Career Education's (CECO) CEO Todd Nelson on Q1 2018 Results - Earnings Call Transcript

Career Education Corporation (CECO) Q1 2018 Results Earnings Conference Call May 2, 2018 5:30 PM ET

Executives

Sam Gibbons - IR

Todd Nelson - President and CEO

Ashish Ghia - Senior Vice President and Chief Financial Officer

Analysts

Peter Appert - Piper Jaffray

Greg Pendy - Sidoti

Operator

Good day and welcome to the Career Education Corporation's First Quarter Earnings Conference Call and Webcast. All participants will be in listen only mode. [Operator Instructions]. Please note, this event is being recorded.

I would now like to turn the conference call over to Mr. Sam Gibbons, Investor Relations. Mr. Gibbons, the floor is yours sir.

Sam Gibbons

Thank you, Mike. Good afternoon, everyone, and thank you for joining us. With me on the call today is Todd Nelson, President and Chief Executive Officer; and Ashish Ghia, Senior Vice President and Chief Financial Officer. This conference call is being webcast live within the Investor Relations section at careered.com. 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, 2017, 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 changed 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 careered.com.

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

Todd Nelson

Thank you, Sam. Good afternoon, everyone, and thank you for joining us on today's call. I'll begin with a review of the first quarter operating results that were highlighted with positive momentum in key operating metrics, which also contributed to adjusted operating income coming in ahead of our expectations. Ashish will then provide some more details around the financials and outlook before I provide some closing remarks at the end of the call.

Please keep in mind that for the remainder of today's discussion, references to ongoing operations represents results from the University Group and Corporate. All comparisons are versus the comparative prior year period unless otherwise stated.

The Education industry remains one of the biggest sectors of our economy, and post-secondary enrollments are expected to see modest growth over the next few years. This combined with the positive momentum entering 2018 will support our objectives to drive sustainable and responsible growth. We believe that the acceptance of online education is accelerating and the use of data and technology to serve students and enhance learning outcomes is becoming an important competitive advantage.

In that context, approximately 90% of our students are online, 75% of them use the mobile app and 40% of our courses are now augmented by intellipath, our personalized learning platform. In fact, we continue to focus on further differentiating our educational offerings and leveraging technology to enhance learning, increase depth and breadth of program offerings and build corporate partnerships.

2018 is off to a good start with our first quarter adjusted operating income of $25.9 million compared to $15.8 million in the prior year, which reflects an improvement of approximately 63%. Income growth and cash generation continue to accelerate and are further supporting our investments in student-serving processes and initiatives.

At CTU, new enrollment for the first quarter increased 4.6%, representing a third consecutive quarter of growth. Total enrollments, which typically lagged new enrollment growth, increased 2.8% versus the prior year. We are encouraged by this momentum, which is primarily driven by our investments in student-serving processes and initiatives that are intended to improve experiences both before and after they are enrolled in our programs. Student interest across our universities is trending well, while execution within the admissions and advising functions remains high.

Our admissions and advising center in Arizona, which is fully operational, is further enabling us to address this increased interest we are experiencing. Additionally, we believe our orientation process, which continued follow-up in new student outreach and preparedness, has improved student experiences after they start school and positively impacting retention over the past few quarters.

We will continue to implement new student initiatives across CTU and are quite pleased to share that for the second quarter of 2018, CTU is expected to experience its fourth consecutive quarter of new enrollment growth. As expected, new enrollments at AIU declined for the first quarter due to the timing impact of the academic calendar redesign.

The 51.5% decline in new enrollments also caused total enrollments to decrease by 12.8% versus the prior year. This decline in new enrollments was expected given there were approximately 57% fewer enrollment dates for the quarter, again a direct impact of the calendar redesign.

In general, enrollment days attributable to any given quarter are the available days during which a prospective student can apply to start school in that quarter. Despite quarterly variability, momentum in key operating metrics continues to progress with the Arizona Center fully operational and performance trending positively.

Our personalized graduate team model at AIU is fully rolled out with cross-functional strategies between admissions, advising and financial-aid functions aimed at improving student engagement prior to beginning school, and continuing through their first academic term as they adjust to the program.

