Adtalem Global Education Inc (ATGE) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2009 DeVry earnings conference call. My name is Jeremy and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's call, Ms. Joan Bates. You may proceed.

Thank you, Jeremy. 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 has a view, objective or outlook the management believes, expects, anticipates, foresees, 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, 2008, and filed with the SEC on August 27, 2008.

Telephone and webcast replays of the call are available until October 30th. To access the replay, dial 888-286-8010 domestic, or 617-801-6888, international. The pass code is 29338872. A replay is also available in the Investor Relations portion of our website.

And, as a reminder, our press release and preliminary financial statements are available in the IR section of our website located at www.DeVryInc.com.

I will now turn the call over to Daniel Hamburger.

Thank you, Joan, and thank you all very much for joining us today for our fiscal 2009 first-quarter conference call. I will provide a brief introduction, and then Rick will discuss our financial results, and then I'll come back and review operational highlights in the quarter before we open it up to questions.

During the first quarter we continued to execute our strategic plan, delivering strong financial results and increases in enrollment. At the same time, we invested in future growth through enhanced academic quality, continued diversification and investments in recruiting, marketing and technology. Of course, I'd like to highlight our key accomplishment this quarter, and this is the completion of the US Education acquisition on September 18th.

In this economic environment, getting any deal done, much less a $300 million one, is an accomplishment, and we're certainly pleased to welcome US Education to the DeVry family.

Apollo College and Western Career College together serve over 9000 students for careers in the high-growth allied health sector through certificate and associate degree programs. While in its early stages, the integration is on track, and we are working to take advantage of the numerous opportunities we have from this combination. These include adding new programs, new locations including co-locations and leveraging DeVry's high-quality online capabilities.

For this quarter, we also launched the Keller Center for Corporate Learning. This program delivers educational solutions to businesses and their employees through a variety of educational offerings, including degrees, more than a dozen MBA concentrations and graduate certificates and professional education. Our objective here is to increase DeVry Inc.'s share among corporations, government organizations and the military by leveraging the DeVry University, Keller Graduate School and Becker brand.

Now let me offer an update on the student loan situation and how it's affecting DeVry as well as just comment on the current economic environment generally.

We have been closely monitoring the news regarding financial institutions that provide loans to our students. We, like all education providers, strive to ensure that students who want an education have access to the loans they need to finance it. Now, we're concerned, we're being vigilant and we're literally monitoring the situation on a daily basis. Some lenders have announced they were exiting various loan programs for some schools. Sallie Mae has announced that they're tightening underwriting criteria for private loans but also indicated they expect the criteria to relax somewhat by the end of the calendar year.

So, given all these announcements and all this news, where does DeVry stand? We are fortunate to report that, to date, we are not seeing a material impact on our continuing students or on our new enrollment as a result of these recent events. DeVry is well-positioned in the student lending area for several reasons.

First, private loans make up a very small percentage of the loans used by DeVry students. Also, increases in federal loan limits and Pell grants have eased the need for private loans. Prior to these increases, private loans had been running about 5% of 6% of revenues, and now we expect that level to decrease.

Second, DeVry students have several alternative funding options. For example, DeVry University students are eligible for most of the state grant programs available; those are grant monies. Students of DeVry can also take advantage of EDUCARD, the internal financing we have provided for more than 30 years.

And then, third, lenders continue to make themselves available to help DeVry students. What we're finding is that as lenders cut back on lending or increase their standards, DeVry is one of the organizations that they want to work with. In saying this we are not trying to boast or anything like that; it's just that it's due to the fundamentals -- our students' excellent record of employment outcomes and favorable loan default rates. And we are doing everything we can to help our students obtain financing. We maintain strong Pell and private loan options for students, and we're continuing to explore options with new lenders to provide expanded private loan availability. In addition, we're fully operational with direct loans, and we are using this mechanism as needed.

So the take away message is that, while we've experienced no material impact to date, we continue to monitor the situation very closely and we continue to pursue all available funding options for our students. Let me now step back and comment more generally on the global economic crisis. You're probably wondering whether, given all the volatility and turmoil, we believe we can continue to grow as we have in the past.

The answer is yes. Education and health care less sensitive to economic downturns, and we are at the intersection of both. For example, we now have in medical and health care education 15,000 students and $400 million in tuition revenue, up from zero five years ago. So our strategy of diversified growth is serving us well in this downturn. In fact, we're seeing somewhat of a pickup in demand as those who are unemployed or underemployed are considering going back to school, especially in allied health professions.

But, to balance these comments, one area that is running a bit counter to this is our Professional and Training segment, as softness in the financial industry is being felt at Becker Professional Review. During this crisis our conservative capital structure is also a source of strength. We have a strong balance sheet and plenty of liquidity. In fact, we're on the lookout for investment opportunities that may present themselves, such as depressed asset prices, reduced advertising rates or management talent which may become available. We see in the current crisis the seeds of opportunity. We'll be prudent -- this is DeVry we are talking about, after all -- but we will be aggressive where we see opportunities to enhance shareholder and academic value.

So with that as a broad introduction, I'll turn the call over to Rick for the numbers and for progress on our financial strategy.

Thanks, Daniel; and good afternoon, everyone. As you have all seen on our press release, we delivered very strong results in the first quarter of fiscal 2009. Quarterly revenue surpassed $300 million for the first time. Revenue of $303.7 million was up 21.3% versus prior year. Reported net income of $34.8 million in the first quarter was up $8 million, or about 30% versus prior year. Earnings per share of $0.48 increased $0.11 versus last year, but note that fiscal 2008 first quarter results included a loss of $2.3 million net of tax, or about $0.03 a share, from the sale-leaseback transactions at Phoenix, Seattle and Alpharetta.

