Perdoceo Education Corp (PRDO) 2011 Q1 法說會逐字稿

Welcome to the Career Education Corporation first quarter 2011 earnings conference call. My name is Christine and I will be your operator for today's conference. 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 Jason Friesen, Senior Vice President Investor Relations. Mr. Friesen, you may begin.

Thank you, Christine. Good morning everyone, and thank you for joining us on our first quarter 2011 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 opened for analyst and investor questions.

This conference call is being webcast live within our investor relations section of our website at www.careered.com.

As you access our website, you will note it has been recently redesigned for easier use by investors and potential students. The replay of this call will also 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.

Now, before I turn the call over to Gary, let me remind you that yesterday's press release and remarks made by -- 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 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, 2010, and our quarterly and other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, we undertake no obligation to update those risk factors or to publicly announce the results of any of these forward-looking statements to reflect future events, developments, or changed circumstances or for any other reason.

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

Thanks, Jason. Good morning, everyone. Thank you for joining us on this morning's call. I will begin with a brief overview of our first quarter highlights. When my remarks are concluded, I will turn the call over to Mike Graham, our Executive Vice President and Chief Financial Officer to provide more details on our business performance.

The past year has been challenging for companies in our sector. Through it all, our team has remained committed to our purpose of enhancing lives through education. We understand that any measure of financial success we have as a Company must be rooted in our commitment to delivering high-quality education and assisting our students in achieving positive outcomes as a result of their new skills.

First quarter results were in line with our expectations. We continue to take steps to move our Company forward, keeping in mind external demands, and new rules under which we will need to operate. As new student interest slowed across a number of our institutions, we continued to proactively manage costs, and we completed the vast majority of the reorganization we announced in January.

The culinary team continued to make good progress in its preparation to transition the new certificate program we discussed in detail on our fourth quarter earnings call. The team remains on track to roll out their new program by June 30, at most of our culinary schools.

And the Student Orientation and Academic Readiness Program, which we call SOAR, will be implemented late in the second quarter for AIU, with CTU following closely behind early in the third quarter as we discussed in last quarter's call.

During the first quarter, we achieved 3% revenue growth over the first quarter of 2010. Operating income of $113 million, was a 27% increase over last year's first quarter. Our 20.8% operating profit margin was 390 basis points above 2010. And student population was approximately 119,000, 2% above the first quarter of 2010.

Like others in our sector, we continue to see the impact of more challenging comparables, and the softening of new student interest in a number of our educational focus areas. New student starts for the first quarter of 2011 were down 14% versus the first quarter of 2010. Similar to last quarter, new student interest was down across nearly all of our institutions.

While there is no single cause, we continue to believe that the combined effect of the weak economic environment, negative publicity that has occurred over the past quarters, increased competition for prospective students and more challenging comparables is having an impact across the sector.

Our current expectation is that these trends will continue during the second and third quarters of 2011. We also expect that new student starts will be impacted, as we implement the SOAR program in AIU and CTU.

As I'm sure you're aware, from a regulatory perspective, we continue to wait for final gainful employment rules. Education Secretary Duncan has indicated the final proposed rule will differ from the rule on which we previously commented. We hope the Department of Education made constructive changes prior to its recent submission to the Office of Management and Budget.

We are also pleased that the Department chose to publish several Dear Colleague letters related to state authorization, incentive compensation, and misrepresentation. While the letters provide some clarity, we continue to have concerns about the fairness and the practical implementation of the rules.

During the first quarter of 2011, we rolled out a new compensation program for our admissions personnel. The incentive compensation clarifications provided helpful guidance with respect to covering individuals and measures for compensation increases.

The guidance didn't cause us to change our plan, but rather it reaffirmed the changes we made were appropriate.

During the first quarter, our online institutions filed applications for additional state authorizations, we believe will be necessary based on the new rules. We were also pleased that the Department will delay enforcement of the rules until 2014 if institutions are making good faith efforts to seek required state authorization. We believe this could otherwise have had a negative impact on students.

As we shared with you in the past, the art and design team is developing action plans pending the final publication of gainful implement rules from the Department of Education. When we understand any final rules, we intend to share our plans with you. In any event, the goal of those plans will be to balance the competing requirements of the proposed gainful employment rule and the existing 90/10 rule.

CTU's performance for the quarter was generally in line with the expectations we outlined during our fourth quarter call in February. Even in this period of uncertainty, we believe it is important to continue to create and introduce new programs. Recently we've launched a number of new programs in the CTU, including a bachelor science and psychology degree program with a concentration in organizational behavior, for which we've seen strong student interest.

At this time, we have nothing further to report on the Department of Education Inspector General's audit division's Title IV compliance audit of CTU. We will update you on our next earnings call it there are any developments.

AIU new students start performance in the first quarter 2011 was at the lower end of our expectations, and was down 23% versus 2010. We experienced declines in new student interest in the form of leads early in the quarter, but saw enrollment trends improve in the second half of the quarter.

During the quarter, AIU had two accreditation visits. One was from the Higher Learning Commission, relating to the approval of two accounting programs -- excuse me, two new accounting programs. The other was from the Accreditation Council for Business Schools and Programs, relating to programmatic accreditation of AIU's business programs.

