Adtalem Global Education Inc (ATGE) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your DeVry, Inc. Year-End Earnings and Summer Enrollment Conference Call. My name is Jean. I'll be your conference coordinator. At this time, all lines are in a listen-only mode, with a question-and-answer session to follow. Should you require operator assistance while on this call, key star zero on your tone dial phone, and we'll be happy to assist you. I'd like to advise you this conference is being recorded for replay purposes. And now over to your host for today's call, Ms. Joan Bates, Director of Investor Relations. Ma'am, please proceed.

Thank you, Operator. With me on the line today is Dennis Keller, Chairman and Co-CEO; Ron Taylor, President and Co-CEO; and Norm Levine, Senior Vice President and CFO.

We'll be following our usual format today with some prepared remarks from management, followed by a Q-and-A session. But before we begin, 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 latest filings with the SEC. Also, I'd like to remind you that telephone and webcast replays of today's call are available until August 29.

I'll now turn the call over to Dennis Keller.

Thanks, Joan.

Good afternoon, everyone, and welcome to our fourth quarter and year-end conference call for fiscal 2003. We'll start by providing a brief overview of our financial performance during the fourth quarter and the year and a review of our summer enrollments, which were also announced today; Ron will provide further information on Ross University and DeVry Online; and, finally, Norm will provide further details on our financial results.

As announced in our press release, revenues for the fourth quarter were $174.4m, compared with $162.0m in the year-ago period. Net income was $12.1m, or 17 cents per share, compared with $16.2m, or 23 cents per share, in the year prior period. For the full year, revenues reached $679.6m, compared with $648.1m in the prior year. Net income was $61.1m, or 87 cents per share, compared with $67.1m, or 95 cents per share in fiscal 2002.

As outlined in the release, earnings in the fourth quarter were negatively affected by previous declines in our total student population and in particular by the continuing underperformance of our Toronto campus.

During the fourth quarter, we continued to realign our cost base to reflect our student population, and as a result, we incurred $2.6m of staff severance expenses during the period.

I'm pleased to report that new undergraduate enrollments at DeVry University increased for the first time since the summer class of 2001, and the positive results that we saw in our U.S. campuses during the spring term continued in the fourth quarter of our fiscal year.

For the summer term, new undergraduate student enrollment increased 2.5 percent to 10,607, and at U.S. campuses, new undergraduate students were up 4.5 percent. The total number of students enrolled at DeVry University undergraduate programs was 41,075, compared with 43,342 a year ago, which is a diminution of 5.2 percent. The upturn in new students electing to pursue their education with DeVry reflects our continuing efforts to reinvigorate enrollments in our core business, as well as increased demand for our online and business degree programs.

Keller continued the strong performance it has shown for years, with enrollments up 15.5 percent to 9,483 course takers for the July 2003 term. We are seeing strong interest in our graduate programs and believe this will continue in fiscal 2004 as more students recognize the benefits of receiving their graduate degree from DeVry University.

Throughout the year, we've spoken about our initiatives to enhance marketing efforts and to improve lead conversions, and we are pleased that these efforts are now beginning to pay off. We are confident this positive trend will continue in fiscal 2004, and we look forward to reporting further improvements in new student enrollment when we announce our results for the fall term.

For the first time, we are reporting Ross University student enrollments. We are pleased to report that the number of students enrolled at Ross University increased 11.8 percent to 2,852 from the prior year's summer semester in 2002 to this summer semester in 2003. This is strong performance and is further evidence of the growing contribution we believe Ross can make to our business.

Let me now turn it over to Ron.

Thank you, Dennis, and good afternoon to everyone. As I think all of you are aware, during the fourth quarter we completed the acquisition of Ross University, and we are now working to integrate the health sciences expertise that we gain through this acquisition into our other educational offerings. Ross provides us with direct entry into the highest levels of the rapidly growing medical sciences field, and we believe there are many opportunities to further grow the current medical and veterinarian student population at the same time that we explore other new initiatives in this market segment.

Healthcare market dynamics all point to a significant shortfall in physicians and veterinarians over the next 10 to 20 years. In fact, some experts predict that the United States will need to train up to 10,000 more medical students per year by the year 2025 in order to meet the growing demand for physician services.

In addition, approximately 10 percent of open residency positions in U.S. hospitals go unfilled each year. Because U.S.-based medical schools are unable to meet this demand, we believe that medical students trained at Ross University will be an important source to help fill this gap. We are in the process of expanding the student capacity at both our campuses in the Caribbean and in the clinical rotations in the United States, and we'll be utilizing DeVry's existing marketing structure to help grow enrollments at Ross University.

