Adtalem Global Education Inc (ATGE) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to DeVry's first-quarter fiscal 2011 results 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 your host for today's call, Ms. Joan Bates, Senior Director of Investor Relations. Ma'am, you may proceed.

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

Before we begin, please be advised that statements made on this conference call may constitute forward-looking statements subject to the Safe Harbor 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, perceives, forecasts, estimates, or other words or phrases of similar import.

Actual results may differ materially from those projected or implied. Potential risks, uncertainties and other factors that could cause results to differ are described more fully in Item 1A Risk Factors in the Company's most recent Annual Report and Form 10-K for the year ending June 30, 2010, and filed with the Securities and Exchange Commission on August 25, 2010.

Telephone and webcast replays of the call are available until November 2, 2010. To access the replay, please refer to today's press release for more information.

I'll now turn the call over to Daniel Hamburger.

Well, thank you, Joan, and thank you all very much for joining us today for our fiscal 2011 first-quarter conference call. I'll do a brief introduction and Rick will discuss our financial, in a moment, results, and then I'll provide a few operational highlights in the quarter. And then we'll open up to questions.

During the first quarter, our continued focus on academic quality produced excellent student outcomes and strong financial results. In particular, our diversification strategy has enabled us to perform well throughout economic cycles and to be well-positioned in these uncertain regulatory times. But let me step back and spend a few minutes on the vital role of private sector colleges in our higher education system.

Just 20 years ago, the US was first in the world in college attainment. Today, we rank 12th. Clearly, we're falling behind in terms of producing college graduates, and part of the reason for this is insufficient educational capacity at our colleges. And this lack of capacity comes at a time when more good jobs than ever require a college degree.

President Obama has recognized the need to regain our educational leadership and recently set an ambitious goal of getting the US back to number one in college attainment by increasing the number of people with college degrees by more than 8 million by 2020.

So where's the capacity going to come from to educate America's workforce? Well, one of the great strengths of the American system of higher education is that the public sector, the private sector, and independent universities all serve different niches and provide diversity of choice for students.

In particular, the US has a vibrant private sector that has shown a great ability to nimbly add capacity, with quality outcomes, at a lower net cost to taxpayers. Last year, 54% of all new Allied health workers and 10% of new nurses received their degrees from private sector colleges and universities.

As you can see from chart one of the press release, while public sector colleges cost taxpayers $15,500 per student, private sector colleges cost taxpayers only $2,400 per student. This is after accounting for the cost of student loan defaults and the fact that private sector schools pay taxes. This data, by the way, comes from an August 2010 study by [Sonicom], and it demonstrates the concerns about disproportionate assistance to private sector schools are misplaced.

And so increasing capacity is critical, but that capacity must be of high quality. When it comes to measuring the outcomes, do students or employers evaluate the quality based on an institution's tax status or its funding source? Clearly, they don't. They look at measures like test scores or graduation rates and employment outcomes.

In terms of employment outcomes, at DeVry University, we hold ourselves accountable to a goal -- that nine out of ten graduates in the active job market will find employment in their chosen field of study within six months of graduation. Now, we don't always hit the goal. This last year with the tough economy, as you can see in today's release, 88.9% of DeVry University's graduates in the active job market were employed in their fields of study within six months of graduation. But over the past 35 years, we've averaged over 90%, and we hold ourselves accountable and do everything we can to help our students graduate and achieve their career goals across all our schools.

Take for example, [Karen Tedder], who's one of several students we featured in our 2010 Annual Report. She recently graduated with a BSN from DeVry's Chamberlain College of Nursing, and credited the support she received from Chamberlain's faculty and staff as being a major influence on her as she prepared to enter the nursing profession. Karen is now employed as a trauma nurse at the Grant Medical Center in Columbus, Ohio. She's a great representative of Chamberlain's graduates.

Another example is [Shaun Satroydre], who earned her Bachelor's in Business Administration from DeVry University in 2002. She comes from an immigrant family and needed a school that would give her a quality education and the flexibility to work full-time. She found that DeVry University enabled her to combine her creativity with technology in the digital world. And the result -- she's the founder and CEO of [Mojo, Inc.], an interactive ad agency.

These students are often called non-traditional, but they make up 75% of today's college graduates and today's college students.

DeVry University has two campuses ranked in the top 10 schools producing African-American Bachelor's degrees in Business. So DeVry and other private sector colleges are increasing access to many students who otherwise wouldn't have had the opportunity. And we recognize that there is concerns with some private sector programs, we respect that students pay a lot of tuition and deserve value and that taxpayer dollars are involved, but it's critical that regulatory changes be done right.

They need to be based on facts and analysis, and they need to consider the student population being served. Solutions must not unintentionally penalize quality programs, and in so doing, actually reduce access for students in this time of need.

As a matter of policy, we should treat all students and all schools with the same standards of accountability -- and that's quality outcomes, no matter the funding source. And we support the Education Department's recent announcement of increased enforcement resources. Enforcement is an important way to accomplish the goal of holding all schools accountable for delivering quality programs.

