Perdoceo Education Corp (PRDO) 2012 Q4 法說會逐字稿

Welcome to the Career Education Corporation's fourth quarter 2012 earnings conference call. My name is John, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Matthew Tschanz. Mr. Tschanz, you may begin.

Thank you, John. Good morning, everyone, and thank you for joining us on our fourth quarter 2012 earnings call. With me on the call this morning, are Steve Lesnik, our President and Chief Executive Officer, and Colleen O'Sullivan, our Senior Vice President and Chief Financial Officer. Following remarks made by management, the call will be opened for analysts and investor questions. This conference call is being webcast live within the Investor Relations section of our website at careered.com. A replay of this call will be available on our site. You can also contact our Investor Relations department at 847-585-3899.

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 21E 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, 2012, which will be filed later today, and our other filings with the Securities and Exchange Commission.

Except as expressly required by the securities laws, we undertake no obligation to update those risk factors or to publicly announce the results of any of these forward-looking statements to reflect future events, developments, or changed circumstances or for any other reason. In addition, the remarks today may refer to non-GAAP financial measures which are intended to supplement, but not substitute for the most directly comparable GAAP measures. Our press release which contains financial and other quantitative information to be discussed today, as well as a reconciliation of the GAAP to non-GAAP measures is available with the Investor Relations section of our website at careered.com. Now let me turn over the call to Steve Lesnik.

Thank you, Matt, and good morning, everyone, and thank you all for joining us this morning. During today's call we will cover four areas. We will review some of the 2012 accomplishments, update you on our strategic plan, discuss the fourth quarter and year-end financials. And finally, provide you with perspective on our 2013 expectations. First, 2012. It was notably a year of challenges for the post secondary education industry. We saw a domestic economy characterized by slow economic growth and sustained high unemployment levels especially at below bachelor degree levels, reduced post secondary market demand reflecting longer decision cycles by prospective students, and a hesitancy by students to take on debt, increased competition for new student leads, especially within digital marketing channels. And finally, a regulatory environment which resulted in curtailing growth in the entire post secondary sector.

In addition to these sector trends, Career Education faced in 2012 its own immediate priorities to address. You will recall in prior earnings calls, I discussed the need to first, resolve our accreditation, regulatory and legal issues, second, reinforce and reorganize the leadership of the Company, and third, establish a well-defined strategic path. I am encouraged by the progress of our management team, and what we have accomplished against each of these foundational necessities. I would like to highlight just a you few pivotal achievements that occurred during the year.

We achieved marked improvements in our placement policies and practices, which culminated in the removal of the ACICS Show Cause this mid-year. Later last year, ACCSC also vacated their accreditation holds on our institutions. Our regulatory and compliance teams restarted our relationship with the Department of Education. You may recall that among other things, we had a consolidation application pending throughout 2011. That issue was resolved to both parties' satisfaction in 2012, and we began to receive approval for new programs, something that had not happened for almost a year.

During 2012, we resolved our outstanding issues with the Veterans Administration. Also, several of our institutions earned significant programmatic and regional accreditations, and successfully completed program reviews with no findings, an important validation of the strength of our education institutions currently. One result for which we are particularly pleased is that the Higher Learning Commission acted to continue the accreditation of CTU, with the next reaffirmation scheduled for 2022/2023. I would commend to your attention details on interim reporting requirements that are outlined in an earlier 8-K and in our press release. I believe you are all aware that this was completed during a time when accreditors have held organizations like ours to very high standards. All our [IPEDS] passed the 90/10 Title IV eligibility requirement. And finally, Career Ed met or exceeded the Department of Education's financial responsibility ratio during the fiscal year ending 2012.

