Education Management Management Discusses Q1 2014 Results - Earnings Call Transcript

Oct.31.13 | About: Education Management (EDMC)

Education Management (NASDAQ:EDMC)

Q1 2014 Earnings Call

October 31, 2013 9:00 am ET

Executives

John Iannone

Edward H. West - Chief Executive Officer, President and Director

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

Analysts

Corey Greendale - First Analysis Securities Corporation, Research Division

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

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

John D. Crowther - Piper Jaffray Companies, Research Division

Timothy Connor - William Blair & Company L.L.C., Research Division

David Chu - BofA Merrill Lynch, Research Division

Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good morning, and welcome to the Education Management Corporation First Quarter of 2014 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. John Iannone, Director of Investor Relations. Please go ahead, sir.

John Iannone

Thank you, Denise. Welcome to Education Management Corporation's Fiscal 2014 First Quarter Earnings Conference Call. With me on the call today are 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. I would like to remind you that information presented on this call contains forward-looking statements. And we undertake no duty to update such statements except as required by U.S. securities laws. These forward-looking statements include, but not limited to, statements about our future plans, outlook and future financial and operating performance. Actual results may differ materially from those contained in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially are set forth in the cautionary statement included in last night's earnings release.

Lastly, EBITDA, which we use to measure operating performance and management uses to facilitate period-to-period comparisons and assists in clarifying operating results is a non-GAAP financial measure. And a reconciliation to report a net income is included in last night's quarterly earnings release.

Before we turn the call over to Ed for his opening remarks, I want to let you know that we have updated our annual October enrollment presentation and posted it on the Investor Relations page of our website at edmc.edu. Ed?

Edward H. West

Thanks, John. Good morning, everyone and thank you for joining us today. On today's call we will cover several operational topics, review our fiscal 2014 first quarter financial results, provide our outlook for fiscal 2014 and discuss our quality measures.

There are 3 important takeaways from this call: Our first quarter enrollment and financial results were in line with our expectations; second, we are encouraged by the recent October start for The Art Institutes campuses, which was slightly positive year-over-year for new student enrollment as well as the continuing trend of improving new student cohort retention; and third, we are managing our business to increase efficiencies and optimize processes so we can provide our students with an education that allows them to build careers as we maintain our focus on access, affordability and student achievement.

Now before I get into the results, I would like to take a minute to mention 2 very notable leaders who have been nominated to serve as our new members on our Board of Directors. William Johnson, former Chairman, President and CEO of H.J. Heinz Company; and Lester Lyles, a retired 4-star General of United States Air Force. Bill would be nominated to serve as nonexecutive chairman. Bill brings a proven strategic vision for growth, business strategy, global business skills, marketing acumen and a consumer focus. General Lyles, through his deep military experience and service as a -- of a director of several notable companies including Chairman of USAA, is uniquely qualified to provide critical strategic and business advice, especially as it relates to serving our veterans. We welcome their perspective and support as we move forward.

I would also like to take this opportunity on behalf of everyone in the Education Management to thank our current Chairman of the Board and former CEO, Todd Nelson, for his many contributions to EDMC and our students.

For the first quarter of fiscal 2014, which is typically our lowest revenue quarter of the fiscal year due to student breaks, we reported net revenue of $580 million, down 5% from the prior year, and excluding restructuring charges, our EBITDA for the quarter was $52 million. New students for the 3-month period ended September 30, were down approximately 6% versus the prior year period. Consistent with our previous expectations that we outlined on last quarter's call. As we also mentioned on last quarter's call, our fiscal first and second quarters are being impacted by variations in the timing and the number of starts, which will cost choppiness in new student enrollments and financial results on a quarterly basis during fiscal 2014 when measured against the prior year, in particular, at The Art Institutes and Argosy University. We currently expect that the year-over-year new student growth rate will be better in the second quarter versus the first quarter results.

I would now like to discuss some of the performance that we are seeing at our education systems. First and foremost, at The Art Institute. I'm pleased to report that the recent October campus start -- class start, exceeded our previous expectations with positive year-over-year new student growth of approximately 2%. As a reminder, July and October are our largest class starts for the Art Institute campuses. As previously discussed, we have placed a significant amount of effort on the traditional high school graduate population, as we typically experience either credit load and better persistence rate with this profile of student at The Art Institutes. The majority of the high school students have now started for the year and we are now actively working high school inquiries for the next fiscal year, which are up nicely year-over-year.

