Adtalem Global Education Inc (ATGE) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the DeVry second quarter fiscal year 2005 conference call. At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs operator assistance at any time during the conference, please press the star followed by the zero.

As a reminder, this conference is being recorded today, Thursday, January 27, 2005.

I would now like to turn the conference over to Joan Bates, Director of Investor Relations. Please go ahead, ma'am.

Thank you. With me on the call today are Ron Taylor, Chief Executive Officer; Daniel Hamburger, President and Chief Operating Officer; and Norm Levine, Senior Vice-President and Chief Financial Officer.

Before we begin, please be advised that this call may include forward-looking statements, pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Potential risks and uncertainties are detailed in the Company's latest filings with the SEC. I'd also like to remind you that telephone and webcast replays of the call are available until February 11th. You can access the replay by dialing 800-405-2236, using conference ID 11020825, or through our website at DeVry.com. And with that, I'll turn the call over to Ron Taylor.

Thanks, Joan. Good afternoon to everyone and thanks for participating in our second quarter fiscal 2005 conference call. As we reported in detail during our last conference call in December, we've developed a comprehensive plan to address the business issues which have negatively impacted our financial performance during the first half of fiscal 2005. As Daniel will report to you in a couple of minutes, we are now well into implementing that plan and I believe the improved results will begin to be visible in the second half of fiscal 2005 and continue into the next year.

The plan we are implementing includes steps to deal with our enrollment and revenue shortfalls and to manage our expense structure to do three things; match the level of our current revenues; match the source and type of future enrollments that we expect; and to match our anticipated future revenue growth rates.

So let's review where we are in terms of second quarter financial results. Reported financial results for the second quarter are improved from the first quarter, but continue at unsatisfactory levels. These second quarter results reflect previously announced Fall term enrollments, where new undergraduate student enrollment at DeVry University decreased 5.8 percent from the previous year, and total student enrollment was down 8.3 percent.

DeVry Incorporated revenues for the second quarter were 194.5 million, compared with 198.8 million one year ago. These revenues were affected by a couple of changes that Norm will describe to you in a couple of minutes.

Net income for the quarter was 5.9 million, or 8 cents per diluted share, compared to 15.6 million, or 22 cents in the second quarter of fiscal 2004. For the first six-months of fiscal 2005, revenues were 382.9 million, compared with 388 million one year ago. Net income for the first six-months was 10.2 million, or 14 cents per diluted share, compared to 26.1 million, or 37 cents per share in the first half of fiscal 2004.

Improving operational effectiveness is a critical piece of our turnaround plan and we have made some significant additions and changes to the managers responsible for divisional operations and system-wide central service functions. We have previously announced the addition of Dr. Thomas Shepherd, as Ross University President and Steve Riehs, as Vice President and General Manager of Online Operations. Additionally, we have appointed Jim Richie (ph) as Interim Chief Information Officer, replacing Bruno LaCaria, who has retired.

Most recently, John Holbrook rejoined DeVry University as Vice President of New Student Recruitment. John is responsible for field and campus recruiting performance, with a special focus on improving fulltime day enrollments. John was previously with DeVry for over 20 years and served as National Director of DeVry Field Recruitment for over 10 years. He joins us from his most recent position as Director of Field Recruitment and Training at ITT.

So, those people, taken together with our new Senior Vice President of Marketing, Paul Eppen, our Vice President of Compliance, Sharon Thomas Parrott, and a variety of other people in new roles, has given us the management team which is focused on achieving the outcomes that we all want.

In order to reduce the overall size of our workforce to meet current lower enrollment levels and evolving demands of our business, we've implemented a two-part reduction in workforce. We will explain the steps we have taken in this regard, but I would like to make an important point, or at least a point that's important to us as the management team at DeVry.

On the inside cover of our annual report is a statement of our values. Included there is a statement that "We believe in the dignity and worth of each individual and strive to treat everyone with fairness and respect." The personnel actions that we have recently taken have been deliberate, thoughtful and conducted with respect for the individual. They were not done in a quick manner or in a manner designed merely to achieve the fastest reduction of expenses without regard for the employees of our business.

Consistent with these values, in December 2004, we offered a voluntary separation package to employees with more than 20 years of service. The voluntary separation program was followed by an involuntary general reduction in the workforce. These reductions included both faculty and staff within DeVry University, Becker Professional Review and at our corporate office. And we did this in December, around the time that we had our previous conference call. But, as you would want and anyone would want, we allowed these individuals to consider the option available to them in terms of voluntary separation and gave them a month to make their choice. After they made those choices was when we implemented the involuntary portion of our workforce reduction program.

Our second quarter results include a $2.2 million pretax charge for severance and other costs associated with reducing our workforce. This charge includes severance pay and future benefits to the 39 employees, who at the end of the calendar year accepted the voluntary separation plan. In the third quarter, that is after December 31st, we will have further charges for workforce reductions related to 45 additional employees who accepted the voluntary separation plan subsequent to year-end, and for the approximately 75 employees affected by the involuntary plan.