AIU was encouraged by the visit from the Higher Learning Commission. Additionally, I am pleased to announce that the ACBSP has granted accreditation for all of AIU's undergraduate and graduate business programs. We believe this is a testament to the quality of AIU's programs and its emphasis on educational excellence.

We will continue to leverage our leading technology as a point of differentiation and to provide students the access to a customizable education delivery system best suited for their individual learning mode.

In April, we launched enhanced iPhone -- an enhanced iPhone application for both our AIU and CTU institutions. Additionally, for our AIU students we have developed a downloadable iPad application that enables students with the appropriate user credentials to complete their course work, watch multimedia content, interact with other students and instructors, receive school announcements and check grades and assignments. We anticipate a similar application will be available shortly for our CTU students.

Finally, as you may recall, we previously discussed that in late 2009, AIU underwent a program review by the Department of Education. We have nothing further to report and we'll update you on our next earnings call if there are any developments.

Based on current regulation, the second quarter of 2011 will be the final quarter where the increases for the Stafford Loan Level Eligibility Pass in 2008 can be reclassified and counted in the "10" when computing compliance with the 90/10 rule. This is a meaningful change and we will need to closely monitor our health institutions moving forward on their 90/10 compliance.

While we did not have any health institutions violate the 90/10 rule in 2010, some of our health institutions were close to 90% threshold. As we complete 2011 and enter 2012, we will need to closely monitor the 90/10 levels across our domestic institutions as the full year impact of the expiration of the Stafford Loan reclassification increases the Title IV percentage.

During the second quarter, our continuing focus will be on the effective roll out of the culinary model. Disciplined cost management to partially offset negative leverage associated with declining new student starts.

Implementation of the SOAR model, which we believe will have a positive effect for both students -- prospective students who may not be well prepared for success in our online institutions, and our institutions, which we believe will see a positive impact on retention and default rates moving forward. In compliance with the 13 final negotiated rule-making regulations that were published last year.

With that, now I would like to turn the call over to Mike.

Thanks, Gary.

As Gary discussed in his remarks, our first quarter results were in line with the expeditions we covered with you in our last earnings call. Let me begin by sharing with you some of the first quarter highlights.

During the quarter the Company generated revenue of $543 million, which is an increase of 3% over the first quarter of 2010. Operating margin increased to 20.8%, representing a 390 basis point increase over last year's first quarter. Due in part to the cost savings initiatives that we put in place in January's reorganization.

Additionally, our results in the first quarter also included a $7 million insurance recovery, which represented reimbursement of previous years' legal defense costs. As you recall, our first quarter 2010 margin was negatively impacted by an increase last year in the allowance for doubtful accounts and lease termination charges.

For this year, new student starts were down 14% over last year, while student population grew 2% over the first quarter 2010. Now let me cover the results by segment.

Revenue for AIU was $104 million, down 11% from the first quarter 2010. New student starts for the quarter were down 23%, continuing the trends we saw in last year's fourth quarter, of overall market softness.

Again, we believe the softness is due in part to the continued weak economic environment, negative publicity in the sector, and also the increased competition for prospective students. AIU's new student interest in the form of leads was lower than the first quarter 2010, due again to a decline in the overall market and a 9% reduction in our six-month advertising spending versus the comparable period.

During the quarter we experienced stabilization in new student interest to enrollment conversion, while also experiencing an increase in our attrition rate at AIU. With that, operating profit in the first quarter was $28 million, and operating margin was 26.5%, down 160 basis points from the prior year.

Our revenue per student for the quarter declined about 1%, in large part due to the increased flexibility of the credit hour structure we implemented last year. As students now can move from an accelerated to a more traditional pace of study.

For CTU, revenue grew 6% over the first quarter of 2010, to $118 million on a 1% increase in student population. New student starts in the quarter were down 16% as we overlapped a strong first quarter last year, and again experienced the market softness in new student interest this year.

As a result of the softness, we reduced our advertising spend level 3% in the current quarter, and our advertising spend over the last six months is slightly up versus last year's comparable six month period.

CTU's operating profit was $36 million in the first quarter, 23% higher than last year's first quarter. Operating margins rose 420 basis points to 30.7%. During the first quarter our culinary arts revenue decreased 1%, to $92 million, on an increase in student population of 11%.

This reduction in revenue per student was primarily due to the combination of degree mix and grant levels. New student starts for the first quarter decreased 8%, primarily due to a reduction in new student interest.

Culinary arts operating income for the quarter was $14 million, operating margin was 15%, a 620 basis point increase from last year's first quarter. As Gary mentioned, the rollout of the culinary changes we discussed in our last call are proceeding in line with our expectations and we remain on track for implementation by June 30.

Revenue for health education was $116 million, up 12% from the first quarter of 2010. Health education student population increased 11%, over the first-quarter last year, while new student starts decreased 3%. If you exclude our health start-ups, student population was 8% higher.