We will also expand Ross's potential student population by making it easier for qualified DeVry University undergraduates to enter the Ross medical or veterinary programs. We think that this will be attractive to some undergraduate students, and it is just one of the ways we are looking to better integrate DeVry's large undergraduate population and services with the Ross content.

We have already extended our course offerings at three DeVry University campuses into the healthcare area, with the introduction this summer of three new degree programs in biomedical sciences. We have been pleased with the level of interest shown in these new programs and plan to expand them to other campuses over the coming year.

Our Online operations have also been rapidly growing as a result of increased marketing focus and the introduction of what we call the Best of Both initiative. Best of Both enables students to take courses online or on site or in combination or using both delivery methods within a single course. As you might imagine, this initiative has been extremely popular, particularly with working adults. Best of Both speaks directly to the convenience and flexibility that these nontraditional students seek, and it also provides an opportunity for traditional students to try online delivery without having to make a full course commitment.

We continue to be excited about the opportunities that Online presents to DeVry University, and while still in the early stages of our development, we believe that over time it will make a much larger contribution to our financial results. In fiscal 1904 -- or 2004, we will be undertaking additional marketing and advertising and better utilizing our existing DeVry recruiting organization to further grow our Online enrollments.

As you can tell by the 19.6-percent increase in our fiscal '03 student services and administration expense line, we are investing marketing and advertising resources to support our undergraduate recruiting. Our newest TV campaign began July 14, and initial results are promising.

We also are doing a better job of converting our Internet source leads. With a modest turn in outlook for IP hiring -- and no more announcements like IBM's layoff announcement of yesterday -- we believe that our overall enrollment should recover nicely.

Having said that, we are continuing to invest in our campuses and DeVry University Centers. During fiscal '03, the new DeVry University Centers were opened in Plano, Texas, Valley Forge, Pennsylvania, and the Cobb Galleria area of Atlanta, and new campuses were opened in Philadelphia, Miramar, Florida, and in Denver. A new facility offering graduate degree programs opened in Manhattan in April. That brings our total number of DeVry University locations to 66, which includes 25 campuses, 40 centers, in addition to DeVry University Online.

Looking ahead to fiscal '04, we expect to open six to eight new DeVry University Centers in addition to the Houston campus, which will open in November.

Before I turn the call over to Norm Levine, I'd like to cite some statistics from the June 2003 edition of the Black Issues in Higher Education publication. During the academic year ending in 2002, DeVry University was the largest source of computer and information science graduates for African-American students, for Asian-American students, for Hispanic-American students, and for American-Indian students -- the single largest source from all institutions across the United States. We're proud of these results and believe that DeVry serves very well the changing face of U.S. undergraduate enrollments.

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

Good afternoon, everyone. For those of you who may not yet have had the opportunity or the time to look, complete detailed financial statements are appended to this afternoon's press release, and they're also available with the press release on our website. Let me take a few minutes to review some of the highlights of our financial statements for both the fourth quarter and the total year.

Starting with the income statement, the Ross University financial results are included in our fourth quarter and total year only for the month-and-a-half during which they were a part of DeVry, and you can certainly get a view of the relative size and profitability of Ross from the detailed historical and pro forma financial information that was in our 8-K, which we filed at the end of July. You may have noted that expense related to the amortization of intangible assets in the 8-K pro forma statements was about double the preliminarily projected amount in our original investor presentations prior to the completion of the acquisition. The actual charge in the month-and-a-half was $1.8m versus our original projection of $900,000 for the period. While this increased amortization affected our fourth quarter results, the good news is that this is a non-cash charge, and the independent valuation that created the intangible assets that are being amortized fully confirmed our belief about the value of this business. Also, the higher amortization in the early years of ownership is going to be balanced by lower amortization in later years when the cost of amortization will be less than we originally expected.

Next, as we said in our press release, our net income for the quarter includes expenses related to workforce reductions in the U.S. and Canada to better match faculty and staff resources against current enrollment levels. This action will benefit future periods in the form of lower wage expense. The associated charge was approximately $2.6m on a pre-tax basis, so you can see that this also heavily influenced our results for the quarter.

And, additionally, although not primarily a fourth quarter charge, the financial results for the year were affected by Canadian facility-related charges of approximately $1m on a pre-tax basis, which includes the Eastern Canada facility consolidation.

Looking at the balance sheet, our financial position remains very strong. Although we added $290m of borrowings at year-end, to which we're applying cash generated from operations to reduce the amount outstanding each quarter, our unrestricted cash level was over $100m, and receivables were actually lower than they were a year ago. Our borrowing agreements have given us access to cash at low levels of interest expense; it's currently less than 3 percent. Even at the full year-end borrowing level, our debt-to-capitalization level was a conservative 41 percent, which will improve with the passing of each quarter as we go forward.