Driven by these student-serving initiatives and investments as well as the calendar redesign, AIU expects significant new enrollment growth during the second quarter and third quarters of this year, which is expected to approximately offset the decline from Q1.

Let me also point out that the variability in quarterly new enrollment trends at AIU, which is primarily driven by the timing of start dates across quarters, will not proportionately impact revenue trends as evident in the first quarter revenue performance, and we expect full year revenue at AIU to show growth in 2018. Overall, we remain pleased with AIU's progress and stabilization efforts and look forward to sharing more updates throughout the remainder of the year.

Both our universities are focused on key enablers of growth, including technology, quality academic outcomes and a student-first mindset. At the same time, we are making improvements and investments in faculty, admissions and advising, which has driven an approximate 12% increase in university staffing during the first quarter as compared to the prior year quarter.

Our investments in the current Arizona Centers are further supporting the efforts to enhance student retention and academic outcomes, while addressing the increased interest we are experiencing across our universities. Encouraged by these trends, we have opened an additional center in Arizona and are continuing to increase our student-serving resources at this facility. Technology will continue to be a key focus for us as it differentiates our institutions across the competitive landscape when it comes to student on-boarding, retention and learning processes.

After the launch of the faculty mobile application last quarter, which was enhanced - which has enhanced our student outreach capabilities, CTU is now testing two-way messaging to support seamless communication between students, faculty and support services. We are also investing in retention analytics tool at CTU and expect to leverage any information and benefit from these processes across the AIU platform over time.

Lastly, we continue to expand our award-winning personalized learning platform to additional courses at both universities. The investments we're making today are intended to align our universities with the demand trends and growth enablers we are seeing across the industry. Strong levels of student interest continue to give us confidence in our ability to achieve responsible, sustainable growth over the long term.

Now I'll hand the call over to Ashish for a more detailed review of our results, balance sheet, and outlook. Ashish?

Ashish Ghia

Thank you, Todd. Today, I will start with a review of our first quarter results and then discuss our balance sheet and outlook before handing the call back to Todd for his closing remarks.

For the quarter just ended, total company operating income was $20.5 million, an improvement of 110% as compared to an operating income of $9.8 million. This improvement in performance was primarily driven by reduced operating costs at teach-out campuses and continued efficiency within our marketing and advertising efforts.

Operating income from University Group and Corporate was $26.8 million in the first quarter, an improvement of 15.8% as compared to an operating income of $23.1 million. Adjusted operating income was $29.2 million, an improvement of 14% as compared to $25.7 million in the prior year. This improvement is primarily driven by efficiency in our marketing cost, which was partially offset by our ongoing investments in student support staffing across our admissions and advising centers.

In fact, staffing at our universities is up sequentially from the previous quarter, while any marketing and advertising efficiencies will be more muted in future quarters. These factors may drive some quarterly variability in our performance from ongoing operations, but we remain confident in our full year outlook provided last quarter.

First quarter University Group revenue declined by 0.4% to $147.7 million as compared to the prior year. CTU experienced revenue growth of $0.6 million, driven by continued improvements in retention and growth in new enrollments. This was offset by AIU revenue decline of $1.1 million, primarily driven by one less revenue day in the quarter versus the prior year.

Moving to enrollments. For the quarter just ended, total enrollments at CTU grew by 2.8%, supported by new enrollment growth of 4.6% as well as improving retention trends. Ongoing initiatives and investments in student support processes are the primary drivers of this performance and for the second quarter of 2018, we expect CTU to, again, experience new enrollment growth versus the prior year.

First quarter enrollment trends at AIU were influenced by the timing impact of the academic calendar redesign. New student enrollments for the quarter were down 51.5% versus the prior year. This decrease was consistent with our expectations and was primarily driven by approximately 57% fewer enrollment dates for the quarter, again a direct impact of the calendar redesign. We will see this reverse itself in Q2 and Q3, which will have a significant increase in the available enrollment days and should commensurately result in new enrollment growth for those quarters. Also contributing to this expected growth will be the AIU admissions and advising center in Arizona.

