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Corinthian Colleges Inc. (NASDAQ:COCO)

F1Q09 Earnings Call

November 5, 2008 12:00 pm ET

Executives

Anna Marie Dunlap – Senior Vice President of Investor Relations

Jack D. Massimino – Chairman and Chief Executive Officer

Peter C. Waller – President, Chief Operating Officer, and Director

Kenneth S. Ord – Chief Financial Officer and Executive Vice President

Analysts

Sara Gubins – Merrill Lynch Global Securities

Jeffrey Silber – BMO Capital Markets

Trace Urdan – Signal Hill

Mark Marostica – Piper Jaffray & Co.

Gary Bisbee – Barclays Capital

[Andrew Fines] – UBS

Jerry Herman – Stifel Nicolaus and Co.

Kevin Doherty – Banc of America Securities

Operator

Welcome to the Corinthian College fiscal 2009 first quarter conference call. (Operator Instructions) I would now like to turn the call over to Anna Marie Dunlap Senior Vice President of Investor Relations, please proceed.

Anna Marie Dunlap

Good day everyone and thanks for joining us. I’m here today with Jack Massimino, our Chairman and Chief Executive Officer, Peter Waller President and Chief Operating Officer and Ken Ord our Chief Financial Officer. This call is being webcast and an audio version of the call and transcript will be available on our web site for 30 days.

In addition a telephonic replay of this call will be available until Wednesday November 12th. The details for accessing the replay are included in the press release we issued today.

Please note that during this conference call we may make projections or other forward-looking statements regarding a variety of issues. These statements are based upon current information and expectations. Actual results may differ materially based on a number of risks which are identified in our filings with the Securities and Exchange Commission.

Following our prepared remarks we’ll open the call for question and answer session and with that Jack over to you.

Jack Massimino

Today I’ll begin with a few comments about our first quarter results and then discuss how we expect the company to fare in the current economic environment. Peter will follow with a review of our first quarter operational progress and then Ken will review the quarter’s financials and provide guidance for the second quarter and fiscal year.

We were encouraged by our first quarter results which exceeded our guidance range for start growth. We’re at the high end of our guidance range for revenue and hit the midpoint of our guidance range for earnings per share.

Revenue was $289.6 million in the first quarter, up 18.4%. The increase was mainly driven by growth in our student population and new student starts. At the end of the first quarter our total student population was 74,265 students, an increase of 11.3% over September 30th of last year.

New student starts grew by 7.3% in the first quarter, compared with the same quarter last year. First quarter operating income was $10.1 million, an increase of 54%. Diluted earnings per share were $0.07 in the quarter versus $0.05 in the same quarter a year ago.

Our earnings include the impact of approximately $0.04 in additional expenses associated with the transition from the Sallie Mae discount loan program to our internal access-lending program. As a reminder the financial results that I just reviewed pertain to continuing operations.

I want to spend a few minutes now discussing how we expect the economy to impact Corinthian. There’s no doubt that the current economic environment is challenging. But it also creates opportunities. Overall we believe that we’re in a good position to grow, to achieve strong student outcomes and to meet our three-year financial and operational goals.

On the positive side of the ledger as unemployment rises, more people return to school to improve their job skills. The Department of Education recently reported a record increase in financial aid applications and post secondary schools in general are experiencing greater demand.

As recent earnings reports indicate, leading players in the for profit education sector are seeing increased enrollment and Corinthian is no exception. Our lead flow in the past couple of quarters has been particularly strong, and although we can’t quantify it, we believe that some part of the increase in leads is due to the weak economy.

Further, the cost of leads is decreasing as fewer companies can afford to advertise in a recession. This has allowed us to negotiate steeper discounts for future media buys. More than 60% of our enrollees are in short-term diploma programs which we believe are attractive in a recession. These programs allow individuals to retool quickly for positions in growth industries such as healthcare, trades and automotive.

About 58% of our students are currently training for healthcare careers which are top ranked in terms of job growth and offer more stability in a down economy. In addition our financial condition is strong. Approximately 85% of our revenue comes through some form of federal government program and the government is a reliable payer in good times and bad.

We have very little debt and approximately $200 million currently available on our credit line through a syndicate led by Bank of America as the administrative agent. The syndicate also includes JP Morgan, US Bank and Union Bank as agents. The credit facility does not expire until July 1, 2010.

From our perspective tight credit markets are the main challenge posed by the current economy, particularly for those with subprime credit. With Sallie Mae’s exit from subprime lending last January we were thrust into the student lending business overnight. Fortunately that crisis hit when the company had strengthened operations and was growing which made it easier for us to adapt.

We believe the amount we are lending for our internal student loan program what amounts to about 10% of revenue is manageable and can be funded out of cash flow from operations. Even so we do not plan to stay in the student lending business any longer than is absolutely necessary. Ken will discuss our student-lending program more in just a few moments.

Based on past experience we know that a recession can make graduate career placement more difficult. Although our placements are running well ahead of accreditation standards for the vast majority of our schools, we’re beginning to staff up in career services to help ensure an ongoing stream of employment opportunities for our graduates.

To sum up, we believe that from a financial and operations perspective, we’re in a good position to weather the turbulence in the economy and the credit markets. We’re growing, we’re financially stable and some costs, such as media, are coming down. We remain confident that we can achieve the three-year goals we presented at our investor day in late May.

Before turning the time over to Peter, I’ll briefly mention the status of California Senate Bill 823. As many of you are aware the previous Act governing career colleges in California expired. To replace that severely flawed Act the legislator has considered several proposals some of which we supported. Unfortunately we could not support Senate Bill 823. The bill was poorly conceived and would have made compliance even more difficult than the previous Act.

We worked vigorously to defeat this legislation and although the legislator ultimately passed the bill it was vetoed by Governor Schwarzenegger. In the coming months we will continue to work with the California legislature and the Governor to pass legislation that protects students while providing clear rules of the road for career colleges.

