Adtalem Global Education Inc (ATGE) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to DeVry's fiscal 2011 second quarter results conference call. My name is Mary, 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). As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Mary. With me today from DeVry management are Daniel Hamburger, President and Chief Executive Officer; and Rick Gunst, Senior Vice President and Chief Financial Officer. I will now review the Safe Harbor provisions for this call.

This call may contain forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements reflect, among other things, management's current expectations, plans and strategies and anticipated financial results, all of which are subject to known and unknown risks, uncertainties and factors that may cause actual results to differ materially from those expressed or implied by these forward-looking statements. Please see our public filings with the Securities and Exchange Commission for more information about forward-looking statements and related risk factors.

Telephone and webcast replays of today's call are available until February 8, 2011. To access the replay, please refer to today's press release for information. I will now turn the call over to Daniel Hamburger.

Thank you all very much for joining us today for our fiscal 2011 second quarter conference call. I'll provide a brief introduction and Rick will discuss our financial results, and then I'll review a few operational highlights in the quarter before opening it up to your questions.

So, to begin, let me offer a belated Happy New Year and I'd like to provide a little perspective on calendar 2010 and our accomplishments during the year that have us well positioned for 2011 and beyond.

So, looking back, the regulatory environment dominated the headlines in 2010. Interestingly, we have begun to notice a more balanced dialogue with Congress and the Department of Education and other key stakeholders who are expressing their concern over the proposed regulation. They realize that there's a potential to produce unintended consequences. In other words, to not just hold poor quality programs accountable, but to inadvertently impact high-quality programs and thus reduce access for the very students we most need to help.

Last week, President Obama issued an executive order to review the myriad of government regulations. He said that we need disclosure, and I quote, as a tool to inform consumers of their choices rather than restricting those choices. Well, we couldn't agree more. And in fact, during the rulemaking process, DeVry and others proposed new standards of enhanced student disclosure. We were pleased to see these concepts incorporated as part of the rules that were issued back in October.

[We] (inaudible) the second part of the rules, but whatever regulation comes to pass, we believe DeVry has the resources in place to properly address them and to implement any changes that might be necessary.

High quality programs that deliver value to students will always have a place in our educational system. We believe DeVry is in a strong position as one of the long-term leaders in providing high-quality, career-focused education.

But, beyond all the regulatory events, we continued to invest in our schools in 2010. Let me give you just three highlights. Our Student Central concept which provides one-stop shopping for all services we provide to students has helped increase persistence and produce better outcomes for DeVry University students. Investments in academic quality in Student Services this past year at DeVry Brasil positioned our schools there for growth opportunities in the coming years, and Chamberlain opened two new locations last year in Arlington, Virginia and, most recently, in Chicago to meet the strong demand for nurses in the United States.

I would also like to take a moment to recognize DeVry University for being highlighted in a recent McKinsey & Company study of highly productive higher education institutions. DeVry University was one of eight schools that were highlighted and the only private-sector school that McKinsey selected. A link to the report is in our press release that just crossed the wire this afternoon.

So as we look forward to 2011, we remain focused on executing our growth plans with continued emphasis on our diversification strategy. Despite the softening new student enrollment that we reported in our fall term, our diversified family of schools will continue to be a real strength for us, and this diversification concept is directly relevant to how we're managing in this environment. A number of you have asked us about the declines in new student enrollment. So let me try to provide some color on that. It's important to keep in mind that there's no single explanation.

Several factors affect different schools in different ways, ranging from internal execution to external market dynamics. Carrington Colleges, for example, experienced a decline in fall enrollment because of how we managed our name change and other process issues that we're working through, as well as some external factors. DeVry University undergraduate program saw some slowing that's more tied to inquiry flow in the market in general. However, there are other schools within our diverse offerings, like Chamberlain, Becker, DeVry Brasil and Keller, where we continue to see growing demand. And so our diversification strategy positions us to achieve consistent performance throughout various economic or programmatic cycles, and to create value in good times and bad.

So with that overview, let me turn the call over to Rick.

Thanks, Daniel, and good afternoon, everyone. I'm going to take the next few minutes to highlight our strong results for the second quarter and first half of fiscal 2011.

Second-quarter revenue of $551 million was up about 17% versus prior year and up 19% through the first half of the fiscal year, all organic growth. After-tax net income of $89 million in the quarter increased 22% and earnings per share of $1.25 increased 25% versus last year. Earnings per share were up about 30% year to date. And, our net income margin for the first half was 15.1%, up 100 basis points versus 14.1% margin achieved a year ago. We reference second quarter results include expense related to share-based payments of approximately $3.1 million pre-tax or $2.6 million net of tax. Our overall effective tax rate was 34.5% for both the quarter and year to date, up from 32.1% for the full fiscal 2010, primarily due to increase in domestic source income.

Note that our income tax provision for the first half of the year was about $85 million, and we had $54 million of capital spending invested in our schools. Cost of Educational Services expense increased by 15% versus prior year in the quarter and Student Services and Administrative Expense increased by 13%. We continue to invest resources to drive academic quality and enhance student services, consistent with our philosophy of quality leads to growth.

