Adtalem Global Education Inc (ATGE) 2005 Q1 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the DeVry Fiscal Year 2005 First Quarter Conference Call. (CALLER INSTRUCTIONS). I would now like to turn the conference over to Miss Joan Bates, Director of Investor Relations. Please go ahead ma'am.

Thank you. On the call today is Ronald Taylor, Chief Executive Officer; Daniel Hamburger, President and Chief Operating Officer; and Norm Levine, Senior Vice-President and Chief Financial Officer. We'll be following our usual format, with prepared remarks from management, followed by our q-and-a session.

Before we begin, please be advised that this call may include forward-looking statements, pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Potential risks and uncertainties are detailed in the Company's latest filings with the SEC. I'd also like to remind you that telephone and webcast replays are available until October 29. The replay dial-in is (800) 405-2236. And you'll need to use pass code 11011172. And with that, I'll turn the call over to Ron Taylor.

Thanks Joan. Good afternoon, and welcome to the first quarter fiscal 2005 conference call. I apologize in advance. I have a head cold going on. So if sound raspy, or whatever, that's what I'm dealing with.

Obviously the reported financial results in the first quarter are completely unacceptable. And we are extremely dissatisfied. Today we'll do our best to give you as much color on our results as is possible. And we'll also provide more details on the steps we are taking to improve both our short and long-term results from operations. Later in the call, Norm Levine will review the financial results for the quarter in detail. And then Daniel Hamburger will give you an update on the progress we are making in achieving our strategic plan for growth, which we introduced at the year-end call.

Just to summarize, revenues for the first quarter were $188.4m, compared with $189.2m one year ago. Net income for the quarter was $4.3m, or $0.06 per diluted share, compared with $10.5m, or $0.15 per share, in the first quarter of fiscal 2004. As we indicated during our year-end conference call, earnings per share for the first quarter includes an additional $0.02 from the realignment of the fiscal calendar of Becker Professional Review to that of DeVry, Incorporated.

Our unsatisfactory financial results in the first quarter reflect continued under-performance in recruitment of full-time technology students, both for the 2004 summer term, and during prior terms at DeVry University. And it reflects significant incremental expenses for improvements in our information systems infrastructure, for our staff to support expanded delivery options in new locations, and for increased advertising and recruitment expenses as we add locations and diversity programs.

Despite our best efforts, full-time technology enrollments have continued to decline. As we indicated in our fiscal year-end conference call, new undergraduate students in the summer term increased by .9%. But total undergraduate enrollment declined 5.8% from the prior year. These results were preceded by spring term enrollments, where new students increased 6.1%, but total students declined 3.1% from the prior year.

In addition, while our DVUC, that is DeVry University Centers, and online initiatives, have raised total enrollments, these delivery modalities include significantly higher levels of part-time students, who of course pay part-time tuition rates. To better understand these results, we'd like to provide you with some additional visibility on recent trends in technology enrollments, when compared to enrollments in our other programs.

In the 2004 summer term, enrollment of new students in technology programs was down roughly 25% from the 2003 summer enrollment. By contrast, new student enrollment in business, healthcare, and other non-technology related programs was up approximately 29%, but of course from a much smaller base. Similarly, in the 2004 spring term, technology enrollments were off about 26% from the previous year, while business enrollments were up about 43%, again from a smaller base.

This, in total, represents a substantial change in program mix for DeVry, which creates significant inefficiencies in campus, lab, and classroom allocations, and in faculty levels that are planned for larger technology enrollments. We believe DeVry is not alone in the redistribution of program interests shown by new undergraduate students.

Data reported in the most recent publication of the UCLA Higher Education Research Institute, which many people, including me, calls the Aston Studies, indicates that interests of incoming freshman in engineering and engineering technologies is approximately half of what it was in previous years. Widely publicized layoffs, together with news articles focused on loss of IT jobs to outsourcing in India and elsewhere, continue to influence high school seniors and their advisors, despite the improving job prospects for graduates of our technology programs.

In fact, for the last graduating class for which we have data, 84% of our graduates who sought assistance obtained employment in the technology field, compared to about 80% in the previous year. And employer interest in DeVry technology graduates appears to be strengthening. We feel strongly that the continuing high profile headlines about weak technology-related employment are impacting the education and career decisions being made by prospective DeVry students.

We're not trying to make excuses for poor performance. Instead, we're trying to portray a realistic picture of the higher quality degree-oriented education market in the area of technology. Despite our poor first quarter financial results, we are continuing to take steps to improve our performance in recruiting full-time technology students.

As previously detailed on our year-end call, we are making significant changes to our programs, such as changes in our admission criteria, in the delivery options available, and in support services for students, to make them both more student friendly, and more flexible.

Improvement in education and online technology has allowed us to reconfigure and create specializations within the programs to fit into a shorter and more efficient schedule. We are also adding student support staff, financial aid counselors and recruiters, with particular focus on growing our online operations where there is strong demand for DeVry programs.

Unfortunately, these improvements raise expense levels in the short-term, while the market gains awareness of the changes we have made. Revenue gains, of course, won't occur until the market understands and responds to the new services, delivery options, and improved employment outcomes that we see.

