Perdoceo Education Corp (PRDO) 2012 Q1 法說會逐字稿

Welcome to the first quarter 2012 earnings conference call. My name is Christine and I'll 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 VP Strategy and Investor Relations, John Springer.

Thank you, Christine. Good morning, everyone. Thank you for joining us on our first quarter 2012 earnings call. With me on the call this morning are Steve Lesnik, our President and Chief Executive Officer; and Mike Graham, our Executive Vice President and Chief Financial Officer. Following remarks made by Management, the call will be open for analyst and investor questions. This conference call is being webcast live 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 question during the call please call our Investor Relations department at 847-585-3899.

Now before I turn the call over to Steve, let me remind you that yesterday's press release and remarks made today by our executives may include forward-looking statements as defined in Section 21-E of the Securities Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause our actual future results, performance, and business prospects and opportunities to differ materially from those expressed in or implied by these statements.

These risks and uncertainties include, but are not limited to, those factors identified in our annual report on Form 10-K for the year-ended December 31, 2011 and subsequent 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 Steve Lesnik.

Thanks, John, and good morning, everyone. Thanks for joining us on this call. The first quarter of 2012 reinforced our expectation that this will be a year of challenges, but also bolstered our confidence that we have great opportunities to make changes to position ourself for success beyond 2012. That's where our focus is.

The last several months have not been easy for this sector. At CEC, we remain focused on executing our own strategic initiatives. We are determined to take all necessary actions to build a foundation for future growth. Importantly, we are working hard to build an educational and technological platform to deliver more consistent, reliable results for our shareholders. Let me comment a bit on the macro environment that we face currently.

At the risk of stating the obvious, the near term economic climate, job market, and political dynamics remain very challenging for us. As we exit the first quarter we continue to experience strong headwinds, similar to what you've heard from others in this sector. Specifically, changes in student demand reflecting longer decision cycles, the hesitancy of students to take on debt, and the general level of uncertainty in the labor market. Reduced admissions effectiveness following the implementation of program integrity rules. Market restrictions, program changes in response to gainful employment rules, and of course negative publicity.

The fact of the matter is we and the entire proprietary post-secondary education sector are front page news and directly on the President's current campaign agenda. We can't speculate about the magnitude of the impact each of these factors has individually but it's clear that overall, the confluence of these currents is having a collective impact on the sector and us, that is more pronounced than anyone predicted several months ago.

That's why it's important for us to aggressively make the changes necessary to adapt to these headwinds, which are unlikely to change in the near term in our judgment and we must reposition our Company to the new landscape. During the fourth quarter call, I provided an overview of the key imperatives we are facing -- we are focusing on in 2012 which include ameliorating our current legal accreditation and regulatory issues, establishing a well defined strategic path, and augmenting the leadership of the Company. Let me start with our efforts to resolve the Company's regulatory challenges.

We made the first step last quarter in that regard with the closing of the independent investigation initiated by our Board of Directors without further negative action. We progressed further with the recent ACICS decision to remove all our schools from show cause with respect to our past internal determination of job placement rates. The latest positive step is a testimony to the commitment of our team and ACS's recognition of the comprehensive processes we have developed over the last several months to improve the way we report placement rates. That includes 100% third party verification of placements, which we believe brings us to a new level of assurance matched by few, if any of our peers.

We are pleased that ACICS acknowledged the tremendous energy and attention we have devoted to this issue and approves of the enhanced processes and procedures that we have put in place to address any issues or confusion regarding our internal determination of placement rates. I'd like to thank the entire Career Ed team, involved in the efforts, for their hard work and dedication to implementing the required operational changes in the short period of time to get us to this point.

A great deal of work has been done, but we still have a great deal ahead of us to improve our placement rates themselves in what continues to be a very weak employment environment. As I mentioned on the call in February, there are various levels of increased ACICS oversight when an institution's placement rates fall below 65%. As we noted in a news release earlier this week, for the 2010-2011 ACICS reporting year, which ended last July, 60 of our institutions have been made subject to various levels of oversight, just like many other schools have been in this environment.

Also, part of ACICS's recent decision, four of our schools will be on probation for having placement rates below 40% for that 2010 to July 2011 period. It's important to note that these schools remain fully accredited and this does not affect the schools' ability to continue to offer programs to existing or new students. The low placement rates during the period between July 1, 2010 and June 30, 2011, which triggered the enhanced reporting and probations, unfortunately continued until the end of 2011. However, after we put new leadership in place at our ground schools in the first quarter of this year, we have done everything in our control to improve placement prospects for current graduates in this tough market.

As part of that commitment we have and continue to invest in our Career Services department to offer more robust counseling and support. We took important actions during this quarter including, we've added over 60 Career Services personnel so far, with plans to add more in the current quarter. We also significantly enhanced contact management software and employment outreach resources available to our advisors to assist them to identify potential opportunities for our graduates. We signed agreements with several career search providers so our Career Services staff has improved online resources at their disposal. Lastly, we've ramped up our contacts, including mailings and phone calls, to businesses to develop stronger direct relationships and determine what job openings they may have for our graduates early in the game.

