Zovio Inc
Q2 2014 Earnings Call Transcript

Published: 7 Aug 2014

[Operator:]

Good morning, and welcome to Bridgepoint Education's Second Quarter 2014 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Paul Goodson, Associate Vice President of Investor Relations for Bridgepoint Education.

[Paul Goodson:]

Thank you, Brian, and good morning, everyone. Bridgepoint Education's second quarter 2014 earnings release was issued earlier this morning and is posted on the company's website. If you are listening to the call on the phone and would like to see the slides that we would be showing in Dr. McAuliffe's section, please visit Bridgepoint's website at www.bridgepointeducation.com and select the Investor Relations page. On that page, click the Q2 2014 Bridgepoint Education Earnings Conference Call link and select the Slides Only option. Joining me on the call today at Andrew Clark, Chief Executive Officer; Dr. Jane McAuliffe, Chief Academic Officer; and Dan Devine, Chief Financial Officer. Before we begin, we'd like to remind you that some of the statements we make today may be considered forward-looking, including statements addressing our expectations regarding enrollments, student persistence, the result of our branding campaign and the timing of our regulatory actions, as well as commentary regarding revenue, bad debt and the future performance of our business. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual performance or results to differ materially, including the risk of that new or total enrollments may under perform our expectations. Please note that these forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our report on Form 10-Q for the period ended June 30, 2014, to be filed with the SEC, for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of our website. At this time, it's my pleasure to introduce Bridgepoint Education's CEO, Andrew Clark.

[Andrew S. Clark:]

Thank you, Paul, and welcome to Bridgepoint Education's Second Quarter 2014 Earnings Call. After I comment on our progress and plans, Dr. McAuliffe will discuss some recent academic developments. Our CFO, Dan Devine, will review our second quarter results and key operating metrics. After Dan speaks, I'll offer my closing comments. I want to begin by reviewing the strategic objectives of Bridgepoint Education. First, our institution's focus is to provide high-quality education with strong student outcomes; second, we conduct our business with integrity and in a best-in-class regulatory-compliant manner; third, provide a highly affordable educational solution to students looking to advance their education; fourth, provide well-branded and differentiated institutions that attract high-quality students who are more likely to persist and complete their education; fifth, differentiate the student experience through the innovative use of technology that enhances the experience and improves learning; and sixth, to diversify Bridgepoint Education beyond its current subsidiaries around innovative educational solutions that advance learning. I will discuss some of these 6 strategic points, and Dr. McAuliffe will address the others. During the quarter, we continued to be able to attract high-quality students to our institutions through an expansion of our internal search and branding initiatives. These higher-quality students have had a positive impact on our annual retention metric that Dr. McAuliffe will further elaborate on in her discussion. As many of you know, over the past 2 years, we have been working hard to build Ashford's brand identity in multiple ways. And in parallel, we've been shifting away from using aggregators. From the first quarter of 2012 until the first quarter of this year, applications from these organic sources have doubled as a percentage of total applications, and they now represent more than half of all of our applications and all of our new enrollments. Looking back just 1 year, organic applications in 2014 are up 1/3 from their level in 2013, and they are continuing to expand. Additionally, our continuing shift toward organic inquiries has allowed us to reduce our admissions workforce expense by 22% as compared to the second quarter of 2013. This is a very important point. Despite the 22% decrease in our admissions workforce, Ashford experienced a year-over-year increase in new enrollment during the quarter. This means that the differentiated branding we have established with consumers is leading to higher admissions advisor productivity, higher conversion and our ultimate objective of higher retention, and better student outcomes. For the first quarter of 2014, year-over-year, the results of these improvements was an increase in applications of over 11%, and for the second quarter, an increase of over 20%. This translated into positive new enrollment growth in the second quarter, as well as narrowing of the decline in total enrollments in both quarters of 2014. The increase in application flow indicates a favorable consumer response to our brand identity and differentiated positioning of the market, which earlier this year, led us to believe that our new enrollments would increase significantly in 2014. However, as we discussed last quarter, we continue to experience a variety of factors that are preventing those increased applications from becoming new enrollments. These factors include the Department of Education's enhanced identity management requirements, which for some students require additional documentation prior to being eligible for Title IV funding. The second factor is internal and results for the organization absorbing the significant process changes that the admissions team undertook over the past 6 months. We are seeing progress, as we implement operational improvements, but we are still not yet where we expect to be. As I noted in the first quarter, a transition of this magnitude is not easy and not always predictable, but we are seeing the positive signs we mentioned and we are committed to doing the right things to ensure success in the long term for our institutions and their students. We are continuing to work diligently to optimize our processes, while maintaining the academic standards that are brought about retention improvement. We do believe there is opportunity to improve the transition between application and enrollment, but now I think it'll take the remainder of the year to work through. As a result, while the continuation in strong double-digit application flow gives us confidence that we will have positive application growth for the remainder of the year, we now anticipate new enrollment growth will be flat to slightly positive in the second half of 2014. Of course, the slower rate of new enrollments will also affect total enrollments. Previously, based on our strong and continuing application flow and the improvement in retention we have seen, we anticipated mid-single digit increases in total enrollments at the end of June 2014 as compared to year end 2013. However, as a result of the factors I have just mentioned, we now expect the year end total enrollments in 2014 will be slightly negative as compared to year end 2013. As we focus on improving the transition between application and enrollment, we are confident that the numerous improvements we have set in place, including the shift toward attracting students organically and our ongoing efforts to differentiate our institutions, is working in the long-term interests of students and all other stakeholders. One recent example of this is our announcement of the of the Forbes School of Business at Ashford University, which is helping to differentiate the business school as well as attract students organically. I'll turn it over to Jane and have her tell you more about the Forbes School of Business.

