Adtalem Global Education Inc (ATGE) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2007 DeVry earnings conference call. My name is Katina, and I will be your coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn this presentation over to your host for today, 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; and Rick Gunst, Chief Financial Officer. Our call will begin with prepared remarks from management followed by the Q&A session with our goal being to complete the call in about 45 minutes.

Before we begin, please be advised that statements made on this conference call may constitute forward-looking statements subject to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by phrases, such as DeVry Inc. or its management believes, expects, anticipates, foresees, forecasts, estimates, or other words or phrases of similar importance.

Actual results may differ materially from those projected or implied by these forward-looking statements. Potential risks and uncertainties and other factors that could cause results to differ are described more fully in Item 1A risk factors in the Company's most recent Annual Report on Form 10-K for the year ending June 30, 2006 and filed with the Securities and Exchange Commission on September 13, 2006.

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. Telephone and webcast replays of the call are available until November 7. The domestic replay number for the call is 888-286-8010 and the pass code is 76236652. A replay is also available via our webcast through the IR portion of our website.

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

Thank you. I think everyone knows but I will just reiterate that our Director of Investor Relations is Joan Bates, not Joanne Bates. And if any of you want to contact her, you have the contact information.

Thank you very much for participating in our first-quarter fiscal 2007 call. Today, I will provide some brief comments on the Company's first-quarter performance. Rick will provide detail on our financial results, and Daniel will give an update on Company operations.

During the first quarter, we produced solid increases in revenues and operating earnings, while continuing to make long-term investments in advertising, recruiting and information systems infrastructure to help drive enrollment growth and profitability in the future. In other words, we have delivered good short-term financial results, while keeping our eye on the long-term growth and profitability objectives of the Company. This is a theme that you will hear more about as Rick and Daniel provide you with additional details later in the call.

Our first-quarter results include a significant gain on the sale of the DeVry University campus located -- or formerly located in West Hills, California, which Rick will describe in more detail in just a few minutes.

As DeVry has evolved and broadened its portfolio of educational offerings over the last several years, many of you will have noticed a change in the pattern of our quarterly earnings results. There are two principal reasons and a variety of other reasons for this change. The first principal reason is modifications which we have made to DeVry University's academic calendar, in particular moving to six class intakes per year; second, enrollment growth at Ross University, which operates on a schedule different from DeVry University's schedule. Going forward, we believe that these items will affect DeVry's quarterly earnings pattern and that that earnings pattern will more closely resemble the pattern prior to fiscal 2005 with less variability from quarter-to-quarter.

As we announced last year at this time, we have again received an unqualified audit opinion for fiscal 2006 with no material weaknesses noted in internal controls over financial reporting. We believe this is indicative of the strength of our reporting, auditing and governance processes and is consistent with DeVry's culture and values, which are based on accountability and integrity.

Critical to our success is planning for the succession of senior management, thus creating a smooth and efficient transition of leadership. As you know, our Board and management team have been executing our succession plan during the last three or four years, placing many talented executives in positions of leadership, such as David Pauldine at DeVry University; Rick Gunst, our CFO; Daniel Hamburger; and many others.

As part of this succession plan, following this year's annual meeting on November 15, I will be transitioning from DeVry's Chief Executive Officer to the role of Senior Advisor. I will continue to serve on DeVry's Board of Directors and anticipate working to serve the interests of the business, our students, employees, and shareholders. At that time, Daniel will assume the position of CEO for DeVry Inc. Daniel and I will work closely with the other officers to ensure the continued progress and fulfillment of DeVry's long-term goals and objectives.

I am very confident that the evolution of DeVry will continue through the strong management team that we have built. As I said earlier, we believe that successful execution of our previously-announced growth strategy has set us on the course for the strong financial results we had in the first quarter and for continued improved financial results in fiscal 2007 and beyond.

With that, I will turn the call over to Rick who will provide additional details of our first-quarter financial performance.

Thanks, Ron, and hello, everyone. I'm going to take the next 10 minutes or so to walk you through our first-quarter financial results. I'm happy to report that DeVry started fiscal 2007 on a strong note. As first-quarter revenues were up 12% with all three business segments achieving enrollment gains and contributing to this growth.

