Adtalem Global Education Inc (ATGE) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to DeVry's fiscal 2010 second quarter 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 be facilitating a question-and-answer session towards the end of this conference. (Operator instructions). At this time I would like to turn the presentation over to Ms. Joan Bates, Senior Director of Investor Relations and Media.

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 believe begin, please be advised that statements made on this conference call may constitute forward-looking statements subject to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by phrases such as DeVry, Inc. or its management has a view, objective or outlook, or that 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 DeVry's most recent annual report on Form 10-K for the year ending June 30, 2009, filed with the Securities and Exchange Commission on August 26, 2009.

Telephone and webcast replays of the call are available until February 9, 2010. To access the replay, please refer to today's press release for information.

Today, Daniel Hamburger will begin today's call with a quick overview followed by a review of financial results by Rick Gunst. Daniel will then provide an operations update before opening up the call for your questions. With that, I'll turn the call over to Daniel.

Thanks, Joan, and thank you all very much for joining us for our fiscal 2010 second-quarter conference call. Since we saw many of you at our Education Day in November and today's announcement doesn't include enrollment results, we will make an effort to be brief this afternoon and get to your questions.

So we are pleased to announce that the continued execution of our growth and diversification strategy and our focus on investing in academic quality has produced successful student outcome and another quarter of strong financial results. The increase that we saw in enrollments in December translated into exceptional revenue growth in the quarter, which drove margin improvement and record earnings. At the same time, we continued to invest in our program in student services to drive future growth.

At DeVry's home office, this quarter has been a busy one for us as we recently moved into our new offices in Downers Grove and in Oak Brook, Illinois, and we moved our data center to its new location as well. Our new home office is a co-location with the DeVry University Center and houses a classroom of the future. The new offices are designed to be open and collaborative with state-of-the-art amenities for our employees and are another part of our strategy to be the employer of choice in education. And we would like to invite you to come visit us when you can.

I'd like to spend a few minutes here on our expectations for the rest of 2010 and beyond in the context of the overarching economic conditions that we are seeing because there certainly are some optimistic signs that the worst of this recession is behind us. But with the government announcement, for example, that 85,000 jobs were lost in December, it remains clear that meaningful economic recovery is not a foregone conclusion here in 2010. As I outlined during our Education Day, we believe DeVry is well-positioned in both good and bad times.

Our confidence is bolstered by two factors. The first, our operating philosophy, namely that quality leads to growth. At DeVry our institutions educate students for positions across a variety of industries, but they have one thing in common. Each provides high-quality programs and services to our students. And as we continue to invest in quality, academic outcomes improve. This continued success of our students drives enrollment and retention, which leads to financial growth.

And this is true in both good times and in bad times. And we in turn put those earnings right back to work by investing them in the quality of our programs. Case in point, we are planning to invest over $100 million this year in capital expenditures on our programs, services and facilities. In today's world of state budget cuts and declining endowments, this investment is an example of the important role that private sector schools like DeVry are playing in today's educational system.

The second factor is our diversification strategy, which has us well-positioned to deliver consistent and sustainable growth, again through both good and bad economic times. Some of our operations are pro-cyclical, like Becker, which has been negatively affected by the weak economy. At the same time, schools like those of US Education are more countercyclical. And in addition, DeVry has schools such as Chamberlain College of Nursing and Ross University that are entirely noncyclical. In fact, DeVry is the only publicly traded education provider that has a medical school or a veterinary school.

Taken as a whole, the DeVry family of schools is best characterized as noncyclical. And so, given our philosophy of quality leads to growth and our ability to mitigate risk through our diverse family of schools, I believe we'll continue to experience sustainable growth when the economy recovers. And as just an illustration of this, I would like to share with you how our largest school, DeVry University, grew during the strongest economic recovery in the postwar era, the '90s. And for this, please refer to the chart that you will find in today's press release.

If you take a look at the chart, you will see that the end of the recession in 1992 and moving forward for 10 years, to 2001, the job market improved with unemployment falling from a high of 7.4% down to 4.2% over that period. And taking a look at DeVry University's total enrollment over that same period, our enrollment continued to grow. In fact, the rate of growth increased. And keep in mind that that was in the '90s, when we weren't as diversified as we are today.

I think a lot of people think we are more countercyclical than we really are. And this example demonstrates that we are able to grow in an economic recovery.

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

Thanks, Daniel, and good afternoon, everyone. I'm going to take the next several minutes to highlight our strong financial performance for the second quarter and first half of fiscal 2010.

I'm pleased and encouraged to see the very positive impact from our investments in academic quality and customer service, which have resulted in strong revenue growth along with significantly improved margins and profitability. Record quarterly revenue of $473 million was up about 28% versus prior year. This is primarily organic growth, as we have an anniversaried the US Education acquisition in September with revenues still up 25% in the quarter excluding our more recent acquisition of DeVry Brazil.

Revenues through the first half of the fiscal year was up about 34% and 25% when you exclude both DeVry Brazil and US Education. Net income and earnings per share were both up about 69% in the quarter and 64% year-to-date. Earnings per share were $1 in the quarter, marking the first time we've broken through the $1 threshold. It's also interesting to note that our earnings per share were only $0.61 for the entire year in fiscal 2006, just 3.5 years ago.