I’ll now turn time over to Peter to provide a first quarter operations review.

Peter Waller

We were very pleased with our continued positive growth momentum in the first quarter. As Jack said earlier we reached a total of 74,265 students at the end of the first quarter an 11.3% increase compared with September 30th of last year.

Our growth in the first quarter and the past several quarters has been entirely organic, generated by increased enrollment in existing and new programs versus new branch campuses or acquisitions.

As we’ve discussed previously, continued growth in the student population is essential to reaching our goal of margin expansion. As the population increases we’re improving capacity utilization and leveraging fixed costs. I’ll discuss our progress on that front in just a few minutes. Our growth is primarily driven by new student starts so I’ll move now to our progress in the marketing area.

For the tenth consecutive quarter we reported a substantial increase in starts from continuing operations. In the first quarter, starts totaled 30,075 an increase of 7.3% compared with the first quarter of the prior year. As you recall our guidance for the first quarter start growth was 4% to 6%.

Most of our US continuing operations both ground schools and online reported an increase in starts. On our last investor call we explained that we planned to moderate the online divisions rate of growth in order to assimilate the rapid growth of recent years. And test the multiple changes in student lenders and move the division's largest operation to a new facility. This move has been completed and they are settling into the new environment.

In the first quarter the online division reported start growth in the high teens in line with our expectation. We now anticipate that online's growth rate will accelerate when the move is complete. As Jack mentioned we believe a weaker economy is contributing to start growth, although the recession appears to be in its early stages, and the impact is difficult to quantify.

Our start growth was negatively impacted by approximately 40 basis points in the first quarter by Hurricane Ike in Texas. Three campuses were affected and one of them our Houston-Hobby campus sustained significant damage.

Hobby was closed for 18 days during which time, owing to the heroic efforts of the 200 employees, we set up temporary trailers so that students could continue their programs. We anticipate it will take several months to repair the damage to the Hobby facility. The other two campuses resumed normal operations within two weeks of the hurricane.

Given current trends we expect second quarter start growth of 10% to 12% for continuing operations. In addition we are increasing our forecast of start growth in fiscal 2009 from 7% to 9% to 8% to 10%. This is above the three-year start growth target of 6% to 8% that we provided at our Investor Day at the end of May.

We expect a significant portion of our start growth in fiscal year 2009 to be derived from the transplantation of core programs. As discussed on previous calls, we’re pursuing a strategy of what we call mining the core. That’s transplanting our core program offerings in the trades, healthcare, criminal justice and business at campuses across the company.

We implemented 80 such programs in fiscal 2008 and expect to expand that number this year. We also continue to close programs that are no longer viable, with the goal of offering programs with the best growth potential and the best career prospects for our students.

Next I’ll discuss the media sources of start growth as well as cost trends. The mix of media channels that generated our start growth in the first quarter was fairly consistent with the past several quarters.

Of total starts we derived 27% from referrals, 22% from television and newspaper advertising, 32% from the Internet and 19% from all other sources. For the ninth consecutive quarter the media cost per start continued its downward trend. In the first quarter media cost per start declined by 6.8%, compared with the same period last year.

We attribute the improvement to several factors, first we continue to achieve greater efficiencies associated with brand consolidation. Such as national advertising, and more effective Internet lead management. We’ve now shifted approximately one quarter of our television advertising budget to national television, which is one of the main drivers in reducing costs. That’s up from about 20% a year ago.

Second, media costs nationwide are declining due to a weak economy and less demand for advertising space. As Jack said we’ve been able to renegotiate several future media buys at significant savings.

Third, we’re continuing to calibrate the balance between media spending and lead generation. In the first quarter media generated leads which exclude leads generated by referrals and high school reps totaled approximately $548,000. That was a 25% increase over the same quarter last year at a substantially lower cost per lead.

Finally as mentioned earlier, we believe the weak economy is helping to increase lead flow, although given all of the factors involved, it’s difficult to quantify the impact.

The total cost per start which includes all marketing and admissions expenses, increased by 1.9% in the first quarter of fiscal 2009, compared with the first quarter last year. The increase was largely a result of a ramp up in admissions reps. As you will recall in the past year we increased the admissions team by approximately 300 reps.

So for reasons just discussed, total marketing and admissions expenses as a percentage of revenue declined to 25.3% in the first quarter this year, from 27.4% in the same quarter a year ago, a decrease of 210 basis points and better than our previous guidance. This is a continuation of a trend that began in the fourth quarter of fiscal 2008. In the second quarter and for the full fiscal year, we expect reductions in marketing admissions as a percentage of revenue.

Turning now to the area of educational services, beginning with bad debt, as you recall bad debt is included in the educational services line item. In the first quarter bad debt was 8.9% of revenue in line with our guidance range of 8% to 9%.

As a reminder the 8.9% figure includes the incremental bad debt associated with a ramp up of the internal access loan program and the timing of that loan funding. On our last call Ken provided an explanation of how bad debt as a percentage of revenue is impacted as the loan program ramps up. He will review that explanation again in a few minutes and provide guidance on bad debt for the second quarter.

Excluding the impact of transitioning to our access loans, we believe bad debt in the first quarter would have been approximately 6.8% versus 6.3% in the first quarter last year and 6.5% in the fourth quarter.

As discussed on past calls, our financial aid packaging fell behind in the wake of changes, particularly on our online division. When Sallie Mae exited the sub-prime lending business in January, we developed and wrote out our new student-financing program, Operation Fire, in just six weeks. Since that time we've been refining some of our Fire processes to ensure that we maintain our underwriting standards while maximizing effectiveness and efficiency at the campuses.

As we've discussed previously, our backlog in packaging creates higher bad debt as students may draw a privately end-packaged amount of the revenue recognized for those students to come as bad debt. In addition to streamlining our prior processes we've increased student financing personnel and provided more staff training. As a result of these changes the rate packaging is improving.

