Perdoceo Education Corp (PRDO) 2017 Q1 法說會逐字稿

Good afternoon, and welcome to the Career Education First Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

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, Senior Vice President and 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 21E 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 in 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, 2016, 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, everyone, and thank you for joining us. I'll begin today's call by reviewing our first quarter highlights, and then A.J. will take you through the financials before I provide some closing thoughts.

First quarter consolidated operating results came in ahead of our expectations, and I am pleased with the operating and academic improvements we've made within the University Group operations. Retention and total enrollments continue to grow, while teach-out related expenses remain well optimized and are trending lower. We remain focused on further improving student retention, outcomes and experiences, and then our transition to a period of sustainable and responsible growth.

During the quarter, we continued to refine our operational and academic processes, including our curriculum and mobile platform, which we believe provides stronger engagement with our students. We refined various student-serving initiatives that have been discussed in the past quarters and also leveraging best practices across our institutions. We believe these types of changes, along with our recent improvements in core sequencing and course design, are promoting learning, increasing faculty interactions with students and continuing to enhance overall student retention, outcomes and experiences.

University Group revenue increased 2.3% compared to the first quarter of last year, and I'm encouraged to see that our recent investments in student-serving operations has had a positive impact in stabilizing new enrollment trends. For the full year 2017, we expect to see new enrollment growth within the University Group as we pursue sustainable and responsible growth.

At CTU, total enrollments and revenue increased during the quarter, while new student enrollments increased by 0.6%. We're pleased to see that new enrollments turn positive in the quarter, reversing 4 consecutive quarters of decline.

At AIU, we continue to be pleased with the progress they're making. Revenue at AIU increased year-over-year. In the near term, we will experience some variability in AIU's quarterly performance as a result of the academic calendar we designed -- we discussed last quarter. This change was made for the benefit of students with a goal of improving student persistence and engagement, but has also impacted the timing of starts and number of earnings days in any given quarter. For example, the second quarter of 2017 will have 7 less earning days as compared to the second quarter of 2016. This will make quarterly comparison to an operating performance at AIU more challenging until some of those differences moderate beginning in Q4 this year. As a result, we believe a better way to measure AIU's normalized performance will be on a multi-quarter basis consistent with how we analyze this internally.

For the 6-month period ending March 31, 2017, as compared to the similar period -- a similar prior year period, new enrollment for AIU increased 2.5%. AIU operations continue to improve, and we believe we will experience new student enrollment growth at AIU for the full year. Overall, we are pleased with the enrollment growth within University Group that we have been experiencing over the past few quarters. We believe that the ongoing improvements and investments we are making in various student-serving areas will further help us enhance student retention and outcomes, and ultimately, increase the academic value proposition of both universities. The overall progress we have made and the operating stability we have experienced had given us increased confidence. Last quarter, we discussed the University Group committed to opening admission and advising centers in Phoenix. These facilities are part of the overall strategic efforts to transition to a period of sustainable and responsible growth. This enables us to serve the demand that we are experiencing and increase the long-term value of the university platforms. We are in the initial phases of opening this facility and expect them to be fully operational in the second half of this year.

From an operating performance standpoint, the University Group generated operating income of $27.7 million for the quarter, which represents growth of 30.9% year-over-year. Increased revenues contributed to this improvement in performance, which was also helped by improved efficiencies across our operating expenses.

Consolidated operating income increased by more than 40% year-over-year to $9.8 million from $7 million as we have rightsized corporate expenses in line with the wind down of teach-outs. Retention at teach-out campuses continues to trend ahead of our expectations, and we are delivering on the commitment to our students while still managing all teach-out related costs. We are optimizing our real estate obligations associated with these campuses and are on track to complete a majority of the teach-outs later this year.

Before I hand the call to A.J. to review our financials, I'd like to make a few more comments relating to our outlook. I remain confident in the full year outlook we provided last quarter, and in our ability to execute against those objectives. The implementation of an execution on our strategic initiatives has driven increased stability within the university operations. With that in mind, we are now providing a range for our full year and second quarter adjusted operating income outlook for ongoing operations.

