Bridgepoint Education Management Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: Bridgepoint Education, Inc. (BPI)
by: SA Transcripts

Bridgepoint Education (NYSE:BPI)

Q2 2013 Earnings Call

August 06, 2013 11:30 am ET

Executives

Paul Goodson - Associate Vice President of Investor Relations

Andrew S. Clark - Co-Founder, Chief Executive Officer, President and Director

Jane L. McAuliffe - Chief Academic Officer and Executive Vice President of External Affairs

Daniel J. Devine - Chief Financial Officer and Executive Vice President

Analysts

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

Corey Greendale - First Analysis Securities Corporation, Research Division

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

Peter P. Appert - Piper Jaffray Companies, Research Division

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Paul Ginocchio - Deutsche Bank AG, Research Division

Timo Connor

Operator

Good morning, everyone, and welcome to Bridgepoint Education's Second Quarter 2013 Earnings Conference Call. Today's call is being recorded.

At this time, I would like to turn the call over to Mr. Paul Goodson, Associate Vice President of Investor Relations for Bridgepoint Education. Please go ahead, sir.

Paul Goodson

Thank you, Karen, and good morning, everyone. Bridgepoint Education's second quarter 2013 earnings release was issued earlier this morning and is posted on the company's website at www.bridgepointeducation.com. A copy of the WASC action letter and special visit team report from the review of Ashford University is available on the WASC website at www.wascsenior.org.

Joining me on the call today are Andrew Clark, Chief Executive Officer; Dr. Jane McAuliffe, Chief Academic Officer; and Dan Devine, Chief Financial Officer.

Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking, including statements addressing our expectations regarding enrollments, student persistence, the results of our branding campaign, the transition of accreditors and timing of regulatory actions, as well as commentary regarding bad debt and the future performance of our business. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual performance or results to differ materially, including the risk that the results of 2012 initiatives are different than currently anticipated. Please note that these forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our report on Form 10-Q for the period ended June 30, 2013, to be filed with the SEC for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of our website.

At this time, it is my pleasure to introduce Bridgepoint Education's CEO Andrew Clark.

Andrew S. Clark

Thank you, Paul, and welcome to Bridgepoint Education's Second Quarter 2013 Earnings Call. After I discuss our recent developments and plans, our Chief Academic Officer, Dr. Jane McAuliffe, will provide you with commentary regarding loss grant of initial accreditation and the next steps for Ashford University. Then our CFO Dan Devine will review our second quarter results and key operating metrics. After Dan speaks, I will offer my closing comments. I hope all of you saw our news on July 10 and participated in our conference call the following day to discuss WASC's granting of initial accreditation to Ashford University. This is truly a significant accomplishment for all of Ashford's stakeholders. The granting of this accreditation underscores Ashford's commitment to quality through recruiting better qualified students, and its focus on providing them with the support they need to remain in school longer and complete their education. We are confident that the changes we put into place are the right things to do for the students, and we realize that these changes will require continued focus as the institution evolves. While these measures have required significant time, effort and investment to implement, they also strengthen the value proposition we offer students. As evidenced by the recent increase in scholarship dollars being offered by some of our peers, students are now doing more research when making their college decision and are more in tune with the national conversation about higher college costs. Ashford University has always been a leading option for students seeking a high-quality and affordable solution to completing their education. That value proposition is grounded in our long-standing practice of offering affordable tuition, which continues to be among the lowest in the industry. It is supplemented by the use of technology to deliver quality instruction and to track and support students in their learning process. Over the past year, this value proposition has been further strengthened by the Ashford Promise, by increases in full-time faculty, by more than doubling our student support team and by a significant expansion in career counseling and alumni resources. All of these initiatives are aimed at enhancing the student experience and providing our students with the greatest possible chance of success both while they are students at Ashford, as well as in their post-graduation careers. For students seeking a quality education at an affordable cost, we believe Ashford's strengthened value proposition extends the university's competitive position in today's higher education marketplace.

