Career Education Corp. Q409 (Qtr End 12/31/09) Earnings Call Transcript

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Career Education Corp. (NASDAQ:CECO) Q4 2009 Earnings Call Transcript February 17, 2010 5:00 PM ET


John Springer - Senior Vice President Finance & Investor Relations

Gary E. McCullough - President, Chief Executive Officer & Director

Michael J. Graham - Chief Financial Officer & Executive Vice President


Bob Craig - Stifel Nicolaus & Company, LLC

Jeff M. Silber - BMO Capital Markets-US

Sara Gubins - Bank of America Merrill Lynch

Gary E. Bisbee - Barclays Capital

Amy Younker - Robert W. Baird & Co.

Corey Greendale - First Analysis

Patrick for Kelly Flynn - Credit Suisse

Bob Wedenhall - Royal Bank of Canada

Analyst for Mark A. Marostica - Piper Jaffray

Analyst for Susan Stein - Morgan Stanley


Good afternoon, ladies and gentlemen, and welcome to the fourth quarter 2009 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to Mr. John Springer. Mr. Springer, you may begin.

John Springer

Thank you, John, and thank for joining us on our fourth quarter 2009 earnings call. With me on the call this afternoon are Gary McCullough, our President and Chief Executive Officer, and Mike Graham, our Chief Financial Officer. Following remarks made by management, the call will be opened for analyst and investor questions.

This conference call is being webcast live on the investor relations section of our website at A replay will also be available on our site.

Now, let me remind you that today’s press release and remarks made by our executives may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are based on information currently available to us and involve risks and uncertainties that could cause our actual future results, performance and business prospects, and opportunities to differ materially from those expressed in or implied by these statements.

These risks and uncertainties include, but are not limited to those factors identified in our quarterly earnings releases, our annual report on Form 10-K for the year ended December 31, 2008 and our quarterly and other filings with the Securities & Exchange Commission.

Except as expressly required by the securities laws, we undertake no obligation to update those risk factors or to publically announce the results of any of these forward-looking statements to reflect future events, developments or changed circumstances, or for any other reason.

Please note that in the fourth quarter, we completed the teachout of six campuses that had been reported within our transitional segment. Accordingly, the results of operations for these six campuses are now reported within discontinued operations.

We adjusted quarterly financials for 2008 and 2009 for continuing operations on this new basis have been provided as an appendix in this afternoon’s release.

In addition, the financial operating for the fourth quarter and full year 2009 and 2008 include significant items that impact year-over-year comparability.

As a result, unless otherwise noted, the operating and financial measures discussed on this call reflect results from continuing operations excluding these significant items.

A reconciliation of the non-GAAP discussion to our announced GAAP results can be found as an exhibit in last night’s news release, which is also available on our website under the Investor Relations tab.

Finally, as a reminder, we will be hosting an analyst and investor day tomorrow, February 18, starting at approximately 1:00 p.m. Presentation materials and live webcast will be available and can be accessed by visiting the Investor Relations section of our website.

With that out of the way, now let me turn the call over to Gary McCullough.

Gary McCullough

Thank you, John. Good afternoon everyone and thank you for joining us on this afternoon’s call. In keeping with the way we historically handle these calls, I’m going to start with a brief overview of our fourth quarter and full year 2009 results.

When my remarks are concluded, I’ll turn the call over to Mike Graham, Executive Vice President and Chief Financial Officer who will provide more detail.

I want to give a couple minutes of a bit of perspective as we enter 2010. We’ve made great strides and have repositioned the company for sustainable growth and we’ve overcome a number of challenges along the way. A number of changes across our organization, changes that have impacted each and every one of our institutions; however, one thing hasn’t changed. That is the commitment of each one of our nearly 13,000 employees toward our purpose of changing lives through education.

In 2009 alone, we enhanced the lives of more than 116,000 students and last year we graduated over 47,000 students, the highest number of graduates in one year in our company’s history. By this time next year, we would have graduated more than 500,000 students since the company’s founding. As I approach my third (thirtieth?) anniversary with the company, I can tell you this is the legacy that makes me proud and makes each one of our employees proud.

