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National American University Holdings (NASDAQ:NAUH)

Q2 2014 Earnings Call

January 09, 2014 11:00 am ET

Executives

Carolyne Y. Sohn

Ronald L. Shape - Chief Executive Officer and Director

Samuel D. Kerr - Chief Operating Officer, General Counsel and Secretary

Venessa D. Green - Chief Financial Officer and Principal Accounting Officer

Analysts

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

Jason P. Anderson - Stifel, Nicolaus & Company, Incorporated, Research Division

Jeffrey Scott Lee - Wells Fargo Securities, LLC, Research Division

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

Operator

Greetings, and welcome to the National American University Holdings Fiscal 2014 Second Quarter and 6 Months Financial Results. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Carolyne Sohn, Senior Associate of Equity Group. Thank you, Ms. Sohn, you may begin.

Carolyne Y. Sohn

Thank you, operator, and good morning, everyone. Thank you for joining us. Yesterday's earnings release is available at the Investor Relations section at National American University's or NAU's website at www.national.edu/investor-relations. You are also welcome to contact our office at (212) 836-9600, and we would be happy to send you a copy. In addition, a recording of this call will be made available at NAU's website for the next 30 days.

National American University Holdings, Inc., the company, also has an accompanying slide presentation available in PDF format on the NAU website, which we will reference during the call.

Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties that may affect the business prospects and results of operations of National American University Holdings, Inc. Such risks are fully detailed on the company's filings with the Securities and Exchange Commission.

Regarding the disclaimer language, I would also like to refer you to Slide 2 of the presentation for more information. Specifically, the company expects to file its quarterly results on Form 10-Q tomorrow and encourages all investors to read all of the company's filings with the Securities and Exchange Commission for a thorough review of NAU's business and financial results.

Let me note a brief disclaimer that the company operates in 2 business segments: one, the academic segment, which consists of the undergraduate, graduate and doctoral education programs; and two, ownership in multiple apartments and condominium complexes from which it derives sales and rental income. The academic segment is where the company derives the largest portion of its business. For the company's fiscal 2014 second quarter, the academic segment generated revenue of $32.9 million, and the company's apartment and condominium segment generated $281,000.

With that, I'd now like to turn the call over to Dr. Ronald Shape, CEO of National American University Holdings, Inc. Please go ahead, Dr. Shape.

Ronald L. Shape

Thank you, Carolyne, and welcome, everyone. I would like to start by acknowledging several of our leadership group who are on the call with us this morning. Dr. Jerry Gallentine, President; Dr. Sam Kerr, Chief Operating Officer and General Counsel; Ms. Venessa Green, our Chief Financial Officer; Dr. Bob Paxton, President of Strategic Initiatives and External Relations; Ms. Michaelle Holland, President of Campus Operations; and several others from across the company.

During this morning's call, I will provide an update on our business highlights, Dr. Kerr will provide an update on our operations and then Venessa Green will conclude with our fiscal year 2014 second quarter and 6 months financial results. We will then open it up for Q&A.

In providing additional background on our fiscal 2014 second quarter results, I would like to highlight some key points for this morning's call. First, we continue to transition our focus from geographic expansion to improving enrollments at approved locations and working to build our operating efficiencies to fiscal year 2010 and 2011, with EBITDA margins of 18% to 20%. These efforts will be challenging and are critical, given some of the recent enrollment pressures being experienced in our sector. While we continue to be pleased with the enrollment growth at and the development of our newer locations, for the fall '13 term, we experienced a 2.6% student enrollment decline over the same period last year across all degree programs and course delivery methods and anticipate a decline in the winter term '13, '14 as well.

To achieve of improved operating efficiencies, we continue to emphasize developing deeper relations with business and community colleges in support of our enrollment efforts. Our relationship with Health Revenue Assurance Associates, or HRAA, is expected to launch this spring and should provide an opportunity to expand our enrollment efforts by providing students with transitional training from ICD-9 to ICD-10 health care coding. Likewise, we continue to develop stronger and deeper relationships with a number of community colleges to provide opportunities for their graduates seeking additional degree completion.

