Adtalem Global Education Inc (ATGE) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to DeVry's fiscal 2008 second quarter earnings conference call. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS).

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

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 today's 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 1A 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.

Telephone and webcast replays of the call are available until February 8. The domestic replay number for the call is 888-286-8010 and the passcode is 43311656. A replay is also available via webcast through the IR portion of our website. 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. I'd also like you to note that in our continuing effort to be more responsive to the feedback we've received, we changed the format of our press release, providing a bit more information earlier in the process, hopefully making it more organized and a little easier for you to read. And like last quarter, we've again provided our preliminary segment data.

So with that, I'll turn the call over to Daniel Hamburger.

Thank you, Joan, and thank you all very much for participating in our fiscal 2008 second quarter conference call. I'll provide a brief introduction and Rick will discuss our financial results, and then I'll come back and provide a few operational highlights in the quarter before opening it up to questions.

During the second quarter, we continued to focus on executing our strategic plan, with particular focus on improving performance at DeVry University, continuing the momentum at Becker and Ross, and accelerating the growth of our online operations through the acquisition of Advanced Academics.

We increased our dividend; opened new locations; and at DeVry University, delivered our ninth consecutive period of positive undergraduate new student growth and sixth consecutive period of positive total student growth. We also experienced robust growth at DeVry University's Keller Graduate School of Management.

As you know, fall enrollments drive financial results in the second quarter, and we are benefiting from the impact of higher enrollments in all operations and from tuition increases. Increased revenues readily flow through to earnings due to the significant operating leverage inherent in our operations, particularly at DeVry University.

Our earnings were strong in the first half of fiscal 2008 and we expect them to continue to grow. We don't expect the growth rate to be as high as it was in the first half. Rick will elaborate in a few minutes, but let me provide a little bit of color on the two main reasons for this.

Some of it is simply timing, in that expenses slated for the first half are now expected to fall into the second. The other reason has to do with investments in marketing, recruiting and other areas to drive growth and quality over the long run.

Now before I turn the call over to Rick, recently there has been a lot of news coverage on the student lending environment. And since we've received many questions in this area, we thought it would be appropriate to answer a few of those questions here on the call.

The most frequently asked question is -- what percentage of DeVry's revenues come from private loans? Well, of course, the overwhelming majority of financing for our students comes not from private loans, but from federal and state loan and grant programs, which are not affected by recent announcements. Private loans to our students in the first half of fiscal 2008 were about $55 million. That's approximately 10% of DeVry's revenues.

Now, about half of that is tuition-related, while the other half is disbursed to the students for living expenses and other non-tuition related costs. So it's really closer to 5% when you consider the portion that directly corresponds to our revenues. And of that, the portion that's affected by recent events is well under 1% of revenues, which I'll come back to in a minute.

But let me address the second question we've been asked, which is -- what's our overall perspective on what's going on in the student lending industry?

While it's out of the scope of this call to go into all the changes happening in the lending industry, here are the factors we think most relevant. First, lenders are analyzing the profitability of each of their loan programs. They are also reevaluating the processes for judging borrower's credit worthiness. As they do this, lenders are paying closer attention to factors like institutional quality, graduation rates, post-graduation employment statistics, and cohort default rates. While lenders may discontinue some programs that they deem less profitable, they will continue to find attractive opportunities to make loans to students, and we fully expect students of organizations like DeVry with longer, higher quality programs and with excellent employment results, to continue to be attractive to lenders.

Now what Sallie Mae told us is entirely consistent with this outlook. As we described in a press release Tuesday, they are discontinuing their discount loan program that typically served higher credit risk students. They told us that their decision applies to all colleges and universities, whether publicly funded state schools, privately funded colleges, or market funded universities, like those DeVry operates. So this is not unique to market funded schools.

Sallie Mae has also confirmed that this decision does not affect any other loan program provided to DeVry students. So it doesn't affect federal student loans and it doesn't affect the vast majority of the private loans that they provide to our students.

This program comprised approximately $2 million in loan volume for us in the first half of this fiscal year; well under 1% of revenue and only about 4% of our private loan volume. So again, to try to dimensionalize this for you, private loans are about 10% of the size of DeVry's revenues overall, and actually about 5% when we look at the tuition related portion. And the program we're talking about, that serves the last credit-worthy loans, was well under 1% of our revenues.

And that leads to the last question we've been asked, and that is -- whether our students are less able to gain access to loans and particularly, private loans? And is that hurting our ability to start new students? Or in other words, is DeVry going to suffer in its ability to grow? And the answer is no. And that we're currently seeing no impact on starts. We believe that despite the recent buzz on student lending, it should not have a material impact on our students. DeVry students should continue to have access to the funding they need to finance their education for many reasons, including the following five.

First, increases in annual federal loan limits for freshman, sophomore and graduate students have eased the need for supplemental private loans like those previously available through this discount loan program. In fact, use of private loans by DeVry students in the first half of this fiscal year is actually lower than it was last year.

Second, DeVry is heavily weighted toward longer duration degree programs. We're 90% Bachelors, Masters and doctoral level degrees. These kinds of programs often translate into higher incomes for students, enabling them to meet their financial obligations after graduation.

Third, DeVry University students are eligible for most of the state grant programs available. Due to our regional accreditation, and again, Bachelors level programs.