New student starts, excluding the startups, were down 8% in the first quarter 2010. For the first quarter of 2011 operating income was $12 million, or 10% of revenue, including $4.1 million in operating losses for startup campuses. Operating losses for the campuses last year were $1.1 million. Excluding the startup schools, the operating margin for health education would have been 13.9%.

Revenue for art and design was $65 million, up 3% from the first quarter of 2010. Art and design's new student starts during the quarter were down 19% compared to last year and student population ended 7% lower. Operating margins were 16.1%, 580 basis points better than the first quarter of 2010.

Finally, in international. Our revenue for the international segment increased 15% in the first quarter 2011, on a 14% increase in student population and an 11% increase in new student starts. Operating income was $14 million in the first quarter, with operating margins of 29.1%. Let me update you on our financial position. As of March 31, 2011, the Company had cash, cash equivalents, and short-term investments of $399 million.

Our cash flow from operations for the three months ended March 31, 2011, was $60 million, with capital expenditures in the first quarter increasing to $24 million or 4.4% of revenue, versus $20 million in 2010.

This includes $9 million of spending to complete the build out of our new campus support center. Our move to the facility was completed in March, and now spending is essentially complete.

From a real estate perspective we have accomplished much in the last three years. Including the sublet or termination of obligations representing 1.6 million square feet of leased space. This includes our move to the campus support center, which enabled us to consolidate out Chicago-based teams.

Additionally, our future lease obligations from continued operations have decreased 20% since the end of 2007. Also in the quarter we sold a parcel of land not being used by one of our schools for $6.3 million, a gain of $1.4 million, which is reflected within the income statement in the first quarter under other income.

Also note, as we have shared with you on our previous earnings call, we have discontinued our student extended payment plans for new students across all institutions within the Company. As a result, going forward, we will not see significant growth in our receivable balances for extended student payment plans. We anticipate the gross receivable balances for these plans will increase less than $10 million this year, with the increase in balances declining quater-over-quarter.

In the first quarter, the Company purchased 4.1 million shares of our common stock for approximately $90 million. And as of May 4, 2011, the Company has remaining share repurchase authorization of $201 million.

Finally in closing, our visibility for the upcoming year continues to remain difficult, and we anticipate the recent market trends to continue in the second quarter and into the third quarter.

In addition, as Gary mentioned, late in the second quarter we will roll out our SOAR program for new online undergraduate students who do not have previous college experience. This course will identify students who may need individual assistance or academic development.

Students unprepared for college work will be dismissed without a grade, will not be counted in the institution's enrollment metrics, and the students will incur no tuition for the course. We will begin to see the impact on the key metrics of this program, and on the key metrics of the institutions in both the third and fourth quarters of 2011.

With that, let's open up the call for your questions.

(Operator Instructions)

Gary Bisbee, Barclays Capital.

Hi. It's Zach Batum for Gary.

Question on your health segment. As demand seems to be getting more challenging, do you see the weakness as a result of the improving economy, and also, do remain committed to continue opening new campuses?

Thanks for your question. We do see some of the challenges as a result of the improving economy. We've seen demand slacking as things have improved. So that's what we contribute it to. We continue to utilize many of the same regeneration activities that we have used before, as we have done that, we've seen the responses to our TV and local media advertising be a little bit less than it has in the past. So we do believe its attributable to the improving economy. We intend to open up 2 new health schools this year. Beyond that we'll continue to evaluate markets that we might go into where we think demand will be strong.

Okay. And the targets you provided last quarter for culinary, which was mid-teens margin and 11, and then low double-digit longer term. Are those still achievable? And would those seem to imply significant cost cuts on top of the expected reduction in bad debt?

I think 13 weeks after giving to those milestones, I think we still are committed to those from the roll out we've seen. Again, the rollout concludes on June 30, and so we will know more about the student mix between associate and certificate programs, between online and certificate programs. The cost structure we have taken a lot of good steps to align the cost structure to the new student population. You've see in the Q and in our disclosures the significant reduction in bad debt. We feel good about the program and the pricing in terms of being able to have more students who may be attending community colleges or elsewhere to get a great education Le Cordon Bleu and new student for us. I don't think in the last quarter anything has changed from the amounts that we have given you. And we did say as we get to 2012, a lot of it is predicated the model and how the model mix comes through. We won't know that until more in the third quarter.

And if I could just sneak in one last question. CTU and AIU margins held up well given the enrollment decline. But with revenues likely to decline at CTU and also to decline at AIU, is there anything to stop margins from contracting even more in the remainder of 2011? And what costs are you considering reducing in this segment.

I think we look at it two ways. We look at metrically driven costs and we look at our fixed cost structure. We did take actions against the fixed cost structure in January. We talked about the $25 million to $30 million of savings across the company that we will achieve for the year. From a metrically driven standpoint, we have reduced our advertising spending, right in line with the slower demand that we are seeing. We continue to reduce the spending. We have also reduced the number of admission reps, not through any type of program, but through attrition, over time as the lead volumes have fallen. So the metrically driven costs, academics would be the same place that student population saw. We feel very comfortable being able to remove those costs. Fixed costs, right now we leave in place, and so we will have some deleveraging on the model as we go forward the next couple quarters.

All right, thanks a lot.

