Perdoceo Education Corp (PRDO) 2011 Q2 法說會逐字稿

Welcome to the Career Education Corporation second 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 of Finance and Investor Relations. You may begin.

Thank you, Christine. Good morning, everyone. And thank you for joining us on our second 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 be open for analysts and investor questions. This conference call is being webcast live within our Investor Relations section of our website at careered.com. A replay of this call will also be available on our site. If we don't get to your questions during the call, please call our Investor Relations department at 847-585-3899.

Now before I turn the call over to Gary, let me remind you that yesterday's press release and remarks made today by our executives may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on information currently available to us. It involves 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.

Thank you, Jason. Good morning, everyone. As always, we appreciate you joining us on this call, and your interest in our Company. As Jason indicated, I'm joined on the call by Mike Graham, our Executive Vice President and Chief Financial Officer. When my opening remarks are concluded, I'll turn the call over to Mike who will provide more details on our second quarter performance.

Our second quarter was busy and challenging. Our teams continue to take action to ensure the effective delivery of our near-term business goals and objectives, while also evolving their strategies and business models, so that our institutions will continue to provide high quality education, and effectively compete as we move forward. I will discuss a few of the actions we've taken with you today, but first, I will recap our results from the quarter.

During the second quarter, revenues decreased 6% versus the second quarter of 2010. We earned operating income of $83 million. Our operating profit margin was 16.6%, a 170 basis points decrease versus the second quarter last year. Student population was approximately 102,000, down roughly 3% from the second quarter of 2010. And new student starts for the second quarter of 2011 were down 14% versus 2010, with new student interest down nearly -- down across nearly all of our domestic institutions.

These results were achieved in a challenging period, marked by lower student demand, negative sector publicity, and the impact of new rules. As I mentioned, our teams continue to take action to evolve their strategies and business models. For example, in the past 2 months, the Student Orientation and Academic Readiness program, or SOAR, was implemented at both AIU and CTU. We believe this program will have a positive effect for prospective new students, who otherwise may not be well prepared for success in our online institutions.

SOAR more actively identifies students who may not be prepared for the rigor of college studies, by having first time college students begin by taking a 5 week college level success course. Students withdrawn, or who fail the course, are not charged tuition. We expected, and are seeing a negative impact on new student starts, as a result of SOAR. However, I continue to believe strongly that this is the right thing to do, and that we will see retention improve in the future.

We gained a number of important states and accredit approvals for Culinary's new certificate program, and rolled out the program in nearly all of our schools during the quarter. The new model will more strategically position Le Cordon Bleu schools, between other private sector institutions that charge higher tuitions and community colleges with lower tuition levels. While it is still early, once the programs were put in place, we did see improvement in conversion rates, relative to year-to-date trends, and we anticipate this more positive conversion rate will continue into the third quarter.

Our segment leaders and marketing teams have also responded to changes in the macroeconomic environment, where historical marketing techniques have proven to be less effective. In doing so, they developed, and are testing new marketing approaches. This includes new brand advertising for each of our key institutions, which is intended to build greater institutional awareness. In addition, we're employing new social media approaches to stimulate interest and greater communication with current and prospective students. Further, the teams are using refined student criteria and new models to optimize marketing strategies and tactics to better identify prospective students most likely to matriculate and succeed in our program.

Our teams continually assess investment opportunities, and seek to determine the organization's best use of capital. For example, after careful analysis of the current student population, coupled with an expiring real estate lease, the CTU team determined its North Kansas City location was no longer viable as a CTU ground campus location, and made the difficult decision to teach it out. We have no plans to teach out any of CTU's other campuses. Over the next few years, the CTU team will remain focused on fulfilling its educational commitment to current students in the Kansas City area.

I want to make clear, this decision in no way reflects the quality of student-focused education services provided by the faculty and staff at the North Kansas City campus. Instead, this was a strategic decision, and CTU will continue to serve markets with greater demand for high quality post secondary education. With these and other initiatives, I'm confident we are taking the right actions so our institutions can deliver an increasingly high quality education for our students, and responsibly grow as we compete in today's dynamic environment.

But despite what I view as very good work by our teams, to do the right things in the right way, we've recently uncovered a situation that goes against what we stand for as a Company. And I want to give you some background on that matter. The Company recently identified improper practices at certain health education segment schools, related to the determination of placement rates. The discovery came as part of the efforts being undertaken by our Company, with respect to the information request CEC, and number of other companies received from the New York Attorney General in May.

Upon receipt of the New York Attorney General's subpoena, consistent with strong effective corporate governance, we engaged outside legal counsel, Dewey & LeBoeuf to help coordinate our response. When our management team identified improper practices, the Board of Directors directed Dewey & LeBoeuf to undertake an independent investigation around these practices. I can assure you, the independent investigation will be thorough.

Once it is completed, the Company will undertake any remedial measures we conclude are needed to ensure our people understand and execute in accordance with our well-defined and often stated expectations. While the instances of improper practices discovered relate to certain health education segment campuses, the Board and I, have asked independent legal counsel to also review placement rate practices at all of our domestic schools. Results of the investigation will be reported to the New York Attorney General, and to other relevant accrediting and governmental bodies as appropriate.

For me, as the leader of our Company, these findings I described, are very, very disappointing. The actions of a few people have let down others who work hard and responsibly every day, on behalf of our students. As you may know, I spent a few years in the US Army as an officer. My father spent 30 years in the Army. And when I was young, he taught me a collection of words that I later found out are part of the cadet prayer at West Point. The idea behind them is simple, but profound, I think. And that is that one should, and I quote, choose the harder right, instead of the easier wrong, unquote.

