Adtalem Global Education Inc (ATGE) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the DeVry Inc. 2006 fiscal year-end conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to our host for today's call, Ms. Joan Bates, Director of Investor Relations. Please proceed.

Thank you, operator. Joining me on the call today are Ronald Taylor, Chief Executive Officer; Daniel Hamburger, President and Chief Operating Officer; Richard Gunst, Chief Financial Officer; and Norman Levine, Senior Vice President. Our call will begin today with prepared remarks from management, followed by the Q&A session, with our goal being to complete the call in about 40 to 45 minutes.

Before we begin, please be advised that this call may include forward-looking statements, subject to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied by these forward-looking statements. Potential risks, uncertainties and other factors that could cause results to differ are described in the Company's most recent annual report on Form 10-K for the year ending June 30, 2005 filed with the SEC on September 13, 2005. In particular, this information is set forth in the section entitled Forward-looking Statements at the beginning of part one and in the subsections of item one business entitled Competition, Student Recruiting, Accreditation and Approvals, Tuition and Fees, Financial Aid and Financing Student Education, Career Services and Faculty.

As a reminder, our press release and preliminary financial statements are available in the Investor Relations section of our website, located at www.devryinc.com. For future reference, our new CFO, Rick Gunst, can be reached at 630-574-1973.

With that, I will turn the call over to Ron Taylor.

Thank you, Joan. Good afternoon to everyone, and thanks for participating in our fiscal 2006 fourth-quarter and full-year conference call. I would like to start today by welcoming Rick Gunst, our new CFO, to the DeVry senior management team. Rick is an experienced executive, having served as the Chief Financial Officer of the $5 billion Quaker Food & Beverages Division of PepsiCo following the merger. As part of our overall succession plan, which we have developed and executed over the last few years, we have appointed Rick to continue the strong financial leadership that Norm Levine established at DeVry. Rick will comment on our financial results later in the call.

Although Norm has stepped down from his roles as Chief Financial Officer and Treasurer, he will remain full-time with the Company as Senior Vice President, assisting in the transition of duties and undertaking certain operating and financial projects that I will assign to him. On behalf of all of us at DeVry, I would like to publicly thank Norm for his many contributions in establishing DeVry as the high-quality leader in career-oriented higher education. So thank you, Norm.

Thank you, Ron.

Today, I will provide commentary on some of our strategic initiatives, as well as an overview of the fourth quarter and 2006 fiscal year. Our President and Chief Operating Officer, Daniel Hamburger, will then give an update on operations at each of our divisions.

I want to start to by saying that I am pleased with our accomplishments in the fourth quarter and throughout the year. From an operational standpoint, we continue to build momentum in new student enrollments by executing on our growth plan. Because of the strong overall enrollment results at DeVry University and Ross University, and another strong quarter for Becker Professional Review, revenue growth accelerated in the fourth quarter.

Summer 2006 enrollment at DeVry University was the fifth consecutive period of undergraduate new student growth, resulting in another period of positive total student growth.

Several factors are helping to drive our enrollment results -- improved execution and marketing and recruiting, increasing demand for technology graduates and continued interest in programs offered through our DeVry University Center and online delivery systems. As we continue to execute our strategic growth plan, we expect to see continued positive enrollment results.

Fiscal 2006 was critical to our growth and renewal as an organization. We took important steps during the year to maintain our position as a high-quality education provider, to reverse the unacceptable financial results of the previous year and to build the foundation for long-term value creation.

During the year, the Board of Directors adopted this strategic plan, which will guide the Company through the next five years. Elements of that plan relevant to DeVry University include focusing on recapturing the full-time day student, establishing new programmatic and organizational initiatives in the online area, continuing our program diversification efforts and renewing our emphasis on Associate Degrees.

A necessary element in the strategic plan is providing the management resources necessary to reach our performance objectives. To that end, we have undertaken careful succession planning that resulted in the hiring of several talented individuals to lead DeVry through its next phase of growth.