Starting -- starts for the balance of the fiscal year at The Art Institutes are weighted toward students who have been out of high school for several years. Visibility to new student enrollments is not as clear for this demographic as a result of the shortened application to start cycles.

As a reminder, the number of starts were lower in the first quarter of this fiscal year as compared to last year at The Art Institute of Pittsburgh online division, which negatively impacted the first quarter on a year-over-year comparative basis for new student growth. This quarter -- this quarter-to-quarter variability will continue at The Art Institutes throughout fiscal 2014 due to the timing in the number of class starts in a particular quarter. We are continuing our affordability efforts at the Art Institutes.

Our scholarship offerings were up approximately $6 million during the quarter, while we have also remained committed to no tuition increases again this fiscal year. As a result to the affordability efforts at AI, average graduate debt is down approximately 15% from 3 years ago.

Lastly, the 180-day new student cohort retention at The Art Institutes improved for the fourth consecutive quarter. At Argosy University, application volume continues to be in line with the prior year, driven by favorable demand trends and improved conversion rates due to better inquiry resources and enrollment counselor productivity at the campuses.

New student growth declined in the first quarter primarily due to the difference in the number of online class starts year-over-year, but we expect this trend to reverse during the second quarter. In addition, 180-day new student cohort retention improved several hundred basis points during the quarter versus the prior year quarter.

Last quarter we announced that the Argosy University had recently received WASC approval for our competency-based MBA program. The first institution to receive such approval, at WASC. We launched the program during December to a small initial cohort of students and we look forward to expanding the offering over time.

At Brown Mackie Colleges, our first quarter new student enrollment growth was down by 4.8%. The team has been making significant changes across the system in an effort to change our mix of programs over time to programs that have better retention and academic progress. Brown Mackie has been rolling out new programs and lowering the absolute number of programs, while at the same time, changing the marketing mix. New student enrollment, retention, academic progress and outcomes, and the more durable programs is quite encouraging.

As we have mentioned before, South University's enrollment results reflect the strategic changes we have made in regards to its fully online programs. The quarterly year-over-year new student enrollment growth trend continues to improve as we are approaching the anniversary of the changes that we implemented at our fully online programs. We continue to experience solid demand for South University's campus-based programs resulting in positive year-over-year new student growth at the campuses. South University is continuing to build on its reputation in the health professions arena. As of this fall, now the majority of South University's students are enrolled in a health professions program. We have been pleased with the progress of South University over this past year and are very excited about its future opportunities.

As a result of the changes that we've made to the online programs and the efforts at the campuses at South University's 180-day new student cohort retention rate improved several hundred basis points this quarter versus prior year.

I will now turn the call over to Mick Beekhuizen, our Chief Financial Officer, for a review of our fiscal first quarter and an update on our fiscal 2014 outlook. Mick?

Mick J. Beekhuizen

Thanks, Ed. In my comments today, I will review EDMC's financial results for the first quarter of fiscal 2014, discuss our segment results, and provide our outlook. Our results for the period reflect the continued execution of our strategy and initiatives focused on student affordability and student outcomes.

For the 3 months ended September 30, 2013, net revenues were $580.4 million. We recorded a net loss of $9.5 million, and EBITDA of $50.5 million, reflecting pretax restructuring charges of $1.6 million that were primarily related to nonstudents facing staff reductions. Excluding these charges, we recorded a net loss for the quarter of $8.5 million or $0.07 per diluted share, and EBITDA was $52.2 million, slightly exceeding the high end of our previous outlook. Please note the remainder of my comments exclude certain expenses that were incurred during the first quarters of fiscal 2014 and fiscal 2013, which are detailed in the financial highlights of our earnings release.

Net revenues for the first quarter declined 4.8% to $580.4 million compared to $609.6 million for the same period a year ago. The decline in net revenues of the prior year quarter was driven by a 8.5% year-over-year decline in the average enrolled student body. In addition, we increased scholarships awarded to our students during the quarter. These scholarships, which were primarily awarded at The Art Institutes, are evidence of our continued focus on student affordability and retention across the company. The revenue declined from lower student enrollments and additional scholarships was partially offset by additional revenue days and higher average registered credits per student. As a result, the revenue per student for the first quarter increased by 4.1% versus the prior year quarter. Roughly half of this increase was due to the additional revenue days this quarter compared to the prior year quarter, which was largely due to the fall start for The Art Institutes occurring on September 30, instead of it's typical start in early October. The balance of the revenue per student increase was principally due to the higher average registered credits per student.