Next, in addition to the efforts previously mentioned, we continue to focus on training and professional development activities for our admissions advisors. For the fall term, we have increased the number of our admissions advisors staff by 13.8%, from 269 last year to 306 this year. Our current goal is to achieve a total advisor count of approximately 340 by the end of Q3 and maintain that number for the next several terms. While we remain committed to staffing an appropriate number of advisors, we are equally committed to ensuring our current advisors receive the training and resources they need to be fully effective employees. Over the next several terms, we will be placing less emphasis on increasing our number of advisors and more emphasis on training, support and retention of our advisors. We realize that improved enrollment efforts are directly correlated to well-trained and tenured advisors who have gained the skills necessary to perform at the levels we expect.

We were very pleased to welcome our first cohort of doctoral students this January. Currently, we have approximately 30 students enrolled in 1 cohort through a community college in Ohio, with ongoing discussions at several other community colleges around the country. In addition, we are very pleased with the commitment evidenced by the community colleges in supporting their faculty and staff in this endeavor. The community college in Ohio is committed to providing their employees who enroll in our program a 40% tuition reimbursement. This is great news for our program and great news for the students.

In addition to concentrating on our new student enrollment efforts, we continue to place an equal amount of emphasis on improving student retention. In that regard, I am pleased to announce that NAU has been selected as one of the initial institutions to participate in the Higher Learning Commission's Persistence and Completion Academy. We are excited about the academy and the opportunity it presents to further improve our student retention and persistent efforts, which Dr. Kerr will discuss in more detail shortly.

As indicated on Slides 4 through 6, over the past 2 years, we have successfully developed an infrastructure consisting of 10 additional fully approved locations; consolidated our graduate operations into the Roueche Graduate Center in Austin, Texas; added 14 new undergraduate programs, 4 master's programs and most recently, received full approval of the Ed.D. program. With these approvals, we feel we are very well positioned to capitalize on the infrastructure we have built which should support and facilitate our growth plans over the next 3 to 5 years. While this infrastructure was necessary, as Venessa will discuss shortly, we also continue to work on building efficiencies and economies of scale while aligning expenses to support our students and ensuring the continued quality of our academic programs. In support of this effort, we restructured a number of our operations during the second quarter, which included a reduction of approximately 40 positions for an annual savings of $2.4 million. In addition, we continue to review our expenditures and plan to make additional expense reductions to further gain efficiencies in our operations throughout the remainder of this year.

In our accompanying presentation, Slides 7 and 8 highlight the metrics surrounding our enrollment figures. Over the past several years, as many institutions in our sector experienced enrollment decline, we expanded our academic programming and geographic footprint, which we believe contributed to the continued enrollment growth at NAU. That being said, the university experienced its first enrollment decline in over 5 years in the second quarter of fiscal year 2014. For the fall term, students enrolled in 98,167 credit hours compared to 102,727 credit hours in the fall term of last year, a decrease of 4.4%. Based on current enrollment numbers, we estimate that winter term credit hours will be down approximately 3.2% over the previous winter term due to decreased enrollment at our more established campuses, which was due largely to weaker overall market demand among our target student population and the shift of several of our more experienced admissions advisors transitioning into management roles and the newness of our more recent employed advisors. While we are not pleased with our recent enrollment decline, as mentioned earlier, we remain confident that the initiatives we have launched and plan to launch will provide the foundation for future enrollment growth.

The next few slides provide a look at our geographic expansion over the past several years. Consistent with our earlier discussions, we currently do not have plans for new locations, but we'll continue to concentrate our efforts on developing our approved locations.

If you look at the map on Slide 11 and the chart on Slide 12 of our presentation, you will note 2 pending approvals for the Austin Grad Center and Houston, Texas campus. We expect to receive the approvals for these locations later this year. For those of you that have followed our company during the period of geographic growth, we successfully expanded our geographic footprint to include 37 physical locations in 11 states. We firmly believe that all of our geographic locations are strategically aligned to provide programs and services to our current and future students. We feel these efforts differentiate NAU from other schools by enabling NAU to provide face-to-face interaction among teachers and students at these locations in a caring and supportive environment.

