Adtalem Global Education Inc (ATGE) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to DeVry's fiscal 2010 third-quarter conference call. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of the conference. (Operator instructions). At this time I would like to turn the presentation over to your host for today's call, Ms. Joan Bates, Senior Director of Investor Relations. Ma'am, you may proceed.

Thank you, Jeremy, and I would like to welcome everyone to DeVry's third-quarter conference call. With me today from DeVry's senior leadership team 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 or that management believes, expect, anticipates, (technical difficulty) estimates or other words and 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, and filed with the Securities and Exchange Commission on August 26, 2009. Telephone and webcast replays of the call are available until May 4, 2010. To access the replay, please refer to today's release for information.

Daniel Hamburger will begin today's call with a quick overview, followed by a review of the 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 today. We are pleased to announce another quarter a very strong performance driven by the continued execution of our diversification strategy and by our operating philosophy, and namely, that is, that quality leads to growth. During the quarter total undergraduate enrollment for DeVry University was up nearly 26% from the year-ago period to a record of 66,909 students. These results flowed directly from the investments we've made in the quality of our programs and services.

And we are being careful stewards of our resources. An example of that is co-location. In today's press release we highlighted two co-locations between DeVry University and Chamberlain College of Nursing in Crystal City, Virginia, and in Chicago. These co-locations will further optimize utilization at those existing facilities and they will enhance academic student experience.

Now, if there was a theme this quarter, it would be health care. First of all, of course, we saw the passage of the new health care reform legislation. This law potentially means that 32 million more Americans will have health insurance by 2014. This will put even more demand on an already strained system. Our schools are well-positioned to educate the professionals who will be serving America's growing health care needs into the future.

The Chamberlain College of Nursing is a great example of how we'll help to meet this demand because, even before this law was signed, it was forecasted that we would be 1 million nurses short by the end of this decade. And yet our nation's nursing schools are turning away almost 100,000 qualified applicants each and every year because there aren't enough seats to meet the demand. So Chamberlain is a great example of how DeVry and the private sector as a whole are meeting the capacity needs that we have.

Likewise, in the world of medical education it's expected that we'll be 125,000 physicians short within 15 years. Ross University School of Medicine is helping to fulfill this critical need.

Then there's also a growing shortage of ancillary care and allied health professionals. Recently, we made a change that we think paves the way to significantly meet the needs for these professionals as well because, during this quarter, we announced the name change of the two schools that make up US Education, Western College and Apollo College. On July 1, the two will become Carrington College. They will be Carrington College, California, and Carrington College, respectively.

And so, taken together, our Medical and Healthcare group is serving nearly 24,000 students, and we are a leading educator all levels of health care from the medical assistants to the nurse to the physician. As millions of Americans become insured under health care reform we expect to play an important role in meeting the needs for health care professionals in this country.

So with that brief introduction, let me turn the call over to Rick and we'll go through the financial results.

Thanks, Daniel, and good afternoon, everyone. We once again delivered strong revenue and earnings results this quarter while making investments in academic quality. Our strong revenue growth continued to be a key source of operating leverage and improved margins and profitability. Record quarterly revenue of $504 million was up about 29% versus prior year with revenue still up 27% including our acquisition of DeVry Brazil last April. Year-to-date revenue was up about 32% and 26% when you exclude the impact of both DeVry Brazil and US Education, which became part of DeVry in September of 2008.

Net income and earnings per share were both up about 60% in the quarter versus prior year on a reported basis and up 51% after assuming the charge for a lease buyout from last year's results. Year-to-date earnings were up 63% on a reported basis and 59% excluding last year's discrete item.

Pre-tax income margins for the first nine months was 22.1%, up 450 basis points versus a 17.6% margin achieved a year ago. We are obviously on our way to significantly surpass our historical full-year peak margin of 17.1% this year and should exceed 20% by the end of the year as well. For your reference, third quarter results include expense related to share-based payments of approximately $2.2 million pre-tax or $1.8 million net of tax, a bit higher than last year. And our overall effective tax rate was 33.8% in the quarter and 33.3% year to date, up from our 30.4% rate for full fiscal year 2009, primarily due to the continued increase in domestic source income.

Cost of Educational Services expense in the quarter increased by about 20% versus prior year, excluding last year's real estate charge, and Student Service and administrative expense increased by 22%, both growing at double-digit rates but less than revenue growth, with or without the acquisitions.

We continue to make prudent, targeted investments while still delivering leverage and efficiencies.

With that, let me now walk you through some of the key highlights of our operating segments, which are further detailed in our earnings release. First, the business technology and management segment continued to deliver very strong top and bottom line results. Revenue in the quarter was up about 29% versus prior year and 26% year-to-date, driven by the strong enrollment growth and increased retention driven by our focus on student services.

Segment operating income of $86 million in the quarter and $220 million year-to-date more than doubled versus prior year. The segment margin at 23.6% year-to-date was up about 900 basis points versus last year, reflecting 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 26% in the quarter, driven by enrollment growth and pricing at Ross University and Chamberlain College of Nursing, along with good but decelerating growth at US Education. Third quarter operating income for the segment of $31 million was up about 19% versus last year. The margin was a bit lower than prior year, driven by a continuing mix shift in the business mix within the segment, with the growth of Chamberlain and US Education, both of which currently have lower margins than Ross University.

