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Edited Transcript of CECO earnings conference call or presentation 7-Aug-19 9:30pm GMT

Q2 2019 Career Education Corp Earnings Call

HOFFMAN ESTATES Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Career Education Corp earnings conference call or presentation Wednesday, August 7, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ashish R. Ghia

Career Education Corporation - Senior VP & CFO

* Todd S. Nelson

Career Education Corporation - President, CEO & Director

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Conference Call Participants

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* Gregory R. Pendy

Sidoti & Company, LLC - Consumer Analyst

* Huang Howe

Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst

* Chris Donovan

Alpha IR Group LLC - Assistant VP

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Presentation

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Operator [1]

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Good day, and welcome to the Q2 2019 Career Education Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Chris Donovan with Alpha IR. Please go ahead.

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Chris Donovan, Alpha IR Group LLC - Assistant VP [2]

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Thank you, Chad. Good afternoon, everyone, and thank you for joining us for our second quarter 2019 earnings call. 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 involves 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, 2018, 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 that accompanies today's call contains financial and other quantitative information to be discussed today as well as a reconciliation of GAAP to non-GAAP measures and is available on the Investor Relations page of the company's website at careered.com.

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

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

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Thanks, Chris. Good afternoon, everyone, and thank you for joining us on today's call. We're pleased with our second quarter and year-to-date results, which has shown acceleration in our operating and financial trends. These trends were supported by consistent levels of prospective student interest and balance investments across our student-serving processes and initiatives. In general, we are executing well against our strategic priority of sustainable and responsible growth, while supporting investments in our student-serving operations and ongoing technology initiatives.

Some key highlights for the quarter include: first, revenue was up 10.1% in part supported by University Group total enrollment growth of 5.4% with both universities contributing to this growth; two, excluding the $30 million FTC settlement and certain noncash items, second quarter adjusted operating income grew by almost 38% to $32.8 million, primarily driven by operating leverage; three, both universities have mostly annualized the investment at our Arizona and Illinois centers that were first made in early 2017.

We continue to evaluate and optimize staffing levels within of our student-serving operations with the goal of effectively serving the prospective student interest we are experiencing, while providing superior student experiences. Lastly, as it relates to Trident University, we're diligently working through the necessary regulatory approvals, while also planning for a smooth integration into AIU that will focus on maintaining and enhancing student experiences for students from both universities.

I'll further expand on some of the highlights for the quarter shortly. Ashish will then cover more details around the financials and provide an update on our 2019 outlook before I add some closing thoughts to end the call. Now to our operating performance for the quarter. We reported a net loss of $0.6 million or $0.01 per share, while adjusted earnings per diluted share, which includes certain significant and noncash items, was $0.39 per diluted share as compared to $0.23 in the prior year quarter. Adjusted operating income was $32.8 million as compared to $23.8 million in the prior year quarter with the improvement primarily driven by revenue growth at our universities as well as a reduction of adjusted operating losses within our closed campuses.

Both universities contributed to this operating growth with total student enrollment up 5.4% supported by year-to-date new enrollment growth of 25% and consistent levels of prospective student interest that has carried through into 2019. Some factors driving this growth were: first, technology initiatives and investments in student-serving operations at our Illinois and Arizona centers that have increased efficiencies within our on-boarding and enrollment processes; next, leveraging data and analytics to further improve our on-boarding and enrollment processes by providing customized and relevant information to prospective students; and next, the timing and impact of AIU calendar redesign that has positively impacted new enrollment trends through the first half of 2019.

Moving on to our segments. At CTU, total student enrollments grew 3.2% as of the end of the quarter supported by new student enrollment growth of 7%. Some of the operational focus and priorities worth mentioning are: first, reporting and technology enhancements have enable admissions and advising staff to customize their on-boarding and engagement strategies based on prior college experience that enables them to provide a more meaningful and customized engagement with the students; next, updating and editing course design and content based on active feedback from faculty and advisers, while optimizing core sequencing based on insights from each session with the ultimate goal of enhancing learning and retention as students progress through their course of study; and lastly, our retention analytics tool has been fully implemented, and we have started to see increased interaction with students with more meaningful intervention, increased student engagement and an overall shift to more proactive outreach culture within student coaching and advising.

A quick comment on Corporate partnerships. We continue to further support and grow the program and are looking to incrementally invest in our Corporate Alliance team as we enter 2020. With partnerships and relationships take time to develop, but as previously discussed, these students have relatively higher persistence and are thus becoming a larger percentage of our overall total enrollments. Driven by the success of various initiatives and investments and supported by consistent levels of new student interest for our programs, we expect new student enrollments at CTU to experience growth for the full year 2019.

