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Education Management (NASDAQ:EDMC)

Q2 2014 Earnings Call

February 06, 2014 9:00 am ET

Executives

John Iannone

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

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

Analysts

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

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

Corey Greendale - First Analysis Securities Corporation, Research Division

David Chu - BofA Merrill Lynch, Research Division

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

Operator

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

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

John Iannone

Thank you, Denise. Welcome to Education Management Corporation's Fiscal 2014 Second Quarter Earnings Conference Call. Leading the call today are Ed West, President and Chief Executive Officer; and Mick Beekhuizen, Executive Vice President and Chief Financial Officer. Following our opening remarks, we will begin a question-and-answer session.

I'd like to remind you that the information presented on this call contains forward-looking statements, and we undertake no duty to update such statements except as required by U.S. securities law. These forward-looking statements include, but not limited to, statements about our future plans, outlook and future financial and operating performance. Actual results may differ materially from those contained in those forward-looking statements. Additional information concerning factors that could cause actual results to differ materially are set forth in the cautionary statement included in last night's earnings release.

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

Edward H. West

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

There are 3 important takeaways this morning: first, we are encouraged that several of our key measures of operating performance were favorable during the second quarter. For the first time in several years, we saw positive new student enrollment growth at both The Art Institutes and South University. And also experienced continued improvement in our overall 180-day new student cohort retention rate.

Second, we have adjusted our outlook for the remainder of the fiscal year based on current application production, and an increased investment in scholarships and other initiatives that we believe will improve the student experience and result in long-term success. The outlook is driven in part, by the fact that the new student enrollments during the second half of the year are heavily weighted to nontraditional students, on which we have limited visibility.

And third, we have been implementing various process changes and cost reductions, and now expect between $120 million to $125 million in cost savings this fiscal year, up from previous expectations.

For the second quarter of fiscal 2014, we reported net revenues of $594 million, down 9% from the prior year. And excluding restructuring charges and other certain expenses, our EBITDA for the quarter was $87 million, in line with our previously provided outlook.

New students for the 3-month period ended December 31 were down less than 1% versus the prior-year period, driven by positive growth at The Art Institutes and South University.

As we have mentioned previously, we are experiencing variations in the timing and the number of class starts, in particular, at The Art Institutes and Argosy University, which will cause choppiness in new student enrollments and financial results on a quarterly basis during fiscal 2014 when measured against the prior year.

Our recent January class starts came in below our previous expectations, driven in part by lower application production than was anticipated. Ironically, we received a significant increase in the number of high school applications at the same time that we were going through several operational changes to comply with the new requirements of the Telephone Consumer Protection Act. This resulted in a lower contact rate with prospective students, which ultimately impacted the number of applications.

In addition, we continue to have limited visibility to the nontraditional student starts. We continue to implement various process improvements to improve these productivity issues.

About 1.5 years ago, South University decided to modify its strategy regarding their fully online programs by adjusting both the operations and programmatic offerings to focus on those programs that had better academic progress, stronger student outcomes and are more differentiated in the market. As a result to these changes, South University has experienced significant improvements in new student cohort retention, realized positive new student growth this quarter, and now has approximately 60% of their students studying in their high-quality health professions programs. Because of these benefits, our other education systems have been moving forward to focus on these academic programs where they have strong differentiation and good student outcomes that meet both employer needs and student career goals. This undertaking will provide benefits by creating a stronger foundation and enhance a high-quality experience for our students. However, it will cause enrollment volatility in the near-term.

I would now like to discuss some of the performance that we are seeing at each of our education systems. At The Art Institutes, I'm pleased to report that driven by the October campus class start, new student growth was up 1.5% year-over-year. This growth was driven by renewed student interest in our fashion and media arts programs. As previously discussed, July and October are the largest campus class starts for the traditional high school graduate population. These students typically take a higher credit load and persist better. Starts for the remainder of the fiscal year are weighted towards students who have been out of high school for several years. While high school inquiries to date for next summer and fall are up this year versus last year, the nontraditional segment has limited visibility and a shortened application to start cycle. We now believe The Art Institutes will experience year-over-year declines in new student growth for the remainder of fiscal 2014.

Lastly, during the first 6 months of the fiscal year, The Art Institutes have awarded approximately $48 million in scholarships, an increase of 35% versus last year.

