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Executives

Jack D. Massimino – Chairman and Chief Executive Officer

Peter C. Waller - President, Chief Operating Officer, and Director

Kenneth S. Ord - Chief Financial Officer and Executive Vice President

Analysts

Sara Gubins - Merrill Lynch Global Securities

Jeffrey Silber – BMO Capital Markets

Trace Urdan – Signal Hill

Mark Marostica – Piper Jaffray & Co.

Gary Bisbee – Lehman Brothers (U.S.)

Kelly Flynn – Credit Suisse

Amy Junker – Robert W. Baird Company

Robert Craig – Stifel Nicolaus

Corinthian Colleges, Inc. (COCO) F4Q08 Earnings Call August 26, 2008 12:00 PM ET

Operator

Welcome to the fourth quarter and fiscal 2008 investor conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Anna Marie Dunlap, Senior Vice President of Investor Relations and Corporate Communications.

Anna Marie Dunlap

I’m here today with Jack Massimino, Chairman and Chief Executive Officer, Peter Waller, President and Chief Operating Officer, and Ken Ord, our Chief Financial officer.

This call is being webcast and an audio version of the call and transcript will be available on Corinthian’s website for 30 days. In addition a telephonic replay of this call will be available until Wednesday, September 3. The details for accessing the replay are included in the press release we issued this morning.

Please note that during this conference we may make projections or other forward-looking statements regarding a variety of issues. These statements are based upon current information and expectations. Actual results may differ materially based on a number of risks which are identified in our filings with the Securities and Exchange Commission. Following our prepared remarks we’ll open the call for a question and answer session.

With that I’ll turn it over to you Jack.

Jack D. Massimino

Today I’ll begin with a few comments about our fourth quarter results followed by the highlights of our fiscal 2008 performance. Peter will then review our fourth quarter operational progress after which Ken will give a review of the financials and provide guidance.

We were satisfied with our fourth quarter performance which was achieved in the context of a challenging student financing environment. We reported diluted earnings per share from continuing operations of $0.06 in the fourth quarter versus a loss of $0.02 in the same quarter last year. Excluding extraordinary charges, diluted earnings per share were $0.11 versus our previous guidance range of $0.08 to $0.10 per share.

Revenue from continuing operations was $274 million in the fourth quarter, up 18.3%. The revenue increase was primarily driven by new student starts which grew by 11.5% in the fourth quarter compared with the same quarter last year, above our guidance range. The total student population at June 30, 2008 was 69,211 students, an increase of 12.8% over the prior year.

For those on the call who may be new to the Corinthian story, over the past three years we’ve been engaged in a turnaround of the company. In the first full year of our turnaround, fiscal 2006, we focused on stabilizing the ground schools, identifying marketing opportunities and challenges, and developing plans to revitalize growth.

In fiscal 2007 we took our plans off the drawing board and began implementing company-wide initiatives including brand consolidation and a new advertising campaign based on in-depth research of our student demographic; operation Ignite which was a complete re-engineering of the admissions process; the Inspire initiative which was designed to improve the overall student learning experience; and Unify our new student information system. By the end of fiscal 2007 our efforts were beginning to produce tangible results. In the fourth quarter of that fiscal year continuing operations posted a 7.9% increase in start growth, the first significant growth in several quarters.

In fiscal 2008 we continued to gather speed, posting 13% start growth for the year. We also made considerable progress on several of our main priorities including building people capability, marketing competitively, consolidating information systems, rationalizing facilities, and regulatory compliance. And last but not least, in the second half of the year we worked through the most difficult changes in student financing in the company’s history.

In the area of building people capability we remained focused on recruiting and developing the best talent available and cultivating a work environment that encourages top performance. In fiscal 2008 we had unmistakable proof of our progress. The results of a second annual employee survey showed improvement across every measure. Overall satisfaction increased by 9 full percentage points and according to the outside firm that administered the survey, 9 points is a remarkable one-year increase. With the improvement in satisfaction, it’s not surprising that we also continued to see a reduction in employee turnover from 48% three years ago to 30% in fiscal 2008. We believe that a large part of our success in reducing turnover and improving employee satisfaction is the result of continued investment in training and development. In fiscal 2008 we provided training for 6,300 employees, up from 3,500 employees in the previous fiscal year.

To create a more effective organizational structure and position the company for continued growth in fiscal 2008 we realigned the operation along brand and geographic lines and continued to strengthen the caliber of field leadership. We internally developed, promoted and hired a number of well qualified regional vice president sand campus presidents as well as education, admissions, career services, and student finance leaders.

A strong board of directors is also vital to our success and in fiscal 2008 and early fiscal 2009 we added three non-employee directors to the board: Tim Sullivan, John Dionisio, and as we announced today Leon Panetta. Tim is the President Emeritus of the College of William and Mary and was appointed to the board in January 2008. John is the Chief Executive Officer of AECOM Technology Group, a $4 billion New York Stock Exchange listed company that provides professional, technical and management services for its clients around the globe. He was appointed to serve on the board in April. Leon and his wife, Sylvia, founded and lead the Leon and Sylvia Panetta Institute for Public Policy, a nonpartisan not-for-profit study center for the advancement of public policy. Leon was a member of the US House of Representatives for 16 years and served as President Clinton’s White House Chief of Staff. He’s been a long-time champion of improving our nation’s education system and we are delighted to have his insight and experience on our board.

As we announced last week, Terry Hartshorn completed his service as Chairman of the Board and I was elected Chairman and CEO. Terry was appointed to the position of Lead Independent Director. We appreciate Terry’s leadership as Chairman and look forward to his continued contribution to the board. In addition, Peter Waller who has been our President and Chief Operating Officer since February 2006 was appointed to the board.

These changes are part of the board’s long-term succession plan. We now have an 11-member board, nine of whom are non-employee directors. Expanding the number of well qualified non-employee directors has been part of our ongoing effort to improve corporate governance.

In the marketing area we continued to make excellent progress in fiscal 2008. We finished consolidating our schools into two brand names, Everest and WyoTech, making it possible to shift more of our marketing budget to national advertising. That effort coupled with more effective advertising helped generate record lead flow during the year. As a result we reported the highest start growth in three years at a lower cost per start.