On the cash flow side, let me point out what appears to be a reduction in the amount of cash generated from operations but actually is not. The statement of cash flows is heavily influenced by the change in deferred tuition revenue, going from a small source of cash in previous years to a use of almost $17m in cash in the current year. Let me explain why you can't judge a book by its cover, or, as many of us have learned from life, beauty is more than skin deep.

First, Keller Graduate School has implemented its transition to the common academic calendar of DeVry University and will have terms of enrollment in fiscal 2004 versus five terms in fiscal 2003 and previous years. In this transition, the term that normally began in the latter part of June was shifted to beginning at the very outset of July. Accordingly, the large deferred tuition revenue that accompanied this June term start last year and in previous years is not included in this June's financial statements. While a June term start would also have generated a corresponding receivable, remember that at term start we collect a large portion of this receivable in the early days of the term. Thus, the benefit of this cash flow has not been lost but simply deferred until July, as the cash flow statement indicates.

Similarly, at Ross University, their May term start occurred just prior to the acquisition date. The result was in the period of time when we owned them, deferred tuition revenues at the time of acquisition were amortized to a lesser amount and appearing as revenue during our period of ownership. The same phenomenon of large receivable reduction in the early days of the term prior to acquisition caused that collection to precede our period of ownership. The result is the appearance of a reduced cash flow. Now, this cash flow that preceded the acquisition was not lost to us. It's taken into account in the purchase price adjustment, and so it is reflected in the cost of acquisition and not as cash flow from operations. Although it's difficult to estimate with any certainty, it seems clear that on a comparable basis of operation, we would've generated at least as much cash as we did last year, as evidenced by the fact that our borrowings were less than the purchase price for Ross, but we still finished the year with more cash than we had a year ago.

One closing note for those of you who were with us on our January call, today is not my birthday, but tomorrow is my wedding anniversary. So, hopefully, my wife is listening and will know that I have not forgotten. And with that, I'll turn the call back over to Ron.

Oh, my God! Okay, with that, we have a lot of people on the call, and we would like to respond to as many questions as we can, but what we'd like to do is ask you to please discipline yourself. Ask only one question. If you have another brilliant question that everybody should hear, get back in the queue, but Norm and Dennis and I and others will be around to answer questions on the phone later on if you have a burning issue.

So with that, Operator, we'll open the call for questions.

[Caller instructions.]

Your first question of the day comes from [Matt Litfin][ph] of William Blair and Company. Please proceed.

Good afternoon. Question on the restructuring charge for -- maybe for Norm. Would you consider that one time in nature? What did that accomplish for you? And the press release said that it was Eastern Canada and the U.S. What actions did you take in the U.S.?

Well, the $2.6m of charges I would characterize as non-recurring. It related to the provision for severance related to a reduction in both faculty and staff in both Canada and the U.S. The benefit in future periods comes in the form of lower wages by virtue of the smaller workforce.

And can you just address the second part of the question about what was it in the U.S.?

No --

Same thing. It's reduction in staffing to better align our expenses with our revenues, and the recurrence of this is, I would say, unlikely, Matt. We're trying to make sure, though, that the biggest expense on our P&L, which is people, is adjusted to reflect the fact that our technology enrollments are still down even while our DeVry University centers are up, our Online is up, Keller Graduate School is up, Becker is up. Everything has gone along fine, but there are some areas where we just have too many people for the enrollments that we have.

Okay, thanks.

And your next question comes from [Mark Marostica][ph]. Sir, please proceed.

[Marostica][ph] with Piper Jaffray. A question as to where you saw the driving force behind the increase in new student undergraduate enrollment. If you could comment on particular programs perhaps that -- in your IT area that were strong that in other periods weren't, or was it across the board? I'd be interested in a little more color there.

The best thing that I can say, Mark, is that our business programs are -- have been very strong, and the technology continues to be weak. I think that we also have seen a lot of interest from people who are responding to our new delivery systems. Both the DeVry University centers are doing well and our Online is doing well. So the technology area is still weak. I think it's not as it has been in the past, and we certainly would like to expand in that area. I think when that turns around in a significant way, we'll have some different kinds of conversations on these conference calls. But right now, it's business in the two delivery systems, DeVry University Centers and Online, as well as Keller Graduate School.

Would it be fair to say by your remarks then that IT new student enrollments are still declining?

No, it wouldn't be fair to say that, but it would be fair to say that they are less than what they have been.

Okay, thank you.

Is that the last question?

And your next question of the day comes from --

Hello?

Operator?

Just one moment.

Okay.

And your next question comes from [Jerry Herman][ph].