During the second quarter, we crossed the 1 year mark for the programmatic changes at South University made to its fully online programs. And when combined with the continued solid demand for its campus-based programs, South University reported positive overall new student growth. We're very proud of South University's strong community ties and reputation for its high-end health professions programs. Students enrolled in the health professions programs at South now represent approximately 60% of the university's total [ph] student body. Further, South University's 180-day new student cohort retention rate improved several hundred basis points again this quarter versus the prior year.

I'm also pleased to report that South University recently received programmatic accreditation from the Accreditation Council for Business Schools and Programs. In addition, South University recently received recognition from the Southern Association of Colleges and Schools, commission on colleges, or SACS, that they have obtained level 6 accreditation status. This marks the university's achievement of offering 4 more approved doctoral degrees, including the newest degrees in theology and occupational therapy. These honors are a great testament to the quality of South University's academic offerings, as well as its faculty. And I congratulate them on this terrific accomplishment.

At Argosy University, new student enrollment experienced a decline during the second quarter. Argosy has a long been recognized as a behavioral sciences institution with an emphasis on graduate programs. As I mentioned earlier, Argosy has begun to modify their offerings to focus on those academic programs where they have a clear differentiation, in particular, in area of behavioral sciences. Further, access and affordability will be further enhanced as Argosy plans to increase scholarship offerings throughout fiscal 2014 compared to last year.

Lastly, 180-day new student cohort retention during the quarter continued its trend of year-over-year improvement versus the prior-year quarter.

Brown Mackie Colleges serves a demographic that can benefit from its high-quality education but one that is still being significantly impacted by the economy, which continues to negatively impact new student enrollment growth. The team continues to make significant programmatic changes across the system including the elimination of certain programs, investing in and growing select health sciences programs, retooling certain healthcare and business programs that are in demand by employers and gradually introducing new stem programs.

During fiscal year 2014, Brown Mackie has rolled out over 25 programs, predominantly in health sciences. These efforts will take time to show net benefits.

At EDMC, we are deeply committed to improving access and affordability for our students, and delivering a high-quality experience at our colleges and universities. This commitment is dependent upon continuous process optimization, efficiency improvements and disciplined expense management across all areas of the company. Accordingly, we now expect to achieve $100 million to $125 million in savings this year. Furthermore, I am pleased to announce the recent appointment of Jim Hobby to the position of Executive Vice President of Operational Services and Support, in which, he will be responsible for providing strategic direction to the center. Jim has over 30 years of experience and operational roles at several multinational companies and will use that wealth of knowledge increase efficiency and customer service to help improve student affordability and outcomes.

I'd now like to turn the call over to Mick Beekhuizen, our CFO, for a review of our fiscal second quarter and an update on our 2014 outlook. Mick?

Mick J. Beekhuizen

Thanks, Ed. In my comments today, I will review EDMC's financial results for the second quarter for fiscal 2014, discuss our segment results and provide our outlook.

Our results for the period reflect the continued execution of our strategy and initiatives focused on student affordability and student outcomes. For the 3 months ended December 31, 2013, net revenues were $593.7 million. We recorded net income of $1.1 million, or $0.01 per diluted share, and EBITDA of $67.8 million, reflecting pre-tax charges of $19.3 million. These charges are related to restructurings in Q2 of some of our nonstudent facing staff, and a sublease we entered into after consolidating some of our office space.

Settlement-related charges and non-cash property and equipment impairment charges at 2 of our Brown Mackie Colleges. Excluding these charges, net income for the quarter was $12.6 million, or $0.10 per diluted share, and EBITDA was $87.1 million, which was in line with our previously provided outlook.

Please note that the remainder of my comments excludes certain expenses that were incurred during the second quarter of fiscal 2014, which are detailed in the financial highlights of our earnings release.

Net revenues for the second quarter declined 9.3% to $593.7 million compared to $654.9 million for the same period a year ago. The decline in net revenues over the prior-year quarter was driven by a 6.5% year-over-year decline in our average enrolled student body, as well as by increased scholarships, primarily at The Art Institutes and Argosy University, and fewer revenue days compared to last year.

