Perdoceo Education Corp (PRDO) 2010 Q1 法說會逐字稿

Welcome to the first quarter 2010 earnings conference call. I will be your operator for today's 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. Jason Friesen. Mr. Friesen, you may begin.

Thank you, Hilda. Good morning, everyone, and thank you for join on our first quarter 2010 earnings call. With me on the call this morning, are Gary McCullough our President and Chief Executive Officer, and Mike Graham, our Executive Vice President and Chief Financial Officer. Following remarks made by management the call will be open for analyst and investor questions. This conference call is being webcast live on our Investor Relations section of our website at careered.com. The replay will be available on our site. If we do not get to your question during the call please call our investor relations department at 847-585-3899.

Now before I turn the call over to Gary, let me remind you that yesterday's press release and remarks made today 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 states. These risk 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, 2009 and our quarterly and other filings with the Securities & Exchange Commission. Except as expressly required by the security laws we undertake no obligation to update those risk factors or publicly announce the results of any of these forward-looking statements to reflect future events, developments or changed circumstances or for any other reason.

Let me also remind you, as we discussed at our analyst and investor day that our University results now include the schools previously in our Arden Design segment. In addition, please note that the results of operations include one remaining transitional school, AIU Los Angeles. All other transitional schools are now classified in discontinued operations. We expect to complete the teach out of AIU Los Angeles within the second half of 2010, at which time it, too, will become part of discontinued operations.

Now let me turn the call over to Gary McCullough.

Thanks, Jason, and good morning, everyone. Thank you for joining us on this morning's call. I'll begin by summarizing the results of the first quarter 2010. I'll then be followed by Mike Graham, our Chief Financial Officer, who'll provide more details on our financial performance. The first quarter marked a positive beginning to 2010. We continued the momentum we've generated over the past two years and our first quarter performance positions us well to reach of the 2010 growth expectations we shared at our analyst and investor day in February. As we indicated then, we believe our growth opportunities and our focus on executing our key -- our priorities will continue to deliver improved results and sustainable value. In addition, to our organic growth in the first quarter, the Company has opened four new health schools this year, two in March and two in April, and our International segment closed on a small acquisition in Europe. We also returned cash to shareholders through the repurchase of our stock. This year, through April 30th, we repurchased a total of $140 million worth of our stock.

Now let me turn to our results. Total revenue increased by more than 22% in the first quarter versus the same period in 2009. Our new student starts for the quarter were up 32% versus a year ago. This was consistent with the growth expectations communicated at our analyst and investor day, where we said we expected first quarter new student starts to exceed 25% growth. Further, we set a student population record of almost 117,000 students, a 23% increase over the first quarter of 2009. As a result of our record student population and strong first quarter new student starts, we generated operating income of $88 million, an increase of 72% from the first quarter of 2009. We expanded operating margins by 480-basis points to 16.6% and we grew earnings per share from continuing operations to $0.67 from $0.38 in the first quarter of 2009.

Now let's review our first quarter results by segment. Health Education continued its strong performance with a 37% increase in new student starts. This achievement, combined with the higher first quarter student population than a year ago, resulted in 25% growth in revenue and a 12% increase in operating income. Excluding the startups Health operating margins would have been over 19% for the first quarter this year, a 350-basis point improvement from last year. Our start-up expansion in Health in the first quarter included the opening of two new schools, one in Hillside, Illinois near Chicago, and another in Cranston, Rhode Island. In April two additional start-up locations opened, one in Tinley Park, Illinois, and one in Indianapolis, Indiana. As we've explained before, we're deliberate in our start-up school approach and we critically evaluate each our start-up locations. The investment required to open each of these schools is relatively modest, but before we commit our team evaluates a number of factors, including the number externships available, the likelihood of successful placement of our students, the demographics of the community and the relative competitive intensity in the community. We anticipate opening up two to four campuses later this year to further expand our geographic reach, consistent with the strategic plan we outlined in February.

The University segment performed well in the first quarter, with new student start growth accelerating to 30% and with total student population growing 21% over last year's first quarter. Within the University segment new student starts for CTU and AIU increased 35% and 21% respectively over the prior year. In the first quarter Art and Design achieved a 53% increase in new student starts. Excluding the effects of a change in timing of a new student start date, which shifted to March this year, the Art and Design new student start growth would have been 12%. Normalizing for the start shift in Art and Design total University new student start growth would have been 26% over the first quarter of 2009. Also, as we announced in March the Higher Learning Commission of the North Central Association of Colleges and Schools, or HLC, granted Harrington College of Design regional accreditation with the next visit scheduled for 2014 to 2015 academic year. This was a tremendous accomplishment and culminates more than a year's worth of work by the Herrington team. Regional accreditation, combined with Harrington's accreditation from the Council For Interior Design Accreditation, or CIDA, provide the school and University segment with an additional vehicle for future growth.

Now let me update you on the status of AIU and the Higher Learning Commission. As I previously shared the HLC completed its advisory visit of AIU in January 2010. At this point AIU has not received a final report from the HLC related to the visit; however, AIU has been notified by the Higher Learning Commission that the HLC advisory team did not cite AIU for any violation of any HLC accreditation criteria. We were also informed by HLC that the team will not recommend any limitation or sanction in AIU's accreditation status with the HLC based upon the results of its review. AIU was also told that the advisory team has recommended a focus visit for 2011 or 2012 to evaluate AIU's transition to a new undergraduate credit hour structure, which was introduced in February 2010. It's our understanding that this visit will take the place of the focus visit previously anticipated for later this year. But you may recall that that visit was intended as a follow up to the initial five-year accreditation AIU received from HLC a year ago.