I am encouraged by these accomplishments of our management team, however, it came at a cost. Our financial performance continued to lag the industry, as it has for several years. We know more is required to stabilize the Company and re-establish it for long-term, sustainable success. I define success to include all our stakeholders, students, employees, including our faculty and shareholders. We are continuously working to enhance our educational offerings, so that they advance career paths, earnings and job opportunities for our graduates. Our Company aims to provide its own employees with engaging work and career development, while supporting our organization's broader educational mission. I strongly believe that doing well by our students and employees is critical, and will ultimately translate into sustainable financial performance for our shareholders.

Central to our ability to achieve success is a well-defined strategy. As you know in 2012, we adopted a progressive strategic plan, as well as a set of milestones to track our progress over the next 12 to 36 months. While I provided an overview of our strategies during the third quarter call, I would like to give an update on the work begun late last year, and share more specific details on activities that will continue through 2013. As you well know, Career Education's diversified group of institutions and global footprint are the result of numerous M&A transactions. While this stacatto growth over a decade enabled the organization to quickly gain scale, it also resulted in ever-increasing levels of complexity over that same period. As I have described to you, we possess 25 IPEDS across multiple institutions, innumerable accreditors, and up to now, largely independent operating processes, approaches and institutional variety. In order to be successful in the future, we must transform the organization and that begins with simplifying operations.

We began to tackle this difficult task during 2012 by consolidating our existing six strategic business units into three, with one leader over each. For the next 18 months, we have also established a unit to ensure an orderly transition for the student at our teach-out institutions. It is our belief that this structure for the long-term will standardize business models across institutions, increase efficiencies and student support, and eliminate redundancies across the Company. With an eye towards simplification, we also made the difficult but necessary decision in the fourth quarter to teach-out 23 additional ground campuses. These institutions were identified after careful analysis of a number of factors including program offerings, market by market placement outlook, operating performance, student outcomes and strategic fit. By concentrating our efforts on a smaller, ground-based footprint, we were able to focus our attention on those assets most likely to succeed in the marketplace. At the same time we announced closures, we also announced the elimination of 900 positions. A smaller educational footprint requires a smaller, simpler support apparatus.

Of course, our financial performance in 2012 is not sustainable. We know the Company must continue to act swiftly to adapt to the radically different post secondary education marketplace. The private sector post secondary market grew rapidly for a sustained purchased period of time. But for two years now, it has exhibited year-over-year population declines. Moreover, we have seen the new expected student inflection point which we all thought would take place in 2012, pushed out once again into the future. The resulting trend reversal has left many organizations, ourselves included saddled with cost structures designed to support a significantly larger student base. We recognize that, and as a result of have determined that we need to further reengineer Career Ed to accommodate the student population we now expect to serve over the next few years.

As a result, we have recently engaged AlixPartners to assist our organization in a broad-based reengineering effort focused on, first, reducing existing student support infrastructure to align with current and expected student population levels. And secondly, improving the efficiency of our business systems, procedures, and processes. It is our expectation to provide further details with respect to the results of this effort in future earnings calls. A second tenet of our go-forward strategy is to refocus if you will, our university career and international education groups in three important ways. First, for each group to target a very well-defined, addressable, student-ready segment. Second, to differentiate each institution's educational offerings, tailored to the student segment being targeted. And thirdly, to fundamentally change the way we attract, engage, enroll and maintain an ongoing relationship with students and alumni in each targeted segment.

During last quarter's call, I mentioned that on our university side our strategy calls for maintaining both of our two institutions, Colorado Tech and American Intercontinental. These schools will focus on different student market segments, backed by extensive research. Colorado Tech will offer students a highly personalized experience, complemented by a robust suite of services. Late last year, the organization underwent an in-depth evaluation of its existing employee base, business processes and infrastructure to assess what adjustments may be necessary in order to fully operationalize the strategy of a highly personalized experience. Early in 2013, CTU has begun executing on a series of initiatives designed to first, expand existing student support and advisory services, second, augment student's online and ground-based educational opportunities, and third, facilitate greater institutional collaboration and teamwork.

