Corinthian Colleges Management Discusses Q1 2014 Results - Earnings Call Transcript

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 |  About: Corinthian Colleges, Inc. (COCO)
by: SA Transcripts

Operator

Good day, ladies and gentlemen, and welcome to the Fiscal Year 2014 First Quarter Corinthian Colleges Earnings Conference Call. My name is Sayed, and I will be your conference coordinator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes.

I would like to turn conference over to your host for today, Ms. Anna Marie Dunlap, Senior Vice President of Investor Relations. Please proceed, ma'am.

Anna Marie Dunlap

Thanks, Sayed. Good day, everyone. Thanks for joining us. I'm here today with Jack Massimino, our Chairman and Chief Executive Officer; Bob Owen, our Chief Financial Officer; and Ken Ord, our Chief Administrative Officer.

This call is being webcast, and an audio version of the call and transcript will be available on Corinthian's website for 30 days. In addition, a telephonic replay of this call will be available until Monday, November 11. The details for accessing the replay are included in the press release we issued this morning.

Please note that during this conference call, we may make projections or other forward-looking statements regarding a variety of issues. These statements are based upon current information and expectations. Actual results may differ materially based on a number of risk factors, which we have identified in our filings with the SEC.

With that, Jack, I'll turn it over to you.

Jack D. Massimino

Thanks, Anna Marie, and hello to everyone on the call. In the first quarter, we remain focused on student outcomes and initiatives to increase our student population and improve operational efficiency. We made further reductions to operating expenses to help offset the impact of a lower student population, and we made the decision to put 4 of our Everest campuses up for sale.

In terms of enrollment growth, our ground schools posted slightly positive new growth in the first quarter versus the same period last year, and as expected, our online new enrollments declined.

Our financial results in the quarter were within our most recent guidance range for diluted earnings per share. Results were below guidance for revenue and slightly below guidance for new enrollments.

Let me comment briefly on a lawsuit filed recently against the company by the California Attorney General. We believe the lawsuit is baseless. It paints a misleading and inaccurate picture of our company and our school. I'll provide more details later in the call today, but for now, suffice it to say that we will vigorously defend our employees, our students, our graduates against this complaint.

As Bob and I move through the rest of our remarks today, I'll review our operational progress and performance in more detail, followed by a discussion of the California AG Complaint. Bob will then review the first quarter operational and financial metrics and provide guidance for the second quarter and fiscal 2014.

First, I'll move to a discussion of enrollment trends. As we reported earlier today, new enrollments decreased by 8.1% in the first quarter versus the same quarter last year. This is slightly below our previous guidance that new enrollments would be down 6% to 8%. As expected, the decrease was driven by a decline in new online enrollments. Online continues to work through a number of operational issues related to new student enrollments. And in the first quarter last year, Online reported near record new enrollments. So it was a challenging comparable.

As I said earlier, our ground schools reported slightly positive growth on a consolidated basis. With respect to Online operations, we have completed the implementation of the new service center technology, which is designed to automate workforce management. Over the next several months, we expect to become more efficient in the use of the new system and to introduce further automation to streamline workflows, data gathering and reporting. In addition, we are making substantial progress with the online student success initiatives that I discussed in our last call. In the first quarter, we began the hiring of additional full-time faculty and have nearly completed the hiring of additional faculty management. The online student success initiative is expected to help improve faculty student engagement and, thus, student retention. We believe the actions we're taking to improve both operations and academics will help position Online for improved performance.

In terms of overall demand, prospective student inquiries were up slightly in the first quarter. However, the rate of transfers to new enrollments, or conversion rate, was down in the first quarter versus the same quarter last year for reasons I'll now discuss.

As a reminder in this context, a transfer generally refers to the transfer of an initial live phone call with a prospective student to the appropriate Everest, Heald or WyoTech ground school or to an Everest online service center.

In the past, we used an outside firm to manage these initial phone calls and transfers for Internet-based inquiries. As part of our focus on continuous operational improvement, we're currently in the process of bringing this function in-house. During this transition, the quality and speed of transfers have been reduced, negatively impacting conversion rates. We expect the new in-house system to be fully implemented by the end of the second quarter.