Wow. Congratulations, Norm. A couple of questions. Ron, maybe you can help with -- sort of similar to the last question and maybe by order of magnitude -- help rank the relative contributions from the DVUCs, Online, and maybe the relative performance of business versus IT? I mean is Online number one, DVUC number two; is that fair?

No, the way I would think of it, Jerry, is that business is really the strongest driver for us right now.

Okay.

There is a lot of growth in our business. There is a lot of growth in our online, but it's from a smaller base, and we're happy with that, but that's something that we're going to continue to stimulate. DeVry University Centers are also up strongly, but business students really comprised recently about half of our new student enrollments.

Okay, that's helpful. I'll circle back.

Thanks.

And your next question comes from [Jennifer Childe][ph] of Bear, Stearns. Please proceed.

Thanks. When do you think you'll be prepared to give us guidance on future quarters?

As you may know, Jennifer, we have not really felt like we should provide that kind of specific guidance. What we have done, and Norm has been helpful to people, I think, has helped to get your model developed in such a way that your thoughts and anticipations can be incorporated appropriately, and we think that's the best way for us to be helpful to you guys to do your job.

Okay, thanks.

And your next question comes from [Jeff Marsh][ph] of Matador Capital Management. Please proceed.

Hello, everyone. Congratulations on the results. I just had a couple of questions, no particular order.

Let's try to do one, and then we'll circle back.

Okay. Well, to speak first about Ross, the enrollment results there seem quite good, ahead of some of the expectations that I've seen. And maybe even coupling that with the 8-K that was filed in late July, at least it appeared, based on the results from the March term, that Ross also experienced an acceleration in revenue growth that period. So maybe you can just talk about what's driving the growth at Ross and whether or not you'd expect these types of growth rates to continue? Thank you.

You're absolutely welcome, and you've picked on a very strong point. We are very pleased with the strong upward trend in Ross, which is going quite fast now, as you'll see as this year unfolds, and which we believe will continue but likely not at the rate that you've seen in the last few months and that you'll see in the coming year where Ross had capacity, and we are filling that capacity, and we are in the process of building. We're under construction right now on the medical school with a major classroom and laboratory building, and we're planning for additional buildings on both campuses. As Ron said earlier, we intend to be a strong source of the new physicians and veterinarians that this society needs over the coming years, and we are pleased to be -- to have a vehicle which is already the largest English language medical school in the world to have enough faculty and enough infrastructure to be able to make a serious contribution in this area. So you picked up on something that is absolutely true and we're very excited about, so thanks for noticing.

Thank you, Dennis.

You know, one addendum to that that people might be interested in is that sometimes you make acquisitions that are not -- that are more difficult to integrate. I would say that Ross comes to us with a very strong management team. The integration of Ross into our activities has been very easy and efficient, and I think you're going to find that you and we will be very happy with operating Ross in the future.

Good. Operator, have you got another one for us?

Yes, the next question of the day comes from [Sara Gubbens][ph] of Merrill Lynch. Please proceed.

Yes, hello. I'm wondering if you could talk a bit more about the Best of Both initiative in the Online area and maybe some of the costs associated with that? I'm wondering does that mean that you would have the same class both taking place with a professor in the classroom and then also online?

Can you just say about what you said, Sara? There was a bit of an [inudible].

Sorry. Can you hear me better now?

Yeah, that's much better.

Great. I'm just wondering if you could describe the Best of Both initiative in a little bit more detail and maybe talk about some of the costs associated with it? And what I’m wondering is if you have both of the class with a professor and a full set of students going on in the physical classroom and then also that same material provided online?

Yes, we do, and one of the great things that we have is a nationwide system of onsite facilities that are supported by and, in turn, support the online. And what we're finding is that people like the opportunity, if they want, to take a course online, a course on site. Some of the courses they want to take at the same time. Sometimes they take a course and they want to be able to review something or go into something in more detail. Sometimes they want to be able to access a lab with some physical help. It really is a model that was pioneered by the Keller Graduate School at the graduate level, but we're now applying that at the undergraduate level, and it may very well be that in the future we can apply some of that at Ross University as well. It's a very exciting combination of technology and education.

Okay, thank you.

And your next question comes from [Jeff Silber][ph] of Harris Nesbitt Gerard. Please proceed.

Good afternoon. I sort of have a two-part question regarding the restructuring charge, and hopefully, you'll let me sneak that in. If you can tell us specifically which line item that restructuring charge was in and kind of an estimate of what potential savings you might get from that restructuring over the next year or so. Thanks.

Well, first, let me not characterize this as restructuring. It is a workforce reduction, and I think when people think of restructuring, they think about the closure of operations or other much more, you know, onerous events. This was simply a workforce reduction.

In terms of the line in our income statement on which it appeared, it is for the -- it is in the student services and administrative expense line.

Okay, great. And what would that have been on a post-tax basis?