Also, the largest number of full-time enrollments is tied to the traditional academic year. Therefore, we wouldn't expect to see material full-time enrollment increases from our recent efforts until students graduate from high school next spring.

For the longer term, these current investments will allow us to serve larger numbers of students, whether that be in technology, business or healthcare, whether they're full-time or part-time, whether they're interested in master's, bachelor's, or associate degree programs, or in one of our exam preparation courses.

In addition to the shift in interest from technology to business and healthcare that I mentioned before, we are experiencing a large movement from full-time students to part-time students. This is the result of both the substantial growth in enrollment at the DVUCs and online, and the decline in full-time technology enrollments.

In the summer term, part-time students made up approximately 65% of our total student population, which is up from less than 55% a year ago. As many of you know, part-time degree oriented students represent a good news/bad news scenario, with a lower short-term revenue per student rate, but with a longer anticipated revenue stream. The short-term result of these changes in enrollment is that we expect a year-over-year decline in earnings, albeit a considerably smaller decline than we reported in the first quarter -- this decline, obviously, for the remaining three quarters of the fiscal year.

In addition to that, however, we are taking action to better match expense and staffing levels to actual revenue, in order to improve our annual results. We are also reevaluating the timing of planned investments to support future growth. However, we will continue with plans to expand capacity in our Ross University operations, to enhance our advertising messages and recruiting efforts at our new and existing DeVry University locations, and to adjust staffing and expense levels more quickly, to reflect the actual enrollment levels and program mix that we experienced.

Our new advertising messages have begun to generate better lead flow, although much of the increased lead flow is from Internet sources, which have had lower conversion levels. While increasing lead flow is very important, we are also focusing on productivity in order to convert these leads into students more efficiently.

To improve enrollment production, we have added approximately 80 enrollment counselors in the last year at our existing campuses, centers, and online operations. We expect to see lead conversion improve as these new counselors gain comfort with our recruitment systems and procedures. However, as you might imagine, there is a learning curve with all new recruiters. And we have, frankly, been disappointed at the time it has taken to increase recruiter effectiveness and efficiency.

Let me turn for a second now to Ross University. I am very pleased, and all of us here are pleased, to announce that Dr. Thomas Shepherd has joined DeVry, Incorporated as the new President of Ross University, and as an Executive Vice-President of DeVry, Incorporated. Tom has more than 30 years experience in healthcare administration, and has extensive exposure to the U.S. healthcare system, with expertise in hospital management, healthcare reform, strategic management, and organization development. We look forward to Tom's leadership, as Ross University continues to grow.

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

Thanks Ron. And good afternoon to everyone on the call. I'd like to start by taking a look at the bottom of our Income Statement, where you'll note the inclusion of a line titled Cumulative Effect of Change in Accounting. As indicated during our year-end call, this change in accounting results from the alignment of the Becker Professional (technical difficulties) fiscal year that is co-terminous with the DeVry (technical difficulties), which ends in June.

The change was prompted by the new CPA Exam Administration schedule to an almost continuous schedule, so that April is no longer the local end of this business cycle. The amount shown represents the income, net of taxes, for the two-month period of May and June, 2004, following the April year-end. It was this April year-end that was incorporated into our fiscal 2004 financial results. Our first quarter 2005 financial statements now reflect the same three-month period, July through September, for Becker Professional Review as to the rest of the Company.

Going back to the top of the Income Statement, first quarter revenues in our professional and training segment increased by almost half a million dollars from last year's reported first quarter. The new CPA exam schedule, that caused us to realign the financial reporting calendar in this segment, and the effect of that is that this year's first quarter results include July to September, as they do for the rest of the Company.

However, for the first quarter of last year, our financial statements included the professional and training segment months of May through July. Future quarters will reflect a similar shift in the months being reported compared to last year. And a new seasonal pattern of exam takers will likely emerge.

Regarding it's increased revenues in this quarter compared to the revenues in the reported first quarter of last year, this segment produced operating income almost equal in amount to the amount of higher revenues year over year. Ross University also recorded higher revenues for the quarter compared to last year, increasing by approximately $2m on previously reported higher student enrollments, and a tuition increase implemented in January of 2004.

However, the higher revenues were accompanied by higher costs for faculty wages, and higher clinical fees, particularly at the vet school, where they're paid the various U.S. vet school clinical affiliates at which Ross students complete their clinical training in their final semesters before graduation.

Turning to the largest segment, the DeVry University segment, revenues declined from last year by $3.3m. Even as enrollments and revenues of Keller graduate school continued their steady increase, the decline in the total undergraduate enrollments that we reported for the summer term, and a greater proportion of part-time students, more than fully offset the tuition price increase that we implemented in March of 2004.

In our 10-Q and 10-K filings last year, we discussed this shifting pattern of undergraduate academic levels, in our online programs, and the programs offered at the DeVry University Centers. These delivery modes attract working adults, who typically take less than a full academic load, and thus pay less than the full-time tuition levels.

To give you an idea of the effect on revenues resulting from this shift, the average revenue per student increased by only slightly more than 3% in the spring term, from the immediately preceding term, even though we increased undergraduate tuition prices by approximately 5-6%.

