Adtalem Global Education Inc (ATGE) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the DeVry second quarter conference call. (Caller instructions.) As a reminder, this conference is being recorded Wednesday, January 21st, 2004. I'd now like to turn the conference over to Ms. Joan Bates, Director of Investor Relations. Please go ahead, ma'am.

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 and A session.

Before we begin, please be advised that this call may include forward-looking statements pursuant to the safe harbor provision 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 the call are available until January 30th. I'll now turn the call over to Dennis Keller.

Thanks, Joan. Good afternoon, and welcome to our fiscal 2004 second quarter conference call. Revenues for the second quarter were $198.8m compared with $172.5m one year ago. Net income for the quarter was $15.6m or $0.22 per diluted share, compared to $23.0m or $0.33 in the second quarter of fiscal 2003. For the first six months of fiscal 2004, revenues were $388m compared with $335.8m one year ago. Net income for the first six months was $26.1m or $0.37 per diluted share, compared to $34.1m or $0.49 a share in the first two quarters of fiscal 2003.

You will recall that in the second quarter of last year, we had a nonrecurring tax benefit of $0.12 per share that was associated with our Canadian operations that are in those numbers from last year.

With new undergraduate student enrollment at DeVry University increasing by 6.2% in the fall semester, with course takers at Keller Graduate School of Management increasing 4.8% and online course takers in total more than doubling and Ross University enrollment increasing by 17.0% this fall, we have much in the way of good news to talk about. However, the continuation of a somewhat lower total undergraduate student population, which will reverse itself as higher new student starts cycle through the system, continues to affect our earnings growth.

Since our undergraduate campus operations are not operating as efficiently as we would like at these levels of enrollment, an aggressive and targeted advertising approach continues to make a positive impact in our undergraduate recruitment efforts. And as you know, we have reported positive new student enrollment data in that department over the past two terms. We expect this trend to continue as we report our spring and summer enrollments.

In addition to our internal efforts to maximize the results of our various recruitment strategies, market trends including a more positive outlook for technology related career opportunities began to increase prospective students' interest in our diverse program offerings, but still with most emphasis on our biomedical technology and our business degree programs. The delivery of our programs is designed to fit the lifestyle of the student who can choose campus based instruction, online courses or a mixture of the two delivery methods.

During the second quarter, Dr. Connie R. Curran was named to the company's board of directors. Dr. Curran was recently named executive director of the national dialog on cancer and previously served as president and CEO of Curran Care which was later acquired by Cardinal Health. Curran Care was a national management and consulting organization providing consulting services to the health care industry. In addition, she has 16 years of experience as a teacher of classroom and clinical courses in nursing and in the academic management of nursing programs.

DeVry will benefit from Dr. Curran's expertise and insight as Ross University continues to grow. Ross University is one of the world's largest providers of medical and veterinary education, and the management and staff continues to establish Ross as a prominent medical institution.

Last year Ross University placed more graduates into new or into first year residency positions than any other U.S. or international medical school. And it promoted more veterinary students into clinical clerkships at affiliated U.S. colleges of veterinary medicine than any other school in the world.

Ross University president Timothy Foster has been an important factor in the dramatic increase in student enrollment at Ross and has built an executive staff that has helped him and helped the university further enhance the quality of education that Ross students receive. In addition, Tim has been at the forefront of the integration of Ross University into DeVry, Inc. since the May 2003 acquisition which has truly progressed seamlessly.

On January 12th, we announced that Tim has decided to depart Ross University to pursue other entrepreneurial interests. While we'll certainly miss Tim, Ross has been in the hands of an extremely experienced and capable staff that Ron and I will work closely with until the vacancy is filled. As we announced previously, I'll assume the responsibilities of the president of Ross University on an interim basis.

The Ross University management team includes two experienced deans, both appointed within the past year, [S. Scott Obenshane] (ph), M.D., is executive dean of Ross University School of Medicine. He was formerly associate dean for undergraduate medical education at the University of New Mexico School of Medicine where he had been in charge of undergraduate medical education since 1970.

[Ada J. DeYoung] (ph), D.V.M, was formerly associate dean and director of veterinary medical services at the North Carolina State University. Last April he was named dean of Ross University School of Veterinary Medicine. Drs. Obenshane and DeYoung are responsible for the educational programs of their respective schools, including basic science curricula at the Caribbean campuses and clinical training in the United States.