Well, you can -- simple arithmetic, I guess, is probably the best. Why don't we assume a composite U.S. and Canadian tax rate of about 40 percent? So you'd have an after-tax charge of 60 percent of the $2.6m.

Okay, great. And that 40 percent is what we should use going forward as well?

Well, yeah, not for the company in the aggregate, but for those items that are centered in the U.S. or Canada, yes.

Okay, great. Thanks.

And your next question comes from [Jerry Odinine][ph] of Jeffries & Company. Please proceed.

Hi. If you could just give a little bit more flavor on how the new openings have been received, along with the new advertising programs that have come through for your new openings, and is that leading you to sense that you're having success with the advertising programs?

Well, the Houston opening, which is our latest opening, is, I think, going to be a very good one for us. And, yeah, we believe the new advertising program is better than it -- than the programs we've had in the past. We're still not necessarily satisfied with that, and there is a significant shift of response to advertising from a direct telephone response to a TV lead -- or to a TV advertisement into an Internet response so that there's a shift of people when they see a TV ad from picking up a phone and calling and going to a website or going to the DeVry home site. The result is that conversion of those leads is still -- conversion of Internet leads is still lower than conversion of TV leads. But our conversions of those are better than they have been in the past. So taken as a whole, the advertising program, I think, has improved. And not withstanding the shift, we are doing a better job with dealing with those leads.

Okay, great. I've got a follow-up later. Thanks.

And your next question comes from [Richard Close][ph] of SunTrust Robinson Humphrey. Please proceed.

Yes, just to hit on Ross, maybe if you could give us or discuss Ross's revenue contribution in the fourth quarter although it was just a month-and-a-half? And then maybe just in addition to that, you know, you talked about 10 cents' accretion in fiscal '04. Has that changed at all based on the change in intangibles and whatnot?

Richard, if you look at the 8-K, you've got financial results for Ross for a nine-month period on an unaudited basis, and that's the nine months ending with March. If you use that as your base -- and you've got an awful lot of pro forma information in there as well that deals with amortization of intangibles and interest expense -- you can pretty well construct a model, I think, that will allow you to judge what you think Ross's contribution will be in the coming year. You've got some very current information in that filing.

Okay. But you're not going to give us what it was in the fourth quarter and whether you're sticking to 10 cents?

You have the first nine months --

Okay.

-- from which you can easily form the last month-and-a-half, and it is exactly a month-and-a-half of inclusion at the back end of our year.

Okay.

And I think we are sticking by our ballpark of 10 cents. There's no change up or down in the number we gave you. We're going to live with that in '04 and intend to live happily.

Okay, thanks, Dennis.

And your next question comes from [Gary Bisbee][ph] of Lehman Brothers. Please proceed.

Hi, thanks. I wondered if you could just expand a little bit more on the plans you've been putting in place and the actions you've taken to diversify the undergraduate business? And specifically in terms of new program offerings, you mentioned, I think, that the healthcare programs are now in three campuses, and I know you recently had a press release mentioning the concentration in sales and marketing, I believe it was. You know, if you could just talk about, first of all, how those are going and, second of all, what your plans are over the next 12 to 18 months in terms of new programs, you know, what share you think they could get, or any color on that would be real helpful. Thanks.

Okay. We certainly have been adding opportunities for our business administration students to concentrate in different areas, including things like sales administration, marketing, and that sort of thing. So there is some opportunity to be a little more flexible, and I think we've seen that student populations have responded favorably to that.

We also are making it possible in a more efficient way for students to enter our Bachelor of Science in Technical Management degree completion program. We're giving them better and more efficient transfer credit options. So we've seen a positive response to that.

And then the third thing that you mentioned, and it's true, is that we have introduced three new healthcare biomedical programs, a health informatics -- or biomedical informatics, a health information technology, and a biomedical engineering technology -- the health information technology at the associate degree -- which we think are pretty interesting because they do combine the technology base that we have with the healthcare demand that we see out there. And I think it gives us an opportunity to create some unique kinds of programs that DeVry can provide on a nationwide basis.

However, if you've watched us for any period of time, you know that we're fairly conservative in that regard, and we are piloting programs today at those three campuses. But, frankly, demand has been good. There's been good preliminary interest in this summer class, and what we'll be looking to do is to expand those programs into other campuses, which we'll do fairly quickly, I think.

Great. Thanks.

And your next question comes from [Brad Safalow][ph] of J.P. Morgan. Please proceed.

Hi. Good afternoon. Just on the Ross expansion, can you give us a sense for how much capacity that adds on a student basis or percentage of your total and, you know, what capex you should expect from that this year?