In this case, it appears some people in our Company didn't do that. This type of behavior is not what CEC is all about. And given that, we will redouble our efforts to ensure that every single one of our employees acts with the utmost of integrity, on behalf of, and in support of our students. With that, I will turn the call over to Mike.

Thanks, Gary. As Gary shared, during the quarter the Company generated revenue of $497 million, a decrease of 6%, versus the second quarter 2010. Our operating margin decreased to 16.6%, which is a 170 basis points decline from last year's second quarter, due primarily to the impact of the lower new student starts, and student populations across most of our domestic institutions. Overall new student starts were down 14% from last year, while student population declined 3% versus second quarter 2010.

Our revenue was impacted not only by lower population, but also due to a slight reduction in the average credit load per student across several of our institutions. Our results in the second quarter also include the impact of a $2.5 million non-cash impairment charge for accreditation rights. One of our goals over the past several years has been to simplify our business, and increase the consistency across our operations where it makes sense.

We've continued to grow our use of more consistent shared services across our Company, move to a single leading IT platform to support our students and schools. And in a similar move towards consistency, we have made the decision to move primarily to one national accreditor, for those institutions that are nationally accredited. This decision led to a change in how the Company had previously accounted for its accreditation rights, which resulted in an impairment in the second quarter, and will also result in an additional $3.1 million in amortization expense, which will be recognized over the remainder of 2011.

Overall, during the quarter, we continued to experience the impact of more challenging comparables, the softening of new student interest in terms of new student leads, and the rate at which new students enter and enroll in our institutions. We believe this overall market softness continues to be the result of a number of factors, including the weak economic environment, the impact of the new program integrity rules including misrepresentation, and incentive compensation, overall negative publicity in our sector, and increased competition for prospective students.

So, let me turn to the business results by segment. Revenue per AIU was $98 million for the quarter, down 18% for the second quarter 2010. New student starts for the quarter were down 24%, as we continued to experience the impact of the more challenging comparables, and the overall market softness. AIU has continued to reduce its advertising spend levels, and to focus its efforts in marketing on the most promising and qualified new student leads from it's historically best sources.

6 month advertising spending during the first half of 2011 was 14% lower than the comparable 6 month period before. AIU's decision to reduce advertising spend was partially responsible for the institution's year-over-year decrease in new student starts. As a result of the lower spending, and the overall negative environment, new student interest in the forms of leads for AIU was down 27% versus prior year. Our new student interest and enrollment conversion has declined slightly from first quarter levels, and will likely remain fluid, as the sector continues to transition in the coming quarters.

In June, as Gary said, AIU also implemented its SOAR program for new online undergraduate students. Based on the June cohort, our first cohort, just over one-third of the June undergraduate students did not have previous college experience, and therefore, participated in the SOAR class. For this cohort, approximately 55% of our students who took the class received a passing grade. As a reminder, our third quarter new student start metrics will be impacted by those students that did not receive the passing grade in the June cohort, as well as the starts for the July and August SOAR cohorts. With the rollout of the new SOAR program, we would anticipate future period retention rates should improve.

Operating profit for AIU in the second quarter was $26 million. Our operating margin was 26.9%, down 640 basis points in the prior year. Revenue per student for the quarter declined slightly, driven by lower average credit hours as a result of the increased flexibility the credit hour structure we implemented last year. In addition, we said in the past we would update you on any further developments related to AIU's program review, conducted by the Department of Education in late 2009. At this point, we have nothing further to report. And we will update you on our next earnings call, if there are any further developments. Last, we're pleased to share that in June, the Higher Learning Commission granted AIU new program approval for it's Bachelor's and Masters degrees in accounting.

For CTU, revenue decreased 2% versus the second quarter of 2010 to $112 million. New student starts in the quarter were down 18%, as we overlapped strong prior year performance, and experienced market softness in new student interest during this year. As a result of the softness, we reduced advertising spending by 4% in the current quarter versus 2010. The 6 month advertising spending during the first half of 2011 was 3% lower than the comparable period for CTU. CTU's operating profit was $34 million in the second quarter, with operating margin increasing 200 basis points over last year to 30.3%. Our SOAR course was implemented at CTU in July, in the third quarter, and the first cohort has not yet completed its class. We will provide additional details related to the SOAR program for CTU on our next earnings call.

In addition during June, we rolled out our downloadable CTU iPad application which allows students with user credentials to complete their course work, watch multi-media content, interact with other students and instructors, as well as check the grades and assignments, all through the device. This application was previously rolled out for AIU students in April. Year-to-date, nearly 20% of our online university students have downloaded our applications. We will continue to leverage this technology as a point of differentiation, and provide student access to customizable educational delivery systems, best suited to their individual learning styles.

Finally, as you recall during June 2010, the OIG's audit services division commenced a compliance audit covering July 2009 to June of 2010, related to the administration of Title IV funds. The OIG conducted an exit conference with CTU's management on June 29, and at that time indicated that CTU should expect to receive a draft report sometime in August or September of 2011, setting forth the OIG's findings. Upon receipt of the report, CTU will have an opportunity to respond in writing. The final report and CTU's response, will then be sent to the Department of Education's Office of Federal Student Aid to determine what action, if any, is warranted. We will update you on the next earnings call, of any further development.

Turning to Culinary Arts, revenue decreased 10% to $83 million, on 17% growth in new student starts, and a 9% overall increase in student population. Please note that this includes an additional start in the second quarter of 2011 that didn't occur last year, and will now occur in the third quarter of 2011. On a comparable basis, new student starts would be down 4%, at the lower end of our expectations. However, in the latter part of the quarter, once the new certificate program was in place, we did experience an improvement in our conversion rate relative to year-to-date trends. We anticipate this year-to-date -- this improved conversion rate will continue into the third quarter.