We anticipate that the final advisory team report will be issued with the AIU within the next few weeks. HLC is not required to accept the conclusions or recommendations contained in the advisory team's report. It could order additional mother monitoring or other action against AIU with respect to the matters covered by the review or with any other matters related to the accreditation of AIU.

That said we're pleased by what we've learned about -- learned relative to the HLC advisory visit. We're also pleased progress AIU made in rolling out its new credit hour structure for undergraduate programs starting last February. All new undergraduate students at AIU enrolled into this new credit hour structure. We expect AIU's current students, who remain in the existing undergraduate course structure, to finish their studies by early 2011. The University's conversion to this new credit structures with a large, operationally complex transition and it speaks volumes of AIU's executional capability. I want to stop here and reemphasize something I've said before that AIU always has been and will continue to be committed to offering educational opportunities that are in accord with the best practices of American higher education.

Switching now to Culinary Arts. In Culinary, revenue increases 23% and student population grew 34% in the first quarter. Our Culinary business continues to benefit from the introduction of a 21-month program offering, which provides students with more financing alternatives. We anticipate that the majority of our student population will be in the 21-month program by the end of the second quarter. Another initiative worthy of mention is the Culinary team's rebranding effort. The transition to the Le Cordon Bleu name across our Culinary segment is now largely complete. International also continued to perform well in the first quarter. Revenue increased over 23% due in large part to a 10% increase in student population. Additionally, on April 16th we announced the acquisition of the International University of Monaco, a leading International business university business located in Monte Carlo. That school has a current enrollment of approximately 400 students from more than 60 countries and is ranked among the top 50 full-time MBA schools in the world by the Economist Magazine. It will join our INSEEC Group and will help -- it'll help us support continued growth in the International and provide our US student population with expanded study abroad opportunities.

We shared our future plans last February, which we believe demonstrated our commitment to achieving growth and to making deliberate choices to deliver value for students, shareholders and employees. Our first quarter results were a good step for the year towards meeting our longer-term goals and our 2010 goals. First quarter was in line with our expectations and have demonstrated continuation of the strengthening of our business. Our results position us well for the balance of the year and I'm proud of the revenue growth we've demonstrated over the past four quarters and our continued focus on controlling costs, which has helped to improve profitability. More importantly, I'm pleased that we've continued to attract new students and to grow population across University, Culinary, Health and International. This traces to our continued focus on enhancing the student educational experience and our commitment to strong student outcomes. We'll continue to do these things and we'll continue to implement actions that are necessary to achieve the milestones we laid out in our strategic plans.

With that let me turn the call over to Mike, who'll provide you with more specific details on our financial results.

Thanks, Gary. As Gary covered in his remarks we again delivered strong growth in the first quarter and our performance was consistent with the 2010 milestones we provided at the analyst and investor day. As result we achieved another meaningful improvement in our financial results. Let me share some of the first quarter highlights. During the quarter the Company generated revenue of $530 million, an increase of 22% over prior year. Operating margin improved to 16.6% in the quarter representing a 480 point improvement over last year first quarter. New student starts were up 32% over last year and student population grew 23%, again to a record 116,700 students. In University, first quarter revenue was $291 million, an increase of 22% from last year, driven by the 30% growth in new student starts and a 21% increase in student population. Again as a reminder, the University results now include the schools previously reported as the Art and Design segment. Operating income was $69 million in the quarter, an increase of 62% from last year's first quarter, with operating manager improving 580-basis points to 23.6%.

Revenue for AIU was $117 million, an increase of 19% from the first quarter 2009, reflecting a 15% increase in student population and a 21% increase in new student starts. AIU's operating profit was $33 million in the quarter, up 59% versus last year's first quarter, resulting in operating manager at AIU of 28.1%. Operating margin improved from 21.1% in the first quarter of 2009. One other point of note, for the first quarter revenue per student for AIU was up slightly year over year. The new credit hour structure at AIU for the undergraduate degree programs can benefit students by providing increased flexibility in terms of class loads and credit hour transferability. Students may take advantage of flexibility of this new structure, choosing to move from an accelerated pace of study to a more traditional full-time pace. If students choose to move to a more traditional pace, revenue per student for the remainder of the year in AIU will be more in line with the 2009 levels.

CTU delivered another strong quarter of growth. Revenue for CTU was $111 million, up 34% from the first quarter of 2009, reflecting a 30% increase in student population, and a 35% increase in new student starts. CTU operating profit was $29.4 million in the first quarter, up 79% from last year. Operating margin of 26.5% was up 670-basis points from the prior year. Revenue for the Art and Design schools within the University segment was $63 million, up from $58 million in last year's first quarter. New student starts were 53%, up over last year. A reminder, this first quarter this year has three Art and Design new student starts versus two last year. Normalizing for the timing shift new student start growth for Art and Design would have been about 12%. The impact of this calendar shift will balance out in the second quarter of 2010, as there will be two starts in 2010 versus the three in 2009. While the actual number of new students starting their educational program will be down in the second quarter due to one less start versus last year, on a normalized base we anticipate the second quarter new student starts in Art and Design will be relatively consistent with our growth target of mid single digits. Art and Design operating profit was $6.5 million in the first quarter, up from $5.4 million last year, with operating margin of 10.3%, up 90 basis from the prior year.