Together, these actions are already markedly improving our current pace of placements. However, where our 2012 placement rates will ultimately come out is difficult to predict at this point in time. In addition to increasing resources available to current graduates, we took actions to help student outcomes by deciding to cap or teach-out programs at a number of our campuses within our Health SBU, and we expect to be taking additional actions in the second and third quarters.

I'm hopeful that these ongoing actions, as well as the recent ACICS decision to remove the show cause action, will serve as signals to other constituents that CEC is part of the solution to the post-secondary education shortfall the Company is facing. Strategically, the resolution to the ACICS show cause matter removes a considerable roadblock in our efforts to address remaining regulatory issues such as our ongoing discussions with the New York Attorney General's office and others, and our effort to simplify the organization -- starting with addressing the issue of consolidating our complex OPED structure in a timely manner.

Having said that, let me update you on the progress we are making on our plans to simplify the organization. We are committed to reducing the number of Strategic Business Units from the present six to three. The three will be University Group, the Career Schools Group, and the International Group. A brief word on each. On the Career School side we currently have nine institutions, many of them with similar, if not identical missions. Those that can be established or reestablished in the marketplace and differentiated we will support. We expect over the next few years to have fewer institutions, a lower cost structure, more powerful and focused student facing services, more relevant programs, and stronger school brands more efficiently marketed. Let me be a bit more specific about what we are currently contemplating.

First, we expect to reduce the number of institutions to a manageable number, eliminating many redundancies. Secondly, we will reduce the number of brands to a differentiable supportable number, eliminating considerable marketing duplication. Three, we will reduce to be subject to fewer accreditors. Four, adopt a single operating model. Fifth, we expect to change from an individual institution location to a multi-institution location model.

Sixth, we expect to modify existing programs now that we're off show cause and introduce new ones to make our students more readily placeable in the future. This will take some time. Seventh, we'll introduce, when ready, some technological advancements we are working on to give our students additional learning options. Eighth, we are going to make strategic investments or acquisitions to strengthen our ground offerings like our career offerings, like Everblue. Ninth, we're going to sustain our renewed commitment to compliance and to students, which we think will make us a more effective educator. Finally, we expect to bring in fresh leadership with strong multi-location experience, operational experience, and customer centric experience.

On the University side, we will look to achieve greater alignment and synergies across our two great Universities, Colorado Tech and American InterContinental University, within what will become our University Group. Intensive cooperation will enable us to streamline our non-student facing activities and concentrate more resources on students' educational advancement and outcomes.

Finally, our International Group will continue to build our Western European presence, leveraging our two well established institutions. The INSEEC Group and the International University of Monaco. Given the issues we have faced domestically, we have not talked or discussed our International operations very much on these calls. Make no mistake, they have a strong team and Western Europe is an important part of our long term strategy. In fact, we recently concluded this quarter, a small acquisition to help them continue to grow by further broadening their curriculum, an action we announced earlier today in Europe and here.

We have already begun to streamline the organization chart and foster greater alignment operationally within each of the three operating groups. In the second half of the year, our goal is to further operationalize this structure. We are in the process of organizing our leadership team to be consistent with this simplified corporate organization.

One point of emphasis, as I also said on the last call, another core element of the strategy is to build differentiated brands. In March, we rolled out CTU's RUN brand campaign, one of our major investment areas in 2012. It has generated a lot of excitement and energy across CTU. The decision to commit to this expenditure was based on its long term potential to help us diversify our sources of new student interest and reach perspective students earlier in their decision cycle.

In addition, we are testing a number of new marketing and admissions initiatives across other institutions, including social media and viral marketing efforts in various new approaches to customizing our new student interest contact strategies. Finally, we continue to make important advances in development of our proprietary and what we believe to be best-in-class educational technology.

Over the last three years, we have fundamentally rebuilt our student platform with two fundamental design principles, enable an end-to-end integrated student experience from enrollment through alumni status. Two, provide flexibility to integrate best-in-class technologies. Throughout this period we have been consistently recognized by such authorities as Information Week for the capabilities we have been building. In 2009, for our mobile learning program. In '10 for MUSE, our online learning delivery system. And last year, for our CEC Technology Labs, a dedicated team focused on rapidly proofing and prototyping new educational technologies and integrating those capable of enhancing the student learning environment.

These developments have all come together as we recently completed development of the next generation of our student learning platform, which can now deliver an integrated student experience across the student lifestyle for ground, blended and online learners across all our institutions. We believe our student platform provides us with industry leading capabilities to provide innovative and enhanced learning experience to all of our students over a variety of modalities. Now back to the subject of leadership.

We are planning to name a new Chief Academic Officer, a Career Schools Officer and a Chief Public Affairs Officer in the current or next quarter, bringing in further stabilization to the leadership team following a lengthy period of turnover here. We also expect more clarity in the University Group before the end of the year. You already know we have reorganized our regulatory and compliance groups. All our new blood will mix with the outstanding executive talent committed to fulfilling our mission of being a trustworthy, effective and efficient adult educator leading America in quality teaching and applying technology to learning.