As a reminder, the fewer revenue days primarily resulted from the fall start for The Art Institute campuses occurring on September 30, instead of its typical start in early October. Approximately half of the year-over-year decline in revenue per student during the fiscal second quarter was due to fewer revenue days.

After normalizing for revenue days, revenue per student was down 1.5%, which was driven by the increased scholarship awards.

Year-to-date, we have awarded approximately $70 million in scholarships, an increase of approximately 50% versus the prior-year period with the majority awarded at The Art Institutes. Scholarships remain an important component of our dedication to student affordability and retention. With the long-term benefits associated with improved retention and student success, more than offsetting the near-term financial impact.

Now, I would like to discuss our expenses in the second quarter. Total operating expenses were $545.2 million, down 4.5% year-over-year, or $25.6 million, reflecting the benefits of our continued cost saving and productivity actions. We continue to make progress on our effort to successfully operate in the current environment and address student affordability through various cost saving and productivity initiatives.

Throughout the quarter, we continued to make the tough decision to adjust staffing levels to the reality of current enrollment. Furthermore, we continued to centralize and optimize some of our nonstudent facing administrative functions. For instance, in areas like registrar services and financial aid processing through the center. As a result of the continued progress in these various areas, we now expect the cost savings for fiscal 2014 of $100 million to $125 million, an increase of $25 million compared to the previously communicated target.

Looking at expenses in more detail. Educational services costs were down 5.2% or $18.7 million to $341.7 million versus the prior-year quarter, primarily due to lower staff levels. Lower supply store expenses and the comparative effect of the $3.5 million net loss recorded last year, in connection with the sale-leaseback transactions. As a percentage of net revenues, educational services expenses increased by 253 basis points, driven by decreases in average class size due to lower average enrolled students and the resulting loss of operating leverage.

Within educational service expense, employee-related costs decreased $7.4 million on a total dollar basis, but increased by 184 basis points as a percentage of net revenues in the current quarter compared to the prior-year quarter.

Rent expense remained relatively flat on a total dollar basis compared to the prior-year period, but increased 94 basis points as a percentage of net revenues. Net debt expense increased 44 basis points to 6.7% as a percentage of net revenues for the quarter versus the prior year. These items are partially offset by lower supply store expenses, which decreased 57 basis points as a percentage of net revenues compared to the prior-year quarter due to lower sales, as a result of The Art Institutes' fall start occurring on September 30.

General and administrative expenses decreased 3.7%, or $6.3 million, to $164.9 million versus the prior-year quarter but increased 164 basis points as a percentage of net revenues, due to a loss of operating leverage. Within G&A expense, marketing and admissions costs decreased 5.5% year-over-year representing 22.4% of net revenues, 103 basis points higher than the prior-year period.

Overall cost per start decreased approximately 4% as admissions productivity more than offset higher advertising costs. Outside legal and consulting services increased by 57 basis points compared to the prior-year quarter, reflecting the current environment and a process optimization and centralization efforts in support of student affordability. We expect these costs to continue at the current elevated levels.

Overall, EBITDA decreased 29.4% to $87.1 million for the fiscal second quarter, while our EBITDA margin was 14.7% versus 18.8% in the prior year.

I would now like to cover the results for The Art Institutes. Net revenues decreased by $40.1 million, or 9.7% to $371.5 million in the current quarter compared to the prior-year quarter, due primarily to the decrease in average enrolled student body of 7% and one less revenue date resulting from the fall academic term beginning on September 30.

In addition, The Art Institutes awarded a larger amount of scholarships in the current quarter compared to the prior-year quarter. Reflecting our efforts on cost control, process efficiencies and student affordability, total operating expense at The Art Institutes were down 5%, or approximately $15 million. Despite continued progress on the cost side, our operating expenses were up as a percentage of revenue, primarily due to reduced operating leverage and our employee-related expenses. As a result, our EBITDA decreased 22.4% year-over-year to $88 million, representing an EBITDA margin of 23.7%.

Looking at our cash flow statement. During the 6 months ended December 31, 2013. Cash flow from operations was $39.7 million compared to $93.2 million for the 6 months ended December 31, 2012. The decrease was primarily due to reduced lower operating performance. Capital expenditures were $31.3 million, or 2.7% of net revenues compared to $39.5 million, or 3.1% net revenues in the same time period last year.