All of us at DeVry wish Tim the best and thank him for the superb job he has done. Ross is an important part of DeVry's future and investments will continue to be made in Ross to support their expansion and the quality of education at both the medical and the veterinary schools. With that, I'll turn the call over to Ron for additional comments.

Thanks, Dennis, and good afternoon to everyone. I'd like to start just by briefly adding a little color to some of the remarks that Dennis made regarding our recent performance.

First at December 31st, DeVry operated a total of 24 DeVry campuses and 42 DeVry university centers. They operated two Ross campuses in the Caribbean and offered Becker Professional Review programs at approximately 250 teaching sites at 35 countries around the world.

During the first six months of fiscal 2004, new DeVry facilities were opened in Indianapolis, Las Vegas, Pittsburgh, and Portland. We continued to grow by adding new geographic locations both as satellites in existing markets and as an entry into new markets.

Second factor is that for the third consecutive term, undergraduate employment rates have improved. For the three terms ending in fiscal 2003, graduate employment showed that 82% of DeVry grads who actively pursued employment were employed in education-related fields within six months of graduation. This is a couple of percentage points higher than the same period in 2003, and it's the third term that it's sequentially higher.

This overall improvement indicates that -- to us, at least, that technology-related job opportunities are beginning to increase, including opportunities in telecommunications management and information technology that were relatively scarce over the last two years. We believe that's a positive signal to both current and prospective DeVry students. We continue to believe that we have passed through an inflection point in undergraduate technology recruiting and that we will see a further recovery in our total undergraduate student population in the summer and fall semesters.

Now turning to the recent steps we have taken at Ross, as you know and as we've said, Ross medical and veterinary medical students complete their basic science curriculum at campuses in the Caribbean countries of [Dominica] (ph) and [St. Kits] (ph) respectively. We are making direct investments to expand the capacity on both of these campuses. These investments reflect the high student demand for our programs and the increased market demand for both physicians and veterinarians.

On Dominica, medical students now have access to new lecture and lab facilities that were opened during the second quarter. A recently completed medical education facility provides over 19,000 square feet of new classrooms, faculty offices, and student support areas, and it includes a 308 seat auditorium with state of the art audio-visual equipment.

In addition, two new simulator rooms house lifelike mechanical and digital patient simulators capable of producing a wide variety of human-like responses or diagnostic situations. Additional medical school teaching, support, and first semester housing facilities are in the planning stage.

At the veterinary campus on St. Kits, we recently closed on the purchase of 5.5 acres of land for first semester housing and other support facilities. The property is very attractive because of its location adjacent to the main campus and immediately across the main access road from [Aucitere] (ph). Additional facility enhancements on the veterinary campus are also being planned.

These new facilities together with planned additions will enhance the student's learning environment and increase the quality of education at Ross, making it a more attractive alternative and making it more competitive with other medical schools in the Caribbean area and elsewhere. The new facilities obviously also increase capacity to support growing student interest in Ross programs.

In addition to the continued geographic expansion at DeVry University, the capacity increase at Ross University, we have continued to develop new undergraduate and graduate program offerings in health care technology and business. Our undergraduate biomedical engineering technology, biomedical informatics, and health information systems programs have been very well received, as has been our information security program.

Business students like the availability of new concentrations in small business management, entrepreneurship, and human resources management. We also are seeing continued strong growth at Keller Graduate School and DeVry University Online. And finally, the Becker Professional Review programs continue as the world's leading test preparation courses for students sitting for the CPA, CMA, and CFA exams.

And with those additional pieces of information, I'll turn the call over to Norm Levine who will give you more detail on our second quarter financial results.

Thanks, Ron, and good afternoon to everyone. As a reminder to you, our complete financial statements for the quarter and the year to date were appended to this press release. And they're also available on our website with the press release in the corporate investors section.

Let me spend just a few minutes to review some of the highlights of our financial statements. And let's start with the income statement since it generally seems to be the focus of most interest.

Revenues increased by 15.2% from the year ago quarter, due largely to revenue from Ross University which was not a part of our financial statements in the second quarter of last year. And it also increased because of higher revenues at Keller Graduate School with its conversion to a six session year and higher student enrollments.

