Corinthian Colleges, Inc. F2Q10 (Qtr End 12/31/09) Earnings Call Transcript

| About: Corinthian Colleges, (COCO)

Corinthian Colleges, Inc. (NASDAQ:COCO)

F2Q10 (Qtr End 12/31/09) Earnings Call Transcript

February 2, 2010 12:00 pm ET

Executives

Anna Marie Dunlap – SVP, IR

Peter Waller – CEO

Ken Ord – EVP and CFO

Analysts

Sara Gubins – Bank of America Merrill Lynch

Andrew Fones – UBS

Trace Urdan – Signal Hill

Kelly Flynn – Credit Suisse

Jeff Silber – BMO Capital Markets

Gary Bisbee – Barclays Capital

Paul Ginocchio – Deutsche Bank

Suzanne Stein – Morgan Stanley

Operator

Good day, ladies and gentleman, and welcome to the second quarter 2010 Corinthian Colleges earnings conference call. My name is Francis and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (Operator Instruction) As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the presentation over to your host for today, Anna Marie Dunlap, Senior Vice President of Investor Relations. You may proceed.

Anna Marie Dunlap

Thank you, Francis. Good day everyone, thanks for joining us. I am here today with Peter Waller, Chief Executive Officer; and Ken Ord, our Chief Financial 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 Tuesday, February 9th. 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 risks, which are identified in our filings with the SEC.

Following our prepared remarks, we will open the call for a question-and-answer session. Over to you Peter.

Peter Waller

Thank you, Anna Marie, and hello everyone on the call. Today I will begin with a review of our second quarter operational progress followed by a few comments about the recently concluded negotiated rulemaking session. Ken will then review the quarter’s financials in more detail and provide guidance for the third quarter and fiscal year.

Our strong second quarter results reflect our continued progress on the strategic plan we set forth several years ago. As a call of that plan is our commitment to providing a high quality educational experience for every student. We continue to invest in building people capability and in facilities, faculty, and other infrastructure that would help our students to learn, complete their programs, graduate and find employment in their fields. And we are getting results. Students satisfaction scores are increasing, our student population is growing for more than three consecutive years, and our financial results are ahead of plan.

In the second quarter, we continue to grow the top and bottom lines while increasing our investment in several key areas, including graduate employment and student loan default management. We exceeded our previous guidance range for revenue and earnings per share, and reported new student growth within the range of guidance.

Revenue was $414.3 million in the second quarter, up 30.2% compared with the same quarter last year. The increase was primarily driven by our growth in our student population and new student starts. At the end of the second quarter, our total student population was 93,152 students, an increase of 22.3% over December 31 last year.

Our second quarter operating income was $64.8 million versus operating income of $27.6 million in the same quarter last year. The operating margin increased to 15.6% in the second quarter this year, up substantially from the 8.7% margin reported in the same quarter last year.

Diluted earnings per share were $0.44 in the quarter versus $0.18 in the same quarter last year, above our previous guidance range of $0.37 to $0.40 per diluted share. In the second quarter we continue to improve the overall student experience and our satisfaction surveys were indicative of our progress. Our practice is to survey students twice the year, in March and in October. Last October’s results showed a marked improvement in the net promoter score over the prior year. As you may recall from past discussions, the net promoter score has a proxy measure for student loyalty for the school and his or her program.

We believe our improvement to student satisfaction is the direct result of several ongoing initiatives, including a major increase in faculty development across all of our campuses and increased investment in faculty leadership, increased investment in student services personnel for exclusively online students, for visions into upgrades to curriculum, most recently in the dental assisting, massage therapy, and medical insurance, billing and coding programs.

Investments in new technology in the classroom, including new computers, an increased wireless bandwidth at our campuses. We will continue to focus on creating an outstanding experience to students at every campus and every program. We believe that if our students are satisfied and find value in our services; we will continue to grow and ultimately create value for shareholders.

I will now move to new student growth. Our new student growth continues to be generated by existing and newly transplanted programs rather than new branch of campuses or acquisitions. Growth continues to be goal based across ground schools, and the online business, continue to experience strong growth.

As we announced previously, on January 4th, we completed the acquisition of Heald College. We are pleased to welcome Heald and its capable management team, instructors and staff to the company. Corinthian and Heald are culturally aligned as both organizations are committed to positive student outcomes including completion and placement.

The acquisition of Heald gives Corinthian an increased presence in Northern California, Oregon and Hawaii. The growth platform for online and campus based regionally accredited programs and a third strong brand. In addition, we expect the acquisition to be accretive and to generative an attractive return invested capital. For today’s press release we have included a table showing Heald's expected contribution to our financial results in fiscal 2010.

In the second quarter, new students totaled 29,156, an increase of 10.7% compared with the second quarter of the prior year. Given the trend, we expect new students in the third quarter to grow by 6% to 8%. This growth rate is pro forma as the calculation includes Heald colleges’ new students for the third quarter of last year as well as the third quarter of this year. If we exclude Heald from the third quarter of last year, but add Heald students to third quarter of this year, our expected growth rate will be 18% to 20%.

As we discussed on our previous call, in the last time of the fiscal year, we expect the rate of new student growth to slow as year-on-year comparisons become more difficult and the unemployment rate stabilizes. For all of fiscal 2010, while maintaining our previous guidance for new student growth of 11% to 13% versus a growth rate of 17.1% in fiscal 2009. Again, this growth rate includes the Heald acquisition on a pro forma basis. If we exclude Heald from last year's fiscal base of students and add Heald students to fiscal 2010, our growth rate will be 17% to 19% for the full year.