For fiscal 2014, we expect capital expenditures to be approximately $80 million. We continue to make the prudent decisions to provide the proper balance between maintenance and investment in this current environment.

Lastly, we continue to believe we will generate positive free cash flow for fiscal 2014. Looking at the company's balance sheet, as of December 31, 2013, cash and cash equivalents were $60.8 million compared to $189 million last year, which reflects $175 million of debt reduction and a cash flow generation for the past 12 months.

Long-term debt was $1.3 billion, a decrease from December 31, 2012, due to the retirement of the $375 million senior notes due 2014, and the issuance of the 203 senior PIK notes due 2018, that occurred in March 2013.

Turning to our outlook. As discussed, [ph] we are lowering our outlook for the remainder of the year. As usual, our outlook excludes impairments, debt refinancing, employee severance, lease terminations and any other potential restructuring expenses, which may be incurred.

For the 3 months ending March 31, 2014, we are expecting EBITDA to be between $97 million and $101 million, net income between $17 million and $20 million, and earnings per diluted share of $0.13 to $0.15.

For the 12 months ending June 30, 2014, we expect EBITDA to be between $310 million and $320 million, net income to be between $24 million and $30 million, EPS to be between $0.19 and $0.23 per diluted share, and CapEx to be approximately $80 million.

Ed, back to you.

Edward H. West

Thanks, Mick. Now I'd like to provide an update on several of the quality measures we employed to measure our performance against our long-term priorities.

I'm very pleased with the retention improvements we continue to experience. This is a great testament to the dedication of our faculty and staff, and the level of engagement with our students. One of our primary measures that we utilized is the retention of a new student cohort 180-days after their initial start. For new students who enrolled during the quarter ended June 30 of 2013, the 180-day cohort retention rate, as of the quarter ended December 31 has shown an improvement of approximately 170 basis points, or 1.7 percentage points from the prior-year period. An even more encouraging trend is that the improvements in the 180-day retention rate we have been reporting over the last several quarters, have been translating into retention improvements when looking at the same new student cohorts 1 year after their starts.

Scholarships remain a critical part of our efforts on access and affordability, and we continuously look for ways to expand these efforts. As a tangible example of the benefits of these scholarships, we have seen new students who received a scholarship retain at a much higher rate than those who do not. Through the first 6 months of fiscal 2014, we awarded approximately $70 million of merit and need-based scholarships, and are now on pace to award nearly $140 million in scholarships for the current fiscal year, up 45% from last year.

Also, I am pleased to announce a new partnership between The Art Institutes and the James Beard Foundation to fund scholarships for the culinary students, which will kick-off in May, with a couple of events. We are excited by being able to further our partnership with such an esteemed organization.

The goal of our colleges and universities is to prepare our students for their careers. And we take pride in their successes.

During the second quarter of fiscal 2014, our colleges and universities added almost 7,000 graduates, bringing our alumni network to 390,000 graduates.

I would like to take a moment to congratulate Eric Haviv, a 2008 graduate of The Art Institute of Atlanta who owns his own boutique production company. Eric was a finalist in this year's "Doritos Crash the Super Bowl" contest with his video, The Breakroom Ostrich. Congratulations, Eric, for being a finalist, and we're really rooting for you.

With that, operator, we are now ready to turn over to our question and answers.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Jason Anderson of Stifel.

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

I wanted to touch on, you were discussing the issue with The Art Institute high school labs coming in heavy with at the same time, the TCPA implementation and the issue there. Could you go back over that? And was that for the current quarter? Or is that for apps for out into the fall -- summer fall enrollment time? And if so, are those -- do you see that as missed opportunities that are recoverable?