For Culinary Arts, the Culinary Arts revenue increased 23% to $93 million on a 34% increase in student population and a 36% increase in new student starts for the first quarter. Culinary Arts operating income was $8 million in this first quarter as compared to an operating loss last year of $1 million. Operating margin was 9% in this year's first quarter. One item impacting in the current year operating results for Culinary is an increase in the bad debt reserve related to our student extended payment plans. As we've shared in the past we are continuing to monitor the students' repayment performance for their financial obligations, both as the student population increases and as the number of months for which we have additional performance data rises. As a reminder, students make small payments while in school and generally these payment plans have seven-year repayment periods following graduation. With an additional amount of performance data, during the first quarter we began analyzing the data in two distinct categories; students who have dropped out of school and students who have graduated. We determined it was appropriate to increase our overall estimate from uncollectible accounts, reflecting the separate experience of these two categories.

The first quarter reserve increase was primarily driven by the payment experience by those students who drop out of school prior to completing their program of student study. We believe this categorization is consistent with student repayment performance that we've seen in the default rates for federal loans. The two-year federal loan cohort default rate for Culinary graduates is between 1.5% and 2%, whereas students who do not complete their course of study experience relatively-high rates of default. This change represents roughly half of the $7.5 million increase in Culinary bad debt expense in the first quarter versus the expense a year ago. The remainder of the increase is related to population growth, as well as increases in the aggregate amount of student receivables. We will continue to monitor of the performance closely as the performance data becomes more seasoned.

For Health Education the revenue increased 25%, driven by 29% increase in student population and a 37% increase in new student starts. Operating income was $11 million in the first quarter, and operating margin was 10.6%, which included $8.1 million in operating losses in the quarter from start-up campuses. Operating losses for start-up campuses in the first quarter of 2009 were $3 million. As Gary mentioned, excluding start-up losses in both years operating margin for Health Education would have been 19.1%, an increase of 350-basis points. We plan on opening six to eight schools in 2010. As of May 1st we are operating 38 Health schools, including Brown College and Briarcliffe College, which both transitioned to the Health segment in the first quarter of 2010. Schools are included in our start-up definition until one year after their first new student start. We currently have 13 Health schools -- Health start-up schools in our total of 38, seven of which had their first new students start in 2009 and four of which have begun to teaching students this year with two more to be opened later in 2010.

Finally, for International revenue was increased -- revenue increased 23% on a 10% increase in student population and operating income increased 18% to $13 million. Versus the prior year revenue for International included a favorable foreign currency impact of about $2 million and operating income benefited from favorable currency rates by about $800,000. Operating margins for International were 31.7% in the quarter versus 32.9% in 2009, related primarily to a higher allocation of shared services expenses. The International University of Monaco is a strategic investment for us, with long-term potential and will play an important part of continuing our historical growth in Europe. We paid approximately $12 million for the school and annual revenues are approximately $5 million.

Turning to corporate segment -- or the corporate reporting, as a reminder, beginning in 2010 we allocate our shared services cost differently than we have in the past. We have historically charged shared service cost as a percentage of revenue. This quarter we began using a new method of allocating costs based on key cost drivers, which we believe is a more precise estimate. This change now allocates cost incurred in the business unit based on utilization of the shared service. As a result, the costs which remain unallocated in corporate represent only those stewardship costs required to run the overall business. We filed an 8-K on February 18, 2010 detailing impact this changed our business segment for 2008 and 2009..

For the first quarter 2010 unallocated cost were $11.8 million compared to $9.9 million in 2009. This increase is primarily attributable to an increase in our estimated loss reserve related to a terminated legacy agreement with Stillwater National Bank. As part of our review of the first quarter we determined that the recent performance of those legacy loans made under a recourse agreement with Stillwater warranted a higher reserve rate. The impact of this change in estimate resulted in additional bad debt expense of approximately $4.1 million. The Company and Stillwater stopped originating these loans in February of 2006 and terminated the agreement with Stillwater in April of 2007. The remaining net receivable now on our books on this program is only $3 million. The adjustment to this loan valuation, coupled with the increase I discussed earlier modifying our extended payment plan reserve estimate, had the impact of increasing the overall Company bad debt expense for the quarter to 5%. As we shared at our analyst and investor day we anticipated a modest increase in bad debt expense during 2010 given economic trends.

For the remainder of 2010 we anticipate the Company's will have bad debt expense as a percentage of revenue in the 4% to 4.5% range. Recall that we ended the fourth quarter of 2009 with overall Company bad debt expenses as a percentage of revenue at 3.5%. One final point of note operating income for the quarter include $3.7 million in early lease termination charges. These charges were in line with the expectations that I shared with you of approximately $10 million of move-related expenses to be incurred in 2010. The remainder of the $10 million will be incurred roughly evenly over the next three quarters.