In addition to Rick Gunst, who I've already mentioned, during the last 18 months that we have been executing this succession plan, we have appointed a new General Counsel, new CIO, new Controller, new Tax Director, a new President for DeVry University and a new Dean for the medical school. In short, we have made significant investments to enhance the critical component in our future success, DeVry's human capital.

Our long-term goal is to produce consistent financial returns and student success which create the pre-eminent career-oriented educational institution in the world. This may sound grandiose, but we already are the largest supplier of new resident physicians in the United States. We play a major role in the development of new CPAs and new CFAs, and we are a major producer of veterinarians, nurses and technically trained workers and managers. Because of the structure and quality of our programs, we are particularly effective in serving minority communities.

Today, I would like to end my remarks by saying that my confidence in our educational offerings and our ability to deliver outstanding value to our students, our employees and our shareholders has never been greater. While the marketplace is competitive, the opportunities for DeVry are outstanding, and we have assembled the human, financial and capital assets necessary to achieve our objectives. Through the continued execution of our strategic growth plan, we are building momentum for DeVry's future growth. We are not underestimating, however, the challenges in today's market for educational services, and we -- like you, I am sure -- are careful to avoid what the former Fed Chairman called "irrational exuberance."

With that, I will turn the call over to Rick, who will provide additional details on our fourth-quarter and full-year financial performance.

Thanks, Ron, and hello to everyone on the call. As you know, I joined DeVry as CFO about three weeks ago, and I'm quickly moving up the learning curve on the business. I'm fortunate enough to be transitioning into this role with the help of Norm Levine, who has ably led the finance and accounting functions at DeVry for many years. I will do my best to fill his shoes. Let me start by taking you through the financial highlights.

DeVry ended fiscal 2006 with the continuation of the improving trends seen throughout the past year. Revenues increased by almost 8% for the year and more than 10% in the fourth quarter. All three business segments contributed to these gains, as new enrollment increases helped fuel the growth across the board.

Aside from the tuition-based revenue growth, other educational revenue grew at an even faster pace for the quarter and the year. This was driven by higher sales of the Becker CPA Review courses on CD ROM and expanding sale of e-books. We also have higher interest revenue on investments and on undergraduate accounts receivable under our EDUCARD student financing program.

The revenue growth, combined with tight cost control, produced net income for the year of about $43 million, up almost 2.5 times from a year ago, and earnings per share of $0.61 versus $0.25 last year. Fourth-quarter income results were also up dramatically, with net income of $11.8 million or $0.17 per share, compared to less than $100,000 of net income last year on a restated basis.

Now, included in 2006 fourth-quarter financial statements is approximately $1.2 million of expense net of tax related to share-based payments. For the full year, this expense totals approximately $3.6 million net of tax. Accordingly, the corresponding [quad of] quarters of 2005 were restated to include this expense.

In the fourth quarter of 2005, we included approximately $6.4 million of share-based payment expense, which resulted in no earnings per share for the quarter. For the full year of fiscal 2005, share-based payment expense was approximately $10.8 million.

I would like to add that fiscal 2005 included approximately $10.3 million in pretax charges related to workforce reduction costs and the sale of a facility in the Denver area. On an after-tax basis, these charges totaled approximately $6.4 million.

On the cost side, costs of educational services increased by 2.5%. If we remove the effects of the higher stock option expense in fiscal 2005, spending only rose by 3.2%. This is well below the rate of revenue growth, and includes spending on an expanding number of DeVry University Centers, of growing online student base at DeVry University and additions to facilities, faculty and staff to support Ross University enrollment gains. Also, students services and administrative expense increased by 4.5% for the year.

Removing the effects of the higher stock option expense in fiscal 2005, spending only rose 6.6%, still less than the rate of revenue growth, even as we expanded our marketing and recruiting efforts to track more students into all of our educational programs. As you can see, the benefits of that higher spending in our reported enrollment numbers increasing revenue base.

Our operating margins continued to benefit from this leverage of increasing enrollments, combined with the team's focus on cost management and the impact of the workforce reductions in fiscal 2005. As a result, gross margin, which is revenue minus cost of educational services, increased from 43.5% last year to 46.3% this year. Our pretax income margin also increased from 2.8% last year to 6.8% this year.