Our fourth principle remains unchanged. We are solely dedicated to providing beneficial outcomes for our students no matter the path they choose. With that, I would now like to turn the call over to Dr. Kerr to provide an update on our operations.

Samuel D. Kerr

Thank you, Dr. Shape. As I indicated during our last call, the university is in the midst of preparing its self-study as a prelude to the next comprehensive accreditation visit from the Higher Learning Commission. The visit is scheduled to occur on September 22 to 24 later this year. A team of peer reviewers from the commission will visit the central administration offices as well as selected campuses in additional locations. The regional accreditation process assures and advances the quality of higher education, and the university is pleased to have the opportunity to demonstrate its commitment to quality and accountability.

Turning to academic programming. You will see on Slide 14 a breakdown of the university students by academic area and by degree offering for the fall 2013 term. In support of our mission to provide technical and professional degree programs for our students, we offer various technical and professional degree programs at both the graduate and undergraduate levels. In that regard, no single area of study predominates our overall enrollment. We again see an increase in students seeking associates degrees, which represents more than half of our total students in the fall 2013 term. The largest increases at the associate level -- degree level have been in the allied health programs. Our diploma in associate degree programs gives students the opportunity to obtain the academic training and skills necessary to enter the job market more quickly.

As Dr. Shape mentioned earlier, new undergraduate academic programmings -- or programs are being added to the professional technical program inventory, including a Pharmacy Technician diploma program and Associate of Applied Science in marketing and management and a Bachelor of Science degree in health information management. These new programs are now in the final stages of external approvals. In addition, through continual environmental scanning, we look to expand our current undergraduate programs to other system to meet student and employer demand. We also continue to place greater emphasis on our graduate programming. We now have received U.S. Department of Education approval for the Ed.D. degree for Title IV purposes and anticipate expansion of that program with additional cohorts over the next several semesters.

On Slide 15, we continue -- we outlined 2 benchmarks the university uses to track student progress and, more broadly, the value of our academic programs, course completion and student persistence. We continue to experience strong performance in course completion. In the fiscal 2014 second quarter, our rate of course completion percentage remained around 90% for the undergraduate programs and around 95% for our graduate programs. Likewise, our term-to-term per student persistence remains rates remain high. We continued to develop and employ numerous retention intervention strategies, such as our rocket [ph] program, which focuses student support to those students in need and online modules to provide students with helpful information as they navigate the university systems. We are also excited about our acceptance into the first cohort of the Higher Learning Commission Student Persistence and Completion Academy.

Goals for institutions participating in the academy include defining and building capacity for collecting, analyzing and using data and other information to identify students' persistent and completion patterns; designing and implementing processes for collecting and analyze information on student persistence and completion; using information on student persistence and completion to evaluate current strategies for improvement as warranted; addressing interrelationships among student persistence and completion; assessment of student learning and program review efforts; researching and comparing current and emerging practice and evaluating improving student persistence and retention; defining student persistence and completion strategies so they're suited to the institution, its programs and its student population; and finally, enhancing organizational capacity and faculty and staff expertise in achieving student learning and success goals. We think our participation will help the university's progress in initiating strategies that will allow students to be prepared for collegiate studies which, in turn, assist their ability to persist. As always, the university is fully committed to ensuring that our students have the academic skills necessary to succeed in the workforce after studying at our university.

You may review our most recent placement rates on our website. We believe these rates reflect our commitment to our students and the continuing efforts of the university to assist students in securing employment.

As many of you know, a key Title IV measure within higher education is the cohort default rate, which we show on Slide 16. The Department of Education previously provided official notice that NAU's 2-year CDR for 2011 is 14.9%, which represents a decrease of 0.7% from NAU's 2-year CDR for 2010. NAU also recently received notice from the department that the university's 3-year cohort default rate for 2010 is 24.6%, which is up 1.7% from the prior year. We are pleased with the decrease in the reported 2-year CDR from the prior year and anticipate the 3-year rate for 2011 likewise will decrease. We attribute this decrease in the 2-year rate to the efforts of our loan repayment personnel who are focused on providing financial counseling and support to our students, along with our continued efforts to encourage our students to borrow responsibly.