Culinary Arts second quarter operating income, $13 million with operating margin of 15.8%, a 240 point -- basis points increase from last year's second quarter. Bad debt for Culinary as a percentage of revenue was 5.8% in the quarter, tracking lower than the high single digits range we have provided previously in this year.

Revenue for Health Education was $110 million, up 2%, from the second quarter 2010. Health Education student population increased by 2% over the second quarter of last year, while new student starts decreased 8%. If you exclude the health startups, our student population was flat, versus the prior year. And new student starts were down 10%, excluding start-ups from the second quarter of 2010.

For the second quarter of 2011, operating income was $3 million or 3% of revenue, which includes $3 million of operating losses from the start-up campuses. Our start-up campuses in the second quarter of 2010 operated at approximately breakeven. Excluding our start-up schools, operating margin for Health Education would have been 5.8%. Health margins are down versus prior year, as a result of lower enrollment causing higher academic expense on lower class sizes, the impairment expense related to the accreditation rights, and higher acquisition costs due both to general market increases and changes in our marketing mix. Finally, as we discussed last quarter, no Career Education Corporation institution violated the 90/10 rule in 2010. However, some of our Health institutions were close to the 90% threshold. As a result of the July 1 [staff] reclassification, we will continue to closely monitor 90/10 levels across all of our domestic institutions.

Revenue for Art & Design was $57 million, down 9% for the second quarter of 2010. New student starts during the quarter were down 41% compared to last year, and student population ended 14% lower. Operating margins were 13.5%, 230 basis points better than the second quarter of 2010. We're in the final stages of our design and relaunch of the Art & Design business model. And our preliminary review indicates most of these programs may not be materially affected by new gainful employment regulations. The team is currently working to ensure the future model provides quality outcomes for our students, achieves sustainable long-term performance, and offers distinct advantages versus similar competitive institutions.

Finally, for International, our revenue increased 25% in the second quarter, reflecting a 32% increase in student population. Operating income was $5 million in the second quarter, with operating margins 14.4%.

Let me up date you on the financial position. As of June 30, 2011, the Company had cash, cash equivalents and short-term investments of $389 million. Our cash flow from operations for the 3 months ended June 30, 2011 was approximately $55 million. Capital expenditures in the first half of the year increased to $48 million or 4.6% of revenue, from $43 million last year, primarily due to the investment in our new campus support center.

During the second quarter, the Company repurchased 1.8 million shares of our common stock for approximately $40 million. As of June 30, 2011, the Company had remaining share repurchase authorization of $160 million. Our earnings per share for the first half of 2011 was $1.69 per share versus $1.46 per share in the first half earlier. Our tax rate for the first half of 2011 was 34.8% versus 33.4% in 2010. Recall that in 2010, EPS was positively impacted by a $4.2 million tax benefit. Our estimated full-year tax rate for 2011 will be between 35% and 36%.

So, as I close my section, we continue to believe, as we have previously shared, that substantially all of our academic programs within AIU, CTU, and our Sanford Brown institutions meet the recently published gainful employment metrics. In addition, our Culinary business has implemented changes in the business model, as we previously discussed. And lastly, our international business remains unaffected by the new rules. Within our diversified model, we believe that some of the current programs of Art & Design may be at risk under the rules, however, the redesign will help many programs comply. Our teams are finalizing those action plans, based on the publication of the new rules. We intend to share the details of the business model with you, once they're finalized.

Finally, longer term visibility regarding growth trends remains difficult. And we anticipate the recent market trends will continue in the third and fourth quarters. These trends, including the softness in new student interest, enrollment conversion rates, have been experienced by most of our domestic institutions, and again, we believe are related to the economic environment, the regulations and the negative sector publicity. Our third quarter metrics will include the full impact on SOAR, on both AIU and CTU. And we will also continue to monitor the business impact of the new program integrity rules that were in place on July 1, including last day of attendance, satisfactory academic progress, and misrepresentation, as we finalize contracts with many of our lead aggregate partners.

As you know, as a matter of policy, we do not provide annual guidance. During last year's fourth quarter conference call, we did lay out certain milestones for the full-year 2011 to help investors create a model for our financial performance. Those milestones were that we expected operating margins to be approximately 14% to 16%. Based on our first half performance, and combined with the trends we expect to see in the second half, and excluding the $6 million of non-cash charges for the accreditation consolidation, and any one-time charges, if any, in the second half of the year, we estimate we will end the year at the low end of the range, or slightly below 14% operating margin, for the year 2011.

From a revenue perspective, we expect 2011 revenues to decline between 7% and 10% versus 2010. In addition, over the last couple of years we have provided milestones, longer term milestones to assist you in understanding our prospective view of the business. Having just completed the second quarter 2011, we believe it is too early to provide milestones beyond the current fiscal year. Let me turn the call back to Gary.

Thanks, Mike. In a moment, we will open the call to questions. I know some of you will want to ask more about the investigation, regarding determination of placement rates. I hope you can understand and appreciate that it would be inappropriate for us to discuss the matter in great detail, given that it is an ongoing investigation, and we're still early on in that investigation. After the investigation is completed, we will update the New York Attorney General's Office and relevant accrediting and governmental bodies as appropriate. With that, operator, please begin the Q&A session.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions).

The first question comes from Bob Craig from Stifel Nicolaus & Company. Please go ahead.

