Adtalem Global Education Inc (ATGE) 2003 Q2 法說會逐字稿

Good afternoon. My name is Mitch, and I will be your conference facilitator. At this time I would like to welcome everyone to the DeVry Inc. fiscal 2003 second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer period. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two. Thank you. I will now turn the call over to Miss Joan Bates, director of investor relations. Miss Joan Bates, Director of Relations, please begin.

Thank you, operator. On the line from DeVry management today is Dennis Keller, Chairman and Co-CEO, Ron Taylor, President and Co-CEO, and Norm Levine, Senior Vice President and CFO. Before the call begins, please be advised that this call may include forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Potential risks and uncertainties are detailed in the company's filings with the SEC. Please be advised also that management's remarks and the contents of this call are copyrighted, and under the sole protection of DeVry. Any reproduction, sale or transcription of such content, not specifically authorized by DeVry, are strictly prohibited. I'd also like to remind you that a telephone replay of this call is available until February 4th.

I will now turn the call over to Dennis Keller.

Thanks Joan, and good afternoon everyone. Welcome to our conference call to discuss our second quarter fiscal 2003 results. Before we start, this is the first opportunity I've had to publicly congratulate my partner, Ron Taylor on being named Co-CEO, which is truly simply the formalization of the shared governance partnership that we've had for more than 30 years. So congrats, Ron.

Now, on to reviewing our fiscal 2003 second quarter results. As those of you who have had a chance to read our press release know, revenues for the second quarter were $172.5m, compared with a $166.7m a year ago. Net income was $23m, or 33 cents per share. I'd like to point out that net income for the quarter reflects certain non-recurring tax benefits, equal to about 12 cents a share. Net income for the second quarter last fiscal year was $18.4m, or 26 cents a share. Norm will be providing more detail of the tax benefits affecting our results later on during his comments.

For the six-month period, net income was $34.1m, or 49 cents a share, again including the tax benefits, and revenues were $335.8m. This compares to net income of $32.5m or 46 cents a share, and revenues of $321.3m in the first six months of fiscal 2002. Contributing to our results, were broad and proactive expense reduction efforts undertaken during the past several quarters. We hope to see further benefits from these actions in the coming quarters.

We continue to see strong interest in enrolment in our graduate programs. As previously announced, the number of course takers at Keller Graduate School of Management, or KGSM as we call it, for the 2002 November term, increased 22%, to 10,761, compared to 8,823 course takers for the same period last year.

While we anticipate challenging revenue comparisons during fiscal 2003, we're finally focused on developing and executing initiatives to restore revenue growth and move our business forward. During the quarter, we announced plans to offer three new majors in our undergraduate Business Administration program. Courses are now available in Human Resource Management, Health Services Management, and Small Business Management and Entrepreneurship.

We also recently announced that we received approval from the Higher Learning Commission for the North Central Association, to expand the number of Degree programs offered online. The approval allowed DeVry to offer five additional undergraduate programs via distance learning. DeVry University has been offering online programs since 1998, starting with its Keller Graduate School of Management Masters Degree programs. The US Department of Education estimates that the number of degree-seeking students taking online courses will grow at an annual compounded rate of 33% over the next several years.

To further ensure our future success in this area, we also named Daniel Hamburger as an Executive vice President, with responsibility for DeVry University online growth and other online programs, and new online initiatives. Daniel is also leading our Becker Conviser Professional Review division, and DeVry University's Center for Corporate Education, which provides corporate education programs to client companies. Daniel brings with him, years of executive level leadership in start-ups and in large organizations with successful internet and technology-based ventures.

We also remain dedicated to our growth plans at DeVry, as well as continuing to improve our capacity utilization by offering both undergraduate and graduate programs at our DeVry University Centers. During the quarter we opened new DeVry University Centers in Plain Oak (ph) Texas, and Valley Forge, Pennsylvania. In addition, seven existing Keller Graduate School Centers were converted to the DeVry University Center format, bringing the total now open to 18. As we've indicated previously, our goal is to convert existing centers to the DVUC, or DeVry University Center format, at the rate of about 10 per year.