I want to briefly discuss our recently launched branding campaign. The campaign will emphasize the importance of technology in the changing landscape of higher education. Specifically, we are expanding our audience reach by continuing our brands campaign throughout 2013 above digital advertising and television. You will remember that last year, we launched our first national branding campaign. Our goals are twofold: first, to continue communicating the Ashford value proposition; and, second, to increase Ashford's brand awareness. Ashford experienced meaningful results on both fronts last year, as well as increasing both conversion and persistence from those prospective students that discovered Ashford through the branding campaign. We have relaunched this campaign in July and anticipate that similar lift in conversion, persistence and brand awareness. At the same time, Ashford is continuing a strategy of increasing organic inquiries that connect us with students who are more likely to succeed. Ashford has substantially reduced its aggregator inquiry investment, which has allowed the university to focus on the highest quality prospective students. With this approach to marketing, we're confident that Ashford is well-positioned to acquire high-quality students that are attracted to its best-in-class value proposition. The strength of our enhanced value proposition and our expectations from our 2013 branding campaign are just 2 of the reasons that we continue to expect growth in new enrollments in this year's fourth quarter. Our conversations with prospective students continue to affirm that there is a strong level of interest in our degree offerings, and we believe that this will only improve in future quarters.

Now I'll ask Jane to describe some of the university's focus areas going forward.

Jane L. McAuliffe

Thank you, Andrew. Ashford University is excited to be joining the WASC family. As we shared in our announcement on July 10, the commission acted to receive the report of the special visit team that was sent to Ashford, granted initial accreditation for 5 years until July 15, 2018, and requested a visit in spring 2015 to monitor Ashford's progress with respect to the team recommendations. I want to provide you with the update from what the Ashford team has been working on since notification of WASC accreditation. Ashford University has notified both the Department of Education and the Higher Learning Commission that it has been granted WASC accreditation. We have submitted the necessary documentation and are working with HLC, WASC and the Department of Education to ensure successful transition from one accreditor to another. Ashford will not voluntarily withdraw accreditation with HLC until the Department of Education has officially authorized the transfer, recognizing WASC as the official accreditor. We do not have a time line on this process, and we remain in communication with all parties. Ashford has conducted an analysis of both the commission action letter and the special visit team report for specific recommendations and has already conducted further work in each area. I thought I would highlight just a few areas today to demonstrate how Ashford is focusing on continuous improvement. In the areas of attrition, support for student achievement and adequate levels of degree completion, Ashford is using a growing body of evidence to inform admissions, academic and student service positions and track the effectiveness of the changes underway. Ashford's planning and effectiveness department has been working on an ongoing series of reports outlining research findings relative to students persistence and retention and is conducting ongoing research projects to evaluate the effectiveness of Ashford's quality initiatives. Ashford is taking an evidence-based approach to monitoring retention and degree completion and making concrete corrective recommendations for action.

In the areas of adequacy of the Ashford faculty model and the role of faculty, Ashford continues to increase its full-time faculty. In addition to teaching, full-time faculty has various administrative and academic responsibilities, including departmental leadership, program review, course review and development and faculty mentoring. Ashford has been very successful at bringing on new faculty and is on track to attain its full-time faculty objective.

In the area of effectiveness of program review, Ashford developed both a set of processes and 5-year timetable for completion of program reviews for all the university's programs. The university completed 19 reviews since 2011 and plans to complete an additional 28 reviews during 2013 and '14. Additional personnel have been assigned to provide further necessary support in this area as well. With respect to assessing student learning and ensuring academic rigor, the WASC commission noted that Ashford has already had 85% of its courses reviewed through quality matters and that the program reviews being conducted reflected expected standards of internal and external rigor. Ashford continues to roll out integrated course-level assessment using Waypoint Outcomes having already achieved Waypoint implementation in over 200 courses. Course rigor is also being addressed through the Ashford faculty forums in each college and, even more fundamentally, through faculty development around techniques for facilitating in-depth online discussions and assignments. The WASC action letter indicated that Ashford was in the process of transforming itself and striving to achieve a major culture change to a university committed to student retention and success. It was evident that there was enthusiastic commitment and support for a significant reallocation of resources to align with this new vision. Ashford will remain focused on continuous improvement as demonstrated in the examples I have shared with you today.

The WASC team commented in the reports that, "The changes that have occurred in such a short time border on being revolutionary. They include what the team considers to be a number of best practices and what can become a model for online higher education for a nontraditional student population." This innovative focus continues to set Ashford apart from others and demonstrates that we will continue to be a leader in higher education.