Thanks, operator. Good morning, everybody. Gary, I heard your comments just now, on the placement situation, but I will just ask a question on that, if I could. How many OPIDs are involved here? I think you have, what, nine OPIDs in the healthcare segment?

That's correct. Yes, Bob, I would love to answer your question, but we're still working through the investigation. So I could give you something that we know at this point in time, but it will be inconclusive, as we are still pretty early in the process. So I would ask that, as we go along, we'll update you, at the appropriate point in time.

Okay. Have you curtailed any further expansion plans in the Healthcare segment because of this issue?

Not at this point. We are working through a plan at this point in time. But the final decisions around what we will do, depends on what we ultimately find. So we work through, a plan of action. Our Board of Directors is involved in the discussion. We will talk with them about the implications, when we have the data, that allow us to make the right call for the business.

Okay. And one last one, and I will turn it over. For starts, the starts decline to be similar in the third and fourth quarter to what you experienced in the first half. Obviously the international side really contributes pretty heavily, in the second half of the year, so what you're looking for then would be continued deterioration from SOAR, and other sources in the domestic operations, is that fair?

Bob, this is Mike. I would look at it across the businesses. Again, AIU and CTU, you will have the information on SOAR that will be in the starts, and we gave you some idea about the size of the cohort, as well as the drop rate. Culinary, we did, on a comparable basis, we did have the start this year, but non-comparable, so that will cause the Culinary trend in the third quarter to look different on the comparable basis.

Okay. Great. That's helpful Thanks, guys.

Thanks, Bob.

And your next question comes from Sara Gubins from Banc of America Merrill Lynch. Please go ahead.

Hi, thanks. Just first, two regulatory related questions. The first is, so you're consolidating accreditors for your nationally accredited schools. Does that mean that you're going down to one OPID for all of them, or is it just moving over to one accrediting body? And can you talk about why you're doing that?

Again, it -- we are moving to one accreditor, which would include going to one OPID for the similarly accredited schools. The reason we're doing that, is primarily for simplicity of the business. We have a very complicated OPID structure, a new program approval process with the DOE, a new program approval process across the different regulators, that plus a number of program accreditors. We believe it is in the best interest of the Company to continue to go to simpler, consistent processes to reduce variability.

Okay. And just -- if I am thinking about this correctly, does that mean that you would have some Sanford Brown institutions and some Cordon Bleu under the same OPID?

Correct. As well, as Art & Design. As well as Art & Design

Okay. Could you talk about any changes you're seeing to recruiter productivity, based on changes in incentive compensation?

Sure, we have seen a couple different factors. We've seen that our conversion rates have been down, in terms of the new student interest turning into enrollment. Part of that may be due to the incentive compensation plan. Part of that also may be due, obviously, to the environment that we're in. We also have seen an increase in our turnover of admissions reps in the past quarter, about 500 basis points increase in turnover. That may be attributable to the economy. It may be attributable to the changes in the compensation program. That said, the level of commentary or dissatisfaction expressed across our reps has been very low.

Sara, the only thing I would add to that, as Mike said, the changes are still relatively new. And so it is kind of difficult at this point in time to parse reasons for things that we're seeing, but we will keep an eye on it as we go forward.

Okay, great. And just one clarification question, about your start expectations in the second half of the year. Your comparisons get much easier in the second half versus the first, because starts -- the growth rates have begun to slow down a lot, as you look at the second half of 2010. Is this -- does the comment suggest that we should still see mid teen start declines in the second half of the year? That's what you're expecting?

Again, we're not going to give specific guidance on the number. I think Bob's question was accurate, in terms of the trend, and how to look at some of the comparables. The comparables are easier, which will make the comparisons different, and may make the trend worse versus this quarter, based on just the normal comparables that you are looking at, for the previous year.

Okay, thanks.

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

Thanks. Just wanted to focus specifically on a couple of your divisions. First is on the Culinary arts program. I know that the trends in revenue per student have been shifting dramatically, because of the shift to the Certificate program from the Associate program. When do you think those will start to improve, or at least getting less worse?

You will have to -- a lot of it depends on where the Associate degree program ends up. During the quarter, we've seen an increase in our attrition in our Associate degrees, as people have either left the institution based on the new model, or are moving over to the certificate over time. That -- we'll cycle out that, through 2012. The last starts for the Associate program are here -- were here in the first quarter, towards the fourth quarter, and the Associate program being a 21-month program. That will cycle out through 2012. So the RPS trends will continue through next year.

And roughly what is the mix between Associates and Certificates right now in Culinary?

I don't -- again, we will have to take a look at that. Right now, it is heavier on the Associate, lighter on the Certificate, but it is hard, because the mix is critical, because of the new starts all coming into the Certificate, that starts the relative number on a comparable basis.

Okay. Shifting gears to the Health education side, you talked about the fairly steep decline in margins. Is that something we should expect going forward, and given some of the start-up costs, do you think that the unit will be able to maintain profitability for the rest of the year?

I can't comment on the absolute numbers, but as you model, I would look at the accreditation charge, which was about $2.1 million in the quarter, the bulk of which was on Health. That increased amortization of $3 million will hit the Health segment. Our start-up efforts, we haven't -- we got the four start-ups that we have right now, and those will continue to hurt the profitability a bit. The key for us is to make sure that we can calibrate our metrically-driven costs, such as academics to our class sizes, without jeopardizing the academic quality that we have. So we are going to look carefully at the deleveraging, to see what variable costs may come out of the system, versus what may stay. But I think the acquisition costs and the marketing costs that we're seeing, are going to continue through the third and fourth quarter.

Okay. And then just a quick numbers question, what should we be forecasting for capital spending for the remainder of the year?