Revenue for the DeVry University undergraduate operations were slightly lower than last year on lower total enrollment in both the summer and fall terms, as we previously announced. The good news is that the fall term enrollment was down less from last year than it was in the summer term, and we look forward to the revenue stream turning positive in future terms.

Gross margins have increased from last year to 47.4% and were also higher than the 44.8% margin in the first quarter. The increase is the result of workforce and other cost reduction efforts, and also the inclusion of Ross University in our financial statements with its higher margins has contributed to the overall company margin increase.

The cost of our continued operation in the Toronto area in conjunction with the agreement with [RCC] (ph) continue to be included in our financial results. We expect that these losses with the benefit of this agreement with RCC will be somewhat less than the losses we incurred from the operation in fiscal 2003. And by the end of fiscal 2005, the [teach-out] (ph) will be completed and there should be no further effects on our financial statements.

Looking at our student services and administrative expense line, remember that this includes the amortization expense for intangible assets largely related to the Ross acquisition. Compared to the second quarter of last year, amortization expenses increased by $3.2 million, just as it did in the first quarter. And that increase is almost 1.6% of revenues excluding the amortization expense, and spending on FFA has been maintained at about the same relationship to revenues as it has been in recent quarters.

Student services and administrative expense without the amortization was 33.6% of revenue in this quarter, down slightly from the 34.1% of revenues in the first quarter and down from the 34% in the fourth quarter of last year. I believe we previously said that these costs would not increase significantly from the level in the latter half of last year, and you can see that it is not.

As we've said before, we continue to invest in marketing for new students for the coming terms. We experienced increased new student starts in the fall term and expect to see the returns manifest themselves again in higher new students for the spring 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 and second quarters is much more pronounced than it will be in the subsequent quarters this year.

Interest expense of course results from our borrowings to fund the Ross University acquisition. During the second quarter we repaid $23m of debt which, in addition to the $27 million that we repaid during the first quarter of fiscal 2004, reduced the debt at quarter end to $240 million compared to $290m at the end of fiscal 2003. And interest expense in future quarters will reflect this lower debt level, assuming that there's no upward pressure in the short-term interest rates on which our debt is based.

Our tax rate on income is the composite of state and federal taxes on the company's operations other than Ross and the single digit tax rate on Ross earnings. And while tax planning and strategy have helped us reduce our tax liabilities, the higher composite rate this quarter up to 29.3% compared to 28.5% last quarter is a result of an increase in earnings coming from non-Ross operations, for example, coming from DeVry University and Becker which are fully taxed.

So for the future quarters there may be some fluctuation in the overall tax rate as the mix of our earnings ebbs and flows. And we can expect that the composite rate to be no more than 30% in any quarter and no less than 28+%, and that those rates should prevail for the near term.

Turning to the balance sheet, cash balances were a little less than last year as we used our cash generation to complete the Ross acquisition and reduce debt. We continue to work at administering financial aid programs and collecting money owed directly by students.

However, we had about $20m of state and federal financial aid owed to us at the end of December. We've had similar but generally smaller receivables in past quarters, including in each of the last two quarters of fiscal 2003. And these receivables are really just the result of timing difference between our application of aid to the student and the reimbursement from state and federal governments which can lag particularly at holiday time.

Another component of the increase in receivables comes from the Ross operations which starts its semesters in January, May, and September. Ross had significant student tuition billings in December in advance of its January term. And you can see this on the liability side of the balance sheet as well with significantly higher deferred tuition revenues. And while the same phenomenon at Ross occurred last year, remember that Ross was not a part of our financial statements last year, and so their approximately $22m of receivables this year adds considerably to the company total.

Turning to the cash flow statement, the increase in receivables from Ross and the federal financial aid receivable both negatively affected cash flow from operations. Federal financial aid receivable is a matter of timing, and we would much rather have Ross and its receivables than not, so that our fundamental cash flow generation has not been impaired.

Capital spending remains moderate and should be in the 40 to $50m range for the year, contributing to what should be another good year of free cash flow which we will use largely for debt reduction. That finishes my summary of the good quarterly report, and now I'll turn the call back to Joan.

Thanks, Norm. Obviously we'd like the opportunity to answer as many of your questions as possible, so we're asking that you limit yourself to one question and jump back into the queue for additional questions. Operator, we'd like to open up the call.

