Adtalem Global Education Inc (ATGE) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Q1 2004 DeVry Earnings Conference Call. My name is Jean. I'll be your conference coordinator for today.

At this time, all participants are in a listen-only mode. We'll be facilitating a question-and-answer session towards the end of the conference. If at any time during the call you require assistance, press star, followed by zero, and a coordinator will be happy to assist you. As a reminder, the call is being recorded for replay purposes.

I would now like to turn the presentation 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 call 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 with some prepared remarks from management, followed by the Q&A session. But before we begin, please be advised that this call may include forward-looking statements pursuant to [inaudible] 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.

I'd also like to remind you that telephone and webcast replays of this call are available until October 31.

I'll turn the call over to Dennis Keller.

Thanks, Joan.

Good afternoon, and welcome to our First Quarter Fiscal 2004 Conference Call.

Fiscal year 2004 started with an increase of first quarter tuition revenue of approximately 16 percent over the prior year. This increase is largely due to the enrollment growth we've experienced in Keller Graduate School of Management over the past 12 months and to the inclusion of revenues generated by Ross University, which we acquired in May 2003.

Revenues for the first quarter were $189.2m, compared with $163.3m one year ago.

Net income for the quarter was $10.5m, or 15 cents per diluted share, compared to $11.2m, or 16 cents in the first quarter of fiscal 2003.

Revenue growth in the quarter did not translate into a proportionate earnings increase because of the year-over-year decline in our undergraduate student population. This decline negatively impacted the efficiency of our undergraduate operations. In other words, while we started this year with an upward trend in recruitment of new students, our earnings reflect lower total undergraduate student enrollments. As we announced on our fourth quarter call this summer, there were 5.2 percent fewer undergraduate students enrolled at DeVry University than there were in the summer term of the previous year. This condition should be less and less of a factor as the fiscal year progresses.

This quarter's earnings were also affected by the increased investment we made in advertising and marketing vis-à-vis the prior-year period. We expect this investment to continue to pay off in terms of growth in new student enrollments for the fall and spring terms. Moreover, ongoing operating expense reductions, coupled with an upward trend in new student enrollments and tuition increases, should enable us to improve earnings as we progress through the year.

During the first quarter, we announced signing a letter of intent with RCC College of Technology in Toronto that will allow us to phase out our DeVry University operations in that market. This agreement should be finalized in November of 2003, and we expect it to have a favorable impact on our financial results in fiscal 2004. Under this agreement, we will no longer accept new students at the Toronto campus for the fall term, and we'll contract with RCC to teach out the existing student population over the remainder of fiscal 2004 and 2005.

Given that private institutions are still not approved to offer either graduate or undergraduate degree programs in this market, we have been looking for a way to exit Ontario while still meeting the educational needs of our enrolled students. Our actions in Ontario will have no impact on our Calgary campus, which will continue to offer a variety of degree programs and continue as an important part of the DeVry University system.

As announced in the earnings release today, in October we acquired the assets of Person/Wolinsky, a New York-based provider of certified public accountant review courses. Founded in 1967, Person/Wolinsky offers courses in multiple formats, including onsite, self-study courses, and in-house training courses for CPA firms. It will be integrated into Becker Professional Review Operations, strengthening our position in the important East Coast market. While we expect this transaction to be accretive, we do not expect it to have a material effect on our fiscal 2004 earnings.

During the quarter, we continued to invest in expanding our distribution system with new DeVry University Centers in Indianapolis, Pittsburgh, and Portland. We also began offering classes in our new Houston campus. In addition, we recently announced our plans to open new DeVry University Centers in Las Vegas and Cleveland.

Finally, I'd like to briefly discuss the new reporting structure we announced today for our DeVry University enrollment numbers. Starting with the fall term, which will be announced on December 4, we will be providing you with a breakout of online coursetakers in addition to total and new undergraduate student numbers and, of course, graduate coursetaker numbers. To help you better understand the trends in these figures, we've provided the prior four terms of data in this release. We hope these numbers provide you with further insight into our business and operating performance and, in particular, the growth of our online [inaudible]. We continue to be pleased with the overall growth rate of DeVry University Online.

With that, I'll turn the call over to Ron for additional comments. Ron?

Thanks, Dennis, and good afternoon to everyone. I have a cold, so I apologize for any raspiness that you hear.

There are several misperceptions that have surfaced recently that I'd like to address with some additional information, particularly on employment rates and graduation rates. Much of what I will say is drawn from public sources, but I want to highlight some of these facts that may not be obvious to all investors and analysts.