During fiscal 2008 we also made progress on implementing our common student information system. When we launched project Unify in 2006, Corinthian had seven computing platforms and limited ability to collect data across functions much less across the company. The Unify team identified a product, Campus View, and a process for taking us from dispirit functions and platforms to a unified singular system that serves as our student tracking backbone. In 2008 we took the effort from concept to pilot and from pilot to rollout. Today 26 of our schools are on Campus View and we are on track to deliver to all remaining schools by the end of fiscal 2010.

As part of our ongoing effort to rationalize our footprint and improve operating margins, in fiscal 2008 we divested 12 Canadian schools outside of the Ontario province. The transaction closed at the end of February. We also sold WyoTech’s aviation maintenance training school in Boston and made the decision to sell the aviation school in Oakland. WyoTech’s aviation programs were small, non-core, and have not met our performance expectations. We sold the Boston campus in May and expect to sell the Oakland campus during fiscal 2009. While we don’t currently have plans to divest any other campuses in fiscal 2009, as a standard management practice we will continue to review our portfolio of schools.

In fiscal 2008 we continued our strategy of mining the core, transplanting our core program offerings in healthcare, criminal justice, business, and the trades at campuses across the company. In total we implemented 80 such programs and a sizable opportunity still remains. In fiscal 2009 we plan to continue mining the core including several program enhancements. We expect to maintain our push into longer-term healthcare programs such as registered nursing and to expand a number of trade programs including electrical, HVAC and plumbing. Combined, these program strategies will play an important role in creating sustained enrollment growth.

Turning now to compliance. In fiscal 2008 we continued to make compliance a top priority of the company and we put two significant mattes behind us. During the year we succeeded in resolving a long-term investigation by the California Attorney General as well as an inquiry by the Florida AG. In addition we made progress on the OIG investigation of our Fort Lauderdale campus and are continuing to cooperate with the OIG to bring the matter to a close.

With respect to accreditation compliance, on balance our progress in fiscal 2008 was positive. We now have just two schools on accreditation show cause and to ensure compliance with accreditation standards, we also proactively tied on a number of programs that did not meet standards for placement and/or completion.

On the legal front, in July we reported that the United States Court of Appeal for the Ninth Circuit unanimously affirmed the dismissal by the US District Court of a consolidated class action securities lawsuit. This case consolidated several federal punitive class actions originally filed against the company and three of its former officers in 2004. We’ve stated our belief on several occasions that the plaintiffs’ claims in this case were without merit and it is gratifying to have this dismissal affirmed.

Moving now to student financing. As most of you know our fiscal 2008 performance was achieved against a backdrop of the most difficult changes in student financing in the company’s history. Sallie Mae abruptly exited the subprime student loan market in January and overnight we were faced with finding alternative funding for our students. In response we developed and rolled out a comprehensive program, Operation Fire, in just a few weeks. Our quick response is a tribute to the standardization hat has been put in place across the company particularly as a result of Operation Ignite. To create Fire we didn’t have to invent an entirely new program; we modified existing processes. Although we’re still perfecting Fire, it has allowed us to arrange funding for the vast majority of students during a difficult time in the credit markets.

At the end of July Congress completed the reauthorization of the Higher Education Act and it was signed into law by the President shortly thereafter. The new law contains several provisions that are favorable to for-profit career colleges particularly as it relates to the 90/10 rule. As a reminder, the 90/10 rule requires us to derive at least 10% of our revenue on a cash basis from non-Title IV sources. HEA’s passage came about three months after Congress passed HR57.15 which increased Title IV Stafford unsubsidized loan limits by $2,000. While we supported the increase in funding for students, the new limits would have made it difficult for Corinthian and many other for-profit career colleges to meet the 90/10 rule. For that reason we’d identified failure to meet 90/10 as the top risk to our business plan. With the 90/10 relief contained in HEA, the risk of failing to meet the rule has diminished significantly.

The key provisions in 90/10 relief contained in the recently passed HEA are as follows:

An institution making loans directly to its students may count those loans as non-Title IV revenue when the revenue is earned, not solely when the funds are repaid as was previously the case. Our ACCESS loan program is covered by this provision which is in effect for four years from fiscal 2009 through fiscal 2012.

The $2,000 in Stafford loan limits may be counted as non-Title IV revenue for purposes of calculating the 90/10 ratio. This provision is in effect for three years from fiscal 2009 through fiscal 2011.

The one-year eligibility requirement related to 90/10 has been changed to a two-year program participation requirement. This means that institutions would have to exceed the 90% limit for two consecutive years before they’re deemed ineligible for the Title IV program versus one year under the previous rule.

Taken together, these provisions help us meet the 90/10 rule over the next three to four years. In addition we now have time to implement alternative strategies such as pursuing our non-Title IV revenue which will help us meet 90/10 in the long term.

Before turning the time over to Peter, I want to emphasize that all of our operational initiatives have essentially the same goal: To help create an outstanding experience for students from lead to graduation and beyond. By the most important measure, graduate employment, we continue to help thousands of students reach their career goals. More than 83% of our graduates were placed in careers during calendar 2007, the most current measuring period. We are pleased with that result and will strive to increase our placement rate over time.

Now I’ll turn the time over to Peter to provide a fourth quarter operations review.

Peter C. Waller

I’ll start with the marketing area. For the fifth consecutive quarter we posted strong growth in new student starts. In the fourth quarter starts from continuing operations totaled 23,015 an increase of 11.5% compared with the fourth quarter of the prior year. Once again, this quarter we were encouraged that our growth was broad-based. All US continuing operations at both brand schools and online reported an increase in starts.

WyoTech continued its recovery reporting an increase in starts for the fourth quarter and for the year, the result of a more productive admissions team and an increase in show rates. Overall we remain confident that WyoTech’s turnaround is progressing as planned and we continue to expect positive start growth from the division in fiscal 2009 and beyond.

As we mentioned in our last quarterly call, the online division posted an extraordinary 66% increase in starts in the third quarter. Over the past several months however the online division has been disrupted by three successive changes in student lenders which reduced the rate of start growth in the fourth quarter. For fiscal year 2008 the division reported start growth of approximately 39%. In fiscal 2009 we plan to moderate online’s rate of growth while we assimilate the growth of the past couple of years and move the division’s largest operation to a new facility.

