Adtalem Global Education Inc (ATGE) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fiscal 2008 first-quarter 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 this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Joan Bates. Ma'am, go right ahead.

Thank you. With me today from DeVry management are Daniel Hamburger, President and Chief Executive Officer; and Rick Gunst, Senior Vice President and Chief Financial Officer.

Before we begin, please be advised that statements made on this conference call may constitute forward-looking statements subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by phrases such as DeVry, Inc. or its management believes, expects, anticipates, perceives, forecasts, estimates or other words or phrases of similar import. Actual results may differ materially from those projected or implied. Potential risks, uncertainties and other factors that could cause results to differ are described more fully in Item 1-A, Risk Factors, in the Company's most recent annual report on Form 10-K for the year ending June 30, 2007 and filed with the Securities and Exchange Commission on August 24, 2007.

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. You should also note that we've provided segment data in today's release, which is also preliminary.

Telephone and webcast replays of the call are available until November 8th. The domestic replay number for the call is 888-286-8010, and the pass code is 28771493. A replay is also available via webcast through the IR portion of our website.

Finally, because of the feedback we've received recently, we're modifying the format of our calls just a bit to shorten our initial commentary to allow a bit more time for questions and answers.

I will now turn turn the call over to Daniel Hamburger.

Thank you, Joan, and thank you all very much for participating in our fiscal 2008 first-quarter conference call. I'll provide a brief introduction, and Rick will discuss our financial results. Then I'll come back and provide and update on operations before opening it up to questions.

We delivered strong financial results in the first quarter, with the most significant improvement occurring in the DeVry University segment. We're executing on our strategic plan with particular focus on increasing margins at DeVry University and on optimizing our real estate assets. We expanded geographically, controlled costs and, at the same time, made investments in facilities and in infrastructure to support our growth over the long term. As you know, summer enrollments drive financial results in the first quarter, and we are benefiting from the impact of higher summer enrollments, in both high school graduates and the adult student segment and from a tuition increase that went into effect in July.

While earnings were strong, it's important that we provide a bit of color here, as we believe our earnings growth will continue, but not at the robust level we saw this quarter. On the cost side, a number of new and open employee positions were not filled in the first quarter. We will be filling those positions and making investments in several projects throughout the remainder of the fiscal year. Our goal is to manage our costs and to drive operating leverage, but at the same time to make the appropriate investment to sustain our growth in the future.

Now, since the end of Q1, we signed an agreement to acquire Advanced Academics, a leading provider of online secondary education. The acquisition is an investment in a high-growth market, and consistent with our strategies of growing aggressively online and diversifying below the Baccalaureate level. DeVry is currently 90% weighted toward Bachelor's, Masters and Doctoral level programs, and we see growth opportunities at the pre-Baccalaureate level. We also see opportunities to articulate Advanced Academics' high school graduates to our postsecondary offerings and to enhance our relationships with high schools.

[Edge of Interest] predicts that revenue in this market will be $2 billion by 2011, compared to $325 million in 2006. Advanced Academics has a strong team, a sound business model and excellent customer service. We expect to complete the acquisition by the end of this month.

So with that brief introduction, I'll turn the call over to Rick for the financial results and for progress on our financial position and strategy.

Thanks, Daniel, and good afternoon, everyone. As you have all seen in the press release, we delivered outstanding results in the first quarter, as we realized some of the benefits of the actions we've been pursuing the past few quarters.

First-quarter revenue was up 14.2% versus prior year, with all three business segments achieving double-digit revenue growth. This strong revenue growth, combined with our cost management focus and the impact of our real estate optimization activity, resulted in significant operating leverage at the bottom line.

Now, reported net income in the first quarter was up $5.9 million, up over 28%, and earnings per share increased $0.08 versus last year. Remember, however, that last year's results included the gain from the West Hills facility sale, which was $11.8 million after tax. Also, this year's results included the net upfront loss of $3.7 million pretax and $2.3 million after tax from the sale-leaseback transactions at Phoenix, Seattle and Alpharetta announced last month. Excluding these discrete items from both years results in net income of $29.1 million this quarter, up about $20 million versus last year, and earnings per share of $0.40 versus $0.13 last year, or both up about three times versus prior year on an apples-to-apples basis.

Also for your reference, first-quarter results include expense related to share-based payments of approximately $1.5 million pretax or $1.3 million net of tax. This is higher than last year's first-quarter expense of approximately $1 million pretax or $800,000 net of tax, due to the timing of our annual stock option grant occurring in the first quarter of this year versus second quarter last year. Our overall effective tax rate was 25.6% in the quarter, composed of a 26.9% rate on continuing operations offset by the tax benefit on the loss from the sale-leaseback activity at a 39.1% rate.