First, regarding employment after graduation, many students come to DeVry for entry into a career. However, many other students wish to advance their existing career. We serve both groups of students, and we serve them very well. In today's economic environment, career entry and education-related positions in areas like telecommunications management and information technology have been more difficult to achieve than it was two or three years ago. I trust that this is not a shock to anyone on this call. Accordingly, employment rates for technology grads at DeVry and elsewhere are lower than they previously were. As the economy recovers, these rates will rise. We've seen this pattern many times in the past.

Despite the significant slowdown in technology sector employment over the last two years, more than four out of five DeVry graduates who actively pursued employment -- note that, please -- were employed in education-related fields within six months of graduation. However, we've also found that during this time, many more of our employed graduates have remained at their current places of employment as a safety net during this technology market slump. The percentage of graduates in this category jumped from less than 2 percent in 2000 to over 13 percent in 2002. Obviously, this group impacts our reported gross employment rates.

In addition, students who elected to continue their education in graduate schools after graduating from DeVry increased from less than 3 percent in 2000 to over 7 percent in 2002. This reflects economic conditions and DeVry's growing stature as a university. And, of course, this group also impacts our reported gross employment rates.

There are many other circumstances affecting employment, including foreign students ineligible for U.S. employment, graduates who get married, who go on to the military, who get arrested, who die, who don't seek employment for a variety of other reasons. What should be obvious to anyone seriously looking at the data is that there are many methods currently being used to report graduate employment statistics. DeVry is very conservative in this regard and includes a comprehensive gross-to-actual figure that no one else, to my knowledge, reports.

A cursory review of SEC reports for other for-profit schools indicates a less conservative approach. Several use a 12- to 18-month timeframe, whereas DeVry uses six month. Others use limited surveys of graduates, and others report data on a net basis only, eliminating the kinds of adjustments I described above. The net takeaway here is that graduate employment rates, taken by themselves, are difficult to compare across institutions, and conclusions drawn from these rates are questionable.

Now, regarding graduation rates, in case anyone didn't know, the Carnegie Foundation for the Advancement of Teaching classifies DeVry University campuses as baccalaureate colleges. Institutions in this category are defined as primarily undergraduate colleges with major emphasis on baccalaureate programs, not associates or certificate programs. DeVry is also classified as a specialized institution, specialized as a school of engineering and technology. These institutions award most of their bachelor's or graduate degrees in technical fields of study. As you might imagine, graduation rates in shorter certificate and associate programs are typically much higher than in bachelor's degree programs, and graduation rates in technical fields tend to be lower as well.

Many students who start at one institution leave and graduate from another. According to an August 2003 ACE Issue Brief, by 2001, only 43 percent of students who entered post-secondary education in 1995/96 and were seeking a degree or certificate had earned a credential at their first institution. This 43 percent includes all types of institutions, from the Ivy League to community college and career schools, and it reflects what are called first-time, full-time students.

The American College Testing, better known as ACT, Graduation Rate Report compiled data for graduation by admission selectivity. Again, no one will be surprised to know that this report says, "We fully expect more selective institutions to graduate their admitted students at higher rates than will less-selective institution." The overall graduation rate reported by ACT for public institutions whose admission criteria are similar to those of DeVry University -- ACT scores of 18 to 21 or SAT scores above 870 -- was 32.1 percent in 2001. That's the ACT reported rate for public institutions similar to -- serving student populations similar to DeVry, 32.1. The overall graduation at DeVry University for that period is 31.2, and this excludes students who transferred from DeVry and completed their degree at another university.

The National Center for Education statistics also provide comparable rates for institutions, four-year colleges, and universities, and certain private for-profit campuses with similar profiles. These are, in other words, urban campuses with significant age, gender, race, and ethnic diversity. The reported rates for these public and private for-profit campuses range from 14 to 39 percent. I remind you, DeVry's was 31.2.

DeVry also serves a large number of students who previously attended another college but found that it didn't meet their educational needs. The graduation rate for students who transferred to DeVry from another college is 48.9 percent. At the undergraduate level, DeVry University serves a varied population, diverse in age, gender, race, ethnicity, and socioeconomic status. We do an excellent job of serving that student population, and it is characterized by the fact that over 50 percent of our student body today is categorized as a racial or ethnic minority. Black Issues in Higher Education publication entitled, Higher Education's Top 100 Degree Producers, reports that several individual DeVry campuses are ranked in the top 50 schools in the nation for providing degrees to minority graduates in the degree programs that DeVry offers. When DeVry University campuses are combined for the academic year 2001/2002, DeVry is the number-one university -- the number-one university -- in the country for supplying degrees to African American graduates, the Hispanic graduates, to Asian American graduates, and American Indian graduates in computer and information science degree programs, number-one university in those categories.

