Adtalem Global Education Inc (ATGE) 2014 Q1 法說會逐字稿

Good day and welcome to the DeVry Education Group First Quarter Fiscal 2014 Conference Call and Webcast. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Ms. Joan Bates, Senior Director of Investor and Media Relations. Ms. Bates, the floor is yours, ma'am.

Thank you, Mike, and good afternoon. With me today from the DeVry Education Group leadership team 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 statement. 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 21. To access the replays, please refer to today's release for more information. With that, I'll turn the call over to Daniel.

Thank you, Joan. Thank you all very much for joining us today. Let me begin with an overview of the first quarter and segment highlights. The story for DeVry Education Group right now is that one half, DeVry University is still struggling. Our other institutions are doing well and growing. DeVry University new student enrollments were better in September than in prior sessions. The turnaround plan at DeVry University is producing early signs of improvement, but we are operating in a challenging and choppy environment in US business and technology education and we expect these conditions could continue for a while.

At the same time, we are investing in our growing institutions, particularly healthcare, professional, and international education. Our long-term formula of quality plus diversification equals growth continues to help us work through the cyclical weakness in US business and technology education. Our focus on quality drives solid student outcomes and our diversification in high growth career fields, degree levels, and geographies positions us for long-term growth. With that overview, let me touch on a few highlights within our segments and I'll begin with the Medical and Healthcare segment, where revenues and earnings grew nicely. At DeVry Medical International, new student enrollment grew 5.7%, as expected. Long-term, given market demand, we think a sustainable rate of enrollment growth in our medical schools is in the low single-digit digital range, with revenues and earnings higher than that. Let me provide some perspective in why medical education is so attractive and why it's such an important part of our diversification strategy.

First, there's a supply/demand imbalance in medical education. In 2012, there were more than 45,000 qualified applicants at US med schools. Given the limited capacity, US schools were able to accommodate less than half that demand. Second, it's projected that by 2025, the position shortage in the US alone will total more than 130,000 with more than half the shortage in primary care. Our graduates go into primary care at double the rate of the US average, so we're meeting the needs where the needs are greatest. Most importantly, our medical schools produce strong student outcomes. For example, our graduates attain high pass rates in step one of the US medical licensing exam.

At both Ross and American University of the Caribbean, the pass rate is 96%. That's on par with US medical students. Our medical schools also have very low cohort default rates; only 1.1% at both Ross and AUC. We have alumni practicing in every state, in every Canadian province, and in nearly every area of medicine. At AUC, we'll open a new academic building in January that'll feature an advanced anatomy lab and simulation center, a large integrated clinical medicine lab, a lecture hall, and individual and group study spaces. Since we acquired AUC a couple of years ago, we've invested $35 million in academic quality and campus expansion to better serve our students and to meet the demand for well-trained physicians. Moving on to Ross University School of Veterinary Medicine, we recently announced that, as part of our partnership with the Morden Research Institute in Scotland, Professor Clare Hamilton has been appointed to a research fellowship in zoonotic infection.

These are infections like rabies that can be transferred from animals to humans. Zoonotic research is a synergy that we can leverage by running both veterinary and human medical schools. Chamberlain College of Nursing delivered strong enrollment growth this quarter, as the solid demand for nurses continues. I'm proud to say that Chamberlain now serves a record 15,000 students, which makes us one of the largest nursing programs in the US. Chamberlain is distinguished by a value proposition that's centered on academic quality and on service excellence that we call Chamberlain Care. Two of our recently launched graduate degree programs are helping to support our growth -- these are the Family Nurse Practitioner and the Doctor of Nursing Practice. Increasingly, nurses are seeking post-baccalaureate degrees to improve their employment opportunities.

To accommodate the demand for qualified nurses, we're investing in Chamberlain's expansion. Mayor Rahm Emanuel recently helped us cut the ribbon on a major expansion at our Chicago campus. We hope you can come to our annual shareholder's meeting next month, so you can see it. Another expansion is underway at our Atlanta campus, which will double the capacity at that location. We've received approvals for a campus in Troy, Michigan that we expect to open in summer 2015 and we've received the initial approvals from the New Jersey Board of Nursing for a new campus there. Chamberlain exemplifies our commitment to academic quality. In September, a number of Chamberlain faculty received one of the highest honors in nursing.

Dr. Dee McGonigle, a professor in our Masters program, was inducted as a fellow in the National League of Nursing's Academy of Nursing Education. She was one of 28 distinguished nurse educators across the US selected for that honor this year. Moving on to Carrington -- we are making good progress in our tunaround plan. Total enrollment was up for the fourth consecutive quarter, new student enrollment was down because of our academic calendar. During the quarter, we had one less start than we did in the same period last year. Tim is going to provide comparable enrollment data in a moment. Let me just note that we have now driven three consecutive quarters of revenue growth and three consecutive quarters of expense reduction at Carrington.