Earnings per share were up 20% excluding this discrete item on a more apples-to-apples basis of comparison. Pre-tax income margin was 16% in the quarter, up versus 15.9% achieved a year ago excluding the discrete item. Our reported results include US Education. For 12 days we owned the business during the first quarter. US Education contributed $5.6 million of revenue in the quarter. Therefore, total revenue growth would have been up 19.1% excluding the impact of US Ed.

Incremental net income contributed by US Education was not material as the additional operating income was offset by incremental amortization expense and interest expense related to the acquisition. Some details shown on our press release on the results of US Education in the quarter, and pro forma financials on a quarterly and annual basis will be filed by the end of November, in accordance with SEC guidelines.

Also for your reference, first quarter results include expense-related to share-based payments of approximately $3.1 million pre-tax, or $2.6 million net of tax. This is higher than last year's first quarter expense of approximately $1.5 million pre-tax or $1.3 million net of tax, primarily due to the appreciation of our stock over the past year and an increase in the number of retirement-eligible awards which are fully expensed upon grant.

Our overall effective tax rate was 28.3% in the quarter, up from 27.4% rate for the full fiscal 2008, primarily due to the increase in domestic sourced income. We continued to realize gross margin leverage in the quarter as cost of educational service expense increased by 15.4% versus prior year, excluding the discrete item, compared to 21.3% revenue growth as we continue to drive leverage within DeVry University. The increasing cost of educational services would have been up 12.7% excluding US Education.

Now student services and administrative expense increased by 28% in the quarter or 26.2% excluding US Education. The higher rate of growth is consistent with the perspective we provided last quarter with the growth in spending driven by tightening shifts last year when we deferred some spending and had a number of open positions. The online growth acceleration actions within DeVry University and Chamberlain College of Nursing increased advertising and brand-building across all of our segments and investments in facilities, people and systems to build our infrastructure and support future growth.

Now, we are making these investments because they are delivering positive returns on our owners' capital by improving academic quality and driving growth.

Let me now walk you through some of the key highlights of our operating and segment results, which are detailed in the earnings release.

First, the DeVry University segment revenue was up 18.4% versus prior year, driven by the strong summer enrollment growth coming from continued online expansion and improved on-site enrollments. The addition of Advanced Academics contributed about 100 basis points of revenue growth in the quarter. We acquired Advanced Academics October 31st of last year, so next quarter will be the last before it completely overlaps.

DeVry University segment operating income increased by 31% or up about $6 million in the quarter excluding discrete items. This improvement was driven by gross margin leverage, offset somewhat by the higher marketing and recruiting spending versus last year. The Medical and Health Care segment revenue was up 43.1% in the quarter or 28.1% excluding the impact of US Education. This growth was driven by Ross enrollments and Chamberlain's geographic expansion into Illinois and Arizona, along with the accelerated growth of the online RN to BSN program.

Operating income for the segment of $15.4 million was up $3.8 million or 32% versus last year. Operating income would have been up about 23% excluding the impact of US Education. As footnoted in the segment results within our press release, US Education continues to perform very well. On a stand-alone basis for the full quarter, revenue was up 22.4% and operating income increased 71%, driven by increased enrollments and operating leverage at the campuses.

Finally, our Professional and Training segment saw revenue growth slow down a bit to 7.9% due to the overall economic slowdown, particularly among the financial firms that Becker and Stalla serve.

Operating income was actually slightly down versus last year due to the increased investment in business to business development and costs associated with our new Hong Kong office. It should be noted, however, that we're overlapping some very strong results from last year, and that business continues to deliver very strong operating margins.

Our balance sheet reflects the impact of acquiring US Education a couple of weeks before the end of the quarter. We borrowed $166 million in the quarter and utilized available cash to fund the acquisition. Our cash and marketable securities balance was about $242 million at the end of the quarter compared to $223 million last year and cash flow from operations in the quarter was $97 million versus $80 million last year.

Our net accounts receivable balance was about $155 million versus $76 million last year. Over half of this increase was a result of the addition of receivables for US Education and Advanced Academics that weren't in last year's balance. Another 20% or so can be attributed to increased enrollment and strong revenue growth in the quarter. Most of the balance, or about $15 million, is because DeVry University receivables were higher than they should have been due to some hangover from our financial aid processing issues mentioned in our August conference call. While the system issues have been remedied, some of the processing for student accounts still need to be updated as of the close of the quarter. Improvements have already occurred in October, and we should be back to normal within the next few months.

I would also like to note that our solid liquidity position was further enhanced recently with the IRS issuing a notice providing companies such as ours with offshore cash the ability to access these funds on a short-term basis without triggering a tax on the funds. In essence, this notice provides us additional liquidity by being able to tap our over $100 million offshore cash balance as needed for domestic purposes for up to 60 days, three times a year, within the next two years. This provides us short-term source of capital for debt reduction, share repurchase activity or other purposes.

Our capital spending was $10.6 million during the quarter versus $6.9 million spent last year. Capital spending is expected to pick up during the balance of the year with total capital spending for the year in the $75 million range, including US Education. This higher level of spending is due to spending on our student system project called Project Delta, spending associated with Ross's expansion into Grand Bahama, DeVry University and US Education spending on facility improvements and new locations and continued geographic expansion within Chamberlain College of Nursing.

That concludes my overview of the very strong results for the first quarter. We will continue to focus on operating improvements going forward while making the investments needed along the way for improved academic quality and future growth. We are also very happy to have US Education as part of our strong portfolio of businesses going forward.

