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Corinthian Colleges (NASDAQ:COCO)

Q3 2013 Earnings Call

April 30, 2013 12:00 pm ET

Executives

Anna Marie Dunlap - Senior Vice President of Investor Relations and Corporate Communications

Jack D. Massimino - Chairman of the Board and Chief Executive Officer

Robert C. Owen - Chief Financial Officer and Executive Vice President

Analysts

Paul Ginocchio - Deutsche Bank AG, Research Division

Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

Jeffrey M. Silber - BMO Capital Markets U.S.

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter Fiscal 2013 Corinthian Colleges Earnings Conference Call. My name is Said, and I will be your conference coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would like to turn the conference over to your host for today, Ms. Anna Marie Dunlap, Senior Vice President of Investor Relations. Please proceed, ma'am.

Anna Marie Dunlap

Thanks, Said. Good day, everyone, and thanks for joining us. I'm here today with Jack Massimino, Chairman and Chief Executive Officer; Bob Owen, Chief Financial Officer; and Ken Ord, Chief Administrative 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, the telephonic replay of the call will be available until Monday, May 5. 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. And with that, I'll turn the time over to you, Jack.

Jack D. Massimino

Thanks, Anna Marie, and hello to everyone on the call. Before discussing our third quarter results, I want to comment on 2 new additions to our Board of Directors: Leon Panetta and Marc Morial. As we announced earlier today, our board voted unanimously to appoint both of these gentlemen to our Board of Directors. Secretary Panetta left our board in 2008 when he was asked by President Obama to head up the Central Intelligence Agency. After serving as Director of the CIA, Leon was appointed U.S. Secretary of Defense. During 3 decades of distinguished public service, he's proven to be a man of uncommon intelligence, judgment and character. He's visited our schools and believes that institutions like ours have an important role to play in providing access to career education. We're delighted that we can once again call upon his experience and insight. Marc Morial is President and Chief Executive Officer of the National Urban League, one of the nation's largest and most influential civil rights organizations. From 1994 to 2002, he served as Mayor of New Orleans. Throughout his career, he's been a tireless and effective advocate for African Americans and other minority groups. Marc has a deep understanding of the student population we serve. He too has visited our schools and spoken with our students, instructors and graduates. He shares our commitment to quality career education and understands the vital importance in creating economic opportunities. We believe he will also be a valuable addition to our board.

I'll move now to the highlights of our operational performance. The third quarter can best be described as steady as she goes, with a continuing focus on student outcomes and a number of ongoing initiatives to strengthen operations, diversify revenue and increase our student population. Here are a few headlines. Our graduate placement rate, the most important metric in the company, remains steady in a challenging labor market. New student enrollment, excluding Ability-To-Benefit students, was slightly positive in the third quarter compared with the same period last year. Our total student population was down due to the loss of Ability-To-Benefit students, but our non-ATB student population has been stabilizing relative to industry peers over the past few quarters. In online learning, we increased staffing in our admissions and student financing departments during the quarter and achieved a sequential improvement in new enrollment growth. The Department of Education recently published draft 2010 cohort default rates under the new 3-year measurement rule, and we were, as expected, well below federal thresholds. In the third quarter, bad debt as a percent of revenue returned to a normalized level after a temporary spike earlier in the fiscal year. Moving now to some of our key third quarter metrics. Our total new student enrollment declined 5.7% in the third quarter versus the same quarter last year, in line with our previous guidance. New enrollment of non-ATB students increased 1.3% for the third quarter and increased 4.1% fiscal year-to-date versus the same period last year. To help increase our student population in the ground schools, we continue to implement new diploma level programs and offer free GED programs to the general public. During the quarter, we also continued to accept transfer students from competitor school closures and expect to see more of these closures in the months ahead.

In terms of revenue and earnings per share, our third quarter results were within our previous guidance ranges. For continuing operations, our third quarter revenue was $400.2 million and diluted earnings per share were $0.04, excluding severance charges of $0.01 per share. As we move through the rest of our discussion today, I'll cover the quarter's results as it relates to student outcomes, enrollment trends, our growth plan, followed by an update on regulatory matters. Bob will then review the third quarter operational and financial metrics and provide guidance for the fourth quarter and full fiscal year.