While I'm on the topic of transfers, I'll comment on the impact of the new TCPA, or Telephone Consumer Protection Act regulation that went into effect on October 16. The new rule requires companies to obtain express written consent from consumers before using an auto dialer to call them. We incorporated the new rule into our planning for the fiscal year and we believe the company and its current vendors are compliant. Thus far, most consumers appear to be consenting to the new TCPA language. For prospective students who made inquiries prior to the effective date of the new rule, we're dialing them manually, which is expected to create inefficiencies through the end of the second quarter.

Turning now to our enrollment growth initiatives. We continue to see the benefit of a less-competitive environment in several service areas and the focus on the rollout of a new diploma-level programs in our GED Advantage program. I'll discuss each of these areas individually.

As we've discussed previously, several factors are driving competitive school closures, including cyclical enrollment declines related to the economy, deteriorating financial performance and regulatory compliance issues. In Everest service areas where competitive school closures have occurred, our new enrollment results continue to indicate that our schools are gaining share. In fiscal 2014, we estimate that approximately 2,000 to 3,000 new students will enroll as a result of competitor closures. Having fewer competitors will also make it easier to help our graduates find jobs and to develop externship and clinical sites for students.

Turning to new program rollouts. In total, we launched 4 new diploma-level programs during the first quarter, all from core curricula. New program approvals continue to be unusually slow due to ongoing delays at the Department of Education and at the state level. The recent federal government shutdown has compounded these delays. We currently have approximately 80 new program approvals that are pending. The number of new program implementations for the balance of the fiscal year depends upon the timing of these approvals, which is uncertain.

Turning to our GED Advantage program. We do expect a temporary slowdown in new GED enrollments as we transition to the new GED tests that go into effect on January 1, 2014. We've been preparing for the implementation of the new tests for several months and expect to be ready for the transition in advance of the January deadline. Of those students who have completed their GED exams thus far, we continue to see about 20% enrolling at Everest.

Looking ahead to the second quarter of fiscal 2014, we expect total new enrollment to be down 7% to 9% compared to the same period last year.

Earlier, I discussed our transition to an in-house transfer management system. In the second quarter, we expect this system change to negatively impact new enrollments at the ground schools and Online. In addition, we expect that continued delays in regulatory approvals for new ground school programs will reduce new enrollments and that negative publicity surrounding the California AG lawsuit will reduce new enrollments in California.

With respect to Online, our previous guidance was that Online would report positive growth beginning in the second quarter. Online's operational progress has been slower than expected, however, and coupled with the transition to the new in-house transfer management system, we now expect Online's new enrollment to turn positive in the fourth quarter of this fiscal year.

For the fiscal year, we expect new enrollments to be down in the low single digits.

Let me follow up just for a moment now regarding the California AG lawsuit. As we reported previously in an 8-K, the California Attorney General filed a complaint against the company on October 10. We were first contacted by the California AG in December 2012 and we've been working cooperatively with them since that time. Prior to filing the lawsuit and holding a press conference, the AG did not share the results of its investigation with us, did not demand a settlement and did not threaten to file a lawsuit. This is, to say the least, extremely disappointing, as well as damaging to our company, our employees, students and our graduates.

As I said earlier, the lawsuit contains allegations that are rooted in a misleading and inaccurate view of our company and our schools, one, we think, the facts will allow us to correct. We have over 3,900 hardworking taxpaying employees in the state who are helping underserved students improve their lives, and we're proud of the work we do. We're fully committed to providing quality career and technical education for occupations in demand in the labor market. Company-wide, 750 career service personnel are dedicated to helping graduates find employment in their chosen fields. We have over 150 full-time career service employees in California alone.

We also have robust regulatory compliance systems in place to help us meet regulatory requirements and to be fair and open with prospective and current students. Nearly 8 years ago, for example, we established a company-wide second-level verification team responsible for checking the accuracy of the job placement data reported by our campuses. We believe we are one of the first, if not the first, company in our sector to do so. And when we find problems or issues, as all organizations do, the record shows that we work hard to fix them.

Further, over 41% of our students trying to -- tried going to a community college before enrolling in one of our schools. Our students are generally seeking a more individualized approach than a traditional postsecondary institution can offer. And our twice-yearly annual surveys indicate that most of our students are satisfied with the educational services we provide. In our September survey, for example, students' overall satisfaction with their academic programs, instructors, student finance, career services and admissions was 84% measured across 33 different attributes. Again, we're proud of the work we do and we're continuously striving to do even better.