It's been a busy six months and we've introduced a lot of incremental change across the organization. I said last quarter that, because of the depth of the changes we seek to make, 2012 will be a difficult year financially. As we exited the first quarter, it has become even more difficult. Mike Graham will talk to you about that in just a few minutes. However, despite the headwinds, we cannot lose sight of some important facts. I believe demand for proprietary post secondary education will continue to grow because the number of jobs requiring post secondary education will continue to grow and the challenge of developing workforce qualified to fill those jobs will persist.

Just last weekend, the New York Times chronicled the reduction in the number of students that the heralded California State University system is accepting. The fact that even with fewer students, class size limitations make it impossible for undergraduates to get into classes they need to graduate. Private sector post secondary schools, like those in the Career Ed family of schools, are part of the solution to education capacity challenges, which are failing to prepare people for the 8 out of every 10 jobs in America which now require post secondary education. Career Education has a distinct entrepreneurial history, great institutions, and learning technologies in a strong financial base. We're confident in our Management team, in our faculties, our staff, and the long term prospect for the organization.

We realize there is significant work ahead. We're not naive. While the operating environment remains challenging, it's important that we continue to act with urgency in implementing our strategies. We are on a path toward a more stable, successful and sustainable future for this organization. That's what 2012 is all about for us. Our Board, our newly designed incentive systems, and our operating priorities are all aligned to this goal. I look forward to sharing more on our progress next quarter and with that, I will turn the call over to Mike Graham, who you all know well.

Thanks, Steve. Good morning, everyone. First a quick review of the quarter's results. Overall in the first quarter total revenue was down 18%, consistent with the pace of declines we've experienced in the back half of 2011.

Operating income was $46.4 million in the quarter. As noted in the press release, operating income included $19 million of proceeds from the settlement of certain insurance contracts, which is recorded within our corporate and other segments. Excluding the settlement, operating income was $27.4 million. First quarter EPS was $0.78, reflecting this insurance recovery and an income tax provision of 0.9%. I'll discuss the income tax provision a little later in my remarks. Now onto our segments.

First, in our predominantly Online Universities, the operating trends in the first quarter remain consistent with what we've experienced since the implementation of our SOAR program in the third quarter of last year. In the first quarter, new student starts declined 23% and 22% in AIU and CT respectively. If you exclude the impact of SOAR, new student starts were down 18% and 14% respectively. SOAR has now been in effect for three quarters and we believe it is having an intent impact of identifying students potentially not prepared for the rigors of University study allowing them to leave the institution before incurring any tuition costs, including student loan debt. Both AIU and CTU are now both experiencing improved levels of student persistence.

For the first quarter, AIU revenue was down 15%, on 16% lower student population. While AIU is still feeling the pressure of lower average credit loads, we're starting to see a moderation in the pace of decline now that we've lapsed the curriculum changes that were implemented in the first quarter of 2011. Operating margins were 16.5% for AIU in the first quarter, versus 26.5% in the first quarter last year. In CTU, revenue was also down 15% in the quarter on 16% lower student population. From a margin perspective, CTU operating margins were 19.1% in the quarter, reflecting the incremental investment we made in the A -- in CTU's advertising campaign.

As Steve mentioned, we launched the national CTU advertising campaign late in the first quarter, an important strategic initiative for us. We intend to continue this campaign throughout the remainder of the year and we're optimistic that more directly reaching potential new students earlier in the decision cycle will improve marketing efficiency as we move into 2013. Now on to our Career Schools.

Starting with Culinary, new student starts were down 11% in the first quarter, with pre-enrollment testing accounting for approximately 400 basis points of this decline. Revenue in the first quarter was down 31%, reflecting the shift to certificate programs and the corresponding reduction in tuition per credit hour. Culinary operating income for the quarter was breakeven. As we move to the rest of the year, the revenue per student pressure from last year's Culinary tuition changes will anniversary in the third quarter.

However, this model shift has also resulted in a significant increase in anticipated graduates in the second and third quarter due to the shortening of the program length. Overall, the model changes have been well received and student retention is strong. We believe we have created a positive foundation for Culinary to move into 2013 despite this near term P&L impact required to transition forward.

Now on to Health, where we continue to aggressively make significant changes to address current placement rates and 90/10 challenges, and reposition these institutions as we head into 2013. You heard some changes from Steve. Again the changes include -- introduction of pre-enrollment testing to better insure students are ready and prepared for the educational experience; increases in tuition levels, which on average are about 8%, now requiring each student to make small in school payments; and for certain programs we've instituted program caps and discontinued other certain programs. Importantly, we believe these changes are already beginning to have a positive impact.

As Steve mentioned, the investments in Career Services have been helpful to improve the pace of placements. In the first quarter, the pre-enrollment testing and the tuition changes have begun to improve our 90/10 position in the six OPEDs we discussed last quarter. However, these changes are also adding further pressure to our short-term operating trends. In the first quarter, Health new student starts were down 40%, as compared to 30% in the fourth quarter 2011, reflecting the impact of these additional actions.