Bottom-line profit results were up significantly, boosted by a strong operating performance and the onetime gain from the sale of our West Hills, California facility in September. Reported net income of $20.9 million in the first quarter was up $16.2 million over last year. Excluding the gain from the West Hills sale, which was $19.9 million pretax and $11.8 million after tax, net income was still up $4.3 million or 92% higher than last year.

For your reference, I should also note that first-quarter results include expenses related to share-based payments of approximately $1 million pretax or $800,000 net of tax. This is slightly lower than last year's first quarter of expense of $1.2 million pretax or $1 million net of tax.

Reported earnings per share was $0.29 for the quarter. Excluding the gain from the West Hills sale, earnings per share of $0.13 almost doubled the $0.07 reported last year in the first quarter. Our overall effective tax rate was 35.1% in the quarter, up from 27.5% in the first quarter last year. However, this overall rate is comprised of a 40.4% tax rate on the West Hills gain and a 26.7% effective tax rate for ongoing operations.

On the cost side, cost of educational services increased by 7.7% as we were able to drive operating leverage with our facilities and staff. As a result, gross margin, which is revenue minus the cost of educational services, increased from 43.2% last year to 45.5% this year. Student services and administrative expense increased by 13.1% in the first quarter and represents investments being made to support future growth and profitability in recruiting, marketing, and system enhancements. The increase in spending, which began to ramp up in the middle of fiscal 2006, is focused on increasing enrollments and enhancing the quality of our programs to fuel additional growth later in fiscal 2007 and beyond. Daniel will elaborate on our plans in just a few minutes.

Let's now walk through some preliminary highlights of each of our business segments. First, in the DeVry University segment, first-quarter revenues increased by $12.6 million or up about 8%. This growth is attributable to improving undergraduate and graduate-level enrollments. Despite this top-line growth, DeVry University reported an operating loss in the quarter of approximately $800,000 compared to a loss of $74,000 last year. The benefit of the revenue increase and the gross margin leverage was more than offset by investment spending behind recruiting and marketing to drive growth later in fiscal 2007 and beyond.

In our professional training segment, Becker Professional Review continued its positive momentum and posted exceptional results on the strength of its CPA and CFA review courses. First-quarter revenues were up $4 million versus last year or about 33%, while operating income of $7 million in the quarter increased $2.4 million or up 52%.

Our medical and healthcare segment also continued to post impressive results. First-quarter revenues were up $7.3 million versus last year or about 31%, driven by strong enrollment results at Ross University and Chamberlin School of Nursing. Operating income in this segment was a strong contributor to the Company's overall performance as well, up approximately $3.6 million or 48% for the quarter.

Now, let me shift from our P&L results and talk a bit about our debt, balance sheet and cash flow. Debt was reduced during the quarter to $85 million, down from $125 million at the end of fiscal 2006 and $175 million at the end of the first quarter last year. Interest expense as a result was approximately $500,000 lower than last year as the favorable impact of the lower debt level was partially offset by higher floating interest rates and the write-off of unamortized deferred financing costs related to our debt prepayment during the quarter.

I should also note that at the end of October in another week or so, we plan to prepay the remaining $75 million of senior note debt with a combination of our available cash and utilization of our revolver capacity, resulting in lower interest rates and more favorable terms going forward. I expect our revolving debt level will likely increase from $10 million today to around $50 million after this prepayment is concluded next week or overall reduction of debt about $35 million. We will also continue to evaluate our debt and capital structure with a goal of further reducing our financing costs, gaining operating flexibility and increasing shareholder value.

The rest of our balance sheet is in good shape as well. Our available cash balance was $169 million at the end of the first quarter. This is up $49 million from last year due to cash proceeds from the West Hills sale and our strong operating cash flow. Meanwhile, net accounts receivable were nearly $7 million lower than last year, despite the 12% increase in revenue benefiting from the heightened focus throughout the organization on receivables managements and collections over the past several months.

Capital spending was $7.8 million during the quarter versus $4.6 million spent last year. The pace of capital spending should pick up during the balance of year with the total capital spending for the year in the $45 million range, which is more in line with prior-year spending levels.

Now that concludes my review of the quarter where we delivered strong top and bottom-line results, while continuing to invest in the business. Now, let me turn the call back over to Daniel for an update on our operations.