For the company as a whole, we expect total start growth of approximately 7% to 9% in fiscal 2009. This is consistent with the three-year start growth target of 6% to 8% that we provided at our Investor Day at the end of May. The slower growth rate in fiscal 2009 versus fiscal 2008 primarily reflects more difficult year-over-year comparisons and a slower growth in our online division.

In the first quarter of fiscal 2009 we expect total start growth of 4% to 6%. In the first quarter last fiscal year we generated record starts of over 28,000 making it a particularly difficult comparison. Again we’re planning to slow the online division’s growth.

The mix of medial channels that generated our start growth in the fourth quarter was fairly consistent with the past several quarters. Of total starts we derived 27% from referrals, 24% from television and newspaper advertising, 32% from the Internet, and 17% from all other sources. The media cost per start declined 19.4% in the fourth quarter compared with the same period last year. Over the past few quarters as you may recall, the media cost per start has declined by approximately 7% to 8% each quarter. The more substantial improvement in the fourth quarter of this year is the result of several factors.

First, we’re still working to calibrate the balance between media spending and lead generation. The fourth quarter is seasonally our weakest quarter and requires less spending. In the fourth quarter of this year we moderated spending and still generated approximately 534,000 leads. Media generated leads which exclude leads generated by referrals and high school reps were up 14% in the fourth quarter of fiscal 2008 versus the same period last year. We also believe that the weak economy is helping lead flow although given all of the factors involved, it’s actually difficult to quantify the impact.

Second, media costs were lower overall in part due to a weak economy and less demand for advertising space.

Third, we continue to achieve greater efficiencies associated with brand consolidation such as national advertising and more effective Internet lead management.

The total cost per start which includes all marketing and admissions expenses decreased 9.8% in the fourth quarter of fiscal 2008 compared with the fourth quarter last year. The decrease primarily reflects the lower media cost per start that I just described. In addition, we continue to focus on reducing rep turnover and increasing the productivity of the entire rep force. So for the reasons just discussed, total marketing and admissions expenses as a percentage of revenue declined to 23.5% in the fourth quarter this year from 27.6% in the same quarter a year ago, a decrease of 410 basis points. For all of fiscal 2008 marketing and admissions expenses fell 110 basis points to 25.9% from 27% in fiscal 2007.

In fiscal 2009 we expect to further achieve reductions in marketing and admissions as a percentage of revenue. In the first quarter of fiscal 2009 we expect marketing and admissions as a percentage of revenue to be higher than the fourth quarter but approximately 100 basis lower than in the first quarter of the prior year. Compared with the fourth quarter, the first quarter is seasonally a stronger quarter and thus requires additional spending. In addition, in the first quarter we are planning to expand our high school admissions rep force.

In the area of educational services, we’re also encouraged by our progress. Bad debt which is included in the educational services line item was 9.1%. However, this number includes the costs associated with the transition from the Sallie Mae’s private subprime lending program to our new ACCESS lending program. In a few minutes Ken will provide more detail on how the ACCESS program impacts bad debt and what we expect it to be going forward. He’ll also describe some changes we’re making to the ACCESS process that will help speed up the funding of the loans. By excluding the impact of ACCESS loans we believe bad debt in the fourth quarter would have been approximately 6.5% versus 6.2% in the fourth quarter last year. Using adjusted bad debt of 6.5% educational services as a percentage of revenue improved to 58.5% in the fourth quarter fiscal 2008 from 59.6% in the same quarter last year. Most of the improvement is the result of a higher average student population and the resulting leverage in school facilities and compensation expenses.

In closing, I want to reiterate that we’re very encouraged by our fiscal 2008 progress. Fiscal 2009 we plan to remain focused on the same fundamental priorities that Jack reviewed earlier. Over the past three years we’ve invested substantially in building a stronger organization and we now have tangible proof that those investments are paying off. We recognize that investors continue to look for margin improvement and we certainly share that focus. As our guidance on Investor Day suggests, in fiscal 2009 we expect sustained enrollment growth tor result in improved leverage and higher operating margins. In addition, the 90/10 relief in the Higher Education Act has mitigated a significant risk to our business for the next several years.

Now we’ll go to Ken for a financial review and guidance.

Kenneth S. Ord

I’ll begin with facilities data which excludes discontinued operations. The schools excluded from the calculation are as follows: The Canadian schools that we divested earlier this year, the Boston and Oakland WyoTechs, the Everest campus in Atlanta, Georgia, the Everest campus in Linwood, Washington, and one of the Everest campuses in Everett, Washington. After adjusting for these discontinued operations we ended the fourth quarter with a total of 4.2 million occupied square feet, approximately flat with the end of last fiscal year. Occupied square footage per student was 72 square feet at the end of June 2008, down from 79 square feet per student at the end of June 2007.

Moving now to enrollment data, again please note that this data is for continuing operations only. The total student population at June 30, 2008 was 69,211 students an increase of 12.8% compared with 61,332 students at June 30, 2007. As previously discussed the increase is the result of higher start growth. The average student population increased 13% in the fourth quarter fiscal 2008 compared with the same quarter last year. Of the total student population 10,546 students were exclusively online, an increase of 32% over last year. Total online course registrations which include both hybrid and exclusively online students totaled 38,470 in the fourth quarter of fiscal 2008, up 27.1% over the same quarter last year.

Turning now to the income statement, again the financial results I’m about to review are based on continuing operations. In addition, the results include a charge of $6.6 million. Of that amount approximately $4.8 million is related to a loss on student loan receivables associated with the Marietta and Jonesboro, Georgia campuses. These schools were branches of the Atlanta, Georgia campus which was closed and placed in discontinued operations. In addition we recorded lease termination costs of $900,000 related to student housing and a severance charge of $900,000.

Revenues for the fourth quarter were $274 million versus $231.6 million in the same period of the prior year, an increase of 18.3%. Our average revenue per student increased by approximately 4.7% in the fourth quarter of fiscal 2008 primarily reflecting price increases. For the fourth quarter of fiscal 2008 operating income was $4 million compared with a loss from operations of $5.9 million in the fourth quarter of fiscal 2007. Excluding charges from both time periods, the operating margin was 3.9% in the fourth quarter of fiscal 2008 versus 0.2% in the fourth quarter of the prior year.