Pre-tax income margin for the first half was 21%, up 470 basis points versus a 16.3% margin achieved a year ago. Now, fiscal 2010 is really shaping up to be a breakthrough year, and we expect to significantly surpass our historical peak margin of 17.1% this year. These results were driven by the excellent enrollment growth and retention results across our schools, while the Professional Education segment continues to be negatively impacted by the economy. The financials reflect the power of operating leverage, which is helping drive a significant profitability improvement.

For your reference, second quarter results include expense related to share-based payments of approximately $2.1 million pre-tax or $1.8 million net of tax, a bit higher than last year. Our overall effective tax rate was 33.6% in the quarter and 32.9% year-to-date, up from the 30.4% rate for full-year fiscal 2009, primarily due to the continued increase in domestic source income. For a perspective, we are now paying over $100 million in federal and state taxes on an annualized basis.

Cost of Educational Services expense increased by 20% versus prior year in the quarter, and Student Services and Administrative Expense increased by 17%, both growing at double-digit rates but less than the revenue growth, with or without the acquisitions. We continue to make prudent, targeted investments while still delivering leverage and efficiencies.

With that as a highlight, let me walk you through some of the operating segment results, which are further detailed in our earnings release. First, the business technology and management segment achieved very strong top- and bottom-line results. Revenue was up 26% versus prior year in the quarter and 25% year-to-date, driven by the strong enrollment growth and increased retention driven by our focus on student services. Segment operating income of $78 million in the quarter and $134 million year-to-date more than doubled versus prior year. This improvement was driven by revenue growth and the resulting operating leverage.

The segment margin was 24.9% in the quarter and 22.5% year-to-date. While we are continuing to make investments to support academic quality and customer service, our incremental earnings flow-through for this segment has been over 60% year-to-date. This shows the power of operating leverage on our cost base from the very strong top-line growth.

Within the Medical and Healthcare segment, revenue was up 28% in the quarter, driven by the enrollment growth and pricing at Ross University and Chamberlain College of Nursing, along with continued good results at Apollo College and Western Career College. Second-quarter operating income for this segment of $31.2 million was up 17% versus last year. The margin was a bit lower than prior year, driven by business mix within the segment, with the addition of US Education and very strong growth at Chamberlain, both of which have lower margins than Ross University.

Our Professional Education segment results continue to reflect impact of the soft economy on the accounting and finance professionals. Revenue was down 6.3% in the quarter and down 4.6% year-to-date versus last year. Operating income was down about 28% in the quarter and 21% year-to-date. Once again, we don't expect performance to improve materially in calendar 2010 or really until the economy recovery takes hold and positively impacts hiring and training within the accounting and finance professions. We are closely managing costs in the short term and recently completed the consolidation of a number of positions in the marketing and sales area. But at the same time, we are planning to seize the opportunity when the industry does rebound.

Lastly, results of our Other Educational Services segment reflect the top-line contributions to growth from Advanced Academics and DeVry Brazil. The segment delivered operating income of $700,000 in the second quarter, following the first-quarter loss due to the seasonal flow of the segment.

Shifting to the balance sheet, our cash and marketable securities balance was $334 million at the end of the second quarter compared to $263 million last year. Cash flow from operations for the first half was $267 million versus $139 million last year, driven by our improved earnings and working capital. These strong cash results enable us to continue to decrease outstanding debt to $45 million, down from $155 million a year ago and $105 million last quarter, and also invest back in the business as capital spending through the first half of the year was $62 million versus $25 million spent last year. The spending has been focused on Project Delta, which we believe will further enhance our ability to provide best-in-class service to our students, as well as on facility improvements within DeVry University and US Education and expansion within Ross University and Chamberlain College of Nursing. We are committed to investing in educational technology and capacity needed to serve our students, so total capital spending is still expected to exceed $100 million this fiscal year.

Our net accounts receivable balance actually decreased to $135 million versus $138 million last year. In fact, if you exclude DeVry Brazil, our net receivable balance would have decreased by $7 million. Receivables per account within DeVry University were down compared to the higher balances last year during the conversion of our financial aid processing system, but they were also lower than our balances two years ago. While we had some issues initially, the new processing system is having a positive impact. So this is a good example of how our investments in new technology are paying off in improved customer service and productivity.

Year-to-date, our bad debt rate increased slightly versus last year to 3.2%, driven by the US Education and DeVry Brazil acquisitions. We have not experienced any deterioration with bad debt in our legacy operations. So our receivables per student are down, and our bad debt rate is essentially unchanged. We see this as another marker of quality and would like to recognize the outstanding performance of our teams in managing this area, particularly during these tough economic times.

Finally, during the quarter we completed the execution of our second share repurchase program by buying back $50 million of common stock over the last year, or about 1 million shares, at an average cost of $48.67 per share. Our Board of Directors approved a third repurchase program in November of $50 million. We have not commenced this program yet, since we have been in the closed trading window, but plan to begin repurchasing once again when the window opens up later this week.

So that concludes my overview of the very strong results for the first half of the year. We are obviously off to a tremendous start and are confident in our ability to leverage strong top and bottom line results for the balance of the fiscal year, all driven by academic quality. As we've said in the past, our long-term financial objective is to deliver earnings per-share growth of roughly 20% per year. Our strong first-half performance puts us in a position to exceed this goal, as we believe earnings will continue to grow in excess of 20% over the balance of this fiscal year.