Excluding bad debt entirely, educational services expenses as a percentage of revenue were 52.2% in the first quarter of fiscal 2009 versus 52.9% in the same quarter last year. As a result of an increase in student population, we saw leverage in school occupancy and compensation costs, but it was offset by an increase in bad debt. In particular, our Everest ground schools are seeing the benefit of a higher student population. Capacity utilization is improving, and we're seeing leverage in educational services expenses.

In the WyoTech division however, we are not yet seeing better capacity utilization as the student population is just beginning to grow. As again, we've discussed previously, WyoTech's turnaround is progressing and we expect positive start growth for the division this fiscal year. Several WyoTech facilities have substantial excess capacity, so it takes several more quarters of growth to see improved leverage of expenses.

Moving now to academic affairs, in the first quarter we hired a Chief Academic Officer, Rick Simpson. For more than 25 years Rick has been an innovative and traditional post-secondary educational, implementing self-funded career-oriented programs for non-traditional students. As Chief Academic Officer he provides ongoing guidance to school leadership and staff, and overseas accreditation licensure, internal regulatory processes, curriculum and faculty development and student services.

He is particularly focused on improving student retention through faculty development. As we've discussed in the past, students are far more likely to graduate if they have positive relationships with their instructors.

Before closing, I'll provide a brief update on campus view on our new student information system. As of the end of the first quarter four of our seven legacy systems have been retired, and 30 out of 106 schools are up and running on the new Campus View system. We continue to expect completion of the project by the end of fiscal 2010.

In closing, I want to reiterate that we continue to be encouraged by our progress. We remain focused on the same fundamental priorities, increasing our student population, achieving strong student outcomes, reducing employee turnover, improving marketing effectiveness, leveraging our facility capacity and overall scale, and expanding margins.

As the guidance in our press release today suggests, we remain confident in meeting our operating margin and earnings per share targets this fiscal year. We expect educational services as a percentage of revenue to improve gradually as the year progresses. Start growth is turning higher than expected, and as a percent of revenue marketing and general administrative expenses are trending lower than expected.

In sum, we believe we're on track to achieve the operating margin goal we set forth at our Investor Day in May, that's 15% by fiscal 2011. In addition, we plan to achieve the milestone of double-digit operating margins in the third quarter of this fiscal year.

We'll now go to Ken for a financial review and guidance.

Kenneth S. Ord

Thanks, Peter. I'll begin with facilities data for the continuing operations. We ended the first quarter with a total of 4.26 million occupied square feet, up slightly from the 4.22 million occupied square feet at the end of September last year. Occupied square footage per student was 67 square feet at the end of September 2008, down from 73 square feet per student at the end of September 2007. We're beginning to see the benefit of a higher student population, coupled with discipline around facility expansion.

Moving on to enrollment data, and again please note that this data is for continuing operations only. The total student population at September 30, 2008 was 74,265 students, an increase of 11.3% compared with 66,719 student at September 30th, 2007. As previously discussed, the increase is the result of higher start growth. The average student population increased 11.4% in the first quarter of fiscal 2009 compared with the same quarter last year.

Of the total student population, 11,014 students were exclusively online, an increase of 26% over last year. Total online course registrations, which include both hybrid and exclusively online students, totaled 40,034 in the first quarter of fiscal 2009, up 24% over the same quarter last year.

Turning now to the income statement, and as a reminder, the financial results I'm about to review are based on continuing operations, revenues for the first quarter were $289.6 million versus $244.5 million in the same period of the prior year, an increase of 18.4%. Our average revenue per student increased by approximately 6.3% in the first quarter of fiscal 2009, primarily reflecting price increases.

For the first quarter of fiscal 2009 operating income was $10.1 million compared with $6.5 million in the first quarter of fiscal 2008, up 54%. The operating margin was 3.5% in the first quarter of fiscal 2009 versus 2.7 in the first quarter of the prior year. The effective tax rate in the quarter was 40.3%, slightly higher than our guidance of 39.5%. The increase is the result of lower interest income from tax advantaged investments.

Income from continuing operations after tax in the first quarter of fiscal 2009 were $5.7 million compared with $4.3 million in the same quarter of the prior year. The net loss from discontinued operations was $220,000 in the first quarter, versus the loss of $2.4 million in the first quarter of last year. Diluted earnings per share were $0.07 in the first quarter of fiscal 2009 versus $0.05 for the same quarter last year. The weighted average number of diluted shares outstanding for the first quarter of 2009 was 86.8 million compared with 85.9 million for the same quarter of the prior year.

Turning to the balance sheet, at September 30th we had approximately $29.4 million in cash and marketable securities versus $32 million at the end of fiscal 2008. Long-term debt, including the current portion as of September 30, was approximately $54.3 million, which includes capitalized lease obligations of approximately $15 million. Long-term debt, again, including the current portion at June 30, 2008 was $77.6 million, including capitalized lease obligations of $15.1 million.

Net accounts receivable and student notes receivable as of September 30, 2008 were approximately $131.9 million versus $132.1 million at the end of fiscal 2008. Net days sales outstanding at September 30 were 35 days versus 30 days at September 30 last year.

Moving to the cash flow statement, cash flow from operations was approximately $27.7 million for the first quarter, compared to negative cash flow of approximately $1 million for the same quarter last year. The increase in cash flow is primarily due to a decrease in the change of accounts receivables and an increase in net income.

After last quarter's call, several of you asked for additional information about fiscal 2009 projected cash flow and how we expect our internal student-lending program to impact cash flow. I will review more of that detail now.

In fiscal 2009, we're currently expecting to generate approximately $140 million in cash flow from operations as follows, approximately $53 million in net income, approximately $52 million from depreciation and amortization, $11 million from non-cash stock compensation, and $24 million in working capital benefit, including accounts receivable. That brings you to a total cash flow from operations of $140 million. To arrive at free cash flow we deduct the following, $50 million of capital expenditures and $50 million from the use of cash to fund our internal access loans.

