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Edited Transcript of CECO earnings conference call or presentation 1-Aug-18 9:30pm GMT

Q2 2018 Career Education Corp Earnings Call

HOFFMAN ESTATES Aug 2, 2018 (Thomson StreetEvents) -- Edited Transcript of Career Education Corp earnings conference call or presentation Wednesday, August 1, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ashish Ghia

Career Education Corporation - Senior VP & CFO

* Sam Gibbons

Alpha IR Group LLC - Assistant VP

* Todd S. Nelson

Career Education Corporation - CEO, President & Director

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Conference Call Participants

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* Gregory R. Pendy

Sidoti & Company, LLC - Research Analyst

* Peter Perry Appert

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Career Education Corporation's Second Quarter 2018 Earnings Conference Call. (Operator Instructions) And please note that today's event is being recorded.

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

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Sam Gibbons, Alpha IR Group LLC - Assistant VP [2]

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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; 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?

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Todd S. Nelson, Career Education Corporation - CEO, President & Director [3]

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Thanks, Sam. Good afternoon, everyone, and thank you for joining us on today's call. I'll begin with a review of the second quarter operating results, which came in at the high end of our expectations. Ashish will then provide more details around the financials and outlook before I provide some closing thoughts at the end of the call.

We continue to experience growth through the first half of 2018, and the positive momentum in operating metrics and enrollment trends is expected to continue into the third quarter. Our focus on leveraging data and technology, enhancing student experiences and investing in student-serving processes has positively impacted enrollment trends across both universities. And we believe we'll further improve student retention and academic outcomes.

With the transformation substantially complete, we are confident that the company is well positioned to achieve sustainable and responsible growth.

Second quarter 2018 total company adjusted operating income improved to $23.8 million as compared to $14.6 million, primarily driven by the substantial completion of our teach-out process. This has enabled us to further prioritize resources towards meeting the increased student interest we are experiencing.

In fact, our universities have incrementally invested in student-serving processes and initiatives across their Illinois and Arizona centers.

At CTU, new student enrollments for the quarter increased 5.8% versus the prior year.

Student interest remained strong, and we are focused on helping them navigate through their onboarding and orientation process as they acclimate to the university.

Total enrollments, which typically lag new enrollment growth, grew 3.3% for the quarter, the highest growth in over 6 quarters. The opening of our Arizona center last fall partly contributed to this enrollment growth, in addition to our previously discussed ongoing initiatives.

Additionally, our academics and advising functions are leveraging technology and have increased their student outreach with robust orientation and student engagement strategies that we believe are supporting overall retention.

After the launch of the faculty mobile application last year, CTU has fully implemented its 2-way messaging platform within the mobile app to support effective and efficient student outreach and communication with advising admissions and financial aid personnel. Initial reactions to the platform are very positive. Our students and staff are increasingly using the messenger due to its ease and simplicity.

In fact, our staff is now able to reach and advise students that would not have otherwise been able to. We believe this will ultimately have a positive impact on overall student retention and academic outcomes. We look forward to learning more about the benefits of this tool.

Overall, we are pleased with the operating progress at CTU and expect new student enrollments to grow in the third quarter as compared to the prior year quarter. New student enrollments at AIU increased 9% as compared to the prior year quarter. The growth in new enrollments was positively impacted by operating improvements across our student-serving functions, including AIU's admissions and advising center in Arizona, which is fully operational late last year as well as the academic calendar redesign.

AIU continues to improve its student-serving operations with the goal of providing quality academics and supportive student services. Further improvements have also been made to the learning management system and AIU continues to adopt on technology enhancements with the introduction of the faculty mobile app during the fourth quarter of last year, and testing of 2-way messaging app this quarter.

AIU's total enrollment decrease of 13.8% for the quarter was a direct impact of the calendar redesign, which drove the new enrollment decline in the first quarter. Recall that the timing-driven variability does not have material impact on the underlying operating and financial performance of the university. And we expect both third and full year revenue to show growth in 2018.

Overall, we are pleased with the operating progress at AIU and expect significant growth in new and total student enrollments during the third quarter.

Both of our universities are still experiencing increased productivity and efficiency from the Arizona teams, as they continue to be more tenured and serve others -- our students. We will slowly start to anniversary the opening of these centers beginning in the third quarter.