Looking ahead, we will continue to grow the network of DeVry locations, and add new career-driven programs, while maintaining our focus on delivering high quality education. We remain confident that with the underlying technology demands in almost every career area, we will move past this slow cycle in enrolment, and see stronger interest in DeVry programs going forward.

With that, I'll turn over the call to Norm Levine, who will give more detail on our financial results.

Good afternoon. Let me take a few minutes to review some of the highlights and the non-recurring items in our financial performance for this second quarter. For those of you who may not yet have looked, we've got complete details of the financial statements, which includes a comparative income statement, balance sheet and a cash flow statement, all appended to today's press release on our website.

First, for the quarter, total revenues were up 3.5% from last year. More important, tuition revenue component, which represents more than 90% of our total revenues, also increased at the same rate, on the strength of continued 20+% graduate enrolment increases and growth in our Becker operations. Continuing in the theme that we've raised before of expense reduction, as we try and match our spending to revenues, total expenses for the second quarter, other than interest expense, increased by 9.4% from the second quarter of last year. There continue to be increases in costs associated with the two new undergraduate campus openings this year, plus the costs associated with teaching upper term courses on the campuses opened last year and the year before, which are just now approaching the full range of course offerings. In addition, we have an increased number of Keller Graduate Centers, an expanded undergraduate online program, and new DeVry University Centers also generating additional costs, along with the revenues.

The rate of expense increase is being moderated. This is evidenced by the fact that the rate of cost increase in the second quarter compared to last year is 9.4%. This is less than the 10.2% rate of cost increase in the first quarter, as you may remember, and is a lesser rate of cost increase than in any of the previous eight quarters, and maybe even further back than that.

As you may recall, our ongoing effective tax rate on income was 40% in the first quarter. During the second quarter, we completed our study of eligibility for certain State of California business and [sign-up] taxes, related to employment and purchases, at our Long Beach, California campus. We determined that we were eligible for State income tax credits for several previous years, as well as for the current year. We should continue to receive benefits, though at a reduced rate, for the next several years as well. The effect of the credits already earned, is to reduce the expected tax rate for the year, to 38.7%, which is the rate you see in our year-to-date ongoing results.

In addition to the reduced ongoing tax rate reduction, we had a non-recurring tax benefit, raising net income by approximately $8.1m for the quarter, which is shown as a separate line item on our financial statements. This net benefit of $8.1m is composed of two separate items. First, as you know, from our geographical segment reporting, we continue to experience unsatisfactory performance on our Canadian operations. So as one of the steps we took in the second quarter, we provided a full reserve for the value of previously recorded Canadian deferred tax benefits, which resulted from prior period operating losses. This is simply another way of saying that we recorded a tax expense for the $6.5m value of these benefits.

Second, as the result of a further detailed study, including independent outside evaluations, we also determined in the light of this unsatisfactory performance, that we could deduct for US income tax purposes, the US tax basis of our investment in DeVry Canada. This deduction provided a non-recurring reduction in our second-quarter tax liability, equal to approximately $14.6m. The combination of these two items, one which is a tax expense and one which is a tax benefit, gives us the one-time net US income tax benefit that you see in our income statement.

The other item we mentioned in the press release was the completion of employment agreements with Ron and Dennis, and the required accounting for post-employment benefits. For those of you who are prone to the technical details of today's financial reporting, the accounting for such items is covered by Statement of Financial Accounting Standards number 106. Essentially, the net present value of the future post-employment benefit, must be recognized over the current relevant period of employment, which covers at least the next several years, and possibly beyond there. As the employment agreement is evergreen, or automatically self-renewing, unless formally terminated. Under these rules, we determined that the amount to be approved in the second quarter was $1.1m, and that in future quarters, although there will be additional costs, they will diminish significantly.