Fourth, we provide extensive financial aid counseling for our students. For example, educating them on getting co-borrowers and helping match their academic load to available financing. We also ensure that they understand their re-payment responsibilities after graduation. And as a result of all these factors and our focus on quality, DeVry students have a strong track record in meeting their financial obligations, as noted in our press release Tuesday, where you can see the loan default rates for DeVry's institution.

And finally, DeVry University has provided internal financing for students for more than 30 years, and has the ability to expand this program, which we call EDUCARD. The performance of this internal loan portfolio has been good. And in fact, we've managed steady improvement in our receivables, which I know you've heard us describe on these calls over the past several quarters.

So, while we're monitoring and managing this area closely, we've seen no impact on recruiting to date. And as you've seen, new student growth has continued its positive trend. To sum it up, certainly we're not immune to what's happening in the marketplace, but we believe our position is less risky, given our long-term focus on quality in the educational programs we deliver and in the academic and career outcomes our students achieve. Our overriding objective is doing what's best for students and their families, including how to best finance their education. That's what we've always done and that's what we'll continue to do.

So with that introduction, let me turn the call over to Rick for the financial results.

Thanks, Daniel, and good afternoon, everyone. We delivered outstanding results once again in the second quarter, recording strong revenue growth and realizing the benefit of our cost management efforts to achieve very strong earnings results. Record quarterly revenue of $273.7 million was up 16.2% versus prior year, with all three business segments once again achieving double digit revenue growth.

Revenue is up 15.2% through the first half of the fiscal year. Net income of $35.8 million in the second quarter was more than double prior year results, and earnings per share of $0.49 in the quarter compared to $0.23 last year. For the first half, reported net income was $62.6 million compared to $37.3 million last year, or up 68%. However, last year's results included the first quarter gain from the West Hills facility sale, which was $11.8 million after tax. And this year's results included the net upfront loss of $2.3 million after tax from the sale leaseback transactions completed in the first quarter.

Excluding these discrete items from both years' results in [net] income of $64.9 million for the first half; up over $39 million versus last year. And earnings per share of $0.90 versus $0.36 last year are up about 2.5 times.

Also for your reference, second quarter results include expense related to share based payments of approximately $1.4 million pretax or $1.1 million net of tax. This is lower than last year's second quarter of expense of approximately $2.1 million pretax or $1.6 million net of tax, due to the timing of our annual stock option grant occurring in the first quarter this year versus the second quarter last year.

Our effective tax rate from ongoing operations increased in the quarter, reflective of the higher portion of earnings from DeVry University and the professional training segments, which are subject to full federal and state income tax rates, compared to our medical and health care segment income, which is taxed at lower overall effective rates. Our overall effective tax rate was 27% for the first half, composed of a 27.5% rate on continuing operations, offset by the tax benefit on the loss from the sale and leaseback activity at a 39.1% rate.

We continue to achieve operating leverage in the quarter, as cost of educational services increased by less than 3% versus prior year. We're realizing the savings from last year's workforce reductions along with the impact of our real estate optimization actions.

Student services and administrative expense increased by 10.4% in the second quarter; a higher rate of spending, but still less than revenue growth. This operating leverage produced a pretax income margin of 17.1% for the first half, excluding discrete items, which is coincidentally our peak full year margin level from fiscal 2002. Now, while we're very pleased with this progress, we've only completed half the year. And as Daniel pointed out earlier, the second half should not see the same magnitude of leverage for improvement.

Let me provide a bit of additional perspective on the reasons why. First, we expect to see an increase in direct cost of educational services due to normal seasonality of about $4 million to $5 million in the third quarter. Also, as Daniel mentioned, we have a number of timing related shifts, such as moving some local and national marketing spend in IT projects from the first to the second half, and filling a number of positions that still remain open. These timing shifts are expected to add another $4 million to $5 million per quarter in direct cost and operating expenses.

Lastly, we are planning to make other investments in incremental marketing, recruiting, and student services to drive and support growth in the future, such as online growth acceleration actions, Chamberlain expansion, and building Ross capacity. We expect these actions will add another $5 million to $7 million per quarter versus our current run rate.

Turning now to our segment results, here are a few key headlines. First, revenue within DeVry University segment, which includes Advanced Academics, was up 14.9%. Medical and health care, up 20.5%; and the professional training segment, up 21.5%. Advanced Academics, which was acquired on October 31, positively impacted the DeVry University segment growth rate, but by less than 100 basis points in the quarter.

Second, the DeVry University business segment showed the most significant year-over-year earnings improvement. Increasing segment operating income from $6.8 million last year to $28.2 million this quarter, or up over $21 million driven by revenue growth combined with labor and facility cost savings.

Finally, our professional training segment delivered exceptionally strong earnings results and grew almost 70% versus last year, due to robust shipments of CD-Rom materials, while the medical and health care segment earnings were up 9%.

Our balance sheet and financial position remains strong this quarter. Our cash flow from operations was approximately $52 million in the quarter and $132 million for the first half, with an ending cash in short-term investment balance of $241 million compared to $171 million a year ago. We also had no outstanding debt this year -- this quarter, versus $50 million at the end of the second quarter of last year. As a result, our net interest income was approximately $2.8 million this quarter compared to only $200,000 last year.