With that, let me now 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 18% versus prior year in the quarter and 21% year-to-date. The growth rate is so strong, but back in the high-teens due to the softening of new student enrollments reported in the fall term and tougher year-over-year comparisons. Segment earnings were up 27% in the quarter and 37% in the first half, driven by the revenue growth and resulting operating leverage. Meanwhile, investments continue in academics, new program development and new location expansion for the balance of this year and beyond.

While enrollment growth is slowing due to the external challenges and tough year-over-year comps, we still believe the supply-demand relationship and value proposition for our programs remains strong over the long-term and see no evidence of this deceleration as a long-term trend.

Within the Medical and Healthcare segment, revenue was up 13% in the quarter and about 15% year-to-date, driven primarily by the strong demand for Chamberlain's nursing programs. Segment earnings in the quarter were about flat with prior year and up slightly for the first half, as Chamberlain's growth was offset by margin compression within Ross and Carrington due to lower enrollment growth. Daniel will provide updates on both Ross and Carrington in just a few minutes.

Within our Professional Education segment, revenue was up a strong 26% in the quarter and about 15% for the first half with segment earnings in the quarter more than double compared to prior year. Revenue in the quarter got a boost from the sale of new materials in advance of the CPA exam change that was effective January 1 of 2011. We expect some of this strong growth to represent a shift of activity that would normally have occurred in the first half of the year -- first half of calendar 2011, that is.

We anticipate hiring within the accounting and finance fields to continue to improve slowly but don't expect a marked improvement in performance until hiring ramps up further.

Lastly, our other educational services segment revenues were up slightly in the quarter as growth at DeVry Brasil was offset by declines within Advanced Academics, driven by the impact of state budget deficits. Earnings for the segment remain low, given the lower top-line growth. And while Advanced Academics is operating in a tight fiscal environment, we're making some headways in several key states, including New York and Texas.

Shifting to cash flow and the balance sheet, cash from operations was $274 million versus $267 million last year. This strong cash generation drove our cash and marketable securities balance to $462 million at the end of the quarter compared to $334 million last year. We also remained debt-free during this quarter compared to having outstanding debt of $45 million last year. Our net accounts receivable balance was $153 million versus $135 million last year. This increase is lower than the revenue growth in the quarter as receivables per account across our schools were closely managed.

I'd also like to note that the receivables per account within DeVry University were down compared to the two prior years due to our efforts and focus of our campus and online Student Services staff. I'd like to take a second to recognize the outstanding performance of these teams in managing this area, particularly during these tough economic times.

Related to this, bad debt expense for the first half of the year was 2.9% of revenue as compared to 3.2% last year, another indicator our students are paying back their accounts and the strong value proposition of our programs.

As I mentioned earlier, capital spending was $54 million in the first half of the year versus $62 million spent last year for the first half. However, we anticipate the rate of spending to pick up considerably and are still anticipating spending around $150 million this fiscal year and possibly even more, depending on the timing of activity over the next six months. This higher rate of spending is driven by facility improvements to better serve students across all our schools, new locations planned at DeVry University and expansion within Ross and Chamberlain College of Nursing so that we can educate more doctors and nurses in this great time of need.

Project Delta is another key component of our capital spending. We rolled out the constituent relationship management or CRM module last summer and just this month released the new student portal phase of the project with student accounts and the academics module still to come. As we mentioned before, the project is behind the original schedule and over the original budget, but we're not going to roll it out until it's time, and we are committed to getting this right. We've chosen to hold off releases at times to ensure all business and system issues have been resolved before making any system transition. We have started to see some of the benefits with more yet to come as the other phases get accomplished.

But given the delays, much of the activity will shift into next fiscal year, and total capital costs will likely now be in the $80 million to $85 million range once the project has been completed.

Finally, during the quarter, we announced a 20% increase to our annual dividend and completed our fourth share repurchase program right at the end of December. We previously repurchased just under $12 million in September of 2010 and completed the remaining $38 million of the $50 million program in the second quarter. In total, we repurchased about 1.1 million shares at an average cost of $45.31 per share under this fourth program. We are now executing our fifth program of $50 million, which was authorized by our Board in November.

So, as I wrap up, let me just remind everyone that looking to the second half of this fiscal year, we expect earnings growth to slow, especially in the third quarter, but still be around 20% growth for the full year. Pre-tax earnings growth is likely to be a bit higher than 20%, and the after-tax growth possibly at or a bit lower for the year, due to the increase in our effective tax rate versus last year.

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

Let me begin with our Business, Technology and Management segment, comprising DeVry University and its Keller Graduate School of Management. In December, we announced that DeVry University had experienced some softness in new student enrollment growth in the fall. I want you to know that we don't observe slower growth in the external market and just accept that. We view it as our job as a management team to improve our processes to continue to reach more students.

So what's important to focus on here are the actions that we are taking moving forward. For example, we were understaffed in some of our admissions teams during the fall recruiting period, so we are in the process of reallocating resources in this area so that prospective students can receive prompt service and have access to the information that they need during the enrollment process.

Another action we are taking is adjusting our marketing mix and continuing to invest in DeVry University's branding strategy, firmly positioning DeVry University as the career university. We recently launched our first-ever combined DeVry/Keller branding campaign as part of our celebration of DeVry University's 80th anniversary. By the way, DeVry was founded back in 1931 right here in Chicago by Dr. Herman DeVry. We've heard very positive comments on the messaging, and you can find a link to the newest example of it in today's press release.