It would be premature for me to speculate further about the course of the Cal AG lawsuit. We will defend vigorously against this compliant and look forward to telling our side of the story in court. We'll keep you informed of significant developments as we move through the process.

With that, I'll turn to Bob for a more detailed review of the first quarter and guidance.

Robert C. Owen

Thanks, Jack. Let me preface my comments by saying that the results I'm about to review are for continuing operations, unless otherwise noted. In the quarter, 4 campuses were put up for sale and placed in discontinued operations. These campuses currently represent about 1,400 students. In addition, in the first quarter, we recorded $3.7 million in severance charges. More detail on our financials can be found in our press release and in our quarterly report on Form 10-Q, which we expect to file within the next day or 2. We will also post restated quarters, including new student enrollments and total student population to our Investor Relations website at that time, reflecting the schools we put up for sale and discontinued operations.

I'll start with the discussion of first quarter revenue. Net revenues in the first quarter declined by 9.2% compared with the same quarter of the prior year. The decrease is primarily due to a 10.9% decrease in the average student population, which was 79,393, partially offset by a 1.6% increase in the average revenue rate per student during the period. Jack has already discussed our new enrollment trends and the reasons behind the decline in student population. The total student population at September 30, 2013, was 80,032 students, down 11.5% from 90,469 at September 30 of 2012. Our exclusively online student population was 25,083 at the end of Q1, 2014, down 17.2% from 30,287 at the end of Q1 2013. The decline in total student population is due to a combination of factors, mainly lower new student enrollment, particularly online students.

We reported a first quarter diluted loss per share from continuing operations of negative $0.09 versus guidance of negative $0.06 to $0.09 and positive $0.09 in the same quarter last year, excluding impairment facility closing and severance charges for both quarters.

The operating margin, again excluding impairment facility closing and severance charges in both time periods, decreased to negative 1.6% in the first quarter from 4.5% in the same period last year. The decrease is primarily the result of lower revenue associated with student population declines.

Next, I'll move to cost trends, starting with marketing and admissions. As a percent of revenue, marketing and admissions increased to 27.7% in the first quarter from 24.3% in the same quarter a year ago. Total marketing and admissions expenses per new student increased 12.7%. The increase for both metrics is primarily the result of duplicative costs associated with bringing transfer management services in-house and lower conversion rates, as Jack discussed earlier.

General and administrative expenses in terms of total dollars decreased by approximately $600,000, or 1.3%, in the first quarter this year versus the same quarter last year. As a percent of revenue, G&A expenses were 11.6% versus 10.7% last year. The increase as a percent of revenue is the result of lower revenue.

Educational services expenses in terms of total dollars decreased by $16.3 million, or 6.7%, in the first quarter versus the same period last year. The decrease is mainly the result of lower compensation and lower variable costs. As a percent of revenue, educational services expenses were 62.2% of revenue in the first quarter of fiscal 2014 versus 60.5% in the same quarter last year, reflecting a lower student population revenue relative to fixed costs.

Bad debt was 4.9% in the first quarter of fiscal 2014 versus 4.8% for the same period last year.

Moving now to capital expenditures. In the first quarter, capital expenditures totaled $12.9 million. For fiscal 2014, we continue to expect CapEx to be approximately $40 million.

I'll move now to the balance sheet and cash flow statement. At September 30, 2013, we had approximately $37.2 million in cash and in cash equivalents.

Total debt as of September 30, 2013, was $101.1 million, which included capitalized lease obligations of $12 million. Total debt as of June 30, 2013, was $139.1 million, which includes capitalized lease obligations of $12.2 million.

Net days sales outstanding in the first quarter were 23 days.

On the cash flow statement. Cash flow from operations was $41 million in Q1 of 2014 versus $20.4 million in Q1 of 2013. The increase is primarily due to the timing of cash receipts and payments.

To close out my comments, I'll turn now to second quarter guidance. As a reminder, our guidance is based upon continuing operations and excludes any onetime charges. We expect second quarter results to be as follows: We expect new student enrollment to be down 7% to 9% versus the second quarter of the prior year. We expect revenue to range from $375 million to $385 million. We expect diluted earnings per share of approximately $0.02 to $0.04 in the second quarter. We're assuming approximately 89 million diluted shares outstanding in the second quarter. And the tax rate is expected to be approximately 40%. For fiscal 2014, we continue to expect diluted earnings per share of approximately $0.10 to $0.15.

