Adtalem Global Education Inc (ATGE) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the DeVry third quarter conference call. (Caller instructions.) I would now like to turn the conference over to Ms. Joan Bates, director of investor relations. Please go ahead, ma'am.

Thank you. With me on the call today are Dennis Keller, Chairman and Co-CEO; Ron Taylor, President and Co-CEO; and Norm Levine, Senior Vice President and CFO. We'll be following the usual format today with some prepared remarks from management, followed by a Q and A portion.

Before we begin, please be advised 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 till April 30th. I'll now turn the call over to Dennis Keller.

Thanks, Joan. Good afternoon and welcome, everyone, to fiscal 2004 third quarter conference call. Revenues for the third quarter were 196.8m compared with 169.4m one year ago. Net income for the quarter was 16.3m or $0.23 per diluted share, compared to 14.9m or $0.21 in the third quarter of fiscal 2003.

For the first nine months of fiscal 2004, revenues were 584.8m, compared with 505.2m one year ago. Net income for the first nine months was 42.4m or $0.60 per diluted share, compared to 49m or $0.70 per share in the first three quarters of fiscal 2003.

You will recall that last year, we benefited from a nonrecurring tax benefit of $0.12 a share in the second quarter of 2003 associated with our Canadian operations. There were no nonrecurring items in the first nine months of fiscal 2004.

During the third quarter, DeVry announced the opening of its first Sacramento area regional facility that will offer master's degree programs, select undergraduate degree programs including business administration and technical management, and an associate degree program in electronics and computer technology. The center is designed to serve career-minded working professionals, recent high school graduates, and transfer students from the area's community colleges.

DeVry has a long established presence in California with Bay Area facilities in Fremont and San Francisco as well as five locations in southern California. With budget cuts limiting enrollment at state colleges and universities, DeVry's new Sacramento center will be a welcome addition for students seeking access to quality degree programs in the greater Sacramento area.

Additionally we announced the planned opening of a DeVry University center in July of 2004 in Gurnee, Illinois, about 40 miles north of Chicago. A nearby temporary site in Gurnee opened March 1st, offering several courses during the spring session. With the addition of the Gurnee center, DeVry now has 11 locations in the Chicagoland area.

This new center fits into DeVry's overall strategy to provide more students greater access to education and help adults fit courses into their already busy lives. The new Gurnee center will offer bachelor's degree programs in computer information systems, business administration and technical management, and all seven master's degree programs.

Finally, we most recently announced the planned opening of a new DeVry University center in Philadelphia's Center City in July of 2004, which will offer master's degree programs as well as bachelor degree programs. We are seeing strong demand in the greater Philadelphia area for graduate and undergraduate level career-oriented programs, and the new center complements DeVry's two currently Philadelphia area locations, which include a center in Valley Forge and a campus in Fort Washington.

Turning to Ross University, during the quarter, Ross University announced that Dr. Nancy A. Perry was named vice president of academic affairs, continuing to strengthen Ross University's executive staff. For the past 12 years, Dr. Perry, one of Ross University School of Medicine's first graduates, has served as dean of clinical sciences for the medical school. She will now oversee accreditation, licensure, and regulatory activities for the medical and the veterinary schools.

In addition, we've retained the search firm of Spencer Stewart to conduct a search for a new president for Ross University. We're making good progress in this search and have identified several attractive candidates.

During the quarter we announced that Michigan State University College of Veterinary Medicine will begin offering clinical training to Ross University School of Veterinary Medicine students as part of their final three semesters of veterinary education. Michigan State is the 20th of the 27 American Veterinary Medical Association accredited schools to become affiliated with Ross University School of Veterinary Medicine. Ross students will be reviewed and admitted by Michigan State's academic dean and will be subject to the same academic standards as Michigan State students.

I'd like to conclude by opening remarks by saying that health care education is projected to be in high demand in the 21st century. And Ross University provides DeVry with high level, high quality participation in this growing field. We intend to continue to expand Ross' position as a leading provider of medical and veterinary medical education in the United States.