Turning to AIU. As a reminder, quarterly enrollment results at AIU have been significantly impacted by its academic calendar. And this was true for this second quarter. Total student enrollments at AIU increased 10% as of the end of the current quarter. And in spite of approximately 17% fewer enrollment days, AIU's new student enrollments for the quarter were relatively flat as compared to the prior year quarter. Excluding this quarterly variability, we believe AIU experienced new student enrollment growth for the second quarter.

Revenue was up 23.2% versus the prior year quarter driven by approximately 12% more revenue earning days for the quarter -- current quarter as well as growth in underlying enrollment trends. I also wanted to point out for the second half of 2019, we are expecting a similar number of enrollment and revenue earning days when compared to the prior year. And Ashish will provide more details on those trends shortly.

Let me quickly point out some of the key operational trends and priorities supporting our students. Student-serving operations at our Illinois and Arizona centers continue to effectively serve prospective students and have further optimized the on-boarding and enrollment process. In fact, student support staff at AIU increased through the first half of 2019 and is positively driving our on-boarding metrics and momentum.

Student support teams continue to evaluate and optimize outreach strategies based on session by session outcomes, while training and development has further improved the level of student service. Overall, tenure and experience amongst our student support teams are increasing and have resulted in further efficiencies within various student processes. In general, AIU is executing well against its objective of sustainable and responsible growth, and we expect new student enrollment to experience growth for the full year 2019.

A quick update on technology initiatives that are intended to efficiently serve and educate nontraditional students, including adult learners. First, we have rolled out an updated version of our mobile app with a refresh look that is focused on key student deliverables around financial aid, assignment completion and notifications. Classroom organization is simplified, and the app now provides additional information on the financial aid process, including required documentation. Adoption rate remains high amongst our universities and is increasingly used by faculty and staff as a communication tool with the students.

Next, leveraging Google's artificial intelligence technology and analytics, AIU has launched its virtual assistant named Lucy that is designed to help our students throughout their academic lifestyle from orientation and on-boarding to ongoing coaching support and advising. While still early, we have the potential to address over 500 queries per minute and thus far are encouraged by the response time and accuracy of the tool. Further, AIU plans to extend artificial intelligence and machine learning beyond virtual assistance to other areas of the university in the near future.

To conclude, the positive momentum from 2018 has carried through the first half of 2019. Both universities are executing well against their objective of sustainable and responsible growth. These trends have provided reaffirmation around our overall strategy of prioritizing student-serving processes and initiatives, while giving us the necessary financial and operating confidence to continue investing in our universities.

With that, I'd like to hand the call over to Ashish for a more detailed review of our second quarter 2019 results and balance sheet as well as the 2019 outlook. Ashish?

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

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Thank you, Todd. I will start with a review of our second quarter results and then discuss our balance sheet and 2019 outlook before handing the call back to Todd for his closing remarks. All comparisons are versus the comparative prior year period, unless otherwise stated.

Before I begin, let me remind everyone about the change in our segment presentation effective 1/1/2019. With the responsible completion of our teach-outs, the all other campuses segment, which included these schools, is no longer an operating segment. As a result, residual losses associated with these closed campuses have now been included within Corporate and Other category. Prior periods have been recast to maintain comparability.

Now to our second quarter results. Total company operating income was $0.2 million compared to an operating income of $11.3 million in the prior year quarter. Adjusted operating income, which excludes certain significant and noncash items, is more reflective of the underlying operating performance. Second quarter continue to see strong momentum with this adjusted measure at $32.8 million, which was above the high-end of our outlook range of $30 million to $31.5 million and grew approximately 38% versus the prior year. Net loss for the quarter was $0.6 million and loss per share was $0.01, but adjusted earnings per diluted share was $0.39.

Before I go into the segment details, a quick comment on the adjusting items for the quarter. First, we recorded a $30 million reserve related to the FTC settlement disclosed in our 8-K filed last week. We are pleased to have reached a resolution with the FTC after 4 years of incurring legal expenses and cooperating with their investigation, thus allowing us to further focus on academic quality, outcomes and student experiences. We expect to pay this amount sometime in the third quarter.