Thanks, Rick. Let me begin by providing an update on some of the initiatives under way at DeVry University. While our working adults segment at both the undergraduate and graduate levels has been very strong, we also intend to recapture our fair share of the high school market. Now to that end, we've undertaken several initiatives which we believe will help us return to past levels of recruiting productivity with high school students.

First, we are rolling out a new campaign that we're calling "On Your Way Today." The competitive advantages of DeVry University are as relevant to our market as ever. And these include gaining a four-year degree in three years, small class sizes and hands-on learning, faculty with real-world experience and a great reputation with employers.

But what we've found with the Millennial or Echo Baby Boom Generation is that we need to communicate these advantages with a more contemporary look and feel -- more urban, more edgy if you will -- and with a completely-redesigned high school presentation. We plan to carry this theme through to the on-campus experience as well, and we will redesign the interior space of our campuses to better appeal to these high school students.

We're also making investments to take customer service to the next level, focusing on academic advising, student finance and other aspects of student services. While in the short-term, our investments will put some pressure on DeVry University margins, we believe we will get a positive return on these investments with better enrollments results and retention in the long-term. For example, the investments we're making in the high schools now won't show results until next year. And our increased efforts with high school juniors would obviously take longer to pay off.

Now, as you have heard, we completed the sale of our West Hills facility in September for $36 million. The relocation of the West Hills operation was a unique situation where we were able to realize a substantial gain from the sale of the asset.

I would like to take this opportunity to put the sale of the West Hills facility into the larger context of our real estate and asset optimization plan. As most of you know, we have underutilized capacity in many of our DeVry University large campuses. At the same time, we have not fully penetrated the geographic market opportunities out there. Thus, we are reconfiguring our real estate assets, meaning fewer large campuses, more DeVry University Centers and also more of something in the middle -- small campuses.

We are conducting this real estate reconfiguration on a market-by-market, location-by-location basis. As the optimization efforts continue, our actions could result in both gains and accounting charges, depending upon real estate market conditions, whether the facility is leased or owned, and other factors specific to each facility. If there are accounting charges, they would be associated with the reduced cost position in subsequent periods with the goal being to enhance economic value for the long-term. As our evaluation progresses and plans become more definite, we will provide more details.

And along the way, no opportunity is too small. We're looking at every opportunity to enhance asset utilization. We have recently moved a headquarters function to a nearby campus, saving over $300,000 annually in rent. We sold rights to excess parking spaces at another campus, yielding an upfront cash payment at about $100,000 a year in P&L savings. These are just a couple of examples to illustrate the point we will optimize our asset utilization.

However, I would like to reemphasize another critical point on this topic. That is that we may move from some of our large facilities, but we will not exit these markets. We're committed to every market we're serving.

Moving on to the Keller Graduate School of Management. Course taker enrollments for the September term increased 10.5% compared to the prior year, reaching an all-time record with 14,069 course takers. We are pleased with these results and believe we are doing good work with the Keller brand, making sure that we preserve and enhance its distinct identity.

Keller will begin offering a new Master of Science in Educational Technology in the March term. This degree will prepare teachers and other educational professionals to use technology in the classroom to support learning. We plan to deliver this program initially online, providing students flexibility and giving us the ability to reach students anywhere.

Turning now to Ross University. The number of new medical and veterinary students in September 2006 term was practically the same as the September 2005 term -- 576 versus 575. But keep in mind that this is a tough comparison because of the 40.6% growth we saw in last year's September term. The total number of students enrolled in the September 2006 term was 15% higher than last year.

We continue our enhanced marketing and branding efforts at Ross with an emphasis on the January and May terms. One of Ross's advantages compared to other schools is its three starting points throughout the year. And we intend to do a better job of marketing this to prospective students. We also continue to expand our human resources and physical facilities at Ross, including faculty, classrooms, labs and housing to respond to increasing student demand.

During this first quarter, Ross University signed new articulation and/or dual degree agreements with three institutions -- King's College in Pennsylvania, Massachusetts College of Pharmacy and Health Sciences, and Seattle's Seattle Pacific University. These enhanced relationships offer students early decision or early admission to Ross, provided they meet the criteria in these agreements.

At Chamberlain College of Nursing, we aligned the academic calendar with DeVry University's. This significant effort will have a number of benefits in the future. It increases the number of student intakes for Chamberlin from three to six per year. It also supports synergies between Chamberlain and DeVry University in that it enables DeVry University to better support Chamberlain's online operations and it allows students from both divisions to co-sit in general education courses.