Now, in terms of the ongoing regulatory process, recently, the Department extended the timeline for the proposed gainful employment regulations. That makes sense, as it's essential for the Department to get a balanced view and to hear from schools like DeVry that have a track record of delivering programs that lead to employment and to long-term careers for our students.

We continue to have meetings to discuss our comments with the Department, including Secretary Duncan, and with other Department and Administration officials. We appreciate the thoughtful approach by the Department to allow for further dialogue to help ensure we get it right.

And concurrent with working with the Department, we also have teams developing strategies for where we might need to make adjustments based on the new regulations, depending on how they evolve. However, we aren't making large operational changes in anticipation of the new rules. Part of the reason for this is that DeVry has always been focused on quality, even though that has meant slower growth sometimes.

For example, DeVry University is not an open enrollment institution, so we already turn away applicants who don't meet our admission standards. It's not like we're now for the first time having to implement these kinds of quality standards and having to go through a long process of figuring out what works. We feel very good about the value proposition offered by all our schools. So again, DeVry's focus on quality will serve us in good stead over the long run.

So with that introduction, let me turn it over to Rick for a review of DeVry's financial highlights.

Thanks, Daniel and good afternoon, everyone. As you've seen in our press release, we delivered very strong results in the first quarter of fiscal 2011. Quarterly revenue of $521 million was up about 21% versus prior-year, all organic growth. After-tax net income of $74 million increased 34%, and earnings per share of $1.03 increased about 36% versus last year. And our net income margin was 14.1% in the quarter, up [104] points versus a 12.7% margin achieved a year ago.

For your reference, first-quarter results include expense-related share-based payments of approximately $5.3 million pretax or $4.6 million net of tax, higher than last year, driven by an increase in the number of retirement eligible awards.

Our income tax provision this quarter was approximately $39 million and we had $23 million of capital spending, which we used to invest in our schools. Our overall effective tax rate was 34.5% in the quarter, up from 32% rate in the first quarter last year and 32.1% for the full fiscal year 2010, primarily due to the increase in domestic source income.

The cost of Educational Services expense increased by 16% versus prior-year, and student services and administrative expense increased by 17% in the quarter, both lower than revenue growth and driving improved margins due to operating leverage. And just a note that Educational Services expense or cost of construction was approximately 4 times that of advertising. We continue to make targeted increases to drive academic quality and enhance student services, consistent with our philosophy of quality leads to growth. Advertising expense as a percentage of revenue was 11.9% for the quarter.

Now let me walk you through some of the key highlights of our operating segment results, which are further detailed in our release.

First, the Business, Technology and Management segment revenue was up about 25% versus prior-year, driven by summer school enrollment growth -- summer enrollment growth, excuse me, coming from continued online expansion, improved campus enrollments, and increased persistence as a result of our focus on student services. Segment earnings were $84.5 million in the quarter, up 51% versus prior-year, driven by the revenue growth and resulting operating leverage.

Total course-taker enrollment for the September session at Keller Graduate School of Management, was up 14.1% versus prior-year, continuing the strong trend. We will report fall enrollment for DeVry University in December, and while we expect Keller to maintain this trend, we expect to report a modest decline in new student enrollment for undergraduate students in this period.

This is driven by continuing tough comps, with fall 2009 growth of 19.4% on top of growth in fall 2008 of 19.7%. Assuming a modest decline this fall, new student enrollment would grow at a compound annual rate of 11% to 12% over the past three years. It's also important to note that the new student enrollment will still be near record levels this term.

During the recent period, we've seen decreased volume of higher quality inquiry flow coupled with lower conversion. One potential factor could be the difficult and uncertain external economic environment. Another factor contributing to this is that we are below the number of admission advisors we'd like to employ to serve our new and prospective students. We're actively hiring advisors to ensure we're meeting those students' needs.

And lastly, DeVry University shifted its advertising mix over the past year to include more Internet-related advertising. This channel hasn't provided as many inquiries as we anticipated and we're making adjustments to maximize our returns on this investment. Further, we believe the upcoming elections have crowded the TV airwaves with political ads, making other advertising less effective. Once the elections are over, we hope this phenomenon will subside.

We do expect DeVry University undergraduate total student enrollment growth to be in the mid to high teens this fall. Our focus on academic quality and student services has continued to improve student persistence, and this is further aided by the roll-out of Student Central across the system. We still believe the supply/demand relationship and value proposition for our programs remains strong over the long-term and see no evidence that this deceleration is a long-term trend.

Shifting to the medical and the healthcare segment, revenue was up about 17% in the quarter, driven by the strong demand for Chamberlain's nursing programs and the opening of two new campuses during the quarter in Chicago and Arlington, Virginia. Segment earnings of $28.2 million were up about 4% versus prior-year, generally as expected.

As discussed during our last call, we moderated enrollments at Ross Medical School while working to add capacity. September term new student enrollment at Ross University was down 26% and total enrollments were down slightly versus prior-year. We'll report new record enrollments at Carrington in December. However, early indications are that new student growth continues to decelerate and should moderately decline versus prior-year. We expect the decrease in new student enrollments at Carrington in the mid-single digits and the decrease in total students in the low-single digits.