We produced significant operating leverage in the quarter, as cost of education services expense increased by less than 1% versus last year. We began to realize the savings from last year's workforce reductions, along with the impact of our real estate optimization actions, principally in Southern California, Calgary and Dallas. As Daniel mentioned, direct costs were also lower, due to some open positions that we intend to fill later in the year and timin on project spending that will occur in the coming quarters.

We also realized leverage with our student services and administrative expense, which increased by 6.8% in the first quarter, or about half the revenue growth rate. As a result, pretax income margin of 15.9% was a significant improvement versus 5.6% last year, again excluding the discrete items from both years. Note that we expect increases in both direct costs and operating expenses during the balance of the year, but we still expect to drive operating leverage, albeit not at the same level achieved in the first quarter.

As you may have noticed, we're now including preliminary operating segment results in our earnings release, so I won't take the time to repeat all the numbers now. But here are three key headlines.

First, each of our business segments recorded double-digit revenue growth, with DeVry University up 12.9%, Medical and Healthcare up 22.1% and Professional and Training up 13.5%. Second, the DeVry University segment showed the most significant year-over-year earnings improvement, going from an operating loss of $1.6 million last year to earnings of $19.3 million this quarter, excluding the discrete items, driven by the revenue growth combined with the labor and facility cost savings. Finally, our Professional and Training segment delivered strong earnings results and grew double digits versus last year, while the Medical and Healthcare segment results were up nearly 10%.

Our balance sheet and financial position strengthened during the quarter. One indication of this strength is that we had net interest income of approximately $2.2 million this quarter, compared to interest expense of $700,000 last year, or a swing of almost $3 million. Also, accounts receivable improved, decreasing $1 million versus last year despite the 14% revenue growth, due to our improved focus and collection efforts. These improvements, combined with the strong operating results, resulted in operating cash flow of approximately $80 million in the quarter and an ending cash and short-term investment balance of $223 million compared to $169 million last year.

Capital spending was $6.9 million during the quarter versus $7.8 million spent last year. This excludes the amount paid to execute our option to purchase our Alpharetta facility, since it was immediately sold for that same amount. The pace of capital spending should pick up during the balance of the year, with the total capital spending for the year in the $55 million to $60 million range, due to investments expected to be made to expand facilities within Medical and Healthcare segments and also to support systems improvements at DeVry University.

Also during the quarter, we repurchased approximately 155,000 shares of our common stock at a total cost of about $5.4 million, bringing the total share repurchases in our program to date to $15.9 million at an average cost of $31.22 per share.

So that concludes my overview of the very strong results for the first quarter. While we don't expect triple-digit growth throughout the remainder of the year, we are off to a great start. We will continue to focus on operating improvements going forward, while making the investments needed along the way for future growth.

With that, let me now turn the call back over to Daniel for a bit more on our operating results.

Thanks, Rick. I'll begin with an operations review at DeVry University, including its Keller Graduate School of Management. Let me start with a little more information on our real estate optimization process. Across the Phoenix, Seattle and Alpharetta, Georgia campus properties, we addressed a total of 287,000 square feet, leasing back approximately 69% of that total space in the three locations, for a projected improvement in operating income of about $1.2 million per year.

We'll continue to evaluate additional opportunities to reduce operating costs while delivering the best facilities and services for our students. Our optimization program is an ongoing exercise, and it's an exercise to ensure that we have the right mix of large campuses, small campuses and DeVry University centers to serve both the high school graduate and the adult student demand in each market we serve. So, to that point, we opened three new locations in September -- Nashville, Bakersfield and Detroit. Looking ahead, we have plans to open five to six new locations for the year in total.

We continue to deliver on the value of a DeVry University education as employment results keep getting better. For the three terms June and October 2006 and February 2007, nearly 93% our graduates obtained employment in their field of study within six months of graduation, at an average starting salary of almost $42,000. At Keller Graduate School of Management, we reached an all-time record of 15,857 course takers in the September term, an increase of 12.7% from last year. That's a little stronger than Keller's average, and it was driven by better lead flow for the recruiting period.

As we've said before, we're making investments in the near term designed to drive growth in the longer term. An example is in the first quarter, we initiated Project Delta. This project's objectives include streamlining policies and processes, improving data quality and reporting and ultimately implementing a new student system, all to improve efficiency and, most importantly, customer service. This will be a multi-year, multi-million dollar project.

Turning now to our Medical and Healthcare segment, at Ross University we saw strong interest in our medical and veterinary progress in the September term. Total students were 3,885, up 4.3%, while new students were down 8.9% to 572 students.