Also note that in Q4 we are planning increased spending associated with the startups for Chamberlain in Chicago and Crystal City, Virginia, as well as costs associated with the name change and geographic expansion within US Education. Our Professional Education segment results continue to reflect the impact of the soft economy on the accounting and finance professions, with some slight signs of improvement. Revenue was up 1% in the quarter and down about 2% year-to-date versus last year. Operating income was down about 15% in the quarter and down 18% year-to-date. Once again, we don't expect performance to improve materially in calendar 2010 or really until the economic recovery takes hold and positively impacts hiring and training within these professions.

Lastly, our other Educational Services segment contributed about $14 million of revenue in the quarter but with an operating loss of $1.4 million. Advanced Academics had increased marketing spending in the quarter to drive future growth and our fiscal third quarter represents the seasonal low point for tuition revenue at DeVry Brazil. No classes were held for most of January, given the academic calendar in Brazil, resulting in only about two months of revenue recognition in the quarter. This segment is expected to deliver operating income again in the fourth quarter.

[Checking] cash flow in the balance sheet, cash flow from operations for the first nine months was $481 million versus $288 million last year, driven by improved earnings and working capital. These strong cash flow results drove our cash and marketable security balance to $502 million at the end of the third quarter compared to $297 million last year, and our outstanding debt was $45 million, which was level with last quarter and down from $135 million last year.

Capital spending through the first nine months was $102 million, about double the amount we 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 also completed our home office move in January to two new locations here in the western suburbs of Chicago. We're committed to investing in educational technology and capacity needed to serve our students, and we've been successful in completing project spending this year. Total capital spending is expected to be in the $130 million to $140 million range by the end of the year.

Our net accounts receivable balance continued to run lower than prior year despite our strong revenue growth. Net accounts receivable decreased to $156 million versus $180 million last year. Receivables per account within DeVry University were actually down compared to the balances last year as well as two years ago. Our year-to-date bad debt rate increased slightly versus last year to 3.1%, driven by the US Ed and DeVry Brazil additions. We have not experienced really any significant deterioration with bad debt in our legacy operations. These results can be attributed to the impact of our financial aid processing system, focus on customer service and the tremendous effort of our campus and student finance teams. And I really do want to commend these people. When you factor in the tough economy, to bring down receivables per account, let alone total receivables, is a huge, huge achievement.

Finally, during the quarter we began executing our third share repurchase program, buying back about 100,000 shares at an average cost of $63.37 per share.

So that concludes my comments on the strong results for the quarter and the first nine months of the year. Fiscal 2010 is going to be a breakthrough year for the organization, significantly surpassing our long-term financial goals, given the power of operating leverage. The fourth quarter will continue to show margin improvement, albeit at a lower rate of growth than we achieved in the nine-month period. As we look ahead to fiscal 2011, we expect the business technology and management segment to continue to deliver strong revenue and earnings growth driven by the flow-through of our recent strong enrollment growth and continued operating leverage. The Medical and Healthcare segment earnings, however, will likely be flat to maybe even slightly down next year. This is driven by capacity and enrollment constraints within Ross's medical school that Daniel will discuss in a few minutes, along with startup costs associated with geographic expansion at Chamberlain and US Education.

In addition, we anticipate existing campus growth at US Education to slow down as the economy recovers and unemployment levels decline. Finally, we hope to see improved top and bottom line results within Professional Education segment as the economy recovers and anticipate that the other Educational Services segment will contribute more to revenue and earnings growth.

Overall, our diversification is serving us well as we expect to deliver results in line with our long-term financial goals for DeVry Inc. of double-digit revenue growth and roughly 20% earnings per share growth in fiscal 2011.

With that, let me now turn the call back to Daniel for some color on the operating results.

Thanks, Rick. Let me start with Business Technology and Management segment, which, of course, is DeVry University and its Keller Graduate School of Management. This was another strong quarter of positive academic outcome and excellent enrollment growth. We were especially pleased to see contributions across all curriculum areas, degree levels and delivery modes. Let me give you some color on that.

Total undergraduate enrollment in DeVry University's business programs grew 22%. Technology programs grew 27%, and the Healthcare programs grew 46%. We're also seeing significant enrollment growth at the graduate level as course takers rose 17% for the January session and more than 15% in March. 17% is the highest growth rate in total graduate course takers since 2003. We believe this demonstrates the strong return on the investments we're making to raise awareness of the quality of our graduate degree programs.

The total number of online course takers at DeVry University in the March session -- this includes undergraduate and graduate together -- increased 21.5% from the prior year, and the campuses and centers grew nicely as well. So we are seeing contributions to our overall strong growth rates at DeVry University from all channels -- that is curriculum areas, degree levels and delivery modes.