As mentioned earlier, all of our business segments are showing improved performance. Let me take a minute to walk you through some preliminary highlights for each segment. First, in the DeVry University segment, fourth-quarter revenues increased by $11.4 million, or up over 7%. For the full year, revenues increased by $31.6 million or about 5%, compared to last year, driven by improved undergraduate enrollment performance and continued growth of graduate enrollments. Operating income in the segment was $20.1 million, with a 3% operating margin, which represents a significant improvement from last year's $600,000 loss.

Our Professional and Training segment, Becker Professional Review once again posted record revenues, on the strength of its well-recognized Becker CPA and solid CFA review courses. Fourth-quarter revenues were up $4 million or 32%, while revenues for the year were up approximately $9.6 million or 22%. Operating income increased $4.5 million for the year, with an operating margin of 34.2%, a significant increase from 31.4% last year.

In our Medical and Healthcare segment, fourth-quarter revenues were up $4.6 million or 18%, while full-year revenues were up $20.8 million from prior year, or 23%, driven by strong recruiting results at Ross University. Operating income in this segment was a strong contributor to the Company's overall performance as well, up approximately $7.3 million for the year. Operating margins in this segment were 35.5% this year, essentially flat with last year.

Although we reduced our debt to $125 million as of the end of June, our full-year interest expense was up $1.1 million to the year. This is due to persistent federal reserve rate increase actions that caused interest rates to rise more quickly than our debt declined. Given that all our debt is floating rate, we have an incentive in a rising rate environment to reduce debt as quickly as possible. In fact, we just recently prepaid $40 million of senior note debt at the end of July without penalty.

Our effective tax rate was 25.1% for the year, down from 26.7% last year. This lower rate is affected by the relative proportions of US-sourced income to income generated by our Ross operations, and also by the level of stock option expense. Looking ahead, as domestic income grows, the effective tax rate should move back up.

Finally, while our balance sheet showed less cash than last year, we did reduce debt by $100 million over the year, with another $40 million reduction made this July. Meanwhile, our accounts receivable are higher than last year, due to the revenue growth across our business segments. The largest receivable increase occurred at Becker, due to their strong fourth-quarter revenue gain and the impact of additional public accounting firms with direct billing arrangements, which have inherently longer billing cycles.

Capital spending was lower than the past years. At $25.3 million, it was less than our depreciation expense for the year. Looking ahead to fiscal 2007, the pace of capital spending should pick up, and could be back in the $45 million range, which is more in line with prior years and is needed to support future growth.

Cash flow from operations increased slightly from last year, even as the non-cash charge components of our earnings declined. Coupled with the lower rate of capital spending, we had another good year of free cash flow generation.

That concludes my review of the year in which DeVry delivered solid performance improvements and established a strong foundation for future growth. Now, let me turn it over to Daniel, who will give you an update of our operations.

Thanks, Rick. Operational improvements at each of our divisions led to improved enrollment and financial results this quicker. So let me begin with DeVry University, where total undergraduate students increased 2.5% to 37,132 in the summer. Total students were driven by a new student increase of 12.2%. Although new students enrolling at the campuses improved slightly from last summer, we still experienced a decline in total students at the campuses.

Keller graduate school of management course takers increased 8.5% to 13,148 in the May 2006 session from 12,113 in 2005. In the July 2006 session, Keller course takers increased 10.3% to 12,617, compared to 11,434 in the prior year.

Now, as we reported last quarter, demand for DeVry University graduates continues to improve, and is supported by excellent graduate employment statistics. For the most recently reported period, 88.2% of all graduates in the active job market were employed in fields related to their education within six months of graduation. This at an average starting salary of more than $39,000 a year.

DeVry University's results reflect actions we have been talking about throughout this fiscal year -- continued process improvements, such as better management of lead flow, improved integration and execution within marketing and recruiting and a rollout of new programs. During the year, we developed several new programs, such as game and simulation programming, and new concentrations such as finance within our Bachelors of Science and Business Administration program.