Ashford's success of bringing innovation to education was recently noted by Ralph Wolff of WASC, who learned about Ashford's early warning system, such as its real dashboard, which will quickly assess student engagement and learning. Ralph commented that these systems hold tremendous promise for ensuring educational quality by giving an early warning about the students who may be in danger of dropping out, thereby allowing for a timely intervention. Through the use of technology and data analytics, Ashford has an extraordinary ability to measure student engagement and faculty effectiveness. Ashford built these systems -- these types of systems internally to increase student support and, ultimately, student success. Ashford's accreditation approval by WASC is the culmination of several years of hard work by the university leadership, faculty and staff, and we are very pleased by WASC's recognition of Ashford's efforts. Congratulations to the university community.

Now I'll turn the call over to Dan, who will review key financial and operational results from the second quarter.

Daniel J. Devine

Thank you, Jane. Let me begin by providing some key operating figures for the quarter ended June 30, 2013. I should remind you that effective in the fourth quarter of 2012, the company made changes in the presentation of its operating expenses to better reflect the industry practices and provide more meaningful information, as well as increased transparency to its operations. We believe that the reclassification better represents the operational changes and business initiatives that we've implemented. The company has reclassified prior periods to conform with this new presentation. For the quarter, revenue was $197.6 million compared with $256.3 million for the same period last year. As of June 30, 2013, total student enrollment was 71,685 compared with 92,620 in the same period last year. New enrollments for the second quarter were approximately 10,600 as compared to 19,300 for the second quarter of 2012. For the second quarter of 2013, instructional costs and services were $106 million or 53.7% of revenue compared with $85.3 million or 33.3% of revenue in the same period last year. The increase was due primarily to increased investment in personnel in the areas of academic advisory, financial aid support and student services, as well as increases in bad debt, instructional-related facilities and IT expenses. Included in instructional cost and services for the second quarter of 2013 was bad debt expense of $18.6 million or 9.4% of revenue. We continue to focus on enhancing our processes and procedures around our accounts receivable.

Admissions advisory and marketing expenses for the second quarter of 2013 were $57.6 million or 29.1% of revenue compared with $87.2 million or 34% of revenue in the same period last year. The decrease is primarily due to decreased compensation resulting from fewer admissions personnel. Other factors contributing to the decrease are lower costs for advertising, facilities and IT. General and administrative expense for the second quarter of 2013 were $17.9 million or 9.1% of revenue compared with $15 million or 5.8% of revenue for the same period last year. The increase is primarily due to increased administrative compensation and professional fees. Included in our 3 main expense categories for the second quarter is approximately $3.8 million related to stock-based compensation expense in the aggregate compared with $4 million for the second quarter last year. For the second quarter of 2013, operating income was $16 million compared to $68.8 million in the same period last year. Our effective tax rate for the quarter ended June 30, 2013, was 39.2% compared to 37.9% in the same period last year. Net income for the second quarter of 2013 was $10.4 million or $0.19 per diluted share compared with net income of $43.3 million or $0.77 per diluted share for the same period last year. The results for the second quarter of 2013 include a pretax charge of $5.9 million for severance, which had an impact on the second quarter earnings of $0.06 per diluted share. Fully diluted EPS is calculated based on a diluted share count of 55.6 million shares for the second quarter of 2013 compared with 56.2 million shares for the same period in 2012. As of June 30, 2013, we had cash and total investments of $536.2 million compared to $514.7 million as of December 31, 2012. The company generated $32.3 million of cash from operations for the 6 months ended June 30, 2013, compared with $76.8 million for the same period in 2012. Capital expenditures for the 6 months ended June 30, 2013, were $6.8 million compared with $15 million for the same period last year.

Now I will turn the call back over to Andrew for his closing comments.