The effective tax rate in the quarter was a benefit of 11.9% which includes a credit for taxes paid during the years 2004 through 2007. The credit relates to our Blairsville campus which is located in the Pennsylvania Keystone Opportunity Zone.

Income from continuing operations in the fourth quarter of fiscal 2008 was $4.8 million compared with a loss of $2.1 million in the same quarter of the prior year. The net loss from continued operations was $5.4 million in the fourth quarter of 2008 versus a loss of $6.7 million in the fourth quarter of last year.

Diluted earnings per share were $0.06 in the fourth quarter fiscal 2008 versus a loss per share of $0.02 for the same quarter last year. Excluding charges, diluted earnings per share were $0.11 in the fourth quarter of 2008 versus our previous guidance range of $0.08 to $0.10 per share. The weighted average number of diluted shares outstanding for the fourth quarter of 2008 was 86.1 million compared with 85.8 million for the same quarter of the prior year.

Moving to the cash flow statement, cash flow from operations was approximately $13.6 million for the 12 months ended June 30, 2008 compared to approximately $38.8 million for the same period in fiscal 2007. The decrease in cash flow from operations was primarily the result of an increase in accounts receivable and a decrease in prepaid tuition. The increase in AR is primarily the result of: First, classifying projected ACCESS loan amounts as AR until they are funded; second, delaying the disbursements of Title IV funds to ensure compliance with the 90/10 rule; and third, enrollment growth. I will discuss the ACCESS loan issue further in a few minutes. The decrease in prepaid tuition is primarily the result of timing issues and the transition from Sallie Mae private loans to the ACCESS loan program.

Turning to the balance sheet, at June 30, 2008 we had approximately $32 million in cash and marketable securities versus $114.8 million at the end of fiscal 2007. The fiscal 2007 total includes approximately $80 million in temporary borrowings to satisfy our financial responsibility ratio for the Department of Education. Long-term debt including the current portion as of June 30, 2008 was approximately $77.6 million which includes capitalized lease obligations of approximately $15.1 million.

Net accounts receivable and student note receivable as of June 30, 2008 were approximately $132.1 million versus $78.3 million at the end of fiscal 2007. As I said earlier, this is primarily the result of increase AR related to ACCESS loans delaying the disbursement of Title IV funds to ensure compliance with the 90/10 rule and enrollment growth. Net day sales outstanding for the fourth quarter of fiscal 2008 were 40 days versus 27 days for the fourth quarter of 2007.

I’ll now spend a few minutes reviewing a few issues related to student financing including the financial impact of HEA 90/10 relief, the accounting treatment for ACCESS loans, the impact of the ACCESS loan program on bad debt, and our expectations about the possibility of selling ACCESS loans to a third party lender.

First, the impact of HEA 90/10 relief. Several of you have asked whether the 90/10 relief included in the HEA will allow us to significantly reduce the amount of lending under our ACCESS student loan program. As you may recall, at Investor Day we estimated that ACCESS student loans would total approximately $95 million in fiscal 2009. Even with 90/10 relief we do not expect to reduce that amount. By definition students who have a gap to be funded through the ACCESS loan program have already maxed out on all other sources of funding including cash and Title IV. As Jack said earlier, we are very pleased to have the flexibility provided by the 90/10 relief in HEA. We are now in a much improved position to meet 90/10 over the next three to four years without resorting to substantial price increases or being forced to sell our ACCESS loans at an unattractive discount.

In terms of the accounting treatment for ACCESS loans, we have received concurrence from our independent auditors that the appropriate treatment for estimated loan losses associated with ACCESS loans is a discount to revenue. This is the same accounting treatment that we used under the Sallie Mae contract for discounted private loans. We continue to expect the discount to be 50% on these loans. For example, for every $1,000 ACCESS loan 50% or in this case $500 would be recorded as revenue. As a reminder, the bad debt associated with our previous loan program called STAR will continue to be treated as bad debt on the income statement. As of June 30, 2008 our STAR loan portfolio was approximately $20 million. We discontinued the STAR program in April.

In terms of the impact of ACCESS loans on bad debt, as reported in our press release this morning our fourth quarter bad debt was 9.1% of revenue. This figure includes approximately $0.05 per share in incremental costs associated with the transition from Sallie Mae private loans to our ACCESS loan program. We had previously guided that we expected such costs to be approximately $0.04 per share. Excluding the incremental costs associated with the ACCESS program, bad debt was 6.5% of revenue in the fourth quarter. As I explained earlier, until projected ACCESS loan amounts are actually funded they are classified on the balance sheet as accounts receivable, thus bad debt as a percent of revenue was elevated in the fourth quarter as we took our standard bad debt allowance on a higher AR balance.

We believe this is a transitional situation until the ACCESS loan program reaches a steady state about halfway through the fiscal year. As ACCESS reaches a steady state, more loans will be funded and then discounted against revenue by 50%. As this occurs we expect bad debt as a percent of revenue to decline. In the first quarter of fiscal 2009 we expect bad debt to range from 8% to 9% depending primarily upon the timing of ACCESS loan funding.

Peter mentioned earlier that we are changing the ACCESS loan process so that we can fund the loans sooner. Previously we didn’t fund the ACCESS loan until the student was approved for Title IV disbursement. Such approval can take up to three months. Under the new process which we began to implement earlier in the first quarter of fiscal 2009, we plan to fund the ACCESS loan shortly after the student is preapproved by underwriting. This should reduce the process to about 30 days.

In terms of the possibility of selling ACCESS loans to a third party lender, there are lenders willing to purchase our ACCESS loan portfolio but thus far none of these lenders have offered terms that we find attractive. Given the passage of HEA however, we may be able to negotiate better terms. We plan to begin selling the loans as soon as we can and will keep you informed of any significant developments. In the meantime we expect to carry the ACCESS loans on our balance sheet for the foreseeable future. In fiscal 2009 we expect to generate approximately $100 million in cash flow from operations which we expect to use in the funding of ACCESS loans of approximately the same amount.

Turning now to guidance, and again our guidance is based on current expectations. It is forward looking and actual results may differ materially as a result of the factors described in our public filings. In addition, the guidance I’m about to give pertains solely to continuing operations.