Keep in mind that the total amount of internal lending needed to replace Sallie Mae is approximately $100 million. Of that total, $50 million flows through the income statement as a discount to revenue, and $50 million flows through the balance sheet. We estimate that the earned portion of the internal access loans would total approximately $37 million in fiscal 2009, and that amount will be recorded as student notes receivable.

The remaining $13 million, the unearned portion, will reduce cash flow by that amount. Accounting rules for our internal loans prevent us from recording the unearned portion as prepaid tuition, as we did previously under the Sallie Mae loan program. Again, after subtracting $50 million in capital expenditures, and $50 million in access loans from $140 million in cash flow from operations, that leaves free cash flow of $40 million. In fiscal 2009, we expect to use most of the $40 million to repay debt.

Next I'll review several other topics related to our internal access loan program, first, the impact of internal loans on bad debt. As reported, our first quarter bad debt was 8.9% of revenue, within our previous guidance range. The 8.9% includes approximately $0.04 per share in incremental costs associated with the transition from Sallie Mae private loans, to our internal loan program.

As Peter discussed, excluding the incremental costs associated with the internal access program, bad debt would have been 6.8% of revenue in the first quarter. To recap from our previous call, until projected internal loans are actually funded, they are classified on the balance sheet as accounts receivable. Thus bad debt as a percent of revenue was elevated in the first quarter, as we took our standard bad debt allowance on a higher accounts receivable balance.

We believe this is a transitional situation until the access loan program reaches steady state by the end of the third quarter of this fiscal year. As access reaches steady state, more loans will be funded and then discounted against revenue by 50%. As this occurs we expect bad debt as a percent of revenue to decline.

In the second quarter of fiscal 2009, we expect bad debt to range from 8 to 8.5%. We explained last quarter that we changed the internal access on process so that we can fund the loans sooner. Previously we did not fund internal loans until the student was approved for Title IV disbursement, which can take up to three months.

Under the new process which we begin to implement in the first quarter of Fiscal 2009, our goal is to fund the internal loan shortly after the student is pre-approved by underwriting. By the end of the third quarter of this fiscal year, we expect the average funding cycle for internal loans to be 30 days from the student's start date.

Next regarding the possibility of selling internal loans to a third party lender, we continue to pursue opportunities with third parties that would allow us to sell some portion of our internal access loans. As we mentioned on our last call, the 90/10 relief contained in the higher education reauthorization has put us in a better position to work with outside parties.

Our goal is to sell the loans as soon as it is feasible, and we'll keep you informed of any significant developments on that front. In the meantime we expect to carry the loans on the balance sheet as previously discussed.

Turning now to guidance, and again, our guidance is based on current expectation, it is forward-looking and actual results may differ materially as a result of the factors described in our public filings. In addition, the guidance that I'm about to give pertain solely to continuing operations.

I'll begin with Fiscal 2009. For the year we expect start growth of 8 to 10%. We expect revenue to range from $1.21 billion to $1.25 billion. This is unchanged from previous guidance. Diluted earnings per share are expected to range from $0.58 to $0.63 per share. Again, this is unchanged from previous guidance. As a reminder, this guidance includes approximately $0.20 per share in increased expenses associated with the transition from Sallie Mae to our internal loan program.

We expect the effective tax rate in fiscal 2009 to be approximately 40%. Our fiscal year 2009 guidance includes stock-based compensation expenses and excludes any one-time charges that may occur over the course of the year.

Turning to second quarter 2009 guidance, again for continuing operations, we expect start growth of 10% to 12% in the second quarter. We expect revenue to range from $304 million to $309 million. We expect diluted earnings per share to be approximately $0.14 to $0.16. This includes approximately $0.05 in increased expenses associated with the transitions from Sallie Mae to our internal loan program. We expect $87 million diluted shares outstanding in the second quarter. The tax rate is anticipated to be approximately 40%. And with that I will turn the time back to Jack for his closing remarks.

Jack D. Massimino

In closing, we are making progress from both a financial and operations perspective. We continue to see solid growth momentum and have increased start growth guidance. Marketing expenses are declining as a percent of revenue, and we are beginning to see improved facility leverage as our average student population increases. We are expanding our core programs and putting initiatives in place to improve the quality of instruction and reduce attrition.

We are ramping up our internal student lending program, expediting financial aid packaging, and expect to see bad debt decline as a percent of revenue as the fiscal year progresses. In addition, we believe we are in a good position to adapt to the turmoil in the economy and the credit markets. We are growing, we are financially strong and some costs including media are trending down.

Overall, we remain confident of achieving our financial goals for the current fiscal year as well as the three-year goals we presented last may. Let’s move now to the question and answer session. As in the past, please limit yourself to one question and one follow-up. If time permits, we will get back to you for a second round of questions. Operator, I will turn the call back over to you.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question will come from Sara Gubins – Merrill Lynch Global Securities.

Sara Gubins – Merrill Lynch Global Securities

In your guidance for the second quarter, I know this depends on the assumptions for enrollment growth, but it looks like you are expecting lower growth in revenue per student and I am wondering if that is a mix shift issue into lower-priced programs, or if it's maybe a function of the accounting for the private access loans starting to come out of revenues?

Kenneth S. Ord

Sara, it's a little bit of everything, but mostly the issue of the increased funding of our internal access loans. Again, as that moves to a discount to revenue, it does bring down slightly the growth in average rate per student.

Sara Gubins - Merrill Lynch Global Securities

As a follow-up, educational services when you take out the impact of bad debt, was up, I think a little less than 17% year-over-year in the quarter and I am wondering what – while it was better than your – or lower than your revenue growth, I am wondering what drove that up into the mid to high teens and whether you would expect that level to continue going forward?

Kenneth S. Ord

You extracted bad debt in total, or you extracted normalized bad debt?