Net accounts receivable were $76.8 million this quarter versus $60.4 million last year, primarily due to the addition of Advanced Academics and the timing of federal funds receivables. Net accounts receivables would have been up 7.5% versus prior year excluding these items; well below our revenue growth rate of 15%.

I'd also like to point out that DeVry University receivables per student -- that is, the receivables that come from EDUCARD -- have improved over the prior year for more than 20 consecutive months, reflective of our heightened focus and improved management of collections.

Year-to-date, our capital spending was $16.8 million this year versus $16.2 million spent last year. This excludes the Advanced Academics acquisition, as well as the purchase of our Alpharetta facility that was immediately sold for the same price last quarter. We expect the pace of spending to pick up during the balance of the year, primarily due to the investments to expand facilities within our medical and health care segment, and to support systems improvements at DeVry University.

Even with this pick up, total capital spending will likely be around $50 million plus or minus, versus the $55 million to $60 million range previously communicated.

Finally, during the quarter, we repurchased approximately 96,000 shares of our common stock at a total cost of about $4.8 million, bringing the total share repurchases in our program to date to $20.7 million, and the average cost of $34.16 per share.

So that concludes my overview of the very strong results for the second quarter and the first half of our fiscal year. While we expect to continue to make progress in the second half of the year, the rate of improvement versus prior year will likely not be as dramatic, due to the timing shifts and incremental investments. Nevertheless, fiscal 2008 is shaping up to be a tremendous year and we're well positioned to achieve our long-term goals of driving top line growth, while at the same time improving margins.

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

Thanks, Rick. I'll begin the operations review of DeVry University, including its Keller Graduate School of Management. I'd like to highlight the investments we're making in three areas -- marketing, human resources, and information technology. The next phase of our marketing campaign emphasizes the value proposition of a DeVry University education, which of course is centered on preparing students for career success. This campaign, in fact, is called We Major in Careers, and was unveiled during the first week of January.

This is a good example of costs that were shifted to the second half of the year, as the campaign wasn't really ready in the first half; but now that it is, we plan to ramp the spending on it in the second half. It's also a good example of an investment that will impact second half earnings, yet support future growth.

Central to this value proposition is the employment success of our graduates and the statistics continue to be strong. The most recent three terms, 92.6% of our graduates obtained employment in their field of study within six months of graduation at an average starting salary of $42,805.

In terms of human resource cost, we have several senior level positions that were opened in the first half that we expect to be filled in the second, including the Chief Information Officer, Chief Marketing Officer at DeVry University, and other positions. We'll also be hiring online admissions personnel and increasing marketing spend in DeVry University, which are investments to support the growth at the University's online division.

In information technology, our largest investments is Project Delta, which will ultimately implement a new student information system to improve efficiency and customer service. We've begun ramping up the spending level here in Q3, bringing on a focused team of subject matter experts. And the teams are now diving in to improving processes and ensuring better data quality, while also issuing the RFPs to the vendors for a new student system.

Just a brief update on DeVry University's real estate optimization program. We benefited in the first half from some of the actions we've been taking to rebalance our capacity to better fit local market demand. While part of this rebalancing involves reducing space in certain locations, another part is continued expansion in new markets. So to that point, we opened our first Louisville, Kentucky location, and just this month began offering classes at our Chesapeake, Virginia center. During the quarter, we also relocated our Bellevue, Washington and Elgin, Illinois sites for better location. Looking ahead, we plan to open five to six new locations for the year in total.

Of course, because of DeVry University's trimester system, this quarterly report doesn't include new enrollment information. Just to quickly recap the fall 2000 enrollment we reported last month, we saw increases across the board. New students increased 10.7% and total students increased 10.3%. Keller Graduate School of Management course takers [includes] increased 12.5% and the total number of online undergraduate and graduate course takers increased 28%.

In our medical and health care segment, we're continuing to invest in our facilities and our faculty to address our growing student population at Ross and the continued strong demand. Part of our capacity expansion involves increasing the number of sites where students complete their clinical training. We are in the process of assigning affiliation agreements with two teaching hospitals, which will expand clinical capacity for about 200 students. I should mention that the costs associated with these affiliations are increasing due to competition for clinical training slots, and we'll begin to see the impact of these higher costs in the second half of the year.

At Chamberlain College of Nursing, we recently discontinued the online delivery of the Associate of Science and Nursing program at our St. Louis campus. That will be effective this coming October. The decision was based primarily on student outcomes, again, specifically in the online program in St. Louis. These students had challenges in obtaining acceptable pass rates on the state Board exams. Our pass rates are currently over 90%. Unfortunately, this hadn't been done consistently over the past two years. Because of our commitment to quality, we had previously decided not to admit new students to this program as of last September. And we worked closely with the Missouri Board of Nursing to make this subsequent decision to discontinue delivery of the program. The decision affects approximately 70 students.

Our students are our number one priority and we are communicating with each of them individually during the transition. Some may be eligible to enroll in our Bachelors of Science and Nursing program. This decision affects one delivery method of that one program at that one location -- that's the online delivery of the Associate program in the St. Louis campus. Students enrolled at the Associate program at our Columbus, Ohio location are not affected. And the Bachelors programs are not affected, as these students have achieved excellent pass rates consistently. Bachelors programs represent over 80% of the total Chamberlain student population.