Expense control remains a focus for the organization, in order to better match expense for revenue. Compared to a year ago, cost of educational services increased by 4.8%, despite increasing the size of our online operation, and expanding the number of DVUCs we operate, as Ron explained earlier. These areas required more faculty and staff, as enrollments there have continued to grow very well, also contributing to the higher cost was higher Ross faculty wages, and vet school clinical costs that I mentioned a moment ago.

Included in student services and administrative expenses was $3.6m for the amortization of intangible assets, largely related to the Ross acquisition. This compares to $3.4m in the first quarter of last year. Excluding the amortization from student services expense in both years, these costs increased by about 8.4% from the first quarter of last year, reflecting both increased administrative costs, and higher spending on new student recruitment.

We previously discussed the accounting policy for the development of our new student information system. Much of the initial system development has been completed, and is now in place across DeVry University. Therefore, we have included in our total expenses for the quarter, partly in cost of educational services, and partly in student services and administrative expenses, both a decrease in the amount of current spending that is being newly capitalized, and an increase in the amount of amortization of previously capitalized development costs.

Compared to the first quarter of last year, the decrease in the amount capitalized and the increase in the amount amortized, when taken together, represent an increase in cost of just over $2m in the quarter. The amount of the cost increase will moderate somewhat in future quarters, but will still be significant.

Interest expense of almost $2m in the quarter reflects lower debt levels this quarter than the first quarter of last year. We ended the quarter with $200m in debt outstanding, compared to $263m outstanding last September. However, you may remember that all of our debt is floating rate. And interest rates have been raised three times now, for a total of 75 basis points, in just the last several months. This offsets a large part of the savings from lower debt levels.

In fact, this quarter's interest expense, driven by the higher interest rates, is higher than it was in any of the last three quarters of last year, even though we have less debt now than we had in any time during those quarters. Although we'll continue to reduce our debt, I think we'll continue to increase likely another 25 basis points in November, and possibly more beyond that, these rate increases will absorb most or all of the interest savings from the continued debt level reduction.

Our composite tax rate for the quarter was 24.8%, which is several percentage points below the rate in previous quarters. This lower tax rate simply reflects the greater proportion of Ross University's relatively low tax rate off shore earnings to the total Company earnings. Because the accounting for taxes is intended to be stabilized as best you can throughout the year, I think that our composite rate will likely remain below the rate we experienced in the last few quarters of fiscal 2004.

Looking ahead to events that will affect future quarters, we previously disclosed that we signed an agreement with (Pollack) (ph) to manage the remaining DeVry bookstores that were not already under their management. The transition of these additional bookstores, which occurred late in the first quarter, and into the early part of the second quarter, is now near completion.

To put the magnitude of this change into perspective, on an annual basis, (Pollack) sales net of the commission they pay to us on these sales, on the campuses that they previously managed, was approximately $16m last year. Extending that to the remaining campuses, we expect that our reported revenues will be reduced by approximately $10m on an annual basis. However, this will have no meaningful impact on profits, as the commissions we receive should approximate the profits we made by running the stores ourselves.

Turning to the balance sheet, with $115m in cash at the end of the quarter, we have almost the same level of cash as we had last September. But we've got a lot less debt. Accounts receivable increased by $13m from last year. The increases occurred in small part at Becker, Keller and Ross, all of which reported increased enrollments and revenues.

However, the biggest part of the increase occurred at the DeVry University undergraduate operations, where the processing and receipt of financial aid was a little slower than it was last year. Also contributing to the increase in receivables at the end of September is the changing pattern of the undergraduate enrollment periods. While there were previously just three traditional semester starts - July, November and March - the online and DeVry University Centers have six starts per year, which adds starts in the month of September, January and May. And they're becoming increasingly large.

With the September new student start, and re-registration in September for students who were enrolled in July on this eight week session schedule, the amount of additional tuition billed and added to receivables in September is growing at this measure of point in time relative to prior periods. Capital spending remains low, just $5.7m for the quarter, naturally less than we spent in the first quarter of last year.

For the year, I expect that capital spending will approximate the $40m level or so, similar to last year's spending of $42.8m. The increase in accounts receivable, and the decrease in deferred tuition revenue compared to last year, reflecting the lower under-graduate tuition revenues and the different Becker exam review cycle, produced a cash flow in the quarter, cash flow from operations equal to $24.6m.

Although significantly lower than the cash flow from operations in the first quarter of last year, remember that the first quarter of last year benefited from the transition of the Keller Graduate School academic calendar to the 16/8-week length format. This resulted in cash flow historically realized in the fourth quarter to be realized in the first quarter of last year. This year, of course, we have no such year-to-year benefit, since the schedule now remains unchanged.

That completes my review of the financial statement. So I will turn the call over to Daniel for some additional comments.

Thank you Norm, and good afternoon everyone. I'd like to provide you with an update on certain aspects of the long-term strategy that I outlined last quarter. Let me begin with DeVry University, and update you on the progress we are making with what we've been calling DeVry University's dual imperative.

Imperative number one is re-igniting growth in our traditional student segment, full-time day students, enrolling in primarily technology and business programs. Imperative number two is to continue to capture an increasing share of the working adult market, with an emphasis on business and management programs.