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

Thanks, Rick. Let me begin the operations review at DeVry University, including its Keller Graduate School of Management where, for the September 2008 session, total graduate course takers were up 12.2% versus the same period in 2007. As we do every year, we'll report DeVry University fall 2008 undergraduate enrollment and November session graduate enrollment in early December.

The first priority of our strategic plan is achieving the full potential of DeVry University. This involves increasing our investment in marketing and recruiting, including brand building, enhancing capacity utilization through facility rationalization and adding new programs and improving retention through customer service and academic quality. We are making solid strides in all these areas. We are in the process of gaining approvals for three new tracks for our computer information systems, or CIS, degree program. New tracks in CIS include enterprise computing, health information systems and Web game programming. We are adding these in response to demand from students and from employers and restructuring them as tracks within CIS rather than individual programs to make them more flexible to deploy.

One of our largest initiatives is the implementation of Project Delta, our new student system that will take DeVry to higher levels of efficiency and service. We continued to ramp up the spending level in the first quarter as we staffed up the team of subject matter experts, and we are now close to selecting a vendor.

Academic quality continued to be strong at DeVry University. For the past year, 92% of our graduates in the active job market were employed in their field of study within six months of graduation, and this at an average starting salary of over $44,000 a year.

Moving onto Ross University, in the September 2008 term total students increased 8.8% and new students increased 6.3%. Ross continues to make investments in faculty, classrooms, clinical affiliations and student housing to respond to capacity constraints and to continued strong student demand. One way that Ross markets itself to prospective students is through information seminars that they hold. I attended one of these a couple of Saturdays ago, and the place was packed. The quality of each incoming class also continues to increase. For the September class the average grade point average was 3.5, and the average MCAT was 26, which demonstrates that even with our enrollment growth we continue to attract high-caliber students.

The new clinical center in Freeport, Grand Bahamas, that was announced in July, is on track for a January 2009 opening in its temporary location. Hiring is on track, and the Dominica Medical Board has given its approval for the new location. Boy, that was easy to say, but let me tell you, it is not easy to achieve. There are a lot of moving parts here, and the Ross team is doing one heck of a job.

At the Chamberlain College of Nursing, Chamberlain, like Ross, continues to respond to the huge unmet need for health care professionals. We believe, of course, that there are tremendous growth opportunities for Chamberlain. There's currently a nationwide shortage of approximately 200,000 nurses, and that shortage is expected to grow in the coming years to over 1.1 million nurses. And yet, at the same time, the US educational system is turning away 40,000 qualified applicants every year.

So at Chamberlain we are investing in the facilities, faculty and technology to help meet this market need. Our goal is to open at least one new location per year. And you will recall they opened two new sites last year. We have submitted an application for a new site in Jacksonville, Florida, and expect approval to open in fiscal 2010. We expect to launch a Masters of Science in Nursing program next year as well.

Let me also make a few additional comments about US Education as it joins our Medical and Health Care group. Both Apollo College and Western Career College are performing well and our joint integration team is doing a super job. They have only been onboard a few weeks now, but we're actively moving ahead, focused initially on infrastructure integration such as finance and accounting, information systems and human resources. Next we will begin looking at process improvements and best practice sharing in several key operational areas, and then the final phase of integration will focus on execution of the growth plan, which includes site co-locations, program rollouts and online expansion.

Let me also add that enrollments at Apollo College and Western Career College do not appear to have been negatively impacted by the tightening credit environment. I recently had the opportunity to visit several of their campuses to welcome US Ed employees to the DeVry family. Prior to DeVry, my past experience was that, when there is an acquisition, everyone at the acquired organization has a lot of fear and trepidation and scurrying around. The experience with US Ed has been quite different from that; it has been great and quite similar to what we saw with Ross, Chamberlain and Advanced Academics.

People are excited and people are glad that it was DeVry because there was a very good match of cultures. Both organizations share the values of teamwork, respect for employees and accountability for quality academic outcomes.

So let me turn to our third segment and Becker Professional Review. After experiencing remarkable growth over the last four years, Becker's rate of growth slowed this past quarter. We believe seasonality played a role as well as market dynamics such as layoffs and hiring slowdowns in some of the accounting and financial firms. We also think that the focus on the accounting industry, in the wake of Sarbanes-Oxley, is beginning to run its course, and that may have also had an impact.

We continue to believe that Becker's long-standing market leadership positions us well to take advantage of increased demand for accountants as a result of the credit crisis and forthcoming switch to international financial reporting standards, or IFRS.

A new initiative at Becker that launched in the quarter is Becker CPE. This is our new online Continuing Professional Education product. Becker CPE offers webcasts complete with streaming video, audio and chat, on-demand courses that are available 24 by 7 and online Q&A capability. These tools further enhance the interactive experience for professionals when they are satisfying their CPE requirements.

Second, at Stalla Review for the CFA, we continue to establish new partnerships, both domestically and international. Most recently, we partnered with the German CFA Society. That press release was just launched this week. And that's to provide our exam product to its members in the German CFA Society. Stalla now has agreements with seven of the 15 largest CFA societies in the world.

Finally, I would like to just comment on DeVry's online initiatives that span across the segments. Advanced Academics, our virtual high school program, continues to expand and recently initiated 14 new contracts with school districts in five states and launched our first online Passport to College program in Minnesota. Passport to College is a program where we let high school students take college courses tuition-free, helping them jump-start their college education. We've been running this program for years at DeVry University campuses, and now we are offering it online, illustrating a synergy with our acquisition of Advanced Academics.