Now I know that many of you also focus on the balance sheet as another indicator of financial performance. Here our receivable levels are substantially reduced from the year-ago level. You may recall that last year's receivables were affected by the inclusion of money that was owed to us under various State and Federal financial [indiscernible]. This year, having done a better job of administering these programs, as we've done in previous recent quarters, there is no net Federal receivable. And even in these tighter economic times, we also did a better job of collecting money from our students earlier in the term than we did last year, and thus the higher cash and lower receivables at this point in time.

In these times of suspect corporate earnings, the real proof of earnings remains in the company's financial position. Cash flow from operations, aided by our strong receivable performance, has increased from last year. Capital spending has been moderated, along with all other spending, to provide an increased free cash flow from last year, even after adjusting for the two campus purchase in the first quarter of last year.

Based on our free cash flow and cash balances at the end of December, compared to a year ago, your evaluation models should be projecting much higher target stock prices.

That about sums it up for me now, and I'll turn the call over to Ron.

Okay, thanks, Norm. Good afternoon to everyone. Today is a special day in a lot of different ways, and I'd like to just mention one, and that is that today is the anniversary of Norm Levine's birth. More than that, it's the first time he gets to celebrate that birthday anniversary with a number that starts with six. So after reviewing that piece of information, anyone on the call that wants their question answered first, should add a little birthday greeting at the beginning.

Before we open the call to questions, I'd like to just make one point that I think everyone has heard before. We are committed to our growth strategy. We are making modification to reflect the current operating environment, so that we will continue to deliver superior educational outcomes for our students, in an environment that produces financial results that are as good as we can make them.

So, with that, let me remind you to limit yourself please to one question, in order to allow everyone adequate time to have his or her question answered. I'd like to ask the operator to open the call for questions if there are any.

Ladies and gentlemen, at this time, I would like to remind everyone, if you would like to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Jerry Herman with Legg Mason.

Well happy birthday, Norm.

Norman M. Levine. Thank you, Jerry.

A question regarding the Canadian adjustment. You guys alluded to evaluating the operations there. Does it also have strategic ramifications for that business on a going-forward basis, i.e. further consolidation, rationalization or other?

We're unhappy with the results we're getting. This is a financial step, which really allowed us to take the tax benefits that were available in Canada, but were not likely to be used, and determined a way to apply them in the States. But absolutely, the operations in Canada will continue to be evaluated for opportunities to be more efficient and more effective, and also to determine ways to enhance our revenue flow in Canada.

Does it impact the asset value of that business if a transaction were to occur, or otherwise?

Only for US income tax purposes. All of these adjustments reflect only the tax values.

But obviously, whatever operational changes we make would affect the value of the assets and the operations in Canada.

Okay, great. I'll circle back through.

Your next question comes from Mark Morostica with US Bancorp Piper Jaffrey.

Let me pass on my congratulations to Norm, happy birthday. You'll get it from everybody, I'm afraid, Norm.

Yes, I know. Let me just say thank you once again, and hopefully never again.

Never again on this call.

Well my question relates to lead flow in terms of what you're seeing in advance of the Spring semester, and how that's trending, and if we should see any improvement as we head into the spring?

The lead flow is divided into a number of different pieces, some of which is oriented toward Summer and Fall recruiting as well. But we have committed additional resources to our lead production. I think we have been seeing increased lead flow from those media, including some new media that we've used in the past, that we moved away from, and that we've now moved into again. So yes, we're seeing a little better lead flow. I think the market in general is still a little tough for technology programs, but we are getting better response to our advertising.

Do you attribute that to the new advertising that you're doing through your new agency?

I attribute that to the fact that we're committing more resources, that is to say, spending more money. That Ad agency has certainly been active in identifying new media, and efficient placements.

Great, thanks a lot.

Your next question comes from Alex Paris with Barrington Research.

Norm, I got to say it too, happy birthday. I have a few questions. I'll just ask one at this point as per instructions. Given your higher cash flow, your lower capital spending and your low stock price, have you or the Board, or the Board specifically, given any further thought to share purchases?