I’ll begin with fiscal 2009. For the year we expect start growth of 7% to 9%. We expect revenue to range from $1.12 billion to $1.25 billion. As we discussed at our Investor Day, in fiscal 2009 we expect to implement an average price increase of 8.5%. Most of this price increase went into effect on July 1 with the balance to be implemented throughout the fiscal year. It’s important to note that the price increase applies primarily to new students so we expect to see the benefit of the increase build throughout the fiscal year.

Diluted earnings per share are expected to range from $0.58 to $0.63. Our fiscal 2009 guidance includes stock-based compensation expenses and excludes any one-time charges that may occur over the course of the year.

Now let’s turn to first quarter 2009 guidance, again solely for continuing operations. We expect start growth of 4% to 6% in the first quarter. We expect revenue to range from $285 million to $290 million. We expect diluted earnings per share to be approximately $0.06 to $0.08. For purposes of first quarter guidance we assumed 86.2 million diluted shares outstanding. And the tax rate is anticipated to be 39.5%.

With that I’ll turn the time back to Jack for his closing remarks.

Jack D. Massimino

As we enter the first fourth fiscal year of our turnaround we believe that we are in a good position to achieve sustainable growth. Over the past three years we’ve made substantial progress on our top priorities. We’re building a strong leadership bench, improving employee retention, and investing in workforce development. We’re producing a greater marketing efficiencies and beginning to leverage our scale to the implementation of Ignite, Inspire and a new student information system. We’re expanding our core programs, rationalizing assets, and achieving solid student outcomes. We believe these initiatives will work in combination o help us drive sustained growth, better capacity utilization, and significantly better margins beginning in fiscal 2009.

Let’s move now to the question and answer session.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Sara Gubins - Merrill Lynch Global Securities.

Sara Gubins - Merrill Lynch Global Securities

For your student start growth forecast for the year, could you talk a bit about why you’re expecting start growth to ramp up during the course of the year given the slowed online growth and pretty tough comparisons throughout the year?

Peter C. Waller

We’re giving guidance of 7% to 9% for the full year and 4% to 6% in the first quarter. You’re seeing that ramp up. It’s mainly a function of rollover frankly. We had a particularly strong first quarter a year ago of those 28,000 starts and so we’re rolling over that target in the first quarter and as we go forward through the rest of the year we believe we’ve got some accounts that are helping us. In the first quarter we’ve also got a little bit of phasing going on for WyoTech between the first and the second quarter. So that’s going to give us a little stronger push into the second quarter versus the first quarter. It’s a granular plan that we’ve put together program by program and division by division and this is the level of expectation that we’ve set as we put our plan together for the year. Also, as we go through the year as we’ve explained before Sara, we’re introducing new programs. At the Investor Conference we shared with you that we introduced 80 new programs in fiscal 2008 and at the Investor Conference we shared a projection of 120 new programs during fiscal 2009. Again, those ramp up as the year progresses. So a combination of rollover, new program ramp up, and a little bit of phasing between the first and the second quarter. Does that help you?

Sara Gubins - Merrill Lynch Global Securities

In terms of your marketing costs per start, it looks like you’re expecting that to be up in the first quarter on a year-over-year basis. I’m wondering if that’s because of the additional enrollment reps focused on high school and whether or not you expect to see marketing costs per student down in other quarters during the year on a year-over-year basis?

Peter C. Waller

First of all, we definitely project marketing admissions costs to be down year-over-year on a full fiscal basis as a percentage of revenue. We achieved that quite significantly in fiscal year 2008 and at the investor conference we shared the three year plan of 300 or 400 basis points over the three years and we expect a fair share of that, the corporate share of that to take place in fiscal year 2009. And we expect that to be frankly, fairly linear as the year goes on. We will be showing marketing admissions as a percentage of revenue lower in the first quarter than a year ago. I’ll give you the percent numbers in just a bit. We’re actually confident on where we are from – the two major elements of that are obviously media costs and rep costs. From a rep cost point of view, we’re fundamentally holding our reps at about the same number of reps and gaining more leverage out of them. We’ve got enough leads with those reps so we’re holding those reps apart from the fact that we’re adding high schools which will be an incremental cost in the first quarter which will amortize as their leads start to flow as the year goes on.

Then, on the media cost side of things, as I described to you in my words a little earlier, the fundamentals are in very good shape. We are getting our sustainable savings through national cable. Our Internet is looking very good from a cost point of view. We will be incurring some, and we put it in to our plan, some sort of hiccup on this directionally with the political but that really will be a short term phase we’ll move through after that. So I think between marketing reps and media costs we’re confident on where we are from a percentage of revenue and that margin improvement.

Sara Gubins – Merrill Lynch Global Securities

Last question and then I’ll turn it over, can you give us an update on how cash collections are going so far?

Jack D. Massimino

Cash collections I think Sarah are not going quite as well as we had anticipated. We are beginning to see, as I think some of you suspected, as the economy has changed and gas prices have gone up and cost of living have gone up, we’re beginning to see fewer students step forward to make the kind of cash contributions we were seeing early on. Interestingly enough for us, as you think about where we are, most of our students are in a diploma program. Our average diploma program costs about $13,800 all in including books, hence they’re fully Pell eligible, they’re eligible for about $14,400 and as Ken said earlier, for a student to have an access loan they had to have had cash and all of their Title IV they were eligible for in the program. So, a number of our students still have eligibility under Title IV as a result of the cash commitments they made early on. If they can’t make those cash commitments or new students coming in can’t come in with cash commitments at that level, there’s still room within the Title IV funding to accommodate them.

Operator

Your next question comes from Jeffrey Silber – BMO Capital Markets.

Jeffrey Silber – BMO Capital Markets

I just wanted to go back to the bad debt issue. Was there something specifically that happened in the last few weeks of the quarter that caused it to spike so much? I mean, it doesn’t sound like you were expecting it back in May at your investor day. And also, if you could just let us know what you’re looking for in terms of bad debt expense in terms of a percentage of revenues for the year on your guidance.

Kenneth S. Ord

Jeff, I think we indicated early on that we expected the impact of student lending to be about $0.04 a share and that we said that this would be a combination of potentially a discount to revenue or coming through the bad debt line. As it happens at the very beginning of this process, it came through bad debt so as I indicated earlier, the $9.1 was really $7.1 million of the incremental cost associated with student lending which would leave about a 6.5% bad debt for an apples-to-apples comparison in your own kind of work. As we move forward in time that frankly bad debt will move to the discount line as we fund these access loans. Until we fund them, we don’t take the actual discount which is a discount to revenue, you see it as a bad debt amount. This was anticipated and is really tracking pretty close to what we thought.