So let me just review that; 39 employees prior to the end of the year; 45 employees after the first of the year, who accepted the voluntary plan; and then 75 employees who were affected by the involuntary plan.

Our estimate of the annual savings from these actions and our decision to leave an additional 100 open positions unfilled, is at least $10.5 million per year. However, the benefit of the lower wages will not be fully reflected until fiscal year 2006, because of the severance charges we will incur this year.

While it is necessary to identify areas where we can operate more efficiently, we are also continuing to add staff at our fastest growing operations, including online and at our DeVry University Centers. This gives us the right people in the right places and will allow us to achieve the objectives we have set.

So with that overview, I'd like to turn the call over to Norm, who will provide some additional details on our second quarter performance.

Thanks, Ron, and good afternoon to everyone in the call. Our press release and Ron's overview have given you a good summary of our financial results for the quarter, so I'll spend a few moments looking at several specific points.

First, on the income statement, approximately 70 percent of the 2.2 million pretax charge for workforce reductions was included in the cost of educational services category, with the remaining 30 percent in the selling and administrative expense category. And we expect to incur additional pretax charges in the third quarter for the 45 employees who accepted the voluntary separation plan during January, and for the approximately 75 employees who were affected by the involuntary separation plan.

As you can see, each of the remaining quarters will be affected differently. So the second quarter we have the $2.2 million of expense and none of the benefit from the lower wages resulting from these actions. And as I just mentioned, for the third quarter, we estimate an additional expense of approximately $2.6 for the remainder of the voluntary and the involuntary reductions. And as we progress in the third quarter we will begin to see some of the benefits from the lower wages, following these reductions. And by the end of the fourth quarter the pay-through wage reduction should be fully achieved.

For the total year we expect to recognize savings that won't be quite equal to the workforce reduction charges we provided in the second and will provide in the third quarters. And as we enter fiscal 2006, that's the point at which we should then realize the full benefit of our actions.

I know that many of you are interested in the performance of each of our reportable segments. Exact earnings numbers for the segments are still being compiled and reviewed, but I'd like to give you an idea of the direction of performance for these segments in this quarter.

DeVry University lagged last year's second quarter revenues by about $2.5 million, or 1.5 percent. And that's a lesser rate of decline than the 2.1 percent rate of decline in the first quarter. On the operating income level, remember that in the first quarter, DeVry University reported a small loss. But the second quarter, this operation is now back into the black, both for the quarter and first half, but at levels well below last year.

Ross University revenues increased about 1.8 million, or 8-plus percent from the second quarter of last year. This resulted in operating income being just a little higher than last year's second quarter and reverses the direction of the first quarter, when we had an earnings decline year over year.

And finally, for the Professional and Training segment, most of which is the Becker Professional Review, following a small increase in revenues for the first quarter, our second quarter revenues lagged last year by about $3.5 million, or 25 percent. Now remember that for Becker, this year's revenue now reflects the same periods as the rest of the Company, October through December. But the year ago period was for the months of August through October, which was the last robust period prior to the implementation of the new computerized exam format. With lower revenues in this quarter compared to what we reported last year, we had, as you would expect, lower earnings. But again, remember the robustness of the period to which it's being compared.

And looking to the third quarter, you'll recall that we reported a significant loss in this segment last year. And with no interruption in exam scheduling this year, we expect to remain profitable in this year's third quarter.

With pressure on revenues, expense control remains a focus for everyone at DeVry. And for the second quarter, if you exclude the cost associated with the workforce reduction, for which there were no offsetting wage reductions in the period, our total cost of educational services actually declined from the first quarter and increased by only about 2 percent from the same quarter a year ago. Even as we expand the number of DeVry University Centers that we operate and we increased the DeVry online operations in response to increasing enrollments.

Just below the cost of educational services line is the student services and administrative expense. Here, while we continue to spend in pursuit of new student enrollments for the upcoming Spring and Summer terms, if we exclude the workforce reduction costs for which we received no benefit in this quarter and if we adjust for the approximately $240,000 per quarter increase in the amortization of intangibles, mostly related to the Ross acquisition, then spending increased approximately 8 percent for both the second quarter and first half, compared to last year. This is a much lower rate of change than we reported last year, as the efficiency of our marketing spending has improved and we've been able to moderate the rate of increased spending.

Interest expense for the second quarter actually increased by about $100,000 from last year, despite the fact that we have $50 million less debt. The higher cost in the face of lower debt is the result of the increase in short-term interest rates under current federal reserve policy. And as you'll recall that all of our debt is floating rate and right now that rate is floating upwards.

Our composite tax rate for the year is now 23 percent. It's a little lower than the 24.8 percent rate we estimated in the first quarter. And it simply reflects the proportion of Ross University offshore earnings to the total earnings of the Company. And it also reflects the relative mix of our domestic earnings within the various states with their multitudes of various tax rates.