We always think about dividends and share repurchases; it's the shareholder's money. And we also think about other investment opportunities to invest that money at high rates of return. So we talk about that in most meetings, and many of you, as we talked, as Ron and I have talked to you, we ask you what you think specifically about both those courses of actions of returning money to shareholders through repurchases, and/or through dividends. So it's a topic, and of course it's a topic in current news to with the President's proposal on the tax treatment of dividends in the hands of individuals. So we're looking, we're thinking.

It's really an evolving environment, Alex. Things that aren't here yet, like the tax treatment that Dennis mentioned, and other things cause that to be something we look at, but the context is not always the same.

Fair enough. So it doesn't look like anything's imminent on that front. I'll get back into the queue. Thanks again.

Your next question comes from Matt Litfen with William Blair and Co.

Well happy birthday to everyone's favorite 60-year-old CFO. I was interested in your announcement during the quarter, concerning the Co-CEO structure. Will there be any changes in the roles the two of you are playing in the company, or in the reporting structure at DeVry?

Well yes and no. There are always changes in our role, and we're doing something that we've done periodically over the 30 years we've been partners. We're reorganizing our roles a little bit, so that we can be in two places at the same time, which is has always been, we think, one of our comparative advantages. As we said in the release, now that we have two strong Executive Vice Presidents, John Skubiak and Daniel Hamburger, about whom you hear a few minutes ago, we have our operational front better covered. Ron and I can spend a little more time trying to look at changes that are not involved with day-to-day operations, but will make us run better and make more money and grow faster, even before we see any turnaround in technology demand. Ron may want to add a word or two. Sometimes he does, sometimes he doesn't.

The only thing I would say, Matt, is that I think this gives us more resource, more efficiently applied. Dennis is going to have more of his time spent on some of the administrative and staff responsibilities, and that means I can spend more of my time working with John and Daniel on the operating side. I think it will give us a better integration of the activities that we need during this period in time.

Great, thanks.

Your next question comes from Howard Block of Banc of America Securities.

Good afternoon, gentlemen. Many, many more healthy birthdays to you, Norm. A question on the expense growth. You pointed out that the growth was somewhat more moderate in the quarter. For purposes maybe of helping us think about the rest of the year, on the cost of educational; services, line item, the growth was less than 4%, which is remarkably low compared to trailing quarters. Yet on the services side it was up 20%, which is also somewhat at great variance from the history. Can you maybe help us think about those growth rates in terms of how they might help forecast the growth in those line items the next couple of quarters?

First let me point out that the rate of change relative to prior years in both these lines has moved up and down with relatively little, I guess trend, predictable trends at least, from your perspective, as we moderate our spending and look at everything we're doing. The money gets spent where it produces the greatest benefit. If you look back to the first quarter, we had roughly equal rates of growth, and much higher rate of growth in our cost of educational services, than we had in the second quarter. In the second quarter we have a much higher rate of growth in our SG&A in part, which includes the provision for the employment agreements, for which there was no pamper able item in the first quarter.

As for where our expense growth will be on each of the two lines? I think that's less important than that we're moderating overall expense growth. We would hope the future quarters will show lesser rates of increase for the sum of the two, than we have seen in either the first or second quarters.

The only thing, Howard, let me add, is that as we've been saying for a while, the activity level of our fellow travelers in this business, in the advertising and promotion side, is higher than it's been in past years. We have not been spending at the same rate that some of these people have increased their spending, and we're certainly mindful of that. It's likely that you will continue to see student services and advertising and selling expense be at levels more like what they've been recently than what they were previously.

Is there anything in there that has to do with changes in say the timing of some of those expenditures, I think as you had alluded to in prior quarter? Particularly on the advertising in terms of discussion about matching the dollars closer to the start period? Again, any timing related issues driving these somewhat varying growth rates?

There's always timing issues, but there's nothing that's significant enough to incorporate into a projection.

Okay, thank you.

Your next question comes from Jeff Silber with Gerard Klauer.

Afternoon, and let me add my birthday wishes as well. I believe the preliminary cohort default rates come out next month, and I know you guys are not even close to triggering the thresholds, but I just was curious if you've got any indication how that's trended over the past year?

