Perdoceo Education Corp (PRDO) 2013 Q4 法說會逐字稿

Welcome to the Career Education Corporation fourth-quarter 2013 earnings conference call. My name is Vivian and I'll be your operator for today's call.

(Operator Instructions)

Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Mr. Doug Craney. Mr. Craney, you may begin.

Thank you, Vivian. Good morning, everyone. Thank you for joining us on our fourth-quarter 2013 earnings call. With me on the call this morning are Scott Steffey, 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 open for analyst 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 Scott, let me remind you that this morning'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, 2013, and our other filings with the Securities and Exchange Commission.

Except as expressly required by the Securities Laws, we undertake no obligation to update these 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 and slide presentation, which accompany today's call, which contain financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures is available within the Investor Relations section of our website at careered.com.

Now, let me turn the call over to Scott.

Thanks, Doug. Good morning, everyone. Thank you for your interest in Career Education. We continue making significant progress in the turnaround of our organization.

My confidence grows with the operational results we're seeing and the changes we are making, with the success of our students always being at the forefront of our strategy. Our students successfully completing their programs and advancing themselves in rewarding careers is at the core of what we do. Our efforts to return our organization to financial stability is aligned with student success.

On this morning's call, I plan to share some of the reasons for my confidence in the operations of the Company and update you on some of the changes we've been making. I believe that we are seeing positive trends in our business. Because of that, this morning, I plan to provide you with additional insights and information regarding 2014 and how we plan to become EBITDA positive in 2015.

This is not something I plan to provide on an ongoing basis, but I felt it was important to help you better understand our business and offer you some realtime insights on what we are seeing as we begin 2014. First, I'm going to begin by looking back at the year and at the fourth quarter. Then I'll hand things over to Colleen, who will go over some of the key financials for the fourth quarter and the full year of 2013. I'll return to give you some additional perspective before opening the call up for questions.

I understand private sector higher education can be complicated and the breadth of our education institutions can make our story more difficult to model than some. One of my goals continues to be to increase transparency with our investors, to help you better understand the changes we're making, the results we're witnessing, and the path we see ahead. As part of this thinking, we're doing things a little differently on this quarter's call, in that we provided slides to more clearly articulate our strategy and progress.

As educators, we understand that students have different learning styles. As we have shared on previous calls, our online universities AIU and CTU, offer content to students in a variety of modalities - audio, video, written and interactive - through our award-winning My Unique Student Experience, or MUSE technology. Students choose to receive content in the way that best meets their learning strengths. We're putting a bit of that into practice here, using graphics to help guide you through the discussion today.

As we go through our results, share our progress and discuss our strategy, you should recognize a recurring theme will be our focus on students. Since I joined this organization last April, Career Education has made considerable progress on a number of fronts. I took this leadership assignment because I saw great opportunity to turn around the business. Day by day, we're beginning to see that progress being realized.

As we exit 2013, I believe the business is behaving as expected at this point in our turnaround. Two key student-driven metrics that we track -- new enrollments to measure our pipeline and total enrollments to measure our revenue generation -- have improved significantly.

As evidenced on slides 3 and 4 of the presentation, over the course of 2013 we saw sequential improvement in both new enrollment and total enrollment trends. New student enrollment growth in the fourth quarter of 2013 increased 4% at CTU, our biggest unit, 21% in Health Education, and 12% in Design & Technology when compared to the fourth quarter of 2012.

Slide 5 shows new enrollment by month, from October 2013 to February 2014, with February still being an estimate. I want to talk to slide 5 just a little bit. What you see here is with AIU, excellent progress in new student enrollment in November. Excellent progress in year-over-year growth, new student enrollment in January. Excellent new student growth again in February. With CTU, you see new student growth year-over-year in November. There was no start in December. We had a little bit of a tail-off, which I'll come back to, in January. Again, excellent new student growth again in February.

With Health, Health started the game a little bit quicker, excellent growth year-over-year in October. The differences between November and December are different start dates on a year-over-year basis. We ran effectively flat new student enrollment through November and December. Excellent new student growth in January, with a little bit of a tail-off in February.

Design & Technology, I'll come back to Culinary. Design & Technology had excellent growth, new student growth year-over-year in November. Again, no start in December. January, flat, and excellent new student growth in February. That just concluded.

Let me now go back and explain a couple of things in this slide. The data is very consistent with my experience of a turnaround. Because it's not just completely a straight line as you take it. You're often pulling many levers at once to expedite the turnaround. As things start to take hold, you also have to look at things that you may have to adjust on a going-forward basis.

At AIU, the December number is a little bit more drops than we were -- cancels, if you will, during the process than we would have liked to have seen. What is happening there is that we have rapidly deployed in Intellipath, our adapted learning product, more aggressively at AIU than we have anywhere else. We fell behind in some faculty training.

As a result of that, we were literally overloading students with assignments. That caused that blip that took place. We have recognized that. We're rebalancing that. We believe we'll be able to reverse that back to normal trends on the going-forward months. We're seeing tremendous progress there, too. The pipe is loading very nicely. We're right on top of what our ability to more rapidly advance in Intellipath through that system.