Now let me turn to our financial position. As of March 31, 2010 the Company had cash, cash equivalents and short-term investments of $422 million. Cash flow from operations for the three months ended March 31, 2010 was $53.4 million compared to $48.7 million in 2009. Capital expenditures in the first quarter increased to $19.8 million, or 3.7% of revenue, versus $14.9 million in the first quarter of 2009. This increase primarily due to our investment in the start-up schools. As a result of the start-up investment, free-cash flow, defined as cash flow from operations less capital expenditure, was $33.7 million for the three months ended March 31, 2010, flat with last year.

Please note as you review our statement of cash flows for the quarter in the press release and our 10-Q filed yesterday, we have had an increase in our working capital. This is primarily attributable to the payout in incentive compensation in March of 2010 that was accrued for in 2009, as well as the modest growth in the students' receivable balances. Our annualized DSO was 14 days, an improvement of 15 days DSO from this time last year. The Company continues to have only modest growth in their receivable related to the student extended payment plans, with total balances as of March 31, 2010 up $6 million sequentially from last quarter to approximately $50 million. We expect approximately $6 million to $10 million of internal payment program receivable growth per quarter for the remainder of the year.

We continue to focus on the best use of our cash balance and operating cash flow. We intend to use our cash to support the DOE financial responsibility ratio and working capital needs, make required maintenance capital expenditures, invest in our high-return projects, such as start-ups, and again, for 2010 only invest in the build out of our new corporate center. We intend to use the balance to return cash to shareholders and as opportunities arise, such as Monaco, for strategic tuck-in acquisitions. Using our stock repurchase program, during the first quarter of 2010 the Company repurchased approximately 3.4 million shares of our common stock for approximately $90 million at an average price of $26.71 a share. In addition, since the end of the quarter, the Company has repurchased incremental 1.5 million shares for approximately $50 million, bringing the total year-to-date repurchases through April 30th to 4.9 million shares of stock at approximately $140 million. As of April 30, 2010 the Company has remaining authorization to repurchase an additional $306 million of shares.

To conclude, we achieved our internal goals in the first quarter and believe that we're on pace to achieve our annual growth objectives for the second quarter. As a reminder, we've shared that our annual 2010 expectations are to grow our student population and our revenue at level at least 15% from 2009. We anticipated that our growth in the first half of the year would be higher than the second half, as we measure against more challenging second half comparables. And now let me turn it back over to Gary for a few comments before we open it up for questions.

Thanks, Mike. Prior to opening the call to questions I want to spend just a minute addressing the ongoing rule-making process. As you know, this process has continued to evolve. Without the benefit of the draft and the final rules and specific details of those rules, it's not possible to specifically comment on the impact to our schools and students; however, I did want to talk about a couple of areas.

First, as I shared with you at our analyst and investor day, as it relates to the proposed rules we believe the appropriate action is to be fact-based in our evaluation and in our approach. We've established an internal team to assess the complex proposals, to gather -- and gather the extensive data needed to attempt to model the proposed rules. We created a database for our 1,300 programs that will assist us in evaluating our programs against future proposals once it's clear what they are. Second, I said that I would be active in sharing our ideas and concerns with the department before they published proposed rules. I personally met and spent a great deal of time in Washington over the two months meeting with the Department of Education, members of Congress and others, and I'm encouraged by the willingness and the interest of members of Congress to understand the impact of the proposed rules on students. That said, we'll continue to work along side others in our industry to ensure that our concerns and our ideas are fully understood by the department.

Last, I again want to stress that our company fully supports doing what is in the best long-term interest of students. As we learn more and as the draft rules become better defined, it's our intention to continue to be transparent regarding any potential impact that they might have.

So with, Hilda, if you would the line for questions we'll take your questions now.

(Operator Instructions). Our first question comes from Sara Gubins from Banc of America.

Hi, thank you, good morning.

Good morning, Sara.

I'm hoping to get a little more detail about the AIU's visit and also the proposal to push back the focus visit. The the first question is within the -- because the focus visit is now pushed back does that mean that you wouldn't be able to add new programs until that takes place?

Sara, it's unclear at that point in time. Here is what I'll tell you. The focus visit was intended to look at primarily the 9.0 credit hour structure and those things. They came and we still, as I said, don't have a final report. We'll wait for that final report and until we have that we don't know what the implications are on our ability to introduce new programs. AIU's relationship with HLC is a relatively young one. We anticipated that we would have a visit coming out of the initial accreditation from last year later this year. And again, we have never had a clear line of sight of what that means for introducing new programs. So we'll get the final report, we'll let the AIU teamwork with HLC as they normally would and as soon as we have a clear line of sight, we'll let you know.

Okay. And what do you think you could grow that business without being able to add new programs?

I have said this on previous calls, AIU has very good programs. We have ideas about things that will grow the institution over time, so I feel confident that our programs are sound. We've demonstrated that we can grow the business over the last couple of quarters as we have gotten through some of the executional issues that we experienced in 2009. So I stand by our estimates and say that it's clear that over the long haul we'll be in the mid it upper single-digits easily, but I think in the short term we should expect more than that.

Okay. Then separately could you give us an update what you seeing in terms of media costs and maybe just remind us about how your media mix breaks down?