And now for an expansion update for Chamberlain. We are very happy to report that we have recently received approvals to offer Chamberlain's programs in Phoenix, Arizona, and Addison, Illinois -- both co-located at DeVry University campuses. We have plans to launch classes in March of this year. So this brings us to four locations as we make progress on our vision of becoming the first national college of nursing.

We held an open house a couple of weeks ago at the Phoenix campus and the response is overwhelming. And the Arizona Board of Nursing was very complementary in the process. They told us we were the first new Bachelors program in nursing approved in that state in 30 years.

Our goal is to open at least one new Chamberlain site per year, and now here we suddenly exceeded that goal by opening two. So what's the color on that? Of course, we can't always control the pace of new openings because of the licensing approval process. We're often asked, when will we open new locations for Chamberlain? And we know you understand when we're not able to provide that information, because we're in the midst of approval processes. We have several more applications in the queue and we will report progress as soon as it becomes appropriate.

In the professional education and training segment, Becker's performance continues to reflect the strong demand for accounting and finance professionals, and the result of our efforts to strengthen relationships with firms and with professional societies. At Becker's CPA Review, this quarter we established new relationships with Wipfli, one of the top 25 accounting firms and the American Society of Women Accountants, which is significant because 60% of all CPA candidates are women. In addition, we renewed our relationship with RSM McGladrey, one of the top six accounting firms.

At the Stalla CFA review -- which is of special interest to all the CFA's on this call -- we renewed our relationship with one of our largest partners, the CFA Society of Washington D.C., whereby we provide course work to their membership. And finally in this segment, internationally we established new relationships with the CFA Society's in Belgium and in Luxembourg.

So, in summary, our strong fiscal 2008 second quarter and first half results were driven by solid enrollments across all our operations, both on-site and online. Our earnings benefited from significant operating leverage as well as from effective cost and asset management. We welcome the newest member of the DeVry family through the acquisition of Advanced Academics. And we believe the investments we're making in the second half of 2008 will drive even greater momentum in the longer-term.

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

Wonderful. Thanks, Daniel. We're excited to take your questions, and as we did last quarter, we're allowing for some extra time in order to answer all of your questions. So, [Eric], if you can give the instructions, we'll begin the Q&A.

(OPERATOR INSTRUCTIONS). Amy Junker, Robert W. Baird.

Thanks for taking my question. I guess first question just within DeVry University, Daniel, now that we have the fall enrollment numbers, can you give us a little more color in terms of if you saw really a meaningful pickup in the high school students in that class? Or at this point if the growth is really still being driven by working adults? And then along that vein, have you started recruiting at the high school for next fall yet? And early feedback in terms of from the high school market you could share with us?

Sure. Thanks, Amy, and we're pleased with the progress we're making in revitalizing our high school recruiting efforts, with relatively new leadership, a new high school presentation, visiting more high schools and reaching more high school students, where we reach about three-quarters of a million high school students per year with that program.

Yes, we did see an increase in the fall in both broad stroke segments -- both the high school graduate segment and the adult student segment. It's going in the right direction; not where we want it to be within the high school market, but we are committed to the high school market. We've done some recent work looking at the program, and based on that analysis and based on that work, we've, if you will, recommitted to that and we are committed to that high school segment.

And the early indications for future classes continue to move in that same positive direction. So thanks a lot for asking about that.

Great. And if I can just ask a quick follow-up with respect to Sallie Mae. I'm just curious if their recent decision has impacted your thoughts or strategy at all going forward on adding more Associates degrees to your repertoire or if that's changed at all?

No, it hasn't. We continue to look at our portfolio and recognize that we don't have as much presence at the pre-baccalaureate level as we should. It's a huge market. It's a growing market for education, educational services. There's a tremendous need. And as we've always said, our intent is -- and the opportunity that we see there -- is for a player who is -- a high quality positioned player in the pre-baccalaureate level. So Associate degrees and diplomas and certificates, those remain attractive segments.

You really have to -- and actually, I would encourage you to listen to what Sallie Mae said at their big meeting yesterday. I encourage you to read that. They must have said a dozen times if they said it once -- you can't make broadbrush assessments. You have to look at the quality of the student outcomes. And that's why we were trying to provide a little insight into that here. You have to look at the cohort default rates. You have to look at the employment statistics. You have to look at the quality of the programs. You have to look at the efforts that are put in place to educate students on their financial responsibility.

So there are definitely opportunities to do that at all levels of the educational spectrum. And so we continue to be excited about continued growth at the pre-baccalaureate level.

Great. I appreciate the thoughts. Thanks.

Bob Craig, Stifel.

Good evening, everybody. Congratulations on the quarter. Just a couple of questions for you, one on the lending side. Sallie is not the only lender you use on the private side, or are they?

They are not the only one, correct.

Okay. You have how many?

We have numerous lenders. Traditionally, we've had preferred lending arrangements with three big lenders. We are in the process of doing the RFP. We are in the RFP process. We've had responses from over two dozen lenders, by the way, in that process. And so we haven't made any announcements about who we're going to select. But it will be at least -- in accordance with the new guidelines, it will be at least three preferred lenders.

Has Sallie been (multiple speakers) --

Just because you're -- by the way, I just want to be clear -- and I know you know this, but just in case anybody is not aware -- just because you have three or four or whatever number of preferred lenders, that doesn't mean those are the only lenders you deal with. We'll deal with any lender that a student wants us to deal with in order to serve that student.

