Perdoceo Education Corp (PRDO) 2010 Q4 法說會逐字稿

Welcome to the Fourth Quarter 2010 Earnings Conference Call. My name is John and 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, John. Good morning, everyone, and thank you for joining us on our Fourth 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 analysts and investor questions. This conference call is being webcast live on the Investor Relations section of our web site at careered.com. The replay will be available on our site. If we don't get to your question during the call, please call our Investor Relations department at (847) 585-3899.

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, uncertainties that could arise, 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 release, our Annual Report on Form 10-K for the year ended December 31, 2009, and our quarterly and other filings with the Securities and Exchange Commission. Except as expressly required by the Securities laws, we undertake no obligation to update those risk factors or to publicly announce the results of any of these forward-looking statements to reflect future events, developments or change circumstances or for any other reason.

Now, before I turn the call over to Gary, it is important to note that in order to better position the Company, we incurred a number of significant charges in the third and fourth quarter of 2010. The total impact of these charges for the full year was approximately $116 million. These charges included a legal settlement related to litigation at the California Culinary Academy discussed on last quarter's call; an impairment charge related to the Le Cordon Bleu trade name incurred in the fourth quarter; and a fourth quarter severance charge related to the reorganization we announced last month. Our press release details the significant items for 2009 and 2010 to enable a more meaningful comparison of year-over-year performance for the fourth quarter and for the year. The financial results we'll discuss this morning excludes the accounting impact of these items.

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

Thanks, Jason. Good morning, everyone. Thank you for joining us on this morning's call. I'll start with a brief overview of recent activities and results. When I've concluded my remarks, Mike Graham, our Executive Vice President and Chief Financial Officer, will provide more details on our financial performance and outlook.

Results for the fourth quarter of 2010 were generally in line with the expectations we shared on our third quarter earnings call. During the fourth quarter, revenue grew 7% over the fourth quarter of 2009. Operating income of $97 million yielded a 17.9% operating profit margin, and student population of nearly 117,000 was 11% higher than 2009 and was the highest year-end student population in our Company's history. But, however, during the fourth quarter, we were not without our challenges. Like others in our sector, we saw the impact of more difficult comparables in the softening of new student interest in a number of our schools.

New student starts for the fourth quarter of 2010 were down 2% versus the fourth quarter of 2009. New student interest in the form of leads was down in the fourth quarter, a trend experienced across nearly all of our institutions. During the fourth quarter we also experienced a decline in the rate of leads becoming enrolled students, particularly within AIU and CTU. While there is no single reason for these trends, like others, we believe negative publicity about private sector education over the past several quarters is having an impact, along with the challenges associated with the weak economic environment and actions undertaken by our institutions that are aimed at improving student outcomes. As a result of these factors and changes related to Le Cordon Bleu business model that we will discuss later, we announced in January that we had made the difficult choice to reduce our workforce by 600 full-time employees or nearly 5%. Let me underscore that while we must proactively respond to the business environment and the trends we are facing, we'll ensure that changes in our workforce are thoughtful and that we'll continue to meet the needs of our students.

2010 was both a year of accomplishment and a year of unprecedented media coverage and regulatory uncertainty. For the full year, we achieved operating income of $363 million or 40% above 2009. We grew operating margin by 300 basis points over last year to 17.1%, and we increased earnings per share by 54% versus 2009 to $3 a share in 2010. We also continue to focus on improving student outcomes. As you may recall, at our Investor And Analyst Day in February 2010, we shared our placement certificates for our university and career focus schools.

While placement can be measured in a number of ways due to accreditation rules and varying definitions, we've continued to use the same definition for placement -- the percentage of students seeking employment who graduated during a 12 month period ending June 30 who had jobs in their field of study or related field by December 31. You may recall that in 2009 our career focus schools achieved a placement rate of 81%, while the university schools were at 73%. In 2010, our career focus school placement rate fell slightly to 78%, while our university placement rate increased slightly to 75%. In light of a tight employment market, we believe our investment in additional career services personnel was important to help identify opportunities across the country for our graduates.

Before I discuss the developments within our institutions, I want to comment on the regulatory environment. We spent a great deal of our time on our second and third quarter 2010 earnings calls discussing the negotiated rule making process and in particular, the Department of Education's gainful employment measure -- pardon me, gainful employment proposal. We've been consistent in our comments that we don't believe that gainful employment rules are good policy. We continue to believe that, if enacted, they would limit student choice, they would result in unintended negative consequences for students, they create a conflict and inconsistency with the 90/10 rule, and they'd eliminate good programs in areas of employment demand. In recent weeks, there has been speculation that the Department of Education is considering more moderate approaches. We remain hopeful the Department will make constructive changes to the proposed rules if they are ultimately published.

That said, for the final regulations that have been published, we have teams across our Company working to implement changes that comply with each new rule. With regard to the new incentive compensation rules, we implemented a new compensation program for our admissions personnel during the first quarter of 2011. Previously, we paid admissions personnel based on students completing a significant portion of their course of study. While we continue to believe that our compensation practice was sound and in the best interest of students, we are discontinuing this program. Going forward, those individuals covered by the incentive compensation rules will be eligible for base salary only with no additional compensation.

With regard to new state authorization rules, by March 15, our online institutions will have filed applications for the additional state authorizations we believe are necessary. However, there are states with no oversight framework or body. As you may know, these states are required under the new rules to create an oversight mechanism that meets the Department of Education's requirements. We can't file an application in states where no oversight body exists, but we'll be prepared to do so when these states are ready. State approval processes can sometimes be lengthy and given that new rules go into effect on July 1 for all US online institutions, we have concern about whether some states may be log-jammed in their processes. If they become log-jammed, it could become problematic, but we are doing all that's within our control to comply with the new rules.

Now, for gainful employment, on previous calls we've indicated that our Culinary and Art and Design programs would be most challenged by the proposed gainful employment rules. Those teams have spent a great deal of time looking closely at our business models and developing action plans to respond, so first, I'll start with what's happening in Culinary Arts. In Culinary Arts, which had a good year in 2010, we're moving forward with some important changes. We believe these changes will be responsive to the regulatory environment and will introduce a new model that will enable the team to further differentiate and grow Le Cordon Bleu in coming years.