A few years ago, we developed and adopted a set of core values by which we would strive to operate. The first will be students that are employee focused. Inaudible…hold their values more closely. The employee-focused approach has enabled us to reduce turnover by 68% since 2007 and it’s our collective student incentive approach coupled with the adaptability we have shown as an organization that are behind the strong financial performance we’re reporting today.

Now let me turn to our results. In the fourth quarter, student population grew 21% to 116,000 students marking our seventh consecutive quarter of accelerating the student population growth.

Our primary objective in 2009 was to generate consistent growth across our full institutions. As of the fourth quarter, AIU, CTU, health education, culinary arts, and international all experienced double digit growth in student population. This broad acceleration of population growth drove another meaningful improvement in our financial performance.

In the fourth quarter, revenue grew by 19%. Operating income was $97 million dollars and grew over 95% from the fourth quarter of 2008.

Operating margins expanded by 740 basis points to 19.1%. Earnings per share from continued operations increased 80%.

On last quarter’s call, I mentioned that a full year basis, we were on target in 2009 to get the low end of our 2010 operating income milestone range of $225 to $270 million. Due to continued strong performance in the fourth quarter, our operating income for 2009 was $252 million, right at the midpoint of the 2010 milestone we communicated in the first quarter of 2008.

In addition, we continue to teach out the six institutions within our traditional segment in the fourth quarter. The teach out process is largely complete. Only AIU remains within the transitional segment.

In 2008, to teach out these campuses was very difficult, but right thing to do for the company. The process was long, challenging, and expensive; however, we elected to teach out the schools, because it was also the right thing to do for our students. We provided them the opportunity to complete their education rather than simply closing the doors and walking away.

I’d like to extend a public thank you for the educators and administrators involved in this process over the last two years. They conducted themselves professionally and they exemplified our commitment to being student-centered.

Now let me turn to the quarter by segment. Health education continued a strong track record of growth with a 32% increase in the student population. In the fourth quarter, we furthered our ground expansion strategy by opening four new health campuses bringing a total number of new health campuses open in 2009 to seven.

In 2009, we continued to expand geographically by adding to our east coast to the conversion of two transitional schools, one in Boston, Massachusetts, one in Farmington, Connecticut, and through the opening of a new campus in Orlando, Florida.

We also opened our first health education campuses in Michigan with one in Dearborn and another in Grand Rapids, and began to expand further west with the addition of campuses in Phoenix, Arizona, and San Antonio, Texas.

The seven new health campuses openings represent a 29% increase in the number of health locations in 2009 and provide a strong platform for future growth.

Within the university segment, student population grew 23% in the fourth quarter, while new student accelerated to 23%.

For the last 18 months, we made a number of significant business operations changes. Those changes enhanced our effectiveness and efficiency. Like in the last quarter’s call, we expect stronger student interest. In the fourth quarter, new student stock growth improved to 14% in AIU and 30% in CTU. Additionally, on last quarter’s call, I indicated we would maintain higher rates of advertising investment as we exited the year. Based on visibility into the first couple months of the year, we expect the first quarter new student start growth to continue to accelerate at both AIU and CTU giving us good momentum as we start 2010.

Now let me update you on the status of AIU and the higher learning commission of HLC.

The HLC has completed the advisory visit and AIU has been advised that the (?) team will report to the higher learning commission in the first quarter. Meanwhile, AIU is continuing to prepare for the focused visit which is yet to be scheduled.

Beginning this month, AIU has completed and introduced the new credit hour structure for its high level of bachelors and masters degree programs. That process has been underway for quite some time. The new structure is in place for all their students as of the February student start and is also available to existing online students if they so choose.

I want to reemphasize something the AIU has said before. AIU has always been and will continue to be committed to offering educational opportunities that are in accord with the best practices of American higher education.