Okay. Has Sallie been the largest?

(multiple speakers) have many, many lenders.

Yes. Has Sallie been the largest, Dan?

Uh, the largest in the private -- yes. They would be the largest.

Okay. A couple of questions on the increased spending in the second half. I know you guys don't break out marketing costs specifically, but is it possible to quantify the increases year-over-year in marketing spend that you will be incurring in the second half? And/or compare that with the first half?

Yes, that's why I tried to portray in my comments -- this is Rick talking -- we talked about some of the investments we're making that are going to affect both marketing and recruiting that will increase sort of the run rate of expenses in the third quarter and fourth quarter.

Okay. But in terms of percentage increase year-over-year, you don't want to go there?

Prefer not to.

And have you estimated -- I can't recall it -- you estimated the total cost of Project Delta?

Yes. We've talked about that in the $40 million to $50 million range in broad strokes over a several year period. And that's our -- it's very early, so that's a broad range guess.

Okay. And last quick one, can you just aggregate the growth in revenue in the professional and training segment between price and volume?

I'm sorry?

Desegregate the 21.5% revenue growth in the professional and training segment between volume and price?

Oh, it's mostly volume. Yes, under 5% or approximate 5% pricing increase. So you can see the majority is volume.

The other dynamic beneath that volume just in case it's helpful, is a real focus on providing a full solution to the students -- especially at the Stalla review for the CFA, we're finding more and more students who are interested in the full Stalla study solution -- a lot of s's there -- as opposed to those who are interested in just buying a book and then studying on their own. And that increases the amount of revenue per student, so we're pretty focused on that.

Great. Thanks, guys.

Sarah Gubins, Merrill Lynch.

Just to clarify Rick's comments about the increased expense, are those off of a run rate of the second quarter? I'm just wondering in particular because in student services and administration, there was obviously a big swing between the first and second quarter. So, are we talking about 106, 107 in student services expense in the third quarter? Is that how we should read that? (multiple speakers) I'm sorry, a little bit more than that.

Yes, working off the second quarter run rate is what I was referring to.

Okay. And then Sallie and other lenders have talked about lowering borrow benefits within the federal financial aid. And I'm just wondering if you expect that to have any negative impact on your students or on your enrollments?

No, we don't. Nothing that we've seen.

Okay. And then last, if you can just give us a quick update on real estate in terms of how much more there is to go on that?

Sure, I'll take a crack at that. If I miss something, Rick, jump in here too.

You might think about it that we've addressed about one-third of the portfolio of large campus facilities so far, through a sale of leaseback or a sale in a move to another facility, co-locations and so forth, all the different levers that you can pull.

There's probably another one-third of the portfolio that we are focused on pending the economics and deals coming together. The remaining third we are broadly speaking in pretty good shape for now. We are always looking at it, but those are probably better shapes. We're focused on about one-third of them at the moment.

Okay. And then last quick question -- within your fall enrollment, can you talk about the demand for IT programs versus business and health care programs?

Yes, we continue to see good growth across the board. I don't think there's anything really noteworthy that there was a huge influx in one vertical curriculum area relative to the other. So nothing of particular note there, Sarah.

Trace Urdan, Signal Hill.

I appreciate those comments, Daniel, about the lending environment. I'm wondering if you could help us understand, maybe just even with respect to DeVry, how it is that the lenders are gathering this data about the schools that at least Sallie has identified as being kind of critically important. Do you sense from Sallie, for instance, that they're collecting more information from you guys about those metrics that they've suggested are important?

No, Trace. Sallie Mae knows DeVry and all the DeVry institutions, not just DeVry University. But they know our cohort default rates from DeVry to Chamberlain to Ross, where it's 0.2%, very well. So I don't think they need to collect any more information in particular. Certainly we work a lot cooperatively with all the lenders that we work with, not just Sallie Mae, to work cooperatively, to analyze data, analyze trends so that we can all do a better job of helping students finance their education. That's -- everybody -- that's the goal, is to try to help as many students as we can finance their education with the appropriate package of federal loans, private loans, federal grants, state grants, scholarships, the whole gamut.

But no, I don't think there is any new sort of data probing that is going on. They already know the data pretty well.

Well, here is the reason for my question, because my read of their remarks suggested that they were kind of taking a swipe at non-traditional students across the board. And you're contending that they are drawing distinctions between higher quality institutions and lesser quality institutions. And I'm just trying to figure out how that's going on. You and I know what DeVry represents versus another school. And I guess I'm asking how it is that the lenders are making those distinctions?

I think they are making those distinctions based on not necessarily new data, I think they themselves said they weren't paying attention to the data that they had as well as they should have. Or maybe not so much paying attention to the data, but they weren't as disciplined in some of their policies and practices that they used -- maybe they got away from some of the classic policies perhaps. Those are the kinds of things that we should obviously let them answer to.

But they did -- to the other part of your question -- take great pains to state that this is not unique to the market funded, as we call it, market funded sector of education. Such that they are going to somehow negatively discriminate against those schools or the students of those schools that are funded by market investment capital as opposed to those that are funded by -- the states are funded by philanthropic activities. So this is not -- this is -- when you take traditional and non-traditional, they were talking about programs that have poor outcomes, and because there is a correlation between poor outcomes and them the default rates and so forth.

