Adtalem Global Education Inc (ATGE) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 DeVry results conference call. My name is Regina, and I will be your operator for today. (Operator Instructions). Today's event is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Joan Bates, Senior Director of Investor and Media Relations. Ms. Bates, please go ahead.

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

I will now review the Safe Harbor provisions of this results 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 the 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 results call are available until November 15, 2011. To access the replays, please refer to today's release for more information.

With that, I will turn the call over to Daniel Hamburger.

Well, thank you, Joan. Thank you all very much for joining us today for our fiscal 2012 first-quarter results call. I will start off with an overview of the quarter, and then Rick and Pat will walk us through the results. Then we will, of course, open it up and try to maximize the time available for your questions.

Let me comment on the factors that are driving our results, what our plans are to improve, and why we believe these are near-term issues and the long-term growth outlook is strong.

Well, the three near-term headwinds that we talked about on our last call remain true today. First, after several years of exceptional growth, we are seeing a reversion to the mean. This trend has presented some near-term downward pressure, and over the long term, we still believe enrollment growth will return to the historical mid to high single digit range.

Second, we are still working through some operational adjustments that we put in place related to the new regulations. As we talked about last quarter, these adjustments have included reevaluating our marketing affiliates to make sure they comply with the new regulations, increased training of our employees on the new regulations such as misrepresentation and what that means for our institutions, and helping our employees adapt to our new performance management system.

The adjustments we have been making have been a distraction to our employees and have impacted our results, but we are working through them as quickly and as thoroughly as possible. We don't foresee them being a long-term issue.

Now the third headwind is the one that we see having the greatest impact on our performance, and that is the economy. The economy is lousy, and in particular, unemployment has remained high for an extended period.

Now these conditions are impacting all of higher education, not just the private sector. There is new data out from the Graduate Management Admissions Council. Those are the people that administer the GMAT exam. And that said that applications for full-time MBA programs dropped on average of 9.9% from a year ago.

Nearly a third of these programs reported decreases of more than 10%. So you might say to yourself, well, that is odd. Usually in bad times, MBA applications go up. Well, they did at first, but now with unemployment persisting for so long, it is turning the other way.

Similarly, according to the Council of Graduate Schools, enrollment of new students at all graduate schools taken together fell for the first time since 2003. Even enrollments at community colleges have slowed dramatically over the last year.

Now community colleges and some other segments of higher education are somewhat countercyclical. Typically when unemployment goes up, people go back to school. But it is not the unemployment level; it is the duration of high unemployment that is key now.

The sentiment we are seeing from potential students is very risk averse, very cautious when it comes to spending or making the significant commitment of any kind. This point really struck home for me when I was recently in Houston doing a focus group with some DeVry University students, and one of the students mentioned that his cousin just graduated from high school last June, but chose to put off attending college for a year.

So he knows he needs to go to college, just putting it off a year. It is not affordability per se, if you will. Loans are available; grants are available. It is more of the psychological effect of the economy on prospective students.

Just as people are putting off buying homes, even when housing prices are cheap and interest rates are extremely low, some students are deciding to put off enrollment commitments until things begin to improve.

So the countercyclical trend has reversed itself. This could imply that once the economy begins to show improvement and the job market rebounds, we will see students go back to school who previously put off that decision.

We have been experiencing these headwinds firsthand, particularly at two of our institutions. As you saw from our enrollment results last quarter, at DeVry University Undergrad and at Carrington Colleges, our enrollments declined.

We are disappointed as we know you are too by our financial results this quarter. We entered the year optimistic to see some upward improvement in enrollment trends, but to date just haven't seen that occurring. As enrollment trends continue to remain uncertain, we are focused on controlling the factors we can control. So let me highlight our action plan to improve our results.

First off, we are being very disciplined in controlling costs and deferring spending where appropriate and carefully matching our resources with our student population. As an example, we have reduced around 100 positions in administrative functions, which we were able to do given new IT capabilities that we have implemented. And this is an example of the investment that we made in Project Delta paying off.

We haven't talked a lot about these kinds of efficiency improvements, but we want you to know that it is a focus, and we'll continue to prudently align our resource levels with our enrollment trends.

Second, improve awareness building. We are refining our communications to optimize our spend and to better connect with potential students. We are reallocating our mix, fewer inquiries from Web advertising, more from search, social networks our website.

We are demonstrating that we can still grow even in the face of the headwinds I mentioned before like the softness in the overall graduate school market. Keller Graduate School of Management is still in positive territory, and Chamberlain's Master's of Science and Nursing is growing nicely as well. We believe actually in the Master's side we are taking share based on having a strong value proposition and this increased awareness that we are focused on driving.

Third, we are enhancing the student recruitment process. At Carrington Colleges, we are implementing a new centralized contact center that will create a faster and more efficient response to potential students. We are also helping students find the necessary financing that they need to pursue a degree.

Last fiscal year we distributed over $28 million in scholarships to our students. Now we are looking at ways to optimize our scholarship strategy even more and help students start and stay in college.

Fourth, new programs and new locations in high demand areas. We just received approval from the Illinois Board of Higher Education for a new Doctor of Nursing Practice at Chamberlain, and this is pending Higher Learning Commission approval. At DeVry Brasil new programs in engineering have been a growth driver. We are on target to open nine to 10 new campuses in fiscal 2012 across DeVry University, Chamberlain, Carrington and DeVry Brasil. And so this is an important part of our action plan to drive growth as well.