DeVry University continues to position itself as the career university, and in line with this we've been making investments in expanding career services for our students and hiring more career advisors. The most recent employment rate for DeVry University graduates in the active job market who are employed within their field of study within six months of graduation remains steady at 87.7%. We believe this demonstrates that employers continue to see tremendous value in our graduates, despite the continued weakness in the job market.

We also accelerated the rollout of our next generation student central location to better support our students from the time they enroll until they graduate. This innovative student central concept will be in all of our campuses by the end of fiscal 2010. And DeVry University is continuing to invest in new locations. Thus far in fiscal 2011 we expect to open new campuses near Houston and Phoenix as part of our plans to open five or six new locations in total at DeVry University next year. The key to DeVry University's strong performance is the quality of the learning experience we offer to our students. And the backbone of providing that quality is our highly talented faculty. So I'm particularly proud of the talent we have teaching at DeVry University and wanted to highlight that, beginning this month, we will be establishing a recurring faculty symposium. This will be another great arena for DeVry University's thought leaders to learn from one another, presenting white papers on essential topics such as student retention, blended learning and many others.

Now I'd like to update you on Project Delta. As most of you know, this is a major student systems migration that will greatly improve productivity and student service at both DeVry University and at Chamberlain College of Nursing. Now, as with any major systems project I've ever been involved in, we have experienced some delays and cost overruns. But, as we've said many times, success means getting it right, and that's the most important thing. We will not launch any of the phases until they are fully tested and ready. We do expect initial phases to roll out in the coming months, and we are excited about the capabilities Project Delta will provide to us and to our students.

Let me turn now to our Medical and Healthcare segment. At Ross University we continue to see growth as new student enrollment in January at the Med and Vet schools was up more than 14% and total student enrollment increased 8% from year ago. As those of you who have been following us know, part of the growth strategy at Ross University School of Medicine is the development of a clinical education Center located in Freeport, Grand Bahama. One of the attractions of the new clinical site which opened in January of last year was that it was expected to play a role in alleviating capacity restraints at Ross's main campus in Dominica. This hasn't gone according to plan. There's a few reasons for this.

One reason has to do with students reaction to a funding difference. Title IV funding has not been available to students studying in Freeport. We knew this, so as a result we developed an institutional loan alternative that alleviated any impact for students. But from a perception point of view the fact that there was a difference led to a more cautious outlook on the part of existing students who were considering Freeport.

There was also a delay in the California review process. So just background on that, four states, including California, require approval of international medical school programs in order to license graduates to participate in clinicals in their states. They also require notification for new locations.

So Ross made the proper notification but California later concluded that Freeport was subject to a more extensive evaluation process. Now, we've heard nothing that would indicate that the California Medical Board has any concerns about the Freeport location or its academics or operation. It's just that it's a process that you have to go through, and we hope to receive formal approval by the end of the year. These things have combined to reduce the number of students in Freeport well below what we had been planning, which means that we need to add investment and resources in Dominica.

So as we continue to work on the Freeport location we are adding capacity in Dominica. We are adding additional classrooms, laboratory space and faculty. We are committed to providing the resources our students need to receive a high-quality education. What all of this will mean is we are lowering new student enrollment for at least the upcoming May and September terms. We will keep you informed of our progress on all these fronts as they unfold.

In the meantime we expect that our well diversified portfolio of programs will enable DeVry overall to achieve its long-term performance goals. To give you some perspective on that, we anticipate that the slowing of enrollment growth at Ross will affect earnings by approximately $5 million in fiscal 2011. So we believe this is a prudent step and will allow Ross to manage through the near-term and prepare for growth longer-term.

This situation reminds me of when we first acquired Ross and we made the conscious decision to slow enrollment growth for a time in order to improve outcomes for students. That investment laid the foundation for the excellent academic outcomes and the strong growth in applications that we've seen ever since. So here, although it's a different situation, we are making a similar investment for the short term that will allow us to better serve our existing student population and manage for long-term growth.

So moving on within the segment, or Chamberlain College of Nursing continues to grow as enrollment was up 72% over the prior year. Chamberlain experienced strong growth at each of its campuses and across all of its programs. We continue to invest in geographic expansion at Chamberlain. For the two co-locations I mentioned earlier we recently received approval from the boards of nursing in both Illinois and in Virginia. Both campuses received wonderful feedback from the accreditor and nursing board review team.

Last week I had the honor of keynoting the ribbon cutting ceremony at the relocated campus in St. Louis, which is yet another co-location with DeVry University. As we toured this wonderful campus, it felt like we were in the hospital with nursing stations and ICU, patient simulators. And these simulators give our students the opportunity to learn in a lifelike yet safe environment and provide an excellent academic experience. I discussed with the local government officials what a privilege it is to open a new 55,000 square feet plus facility with state of the art equipment at a time when public universities are capacity constrained.

And then at Apollo College and Western Career College, soon to be Carrington Colleges, new enrollments dipped 2% while total enrollments were up 10% for the period. New enrollments were affected by several factors, including a moderation in enrollment as the economy recovers and a tougher comparison to last year's very strong growth; execution issues, which have been addressed, and near-term capacity constraints as we develop new locations.