Andrew S. Clark

Thank you, Dan. I want to take this opportunity, once again, to acknowledge all of the hard work that has been required of everyone in the Bridgepoint family in attaining WASC accreditation. We are now well-positioned to go forward with a stronger value proposition to offer students and a more effective operational structure from which to grow. We're confident that our academic model will continue to be sustainable and successful in the future because it continues to be centered on delivering an exceptional student experience and educational value to our students. That educational value centers on student success based on affordability, quality and innovation, and it's continuing to differentiate our institutions from the many academic alternatives available today. Our plan over the coming 12 months is to fully communicate Ashford's value proposition to a broader population of prospective students who are more likely to succeed. This concludes our opening comments on today's call. At this time, I'll ask our operator to open the phone lines for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question today from Trace Urdan with Wells Fargo.

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

I wanted to -- I know that you're not giving guidance for 2014 at this point, but I wondered if you could speak with us qualitatively about what you're seeing at this point in time that continues to give you confidence that you're going to see starts turn positive in the fourth quarter? And whether there's anything you can tell us about the trend line that might help to -- there's such a range of perspectives on what 2014 is going to bring for you all, and I'm wondering if you can do anything, at this point in time, to sort of help us understand what you think things are going to -- how things are going to shape out on enrollment revenue and on the cost side into 2014.

Andrew S. Clark

Sure, Trace. Well, I'll try and answer your questions as best as we can without getting into too much detail about 2014. Just in terms of the trends and what we're seeing, you have to keep in mind that prior to the WASC decision here in July that every conversation that an admissions advisor had with a prospective student centered around current accreditation at that time and the uncertainty around that accreditation and kind of some of the negative information that students had with regards to the previous WASC decision. So obviously, all of that now has been cleared up and lifted, and that, I believe, will be a strong contributor to admissions just having a more productive and fruitful conversation with prospective students. And I would think that, that would mean that we would see a slight to moderate improvement in the third quarter. And as we've said, an improvement in the fourth quarter over the prior year, as well. And then when you layer on top of that what we know historically from our branding campaign last year and the lift that we saw in conversion and persistence and just how effective that campaign was at bringing even higher-quality prospective students to Ashford, along with kind of some recently emerging trends that we've seen in the last several weeks, we have a good confidence level that what we've been thinking since the first quarter of this year, we believe in even more strongly at this point.

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

When you say the trends over the last several weeks, is it -- I mean, are you referring to changes that reflect already the change in the last situation?

Andrew S. Clark

Yes. I think that would indicate what I said at the very beginning, which is the conversation now is much different, Trace, post the favorable WASC decision than it was for the previous year.

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

Okay. And then just, Dan, maybe the onetime costs in the quarter, where they all isolated at a single expense line, or were they spread out and if they were [indiscernible] communication?

Daniel J. Devine

Yes. Sure. $5.9 million was the gross amount. $4.8 million was instructional cost and services. $800,000 was in G&A, and was it $300,000? The difference is in admission services.

Andrew S. Clark

Yes, and then, Trace, just one last comment on 2014, since you asked about that. I think that as I've indicated, the institution has gone through a tremendous amount of transition over the past year, and even WASC commented on the cultural transition of the institution. My view has been and continues to be that as all of that kind of settles out now that we're past the accreditation, that the institution now is in a point where it'll be able to strengthen itself and really kind of settle into that culture. And that gives us confidence about 2014 and just what the institution will look like from a new enrollment perspective and a persistence perspective.

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

Do you have the sense that the changes that you've made over the last year have -- had -- have contributed to any strength in persistence that we're starting to see at this point?

Andrew S. Clark

Yes. I mean, as you've probably read, Trace, WASC noted in its report all of the use of analytics and the early detection systems that we have and the way in which really use the data to determine engagement level of our students and to detect early on if a student is struggling or having problems. And so because we have those systems and they're so robust at this point, we're able to have a fairly good window into almost a real-time situation in terms of how students are doing. And in addition to that, it's giving us a good view into how students, under these new initiatives, are performing and their likelihood to persist, and we are seeing improvement there. So we do have a lot of kind of underlying data that we can't share with you specifically that also helps give us confidence for next year.

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

The -- we're not able to see to sort of separate persistence from graduations. But ostensibly, this is the first quarter where that kind of sell-side measure that we're able to look at, which is the number of students that continue quarter-over-quarter. This is the first quarter where we've seen that tip positive in a while, and I'm wondering if that you think is a trend that we can kind of rely on going forward.