American Intercontinental University, on the other hand, will focus on enabling students to efficiently and effectively complete their degree at a more competitive price point. Like CTU, AIU is well along in the process of operationalizing its strategy to differentiate itself in the marketplace, and deliver on the expectations and needs of its coterie of target students. These strategic efforts are not limited to our university business. Our career-focused institutions have embarked upon a significant undertaking to turn around performance, and establish a new and attractive value proposition for student and employers across its institutions. Our career schools' management team has put considerable emphasis on promoting a service-oriented culture within its students and employees.

While delivering an extraordinary customer experience is applicable to many occupations, our culinary, health and design students are more apt to find themselves on the front lines, interacting daily with end consumers. We believe the combination of our curriculum service philosophy and employer partnerships will differentiate our institutions, and deliver strong outcomes for our students. Our career schools have also begun executing on a number of initiatives, such as to rationalize its geographical footprint which you are aware of, standardize operating structures, launch new programs and limit the number of supported brands, ultimately establishing a multi-dimensional career college.

Our international business continues to perform well and deliver high quality education to students through our two well-established Western European institutions, the INSEEC Group and the International University of Monaco. Also during the year, we completed two tuck-in acquisitions, Luxury Attitude in May and ESC Chambery during December. These acquisitions further broaden our curriculum library, and serve as additional footholds in the highly desirable Western European region. The investments in expanding accreditation and introducing hybrid learning both made during 2012 strengthen the institution's core value proposition.

Besides these initiatives principally focused on the respective businesses, we have engaged in a number of activities that cut across the enterprise. Nowhere is this more important or apparent than in the manner in which we attract and enroll students. Early in 2012, I discussed with you several marketing efforts designed to strengthen institutional awareness among prospective students, and enable shifting of the marketing mix more meaningfully away from the aggregator channel. In particular, CTU's Are You In brand campaign, which I am sure many of you have seen on conventional media was identified, in addition to some smaller social media and viral marketing efforts. While brand building takes time to take hold and can't be done in just one year, we have been impressed with the initial results of these efforts.

Further, we have placed a definitive focus on revamping our approach not only to marketing efforts, but to direct lead generation and student enrollment. Mid last year as we previously announced, Pricewaterhouse Coopers was engaged to review our intake model and approach. As a result of this project, a series of initiatives across both our university and career-focused institutions were launched during the fourth quarter. We believe the combination of a regulatory clarity we have achieved, marketing improvements, and operational modifications within the student enrollment area will generate continued improvements in representative productivity over the coming year.

Finally, Career Education has historically possessed a strong core competency, and perhaps distinct competitive advantage in the application of technology to education. This track record of technological advantage began with our fully-integrated student platform that has served as a model for the industry, even up to today. Later, this advantage was extended with the development of our award-winning adaptable learning MUSE, My Unique Student Experience, which offers students the choice of multiple learning modalities. In addition, our health education technology collaboration with Simpro resulted in the creation of Virtual Trainer, which literally changed people's perception of online medical simulation.

Our commitment and efforts to remain at the cutting edge of educational technology continues today with our adaptive, or what we call personalized learning technology application. This application enables curriculum to be tailored to an individual student's style and ability. It allows the student to learn via pathways that can be modified in real-time. It provides continuous feedback on student performance to both student and faculty, and emphasizes achievement and demonstration of skill mastery. Over the last five months, we have conducted pilots of our new technology with over 1,000 students across certain of our AIU and CTU english and math courses.

We have witnessed and tracked the positive impact this teaching technology is having, relative to traditional online learning, on first, the level of student engagement, second, on student learning growth, and third, on student persistence. We will continue over coming months to increase our sample size and further validate the positive results we are seeing. We intend this year to scale this technology across our curriculum, expanding it in the number of new courses we offer to student. To the extent we can validate all the positive results we are seeing, we believe that this technology could prove to be a difference maker to many, many students.