[Jane L. McAuliffe:]

Thank you, Andrew. As Andrew mentioned, I wanted to update you on the Forbes School of Business, which represents 37% of Ashford's student body. The Forbes relationship with both the content and the branding opportunity for Ashford that is helping differentiate the school and bringing business content to Ashford's students. We are continuing to work with Forbes to update our business curriculum with this valuable content. While new enrollments growth for Ashford overall is in the mid-single digits in the second quarter, we saw a double-digit growth in the Forbes school, with MBA applications at an even higher level. In addition, total enrollments in the business school declined at a slower rate than total enrollments at Ashford. We are pleased that our relationship with Forbes is off to such a positive start. At the same time, the other policies we instituted are succeeding at admitting students with a highest likelihood of completing their educational objectives. Last quarter, we announced that we would report the 12-month retention of active students for every quarter. We then compare that to the 12-month retention for students who were actively enrolled in the year-ago quarter. At the end of the second quarter 2014, the 12-month retention for all students who were active on the last day of the second quarter of 2013 was 65.6%. This compares very favorably to the 61.2% retention statistics for the prior year's quarter. In addition, this year's second quarter number improved sequentially from the first quarter's retention of 64.5%. As such, we view these positive results, as evidence that the numerous quality and process improvements we have put in place, are producing a more committed and better-prepared student body and better learning outcomes. We're seeing other benefits as well as measured by student satisfaction scores. For newly enrolled students, student satisfaction results have recently reflected in a major survey of students during their first year in college. If you're following along on the Internet, you should now see a slide that says Your First College Year Survey. Last October, Ashford participated in the Higher Educational Research Institute at UCLA's national survey, called Your First College Year, which asks new students about their college experiences. In the latest survey completed in the third quarter of 2013, thousands of students at approximately 60 traditional, 4-year, nonprofit public and private colleges and universities were surveyed. You would recognize the names of many of the schools, such as Fordham University, Ithaca College, Babson College, Pepperdine University, Mills College, UC San Diego, Case Western Reserve and many others. I am both pleased and proud to share the following survey results with you. When new students were asked if they could choose their current college again, if given the chance, 42% of national survey respondents said, "definitely yes", while 66% of Ashford responded, "definitely yes." Of new students invited to participate in the first college year survey, 80% of national survey respondents agreed or strongly agreed that admissions or recruitment materials portrayed the campus accurately, while 91% of Ashford respondents agreed or strongly agreed. When asking new students whether their courses inspired them to think in new ways, 41% of national survey respondents said "frequently," while 61% of Ashford respondents said "frequently." And finally, 59% of national survey respondents were satisfied or very satisfied with the relevance of their coursework for everyday life, while 80% of Ashford respondents were satisfied or very satisfied. We believe survey results affirm the relevance and values of our degree program even in comparison to some well-known and established traditionally institutions. I also wanted to provide a quick accreditation update. Both of our institutions continued to develop new programs to increase program offerings in the areas of needs. Ashford University recently launched its first new program since moving to WASC Senior College and University Commission. They began offering a Bachelor of Science in Health Information Management upon securing Department of Education approval this past quarter. Ashford also recently received approval to offer 2 new master degree programs