We believe that our projected growth rate can be achieved for the same drivers we’ve discussed previously. It includes transplanting current programs across our systems and school, continue strong growth on the online business, new campuses and a ramp up in high school recruiting. In the first half of fiscal 2010 we transplanted 33 core programs across 28 campuses, and expect to continue rolling our core programs in the second half of the fiscal year. We plan to launch up to four new campuses by the end of the first quarter of fiscal 2011. We continue to expect healthy growth on our existing online division and Heald plans to Heald’s regionally accredited online platform for two-year degrees by the end of calendar 2010.

Our high school recruiting efforts are proceeding as planned and we expect to have approximately 450 high school admission representatives across all of our campuses by fiscal year end. This is about double the number of high school representatives we had in fiscal 2009. In the second quarter of this fiscal year, high school students represented a significant percentage of new student growth and we expect growth in its emerging part of our business to accelerate in fiscal 2011.

Next, I will discuss the media sources of new student growth as well as marketing cost trends. The mix of media sources generating our new student growth in the second quarter continues to show a shift toward the internet. Of total new students – total new adult student, we derive 42% from the Internet, 24% from referrals, 19% from television, direct mail and newspaper advertising and 15% from all other sources. The 14th consecutive quarter, the media cost per new students continued its downward trend. In the second quarter the media cost per new student declined by 20.6% compared with the same period last year. We attribute the improvement to the same factors that we discussed on past calls, including greater efficiency associated with ground consolidation and more effective advertising, recession related declines in advertising costs and our continuing efforts to improve lead quality and efficiency.

Media generated enquires or leads which exclude enquires from referrals and high school representatives totaled 620,000 in the second quarter, an increase of 24.8% over the same quarter last year. The total cost per new student, which includes all marketing and admissions expenses was essentially flat with the same quarter last year. As mentioned earlier, we are ramping up the number of high school admissions representatives, which partially offset the improved efficiencies in marketing.

For all the reasons just discussed, total marketing and admissions expenses as a percentage of revenue declined to 19.4% in the second quarter of this year from 23.1% in the same quarter a year ago, a decrease of about 370 basis points. When the economy improves we may gradually get back some of the savings on media buying. In future years, we expecting marketing admissions expenses to reach a sustainable level of 21% to 22% of revenue, and this is in keeping with our goal of reaching a 15% operating margins for fiscal 2011.

Turning now to the area of bad debt. In the second quarter bad debt was 5.8% of revenue, down substantially from 8.7% in the same quarter last year and below our second quarter guidance range. The timeliness of student financial packaging was the main factor behind the continued decrease in bad debt. Ken will discuss bad debt guidance for the third quarter and the fiscal year in just a few minutes.

I’ll now move to the topic of educational services where we continue to see leverage of facility costs. Educational services expenses as a percentage of revenue were 53.6% in the second quarter of fiscal 2010 versus 58.1% in the same quarter last year, a decrease of 450 basis points. About 60% of the improvement was the result of the increase in student population, which leveraged occupancy costs and other fixed expenses. The remainder of the improvement was the result of lower bad debt as I just discussed. And as you recall, bad debt that was essentially revenue is included in the educational services line item. Education personnel cost increased slightly as a percentage of revenue in the second quarter of 2010 compared with the same quarter last year, reflecting our continued investments in faculty, career services and student finance.

By fiscal 2011, we expect educational services to be in the sustainable range of 53% to 54% of revenue. And this is in keeping with our guidance of achieving a 15% operating margin for fiscal 2011. General and administrative expenses were 11.4% of revenue in the second quarter of fiscal 2010 with a 10.1% in the year ago quarter. The increase is mainly due to the earlier timing of variable compensation accruals for management personnel across the company.

As our student population grows, we'll continue to make judicious expansions in infrastructure, including facilities, equipment and staffing. Ken will discuss our planned increase in total capital expenditures in a few minutes.

I'll now turn to two critical areas of focus for the company. Cohort default rates for student placement. During the second quarter, we continue to refine our analysis of the available default data for the 2008 cohort. Based on that analysis, we are confident that the number of OPEID numbers were expected to be above the required threshold in 2008 has not deteriorated since our previous call. We'll have more definitive information when the Department of Education publishes preliminary data for 2008 cohort, at which time we would file an 8-K with the SEC.

In the second quarter we made substantial progress implementing our plan for reducing cohort default rates, focusing on the 2009 and 2010 cohorts. Our internal cohort default management team dedicated to early stage default management is fully staffed. Our student contact information system has been implemented. We now have dedicated cohort default management specialist at every campus with implemented more extensive financial literacy and default prevention training for current students.

In addition, we have increased staffing at the outside agencies who are assisting us with default management. In short, we are aggressively attacking cohort default rates, and expect to see measurable results. We will continue to keep you updated on our progress.

Turning now to the topic of student placement, as we discussed previously, given the recession we're making a substantial investment in career services to help our graduates find employment in their fields of study. During the quarter, we continue to increase the number of career services personnel, and now have nearly 700 individuals in place across our network of schools including Heald. We continue to expand our acquisition of employers, [ph] including national partnership development and provide more in-depth staff training of building B2B relationships.

As we said previously, due to economic conditions there are certain markets and programs we have capped enrollment until placement trends improve. The growth impact of these caps is approximately the same as in the previous quarter, and is included in the new student growth guidance that we provided earlier.

Given the information currently available, we expect the placement rate for the 2009 cohorted graduates to be approximately 70%. We’ll continue to keep you updated on our progress.