The one project we're doing now adds about 20 percent to our student capacity in the medical campus in Dominica. The planning we're doing, which is not complete yet, will add up to 100-percent capacity on those campuses, probably a little less on medical school in that area or in the 50- to 100-percent area. And the capex that we expect for this coming year is -- in this fiscal year is well under $10m, well under.

And just so --

But over five.

Okay.

So in that range.

And just so I'm clear, the --

I was afraid you might think well under means one million or two million.

Okay. Just so I'm clear, the 20 percent should be done by this year and maybe the planning rolls into fiscal '05? Or is that expected to be done this fiscal year as well?

The expansion that's currently underway will have students in that facility in September, next month. The inside we finished. We'll be finishing up the outside in September and October. So the September class will be in that facility. You're correct in thinking that the planning process, which is going on now and will take several more months, we'll have to be -- we'll need then architects, we'll need construction, and so the whole process is probably a year-and-a-half away and maybe in that ballpark, maybe a little more.

Okay, great. I'll get back in the queue. Thank you.

And your next question comes from [Greg Halter][ph] of LJR Great Lakes Review. Please proceed.

Good afternoon, guys. You commented on the capital expenditures for Ross. Can you do the same for the company as a whole given the fact that they were down quite a bit year over year in the fiscal '03?

They'll continue to be down, Greg, in the sense that we were committed to expanding capacity at rates in the past that was beyond what the enrollment in the last year or two justified. Like a battleship, it takes a while to turn the ship, and we're now at a point where we're pretty much at steady state in that regard. We can grow with the existing capacity, and the only things we really have in the queue, if you will, is finishing up the Houston and then the six to eight DVUCs, and we'll probably be at about what our 2003 level is in 2004, which, for round numbers, just call it -- think of it as 45 to 50 million and add another five to six million for Ross, and then you're probably pretty close.

Okay, great. Thank you.

And your next question comes from [Jerry Herman][ph] of Legg Mason. Please proceed.

Question with regard to Keller Graduate School of Management. The numbers there were a little less than we expected. Are you guys sensing any dilution being created by the DVUCs for that particular brand?

And, secondly, if you look at your most recent graduation, how would that mix be. IT versus business?

Well, the Keller Graduate School results -- you don't get Keller Graduate School results that go straight to the moon. The Keller Graduate School is doing quite well, but the one thing that impacted the year or this latest reported enrollment gain for Keller is that -- I think Norm alluded to it or maybe Dennis did -- that we went from a five-semester-per-year program to a six-semester-per-year program in Keller Graduate School. We were able to do that by incorporating technology and our online delivery capability within the classroom, and it allows us to offer more starts to students, a more concentrated program, and the result is that the report in this particular time frame looks a little less. I guess Norm referred to it in terms of cash flow, but it also impacted enrollment. So you shouldn't take too much from that with regard to Keller. The biggest area that we have issues with in enrollment is in the IT and technology area. The rest of them, including Keller, are doing quite well.

How about grads, Ron?

Oh, grads, yeah, I mean as you build up, you get more grads, and our -- as you focus on attrition, you retain more students through graduation. So we love to have graduations, but we hate to see those revenue units walk out the door.

Okay, thanks.

And your next question comes from [Jeff Marsh][ph] of Matador Capital Management. Please proceed.

Hi, thank you. Just on an earlier question, if you back out the $2.6m from SSA for the term, it looks like the overall growth in the line item is really no higher, no lower than it was last term. Yet, the new student enrollment again seemed to outperform expectations by a fairly decent degree. So I was hoping maybe you can comment on the cost of getting students in the door. I guess it would seem from these results that at least it doesn't appear any more expensive or that you might be actually doing reasonably well on that front.

Yeah, I guess that another way to say what you just said, Jeff, which we did say except maybe not everyone heard it, is we feel very good about the new advertising. It is generating more leads, and we're doing a better job of converting those leads. Another way to look at it is the way you just did, and that is that the cost to acquire those leads and all the other costs are up, but they're not up dramatically. I know we look at some of the other spending in our sector, in this area, and it's up pretty dramatically. We're trying to be frugal, and we're trying to be efficient, and I think so far we're doing a pretty good job.

Right. And just as a follow-up, if I may -- am I still on?

Yeah.

Just want to make sure I heard Norm correctly. In addition to the intangible amortization being about $900,000 above plan this quarter and the $2.6m charge, did I hear that there was another million-dollar pre-tax charge related to Canada in these results?

Yes, there was. It occurred, though, primarily in earlier quarters, and it related to facility consolidations.

Okay, so that's not entirely a fourth-quarter charge?

No, only a small portion of it is reflected in the fourth quarter.