[Daniel J. Devine:]

Thank you, Jane. As you can see from our filings last week, we are now up-to-date on the filing of all revised and restated periods through March 31, 2014. In summary, the revisions and restatements for the periods primarily impacted revenue and bad debt expense for all periods. Our adjustments decreased revenues for the period by between 2% and 3%, with bad debt expense declining by dollar amounts of a similar magnitude. In the second quarter, this change in policy had a revenue impact of $4.7 million and a benefit in bad debt expense of $7.1 million. For the remainder of the year, we expect that revenue will be reduced by approximately 3%, with a corresponding decrease in bad debt expense over the remainder of the year. Additionally, we have now identified certain components of our cash balance as restricted. And for the second quarter, that amount will be $32.6 million. We expect the amount of restricted cash to remain approximately at this amount for the remainder of the year. Turning to our results for the second quarter of 2014. Revenue was $171.5 million compared with $193.5 million for the same period last year. The decrease was primarily due to lower student total enrollment, which was 61,117 as of June 30, 2014, compared with 71,685 in the same period last year. For the second quarter of 2014, instructional costs and services were $76.9 million, or 44.8% of revenue, compared with $99.6 million or 51.5% of revenue in the same period last year. The decrease was primarily due to reduced total student enrollment resulting in decreased direct compensation, bad debt and instructor fees. Included in the instructional costs and services for the second quarter of 2014 was bad debt expense of $5.4 million or 3.1% of revenue. This compares to $11.4 million or 5.9% of revenue in the second quarter of 2013. Admissions advisory marketing expense for the second quarter of 2014 was $55.5 million, or 32.4% of revenue, compared with $57.6 million or 29.8% of revenue in the same period last year. The decrease was primarily due to decreased compensation resulting from fewer admissions personnel and reduced facilities expense, partially offset by increases in advertising and branding. General and administrative expenses for the second quarter of 2014 were $16.7 million, or 9.8% of revenue, compared with $17.2 million or 8.9% of revenue for the same period last year. The decrease was primarily due to a lower administrative compensation and professional fees. Included in our 3 main expense categories for the second quarter was approximately $3.2 million related to stock-based compensation expense in the aggregate, compared with $3.8 million for the second quarter of last year. For the second quarter of 2014, operating income was $22.4 million compared to $19.1 million in the same period last year. Our effective tax rate for the quarter ended June 30, 2014, was 44%, compared to 39.1% in the same period last year. The increase in our effective tax rates is due to the effect of relatively constant nondeductible expenses on lower pretax income year-over-year, as well as an increase to income tax contingency reserves. Net income for the second quarter of 2014 was $13 million or $0.28 per diluted share, compared with net income of $12.1 million or $0.22 per diluted share for the same period last year. The results for the second quarter of 2013 included a pretax charge of $5.9 million for severance, which had no impact on the second quarter earnings -- which has an impact on the second quarter earnings of $0.06 per diluted share and was not repeated in 2014. Fully diluted EPS was calculated based on a diluted share count of 46.5 million shares for the second quarter of 2014 compared with 55.6 million shares for the same period in 2013. As of June 30, 2014, we had cash and total investments of $342 million, compared with $356.4 million as of December 31, 2013. The company used $3.8 million of cash from operations for the 6 months ended June 30, 2014, compared with generating $38.7 million for the same period in 2013. Capital expenditures for the 6 months ended June 30, 2014, were $6.2 million, compared to $6.8 million for the same period last year. Now I'll turn the call back over to Andrew for his closing comments.