In addition, we began to re-establish a strong presence in the large and growing Associate Degree market. As recently as 2002, we had just one Associate Degree program, and we now have four at DeVry University, with curricula such as Accounting and Health Information Technology. We expect to add additional Associate programs in high-demand areas.

Part of our strategy to improve operating results is the optimization of our real estate assets. While we're focused on the larger projects, such as the sale of the West Hills campus, we are also leaving no stone unturned. Currently, several smaller parcels of land are being marketed for sale, and we are in the process of renegotiating the leases on a couple of smaller auxilliary facilities. We expect to complete these activities and the sale of the West Hills campus within the next several months. DeVry University now has 81 locations, including the new Denver South DeVry University Center or DVUC, which opened in May, and the new Dayton Center, set to open in September.

As Ron mentioned earlier, our plans for future growth require that we continue to build our management team. David Pauldine was promoted to President of DeVry University during the fourth quarter, succeeding John Skubiak. Dave rejoined the Company in October 2005, and has been responsible for enhancing the University's marketing and recruitment functions. With 27 years of experience in the education industry, nine of which were previously with DeVry, his unique combination of marketing and operations experience make him particularly well-suited to lead DeVry University to the next level of growth. John Skubiak has transitioned to a part-time business development role, focused on primarily on the growth and development of Keller Graduate School of Management and the DeVry University Centers. On behalf of the entire DeVry organization, I think him for his strong leadership.

We have also added new management talent in other critical areas, appointing two new Metro Presidents for two of our largest markets, Chicago and Atlanta; a new Vice President of Enrollment Management for DeVry's online operations; a new Vice President of Central Services; and two new managers who will lead our high school program. Their goal is to regain the levels of high school leads, applications and starts that we had prior to the downturn in enrollments.

Let's turn to Ross University. We are pleased with the progress that we made at Ross throughout the year. New students were up 63.8% to 439 from 268 last May. But recall, this is compared to unsatisfactory new student recruiting performance last year. Total students are up 13.2% to 3,428, compared to 3,029 at this time last year.

On the management front at Ross, we appointed a new Dean of Ross University School of Medicine. Dr. Mary Coleman is a seasoned medical educator and administrator, with a wealth of clinical experience in family medicine. Dr. Coleman has extensive experience as an instructor and administrator, and her experience will benefit our students and faculty immensely. The appointment of Dr. Coleman makes Ross one of the few medical schools with a female Dean. She comes to Ross from the University of Louisville School of Medicine, where she served as an Associate Dean of Curriculum and as Senior Vice Chair of Clinical Affairs.

Process improvements continue across all of our operations, and at Ross we are implementing an online application capability, which will enable students not only to submit their application electronically but to complete the entire process online. These and other enhancements are helping us to speed up the admissions process for new students.

Continuing on in our Health segment, we successfully launched the new name of Chamberlain College of Nursing this quarter. The website is chamberlain.edu. The new identity marks the founding of a new era at an institution with a 117-year legacy of quality and professionalism. This rebranding also supports our strategy to make Chamberlain the leading national provider of nursing education. Our plan is to further develop the Chamberlain brand, expanding it into a national system and blending its tradition of quality with state-of-the-art programs and innovative delivery methods in nursing education.

Currently, the Columbus campus of DeVry University is undergoing modifications for a planned co-location of Chamberlain in fiscal 2007. We're working on other locations, and will announce those sites as we receive regulatory approval. In the July term, Chamberlain enrolled approximately 600 students.

Becker Professional Review had another record year, supported by the continuing strong demand for accounting graduates. During the quarter, we signed another preferred provider agreement for CPA review courses, which Becker now has preferred provider agreements with all four of the big four accounting firms. Although we are certainly pleased with Becker's performance, we're not resting on our laurels. We continue to look for new ways to help our students pass these difficult exams. For example, we recently rolled out a new product for the CPA exam called The Final Review. Offered both online and in a CD ROM format, this is a summary review that enables candidates to be better prepared for the exam.