Thank you, ma'am. (Caller instructions.) Our first question comes from Fred Mccrea with Thomas Weisel Partners. Please go ahead with your question.

Afternoon, gentlemen. Quick question in regards to -- you had referred to certainly the operating leverage and the opportunities for expanding earnings. Maybe we could talk a little bit about the capacity at the undergraduate campuses right now, the 24 campuses and what kind of implicit leverage we could see going forward with some expansions in terms of the undergraduate technology enrollments.

Obviously, we have a couple of schools that are relatively new, including Houston which only has one term in operation. We have several that are relatively new where the growth is significant but where the capacity utilization is not as high, and then we have the more mature campuses where the short fall from capacity is principally the result of technology enrollment decline.

I don't have a hard number to give you, Fred, but I think we should talk in terms of practical capacity because you never get 100% of the seats filled. And I'm guessing that in terms of practical capacity we’re something on the order of just under two thirds or 60% of practical capacity.

That's completely unscientific, but I think the basic answer to your question is that we have significant opportunity for leveraging the fixed facility investments which we made previously in large campuses with the recovery of the technology enrollments.

Great, thank you so much.

Our next question comes from Gary Bisbee with Lehman Brothers. Please go ahead with your question.

Thanks, and congratulations on a good quarter. The question's actually for Norm. You talked a lot about the student services line, especially that it actually got slightly better when you pulled out the increase in amortization. I wondered if you could just drill down a little bit more on that in terms of what we might expect in the next couple of quarters. Is it likely that we'll see continued modest improvement in that line item? And is there any chance that it actually -- that the absolute number could go down over the next couple of quarters? Are you expecting overall student services costs to continue to rise modestly?

Well, as I said, if you look at the last three quarters, you know, the second quarter, the first quarter of this year and the fourth quarter of last year, you've got FFA without the amortization expenses running in a fairly narrow range from, what, 34.1% down to 33 point something. And I would expect that for the coming quarters, it will remain in about that range as a percentage of revenues.

Okay, and then just one follow up to that question, was there much or any one time cost in that two quarters ago and last quarter due to the Ross acquisition? So is there anything that would lead us to believe that if the marketing doesn't improve from where it is now, that that number is not going to continue to trail down?

There were no unusual or one-time costs associated with the Ross acquisition, no.

Okay, thanks a lot.

Our next question comes from Jerry Herman with Legg Mason. Please go ahead with your question.

Thanks, good afternoon, everybody. Guys, based on your comments I would assume that lead flows have improved based on your comments with regard to the technology environment. And, A, I guess, is that true, and if that's true are you also seeing [Draft Worldwide] (ph) do a better job in terms of improving conversion rates?

The lead flows have improved, and it's not Draft Worldwide that influences the conversion rate so much, it's our sales force. And if you recall the conference calls from the last couple of times, we said among the things we were doing was taking -- putting more focus on training of the sales force to deal with the evolving mix of leads which includes more leads from internet. And our conversion as a result of those training programs and other things has improved.

Great, thanks a lot. I'll circle back.

Our next question comes from Jeff Silber with Harris Nesbitt Gerard. Please go ahead with your question.

Thanks and good afternoon. I know you don't normally disclose segment data until you release the Q, but I'm going to try to ask this anyhow. If I look at the over a year margin compression between first quarter '04 and first quarter '03 and then compare it to second quarter '04 versus second quarter '03, you had some improvement. That gap narrowed this quarter relative to last quarter. Are we seeing improving trends on the margin line at your DeVry undergrad campuses as well?

Well, remember you're drawing your comparison to a year ago period that did not have Ross University in it. I think you probably need to look at it a little differently.

That exactly was my question. If I just strip out Ross, would we have seen margins improved at the DeVry undergrad university?

Well, at this point we haven't done our segment analysis yet, which is one of the reasons we don't disclose them at this point. So I honestly can't answer your question.

All right, I thought I'd try, thanks.

Our next question comes from Greg Cappelli with Credit Suisse First Boston. Please go ahead with your question.

Hi, guys, it's Greg and Eric.

Hi, Greg and Eric.

