Adtalem Global Education Inc (ATGE) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-one 2013 DeVry conference call. My name is Emily, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct 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 call over to Joan Bates, Senior Director, Investor and Media Relations. Please proceed.

Thank you, Emily. With me today from DeVry management are Daniel Hamburger, President and Chief Executive Officer; Tim Wiggins, our Chief Financial Officer; and Pat Unzicker, our Vice President of Finance.

I'll now paraphrase our Safe Harbor language. This call will contain forward-looking statements. Actual results could differ materially from those expressed or implied. We undertake no obligation to publicly update or revise any such forward-looking statements. Please consult our most recent 10-K and 10-Q filings for a more complete description of factors that could affect our financial results.

Telephone and webcast replays of today's call are available until November 14, 2012. To access the replays, please refer to today's release for information.

And with that, I'll turn the call over to Daniel.

Well, thanks, Joan, and thank you all very much for joining us today. I'll begin with an overview of the quarter; followed by Tim and Pat, who will walk through the financial results before I wrap it up.

Last quarter we discussed expectations for our planning horizon through fiscal 2016. We view fiscal 2013 as a transition year, where we are improving our performance, and then return to a growth phase in the 2014 to 2016 period. And I'm pleased to say that we've begun this new fiscal year on the right foot, with a solid quarter of execution on our performance improvement plan.

As a reminder, the plan has three priorities -- aligning our cost structure with enrollment levels; regaining enrollment growth; and making targeted investments to drive future growth. DeVry made solid progress on each of these during the quarter.

Our first priority, aligning our cost structure -- and we've begun to see our efforts here payoff. During the quarter, we realized cost savings over and above our target. As Tim will explain in a second here, we now believe we can exceed the $50 million commitment that we made previously, and achieve $60 million in savings and value creation this fiscal year.

As enrollments have declined, we have reduced volume related costs. And, unfortunately, we've had to make the tough but appropriate reductions in our workforce, mostly at DeVry University and Carrington. In addition to these volume-related cost reductions, we're also focused on reengineering, restructuring, and redesigning processes across our institutions.

We have launched a number of task forces that are focused on this. One area where we are reengineering the process is electronic course materials. As we increasingly adopt e-materials, we provide enhanced academic tools for our students; we reduced their textbook costs, relative to buying a new, hard copy textbook; and we improve our economics, as well.

Another opportunity for restructuring is real estate. As part of our operational excellence initiatives, we're reviewing our real estate portfolio to find ways to optimize our locations. And this task force has done a great job. They've already uncovered an opportunity to consolidate some of our administrative offices here in the Chicago area.

We've decided to sell our office building in Wood Dale, Illinois and relocate the employees to other facilities in the area. This move will save over $2 million annually.

And a third example of process reengineering -- during the quarter, we began combining Chamberlain's media buying with DeVry University. And this synergy has created a more cost-effective way to market both institutions.

While volume-related cost savings have driven most of our near-term efficiencies, these restructuring initiatives are creating a leaner, long-term cost structure. And so as enrollment volume returns, we expect to realize operating leverage and margin expansion.

Now turning to our second priority -- regaining enrollment growth. Our teams executed well in the quarter, once again. At Carrington, we're beginning to see solid improvement in our recruiting process, with new student enrollments up 33%. Going forward, as we work through the turnaround, enrollments could be choppy somewhat. And part of this is the result of the new session-based academic calendar that we moved to earlier this year to benefit our students.

We'd like to point out that each quarter doesn't have the same number of starting dates. For example, in fiscal 2013, the first quarter had six start dates; the second quarter has three; the third quarter has five; and the fourth quarter has four start dates. We're encouraged by what we're seeing, and we expect new student enrollments for the second quarter to be positive again, probably in the single-digit range.

But let me mention that we do have a session starting officially on the last day of the quarter. But given that December 31 is a holiday, students won't begin classes until after the new year. So we'll include these projected enrollments in the third fiscal quarter, not the second. If we did include those projections in the second-quarter forecast, we would anticipate a double-digit increase; and, thus, a smoother pattern.

In August, we relaunched the Carrington brand, refining our messaging and then carrying it out through a number of media, such as local network television and social media. It's still early in the process, but we believe this relaunch process is going to increase awareness of Chamberlain's value proposition, and that includes the individual attention and the career focus that we provide Carrington students.

Enrollment for DeVry University undergraduate also showed some positive signs during the quarter, as the rate of decline for new student enrollment narrowed sequentially; and conversion rates improved, as well. On the graduate student side, we experienced some weakness this quarter. And, of course, we're not alone -- many graduate programs are experiencing enrollment decline. A recent New York Times article pointed out that in 2008 and 2009, at the onset of this recession, many recently unemployed went back to school, seeking a haven from the tough job market.

Following that surge, there has now been two years of new student enrollment declines among the graduate population nationwide. And that's the total grad school market. When you look at just MBAs -- which is Keller's largest program -- it's even more profound, as the country has experienced four straight years of declining enrollments across MBA programs. In 2011, MBA enrollments were down 22% nationwide.

So, clearly, prolonged economic uncertainty and a challenging job market have led to a cyclical trend of prospective students hesitating to pursue an advanced degree. This is a trend to which we're not immune.

Our plan to regain enrollment growth at DeVry University includes channel-focused initiatives, technology, and brand awareness. Now, by channels, we refer to the relationships that we develop with high schools, community colleges, corporations, and government and military. Each of these is an important source of new students for DeVry University.

In the high school channel, we're leveraging our diverse array of institutions beyond DeVry University to raise awareness of career paths from business to technology, from nursing to allied health. We began a pilot of this new, cross-institutional approach during the quarter.

With community colleges and corporations, we've increased the number of representatives in each of these areas.

In terms of our technology-focused efforts, we're developing a self-service portal that prospective students can use to streamline the application process. Some students don't want or need as much live service during the enrollment process, and we're providing self-service technology for them.

