Good afternoon, and welcome to the Perdoceo Education Corporation Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brooks Hamilton with Investor Relations. Please go ahead.

Thank you, Andrea. Good afternoon, everyone, and thank you for joining us on our second quarter 2020 earnings call. With me on the call today is Todd Nelson, President and Chief Executive Officer; and Ashish Ghia, Chief Financial Officer. This conference call is being webcast live within the Investor Relations section at perdoceoed.com. A webcast replay will also be available on our site. 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 of 1934. These statements are based on assumptions made by and information currently available to Perdoceo Education and involve risks and uncertainties that could cause actual future results, performance, 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 Perdoceo’s annual report on Form 10-K for the year ended December 31, 2019, and subsequent 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 the reconciliation of the GAAP to non-GAAP measures and is available within the Investor Relations page of the company’s website. With that, I’d like to turn the call over to Todd Nelson. Todd?

Thank you, Brooks. Good afternoon, everyone, and thank you for joining us on today’s call. Let me start by saying that I’m very proud of our faculty and employees for their commitment and dedication to educating and serving our students during these uncertain times. Supported by our scalable and innovative technology infrastructure, all of our students are taking classes online and are well served by employees working remotely. We continue to improve our technology and processes and are providing the necessary tools and resources for our employees. The health and well-being of our students, employees and communities remain our top priority, and I am proud of the remote learning and service environment that we have built which I believe will help keep our students and employees safe during the ongoing pandemic. Now let’s discuss the quarter. We’re pleased with our operating results for the quarter, which came in ahead of our expectations. We continue to execute against our objective of sustainable and responsible growth while remaining focused on providing a quality education to our students. Some key highlights for the quarter included: first, year-over-year growth in revenue and operating income for the quarter, supported by, among other items, student-serving operations and technology initiatives; two, organic enrollment growth at both universities, supported by consistent levels of prospective student interest that were well served by our student enrollment processes; three, the positive impact of the quarter from the Trident acquisition. As a reminder, the acquisition of substantially all the assets of Trident University International was completed in early March. We refer to this asset acquisition transition as the Trident acquisition for the remainder of today’s discussion. The second quarter was the first full quarter with the Trident academic programs as part of AIU, and we are pleased with the broad range of…

Thank you, Todd. I will review the second quarter 2020 results and then discuss our balance sheet and 2020 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, a quick comment on the year-over-year comparability. Operating results for AIU now reflect the Trident acquisition, commencing on March 2, 2020. Total company operating income for the second quarter was $37.4 million as compared to operating income of $0.2 million in the prior year. As a reminder, the prior year quarter included a $30 million expense related to the FTC settlement. We believe adjusted operating income, which excludes certain significant and non-cash items, is more reflective of the underlying operating performance. This measure increased 27.2% to $41.7 million for the quarter, and was above the high end of our outlook range of $38 million to $40 million. Net income for the quarter was $28.2 million or $0.40 per diluted share, while adjusted earnings per diluted share, which we believe is more reflective of the underlying operating performance, was up 20.6% to $0.41 per share. The improvement in adjusted operating income was primarily due to revenue growth at both universities, which reflects underlying enrollment growth that was well supported by our student-serving operations. Also benefiting our second quarter results was the Trident acquisition as well as COVID-19-related savings associated with reduced employee health insurance expenses, occupancy-related expenses, travel and other events. Partially offsetting these positives were incremental investments in marketing and student-serving functions, costs associated with compliance and monitoring efforts and legal expenses related to the recently resolved VA matter. Now on to more specific details around the second quarter. Total company revenue increased by $19.6 million or 12.5% to $176 million as compared to the…

Thanks, Ashish. Our teams remain focused on positively impacting student experiences, retention and academic outcomes and we are executing well against our objective of sustainable and responsible growth. With our scalable and innovative technology infrastructure, I’m confident in our ability to provide a learning environment for current and prospective non-traditional students, including adult learners, which helps to keep them safe during the current pandemic. I’m proud of the entire Perdoceo team for their hard work and dedication to our students. Thank you again for joining us today, and we’ll now open the call for any analyst questions.

[Operator Instructions] And our first question comes from Alex Paris of Barrington Research.

Todd and Ashish, congratulations on the quarter. First question, both Todd and Ashish, you said you had organic enrollment growth across both universities, supported by consistent demand from prospective students. What are your thoughts on the counter-cyclicality of enrollment in higher education? There’s been a number of different players in the space who talked about it being countercyclical. Others talked about it being acyclical. And most recently, a large player in this space talked about it being very – very pro-cyclical. So have you noticed any uptick in demand as a result of increased unemployment? And what’s your view generally there?