Encouraged by the positive momentum we are experiencing and supported by the operating efficiencies gained through the year, we have committed to increase investments to further augment our advising and admissions capabilities for both universities across their Illinois and Arizona centers.

We expect these incremental investments to also support our goal of sustainable and responsible growth, while helping students progress through their academic life cycle. Corporate partnerships have also been a key contributor to our enrollment growth, with just over 11% of our University Group population now coming from such partnerships.

We believe that having strong corporate partnerships is an important component in the value proposition and is a strategic growth driver of our universities.

CTU is further along in the process of developing these relationships, and it is a key driver of their new enrollment growth during the second quarter.

AIU plans to further develop these relationships in future quarters. Also note that students enrolled under such corporate programs have relatively low acquisition costs, while their onboarding and retention metrics are generally higher.

With that, I now will turn the time over to Ashish to have a more detailed review of our results, balance sheet and outlook. Ashish?

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Ashish Ghia, Career Education Corporation - Senior VP & CFO [4]

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

Total company operating income was $11.3 million for the quarter, an improvement of 24.2% as compared to $9.1 million in the prior year.

Adjusted operating income, which excludes significant legal settlements, unused space charges and depreciation was $23.8 million for the quarter as compared to $14.6 million in the prior year. This improvement in performance was primarily driven by reduced operating costs at the teach-out campuses.

Also included in the quarter was an increase of $6 million in legal settlement expenses, which were partially offset with the recovery of $2.5 million for past claims. A substantial portion of this recovery, along with other operating efficiencies, have been committed to incremental investments in student-serving operations that Todd mentioned earlier.

In fact, staffing for our universities is up approximately 9% versus the prior year, while marketing efficiencies, if any, will be more muted in future quarters. We have relatively optimized our overall spend and are now looking to opportunistically increase our marketing investments.

These trends may drive some quarterly variability in our performance, but we remain confident in our full year outlook provided last quarter.

Second quarter University Group revenue improved by $4.4 million or 3.2% to $141.8 million as compared to the prior year. Both universities contributed to this revenue growth, primarily driven by the positive momentum in our enrollment trends.

CTU experienced revenue growth of $2.1 million or 2.3%, while revenues at AIU grew by $2.4 million or 5.1% versus the prior year.

Also impacting AIU's current quarter revenue were 4 additional revenue-generating days as compared to the prior year.

As expected, second quarter University Group operating income of $25.5 million was below the $29.1 million achieved in the prior year. This decrease of $3.6 million was primarily driven by increased investments in our admissions and advising centers, partially offset by the increased revenues for the quarter.

Also included in the quarter was a noncash charge of $1.2 million, primarily recorded within AIU. This charge is related to optimization of ongoing real estate, which will result in cash savings of approximately $5 million through 2023.

Now on to enrollments. Total enrollments at CTU grew by 3.3%, supported by new enrollment growth of 5.8% for the quarter. Continued investments in our student-serving processes, progress within our corporate partnerships and ongoing adoption of technology initiatives contributed to this positive performance.

Driven by these initiatives, we expect CTU to again experience new enrollment growth for the third quarter. New enrollments at AIU grew 9% for the quarter. And as Todd mentioned, the decrease of 13.8% in total enrollments was due to the calendar redesign impact from Q1.

Looking ahead, we expect new and total enrollments at AIU to experience significant growth during the third quarter.

Also recall that the calendar-driven variability in quarterly enrollment days will not materially impact quarterly revenue trends, which are still primarily driven by our underlying long-term enrollment trends and the number of revenue-earning days during the quarter.

That is why, despite quarterly variability in enrollments, we expect AIU to experience revenue growth both in the third quarter and for the full year.

Let me spend a few minutes discussing our operating expenses. Admissions cost as a percent of revenue have increased due to investments in our Arizona and Illinois centers, while academic expenses as a percent of revenue have decreased as a result of our teach-out operations. This teach-out driven decrease has been partially offset with academic and advising investments within our 2 universities.

Bad debt as a percent of revenue has remained relatively flat as compared to the prior year, and our teams continue to focus on assisting students with securing funding for their education.

Moving to our teach-outs. Our All Other Campuses segment reported an operating loss of $12.2 million in the second quarter, which represents an improvement of approximately $2 million as compared to an operating loss of $14.2 million in the prior year. After adjusting for legal settlements and unused space charges, adjusted operating loss was $3 million, an improvement of approximately $8.2 million as compared to $11.2 million in the prior year.