Later this year US Education is going to co-locate with DeVry University in Pomona, California. That will be our first location in Southern California for what is soon to be called Carrington College of California.

Turning to our Professional Education segment, the economy continues to affect the accounting and financial fields that Becker Professional Education serves, but we are seeing early indications that the worst is over as our CPA segment is beginning to show modest growth. We believe Becker is well-positioned for long-term growth. This is evident when you look Accounting Today's list of the top 100 firms. You see that Becker has relationships in place with 97 of them.

Our Stalla Review for the CFA exam recently entered into partnerships with the Ontario Teachers Pension Plan and with UBS to serve as their preferred partner.

And then finally, moving to our other Educational Services segment, I'd like to comment on DeVry Brazil. Total enrollments were flat because of tougher comparisons in graduate student enrollment and in the delay in the rollout of several new programs. Even though it's small today, we believe DeVry Brazil continues to have different great potential for long-term growth. Right now we are focused on building our infrastructure, including student services and online delivery in order to build upon our quality offerings there and to foster future growth.

During the quarter we received approvals for numerous new courses in the health care field in Brazil including nursing, physiotherapy and nutrition and these should contribute positively to future enrollment growth. We are also exploring further expansion options through new locations. I'd like to mention that we are building upon a strong foundation of academic quality at DeVry Brazil. For example, based on outcomes of the OAB exam, which is the equivalent of the bar exam in the US, for the second year in a row Ruy Barbosa student test scores were number one in Salvador and number one among all private institutions in Brazil countrywide.

And so, to wrap it up, overall we are very pleased with the results in the quarter as, more than anything, they demonstrate that our diversification strategy is serving us well. While we discuss some near-term challenges at Ross University and the countercyclical moderation at US Education, these are more than offset by the outperformance at DeVry University and at Chamberlain College of Nursing. So, taken together, we are very, very well positioned to meet our near-term and our long-term goals.

So with that, we'd be happy to take questions. Joan?

Thanks, Daniel. We can take questions now for about the next 25 minutes. So if Jeremy can please give our callers the instructions, we'll begin.

(Operator instructions) Suzi Stein, Morgan Stanley.

A quick question on enrollment counselors. Has there been any change in turnover? I know you were in the process of hiring some additional enrollment counselors. I'm just wondering if there's been additional turnover or if the market has gotten more competitive for these individuals.

No, no real change in the market that we can -- have anything to report.

And then a question on CapEx. You said you will be in the $130 million to $140 million range this year. What's the longer-term outlook for that?

Well, we are working through those plans right now for fiscal '11 and beyond. It will probably come down a bit, but again we are going to continue to make the investments necessary to support the capacity needs that Daniel alluded to and complete Project Delta and other things. So it's probably going to be north of $100 million again, but exactly where I'll be able to tell you next quarter.

We've heard from ESI this morning that they're seeing an increase in spot advertising rates, which I guess was expected at some point. But can you comment on what you're seeing in the various media that you use? I know you're shifting your spend around just to accommodate the changes.

We don't have anything to report in terms of a change in that regard, so I just don't have any color for you on that one, Suzi.

No major changes there.

Sara Gubins, Banc of America/Merrill Lynch.

Rick, you mentioned in the fourth quarter that you are planning increased spending with the Chamberlain startups and the US Education name change in more locations. Can you just give us a sense of the magnitude of that?

For that segment it's the startup costs associated with hiring the faculty and recruiting students initially and the advertising of a new location for the Chamberlain startups, and then the initial cost for marketing on the name change. It's in the single-digit millions, so it's not huge but it's several million.

More of a conventional question, but within the Business Technology and Management segment, I'm wondering how you think about the potential for continued margin expansion over time. You're obviously going to have phenomenal expansion this year, and I'm wondering what kind of magnitude you are expecting over the next several years.

Well, not the magnitude we have had this year, I can tell you that. But we do anticipate with the enrollment growth we've seen lately that that will carry forward into next year and then year after. We continue to give us good double-digit revenue growth, and then as we go forward it's going to be more focused on continued efficiencies to enable us to continue to derive overall operating margin improvement.

I think it will, more from SS&A in the future than from cost of instruction as we continue to invest in academic quality.

Should the other segment be profitable this year?

In total for the year, it's going to be close to breakeven. It's not going to be material one way or the other.

Corey Greendale, First Analysis.

Rick, I'm sorry to have you repeat something. Can you just repeat what you said about the Medical and Healthcare segment in fiscal 2011? I just didn't catch what you were saying, top and bottom line expectations.

I didn't say anything about top line. What I said about bottom line is, for earnings for the segment, it will likely be relatively flat, maybe even slightly down, for the reasons in terms of the enrollments on Ross University that Daniel mentioned, along with the start-up underwriting for the new locations and some of the name change costs in US Education and more expansion in US Education and Chamberlain later in the year.

And the next question is the requisite regulatory question. Can you give us some sense of what completion rates are for the various segments and if there's anything you can say about bachelor degrees, specifically within DeVry University, that would be of interest?