Andrew S. Clark

It's certainly a trend that we're hopeful that we'll continue to see going forward. We -- it's a good thing. We've had a lot of students graduating, and so that does kind of change the persistence numbers to some extent. But we believe that, that trend should continue to be a positive one going forward.

Daniel J. Devine

Yes, Trace, I'll just make one comment on Andrew's graduation -- the item he just mentioned. If you look at the first and second quarter, the graduation trend, as a percentage of total student enrollment, has increased, and it's probably created a drag, so to speak, between 1% and 1.3% when you do your street persistence calculation. And that's because you're coming off a higher enrollment number, and you're going to lower enrollment number, so you're kind of graduating off of a higher enrollment number. And when that levels out, you'll see that, that -- hopefully, that drag will be eliminated.

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

How much longer do you think we'd see that drag, Dan?

Daniel J. Devine

Well, I think you have to go for at least probably through this year, right? That's when you kind of saw the significant adjustment in enrollment. So 2 to 3 more quarters. Probably not as significant in future quarters as it was in the first 2 quarters.

Andrew S. Clark

Right, which means the persistence improvement that we have has kind of -- even though you have the improvement, it's -- how much it's improving is masked a little bit, so...

Operator

And our next question will come from Corey Greendale with First Analysis.

Corey Greendale - First Analysis Securities Corporation, Research Division

First question is looking at the WASC action letter, obviously, there's a lot that's positive there. It talks about being cautious in introducing new programs until existing programs have been evaluated and making sure that you're not growing beyond your capabilities. Can you just put that in -- how you're thinking about those comments as far as what the implications are for your new program introductions, and what you think WASC expectations are as far as how much you can grow in the next year?

Andrew S. Clark

Well, it's a good question, Corey. I think, first and foremost, Ashford has quite a few number of programs that, obviously, sustained the institution at a 22% higher total enrollment than it is today. So I think there's opportunity with what exists. I think the leadership at Ashford is going to be very diligent and very thoughtful about additional programs and adding new programs. And I'm sure it'll be a consultative approach with WASC. I don't think that they would just kind of do that within a vacuum. I think WASC encourages a very collaborative culture and approach with its institutions. So I think that they would do that jointly with us.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay. And as far as saying, and it's a very kind of nebulous comment that the -- the comment about not growing beyond your capabilities. I mean, do you think to WASC that means that over the next few years, you shouldn't be growing more than 5% a year or 10% a year, or if there is some number that they have in mind?

Andrew S. Clark

Well, there's certainly not a number, per se. I think what will be important to WASC when they come back in the spring of 2015 is to see that the institution certainly is growing again. They want to see the vitality of the institution that's there and the energy. But I think they'll want to see that all of the investments that we've -- that the institution's made behind the quality of its programs and student learning, that those investments are continuing to be prioritized and made into the future, and that they support the level of enrollment that the institution has, whatever that enrollment level tends to be.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay. And then with the WASC issue, at least, resolved -- the high-level stuff resolved, can you talk about how you're thinking about usage of your -- the cash in your balance sheet and free cash going forward?

Andrew S. Clark

Well, I'd love to talk to you about what we're thinking there. Obviously, our #1 priority, as we indicated for the last year, was seeking accreditation from WASC for Ashford University. Now that that's occurred, Corey, we, definitely, Dan and I, will be meeting with our board and discussing the various uses of capital and making sure that we're thinking about it in a way that would return -- provide the best return to our shareholders.

Corey Greendale - First Analysis Securities Corporation, Research Division

I don't suppose you want to preview that by giving your perspective, Andrew, on what the best use of cash is.

Andrew S. Clark

I didn't catch the last part.

Corey Greendale - First Analysis Securities Corporation, Research Division

I said I don't suppose you want to preview that by giving us your perspective on what the best uses of cash are.

Andrew S. Clark

Well, I don't want to -- no, I'm not going to preview it, per se. I mean, I think there's a variety of different ways for us to put that capital to work. I think we'll give it a thoughtful -- very thoughtful analysis about what are the best ways. And I don't think -- it doesn't mean there's any one particular way. It could be a combination of approaches. So I'll leave it at that.

