Education Management Management Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: Education Management Corporation (EDMC)
by: SA Transcripts

Education Management (NASDAQ:EDMC)

Q3 2013 Earnings Call

May 02, 2013 9:00 am ET

Executives

James Sober - Vice President of Investor Relations

Edward H. West - Chief Executive Officer and President

Mick J. Beekhuizen - Chief Financial Officer, Executive Vice President and Director

Analysts

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

George K. Tong - Piper Jaffray Companies, Research Division

Kelly Metzler

Operator

Good morning, ladies and gentlemen, and welcome to the Education Management's Third Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Jim Sober, Vice President of Finance. Please go ahead, sir.

James Sober

Thanks, Denise. Welcome to Education Management's Fiscal 2013 Third Quarter Earnings Call. With me on the call today are Todd Nelson, Chairman; Ed West, President and Chief Executive Officer; and Mick Beekhuizen, Executive Vice President and Chief Financial Officer.

Following our opening remarks, we will begin a question-and-answer session. Before turning the call over to Ed for his opening comments, I'd like to remind everyone that information presented on this call contains forward-looking statements. These forward-looking statements include, but are not limited to, statements about our future plans and our future financial and operating performance. Actual results might differ materially from those contained in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially are set forth in the cautionary statement included in the earnings release.

Ed?

Edward H. West

Thanks, Jim. Welcome to our fiscal 2013 third quarter earnings call. On today's call, we will cover several operational topics, review our financial results, provide guidance and discuss our quality measures.

But first, I would like to welcome 3 new members of our executive management team who will strengthen our efforts to operate with high standards and maintain our core values of student success, integrity, innovation and achievement.

Carol DiBattiste join us as Executive Vice President and Chief Legal and Compliance Officer and will have responsibility for oversight of all compliance matters and legal affairs. Carol is a recognized expert in compliance and enterprise risk management and has extensive experience in both the public and private sectors.

Joan Walker was recently appointed Executive Vice President of Corporate Communications. Joan, who has over 25 years of experience and leadership in corporate communications, is a trusted leader in the field and will utilize her skills to deepen relationships in the communities that we serve.

And Mick Beekhuizen has joined us as Executive Vice President and Chief Financial Officer. Mick's experience and skill set will greatly benefit us and help us execute on our strategy. As a member of our Board of Directors for over 3 years, he already has a deep knowledge of the company and will have a short learning curve given his outstanding financial background and history with EDMC.

I would also like to thank Randy Killeen for stepping in and working with me as our acting CFO over the last couple of quarters. He did an outstanding job. I believe it is a testament to our mission and our market position that we're able to attract these accomplished individuals to come work for EDMC.

Now we made great progress on the objectives that I outlined last quarter. Of the many things that we will discuss today, what I would like for you to take away are these: first, during the fiscal third quarter, we experienced sequential improvement in new student enrollment trends across all education systems; second, we are still seeing strong positive improvement in student retention from the various initiatives that we have underway in our schools; third, we made progress in our efforts to free up liquidity and successfully paid down and extended the maturity of our senior notes; and fourth, we continue to make progress on driving expense savings initiatives across the company while supporting our students with quality instruction and services.

For the third quarter of fiscal 2013, we reported net revenues of $639 million, down 9% from the prior year, with EBITDA of $122 million, after excluding the noncash impairment charges in a loss on debt refinancing described in our earnings release. New students for the 3-month period ended March 31 decreased approximately 9% versus the prior year period. However, when excluding South University's fully online programs, where we have made significant changes, total new students were up 2% for the quarter. This increase was driven by continued campus-based new student enrollment growth at Argosy University, Brown Mackie Colleges and South University, as well as at the fully online programs at Argosy University.

Despite overall industry challenges that are impacted by macroeconomic conditions, we continue to execute on our plans to drive future enrollment growth. Let me take a minute to walk through some of the initiatives and trends at each of our education systems. At The Art Institutes, in addition to the new scholarship program we discussed last quarter, we recently announced a tuition freeze through calendar year 2015 for any student enrolled by this October, demonstrating our commitment to improving the affordability of the education we provide. Further, we are continuing our focus on traditionally aid students as we prepare for the July, August and October class starts, which again, are when more than 2/3 of these students typically enroll. Through these efforts, we are seeing nominal year-over-year growth in applications at The Art Institutes for the prospective high school graduate population. We continue to believe that The Art Institutes will see new student growth trends that are less negative during the fiscal fourth quarter when compared to the other quarters of the fiscal year.