The decrease in new students is related in part to the enrollment of transfer students last year, but the primary cause of the decrease is that September is our peak enrollment team, and thus we're capacity-constrained. We're working to counsel applicants to enroll in the January and May terms, when we have more capacity. We're also investing in our facilities to address our growing student population at Ross and the strong demand for medical and veterinary medical school seats.

Construction projects at the medical school include a building to house student academic activities, a second building to house our facilities department, and then a new student center and gymnasium. As another means of adding capacity, the medical school signed an agreement with Synergy Medical Education Alliance in Saginaw, Michigan.

For context, now, remember that our medical school students spend semesters one through four at Ross's campus in Dominica; a fifth semester at our Miami clinical training site, which many of you visited at our recent investor day; and then semesters six through 10 at teaching hospitals around the US. So this agreement with Synergy provides another location for our fifth-semester students and gives them the option to complete all their clinical rotations in the Saginaw area without the need to relocate.

At the veterinary school, the 150-bed housing facility officially open for the September 2007 semester with over 100 students residing in the new building. Currently, we're finalizing plans to build two new classrooms to help with capacity there at the vet school as well.

Results in the July class at Chamberlain College of Nursing had a positive impact on results for this segment, primarily because of the expansion to our Columbus location, which is enrolling its third semester of students, and robust demand in the online RN to BSN program. With continued strong demand for seats in nursing programs, our goal is to open at least one new Chamberlain site per year, and we're currently anticipating approval from Illinois and Arizona.

In the Professional and Training segment, Becker's performance reflects strong demand for accounting and finance professionals and the results of our efforts to strengthen relationships with firms and professional societies. The AICPA recently projected that the number of candidates will be up 9% in 2008. That's good growth, but down a bit from 12% last year. As a reminder, Becker's first quarter is typically stronger than the second quarter because of seasonality in the business, as very few classes are taught in December.

At Becker CPA Review, we have new direct-bill relationships with BDO Seidman and with Grant Thornton. So, as we previously reported, we serve all four of the Big Four, and we're pleased to say that we now have all six of the Global Six. And, for the second year in a row, seven of ten highest scorers on the CPA exam were Becker graduates.

At the Stalla CFA Review, the Chartered Financial Analyst Review, we signed an agreement with the Philadelphia CFA Society to serve as their educational partner and to provide coursework to their membership. It seems almost every quarter here, we announce another partnership. We have relationships with nine of the top 15 CFA societies in the world. Early indicators point to the total market of CFA candidates worldwide being up significantly for the 2008 exam cycle.

We also experienced strong growth internationally at Becker. Earlier this month, I had the privilege to meet with Becker's international marketing affiliates, when we hosted them here for a strategy session. Representing all 27 countries where we teach, this affiliate network is a significant part of Becker's international sales operation, and we are proud to call them partners. It was also a part of our overall international strategy to leverage this international presence to provide new business opportunities, including potential acquisition candidates.

So, in summary, we delivered strong financial results this quarter, and DeVry's team is focused on executing our strategic plan with particular emphasis this year on five priorities -- increasing margins at DeVry University; maintaining our growth limit them at Becker, Ross and DeVry Online; expanding Chamberlain as a national system; continuing our diversification strategy at the pre-Baccalaureate level and internationally; and enhancing our technology infrastructure to support our growth.

So, Joan, with that, let's go to the Q&A.

Fantastic, Daniel. We're excited to take your questions. So, if you could give our callers the instructions, we'll begin.

(OPERATOR INSTRUCTIONS). Edward Yruma, JPMorgan.

Thanks very much and congratulations on a nice quarter. Can you talk a little bit about your acquisition? Do you need additional acquisitions to get the kind of critical mass in that space that you need going forward? Is this an implicit kind of shift away from some of your international growth plans?

You're talking about the acquisition of Advanced Academics?

Yes.

In the high school market? No, I don't think we necessarily need to do more acquisitions in order to achieve our growth plans in that market. It's certainly possible, and we keep our eyes open to those. But it wouldn't be necessary for our growth. And no, I wouldn't see this as opposed to acquisitions for international expansions, but in addition to.

This is some of the strongest growth we've seen out of Keller in some time. I know you alluded to improved lead flow. How sustainable is this rate of improvement? Do you expect to see it over the next couple of enrollment periods?

As I mentioned, it's a little above the average, so it was a very good enrollment period for us.

Amy Junker, Robert Baird.