In addition, the university continues its relationships with Texas Guaranteed to assist the university in working with our withdrawn students during their grace period to provide additional financial information, counseling and support services. Given the timing of these efforts, we anticipate the work of Texas Guaranteed will have a positive impact on future CDRs. Finally, we intend to implement a default management plan that will further engage our internal and external constituencies in connection with cohort default rates.

With that, I'd like to turn the call over to our Chief Financial Officer, Venessa Green, for a discussion of financials.

Venessa D. Green

Thank you, Dr. Kerr. The company's total revenues for the 3 months ended November 30, 2013, decreased 3.8% to $33.2 million from $34.5 million for the same period last year, with our academic segment's total revenue decreasing to $32.9 million from $34.2 million for the prior year period. This decrease is primarily due to decreased credit hours offset by the tuition increase that took effect in the fall, as well as lower book sales due to lower enrollment. For the 3 months ended November 30, 2013, cost of education expenses totaled $7.6 million or 23.1% of the academic segment's revenue compared to $7.5 million or 21.9% for the 3 months ended November 30, 2012. The increase as a percent of revenue was driven by our fixed facility cost on a decreasing revenue base.

NAUH's SG&A expenses in the fiscal year 2014 second quarter were $21.5 million or 64.9% of total revenues compared to $20.4 million or 59.1% in the prior year period. This 5.8% increase was primarily due to the staffing of additional advisors and the marketing dollars to support the new staff. Of our current admission staff of 330, 136 or over 40% have been with the university fewer than 180 days. The advisors that have been with us in excess of 180 days count for over 80% of our total enrollment. As these new advisors become more tenured and experienced, we anticipate increases in our enrollment and the average enrollment per advisor.

NAU grew its geographic footprint significantly over the last few years, and as Dr. Shape shared earlier, we are now concentrated on building enrollment at existing locations. As we concentrate on this effort and in light of our recent negative enrollment numbers for the fall term, we are simultaneously focused on aligning expenses to reflect our current revenue stream. As we stated earlier, a reduction of 44 positions resulting in an annualized savings of about $2.4 million occurred late in the second quarter. These reductions were offset by severance packages that resulted in no realized savings in the second quarter. However, we expect these savings, along with other reductions, will provide savings in the last half of this fiscal year. We will continue to align expenses with revenues and we'll make additional reductions and expenditures as circumstances dictate.

Moving to Slide 19. Income before income taxes and noncontrolling interest for the 3 months ended November 30, 2013, was $2.2 million compared to $4.7 million for the same period last year. As previously mentioned, this was due to lower enrollment and increased expenses for additional admissions advisors, marketing dollars and costs associated with new programs and locations compared to last fall. Net income attributable to the company for the fiscal year 2014 second quarter was $1.4 million or $0.05 per diluted share based on 25.1 million shares outstanding compared to $2.9 million or $0.11 per diluted share based on 25.6 million shares outstanding in the prior year period. Again, the decrease in the number of shares outstanding is the result of the company's repurchasing of 550,000 shares in May of 2013. The company's EBITDA for the second quarter of fiscal year 2014 was $3.9 million compared to $6.3 million in the prior year period. A table reconciling EBITDA to net income can be found in yesterday's press release.

Slides 20 and 21 show financial highlights from the first 6 months of fiscal year 2014. NAUH's revenue for the 6 months ended November 30, 2013, increased 0.2% to $64.1 million from $64 million for the same period last year. This increase was primarily driven by our scheduled tuition increase that became effective in the fall term. Educational services expense for the 6 months ended November 30, 2013, remained relatively flat at $14.6 million or 23.1% of the academic segment's total revenue compared to $14.7 million or 23.1% in the prior year period.