CTU had excellent new student growth in November as well as in February. December was excellent from the standpoint of improvement and persistence that you see there. January had a little bit of a tail-off. We had a very unfortunate thing that happened to us at the end of the fourth quarter leading into the January enrollment, which was an outage that lasted for a little too long and it impacted our enrollment. The outage was a combination of three things: power, redundancy, and weather.

That was a little bit of a perfect storm that caused a failure that was quite unfortunate. We also did a little bit different mix shift in our marketing that wasn't terribly effective. We changed that back. Obviously, we recreated the stability that we needed from the standpoint of curing any outages and we had a fantastic February. Show rates are up. Persistence looks fantastic.

Health and Design are very interesting in that from the standpoint of how the enrollment occurs in both of those entities, the quicker you fill up the pipe, the quicker the applications roll into enrollment. It's a very short time period, unlike Culinary, which has a much longer time period that takes place for recruiting new students.

Which is why you see Health responding very quickly to the changes that we talked about back in August and that I reaffirmed again on the November call, increased applications, as well as other intake things that we have adjusted. They responded fastest to those things. They had great set of months here, as you can see. Design had -- fantastic.

I'll talk on page 6 -- or slide 6, excuse me, that we were impacted a little bit by weather. It was something that really hit us badly towards the end of January, but I'll talk about that in a little bit. Having said that, excellent performance from both of those units.

Culinary as a unit, as I alluded to before, it takes longer lead time to be able to impact new student enrollment. Many of the culinary institutions out there, as you're probably aware, have aggressive enrollment from sources like high school. As you can understand, it takes time for people that are in high school or graduating high school, to make a decision as to which way they are going. The pipeline takes longer to stack up in culinary.

Culinary is making very, very nice progress. I'm very pleased with that. Our advertising spend is also consistent with understanding that it takes a longer time to correct that new student population. I'm very comfortable as I look out into future months as to how that is starting to stack up and where that turns.

The other item to keep aware of with regards to Culinary is that we have a large enrollment positive coming in April. April is the time when we reintroduced our Associates program, which is a longer program. We'll have a natural increase in enrollment as we get back to the April timeframe and as we get refocused on filling up that student pipeline. We are recommitting to recruiting from high school, something that we walked away from in the past.

Our ground-based Career schools have experienced some difficulties due to the in inclement weather at several campuses across the country. If you turn to slide 6, you'll see exactly what happened. I did not see problems with the weather in the middle and early part of January at all. Some of the outages that occurred, or delays that occurred with regards to the winter had really not impacted our biggest campuses.

When you got to the last few days of January and February, the results changed significantly, even in the warm weather we had campuses that had starts and days that were canceled. That impacted our starts. I will say the Design & Tech was able to power right through this. It did hurt the Health performance in February. To try and quantify that, we've probably lost 20% of our work days as a result of these outages, as it pertains to the Health start. The Design & Tech start was actually much later in the month, which helped them continue on.

While Mother Nature affected our new student enrollments in January and February, we believe the underlying trends of the business are improving, that our positive enrollment trends support our future growth plans for modest online new student enrollment growth and stabilization of the Career schools enrollments and that these trends further demonstrate that our plan is very achievable.

As summarized on slide 7, we continue to see positive trends in other areas of the business as well, when comparing the fourth quarter of 2013 to the same period of 2012 and excluding Transitional Schools. For example, we generated a 49% improvement in the rate at which we convert a prospective student to new student enrollment. Improvement was seen across all segments. In addition, we reported higher applications across all of our segments, with a 38% overall improvement. Finally, we saw improvement in our retention rate, while effectively lowering our new student acquisitions costs by more than 2%.

Our revenue trends, excluding Transitional Schools that are in the process of being taught out, also improved each quarter in 2013. Fourth-quarter revenue, excluding Transitional Schools, was $235.1 million, a decrease of 12% from the fourth quarter of 2012. That compares to declines of 21%, 17%, and 15% in the first, second and third quarters respectively.

Recall on the November call I talked about our focus on three main things: enroll, educate and place. This degree of focus and attention to our students is ingrained in our culture. Everything we do from a strategic standpoint aligns with it. With that, let me take a few minutes to walk you through the progress we've made throughout the year to become stronger as an organization at enrolling, educating, and placing students.

First, from a financial perspective, we lowered our cost structure by more than $200 million in 2013 through a variety of initiatives, which are demonstrated on slide 8. We've instilled a new culture of efficiency as we seek opportunities to share best practices across our institutions, leveraging technology wherever possible and challenging the norm on a daily basis. This is an area we can make further progress on in the future as we strive to get our overhead structure more in line with our peers.

While we've been reducing our cost structure, we've also been reducing the rate of our cash burn. As illustrated on slide 9, you can see that the rate of our operating cash flow burn significantly improved in the second half of 2013, as many of the measures we put in place earlier in the year resulted in benefits later in the year. Our balance sheet is among the most liquid of all the post-secondary, higher education companies.

Because of our advantageous sale of our International institutions, which clearly had been undervalued in the marketplace, we closed 2013 with an excess of $360 million in cash and investments. This gives us the resources and time needed to continue carrying out our turnaround strategy.

Furthermore, we renewed our credit facility at the end of the year, entering into a new $70 million revolving credit facility, which expires in June 2016. We also took a number of steps towards improving our operational efficiencies in 2013. We began reorganizing our Career schools late last year, by combining our Design & Technology and Health education groups.

