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Education Management (NASDAQ:EDMC)

Q1 2012 Earnings Call

October 27, 2011 9:00 am ET

Executives

James Sober - Vice President of Investor Relations

Edward H. West - President and Chief Financial Officer

Todd S. Nelson - Chief Executive Officer and Director

Analysts

Gordan Lasic - Robert W. Baird & Co. Incorporated, Research Division

Trace A. Urdan - Wunderlich Securities Inc., Research Division

Sara Gubins - BofA Merrill Lynch, Research Division

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

Kelly A. Flynn - Crédit Suisse AG, Research Division

Thomas Allen - Morgan Stanley, Research Division

Jeffrey M. Silber - BMO Capital Markets U.S.

George K. Tong - Piper Jaffray Companies, Research Division

Corey Greendale - First Analysis Securities Corporation, Research Division

Zachary Fadem - Barclays Capital, Research Division

Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division

Elizabeth Gilson - Barclays Capital

Gary E. Bisbee - Barclays Capital, Research Division

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Operator

Good morning, and welcome to the Education Management Corporation Fiscal 2012 First Quarter Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jim Sober, Vice President of Finance. Mr. Sober, please go ahead.

James Sober

Thanks, Denise. Welcome to Education Management's First Quarter 2012 Earnings Call. With me today is Todd Nelson, our Chief Executive Officer; and Ed West, President and Chief Financial Officer. Following our opening remarks, we will begin our question-and-answer session.

Before turning the call over to Todd, for his opening comments, I'd like to remind everyone that the information presented on this call contains forward-looking statements. These forward-looking statements include, but are not limited to, statements about our future plans and our future financial and operating performance. Actual results may differ materially from those contained in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially are set forth in the cautionary statement included in the press release. Todd?

Todd S. Nelson

Thanks, Jim. Welcome to our fiscal 2012 first quarter earnings call. On today's call, I'll provide an update of our business operations and Ed will review our fourth (sic) [first] quarter results, cover several operational topics and provide guidance.

We are pleased with our first quarter financial results and are continued dedication of our faculty and staff providing opportunities for both our students and graduates in this challenging economy. That said, we did see lower new student enrollment results leading up to our October start, than we have previously expected across both our online and on-ground academic programs. In addition, we experienced more drops than anticipated from our transition to non-term at Argosy University Online. However, we believe we will likely experience improving new student enrollment trends in calendar year 2012. Finally, we continue to firmly believe that the long-term growth trends for our industry remains favorable, as the need for post-secondary education remains high, given the competitive global economy, and that we are well positioned for long-term growth due to the breadth of our programmatic and degree offerings and our individually-recognized and uniquely-positioned academic institutions.

For our recent October start, we had enrollment of approximately 151,200 students, a decrease of 4.5% over the prior year period. Excluding the 5 locations that are less than a year old, same-school enrollment declined approximately 5%. Students taking their classes in a fully online modality decreased 7.6% from the last year to 39,100 students, representing about 26% of the total population. Further, new students for the 3-month period ended September 30, 2011, decreased by approximately 11% over the prior year period. I'd like to add that we have posted an updated presentation of our October 2011 enrollment information to the Investor Relations page on our website.

During fiscal 2012, we introduced over 350 new or existing academic programs to locations that have not previously offered them. We have continued the strong pace through the first quarter of fiscal 2012, where we've rolled out 95 programs across schools not currently offering them. We've also developed several new programs at Argosy University. An associates in psychology and a doctoral degree in teacher leadership, as well as a Masters in human resource management for fully online students. In addition, as part of our effort to bring our programs to new markets, I'm pleased to announce that during August, we opened a new South University campus in Austin, Texas.

Let me now provide a brief update of our graduate statistics. Of our undergraduate students, excluding Argosy University, available for employment who graduated during the quarter ended this past March, approximately 80% were employed in their fields and related fields within 6 months to graduation. For the average starting salaries for these graduates from our undergraduate programs for the quarter ended this past March, bachelor's degree students obtained an average salary of approximately $33,000, while graduates from associates and diploma programs earned $28,000.

Over the past several months, we have launched a number of initiatives across our education systems, focused on enriching the student experience and improving persistence. For example, we have began a joint curriculum project for the unification across all 4 educational systems with 5 fundamental, general education courses: Students success, developmental math, college algebra, developmental english and english composition. Argosy University began offering tutoring service, including access to writing center to improve student's access to experts who work with our faculty, to help guide students with assignments and advance course topics. The Art Institutes are implementing a new academic advising model that is more traditionally focused but advisors being accountable for student class registrations, following up on class absences and working with high-risk students to help ameliorate their risk factors.