Sure, I'll try to do both here. I'd start by saying that we're not experiencing any meaningful rate ranges, either in TV or print year over year. We've experienced some increase in costs in those channels, largely attributed to creative changes we've actually made. We looked at our advertising and so as you think about the costs that we've incurred we decided we needed to change in some of our advertising and so we've incurred cost to do that. TV spend represents approximately 15% of media spending and we don't anticipate -- actually, we didn't participate in some of the reduced costs that we saw in those channels over few years as our competitors do because we don't have that as a significant part of our mix. So again, I step back and say we're not seeing significant increases. We have experienced a change in the quality of bonus inventory that we're seeing in TV, but overall bonus inventory's about the same as it was last year. Print is not a primary channel for most of our brands, as well, other than Health and Health accounts were about 75% of our total print budget. So net-net we're not seeing significant uppers or downers in our business.

Okay, great, and then just last question about Health. Demand remains very strong there. I'm wondering if you're seeing increased competition in that, if you're seeing any signs that an improving economy or starting to slow it down and if that's something that you're concerned about for later in the year?

We haven't seen any material impact to date from the countercyclical trends that I think people are projecting or assuming might come. We haven't seen a significant reduction in our lead flow, as well. I think it was slightly off, but as you recall one of our focuses, even starting a couple of years ago moving through now, was the reduced -- the sheer number of leads that we were dealing with in favor of having a higher quality of leads and doing a better job of conversion and that's, is fact, what we saw as we came through the first quarter. So we did anticipate, as you recall during our investor and analyst day, we anticipated the slowing down as we get into the year, because we're experiencing capacity constraints in some parts of our Healthcare business. So we do expect to slow thing downs and that's really a governance that we're placing what we can do because we don't want to degrade the education the students receiving in the schools. In Q1 we had a small decrease in the overall number of Health leads, but again, as I said, that was offset by higher conversions, which resulted in new starting -- new student start growth that was in excess of 20%. So we feel good about where we're at and we'll keep our eyes open.

Great, thank you very much.

You're welcome.

Our next question comes from Jeff Silber from BMO Capital Markets.

Thanks so much. I'm not sure if you talked about persistent trends across the different segments, if you haven't, if you can give us color on that, that'll be great?

Persistent trends or retention, as we call it. we've had improvements over the last several years. In the first quarter we -- because of the strong improvement we made year over year we didn't see the same type of improvement. Our retention trends for the first quarter were basically flat versus the year before burst.

Okay, great, and just a few numbers questions. Mike, in the press release you called out the $3.7 million in lease termination and $8.1 million in bed debt. Can you just remind us which segments those are in?

Sure. On the lease termination, because we're allocating our corporate costs out, you can assume that those are roughly spread across the domestic segments, none to International. For the bad debt expense of the legacy Stillwater agreements from those loans that originated four or five years ago that $4.1 million is in corporate and then you can see the bulk of remainder of the bad debt expense is in Culinary.

And stripping that out in the corporate area, is that a normalized rate for corporate expense going forward?

Once you take out -- yes, the Stillwater should be a one-time event and then we're down to $3 million left on that. If we have to write off something else we will depending on collection patterns. So your normalized spend would be closer to the last year rate versus this year's number.

Okay, great. And I know you are not talking about 2011 yet, but just one minor modeling question. I know we had the shift in starts between first quarter and second quarter in Art and Design, are they going to shift back next year or is this the normalized start calendar?

Think I this is more towards the normalized start calendar. I think what you're seeing is the abnormal start was last year for Art and Design as we made the curriculum and calendar change versus this year. So I think this year you're back to the normal start pattern under our new curriculum and calendar design.

Okay, great, I'll jump back in the queue. Thanks so much.

Thank you.

Our next question from Corey Greendale from First Analysis.

Hi, good morning.

Morning.

Question about AIU. In commentary, Mike, I think you mentioned the possibility that students would take advantage of the shift in credit structure and start to decelerate. Is that something you've seen already or is that just head's up that that could theoretically happen?

That's just a head's up because of the increased flexibility and the benefit to the student. Remember we did the conversion for all new students in February as part of the February start and for the existing ground and online students they could convert in March. There'd be no effect in the first quarter. We just know that from the -- breaking the core structure into two and the potential for deceleration just want to make people aware that if students take advantage of that the increase in RPS, which is about 3% over last year, might go back to flat based on how they do. But it's too early for any evidence of material change.

Does the change in structure also change in any way AIU's positioning in the market? I think there was a time when part of its differentiation was the accelerated nature of the program.

I don't think So you still have the accelerated nature of the program. I think it actually increases AIU's position in the market. You have enhanced credit transferability from our inst -- other institutions, potentially enhanced credit transferability out into -- from Associates to Bachelors or Bachelors to Masters based on the credits. Hopefully, fully if a student now where in the past couldn't keep up with the accelerated program and may have wanted to drop down and we didn't have the option now on a more traditional full-time basis they can drop down easier. And given all of that, I think it's a better competitive position for the institution than it was previously.

Okay, and one question on the bad debt. Would you be willing to share anything about the rate that you're reserving at for those two buckets that you mentioned for the extended payment plan, the in school and out of school?

I don't think so. We said in the past that we had to take the rate that Sallie Mae gave us as a last recourse, which was around 48% as we left. Now as you break those two buckets into pieces the graduate bucket would be less than that and the drop bucket would be move. I think on a blended base it's higher than the 48%, but not materially higher than that right now in the early experience.

Okay, thank you.

Our next question comes from Gary Bisbee from Barclays Capital.