And fifth is building the team. We are confident in our ability to manage through this cycle, and a key reason for this is the strength of DeVry's team. We continue to add outstanding talent. Last month we hired Dr. Andrew Jeon, formerly of Partners Harvard Medical International to succeed Dr. Tom Shepherd following his retirement at DeVry Medical International. DeVry Medical International includes Ross University School of Medicine, Ross University School of Veterinary Medicine, and American University of the Caribbean School of Medicine.

At Ross University School of Veterinary Medicine, we've just appointed Dr. Elaine Watson to serve as Dean beginning in February. Dr. Watson will come to us from the University of Edinburgh, one of the world's leading veterinary medical schools. We believe she will continue to drive the quality of our programs to the next level.

And we have deepened our bench of talent at Carrington Colleges with the addition of Dr. Tamara Rozhon to serve as President of Carrington College and Melissa Esbenshade as the new VP of Marketing at Carrington.

I was recently at a meeting with Anne Mulcahy, former CEO of Xerox, who led their impressive resurgence. She talked about turnarounds in tough economic times like we have today, and in these times, this is a time to get really tight, very focused, control costs, preserve cash. But it is also a time to invest, invest in your strategy, invest in quality and in growth initiatives, and that is what DeVry is doing.

Investing in areas like health care where we continue to see growth in nursing and medical fields. That is why we acquired AUC, American University of the Caribbean. Investing internationally. While the developed world's economy is struggling right now, developed countries are growing, and that is also a long-term trend. So we are adding resources at DeVry Brasil.

Professional education is a third growth area, and our acquisition of ATC International is an investment in both professional education and this international trend. We make these investments with confidence that what we are seeing now is a near-term discontinuity in the long-term growth trend.

A recent McKinsey study cites the skills gap that we have in our workforce as one of the reasons for the high rate of unemployment. Jobs are actually available, but employers can't find the people adequately trained to fill those jobs. It has been estimated that there is up to 3 million current job openings nationwide in the United States, even though there are 14 million unemployed.

GE CEO Jeff Immelt said on 60 minutes a couple of weeks ago that there are hundreds of thousands of openings for radiology technicians. He sees this because GE, of course, is one of the largest sellers of radiology machines. So this skills gap remains a long-term driver of demand for career-focused education like Carrington's radiography program.

So our confidence is bolstered by this fundamental need for career-focused education and by the strong value proposition that we offer our students.

Recently we released a study we had commissioned by The Cicero Group which tracked wage growth from 2003 to 2010 for graduates from three of our institutions in seven states, alongside a control group of individuals who expressed interest in one of these colleges but ultimately did not pursue a degree.

By the end of this seven-year period, Bachelor's degree graduates from the DeVry institutions increased their earnings on average by 65%. Compared to that control group, the average was 18%. And similarly for associate degree graduates, wages increased on average 42% compared to 22% for the control group.

This study demonstrates that our graduates are receiving a significant return on their educational investment.

As another indicator of the value proposition that we offer students, even in this tough job market, our graduate employment rate for DeVry University students in the active job market employed in their field of study within six months of graduation is 87%.

Now the goal we hold ourselves accountable to has always been nine out of 10. So to hold ourselves accountable, we are investing in more resources to help our students like our new partnership with CareerBuilder.

So there is clearly a need for programs that can bridge the skills gap. That gap is going to continue to be a long-term demand driver for education, and it will be filled by colleges with a strong value proposition of career-focused education. (technical difficulty).

Thank you for giving me a chance to give you that overview. And now I would like to turn the call over to Rick and to Pat for the financial and enrollment results.

Thanks and good afternoon, everyone.

As expected, fiscal 2012 started out with continued revenue deceleration, resulting in earnings falling below the prior year level for the first time since the fourth quarter of fiscal 2005. Revenue in the quarter was $519 million, down 0.5% versus prior year with the acquisitions of AUC and ATC International contributing about 150 basis points of growth in the quarter.

Net income of $57 million was down 22% versus prior year, and earnings per share of $0.83 was down 19%. And in the quarter, our income tax provision was approximately $22 million, and we invested about $34 million of capital in our various educational institutions.

First-quarter results reflect a slowdown of topline growth driven by lower enrollments within DeVry University and Carrington and a resulting margin pressure. Our overall effective tax rate was 27.9% in the quarter as compared to 34.5% in the first quarter last year and 33.1% for the full year of fiscal 2011.

The tax rate was quite a bit lower in the first quarter due to the lower mix of domestic source income this year, stemming from earnings declines at DeVry University and Carrington combined with earnings growth at DeVry Brasil and the addition of AUC.

We also obtained certainty on the state tax treatment of our online operations that resulted in a favorable catch-up adjustment for prior years, as well as an ongoing benefit. We anticipate the full-year fiscal 2012 tax rate now to be in the 31% to 32% range.

Cost of educational services expense in the quarter increased by about 4.5% versus prior year and up about 3%, excluding the AUC and ATC acquisitions. Student services and administrative expense was up 10.7% versus prior year. Now about half of that increase was for incremental inquiry generation and new location support primarily at DeVry University and Chamberlain.

About 170 basis points of this growth was driven by expenses from the addition of AUC and ATC, which were not part of the organization last year. And the balance, or about 330 basis points, of the growth was the impact of inflation, exchange management activities and the impact of hiring from prior year.

We continue to invest resources to improve academic quality and enhance student services, while at the same time reducing expenses where revenues are not consistent with the cost structure on a location by location basis.