Edward H. West

Sure. Good morning, thanks, Jason. Just going back on that. What we're talking about is coming off of the fall, obviously, with The Art Institutes had a strong fall with the high school start in October, looking to how July did as well, which was very encouraging. And then we started receiving the inquiries, not the applications, but the inquiries for the high school students looking into next year's high school start, where again, we see predominantly those students didn't start in July, August and October. So those inquiries are coming in, in the fall and actually, and in significant increase than what we had seen in the prior year, over the last several months. And it's kind of a good news/bad news situation. Ironically, all those inquiries started to coming in at the same time we were going through process changes to comply with the new requirements of TCPA. And that kind of created some operational bottleneck during that period of time, which also then allowed for a less contact or contact rate with the prospective students went down during that period. And to address that, now we have put through different process changes during over the last couple of months. And we're now seeing contact rate improve. So that period where we saw all the lower production for those high school and other applications happened over the last several months. Now at the same time, we also are focused on the starts, going into -- for April. And we just came off of July, which were predominantly nontraditional students at The Art Institutes, which frankly, we just have less visibility to. It's always shorter cycle, less visibility to that and that's really one of the drivers to lowering the outlook. Let's say, kind of a final point on that. Which just frankly, in addition, it didn't help by the fact that we lost over 65 school days. We're closed during the January start -- during the month of January, which was -- had an impact as well.

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

Okay. On RPS, I'm presuming we should see some declines through the rest of the year. Is there -- could you give any sense of magnitude to that?

Mick J. Beekhuizen

I think that, if you look at you obviously, saw, if you look at the first quarter, you saw the increase of revenue per students, you now saw the offset that we described already during our last earnings call. And as we mentioned last time around for the full year, I'm still expecting it to be relatively flat maybe slightly down, in light of the investments that we're making on the scholarships as we described.

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

Okay. A little more on that. Is there any more revenue day impacts in 3Q or 4Q that we should be aware of?

Mick J. Beekhuizen

Not as big a shift as we have seen in -- between the first and the second quarter. Particularly if, I mean, as we described The Art Institute, is obviously the move of the fall start had a significant impact.

Operator

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

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

Just a follow-up on that -- on Jason's last question with respect to TCPA. So it sounds like obviously, there was hiccup there. You described process changes. I'm guessing maybe that has something to do with changing the language a little bit? Maybe you could elaborate on that? And then, yes my question is, do you feel as though there will be some slight overhang that will remain until those changes anniversary? Or do you think that as a result of the process changes, you're sort of back to the levels that you could have expected before the TCPA change?

Edward H. West

Trace, good morning. Yes, you broke up a little in there. But I think you're talking about the process changes related to TCPA. Obviously, what we anticipated coming through into the center, at the same time those employees were handling this sort of significant increase in the number of high school inquiries. So it's really capacity issue to manage with that. And we took a very prudent approach on managing the requirements with -- to comply with the law on that new regulation. And so there was a capacity issue in terms of being able to respond back to all those inquiries, in addition to working those inquiries coming in for the nontraditional students in January. So frankly, it was a -- we did lose time there. So that has impacted the application production for those prospective students in the January. And then compound [ph], as I mentioned earlier, that's been compounded by other issues just because the visibility of nontraditional as well as the weather. ...

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

Okay. I don't want to obsess on it, I just -- my question is, does that -- what I'm just trying to understand what that means. So for some companies, they've changed the language and kept the automated dialing but it sounds to me like what you're describing is maybe that you're handling more of the inquiries manually? Is that what that means?

Edward H. West

Yes. We took a very prudent approach and did both. So we're having obviously, students our prospective students, may waive to be contacted. But we've also turned off, removed any auto dialer and handle that manually, just to be prudent and making sure how everything was adopted and moving forward under that structure.

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

Okay. So then it's fair -- I guess then to assume that you'll still -- even though you've managed to sort of correct the initial issues, we're still going to have some pressure from that change until we anniversary those changes next year, is that right?

Edward H. West

Could be some, but obviously, we've increased capacity to handle that. And we're now seeing our contact rates improve. But there is, obviously, still lower application production for prospective students have continued on. But I don't know if its related to that, or if it's just frankly because we're concentrated more towards nontraditional students right now.

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

Okay. And then I also wanted to ask about some of the program changes that you alluded to. I'm wondering if you can just briefly remind us of which programs were changed at South, I guess in a substantive [ph] way? And then, can you give us a little bit more color on what changes you're making at Argosy and Brown Mackie? Are you actually eliminating some programs? Or is it more subtle than that?