We don't have any material changes in capital spending, so I think it continues to be somewhere around 3.5% of revenue.

All right. Great. Thanks so much.

Thank you.

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

Hi, guys. I would like to start, just by zeroing in on the margins at AIU and CTU. Starts have been falling, but the margins have hung in there like a champ. And those divisions now are -- look like to be about 60% of your profits. But is it a reasonable expectation that you have a lot more variable costs there, and you can maintain attractive margins, even as you face further declines? Or should we expect that those really start to get pretty severely hit as the starts continue to weaken, and as you have costs for the SOAR program, but fewer revenues coming in there?

I think you're going to see the deleveraging continuing to occur on the business. Remember, because we don't have occupancy expense which is a fixed cost, and brings about 12% of our revenue on the ground schools, that doesn't affect AIU and CTU, so you do have more variable cost structure. The metrically-driven models that the online institutions follow, in terms of admissions, marketing, are very tuned to new student starts, and their population levels, and we've been very effective at adjusting those variable costs.

That said, as population continues to fall, we will start to see more deleverage going forward. The difference between AIU and CTU is primarily on the revenue per student. Where we've had the deceleration, the shift of the Bachelor's program hitting AIU that doesn't hit CTU, so you see the difference in the amount of deleverage that is occurring. But I think in the second half of the year, we will be experiencing more deleveraging on AIU and CTU, as the population (inaudible).

Okay. Thanks. And then, I think you were early, relative to much of the industry, in seeing that the effectiveness of some of your advertising was falling, and deciding to either reduce spend, or shift spend around, starting last fall. And maybe it was even earlier. Do you have any sense how much the lower spend, in absolute terms, has hurt inquiry flows versus all of the other industry factors that we've all been following, and you cited?

We don't have a reliable way of estimating, what is contributing to those factors. So you're correct, in that we have, as we noted, the less effectiveness of our advertising spending, we have reduced it. And as I indicated in my remarks, we began to look at new ways to reach our potential target students, and some of those efforts are in progress right now.

And then just one last one. I know have you done a awful lot, doing more shared services and reducing costs, and you've done a great job over the last, say, two years on that. Is there a lot of opportunity left? Or are we cycling through the benefit of a lot of the real hard actions you've already taken? And I'm not, I'm just trying to think, as we think out over like the next 18 months, and you probably got some more regulatory spend, but there are still places you can pull costs out of the business? Thank you.

This is Mike. I would say that we have done the bulk of the shared services work. There is still more we can do, from a consistency standpoint, but the large gains are gone. But on a smaller basis, we continue to see opportunities across the organization. We have been pretty good about looking at our fixed cost structure, as the populations have changed. And we haven't been reluctant to reduce costs. As you remember earlier in the year, we did take a severance charge, and we did reduce costs that saved us $25 million to $30 million, some of which you're seeing through the margins of this quarter, and should hopefully continue to help us through the remainder of the year. So we won't be shy about taking costs out, but I think the bulk of the shared services savings have been realized.

Thank you.

Your next question comes from Brandon Dobell from William Blair & Company. Please go ahead.

Hi. Thanks. Maybe following up on Gary's question a little bit, with an AIU and CTU from a marking perspective, we've heard a number of companies talk about changing the mix dramatically, are looking at really reallocating spend between internet leads and traditional media. Maybe some more color there on how dramatic, some of the changes that you are making are? Or if they're not dramatic, maybe a little better idea of what you guys are doing to get better leads with the same spend?

I will give you a sense, for some of the types of activities we're engaged in right now, and then Mike will talk about the percentages in just a second. From a branding perspective, we have a number of branding efforts under way with all of our institutions, with the exception of Art & Design. And theirs is still in development, at this point in time. All of the branding work that we've done, Brandon, has been primarily based on proprietary segmentation work that we've done over the course of the last 12 to18 months, that have really helped us better understand how we would differentiate our institutions from one another, and how we position them in the marketplace relative to competitors as well.

The work has all been tested -- when I say the work, I mean, the advertising that we're doing itself, and the positioning work, have all been tested quantitatively by some methodology. And for example, in the case of our advertising, our consumer advertising, in most cases we have used ARS testing, which provides us insight into how strong the campaigns would be, relative to a large base of thousand commercials that these folks have tested over the course of time. So in Health, we've launched a campaign in mid July, updated our TV, our print, our web materials, it's still to early to talk about the results there.

In Culinary, we launched in May, with new digital materials, primarily the web pages and banners. We also have some TV that we're -- we'll want to get in the mix, that we're still working through how to do that, in a way that is responsible for the business. At CTU, we launched a test in late May. In that particular situation, we are -- we have test cells, and we have control cells, and after only a couple of months, all of the early indicators are very strong. Branded search is up. Organic search is promising. Again, we're trying to bring leads into our sites, in a way that is more responsible than simply buying them from lead aggregators.

AIU has also updated all of its digital assets. And so we're working right now on doing more things that are viral, going into Q3. So again, all of the metrics on the things that we're testing, look positive.

We believe in testing, to make sure that before we launch things on a national basis, we know what to expect for the expenditure that we will put out. Like other companies in the industry, we're all working with social media type of activities. We put a lot of grass roots efforts into our social media, across all of our business units. One issue with social media, as you might know, is that it is very, very difficult to measure the actual impact. But where we're working with things like Facebook or LinkedIn, those type of things, we've seen positive responses from all of the things we're doing on the business.

And the engagement that we're seeing, both from our current students and potential new students, as we engage in conversation about why our institutions are right, is all up. So again, all positive things, but still early in the process. Mike, do you want to talk about numbers?