As we evaluated the overall Culinary Arts market, we determined that there is an opportunity to enhance Le Cordon Bleu's position by striking a more effective balance between Le Condon Bleu's strong kitchen curriculum and more competitive pricing. Some higher priced institutions grant associate and bachelors degrees that can range in cost from $50,000 to $100,000. Community colleges typically offer lower tuition, substantially funded by state and local taxpayers. They generally offer certificate programs that, as compared to Le Cordon Bleu, have significantly less hands-on time for students to become truly proficient in important kitchen competencies.

Here is a summary of some of the things we are doing in Culinary. At the beginning of 2011, we ended our internal student payment plans for incoming Culinary students. By the end of the third quarter, we will offer a 12 month certificate program in Culinary Arts at a cost of about $17,500 versus $21,000 today. The 12 month program, which is more in line with the program at the original Paris school, will continue to emphasize practical hands-on kitchen skills and incorporate the high quality kitchen curriculum that has made Le Cordon Bleu the leader in US Culinary Arts education today. The overall average cost of the Culinary Arts education with Le Cordon Bleu will be reduced by 50% between the lower tuition level and the shift of focus from associate degrees to certificate programs.

Our curriculum will enable Le Cordon Bleu students to demonstrate 450 critical cooking competencies consistent with what's been offered in our associate degree program, which is well beyond a typical community college curriculum. For the new programs, there will be less emphasis on general education subjects that are less critical for success in the kitchen. Those general education credits previously would have enabled students to earn an associate degree. Under our new program, students interested in enrolling in an associate degree program in Culinary Arts will be able to do so only in Chicago and Los Angeles. We will also continue to offer our online bachelor program.

In considering the potential competitive and student benefits of this new model, our team recommended moving forward with these changes, even if final gainful employment rules never materialize. We believe the changes will enable Le Cordon Bleu to demonstrate real value of students. As a by-product, it will position our Culinary schools for potential gainful employment draft rules. The new Culinary model required us also to critically evaluate every position across our Culinary schools. To ensure the model would be sustainable over the long term while maintaining our high standards, the team developed a different approach to staffing and shared services in certain areas. The impact of these changes was included in our January 2011 reorganization announcement.

Now, on to Art and Design, as I've explained before, changes in Art and Design are somewhat more complicated to implement since we currently have several OPE IDs across a more diverse set of institutions including IADT, Harrington College of Design, Collins College, and Brooks Institute. These institutions offer certificate, associate, bachelor's and master's degrees and are admissible to regionally and nationally accredited schools. Our objective in Art and Design will be to thread the needle in such a way that the solution would meet the requirements of proposed gainful employment as well as the 90/10 rule. While we have taken steps on certain programs already, more fundamental changes will be deferred until the regulatory parameters are more clear.

On to our university business, the online universities of AIU and CTU performed in line with expectations outlined on our third quarter call. During the fourth quarter, we continue with actions aimed at enhancing student quality and outcomes. Some of those actions are as follows. We began by increasing academic and career services personnel by 23%, compared to the fourth quarter of 2009. In addition, AIU implemented the faculty performance management and development program to ensure the best teachers are assigned to teach courses most critical and challenging to overall student success. Recall, this program was previously implemented in CTU, and both institutions are preparing for a modification to their current college preparatory course. As you may remember, for some time now, we have required students to complete an orientation course at AIU and CTU. Students do not incur any financial obligation for this course and are not counted in any of our new student start and student population metrics. In addition, we require students in our online programs, who never previously attended college, to complete a college prep course as their first class to help to identify those students who are more likely to persist towards graduation.

Over the second and third quarter of 2011 AIU and CTU will modify their current college prep course and implement a new program we call SOAR, which stands for the Student Orientation and Academic Readiness Program. New online undergraduate students who do not have previous college experience will be required to pass this course to continue their studies. Students who are not successful in this course will not receive a grade, will not be counted in our new student start numbers, and will not be charged tuition for the course. We believe this will ultimately have a positive impact on persistence towards graduation as well as have a positive impact on current default rates for AIU and CTU.

During the first quarter of 2011, we made changes to the tuition of the associate and bachelor's degree programs within AIU and CTU. We simplified our tuition structure to encourage students seeking a bachelor's degree to enroll directly into the bachelor program versus the two plus two program. We adjusted the credit hour tuition rates, decreasing the costs for bachelor's degrees and increasing the costs for associate degrees. These changes have been rolled out for new students. Current bachelor degree students will experience a tuition decrease to $290 per credit hour, and current associate degree students will see a small tuition increase to $275 per credit hour.

We have nothing further to report on the two regulatory reviews discussed on our last two calls. As you may recall, in late 2009, AIU underwent a program review by the Department of Education, and that the Office of Inspector General of the Department of Education, Audit Services Division, was in the process of conducting a Title IV compliance audit at Colorado Technical University. We'll provide additional information regarding the above matters on the first quarter 2011 earnings call in May.

Now, I would like to turn the call over to Mike. When Mike's done, we'll take questions after which I'll have a few concluding remarks. Mike?

Thanks, Gary. As you review our results for the fourth quarter and the full year 2010, as Jason noted earlier, there is a number of items impacting the year-over-year comparability. Let me first start off by reminding you that in the fourth quarter, we completed a teach-out of AIU Los Angeles that had been reported within our transitional segment. The results of AIU Los Angeles, including a fourth quarter non-cash charge of $9 million, related to our estimate of the remaining aggregate lease obligation, are now reported within discontinued operations. This closure represents a culmination of teaching at 11 schools, previously identified as our transitional segment and now in discontinued operations.

Next, as we said earlier, we've attached to last night's press release a GAAP to non-GAAP reconciliation to help you at making meaningful comparisons of our results. Again, in the fourth quarter of 2010, GAAP operating income was $21 million, but it included a non-cash charge of $68 million relating to the impairment of our value of the rights to the North American Le Cordon Bleu trade name. This reduction into the accounting valuation of the LCB trade name is directly related to the new business model and the changes that Gary discussed earlier. We also had an $8 million severance charge related primarily to the reorganization and the headcount reduction we announced in January. For the full year of 2010, operating income included the items I just discussed as well as the California Culinary Academy legal settlement recorded in the third quarter of 2010 for approximately $41 million. For comparison purposes, remember that operating income for last year, 2009, included a $23 million charge for our incremental performance-based compensation plans related to 2009's out performance.