Now, in terms of total enrollment, we are continuing to see strong growth rates, and that's in part because of increased persistence. This is being driven by our continued investments in the quality of our Student Services like Student Central, which I mentioned earlier. We got great feedback from students about how helpful Student Central is to them, and during the quarter we completed the rollout to all DeVry University locations.

Moving on to our Medical and Healthcare segment, I'll begin with Ross University. In the second quarter, Ross received licensing approval for its Freeport, Grand Bahama location from the Medical Board of California. This was an important step for student licensure in California. We're pleased with this result and we believe it's consistent with the quality academic programs that Ross provides to its students.

Now, given some capacity constraints at the Dominica campus about two years ago, we set an expansion strategy that included the Freeport location, but since then, subsequent events have caused us to slow down and reevaluate this strategy. So for some of you who weren't here at the time, I'll provide a bit of history for you. We always knew that students were not going to be eligible for federal financial aid in those semesters while attending Freeport, so we developed an institutional loan program for those students. Our understanding has been that, once students move beyond their semesters in Freeport, they would become eligible for federal financial aid for the balance of their education.

The Education Department has recently raised some questions that we will need to work through and that could impact Title IV eligibility for new students. So we are evaluating how to best leverage our Freeport location, but I would like to remind you that Freeport is just one part of our overall expansion strategy for Ross as we continue to invest in Dominica, and so that's a part of our strategy as well.

And we are also expanding our clinical capacity in Miami; Saginaw, Michigan; and throughout our clinical network. And as we've projected, we were down in new students the last two semesters, and we expect new students at Ross to be down slightly in the January semester as well, which we will be reporting next quarter. But then, we should start to see growth again.

Long-term, we expect continued, steady growth, given the demand for physicians. In fact, a recent article in the Wall Street Journal stated that in order to keep pace with physician demand, the US will need to train an additional 6000 to 8000 doctors each year for the next 20 years. Ross graduates serve some of the most underserved populations in the country, providing critical care to people who may not have access otherwise. And, based on information from the Association of American Medical Colleges, Ross University School of Medicine ranked number one in African-American physician graduates in 2010, more than any US medical school.

So, Ross and schools like it are helping to fulfill and to meet a critical need.

At Chamberlain College of Nursing, we are continuing to see strong demand as the need for skilled nurses continues to rise. In particular, our Masters of Science in Nursing program showed strong growth during the quarter, which indicates the demand for nursing professionals with advanced degrees. We are continuing to invest in new programs, locations and partnerships at Chamberlain as well. In the coming months, we will open a new Houston campus, and that's pending approval, and that will be a co-location with DeVry University. And in the summer, we are expecting to open a new campus in Miramar, Florida, again pending approvals. That will be a tri-location -- not a co-location but a tri-location -- with DeVry University and a replacement clinical location for Ross University.

At Carrington Colleges, we continue to focus on improvements in our internal execution in order to drive growth. We have been in the process of shifting to more direct advertising versus brand advertising. We're putting procedures in place to respond to inquiries more rapidly. We are creating a more straightforward web site experience for prospective students, and we recently opened a new campus in Pomona that is offering high-demand programs in medical, pharmacy and veterinary fields. This, by the way, is another co-location with DeVry University.

We expect these improvements to take some time to produce results. We do see long-term opportunities for growth at Carrington because of the need for healthcare professionals in the United States. Let me just comment on that, because the Carrington Colleges are a great example of how the private sector responds so nimbly to society's workforce needs. Last week, I attended an education conference that was put on by the Aspen Institute, and one theme was how many young people may not want or be suited for a four-year bachelor's degree and would be better served by pre-baccalaureate programs, with certificates and associate degrees.

And the other day, Bill Hughson and I visited with a major hospital system where they described the hard time that they have finding allied health and ancillary care professionals, and they wanted to know if we could help. Again, these are mostly pre-baccalaureate levels. Carrington is responding to these educational and workforce needs.

Turning to our Professional Education segment, Becker experienced a surge in demand for its test preparation services ahead of the new 2011 CPA exam. We expect enrollments to return to more normal levels for the second half of the year. Investments in quality are also continuing to pay off at Becker. Recently, the AICPA, the American Institute of Certified Public Accountants, announced its 2009 Elijah Watts Sales Award winners. That's the award that honors the candidates who scored the highest on the exam.

Now, you may remember that last time, nine out of 10 of the awardees were Becker grads. Well, this year, they increased the total number of winners to 15 because of ties. And of the 15 candidates, 14 prepared with Becker, and that's out of about 80,000 test papers worldwide. So in the past five years since they established this award, 47 of the 55 winners prepared with Becker. We're very proud of our students' success and we believe this is a testament to the quality of our products and of our instructors at Becker.

And then finally, for our Other Educational Services segment we are continuing to grow DeVry Brasil through investments in programs and in new locations. Currently, we are in construction on a new campus building at our Ruy Barbosa school that will feature enhanced program offerings in fast-growing healthcare fields and continuous improvements in student services has been a major focus for our schools in Brazil. This is a good example of utilizing best practices across the DeVry organization.

I mentioned Student Central before, where we've taken the success of DeVry University Student Central to begin implementing a similar student services center down in Brazil. But of course, there it's called Coordenadoria de Apoio e Suporte ao Aluno. And I may be driving our transcriptionist crazy here, but you can just call it CASA for short, and that means home, because this is our students' home for all their support services. By increasing the quality of those student services and adding new programs and locations, we continue to see a wonderful opportunity to grow DeVry Brasil into the future.