A few things to note. As shown on Slide 5, the full year 2017 outlook range of $100 million to $105 million for ongoing operations is consistent with our previous provided outlook of growth as compared to 2016. Additionally, as you can see, based on both the full year and first half performance shown on this slide, we expect the second half of 2017 to show significant improvement as compared to the second half of 2016.

Now I'll hand the call over to A.J. for a more thorough review of our financials and outlook. A.J.?

Thank you, Todd. For the quarter, consolidated revenue was $162.1 million, which was down 18.5% year-over-year with the decline in revenue attributed to the teach-out strategy in Culinary Arts in our Transitional Group. Within our University Group, revenue increased 2.3% year-over-year.

We posted consolidated operating income for the quarter of $9.8 million as compared to operating income of $7 million in the prior year quarter, driven by improved operating income within our University Group. We ended the quarter with $166.6 million of cash, cash equivalents, restricted cash and available for sale short-term investment, which we'll be referred to as cash balances for the remainder of today's discussion.

Net cash used from operations was $39.1 million, which includes $32 million paid to resolve the previously discussed legal settlements. Absent this event, cash used in operations improved versus 2016, reflecting improved operating performance and slightly better working capital trends. Capital expenditures for the quarter were $0.7 million.

Moving to the results of the University Group and Corporate. Total enrollment within the University Group improved by 0.6% year-over-year. As previously mentioned, revenue increased 2.3% year-over-year in the first quarter, which, when combined with lower overall expenses, led to adjusted operating income improving to $25.7 million or 29.7% versus the first quarter of 2016.

In Culinary Arts and Transitional segments, revenue continued to decline year-over-year, in line with the progress of the teach-outs and the adjusted operating loss increased to $9.8 million from $2.9 million in 2016. This trend is consistent with our expectations and the teach-out operations are progressing better than anticipated. Recall, Culinary Art campuses will complete their teach-out in the third quarter of 2017.

On Slides 3 through 5, we have provided additional clarity around our outlook for 2017. As Todd mentioned, given the increased stability of our operations, today we are providing a range for the full year 2017 as well as additional information for the second quarter. On Slide 3, you will see that we are expecting adjusted operating income for the University Group and Corporate for the full year 2017 to range between $100 million to $105 million, which is consistent with our previously provided expectation of growth versus prior year. Additionally, towards the bottom of Slide 3, you'll see the outlook for Culinary and Transitional segments. We continue to expect adjusted operating losses of $50 million to $60 million for 2017, and $10 million to $20 million for 2018.

The LCB teach-outs are on track to be completed in 2017, which significantly lowers the number of students involved in the teach-out strategy going forward. We continue to expect year-end cash balances of approximately $150 million to $160 million for the year-ending December 31, 2017. And with the anticipated improvements in adjusted operating income in 2018, cash balances will increase.

Slide 4 provides further details related to our full year outlook.

On Slide 5, we have provided additional information regarding our outlook for the second quarter. As you can see, we expect adjusted operating income for the University Group and Corporate to be a range of $20 million to $22 million. This outlook includes the impact of timing-related items, including the impact of the academic calendar redesign at AIU as well as the timing of certain operating expenses in the second quarter versus the prior year quarter.

Also impacting the quarter will be the investments in our admissions and advising centers in Phoenix, which were not present in 2016. The fluctuation in adjusted operating income for the second quarter is incorporated into our full year outlook. Finally, as we've done in the past, the last few slides of our presentation provide a summary of the key assumptions contained within our outlook as well as the reconciliations of GAAP to non-GAAP items.

With that, I'll turn the call back over to Todd for closing remarks.

Thanks, A.J. In closing, 2017 is off to a good start, and we're on track to a period of sustainable and responsible growth. Our priorities for the future remain the same. Our outlook for University Group and Corporate's adjusted operating income is that it will grow to approximately $100 million to $105 million in 2017, and our long-term outlook continues to improve. And as I mentioned earlier, we expect the second half of 2017 to show significant improvement as compared to the second half of 2016.