We had $14 million of charges for remaining lease obligations for vacated space in 2009, severance, and asset impairment charges for $4 million, all of which was partially offset by $12 million of income related from the termination of an insurance policy. So, after consideration of these items in both years, adjusted operating income for the fourth quarter of 2010 was $97 million, down 2% compared to fourth quarter 2009. On a full-year adjusted basis, the Company generated adjusted operating income of $363 million or $3 per share in 2010, compared to $258 million or $1.95 per share last year. This represents an operating income increase of 40%. Unless otherwise noted, my discussion of earnings and results during the remainder of the call will exclude these items.

So, back to our results, overall, in the fourth quarter 2010, revenue was $543 million, an increase of 7% over the prior-year quarter. Our operating margins decreased to 17.9% in the quarter, representing 160 basis point decrease over last year's fourth quarter. Our new student starts decreased 2% over last year, while student population grew 11% over the fourth quarter of 2009. For the full year, revenue increased 16% to $2.12 billion, and full-year operating margin was 17.1%, a 300 basis point improvement over prior year and this is inclusive of bad debt expense, which increased to 5% of revenue for the year 2010, versus 3.1% last year. Overall, new student starts were 13% higher this year than last year.

In our University segment, fourth quarter revenue grew 4% to $281 million. This is primarily attributable to our 5% increase in student population. Operating income for the quarter was $73 million, up 14% from last year's fourth quarter. Operating margin increased 210 basis points to 25.8%. Revenue for AIU was $99 million, roughly flat with last year's fourth quarter. New student starts for the quarter were down 14%, again, we believe, reflecting overall market softness due to the continuing weak economic environment, negative publicity on the sector, and the impact of new and also proposed regulations.

Our lead flow in the fourth quarter at AIU was down in the mid-single digits in line with our 5% reduction in advertising spend relative to the fourth quarter of 2009. We also saw a reduction in our year-over-year lead to enrollment metrics. We believe this is also due in part to our reductions we've made across the size of our admissions team to align with the business demand in the fourth quarter. Operating profit in the fourth quarter for AIU was $24 million and operating margin was 24.2%, up 130 basis points. For AIU, during the fourth quarter of 2010, we also continued to see a slight reduction in student credit loads, continuing the trend we've experienced since we increased student flexibility and moving from an accelerated to a more traditional full-time pace of study in our undergraduate degree program. As a result of this, revenue per student for the quarter declined about 1%.

CTU revenue grew 17% over the fourth quarter 2009 to $123 million on a 13% increase in student population. New student starts in the quarter were down 11% as we experienced similar reductions in lead flow, conversion, and the size of our admissions team. This reduction in new student starts was due not only to the overall market trends and more difficult comparables, but also remember our transition from our medical coding and billing program at CTU into our Associate of Science in Health Administrative Services we call AHAS. The new AHAS degree which we rolled out in the third quarter of 2010 provides a broader education in health care delivery system, and we believe, an improved potential employment opportunities for graduates.

CTU's operating profit was $41 million in the quarter, 34% higher than last year's fourth quarter. Operating margins rose 420 basis points to 33.2%. Finally in University, for Art and Design revenue was $59 million, down 7% from the fourth quarter 2009. Art and Design's new student starts during the quarter were flat to last year and the student population 2% lower. Operating margins were 13.2%, 340 basis points worse than last year's fourth quarter.

As Gary mentioned, we intend to make some changes within our Art and Design institutions later this year. Our Art and Design team has developed action plans, pending the publication of the final gainful employment rules, and again our objective will be to implement a solution that meets requirements of gainful employment as well as not violating the 90/10 rule. We will provide additional details on changes related to Art and Design institutions in our next quarterly call; however as you think about 2011, we would anticipate this to be a transitionary year. As a result, if we were to implement changes similar to those we are making in Culinary, we estimate operating income for Art and Design would be in the range of $10 million to $20 million in 2011.

During the fourth quarter for Culinary Arts, revenue increased 3% to $94 million on a 20% increase in student population. New student starts for the fourth quarter decreased 3%, primarily due to reduction in new student leads. Culinary Arts operating income for the quarter was $8 million with operating margins of 8.5%, a 740 basis point decrease from last year's fourth quarter.

Again, as Gary outlined, we're implementing the new model with a lot of important changes. As we roll out our new model and continue to teach students in the programs they enrolled in, we estimate that we will see, for 2011, a decline in year-over-year revenues in the high single digit to low teens percent range versus 2010. We should also see a significant reduction in Culinary in bad debt expense as we've entered our internal extended payment plan program for new students. As a result, as a percentage of revenue, we would expect Culinary bad debt expense in the 7% to 9% range for 2011, which reflects both expense related to amounts that are unpaid that we normally experience across all CEC institutions, as well as extended payment plan bad debt for Culinary students who have been previously packaged and will be completing their course work. This 7% to 9% range compares to 14.5% of revenue for Culinary in 2010.

We will continue to closely evaluate our processes and anticipate our efforts would allow us to hold the other line items relatively constant as a percentage of revenue in Culinary, resulting in 2011 operating margin in the mid-teens. Over the coming years, as we transition to the new model, and the transition is fully rolled out, and we are able to validate the expected impact of these model changes and what they'll have in the key variables within the P&L, we anticipate an operating margin in the low double digit range.

In addition, we announced last month that we will be teaching out our Le Cordon Bleu Pittsburgh Culinary school. The lease for LCB Pittsburgh will expire in 2012. As we considered how we would best deploy our capital, particularly in light of the lack of clarity we have related to gainful employment, we made the difficult choice not to renew our lease. This renewal would have required a capital investment of nearly $8 million. We anticipate that the teach out will be complete as of the third quarter 2012. As a result of this decision, in the fourth quarter we recognized the non-cash charge of $1.4 million for goodwill impairment which is also within the Culinary results.