At Argosy University, demand trends continue to be favorable, with application volume and new students up double-digits versus the prior year. This positive growth was broad-based across most areas of study and degree levels. In addition, the 180-day new student cohort retention improved during the third quarter, up several hundred basis points.

At Brown Mackie Colleges, the positive new student growth that began in December continued for the third quarter as new students grew approximately 4% year-over-year. In addition, the 180-day new student cohort retention rate improved several hundred basis points versus the prior year period, continuing their streak of improved performance.

South University's enrollments continue to be impacted by the changes that we have made to the marketing of its fully online program offerings, which should begin to anniversary later this calendar year. However, demand for its campus-based programs remains strong, with both application volume and new students showing double-digit growth during the fiscal third quarter. Also, 180-day new student cohort retention was up several hundred basis points during the quarter.

In summary, we are pleased by the positive demand trends we experienced during the quarter. Now for the first 9 months of fiscal 2013, we rolled out over 225 programs across our colleges and universities where they were not currently offered, covering a wide range of programmatic areas and degree levels. We have rolled out over 40 graduate level, 75 bachelor's and over 80 associate's degree programs. We've also developed 2 new bachelor's degree programs: designing for tablets, digital publishing at The Art Institutes and public relations at South University. New program development and program rollouts will help support future enrollment growth.

So far this fiscal year, we have made progress on our plan related to our capital structure. We increased our cash through sale leaseback transactions and efficiencies gained in capital spending, as well as freed up liquidity by lowering the letter of credit posted with the U.S. Department of Education. We have addressed the near-term maturity of our senior notes due 2014 through the completion of exchange offer for new Senior Cash Pay/PIK notes and cash. As a result, we paid down debt and pushed out the note balance by 4 years.

As we mentioned on previous calls, we have taken cost savings actions across the company, which will result in annualized savings of $100 million, with $70 million of these savings realized in fiscal 2013. In support of EBITDA stabilization and improving the affordability of education for our students, we continue to review our business to identify efficiency opportunities and process improvements across the company. This is an ongoing effort and a mindset. Accordingly, this past quarter, we announced the creation of the Education Shared Services Center. This center will provide support services to our education systems. Centralizing these services will assist in standardizing certain activities while allowing us to better deploy technology to automate and expedite certain processes and apply best practices across many of our support activities.

I will now turn the call over to Mick Beekhuizen, our Chief Financial Officer, for an update on our financials and our fiscal 2013 guidance. Mick?

Mick J. Beekhuizen

Thanks, Ed. In my comments today, I will review EDMC's financial results for the third quarter of fiscal 2013, discuss our segment results and provide guidance.

First, I would like to say how excited I am to be part of EDMC. I've been closely involved with the company for a long period of time, and during that period, I've gained a deep appreciation for the passion and dedication that our employees have for doing the right things for our students. I look forward to working closely with the team as we embrace the opportunities ahead.

Now let's have a closer look at the third quarter results. Net revenues were $638.9 million, down 9.1% versus the prior year quarter. We recorded a net loss of $284 million and an EBITDA loss of $207 million for the third quarter, driven by noncash impairment charges of $323.7 million, which primarily impacted The Art Institutes. Excluding the noncash impairment charges and a $5.2 million loss on debt refinancing associated with third-party fees, net income for the quarter was $30.5 million or $0.24 per diluted share and EBITDA was $122 million. Our EBITDA results, excluding these items, slightly exceeded our previous guidance, as expenses came in better than previously anticipated, some of which was timing.

Based primarily on the third quarter decline of the company's equity market capitalization, we determined it was necessary to perform an interim goodwill impairment test as of March 31, 2013. After completing the valuation process, we concluded that we had a noncash goodwill impairment of $294.5 million and a noncash indefinite-lived intangible asset impairment of $28 million at The Art Institutes. The valuations of Argosy University, South University, did not indicate goodwill impairment. Brown Mackie Colleges' goodwill was fully written off in the third quarter of fiscal 2012. In the prior year quarter, we recorded $495.4 million of goodwill impairment charges at Brown Mackie Colleges, Argosy University and South University.