Now let's talk about our expenses. For the first quarter, total operating expenses were $528.2 million, down 3.4% year-over-year or $18.4 million. Reflecting the results of our continued cost saving and productivity actions. As I mentioned last quarter, we've been focused on positioning ourselves to successfully operate in the current environment and to continue to direct resources towards student affordability. Last quarter, we set a cost savings target of $75 million to $100 million for the year. Some of those anticipated savings will be offset by inflationary pressures in certain expense categories as well as investments in growth opportunities such as Argosy University's competency-based MBA program.

Based on this quarter's results and our current outlook, we believe that we will achieve our target for the year. The overall reduction of our cost base to improve student's affordability is a result of various initiatives throughout the organization, including, for example, realignment of our nonstudents facing employee-base across our education systems and corporate services. Secondly, improvement of admissions productivity, and thirdly, centralization, standardization and automation of transactional processes at the center.

Now looking at our expenses in more detail. Educational services costs were down 4.3% or $16.2 million to $356.8 million versus the prior year quarter, primarily due to lower staff levels. As a percentage of net revenues, educational services expenses increased by 28 basis points. The largest driver of this increase was a rent expense, which increased 3.4% year-over-year or 67 basis points on a percentage of net revenue basis. The majority of the increase in rent resulted from the incremental rent from the sale leaseback transactions we entered into during the quarter ended December 31, 2012, and the comparable effect of a favorable rent credit that was recorded in fiscal '13.

Additionally, outside services increased by 37 basis points compared to the prior year quarter. And cost of sales increased 31 basis points year-over-year due primarily to higher supply store sales as a result of The Art Institutes starts on September 30. Partially offsetting these items was a reduction in employee-related costs and bad debt expense.

Employee costs were down 7.6% compared to the prior year quarter. As a percentage of net revenues, employee costs were down 101 basis points versus the prior year due to the impact of the previously mentioned additional revenue days during the quarter as well as a year-over-year reduction in salaries and benefits. Additionally, bad debt expense as a percentage of net revenues was 7.8% for the quarter, down 26 basis points from the prior year.

General and administrative expenses were down 1.3% to $171.4 million versus the prior year quarter, reflecting a 106 basis points increase on the percentage of net revenue basis. Within G&A expense, marketing and admissions costs decreased 2.6% year-over-year, representing 24.3% of net revenues, 54 basis points higher than the prior year period.

Overall cost per start slightly increased as admissions productivity was more than offset by higher advertising costs. Additionally, outside legal and consulting services increased by 65 basis points compared to the prior year quarter. The latter investment is important to support our process optimization and centralization efforts to support student affordability. Overall, EBITDA decreased 17.1% to $52.2 million for the first quarter, while our EBITDA margin was 9%, down 133 basis points versus the prior year.

Depreciation and amortization was down 2.4% year-over-year to $38.6 million. As a percent of net revenues, G&A expenses increased 16 basis points versus the prior year quarter, primarily due to lower net revenues. Net interest expense was $31.9 million in the current quarter, an increase of $0.4 million from the prior year.

I'd like to now cover the results for The Art Institutes. Net revenues decreased by $23.6 million or 6.2% to $356.5 million. In the current quarter, compared to the prior year quarter, due primarily to the decrease in average enrolled student body of 8.5%, which was partially offset by one more revenue date resulting from the timing of the start of the fall academic term. Additionally, The Art Institutes awarded a larger amount of scholarships to students in the current quarter compared to the prior year quarter, which was offset by increased average registered credits. EBITDA decreased 14.9% year-over-year to $59.1 million with an EBITDA margin of 16.6%, reflecting negative operating leverage from lower student enrollments and increased investments in marketing and admissions that we believe will help stabilize enrollments in future periods.

Looking at our cash flow statement. Cash flow from operations for the 3 months ended September 30, 2013, was $127.2 million compared to $156.6 million for the 3 months ended September 30, 2012. The decrease was primarily due to reduced operating results and delays of financial rates receipts that were collected in October.

As a reminder, due to the timing of class starts, we typically used cash during our fiscal second and fourth quarters, and we expect the seasonality to continue going forward. Overall, we continue to believe we will generate positive free cash flow for fiscal 2014.

During the current quarter, we spent $17.3 million or 3% of net revenues on capital expenditures compared to $20.5 million or 3.4% of net revenues in the same time period last year. For fiscal 2014, we expect capital expenditures to be between $80 million and $90 million, which includes the anticipated opening of 1 additional new school, depending on the timing of regulatory approvals. We believe this provides the right balance between maintenance and investment in the current operating environment.