We are actively implementing plans to merge some institutions in these groups to broaden their program offerings and reduce the number of educational brands we are supporting. This has been a long-term goal of the organization and it's one we're making happen. This discussions we've had with our regulators regarding our brand consolidation plans have been favorable.

We'll emerge from these changes with Career Colleges that are better able to meet the needs of students and employers, with expanded program offerings and more options for our students. This will allow our Career Colleges to better adjust to the ebb and flow of our local and national market needs now and into the future, and better equip us to prepare students for fields where employment opportunities are strong.

This brand consolidation also brings with it a number of areas in which it simplifies and streamlines our business. From academic calendar alignments, efficiencies achieved in the marketing strategies, organizational structure to regulatory structure, the changes we are making will take us a long way in simplifying what has historically been a very complex organization.

During 2013, we also made strategic decisions, including the divestiture of our International School segment, redeploying capital from Europe to the United States to help us best serve the vast majority of our students who are US based. We also announced six additional teach-out locations, which brings the total number of campuses in teach out to 30. We believe we now have the core campuses upon which we intend to move forward.

Slide 10 provides you with a time line of the expected closures of our Transitional Schools. A key consideration of our future performance is the winding down of these campuses. Of the 30 campuses in our Transitional Schools group at the beginning of 2014, we're on track to complete the education of students and close 20 by the end of this year, six of which have already graduated their final students as of today.

We have consistently heard from our regulators that they are pleased with our approach to ensuring that students have a reasonable opportunity to complete their studies before these campuses close. By this time next year, the Transitional School's contribution to operating losses of the Company will be greatly reduced. Colleen will share more detail on this later.

We also have made key additions to our leadership team during the year. We have a strong leadership team in place and I'm pleased with the way in which they are advancing our organization in meaningful ways, demonstrating the sense of urgency that I ascribed to instill throughout the organization.

As we announced earlier this week, I am pleased that we have hired a Chief Compliance Officer, Jeffrey Cooper. Jeffrey joins Career Education from ITT Education Services, where he served in a similar capacity, responsible for regulator and accreditor compliance and enterprise risk management. I'm excited to have Jeff join our strong team and look forward to his contributions.

This past year, we have also made great progress in resolving a number of our regulatory and legal concerns. We reached an agreement with the New York Attorney General's office, which was fully paid. We also settled the shareholders derivatives and securities litigation. Late in the year, we successfully negotiated a preliminary agreement to settle about 1,000 cases by former students dating back from 2003 through 2008 at our Culinary school in California. Our estimate to resolve this matter of $15.5 million was recorded in the fourth quarter. Each of these actions has represented meaningful steps of progress in reducing our outstanding litigation.

Last month, we were one of several companies to receive inquiries from 13 state attorney generals regarding our business practices, including recruitment of students, graduate placement statistics, graduate certification and licensing results, and student lending activities, among other matters. As we've stated publicly, we intend to cooperate with these states involved.

This inquiry into the practices of a number of larger publicly traded education companies should come as no great surprise. We operate in a heavily regulated industry. The request from regulators and accreditors to review our work are part of doing business in private sector higher education. We have responded to inquiries like this from others and will do so again if needed.

A significant number of our students use Federal Student Assistance to attend our institutions. As a result, regulatory oversight will continue to ensure that we are administering Title IV funds appropriately and that the investment of the taxpayer and student dollars is meaningful. It's important that you know the emphasis we place on acting with integrity and working to provide our students with an outstanding experience at our institutions. I have no tolerance for misconduct in our organization.

Career Education has sharpened its focused on the entire student experience over the past two years. Throughout all of these changes, emphasis has been placed on adherence to legal, regulatory and accreditor requirements. This is clearly evident in how our placement rates have continued to improve. For 2013 cohort, more than 90% of our 38 nationally accredited ACICS campuses that are not in teach-out reported higher placement rates when compared to 2012 reporting year. In addition, 25 of the 38 campuses met the new higher ACICS benchmark placement rate standard of 70% of graduates.

At the same time that ACICS has increased its requirements, we have improved our placement results to meet or exceed them. We have the processes in place and resources committed to continue that upward trend in the 2014 reporting year. Our emphasis on enrolling, educating and placing, doing right by the students through their lifecycle within our institutions continues to be our mantra. It is only through quality student experiences and outcomes that we maximize the potential success of our institutions.

Along those lines, I would like to mention a few other notable accreditation accomplishments. First, AIU received initial Teacher Education Accreditation Council, or TEAC accreditation for its Masters of Education degree program. AIU's program is one of the first fully online Masters of Education programs to receive this accreditation. AIU's program allows professional educators to more easily pursue a Master's degree in their busy lives, while knowing their program has been held in rigorous and comprehensive TEAC evaluation standards.

Second, CTU received initial accreditation in December from the Accreditation Council for Business Schools and Programs for its key business programs. This is another indication of the University's commitment to quality teaching and having a process of continual improvements of its business programs.

On that note, I would like to turn the call over to our CFO, Colleen O'Sullivan, who will take you through some more details of our results for the fourth quarter and full year.