Health student population was 27% lower than last year, resulting in a 22% decline in revenue and an operating loss for the quarter of $11.8 million. We are also taking significant steps to realign the cost structure by bringing more efficiency and consistency to Health in the areas like admissions, financial aid, and academic and administrative support functions, while also investing back in Career Services advisors and placement resources. These steps started in the first quarter and will continue through the remainder of the year, and we believe we will start to see the improved overall cost efficiency in 2013.

Art and Design has the most extensive business model changes. Again, including the implementation of pre-enrollment testing, it's new tuition levels and pacing options, and transition to new program areas. As a result in the first quarter, Art and Design new student starts declined 45%, in line with the declines we've experienced in the latter part of 2011. Ending student population was down 24% versus last year's first quarter, resulting in a 26% decline in revenue and operating loss of about $1 million.

Finally, the International which, as Steve says, remains a solid performer for us. In the first quarter, International revenue increased 16% driven by higher average student population and annual tuition increases. Operating margins were 30.6% in the quarter, up 410 basis points from last year's first quarter. As we move through the next few quarters, International will go through a bit of a student population transition of its own as we experienced higher than normal graduation levels in the first quarter. Due to the timing of certain program completions, resulting in ending student population that was 10% below last year. New student interest remains strong and we expect growth in new student starts throughout the remainder of 2012.

Now quickly on to our outlook. As we've discussed, there continues to be a great deal of change in investments in our Career Schools. Last quarter we projected approximately $60 million in operating losses for the Career Schools as a group. Based on the trajectory coming out of the first quarter and changes we continue to make in the Health Group, we now estimate that combined operating losses for Career Schools will be between $100 million and $120 million in 2012. That excludes the impact of impairment, legal settlements, or any other one-time items, again if any occur.

As you review our first quarter results, you'll note the unusual tax provision rate. Under GAAP, we have applied the annual tax rate estimate to our first quarter results. The low basis of expected operating income for the year, given the Career School's anticipated losses, together with significant regional differentiation and tax rates including International, makes the overall tax rate itself less meaningful due to this significant change in mix. Before opening the call for questions, let me update you on the financial position.

As of March 31, 2012 the Company had cash, cash equivalents and short-term investments of 100 -- of $390 million. Our cash flow from operations for the three months was approximately $17.4 million with capital expenditures in the quarter of $12.3 million, or 2.8% of revenue. During the first quarter, we repurchased 6.1 million shares of our common stock for approximately $56.4 million. As of March 31, 2012, we had a remaining share purchase authorization from the Board of Directors of $183.3 million.

In closing, before we open it up for questions, again we're in the middle of a disciplined path to repositioning CEC. As Steve said, we're aggressively addressing the regulatory concerns that have served as strategic barriers, again, as evidenced by ACICS's decision to remove us from show cause. We have and continue to take the necessary actions to enhance student persistence and outcomes across all the institutions. Again, we have introduced enrollment criteria or orientation across all major institutions.

We have eliminated or altered programs, that did not meet student outcome standards. We've eliminated extended payment plans and, in some cases, reduced tuition levels to reduce our students' financial burden as they leave the institutions. We've implemented significant enhancements to the placement reporting process, as Steve discussed, and finally we continue to expand the Career Services resources available for our graduates.

Again, these are essential foundational steps and as we move forward, as Steve said, simplify the organization, we will determine the optimal portfolio of institutions and brands that can best leverage the collective assets of CEC, the breadth of the market based curriculum, the breadth of the geography, and our world class technology. By doing so, we're going to position CEC as a more streamlined and differentiated Company poised to return to market growth. With that, Operator, let's open the call for questions.

(Operator Instructions). Jason Anderson, Stifel.

I was wondering if you could provide a bit more color on the change in the guidance on the career Op loss to the $100 million, $120 million. Is it more a demand change and the negative leverage or is it also expense weighted also or a combination of both?

I think it's a combination of all of the factors. I think as Steve discussed earlier in the call, many, many moving parts between the industry and between our model, significant changes put in place. Jason Friesen, as those of you who have experienced in the past in Investor Relations, has done a great job with the health team to put in steps. His steps of the team are over 19 different steps to improve the institution.

As we've looked at the new student demand that's out there across the allied health industry across the United States, the current programs we put in a lot of changes. We're taking costs out, especially metrics with different costs that are aligned closely with student population and new student starts, while again investing back in what we need for outcomes. This is based on trajectory, based on all of the changes we've made, we're giving you our best current estimate of what the combined ground school trajectory would be.

One other on the tax rate. Should we assume then that this is going to continue through the remaining quarters of '12 or is there any other color you could give us on that?

Let me give you some color. It's just very difficult given where the numbers are, you'll have to do some modeling yourself. As you model out the tax rate, I would focus on domestic income as traditionally tax number between 35% and 37% and our international income is probably at a mid-teens rate. As you look at your models and look at your blends, every quarter I would apply that and then on an annual basis you would come back to a rate, but it's probably easier to compute out the income tax expense and then back into a percentage number.