The Brown Mackie College has initiated the use of advisors to provide academic advisement and support to help at-risk and new to college students acclimate and persist. We believe that these and many other investments we are making in our schools will enhance the student experience, improve persistence and further the strength of our brands and our positioning in the marketplace.

With that, I'll turn the time over to Ed West.

Edward H. West

Good morning. Thank you, Todd. In my comments today, I will review our financial results for the first quarter of fiscal 2012, cover several operational topics and update our guidance. For the first quarter ended September 30, net revenues were $682.1 million, up 2.4% versus the prior year. EBITDA decreased 9.8% to $109.8 million. Operating income was $71 million and net income was $27 million with diluted earnings per share of $0.21. Excluding the $6.7 million of expenses related to restructuring and the lease termination incurred during the quarter, EBITDA was $116.5 million, net income was $31 million and diluted EPS was $0.24. The revenue increase was primarily driven by a slight increase in enrollment and higher revenue per student year-over-year resulting from the higher mix of on-ground students.

During the first quarter of fiscal 2012, we incurred expenses of $5.2 million in connection with restructurings at several of our education systems and corporate offices. We also incurred a $1.5 million charge related to a lease termination at one of our school locations. The after-tax net effect of these items is approximately $4 million or $0.03 per diluted share. These items are detailed in our earnings press release. Please note that my comments on the fiscal quarter's income statement will exclude the items I just mentioned.

Total expenses for the first quarter were up 4.3% to $604.5 million versus last year. Now looking at expense categories in more detail. Educational services were up 4.5% to $373.7 million. As a percentage of net revenues, Educational Services expenses increased by 110 basis points versus the prior year quarter. The increase, as a percentage of revenue was primarily due to the changes for our fully-online students, including the rollout of the non-term academic structure at South University and Argosy University and the graduation focused teams. Within Educational Services, bad debt expense represented 5.2% of net revenues for the quarter, down slightly from last year when including the expense related to EFL a year ago.

General and administrative expenses were up 2.7% to $191.9 million versus the prior year quarter, similar with prior year's level on a percentage of net revenues basis. Within G&A expense, marketing and admissions costs represented 24.3% of net revenues, an increase of 67 basis points from the prior year quarter. Growth in cost per start was driven by higher inquiry volumes with a nominal growth in CPI, while we experienced declines in conversion and start rates. In particular, the start rate came in below expectations for the fall start.

EBITDA decreased 4.3% to $116.5 million for the fiscal first quarter. EBITDA margin was 17.1%. EBITDA, which we use to measure operating performances is a non-GAAP financial measure, and a reconciliation to reported net income is included in the quarterly earnings press release.

Net interest expense was $26.9 million in the current quarter, a decrease of $0.5 million from the prior year quarter. Looking at the cash flow and balance sheet, cash flow from operations for the 3 months ended September 30, was $221.3 million compared to $231 million in fiscal 2011. In line with relative operating performance when compared to the prior year. Cash paid for CapEx was $20.2 million or 3% of net revenues for the 3 months ended September 30, down from 5.8% of net revenues during the same period last year.

During the fiscal first quarter, we repurchased 2.5 million shares of common stock totaling $47.3 million. Since the inception of our share repurchase program in June 2010 through September 30, 2011, we have repurchased 15.8 million shares or 68% of the 23.4 million shares of common stock issued since our IPO, at an average price of about $17.32 per share. At September 30, approximately $51 million remained on the $325 million share repurchase program that we originally announced in June 2010.

Looking at the balance sheet as of September 30, cash and cash equivalents balance was $465.5 million. We had no borrowings outstanding under our revolving credit facility and long-term debt was $1.4 billion.

I would now like to provide updates in several key areas of our business. Regarding investments in new locations during the first quarter, we incurred approximately $2.5 million in losses from startups and operation less than 24 months. During fiscal 2012, we still plan to open 5 or 6 new locations with a majority occurring during the second half of the year depending on regulatory approvals. Now as Todd said, we were pleased by our first quarter financial results. We experienced weaker enrollments trends than we have previously anticipated for the October start. We continue to see weakness in conversion rates, start rates and persistence rates. In addition to student hesitance to enter into financial commitments as a result of the current economic environment, we also experienced a higher level of student drops than anticipated from our transition to a non-term academic calendar for our fully-online students at Argosy University. While the increase in drop rates were greater, than what we experienced for our fully-online students at South University, we believe they were mostly related to students who were seeking a higher amount of stipend payments while enrolled part-time. Today, approximately 2/3 of the fully-online students at Argosy University have been transitioned to non-term with the remainder expected this quarter. Once the transition to non-term is complete, we expect higher retention rates and reduced levels of student debt. We are pleased with the early signs of student success, we are now experiencing at South University, which completed its transition of fully-online students to non-term this summer. Thus far, we have seen sustained improvement in retention rates for South University's fully-online students.