Thanks, Scott. Good morning, everyone. This morning, I'll take you through our financial operating results and provide some insights into how best to interpret these results.

In our filings this morning, we included a schedule that provides a non-GAAP reconciliation of our fourth-quarter and full-year operating loss. This schedule is helpful in that it excludes certain significant items that are not part of normal ongoing operations, including impairment charges, legal settlement charges, and insurance recovery and severance costs. My comments going forward will exclude these items.

Both new student enrollments and total enrollments, excluding our Transitional Schools, declined 9% compared to the prior-year fourth quarter. The lower ongoing student base, coupled with the continued wind down of our Transitional Schools accounted for the 18.5% decline in revenue in the fourth quarter of 2013 as compared to the prior-year quarter. Our fourth-quarter consolidated operating results was $34.5 million compared to a loss of $37.6 million in the prior-year quarter.

Our Transitional Schools accounted for $19.5 million of losses in the fourth quarter of 2013 compared to a loss of $20.1 million in the prior-year quarter. Therefore, more than one-half of our overall operating loss in the fourth quarter of 2013 was attributable to Transitional Schools. As Scott previously discussed, over time, these Transitional School losses will subside as we progress through 2014 and complete the teach-out process at approximately 20 of the remaining 30 campuses.

In addition, the cost reduction actions taken by the organization throughout 2013 contributed to the $59 million of lower costs in the fourth quarter, which offset the revenue reduction. Furthermore, we've been active in identifying opportunities to reduce our remaining lease obligations for our Transitional Schools. In doing so, have lowered those obligations by approximately $10 million through sublease arrangement, buyout options, and other strategies to date.

Turning to financial results by operating segment. First, the Career Schools Education group. In the fourth quarter, revenue of $98 million decreased 14% versus the prior-year quarter. This decline was sequentially better than third quarter of 2013 and was the lowest decline in revenue reported all year, which echoes Scott's earlier message on steady improvement in our business over the course of 2013.

Together, our Career schools segment reported an operating loss of $24.7 million during the fourth quarter, as compared to a loss of $23.7 million in the prior-year quarter. This loss can largely be attributed to the 8% decline in total enrollment. New student enrollments at our Health and Design & Tech campuses increased 21% and 12% respectively compared to the prior-year quarter, while new student enrollments at Culinary declined for the reasons Scott spoke to earlier.

Now, moving to the University group. In the fourth quarter, AIU revenue of $49 million was 25% lower versus the fourth quarter of 2012, as total enrollments at AIU decreased 18% compared to last year. Operating losses were $3.7 million in the current quarter compared to break even in the prior-year quarter. Revenue for CTU of $88 million was lower by 2% versus the fourth quarter of 2012, as a 4% reduction in total enrollments more than offset modest increases in revenue per student.

Operating income at CTU was $21.8 million compared to $13.7 million in the prior-year quarter as a result of lower operating expenses. Looking forward, I would stress the importance of understanding trends in our core or ongoing business, our University and Career schools segments. This is the business from which we intend to stabilize and grow.

Now, turning to our Transitional School segment. Early in FY13, we estimated $70 million to $80 million of losses for the Transitional Schools for the full year. On the November call, we increased this estimate to $90 million of losses to factor in the six additional campuses that we added to Transitional. Full-year operating losses for Transitional Schools were $70.3 million.

However, four campuses completed their teach-outs in 2013 and therefore, their results are reported as a component of discontinued operations. The losses associated with these campuses was approximately $10 million. All in, we met our internal expectations for our Transitional Schools segment and feel that we have good visibility on this segment's results going forward.

As we look ahead to FY14, we believe the Transitional Schools will report operating losses of approximately $70 million. It should be noted that this figure includes an assumption surrounding remaining leased obligation charges, which will be required to be taken as of the vacancy date for certain campuses. Also, upon closure of a campus, the results of operations for the campus will be reported as a component of discontinued operations, with all prior-period results recast for comparability.

As illustrated on slide 11, we are expecting that 20 of our campuses will close in 2014. The estimating operating losses associated with the 20 campus closures is approximately $36 million, with the losses heavily weighted in the first half of this year. The fourth-quarter results also include a $130 million gain resulting from the sale of our International business. This gain is reflected as a component of discontinued operations.

As the tax on the gain was largely offset by tax benefits recognized in 2013 related to our domestic operating losses, we expect to pay roughly $15 million in taxes in 2014 related to our 2013 results. To reiterate what was previously disclosed, the total consideration related to the sale of this International business was $305 million and the cash proceeds received at closing after certain adjustments was approximately $276 million.

Let me briefly discuss the non cash, discreet tax charge taken in the fourth quarter related to our deferred tax assets. As disclosed in our Form 10-K, the Company recorded a valuation allowance of $72 million against our deferred tax assets in the fourth quarter. As we have disclosed in previous filings, and as was the case this year, we assessed recoverability of our deferred tax assets in connection with our year-end close process. One critical factor in this assessment is that over the three-year period ended December 31, 2013, the Company is in a cumulative loss position.

This factor limits the ability to consider other subjective evidence such as our projections for future stabilization and growth when evaluating the recoverability of our deferred tax assets. After weighing various pieces of evidence as prescribed by the accounting literature, we concluded that a valuation allowance was warranted.

