Perdoceo Education Corp (PRDO) 2011 Q3 法說會逐字稿

Welcome to the Career Education Corporation third quarter conference call. My name is Dawn and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Mr Mike Graham. Mr Graham, you may begin?

Thanks, Dawn. Let me start by expressing our appreciation for you joining today's call on relatively short notice. As always, we value your interest in Career Education Corporation. The purpose of today's call is to provide you with information about a change of leadership at Career Education and a commentary on the Company's third quarter performance. The Directors and Chief Executive Officer, Steve Lesnik, will provide you details of the change.

Before I turn the call over to Steve, let me remind you that yesterday's press releases as well as our remarks today 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 can 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 filings, our quarterly earnings release, our annual report filed on Form 10-K for the year ended December 31, 2010 and other filings with the Securities and Exchange Commission. Except as expressly required by 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.

At the conclusion of Steve's remarks I will provide commentary on our third quarter performance and provide an update on key matters we have discussed in previous quarters earnings calls. Last night we reported our third quarter operating results. We intend to file our Form 10-Q for the quarter ended September 30, 2011 with The Securities and Exchange Commission on or before November 9. As I will be discussing our results on today's call, we will no longer hold our call previously scheduled for November 10. We understand that this information is a lot to absorb in a short time and to cover in a 1 hour call. Since we have a limited amount of time for this call, we may not get to all your questions and recognize you may have follow up items. As always, Jason Friesen and I will be able to answer your questions and can be reached through our Investor Relations department. Let me turn the call over to Steve Lesnik?

Thanks, Mike and good morning to all of you for the first time. I'm Steve Lesnik, Chairman of the Board and now also the Company's President and Chief Executive Officer. The Board has appointed me to these roles succeeding Gary McCullough following his resignation. As CEO I will deal with the day to day management of Career Education Corporation, as well as dealing with the development and implementation of strategic business initiatives to move Career Education forward in a rapidly changing competitive environment. This is an important time for CEC and as CEO it will be my job to make sure that across the entire enterprise we are focused on serving our 100,000 students through providing them with high quality educational experiences that are useful to them. I will be working closely with our Board and experienced members of our senior management to make sure we keep our sights on that central focus of our mission. We have, throughout this enterprise, experienced highly dedicated management professionals and we have a solid foundation of educational institutions and brands.

I would like to thank Gary for his years of service to our Company. Gary joined Career Education in March of 2007 and worked hard to professionalize and improve the management of the Company at both the corporate and operating levels during a difficult period, and he succeeded in doing that. The Board and I are committed to ensuring that Career Education's future is dependent on our institution's ability to provide quality education and services to our students. This is absolutely critical to enable the Company to achieve increased value over the long-term for all our constituencies.

Turning to the mandate that I have been given by the Board, it is as follows. First, assure that our corporate governance, including our adherence to strict regulatory compliance, is strong at all times and in all places and is executed consistently and effectively. Second, assure that the Company has a strong and well defined strategy against which we can educate to create long-term value for all stakeholders. Third, supplement the fine core management team with new talent. Fourth, assure the Company is advancing the learning and the lives of our 100,000 plus students.

Over the last 2 years Career Education has been both reactive and progressive in dealing head on with significant changes in the regulatory environment. We have improved our IT infrastructure and built upon our acknowledged position as an industry leader in that regard. We have streamlined operations and built solid and leverageable shared service capabilities. We have also expanded our geographic footprint. I know management is very proud of all of these achievements.

At the same time the Board in evaluating the progress of Career Education believes that more tangible results in enhancing enterprise value need to be achieved. And to do so requires different thinking and new leadership at the Chief Executive Officer level. We are very aware that in order for the Company to build its value we must confront head on a number of issues now before us. Some of these issues are industry based, while others are company specific. We are dedicated to a culture of student commitment, compliance and quality.

As part of this, we will complete and resolve any issues arising from our internal investigation regarding our placement rates. We are, obviously, disappointed by the findings of our internal investigation conducted by independent council. It will be tracked from the work that has been put in by many members of our team. I believe our people are focused on doing the right things in the right way on behalf of their students. Unfortunately, the behavior discovered in this investigation doesn't align with that broader belief in a compliant culture. That will change. We are continuing to fully cooperate with the New York Attorney General's office with a view towards satisfying their inquiries just as promptly as possible.

I am confident we can reinforce the governance foundation in place that the Board mandates for Career Education. We need strong leadership to do that at the top of all of our operating groups and will fill open positions within those units. We are committed to achieving financial performance consistent with the priority of growing the value of Career Education over the long-term. I will serve as Chief Executive Officer while a comprehensive national search is under taken by the Board of Directors to identify a long-term CEO to lead our Company. Because we are focused on identifying and hiring the best possible person for the job, we will undertake the search in a deliberate manner with no immediate deadline. We have a goal that it will be concluded in 2012.