A couple of comments about the balance sheet. The lower inventory is the result of having completed the outsourcing of the remaining DeVry University campus bookstores to the Follett Higher Education Group. The completion to Follett also resulted in lower other educational revenue on the income statement, as we now receive only a commission on these sales, instead of reporting the sale itself.

To put the magnitude of this change into perspective, last quarter we said the transition of these remaining campuses to Follett would probably reduce revenues by approximately $10 million annually, with little or no effect on earnings. With more cash and less debt than a year ago, we had about $57.6 million net debt this December. And that compares to $133.9 million net debt just one year ago. Our financial position, which has always been strong, continues to improve.

While cash flow from operations is down from the first half of last year, the decrease is entirely attributable to the lower net income. We continue to manage our assets and liabilities to generate cash.

Capital spending for the first half increased by about $8.3 million from last year, almost all of which is attributable to the acquisition of an office building in Naperville, Illinois, which is a suburb several miles to the West of our offices. This will be used to house our online operations when the building renovations are completed. This represents some operational and cost efficiencies, with occupancy costs about $1 million lower than our higher cost corporate office space. In addition, this space will also accommodate the expansion in marketing and administrative staff needed to serve the growing online business.

Also, on the facilities front, we recently sold 2.2 acres of unused land that was a part of the DeVry Houston campus site. The land was purchased at the time we planned to build that campus, but it later turned out to be a somewhat larger site than was actually needed. And while the amount of the sale is relatively small, it does demonstrate that we are evaluating every asset and the purposes that they serve.

That completes my review of the financial statement, so I'll turn the call over to Daniel for an update on the progress of our turnaround plan.

Thank you, Norm. As a reminder for those who may not have heard our December call, our five-point turnaround plan is focused on the DeVry University division and consists of these components. One, fix undergraduate campus-based marketing and advertising. Two, regain and improve upon recruiting productivity. Three, make our programs and delivery options more competitive. Four, improve operational effectiveness, while reducing cost. And five, improve capacity utilization through new programs, both internally developed and through strategic acquisition.

First I'll address our efforts to fix campus-based marketing and advertising. We have made some significant improvements to our internal marketing structure and these changes continue with the hiring of two regional marketing directors. These new regional directors will drive our increased emphasis on local and targeted marketing efforts, working with personnel from the metro markets and our campuses. As we've discussed in the past, we are transitioning from a national focus to more emphasis on local and more targeted campaigns. With distinct geographies and demographics comprising our perspective student population to continue to evolve toward tailoring our messages by geography, by age and by ethnicity.

Our overarching differentiated message to perspective students is that DeVry University is focused on their needs, and that means smaller class sizes than other universities. It means professors who've worked in their field and a hands-on, career focused education. And this applies whether they are studying technology or business or our newer healthcare related programs.

On our last call I also described how we would consolidate all marketing, advertising, outreach and public relations activities under our Chief Marketing Officer, Paul Eppen, and this has been completed. Our message is being delivered through public relations activities as well as advertisement. In fact, if you look at last week's Time magazine, you'll see that the cover story mentions DeVry. The article describes how universities like DeVry do a better job of meeting students' needs for career preparation than many traditional universities.

In addition to structural and thematic changes we have made to our marketing, we continue to analyze our marketing spend to be more efficient and we are beginning to see some efficiency in cost per lead from television advertising, as we conduct the modeling and optimizing work that I described on the last call.

Improving recruiting productivity is point two of our plan. As a brief update, let me comment on just one element of this, which is having the right players in the right roles on the recruiting team. Given the growth opportunities for non-US markets and the fact that more young men and women are active in military service, we have made some additions to our team to focus on expanding our international and military recruiting presence. Recently we added two recruiting executives who have prior experience in international and military recruiting, from within our industry. And as Ron mentioned earlier, we're very pleased to welcome John Holbrook back to DeVry. In fact, I'm pleased at DeVry's ability to attract additional A-players and we're finding that talented people tend to be excited and energized by helping lead the turnaround.

But next I'd like to spend a few minutes on the actions we've taken to make our programs more competitive, point three of the five-point plan. We are conducting thorough reviews of each of our programs to improve their competitiveness. We are making changes to our associate degree program in electronics and computer technology, the ECT program, and those changes are proceeding well. Students now have the option to complete the ECT program more quickly, as it will be offered on a three-day per week schedule, which is very beneficial for students who work and attend school at the same time. The program is not only more competitive, we also believe we're improving educational outcomes. For example, in the new format, students are learning in an integrated lecture lab environment and have the use of laptop computers, which we believe further enhances their learning experience.

We are now working on the computer information systems, or CIS program, and we are targeting to rollout a new eight-semester program formally offered in only a nine-semester format. We are targeting the program rollout for Summer of 2005. In addition to the new format, students will have a number of specialization areas or tracks from which to choose and we think these improvements make the program more attractive and more competitive. We rolled out CIS online a little over a year ago and we're seeing good growth there. Having the capability for students to mix and match online and onsite courses adds to this program's flexibility and competitiveness.