Now let me turn the call back over to Daniel for some more color on the operating results.

Thank you, Rick. Let me begin the operating review with our Business, Technology and Management segment, which is DeVry University, and its Keller Graduate School of Management. And since we didn't have a conference call in December when we reported the fall enrollment, I would like to comment on the strong growth that DeVry University experienced during that period with new undergraduate enrollment of more than 19% and total undergraduate enrollment rising nearly 23%. These results and our continued strong execution position us well for the remainder of 2010.

It's important to note that we are seeing broad-based contributions at DeVry University from online and on-site, in both graduate and undergraduate and across our Business, Technology and Healthcare programs. This quarter DeVry University continues to focus on its positioning as the career university. Over the coming months we plan to hire additional career advisors beyond the 150 we already have in place.

To further improve persistence, we are hiring more student coaches as we implement our innovative Student Central concept across our campus locations. Student Central brings all key services together in one place and proactively supports our students from the time they enroll to when they graduate. Other growth initiatives include our plans to open new locations in Glendale, Arizona and Houston, Texas in the next few months.

At Keller Graduate School of Management, total course takers in the November session increased more than 16.5% from a year ago. As part of our initiatives to increase awareness at Keller, we will be investing a bit more in the communications campaign. Our goal is to align Keller more closely with our students' familiarity with traditional business schools and to reinforce Keller's high quality reputation. We are very excited for this new campaign, and it begins in the spring.

Moving onto our Medical and Healthcare segment, at Chamberlain College of Nursing enrollment in the fall increased 67%, and we continued to invest in facilities to meet the huge demand for qualified nurses around the country. In addition to our newest campus in Jacksonville that opened seven months ago, Chamberlain's new Chicago and Crystal City, Virginia, locations are on pace to open this summer, pending approvals. And after 80 years, Chamberlain is also moving its St. Louis location to a brand-new building in nearby Maryland Heights. All four of these campuses are co-locations with DeVry University; it's pretty interesting.

In addition, a new launching a new RN to MSN bridge program in July. This program will be part of Chamberlain's expanding online offering, and it provides a great option for RNs, registered nurses, who want to earn a master's degree. And in line with our emphasis on doing well by doing good, Chamberlain's mission in November to Brazil was a great success. Chamberlain partnered with DeVry Brazil to set up a local clinic in the city of Madalena. A second trip is happening this week, and we plan on expanding the program to three trips a year; very proud of that.

At US Education, and that's Apollo College and Western Career College, we continued to invest in new programs and to focus on integration and efficiency. During the quarter, we launched a physical therapy assistant program at Apollo College's Mesa, Arizona campus. We expect to bring this program to other campuses, pending approval, and we've hired new program directors to support that goal. Now that the integration of Apollo College and Western Career College is really in its final phase, we are focusing on expanding student enrollment both on-site and online. And we are also looking at other areas of value creation. As one example, we recently consolidated US Education service centers in Phoenix and its accounting function in our Mission Viejo office, which streamlines our operations and supports future expansion.

Another example -- we are also seeing efficiency through higher capacity utilization. We noticed that, while we were very well utilized in the mornings, afternoon and evening classes were less so. So this led us to initiate a program aimed at helping students find the class time that worked best with their schedule. The result has been much more evenly dispersed classes in the afternoons and evenings and greater campus utilization.

So now let me move to our Professional Education segment, where the economy continues to dramatically affect the accounting and finance fields that Becker serves. During this quarter, Becker's CPA group piloted a 0% financing initiative to help recent college graduates who are most affected by the current job market. The initial results of this program have been pretty promising and could be expanded, once we have a chance to thoroughly review the program.

In December at Becker we also signed an exclusive partnership with China Distance Education Holdings, Ltd. to distribute Becker's materials in China. This partnership offers great potential to expand our CPA courses in China and could eventually include our Stalla CFA program as well, the chartered financial analyst.

While times are tough, it's tough for Becker's competitors too. One key advantage for Becker is being part of a diversified organization that can support its long-term growth. Most of Becker's competitors are small and don't have this advantage, so we believe this positions Becker very well for when the accounting and finance fields start to recover.

And our final segment, Other Educational Services, as we announced at Education Dates, what we had been calling Fanor we are now calling DeVry Brazil, which includes three colleges. There's Fanor, there's Ruy Barbosa and AREA1. Our people in Brazil see tremendous value in the DeVry name and are very excited about the change. We are also in the process of launching several new programs in high-demand healthcare fields such as nursing, physiotherapy and nutrition. Classes should be available beginning next month.

So to summarize, as you can see, our diversification strategy and our focus on investing in quality continue to lead to growth, strong student academic outcomes and another quarter of solid financial results. Investments we have talked about over the last couple of years are paying off.

From time to time we've heard feedback on occasion, let's say, to the effect of, you know, I think you should invest less and show more near-term margin, that kind of thing. What we are demonstrating here is that by investing in quality, we are getting great academic outcome as well as growth and margin. In sum, quality leads to growth.