Sara Gubins - Merrill Lynch Global Securities

I took out all bad debt just to see what educational services was excluding bad debt and it looks like it is up about 17%.

Kenneth S. Ord

As we move forward in the year, you will actually see it continue to be up slightly from the prior year until you get into the second half of the year.

Jack D. Massimino

Sara, one of the things that is driving that obviously, is population growth, student supplies, things of that sort are moving along. Our population growth is up substantially year-over-year. The other thing that is in there is an increase in compensation, because of reviews that we have done. There is an impact of that running through there, so those are probably the two fundamental things rolling through.

Peter C. Waller

Sara, you were focusing on the absolute. I talked in my words to the margin leverage that we are getting and the revenue up north of 18%. We are getting the margin leverage and particularly when we take out bad debt and we peel it back into the different verticals that we have. So we are actually encouraged by progress that we are making in educational services.

Sara Gubins - Merrill Lynch Global Securities

I guess I am just wondering though on an absolute level if you would expect that level of cost increases to continue or if we should start to see that up but not up as much and therefore that you might get more leverage in that line item?

Jack D. Massimino

You will start to see that – the things that we just discussed, you will start to see that level up, and we will start to get that leverage as we go forward. As population moves into these fixed assets, particularly the facilities, you will really start to see that ramp over the course of this year as population starts to move up.

Kenneth S. Ord

The leverage part of educational services, you won't start to see until the second half of the year.

Operator

Our next question will come from Jeffrey Silber – BMO Capital Markets.

Jeffrey Silber – BMO Capital Markets

Sorry to go back to a funding related question. I know I am not sure you are going to want to disclose this or not, but can you disclose the amount of bed debt that was booked as a contra-revenue account in this quarter and how that compared to last year?

Kenneth S. Ord

Yes, that is something that we really don't disclose.

Jeffrey Silber – BMO Capital Markets

I mean, did the trends change significantly, even if you are not willing to disclose the absolute number?

Kenneth S. Ord

The amount that we booked as an increase to our allowance of adaptable accounts?

Jeffrey Silber – BMO Capital Markets

[Private dues], I am sorry.

Kenneth S. Ord

The amount we booked at discount was very, actually very similar to last year, but within that mix obviously there is still a little bit of Sallie Mae discount that is rolling through that. The amount of access loans that we booked was slightly lower than we would have booked based on the ramp up process, but we are booking that at twice the rate; at 50% now verses approximately 25% last year. If you look at that line item, the contra-revenue account is up slightly year over year but not significantly.

Jeffrey Silber – BMO Capital Markets

I appreciate that. One of your competitors has been talking about some sluggishness in the auto education market just because everything is down in Detroit. I was wondering if you can comment on that, if you have seen that, and if you have what you are doing to kind of negate that perception?

Peter C. Waller

Really, as I said in my words, the WyoTech business we have been running this turn around for the last three years frankly now, as we reengineered our emissions machine and the people and upgraded our processes. We are finding ourselves in good shape. We are pleased with the progress that we are making. As we said, WyoTech we are fully accustomed to be up in starts for the year.

The first half of the year, will be probably flattish as we come through that trend, a negative trend of a year ago, coming through the flat trend and then moving to positive. So actually, we are encouraged by what we are seeing, whether we think there is still a demand there.

The thing to remember always when we are talking about automotive sequentially is that we have a relatively small market share. We only have 7%, 7% to 8% market share of all automotive if you include community colleges. Half of the market is community colleges and then we split that between UTI, Lincoln, and ourselves. We have got a big opportunity, we believe in automotive still and very committed to it and seeing some underlying strength quite frankly.

Jeffrey Silber – BMO Capital Markets

Just to sneak in a quick numbers question, what was stock-based comp in the quarter?

Kenneth S. Ord

Hold on. Stock-based comp was $2.6 million. Next question?

Operator

Our next question will come from the line of Trace Urdan – Signal Hill.

Trace Urdan – Signal Hill

I am wondering if you guys could maybe comment because I don't think you did specifically on what cost either related to the hurricanes and or related to the move of the online center, what cost in the quarter might have been considered one time or non-continuing?

Kenneth S. Ord

There were some costs. They are not significant and they float through. We have insurance on those. We have not received the proceeds of those, but frankly the amounts are insignificant, so we really did not talk about them or break them out.

Peter C. Waller

That is on the hurricane, and the online move I think you were referring to is actually technically in the second quarter. Again, the actual cost of the move is immaterial.

Trace Urdan – Signal Hill

Given that then, I guess I want to go back to Sara’s question about the leverage in the educational services line excluding bad debt expense because it looks like – I guess I just need a better sense of why it would be less in the first quarter than in the subsequent quarters or the later quarters of the year. It looked like you sort of had better leverage in Q4 at that line, again excluding bad debt expense than you had in Q1. I am not really following why that should necessarily be the case.

Jack D. Massimino

I think, Trace, as we go throughout the year, maybe I misunderstood what you said, but as we go throughout the year, our expectation is that we will see improvement in the educational services line over the balance of this fiscal year.

Trace Urdan – Signal Hill

You put up some really impressive leverage last quarter and it was – there was still leverage this quarter, do not get me wrong, but it was not as great. I am wondering what is the seasonal impact there? Why should that be the case, and why would it then expand later in the year?

Jack D. Massimino

I think the biggest issue running through here are reviews for example. Those run through in this first quarter and into the second quarter, so that is a part of it. We will see that start to flatten out as population increases over the course of the year. Compensation is a little bit of that. The other areas –

Trace Urdan – Signal Hill

[Inaudible]. Is that what you mean?

Jack D. Massimino

Sponsors would be –

Trace Urdan – Signal Hill

Is it reviews that you –

Jack D. Massimino

Sponsors would be in the G&A line, but the other thing that you have flowing through there are supplies and things of that sort for the school. When the population is up year-over-year, quarter-over-quarter.