Just a quick question on the margins. I'm not looking for guidance; I know you're not going to give it. But can you give us some sort of qualitative comment? I know you're making some investments going forward, and you're saying that this quarter's improvement is not sustainable. But any order of magnitude of what we can expect, in terms of investments and where those might come and, in terms of timing?

Sure. Rick, jump in if there's things you'd like to add to this. But I guess what we're saying is, if we saw triple-digit increase in earnings, that it wouldn't be reasonable to expect that going forward. We're certainly focused on improving our margins, but probably not at the same rate that we saw in this quarter. Maybe some of the color there would be investments, whether -- and I'm using the word investment broadly, not just capital investments but also things that would hit the P&L as expense in terms of people.

We did have a number of unfilled positions in the first quarter, just because we are focused on hiring the best people we possibly can, and sometimes it takes a little longer than you plan. But we do expect to get those filled, and that will certainly have an impact on the margin expansion.

Then there's the investments in marketing and recruiting, and then there's the investments in the information technology infrastructure. So that's a little bit of color.

I think some of these investments will occur in the coming months and into next calendar year, and they just carry forward. So the good news is we've got a lot of things that are happening that help keep expenses down, given the workforce reductions we've had and the real estate optimization actions. But there will be other things that we'll be starting to increase that will somewhat mitigate those savings.

On the revenue line, last quarter you talked about having a greater mix of maybe part-time students. Was that issue resolved in this quarter, or was there something else that perhaps offset that? Without the enrollment numbers it's a little tough to say, but did that average revenue per student increase this quarter versus last?

No, in fact -- no, the part-time next did not resolve itself this quarter. So we continue to work on that issue.

So there was enough of an enrollment bump to offset that, then?

We had a combination of the enrollment growth that we had in the summer of 2007, plus we had a tuition price increase that went into effect in July of this year as well. So that helped the revenue growth as well.

Trace Urdan, Signal Hill.

Good afternoon and absolutely congratulations. I wanted to ask a little bit about the other segments. One, in the Professional/Training segment, it looks like some pretty healthy margin increase to an absolute margin level that looked very high. I'm wondering if you could speak to that, and to the scalability in that business. I would have thought that you'd sort of blown through anything that seemed reasonable as a sustainable level of margin there. How should we think about what the profitability of that segment can look like over time?

Well, thanks, Trace. You are right; that's probably not the long term. We need to be making investments in the Professional/Training segment at Becker, CPA at Stalla, CFA and in our continuing professional education Gearty CPE business. We're also looking at acquisitions in the Professional/Training segment. It's actually the segment where we've made the largest number of acquisitions in DeVry's history. Some of them have been quite small, but we do know how to make acquisitions there and how to integrate them effectively.

So all of those would be some of the kinds of investments that we would like to make, and also just making some investments in marketing and continuing to build our brands. We have very, very strong brands with Becker and Stalla. This is a time to be investing in that. So, for all those reasons, you could see that change a little bit.

I guess the only thing I would add to that is, as Daniel mentioned in his comments, there is the seasonality to the business as well, and the first quarter tends to have a little stronger margins. You really have to look at the margins for that business on an annual basis.

No, I appreciate that. Is it just that the classrooms are all full at this time of year? I'm just wondering what might be behind it. Are the international margins better than domestic margins? Is it the mix moving online? Does that help?

No, it's not that the classrooms are all full. It's really a function of demand. In the second quarter, it slows down a little bit. Accountants, just like all the rest of us, take off a little bit around the holidays. You have the natural rhythm of the accounting world, the public accounting world, where people are very, very busy at certain times of the year doing tax returns and other things. Then they come up for air and say, okay, now I need to get certified. So that just leads to a little bit of seasonality in the business.

The other thing I wanted to ask about was the capacity constraints and the impact that that had on revenue growth -- or enrollment growth, rather, new student enrollment growth at Ross. Can you help us understand that phenomenon a little bit more, just to give us the comfort that the demand is there and that's really the issue? Are there metrics? Were you aware of this, and were you able to pull back on the marketing investment that you made in preparation for the quarter?

Yes, and it's really not a question of marketing. The marketing efficiency is very high in that operation, as you know. In terms of comfort with demand, the demand is there.

Do you turn people away? Are there people waiting in line?

Yes, we're turning -- well, we've always turned people away at Ross. We have more than twice as many applications relative to those who we admit, just because of our admissions requirements, and that continues. But for context here -- and it's an excellent question to ask, what we've seen here, Trace; I appreciate it.

We focused for a year to two years, after the acquisition of Ross, on quality. During that time, you might remember that we said we would make investments in the short term to underpayment long-term growth, and we raised the standards. That led to a surge in demand, because of the increased reputation of Ross and because of the outcomes.