Now regarding guidance. While lower enrollment won't impact our financial expectations for the remainder of the year, we will continue to make proactive changes in the short term, which we believe will have long-term benefits for our students and schools. Our second quarter and annual guidance for fiscal 2012, reflects our recent October start and projects a single-digit enrollment decline on average for the year. We believe that we will likely experience improving new student enrollment trends in calendar year 2012. We also expect to benefit from recent changes in staffing levels and company-wide centralization of certain student financial services. For our fiscal 2012 second quarter guidance, we are expecting EBITDA to be between $163 million and $168 million, net income to be between $59 million and $61 million, and EPS to be $0.45 to $0.47 per diluted share.

For the 12-months ended June 30, 2012, we're expecting EBITDA to between $555 million and $570 million, net income to be between $175 million and $182 million and EPS to be between $1.34 and a $1.40 per diluted share. Please note that the guidance I just gave excludes the expenses associated with the restructuring and lease termination cost. A reconciliation is included in our earnings press release.

Finally, I would like to reiterate what Todd said. We firmly believe that the long-term growth trends for our industry remain favorable as the need for post-secondary education remains high, given the competitive global economy. And that we are well positioned for a long-term growth due to the breadth of our programmatic and degree offerings and our individually-recognized and uniquely-positioned academic institutions.

Todd, back to you.

Todd S. Nelson

Thanks, Ed. We'll now go ahead and open up for questions. Just to respect people's time, if we could ask -- try to keep it to one question. We would appreciate it.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Bob Craig of Stifel, Nicolaus.

Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division

Todd, I was wondering if you could provide some color, I know you mentioned that starts were a little bit below your expectations for the quarter, for the fall term. Any comments as to where that deviation was greatest?

Todd S. Nelson

No, I mean, I think we saw it across several of the education systems. But again, it's the same things that we've mentioned before with the rollout of the new compensation plan. As that works its way through the system, you'd expect some drop in productivity. Obviously, there are tougher comps earlier in this year. And again, you can't dismiss some of the negative press and the impact that that's having. But pretty much, we saw it almost across the board.

Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So both working adult and traditional?

Todd S. Nelson

Yes. Probably a little more stability with the traditional but we saw it across the board.

Operator

And our next question will come from Jeff Silber of BMO Capital Markets.

Jeffrey M. Silber - BMO Capital Markets U.S.

Just wanted to get a little bit more color on the impact of the shift to the non-term academic year. Did you see any impact on new enrollments? You mentioned starts, I'm just wondering if there was any impact on new enrollments. And also if you can give us a little bit more color in terms of Argosy and South as a percentage of your total online enrollment base?

Todd S. Nelson

Again, let me just comment on the first part. We said, we saw some softening in the new students, being recruited for all the systems both -- whether they are non-term or on traditional term. And you would have obviously some timing issues. At times, if you have more starts in a particular quarter than the prior year in that particular quarter. As far as in the continuing students, which is really more where we were affected, I'll let Ed respond to that on Argosy Online.

Edward H. West

Sure. On -- from the continuing students, we did see a higher drop as we noted in both of our comments at Argosy Online, fully-online students from the transition to non-term than we expected previously. Now, we were looking at before is what we experienced at South, the transition at South and just the drop rates came in higher than what we have previously seen. From a start standpoint for new students, there's really both brands. We did see in both institutions pressure on both conversion rates and start rates. Not uniquely different from what we saw online as well. Probably what caught us, we saw more pressure on than what we have previously anticipated both on-ground and online, were really on start rates. Where we actually had applications, decent application interest from students but they were reluctant to start at the end of the day and going into the fall quarter, which is as you know is the large quarter for us. With respect to the breakdown of our fully-online students, we just reported about 39 students -- 39,000 students fully online. It's roughly 1/3, 1/3, 1/3 between The Art Institutes, South University and Argosy University, with a little bit higher weighting for South University for our fully-online students.