DeVry's brand awareness campaigns are helping to drive higher-quality inquiries and steadily improving conversion rates. Our goal is to differentiate DeVry University as the career university. We recently launched our know-how series of ads, which I know many of you have seen. Our aim here is to highlight the growing need for an educated workforce to fill jobs in high-demand sectors. We're showcasing how leading employers, such as Cisco Systems, partner with DeVry University to encourage prospective students to pursue a degree. We provided a link to these ads in today's release.

At Chamberlain College of Nursing, enrollments for the quarter showed improvement, based on our continued focus on reputation, quality, and execution. Chamberlain reached a milestone in total enrollment, educating more than 12,000 nursing students in the September session. The National League for Nursing, the NLN, recently announced that it has partnered with Chamberlain to establish the NLN Chamberlain Center for the Advancement of the Science of Nursing Education. What an exciting partnership. This is going to promote nursing education and new teaching methods for nursing instructors, while significantly enhancing Chamberlain's already strong reputation.

Now, the third priority of our performance improvement plan is making targeted investments to drive future growth. Of course, this includes new campuses and programs. Chamberlain's most recent new campus opened in Atlanta this quarter, and its first class set a record for the largest Chamberlain campus opening. Making targeted investments does drive growth. In fact, the majority of Chamberlain's growth this year will come from new campuses opened in the last two years.

We'll continue looking for new campus locations. We're on track to open a new Cleveland campus in January; and one in Tinley Park, Illinois, later in fiscal 2013.

At American University of the Caribbean, AUC, we're well underway on an expansion plan that will deliver a new state-of-the-art simulation center and labs for students and faculty. This will further improve AUC's high-quality learning experience. We expect the project will be completed in the fall of calendar 2013.

We're also investing in new programs at our institutions. And one great example is the recent release of course materials at Becker CPA review in Mandarin Chinese. We've done this in partnership with China Distance Learning, an organization many of you know.

International expansion in the accounting profession holds a lot of potential. And this partnership represents incremental exposure to 40,000 Chinese CPA candidates who could benefit from Becker's course.

Selective acquisitions are also an area of focus for potential investment. And during the quarter we expanded DeVry Brasil with a purchase of Faculdade do Vale do Ipojuca, or FAVIP, which is a little easier to say. This acquisition further builds our platform in the world's seventh-largest economy. Including this most recent acquisition, we now have over 26,000 students in nine campuses across Northeast Brazil.

I'm pleased to report that the integration process is going very well. We have a strong integration playbook, which includes sharing best practices to improve student services. One advantage of this FAVIP acquisition is that the campus is located only about 80 miles from our campuses in the city of Recife. This allows us to share some faculty and resources, and to realize the full potential of this platform that we've built at DeVry Brasil.

We've realized much of our growth from this sharing of best practices and leveraging of resources. So, assuming that we make our plan this year, we expect revenues at DeVry Brasil to reach $80 million to $90 million. So, Brazil is obviously becoming an increasingly significant part of our future growth.

And before I turn it over, I'd like to acknowledge the upcoming retirement of Julie McGee, a member of DeVry's Board of Directors since 1994. We're very grateful for Julie's many years of service to DeVry, and we wish her well as she continues to work on improving educational opportunities for our nation's young people -- something she's very passionate about.

To fill this new vacancy on the Board, we're pleased to announce that Dr. Alan Merten has agreed to be nominated at our upcoming annual meeting next month. For the past 16 years, Dr. Merten has served as the President of George Mason University. Before that, he served as Dean to both the Johnson Graduate School of Management at Cornell, and the College of Business Administration at the University of Florida. So, obviously we're very excited to welcome Dr. Merten, with his tremendous academic and business experience, to DeVry's Board.

Now, also, at the Chamberlain College of Nursing Board of Trustees, we recently appointed Dr. Joanne Disch to serve as chair. As the current president of the American Academy of Nursing, and a clinical professor at the University of Minnesota, Dr. Disch brings a great deal of experience to the position. And she'll help the Board of Trustees oversee academic and operational policies at Chamberlain College of Nursing.

So with that overview, let me turn it over to Tim for discussion of the financial results. Tim?

Thanks, Daniel. Good afternoon, everyone. Our first-quarter results reflect the continued progress of aligning our cost structure, as well as improvements toward regaining enrollment growth. You're probably wondering why cost came in lower than expected. As we came out of the fourth quarter, we approached our first-quarter spending with an abundance of caution. We really clamped down.

You can see that reflected in the $27 million sequential reduction in costs and expenses. Let me provide you with some additional color. First, during the quarter, we overachieved on our anticipated targets from our operational excellence initiatives. This contributed about $2 million in additional savings in the quarter. These additional savings will continue going forward, and are one of the key reasons we are increasing our savings target to $60 million for the full year. We're continuing to focus on future savings opportunities as well.

Second, we generated about $6 million of savings from tight controls on open positions, reduced travel, and other expenses during the quarter. And finally, we're generating another $5 million in savings from deferring first-quarter spending until later this year. Advertising expense is one example.

Let's now focus on first-quarter results. Total revenues of $483 million were down 7% versus the prior year. For the institutions that are in transition -- DeVry University, Carrington and Advanced Academics -- revenues of $326 million were down 15% versus the prior year. This was partially offset by our growing institutions, which saw revenues increase 16%, to $157 million. That was fueled in part by acquisitions of AUC, Falcon, FBV, and FAVIP, as well as expansion at Chamberlain.

Total operating costs and expenses of $437 million declined about $27 million sequentially, and about 0.5% compared to last year. Costs at our institutions in transition were down a little more than 7%, or $24 million versus the year-ago quarter, as a result of our cost reduction initiatives. Costs at our growing institutions increased 18%, and that's consistent with our expectations, and to fuel growth at Chamberlain and DeVry Brasil.