So I would like to close by thanking the 114,000 students across all DeVry schools. It's truly our privilege to help them achieve their career goals. I would also like to thank the 17,000 members of the DeVry family for their dedication to our students and for the vital role that they play in our success. So with that, Joan, we are happy to take questions.

Thanks, Daniel. Before we move to the question and answer portion of the call, I'd just like to remind everyone that since our move to the new home office we also have new phone numbers. So if we don't get to your question today, for follow-up calls you can reach Rick at 630-515-3137, and you can reach me at 630-353-3800.

So with that, Jeremy, if you could give the callers the instructions, we'll begin.

(Operator instructions) Amy Junker, Robert W. Baird.

Can I just ask a question about Project Delta? At your education day, Dave Pauldine had said that the bulk of the work was going to be done over the next couple of quarters. You've obviously had tremendous results, and so it's hard to decipher here. But I'm just wondering what percentage of that is really student-facing? And have you seen any signs whatsoever that there's any productivity disruption as the enrollment counselors become acclimated to the new system?

Regarding Project Delta, we have not launched the bulk of Project Delta. So no, we haven't seen any impact on operations because it hasn't launched. And Rick was referring to a part of our overall systems technology investment which was in the student finance area, that we have seen have an impact and a positive impact. And to be able to report that our accounts receivable is actually down in this economy really does speak to not only the quality of the fundamental value proposition that students are receiving, but it also -- it takes a lot of processing and a lot of customer service to make that happen. So the systems investments that we've made have had a positive impact there. And so, as we look forward to implementing Project Delta, we are looking forward to similar types of results.

But I would say, and maybe there was a little misunderstanding there, not the next couple of quarters. I'd say it's a little bit longer-term than that. It's several quarters in rolling out. And the thing that I can assure you is that we are not going to roll any system out until it's ready.

And then just the piece of it that's potentially student facing -- how much is that?

Sure. Well, you can think of Project Delta going forward here beyond the piece that we mentioned earlier in two main areas. One is Student Information System, the SIS, and the other is the Constituent Relationship Management, the CRM. In some other industries they call that customer relationship management, but a similar concept.

Both of those areas have both back-office, you might say, as well as student-facing or other constituent facing components to them. So for example, in the Student Information System, you tend to think of that as a back-office system that helps you keep track of all your students and where they are in the program and everything like that. But there's also a self-service registration component that flows out of that, and that is directly -- is available to students and helps improve service levels. Many students prefer to register themselves rather than talk to anybody. And we want to make that available.

So that has both in-house and customer facing. Likewise, the constituent relationship management directly affects both sides of the coin there. So it's a big project, it's a big investment. We're very excited about the customer service improvement, the student service improvement, and the internal productivity and efficiency that we anticipate from that.

If I recall correctly, the bulk of that spend is going to show up in CapEx rather than on the P&L; is that correct?

That's correct.

Sara Gubins, Banc of America-Merrill Lynch.

I'm wondering if there's anything unusual in the business technology and management margins this quarter. They were much better than what we're expecting. And I guess I'm wondering if that 60% incremental margin is a good target for the rest of the year.

I don't think there's anything unusual in the quarter. I think what's resulting in the flow-through is just operating leverage that we are able to obtain. Given the strong enrollment results we announced in December, our retention still is very, very good year-over-year. And the courseload that we saw deteriorating a little bit has stabilized. So all of those things have added up to improving our revenue numbers. And while we are still investing in operating expenses and academic quality and cost of instruction, we are getting that flow-through. For the balance, back half of the year, it should be in that range, not too far distant from that.

I'm wondering if you can comment at all on the negotiated rulemaking proceedings, and particularly on the gainful employment discussion, and if you could talk a bit about your debt service to income ratios, given that that's a hot topic.

Sure. Overall, we see the negotiated rulemaking as a healthy collaborative process. We think that it's good that there are many, many points of view represented there. And we support that; we feel honored, actually, to have a representative on one of the teams. And we're obviously engaged (inaudible) teams. So it's part of the normal process that the department has run for over the course of many, many years.

And it is a fluid process, and we really can't speculate and won't speculate on the final outcomes other than to say, based on many years of past experience and several rounds of this, and we had the benefit of Sharon Thomas Parrott's experience at our education day, we do expect that common sense will prevail.

In terms of the debt loads and the value proposition, we feel very good about the value proposition that our students achieve at our school, at DeVry's school. Let me just give you an example of that. Just consider a graduate of Chamberlain College of Nursing who would pay somewhere around $68,000 in tuition and fees and leave school with debt of about $34,000, on average. Now, he or she would typically make about $55,000 a year, and that's starting. Obviously it goes up from there because they have excellent lifelong career prospects. And that's all enabled by the education that they received at Chamberlain.

So we've done an ROI, a return on educational investment analysis, of that, and it comes out to about 28% return on educational investment over a 30-year career. That is a very strong value proposition. I don't know about you, but other than DeVry I don't have anything in my portfolio where I expect that kind of a return.

So students and parents understand that, and that's really what supports the value proposition of our schools.

Mark Marostica, Piper Jaffray.

I just want to kick off -- Daniel, you ended your opening remarks with a comment on academic outcomes. I was curious if you had any fresh data for us on placement rates.

