October 18, 2013

A Letter to the Board of Directors of Corinthian Colleges Inc.

Board of Directors, Corinthian Colleges Inc.
Santa Ana, California

To All Members of the Board:

We would like to start by sharing that we have been loyal shareholders
of the company for around 3 years and currently hold over 2.2%
(top 10 shareholders) of the companys outstanding shares. We believe
Corinthians story is a noble one and it is doing a service to
its students and respective communities. We also want to be clear
that we carry respect for the current management team and realize
they have worked hard. Sadly, the vast majority of these efforts
have either not materialized or have been in vain. Management
along with everyone reading this letter undoubtedly must share
many of our disappointments, frustrations and concerns.

As a long-term shareholder, it has been quite concerning to
see the companys stock price languish over such a prolonged
period of time. We acknowledge that management has not been
dealt an easy hand over the years and some of its troubles are
indeed out of their control. However, we have become increasingly
concerned, about the long term viability of the company unless
swift and meaningful actions are taken. Despite managements
efforts to weather challenging industry dynamics through marginal
cost cutting, the addition of new programs, and tuition reductions,
our stock price is now approaching one of the lowest levels in
the history of its listing.

Below, we have provided a list of some of our most urgent
concerns along with recommendations of immediate action.

OUR CONCERNS:

1. Recent California Attorney General Job Placement Accusation:
We fear this negative publicity will further impede Corinthians
ability to attract students and we fear more states may jump
on the bandwagon.  Even more concerning, we fear that the legal
costs alone will push Corinthian dangerously close to impairment
and a failing Financial Responsibility Composite Score, thus
re-awakening the need to post a letter of credit. This dangerous
domino effect scenario must be avoided as the consequences would
be disastrous.

2. Dismal Ground School Capacity Utilization:  Despite extensive
efforts by management, ground school capacity utilization remains
painfully low at 50%, with no signs of meaningful improvement
on the horizon.

3. Student/Employee Ratio Significantly Higher:  Our 15,200 employees
and 81,284 students give us a student/employee ratio of 5.3 compared
to an industry average of 8.8. (Interestingly, some of the best
performing industry peers have the highest student/employee ratios.
Ie: Grand Canyon Educations ratio is 19.3 and Capellas is 12.7.)

4. Decline and Loss of Market Share in Online Students: The extended
slide in online enrollments beyond managements prior forecasts
concerns us that management either has not grasped the magnitude
of the problem, has not identified how to fix the problem, or both.
Additionally, we are becoming increasingly concerned that the online
platform, in its current state, may not be the right fit for
Corinthians target student due to the heightened hand-holding
and student/teacher interaction the Corinthian student requires
for success.

5. Depressed Valuation:  Our shares continue to trade at the highest
discount to book value (30 cents on the dollar) among industry peers
as our net margins are among the lowest in the industry and no clear
plan aside from cost-cutting exists. We acknowledge that the students
requires additional hand-holding which requires additional time &
expense and we appreciate the fact that these low net margins are a
function of low capacity utilization, however, a clear operational
plan with industry-average operating margin targets must be
implemented.

6. Inefficient Marketing Budget:  We are spending $100-$150Million
in advertising mainly with Television, Yellow Pages, direct mail
and newspaper advertisements, however, only 7% of enrollments
were generated through these 4 costly and somewhat inefficient
methods in 1H 2013.  Conversely, 77% of our new student enrollments
came from internet and referrals. We acknowledge the fact that
all methods of advertising are inter-twined to an extent, but
it is quite clear that significant savings potential exists
here with the implementation of more effective and less
expensive marketing methods.

7. BOD among largest in peer group:  With 10 members and a median
age of 66 years, our BOD is one of the largest and oldest boards
among publicly traded peers. Dell computers with $25 billion
market value just announced that they plan on having only 3
members on their Board.

OUR SUGGESTIONS:

1. Attorney General/Job Placement:  We recommend an immediate
evaluation of a possible sale of Wyotech, and/or any other non-core
assets in order to free up enough cash to provide us vital breathing
room to survive this most recent crisis. We believe the company has
fallen into an increasingly dangerous position and the company is
at crossroads. Regarding job placement, we urge you to establish a
team to evaluate the quality of all existing employer relationships
as well as secure more significant employer relationships/partnerships
by degree/diploma. We must have higher quality employer relationships
than peers to provide our students the greatest job placement edge
in the for-profit education space. If we can secure relationships
with employers who request specific training, then our students
will have careers waiting for them immediately upon graduation.
This type of relationship would boost enrolments, improve job
placement, and eliminate some of the damaging political
onslaught such as the recent one.

2. A Plan to Increase Campus Capacity Utilization:  Establish a
team to identify and enroll the 800,000 Latin American students
in California who have tried to attend Community College, but
cannot find a seat due to overcrowding. Another area with great
potential includes socially responsible/green diploma programs
to fill classrooms, provide students with job training for
the 21st century, and to gain the respect and admiration of
some of our biggest political adversaries. One such example
includes Natural Gas engine certificate programs which is gaining
a significant presence throughout the U.S., however it is
mainly taught at Community Colleges. Additionally, conduct
a study on the relevancy of all existing diploma and degree
programs to find which programs are most relevant and which
ones are falling out of favor among students.

3. Student/Employee Ratio: Immediate 10% headcount reduction
with internal plans for additional 5-10% in second half of 2014.
100 employees for 530 students are just outrageously high.

4. Through Review of Online Segment:  Immediate in-depth
review of the online segment beyond administrative level to
address student aptitude and ability to succeed in our current
online platform. Additionally, the review should identify
and provide programs that are relevant in todays World.

5. Reduce Marketing Spend:  Immediate reduction in traditional
marketing spending by 40-50% along with in-depth review of
our target markets. Cessation of all television, radio and
newspaper advertising in California with the exception of
Hispanic television, radio and newspapers. Appoint an in-house
online & social media team to unlock highly effective and
inexpensive methods of reaching out to our target students.
A restructuring of the team may be necessary as our online
and social media presence is significantly lagging peers.

6. Board Size: Use the Dell model if truly possible.
We would benefit immensely from the addition of
creative/innovative leaders with an entrepreneurial and
problem solving spirit as directors.

7. Opportunistic Equity Buyback: As soon as Corinthian is
cleared from the Financial Responsibility Composite Score,
we highly urge the company to issue a repurchase of 10% of
the outstanding shares over the course of calendar year 2014
to help instill investment community confidence. This timely
buyback is also quite beneficial to the long-term
shareholders like Shah Capital as it is taking place at
very depressed prices.

8. Hire of a Financial Advisor:  We strongly urge the Board to
hire an advisor to unlock the true value of the Corinthian
franchise through M&A unless we are right on our above
listed 1 through 5 suggestions.

We highly recommend the management team to use the First Quarter
2014 Earnings Conference Call on November 5th 2013 as a
platform to announce the company will be conducting a comprehensive
strategic review of its entire operation.

We must bring back an entrepreneurial and start-up culture throughout
the organization to rejuvenate this venerable organization for
the 21st century!

We have decided not to make this letter public at this juncture
or start a conversation with other large (suffering) shareholders
as we respect the management team and believe you will do what
is right for the company, its students, and all shareholders.
We look forward to a constructive conversation soon.


Very sincerely,
Sd
Himanshu H. Shah
CIO & Managing Partner