Other categories -- and I'll stop with this data [dump] -- one of our campuses in California is the number-six ranked in the nation in terms of business degrees for Hispanic students. One of our campuses in Georgia is the number eight in business for African American. The California campus is number nine for business in Asian American. This is by comparison with every other educational institution in the United States.

So let me just end by saying in spite of the significant slowdown in technology sector employment, 82.3 percent of DeVry graduates who actively pursued employment were employed in education-related fields within six months of graduation.

Second, the graduation rate for first-time, full-time DeVry University undergraduate students is 31.2 percent, which is consistent with or better than those of other institutions offering bachelor's degree programs to student populations with profiles similar to those served by DeVry. Students from low-income families have significantly lower graduation rates than students from middle- and upper-income families. These range from 4.5 percent for families below $35,000 to 12.4 percent for families with incomes up to $65,000. DeVry serves this group of students very well, as indicated by our 31.2-percent graduation rates. These results, as far as I'm concerned, when fairly evaluated, speak for themselves.

Let me just say that DeVry today is a much stronger company with a more diverse product mix, a leaner organizational structure, an improved delivery system, and exciting opportunities in healthcare and online education. We believe that we are well positioned to continue as a leader in high-quality education and to reestablish ourselves as one of the financial performance leaders in this industry sector.

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

Good afternoon, everyone. And as a reminder to all of you, our complete financial statements for the quarter were appended to this press release, and they're also available with the press release on our website in the Corporate and Investor section.

Let me just spend a few minutes to review with you some of the highlights of these financial statements, and let's start with the income statement.

Revenues increased by almost 15.9 percent [inaudible] revenues of Keller Graduate School and Becker Professional Review, and because of revenue from Ross University, which was not a part of our financial statements in the first quarter of last year. Revenues for the DeVry University undergraduate operations were essentially flat with last year as the 5.2-percent lower enrollment offset the July term price increase.

Looking ahead, we've announced a 6.8-percent tuition increase for undergraduate students and a 4.9-percent increase for graduate students, which will take effect in our spring 2004 term, which is one term earlier than the 2003 increase.

Gross margins have increased from last year to 44.8 percent as a result of workforce reductions and other cost-reduction efforts we have been implementing. Also, the inclusion of Ross University with its higher margins has contributed to the overall company increase.

Results of operations from our Toronto area campus continue to be included in our financial results. We expect reduced losses with the benefit of our pending agreement with RCC, and this should benefit fiscal 2004 and result in losses that are less than we incurred from operations in fiscal 2003.

Looking at our student services and administrative expense line, remember that this includes the amortization expense for intangible assets largely relating to the Ross acquisition. Compared to the first quarter of last year, amortization expenses increased by $3.2m, or almost 1.7 percent of revenues. And as Ron and Dennis said earlier, we continue to invest in marketing for new students for the coming terms and expect to see the returns on that investment manifest themselves in higher new student enrollments for the fall term. As you may recall, this higher investment in marketing really began in the second half of last year, and so the comparison with last year's first quarter is much more pronounced than it will be in subsequent quarters this year.

You may also recall that when we announced our fiscal 2003 earnings in August, we said that we would continue to invest in marketing for the future. Excluding the amortization expense, our student services and administrative expense has been maintained at about the same relationship to revenues as it was at the end of last year. Student services and administrative expense was 34.1 percent of revenues this quarter, compared to 34.0 percent in the fourth quarter of last year and 33.4 percent in the third quarter of last year.

Interest expense, of course, results from our borrowings to fund the Ross University acquisition. During the quarter, we repaid $27m of that debt, and interest expense in future quarters, assuming no upward pressure on short-term interest rates, will be reduced as we continue to further repay that debt.

Our tax rate on income is the composite of state and federal taxes on the Company's operations other than Ross and a single-digit tax rate on Ross earnings. Tax planning has helped us reduce our tax liabilities, and we expect that a composite rate of less than 30 percent should prevail for the near term. Remember that taxes are a real expense element and that appropriate steps to reduce this expense are as beneficial as cutting expenses in other areas of operation.

Turning to the balance sheet, cash balances are higher than last year, and our receivables are lower than last year although the revenues in the quarter that generated these receivables were higher.

