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Corinthian Colleges Inc. (NASDAQ:COCO)

F2Q13 Earnings Call

January 31, 2013 12:00 PM ET

Executives

Anna Marie Dunlap - SVP, IR

Jack Massimino - CEO

Bob Owen - CFO

Analysts

Dave Mitchell - Bank of America Merrill Lynch

Paul Ginocchio - Deutsche Bank

Trace Urdan - Wells Fargo Security

Jerry Herman - Stifel

Jeff Silber - BMO Capital Markets

Kelley Flynn - Credit Suisse

George Tong- Piper Jaffray

Jeff Meuler - Baird

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2013 Corinthian Colleges Earnings Conference call. My name is Sayed and I will be your conference coordinator for today. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded for replay purposes.

I would now like to introduce your host for today’s conference, Ms. Anna Marie Dunlap, Senior Vice President of Investor Relations. Ma'am you may begin.

Anna Marie Dunlap

Thanks Sayed. Good day everyone thanks for joining us, I am here today with Jack Massimino, our Chairman and Chief Executive Officer; Bob Owen, Chief Financial Officer; and Ken Ord, our Chief Administrative Officer.

This call is being webcast and an audio version of the call and transcript will be available on our website for 30 days. And in addition, a telephonic replay of this call will be available until Wednesday, February the 6th. The details for accessing the replay are included in the press release we issued this morning.

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 risk factors, which we have identified in our filings with the SEC.

With that, I'll turn the call over to you Jack.

Jack Massimino

Thanks Anna Marie and hello to everyone on the call. During the second quarter we continued to focus on student completion and graduate placement as, well as initiatives to strengthen operations and improve growth.

We remain disciplined about keeping costs in line with our student population and held operating margins flat while continuing to absorb the loss of Ability To Benefit students in the grad school.

Although our second quarter new enrolment growth declined more than expected compared with the same quarter last year, new enrolment of non ATB students was flat.

In the first half of the fiscal year new enrolments of non ATB students was up approximately 5.6% compared with the same period last year. We're pleased with this progress and continue to focus on growing our student population through our new diploma level and GED programs, as well as tuition price reductions where we have flexibility under the 90/10 rule.

In terms of our second quarter financial performance we are within our previous guidance ranges for revenue and earnings. For continuing operations, our second quarter revenue is $409.7 million and diluted earnings per share were $0.05.

Bad debt improved sequentially, but was higher versus the same quarter a year ago for reasons that Bob will discuss later on in the call. As we move through our discussion today, I'll cover the highlights of the quarter related to student outcome, enrolment trend and our growth plans followed by an update on regulatory matters. Bob will then review the second quarter operational and financial metrics and provide guidance for the third quarter of fiscal 2013.

I’ll begin with student outcomes. Accreditation agencies are of course one of the main regulatory guardians of educational quality and student outcomes and we continue to meet or exceed their standards during our reaccreditation visit.

During the second quarter seven of our Everest and WyoTech schools received reaccreditation approval. Of those, two had zero findings which is the equivalent of a perfect score from the accreditation agency.

Over the past few years we have increased the rigor of our internal audit procedures, and as a result we have been successful on reducing the average number of reaccreditation findings per campus. Over the past 12 months, the average number of finding related to reaccreditation determination is 1.5 per campus, down from 2.8 findings per campus 2 years ago.

In addition to the reaccreditation of several campuses, in the first half of the fiscal year we received approvals from 92 new academic programs from regulatory authorities. As a remainder program approvals are required for each new program at each campus. The approvals allow us to continue our growth strategy in building out the compliment of programs offered at each campus.

In the area of placement we continue to achieve solid results for the 2012 cohort of graduates. We currently expect our calendar 2012 placement rate to meet or slightly exceed our placement rate in calendar 2011 which was 68.1%.

In our online learning programs we are focused on improving student retention, a challenge faced by online schools across the country. As part of our ongoing retention efforts we continue to test different ways of tightening and mission standards.

During the second quarter we developed and enhanced remedial program at Everest University online, called the online learning readiness course. The course is 4 weeks long, instructor led and intended to give prospective students the first $0.10 for the online college experience.

In addition, the course is designed to enhance basic reading comprehension and writing skills, while building student confidence and technical capabilities. The remedial program is being piloted with about 400 prospective students based upon their scores on our standard assessment test. Students in the pilot who did not successfully complete the remedial program will not be given the opportunity to enroll at Everest University online.

If the pilot is successful, and we expand the program overtime, we believe it will help improve student retention and reduce a number of students who have a lower probability of success.

As previously reported, to improve the student value proposition and be more competitive, we implemented a number of tuition price reduction at the beginning of the fiscal year and our six new department programs are being offered at a lower tuition level in the most of our existing diploma program.

In addition, our third party lender reduced interest rates on GAAP financing for a student to a range of 2.9% to 9.9% which reduced the average in-school payment by 40%.

Taken together, the tuition and interest rate reductions are helping to reduce student debt and makes school more affordable. And since many of our campuses are running below capacity, reducing prices is not only good for students to the extent that it helps increase enrollment, the marginal contribution to earnings is substantial.

Next, I'll move to a discussion of enrollment trend. New enrollments decreased by 4.4% in the second quarter of fiscal 2013, below our previous guidance of flat new enrollments. The decrease was primarily driven by the loss of Ability To Benefit students and lower than expected new enrolments at online learning.

In the second quarter, we enrolled approximately 434 ATB students, compared with 1,558 new ATB students for the same period last year. As I said earlier, non-ATB enrollments were flat in the second quarter versus the same quarter last year.

With respect to online learning, we continue to see solid demand for our programs driven in part our niche and associate degree. As discussed in our previous call however, online faced the challenging prior year comparable than the second quarter.

In addition, online had execution issues, primarily inadequate staffing in the student financial aid and admissions department which had a negative impact on the processing of new student enrollment. These issues are in the process of being fixed and we expect online to return to growth in the third quarter. By the fourth quarter, we expect online to return to double digit growth.

In the Everest ground schools, we are beginning to see an easing of the competitive environment. Based upon publically available data, 42 schools owned by other school companies have closed in 17 of our markets over the past few months. These schools were direct competitors to our Everest ground schools offering many of the same diploma level programs.

Based on our current market share data, we estimate that over the course of the year, approximately 2,000 new students could enroll in our schools as a result of these closures. We are would also gratified that regulatory authorities perceive our schools as a quality alternative for students when competitor teach outs or closures occur.

During the second quarter, we worked with regulatory authorities and school companies in Florida and Texas to transfer students to Everest from competitor schools that were been closed. These transfers coupled with tuition reductions and third party loan interest rate reductions resulted in better than expected enrollment in the Everest ground schools in the second quarter.

Thus far in the third quarter, we have been working with school companies and regulatory authorities in Ohio, Maryland, Massachusetts, Michigan and Virginia to assist students from competitive schools that are in the process of teach out or have closed. We expect more of this type of activity in the coming months.

In addition, we continue to pursue other alternatives to generate new enrollment growth. As I said earlier, we’ve made tuition pricing changes and interest rate reductions on third-party student loans. These actions appear to be having a positive effect although it’s too soon to gauge the full impact.

In October, we’ve began the rollout of our new diploma programs in the areas of business, criminal justice and information technology. We expect the bulk of new diploma programs later for this year to occur in the second half.

During the second quarter, we launched 22 new programs. As reported our previous call in October we’ve successfully launched our imitative to offer free GED preparation services to the general public.

Our program called GED ADVANTAGE is now offered at 9most of our Everest campuses in the United States. As of the end of the second quarter, we had approximately 750 GED ADVANTAGE students.

As we’ve discussed previously, we believe that some portion of those who complete our GED ADVANTAGE programs and succeed in passing the GED exam could potentially go to post-secondary education at Everest or elsewhere.

Since our program was just launched four months ago, we did not yet have sufficient data to report. However, the preliminary data looked promising both in terms of GED pass rates and ultimate enrollment in Everest campus.

Looking ahead, we expect total new enrollment in the third quarter to be down 4% to 6% compared to the same period last year. The main reason for the decrease is the loss Ability To Benefit students. In the third quarter of last year, we enrolled approximately 2,343 ATB students. In the third quarter of this fiscal year we expect to enroll approximately 300 new ATB students.

In terms of non-ATB students, we expect new enrollment to be up approximately 1% to 3% in the quarter. Our guidance is based on the expectations that are online returns to growth and that our tuition and interest rate reductions will continue to have a positive impact on enrollment.

We also expect to begin seeing the benefit of new programs that we’re rolling out in the third quarter as well as additional new students resulting from competitor school closings and a less competitive environment overall.

Given lower than expected total new enrollment growth in the second quarter, we now expect total new enrollment growth to be down slightly this fiscal year versus the prior year. However, we expect non-ATB enrollment to be up by approximately 4% to 6% for a fiscal year.

I’ll turn now to an update on regulatory developments. On November 5th of last year, we filed an 8-K regarding a letter from the Department of Education about our financial responsibility composite score for fiscal 2011. The score is calculated annually by ED as to test whether an institution meets ED's standard of financial responsibility.

ED has calculated the company's fiscal 2011, composite score to be 0.09, while the company has calculated its fiscal 2011 score to be 2.1. The main source of the difference between the two calculations is ED's interpretation of how goodwill impairment charges should be treated in the formula.

As described in some detail in our 8-K, a composite score below 1 subjections the company to additional monitoring reporting by ED and requires the posting of a letter of credit.

We met with ED officials in November and provided them with additional materials and they are currently reconsidering their determination. In December 2012, we filed our fiscal 2012 financials with ED and re-filed our fiscal 2011 financials to reflect the re-classification of certain schools into discontinued operations.

Based upon our re-filed fiscal 2011 financials and our fiscal 2012 financials, even using ED's methods for the treatment of goodwill impairment charges, we calculated our composite score to be 1.0 for fiscal 2011 and 1.5 for fiscal 2012. Either result could serve the basis for ED not to impose the letter of credit requirement. This matter is pending in ED and no assurances can be made with respect to ED’s file determination.

As a contingency, we have retained an investment banking firm and we are exploring the availability of additional capital, so that we can provide cash collateral for a letter of credit if one is required. While this matter is pending, we have agreed with our banks that we will not draw additional amounts on our credit facility.

Even without the line of credit, we believe have sufficient cash flow from operations to meet our working capital requirements for this fiscal year. We'll keep you apprised of important developments as we move forward in the process.

Separately, on December 27th we received an investigative subpoena from the California Attorney General which requires production of a broad range of documents and other items. The subpoena appears to be part of a broader investigation and for profit education industry in California.

On January 11, 2013 we received a request from the Wisconsin Attorney General requiring the production of information related to the Everest Milwaukee campus. Our Milwaukee campus was placed in discontinued operations as to the end of December. We expect to provide more cooperation in responding to both the Attorney General.

With that we'll turn to Bob for a more detailed review of the second quarter and third quarter guidance.

Bob Owen

Thanks Jack, let me preface my comments by saying that the results I’m about to review are for continuing operations. At December 31, we placed three Everest schools Arlington, Decatur and Milwaukee in discontinued operations.

More detail on our financials can be found in our press release and in our second quarter 10-Q which we expect to file later this week. We will also post restated quarterly financials including starts and population on our Investor Relations website at the same time.

I'll start with the discussion of second quarter revenue. Net revenues in the second quarter increased by 4.5%, compared with the same quarter of the prior year. The increase is primarily due to a 5.4% increase in the average revenue rate per student during the period primarily as a result of tuition price and changes at Heald, and the acquisition of QuickStart which contributed about $3.3 million in revenue in the quarter.

As Jack said earlier total new student enrolments decreased by 4.4% in the second quarter, versus the same quarter last year. The total student population at December 31, 2012 was 88,688 students, down 2.4% from 90,910 at December 31 2011.

In the second quarter the average student population was 90,313 down 1.6% from the same quarter last year. Our exclusively online student population was 31,373 at December 31 this year, up 4.5% from 30,034 students at December 31 2011.

We reported second quarter diluted earnings per share from continuing operations of $0.05, versus $0.06 in the same quarter last year excluding after tax impairment facility closing and severance charges in the second quarter last fiscal year. The operating margin was 3.5% in the second quarter this year versus 3.4% in the same period last year, excluding charges in the second quarter last year.

Next I'll move to cost terms, starting with marketing and admissions. As a percent of revenue marketing and admissions increased to 24.9% in the second quarter, from 24.6% in the same quarter a year ago. In terms of total dollars marketing and admission expenses increased by 5.4%, total marketing and admissions expenses per new student enrolment increased by 10.2%, primarily reflecting lower conversion rates at online learning, related to the enrolment execution issues already discussed and higher costs per transfer in the ground schools due to the loss of ATBs.

General and administrative expenses as a percent of revenue were 10.3% in the second quarter versus 11.7% in the same period last year. The decrease is primarily due to cost savings measures. As we have discussed previously we have implemented approximately $150 million in annualized cost savings over the past two years. Some portion of those savings are in the G&A category.

Educational services expense as a percent of revenue was 61.4% in the second quarter, versus 60.3% in the same quarter of last year. The increase is primarily due to higher bad debt.

Bad debt increased to 4.3% of revenue in the second quarter this year, versus 3.4% in the same quarter of last year and 4.8% in the first quarter of fiscal 2013. The increase is mainly the result of the student information system conversion issues that we discussed on our previous call. These issues are now largely behind us and we expect our bad debt to continue the decline in the third quarter.

Moving now to capital expenditures. In the first six months of the fiscal year, capital expenditures totaled $18.1 million versus $20.1 million for the same period last year. For fiscal 2013, we continue to expect expenditures to total approximately $40 million to $45 million.

I’ll moving now to the balance sheet and cash flow statement. At December 31, 2012, we had approximately $43.6 million in cash and cash equivalents compared to $72.5 million at June 30. The decrease is primarily due to the repayment of debt during the year partially offset by the time we have cash receipts and other payments.

Total debt as of December 31, 2012 was $47.1 million which included capitalized lease obligations of $12.6 million and borrowings under the student notes receivable sales agreement of $14.3 million.

Total debt as of June 30th, 2012, was a $149 million which included capitalized lease obligations of $13 million and borrowings under the student notes receivables sales agreements of $13 million. Net day sales outstanding in the second quarter were 17 days.

Moving to the cash flow statement; cash flow from operations was $102.1 million in the first half of fiscal ’13 versus $137.2 million in the same period last year.

Next I’ll provide an update on the sale of our four California based campuses. As previously disclosed, our Everest campuses in San Francisco, San Jose, Hayward and LA, Wilshire were placed in discontinued operations on the third quarter of fiscal ’12. Earlier this month, we closed the sale of these campuses for a negative purchase price of $1.5 million. We have previously reserved for this cost. Those schools are now owned by Biohealth College Inc., San Jose proprietary school that has been in the industry for many years.

To close out my comments I’ll turn now to third quarter guidance. As a reminder, our guidance is based upon continuing operations and excludes any one time charges. We expect third quarter results to be as follows.

We expect total new student enrollment to be down 4% to 6% versus the third quarter of the prior year. We expect non-ATB new student enrolments to be up 1% to 3%. We expect revenue to range from $400 million to $410 million in the third quarter and we expect diluted earnings per share of approximately $0.04 to $0.06 in the third quarter. We assume approximately $87.7 million diluted shares outstanding in the third quarter and we expect the tax rate to be approximately 40%.

I’ll now turn the time back to Jack for closing remarks.

Jack Massimino

Thanks Bob. In closing, we continue to focus on the success of our students and the value proposition of our program, as well as initiatives to strengthen operations and increase growth. We continue to streamline operations and keep expenses in line with our student population.

Our non-ATB student population is growing and we are addressing the loss of Ability To Benefit students with tuition price reductions, the rollout of several new diploma-level programs and our new GED ADVANTAGE program. We expect to return to growth in new online students in the third quarter. Further the competitive environment is easing and we have begun to take advantage of that opportunity.

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’ll get back to you for a third round of questions.

Operator, I’ll turn the time back to you.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from David Mitchell from Bank of America Merrill Lynch.

David Mitchell - Bank of America Merrill Lynch

If Ed’s fixed with their initial assessment for the fiscal 11 financial responsibilities for 0.9, how much in cash would you have to reserve?

Jack Massimino

David, what we’d end up doing is go into the marketplace and actually raise cash so that we’d be able to fund a cash collateralized letter of credit. So it would really depend on the amount that we ultimately determine is the right amount.

David Mitchell - Bank of America Merrill Lynch

So that should be just a percentage of title for funds, right?

Jack Massimino

Yes, it’s a percentage of title for funds and its 10%. The initial letter was $175 million.

David Mitchell - Bank of America Merrill Lynch

Okay that’s helpful and revenue per student was up very nicely this past quarter. Just hoping if you can give some guidance around how we should think about that for the rest of the year?

Jack Massimino

Yes, the rest of the year, I would expect it to be similar to what you saw this quarter. It’s really a result of the shift and the mix of students in yield and online continuing to shift towards fulltime. So the balance of year should be similar.

Operator

Thank you. Our next question comes from Paul Ginocchio from Deutsche Bank.

Paul Ginocchio - Deutsche Bank

On the discontinued operations, obviously the loss there is as much as the earnings you reported. Just wondering how many schools make that up and what if they keep running or based on sort of teach outs that you are thinking about, how much cash they will consume until that dwindles and how long will you have, just losses in discontinued ops.

Jack Massimino

So the three schools were put in this quarter and discontinued ops is about half of the cost in the quarter was an accrual for the lease obligations remaining on those schools that we placed in discontinued operations. Those schools are effectively taught out so they won’t continue to generate losses. Go forward the schools that continuing to operate in disc-ops are Sacramento and Daytona and we don’t expect those losses to be significant in the next six months.

Paul Ginocchio - Deutsche Bank

Okay. So less than 10 million or can you size that for us.

Jack Massimino

We are not giving that kind of guidance at this point, no.

Operator

Thank you. Our next question comes from Trace Urdan from Wells Fargo Security.

Trace Urdan - Wells Fargo Security

The test for the 400 students for the online program that you described Jack, when did that begin and is that at all a factor in the weakness that you saw on the online starts?

Jack Massimino

It started in early December Trace and no it didn’t have a big impact; it’s a small number. What really impacted the online starts, it really wasn’t about interest from the students, it was really on our side about not having enough people in place to process financial aid, and we actually got in a position where we were doing a very good job of covering weekends and evenings. And we subsequently resolved that problem. As a result we are looking forward to increased enrollments in the third quarter. So it was it really on our, yeah.

Trace Urdan - Wells Fargo Security

If we assume the pilot though is successful and you do roll it out more extensively would, how long does it take and would we anticipate sort of a delay in starts that could cause a hiccup going forward?

Jack Massimino

It’s hard to say. We are not going to roll it out across the entire organization in one fell swoop. This is going to be phased in over a period of a year if it works the way we think it’s going to. I wouldn’t anticipate a big impact. There will be some impact obviously. But the demand seems to be holding very well for this online arena.

Trace Urdan - Wells Fargo Security

Okay. The reduction in the interest costs for the students; are we still talking about the program that you guys are back stopping, right. So have then in this process effectively just assumed that additional risk yourself?

Jack Massimino

No, we actually shared it between ourselves and the third part lender. So we both took a little bit of a hit in that regard.

Trace Urdan - Wells Fargo Security

What was the range previously on those loans?

Jack Massimino

The range previously; the average previously was around 14% and the average today is around 8.5% for those loans with the adjustments that have been made. What really has affected the students is it's been about 40% decrease in school payments, which is a good thing for the students.

Trace Urdan - Wells Fargo Security

Okay and then the sale of the Everest Campuses, congratulations by the way. I am wondering sort of how we should we think about the process of the WyoTech that I gather you're still on the midst of. You mentioned that you had reserved for the cost associated with the Everest sale. Are you anticipating that you would kind of incur a similar cost in the case of the WyoTech assets or might you actually be in a position of receiving cash if those sales go through?

Jack Massimino

Yes, it really depends on what ultimately happens with those schools. Currently we're in discussions and at this point I'm not going to really go out too far on a limb on those issues because we are still pursuing our alternatives with regard with those WyoTech schools and we have people interested.

Operator

Thank you, our next question comes from Jerry Herman from Stifel.

Jerry Herman - Stifel

Just a follow up on the online question Jack if I can. Can you quantify the impact on starts that the disruptions in online had during the quarter?

Jack Massimino

Yes, Jerry it was fairly significant. It has about 1500, I would say.

Jerry Herman - Stifel

1500?

Jack Massimino

A lot.

Jerry Herman - Stifel

Okay great and let me follow up again on that. Can you talk about your reference to attention in online and I know that's a challenge for everybody but how about outcomes for you guys, given that you guys are in the associates type programs.

Jack Massimino

Yes, we are actually working through that right now on our online arena and we have been almost a year now. We've got a whole re do taking place in placement across the organization, how we approach it. The business used to be one where we just took orders when the economy was going the right direction.

Now, we got to be out there establishing more external ships. We have an inward facing program and outward facing program. We've developed the same kind of skills in the online arena. And on progress on online is about where it was last year so we're pleased with it. We want it to be better. We're continuing to move it forward.

Interestingly enough this year we have a lot more people in online to place than we did last year or the year before. So, as graduates pick up and as the volumes picks up, just expand the need for additional people and a better profit. So, a lot of work going in that area, but it’s about the same as it was last year.

Jerry Herman- Stifel

Can I sneak one real quick question in about interest expense?

Jack Massimino

Of course you can, Jerry.

Jerry Herman- Stifel

It went up a lot and I'm wondering if that's indicative of a run rate on a go forward basis.

Jack Massimino

Interest expense, you mean other expense below the line?

Jerry Herman- Stifel

Right.

Jack Massimino

Yes, which is basically the cost of the student lending program. What you saw in the quarter should be a consistent run rate.

Operator

Thank you, our next question comes from Jeff Silber from BMO Capital markets.

Jeff Silber - BMO Capital Markets

Jack you had talked about in certain areas the competition in terms of schools that have been closing. I'm just wondering, are there any specific geographies where that's a little bit more intense, and are these local schools, regional chains, any kind of color would be appreciated?

Jack Massimino

Yes, Jeff, look it's a combination of things. We all know that a number of the larger schools have put schools into discontinued operations. You know there were issues. I think ATI as an example's one of the organization's that had some real significant issues. We clearly have helped out both in Texas and Florida, in that arena.

We were asked by regulators to step in and help out, as were a number of other schools. We're not the only ones that were participating in that process but it's across the board. There are some regional, some local and some national players that are engaged in that process.

Everybody's announced as you well know over the course of the last four-six-eight weeks, there've been a lot of announcements about school closures and we did a little work around what it would mean to us and what we gave you this morning was our best shot at it, as we sit here right now.

We'll know a heck of a lot more as we finish this quarter out and talk to you at the end of April about where we are and we’ll have a better feeling for how this is really working. We picked up about 500 students in the corner as a result of what we're doing in both Texas and Florida.

Jeff Silber - BMO Capital Markets

Okay, that's great and then I have some numbers questions, I know you're going to be providing restated information when you file the Q but can we at least get last year's third quarter revenue, diluted EPS in starts numbers just so we have a base to grow from?

Jack Massimino

Sure, so third quarter revenue last year was $407 million 857 (ph). Diluted EPS on a continuing operations basis, I don't have the math without the charge but its $0.12 including a charge of $5.3 million and then you asked also for the starts.

Jeff Silber - BMO Capital Markets

Correct.

Jack Massimino

Approximately $28,400, $28, 355.

Jeff Silber - BMO Capital Markets

That's fine, if I can sneak in also just enrolment as well that'll be great.

Jack Massimino

Total enrolment about $93,600.

Operator

Thank you, our next question comes from Kelley Flynn from Credit Suisse.

Kelley Flynn - Credit Suisse

My question relates to the contingency plan you referenced relative to the financial responsibility ratio. Like you said you had hired bankers to talk about potential capital raise. I’m just wondering if you could be a little more specific, are you talking about an equity raise or potentially selling assets or both?

Jack Massimino

Now that’s what we’ve been in the private market and this would be a cash raise. We’ve had a number of conversations but we’re real preliminary in the process because we don’t exactly know where that is. They’re still working on their side of the equation. I had a call with them recently as recently as yesterday and we are in re-consideration, they have got a processor going through and once we know more Kelley, then we can begin to firm up how we have to go. If we don’t have to do it, great that’ll be at the right place to be. If we have to, we wanted to make sure that there are people out there who had an interest in providing some kind of capital for the organization.

Operator

Thank you. Our next question comes from Peter Appert from Piper Jaffray.

George Tong- Piper Jaffray

It’s George Tong for Peter Appert. Beyond what you’ve already announced, I wanted to get your thoughts on how many additional ground campuses are at risk of closure and what the enrollment impact could be?

Jack Massimino

In our organization, in the industry, in the world?

George Tong- Piper Jaffray

In your organization.

Jack Massimino

Okay. At this point we don’t have any plans for any additional schools. We constantly review that just like review programs and as schools either performed or don’t perform market shift, things happen, we make judgment at the time. But at this point in time we have no other schools that we’re looking at.

George Tong- Piper Jaffray

Got it. And then as a follow up, could you give us bit more color on what drove the decline in retention this quarter and what you’re expectations are for the remaining quarters this year?

Jack Massimino

Yeah, we can certainly do that. I think you all know that we’ve transition both online and Heald into an opportunity for full time pricing and if the students went to school full time, they got a discount; if they didn’t go to school full time, the tuition actually went up a little bit. We’re trying to move students more into that full time arena. As a result of doing that we saw a spike in attrition, both in the online arena as well as Heald. Our expectation is that that should start to come down over the course of the next several quarters. It was an event that took place over the course of last six months or so.

Operator

Thank you. Our next question comes from Jeff Meuler from Baird.

Jeff Meuler - Baird

I wanted to ask a question about your Q3 starts guidance. It sounded to me like lot of shortfall this last quarter was due to the execution issues on the online side and it sounds like you have them fixed and our guiding to getting back to online starts to go up next quarter. So, why the continued 4% to 6% total new student decline next quarter.

Jack Massimino

Because we’re phasing and the improvement in the online arena. It wasn’t something that we could just turn on and turn off. So there is a run up in that arena, and we have a pretty big ATB population that we have got to make up, (inaudible) little over 2,000 ATBs that we’ve got to make up and that’s a big push.

What we’re looking at is a non-ATB population and the quarter is actually going to be up between 1% and 3%. We think that’s the focal point for the organization because that’s continuing population as we go forward.

Jeff Meuler - Baird

So would it be fair to say that you expect online starts growth for the full quarter but maybe below the trend that you were having say in Q1 before you started to have some of the execution issues?

Jack Massimino

Yes Jeff that’s a very fair statement.

Jeff Meuler - Baird

Okay and then have you guys discussed the discontinued ops with ED, have they responded to whether or not they are going to make the adjustment for discontinued ops when they calculate the financial or the composite score?

Jack Massimino

As I mentioned a moment ago, I actually spoke to the leadership over there yesterday. We had a good conversation. They are in the middle of the process. They have recognized and we have now filed the ‘11 information, they only had it for couple of weeks. They have had the 2012 information right before the holiday so that they have had a little chances to start taking work out but they’re in the middle of the process, they’re taking a look at it and we don’t have a timeframe at this point but they have given us and continuing extension as where we are. So we are in the middle of the reconsideration.

Jeff Meuler - Baird

Okay and then just finally, is there any language in the ASFG agreement, in terms what there could be for an impact if you did have to raise capital for the letter of credit or if your finical responsibility score is below a certain threshold or can that ASFG agreement be impacted at all?

Jack Massimino

Operator

Thank you. Our next question comes from Paul Ginocchio from Deutsche Bank.

Paul Ginocchio - Deutsche Bank

This is on the ATB, the 400 or so students, are those all self-financed students that enrolled in this latest quarter and then just second on the accrediting standards for ACICS, what is just the place and rate standard that you have meet?

Jack Massimino

For the ATB students, Paul, those are the students who have previously had Title IV and the way they Congressed out with it and the department’s interpreting is if a student had prior access to Title IV and they were an Ability To Benefit student, they can continue to have access to Title IV.

That’s why we’re talking about limited number. These are the students who have already had Title IV. So they are not self-paid, they are still eligible for Title IV but they’ve used some of that eligibility.

Paul Ginocchio - Deutsche Bank

They reenrolled in a new program?

Jack Massimino

Yes, they have re-enrolled in a new program, whether it was one of our students where they came from the third party, where they came from community college, wherever they had Title IV previously, they are still eligible Title IV. That will be a shrinking population as you can imagine over time. But at the moment, we think it’s going to be 300 or 400 students in the quarter.

And then ACICS, I mean, that’s a complication. I’m happy to talk to you about that, but that is a little bit of a moving target they have. They have put together program level thresholds for completion and placement. They put together school level threshold for the completion and placement for 2012. It changes this year in 2013.

The issue is it’s a little broader. It’s going to be a little more difficult than it was in the past. It’s going to be more reflective of what we do we with ACCSC which is a programmatic based approach. And so we are in the middle of all that with them at the moment.

But we feel pretty good about where we are, about the same place as we were last year with regard to schools on reporting with ACICS irrespective of the approach.

Paul Ginocchio - Deutsche Bank

What I am hearing is that you are pretty close to the lower threshold. Does that sound right?

Jack Massimino

I would say, some of our schools are doing extremely well with it and some of our schools are doing as they have in the past not as well with it and it’s mostly around placement. Completion works out fine, but most these issues are around placement, and we continue to work in that arena.

And they have got a three or four step process. None of this is cliff. You miss one year, you don’t fall off the wagon. There is process for remediation that you have to go through. I have tell you, I’m not as familiar as I probably should be with it, because my view was that we’re about where we were under both scenarios. So I felt pretty good about it.

Operator

Thank you. And our next question comes from Trace Urdan from Wells Fargo Security.

Trace Urdan - Wells Fargo Security

Can you talk about the cost of the GED program, being available in all your Everest campuses and kind of what sort of return you are hoping to get from that investment and how long you are going to give the process to kind of begin to work for you?

Jack Massimino

Trace, this is a program where we already had in place. For our ATB student, we offered them GED training while they were in school previously. This is just a souped-up version of that. So our costs are really, are insignificant in terms of any kind of increase. So we think this is a good community service that we are offering back to the community. It’s an opportunity for the students to come in and get their GED. Since we were already providing it, if we get a couple of students out of it, it works well for us; it will pay for itself, but it’s not a big expense to us at all. It’s just a good service to be able to provide.

Operator

Thank you. This concludes our question and answer session, and I would like to hand back the conference back over to Mr. Jack Massimino for closing remarks.

Jack Massimino

Thank you everybody, we appreciate your time this morning and we look forward to talking to you again in April.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program for today. You may all disconnect and have a wonderful day.

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