So, in summary, we continue to see increased operational effectiveness driving improved results across all our segment and divisions.

Let me now turn the call back to Joan.

Thanks Daniel. It looks like we have about fifteen minutes for questions. So Eric, if you could give the instructions for the Q&A.

(OPERATOR INSTRUCTIONS). Matt Litfin, William Blair & Co.

Norm, thanks for the memories.

I'm not dead yet.

So you have had a wider-than-normal variety of new undergraduate growth rates over the past three intakes -- 12%, 16% and 6%. Can you give us any sense, as we move forward from here, what level we should be thinking about, given what you are seeing in lead flow for the coming fall intake?

Matt, we don't give guidance and we don't try to make public projections, but I think we're comfortable that if we can achieve high single-digit new student enrollments, that would greatly facilitate achieving our overall financial objectives.

One more question -- can you talk at all about trends in retention that you are seeing? Especially I'm asking about the DeVry undergrad portion of your business.

I will go ahead and just comment on that. As we've mentioned in previous calls, we don't really have any major trends to report in the area of retention, other than to say that it is absolutely a top focus and priority for us. I will just add that Dave Pauldine has brought a renewed focus and vigor in that area, and brings a lot of expertise to us. So that is a very, very important area. I'm glad you're focused on it, because we sure are.

Mark Marostica, Piper Jaffray.

Daniel, I thought you may have mentioned that you saw a decline in total enrollments at the campuses. I could be wrong, but did you mention that?

Yes, I did.

The question I have, then -- does that mean -- and I know you don't get a lot of full-time undergraduate starts in the summer semester, but I believe you get some. Does that mean that the full-time undergraduate starts that you did have this summer declined year over year?

What it means is that although we are continuing to make progress, it hasn't been enough to turn the total enrollments to positive in the campuses. It's kind of like where we were a while back, from an overall perspective, where we started to make an improvement in new. But there is a lag effect, and it takes time, because we are dealing with the weaker performance of the past for the improvement in new to turn around [in total].

So, just back to the question, is it fair to say that you saw a decline in new undergraduate starts, full-time undergraduate starts, this summer versus a year ago period or not?

No, what we can tell you is that we've had an increase -- not a huge increase, what I would call a slight increase in new at the campuses. But that is not enough to turn around the total yet.

Just to wrap up on this question, of the total mix of new starts this summer semester, how many would be in that kind of full-time category, or percentage-wise, roughly?

We don't have a breakout for you on that. I can tell you that we have a focus on -- it's absolutely a major focus on improving our performance in the high school, which equates to the full-time day student segment, student population you're talking about. To support that, we have a number of initiatives going on in the marketing area and recruiting area, in the area of our campus facilities, to make them more appealing and ever more relevant to the high school generation, which is made up of a generational group that is called The Millennials. We have put quite a lot focus on that. So we think we'll make continuous improvement there, but at this point we haven't turned around, haven't turned the corner on it yet.

One last question, and I will turn it over. With the sale of West Hills presumably coming, and the sale of the smaller locations you talked about, Ron, plus the renegotiation of the leases you talked about, where will you be at in terms of capacity utilization?

We haven't really made a significant impact, as Daniel just said, on the total full-time day school students. So on that side, we are still looking ahead toward the fall and to the results of our new campaign, with regard to this so-called Millennial Group. But you can figure that we have 23 large campuses, and one of those will be replaced by much more efficient DeVry University Centers out in West Hills or in the San Fernando Valley, really. That is just the starting point for a plan to similarly reduce the total number of facilities that we operate in that old large campus mode.

Best thing I can tell you is one step at a time, and we are doing the first step with West Hills. We have an emphasis on the other side of the coin in recruiting more full-time day students.

Sarah Gubins, Merrill Lynch.

Could you talk a little bit about new student enrollment growth, in terms of IT versus Business Healthcare? What did the growth rates look like in the different segments?

We did see good growth in technology students, new undergraduate technology students, which was over 20% in the summer. So we are pleased with that. We think that is a result of increased interest and increased demand, as well as the internal execution things that we are doing.