Cost of educational services increased about 1.8% during the quarter. Costs were down at our institutions in transition by 6% year over year. This was offset by a 24% increase in costs at our growing institutions, driven by our recent acquisitions and expansion at Chamberlain. As you can see, the majority of these increases were offset by our cost reduction initiatives, primarily within DeVry University and Carrington Colleges.

Student services and administrative expense declined 3.2% compared with the prior year. Costs at our institutions in transition were down 8.3%, largely reflecting our cost reduction initiatives. Costs at our growing institutions increased 9.4%, which was more than offset by our cost reductions. As a result, net income was $32 million for the quarter, down 44% versus the prior year. Earnings per share of $0.49 for the quarter were down 41%, versus $0.83 last year.

Our effective income tax rate was 29.1% for the first quarter of fiscal 2013, as compared to 28.1% for the full year of fiscal 2012. We expect that our effective income tax rate from operations for fiscal year 2013 will be relatively consistent with the first quarter, in the 29% range.

With that overview, let's shift to our operating segment results, which are further detailed in our release. Starting with the business technology and management segment, revenue was down 15.7% versus prior year, driven by the decline in total undergraduate and graduate enrollments. Enrollments continued to be impacted by weak economic conditions, and the resulting hesitation on the part of some students to enroll in college.

During the quarter, we elected to grant additional scholarships because of the current enrollment environment conditions. We now expect scholarships awarded for fiscal 2013 to be in the low $50 million range, up from the mid-40s range we indicated last quarter.

Total segment expenses for the first quarter of fiscal 2013 decreased 6.2% as compared to the year-ago period, and were down 8.1% on a sequential basis, demonstrating our continued progress on cost reduction initiatives. Segment earnings were $25.6 million in the quarter, down 58% versus last year, driven by the revenue decline and the resulting margin compression. We've been focusing on reducing costs without compromising academics.

Within the medical and healthcare segment, revenue was up 7.4%. Chamberlain College of Nursing delivered strong results, fueled by the double-digit total enrollment growth reported in the July and September sessions. The growth is being driven by four new locations added over the past year and a half in Miramar, Houston, Atlanta and Indianapolis, combined with increased enrollment in our existing locations and online.

At DeVry Medical International, September-term new student enrollment grew as expected, up 8.4% versus the prior year. At Carrington, the operating loss narrowed sequentially from the fourth quarter, reflecting the continued progress from our turnaround efforts. Earnings for the medical and healthcare segment in the quarter were up 8.1% versus the prior year.

Finally, revenue with the international, K-12, and professional education increased 17% in the quarter. Revenue growth from the quarter benefited from the acquisitions of FBV in February 2012 and FAVIP in September 2012. Revenue also grew at Becker, driven by the acquisition of Falcon Physician Reviews in April 2012.

Advanced Academics experienced a revenue decline, but narrowed its operating loss sequentially. The segment operating loss narrowed significantly during the quarter versus prior year, driven by increased operating leverage within DeVry Brasil and Becker, along with lower marketing costs at Advanced Academics. Also, let me remind you that the first quarter represents a seasonal low point for tuition revenue at DeVry Brasil, Advanced Academics, and Becker.

Turning to the outlook for the second quarter, we expect operating expenses at our transition institutions to be down year-over-year and sequentially, while costs at our growing institutions will obviously increase to support their growth. Total costs for the second quarter are expected to be up slightly from the first quarter, driven in part by costs associated with recent acquisitions and marginal seasonal enrollment of the September session.

As we've discussed previously, total costs for the year will increase. This is driven by cost increases at our growing institutions, and from newly acquired ones that weren't in our cost structure last year. We will continue to execute on our performance improvement plan to generate the $60 million in operating savings at our institutions in transition that we've committed to for the full year.

We anticipate that Carrington will experience positive new student enrollment in the second quarter compared with the prior year, while enrollments at DeVry University will decline from the year-ago session. We will continue to execute on our performance improvement plan as we continue our transition year.

I'll now turn the call over to Pat to talk more about our balance sheet and financial position. Pat?

Thank you, Tim, and good afternoon, everyone. Our financial position continues to remain solid. Cash flow from operations for the first quarter was $164 million versus $187 million last year, reflecting our lower earnings. The cash and marketable securities balance was just over $250 million at the end of the quarter, compared to $325 million last year. And we continue to remain debt-free.

Our cash and marketable securities balance is lower than last year, reflecting investments of $179 million for the acquisitions of FBV, Falcon Physician Reviews, and FAVIP; and for capital expenditures to expand and enhance our existing institutions.

Our net accounts receivable balance was about $191 million versus $151 million last year. The increase was due in part to recent acquisitions, as well as a change in the timing of the receipt of financial aid because of our move to the new student-centric schedule at DeVry University and Chamberlain.

This year, we made an adjustment to our tuition pricing structure to align with our eight-week session versus a 16-week semester. Our tiered pricing structure is now available to students on an eight-week session basis, versus the 16-week semester basis previously offered.

In the past, we offered a reduced credit hour rate to students for every hour they took over 11 hours during a semester. Given the shift to session scheduling, we've now altered that to begin for every hour they take over six hours during a session. So this allows students to start with any session, and receive the benefit of full financial aid. And now our students also have more flexibility with their scheduling.

In this quarter, we did see some students taking advantage of the new pricing structure and taking higher course loads, which is certainly encouraging. However, in addition to increasing our accounts receivable, it also had a minor impact on our revenue per student.

Moving on, our bad debt rates continue to reflect the focus on the receivable collection process, with bad debt expense for the quarter down to 2.1% of revenue, as compared to 2.3% last year. This is certainly an indicator of our students paying back their accounts, even during these tough economic times, and the strong value proposition of our programs.

I believe this level of bad debt is about the best of any of the other private-sector, post-secondary education providers.