With that said, we are mindful that time is of the essence. The Board's objective is to put in place an executive who, based on his or her expertise and accomplishments, can take a fresh look at how Career operates as a corporation and how it should best operate in this new complex environment that characterizes our industry. That in turn should facilitate using the many and deep resources of the Company to build its value for the long-term.

On a personal note, I'm pleased that board member Leslie Thornton, who has a respected background in education from the public service side, including a service at the US Department of Education, has agreed to assume the newly created position of lead independent director of the Board during my tenure as CEO. The Board and I are confident about Career Education's long-term potential. At Career Education we define our success by our ability to provide students with quality education which ultimately drives long-term growth, value and success for all of our stakeholders including, importantly, our stockholders. Now, I would like to turn the call back over to Mike who will review our financial results for the quarter and provide you with an update on other key items of note.

Thanks, Steve. The third quarter presented challenges for both CEC and the industry as other private sector schools have recently disclosed weak new student demand, lengthening student decision making processes, and operating deleverage have had significant impacts on operating results. During the third quarter our teams continued to execute the actions required to optimize our near term business goals and objective, while also implementing the strategies and business models necessary to effectively compete and continue, as Steve said, to provide high quality education for our students. Before I discuss a few of the actions we have taken and provide you an update on our placement rate review, let me recap the results for the third quarter.

During the third quarter our revenue decreased 18% versus the third quarter 2010. We earned operating income of $16 million. Operating income for this third quarter reflected a pricing of $11 million of charges related to various regulatory matters. First, approximately $2 million in outside legal fees associated with responding to the New York Attorney General subpoena requests. Second, roughly $3 million in charges associated with conducting our internal placement rate review. And third, a reserve for $5 million related to a potential return of veterans' affair funds which I will speak to later. Our operating margin for the quarter was 3.7%, a 380 basis point decrease from the third quarter last year. The $11 million I just noted decreased operating margin by 260 basis points and reduced reported earnings per share by $0.10 per share.

Student population was approximately 104,000 students, down 12% for the third quarter 2010. And our new student starts for the third quarter of 2011 were down 22% versus last year, and remember this includes a negative impact of our student orientation and readiness program, known as SORE, and AIU and CTU, and as well as other entrance requirements that we placed in other operating units. Again, 2011 has been a challenging year for our sector and it's certainly been a challenging year for CEC.

Let me give you updates on our responses as we met these challenges head on. During the year we gained clarity on the program integrity rules, including gainful employments. As a result, we have rolled out the new culinary model. We have negotiated and established new contracts and new ways of working with our lead aggregate partners. We have rolled out new entrance requirements for certain of our programs, including implemented SORE and expanding pre-enrollment testing within culinary and art and design. We are also rolling out additional changes to art and design SPU that we believe will improve the competitive positioning of the business, as well as position certain of our programs to achieve compliance with the gainful employment rules.

First, we critically assessed each of the programs in art and design and the respective curriculum. As a result of the review, we have optimized the program content, the degree type and the program duration with the anticipated first job in mind to more effectively prepare students with the skills in line with marketplace demand. Second, we worked to do our best so that our tuition levels would thread the needle, complying with both the 90/10 rule, as well as the gainful employment. Third, we will implement a full-time traditional term structure. As a result, students gain their degree in 4 academic years instead of 5. And finally, we will continue our efforts now and into the future of aligning our marketing messaging, marketing campaigns and lead sourcing with new student demand.

On the New York Attorney General's investigation, last quarter we reported that in May we received a subpoena from the New York Attorney General's office. A number of other private sector post secondary education companies received similar subpoenas. As we reported in our press release yesterday, the investigation is ongoing. We continue to cooperate fully with the New York AG with a view towards satisfying their inquiries as promptly as possible.

Regarding the internal investigation for the determination of student placement rates, in August we also discussed that we identified improper practices at certain of our health education segment schools related to their determination of placement rates. As a result of the discovery, the Board of Directors, in keeping with the solid governance processes we have in place as Steve spoke of earlier, directed law firm coordinator New York AG response, Dewey LeBoeuf, to undertake an independent investigation of our placement reporting practices. As we previously reported, the Dewey investigation was initially focused at the campus level of our 6 health education ground schools located in New York which were among the schools covered by the New York AG's subpoena. As we previously reported to you, our Board also directed Dewey look beyond the specific issues uncovered at New York and the New York based health education schools and take a comprehensive look at all current placement rate determination practices at all domestic campuses to make sure they are appropriate.