Tends have been down for the last half a dozen years, and have been flat to moderately down. We're at rates now that are sustainable, that are very good, and really there's no indication of any performance problems in that area.

Okay, great. I know I'm not supposed to ask a follow-up, but just dealing with that. From a regulatory perspective, I'm just curios in terms of your view of the environment right now, and how you think it might be changing over the next year?

Well everybody is starting to contemplate the reauthorization activities, and that always comes into it. Really, default rates -- historically default rates were used as a surrogate for quality for a while, and it was a tool that some people pointed to when they were trying to develop some inter-sector advantages. What's happened is, they've got focused on that, all the schools have paid attention to it. Most of the ones with problems are now out of the program. So I don't really think that this is something that's going to have the same prominence that it's had in the past as far as a surrogate for quality.

Okay, great. Thanks.

Your next question comes from Mark Feran with First Analyst.

Good afternoon. Could you talk a little bit more about your plans for the undergraduate timeline as you add programs? Specifically, the marketing element of that, if you think you're reaching out to a slightly different student body or potential student, maybe an older student than what you see in the institutes? As well as what kind of infrastructure, call center, call it what you will, investments that might be going in to support that business? Thanks.

The investment which we're making in our online growth, from most senior management through our student support, student acquisition and our communication to potential students, are all growing. We think this is an investment which will produce dividends to us in the form of student growth, revenue growth and earnings growth, and so we're deploying resources in this area.

Thanks.

Your next question comes from Gary Bisbee with Lehman Brothers.

Thanks, and my birthday congrats, Norm, as well. You guys announced, I think it was last quarter or the quarter before, that you would consider the future plan to increase the number of start periods per year, if I recall correctly, at the DeVry institutes. Maybe adding a mid-term start or something like that. I wonder if that's still something you're considering in the future, and if you might be able to give any updates on your plans in timing in this regard?

Gary, we can do better than that. We're actively involved now in all of our institutes, with mid-term starts. So there is a start every, roughly eight weeks. And that mirrors what we do at our centers, as well as for a small number of adult learners, working adults at our campuses. What we do in eight week terms is an accelerated program at the undergraduate level, right now. We have also - you may have heard us talk about or announce the fact - we're going to conform the graduate school calendar to the undergraduate calendar. That will happen on June 30, at the end of this fiscal year. So next year, next fiscal year, there will be eight-week terms instead of 10-week terms in the graduate school. There will be six eight-week terms instead of five 10-week terms. And the equivalence in educational terms will be maintained by adding an online component to each graduate course.

We're working very hard right now to implement that with a large faculty taking care of these, over 10,000 courses every term. It keeps growing at the rates we talked about earlier, so there's a lot of work to be done. We've been working on it most of last year, most of calendar '02, and we'll be working on it in '03 through the implementation and ever after the implementation. But at that point, we will have accelerated courses throughout the university on an eight-week schedule, and standard courses throughout the university on 15-week semesters.

Okay, great, thanks.

Your next question comes from Fred McCrea with Thomas Weisel Partners.

Norm, once again, congrats. A quick question in regards to capital expenditure plans. Clearly we've seen a potential reduction there year-over-year. Could you give us some guidance or some thoughts on building projections for the back half of this fiscal year?

Capital expenditure plans have reflected a reduced anticipated capital expenditure in the second half of this year, and running through the first half of next year. Other than committed capital for construction, like the new facility in Denver, and the new facility in Houston, we have limited any major capital programs to improvements in our current academic programs, but not new capital projects.

Specifically, when we think about reductions --

Probably half of what it had been running.

Half of what had been running this year?

This year.

Okay. Thanks very much.

Your next question comes from Bob Bridges with Sterling Capital Management.

Ron, can you just repeat that last comment? That was along the lines of my question. No additional capital dollars are being allocated right now for new campuses, beyond Denver and Houston, is that what I heard you say?

For our undergraduate campuses, that's correct. We are continuing to build our DeVry University Centers, and convert them. We are putting money into our integrated student information system. We're not closing down any capital expenditures, but we are postponing or re-evaluating our major campus construction.