Capital spending for the quarter was about $28 million, versus $34 million spent last year. And we expect total capital spending for the full fiscal year to be around $150 million.

Finally, during the quarter, we repurchased more than 1.1 million shares of our common stock for about $25.7 million, or on average $22.74 per share.

Now with that, let me turn the call back over to Daniel.

Okay, thanks, Pat. In the current environment, many potential students are increasingly discouraged by the economy. I'm sure you saw the recent AP study that showed half of college graduates are unemployed or underemployed. And the headline in Inside Higher Ed the other day was, it's official -- higher education is shrinking for the first time in at least 15 years. Now, that's all of higher ed -- public sector, private sector and independent taken together.

Some people are questioning the value of a college education. This was the cover story of Newsweek a few weeks ago. Is college a lousy investment? And of course, not to be outdone, Time then had to put out a special report with basically the same theme.

In the current economy, with high unemployment having dragged on for four years, it's understandable. But we all know that, in the long run, of course college is worth it. If you get a chance to talk to the author of one of these stories, simply ask them, which of your children will you advise not to go to college?

Now for career-oriented education, the ROI, the return on investment; or the ROEI -- return on educational investment, I should say -- is even higher. The US Census Bureau recently released a report showing that the difference in lifetime earnings between a high school graduate and a college graduate is $1 million. And the difference is even greater for graduates in fields like engineering, computer science and business. And of course accountants and nurses, doctors, and ancillary care professionals will have enormous employment opportunities in the coming years.

DeVry's programs across all our institutions are focused on these types of high-ROI programs -- or high-ROEI programs. And this is why DeVry is so confident about the future. The new DeVry University employment statistic we announced today shows that 86% of DeVry University graduates who are active in the job market; were employed in their field of study within six months of graduation. Average salary -- $42,623. Now, that's remarkable in this economy. It demonstrates the quality of our academic offerings, and the return on investment for our students.

And we're actively enhancing our differentiated, career-oriented value proposition. For example, we're expanding our partnership with CareerBuilder. This provides Keller graduates with career services, including access to a personal career coach. Now, as the economy recovers, we believe we could see a release of the pent-up demand from people who are choosing to wait -- putting off pursuing a degree until they feel the economy improves. When that time comes, DeVry's family of institutions is well-positioned to help those students achieve their goals.

Before opening up for everybody's questions, I'd like to highlight just two other accomplishments of the quarter. We are very proud to say that the DeVry University Advantage Academy was ranked in the top 10 in Chicago Magazine's annual list of top high schools in Chicago. During the ranking period, Advantage Academy had a graduation rate of 100%.

And the other highlight is the success that we had during the Olympics this quarter, as an official education provider to the US Olympic Committee. Not only are we helping our student athletes achieve their goals, but DeVry's reputation benefited by being aligned with the USOC and these athletes.

In fact, as one data point, the lift that DeVry's brand awareness received in social media was on par with Olympic partners such as McDonald's and Coca-Cola. We're now honored to support more than 60 student athletes currently studying at DeVry University, one of whom is swimmer Peter Vanderkaay, who won bronze at the Games and is now well on the path towards achieving his graduate certificate in entrepreneurship from Keller.

So to wrap up, we ended the first quarter pleased with the progress that we've made on our performance improvement plan -- progress in cost alignment; progress in enrollment; progress in growth investment. We know there's much more work to be done. But we're focused on making fiscal 2013 a successful transition year, and setting the stage for a return to overall enrollment growth and increased operating leverage in 2014 and beyond.

And now, we'd be very happy to take your questions.

Okay, with that, I'm going to ask Emily to give our participants the instructions for the Q&A portion of the call.

(Operator Instructions). Jeff Volshteyn, JPMorgan.

Yes, thank you. When you look at the average cost per credit, now that students will get some discounts after six credits, how should we think about revenue per student? I understand the tuition -- the average cost is going to come down. It will improve retention. Help us go through the dynamic.

Sure. It's Tim, and thanks for your question. The first thing I think you need to point out is that, this is fundamentally the same tiered pricing structure we had before. We're just converting it from a 16-week period to an 8. Now, we did see in the quarter some students take advantage of that. And we saw some increase from those students to take advantage of that pricing advantage.

When we talked to you last quarter, we talked about expecting about a 1% net improvement in our pricing, based on the price increase that we had announced. And we actually saw average revenue per student go down about 1.5%. So here's what the components were. About 0.5% was from students taking advantage of this new tiered pricing structure. About 1 point came from mix shift, where we saw movement toward corporate and military channels, where tuitions are lower; and about a percentage from additional scholarships that we referred to earlier.

Some of the pricing is sticking. But we're seeing some other moving pieces here. And we think this probably lower revenue per student is probably the new normal, at least in the near-term.

Okay, thank you. When we look at the capacity, the physical capacity, in campuses, do we still have -- some time ago, you used to talk about big-box campuses. Are those pretty much rationalized, or there's still capacity there?

Sure, Jeff. There is some opportunity there, and we're taking a look at that, as we always do. And also, some of our -- if you will, back office facilities -- in the announcement that we made here today was, if you will, a service center. It's not a campus. But the savings to our cost structure is something we're going to take advantage of nonetheless.

Okay. Thank you.

James Samford, Citigroup.

Thank you, and congrats on a great quarter.

Thank you.

I wanted to focus a little bit on the medical and healthcare side. It looks like -- obviously, operating margins came in, I think, positive year-over-year for the first time in, I don't know, at least three years here. I'm just wondering, how much is that a function of mix, cost cutting, versus -- or slowing down of investments that are lapping some of the investments you are making in Chamberlain, for example, in the prior years?

Good question. This is Pat. Part of the margin improvement was driven specifically within DeVry Medical International, where in this quarter we'll have three full months of the results of AUC; whereas, last year, we had just two months. And from an overall mix within that segment, DeVry Medical International has a higher OI than its peers.