I think there are a few key take-aways that are important to understand. This charge has no impact to cash. Our deferred tax assets have no expiration date. The valuation allowance can be reduced in the future, as we return to profitability. Most importantly, our day-to-day execution against our operating plan remains unchanged.

Let me now update you on our financial position and liquidity. As of December 31, 2013, the Company had cash, cash equivalents, and short-term investments of $363 million. This was slightly lower than our previous estimate of $375 million, the reason being the timing of receipt of certain tax refunds, which were initially expected to be received prior to the end of the year. These refunds are now expected to be received in 2014. Net cash flow used in operating activities for the full year ended December 31, 2013 was $86 million, of which $8 million occurred in the fourth quarter.

As Scott shared with you on slide 9, the rate of our operating cash usage declined significantly in the back half of the year, which is a function of progressing on our goal of lowering our cash burn and returning the business to profitability. Capital expenditures in 2013 were $20 million. Before turning the call back over to Scott, I have one additional item I would like to comment on. Effective January 2014, we have changed our segment reporting to align with the manner in which we are managing the business.

Our reportable segments going forward will be AIU, CTU, Career Colleges, which is the combination of our Design & Technology and Health education segments as reported in 2013, Culinary Arts and Transitional Schools. We have recapped our quarterly and full-year results for 2013 and 2012 under this new reporting structure and have provided that information in our Form 8-K filed earlier today, as well as on our website at careered.com within the Investor Relations section.

With that, I'll turn it back to Scott.

Thanks, Colleen. Now, I would like to turn a little to the year ahead to help you understand how we're seeing the future and some things to consider along the way. I mentioned on previous calls that AIU was exploring ways in which it could attract new student's interest through price disruption. Those plans are beginning to roll out this year.

New students beginning their study at AIU last month became eligible for the AIU Milestone grant, providing an important incentive to improve the persistence of students beyond their first term. According to the American Institutes for Research, nearly one-third of students who start college do not return for the second year. Complete College America and the National Governor's Association have also concluded that success in the first year of college courses is strongly linked to the overall student success.

The AIU Milestone grant is a one-time grant equal to the cost of the student's first class that rewards students for completing their first quarter and beginning their second and shows our commitment to their success. The grant properly aligns our interests in rewarding and incentivizing our students to complete their studies. We will begin to see how this grant might affect student outcomes and behaviors as the year goes on. Further steps at AIU price disruption will commence later this year, including the introduction of an Intellipath adaptive learning MBA program.

As I've mentioned before, one of the benefits of having two universities within Career Education is the ability to test innovation with one university and then consider implementing it or not, depending on results across both institutions. As I mentioned on our earnings call in November, with the execution against our operating plan in 2014, the business is expected to be EBITDA positive in 2015. If you'll turn to slide 12, I'll walk you through the combination of factors that we believe will get us there.

First, our Transitional Schools segment stair-step down greatly through the course of this year. As I mentioned earlier, we began this year with 30 campuses in teach-out. This time next year, that number is expected to be 10. With those schools no longer drawing down cash at current level, our profitability improves. Second, the cost savings initiatives we undertook in 2013 should benefit 2014 by an additional $75 million of lower operating expenses and that is in addition to the more than $200 million of lower expenses in 2013.

Slide 13 shows the progress we will have made on cost control over a three-year time horizon. Third, we expect our university segment to post modest new student enrollment gains while at the same time we stabilize our Career schools. I spoke earlier how we are generating sequential improvement in our enrollment trends.

Slide 14 illustrates our student acquisition costs over the last three years, as well as our projections for 2014. The modest online new student enrollment growth we are projecting, together with cost containment and lower student acquisition costs, should generate positive leverage in 2014 and into 2015. To sum it all up, based on current behavioral trends of our business, we believe being EBITDA positive in 2015 is an attainable target.

Throughout 2013, we invested in numerous activities that focused on improving the student experience, from the initial interaction with prospective students through completion and placements of graduates. One of the critical areas of improvement is our student orientation program. We believe a well-informed student is more likely to be successful in school and more successful in achieving his or her goals. A well-designed student orientation process is the first step in informing students about their readiness for college and the programs and services we offer.

With that in mind, we enhanced our student orientation process by integrating our Intellipath tool to help students determine that the program and school they choose are right for them, before beginning any course work. The new program provides a better and more engaged experience for students with enhanced content in online classroom environment, exposure to Intellipath adaptive learning and a dedicated resource for students to guide and assist them through the process. We're utilizing technology in conjunction with specialized faculty and student services to make the process better, more personalized, and more effective for students.

With the implementation of this new process, we will be migrating away from what was previously referred to as our Student Readiness program. We found that our more passive approach in the past didn't always encourage students to test their abilities or explore our programs. Instead, in some cases, became somewhat of an incentive for certain students to enroll without fully committing to their success.

The manner in which we account for new student enrollment is also changing with the introduction of this new process. As such, we will face year-over-year comparability issues in our reported new student enrollment metrics in 2014. To account for this change, when we report first-quarter results in May, we plan to provide you with recast quarterly 2013 new student enrollment figures to align with how we will be tracking new student enrollments in 2014.