We've launched a five-part initiative to support this first imperative. First, we are reengineering our programs at both the bachelor's and associate degree level, to enhance the value proposition for prospective students. We have begun to strengthen certain programs, such as ECT, our Associate Degree in Electronics, to be more competitive, including flexible scheduling, which allows students the option of completing the program in four terms rather than five.

We're further enhancing flexibility by offering more undergraduate programs during the day at DeVry University Centers or the DVUCs. Our ECT program, our business administration and technical management programs, are currently available at certain locations in Arizona, California, Colorado and Ohio. And we plan to offer the ECT program at five additional locations by next quarter.

Second, we are working to better communicate the value and affordability of a DeVry education. This includes enhanced student finance advising and financing options. We are augmenting our internal staff and processes, as well as tapping into external provides of these services. These actions are being taken in order to provide the best possible financing solutions and service to the traditional student segment.

The third initiative is revising and strengthening our marketing and advertising, focused on high school students and recent high school graduates, for developing new creative execution to student settings within this group, with more targeted messaging and stronger call to action, through our various acquisition channels and marketing media. We are also adjusting our media spending, timing and placement to more effectively reach these prospective students.

Fourth, we are enhancing the recruiting process itself. This includes rolling out a revamped and more targeted high school program. In addition, we are redesigning goals and responsibilities to enhance the productivity of our admissions advisors. As Ron mentioned earlier, that we have added a number of enrollment advisors, all put through rigorous training on our systems and procedures.

The list of leads we generate has been shifting to be more heavily weighted towards Internet-based sources. Those familiar with this process know that Internet space leads are more difficult to convert. So we are investing in additional systems, training, and specialization of roles, to improve conversion rates.

Fifth, and finally in this area, we are working on filling our campuses, by adding new programs and new curriculum areas, that appeal to incoming freshman. Building from our traditional base in technology and engineering, we have diversified into business programs. Business programs now represent 50% of our new students university-wide, up from 14% just three years ago.

In addition to the business programs, we have also added new bio-medical technology programs, providing further diversification and broadening our appeal to female students. The number of females enrolled in our bio-medical technology programs has increased fourfold since we began altering the programs over a year ago. The bio-medical technology programs are now offered at 18 locations. And in early calendar '05, we will begin offering the health information technology degree program online.

So that's an overview of our plan to achieve imperative number one, which is obviously our top priority. And, at the same time, we will continue the momentum we have built in capturing our share of the working adult student market. And that is imperative number two.

Let me briefly cover three initiatives currently underway here -- DVUC expansion, enhancement of the Keller delivery model, and the growth at DeVry University Online. Now we remain on target to meet our stated goal of opening 6-8 new DeVry University Center locations during the year. Thus far in fiscal 2005, we have opened new centers in Florida, Texas, Georgia, Pennsylvania and Minnesota.

Our Keller Graduate School of Management continues to grow and serve working adults, supporting by our iOptimize hybrid format. We continue to believe that the iOptimize hybrid delivery model, where students attend class one session per week on site, and conduct the remainder of their class time online, is a distinct advantage, as it enhances the learning experience, and also increases productivity and capacity at our locations. This hybrid model is fully deployed at Keller Graduate School, and was a significant enabler in our transition from 5 to 6 terms per academic year.

And of course our largest growth opportunity among adults is DeVry University online. We have recently eliminated the minimum age 21 requirement for students who choose to take courses online or complete their coursework in an accelerated format. We made this decision after successfully piloting this change with certain categories of students, including active duty military students.

Our focus at DeVry online continues to be ensuring that we maintain and enhance the quality of both our academic delivery and supporting student services, while we grow at such a rapid rate, which in the recent summer term was over 92%. I am pleased with our academic evaluation, which has actually been getting stronger in the midst of this drastic growth.

Turning briefly to Becker Professional Review, Stalla, the review for the CFA, we are pleased with the recent announcements that the Toronto Society of Financial Analysts and the Washington, D.C. Society of Investment Analysts have each signed long-term agreements that allow Stalla to be exclusive provider of preparatory materials to their members. This may be of particular interest for all of you CFAs on our call today.

At Becker CPA Reviews, enrollments are coming in as expected. And we continue to receive great feedback on our adaptation of the course to the new exam format, including case-based simulations.

I'd like to wrap up my remarks by stressing that in addition to the strategy that I have outlined, we are putting an increased emphasis on excellence in execution. This means greater levels of management oversight, ensuring we have the right talent in the right roles, and operating with a high degree of quality and integrity. In this regard, we have put an increased focus on quality of business practices, and on internal controls.

I also want to say that implementing this strategic plan for growth as a refocused management team is more than a next quarter project. We believe, and I personally want to emphasize, that the long-term prospects for our businesses are excellent, including the demonstrably resilient technology center, and that DeVry is very well positioned to capitalize on.

And with those remarks, I will now turn the call back over to Joan.

Thanks Daniel. Obviously we'd like the opportunity to answer questions from as many of you as possible. Therefore, if you could just ask one question, and get back in line to ask your question, we'd appreciate it. Operator, we'll take questions now.