The current quarter noncash goodwill impairment charge of $294.5 million was nondeductible for tax purposes. This was the driver of the negative 2.3% effective tax rate for the quarter. Of the total goodwill charge of $495.4 million in the prior year quarter, $379 million was not deductible for income tax purposes. Excluding the impact of this impairment and certain other expenses detailed in our press release, the effective tax rate would have been 40.6% in the current quarter compared to 39.2% in the prior year quarter.

Please note that the remainder of my comments exclude the expenses that were incurred during the third quarter of fiscal 2013 and fiscal 2012, detailed in the financial highlights of our earnings release.

The third quarter revenue decrease of 9.1% was primarily driven by the year-over-year decrease in our average quarterly enrolled student body of 11.4%. Average revenue per student was up 2.6%, primarily due to a greater mix of campus-based students. Total operating expenses for the third quarter were down 8.5% versus the prior year quarter to $557.2 million.

Looking at the expense in more detail, educational services costs were down $350.1 million, down 7.7% or approximately $29 million versus the prior year quarter. This decrease was primarily due to lower staff levels related to lower enrollments. As a percentage of net revenues, educational service expenses increased by 82 basis points versus the prior year quarter, primarily due to the disproportionate decline in net revenues.

Within educational services, instruction costs, as a percentage of revenue, were roughly flat to last year, while our students-to-instructor ratio declined. Bad debt expense, as a percentage of revenue, was 6.2% for the quarter, up 37 basis points from the prior year. On an absolute dollar basis, bad debt expense declined due to better collection performance at South and Argosy Online.

General and administrative expenses were down 11.7% to $166.8 million versus the prior year quarter, down 77 basis points from last year on a percentage of net revenue basis. Within G&A expense, marketing and admissions costs were down 10.1% year-over-year and represented 22.7% of net revenues, an improvement of 26 basis points versus the prior year period. Further, marketing and admission costs for new students starts were down slightly less than 1%.

Depreciation and amortization was roughly flat year-over-year at approximately $40 million. As a percentage of net revenues, D&A expenses increased 52 basis points versus the prior year quarter, primarily due to lower net revenues. EBITDA decreased 9.3% to $122 million for the third quarter, while EBITDA margin was 19.1%, flat to the prior year. EBITDA, which we use to measure operating performance, is a non-GAAP financial measure, and a reconciliation to reported net income is included in the quarterly earnings release.

Net interest expense was $30.5 million in the current quarter, an increase of $5 million from the prior year quarter, primarily due to higher rates on the portion of the term loan maturing in 2018 as a result of the refinancing on March 30, 2012.

I'd like to now cover the results of The Art Institutes. The average enrolled student body for the 3-month period ended March 31, 2013, was 67,000, down 11.1% year-over-year, with approximately 3/4 of the decline from campus-based students. Revenue declined 11.1% from the prior year quarter to $393.6 million, driven by the year-over-year decline in the average enrolled student body. Operating expenses, excluding depreciation and amortization, decreased 7.9% year-over-year. The decline was driven by previously implemented staffing adjustments, and that -- intended to align costs with enrollment levels and slightly lower advertising costs. EBITDA decreased 19.3% year-over-year to $100.5 million, with a segment EBITDA margin of 25.5%.

Turning briefly to South University. I would like to highlight the continued significant year-over-year improvement in EBITDA, which during fiscal 2012, was negatively impacted by the performance of South University's fully online programs. For the 9 months ended March 31, 2013, EBITDA has improved from $1.3 million in the prior year period to $30.7 million. This improvement is a direct result of the continued demand we are seeing for campus-based programs and the success of the marketing strategy and operational changes we have implemented related to fully online programs.

Now looking at selected details from our cash flow statement. Despite the decrease in EBITDA of approximately $110 million between the 2 9-month periods, cash flow from operations for the 9 months ended March 31, 2013, was $286.2 million compared to $152.7 million for the 9 months ended March 31, 2012. The increase in cash flow from operations from the prior year period was primarily due to a transfer in March 2012 of $210 million to restricted cash in connection with the issuance of cash secured letters of credit used to help satisfy our previously disclosed letter of credit requirement to the Department of Education.

Due to the timing of class starts, we typically use cash during our fiscal fourth quarter. While we expect that to be the case as well this fiscal year, we continue to believe we will generate positive free cash flow for the full fiscal year.

