Perdoceo Education Corp (PRDO) 2016 Q2 法說會逐字稿

Good afternoon and welcome to the Career Education second quarter 2016 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. And I would now like to turn the conference over to Sam Gibbons. Please go ahead.

Thank you, Amy. Good afternoon, everyone, and thank you for joining us.

With me on the call today is Todd Nelson, President and Chief Executive Officer; A.J. Cederoth, Chief Financial Officer; and Ashish Ghia, Vice President of Finance. This conference call is being webcast live within the investor relations section at careered.com. A webcast replay will also be available on our site and you can always contact the Alpha IR Group for Investor Relations support.

Let me remind you that this afternoon's earnings release and remarks made today include forward looking statements as defined in Section 21-E of the Securities Exchange Act. These statements are based on assumptions made by and information currently available to, Career Education and involve risks and uncertainties that could cause actual future results, performance, and business prospects and opportunities to differ materially from those expressed and/or implied by these statements.

These risks and uncertainties include, but are not limited to, those factors identified in Career Education's annual report on Form 10-K for the year ended December 31, 2015 and other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, the Company undertakes no obligation to update those factors, or any forward-looking statements to reflect future events, developments or changed circumstances, or for any other reason.

In addition, today's remarks refer to non-GAAP financial measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The earnings release and slide presentation which accompany today's call, and which contain financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures, are available within the investor relations section at careered.com.

So with that, I'd like to turn the call over to Todd Nelson. Todd?

Thank you, Sam. Good afternoon and thanks to everyone who's joining us on the call today.

During the second quarter, we've continued to focus on and invest in our University institutions, with the goal of further enhancing student retention and outcomes and are pleased to report quarterly results that were ahead of our internal estimates. In fact, we are encouraged by the progress in our operating performance at AIU and CTU, while maintaining our commitments to students at our Teach-Out campuses.

Net income for the quarter was $11.8 million, as compared to a net loss of $20.7 million in the prior-year quarter. Consolidated adjusted EBITDA, which we believe to be a useful indicator of performance during the wind down of our Teach-Outs, was $25.6 million during the quarter compared to a negative $4.3 million in the second quarter last year.

This performance was primarily driven by an increased revenue at our University Group on an aggregate basis, as well as continued progress on our Teach-Out plans. The University Group revenue increased by 3% for the quarter, primarily driven by improved student retention within CTU, and new enrollment growth at AIU. And operating income increased by 25%, to $36.8 million, compared to $29.4 million in the prior-year quarter.

Our second quarter also was marked with several ongoing initiatives and investments with the goal of improving student experiences, both before and after they are enrolled in one of our programs. First, we have continued to enhance our mobile platform with added functionality and have further leveraged and intergraded technologies like IntelliPath into our course offerings.

Second, we've also leveraged technology to optimize our student intake processes aimed at improving overall onboarding experiences for students as they begin their academic sessions. Third, we've increased faculty interaction with our students, refocused our orientation processes for new students, and have made progressive updates to our curriculum and course sequencing.

Lastly, we have also committed incremental investments in various student-serving areas of our operations. Improving student experiences both before and after they are enrolled in one of our programs will help provide stronger engagement by incoming students, which should further enhance student retention, and outcomes, and ultimately increase the long-term academic value of our University platforms.

Within University Group, total enrollments increased 1%, and new enrollments were down 4% for the quarter, as compared to prior-year quarter. We continue to manage to our goal of achieving flat to modest growth in total student enrollments, and believe that our focus on student retention and outcomes, and our efforts to improve overall student experiences has positively impacted total enrollments.

Both universities continue to make progressive changes to their operations that we believe will help improve student engagement and retention. For example, the team at AIU is focused on perfecting the leveraging, the new student advising model. As a reminder, this model provides dedicated, personal instruction and coaching to new students during their initial sessions.

The team at CTU has enhanced its advising function by coordinating outreach between student advisors and faculty. CTU is also enhancing its instructional model that demonstrates substantive interaction in the classroom, which we believe increases faculty engagement.

Now I'll move onto our transitional and culinary arts segments where serving the interests of our students has been a priority of ours since we made the Teach-Out announcements. We're focused on responsibly managing these Teach-Outs and providing each of our students with the attention and resources needed to complete their chosen field of study. I am pleased to report today, that I believe we are meeting that objective. Total enrollments and retention were better than our internal estimates for these campuses. Operating losses improved by $10.9 million for culinary arts, and by $17.6 million for transitional for the quarter.