Suzi Stein, Morgan Stanley.

On the share buybacks, are there any restrictions, either regulatory related to financial responsibility or with respect to the credit agreement, that would preclude you from being aggressive with buybacks? On the credit agreement, have you had any discussions regarding the covenants on your existing agreement or on putting a new agreement in place?

On the repurchase there are some restrictions. There is a restriction in our current revolver around net worth or net equity, and so we would have to always be conscience of that. There's also the Department of Education restrictions on buyback. As we've talked about in the last several years, our buybacks have traditionally run around the level of net income and so we do have those constraints.

Within the credit agreement itself, the credit agreement expires November 1. We are in discussions with our banks. We put some color in there in the 10-Q in terms of where we stand on certain covenants and where we stand on the revolver, but we will hopefully have more news next quarter about where we stand with renewal extension or new revolver for the Company.

You talked about some of the issues that are driving the weakness in starts, but you didn't mention competition. I'm just wondering if you could comment on that.

On the competition that we're experiencing, we are finding on the marketing end that most of our peers are stepping up their marketing efforts in this difficult environment with the students taking longer to decide and some students being talked off going to post secondary education, we are finding a heightened experience by the competition. At the same time, we are pinpointing our own efforts to students that we think have a better opportunity of persistence, completion, and placement.

In terms of the timing of some of teach-out of some of the health schools, when do you think we'll get to a normalized environment for health?

We have not announced any teach-out of health schools beyond one school that we've decided to teach-out upon the expiration of its lease in the St. Louis area. We have talked about the teach-out of certain programs that we've initiated. Those programs typically run in length between 9 months and 15 months of duration, but again we've made no announcements of teach-out of school, simply certain programs.

Jeff Silber, BMO Capital Markets.

I know you don't provide specific guidance but I'm just curious, given the operating losses expected in the career schools, do you think that the other units will be able to make enough operating income this year to offset that?

I think the question, you answered it yourself a little bit there, Jeff, in terms of we don't give guidance. I think if you do the model as you always do in a great shape you'll see where we're targeting. You've seen the international income and where we have been traditionally where universities' trajectory is. Given all of those together, there will be a relatively low level of net income for the Company based on the losses in the ground schools, as well as the tax rate that we're showing you.

In terms of any one-time issues besides the insurance recovery, were there anything in the quarter that we should be aware of and anything in the upcoming quarters we need to know about?

The upcoming quarters, again there's always the possibility with reduced earnings that one would look at impairment and as you know, we're working through a lot of the different legal issues of the Company. There's always a possibility of impairments or potentially anything else on the legal environment as disclosed in the 10-Q. During the quarter itself, there was nothing unusual besides the insurance recovery and remember last year in the first quarter, we also had a similar insurance recovery. Our risk management group has done a great job of getting us policy protection for certain legal expenses. We don't expect to have similar recoveries in the future based on the settlement we've made.

You'd mentioned some of the increase in graduations in some of the units. Are there any, again, quirks dealing with timing of starts coming up that we need to know about?

I think there are some quirks, if you look at our second quarter. As you remember, last year we did have a change in our culinary start, our traditional July culinary start last year in 2011 was in June and we had a non-comparable start there. This year it goes back to a July start. As you model, I'd go back to the two year trend on culinary. I also believe that within health we will probably have some shift of traditional June starts to July starts, hard to give you quantification on that because it's a onetime item. Based on calendars, those are the only two material start calendars to look to.

Can you tell us what we should be modeling for capital spending for this year?

I continue to think that the best model for capital spending has traditionally been somewhere between 3% and 3.5% of revenue.

Gary Bisbee, Barclays.

Of the operating loss in career schools, is there any way to quantify incremental expense you're layering on that may be of a shorter duration as opposed to ongoing part of the cost structure or is that too difficult to do right now?

Obviously we've done it internally. We've built very detailed models in terms of the forecasting. I think right now, given the degree of change as Steve talked about, the consolidation efforts that we've talked about, the new career services leader to join the organization in the second or third quarter, things like that will obviously require investments, require changes. It's hard to speak to exactly one time investments.

There's a significant investment in career services personnel, significant investment continues in academics, because of the populations have come down in terms of student populations. We continue to maintain our academic levels to serve every student possible within the schools. Too much granularity to give you, but that's the best I can do for now.

How about thinking beyond this transition period. How do you think about the profitability potential of the career schools segment in general? Will it take a significant rebound in students to get enough leverage to be solidly profitable off of what you're thinking of the new cost base being today? Is there any way to help us think about this over the medium term?

I think you're absolutely right that what we're thinking about is growth and we're thinking about increasing student populations back to some of the levels that they've been at in the past. We are thinking of doing that by not only the consolidation and integration, but looking at being able to provide the kinds of programs, modifying the kinds of programs that make students that we're offering that, as I said earlier, make students more readily placeable and make them more placeable gainfully according to the gainful employment rules.