Corey Greendale - First Analysis Securities Corporation, Research Division

And just one last one for me, and maybe for Dan, on the -- you mentioned improving your collections on the bad debt, just given the changes you've made in -- with the Ashford Promise and admissions and the orientation and all those things. One would think bad debt would be coming down. So can you just say a little bit more about why it's kept coming up, and what you can do to get it back down?

Daniel J. Devine

Sure. There should be a positive effect on the Ashford Promise. I don't know if we've seen that yet. But I agree, you should see a positive effect from that. I think we've made some changes to the way we've worked with our accounts receivable in the first 6 months of the year, and I think we should see some improvement as we go forward. We're not committing to any specific figures for the upcoming quarters. But the things that we've done to improve the collection of the receivables, as well as the timing of how dollars our collected, we feel will have a positive impact going forward. And you're correct, the Ashford Promise should be -- should have a positive impact on our receivables going forward.

Operator

And next, we'll go to Jeff Silber with BMO Capital Markets.

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

Can you remind us what the expected savings are from the reduction in force that the company took?

Andrew S. Clark

The dollar amount, or the -- how they were broken out, or which...

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

Just the expected savings going forward.

Daniel J. Devine

The dollar amount.

Andrew S. Clark

I'll take it. So I think we're -- on an annualized basis, I thought we -- it was about $85 million. 1/3 of that being -- on an annualized basis, 1/3 of that being labor that was reduced. About 40% of it being, basically, serving a lower number of enrollments. And the difference being other operating expenses that we took a look at and reduced.

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

And should we divide that by expense line roughly in the same proportion that you were having in terms of the severance cost that you took, the severance charge in the second quarter, so that most of the impact will be on [indiscernible].

Andrew S. Clark

Yes. I mean, yes, yes. Generally, yes, yes.

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

Okay, great. And just from a modeling perspective, if you look historically, except for last year, you tend to have a sequential increase in revenues and a pretty sizable increase in operating cost between the second quarter and third quarter. I'm assuming, given enrollment trends, we're not going to see the sequential topline increase. But should we be expecting a sequential spike in operating cost between the second quarter and third quarter?

Daniel J. Devine

Yes, I thought we -- the significant change in operating expenses between Q3 and Q2 will be in the admissions line, and we are increasing our branding spend. You'll see that expense. You won't see...

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

But in terms of the other 2?

Daniel J. Devine

The other 2, you should not see significant increases in expenses, no.

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

Okay, great. And then just one final question, with the decline in new student enrollment, I know this might be difficult to quantify, but is most of that due because of the actions that the company has taken in terms of focusing on better quality students, or is some of that due just to the general market? I don't know if you have any insight on that.

Andrew S. Clark

Yes, that's great question. I mean, my view is that 90% to 95% of it is due to the actions that the institution took almost a year ago. In terms of its increased admissions standards, the orientation program, the Ashford Promise, students over the age 22 and over, just all of the perfect attempt -- you just put everything together. I think those admissions standards are probably some of the more stricter standards amongst the institutions that Ashford competes with, and that is what has contributed to the new enrollment decline. In fact, if you look, I think, in our new enrollments last year, previous to the WASC decision and before these new admissions policies went into effect, you saw Ashford, who had, had previously negative new enrollments in quarters, have its first positive new enrollment in that quarter just prior to the WASC decision. So I think that's kind of a good proof point for what I'm saying.

Operator

The next, we'll go to Peter Appert with Piper Jaffray.

Peter P. Appert - Piper Jaffray Companies, Research Division

So, Andrew, you guys have managed the gross margin down fairly substantially with more full-time faculty and other enhancements to the offering, and I know it's dependent, as well, on revenues, but do you have a thought in terms of what the appropriate level of gross margin on a go-forward basis should look like?

Andrew S. Clark

Yes, Peter. I certainly appreciate your question. I don't think I want to quantify the number, per se. I think that there's an opportunity to improve the margin from kind of where it is today gradually over a period of time. I don't think that the margin, for example, in 2014 and '15, certainly would be lower than what it is today. I would expect it to improve over those years. But our first priority is always going to be to instructional quality and student outcomes and student learning. And so we'll continue to make sure the appropriate investments are being made there, that we're attracting the right kinds of students that are most likely to persist and then the margin of the company will sort itself out from there.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay, fair enough. Then in terms of the brand advertising, any quantification in terms of how much you're planning to spend on that?