And, finally, I'd like to mention some management moves over the last quarter that I think illustrate the management bench strength that we continue to grow. John Roselli smoothly transitioned into his new role as President of Becker in the quarter, and as you saw, we didn't miss a beat. He was succeeded by Adriano Allegrini, a former McKinsey consultant who has stepped right into the strategic planning and business development role. And in January, Chris Caywood joined us from Kaplan, to lead DeVry Online Services as Steve Reese transitioned into his new role overseeing K-12, international and professional education.

I can tell you that, given the fact that I've had to spend just a little bit more time in Washington DC of late, our strong management team lets me do that and I know that we are minding the store.

And so, to summarize, our strategies of investing in academic quality and of diversifying our educational offerings continue to position DeVry very well throughout economic cycles and during this time of regulatory activity. So we are highly confident that 2011 will be a year of continued growth and successful outcomes for our students.

Let me take a moment to thank all the employees of DeVry. 2010 was a tough year in some respects. It wasn't easy to keep reading negative articles about private-sector schools. DeVry team members' commitment to our students and to compliance and their continued focus, despite all the noise, was truly an inspiration to me. 2011 holds a great deal of opportunities for DeVry, and together we know we will continue to make a difference in the lives of our students. Thank you. With that, I would like to take our questions.

Thank you, Daniel. As we move into the Q&A portion of the call, I would like to ask that everyone limit themselves to one question and one follow-up. I'm sure we have a lot of people in the queue waiting to ask a question, and we want to try to get to as many of you as possible in the time that we've allotted today.

So, Mary, if you would go ahead and give our callers the instructions?

(Operator instructions) Bob Craig, Stifel Nicolaus.

First question -- I realize you are the better part of a month away from the session A start for the spring term, but I was wondering if you can comment as to whether or not you've seen any changes in trends on inquiry flow overall?

I would say we haven't seen any real change that I can report to you there. Relative to a year ago, two years ago, there's a change. But in terms of the last couple of months, couple of quarters, not a real significant change there.

Okay. And, Rick, you mentioned some media mix change. I was wondering if you could embellish on that. And are you increasing your ad spend overall, generally?

Well, the ad spend is going to be higher than prior year, but it's not dramatically out of line with what our plans were that we've been talking about all along, making adjustments here and there, but no major dramatic increases.

Okay, and the media mix, any embellishment there?

Well, as Daniel alluded to, we are, for example, in Carrington shifting away from -- more away from brand advertising, which we did with the name change, more towards the inquiry side of things, and within DeVry University trying to again focus on inquiry generation and quality inquiry generation.

Okay, great, thanks.

Arvind Bhatia, Sterne Agee.

Just a couple of quick questions here; one is just on your earnings growth projections here for the second half. Given the comparisons, Rick, you mentioned it's going to be slower than the first half. Should we, then, take the second-half trend in general and move forward as you think about fiscal 2012, or do you think that 20% full-year growth is what you would be, longer-term, be comfortable with? I'm not asking for guidance, but just how you view the world, given everything that's going on.

Yes. Again, we don't give guidance. We give a little bit there with what -- we are above our long-term goal of 20% this year, about 30% through the first half, and we are going to be lower than that for the back half and, as I said, be right around 20% for the full fiscal year. And the long-term goal is roughly 20% earnings growth, and that can vary quarter to quarter, year to year. And so -- but we don't see anything major that's disrupting that long-term goal, but intermediate things can be a little bit lower, as they are a little bit higher here for the first six months.

Trace Urdan, Signal Hill.

There was a story in The Times in December about a movement by some medical schools in New York to try to get overseas schools kicked out of the teaching hospitals in New York. There has not really been any kind of noise about that since, and I just wondered if you could offer some commentary there. Have you been able to talk to the Board of Regents in New York? Do you think this is a material threat in any way? And would it be possible to characterize what that would mean for your institution if New York was off-limits?

Here's what's happening. In New York, the state's Board of Regents is conducting a review of its processes to approve international medical schools. And our perspective is that international medical schools play a huge role, a vital role in addressing the physician shortage nationwide, and certainly New York State is not an exception to that. And Ross, in particular, has a strong history in the state since being formally approved there back in 1994.

So that's the process that's going on.

Okay.

Gary Bisbee, Barclays Capital.

I guess the first question, following up on an earlier one, how should we -- and I understand you're not giving forward commentary -- but how should we think about how you will handle cost growth and investment if we were to see the recent softening of enrollment trends to last for a couple terms? So, in other words, are there areas that you would look to be more aggressive pulling costs out? Or is it much more important for you to continue to make the investments that you are making at this point and maybe be willing to let earnings slow a bit more?

Sure, Gary. The way we look at that is we manage for the long-term and we manage to ensure quality academic programs for our students. I think Ross is a good example, as we were just talking about Ross University. You can't manage a medical school for the quarter. That does not work, that is not what we do. And so what you do is you continue to make sure that you're making the investments to ensure that those students are getting a high-quality academic experience and that you are managing to the kinds of student outcomes, because as long as you maintain that quality, quality leads to growth.