We have eliminated or deferred hiring, cut discretionary spending and continue to pursue cost saving initiatives with materials, supplies and other outside services. We are managing our cost structure closely while we are making prudent investments for future growth were warranted.

So, with that overview, let's now shift to the operating segment results, which are further detailed in our release. Starting with the Business, Technology and Management segment, revenue was down about 4% versus prior year in the quarter, driven by the decline in total undergraduate enrollment reported last period.

Enrollment at the graduate level was up about 2% in September. We don't have a perfect crystal ball showing us when the undergrad trend will turn positive, but we do believe long-term growth is expected to return to the mid to high single digits.

Segment earnings were $61.4 million in the quarter, down 27% versus prior year, driven by the revenue decline and resulting margin compression. We have been focusing on reducing costs where appropriate without compromising academics, new program development and new location expansions, the benefit of which we will see in fiscal 2012 and beyond.

Within the Medical and Healthcare segment, revenue was up about 8% with varying performance among the institutions. Chamberlain College of Nursing delivered strong top and bottom line results, fueled by the [16%] total enrollment growth reported last period.

The growth is being driven by our four new locations added over the past year or so in Chicago; Arlington, Virginia; Houston and Miramar, Florida, combined with increased enrollment at our existing locations and online due to strong demand for nursing professionals.

We continue to expand Chamberlain's geographic reach with Atlanta and Indianapolis our next expansion targets pending approvals. At DeVry Medical International, September term new student enrollment showed strong growth as expected, up 23% versus prior year due to overlapping the weaker new student enrollment last year at Ross' medical school campus. Total enrollment was up 6.3%.

AUC contributed 192 new students and 1226 total students to these results. The integration efforts with AUC are going as planned under the leadership of AUC's Dean, Dr. Bruce Kaplan.

Carrington results reflect the effects of the double-digit enrollment declines reported last period and prolonged poor economic environment and hesitancy of prospective students to pursue an education. We continue to address admissions and marketing-related opportunities and firmly believe in the long-term value proposition, and we are going to report Carrington enrollment next in December.

Earnings from the Medical and Healthcare segment in the quarter were down 17% versus prior year with strong performance at Chamberlain and the addition of AUC offset by declining earnings results at Carrington.

Finally, revenue within international, K-12 and Professional Education increased about 7% in the quarter, while the operating loss increased versus prior year. Revenue growth for the quarter benefited from strong student enrollment growth at DeVry Brasil with new student enrollment up about 29% and total enrollment up 18%. This growth is largely driven by the sharing of best practices that has occurred over the past year and a half or so.

Revenue also grew at Advanced Academics, while Becker experienced a slight revenue decline. You may recall that Becker is overlapping strong comps from the year ago period, driven by the rush to take the CPA exam in advance of the 2011 exam change.

The higher operating loss in the quarter versus prior year resulted from increased investments in new campus location costs at DeVry Brasil.

In addition, the first quarter represents a seasonal low point for tuition revenue at DeVry Brazil, Advanced Academics and ATC International.

So fiscal 2012 is off to a slower start than in past years due to the enrollment challenges at DeVry University and Carrington. During our conference call last quarter in August, I stated that earnings in the first half of the year would be below prior year given the impact of the enrollment deceleration and tougher year-over-year comparisons. This is still the expectation given our first-quarter results.

I also stated that we expected second-half earnings to be up versus prior year with the full-year likely to be plus or minus the fiscal 2011 level, and that was predicated upon improved enrollment at DeVry University Undergrad and Carrington to be able to show earnings growth for the year.

Even though enrollment declines appear to be stabilizing, we don't expect full-year earnings growth at this point given enrollments are not improving as much as we had hoped.

Back in August we thought we were seeing some early signs of improving economy, but then the US debt ceiling debacle and the European debt crisis delivered yet another blow to consumer confidence. And so while we are not happy to report a decline in revenue and net income, we are focused on improving our operating results, and I also think that it's important, very important, to keep things in perspective.

First, these declines follow a five-year period of above trend growth with revenue growing about 20% per year on average and earnings growing at 50% per year over this five-year period.

Second, our economics are still quite favorable with double-digit net income margins. And finally, our balance sheet and financial position are very strong.

And so, with that, I'm going to turn it over to Pat to talk more about that balance sheet and financial position. Pat?

Thanks, Rick, and good afternoon, everyone.

Cash flow from operations for the first quarter was $187 million versus $196 million last year. This strong cash generation drove our cash and marketable security balance to $325 million at the end of the quarter as compared to $453 million last year.

We funded the acquisition of AUC from our international cash balances while continuing to remain debt free. Our net accounts receivable balance was about $151 million versus $161 million last year. The slower accounts receivable balance was in part the result of decreased revenues, but also attributed to our student's ability to pay back their accounts based on positive student outcomes, as well as our continued focus on student service and collections management.

Our bad debt rates continue to reflect the focus on the receivable collection process with bad debt expense for the quarter actually down to 2.3% of revenue as compared to 3% last year, again an indicator of our students paying back their accounts even during these tough times and the strong value proposition of our programs. We are proud of our team's strong focus on receivables and cash management.

Capital spending for the quarter was $34 million versus $23 million spent last year. This spending was focused on facility improvements to better serve our students across all of our institutions, as well as new DeVry University campuses, expansion at DeVry Brasil, and also within Ross University and Chamberlain College of Nursing so that we can help meet society's needs for more doctors and nurses.

Total capital spending for the fiscal year is likely to be in the $170 million range, which includes capital investments in our newly acquired ACU institution.