I'm also pleased to announce that [Steve Reese] was recently promoted to President of Online Services for DeVry Inc., in recognition of the great job that he and his team have done with enhancing quality and driving growth in online education. The Online Services group is powering growth on a shared services basis for all DeVry's institutions. I was at an education conference recently where many providers were just announcing their blended learning capabilities, and DeVry has offered a blend of both online and on-site learning since we launched online back in 1997. This best of both, online and on-site, across 92 locations, is a competitive differentiator from regional universities or online-only players.

So, as I wrap up my comments here, we're continuing to execute our strategic plan. In summary, our strategy is to achieve the full potential of DeVry University, to grow through continued diversification across vertical curriculum areas throughout the horizontal levels of education and in new geographic markets with an eye toward international expansion, particularly in Latin America, and to build the infrastructure such as or Online Services group to support this growth.

Our strong first quarter results were driven by solid enrollments across all our operations, both on-site and online and our earnings benefited from continuing operating leverage. We welcome the newest member of the DeVry family through the acquisition of US Education, and our strategy of diversified growth is serving us well despite the economic downturn.

We believe the investments that we continue to make across all segments of the business will drive improved academic quality and even greater momentum in the long run. So Joan, would you please go to the Q&A?

Wonderful, thanks Daniel. We're very excited to take your questions, and hopefully we have some people in the queue. So Jeremy, if you could give the instructions for the callers, and we will begin that portion.

(OPERATOR INSTRUCTIONS) Amy Junker, Robert Baird.

If I could just start, Rick, with the margins came in better than I think, certainly than we had expected, and you had kind of guided that that would be down. I just want to make sure I understand. Was it an issue that you spent less or some of the spend that you had anticipated got pushed into maybe the second quarter, or just because the enrollments have been so strong you've seen better than expected leverage, perhaps?

Well, I think when we talked last conference call I focused in on the operating expense increase. I don't think I gave any specific guidance on margin. I said that there could be some slower growth in the first half of the year versus the back half of the year. But I think we did get a little bit more leverage, given our top-line growth, and the operating expenses were about in the range we said, maybe a little bit less.

And just your thoughts new going forward, in terms of second quarter. I know seasonally that's a higher quarter, and now you're going to have US Education Corp. in there. Any thoughts on or any comments you would be willing to make in terms of the SS&A spend in the second quarter?

Well, it's harder to make comparisons on a run rate basis versus last year, given the US Ed piece. So I think the comments that I gave before still hold true. Our run rates on operating expenses are still running well above prior year because we still have the overlap issues that we have been talking about with some of the investment spending we made in the back half of fiscal '08 and some of the timing that was deferred in -- from the first half to the second half last year. So I think you'll still see a sizable increase in SS&A expense in the second quarter.

Last question and then I'll get back, or let other people take a turn. Now that you've closed the US Education Corp. acquisition -- and congratulations on getting that done -- can you maybe just share with us what your expectations are for how much they are going to contribute in terms of revenue or margin or what your growth expectations are so we can have some sense in terms of modeling going forward? We have the numbers on a June year-end basis, and I guess -- is the growth that you experienced in the fourth quarter indicative of what you would expect for the remainder of the year?

I think US Education, as Daniel mentioned, and I mentioned as well, they are doing very well. I think they, given their shorter programs, they are a benefactor of a softer economy. And they are in the health care industry, which is a high-demand field. So I think the momentum has been positive in terms of their enrollments and revenue growth. And with that, they are able to get more leverage in their P&L. So, relative to the numbers that we talked about that they reported last year -- and we'll have that in our disclosure when we do the pro formas at the end of November -- we expect to see further improvement in their results, both top line and bottom line, as we go through the balance of the year.

Bob Craig, Stifel Nicolaus.

Just a follow-up on Amy's last question. Rick, is it reasonable to assume that US Education's revenue and operating profit contributions in the second quarter will be very similar to what the pro forma numbers were for the first?

The pro forma numbers?

Yes, the $41.5 million and the $6.5 million, respectively.

Well, again, they don't have as much seasonality. So I think it's probably, as a percent of the total, not too far off. Again, when we issue our pro formas, you will be able to see the breakout of their results by quarter last year, and be able to extrapolate that with what you saw in the first quarter.

Okay, but as a starting point, that's probably okay?

As a starting point, it's pretty good.

Okay. Next question, and I think I know the answer to it, but I'll ask it anyway. Any indications on the general health of the Session A start, which I think is on Monday, in terms of either starts that you have in the book to date or inquiry flow, et cetera?

You are right, Bob. You know the answer.

I was hoping, with Ron's departure, you might answer that one, Daniel.

Well, no. We learned carefully and for many years. It was a long transition of an apprenticeship here.

Overall, things continued to move along, and we are just executing. The overall theme we have been saying, if you step back and look at the big picture we've gone through, a few years ago, it was more of a turnaround sort of a story, and now we're back in growth mode. And as we are, and with that renewed confidence, we are not being shy about making investments because those are a positive return on investment on our owners' capital.

So that's all of this commentary that we have had over several quarters, and Rick has done a tremendous job with that and appreciate it, and I know many on the call have as well, has really been to try to help illustrate that fundamental point. And so that increase in spend will continue as long as it drives that positive return on quality and positive return on academic results and positive return on growth. And they are linked -- quality leads to growth. Quality begets growth.

So those are the kinds of investments that we're making. And, as long as we continue to see the good results like we did in the summer, from a new student perspective, then we will continue to do that.

Last one and I'll turn it over. Let's focus on the marketing side for a second. Could you comment on cost per start trends? Earlier today we heard ITT talking about lower ad spot costs. Are you seeing that? And also comment, if you could, on the recruiter levels, where you stand now in terms of that build and, on a productivity basis, are they where they should be?