Kenneth S. Ord

The student services – well the people in finance and student services in terms of our packages and packagers and those handling genesis loan processing, we ramp those up a little bit at the end of the fourth quarter and the first quarter. They are in there, and the number of items going through there. There is also a little bookstore issue as we transition from an internal bookstore process to the Ambassador which is our external bookstore process.

We sometimes have to take an adjustment when we do a fiscal inventory on making those adjustments. There is some noise, but it is some increased costs going through there. It is offset by, as we mentioned, some favorable leverage on facilities costs coming through primarily the Everest ground school, and you do not see that benefit from the WyoTech division until kind of later this fiscal year as their population starts growing more significantly year-over-year.

Trace Urdan – Signal Hill

What seems to be sort of strong or strengthened enrollment guidance and kind of flat revenue guidance, I am wondering if that – am I reading too much into that or is there kind of a mix shift in terms of your expectations about which programs are relatively strong versus maybe what you had three months ago?

Kenneth S. Ord

It is a very, very wide range.

Peter C. Waller

I think what we are saying is, we have definitely got – we are looking for the student enrollment increase, and we have increased our guidance around that. The range on revenue is sufficiently wide. That is really accommodated within the range that we already had out there.

Operator

Our next question comes from the line of Mark Marostica – Piper Jaffray & Co.

Mark Marostica – Piper Jaffray & Co.

I would like to get a little more color on placement rates in the healthcare vertical. Also coupled with that, why you see the need to staff up in career services?

Jack D. Massimino

I think that, Mark, our placement rates last year we ended the year around 84% for all of our programs across the company which was in line with what is was a year ago. We think that the allied health business, because it is traditionally not as impacted in a downturn, is going to be an opportunity. The other thing we see obviously is the aging of America is going to increase demand. We know demand for these jobs is out there, so we think allied health is a good place to be in terms of placement.

What we do know, however from historical experience is, as you go into these time out in front of us, not today, not tomorrow, but six months, twelve months from now we will start to see implications if this recession deepens. And so our goal is to get in front of that, and we think we need to staff up, because it will take more touches with employers out there to get those kind of jobs put into place. Last year, when you have an economy where there are a lot of jobs available, you can use one person to touch so many people. This year you are going to have to use two people to touch so many people.

I am not suggesting that this is a 100% ramp up, in fact it is not anywhere near that, and it is market by market. The Detroit market which we have been active in for the last couple of years and we have seen a real downturn in that economy. We have more student service reps per population there than we would, for example, in a Dallas market or a California market or a Florida market. We are just preparing ourselves to make sure that we don't have a placement problem 6, 9, 12 months in front of us.

Peter C. Waller

Mark, like everything else we do at Corinthian we try to run this thing by metrics, and this means some good experience built up over the years, in terms of the number of career services representatives versus the number of graduates that we have, the number of extern helpers – the people that find the externships for our healthcare program versus the number of students that we have.

And we watch these metrics like a hawk and they vary around the country according to the health of the employment market. And we're just getting ahead of ourselves as Jack said, and looking at those ratios and building some strength into those ratios for the second and third quarters.

That said, I want to insure that these are not particularly expensive employees, and so this is not necessarily material impact in terms of our outlook from a profitability in the margin standpoint, and it's certainly within the realm of the guidance that we provided.

Mark Marostica – Piper Jaffray & Co.

And then one other question and I'll turn it over. The baseline bad debt increased sequentially again this quarter, and I know you're starting to get more efficient on packaging the loans. Is that a metric now that we should see start leveling off here in the December quarter? And if you can give us a sense of where you think that will go over the next couple quarters, that'd be helpful.

Kenneth S. Ord

Well, we're also monitoring that ourselves. And as you kind of indicate, there are several items that will significantly impact what we – what that normalized rate is. Part is that the improvement in packaging that we're seeing, but on the flipside, the recession that we're in also is impacting obviously some of our students and their ability to pay. And so we're monitoring both of those and giving you what we see on a quarter-by-quarter basis.

Mark Marostica – Piper Jaffray & Co.

So that said Ken, are you anticipating for the December quarter that that baseline bad debt percentage would increase sequentially from the September quarter?

Kenneth S. Ord

We're really not forecasting that piece of it. We do think our total bad debt will be in the range I gave you – that 8 to 8.5%. We don't expect that normalized will move very much, but again we're monitoring both of the elements, both the packaging and then the ultimate impact of this recession on our students from a financial perspective.

Operator

Your next question will come from Gary Bisbee – Barclays Capital.

Gary Bisbee – Barclays Capital

Nice job in the quarter. Due to the – I know at your Investor Day before we got this loan limit, and I guess more importantly before the 90/10 fix that was put in, I mean you had talked about trying to get $35 million or so of incremental cash from the students. Given the increase in the loan limit and the 90/10 relief, have you been able to back off sort of demanding the kids pay $25 or $30 a month? I'm wondering if maybe that has been one of the factors that led to some of the better enrollment growth? Or are you still trying to push this through, as you talk about that?

Kenneth S. Ord

I mean part of our fire process is always, again, we ask the student how much cash they have as part of their process, and how much they can fund their program and education through a cash contribution while they're in school.

I think the reality is that the recession has lowered slightly our expected cash contribution from our students, and the nice thing is the Higher Education Act, which gave us that $2,000 – many of these students qualified for incremental unsubbed loans, and therefore essentially the slightly lower cash that we expected primarily being offset by slightly higher Title IV funds.

Peter C. Waller

The other point that I'd build on it Gary, is that on top of what Ken was saying, I would say three months ago, actually on this call I think, that we were talking about gas prices. There was a lot noise, The Career College Association meeting around gas prices and the impact on students and their ability to pay cash.

We weren't seeing frankly too much of that in our students, but there was an expectation that might start to bubble up as more of an issue, and we certainly been proactive with our student services folks when necessary with gas cards and such programs.