I guess from a bigger picture perspective, what I wanted to get some color on from you is you've obviously made some very important strategic moves over the past year or so. You created the [DVUCs] (ph), you bought Ross, you've repositioned [KGSM] (ph) and obviously some of the large DeVry centers as well. And I wanted to get your thoughts on if you can sort of quantify how the business model will look, you know, two or three years out relative to how it looks today.

I think, Ron, you had even mentioned at one point that wouldn't be out of the question, you know, better economy, better environment, that you wouldn't maybe get going again with the big box strategy opening them again if it was the appropriate time. So I wondered if you could -- if you take a look out and tell us what you think the model is going to look like.

This is Dennis, and let me give you a little picture that I hope will help. There's a silver lining to most things. And the downturn in technology really made us look at all those things you just mentioned, the DVUCs, Ross, health care, repositioning KGSM, creating DeVry University. And our belief is that as the -- if people who say technology is not gone forever, if they're correct, and I think they are correct, then when technology returns and we have these new thrusts that we were goaded into doing, working very hard and relatively quickly to do things that have improved our total corporation a lot in the face of something that hurt it a lot, which is the downturn in technology.

So when that's back, we think the corporation will look different, but that you will see -- observers will see those new thrusts, including importantly online which has, as you know, doubled its enrollment and is now serving lots of course takers. And you'll see a company that includes that but includes a core that is a day student, full-time student core at these campuses coast to coast that will be back growing again and will -- our hope and our plan is to come out of this stronger and to begin another run. And Ron has a word or two he wants to add to that.

I don't know what your politics might be, Greg, but if you watched President Bush last night in his state of the union message, he stole a message that we've been telling people for some time now, when he said that every job is a technology job. And to the extent that's true, DeVry is going to remain one of the principal and high quality providers of applied technology programs.

But as Dennis said, our delivery systems are more diverse and more robust. Our program offerings are more diverse and increasingly more robust. Our opportunities are very good, and in the end we're going to be a force in health care education at the highest quality levels. So maybe that's a little different look at three to five years from now.

Okay, that's helpful. I'd heard Bush called you right before his speech as well, Ron.

Yeah, he checks with me all the time.

One quick qualification from Norm. Norm, you mentioned 20m in financial aid owed to you. Has that actually been collected? Did you mention that or do you expect that soon?

Well, let me tell you that about 7m of that is owed to us by the State of Illinois, which as you know is not in the greatest of financial situations right now. No, the federal portion has largely been collected. We have about half of the total. Most of that half is sitting owed to us in the State of Illinois, that we've not yet received. It's just a timing issue.

Okay, thanks a lot, guys.

Our next question comes from Richard [Close] (ph) with Jefferies. Please go ahead with your question.

Hi, it's Trey filling in today. Nice job on the quarter. Quick question regarding the breakdown on the students at the undergraduate level. If you have any color there, we'd be interested in hearing it.

Well, there's more students in our business programs than there ever have been before. And that's been the principal source of growth. There is very strong interest, we're very gratified by the interest in the new undergraduate health care programs, biomedical engineering technology, biomedical informatics, and health information systems.

And then concurrently or concomitantly we're still seeing weakness in the technology side, although there's lots of little pointers that say to us that we're likely to see some recovery in that area. But business, growing; health care, very small but growing; and technology, still being affected by the tech wreck.

And following up on that, is -- do you have a sense of what the revenue breakdown is between DeVry University Centers and the actual campuses?

We do, but we haven't broken that out specifically. So I don't think we'd want to at this point.

Okay, thank you.

Our next question comes from Sarah [Govern] (ph) at Merrill Lynch. Please go ahead with your question.

Hi, good afternoon. I was wondering if you could talk -- if you're seeing heightened competition in any of your markets, particularly as you're expanding into new markets with DeVry University Centers and extending your business offerings. Are you seeing more competition from some of your peers in any particular markets? Thank you.

Sarah, I can quickly answer that. Competition is not getting easier, has not been getting less prevalent. It's -- we realized this as we began 15 years ago to build our business programs that there were a lot more people offering business programs with whom we would complete than were offering technology programs. But on the other hand, there are a lot more students in business in this country than there are in technology.

So I think we're seeing new competition, but that's just part of life. In fact some people say that one of the big reasons K-12 is not envied throughout the world -- this country's K-12 is full of issues and postsecondary is the envy of the world is the competition and choice at postsecondary. So, Ron, do you want to add anything to that?