Overall, enrollment trends are positive for both universities, and we expect enrollment growth for the University Group for the full year of 2017.

Lastly, our cash position continues to be solid and has enabled us to make investments in university operations for the benefit of our students and prospective students, such as our Phoenix admission and advising centers. We continue to make smart investments in student-serving areas as well as in faculty and technology that we believe will enhance overall retention and outcomes for our students. And as the operating performance of the company improves, we will continue to analyze and evaluate growth investments for the benefit of our students.

Thank you, again, for joining us this afternoon. And we'll now open the call for any analyst questions.

(Operator Instructions) First question is from Peter Appert of Piper Jaffray.

So Todd, I assume that the retention numbers were probably being distorted a bit by these changes in the academic calendar. But could you just talk about the trends in retention? Because what -- I would calculate it -- it looks like AIU, in particular, would be down pretty substantially year-to-year?

I'm not sure that that's accurate. I mean, as far as retention being down, I -- in fact, what we're finding is that we're actually seeing good improvement from retention at AIU. We have, as you know, with the timing of the calendar, there is some fluctuation there as far as start numbers. But other than that, no -- retention continues to make good progress at both CTU and AIU.

Okay. I'll have to -- I'll take it offline, maybe we can better understand the calculation. Todd, can you also talk about this new Phoenix center? You've talked about it for the last quarter or so. What's the strategic thinking? This combines the marketing efforts for both of the universities, is that correct?

Yes. I mean -- it's a great question, Peter. What we have found over the years is that with online enrollment is that the enrollment position -- the enrollment counselor position, as well as academic and financial counselors, it is -- typically those people who were recruited are around a particular geographic area. And one of the challenges that you face is that if you are too saturated in one particular market, you have difficulty hiring the level of -- the number and the quality that you would like. And so with Phoenix being a very good market, it gives us the opportunity to not only continue to invest here, but to -- based on the demand that we're experiencing, an opportunity to add, again, enrollment staff as well as financial aid staff and the academic counseling staff to be able to support what we're seeing as a strong demand. It helps being familiar with the area, but again, given the amount of education companies that have had online enrollment centers there and the fact that it's a much smaller number now, there is a very good employment base there. And so we're actually very excited about it. We're very much in line with what we thought we would be, as far as the hiring process out there. We've been very impressed with the people that we've hired. And they've already began enrolling students, which are also very excited about. And -- again, I think it gives us an opportunity to diversify geographically. And again, given the nature of the online enrollment process, it's a very important, I think, part of your strategy to make sure that you're doing that. And that's really what's behind it. It's a great opportunity for us. And I would say out of the blocks right now, we're pleased with the results.

And in terms of the expectation of low earnings for the second quarter, presumably some of that is start-up costs related to this new center. Is that a significant factor?

There are multiple factors, but yes that's a big part of it, yes.

Okay. The -- in the last quarter...

And I would just say that -- the other 2 pieces to that is, the timing of some expenses that occurred in 2016 this quarter -- excuse me, in Q2 versus what will occur in '17 as well as -- again, there are -- there is some effect by, as I said, moving some of those revenue days of AIU from Q2 into Q3 and Q4. That -- so it's a combined effect of all. But yes, we're -- again, we saw the opportunity in Arizona or in Phoenix and it was -- again, the right thing to do based on the demand that we're experiencing.

Understood. And on the shifting of the days, Todd or A.J., can you be more specific in terms of how then it falls in the third and fourth quarter?

Well, it's basically 7 days and -- so again, I -- and again, some of that is spread over -- it's spread over the 2 quarters, but the majority of that probably is, I would say...

In Q3 into Q4.

Yes.

So just assume it's sort of even between 3 and 4?

That's correct.

Yes.

Okay. The -- last quarter, Todd, you talked a little bit about the gainful employment stats and a couple of problem -- couple of areas where there might be issues. Can you give us an update on where you are in terms of addressing any problematic programs at this point?