Jeffrey Silber – BMO Capital Markets

So just so I understand, you thought it was going to be a net to revenues as opposed to an expense?

Kenneth S. Ord

Well no, we knew starting out it would be a combination of the two and based on the actual funding it would split between the two lines. It was a little bit more in the bad debt column than the discount to revenue than we anticipated as funding of these loans took a little longer than we anticipated but, the totality of the amount was again, every close to what we anticipated.

Jack D. Massimino

Jeff, I would add one thing to that as well. When you think about how we dealt with Sallie Mae on our discount to revenue, this is really no different. If we had a loan with our students we would take that as a discount to revenue as long as it was funded. If during that period between the time the loan was written up and the time it was funded the student dropped and we accrued that revenue, we would have run that piece of revenue through bad debt. This is really no different it just took us a little longer on the front end to get our loans funded than we had originally anticipated and so some of those dollars were sitting in that receivable and they were clicking away on a bad debt line.

As we get better at this, and one of the things Ken said earlier is we’re speeding up our process. We initially decided to tie our own access loans to the Title IV lending so when a student receives Title IV funding they’re going to receive access funding at the same time. We’ve now accelerated that process so if access funding occurs we think within a 30 day period of time, that will speed that process up and move those in to a discount against revenue as opposed to flying through to the bad debt line. But, as Ken said on balance, we’re right where we thought we would be. We thought it was going to be a $0.04 impact, it turned out to be a $0.05 impact in the quarter.

Jeffrey Silber – BMO Capital Markets

Then just a quick follow up in terms of the access program, in order to get to the $95 or $100 million is that something we’re going to see gradually throughout the year or should we see more of that in the fall with the peak enrollment period?

Jack D. Massimino

You’ll see it in the enrollment period, there’s no question about it, the more students the more access required there will be so the fall period will be that higher point and then it should – typically the fall is our highest, January is our second highest and then as we get in the summer, our enrollments slow down a little bit so yes, you’ll see it move that direction.

Operator

Your next question comes from Trace Urdan – Signal Hill.

Trace Urdan – Signal Hill

Just to kind of put a cap on that the bad debt is simply going to reflect the period between when the student enrolls and when the loan is fully funded and processed is that correct?

Jack D. Massimino

That’s correct.

Kenneth S. Ord

That’s correct.

Trace Urdan – Signal Hill

Then you also suggested that we would continue to see it at a spiked level for the first two quarters of the fiscal year and then settle down to a lower level?

Kenneth S. Ord

Right. Until it’s fully operational in terms of the funding being at a steady state, at that point we should get back to more traditional bad debt level which we would think would be the second half. Until that period, you’ll see it both in the discount and the bad debt lines and we gave you guidance in the first quarter we anticipated bad debt to be about 8 to 9 which would be having then probably the difference of roughly 6.5 to that 8% to 9% being that incremental student financing cost plus a little in the discount to revenue line.

Jack D. Massimino

Trace, I think it’s also important to remember this hit these lines on a pro rata basis. So, if a piece goes through bad debt, there’s not an equal amount going through a discount. So, if there’s a five point hit here its either going to go through bad debt or it will be a discount from revenue, it’s not a combination of the two to get to a higher number. Do you follow that?

Trace Urdan – Signal Hill

It goes in to one place and then it moves to the other?

Jack D. Massimino

That’s right. It’s not double counted.

Trace Urdan – Signal Hill

Then my follow up question and I apologize if this is kind of obtuse, but given the flexibility that you guys have now with HEA preauthorization, is there not some mechanism by which you could sort of delay the billing of the student for this portion of their tuition until that loan is processed and sort of avoid having to send them through the bad debt line all together? Do you see what I am saying?

Jack D. Massimino

No. No, we can’t do that because we recognize revenue as a student’s going through class and so once they’re enrolled in a class and they’re sitting in a seat, we start recognizing revenue.

Trace Urdan – Signal Hill

But can’t you charge the Title IV revenue up front and the loan revenue further in to the period of students in school?

Kenneth S. Ord

No, there are pretty strict guidelines and rules around Title IV funding and the whole process of what you can actually be entitled to in terms of that Title IV amount. There’s a disbursement period and then there’s a return to Title IV calculation, all of which gives us specific rules about how much of the Title IV we can recognize over the course of that student’s education.

Trace Urdan – Signal Hill

Then maybe could I just ask Peter to maybe go through one more time what the point about the slowed online growth and what’s different now than was true at the time of your investor day to sort of impact that part of your business and then I’ll let you move on.

Peter C. Waller

First of all, let me step back for a second, we enforce that online is still growing very strongly. We talked about it at the investor day, 66% growth and we are 39% for the year and I can assure you that the growth plan we’re achieving online is ahead of the company average. It’s a strong performing business and we’re very confident about its future. One of the things we know about online is we have quite a bit of control actually in terms of the way we can grow that business. It’s directly related to how many leads you get off the Internet and you buy those leads frankly, and then the conversion rates and how many reps you put against it. So, one can control the front end as long as one is operationally tight. Then, we’ve got student services in the middle of the P&L and the show and retention and then placement.

We’re going through a very past period with online and we’re doing two things operationally within this coming year which are going to be important dynamics to continue to set us up for the future. First of all, I referred in the script Trace to the new facility and we have a beautiful new facility 10 minutes from our current location in Tampa which is much more designed around a core center. We’ve grown so fast in our current Tampa facility it’s not optimized for a core center layout and that transition will be taking place in November. We want to make sure that we have a stable work team during that period of time, that we have our systems in place, so yes, continuing growth but we’re not looking for the 66% type rates that we were getting in the third quarter. That’s one thing to absorb.

The second thing to absorb is that Unify, our campus [inaudible] operating system will also be moving to online during fiscal year 2009. We’re scoping that out currently, it’s not quite the same obviously as the ground schools and we want to again, make sure that we have not stability in terms of flat situation on growth but a moderated growth pattern so that we can readily absorb both Unify and the new facility. So we’re moving across, we’ve increased significantly our investment of people on student services to encourage us to take retention to the next level and create more graduates. We have very strong placement rates, actually we have the highest placement rates in the company coming out of the online business for fiscal year 2008 so we’re feeling very good about the online business. It’s not that far off frankly, where we were at the investor conference. At the investor conference we certainly weren’t seeing straight line on 66% which is our third quarter number and we were looking at very significant growth in to the year which we’re still going to deliver against.