As investors, you can read the press releases and the public statements, but what you don’t see is the effort and the commitment of Steve Tober, AIU’s chief executive officer and the AIU team.

2009 was a challenging year at AIU on a number of fronts. I’d like to thank the entire team for their hard work and dedication in navigating these challenges while also delivering on AIU’s commitments to its students in that bit of a fashion.

AIU’s new senior enrollment numbers and improved business fundamentals are tangible results of their team work.

Within culinary arts, student population grew 31% in the fourth quarter, up from 21% growth in the third quarter of 2009. This was due in part to the new 21-month program in which over 20% of our culinary student population is now enrolled.

Last month, we transitioned the (?) blue name at almost all of our campuses nationwide. As I said last fall, this will give us a more unified brand presence and allow for greater marketing and communications efficiency.

Within international, we ended the year with another double digit increase in student population. This is a testament that the core strength of our INSEEC and Marangoni institutions in their markets.

In 2009, we made investments at each institution to ensure sufficient capacity to accommodate their continued growth.

Work in progress as we begin the year is art and design. We made important changes to align calendars and curriculum across these institutions, which helps stabilize the student population in 2009 and we grew operating margins to 13.8%; however, it’s clear that we’ve got more work to do to position art and design for future growth and we’ll talk more about art and design tomorrow.

Overall, I continue to be proud of the profits we made as an organization. We reached our original 2010 milestone objectives one year early and we have positive momentum as we begin this year.

Now let me turn the call over to Mike who will provide more detail on our financial.

Michael Graham

Thanks, Gary. Results for the fourth quarter and the full year 2009, let me begin to remind you that in the fourth quarter we completed teach out of the six campuses that have been reported within the transitional segment.

The results in operations for these six campuses, including a non-cash charge of $44.1 million, which is our estimate of the aggregate remaining real estate obligation which we paid over the next nine years are now reported within discontinued operations.

Discontinued operations also reflects the results of operations for campuses that had ceased operations or sold prior to the fourth quarter of 2009. (?) schools which expand over $200 million dollars of operating losses in the past five years.

As Gary mentioned earlier, our AIU LA campus remains the only school operating within the transitional segment.

Also, as you review our results, there are a number of items impacting our year-over-year comparability for the fourth quarter and our full year 2009, which are highlighted in our table in the press release and available on our website under the Investor Relation’s tab.

For the fourth quarter 2009, GAAP operating income of $97 million included unused base charges of $14.3 million or $0.11 per share. $5.3 million of this charge was in our transitional segment. $3 million was in our AIU segment our university segment, and the remainder across the business units.

$2.2 million or $0.02 per share benefit resulting from the finalization of our estimated annual incentive plan payout due to our operating plan over performance, which we discussed in the third quarter. The reversal of $2 million is spread similarly to the details we gave you in our third quarter for the original charge.

Finally, the $12 million or $0.09 per share of benefits, payment we received for the termination of certain insurance policies. That is reported within the corporate segment.

For the Q408, the items were a $1.9 million or $0.01 per share charge for unused space. Severance and (?) of $1.5 million or $0.01 per share, and $3.6 million or $0.03 per share charges related to legal settlements.

Unless otherwise noted, my discussion of our earnings and the results during the remainder of this call would exclude these items.

Now, our results. In the Q409, all revenue was $507.8 million dollars, an increase of 19% over the prior year quarter.

Operating margins improved to 19.1% in the quarter, representing a 580 basis point improvement over last year’s fourth quarter.

For the full year 2009, revenue increased 11% and full year operating margin was 13.7%, the highest level of operating margin since 2005.

Now let me review the segments. In university, fourth quarter revenue was $216.5 million, an increase of 22% over last year, driven by 23% growth from both student population and new student starts.

Operating income was $58.4 million, an increase of 35% from last year’s fourth quarter as operating margins expanded by 260 basis points from last year’s 27.0%, the seventh consecutive quarter of operating margin improvement.

As Gary mentioned earlier, we continue to have strong student interest in the fourth quarter and invested our advertising dollars accordingly.