To summarize 2012, I can only say that while we need to significantly improve our financial results, we accomplished what we set out to do, resolve our multiple pressing external crisis, reorganize our institutions and our leadership, and adopt and begin to implement the strategic plan that we expect to enable us to excel in teaching adult learners, ensure positive student outcomes, and lead us back to growth and profitability on merit. Speaking to our employees listening, I am proud of what you accomplished. And now I will turn the call over to Colleen.

Thanks, Steve. As we review our results for the fourth quarter and full year 2012, there are a number of items impacting year-over-year comparability. Let me first start out by reminding you that in the fourth quarter, we completed the teach-out of LCB Pittsburgh which had been reported in our culinary segment. The results of operations for LCB Pittsburgh including $4 million of full year operating losses are now reported in Discontinued Operations. Additionally, our segment level financial reporting has expanded to include a separate reporting unit entitled Transitional Schools. This reporting unit includes the results of our 28 campuses engaged in a gradual teach-out process. During this period, the campuses will continue to operate and serve their existing student base, but are no longer enrolling new students. I will provide more details on our 2013 Transitional Schools expectations in a few minutes.

Our fourth quarter results as outlined in yesterday's press release include severance and asset impairment charges totaling $55 million. Those charges consist of three elements, $29 million of asset impairments related to our decision to teach-out certain campuses, $13 million of severance and related costs in connection with both our reduction in force and campus closure actions, and $12 million of trade name impairments. For the full year 2012, operating losses included these fourth quarter items, as well as an $86 million charge for goodwill and asset impairments recorded in the second quarter of 2012, primarily related to our Health and Design & Technology reporting segments, and insurance proceeds of $19 million related to the settlement of claims under certain insurance policies.

For comparison purposes, remember that operating income for the full year 2011 included $192 million in goodwill and asset impairment charges, and a $7 million insurance recovery related to previously settled legal matters. After consideration of these items, adjusted operating loss for the fourth quarter of 2012 was $23 million. On a full year adjusted basis, CEC operating loss was $61 million. A schedule illustrating the reconciliation of these figures was provided in the press release issued last evening. All of my comments on the remainder of this call will be on the non-GAAP basis, which excludes the charges I just discussed.

Now on to our results. In the fourth quarter 2012, revenue was $355 million, a decrease of 19% versus the prior year. Operating losses were $23 million in the quarter, and primarily reflect the impact of lower new student starts and student populations across our domestic institutions. Overall, new student starts were down 22% from last year, while student population declined 23% versus the first -- fourth quarter of 2011.

Let me now turn to financial results by reporting segment. In our university segment, aggregate revenue decreased 11% to $155 million. For the fourth quarter, CTU revenue of $89 million was down 8% versus the fourth quarter of 2011. New student starts during the quarter were down 24% compared to last year, and student population ended 10% lower. AIU revenues was $65 million, down 15% reflecting the impact of a 27% decrease in new student starts. As Steve discussed, we believe similar to many of our industry peers, the macroeconomic environment remains challenged, and this has continued to influence a student's thoughts on returning to school.

In past quarters, we have discussed our student orientation and readiness program, as we have called SOR. This orientation program required for those students without prior college credit has proven successful at identifying individuals not likely prepared for the rigors of university study, and allowed them to leave the institution prior to incurring any debt. During the fourth quarter, both AIU online and CTU online implemented our 21 day readiness opportunity, which now provides all undergraduate students with a similar chance to engage in college level work by attending classes without the upfront tuition commitment.

Both AIU and CTU experienced improved retention trends throughout the course of 2012, and we expect that with the introduction of the 21 day readiness opportunity, these trends will continue into 2013. CTU's operating profit was $14 million in the fourth quarter, with operating margin declining to 15%. AIU reported a slight profit. While both institution's lead flow was roughly in line with the prior year, each continues to experience reductions in lead to enrollment metrics. As discussed last quarter and in Steve's remarks today, we are in the process of modifying the way we attract, engage and enroll prospective students.