A major objective in undertaking this type of review was to make sure we were confident in the data our schools report to our creditors and our students for the current reporting period. This work is ongoing. We can report to you that Dewey has completed, substantially completed its investigation of the placement practices at our New York based health education schools and also completed its broader review of the placement determination practices of all our health education and art and design schools. As to the findings of improper placement rates determination practices at the health education school, Dewey was able to confirm through its investigation that such inaccuracies and practices occurred. We are, obviously, very disappointed by these findings, but we took swift action and effective action in identifying the conduct and rooting out the problem. We have been fully transparent with the New York AG and other regulators about what we found at these schools.

Again, as noted in yesterday's press release, the Company has completed its broader review of health education and art and design schools placement rate determinations and those schools have reached the report of their 2010 and 2011 placement rates to ACICS, taking into account the results of the review. We reported yesterday that a number of schools fall below the traditional 65% hurdle set by ACS. From an overall SPU average level, both health and art and design were not materially below 65%. At the direction of our Board of Directors, we have already taken a number of steps with respect to our schools determination and reporting of placement rates.

Before it is completed, our work in this area will extend from the classroom to the career services department at each school. Among the steps we have already taken as part of this effort, regarding employees we have taken appropriate action with respect to all employees engaged in misconduct regardless of their position in the organization. In regards to policies, we have adopted new career services policies to provide further direction and clarification surrounding the criteria for including students as being employed in their field of study or a related field of study.

From a training standpoint, we have instituted additional training to ensure that all of our career services personnel fully understand our career services policies. All of the career services employees in our health education and art and design segment schools have been trained on these new policies and procedures. We are planning to significantly increase the number of career services professional personnel dedicated to helping students in finding employment after graduation. In addition, we have made a number of personnel changes in the career services area and anticipate additional restructuring of our career services operations. We have also implemented changes to the staffing of compliance personnel with oversight responsibilities for our placement rate reporting. And finally, we are planning to cap enrollments or to teach out certain programs for which employment opportunities may not be as readily available as other programs at our institutions.

All this is being done to ensure that our students and our graduates have ample support as they pursue job opportunities. Recognizing the current challenging economic environment under which our students are entering the job environment. We are focused on placements for our students at each of the health and art and design schools for the current reporting year which ends next June 30. At each school, as I said, we are undergoing a thorough review of capping enrollments on certain programs, teaching out certain programs, increasing the career staffing level, all with the goal of bringing each institution above the 65% level. Our experience with the creditors is that they want to see clear steps each institution has taken to bring placements above the 65% level and our intent is to sit down with them and show them our actions and what we are doing this year to achieve that.

Steve spoke to filling open leadership positions within our operating units and this includes turn over within our senior management team. 2 managers decided to leave the Company recently for personal reasons. Brian Williams, our culinary leader, has returned to his roots on the west coast purchasing a restaurant and following his dream of going back to the kitchen. Tom Budlong has been our Chief Administrator Officer and head of our international segment, has left the Company due to a recent health concern. In addition, Tom McNamara, our art and design leader, left the Company to pursue another professional opportunity. The international business unit is now under my leadership, while the culinary and art and design teams report directly to Steve. Our efforts to identify the right leaders for culinary, art and design, and health businesses are well under way with Steve fully engaged in the recruitment process.

Let me turn briefly to the operating results of the segment. Again, overall during the quarter as is the case throughout the industry, we experienced further softening in new student interest in terms of student leads and at the rate in which students enrolled in our institutions. We view the overall market softness as a result of a number of factors, including the weak economic environment, new program integrity rules, negative publicity in the segment and increased competition for prospective students.

By business revenue for AIU was $86 million, down 24% from the third quarter 2010 and new students starts for the quarter were down 32% from a year ago. As we discussed last quarter, new students starts were impacted during the third quarter by the implementation of the SORE program. During the third quarter approximately 1/3 of new student undergraduate starts participated in SORE and approximately 60% of AIU students participating in the SORE program received a passing grade. This now represents the results from 3 cohorts of students. Had we not implemented SORE for the third quarter, new student starts would have been approximately 1,100 basis points higher than reported, or negative 21%.

AIU also continued to reduce advertising spending levels and focus efforts on the most promising and qualified new student leads from historically best sources. The past 6 months advertising spend for 2011 was 18% lower than the comparable period in 2010. AIU's decision to reduce advertising spending was partially responsible for the institutions year over year decrease in new student starts. As a result of the lower spending and the overall market environment, new student interest in the form of leads was down approximately 30% versus last year. With a new student interest to enrollment conversion relatively stable when compared to the second quarter of 2011. Operating profit for AIU in the quarter was $12 million and operating margin was 14.5%, down 610 basis points from the previous year. Margin was impacted by a revenue per student decline for the quarter, partially driven by lower average credit hours as a result of the increased flexibility of the credit hour structure we implemented last year.