We have graduation rates of 31% at DeVry University, 30% at Chamberlain College and 57% at US Education. You have to bear in mind that that's the way they are reported on a first-time, full-time basis. So that doesn't include all the other students who come in with transfer credits, which is at this point probably the majority, many of our students, anyway.

And so I always urge caution in interpreting those. And also, we need to compare those two institutions who serve similar populations of students, often with several of the Department of Education defined risk factors and other factors like that. So those are the numbers that we have.

I was hoping you might be able to share the numbers that include the transfer students.

Do we have that? We can get that to you, but I don't have that. It goes up, obviously, but I don't have that at my fingertips here.

And since I think you've been involved in some discussion with the department, I just want your opinion, Daniel. Do you think that the department is aware of the fact that the proposals on gainful employment seem to be somewhat biased against bachelor programs and that that is their intention? Or, do you think that they are unaware of that and are amenable to dialogue in trying to change that?

I can tell you they are definitely amenable to dialogue, and I really commend the Department of Education for conducting the process of being very open, of listening. And I can tell you with first-hand experience just in general that they are listening and there is a lot of dialogue going on.

Jeff Silber, BMO Capital Markets.

Daniel, in your remarks about US Education you alluded to some execution issues. I was wondering if we can get a little color on that.

Yes. What we saw was a little bit of turnover in the marketing department, and that led to some fumbling as well as in the department of enrollment management also, just executional issues that happen from time to time. We had a bit of a stumble there, and we've addressed that. We feel pretty confident we've addressed that, and it was just part of the ongoing day-to-day, month-to-month type of management that you do. And so we think we have addressed that, and that's what I was referring to.

Is that the first time this has occurred since you bought this company?

I would say that was the most significant occurrence of something like that, and we have a really strong management team at US Education, soon to be Carrington Colleges, and they very quickly addressed that, unfortunately not in time to make as much of an impact on that particular period that we saw.

And that was only one factor in combination with the comparables and other factors that I mentioned. And I'm very confident that the strong management team at -- I'll just start saying Carrington Colleges; I'll jump the gun on July 1 -- at Carrington Colleges -- I just love the name so much. I am very confident in that management team, and we continue to strengthen the management team. I've just seen a press release on a new member of the team. And we feel very good about how we run things there, very, very strong operating. But even with that, blips can occur from time to time, and that's what we saw there.

And just a quick follow-up, just on Ross. You mentioned issues with Freeport location and the California Medical Board. Are there any other issues with any other states? Did you see non-California students affected by this?

No, no and no.

Andrew Steinerman, JP Morgan.

When you called out countercyclicality for US Ed, and I know you also said it was other factors as well, I kind of think maybe it's still early in the unemployment rate to start to [crawl to] countercyclicality. How would you judge that countercyclicality is affecting US Ed, and do you see countercyclicality becoming a headwind for any other unit at DeVry?

No, it's really US Education, or soon to be Carrington Colleges, that has been most countercyclical within our family here at DeVry. And this is, as we've said many times, that really it balances out some of the other parts of our family, where we are procyclical, like Becker or areas where we're completely noncyclical like the medical school, the nursing school, the veterinary school.

So from an overall DeVry perspective, the most important thing is we can continue to achieve our goals even if there is a little bit of -- and I wouldn't call it a head wind as much as just less of a tail wind that we've been seeing at the shorter term programs that we have at Carrington Colleges.

Fair enough. And, could you also give a comment about student persistence rates going forward, what will be the drivers there?

Well, student persistence and retention is a huge focus for us from an academic perspective. All of our colleges and universities, and the drivers there would be things like our -- this innovative student central model that we have put in place at DeVry University and rolling out to full rollout to provide the kind of student support services, academic advising, Student Services, part-time jobs, career services, financial aid services, to support our students. That's what our students and our graduates tell us helps to make the difference in helping them to persist and to graduate, is providing that kind of support service that, unfortunately, aren't always provided at some of the public institutions. And so that would be, I'd say, the number one area that is going to help us with persistence, along with the other investments that we've pointed to in terms of just the academics within the classroom, investments that we are making to support our faculty. I'd point to all those factors.

Right, and do you think student persistence will be up because of those factors, or will it be challenged because of any countercyclical effects?

Oh, no; we think that we can continue to make -- we've had improvements in student persistence, and we've been doing that through the economic cycle, so we'll continue to focus on that through the economic cycles as well.

Gary Bisbee, Barclays.

First question, and I realize business technology segment is a key profit driver in the near-term, so this might seem like nit-picking. But I look at the press release, and you've got either slightly negative growth or issues at three of the school groups, between Ross and US Ed and slightly negative starts in Brazil. And I can't help but wonder if maybe you have overextended yourself in terms of all the things you are trying to do here and successfully execute. I guess, is this just sort of bad luck all around, or what is your take on that thought?

Our take is that we are really pleased with the performance of the DeVry family this quarter, and we see tremendous opportunity to continue this strong growth in the near-term and in the long-term. And we think that one of the strengths of DeVry is our diversified positioning. And the things that you pointed to -- I really would talk about each one on their own. Brazil is very, very small; that's a long-term investment that we are making.