[Andrew S. Clark:]

Thank you, Dan. As I said early in the call, we are pleased with our performance in the quarter. On the 6 strategic points I covered earlier in the call, you can see we're making good progress on each one. Both the first year students survey and our quarterly cohort retention are evidence of our strategic commitment to quality education and strong student outcome. The consecutive quarters of mid double-digit application growth and a continuing decline of new enrollments from aggregators proves our branding strategy is working. The mid double-digit increase in new enrollments for the Forbes School of Business is further evidence that innovation and differentiation around the student experience are meaningful to students. I have said several times over the past couple of quarters that 2014 will be a transitional year, and so far this year, we have seen many positives, along with a few challenges. Directionally, the positives positions us for long-term quality outcomes while the challenges represent only short-term delays in our returning to growth. This concludes our opening comments for today's call. At this time, I'll ask our operator to open the phone lines for your questions.

[Operator:]

[Operator Instructions] Your first question comes from Paul Ginocchio from Deutsche Bank.

[Paul Ginocchio:]

Just first, just maybe asking about the job market; have you seen any changes in the conversion rates of students, maybe from associate -- and then maybe differentiate between associates, bachelors and masters? I'm just wondering if the improving job market may be improving the conversion rate of higher level degrees while potentially limiting the conversion rate of lower-level degrees. And then I've going to follow-up.

[Andrew S. Clark:]

Yes, Sure. Paul, we've limited our associate degree offerings, so we don't have too maybe students. And I can't really say that we've seen much in a way of conversions that I could correlate directly to an improving job market. I will say that, as we mentioned earlier in the call, that our branding strategy is really producing strong outcomes in terms of higher productivity and conversion that we are seeing out of our admissions advisors. And as you probably noted, the labor workforce has been reduced by about 22%. So it's pretty significant the results that we're attaining. And I think they're strong proof points for how the branding strategy is really beginning to work.

[Paul Ginocchio:]

Yes, if I could just touch on that. So the applications were up 20% in the second quarter, but you're finding your application to new enrollments droppings. Is that because you don't have enough admissions workforce people? Is that where, I mean, you've dropped a bit? Well, I don't fully understand the disconnect between the deterioration and the conservation from application to new enrollment. If you could just review that for me?

[Andrew S. Clark:]

Yes, sure. So it's not that it's dropping. It's not flowing through. So applications were up 20% on a year-over-year basis, and then we were up mid-single digits on new enrollments. And so there's kind of 2 factors there, Paul. The first factor would be the Department of Education and the identity management program that they have in place. And it just means that there is additional requirements for documentation, which then delays students from being able to begin. So it kind of pushes students out. And in some cases those folks never start, in other cases they start, but you don't see them start within a particular quarter. In some cases, they push out beyond that. The other piece is just internal. I mean, as I've been talking about the last couple of quarters, we've done quite a bit in terms of our whole marketing mix shift and our branding initiative. We've decreased the workforce by 22%. And all of that means that there's just a tremendous amount of kind of change there that's being absorbed by that admissions team, and that is what contributes to some of the increase in applications not translating into an increase in new enrollments. Now that improved in the second quarter over what it was in the first quarter. It just wasn't as high as what we had forecasted internally and what we had hoped for. We think it will continue to improve like the second did over the first, so we think we'll see improvement in the third and the fourth. But it is apparent to us that that it's just going to take a little bit more getting used to for the admissions folks.

[Paul Ginocchio:]

Great. And then if I could just maybe one final one on that same point. Can you just talk about the relative conversion rates of organic versus aggregators? If it's not absolute, just maybe some kind of relationship?

[Andrew S. Clark:]

Yes, I mean, I can't give you specifics, but I can tell you that what you probably already know, what you said organic conversion rates are extremely high and extremely strong, that our aggregator conversion rates by comparison to the organic are much lower. I will tell you that we have seen an increase in conversion in our aggregators. So we've seen a very nice lift there. I think that's because of some very specific data intelligence that we've used to make sure that when we do use the aggregator channel, that we're getting a better-qualified, higher-caliber student that's going to be able to persist and be more likely to persist.

[Operator:]

Your next question comes from Peter Appert from Piper Jaffray.