Then on the Business Healthcare side?

Those continue to grow as well. I don't have the figures at my fingertips on those.

We did indicate, though, that the healthcare, especially as related to Ross, is up significantly.

Oh, yes. Then, in terms of the review of your big box campuses, can you give us any sense of how many, at this point, you're thinking that you would close on an annual basis?

I want to, if I may, just a change a word or correct a word. But any perception that could come out of the premise of your question, when you use the word close -- we're not closing campuses; we're dealing with buildings. So Ron just talked about West Hills. We are not getting out of West Hills. We just moved about three miles down the road. So we're going to a smaller, small campus format, which is more efficient. It's more effective. It's very well-suited to our students' needs and to our people's needs. We're not closing anything. We're not exiting any markets. We're committed to every market that we serve. I just wanted to take this opportunity to make sure that is absolutely clear to everybody.

We can't give you a specific number, because right now, we have a team that Dave Pauldine and others are leading that is evaluating on a market-by-market, facility-by-facility basis what is the best way for us to achieve the full potential, our fair share and more of the students that we are targeting, both the high school segment and the working adult segment, within each geographic market. So what is the right mix of large campus, small campus, DeVry University Center and online, to make sure we achieve our full potential in each market.

So as we work through those analyses, analyzing the owned facilities, analyzing the leased facilities and so forth, we will make announcements as we go. But do know, please, that we are very focused on this. It's a major priority for us.

Price increases for undergrad and Keller -- did you have one this summer, and are there any others planned?

Yes, we did announce a tuition increase, effective July, a little less than 5% at the undergraduate level, and similar at the graduate level. There were also tuition increases continued in our other -- at Ross University and Chamberlain -- well, and at Becker, for that matter. So price continue to go up. At the same time, we're very focused on helping our students finance their education, and doing a better and better job of providing the assistance to our students to finance their education.

There aren't any other price increases planned at this point?

No, that is all we have announced.

Greg Cappelli, Credit Suisse.

This is actually Chris in for Greg today. On the new campus openings, I know you've said in the past that you expect six to eight per year. Is that still your thought on that front?

Not new campuses, Chris.

I'm sorry, DeVry University Centers.

Exactly, and that is still our plan.

The only other question I had was on the marketing front. Last quarter, you talked about making your marketing message a little more relevant, and really just wondering what progress you have made on that front, and if you have made any changes or are reevaluating any of your marketing at the present time?

Yes, we have a plan for our marketing message and the media we use, and the facilities we provide to students when they come into us that we think is much more relevant to the target audience that we are seeking to serve. We are very happy with the development of that, and now the implementation will proceed apace.

One follow-up -- has the percentage of your ad spend changed by channel?

Yes.

How so? Are you are using more TV, more Internet, etc.?

We're trying to be more efficient with all of our media, and I don't think we are going to publicly announce what we're doing exactly. But we look at that pretty closely, and that is an expertise that Paul Eppen brings to our management group.

Howard Block, Banc of America Securities.

Norm, I want to wish you improving health and prosperity in retirement.

Thank you.

I had a couple of questions. I just wanted to clarify a couple of statistics. So, the new students at campuses, that -- the growth, which sounds like it was modest in the quarter, that's what followed 11% growth in the last quarter? Is that the same statistic?

Yes, that is correct. That's right.

And the new students growth in technology overall of 20%, that is what was following the 37% growth in the last quarter?

Yes, that's right. I am just giving you a range around that. Just a quick reminder that March -- or, I'm sorry, that spring, I should say, the period that you are referring to, the sequential period, was off of -- spring is a little bit more of a variable, highly variable period. So keep that in mind.

That's helpful. Anything else within those statistics that might add some explanation for the decelerating growth, in terms of a mix of part-time/full-time or anything else that would (multiple speakers) decelerating growth.

Yes, the color on that would be that you might perceive that not so much as a decelerating trend, but just a little bit of choppiness within that particular phenomenon. Because again, you're comparing a spring to a summer. There's a lot of seasonality patterns going on. So, yes, you can draw a line between two data points, but I think sometimes you can be a little bit -- mislead yourself. So that would be the color.