Finally, during the quarter, we repurchased just over 1 million shares of our common stock for about $44.5 million or on average about $44 per share. Under our structured 10b5-1 plan, we were repurchasing more shares with the recent stock price volatility. We are now (technical difficulty) -- million program.

Now let me turn the call back over to Daniel.

Thanks, Pat. Before we open it up to questions, it is important to mention that our diversification strategy has continued to be a real asset for us.

While we are disappointed in the softer enrollments at DeVry University Undergraduate and at Carrington, we are encouraged by the enrollment increases that we have driven at several of our institutions, namely Keller, Chamberlain College of Nursing, Ross University's Schools of Medicine and Veterinary Medicine, American University of the Caribbean, and DeVry Brasil.

Overall our diversification strategy helped to mitigate the decline with total enrollment across all DeVry institutions down less than 1% to about 123,000 students.

As we go forward, we will do everything we can to manage our institutions efficiently and to focus on controlling the things we can control. No matter what, we won't sacrifice quality.

When students attend one of our institutions, they don't plan their educational experience by the quarter and neither do we. We will continue to make the necessary investments in the programs, locations and services that have made the DeVry family of institution so successful over the long run. So we feel very positive about the long-term opportunities that we see.

And with that, we would be very happy to take your questions.

Okay. Great. Before we give our instructions, I'm just going to ask the participants to ask one question and maybe one quick follow-up and if you jump back into the queue we are going to give you as much time as possible today to ask your questions.

So, Regina, if you could give our callers the instructions.

(Operator Instructions). James Samford, Citigroup.

I just wanted to revisit real quickly the outlook you provided. I think did you say that you wouldn't see revenue growth this year and that earnings would be -- or profit would be down slightly? Is that what I heard?

I actually did not say anything about revenue growth, I did say that earnings were likely to be down this year.

Okay. And should we always think of Q1 as a sort of (technical difficulty) -- or is that sort of a reasonable way to think about that part of the business?

Yes, it is. Given the fact that at DeVry Brasil there is only one month of revenue-generating activity based on the semester start there, as well as Advanced Academics, for the high school and middle school sessions really don't start in earnest until the first of September.

Andrew Steinerman, JPMorgan.

This is [Jeff] for Andrew. When you look at the continuous student enrollment, what are you seeing persistence, particularly within DeVry University?

Jeff, could you repeat that?

What do you see in student persistence within DeVry University within this quarter and the current quarter?

You know, Jeff, we don't break out retention as a metric. But I can just in broad terms tell you that it is at a historical -- its overall rates are up historically.

We did see some softness there in the summer, and we think that could continue here in the near term. You have got a little bit of phenomenon of higher numbers of graduates driven by the higher enrollments that we saw in past enrollment cycles, of course. And some of the same economic factors that I talked about affecting new student enrollment could be a little bit of pressure on persistence as well.

So that is a little bit of color around that issue for you. Thanks.

As a follow-up, are you seeing changes in the average class sizes within DeVry University given the decline in enrollment?

I don't have a number to report for you. I mean it would be expected you might see the average class size down a little bit, but part of what we do is manage that, and where it makes sense to consolidate class sections, we'll certainly do that where that is possible without impinging on either academic quality or student convenience in the schedule.

But yes, on the margin that tends to compress a little bit, and so students have that experience for them whenever you have a contraction in enrollments.

Gary Bisbee, Barclays Capital.

Can you give us any sense of magnitude of either the efficiency savings you'd get from those layoffs and anything else from the new system, and then also any sense of how much cost you might be looking to or able to cut this year? Is it likely to be a material thing that could reduce the amount of margin degradation that happens from the falling enrollment, or should we not expect there to be a real rate of change on costs from the trend this quarter?

Sure. We are controlling, as Daniel said during the call, a number of factors that we can positively influence. We continue to match our cost structure with our revenue expectations on an individual location basis. So that is an opportunity and will continue to be an opportunity.

At the same time, we are deploying both human and financial resources to further invest in those areas and programs of high demand across the portfolio of institutions. And we expect these savings in terms of deferred hiring, renegotiating contracts with vendors, consolidating certain sections without impinging on academic quality certainly to be in the tens of millions of dollars this year.

And the quick follow-up is just last quarter or I guess earlier on the call, you said to date you haven't seen the enrollment trends improve at all. Can you just give any color on what maybe you thought you would have seen to date and that hasn't occurred, or what makes you say that statement?

Well, one piece on that is I think Rick mentioned that in the spring and the summer we collectively, in the United States, saw an improvement in consumer sentiment. We saw the economy seeming to go up a little bit. And then we got hit with the debt ceiling debacle, which was right at the time actually that we spoke last on one of these calls. And then, of course, the European crisis as well.

And that debt ceiling debacle did really seem to give a blow to consumer confidence. In fact, somebody just handed me an hour ago off of Reuters a new article that said, "The conference board index of consumer attitudes has fallen to its lowest level in two and a half years." And what they pointed to was that consumer attitudes had soured since the spring hit by fears of renewed recession, political gridlock, high unemployment, volatility in the stock market.

So that was the change that we saw. So I think it is consumer sentiment that is behind the decision to make that commitment.

Peter Appert, Piper Jaffray.

I'm just wondering on the longer-term margin expectations for the business, Daniel, you talk about the unsustainably high growth rates you have enjoyed in the last couple of years and the margins got to the low 20s. Is it unrealistic, therefore, to expect in the context of the new environment that that level of margin is achievable again?