Todd S. Nelson

Yes. And let me just comment on, in particular, as we mentioned about the start rate. One of the things that obviously they would -- as we learn how in today's market and the students are reacting. At The Art Institutes, again, they are adjusting their academic counseling model to try to address that and again, hopefully, we'll start to see that in time the start rate improve.

Operator

And our next question will come from Gary Bisbee of Barclays Capital.

Zachary Fadem - Barclays Capital, Research Division

It's Zach Fadem for Gary. Just question about recruiter productivity. Are you experiencing any improvement there? Or you mentioned last quarter that there was some improvement. And I just wanted to see where you're at now.

Todd S. Nelson

Well, let me just comment on, you have 2 things happening here, 2 significant dynamics in the recruiting process. One is, is we have worked to initiate new programs to improve productivity, including the process at the very beginning as students come in with the QMT Center, as well as some of the training materials and training of our enrollment counselors. That helps in a positive way. But then on the negative side again, you do have the impact of a new compensation plan that as we've said, can't or really don't think will allow them to be as productive. And so you have that both sides working against each other. But as Ed said, although we've seen some stabilization at the application trends, we still see the start rate being soft. And again, we're trying to not only address that with the enrollment counselors but you also address that with the academic counselors, who are working with those students going forward to try and keep them in, those who do start.

Gary E. Bisbee - Barclays Capital, Research Division

Okay. Just second question, you said you're expecting to grow enrollment in calendar year '12. Just what is basically the basis for the growth in '12 vs fiscal '12, and why you see it improving then?

Edward H. West

Well, again, I think you have to start with just the overall market end demand and the value of education. As we've said, we feel strong that, that demand is going to continue. But there are several factors, as I said, one is the stabilize the application trends that's giving us some confidence there. Although as I said we've not seen that in the start rate yet. You do have lower comps that will be kicking in later in the year, which is always helpful. You also have the new comp plan, which will work its way through the system. It started in Q3 of last year for us, our fiscal Q3 and as that works its way through the system, what happens is, our belief is that you'll establish a baseline of productivity for this folks and then you'll be able to then hire accordingly and improve your modeling because again, you have an idea of where that productivity levels off given, again, the new comp plan.

Todd S. Nelson

If I can just -- one further point on that and what we are talking about was that the trends in new student enrollment. And not -- you had mentioned this enrollment, what we are speaking to is new student enrollment.

Edward H. West

And as Todd pointed out, on our new plans for admissions representatives that really began almost this time a year ago. Then the majority of our representatives were transitioned to a new plan during our fiscal third quarter last year, so that the was phased in over time. And that then as you go into calendar '12, in terms of the kind of back end of our fiscal year, we should see some of the benefits from a year-over-year comparisons there. And just one last little piece of color or the like on The Art Institutes more specifically. In terms of looking at the conversion rates and the applications, we've seen the actual applications nearing now year-ago levels, which has been an improving trend versus the fall. It really speaks to the start rate, where we've had applications in hand but students were just reluctant to start and take on that financial commitment and we continue to work with them.

Zachary Fadem - Barclays Capital, Research Division

Got it.

Todd S. Nelson

Let me just maybe add one more thing. Thanks, Ed. Is that, again, it's a bit of a learning experience. Because again, you are seeing the enrollment counselors functioning a little differently as they adjust as well. So our ability to react quickly to that especially -- and we've emphasized those who are managing the enrollment staff to be able to help them be productive and successful.

Operator

And our next question will come from Corey Greendale of First Analysis.

Corey Greendale - First Analysis Securities Corporation, Research Division

Also on the start trends, 2 questions about that. The first is, I know you said, you expect improving new student trends in calendar 2012. I was hoping you might be able to be a little more specific. Does that mean you think new students will be positive in the March quarter? And then secondarily, if one of the primary issues or a major issue is the economy, and that it's impacting the show rate, is there anything that you can do other than working with those students differently in terms of more scholarships or different kinds of scholarships or anything that might motivate them?

Edward H. West

Yes. Let me answer your latter question, first. Yes, there are some things that you can do which we were looking at that hopefully will help that. But yes, I think, as we've heard from some of the other education companies, there is a reluctance to commit with the extended economic downturn. So we're continuing to try and do things to help offset that. As far as -- the first part of your question, not necessarily. I mean, what we've said is you'll see the -- what we believe is that, that trend will start to stabilize and move it forward in a positive way. But as far as to say that it's going to positive in the next quarter, I think that, that would be -- again, that's not what we're saying.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay. Ed, does that mean you think it could be less negative in the March quarter?