Hey, guys, good morning. Congratulation on the quarter. Over the last year you've earned very high incremental margins on you revenue growth as revenues accelerated and the 2010 plan that you talked about seems to imply a fairly significant deceleration in those incremental margins yet that didn't really occur in the first quarter. Are there any big expense incremental costs or expense areas outside of the $10 million for the new building that you think could depress the incremental margins as we move through 2010, or are we are likely to be -- if you continue to have pretty healthy revenue growth high incremental profitability?

I think -- we spoke a lot about operating leverage at the analyst day and I think we're experiencing that operating leverage. We don't see any material large increases in costs that are not metrically driven. We are investing in the metrically driven costs, we are adding career services people. We're 17% higher in career services personnel than this time last year. We're adding faculty. We're up about 10% in faculty levels from this time last year. So on metrically-driven costs we'll continue to do that. From the corporate overhead and the fixed cost our goal has been to hold that at inflation and we've been successful in the first quarter doing that. We benefited from that leverage.

I don't think there is anything in the back half of the year or next three quarters that should change that. The bigger -- the flexibility would be in the marketing and the admissions cost. We've gotten a lot of productivity from our reps over the past two years, from our peer model, from different things that we've done. We may see some deceleration in that rep productivity because we came off a low base and did a great job. And then the advertising costs are always subject to the market. So I think we'll continue to grab the operating leverage that we've had and we remain confident that we're going to hit those 2010 op income goals that we laid out in revenue and population goals.

Okay. And then how should we think about start-up losses in Healthcare trending throughout the year, given a lot in the back half of last year and an early start this year. Should those losses be peaking at this level, this $8 million level, or could it likely trend higher over the next couple of quarters?

If you go back to investor day I think we gave you some guidance around $30 million for the year and we had $8 million in the first quarter. I think what you see now is you have some vintage start-ups that opened last year that'll start becoming more profitable. As we've said in the past, we anticipate profitability somewhere around the fifth quarter and some of those vintage start-ups from early 2009 will start to come in. So you've got the pos -- $8 million in this quarter versus $30 million for the year so you can try to model from there.

Okay. And then I guess following up on the bad debt at Culinary, so is it -- I guess $3.5 million or $4 million of that increase you said was one-time getting your reserve back to the right level. It would thus make sense that bad debt in the Culinary segment would fall from 13% of revenue, but maybe be somewhat higher than before it had been trending over the last few quarters. Is that the right way to think about that?

Yes, I would think about modeling for the remainder of the year for Culinary some place between 10% and 13%.

Okay. All right, thanks a lot.

Our next question comes from Brandon Dobell from William Blair.

Thanks, guys. A couple of short ones here. First, in the Culinary with your comments that the majority of students should be in the 21-month program by mid-year and should we think in a revenue per student in that business should turn positive in the second half of the year or there is still enough cycle-through issues that it's going to take a little longer?

You still have cycle-through issues. We have two schools that have not yet started on the 21-month program, they're still on 15, and you do have -- you had (inaudible) You do have students in the old 15-month program that are still working through. I think it'll take us to the third quarter to cycle through that and get to the fourth quarter we'll have the majority of the students in 21 but the RPS was not having as much pressure.

Any chance you can provide this CDR data similar to that of the Culinary program for AIU, either within -- sorry, AIU or CTU like you talked about with the Culinary data?

In terms of the various graduate rates CDR's?

Yes, exactly.

Brandon, give me a second and let's go to the next one and I'll it bring it back in a second.

Okay, and the final question for you. Obviously AIU starts remain strong, any sense if there's outsize growth degree area or a program area that's driving that or is it broad-based?

It's broad-based. AIU's primary area of study is business, but it's a broad, broad base, we're seeing good experience across the board.

Great, things.

You are welcome. I think Mike's working on looking up things. We'll go to the next call and we need to come back to this because it's in mouse print here.

Our next question comes from Jerry Herman from Stifel Nicolaus.

Thanks, good morning, everybody. Just wanted to circle back to Sara's earlier question with regard to the regulatory front. Just to be clear the field team indicated recommendation of no sanctions or limitations. Do you expect them to be very clear in the final report as to whether you can introduce new programs or not? And secondly, did they communicate in any way why they pushed out the focus visit into 2011, 2012?

I don't mean to be flippant when I give you the answer, but honestly we don't have insight to what will be in the final report or how it will be processed through the HLC leadership and so we just don't know. When we get the final report, we'll let you know and we'll tell you what the implications are.

Okay. And you guys have been obviously very strong in the health area, can you talk about placement trends and even default trends in that business?

Placement trends have not materially decreased from the year before. We've been diligent, we've added more career services people into our Health unit than we have any place else around our Company. Our new student starts and start-up schools have always been driven about externship, so we're in a good place there. We haven't changed data materially from what we gave you at investor day. From the CDR standpoint from Health graduates CDR (inaudible) is somewhere around four. We said Culinary was between 1.5 and two, University's around 3.5 and total Company around 3.3, so the Health students also meet their financial responsibilities when they graduate which speaks to the placement.

Okay, great, and then just one final numbers question, if I can, Mike. The share repurchase at one point you guys had somewhat of a constraint on the upper limit given the concentration of ownership, are there any current constraints on the upper limit of that buy? And then separately, can you explain is the rationale for the use of 10b5?

