess you will give us more on 2010 outlook tomorrow, but the schedule shift that you had in Culinary and in Art and Design this year, are we likely to be at sort of a normalized level versus the 2009 as we into 2010? Or are we likely to have those types of changes again?

I think if you look at Art and Design, I think you will still have noise in the first quarter because it annualizes out on April 1 I belive. We did not have changes from a calendar standpoint for Culinary. What we did have is a shift from the 15-month program to the 21-month program. As Gary said, we now have about 20% of our students there. We have -- every one of our institutions now has a 21-month program. So you will continue to see on an RPS basis for Culinary, the shift into the 21-month program and some deceleration in RPS for 2010.

The -- I thought there was academic calendar timing shift that was supposed to help this quarter but hurt last quarter. I guess part of the question is in Culinary specifically --

No there --

is that not right?

You may be recalling last year in the third quarter, fourth quarter, we did state that we had a non-comparable start date between between 2008 and 2009. But the start date of -- excuse me 2007 and 2008. The 2008 and 2009 start calendar are fully aligned. So last year in our call at this time, we spent a lot of time talking about the shift between Q3 and Q4 starts.

Yes. Okay. All right. That was just normalizing then. And then I guess just a couple of more clean-up questions. I missed the number you gave us for the losses from the start-ups within Health Care.

Sure. The loss for the quarter was about $5.3 million, and the cumulative loss for the year was around $19 million.

Just one last question, the -- I know you don't want to get into gainful employment too much, but do you feel the risk of this going in is such that you need to change strategy around whether it's what programs you are going to add to campuses or where you would start new campuses until you get more clarity? Or is it pretty much business as usual and hopefully we will be able to work it out whenever we get more color on that?

I always hesitate to say business as usual. What I will say is we have stepped back. We're looking at what is out there at this point in time and our teams are doing assessment. Ideally, we will get to a point that we can influence where things are at. But we will be prepared to go whatever direction we need to go at the appropriate time.

Okay. Thank you.

Our next question comes from Amy Junker with Robert W. Baird. Please go ahead.

Hi, thanks. Gary, if we can go back to the rep force. You have made a number of operational improvements there over the last several quarters.Do you feel that you are where you need to be at this point or are there still improvements that can be made going forward?

That's a good question. I again, I'll go back and say that I always think there are improvements that need to be made. We've made improvements, we see greater productivity. We've seen decreases in turnover in our rep forces.We've made some of these changes. And as you know, early last year it was pretty challenging as we did them. We will continue to train our organization, we will continue to do those things that are necessary and evolve. I think from a sheer numbers point of view, one of the things we've done now, is we have looked across the various functions that we have, and we're prepared to continue to hire as our population increase and as demand warrants doing so. But for the time being we think we are in a pretty good place.

And then just as the economy improves, what can you do to keep the turnover down? Because it is obviously it's probably a little bit easier in this environment. Do you maybe hire a bit more, train a bit more than perhaps you need thinking that you might see greater turnover?

I will -- we will talk about some of this tomorrow. But I will tell you that as an organization, we have stepped up training. We have looked across the range of things that we think are employee satisfiers and work to do a better job across the board. And so we will continue to do those things. I think you could [certainly] say it's a challenging environment out there for people to go from. But I would remind you that in this industry, it's been a pretty robust environment. We've managed to hold our own and keep our turnover down.

Great --

I think, Amy, the other thing to think about is from a rep standpoint, within our rep comp structures we've talked about before, our payments to our reps are on successful completion of programs. And so as these students continue to graduate, and you heard the numbers we gave out, our reps will be compensated for the graduation. So we are hoping that as the economy turns up and students continue to graduate the reps will be rewarded for outcomes.

Great. And then just one quick one on Culinary, and I'll pass it over. Gary, last quarter you talked about reducing the size of some of the culinary schools. How many of those do you think you need to do that for? Is that more on a go-forward basis? I'm just curious what type of the amount of investment that would be required to do that.

Actually, I'll give this over to Mike as well, because he has got the numbers on this.

Yes. We will share a little bit tomorrow. I think that there is some optimization to [made] of Culinary. And we've done a great job on real estate in the last few years. We continue to look for optimization. If we can spend money, optimize a campus and reduce some excess square feet, we will do that. That said, we do not spend money to simply free up real estate in Culinary. And with our population growing, you saw the start that we had in the population up. We are doing well to fill the existing capacity we have. So we don't anticipate any large reductions in capacity in Culinary, the more optimization plays.

Great. Thank you.

Thank you.

Our next question comes from Corey Greendale from First Analysis. Please go ahead.

Good afternoon. First question, just for our own planning purposes to set expectations, are you going to give specific 2010 guidance tomorrow or just kind of longer term, three to five-year target?

Consistent with what we did a year ago -- two years ago, we will definitely give you long-term guidance and milestones for which you can model against . We think we did a good job last time, and as you know we beat those a year ahead and delivered on our commitment. I think we will also give you more color on 2010 given our carry-in population and some of the strength of our business

Okay. I wanted to revisit the question that Jeff asked about the change in the AIU credit hours. Is there any change resulting from that, either from the point of view of students? Anything that would make the program more or less attractive because of the change or any financial implication. Or is it simply a function of splitting a single class into two classes and it doesn't affect how the student would go through the program with the [comps] or anything?

There is no material impact to our financial statements in terms of revenue or recognition of revenue or the amount of revenue that would be involved. As Gary did speak to, there is a better ability to potentially transfer credits which could translate into more students for the University. There is also a program [adequately] within the 4.5 hour structure that is a bit easier to decelerate. [University] has traditionally been an accelerated program and at a 4.5 structure, it gives you more flexibility from a course load and the ability to go more part-time [with] deceleration, which could also help the institution continue to grow its population with its great outcomes.