Next, I’ll comment briefly on the recently concluded program integrity, negotiated rule making or (inaudible) session. Last week, the third and final round of (inaudible) took place. As expected, based on the number of controversial issues and the divergence of use among many other negotiators in the Department of Education, the committee did not reach consensus.

Importantly, the unresolved issues did not relate solely to private sector institutions. (inaudible) failed because of disagreements at a multiple issues from a variety of interest. The Department must now determine whether to move ahead with the proposed regulations on its own.

If it decides to go forward, the regulations the department decides to propose will be published in a Notice of Proposed Rule Making or NPRM. The timing of the NPRM is uncertain. That notice will be followed by a comment period, further requirement of the regulations and then final adoption. On the cover schedule, July 2011 is the earliest effective date for any of the new regulations.

As part of our ongoing legislative or Regulatory Affairs program, we along with others in the sector, will continue to make our views on gainful employment, incentive compensation and other issues of importance.

Before turning the time over to Ken, I want to emphasize that we believe we are well positioned for continued growth and margin expansion. We believe that our growth drivers, core program expansions, online new campuses, and high school recruiting will work in a strong or weak economy.

In addition, the acquisition of Heald is expected to enhance growth and earnings. In the recent quarters, recession has also helped us grow. But as previously discussed, it also poses challenges in the areas of graduate placement and student loan defaults. Overall, we are confident that we can continue to deliver positive results for our students and ultimately to our shareholders.

Now I will turn it over to Ken for a financial review and guidance.

Ken Ord

Thanks, Peter. I will begin with a discussion of capacity utilization and facility expansion plans. For grad school continuing operations, we ended the second quarter with the total of 4.4 million occupied square feet, up slightly from 4.3 million occupied square feet at the end of the second quarter last year.

Occupied square footage per student was 56 square feet at the end of the second quarter, down from 66 square feet per student at the end of December last year. As this data suggests, we are continuing to see the benefit of a higher student population coupled with disciplined facility expansion. Given the increase in students, we plan to expand instructional capacity at many campuses to extended hours and more efficient scheduling.

However, in addition to our previously planned capital expenditures we’re making, remodeling and new facilities we also planned to reconfigure and/or expand many of our campuses to accommodate additional career services and student can add personnel as well as admissions representative for our high school program. This is expected to cost an additional $12 million in capital expenditures in fiscal 2010.

As a result of these expenditures, plus estimated CapEx for Heald of approximately $10 million, and $3 million in additional spending for information technology, we are increasing our guidance for total capital expenditures from approximately 90 million in fiscal 2010 to approximately a $515 million.

Moving now to enrollment data, and please note that these data are for continuing operations only. The total student population at December 31, 2009 was 93,152 students, an increase of 22.3% compared with 76,165 students at December 31, 2008. As previously discussed, the increase of the results highest new student growth and improved retention. The second quarter is the average student population with 94,662, an increase of 24.1% compared with the same quarter of the prior year. Of the total ending student population, students were exclusively online, an increase of 53.6% over 13,253 students last year.

Turning now to the income statement, and again as a reminder, the financial results I am about to review are based upon continuing operations. Revenues for the second quarter were $414.3 million versus $318.3 million in the same period of the prior year, an increase of 30.2%. Our average revenue rate per student increased by 4.9% in the second quarter of fiscal 2010, primarily reflecting price increases.

Operating income were $64.8 billion or 15.6% of revenue in the second quarter of 2010 compared with $27.6 million or 8.7% of revenue in the same quarter of last year. The effective tax rate in the second quarter was 40%.

Income from continuing operations after tax in the second quarter of fiscal 2010 was $39.4 million compared with $15.5 million in the same quarter of the prior year. The net loss from discontinued operations was zero in the second quarter versus a loss of $374,000 in the same quarter last year.

Diluted earnings per share from continuing operations were $0.44 in the second quarter versus $0.18 for the same quarter last year. The weighted average number of diluted shares outstanding for the second quarter was $88.6 million compared with $86.9 million in the same quarter of the prior year.

Turning to the balance sheet, at December 31st, 2009, we had approximately $251.2 million in cash and cash equivalents versus $160.3 million at the end of fiscal 2009. Long-term debt, including the current portion as of December 31st, 2009 was $18.2 million, which includes capitalized lease obligations of $14.4 million.

Long-term debt including the current portion at June 30, 2009 was $28.6 million, including capitalized lease obligations of $14.7 million. Net receivables as of December 31, 2009 were $115.8 million versus $66 million at the end of fiscal 2009. Student notes receivable, including the current portion as of December 31, 2009 was $57 million versus 41.5 at the end of fiscal 2009. Net days sales outstanding at December 31, 2009 were 13 days.

Moving to the cash flow statement, cash flow from operation including discontinued operations was $126.9 million in the first half of fiscal 2010 compared with cash flow of $79.4 million in the same period last year. The increase in cash flow is primarily due to an increase in net income.

Next I’ll review the topics of bad debt and internal lending. As Peter mentioned, our bad debt in the second quarter was 5.8%, which was below the guidance range of 6.2% to 6.7%, and a substantial decrease from the 8.7% reported in the second quarter last year. The improvement is primarily the result of better financial aid packaging, including automating certain elements, such as online passes and electronic signatures.

In terms of bad debt guidance, in fiscal 2010 we expect bad debt to go lower than our previous guidance range of 6.2 to 6.7%. Our revised guidance range is 5.9 to 6.3% for the year. In the third quarter of fiscal 2010, we expect bad debt to be approximately the same as bad debt in the second quarter. This guidance includes the impact of the Heald acquisition.