Looking at our company's balance sheet as of September 30, 2013, the cash and cash equivalents balance was $163.3 million. Long-term debt was $1.3 billion, a decrease from September 30, 2012, due to the retirement of the 375 million senior notes due 2014, and issuance of the 203 million senior PIK notes due 2018 in March of this year.

Net current student receivables in both the current year and prior year were impacted by the timing of class starts. After adjusting for these, the most significant of which was the aforementioned Art Institutes start that occurred at September 30, instead of the beginning of October. Net current student receivables would have decreased by approximately $10 million at September 30, 2013, compared to September 30, 2012. Further, unearned tuition and advance payments were also impacted by the current year September 30 fall starts and will normalize within the second fiscal quarter.

Turning to our outlook. Our second quarter and annual outlook for fiscal 2014 reflect our recent fall starts and our current view of student demand dynamics and broader market conditions. It also reflects our expectations for continued higher legal expenses, incremental cost savings from prior restructurings and operational initiatives underway, rents, from the prior year sale leaseback transactions and slightly lower bad debt expense.

As usual, our guidance excludes impairments, debt refinancing, employee severance, lease terminations and any other potential restructuring expenses, which may be incurred. For the 3 months ending December 31, 2013, we are expecting EBITDA to be between $85 million and $88 million. Net income between $9 million and $10 million, and earnings per diluted share of $0.07 to $0.08. For the 12 months ending June 30, 2014, we continue to expect EBITDA to be between $325 million to $340 million. Net income to be between $28 million and $37 million, EPS to be between $0.22 and $0.29 per diluted share, and CapEx to be between $80 million and $90 million.

Ed, back to you.

Edward H. West

Thanks, Mick. I would like to now provide an update on several of the quality measures that we employed to measure our performance against our long-term priorities. Driven by our affordability initiatives and commitment to providing our students with high-quality courses and exceptional faculty in areas that lead to careers, we continue to make progress on our retention efforts. One of our primary measures that we utilize is the retention of new student cohort, 180 days after their initial start. For new students who enrolled during the quarter ended March 31 of 2013, the 180-day cohort retention rate as of the quarter ended September 30, has shown an improvement of over 250 basis points or 2.5 percentage points from the prior year period.

Furthermore, the improvement in retention was experienced across all 4 of our educational systems. In addition to the benefit of lowering the overall cost of education, scholarships are a significant contributor to improve retention as we see considerable improvement in new student cohort retention for students who received a scholarship compared to those who do not. We awarded approximately 33 million of merit and need-based scholarships during the first quarter and remain on-pace to achieve the $130 million target for the current fiscal year.

Clearly, the goal of our students when attending one of our colleges and universities is to create an opportunity for themselves after their studies are completed. During the first quarter of fiscal 2014, we had nearly 7,000 graduates bringing our alumni network to over 380,000 graduates. Of our undergraduate students who completed their studies during the quarter ended March 31 of 2013 and were available for employment, approximately 77% secured employment in their fields or related fields of study within 6 months of graduation with an average starting salary of approximately $29,000.

The entire EDMC family has the utmost respect for men and women who have served and who continue to serve our nation and our colleges and universities are uniquely suited to serve the needs of members of our nation's military.

I am pleased to announce that the last -- that last month, G.I. Jobs Magazine selected Argosy University and Brown Mackie College System of Schools, South University and 34 of The Art Institutes, for recognition and inclusion in its list of Military Friendly Schools in 2014. The list honors the top 20% of colleges, universities and trade schools doing the most embraced America's veterans as students, and espousing a shared priority of providing military students with focused support.

Operator, we're now ready to take some of the questions. Would you go ahead and review the instructions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Corey Greendale of First Analysis.

Corey Greendale - First Analysis Securities Corporation, Research Division

A couple of quick questions and a longer question. The questions, Ed, I think in your comments you said that you expect better year-over-year growth in new students in Q2 than in Q1. Does that mean you actually believe new students will be positive year-over-year?

Edward H. West

It could. It could. The -- we just -- we expected to be better than it was in Q1 and it's progressing along, and obviously, it's a fairly well buttressed with a positive experience that we had to the campuses at The Art Institutes.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay and the impact of the extra revenue day in Q1, does that reverse in Q2 or when does that reverse?