Regarding CapEx. During the 9 months ended March 31, 2013, we spent $64.6 million or 3.4% of net revenues on capital expenditures compared to $64.7 million or 3% of net revenues in the same time period last year. We expect CapEx to be approximately 3.5% of net revenues for fiscal 2013, and we continue to anticipate the opening of only one additional new school, depending on the timing of regulatory approvals, for the remainder of this calendar year.

Looking at the company's balance sheet. As of March 31, 2013, the cash and cash equivalents balance was $183.6 million. We had no borrowings outstanding under our revolving credit facility, and long-term debt was $1.3 billion, a year-over-year decrease largely resulting from the refinancing of the $375 million senior notes due June 2014, which was completed on March 5. In connection with the debt refinancing, participating senior note holders received $162.3 million of cash and $203 million of new senior notes due July 2018. The remaining $9.7 million of senior notes, due 2014, not tendered, were extinguished in April 2013 at par. In connection with the exchange offer, $5.2 million of third-party fees were recorded in the fiscal third quarter as a loss on debt refinancing.

Now let's talk about guidance. Our fourth quarter and annual guidance for fiscal 2013 reflects our recent April start, which had a slightly higher mix of fully online students than previously anticipated, continued higher bad debt and legal expenses, cost savings from prior restructurings, rents from sale leaseback transactions completed in the first half of fiscal 2013 and excludes impairments, debt refinancing and restructuring charges, employee severance, lease terminations and any other potential restructuring expenses which may be incurred.

For the 3 months ending June 30, 2013, we are expecting EBITDA to be between $62 million and $67 million, a net loss between $6 million and $3 million and a loss of $0.05 to $0.02 per diluted share. For the 12 months ending June 30, 2013, we are expecting EBITDA to be between $370 million and $375 million, net income to be between $51 million and $54 million, EPS to be between $0.41 and $0.43 per diluted share, and finally, CapEx to be approximately 3.5% of net revenues.

Ed, back to you.

Edward H. West

Thanks, Mick. In support of our long-term priorities that I've outlined in previous calls, I would like to cover several of the quality measures that we utilize: Student retention, scholarships awarded, the number of graduates and graduate employment statistics. In addition to enrollments, student retention remains a primary focus.

As I have previously mentioned, we measure new student retention on a student cohort basis 180 days after their initial start. For new students that enrolled during the quarter ended September 30, 2012, the 180-day cohort retention rate as of the quarter ended March 31, has shown an improvement of over 300 basis points or 3 percentage points from the prior year period. Further, this is the third consecutive quarter where we have experienced positive year-over-year retention improvement.

Now last quarter, I mentioned that we had expanded our scholarship programs at The Art Institutes. While it remains a little early to assess the full student impact that these scholarships will have, I am encouraged by the significant improvement in retention seen to date for those students who have received these new merit scholarships. Our students are the core of what we do, and we are passionate about helping them achieve their career goals through education that is aligned with real opportunities in the workforce.

During the first 9 months of fiscal 2013, we have had over 20,000 graduates, up slightly versus the prior year. Of our undergraduate students who graduated during the quarter ended September 30, 2012, from all of our colleges and universities and were available for employment, approximately 75% became employed in their fields or related fields of study within 6 months of graduation, with an average starting salary of approximately $29,200.

Lastly, I would like to congratulate The Art Institute of Vancouver for being named, for the fourth time, to The Princeton Review's Top Schools to Study Video Game Design and being ranked #9 on the list of Top 15 list for undergraduate schools in 2013. This ranking is a testament to the quality of higher education our faculty and staff provide, the hard work of our students and our commitment to remaining relevant in a gaming industry that constantly changes.

I would now like to turn the call over to -- back to the operator for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Brandon Dobell of William Blair.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Maybe focus a little bit on price to start with. We've had a lot of schools in the group over the past several quarters freeze tuition, delve more into programmatic pricing, just kind of continuing tweaks, I guess, is the word I'd use. How should we think about your guys plans going forward, especially looking at the big fall enrollment for the high school students? Any major comments, especially within the online segments for how we should think about price or revenue per student trends?