Sure. In terms of the constraints, the one shareholder's close to 20%. As you remember we did change the senior management agreements where a 20% change in control does not vest. As those agreements have been changed, so that most new grants in 2009 and 2010 do not have a 20% change in control, it's a 35% change in control. So the limit that we used to have on that is pretty much gone. We do have a limit, obviously, from what we can prepurchase from the DOE ratio and so as you model out finance responsibility ratio and where want to be, given our cash balances, no debt and our intangibles there is always a limit for where you can be.

From the 10b5 standpoint as we exited last year we knew that with investor day we would have -- and the timing of our earnings we'd have a very limited number of the days to trade in the open window. We felt that given the market price at the end of last year, given the valuation and given the confidence we have in the Company's numbers and how well we're doing we felt the price was a good investment of our cash for shareholders and so we did want to make sure that we had as many days open in the window as possible. So we put in a plan in place in the first quarter to trade in blackout and we put a plan going in the second quarter to allow us to purchase as many share as we desired. We told you $140 million and give us as many days to spread the buy out over for the period. So that is the purpose of the plans.

Great. Thanks, guys, appreciate it.

Thank you.

Our next question comes from Amy Junker from Robert W. Baird.

Good morning. Gary, can you just talk little bit about your strategy for the International business in 2010 as far as leveraging real estate, investing in accreditation efforts, new program areas and now the recent acquisition of the School in Monaco plays into that strategy?

Sure. I'm not sure I can cover all of those because we don't have -- because we haven't talked about some of these things with our Board to that level of specificity. I will tell you that we like our International business, we particularly like the strength of our INSEEC Group in Europe. INSEEC is a group of schools. A lot of times you think about it as one school that's based in Paris. We have multiple campuses throughout France and a very strong team. When Monaco became available we looked at the strong business programs, which also exist at INSEEC. We looked at their accreditation, which are accreditations that extend into Europe and we saw it as a good fit with INSEEC and a good way to get accreditations that we were also seeking for INSEEC and to combine the knowledge that exists there. As we think look at Europe, as we think about our online capability we see a convergence that will come in the future and so we're preparing for that future convergence by having a strong enough footprint there.

In terms of our real estate, there haven't been any significant changes this year, nor do we anticipate them. We did have to make some changes last year as we saw an increase in the student body in Europe, and so we moved INSEEC, its main campus. to a new campus in France, which opened up in the fall term. But beyond that we have no other significant changes planned.

Great, thanks, I'll pass it over.

Our next question comes from Trace Urdan from Signal Hill.

Thanks very much, good morning. I was struck particularly by the difference between the default rate among the Culinary graduates and the students who dropped out and I'm wondering if you feel as though you have any ability to -- better over the last couple of years to determine who's going to make it and who's not going to make it and whether you feel prompted to do anything different at the front end to try to influence that, or maybe you could describe what you have been doing differently at the front-end to influence that --?

Sure. Probably --

Go ahead.

Sorry, go ahead. Go ahead. I'm sorry, Trace --

No, no, that's -- I'm done.

All right. It's a great question. One of the things that we are doing differently, particularly once we began to extend loans off our balance sheet, is we -- and we've talked about this on previous calls -- is we created a position called success managers and these people are literally there to help ensure that the students who enroll have all the things that are necessary to stay in school. So they meet with them frequently, make sure there are no transportation issues, make sure there's no family issues, and so on and so forth, to continue to keep them in school because we know that when students stay in and complete the programs that we can help them find jobs. And it's clear from the data that when we help them find jobs they'll pay back the loans that they've taken and pay back their obligations and so it's a virtuous cycle. That's the biggest change that we made in the short term just to simply manage them through the process.

When I go visit Culinary schools one of the things I ask some of our chef instructors is whether they can very quickly determine who has the skills and who doesn't, is it easy to see, and what they'll tell me is that there's 10% of the students that they see that it's clear that they have skills or they've come in, they have the passion and they can -- they'll make it. And then similarly there are people that they'll have to coach more than the others. But what they'll also tell you is they think everybody's coachable and that everybody, if they apply themselves, can make it through. So we've done those things, but until you get them in the kitchen and have them work through some of the things you simply don't know who's going to get to the end.

I think, Trace, also remember that the cohorts we're giving you are all on the 15-month, not the 21-month program, so we decelerated the course, got them some more access to Stafford loans, a little more access to Pell, but more importantly cut down the number of drop because of the pace, cut down the retakes, allowed them to work school, helping them more success. I think second to look at is, again, our overall core default rate for Company is somewhere around 10%, our graduate core default rate as a Company is around 3% and so we've had lowest core default rates in Culinary, both for graduate and totals, so I think that relationship is not that out of line with the rest of the data we're seeing across all the different institutions.

Okay. And then maybe could I just ask you to briefly comment on the other institutions, as well, in that regard? I obviously know that you guys are focused on retention in all your schools, I guess I'm a little more interested in any work that you've done or thinking about doing more at the front-end. Not that you are not optimistic about everybody's potential, but are there things that you can do in terms of evaluating students that are coming in the door in terms of their capacity to really get through.

Sure --

I thought that maybe -- yes, go ahead.