And because other prospective students see that quality, and Ross is a great example of that. Even though in the early days when we first acquired Ross, there was some softness, we invested -- and we were very open about that. We said that was going to depress earnings in the near-term, but that it was going to lead to long-term growth. And that's exactly what happened.

The investments we made in quality led to a strong growth in applications to Ross University School of Medicine. We then continued to invest -- take that growth and invest in more quality, and it's like a continuous cycle where quality begets growth begets resources begets quality investments begets growth. So that's our philosophy, and we will continue to stick to that. And that's the long-term.

Within that, there's always this quarter, that year, you're making management adjustments to make sure you are on course, make sure you're on track. That's normal. But that's the long-term trend.

And so, I appreciate that. I think that's the right philosophy. But are there some maybe non-student-facing or areas that aren't so critical to student success in which you are likely to look to either reduce cost or be much more aggressive in not growing costs? I guess I'm just trying to understand. Is this something you think about?

Sure. As stewards of our owners' capital and as managers here, we understand that. And that's the normal management day-to-day, month-to-month, quarter-to-quarter management that we are constantly looking at. Hey, if there's an opportunity to run a process more efficiently and more effectively that can save money, that's great because that can free up resources that could be better invested somewhere else. Or in the near-term, it might show up on the bottom line. We are always looking at that, in good times and in bad.

And you are right; if you have a slow time, you double down on your efforts to look for areas that are not maybe absolutely critical in that particular period of time, where you can cut back a little bit. Sure, we certainly have those opportunities, and that's something that we take a look at as a management team.

Sara Gubins, Bank of America Merrill Lynch.

First question -- how did your view for the second half incorporate any changes that you may be making related to the regulatory environment? And can you give us an update on your thoughts around compensation structures for enrollment advisors?

Well, compensation structures for enrollment advisors are a base salary. And I want to be very clear that DeVry -- and when I say DeVry without University, that means DeVry, all of DeVry -- DeVry pays a base salary. That means all the schools of DeVry that are covered Title IV employees, and I'm not talking about Becker Professional Education, for example or DeVry Brasil, for that matter. We do have operations that are not subject to the Title IV restrictions and so forth.

But DeVry schools, like we're talking about here, pay a base salary to enrollment advisors and financial aid professionals. And so a lot of this talk about incentive compensation is -- there's a lot of misunderstanding. A lot of people think that suddenly incentive compensation is banned, and that's not the case. It's been banned since 1992. And so what the concern that many, many schools have around the compensation regulations -- and of course, those apply to all schools, public sector, private sector like DeVry or independent schools, for that matter -- is that it makes it very difficult to manage and it treats your base salary as though it were incentive compensation as well. So you can't do performance management of somebody even in their annual performance review, directly or indirectly, based on how they do their job. And we are very -- many schools, all schools, are concerned about the potential litigation risk that that could create for colleges and universities.

So those are the things that we are concerned about in that area.

So, are you planning for changes to your -- recognizing that you are only paying base salaries, are you planning for changes to the comp structure?

Nothing that you would be able to model or see. I mean, there's always management changes. There are things that we're looking at in our performance management system. We will certainly do everything we need to do to ensure that we are compliant, as we always strive to be, with all rules and laws, but nothing that would be significant or that would affect your model.

Okay, thank you.

Corey Greendale, First Analysis.

I wanted to ask about what you were saying about Ross and the questions that the Department has with the Freeport facility. Can you just elaborate a little bit on what that is, and what the next steps are from here and if somehow those people, people who would enroll there, would never get Title IV eligibility, what your alternatives would be?

Right, well thanks, Corey, and that's exactly what we're saying is we are evaluating that. And so, rather than give just a hypothetical of, if this happened, what would that mean, I'm just saying that we are stepping back and we are reevaluating the role of Freeport in our expansion strategy and our long-term strategy, along with all of the other parts of the full value chain. Ross is a 10-semester program. Four of those semesters happen outside the United States, and then we come for our fifth semester in Miami and then semesters six through 10 throughout our clinical network, including Miami; Saginaw, Michigan; other places. And so in order to expand, you have to expand across that whole chain, that whole 10-semester chain.

So where does Freeport fit into that, what's the role, what's the relative role relative to Dominica and other places, is what I'm saying that we are evaluating.

Okay, and if I could have one follow-up, Rick, I think in your commentary, you said that particularly we might expect slower growth in Q3 within the context of the 20% that you're talking about. Did I get that right? And if that's right, why would Q3 be particularly slow relative to Q4?

Just as you roll things forward in terms of the year-over-year comparisons and the investments we made in the prior year and what we're going to be doing this year, Q3 will have a tougher bottom line overlaps than Q4. And so, see that the back half of the year is going to likely grow earnings at a slower rate than we saw in the first half with Q3 a little bit lower than what we'll see in Q4.

Okay, thank you.

Peter Appert, Piper Jaffray.

So, Daniel, just to follow up on the Freeport situation, is the implication that potentially, if Title IV is not going to be available, that it perhaps doesn't really make sense to have that location?

And then, secondly, I'm wondering, is the profitability of the Ross operation broadly impacted longer-term by having to run the operation differently without that capacity?

Yes; well, what it might mean is that, yes, if the students who attend Freeport are not eligible for Title IV, not just at Freeport but subsequently, then yes, that would be a change. That's not our understanding of the way -- that wasn't our understanding. Some questions have been raised, and we just need to work through that. So it's an open question, is what I'm saying.