We continued to do an improved job of administering financial aid programs in collecting money owed directly by students.

Capital spending remains moderate and should be in the range of $40m for the year, contributing to what should be another good year of free cash flow.

And with that, I'll turn the call back to Joan.

Thanks, Norm.

We'll take the next half hour or so to answer any questions you may have. As I'm sure you're all aware, the SEC has made recent decisions that further clarify the parameters of the Regulation FD, so in order to remain in compliance with Reg. FD, we're going to be unable to expand upon the details of our results in any of our follow-up conversations we may have with you. So we ask that you seek verification now, and we'll do our best to provide you with the answers.

Operator, we'll open the call for questions.

Thank you. [Caller instructions.]

And your first question today comes from Matt Litfin of William Blair & Company. Please proceed, sir.

Good afternoon. Norm, I'm interested in the interest expense in the quarter, the $2.2m. Is that amount for a full quarter, or is that something less than a quarter?

No, that's a full quarter, Matt. If you'll recall, we completed the Ross acquisition in May of last year, and as of our fiscal year-end 2003 had $290m of borrowing, so that's a full quarter's worth of interest expense. And, yes, if you compute that that leaves you with a very low effective interest rate, you are absolutely correct. It's the strength of our financial position that allows us to borrow at very favorable rates.

Okay, one more follow-up if I might for Dennis. Dennis, I noticed in the press release you mentioned that this first quarter was a turning point for the Company. I was wondering if you could maybe expand on that, give us your thinking in terms of using that phrase, and are you referring to -- you know, maybe you could comment on lead flow for the fall term as it relates to that usage of that phrase.

Thanks for the question, Matt, and let me see if I can answer at least part of it. There was a clue in there when, as you may recall, in our last conference call, we talked about our confidence that the fall semester or the fall class would be better than the summer class, and you probably noticed that this time we talked about the fall and the spring being better as we see it now than their counterparts a year earlier. So I think that is the genesis of the turning point in the -- I think we can also say and get it out so everybody will know it that lead flow is up for DeVry University over the last two months or so to -- by 7 or 8 percent on a year-to-year basis.

And that's including everything, including the technology undergrad?

That's for all of DeVry University.

Thank you very much.

And your next question comes from [Brad Cefalo][ph] of JP Morgan. Please proceed.

Hi, good afternoon. I was just hoping you could help us reconcile some of the coursetaker numbers. Can you give us a sense for, particularly undergraduate students, what percentage of those students may be enrolled strictly online or full-time online?

Well, we really -- we may have that facility when we -- later, but one of the things that we consider a big advantage of our program is that we give students absolute freedom to, term by term, be either online, be in person, be both, be at one physical location this term and at another physical location the next term, so we don't think of students as being "online students" or "in-person students." We think of students as being DeVry University students taking their work wherever it best suits their needs.

Understood, so I guess we'll focus on the convenience aspects for this, at least in the short term.

And just a follow-up question. In terms of understanding, on the online side, the magnitude of spending either year over year and what we can expect going forward, how much has that contributed, if you could, at least qualitatively, better quantitatively, to the increase in SS&A expense?

I may have missed the front part of that question. Norm, did you get it, or Ron?

Yeah, it's -- we are investing in our online, and you can see it in the growth, and of course, you remember -- I think maybe not everyone remembers, but you remember that we were proscribed from being able to offer all of our programs online until about a year-and-a-half ago. So we have been making investments in online, we're seeing a significant increase, and it is important, we think, to assure that we have the student service resources available to serve the student population that we want to serve, and we're doing that in a metered way.

What is a little bit different and you might not have thought about, or maybe you have, is that we advertise across a wide spectrum, and our advertising is designed to serve students at DeVry University, Keller Graduate School division, online, onsite at the DeVry University Centers. So one of the things that we see is that we can spend in a little bit broader categories for our advertising and generate leads across the spectrum of our product offerings.

Okay, I'll turn it over. Thank you.

And your next question comes from [Mike Marasco][ph] of US Bancorp.

Hi, it's Mike Marasco with US Bancorp Piper Jaffray. First question, just wanted to get a sense for how conversion rates are trending. You made the comment lead flow is up 7 to 8 percent year over year.

We're still trying to improve our conversion rates. I think the last time we were on the conference call, Mark, we talked about some of the elements of better processing our leads and also training our sales force. The lead processing piece of that, we've made good progress on. The sales force training is one of the things that continues to be a focus. I think what you'll see is improving conversion throughout this year as the training of the sales force and as the lead processing continues. Whether that will have an impact -- proportionate impact on this fall class remains to be seen because, of course, we've just been in the process of making those changes. So the effectiveness of those changes should improve as we go along. But we are seeing better conversions and better lead flow.