Edward H. West

Well, a great question. It's something that we have as a top priority across the company and that we've taken a lot of initiatives underway. It's one of our top goals to continue to improve the affordability of education across the country. And let me give you a couple of examples, and largely, most notably at The Art Institutes. We're now on our third year in a row for many of The Art Institutes that have not had a tuition increase across -- the schools across the country. And just last month, we announced that for students who are enrolled by this fall, that they will not see a tuition increase through calendar year 2015. So that's, we believe, a very, very strong testament to our -- continue to focus on the cost of education. And in fact, at AI, many students who were enrolled 3 years ago, and today, the cost of an associate's degree or a bachelor's degree is approximately 9% lower for them to obtain their programmatic degree. And that really just gets back to changing a lot of the other costs, lowering different fees, services and other costs, using e-books and the like, and then also keeping a lid on the tuition and frankly, also, on the credit hours that are required. We look at every program across all of our education systems, understanding the marketplace, the value, the costs relative to employment, the competitive marketplace and assess that. And we look to make sure that we continue, as a focus, to drive the affordability and to keep the costs down for our students for -- to the greatest extent possible. With respect to looking at, I think, about the unit revenue, in terms of overall tuition, we think it's going to be roughly flat. It's up, as Mick alluded to earlier, on a year-over-year basis, but that's really driven by mix, not the tuition levels. It's really -- is a greater mix in proportion of campus-based students relative to online. And we'll continue to drive to lower the cost of education wherever we can.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay. You mentioned some of the support services, kind of centralization efforts, I guess 2 questions there. One, the timing of your kind of rollout of that, and do you think you've got a handle on how to make that happen without kind of upsetting the application to enrollment process at the different institutions? And then second, related to that, any kind of quantification around potential cost savings or potential, I guess, efficiency metrics that we should be paying attention to from that point of view?

Edward H. West

Sure. As you point out, Brandon, about -- where I talked about the center, and that's something that we initiated this past quarter. A lot of efforts are underway, high coordination, lots of communication working across the system, whether it's through our campuses, our online operations and the corporate activities and the like. The goal here is obviously to drive scale, efficiency, effectiveness, free up activities, in particular, the campuses and online so they're working -- more focused on direct student engagement, student support, helping drive retention, the student experience, better work-life activity for the individuals at the campuses, as well as online and freeing up many of the administrative support and functions in the areas where we can scale in the center and where we can also drive standardization, or we can then automate those activities to the best extent possible which will, in return, give better services ultimately to the customer and -- who are both our employees, as well as the students. We would expect to see cost efficiencies through this. We'll give more guidance as that ensues. But to your initial point on that, we want to make sure that it is on a highly, highly coordinated effort. You mentioned the enrollment process. Again, from an enrollment standpoint, that's handled at the campus or at our online operations and not at the center, where we would do more -- some of the functions to support, would be like the processing of financial aid activities after, which is not in the front student-facing activity. Certain activities that you would see in the center will be more support in nature, financial aid processes, some registrar activities, student accounting, out-of-school collections and the like, mostly support functions, again, so that folks in the campus can have more time freed up to work directly with our students.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay. And then final one from me. In the last couple of quarters, you've talked about the influence of PLUS loan issues on enrollments. Where do you stand with that? Has there been any major changes or has -- as we kind of anniversary that, if you want to call it that, I guess? Has that changed the enrollment trajectory for those types of students?

Edward H. West

No. There's really -- we really -- unfortunately, what we talked about earlier and what we had anticipated on the whole PLUS loan program unfortunately has come to fruition. I mean it has had a substantial impact to families and students across the country and the like. I mean our levels were down. We think -- we believe it's impacted close to 8,000 students, whether those were students who were currently enrolled that then had to drop out because of the -- where they had previously received the PLUS loan, they no longer had it. Students who were applying, but then elected not to enroll because they could not obtain the PLUS loan or frankly, also, where we're supporting students then on our balance sheet. We have seen a decline. Total -- if you look at the financial aid from PLUS loans over from -- over the last reduction for this fiscal year, is down almost $100 million. And consequently, it's also had a similar impact to our EBITDA this year, whether that's just from the loss of enrollment, as well as supporting students on our balance sheet and doing the reserves associated with that. Now the Department of Education did mention that for many families who may receive a letter of denial that they are encouraged to reapply. We do -- we had seen there are many families have reapplied and then they subsequently get approved. So we make sure that families are aware of that to a great extent. The only positive on that is that as you pointed out, Brandon, that will anniversary itself. The applications, as I mentioned earlier, for high school students, we do see positive trends on the high school applications going into this summer. One thing that's very different that we're doing this year relative to historically because now we know about the issues of PLUS loan, is that we're working with families much earlier in the process, going through the packaging process, making sure that they apply. If they were then to be denied, what are other solutions. Just going through that process a lot earlier versus what happened a year ago when we were not aware of it. It got close to the start. And then the start where we felt we were actually feeling good a year ago. And then we came close to the start and realized the students were not being approved. The other benefit now is we're much further ahead of that process and we have there -- many of the applications are further along and have already gone through that approval process.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay. And then final one from me. It sounds like good trends in applications. Have show rates kind of kept up with your expectations for this most recent start, and kind of how are you assuming things trend in the next couple of quarters from a show rate point of view?