Edward H. West

Yes, it does. It does reverse in Q2. And just kind of stepping back, as I mentioned last quarter and elaborated it in my talking points earlier -- the timing of the number of starts as well as the number of starts, obviously, are impacting their performance. When you look at it relative to the first quarter and second quarter, it does also have some additional impact later in the year as well. So what you're talking about there is really the timing predominantly, the fall start at The Art Institutes to cram [ph] September 30, did pull revenue into Q1 and that will adversely impact Q2.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay. And then the longer question is if you look at the guidance for Q2 and the guidance for the full year, it implies that more of the EBITDA for the full year will be coming in the back half of this year than in any prior year, at least over the past several years. Can you talk about what the factors are that make you think you'll get that greater ramp in the back half of the year, how much of it is enrollment driven versus cost driven?

Edward H. West

Sure. There are a lot of factors involved. I mean obviously, when you compared -- as you just suggested there, when you compare it to the previous several years, obviously, we've been declining for the last couple of years. So that in itself has an impact on how the quarters are distributed. Just stepping back, as I just mentioned, there is that choppiness in the timing. So with how we see performance in the first quarter and the second quarter due to the timing and the number of starts having an impact now. But we -- overall, if you step back, we do see an improving performance trend in the growth rate for new students. Q1 was in line with our expectations. Even impacting the fact that we had a fewer starts during the quarter as compared to the previous year. Q2, we believe will be better than Q1 and as we've talked about a minute ago, could be positive. And this can be choppy for the rest of the year, but on balance, we do expect today that for the back half, we'll look better from a new student comparison standpoint than the first half of the year. And consequently, that will help impact EBITDA, so that the back half will be benefited by that in terms of performance. Now as Mick also talked about in his points, the costs, we've been very active on a cost standpoint, driving efficiency, standardization, realignments across the system. And in fact, if you look at our costs, frankly, for the first quarter, from the quarter that we just had for a total expense standpoint, will be the high watermark in terms of total dollars on expenses to where each quarter from here on will be the lower than the first quarter. So that will further benefit the outlook. And then finally, obviously the improvement in retention also helps to further buttress the point. So that's why we make confidence that we outlined in terms of the guidance and the range of the $325 million to $340 million on EBITDA that we had continue to support that.

Operator

Our next question will come from Trace Urdan of Wells Fargo.

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

Ed, I just wonder if you could sort of step back a little bit. And I'm not sure that you really spoke to the extent to which you think what's going on in the enrollment side is really a function of the efforts you all are making specifically, and maybe starting with Art Institute, but addressing each of the systems? And to what extent do you think there's something shifting in the overall demand environment? I wondered if you could speak to that?

Edward H. West

Sure. So starting off with The Art Institutes in terms of what we're seeing there, it really -- going from, as I mentioned on my points, thinking about July, it was really kind of the first half of the year. July, particularly July and October are our 2 largest starts for the year. And as you know, we -- this past year, are going back 1 year, 1.5 years, we had a very strong emphasis on the high school student. Those are students just graduating from high school, coming in. We see in that profile of student a higher credit load they typically take, more full-time students, better retention, better persistence. Overall, a more stable student had a strong emphasis, one that and frankly, that's resulted in a positive start. So I think it's really -- that's been a strong effort and thinks it will continue on and frankly, as we sit here today, are encouraged by the high school inquiries that we have for next summer and fall, that those were up nicely year-over-year, obviously there's a lot of times to work those. So having that and that distinctiveness for that traditional-aged student for AI is critical and we think a strong differentiator in the market. And now what...

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

And do you -- I'm sorry, Ed. Did you think, Ed, that that's a function of you're getting your message to those -- to that market more clearly and effectively or is there something in the zeitgeist that's kind of making people feel more expansive?

Edward H. West

It's just relentless focus on that. We have over 250 high school representatives who are making thousands upon thousands of presentations to high school class bringing in the schools into our schools. Going out, having instructors and faculty meet with schools and campuses. And what -- I think this also goes into, for example like at South, and/or all of our systems towards strong emphasis on being a strong asset to the community -- in the community, particularly at the campuses that we serve. You look at South and the communities that we serve in South in terms of the health care, the affiliation with the hospitals, the medical practices, strong affiliation there. I mean, the clear part of our strategy of being very community-centric and being an asset to the community and continuing that going forward. That's why we feel strong having that solid campus presence is critical.