[Peter P. Appert:]

So Andrew, does your expectation of mid single-digit -- or decline, I'm not sure you quantify it, decline in starts for the full year assume that the applications in the second half remained -- the growth rate remained similar to what you saw in the quarter?

[Andrew S. Clark:]

Yes, Peter. I think we anticipate that we'll continue to see a strong growth rate in applications in the back half of the year. And so kind of the unknown for us, so to speak, is how quickly do we improve throughout the second half of the year kind of the gap between those -- that application growth and new enrollment growth. So we've taken a pretty conservative approach, I think, in anticipating really that we won't see much improvement, but yet, that will lead us to being just slightly negative on total enrollments for the full year.

[Peter P. Appert:]

Got it. Okay. And can you remind me what you've done recently on the pricing side? I think, if I'm computing this right, your revenue per student is up pretty nicely here in the second quarter.

[Daniel J. Devine:]

Yes. Peter, we had a price increase at Ashford University of 1.7%, I believe, effective April 1. So you see some of that coming through. As you may know, if you remember back in 2013, we did our technology fee transition. Some of those people who were existing at that time, that technology fee was not charged to them. So you're seeing year-over-year -- right now, you're seeing a year-over-year increasing your technology fee because you have more newer students who are being charged at per-course basis, and that's where it hurt us last year in revenue per student is actually helping us slightly this year.

[Peter P. Appert:]

Okay, great. And in terms of the military enrollments, anything noteworthy going on there?

[Andrew S. Clark:]

Military has been very consistent for us, Peter. In fact, I was looking back at total enrollment for military students, and it has remained just amazingly consistent since the beginning of the year. We haven't seen any significant decreases or significant increases. Our total enrollment has been very consistent. Whereas our total enrollment for the overall organization has dropped by about 14%, it's been virtually kind of flat in the military.

[Peter P. Appert:]

And then last thing, the -- so obviously you've got a very good balance sheet liquidity here. It feels like the regulatory issues -- a lot of the regulatory issues are behind you at this point. And from the past, you've talked about the potential of diversifying the business maybe through M&A. How are you thinking about that now?

[Andrew S. Clark:]

Well, I think first and foremost, we want to continue to have a strong balance sheet. That's, I think, very important in this regulatory environment. But we continue to think about the ways in which we can diversify Bridgepoint by looking at different kinds of business models and companies that would be unique and different from what we currently do today, but would probably utilize technology, utilize the Internet and online and wouldn't be -- for example, we wouldn't look at some kind of ground -- mostly ground-based type of institution. We would be more inclined, if we were to acquire another institution to look at something that that's predominantly online.

[Peter P. Appert:]

Got it. And how about further stock buybacks in terms of priorities for use of cash flow?

[Andrew S. Clark:]

Well, I think it's something we always look at. We have that conversation every single quarter, and we'll have it again. We're going to do, as we have consistently, try and do whatever we can that's really in the best interest of our shareholders.

[Operator:]

Your next question comes from Corey Greendale from First Analysis.

[Corey Greendale:]

I'm going to pick up on a few of threads Peter was asking about. So first of all, on the revenue per student. If the increase in new students and the resulting tech fee revenues was a big driver, does that suggest we should continue to see similar growth in revenue per student in the back half of the year?

[Daniel J. Devine:]

Yes. I mean, my calculation of revenue per student, I believe, is up like 6%. I would say, if you're modeling it, I would go all the way to 6, maybe. But yes, 5%, you should see that.

[Corey Greendale:]

Okay. And then on the -- a question about the application to new student transition. Could you give us a sense -- my first question is, is it that the applications, because of these delays, they're just falling off and never enrolling, or they're just taking longer to enroll?

[Andrew S. Clark:]

Yes, it's a great question, Corey. So they're taking longer to enroll. But in some cases, they aren't enrolling, because for adult students, they -- it's really important, once they've made the decision to go back to school, for them to be able to start school. And so some of the operational kind of executional issues that we've been experiencing on the admission side. When we don't capture that student's sense of urgency, then we do lose them, but not all the times. Some of them are just pushing out into other months, or if it's at the end of the quarter, into the next quarter. This is something that's very much -- the good part of this is it's something that's very much in our control. It's something that we continue to work on, as we are, to really understand all the different things that are contributing to it and then to change those things. I think it'll just take a little bit of time. We've made some significant changes. We have 22% fewer admissions folks, but yet we're producing positive new enrollments on a year-over-year basis, which, I think, when you sit back on it, that's an extraordinary result and really proves that the educational product offerings of our institutions are being highly regarded by students who're differentiating well and the branding is really paying off.