Well, the numbers have not changed dramatically, because most of the activities have happened during the year, and especially during the second quarter, as we continue to adjust the marketing mix. So our reliance on aggregators versus traditional sources, the numbers have not changed dramatically yet, because of the new activities, but they hopefully will going forward.

One last thing I would say with response to, with regard to aggregators is -- we given the incremental risk that we would assume, and that they would assume coming into July, we have negotiated new contracts with all of our lead aggregators. And we have shifted, to make sure that we're relying more on the primary lead aggregators, and not some of the sub-aggregators that they sometimes utilize to bring leads. And so again, we want to make sure we do it in a responsible way, and that we minimize the risks to the Company.

Okay. And you guys have talked about retention within AIU and CTU, in the past couple of quarters. Some of the early initiatives that you have got in place, are you happy with what they're doing to retention? Or are you seeing other factors outside of the industry, kind of dampen some of those? And I guess what I'm trying to get at, what kind of expectations should we have, the next several quarters, as you work through, not only increased graduations and kind of focus on the students, but the internal efforts, and how do all those things -- those three things converge in the back half of the year and the first part of 2012?

Again, it is pretty early to tell. We've increased the number of student advisors. We put in the SOAR program. If you look across our Company, we have experienced some increase in attrition over last year's second quarter. Again, I talked to the Culinary effort. If you look at our attrition trends, there in the second quarter, the best performance on attrition was at CTU, so the lowest attrition trend. So part of the online efforts are working within the institution.

Okay. Thanks a lot.

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

Hi, I'm not sure if you can answer this, and understand if you can't. But just in trying to understand the placement rate issue, can you maybe just talk a little bit about what the rule is, and give us an understanding, of what they were doing that was really improper? And it sounded, Gary, from your comments, that this wasn't necessarily widespread, but a couple of bad actors. If there is any commentary you can make there, it would be appreciated.

Amy, I appreciate your understanding around what I can and cannot say at this point in time. What I say is this, we -- it is primarily, at this point in time in our Healthcare, in some campuses in our Healthcare group. We are working to understand. I do not want to go into exactly, what is going on, because as we're in an ongoing investigation, I think it is important to keep that to ourselves for the moment, because we're looking at all of our campuses. And if some of the practices that we've seen exist, we want to give ourselves a chance to see those, before becoming public about them.

Here is what I will promise you. We have really controls in place, at this point in time. The challenge we have is, that we've got people that didn't do the right thing, very simply. And so, we will go back, and we will deal with those people. If the investigation indicates that they have done something bad, or they have broken our rule, they will no longer have a place in our Company. But when we can be public about what has happened, we will let people know, and we will fix the issue.

Thank you. I appreciate that. And if I could just ask one other unrelated question? Just with regards to new program approvals, have you noticed any slowdown or delays in getting new programs approved, and any difference perhaps across segments or accrediting bodies?

Not at this point in time. At this point, we're still early in the process. We have a number of programs out for approval. I can't say that we've seen a material slowdown at this point in time.

We -- and also, just remember, we did a large change to our Culinary model with new programs and certificates. And we're pleased by, both the internal team and the external responses that we got those programs into place here in the second quarter. So we did see a lot of responses from the accreditors to help us on that.

Okay, thank you.

Your next question comes from David Warner from First Analysis. Please go ahead.

Hi, it is Corey. Gary, I'm hoping you might be able to answer just a couple of factual questions about placement. Is -- do your regionally accredited schools collect placement data, and report that data to either students or accreditors.

Yes. Yes, they do.

Okay. And is placement data collected at a campus level, or is it done at more of a -- a school chain level?

Placement is collected and reported from the campus level. And that is the answer to that question. It is collected, and reported at the campus level.

Okay. And if I could take a step back from the issue, can you just talk more broadly, given that there has been such a focus on compliance at the Company over the past, really, since you -- over the past few years, is -- can you speak more broadly about your efforts there? If you think there is any --anything you want to be doing differently, given that this issue came up? And I will throw out one example, about compliance. You mentioned in your marketing efforts that you're doing more with social media. How are you ensuring that no one from the company is saying anything that misrepresents in postings on social media? Do they have to run anything they say past compliance, before it is posted, or what do you do?

Sure. Let me just step back, and say that, we will make whatever we believe the appropriate changes should be, based upon the investigation when it is completed. We're obviously disappointed by what has happened at the campus level. As I said, and I believe this to be the case, when you have rules in place, when have you procedures in place, unfortunately, they can be thwarted by people who aim to do that, and who work together to do that.

And so, we will work to make sure that our rules and procedures, if they need to be modified, are clearer, although I can tell that you I believe that they were clear, and that people simply worked to skirt the rules. With regard to what we do from a marketing point of view, we have put in a series of checks in the process, so that what we post goes through an internal compliance process, both as our compliance group and our legal group, before they are posted.

And as we put those rules into place, as you might imagine, there has been quite a tug-of-war sometimes around the fact that we're making people go through those internal gates, but it is the appropriate thing to do. So we can be assured or more assured that the things that show up that represent our Company, are things that we intend to be there. Which is why, as we've gone through, the renewal process with our lead aggregators, we made the decision that we do not want to have third, fourth, fifth tier aggregators out there, doing things that we can't control.

Okay. And if I could just throw in one more question. I think it has been a couple quarters since you put in place, the relative tuition price changes that CTU and AIU for Associate and Bachelor. Can you just talk about student reaction to that, and whether you're seeing any changes in mix as a result of those price differentials?