Jeff Silber from BMO Capital Markets.

Thanks so much. In your prepared remarks you talked about the recent trends continuing in the second and third quarter . I'm just wondering, what do you think is going to happen in the fourth quarter or why did you decide not to mention is. Is there something going on that we should know

I think we tried to be as transparent as we can. We know our second quarter trends because we're obviously half way through the quarter, and we can start seeing our lead trends here in the second half of the second quarter leading to third quarter new student starts. Fourth quarter visibility is very, very difficult to see right now. So we are not able to comment more besides annual guidance that we've given and the immediate trends that we see.

Okay. I understand. I appreciate that. I was wondering also if you can comment on the recent changes or potential changes in the cutting of the year-round Pell Grant. What impact do you think that will have on your business?

Sure. We are looking into that now. Our total Pell Grants for the year 2010 for about $450 million, and about less than 10% of that was the full-year Pell. We are doing an analysis to determine how much additional capacity many of those students may have under the Stafford levels when their Pell amount drops. Where they can continue to gain financial aid through that. We are also looking at the additional cash payers that we have from students. So the year-round Pell Grant may have been $40 million that would be lost over time. However, other sources of cash and Stafford may offset a good portion of that.

Okay, great. And just a couple of quick numbers questions. For modeling purposes, what should we be using for tax rate and capital spending this year?

I would look at tax rate some place between 36% and 36.5%, up from the previous years as we've had some benefits from software credits in the past. And then, I forgot -- I missed that other part of the question, I'm sorry.

Jeff, can you repeat that part of question?

I'm just looking for your capital spending for this year.

Sure. Sorry about that. I think the capital spending will probably range between 3% and 4% of revenues.

Okay, great. Thanks so much.

Thank you.

Jerry Herman from Stifel Nicolaus.

Thanks. Good morning, everybody. As you guys get closer on the orientation and SOAR program, could you maybe help us in terms of what your estimate is on the impact of the program for student flow? I'm sure you've engineered it in a way that you have some ideas.

We have built some models, and those models are incorporated in the milestones we gave you for the year. In terms of the details of the program, too early to tell and too early to disclose what we have modeled in because the models have a great deal of assumptions about the incoming student, whether it's a previous college credit student or new student. And so it is too early to tell you until we get to that first start here at the end of the second quarter. We will have more to share with you as we get to the third quarter.

Okay. And then compensation changes for enrollment reps. Help us think about the potential dislocations there, and also, how you think about how that will impact the average compensation of those individuals?

Yes, we basically went through a program where we looked at the total compensation and rolled everything into a straight, salary-based compensation plan. It's too early to tell whether that is going to have a material impact on what we're doing with our reps, but they understand what we have done, how we've done it, and we will know more as things play out over time. Our admissions reps, like many others, have gotten used to having the ability to earn a bonus over time. We tried to account for what they had previously and rolled that into their base salary. And so at the end of the day while there may be a small -- a small change in what they would get versus what they had previously earned, it is fairly consistent with previous years for them.

And then just a quick one with regard to trends. It sounds like AIU actually improved relative -- relatively speaking later in the quarter. Is that fair?

We'd say we saw stabilization of the trend. The first half of the quarter was worse than the second half. I'm not sure I would call it a strong, improving trend, but a stabilization of the trends that we had.

Thanks guys, appreciate it.

Sara Gubins from Bank of America, Merrill Lynch.

Thank you. Thanks for your comments about 2Q and 3Q. When you talk about trends continuing, you're start comparisons get a lot easier in the second and third quarter versus the first quarter from last year. So I am wondering if that means as trends continue, that you would actually see your students start declines get better versus the first quarter, or do you think you could stay at that same level?

I am not going to give you specific numbers right now in terms of the trend. We did have a very strong first quarter last year as you know, at a plus-31 new student start in the second quarter, still a strong quarter just not a strong. So you have comparability change. That said, we are seeing lead flow declines and new student interest declines at a higher rate than we did as we left the fourth quarter. So think it's hard for me to give you the model, but I would model those 2 things. But we think we will see the same type of trends from the first quarter here ito the second. And additionally, as you get into second and third quarter it's a modeling on the SOAR program will be important. So a discrete number is hard for us to give right now.

You mentioned in the prepared remarks that the weak economic environment is probably hurting demand? By that do you mean that people don't want to take on loans or is there something else?

I wish we had a great answer for you. What we know is, we see a decline in demand like most others in our sector. Overall, our starts were down as you saw. Our lead flow was down across nearly all of the institutions that we've got. And the rate of new student interest was down particularly at AIU and CTU as we discussed as well. So we don't think there is a single answer. We think it's a combination of things that have happened. We've made some proactive adjustments as it relates to our marketing programs. We engage in a number of strategies that would shift our marketing mix, so we dropped our lowest performing lead aggregators, we increased our spend, you know the more promising channels, including pay-per-click and other types of quick-to-lead types of things for our business. At the end of the day, while we have made some proactive adjustments to make sure that we can focus on the most promising students, net net we have just seen declines across our business. So we think it relates to the economy itself. We think that there is some aversion to our institutions, and is that broadly in the sector, based on what's happened across the media over the past year, year and a half. So we will continue to plow into -- we will make smart changes, some again proactively driven by us, some we think that are market-driven.