[Corey Greendale:]

Okay. Can you give us historically what was a typical period between application students starting school and what does that look like now?

[Andrew S. Clark:]

I'm not sure I understand your question. The timing?

[Corey Greendale:]

Yes. So the people are applying, but because of the delays, they're not actually starting school. So my question is

[Andrew S. Clark:]

Well, I mean, I'm not able to give you a specific number on that. I mean, historically, you would see -- if you saw a 20% increase in applications, you would probably see a flow-through of kind of low double digits in new enrollments. So basically, that kind of shows you that spread between our mid single digits and low double digits of the students that we're missing.

[Corey Greendale:]

Okay, that helps. And then on the cost side, if I look at instructional costs and services and I back out bad debt, you actually got nice leverage on that line this quarter, which has not been the case recently with the declines that you've been deleveraging on that line. What drove the improved instructional costs and services margin? And is it sustainable?

[Daniel J. Devine:]

It is -- if you take out the bad debt component?

[Corey Greendale:]

Yes.

[Daniel J. Devine:]

We did have a -- we had a good quarter in instructional costs. We do -- I would say, it's going to be slightly higher for the remainder of the year. That's what's currently in the plan. There are some expenses in there. Basically, our expenses are usually conservatively projected. So there might be some opportunity there. But operationally, nothing significantly happened in the quarter. And we don't anticipate change in the way we're doing things. So it's going to be slightly higher, but not dramatically higher for the remainder of the year.

[Corey Greendale:]

But anything -- slightly higher meaning the dollar amount is up from the Q2 level, you mean up as a percentage of revenue year-over-year?

[Daniel J. Devine:]

Up -- at dollar level, it's up.

[Corey Greendale:]

From the Q2 level?

[Daniel J. Devine:]

Yes.

[Operator:]

Your next question comes from Jeff Silber from BMO Capital Markets.

[Jeffrey M. Silber:]

Corey's questions on the other 2 expense line items, can you give us expectations for trends relative to the second quarter?

[Daniel J. Devine:]

In the third quarter related to admissions? Admissions, we always have a lot of investment in advertising in the third quarter. So you'll see that dollar value rise in Q3. And for Q2, it will kind of retreat -- or for Q4, we'll kind of come back to where it was in Q2. And then for the admissions line -- I'm sorry, for the administrative line, should remain relatively flat for the remainder of the year.

[Jeffrey M. Silber:]

Okay. So based on that -- and I know you're not giving official guidance, should we be expecting operating profit on a year-over-year basis to potentially increase 3Q '14 versus 3Q '13?

[Daniel J. Devine:]

We are -- as you said, we're not giving guidance, so I'm not going to give out that component of the guidance. At a high level, I could give you a few data points. Because we're still on a declining total enrollment environment, you will see that revenues in the second half of this year will be lower than the first half of this year. And that will impact our margins in the -- that will impact the earnings in the second half of the year.

[Jeffrey M. Silber:]

Okay. That's helpful. And then just if we can get guidance on the tax rate?

[Daniel J. Devine:]

Tax rate should be approximately at 44%, 45% for the remainder of the year at this point.

[Jeffrey M. Silber:]

Okay, fantastic. Just one other question. Bad debt came down, as a percentage of revenue, pretty substantially. That rate's sustainable?

[Daniel J. Devine:]

I would expect, to the remainder of the year, we'll be in the rate of lower than the first quarter, which was 4.8%. It will be about 4.2% to 4.5% for the year.

[Operator:]

Your next question comes from Trace Urdan from Wells Fargo Securities.

[Trace A. Urdan:]

I'm just going to go ahead and beat this horse completely to death. So the gap between the application strength in the enrollment, you say that -- so part of it has to do with the new screening process that's instituted by the feds and part of it has to do with your own management of the folks. And so you've said that that part of it, I guess, is addressable and you're working on that. I guess my question is, what about the other piece? Is the screening still kind of in transition? Are you seeing folks getting pushed out as part of that process? Is there a learning curve there? Can you just kind of talk about those 2 components?