Yes. I think it's generally where it should be from the recruiter standpoint. We see opportunities to improve productivity, and we have a relatively new leader of that function that we brought over from another school system who came to DeVry. She's doing a great job. So there are definitely opportunities to improve that.

The advertising -- we are on the lookout for that. I think it's too soon to say that there's a definitive answer there. But as I mentioned in my opening comments, that's one of the things that, while we are being very prudent and being very careful in the overall economic crisis environment, we also want to be mindful that the flip side of crisis is opportunity. So, if there are soft spots in the advertising market, we are going to look to take advantage of that, if it makes sense.

At this point, I would just say that's something we are looking at, at this point. And then, in terms of costs per start, no real news to report there. It's pretty steady as she goes.

Are the recruiter levels still up around 20% year over year?

Yes, pretty similar level of -- the overall level is pretty similar to the last time we reported.

Sara Gubins, Merrill Lynch.

I wanted to get back to Amy's question about costs and particularly the SS&A costs. I guess I'm a bit surprised to see that number down sequentially from the fourth quarter, particularly now that you have US Education in there, even if it's only for a few days, and there is higher option expense in the quarter. So I'm wondering if you can just help us understand a little bit more about what sequentially came down in that cost item and whether or not that's something that should continue. And also, presumably, you expect that stock option expense level to stay where it is or maybe go down a bit. But if you could give us some color on that for the rest of the year, that would be helpful.

Sure. The last time, as I mentioned on the call, Sara, and said we thought it was going to stay pretty much in line with what we had sequentially experienced in Q4, give or take. And it was a little bit lower. I think, as we look back, there are some hiring costs that we have are a little bit higher in Q4, some project spending. And then there's always the advertising timing of spending in Q4 versus Q1 that was down a little bit on a run rate basis.

And the stock option expense -- that is accounted for both in SS&A and cost of educational services, so it's split. And the reason it was up is a good portion of that is a one-time recognition of that expense because of those retirement-eligible awards. They get expensed right up front as opposed to over the grant life.

So it should go back down to more normal levels by the second quarter?

Yes; it's really more of a timing issue. More of it got expensed in Q1 than it would have been, typically, in the past.

Back to student lending just for a minute. Are you using your EDUCARD program any more than you had in the past?

We have increased it a bit. We've had some takers on an expanded focus on that, but -- and we have also always used it for timing-related issues like what we saw at the end of the quarter, where some of the packaging wasn't happening on a timely basis because of some of those financial aid processing system issues. But we have a good balance sheet, and we're prepared to use that as necessary. But it's an avenue of last resort.

Okay, last question and then I'll turn it over. Are you seeing any shift in terms of more students deciding to go to school part-time?

No, haven't really seen -- there has been an overall sort of seminal trend in that direction for years now, so nothing departing from that overall trend. If you're saying, well, maybe with the economy, maybe more people are going to go part-time, we are certainly on the lookout for that as we share your concern, but haven't seen it yet.

Andrew Steinerman, JP Morgan.

Just to follow up on the last question, what about high school recruiting efforts? Surely this would be the time for it. And I know we have been talking about this for years, but my thought is maybe the multi-year shift to part-time would be pushed in the other direction if the high school recruiting was successful.

Yes, I hear you, but I think at the same time the high school recruiting is improving. There's continued growth in the adult student market. So when you put both of those into the same pot, there's still an overall -- it still looks and feels like a mix shift that's going on, or you could model it that way.

I hear you -- you are saying [both is] growing, but it's still the part-time growing faster?

Exactly, exactly.

Could you just give us a quick, if it's not too soon, a quick estimate on amortization stream that we should model in because of the US Ed acquisition?

Yes, the amortization costs on a go-forward basis approximately is going to be about $1 million a month for the balance of fiscal '09.

And then after that, how does it look?

Well, after that, we are still finalizing the amortization schedule, given the makeup of the intangibles. There will be likely a drop-off in fiscal '10, given the shorter duration of the programs that US Ed has. A big piece of it is the student relationships. And given that their programs are a year to two years, they get amortized over that period of time.

Jeff Silber, BMO Capital Markets.

I wanted to drill down a little bit in the Professional and Training area. Can you just give us a little bit more background in terms of how much of that is related to the CPA and the related market as opposed to the CFA market, and if you are having or seeing any kind of diverging trends in terms of the softness on either of those sides?

Yes, thanks Jeff. That's an excellent question and we're analyzing that ourselves. I would say there's softness, really, in both of those markets. But being that accounting is a much larger portion of our professional and training segment than the Stalla CFA review is, it was the accounting that was the bigger driver in the quarter.

When you say much larger, is there any way to quantify that for us?

Much larger.

I appreciate that; thank you. And also I think in your prepared comments, when you talked about the funding environment, you talk about being direct lending ready. Can you just tell us how that has been going in terms of if that has been increasing? Have there been any issues related -- I know some of the other schools have talked about sometimes some of the delays involved there. Thanks.

That's right, thank you, and that's why with direct lending, as we had indicated before, we would be ready to go. And sure enough, we did what we said we would do. We got all those pipes cleaned out, and there's water flowing through the pipes. So we are up and running with direct lending. But we are really doing that as needed. So if a student comes in with a direct lending situation, we need to continue that. Or if there's some of the smaller lenders who dropped out of [Pell], and then there was a reversion to the direct lending as an administrative system to get those funds to the student. For all those reasons and maybe some others, we got the pipes flowing.

So, in case there turned out to be a need for a bigger volume going through direct lending, the good news on that is it wouldn't take us weeks or months, as it might have if we were somebody else and have all that. That's flowing now.

Okay, appreciate the color, I'll jump back in the queue, thanks.