Yes. No; I'm sorry, we don't have fresh data. But I can comment on -- well, we like to see career statistics, so our graduates' career statistics. And, even though the job market is tough, we are continuing to invest in that area. I mentioned 150 career service advisors, one of the largest career services offices of any university that you can find. And we are going to add even more on top of that.

But we don't have an update. The next update on the statistics will be on our next conference call, which will be in April. And then again, in August, when we report at year end, and that's just a good opportunity, Mark, I'm glad you raised this because I'd like to give everyone a heads-up that from that point forward we are going to be reporting statistics on an annual basis. And the reason is, the statistics don't really change dramatically from period to period, but we've spent a lot of staff time going through all of that, getting ready for that reporting. So it's not really worth it. So it's an increase to staff productivity and it reduces the amount of collateral materials that are produced from each location instead of three times a year to one time a year.

So you will still get an update, look for an update in April, look for another one in August. And then it will be annual in August from thereafter.

And just to be clear, that collateral material is really within DeVry University, as they are looking into the locations providing that. So it's really, from a school perspective, trying to make life simpler and easier for them.

So, thanks, Mark.

Also you mentioned that you will be hiring some additional enrollment counselors. Could you give us -- over 150, I believe you said. Can you give us a sense how many you will be hiring and the timing of those adds?

I don't think it's anything that's going to be material in your models, but we are doing that as we speak. And I don't have a specific number for you.

I just want to make sure I understand the year-over-year decline in other Educational Revenue this quarter.

Decline? No, no; it was an increase.

I'm sorry; I may have missed it.

No; other --

Other Educational Services was -- that was an increase (multiple speakers).

I'm just looking at the P&L going from $27.6 million to $24.0 million in the income statement.

Are you talking about the line on the revenues?

On the P&L; right.

Oh, oh. That's our fees. We changed the structure of our revenue and when we did our tuition pricing a year ago, we reduced some of our -- I'll call them nuisance fees, and so that's why that's going down. And we also -- some of the Becker materials are in that line as well. And obviously, Becker is down.

Okay, that's fair, thank you.

I think the dominant factor is the shift from the tuition to the fees.

Yes; I misunderstood. I thought you were talking about the segment numbers.

No, I got it. So for modeling purposes going forward, we should be looking at this new, I guess, other add as a percentage of net revenue as a guidepost going forward?

Yes. I guess I would look at the total revenues as the way to best manage that.

Jeff Silber, BMO Capital Markets.

I wanted to focus on the business management and technology area. There was a report released last week by the Higher Education Research Institute where they are seeing a slowdown in the number of freshmen that are choosing to go into business. I know that they focus mostly on traditional schools, but I'm just wondering, are you seeing any of that in either your undergrad classes or your graduate classes?

No, sir, Jeff, we are not. We are seeing strong interest in business programs, and I'm seeing that at the bachelor's and the master's degree level. I was trying to think if there's any other color I can give you. No; we are not seeing that at all.

Okay, good to hear, just wanted to double-check. Just to shift gears, just to focus on another regulatory issue, and this will be cohort default rates, I know next month you will be getting your cohort default rates for fiscal year '08, but you probably have some indication of how those are turning out. I'm just wondering if you can comment on that.

No, we really can't. I don't have any color to give you there, and I think we're planning to release those when they are final.

Yes.

Yes, so I know that that's always been the tradition, and we think that's the right thing. That number should be reported when they're numbers, when they're final. And in recent times, for various reasons, maybe that tradition -- some people have departed from that tradition. But I think you are going to see people get back to that tradition unless there's some specific reason, or some organizationally specific reason why somebody feels compelled to do that, you should expect to see all the schools report that when they are final numbers.

And just one quick numbers question, I guess for Rick. I know the tax rate has been moving up because you've seen more of a shift towards your domestic income. Should we be seeing that continuing over the next few quarters, or have you anniversaried the major aspects of that shift?

Well, the rate that we have implicit in our year-to-date results of just under 33%, it should be a good barometer of what it should be for the full fiscal year at this point. That's how we try and estimate it. And then, as we go forward, it's just, again, how big of a growth factor do we see in the profits, in the Business, Technology and Management segments, and within Professional Education and within the domestic pieces of Medical and Healthcare, relative to Ross University? And so as that shifts more domestic, that would continue to inch that tax rate up a little bit over time.

Jerry Herman, Stifel Nicolaus.

The first question is actually about neg reg, but actually the other team, the foreign medical schools team. Is there anything that came out of that language or out of those sessions that you think will affect your business in any way or the competition? And then maybe, just as part of that, is there anything changing or different on the competitive landscape for Ross?

In terms of the negotiated rulemaking sessions, there again, we were honored to have Dr. Nancy Perry as one of the team members. When it's in flux, there's nothing to really comment on, so we won't. And in terms of increased competition, no; we really haven't seen significant levels of new competition. Ross University School of Medicine is providing more new physicians to the United States residency system than any other school. And by the way, this past year we vaulted to the number one ranking for African-American physicians, number three ranking for Hispanic-American physicians, number one ranking for primary care physicians.

So clearly, there is a need and we are helping to fulfill that need. But the level of competition is certainly there, plenty of competition but I don't see a material change in that competitive dynamic.

And then one for Rick; it's about margins, Rick. Usually, you third-quarter margins are a bit higher than your second quarter margins. These second quarter margins were pretty high, but I guess there's also some influences on businesses, i.e., Fanor and some others. Is it fair to assume that sequentially margins will be better in the third versus second?