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

And have you -- just a follow-up on that point, have you sort of stepped up those kind of community outreach activities? Would you say, I mean is there something deliberate, the specific that you're doing to kind of deepen those relationships?

Edward H. West

Yes, we have. And just make an emphasis in priority, and we saw a long way to go. I mean, as I've mentioned in my comments earlier, we continue to challenge ourselves to do more in the relationships there and we will continue that and it's something that's front and center to all of us across the country.

Operator

Our next question will come from Jeff Volshteyn of JPMorgan.

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

Just to clarify, the second quarter impact of fewer days, is revenue per student, is that coming down because of the days or is the result sort of an impact of tuition and discounts and so forth?

Edward H. West

Mick?

Mick J. Beekhuizen

Yes. So Jeff, with regards to the revenue per student, if you look at the second quarter, I expect the cause of the effect that you just described with regard to the revenue days and what I just spoke about, I expect revenue per student for the second quarter to be slightly down year-over-year. Basically, reversing the effect that we -- the positive effect that we had in the first quarter for the full year as I previously mentioned on one of the other calls, I still expect revenue per student to be flat year-over-year.

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

That make sense. When I look at the balance sheet, I noticed quite a bit of a change in the receivables and in tuition, can you comment on those?

Mick J. Beekhuizen

Yes. So that was what I mentioned also earlier with regard to the impact from the fall start being earlier, i.e., now being at The Art Institute at the end of September instead of being at the beginning of October. And that's what you see reflected on our balance sheet. That does, however, not have an impact on our cash flow statement as you'll see because it's really receivables being offset by the unearned tuition.

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

Great, that's helpful. And last question, if I may. When we look at the number of graduates in your fiscal 2013 and this past compared to 2014, sort of how should we think about the number of graduates in '14 versus '13?

Edward H. West

Well, the -- obviously in terms of total enrolled student body, has been declining over the last few years. So that will impact that. Obviously, we're trying to offset that by the focus on retention and ultimately improve graduation rates over time. Now the fact that about half of our programs are bachelors, we don't want to wait 4 years to find out how we're doing. That's why we have the focus on the new student cohort retention. And trying to improve that to offset the recent decline, ultimately we'd like to see overall enrollment improve and then seeing grads, the number of grads begin to grow again.

Operator

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

John D. Crowther - Piper Jaffray Companies, Research Division

Yes, this is John Crowther, on for Peter. First question just for -- you've made it kind of clear and very helpful in terms of the impact for the extra day on revenue. Wondering if maybe you could give us a little bit of the quantity of the impact of new starts? You said there it was a little bit choppy and that Q1 had 1 less start period. I'm wondering what that impact would be as a drag on Q1 versus a benefit to Q2? So we could just kind of see what the overall trend is?

Edward H. West

Yes, unfortunately its not as clear as revenue because obviously with revenue, you have the exact number of students versus not having to start. So we don't know what that exact number is other than just the fact that because we had more starts in Q2 versus prior year and fewer starts in Q1 versus prior year. There is an impact. Can't quantify that precisely but it is a negative impact for the -- this past quarter. And also that, this compares to the growth rate when you look at Q4 of last year, which is why we had indicated last quarter why we thought Q1 looked pretty similar to Q4 of last year from a growth rate year-over-year perspective.

John D. Crowther - Piper Jaffray Companies, Research Division

Okay. And then just wondering if you can talk -- I think you guys had mentioned -- and maybe it was at a conference this last quarter, the July starts in The Art Institute were positive. Now you've talked about starts positive in the October start period for The Art Institute. Just wondering if you could maybe talk about any sort of -- is there any sort of difference in trends between those 2 or is it pretty consistent between those 2 start periods?

Edward H. West

Pretty similar because they're both just slightly positive on a year-over-year basis. And then like on The Art Institutes online, as the Pittsburgh online group was down, it was impacted because also a less of a start. Now going forward, it's a -- it's more centered in terms of high school students for those 2 starts going forward. It has more of an impact towards students who have been out of high school for a while and it's just not as clear visibility on that. So we'll continue to work that for the balance of the year. But the good thing is now the majority of the starts will have occurred for the first half of the year.

Operator

Our next question will come from Tim Connor of William Blair.

Timothy Connor - William Blair & Company L.L.C., Research Division

The same cohort retention improvement that you're seeing. How much of that do you attribute to mix shift -- continued mix shift toward ground students away from online and how much, due to just sort of procedural improvements or anything kind of more internally directed at just keeping students longer?