The fourth point of the turnaround plan is improving operational effectiveness. Ron has already described how we have made some of the tough decisions you have to make in a turnaround, such as reducing staff. As important as these actions are to restoring our margins, I want to emphasize that operational effectiveness is about more than cost reduction. While we are cutting costs, we are also investing and improving our effectiveness, especially in the area of improving customer service.

We'll soon be launching a major initiative to improve service across all operations of DeVry University as well as Ross University and Becker Professional Review. This will include changes and investment in people, processes, measures and technology. Improved service will enhance retention and referrals. A good example of these initiatives is that we recently extended the operation of our Online Student Service Center by three hours a day, so student advisors and faculty are now even more accessible and available to meet the needs of our students.

Finally, the fifth area of the turnaround plan is improving capacity utilization through new programs. We're very excited about offering our Health Information Technology degree, the HIT degree, in an online format. Scheduled for March 2005, this is the first associates degree program we've offered online. In addition, we are targeting the rollout of the Network Systems Administration and Network Communications Management programs online as well as in DVUCs, by Fall of 2005. I'm pleased with the online team's performance in accelerating the pace of rolling out new programs online. Because one of our goals has been to better utilize our online DVUC delivery method. With these new online programs we expect to enroll more students who are attracted to our mix and match option, which improves capacity utilization at our campuses as well.

We are also planning to launch a completely new bachelor's degree, Game and Simulation Programming, which prepares graduates to work in the areas of video game programming and other areas such as digital animation, architecture and even military simulation. Industry data indicates that jobs in these fields are expected to grow by 13 percent annually. We are excited to be at the forefront of offering new technology programs with strong career potential.

So with that brief update on progress of the DeVry University turnaround plan, I'd like to turn now to Ross University. At Ross we have broken ground now on housing for students at the veterinary campus in St. Kitts. I recently had the opportunity to visit our operations there and also at the medical school campus in Dominica. I can tell you that our quality control measures are being implemented and are moving forward according to plan. As we indicated on the December conference call, we expect that our increased entrance requirements will affect enrollments in the near-term at Ross, because our top priority is to ensure that our program continues to produce high quality graduates. We see this as important to supporting longer-term growth initiatives and increase overall enrollments at Ross.

Let me turn now to Becker Professional Review. Like DeVry University, Becker is reallocating its organizational resources to ensure it has the right people in the right roles to carry out its objectives and growth goals. Prior to implementation of the new format and schedule for the CPA exam last April, the AICPA predicted a 25 percent decline in exam candidates for the first year under the new format. Currently the predictions indicate a 50 percent decline in exam candidates this year.

However, Becker's CPA Review is not experiencing, nor do we anticipate declines at those levels. Although we've been impacted by the slowdown in candidates sitting for the exam, with first half prep course revenue down about 15 percent year over year -- that's 15 percent year over year, we are not losing market share. In addition, as Norm mentioned earlier, with the exam and our courses running continuously throughout the year, we don't expect a repeat of the poor third quarter that we had in fiscal 2004. The hiring environment for CPAs continues to be very strong. Recent articles in the Wall Street Journal and USA Today, just to name a couple, and many other sources, confirm that.

Demand for our Stalla CFA Review courses continues to be strong as well. Continued low pass rates and younger candidates that need the structure and the detail of a full CFA Review, are still the main drivers impacting the Stalla business. For the Fall term, revenue in the Stalla CFA Review business was up 36 percent and enrollment increases of approximately 21 percent. Stalla was also recently chosen as the exclusive course provider partner by both the Toronto and Washington, D.C. Analyst Societies, after a thorough comparison of Stalla's Review system to others in the market. So although market conditions are still unsettled, we are off to a good start at Becker and expect to continue this momentum throughout fiscal 2005.

So with that, let me turn the call back over to Joan.

Great, Daniel. We're happy to answer your questions, so if the operator could come back on the line and give instructions, we'll get that portion of the call started. And we'd like to add, if you could just ask one question and then jump back into the queue, that way we have a chance to answer everyone's questions, we'd appreciate it.

(OPERATOR INSTRUCTIONS.) Mark Marostica, Piper Jaffray.

Good afternoon, everyone. You mentioned that you've seen some early indications of improved results with respect to some of the changes that you've made. And I'm wondering if you're sending a message that we should see an improvement in the year over year undergraduate student enrollment growth in the Spring, versus the Fall, as a result? Is that the case, in terms of --?

Well, the undergraduate -- especially the undergraduate new student from out of high school, don't really come much in the Spring. So it tends to be more of an older population. And rather than focusing on the Spring, what I would say is that we're seeing the early results of the indicators that would lead us to believe that in the Spring and perhaps in the Summer and the Fall -- we would anticipate in the Summer and Fall, that we would begin to see improvements in the undergraduate on-campus recruiting results. So it really was not as specific as you're asking, but we feel a little better about it.

Greg Cappelli, Credit Suisse First Boston.

Hi, Ron. It's Greg and Steve. Ron, where are you in moving some of your programs? You'd mentioned earlier to a three-day versus a five-day week? And then should we eventually start to see some natural margin improvement from that at some point going forward when that kicks in?