I understand the interest in tracking new student enrollments. For that reason, we made the decision to recast our 2013 metrics to appropriately set the comparison point as we move through 2014. All of the enrollment numbers I've shared with you for January and February have already been recast. Otherwise, they would have been in fact much higher.

To address a common question of investors, I would like to talk about our cash balance. One of the highest balances in the industry, I might add. Our greatest priority as it relates to cash is to stabilize and lower our cash burn in 2014 as we progress to an EBITDA positive position in 2015. Over time, there are a variety of options for us to use our cash, which include opportunities to repurchase shares, buy out of long-term real estate obligations, invest in the business, or consider strategic acquisitions to name a few.

We have done each of these things in the past to some capacity. However, in making any decision about future investments, we need to remain cognizant of any impact these decisions might have on our financial responsibility ratio. Colleen talked earlier about the deferred tax asset valuation that we recorded in the fourth quarter. While this is a non-cash event, it does affect equity and does affect our FRR.

Therefore, it may change how we deploy our assets, including our existing cash over the short term. As I've indicated to you in the past, as CEO, I continually evaluate our portfolio of assets to determine how best to deploy our capital to generate the greatest opportunity for shareholder returns. The point I would stress here is that the Board and myself are very engaged on uses of cash and our strategy is to deliver the greatest return to our shareholders over the long term.

On that note, I would like to open the call up to questions.

(Operator Instructions)

Jerry from Stifel.

Just some basic questions here. Your carry-in population is down about 9% on a continuing basis. You talked about the likelihood, or at least the expectation, that new student volume would be modestly up for this year, which would suggest some lift to the carry-in population over time. Does that sound right, or is there something else going on with regard to graduation rates or timing issues? The other thing is, with the new program, the new scholarship program, if you will, how should we think about revenue per student this year?

Let me talk to the first one, or the second one first. In terms of the way that we're timing that milestone grant is one where it would have the greatest potential impact on persistence. On a revenue-per-student basis, we're really looking at it. We're going to offer it. We're not going to necessarily offer it constantly all the way around the year. We're going to look at what makes the most sense for incentivizing our students to persist. Our goal is that that will have a positive impact on the business overall.

With regards to the carry-in rate of the continuing student population, you're right. There should be a further lift as we go, loop around the year, because we're anticipating that our persistence rates do not deteriorate from where they are. All the evidence that we have is that they are actually improving. That should result in a greater, overall student population that persists.

Okay. So, maybe some additional further lift to --?

As I said in my comments, we've had a slight uptick in retention.

Okay, great. Then, with regard to the cost saves, I mean, you guys have done a lot. You did a lot last year. The $75 million this year, that should be fully realized this year. Likewise, is there any carry-over savings from the initial $200 million? Or should we just think about $75 million this year?

The $75 million is what we have said to everyone that we'll be able to -- that you'll realize as we go through this year. We do have, as I said in the press release, we do believe that there are additional opportunities for savings, expense savings in the business that we can obtain without impacting the progress that we're making with our students and with our overall enrollment.

Great. Just a couple of cash flow questions. Can you guys talk about your expected D&A for this year? Also, Colleen, you were helpful with the expected operating losses of the Transitional Schools. Can you talk about the cash flow impact on those?

D&A will be a little bit lower than 2013 given the fact that we have started, probably in 2012 and 2013, to have a few bit lower in capital expenditures. We are still anticipating about $20 million of CapEx for 2014. If you'll recall back to 2012, 2011, we were more in the $30 million range. As it pertains to the cash flow, I think as I shared in my remarks, we've got the majority of our Transitional Schools closing in the first half of 2014. As their enrollments decline, as you see what they exited with out of 2013 from an enrollment perspective, they have quite a significant cash burn here early in 2014, which as those campuses cease operations, that drain will subside as well.

Just one quick follow up. Should the cash burn be -- how much different should it be relative to the $70 million in operating losses?

Not significantly different, other than for those campuses that have some remaining lease obligations on them that go on after closure. There's not a lot of D&A within the Transitional School segment.

Great. Thanks very much. I'll turn it over and circle back.

Jeff from BMO Capital Markets.

I just wanted to go back to the comment about starts growth. Are you expecting starts growth for the entire organization this year, excluding Transitional Schools, or was it just for the University segment?

What I have laid out is that we'll be able to -- our expectation is to be able to grow new starts at the online University segments modestly and that we'll be able to arrest the decline of the Career school during the year. I think the evidence that I've shared with all of you and the progress that we've made in the fourth quarter and the beginning of 2014 very much underscores the achievability of those goals. That's what we need to be able to achieve in order to get to EBITDA positive in 2015. We are setting our sights higher than that. As is evidenced by what I released to you today, there is potential upside in our abilities to execute against the forward-looking guidance I've been giving you of what's required to get this organization back into the realm of profitability.

Okay, great. If we look at 2015, and I know you're not giving official guidance, but let's assume you're on that road to positive EBITDA. Would that assume top-line growth? Or can you do it even if revenues are shrinking because of all the cost cutting we've done?

Well, you're right. I'm not giving guidance for 2015. I'm going to stick to my guns in terms of Iv given quite a bit of guidance here. I'm going to stick to my guns as to how we do that. We believe we can modestly grow the online units. We can arrest the decline of the Career schools. We're seeing very strong performance in our new student enrollment and very good signs in terms of our increases in conversion rates, and very good progress in retention rates.