I'll begin with student outcomes. As you know, accreditation agencies set industry standards for educational quality and student outcomes, and we continue to meet the requirements for reaccreditation. During the first 3 quarters of this fiscal year, 22 of our schools received reaccreditation approval. In addition, 12 schools have reaccreditation visits during the same time period, and of those, 4 had 0 findings, the equivalent of a perfect score from the accreditation agency. Over the past few years, we've increased the rigor of our internal audit procedures, and as a result, we've been successful in reducing the average number of reaccreditation findings per campus. Fiscal year-to-date, the average number of findings related to reaccreditation determinations was 0.91 per campus, down from 1.75 findings per campus 2 years ago.

In addition to the reaccreditation of several campuses in the first 3 quarters of the fiscal year, we received approvals for 101 new academic programs from regulatory authorities. These approvals allow us to continue our growth strategy of building out the complement of programs offered at each campus. We're also pleased to report that the first graduating class of our registered nursing program at Everest Henderson received 100% pass rate on the national licensing exam known as NCLEX. Although the number of graduates is relatively small, it's highly unusual for a new nursing program to achieve this result. In fact, according to the Nevada Board of Nursing, it may well be unprecedented for either a not-for-profit or for-profit institution. As an aside, we continue to expand the number of registered nursing programs in our Everest campuses and now have 7 programs in place with nearly 700 students. Across all of our registered nursing programs, our average NCLEX pass rate was 95.2% in calendar 2012, higher than the national average of 92.1%. Health care has been and will continue to be our single largest training vertical, and we remain committed to developing and offering a wide range of entry-level through higher-level programs. Towards that end, we currently have 6 new registered nursing programs, including 2 bachelor's degree nursing programs, in various stages of development. In the area of placement, we're achieving consistent results for the 2012 cohort of graduates. We continue to expect our calendar 2012 placement rate to meet or slightly exceed our placement rate in calendar 2011, which was 68.1%.

Next, I'll move to a discussion of enrollment trends. As I said earlier, new enrollments decreased by 5.7% in the third quarter of fiscal 2013, within our guidance range of negative 4% to 6%. The decrease was primarily driven by the loss of Ability-To-Benefit students and a slight decline in new enrollments at Online Learning. In the third quarter, we enrolled approximately 364 ATB students compared with 2,313 new ATB students for the same period last year. As I said earlier, non-ATB new enrollments were up 1.3% in the third quarter versus the same quarter last year. We will continue to absorb the loss of ATB students through the balance of the fiscal year. With respect to Online Learning, we continue to see healthy demand for our programs, driven in part by our nursing associate degree. As I said earlier, Online's rate of decline in new enrollments improved sequentially from the second quarter but we did not make as much progress as previously anticipated. On our previous call, we explained that online was understaffed in financial aid and admissions, which created delays in new enrollment processing. During the third quarter, online improved its staffing levels in both departments, but we are continuing to make related workflow process changes in these areas to better serve new students. We also continue to refine our approach to preenrollment assessment and remediation. Overall, we believe we're taking the steps necessary to ensure Online's continued success. In several of our Everest ground school service areas, we continue to see competitor school closures and a corresponding increase in new non-ATB students at our campuses. During the third quarter, we worked with regulatory authorities and school companies in Ohio, Maryland, Massachusetts, Michigan and Georgia to better -- to accept transfer students from competitors schools that are in some stage of closure. We're gratified that regulatory authorities perceive our school to be a quality alternative for students when competitor closures occur. We expect more competitor school closures and industry consolidation activity in the future, owing to several factors, including cyclical enrollment declines related to the economy, deteriorating financial performance and regulatory compliance issues. We expect to build upon our leadership position in our service areas over the long term. In Everest service areas where competitor school closures have occurred, early results indicate that we're gaining share. We continue to expect an additional 2,000 to 3,000 new students this calendar year related to competitor closures that have already occurred. Equally important, we expect that less competition will make it easier to help our graduates find jobs and to develop externship and clinical sites for our students. At the Everest ground schools, we continue to roll out our new diploma-level programs in the areas of Business, Criminal Justice and Information Technology. In the third quarter, we've launched 42 new programs at 20 Everest campuses. For the fiscal year, we now expect to implement approximately 100 new programs. This is a little bit lower than previously expected due to the timing of regulatory approvals.