Thank you ma'am. (CALLER INSTRUCTIONS.) Matt Litfin with William Blair & Company.

Hi. Good afternoon. What was the EPS contribution from Ross University in the first quarter?

Well, we haven't broken that out Matt. It's -- training and professional is the only breakout we -

Well, no. Ross, yeah. We haven't finished the segment analysis yet Matt. And even when we do, remember that the segment analysis will only take you down to the operating income line. The contribution to earnings from Ross in this first quarter was just slightly less than it was in the quarter of a year ago. That's a result of the higher costs that I mentioned, growing by slightly more than the increase in revenues.

Let me try to ask that a different way. Ron, I think you said in your prepared comments that the full -- I am sorry, you mentioned that Ross University's expenses were up, along with the revenue. I think Ross' EBIT margin has been running in the low 20s. So maybe you could give us a stab at what you think Ross' EBIT margin might have looked like in Q1.

Yeah, it's off from what it has been a couple of points. I don't know exactly how many points. But it's down from what it was.

And the only other thing I have is you had said Ron, I think, in your prepared comments that (technical difficulties).

That what?

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

Did you cut Matt off?

Yes, they're holding people to the one question quota Ron.

Oh.

Ron, your expression of, I think if I can call your extreme dissatisfaction at the beginning of the call.

Yeah.

I'd say it's sort of a material change from the last conference call. And at the time of that call, you had what I consider a high visibility into the population that would drive the revenue in the quarter, as well as high visibility into the spending needed to support the students. So I guess what's the source of your surprise over the past 10 to 12 weeks?

I didn't say surprise. I said dissatisfaction. The dissatisfaction comes from the mix shift and the amount of the mix shift, the under-performance in the technology enrollments. And those are things that there is some visibility, it's true. But we now have registration both in July and September. We really didn't know what the September numbers were. And we had indications that there was a recovery in the technology interest.

And, if you recall, there's been sort of a trend over the last several terms, where there has been less negative or positive recruiting result. And so it really was a sense that we were moving forward. The early indications were that. But they did not come out the way we liked. And there was more movement to part-time programs than we otherwise would like.

So, when those students enrolled in the summer, when you had visibility in July, when you gave enrollment numbers, you weren't aware that they were going to be part-time students at that time?

Well, we knew to the extent that we had those enrollment numbers. Sure.

Okay. I'll jump back into the queue. Thanks.

Bob Craig with Legg Mason.

Good afternoon everybody. Ron, I was interested in your comments about matching expenses with current levels of business. Is there any way to quantify or embellish on efforts to control costs? How much in the way of costs do you believe you need to take out of the system currently?

Well, we certainly don't want to have earnings levels at what they have been. And there's two ways to do that. You can spend money to increase your revenues, which is what we've been doing. But you also have to be fairly active in responding on the expense side when you don't get the revenues that you want. And all I really meant to imply there is that we're going to be active in doing that.

Okay great. Thank you.

Greg Cappelli with Credit Suisse First Boston.

Yeah, hi Ron. I guess I'd like to focus on, maybe you could talk to us about the, when you talk to your students or prospective students, what are they telling you that they want now? Is it -- ? You had mentioned some things. But is it shorter courses? Is it the service? Is it more locations? What are the areas that you feel like you've got to spend the most amount of time or capital on going forward in order to satisfy and fill their needs?

Well, there's two different types of students that we serve, the recent high school graduates, and the employed adults. And there's different needs that both express. But we really have been trying to respond to what students have told us about the process of enrollment and getting the financial resources to allow them to stay in school.

So one of the areas is to increase the level of service with regard to financial aid, and to make sure that the transition from the recruitment side to the enrollment side is fully supported by the financial results that we have. That's pretty critical for the recent high school graduate. It's important for the adult learner. But it's a little different.

Beyond that, we have been getting feedback that some of our competitors are -- let's forget our competitors. We have, I think, what is recognized as a high quality program. And the quality of that starts with the requirements for getting in. So, one of the things we've been doing is trying to ask ourselves if the requirements for transfer credits, let's say, are really need to be set at the levels that we have.

And, as we've looked at it, and as we've had experience with populations of students that have been successful, we've realized that the age restrictions for online or the transfer credit restrictions have been set at a higher level than probably it needs to be. So one of the things we've tried to do in this whole process is to assure that there is a congruence between the admission standards, the standards in the classroom, and our graduation standards.

Okay, that's helpful. Just on that one point you brought up on financial aid, is that -- ? Are students struggling to get enough money? Or is that something that's --?

One of the things that has caused the shift from full-time to part-time, and it's not quite so easy to have the kind of visibility that one of the early questioners asked about, is that people have been moving to shorter-term programs. They've been moving to community college programs. And they've been moving into part-time programs, because the financial pressures on the family that these students have. So yeah, it's an important part, or at least we discerned that it's an important part of a degree program of the type that we have.

Okay thanks. Hang in there. There will be better days.

Yeah, especially if I can get over this cold.