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

Thanks, Dennis. And good afternoon to everyone. I'd like to start these comments by just adding some color to our performance this quarter. First, DeVry operates a total of 24 DeVry campuses and 45 DeVry University centers, which includes the planned opening of three centers in July, 2004, bringing the total to 69 locations. And of course we have major operations now in our online activities.

The new Sacramento center is what we call a level II center. These centers are larger facilities that are able to accommodate approximately 1,000 course takers. Level II centers enable us to efficiently and effectively enter new markets or markets where we may eventually establish a full service campus.

The Gurnee, Illinois, and Philadelphia centers are smaller level I centers that serve typically 300 to 600 students and are designed to expand our presence in existing markets or serve as satellites to existing locations.

Financial results in the third quarter were negatively impacted by lower enrollments in our CPA test preparation courses, which are offered through the Becker Professional Review Division. As many of you probably know, in April of this year, the new computerized version of the Uniform CPA Examination was offered for the first time. This test has been enhanced in many ways to answer the call for CPAs better prepared to handle the rigors of a post-Enron, post-Worldcom, [Sarbanes Oxley] [ph.] environment.

With the new format, the exam is now available almost year round, as opposed to just two times per year. Candidates may choose to take the exam sections individually and at different times. And while this provides greater flexibility for the candidate sitting for the exam, it extends the timing for entering and completing exam prep courses, such as those offered by Becker.

Because we schedule our prep courses so that students can take the exam immediately after the course ends, and given that the first offering of this new exam was on April 5th, we essentially had no Becker students during January or February of this year, a one-time event. Thus, we will realize less than the two full exam preparation cycles during fiscal 2004, and we will therefore receive less revenue in the fiscal year beginning with the third quarter.

While the new test was being developed and deployed by the CPA industry, the ASCPA, Becker Professional Review reengineered our preparatory course to adapt to the new exam, including case based simulations, which is a major feature of the new exam. During the third quarter, as a result of this reengineering, we incurred additional development expenses related to the enhancement of our course materials to reflect the new format.

Looking at the fiscal 2005, we expect to benefit from higher revenues as students who deferred exam preparation this year return to their exam preparation activities next year. I'd also like to point out that our distance learning and online infrastructure is an important and growing element of the program and now comprises more than one-third of the revenues generated from our CPA reviewed courses.

At DeVry University, our more focused advertising effort continues to make an impact on lead flow and ultimately on undergraduate recruitment. We have reported year-over-year new student enrollment growth for the past three terms. Enrollment in the spring term increased 6.1% or approximately the same rate as they increased year-over-year in the 2003 fall term. We believe this success is -- or this relationship is primarily due to the effects of the traditional academic calendar, with spring enrollments being typically lower than fall term enrollments.

While a number of new spring undergraduate students increased by 6.1%, total students declined 3.1%, reflecting the continuing effect of lower new student enrollments during fiscal 2002 and 2003, when the technology employment began to decline and the dot-com bubble exploded. These results, of course, do not include the Toronto location, which has not enrolled new students since July 2003.

I think you probably recall we've entered into an agreement with RCC College of Technology in Toronto to teach out and administer the programs that we formerly offered in our Toronto school. Once again we experienced strong demand for our online degree programs in the spring term, with online enrollments increasing more than 110% compared to the same term last year.

At Keller Graduate School of Management, the number of course takers increased by 3.5% to almost 12,000 students in March, compared with 11,413 in the April term last year. Now you have to recall, we've realigned our undergraduate and graduate school academic calendars by adding an additional term to the Keller schedule this year.

So we expect, given that, that the fiscal year 2004 annual course taker enrollment will increase by more than 20% from the prior year when you add in the results of the new May class start which we did not have last year. So the sixth term that results from the realignment really hasn't been incorporated yet into our year-over-year increase in course takers.

In addition to this, Ross University posted solid spring term enrollment gains, up 11.1% over the January term. Enrollment in future terms at Ross should continue to grow as we add teaching, lab, and housing facilities at both the Dominica and St. Kitts campuses.

So with that bit of additional information, I'd like to turn the call over to Norm Levine, our chief financial officer who will give you some more detail on the third quarter financial results.