Next, the International and Professional Education segment. DeVry Brasil's revenues were up and total student enrollment increased. New students were down in the last semester. I've asked Tim to give you some more detail on enrollments that we hope you'll find helpful. DeVry Brasil's reputation is strong and growing and we've really become an acquirer of choice in northeast Brazil. Our three most recent transactions were done on an exclusive basis, not through an auction process. We feel very good about the academic and economic value that we're able to create through acquisitions.

Becker Professional education also had a good quarter, with revenues growing about 3%. During the quarter, Becker signed an agreement with EduPristine to offer our CPA test materials to exam candidates in India's largest cities. The CPA market remains steady while the other four markets that Becker serves are good growth opportunities; namely, the US medical licensing exam, the Association of Chartered Certified Accountants, project management professionals, and continuing professional education. Let me turn now to Business, Technology, and Management segment. One of the factors impacting demand at DeVry University, as well as higher education across the US, continues to be prospective students' lack of confidence in the job market and hesitancy to make the commitment to go college. The recent government shutdown didn't help. We saw a downturn in internet searches across education and in our own inquiries within days of the shutdown announcement.

Many students worry that federal aid might be stopped and indicated that they were going to wait until the uncertainty cleared up. Put yourself in the shoes of a single mother who's thinking about enrolling in college or a government worker on a furlough or a military student. With the shutdown, you worry that federal aid might not be there. This becomes one more reason to potentially put off the decision to go to college. We believe this is a micro version of the larger macro story we've seen in the last two years. Enrollments have historically fared well during economic downturns, but the prolonged high unemployment has giving many potential students pause that they're just not sure the job's going to be there when they finish their program. To this point, the Career Advisory Board, which was established by DeVry University, recently conducted a study that said that nearly 40% of job seekers lacked confidence that the job market would improve next year.

We believe this is why we've seen even community college enrollments down two years in a row, despite their low tax subsidized price, and why we've seen reports of many traditional institutions miss their enrollment goals by 10% or 20% or even 30%. It's the not an issue isolated only to private sector institutions, but it's an issue across post-secondary education in the US. All of this leads us to think that there may be pent-up demand building to be released as the economy improves. Now our recent enrollment results at DeVry University improved in September, but we're still facing this challenging environment. In response, we've put in place a five-point turnaround plan. That's, number one, to further improve academic quality; two, align our cost structure with enrollment levels; three, regain enrollment growth; four, to make targeted investments to drive future growth; and five, to manage the change process while, at the same time, developing our team. Let me update you on our progress in some of these areas.

First, academic quality -- you may recall that, in the past few quarters, we've announced academic milestones, including reaffirmation of DeVry University's institutional accreditation from the Higher Learning Commission and earning specialized accreditation of our business programs from the Accreditation Council for Business Schools and Programs. During the first quarter, DeVry University achieved another academic success. The Accreditation Board for Engineering and Technology reaccredited DeVry University's onsite bachelors programs in biomedical technology, computer engineering technology, and electronics engineering technology. We know there have been questions about accreditation problems at some other schools. We believe that if you deliver quality for students, it will be recognized by accreditors. Second, in aligning our cost structure, we continue to manage aggressively. The entire organization is focused on increasing efficiencies.

We've reduced costs through staffing adjustments, through consolidating certain functions, and by lowering variable costs. We're still on track for at least $60 million in savings and value creation for fiscal 2014. Longer-term, we'll continue to optimize our real estate footprint. We're also working on process redesign and restructuring to both lower cost on a sustainable basis and to make them more variable, while improving service quality. As part three of the plan - regain enrollment growth. You'll recall that we're implementing a new approach to attracting students to DeVry University, including call to action events. These are integrated, university-wide events to drive more internal and external energy at certain points in the year.

The September call to action event included a new career catalyst scholarship of up to $20,000. Now, for this, we consolidated multiple smaller scholarships into a single bigger program to facilitate communications with a stronger impact and we did a better job of telling prospective students about scholarships earlier in the process. It's important to note that our improved performance in the September class was about much more than just a new scholarship. Successful elements of this broader call to action event included a clear message with a benefit to students and a sense of urgency and included enhanced media to support that message; everything from traditional media right down to changing out the literature in every rack and every campus simultaneously. It included a whole school approach where every department played a role; training over 2,000 people on the initiatives in two days and metrics to track the event on a daily and weekly basis. I hope you can see this is an integrated effort, rolled out university-wide that generated momentum and got the whole team energized and they did a great job. In point four of our turnaround plan, making targeted investments to drive growth, we're currently investing in the development of new competency-based degree programs.