Andrew S. Clark

I don't think we have quantified that previously. I would say -- maybe the only helpful point I could give you is that we plan to spend an equivalent amount to what we've spent last year. To the extent that you kind of -- from a dollar standpoint, if you -- so if you have any information from what we did in the third quarter last year from a dollar standpoint, that would give you some insight.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay. So you're not increasing it on a year-to-year basis, though?

Andrew S. Clark

No, we're not.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay. And then back to -- follow-up on an earlier question, just -- is it possible to give us any thought in terms of the importance of M&A on a go-forward basis to the business strategy, thinking about this in the context of the uses of your substantial cash balances?

Andrew S. Clark

Sure. Well, again, and I appreciate that question, Peter. Because I think it is a component when you think about our use of capital and the best return that we can provide to shareholders. There's a variety of different ways we can do that. I think M&A is one. I think from a strategic standpoint, it's important, over the longer term, for Bridgepoint to diversify itself beyond its current institutions, Ashford University and the University of the Rockies. So I think that certainly is a strategic goal of management and one that we will seek to pursue over some period of time. I wouldn't say that it would happen in the near term, per se. But I think over a period of time, we'll take a thoughtful approach to that and try to find a way in which we can diversify Bridgepoint, because I really think that, that best serves the company and will best serve the shareholders over the long-term.

Peter P. Appert - Piper Jaffray Companies, Research Division

Will you be looking primarily domestically or internationally, or both?

Andrew S. Clark

I think our focus would be domestically, primarily, although I wouldn't rule out international. We certainly have a very capable strategic and corporate development team that has been with us for several years now. And they have been hard at work while we've been pursuing WASC accreditation. And I'm sure they'll continue to be hard at work over the next 12, 18 months.

Peter P. Appert - Piper Jaffray Companies, Research Division

And this will be the last question. So when you talk about diversifying beyond the 2 current institutions, is the idea just that another brand in the traditional post-secondary market, or a different, maybe, vocational focus or something? Is that -- can you help us understand what you have in mind?

Andrew S. Clark

Yes. Well, I don't want to give too much away in terms of what we're thinking. But definitely, I think opportunity for another institution, another brand that provides some differentiation from Ashford and the Rockies. I think that, that would be attractive to us. There's other considerations as well. I don't want to kind of tear the playbook on the call today. But we're definitely thinking about ways in which we would build upon our core competencies here in terms of online learning and innovation and quality of instruction. And I think we'll look at those and try to find acquisitions that would fit appropriately with those competencies.

Operator

And next, we'll go to Jeff Volshteyn with JPMorgan.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Andrew, some time ago you shared with us attrition metrics around the Ashford Promise program, as well as the orientation program. Are there any material changes as far as how many students self-select out, and what are the metrics around these programs now?

Andrew S. Clark

Yes, Jeff, great question. I did share those metrics with you. They've been consistent from quarter-to-quarter, which is another reason why we have some good confidence about where we think things will be in the third and fourth quarter. We're not seeing any dramatic changes in the orientation or the Ashford Promise. I think there was a statement [ph] though on our comments on the 16th. I don't have those numbers right in front of us, though, but those metrics were on the 16th call.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Okay. That's helpful. And just -- I got them in the notes, as long as they're stable, that's fine. Just to be clear on the -- on your statement on the timing of inflection of -- in starts. Is it -- just so I understand, is it during the second half, or is it in the fourth quarter? Just maybe you could clarify it for us.

Andrew S. Clark

Yes, sure, Jeff. What I was saying, I think, to Trace is that I expect slight to moderate improvement in the third quarter as compared to the second and first quarter. And we certainly anticipate positive new enrollments in the fourth quarter as we've been seeing over the last several quarters. So I guess that if you take that altogether, I would say that we expect the trend line gradually throughout the second half of the year, that leads to positive new enrollments in the fourth quarter.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Makes sense. And the last question for me. In your prepared remarks, Andrew, you mentioned that you're going to reach out to broader population. Does that mean changing the geographies a little bit?