Thanks, Ron, and good afternoon to everyone. As a reminder, our complete financial statement detail for the quarter and the year-to-date are appended to the press release. And they're also available with the press release on our website in the corporate investor section. I want to remind you that these detailed statements that we've appended, as always, are preliminary and subject to classification adjustments between account categories as we review the detail in greater depth.

Let me spend a few minutes elaborating on some of the highlights of these financial statements for you. Starting with the statement of income which is I'm sure of the most interest to you, revenues continue to increase versus the prior year level, up 16.2% from the third quarter of last year, despite the slowdown in revenue from our Becker operations that Ron mentioned just a few minutes ago. I'll go into that in more detail shortly.

Ross University had revenue of almost $22m in the question, which as you know was not a part of our financial statements last year. And in addition, at DeVry University while undergraduate and graduate revenue increased from last year in the third quarter, however, as Ron described for you, Becker revenues were affected by the new CPA exam format and schedule, resulting in fewer students taking fewer courses this quarter, producing revenues that were lower than the third quarter of last year by more than $6m.

The decline in operating earnings from Becker operations in the third quarter of 2004 compared to the third quarter of 2003 was approximately $0.04 a share. Gross margin for the quarter for the total company was 46.6%, compared to 47.9% in the same quarter last year.

It's not that our costs increased so much. They were about what we expected them to be. But with less Becker revenues to support them, the costs were a higher percentage to the resulting revenue base. In fact our cost of instruction was up only slightly from the level of the preceding quarter, even as we expand our number of DeVry University Center locations and the online operations.

The cost of our continued operations in the Toronto area in conjunction with the agreement with RCC continued to be included in our financial results. And we expect that these costs, with the benefit of this agreement with RCC, will remain less than the costs we incurred last year.

Looking at our student services and administrative expense line, remember that this line includes the amortization expense for intangible assets, largely related to the acquisition of Ross University. And compared to the third quarter of last year and prior to our ownership of Ross, amortization expenses increased by approximately $3.2m or almost 1.6% of revenues.

Excluding this amortization expense, spending on SSA declined slightly as a percentage of revenues to 32.2%, compared to 33.4% in the third quarter of last year. You'll recall that the third quarter of last year marked the onset of our increased promotional efforts that Ron mentioned earlier.

Interest expense decreased about $100,000 from the second quarter and it reflects our continued paydown of the Ross acquisition debt which was $230m at the end of March. Looking ahead, interest expense should continue to decline each quarter as we pay down the debt, but for the possible upward pressure on interest rates that could offset the declining debt levels.

Our composite tax rate for the quarter was 28.4% that reflects the relevant proportions of Ross University earnings to the earnings from our other operations. The third quarter tax rate compares to a 29.3% rate in the previous quarter. And we expect our tax rate to remain generally stable in the near term, within a range of 28 to 30% that we've previously discussed.

Turning to the balance sheet, the picture is one of considerable financial strength. We have a lot of cash, although remember we still have $230m in debt. The third quarter ends only a few weeks after the March semester at DeVry University with an attendant influx of cash flows so that cash balances gradually decline as we progress through the fourth quarter.

And accounts receivable, although they're up by almost $7m year-over-year or about a little over 8%, increased by less than the increase in revenues as we continue to manage our collections and federal aid programs in a timely fashion.

Capital spending remains moderate. It was just over $26m for the first nine months. And we may well finish the year with less spending than my earlier 40 to $50m estimates. That completes my remarks about the third quarter. So I'll turn the call back to Joan.

Thank you, Norm. We'd like the opportunity to answer questions from as many of you as possible and we ask that you -- those of in the cue for questions, please ask one and then jump back into the cue for additional questions. Operator, we'll open the call.

Thank you, ma'am. Ladies and gentlemen, at this time we will begin the question and answer session. (Caller instructions.) Our first question comes from Matt Litfin from William Blair. Please go ahead.

I'll save that for later. The one that I wanted to ask is if I recall your tuition price increase was accelerated to the spring term this year. So should we basically assume that you will receive a double price increase in the June quarter?

It will be a higher price increase than previous year, but it's just moving up the same level of increase in that term. So for that term, the next term, it will be the same amount as it would have been. It's just that in the earlier term, we received it earlier.