Yeah, just one thing. There is competition. There's more competition, but we really have tried to put into place some of the pieces that will allow us to compete on a better basis. We have a national brand identity, in fact an international brand identity for DeVry University, Ross University, and Becker Professional Review. We have the ability to market on a nationwide basis using those brands. We're not constrained by a proliferation of multiple brands in any of these markets. And we have an efficient delivery mechanism now to establish ourselves in new markets and to extend our presence in existing markets with the DeVry University Centers.

So the combination of branding and positioning, delivery methods, and our advertising programs are our response to an increasingly competitive marketplace that we think will continue to become more competitive and where the traditional schools are becoming more active in their own promotion and marketing. So it's a world in which we even have friendly competitors that listen in on this call, so we're happy to have them with us. But we just see that as part of the environment.

Just one follow up question, the competition that you mentioned, are you seeing it primarily from other private providers or are the traditional schools as you mentioned becoming more active really providing a significant amount of increased competition?

It's everybody. It's the whole -- and we like it that way. There are some 4,000 degree granting institutions of higher education in the U.S. and because our geography -- we cover the geography coast to coast, we complete with most of them.

Great, thank you very much.

Our next question comes from Trace Urdan with ThinkEquity Partners. Please go ahead with your question.

Thanks, good afternoon. Ron, you had sort of posited I think maybe, it's almost a couple of years now, that when the enrollment declines began, that one of the things that was happening was that a lot of the traditional undergraduate students were maybe going to lower cost community colleges and you had the idea that perhaps once things started to pick up again, they would migrate back and look to transfer into DeVry programs. Are you seeing any of that happening? Do you still think that's kind of a pattern that's likely to emerge here?

I do think so, Trace. And I think we're seeing it principally in the business programs. Two years ago when I first posited that, as you say, I think it was with a view that there would be sort of a holding pattern for people that were interested in technology and that they would come into the technology programs.

But in my view, there's been sort of a sea change, at least in the short term, where students are coming into business programs. I think they still have the interest in technology. I think there will be interest in technology, but we haven't seen the flow directly into technology programs.

Okay, thanks.

Our next question comes from [Garrett Wilder] (ph) with Piper Jaffray. Please go ahead with your question.

Thanks. Mark Marostica is traveling. Most of my questions have been answered. Just one quick question. Could you specify how many campuses have the biomedical engineering programs up and running?

We're at three at this point, and we rolled out over the next few terms two additional campuses.

Okay, great thanks.

Our next question comes from Corey Greendale with First Analysis.

Hi, I wanted to ask a couple things about Ross. First of all, if you could give any sense of what the capacity is of each of those two schools at this point, where you think the projects you're looking at could get you to and over what sort of time frame. And then also just on the leadership transition there, how that search is going, whether you'll likely end up with an inside, outside candidate, what sort of background you're looking for in a person there.

Let me start with the last first. Tim doesn't leave until the end of the month. And we haven't initiated a formal search. We, of course, have looked beyond that, and it's our intent to look for new leadership that comes from a business background and that has some exposure or experience in the health care field.

The operations we're quite comfortable are being managed very well from the point of view of the deans that Dennis mentioned and the staff in the headquarters at Edison and in Miami. So what we're most interested in is somebody who has the vision to take Ross to the kind of places that we think it can in the early part of this century.

With regard to capacity, I don't think it serves probably to try to [inaudible] out exactly what that is, but suffice it to say that we are adding capacity sufficient to allow us to expand at the kind of rates that we have in the last year or so on a going forward basis.

All right, thank you.

Our next question comes from Jason [Rogers] (ph) with LRJ Great Lakes Review. Please go ahead.

It's LJR Great Lakes Review. Hi, I had a question about the debt. Do you know what the interest on that debt is approximately right now?

Yeah, it's something, you know, in the 2.5 to 2.75% range. It beats all to heck anything you can get on an advance on your credit card.

Any plans at all to maybe fix some of that going forward?

As we've disclosed in our footnotes, we have interest rate cap protection on about $100m of that debt. So we are not exposed to a complete bust or an explosion of interest rates.

We also think that the current political environment leading up to the election is unlikely to result in rate moves in the short term.