Edward H. West

Yes, I would say it's mixed. You have some pockets of positives, some negatives, really it's mixed. We've seen on a convertible -- we would call conversion rates, which are where a student inquires into one of our schools, and then completes an application. We've seen some improvement there, ultimately going from that application rate to the start has been mixed. We would think, logically, that because of all this extra effort, with The Art Institutes, in particular, the campus-based students and all the work that's being done, we're hopeful that we would see some improvement of that going into this summer and fall. But, hey, based on what we learned last year, we don't want to give any indications on that until after it's done and then we'll tell you how it went.

Operator

Our next question will come from Jerry Herman of Stifel.

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

I just wanted to follow up on that question, Ed, with regard to AI and in particular, I think you said that there were nominal growth in apps for the high school students, is that correct? And if so, what percentage of the summer and fall starts are typically from the high school demographic?

Edward H. West

It's the vast majority. So if we look at July, August and October, the majority of those starts come from high school students, and it's the majority of all of our high school starts for the whole year are in this summer and fall period. So that's why this is such a big focus of ours and then working with these families early, early on into the process and which is why it's an encouraging sign that we are seeing a nominal increase in the applications. But about -- to your thing, it's probably about right around 3/4 of the students that'll start will be dependent age high school and major [ph] student or for The Art Institutes.

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And you said you would expect fourth quarter to be less negative in terms of new volume at AI?

Edward H. West

That's from a new student standpoint, those were -- that's our expectation that, that would be less negative.

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then with regard to expense reduction, you guys have done a good job there. You said there was a sort of residual effect into next year's $30 million. Any update on potential additional programs along those lines?

Edward H. West

No, no further update. We'll give guidance this next quarter as we further details. I mean, like I said earlier, I mean this is just a mindset of where are the efficiencies, effectiveness, how do we continue to streamline, working across from a process standpoint, so that again so that people in our faculty and staff are more focused working with the student and student experience and doing the phenomenal job that they do. Are there other things that we can do to automate certain activities? Frankly, we feel like we have a lot of opportunity on that, it's just focus on executing on that. We'll give you more guidance on that as time goes on.

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

And then just one last question with regard to sort of the South and Online piece of the business. It looks like the campus-based piece is very strong at South. The numbers would suggest that the Online piece is very weak. Talk about differentiation there, if you will, and what you guys can do to potentially get that business Online piece back on track?

Edward H. West

Well, we actually -- we feel great about South University in terms of the performance that they've had. If you look at the campuses, very, very strong programs, very strong positions in their communities where we have campuses. High-end health care programs that -- obviously, starting from the doctor of pharmacy, nursing programs, physician assistants programs and the like, ranging from -- their programs are going from doctoral level to associate's. So very strong on that on the campus. On the online side, we took actions. If you recall from previous calls where I outlined this past summer where we took various actions to step back and went back. And where are we seeing solid academic progress, which programs, what degree mix, where are those students based, what regions are they? When we saw a really good academic progress, we pulled back to focus in on those areas. And then went back and looked what are the sources from which those students inquired, then re-architected our marketing strategies to really focus on when we saw good academic progress, good retention, good success and then size the organization, the infrastructure and the marketing spend accordingly. It was obviously a very, very tough process. But that has happened. And since then, we're now seeing very good retention improvement. Obviously, it's on a lower base. So now you still have all the year-over-year impact where the percentages look negative. But actually, we're not worried about that. Where we're really focused on is where we're seeing good academic progress, student retention and frankly, you can see that's manifested itself in the financial results where there's been dramatic improvement year-over-year. And now combining the online, on-ground offering with South University, now focused on where we see those areas of strength, so we're really encouraged by the progress. That will start looking better as the calendar fixes itself, and we look forward to discussing it further.