Our GED Advantage program, launched nearly 7 months ago, continues to grow. At the end of March, we had approximately 1,100 GED Advantage students, up from 750 at the end of December. 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 on to post-secondary education at Everest or elsewhere. Our early results continue to look promising both in terms of GED pass rates and ultimate enrollment at an Everest campus. Looking ahead, we expect new enrollment in the fourth quarter to be down 3% to 5% compared to the same period last year. The main reason for the decrease is the loss of ATB students. In the fourth quarter of last year, we enrolled approximately 2,949 ATB students. In the fourth quarter of this fiscal year, we expect to enroll approximately 325 ATB students. In terms of non-ATB students, we expect new enrollment to be up by approximately 7% to 9%. For the fiscal year, we expect total new enrollment growth to be down approximately 2% versus the prior year. However, we do expect non-ATB new enrollment to be up by approximately 5% for the fiscal year.

I'll turn now to an update on regulatory developments. Last quarter, we reported that the Department of Education was reconsidering its calculation of our fiscal 2011 financial responsibility composite score and the related requirement of posting a letter of credit. Most of you on the call are familiar with the background on this issue so I won't repeat it today. For those of you who need more detail, please refer to the 8-K we filed on November 5 of last year or to the transcript from our second quarter investor call. Both of these documents are available on our company website. Since our second quarter call, we have no significant new developments to report. The Department of Education is in the process of reviewing our revised fiscal 2011 submission, which excludes discontinued operations, as well as our fiscal 2012 submission. The department is reconsidering whether we should be required to post a letter of credit, taking both fiscal 2011 and fiscal 2012 into account. In March, the department sent us a letter requesting additional information on several issues related to our fiscal 2012 submission and we have responded to their request. I stayed in touch with higher level department officials since this process began, and we've provided them with written expert opinions and other information in support of our position. In addition, at the time of our previous call, we had agreed with our banks that while the composite score issue was pending, we would not draw additional amounts on our credit facility. However, since the issue remains unresolved, we have reached a new agreement with our banks to draw upon the facility to satisfy short-term cash needs and then to repay as our cash position improves. We'll continue to keep you apprised of important developments as we move forward in the process.

Last, I'd like to discuss cohort default rates. In late March, we received draft cohort default rates from the Department of Education for the 2010 cohort of students measured over 3 years. As we've discussed on previous calls, this is a new measurement period. Previously, defaults were calculated over a 2-year repayment period. As we reported in an 8-K on March 25, the weighted average for our institutions was 19%, well below the federal threshold of 30% and 9.2 percentage points below the 28.2% reported for the preliminary 3-year measurement of the 2009 cohort. We've achieved this improvement in part by establishing a robust in-house cohort default prevention program. Our program includes financial literacy training provided to students while they're in school, counseling related to repayment options and early intervention in the default process.

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

Robert C. Owen

Thanks, Jack. Let me preface my comments by saying that the results I'm about to review are for continuing operations. More detail on our financials can be found in our press release and in our third quarter 10-Q, which we expect to file later this week. I'll start with a discussion of third quarter revenue. Net revenues in the third quarter totaled $400.2 million, a decrease of 1.9% compared with the same quarter of the prior year. The decrease is primarily due to a 4.9% decrease in average student population during the period, partially offset by a 2.4% increase in average revenue per student. As Jack said earlier, total new student enrollments decreased by 5.7% in the third quarter versus the same quarter last year. The total student population at March 31, 2013 was 87,776 students, down 6.2% from 93,574 at March 31, 2012. Our non-ATB student population at the end of the third quarter this year was 85,798, down 3.2% from March 31 last year. Our average student population was 88,601 in the third quarter this year, and as I just said, that was a decrease of 4.9% over the same period last year. Our exclusively online student population was 30,054 students at March 31 this year versus 31,116 at March 31, 2012, down 3.5%.

We reported third quarter diluted earnings per share from continuing operations of $0.04 versus $0.16 in the same quarter last year, excluding after-tax impairment facility closing and severance charges in both time periods. The operating margin was 3.2% in the third quarter this year versus 6.8% in the same period last year, excluding charges in both time periods.