For Health education, the student population grew 20% over the fourth quarter of last year and new student starts increased 14%. As a result, revenue was 16% higher than last year's fourth quarter. Operating margin was $17 million in the fourth quarter and operating margin was 14%, which included $3.3 million in operating losses from start-up campuses. Operating losses for start-up campuses in 2009's fourth quarter were $900,000. Excluding start-up schools, operating margin for Health education would have been 17.4%. We opened up 6 new start-up schools in 2010. Based on our belief of the needs of the market and Sanford Brown's competitive positioning in Health education, we remain committed to expanding the geographic footprint. As of December 31, we are operating 39 Health schools, six of which are classified as start-ups. Again, to remind you, start-ups are included in our start-up definition until 1 year after the first new student start. For 2011, we'd anticipate that start-up losses in the Health segment will be approximately $21 million, about $8 million higher than 2010.

Finally, for international, our revenue increased 8% in the fourth quarter, reflecting a 13% increase in student population, and a 21% increase in new student starts. Recall in our third quarter conference call, we did discuss a calendar shift that would result in a noncomparable fourth quarter start. Normalizing for this impact, fourth quarter new student starts growth would have increased 16%. International operating income is $12 million in the quarter, up 36% from 2009, and operating margins 520 basis points higher. During the quarter, changes in exchange rate had a $3.3 million detrimental impact on revenue, and a $700,000 detrimental impact on operating income. As of the end of December, our student population in international was 12,300 students, up 13% from last year.

Finally, let me talk to you about our financial position. As of the end of the year, the Company had cash, cash equivalents, and short term investments of $449 million. Our cash flow from operations for 2010 was $272 million. Generally, our free cash flow, defined as cash flow from operations less capital expenditures, is directionally in line with net income adjusted for significant charges or unusual capital expenditures, such as our new campus support building in 2010. For 2010, cash from operations is roughly flat with 2009 despite our significant increase in net income. This is partially attributable to significant items we incurred and discussed in 2009; most notable of those items are the $23 million of incremental bonus paid in 2010 that was recognized in 2009. Roughly $76 million in charges in 2009 related to closure of the transitional schools, which is $17 million more than 2010.

In addition, this year in 2010 we did experience growth in receivables due to the revenue level as well as the performance from the payment plans for about $30 million. Offsetting that in the P&L is the $41 million charge for California Culinary Academy. That will be funded and has been funded here in the first quarter of 2011. Capital expenditures in 2010 increased to $127 million or 6% as a percentage of revenue from $74 million in 2009, again, primarily due to the build out of the new Campus Support Center. During 2010, we spent approximately $42 million on the Center, $31 million of which was in the fourth quarter. Excluding the new Campus Support Center spend, capital as a percent of revenue is about 4%, and we anticipated in 2011, capital expenditures will again be between 3% and 4% of revenue.

As of the first of year, it is important to note that we have discontinued our extended payment plans for new students as Gary discussed in Culinary and Art and Design. As a result, we will not see significant growth in our receivable balances related to these plans going forward. For 2011, we would expect gross accounts receivables related to the extended plans to increase approximately $10 million. This increase in our gross receivable balances will decline during the year, so as we enter 2012, we'd anticipate no net additional growth. As a result, we expect that our overall Company bad debt expense rate for 2011 will be between 3% and 4% of revenue. We continue to focus on the best use of our cash balances. Consistent in our approach to the past, we intend to hold cash as required by the Department of Education, financial responsibility ratio, meet working capital needs, make required maintenance capital expenditures, and invest in high return projects such as start-ups.

As I discussed last quarter, we closely monitor the DOE financial responsibility ratios which are very sensitive to changes in equity. As a result, we did not purchase our shares in the fourth quarter 2010, but for the year we did repurchase 5.4 million shares at $155 million. During 2011 in January, under 10B-5 plan, we repurchased 3.7 million shares of our stock for approximately $80 million. As of February 17, 2011, we have remaining $211 million under our existing share repurchase authorization.

Just one additional item, as you look at our share repurchase, I'd like to comment on, during 2011 in January as we execute against the plan, the percentage ownership of our largest shareholder, Long Capital Partners, rose above 20%. This triggered an accelerated vesting in one of our stock compensation programs, covering grants that were made through early 2008. As a result, a limited number of nonexecutive employees received accelerated vesting of restricted stock and of stock options. None of the Section 16 Officers of the Company were impacted by this acceleration.

As we move into 2011, we're no longer going to report university as a full segment, instead reporting separately on AIU, CTU, and Art and Design. In our historical 10-Qs and 10-Ks, we've provided you the detail of each of these businesses, so this detail should be a good comparison basis for your future comparisons and models. As you know, we received cohort default information in February and our final cohort default information in September for each year. In the fourth quarter of 2010, we were informed by the Department of Ed that the cohort default information contained within their database, NSLDS, for loans purchased by the Department from FFELP lenders was incorrect.

These PUT loans were loans that were sold by FFELP lenders back to the Department. The Department was then responsible for lacing these loans with one of four federal direct loan servicers. The time it took to place these loans with one of the new servicers combined with lower servicing levels, provided by direct loan servicers relative to default programs, appears to have had a significant impact on our 2009 cohort default rates. Unfortunately, we did not receive any communication from the Department that the information in their database was incorrect until the 2009 cohort window closed at the end of September. We are still reviewing the data, but it appears that the default rate for PUT loans sold to the Department defaulted at nearly 2 times the rate of the population that was not sold to the Department.

None of our OPEs are in violation of the 25% two-year threshold based on the preliminary rates shared with us Monday. However, the preliminary rates we received indicate that the Company's overall CDR rate increased to approximately 16.6% from 9.8% last year, with cohort default rates across our institutions ranging from 7.9% to 18.9%. We are still reviewing the draft rates received on February 14 and will work with the Department to correct any errors prior to receiving our final 2-year default rates for the 2009 cohort in September. We also continue to invest in additional resources to work with students and ensure they understand their commitments and federal loan alternatives, and now, with increased emphasis on PUT loans. Our focus on students in their third year after entering repayment will also increase as the regulation transition from 2 year to 3 year basis; the third year has not been an area of focus to date. We are still gathering information with the Department related to the things I just talked about and the increase in defaults for the loans that were sold to the Department. We hope to hear more from the Department of Education over time.