Can you just make a comment directionally, how retention rates have been looking over the last quarter? Thanks.

Retention rates are improved with one [lower] asterisk. That is that as your student population goes up, which it had been doing consistently, three year's later you expect graduates from those new student enrolments. So when you have changes in the rate of change, as we have had over the last couple of years, the graduation rate today reflects the enrollment rate from three years ago. So retention rates are improved, graduation rates are also improving, so the absolute number of graduates is increasing. Which is a higher rate to a flat student population.

Great, thanks.

Your next question comes from Trace Urdan with Think Equity.

Hi, that was an interesting interpretation. This is Tray. I just wanted to say, Norm, that I'm only sorry that [Apert] moved on to the evil Goldman Sachs, because I feel quite certain he would be serenading you this afternoon.

Knowing Peter, I've no doubt that that's exactly what he would be doing.

I had wanted to ask about Becker Conviser, and what trends you might be seeing in that business? Specifically maybe give us an indication of whether the growth pattern there is changing at all from what you've seen?

Becker Conviser has been a very strong performer for us. We've transitioned through the most important down period of the 150-hour transition. The acquisition of Stower (ph) CFA is proceeding very well. Stower (ph) is one of the two most important brand names in that business, which continues to grow. There is strong demand overseas for both CFAs and CPAs. So the performance in Becker has been very good.

It was the 150-hour that I was thinking of. Are we seeing now, or have we started seeing accelerated growth because of the comparisons with that down period?

The growth is impacted by that transition, but the interest is also impacted by the additional time required for students to enter into the CPA. So it's about balanced.

Okay. Alright, thank you.

Your next question comes from Brad Safalow with JP Morgan.

Good afternoon, gentlemen. Happy birthday, Norm. Just a quick question on Canada. In conjunction with the consolidation of the operations there, are there any other strategic changes you're making there in terms of how you approach that business? Can you give us some color on how you plan to make that a better performing operation up there?

Brad, we have been in the process for a while. As you probably recall, we've gone from three locations in Toronto to two locations, now, shortly to one location. We postured the programs anticipating Ontario Provincial approval for degree granting by for-profit schools. That has still not occurred, so we've repositioned our programs, made them shorter and more focused, with less content for general education. That process is going well, and will continue into the future.

And in terms of the outlook for gaining access to the Ontario Student Loan Program, is it - I don't want to say status quo - but same as the last quarter and the quarter before that, quarter before that?

Well we're not holding our breath any more on that. We walked around until we were blue in the face, holding our breath. Now we're going to proceed with our business. We're making additional expenditures there for our advertising and sales program, and it's our intent to get that onto a basis that's a contributing basis. We're just not going to sit around waiting for them to figure out their policy orientation.

Thanks a lot.

Your next question comes from Richard Close with Sun Trust Robinson Humphrey.

Good afternoon, it's actually Tray Cowen [on the phone today]. How are you all doing.

Good.

A quick question regarding the marketing message, the new advertising program. Are you seeing a different as far as the appeal that it has for women, of your program? Has that seen any improvement there, or is it about the same?

Overall the message is a little bit more thought provoking, and not as hard a message that people ought to commit to DeVry. Our appeal to women is, I think, improved, but not in any significant way.

Well thanks a lot, and happy birthday, Norm.

Your next question comes from Greg Halter with Great Lakes Review.

I'd like to add happy birthday wishes to not only Norm, but everyone out there who won't have a birthday on a date of a conference call. On the last call you had mentioned about the Community College and surge of enrolment there, maybe effecting some of the more cost conscious students. Can you give us an update on any changes that may have occurred in the last three months or so?

We really don't see much of any change. We see the Community Colleges still doing quite well. But we also, as Ron said earlier, we see our own lead flow increasing for reasons that include not only the fact that we're spending more, but some other reasons as well, which we're pleased to see.

Great, that's good news. Thanks.

Your next question comes from Greg Capelli with SCAB.