Next, I'll move to cost trends, starting with marketing and admissions. As a percent of revenue, marketing and admissions increased to 25.7% in the third quarter from 24.2% in the same quarter a year ago. In terms of total dollars, marketing and admissions expenses increased by 4.2%. Total marketing and admissions expenses per new student enrollment increased by 10.5%, primarily reflecting lower conversion rates at Online Learning related to the issues already discussed and higher cost per transfer in the ground schools due to the loss of ATB students. General and administrative expenses as a percent of revenue were 10.2% in the third quarter versus 9.6% in the same period last year. The increase as a percent of revenue is primarily due to an increase in professional services expenses. Educational services expense as a percent of revenue was 60.9% in the third quarter versus 59.5% in the same quarter last year. The increase is primarily due to higher bad debt. Bad debt increased to 3.4% of revenue in the third quarter this year versus 2.5% in the same quarter last year and 4.3% in the second quarter of fiscal 2013. The increase from Q3 of '12 to Q3 of '13 is primarily due to the last phase of our systems conversion, which is now complete. As Jack said, 3.4% is within the range of where we expect to be going forward.

Moving now to capital expenditures. In the first 9 months of the fiscal year, capital expenditures totaled $28.6 million versus $31 million for the same period last year. For fiscal 2013, we expect capital expenditures to total approximately $35 million to $40 million. I'll move now to the balance sheet and cash flow statement. At March 31, 2013, we had approximately $43.9 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 timing of cash receipts and other payments. Total debt as of March 31, 2013 was $30.7 million, which included capitalized lease obligations of $12.4 million and borrowings under the student notes receivable sales agreement of $10 million. Total debt as of June 30, 2012 was $149 million, which included capitalized lease obligations of $13 million and borrowings under the student notes receivable sales agreements of $13 million. Net days sales outstanding in the third quarter were 17 days.

Moving to the cash flow statement. Cash flow from operations was $128.8 million in the first 9 months of fiscal '13 versus $195.7 million in the same period last year. The decrease is primarily due to the timing of cash payments and receipts related to working capital. To close out my comments, I'll turn now to fourth quarter guidance. As a reminder, our guidance is based upon continuing operations and excludes any impairment facility closing and severance charges. We expect fourth quarter results to be as follows. We expect total new student enrollment to be down 3% to 5% versus the fourth quarter of the prior year. We expect the non-ATB new student enrollments to be up 7% to 9%. We expect revenue to range from $378 million to $388 million in the fourth quarter. We expect diluted earnings per share of approximately $0.03 to $0.05 in the fourth quarter. We assume approximately 87.5 million diluted shares outstanding in the fourth quarter, and we expect the tax rate to be approximately 40%. Back to you Jack for closing remarks.

Jack D. Massimino

Thanks, Bob. In closing, we're focused on the success of our students, and the primary measure of that success, career placement, remains steady in a challenging labor market. We continue to strengthen our operations as evidenced by our improvement in cohort default rates and bad debt. We're receiving high marks during our reaccreditation reviews, and an increasing number of our campuses are achieving perfect scores on their site visits. Our non-ATB student population has been stabilizing relative to our peers over the last few quarters, and we're making progress in addressing Online Learning's operational issues. We remain confident about the vital role that our school is playing in postsecondary education landscape. We recently commissioned a study on the skills training gap in California where we have 23 schools. The study, which received widespread media coverage and is posted on our company website, found that a major shortage in career education exists in California. This year alone, 590,000 Californians will be turned away from community colleges due to a lack of capacity, and that gap is projected to grow over the next few years. Our schools provide additional access to quality career training programs in California and in our other service areas at a time when public institutions are struggling with reduced budgets and increased demand. Finally, our industry continues to consolidate, which gives us the opportunity to grow stronger in our service areas and provide quality career training to even more students in the years ahead.

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 it back to you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jeff Silber from BMO Capital Markets.

Jack D. Massimino

I think we lost Jeff.

Operator

Our next question comes from Paul Ginocchio from Deutsche Bank.

Paul Ginocchio - Deutsche Bank AG, Research Division

Just wondering how cash flow generation year-to-date is progressing versus your plans, and what should the operating cash flow look like for the fourth quarter?

Robert C. Owen

So our operating cash flow through the 9 months is consistent with what we expected. And as far as the full year goes, at this point, we're not providing guidance on operating cash flow for the full year.

Paul Ginocchio - Deutsche Bank AG, Research Division

Okay. Should we expect maybe more than fourth quarter of last year, where you were down $40 million?

Robert C. Owen

Honestly, I don't have that projection in front of me, so I can't respond at this point in time.

Jack D. Massimino

Paul, we'll get on the phone with you and provide you the information. But at the moment, as Bob said, we're right in line with where we thought we'd be from a cash flow projection for the first 9 months of the fiscal year, and our expectation is we're going to be where we thought we'd be for the full year.