Great, thank you.

Trace Urdan from Signal Hill.

Thanks very much. I'd love to follow up with Sara's question there. You all obviously operate a number of very different types of institutions with very different types of student profiles. So Gary, given those comments you just made, I am wondering if it's possible to parse those factors based on those different markets that you are serving. Do think there are some markets that are more affected by this aversion you're describing and other sectors that may be more affected by economic conditions? Can you give us a little bit more color there?

Briefly, I wish I could give you more color there, but the reality is just as we said in the prepared comments, we are seeing similar declines across each of our institutions, and to your point, they do have different types of students that are motivated by different things. We've seen that those same types of numbers across each of our institutions, and so I can't give you greater detail because we don't see a breakout in our analysis of the business at this point.

And you're not getting any kind of feedback from the folks that are running those institutions to give you some indication there?

Not that I could give you with a degree of certainty that you can take to the bank. So no, we're not seeing it. Again, what we've seen is, a bit more program mix activity in the university business. We saw -- we proactively drove some declines in CTU as we've talked before, because we reduced some programs, we eliminated some programs. But we are not seeing the types of changes that we can delineate across the institution as you might like us to at this point in time.

Okay. And I'm going to make one last run at this. Do you think that there is any distinction to be drawn between those schools that have ground-based campuses and those schools that are predominantly online with respect to any of these factors? Do you think the publicity is hurting online schools more for example?

Again, I wouldn't say that's right.

Okay, fair enough. Thank you, Gary.

We will continue to look at it, and if we have anything that's meaningful for you the next time we have a conversation we will let you know.

Brandon Dobell from William Blair & Co.

Hi, guys. Good morning. I wonder if I could talk a little bit about the marketing mix. In terms of where you are right now, and where you anticipate the mix between what's called traditional sources, online, or things you haven't been spending an awful lot of time during the last couple series of quarters. Do anticipate a big mix shift in terms of how you go students? Looking out the next year or so, or if there's any kind of color by brand that would be helpful to get a sense of as well.

Sure. I think the. We're getting some feedback there. Brandon, could you put your line on mute? I think the feedback is coming from your line. Thanks. I think what we are seeing from the media mix standpoint is we have consistently held our mix to about 70% of online aggregator type activities, about the 15% television, and the remainder of personally developed leads and other sources. We haven't seen the need to structurally shift away from that. We've seen the conversion rate and the student interest change across those resources rather equally, and not being delineated across those. As we enter the period here July 1 and we look at the rules on misrepresentation and the responsibilities of the lead aggregators, we have spent a lot of time with each of our the aggregators working through contractual terms, their marketing programs, and other things to make sure they are fully compliant, we are fully compliant with the new rules on misrepresentations. That could cause changes in our mix a bit. That could cause changes among the aggregators that use, but we have no plans in the immediate future to do a large shift away from aggregation channel to another channel. And it is not significantly different across business. Obviously the AIU and CTU institutions have a higher use of aggregators and online sources where health and culinary have higher uses of television and personally-developed leads.

Fair enough. From a grant or scholarship perspective, maybe some color on how you expect that to play out the next several quarters. Do you think you have the right kind of mix now of using different incentives for students early on or I guess later in their careers? Thanks.

We have looked at that. We think right now based on the changes we've made to the culinary model, the changes in pricing we have made with AIU and CTU, balancing 90/10 against gainful employment, dealing with the oversight being the students can still be able to do, which hasn't been addressed yet. The use of grants and scholarships is pretty consistent. In culinary we have looked at giving certain scholarships/grants, more grants to students who have earned those to help them get into the school as we have discontinued our lending program. We are watching state grants, which are not an important part of our mix. We've seen the changes in the Cal grant program, which to us is immaterial. It's less than a couple of million dollars. So nothing major in the shift from what we can see in these scholarships and grants.

Okay, thanks a lot.

Susie Stein from Morgan Stanley.

Hi. I am just wondering, would you attribute any the strength in operating margins from the lower starts and just a lower cost of serving these students? Would this be viewed maybe as a short-term phenomenon?

I'm not sure I would call it a short-term phenomenon. I think we are pretty good at reducing the variable costs as we can, when we see changes in the student interest or we see changes in population. And so the marketing changes we made in terms of the leads, if the demand is not there we simply have not bought higher than we need to based on the population that we are desiring to bring into the institutions. Adjusted the number of admissions reps from the company is a calibration that we do through attrition and through hiring, which is a long-term trend. You've seen us do that. Our representatives have range anywhere from 1,800 to 2,700 over the last 3 years, so we have been able to, through attrition programs and other methods, allow those costs to move with the population. So I wouldn't call those short-term steps. I would call those steps that are just calibrated with the metrics of the institutions.

Okay and then, I'm not sure if you'd be willing to do this. But you could you maybe quantify in any way the expenses that you think you have associated with the SOAR program? How much of an impact do you think that will have on operating margins?