Now turning to overall guidance. Our guidance is based on current expectations, it is forward-looking and actual results may differ materially as a result of the factors described in our public filings with the SEC. In addition, the following guidance includes the impact of the Heald acquisition. To assist you with your financial model, we have attached a table to the second quarter press release, which shows guidance with and without Heald. In the second half of fiscal 2010, we expect the Heald acquisition to increase otherwise normal expenses by an additional approximately $10 million to $12 million to cover amortization of intangibles, interest expense and integration costs. Also, please note, that our third quarter and fiscal year 2010 guidance excludes any one-time charges such as one-time Heald transaction cost of approximately $4 million.

I’ll begin with third quarter 2010 guidance. We expect new student growth of 6% to 8% in the third quarter. Again, this rate includes the impact of Heald on a pro forma basis. If we exclude Heald from the third quarter of last year, and add Heald to students in the third quarter of this fiscal year, our expected growth rate would be 18% to 20%. We expect revenue to range from $470 million to $480 million. We expect diluted earnings per share to be approximately $0.45 to $0.47. We expect 88.6 million diluted shares outstanding in the third quarter. The tax rate is anticipated to be approximately 40%.

I'll move now to guidance for the full fiscal year. Again these figures include the impact of Heald. We expect new student growth of 11% to 13%. Again, this range includes the impact of Heald on a pro forma basis. If we exclude Heald from last year’s fiscal – last fiscal year’s base and add Heald students in fiscal 2010, our expected growth rate would be 17% to 19%.

We expect fiscal 2010 revenue to range from $1.74 billion to $1.76 billion. For fiscal 2010, we expected diluted earnings per share to range from a $1.63 to $1.68 on the basis of 88.8 million diluted shares outstanding. For reasons I discussed earlier, we expect capital expenditures to be approximately $115 million, above our previous guidance range of approximately $90 million. We expect the effective tax rate in fiscal 2010 to be approximately 40%.

In terms of guidance beyond fiscal 2010, in keeping with past practice we plan to provide more detailed guidance for fiscal 2011 during our fiscal 2010 year-end conference call scheduled for late August. That said, we want to reiterate that we still expect to reach an operating margin of at least 15% in fiscal 2011. And as our 2010 guidance suggests, we are fast approaching that target. As discussed previously, we expect Heald to add approximately $0.15 to $0.20 to earnings per share in fiscal 2011.

For the next few years, we expect to reach operating margins in the high teen. We are trying to provide three-year goals for student population growth, revenue and operating margin at our Investor Day on May 27th.

And with that, I’ll turn the time back to Peter for closing remarks.

Peter Waller

So, in closing, we continue to focus on improving the student experience while continuing to grow and achieve operational excellence. We expect the growth drivers that Corinthian have in place to generate sustainable growth over the next few years. Given the weak economy, graduate placement and student loan defaults have necessarily become more critical areas of focus. As discussed earlier, we are aggressively tackling these challenges, we will continue to update you on our progress during our third quarter call at our Investor Day in May.

Even with these investments, as Ken has guided, we continue to see future expansion of the top and bottom line. So, let’s move now to the question and answer session. As in the past, please limit yourself to one question and one follow-up. And if time permits we will get back to you for a third round of questions. So, over to you operator. Francis, thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Sara Gubins with Bank of America Merrill Lynch. You may proceed.

Sara Gubins – Bank of America Merrill Lynch

Hi, thank you. I believe you can hear me?

Peter Waller

We can, Sara.

Sara Gubins – Bank of America Merrill Lynch

Okay. The guidance suggest that you could be pretty close to 15% operating margins for this year, and so I guess, I am wondering why your reiterating the 15% target for 2011? Is that a comment that you might see margins down or way up slightly or is it to see how are they updating those numbers?

Ken Ord

Sara, if you looked at CCI without the impact of Heald, yes, our margins would be getting very close to 15%. The impact of the amortization of intangibles and the transaction costs are kind of ongoing, including some of the integration cost, mean that including Heald the margin is slightly lower, which is why we’ve kind of reiterated that we in fact to get to those 15% margins frankly, including the Heald transaction, which is slightly deteriorated margins in the last half of this fiscal year and will slightly deteriorate margins in the first half of next fiscal year.

Sara Gubins – Bank of America Merrill Lynch

Okay.

Ken Ord

And sorry, Sara, I want to wish you well. We're updating official guidance at this stage. I think that’s sort of the headline that, we’re just reiterating that we’re going to be in the framework that we’ve talked before, and we’ll go into more detail at the Investor Day some outlook for next year. We do acknowledge that we think we’re ahead of schedule on that margin goal.

Sara Gubins – Bank of America Merrill Lynch

Okay, and then switching back to the topic of the year, I don't know if you can give us any sense about the impact of the gainful proposal right now, but can you give us any commentary about median debt loads of your graduates or debt service to income ratios?

Ken Ord

Okay. So let me take that a little bit. Let me just frame a little bit beforehand with our overall view on where it stands today, so as I said in my commentary a little earlier and then I’ll comment specific with your question. I mean the reality today is that the proposed rates are not cast in stone, we see them sit on a high state of flux, and even the education department says that it plans to do some more analysis, so. And it is up to them that is aside how to incorporate these discussions into these law proposals. We disagree with where they are coming out in terms of their proposal on gainful employment, and I'll give you our specific numbers in a second but given that disagreement, we will be certainly joining forces with other institutions and associations. This isn't just a private sector at issue here. We're joined across higher education industry and we make our views known again on the draft proposals.