As we previously shared, HLC completed its advisory visit of AIU in January of 2010. That review was concluded with no sanction or limitations placed on AIU's accreditation status with HLC. HLC conducted a follow-up focused visit between September 19 and September 21, 2011 to evaluate AIU's transition to the new undergraduate credit [structure]. AIU has received the HLC evaluation teams final report which recommends that no further HLC follow-up is needed on the matter. We are very pleased with the school's work in this area and the teams reports. Of course, as you know, the HLC is not required to accept the recommendation of the AIU teams report and could order additional monitoring and other action against AIU with respect to the matters.

Turning to CTU. CTU revenue declined 14% during the third quarter to $100 million. New student starts in the quarter were down 29%. As a result of market softness, we reduced advertising spending by 5% in the current quarter versus 2010. New student starts for CTU were also impacted by the implementation of SORE. Similar to AIU, approximately 1/3 of new student undergraduate starts did not have previous college experience and, therefore, participated in the SORE orientation class. Based on 2 cohorts of students at CTU, approximately 67% of the students who took the orientation class received a passing grade. Had SORE not been implemented, CTU new student starts for the third quarter would have been approximately 600 basis points higher than reported, or negative 22%. CTU's operating profit was $17million in the third quarter and operating margin of 16.7%. As I mentioned earlier, CTU's results for the third quarter included a charge for $5 million.

In August of 2011, the US Department of Veterans Affairs conducted a compliance survey at the Colorado Springs campus of CTU and preliminarily identified certain current and past students for whom they believed CTU had incorrectly certified the monthly housing allowance provided pursuant to the Veteran's Educational Systems Act. While we disagree with the Department of Veterans Affairs' interpretation and we continue to seek an appropriate resolution to this issue, we do not believe the students are best served if the department seeks a return of funds directly from these students. We chose to provide a reserve in the event that CTU needs to step in to ensure our students are not harmed or held financially responsible in anyway for this obligation.

Turning to culinary arts, revenue decreased 32% to $74 million on a 26% decrease in new student starts and a 6% decrease in student population. Recall the non-comparable calendar shift that we discussed last quarter that resulted in an additional start in Q2 of 2011. Looking over the second and third quarters combined for 2011, to normalize this impact, culinary new starts were down 13%. In addition, we have also rolled out new entry standards for our culinary programs. This also impacted new student starts within the quarter. Approximately 420 potential students did not achieve our minimum standard. Had all students passed, our reported third quarter new student start would have improved by approximately 240 basis points to a negative 10%. Conversion rate trends over the past month have improved and are higher than those experienced for the comparable period last year. Culinary arts generated operating margin of 5.2% for the quarter with bad debt expense of the segment as a percent of revenues 6.8% in the quarter, tracking lower than the high single digit range we provided earlier this year.

Revenue for health education was $102 million in the quarter, down 7% from the third quarter 2010. Health student population decreased 10% versus third quarter last year, while new student starts decreased 18%. Excluding health start ups, student population was also down 10%. For the third quarter 2011, operating income was a loss of $4 million including $3 million of losses from the start up campuses. Last year those start up campuses reported approximately break even results.

For art and design, revenue was $50 million, down 19% from the third quarter of 2010. Art and design new student starts during the quarter were down 40% compared to last year and student population ended 18% lower. During the quarter, art and design also implemented entrance testing for certain of its programs. New student starts in the quarter would have been approximately 400 basis points higher than reported had we not implemented our new entrance requirements. Operating margins were 5.1% for the quarter, 990 basis points lower than last year. Longer term, as we implement the changes I discussed earlier within art and design business, it is our goal to improve the operating results for the SPU to levels that would generate returns in excess of the Company's cost to capital. Finally, revenue for our international segment increased 30% in the third quarter, reflecting a 15% new student population. Again, remember, those schools in summer months are closed and we had an operating loss for the quarter.

Let me now comment on our financial position. As of September 30, 2011 we had cash, cash equivalents and short-term investments of $449 million. Cash flow from operations was approximately $200 million. Cash expenditures in the 9 months of the year were $68 million, or 4.6% of revenue. In the third quarter the Company repurchased 300,000 shares of our common stock for approximately $7 million. With the ongoing review by outside counsel regarding placement rates and the onset of our response to the New York Attorney General's investigation, the Company determined it would not repurchase shares until subsequent public update on the matter was provided. Based on the progression of the placement review to date, including the steps I discussed earlier, we do not anticipate these same limitations in the fourth quarter. As of September 30, 2011, the Company had remaining share repurchase authorization of $153 million.