Okay. Fair enough. Colleen, you were very helpful giving us some data to try to model out the cash balance. I'm just curious, again, at a high level, do you think the Company will be free cash flow positive in 2014?

Pulling a little bit from Scott, and clearly we've got losses continuing in our Transitional School segments. We're not giving specific data point guidance, but I think you need to factor that in along with the fact that we did exit 2013 with fewer students entering into 2014 than we came in 2013. I think those two data points can maybe help you think through cash, free cash flow for 2014.

Okay, great. Just one other question, and I know you're not giving any quarterly guidance, but are there any changes in start dates that we need to be aware of, just in terms of having some differentiation on a quarterly basis relative to 2013?

No.

Okay, great. All right, I'll jump back out. Thanks so much.

Trace from Wells Fargo Securities.

I wanted to start by going back to Jerry's question about the grants at AIU, because I wasn't really sure, Scott, that I understood your answer. Are you suggesting that you're going to offer them on a student-by-student basis as you see fit? I didn't understand your response to his question. I wonder if you could just at least size the grant for us, if you can't comment on revenue per student specifically?

Yes, it's equivalent to the price of a class, is what the grant is. It wasn't --

But, that's three credit hours?

Yes, about roughly, yes.

Okay.

Several folks that are already offering various forms of grants might do it in one quarter and not do it in another quarter. We're looking at how best to complement and incentivize the success of our students. That's what I was referring to. It was nothing more than we may do similar types of offerings. We may not. It really depends on how we best are able to incentivize the persistence of our students in accomplishing their educational goals.

I still don't understand how this gets communicated to students. Have you just not decided what you're going to do yet? Or you're simply announcing a one-time preliminary program for students and then you'll reevaluate it? I mean, what's the message to the students here?

The message to the students is, as I have tried to articulate here, as they get through their first segment of work with us, if they commit to the next segment, they are able to qualify for a milestone grant. That then is something that if they continue to persist in their studies, will be a great incentive for them and will be positive for us if they are able to take that commitment and continue on in their studies.

Does this continue on for the duration of their program?

It's a one time.

So, just at the beginning, they get three credits, they get a discount for three credits in the first term?

Yes.

Okay. All right. I wondered if you could elaborate a little bit. I didn't really understand the explanation that you offered about AIU. It sounded like something like you made it too hard for the students and that affected persistence in the quarter, but you fixed it. Can you give us a little bit more --?

With regards to our rollout of Intellipath, what we did is we effectively dramatically increased the seat time a student was -- of what was required of a student on a homework basis for them to get through the course. It had a slight negative impact. That's something that we saw very quickly and did some work to understand it. It was inconsistent with some trials that we ran and it was inconsistent with what we were accomplishing over at CTU. With all the different data points we were able to figure out that we just, frankly, loaded -- we had a faculty training issue on our hands for how we were loading work associated with that. That caused a few more people than normal to say it's too much.

Okay. All right. My last question is, it looked like the operating margins at CTU were quite strong. I think you even alluded that in your comments. I'm wondering if that level that we saw here is something that you feel is sustainable going forward? Can you just comment on what the profitability of CTU? Because that's an in-step business that's not necessarily in transition, and I'm wondering if we can count on that level of operating margin going forward?

Yes, the operating margins at CTU were very strong. I'm not going to comment forward looking on anything. It is a mature business and we're not doing anything there that I would anticipate as a major disruption to the consistency of that business.

Okay. Thank you very much.

Cory from First Analysis.

This is David Warner for Cory. I just wanted to go back to the operating costs for 2014. It sounds like you expect to potentially get some additional cost savings? It looks like, on slide 13, your forecast for operating costs are pretty consistent with Q4 run rate. I'm just wondering, is there any additional incremental cost in 2014 coming out? Or is that Q4 cost run rates, the baseline for what you're assuming?

We haven't set any targets. What I've said in the press release and what I said on the call today is that I believe that there are more expenses that we can take out of the business that won't negatively impact the progress that we're making. Is there incremental progress on that? Yes.

Okay, great. I jumped on a little late, so I may have not caught some of the color regarding some of the starts trends and enrollment trends. Can you just give a little color on the divergent trends between AIU and CTU regarding starts? What maybe you're doing differently regarding maybe branding or marketing in those two institutions?

We do do things differently on a branding basis. We have a branding spend at CTU, which frankly far exceeds any branding spend that we do on the AIU side. We do some things differently in terms of specific marketing activities.

Although again, it's valuable to have two of the units because you get to see a lot of the things that work and then do some copycatting, depending on what your progress you're making with lead aggregators and a variety of other different outlets that you're using. In terms of new student enrollment, AIU has had several months now of excellent new student enrollment. CTU has also had, beginning in November, excellent new student enrollment, a few months of really great progress.

We had a little bit of a blip, as I told everybody on the phone, in January with CTU. We unfortunately had an outage that was power, weather and redundancy related, right at a critical moment in the enrollment cycle that had a negative impact on them. We fixed all of that.

There was also some marketing spend tweaking we needed to do and that unit responded in stellar fashion for February. We're very happy with how that unit, which is our biggest unit and our most profitable unit. We're very happy with how that's poised for the future. We think it's clearly demonstrate that we have the ability for modest growth there, if not better.