And then we did -- Chamberlain was relatively flat. And we did see, again, what we already said, new students up at Carrington is also helping drive some improvement in the profitabilities in that segment.

And how should I think about -- so, it sounds like there was a little bit of a one-time benefit from AUC. And so we may get back into negatives, just given mix shift back in the other direction, going forward. Is that fair?

Well, moving into the second quarter, again we'll see some seasonality. So we'll see an increase in the enrollment site, DeVry Medical International, just with a larger September enrollment class. But we do see some softer revenues at Carrington, just from a seasonality perspective, in that we offer fewer classes during the month of December. So from a sequential perspective, the operating margin for that group could likely be a little bit off, and then pick back up for the balance of the year.

We do expect -- it's Tim -- we do expect to see revenues up in each of our three segments sequentially.

Okay, that's helpful. And then one quick question on advertising. What was the advertising spend this quarter, and how much is shifting into Q2?

Sure. The advertising expense for this quarter was $68 million, versus $70.8 million in the fourth quarter; and we expect, say, $3 million to $4 million will shift into Q2.

Thank you.

Sara Gubins, Bank of America Merrill Lynch.

Hi, thanks, good afternoon. I'm hoping that you could talk about how you determine the effectiveness or the decision to increase scholarships? And what I'm really wondering is a why not ramp scholarships more to drive enrollment?

Sure. Sara, we are certainly taking a look at that. We're running a couple of tests right now at DeVry University to do just that, to help new students to achieve their goals. We like to test before we roll it out. We feel it's very important to do a test before rolling out system-wide. It takes a little longer; but DeVry manages for the long-term, so that is underway.

The other thing to keep in mind is scholarships are certainly quite different institution by institution. so really not -- very little of that activity, for example, at the DeVry Medical International schools or that kind of thing, as opposed to what I'm referring to in that test, which is DeVry University.

Okay, great. And then, you saw a nice improvement for undergrad, DeVry University, in terms of the declines in new student starts. Based on what you're seeing, do you think you've seen the worst of it, and that we should see those declines narrow going forward?

You know, that is certainly what we're looking for. That's what hoping for. I think it's a little too early to call the turn on that. And we continue to be cautious. I'm not going to get too excited about July and September. We're a little bit ahead of our plan, but we are not as clear here on the upcoming fall.

I think we're going to probably see, net-net, about the same range. So I'd like to see that decline narrow a little bit more; but not quite seen that yet. Still looking for that in the second half of the year; but near-term, probably about the same as what we're seeing right now.

Okay, thanks a lot.

Paul Ginocchio, Deutsche Securities.

Thanks. Maybe just a follow-up to that last one. As you look through applications and conversion rates and show rates, is there -- and I guess the channel mix, because as you move away from high school that should show some -- I guess that would -- I think that's your worst channel. So I would've thought as you move away from higher exposure to high school, your new enrollment -- your enrollment trends would become -- see less declines.

Can you just talk about what's changing in the various channels on each of those three underlying ones? Then a second follow-up on the last question also, do you think there's pretty good elasticity of demand around price? And is that -- from what you've seen so far. Thanks.

Sure. Elasticity of demand, we've generally been -- historically, higher education is relatively inelastic, in the sense that changes in price don't really affect demand very much. I think we're in a period of discontinuity in that long-term dynamic. And it's very difficult to say if that will carry as the economy improves -- let's all hope that it will, and let's expect that it will -- will that go back to the way it was? Or have we permanently reset that? That's difficult for anybody to forecast.

For the near-term, we are anticipating that tuition will go up in some of our institutions, but stay the same, at some other institutions and programs it may stay flat. In terms of inquiries and applications and conversions and the things you're asking about, I would say overall, at DeVry University, inquiries remain soft. The good news, though, is that higher-quality inquiries are up, and that's important.

Conversion rates are up, and that's important. And then third, I would say, whereas at the start of the downturn, everything was down -- every metro, every channel, every -- everything was just down. Now there's a lot more variability. Many of our metros are up -- up on conversion, up on new students in absolute terms. And so, while we're down overall, obviously, it is encouraging as a manager when you start to see these signs of improvement. So we don't think that it's just a continued, long-term decline forever.

We see that we are going to be able to turn this around. And I think that Carrington's turnaround is very encouraging. Traditionally, historically, the two-year market has been a leading indicator of the four-year. So we would like to think that will happen again here.

Thanks, Daniel.

Gary Bisbee, Barclays.

Hi, guys. Good afternoon. And congratulations on a lot better-turning quarter.

Thanks, Gary.

I guess two questions for me. The first one, could you -- I think you gave some color around Carrington. But I missed the -- in terms of the number of start periods, and specifically what impact that had on this really strong-looking new student number. Could you review that again, and just maybe a little more color on exactly how you have turned the corner there? What led to the better performance? Whether it was marketing, whether it -- what are the factors there? Thank you.

Sure, sure, absolutely, Gary. At Carrington, just to review the numbers you're asking for -- and this is a change to our academic calendar that we've anticipated and been working on for some time. It has a number of student academic benefits. But one of the results of it is, it does create a little quirkiness or choppiness in the economic calendar with different starts -- numbers of starts in each quarter.

So the first quarter of fiscal 2013, or September quarter that we just wrapped up, had six start dates. Second quarter will have three; the third quarter will have five; and the fourth quarter will have four. As the years go on, just because of the nature of academics and the way they set calendars, there will always be a little bit of variation, just the way holidays fall and things like that.

I don't think that's the driver of why we are up at Carrington, that -- oh, we had more start dates. The driver is execution on the turnaround plan. So it has been much better execution in the marketing function, for one. We've done a -- what we call the relaunch of the Carrington brand. We did a good job changing the brand. But it happened to happen at the perfect storm. It happened at the very time of all of the discontinuity and tumult -- I'll use the new buzzword of tumult -- in the career college segment.