I got it. So in other words, once we get to the summer, we'll be looking at, you know, the --

Looks like the same thing that we would have done.

Okay, great. I'll jump back in. Thank you.

Okay, thanks, Matt.

Our next question comes from Ms. [Sarah Gruvins] [ph.] from Merrill Lynch. Please go ahead with your question.

Hi, good afternoon, given the impact that we're seeing in the quarter from Becker, I'm wondering if you might be able to give us a sense of what margins were like at DeVry University and Ross under a circumstances. And also perhaps talk a little bit about seasonality of margin trends at Ross. Thank you.

Well, Sarah, the margins at each of the other operations is a function of completing our segment footnote. And we've not yet gotten that far along, although I think it's fair to say that the margins at Becker, which as we said, you know, was earnings -- operating earnings were $0.04 a share less than they were in the corresponding quarter a year ago, means that the combination of Ross University and DeVry University were obviously significantly higher margined.

And I think that extends to both of them, because obviously Ross University was not there at all last year. And the results -- the financial results and the qualitative results we are very happy with. So that maybe will give you a little color on that.

Okay, thanks, I'll wait for the cue.

Thanks.

Thank you. Our next question comes from Bob Craig from Legg Mason. Please go ahead with your question.

Good afternoon, everyone, just sort of an obvious one. Do you expect any lingering issues regarding Becker in the fourth quarter? I take it by your commentary on losing enrollments very early on in this calendar year that that probably is not the case, but I thought I'd ask it anyway.

Yeah, when you take the annual impact, just pulling those two months out is a big thing. And we've been anticipating this for some period of time. But on a going forward basis, the principal impact of that is in the third quarter, not the fourth.

You will see something that we want to tell you about now so that it's not confusing. There will be in Becker this year also some nonrecurring earnings, Becker's fiscal year at acquisition eight years ago and at the end of April, based on the test schedules. And so for the eight years since, we've been ending their fiscal year at the end of April and tying that into our fiscal year at the end of June. And it's been an immaterial difference and it's been done that way with everyone's concurrence.

This year we're going to bring it up to the same year end as every other division, which is June 30th. So we're going to have two months of nonrecurring income, i.e., 14 months of Becker income this year, so you'll see that and that will also affect the Becker numbers this year, just not to be confused.

But that will happen in the fourth quarter, correct?

That will be prior to the fourth quarter. Nine months to date there have been no nonrecurring earnings.

Okay, great, thank you.

Thank you. Our next question comes from Mark Marostica from Piper Jaffray. Please go ahead.

Good evening, guys. I was wondering if you can comment on the rollout of the new health care programs and any traction you're seeing there.

There is a lot of interest in those, but it's still relatively small. The biggest interest that we're seeing early on is in the health information systems program. That's the associate degree program, and it's one where we are doing the earliest traction. It's also the one that's probably the most clearly identifiable and shortest, so that people can get into the job market.

But the whole intersection of technology and health care is one that we're very favorably disposed to. We think the market is going to be very strong. But we haven't really been overly aggressive about rolling that out yet.

So, just to follow up, how many campuses is the health information systems program available at?

At this point, including the ones we're just starting, eight campuses.

Okay, thank you.

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

Thanks. Hi, guys. I wondered if the timing of the change in the CPA exam took you by surprise, or was it something that was planned. And, Ron, maybe if you and Dennis could just give an update with respect to your efforts in online as well. You mentioned a portion of it, but what's the latest and how are things turning there? I'm curious to know what your focus -- if it's going to change at all or if it's going to stay the same just over the course of the next year.

How do you want us to answer this one question, sequentially or serially?

Just pick something.

Do you -- Norm, why don't you --

Yeah, Greg, your question about whether this took us unexpectedly is no. The change in the exam schedule and its potential impact on our revenues and earnings was disclosed first in our 10-K filed last September and most recently in our second quarter 10-P in the MD&A.

And, Ron, on the second part?

What was that second question?

What was that? Yeah, that second question was about online.

Online.

Wonderful, wonderful online.