You also mentioned regarding RCC that it would have a favorable impact on fiscal '04 results. Would you care to elaborate or quantify that impact for us?

Yeah, I can elaborate easily. We were losing money, and getting rid of it allows us to lose less money.

Would you say -- just give us a little bit further clarification on that, is it a material amount of --

Sure, sure.

-- incremental earnings for next year?

You know, we've been talking about Canada for the last several years, and we've tried to make a go of it with a structure that was oriented toward degrees. DeVry University does, after all, offer degrees. We weren't approved -- no one was approved -- to be able to offer degrees in that market that's a private institution. We tried to change, and that was an inefficient change, so if you look in some of our past financial statements at international operating components, you'll see some pieces of information that will give you some sense for that, and I think this -- we don't like this -- we don't really like not being in a major metropolitan area market like Toronto, but, on balance, this was the best answer for serving our students, which, really, we've been focused on and improving the financial circumstances in our Canadian operations.

Great. One last follow-up for Norm. Norm, just a clarification. You mentioned, I believe, a figure of 33.4 percent of the student services and admin. expense, but I wasn't sure for what quarter you were referring to.

That was the third quarter of last year, and excluding from that the amortization of intangibles that was included in that quarter. I'm looking just at the pure student services and administrative expense.

Got it. What was the year-over-year figure, excluding amortization expense, compared to 34.1 percent?

Well, as I said earlier, our big increase in the investment and advertising didn't occur until the second half of last year.

True.

But if you look at the first quarter of fiscal 2003, our SS&A actually in that quarter was 32.0 percent.

Okay, thank you. I'll turn it over.

Your next question comes from [Sara Gubitz][ph] of Merrill Lynch.

Hi. I'm hoping you can give us an update on Ross and how it was trending in the quarter.

I'd love to do that. I spent four out of five days last week in the Caribbean on both of those campuses, and I have to hold myself down, or my partner will kick me from being too enthusiastic. But the answer is that Ross is making what I think is extraordinary and excellent progress toward a long-term goal of maintaining a higher and higher more and more effective level of service for more and more students. Responsible growth, in other words, growth in numbers of students that will at the same time allow us with the resources that we have and can put together and train over time -- at the same time will allow us to do it for more students. So a better job for all students and at responsible rates, more students. We also are just inaugurating this semester down there -- their semesters are a little different. They do three a year, but they start them in May and September and January. In the September semester, we inaugurated a gorgeous new building with wet labs and a big auditorium and offices and student study rooms, and so there's an added capacity for more students to serve them well so that we will -- we're planning for the future, we're putting facilities in place, we've got facilities on the drawing board for the other campus, as well as additional facilities for the MD campus. I think I've probably taken enough time, but the -- it should be clear that I really believe that Ross is going to be a spectacular addition to our corporate family.

Let me just add, without kicking you, but Ross -- the Ross integration is going about as well as it could go, in my opinion. There is a terrific management team there headed by [Tim Foster][ph]. They add a lot to our management capacity. The Ross University School of Medicine and Veterinary Medicine serve a significant demand from the student population. They serve a significant demand for trained professionals in these areas. We think that this is a marvelous entry into the highest levels of healthcare, and we think that that is a great position to be in for the beginning of this century and beyond. So we're very, very pleased with this acquisition.

Would it be possible to give us a sense of pro forma revenue growth in the quarter or perhaps enrollment growth year over year?

We don't break out the --

Actually, Sara, when we file our 10-Q, you'll recall that Ross University is a separate reportable segment, and you'll see their revenue growth -- well, you won't see their revenue growth because, of course, they weren't a part of our segment reporting a year ago, but you will see their first quarter revenues when we file the Q.

Okay, but not before then?

No. At this point, Sara, we haven't compiled the footnotes or the information it would take to be sure the answer's correct.

Okay. One last question just about taxes. The tax rate was much lower, as you mentioned earlier, than we might have been expecting, and I'm wondering, would it be possible to give us a sense of how much of that is just your ability to bring down the tax rate for the underlying business and how much of that is taking into account owning Ross and having a much lower tax rate?

Well, if you characterize it as two pieces, one being the effect of Ross and the other being our effect to reduce state taxes because, of course, the federal rate is pretty well determined, clearly, the largest single factor of the two is the inclusion of Ross. But we have made progress. There are all sorts -- there were a number of opportunities for state tax planning that can reduce your state tax liabilities, and we've taken an opportunity to do those to the extent that we can benefit from them. But by far and away, the largest factor affecting our tax rate is the inclusion of Ross.