[Andrew S. Clark:]

Yes. So Trace, think -- are you referring to orientation and...

[Trace A. Urdan:]

You've been asked a couple of times now about the strength that you've seen in applications and how that isn't all translating into new students. And I think that I heard you say that the good news was it that some of that is addressable on your and. But I think you also attributed some of the that gap to the -- I forgot what it's called now, basically the government -- a Department of Ed trying to these stipend chasers out of the mix. So my question is

[Andrew S. Clark:]

Yes. No, I understand. Thanks. Yes. So I think when it comes to the identity management verification process that some students have to go through, I think there's probably a little bit of opportunity for us internally in terms of just our ability to assist students with getting the additional documentation that they need to get, so that they're able to begin class. And so I think there is probably a little bit of room for improvement on that piece. But then, the rest of it is going to be kind of what it is. If you had somebody who is stipend chaser that's somehow trying to get into the system, it's going to continue to prevent or discourage that person from getting in. So there is a certain piece that I don't think will change much. There's a little bit in that process where I think it can be positively affected by us doing a better job of helping students with getting the additional paperwork so they can start school.

[Trace A. Urdan:]

Okay. And then Andrew, do you see any part of strength in applications being a function of the macroenvironment or is this really just sort of a function of your own turnaround process?

[Andrew S. Clark:]

Well, I wish I could say it was part of the macroenvironment. But as I look around to some of the competitors, I don't think there is evidence that the macroenvironment changed in the real favorable way for everyone. So I'm more inclined to attribute it to what we've done from a branding standpoint and differentiation standpoint. I mean, Trace, our Forbes Business School, our business school students represent 37% of all of our students, and we saw really strong double-digit new enrollment growth there in the quarter. So I think that tells us that the differentiation, the branding that we're doing is really unique to us, and in this case to Ashford, and it making a big difference.

[Trace A. Urdan:]

Got it. And then my last question is for Jane. You showed us the good slides from the survey. I'm wondering if the survey revealed any areas where you felt like you had room to make improvements.

[Jane L. McAuliffe:]

Yes, you know what? We wanted to highlight more of what we typically focus on. I haven't gone through a deep analysis or a deep dive. But really, that's just the feature sort how students are perceiving their learning and their programs and that's sort of what we focus on from a consistency standpoint.

[Andrew S. Clark:]

Yes, I'm sure there's probably a couple of points in that, that we -- that offer opportunities for improvement. But I think the takeaway is, the majority of the survey show that Ashford performed incredibly strongly against national averages of traditional universities, Trace. So I think that really supports all the wonderful things that, that institution has been doing over the last 1.5 years.

[Operator:]

[Operator Instructions] Your next question comes from Jeff Volshteyn from JPMorgan.

[Jeffrey Y. Volshteyn:]

I only have a few housekeeping questions. On the retention metric, we appreciate you sharing this with us. How are the graduates treated in that calculation? And are there any other adjustments when you calculation retention?

[Andrew S. Clark:]

So when we calculate cohort retention, we're looking at all the students that started within that quarter and that were still here that quarter later. So if somebody graduated, obviously they're taken out of that number, but in a positive way, obviously not a negative way. This is the positive outcome. So we've treat it the same in both how we calculated it in the first quarter as well as this quarter.

[Jeffrey Y. Volshteyn:]

Right. So it sounds like it's more, let's call it, persistence number as opposed to retention. Am I understanding this correctly?

[Andrew S. Clark:]

No, I think this is a pure retention number. I mean, these are students that -- did they start that are they still taking classes a year later. The only reason they wouldn't be taking classes, obviously, is that they've dropped or if they graduated. So I think it's this pure retention number as you could have.

[Jeffrey Y. Volshteyn:]

Okay. We can follow-on later. Second question is on seasonality. Up until 2010, 2011, and we've looked at this third quarter being seasonally sort of heavier. Given the change in enrollment over the last couple of years and more stability and persistence, is there a way to all kind of rebalancing and looking at more normal seasonality going forward? And if you guys can quantify it or kind of give us direction, would be helpful.