Turning to our career schools. Revenue of $123 million decreased 26% versus the fourth quarter of 2011. Operating losses during the quarter were $27 million, and continued to reflect the recent deleveraging. The actions that we took in the fourth quarter to reduce our headcount across the organization by 900 positions, included a significant number of positions within career schools. Even so, the project that has just commenced with AlixPartners will include within its scope, both career schools and university. This coupled with the launch of new programs are expected to position career schools for operating margin improvement in the long-term. However, while these actions are being implemented throughout 2013, the benefit to our operating results will not be fully realized until 2014 and beyond.

Revenue for our international segment increased 6% in the fourth quarter of 2012. As mentioned during our first quarter call, international has experienced its own transition, as a result of higher than normal graduation levels early in 2012. At year-end, total student population was 11,400, up 3% versus the prior year. Operating income was $21 million in the fourth quarter, down slightly year-over-year, due to investments in programmatic accreditation and blended learning curriculum. During the quarter, changes in the exchange rate had a $3 million detrimental impact on revenue, and $1 million detrimental impact on operating income.

Turning to our Transitional Schools. We anticipate that the majority of these campuses will complete their teach-out activities by the second quarter of 2014. During this period, we remain focused on fulfilling our educational and post educational commitments to our students, consistent with our Student First philosophy. From an operational perspective, I want to remind you that these schools have ceased all admissions and marketing activity. When thinking about the financial impact of the campus closures, I would recommend you think about it in three separate buckets, one-time charges, remaining lease on obligations, and operating losses during the teach-out period.

First, as previously mentioned, management anticipates that we will incur one-time charges including non-cash expenses of approximately $33 million to $41 million, of which $35 million of these charges were taken in the fourth quarter of 2012. We do not anticipate significant additional charges in 2013. Next, in addition to the one-time charges, a number of these campuses will have remaining lease obligations following the eventual campus closure, with the longest lease term being through 2021. Total gross lease obligation for these campuses once they complete the close process is estimated to be approximately $78 million. Please keep in mind, that this figure represents the maximum liability, and several departments within the Company are currently in the process of working to reduce the future potential cash outlay. During 2013, we anticipate that four campuses will complete teach-out, and the resulting remaining lease obligations impact to our financial statements will be minimal. Finally in 2013, we would anticipate that total Transitional Schools operating losses will be between $70 million and $80 million.

Let me update you on our financial position, liquidity, and DOE ratio. As of December 31, 2012, the Company had cash, cash equivalents and short-term investments of $402 million. Cash flow from operations for the 12 months ended December 31, 2012 was a $17 million net usage of cash. Included within the $402 million of cash is $98 million of restricted cash, which is primarily attributable to cash collateral required under our credit facility and to support outstanding letters of credit. Capital expenditures in the year were $38 million or 2.5% of revenue. For the full year, we repurchased 6 million shares of our common stock for approximately $56 million. No share repurchases were made in the fourth quarter.

In the fourth quarter, we entered into a US credit agreement which allows for cash collateralized borrowings of up to $80 million. In December, we drew down on this facility. As we enter 2013, we expect there will be continued pressure on our domestic operating cash flow in the short-term. However, we do anticipate that we will be able to satisfy the cash requirements associated with among other things, our working capital needs, capital expenditures, and lease commitments through at least the next 12 months, primarily with cash generated by operations and existing cash balances.

Further, we are monitoring the operating performance of the business very close, and as Steve discussed, implementing a number of initiatives to begin improving the financial profile of the Company. There are various scenarios that could unfold over the course of the year, and we have identified contingency plans to address each. Lastly, during last quarter's earnings call, we had foreshadowed that our current projections had shown that on a consolidated basis our composite score were to be in the zone of financial responsibility for our fiscal year ended December 31, 2012. Our current calculation for the consolidated entity is 1.6, which is considered financially responsible without conditional -- conditions or additional oversight.

Finally, as a matter of policy, we do not provide guidance. However, due to the current restructuring efforts under way at Career Education and existing market dynamics, we thought it might be helpful to provide some perspective for 2013. First, we anticipate our first quarter 2013 start growth excluding transitional, to be consistent with overall industry projections. Further, it is our belief that the downward year-over-year new enrollment trend will begin to show improvement later this year.