Now, at Becker Professional Review, revenue was up 32.6% compared to the first quarter of fiscal 2006, marking another record quarter. And as a reminder, Becker's second quarter is typically weaker than the first quarter because of seasonality in the business, as very few classes are taught in December.

So, before I turn the call over to Joan, I would like to take this opportunity to acknowledge and to say thank you to Ron Taylor. For 34 years, Ron has provided leadership, entrepreneurship and a focus on quality and integrity that have formed the bedrock of this organization.

Through it all, he has not only been a tremendous business and educational leader, he has been a great friend to so many people here at DeVry and also to many of you on the call. So, on behalf of the DeVry family, thanks, Ron, for your contributions and we look forward to your continued support in your new role.

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

Thanks, Daniel. We're going to take your questions for about the next 15 minutes or so. So, Katina, if you could give the instructions, we would appreciate it.

(Operator Instructions). Sarah Gubins, Merrill Lynch.

The first question I had was just about the recruiting and marketing initiative. It sounds like you will start to cycle through that in the second half of the year. Could you give us a little bit more detail about what those initiatives are?

Sure, Sarah, it's Daniel here. And the initiatives center around first and foremost recapturing our fair share and then some in the high school market. We have been talking about that, and I elaborated a little bit earlier. It's critical that we continue the strong growth that we have been having in our adult markets, both at the undergraduate and at the graduate level, while we improve our results in the high school market.

So, there is a lot of investment in people and processes in technology, a whole new high school program presentation, laptops and projection technology for those high school presenters. Those are the kinds of investments that we're seeing.

And is it fair to say that you should cycle through that by the time we get to the second half of '07?

Well, I'm not sure when you say cycle through that --

I guess what I mean is I'm just looking at the impact that it had on student services and administration as a percentage of revenue. And it was up pretty significantly year-over-year in the quarter. So I guess I'm trying to get a sense of whether or not you would expect to get leverage on that line item by the time we get to the second half of the year.

Yes, we think that the -- many of the impacts that you will see will show up in the next fiscal year because of the cycle of high school recruiting. So, I think that's sort of the timing that I would look at. And as I mentioned, some things have different time frames. We are putting an increased emphasis on reaching juniors, not just seniors in the high school. And obviously, that takes a little bit longer to see your way through.

Then just a second question just to follow-up on that. Regarding the various initiatives that you're implementing for the high school program, you're in the midst of high school recruiting efforts right now and probably starting to wrap that up. Are the changes that you are making a reflection of this recruiting season not coming in where you might have expected it or is it more of an effort to try to enhance efforts for next year?

Yes, it's more of an effort to enhance efforts for next year, and it's also just a continuous process of improvement, which is we started to see as we brought John Holbrook back and Dave Pauldine back, these are the kinds of things that have been -- we've been putting into play.

But you don't turn that thing around in one day or one quarter or even one year. So, we are on an improvement path, and we just think that we will continue to see improvement as we go forward.

Jeff Silber, BMO Capital Markets.

Just a bit of a follow-up on Sarah's question. Can you give us any insight as to how the fall enrollment numbers are trending for DeVry University? I know you're not going to give us hard numbers. But is it sort of meeting your expectations so far?

Jeff, Jeff, Jeff.

I just wanted to try, Ron.

What I did want to add that maybe we'll give you a sense for this, we started talking 1.5 years ago about inflection point and having gone through the cycle the three-year length of our programs and starting on a downtick cycle in 2001, 2002 and cycling through that, I don't think that's what Sarah was talking about.

But we really feel that we're putting into place the kinds of things that will allow us to grow the business. And I think you are seeing if you look back that when we started talking about inflection points, that was probably an appropriate time. And we would anticipate that we would continue to see growth from the kinds of things that we're doing, marketing programs and recruiting programs that Daniel mentioned. So, we are optimists by nature. We look forward to continuing our progress in this fiscal year and beyond.

Let me ask one I hope you will answer. It's regarding balance sheet. I know you talked a little bit about the plans to pay off the senior note. In terms of cash flow going forward, what would be the plan for any excess cash? Would it be buying back stock? Would it be another acquisition? What are you looking at?