In closing, it's been our policy not to provide guidance and in a challenging year, in 2011, this policy will be even more important. However, to help guide investors and analysts, we would like to provide you with some milestones for a year in which we anticipate a significant amount of changes to our business model.

Visibility for the upcoming year is difficult, and we've constructed some broad-based estimates based on our 2011 plan. As we implement our new business models in Culinary and, potentially, Art and Design, as we experience some credit loan deceleration across AIU until a comparable impact from our changes anniversaries in the second half of the year of 2011, and as we see the impact of the changes in our college prep course discussed by Gary, we would expect revenue to decline in the 2% to 5% range versus 2010. To proactively address our cost structure in light of business trends and somewhat offset the impact of negative operating leverage, we took the actions described in January to align our resources with demand and reduce our operating costs. As a result of the year, we would anticipate an operating margin of between 14% and 16%, again, based on our plan and based on the visibility we have entering the year.

With that, we will open up the call for questions.

We will now begin the question-and-answer session. (Operator Instructions) And our first question is from Bob Craig from Stifel Nicolaus.

I know you guys don't provide guidance, so I'm pushing the envelope here a little bit. But any read into start trends in the first quarter?

Sure, Bob. We're in the -- since we are halfway through the quarter, we have some good visibility. I think, from what we can see, the trends of the fourth quarter continue into the -- through the first, so for culinary and the health businesses, we would probably expect something similar, maybe a bit worse to what we saw in the fourth quarter.

For the university group, Art and Design, AIU and CTU -- I think AIU and CTU you'll see the same trend in the quarter. I just want to remind you that -- go back and look at 2010 first quarter starts. AIU was a plus 21. CTU was a plus 35, and Art and Design was a plus 53, so as you look at the comparable from the first quarter to the fourth quarter, the comparable is much harder for us in the first quarter. So, I would anticipate AIU and CTU trends to be, on a reported basis, worse than the fourth quarter based on the comparable that we are showing.

That's helpful. Thank you. Regarding the workforce reduction that was announced earlier, what annual savings should you realize from those moves?

Yes, we took a look at that. Remember, they are in conjunction with the culinary move and the changes in the model. The 600 positions will probably yield annualized cost savings someplace between $25 million and $30 million, and those have been embedded in the milestones that I provided you.

Okay. And do you expect with the changes that you have coming later in the year in Art and Design and so on that that might be -- that might not be the last action we see in that regard?

Well, I think we'll see what happens. I gave you some guidance on what Art and Design numbers would be if we impacted culinary. It's a fine line between 9010 and gainful employment, and I think all of us in the industry, because the rules are in such conflictual nature, have to find the window and how you go between that. And, we'll look hard at AIU, CTU and the rest of the businesses as the rules become more clear, hopefully get some more guidance on 9010 as well. If there's mild tweaks we have to do, if there's programs we have to teach out, we are doing everything everyone else is to do it on a program to program basis, but the material changes we've talked about in culinary and potentially later in Art and Design, we put out for you.

Okay, great. I'll turn it over. Thanks.

Thanks, Bob.

The next question comes from Blair Mlnarik from Robert W. Baird.

Thank you. I appreciate all the color on the contingency plans. Can you talk about, I guess, and clarify the magnitude of those tuition cuts and how you expect them to be received by students and the offsetting demand, I guess? Will the associates seeing the increase and bachelors seeing the decrease -- do you expect that to meaningfully shift your mix going forward?

Sure. I don't think the -- I wouldn't refer to them as tuition cuts. I would look at those as realignment of the tuition levels between the associate and bachelor's, to not discourage someone going from one place to the other and making it in their best interest to pick the degree choice they prefer.

Historically, as a company, we've enrolled everyone in a 2 plus 2 program in AIU and CTU and have not had direct entry into the bachelor's degree. Last year, we began opening up the direct bachelor's entry and as we did our January 1 adjustments of tuition, we thought it was best to align the tuition levels. We don't anticipate significant financial impacts from those changes. We just did that in line with what the student interest has been.

Blair, this is Gary McCullough.

Just to put it in perspective, these were not dramatic moves. For example, the tuition increase on our associate programs was about $15 a credit hour, so it was a margin move up in the scheme of things.

Okay, thank you for clarifying. Then, I guess, just quickly, were the -- I guess you said it was across the board that lead flow was down. Does that still apply to health or would you still see them as being relatively more insulated from the current cyclical trends and being a bit stronger there?

It's a little bit hard to look at health because of the start-up units. Across our base legacy health units, we did see lead flow down, not quite as much as we've seen in the other institutions of AIU and CTU. Obviously a lead flow, given our start-ups, is up significantly as we enter the market and new student interest is very strong.

Okay, great. Thanks. I'll pass it over.

Thank you.

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

Thank you and thanks for all the color about your plans. A couple of questions, the comments around 2011 and your broad expectations, does that include making all of the changes to Art and Design including things like tuition cuts?

It embeds the number that I gave you as someplace between $10 million and $20 million for Art and Design operating income for the year.

Okay. So, it does include those changes that you might or might not have to make?

It includes an estimate of what the operating income may be. All the changes aren't baked and they're not done yet. So, there may be some variation, but it's our best estimate right now.

Okay. And then in Culinary, you talked about a 50% cut to revenue per student, but revenue is only down in the high single digits to low teens in 2011. Is that just because the impact gets delayed into 2012 or are you assuming growth in enrollment there?

I think a few things. We will be teaching out the current programs, so the students in the current programs, that revenue, when they are on the 21 month program, will continue through 2011 into 2012.

Second, those students in our certificate program, the adjustments Gary talked about, was from 21,000 down to 17,500, so the shift in the RPS is dramatically driven by the movement from associates to certificate programs for new starts. And, so, you'll anniversary that out, the decline will be in 2011 and into 2012 as you have more certificate students at 17,500 and less associate students. Associate students will still continue at Chicago and Los Angeles, and also the bachelor's degree program will continue to exist in LCB for online students.