Finally, as we look forward we anticipate and appreciate that there is a lot of interest in our view of 2012 and longer term visibility regarding growth trend remains very difficult. We anticipate recent market trends will continue in our fourth quarter. These trends, including the softness in new student interest and enrollment conversion have been experienced in most of our domestic institutions and we believe, again, our primarily rate of the economic environment, the new regulations and the negative sector publicity. Let me turn the call back to Steve.

Thanks, Mike for that update. I would like to conclude by affirming that the Board of Directors and my management colleagues at Career Education are fully focused on continuing to position the organization to build potential for the longer term. Each of us believes that education is one of the most vital sectors of our society and central to this country's economy. It is education that fuels broader opportunity and fuller employment. We are confident that private sector education, despite all the recent turmoil, has an important and growing role to play, not only in America but in a number of other countries, and that Career Education can be among the best and brightest performers.

Having just come through a period of heightened government scrutiny and regulatory upheaval, private sector education is, I believe, at an inflexion point and moving into a new educational climate. I believe this environment will offer enhanced opportunities for students and educators and will undoubtedly serve as a significant driver of economic growth and economic return for us. I know that I speak on behalf of our entire board in saying that we expect our Company to lead the way in using improved teaching techniques, research and technology to be increasingly effective in achieving concrete and useful learning outcomes.

Career Education recently became a founding member of the coalition for educational success and I wanted to take a moment to speak about that. We adopted the coalitions new standards of responsible conduct and transparency. We will continue to be a strong advocate for the very highest standards for conduct and accountability, and support government policies that enable wider access to higher education, particularly for non-traditional students. With that, let me open up the line for a limited number of questions until 8.30.

We will now begin the question and answer session. (Operator Instructions) Our first question comes from Gary Bisbee from Barclays Capital. Please go ahead.

Good morning, guys. A question, one for each of you. Steve, you mentioned that one of your goals will be to ensure that the Company has strong and well defined strategy and I think you insinuated that maybe new leadership, new thinking at the top would be necessary to achieve that. From your time on the Board, can you give us some impressions of where there are shortcomings in the strategy or what you think needs to be done?

I don't think I want to go into specifics on the contours of the strategy right at the moment. Suffice to say that a strategic review has been under way now for some time within the Company. We hope to bring that review to a conclusion as quickly as possible and adopt a very definitive strategic plan that will enable everybody in the Company to rally around it.

And then, Mike, just on the expected spending around all of this, the margins took a big step backwards. I guess not unexpected given recent start trends. How should we think about the potential for cost saving in the short-term versus investments to accomplish the strategic review and all the other things that are going on with the business?

Again, first and foremost, everything is centered around the student and taking care of all the issues we have, as Steve said. We look at those costs as investments. We don't try to minimize those costs at all and we spend everything we need to, as you saw in this quarter, to address the matters head on and do everything we can. We will continue to experience deleveraging as the population goes down. We have been active in taking costs out of the system. We will continue to take metrically driven costs out of the system. You have seen that from a admissions and marketing. Occupancy remains somewhat fixed and our student teacher ratios, obviously, decrease as our population goes down and we don't change the instructor level. We are going to continue to experience deleverage as we go forward.

In the fourth quarter, I think you will see continued costs related to our investigation, obviously, the $5 million for the VA, if we need to step up and help our students with that, it is a one time event. You will continue to see regulatory costs in the fourth quarter. You will also see precarious employment agreement, the cost related to that, which you can get an estimate from in the proxy statement.

Thank you.

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

Thanks so much. Mike, you just mentioned that your focus is on the students. I'm just curious in terms of this placement investigation, how have these results been communicated to the students at these schools and what are plans, if any, to notify prospective students of this issue?

Jeff, as we have just recently completed the investigation for both health and art design and are moving promptly within culinary AIU and CTU. We have just put together the data and our first approach was to share that with the New York AG and to share that with ACICS. We will appropriately change any placement Web sites that we have, be it the DoE mandated one, or student ones, or on our own Web sites, and we are in the process of doing so as we speak.

In terms of the investigation at the other units, do you have any time frame when those will be completed?

They are being done very promptly. As you can imagine with the size of AIU and CTU from relative population, that takes longer than the other ones. We hope and our expectation is that those will be completed within the next 30 to 45 days.

Alright, great. Thanks so much.