In addition to the same type of external factors cited for DeVry University, Carrington continues to ramp up its new brand strategy and associated awareness effort, while making internal changes to complement this new strategy. And while the initial feedback on the new name has been encouraging, the change to more brand advertising versus direct response did result in lower inquiry volume this past term. The same change coupled with other internal changes we've made have contributed to near-term softness in enrollments. However, we're confident these initiatives will strengthen Carrington for the long-term.

Meanwhile, at Chamberlain College of Nursing, enrollment growth remains strong, driven by the supply/demand imbalance for qualified nurses. Within our Professional Education segment, revenue was up 4% versus prior-year and segment earnings down just 1% in the quarter. Trends are better than what we saw a year ago, but we believe some of this recent revenue growth is attributed to activity in advance of the CPA exam change that is occurring January 2011.

Lastly, our other Educational Services segment revenues were up 5% and segment earnings down about $1 million versus prior-year. Advanced Academics revenues were [off], primarily due to declines in summer school enrollments and the impact of state budget deficits. Meanwhile, DeVry Brazil new student enrollments were up 9%, resulting from some of the admissions improvements made over the past year.

Shifting to cash flow and balance sheet, cash from operations was $196 million versus $177 million last year. This strong cash generation drove our cash and marketable security balance to $453 million at the end of the quarter, compared to $340 million last year. We also remained debt-free during the quarter compared to having outstanding debt of $105 million last year.

Our net accounts receivable balance was $161 million versus $157 million last year. This increase is attributable to revenue growth in the quarter, as receivables per account across our schools are generally in line or lower than prior-year. Receivables per account within DeVry University were also down compared to two prior years ago, due to our efforts in focus of our campus and online student services staff.

I'd like to take a second to recognize the outstanding performance of our teams in managing this area, particularly during these tough economic times. Related to this bad debt was 3% of revenue in the quarter compared to 3.4% a year ago, another indicator of our students paying back their accounts during these tough times and the strong value proposition of our programs.

As I mentioned earlier, capital spending was $23 million during the quarter versus $26.5 million spent last year, a bit lower just due to timing of spending between quarters. Spending was focused on Project Delta, facility improvements to better serve students within DeVry University, Carrington, and DeVry Brazil; and expansion within Ross University and Chamberlain College of Nursing, so we can educate more doctors and nurses in this great time of need. Total capital spending for the fiscal year is expected to likely be in the $150 million range.

Finally, during the quarter, we completed our third share repurchase program and seamlessly began executing our fourth program. For our third $50 million program, we repurchased approximately 972,000 shares at an average cost of $51.43 per share. Under the fourth program, we've repurchased about 266,000 shares at an average cost of $43.95 per share, with about $38 million of authorized amount outstanding.

So that concludes my overview of the strong results for the first quarter. We're off to a good start and our first-quarter results put us in a good position to deliver our goal of roughly 20% earnings growth for fiscal 2011.

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

Thanks, Rick. Our strategy of quality and diversification is really paying off, enabling us to perform at a more consistent, steady pattern throughout economic cycle and to be well-positioned in uncertain regulatory times as well.

Despite the potential softness in the fall that Rick described, both Keller Graduate School and Chamberlain expect to report continued solid growth rates. And student persistence is up because of the investments we've made in academic quality, which continues to drive solid growth in total enrollments.

A recent example of this is in our Business Technology and Management segment. This is the continued investment we've made in our Student Central initiative, which provides students with a one-stop destination for curriculum, career, and financial services. The program has helped drive an increase in student persistence and we're near completing our goal of having Student Central in every DeVry University location.

We've received a lot of positive feedback on the career services we offer to DeVry University undergraduate students and many have asked us to expand it to our graduate level. Well, we listened, and in the first quarter, we began offering career services to all of our Keller Graduate School of Management students as well.

DeVry University recently opened a new co-location in Pomona, California with Carrington College, and our first tri-location -- there's a new word there -- between Ross University, DeVry University, and Chamberlain, is in the planning stages in Miramar, Florida.

Let me move on to our Medical and Healthcare segment. At Ross University, enrollments were in line with our expectations as we worked to expand capacity at Ross Medical School, to help ease the growing physician shortage. We're still working through the approval processes, with the next step being the Medical Board of California November meeting regarding our Freeport, Grand Bahama's location.

We continue to invest in academic quality at Ross and we're currently constructing new, large-scale academic centers for both the medical and veterinary school at our campuses in Dominica and in St. Kitts. Chamberlain College of Nursing continues to deliver strong results as the demand for highly skilled nurses has never been higher. Our students continue to value the quality of the coursework and the flexibility that Chamberlain's programs provide.

In September, Chamberlain launched an RN to MSN option -- that's Masters of Science in Nursing for RNs who already have an Associate degree or diploma in nursing, to go up to the Masters level. Chamberlain also submitted an application for a new location in Houston to be open in spring of 2011, pending approvals. The new campus will be co-located with DeVry University.