We’re going to participate in meetings with appropriate officials at the Education Department, and then of course we'll between the association and individually meet with them as a congress and their staffs. And so it will be a broad-based communications plan as to why the proposed gainful employment is not the way to think about the value proportion. I do want to reinforce ourselves into others that it is fundamental to who we are as a company and our proposition that, we embraced the notion that student value is critical. That’s why we’re here. We all starting people on a career path, and that’s why we’re really focused on entry level post-secondary education.

We see value proposition in a different way than the department does, and as we’ve shown in exhibits at Investor Meetings, Analysts Meetings et cetera, we’ve really seen it on through our lifetime return on investment, and we've shown at many meetings our increase in earnings over 15 years, how that investment of the education pays back for them.

So we see ourselves having a discussion on a different angle frankly where the department is. I'll give you now the specifics on where the department is and where our numbers stack up versus the department. And it frankly varies according to whether you assume Pell Grants are included or not. If you assume that the student receives the full Pell Grant, our core medical assisting program would appear to be under the 8% debt on a payment and monthly income level. If they don’t get the Pell Grant, they are going to be about 8%. And then some of our other programs move around but most of the – as I think will be the case across the industry would be above the 8%.

So those are sort of where our programs actually rest. As you’ve heard I think at the NegReg themselves, there was some confusion I think from the Education Department as to whether they were looking at it purely with federal loans or whether it include private loans, and so there’s some math that is moving around here.

And the other point I'll just make, it obviously it’s heard off the press because of the budget speech the other day the State of the Union and budget proposal out yesterday. Even the President seems to be at different place to the proposal being made in NegReg where he is proposing to use the existing income base for payment plan as a vehicle, and he’s actually setting a 10% monthly debt payment to income ratio.

Sara Gubins – Bank of America Merrill Lynch

Okay. Thank you so much.

Operator

Your next question is from the line of Andrew Fones with UBS. You may proceed.

Andrew Fones – UBS

Yes. Thank you. Just kind of follow-up on your answer, and thanks for the detail there. I was wondering if you could help us understand, I guess, what the average proportion of your students transferred in with credit, and so I guess, wouldn’t be incurring debt at Corinthian?

Peter Waller

Most of our students, Andrew, are entry level. They are 25 to 27-year-old average age, who frankly have got lost in life, and we are their lifeline to a career, and so many of them are not in bringing in credits, that would be minimal. We do get some transfers from community colleges with some limited credits, but most of our students will be starting from scratch.

Andrew Fones – UBS

Okay. And then could you remind us what kind of proportion of your revenue that's coming from Title four loans, PAL, to make up kind of the Title four proportion and then what the breakup is of the rest in term of between (inaudible) some of the institutional loans and then cash at a pocket, so forth. Thanks

Peter Waller

Sure, I mean our 9010 proposition, if you exclude the $2000 of unsub Stafford that we are allowed to exclude are roughly 83%, 84%. If you include it will roughly at 89% about 60% to 70% of our students are eligible and bring back in. If you look at the proposition of private loans to our income after the discount that represents about 5% of our loan and there is only about essentially 1% to 2% of cash coming in that right now from our students. And so, then there is few percentage of State Grants and miscellaneous funding from various sources. So again, each student is different depending on whether they are Pell eligible or not I think that's gives you the rough break down of the revenue by source.

Andrew Fones – UBS

Yes, that was very helpful. Thank you.

Peter Waller

Thank you, Andrew.

Operator

Your next question is from the line of Trace Urdan with Signal Hill. You may proceed.

Trace Urdan – Signal Hill

Thank you. I wanted to ask about the 70% employment number, and for starters, whether you could share with us what the range looks like around that figure. In other words what’s low, what’s the high and then related to that I am wondering sort of as you think about where their capped enrollment, what's the employment placement number that we do to that decision?

Peter Waller

It's still relatively early days on the 2009 cohort. These are for students who graduated during the year of 2009 and we measure ourselves up until June 30th. So we still got about six months long way to go, and so these are our best projection. We are getting actually a little bit more of a target to match than we have in the past. In the past, we've said that accreditation standards are 65% to 70% depending upon the length of the program and that we will above them. Our projections, and again, our early day projection is now even the – above 70% on the low 70s where we expect to come out. And it moves around – around that I only got specifics on the range, but we do not see ourselves threatened by accreditation standards across the organization.

Trace Urdan – Signal Hill

Okay. As you look at and make this decision about where the cap enrollment, what's the actual mechanism for doing that? Do you become more restrictive in terms of who gets admitted to the program?

Peter Waller

So as I said last time there is relatively limited number of campuses, so about 10 campuses where we are looking at today. And, it's in classic sort of high unemployment areas like Detroit or downtown Chicago or some of the intercity areas of Texas. And what we are looking there is not so much what our placement rates are today, but we are doing a projection as to the level of enrollment that make sense for the market place absorption of these students into healthcare a year from now or two years from now. So, we are sort of getting ahead of ourselves proactively. It’s not that we are in trouble today, we are getting ahead ourselves proactively and being realistic about where those markets are. You saw the growth rates that we were enjoying a year ago across the company in low 20% growth, and we've considered on judgment frankly that it is not right for the students to be coming in at that level of growth consistently with an emerging graduate base 9, 12, 18 months from now.

So we’re not in any trouble to day [ph] accreditation point of view. This is about thinking forward and managing our caps appropriate. And what happens from a process point of view, Trace, you specifically asked about the process, Matt Quimet is our President and Chief Operating Officer, is always very close to school by school and program by program analysis on where enrolments are going and doing forward projection for placement and then we form some judgment as to where it makes sense to moderate our growth. Frankly, we have always done that. We’ve always been in marketplace for sponsors, which programs we’re involving students into, in the current environment we just got about 10 campuses where we are taking particular care.