Andrew S. Clark

Yes. What that really means for us is kind of really putting to work some of the data analytics capabilities we have, Jeff, in terms of our branding strategy and our targeting various geographies using that strategy. And we will put a plan in place for 2014, '15, '16, and I think we're real thoughtful. As we have with everything else done from a strategy standpoint, we will do the same from a branding standpoint. I think that, that will be very helpful in -- because we know, it was tremendously helpful last year. In fact, I think it blunted some of the negativity in the environment when Ashford did get denied by WASC. So we know that it really produces quality students and makes many more people aware of Ashford than they previously were aware. We thought brand awareness increased significantly last year when we did this.

Operator

And next, we'll go to Paul Ginocchio with Deutsche Bank.

Paul Ginocchio - Deutsche Bank AG, Research Division

Dan, just back to bad debt. What percent of bad debt occurs in the first quarter of enrollment for a student, or what percentage of bad debt comes from students dropping in their first quarter?

Daniel J. Devine

You mean in their first course, or what do you mean? I think in the third quarter is what you're referring to.

Paul Ginocchio - Deutsche Bank AG, Research Division

Yes, within the first 3 months of them enrolling.

Daniel J. Devine

I would say approximately 1/3 of students who are enrolled in the institution, who leave the institution either prior to receiving their eligibility for Title IV funds or leave the institution after -- effectively, somebody in their second class. But in their first class, there's very little financial exposure.

Paul Ginocchio - Deutsche Bank AG, Research Division

Right. Okay. And then what did the -- you talked about changing some of your AR, I guess, your collection or policies in the first half relative to a year ago. How much did that impact on a year-on-year basis the increase in bad debt as a percent of revenue, or did I mishear that?

Daniel J. Devine

I think most of those things are -- the processes that were in place, that were improved at the end of the first quarter and during the second quarter. So I haven't seen that impact. I would say that it's probably contributed to most of the incremental difference year-over-year. But I think that we have addressed those issues. And moving forward, we're hopeful that those things that we address will have a positive outcome.

Paul Ginocchio - Deutsche Bank AG, Research Division

Okay. So I keep looking at this metric sort of bad debt divided by new enrollment, and it keeps kind of spiking at some 100%. But you would say most of that is because of the changes to your policies?

Andrew S. Clark

Yes, I would -- well, I have never heard of that analysis, so I'm not familiar with it. I don't know if everybody uses it, but -- so I can't really address that.

Operator

And next, we'll go to Tim Connor with William Blair.

Timo Connor

Did you develop some technologies internally -- and WASC was very complimentary, though. You've been pretty open at conferences and other education events about the technology. Would you ever consider monetizing those with other schools?

Andrew S. Clark

Yes, Tim. I mean, that's a great question. I think that -- I mean, you're correct. WASC was very complimentary. They're very impressed by Waypoint in particular. We do provide Waypoint to 30-or-so other institutions around the country. I think that our first priority is going to be making sure that Waypoint is as effective as possible for our own institutions in the near term. In the longer term, from a strategic standpoint, I think monetizing those products and providing some technology that addresses student learning outcomes, which is really one of the biggest focuses in higher education today and will continue to be for some time. Providing that technology in a way that's supportive and helpful to other institutions, and to the goals of those institutions and accreditors, I think would be something that we ought to think about and be thoughtful about and, potentially, might be something we would want to do at a larger scale than what we're doing today

Timo Connor

And then the 30 institutions that you're partnering with for Waypoint, is that a meaningful contributor to revenue right now?

Andrew S. Clark

I didn't catch the last part. You broke up there.

Timo Connor

Is that a meaningful contributor to revenue right now, the Waypoint [indiscernible]

Andrew S. Clark

No, it's not a meaningful contributor to revenues today. No, it's not.

Timo Connor

Okay, okay. And I wanted to follow up on Peter's question. I think he had asked about gross margin improvement and when you expect to see it. And you said if things play out, you think you could see improvement in margins in 2014 and '15. Are you talking about operating margins or gross margins?

Andrew S. Clark

Operating margins.

Operator

[Operator Instructions] And it would appear that we have no further questions. I'll turn things back over to Mr. Goodson for any closing remarks.

Paul Goodson

All right. I just want to thank everybody for joining our call today.

Operator

And that will conclude today's conference call. Thank you, everyone, for your participation.

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