Given where we entered the year from a population perspective, down 23%, and the fact that the initiatives we identified will take time to manifest themselves into our results, we expect student population to be down approximately 2% in 2013, which will result in declines in revenue as compared to 2012, and an overall decline in operating margin compared to last year. As Steve mentioned in his remarks, we do believe that we have identified the steps needed to reposition the Company for growth and profitability beyond 2013. We look forward to providing you with the progress against our strategic and operational initiatives in future quarters. Now let me turn the call back to Steve who has a few closing remarks.

Thank you, Colleen. Before we get to the Q&A, I would just like to say two quick things. First, I would like to congratulate the new Secretary -- Defense Secretary, Chuck Hagel, who is a Brown College alumnus and former United States Senator. He graduated from Brown College, which is one of our institutions with a degree in broadcasting in 1966. Perhaps in terms, at least of pop culture more importantly, just last night on the Bravo network, Kristen Kish, a 2006 graduate of Le Cordon Bleu in Chicago won season 10 top Chef of the Year. And she is actually the third graduate of Le Cordon Bleu to win Top Chef of the Year. So, congratulations to both Kristen and to Secretary Hagel. Needless to say, we are very proud of all of our alumni. And with that, I will open up the call to questions.

Thank you.

(Operator Instructions)

Our first question comes from Jerry Herman from Stifel. Please go ahead.

Hi, good morning, everybody. I just wanted to make sure I understood some of the directional discussion on 2013, and in particular the student population. I think Colleen you said it would be down 2%. Is that an average number? And if you could just give some color, in terms of what sort of start growth that would require, in order to generate sort of that level of improvement in total versus now?

Sure, Jerry. The reference to student population being down 2%, is an end of year, year-over-year comparable comparison point. And at this point, I don't think we are in a position to provide a specific data point on start growth.

Okay. And very helpful, in terms of the operating losses on the Transitional Schools. I imagine you could probably convert those operating losses to cash flow absorption as well. Can you help us with that?

Sure. I mean, the $70 million to $80 million -- obviously, we are not putting any additional capital expenditures into those institutions. We are in the process of ensuring that they are orderly, finishing out the education of the existing student body. From a cash flow perspective, I think you could estimate maybe $5 million to $6 million of depreciation expense in that base, as it pertains to 2013.

Okay. Great. And then when we think about 2013, understanding your substantial cost reduction efforts, reengineering, so on and so forth, how do you think about the incremental margin? How do you think about what a dollar of revenue does to the operating income line at this point?

We think that it contributes to the operating income line substantially. It is highly leveraged -- deleveraging is -- you suffer a very steep in percentage-wise decline to operating income, and as revenue goes in the opposite direction, you have an equally steep contribution to operating income.

Okay. Great. And just one final question if I might. With regard to starts in the university segment, they seemed to be sequentially lower. And I am just wondering if you can help quantify the effect of the new readiness program, and if there is a way to disaggregate what sort of impact that had versus, let's call it normal flow, student flow.

Well, I don't think there's a way to disaggregate it from a quantitative standpoint, but embedded in your question is the answer. It is two factors. One is all of the general conditions that we have all discussed, all the companies have discussed, and you are well aware of. And the other is the fact that we introduced a 21 day guarantee in the middle of the fourth quarter, which we think did have an effect on starts on the university side. But I would also point out that we have had two cohorts now, and we are seeing evidence that we are having a positive effect on retention.

Great. Thanks very much. I will turn it over.

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

Hi. Good morning. I also wanted to ask about that suggestion that population would be down 2% at the end of the year. Does that include the teach-out segment, or is that in the ongoing schools?

That is excluding transitional at this point.

Okay, excluding transitional. And then I think last quarter you had said that the target from the -- cost savings from the headcount reductions was $45 million to $55 million. Is that still a good number to use, and I am wondering how much of that benefit was already in the Q4 results?