I think that we lost some mind share with prospective students. And we just said, let's just do a fresh start and a relaunch on the brand campaign. So I think that had an impact. Inquiries are up; high quality, better-converting inquiries are up, as well. And then, better execution on the recruiting side -- we've implemented a qualification center, as we call it, a contact center. And that team is doing a very, very good job.

And just overall, Carrington is executing much better in executing its plan. That is what is we're seeing. And then I was just alluding to some color -- we don't think you'll see double-digit, 33%. Next quarter, it will be more like single-digit. And part of that is due to these start dates going forward. But we do see another quarter of positive. Not choppy to the extent of positive and negative, just varying rates of positive.

Okay. And then just one quick follow-up, where there other costs in the marketing you talked about earlier that were deferred? Or was much more of the improvement versus last quarter that you actually -- the line about taking costs out?

It was mostly costs out, but there was a little bit of timing shift.

Yes, the significant majority was taking costs out, vis-a-vis our operational excellence initiative; as well as what Tim said, we really clamped down on a lot of other spending. In terms of the overall deferral, about $5 million in total; the majority of that is advertising, and there were some other deferred projects that we shifted for the balance of the year.

Okay, thank you.

Peter Appert, Piper Jaffray.

Thanks. Tim or Pat, I was hoping you could maybe give us a little help in terms of thinking about the seasonality and profitability this year. I think the normal pattern has been that your margins are a fair amount higher in the second and third quarters than they are in the first and the fourth. Is that the pattern this year? And I'm asking this in the context of some of the timing issues around cost. And any thoughts in terms of, sequentially, could we see the same level of margin improvement we've seen in past years?

So, from the overall seasonality, yes, we expect that that seasonal pattern will hold true for fiscal 2013, with some improvement in our margins as we move here into the second and third quarter; and then stepping down a little bit in the fourth quarter as students start to graduate and matriculate from the university.

Just a way to think about maybe expenses, as we look from Q1 to Q2, we have these additional operational excellence savings we talked about earlier, kind of in the $2 million range. And probably $4 million to $5 million of these costs that got deferred will flip back into the second quarter. And then we have about $2 million of additional costs from FAVIP. So, a net $4 million to $5 million increase, and that should get you in the right ballpark, plus or minus a couple million, just given the size of spend. But hopefully that helps you think about the sequence.

That's great, thank you. And then, Daniel, just one unrelated question. Much discussion in the industry about pricing dynamics and pricing pressure, et cetera -- I'm just wondering how you're thinking, conceptually, over the next several years about pricing dynamic for DeVry? Do you think there is room for modest tuition price increases going forward?

Yes, Peter, I do. I think that pricing is a function of the value that's provided to the student or to any customer in any industry, I suppose, you could think of it that way. The other factor that comes into play is the competitive set. We're still seeing tuition increases at the largest group of competitors, that most of our universities face, which are the public sector colleges and universities.

Now, this last year, it just came out, I think you probably just saw the other day, that the lowest rate of tuition increase in years, in recent memory, from the public sector colleges and universities -- I think it was 4.2%, 4.4%, something like that, down from 8.4% increase the prior year. This came from the College Board. And everyone was acknowledging -- boy, what a low rate of increase at 4%-plus.

So there is, I think, going to be -- now, it varies by institution and it varies by program. So we do have some programs where this year we didn't take any price increase or tuition increase, and we kept it flat. And then others increased. And I anticipate that kind of dynamic for the near future, the next few years. There will be some programs that might not go up but others that will.

Thank you.

Kelly Flynn, Credit Suisse.

Thanks. Sorry to waste a question on this, but I just want to go back to the comments you made on -- I think it was the last question, Tim, how about expenses sequentially in the second quarter. If you net out all the things you said, you're saying, sequentially, you think the expenses will be up $4 million to $5 million? Is that what I heard?

That's correct. Plus or minus a couple million for -- it just depends on what happens.

Okay, got it. That's very helpful. And then, also, I know we talked about discounting revenue per student, but can you give a bit more help on how to think about annual revenue per student change at DeVry University for fiscal 2013, in light of some of the factors you're talking about?

Sure. Let me walk you through that again. We did have a tuition increase at DeVry University undergrad, and we didn't expect all that to stick. The tuition increase was around 2%. We expected about half of that to stick, counting some of these moving pieces. As I mentioned earlier, it actually declined -- instead of going up 1%, it went down 1.5%. Three factors -- one, we did see about 0.5% -- and so think about this, Kelly, in the sense of the total revenues for the quarter for the business technology and management segment. A percent is a couple million dollars.

We did see students taking advantage of this new tiered pricing structure, which means that they were able to, and did take, more classes so some more of them got into the lower rate. We think that's good for students and persistence. The second factor is, we did see a mix shift, about 1 point, toward corporate and military channels; the tuitions are lower. And then we saw about 1 point from additional scholarships that we talked about earlier. So instead of being up a percentage, it was down 1.5% -- those three factors.

And we think, based on our visibility, we think that is kind of the new normal in the near-term. That's about as good a picture as we have at the moment. Of course, we're paying a lot of attention to scholarships. We talked about that earlier on the call. So we're working all the levers here, but that's a way to think about revenue per student.

Okay. Both really helpful, thank you.

Donnie Greendale, First Analysis.

I haven't heard that one before.

Hello, Donnie. I think it's Corey. But, go ahead, Corey.

I think I've joined New Kids on the Block or something. All right. I had a few questions. So first of all, Daniel, congratulations on the quarter. And I'm picking up more of a positive tone, and understandably so. You're somewhat bucking the trend in that sense. And I was hoping -- could you just put in context how you're thinking about the business generally?

Would you say it's still quite choppy visibility? Not great, this happened -- you put some -- a couple good points on the board here. But this isn't necessarily an inexorable step on the pathway up. Or do you think you really have started to turn a corner here?