Our next question comes from Bob Craig from Stifel Nicolaus.

Good morning, everybody. Mike, some of our commentary earlier about leads being down substantially and conversions fairly stable, differ from what we are hearing from many other organizations. Might that give you pause to re-think your marketing spend strategy and perhaps increase that spending going forward?

Just to clarify, Bob, on the conversion rate I spoke to -- basically to AIU experiencing the same sequential basis. But across the board, our conversion rate was down between 5% and 10% across the Company. I think we are seeing what everyone is seeing. Our lead volume was down some where between 15% and 20%. I think the strategies that we have put in place, spending appropriately, not additional advertising spending behind lower quality leads, continue to find the best and highest qualified student through the best trusted lead sources we have, is the path we will continue on.

Is it possible to give us any specifics or further specifics on the changes you are making on art design and what the likely impact of that is going to be on future results?

I think we will have to wait until next year. As we have talked about -- as we have gone through a significant change in culinary. Changing all the institutions, changing the programs, we have gotten some data, we know how to do this. Art and design is just starting as we speak and as we go to next year, it will be more definitive to use some information. Our goal, always, is to make each unit at least generates the cost to capital and is accretive to our shareholders and that is our goal as we complete it out.

Thanks.

Our next question comes from Brandon Dobell with William Blair.

Thanks. Mike, maybe focus on the health business for one second. Magnitude of potential, either program closures, or teach outs, maybe also any color or commentary for us on how the fixed costs, the lease terms look at that business if you are in a position where you have to down size a population a lot or are a lot of leases coming up near term, are a lot of them 5 years out? Trying to get a sense of how the fixed costs could change in that business if population changes a lot.

Again, we are not necessarily saying population is going to change a lot. What I did speak to was we are looking at teaching out certain programs and putting caps in certain programs and not looking at institutions themselves. Right now as we look at that, I can't comment in detail about which of those would be. We are still in conversations with various parties to make sure they agree with the steps that we are taking.

The leases for the 40 different health campuses are, obviously, staggered. We will look on a campus by campus basis as we always do in terms of the student outcomes, the financial return to shareholders, the programs and the lease term to make sure the campus is as viable as it can be as we serve the students and we make those on a one by one basis.

Just one clarifying point. The time frame you just gave in response to Jeff's question around the rest of the inquiries or investigations in placement rates, is culinary on the same kind of schedule there or do you expect that to be sooner or later or is there anything else different that you are doing with that business compared to AIU or CTU regarding placement rates?

We are along the same schedule. Our investigation is progressing well and I think as a whole, those 3 SPUs will be completed in 30 to 45 days.

Thanks a lot.

Our next question comes from Sara Gubins from Banc of America Merrill Lynch.

Thank you. Can you hear me?

We can hear you.

Could you give some more clarity on what type of placement issues were found and have you spoken with the Department of Education about this yet?

The answer is yes, we have spoken to the Department of Education and all of our appropriate regulators and accreditors about the situation.

And some more clarity on what the actual issue -- kind of issues that you are finding are?

I think, Sara, as we said in our remarks, across the health unit, we saw improper actions that were being taken and employees that were involved in any of those improper actions we have dealt with and addressed the employee matters. There is also, across the institution's health and art and design, some inconsistencies and some inconsistencies in reporting and the support.

So, as our team, our independent team looked at the placement rates, they went through and did a very thorough job to make sure every piece of documentation, every piece of placement information was provided. If for some reason a file was incomplete, even though there was a placement, we determined that would not be counted as a placement. The team did a very thorough review. Some improper actions in health as we talked about, and inconsistent policy application we look at in field and related field placement data.

Maybe just following up on some other questions about your costs, as we think about it for the Company as a whole, is there any way to give us a rule of thumb for what you view as fixed versus variable as you face most likely continued revenue declines next year?

No different than the color I have been able to provide to different analysts and yourself in the past around, other than our occupancy costs that is relatively fixed, our administrative costs which is semi-fixed and our academic and admissions and marketing costs that is highly variable.

Thank you.

Our next question comes from Trace Urdan from Wunderlich.

Thank you. Just following up on Sara's question, do you see the issues surrounding the improper placement rate reporting, are these control issues or communication issues or cultural issues? How did this happen? Firing some employees, I think, seems to understate how widespread the issue is across 2 different school brands. I'm wondering if you spent any time thinking about a root cause here.

I think the Company spent a lot of time on the root cause analysis, both for the investigators and ourselves. I think the points that I talked about in terms of the remediation speak to where the issues would have been. We talked about personnel, we talked about employee training, we talked about clarifying the policies, we talked about fixing and looking at the compliance oversight of those placement rates, we talked about certain programs that need to be [teached out] or capped. If you look at those remediation steps, those tell you what the issues that we found are and we addressed those head on.