As we look to the second half of 2016, our priorities remain the same. We are focused on continuing to improve the market position of our universities by strengthening the breadth of program offerings and leveraging faculty and technology, with the goal of enhancing retention and outcomes for students. Given the improvement in student retention, continued stability and efficiency in our University Group and stronger than estimated total enrollments at our Teach-Out campuses, we are raising our ending cash and full-year adjusted EBITDA outlook that we provided last quarter, with 2016 consolidated adjusted EBITDA expected to improve and be positive.

With that I'll turn it over to A.J. and he can give us more color on the financials as well as the improved outlook. A.J.?

Thank you, Todd. As we review financial performance, I want to start with the results from the consolidated Company and then review the segment results. On Slide 4, we've summarized the consolidated results for Q2 and year to date and provided a comparison to the same periods in the previous year. For the quarter, revenue was $182.6 million, which was down 15.8% year-over-year, and for year to date, revenue was $381.5 million, a 14% decline year over year. With the decline in revenue attributed primarily to the Teach-Out strategy at our culinary arts and transitional group segments.

As you will see on the next slide, the University Group posted a 3% revenue increase for the quarter and a 3.9% increase year to date as compared to prior-year. Operating income for the quarter and year to date was $17.3 million and $24.3 million respectively, versus prior-year second quarter and year-to-date operating losses of $19.9 million and $44.3 million.

The improvement in performance can be primarily attributed to lower operating costs in the current year, including the reduction of admissions and marketing costs associated with our Teach-Outs, as well as the nonrecurrence of a $12.8 million restructuring charge that was recorded during the second quarter of 2015. We expect our operating costs for the second half of the year to trend lower as compared to the first half of 2016, however, the year-over-year differences will begin to normalize in the second half, as the impact of our strategic initiatives, which began last year, annualize, and the initial economic benefits associated with announcing the Teach-Outs start to diminish notably, especially within our culinary arts campuses.

Consolidated adjusted EBITDA was $25.6 million and $38.8 million for the current quarter and year-to-date respectively, as compared to negative consolidated adjusted EBITDA of $4.3 million and $16.1 million for prior year periods. We have included a line that highlights adjusted EBITDA for our University Group, plus corporate costs, because we believe this reflects our ongoing business, once the Teach-Outs are completed. Adjusted EBITDA for the University Group and corporate improved by $7.8 million and $16.7 million, to $34.3 million and $54.5 million for the quarter and year-to-date respectively.

We ended the quarter with $208.8 million of cash, cash equivalents, restricted cash, and available for sale short-term and long-term investments net of borrowings, which I will refer to as ending cash balances for the remainder of this discussion. For the quarter, cash flow generated from operations was $16.7 million, which compares favorably to negative cash flow used in operations of $6.4 million for the second quarter of 2015. This improvement in cash flow was primarily attributed to lower operating costs. Capital expenditures for the quarter were $1.1 million. As we discussed on previous calls, we continue to be prudent at managing our cash.

Moving to Slide 5, we highlight the results of the University Group segment. You can see the 3% and 3.9% improvement in revenue, year-over-year in the quarter and year to date, which is attributed mostly to improved student retention at CTU, and new enrollment growth at AIU. Overall, total enrollment within the University Group improved slightly year-over-year.

Operating income improved by $7.4 million and $16.8 million versus prior-year quarter and prior year to date respectively. Again attributed to improved revenue and lower operating costs. Operating costs decreased primarily due to optimization and timing of marketing spend as well as continued operating efficiencies.

Turning now to Slide 6, we highlight the results of the culinary arts and transitional segments which are in Teach-Out. Revenue declined year-over-year in both segments, but the overall operating losses have decreased as a result of effective management of our cost structure in response to the declining student enrollment, and the reduction of admissions and marketing expenses. As a reminder, the operating losses will increase in future quarters because we will maintain sufficient staffing and facilities to support our students despite declining revenues.

Turning to Slide 7. As Todd mentioned, we are updating our outlook and raising our ending cash balance and adjusted EBITDA guidance. This is primarily driven by improvement in our retention trends, better than estimated total enrollments at our Teach-Out campuses and continued efficiency and stability at our University Group. Specifically, we now expect consolidated adjusted EBITDA for 2016 to improve versus 2015, and as Todd mentioned, to be positive.

In conjunction with this improvement, we also expect our ending cash balances to be higher ranging between $160 million and $170 million, an increase of $10 million from our previous forecast. Recall the cash outlook incorporates funding the cost of the Teach-Outs, including payments related to severance and lease obligations.

This momentum should carry into 2017 as well. We currently expect our 2017 consolidated adjusted EBITDA to be flat as compared to 2016, because we expect our University Group to continue to deliver improved results, however, the impact of the Teach-Out strategy will increase. We estimate our 2017 ending cash balances to be in the range of $140 million to $155 million.