I guess I'd characterize it, usually the first and the fourth quarter margins are a little bit lower than the second and the third. So my expectation would be that our margins in the third quarter shouldn't be that dissimilar from what we had this quarter, and then they should go down in the fourth quarter.

Andrew Steinerman, JPMorgan.

My question is about persistence. DVU's persistence, in particular, was up quite a bit. Could you talk about the sustainability of persistence and opportunity for increasing persistence?

Yes; we are very focused on that across all our schools, including DeVry University that you mentioned. And there are things that we do inside the classroom, and then there are things we do outside the classroom. And you can have the greatest curriculum in the world and the greatest professors in the world and we certainly think very highly of our curriculum and of our professors. But if you have that yet you don't have the supporting student services to surround the classroom and support the student, then, especially with working adult students or other nontraditional students, that -- let me state in the positive -- you need both in order to support those students and help them to succeed and persistent graduate. And that's why we are investing in areas like Student Central, which provides the kinds of support services in a very clear, easy-to-access kind of format for our students and many other sorts of curriculum changes and academic changes as well, to keep that focus.

So when we talk about investments, this is one of the most important areas that we are constantly looking for ideas from our professors and from our service people. Give us ideas, give us projects that we can pilot, that we can test, that we can invest in. Those are the highest-return projects that we can invest in. So those are the kinds of things that we are doing to keep working on persistence.

Could you talk about some of that quantitatively? I'm asking -- persistence was up significantly year-over-year at [DDU]. I'm asking, can -- is there anything unusual about the elevation? Do you think you can continue to improve on this, or will DVU's persistence continue to rise near-term and intermediate term?

That's certainly our goal, is that the persistence can continue to rise. But I don't have specific numbers to give you, Andrew. But, yes, that is our goal, that persistence can, and that is our goal that it will continue to rise.

And do you think labor markets, when they improve, will be a headwind to persistence?

It could be, but I don't think that so much so that we won't be able to continue to grow the enrollments at our universities. And that's why I provided that example. And it's just an example that I have, from a very strong period of the 1990s, even though the unemployment rate went down and the economy got stronger, we were still able to continue to grow our enrollment.

It sounds like you are very confident on the direction of persistence.

Yes.

Ariel Sokol, Wedbush Morgan.

A question regarding acquisitions -- you paid down debt in the quarter, and it looks like you're almost done with the last one, so a couple of questions. One, what is the pipeline look regarding future acquisitions, and how may it have changed over the past couple of months? And, two, is a regulatory environment and perhaps gainful employment a variable for either you as the buyer; or, alternatively, is a variable for potential sellers that you are having conversations with?

We are certainly looking at acquisitions all the time and we have a very strong -- we feel that we have built over the last couple of years a very, very strong function there, of internal resources and external resources, to assess potential mergers, acquisitions, to do very, very thorough due diligence and then to apply very focused acquisition integration once the school becomes part of the DeVry family. And so we feel very good about those resources and our track record in this regard, and we continue to look for acquisitions in the future.

One of the things that I've commented on recently at the Education Day was over the last couple of years we were building the framework for the house. And now we've largely built that, and the focus is shifting a little bit more to filling in the framework that we've built. So those are the kinds of acquisitions that we might see, so continued filling out of the international framework, continued filling out at the pre-baccalaureate level and those kinds of things.

In terms of an impact, from the current discussions that are going on in negotiated rulemaking process, I can't say that I've seen that have a significant impact one way or the other in our view of potential acquisitions.

Trace Urdan, Signal Hill.

Daniel, you used the Chamberlain example, and I'm returning to this because you kind of opened the door here. But you used the Chamberlain example, which is a terrific example and comes in well underneath this 8% threshold that the department is talking about. But normally what you talk to us about is the $45,000 that is earned by DeVry graduates, which would fail to meet that threshold. So I'm wondering what you do with that example or how you think about that. Or do you think, when you make this statement that you think common sense will prevail? Is it your feeling that the criterion here will move to accommodate schools like DeVry?

Essentially, yes. We think common sense will prevail and DeVry University, founded in 1931, approaching its 80th anniversary, I don't think is going to suddenly go out of business in its 81st year, or whatever. I don't think that there's going to be a problem.

Okay. Can you share with us maybe what the lifetime cohort default rate looks like for DeVry?

Lifetime? No; we don't have figures like that to share.

Do you know offhand what, including deferments in the cohort default rate, does to the numbers, maybe without being specific, but just order of magnitude?

I think we've given information recently, in the last couple of months, that some people have seen that. And there's an increase, certainly, when you go from two years to three years. But in none of our institutions does that trip any wires or create a major problem. It's something that we are concerned about. It's something that we are actively working with students and with lenders to ensure that we educate students and parents on their responsibilities. These are the kinds of activities that have proven over time to help improve the performance and repaying those financial obligations and thereby reducing the default rates. And so we continue to manage that. But I want to be very clear to everybody that there's nothing in any of those rumors that tripped a wire or anything like that.

So, not to press this point too much, but looking at those three-year numbers, which have not had the benefit of being, quote-unquote, managed, do you think like those three-year numbers give you a pretty good proxy for what those defaults look like when deferments are not included in the calculation? Is that fair?