Now, the outcomes at Ross -- there's many measures, but one measure is board scores -- are at a level if not surpassing US schools. In this endeavor, quality leads to growth. Quality underpins growth, and that's what we've seen that has led to a surge in demand. Maybe we were a little slow today in responding to that surge, just because we're trying to be responsible managers and not put too much cost or capacity ahead of revenue.

But maybe we were a little slow to recognize that, and now we are finding, boy, we've got this surge. So we are turning people away, particularly here in the September term, which is the number-one enrollment period for, in particular, the medical school.

That's just a little bit of color around the dynamic there.

When can we expect, with the new capacity to come online sufficient to take care of that issue?

Sure. We can't give you a specific timeline or a date or a quarter when that will happen, because it's a process that involves a lot of factors. But we are focused on increasing the capacity with quality at Ross Medical School, as well as at Ross University Veterinary Medical School.

Corey Greendale, First Analysis.

Congratulations. A couple questions, first of all on the DeVry University revenue. I know last quarter, you discussed, I think, a $1 million impact from a shift in the timing of bookstore sales. Did that actually play out, and there was a $1 million benefit in this quarter?

Yes, it did. The shift between June and July did occur as we expected.

Are you willing to say anything about the contribution of Chamberlain to the Medical segment revenue?

Sure. By the way, thanks for being diligent and following up on that bookstore. We're glad that you are paying attention to items large and small.

Anyway, yes, in terms of Chamberlain, it is making an increasing contribution, but it is still quite small relative to the size of Ross within that segment. But clearly, it's in growth mode, and we're going to keep that institution in growth mode. So we are more focused on growth and trying to maximize earnings at this point. So we are, although you can't help but increase earnings as it's growing so quickly, our focus right now is on growth.

Then being diligent and trying to follow upon another item, I know you are not going to give guidance on the margin, but is there enough non-recurring benefit from some of the timing issues that you'd expect the sequential change to be different? Ordinarily, operating margin goes up Q1 to Q2. Is it reasonable to think that actually would be more likely be down in Q2 from Q1?

Yes, if you look at historical patterns, I think obviously Q1 is an unusual aberration in terms of the positive improvement going from a 5.6% to 15.9% is a huge increase in margin in this quarter. So when you look at it relative to history, it's unprecedented. I can't really give guidance, but I don't think we'll see the same pattern of quarter-to-quarter margin swings.

I think, Daniel, when you were talking about Advanced Academics, you said that you hoped it would enhance your relationships with high schools. Could you just elaborate on that? My sense is that at times, anyway, high schools see Charter schools of one sort or another as more competition than friendly. So just talk about why you think they would view you as a friend.

Sure. Well, one of the reasons for that is that, in addition to running those complete virtual high schools, Advanced Academics also partners with over 125 school districts around the country to run the online courses for those schools. So they have always taken a very friendly and a very partnership-driven approach, which is one of the reasons that I mentioned they have a strong business model. That's in contrast to some others that have had maybe not such a good relationship.

So, given those strong relationships that they have, we think that some of those districts are places where we'd like to have a better relationship at DeVry University, or maybe a Chamberlain College of Nursing. So we think that they can help us.

At the same time, we think that we can add value to Advanced Academics' trajectory, because we have some very strong relationships with some high schools and some school districts that perhaps they would like an introduction to. There are many other potential points of synergy, but all of those -- let me just add one other thing that you didn't ask. All of those are in the longer term.

In the near term, we are very much focused on letting Advanced Academics be Advanced Academics, and just supporting them, providing them the capital resources they need to grow as quickly and with as high quality as they possibly can. Then, at the appropriate time, we will pursue these kinds of synergies. That formula of leaving acquisitions kind of alone, other than support, and then looking for synergy later has worked very well for us with Ross and Chamberlain and Becker and others, rather than trying to be too hands-one or try to force things. So I wanted to make sure that that's clear.

Jerry Herman, Stifel Nicolaus.

Good afternoon, everybody. Good quarter, guys. Daniel, the question is about margins. I know you have been pretty visible in terms of talking about returning to your old peak margin of 17%. Generally, you have talked about that in the context of years. Given momentum and the good quarter, do you care to update either the timing or the goal on that kind of objective? I know it's not guidance, but what are you thinking there?

If you could also talk about what the margin potential of the business is relative to maybe the peer group?

Okay. Well, first of all, it was 17.1%.

Sorry about that. I forgot that tenth of a percentage point.

Every piece helps. Every piece counts. So yes, we said that, I think, beginning maybe about a year ago. We're an organization that prides itself on planning what we do and doing what we plan and doing what we say we're going to do. So I think this quarter shows that those goals are -- it's just another piece of evidence -- it's not the only one -- to show that that is in the realm of achievability.