At Carrington, we continue to invest in academic quality and additional capacity. In addition to the new Pomona co-location campus that I mentioned, we expect to open a new campus in Mesquite, Texas, which is just outside of Dallas, by the middle of next year, pending approvals. We are also expanding our program offerings with the launch of physical therapy programs across several new locations and four additional online Associate degrees that have already begun.

Now turning to our Professional Education segment, we also continued to make investments in Becker's offerings, in order to best position Becker to benefit when the economic climate and financial job market improves. Beginning in November, we'll be offering our revamped courses for the new 2011 CPA exam.

We believe this new exam is a great opportunity. Unlike many of Becker's competitors, most of whom are small, we believe our ability to make investments, even during this downcycle, is a competitive advantage. This is a recurring theme for Becker -- whenever there is a change in the exam, Becker has a competitive advantage, given its industry leadership and its access to the resources of DeVry.

Becker also recently announced a new three-year partnership with London-based ATC International that will expand Becker's CFA and CPA program offerings into Central and Eastern Europe as well as into Central Asia.

And finally, in our Other Educational Services segment, DeVry Brazil delivered solid growth in new student enrollments. When we first started our operations in Brazil, we saw a lot of potential. The team we have in place is doing an exceptional job implementing the processes, programs and facilities that are producing growth that's outpacing the overall Brazil market. As part of our long-term growth and diversification strategy, we'll continue to invest in Brazil.

During the quarter, we increased the number of admissions counselors to better serve our current and prospective students. We also focused on expansion, as we broke ground on a new campus for our Ruy Barbosa School.

So, in summary, our strategy of focusing on academic quality and on diversified growth continues to position us for sustainable, long-term value creation. We remain extremely confident in our ability to meet our performance goals over the long-term, as we continue to focus on academic quality and successful student outcomes.

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

Thanks, Daniel. Before we get the Q&A started, I'd like to point out to everyone that we have changed the date for our fall enrollment announcement. Those results will now be released on December 7 rather than December 9, as we had previously indicated. So again, mark your calendars for December 7 and take it off December 9.

So, now as we move into the Q&A, we're going to ask that everyone limit themselves to one question and just one small follow-up. We have a lot of people in the queue and we want to try to get to everyone as quickly as possible in the time we've allotted.

So, Jeremy, if you can give everyone the instructions, we'll start the Q&A.

Thank you, Joan. I'd be happy to. (Operator Instructions). Peter Appert, Piper Jaffray.

So Daniel, the decline in new undergraduate enrollment anticipated, you site lower conversion and lower high-quality leads, and these sound like they are more than perhaps a one-quarter phenomenon. So how are you thinking this is going to play out over the next several quarters?

It's really not possible to speculate on that, Peter. We don't see it as a long-term trend. And in general, most of the factors that we cited are -- many of the factors that we cited are internal as well as some of the external factors. So we do think that we can continue to follow our longer-term what we've been looking for of mid to high single digit new student enrollment growth.

And then just as a follow-up, you cite below-plan on the number of advisors. Can you give us any color on that in terms of what led to that outcome?

Yes, again, really an operational management challenge I would say that we have I think good plans in place to turn that around. And we just got a little bit behind the ball on filling some open positions, and that left us with less ability to follow-up on some of this new student inquiries that we did receive than we should have. And that led to a little bit lower conversion rate.

So something that we think we've got our arms around and we expect to over the next quarter and we'll keep you posted. Thanks, Peter.

James Samford, Citigroup.

Thank you for taking my question. Just a quick question on the competitive environment from a marketing perspective. We've seen a few companies announce moving upstream in the marketing channel in terms of targeting your students. I was wondering if you could talk about what you're seeing from a competitive perspective on the marketing channel as well?

Yes, that's not a characterization, is moving upstream or doing something like that. As I mentioned earlier, DeVry schools are not open enrollment schools. It's not to say that if somebody is open enrollment, that's a bad thing or a good thing; it's just the fact. And so we already have a number of those kinds of processes in place. So we don't anticipate major operational challenges and hurdles for us to go through -- jumping through hoops over the next period of time.

In terms of the competitive environment, it's always competitive. And in fact, most of our competition comes from the public sector schools, the state schools as well as some of the independents that are out there. Only about 10% of the students that we survey at DeVry University specifically report considering another private sector or proprietary school -- quite interesting. So certainly competitive, but not a real drastic change there.

Sara Gubins, Bank of America Merrill Lynch.

Rick, I think you mentioned that you still have confidence that you'll able to grow operating income 20% year-over-year in fiscal year '11. And given the expected declines in new student enrollment at the undergrad level in the fall, I'm just wondering where that confidence is coming from in terms of revenue and margin expectations?

I'm talking for the full fiscal year, so as I mentioned, the fact that we're off to a good start with 34% increase in net income in the first quarter puts us in a good runway to be able to deliver 20% for the year. So the growth will probably subside and still be good growth in the balance of the year to come in roughly around 20% for the full year.