These will allow students who qualify for the programs to complete their degree more quickly and at lower cost. We realize competency-based programs are a hot topic right now and what's new is a total competency-based program. But note that we've run competency-based courses for several years, so we really do have experience with this form of learning. That's an update on DeVry University's turnaround plan. We used a similar approach at Carrington, where we launched a five-point turnaround plan, put the right people in place to execute it, and the result, enrollment was up in the last 12 months, even in a difficult market. This is how we're responding and this is why we believe we can control our destiny. Lastly, before I turn it over to Tim, DeVry Education Group is gearing up for the Winter Olympics in Sochi, Russia and our role is an official education partner of Team USA.

We're educating over 120 student athletes and could potentially have as many as 14 from our institutions competing for spots in these games. One athlete, Elana Meyers, is vying for a place on the US bobsled team. She's also studying for an MBA at Keller Graduate School of Management. When asked how she possibly has time to do both, she says the answer is Keller. Keller's program gives her the flexibility and support that her schedule demands. We are excited for her and proud to help her achieve her career aspirations while she reaches for her Olympic dream. Now, I'd like to turn it over it to Tim.

Thanks, Daniel. Good afternoon, everyone. Let me start with the overall financial results. First quarter total revenues from continuing operations were $451 million. Revenue grew at all institutions with the exception of DeVry University. We also had three special items during the quarter. First, we recorded a $12 million pre-tax charge for restructuring activities related to a voluntary separation program and real estate optimization.

The voluntary separation program was offered to DeVry University and our home office colleagues. Second, we recorded $1.9 million in pre tax gain on the sale of the former DeVry University campus in Decatur, Georgia, which was part of an earlier real estate optimization. Finally, we recorded an impairment charge related to the write-down of Advanced Academics carrying value to its fair market value. In the first quarter, revenues from our institutions in transition, DeVry University and Carrington, were down about 16% versus the prior year. The revenue decline was partially offset by our growing institutions where revenues increased almost 15% to $180 million. The acquisitions of FAVIP and Facid in Brazil continue to contribute positively to these results. Excluding the restructuring charge and gain on sale of assets totaling $10 million, total operating costs from continuing operations for the quarter were $431 million; essentially flat versus last year.

During the quarter, we continued to reduce costs at our institutions in transition. Total first quarter costs, excluding special items at our institutions in transition, were $252 million, down 7% versus last year. Total first quarter costs, excluding special items at our growing institutions, increased nearly 17% to $137 million. This is driven by the investments we're making to support future growth. Costs of educational services increased by 1% during the quarter. Costs at our institutions in transition were down 8% year-over-year. This was more than offset by a 22% increase in costs at our growing institutions.

The increase was driven by the impact of the Facid acquisition and higher costs to support enrollment growth at DeVry Medical International and Chamberlain College of Nursing this quarter. Student services and administrative expense decreased 1% compared to the prior year. Costs at our institutions in transition were down 5%, largely reflecting our cost reduction initiatives to match enrollment levels. As we discussed with you on our last results call, we shifted advertising spend at DeVry University into the first quarter to support the University's call to action. So without this change, costs would have been down even more. Costs at our other institutions grew nearly 6%, largely driven by the impact from acquisitions and supporting growth within Chamberlain. We reported a net loss of $7.1 million for the quarter and a loss of $0.11 per share.

Net income from continuing operations and before special items was $14.2 million. Earnings per share from continuing operations and excluding special items was $0.22 this quarter. Our effective income tax rate from continuing operations was 17.3% for the quarter. We expect that our effective income tax rate from operations for fiscal 2014 will be in the 15% to 17% range and this reflects an increased proportion of internationally sourced earnings. With that overview, let's now shift to our operating segment results. Starting with Medical and Healthcare segment, revenues of $176 million was up 11% during the first quarter. Excluding restructuring costs at Carrington, earnings for the Medical and Healthcare segment in the quarter were $26 million, representing an increase of 4% from the prior year and reflecting investments we're making in future growth initiatives.

At Carrington, revenues grew 3.6% and total students were up 1%. Reported new student enrollment was down because we had one less session start in the quarter, five starts in fiscal 2013, and only four in fiscal 2014, and because we're in the process of teaching out several low enrollment programs. In this transition year, we expect Carrington revenues will grow in the low single-digit percentage range and we expect expenses to be down year-over-year in the mid-single-digit percentage range. If all goes as planned, that means that Carrington will exit the year with positive operating income. Turning to the International and Professional Education segment, revenue of $44 million increased 18% in the quarter. At DeVry Brasil, revenue increased nearly 36% this quarter. This was driven primarily by the recent acquisitions of FAVIP and Facid.