Thanks, Norm, it just hit the wire, there's a big party at your house tonight, so we'll be there. I guess I'd like to follow up on something. I thought Ron, I heard you say, after you get Houston open, you'll be evaluating, I guess, the strategy for opening up the bigger boxes. I guess this gets to a capital efficiency question for the overall company. Is it possible that we could see you guys go solely with the DeVry University Centers, just a smaller school model going forward, that I guess would require less Capex? Can I get your thoughts on that?

It is possible that we would modify our program. We're not going to not do new campuses. We're still going to do that. We are evaluating the timing of those new campuses, and I think we will be careful to evaluate the markets that we enter. Especially as we look at how to best position ourselves within each market. We are increasingly looking at efficiencies in our communications, which involve both the graduate school and the undergraduate school. We have a model which now is an adult learner model that serves both graduate and undergraduate students. So it's very possible that the bulk of the new campus openings on a going-forward basis, will be on a slightly modified basis, and perhaps smaller than the campuses which we've opened in the past.

Okay, that's helpful. Ron, just one quick follow-up, is there any thought -- can you give us maybe just a quick review of -- there's been a lot of talk about you guys expanding your curriculum into some areas outside of technology. I know healthcare was one of them. Any thought there as of late that you can give us?

There are three new concentrations in our business programs, majors that include a Health Services Management concentration. You're aware in the Masters programs there's a Higher Ed administration. We actually have seen new interest, renewed interest in our business programs that may reflect - going back to one of the previous questions - that may reflect a more general interest, perhaps more interest among female students, for the less technical end of our curriculum offering. So, yes, there is certainly interest on our part, in looking at curriculum areas outside of our base technology business.

Greg, I can add something to that, that may let you make your own conclusion. If you went back 15 years, DeVry's undergraduate programs were essentially 100% in technology. If you look at them now, they're about 80% technology, 20% in business. That has happened at a time of growth in the technology program, so business programs have just grown faster. If you extrapolate some kind of a trend, and think that we might want to continue to carefully diversify our business a little, you might get a long-term picture that may be helpful in answering the question. I think it lies behind what you said.

Okay, that's very helpful. Thanks very much. Also congratulations to you, Ron, well deserved.

Your next question comes from Jennifer Childe with Bear Stearns.

Norm, you don't look a day over 40. Is it safe to say that margins have bottomed here?

Is it safe to say that? Well, if nobody writes down anything and doesn't write in their reports. Margins, we're working hard on margins, but I wouldn't say that, no. I hope so, we're going to plan for it to reflect the things we're doing, but we're continuing to invest in growing the business. If that means in the short term there is a little more margin enrolment, then let it be.

Okay, maybe I can squeeze in another one. Can you provide any evidence that the DeVry University Centers are working, that they're appealing to a wider audience?

Can we provide any evidence?

Yes.

Sure.

Same store growth figures there, something like that?

We're in a period of time where we're converting a lot of these previously graduate centers to adult learner centers. Some of the centers that are new now have student populations that are beginning to be significant. In the aggregate are significant. So the evidence to me that there is something here, lies in the fact that there's a significant portion of our student population that now is attending at DeVry University Centers that really didn't exist before 15 months ago.

Okay, thanks.

I think we ought to try to encourage people to do one question rather than two, though.

Your next question comes from Jerry Herman with Legg Mason.

Am I allowed a follow-up?

You can circle back. You're okay.

Ron, earlier you alluded to lead flow improving, and maybe a more applicable question is, conversion. Are you also seeing an improvement in conversions in the current timeframe?

Yes. Well it's really early, Jerry, to say much about that. We are, as I have said, putting some resources behind our selling activities. One of the areas that we did talk about in the last conference call - if I remember correctly - was that a higher proportion of our lead flow was from internet sources. It was fairly clear to us that what that required was for us to reorient our sales force training, our recruiter training to allow them to better manage that increased internet flow. We're in the midst of doing that. I would expect to see some improvement in conversion, but it's early to really say.

Great, thanks guys.