SG&A expenses for the 6 months ended November 30, 2013, was $43.8 million or 68.3% of total revenues compared to $40.8 million or 63.8% for the 6 months ended November 30, 2012. A significant portion of the increase in this category is due to the increased staffing of admissions advisors and the marketing dollars to support them. We anticipate this expense will begin to decrease as we align the expenses with current revenue being realized. A reduction of 40-plus positions which we discussed earlier in this call was the beginning of this work.

NAUH's income before noncontrolling interest and taxes for the 6 months ending November 30, 2013, was $1.7 million compared to $4.5 million for the same period last year. During the first 6 months of fiscal year 2014, the company reported net income attributable to NAUH of $1 million or $0.04 per diluted share based on 25.1 million shares outstanding compared to $2.7 million or $0.11 per diluted share based on 25.6 million shares outstanding in the prior year period.

National American University Holdings, Inc.'s EBITDA for the first 6 months of fiscal year 2014 was $5.2 million compared to $7.6 million in the prior year period. Again, a table reconciling EBITDA to net income can be found in yesterday's press release.

Moving to the balance sheet highlights shown on Slide 22. As of November 30, 2013, the company had cash and cash equivalents and investments of $32 million, working capital of $24.3 million and stockholders' equity of $50.4 million compared to cash and cash equivalents and investments of $31.9 million, working capital of $23.8 million and stockholders' equity of $50.8 million at May 31, 2013. The company has no outstanding lending debt of any kind.

With that, I will turn the call back over to Dr. Shape.

Ronald L. Shape

Thanks, Sam and Venessa. With that, operator, let's open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Tim Connor with William Blair.

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

The numbers on enrollment counselors that you gave, the 269 and the 306, what periods were those for?

Ronald L. Shape

Those were fall of Q2-over-Q2 in the prior year, fall-over-fall. And the number Venessa shared was the current number as of, I think, probably last week.

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

Okay. I'm sorry, what was the current number?

Ronald L. Shape

330.

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

Okay. And you expect to add 10 more or so in the next couple months?

Ronald L. Shape

Yes, probably in the next couple of weeks, and then we will maintain that number at no more than 340 for the next several terms while we bring the newer group up to speed and get them trained and effective.

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

Okay. And you mentioned that 80% of your new enrollments are coming from counselors who've been with you for more than 180 days. How many -- what portion of your counselors have been with you for more than 180 days?

Ronald L. Shape

60%. 60% of the counselors, greater than 180 days account for 80% of our enrollment.

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

Okay. And the 340, you plan to kind of keep that number steady, so backfill any attrition, but just kind of keep it where it is?

Ronald L. Shape

Yes. At least for the next several terms, Tim, because that -- one of the things we have found without exception, that there's a direct correlation on the 180 days, the 6 months of employment for an admissions advisor to become effective. And so we want to concentrate our efforts on keeping, retaining those folks, getting them trained up so that they can contribute as we would expect them to.

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

Got it. And are you seeing any benefits from putting your more experienced counselors in management positions? And is that the way that you've typically seen good training take place?

Ronald L. Shape

It's a double-edged sword, Tim. It is. We've got some phenomenal folks who have performed exceptionally well, without a question. And to some extent, as I have done and we, as an institution, are a firm believer of promoting from within, those folks have earned the right and the potential and the opportunity to move into those management positions. And in most cases, granted not all cases, but most of the cases, those folks move into management, do an exceptional job, they're able to convey the skill set, the training, to be effective to folks who have replaced them in the advisor roles. But the other side of the coin is, we take a person who has contributed to our growth exceptionally well, and we've taken them out of that enrollment function, and that hurts. Because in a lot of cases, it takes 4 or 5 individuals, new individuals coming into those advisory roles to replace what some of the seasoned folks were doing.

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

Got it, okay. And I'll ask one more and then get back in the queue. Did you see any impact in the quarter on either increase or vendor costs from the implementation of TCPA?