I don't know, and I really just can't comment on that one, Trace. Sorry.

Paul Ginocchio, Deutsche Bank.

Just a question about income-based repayment. I know CDRs aren't really an issue for you, but have you looked at income-based repayment? Can that help you get your core default rates even lower? And if you haven't looked at it, do you think this is significant for some of your students, and can you size it at all?

Yes; we support that. We think it's a good idea. And we support all kinds of creative ideas like that, that can help students, be helpful to students. And yes, I think that would probably be a positive.

Any way to size the percentage of your students that could avoid defaults through an income-based repayment program?

Not off the top of my head. Sorry, Paul; I just don't have a number to give you off the top of my head.

Corey Greendale, First Analysis.

I wanted to start with the question that probably would've been the first one out of the queue if this were five years ago, which is just how enrollments went in the fall start for the younger high school population versus the working adult students.

In terms of our high school -- and I've got to thank you for that question. Thank you for bringing us back to just talking about students and education. It is refreshing.

I would say that, as an overarching point on that, Corey, we do feel very good about, we like the traditional out of high school, traditional college-age student segment, and we like the working adult segment. And we really like the fact that our strategy encompasses offerings and services to both of those overall segments of students. And we find a lot of synergy and a lot of benefit in having programs that respond to the needs of both those segments, not just one or the other.

We are actually investing and focusing even more of late on the high school segment, and we expect to see synergies from our K-12 programs at Advanced Academics, in fact, in helping that, and also the fact that we run high school recruiting programs, high school educational programs at not just DeVry University but also at Chamberlain College of Nursing and at Apollo College and Western Career College, that really are additive to the whole.

So we feel good about the high school program, and I think we'll see continued improvements there. Rick, do you want to add anything to the high school question?

Yes. I guess the only thing I would add is that when you look at our enrollment growth, like we disclosed back in December, we've seen a nice balance in the growth rates between on-site and online. If you go back five years ago, you would have seen on-site actually experiencing some declines and online really driving some of the growth; whereas, now, given our best-of-both philosophy, we are seeing growth in both online and on-site in pretty equal proportions.

And is online still primarily a working adult model, or are you seeing the younger traditional students interested in online as well now?

It's still primarily the working adult, but increasingly the traditional college-age student coming out of high school is taking online courses, so it's really a mix-and-match. And I think that's really -- the both online and on-site -- is where the market is going. That's where the demand from students is going and we've been saying that for over 10 years. That's why we've never separated the online and the on-site. We never gave separate numbers. We always talked about it in terms of total online course takers, and it's for that very reason.

So that's the dynamic that we're seeing.

I have one other question for Rick. It was helpful, at the Education Day, you talked about long-term targets for each of the segments. Could you just put that in perspective? Obviously, you are well above those targets, particularly in the Business, Technology and Management segment. Will the goal be to meet those targets year in and year out, or would you consider it a victory if the compound annual growth rate ends up being at those levels in some years where you are below that rate, compounded over this year, when you are going to be well above [the] rates?

I guess I'd say that the success we are having this year, the strong results that are going to have us exceed the goal in fiscal '10, I don't think would lead us to believe that we would then be below that for the next couple of years to average it out, if that's what you're asking. I think we feel good about being able to deliver roughly 20% earnings growth going forward after this year, as the base.

So we challenge ourselves to continue that, even though we've set a higher bar, you might say.

Well, congratulations on the progress, thanks.

Scott Schneeberger, Oppenheimer.

Thanks and congratulations on your quarter. The first question I have, last quarter there was a lot of talk of, you had really nice margins, and there was talk about some branding and marketing spend that was delayed in the first quarter. And I think it has already been covered in the Q&A today that you are looking for comparable margins 3Q versus 2Q. But could we go down in the weeds a little bit and talk about some of the investments that you are making currently, including marketing?

Sure. Let me start; and, Daniel, you can add to it. But the investments -- when we talk investments, we are talking both spending that is expense than spending that's capitalized. The capital spend we've talked about, the Project Delta is a big piece of that, along with the spending within DeVry University for makeovers and expansion and some real estate optimization activities, expansion at Chamberlain, expansion at US Education. The types of things that hit expenses are in the areas of academic quality, brand quality and just growth initiatives. Academic quality would be things like our Student Central rollouts and support behind the career services advisors that Daniel mentioned, more student services to work with students throughout the time from when they first enrolled until they graduate.

Brand quality, in terms of the things that Daniel mentioned on Keller awareness and relaunch initiatives at certain locations to really get some resurgence in locations that maybe need a little jumpstart. And then, growth and adding more admissions advisors in online, for example. The more we grow, we need people that can work with the students in advising them up front. So those are the types of things that we are investing in.

And it's fair to say -- Daniel mentioned earlier that you really been investing a lot in the past couple years, and people had mentioned that you're not showing perhaps some of the margin expansion that others had seen, and certainly putting that up now.

So is it a nice, measured pace now, or could there potentially be some lumpiness going forward?

Well, we are always going to take advantage of opportunities. We're not going to be shy for making investments in academic quality where we -- or other quality initiatives where we think that it's warranted. So could there be some lumpiness? Without a doubt. We are not managing this for the quarter, were managing this for the long-term.