It is important to note that this calendar-driven variability in quarterly enrollment trends will not materially impact revenue trends, which are still primarily driven by our underlying long-term enrollment trends. And as Todd mentioned, we expect AIU to experience revenue growth for the full year 2018. While on revenue, I wanted to point out that we have adapted the new revenue recognition standard ASC 606, and as previously disclosed, the updated guidance does not have any impact on how we recognize revenue.

Moving to our teach-outs. The All Other Campuses segment, which reflects the remainder of our teach-outs reported first quarter operating loss of $6.3 million, which represents an improvement of approximately $7 million as compared to an operating loss of $13.3 million in the prior year. Adjusted operating loss was $3.4 million, an improvement of approximately $6.4 million as compared to an adjusted operating loss of $9.8 million in the prior year.

These improvements are primarily driven by reduced expenses as campuses wind down operations while still providing an opportunity for our students to graduate. As we speak, we have approximately 20 students remaining in teach-out campuses with all expected to be taught out by the end of this year. As of today, all our institutions are regionally accredited and all ACICS-accredited institutions have been fully taught out.

Now let me spend a few minutes reviewing our balance sheet. We ended the quarter with $187.6 million of cash, cash equivalents, restricted cash and available-for-sale short-term investments, which will be referred to as cash balances for the remainder of today's discussion. This represents an increase of $7.5 million over year-end 2017 and was primarily driven by positive cash flows from our university operations, offset by cash outflows related to payments for contractual lease obligations as well as operating losses for our teach-out campuses.

As previously noted, we expect to see continued improvement in our operating cash flows and the strength of our balance sheet due to the substantial completion of these teach-outs. Net cash provided by operations was $11.1 million during the quarter as compared to cash used of $39.1 million during the prior year. The increase in cash provided by operations was primarily attributable to the $32 million in legal settlement payments made during the first quarter of last year as well as the substantial completion of teach-outs that resulted in significantly lower operating losses.

Capital expenditures were $1.4 million in the first quarter. This compares to $0.7 million in the prior year with the increase reflecting selective growth investments in our universities. For the full year, we expect capital expenditures to be approximately 1% to 2% of revenues.

Finally, income taxes, for the quarter just ended, we recorded a tax provision of $3.5 million. This resulted in an effective tax rate of 16.4% for the quarter and was primarily impacted by excess tax benefits associated with stock-based compensation and the release of previously recorded FIN 48 reserves. The impact of these discrete items decreased the effective tax rate for the quarter by 9.3%.

We now expect the full year tax rate to be between 23% and 26%, which reflects the reduction in the U.S. corporate tax rate from 35% to 21% due to the enactment of the Tax Cuts and Jobs Act that became effective in January 2018. Please also note that at the end of '17, we had $215 million of federal net operating loss carry-forwards, which will be used in future years to offset federal taxable income effectively reducing related cash taxes paid. Specifically, as it relates to 2018, we do not expect to pay any federal taxes.

Now to the outlook. Our full year outlook remains unchanged from the previous quarter. As you can see on Slide 3 of the presentation, we continued to expect full year total company adjusted operating income to be in the range of $99 million to $106 million, which represents an approximate 50% increase from prior year levels with continued growth into 2019. We do not expect any material changes in the full year adjusted operating loss range of $9 million to $11 million for our teach-out campuses.

Slide 3 also provides some additional information regarding our expectations for second quarter of 2018. With the substantial completion of teach-outs, we will primarily focus on total company outlook and expect adjusted operating income for the total company to be in the range of $19.5 million to $21.5 million. This represents an improvement of approximately $6 million or 40% versus the prior year. We continue to expect year-end cash balances to be in the range of $220 million to $225 million at December 31, 2018, with growth anticipated in 2019.