Well, I think it really depends on getting back to trend, and we have had a historical trend of the mid to high single digits enrollment growth. Historically we have seen tuition increases that add a little bit on top of that, so we are able to get to revenue growth that is somewhat above that.

You've got operating leverage, which -- plus just being good managers, we see a number of opportunities to run things more efficiently. Project Delta was a good example of that, something that we started before this recent softness, and I'm glad we were looking ahead and making long-term investments.

And there's many other opportunities like that that can help you to drive earnings growth that is commensurate with the kind of things that we are talking about here. So that is one way of looking at it.

I'm wondering, though, if you have a particular longer-term margin target though you could share with us?

I agree everything what Daniel said and what Pat talked earlier about the cost savings. So we'll be able to mitigate some of the margin decline by some of the cost savings actions and trying to look at this on a location by location basis.

But there is, has been and will probably short-term continue to be some de-leveraging within our results. But then once the long-term trends come back, then we should be able to get back on a state back to margins where we have been the last couple of years. But we don't state a specific goal, though.

Paul Ginocchio, Deutsche Bank Securities.

Just going back to that DeVry new undergraduate enrollment number, I think it was minus 26 last quarter. And I think, Daniel, at the time you'd said you'd hoped for a little bit better number, and I know the commentary you just gave around consumer confidence. So should we be expecting another minus 25% for the fall? Is that roughly where we are going to come out?

Well, we don't have forward guidance for you. We don't expect any significant improvement at DeVry University or Carrington in the near term. We see stabilization of the rate longer-term getting back -- having a reversion back to trend.

But it is also possible that new student comparable numbers year over year could be a little bit choppy as we moderate. I think over the long term mid to high single-digit increases are sustainable, and we think what we're seeing right now is a near-term rate or discontinuity from the long-term trend.

And just the follow-up, I think you had said in your prepared remarks that you had spent more money on inquiries or leads. Is that correct? And has that not -- I guess conversion fell off?

Yeah, what I would say is that the color there, the interest is there on the part of prospective students. And so the inquiries, while they are a little bit weaker overall, I would say the bigger impact is more the conversion to the ultimate enrollment. The interest is there, the follow-up, people are doing a great job of following up with their prospective students, providing great customer service.

And then what you see is sort of right at the end -- gosh, maybe I just can't commit right now, and that is where that consumer sentiment, that consumer confidence and the prolonged down economy that really the prolonged persistence of unemployment is really having the impact.

Trace Urdan, Wunderlich Securities.

Daniel, at the beginning of their prepared remarks, you commented on the impact of the regulatory changes on the staff and you talked about some of the training that you had to do. And I know that you had to make some changes to the way you compensate your enrollment counselors.

I'm wondering if you believe that any of those regulatory changes may have had an impact on the student starts and whether you have any kind of visibility on when you might be able to roll past some of that disruption.

Okay. Let me comment on those issues. Start off first by saying something I know that you know, but just in the way that came out, I just want to make sure that nobody has a misperception or misconception. Just because in the media, the general media that is not as informed as many of the people on this call probably are, there are misperceptions.

One of those is that, well, we were paying commissions, and now we can't pay commissions anymore. We were not paying commissions before; we are not paying commissions now. We were compliant with the compensation rules before, and we remain and will remain compliant now.

But there was a change in the performance management. For example, for a admissions advisor or recruiter, the enrollments were a part -- they were not the sole measure by any stretch -- but they were a part of performance management, and now it's not. So any time that there is a change, there is a learning curve, and there is a lag effect. So that is an example.

Another one that I would give you is that the managers, they've been somewhat unclear in how to best coach their enrollment advisors, the recruiters. And so being good DeVry people in the DeVry culture is very conservative and they act that way, they are erring on the side of being very cautious and very conservative.

And so that is the kind -- let me say a distraction or an adjustment, that is the kind of thing that we are talking about, and yes, I think that has had an impact. Very hard to quantify, but has had an impact on our performance in the near term.

But the reason that we have confidence in the long-term is that these things -- we have been through these roads before over many, many years and even decades. We've had changes in these kinds of rules. We've always adapted to that, in effect come out stronger on the other side of those changes, and we know that the fundamental value proposition of the program is ultimately what drives the enrollment.

It is the need for the education that students are looking for, and so that is why we have a confidence over the longer term.

Do you have any kind of sense of when you think things will be sort of back to normal if that is a proper concept?

I really don't have a crystal ball for you in exact timing. But I put these more in the near term, not in the long-term category.

Jason Anderson, Stifel Nicolaus.

Just a question on your new locations and new program approvals, have you seen any delays there? Obviously you commented on a couple of state approvals. I noticed HLC pending. I'm just curious on the trends you're seeing there.

Sure. Thank you. Not a major shift there. There is always from time to time a certain state or a certain jurisdiction where it can take some time, and those are barriers to entries or moats as Warren Buffett likes to call them. When you are on the other side of them, they look really good.

So when I said -- and I think Rick mentioned this also -- pending approvals, that is our -- we always say that because until you have the final approval, we are always very careful to use that kind of compliant language. And we've always done that even before it was cool, even before there was the new misrepresentation language, I guess. So that is just our standard way. Until it is final, it is not final.

But we do expect nine to 10 new locations this year, many new programs. We are actually investing more, we are spending more on new program rollouts because we see high demand areas. So that is an area where -- I know some people have asked, well, why don't you just cut costs across the board if things are -- your earnings are down?

Well, the earnings are down, but we still have positive earnings, 11% after-tax margins, and so we still have the resources to invest in growth opportunities. And that is our job is to serve the growing need for career-focused education. So new programs, new locations, definitely a part of the plan.