Too early to tell. There is very little expense. It's the first course that students will take. We previously had an orientation course, we have now expanded this to a 5-week course, which is the first course in their sequence. So it's a traditional course of education in their program. So there is not a lot of additional cost that would go with that. The loss will be the 1 quarter of revenue -- or 1 term of 5-week revenue for the student, who, if they're unable to complete -- cannot go further in the institution and we'll lose that student. So theoretically there could be some lost revenue obviously for students that in the past have moved through the orientation program, have moved into a course 2 and potentially have left the institution upon the inability to keep up with the academic curriculum. So we will see a revenue decrease, which we know, and which is intentional. We should see an improvement over time in our persistence and our graduation rates as we continue to get the students that are best prepared through the institution.

Okay, and maybe just one more. How are you planning on dealing with the 90/10 issues? I think you mentioned tuition increases, but could you maybe be more specific about how you're going to address that at the health institutions?

Sure. We're looking carefully at where the 90/10s land. We didn't have an issue in 2010, we'll see what happens at the end of 2011 for certain of the institutions. We have a couple of tools available. We have the tools of helping students bring in more cash and more cash paying students. We have the ability to bring in other type of program revenue on a non-Title IV basis, i.e., continuing education, CPE credits, other things that health professionals need that we can give them across our 39 different schools. For certain institutions we can look at tuition increases. We don't think that is in the best interest of the students. We hope that there is some legislative relief because we think a lot of us are facing the same issues, especially with gainful employment and this small needle that you can go through. And we're really hopeful that the over-stipending can stop. We think it is in the best interest of the students not to take down more Title IV and Stafford money than the programs require. And when a student does that and brings that student to 100% in the 90/10 calculation, and brings on debt it hurts the gainful employment ratio and it hurts them in repayment. We think that is bad policy. We are hopeful that, that may be an area the government looks at to help students.

Great. Thank you.

Corey Greendale from First analysis.

Just a couple quick ones for me. Just following up on that last answer. Can you give us a sense, if you were to factor in the sunsetting of the inclusion of the 2000 increase in the unsubsidized loans in the 10%, how many or what exposure would be -- how many OPIDs would potentially be above the 90% now just with that one change?

Not able to comment on that. As you know we have 23 or more different OPID numbers. We do the calculation by OPID and it's a specific calculation done on December 31, so it is hard to comment on that. Obviously the shift in the Stafford and the (inaudible) for next year is very, very large for most of us, and it does move your metrics. I can't tell you how many basis points, but it moves from our institutions from all being within 90/10 to certain of those having issues as we enter 2012 on 90/10.

Okay. And then my other question is just for modeling purposes. On the corporate expense. If add back the $7 million legal recovery and you get somewhere in the range of $8 million is that a good run rate to use for that item?

Yes. Hard to comment, but there was nothing else unusual within this quarter beyond the $7 million legal settlement.

Okay, thank you.

Thank you, Corey.

Blair Mlnarik from Robert W. Baird.

Hi, thank you. If I could come back to margins one more time. Just kind of given the targets that you have already provided for 2011 and no change there in the implied compression for the rest of the year. Could you give a bit more color either by your different segments on what the primary drivers will be there?

The primary drivers of?

Of the implied margin compression.

I think, if you look forward to the rest of the year, with deleveraging in the model, again the 3 buckets of cost -- you would say metrically driven costs -- you would talk about controllable and non-controllable costs. As population falls, we do delever, and obviously in the ground campuses with an occupancy rate of about 10% to 12% of revenues, the delevering is different than the online institutions. As we go forward and in the models that we have given you in terms of our milestones, we have looked at a 14% to 16% overall corporate operating margin for the year, and give it a negative 2%-to-5% range on our revenue. I think given the trends we're seeing, it will be towards the bottom end of the 2% to 5% range. We'll do our best to offset the impact of deleverage, and then again, as I spoke to earlier, academic costs -- the expense are population related are adjustable, admissions costs and marketing costs are adjustable. Other fixed costs of the company are more difficult. Over time, if we need to reduce other costs, we will. But we have no plans at the present to do so.

Okay. Thank you. That is very helpful. I guess as a follow-up for your other TNA, so not including bad debt, would we assume that most of the rest of the spend there is pretty fixed and as revenues go negative for the rest of the year that, that would be a primary area of compression?

I think all of the costs, we will try to move all the costs down as population moves down. You probably have more non-controllable fixed costs in that line item than you do some of the others.

Great, thank you.

James Stanford from Citigroup.

Great, thank you. Just wanted to touch on, I think last quarter you called it a realignment of tuition levels for your culinary and your art and design. Where are you in assessing art and design at this point? And your thought process about how you're making some changes, or potentially making changes there?

As I said we -- in my prepared remarks and again last quarter, we are looking at a number of different options for art and design. Some of them are in line with some of the activities we've taken on. Primarily in our culinary business as they are similar with ground campuses. But until we understand there gainful employment nets out, we are not going to comment further on what we and intend to, because it will be in response to that. But again, all of the activities we've undertaken in culinary, some in our health business, would be things that we will consider doing in our art and design business. .