I will take that one. This is Rick. The plans immediately, as I said, were to buy down some more debt. We will still have $50 million of debt outstanding. So, I think that's obviously a priority that we will continue to look at to clean up our balance sheet even further going forward. And, we are fortunate we have a very strong cash flow outlook going forward. We will be investigating all different opportunities that you've mentioned there as we proceed forward.

You know, Jeff, the pattern has been in the past that we tend to operate conservatively in that regard. We do look around at strategic investment opportunities. And we make them when we think we can buy them at an appropriate price. Our practice has been to lever up to do those acquisitions or those strategic initiatives, pay that down over a period of time and then have the cash resources that we need to do the next one. I don't think we're going to vary that pattern very much.

Mark Marostica, Piper Jaffray.

My question relates to Ron's comment earlier in the call regarding a change going forward in the variability of earnings quarter-to-quarter. And just to make sure that I'm understanding your comments, Ron, if I look back to fiscal '04 and look at what seasonally is a weaker September obviously and then level earnings for Q2 through Q4 as a percentage of revenue, is that essentially what you are communicating as kind of the go-forward model?

Yes, this is Rick. I will take a shot at it and maybe Ron will add some more. But I think if you looked at the last couple of years, there were a lot of things going on within the business -- results that skewed the results quarter-to-quarter. And what Ron was alluding to earlier is that we anticipate that as we move forward 2007 quarter by quarter and beyond that we're going to see a more leveling between the quarters, especially as you look at the second and third quarter going forward. If you looked back in our history, 2003 and before into the 1990s, the quarterly flow was pretty even between the quarters.

Fair enough, fair enough. And then, relative to Daniel's remarks about the new campaign, I was wondering if you could quantify the incremental spend for us and then perhaps comment as to whether you think DeVry University will turn the corner on operating losses in fiscal '07 or is that a fiscal '08 event?

We are certainly spending a significant amount of money in marketing and recruiting efforts. And this new campaign, the On Your Way Today, that we talked about earlier is a big part of that. And in terms of putting the exact time frame on forward guidance, as you know, we just -- we don't do that. So I'm not going to be to answer that part of the question.

Mark, one thing you should understand and I think everyone does but we've been talking about it for some period of time, the operating leverage that we will significantly bring to the party will come as we add full-time day school students to our existing large campus delivery system. Those full-time day school students tend not to come to school in the same numbers in the spring as they do in the fall.

And so, what I would expect or what I would say to you is the focus of what we're doing, we obviously want to have a good fall class this year. But the things Daniel is talking about are most likely to be visible in the summer and then fall of next year.

This is Rick. I would just like to add one point. The operating loss we reported in the quarter was for the quarter. Last year, DeVry University segment did report an operating profit for the year of roughly $20 million. So, the first quarter was generally low for DeVry University and it was low again this year. But we anticipate for the year we will have a sizable profit.

Greg Cappelli, Credit Suisse.

Dan just said congratulations on your 34 career, but I heard you at our conference this year telling everybody you just turned 35. So what gives there?

We need an internal auditor to check out anything I say.

We'll look into that. I just wanted to ask on Ross again, what is your -- I understand about the big comp. But what is your -- if you look at the next two, three years, what should Ross grow at or what do you hope to grow it at?

Well, there is demand in the marketplace and we are building our capacity to serve more people. Frankly, the place that we can appeal to students that otherwise wouldn't have opportunities we think is in our winter and spring classes.

So, the measures that we gave you for the fall, that's what we are giving you because that is the latest information. But the lever points for us I think are in the winter and spring classes. So, we are building significant new capacity 20, 25% more capacity. And I think there is sufficient demand for us to be able to serve that kind of student population.

Just real quickly, Daniel, you mentioned the On Your Way campaign. You talked about incremental spending. Can you give us an idea of what kind of incremental spend will be involved in that?

Yes, the kinds of things that we're doing are pushing this through the media, which includes television spending for sure and also the Internet media. And so, there are branding if you will or awareness building efforts. And at the same time, there's a direct marketing regeneration focus to it as well.

Do you have a dollar figure? Do you expect to spend an extra $10, $15, $20 million? Is there any way you can quantify it?

