Career Education's (CECO) CEO Todd Nelson on Q4 2016 Results - Earnings Call Transcript

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Career Education Corporation (NASDAQ:CECO) Q4 2016 Earnings Conference Call February 23, 2017 5:30 PM ET


Sam Gibbons - IR

Todd Nelson - CEO

A.J. Cederoth - CFO

Ashish Ghia - VP Finance


Peter Appert - Piper Jaffray


Good day, everyone, and welcome to the Q4 2016 Career Education Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instruction] And please note that this event is being recorded.

I would now like to turn the conference over to Sam Gibbons of Investor Relations. Please go ahead.

Sam Gibbons

Thank you, William. Good afternoon, everyone, and thank you for joining us. With me on the call today is Todd Nelson, President and Chief Executive Officer; A.J. Cederoth, Chief Financial Officer; and Ashish Ghia, Vice President of Finance.

This conference call is being webcast live within the Investor Relations section at A webcast replay will also be available on our site and you can always contact the Alpha IR Group for investor relations support.

Let me remind you that this afternoon’s earnings release and remarks made today include forward-looking statements as defined in Section 21E of the Securities Exchange Act. These statements are based on assumptions made by and information currently available to Career Education and involve risks and uncertainties that could cause 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 Career Education’s Annual Report on Form 10-K for the year ended December 31, 2016, and other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, the company undertakes no obligation to update those factors or any forward-looking statements to reflect future events, developments or change circumstances, or for any other reason.

In addition, today’s remarks refer to non-GAAP financial measures which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The earnings release and slide presentation which accompany today’s call and which contain financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures are available within the Investor Relations section at

So with that, I’d like to turn the call over to Todd Nelson. Todd?

Todd Nelson

Thank you, Sam. Good afternoon, and thanks to everyone who’s joining us on the call today. Today, I am going to cover a few key items including overall academic and operational progress at our university group; major initiatives and achievements and some key highlights including our financial results which showed continued improvement and came in ahead of our expectations.

Now let me begin with the call by reviewing some of the academic and operating progress that we achieved during 2016. The past year at CEC was marked with a strong focus on across the board improvements and operating processes and efficiencies that we believe has enhanced our position as a long-term leader in post-secondary education. Our teams have been focused on refining and executing operational changes while undertaking several new initiatives and investments. With the overall goal of improving student experiences both before and after they enrolled in our programs.

A new management team was put in place in 2015 with a streamline reporting structure that has been more effective and efficient. We also continue to maintain and build upon a compensation structure that emphasizes and promotes a culture of ownership which further align with shareholder interest. I truly believe that we have some of the best talent in our industry and are maintaining an excellent employee base. You can see that quality through this year's results. We are motivated and focused with a clear vision to serve and educate our students and the progress we have achieved has allowed us to invest more time, intellectual capital and dollar in various student serving areas of our university platforms.

During the year, we continue to focus on improving student outcomes and retention by leveraging technology and making progressive updates to our curriculum, and of course sequencing. We have further enhanced our mobile platform and added new functionality for the benefit of our students. Changes we made to our core sequencing and course design have promoted learning, increased faculty interaction with students and improved overall student experience, during the first few sessions.

We believe improved retention is a catalyst to student success that benefits long term shareholders. Recently both institution that continue to expand a graduate team modest structure which personalizes student facing services and financially aids, admissions and advising that we believe helps increase accountability and ultimately improves overall student experiences and retention. We also experience reduced turnover in our admissions and advising functions and increased the effectiveness and efficiency of our front-end operations which we believe should ultimately reduce cost for start, while improving the student experience.

At CTU, we modify the application process for first time students which we believe will increase their opportunity for success and make them more prepared for class. We have invested incremental resources in our financial aid function which has helped increase our document collection and counseling efforts to students. We invested in full time faculty roles, increased our professional development offerings and continued leveraging our mobile platform and integrated technologies like Intellipath to improve the student experience. In fact, CTU has increased the number of full time faculty by 30% since the beginning of 2016. We believe this has improved overall faculty-student engagement, promoted learning and ultimately resulted in enhanced overall student retention and outcomes.