Okay. And then I noticed on the balance sheet there is an account now. Long-term Receivables. Is that just the amount of internal loans you provided net of reserves?

Exactly. When we first started originating the program, the amounts were immaterial and we did not have good charity in terms of the tenure of the loans. Now that we have been through the program for over a year, we have good clarity on what is current and due and what is long-term due, so it's a reclassification.

Okay. I appreciate it. Thank you.

Thanks.

Our next question comes from Kelly Flynn from Credit Suisse. Please go ahead.

Hi, it's Patrick [O'Grady] for Kelly. As we look ahead, should we expect any more charges related to the transitional school that is still operating?

Yes. We will see trends -- you will see charges in 2010 to shut our AIU LA campus. And then as we go forward over the nine years, as we've talked about before, what you'll have is you will take that liability from a discounted to a full value and accrete that. In our guidance that we gave on 2010 we talked about that being some place between a $5 million and $10 million number every year, all below the line in Discontinued. So Transitional will close out this year with AIU LA, and then AIU LA does close, that will move down to Discontinued Operations. So after 2011, there should be nothing in Transitional and everything will be below the line in [Disco].

Okay. Can you provide some color on average student debt levels and how that varies at the different schools generally, or if it's proportional to cost?.

Again, I think we are working on the details as it relates to Negrev and that to us is an issue about the Negrev. The process is early. I don't think right now for the 1300 programs and the debt levels for each program we are in a position to share that. We will be transparent with you and we'll give you some more information about different information about placement outcomes of our students tomorrow at the Investor Day.

Okay. Perhaps you will address this as well tomorrow, but given the expansion efforts in the Health segment and the strong demand there, what does it look like in terms of operating margins and how that should trend in that segment as we move through 2010?

That's a great question for tomorrow. It will be answered.

Thanks a lot.

Our next question comes from Suzanne Stein from Morgan Stanley. Please go ahead. Suzanne Stein your line is now open.

She dropped off. Next person.

Our next question comes from Bob Wetenhall from Royal Bank of Canada. Please go ahead.

Congratulations. Nice job.

Thank you.

I was curious, and maybe you will address this tomorrow, but you've done a very strong job in improving operating margins and a pretty comprehensive job in managing through the turnaround program. And just from a very high level, and not speaking about guidance, do you expect kind of like a 19% operating margin to be sustainable doing forward?

Again, let's save that for tomorrow. What I would ask you to do as you look at your models, and look at the seasonality of our business and how our fourth quarter margins typically differ from the rest of our quarters. Remember, our International units are closed in the second and third quarter. It is our highest revenue quarter, so there is seasonality that may not make the fourth quarter operating margin a consistent one based on the modeling you need to do by quarter.

Fair enough. And just one follow-up. You said that first quarter had gotten off to a strong optimistic start in terms of enrollment. Can you put some parameters around that?

I think as Gary said, we see accelerating growth over the numbers that AIU and CTU experienced in the fouth quarter. And AIU was about a 14% start and CTU about a 30% start.

That's terrific, thank you very much.

Thank you.

Our next question comes from Mark Marostica from Piper Jaffray. Please go ahead.

Thanks, it's actually Mark Scitovich in for Marostica. Just a quick follow-up on the marketing spend directed at online. Just curious, how does that sort of trend through 2010? It sounds like in the back half of 2009 you have been spending incrementally more there. I think you mentioned that spend -- that general spend would come off in Q1. I'm just curious if you are looking at just specifically online and maybe more specifically AIU. How much -- what does that trend line of spend look there and it's directed at program?

Again, I think it gets more normalized. So the fourth quarter was abnormal on a comparative basis versus the previous year. I think on an absolute basis, it's more normalized. And as we go into 2010, we will see that normal spend level again spent behind very high student demand and high population growth that we had. So you will see that more metricically driven than the outlier of the fourth quarter.

And as that drops off, do you anticipate seeing a sustainable trend on starts or -- I mean how do you see the spend correlating with the start growth that you are seeing there.

I don't think I see a dropoff. I think -- what we had traditionally done was to drop off the fourth quarter advertising and pull back based on holidays, based on student interest and calendars, and this quarter based on the high amount of student interest we had in our institutions. We continue to invest and we continue to believe that was a great investment because of the results we are seeing. I wouldn't say it's a dropoff. I would just say that we have picked up the spending on a non-comparable basis in the fourth quarter, which will carry into 2010.

Okay, great. Thanks. That's it.

Thank you.

Thank you.

Our next question comes from Suzanne Stein from Morgan Stanley. Please go ahead.

Hi. This is Christina [Gomez] for Suzy Stein. Sorry to drop you earlier. Thanks for taking my question again. Would you mind giving us a little bit of color around student financing, particularly for some of these programs that are a little bit higher debt? I'm curious if you have examples of ways of that students lower their own debt burden if they so want to. Do you know of any situations or programs where they tend to have cash payment or more corporate reimbursements than average, that sort of thing?

Again, I think that's -- we answered it a bit earlier in terms of what that is. I think it's a pretty complicated, detailed question, a little premature on Negrev and on [Tomales]. Let me defer that one for now.

Our next question comes from Jeff Silber from BMO Capital Markets. Please go ahead.

My question has been answered, thanks.

Okay.

We have no further questions at this time.

I want to thank you all for joining us on this call. As I said, I look forward to seeing many of you tomorrow at our Investor Day. Again, we intend to share information on our strategic initiatives and we'll probably provide updated financials. It sounded like people are interested in understanding both the short-term and the longer term, so we intend to give you some color on that. We appreciate the time you spent with us this evening, and we'll see you tomorrow. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect