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Corinthian Colleges Inc. (NASDAQ:COCO)

F2Q09 Earnings Call

February 3, 2009 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 – Bank of America Merrill Lynch

Jeffrey Silber – BMO Capital Markets

Trace Urdan – Signal Hill

Mark Marostica – Piper Jaffray & Co.

Gary Bisbee – Barclays Capital

[Vick Ram] – Sonar Capital

Jerry Herman – Stifel Nicolaus and Co.

Andrew Forbes – UBS

Kelly Flynn – Credit Suisse

Gordon Lasik – Robert W. Baird

Operator

Welcome to the second quarter 2009 Corinthian Colleges’ conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Ms. Anna Marie Dunlap, Senior Vice President of Investor Relations. Please proceed.

Anna Marie Dunlap

I’m here today with Jack Massimino, Chairman and Chief Executive Office, Peter Waller, our President and Chief Operating Officer, and Ken Ord, Chief Financial Officer. This call is being webcast and an audio version of the call and transcript will be available on Corinthian’s website for 30 days. In addition, a telephonic replay of this call will be available until Tuesday, February 10th. 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 risks, which are identified in our filings with the Securities and Exchange Commission.

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

Jack D. Massimino

We believe that our performance in the second quarter marks a turning point for the company. We are merging from the turnaround phase and establishing clear momentum in achieving balance, sustainable growth, and margin expansion. As planned, we’re gaining leverage in marketing and education services and we’re slowly bringing bad debt down as a percent of revenue. As a result, our earnings, free cash flow and cash position are improving, and as we reported earlier today, we have increased guidance.

Further, we believe the recession is helping growth, and our current and perspective students and the company stand to benefit from the economic stimulus proposals currently under consideration by President Obama and Congress.

With that introduction, I’ll make a few specific comments about our second quarter results and then briefly discuss the economic stimulus proposals under consideration by Congress. Peter will follow with a review of our second quarter operational progress, after which Ken will review the quarter’s financials and review guidance for the third quarter and fiscal year.

First, a few highlights of the second quarter. We recorded a strong second quarter this fiscal year exceeding our previous guidance range for start growth, revenue and earnings per share. Revenue totaled $318.3 million in the second quarter up 17.8%. The increase was mainly driven by growth in our student population and new student starts.

At the end of the second quarter, our total student population was 76,165 students, an increase of 13.2% over December 31st of the prior year. New student starts grew by 16.2% in the second quarter compared with the same quarter last year.

We are particularly pleased with our progress on operating margin expansions. Second quarter operating income was $27.6 million, an increase of 82.8%. Diluted earnings per share were $0.18 in the quarter versus $0.11 in the same quarter a year ago. As a reminder, all of the financial results I just reviewed pertained to continuing operations.

It’s worth noting that tomorrow marks Corinthian’s ten year anniversary as public company. Over the last decade, the company’s enrollment has grown from about 14,000 students to over 76,000 students today. Revenue’s grown from $106 million to our current annualized run rate of nearly $1.3 billion and our market footprint has grown from 35 campuses to 106.

Most importantly, from an investor’s point of view, our stock price on a split-adjusted basis has grown from an IPO price of $2.25 per share to $18.99 per share at yesterday’s close, an increase of over 740%. We’re proud of the substantial progress we’ve made over the past decade.

I’ll turn now to the proposed economic stimulus bills. Both Houses of Congress and President Obama have included additional funding for post secondary education in their respective stimulus measures. We applaud their efforts to make higher education and job training more affordable and accessible, particularly for low income students and unemployed or dislocated workers.

The House Bill, which passed along party lines last week, included an increase in programs and an increase in unsubsidized Stafford loan limits. The Senate Bill and President Obama’s plan include an increase in programs but no increase in loan limits. The situation is changing by the hour. We expect any increase in grant or loan limits to be beneficial for our students and for the company. However, we are not prepared today to discuss the specific financial impact of the various proposals.

Students are awarded a package of financial aid and when grant, and loan limits change it changes the mix of the overall package. For example, Pell Grant increases have the affect of reducing a student’s need for Stafford loans as well as reducing the total volume of company sponsored loans. To the extent we reduce our internal lending, it reduces the associated discounts taken against revenue, which in turn increases earnings.

The point is it’s not a straightforward calculation. There are many moving parts to be taken into account. Again, we believe any increases will be a net positive for our students and the company when a final stimulus bill is passed and signed by the President, we’ll be in a better position to advise you with respect to the specific impact. Before turning the time over to Peter, I have three other issues to briefly discuss.

The first is related to the securities litigation that was filed nearly five years ago against the company on certain of its former officers. On the 12th of January, the U.S. Court of Appeals for the Ninth Circuit denied the plaintiffs petition for a rehearing or rehearing on en banc. The plaintiffs have informed us that they will not seek a review by the U.S. Supreme Court, so the Ninth Circuit Court denial puts the matter behind us.

Second, as reported in our press release earlier today, we have been informed by the Department of Education’s Office of Inspector General and the U.S. Attorney’s Office for the Southern District of Florida, that they are nearly complete with their investigation of our campus in Fort Lauderdale, Florida. On the basis of evidence they’ve reviewed, they do not anticipate bringing proceedings against the company or any of its subsidiaries. We are pleased by this positive development.

The final issue I want to discuss relates to Leon Panetta, one of our board members. He has received the high honor of being appointed by President Obama to lead the Central Intelligence Agency. Assuming he is confirmed, he expects to resign from all board assignments including Corinthian’s board. He is a valued board member and we will regret losing him. At the same time, he has a long and distinguished record of public service and we recognize that his appointment is vitally important for our country.

Now, I'll turn the time over to Peter for a review of our operational progress.

Peter C. Waller

We were pleased with our overall progress in the second quarter from our continued growth momentum to the improvement we achieved on the bottom line. For the past several quarters, our growth has been entirely organic and the second quarter was no exception. We continue to generate increased enrollment for existing and new programs rather than from any new branch campuses or acquisitions.

Continued growth in the student population is essential to reaching our operating margin target of 15% by fiscal 2011. The 13.2% increase in population we achieved in the second quarter this fiscal year is helping to improve capacity utilization and lower [inaudible] costs. I'll discuss more about our progress on that front in 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 11th consecutive quarter, we reported an increase in starts from continuing operations. In the second quarter, starts totaled 26,334, an increase on 16.2% compared with the second quarter of the prior year. As you recall, our guidance to second quarter start growth was 10% to 12%.

All of our U.S. and Canadian 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 division rate of growth in order to assimilate the rapid growth of recent years, adjust the multiple changes in student lenders and move the division's largest operation to a new facility.

This move has been completed and in the second quarter we reaccelerated the online division's rate of growth. Given current trends, we expect third quarter starts to grow by 12% to 14% for continuing operations. This growth rate, which is lower than the second quarter, reflects a challenging comparison with the third quarter of the prior year. In particular, the online division posted a 66% increase in start growth in the third quarter last year.

For the full fiscal year, we're increasing our staff forecast for start growth from 8% to 10% to 11 to 12%. This is well above the three-year start growth target of 6% to 8% that we provided at our investor day at the end of May.

As previously discussed, we expect a significant portion of our start growth this and next fiscal year to be derived from transplanting core programs across our network of campuses. Year-to-date we remain on track to implement approximately 120 programs for the fiscal year. This is an increase from the 80 core programs implemented in fiscal 2008. We also continue to close programs that are no longer viable with a goal of offering programs with the best growth potential and the best career prospects for our students.

Next, I'm going to discuss the media sources of start growth as well as cost trends. The mix of media channels that generated our start growth in the second quarter was fairly consistent with the past several quarters. Of stocks in total, we derived 33% from the internet, 26% from referrals, 23% from television and newspaper advertising, and 18% from all other sources.

For the tenth consecutive quarter, the media cost per start continued its downward trend. In the second quarter, the media cost per start declined by 19.7% compared with the same period last year. We attribute the improvement to several factors, including greater efficiency associated with grant consolidation and more effective advertising, recession related declines and advertising costs, and our continuing efforts to improve in equality and efficiency.

Media generated leads, which exclude leads generated by referrals and high school reps, totaled approximately 497,000 in the second quarter, an increase of 13.7% over the same quarter last year. Starts grew faster than the leads in the quarter. That's an indicator of the increased lead quality that I just discussed.

The total cost per start, which includes all marketing and admissions expenses, decreased by 12.9% in the second quarter of fiscal 2009 compared with the second quarter last year. Our mission rep productivity increased in the quarter compared with the prior year, as rep turnover continued to decline and conversion rates for adult leads improved.

So for all of the reasons just discussed, total marketing and admissions expenses as a percentage of revenue declined to 23.1% in the second quarter of the year from 26.9% in the same quarter a year ago, a decrease of 375 basis points better than our previous guidance.

Turning now to the area of educational services beginning with bad debt, and as you will recall, bad debt is included in the educational services line item. In the second quarter, bad debt was 8.7% of revenue, which includes the incremental bad debt associated with the ramp up of our internal lending program and the length of the loan funding cycle.

As discussed on our last call, to improve our bad debt performance we've been streamlining student financial processes, increasing student finance personnel and providing more staff training. As a result of these changes, the timeliness of financial aid packaging improved in the second quarter. You may recall that efficient packaging is essential to reducing bad debt.

If students dropout while they're being packaged, much of the revenue recognized for those students becomes bad debt. Our improvement in packaging efficiency is reflected in our day’s sales outstanding, which decreased from 35 days in the first quarter of this fiscal year to 27 days in the second quarter. In addition, our consolidated cash balance is trending higher.

Going forward, we expect more efficient packaging coupled with improved management of internal lending to result in a gradual reduction in bad debt as the fiscal year progresses. And Ken will discuss more specific bad debt guidance in just a few minutes.

If we exclude bad debt entirely, educational service expenses as a percentage of revenue were 49.3% in the second quarter of fiscal 2009 versus 51.0% in the same quarter last year, an improvement of about 170 basis points. This improvement is primarily the result of an increase in student population, which leveraged school occupancy, compensation costs and other fixed expenses.

Before closing, I'll make a few comments about the impact of the recession on our business. As we said on our last call, the economic downturn has both pluses and minuses. In the second quarter, we believe the recession made it easier to achieve both measured, sustainable growth and mountain improvement. Although difficult to quantify, the weak economy has helped increase the number of respective and new students.

During the second quarter, we continued to reduce market expenses while increasing lead flow achieving a healthy growth rate and increasing the operating margin. Of course, the recession also has its disadvantages. Based on past experience, we know that higher unemployment makes graduate career placement more difficult. Although we believe our placements are currently running ahead of accreditation standards, we continue to staff up in career services to ensure an ongoing stream of employment opportunities for our graduates.

In addition, it's reasonable to expect the recession to have a negative impact on in-school cash collections from the students as well as loan repayments. As an offset, we have added collections personnel at certain campuses to focus on active receivables as well as engage new outside resources to focus on both active and inactive receivables.

Although year-to-date cash payments are down as a percent of revenue, we're seeing a corresponding increase in Title IV funding. This indicates that our students are accessing more Title IV funds than previously estimated. This has also had a positive impact on the anticipated volume of internal lending, which Ken will discuss more in a few minutes.

Some of you have asked whether the recession makes it more or less likely that the student will remain in school. Although it's too early to know with certainty what the impact will be, thus far our student retention is holding steady. Overall, taking the pluses and minuses of the economy into account, we believe that we remain in a good position to grow, to achieve solid student outcomes and to meet our financial and operational goals.

In closing, I want to reiterate that our progress is the result of continued focus on the same priorities, building people capability, increasing our student population at a sustainable pace, improving student outcomes, standardizes and upgrading our business processes and our marketing effectiveness and leveraging our facility capacity and overall scale.

We expect increased leverage of education service expenses as the year progresses. Start growth is trending higher than expected and marketing and admissions expenses are trending lower than expected. In sum, we believe we're on track to achieve our operating margin goal of 15% in fiscal 2011. In addition, we're on track 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

I'll being with facilities data for continuing operations. We ended the second quarter with a total of 4.25 million occupied square feet, an increase of approximately 36,000 occupied square feet compared with the end of December last year. Occupied square footage per student was 66 square feet the end of December 2008 down from 73 square feet per student at the end of December 2007. We are seeing the benefit of a higher student population coupled with disciplined facility expansion.

Moving now to enrollment data, and again please note that this data is for continuing operations only. The total student population at December 31, 2008 was 76,165 students, an increase of 13.2% compared with 67,270 students at December 31, 2007. As previously discussed, the increase is the result of higher start growth. In the second quarter, the average student population was 76,264, an increase of 11.9% compared with the same quarter of the prior year. Of the total student population, 12,183 students were exclusively online, an increase of 29% over last year.

Turning now to the income statement, and as reminded the financial results I'm about to review are based upon continuing operations. Revenues for the second quarter were $318.3 million versus $270.3 million in the same period of the prior year, an increase of 17.8%. Our average revenue per student increased by approximately 5.2% in the second quarter at fiscal 2009 primarily reflecting price increases.

For the second quarter of fiscal 2009, operating income was $27.6 million compared with $15.1 million in the second quarter of fiscal 2008 up 82.8%. The operating margin was 8.7% in the second quarter of fiscal 2009, versus 5.6% in the second quarter of the prior year.

The effective tax rate in the quarter was 40.5% higher that our guidance of 40%. The increase is a result of a slightly higher effective state tax rate. Income from continuing operations, after tax, in the second quarter of fiscal 2009 was $15.5 million compared with $9.5 million in the same quarter of the prior year.

The net loss from discontinued operations was $400,000 in the second quarter versus a loss of $1.4 million in the second quarter last year. Diluted earnings per share were $0.18 in the second quarter of fiscal 2009 versus $0.11 per share for the same quarter last year. The weighted average number of diluted shares outstanding for the second quarter of 2009 was 86.9 million compared with 86.4 million for the same quarter of the prior year.

Turning to the balance sheet, at December 31st we had approximately $58 million in cash and marketable securities versus $32 million at the end of fiscal 2008. Long-term debt, including the current portion, as of December 31st was $37.8 million, which includes capitalized lease obligations of $14.9 million. Long-term debt, including the current portion at June 30, 2008, was $77.6 million including capitalized lease obligations of $15.1 million.

Net accounts receivable as of December 31st were $94.7 million versus $115.1 million at the end of fiscal 2008. Student notes receivable, including the current portion, as of December 31st were $27.6 million versus $17 million at the end of fiscal 2008.

As Peter mentioned earlier, our internal loan volume is trending lower than anticipated as students are accessing more Title IV funds than expected. We had estimated that we would land approximately $95 million in fiscal 2009 to replace Sallie Mae private loans. In fact, we are trending closer to $80 million for the fiscal year.

As a reminder, in addition to placing Sallie Mae private loans, our internal lending program is also replacing our Legacy Loan Program called Star. That part of our internal loan portfolio is trending lower than expected as well. All in, we expect internal loans to total approximately $100 million in fiscal 2009 versus approximately $125 million previously expected.

Net day’s sales outstanding at December 31st were 27 days versus 35 days at December 30, 2008. As Peter said, the improvement is primarily the result of an increase packaging efficiency.

Moving to the cash flow statement, cash flow from operations, including discontinued operations, was $79.4 million for the first six months this fiscal year compared with cash flow of $59.3 million in the same period last year. The increase in cash flow is primarily due to an increase in income from continuing operations and timing of cash receipts and payments related to working capital, primarily accounts receivable.

For all of fiscal 2009, we expect free cash flow to be approximately $60 million, which is $20 million higher than previously anticipated. The expected increase is the result of higher income from continuing operations and lower internal lending volume as just discussed.

Next, I'll review the topic of bad debt. Our bad debt in the second quarter was 8.7%, an improvement over the first quarter bad debt of 8.9% but slightly higher than our previous guidance range. We are moving in the right direction, although more slowly than anticipated.

As discussed on previous calls, we are ramping up our internal student lending program and making adjustments to the lending process. For example, we continue to work on decreasing the time it takes to fund internal loans. Loans can be funded when all the necessary paperwork in completed and signed and the student has been pre-approved by underwriting. By the end of the third quarter, we expect to reduce the funding cycle to 30 days or less from the students start date.

As you may recall, until internal loans are funded, the earned portion is classified on the balance sheet as accounts receivable. By shortening the funding cycle, more loans will be funded, which serves to reduce accounts receivable and associated bad debt. When an internal loan is funded, 50% of the earned portion of the loan value is classified as a student note receivable on the balance sheet, and the other 50%, the estimated loan default ratio, is discounted against revenue.

In addition to streamlining our internal lending processes, we expect other factors to help improve bad debt as a percent of revenue, including continued improvement in packaging efficiency and the ongoing phase out of our legacy loans, which is expected to be complete by fiscal year end.

In terms of bad debt guidance, given all the factors just discussed, in the third quarter fiscal 2009 we expect bad debt to range from 8% to 8.5%. In the fourth quarter, we expect bad debt to range from 7.5% to 8%. We remain comfortable with normalized bad debt of 6.5% to 7% and we expect to make further progress toward that goal in fiscal 2010. We will provide more specific guidance on next fiscal year's bad debt when we report fourth quarter earnings.

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

Turning now to guidance, and again our guidance is based on current expectations. It is forward-looking and actual results may differ materially as a result of the factors described in our public filing.

In addition, the guidance I'm about to give pertains solely to continuing operations.

I'll begin with fiscal 2009. For the year, we are increasing start growth guidance from 8% to 10% to 11% to 12%. We are increasing our revenue guidance from $1.21 billion to $1.25 billion to $1.26 billion to $1.27 billion. We're increasing guidance for diluted earnings per share from $0.58 to $0.63 to $0.66 to $0.70 per share.

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 third quarter 2009 guidance, and again, for continuing operations, we expect start growth of 12% to 14% in the third quarter. We expect revenue to range from $329 million to $334 million. We expect diluted earnings per share to be approximately $0.22 to $0.24. We expect 88.2 million diluted shares outstanding in the third quarter. The tax rate is anticipated to be approximately 40%.

With that, I'll turn the time back to Jack for his closing remarks.

Jack D. Massimino

In closing, we're making progress from both a financial and operational perspective. We continue to see strong growth momentum and remain focused on the fundamentals of our business. Marketing expenses are declining more rapidly than expected, and the productivity of our admissions rep force is improving. We're seeing improved capacity leverage as our average student population increases.

We're continuing to transplant our core programs and put initiatives in place to improve the quality of instruction and reduce student attrition. We're streamlining our internal student lending program, expediting financial aid packaging, and expect to see bad debt decline during the balance of the fiscal year.

In addition, our internal lending volume is lower than originally expected, which helps reduce discounts against revenue and improve earnings. As a result of all these factors plus the impact of the recession, we've raised our guidance for growth, earnings, and free cash flow. Overall, we remain confident of achieving or exceeding our three-year financial goals and increasing shareholder value.

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 second round of questions.

Operator, I'm turning the phone back to you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Sara Gubins – Bank of America Merrill Lynch.

Sara Gubins – Bank of America Merrill Lynch

If you're lending less than expected I'm wondering why bad debt is coming in higher than expected, and I'm wondering is that a function of maybe some of that not moving into the line item as a discount to revenue as rapidly as expected, or are you seeing some change in underlying bad debt?

Kenneth S. Ord

No. I think you're entirely on point Sara. Until it moves into the discount line, it really is in accounts receivable, which means that there's a greater bad debt applied to the accounts receivable. So we're feeling better that the accounts receivable balance has come down, the DSO is down and that's, I think, a forward indicator that bad debt should be trending as we gave you in our guidance.

Sara Gubins – Bank of America Merrill Lynch

On the whole if we combine what was going to come out of revenue and what was going to be included in bad debt, you're expecting that total number to be lower than you had previously expected in fiscal year '09?

Kenneth S. Ord

That's true.

Sara Gubins – Merrill Lynch Global Securities

Then just as a follow-up, are you hiring as many admissions reps to focus on high school marketing as you expected, or are you planning to ramp that up more rapidly in the second half?

Peter C. Waller

Sara, we put it together a careful three-year plan on building our high school and this was really the first year of that build plan. We've been hiring at the rate that we expected and putting the management structure in place that we expect and we have plans to continue to ramp that next year. As you know, high school really has a delay impact so we put the reps in place this year and we expect to see the starts come through at the beginning of next year as the high school cycle finishes.

Operator

Your next question comes from the line of Jeffrey Silber – BMO Capital Markets.

Jeffrey Silber – BMO Capital Markets

I was wondering if you would be willing to give us some trend information by your various verticals. I'd like to see how healthcare, for example, is doing against auto tech.

Kenneth S. Ord

You know Jeff, I think we certainly haven't done that historically, but what Peter said earlier in his initial comments were that we were seeing growth across all of our verticals, both ground schools including Canada, as well as our online business. And I think the comment he made on the online business was that we have returned back to kind of a normal growth rate as opposed to what we had seen earlier on because of our own intentional slowing down. So, we're seeing growth across all the verticals.

Peter C. Waller

That does include, because I suspect there’s a follow-up on WyoTech, it includes hitting our plan on WyoTech of increased starts and populations versus a year ago.

Jeffrey Silber – BMO Capital Markets

Are you running up against any type of capacity constraints? Do you see yourself either transplanting branches or adding new branches in the foreseeable future?

Kenneth S. Ord

At this stage we still have capacity and we're rubbing up against that, but I think you'll hear from us in this next cycle as you would expect that we obviously are looking at new green fields, and we'll tell you more about that when we give you the guidance for next year.

Operator

Your next question comes from Trace Urdan – Signal Hill

Trace Urdan – Signal Hill

I'm not going to let you off the hook that easily on the WyoTech front, I’m afraid. You hit your plan on WyoTech that's great, I'm wondering about whether you're seeing maybe more relative strength in the skilled trade areas relative to automotive. And you mentioned last quarter that you were seeing a little bit of resistance in the automotive side from folks reading the headlines about the car manufacturers. I wonder if that has abated at all or if you are still facing that kind of those types of questions in the marketplace?

Peter C. Waller

I would just say that the WyoTech business is robust at this stage. We're getting growth versus a year ago on starts. As you know, we re-engineered our admissions team over the last year or eighteen months and that seems to be coming through. So the WyoTech is there and our population is growing, but as Jack alluded to, we're seeing that growth also across the healthcare vertical and actually in our degree programs as well. So it is pretty common across the whole spectrum of our activity.

Trace Urdan – Signal Hill

Yes. When companies are suffering they're all full of details, and when they start to do well they clam up. All right I'll let you guys move on and get back in get back into queue.

Operator

Your next question comes from Mark Marostica – Piper Jaffray & Co.

Mark Marostica – Piper Jaffray & Co.

I just wanted to see, Ken, if you could give us a little more delineation around the bad debt expense in the quarter, what the base line bad debt expense to the percentage of revenue was versus that tied to the internally funded loans.

Jack D. Massimino

I'll go back to really our outlook for what we really might call normalized bad debt, and again we think that, as we indicated, the 6.5% and to 7% normalized bad debt is something that we can return to. We haven't given you guidance to return to that level this fiscal year, but I think as we look at the next fiscal year that may be appropriate. I think that's about the best I can do in helping you get some additional color on the bad debt line.

Mark Marostica – Piper Jaffray & Co.

I wasn't so much asking about the forward view as the second quarter.

Jack D. Massimino

Well, again, I think we indicated that we're a little behind what we gave you guidance for because again, the rolling out of our processes, frankly, is slower than anticipated. The training aspect and getting all of our branches and schools to follow the procedures is taking a little longer than we anticipated.

Peter C. Waller

I'll give you the operational perspective on this market, as you recall six almost nine months ago now, we introduced our internal loan program, and really this was the first time that we were asking our school operators to both walk and chew gum at the same time.

They clearly were very expert at the Title IV packaging, but until then Sallie Mae had been a fairly straightforward process. And then we introduced our internal loans, which is a multi-step process, and that just introduced a new level of complexity at the school and we took time to train through that.

But with a great focus on training, that has really picked up towards the end of the first quarter and into the second quarter, and now we're feeling much more streamlined around mainly both to put our Title IV packaging in promptly as well as process our internal loans more efficiently, and then the combination. And in a combination of the two, you're beginning to see the improved in Title IV coming through in the DSO. The DSO is a leading indicator on that.

Jack D. Massimino

Mark, I would add one other piece. In the quarter, with a little specificity, we think that normalized was 6.8% to 7% and we think that we're talking future about 6.5% to 7%.

Mark Marostica – Piper Jaffray & Co.

Just one follow-up, Jack, I want to just clarify a point that you made. You said placement rates you believe are ahead of accreditation standards. Can you give us a sense more specifically on that point where your current placement rates are running relative to those accreditation standards? And if there are any areas where you're finding it particularly challenging to meet those standards?

Jack D. Massimino

Mark, what I would tell you is that our placement rates are running a little bit behind where they were at this point last year, but our expectation is that we'll meet our accreditation standards across the board for all of our programs. As we do have year in and year out, we have one or two programs in markets that don't make the accreditation standards for a variety of reasons and then we take action regarding those particular programs. But as we sit today, we feel that we're going to make our accreditation standards replacement albeit that we're a little bit behind where we were at this point last year.

Peter C. Waller

I'll also amplify, Mark, that we track placement by program by school very closely every week, and if there is a situation or a particular situation or position in a school, we have the lead time to act to that in terms of putting extra effort against it, more training so we think we're driving with a full dashboard in front of us and visibility to what's going on. And as we both stated we believe that's putting us in a position to exceed our accreditation standards.

Operator

Your next question comes from Gary Bisbee – Barclays Capital.

Gary Bisbee – Barclays Capital

The first question, when you gave us the three-year margin targets last May a big piece of it was marketing and admissions and you've basically almost already got close to that whole amount you talked about. Can you give us some help and understand, I know you cited several things, but what part of this is the increased efficiency of your reps and also the improvement from the re-branding and the ability to do national as opposed to all the different local spots versus just what might be attributed to lower spot rates because of the weak economy?

It seems to me that it's got to be both things, but have you made real progress in your own internal efficiency stuff or has a lot of the last couple of quarters really just been the weak economy and the terrible media environment overall?

Peter C. Waller

Gary, this is Peter. Let me tackle that. First of all, within the admissions and marketing savings or the efficiencies that we're getting at the moment, it is primarily in the area of marketing. We know that our reps are becoming more productive and we expect to see further leverage coming through from our admissions team, but it is primarily in the area of marketing.

As I said in my few words earlier, it really is a combination of several factors. The branding has been helping us in terms of getting us onto national advertising and about 28% of our television spend now is spent on national cable. So the efficiency anyway of gaining on national cable and the national cable has been hurting quite frankly in the media market. So the combination of the two has put us in a strong position of leverage.

We do track our multi-variables in terms of being a direct response company we have a lot of visibility to effectiveness of advertising and these are tests spot-by-spot. We do know that accretive is working harder for us. This was definitely a plan for the last two years to, not only to improve our efficiency, but also our effectiveness of our advertising so we know we're getting a kicker from that, and of course we're getting a kicker from media costs.

So putting that in the broader perspective, as you pointed out that, we had a three-year plan by 2011 we were planning to save three points on marketing and admissions, basically a point a year over the three-year plan and we're clearly running ahead of that run rate at the moment. But there are variables on the media side of things. Media costs do come up and down so we're really not stepping away from a three-year projection of a net three point margin leverage on marketing and admissions albeit today we're ahead of the run rate.

Does that give you a little more color?

Gary Bisbee – Barclays Capital

Then just a quick follow-up, I see continued chatter out in your guy's home state about the Cal Grant programs potentially being cut. The last time I asked, it's been a couple of years, but I think it was like less than 2% of your revenue. Is that still just a really tiny source at this point, and if that did go away a non-event?

Kenneth S. Ord

Yes. It's a non-event for us, Gary. It is a very small piece of our revenue out here in California.

Peter C. Waller

I will just give you one piece of color though in California in total is, the Cal Grant situation you just identified, it is a small part. But the whole economic situation in California will be impacting us frankly positively in a number of ways. Today the Los Angeles Times actually had a front page story entitled university cuts worse than strain on two-year colleges and explaining that the community colleges, 110 of them in California, are basically full.

And we know that they're not getting any capital or program investment so the need for us in terms of the role that we play in society and the marketplace of retraining and recalibrating people in their careers is even more acute quite frankly in California. And I suspect we know that is a situation that moves across other states as well.

Operator

Your next question comes from [Vick Ram] – Sonar Capital.

[Vick Ram] – Sonar Capital

Can you talk a little bit about what's the best way to think about operating margin is? You made a comment about looking to double-digit operating margin next quarter and later on in the year. That seems a lot higher than where a lot of people are thinking right now on the outside. I'd love to understand a little better why.

Jack D. Massimino

I think that if you were at the investor conference we laid out a plan to get ourselves to mid-teen margins over this 2011 time period. And it's just part of that continued progress we're seeing opportunities in marketing side, as Peter said. We're seeing marketing opportunities in the educational services line. All of these are coming together to get us into that double-digit margin opportunity for the company.

We've got growth moving forward with us, which is significant. Starts are up and we've guided you up with additional start growth in the quarter and end of year. So it's coming from all of those places. It's coming from revenue generation. It's coming from cost controls. It's coming from filling capacity. It's coming from improved marketing costs. All of those pieces drive us to that point.

Peter C. Waller

[Vick], we had put in sort of a line in the sand three quarters ago now and sort of kept reiterating it that by the third quarter we would get to double digits. So you laid out mid-teens by 2011 and then so certain milestones. One of them we went public was double-digit margins by the third quarter. I think if you run the models on the guidance that we've given now that you'll see that delivers within the double-digit margin goal that we outlined.

Operator

Your next question comes from Jerry Herman – Stifel Nicolaus and Co.

Jerry Herman – Stifel Nicolaus and Co.

Jack and Peter, in light of the strong volume and what might be more challenging exit metrics like placements, and I'm assuming defaults, are you guys making any changes in admission standards and/or any other tactics that might siphon off some growth at the front end in an attempt to enhance some of the exit metrics and quality metrics?

Jack D. Massimino

No. I think we have underwriting rules that have been in place with the organization since we started funding our loans and our process that we have in place for admissions hasn't changed dramatically over the last year or two in terms of the level of students coming into the program. So I would say, Jerry, that on balance we're doing what we have historically.

Peter C. Waller

We have an [Ignite] program that we really put in a place a couple of years ago. We do in-depth interviews and conversations with the students and then showing that they are motivated and they have the skill sets to complete. And I think that's evidenced by retention holding steady.

We've been getting this growth now for some while and our retention is holding steady and we've moderated our plans. And in parallel with [Ignite] you remember we did make significant advancement with Inspire, which was our whole classroom orientation around interactive learning and classroom training for our faculty. So the combination of the two shows we're in good place with our students going forward.

Where we are increasing our resources, as I outlined in my words, is on the placement side. We do recognize that in a tougher economy we're going to have some headwinds, particularly in certain cities, and we need to strengthen our teams accordingly.

Jerry Herman – Stifel Nicolaus and Co.

Peter, can you maybe quantify the increased investment there either in number of people or number of dollars on placement?

Peter C. Waller

Career placement we put about 70 people in. We’re in the process of putting 70 in we’re about two-thirds the way through that process at the moment.

Jerry Herman – Stifel Nicolaus and Co.

On a base of?

Peter C. Waller

I would say we’re talking here about 300, 350 and about three per school.

Operator:

Your next question comes from Andrew Forbes – UBS.

Andrew Forbes – UBS

First I was wondering if you could tell us the volume of loans that you have provided so far this year just wanted to kind of check that kind of these 100 million that you’re guiding to for the full year that you’re kind of currently running about that run rate if you like.

Kenneth S. Ord

Sure. In second quarter it was on that run rate, the first quarter was just a little less than that. So of the guidance we gave you of the incremental 80 or the total amount of 100, just slightly more than a half of that will be in the second half just slightly less will be in the first half.

Andrew Forbes – UBS

Then on the advertising, I guess you mentioned you did a great job with the start growth at 16%. I think you mentioned that the lead growth was only 13%. Given that slight differential there should we expect you to actually ramp up the amount of marketing you do in the second half of the year here? Or you know are you comfortable where you’re at?

Peter C. Waller

Andrew, we go very carefully now in terms of the calibration between our lead flow, the number of reps that we have and the number of starts that we guide to because you know we’re juggling several areas. First of all, we’re ensuring that we have sustainable and balance growth. We want to ensure that we have growth rates that we can accommodate in our schools with a great student experience. And secondly, we’ve gone very much out there in terms of that where bad margin growth.

So we are balancing our lead flow, the number of reps we have to generate the margin targets that we laid out in front. As you know from previous discussions, if you ramp up to fast you have to put a lot more extra reps on board or else you have a lot of inefficacy and those extra reps don’t really pay for themselves for the first six months.

So it’s an important piece of collaboration, and as you saw the differential between start growth and lead growth, we are picking up productivity in the second quarter and we expect to continue to improve productivity going forward.

Andrew Forbes – UBS

Then just on the 66 square feet per student. Any thoughts on where that can actually get to? Is it, obviously, one of the drivers of margin improvement on the educational servicing lines things?

Kenneth S. Ord

We don’t really give guidance per say. We feel comfortable that we’ll continue to get facilities leverage and you’ll see the results of that in that number, but we don’t give guidance on that number specifically.

Operator

You’re next question comes from [Patrick Uglibe] – Credit Suisse.

Kelly Flynn – Credit Suisse

This is actually Kelly Flynn from Credit Suisse. I have a couple questions. Just on the margin target the double-digit margin target you discussed earlier. I just want to confirm, is it correct that you expect double-digit margin in the third quarter but not in the fourth quarter due to seasonality?

Peter C. Waller

Yes. And that’s how we indicated before and we’re reinforcing that guidance.

Kelly Flynn – Credit Suisse

Then just on your comments with respect to the stuff going on in Washington, specifically the Stafford loan proposal. I know that you don’t want to quantify it, but could you share any insights on how optimistic you are that the Stafford loan limits will be increased?

Jack D. Massimino

Kelly, it’s very difficult to give you much more insight that what you already are hearing. We’re hearing the same things. I mean this stuff is all being done in a very high level within congress and you’ve got the good news, I guess, is that Pell is in all the proposals both the president’s proposal as well as the house and the senate.

The house proposal is a little more aggressive as we know, and usually that’s where you would expect it to be more aggressive and it is. This is going to be a negotiation, I think as we all know, and we’re going to wait and see how it shakes out. And then once we k now, as we’ve done in the past, we’ll clearly give you the kind of guidance and the impact that we think that it’s going to have on the organization.

Operator

You’re next question comes from Gordon Lasik – Robert W. Baird.

Gordon Lasik – Robert W. Baird

I just had one final question on, I guess, the long term operating margin target of 15%. Is that dependent on this level of enrollment growth or can you still reach that with slowing demand in fiscal 2010 and 2011? What are your thoughts there?

Jack D. Massimino

Our guidance that we came up with that we gave you at our investor day really talks about 6% to 8% start growth will get us with some rate increases get you to double-digit revenue growth, which gets you to mid-teen margin growth. So, as Peter said in his comments early on, our guidance at that point was 6 to 8. We’re exceeding that currently.

Our expectation is as long as we’re in this kind of slowdown in the economy that should be good for us. As it starts to speed up, it’ll go the other way but not dramatically. And so as a result we don’t need to have really accelerated growth at the start line level to get to that mid-teen margin level.

Anna Marie Dunlap

Last question, operator.

Operator

Your question comes from Trace Urdan – Signal Hill.

Trace Urdan – Signal Hill

You kind of just touched on this but I’ll sort of put it more directly. Given that we’re seeing kind of accelerated start growth here relative to your expectations at the time of the investor conference, why wouldn’t we also expect to see the mid-teens margin guidance move up in terms of time line there?

Jack D. Massimino

Trace, we’ve already given you an increase in guidance for the balance of this fiscal year. That’s where we think we’re going to be this year. We’re taking advantage of the market as we see it, and as a result you’ve seen a pretty good increase in our guidance for the rest of the year. We’ll give you guidance for next year as we get to that point.

Trace Urdan – Signal Hill

This is don’t look a gift horse in the mouth. Thank you very much. Fair enough, Jack, thank you.

Jack D. Massimino

Listen, we’d like to thank everybody who participated on the call today, and we do look forward to providing you with an update of our progress when we announce our third quarter results on April 30th. Thanks everybody.

Operator

Thank you for your participation in today's conference. You may now disconnect.

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Source: Corinthian Colleges Inc. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

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