In fact, if I could just add one point to what the students are looking for Greg, it would be schedule flexibility. And that is in many ways being addressed by some of the things that I talked about, such as the ECT having a 4 term option, in addition to the 5 term, and by the -- I didn't talk about this time, but I've talked about it before, and Ron's talked about -- our whole focus on the best of both online and on site studies. That is something that we're hearing from students, and something that we're investing in, and think we have an advantage. So that's showing good progress as well. Thanks.

Mark Marostica with Piper Jaffray.

Is reduction of undergraduate faculty part of the matching of staffing levels that you talked about? And, if so, just give us an idea of how quickly you will be able to affect those changes. I understand that most of your undergraduate faculty are full-time. And I am not privy to the contractual relationships you might have with those folks. Thanks.

There is essentially two types of faculty. There are full-time faculty, who are employees directly. And then there are adjunct faculty. And we have tried to match full-time students with full-time faculty, and part-time students with part-time faculty.

However, there is flexibility in the faculty to move between locations and deliver modalities. So we -- and this is an area where we're trying to assure that the allocation of faculty resources matches the revenue streams. It's probably not the case that faculty will be only faculty at a campus, or only at a DeVry University Center, or only online in the future. Faculty will probably move between those, as the shifting demand requires.

And it's a function of management, I would say, to do that, and to do it in an active and a proactive and a rapid manner. And I think the faculty across the board is thoughtful about that. They're willing to be flexible in most cases. And it's purely a question of the skill with which we can, and speed with which we can get the information required to get the faculty in the appropriate place at the appropriate time.

But, when you get all said and done, I don't want that to sound like B.S. We are looking at faculty staff recruiters across the board, always to be more efficient, and to better align expenses with revenues. That's just a fact of today's environment.

So Ron, given what you just described, it sounds like you'll be able to affect these staffing changes at the faculty level fairly quickly by realigning people. Would that be fair to say?

Well, I don't know what fairly quickly means. But the better we are at that, the better the results will be.

Would fairly quickly be over the next quarter? Would you be able to affect these changes?

I would say that it's not a reasonable thing to think that we can adjust our expense levels that quickly to this kind of change.

Fair enough. Thank you.

Richard Close with Jefferies.

It's [Ray], filling in for Richard. Just a quick question here about the -- if you're talking about the part-time trends, has that been something that you, as far as students taking more part-time courses, is that something that you've been seeing over time? Or did it crop up in this quarter?

No. It's been over time. And obviously the online and the DeVry University growth has had a greater proportion of part-time. It's not that that's a brand new phenomenon. It's just that in this term, when you have the under-performance that we've had in the full-time technology, the percentage of people taking courses only part-time goes up. It's a mathematical certainty. And so it comes back to what Daniel described as the first of the dual imperatives. And that's to re-ignite our full-time under-graduate technology enrollment.

So, in the short-term, like near-term future, should we associate a certain level of margin compression with this trend?

I would think so.

Any guidance there?

Well, I think you certainly can take the first quarter and the results in July, which, as Howard pointed out, now we have complete or better visibility on those, and apply that. You're probably in the ballpark if you use that sort of relationship.

Okay. Thanks a bunch.

Gary Bisbee with Lehman Brothers.

Thanks. Yeah. At some point in the future, maybe what would get you to sort of throw in the towel, so to speak, on a bullish, longer-term outlook for IT, and more aggressively try to either bring in your infrastructure at the campuses, or more aggressively add different curriculum?

Well, I can tell you this. The results in this quarter is one stimulation. It's completely unacceptable. And we don't like it. I don't like sitting here talking about it with you guys, or with anybody. And my management team doesn't like me talking about it with them. I can assure you of that.

Throw in the towel? No, we're not going to throw in the towel. Technology is not going away. Adjust the model? Change the structure? Yeah, absolutely. We're -- we are not married to any single model. We are prepared to do the things that are necessary to have a quality educational outcome, and a quality financial outcome.

And you can do silly things in the short term, to try to make a sow's ear into a silk purse. We're not going to do that, to the extent we can avoid it. But we're going to take the actions that are necessary to adjust the model to today's competitive realities, to the environment, to the pace of recovery and technology. We've been talking about technology recovering for some period of time. And it just hasn't done it at the pace that we have. So, what visibility we have on that is probably appropriate. But the timing and the time frame within which we achieve that, it's one of those things.

Now I will point out that we have, over the last year or so, or a little more, made what I would call some fairly significant moves. We've acquired Ross University. Maybe some people don't see that as a diversification from technology. But I think it certainly is a revenue stream that's not impacted in the same way. We've taken our initial move away from our large campuses into DeVry University Centers. We now have about 50 DeVry University centers. We have 23 University campuses.

So the enrollments are not commensurate yet. But we have moved into a different delivery structure. We've put a lot of emphasis in online. And we have, I think we reported last time, 12,600 or so online students. And that's growing pretty well. We have adapted the DeVry University model to the realities of demand that's more convenient and flexible, by adding the level to DeVry University centers, the super-sized DeVry University centers, which, as you know, we have used as a model to enter new markets that we otherwise probably wouldn't have entered -- Las Vegas, Indianapolis, Fort Worth, etc.

So I am not beating a drum. I am not. I am just trying to indicate to you that there is today, and there has been, an attempt by us to diversify our delivery methods, to add programming that diversifies that. And now we need to be a little active and thoughtful, and come up with some new things. So that's really the answer to that.