Operator

Our next question comes from Bob Craig from Stifel.

Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division

Jack, I was wondering if you could give us some ideas for reception of the newer programs in both the rollouts and the introductions, and the impact that those programs might be having on starts? And as my follow-up, how active a year do you think fiscal '14 will be in terms of rollouts and intros, relative to '13?

Jack D. Massimino

I think, Bob, last part first. I think it's going to be about the same. Our expectation this year is we're going to roll out about 100 programs, and we think we're going to roll out about 100 next year. And probably the year after that, probably another 100. So I mean, if you think about it, there are 6 different verticals here, and we have 100 schools. The potential could be 600. It's not going to be 600, but it will be something south of that. So I think 100 a year for the next couple of years makes a lot of sense to us. Schools have got to be prepared. They've got to be what we call ready to accept the new programs, and we've got to get them approved through the process. And some of that's taking a little bit longer than we had anticipated. I think we told you earlier that we thought we'd probably get about 125 programs out. And it looks like we're going to be a little bit over 100. In terms of our expectation, the growth is going just about what we expected it to do. I mean, these are new programs coming out for the first time. It takes a little bit of time to ramp them up, but they are contributing to our student growth, particularly in the ground school. That's really where the focus is because the marginal contribution in those ground schools is significant. So all the focus on new program development is headed that way.

Operator

And our next question comes from Trace Urdan from Wells Fargo Securities.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

Jack, could you speak to the efforts that you've been making to foster lines of revenue that are cash pay over and above your core business, and what kind of progress you're making in that respect?

Jack D. Massimino

Yes, sure. I think in August, we closed a transaction with QuickStart. That has been working just as we expected it would. We now have it enrolled in a number of our campuses across the country, particularly in our regionally accredited organizations. And it's growing just as we thought it would, Trace. I mean, this is not a high margin business, but it's an opportunity, as we grow this business and migrate it across this country. I think we're now just about in every state from an online perspective. And so we're meeting all the expectations that we've setup for ourselves. I think when we acquired that, we told you they were doing about $18 million in revenue. Not all of that obviously works through our classrooms. A lot of that is still outside the organization. We're continuing to see that grow. And our expectation is that over a number of years, this could be a pretty significant part of our business. We're currently looking at another, much smaller transaction in the same arena, again training, online training, same kind of relationship, another smaller organization that we're excited about. So I think that we're going to look at a number of these programs over time, just to diversify that revenue stream and create a new vertical for the organization. A lot of work has been done in that arena.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

Okay. And then just as my follow-up, could you speak to trends at Heald and WyoTech inside the overall numbers that you reported today?

Jack D. Massimino

I would tell you that WyoTech's doing as we expected. We're having a little better year there than we have historically, and I think that we're continuing to be excited about the WyoTech opportunity. Heald, as a lot of the schools have, had a slowdown in terms of enrollment. Our expectation is we'll begin to see that come around the other way. As they all go through the valley, it takes a little bit of time to work through it. We've made some corrections out there. The big thing for us in Heald right now is waiting to get a transition from the Feds on moving from WASC Junior to WASC Senior. Once we have that in place, we've been approved by the accreditor, we're in the process with the department, our expectation is early this summer, we should have that worked out. And once we have that worked out, it opens up the opportunity to open new programs for Heald, and we haven't been able to do that as a result of this process we've been going through. And it's been almost, what, 2.5 years or so that we've been in that process. So there have just been a lack of new programs going in to Heald. We're excited about being able to get that moving forward.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

Is that just specifically 4-year versions of what you're offering on a 2-year basis now?

Jack D. Massimino

Yes. I mean that's exactly the idea. We've got a bachelor's degree in business, for example, and a bachelor's degree in nursing program. They're already teed up and ready to go once we get the approval. And then we have teed up a number of other programs that we're submitting to WASC. We'll go through that process. Now it will take a little bit of time, but again, we've been waiting 2.5 years to get this to happen.

Operator

We have a question from Jeff Silber from BMO Capital Markets.

Jeffrey M. Silber - BMO Capital Markets U.S.

You mentioned guidance for non-ATB students going up about 7% to 9% in the fourth quarter. I'm just wondering how confident you are in that and how sustainable is that going into next year?

Jack D. Massimino

Jeff, that's not ATB students. That's non-ATB students.

Jeffrey M. Silber - BMO Capital Markets U.S.