Great. Thanks. And then just as a quick follow-up, do you expect -- is there any distribution throughout the year you would expect those to land earlier or later or spread out?

We have a lot of color on the spread there --.

We've already got a few of them at DeVry University already in place and starting, and then others will come later in the year. So it's on average pretty evenly spread throughout the year.

Yes, it was just done in -- I mentioned Houston and visited DeVry University. But I was also there for a ribbon cutting or grand opening on a new Chamberlain College of Nursing location. So those are definitely one of the most rewarding parts of my job is to open a new nursing campus.

So we are certainly looking forward to doing more of that. But those tend to come throughout the year, and we tend to focus on doing several in parallel. Because of those approvals, you can't always control when you going to get those approvals, so you put several lines out in the water so that you maximize your chance to serve those programs in those markets when you get the approvals.

Kelly Flynn, Credit Suisse.

My question relates to the business technology segment revenue. It was a bit lower than I was modeling off of the summer enrollments. So I'm just wondering if you can clarify, was there anything new going on with pricing, any discounting that may have impacted that, or was there an incremental persistence issue which I think you might have alluded to earlier?

The only thing might be maybe the way you were modeling the persistence, I think. No real change in the pricing or scholarships or discounting or anything like that other than what is already out there in the publicly announced world.

But the persistence did get worse due to graduations? Is that how to think about it?

A little bit, but I don't think that was a major --- probably a factor.

Corey Greendale, First Analysis Securities.

I also had a question on the business technology management segment but on the cost side. So I know you have talked about some of the cost saving measures, things like contract renegotiations. I was hoping you might be able to speak more specifically to just a variable portion of the cost structure and to what degree you can get cost savings just based on being able to take out faculty costs as the student population decreases?

I will take that first, Pat, join in, but we are able to modify, as Pat mentioned earlier, our scheduling within DeVry University. If the enrollments are down, we can vary that for some faculty. We do have full-time, and we do have some part-time faculty. So that is able to be an adjustment.

And some of the cost savings actions that Pat alluded to we've implemented some of that at the end of last year and implemented it during the quarter. So that will carry forward and drive more savings as we go on throughout the year. Pat?

Yes, but to your point, in terms of when we referenced tens of millions of dollars, labor represents the largest portion of that, again driven primarily by deferring the hiring and benefiting from the right-sizing that we did in the fourth quarter of last year and having that carry through this year.

And then secondly, I was hoping just for an expectation management goal here that, so, as I calculate it in the quarter you just reported, the pretax income was down about 29%. So if you've got similar trends at DeVry Undergrad in terms of new students, similar trends at Carrington, is it fair to assume then you have decelerating revenue there and maybe some cost savings offsetting that?

But the bottom line is, is there any reason to think that the year-over-year change in the pretax income should start getting materially better in the next quarter or two?

Well, again, we don't give any quarterly guidance as you know. We do anticipate, as I said in my comments, that earnings in the first half of the year are going to be down, and we do expect things to improve from an earnings comparison to prior year as we go into third and fourth quarter.

Okay. Thank you.

And also, we didn't see your research report, so we'll give a little commercial for your research report that just came out, I guess, within the last few days. And these guys did a survey of prospective students and showed that sort of a de-coupling of the historical relationship between high unemployment and enrollment growth that showed that maybe an economic recovery would have a positive impact on our enrollment. And so I appreciated that analysis.

I appreciate that, Daniel. And if you have any questions, feel free to follow up off-line.

Sara Gubins, Bank of America/Merrill Lynch.

Daniel, I had a question about your comments really attributing the weakness in student starts to the economy. And I don't doubt that that is a big factor. But given the operational changes that you've been making, how do you disaggregate how much of the decline is due to operational changes, which will clearly begin to cycle through over the next few terms versus the underlying economic environment?

Well, the operational changes that you are referring to are what -- I equate that to the distraction factor around the new processes, new performance management systems, things like that. I should point out that -- I know you know this, but some people may not -- we didn't change the admissions criteria. And, by the way, our institutions are not open -- not going from open enrollment to having admissions criteria. We already had admissions criteria at DeVry University, for example, Undergraduate, which is where we are really looking has had admissions criteria, exam results, sort of test scores and other entrance criteria for many years.

So it is not like we went from open enrollment to having those, and therefore, that caused the decline. We will continue to take a look at those, we are looking at those, and we may be tweaking those. But that really wasn't a factor for us. It was much more, we think, the economic and the consumer confidence factor.

Okay. And then separately regarding scholarships, in your prepared remarks, did I understand correctly that you are planning to do more scholarships next year, and if so, could you just talk about how that might be ramping?

Well, it is really being more strategic in the use of the scholarship dollars than any very large or even significant increase. And we'll try to keep it in the same range where we have been, but try to be more strategic in the use of that.

So instead of one student getting X, maybe two students get half of X each, administered in a more strategic or targeted way. And also, in addition to helping students start school, how can we use the scholarship monies that we do have to help students stay in school?

So we are proud of allocating a significant portion. The last few years it's been about 10% of our after-tax earnings toward scholarships, and we want to continue to do that and find ways to do it more strategically.

Suzi Stein, Morgan Stanley.

I just wanted to follow-up on what you said as far as the impact of changes in the performance management plans. I'm just curious, has there been higher turnover of admission counselors, or are they just being less productive given the new structure?