No, we really for competitive reasons wouldn't break that out. But I can tell you that it's not just -- I was going to say it's those media spend that I referred to but it's also people. One of the things we're doing is separating some of the roles. We have created a specialized role of the high school presenter, who goes into the high school and builds those relationships and talks to the students, talks to the guidance counselors, talks to the teachers and principles. And we are arming them with a whole new presentation, and each one of them is running around now with a laptop and projection technologies. So, training them, hiring them, hiring them, training them and then equipping them with all of those tools represents a big piece of the spend too.

One final quick one. The interest, can you give us how big the interest and recruiting for tech students on your campuses? How is that trending this year versus even a year ago?

You mean employers recruiting our--?

I'm sorry. Yes, employers.

Yes, employers recruiting our students is going very well. And that's been on a nice increasing pattern. We have several campuses reporting in that basically they are -- they wish they had more -- every single graduates in some of these programs is being snapped up by employers. We're talking about big well-known national and global employers. So, we feel very good about the employment market for our graduates.

Ron, over your -- you've had a lot of history here and you've seen different cycles. Is it usually -- is there a time frame? Is it a year, 1.5 year that that translates into people looking out there saying I can see the jobs; now, I know what I have to do. I can get a job in this area. And so, that usually takes a certain amount of time to impact new enrollments.

There is a lag as you might imagine and especially for us where we are trying to assure that high school graduates really consider technology jobs and the kind of demand that really is strong. That takes a while because you have to have the people to influence high school students, whether it's counselors or parents or even their peers, begin to understand that there are opportunities and translate that. My experience just looking backwards, the 12 to 18 months is not an unusual time period.

Gary Bisbee, Lehman Brothers.

One of the things you've talked about for a couple of quarters now is that with the real estate -- the market-by-market and location-by-location analysis you are going through, I guess could you give us a sense as to how far into the process you are right now and then over what period you are likely to complete this review?

It is Daniel. I would say we're pretty early in that process with some of the smaller things that I've talked about having been done or being initiated, some of these parcels of land adjacent to our campuses, in some cases that aren't needed or transactions such as those. And then the West Hills being the first of the major transactions.

So, clearly, it's pretty early in executing the strategy. It's not as early as that in the planning of the strategy. But when you're talking about commercial real estate transactions as everybody on this call knows, those take time. The West Hills, we put up for sale about nine months -- probably about nine months before we announced that we had closed the transaction.

Why does it take so long? You go through and you put it up and then you have buyers. These commercial real estate guys are pretty savvy, and they know how to negotiate and drag it out. And then sometimes, you have to go to the second buyer. We got the deal done and we are happy with the transaction. But it does take time. So I think we're pretty early in the process.

So would it be reasonable to think that this is like sort of evolutionary rather than revolutionary? It might take like a five-year window or something to get completely through the hole? Or is this something you think you can get through much more quickly??

Yes, I think that kind of a time frame or maybe a little quicker than that. And the transactions could look different. They're not all going to be of the nature of the West Hills transaction where it is an asset sale with a big gain and all like that. I said that was relatively -- that was unique. There could be other transactions where there's even an accounting charge. And it depends on if you are talking about a facility that is owned or a facility that is under a long-term lease. You can imagine the different scenarios and financial transactions that would ensue. So that gives you a flavor for it I hope.

Then my follow-up would be you've talked over the last couple of calls about doing a few things to expand the curriculum. Like returning focus somewhat to associate's programs is one, and you have clearly talked about expanding the online curriculum you offer, the number of programs. Can you give us a sense with both of those actions, is that targeting a meaningfully-different type of student or demographic -- younger, older, anything different? Or are you just trying to within the same type of person expand the offering so that you've got a wider appeal?

Yes, it's a couple of things from a programmatic standpoint. One of them is a little bit of back to the future if you will with our increased emphasis in associate degrees. And we now have -- as recently as I think 2004, we had one associate degree. Now, we have five. I am including in that the associate degree at the Chamberlain College of Nursing, but I'm talking about from a DeVry Inc. perspective.

So, increasing that array of offerings at the associate degree level in a way kind of takes us back to a demographic and a group of students who we used to focus on much more. But we've moved if you will up the pyramid of education more toward bachelor's and master's and even doctoral level of degrees with the addition of Ross in the last few years. And we're just seeing that there's a great market at the two year or even shorter than that level; that's all part of our strategy. So that is capturing a very different sort of a new -- an incremental group of students over time than we would be capturing with the four-year programs and the graduate-level programs.