Scott Schneeberger, Oppenheimer.

This is [Ella] for Scott, congratulations on a great quarter. First, to just to follow up on the prior question. On EDUCARD, how much capacity do you think you can provide, if necessary?

On what?

EDUCARD.

Oh, on EDUCARD.

Yes.

How much additional capacity?

How much capacity do you think your balance sheet is able to provide, if necessary?

Well, I think we could take on quite a bit. Our balance sheet is quite strong. We've got the ability to take on more. But again, as I said earlier, that's not our strategy, not our plan. It's more the avenue of last resort.

Okay. And have you seen, other than the private lending and the federal, have you seen any changes in other funding resources, such as corporate funding, corporate endorsement?

Sure, thanks. So the question is -- have we seen changes in the corporate reimbursement funding, in that source?

Actually, no. And we get asked that question a lot, and what we have seen over a long period of years in a number of different upturns and downturns in the economy is -- it may be surprising or counterintuitive, but it tends to be pretty stable. So it doesn't go up a lot in good times, direct -- corporate reimbursements is what I'm talking about -- don't seem to go up a lot in good times, and yet they don't seem to go down a lot in bad times.

I guess, if you stop and think about it, it makes sense because if you are a corporation or a government entity or the military or an employer, and one of your employee benefits is tuition reimbursement for those employees to go back to school, that's a real retention weapon. And most of our corporate partners that we have in the Keller Center for Corporate Learning that I talked about report to us that they see that benefit, that employee benefit of sending employees back to school to get a degree or improve a degree or improve their credentials, is a real retention tool.

So it's sort of the last thing or one of the last things, anyway, from an employee benefit standpoint that you want to cut in your benefits package. That seems to be the reason that explains this relative stability of corporate tuition reimbursement in good times and bad times.

Okay, thank you. And the last question on -- can you just talk a bit about your pricing environment? Have you seen any pressure from pricing in any of your segments? Do you think you will continue to be able to increase price by maybe mid to -- low to mid single digits?

Yes, we do, and that's what we are seeing in the environment. That's how we -- thank you for that question about tuition levels and pricing strategy. That's exactly how we look at our tuition pricing strategy; it's on a competitive basis. We look at what the state schools are doing, what other institutions are doing, and that is -- and we have actually invested resources to make sure that we're current on that. And we are, and that's pretty much what we're seeing.

In fact, there are a number of data points that are suggesting that many of the state or government-funded institutions that rely on state taxpayer funds, and if those funds start to decrease might be in a position of having to increase tuition even more. So we may see high single digit or more increase on the part of many of the state schools.

I doubt you would see us do that. We tend to be a little bit more stable and take a long-term approach to it, to not take advantage of short-term opportunity so much. But we do expect that tuition will continue to increase across the various institutions of DeVry, whether we're talking about Ross University or Chamberlain College of Nursing or Becker or DeVry University and so forth.

Trace Urdan, Signal Hill.

Rick, I'm thinking that Amy let you off the hook a little bit too easily there, so I'm going to go back to this question. You were pretty clear with us last time that you saw operating expenses increasing in the first half faster than revenues. And, given that the professional and training segment came in a little bit -- I think in your prepared remarks, you suggested weaker than expected, I'm wondering if you can focus for us on where the leverage that was unexpected really came from in the business. Where did you spend less than you thought, or where was there more revenue than you expected?

Well, I think the revenue growth was really an outgrowth of enrollments that we saw last summer and the revenue per student numbers that came through, it was a little bit better and the operating expense timing. We are not perfect on this, and we try and estimate what we think the operating expenses are going to be. We came in within a couple percent in terms of the growth rate, and the difference is due to timing of spending on advertising and some project spending that occurred in the fourth quarter that didn't repeat in the first quarter.

Some open positions.

Some open positions. And so we based that on what we saw was in our forecast, and we beat the forecast by a little bit.

So would you want to amend your comments in terms of the first half of the year? Do you expect that the second quarter will kind of slow down in some way? You'll fill some of those positions, or do you think something will change there?

I think, what I said last quarter in terms of the first quarter and the second quarter was I would expect operating expenses to grow at a faster rate than revenue. And we saw that in the first quarter and I think we're going to see that again in the second quarter.

Well, you saw margin leverage, so actually operating expenses didn't --

Operating expenses went faster. Operating expenses increased by (multiple speakers) --

Are you talking about gross margins?

-- we got the leverage in our gross margin, where I think we're going to continue to get the leverage. Again, for the year, we expect to our operating expense, our SS&A -- when I say operating expenses, I'm talking SS&A -- to increase at the same, roughly the same rate as revenue, and that the leverage will come from cost of educational services as we leverage our campuses, leverage our fixed cost base.

And then, Daniel, you referenced the slowdown in the global financial markets as a reason for the Professional and Training segment coming in light. But you really only had a little bit of that crisis time included in the quarter and a lot more since. I'm wondering how you are thinking about what the outlook is for the Professional and Training segment going forward, from here?

We can -- and you know, we had Bear Stearns back in March, we had financial firms --

You know about Bear Stearns more than -- before everybody else did, if you had them in March.

Or -- no. When did --?

I get your point. My question is still the same, though. Do you think that things could deteriorate from here, or do you think you've got a baseline that you can work with now in that segment?

I don't know anything any faster than anybody else knows it, but I do know that Bear Stearns collapsed in March. And, what I'm saying is that maybe some people perceive that this crisis just began a few days ago, but it has kind of been building, from our perspective, and that's something that we've seen over a period of time.