Okay. And last question, on the cash flows, Norm, if I heard you right, I guess basically the essence of your comments were that cash flows were negatively impacted in the quarter and on the year because of certain timing events, which, to me, if true is pretty remarkable given the improvement in free cash flow in '03 on about a $6m reduction in net income. Maybe you can just kind of talk about the progress that you made in free cash flow on the year irrespective of the timing event because it was still pretty strong relative to the last several years.

Well, in a growing business, I mean there are some just marvelous attributes to this business. One is the ability to operate in part with very little in the way of working capital because, among other things, we have no inventory. And, of course, over the last several years, we've taken renewed interest in managing not only the assets -- the principal asset, of course, being accounts receivable -- but also in managing our liabilities and making sure we don't pay our bills too quickly. You can see the benefit of that in the strong and ever-increasing cash flow in the years leading up to 2003.

Right.

So it's just attention to the transactions that generate cash and that then use it.

Okay. Thank you very much.

And your next question comes from [Jeff Silber][ph] of Harris Nesbitt Gerard. Please proceed.

Thanks for letting me back in. Ron, you had mentioned something earlier in the call about how you were -- I think the quote was "making it easier for some of your undergrad students to enter Ross." I was wondering if we can get some specifics and a little bit more color on that?

Yeah, first of all, you know, when we talk about all these programs, I just want to caution everybody, these are things that we are working on that I think are going to be good, long-term providers of students and revenue and earnings for us, but nobody should go wild on the short term here. We're putting into place a lot of things that we think will have good impact.

The program you're talking about we're calling "One Step." And what we will be able to say to people is if you enter DeVry as an undergraduate student and you complete the program with appropriate levels of achievement, grade point average, and if you have the ability to pass a test, we can guarantee you entry into medical school in one step. So if you come to DeVry, let's say, and take a Biomedical Engineering Technology degree, three years later -- because you know DeVry offers its programs year-round -- three years later, you can be guaranteed entry into medical school if you're qualified and go down to Ross, complete the on-island program, go through your clinical rotations, and have your medical degree a full year earlier and with -- than your peers -- and have the assurance that you can get into a medical school that if you -- that you might not have if you were going somewhere else.

This strikes some people as not necessarily reflecting the current positioning and branding of DeVry, but we're not trying to manage to today or to yesterday; we're trying to manage to the future. And we think that DeVry University and Ross University taken together provide us with a platform that in the future is going to allow us to continue to be the leaders in this sector, not necessarily that we're flogging things to make it the biggest, the fastest, but in the long term, we can be the highest-quality provider in these areas that we choose to be in.

Okay, great. That's helpful. One more quick follow-up. If I took a snapshot of your undergraduate population now, roughly what percentage was in business and roughly what percentage are in tech?

We just did that, and Norm has it, John has it, and I have it. It's roughly 30 percent in business today, and that's up sharply in the last two years.

Okay, great, Dennis. That's very helpful. Thanks a lot.

And your next question comes from [Gary Bisbee][ph] of Lehman Brothers. Please proceed.

Yeah, in terms of the undergrad completion, I was wondering if I could get some more color on that. Specifically, is that being offered at the campuses in addition to the University Centers? And can you give us a sense if that's a significant piece of the new undergrad? And then I think I heard you also say that you're trying to make it easier for students to transfer credits and get into that. Any additional color there would be helpful. Thanks.

If I heard your question right, Gary, yeah, there is a significant facilitation of transfer of credit into the DeVry programs, and the program that we proffer to people as being the best opportunity to complete a degree, complete a baccalaureate degree, is the Bachelor of Science in Technical Management, BSTM. And so we're getting a lot more interest from working adult students who have a need, who have some background, and often it's previous credit from multiple schools. You know, as young adults move around to different jobs, they take some courses here or they take some courses there, and sometimes they have difficulty in aggregating those in ways that allow them efficiently to get to their baccalaureate degree. We've been thinking about that. We think we have a program that is -- will allow them to aggregate those credits, move toward a bachelor's degree from DeVry, and do it in a pretty efficient and effective way.

And is that -- that's something you talked about, the DeVry University Centers, or are you teaching that out of the campuses, also?

Yeah, no, yeah, we can do that at any of those locations and online.

And online. Okay, great. Thanks.

So for somebody that's overseas or in the military or wherever, this may create an opportunity for them that they wouldn't otherwise have.

Great, thanks.

Your next question comes from [Greg Capelli][ph] of CSFB. Sir, please proceed.

Good afternoon. It's Eric filling in for Greg. I was wondering if you would discuss -- provide some color on the number of students enrolled online and the percentage of those taking, you know, wholly online versus the [indiscernible] program?