To summarize, our University Group continues to improve its performance despite some industry related headwinds. Our Teach-Outs are progressing and our outlook shows we have sufficient capital to complete this strategy as well as to make investments in various student serving areas of our institutions, while continuously improving the quality and depth of our curriculum. This concludes my summary.

For additional information, I would like to refer you to Slides 8 through 11 included in the presentation. There you will find an updated summary of the key assumptions contained within our outlook as well as the reconciliation of GAAP to non-GAAP items. With that, I'll turn the call back over to Todd for closing remarks.

Thank you, A.J. In closing, when I joined the Company approximately a year ago, we had just laid out a strategic plan to transition our Company to a strong University platform with the potential to make a positive difference in students' lives through education, and today I'm encouraged by the progress we have made thus far.

First, I want to point out our financial position and operating performance has improved over the past year. Number two, we have key leadership positions filled with some of the best talent in the industry. Three, our employees are motivated and focused with a clear vision to serve and educate our students. Four, our transitional and culinary arts campuses are well underway with their Teach-Out plans performing better than our initial estimates.

Five, the success we are achieving has enabled us to invest more time, intellectual capital, and dollars in various student serving areas of our University platforms. And lastly, our University platforms continue to take positive steps to improve overall student experiences that will positively impact student retention and outcomes.

We've made substantial progress for each of these items, while continuing to focus and serve the needs of our students with the goal of providing them with a quality education. There's still a lot of work to be done, however, I want to thank all of our employees, students and shareholders who have supported us as we continue to execute on our strategic initiatives. Again, thank you for joining us this evening. And with that, I will now open up the call for any analyst questions.

(Operator Instructions)

Our first question comes from Peter Appert at Piper Jaffray.

Thanks, good afternoon. So Todd, I'm wondering if what your expectations are -- if you can be more specific, rather, in terms of your expectations for the second half EBITDA. Do you think the numbers can stay positive in the third and fourth quarter?

Well, as we said, we haven't really given a lot of direction quarter by quarter -- excuse me, a lot of guidance on a quarter by quarter basis, Peter, but what we have tried to do is stay conservative and say that we believe that it will be year over year an increase over 2015, and the previous guidance was flat, and so again, we feel positive about saying that, but we really haven't given any guidance beyond that.

Okay, fair enough. With regard to the starts, the numbers at CTU I'm noticing a little bit weaker quarter to quarter, AIU obviously better, anything you would call out in terms of the trends at either school?

No, other than, again, what we've said in the past is we've really tried to focus this year more on total enrollment, because our feelings are that our retention is not where it should have been, and so we want to continue to focus on that this year. And we want to make sure that we have the most efficient onboarding process and so we've really worked to try and improve that.

And in that process, it's one of those things that we think, from a positive point of view, that we continue to see strong inquiry flow and our view of that is we're going to continue to focus on total enrollment, but with the potential that we'll start to see, again, new students at CTU turn flat to positive, and that at AIU, as we've said in the past, we think that we're going to continue to see good things there as well.

Thank you. And then, Todd, there's been a lot of discussion in the industry about changes -- various companies are changing their marketing approaches, marketing channels, can you talk about what you guys are doing in that regard?

I think, like we've heard from several folks in our industry, all of us would like to increase the number of organic leads that we generate, and inquiries, and we're going to continue to focus on that as well. But we also believe it's important, as we do receive aggregator leads, that we work there to make sure that we are implementing, and with them, working with policies that make sure that it's done correctly and in a positive way, and that's been the majority of our dollars have been spent in those areas, and we feel like we have a process that's allowing us to really focus on the higher-quality leads.

Okay. And then last thing, maybe for A.J., how should we think about the trend in total operating costs over the next few quarters, maybe even going into 2017 if you can talk about that?

Sure, Peter. I think what you'll see is our costs will continue to improve. We put in place last year a deliberate strategy to eliminate costs throughout the organization, while focusing on what we're delivering to the students and do not impacting that. We still have opportunities there, but overall cost within transitional will stay relatively flat, but you will see a decline in revenue, which is the impact there to the bottom line. And then there are still opportunities, I think, as we move forward, within our corporate costs to improve some costs there.

I would assume that the total operating expense number for the second quarter, I shouldn't just assume that's a run rate number, right? Because of the seasonality in the business?

That is correct.

Okay. I think I'm good. Thank you, guys.

Thanks, Peter.

Because there are no further questions, this concludes the question and answer session and the conference. Thank you for attending today's presentation. You may now disconnect.