In terms of going forward, we continue to see growth opportunities for Becker. It has just slowed down a little bit, as I described. And that's -- on the accounting side is the bigger driver, and I would say that the boom or boomlet that we had in the wake of Sarbanes-Oxley, a lot more demand for accounting hours and accounting professionals -- maybe that has run its course, to some extent and there's a little bit of softness at some of the accounting firms.

But that's not a forever thing, and we do see another boomlet perhaps coming on the horizon here as international financial reporting standards, IFRS, starts to raise its head; that is going to -- or, we expect that it's going to increase the demand for accounting professionals and accounting hours and create, by the way, tremendous opportunities for just accounting students. So anyone whose kid is going to school and thinking about a business career in general, not just accounting, I would certainly recommend an accounting degree. It's a great start to a business career.

So those are some of the dynamics that we're seeing looking back and then looking forward.

But the international financial reporting standards -- is that something that's coming on gradually, or is there catalyst there that -- ?

Yes, that's gradual. That's not going to be tomorrow, but I think you're going to start to see that pick up over some period of time and then probably take off in a bigger way. So that's more gradual than a near-term catalyst.

Okay, thank you.

Gary Bisbee, Barclays Capital.

I guess a couple of questions. First of all, now that you have closed the acquisition and the balance sheet is obviously still in real good shape, and it seems to me you're going to have a lot of free cash flow in the rest of the year, how do you think about prioritizing, reinvesting that capital? Are you likely to keep this debt outstanding for awhile, or, given the financial and liquidity issues out in the marketplace, are you likely to pay some of that down? I guess I'm wondering -- repurchases, raising the dividend, repaying debt or maybe plowing ahead with other acquisitions?

Yes, we are in a fortunate position that we've got some good liquidity. We've got the debt right now, but the thing I mentioned with the IRS really helps us in terms of our cash flow. We can tap some of the offshore cash for domestic purposes on a periodic basis throughout this year and next. So that gives us the wherewithal to do a number of the things that you mentioned -- acquisitions, share repurchase activity. We have a program that has been authorized that we haven't begun to execute because of the acquisition, but we could do so going forward. And we are due to declare a dividend coming up, so that's all part of the potential uses of cash.

I think I'll just continue on that, Gary, because I think it's an excellent question, one we look at, every day. And it's a very strategic question of how to strike the right balance. It really is a balance. And so there's going to be some of that cash put towards deleveraging, which creates value toward direct return and thanking our shareholders through dividends and share repurchase. Investments of a P&L nature, capital expenditures as well as to increase capacity, improve academic quality.

And then acquisitions, as you mentioned, and we're still active in the acquisition market, particularly internationally, to execute the strategy that we have been very, very transparent about over the past couple of years, that international is on our radar screen and we think the preferred way of executing the international strategy is re acquisition. So that remains on our to-do list for deployment of our owners' capital.

So it's safe to say that you're likely to use some of it in the near-term to repay the debt; you are not just going to sit on this debt, since you've got a pretty attractive rate?

Yes. And, also, given this IRS notice, that alone helps us to reduce the debt from what it would be otherwise because we can take cash that's offshore and use it to keep our revolver balance during the middle of the quarter down.

Okay. And then just two articles caught my eye in the last week around health care. One of them, I think the first time in years, that med school applications dipped 6% or 7%, and the second one was talking about the scarcity of seats in the teaching hospitals for the clinical rotation. Any sense how the application drop is going to impact you guys, if at all? And then, is the cost for you to get your kids in these critical rotations growing? Is that something you worry about? Is that something we should think about as it relates to the margins? Or, is it not, in the near-term, something you view as an issue?

Sure, great question, Gary, and let me take the first one first. Applications were actually down not 6% or 7%; they were down 0.2%. They were down about 85 applicants on 42,000. But that is a change; they had been growing moderate single digit. I just looked at this, literally had a Ross Board meeting today; I just looked at those figures.

And so what we think is going on is a little bit of the frosting, not the cake itself. I'll draw that analogy. What I mean by that is, there's a certain sort of core, if you will, of students who are applying and then getting in and going. Then there's another group that tends to maybe apply year after year, and we think that some of those up at that level are perhaps getting a bit discouraged and maybe -- and not applying. So that might be the primary driver of that slowdown in growth there, or a little flattening of the application volume.

In terms of the implication for Russ University School of Medicine, we don't think there's a real impact there at all. We're already turning away more applications that we can admit, and so -- and, improving the quality of the incoming classes, as I mentioned in my earlier comments. So we don't see an issue there.

Your second question was about clinical rotations, where we do see an issue. And we've commented on that on several of these calls over the past quarters. I didn't on this one, so I'm glad you brought it up because it's important. You asked -- is that something you should be thinking about or concerned about? And I would say yes. We are certainly thinking about it and concerned about it. There is increasing demand and increasing competition for those clinical spots, and that is also driving up the cost. So that is one of the elements that is increasing some of the operating costs that Rick was commenting on earlier that was also in there.

So we are taking action on it in this regard. We have added to our team of clinical specialists. We have added to the number of strategic alliances that we have with hospitals. I think we announced a few of those on the last call, last quarter, so you can look back at a couple of those in the transcript there. So we are very, very active in ensuring that our students at Ross University School of Medicine have the clinical rotations that they need to pursue their studies on a timely basis and graduate within their four years, and they are. So at this point we are keeping our commitment to those students, and they are getting their rotations. That is something that is a differentiator from some of the other international schools that are out there.

If we could ask the next few callers to try and limit their questions? We only have a few minutes left, and we want to get as many of these questions answered as possible. We appreciate it.

Andrew Fones, UBS.

Thank you, I had two questions, so perhaps I can ask them together. In terms of lead generation, what's the quality and quantity of leads at the moment, given your advertising spend? And then the related question was the conversion trends -- any comments there? Thanks.