Let me also point out that due to the significant decreases in our balance sheet obligations associated with our teach-out campuses, we now expect more of our operating income dollars to result in positive operating cash flows. With this anticipated cash generation, let me comment on capital allocation. Our strategy thus far has focused on building a strong balance sheet, while prudently investing in organic growth projects. As we further build our cash balances, we will continue to evaluate diverse strategies to enhance shareholder value, while maintaining adequate liquidity and capital for organic investments within student-serving processes of our universities.

On Slide 4, we have provided a summary of key assumptions contained within our outlook. Please keep in mind that we expect some variability in our quarterly results driven by timing of our operating expenses and the varying impacts from initiatives, including the ongoing impact of the calendar redesign at AIU.

With that, I will turn the call back over to Todd for his closing remarks. Todd?

Todd Nelson

Thanks, Ashish. We have entered 2018 from a position of strength and are continuing to execute against our objectives to drive sustainable and responsible growth. Key takeaways as we continue to execute in 2018 and beyond are: first, overall operating metrics and trends are in line with our expectations.

Two, we will continue to accelerate our investments in student-serving processes and initiatives; three, there will be a strong focus on technology and academic quality as key enablers of growth; and finally, our teach-outs are substantially complete, and I wanted to take a moment to thank our faculty and staff, who have worked tirelessly to provide a quality education for our students.

To wrap up, our operating performance is allowing and encouraging us to accelerate growth and investments in technology enhancements that will align our universities with the long-term demand trends we expect to see in post-secondary education. We are taking a measured approach to balance our objectives of effective and efficient student services with our financial and operating commitments and remain confident in the long-term academic value proposition of our universities and our position in post-secondary education.

Thank you, again, for joining us today, and we'll now open the call for any analyst questions.

Question-and-Answer Session

Operator

Hey, thank you, sir. [Operator Instructions] The first question we have will come from Peter Appert with Piper Jaffray.

Peter Appert

Thank you, good afternoon. So Todd, a couple of things; one, can you help me better understand the sort of the arithmetic between the disconnect, between enrollment performance and revenue performance at AIU in the quarter, right? Enrollment is down 13%, revenue is down 2%. Obviously, it's not just a function of tuition price increases, so what's the disconnect?

Todd Nelson

Sure. Well, it's not really a disconnect. It's what it is, is that, it is the timing of when I start actually the number of days that you have that contribute to a start doesn't mean that you are not recognizing revenue on your total enrollment during that period of time. And so - although you - again, as we've said, we expect it based on that timing, you would see a large drop in new enrollment that should be, as we said, bouncing back in Q2 and Q3.

Peter Appert

Okay. And then how about, sort of the operating metrics, Todd, for AIU in terms of inquiry volumes, conversion rates? Were they impacted at all by these calendar changes?

Todd Nelson

Well, the good news is as we mentioned in the script is that there are - we continue to see good demand for both CTU and AIU. So our ability to generate increases, we still feel very good about that. What we have done based on that, Peter, is we continued to add enrollment staff. Obviously, as you add enrollment staff at a higher rate than you have in the past, it dilutes a little bit your - I would say, your conversion rate slightly because you have newer enrollment counselors who are coming up to speed.

And you saw some of that obviously in the last quarter. Going forward, again, because of the level of now tenure of those enrollment counselors, we're feeling very good about that. And we're seeing, in particular, the productivity in, now, two Arizona advisement centers as you see, we mentioned we've added the second one because of the success there. You're seeing those productivity levels coming up. So we're, as I said, encouraged that gives us some momentum going into Q3 - Q2 and Q3.

Peter Appert

Got it. And Todd, I think, you've talked about this in past quarters. As you're getting to this meaningful positive inflection and free cash flow and teach-out losses, obviously, are dramatically diminished, you're in a pretty advantageous position from a capital standpoint. Talk about, please, the - how you're thinking about capital initiatives? How important M&A is on a go-forward basis to the strategy?

Todd Nelson

Sure, thanks, Peter. A good question. First, our goal was to really get our balance sheet stronger, which I feel like we have done that. And then, obviously, the organic growth opportunities and initiatives have been our key focus and will be. I mean, again, we're continuing to feel we have demand - a positive demand for both AIU and CTU. We need to take advantage of that.