Well, I think when it comes to -- it's two stories, really. One is the Carrington story, with that solid up, and then DeVry University, with a narrowing decline -- but, unfortunately, still a decline. We shouldn't take too much credit or anything here.

I think with Carrington, it's really not clear that we can call the turn on the career college market -- when people say you call the turn, to me that means calling the turn on the market. And I don't think we can say that. We don't have data to support that.

I think it's more of Carrington claiming its rightful share in that down-market, relative to prior periods where we weren't. And we were not executing as well. And we put a turnaround plan in place. And we walked through all the points of that previously, so I won't belabor that. But we're clearly executing on that. So I think it's Carrington stepping up and taking its share.

With DeVry University, we've had some sessions a little bit better than we planned. I think here as we move into the fall, we hope to narrow the decline a little bit more. And I think we're a little behind that initial plan that we set. Probably about the same as where we are; and we are bound and determined to lift that up in the second half.

I think we have a number of factors that give us reason for setting that plan, because some of the things that are holding us back a little bit are still continued adjustments to some of the changes that were put in place in the recruiting function. We did go through a pretty painful reduction in our staffing levels here. It was the right thing to do; we had to do that; we needed to do that; we did it. But that does have a distracting impact. And I think in the near-term, that's actually taken away.

So even though we've narrowed the rate of decline, maybe it would have been even more narrowed if we hadn't gone through that period of distraction. But we don't expect to see a lot more of that, so we think that will help us improve as we move more into the second half.

And then there's a number of innovations, technology improvements. I mentioned the portal for helping new students do more self-service. There's a whole raft of projects lined up there, Corey, that we're excited about. So it's really -- it's management. We're managing. We're controlling the things that we can control. And we think that by doing that, even in this somewhat down market -- for all of higher ed, public sector, private sector, independent -- we can control our destiny and narrow these rates of decline, and then get it to flat and then start to grow again.

That's really helpful. And then just one quick one on the cost side. And, Tim, you were really helpful with describing how much of the costs were deferred versus taken out. When you look at the $60 million for the full year now, how much is that just an acceleration of getting some costs earlier than you expected? And how much is it that, by the end of the year, the full run rate is now higher than you would've thought? What -- at the end of the year, what would you expect the annualized number to be?

Yes, good question, Corey. The $2 million is above and beyond, so when you think about that $2 million a quarter going forward, we think -- initially, our prior thought, we'd exit the year at about a $60 million run rate. We now think we exit the year at a $70 million run rate, give or take.

That helps. Thank you very much.

Paul Condra, BMO.

Great, thanks. I just wanted to return to the Carrington start dates really quick. I know that -- not to split hairs here, but when you talked about six start dates in this first quarter, did that compare to six start dates, then, in the first quarter of 2012? And are there always going to be the same amount in each quarter?

No, because we haven't fully anniversaried the new calendar for both of the educational institutions. And also when we say six start dates for the first quarter, I want to keep in mind when we speak to Carrington, we talk about a Carrington Colleges Group; but there's two specific colleges -- Carrington College and Carrington Colleges California. So those -- each institution had three each in the first quarter. And there is a little bit of shifting, based on holidays, et cetera, which is why you see a dip in the second quarter going into the third.

Okay. So maybe just each year, you update us on what those start dates are going to look like for the ensuing or upcoming year, that kind of thing?

Sure, sure. We can do that.

Okay, all right. That's great. And then also just on the scholarships, is that all in the -- for the DeVry University, or what is the scholarships -- like, in the medical healthcare or other schools?

So, the scholarships range that we provided fourth quarter -- and we have given a little more guidance here -- speaks to the DeVry Inc. enterprise institution.

Okay.

But the largest within that, by a large, large measure, is DeVry University.

Got you. So, for example, at Carrington, there are some scholarships available -- or at Chamberlain?

Yes.

It is? Okay. And then what are some of the programs in Carrington, too? You had such a strong start growth there, so maybe just a little bit about what programs students are really focusing in on? And that's it. Thanks a lot.

Sure. Mainly allied health ancillary care programs -- so nursing, medical assisting, surgical tech, respiratory care, therapy, physical therapy assistant. We also have a wonderful vet tech program. And it's nice that we have a Doctor of Veterinary Medicine program at Ross University School of Veterinary Medicine. We have got a vet tech program at Carrington.

There are non-healthcare programs as well; in business, and in tech, and programming. But the bulk of it here was led by the healthcare programs.

Emily?

Jeff Meuler, Baird & Co.

Thank you, and congrats on the quarter. Could you guys just talk a little bit more about what drove the acceleration and starts at Chamberlain and how much of it was openings? Especially Atlanta, since you said that was the largest location for you guys.

Absolutely. Chamberlain is just doing so well, and serving its students so well. And the outcomes are phenomenal. And it's really leading to a very strong reputation. It's amazing. Even though Chamberlain is over 120 years old -- it's closing in on 125 -- the name, Chamberlain, is only maybe five-ish years old, because it was Deaconess College of Nursing before that. So in just those few years, we've really built the Chamberlain name and reputation and brand, if you will. And I think that's helping a lot.

The other thing I would say is healthcare development specialists -- this is something that we've initiated over the last couple of years, but really getting traction this year. These are folks who are professionals who work for Chamberlain College of Nursing, and go out to hospitals and educate the Chief Nursing Officer and their staff on the educational opportunities at Chamberlain; in our RN to BSN program, so those nurses who maybe have an RN but don't have a bachelor's, a BSN; and also our programs in the master's degree area, the MSN, Master's of Science in Nursing. And then soon, pending approvals, the doctoral-level programs that we'll have at Chamberlain. So that initiative has helped a lot. So, overall, the conversion rates are up quite nicely at Chamberlain. And we are looking forward to more growth there.