At AIU, we focused our efforts during the year on increasing accountability at all operational and student facing functions by revising and improving our managerial and skill development program. We redesigned our calendar to align better with student lifestyles and provide more desirable breaks in our curriculum. And we have enhanced the first course that under graduate students take by building workload levels slowly as they develop the necessary skills and motivation to be successful.

During the year, we conducted review of, and eventually improved the assignment [ph] workloads and content for new students while reducing average class size to encourage personalized support from faculty. Our new student advising model promotes further collaboration between faculty and advisors which we believe elevates accountability and effectiveness of our retention efforts. We believe those efforts in addition to sharing best practices across the universities and are focused on continuous improvement have paved the way for AIU to potentially achieve academic operating and financial metrics that are and resemble more closely with CTU over the long term.

Lastly, we have optimized our spending across marketing channels by allocating resources towards those with a higher propensity of positive outcomes. All of these changes at our universities are intended to provide strong engagement with students which we believe will enhance retention and outcomes and ultimately increase the long term academic value of our university platforms. And in fact, we saw the positive impact from some of these operational initiatives during the year, with university total enrollment growing more than 5% year-over-year.

In order to further leverage the investments and operational improvements made in our student on-boarding, advising and learning process and to pursue responsible and sustainable growth, we have committed to opening an admission and advising center in Phoenix, Arizona. This center should enable us to test new approaches and processes at a regional cost and will enable us to better leverage and serve the increased demand that we are experiencing. We expect the center to be fully operational in the second half of 2017.

Moving on to some of the recognitions our university has received in the last year. AIU was recently selected as a top school and the military advanced education training 2017 guide to colleges and universities research study. Although the MA ENC Publication does not rank schools in the guide, they recognize the schools that exhibit best practice in military and veteran education with the use of their 2017 top school logo.

We also received several recognitions last year for our mobile technology, CTU mobile was the winner of the international E learning associations, 2016 work for mobile learning in the academic division. The international E learning association was or giving each year for the best work in E learning, mobile learning and blended learning in both academic and business industry divisions and are based on a review of variety of attributes including educational soundness and effectiveness, usability and overall significance.

Eduventures is a research and advisory firm that is focused on analyzing the forces that are transforming higher education, awarded CTU with the Eduventures 2016 innovation award which recognizes the achievements of individual and organizations that share Eduventures' vision for improved outcomes through innovative programming that supports critical areas of an institution. We are proud of our universities and all the progress that our organization achieved during the year and are looking forward to greater success in the future.

Now, I’ll provide a brief overview of some of the operating and performance highlights of the quarter and full year. Before I do, however I'd like discuss the settlements that were announced Tuesday afternoon.

During the fourth quarter, we recorded a $10 million charge for a settlement related to a case that was filed in 2008, which was scheduled to commenced in a jury trial later this month. While the company felt strongly that this case had no merit, we concluded that moving forward with a trial and incurring associated legal expenses along with the risk inherent in any jury trial would not be in the best interest of the organization and our students.

The settlement of this law suit that was filed over eight years ago does not in any way reflect on our ongoing operations, practices and processes and we have not admitted any liability nor committed any validation of law in the above matter. Our organization continues to emphasis a culture of compliance embedded into our daily operations. We also reported a separate charge for associated third party legal fees of $22 million during the fourth quarter. Please note that my review of the fourth quarter key results exclude the impact of these two charges.

During the fourth quarter, we continue to make progress against our strategic initiatives, total enrollment within the university group increased by more than 5% year-over-year, supported by improvements in student retention. As we had mentioned, throughout the year, we have been and will continue to be focused on improving student retention and experiences and believe that our growth in total enrollments is a testament to the positive impact, our efforts and initiatives have had on retention.

University groups revenue improved 2.3% for the full year. Excluding the fourth quarter settlements, the university group generated operating income of approximately $22 million for the quarter and approximately $102 million for the full year, which represents the highest level of full year operating income in more than five years, which we again believe is evidence of the quality of the team we have in place and the improvements we have been making in serving and educating our students.

Our discussions in previous quarters were primarily centered on improving student experience retention, after a student starts school. During the fourth quarter, we made several investments in our admissions and advising functions that were focused on improving student experiences before they start school. Similar to our retention initiatives, we believe that these investments and improvements in front end resources will help drive sustainable and responsible new student growth. We are seeing positive impacts of these investments on new student enrollments at both CTU and AIU in the first quarter of 2017.