Okay, that's very helpful. Then, on the spending, I just had a question which is you now have concluded two years, full years, of very modest growth in spending. I know you don't give guidance, but before we get carried away with that, obviously there were a lot of opening comments even speaking to that. I was wondering if there might be at least some general guidance, in terms of making the gross spending more consistently with revenue growth or in excess of revenue. Or just some direction, I guess?

No guidance, of course, but I think we have done a pretty good job of being good, disciplined managers. We're going to continue to keep our focus on that. But it's fair to say that within that timeframe, there were some events that won't reoccur, such as the reduction in force that we incurred, and items such as that. So those are behind us, and we are back to a more normal (multiple speakers). There is no such thing as normal in life, but that would be how I would characterize it.

Trey Cowan, Stanford Group.

Great way to end up the year, guys. Looking at the co-location there in Columbus, Ohio, I'm not familiar with that facility. Is that one of the larger campus footprints there in Columbus?

Yes, it is. It is the old Ohio Institute of Technology, and it has been around for a very long time, and a very good reputation there in Ohio in Columbus.

Can I assume that that is the strategy, is the co-locations would be at your larger campuses?

Yes. As we have talked about in other public forums, we have talked about in our real estate strategy, as we do that market-by-market, location-by-location analysis that I referred to earlier, in some cases we will conclude that the best option for a particular facility is to stay right there. In some others, it may be to move. West Hills is an example of that. In others, it may be that the best option is to reconfigure.

So it might be to sublet some of the space, if it's a leased facility or even an owned facility, or it might be to co-locate some operations. It could be a co-location with the Chamberlain College of Nursing, which Columbus is an example of. It could be a co-location with another type of educational activity. Or it could also be a co-location with some operating facility or operations that we run. We're looking at all of those things, to make sure that we're optimally using our real estate assets, as well as all of our other assets and resources, that we're optimizing those resources.

It sounds like over the longer horizon, the opportunity for co-locating Chamberlain is about 20-something campuses. Would that be a fair estimate?

Yes, that would be the upper limit, because that's about how many that we have.

Jerry Herman, Stifel Nicolaus.

Three quick questions, the first two on capacity. Could you guys give us a year-end capacity for the DVUCs, roughly? How much space is committed in that methodology?

We really wouldn't do that Jerry. We have given you some indications on large campuses, because we think that is a good indicator on one element of what our future strategy is. But I wouldn't want to talk about the DVUCs in that way.

At Ross, you guys are getting close to pushing record numbers there. I know you made some additions to capacity there. Can you talk about utilization in that complex, and any near-term needs to expand?

As you say, in both cases, this is a moving target. We have developed, planned ahead, invested ahead of revenue to have the human and physical resources available, and of course we have the financial resources and the overall corporate entities. So, we have built housing for students so that we think we can impact things like our retention there. We have added teaching capacity. We have added lab space. So in a way, it may be relevant, but we're building capacity to serve the number of students that we think we can recruit.

One last quick question on your high school recruiting efforts. You guys have made a lot of changes there. Can you give us a progress report? I guess, this quarter would indicate you made some headway, but at least on the full-time side, maybe not as much traction as you would like. I don't know -- some color on those endeavors at this point?

You're right. We have not made as much progress as we would like. There's a lot more opportunity ahead of us. Some of the things that we're focused on are, as we have talked about before, ensuring that we have the right division of roles, or role separation, and folks who are focused on building relationships and making presentations in the high school, and thereby making the educational advisors more productive. A big focus on recruiting productivity and the marketing activities that Ron described earlier. Some changes in the facilities, and continued focus on making sure that our educational delivery in the programs themselves are absolutely competitive. So, if we keep -- and we will -- plugging away at those strategies, we are expecting to see continuous improvement.

Gary Bisbee, Lehman Brothers.

If I tried to normalize for the much bigger stock option expense in the year-ago period, I guess just looking at an operating margin before that cost, and adjusting for the charges you had last year, adjusting those out, it appears to me that the operating margin was actually down 80 basis points year over year. I guess, first, do your numbers dovetail with that? Secondly, any explanation as to why?

