Education Management's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Education Management (EDMC)

Q3 2012 Earnings Call

May 03, 2012 9:00 am ET

Executives

James Sober - Vice President of Investor Relations

Todd S. Nelson - Chief Executive Officer and Director

Edward H. West - President and Chief Financial Officer

Analysts

Sara Gubins - BofA Merrill Lynch, Research Division

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

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

Reza Vahabzadeh - Barclays Capital, Research Division

Nick Gibbons - Gradient Analytics, Inc.

Gary E. Bisbee - Barclays Capital, Research Division

Suzanne E. Stein - Morgan Stanley, Research Division

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

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Corey Greendale - First Analysis Securities Corporation, Research Division

Kelly A. Flynn - Crédit Suisse AG, Research Division

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

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

George K. Tong - Piper Jaffray Companies, Research Division

Presentation

Operator

Good day, everyone and welcome to the Education Management Corporation's Fiscal Year 2012 Third Quarter Results Conference Call. [Operator Instructions] Please also note that today's event is being recorded. I would now like to turn the conference call over to Mr. Jim Sober, Vice President of Finance. Mr. Sober, please go ahead.

James Sober

Thanks, Jamie. Welcome to Education Management's fiscal 2012 third quarter earnings call. With me on the call today are Todd Nelson, Chief Executive Officer; and Ed West, President and Chief Financial Officer.

Following our opening remarks, we will begin our question-and-answer session. Before turning the call over to Todd for his opening comments, I'd like to remind everyone that the information presented on this call contains forward-looking statements. These forward-looking statements include, but are not limited to, statements about our future plans and our future financial and operating performance.

Actual results might differ materially from those contained in the forward-looking statements. Additional information containing the factors that could cause actual results to differ materially are set forth in the cautionary statement included in the earnings release. Todd?

Todd S. Nelson

Thanks, Jim. Welcome to our fiscal 2012 third quarter earnings call. On today's call, I'll provide an update of our business operations, and then Ed will review our third quarter results, cover several operational topics and provide our guidance.

While the operating environment continues to be challenging, our financial and operational results for our fiscal third quarter were generally in line with our expectations. There remains no doubt of the long-term need and benefits of higher education. However, given the weak economic recovery and uncertain employment landscape and the new regulatory changes, the operating environment continues to be challenging. We remain focused on 4 main priorities: enhancing student success, which we measure through retention and persistence; graduation rates and graduate employment outcomes; improving performance for our fully online students; implementing initiatives to help mitigate risks from the new regulations; and enhancing the support for our operations through productivity and centralization initiatives.

While business trends may not be improving, we are beginning to see stability in various metrics, particularly at our on-ground schools. Application flow for our on-ground schools, while still down slightly year-over-year, has begun to see some stabilization over the past 9 months. In addition, new student cohort retention rates for our on-ground students, while still negative as compared to our prior-year period, are not declining as much as recent quarters.

Although we have not seen the stability in our online programs that we are seeing on our on-ground programs, we do see some positives. The transition to non-term academic structure for our fully online programs at South University and Argosy University are complete. And we're beginning to see some of the benefits of the transition materialize, as continuing students are earning more credits and persistence by students attending fully online programs offered by South University has increased year-over-year.

Furthermore, the year-over-year application declines that we have experienced have remained in the same general range since the beginning of the calendar year with some stabilization in volume over the last quarter. And while overall persistence remains down compared to the year-over-year to the prior-year period, we believe these underlying trends could begin to show up in the overall metrics over the remainder of the calendar year 2012.

For our recent April start, we had enrollment of approximately 134,900 students, a decrease of 9.3% over the prior-year period. Excluding the 6 locations that are less than a year old, same-school enrollment declined approximately 10%. Students taking their classes in a fully online modality decreased 16.6% from last year to 34,200 students, representing about 25% of the total student population. Further, new students for the 3-month period ended March 31, 2012 decreased by approximately 21% over the prior-year period, in line with our comments on our earnings call last quarter that this decline should be at or near the low watermark.

We continue to believe new student year-over-year enrollment trends will remain choppy in the near term, but should improve in the latter half of calendar year 2012.

On a positive note, benefiting from over 140 new diploma and certificate programs we introduced last year, we did see slightly positive new student growth and shorter-term programs during the third quarter. Furthermore, our on-ground schools experienced sequential new student growth at certain degree levels and disciplines, in particular, at both the doctoral and the masters degree levels as well as in behavioral sciences, business and health sciences programs.

During the third quarter of fiscal 2012, we rolled out over 60 programs across schools not currently offering them, bringing the total programs rolled out during the first 9 months of -- to over 210.

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