Okay. But, given the charge that you took and the kind of cuts that you are talking about, is it fair for us to think about that business longer term, top line being about half of what it is today?

I don't want to give you any guidance on the revenue what the -- the models that we built to support the valuation of the trade name reduced the trade name carrying value by about 50%, so obviously we are still carrying the trade name with $70 million, which shows that the business and the ongoing profitability continues to be strong to support that.

We think that as we enter into 2012, 2013, we are looking at low teens, 10% to 12-ish%, operating margins in that business unit based on the model, but there is a lot of variability that is going to have to be sorted out as we change through 2011, 2012; but that is our best estimate for you now.

Okay. Great. And then, just last quick question, can you give us a basic share count, please?

Right around $80 million.

$80 million. Okay. Thank you.

Thank you, Sara.

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

The margins at both AIU and CTU were actually up. I guess -- two things, sounds like maybe advertising spend was down a bit and there was some reduction in headcount of reps. So are those the primary drivers? And I guess with your commentary on starts this quarter and what seems to be trending in Q1, is the right assumption that the margins there are going to start to head quite a bit lower over the next few quarters? Or are there any other incremental cost actions that might support those remaining at fairly attractive levels?

I think your fourth quarter comments are pretty accurate. I don't want to give you any guidance or any thoughts on first or second quarter margins. There is not a lot of noise in our numbers from 2010 in those quarters to look at to try to normalize out.

As we go through the process with the SOAR program -- to be seen where the margins are and where the RPS is. So I can't give you that granularity right now.

Okay. But, there is no incremental cost actions, and if anything that SOAR program would probably leap costs higher and revenue to be delayed a bit. That's a reasonable way to think about it?

Yes, we're -- as we left the year, we're carrying about a rep headcount online about 6% lower than we did at the end of the year before.

Okay. And then -- I appreciate the commentary around the state authorization. Can you give us a sense, what states that do not have a higher ed authority where you may have some significant presence online? And how much -- what is your plan going to be if that remains the case a quarter from now? Will you just stop enrolling new students that are based in some of those states?

I know you are going to look for clarity on the states, the exact states we are talking about. I'm not going to satisfy you on that front. Suffice to say that we do have a list of states that we are going after. It's a number that is about 10 states.

We have done all the work to understand the number of students we have in those states and what the implications might be and I think we'll cross that bridge when we come to it; because, I think, when you try to paint things with a broad brush and say we do one thing one place or not another -- or across the board, depending on what the states we are dealing with, I think there would be different actions that are taken. So, we know what they are. We don't anticipate we're going to have any issues at this point in time, but we wanted to call out just to make sure people understand that we are doing all the things that we can do internally to make sure that we are ready, but to some degree, we are at the mercy of the state's ability to comply with what they have been asked to do.

Okay. Then just one last one for me, the financial responsibility score that made you decide not to repurchase shares in the second half of the year -- now that you are through the year and all those charges -- I guess you did some buy backs in Q1 -- is there any reason that would limit the amount of buy backs you would do this year -- to your net income or anything like that? Or do you feel like now you are back in a position maybe to continue to be more aggressive?

We did purchase back $155 million during the year; we purchased back $80 million here in the first quarter. Again, as we get towards the end of the year, we'll have to look closely at changes in equity, and because changes in equity are derived by net income, your buy back against net income is where you have to look at it. We ended the year with a ratio between 2 and 3. Our goal is never to go below 2, although you can go down as low as 1.5.

Okay. Thank you.

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

First, I wanted to ask about the SOAR program. Have you piloted that or do you any data that would suggest what percent of the students may end up not enrolling after going through that?

We have not piloted that particular program, as we indicated on previous calls. Some of the actions that we have taken prior to this, as we oriented students and brought them into our programs resulted in, in some cases, about 15% of the students choosing not to continue. We haven't done -- the important thing is, we'll continue to screen students at the front.

They will come into a course that we think is appropriate for them. When they take that course, it will help us understand whether they are prepared or whether they've got some deficiencies that we need to help them with in terms of incremental instruction, and it will also weed out some students.

And, the ones who don't pass the course or choose not to go on will not be charged for that course. The ones that, in fact, are successful will receive college credit and will continue on if they choose to, so -- but we have not piloted. We just -- we think it's the right thing to do to make sure that our students get a good sense of whether they are prepared; we get a sense of whether they are prepared and that they incur no obligation if, in fact, they are not successful.

Okay. On the Culinary business, I imagine the answer to this is somewhat embedded in what you're -- the changes that you're making, but Culinary has never been one of the highest return businesses in your portfolio. Is -- are the changes required under gainful employment such that at some point you'd have to consider whether this is a business that makes sense to be in at all?

I think, again, without going into much detail -- I think we always look at our businesses to understand how they are doing relative to our own expectations. We like the Culinary business. We understand that it has been one that has been looked at and people have talked about it not being a good return business or a business that will perform well as it relates to gainful employment. I usually remind people that as we think about cohort default rates and employment rates, this is a business that has performed best in our Company on employment rates and on cohort default rates. So, based upon that, we've liked this part of our portfolio. We are making these changes because we truly believe we can find a more competitive niche for the business to be in to continue to grow it over time.

Corey, I think we're being -- we're continuing to be very disciplined about the way we look at it. We've got 13,000 students in the program, we've got investment in real estate, and we have good outcomes as Gary said. And you can see by making the tough decision not to invest $8 million of capital into the Pittsburgh school, although it's a great school, we are being smart with our shareholder's money right now until we have better clarity about what the future looks like.

Okay. I appreciate that. And, just generally speaking, the changes you are discussing, other than what might be coming in Art and Design, do you expect that these are all the changes you are going to have to make if gainful employment were to come out identical to the draft version?

That's hard to say because, unfortunately, gainful employment, as you know, is on a program-by-program basis, and so we'll have to continue to look at each program. As we said before, we have over 1,300 programs in the Company. We will look at that; we'll see what the final rules are, and we still also have to get clarity from the Department about -- on gainful employment, what growth restrictions may look like, depending which category you are in and how you apply those. So, more to come when the Department comes out clear with what the regulations will be.