Okay, thank you.

And your next question comes from Richard Close of Jeffries.

Congratulations. Just had a couple quick questions here. I think last conference call you talked about business programs being roughly 30 percent of undergraduates, if I'm not mistaken. What are you seeing for the fall? Do you think that's going to bump up, increase significantly, or--?

We're continuing to see strong interest in our business programs, and I think we'll continue to see higher percentages of business enrollment until the time that we get -- until the time that we get a strong rebound in our technology enrollments. But whereas that was in the 30 percent, the new incoming students, it could be 40 to 50 percent. Did we lose you or --?

No, I'm here.

I know you changed desks and locations.

[Indiscernible] figured out the phone yet, Ron. Just one question. On Ross, you know, they didn't really do much in terms of marketing and advertising previously. Can you talk a little bit about the changes you guys have put in place there and whether you're seeing any type of impact? Because if they had a cycle start, I guess a period start in September, did you have any impact on that?

No, they had really had an organizational structure that was doing very well in terms of serving the student population that was in contact with them. And, in fact, it's headed by a former DeVry sales guy. But the additional marketing, the communications that would allow larger numbers of students to understand the quality of what DeVry offers, we haven't begun to implement to any great extent. That will come as we put into place the additional capacity at the campuses down in the Caribbean. So you have to -- you have to sort of take one step first, then take the next, then the next, then the next.

I'll tell you, there are -- Ross visits colleges and talks to and writes to the medical school counselors at colleges on a more and more aggressive basis since the arrival three years ago of Tim Foster as President and since Tim's recruiting of an experienced high-level sales manager from here. So they're doing quite well on their own, and when it comes time, as Ron said, that we add articulation with DeVry programs to Ross, it can only be better, but we want to be ready with capacity before we do that.

Okay, thank you, guys.

Hey, congratulations, Richard. Or I guess it's congratulations.

Yeah, right.

And your next question comes from Jerry Herman of [LGG][sic] Mason.

We have a new firm, too!

Right!

Just a clarification, if you will, on Canada guys. Norm, I think we framed the losses in Canada with the charges last year at five to seven million. Is that in the ballpark? And based on the timing of the change and the relationship with RCC, can you at least better help us gauge what the reduction in losses might be? Is it half of that? Is it three-quarters of that? Certainly by timing, it would imply roughly half. But can you help us?

Well, Jerry, let me point out, first, that the framing of the five to seven million is something, I think, that was built with a hammer and nails at your end. I don't think we've put a range around last year's losses, but, clearly, they were significant. And as we go forward in this fiscal year, there will be a significant reduction relative to the operating losses we incurred last year.

And are there any other P&L ramifications of that change, i.e., revenue recognition or otherwise?

No, there will be obviously a diminishing revenue stream as we have stopped recruiting new students. There may be -- depending upon the specifics of the teach-out plan, there may be at some point in the future an acceleration of a provision for the costs of that, but barring a change in the timing of that recognition, our losses in the current year are going to be, as I said, considerably smaller than they were a year ago.

Okay, great. And, Norm, your message with regard to services and admin. -- you gave us the last three quarters --

Right.

Is the message there that that's the approximate run rate excluding amortization, and the way we should look at it is those kind of averages or those kind of percentages and then increase that by either roughly $3m per quarter? Is that correct or--?

Well, that's an indicator of the rate at which we're currently spending, and as we've said, we're going to continue to invest. So I think you can take that for what it is. But, clearly, you need to take into account the fact that there's in total in that line $3.4m of amortization, $3.2m of which comes specifically from Ross.

Great. Thanks. And then final question. Ron, you talked earlier about the conversion rates. I think we can clearly say that there's not a reduction or any sort of diminution in conversion rates at this point, right? We can rule that out?

You know, I've been around long enough to not rule anything out, but as of what information we have today, it appears to us that the things we've implemented with regard to lead processing and sales force training have resulted in increases in conversion rates, that's correct.

Okay, that's great. I'll turn it over. Thanks, guys.

And your next question comes from Gary Bisbee of Lehman Brothers.

Hi. Wanted to ask a couple questions about online profitability, and I think I heard you correctly earlier when you said you're still investing in online, which --

Yes.