And the good news is that gas has come down, so if anything about that now, so that economic impact on the cash collections is not where it used to be. And certainly I've talked to people who've been through this cycle before, in terms of recession, and one of the concerns outside the industry, as well as within Corinthian was, we are going to get double hit with the recession and gas prices.

So you don't necessarily get the upside that a recession, the kind of cyclicality that it brought to the category. With gas prices coming back down again, I think we sort of neutralized that issue. And we're seeing strong enrollment growth from the marketing that we're doing and our fully trained admissions representatives, etc. So we think we have a strong foundation surrounding this whole front end.

Kenneth S. Ord

I think it's fair to say, that with every student we ask them what cash they have available to pay toward their education. We've been doing that for a long time, no real change for us in that regard, and so our population growth really isn't related to whether we're asking for cash or not asking for cash.

Gary Bisbee – Barclays Capital.

But safe to say the loan limit increase and the 90/10 fix make it sort of less of a necessity.

Kenneth S. Ord

It certainly helps. It certainly helps.

Gary Bisbee – Barclays Capital.

And then I guess just my follow-up question is – this will be sort of a random one – but I was going through your 10-K last month, and I noticed that it looks like almost 100% of the student growth over the last two years has come from the ATB student classification, and very little has come from your typical high school graduate student. I guess historically we had all thought of that as a lower quality or maybe a higher risk student base.

So number one, do you have any sense why that's happened? And number two, how do you think about it? Is that worrisome? Is that not an issue? Is it happening just because of a mix in what programs are growing? Any thoughts there would be helpful.

Peter C. Waller

This one also – I'll take it in two separate parts there, Gary. Our population has been very much the adult population. The average age of our student is 25; the average year of our trade student is more like 30, and that's of the electrical and HVAC, so 25.

We've had a very underdeveloped high school business in total. We're actually – I think we might have talked about it on the last call – ramping up in our classic high school program. And have significantly increased our number of reps that we've put in place on there, and that's a big growth driver. Really it'll come through as growth driver for us in 2010, rather than 2009 because we're working hard with the high schoolers in this fiscal year to get enrollments up for the beginning of the following year.

So classic high school is a little one-sided, that's the first part of the question. Within the adult sector, we're seeing growth frankly across all types of demographics. And particularly as we expand our programs and are mining the core and bringing more degree programs into different areas, we are appealing to non-ATB students as well as ATB students. There is no doubt that with the situation in the marketplace around low high school graduation and completion rates, that the performance of ATB students is greater, and the need to fill their needs is greater, and we clearly see ourselves as a company committed to career education and responding to the news in the marketplace, and we embrace ATB students.

It's been a policy of ours, we are careful in terms of the limits that we put around ATBs as a percentage of our student population, but ATBs are an important part and I think a valued part of what our service to society is, in terms of changing student lives.

Ken S. Cord

Gary I would add one other thing to that. From a compliance perspective we are much safer taking a student in who may or may not have a diploma, having them take the ATB test; so it is a default position for us for students coming into the organization. So I would expect to have seen our ATB population increase simply as a result of that, notwithstanding everything else that Peter said.

Peter C. Waller

We've also – so that's the reported ATB – and protection around that. The second thing I – or the third point I would make around it is, and this is being a very conscious and planful effort, to insure that in the schools, we are putting the appropriate support programs in place. ATB students can be excellent students, quite frankly, and it is often that the high school has let them down, as opposed to them not having the capability to complete an educational program.

So linked to that and built into our cost structure at the moment, is the appropriate measures to insure that the ATB students become successful, and that they integrate in the way that we run educational services and it's a major passion of Greg Simpson, our new Chief Academic Officer.

Operator

And our next question comes from [Andrew Fines] – UBS.

[Andrew Fines] – UBS

I had a question about your guidance and your comment that you might reach double-digit price to margin in the third quarter. As we look down the different drivers of margin growth – I think you mentioned bad debt should fall in the second half of the year and then outside of bad debt, other educational services we should see better leverage there, and the other one being marketing of admissions. How should we think about the order of magnitude of impact from those three items?

Peter C. Waller

I think that's a great question, and also we're not going to get into the specific by line item, as to what makes up our double digit for the third quarter, unfortunately Andrew. I would very much like to do that for you, but it would be inappropriate.

However, we are going to get improvements in our marketing and admissions line. We are going to get leverage on educational services, and we are going to get reduction in bad debt as we outlined. We've also got another factor coming through which is not a dominant factor, but it's an important factor, is that our pricing that we started to put in place in July, some of that was only going to impact ongoing population from the second quarter onward.

So we begin to pick up some pricing impact from the second and third quarters, in terms of margin impact. So we are seeing ourselves laddering our way there during the second quarter, and completing our path to double digit by the third quarter. We did leveraging all key elements and a little bit of halo coming through for pricing.

Kenneth S. Ord

I mean reading between the lines of what we said previously, particularly in education services. You've already seen progress on marketing and admissions. You've seen some progress on G&A. What you haven't seen as much of is the progress in educational services, and obviously to achieve that third quarter double digit, you'll have to see more progress in that particular line item and reading between the lines you'll start seeing more of it there, which will allow us, by having leverage on all three of those line items, to achieve that double digit margin.

[Andrew Fines] – UBS

Just, in terms of the enrollment advisors you mentioned you added a few people and some enrollment advisors in the third quarter, would you say you're likely done now for the year? Would you expect to continue hiring steadily through the balance of the year? Is this something that is subject to change based on start growth, but given your guidance, what are you thinking?

Peter C. Waller

And let me just clarify something. I think you probably picked up my high school representatives comment. Actually we increased last year from about 1,100 reps to 1,400 representatives, and we stated and actually we sort designed our business to basically be around that level.