[Andrew S. Clark:]

I mean, we still anticipate that there are a stronger even interest in the fall for students to return to school. Our models still have some seasonality flow in the first quarter and the fourth -- and third quarter build into them. So I don't know if I'm answering your question, but we have -- we still see that there is that benefit of seasonality as you enter in the August-September timeframe.

[Jeffrey Y. Volshteyn:]

Let me maybe ask it more directly. Sequentially, do you see directionally enrollments in the third quarter versus the second quarter going up or down?

[Andrew S. Clark:]

Up sequentially. Yes, we see that going up.

[Operator:]

[Operator Instructions] Your last question comes from Tim Connor from William Blair.

[Timothy Connor:]

I just wanted to dig in a little bit on the expectations for slightly down total enrollment at the end of the year. Can you be any more specific than that? Yes, and do you expect significant improvement over the next couple of quarters?

[Andrew S. Clark:]

I didn't catch last part, Tim. What did you say?

[Timothy Connor:]

I just wanted the gauge kind of level of improvement you expect over the next couple quarters in that and how significant it would be, and how you're thinking about it.

[Andrew S. Clark:]

Well, I think the second half, in terms of -- in terms of where we think total enrollment is going to end at the end of the year, I think it's going to be slightly negative, which I -- less than 10%.

[Timothy Connor:]

Okay. And what was the exact technology fee revenue in the quarter? I know it's going to be in the Q. I'm just wondering if you have that number now.

[Andrew S. Clark:]

The technology fee in the quarter, approximately $2.5 million.

[Timothy Connor:]

Okay. It looks like even -- yes, there's a little bit of improvement there and then you had the tuitions fee increase, but it does look like there was a gap between those 2 components and your 6% revenue per student increase. I'm just wondering what the difference was. What else was going on? Whether it was less military students or some timing difference, or extra revenue accrual days? Is there anything else there?

[Daniel J. Devine:]

Well, I could tell you a couple of things. One, is was no more revenue days. I see on the tech fee was a 12% increase. You had a little bit of flow-through on tuition that we see a 5% increase in numbers I have in front of me. So obviously, the 12% is, it doesn't represent all our revenue. So I don't have any other specific data, except to tell you that there was a same number of instructional bays in the period.

[Timothy Connor:]

Okay. So it sounds like students are taking a few more classes. Now is that a product of bringing in more prepared students? Or is there any changes in curriculum or anything else that might drive that?

[Andrew S. Clark:]

Well, I think it's probably a product of the better persisting higher retention. I don't think -- there had been changes. -- We're always making changes in the curriculum. But I don't think there we would attribute any of the specific changes per se to that, Timo. Forbes, obviously, it's the biggest area where we're making curriculum changes and integrating that content. And so -- but that could be a contributor, but it's kind of an anecdotal for me at this point.

[Timothy Connor:]

Okay. And then final question. The WASC approval on your report in your recent metrics reflect a lot of academic improvement. Yes, I guess how can you better get the message out to regulators, and how long until regulators start to grasp these improvements. And what is that process? How can you do that?

[Jane L. McAuliffe:]

We are in constant communication with regulators and we have pretty nice relationship with WASC, obviously, with the Higher Learning Commission, Department of Ed, States, when we do State applications. So we are always updating our content and very transparent about our progress. We're proud of our progress, right, so we'd like to tell the story. So it's out there.

[Andrew S. Clark:]

Yes, I think one of the advantages actually, Timo, that we have is that, obviously the WASC report was made public. And so -- I mean, that's out there for every regulator to able to read and see what the institutions done. I think that was another reason for us highlighting how well the university performed in this survey against a lot of traditional universities. Another way of getting the message out that the quality of the education, the quality of the way in which the institution represents itself is actually significantly better than other institutions on a national basis.

[Operator:]

We have no further questions at this time. I turn the call over to the presenters.

[Andrew S. Clark:]

All right. Thank you, operator. I want to thank everybody for your interest in Bridgepoint and participating in today's call. This concludes our call.

[Operator:]

And thank you again to our participants. This does conclude today's conference. You may now disconnect. Have a great day.