And just one more [inaudible] flow. Would you be able to quantify how much higher it's been recently versus last year?

Well, we wouldn't want to do that, but it has been significantly higher.

Okay, thanks.

Our next question comes from Brad Safalow with J.P. Morgan. Please go ahead with your question.

Hi, good afternoon. I guess my first question would be about Ross University and the intake in January. Can you give us any comments on either how that went, whether it was in line with the September intake?

I sure can. We were -- it was ahead of budget and we're very pleased. And there is some seasonality, so just as in DeVry we compare year to year. We don't compare last semester to this semester. And on a year-to-year comparison, it's a very good comparison.

But we haven't put it out. I guess the last thing we put out was the fall semester being 17% ahead of the year -- of the prior year. So we haven't put anything out about the January semester yet.

But a similar level of growth is probably a safe operating assumption?

Well, in --

Year over year terms?

Yeah, in that ballpark. We're pleased but we're not -- I'm not even sure we're going to release that. I guess we release it with the April term. So I think you'll be pleased.

And then my other question had to do with the -- you know, looking over the year-over-year increase in SSA, can you give us a sense for how much you have been spending increasing investment in online, particularly the number of enrollment counselors and how that has contributed, versus what you're spending on marketing?

As you would expect with enrollment increases, as Dennis said, that have about doubled in the previous year. That's been a significant area of increase for us. We don't break that out individually for obvious reasons, but it is important for us to provide the kind of quality student services that DeVry is known for, and we have been investing in them.

And I assume you should expect, you know, incremental investment to occur over the remainder of the fiscal year.

Absolutely, and you should also expect significant increase in online enrollment as well.

And I guess to that point, you know, looking -- you had a sequential increase in terms of the growth rate for the fall term. Sustaining that kind of level of growth, is that a target you're working with or are you still in the mode where perhaps you're not able to predict exactly how those will shake out based on the mix and match elements of your DeVry Online offerings?

There is continuing strong interest in the convenience of online delivery, and we're benefiting from that. We do have a component of mix and match that's very strong, and I think people value that as well. We are I think likely to continue to experience the kind of growth that we have in the past in online.

And if I could just squeeze in one more question.

Well, my god, Brad.

I'm being a little piggish, I understand. This surrounds more on the tuition reimbursement side now that you've made a greater thrust into the working adult segments. What efforts are you making to sign up corporate tuition reimbursement programs? What successes have you had?

Those programs, because we are regionally accredited, if there are programs, if a corporation has a program, we qualify. DeVry University qualifies for that program.

But typically, corporations, some corporations simply don't reimburse or help people with education. Most do. The ones who do sometimes have internal rules that say, well, it has to be approved by your supervisor, it has to fit your job description and your career line in the corporation, and you have to sign something that says that if you leave within two years you'll pro rata return the cost, so that it isn't really a matter of whether or not we qualify or the university qualifies. It's a matter of working with each student for his or her unique circumstance in his or her employment circumstance. So the -- I think that's enough, I think. That gives you --

We do have arrangements though with the corporations where employees are -- where the program's preapproved and we've had new programs where that has come into being in the last few months as well. So there is development there and it's a good aspect of our business. It's not one we spend a lot of time communicating though.

I appreciate it, thank you.

Our next question comes from [Mark Hughes] (ph) with [Sun Trust Robinson Humphrey] (ph). Please go ahead with your question.

Yeah, thank you very much. Could you talk about the efficacy of the internet advertising, how meaningful it's been in terms of driving the recent lead growth? And then can you say whether there's been any recent change in cost per lead coming across the internet? Thanks.

I would say that everyone in this business has had a dramatic shift in lead mix with many more leads coming through online sources. Younger students and older students today are much more used to accessing information and communicating via the internet. And we have benefited from that.

And I would venture to say that if not every, most other postsecondary education institutions have also seen that. Internet leads are cheaper but convert at a lower rate. That's sort of the model. And so dealing with that as an earlier question referred to, I -- we've been talking about a combination of processing those leads more efficiently and more effectively and also training our sales force to work those leads more efficiently and more effectively.

How about in terms of cost per lead? Have you seen much of a change there?

Cost per lead is about in the same general ballpark. There hasn't been a big change in that regard, but the internet as a source of leads of course has become bigger in our operations and around the industry.