US Education, I think we are going to see, as we've been saying, I think anybody who says otherwise just might not be looking at reality. Reality is the tail wind, countercyclicality, and it's not going to last forever. That's okay; we can still continue to grow at US Education, or soon to be Carrington Colleges, as we invest in new locations and online and new programs as well. So even with the flagging of the tail wind, we are looking for and expecting growth at Carrington Colleges.

So we can talk about each particular instance here. But overall, when taken as a whole, which I think is what's most important, we really like the array of colleges and universities that we have, and we like our diversified positioning.

I've always thought of DeVry University, and I think you made this point a bunch of times, is much less countercyclical than a lot of the heavy diploma and maybe more associate type businesses that are out there. But clearly, the business has said a significant acceleration in the last two fiscal years in terms of new student growth.

Can you help me just get comfortable as I look at that trend understanding maybe how much of that or what has been you guys executing better versus just an improvement from the cycle? Is it reasonable to think that, while it probably slows, that this can remain a low double-digit or high single to low double-digit grower as we look out over the next two to three years, even in a stronger economy?

Yes. It's really interesting, Gary, that DeVry University has been able to grow through good times and bad times. In fact, back in the vaunted '90s and the 20% plus earnings growth for 10 years in a row, 40 quarters, the average enrollment growth was less than 10%, it was about 7%-7.5%. And I think we shared last time that, as you look at DeVry University's total enrollment growth, after the last recession, we showed very good growth throughout, as that ended and we had falling unemployment and an improving economy, DeVry University performed very, very well.

So DeVry University's programs are really a lot less countercyclical than I think some people think. And when you think about that it makes sense because you've got business programs, you've got technology programs and you've got an increasing cadre of health and health care programs technology programs at DeVry University. So they are programs that appeal to students across economic cycles.

The other thing is, DeVry University has a nice complement of both working adult students, like many others have, but also a lot of traditional college-age students coming directly from high school. And they don't stop making 18-year-olds in good or bad economic cycles. Right? So you have a nice, stable base of 18-year-olds coming through. And that's a differentiator for DeVry University relative to many others as well. So we feel very confident in DeVry University's ability to grow and serve students throughout good and bad economic cycles.

I know you've talked over time of all the things you've done to run the business more efficiently. Is it fair to think that part of this acceleration has been some of the internal processes and marketing better and whatnot that you have done? And some of that certainly would then be sustainable? Is that a fair concept?

Yes, and maybe -- we try to not tout that too much. But to be fair, when we had our big downturn in the early part of this decade, first we pointed to our internal execution. We didn't blame the market. Although that was a factor, that was the secondary factor. Likewise, as we've gone through the turnaround and continued to perform, yes, I would say the first factor is internal performance and the second factor is the market.

Amy Junker, Robert W. Baird.

I just had a couple of follow-ups on some other topics. Daniel, with respect to Project Delta you mentioned you saw some delays, but I just wanted to clarify. You haven't seen any disruption at this point; is that correct?

That is absolutely correct. We have not seen any disruption, and really we haven't rolled out very much at this point, either. But that's the point is -- and why we are a little bit behind the original schedule, and I reported that, is actually to underline the point I think you are getting too, which is sell no wine before its time. We will not roll out any module of the system until it's fully tested and ready, and that we've done to change management, which is something we teach at DeVry University and Keller Graduate School of Management, which is sort of an academic term for training and making sure that everyone knows how to use the system properly. And so we are putting a big investment with increased investment in training and change management, which again speaks to a little bit -- we are a little bit over time, a little bit over budget.

But I can tell you, sometimes the wind isn't coming in under budget and under time. It's coming in a little over budget and a little bit over time, so like you didn't blow anything off in the process. And from my experience I can tell you that sometimes is the definition of success with these large systems, projects and business change projects. So that's how we are approaching it. At the same time, I can tell you that over the last few months I've seen demos, I've participated in some of the training. And I've been blown away by the opportunity here, the opportunities for enhanced service to our students as well as internal productivity, but also through the change management and training, seen a level of excitement and enthusiasm from people that I've rarely seen in the many systems projects I've been involved with over the clients and as a consultant I used to do with Accenture.

Usually it's, oh, gosh, when do we have to do with this thing? This has been, wow, we can't wait for the new system. So very confident that Project Delta is going to pay off and achieve the kind of returns that we are looking for.

Thanks, and just a couple of quick ones on Ross. You had commented that you are going to see slowing starts. And I just wanted to clarify, should we expect an actual decline in starts? And, could that lead to a decline in overall enrollments, or you think this is more just a slowing that's going to occur?

Yes, you've got it. We do think that new student enrollment will decline in May and September, and that could be in the range of 30% to 40%, even. We don't think that total student enrollment will decline. We think it will be about flat.

And then, Rick, you had said that you thought the impact of that in 2011 would be about $5 million to the bottom line. And I just wanted to clarify, given those comments, can we still expect or do you still expect to be able to achieve your targeted 20% net income growth in that year on top of this phenomenal year you are having in 2010?