It’s a good question. I think it depends, Alex, on the program and also the level of degree versus – Bachelors versus Masters or Doctoral degree, but I would say that, again, we’ve had very consistent demand. In some areas, we have seen a pickup and again, I think that the philosophy that during a tough economy, there is more attention given to prospective students upgrading their education to help them get a job, a better job or promotion raise. And I do think that is very consistent with what we’re seeing. But again, across the board, I would say, as we said, it’s been very consistent for us at this point with some areas better than maybe it has been in the past.

All right. And then similarly, what’s been your experience with conversion of this demand? Has there – has it improved? Has it stayed the same?

That has been consistent. And again, I think that this is just, again, what I have seen over the years of being in this industry is what you will see is that conversion rate as far as those wanting to attend tends to increase, but it may be a little more difficult for them as far as funding, so that may then have a little bit of a counter effect. So I think what you look for is a consistent conversion rate during a time like this because, again, you see some things – more incentives for people to do it, but against some maybe a little bit more headwinds as far as getting their funding.

Got you. All right. And then kind of my final question is a bigger – is kind of a bigger scope question. There was a negative article over the weekend in Barron’s. I’m sure you saw it. It was an interview with an investor. He talked about a couple of stocks that he liked and a couple of stocks that he’d avoid or short. Yours was one of them that he mentioned as a pan as opposed to a pick. And your stock, and the other one mentioned, was down on Monday. Your stock has since recovered, but I was wondering if you could maybe address some of the issues he brought up because I think it’s important. First of all, he brought up the FTC settlement and then the VA issue, obviously, both related. This is from a long time ago. Maybe you can kind of refresh our memories on what it really involved, what period of time were they looking at, and why you settled it without admitting wrongdoing?

Thanks, Alex. And again, I did read the article. I thought – again, it was – some of the arguments, again, I felt were very outdated, and frankly, some of them are just not – again, I don’t think really applied, but that’s my opinion. But regarding the FTC, yes, those – again, there were allegations of issues relating to the use of lead aggregators. It wasn’t anything we were doing internally, which, again, the article led – I think it kind of led to imply that. But again, it was the use of some aggregators. And Alex, these were – it was years ago, and there were well over 100 universities that bought those leads. And as soon as we found that there may have been some information that wasn’t accurate that they were using, not to our knowledge, we stopped using them. Other universities continued to do that. But regardless, again, I think that in the article, it made a connection there that just was not the case. But regardless, the FTC agreement is something we’re actually very proud of because in that, we commit to a very robust process using a technology partner to make sure to literally scrub every lead before we acquire it to make sure the accuracy, the consistency of the information before we acquire that lead. And I would say that I’m not aware of, if any, universities, for profit or non-profit, have as robust a compliance process as we do and that we were willing to agree to that in an agreement with them. So again, we feel that as a very positive versus the negative slant that I think was used there. So that’s our approach. As far as the VA, again, that stemmed from, again, some of those things that were mentioned in the FTC agreement, which again were years ago, that are nothing new. And as soon as we submitted the information, they considered it. The outcome was what we had expected as they would see the very robust compliance process that we have. And therefore, there was no interruption. And so again, although you can’t prevent those things from them asking or presenting an inquiry. Once they did review the data and the information, it was a very positive outcome for us, which we expected because we knew what we’re doing. So again, I felt like it was consistent with maybe those who try to short our stock, put out information that I think when you read between the lines, there’s a lot more there. And in our case, again, it was – I view as positive information, but again, that’s my opinion.

And then just one other question, and it also was raised in that article, but I would have the question anyway. Bad debt, you called out bad debt in excess of 9% of revenue. That’s higher than I had calculated. First of all, what is bad debt as a percentage of revenue currently? Why it was that high?

I’ll respond to just the issue of bad debt in general and then if Ashish wants to add anything to it. First of all, I think there’s a disconnect there as far as bad debt in any way reflecting on the quality of students. That bad debt is more an issue of what is going on in the economy in general, as you would expect. And in this – during this time of pandemic, you in your desire to help students graduate, it’s probably – I think it’s very much in their favor to be very helpful for them, and that may impact your bad debt. Having said that, we are seeing improvements in certain areas of bad debt. So – and again, I’ll let Ashish go on, but again, I think that the guiding principle there, which is missed is, what are you doing to help your students graduate, especially on time, so maybe funding is a little bit more difficult for them. And I think, again, it needs to be within reason, it needs to be managed, but it should be something that is – your goal should be trying to help your students. So Ashish, you want to add to that?

Sure. Alex, to your first comment, I think you are correct. The article does mention 9%, but that is – I don’t know where that number came from, but to your point, bad debt for year-to-date is 7.3%, not 9%. And then for the quarter, it is 7%, which is better than the prior year quarter. So we are seeing good progress in that area. As Todd mentioned, we have invested a lot of resources to make sure students are financially prepared for school. The goal is to always do everything in the best interest of the students. And lastly, also, if you just look at the revenue growth that we have had over the past few quarters and years and if you look at the quality of earnings, if you will, you will see there is healthy cash flow from revenue to operating income to our EBITDA and to cash. So all those factors combined, we believe – we are happy with the progress we have made in that area. And we are cognizant of what goes on there, and we’ll continue to make sure we make progress there.