I'm sorry to persist with this, but I'm trying to sort of counter or at least address some of what I perceive as being some of the short seller issues in the marketplace. But in your estimation, do you think there is a scenario in which a students with a strong FICO score but who is enrolling in an institution that has traditionally poor default rates might find it difficult to attract a loan? In other words, are they going to start to sort of pay more attention to institutional quality and less attention to just plain old credit scores going forward, would you say?

I would say that they are going to a better job -- what they've said they're going to do is do a better job of looking at that whole picture. Because they do look at the individual student information and they look at the institutional information. And to the extent that you are trying to counter those who have a shortsighted view of this, let me lock arms with you, Trace, because I think -- we clearly believe that this is not a long-term and there's a lot of short-term reactions going on out there. But there's still very good business here for the lenders to lend money to students so that they can go and finance an education, and thereby generate the earnings to -- improved earnings power to go pay back those loans. That business is still a very good business. And it should be, because it is performing a vital function in our society.

That's not going away. There's some near-term dislocations in some things. In the long run, it's probably creating opportunities. And that's what these short-term dislocations often do, is create long-term opportunities. So we'll continue to keep a long-term focus and keep the focus on doing what's right for the students.

Okay. Thanks for taking the leadership to help us understand the situation better, Daniel.

Okay, you're welcome. Thank you. Appreciate the questions.

Suzy Stein, Morgan Stanley.

Going back to the cohort default rates and just thinking about how they have become much more important I guess in the past. As long as you weren't near 25%, we didn't really pay that much attention to it. But in thinking about how that is becoming more important for lenders going forward, what are you doing as an organization to manage that with students after graduation? Is that something that you are investing more time in?

Yes, we are. I mean, we've always invested time there. And the results show it with the cohort default rates that were in the press release we put out Tuesday, as low as less than 1% for some of these institutions.

What we're doing even more so is the education that we do with students and the counseling. I mentioned some of those things. For example, helping to educate students on the importance, in many cases, of getting a co-borrower to sign up with them. That can help them get more and better financing and more attractive rates.

We do counseling and educational programs with students to prepare them and make sure that they understand their re-payment responsibilities after graduation. And we do work with the lenders to provide that kind of education. And in many other thrusts and activities and investments that we make, all of which has paid off. And once again, DeVry's long-term focus on quality has served us in good stead. So those are some of the activities.

Okay. And just one more question. Can you talk a little bit more about EDUCARD? I guess I was always under the impression that this was used mostly for out of pocket expenses for students as opposed to for tuition. Is it your intent going forward if the lending environment changes to use this in a different way?

Not necessarily to use it in a different way. It has always been there for student's cost of education including both tuition and non-tuition related charges. So there's nothing new there at all. We've had this program for 30 years. The performance of that loan portfolio, if you want to look at it that way, has been fine, and improving, by the way. In the recent environment, it continues to improve.

So despite all the buzz and all the noise, the performance is improving. We're adding resources to ensure that that continues to be the case. And yes, strategically, we are prepared to use our strong balance sheet and to use this capability that we have if needed at greater levels. So far, we don't see a need to do that but we are prepared to do that. And I think strategically for the long-term, we'll need to keep that facility in place so that if there's any short-term dislocations, we are prepared to handle that.

Kevin Dougherty, Banc of America.

Great. Thanks for taking my call. I just had a follow-up on that last question. Could you maybe just say what the size of the EDUCARD receivable was at the end of the last quarter?

Yes, the -- well, the receivables balance was -- just hang on, I'm looking for that -- do you have that, Rick?

Yes. The total receivables --

Here it is.

-- the net receivables within DeVry U.S. was about just under $55 million to $60 million was the net balance.

And how has that really trended in the last few years?

Well, again, when you look at any point in time, as you're looking at during the term versus the end of the term, it will go down dramatically. So like at the end of last year, I think we were down $17 million at the end of last fiscal year, which is really the data points you've got to look at. Because students will be financing things during the term and then what we try and do is get them to pay it off while they're in school in that term before they go into the next semester.

And what would be some of the -- maybe the interest rates that students would be paying on that program versus what they may be saying from some of their private loans? I mean, how comparable would those two funding sources be?

It's fairly comparable. I mean, it's -- as we state in our 10-K, it's a percentage point each month. So about 12% annually.

Okay. And just to switch gears, I know you had talked in the past about some shifting in the average course load per student. How has that been trending? And maybe how does that vary between DeVry and Keller? And just kind of the -- maybe where the mix of your full-time versus part-time students would play out as well?

The course load per student, first within Keller, it's remained relatively stable. That has not been the driving force of change. It's been more that we've seen over time, over the past few years, a decrease in the course load on the undergraduate side with a mix of more online, more adult students that tend to take fewer classes. That's begun to stabilize and in fact, most recently we've seen it relatively flat to the prior term.

And have you broken out that mix of part-time and full-time between Keller and DeVry University?

Yes, we break out, yes, the Keller but we don't break out the full-time/part-time mix numerically. We've never broken that out. But I can assure you that, as Rick just said, it is bottoming out and that's because there's a real focus on that. We see an opportunity in increasing that credit hour per student statistic. And that's a good thing for students because they finish sooner, they actually pay less in total for their program, they start earning faster so the value proposition is stronger. And it is better for DeVry as well.