Non-ATB, that's what I said.

Jack D. Massimino

Yes, okay. You're breaking up just a little. But it's non-ATB students, and we're confident about that population growth. I mean, we've seen it steadily performing for us throughout the year. I think we said for the year, we're going to be around what, 4%, 4% to 5% in the non-ATB population for this fiscal year. So we're just continuing in that mode. I mean, all of our new programs, obviously, are geared directionally towards non-ATB students. So we feel pretty good about it.

Jeffrey M. Silber - BMO Capital Markets U.S.

Okay. And just shifting gears in terms of the CDR numbers, roughly what percentage of those students where the improvements came from including students not forbearance?

Jack D. Massimino

I would tell you that the majority of those students, the improvements are coming through that. It's either forbearance. It's dealing with IBR, income-based repayment, all the alternatives that are available to the students, where our students are taking advantage of, just like everybody else in the process.

Operator

[Operator Instructions] Our next question comes from Paul Ginocchio from Deutsche Bank.

Paul Ginocchio - Deutsche Bank AG, Research Division

If I remember correctly, a few quarters or maybe a year ago, you talked about limiting enrollment at some programs in some cities because of placement rates. Is that still limiting enrollment growth or is that sort of -- have we cycled that?

Jack D. Massimino

We've cycled it, Paul. And those programs, we've either taught out or shut down. I mean, as we get into the process, we'll slow these things down. This year, we think that we're probably going to close about 10 programs, I think, for the year, We've closed a half a dozen or so, so far, and it may get up to 10 for the full fiscal year. We're constantly evaluating those, and we have gone through the cycle of those, as we've talked about earlier.

Operator

Our next question comes from Trace Urdan from Wells Fargo Securities.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

The ITT spoke last week about sort of a deterioration, even in the last couple of months, versus what they expected in their off balance sheet loan programs. I wonder if you could speak to what you're seeing at ASFG and what the trend line looks like in terms of the guarantee payments relative to your expectations?

Robert C. Owen

Yes, Trace, it's Bob Owen. Again, we have -- we've got about 10 years of experience in looking at the performance of these loan portfolios, and we're seeing really a performance consistent with what we've expected in how we've reserved for the notes. So we haven't seen any sequential deterioration.

Jack D. Massimino

And the only thing I would add, Trace, is that as we move away from the Ability-To-Benefit students, our expectation is that this portfolio will actually perform a little bit better.

Operator

And our next question comes from Bob Craig from Stifel.

Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division

I was wondering if you could comment, where are you in terms of average capacity utilization in your facilities, and could you maybe talk about the incremental margin on filling that excess capacity given the cost-cutting efforts that you've undertaken? And is there any consideration to further rationalization of that capacity?

Jack D. Massimino

Bob, I'll answer the last part first. Obviously, as we go through our fiscal year planning, we're always taking a look at the performance of our schools, and it's always a question of the how's the market changed, program mix change, things of that sort. And we take appropriate action when we think we need to. With regard to the schools themselves, we believe we're currently running at about 50% capacity. And as a result of that, marginal contribution is in that, depending on the program, depending on the school, but it will range anywhere from 50% to 70%. And so we think in all of our planning, we look at about a 60% marginal contribution rate coming in. So a lot of focus for us, as I said earlier. All these new programs are really focused on driving enrollments into those ground schools. And actually, we're doing -- our performance in the ground schools, clearly not where we want it to be but certainly better than even we had planned for. So we're getting a little bit of a bump on that, that's been helpful for the performance of those schools.

Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division

Okay, Jack, that's helpful. When will the Online issues be totally rectified?

Jack D. Massimino

I think it's going to take a few months to work our way through. One of the things we've done, in January, we started to roll out a new system within the Online arena to better manage our staffing and flow processes in the organization. And so we've got that rolling through with this reduction or need to hire up in both financial aid and admissions. We've taken care of the hiring process. Now, all the new programs and the new systems are rolling through, and it's going to take us another quarter or so to get through that. My expectation is by the next fiscal year, we'll start to see some real improvement in the Online performance.

Operator

I would like to hand the conference back over to Mr. Jack Massimino for closing remarks.

Jack D. Massimino

We'd like to thank you, all, this morning for spending a little bit of time with us, and we look forward to seeing a lot of you at the upcoming conferences. And we'll be talking to you in late August when we announce our year-end earnings. Thanks, everybody.

Operator

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

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