I think it is more the latter. Not a significant change in turnover. What we are doing about it is training our way through this. So increased levels of training to -- and part of the training, by the way, reassures our folks that a lot of what is happening is no change. It's almost like reassuring people you don't have to change. The way you serve your students, the way you advise them about the value of an education or this particular program or that program, none of that changes.

And what is interesting is a lot of our folks just sort of made the assumption that I've got to change everything or I've got to be -- I've got to do something different when a lot of the training is just reassuring people to continue to do the good job of serving your students that you did before.

So it's very interesting, but it is human nature, and that adjustment process has a little bit more of a lag effect maybe than we thought.

The other impact there is in contrast to maybe some other publicly held organizations, we started that a little bit earlier, even like as far back as a year before. We were very careful, very conservative. We waited until we saw all the rules in their final form. And so I guess that is the bad news is it is hitting us a little bit later, maybe we are a cycle behind.

The good news is, we were extremely thorough. We invested pretty heavily in that, and some of those investments hit yet in the first quarter, and we took the DeVry approach, including flying in over 600 of our managers across all the institutions for three solid days of training, and I think it was a really good way to cement our culture. We got very high marks from our people about that. It was sort of the DeVry way of doing it.

So, again, the bad news of that is maybe it is hitting us a cycle or a step a little bit later. The good news is it's a great long-term investment in DeVry's quality culture.

Okay. And then as far as your capital deployment strategy, just given your stock price and your confidence in the business over the long-term, should we expect a pickup in share buybacks?

Well, there has been a little bit of that, and the way I would put that into context of, how do we look at allocating capital, and what are the priorities?

The first priority is to strengthen our core, which we define as US post-secondary education. So anything that we can do to strengthen that core, improve academic outcomes, is our first priority use of capital.

But we, because of the favorable economics, tend to generate more capital that can even be deployed reasonably there. So the second priority is to then grow the core. So that is where new programs, new locations, those kinds of initiatives are very high return on learning and high return on investment use of capital.

Then the third priority is to leverage beyond the core, and that is beyond US post-secondary. So international post-secondary or global non-post secondary, so professional education, for example. And those are areas that we have targeted for deployment of capital, including acquisitions. So AUC fit right into that; ATC International with Becker fit right into that.

And it is really then the fourth priority would be share repurchases. And, as you've seen, that has been a little bit higher level in the last couple of periods of time just because of that lower share repurchase -- share price.

So yes, that is how that fits in. I wanted to make sure that fit into a broader context of how we think strategically about deploying and being good stewards of our fellow owners capital.

Amy Junker, Robert W. Baird.

Just two related questions on margins. First, with respect to the Medical and Healthcare, can you just maybe provide a little more color on what drove that pressure that you saw there, particularly with the topline growth? I'm wondering if that is due more to the AUC acquisition or if there was something else there that we should be thinking about?

Sure. With respect to the topline growth, the AUC acquisition from a consolidated perspective accounted for about 150 basis points of the quarterly revenue growth. So further narrowing that down to the Medical and Healthcare segment, it was a very big driver.

With respect to the margin compression, there is a confluence of two items that are driving that. One, the continued expansion and new location openings for Chamberlain and the continued investments in those new programs, which will certainly pay off in the long run, is resulting in some margin compression. But, at the same time, we are starting to overlap and get the benefit of mature campus openings at Chamberlain.

And then the largest driver there on the margin compression would be the continued deleveraging or deceleration at Carrington.

Thanks. That's helpful. And then just related to the Business and Technology segment, given your comments about the cost savings that will probably help to offset some of this, but what risk is there that those margins -- we don't see those come back to the past trough levels experienced in the last downturn, meaning low single digits. Do you feel confident that you can avoid those kind of levels?

We think what is different this time, one thing that is different, last time around -- so you are referring back to the sort of 2005 timeframe, back then we were very heavily focused on technology, engineering and technology programs. And in response and also just driven by the opportunities that we saw and continue to see, we've diversified quite a bit.

So DeVry University specifically has now about half business programs and about half engineering and technology, or they are evenly split, and then there is a new complement of healthcare and healthcare information programs in there as well like HIT, Healthcare Information Technology, which is one of our faster growing programs.

So there is also a nice complement of graduates, so the Master's degree programs at Keller to complement the undergraduate programs. So it is a more diversified mix even within the BTM segment, even within this more diversified overall group, which is DeVry education overall.

So I think that is a very significant difference now relative to what we saw back at that timeframe.

Yes, I think we've also optimized our real estate footprint compared to where we were in the early part of this -- the century that was really having a big downward impact on margins. Now we've got better utilization and sharing of facilities with the likes of Carrington and Chamberlain and even Ross.

That is an excellent point. Go ahead, Pat.

And then just lastly, we are further diversified in delivery modality, wherein back in 2005 we would have had a much higher concentration of on-site students. As our online population and online delivery modality has grown, that does allow us some more flexibility on the cost end, again without impinging on academic quality, to rationalize sections a little faster than we could on the on-site during enrollment decline.

Yes, excellent point. That is a much more variable versus fixed cost structure over there. And yes, I think that real estate optimization process that we went through is much -- we are about to open our 100th DeVry University location this year. We should have a nice celebration for that milestone.

But the mix of smaller real estate footprint relative to the larger is much different today than it was at that time. So all factors to think about, and so you may appreciate that question. That really gave us a lot to think about.

Paul Condra, BMO Capital Markets.

I just wanted to ask about the enrollment starts. I think Rick had said last quarter that the summer decline would be the trough. I guess I'm just not real clear. You still think that to be the case going forward?