And the other part of your question is that, yes, that could create some changes, so you have options. You could use the institutional loan program, which we have and we have that capability to do that. You have very, very low default rates on loans with medical students. So that's certainly something that's within our capability to do.

You can expand capacity with approvals from our regulators and the creditors in Dominica and in other places. So there's a number of options, and that's why I just wanted to give you that color that we are taking this opportunity to step back and reevaluate the whole chain, the whole 10-semester chain and see where does it make sense to invest, because we know that there is steady, long-term demand. That's not a constraint on growth.

Right now, our constraint is our own capacity, so we're trying to figure out what's the best way to deploy resources to address that so we can continue to have solid, steady, moderate growth at Ross University School of Medicine.

Okay, thank you.

Paul Ginocchio, Deutsche Bank.

Just a question on Pell Grants. Are you concerned at all about the Republicans in the House and their ability or their willingness to fund the continued growth in Pell Grants?

We don't have any concern there. There's nothing that has been indicated to us that would give us cause for concern. And Pell Grants are, of course, are a very important program serving low-income students, and that's something that students take advantage of across all sectors of higher education because the money goes to the student, of course, and then they can apply those funds at any accredited program, whether the school -- whether that's in the public sector, the private sector or an independent school. So not really.

And if I could just have a follow-up -- what percentage of revenue is from Pell?

I don't have a figure off the top of my head.

We don't break Pell out separately, but within the overall -- federal aid is about 75% of our total revenues, and Pell is part of that.

Thank you.

Scott Schneeberger, Oppenheimer.

Could you speak a little bit, Daniel, please to persistence and the Student Central initiative, and domestically and, perhaps, now that it's in Brazil, what impacts that's having?

I just have to -- I can't have a fellow 'berger name butchered like that. So, it's Scott Schneeberger.

Thanks.

Absolutely. The question was about persistence?

Yes, exactly, and just the Student Central initiative domestically now in Brazil, that impact. And then just overall, maybe if you could help us a little bit into the second half, and if you think that's going to remain strong.

Yes, we are encouraged by the investments that we've been making in student support, and we know -- we have good evidence and data that says that, for example, DeVry University spends more, invests more in student support services by a good margin than most universities in the United States on a per-student basis. And that's important because many of the students that we serve are first in their family to go to college or other types of students that are sometimes called nontraditional, which is kind of funny because they are now 75% of all college students. So the nontraditional, I guess, is the traditional.

And they need more support. They need more Student Services. And so, some of the services that are in Student Central are academic advising. What course do I take next? Making sure that the credits they take are productive credits, they're not taking -- sometimes your kid goes to college and they end up taking way more credits than they needed to graduate, and that's why it takes them five or six years. So we put a lot of investment to make sure that our students have the ability to graduate on time. Many of our students graduate with a four-year bachelor's degree in three years at Chamberlain College of Nursing and at DeVry University.

Part-time jobs, student housing, student life, clubs, all those kinds of things and, of course, student financial aid and advising there are all part of Student Central. And so, by providing that, we went through a pretty rigorous process of piloting the concepts at a small number of campuses. We looked at the lift in retention and other measures of student satisfaction and student success. And when we saw that that was positive, then and only then did we start to roll it out. And now it's being rolled out to all DeVry University locations.

And now, based on that best practice, we are sharing that and creating concepts down in Brazil, and we expect that to have a positive result, too.

So yes, I would say that going forward into the next half of the year, we do expect to have continued improvement in student persistence and in student satisfaction.

Thanks. In Advanced Academics, you mentioned progress in New York and Texas. But just curious if you could give us some color on that, and then just curious on how aggressive you're going to be in that area, given some budget pressures for the foreseeable future.

Well, just how aggressive we are going to be -- this isn't -- maybe it's to the earlier question about making management adjustments and pulling back and so forth. We have a little bit -- at Advanced Academics, we have scaled back a little bit and said, look, we are going to really focus and maybe not grow quite as fast and focus on what we have and make sure that we are doing a really good job there and try to improve the economic bottom line at Advanced Academics. So that is a focus that we have. So we are in a situation where, in many states, probably the majority of states, the budget situation is tough. And that has led to reducing some of their online programs, and we think that's a short-term phenomenon.

Long-term, we think that flips around and districts increasingly look to technology and look to online as a way to deal with constrained resources. If you can't run summer school, maybe you can do online to supplement what you weren't able to do in the physical school, if the schoolhouse has been shut down for the summer, as just one example of how they might think about using online as a solution to budget pressures.

So I think in near-term, the budget pressures are not our friend. Long-term, they could have turned around and actually help create more demand for online high school courses.

James Samford, Citigroup.

A couple of quick questions -- just quickly, can you remind us what the advertising expense as a percentage of revenues was this quarter, and any changes that have happened in terms of whether it's lead gen mix, etc.?

Well, some of the changes have been -- at DeVry University, it has been a shift a little bit more toward the branding we talked about in the career University, as well as the DeVry/Keller 80th anniversary, spending just a little bit more in broad-based media, including television. Whereas it's a little bit different story at, for example, Carrington College, where we are focused on -- we were doing a little bit more of the branding because of the name change, and now it's getting back a little bit to more of the direct marketing sources.