Also as we talked about last quarter, it is a lot more collocated in terms of model because we have Associates, we have Bachelors, we have Masters and we have online students.

And we have a range of accreditors. So the complexities in art and design tend to be a bit more challenging than something like we have in our culinary business.

Fair enough. Have you provided any sense of what percentage of your students would actually need to go through the SOAR program?

We have not given any kind of color guidance on that to date.

Okay. One final one, on the international side, any benefit from currency? I assume you have some benefit from currency there in this quarter in terms of driving some of that growth, and I think there was also $1.8 million from acquisition related. So is your growth rate organic, x-currency, x-acquisition?

We gave you some guidance last year about the University of Monaco is doing. The foreign exchange rate difference in the first quarter was very small. I think if you look at the Euro versus dollar in the first quarter it was somewhere around $1.38 for both periods, so there wasn't a lot in the quarter. As you go forward at $1.50 conversion rate, depending on where it goes, remember that will hurt us in the second half of the second and the third quarter as those are traditional schools that don't run operations in the summer and they lose money in the fourth quarter. As students return, we go back to profitability levels. So the weaker dollar hurts us in late second through the third quarter, and helps us in the third and fourth

Fair enough. Thank you.

Ariel Sokol from UBS.

Hi, good morning, congratulations on the quarter. Just a couple questions. The first one. You guys made changes to tuition at a AIU and CTU during Q1. What was the market feedback to those changes and was it a benefit to starts and other systems?

The market feedback, the student feedback was small. We traditionally have made changes on January 1 to different tuition levels within AIU and CTU and again we did it this year. We did it to simplify things. We did it to encourage students to move towards bachelor's programs versus associates. The biggest impact we've seen is that year-over-year we have had about an 850 basis point increase in the number of bachelor students in the institutions versus those seeking associates, so it's been -- the change was intentional and the results to date have moved more students into direct bachelors than associates.

That's helpful. And the second question is, and I acknowledge that you guys are seeing starts down on a year-over-year basis, but if you compare it to some of your publicly traded peers, it seems like you guys are doing a lot better job in terms of seeing the starts decline. I guess, perhaps you can speak to , assuming you agree with that comment. What are the attributes, that are making somewhat of a successful execution during turbulent times at AIU and CTU. What do you think is happening? Is the value proposition that people are being attracted to? Is it the marketing tactics the you

First of all, thank you for your comments. The reality as again, we have tried to do the right thing all along. As I said over the past couple of years, both AIU and CTU -- as we do net promoter scores with our students, with our faculty, the results that we get back have consistently been very, very positive. I think people recognize both the quality of the classes and the technology which they are taught that allows them to utilize what they learn in their own way at their own pace. That said, we have just continually made adjustments to how we go to market at AIU and CTU. We, as I said earlier in my comments, we have continued to adjust our marketing mix, so that we have dropped the lowest performing lead aggregators. We continue to invest in the highest performing lead aggregators and other smart things like that. So I can't say that there is anything that we are doing that we know to be different than other people in the industry. It's just that I think our students recognize the value of what they get at AIU and CTU. Our faculty is enthusiastic despite some of the challenges that we have seen across the last year or 2 years. And that is playing out in the marketplace, we hope that continues to be the case.

Great. Well, thank you again.

Bob Wetenhall from RBC.

Good morning guys, how are you doing? Stephen (inaudible) in for Bob Wetenhall. Quick question for you. Do you guys think that you are seeing increased competition coming from other for-profits, nonprofits. Could you expand a little bit more on where you think that might be coming from?

I think that is hard to tell. If you look across as large of institutions of AIU and CTU and other institutions that our students may attend, the number of leads we have and the granularity to see that and to see what our competition -- is very difficult. I know there has been talk around specific institutions competing against other specific traditional or not-for-profit institutions. But for AIU and CTU give the lead mix and the volume of leads we see, we couldn't speculate on that.

Okay, thank you. And just one more. Do you have any indication on persistence trends in general? Particularly after the implementation of SOAR and where you think that persistence is going in general?

We have seen across our institutions in the first quarter a decrease in persistence, or an increase in attrition. Again, the factors about are probably more related to economy, and other macro factors than anything specific in the institutions. We would anticipate that our persistence levels from AIU and CTU will improve as part of SOAR. That is the intention of the program. Too early to tell, any kind of numbers or results of that until we see how those first cohorts perform.

Fully understand, thank you very much.

Peter Appert from Piper Jaffray.

Hi. This is George Tong for Peter Appert. Could you give us some color on the cost savings initiatives you undertook. Specifically whether it was all related to the head count reduction you announced in January?

Well the cost savings initiatives that we put in place in January that go -- that were in the first quarter, and then they go through the remainder of the year. And we did talk about a $25 million to $30 million target over time, over the year. I did speak again to the reductions in advertising, the reductions in admission reps and things like that. Again, remember this quarter we did a $7 million benefit in our margins because the reimbursement of insurance costs from previous years, which will not occur again.

Right. And as you begin your new incentive comp structure, how do you expect your cost mix to change?