Trace Urdan – Signal Hill

So once we’re through those transitions would you expect to bring the growth rates back up again?

Peter C. Waller

Yes. I think we’re going to be continuing to grow the online business and we’ll work through where that growth is. As I say, we have a model amount of control about our growth rate on online. We want to make sure that as we’re doing that growth that we’ve got great connectivity with our students, that we’ve got terrific retention, and obviously once they’re out that we’re placing them appropriately and that we’re really delivering first class outcomes. So we have got controls around that so we’re feeling very good about it. We have a Phoenix operation, a Tampa operation and both are doing very well. This is a growth vehicle so strategically I guess steering back to the strategy Trace, strategically in the investor conference we very much outlined online as a growth vehicle and this is a disproportionately a high growth vehicle for us as a company both in 2009 and the outgoing years.

Operator

Your next question comes from Mark Marostica – Piper Jaffray & Co.

Mark Marostica – Piper Jaffray & Co.

I just wanted to go back to the bad debt issue again or access loan program and I’m trying to get a better idea of why it takes a half year time lag to get to steady state where you’re funding access loans in concert with Title IV loans?

Kenneth S. Ord

Mark, going in to a little more detail, one of the reasons its going to take that amount of time is as I mentioned in my comments that we had a previous program called Star Loans which we discontinued in April. Frankly, for the month of March and the first part of April, we were actually funding this Sallie Mae gap using those Star Loans. Those Star Loans will never have a discount to revenue so all frankly, the bad debt we anticipate being associated to these will be recognized over the life of these loans or the life of the student which we think then will take going through the first half of this fiscal year. So, that’s the primary reason it’s going to take a little longer than you might anticipate otherwise.

Mark Marostica – Piper Jaffray & Co.

Then your comment on cash collections Jack as I understand it coming in a little bit below your previous expectations due to the economy. I’m curious whether or not that changes your thoughts around the size of the access loan program in fiscal 09 at $95 million given those cash collections are going to come in lower than where you originally thought?

Jack D. Massimino

Mark, I don’t think we think that at all. We think that the access loan program is going to be right in that same $95 to $100 million range. As I mentioned earlier, a significant portion of our students don’t have an access loan today they have cash and Title IV. As we go forward now, as new students come in and they’re not able to put up as much cash, Title IV will cover the balance of the program for them. As I mentioned, our diploma program, as I said, they run about $13,800 a year in tuition and Title IV if you’re fully Pell eligible will be about $14,400 and then on our linear programs, students who take eight units for example are fully covered under Title IV so we’re not anticipating any move up in the amount of access monies that we’re talking about.

Mark Marostica – Piper Jaffray & Co.

Last question and I’ll turn it over, bad debt of 6.5% in the quarter excluding access was up some from Q3 and I’m just curious if you could give us a little color on what drove that sequential increase.

Peter C. Waller

Good question, it’s pretty straight forward thought, it has to do with the speed of the packaging particularly on the online business in face of student lender changes. So, what happened was that online in particular had three changes on their student lenders for the loans and as a result of that they had delays in their packaging and students who were delayed in packaging they then withdraw or leave school and we’re having to take that as a bad debt charge. So, it was delayed in packaging particularly online and as you can imagine I’m sure with those online students having to be packaged and repackaged again long distance it wasn’t like you could go find the kids in class and bring them in, it was particularly tough situation. So, we did have a spike in online bad debt as a result of that packaging issue.

Jack D. Massimino

Mark, we went from College Loan Corp to Student Loan Xpress to Sallie Mae’s Carnegie program and we had to roll them all through that. At the same time, we were experiencing like in the third quarter 66% start growth so there was a lot of pressure on packaging in the online business.

Peter C. Waller

We’ve previously said the bad debt is in the 6% to 6.5% range and I’m certainly not satisfied as a leader here with a 6.5% ongoing basis and we’re driving very hard against packaging, we’re moving more in to stable state now with the lender situation we’re a little bit more certain.

Operator

Your next question comes from Gary Bisbee – Lehman Brothers (U.S.)

Gary Bisbee – Lehman Brothers (U.S.)

A question on the cash flow and I guess it’s got a couple of parts, but did you say that you expect cash flow from operations to be $100 million approximately in fiscal 2009 but that whole amount will be used to fund the loans. So, what is that going to mean? By funding loans your account receivable will grow in the working capital used cash. Are we thinking cash flow from ops after all of your lending activities is going to be basically zero? I’m a little confused around what you said.

Kenneth S. Ord

After expected cap ex of about $50 million and student lending that would be about zero, yes.

Gary Bisbee – Lehman Brothers (U.S.)

Okay so free cash flow would be but it’s not going to be negative?

Kenneth S. Ord

No.

Jack D. Massimino

No.

Gary Bisbee – Lehman Brothers (U.S.)

In one of the explanations for the higher accounts receivable you said there were some delayed disbursements of Title IV money due to the 90/10 compliance. Now that that is no longer an issue are you going to get those funds or have you already this quarter or will you right away? So, in other words, is that a timing issue that bounces back?

Kenneth S. Ord

Yes Gary, we’ve already gotten those funds back.

Gary Bisbee – Lehman Brothers (U.S.)

Can you tell us how much it was?

Kenneth S. Ord

Yes, it was about $27 million.

Gary Bisbee – Lehman Brothers (U.S.)

Then just the last question, given that more of the bad debt came in as bad debt as opposed to a discount to revenue. I guess I would have expected revenue growth to be a little higher and maybe the revenue per student to be a little higher given how that trended the last couple of quarters. Anything else going on there that we should think about?

Kenneth S. Ord

Yes, I mean technically when we gave you guidance before we had not included Georgia or one of our Washington campuses in that continuing operation – we had included Georgia and one of the northwest campuses in that continuing operations. In the end, we put both of those in discontinued ops so the revenue associated with those two campuses was outside of the continuing operation guidance number that we gave you so that changed it by a little bit amount. So, we would have been in the guidance range had we not made that change.