The operating margins down from 2005 versus --?

From the June 2005 quarter to June 2006. That is if you think about operating margin before the option expense, given the big disparity.

Are you looking just at the quarter?

Yes, just the quarter. For the year, it was Obviously up quite a bit.

Well, last year's quarter had some unusual components in it.

Yes, the income before income taxes in 2006 was $15.4 million, compared to about $0.5 million last year, including the option expense. The option expense in 2005 was $6.4 million; that is after tax. So there's about $10 million before tax and about $1.2 million after tax, which is about $2 million before tax.

I was also taking out the $5 million of onetime charges for the workforce reduction last year. It seems like if you tried to apples-to-apples that, I realize that's not how you think about the numbers. But what were the onetime -- or not the onetime, but what were the issues that might have made last year more profitable, that quarter?

What I might suggest is that given that this is sort of a more detailed item, and some of the other people on the call may not get their question answered, is to suggest if you would to call Rick and Norm and to discuss this offline.

No problem. Let me ask a bigger-picture question, then, in lieu of that one. If we were to assume that the full-time undergrad graduate student takes some more time before you make real progress with that, do you think moving forward over the next year or so, that you will be able to generate solid -- are you confident you can generate solid operating margin expansion, even if you can't fill the big boxes with full-time undergraduate students?

I would remind you of what was said earlier on the call, that we feel that if we can continue to make the kind of new student gains that Ron talked about earlier, that yes we absolutely feel we can achieve our financial objectives.

You know, you have never really laid those out for us. Any willingness to give us a sense what the financial objectives are, what the mid to long-term plan here is?

One of the things that we have consistently done throughout our history as a public company is not provided guidance. Some people don't like that, but I think the industry -- not the industry. Public companies are coming around to realizing that you guys are experts in developing your projections, and for us to give guidance on that is probably not appropriate. So, no, that is not something we want to comment on.

Okay, then just one cleanup one. Given all the recent hires, would it make sense for us to expect that option expense will in fact be a decent amount higher in fiscal 2007, or should we work off of a similar number as this year?

I would say we're not going crazy with anything. Some of the people who are transitioning their roles won't be participants in the same level in the future option pool, or actually the long-term incentive pool, however that is arranged, and so I would suggest -- or I'm not going to suggest anything. But it seems to me if I was doing things, I wouldn't make a major change from where we are.

Operator, we are going to have time for just one more question.

Jeff Silber, BMO Capital Markets.

You had mentioned the workforce reductions last year. Now that this year is over, fiscal year 2006, roughly what do you think you saved from those reductions?

Of course, you won't see that in 2007. I think we said previously that they where --

I think it was about what we projected, and I think it was around $10 million.

I just wanted in to see if you came in where you projected or if it was better than worse?

It was pretty close.

In terms of just the breakdown of the stock-based comp expense in the quarter that just ended, the fourth quarter, is it roughly along the lines, in terms of the two expense line items, like it had been tracking over the course of the year?

Yes, it's pretty much evenly split between the lines as it has been tracking, yes.

Finally, if I looked at your DeVry undergraduate total enrollment right now, typically at the end of the year, you have given us kind of a rough breakdown by vertical. Can you do that as well? Is technology still the sizable majority of that population?

I'm not sure that we have had a tradition of breaking that out, but I could tell you that they're roughly equal size. Technology and non-technology, they can go back and forth a few percentage points. But it is interesting to note that whereas as recently as 5, 8, 10 years ago, we were primarily a technology and engineering-oriented university. Now, we're much more diversified across technology, business, accounting and increasingly healthcare-related education. So it is more diversified.

Thanks everyone for joining us today. Our next call is scheduled for October 24th, when we will announce first-quarter fiscal-year 2007 results and September 2006 enrollment at Ross University and Keller Graduate School of Management. Thanks again for being with us today. Have a great evening.

This concludes our presentation. Thank you for your participation. You may now disconnect. Have a good day.