Okay. And then at DeVry Brasil, in terms of the 2% starts growth, is that an organic number? And if there was slowing, can you just talk what drove it? If it's a capacity issue, like you've had in the Caribbean med schools at times -- or what else would be driving that?

A couple of thoughts there and Pat may want to get in on this too. There is a little bit of capacity constraint there in some programs. Some of the programs have caps on them from the Ministry of Education there in Brazil. And those caps can and do go up, periodically. And you have to apply for that; and it's a process you work your way through.

We are turning people away, particularly in engineering programs right now. There's a huge demand for engineering, with all the infrastructure growth in Brazil. Those are some of the programs where -- and so, when we're in those positions, we certainly use those opportunities to be more selective; and improve, if you will, the quality of the class. Any other color that you would add on that, Pat?

Just a little bit more color there, just to keep in mind -- in Brazil, the start of the September session, or the session that is kind of their off-cycle, compared to the United States; so the typical big enrollment period for them is in January.

Okay. Thanks, guys. And congrats again.

Thank you.

Brandon Dobell, William Blair.

Thanks. A couple of quick ones on DVU. Should we expect any new capacity additions this year, or maybe looking out at the next couple of years? Or is it more just about filling in what you have, given the population dynamics?

Sure, Brandon. And it's funny how you always seem to be towards the end of the call.

You know, I just -- yeah.

You're the anchor. Look at the bright side -- you're like the anchor guy.

Yeah, I'm just weighing it down, apparently.

Everyone's waiting around to hear what Brandon has to add.

Right. Right. I highly doubt that, but appreciate it.

Okay. Look, we see a number of markets, actually quite a hefty percentage on the base, long-term, that we think is the opportunity for DeVry University to continue to grow. So in other words, we don't think DeVry University is saturated in the United States. We think there's a good percentage yet to go to achieve full potential. It's just that in this current environment, we feel it's more prudent to pull back a little bit and consolidate where we are, just given the current near-term performance.

But that's not a reflection on our analysis. And we've recently had that looked at from a third party, as well, to give us -- what's your view of our full potential, geographic opportunity. So, yes, there is one new campus for DeVry University slated for this year; so, just one. In past years, we were more in the 4 to 5, maybe 4 to 6 range per year; nice, steady. We don't feel like we overbuilt the footprint.

We wouldn't expect a massive retrenchment, if that's part of the question, just in case. But we are looking at opportunities to be -- do real estate optimization, if we can.

And, Brandon, it's Tim. Be sure to get by our expansion on our Chicago campus. We have a beautiful new building under construction there, that will support both DeVry University and Chamberlain.

I'll wait till it starts snowing here, which is probably like three days from now, and that I'll go check it out. Persistence within DVU, maybe with and without the impact of graduations, as obviously, as we see it externally. When would you guys expect to see a tailwind to start from a persistence point of view? Or, I guess alternatively, the negative headwind from graduations being higher than previous years to fade away?

Sure. We're a little bit soft on persistence in this time period. And that's following off of historical peak. So we had invested a lot in student services -- our student central initiative, and so forth -- and in many other academic initiatives to help improve persistence. And now we're taking a little bit of a pause here. But long-term, we do have plans and expect that to go back up.

I would say that right now the economy impacts persistence, as it also does new student enrollments a little bit. That's probably the biggest driver. And I think that's the color I can give on persistence right now.

And in a similar fashion, at Carrington, given the nice recovery in starts there, it may be too early to tell what the persistence of those students that are -- that turned the corner, but any actual evidence of how those students are sticking around yet?

Yes. Persistence is a little bit up at Carrington. We're pleased with that. And, remember, much shorter programs typically -- nine or 10 month certificate or a two-year associate degree. But, yes, up a little bit.

Okay, great. Thanks, I appreciate you sticking around for me.

I think we have time for one more question.

Trace Urdan, Wells Fargo securities.

(multiple speakers) the honorary Brandon Dobell spot. Daniel, I wonder if you could talk about -- during the period of pressure in the undergraduate enrollment, and now that it seems to be perking up a bit, has there been any variability between demand for the tech programs versus the business programs there? And then, specifically, maybe if you could comment on that -- whether there is any difference with the traditional 18- to 22-year-old students versus the working adult students.

Sure. Yes, this period -- I'll give you the data point that I have. But I would caution not to get too excited about it, because it's just one data point, the September session. And these things do move around a little bit, so I cannot claim that it's a trend or say that it's a trend. But we did see a little bit better performance -- and this is within -- it is a negative new student result, even though that negative narrowed, it is negative. I was just raised -- there's no such thing as good when it's negative. I just have a hard time --

We'll take less bad these days. Less bad is good.

Yes, I know. Less bad is good but -- I don't know, my upbringing doesn't let me go there. But the tech programs were less bad than the business programs at DeVry University undergraduate. So they were a little bit better. So that's engineering, technology, computer science. And also, we do have healthcare technology programs at DeVry University. A couple of those programs are little more -- are new, newer, and so they are actually growing. So those are our positive numbers. And so that's doing a little bit better than the business, as well.

In terms of the traditional college-age student, 18- to 22-year-old coming straight out of high school, we've been a little bit disappointed there over the last year. Yes, that disappointment continues.

One piece of color on that is to remember that here this fall we're still feeling the effect of the changes that we put in place in our recruiting process a year ago. Because we were out in the high schools back last August, last September and so forth; and then you're working with those students throughout the school year. And then some of those are coming here even now into the fall. So, hopefully, this forms the low point of that trend, and then we can go from there.

Very good. All right, I'll let you go. Thank you very much.

Okay. Well, with that, I'd like to thank everyone for your questions and remind us that our next quarterly results call is scheduled for February 6, when we announce second-quarter fiscal 2013 results.

So thank you all for your continued support of DeVry, and we'll talk to you soon. Thanks.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Have a good day.