Operator

The next question will come from Andrew Steinerman of JPMorgan.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

I'm going to ask about new students enrollments in the first half of your fiscal. Do you feel, with the comments that you made, that audits should overall could be flat to up as you get into the fall timeframe? And what would be the timing of when you could see an inflection back to kind of flat to up at South?

Edward H. West

So on the new students, yes, as you pointed out that we have seen progress this past quarter relative to the previous, and we expect to see further improvement going into this next quarter. I would say, it's going to be choppy. It's going to be -- we're going to have periods where it looks a little better, it's going to look a little worse, it's going to be choppy up and down. We don't want to give guidance going into this next year. And on that, obviously, the comps will be more favorable. But just given the impact that AI has seen from the PLUS loan, working with students, obviously we've been working a lot on the affordability. We're seeing very, very good encouraging progress. And on retention, from those it's still very early. But seeing that short frame turning positive, so some other encouraging signs. It's also it's positive just seeing these high school apps turning it positive. Offsetting some of that, overall, just general inquiries have been impacted, offsetting some of that from looking in the third-party lead area. So it's going to be choppy, and we'll just give you more color as time ensues there.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

And, Ed, I also asked about South. Could you frame up South and what it will take to kind of get back to flat to up new enrollments?

Edward H. West

Sure. Well, on the campuses, they are solidly positive and double-digit growth, and we see that going into this next quarter as well. The Online side will begin to anniversary itself later this calendar quarter. So towards the end of the calendar year, we should see that beginning to anniversary itself.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

And then also just when you talk about the success in student retention that you've had, could you talk about, well, kind of further-out goals, do you feel like there's a lot of room to still improve student retention from here? Or do you feel like the progress has been so much that it's hard to have as much significant improvement going forward?

Edward H. West

Well, I'll tell you one thing we're most proud about is across all of our colleges and universities and across our system is the progress that all of our faculty and staff have made in our retention and working with student success and achievement there. They've put a lot into it. And to your point is -- and it's been -- when you see over 3 percentage points of improvement in that, that is a big accomplishment. But there's still, we believe, still a long way to go, that it's a mindset. How do we continue to improve it? It's one of our goals as a -- overall as a company. And all of our colleges and universities, to be -- move towards the top quartile in terms ultimately in graduation. Only way we're going to improve that is to continue to focus in on this new student retention and see ongoing improvement. So we intend to drive more of that and working that, finding other solutions, additional effort across the system. There is no single silver bullet on this. This is just hundreds of different initiatives and activities underway, whether it's in with the instructors, the curriculum, the content, class scheduling, graduation focus plans, student engagement plans, being a part of the community and environment, working with students from a student affairs standpoint. It's just a lot of different things and having everybody in that campus engaged. It's one of the reasons why we're seeing the improvement, and we feel like there could be -- more will happen. Now we're going to have periods where some quarters don't look as good as others. But over time, we feel like there's more to be done.

Operator

Our next question will come from Peter Appert of Piper Jaffray.

George K. Tong - Piper Jaffray Companies, Research Division

This is George Tong for Pete Appert. Just wanted to dig a bit deeper to your fourth quarter guidance. Your EBITDA this quarter was $7 million higher than the midpoint of your guidance for the third quarter. But the midpoint of your full year EBITDA guidance is only going up by $2.5 million. You mentioned the timing of expenses helping a bit this quarter. Any other reason for the rather conservative guidance for the fourth quarter?

Edward H. West

Yes. The most -- in general, most of that really is as we -- as Mick had outlined on there on the timing of certain expenses, a lot of that, some outside services related to legal consulting, bad debt. Bad debt came in a little better, as Mick had indicated, than anticipated. We expect that the bad debt rate will tip up and tick up in Q4. Just to be prudent on that. And obviously, you -- the timing related to expenditures associated with employee-related costs. So there is a lot of timing in on that and on from a staffing standpoint. And those were the general areas. I think Mick had covered those before.

George K. Tong - Piper Jaffray Companies, Research Division

Got it. Any contributions from maybe enrollment that you see in the fourth quarter that might be embedded in the guidance?