That's still what we're targeting, as Daniel said all along. That's the power of the diversification because we are doing this because we need to manage through this with Ross, and we are making these investments in expansion and in Chamberlain and US Education, soon to be Carrington College. And we can do that, given the power of our diversification and still come in, again, roughly 20%. We're working retail the details of our plans sort of as we speak, but we still think that's very much doable.

If I could just add one more thought on that, that's the reason we gave you that little bit of color and actually quantified it. You can see, it's not a 50% problem or a 10% problem or a 5% -- it's like a 1% type of magnitude.

Okay, perfect, and then one last one and I'll pass it over. Rick, you had said in the other segment that you thought that could be profitable this year. But that's lost $7 million year-to-date. So do you think you're going to earn $7 million in the fourth quarter?

I think I said profitable in the fourth quarter. For the year I said it's not going to be material. I think, given the underwriting we had in the first quarter it's probably going to be slightly negative.

Okay, I just wanted to clarify that. Great, thank you so much guys.

Trace Urdan, Signal Hill.

I'd love to hear a little bit more about the countercyclicality that you are seeing at US Education/Carrington College. How is that manifesting itself? Why do you believe that that has started to happen in that business or started to affect that business?

No, Trace, I just think that we're starting to see the beginnings of that. It's probably, not being a macroeconomist, this is just my own take on it, but it's probably --

But are show rates declining? Are you finding that girls are leaving to go take employment somewhere else? Are they telling you this in the enrollment application process? Do you have any sort of --

I think the color commentary here would just be that, as you look at the rate of new unemployment claims, for example, it's all starting to slow down, which is good for our country, good for our economy. Right? We all want to see that. And that aspect of it, which does impact our non-degree programs, in particular, at Carrington, so the certificate program a little bit more. We're starting to see a little bit of that, more in the front end of interest, not so much necessarily in terms of the conversion from there.

The other thing that I would say is, we're positioning Carrington increasingly for growth through new locations, new programs and online, as I mentioned, but also the fact that we have a very healthy complement of degree programs, including nursing, at Carrington. And those are much less countercyclical. So we like the positioning.

And I would just add that, we've been saying all along that since US Education became part of DeVry 18 months ago, we've been the benefactor of the soft economy and the increase in inquiries as a result of the higher levels of unemployment. And now I think what we are seeing is that those inquiries are starting to go back to normal levels. And when you compare that to prior year, that was inflated, it ends up in less of a growth or in some cases maybe flat. So it's, again, relative to what we got. We had a tailwind that's now starting to be maybe a neutral, but that neutral compared to a tailwind is a tougher comp.

I think you've addressed this, but I just want to be clear. It looked like the flow-through margins in the Healthcare segment declined. Was that really just a function of the surprise in terms of enrollment relative to the capacity you had -- I guess this sort of cuts across both the comments you made about Freeport as well as maybe what you saw in US Education. Is that the reason for it, or is there something else in there?

I think it's just the continued mix shift that's going on within that segment with Ross and having the highest margin. And then as US Education and Chamberlain grow and even though their margins are okay, they are still lower than Ross's.

[Adam Shattuck], Credit Suisse.

Hi, sorry, this is Kelly Flynn. Quick question, a lot has been covered, but Rick, you mentioned the bad debt. Could you just back to that, just repeat what you said, and also give some more color on what drove that change and then how you see that evolving over time, especially as the mix of the business arguably shifts?

Sure. The story is, it really wasn't a lot of change. The bad debt rate is about 3.1% on a year-to-date basis, which is a little bit higher than last year, but it's really driven by the additions of US Education and DeVry Brazil into our family. We really have not experienced any deterioration in our bad debt levels within our legacy operations, and it's all driven by the focus on our student accounts and our receivables. Our new system and the teams that are out there working on this day in and day out are doing a fantastic job of providing customer service and working with these students on a day-to-day basis.

Bob Wetenhall, [DeVry].

Royal Bank of Canada. $500 million of cash at the end of the quarter on the balance sheet -- any notion of making an acquisition or something?

We are always looking at that, Bob, and we look at that strategically, and we look at that long-term. So we are focused on delivering long-term results in terms of academic quality, enrollment growth and then ultimately the revenue and earnings that we talked about here. And so, from an acquisition standpoint, we kind of feel like we've built the framework of the house. And acquisitions will continue to be a tool that we can use to build out the house. But less likely to get into a whole new area when you look back to five or six years ago, when we were building out this diversification strategy.

And then other uses of cash include share repurchases, and we've initiated our third plan there. And then, of course, we have a good -- we started to build a track record. We're trying to build a long-term track record of dividend increases off of the relatively modest base that we started with. So those are other uses of cash as well.

Accounts receivable was a use of cash use of $122 million through the first nine months compared with $150 million during the same period last year and your revenues are up very materially.

Can you provide a little color on how you're managing to do such a strong job with working capital management?

Yes, it's the same answer I would have -- gave Kelly just earlier on the receivables standpoint, because that's really the key component that we've been focusing on. We manage obviously the rest of it with payables and other liabilities, but it's really staying on top of the student accounts, working with them from the day they walk in the door to the time that they graduate and beyond. So, that's the key component.