Edward H. West

So on South, this goes back to summer a year ago where we changed our -- the programs and the offering on -- predominantly, on the online programs. So really focusing on the health professions and to areas where we saw a good student retention, good outcomes, concentration and focused our efforts both for our marketing, our people working those inquiries coming in for those areas and also by region. So we pulled back capacity and infrastructure to really focus on those programs. Now we still, obviously had business or other IT programs could see a lot less or lower enrollment there and concentrating with the growth into the health professions, where now the majority of the students are in the health professions program. And frankly, we've also seen growth there in our postgraduate programs as well. We're going through a similar exercise at both Brown Mackie. Our Brown Mackie and Argosy are going through similar exercise, really focusing in the areas like at Argosy, as I mentioned, the behavioral sciences, where they've always had a strength and also in the graduate programs to concentrate more of their effort and focus there. And Brown Mackie, moving more into health sciences have rolled out programs, 25 programs across the system. Also whether it's in health sciences or biomedical equipment, engineering programs, that will increase. That will take time.

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

Okay. So it sounds like at Brown Mackie, you're introducing new programs and at Argosy, you're maybe emphasizing some over others. Can you just tell us what are the programs at Argosy that you are deemphasizing as a result of the change?

Edward H. West

[indiscernible] I'd rather stay focused to the one where we see the emphasis on the behavioral sciences areas both undergrad and grad, and probably more emphasis into the grad.

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

Okay. So more emphasis on grad over undergrad and then more emphasis on behavioral sciences over? What else, I mean that's how I think of Argosy's, so over what, business?

Edward H. West

It still have -- we'll have undergrad business programs, masters. We're just rolling out -- rolled out the competency MBA program. Probably less -- like less on criminal justice [indiscernible]

Operator

Our next question will come from Corey Greendale of First Analysis.

Corey Greendale - First Analysis Securities Corporation, Research Division

For a while, I think the bigger issue was within the high school population because of the PLUS loan change in the criteria there. It sounds like that's shift into the adult population but when you say visibility isn't as good there, are you talking about relative to high school or is this visibility actually deteriorating relative to how less of the adult population, and what's causing that?

Edward H. West

Corey, we just still see a shorter application to start cycle there. So forward visibility is limited to that relative to the high school. I'll just tell you, I mean, I think the market still very challenging and still see softness there for the adult population. Obviously, the economy hasn't helped in particular, this segment. So we just still see the ongoing challenges there, where we probably hope that, that probably stabilize more. But we're encouraged by the efforts that what's happened on high school this past couple of quarters.

Corey Greendale - First Analysis Securities Corporation, Research Division

So, I mean, can you talk a little bit about the top of the funnel and inquiry flow? I'm just trying to square what it sounds like the challenges were around TCPA with the fact that I think, Mick, said that cost per start was actually down 4% because productivity was up?

Edward H. West

So on the other front end, so you look at on new students or inquiries coming in for the high school start. A lot of those started in the fall and they -- as I said earlier, there's a significant increase year-over-year on the inquiries for those high school students coming in earlier than in previous years, which obviously, as a mentioned earlier, has created a bottleneck. At the same time, we have the inquiries for non-high school, were actually down but also there's been less promotional spend as well. So we would expect that to be down somewhat. But that was the same time were going through the various process changes to comply with the requirements.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay. And just quickly. Could you, I'm sorry if I missed this, but could you elaborate on the revenue per student at Argosy? It sounded like the bigger revenue days and the scholarship was more AI but Argosy revenue per student was down like 11%. What drove that?

Mick J. Beekhuizen

It's really a combination of 2 items. It's, first of all, a move of revenue days between the quarters. We had a little bit impact there, not as big as The Art Institute. However, comparatively, it did have an impact over there. And then the other piece is the additional scholarships. And just because you're obviously looking at smaller dollars over there, you see a bigger percentage impact.

Corey Greendale - First Analysis Securities Corporation, Research Division

So until the scholarships anniversary, do you think we're going to be seeing high single-digit declines in revenue per student at Argosy?

Mick J. Beekhuizen

If I think about, I think about you had a disproportionate move between the first and the second quarter this time around. You'll continue to see some choppiness throughout the other quarters but then overall, I still expect revenue per student for the full year at Argosy to be slightly down.

Operator

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

David Chu - BofA Merrill Lynch, Research Division

So you mentioned that you now expect starts to be down for AI for the year. Can you give us your overall start expectation?

Edward H. West

Well, as I mentioned, obviously, with AI being down, with the expectations of that for the fiscal year, that would obviously have a disproportional impact for the rest of the company. So we will expect it to be down for the balance of the fiscal year.