These improvements are primarily driven by reduced expenses as campuses wind down operations, while still providing a reasonable opportunity for our students to graduate. As we speak, we have approximately 10 students remaining at teach-out campuses, with all expected to complete their program by year-end.

Now let me spend a few minutes reviewing our balance sheet. We ended the quarter with $190.1 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 $10 million over year-end '17 and was primarily driven by positive cash flows from our university operations, offset by cash outflows related to payments for contractual lease obligations, operating losses for our teach-out campuses and legal settlements.

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 the teach-outs. Net cash provided by operations was $3.7 million during the quarter as compared to $4.8 million during the prior year.

Included in the current quarter were payments of $4 million related to previously disclosed legal settlements. Capital expenditures were $1.4 million for the quarter and in line with prior year. 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 $2.9 million. This resulted in an effective tax rate of 24.9% for the quarter and a year-to-date tax rate of 19.4%. We continue to expect our 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 Jan 2018.

As a reminder, specifically, as it relates to 2018, we do not expect to pay any federal income taxes due to the $215.5 million of federal net operating loss carryforwards that existed as of December 31, 2017.

Moving on to our outlook for the year. As you can see on Slide 3 of the presentation, we continue 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 anticipated 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 the third quarter of 2018. With the substantial completion of our 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 $23.5 million to $25 million for the third quarter.

Our expectations for year-end cash balances have been reduced by $5 million to a range of $215 million to $220 million, primarily due to the additional $6 million of legal settlement expenses booked during the second quarter.

After adjusting for these increased settlement liabilities, our revised year-end cash expectation is slightly ahead of the previously provided outlook. Please note that we expect the remaining $13 million payment for the legal settlement to be paid out in the third quarter.

As a reminder, due to the significant decrease in our balance sheet obligations associated with our teach-out campuses, we expect more of our operating income dollars to result in positive operating cash flows and continue to anticipate growth in our 2019 cash balances.

With this anticipated cash generation, let me again comment on capital allocation. We are 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 prioritizing organic student-serving investments at our universities and maintaining adequate liquidity.

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

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

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Todd S. Nelson, Career Education Corporation - CEO, President & Director [5]

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Thanks, Ashish. The education industry remains one of the biggest sectors of our economy, and postsecondary enrollments are expected to see growth over the next few years. We have completed a good first half of 2018 and are well positioned to continue meeting our objectives of sustainable and responsible growth.

A few key points to note include: first, overall operating metrics and trends are in line with or better than our expectations; two, we have accelerated our investments in student-serving processes and initiatives; and three, there will be a strong focus on data technology and academic quality.

To wrap up, our operating performance is allowing and encouraging us to accelerate growth investments and technology enhancements that should align our university with favorable long-term demand trends in postsecondary education. We are taking a measured approach to balance our objectives of responsible and sustainable growth with our commitments to improve student experiences, retention and academic outcomes and remain confident in the long-term academic value proposition of our universities.

Thank you, again, for joining us today. And we will now open the call for any analyst questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first questioner today will be Peter Appert with Piper Jaffray.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

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Todd, I believe you said something along the lines of potentially less room for incremental marketing efficiency going forward. I was just hoping you could expand on that, and what the implications of that might be?

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Todd S. Nelson, Career Education Corporation - CEO, President & Director [3]

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Well, actually, I think Ashish commented on it, but the bottom line is this -- we've had significant, as you know, decreases in our overall marketing spend and as a percentage of revenue. So we've been encouraged by that. And what we're seeing now is opportunities to invest in because if demand continues, certainly, it's something we want to invest in and take advantage of that. But I would just say that being careful to not -- I guess, to not expect those types of decreases because, again, of where we started. I don't know if, Ashish, you want to add to that?

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Ashish Ghia, Career Education Corporation - Senior VP & CFO [4]

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I think that is correct, Peter. What we are referring to is, as you can see in the second quarter, our advertising expenses are pretty much flat to second quarter last year. But the first quarter was the last quarter where we had significant efficiency. So that is all we're trying to point out.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [5]

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Okay. And student acquisition costs for the university, do you see any significant changes there?