Yet Rick is going to be the first one to hasten to add that one quarter does not a year make, and we've pointed out a number of things that happened in the quarter which were unique to that quarter, to this particular quarter. So that remains a goal and something we think is achievable. As we've said before, we set goals kind of like mountain peaks. Then you get to the top of the mountain and you survey the landscape and look for the next highest peak to climb.

The only thing I would add is I think there's several components of getting to that margin improvement, and we've talked about a lot of the cost items. Revenue growth is the first and foremost priority, and showing the 14% revenue growth this quarter goes a long way to improving margins. As we continue to deliver the enrollment growth and revenue growth in the quarter, that's the quicker we can get to our goal.

Have you guys started giving the presentations at high schools? It's a fairly new presentation -- what has the feedback been on the new delivery?

The feedback has been good. The inquiries that we get from high school students, both juniors and seniors, are up. We gave some indication of that without specific numbers, just for competitive reasons, at our investor day, and those slides are on the website.

So yes, there has been a good response to the presentation itself, to the use of technology in the presentation. Part of this is driven by the role specialization that we implemented or reorganization in the recruiting force, where some people now are focused on making those presentations and building those relationships, and then handing over to the enrollment advisors themselves the individual students to work with, and advise them and work on them getting enrolled in school.

So, for all those reasons, we're pleased with the progress in the high school graduate recruiting market. But we are not where we need to be and we're not at our full potential in that market, either.

Sarah Gubins, Merrill Lynch.

I'll add my congratulations. Just to follow up on Jerry's questions, now that we're at the end of October -- I know that you're not actually going to give us undergrad enrollment growth until early December. But can you give us an indication of how that is looking and, in particular, the level of interest that you have seen in IT programs?

Sure. Things are going well. We are moving along. We are executing on our plan, and that's really where I would leave it in terms of the fall.

In terms of interest in IT programs -- in particular, you mentioned IT, and our computer information system or CIS program is doing well, both on-site and online. The educational outcomes and the demand from employers is robust as well, and we recently added the employment statistics to these press releases, and I commented on it.

The DeVry 90/40 that we talked about, 90% employed in their field of study within six months of graduation, $40,000 plus, is now at 93/42, roughly speaking. So we're sort of the overdelivering on that goal.

So those are all positive indications, but nothing that says there's some sort of huge spike or massive increase in a short period of time, either.

Then, on the cost side, in terms of the unusual savings that you got from the real estate action and the headcount reduction last year, and the costs that essentially weren't included in this quarter but will be in later quarters, does that skew towards one line item or the other? I'm assuming most of the savings are in cost of educational services?

Yes, all the workforce reductions were all on that line, as well as the real estate optimization savings also flowed through that line.

Then the employee costs that essentially weren't there in the quarter -- is that in one line item or the other?

That will be a combination, because that's going to be investments at the campus level but, in addition, things on the marketing, recruiting, G&A front related to systems spending.

Just the last question, on cost -- did you get leverage from your sales and marketing spend in the quarter?

Yes, we did. But again, I want to, at the same time, provide context to say that we do plan to make investments there in the future and in future quarters. So I don't want anyone to get too carried away with that, at the same time.

Tax rate of about a little less than 27% -- Rick, is that a reasonable rate to consider going forward for the rest of the year?

Yes, that's what we estimate at this point. It's going to be largely determined based upon the mix of our domestic and international income. So, based upon how that falls out, that's where we see it today.

Mark Marostica, Piper Jaffray.

Nice job on the quarter. I wanted to follow up on an earlier point, Daniel, that you made. You mentioned you're pleased with the progress in the high school recruiting market. I'm curious whether, at this point in the progression in the fall semester -- can you give us a sense of how your fall high school starts to date have tracked versus last year?

Yes. I don't think we can give you that specifically, but I can tell you that we are making progress, and we're continuing to make forward progress relative to last year and to the year before that and the year before that, because we are on an upward trajectory, for the reasons that I outlined earlier.

Is it your feeling that the part-time mix issue might still resolve itself by the time you report the fall results?

No. I think that's a longer-term issue, and really don't know where that's going to settle out, and that's not unique to DeVry University, but you can study this across the country at universities. As the mix continues to shift from the old days of many more traditional, full-time students, and now the mix is more heavily weighted and that mix continues to shift towards working adults and, at the same time, even those who used to be traditional high school graduate students -- they themselves are working full-time, even though they are still the same age as the old traditional age group.