I'll now turn the time back to Jack for closing remarks.

Jack D. Massimino

In closing, despite a complex operating environment, we remain focused on what's important: the achievement in career success of our students and continuous improvement of our operations and compliance systems. We believe our schools play a vital role in the postsecondary education landscape. We provide needed access and services for students who are underserved by traditional institutions. As I said earlier, many of our students, 41% at last count, tried but did not succeed at a community college. We formally survey our students twice each year about their entire experience, from admissions to academics and career services, and consistently receive high marks. We're proud of the work we do.

Let's move now to the question-and-answer session. [Operator Instructions] Sayed, I'll turn it back to you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Peter Appert from Piper Jaffray.

John D. Crowther - Piper Jaffray Companies, Research Division

You've got John Crowther on here for Peter. The first question I just want to ask is in terms of your Q2 guidance, you're sort of signaling a sequential uptick in revenue from Q1, pretty large to the size we haven't seen since 2009 when you guys were growing enrollments at 20%, starts at 10% and pricing was up 5%. So just wondering with new starts under pressure, which likely is going to pressure total enrollment, where is that sort of sequential uptick in revenue coming from?

Robert C. Owen

So it's coming from 2 things: first, average student population, which actually goes up in Q2 and that's a result of lower persistence in the quarter, typically seasonally, as well as the full impact of the start from Q1. So its average population is up and then we also expect a slight increase in revenue rate per student as well.

John D. Crowther - Piper Jaffray Companies, Research Division

Okay. And then just sort of following that down to the expense line. You guys had talked about reducing the overall expense line on a year-over-year basis by upwards of, I think, it was $40 million, including fixed and variable costs previously. Just wondering how much of that actually did we realize in Q1? Or is there more of that we're going to start seeing in Q2? It sounded like you talked about duplicate expenses in the marketing and administration line from bringing in-house a number of operations. So are we going to see some benefits from that as we move through the rest of the year?

Jack D. Massimino

Yes, John, absolutely you will. I mean, you'll see that really roll out in the second, third and fourth quarters. We had some piece of it in the first quarter, but that was really offset by the duplication that was taking place. As we brought up the new system in marketing, we had additional employees and we were still paying for the outside services. So we had a compounding effect there. That will now go away at the end of the second quarter. We'll see the benefit of that in the last half of the year as well. So you've got a couple things going on there, but you'll see that $40 million rolling through, through the balance of the fiscal year.

Operator

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

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

I wanted to ask about the cash flow. We don't have the benefit of the full balance sheet from you guys yet, obviously. But you had a big uptick in cash flow from operations, although the release signals that this is maybe just a timing issue. Wondering if you could talk about your expectations for cash flow from operations for the year and if you could maybe address your expectation, generally speaking, about what additional cash costs might come from defending yourselves against the California lawsuit?

Jack D. Massimino

Trace, I think that all of that is included in our guidance. The cash flow that we commented on in the press release and Bob talked about today or earlier this morning really does relate to timing. We had a benefit in this quarter that made the numbers extra normally high. Our expectation is that CapEx is going to be where as we suggested it would be, around $40 million for the fiscal year. In terms of giving you cash flow guidance for the balance of the year, obviously we're not going to do that. But we did give you guidance for our earnings for the balance of the year. And with regard to the Cal AG, we've got -- we have a budget in our legal department that continues and we think we've included all of that in our guidance.

Operator

And our next question comes from David Chu from Merrill Lynch.

David Chu - BofA Merrill Lynch, Research Division

So can you explain in a bit more detail like the changes you are making to Online and just your thoughts on how you think this will help improve student demand. I know you've touched on this in the past, but just wanted to get a little bit more detail.