Edward H. West

I think it would be in the vicinity. I think that you could see it up a few percentage points from where it is or down a few percentage points. But again, I guess the keyword is in the vicinity of where it is.

Operator

And our next question will come from Sara Gubins of Bank of America.

Sara Gubins - BofA Merrill Lynch, Research Division

For the students at The Art Institute who went through the application process and then kind of towards the last minute decided not to start. Do you have any sense of whether or not they're choosing to go to another school? Or are they just deciding not to go to school? I'm particularly curious for that around traditional-aged students?

Todd S. Nelson

Well, we haven't had any indication yet that they're choosing other schools, speaking of The Art Institute. What we're finding is that, again, you have several things working against them. One is the current economic trends that are out there, it's -- and I'll again -- as you know there are -- many of them are traditional-aged students. They rely on parental and family support and so that is a challenge for them. So that plays into it, as well as the fact that these students are -- many of them involving their parents in the decision and therefore, probably taking their time making the decision given again, some of the negative press and other things. Although, we feel like we are successful when we get a chance to get in front of them to help offset that. But you just have several different factors working against them that way. And then again, understanding again, the role of an enrollment counselor, given the new compensation plan and their ability to continue to work with those students. That's something, I think -- we think we're going to work through. But those are just several factors that we think are affecting the start rate.

Sara Gubins - BofA Merrill Lynch, Research Division

I guess it's just interesting to me, I mean, it makes a lot of sense that a working adult may put off school for 6 months or a year. But traditional students particularly around the fall are kind of geared towards going to school. And so, I'm wondering if they are just literally putting off that decision or going somewhere else, and maybe it's too early to tell.

Todd S. Nelson

I think it is too early to tell. I would just say that we haven't heard, I myself have not heard as we meet with the education systems that it's going to other schools. It's more putting off that decision. But again, it is too early to tell, Sara.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. And then just one quick follow up on the cost side. Based on your expectations, it looks to us like cost are expected to ramp up sequentially in absolute dollars in the second quarter and then come down in the back half of the year. Is that a reasonable way to think about it?

Edward H. West

In terms of just specific and absolute total dollars across the system?

Sara Gubins - BofA Merrill Lynch, Research Division

Yes.

Edward H. West

It's going to follow that same level of seasonality that you have seen in previous periods year-over-year.

Operator

And our next question will come from Trace Urdan of Wunderlich Securities.

Trace A. Urdan - Wunderlich Securities Inc., Research Division

So, Ed, you talked about the changes in enrollment comps or compensation beginning a year ago and then I guess rolling out over some period of time to the various schools and campuses. Is that correct?

Edward H. West

That's correct.

Trace A. Urdan - Wunderlich Securities Inc., Research Division

And are you guys able to now look back on that and gauge, A, where you are in terms of getting back to normal? And B, whether you're able to -- you think you'll ever be able to get back to the previous level of productivity per counselor? And then I guess, C, what you're estimate would be of what kind of an impact that piece of the puzzle has had on the overall drop in enrollment?

Edward H. West

Well, Trace, let me try to answer, there's a lot of parts to that question. But our view of it is, that as you roll this compensation plan in and as we rolled it in, the student -- the enrollment counselor with the new compensation plan, there's really no -- they themselves want just having a new comp plan in general, which again causes the change in productivity. But there's really not, at least from what we're seeing is that with the old compensation plan, there was both qualitative and quantitative factors per the Safe Harbor language that existed. And so there was still, you had the enrollment counselors who probably were being more productive because again, there was a reason to continue to work with more students. Whereas now, again, that really doesn't exist and so that's why you'd expect over time that, that would start to slow down. And that's really what we have -- at least what were early indications of what we're experiencing. But our belief is that as, again, they start to become as they are now familiar with it and they are working within that, that we think it will establish a baseline and we think that the baseline amount of productivity will be lower than what it was before. As you know, Trace, you're familiar with the new rules, and the new rules is you really can't include in any pay decision any factor that's measuring any kind of behavior or any kind of a metric. And so with that not there, just again human nature, you think that you'll have less productivity and that's what we're seeing. But our managers are becoming more proficient at managing behavior and our belief is that, as you said, we're seeing it in the application trend. And we're hoping that over time, we'll also see that in the start trend as well.