Your next question comes from Howard Block with Bank of America Securities.

It's me again. There's been a lot of discussion and some changes already with regards to the business, new programs and focusing on DeVry University Centers, and less focus on the bigger box. Things in the calendar and the new marketing message. Is there any way you can perhaps give us a sense as to how the student composition at one of your new schools, may reflect some of these changes, the marketing message, the program offering? Is there anything you're seeing in Miramar and Philadelphia and Virginia and Seattle, that would suggest some of these changes are beginning to stick, from which we may be able to again extrapolate across your network of schools?

Well the biggest thing is that we're seeing greater enrolments in our business programs. I would proffer to you that one thing that could be, is that the message that people are getting from our new advertising is, a message that's not quite as focused on the technology end of the spectrum, and that we're seeing people respond to that changed message.

Can you quantify that at all in terms of -- Dennis mentioned an 80/20 mix for the system as whole. Perhaps in the newer schools is it 60/40, 50/50, 70/30?

Ronald L. Taylor. No, I don't think it's anywhere near that high. What you're asking about, and what we're talking about, are nuances on a fairly large trend. Even the variation in the message in the advertising is important, and it's likely to better attract new segments. But when you take the overall new student flow, the trends are not at that much variance. Just one other example that just came to mind as I was talking is that, certainly a place like our new Miramar campus, is attracting students from Hispanic background in greater rates. You would certainly see that at that location, but I don't think that's probably what you were thinking of. But that is an example.

Okay. And if I could sneak a quickie in for Norm - in term of a question that is. The deferred revenue declined I think for the first time in the history of the company. Can you offer an explanation? Also is there any significance to that?

Well the deferred tuition revenue is, as you know, the portion of revenue that we recognize in the coming periods, for that portion of the term that's not yet started. In part, some of this is a reflection of the decline in the enrollment at the undergraduate level. That's the bulk of your deferred tuition revenue, comes from your undergraduate revenues, which is 85%, give or take, of the total company revenue. So when you look at the company as a whole with 3.5% tuition increase, tuition revenue increase in the second quarter, recognizing that all of that is coming from Becker and from Keller Graduate School. Terms tend -- some of them tend to coincide more with the ends of quarters than the DeVry terms. It's a reflection of the declining undergraduate enrolments.

Thank you.

Operator, we only have time for maybe one or two more questions if we're approaching an hour for the call.

Certainly. The next question comes from Jeff Silber with Gerard Klauer.

Great thanks. Do I have to wish Norman happy birthday on a follow-up question?

No not -- well, what the hell, yes.

Happy birthday. Since this question is for him, I definitely will. You had mentioned the accrual of the costs for I guess the post retirement benefits on the employment agreements. Just for modeling purposes, roughly what time period are you going to be accruing that over?

The bulk of the costs will be accrued over the next 2.25 years or so. The rate of cost accrual in quarters subsequent to the second quarter, diminishes rather substantially.

Okay, great. Thanks.

Your next question comes from Trace Urdan with Think Equity.

I keep stumbling on that one. I was going to ask about the internet lead conversion, and jerry got to that. I'll ask another question maybe. What would it take to get you guys to start talking about the internet enrolment, online enrolments? Is it the kind of thing where it needs to get up to a critical percentage of the total, or are you sort of going to keep tight lipped about it forever?

Forever is a long time, but we're going to try to give you some exciting overall news over the next year or two. We're excited about Daniel Hamburger coming on board. We'll give him a little time to do his thing with online. We'll let John Skubiak do his thing with DeVry University Centers. And then maybe we'll slice this a little different way.

Got it, thanks, Ron.

I think that's the last question.

Good. We now want to say thank you again. Thank you for your interest, thank you for your follow up. As always we're available by telephone when you call us.

And thank you for your birthday wishes.

Yes, Norm is just sitting here beaming -- well not exactly beaming, but he's --

As much as any CFO can beam.

Yes, he was happily embarrassed. So, nice to talk to you all and goodbye.

Ladies and gentlemen, this concludes today's conference. You may not disconnect.