Second, adjustments related to vacated space will continue to become smaller as we approach the tail end of our remaining leases. Excluding these items, improvement in operating performance was primarily driven by revenue growth at both universities as well as reduced losses associated with our closed campuses. Partially offsetting these positives were costs associated with ongoing investments in technology as well as increased bad debt expense.

Moving on to some more details around the quarter financials. Total company revenue increased 10.1% to $156.4 million as compared to the prior year quarter. This growth was supported by positive enrollment trends at both universities that have been driven by the strategic initiatives that Todd just outlined. Also positively impacting the quarter were more revenue earning days at AIU, which I will discuss shortly.

As it relates to our segments, revenues at CTU was up 3.5% for the quarter supported by total enrollment growth of 3.2%. Operating income of $12.1 million was $15 million less than the prior year quarter, but includes the $18.6 million charge for a portion of the FTC settlement recorded within CTU. Excluding this charge, operating income improved by approximately 13% or $3.6 million versus the prior year, primarily driven by revenue growth. Operating expenses were relatively flat to the prior year with efficiencies across various student processes partially offsetting increased bad debt expense.

Now to AIU. Revenue increased 23.2% or $11.3 million for the quarter supported by growth in underlying enrollment trends as well as approximately 12% more revenue earning days for the quarter. Note that year-to-date, there were approximately 8% more revenue earning days at AIU. A quick reminder that any calendar-driven variability in quarterly enrollment trends does not materially impact quarterly revenue trends, which are primarily driven by our underlying operating performance and the number of revenue earning days during the quarter.

Operating loss for the quarter was $4.2 million driven by the expense recorded for the FTC settlement. Excluding the $11.4 million charge for a portion of this settlement recorded within AIU, operating income would have shown an $8.8 million improvement when compared to prior year's operating loss of $1.6 million. Leverage was strong with most of the revenue growth resulting in operating income growth, while increased bad debt expense was the primary offset.

Moving to enrollments. Total enrollments at CTU grew by 3.2% supported by new enrollment growth of 7% versus the prior year quarter. As Todd outlined, this growth was supported by consistent levels of prospective student interest that were well served by investments in the Illinois and Arizona centers that have now mostly annualized. Also contributing to this positive performance was the continued progress and growth within our Corporate partnership program.

Driven by these initiatives, including improved efficiencies within our student enrollment process, we expect CTU to experience new enrollment growth for the full year 2019. Further, we expect third quarter new enrollments to be relatively flat compared to the prior year. Please note that the third quarter student enrollment trends will be moderated by a strong prior year comparative performance period during which new enrollments were 9% higher as compared to the third quarter of 2017.

Total enrollments at AIU increased 10% for the quarter. And as Todd mentioned, new enrollments were relatively flat for the quarter. Please note that there were 17% less enrollment days in the second quarter. Recall that the academic calendar redesign at AIU, specifically the number of enrollment days in any given quarter, has a significant impact on the new enrollments for that quarter. Excluding this quarterly variability, we believe AIU actually experienced new enrollment growth that was a result of various operating initiatives and investments discussed earlier.

For the third quarter and full year 2019, we expect new enrollments to show growth as compared to the prior year. In context of the academic calendar, I wanted to point out that for the third and fourth quarter of this year, the academic calendar will not materially impact quarterly new enrollment comparability since the number of quarterly enrollment days will be mostly in line with the relevant prior year period.

A quick update on Corporate and Other. This category now includes residual operating losses associated with closed campuses and reported an operating loss of $7.7 million in the second quarter as compared to an operating loss of $14.2 million in the prior year quarter. Note that the prior year quarter included $6 million of settlement expenses related to the Surrett matter. Teach-out losses during 2019 now include expenses related to legacy legal matters as well as some residual occupancy related items.

Now to income taxes. We recorded a provision for income taxes of $2.3 million for the current quarter, which resulted in an effective tax rate of 129.3%. The tax rate for the quarter was negatively impacted due to the $30 million FTC settlement reserve, which was mostly nondeductible, thereby disproportionately reducing earnings before taxes as compared to the provision for income taxes. This nondeductibility is an estimate based on facts and circumstances we know today.

The quarter was also benefited by approximately 28.2% related to the closure of a Florida income tax audit. For 2019, we now expect our tax rate to be between 29.5% and 31%, which is higher than our previous expectation due to the partial nondeductibility of the FTC settlement. Separately, we ended 2018 with approximately $193.6 million of federal net operating loss carryforwards, which are available to offset future taxable income. As a result, specifically, as it relates to 2019, we do not expect to pay any federal income taxes.