So, for all those reasons and others, that part-time/full-time mix has shifted, and the credit hour load has shifted a little bit. I can tell you that we have a very strong focus on this particular dynamic, and we are focused on advising students on why it's in their best interests, from an academic perspective and fraud and economic perspective, to go to school full-time and to take a higher credit load.

So we are, at this point, I would say, hopeful and confident that those will have a positive impact in that credit hour load per students or credit hour mix issue. But we are still in the early stages of that particular dynamic.

Just switching gears, in terms of optimizing your large campuses, can you speak to where you are at along the spectrum of optimizing category two or category three schools? Perhaps give us some color on how many campuses are left for potential sale-leaseback or relocation.

Sure. The crux of the real estate optimization program is that it's ongoing. By the way, even where we have taken an action at a particular campus, it doesn't mean that we are done.

For example, we had reported earlier that the Phoenix campus, part of the strategy was to co-locate Chamberlain. That is not done, because we still have to get approval, although the capital expenditure is pretty much done there. We are ready, and the simulators and the beds and the equipment is all there. But that didn't mean we were done with Phoenix, and as we just followed up, we followed up with the sale-leaseback transaction at Phoenix.

So you are never done, but we have taken significant action at six of the large campuses. When we started, there were about 23, so I would say about a quarter of them. There's probably a similar-size group where we will pretty much stay as we are, certainly look for opportunities to co-locate, and do things like that. But we like where we are and so forth.

Then the group in the middle, we continue to work on. So that kind of gives you a little bit of a feel for how far along we are.

Gary Bisbee, Lehman Brothers.

Awesome job on the quarter. Let me take another cut or another different way to ask the question around the margins. When I look back at the segment results -- and by the way, thanks for putting those in the press release; that's great. In each of the last five years, the first quarters had the lowest operating margin for DeVry University segment. In the last two years, it was really low, but the three years before that, closer to the rest of the year but still below.

Given that, how should we think about this? Should we think about this close to 10% margin as a new baseline level for DeVry University? Or are there some reasons that it could be materially different and potentially lower at some point in a future quarter?

That's a good question, because that's something we're evaluating, obviously. We're sort of in new, uncharted territories over the past few years. How quickly we can get back to where we were and how that's going to change in terms of the seasonal flow of margins, quite frankly, is still yet to be proven.

So the honest answer is we are evaluating it just like you are. We've made a lot of changes. We've done things on the cost structure that are going to have an impact that are different than the past several years. We're getting, now, double-digit revenue growth in this quarter. That had a big impact, and that had the largest impact on the margins. So, as we can get that revenue growth sustained over time, that will prove the best source of margin improvements next quarter and beyond.

So I think it's going to be tough to compare the current-year quarter to past years, and I think it's just going to be a different mix in terms of the seasonality on margins that you're going to see this year. But in the end of the year, our goal is to see a good, substantial increase in the margin for the year.

So would it be possible that that could fall a couple hundred basis points in one of the other quarters this year? I'm just trying to get a sense for the magnitude of these other investments, and maybe what level the people are, the open positions, so what type of salary and benefits cost.

The timing of it -- we could see some bumps one quarter to the next. But I think what we're trying to do is not necessarily manage the quarter-to-quarter margin; we want to see improvements year to year as we're going forward. But if one quarter doesn't show as much improvement as the previous one, that's not going to cause us much concern, as long as we're making progress to that ultimate goal.

Things we could be doing in the way of marketing and recruiting spending, project spending, could have a bigger impact in one quarter than the rest. Some of it could be building over time, and some just could be project spending that has a bump in a given quarter.

One last one on the margin. I understand you're getting terrific savings from all the cost and issues you have taken. But the student services line had the slowest growth we've seen in a while. As I try to think about your strategy for spending on marketing, is it likely that the growth of that cost line would be somewhat higher than that, as we think about going forward? Over the last two years, it has been more than double the growth rate, on average, that it was this quarter. Is this an anomaly, or are you doing something a lot better there that I'm not aware of?

Well, I think as we talked before, we expected to see the growth in that line start to come down in the second half of fiscal 2007. In fact, it was, I think, 6.5% in the fourth quarter of fiscal 2007, and we are 6.7% in this quarter.

So we were making some significant investments in the prior years. We're now overlapping some of that. So having increases in the single digits, high single digits, is not going to be unusual, I don't think. Our expectation is that we don't necessarily want to get back to the double-digit increases. But we will, if necessary, on a case-by-case basis, to make the right investment for future growth.

Chris Shutler, William Blair.

Just another question on the margin expansion you guys saw this quarter. In that context, how should we think about the utilization rate? I know you don't give specific rates, but any color you can give on the absolute number, or the change or trends that you've seen at the university centers versus the big box?