We ended the year with a strong liquidity position with cash and equivalent increase into $207 million, this was ahead of our outlook range of 180 million to 190 million and is the first time in over five years that we have had positive cash flow from operations, primarily driven by the strength of our execution.

As we look to 2017 our priorities remain the same. We are focused on continuing to improve the market position of our universities by strengthening the breadth of program offerings and leveraging faculty and technology with the goal of enhancing retention and outcomes for our students. Given the improvements in student retention, continuous stability and efficiency in our university group as well as the prospects for new student enrollment growth at both the universities, we are updating our 2017 cash outlook which also now incorporates the payments related to the fourth quarter settlement charges.

Please note that as we near the completion of the teach-out phase of our transmission and enter a period where we expect sustainable and responsible growth within the university group, we'll be providing our outlook under a more conventional manner that focuses on operating income and adjusted operating income rather than adjusted EBITDA and is more reflective of the company's future state.

I’ll provide some additional closing remark later, but A.J. will now take us through the financials and review our updated outlook. A.J.?

A.J. Cederoth

Thank you, Todd. As we review the financial performance, I want to start with results for the consolidated company. On Slide 4, we have summarized the consolidated results for Q4 and the full year, as well as provided a comparison to 2015.

For the quarter, revenue was $155.3 million, which was down 22.4% year-over-year. And for the full year revenue was $704.4 million, a 16.9% decline year-over-year. The decline in revenue is primarily attributed to the teach-out strategy in our Culinary Arts and Transitional Group segments. Excluding the impact of the settlement charges that Todd discussed earlier, the consolidated operating loss was $23.9 million for the quarter and $0.3 million for the full year. This compares to operating losses of $3.9 million for the fourth quarter and $92.2 million for the full year in 2015. Please note that these figures include $34.7 million in 2016 and $17.9 million in 2015 for charges related to the remaining lease obligations for the vacated space within our teach-out operations.

On a consolidated basis without adjustments for legal reserves, we posted a net loss for the quarter of $32.9 million as compared to net income of $142.7 million in the prior year quarter. As a remainder, last year's fourth quarter net income included a reversal of a tax valuation allowance of approximately $147 million. Full year consolidated adjusted EBITDA was $41.9 million which was a $46.4 million improvement versus 2015. We ended the quarter with $207.2 million of cash, cash equivalents, restricted cash and available for sale short term investments which will be referred to as yearend cash balances for the remainder of today's discussion.

Cash flow generated from operations for the year was $5.9 million which compares favorably to cash used from operations of $21.7 million for the prior year. This improvement in cash flow was primarily attributed to lower operating cost. Capital expenditures for the year were $4.1 million.

Moving to Slide 5, here we highlight the results of the university group. As Todd mentioned total enrollment within the university group improved by 5.3% year-over-year. Revenue decreased 1.3% year-over-year in the fourth quarter, but grew 2.3% for the full year. The universities groups operating loss for the quarter included several key items which impacted the year-over-year comparability. These items included charges for the settlement that were discussed earlier, increased compensation expenses related to performance driven metrics and the timing impact of the transition to a new calendar at AIU that Todd spoke about. If we adjust for these items to simplify the comparison, the fourth quarter operating loss would have been relatively flat year-over-year.

Turning now to Slide 6, we highlight the results of the culinary arts and transitional segments which are in teach-out. Revenue declined year-over-year for both segments, but the overall operating losses for the full year improved in line with our expectations. Note that per our previous discussions year-over-year differences in the financial performance were expected to normalize in the second half of 2016 as the impact of our strategic initiatives annualized and the initial economic benefits associated with announcing the teach-outs start to diminish notably, especially within our culinary arts campuses.

Turning to Slide 7, we have summarized our 2016 results compared to our previous provided outlook. 2016 consolidated adjusted EBITDA was $41.9 million, was a significant improvement versus 2015. Improved retention trends across most of our institutions resulted in better than estimated total enrollments and we generated stronger than expected operating efficiencies at out teach-out campuses. Yearend cash balances were $207 million, improved operating performance, earlier than expected realization of operating inefficiencies and slightly better working capital trends contributed to the improved cash position.