Now let me spend a few minutes reviewing our balance sheet. We ended the quarter with $280.2 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 $51.1 million over the year-end 2018 and was primarily driven by positive cash flows from our core operations, offset by cash outflows related to the attorney general settlement payments of $5 million as well as the annual and long-term incentive compensation payment made during the first quarter. Note, our cash balances does not reflect the payment for the $30 million FTC settlement that we expect to pay in the third quarter.

Capital expenditures were approximately $0.9 million in the second quarter as compared to $1.4 million in the prior year quarter. For the full year 2019, we foresee capital expenditures to be in the range of 1% to 2% of revenues. Overall, the company is executing well against its objectives of sustainable and responsible growth with investments in student-serving initiatives and technology showing positive results. The improved performance and efficiency of our operations is allowing us to maintain and balance investments within our 2 universities helping us create better experiences and academic outcomes for our students.

We seek to maintain optimum staffing within our student-serving operations at levels that we believe will enable us to efficiently serve prospective student interest, while providing superior experiences to our current students. With this in mind, we expect employee-related costs in the second half of 2019 to be modestly higher than the first half.

Finally to our 2019 outlook. We are updating our full year 2019 outlook as follows: Increasing full year adjusted operating income to be in the range of $118 million to $122 million as compared to $105 million in 2018 reflecting expected growth of approximately 12% to 16% versus the prior year. This raised outlook is primarily driven by positive year-to-date operating performance.

The above outlook reflects our expectations of new enrollment growth for both universities in 2019, which we believe will lead to revenue growth at each university. For 2019, we expect revenue growth to be in the range of 4% to 5% and new enrollments to grow approximately 8% to 10% for the full year 2019, again, supported by our strong year-to-date performance.

We continue to expect year-end cash balances to grow during the year, net of the pending acquisition of Trident University during the year and the $30 million payment related to the FTC settlement. Adjusted earnings per diluted share to range between $1.20 and $1.24 per diluted share versus $1.05 in 2018.

For the third quarter, we expect adjusted operating income to be in the range of $26 million to $27 million and adjusted earnings per diluted share to be in the range of $0.23 to $0.25. Please refer to our earnings release filed today for important information about key assumptions and factors underlying this outlook and other expectations discussed on today's call as well as the GAAP to non-GAAP reconciliations.

Finally, a quick reminder on our balanced approach to capital allocation. We continue to focus on building a strong balance sheet, while prudently investing in organic growth projects and have also committed capital to inorganic opportunities such as the pending acquisition of Trident University. Our ultimate goal is to effectively and efficiently deploy resources in a way that we believe will lead to increased shareholder value, while supporting and enhancing the academic quality of our institutions.

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 - President, CEO & Director [5]

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Thanks, Ashish. We look forward to continued success in the remainder of 2019 as we execute against our overall strategy of prioritizing student-serving processes and initiatives, while investing in our universities to achieve sustained and responsible growth. I believe we're well positioned both from a competitive and operating standpoint to serve and educate current and prospective nontraditional students, including adult learners. I'm proud of the entire Career Education team for their focus, hard work and determination that is helping drive quality academic outcomes for our students.

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) The first question will come from Alex Paris with Barrington Research.

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Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [2]

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This is Chris sitting in for Alex. Recently, there has been some news about the Navy TA funding program being halted until the end of September. Would this have any impact -- I'm not sure if you can comment on this -- on the military enrollments within Trident?

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

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Well, this type of thing is something that we have always monitored and paid very close attention to, and we continue to monitor that. As far as AIU and CTU, again -- just, again, first look at that it seems like it would be a minimal impact, if any. And as far as Trident, we'll continue to obviously monitor that. But again, our view of that is that they are very well diversified in the military that they serve and again, not -- at this point in time not overly concerned.

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Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [4]

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And then I was -- it's great to see the new enrollment growth that you're driving with the outlook for 8% to 10% growth above your prior guidance of 3% to 5%. Can you provide some additional color into your retention efforts for this growing student population as we transfer new students to total student enrollment growth?

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

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Yes. Well, that has been a major focus of ours for some time and will continue to be. Again, our view of that is that to provide a quality education is the #1 priority, to provide excellent service that will affect and impact the retention. And then to add as much technology initiatives, whether it's the mobile app, whether it's our different platforms that we have to better serve them. And so going forward, our view of that is that it will -- on a net basis will increase retention. But you do have, as you know, several things that -- for example, corporate students tend to -- if you have a higher percentage of that, that inflates your retention rate or -- for example, you maybe have a higher mix of undergraduate students versus graduate students. They tend to have a lower retention rate than graduate students. But the bottom line is a major focus of ours, we feel like we really are -- have the right people focused on it, and we feel encouraged by where we think it's going to be in the future.