So Corey, we still feel comfortable with that range of benefit from the actions we took in the fourth quarter. But I would remind everyone that we announced both the closures and the reductions in force late in the fourth quarter. The individuals impacted were not out of the organization until the end of the year for the majority of the actions that we took. Some did actually stay with us into January. So there is very little impact in Q4.

Okay. And Colleen, can you give us a sense how much of that dollar amount is in the transitional segment?

How much of the savings?

Correct.

I don't have that figure for you, Corey. We -- you can follow up with Matt after the call on that.

Okay. And I just wanted to ask about AIU. You, Steve, in your presentation you mentioned changes in their pricing structure. I imagine you are still thinking that through. But any color on that?

No. They are -- we are still thinking it through. We have got some research going on. We have got some consultants working with us. Obviously, we have to provide definition to the offering, and what kinds of cost structure is going to be needed to support new cost structure, is going to be needed to support the offering, and then that will lead us to pricing. But we are working assiduously to get to that point as quickly as we can, as early as we can in [2013].

And just -- well, next one, philosophically, I think you said in kind of looking at your overall cost structure, one of the things that you are considering is reducing support infrastructure for students. Just how are you thinking about that, kind of balancing that against the fact that you are also trying to improve quality and student engagement?

No, what I said was, when I referred to reducing corporate support, it is corporate support to the institutions, not to student-facing services.

Okay.

It is backoffice kinds of stuff. We don't anticipate having any reduction in student-facing services, unless they are enabled by technology or other efficiency, operational efficiencies that we can identify. It is basically fewer schools, fewer students in the schools, requiring smaller functional units at the corporate level.

Got it. Thank you for clarifying that.

Our next question comes from Trace Urdan from Wells Fargo Securities. Please go ahead.

Thanks very much. I wanted to ask about the 21 day readiness opportunity. I think if I caught that right, you described that as something that would apply to both AIU and CTU; is that correct?

Correct.

And do you have the expectation that it will have the effect of pushing back starts over all? Is there going to be sort of a cost associated with it as you roll it out?

What do you mean by pushing back?

Well, if you are push -- if you are not formally enrolling the students for 21 days, then presumably some percentage of the students coming in, instead of starting class and generating revenue will be engaged in this readiness exercise.

Corey, we are enrolling the students in -- this is Colleen -- to the institutions as normal. Think of it similar to the 21 day, in that I think as we shared, when we put that program into place, we are not counting those students as starts. We will remove them from the start figure, once they complete their readiness program. It will be a cancel, in effect.

I am sorry. I didn't understand what you just said. You are going to enroll them and generate revenue, but you are not going to count them in the start figures?

They will not -- they do not incur any indebtedness or any cost, until they pass the 21 day milestone.

Okay. What are you --

There is no revenue. There is no cost. And there is no incurring any expense until they pass the 21 days. So they are subtracted out, if you will from numbers, and there is no cost -- revenue implication at all.

Okay. But then that 21 days is counted as credit towards an actual course?

If they pass the 21 days, they are in the course, yes.

I see. I see. Okay.

If they pass the 21 days, you have had the car for 21 days and drove it, and we do charge you for those 21 days. But only if you make the decision to remain in the course and complete the course.

I see. So is it -- is their specialty -- is what they are studying during that 21 days just the normal course material, or is there some special curriculum that is associated with that period?

It is the normal course.

I see. Okay. Thank you. That's helpful. And then Colleen, you spoke to --

I would say -- I would say this.

Yes.

The normal course, with close monitoring by faculty.

Okay. I wanted to ask another question about the financial responsibility ratio. Colleen, you mentioned that it was sound. I presume that is at December 31, 2012?

Yes.

Do you expect that that ratio might be put under some pressure, as you go through the process of the teach-outs and the cash outlays that are associated with that?

The question related to 2013, is that what you are --?