Online, we as most of the people in this space are experiencing strong demand for online. We are investing a lot of time and effort in assuring that the student service infrastructure and the new faculty training and quality control mechanisms are of the quality that produces a DeVry degree. I think there's a strong growth orientation in online.

But as we have with almost all our programs, with all of our programs, we want to assure that we grow and have the support structure that's necessary to produce high quality graduates. We're very happy with it. We have certainly been applying resources to our online program.

Thank you.

Thank you. Our next question comes from Fred McCrea from Thomas Weisel Partners. Please go ahead with your question.

Good afternoon. First question for Norm. Can you quantify for us the Q4 impact of the Becker side?

Not entirely, no. When you say the Becker impact, what are you referring to?

Well, when you discussed the Q3 impact of $0.04 what the overflow or will there be any future dislocation in the fourth quarter as a result of the change in the schedules that you've been able to estimate?

Yeah, we would expect that there will be a continued decline relative to the prior year's pattern which had the two full revenue cycles in the fourth quarter. But in a lesser -- to a lesser extent than we experienced in the third quarter.

Okay, and then in terms of Sacramento opening. Dennis had referenced the issues in regards to the state budgets here and the availability of state universities. What type of research did you guys do to quantify that, if any? And if you have it, would you care to share it?

Let me quickly share something that somebody else might have more, but there was a study that's probably a year old by now of a trend in large public universities of a longer and longer time to graduate. It's now well over five years on average. And that timing comes -- versus a usual four years at private universities.

That timing comes from a cutoff of resources and cutoff of class rosters so that students can't get the courses they need to finish their majors or finish their course work with the hours they need. They just don't -- the courses they can get into are courses they don't want, and it just takes longer and longer. It's a classic resource allocation question where budgets are cut and so -- or budgets aren't enough.

And so what do you do? Well, we're going to offer fewer classes and we're not going to give the faculty more than X number of students per class, so if you don't get your registration in there right away, you're out of luck. Now there may be others who have input on this issue, but that's one thing. And if you'd like, we can try to get the citation for you on that.

Great, thank you.

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

Okay, good afternoon. I wondered if you guys would be willing to give us a little bit more color on the online course takers and whether they -- you know, how they break down in terms of graduate and undergraduate students.

In essence the previous -- there's been no change in the mix component. The rate of growth, of course, for the undergraduate online is greater than the graduate because it's relatively newer and the base is smaller. But that's really all the breakdown we want to give.

Okay, just one followup then. I mean can you -- the pace of growth is so much faster there than what we're seeing in the new student growth and what seems to be what we're seeing in the Keller growth. And so I'm trying to understand, you know, is it possible that we're still seeing declines in new student starts at the on-ground campuses?

Well, certainly in the technology area we haven't gotten back to the kind of growth that we want in technology at all. And as we've said in previous discussions, the focus of what we've been doing, we've been getting more business students, more adult students, and more online students. And the technology students and the capacity we built before continues to be something that we are working our way through, but is not really there yet.

When we do get that recovery, given the other things that we've initiated and given the nice growth that we have in those, we will absorb capacity in the large box 24 campuses that we operate and we should have a very interesting financial picture. But, no, we haven't -- that hasn't really changed.

Let me add a little -- another thought to that, a way to think about it for you. As we bring adult learners especially toward desiring our programs, they now have two alternatives. They can go -- three alternatives, really. They can go to one of our 69 physical locations, they can go online, or they can do a combination. Many, many of those students are close enough to one of our 69 locations that they could do their whole programs in person if they wanted to.

So those are students, many of whom would have come. Some wouldn't, but most would have come even without online. But they like online better. It's more convenient. It's more flexible for them. And we think if you give the customer what he or she most wants and finds most attractive, you've got a better chance of both getting and keeping that customer. So a lot of this has to be seen as a reorientation of the kind of delivery that students are choosing around the United States, around higher education, and in DeVry as well.

Okay, thanks.

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

Thanks. Yeah, I'm wondering if you'd comment on the 24 big box campuses. What's the capacity utilization in those today? And what is that relative to what it was, you know, two to three years ago?