Trace Urdan – Signal Hill

So you deal with it through changing your promotion spending, is that what I heard you say?

Peter Waller

On promotion spending we're dealing with…

Trace Urdan – Signal Hill

Peter, I didn’t understand what the answer was in terms to the mechanism. How do you – I presume you’re not teaching them out, right, so you're still admitting some students into the program.

Peter Waller

Yes, so we limit some into them and so we think if those targets or those parameters to the local president and his team, and they limit the number of seats for new students in those programs.

Trace Urdan – Signal Hill

Okay, all right. Thank you.

Peter Waller

And then I would make the other point for you, Trace, we are now investing in placement team as you’ve heard over the last two or three quarters, and so we expect to get more robust even in the placement, even in the cities, and so those tax are not necessarily forever during this transition period.

Trace Urdan – Signal Hill

Okay.

Peter Waller

Thanks Trace.

Operator

Your next question comes from the line of Kelly Flynn with Credit Suisse. You may proceed.

Kelly Flynn – Credit Suisse

Thank you. Maybe I missed it but, I didn’t hear you give an update on the Genesis loan program, can you provide us an update of how big you expect that to be for this fiscal year and if you may need additional changes to your reserve assumption? And then also if I could throw in there, any update on price increase plans? Thanks.

Ken Ord

Yes, in terms of the Gensis loan program, we are forecasting that for this fiscal year, we’ll be loaning approximately $150 million, that’s up from our forecast last quarter about a $140 million, again that’s before the discount. And we actually, in terms of the terms for that loan program, our feeling frankly good about what we’re offering to our students. But again, as I mentioned earlier as you – after you discount that represent about 5% of revenue. In terms of anticipated price increases, we're looking that across the board, our early indication is that that would be approximately 4% next year.

Kelly Flynn – Credit Suisse

Okay. What about the reserve assumption against the…?

Ken Ord

Yes, just as we've indicated, we have a range of 56% to 58% in terms of the discount rate, and we continue to think that that’s appropriate.

Kelly Flynn – Credit Suisse

Okay, great. Thanks a lot.

Operator

Your next question is from the line of Jeff Silber with BMO Capital Markets. You may proceed.

Jeff Silber – BMO Capital Markets

Thanks so much. You commented in your introduction about some expectations around gainful employment. Can we talk about incentive compensation if, and I know there is no consensus yet but if some of the changes that they talked about go into effect, what changes would you have to make to recruit your compensation policy?

Peter Waller

Hi, Jeff, it’s Peter. I think its really early frankly to speculate on that, and its probably inappropriate for me to do so. I think we are definitely in a stage of flex and flux here, the dialogue is going on in sort of multi-dimensions. We continue to express our concerns about the latest proposals the Department of Education put on the table. And we do have concerns, frankly around the ambiguity that the removal of the safe harbors will create, and that will create problems in their proposal around compensating Admissions and Financial Aid personnel for their performance, for their core functions are. So as I discussed earlier, we will join forces other institutions, with trade association to make our views known on those draft proposals. We're going to participate as much as we can with the appropriate officials on the Department of Education. And meet with other people who can surround the issue. We just can’t leave at this. This ambiguity is not good for our students, it’s not good for employees and it's not good, frankly, for the agenda of the Obama administration to have a clear line of access to students in need.

Jeff Silber – BMO Capital Markets

Alright, if I could just follow-up with some quick numbers questions. On a pro forma basis including health roughly what percentage of your total populationary new medical assistant program?

Peter Waller

40% to 50%.

Jeff Silber – BMO Capital Markets

40% to 50%, okay, great. And then in terms of the amortization expense and the incremental interest expense from that acquisition in the back half of the year, can you give us some rough numbers on that?

Ken Ord

Sure, I mean, on a preliminary basis the value of the intangible we were thinking it's going to about $10 million and that, that would be amortized over 12 months. So that’s $2.5 million a quarter. The incremental interest expense in the back half of the year is about $2 million. And then there is some additional integration costs that adds up to the full $10 million to $12 million over that last six months.

Jeff Silber – BMO Capital Markets

Okay. Great. That’s very helpful. Thanks so much.

Peter Waller

Sure, Jim.

Operator

Your next question is from the line of Gary Bisbee with Barclays Capital. Please proceed.

Gary Bisbee – Barclays Capital

Hey, guys. Good morning.

Peter Waller

Hi, Gary.

Gary Bisbee – Barclays Capital

I guess just want to ask about the campus expansion plans you mentioned. I understand reconfiguring some of them to add more support personnel, but in terms of adding more classroom space, how do you balance thinking about that right now relative to the fact that some of your programs clearly had a big same store lift from the weak economy at some point, that will become so much tougher. Do you feel confident continuing that space and is there a program that you can grow stronger economy or do you – are you not doing as much of that, you know, just understanding that you are probably at some point you are going to peak out and have utilization properly (inaudible)?

Ken Ord

Yes, Gary, this is Ken. Really with my comments really revolve primarily about doing reconfigurations to add administrative staff. We really are going to get additional capacity primarily from looking at scheduling and make sure we are utilizing five-day schedules and even some weekends. So, we really not in terms of the CapEx, the comments I had not spending any dollars to add instructional room because we do want to continue to fill the existing capacity, but we are actually doing some reconfigurations to add some of this administrative personnel that I discussed.