Basically. As you can look through 2013 and even 2014, in terms of what you are expecting to incur with respect to the teach-outs?

Sure, Trace. As you can -- as you I am sure are well aware, the calculation is a point in time, as of December 31, in each respective year. As we have laid out, and as Steve laid out in his remarks and mine, we have a number of initiatives going on in 2013. So at this point it is too early for us, and I don't think it would be prudent to forecast out what we believe the ratios will be in future years.

Okay. And then the last question, you mentioned in your discussion of what you expected in 2013, that you thought that the start growth in the first quarter would be consistent with industry projections. I am just curious as to what you believe that -- those projections are?

We kind of anticipated that question. (Laughter).

I guess.

There is lots of stuff published out there, as to what various people are anticipating, and I am not going to characterize that. It is out there in the literature, and there is a range obviously, of projections. And what we are suggesting is that we are well within the range of projections that a number of you have made.

All right. Thank you.

And Trace, I would just add to that just for everyone to keep in mind, that that excludes Transitional Schools.

Understood.

(Multiple Speakers) We are not enrolling students there.

Yes. Thank you.

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

Thanks. Colleen, can you give us any sense of what the transitional school loss in 2014 might look like?

At this point, I would not give that kind of guidance that far out.

Okay. How about -- I mean, the fundamental challenge, Steve, as you understand from an investor standpoint, is you have got a business that is in significant transition, and very hard to get a bead on what the financial model is going to evolve into. So can you give us any help in that regard? Can you talk about sort of what you have in mind, in terms of the targets you would like to achieve in the next few years, in terms of maybe margin benchmarks, levels of enrollment growth you think the business can get back to, things along those lines?

I cannot.

Can you speak to when you think the business can be profitable again?

I can tell you -- I can tell you that I have said repeatedly, since almost the first call that I did with you, that the margins in this Company have been at the lower end of the spectrum of the publicly-held companies in this sector, and that is unacceptable. And everything that we are doing that I described and Colleen described, is designed to get our margins to be at least in the second quartile, if not the first quartile of publicly-traded, those companies whose numbers we can see. And that is the ultimate goal of everything that you hear us talk about, to get into one of those two quartiles in terms of margin. So that is one. As far as timing is concerned, when are we going to get there? We have got, as I have indicated a strategic plan. But I don't want to -- so our Board probably could answer that question. But I don't want to get onto the slippery slope of, particularly as a public Company, in trying to give you specific guidance on what period of time we expect to get into the black. We do think that we are on a -- an improvement slope that will get us there.

Fair enough.

I know you would like more specificity than that. But unfortunately, I have got our General Counsel sitting here, and that is about as far as he will let me go.

Well, you could send him out of the room, of course. (Laughter). The -- and then just last thing. Obviously, you have done a ton of research to identify the schools that you wanted to teach-out. Is there any continuing -- and I assume there is continuing analysis looking at all the campuses. But should we assume that the teach-out process or the -- there is not going to be additional schools in the teach-out process?

I want to be careful about leaving that last phrase, the implication of the last phrase. Look, we are continuing to monitor all of the remaining schools on a very close basis, against the criteria that I mentioned generally in my remarks today, and which we have discussed previously, and which we touched on when we announced the teach-out. All of the schools are continuing on high monitoring. And we will re-evaluate these schools on a periodic basis during the year. As we sit here today, the schools that we have chosen to teach-out, are it. But as we move forward, time will tell.

Got it. Thank you.

(Operator Instructions)

Okay.

We have no further questions at this time. Do you have any closing remarks?

I do. I want to thank everybody that was on the call this morning for following the Company. I am sure all of you who are on the call know that this is an interesting Company, to say the least. And I also would like to again, acknowledge the tremendous work of our employees during a very compelling year in 2012. My hats go off to all of you. Thanks, everybody, for being on the call. Again, if you have any further questions that you think of after the call, Matt Tschanz is available to talk to you. And with that, thanks a lot, and we will see you down the road.

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