It obviously is something we do very well, and we feel very cost-effectively and so that still is a key part of our strategy. Don't feel like we're done with that yet, and so we're going to continue to invest in that. I think the next step would be to find a way to leverage the things that we - some of the things we do well, which is - again, we feel that our front-end process is effective. We feel we have a good back-office, and we also do feel that we do a good job with our - the quality of our education producing outcomes.

And so the ability to - if the right opportunity presents itself to look at an additional brand, one that again we would be very selective and certainly in no hurry to do that, but that would be something that we would, I think, look at beyond that. And beyond that, again just continuing to balance the need for a strong balance sheet as well as being very cognizant of providing a good return on the capital that we have.

Peter Appert

Thank you and then last question. I think, Todd, both you and Ashish mentioned the potential for variability in the quarterly results this year. I'm just wondering if you can give us any incremental color in terms of just short term? Is there anything plus or minus in the June quarter we should be focused on that could be put or take in terms of performance?

Todd Nelson

From an overall corporate perspective or overall company perspective, no, not necessarily. But obviously, on the university segment, you have some timing based on the ramp-up of your enrollment staff as it compared to the prior year and the level of productivity. So it puts a little bit of pressure on the second quarter of the University and ongoing. But again, we see that as we go - as we said, we reaffirmed our annual outlook, the year's outlook. It doesn't really - on a four quarter basis, it doesn't become problematic. Just there are - there is some variability in that second quarter.

Peter Appert

Got it, understood. Great, thank you.

Todd Nelson

Thanks, Peter.

Operator

[Operator Instructions] Next we have Greg Pendy of Sidoti.

Greg Pendy

Hey guys, thanks for taking my questions. Just two questions, first I just wanted to confirm, did you say that tax rate was going from 23% to 26%? And does that compare to - was it previously 26% to 30%?

Ashish Ghia

Yes, it is going from 23% to 26% and the last effective tax rate for 2017, obviously, was influenced because we had our - the adjustment for our deferred write-offs due to the new Tax Act. But the new tax rate is 23% to 26%, at least, that's what we anticipate.

Greg Pendy

Okay. And then the second question. I think, earlier in the call, you mentioned that 40% in the classes, right now, are being - are using intellipath. Is there any color on where you see that going? Where that trend is going? And any kind of metrics we should be thinking about? Is that impacting anything within the business?

Todd Nelson

Well, again, I think that the thing that it affects the most is the long-term positive impacts on the universities, because it provides, we believe, a better education for the students and better outcomes. It's hard to measure the impact financially in the short run. I think in the long run, it has a positive impact, but it really is on the quality of the education.

And we're big fans of that, and we're going to continue to invest in it and increase the percentage, number of courses that have intellipath in it. But as I said, it really is - in the short run, it's the benefit of the student. And in the long run, again, benefits the overall outcomes of the institution. And I think it's the right business decision as well.

Greg Pendy

Okay. And then just, I guess, one final one. I guess, just within enrollment trends, are you seeing any kind of - I think, you said this was third quarter in a row you're seeing CTU enrollment trends in the right direction. Is there any certain programs that are standing out or trends that you're seeing within that?

Todd Nelson

Well, I would say, not necessarily. I mean, you've always see ebbs and flows within the programs, but one of the things that we continue to be encouraged by is the number of corporate students they have, students that are being recruited from programs where we have relationships with those companies. And we feel good about where that's going. And again, just overall good execution across-the-board at CTU from the generation of inquiries, through the handling of admissions process, and then the back-end of making sure that they're working hard to retain those students.

Greg Pendy

That's helpful, thanks a lot.

Todd Nelson

Thanks Greg.

Operator

Well, this will conclude our question-and-answer session. I would now like to turn the conference call back over to Mr. Todd Nelson for any closing remarks. Sir?

Todd Nelson

Thank you, again, for joining our call today, and we look forward to giving you an update next quarter. Thank you.

Operator

And we thank you, sir, and to the rest of management team for your time also. The conference call is now concluded. At this time, you may disconnect your lines. Thank you, again, everyone. Take care, and have a great day.