Todd mentioned earlier that we will be providing our outlook under a more conventional measure that focuses on operating income and adjusted operating income rather than adjusted EBITDA. We believe this is a simpler measure and we will reconcile all adjustments back to GAAP measure of operating income.

On the next two slides, we have provided an update to our outlook. As you can see we expect the university group and corporate operating income to grow in 2017 and again in 2018, primarily driven by expected modest growth in total enrollments. We expect the adjusted operating loss for our teach-out segments to be approximately $50 million to $60 million in 2017. The Culinary arts teach-outs are schedule to be completed in 2017, so by 2018 our losses should reduce to a range of approximately $10 million to $20 million, as we wind down the remainder of our teach-out campuses.

We continue to actively manage the real estate associated with these teach-out schools. During 2016, where it was appropriate and financially responsible, we reduced our footprint and lowered our ongoing cost. We have highlighted the estimated real estate charges which will be recorded upon the completion of the teach-out on this chart for your benefit.

We expect yearend cash balances of approximately $150 million to $160 million for the year ending December 31, 2017 and expect balances to increase in 2018. We continue to carefully manage our cash balances during the teach-out phase of our strategy in an effort to maintain sufficient liquidity. We also -- also we have revised our outlook -- I am sorry -- also our revised outlook includes the impact of the settlement payments discussed earlier. It's worth noting that without this impact our yearend cash balance outlook would have been ahead of our previous provided outlook.

Finally, please refer to Slide 10 through 15 included in our presentation, there you will find the summary of the key assumptions contained within our outlook as well as reconciliations of GAAP to non-GAAP items.

With that I’ll turn the call back over to Todd for closing remarks.

Todd Nelson

Thanks, A.J. In closing, 2016 was an excellent year of execution and operational improvement for the company during which we met and exceeded our operational and financial targets. We developed a strong track record of performance against our goals and 2017 will be a year in which we transition from a period of teach-outs to what we believe will be a period of sustainable and responsible growth and further we expect an inflection point in our overall operating performance in 2018.

We have a solid cash position of $207 million in yearend cash balances which was considerably greater than our initial 2016 outlook, and will enable us to continue making smart investments in student facing services, faculty and technology that we believe will continue to enhance overall retention and outcomes for students.

As we entered 2017, we remain focused on improving the market position of the universities by strengthening the breadth of program offering and leveraging faculty and technology improvements. As the operating performance of the company improves we'll continue to analyze and evaluate incremental growth investments for the benefit of our students. We are focused on improving the strength of our overall university group as we seek to improve retention and outcomes that ultimately benefit all of our students and shareholders.

I remain excited about the talent we have throughout our company as well as the opportunity we have long term to grow responsibly, through focus on student outcomes, quality and retention. Lastly, I want to thank all of our students, employees and shareholders for their continued support.

Thank you again for joining us this afternoon. And we will now open the call for analyst questions.

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. [Operator Instruction] And the first question of today is Peter Appert with Piper Jaffray. Please go ahead.

Peter Appert

Todd, congratulations on the momentum and the turnaround efforts, they defiantly are impressive in terms of what you guys [Multiple Speakers]. You mentioned -- I think you mentioned positive momentum in the first quarter from a start perspective, any more color or specifics on that?

Todd Nelson

Yes, I mean there are two things that are happening as we said, we've really focused '16 more on retention, we will continue that focus, but also on improving the process, the front-end process including as I said AIU, and what we are starting to see as we come out of '17 is a positive new student enrollment and we are seeing an improvement in the CTU enrollment as well, new student enrollment as well.

So our view as going forward, again, if -- obviously CTU being a larger scope, it takes a little more time to build that momentum. But, yes we are seeing, again, positive improvement at CTU and a positive trend at AIU and again we are very hopeful that that will continue through the year.

Peter Appert

So positive trend that CTU, do you think you can be in positive territory in terms of year-to-year gains and starts in the first quarter?

Todd Nelson

Well, again if you look at where we have come from, it will be improvement. But to say at this point exactly, when that goes positive, certainly we are going to work towards that, but this is one of those things that you don’t want to get ahead of yourself.