As this highlight of advertising investment dampened, the rate of margin growth from the fourth quarter, we expect this investment another sequential increase in new student start growth for both AIU and CTU in the first quarter of 2010.

Revenue for AIU was $99.8 million, an increase of 14% for the fourth quarter 2008, reflecting a 15% increase for student population and a 14% increase in new student starts.

AIU operating profit in the quarter was $23.9 million up 28% versus last year’s fourth quarter, resulting in operating margins of 23.9%.

CTU finished the year with another strong quarter with revenue of $105.5 million up 33% from the fourth quarter of 2008 reflecting a 29% increase in student population and 30% in new student starts.

Operating profit at CTU was $31.7 million in Q4, up 39% versus last year. Operating margin was 30%, up 130 basis points over the prior year.

Now for culinary and arts, revenue increased 18% to $99.1 million, a 31% increase in student population. Culinary and arts operating income was $15.4 million in the Q4 as operating margin expanded to 16.9%. As you may recall, this fourth quarter was the first full quarter benefiting from elimination of royalty payments as a result of the Cordon B(?) N.A. lights in September. This added 500 basis points of margin in this quarter.

Health education finished the year with a 29% increase in revenue, driven by 32% increase in the student population.

Operating income was $16.1 million in Q4 and operating margins were 18.8%, which included $5.3 million of losses in the quarter from the seven start-up campuses.

Q409 for our international segment, the revenue was $45.1 million, up 26% from last year’s A4, including approximately $2.1 million benefit from foreign currency.

International operating income was $8.9 million in the fourth quarter and this operating income included a $3 million pre-tax charge to correct prior period (?). Excluding this charge, operating margins would have been 26.4% in the Q4, up 370 basis points from the same period last year.

Art and design revenue increased 3% in the quarter as student population was essentially flat to last year.

Operating income was $12.7 million in Q4, as compared to $10.9 in last year’s fourth quarter.

Now let me update you on our financial position. The company continues to have only modest use of our internal student payment plans with total balances as of December 31, 2009 of approximately $44 million dollars, up $7 million sequentially from Q3 and $22 million higher than last year.

Total (?) expense of revenue was 3.5% to the quarter and our annualized DSO was 17 days or just higher than 16 days a year ago.

In total, our final two year call rate for 2007 was 8.9% and our preliminary 2008 rate was 10.0.

Turning now to cash flow, for the 12 months ended December 31, 2009, our operating cash flow was $288.3 million.

Capital expenditures was $74.1 million or 4% of revenue and free cash flow defined as cash flow from operations less capital expenditures was $214.2 million for the 12 months and December 31, 2009 cash flow was up $32.8 million from last year.

Under our stock repurchase program for Q409, the company reports approximately 800,000 shares of our common stock or approximately $75 million dollars at an average price of $26.54 per share.

During the year 2009, the company repurchased approximately $9 million shares of its stock for approximately $200 million, which is essentially all of 2009’s free cash flow at an average price of $22.23 per share.

In January 2010, the company purchased an additional 1.7 million shares under a (?) plan for approximately $40 million.

So, as of January 31, 2010, the company had approximately $155.5 million of (?) available, which together with the additional authorization of $250 million approved yesterday by our board of directors, brings the total amount now available for repurchases to $405.5 million. This reflects the company’s confidence in our strong cash for generation and the ability to return cash to shareholders as our institutions continue growing in 2010.

As John said, I want to again remind everyone that we will have an investor and analyst day tomorrow, February 18, and broadcast live webcast for those of you that cannot attend in person. We will have the presentation materials available on the Investor Relation’s section of our website and the webcast event will start at approximately 1:00 pm ET.

And now, let me turn it over to Gary for a couple of quick comments before we open it up to your questions.

Gary McCullough

Thanks, Mike. Before we get into the question-and-answer portion of the call, I want to do what my peers have done and say a few words about the recently completed negotiated will making process engaged in by the Department of Education and a variety of other parties.