There is no question that we are banking on restoring top line growth to the Company. As both Mike and I indicated, we think we have a lot of intrinsic resources and assets that position us well to do that and we look for a reversal of the decline in starts, student population, and therefore revenue, in, as you put it, the medium or intermediate period ahead.

The 24 schools that were incrementally came under some heightened level of oversight by ACICS, is that a good number to use then for the number of schools that may have been incorrectly reporting their placement rates? I assume the first 36 ACICS already knew they were below the threshold, but in your restating them and working through the challenges, basically you're admitting that 24 more actually hadn't made that threshold. Is that a reasonable way to think about that?

No. First of all, I want to correct you as I correct everyone. We did not incorrectly report our placement rates. We determined before the reporting deadline internally inconsistency in the numbers. We were required under ACICS rules to tell them that we discovered those inconsistencies and they were corrected before we reported at the proper deadline. We did -- I need to correct everybody. We did not incorrectly report our numbers.

In answer to the second part of your question, 24 additional schools were put on because ACICS asked us to reverify and update some of our placements. In looking at the refreshed numbers that we gave them, we did fall under a certain reporting gate that they have. By the way, they themselves during this period of time updated how they look at placements. As a result of both our updating our reporting, which we do put on our website so a student can see them, and their own review of how they look at placements, they decided to put 24 additional schools on reporting having nothing to do with the way we report, which is for low placement rates themselves.

Brandon Dobell, William Blair.

Any concerns on a prospective basis in the university or within culinary around 90/10? If there are any, how should we think about the potential for time frame around any thoughts about the risk profile there?

As we've talked before, given the increased level of the 2,000 staffer change in the middle of last year, all institutions of ours go from a higher basis of 90/10 and you can see from our disclosures traditionally in the 10-K in terms of our mix of Title IV revenue, I think last year we were around 82%, 83%. Right now our forecast from this year within the university group does not show any issues with 90/10. As we go forward, obviously one has to look at the different levels of federal support, the mix of students et cetera, to see where it is so clearly for 2012 the university does not present a challenge.

In terms of culinary, again culinary is going through a significant model change and the new model that we developed was designed to do our best to pass both gainful employment and 90/10. As we keep going through and anniversarying that model change and see the different cash levels brought back by students, we don't see traditionally or at least don't see right now material issues in 90/10 from culinary.

Switching to the university specifically, in terms of incoming student inquiry levels and quality of students, those kinds of things, even before they get into the SOAR program, I think I got your comments correct but I want to make sure. Can you review where you are in terms of your comfort level or what you're seeing from the incoming inquiries and within that question, how should we think about marketing spend to the balance of the year based on what you guys are seeing so far in this year?

Yes, we are seeing a reduction in student interest, as I indicated in my prepared remarks. We are seeing a more difficult environment in student interest in post secondary, proprietary post secondary education and more competition for student attention. We also see students being less decisive than they have been in the past with respect to their commitment to post secondary education. The marketing has to start earlier and be more sustained. We are seeing some diminution in leads to our organization and as Mike indicated, we are also watching very carefully conversion rates as students shop more carefully.

With respect to marketing spend, we do not foresee any change, up or down, on a material basis in the remainder of the year. If Mike would like to be more specific on that, I'll turn it over to him.

I agree with Steve. Let me give you more clarity on the marketing spend. We are seeing lead costs up in terms of the traditional costs we've seen probably related, again to misrepresentation, industry changes and lower student demand. As we did state, we have made an investment in CTU and we will continue to make that investment. That was spent late in the first quarter, so the marketing spend quarter-over-quarter in the future will probably reflect that spend level.

In terms of new student interest in terms of quality, we remain committed to get the best student into the institutions and the most prepared students in the institutions. SOAR has been working as designed, approximately a third of the new students interested in CTU and AIU enter the SOAR program. We're seeing approximately two-thirds of those come through the SOAR program successfully, somewhere between 55% and 65% so it's doing its intended purpose. The persistent rates of the cohort are improved, which is exactly the outcomes that we wanted by putting in orientation.

Corey Greendale, First Analysis.

Steve, I want to go back, you outlined, I think it was 10 steps you're taking to improve things at the career schools. So, it sounds -- just given the number and the magnitude of those steps, it sounds like it is a pretty significant undertaking. Can you give us some sense of time frame? How long you think it's going to be before you can say we're through all those 10 things and that part of the business is structured the way it's going to be going forward?

I can't give you a time frame. I can tell you that our strategic plan covers a three year period, so we surely will get this done well within that period of time. I think that you will see a quickening of our pace in making these changes beginning in the second half of the year. Obviously, we've been somewhat preoccupied with some other issues in the first half of the year. I can't give you a specific timetable, but we are expecting to have a material impact on our operations, certainly in 2013. I don't know how responsive that is, but that's the best I can do at the moment.

No, I understand. Within that -- on the fewer institutions, I just want to make sure I'm getting the messaging right. You're saying -- I think that you are saying that you haven't announced, other than St. Louis, you haven't announced any teach-outs, but that's on the table. You are still looking across the portfolio and seeing whether that would make sense in some additional place?