Yes, we're anticipating those developments and let me ask Daniel to just make a comment or two on that.

Greg, the main benefit of moving to the three-day from the five-day, or in addition to the five-day option, is that it better meets the needs of today's students. In the past, the need to work and go to school was something that clearly was understood for the working adult segment. Our experience as well as research is telling us that today's traditional student, the career-launcher as we call them, that segment, the traditional segment, also has a high need to be able to work and go to school at the same time. Many of the students, even if they're in the younger age category, are supporting a family or they're supporting a child and needs to work and go to school at the same time. So that's an example of what I talk about in point three of the five-point plan of making the programs more competitive, to be in tune with the needs of the customer, of the students today. So that's the main benefit that we see from the three-day.

Okay, I understand that. And then where do you stand in terms of how many programs that you've moved to that and how many can you? Eventually will everything go to a three-day week?

It's unclear whether everything would go to that. But at this point we are focused on the ECT program, that's the Electronics and Computer Technology, which of course is one of the long-term hallmarks of DeVry. And that's an area where we thought that it was very important to increase our competitiveness through that schedule change. And we're pleased with the progress so far.

Okay, so for right now it's one program that's gone to a three-day week?

That's right.

And just to clarify, Ron, did you guys say the charge in the third quarter was going to be 2.6 million? I want to make sure I --.

We estimate that it'll be 2.6 million, yes.

Trace Urdan, Robert W. Baird.

Hey, good afternoon. I wondered -- and maybe Daniel, you're the right person for this, but I was hoping you could sort of add some more color to the program areas that you're interested in developing going forward. I think the areas that you've mentioned so far in terms of serving the biotech market and now with the new Gaming and Simulation, they're very sexy, but it strikes me as maybe smaller in terms of the market opportunity, and I wonder if you could comment on that as what general directions we might expect you guys to move in going forward?

Sure, Trace, happy to. Our overall vision and strategy from curriculum standpoint -- and we've mentioned this before, but some people may not have caught this -- is in the area of, if you want to call them verticals, the verticals of technology, of business, of health and ultimately with education. So technology is here to stay and we do educate students in the area of technology. And we do it better than anybody else for the students that we choose to serve and target. And we're going to continue to do that. So Game and Simulation Programming, you may perceive as being small. We don't perceive that. We do think that there is a good, long-term growth opportunity there.

I think that also in the area of business, I mentioned recent articles in the Journal and other places talking about all the sudden accounting being sexy, which is kind of an interesting concept. We're seeing that. And that is something that we offer in our business programs and also at the graduate level and then of course through the Becker Professional Review and I think we've got a differentiated unique story to tell to perspective candidates. So that's an area of focus.

And then the third super-vertical of healthcare related programs is, of course, an area of strategic focus for us that underpinned the move to acquire Ross University and continues with the areas such as biomedical, health information technology. Now rolling that out online looks very very interesting to us. And so that's an area of further emphasis.

Okay. I mean, I appreciate that you've talked to this before and I know I've asked this question before, but do you all have any kind of market research or indications that say these areas that we're investing in ahead of maybe our peers or competitors, are really going to grow to a size that makes them compelling across our network?

Yes, I mean, about a year ago we put into place a person here on our staff who's responsible for analyzing and evaluating opportunities like that and conducting the kind of evaluations that you would expect. What we're really trying to do is to build upon the strengths, extend in the areas that we have resources and a position, and look closely at some of the others.

What we're not really doing is looking wildly outside of our particular areas of competence. So, people have asked me before about everything from criminal justice to beauty schools. Well, there may be very good businesses in each of these areas, and more power to the people that make them. But what we want to do is build upon the strengths that we have. We think there are opportunities in those areas and we want to extend those.

Mark Hughes, Suntrust.

Thank you very much. It seems like IT job creation is moving up, you're seeing some positive growth there. Are you seeing anything on the placement or salary size that gives you an indication that it's affecting your graduates?

I would say the market is lurching up. I'm not sure that it's really taking a smooth path. But we are seeing demand for our graduates. We have not seen any diminution in that, that's improved. The salaries that our graduates are getting are stable to up, depending on the location and the program that they're graduates of. And I would say overall we're quite happy with the exit metric that is represented by our placement efforts.

Right. And then the tax rate that you expect in the second half of the year, could you give me that?

Well, I think the tax rate will probably come up a little bit from the one that was just mentioned in the second quarter. And it wholly reflects -- well, wholly -- it essentially reflects the relationship that the Ross earnings bear to the total Company earnings. And so there's some fluctuations. But it's in the general area that we were talking.

Gary Bisbee, Lehman Brothers.

Thanks. I wondered, Ron, since you gave some good color on the different divisions, if you'd be willing to give -- I appreciate that DeVry University is somewhat harder to, but in terms of the Becker and the Ross, as we look to fiscal '05 and the second half, can you give us any sense as if you think profitability is likely to be flat, up or down, versus fiscal '04, for the whole year?