In your conversation with ACICS do you have a sense of when they are going to come back to you with what they believe to be the appropriate remedy for the schools in question?

We expect to have a dialogue with ACICS as quickly as we possibly can and I think we have already scheduled a meeting with them. This is Steve speaking. With respect to your question, I would say that we have gone to extraordinary lengths to try to investigate this matter and identify the causes of why it cropped up in a number of places in our Company.

I believe that the report that we have received from independent counsel to the Board of Directors was just extraordinary. The independent counsel literally went student by student. I'm not sure anybody has ever investigated its placement activities as closely as Career Education has done and we have uncovered the fact that what we are going to be reported as placements in a number of cases, in a number of places were not genuine placements according to our standards as a company.

We have reported therefore, accurate numbers to ACICS at the appropriate time. The time to report them was a week or 2 ago. We did that on time and with the results of this investigation. We have identified, as you stated, a myriad of possible causes of this and, as Mike has tried to detail, we have addressed all of the causes that we have been able to identify and we will continue to work on this problem until we are certain that we have it completely rooted out.

Thank you.

Our next question comes from Suzanne Stein from Morgan Stanley

This is Thomas Allen calling in for Suzi. Can you just talk about your start trends for AIU and CTU? I believe if you adjust out the SORE program you are still seeing, I think, 3 or 4 quarters of down based starts. Should we expect to lap that and maybe it starts to improve backing out SORE?

I think SORE will be comparable all the way through the beginning of third quarter next year. The starts on an adjusted basis, ex SORE, were negative 20%. I think you will continue to see that level in the fourth quarter. As you start getting into next year, the comparables will change and we are hoping that we start seeing market trend changes in terms of student interest as well as those comparables lapping as we go into 2012.

That's helpful. Thank you. In terms of revenue per student, we, obviously, adjusted our model for the changes you are making. It seemed like it was weaker than expected across the board. Was there anything else going on there?

In terms of the -- you got the credit hour change in AIU which you need to look at. Again, just make sure your models are sensitive enough that as you have student count, you might have student count of students that are in the SORE program for which there will be no revenue. There could be noise around the recognition of revenue between the student population data and the revenue data.

Okay. Thanks.

Thank you. Our next question comes from Amy Junker with Baird and Company.

Hi, thanks. Mike, can you talk about how many of the ACICS accredited schools passed on the placement rate metric if you go back to 2009 -- the 2009 - 2010 school year? Assuming you have had some schools fail in the past, how did they treat those cases?

Amy, the investigation focused on the current year's reporting. As you can imagine, by going back and having the independent team reaffirm every one of our placements across every one of the institutions, the focus was on the current year and the current year data and that is what we supplied ACS on an adjusted basis. I don't have the data and I wouldn't speculate on the data going backwards. We know the issue, we have given the new data to ACICS and we go forward with the plans to get above 65% this year.

Have there ever been, though, since at least you have been there, Mike, any cases where they have failed, regardless of the integrity of the data?

If you look across our OPIDs -- remember the OPID structure we had with the number of different OPIDs. Within certain programs, because the placement rates are measured on a program by program basis, there have been instances where we have been below 65% in a year. And we have worked really hard to make sure that we have (technical difficulty) processes in place so that next year we are back above 65%. It is really difficult this time though, as you look back across my past with the really soft economic environment and the difficulties for students to get jobs, the comparability of the data.

Great, that's helpful. Thank you.

Our next question comes from Kelly Flynn with Credit Suisse.

Just a quick one on starts, I think you have given a lot of color. I want to clarify, for Q4, basically do you expect them to be a lot worse year-over-year than the decline was in Q3? I think you just said, in response to another question, that ex SORE they will be down about the same. Does the SORE impact get worse or for Q3 it was that the full impact?

The SORE impact doesn't get worse because you do have the full cohorts in the third quarter. Remember, the second quarter we didn't have full cohorts, so the third quarter is the first one. So, we right now believe we will have comparable starts in the fourth quarter as we did third.

Down about the same amount year-over-year you mean?

I'm not sure I would say down or up versus the number but comparable and overall trend that we have now.

Okay. Thank you.

Our next question comes from Corey Greendale from First Analysis.

Hi, good morning. I just wanted to go back to a question that Jeff asked earlier, specifically interested in what your messaging is to current students, particularly if the question is raised over -- we thought the placement rate was accurate. It sounds like we maybe weren't informed properly. How are you messaging the changes you are making and trying to ensure that those students stick around?