Okay. I appreciate it. Thanks.

Thank you, Cory.

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

Thanks so much. You mentioned the changes to your compensation policy for your enrollment counselors. I'm just wondering, have you seen any change, any kind of turnover? I know it's early, but I'm just wondering if there's been any impact as of yet?

Our turnover in our Admissions Organization at this point is flat to what it's been over the last year or so.

In terms of just the feedback from them, any color on that?

Not at this point in time. We have indicated to the Organization that we are going to a salary basis. We will be making adjustments to salaries as we go forward. At the same time, we've talked to our Organization about what we are putting in, and we have created a tiered structure in our Admissions Organization where people can continue to see upside growth in their salaries based upon their ability to demonstrate certain proficiencies and based upon their product knowledge.

So, it's not -- we really thought through what we are doing. We are in the process of rolling out the entire program. It's not completely done at this point in time, because we typically take salary actions in the month of March, so we will know more, likely in May.

Okay. Mike, thank you for the color on the cohort default rates and the impact of the PUT loans. I'm wondering what percentage roughly of the cohort loans were put to the department?

Somewhere around half.

About half. Okay. Great. And, in terms of the -- I'm sorry if I'm shifting around, here. In terms of your health education division, are there any new start-ups planned for 2011?

We are planning new start-ups for 2011. Probably somewhere around 3, depending on the nature of rules 9010, real estate, everything else that happens, and looking across our portfolio as done in the past, where we've redeployed existing real estate to health. We have been pretty successful at that, so we continue to look at our current real estate assets to see if one of them or two of them may be better served as a health location.

Okay. Great. Then, just in terms of a little bit more color on the 2011 outlook, what should we be using to model the tax rate and depreciation and amortization?

Sure. I would look at tax rates someplace around 35%. Depreciation and amortization, just look at the capital expenditure that we've had this year and roll it forward, so it should be slightly above, obviously, this year's number depreciation.

Okay. Great. Thanks so much.

Our next question from Trace Urdan from Signal Hill. Please go ahead.

Thanks, guys. I just want to echo my thanks for all of the color and detail you have given on your -- the steps you are taking. I think it demonstrates your leadership.

Along those lines, you clearly focused on outcomes, and my question is whether you've taken any kind of a look at the career placement efforts there? And, specifically, I'm interested in whether you secured any kind of employer feedback as you looked at what to do with Culinary and what kind of responses you got as to this notion of giving up degree programs in that field?

Sure. We actually do have a panel of employers who advice our Culinary Arts organization. We talk to them about what is necessary. At the end of the day, what they tell us is they worry about hiring people with great cooking skills. And so, based upon that feedback, based on what we know is valued, we have done a couple of things. We've tailored a program that will ensure that the graduates that we put out can continue to deliver the cooking competencies that our employers most value, and we've also continued to provide avenues of approach for those students who do want to go on to get either an associate or bachelor's degree.

So, we tried to find a way to accommodate both sets of needs while being mindful of what is required now in today's environment. Again, when we think about what we have done historically, our outcomes have been very strong, the placement rates have been strong, and the students' abilities, demonstrated by cohort default rates, to manage their debt has been demonstrated; but we are responding to the environment we find ourselves in, but utilizing employer feedback to make sure what we do is right.

Gary, just to follow up there, do you have a sense that -- I mean, is there any kind of return available to you from investing more resources behind career placement efforts with respect to improving outcomes? Or do you think you are already doing everything that you can do in that regard?

With regard to placement or salary? Let me understand your --

Well, I suppose they are related, but I was specifically concerned with placement. I guess maybe better salary would be one consequence of more help there. I don't know.

Sure. I want to put it in perspective. The growth that we've had in our career services organization during the quarter, during the year -- we were up about 21% in career placement personnel. That was already on top of what were strong outcomes from a placement point of view; but we understand, and felt the need to continue to invest in that area, and we have done it across all of our organization. We will continue to do that.

So our placement result, as it relates to the percentage of students placed, remain very strong in Culinary. We have talked to employers about skills that are necessary to ensure that our students get the best available jobs from a salary point of view, but as many of you have noted, entry level jobs in this field tend to be relatively low paying jobs. Our graduates also tend to grow more quickly because of the skills they have in the kitchen in terms of salary. So, we think, again, we're doing the right things.

I'm not sure what else to tell you at this point, Trace.

Is the 21% across all of the schools or --? I couldn't tell if your comments were specific just to Culinary or whether you were talking about the whole network.

The 21% higher across the Company, I think about 23% higher in universities, so high teens in the career based schools.

Great, thank you.

You're welcome.

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

Just to follow-up on what you said about the new compensation program, what is your expectation of how this is going to impact total compensation cost? And, also, is it your expectation that the change in the compensation plan will put additional pressure on enrollment growth?

Two things -- the first question I don't think it will have a material change. Remember, our program in the past is we have compensated representatives with base salary and with success payments upon graduation and the successful matriculation through course work.

And so we have carefully looked at the previous bonus plan or payment plan, if you want to call it that, for student success, and we've taken that and reinvested that back into our team, so there shouldn't be a material change. In terms of -- again, conversion rates or other things related to it, too hard to identify that. Again, we think that our reps have been really aligned around getting students through the program, getting them graduated and paid on their success versus enrolling the student.

Okay. Then a separate question. So for the most part you seemed okay on the 9010 numbers that came out this week, but in the schools that you were close to 90 -- and I think that there was one Sanford Brown school that was at 89.6 -- are you taking more drastic actions in those cases now to address this?

We manage the 9010 very carefully. We don't see dramatic actions as we go through 2011 on the 9010s. Some of that is obviously, when you look at schools, could be the timing of draw downs of Title IV money and different things that would put an institution closer to the high 89 range than maybe 85 to 87, so we don't see a significant issue in 2011 for our 9010s. Some of the Sanford Browns, because they have the highest 9010 rates, may trigger a 90 issue, but we will see what happens going through the year and when the rule changes as of July 1 on the [insets].

Okay. Great, thank you.

Our next question is from Ariel Sokal from UBS. Please go ahead.