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Todd S. Nelson, Career Education Corporation - CEO, President & Director [6]

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Well, again, I think we're doing things to become more efficient, but we'll need to see how that plays out. But as of now, we're not projecting any significant decreases in that.

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Ashish Ghia, Career Education Corporation - Senior VP & CFO [7]

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And Peter, one more thing to add here. Also, recall that we also mentioned that, in addition to decreasing efficiencies, we are also trying to reinvest back into our marketing spend, so that will be another reason why our year-over-year spend may not be significantly lower.

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Todd S. Nelson, Career Education Corporation - CEO, President & Director [8]

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And I would just add one thing because the main -- that cost is divided between admissions cost and advertising. And as you know, we've been investing significantly in adding enrollment staff after several years of being flat. And so it does take a little bit of time to ramp up. So again, I think it's -- we're encouraged by the fact that we're still experiencing the demand to support adding more enrollment staff, correct.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [9]

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Right. Understood. And then apologies if I might have missed this in your comments. I know the retention metrics are distorted because of the scheduling changes. Could you just comment on what you're seeing in terms of retention trends at AIU specifically?

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Todd S. Nelson, Career Education Corporation - CEO, President & Director [10]

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Yes, again, what we're seeing is, again, they've been implemented several changes that we believe, in time, are going to allow them to see improvement in retention. In particular, they have gone to, as you know, Peter referred to before as the grad team model. And that's something that we found from our past history. Those types of models were more effective. It just takes a little bit of time for them to actually get fully implemented, and then to convert from the old process. That's what I see. Ashish, do you want to add anything to that?

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Ashish Ghia, Career Education Corporation - Senior VP & CFO [11]

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No. I think that is correct, Peter. And as long as we continue to translate the new enrollment growth into total enrollments, which is what we expect in Q3, our retention efforts are being supported by the initiatives. So I think we feel good about it.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [12]

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And any comments on the relative profitability of CTU versus AIU whenever we have talked about this in the past in terms of the needing to get to scale at AIU. But just thoughts on ability to narrow the margin gap between the 2 universities?

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Todd S. Nelson, Career Education Corporation - CEO, President & Director [13]

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Well, I think you have 2 things going on there. One is CTU is continuing to grow. So that will certainly take longer to close the gap, which is a good thing. But I -- if you just look at kind of the fundamental attributes of AIU, they are similar to CTU. They are similarly priced. They have, as you know, the same type of accreditation, good leadership, at both. And so our view of that is, again, as you continue to make that investment, which we're doing, we think, in time, again, they will be able to certainly get to -- hopefully able to get to where CTU is. Just, again, CTU is a moving target because they are growing. So it's hard to know exactly when and how long, but we certainly feel that has the possibility.

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Operator [14]

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And the next questioner today will be Greg Pendy with Sidoti.

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Gregory R. Pendy, Sidoti & Company, LLC - Research Analyst [15]

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I guess, just one question just on the guidance. I'm assuming just, if it's not surfacing in the third quarter, you've now completely cycled through your unused space charges. Is that fair to say?

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Ashish Ghia, Career Education Corporation - Senior VP & CFO [16]

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Yes, that is correct. We have mainly cycled through our unused space charges as it relates to our teach-outs.

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Gregory R. Pendy, Sidoti & Company, LLC - Research Analyst [17]

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Okay. Great. And then, I guess, just one bigger picture just on the growth. You mentioned the -- it was the best you've seen in 6 quarters at CTU. Is there anything to specifically call out? You mentioned corporate partnerships, but what type of students or what are the areas of strength that you're seeing?

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Todd S. Nelson, Career Education Corporation - CEO, President & Director [18]

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Well, I think, we see it across-the-board. I mean, obviously, some of those ebbs and flows depending on what your, again, what's happening in the market, but it's really across-the-board. I think that in addition to obviously with the things that we've mentioned the fact that we continue to add enrollment staff based on the demand, based on the inquiries that we're getting, that's driving the growth. And we've been able to invest in adding enrollment staff, whereas in the past, CTU was relatively flat.

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Operator [19]

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And at this time, we are showing no further questions. So I'll turn the call back to Todd Nelson for any closing comments.

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Todd S. Nelson, Career Education Corporation - CEO, President & Director [20]

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Well, we just want to, again, thank everybody for joining us. And we look forward to speaking with you, again, next quarter. Thank you.

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Operator [21]

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And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.