Yes, it goes back to the at-value proposition and just overall financing story with the student. If you can complete your degree in three or four years versus stretching it out over four, five, six years, you obviously start earning that higher salary quicker and your overall cost of your education is much less.

Okay. Thanks for the commentary.

Corey Greendale, First Analysis.

First question is for Daniel, if I could ask you to put a macro hat on, not a large hat but a macro hat. Given looking at the DeVry's history, would you say that the economy at this point over the next six months is your friend or your enemy?

We think the economy is our friend. One of the things that you see in the macro picture -- to respond to your question there -- that most people on this call certainly understand is that the a-cyclical nature of educational programs is a little bit more pronounced with shorter programs, where there's a little bit more of a dynamic of some potential students who might have gone to certain jobs where those jobs may not be there, than going back to school. That dynamic is much less pronounced or non-existent with most of the longer programs and professional level programs.

So, an obvious example would be medical school applications, have no correlation whatsoever, that we can find, to the economy. Nursing programs, veterinary programs, accounting. Accounting actually was down through the boom times of the '90s -- sort of almost without explanation. And then started booming actually during the soft economy post-2001. Probably more correlated with Sarbanes-Oxley, obviously, and things like that.

And so there is more of a -- many of these programs, these vertical curriculum areas tend to be on their own cycle rather than tied to the economy. So when you look at DeVry's portfolio as it is today relative to some others, I think we are much less either cyclical or counter cyclical. And so you might call us a-cyclical.

And actually you mentioned Ross, do you have any updates on the timing of some of your expansion efforts there, when you might be able to increase the capacity?

Yes, at Ross, and there's some things that are in process that we are just not able to comment on at this point, and the real issue is the capacity at the medical school in the September term. Not so much in the January and May. And it's not so much an issue at the vet school.

But we do have a number of irons in the fire including physical capacity, teaching capacity, human capacity, in terms of the high quality faculty that we have and we are building on, as well as the capacity beyond the science program that happens in Dominica. 60% of the time they actually spend in the U.S. at rotations in teaching hospitals -- partnerships that we have. We are adding to those partnerships. I made a comment on that in the prepared remarks.

And this is one where -- it is a high-class problem, I guess, but if we had a fault, we were probably too slow to expand the capacity. But I guess just our focus has been on ensuring that academic quality because we know that quality leads to growth. Quality underpins growth. And the investments that we've made in improving quality academic outcomes at Ross is evidenced by the outstanding U.S. medical licensure exam Board scores that they have, had led to the surge in applications that we've had.

So that's about the color that I can give you. I can't give you a lot of detail on timing just at this point yet.

Okay. And lastly, Rick, if I could just go back to some of those cost increases that you mentioned, are the vast majority of those going to be in the DeVry University segment?

Yes, just because DeVry University is the biggest piece of our portfolio, I would say so. But it is across the board because there's things going on within Ross, as Daniel mentioned, as well as our professional training segment, so -- and Chamberlain.

Okay. And within those buckets, how much would you say or could you take a guess at how much would be more kind of project based or temporary as opposed to in perpetuity hirings that you're doing?

I don't want to even take a guess at that because it's -- as we make some investments, let me take an example. We mentioned the online expansion. That's something you could say that's a one-timer. But as we -- if we prove that that continues to pay long-term dividends, we'll continue to do more of that in the coming years. So a lot of it depends on the payback we get from these investments and how we evaluate each one as they play out.

Brandon Dobell, William Blair.

Rick, a couple of quick housekeeping ones for you. As you think about tax rate the next couple of quarters, it's been bouncing around a little bit. Should we trend it the same way? Should it look like the first half of the year?

And then also, the acquisition you guys made, [quite a] pretty immaterial contribution to this quarter's results and how should we think about the contribution in the next couple of quarters?

Sure. On tax rate, our tax rate is something we try -- as we do in our rates for each quarter -- try and do a projection of what the year is going to be. So it is all dependent upon the mix of what is going to be domestic versus our international business. So our first half rates should be a good estimate for the full year.

And as far as Advanced Academics, we said what percentage it was of -- in terms of basis points for the first -- excuse me, for the second quarter, it was only two months in our business. And so you can try to extrapolate it from that. For competitive reasons we prefer not to give exact numbers on Advanced Academics.

And from an earnings perspective, while we will be making money sort of at EBITDA level, we do have amortization of goodwill. So it's sort of -- it's immaterial at the profit line for the balance of the year.

And Brandon, I'm sorry, it's Daniel, if I could just jump in here. I want to make sure you understand, we're not trying to be evasive, we're not trying to do anything but just -- this online high school market is growing very quickly. It's very attractive, there's a huge need for it. And there's a lot of people who would like to know a lot about what we are doing. And so that's the reason we just aren't disclosing much there.

Fair point. And then maybe kind of combining a couple of questions and comments you guys made, I'm trying to reconcile how we should think about the extra second half of the year spending, which you guys laid out nicely with your comments, Daniel, about we're only kind of one-third of the way, maybe half a way through some of this real estate optimization stuff. Should we see -- if you look at the run rate expenses here in the second quarter which are the based on we're using to add up or increase spending going forward in a number of areas, is there a corresponding or somewhat of an offset from a real estate perspective we should think about as well that will play into how we think about back half of the year, primarily cost of [that] services?