Gary, we get asked that question a fair amount, but it's not like this is a static thing. And one of the ways that we are changing the capacity of our whole entire operation is with something that we call I-Optimize, where we combine the ability to take coursework online with the ability to take coursework on site in whatever proportions people want. It's one of the ways that we've gotten the Keller graduate school program to be able to come to a six term cycle instead of a five term per year cycle.

So the second piece that I would just cite for you is our ability to deliver those kinds of lab experiences that we have for a long period of time through an online delivery mechanism is getting better and better and better. So the capacity of the fixed sites really is not very relevant as a measure and for sure is not very relevant for two or three years ago.

But if you pin me down and said, well, how many more students could you take today, given all that kind of stuff, it's a fairly wide range. But I would say we're operating at, you know, maybe 60, 65% of our practical capacity.

That was good color. I wonder if you could just follow up -- or if I could follow up on that by saying that the way I was thinking about it more was to the margin impact of maybe not having the big campuses as full as they were a couple years ago and, you know, understand that you can certainly be interested in increasing your capacity.

But have you thought about maybe changing some of that lab space you referenced to teach, you know, some other programs other than business or anything to try to get that 65 to 80% such that your margins in those campuses surely start to go up again?

Absolutely, that's something that we think about every day. But the reality is what we want to be able to do is put technology students back in this. We're not going to take 24 big box campuses and in a relevant period of time put in fashion design courses. You know, that's just not a practical thing.

So this is not something where next quarter we're going to change the capacity utilization in a way you're suggesting. But we think about it all the time as far as how to do this. And as we grow things like the health care programs and other things that we have in mind, the campuses will become less of a DeVry institute campus, which they really aren't anymore; they've evolved into a DeVry University campus.

And I would suggest that at some point in time in the future, maybe sooner, maybe later, they will evolve into a university center that perhaps houses DeVry University courses and maybe other divisional -- other programs from other divisions, some of which aren't currently in our stable of program offerings.

Okay, thank you.

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

Good afternoon, and I hate to go back to this Becker issue, but I just wanted to clarify something. I know you don't give guidance on a quarter-to-quarter basis, but just directionally, should we expect revenues in your fiscal fourth quarter to be higher than the revenues you've just reported for the third quarter? And the same question goes with earnings, again just directionally.

Yeah, it should be higher.

Okay, and if I strip out the Becker impact, if I were just looking at DeVry University and Ross, would the same answer hold true? Would it be higher seasonally between the third quarter and the fourth quarter?

No, if you go back to the historical operating pattern of DeVry prior to the acquisition of Ross, typically the fourth quarter revenues were very similar to those in the third quarter. There's no significant increase. There is no large influx of a new class in the fourth quarter that could drive that revenue base up.

And then again, I'm sorry, on the Ross seasonality, if you could just clarify that as well between 3Q and 4Q.

Before he does that, don't forget that there's the 5% ballpark tuition increase taking effect with the spring term as well. And that's a big number.

Sure, and then again, I'm sorry, just on the Ross seasonality between 3Q and 4Q.

Their seasonality is similar to the DeVry seasonality. I mean their terms are offset by two months from the DeVry term. So instead of a March start, their previous start was --

January.

The spring term, like most educational activities in the United States, the spring term is the smallest term because it's the least in phase with the traditional academic calendar that we have in this country.

Right, and the summer term at Ross begins in May, if I remember correctly?

Right.

Yes, there is a May start.

Okay, great, all right, that's all. Thanks a lot.

Thank you. Our next question comes from Richard Close from Jefferies & Company. Please go ahead with your question.

Yes, you know, you've had the university centers open for I guess, what, three years now. I was wondering if you could just elaborate maybe. Have the university centers, where you're actually just offering undergraduate, are those approaching the similar margins yet of the Keller centers previously?

First of all, there are none. There's still a couple that offer graduate courses only, but there are none that offer undergraduate courses only. And the -- we are -- there's a spectrum of those that have been in it longer and those that have been in it less. Typically, as we've said before with Keller only, as you get above a couple hundred students, you start to get into very nice margin territory in a center.

And then just a followup to that, Norm, when you do the segment reporting like on a DeVry University center, I assume the undergraduates going with the -- it's not embedded in the graduate side, correct?

Well, you don't see -- our segment is the DeVry University segment, so it includes both graduate and undergraduate.