Yes, as I said last call, this call and Mike reinforced, we are looking at additional -- we are looking at capping programs, eliminating programs, and teach-outs where appropriate, where we can't get appropriate placements and get our students gainfully employed. Those are the prisms that we're looking at.

In terms of the -- I think you mentioned the possibility of some new program introductions. I think as the regulations currently stand, the Department of Education has to submit a bunch of information to the department and they have the ability to ask for additional information or block those. Wondering if you've had any initial dialogue or want to set expectations as to whether that could be a -- they could put roadblocks in the way?

We don't believe that the roadblocks [locks] that may have existed while we were on blanket show cause exist any longer. We believe strongly that the roadblocks have been eliminated, not only at the level of the Department of Education but at ACICS and other programmatic accreditors. I'm telling you that from my perspective and accreditors and the Department of Education will have their own perspective, but there is no reason why any roadblocks should exist as we have satisfied our accreditors that anything that was in question has been rectified and that we are back in good standing. I, for one, am optimistic, hopeful, whatever you might, however you might want to characterize it, that the roadblocks that you refer to are eliminated.

I want to clarify in your clarification in Gary's question, you said that there was no misreporting of placement data. You were just talking about the one year period ending June 2011 correct? Or, are you saying you're confident there was no misreporting in earlier years?

The earlier years have never been raised by anyone. We were put on show cause for our reporting from 2010 to June 30, 2011. That's the only period that anybody has talked about, looked at, considered, and it is that period that we're addressing.

Sara Gubins, Bank of America.

Hi, this is David [Chu] for Sara Gubins. I wanted to address the orientation that you guys had talked about in the past about implementing across your other school systems, wanted to see if that's still a go and timing of that launch?

We had talked in the past about the coalition for education success that we had endorsed the pledge that the group had done about either for student readiness, either a 21 day refund period so no debt is incurred upon an early drop or an orientation program. We're looking at that carefully. As you know, we've done a lot of work on pre-enrollment testing. In the quarter alone, 2,700 potential new starts did not move into the institutions based on different pre-enrollment and orientation programs that we have in place. The SOAR program, as we put in place, has been working well. As we enter the back half of the year into the fourth quarter, we're looking very carefully at what the best way to implement that because we feel that the steps we've taken to date are really aligned with the philosophy of students first.

Are you saying that you're not sure if this is something that you are going to implement going forward?

I would say that it is under discussion within the Company. Our academic people are taking a very close look at it. There are operational issues with respect to doing it and there are serious questions with respect to whether it's more efficacious than what we're currently doing, particularly in the minds of our academic people. We may defer this somewhat. Until we satisfy ourselves that it is an improvement over SOAR and other steps that the Company has taken over the past 9 to 12 months, we are not going to implement it until we are assured of that by our academics and other people.

Looks like administrative expense was down quite significantly in this quarter. Wondering why that is and if you think that's sustainable?

I think the two things to look at would be, one, year-over-year $12 million change in insurance recoveries as we stated. Two would be the bad debt expense. Insurance recovery should not reoccur. The bad debt expense probably should stay on this trend going forward as our changes in student payment plans and other things are now fully anniversaried and our bad debt rate is back to traditional 2% to 3% of revenue.

Jeff Meuler, Robert W. Baird.

With CTU and AIU starts looking like they are troughing in terms of the rate of year-over-year decline and with the new advertising program at CTU and the social media advertising that you guys are doing at ATU, would you expect a continued lessening of the rate of year-over-year contraction and starts at AIU and CTU from here?

I'm not going to specifically talk about the start levels. I will remind you that the advertising and things that we've put in is going to be impactful, we think, in the longer term as we enter 2013 in terms of getting more directly to the student and helping the marketing efficiency next year and the growth of the institutions. Also, please remember that we do anniversary the SOAR program in the back half of the year and so some of the comparables for both AIU and CTU will be impacted by that in terms of your model.

On the placement rates, in terms of getting off to a worse than expected start for the 2011/2012 cord and I know you've made some changes and allocated significant additional resources at it more recently but when you talk about it being disappointed, was it down year-over-year or was less than you were expecting?

I think the disappointment was that we didn't have more traction or didn't devote resources to it earlier than the first quarter this year. That's what, if it was I who spoke, expressed disappointment that we didn't get more attention, velocity, resources to this in the final six months of 2011. As I said in my remarks, we have, under Jason and his team, we have redoubled our efforts. We have mentioned many time the amount of resources that we've hired this year to work on this. The numbers since the new leadership went in place are considerably better and are improving month-to-month. I can't predict, however, where they're going to come out. We're sure hoping things are going to be better. We come in every day hoping things are going to be better and we're beginning to see those results occur.

Kelly Flynn, Credit Suisse.

I was wondering if we could revisit international. It's obviously becoming a bit more significant and like you said, you guys don't talk about it all that much. Given all the seasonality that we've seen there historically, it would be helpful if you could, if possible, give a little color on how you expect the operating income seasonality to play out this year from here.