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Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [6]

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Okay. Okay. And then one more question here and there I'll hop back in the queue. Recently California has been in the headlines, as you know, over students attending out-of-state not for profit online universities. You're for profit, but how should we characterize where the current regulatory environment is and Career Education's current standing?

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Todd S. Nelson, Career Education Corporation - President, CEO & Director [7]

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Well, good question, and I think obviously there are 3 levels that you're always engaged in, are the federal level, the state level and then with your creditor. And, as you know, we've had recent business over the last year or 2 with CTU and AIU. And those were positive outcomes from those -- your accreditation reviews. We obviously, from a state perspective, continue to have positive relationships there. And at the department level, again, that's something that's constantly changing in there. I think the most important thing is to have a good team that can, again, engage with the folks in Washington to see what's coming. And we feel like we have a good team to address that. So that's the overall environment.

As it specifically relates to California, you're right. That process that was -- that has created quite a bit of noise is really -- again, that applies to nonprofit universities. So in our case, it's around the student complaint process. There is a student complaint process in place in California for out-of-state for profit universities. So that doesn't affect us. And, but it is at this point affecting the nonprofits. And again, there's a lot of noise around that. And I -- just an opinion here. I think that they will get that worked out in time. But in our case, we're exempt from that. But the bottom line is I think the number one thing you need to do as an institution is to provide a good quality education. And I think that really puts you in a good position to address an environment that constantly is changing. But then second is you really have to have a confident team around you that interacts with all 3 of these layers of regulation, which can come from your creditor, state licensing and then the federal level.

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Operator [8]

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(Operator Instructions) The next question comes from Greg Pendy with Sidoti.

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Gregory R. Pendy, Sidoti & Company, LLC - Consumer Analyst [9]

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I know there's been a lot of technology, which you've talked about at your Investor Day and you alluded to here, improving the on-boarding and retention analytics. But can you just remind us where intellipath is in terms of course penetration? Is that something that has been rolled out at most of your courses right now? Or is there still sort of a penetration story there?

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

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Well, we continue to roll it out. And as you know, it's a very effective tool for learning and outcomes. We also believe it affects retention as well and have always offered for anyone who would like to let us know and even provide a demonstration. It's something very proud of. And -- but as far as -- the direct answer to your question is we continue to roll that out. We have plans to continue to do that. And again, it just takes time, because, again, it's a complex process, but very effective.

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Gregory R. Pendy, Sidoti & Company, LLC - Consumer Analyst [11]

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Is it -- would you stay it's still -- is it at 50% of your courses right now?

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Ashish R. Ghia, Career Education Corporation - Senior VP & CFO [12]

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I mean we haven't necessarily given penetration. But to Todd's point, what we do is we strategically roll out in courses, which have the maximum impact for maximum students. And so we go very strategically course by course and try to make sure that we maximize that impact.

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Gregory R. Pendy, Sidoti & Company, LLC - Consumer Analyst [13]

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Okay. That's helpful. And then, I guess, just this is the second quarter with pretty strong enrollment growth. Is there anything deploying out -- maybe any -- is business or health care -- are you seeing outside strength in any of the areas?

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Todd S. Nelson, Career Education Corporation - President, CEO & Director [14]

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Well, the good news on that one, Greg, is that it's something that, I think, our ability to -- regardless of kind of where the market is going, both CTU and AIU have very broad statements of affiliation with their creditors. So we have the ability to offer a broad degree of programs. And so you do see in times an ebb and flow. Health sciences in particular is one that has seen some strong demand for a long time. But across the board, we're continuing to see very reliable interest from prospective students. And so, no real big change in any of our degree programs as far as a percentage of the total mix. But again, I think the key to being successful there is the ability to move quickly, should you see that shift. But at this point, it's been relatively stable over the last few quarters.

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Operator [15]

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Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Todd Nelson for any closing remarks.

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Todd S. Nelson, Career Education Corporation - President, CEO & Director [16]

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Thank you, again, for joining us, and we look forward to talking to you again next quarter. Thank you.

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Ashish R. Ghia, Career Education Corporation - Senior VP & CFO [17]

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Thank you.

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Operator [18]

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