I do this recognizing there’s little I can add that most of you haven’t already heard. …dedicated team studying each of the rules. We see two areas where significantly more work needs to be done. Compensation and gainful employment. I think it’s important to reinforce several things. We’re still early in the process. There’s still time before the Department of Education propose rules for comment and the final rules won’t be in effect until at least July of 2011. The rules as proposed are complex and maybe difficult to implement.

Our company full supports the long-term interest of students. Accordingly, we’ll use whatever means is necessary to share our ideas and our concerns with the department before they publish the proposed rules. As I’ve said, once the idea is proposed, complex draft rules are better understood, we’ll be open with you regarding any potential business impact we see.

On compensation, our hope is that criteria will be established that are clear and consistent and achieve a level playing field across the range of secondary providers. We believe our current practices are sound and focused on positive student outcomes and graduation.

We do not believe the elimination of safe harbors without replacement to provide some level of (?) is helpful. In fact, doing so, we believe we create an environment of increased stan(?) and the actual increase differences in practice due to interpretations of the statute from institution to institution.

We will work cooperatively with other institutions to help develop a solution that is clear, concise and student outcome focused.

We understand the department’s desire to ensure the students are protected, however, in addition to concerns about the department’s authority to adopt such rules, we’re deeply concerned that the analysis and the discussion of the impact of this proposed rule on students and on post-secondary education is incomplete. As proposed, we believe the gainful employment language is complex and flawed and may have unintended consequences. If adopted, it could result in public policy that does more harm than good for those the department intends to protect. We believe it could reduce access to higher education for a wide spectrum of students at a time of high unemployment when many students are seeking to build and retool their skills to be more relevant in today’s marketplace.

Most at risk are those who have historically been under-served or not served at all by traditional colleges and universities. Again, we’ll work with others in our sector that raise concerns with the department. Meanwhile our internal teams will analyze in the coming weeks and months the potential impacts based upon lasting interpretations of the proposed rule.

Now as you know, this requires conducting analysis on a program basis. To put that into perspective, the proposed rule require us to analyze more than 1,300 programs. While the proposed rules are not clear, it’s apparent that our culinary and our art and design programs will be more impacted than health and university. In keeping with our practice, we’ll be open and transparent with you at the appropriate time.

I look forward to seeing many of you tomorrow at our investor day. We’ll share strategic initiatives and provide updated financial milestones. We’ll also hear about our plans for the next stage of evolution(?), changes we believe will continue to make us even better at delivering and improving upon our purpose of providing large changing education.

Today’s call is focused primarily on our strong fourth quarter, I would appreciate your help in limiting questions to our results and we can discuss the broader issues tomorrow.

With that, operator, I ask that you open the call for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Bob Craig - Stifel Nicolaus & Company, LLC

Bob Craig - Stifel Nicolaus & Company, LLC

Just one question regarding the gainful employment issue. Have you guys computed or have hand graduate CDRs in areas like culinary and art and design?

Michal Graham

We’ve got some visibility to the two-year rates. We’ve looked across our portfolio. Very encouraged that other people have disclosed the same thing. Our two-year rate on culinary is approximately 1.7% for those students to graduate and overall our culinary probably dropped by about 60% as a company when you look at the graduate only rates.

Bob Craig - Stifel Nicolaus & Company, LLC

You mentioned increase marketing spend. Could you take a little bit of forward look into 2010 and what are your plans there and also where are you at the end of the year in terms of rep force size and turnover in productivity?

Gary McCullough

Sure. I won’t give you too much on 2010, because we do intend to share some milestones with you. I’ll remind you that this is the first year that we’ve really spent heavily on the fourth quarter and so our run rate in the fourth quarter going into the first will be more normalized. You’ll get some view on that. I think going forward we’ll continue to see some savings.


Our next question comes from Jeff M. Silber - BMO Capital Markets-US

Jeff M. Silber - BMO Capital Markets-US

In your prepared remarks you talked a little bit about the new credit hour structure. Can you just remind us exactly what that entails.