And then, quickly, I do want to take the opportunity to issue a correction here. Because in my prepared remarks, I said that Keller would begin offering a Master of Science in Educational Technology. We are actually offering that as DeVry. So that's actually a DeVry master's. I just wanted to make that correction.

Howard Block, Banc of America Securities.

Ron, you will be sorely missed. I was hopeful I would retire before you. I did want to ask you a question though before you leave. What is the sort of the basic box profile in terms of the student age, how it has changed maybe over the last couple of years and if you think there are some changes out there in just the average age of your students at the box?

Well, I assume you're talking about the big box.

Right, right, I'm sorry, the big ball.

The biggest thing I would point out there is that there is a large number of students who take classes at the large campuses and take classes online. So, there is much more diversity and what I would describe as sort of an in-and-out flow of students. They don't necessarily say, well, I'm only going to school in the Pomona campus. They go in the Pomona campus; they might take a course online. They might go to a DeVry University Center where they have a course at a particular time they like. So, it's a little harder to speak to a set category of students that are in the large campuses.

The other thing is, as you might imagine, as we've seen decreases in the total number of full-time day school recent high school graduate technology students, what that has meant is that the tomography of the student population in those campuses skews more to an older student.

So, whereas you might have had a pretty large population of 18, 19, 20-year-old students now, that is much smaller. And your average age is probably mid to upper 20s now but sort of in a bimodal distribution I would call it.

Rick, the spending growth in the quarter was more modest than I had expected which is certainly great. Congratulations on the quarter. But my question is typically, your first-quarter spending levels in terms of growth rate, it usually suggests a pretty predictable pattern in terms of a run rate for spending. Was there anything in the first quarter that should dissuade us from looking at that as a precursor for spending levels the rest of the year?

Well, one thing I did mention in my remarks was last year some of the spending levels began to ramp up a bit in the middle of last fiscal year. So, the first part of this year, we're overlapping a little bit lower spending levels. And so, one would expect that the year-to-year comparisons might somewhat be softened a little bit as we get later in the year. But, we will continue to be looking at ways to make the investments to trade off the short-term results with making sure we are building for the long-term.

But, again -- but in terms of the dollar levels, there was nothing in the spending per say. I know the comps obviously were -- you are right -- a little I guess you could say easier. But there was nothing in spending that was not sort of that wouldn't be sort of a recurring level and it suggests a run rate in spending for the rest of '07?

No, not really. Nothing that sticks out.

Then anything I guess, Daniel, just in terms of trends you could offer in terms of cost per lead, cost per start, cost per graduate?

Yes, hey Howard. I'm going to go three for three here, go around the horn and give everyone a chance to answer a question, which I think is great. Yes, Howard, I would say that we have not seen a real big change there in those metrics. So we're kind of ticking along and continuing to put our efforts to improve productivity in the marketing process and in the recruiting process. But, we don't have anything to report to you in terms of wild swing and cost per lead or cost for this or cost for that.

If I can just try to get an answer from you and then I will be done. Just in terms of pricing, any changes in your strategy with regards to pricing? And obviously, you have quite a varied product mix but as we think about pricing growth over the next year or two?

Yes, in terms of our tuition pricing you mean?

Right, yes.

Our strategy is the same. We're basically the same as it has been, and so we don't anticipate a wild or dramatic change in how we have looked at tuition pricing increases as we go forward.

Mark Hughes, SunTrust.

Just wanted to make sure I understand your comments regarding the earnings distribution for the year. You did $0.13 in this quarter. If that were say one-fifth of the full-year numbers like in prior years, it would seem to imply earnings up modestly for this full year.

But then, on the other hand, you've talked about being on an improving path, making progress. You just mentioned some easier comps in terms of costs in the back half of the year -- how to think about all this?

I think you kind of -- maybe Rick, you can say what you outlined before.

The first quarter is usually the lowest quarter of the year. So, that part won't change. And, as we continue to go forward and get some of the benefits of last year's spending and the spending that we're making now in the latter part of this year and beyond, we should see continued improvements in both our top line as well as our margins over time.

Right. So continued year-over-year improvements?

Pardon me?

Continued year-over-year improvements?

Yes, definitely.