Ronald L. Shape

Nothing substantial. I mean, numbers have gone up a little bit over the course of the last 12 months, but nothing significant.

Operator

Our next question comes from Jason Anderson with Stifel.

Jason P. Anderson - Stifel, Nicolaus & Company, Incorporated, Research Division

If I'm not mistaken, Ron, this is the first time you maybe alluded to some of the softness in the market demand. I think you haven't really attributed anything to that in the past, unless I'm wrong there, but I know the enrollment advisor situation, too. But I guess if you can give me some more color on maybe what's happening on the market demand and if things are changing and to what degree. And then also, you talked about having maybe seeing enrollment growth in the later -- later in 2014. Do you still think that's achievable for where you're at today?

Ronald L. Shape

Yes. And you're right, Jason. Historically, based on lead generation, we had not seen significant shifts in our ability to generate leads. But I would tell you this, and I don't know exactly how to quantify it for you, but I would tell you this. The leads that we're generating, we're seeing today what I would classify as maybe a more cautious consumer doing more research, being more careful before they step in and commit to something. Our lead flow generation capacities, we've not seen substantial shifts yet. Now that more conscious consumer, the other piece of it could be the newness of our admissions advisors and not being able to effectively work with that consumer and address their issues and to deal with those though. It's 50-50, and I couldn't tell you which side is it. Is it more the consumer less committed in the current environment with the market and what's happening, employment, what's happening? Are they less committed to jump in and complete a degree at this point in time? Or have our newer admissions advisors, that 40% that are new, unable to deal with the uniqueness of that consumer to support them, answer their questions, get them satisfied so they can start? But those are the things we're seeing. And that's driven our position to kind of cap that enrollment advisor count at 340 and concentrate on the 40% of our advisors that are new inside of 6 months to help them get up to speed, get the knowledge base that they need to deal with objections and issues and challenges that consumers and students bring to the table so that they have the solutions, the answers and can provide the support infrastructure for that person to be successful. As we do that over the next several months, as we concentrate on those efforts, to your second question, yes. I do believe later this calendar year, we should see our ability to regain some of our enrollment growth because 40% of that admissions advisors, 130-some advisors contributing more so to enrollment efforts, will make a profound difference if we have all 340 headed the right direction.

Jason P. Anderson - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay, great. Thanks. And one other one. I don't know -- Venessa, I don't know, you commented before on the kind of the run rates or how we should look at the SG&A aligned with the savings in 3Q and 4Q. Is there any update to that? Or how would you expect those -- I mean, you did allude to we should see savings then year-over-year in 3Q and 4Q. I guess, can you give more color on that?

Ronald L. Shape

Well, I can jump in here and Venessa can correct me where I misstate, Jason. And I would say that right now, less the year-over-year numbers and more so current spend that we have and reducing our current spend from term-to-term. And so the $2.4 million, 44-position reductions that were made in fall will be realized in Qs 3 and 4 because there were 0 savings that occurred in November. And with severances, there were no dollar savings in Q2, but that will be realized in Q3, Q4 and going forward. In addition, looking at fall quarter spend in marketing dollars and in other areas, making additional reductions to that fall quarter Q2 actual dollar spend. And that has been our concentration, right now, is to look at the term-over-term or term-to-term, I should say, run rate versus year-over-year. Just because of the growth and the expansion of new campuses and the development we've done, the year-over-year piece, I think probably for the next 10 to 12 months until we get into Q1, Q2 of next year, it wouldn't be real. It wouldn't be a fair comparison.

Operator

[Operator Instructions] Our next question comes from Jeff Lee with Wells Fargo.

Jeffrey Scott Lee - Wells Fargo Securities, LLC, Research Division

Credit hours declined more strongly than total enrollment growth this quarter, and then credit hour growth has also trailed student growth the past 4 quarters now. What do you believe is causing this? Is this a mix shift issue? Or is this due to financial pressures on students? Or is it something else?