Yes, sure. Clearly, by leasing back roughly 69% of the space in those three large campuses that we talked about, you can get a sense of how we're trying to improve the utilization of that space. In terms of the DeVry University centers, there's definitely underutilized capacity in those as well. So we do have the opportunity to gain leverages so the enrollments increase across all of the on-site operations.

The other thing that also can make you crazy when you're trying to measure utilization -- which is why we don't talk about that or give specific numbers, as well as for competitive reasons -- is the mix of online in there, both from a mix-and-match perspective, that is defined as students who are taking some courses online and some courses on-site, as well as from a hybrid perspective or, as we brand it, i-Optimize, where a portion of a single course is offered online and then a portion of that course is offered on-site. So the strength of our online program and adding more of DeVry University, in particular, more of DeVry University's courses and programs to be available online, all give students for opportunities to take some of those courses online, and then you don't have quite is much on-site utilization. So there's a lot of factors swinging in a lot of directions on that one.

I think what we've seen this quarter is sort of the inverse of what we've seen two or three years ago. We have a fixed cost base. We have been doing some things to reduce that fixed cost, and now, as we get revenue growth, especially in our campuses and our DVUCs, that revenue growth becomes very largely incremental. You saw the results of what that did to the income growth in that segment for this quarter.

So, of the part, the margin expansion this quarter that was from enrollment improvement, would you categorize -- how would you talk about the high school impact versus the working adult impact there?

We don't really think about it that way. You saw the enrollment growth that we reported back in the summer. We're going to be talking about our fall enrollment coming up in December. It's a combination. We're still going after high school students; we're going after adult learners as well. The revenue growth of the 14.2% is being sourced from both groups.

Any trends you guys have noticed in terms of students maybe shopping around a little bit more on price or maybe on accreditation, anything like that?

No, no change in that dynamic that we noted in this quarter, no.

From third-party lenders -- I just wanted to get your perspective if you're seeing any sort of push-back from those lenders, in terms of wanting you to take on any more of the risk for some of your third-party lending sort of students or anything?

Nothing that was significant or that would have showed up in this quarter. There's a general -- a lot of buzz about that in the industry, but one of the advantages that DeVry has always enjoyed is with the quality of our student base, the length of our programs. We enjoy very, very strong relationships with lenders. So maybe we're not seeing as much of an impact as some others might be reporting. It goes back to what we have often talked about, in terms of the risk-adjusted return in investing in the education industry.

If you could just give me the breakout on the stock comp between the expense lines, if you don't mind?

Sure, I have that here. Just one second. It's been about two-thirds within SS&A and the balance within the direct costs.

Mark Hughes, SunTrust.

I'm sorry if I might have missed this earlier, but I assume you did not give any specific numbers in terms of the magnitude of the costs that you avoided this quarter or that you anticipate might ramp up. You just said they might, but you didn't give any specific numbers. Is that correct?

That's correct.

Jennifer Childe, Bear Stearns.

Congratulations. Two questions -- one, is there enough capacity at Ross to generate, say, high single-digit new enrollment growth in the next two starts?

Second question -- I'm a little confused about the mystery surrounding when you will be able to return to positive start growth in the fall term. Are there certain approvals that you need to get, and therefore you can't be certain when you will be able to start construction? Can you give us a little color there?

Sure. The first part is yes, and the second part is there are; there are approvals. There are investments to be made in facilities; in hiring high-quality, experienced faculty; in making investments in educational technology; and doing all the things that we've done effectively. We're just not going to do anything to imperil the quality and the reputation that Ross has built. So, if that means it takes a little bit longer than we'd all like, then that's what we'll do.

So those are some of the reasons, Jennifer, that it's a little hard to predict, okay, it's going to be exactly this particular point in time where the capacity will be significantly increased. But just know that management does have a focus on increasing that capacity with quality, and we will keep you informed as that goes on.

With no further questions, I would like to turn the call back to Mr. Hamburger for any closing remarks.

Okay. Well, thank you very much. I really appreciate everybody's questions, and we're trying to be responsive to the request for more information. So we added some things to the press release, tried to skinny back the commentary so we have more time for questions.

Just as a program note here, our fall enrollment for DeVry University will be announced on December 6th. Remember, we historically don't do a conference call there. So we won't, on December 6th. DeVry's next conference call, then, will be held on January 24th, when we announced second-quarter financial results.

Thanks, everybody, for joining us, and we'll talk to you then.

Thank you for your participation in today's conference, ladies and gentlemen. This does conclude the presentation, and you may now disconnect. Have a wonderful, wonderful day.