Jack D. Massimino

Yes, David, I'm happy to. I mean, there are a couple of things going on here. The first thing that took place, and this started about 6 months ago, we implemented a new operating system within our Online arena. And as we brought that out, as always happens in transitional periods, we had a few hiccups along the way. And so there's been a lot of education, a lot of process work taking place with regard to that and that's going to be ongoing. I mean, we now have that implemented, but it's going to take some time for that transition to get into place, people to figure out how to use it, the benefits of the system. We use the same system in a number of our call centers across the organization already. We know it works. It's just a function of time to get it across-the-board and implemented to a point where it's running as smoothly as we would expect. I want to step back just a moment and talk about a number of other transitions that we've done in the company. We brought CDR in-house. We made some mistakes along the way. The benefit to us in the long run was we have a very good CDR program, and our cohort default rates for our organization are very good. With regard to financial aid, I think you guys remember that financial aid for our organization, our bad debt, ran 6% to 7%. Today, we're running in the 4s. We've brought it in-house. We had some hiccups along the way, we smoothed that out, and over time, it got better. My expectation is exactly the same thing is going to happen with both of these new processes that we've put into place and online. The management system we put into place, we already have in place in a number of our other call centers across the organization, as I mentioned. We know that will smooth out. The third piece, though, is bringing in-house this whole process of lead flow and transfer of students who are interested in coming into our organization. Again, as with everything, there are process changes that has to take place. We had a third party that was involved with us for a number of years in that process. As you might expect, as we began to wind down their involvement, they weren't maybe as good as they could have been as we went through the process. That will be over at the end of this quarter, and our expectation is we will have total control of that process internally. And as we have in the past on the other programs and processes that we've brought in-house, we've seen a smoothing out and an improvement overall for the organization. So I would tell you that those 2 things really are in the middle of process for the organization. We'll begin to see the improvements in the third and fourth quarters of this fiscal year.

David Chu - BofA Merrill Lynch, Research Division

Okay, that's very helpful. So given the, I guess, changes to the in-house marketing initiatives, do you expect that we can see more than $40 million in savings in fiscal '14?

Jack D. Massimino

No, I wouldn't expect that. I mean, we put together a plan of action. We have a budget that we run against. The additional $40 million, we've already put into effect. It's already in place and we're already seeing the benefit of it.

Operator

[Operator Instructions] Our next question comes from Jerry Herman from Stifel.

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

Jack, the first question is about the relationship between the changes with the TCPA and your in-sourcing, if you will. Was that in-sourcing actually driven by the Act?

Jack D. Massimino

No, no, not at all, Jerry. I mean, this is a process that we started with a variety of our processes since I have been engaged in the organization, where we've had what we consider to be a significant outsourcing. Where we think we can do it better in-house, we have, over time, brought those and internalized them. So that's exactly we've done here. We started this process about 18 months ago, made our mind up about how we were going to go about it, went out, shopped for systems, IT systems or software systems, to help us implement this kind change. This has been part of our ongoing strategy we call it controlling our destiny. But bringing these key processes in-house makes a difference to the long-term viability of the organization. It had nothing to do with TCPA.

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

Okay. And now let me just ask about Online, if I may. A lot of the players in the space have had difficulty getting online volume to recover, yet you seem to have confidence that yours will. How do you view your differentiators? What differentiates your product relative to the others that you compete with?

Jack D. Massimino

I think there are a number of things, Jerry. First of all, we're in the community college sector as opposed to a number of our peers who are really in the bachelor's, master's and Ph.D. sector where I think there's a heck of a lot more brand competition. So I think that's an advantage. The other thing that I think is going to be a big advantage for us as we go forward is our whole interaction with our students. The majority of our peers use adjunct professors and I'm not suggesting that's a bad thing to do, but what I am saying is we're going in a different direction. We're changing to full-time professors. So a high percentage of our faculty will be full-time who will engage with the students at a full-time level. They'll be committed to the organization in a way that adjuncts may not be committed. Adjunct professors work for us, they work for EDMC, they work for DeVry, they work for the University of Phoenix. So I'm not suggesting that they're not good professors and they're not good at what they do. But what I do know is that full-time faculty members who are engaged in your organization and buy into your culture and understand who your students are might have a leg up in the process of dealing with the students. And we've already begun to see that. We've brought a number of the new faculty members online in this first quarter of the fiscal year. We're beginning to see improvements in attrition, things of that sort, which are critical for our students. And so I think that all of those things really are beginning to make a big difference.

Operator

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

Jack D. Massimino

Listen, I appreciate everybody being on the call this morning. I know there are a number of companies going through the process this morning. Thanks for your attention, and we look forward to talking to you again next quarter.

Operator

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

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