-- so but can you give us some sense as to what your thoughts are in a longer term? And part of the reason I asked is I recently was walking around your campus in Dallas, and I saw lots of signs on the walls, you know, encouraging or recommending that undergrad campus-based students consider taking a class online as well, and I guess I wondered, you know, if part of the issue in those large campuses is that you've had lower student counts year over year, so you're having negative leverage of the highly fixed-cost structure there, what is the benefit to having these kids take classes online other than, you know, convenience for them, which I completely understand. Is this something that you're willing to take your lumps today? Could you feel that the kids taking those classes online in the future are going to be more profitable than the kid at the campus?

No, no. Look, there's a lot of reasons to do that, but among the reasons are that if you have -- just think through upper-level classes scattered around at 25 different locations. If you can not have to offer small classes at 25 locations but instead have students in a single class delivered online, you have the ability to reduce some expenses and perhaps offer coursework that you wouldn't otherwise offer or be able to offer. So that's not the primary driver, but it is -- there's a lot of aspects to assuring that we have students able to take online, on-site or some combination.

It's also the case that the faculty resources that we have are able to be -- especially the outstanding faculty that have a particular expertise are able to be provided to students on that basis, whereas they might not be able to in a single campus.

But the bottom line and the initial start to your question, we view online as a significant delivery method now and in the future. We think we have the capacity to deliver high-quality programming to a large student population in this regard, supported by and supporting mutually the onsite programs that we have, and we're interested in assuring that we have opportunities to explore how best to do student service, to do the delivery of teaching, to do financial aid for students using both the onsite or the online delivery mechanisms.

So some of this -- I don't know what signs you saw and that sort of thing, but we're very interested in having an integrated whole in DeVry University, and we think that that's going to make us a much more competitive provider in the future.

And one more thing. We also think it is good for students to learn how to learn online, to take a course online, and so those signs that you saw had that behind them as well, student -- the quality of student outcomes and student success.

Okay, now that makes sense. So in the short term, you can leverage some of the faculty costs by putting kids from several campuses into one classroom, and longer term, I think that makes sense, on the delivery.

You know, one other question, you've, obviously, the last few quarters increased your marketing spend year over year. Can you give us some sense in terms of -- not necessarily what you're spending on but where you're focusing the dollars? You know, is a larger percentage of that going to the markets in which you've got the 25 big campuses, or, you know, is that pretty much the same, and a lot of that is due to the new university centers and/or online? Can you just break down where you're spending it?

Yeah, if you recall that originally when we joined forces with [Draft][ph], we took the posture of informing the market about DeVry University per se. And if you recall, one of the senses that we got is that we were doing a good job of that, but we forgot to ask for the order. So we went back with the new campaign and a new approach that was a little bit more assertive about the fact that students really should consider DeVry University for a variety of reasons, which we were trying to articulate.

As I said before, we've been articulating them in an integrated way across all of our delivery systems, and we find that night school supports day school, and day school supports online, and online supports DeVry University Centers. And so the message has been focused on DeVry University and all of its delivery alternatives, and where the message is not just a warm fuzzy about DeVry University but where we are assertive about the fact that students can benefit by going to DeVry.

Okay, so it's just in general? You're not targeting, you know, specific markets more than others?

Well, we certainly try to do an effective job of analyzing markets that have special opportunities for us. There are opportunities for us to carry special messages in individual markets, and we do have an integration of our operations in various metro areas, and so we are doing some marketing that is supportive of that. And I guess, finally, we did open a campus in Houston, and there's specific marketing targeted to that. But, no, generally, we are marketing across the board in the markets where we serve, and, obviously, also, we've diminished the amount of marketing activity in Toronto.

Okay, great. Thanks a lot.

And your next question comes from Fred Mccrea of Thomas Weisel. Please proceed.

Good afternoon, everybody. Kind of following up on a statement that was made earlier in regards to the impact of the lower overall enrollment growth relative to EPS and the effect it's having. When can we expect the improvements in new student starts begin to move more along step with the total student growth and begin to see less of an effect on the EPS line? Is this two to three quarters, or a little bit further out?

This year, Fred; it's going to be this year. I feel it certainly.

Well, it took -- you'll recall, or you may recall, that the first two semesters where we had down new students, we had up total students.

Yup.

That's the way the process works. Now that we have up new students, it's going to be a few semesters before we have up total students. That's just the mathematics of the thing. Or, as some people say, the pig going through the python.

That's largely just due to the fact that you had these large classes that enrolled two or three years ago that were graduating students and catching up to that effect?

Yes. It is --

A little more complicated.

Yeah, exactly.

But it's more or less.