Yes, if you'll remember, Gary, one of the things we tried to give everybody a little heads up on is that there's a dynamic in the Ross activities that is actually fairly important. I think it will be short-term, but it none the less is important. And that is when we inherited -- when we acquired Ross, the admission standards and the activities were designed pretty much to achieve the objective of the owners at that time, which was to produce a sale at the highest price they could produce.

Our interest is long-term and we have made some adjustments in the entrance testing and the entrance standards for the students that we select for the program. And we do that with the fairly sure knowledge that the higher caliber of entering students will produce outstanding results on the various tests and will produce outstanding physicians that you and I would both want to have or family treated by. If that means that for the next six-months we have pressure on our earnings as we sort through that, not withstanding that we get criticized for that, we're willing to tolerate that, because we really do try to operate this business with the long-term in mind.

So, I would suggest to you that I would not look for any significant recovery in -- recovery, improvement or whatever you want to call it, in the earnings at the Ross level. And I say that even though we've got a great guy in there now who's the President and he's making some really strong -- taking some strong actions with regard to Ross. That's Tom Shepherd.

In Becker, we've got a little bit of a changed environment. And here again, there are some plusses and there are some minuses. The demand, as Daniel mentioned, for accountants. We've got our own entrant to the sexy accountant contest. That's Norm Levine. Any of you that have seen him probably would vote for him. But, it's -- I'm not sure how many other sexy accountants there are. But there is demand for the accountants relief act (ph), namely Sarbanes-Oxley. And yet for people preparing for the exam, when you can spread out the exam and take various parts one at a time, it takes the pressure off the people sitting for the exam to get that review program right now. But here again, with regard to Ross and Becker, I wouldn't count on any big dramatic changes one way or the other really.

Okay. And if I can just sneak one other one in. You talk about improving the effectiveness of your recruiting and you mentioned a bunch of things you're doing. I wondered, have you collected data historically and/or recently about when you're not converting a lead, where those students are going? Have you seen any change in people going to competitors or for pricing reasons just deciding not to go to school?

Well, yes, I've talked about this in the past. The biggest single place that people go is to community college, because it's cheap. That hasn't really changed a whole lot. People are still interested in that. The second place that people go tends to be either into employment and take some part time courses here and there, or to state colleges.

There was a group of people who visited one of our campuses not too long ago and there were a group of students who were asked exactly that question. And the answers were not the other for-profit schools in our space. The answers were local colleges and community colleges. And so, I think it just proves that we've got a segment of students that we serve. The options that they see are not necessarily some of the people who are providing what I might call the -- well, they're not particularly interested in the very -- the lower level associate degree, career oriented associate degrees.

Sarah Govens, Merrill Lynch.

Thank you, good afternoon. I hope I didn’t miss this, but could you talk about trends in marketing costs during the quarter, and particularly Internet costs if they were trending upwards again?

Yes, Sarah, this is Norm Levine. In the earlier prepared remarks we talked about the increase in selling in general, and administrative this year. And if you adjust it, this year’s second quarter and first half for the portion of the cost of the workforce reduction that’s included on that line, as well as the increase in the amortization expense related to the acquisition of Ross University, it’s also included in there, year-over-year on a comparably measured basis, the increase in SG&A is about 8 percent. And you’ll recall -- I mean, that’s true for both the second quarter and the first half -- and you’ll recall from our earlier remarks in previous calls as well, that line, that selling, general and administrative, although it includes both our marketing and administrative expenses, dominated by the marketing costs. So that’s -- that ought to give you an indication of the -- a much lower rate of increase as our marketing spending has become more efficient this year compared to last.

Okay, great, thank you. And then one other quick question. It looks like average revenue per student at the undergrad level continued to be impacted by the shift towards part-time students, and I just wanted to confirm that that was the case. And then also ask if you have a sense of how long it takes, as the percentage of part-time students increases, for us to see the actual tuition increases that you’re implementing reflected in that line item?

There has been a significant shift from full-time day school programs to part-time programs at the DeVry University Centers, and online. And rule of thumb, I think you can say that it stretches it out by about almost twice. In other words, it’s almost twice as long to complete the program at the part-time rate.

Okay, thank you.

Howard Block, Banc of America Securities.

Thank you, good afternoon everybody. How many of your undergrad campuses have mid-term starts?

All of them.

So when was the last mid-term start you had at an undergrad campus?

January.

And how is that start relative to the prior year?

We haven’t reported that, and our last enrollment report was in December, but I would put it into the category of things that I tried to characterize as being reflective of some of the efforts that we’ve made.

And across those larger campuses, those 20ish or whatever that number may be, is there extreme variability in terms of the operating performance?

Sure.

And is there any consideration given to perhaps selling some of those underperformers, and reinvesting those proceeds into the Devry University Centers in the same area?

Yes, there is.

So, actually that could happen some time in calendar ’05?

I would say that we’re not prepared to make any announcements today, and I’d be shocked if there was any announcement right away on anything like that.

Okay.