Peter Waller

I’ll update on what Ken was saying Gary that this is very, very disciplined process and certainly we clearly want to make sure that we are not in a bubble here. And so we are looking at a program by program, responding to the market places and do everything sustainable, and employment opportunities will be, most of the capital is here about reconfiguration to optimize the campuses against the current program and make some and the way we are going with high school. We will be doing some very careful, limited surgical expansions around new programs, and classes would be as we expand our nursing program, as we expand our Trace program, they tend to require that extra few thousand square feet. But it's a, it's a very measured approach from any square footage expansion.

Gary Bisbee – Barclays Capital

And then just I think a bigger picture question on the same angle here, when you look at your current program offerings, are there any areas that you’d really thinking you need get into once expand into if you take a three to five year view to make sure that business can be well positioned for at least moderate sustainable growth over the next few years? Are you confident that the current, the current areas as you are in are likely to be sufficient? Thank you.

Peter Waller

What we see Gary that all of our three to five year plans we’ve laid out, the current verticals that we’re in and have a lot of opportunity, many because, we’re not in all those verticals and everyone of our markets. Just the notion of transplanting are identified 10 core programs into either every campus or the capital market planning basis to every market, and I still have a long, long way ahead of it. We do have medical assisting everywhere now, but there are degrees which are only in about half of our schools that we expect to be transplanting business schools. We expect to continue to roll out the trades vertical. We expect to continue to rule out the nursing program. And, so, the boxes that we have identified we believe gives us the runway against our strategy plan today and there is still a lot of opportunity in the market.

I’ll remind you that we are only in between 35% or 40% of the zip codes of the country with our ground schools today, so there is a lot of opportunity for Corinthian to reach into those programs. The other point I'd make is a mix with the programs that we have is changing more towards the associate programs because of the growth of our online opportunity and because of the acquisition of Heald, we now will move to more of a 50/50 associates diploma program. So, we see some optimization in mix and still one way in the verticals in which we participate. That said we’ll always be open-minded to find new verticals going forward and we’ll perhaps share some ideas around that at the investment meeting in the May, the 27.

Gary Bisbee – Barclays Capital

Great. Thanks.

Operator

Your next question is from the line Paul Ginocchio with Deutsche Bank. Please proceed.

Paul Ginocchio – Deutsche Bank

Thanks. Just to make sure I got the comments really about the CDR is right, so you are still looking for the 10 to 12 that we’ll breach, with another five to go, probably there’s really no change, is that correct?

Peter Waller

No change at this stage based on the continuing data that we are looking at but the draft reports come out on the computer, there is the debate as whether the 6th or the 8th of February but next week we expect, they released individually the schools and because of the nature for Corinthian, we are anticipating issuing an 8K with the detail at that time.

Paul Ginocchio – Deutsche Bank

As you look down a couple of years with the President's proposal on IBR and a 10% threshold in a 20 year – after 20 years for giving it. How do you think that impact your students and have you tried to estimate what the potential impact on CDRs is, I mean without getting specific is it meaningful positive impact or is it or do you think it's insignificant? Thanks.

Peter Waller

Paul, let me just address that, we have been working with the income base for payment plan since July was when it came into action. And it is an integral part now of our programs, and as we reach out to students, contact into our new contact system, and then try and provide options for them going forward. So, it is a tool that we have, and we expect the tools that the President that manages to get into law will be, it’s parallel tool. I will say that we’ll be coaching the department and the administration on the income base for payment plan because it is very tough bureaucratically, and there is a lot of paper work. The first job is that they have to go into full balance, and when they do have that system of hardship, they are in for balance and then we can then go to the second stage of getting them into what’s called the IBR program.

So I would suggest that there still work in progress around that, both within the department and within the sort of flow of information on the expectation of online completion of forms et cetera. So, which is a big idea, and over the next few years I am sure those wrinkles will get sorted out by the administration.

Paul Ginocchio – Deutsche Bank

Great. So it's a big idea that potentially help for your students, is that potentially lowers CDRs or grow them…?

Peter Waller

Yes, it will. We certainly expect it to do so. IBR was – this really – if you think about our students, our students are entry level, they’re high risk high need students, tough socio-demographic groups. So the income base for payment plan was already frankly pretty aggressive against our student base where the President is focusing, he actually framed it in the State of the Union around the middleclass benefits, and middleclass benefits being 10%. We tend to be looking advance more so low middle class and tougher socio demographic group. So I am not sure quite whether the President’s twist is going to give us the added value as opposed to just reaching the core of the IBR program as currently, as Rich stated.

Paul Ginocchio – Deutsche Bank

Great. Thank you.

Operator

Your next question is from the line of Mark Marostica from Piper Jaffray. Please proceed.

Peter Waller

Hey, Mark.

Unidentified Analyst

It's actually Mark (inaudible) for Marostica. Just a couple of questions here. Peter, you talked about media efficiencies were down roughly 20% this quarter. Just I was looking for little more granularity and where you are seeing the biggest efficiencies and sort of when did you expect to see comps get tougher in any of those particular areas?

Peter Waller

I think let me share with you, I think we’ve clearly all benefited over the last 18 months from recession and the depression on media costs, and I think we've added value to that at Corinthian because of the national branding and because of frankly the quality of our advertising has been more effective. As we go forward, we do expect to see some recovery, limited recovery on those media costs. We are seeing – there’s a bottoming out at this stage. And in fact we are planning, made assumptions on our guidance that they are going to come up just a few percentage points at the backend of our fiscal year. So there seems to be a little more solid and robust in the immediate buy markets. So many people are experimenting, we are getting into the media world which could have ramification on us, but we see that as a few percentage points of cost recovery on TV.