John Springer

Sure. The credit hour structure, AIU had consistently had for the past six or eight years was a nine credit hour course structure. So there was some questions about how that translated and how it’s compared to other institutions. What we’ve done is we’ve gone from nine credit hour core structure to a four and a half hour credit hour structure. So we’ve broken up the nine hour credit course. More comparable. One of the reasons we did that, frankly, and we’ve been working on is because we saw the transfer of credit issues. We have been working on making the changes to that four and a half credit. It’s just an easier transfer of credit situation.

This is something identified as a student dis-satisfier some time ago. So we were working on it. It has nothing to do with some things happening more recently.

Jeff M. Silber - BMO Capital Markets-US

Can you comment on the letter the DOIG sent regarding your AIU’s re-creditation and some of the issues involved?

John Springer

I’d urge you to go back to the press release that AIU put out. It’s an issue that exists between the commission and the OIG and so at the end of the day, as I said in prepared remarks, AIU stands by the way it operates and we’ll help them hash that out.


Your next question comes from Sara Gubins - Bank of America Merrill Lynch.

Sara Gubins - Bank of America Merrill Lynch

In your G&A expense, it was down sequentially quite a bit and wondering if there were a lot of administrative cost cut out there, if that’s something that might be seasonal?

John Springer

Third to fourth quarter?

Sara Gubins - Bank of America Merrill Lynch

John Springer

I’d go back and normalize the third quarter for the bonus that we spoke of last quarter. The last quarter we had in our normalization table the bonus charge of approximately $20 million I believe that if you normalize out, the sequential change is not as large.

Sara Gubins - Bank of America Merrill Lynch

Have you been able to do any work to understand what the use of deferral and forbearance is by your graduates?

John Springer

We’re taking a comprehensive view. We’re looking at every program, all the data we have, to the extent we have that data, we’ll look at it, but we’ve just begun the process program-by-program and I don’t have the data on deferments or forbearance.

Sara Gubins - Bank of America Merrill Lynch

I’m trying to understand the dynamics of revenue per student trends and AIU and CTU. I think you mentioned that tuition increased around 10% and we don’t see that in the revenue per student.

John Springer

A couple things to consider. One, we talked historically about a mix shift and if you look at it, we continue to have some mix shift toward associate, but it is moderating. We indicated we did take a price increase last year in January between 0 and 10%. Remember, we did also say that that price increase was only for new starts and not for existing cohorts.

I think what we’re seeing is a deceleration of the RPS and now it’s starting to increase RPS quarter-over-quarter.


Your next question comes from Gary E. Bisbee - Barclays Capital.

Gary E. Bisbee - Barclays Capital

The schedule shift that you have in culinary and in art and design this year, are we likely to be sort of normalized level versus the 09 as we move into 2010 or are we likely to have the change?

John Springer

If you look at art and design, I think you’ll still have some voids in the first quarter, because it annualizes out on April 1. I believe we did not have any changes from a calendar standpoint for culinary, but we did have a shift from the 15 to 21 program. As Gary said, we now have about 20% of our students there.

Every one of our institutions now has a 21-month program, so you’ll continue to see on a RPS basis for culinary, the shift in the 21-program and some de-(?) RPS for 2010.

Gary E. Bisbee - Barclays Capital

I think the academic calendar, helped this quarter but hurt last quarter. I guess part of the question is in culinary specifically.

John Springer

You may be recalling last year in the third to fourth quarter, we did state that we had a non-comparable start date between 2007 and 2008, but the 2008 and 2009 calendar aligned. So last year at our call at this time, we spent a lot of time talking the shift between Q3 and Q4 starts.

Gary E. Bisbee - Barclays Capital

I missed the number you gave us for the losses from the start-ups within health care.

John Springer

The loss for the quarter was about $5.3 million and the cumulative loss for the year was around $19 million.