Trace A. Urdan - Wunderlich Securities Inc., Research Division

Okay. I wonder if you could just describe briefly what -- how does the communication to the student take place around the change to borrower base? What is the message to them and what kind of response do you get back in response? And what are those students elect to do when they choose to drop out or choose not to enroll as a function of the change in the way the lending is structured?

Todd S. Nelson

Well, let me just deal with the first part of it and then let Ed attempt the second part. What does happen is that, again, although we've been dealing with non-term, not necessarily the borrower base. But is that -- again, there are students as we know and this is unfortunately exist through all of post-secondary education, it's not specific to the for-profits as we saw that recently. This has become a large trend in the non-profits, in the community college system especially. And that is that those students who may have been attending for the stipend, the amount that's available to them over and above what the school has for tuition. When they're not getting that, they're making the decision in many cases to not enroll any further. And we actually think that is a good thing, we don't want students who has been characterized as those who are there for the stipends. That's not necessarily what we want to see.

Edward H. West

As Todd said, it's very straightforward especially for a new student because they haven't had -- they have not been continuing and been under a different academic structure. So for new, it's straightforward. For those that are continuing on, going from the term-based to the non-term, the discussion is around if they were receiving a stipend before. And that then more likely than not, they would not be receiving that going forward. So that is the discussion of why that's the case. And then how they are working forward in terms of their program under a full-time basis.

Trace A. Urdan - Wunderlich Securities Inc., Research Division

And do you have a sense that they're -- when they choose not to continue, are they trying to find some other schools that's going to give them a stipend?

Todd S. Nelson

I think that could very likely be. Obviously, we don't know that. But based on at least some of the anecdotal examples that we've received, that's probably the case. One of the things I think it was -- we were fortunate on our part is we did phase this as you know, we did South first and then Argosy rather than taking it all at once. I think that was a wise decision on our part. But again, I think, given the environment that was the right, I think, to do. It's better for the students in the long run. We think it will help retention and if there are students who are maybe attending for 2 different reasons and not just the reason of getting an education, we've preferred that they attend another school.

Operator

And our next question will come from Brandon Dobell of William Blair.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Wondering if you could characterize maybe the level of activity around new program or new degree rollouts across the different institutions compared to where you were maybe 6 or 9 months ago. I guess I'm just trying to get a feel for -- not how aggressive, it's the wrong terminology. But how confident are you now, that you've got enough visibility into all the different moving parts that you want to re-accelerate rolling out programs, re-accelerate instituting new programs at institutions that kind of thing. And within that, I guess, the context would be, at what point do you think those efforts start to make a difference in, and I guess, a difference that we can see in new student enrollments?

Todd S. Nelson

Sure. Good question. We do feel and encouraged by the results of rolling out these new programs. What was happening before as you know, not having clarity around the gainful employment rule, we -- as we very clear were hesitating rolling out certain programs. As we've gotten more clarity, we begin to do that very carefully. But for example at The Art Institute, there were several key programs not just shorter in length but key programs that we had hesitated, we've now done the analysis based on the particular location and they're starting to roll those out. As we've also said in the past, we've started to enroll out a number of a shorter in length programs and thus far, the reception has been positive. So we're actually feeling good about that and as far as when it does take some time for those to start to ramp up. But our view as we said, as we look out over into this calendar year 2012, we would hope to see some positive results from that.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay. I have one more quick one. I may have missed it in the early Q&A. But any color on, if there is any programmatic strength or weakness, I guess, especially within The Art Institutes, maybe it's applications in certain programs and those students tend to not show at a higher rate. Or if you're seeing anything in particular either in associates, bachelors or different types of degrees that are particular strong or weak for new students?

Todd S. Nelson

Well, I think, again, you're seeing -- as you know one of the strengths of EDMC is that we have so many programmatic offerings in all the different degree level. And so you see a couple of things. One, is that the job market is still driving a lot of the program success in health sciences in particular. But as we've said, we also modified our rollout of programs in certain locations, so that was maybe working against that a little bit. But as we've said, we've had the -- the softness is not, I would say, across-the-board in all programs but many of the programs, and certainly all 4 of the education systems. But I would say again, where you're saying, a lot of the job demand in the labor market is where we're seeing also strength in our programmatic offerings.

Operator

And our next question will come from Peter Appert of Piper Jaffray.

George K. Tong - Piper Jaffray Companies, Research Division

This is George Tong for Peter Appert. You know that conversion rates and persistent rates are turning below expectations and you touched on this before. But could you give us more details on what steps are being taken to manage these trends up?