Okay, great. And then I'm just wondering, can you clarify your expectations around Keller enrollment? I didn't quite understand if that meant that you expect Keller course-taker enrollment to be flat versus recent trends on the numerical basis, or if you're expecting the growth rate to remain the same on a year-over-year basis?

Right. With Keller, of course, we report total course-takers and that's what we're saying -- that we expect that to be roughly similar to the trends that you're seeing.

Meaning the growth rate, not the number of course-takers?

Right, the growth rate in total course-takers, yes.

Got it. Okay. Thanks a lot.

Gary Bisbee, Barclays.

I guess the first question -- how can you or can you be certain or do you have a sense what reputation overhang from all the awful publicity around proprietary schools has had on your enrollment? Is that possible that that's been something that's hurt your conversion rates?

Sure. It's certainly possible, but we just don't have any data or evidence to that other than anecdotes. And we tend to be analytical types that like data and analysis. So we're certainly trying to assess that and doing some market research to see if that's a factor; but again, we have not seen that. And if it is a -- but it's certainly possible. And if it is a factor, we wouldn't expect it to be a factor for the long-term.

Okay. And then I guess just a follow-up, can you give us any thoughts on what might have to happen with incentive comp policies across your schools? I mean, is the number of students signed up currently part of the formula in any sense how you think about changing that based on the proposed rules? Thank you.

Well, thanks for asking that because that gives me a great opportunity to clarify in case anybody thinks that we pay a bonus or an incentive payment to our admissions advisors. The answer is no, we don't. We pay a base salary. And we expect to continue to pay them a base salary; I don't think they're going to work for free.

So no, we don't -- we do not pay incentives or bonuses. And that's one of the things I think is so unfortunate about some of the reporting that's out there -- again, based on anecdotes and stories and not based on facts. The fact is that incentive compensation is already banned, has been since 1992.

And so, no, we don't -- I mean, well, there could be changes; we may need to make changes in our evaluation processes, depending on the rules that are forthcoming, but it won't be like we're going from a situation where before, you were paying a commission and after, you're not, and you have to make this massive adjustment. That's not the case.

But can you clarify the change in the salary? Is it all impacted or has been by success in signing up students? Is that something that impacts the change in salary?

Yes. We do a performance evaluation for admissions advisors just like we do for any other employee. And just like we do for any other employee, we look at the effectiveness of that person in their job. And since a recruiter's job is to recruit, we certainly do take into account, did they recruit any students? And that is a consideration, which is compliant with the statute and the regulations.

Andrew Steinerman, JPMorgan.

You had great operating margin leverage at the beginning of the year. My question is, how do you see operating margin through the balance of the year to make that 20% goal?

And also, just to clarify, is that 20% net income growth or 20% EPS growth?

As I said during our last call, we are expecting to see a differential between the pretax income growth and the after-tax income growth, because of the fact that our tax rate is going to be higher this year than last because of the domestic source income. So it's going to be right around 20% for both.

The pretax income we expect to be a little bit higher and the after-tax income should be right around 20%, might be a little -- a titch below. But we're off to a good start, as I mentioned before, with our first-quarter results. We still expect to see, for the balance of year, margin expansion, but albeit probably not the same level of expansion that we've seen last year or even for this quarter, that will still lead us to, again, roughly 20% growth, give or take, for both pretax and after-tax.

Right. And did you say why the margin expansion will be less in the balance of the year than at the beginning of the year?

Well, I think that we're going to see our total revenue growth come from north of 20% to probably south of 20% as we go through the year, given the tougher comps and given some of the softness in the new students for DeVry University and Carrington. And we'll still be making investments in academic quality. So that differential between revenue growth and expense growth will narrow.

Kelly Flynn.

A question about the placement rate language that you put in the press release. I just wanted to clarify because the language looks a little bit different than what you've included in the past.

Have you changed the methodology there? And also, you put in something about how it includes people who are already employed in their field of study. Can you give us an estimate of what portion of the people are already employed? Thank you.

Thank you. And we -- just to clarify, we always talk about employment statistics rather than placement. And it's just important to note that, because we assist students with lifelong career schools and we assist them in finding their employment, but we don't place students or place graduates.

And the wording was just to clarify that, yes, it does. So if a student finds a job -- many students do find employment while they're in school. Their first or second, the freshman or sophomore or junior year, help them gain skills that help them gain employment in their field of study, and then they retain that employment after graduation. And so that's included.

I don't have a figure for the percent of students who are like that or who came in with a job and kept that job all the way through school for you, but I think we have that available. I just don't have that close at hand.

And just a note, this is consistent with the way we've been reporting it all along; it's just clarifying it for everybody's purposes. But it's consistent with how we've reported in the past.

Right, thank you. Yes, no change in the methodology.

Okay, great. And then one follow-up just on Carrington. I think you said some of the reasons for the negative new student growth were similar to the ones you cited for DeVry University. Can you just clarify what role the economy is playing? Because you said the bad economy is hurting DeVry University. But a couple of quarters ago, countercyclicality came up -- where are we as far as how the economy is impacting Carrington for good or bad?