We have put a – it's immaterial in the total number of 1,400 reps, but a number of high school reps on as part of our ramp up. But fundamentally we're in that 1,400 type of range, which is the guidance that we had provided. And our approach is to improve the productivity of the 1,400 reps that we have, where we do not see ourselves going for a significant surge in the numbers of admissions reps now. This is all about leverage and productivity to insure that we're getting the right balance on leads and media money and getting the productivity from the representatives that we have.

As we've counted on a number of occasions, you can give a lot of leads to representatives, but they often become less efficient in the process. And so we're managing that mix. Does that help you Andrew?

Operator

And our next question will come from Jerry Herman – Stifel Nicolaus.

Jerry Herman – Stifel Nicolaus

In light of the issue on pricing, I know there was a lot of confusion at your Investor Day about pricing; could you guys give us a summary of the implementation of price increases, say for Fiscal '09?

Jack Massimino

And I think as we said, the normal thought process was, what did we roughly think, about 5%? We announced that we had done an incremental pricing, so with the exception of Canada and WyoTech, we implemented a price increase roughly of about 10% that average that. It obviously impacts our diploma schools for all new students immediately, and then it impacts the linear schools in each quarter as that's implemented.

So Florida got implemented a little later than some of the schools, and as I indicated, the mix of our average revenue per student in the first quarter was up 6.3%, but that will increase slightly as you have virtually the whole population, with the exception of WyoTech and Canada, have that price increase that I just mentioned.

Peter C. Waller

So Jerry, just to – in case we stated the obvious, but on the diploma side, we only take increases as the students come into the program. And so it takes awhile for the full impact of that pricing to emerge over really the first six months, quite frankly.

And with 60% of our programs being in diplomas, therefore that's why we see that ramp up coming through. So there's a different model where you might see a view in dealing with the linear type of programs at traditional universities, or some of the other school systems in the propriety sector which are primarily associate's or full degrees. So that diploma increase which is coming through very nicely with the new students.

And we’re seeing good sticking power on that. Not an issue from a student enrollment point of view.

Jerry Herman – Stifel Nicolaus

That’s great. Thank you. And then just a question on cohort default rates. It seems like there has been some trending up in yours and in light of a pretty strong economy I’m wondering what remediation efforts are taking place. Again especially in light of some of the definitional changes on cohort default rates, and potentially creating greater penalties or challenges if those are too high.

Jack Massimino

I think that is a great question Jerry. I mean you know the expectation is that these rates will start to move up a little bit. I don’t think that anybody is doubting that is happening. What we’ve done within Corinthian is we just retained a new cohort default rate manager outside our organization who really comes to us with a lot of experience. In the past we did part of this internally and we used a smaller group outside of the organization; took about 50% of our program. Now we’ve got all of it outside with a much larger, much more sophisticated organization chasing these students.

And our expectation is that we will do a better job on it. But I do think that both us and the traditional schools, both propriety and traditional are going to see a move up as a result of the economy. I don’t think there is a question about that.

We have contacted and are dealing with our students. Getting them to complete all of those things really do make a difference from a cohort default perspective. And frankly having our students even pay that minimal $20 a month makes a big difference as we come down to the end game. Once they’ve graduated and getting them to continue to pay on these loans.

So we have got a lot of programs in place to try to help ourselves, you know, maintain our cohort default rates that are at historic levels. We can take one more call-- or one more question that will be it for the day.

Operator

Your last question will come from Kevin Doherty – Bank of America Securities.

Kevin Doherty – Bank of America Securities

Just a question for Jack, I know that you talked earlier about the positive economic impact on demand. You’ve seen some of your peers putting up some pretty significant accelerations starts versus what they were doing a year ago and just looking at your 8 to 10% this year, it’s going to be off a bit what you did last year. Is there anything holding you back from higher growth rates, particularly with some of the strong lead flow that you’re seeing, and again, just taking into account the fact that you mentioned you're paring back the online growth rate a bit.

Jack D. Massimino

Well you know, we’ve paired back that online growth rate in the first quarter. We’re starting to reaccelerate that as we go through the balance of the year, Kevin. I think last year we had some pretty darn good growth because we were starting from some pretty low points.

This year our population's up fairly dramatically. I mean we now have 74,000 students and our start growth is in the 30,000 range. So when you start talking about 10 to 12% kind of movement. That’s a big number.

The other thing that you need to remember is that all of our starts are organic. They’re coming – this is all same school stuff for us as we sit here today. We’re not opening new shops or new schools at this point. We haven’t’ done any transactions.

So this is based on our existing base that we’re moving from. So you know and there is a balance in here. Our goal is to obviously continue to grow the business and improve our margin simultaneously. So there is the balance that we look forward to. And so we think that our guidance that we’re giving you gets us to both places.

Kevin Doherty – Bank of America Securities

Okay. And if I could just sneak one in for Ken, one of the peers today talked out a reduction and the amount of internal lending they’re going to need to provide. I think that they mentioned an increased use of co-borrowers and even just a shift to some less expensive health scientist programs.

Do you guys see any sort of incremental offsets? And are you still thinking about kind of a $95 to $100 million number?

Kenneth S. Ord

Well that’s still the number we’re using. I mean if you look on the margin of which direction it’s moving; it’s moving probably slightly lower than that number but for a number of reasons, but we’re not-- we’re still in our official guidance using roughly that $95 to $100 million. But I will agree on the margin. It looks like it may come in potentially slightly less than that.

Jack D. Massimino

You know, we could also Kevin get a little help out of Congress. We don’t know if they’re going do a supplemental bill in this lame duck session. If they do it could have some language around education which may be helpful. There is a little buzz around that. If it comes in our direction it would be a good thing.

Anyway what I would like to do now is thank everybody who participated on the call today and we look forward to providing with you on an update on our progress when we announce our second quarter results in early February. Thanks everybody. Thanks for your time and patience.

Operator

Thank you for your participation in today’s conference. This concludes the presentation.

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Source: Corinthian Colleges Inc. F1Q09 (Qtr End 9/30/08) Earnings Call Transcript
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