I think, not really. Certainly there could be announcements of actions that we are taking, but their P&L impact would be hard to forecast at this point. And then probably not highly material to the third quarter since we are already partway through the third quarter and we're not announcing anything. So probably not a big impact there.

Okay. And then final question. Generally looking at the last couple of years of seasonal revenue trends in the different business segments, anything from a timing of starts or launch of programs or anything like that that would be different as you look out to the margin, the June quarters from what we've seen the past couple of years? Or is the past couple of years a pretty good guide for how quarter-to-quarter revenue trends should look like this year as well?

You talking about at the top line with revenue -- it really shouldn't be anything dramatically that affects the seasonality of our revenue across their different business segments within DeVry University. Things tend to be a little smoother out than they were maybe historically several years ago, as we've more -- the sessions have become a bigger piece of our core business within the professional training segments. Q2 is typically softer, but we've been seeing a nice increase as we demonstrated by the results in this quarter that that's tending to be smoothed out as well, especially given the change in the way the CPA examine is administered as well.

And Ross and Chamberlain, those are -- shouldn't change much in terms of seasonality. Chamberlain, we're going to see pickups given the expansions that are going on with the new facilities.

[Ryan McGuire], Lehman Brothers.

Congratulations on a great quarter. Just back to the EDUCARD program, I was wondering if you might provide some data on what the average re-payment period or the average borrowing amount per student might be?

Again, the average amount varies throughout the term. And the goal being that for a student that's in school, we try and have them pay off their balance by the end of the term to start the next term. But there are things that carry over and it varies. I think some students we have it go beyond the term but in total it's usually around $1,000 per student.

Okay. But by the time the student's graduated, that balance is expected to be paid off?

Yes, and then, again, there are cases where some students pass it [on] beyond graduation. We try and keep that down as part of our collection activity.

Okay, great. And then Rick, just to clarify your comments on incremental costs in the back half of the year, I just wanted to be clear on that. Is that about a $10 million increase over the second quarter in each of the next two quarters, the third and the fourth? Can you just clarify that?

I put it into three buckets, one was just seasonality because the business will have some increase in revenue too in the third quarter, so that's part of the direct costs. And then, yes, the timing shifts will likely add 4 to 5 in both direct and operating expenses in both quarters. And then, depending upon the timing of our investments, that will probably be around 5 to 7 per quarter as well. So yes, those are additive.

Okay, great. And then just one last one. Given some comments in the past about some M&A activity especially in some of the technical vocational segment of the market, I was wondering if you might just provide an update on the M&A pipeline, what you guys are seeing there, what you're thinking about?

Yes, that continues to be strong. We have a strong corporate development business development group and also outside advisors that are helping us with that. We continue to look at the pre-baccalaureate level. So that's Associate degrees, diploma certificates, particularly with a focus on allied health programs. And when we say allied health, we delineate the primary caregiver being, for example, a doctor or a nurse or in the animal medical world, the veterinarian, whereas the allied health might be the person who is allied with that primary caregiver. So with that [tack would have been] the medical assistant.

So that's a focus. International markets are a focus for an M&A investigations as well. And there's still many, many good opportunities out there.

Okay. Great. Thanks, guys.

[Scott Sleverville], Oppenheimer.

Good afternoon and congratulations. First question, could you speak a little bit to pricing? Just your forward outlook within DeVry University and within Chamberlain, competitive pressures? Anything in light of the lending environment that changes how you're going to go forward there?

No, nothing that we have seen in any of the lending environment has impacted our outlook on next year's tuition increases. We are in that process of analyzing that now. And I would expect nothing -- no radical departure from our past practices. We continue to look at that from a competitive standpoint. We are looking at what the market is doing, what the publicly funded schools are doing, what the privately funded schools are doing, what all the market funded schools are doing. And that's really the main input into that analysis and that pricing strategy.

We are also looking at the structure of pricing, trying to take a look at are there any ways that we could do a better job there in terms of the way it is packaged and the structure of it. And that's part of our strategic plan over the next couple of years is to do some tests and some pilots to see if we can do things that are a better form of pricing; not just the level but the structure of it.

But overall, levels we would expect at this point to be along the same lines that we've seen over the past few years.

Okay, thanks. And I assume you're speaking very broadly across DeVry University and maybe in the medical, but specifically in Chamberlain, are you seeing any pricing pressure from added competition?

No. No, not at all.

Okay. And then just a question going back last year you had some headcount reduction. You had forecast about a $10 million operating margin impact annually going forward. Just curious to hear, was that estimate accurate? Are you seeing a more positive result in your financials? Negative? Is the timing on time? Just how is that tracking per the guidance you gave prior?

Sure. This is Rick. That number that we gave when we took those actions in the fourth quarter last fiscal year were based upon our estimate of the savings from the positions that were eliminated net of any addbacks of positions we'd have to make to go forward. And I think what we found is that the timing of some of the addbacks may have taken a little bit longer, that some of the positions that we talked about earlier that haven't been filled.

So, in reality for this fiscal year, it'd probably end up being a little bit bigger number than that. The gross amount was [right] on target from what we thought but the net amount was probably a little bit higher.

We are showing no more questions in queue at this time.

Very good. Well, thank you all for your questions. I want to remind everyone our next conference call will be held on April 24. And that announcement is not just third quarter results but also the spring enrollments at DeVry University and Ross University.

So thanks again, everyone, and we will talk to you next time.

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