Jerry Herman, Stifel Nicolaus.

Ron, our congratulations and best wishes to you. We're going to miss you.

A couple of questions. First on the facility reconfiguration plan if you will. How representative is Western Hills as a transaction relative to the other ones you're looking at, either in size or staff?

It's non-representative I would say. It was a unique opportunity in a very hot real estate market in Southern California where we had the opportunity to sell the building, not sell the school. I just want to emphasize we moved the school two miles down the road frankly to a better location in the San Fernando Valley, which by the way having one location -- one large location -- one large campus in the San Fernando Valley from a full market penetration strategy is probably not the right strategy for us. We probably instead of having one large and no small should have no large and several smaller facilities just in the San Fernando Valley, not even to speak to all of LA and the Southern California area.

So, what we're saying is we're underpenetrated from the geographic market perspective. And Southern California is a good example where a couple of years ago, we had three large campuses and one center and that was it. Here in Chicago, we have about 14 locations. So, you can see that we're underpenetrated but we have the wrong mix. We had the wrong mix. We had the large as opposed to more points of presence for our students, particularly in a market like that where it's hard to drive. The traffic is terrible. It's pretty difficult -- even more points of presence.

So, it is not really representative from the standpoint of a hot real estate market, we've got a big accounting gain. We also had a large pile of cash, which we used to pay down debt. And then, we moved down the road. So, I wouldn't expect lots of those or any more like that. So, in that sense, it's not representative.

But where it is representative is the sinking of what's the right footprint? What's the right mix of large campuses, DeVry University Centers and this new word concept of guess what it isn't one of the other; it's something in the middle of a small campus. And then, with online thrown into the mix, what's the right set of delivery modalities and delivery options to capture our fair share and more than our fair share in each of the geographic markets we serve? That part is representative. I hope -- does that help?

Yes. What would be a good estimate in terms of the number of facilities you may either own or no longer owns a couple of years down the road? Of the ones that you do own, what are eligible or at least considered to be part of this analysis?

Yes, Jerry, I can't give you a specific number. But yes, probably a fewer large campuses and then continued growth in the small centers and we've talked about six to eight per year. So, you could end up seeing 100 centers in the not too distant future. Whereas five years ago, we had one -- our first experiment with the Chicago Loop Center.

This is Rick. I don't think it is necessarily the ownership that is the main criteria. It is the market condition and the situation at each of these campuses, whether they are owned or leased, that will determine how we move forward.

And then, I was wondering if you guys could give us an update on rollout plans at Chamberlain and maybe an update on e-books and the penetration there?

Sure. At Chamberlain, we continue to focus on investing in both geographic expansion and online expansion. It's a twofold strategy for Chamberlain. We are making application to a number of states. We're very, very careful not to say anything or announce anything until we have those approvals because the last thing we want to do is get on the wrong side of those important constituent stakeholders that we have and that we deal with.

So, we're continuing though to push forward geographically. While at the same time, they have -- at Chamberlain, we have a tremendous online growth opportunity at both the bachelor's level, which is essentially an RN to BSN completion program and at the associate's level, where we have one of the few programs in the country where you can go at a pre-licensure level. You as a student can go from scratch if you will to becoming a registered nurse with a program where virtually all the didactic portion is done online. And then, you do your clinicals on-site at teaching hospitals rest assured. But it's a relatively unique program. So those are the two thrusts of the growth strategy at Chamberlain.

In terms of e-books, we think we continue to focus -- part of our technology strategy is to ensure that we have the best student-facing technology. It's a technology that supports the learning process. Electronic materials are an important part of that. E-books is one way to think of it. But we think of it even more broadly than that -- electronic course materials and course packs, integrated and online delivered labs and lab experiences for students. All of those areas we're investing quite a bit in, and that's one of the other investments that Rick alluded to when he talked about technology investments earlier. So, those are going well.

How many students or courses are now being delivered with e-books?

We haven't broken that out. But it is a growing percentage, and it shows up as part of the other educational revenues. You can kind of track it a little bit there.

Okay, well thanks to everyone. I think we've run through our time. We appreciate you joining us on the call today. For myself, it's been fun to interact with you over the years. I will just close by saying we will release fall enrollment for DeVry University on December 7th, and our next earnings call is scheduled for January 25, 2007. So long.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.