Okay, all right, thank you.

Thank you. Our next question comes from Corey Greendale from First Analysis. Please go ahead with your question.

Hi, good afternoon. I had a question about the undergraduate enrollment. For several terms the year-over-year change has been improving along with the new student enrollment. And this term if you improve it -- if you compare it to the fall term, it kind of flattened out. Is there anything you would point to that has sort of contributed to that flattening?

Sure, the sap rises in the spring and, you know, people do consider other things. Fall is when people tend to -- summer and fall, we push people into the summer, but there's just a declining interest that people have in the spring. And it crosses all the programs and I think it's fairly typical across the board.

So kind of looking the leading indicators, you could expect the improvement to continue again starting with the next [inaudible]?

Well, we would certainly like that to be the case.

And we intend that that will be the case too. All of our work and planning around here is on the goal of continuing the move back toward the growth levels that we have run with for a long, long time, the first 10, 11, 12 years that we were public.

Thank you very much.

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

Hi, good afternoon. Could you guys talk about the mix of new student starts between business and IT? And then as a quick followup, can you talk about your plans to roll out the health care programs further? [Inaudible] I think you offer one of the three health care programs at 11 campuses currently. What should we expect for the summer term?

The mix we've talked about quite a bit. Significant growth in the business program, significant underenrollments in the technology programs, that's been pretty much the pattern for the last three years since the tech wreck in 2001. And we think we can make progress in that area, but -- and if you read various things in the business press, you see articles now appearing about hiring and about things that are going on in technology businesses.

But I don't think there's been a general recovery yet. We see some signs of evidence. I think in the last conference call we talked about employers coming on campus that have been off campus for several quarters before that. But the strong interest of students today is business. The weakest area is technology.

So is that consistent with 50% of starts coming from business, 50% from IT, or is it being swung so that business maybe is even a higher percentage of the total starts?

Well, business has certainly been climbing a lot. And I would say its trajectory is such that if there is no recovery in technology, the scenario you paint is clearly going to be there.

Okay, and then on the rollout of the health care programs?

What did you -- you said something about 11 --

That are offering at least one of the three programs.

That's one of those things that we will expand that as the market drives us to. It's one of those -- it's a new program offering. It's a new area for us. We want to expand it, but we want to expand it in a reasonable way, and we want to do it in a way that would make money as we expand it. So I think you can expect to see broader coverage of those health care programs, but it's going to be in a controlled fashion.

Okay, I'll turn it over.

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

Thank you. I just wanted to be clear on a couple of earlier answers. Was there any enrollment growth at the big box locations?

The total -- no, the total students was down 3.1%.

New student growth at the big boxes.

No, no, most of the new students, the biggest proportion are in online and DeVry University centers.

Okay, was that all or most? I mean is there -- are you seeing any incremental growth at all in new students at the --

There is incremental growth by program, but the technology programs remain weak.

It goes back to what I said earlier -- this is Dennis -- that some of the students that would have gone into the big boxes to be adult learners in those programs that they want, which we teach in our big campuses, are finding online more convenient.

Okay, great, that's all I wanted. Thanks.

Thank you. Our next question comes from [Dana Walker] [ph.] from [Calmar] [ph.] Investments. Please go ahead with your question.

Thank you, good afternoon. The SSA spending, comparing Q3 to Q2 was down in excess of $3m. How much of that would you attribute to a more efficient use of media spend versus some negative felt at Becker or elsewhere?

I would say mostly the former. If you recall the last couple of conference calls, we've gotten questions about our marketing spend and the focus of what we've been doing there. And what we had said, really for the last year or so, is that as we have gotten the metabolism rate of draft up to the level that we expect, and as we've gotten the more focused advertising program, that our ability to generate leads has improved.

And as we have gone along, as you know, we've been training our sales force to be able to do a more efficient job with those leads in a little different environment, where the source of those leads has moved away from media and toward internet source leads. And so that combination has allowed us to produce leads and produce enrollments, but on a more efficient basis than we had in the past.

Ron, is it your view though that the productivity of your spend in Q3 is satisfactory?