Well, I'm not sure we've seen any changes in mix, different than what we talked about before. As we talked about in the first quarter, we aligned AIU and CTU tuition levels, to make sure that the student wasn't encouraged to join the Associate's program versus the Bachelor's. And so, we evened out the credit -- cost per credit hour on those programs. We haven't seen a dramatic shift continuing from the Bachelor's, into the Bachelor's program. On average, about 25% of our students last year at this time were in the Bachelor's program and now about 40% are in the Bachelor's program, with the Associates going from roughly 65 down to 20, or 65 down to 50, I'm sorry.

That's helpful. Thank you.

Your next question comes from James Samford from Citigroup. Please go ahead.

Great. Thank you. Just wanted to touch on the International side. It looks like it continues to be strong here. I was wondering, have you seen any increase in competition? Obviously, there have been some acquisitions lately. And where are things, in terms of valuations? Are they getting stretchy, on the International side right now?

Sure. Our International business is doing extremely well, as you saw from our performance results. We have very differentiated institutions, our Maragoni institution, from a fashion design standpoint is a world leading brand, our INSEEC institutions in France. Our Monaco institution are, again, great strong brands with long histories and great recruitment from high schools of students that are high quality. So we have not seen any new competition enter these markets, these established schools. And we haven't seen a lot of different competitors from us, besides the traditional institutions.

From a valuation standpoint, hard to say. We've looked at a lot of acquisitions, as many of our competitors have probably done throughout the world. Valuations are obviously much higher outside the United States, than they are inside. That said, we haven't seen deals that would appeal to us from being accretive to our business and accretive to our shareholders, and being a wise use of our capital over the last six months.

Okay. If I could touch on bad debt really quickly. It looks like it is particularly lower this quarter, certainly lower than what our estimates. And it looks like you had negative bad debt at AIU. I just wonder if you could walk us through how we should be thinking about that trending? Was this more of a one time nature type of quarter?

I think if you look at it, there are two things happening. Within Art & Design and Culinary, because we've dramatically curtailed the amount of student payment plans that we've been using, the bad debt has been falling pretty sharply, and will continue to fall on a comparable basis. From AIU, I think it is just a timing issue, between the cash balances of students outstanding, we wouldn't anticipate see that type of negative response. I think on average, you will see the institution, the online institutions ranging some place on a normal basis, between 1% and 3% of revenue of bad debt.

Great, thanks.

The next question comes from Susie Stein from Morgan Stanley. Please go ahead.

Hi, can you just give us a sense on how much you expect to spend on this internal investigation? And also, how will you communicate findings as you review placement practices at other schools? So if you find inconsistencies, and after you report to the Attorney General, is that something that would be worthy of an 8-K, or should we expect that in future quarterly results?

Thanks for your question, Susie. First let me say, we will spend whatever is necessary to get to the bottom of the issue, and to put into place the controls that are necessary, to make sure that we don't see this type of thing again. I will start there. I don't know what the estimate will be. But we will obviously, factor that one in as we go forward. It depends on what we find, what we will do next. Again, we're very early in the process. What I'd say is that, we found the issue. We reported the issue.

I think we've acted responsibly at this point, in time in terms of engaging our Board, engaging an independent party to look at the issues that we found. And with regard to, how we've reported out to both the New York Attorney General and to the relevant accrediting bodies. We will continue to do that. And when we have resolution and an action plan, what you can count on is, that we will report it back out in a way that is responsible, so you can understand what is happening here.

Okay. And then you touched on 90-10, but can you talk specifically about what you're doing to address this?

Again, from a 90-10 standpoint, we're -- for 2010, we don't see a high degree of risk as we -- or 2011, excuse me. As we go into 2012, we have to carefully look at where the full-year of the Stafford plays, how it plays against each individual OPID numbers. We're looking at a variety of options. We looked at different ways from grant programs to bring in more ten money. We've looked at different price increases across the institutions, to drive more gap. We've obviously moved away from using the balance sheet, and asking the students to use more cash pay. We're looking at those as options along the way. So we will see where it goes in 2012. We're conscious of it. We will see what other options are available. 2011, from right now, looks like we should be, in an okay shape for 2011.

Okay. Great. Thank you.

Your next question comes from Ariel Sokol from UBS. Please go ahead.

Hi, guys. Good morning. Just, Gary, a very big picture question regarding the Company and it's programs, in the context of the macroeconomic environment. I think it has been mentioned how the economy plays a role, and some of the challenged enrollment growth, or new starts declines. What are your thoughts about the institutions and programs, were the US economy go to double dip? Do you think we would see a pickup in demand, or could business conditions potentially get worse for your institutions?

I'm not an economist, so I don't try to comment on double dips and things like that. But here is what I can tell, what we do. We look at fundamental demand in the marketplace for the programs that we teach. We review those programs on about a quarterly basis. Where we begin to see that the demand has slackened, or that we're not meeting employer's needs, we either eliminate programs, or we make program modifications to ensure that we're teaching students that will be marketable and meaningful in the marketplace.

Our goal here has been to have a process that allows us to do that, in a way that is responsible and no matter what happens to the macroeconomic environment. So we will continue to do that. We will roll with the punches. And we will make the appropriate changes, both to programs and to our Company, based upon what we see is coming at us. But I really don't, at this point in time, don't -- can't give you an answer, on what I see from a macroeconomic point of view.

That's helpful. And then from a marketing perspective, can you speak to customer acquisition costs, or alternatively trends in the marketplace you're seeing in all of your channels? Are you seeing potential reduction in certain channels, perhaps on a non-internet lead aggregator side?