But I think we've proven and feel that as we invest in these, make these investments, that they will pay out over the long-term. And so, when you look at it on a year-to-year basis, we think it, again, should be pretty consistent in terms of our 20% earnings growth on a compound annual basis.

You guys did a nice job of talking ahead of time about seasonality in the first half of the fiscal year with regard to the Other Educational Services segment. Anything to look out for in the second half there?

I think that, if I recall, the third quarter is going to be pretty close to what we saw in the second quarter. Again, the revenue will continue to build. But in the fourth quarter you do have, I think, June, where there's some weeks where we don't have class, so you end up having the revenue not be as large in the fourth quarter because of that, in Advanced Academics, for example, high school ending in early June.

Gary Bisbee, Barclays.

Can you give us any sense how, as we think about the huge margin expansion in the DeVry University segment, how much of that over the last few years has been driven by mix shift and growth of your online business?

And secondly, how much of that has been driven by this whole concept of the co-located schools? I think it's in your Company expense, of paying some rent expense or other payment to that segment to use those facilities.

I'll give it a shot here. Rick, I'm sure, may have more color. But I would say that the biggest driver is operating leverage. In terms of mix shift, I think that has slowed down as a percentage over the last little while, relative to what it's been a couple of years ago. Co-locations are a wonderful, wonderful strategy. They are paying off in excess of our expectation. And so we continued to look for those opportunities. I just mentioned four Chamberlain co-locations here in the period of about a year, and we're also looking at Apollo College and Western Career College opportunities to co-locate with Chamberlain and with DeVry University.

So all of those I think are good factors.

And I would just add that online has got good, attractive incremental margins, just by the nature of online. But on-site, given where we are today, either through the co-locations, utilizing the facility, or through the strong enrollment results we've had, where you have students sit in empty chairs within facilities, brick and mortar, that's already existing, that leads to that strong incremental flow-through that we've been experiencing here short-term. And we still have available capacity to go forward. So for the not-too-distant future, we should continue to see good leverage.

And when you laid out the long-term plans at your investor day, it seemed to include not only moderate pricing growth for this segment, but also clearly the expectation of some moderate leverage as you grow it. Can you give us any sense as to what the upper bounds might be? Obviously, today, with the terrific growth, it seems like it's been pretty easy the last couple of years. But it's got to be getting somewhat tougher, particularly if one expects enrollment to slow down maybe in fiscal '11 or '12 towards that long-term target. Are you comfortable with all the levers as you see them that you can continue to get over the next several years, looking beyond this fiscal year?

Sure, Gary. I would say that we've been working pretty hard even the last couple of years. And our people have worked incredibly hard, and really these results are a testament to the team's hard work. And if we continue to do that and keep the focus on our students and their academic success, we really don't see any reason that we can't continue to achieve the targets that we've laid out at investor day and at the Education Day. And, while there may be some things that get a little bit harder, there are some other things that we haven't really even pulled the lever on.

And the earlier question that Amy asked about Project Delta is an example of that. We are investing in this new system for a reason -- better service and better productivity for our students. And that hasn't rolled out yet. So we would expect that to be a lever. We are certainly gearing up and looking for other ways to be more efficient and more effective in many areas throughout the operations, and that's the nature of management. You are always finding -- you pursued this particular initiative, and that maybe ran its course, but it continues to pay off for you. And you move on to the next one. And we see plenty of opportunities here to keep a good thing going.

I think you mentioned earlier, you might do some more actual branding work with Keller. I know that was something that got mentioned a couple of times at the investor day, a larger percent of your ad spend on branding. Can you give us a sense as to what type of format? Are you talking television commercials like we've seen a couple of your online competitors doing? Or how are you thinking about more time on branding?

Sure. And we'd like to, instead of using that word, we are trying to use the word identity. And so that's really what I was talking about. But yes, so building the identity, building the awareness of Keller. One of the things I think we talked about back at the Education Day was on the undergraduate side, DeVry University has quite high awareness, and we need to work on its consideration, whereas Keller, specifically the graduate school of DeVry University, has, when you know about it, very high consideration. It's just not enough people know about it, so we need to increase the awareness. So that's the strategy there.

In terms of some of the tools that we have used to increase that awareness and identity, we would use a very -- there's really not a lot of new inventions under the sun here. We had used the same sorts of identity-building activities that traditional universities you might see, billboards or television ads or online ads. Certainly, the social media, social marketing is a newer area, and we are very well versed in the opportunities there. So those are all the kinds of opportunities that we have.

One opportunity we don't have that some of the traditionals have of big-time sports teams -- we can't pull that lever real hard. But pretty much everything else you will see us doing.

Well, Phoenix named a football stadium, so I suppose you could always try and do that. But at any rate, thanks for all the color.

Not going to happen. Thanks. Is that it? Okay.

Listen, thanks, everyone, for your questions. At our next conference call, which is April 22, we will be reporting the third quarter financial results and the spring enrollment numbers. So I'd really like to thank everyone on this call for your continued support of DeVry. Thanks very much. Have a great afternoon.

Ladies and gentlemen, thank you for your participation in today's conference, and at this time, this concludes the presentation. You may now disconnect. Have yourselves a wonderful day or evening.