Okay. Thank you.

Corey Greendale, First Analysis.

Good afternoon. I just wanted to ask about -- you had talked about the effect of the shift toward part-time schedules on the revenue per student. Could you just comment on any trends in retention levels, and the effect that might have on the same metric?

Retention is sort of a two-part question. One has to do with graduation. And one has to do with our ability to retain people who are in the program. Our -- and we have made a fair amount of effort to increase our retention, with mixed results. The retention has not been down. But it hasn't been up either.

Graduations have been higher. And those are classes from the period before the decline in technology. I don't believe that we're going to continue to see those high graduation numbers as we go forward, as we sort of go through the period where those higher classes are graduating. But the combination of those is that that's another pressure on the total number of students.

All right. Thanks.

[Sarah Govins] with Merrill Lynch.

Hi. Good afternoon. I just had a question about Ross, and the lower than expected margins, or lower than last year margins in the quarter, due to some of the investments. How long would you expect that to continue to put pressure on margins headed into the rest of the year?

Well, I think we are about at our budget levels at Ross in the first quarter. And I think we'll see for the year that Ross will improve, likely improve its results. But I don't think it will achieve last year's levels, in part because we're investing in growing that business. And it requires us to add both facilities and people, to assure that we can serve the students that we are interested in.

You are aware, we have purchased property at both the St. (Kitts) (ph) and the (Dominica) (ph) campus, to increase our capacity at each of those. But, when you increase capacity, you need support staff, and all the things that go along with it. Again, we'll try to balance the timing of those investments with the revenue streams. But I would say that you're likely to see, in this year, a modest lower level of margin at Ross.

Okay. Thank you very much.

Jennifer Childe with Bear Stearns.

Thanks. Ron, have your online costs per leads been improving at all?

No. They've been going up. But cost per lead in -- I would say for most the people that are active on the Internet, is -- has been up, as the competition bids up the opportunity they have there, a particular message shown on attractive websites.

Has that been offset by any improvement in conversion rates?

You know, this is back to visibility. We thought we would get better improvement in our conversion rates from some of the things that we had invested in, more training. And when you sit looking a couple months into the future, and you say we've been doing these things, we ought to get better conversion, that means better enrollments, that's one thing.

The answer is no. It's one of the reasons that I said we're very disappointed and dissatisfied with the results in the summer. It's not just the absolute numbers, although I realize you guys don't see the detail. You see the absolute numbers. But I am disappointed in the absolute numbers. But I am very disappointed in our failure to achieve a better conversion of the kinds of leads that we're generating over the Internet.

It's very frustrating, and it's very irritating. And it's something that we're going to fix. It's a drag, and a deleterious effect on our ability to achieve the financial results we want. And it's -- we're -- I'm dissatisfied. We're dissatisfied. We don't like it. So that's an area that we thought we were doing some things that would affect it in a positive way. We still think some of those things are appropriate to be doing. But we did not achieve the conversion that we wanted in this summer term.

Brad Safalow with J.P. Morgan.

Hi. Good afternoon. I just wanted to delve into some of the initiatives you have in terms of, I don't want to call it lowering admission standards, but allowing certain credits to transfer more freely, changing the age restrictions. Is all of that I place for the fall term? And the new delivery format, is that going to show up in your marketing for the fall term? Or is this really, we're really positioning, getting things in place so that next summer when we have the high school graduating class, that's going to be the target.

Brad, it's Daniel. And thanks for your question. And it's a mixture of both. Some of those things are in place now. And others of those will have a bigger impact on that first of the dual imperatives that I talked about, in that traditional student segment, of the high school or soon after post high school graduation segment, where we really wouldn't expect to see a lot of that result until the summer time. So those would be a bit of both. The 21 is in place now.

Okay. And from an enhancing your student services, the hiring you've done there, is that reflected in some of the results we see today? Or is that also we're going to see a lot more of that on to come in '05?

Yeah, I think that is reflected in some of the results that you're seeing there. We're making investments, as Ron said. We're not throwing in the towel. We're adjusting, and changing the model, and investing in the growth that we see in technology, and also in the business and health programs, that are growing a little bit faster. So you're seeing the impact of that now.

And just on the business and healthcare technology programs, what is their contribution to this as a percentage of the total undergraduate population at this point?

Yeah. We are seeing about half of our new students recently in business programs. So that is a big change. I think that's up from -- what did I say earlier? That is up from 14% three years ago. So our new students, and that's university-wide, about half of them are business students.

So sort of, as Ron pointed out, there's good news and bad news, depending on how you want to look at that. The bad news is the technology is not as much. The good news is that we have shown an ability to diversify. And we're going to continue to do that with the business programs as we are in the bio-medical and health programs. And those are at the campuses, as well as increasingly at the small campuses or centers.

You haven't had that on a total population basis, not on the kind of starts, just so we can gauge?

Sure. No, sorry Brad, we haven't broken it out that way.

Okay, I'll turn it over. Thanks.

Mark Hughes, Suntrust.