These numbers are current numbers, so what we will be reporting to students is current numbers and they are, to the best of our ability and to the best of the ability of independent counsel, very accurate numbers. We will be reporting these current accurate numbers to students.

Mike, if I could, some people have asked about the cost structure generally. I want to ask specifically about the health education segment, which I don't think you called out any non-recurring items as being responsible for the loss in the quarter. Do you think, given this level of revenue, there is a way of getting that business to be sustainably profitable?

I fully believe we can sustainably profitable as we have been in the past with the business. I think you have a significant amount of deleveraging going on. We had the start up campuses that we invested in the last several years that we tell you about the start up number, which is the most recent year. Remember, our start ups in one year after opening, we count those as start ups.

We have many campuses, if you look at our account that are maybe 2 years old, which aren't up to the full profitability levels of a mature campus. Once those campuses continue to grow, we will do well. Also, additionally, this has been a very thorough investigation by the Board of Directors and counsel and throughout the health unit, there has been distraction and there have been priorities that made sure we did everything working on the investigation, the placement data issues, everything else you have heard about that may have taken the ball off of some of the operations of the campuses, that as we clear this up, will be behind us.

Our next question comes from James Samford from Citigroup.

Great, thanks a lot. At a high level, Steve, you have been at the Company for quite a while, have seen the Company go through some pretty significant changes. I was wondering if you could comment on the magnitude of what you are facing today versus maybe some of the challenges that the Company has faced in the past, perhaps, 3 or 5 years ago?

I'm very optimistic today, certainly compared to 3 to 5 years ago, but in the context of today, I'm very optimistic. As I pointed out, I think that there is an opportunity here for the entire sector, even in the aftermath of the changes that have been imposed on the industry by the Department of Education. So, I think that we and other companies have a real opportunity to grow and expand and to serve a larger population of students. So when you have that fundamental belief that you are in an area that needs to grow, that needs to serve more people, more students, more consumers, you have an optimistic view.

I also said earlier and meant it that this company has broad resources, including financial resources and I think that they can be put to work for the Company in meaningful ways that are going to enable it to be successful. I also tried to indicate that there is going to be a balance between dealing with our near term compliance issues and the longer term need to put a strategy in place around which we can rally as an organization. We have a head start on developing that strategy and I think that we can distinguish this Company and move ahead and grow profitably in the long-term.

Thank you.

Our next question comes from Peter Appert from Piper Jaffray.

This is George Tong for Peter Appert. I know you touched on this a bit earlier, but could you give us additional clarity on how you expect starts and enrollment trends to play out, specifically whether you have any views on when either will turn positive? And, could you tell us, if you feel comfortable, reiterating your prior revenue and operating income guidance?

I don't think I can give you anymore color about the market trends and start trends than I have already given you. In terms of our guidance, we have never given out guidance, as you know. We have given out some milestones. At the beginning of the year we have given out some milestones. You now can see that we had costs in this quarter which were unanticipated. We will have costs in the fourth quarter in terms of Gary's employment agreement we haven't anticipated. I think it is important to look at where the business is after 3 quarters and to build your model and anything you need in terms of help filling in that mosaic, we are happy to help you with.

Got it. What are the implications of having -- for the 36 schools in health ed and arts and design that didn't meet the 65% minimum placement rate standard? Do you have any specific plans on how to bring those into compliance?

I think the plans to bring them in compliance are exactly what I spoke to earlier about the change in personnel, the increased training, bringing in more career services people, making sure the policy definitions are proper, teaching out certain programs, capping certain programs. I think those are all in the right place. ACS has a variety of different steps that they can take. Again, given the circumstances that we have, that we have been open, we have been very forthright, we have gone to them on a very proactive basis. That the overall numbers for both health and art and design are not materially different than 65%. We will go talk to them on an individual, institution by institution basis and put on remedies and do as much as we can to make sure that for this year we are above 65%.

Thanks.

Thank you. That is all of the questions for today. I will now turn the call over back to Mr Lesnik for closing remarks.

Thank you, Dawn. On behalf of the Board as well as our employees, I would like to thank you all for joining us today and your interest in the Company. As I said a couple of times, I believe we have fundamentally strong institutions and I believe we have a wealth of talent among the 13,000 people who work here. As a company, we have always been transparent with you and with our other constituencies and open with all investors, and we have hopefully continued that approach today in our remarks.

We appreciate that you will have questions as you further review and think about our remarks and the materials we have issued last night. If you do, please contact our Investor Relations team to answer any questions you may have. As they say, they will be ready at the phones any time. This concludes our call for this morning. Thanks for joining us and thanks for your continued interest in Career Education.

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