Well, yes, I think what we said is that we had hoped to see some improvements, not turning positive, but to see that rate of decline stabilize and then turning positive. I think we are seeing some stabilization, but, as I said in my comments, we hope to see maybe some positive movement and have not seen that near-term here.

So expect to see it as we go forward. Hopefully we'll see some positive in the second half of the year and beyond, but that is that.

So you wouldn't say that that is a trough start rate then?

Well, in terms of a rate of decline, I think it's stabilized.

Okay. And then just to follow up just the proverbial update on the CFO search, and thanks a lot.

Sure. The process continues. We have driven an excellent process in my view, and I appreciate the help of the team that is working with me on that search. A very inclusive, diverse slate of candidates and a very strong process. And we will keep you posted.

Brandon Dobell, William Blair.

I want to go back to the new enrollments in TVU for a second or BTM. Any way you could give us some color on, let's call it, relative performance between the high school recruitment channel, maybe the Internet channel and traditional media channels if that's possible? Or maybe even just high school channel versus other? I'm trying to get a sense if there's any major difference between either the start performance either kind of by an age group or by certain marketing channels you guys are employing?

Sure. I appreciate that. Don't really have a lot to report there by channel, if you will? Nothing really stands out. We do see opportunities in the near-term with, you mentioned the word channel. That's one way to think of our outreach to community colleges, to the corporations, many of whom we serve by providing educational programs to their employees, government organizations, the military, other groups like that, in addition to our one-at-a-time efforts with students.

About the only thing I could tell you is grad versus undergrad, you saw more strength at the graduate level, and programmatically healthcare looks -- is performing well. And the other interesting one is accounting. Accounting is a bright spot and something that we just continue to do a better job of letting the world know that DeVry University is one of the largest accounting programs, undergraduate accounting programs in the country. I think it surprises a lot of people because they think of us for engineering and engineering technology and so forth.

But accounting is a great value proposition, and we strengthened that by the relationship between the undergraduate, the Keller graduate and then the Beckers. We call it DKV, DeVry, Keller, Becker, which allows students to save about a year and a half and about $10,000 of tuition relative to if they'd done those three separately. So that's a little bit of a differentiation there. I hope that is helpful.

Okay and then one follow-up related to that. It doesn't sound like there's been any major changes in terms of how you are approaching the Internet channel. Maybe a mix shift or so between traditional media and Internet, but within the Internet channel maybe some color on how much churn you have either proactively managed or have seen within the aggregators you work with, how much control you are taking now versus three or six months ago in terms of that downstream process.

I'm just trying to get a better idea of how the strategy is changing with the Internet side of things.

Right. Thank you. I am proud to say that DeVry has been a leader there. And Dave Pauldine, President of DeVry University, in particular has been a leader for us, but also for higher education in general and working with the Association of Private Sector Colleges and Universities to help set standards for these marketing vendors and advertising agencies to set standards for their conduct and standards of best practice for them.

It's great. It's great to hear everybody on this call use the word inquiries and to use the kind of language that we think is appropriate for higher education.

And so early on in this cycle and we commented on this, I think, last time, that we did see some of the providers, some of these vendors who not necessarily were doing anything wrong, but if they couldn't meet our standards, and DeVry was commended by many as having set the highest standard, then we would just say we're not going to do business with you until you do.

We are starting to see that -- then now comply with those standard, and so some of those are coming back online. So there is still some disruption in that process, some churn as you put it. But I think we are starting to see stabilization there.

Ladies and gentlemen, this concludes the question-and-answer portion of today's conference call. I will go ahead and turn the call back over to management for closing remarks.

Do we have one more person in the queue?

Scott Schneeberger, Oppenheimer.

We are not going to cut off any one with a burger name.

Thanks, Daniel. Thanks for fitting me in. Just a couple of questions. I'll ask them both upfront. I know you guys don't like to go into persistence too much. Any commentary you can help us with with graduation rate over the coming fiscal year, any interesting comps or discussion there?

And then just the second question would be, the pricing environment, what do you think looking a year or two out?

Well, Scott, I would say that we are not one that provides a specific retention metric. So the color I can give you is that overall the retention is up historically. But we did see a little bit of softness here in the recent patch, and that could continue. Also, you do have the effect of graduates because we did have higher enrollments in the last couple of cycles. So that is not unexpected.

It is -- we are still trying to tease out. We think there is a little bit of this same issue of consumer confidence that has impacted us on the front end, if you will. It can impact some students in terms of staying in school.

So what we are doing about it is continuing to enhance the quality of our programs. We have added resources like what we call Student Central that provides a one-stop shop for student support services to help them stay in school.

We talked a little bit about looking at the scholarship program and how that might be able to help students stay in school, as well as start school. So all of those are some of the things that we are doing there.

In terms of pricing, we tend to see that relative to the competition. And, as we see many state schools in the United States raise tuition -- you know, 9%, 11%; I think California was 15% per year for a couple of years, that our 2% or 3% at DeVry University Undergraduate is one example, is viewed in that context.

And I guess I will just -- operator, I will just go ahead and wrap it up because I know we are over time. But we wanted to get all the questions in, and I would like to thank everyone for those questions and remind everyone that we will report fall enrollments on December 12, and then our next quarterly results call is scheduled for January 26 of the new calendar year, and then we will report second-quarter results for our fiscal year.

So thanks, everyone, for your continued support of DeVry.

Ladies and gentlemen, this does conclude our presentation today. Thank you so much for your participation. You may now disconnect. Have a wonderful evening.