It's a pretty dramatic improvement; that's why I'm highlighting it.

Well, thank you for that, Bob. And, I would also mention another factor, which is we've talked about investments that we've been making over many quarters. Some of those investments have been more staff, more Student Services and financial aid services people to help work with the students. Again, that's the kind of thing you can only do when you're managing for the long-term because it's going to depress your margin whatever for a quarter or whatever it is. But you've got to have faith that that's going to lead to positive outcomes for a student, and that by providing positive outcomes for students, that drives the flywheel as quality leads to growth.

And to be fair, when you compare it on an annual basis, last year -- we talked about this a year ago, 18 months ago, we were having some issues with our transition to this financial aid processing system that are now behind us. But it's still better than two years ago. And so a little inflated base last year, but even better than two years ago, so it's still very good.

That's helpful, thank you; one final question. You have obviously delivered very quickly and effectively on your effort to improve campus utilization rates. And it sounds like, I'm assuming, square footage per student is probably somewhere in the 50s and operating margins are mid-20s in BTM. What do you think, given the fact that you're operating at a much more sustainable and more efficient level, what's the peak operating margin you can expect on a normalized basis in that business?

There's not a number that I can give you on that, Bob but we do think that there's still further opportunity. And at some point there's probably -- it doesn't go up forever as a percentage, right, as a margin percentage. But then you can continue to deliver growth every year because, as you said, inherent operating leverage. So from a long-term perspective we think we can continue to meet the kind of guidance that we've outlined, not just at the BTM segment, but throughout the family.

Would it be fair to say you've met your internal targets earlier than you anticipated?

No. I think we are pleased with the progress we've made, particularly at DeVry University. Our hats go off to the very strong team that Dave Pauldine and the team have built there, and they have done a really good job. I'd say we are on track, our mantra is meet or beat plan. So yes, maybe we are beating a little bit. But that's what we like to do, and we're going to keep on doing it.

Terrific stuff, thanks very much, guys.

Jeremy, we're going to have time to take just about maybe two more people that are in the queue.

Scott Schneeberger, Oppenheimer & Co.

This is [Bhavindra Bora] sitting in for Scott Schneeberger. If you guys can talk about, give some color commentary on your co-location strategy and how basically that's impacting or benefiting the operating margin?

Sure, I'll speak to that. Co-location is something that's actually, I'd say, exceeding even our internal expectation. Again, as with everything at DeVry, we are pretty conservative and took a slow approach at the beginning and tested it out in one campus and then another. And now, given the results of that testing phase, we now are proceeding with confidence a little bit more aggressively. There's just a few of the reasons that co-location leads to synergy, I'll just use that word, include the ability to share the facilities and you spread the facilities cost, including the library, the student commons, the bookstore, many areas like that.

You, in some cases, are able to have students co-sit across institutions. Like at Chamberlain College of Nursing and DeVry University, students can actually co-sit in some courses, general education courses. So there's a sharing of resources there which benefits our students and actually enriches the learning as well as having efficiencies.

And many of the other Student Services can be shared or, if not totally shared, there can be just some back-office or common frameworks, common infrastructure -- Student Services, financial aid, packaging. Financial aid packaging is pre-similar whether you are going to a nursing college or you're going to an engineering program. When we do your financial aid packaging, it looks kind of the same. And so there can be a sharing there.

So those are just to give you a little color on some of the reasons that the co-location is adding value and is part of this diversification strategy that we are pursuing here at DeVry.

Sara Gubins, Banc of America/Merrill Lynch.

I wanted to ask about financial aid and whether or not you're making the transition to FDL direct lending, and also just any comments on the third-party student loan market, how important that still is to you and what trends you are seeing there.

It's interesting, Sara, that it seems like ancient history, just a year ago or 18 months ago, whatever it was, that everyone was all in a panic that the reduction in private lending -- okay, that was going to be the thing that was going to kill the private sector or whatever. And of course, we said we don't think that's going to happen. And I think that has proven to be the case.

So the private loans as a percent of total tuition or any way you want to look at that is very small, a couple of percent. So it really has not had an impact on our current students or on our ability to attract new students. I think, when you take a look at some of the new student numbers, you've seen that.

So likewise, the other part of your question, about direct lending -- that's really more of an issue for the banks or other people. It does not have an impact on the schools or on the students themselves. So we don't anticipate hiccups or problems. We've been working collaboratively with the Department of Education from an administrative point of view to ensure a seamless transition for our students. And that's the key thing, to make sure that it doesn't impact the students.

Thank you.

I'll just give a final comment that says -- well, first of all, I'd like to thank everyone and point out that our next conference call will be held on August 12. And importantly, we'll report year end results and summer enrollment. I'd like to thank everyone for your continued support of DeVry as we pursue our purpose to empower our students to achieve their educational and career goals. Thank you.

Ladies and gentlemen, thank you very much for your participation in today's conference. This does conclude the presentation, and you may now disconnect. Have a wonderful day, evening or night.