Could you talk about the effectiveness of your marketing in the more traditional media? And then secondly, how has the trend been for those non-IT, sort of the business and allied health? How has the trend been say in the last three months, compared to earlier in the year, if you can say?

The media advertising has been less effective across the board than we would like. It's the cost per lead in some of the media sources has reached points that are just unacceptable to us. What it's forced us to do is to take a much more segmented approach, and a much more targeted approach. We have adjusted our media mix. We've eliminated some particular advertising vehicles in certain marketplaces, and really have shifted some of that spending to Internet-based lead sourcing.

So I would say that the media spend for us is now less than what it had been. It's different in different markets. Mixed, that is to say, the media is different in different markets. And across the board, there is a higher spend on Internet-sourced, and a lower spend on media.

Thank you. And then in terms of the trend in the non-IT lately?

For advertising results?

No. More enrollment success in terms of pulling students in.

Oh, well, the healthcare and the business have been up significantly. If you recall from my early statements, we had had 43% in the previous time period, and up 29% in business in the last time period. So, compare that to down 25% and down 26% in the technology.

It's a dramatic shift for a company that is known for being a high quality technology provider of degree programs. But, it's all right. That's the way it is. We're shifting as well. And we don't want to shift so far that when it does change, that we're unable to supply that need. I don't think we are though, because we've made some interesting applications of technology that flow from our online delivery of product. And I think we're expecting to see some better efficiency in the use of our campus labs and other facilities as we apply some of those lessons.

Thank you.

Matt Litfin.

I'll follow-up off line.

Okay. Did you get cut off Matt? Or did you cut yourself off?

I got cut off. But I'm not worried about it.

Okay.

Thanks.

[Ken Robertson] with [Durama].

I just wanted to ask, I didn't fully get a sense of how these, how you're addressing the cost issues. So I wondered if you could give a little bit more detail on the process that you're going through. And I guess not just costs. It's also just general execution. I mean last quarter we had the marketing problem, which I think was an execution issue. And just, it seems to me there are some process issues that need to be addressed. And I am wondering how you're approaching that.

Yeah, I wouldn't disagree with you. And if you remember, one of the closing remarks that Daniel had is that we're focusing on execution. And he is focusing on execution. The answer to your question in the general sense is we have a President and Chief Operating Officer who is picking up the pieces of operating the business. We have a new Chief Marketing Officer, who is responsible for that. We have a President of DeVry University, all three of whom are at the central focus of being responsive in the ways that we've tried to indicate.

Now I wish I could say, well, we know these three things were screwed up, and we're going to fix these three things, and that will be the answer to it. It's not exactly like that. There have been some execution issues. And there are execution issues. But it really is trying to be responsive in a time frame that makes sense to the change in the perspective of our student population, and without throwing the baby out with the bath water.

So the operations and the execution is central to all this. There's just no two ways about it. And the management team here accepts that challenge. They're going to work on doing the things that are necessary. And we'll go from there.

Okay, thanks.

Jeff Silber, Harris Nesbitt.

Thanks. I know it's late. Just in terms of you potentially aligning your costs with your revenues, are you considering at all potentially closing or consolidating some of your larger campuses?

It is the case that we will evaluate each market, and try to assure that the mix of campuses, centers, and online services reflects the robustness in the demand that exists in each marketplace. And we don't have any particular plans today to change anything dramatically in that way. But, as I said before, we're not foreclosing anything. And we are driven to assure that we have both the quality of education, and the quality of financial results that are appropriate.

Okay. And on a completely different topic, I guess there was a recent law change allowing companies that have profits overseas to repatriate those back into the United States at a lower tax rate. Are you at all considering that with some of your Ross profits?

No Jeff. Let me answer that question for you. When we acquired Ross, we structured the acquisition debt so that a significant portion of it remains offshore. And we'll utilize many years of future cash flow, so that we don't find ourselves in a position where we have cash amassing offshore, that could or should be repatriated.

We're also using cash generated at Ross, as you've heard, for investment in facilities and operation expansion. So that's not going to be -- the need or the build-up of un-repatriated earnings is not going to be a problem for us for many years to come.

Okay. Appreciate that. Thanks.

We are letting this run a little longer than we normally do. But that's all right. I think in this kind of circumstance, we want to make sure that we've responded to most of the salient questions. If they start getting redundant, we'll stop.

Gary Bisbee.

Just a quick one. I think that you said that the real benefit from some of the switches you put in place you're talking about might not come until next spring, when the next graduating class of high school students will consider going to the school. And I guess I just wondered, was that a way of saying that your expectations for the fall enrollment period are in line with what it was this summer? Or were you not trying to really say anything there?

I would advise anyone to be cautious, given the fact that we have not achieved the results that we expected. And we have tried to indicate that we're being cautious, by looking at the next three quarters and saying it's unlikely that we'll achieve the levels that we had last year. And that, of course, reflects importantly the shortfall in the summer. But it also reflects expectations about the fall.

Great. Thank you.

Gentlemen, we have no further questions at this time.

Well, we appreciate everyone taking all this time. And we know it's not a particularly happy call. And believe me, we're not happy. But we appreciate the quality of the questions. And we'll try to make sure that everyone's investment in DeVry ends up being a good one in the long-term. Goodbye.