Thanks again for the transparency regarding the changes to your business. It's a shame that others haven't followed your lead.

So, 2011 is clearly a transition year for the sector. On that note, would you lower your tuition prices were competitors to do so as well in 2011? Or put another way, what would it take to lower your tuition prices this year perhaps just in the university business?

Ariel, one of the stances that I have taken since I came to the Company is we just don't do across the board types of things. And so what we tend to do is we look at the competitive environment, and we try to understand whether we are out of whack, either on the low end or the high end, and make the appropriate tuition adjustments. And, so, we will be mindful of what is happening in the marketplace competitively.

If we find that we are out of whack in some way, we will look closely at us. Our business unit has -- are charged with the way they look closely at their tuition. They recommend the appropriate moves one way or the other, which is how we got to where we got to on university, we will continue to move forward in that manner. And so, again, we'll -- as you're looking at the marketplace, we do the same thing here.

How much flexibility do you have to lower tuition prices in the context of 9010?

Again, we have over 20, 25 OPEDs. You have to look at each one individually, so it's hard to make a broad-based comment on that. You can see the date of those that's been put out on 9010 where we range from the mid- to high 70's% all the way up to 89%.

How about just the university business for AIU and CTU? How much flexibility would you have if some of your competitors started lowering tuition prices on degree granting programs?

You would have to take a look at the data, but I think the data that came out has the university group in the high 70s%.

If military was included in the 9010 calculation, how many of your institutions would be above 9010?

I've not done that calculation, but about 25% of our students within CTU and AIU are military students.

Okay. Thank you.

You're welcome.

Our next question comes from James Samford in Citigroup. Please go ahead.

Just a couple quick ones, here, I just wanted to follow up on. It looked like the persistence rates at CTU were really solid here. I was just wondering if there is something interesting going on there that you would like to talk about.

And on the international front, obviously, solid growth there. How much of that is acquisition related versus organic? And is there a developing market for nontraditional proprietary schools in Europe, in particular? Thank you.

Sure. Let me give you a couple -- there's -- the persistence rate at CTU was nothing different than what we had done in the past in terms of our faculty engagement and our student success coordinators working with the students. So I wouldn't point to anything specific.

In terms of international -- our international business does very, very well. It was not -- our performance was not related highly to the International University of Monaco which we purchased in April. That's a small school that is doing exactly what we thought it would do in terms of expectations.

If you do look back to our fourth quarter last year, please remember we don't normalize it or do GAAP adjustment for it, but we did have a correction of an error last year in some of our GAAP adjustments, I believe about $3 million in the fourth quarter for international 2009, which shows this growth this year higher than might have been expected.

James, I want to answer one part of your question. You asked whether there is a developing market for nontraditional schools in -- developing in Europe. I participated in a symposium in Paris in January -- less about nontraditional school and more about the growing acceptance or the belief that there is going to be growing acceptance of online education in Europe. And so we like our European business, we like the base that we have there, particularly with our group [inset] in Paris, and we will continue to pursue that as a potential option to continue to grow our business.

That's great. Thank you.

You're welcome.

Our next question is from Bob Wetenhall from RBC Capital Markets.

This is actually -- hi, this is Tom [Ossinoff] for Bob Wetenhall.

I noticed you guys said that leads and conversions were down. I was wondering if you could talk about if you had seen any difference between the leads and conversions, if conversion rate was actually down more than leads?

Again, we don't give that kind of detail by specific institution, but both leads -- lead volume -- marketing spend, lead volume, convergence were down as well as the head count of our representative workforce.

Okay. Got it.

And along that line, since we have seen such wide variations in new student starts across the industry, I was wondering if you had thought about adjusting your marketing strategies based on what you have seen in the market place?

I can tell you that we are always looking at the marketing strategies and we continue to adjust them. We did that last quarter. We look at where leads are coming from, the sources of new students, which of our sources are converting better than others. We drop the ones that don't convert well.

We make adjustments on the go all the time. We have not made significant changes in the strategy. We have done some things, particularly, more recently in the beginning of the year, where we have changed our websites to make them more student friendly, so we are seeing, once we get students to our websites, more organic lift from them having landed on one of our pages. So, again, we are making a number of subtle changes, but we do that on a going basis, nothing radical.

Thanks.

You're welcome.

We have no further questions at this time.

Okay. Given that there are no further questions, I do want to take just a couple seconds to close our call.

I have had time to reflect as I'm approaching my fourth anniversary here at CEC and it's also my fourth anniversary, obviously, in the proprietary education sector. I will be passing that milestone in a couple of weeks. I can tell you that it has been a bumpy ride. As I reflect on where we are as an organization, I'm really proud of what our CEC team has accomplished over the course of the years. We have worked hard to become a better institutions and in turn, a better company. The results over the time since 2007 would reflect my point of view that we've made a great deal of progress.

Since 2007, our total revenue's grown almost 30%, even after we count discontinued operations that generated $110 million in 2007. Over the same period of time, our normalized operating income increased 230% or $210 million and our margins have increased about 700 basis points. Our employee turnover is down about 30% since 2007, but most importantly, we now serve about 117,000 students, up more than 40% from where I started in 2007, and it's because of those students that our -- that I am and our leadership team is not satisfied or complacent about what we have to do with the business. The external scrutiny of that and the new demands that we face today fit well into the things that we have been working on for the past few years, so we will continue our focus on changing lives through education by doing things the right way.

We have made tangible and measurable improvement in our business, but it's clear that given what is going on, we have to become even better at an even faster rate than we have in the past, so in 2007 -- excuse me, 2011, we will continue to raise the bar on quality. This means we will continue to enhance our programs, we'll ensure they prepare students for success in their chosen field, and we'll improve our methods for identifying students that are more likely to persist and graduate for better student outcomes.

As I said earlier, it has been a very bumpy ride, and I expect 2011 is going to be just as bumpy and just as challenging as the last several years, but I know at our core we are a stronger and more capable company today than we were 4 years ago, and that is a testament to our terrific employees, so I want though thank them publicly on this call. I know that with them, we are going to deal with whatever comes our way.

With that, I want to say thank you for your interest in our company. Have a good day.

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