Yes. As you recall, there was a small number of our programs. They -- and again, none -- pleased to say were unexpected. And we continue to make progress and -- as you know, criminal justice was an area, in particular, that was affected. And so our ability to continue to develop new programs as well as making sure that if there is opportunity to offer specializations in some of the other programs that are in that area, not only in criminal justice but cybersecurity and other areas like that, we continue to feel confident in our ability to manage through that and not have it impact our enrollment.

Right. And Todd, sort of a big picture question. The -- you've made great progress here, obviously, improving (inaudible) performance. Any thought to the possibility of combining the CTU and AIU brands and whether there might be some significant cost efficiencies rather than running 2 separate universities?

Good question, Peter. I think -- I mean, that's something you should always be looking at. But from our point of view, we have 2 high-quality universities that each have, again, attributes that are very specific to each of them. And the possibility of losing that by combining them, although -- maybe there are some cost-savings to be achieved, I think you negatively impact your -- potentially impact your revenue because, again, I think that you may lose some of the identity and the attributes that both of these very strong universities provide right now. And so -- although, again, it's very prudent to always be careful to assess that, there is no plan at this point, again, given we see good demand for both. And -- we also can learn from the 2 universities, can learn from each other. So when there is opportunity that has some synergy, certainly it's a very collegial friendly, collaborative environment. But at the same time, they have very strong -- both of them have very strong independent academic functions as well as good leadership and very strong faculties. Just -- and we don't want to lose the momentum or the identity that each of them have right now. We think that's really -- it, overall, is a more positive structure for CEC to have them separate.

Okay. And then last thing, just in terms of the wind down costs on Culinary and Transitional. The loss was up on a year-to-year basis as you pointed out, but I think it was actually down a bit sequentially, and I think there were some special charges in 4Q. But I'm wondering the -- based on the trajectory, it feels like the $60 million to $80 million might be a little bit on the high side. What do you think?

Well, we've actually got it listed as $50 million to $60 million, and then dropping down to that $10 million to $20 million for '18.

Okay. Sorry. I thought I heard $60 million to $80 million. But again, maybe I'm hallucinating.

I don't think if -- yes, if you look at the adjusted operating loss, which is the $50 million to $60 million, there is some unused base charges there that has been not adjusted, which is the regular operating loss. That's where is the $80 million to $90 million, but got that $25 million unused base charge.

Got it. Okay. But even so -- I mean, to the -- well, I guess that would make sense. Right. If we just sort of annualize what you did in the first quarter that wouldn't -- that would get you towards the -- that would get you into the range. So I guess that makes -- that certainly makes sense. Okay.

Yes. No, I think it -- by the way, I think it's a point that I hope doesn't get lost and the fact that the universities are doing well, and that is that one is the teach-out that's being executed at a high-level of efficiency, but also the fact that -- again, a large amount of expense that the organization leaves by the end of '17.

Right. Actually, one more last thing. The -- I think you said, Todd, something to the effect that the -- that you were fairly well long in the cost-reduction efforts as it relates to the overhead expenses. Did I hear that correctly or is there more to come?

Yes. I mean, the bottom line is that we've, as you know, been in a several year transformation process with a lot of cost elimination and familiarization. Obviously, a big bulk was through at the beginning. And then as the teach-out finishes, you'll also then have a significant amount leased. And the overhead associated with -- again, that larger structure now versus smaller. But yes, as it winds down, that becomes a much smaller percent -- a much smaller number.

Got it. Okay. And I'm sorry, one more -- one last question. The -- anything you would call out for us in terms of programmatic offerings areas where you're seeing particular interest or strength from an enrollment standpoint?

Great question. The good news is we continue to see at both graduate and undergraduate level strong demand across all of our programs. And our view of that is, I think, it's a testimony of it. The programs we do offer good quality programs that are meeting the need of their demand that's out there. So I would say the best answer is really across the board, we are experiencing solid demand.

(Operator Instructions) Actually, it looks like we have no further time for questions, and I would like to turn the conference back over to Todd Nelson for closing remarks.

Well, again, we want to thank you again for joining us. And we look forward to speaking with you again next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.