Yes, and let me -- so, thank you, Kelly. I think that is an excellent question, and I know it can be confusing sometimes when we talk about economic and cyclicality or countercyclicality. And the big picture for the DeVry family is that, overall, our diversified family of schools helps us to perform well in good and bad times -- because we do have some schools that are a little bit countercyclical and Carrington would be one.

On the other hand, we have other schools that perform better in good times -- Becker or Advanced Academics and other things. And then some that really are non-cyclical one way or the other, like nursing programs, being the only publicly held organization with a medical school, a veterinary school. That's something that's unique to DeVry that's non-cyclical.

With regard to the counter-cyclical impact that maybe we saw before, one of the things that we had wondered about and we talked a little bit about this is, what happens if a recession persists? And we really do not have a precedent for this since the Great Depression when Dr. Herman DeVry started DeVry University back in 1931. So we just have not seen the prolonged recession and the prolonged level of high unemployment as this extent for. And so it could be that when it extends this long, that the countercyclical boost that perhaps Carrington got earlier, maybe that's waning and you're not seeing that any more.

And then one other comment on Carrington is that some of its programs are more countercyclical, like the certificate level, whereas other programs, which has been the focus of our growth initiatives at Carrington, at the Associate degree level and other programs like dental hygiene, are not cyclical. So those programs should do well in good times and in bad as well.

So even in our most countercyclical school, which is Carrington, our strategy is to reduce that cyclicality and have more of a steady performance in good times and bad. So thanks for the opportunity to provide a little color on that.

Corey Greendale, First Analysis.

At the risk of asking a little bit of a silly question, when you refer to a high quality lead, can you just elaborate on what you mean by high quality? And I think what we're all trying to grapple with here is whether we should be concluding that if everyone is moving out toward -- if everyone is looking at high quality in the same way, have effectively the market opportunity diminished because some percentage of the population is no longer being viewed as attractive as candidates for post-secondary education.

No, I wouldn't characterize it that way, Corey, and I don't think it's a silly question, if that makes you feel any better. I think what we were -- what we really -- let me provide a little bit more color on that with regard to DeVry University, specifically.

Something you've heard us -- and Dave Pauldine at our Education Day back in Phoenix, talked quite a bit about this. We had gone into a marketing strategy about two years ago of putting more of an emphasis on brand marketing, relatively speaking, and actually taking the strategy of driving a smaller number of higher quality leads. But higher quality in the sense that they're more responsive, they're more likely to respond and to start. That wasn't saying that they were more or less academically qualified, something like that.

And that cycle led to an improved efficiency in our marketing process, and then we took those extra resources and plowed them back into academic quality initiatives. And that cycle worked very well for us a couple of years ago, worked very well for us last year, and we're just in the recent period of time seeing that didn't translate quite into the same effectiveness as we've seen before. And that's why we're having to make some operational adjustments and management adjustments in the marketing operations, in the buying that we're doing.

But that's what we meant by the quality of the inquiries -- it was more the responsiveness, not the academic preparedness.

Okay. And my follow-up question, just following on Kelly's question about placement. I think there is some skepticism -- not about DeVry specifically, but in general about the validity of placement rates. Can you just talk through how those rates are audited? I don't know if HLC looks at those or does your auditor look at them? Or how do -- but how can you give us confidence that those rates are thoroughly embedded and valid?

Sure. And again, we talk about employment rates rather than placement rates, just for everyone's edification. And we do have those audited -- both our internal audit team goes through and we have an external audit firm who goes through and validates and audits our processes. We have done it on a consistent basis over many, many years.

And -- no, HLC, being a regional accreditor, does not review that, but national accreditors do. And so our schools that have national accreditation, which would be Carrington College -- as this being from Carrington College of California -- is nationally accredited, and ACICS has a process of review and has a set of standards for how those employment statistics are tracked and the survey methodology.

So there is -- there's actually a whole body of knowledge. There's a whole established set of processes, which we think are, by the way, a great way of measuring gainful employment. And we have proposed that as an additional set of rules that regulators might want to consider using when they measure gainful employment. So we have a very high degree of confidence in the processes and in the audit that goes on top of those processes in the area of employment statistics.

Great. I appreciate it. Thanks.

Trace Urdan, Signal Hill.

I wanted to follow-up on Corey's actual question and just press you a little bit further. I think that you might agree that leads that have been qualified in some way as students that are highly focused in their academic goals, are highly academically qualified, are more valuable in the marketplace at large. And I think what Corey was alluding to is that many other schools in the private sector are bidding for those leads.

And so the question is, are you seeing that type of specific competition? Is it becoming more expensive to acquire the leads that you believe are going to lead to a successful DeVry enrollment and graduate? Or are you not seeing anything necessarily different in that particular market place relative to competition?

Okay. I understand your question and I would say at this point, while that's certainly possible, at this point, we have not seen that phenomenon. And I would also just like to remind everyone that we use the term inquiries for prospective students who inquire with us. Thank you.

I tried really hard on the vocabulary, but I guess I missed one.