Gary E. Bisbee - Barclays Capital

Do you feel the worse going in such that you need a change strategy around whether what programs you’re going to add to campuses or whether to start new campuses. Is it pretty much business as usual and hopefully we’ll be able to work it out whenever we get more color.

John Springer

We’re looking at what’s out there at this point in time and our teams are doing assessment and ideally we’ll get to a point that we can influence where thing are at, but we would be prepared to go whatever direction we need to go at the appropriate time.


Our next question comes from Amy Younker - Robert W. Baird & Co.

Amy Younker - Robert W. Baird & Co.

Gary, if we can go back to the rep force. You’ve made a number of operational improvements there over the last several quarters. Do you feel that you’re where you need to be at this point? Are there still improvements that can be made going forward?

Gary McCullough

There are always improvements to be made. We’ve made improvements. We see greater productivity. We’ve seen decreases in turnover in our rep forces, we’ve made some of these changes. One of the things we’ve done now is we’ve worked across and are prepared to continue to hire as our population increase and as demand warrants doing so, but for the time being we think we’re in a pretty good place.

Amy Younker - Robert W. Baird & Co.

Until the economy improves, what can you do to keep the turnover down, because obviously it’s probably a little bit easier in this environment. Do you hire and train a bit more than perhaps you need, thinking you might see greater turnover?

John Springer

We’ll talk about some of this tomorrow, but I will tell you that as an organization, we have stepped up training. We have looked across the range of things that we think are employee satisfiers and work to do a better job across the board. So we’ll continue to do those things. It’s a challenging environment out there for people to go from, but I would remind you that industry, it’s been a pretty robust environment. We’ve managed to hold our own and keep our turnover down.

Gary McCullough

I think the other thing to think about from a rep standpoint, within our rep structure we talked about before, our payments to our reps run successful completion of programs and so as these students continue to graduate and you’ve heard the numbers we gave out, our reps will be compensated for the graduation. So we’re hoping as the economy turns up and students continue to graduate the reps will be (?) for outcomes.

Amy Younker - Robert W. Baird & Co.

Gary, last quarter you talked about reducing the size of some of the culinary schools. How many of those do you think you need to do that for? Is that more on a go-forward basis?

I’ll give this to Mike.


We’ll share a little bit tomorrow. I think there is some optimization to culinary and we’ve done a great job on the real estate in the last few years. We continue to look for optimization. If we can spend some money optimizing a campus and reduce some excess square feet, we’ll do that. That said, we do not spend money to simply free up real estate and culinary. With our population growing, you saw the start we have in the population. We’re doing well to fill the existing capacity we have. So we don’t anticipate any large reductions of capacity in culinary, the more optimization in place.


Our next question comes from Corey Greendale - First Analysis

Corey Greendale - First Analysis

For our own planning purposes, are you going to give specific 2010 guidance tomorrow or just kind of longer term three to five year target?

John Springer

Consistent on what we did two years ago, we will definitely give you long-term guidance and milestones for which you model against. We think we did a good last time and as you know we beat those a year ahead and delivered on our commitment. I think we’ll also give you more color on 2010 given our population and some of the strength of our business model.

Corey Greendale - First Analysis

I wanted to revisit the question Jeff asked about the change in the AIU credit hours. Is there any change resulting from that, either from the point of view of students. Anything that would make the program more or less attractive because of the change or simply a function splitting a single class into two classes and doesn’t affect (?) or cost or anything?

John Springer

There’s no material impact to our financial statements in terms of revenue or recognition of revenue or the amount of revenue that would be involved that Gary did speak to, there is a better ability to potentially transfer credits, which could translate into more students for university. There’s also a program within the four and a half structure a bit easier to decelerate. It gives you more flexibility from a course load, from a deceleration, which could also help the institution continue to grow its population.

Corey Greendale - First Analysis

Balance sheet, long-term receivables, is that just the amount of internal provided net of reserve?

John Springer

When we first starting using this program, the amounts were immaterial and we did not have good clarity in terms of the tenure of loans. Now that we’ve been through the program for over a year, we have good clarity on what is current and due.