In terms of incentives cost? Gary spoke to earlier, our intention of the program was to take the supplemental compensation earned by reps upon the graduation and the successful achievement of their programs and take that investment that we made every year and put it directly into the salary remuneration of those employees, which we have been. So there is no cost savings to us from the change in the program.

Okay. You also indicated new student leads declined virtually across the board. Could you give us some idea of where you're seeing this the most?

Again, we saw it more dramatically in the online institutions than we did in the health and culinary ground institutions. I won't speak to international. Again, part is that is due to mix, with the online institutions being heavier on the aggregators and the ground institutions relying more on TV, local draws and personally-developed leads. We didn't see as dramatic a decline in lead mix.

Great, thanks.

James Tan from CPE Partners.

Hi. I don't know if you can speculate on this or not, but I will ask it anyway. If you assume that our 2014 targets are now off until we get more clarification. But let's assume that the DOE regulations on gainful employment are as rigid as the original proposal from last summer, including using some kind of income data versus BLS. Is the 2014 targets possible in some time frame, and if that's -- how many years plus 2014 would it be possible in? In other words, let's say it's as Draconian as what the DOE originally proposed. Can we do it in 2015, 2016, 2017 --is it even possible?

We will see. As we said when we talked to you in the first quarter for the fourth quarter call, we pulled back from that guidance that we said and the long-term milestones we gave at our investor day given the change in the environment, the change in the rules were no longer achievable. And we couldn't give anymore milestones than what we've given for 2011. So 2014, the visibility to then is very difficult.

What we can do is we can build our models and build our businesses and our institutions around the rules that exist, once we have rules. And do the best job we can to bring in the most into our institutions through graduation. And based on the graduation rates and the persistence rate, that will drive the profitability of the company.

It's to be seen when the rules come out what we can do. But I can't speculate on that, and I know a lot of the different analyst that are trying to build models aren't able to do it as well.

James, this is Gary. I just want to add one thing here. As we had our investor and analyst day early last year, despite what is going on in the market over the last 12 to 18 months, we have built our business, we have built our company based upon long-term expectations in the sector.

And so we continue to believe that this is going to be a great business to be in, because what we do is noble and it is good and it is the right thing, and there's a place for what we do in public higher education. We have made our choices, assuming that over the long haul, we will be in the right places. With the changes that have gone, as Mike said, we will continue to make those adjustments we think are necessary to protect the company, and that will be in the best interest of students.

I would never go out on a limb and sit here and talk about 2014's objectives and when it would be achievable, We will know more as we continue to play things out. If we have to make adjustments to our strategic plan, we will do that in order to grow the business grow our company over the long haul.

Let's take that and reverse it. So if we are making adjustments for the next 2 or 3 years, how Draconian do we assume -- do we assume gainful employment standards would be as Draconian as the DOE is -- as initially requested or proposed?

Again I think we would love to help you and we try to be as transparent as we can, but right now, if the final rule comes out where Social Security income data is used, but the industry, the calculations have absolutely no visibility and we have no ability right now beyond BLS which we have modeled, to model. If that is the case, it is very, very difficult to model without data.

I don't think we can comment any further on the speculation, especially if the rule goes through, using actual data that no one has any visibility or ability to access.

Okay. I appreciate that. Thank you.

Steve McKay from EverKey.

Hi. Yes, just wanted to get clarification on, follow up on some other questions that were asked about the weak economic environment sort of hurting enrollment. And then, you also said that the improving economic environment was having an impact as well. So how should we be thinking of that going forward?

Is it really just a worsening environment that's helpful from a counter-cyclicality point of view, or how should we be thinking about the business going forward ?

Again, these are always challenging to talk about. When I think about the weak economic environment, I think that dampens consumer confidence and that hurts people's ability to potentially to take on what they see as incremental debt, even though it's an investment in themselves. So I think that ends up hurting our institutions.

At the same time, we know that when students are considering going back to school because they can't find a job, as things improve, and they can find a job, they change their plans. So we get hurt one way or the other, I think. When you think about basic consumer behavior, that is what's happening in the marketplace. So I can't say which is having more of an impact one way or the other. I think they both hurt us.

And that is the best way I can answer your question. We tried to model -- or try to understand what we think would be the case with potential new students, and we find that either way, those students' thought processes are impacted. One of the things we're trying to do as well, as when we have students who are in school, as Mike indicated, as we indicated in our prepared comments, our retention rates have been down, persistence rates have been down.

And that ultimately is because students find it difficult to stay in, and we give them as much assistance as we can, in some of the programs. Or they believe they have an opportunity to take advantage of and to become overwhelmed with balancing job, a family, and school, and something has to go. So in this case, we do all that we can to help them remain in class.

Great, thank you.

That concludes the question-and-answer session for today. Please go ahead with any final remarks.

I don't have a long set of prepared remarks. I just want to thank you all once again for your interest in our business. As we've indicated a couple times on this call, it has been challenging environment , and one that is increasingly difficult to project forward. And as we have new information, we will, as we have in the past, be as open as we can with you on future calls. So again, thank you very much for your interest. With that, have a great

Thank you for participating in the Career Education Corporation's first quarter 2011 earnings conference call. This concludes the conference for today. You may all disconnect at this time.