We're cognizant of the things that are going on in our industry around doing a better job of making sure students can actually do the work, so we're cognizant of that and we're doing our own activities around making sure that this quality of students coming in. With that said, I think there's room for improvement and so one of the things that we're working on and we'll pass through the organization with is making sure that, despite the fact we're open -- largely open-enrollment schools that the people come in, that we test them, that we sit with them, we make them understand the commitments that they've making as they through and they -- and that we get them through the programs because it does none of us any good, in our Company or in the industry, to have a high-level of starts, but not have a high-level of completion so that people can go out and be productive citizens once they're out there. So we're cognizant of that, we've seen some of the work that others in the industry are doing and we're as committed as they are. Although I will say honestly on this call that we don't have the formalized programs that I would like to see consistently across the Company.

Okay, thanks, Gary.

You're welcome.

Your next question from Bob Wetenhall from Royal Bank of Canada.

Hi, nice quarter, gentlemen.

Thank you.

Just wanted to see -- you're still providing -- you're still comfortable with your increase of student population in 2010 by 15%?

Yes.

So you're just reaffirming the guidance targets that -- in the 2010 milestones you provided the investor day, no change?

Yes, I think -- we're a calendar year company and so we're one quarter into the annual goals that we gave you back 90-days ago and we knew where our quarter was heading and this quarter's very consistent with the milestones that we laid out.

Do you think your operating margin guidance of 17% to 17.5% might be conservative given the huge pick up you guys had in the first quarter?

I'm not going to comment on that. Again, as we built our confidence we knew exactly where our first quarter start was because we had half the start in. We knew what our forecast looked for the end of the quarter and we knew our trends for the year. So I think -- again, I'm not going to comment specifically, but this quarter's right in line with our annual number and our annual number of $350 million to $370 million of op income we're still fully committed to.

Got it. And just a broader question. It sounds like it's a very healthy enrollment growth rate. What's making it so that you guys are feeling any (inaudible) from the countercyclical tailwinds that are fading away as the labor market tightens. Is it just the fact that you keep opening campuses in Health, which is helping drive student enrollment and good execution?

There's a couple of things we'd say. We certainly have had our quarters where we didn't execute as well. We got increasingly strong as we moved through 2009. We're seeing the benefits of our ability to execute, our ability to be fundamentally sound in these areas. I would also say that in this first quarter we were comping off a relatively weak first quarter last year, given the fact that we actually stubbed our toes last year and I remember that call fairly painfully. So as we look forward, we believe we'll be comping off of stronger -- strengthening that we saw in 2009. Mike indicated in his comments that we conversions but we still expect things to be strong and we haven't seen a significant reduction in demand.

We also benefit from having over 10,000 students on the International platform. Those international businesses are traditional businesses that are more three to four years in course duration, so you're not subject as much to economic headwinds or tailwinds, which also helps our business.

Got it. That helps provide acyclic bend toward the enrollment profile. Thank you

You're welcome, thank you.

Our next question comes from Patrick Elderby from Credit Suisse.

Hi, thanks, just one quick question. Wondering if you can update us on capacity and if your outlook on that has changed at all and perhaps there are any constraints that you're seeing down the road?

I think if you look across the businesses, from a University standpoint Art and Design and the traditional online institutions we don't see any capital or capacity issues within the business. I think within Health we talked about capacity issues and we've added new start-ups. Within our International locations we have added real estate in the last couple of years in advance of the population growth we have experienced. We've been experiencing 20% population growth and we've been able to add real estate and we can continue, if need be -- as Gary said earlier, if need be we can add real estate there. From the Culinary business we are back at record levels, but as we've talked about over the last several years, the historical pattern of the Company was to build some very, very big culinary boxes that have plenty of space in those boxes. Our challenge is to continue to enroll students who meet their financial commitment, that will graduate, that'll get placed and that we continue to do a good in Culinary to bring in the right students with the right profile. But there's no capacity limitations across the bulk of the Company.

Okay, thanks.

You are welcome.

Our next question comes from Matt Snowling from FBR Capital Markets.

Yes, thanks for taking my call. I was wondering if you could break out by school segment the receipts in terms of Title IV and specifically does a longer Culinary program somehow have an impact on skewing that to higher Title IV receipts?

We don't have that detail available, nor do we traditionally provide that. The way you look at that, though, is to model it against the traditional historical GAAPs. So if you looked at that you would say that our Health business would be closer to 90% of Title IV and our Culinary business would closer to 70% of Title IV with the other businesses in between based on where the price point is and relative gaps that they have from the public funding markets.

Maybe as a follow up to that, as you approach 90% in the Healthcare put a limit on enrollment growth for you?

As we have talked about before, we're not above 90% on any of our 90/10 ratios in Health but the nature of the Allied Health and different health programs that we and competitors have do traditionally run at a level that does approach 90%. The $2,000 adjustment from the Stafford loans has helped everyone, it's helped us equally and as we go forward we'll watch that to make sure it's given a long-term solution. And we've been careful on taking price in the Healthcare business because of the 90/10 implications of that.

Okay, thanks.

That was our last question. Do you have any closing comments?

Just briefly I want to say thank you very much once again for joining us on this call. We appreciate your interest in our business. We're very pleased with how we started the first quarter. We recognize that we continue to have a few things -- a few challenges in the business, but we've made significant progress over the last three years in our business and we'll continue to do that going moving forward, I'm very confident of that. And with that, we'll close the call and, again, thank you very much.

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