I'll remind you that half of our, about half of our media spending dollar wise is actually on the internet, and the internet has been oddly flat. So, in cost we don’t see any increases coming along on the side of internet. So I think I am trying to hammer the point, we have given some appropriate guidance of 21% to 22% for marketing admissions as we go forward, but we are not seeing ourselves in carrying those media cost inflations at this stage.

Unidentified Analyst

Okay, great. And then on the CDR your investment in CDR management, what have your, just initial looks, that telling you aside from staffing enrolments, what, you know, there are other sort of low hanging fixes that can be made, that may have been just overlooked. Just trying to get a sense what your initial look is at the schools that have been running at the higher estimated levels?

Peter Waller

Well I will say I think there is low hanging fruit in a way that we do things, because of where we have been operating in the last four to five years, where cohort default rate had not bubbled up frankly as an issue for our schools. It’s the first year and the preliminary data that we share with you that of the 208 cohort that we have schools moving above the 25%. And the plans of attack that I identified in my words earlier really are pretty basic blocking and tackling. We think we are doing it in a professional, sophisticated way, but putting an internal default management team and creating focus from that, even our campus support centre with dedicated early stage fully staffed teams.

Secondly, the student contact system is actually very sophisticated tool that we are developing or we have developed and is being implemented now to stay in touch with our students. The key on those cohort default rate notion is to stay in touch with our students, and in the digital media world of switching cell phones and temporary cell phones numbers that becomes increasingly difficult. So, accessing social networking, they all are on Myspace, as it turns out with our student profile.

So student contact system sounds easy. It’s very complex and has been a significant investment, we’ve got that in place so that we can track them. Dedicated cohort default rate specialists in every campus, and we haven’t that in Corinthian for the last few years. Some other school system frankly have, we now got them in place. They received their training and they are giving more extensive financially literacy training.

And thirdly, of course, rather third-party agencies dramatically increasing their staffing when they use the skip tracing et cetera to include this. This is not rocket science here. This is classic proven CDR management tools that we have now got in place, and we believe that by focused attention from executive committee and throughout organization we can bring those tools alive and make a significant impact on CDR, and that’s why we have continued to give guidance. So we do not expect to be over 25% two-year cohort default rates for three consecutive years in any of our OPIDs.

Unidentified Analyst

Okay, great. If I just couple of growth specific numbers questions. What’s the concentration of the 10 campuses at your camping enrollments? What’s the concentration in your overall enrolment mix? And then what’s the average debt that your students are coming in with generally? Thanks.

Peter Waller

I think I will go to you first question which was – are those campuses big or small or regular, so what was it about, and I would say they are average sized campuses. We’ve got 89 in the United States plus obviously, (inaudible) to 106 in that Heald campuses, so we have got around 125 campuses. So I think about average will be the way to think about it. And we are not capping them, I want to make it clear, we are not capping. It is actually our growth. We are just moderating that growth in certain programs, sort of mechanics that I described to Trace. So these campuses, most of these campuses are still growing. We are just being careful about the way they grow; we are bringing those campuses on certain programs.

Unidentified Analyst

All Right. And the average debt that your students coming with?

Peter Waller

Are you talking about the genesis loan program?

Unidentified Analyst

No, no, I am just talking about any debt in general, loan debt that your students are coming in with that maybe counted in the proposed gainful employment proposal?

Peter Waller

Well, the average situation on our diploma program is $14,000, $15,000 and that will taking out a mix of, some of them are getting Pell grants. So if they get Pell grants, the average debt loan that we'll taking on will be about 9,000. If they don’t get Pell the average debt might be 12,000; a combination of subsided Stafford loans, unsubsidized Stafford loans and in limited cases some genesis loan top up.

Unidentified Analyst

Okay, fair enough. Thank you.

Operator

And your final question comes from the line of Suzanne Stein with Morgan Stanley. Please proceed.

Suzanne Stein – Morgan Stanley

Hi, thank you. I am just curious, is this 6% to 8% start guidance left anything in terms of controlling the quality of enrolments for next year, just as the names of controlling CDRs?

Peter Waller

No, this has no resemblance to that at all. It’s made up of strong quality enrolments around the drivers that I gave you which was the new programs, high school growth, online and new campuses. And so we have said that our normalized growth would be 6% to 8%. Normalized growth would be 6% to 8% is not tempered by anything to do with cohort default rates.

Suzanne Stein – Morgan Stanley

Okay and I guess, as you talk about potentially limiting enrolment in some of these programs, how does that play into your long-term margin guidance?

Peter Waller

It's pretty consistent with the margin guidance, again I won't dimensionise this we said last time these programs cancelled by 2% of our stock load, we see that is being temply, as we put extra placement robustness into the particular campuses. So, quite frankly, we've always being careful about the way that we manage programs against the needs of the marketplace. We just drew attention to it on the last call, because of I think particular interest around the state of the economy, is anything from the state of economy to the placement way, but it is in a very limited number of campuses, is not more than last time and its in very select number of programs and for temporary period of times about 3% of (inaudible) loan and obviously that’s at the margin.

Suzanne Stein – Morgan Stanley

Okay, all right. Great, thank you.

Peter Waller

Thank you.

Operator

And at this time I like to turn the call over to Peter Waller for final remark.

Peter Waller

Thanks everybody for the range of questions. And we do want to thank everybody who participated on the call today. And we look forward providing you with an update of our progress when we report our third quarter in late April and hope to see most of you at our Investor Day in May. Thank you

Operator

And ladies and gentlemen, thank you for all for your participation in today's conference call. This concludes the presentation and you may now disconnect.

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