As Norm said, we evaluate all of our assets, we look at the pluses and minuses, and sometimes the pluses and minuses are not as obvious as people would say. There’s not a capital constraint for us in this business. And so when you talk about selling an asset to produce cash, unless you’re going to buy back stock, or give a dividend or something like that, you’re talking about a level of analysis that has pros and cons to it.

Okay, thanks. When you start a new program, for instance this software, this game simulation program, do you sort of set milestones for enrollment over a 1, 2, or 3-year period?

Sure.

So along the healthcare, health information programs, how have those programs performed relative to the milestones that were set a year or so ago?

You’re not going to like this answer, but some of them above what we said, and some below. We’re happy with the trends in all 3 of those programs. We’re happy enough with the health information program that we’ve now extended it, as is our practice, to online delivery. So somebody could conclude that that’s been the best performer, and I wouldn’t disagree with that.

Okay, thank you very much.

Yes, see ya.

Richard Close, Jefferies & Co.

Yes, hitting on the customer service area, maybe talk about the reduction in employees that has occurred, and will occur, does that in any way jeopardize the quality of the teachers, or the administration, or risk any type of quality assurance, or customer satisfaction issues, or anything like that?

I think you’ll find, and we have carefully analyzed this, that what we have done is to look at the fact that we have dispersed services that we interact with our customer in a distributed way, but where the back-office activities do not have to be dispersed. So, if you have financial aid, let’s say, at 23 campuses, the processing of the paperwork does not have to apply at 23 campuses. If you think about it a little further than that, we announced 16,000/plus online students. Well, they get their services online. With today’s communication and our technology resources, we can supply those kind of centralized processing services without having to have them onsite at the campus, or at a DeVry University Center. And in some ways, you get higher quality and better control by having those centralized, so that you can scrutinize them and develop the kind of processing metrics that are important in assuring that you get efficiency.

So, I think it’s important to ask the kind of question you ask. We ask that of ourselves. But I think the net result of what we’re doing in that regard is that we are going to have stronger controls, rather than weaker; that we’ll have better service, rather than less good service. And that in the end, the structure of activities that we’ve undertaken is not just slicing away something that we have to have, but reallocating resources to assure that the growth areas get the resources they need, but that the areas that have been struggling don’t have excess capacity.

Maybe with respect to the level of, or the shift from fulltime to part-time teachers, has there been much change there?

No. I think you’ll find, if you talk to anybody around the industry, that the training and evaluation, and control of the faculty resources control -- with a little “c” -- because faculty control themselves in an academic sense, but in terms of the activities in the classroom, that I think DeVry is without peer.

And just with respect to the customer service, that’s one of the five points in your turnaround plan, was there something that jumped out that you guys were not doing something there, or were the students dissatisfied that made this part of one of the bullet points here?

No, I saw an opportunity as I’m focused on improving customer service across Becker, Ross, DeVry University, and areas within them that looked -- what we were finding was that we were conducting similar analyses, and sort of reinventing the wheel multiple times. So what we’re doing is pulling together all of those operations, and forming a focused team to improve customer service, student service across all our operations, with a view toward improving retention, improving service, improving word of mouth referrals as a result of that. So it’s an opportunity that we’re capturing, rather than a serious problem that we’re remedying.

Okay, thank you.

Jerry Herman, Legg Mason.

Thanks, I should run out and cast my vote for you, Norm.

Thank you. Now I have one vote.

We’ll send all the women in the office out, too, if that’s what it takes. Just a couple of questions. Ron, circling back to this early indications comment, I heard you guys talk about marketing efficiency, and then you also alluded to sort of the January start. Are there any other things that fall into that early indications category, and I guess, are the ones that I mentioned accurate?

Those were responses to questions, and yes, I mean, there’s a whole host of metrics that we watch, and not everything is going the right way, and not everything is clear, but we have metrics with regard to leads, and we have changes with regard to how we’ve got the sales force organized, and we’re not doing back-flips, but maybe just a little bit of a hint of a smile on our face.

Okay, great. And you folks have talked about the cost reduction efforts, but by the same token, it seems like you’re adding some good quality, high quality mid- and upper-level management folks. Can you maybe give us an idea of what the net add is in organizational infrastructure costs?

Net reduction rather than a net add.

Yes, we’ve --

Well, okay. The offset ad then, if you would.

No, we can’t give that to you.

Okay.

I don’t have it here. We don’t have a good specific detailed answer for you.

Okay, great.

We’ll try to give you -- you’re asking what’s the investment in online, and what’s the investment in DeVry University Centers, and we’ll try to give you some indication of that on the next conference call, but that’s really not something we’re prepared to give you today.

Okay, great. I’ll circle back offline.

All right.

Bradley Safalow, JP Morgan.

Good afternoon. Just wanted to follow-up on the marketing strategy, and now Paul has been there almost nine months, and obviously you’ve been focused on adding expertise, and hiring some outside people. Just want to understand where you really stand in terms of implementing this strategy down to each campus level? I know what the plan is in terms of -- or I understand the plan in terms of targeted by demographic and region. Is that already in effect, or is this you’re kind of half way there, or where you really stand in terms of the --?