Edward H. West

It's really an answer across the board, where as I mentioned on the call, that we've seen retention improvements in each of our education systems and we're seeing it in the campuses and online. We're like, for example, we've made some pretty significant changes a year ago at our online operations for South University. Really refocusing on some programs where we saw stronger academic progress and retention, and doubled down our efforts on those and stopped enrolling on other programs. Obviously, now we're -- we look smaller there. We're seeing that. We're coming out next quarter and that will anniversary itself. And so we're seeing retention improve there. We see it at Argosy Online's programs. So it's been both campus and online. And it's just -- its efforts being a lot of focus on it, on multiple different fronts. There's no one kind of single silver bullet, just having a relentless focus.

Timothy Connor - William Blair & Company L.L.C., Research Division

And did it change how you think about the potential lag from a turn in new enrollment to total enrollment?

Edward H. West

We have factored that in when we think about turning here once we -- as we've talked about publicly, is that once we turned solidly positive from a new student standpoint, then you're typically the turning -- the enrollment will turn positive about 9 months, on average 9 months later. That could be accelerated by continued retention improvement, which would be upside to that.

Timothy Connor - William Blair & Company L.L.C., Research Division

Okay. And that's across the institution, that's a blended average?

Edward H. West

Yes, that's across the system.

Timothy Connor - William Blair & Company L.L.C., Research Division

Got it. Okay. And then the graduate debt, it's coming on nicely. How clearly do you think you've been able to communicate a stronger value proposition to prospective students? And then do you feel like the total cost of a degree is where it needs to be for you guys to be competitive?

Edward H. West

As I said on my call and we can always improve. And we're -- we have that as a mindset to continue to drive affordability, that's why we've increased scholarships so much. We have not had a tuition increase at The Art Institutes, now in our third year. We removed other fees, overall, lowering that the cost of education, which has resulted in that 15% reduction that you've noted. We would like to continue that and drive that. It's one of our top priorities and do that as much as possible.

Operator

Our next question will come from David Chu of Merrill Lynch.

David Chu - BofA Merrill Lynch, Research Division

It sounds like Ed has reversed its decision to take PLUS loans standards. Did this have an impact to starts in retention in the first quarter?

Edward H. West

I will not -- if you're aware of something that we're not aware of, then, I think what they've said is that what we're aware of is that the standards are out there and that if you reapply, that they'll reevaluate that and there's a probability that, that -- then you get approved when you reapply. Now, they have also announced that for our future neg reg session and put that on as an agenda for our future topic to discuss. So we have not seen a reversal on that and continue to see the impact on how that's impacted students and families to enroll predominantly at The Art Institutes.

David Chu - BofA Merrill Lynch, Research Division

Okay. So maybe it was reapplication. So did you see a lot of students reapply?

Edward H. West

You see some, but it's not a significant amount with them reapplying and then approved. I think a lot of times, people, they get rejected the first time and they aren't look forward to doing that again.

David Chu - BofA Merrill Lynch, Research Division

Great, okay. And is there any way you can quantify what type of start expectations are embedded into your guidance for fiscal '14?

Edward H. West

Well what I said a minute ago is from expectations is that we think that will improve through the year and that the back half would look better than the first half.

David Chu - BofA Merrill Lynch, Research Division

Okay. Last question. Have you assessed the impact of the revised gainful employment proposal?

Edward H. West

Obviously, this is a process, it's underway. There's another meeting that's now scheduled for November. I -- as I've mentioned on to the last previous call, that obviously with the proposal that's been put out there, the initial draft is obviously is materially worse for the entire industry relative to what was the final approved the last couple of years ago. So obviously, we'll go through the process and work in as following the sessions that they have over this next month, we'll look forward to seeing where things come out.

Operator

Our next question and final question for the day will come from Jason Anderson of Stifel.

Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division

Just wanted to talk about the competency-based learning. Could you give us a little more color on how -- I know that just started up or just rolled out on a smaller basis, but how the feedback has been, how that might be progressing? And maybe a little more on how you see that going forward as far as the expansion of that, maybe expense impact, as you roll that out or grow that? And in addition, any other new program topics or new programs in general that you might be introducing or looking at?