Eric, we have said that we will begin this fall to provide a little different construct of what our enrollments are, and we'll also provide a roadmap of how to get from the current historical data that you have to whatever the new construct is. But we're trying to figure out how to give you information that's appropriate, you know, for your development of your models, whatever, and we're not there yet. So I think if you stay tuned in December, we should have a little different line-up. We are working on that, and we'll give it to you as soon as we get an appropriate way to deal with that.

Okay, thanks.

Your next question comes from [Brad Safalow][ph] of J.P. Morgan. Please proceed.

Hi. My follow-up question actually has to do with maybe something in the long-term horizon, as you guys seem to have turned the corner here on reinvigorating [indiscernible] growth at the undergraduate level. You've made a number of changes to your campus model. You have an online platform that appears to be growing. How should we think about long-term operating margin expansion and potential of the Company? I think the highest operating you guys have ever reported on a full-year basis is around 17 percent, and where three to five years from now do you see as, you know, enrollment trends improve and you have greater diversity of sources could you see the Company having operating margins?

If we begin to get a strong return of technology students, which I think in the kind of time frame you're talking about, undergraduate students, I think you'll see our operating margins expand. We have always tried to expand those at a moderate rate so that we're both fair and viewed as fair by our students with regard to our pricing, but if -- it would not surprise me if we were able to -- in that kind of a circumstance to raise those margins by several basis points up to the -- call it up to and approaching 20 percent.

Okay. Thank you very much.

Operator, we have time for one last question.

Your last question of the day comes from [Howard Block][ph] of Banc of America Securities.

Good afternoon, everyone, and congratulations to Norm, as well. You spent about $300m on Ross, and apparently it's encumbered the balance sheet with amounts that are having a hugely dilutive effect on your once-impressive returns on invested capital. It seems that it was, in great part, to sort of acquire the health sciences expertise in order to help with the new offerings. I was wondering what expertise is that at Ross exactly, and maybe in practical terms -- not in any sort of grandiose or general terms -- what expertise is that that you utilized and how did they provide, I guess, leverage points for the new offerings?

I think we will utilize Ross's expertise, which can be simply said as knowing how to create DVMs, Doctor of Veterinary Medicine, and MDs, and to create them at high levels of quality and with excellent outcomes for those students. That expertise will help us in healthcare and health sciences. We see the sciences part in -- we see the sciences part already in DeVry University and focused in DeVry University, but with some help in the healthcare part of that from Ross, for example, we'll be teaching chemistry and biology. The same basic sciences that are taught at Ross are going to be taught in DeVry University for these bioscience programs. And then the whole of healthcare, and I don't mean -- I'm going to say a few things that are not things we are committed to do but are things that we could do and are looking at over a period of years. For example, in nursing, there's not only a need for more RNs and nurses of all kinds, but also for high-level nurses, nurse practitioners, they're called, who have additional skills and additional capacity to do medical procedures without the supervision of a doctor, and they make physicians more productive.

There are -- let me turn -- and there are other things that are very much like that at the highest levels of professionalism in healthcare, and we also want to talk to you about your dilutive idea. I know you're talking about return on invested capital, not income, and you know that 10 cents a share is not dilution in the coming year, but I want to turn it to Ron, who is jumping up and down and has a few things to say about accretion and dilution.

Yeah, and I'm not jumping up and down, but the preamble to your question inferred -- or implied some things that some other people might take away that I don't want them to be -- I don't want to [indiscernible].

First is that the deal is accretive. No ifs, ands, or buts, it's accretive. It may be that it's dilutive to return on invested capital in the short term, but so what?

Second is if there's ever been an environment to borrow money to buy an accretive platform in an area that we like and that is at the base for the 21st century, in our view -- somebody else can have a different view, but in our view this is the time. Our price to borrow right now is -- our cost to borrow right now is very low, and it makes imminent sense given our strategic posture to be in this kind of vehicle.

Third, and you didn't say this in your preamble this time, but there's no requirement on us to adopt a model that other people have adopted for expansion of this business by rolling it out to multiple little sites around the United States. We have a very strong franchise and brand identity for Ross University, both in the vet area and in the medical area, and notwithstanding that they do program -- the first part of their programs in the Caribbean, they actually are pretty well regarded. And I think that our ability to leverage that with a little good marketing input from DeVry, a little capacity expansion on the campuses, and by looking at some other attractive ways of participating in this market are going to prove to be not only attractive but highly attractive. And so return on invested capital maybe; return accretive to our profits and low cost investment, it's pretty good to me.

All right. We have reached a little over an hour. For those of you who are still out there, we thank you very much for your interest and your sticking with us for the full hour, and we look forward to talking with you individually. If you have any other things that you didn't get a chance to cover, we're all here, and we'll be here today and tomorrow. So with that, may I just say thank you again, and we look forward to talking to you next time.

Thank you very much for your participation in today's conference. You may now disconnect.