Operator

Your next question comes from Kelly Flynn – Credit Suisse.

Kelly Flynn – Credit Suisse

A couple of questions, the tax elections issue that you mentioned, is there a possibility that could cause you to revisit the 50% discount that you’re applying to the access loans?

Jack D. Massimino

No.

Kelly Flynn – Credit Suisse

Why not?

Jack D. Massimino

The discount is directly related to the experience we’ve had on our other loan portfolios, the Star program and the experience that Sallie Mae had on our subprime debt component Kelly. It really didn’t have any direct relationship to our cash collections.

Kelly Flynn – Credit Suisse

Right but, what I’m saying is if cash collections are getting worse it implies the overall experience is changing so that might imply that the past is not a good indicator for the future.

Jack D. Massimino

I see where you’re headed. I think it’s really early to figure that out I mean we’re just beginning the feel for this cash collection issue. We’re collecting as much cash as we collected historically, it’s just about how much cash we’re collecting over and above that amount is the question we’re asking ourselves. So, we’re not seeing a visible decrease in the amount of cash we’re collecting, we’re just not collecting as much cash as we had anticipated.

Kenneth S. Ord

And this goes to upfront when the student kind of volunteers how much cash they can pay during their school experience. Now, this isn’t quite as much as we would have anticipated and therefore it’s not a matter of this is kind of how much they want to pay versus once they have a loan in place and collecting that cash, that’s a different cash collection issue.

Kelly Flynn – Credit Suisse

A different question on pricing and revenue per student, I know you said that you put through an 8.5% price increase but you said that only applies to new students. Can you help us with the average price increase we should use for 09? And then, I guess another number, revenue per student, what are you assuming for 09 recognizing that that number will be impacted by the access discount?

Kenneth S. Ord

I think for 09 in total, that will come through at about 6% in terms of an average incremental revenue per student.

Kelly Flynn – Credit Suisse

So that’s netting pricing as well as access?

Kenneth S. Ord

Exactly.

Kelly Flynn – Credit Suisse

Then just a final quick one, for online starts I think you gave full year but can you just tell us what it was for Q4? Starts growth for online?

Jack D. Massimino

Kelly we’ll give you a call back and get it for you.

Peter C. Waller

We’ll get it for you off line.

Operator

Your next question comes from Amy Junker – Robert W. Baird Company.

Amy Junker – Robert W. Baird Company

Just a quick follow up I guess on the marketing expense. I’m trying to understand with respect to your guidance, are you kind of assuming that the current environment which you described as fairly attractive right now because of the weak economy, that that’s going to continue? I’m wondering what’s the risk if advertising costs go up and what that impact could be to your thoughts on marketing spend?

Peter C. Waller

We put together our three year plan Amy based on a fairly conservative view where advertising as a media industry was going to go so we were not assuming any major decrease in media costs as a result of the economy. We are playing the effectiveness and efficiency game which we know has been working for us over the last 18 months, the national advertising buy is better accretive, etc. So that was our commitment to the 300 to 400 basis points over the next three years and that’s how we’ve delivered it in the last year and how we delivered it in the first quarter and so on. We do see the softness in the media costs frankly as an opportunity on that, too hard to dimensionalize at this stage but we’ve got two things that are working for us I guess from a macro point of view, one is the economy depressing overall media buying costs in the television market in particular.

There are a lot of hype around the upfront a few months ago form the networks but actually that proved to be hallow. The networks are having a rough time, national cable is having a rough time and the local markets are also getting neglected advertising so there’s one on the media side. The second thing is what the economy is doing to general appetite for further education and career education in terms of lead flow. Again, putting a number around it is difficult but those two macros we see as top spin to our fundamental plan that we’re committed to on the basis of our solid programs on efficiency and effectiveness improvements.

Operator

Your last question comes from Robert Craig – Stifel Nicolaus.

Robert Craig – Stifel Nicolaus

Just a follow up on that online growth side, what would you expect the growth to be this year? I think you mentioned 39% for the year and it still should grow but, where should we be looking for it in overall growth in 09?

Peter C. Waller

We weren’t planning to give the number but since Bob you’re being persistent, about 20%, just north of 20%. But, getting back to Trace’s question earlier, that’s very healthy it’s obviously significant above level growth rates. So, north of 20% is where we’re planning it out.

Robert Craig – Stifel Nicolaus

Last one, you didn’t mention I think, or at least quantify the WyoTech start, I was wondering if you could perhaps do that and make some commentary regarding show rates? Also too, if you can give us some idea where the population at WyoTech stands versus a year ago? Is it still down?

Peter C. Waller

First of all let me go generals rather than specifics because we don’t really want to get in to the actual numbers on WyoTech, but I’ll tell you in the fourth quarter we had strong growth at WyoTech both in terms of big boxes as well as the community schools so we are very encouraged by what we saw there. Obviously, the fourth quarter starts at the lowest starts of the year but that was a good trend and I think it showed to us that our admission engines is kicking in well. We’re looking at WyoTech, big boxes from a total first half of the year basis because last year we did do some phasing between October and July that was a little unusual. We’re encouraging students very strongly to come in to July rather than October. We’re seeing that over the July/October period which the two big starts will be up significantly versus a year ago and we’re very encouraged by the pipeline of enrollments that are coming through. That’s really where we’re at in terms of WyoTech. The fundamentals are encouraging.

In terms of actual population at WyoTech I think we’ll kind of be sort of turning the corner now is really where it’s at. By the time we get through the first half of the year we’ll be up versus the year ago and I’d expect that coming out of the first half of the year our net population will be up versus a year ago. We’re encouraged, we see what’s going on in the industry on it and we frankly think we’ve got our act together. We know that our operations are very strong at WyoTech from our retention point of view, from a placement point of view, from a financial point of view in terms of packaging, etc. We know that our show rates are up significantly versus a year ago. The WyoTech Guide program is really delivering big time for us and we’re very encouraged by what we’re seeing at the admissions site from an enrollment point of view.

Operator

I would now like to turn the call over to Jack Massimino for closing remarks. Please proceed.

Jack D. Massimino

We want to thank everybody who participated on the call today and look forward to providing with an update of our progress when we announce our first quarter results in early November. Thanks everybody. Talk to you soon.

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