You got the private sector, Trace, that was excellent. I give you full credit for that, but you own me $1 for the other one.

Alright, thanks, Daniel.

I think he owes you $3; he used it three times.

$3. He did it three times. Rick being the bean counter here (multiple speakers) --

Yes, he's got the chalkboard there, I know. (laughter) Alright, thank you.

Ariel Sokol, UBS.

Ariel Sokol. Two questions, I guess. The first one is -- my understanding is that the Department of Education is speaking with most of the publicly traded institutions maybe last week or this week or perhaps next week for around half an hour. Just curious to find out what is the nature of these discussions? Are there any signs of receptiveness on their part to make adjustments to ensure unintended consequences don't occur?

Yes, and thanks for that. Yes, and we actually think that the Department's decision to open up that process and allow for a little bit more dialogue and understanding of the public comments that were submitted is a great thing. We applaud them for that. And yes, I would say that we have good dialogs. We continue to have dialogs. We continue to have meetings with the Department as well as with policy people -- you know, in the White House policy areas.

And yes, I think there is a genuine desire on many people's part to listen and understand, and try to get it right. As we've heard the Secretary say many times, it means -- getting it right means that making sure that we have quality programs from the private sector, they're vitally important to meet our country's goals. And at the same time, make sure that if there are programs that are not providing quality, that those programs are held to account.

And he has said many times that good -- the quality programs in the private sector are part of the solution and poor quality programs are part of the problem. And quality programs in every sector are part of the solution and not quality programs in every sector are part of the problem. So they've been very good about acknowledging that it's not about a witch hunt on private sector schools or something like that. And they are really trying to get this right.

Okay. Just a follow-up question -- one of your competitors suggested that compliance with the 90/10 Rule could prove a challenge. I think in 2012, are you seeing this as a challenge? And specifically a challenge at Carrington?

No, 90/10, overall we feel that we're well within the comfort zone and we continue to monitor it. There are a couple of schools -- you mentioned one where it's a little bit higher. But at this point, we don't have a report like that to issue to you.

Paul Ginocchio, Deutsche Bank Securities.

It looked like the losses year-on-year were a little higher in international or Advanced Academics. Could you just talk about that? Is it just the continued buildout or is there something else we should be thinking about?

Yes, I mean, if you might recall, Paul -- this is Rick -- for the first quarter of the year, it's the lowest earnings period effect loss for the segment because it's summer period for high school, so you only had summer school enrollments and they were down, very low. And it's also the time where we spend the bulk of our investment in marketing and recruiting efforts for Advanced Academics.

And then down in Brazil, they're not teaching classes for most of July. So you have two-thirds of the quarter where we're teaching and one-third where we're not. So you end up with a loss and then you make that up in the balance of the year. So it's more the fact that a lot of the investment spending occurs during that -- during this period.

There's one other thing I would just add there if I can, Rick. Last summer was really tough for public school districts around this country and many of them were cutting summer school. So one of the things that Advanced Academics did -- and I'm quite proud of the team for doing that -- was offer free summer school courses online through Advanced Academics capabilities. And that basically enabled students to take summer school courses, who otherwise would not have been able to do so. But free means no revenue. So that was a little bit of that.

Maybe it's another factor. Right. Thanks.

Would we assume that losses for the rest of the year would be lower than what we saw last year? Or how should we think about the rest of the year based on what we've seen here year-on-year in the first quarter?

We don't give guidance on that, but again, the first quarter tends to be the big loss quarter, then we'll show profits in the balance and -- again, we don't give guidance for -- on a segment-by-segment basis.

Can I just sneak one in about -- have you been -- I'm sure you've petitioned to speak at the public hearings. Have you been notified whether you're going to speak or not?

We have not yet.

Okay. Thanks.

Jeff Silber, BMO Capital Markets.

I wanted to circle back to Ross. Assuming you have positive outcome at this meeting in California next month, can you just tell us what the next steps are?

Yes. Thanks, Jeff. And what we are looking for is to continue to expand capacity across the Ross University School of Medicine system. And so -- and I just want to emphasize, because a lot of attention has been focused on Freeport, and that's important -- but Freeport is not the beginning and the end of our capacity capability at Ross. We can and expect to expand capacity in Dominica, in our Miami and Saginaw [fifth] semester location and then throughout the clinical network as well.

So expanding capacity at Ross is a multifaceted approach. And so we are expecting as we -- this is in line with what we said before -- that January would continue to be a modest decline in new students. And then in May, we should start to see growth again.

And that's regardless of the outcome in California?

Yes, that would be regardless of the outcome in California, although, of course, a positive outcome would make things more positive.

Great. Makes sense. And I'm sorry, just one quick follow-up. In terms of the NPRM that we're expecting out within the next few days that you talked about incentive comp. Are there any other items in there that might worry you in terms of having an impact on your business?

That's the main one. Yes, the incentive -- the so-called incentive comp. I call it so-called because it's not like we're paying incentive comp now and suddenly can't do it. We don't pay incentive comp now. But it's this -- and going back to the statute and eliminating the safe harbors would be acceptable to support that.