Your next question comes from Kelly Flynn - Credit Suisse.

Patrick in for Kelly Flynn - Credit Suisse

As we look ahead, should we expect any more charges related to transitional schools that is still operating?

John Springer

Yes, you will see charges in 2010 to shut our AIU LA campus and then as we go forward over the nine years, as we talked about before, what you’ll have is you will take that liability from a discounted basis to a full value in a pre-pact. In our guidance in 2010, we talked about that being some place between a $5 and $10 million dollar number every year. After 2011, there should be nothing in transitional and everything below the line in discount.

Patrick in for Kelly Flynn - Credit Suisse

Can you provide color on average student at levels and how that varies at the different schools generally or if it’s proportionate to cost?

John Springer

Again, I think we’re working on the details as it relates to neg (?) and that to us is an issue about the neg (?). The process is early. I don’t think right now we’re in a position to show that. We’ll be transparent with you and we’ll give you some more information about different information about placement outcomes of our students tomorrow at the investor day.


Our next question comes from Bob Wedenhall - Royal Bank of Canada

Bob Wedenhall - Royal Bank of Canada

You’ve done a very strong job in improving your operating margins and pretty comprehensive job in managing through the turnaround program, do you expect a 19% operating margin to be sustainable going forward?

John Springer

Let’s save that for tomorrow. What I would ask you to do is as you look at your models that you look at the seasonality of our business and our fourth quarter margins typically different from the rest of our quarters. Seasonality that may not make the fourth quarter operating margin a consistent one based on the modeling you need to do by quarter.

Bob Wedenhall - Royal Bank of Canada

You said first quarter got off to a strong optimistic start in terms of enrollment. Can you put some parameters around that?

John Springer

As Gary said, we see accelerating growth over the numbers that AIU and CTU experienced in the fourth quarter and AIU is about a 14% start and CTU about a 30% start.


Your next question comes from Analyst for Mark A. Marostica - Piper Jaffray.

Analyst for Mark A. Marostica - Piper Jaffray

Quick follow-up on the marketing spend directed at online. Just curious, how does that trend through 2010? It sounds like the back half of 2009, you’ve been spending incrementally more there and I think you mentioned that spend would come off in Q1. Just curious if you’re looking at specifically online and maybe more specifically AIU? What is that trend line of spend look there as directed at that program?

John Springer

More normalized. Fourth quarter was abnorm on a comparative basis versus the previous year. I think on a absolute basis, it’s more normalized as we go into 2010 we’ll see that normal spend level again.

Analyst for Mark A. Marostica - Piper Jaffray

As that drops off, do you anticipate seeing a sustainable trend on starts? I mean how do you send the spend correlating with the start growth that you’re seeing there?

John Springer

I don’t think I see a drop off. I think what we had traditionally done was to drop off the fourth quarter advertising and pull back based on holidays based on student interest and calendars and this quarter based on the high amount of student interest we had in our institutions. We continue to invest and we continue to believe that was a great investment, because of the results we’re seeing. So I wouldn’t say it’s a drop off. I would just say that we have picked up the spending on a non-comparable basis in the fourth quarter, which will carry into 2010.


Your next question comes from Susan Stein - Morgan Stanley

Analyst for Susan Stein - Morgan Stanley

Would you mind giving us a little bit of color around student financing. Particular for higher debt. Do you know of any programs where they have cash payments or more corporate reimbursements than average, that sort of thing.

John Springer

We answered that a bit earlier. Pretty complicated detail question, premature, and get into tomorrow. So let me defer that one for now.


We have no further questions at this time.

Gary McCullough

I just want to thank you all for joining us on this call. As I said, I look forward to seeing many of you tomorrow at our investor day. Again, we intend to share information on our strategic initiatives and we’ll probably provide updated financials and people interested in short-term and longer term that we intend to give you some color on that. So we appreciate the time you spent with us this evening and we’ll see you tomorrow.

Thank you.


Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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