No, no, no, it's not satisfactory. This is an area where we are focusing. We have some new activities that we'll let you know about on a timely basis when they occur. And no, we're not satisfied at all.

Does that mean though to [inaudible] what you hope to see in terms of enrollment outcome that your spend rate has to change on this level?

No, what we said is that we think we can achieve our growth objectives with a spend level at or close to what we had in the past. We said that the percentage should go down, percentage versus revenue, but that we would not necessarily reduce the overall dollar expenditure. Now if we can, we certainly want to do that. And as we go along, it would be a goal I would have to be able to spend at a lower level and achieve results that are better than what we've been achieving.

In a way, we've shifted the focus of what we're doing away from some of the historical roots. You know, when you're talking about business students and health care students, it's a little different thing than the technology students. And it's harder to get young people interested in technology careers today when they're concerned that there might not be a job.

But that's going to change. That will shift. And as that shift occurs, we'll try to be very sensitive to that in ways that will allow us to spend money -- either less money or to get better results with the same levels then.

By the way, Norm, when you said that Becker's revenue was down 6 plus million in the quarter, are you comparing that to Q2 levels or Q3 a year ago?

Q3 of a year ago.

And I'm looking at your segment reporting here where I believe that number was around 8.5 a year ago?

Yeah, I believe that's correct.

And I believe it was around 13m in Q4 a year ago?

I don't have the Q4 numbers handy, but last year's third quarter was in the $8m range. That sounds about right though, [Dana].

Okay, thank you.

Thank you. Our next question is a followup question from Gary Bisbee from Lehman Brothers. Please go ahead with your question.

Thanks. I just wanted to ask you if you're planning on opening more of this, I guess what you'd call the level II, sort of hybrid campus.

That strategy which we've articulated now for some time, and I think just for your information, Gary, the Chicago school of -- the Chicago DVUC was the first one we opened. And we opened that on a model that was about a 4 or 500 student model. And that student enrollment ran up to 900, almost 1,000 students. And we began to look at that and realized that this was a model (a) that economically would work, but (b) that had some very salutory benefits for us in an environment where we didn't necessarily want to create new big box campuses.

And as I mentioned in my comments earlier, one is entering new markets like Sacramento that are moderate level markets, where you wouldn't necessarily build a full service big box campus. And two is where you -- and where level I might be used as a satellite in an existing market, but where the level II can be used as sort of an intermediate market entry.

It gives us really four options, big box level II, which is -- big box might be 2,500, 3,000 students in today's environment. A level II might be 1,000, 1,200 student. A level I might be 3 to 500 students, and then online. So the amount of flexibility of delivery options and convenience to students is, we think, maximized by having four alternatives rather than three.

Okay, but it did sound like in your introductory remarks that level II would have at least some amount of lab space in it?

Well, yeah, yeah.

And is that a model that you're likely to continue to replicate going forward?

Well, that model is evolving just like everything else is. As we continue to like the results in the online labs and on our ability to deliver services that are functional for kids that want to enter a career, that model will evolve as well. We want to be as efficient as we can with our capital and with our space. And yet we want to make sure that we have the capacity to deal with the turn in the technology market when it comes.

Okay, great, thanks.

Thank you. Our next question is a followup question as well from Richard Close. Please go ahead with your question.

This will be the last one because we've reached the end of our hour. But come on, Richard.

I really snuck in there. Just a followup on Gary's question. Maybe if you guys could just elaborate, you know, as we're progressing into fiscal '05 here shortly, what you're expecting in terms of, you know, new initiatives or continued initiatives with respect to the university centers. How many of those are we going to see next year?

We've said that we would do six to eight per year. That's our plan. We've announced that we're initiating three starting with this summer term, one in Philadelphia, one in Gurnee, Illinois, and one in Sacramento. And I would say we'll continue to implement the plan that we're talking about.

Okay, and maybe a third of those be level IIs?

We haven't announced any mix like that, but we certainly have some thoughts about program expansion and new alternatives for students that might enhance the ability to DVUCs to create revenue opportunities.

Great, thank you.

Thanks, everyone.

Thank you very much. We will see you again before too long, and we appreciate your interest and your support and thanks.

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