Todd S. Nelson

Well, on conversion rate, again, I think that there's several things. One, is that to mitigate the impact of the new compensation plan, we've really focused on our -- continuing to work with managers and their training and the managing of the enrollment counselors to be able to help that. Again, that's probably one of the larger things and more important things you can do, is beef up the amount of attention and tools and support you're giving to managers to try and do that. Our view over time is that will help. We also are doing certain things on the front end with some of our outside vendors to also improve the conversion rate of the increase that we're giving.

Operator

And our next question will come from Andrew Steinerman of JPMorgan.

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

This is Jeff Volshteyn for Andrew. I wanted to ask about revenue per student. It was up about 1.7% based on my calculations in the quarter. I would have thought it would be coming up a little bit slower because of the shift to non-term. Can you talk about trends going forward in revenue per student and actually for this quarter as well?

Edward H. West

So for this past quarter, I think, probably the most notable point on that as I mentioned regarding the mix, we had a higher, a greater proportion of the students who are in-ground versus online. So which typically carry a higher load. So that revenue per student from a mix standpoint was higher. Going forward, if you do that as we talked about last time, will moderate in terms of overall unit revenue growth, just the lower tuition increases and historically speaking and as we talked about, the mix between on-ground, online with all of the transition, you're not going to see substantial changes in the overall mix.

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

And so the shift to non-term will definitely have a material impact in the next couple of quarters?

Edward H. West

Well, South is now in, we're fully converted and by the end of the calendar year, we will have fully converted Argosy University Online students. So on a year-over-year basis, you'll still see that impact from the lower credit loads during each one of our fiscal quarters. Then once we get the year-over-year annualization of this change you will see that year-over-year impact moderate.

Operator

And our next question will come from Suzanne Stein of Morgan Stanley.

Thomas Allen - Morgan Stanley, Research Division

It's Thomas Allen filling up for Suzie. Can you give us an update on gainful employment? You touched on it a little earlier. But you've spoken about the past few quarters about making changes to programs, do you think that could have an impact on demand at all? And then, Obama's proposal from earlier this week, could that help on gainful employment or on any other points of demand at all?

Todd S. Nelson

Let me just start from the beginning and turn it over to Ed. On demand, as we've said, we -- gainful employment has not, in our view, had an impact on demand. Although again we've seen as we said, although we had softness in our start number this quarter, the demand continues to be across the board for the ed systems and the programs, so we're not seeing much from there. We have, as far as rolling out of new programs, that was a self-imposed shift and as I' said, we're having reasonable demand for those programs as well. So in that part of it, it is going well. We've adjusted several other things including the length of certain programs as we talked about before, that's been implemented. We also continue to analyze carefully the rollout of new programs in new locations. So those are things that continued to go very well. We haven't -- I don't think we've had any surprises about that. Now...

Edward H. West

In just the restructuring that you recall from earlier conversations. We restructured over 300 programs across the systems, and then we rolled out 142 new programs, mostly certificate and diploma level programs across AI and Brown Mackie. So those have been out there and frankly, now rolling out across the system and we would see positive from that going forward. With respect to your second part of the question, the student loan changes. We respect President Obama's Executive Order concerning the educational loans. It should motivate students to consolidate their privately-serviced FFEL loans with their direct loans. And we think this should overall help students decrease their required monthly payments and have onetime point of contact for the loan repayments. But also by promoting a lowering of the required minimum payments to only 10% of the student's discretionary income, it should also reduce the unnecessary student default rates in these difficult economic times. That said, we are researching whether there's an unintended consequence of this change would have on more borrowers legally paying their loans back on time, but creating negative amortization of their loan balance. Unfortunately, the current gainful employment regulations limit the percent of the students in the situation to about 3% of the cohort, and any students above that percent will negatively impact the repayment rates. So it's yet another unintended consequence, potentially of the gainful employment regulation. And we will continue to evaluate this model to that and work closely with both the administration and the Department of Education and Congress, to make sure we're all aware of -- this is a good action we think for students but it could have a negative unintended consequence.

Operator

[Operator Instructions] Our next question will come from Kelly Flynn of Credit Suisse.

Kelly A. Flynn - Crédit Suisse AG, Research Division

A couple of quick ones. First on the non-term base, I think you guys have made a good case for it being a student-friendly move. So I'm wondering if you can talk about whether there's any reason why you would not eventually do it at The Art Institute online? And then just secondly, I know Corey asked this, but I'm not clear on the answer. When you say expect start growth to improve in calendar '12, are you saying you expect year-over-year growth at some point during the year or just a narrowing of the declines?