David Chu - BofA Merrill Lynch, Research Division

I mean, so if we look in aggregate, are we talking single-digit, double-digits?

Edward H. West

I would just say there, we should expect it to be down for the balance of the year. Having anymore precision on exactly and precisely what, can't provide further.

David Chu - BofA Merrill Lynch, Research Division

Okay. And so what is the average scholarship amount for a bachelor's degree student now at AI? And just to follow-up, how much in average debt do you expect the students to graduate with?

Edward H. West

Well, going back to the latter, that's been coming down. That's one of the things, a lot of the efforts have been done over the last several years. A student debt is down 15% over the last 3 years due to a lot of the changes we made across the system. And then also, the reduction of fees, not having any increases in the growth in scholarships, so that's down over 15% for grads. Scholarships range, obviously, across the students, on average, the last been $750 per quarter.

David Chu - BofA Merrill Lynch, Research Division

Okay. And just lastly, is the closure of underperforming campuses something you're considering at this time?

Mick J. Beekhuizen

We're always looking at our portfolio and making sure that individual locations are serving the students and are viable. And currently looking at the different locations. I don't see any -- don't foresee any closures. But as mentioned, we're continuously evaluating that, so because the environment is obviously changing, as we speak.

Operator

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

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

You mentioned increase use of the scholarships. How are you structuring those to incent retention? And then what do you think the impact that will be on retention over the next couple of quarters, years?

Edward H. West

Tim, we have all sorts of scholarships, both need and merit-based scholarships offered by various colleges and universities. And we just -- we feel it's a significant benefit for whether it's new students who are enrolling or students who are continuing on with their education. For the students, when we look at a cohort of students who've started over the last several quarters, who received a scholarship versus those who have not. The retention differences are significant, upwards of almost 10 percentage points for those, it's really -- it's a big effort to help on with the affordability with students. And that's why we continue to increase and look for ways for additional investments with scholarships.

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

Okay. It's fair to say though that should be an extended tailwind for retention?

Edward H. West

We believe that is one factor from retention and affordability of making sure staying school, but also, it's really important for engagement with students and a lot of different activities in enriching environment, the classroom, working closer with faculty, the advising staff. It's more than just scholarship. It's a full engagement in many different fronts with the students and helping them to succeed and achieve their goals.

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

Okay. And the PLUS loans program. It sounds like, there may not be a resolution there for a while on what the sort of the credit standards will be. But are you seeing traction with PLUS loan reapplications, now that you gone through the big traditional fall start?

Edward H. West

You do have -- first of all, we haven't seen any other changes in the PLUS loans over the last couple of quarters. We're aware that the department did notify to have students reapply or parents reapply for that and obviously, that is encouraged, but you see less of a take up rate on folks really going back and reapplying again. So that, that really hasn't changed much.

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

Okay. And average enrollment in South, the trends there ticked up pretty nicely in the second quarter. A chance you'll see positive growth in average enrollment in South?

Edward H. West

Well, depending on the timeframe. Obviously, the trend, the trajectory is very encouraging on multiple different fronts having new students turning positive at South University, as well as a continued improvement in retention will result in year-over-year enrollment being positive.

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

Okay. And then the cost cutting. If you had to weight that by revenue or by enrollment, which segment is that probably going to be most -- impacting most?

Mick J. Beekhuizen

If you look at it across the basin, you look at our cost base, obviously, you got the biggest cost base from a dollar perspective, within The Art Institute. So as a result from a dollar contribution perspective, you have a larger proportion in that specific education system. However, it is the total cost savings that I previously mentioned or across-the-board. And it's all the different parts of the organization that we are evaluating and we're making sure that we achieved optimization in order to get to the $100 million to $125 million that I mentioned previously, for fiscal 2014.

Operator

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

Edward H. West

Great. Thank you for joining us today. A couple of final points here. While the operating environment remains challenging with limited visibility, our students are at the center of what we do and we continue to take steps that we believe will improve the student experience and result in long-term success. Based on the successes of the strategy changes at South University's online programs, our other education systems are moving forward to focus on their academic programs where they have strong differentiation and good student outcomes that meet both employer needs and student career goals. With that, I'd like to thank you, and have a great day.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect

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