Great. Finally, can you remind us how you are calculating new students under the old student readiness plan and how that's going to change going forward?

Yes, what we did -- it's a little complicated because we had a 21-day period versus the different drop/add period that we're having now, based on revamping an orientation and getting students more familiar early on and getting a commitment out of them as opposed to having a lot of students that sign up that never had any intention of a commitment. What we're going to do in May, when we have the first-quarter call, is we're going to give you a model for that.

We didn't want it to complicate the world here because we're reporting on the fourth quarter. We'll give you that model as we get to the first quarter, but all of the enrollment numbers that I've given for you January and February have already been recast. It will be apples to apples as you get the model in May.

Okay. All right. Appreciate it. Thank you.

Jerry at Stifel.

Just wanted to talk again about the starts thus far this year, Scott. I mean, it looks like if you add up the numbers, you're flattish to maybe down very slightly. I think at two cross currents, if you will, one would be that AIU students potentially getting a positive lift from the incentive of the program, the grant program. Then likewise, the headwind of weather, as you described. I guess this is speaking to the second issue first. Should that suggest there's some pent-up demand in the March month?

Well, with regards to Health, they were a little disproportionately impacted by the weather at the end of January and in February. I feel very good about the outlook for them to perform according to our internal plans on a going-forward basis. I feel very good about that unit, the Career schools unit overall, of being able to hit what I have given as external guidance of arresting their decline. I think I've given you pretty strong evidence of trend reversal thus far.

For us to get to cash flow positive doesn't necessarily have to be a reversal from the standpoint of just getting to flat line. There is no -- just from the standpoint of looking at them, are not exactly sure what you're talking about as pent-up demand, if it would be the Health division or others. Design & Tech had an excellent February.

There is no start for Culinary in March. They have a big start, though, in April. I'm not exactly sure how -- what piece part are you at. I think I've answered that.

From the standpoint of the online, AIU has had, now, several months of just fantastic performance. We've got our arms right around how we need to load those classes and get the benefit out of the adaptive learning that we want to get out of it, which we think will have very positive impact on the persistence side of the game at AIU. CTU is already there. If we didn't have that outage, I think we would have had a great January.

That's fine. When you're taking these piece parts and trying to get a turnaround going, it doesn't always go in an immediately smooth path. As I said in the outset, you're pushing a lot of levers at once and trying to make a lot of improvements. We think we have a very good handle on how to steer that ship in a very positive way and we've got some exciting plans, not just for the end of this year, but also for 2015 for that unit.

Then just one last haul, if I can? A regulatory question, if I may? Can you talk about your positioning relative to some of the new discussion around gainful employment? The area that I think about for you guys, at least, is Culinary, especially as you shift back towards associates degrees, which tend to be higher priced relative to certificate and diploma programs. Generally, with regard to career schools?

Sure. We're following gainful employment very closely, obviously. It's a regular part of my activities to spend some time with folks in DC. I have three things that I say on the regulatory side.

I'll give you probably a little longer answer than you want here. I have three things that I tend to talk about on the regulatory side. What I say with regards to gainful employment is in one sense, I really don't care if you have single definition for all schools, gainful employment works itself out. Because I think it just does what the overall policy intent of everyone is to have a common set of outcomes by which people are measured by.

I also talk about the need for having some sort of a sliding scale with regards to default rates that takes into consideration the socioeconomic group that you're trying to serve.' We all know that that fluctuates based on the socioeconomic group that you're trying to serve. Just decide how much of the social dollar you want to spend in which bucket and I'll manage the institution to that. That's part of what I think the consideration should be.

I also say in my visits that we should have the power to lower tuition. The way that the lending rules take place now, we don't have the real ability to lower tuition without increasing potentially risky borrowing on the part of students. If you did those three things, I think you would accomplish most, if not all, of the policy goals that I've heard articulated with regard to the intent on this.

Now, with regards to gainful employment specifically, we've got a time line that we have created for gainful employment. One of the reasons that we're looking at merging our Health and Design & Tech fields is so that we best have the grid of courses at our ground schools to be able to best meet gainful employment and phase out those things that are most troublesome on that side and emphasize those things that we excel at on those sides. That's part of the reason for doing the consolidation to a single brand on that side, is to also give us the flexibility to do what we need to do on the gainful employment side.

I'm very aware of the Culinary as suspect aspect of things that you point out. We are actively involved in doing things that I think other competitors are doing that are at higher price points than us, frankly, which are making great strides in their placement rates, so that their graduates are getting much closer to an acceptable return on the gainful employment side. That's something that we've got a lot of focus going on right now.

Thanks very much.

All right. If there aren't any more questions, let me just wrap things up here. 2013 was a year of many positives throughout the organization. Excellent progress was made towards executing upon our turnaround strategy. While 2014 will remain challenging from a market perspective, we expect that our efforts from 2013 will begin to come to life in 2014.

As our core business takes meaningful step forward in improving results, while at the same time we graduate remaining students at our Transitional Schools. We will continue to implement our strategy and expect to continue seeing positive momentum from it. Thanks very much for your time today. I look forward to sharing our first-quarter results with you in a few months.

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