Got you, thank you very much.

Our next question comes from Gary Bisbee with Lehman Brothers. Please go ahead with your question.

Yeah, just one quick follow up. I'm wondering, and you may have said this and I may have missed it, is your online business profitable today? And if so, would you comment on exactly how profitable is it? Is it near the corporate average, above the corporate average, below the corporate average?

It's I think profitable and I don't know that it's dramatically different than anything else, that there are some efficiencies in online education, but there are some costs in online education.

And just so you know, philosophically, and you'll hear this from DeVry, you may or may not hear it from other people, but it's important for us that we provide a quality education experience whether you do it online or on site. It's one of the reasons that our mix and match is very effective. And as a result, we keep the number of students in each class at a certain level vis-a-vis the instructor.

And so it would be possible and there are people around the industry probably that are pushing on the efficiency, that it's inherent in that delivery. But a student that graduates from DeVry graduates with a quality experience irrespective of what means he gets it. And that's an important thing to us, and we're willing to focus on the long term that that foundation provides for us rather than flogging the edge of the growth spectrum in that area.

Is that another way of saying that you think that in the next year or so the profitability is not going to be substantially higher than the trending of your overall profitability?

No, I'm not saying that at all.

Okay, thank you.

Our next question comes from Jennifer Childe with Bear Stearns. Please go ahead with your question.

Hi, could you share with us the losses associated with Canada during the quarter?

I didn't get the name, who --

Jennifer Childe with Bear Stearns.

Oh, Jennifer, hi. As you know international operations are not separately disclosed and haven't been for some time now. But the only thing we've said and we'll continue to say is that our expectation for the losses arising from the teach-out with RCC will be less this year than the cost or the loss of the operation last year. But no, we won't disclose the amounts.

Okay, thank you.

Our next question is a follow up question from Richard Close with Jefferies. Please go ahead with your question.

Hi again, this is Trey. Quick question regarding the tuition schedule for next year. Are there any planned increases for fiscal '04, and if so, what time?

We'll have our regular tuition increase. And in the past, those have ranged in the 5 to 6% category. But there's pressure on pricing across the industry in the traditional schools because of lower endowment returns and lower support, especially state government support. And so we're going to look quite closely at that. Nonetheless, I think that we will have a tuition increase. And the timing of those tuition increases will be something we'll look at as well.

And then switching gears just a little bit, could you talk about the progress made in Houston with your campus there? That's one of the newer ones.

Yeah, it's the newest one, and as we -- I don't know if we've said it anywhere particularly, but the start up in Houston has been a very successful start up. It's a strong market for us. We like our position there. There's a need for quality technology and business education in that market, and of course we've been operating in Texas for a long time with Dallas. The experience there is good. And Houston looks like it's going to be a winner.

Is the mix right now leaning more towards business there in Houston? Or is it pretty much 50/50 or how's it shaping up?

It runs about the same as our other campuses with regard to the breakdown between technology and business.

Okay, thank you very much.

Operator, we're about at the end of our hour. If there's one more question, we'll take another question and then let everybody get on and thank them for their attendance and let them get on with the rest of their day.

All right, sir, we do have a follow up question from Jeff Silber with Harris Nesbitt Gerard.

Thanks for letting me sneak in. Ron, you talked about President Bush's state of the union address. And I know there's a proposal on the table to create a fund that will create some partnerships between community colleges and employers to sort of funnel people into some of these high demand jobs. Do you think for-profit universities such as yourselves would be eligible for that?

I think it's unlikely at least in the early stages. The community college system has been rapidly growing. They serve a large number of students. They are operating in a lot of legislative districts. And so I think the focus of that proposal and the focus of any funds, at least in the short term, will be into the community colleges.

However, for-profit education is increasingly recognized as an efficient way to provide job training to a large number of people. And I think that there will be more openings for for-profit education to participate in various governmental programs federal and state and potentially local as well. So I think it's indicative of a changing environment rather than a likely flow of funds to for-profit institutions.

Okay, great, thanks for the insight.

Gentlemen, do you have any closing comments?

Only to thank everyone who attended very much and to say that we're looking forward to the continuing progress and DeVry's future. Good-bye, everybody, so long.

Ladies and gentlemen, this concludes the DeVry second quarter conference call. (Caller instructions.)