Peter Appert

Thanks, fair enough. And then the AUI numbers, obviously really standout in terms of the percentage gains you are seeing there, anything in particular you would call out in terms of drivers or maybe even any granularity in terms of program areas where you are seeing particular strength?

Todd Nelson

Well I think again, we have pretty good strength across most of our programs at both CTU and AIU, but I think in particular at AIU what's happened is, we changed the management structure there, we added a person that overseas all enrollments there, as well as looking at the entire admission process, reducing the amount of hand off that occurred. And that along with several other things that really improved the process.

We are very encouraged by the fact that we continue to see good demand across both institutions and we hope to see that continue. As we mentioned about opening of the Phoenix advising and the admission center, the main driver behind that is, again, we see strong demand and so that’s, as you know a very good labor pool there. And so that’s again one of those things that we are hoping. Again we don’t want to get ahead of ourselves, but as we prepare to open that during the second half of '17. We are hoping to also see a little bit of lift from that as well.

Peter Appert

Todd, you also mentioned changes in marketing channels and I think you talked about this for last couple of quarters, how far longer you're in that process?

Todd Nelson

What we've done, I think we've -- although CEC has done a good job. We provide a higher level of sophistication there and really looking carefully at where not only the leads are been generated, but obviously the quality in the context of the cost, and our view is that we can continue to bring down our cost of acquisition, partially due to the fact that, again, a better admissions model.

But frankly our ability to continue to generate good quality leads at a reasonable cost and, so I guess that's a long way of saying, we see that there is still opportunity to lower our acquisition cost. But again our ability to generate the higher quality lead at a more reasonable cost, I would say we're well along in a process, but there is still, we believe some benefits to be gained from that.

Peter Appert

And then maybe lastly just, post the settlement this week, can you just remind us sort of the most significant things that might still be outstanding from your perspective, and I know you can quantify potential future charges you might have to take, but what's left?

Todd Nelson

Well I would say, I don’t know if this is necessarily a positive, but one of the nice things that I think that any of us can do as shareholders is make sure you refer to both the 10-K and the prior 10-Q's, everything that we're aware of, we're very careful to include it in there. And so that's really is the best source to look, certainly if I'm aware of anything it will be in there. That's number one.

Number two, I think if we look at in the context of the one that was settled, that was filed in 2008, so again by looking at what's -- the potential that's maybe out there that we don't know about, let's hope there's not, but the timeline associated with those things, I think because again sometimes the frivolous nature of them, it even takes years to get them where they are. But again the 10-K and the 10-Q's that we've filed in the past, I think that gives you a pretty good comfort level of what's out there.

Peter Appert

Actually, one more last thing, and that is, you're seeing much improved momentum from -- starting enrollment perspective at AIU and I know you've got a balancing act here in terms of incremental spending to sustain that versus driving increased profitability. So, I guess the trick question here is, how do you balance those two things and is it possible that we could see some measurable improvement in profitability and margins at AIU in '17?

Todd Nelson

Well I think really the philosophy here is responsible and sustainable growth and we're going to continue to focus on that. And I think this year we're excited about the potential prospects of that Peter. I think always you're balancing that with the financial performance, but our view of it is, there is no reason why, as an organization we don't have the potential to have a competitive margin [ph] for our industry.

We have two great universities, we have a very good management team in place and we're encouraged by the demand that we're seeing. And so, again you've known me for a while, and the ability to balance the two is something that I think we have a pretty good feel for what we should be doing. And so again I think it comes back to that responsible and sustainable growth that can be achieved by still expanding your margins, but again, you want to do it in a prudent and careful way to make sure that the most important thing is, you're providing a quality education for the students that'll show up through the retention and the outcomes.

And that really is the guiding principle, and we're not going to grow beyond our ability to make sure that the quality education is there.

Peter Appert

Got it. Understood, thanks very much and congratulations again.


Showing no further questions so this will conclude our question-and-answer session. I’ll now like to turn the conference back over to Todd Nelson for any closing remarks.

Todd Nelson

Well, again we appreciate you joining us this evening and we look forward to speaking with you again next quarter. Thank you.


The conference is now concluded. Thank you all for attending today’s presentation. You may now disconnect your lines.

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