More or less, yes.

Okay, but two to three semesters or quarters would be a good way to view it?

Yeah, we're on semesters around here, so two or three terms.

Perfect. And then a quick one for Norm. Looking at the cash flow, Norm, certainly a nice improvement there. Anything you want to highlight in terms of the nice improvement on a year-over-year basis?

We do a great job!

Norm feels like it's in his own pocket instead of DeVry's pocket. He's just very protective.

Okay. Any particular working capital issues other than the [inaudible]?

No, I mean, clearly, you know, cash flow comes from a single source. It's from your student billings. It relates to your ability to process and collect financial aid, as well as money that students owe you. If you don't do that, your cash flow can't possibly improve.

Okay.

Fred, we do -- we have made a number of improvements in our processing in this area. It's part of the expense -- the attention to expenses that we've been making over the last couple years. I mentioned in my comments that we're a stronger company. This is just one of the pieces of evidence that would indicate that.

Great. Thanks, all.

And your next question comes from [Mark Hughes][ph] of SunTrust. Please proceed.

Yeah, thank you very much. The change in the CPA test format, has that had any sort of material effect on the number of graduate coursetakers?

We, of course, have been at the forefront of preparing for CPA on demand and computerized CPA. We thought that it would have a significant deleterious effect in this last term. We were -- we did not experience what we expected and to the extent we expected it, and so the answer is not very much at this point although we're spending a lot of time and effort to be ready for it.

Right. Then how about the healthcare pilots? How are those progressing? Any renewed plans or updated plans for rolling that out more broadly?

Those are going to be terrific for us. I think the interest in all three is quite strong, and the health information technology gives us an opportunity to serve a student population we haven't served too aggressively in the recent past, and I think in combination with Ross, these are going to be stellar performers for us in the healthcare area for an extended time into the future.

Right. Thank you. And since it's come up, I'd like to thank Richard for leaving so I could take over his job!

That's fair. That's collegial.

With that, we have just time for one more question.

And your last question today comes from Jeffrey Silber of Harris Nesbitt Gerard.

Great. Thanks for letting me sneak in. Norm, I just wanted to clarify something you said about tax rate. Did you say that Ross is being taxed at a low single-digit rate?

I said a single digit rate. I didn't characterize it.

I just wanted to double-check that. And then the non-Ross earnings, roughly what should we use for modeling purposes going forward for that tax rate?

Well, historically, absent Ross, you know, in the company before them, we had effective tax rates that were in the 39-percent range give or take. With the tax planning we've done, we've been able to bring that down slightly, so I'd say, you know, the 38- to 39-percent range is consistent with where we've been in the past.

Okay, great. And then on your online coursetakers, I know you may not want to give a little bit more color on that, but just roughly, could you tell us sort of the difference between the graduate and undergraduate coursetakers? Are you seeing more grad students taking online or more undergrads?

Well, we -- because we are so focused on giving all of our students, undergraduate and graduate, total choice in their programs, we are -- we're not focusing our own attention, nor do we wish to focus anybody else's attention on that mix. Another reason we don't want that focus, at least for now, is that while we are offering all of our seven master's degree programs on the -- online, we are not currently offering all of our laboratory-based undergraduate programs online, and that we expect when we can, and we're working very hard on it, we won't do it until we can do it with very high quality, and we're -- we believe we're going to be able to do that. But we think that that again will change the mix between undergraduate and graduate online, and, of course, you know that the undergraduate market, if you simply look at the number of students taking degrees in America, the undergraduate market is much larger than the graduate market, as well, so we don't want to -- we're just not ready to start managing ourselves or wanting others to analyze us on that basis yet.

I understand. And is there a price difference in what you charge between an online course and an on-campus course?

Well, there was, but there's less of a price differential now. We're -- we probably, I think, that price differential will continue to erode as time goes by.

So is it safe to assume that that 6.8-percent price increase you mentioned in -- coming up in the spring, we may not see that in the online courses?

That's a composite. Six point eight percent is a composite, a weighted average composite of all of our student enrollments.

Undergraduate.

Undergraduate [inaudible].

Undergraduates, got it. Okay, and on the grad side, is there going to be a price increase instituted as well?

Yes, four -- I think we said it was 4.9 percent.

I'm sorry I missed that. Thanks so much.

Okay, and, Jeff, thank you, and thanks to everybody who's been on this call and who has the interest to follow us, and we appreciate your time and your interest, and we'll have the next information for you but without a call on December 4. Thanks a lot, and goodbye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Goodbye.