Paul has now got gathered under his wing all the marketing resources, including the non-advertising outreach activities, like PR, and that sort of thing. And we are in the midst, I would say, of implementing the modeling, and targeting programs that we’ve mentioned in December. But no. It’s a month later. We’re doing it. It’s actually some of the things we’ve done in the past, look pretty good, but we’re nowhere near complete on that kind of stuff.

And is that a situation where you think summer’s a more realistic goal to have fully implemented?

You know, Brad, think about it this way, for a kid in high school, he’s not -- he’s a target of your marketing/communication during the year, but he’s really not going to convert to an enrollment until the Summer Fall. In the areas that we’ve been trying to get some improvement have been in the fulltime day school recruiting area, which is very significantly related to high school graduates. So you don’t see that right away, and I just think that’s something that will evolve, as we move through the end of this Fiscal Year, and then into the beginning of the next.

I guess I was more focused on when the actual marketing and message will change, not when the impact will be seen. So it’s still --?

Well, that’s in-process.

Okay. All right, I’ll turn it over.

Corey Greendale, First Analyst.

Good afternoon. Here, I’ll lob one Norm’s way. Could you break out the fact of the change in advertising the internally developed software on margin, compared to a year ago quarter?

Yes, let me see. We clearly have a much lesser rate of capitalization in this quarter compared to the same quarter a year ago, and also a much higher rate of amortization. Let me just -- you know, I know what it is (indiscernible). Now I can tell you what it was in the second quarter of this year; I don’t recall, nor do I have handy what it was in the second quarter of last year. That you’ll find in our 10-K news. But for this year, our capitalization in the second quarter on the major project, which was our student information system, is just barely over $500,000. And we amortized in the quarter a million one (ph). So we’re into a net amortization position; whereas, last year, I think, at this time in the second quarter we were probably in a net capitalization situation.

On the charts for the layoff. If one wanted to come up with an after tax number, should they use the US tax rate --?

Yes, the US tax rate which would be applicable to that is probably in the 30 -- roughly 38 percent is the combination of the effective federal and state tax rate.

Okay.

This will give us approximately -- the 2.2 (ph) million is approximately 2 cents a share.

Okay, thanks very much.

Follow-up, Mike Marostica, Piper Jaffray.

Yes, I just wanted to follow up in the marketing front regarding your comments on the last call about using a multiple agency approach to your marketing and advertising efforts. And I’m wondering if you can give us an update on your ad agency approach?

Yes, Mark, thanks. That continues. We’re at the early stages of that, as Ron pointed out, it was about a month ago that we mentioned that, but we are looking at specialist agencies. Some who are more focused on television, some more focused on direct mail. Some more focused on Internet, just as an example. (technical difficulty) find that, and ethnic would be another example, ethnic marketing specialist. You just find that as much as many agencies want to tell you that they can do everything under one roof, maybe they can; maybe they can’t, but our experience and Paul’s experience has been that in general -- there’s always some exceptions -- specialists, and having a stable of agencies, is a little bit better way to go, because you can spread the risk.

Daniel, when do you anticipate finalizing your cadre, if you will, of ad agencies?

Well, that’s never over. That’s a continuous process, and I was just sitting in this room the other day with a new player, who we’re going to test. We’re always testing. It’s what direct marketers do. You test, you measure, and if it goes well, you step on the accelerator; if it doesn’t, you step on the brake. So that’s very much the world that Paul Eppen comes from is just a maniacal focus on testing, and rolling on from there. So that’s going to be ongoing process.

Would it be fair then to ask the question, when do you get to a position of “comfort” with you know with your set of ad agencies that you want to go to market with? I know it’s going to be a changing, ongoing process, but at some point I would think you’d get to a -- you’ve got a short list of people you’re going to work with, and bet the Company’s future on it.

You know, we’re not going to bet the Company’s future on anybody, but I think that what we will do is have agencies that do better, and agencies that do worse, and you continually appraise them just like you would any other supplier, and we’ll continue to do that.

Mark, you get the gold star for the day, unless you ask another question, because you went -- asked one question and went to the end of the line. But I think we’re over our hour now. And we appreciate everyone taking the time to participate in this call. As you can tell, I think, in the last six months or more, we’re trying to give you a better flavor of what we’re doing and why we’re doing it; a little more color on what’s going on. We’re confident in where we are going, we’re confident that we have some really talented people coming in to the important areas of responsibility, and we’re prepared to bet on that group of people. So, with that, thanks for everything. And we’ll talk to you in the next quarter.

Thank you.

If not before.

Ladies and gentlemen, this concludes the DeVry Second Quarter Fiscal 2005 Conference Call. If you’d like to listen to a replay of today’s conference, please dial (1-800) 405-2236, or (303) 590-3000, and enter the PIN code 11020825. Once again, if you’d like to listen to a replay of today’s conference, please dial (1-800) 405-2236, and enter the PIN code 11020825. We thank you for your participation.