Good. And I appreciate the consistency of Perdoceo through this pandemic both in terms of actual and – keeping guidance and actually raising guidance last quarter and maintaining guidance this quarter. So I think consistency is pretty valuable in this environment.

Our next question comes from Dan Moore of CJS Securities.

This is Brendan Popson on for Dan. Just wanted to ask about – and you might have mentioned this, if I missed it, but could you speak to the organic growth for the business, excluding Trident?

We didn’t break that out, but I think you can – from the numbers that we present, I think you can see that it was a very good quarter from a growth perspective for AIU. Yes, there were 50% more enrollment days during the quarter year-over-year. So again, it’s not exactly apples-for-apples, but you can use that as a good benchmark, and yet they had 118% new student growth. And so again, without – when you take out the 50%, you’re still talking about a 68% implied growth year-over-year. And yes, part of that is Trident, but, yes, there’s still a significant amount that’s AIU. Ashish, you want to add to that at all.

No. I think that is correct. We don’t separate out, excluding Trident, but we do say there is underlying organic enrollment growth at our AIU and that organic enrollment growth also is resulting in the operating income growth. So I think that’s fair to say.

Okay. And then on Trident, could you speak to anything you’ve seen in terms of cost and revenue synergies that you’ve had for at least a little bit of time?

Well, I think that just again, in general, we’ve been very pleased with the quality of the staff and faculty and programs that Trident brought to the company. And in particular, they are students. They’re – they have a lot of graduate students. They’re very dedicated just – even though we felt that, that would be good, I think it’s been even more encouraging what we’ve seen. And especially, they’re at the graduate level and then in their relationship with the military, those types of things have been, I think, really nice improvements for us. And I think they have benefited from our robust technology and infrastructure compliance programs, those types of things that we’ve been able to help them with. And so the resulting combined effort of the two of them is – I think that’s why you’re seeing good growth in the quarter and looking forward to more of that in the future.

And then just last question. Could you just speak to any – I guess, your corporate partners. It sounded like you heard some good things this quarter, but is there any pulling back or any new interest and then any incremental opportunities with remote corporate training?

All good questions. Not to our knowledge as far as anybody pulling back at this point. Again, I think that is always a risk that you would have across our industry. We’ve been fortunate that a lot of our partners are in industries that have not been affected by what’s going on in the overall economy. Whether it’s – we’ve got areas of – some of our partners are in technology. Some of them are in healthcare, and those are areas that are doing well. And I think that’s been, for us, again, very positive. As far as the remote learning opportunities, there – this is a real strength for the company. We have a very robust technology. And one of the things that I have noticed, as I noticed some of my own children and grandchildren, some of the remote – the transition from on-ground to remote technologies to deliver the education candidly is somewhat lacking. And that’s where, again, you look at what we do and the years and years of experience and millions of dollars devoted to the technology and the academic infrastructure to produce quality learning outcomes as good or, in some cases, better than on – than face-to-face type education. And this is where, again, I think we really have an opportunity to shine as a very good alternative, certainly in an environment like this, but I also think going forward, I think more people are seeing the benefit of this as not just as a technology that’s utilized in this environment, but going forward because there are some real efficiencies. And again, I think that it is really a complement to our academic staff, our technology staff over the years to continue to refine and develop that.

Our next question is from Greg Pendy of Sidoti.

And I apologize if this was asked earlier, but just – this was probably one quarter end with Trident University. So just kind of looking at the operating margin differential with CTU and AIU, how should we be thinking about that maybe over, not the next quarter or two, but just over the next couple of years, and do you think big picture, AIU would be at a similar operating margin as CTU, if it had, say, the same number of students?

Greg, yes, very good question. And yes, the way we look at it is there are certain variables that exist at both CTU and AIU that if they’re consistent being your cost per credit hour, your quality of your program, the – what your programmatic offerings are, the particular demographic of students you serve. And there’s a lot of consistency between AIU and CTU and so given that, we do believe that there’s the opportunity for AIU to have similar margins at a similar number of students. Again, a lot of things can change externally in the environment that will affect that. But it’s certainly, from our point of view, the potential. And I think adding Trident, what that did is that, one enhanced the breadth and depth of AIU programs in a very much faster level than if you would go through and get those individual program approvals and development over several years as you add them one at a time versus adding a partner that already had approved programs. And so that actually does, I think, shorten the time frame that would allow you to have comparable margins. It still takes time, and you still need the scale that you’re referring to. But certainly, we believe the elements are there, excluding, obviously, the external impact that may happen. But yes, we feel like there’s that opportunity and Trident really added to that – their ability to accomplish that. And I would just, again, thank you all for joining us today, and we look forward to speaking with you again next quarter. Thank you.

The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.