It's where there's a further explanatory comments in the preamble that is troubling; where for example, the idea of securing enrollments is redefined to include even retention and graduation. So why wouldn't -- it just doesn't seem to make sense, especially when you look at K-12, where in race to the top, it's mandated, you have to hold people accountable for outcomes. It should be banned in higher ed. It just doesn't seem to make sense. So we'd like to be able to hold our employees accountable for retention and graduation outcomes.

So that kind of thing is what's very troubling to -- not just to us, comments have been -- there's been a large number of comments on this from private sector but also from public sector and independent schools. Take a look at some of the public comments submitted by Michigan State or Austin University or Indiana Wesleyan, because again, this rule applies to all schools -- public sector, private sector, and independent. Just a little extra elucidation for you on that one.

Bob Wetenhall, RBC.

Nice quarter. In the BTM segment, I think you got an operating margin of close to 24%. Do you expect that to increase during the balance of the year?

Well, again, as I've said before, we don't give segment guidance and the only perspective we're giving is that we expect to see some margin improvement across DeVry Inc. over the balance of the year, but not nearly to the extent that we've had to date. And I'm talking about the balance of the year on average.

Okay. And then Medical and Healthcare segment was 240 basis points lower year-over-year. Can you break out, just to provide a little clarity, in this quarter that just passed, what explains the delta there?

Well, part of the delta is just the mix. We've got lower growth within Ross that tends to have higher margins compared to the Carrington and Chamberlain results. Chamberlain has been growing nicely but we've been expanding. We have the start-up costs for the Chicago and Arlington campuses in there that's driving it down, and making the investments in academic quality across the line for each of the institutions. And then the name change for Carrington was some carry-over spending in the quarter for the name change from Apollo Western to Carrington. Those are the main factors.

So kind of with the ramp-up and the needed investment just to maintain and enhance quality standards, is that going to mean that margin is going to be flattish effectively?

Well, as we looked at the guidance we did give for the year, was we expected profitability for the segment to be flat to down. So, with revenue growth. So we're going to see margin deterioration throughout the year.

Okay, great. Thanks very much and nice job.

Brandon Dobell, William Blair.

Have you noticed any change in the tone of conversation with your creditors in advance of the program integrity rule changes? Or any change in conversations with your counterparts there, just about the market environment, about what they expect from you in terms of program quality or interaction, those types of things?

Creditors, both institutional and programmatic, are tough and that's their job to be tough and appropriately so. But in terms of a pronounced or significant change in tone or something like that, no, I really don't have anything to report there.

Okay. And then second question would be -- within BTM, any start differences in terms of how online or ground students or conversion rates have been? You mentioned some broader issues, but I'm trying to drill a bit into the different types of modalities. Have you seen a start change in momentum in the ground versus online, or lead costs, conversion rates, those types of things?

No, I really would say that within DeVry University undergraduate, I don't have any color to give you in terms of this program versus that program or online versus on-site or anything like that. It was more of a general -- and again, a lot of these were operational factors. So that's really the way I would characterize it, Brandon.

Alright, fair enough. Thanks.

Gordon Lasic, Robert W. Baird.

First, I just wanted to move back to Rick's, I think, earlier comment that the uncertain economic environment is potentially driving some sluggishness in starts. I'm wondering how to think about that? Should we take that mean that potentially some of your students are giving pushback or are kind of reluctant to take on additional debt, given the prolonged high unemployment rate? If you could just give a little more color there.

Yes. And I commented on that quite a bit in an earlier question, you might have missed it and so I'll just be brief.

It could be that -- and we don't have definitive data on this, but it could be that when you have a recession that goes on this long and with unemployment at this level for this long, that whatever countercyclicality maybe you got earlier goes away a little bit. And yes, that maybe some students are a little bit more reticent about taking on debt to go to school and go through that cycle. So that could be a factor, but we don't have proof of that but we're just citing that as a possibility.

Thanks. Just really quick on my follow-up, you've had very, very strong persistence growth over the last couple of years. And you certainly made comments that some of that is internal initiatives that you've implemented. I'm just wondering, how much headroom do you think you have in terms of persistence and getting that to continue to grow the way you've seen over the last -- over the next 12 to 18 months?

Sure. We think that there is opportunity for us to continue to improve persistence in graduation rates across the different members of the DeVry family of schools. So this is not just at DeVry University but also Carrington and Chamberlain, down in Brazil, and across the board. We're constantly finding ways to improve the quality of the curriculum and the quality of the supporting student services, which is a really key part, especially for many of the non-traditional students that many of our schools serve.

So we do think there's additional opportunity there and we're going to continue to invest our resources in support of our students in helping them graduate.

Thanks.

Okay, we're going to wrap up the Q&A. Daniel, if you want to close it out for us?

Okay. Thank you. Well, thanks for all those questions and I just want to remind everyone that our next conference call is scheduled for January 25 of the new year. And we'll announce second-quarter results then. Thanks for your continued support of DeVry.

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