Edward H. West

Well, yes. With the enrollment, well, obviously, will drive that from there, whether it's better or worse, obviously, is a probability that could happen either way. We know we've had the start for April, which is the largest part of it. It could be impacted positively by better retention than we anticipate, but we feel we've already factored in a fair amount of the improvement that we're seeing into that. But it could also be negatively impacted or positively impacted by additional new student enrollments that'll occur throughout the quarter, principally at our online operations between [ph] the 3 systems that have online courses. So it could be impacted by that. We also have monthly starts at Brown Mackie. We've factored in what we believe to be realistic and achievable on that, but it could be impacted one way or the other.

George K. Tong - Piper Jaffray Companies, Research Division

Right. Would you say heading into the fourth quarter, your outlook for enrollment has improved versus what your outlook was in the third quarter?

Edward H. West

I would say that, obviously, as I mentioned earlier, the new student enrollment we expect to be less negative. And it hasn't materially changed from previous expectations.

George K. Tong - Piper Jaffray Companies, Research Division

Got it. Okay. And then final follow-up. Any idea as to when, on a blended basis, new enrollments will turn positive?

Edward H. West

We haven't given any guidance on that. We'll [ph] be going into next fiscal year. There's the opportunity for that to turn positive. But it could also be -- before that happens -- we're seeing progress now going into the summer and fall. It could be -- go back slightly negative. As I mentioned earlier in one of the previous questions, it's going to remain choppy because you have differences on when the starts are, there's more of a preponderance, more weighted to The Art Institutes in the first and second quarter and on that -- which could impact the overall weight. But if you step back and look at it over time, there's going to be choppiness, but over time, we do believe would be a general trend of improvement.

Operator

Our next question will come from David Chu of Bank of America.

Kelly Metzler

This is Kelly Metzler for David Chu. I was just wondering, you've made increases in scholarships at The Art Institutes. Have you made any changes or plan to make any changes across other segments in your scholarship views?

Edward H. West

Yes. We have scholarship programs across all of our colleges and universities, the largest of which though is -- are The Art Institutes, in particular just the programs, the size of AI relative to the entire company, as well as the programs that they have. But we have both need merit-based scholarships, success-based scholarships across all of our colleges and universities and continue to evaluate different things that can be done. As I mentioned earlier, we're encouraged by the early indicators with some of the scholarships that we've increased this past quarter.

Kelly Metzler

Great. And just a follow-up, I was wondering how retention compares between campus-based and online students. Are there improvements that you've seen across the board or weighted towards a particular segment?

Edward H. West

Actually, a great question. For our fully online programs, we've seen a significant amount of retention improvement. When I'm speaking to retention, what I'm alluding to is our new students cohort retention measured 180 days after they start. We went through a lot of changes a while ago when we converted to non-term and then really focused in on the students where we've seen very solid academic progress, who are there to be -- with conviction towards an education. We made the changes on the South Universities Online programs. Since those changes, the team has done an extraordinary job of student engagement, with the faculty, with the staff, and have seen a substantial improvement. We were also seeing improvement at the campuses. Most notably, Brown Mackie has done an extraordinary job. They've been a leader throughout our organization of driving improvement, working with all our students having a graduation-focused plan. They've seen strong, strong improvement for several quarters now in a row. We've also seen that turn positive at Argosy. Early signs from AI. Obviously, AI, The Art Institutes were negatively impacted because of the PLUS loan issues. We had many students, as I mentioned earlier, who had dropped out because their families lost access to the federal loans, the PLUS loan, they dropped out. So that had negatively impacted The Art Institutes. Now what we're starting to see though are the early signs for our recent class start this past quarter of improved retention, also buttressed with some of the college scholarships. So seeing early signs of improvement there. So it has been broad-based, both online and on-ground and something that, across our organization, we're very, very proud of, that we've seen there.

Operator

And showing no additional questions in the queue, this will conclude the question-and-answer session. I would like to turn the call back over to Education Management's President and CEO, Mr. Ed West. Please go ahead, sir.

Edward H. West

Great, thank you. While the operating environment remains challenging, we continue to see some positive demand trends as we continue to execute on our commitment to our students. I also wanted to most especially thank our full-time and part-time faculty and staff across the country for their dedication and hard work at making a difference in people's lives each and every day. We are all dedicated to operating with the highest possible standards in maintaining our core values of student success: Integrity, innovation and achievement, as the company evolves in a changing marketplace.

Thank you, again, for your time today, and have a great day.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

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