Ronald L. Shape

I think it's something else. And I think it's tied to the curriculum and the courses and when those courses are offered in terms of how many courses, which is credit hours that a student is taking at different times. Given some of the degree programs that we have, like our nursing program, some of our allied health programs, there are different size credit hours. In one term, a student may take a course that consists of a 2-credit hour lab which changes that credit hour to student mix. So it's more the program component than anything that we've seen. We've made no changes in our degree structure credit hour requirement this year. Last year, we made changes to reduce the overall credit hour requirement to reduce the overall financial burden per student. But anything you're seeing now, I would say is tied to what courses students are taking and when, and that mixture, of course, is they may be in 10 credit hours in 1 term. They may be in 8 the next term.

Jeffrey Scott Lee - Wells Fargo Securities, LLC, Research Division

Okay, great. And both course completion and then more strongly persistence were down in the recent -- this quarter. What reason do you think is behind that? And is there anything you can do to try to improve that?

Ronald L. Shape

There's many things we're doing to improve it, but the primary reason why that has occurred is tied to SAP, Satisfactory Academic Progress. There continues to be updated interpretations, I guess, for lack of anything different from the department on different measures, different things that should be tracking in as we have always done. As soon as those interpretations come out, we apply and we update them. And so we saw an additional reduction in students persisting because of us implementing and adhering to those newer standards. And I don't think that will continue. I think you're seeing that more as a onetime component. I don't think you'll see that persist term-over-term going forward.

Jeffrey Scott Lee - Wells Fargo Securities, LLC, Research Division

Okay, great. And one last one.

Ronald L. Shape

We also -- yes, please.

Jeffrey Scott Lee - Wells Fargo Securities, LLC, Research Division

The further expense reductions you mentioned during the balance of the year, what areas do you think this might come from? And do you have a target for how much additional savings you're hoping to generate above the $2.4 million?

Ronald L. Shape

Yes, we do. We've not announced it, Jeff, and I wouldn't share it at this time other than to say, there will be reductions, probably 50-50 mix additional staffing reductions and then reductions in marketing spend. Those are the 2 areas that, right now, need the greatest alignment. And -- but do not have or have not shared, I guess, specific targets. And at this time, would not want to share them until probably our call here for Q3, once we know kind of how the revenue and the response of the admissions rep counts we have come into line.

Operator

Our next question comes from Tim Connor with William Blair.

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

I'm back fortunately, unfortunately for you. The -- just want to understand. So SG&A for the next couple quarters, do you think it's going to look pretty similar in total dollars to what it looked like in the second quarter?

Ronald L. Shape

First of all, Tim, we don't think of you as the Terminator, so we're good there. Secondly, no. The SG&A spend will be down from Q2 moving into Q3 and 4. As a result of the staffing reductions, the majority of which, yet, SG&A and additional reductions we will be making which will almost all be in the SG&A arena.

Operator

Our next question comes from Trace Urdan with Wells Fargo.

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

Ron, I just want to follow up on that Satisfactory Academic Progress answer. So are you saying that there were incremental changes to that standard imposed by the department in the quarter? Or are we still dealing with the previous change that was made?

Ronald L. Shape

I would say this, Trace. In the -- and I don't know the times, and so some -- you probably know, I guess. The national conference that occurred here a couple of months ago, there was some additional insight on Satisfactory Academic Progress that was shared during that conference that was different than anything we had seen or heard or in the regulations previously. And it had to do with determining future funding eligibility and if students could complete the degree based on leftover resources. I'm not doing justice to the interpretation. But it was those, that language, that presentation that made us come back and rereview a number of students who then ended up moving into suspension status that were not there before.

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

I see. Okay, that's helpful. And then, I just wondered if you could comment a little bit more on the success you've had with the new graduate program. That scenario that a number of schools have struggled with recently, I think, as more traditional or not-for-profit schools and state schools have kind of entered that arena. And I'm wondering if you could just speak qualitatively to who these students are. Do you feel like you're expanding the market by pulling students into the graduate market? Or are these students that were already going to be pursuing a graduate degree? And if it's the latter, I wonder who you see as your competition in that range, if you get any color from them in terms of which other providers they may have been looking at before choosing to go with you guys.