So that's a little color on how some of the shift is going.

And as a percentage of revenues this quarter?

Well, the total advertising spend was about $186 million in the quarter.

Okay, great, thank you --

Excuse me; no, that's wrong. That was the total SS&A. Total advertising spend was about $61 million in the quarter.

I was going to say. A quick question on nursing, on the nursing side, or the Medical and Healthcare. I believe you said Carrington and Ross were the primary sources of margin declines in that segment. Should we think about when Ross turns the corner on growth as a potential inflection point for margins, or is nursing a structurally lower-margin piece that we should just expect declines in margin over time as that business continues to be invested in?

Sure, well, over the past several quarters we've seen margin deterioration because of mix within the segment. Ross has got the highest margin and Carrington is lower, and then Chamberlain is somewhere in between. And there's a lot of things going on within Chamberlain as we grow and open new locations. There's obviously underwriting in the first year or two for those new locations. So that's influencing the pace of growth of margin expansion at Chamberlain as well.

So what's going on here near-term is Chamberlain is growing and expanding margins, but the mix impact is a negative, and then we are seeing some compression of margins at Ross and Carrington due to trends.

Great, thank you.

Bob Wetenhall, RBC.

Just wanted to see if you could get a little bit more granular in how you think Student Services and administrative expenses will trend as a percentage of sales into the back half of the year, and if you could provide any color as well on Project Delta, if those costs will filter into the cost of Educational Services or for capitalizing those costs, and what we should expect for that line item. That would be great.

Sure, yes. Somebody asked earlier about the pace of growth in earnings, and part of it is because we will continue to see growth in SS&A costs in the third quarter and then not as much in the fourth as we overlap, again, investments that were made last year in the fourth quarter. And Project Delta will be -- as these modules get implemented, you begin depreciating those capital investments on a go-forward basis, and so we've already completed two modules, have a couple more to go. And as they get completed, they get depreciated through the cost of instruction.

So, just on that, are you trying to say that Student Services and administrative expenses are growing in line with the growth in sales or a little bit slower? And I'm just trying to understand because I know you guys have a big focus on efficiency, if there are some cost reduction initiatives in the background that I'm not picking up on.

Well, that has been our goal. To date, we have been able to grow our revenues at a faster pace than Student Services and administrative expense. The growth on revenue, given the student enrollments, as we've said, is going to start to see some deceleration, as it has -- as it did in the second quarter compared to the first. We should probably see that again in the third and fourth, and we'll strive to get more efficiency in SS&A, but that Delta will diminish. Again, more in the third quarter than in the fourth.

That's real helpful. Will the Delta diminish also in cost of Educational Services as well?

There, we have been able to make nice progress over the past several years. And we're now at the point where, as we are investing in academics, whether it be programs and technology, such as Project Delta, that will limit the expansion possibilities there for the gross margin.

Thanks, guys. Nice quarter.

Andrew Steinerman, JPMorgan.

I wanted to ask a question about the DeVry inquiry flow. Rick, when you described it, I think you said something about quality. Was that an internal shift at DeVry University to look for more quality leads? And if so, how do you guys define quality leads?

No, that hasn't been a shift. It has just been -- that's been a focus over the past -- it's always been a focus, but more so in the past quarters. And looking for leads that are going to have a better chance of converting; that's how we define leads, those prospective students that we think will attend and succeed at our schools.

And has there been more competition for those type of leads that you have been looking for?

Yes, there has been more competition, obviously, in the marketplace. That's part of the external factors that Daniel was alluding to earlier.

Okay, perfect, thank you so much.

Gordon Lasic, Robert W. Baird.

Two quick ones -- first, on admission advisors, can you provide an update on your staffing levels currently? I think last quarter, you said you were below target, and I'm wondering if you still have more hiring to do at this point.

Yes; we have -- we are pretty much in the same situation there. It's as much to do with allocation of resources to the right place. We were over here, we were under there, this team versus that team. So that's a part of it as well, Gordon.

Okay, and then just a quick one on pricing -- can you remind us what your average price increases have been historically for your various schools, and if you expect any material changes over the next couple of years?

No material changes. There will be tuition increases, but the rate of increase, I'd say it would be relatively in line as I think through here, Chamberlain and Ross, DeVry. We were roughly in line with what we've seen in the past.

Thanks.

Brandon Dobell, William Blair.

Daniel, I wonder how much, I guess maybe confidence is the right word to use here -- how much confidence you guys have in the visibility of program-level detail around all this regulatory stuff. I know you've got great visibility on starting salaries for some parts of your organization. How have you been able to work through some of the roadblocks that have been thrown up there, in terms of implementation or definitions of the [deal] we may be using?

Well, Brandon, It's hard to answer that question, because we don't know what new regulation we may see in the second part of the so-called gainful employment rules. But in general, I would say that our level of program-level detail is good. We have good system -- good information systems. We have a lot of history. We have very, very strong people in our regulatory area, in our student finance/financial aid area. And actually, I've been amazed at the kinds of analyses that they've been able to produce, and whereas I had heard that some others had to spend millions of dollars to comply with data requests from the government and so forth. It was certainly not fun, but we were able to produce this without having to spend millions of dollars or anything approaching that.