Edward H. West

Sure. Well, obviously, we're really enthusiastic about the competency program. The team at Argosy has done a great job and then working with WASC to get that approved. We're actually have other programs that we're evaluating and are underway as well that we'd like to be submitting for approval too. So we see this as just yet another way for students -- prospective students, to obtain a degree, they're really based on what they've -- what they know, what they've learned through life and now get credit for that. It's just a way to achieve a degree at a lower cost for them and things based on their assessment of competency. As I mentioned, we just started the other pilot not too long ago, last month. Initial feedback is positive. And we looking forward to rolling that out on a very prudent basis. And we'll continue to work on other programs. I think that the cost of this program is in the guidance that Mick outlined. And if we can do more, we will and we would adjust that accordingly because obviously, there is a cost to doing that up front. And -- but this is something that we feel like makes a lot of sense from an investment perspective.

Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division

Great. And is it something you feel like you can translate across to your other, I know it's primarily Argosy, but is that something you could -- are you working on for your other systems?

Edward H. West

Absolutely, yes. It's something that we think can make a lot of sense and we're evaluating and working on that as we speak.

Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division

And then one other thought here. I know that we've talked a while in your admission staffing level, maybe you can comment on where you're at now size-wise, where you were last year and maybe where you're looking throughout this year? I mean, I know you have expense reductions happening, but should we -- and maybe any color you could provide there?

Edward H. West

Well, the expense is down as is the headcount in admissions and a lot of that just kind of changes that we've seen across the system. Overall enrollment, obviously it had an impact of productivity. Other initiatives that we've had underway, the marketing, where we see leads coming from in terms of various channels has resulted in lower admissions headcount on a year-over-year basis. And we kind of see that kind of stabilize now where we are right now from an overall staffing level.

Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division

Can you quantify at all in any way, maybe how much down and maybe on the other side, maybe where productivity is? How much upper -- up it is?

Edward H. West

Well, I would just say that we have seen improved productivity in various areas. I don't want to generalize across the systems because there's always pockets here and there in terms of where they see demand. As I mentioned earlier, Argosy, we've seen good productivity in the campuses and frankly, across many of the systems. Overall, admission staffing now is down approximately 10% across the system, and we're roughly between, depending on where it is, but a little over 2,500 individuals across the country.

Operator

And we do have an additional question from Alex Paris of Barrington Research.

Unknown Analyst

This is Joe filling in for Alex. I just want to get back to Tim's question real quick on persistence. Acknowledging that I heard 4 quarters of improvements in The Art Institute as well as the improvement on a consolidated basis. I mean, should I be looking at this as I look out the next 3 quarters, looking at similar gains or do you expect this kind of bumping up against a little bit of tougher comps and kind of level out as we move through the year?

Edward H. West

Oh, yes. It's -- in terms of retention, obviously, we've seen the benefit of that over this past year just carrying on from some objectives and the priorities that we've had for a while of improving retention and we've seen the benefit of that this year. And clearly, going forward, it's going to be -- and now you're getting the benefit on top of the benefit. So we're going to see, I think, the amount of improvement decline just from laws of gravity. But it is a top priority and focus across the organization that we will continue to drive that across the system at the program level, campus level, online, on ground, however, across the system. And we expect to anticipate to see future ongoing improvement on a year out -- year in, year out basis.

Unknown Analyst

And then if I -- the turn in total, I know you talked earlier about the lag, you expect that to be 9 months, but assuming you had flat persistence going forward and based on your new start commentary, Q2 better than Q1, and then slightly getting better in Q3, Q4. Fair to assume, if that happens that, you could see the turn in total in the first half of 2015 or do you think more realistically the second half?

Edward H. West

I just -- I don't want to speculate on the dates. Let's make sure we continue with our priorities in terms of focus on this as an objective. Seeing things turn and obviously, we're all working diligently across the country to have that happen sooner rather than later to focus on programs that are durable and attractive, good academic progress and retention.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Ed West for his closing remarks.

Edward H. West

Well, great. Thank you very much. Our operational and financial performance this past quarter was in line with our expectations and we were particularly encouraged with the October start at The Art Institute campuses. That said, we must continue to push ourselves to be better from a student affordability and achievement perspective. I had the privilege to meet with thousands of faculty staff and students across the country. I couldn't be more optimistic and motivated about our role and opportunity in educating America's workforce after hearing the stories directly from the students on why they attend our colleges and universities and the meaningful difference our faculty and staff make in their lives. So thank you for your time today, and we look forward to speaking with you next quarter. Good day.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines. And once again, the EDMC conference call has ended. You may now disconnect your line.

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Education Management (EDMC): FQ1 EPS of -$0.07 beats by $0.02. Revenue of $580.4M beats by $5.23M. (PR)