Ronald L. Shape

Sure. Two pieces of that. First of all, I would start with the Ed.D. program in the graduate market. And I would say our program is highly differentiated from the way it's been built, the faculty in the program that truly, right now, I don't see nor does anyone else that I've talked to, see any type of a competitive environment for the program we've built. There's other Ed.D. programs, but the way ours is designed and the faculty that it entails, I don’t think anyone else in the country has access to those types of resources. And we find that the relationships that have been built over the years with Dr. John Roueche and a number of the advisory folks that make up the advisory council for the Ed.D. program create a natural opportunity to work with these community colleges across the country in identifying staff and faculty within those institutions to step in and take advantage of this program. The piece that we did not see coming, which is absolutely fabulous and great, is a number of these institutions are stepping up and providing development dollars for this program to the tune of 40% of the cost of the program. And I think that's great. I think you'll have a -- we'll have a much greater committed student in the program because their employer is footing 40% of the bill and supporting and is a true believer in the program and helping develop the staff accordingly. On the Master's side, I would say we continue to develop our Master's programs. We have moved away from and are moving away from the highly generic Master's programs. There are thousands of them out there and we have realized that competing in that arena doesn't work and actually reinventing some emphasis areas that will differentiate our Master's programs from anything that's in the market, and I think that's key. And that's what we will be rolling out over the next several terms is very unique, at least in our mind, in what we see across the country, unique content and emphasis areas that I think will give us an edge for those folks who are looking for something more tailored, more specific versus the generic MBA, Master's of Management, et cetera.

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

Okay. If I can just ask a follow-up to the Ed.D. piece. It sounds like you're pioneering something there, and I'm wondering if you can help us to maybe size the opportunity. How many people at a community college do you think would be prospective students for this kind of a program? And how much exposure do you feel it's had so far relative to what you hope to gain over the next few years?

Ronald L. Shape

I would say this, we've been phenomenally impressed with this first cohort group in Ohio of 1 community college system with I think 30 or 33 students who are currently enrolled in the program. We are also working at a number of other institutions in Florida, in Texas and other areas who have the interest. And our plan is to run the cohorts with anywhere from 18 to 24 students. The fact that we have 30, I think 33 in this first one, is great. But the interest and demand is out there. However, because we're looking at staff and faculty, the timing of when to launch those and to work with these folks has been a challenge coming into the fall term when the faculty are getting into the classroom, and it's kind of tough to design and structure, get their attention and to focus on this. So I think we're well positioned moving into this next year with all the approvals. Because we didn't get the Ed.D. program until, well it was December, I think, of this year. So we couldn't effectively get out and market the Ed.D. program until this January cohort start. But we expect anywhere from 2 to 5 cohorts running here over the next 12 to 18 months.

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

But looking through the executional challenges, Ron, which I know are meaningful, I mean, could we theoretically sort of multiply 30x every community college in the country and kind of consider that an addressable market for this program?

Ronald L. Shape

No. The community college environment, I think 30 individuals from a community college, you're looking at a community college the size that's probably got 35,000-plus students, just to have enough staff, administrative faculty to facilitate a cohort. And then these smaller -- there's a number of these smaller 5,000, 6,000-student community colleges that have the same need. And what we will be working on is then pulling a number of those smaller ones geographically within a specific area together into a cohort because they have as much need to develop a staff and faculty as the larger ones. But they're maybe more remote, more isolated, and so we'll have to bundle them together in order to get the cohort of 18 to 24 individuals to offer the program.

Operator

There are no further questions in queue at this time. I would like to turn the call back over to Dr. Shape for closing comments.

Ronald L. Shape

Thank you, operator. Appreciate that. We'd like to thank everyone for joining us. We are available to answer any additional questions you may have. You're also welcome to contact our Investor Relations firm, The Equity Group. With that, we look forward to speaking with you again during the fiscal 2014 third quarter and 9-month financial results conference call. Thanks, everyone, and have a great day. Bye now.

Operator

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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