We have seen across the board, an increase in our acquisition costs, be it on a cost per lead basis or other metrics. Probably overall, our cost per lead for the quarter may have been up as much as 10% to 15% across the board. However, that is hard to tell whether that is a cost increase, or a shift increase from the different channels that we've used. So we're seeing pressure across the board, on all of our different costs. Probably within the regulatory environment, is the aggregators are changing their models, that is probably just a hypothesis. It has probably lifted all of our costs, as they have more regulatory obligations.

Great. Thank you.

Your next question comes from Bob Wetenhall from RBC Capital Markets. Please go ahead.

Hi, guys. It is actually [Tom Wilson] on for Bob Wetenhall. I may have missed it, but I just noticed that you guys said that it seems like the number of credits, credit hours were down among students. I was wondering if you could just kind of get into the reasons for this? And maybe if that is a trend that you expect to continue or to reverse?

I don't know what to say about the trend, but we definitely saw a reduction in credit load hours at AIU that we spoke about because of the changes in the program. But also, just across all of our institutions, we have seen a slight lowering of the average credit load of the student. You couple that with some of the trends in acquisition and new student starts, and you also couple that with some of the retention trends that we talked about, that students are leaving. And I think students are just in general decelerating a bit, and we've seen that across the institution, driving lower RPF.

Okay. You just think that kids don't want to take as many classes? Is there any specific reason behind it, do you think?

I don't think there is a specific reason, but we've seen that. But you also have to look the at different mixes of program changes we've done, in Culinary from Associate to Certificate, in Art & Design in redesigning our program, the shift from Associate to Bachelor's concentration for the AIU and CTU students. So there is a lot of noise in what we see, hard to draw that conclusion. But at least the fact and the numbers show us, that the average credit load is down slightly.

Got it. Thanks.

Your next question comes from Mike Tarkan from Friedman Billings Ramsey. Please go ahead.

Good morning. Just a quick one on capital. Can you just talk about what -- how you're thinking about capital at this point, given that you're sitting around, $300 million in cash or so. Can we -- are we going to look for buyback activity to accelerate or pick up in the back half of this year?

I don't think -- we can't comment specifically, but we as you know we have been buyers of our stock over the last four years, and the last five years, since Gary and myself have been with the Company. We continue to deploy capital in the best way that we can, first and foremost, keep the balance sheet strong, as we've always talked about. We are looking at acquisitions that might make sense. Our capital expenditures remain strong at about 3.5%. We're looking at our start-ups closely based on the economy, based on the regulatory environment. With -- at the end of the day, without using capital for those purposes, which are the foremost purposes, we will return it back to shareholders as we can.

Great. And then just real quick, regarding Pell grants, any potential impact from the elimination of interest subsidies for graduate students?

Too early to tell, but it should be very small, from what we can see.

Okay. Thanks.

Your next question comes from Peter Appert from Piper Jaffray. Please go ahead.

Thanks. Any color you can offer on the -- your thoughts around the changes in the business model for Arts & Design, in terms of specific things you're considering?

Again, give us some time to share it out with you. But I think we're looking at making sure the program design, is done right around the outcomes for the student, make sure that we look on a selective basis where testing is appropriate for students entering the program, that we ensure the best and most potentially successful students enter the programs. Looking at the optimal degree, is it an Associate, is it a Bachelor's, is it a Master's, based on the program, based on the outcome? Make sure we have a consistent message to the market, around our brands and around our institution, and to make sure we're probably optimizing the use of our IEDT online institution, with our core ground campuses to get a great blended opportunity for the students, more than we've done in the past. So those are probably some of the changes we're looking at.

Would pricing be a significant consideration, do you think?

I think tuition levels are always significant, when you look at meeting the past gainful employment without violating 90-10., so you have to thread that needle still within the rules. So we have to optimize between degree type, outcome, salary data and 90-10, where those tuition models will have to fall.

And then, is it possible, Gary, to give any time frame around the investigation?

Not at this point in time. We are again in process, we're early on and we will move as expeditiously as it makes sense to move.

Thank you.

Thank you.

The final question today comes from the Greg Karp from the Chicago Tribune. Please go ahead.

Hi. Regarding the misreporting issue, I can appreciate that it is an ongoing investigation, but I was hoping you could just provide some basic information, such as what exactly was misreported and how? Was it just the top line number for placement rates, or did schools just lie about placement rates, and use -- or did they maybe use flawed methods for calculating them?

While I understand that you would like me to comment on all of those things, it would be inappropriate at this point in time, given where we are in the investigation.

Okay. Maybe you can elaborate then on how disappointing it must be, that this misreporting was about such a high profile issue, as placement rates?

I will -- I will make a quick comment, and then this will be the end of our discussion. So let me do that. Let me reiterate the fact, that I couldn't be more disappointed right now, with what we found. It is not what we stand for, as a leadership team. And -- and I will tell you that the actions of a few people have tarnished what I believe has been really good work over the course of the last several years by the overwhelming majority of the employees that we have in this Company. So again, couldn't be more disappointed.

I -- when we found the issue, as a team, we did the right thing by engaging external counsel, by engaging our Board of Directors, and by launching an investigation. And further, by reporting it to, in this case, the New York Attorney General, and the appropriate regulatory agencies that are out there. So it is our intent to do the right thing.

I regret at this point in time, that we can't provide you more details. But as I said at the outset of the call, it would be inappropriate to do that, given that we are so early on in this process. I've tried to give you as much as I can give you, at this point in time. When the investigation is complete, we will report to the New York Attorney General, to the accreditors, and as appropriate, to the folks who have been on this call.

But until then, we will go about our business of taking care of the issue at hand, of making sure that all of our employees understand, why what has happened is wrong. And we will go forward from there, to run our Company. So thank you very much for all of your questions. And again, for your interest in our Company.

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