Sure, thank you, Andrew, and -- inquiries. Inquiries from prospective students are running at a healthy pace, and so we're pleased with that flow of inquiries. Not any major news to report, but overall good news.

And then, in terms of the conversion, as we like to call it, from an inquiry to an application, and ultimately to starting school, also good, steady progress there. And at the same time, we can think that there are good opportunities for us to improve that through productivity, through training. And that's similar to the question that I answered earlier with our new head of recruiting at DeVry University, is leading the charge there.

There's also some synergies, by the way, that we see with US Education. It will take a little time to execute on those, but that's one of the potential synergies that we've cited as one of the strategic rationales for doing that acquisition, is opportunities to improve conversions and marketing efficiencies, generally speaking. So, thank you for that.

Corey Greendale, First [Analyst].

So, I also have two questions, and I will try to put them together, which is -- both relate to the effect of the down economy on your business; on the DeVry University business, specifically. The first is -- obviously, the downturn hurt last time, or at least it didn't help, or at least enrollment results went down during the downturn. I think a lot of reasons for that, but one of the theories at the time was that students preferred shorter degree programs, and you were largely Bachelor's degrees at the time. So the question is, are you seeing a shift toward Associate degrees? And if not, how do you feel about your portfolio of Associate degrees if students do start to show that preference? And then just generally, what do you think about the effect of the economy on the technology-related programs in the business?

Artfully done, Corey, and here's what I would say. First and foremost, our downturn, our swoon a few years ago was -- and I've said this many times, we've said this many times -- was more look in the mirror than look out the window. It was our own internal performance that was the bigger driver of our poor enrollment performance during that time than it was blaming it on the market. Okay? So that's important to remember.

In terms of a shift towards shorter programs and Associate degrees, it could be. And we feel that we're better positioned today than we were back five, six, seven years ago in our strategy of diversification reduces risk and enhances value. So that's why we have added Associate degrees at DeVry University, at Chamberlain College of Nursing and at US Education, Apollo College and Western Career College. So we think we're better positioned today to take advantage of any shift that may materialize towards shorter programs than we have ever been positioned before, and we do think there's a little bit of that. We're seeing debt at Apollo and Western, in particular, a little bit of a pickup. And I mentioned that earlier.

And then, finally, in terms of technology, haven't seen a major trend there. It has been trending up in the past few reporting periods, and we will report further on that when we report enrollment next time.

And artfully answered, thank you Daniel.

Jennifer Childe, Credit Suisse.

Your Ross new enrollment growth came in a lighter than what we saw during the summer term. It sounds like it wasn't a demand issue, despite the overall dip in applications. So was it due more to capacity constraints, either physical or clinical rotation limitations on what -- that might have caused you to limit new enrollment growth? And then maybe the second --

Ross -- as we know, September is the tightness capacity constraint at Ross. That's the typical time that veterinary students and medical students want to go to school. So it's not surprising, and it was totally expected that the growth in new students wouldn't be as robust as in some other seasonal periods in the year.

And how much additional capacity does the temporary facility give you?

It gives us some additional capacity and over a period of years, and it will take some capital expenditure to get there. We think we'll have quite a bit of incremental capacity in combination with our campus in Dominica, together with the clinical center, which is the proper name for it, by the way, it's a clinical center, in Grand Bahama. Taken together, it will give us quite a bit of incremental capacity.

Can you give us a little color on what you think the sustainable growth rate of this business is, enrollment growth rate?

Yes, enrollment growth rate in the single digits, mid to high single digits, is probably a good way to think about it from a long-term perspective. Again, there's always choppiness in any given quarter. There's always movement. We've seen that. But over a long-term perspective, that's probably a pretty good, comfortable rate at which we can grow and continue to power that growth by improvements in quality. That's what leads to growth, particularly -- medical school is probably the best example where our investments in improving the quality of the academic programs at Ross a few years ago are what led to, directly led to, the surgeon applications that we saw. So quality begets growth.

Okay, thank you.

Daniel, do you want to take one more?

Yes, I think we can go ahead.

Brandon Dobell, William Blair.

I appreciate you extending the time frame for me. I guess I'll do full circle here and go back to lending for one quick second. The last couple of months, couple of quarters, you mentioned that things have been a little bit worse from a macro perspective. Have you seen or, in your conversations, heard from the private lenders any change in how they are thinking about credit standards for your students and that it still might provide access, but is it different types of access? Or, are they starting to funnel different students different places? Just trying to get a sense of directional changes or tenor changes.

The overall trend is, we've seen some lenders pull out of the private lending market, and a few others have pulled out of the [Pell] market. So there's not sort of one trend. And then the other trend is, if there's a little bit less dry powder to lend, well, then, they might raise their credit standards. And I spoke to that a little bit earlier. There's an expectation that that's not a forever thing, that that will come back as the situation improves. And in the meantime, we're standing by ready, if need be, to use our a EDUCARD program. So that's the overall situation that we see.

Is the expectation on your part or their part? Have they communicated to you, hey, if things were better, we would be behaving differently?

Yes. They have communicated to us that they expect that, while credit standards may have tightened in the short-term, they expect that that will come back and possibly even as soon as by the end of this calendar year. So that's something that they have been communicating to us.

So thank you very much for that question, and thank you all for your questions. I just want to give a reminder that we'll report DeVry University fall 2008 undergraduate enrollment and the November session graduate enrollment on December 4th, and then our next conference call will be held in late January, when we announce the second-quarter results. So thanks, everybody, and we will talk to you then.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude, and you may now disconnect. Have yourselves a great day.