Todd S. Nelson

On non-term again, although there maybe an opportunity to do that at AI Online, we're not necessarily saying that for the on-ground at AI, simply because of the -- it's not as easy to do that when you have multiple locations as it is in an online environment. But that's certainly something we'll monitor and watch for opportunities there at AI. As far as the trend again, we see a lot of things going forward that are positive that give us encouragement. But we don't -- Kelly, we really never give an exact guidance on new students. But again, we feel that the trend will be improving. When that becomes positive, that's a good question but we certainly feel there's the opportunity for that.

Operator

And our next question will come from Reza Vahabzadeh of Barclays Capital.

Elizabeth Gilson - Barclays Capital

This is Elizabeth Gilson in for Reza. You have quite a lot of cash in your balance sheet currently, would you plan to utilize that primarily for stock repurchases or also for some debt repayment? And then also I was wondering if you had revised outlook on what you're going to do for the portion of the term loan that's due in 2013?

Edward H. West

So just like -- as we've talked about previously from a capital structure standpoint, in terms of the excess cash flow, we're keeping things in balance. We repurchased both stock over the last year, a year and a half, as well as call the additional debt and we paid off our most expensive debt. We will continue to monitor the capital structure over time and put the free cash flow to the highest and best use with everything in balance. We continue, on all of our securities, monitor the market and looking for the most opportune time, whether we pay down additional securities or refinance or extend, and at least monitor the market on a routine basis and take the appropriate action.

Operator

And our next question will come from Gordan Lasic of Robert W. Baird.

Gordan Lasic - Robert W. Baird & Co. Incorporated, Research Division

Just had a question on retention again. I know you talked about it a little bit earlier, but you're seeing a little bit of a boost in South. I'm wondering if you could quantify that? And what type of increase are you expecting, is baked into your fiscal '12 guidance? And then how much headroom do you have in terms of retention after you lap some of these non-term initiatives?

Edward H. West

Yes, going back to that. The comment on retention was specific to our fully-online students at South University, once we made the transition to a non-term academic calendar. And what we saw was an improvement, and we've been experiencing now as sustained improvement year-over-year or even from previous quarters prior to the change to now once that's been fully implemented and the performance of those students who are all in non-term basis. That has been improved. We'll continue to watch that. But obviously, that's one small subset of our total 150,000 students across EDMC.

Todd S. Nelson

Yes. Then I would just comment in general about retention. The thing that we are very well aware of and addressing is, that really, is the changing environment out there. We think given all of that's happened with the regulatory changes, with the media attention and just the market in general. It's very important that you address the changing needs of the student and that is our focus as we talked about, each of these, we talked about just a sample of the initiative that are taking place. And it varies by education system, because it varies by the particular student that they serve. For example, some of the sophisticated level of doctoral students and the support you need to help retention there, differs very much from those students who are just entering college for the first time in our Art Institute or some of the programmatic offerings there at Brown Mackie. An so that really has been our focus over the last several quarters and it's going to be a -- continue to be a big focus for us. And our view is that you can't just make one particular change and affect retention. It really is at a granular level. We're encouraged by the programs that are out there and we hope in time, you will, despite the challenging economy, you'll start to see them impact retention in a positive way. So that really is a major focus for us this coming year.

Gordan Lasic - Robert W. Baird & Co. Incorporated, Research Division

If I could just squeeze one more quick one. What level of cost savings are baked into your fiscal '12 guidance? And what kind of levers can you pull going forward to minimize some of the margin pressure?

Edward H. West

Well, there are cost savings across all systems and categories whether that's been from strategic sourcing, different things that we procured across the company to centralizing various functions, nonstudent-facing or support functions across the system is centralizing that. Trying to incorporate rate as much variable cost in there as possible. That is built into our guidance going forward. But obviously, we'll continue to pursue other ways, additional ways to enhance effectiveness and drive additional efficiencies. Honestly, those benefits, the cost reductions are mitigated and have been offset by a lot of the investments we've been making, some of the changes, which we believe are the right actions to take for our institutions going forward and for the long-term support and durability of the company.

Operator

I'm showing no further questions in the queue. This will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Todd Nelson for any closing remarks.

Todd S. Nelson

We just want to thank everybody for taking the time this morning. We appreciate your attention and we do look forward to speaking with you again next quarter. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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