Yes, remember our international institutions are, for the most part, traditional four years and Master's Degree institutions, which the students do take the Summer off. For the period of time from about the 15th of June until the 15th of September, the institutions have no revenue as there's no students attending, no material number of students attending and we do experience losses for those periods of time. The seasonality that we've had in the last several years related to international, that pattern will recur again this year, albeit at a higher level of operating income from the last several years as the business is growing on a very good clip.

On the corporate expense, it looks like there was about $6.5 million if you take out the insurance thing. It's been a lot higher in the fourth quarter in the past couple of years. Should we expect that type of seasonality this year or should we run rate that?

I would run rate it for now. Remember that corporate expense is stewardship cost, cost of running the public company and another things that are not allocated to schools on a shared services basis. Sometimes in the fourth quarter we've had seasonality related to incentive compensation accruals and different true-ups on a year-end basis, but for now we don't anticipate any material true-ups in the fourth quarter.

Peter Appert, Piper Jaffray.

This is George Tong for Peter Appert. You mentioned earlier you're seeing longer decision cycles with perspective students. Could you quantify how much longer these decision cycles have become and which programs are being most affected?

I don't have that data right in front of me. I am relating to you the results of what we're hearing from our marketing people across all of our -- particularly our ground schools, but also our career schools, but also our university schools as well. I don't have quantification in front of me, but we do know that once a student makes contact, they're taking a longer period of time and there are more calls back and forth and more exchanges with students as they consider whether to take the step. We are also told by our marketing people that they're seeing more of a two step decision-making process where both a mulling a school itself, but also mulling a number of brands and there is not quite as much sole sourcing as there has been in the past.

Secondly, could you give us a bit more color on trends in admissions counselor productivity, in particular when you expect productivity to stabilize and what active steps are being taken to improve productivity?

I think if you look at our productivity in terms of our advisors, the number of leads per advisor have remained relatively stable over the last several quarters in the last -- we had a troughing in the fourth quarter as some of our metrics around the number of new students, each advisor was able to move into the institutions, saw a slight improvement in that in the first quarter. We're still looking at all of the impacts in incentive comp, as Steve talked about. Obviously admissions advisor compensation has been a discussion topic around the industry and we're looking very closely at the plans that we put in place over a year ago to make sure those are best aligned with what our advisors need and how we manage the teams going forward.

James Samford, Citigroup.

You mentioned that students are increasingly debt averse and price sensitive and you just raised tuition by another 8% at the healthcare segment. I'm wondering when do these price effects go into effect and why shouldn't we be worried about this exacerbating the start problem that you're having in the healthcare segment?

The tuition increases that we spoke of are for the health business units, the first ones went into place in January and they were complete across the institutions by the middle of April. That is hurting the new student start performance, but we do need, from a 90/10 standpoint, to have the students bring in 10 cash to pay for their education. It's a fine balance given the 90/10 rules and gainful employment rules, and this tuition level is the best level we can use to determine to balance 90/10 and gainful employment for each of the students.

That leads to my next question on how do you think this will impact your gainful employment expectations as those numbers come out as well?

We look closely at that. As you know, gainful employment is either on a debt to income, debt discretionary income or repayment basis and the department comes forward with its repayment data that who knows when that will come out, but when that comes out we're prepared across all 1,300 programs to keep looking at that. We'll look at the combination of debt to income or on the different repayment metrics and also on actual wages to the extent the department is able to provide those to find out. We've tried to balance that as best we can. It will put some pressure on gainful employment, but I'm not sure right now, early on that will be a material change for us until we know more data from the department.

How is the mood among the staff side on the academic side? How is attrition levels and people buying into a lot of the initiatives you're going through?

I would say that the attitude is good. I hope a lot of people are listening in and I wish that they could get on and speak for themselves, but we recently had about the top 200 leaders of our Company get together within the last couple of weeks and we were able to talk with them in detail about our plans for the future, our commitment to the future and some of the fundamental changes that we're making to position ourselves for the future.

Based upon what we're hearing as a result of those meetings and also based upon what we're hearing as a result of some town halls that we've held with our staff, I think people are excited about being here. They're excited about our future. We're watching our turnover rates and they're stable if not reducing and I've been heartened by what I have heard and what I have seen in terms of the morale of our staff.

We have no further questions at this time. I will now turn the call back over to Steve Lesnik.

Thank you very much and thank you to everybody who has been on the call here today. I also want to thank Mike Graham, who I think did a great job here this morning. You can see we've got a lot going on here. We have a lot of moving parts, as I've said in the past, both on an internal and external standpoint, both from an operational standpoint and a regulatory standpoint and also importantly from cultural and, in response to the last question, morale standpoint.

We feel that we need to address them all at the same time simultaneously. We've agreed to do that internally and we feel that we're making progress on that front. We are looking forward to our next session with you next quarter and hopefully we'll be able to report the kind of progress on all fronts next quarter that we have experienced this past quarter. Thanks very much for being with us, folks.

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