So I think our systems are good. I think our practices are sound. I think our values and our culture here are all such that we are confident, as I mentioned in the opening remarks, that whatever regulations that we may see, we have a sense that we'll be able to deal with those. And that's not making a prediction. It's not saying we know what they are. It's just, we have a feeling that we should be able to manage in that environment.

Okay, fair enough. And then a follow-up would be, in looking out a couple of years, what do you expect Carrington to look like, given there's a lot of back and forths on all kinds of things in that segment just more broadly not even just about your business. But is there a particular kind of positioning that you want to have that segment lock into? And does that look the same as when you purchased the asset a couple of years ago? Thanks.

Yes, thank you, and the vision for Carrington is to continue to expand and grow to meet the needs at the pre-baccalaureate level, particularly in healthcare field, the allied health and ancillary care -- not exclusively. And that growth, the vision for that is to grow geographically. So part of that vision would be not just 20 campuses in seven states out West, but dozens of campuses across the United States, ultimately. It would be continued new program development with an emphasis on healthcare programs, but not exclusively; there are some other programs as well.

And then the third dimension of growth would be online. And we've launched organically in online capability at Carrington, leveraging our internal shared services, our online services group. And so we think there's a real synergy there.

So those are the kinds of things that are in the future, at least our vision for the future, for Carrington.

Jeff Silber, BMO Capital Markets.

I wanted to follow up on the Professional Education segment. You mentioned the influx in Becker due to the new CPA exam. Can you quantify what that was in the quarter and what we should look for in terms of, quote-unquote, normalized growth in that business going forward? And then I have a quick follow-up.

That's a difficult one to try and pinpoint exactly what was advanced sales versus the normal flow. I guess I wasn't here the last time it went through a change from paper to a computer system. But they saw a similar trend where there was a surge before the change and then a little bit of a lull, and then back on normal. So we're just anticipating that a lot of the activity that was pent-up and waiting for the new exam that got shipped out in November and December will soften a little bit in the next few months, and then get back to normal thereafter. But I don't have a specific number. I wish I did, but we are watching it and we'll have, obviously, a better feel as we get into it. But we expect that to be a timing issue.

Okay, great, and just a couple of quick numbers questions -- for a tax range, should we be using that 34.5% for the rest of the year?

Right now, that's the number that we used for the quarter and for the half. We do have a few things going on in the back half of the year, but we think they are going to probably offset one another, so 34.5% is a good number.

And just on Freeport, can you give us an indication of how many students you have there?

No. We haven't broken that out, so I don't have a number for you. Sorry.

Okay, thanks.

Ariel Sokol, UBS.

Good afternoon and congratulations. So two questions -- the first one, Daniel, when you were at the Durbin Forum back in August, you mentioned that you were working on an educational quality index, presumably working with Representative Andrews. What is the status of that? And, can you speak what we could see over the coming months?

You have a good memory. That feels like ancient history to me. But we are continuing to work on that. We are working with others in higher education across all sectors, actually -- the public sector, people we've talked to, the private sector, fellow travelers and independent schools as well. And I'm attending a conference next week where that's going to be a topic. We've talked to people in some of the think tanks and other influencers in the discussion.

So that continues. And I think it centers around graduation rates, employment or acceptance at grad school, whichever one the student -- the graduate may be going to. Defaults, the repayment of loans and pass rates on licensure exams for programs where that's applicable, like nursing or medicine or like the accounting CPA exam, that kind of thing.

I would say those four areas are four areas of metrics that you could form an educational accountability framework around. And those are the four areas that I'm hearing a lot of momentum getting behind. There's many, many, many other metrics that you could use. And there's many metrics, for example, of learning outcomes or other metrics of quality.

Those are generally, I think, seen as the purview of the accreditors. And we need to make sure, of course, that we have strong accreditors and strong accrediting standards. And I'm sure that will be the case. But when you try to create a framework like Representative Andrews has promulgated that is going to be a framework for holding schools accountable for being good stewards of the federal student aid, I think those four areas -- the graduation, the employment, the pass rates on the key exams and the default or repayment of debt -- those are probably the four areas that you would want to build a framework around.

So a lot of good thinking has been going into that. I think you will see more as we go on. And the next step, of course, will then be reauthorization of the Higher Education Act. And it comes around again, and I think that's probably where some of these ideas could take flight.

Peter Appert, Piper Jaffray.

Daniel or Rick, I was wondering if you had any early read on the CDR number.

Well, it's our policy, and I think most -- I hope it's everyone's policy not to comment on things until they are final. And so we are going to stick to that. And the preliminary rates will come out soon. I guess they usually come out in February and they get finalized in September. And so we'll comment on them when they are final.

Okay. It's, in fact, not everyone's policy.

Well, it should be everyone's policy, and that's going to be our policy and we're going to stick to it. But I appreciate your question and I understand why you ask it. But we just think it doesn't serve -- likewise, others have speculated on the outcome of regulation or how it's going to impact specifically, will it do this or do that. It's just never a good idea, and that's -- so I hope people understand. I know it can be frustrating sometimes, but that's why we have followed that policy and encouraged others to do the same.

There are no other questions at this time. I would like to hand the call over to Daniel Hamburger for closing remarks.

Well, thank you, Mary, and thank you all for your questions. Just a reminder that our next conference call is scheduled for April 26, when we'll announce third quarter and spring enrollment results. Thank you all for your continued support of DeVry.