We continue to explore growth opportunities in Brazil, both through organic expansion into new programs and locations, as well as through acquisitions. Total students increased 11% at DeVry Brasil in September, again driven by the acquisitions of FAVIP and Facid, primarily because of temporary admissions restrictions for three programs at one of its institutions, AREA1, located in Salvador. We're working with the Ministry of Education to have these restrictions lifted and expect that to occur in the near future. Segment earnings of $1.1 million declined by $2.3 million as compared to the prior year, reflecting investments for expansion and growth. Finally, within the Business, Technology, and Management segment, revenues of $232 million were down 18% during the quarter versus prior year. New student enrollment at DeVry University for September 2013 session was up slightly compared to the prior year, with total students down 16.3%. DeVry University undergraduate revenue per student was down 3.7% in the first quarter, primarily as a result of the higher use of scholarships over the last several sessions, including the impact of the Career Catalyst Scholarship in the first quarter.

Excluding special items, total segment expenses for the first quarter decreased 8% compared to the year-ago period. As expected and excluding special items, the segment generated an operating loss of $5 million compared to $26 million of operating income last year. This was driven by lower enrollments and the planned shift of advertising and marketing spend to support the September call to action event. We expect DeVry University to return to profitability for the second quarter and for the balance of the year. Continuing our look at the second quarter, we expect all of our institutions to grow revenue except DeVry University. While total cost and expenses will be up slightly compared to prior year, we expect them to be down slightly on a sequential basis. Costs at our institutions in transition are expected to decline both year over year and sequentially.

We expect total costs at our growth institutions to increase sequentially, in line with revenue growth. I'd like to give you some additional perspective on what we expect it in terms of margin performance in our BTM segment. Among other factors, let me discuss our strategy for scholarships, enrollments, and expense management. We're focusing our scholarships on two overarching objectives -- helping prospective students start college and improving their persistence once they're here. We're becoming more strategic in the use of our scholarships and in many cases, reallocating money from one program to fund the other. Our current thinking is total scholarships for DeVry Group will be up about 30% in fiscal 2014 from the mid-$50 million to the low $70 million range; the majority of the increases to support enrollments at DeVry University while we also work to shift dollars to increase effectiveness. With higher spend and lower planned revenue in fiscal 2014, scholarships as a percent of revenue will increase, putting downward pressure on revenue per student.

Enrollment and expense management also impacts our margins. Declining enrollments have met smaller class sizes and lower utilization of our campuses and faculty. Given the fixed nature of our expenses, this has resulted in negative operating leverage. Just a few years ago, BTM margins were in the mid-20%s. Last fiscal year, BTM margins had declined to 9%. We're working to make our costs more variable, but given the nature of costs like real estate, it takes time to make the necessary adjustments. Last year, we achieved more than $100 million in savings and value creation at our institutions in transition and this year, we're on track to achieve at least $60 million of additional cost savings and value creation.

Near-term, we'll continue to experience margin compression given revenue weakness and resulting loss of operating leverage. We expect BTM margins to be in the mid-single-digit range in fiscal 2014. Longer-term, a return to modest levels of enrollment growth in a stable pricing environment should produce margins in the mid- to high teens range. I'll now turn the call over to Pat to talk more about our balance sheet and financial position. Pat?

Thanks, Tim. Good afternoon, everyone. Our liquidity and financial position continue to remain solid. Our cash flow from operations for the quarter was $140 million and our cash and marketable securities balance was $312 million at September 30, 2013, as compared to $250 million last year. Our bad debt rate continues to reflect the value proposition of our programs and our team's focus on student financial aid and the collections process. For the quarter, our bad debt expense as a percentage of revenue was just 2.1%. While this was unchanged from last year, it is one of the lowest among private sector colleges and universities.

Our net accounts receivable balance was $183 million versus $167 million last year. The higher AR balance was the result of revenue growth from our medical and healthcare institutions and from the impact of the Facid acquisition in Brazil. Capital spending for the first quarter was $22 million versus $26 million spent last year. Our capital spending was down because of our continued focus on prudent capital deployment with targeted investments in Healthcare and International. Now, we expect capital spending for the fiscal year to be within the $115 million to $125 million range. Overall, our strong financial position in cash flow generation gives the DeVry Education Group the flexibility to reinvest in quality and growth. Now, let me turn the call back over to Daniel.

Thanks, Pat. Before we open it up for your questions, I'd like to comment on our priorities for growth and diversification. Our first priority is to invest in the growth of our healthcare education offerings. The strong workforce demand in many healthcare fields, including projected shortages for doctors and nurses over the next decade, DeVry's institutions serve where the need is greatest, such as primary care physicians, nurses, and medical assistants. With strong student outcomes, including completion, employment, and exam scores, our healthcare graduates are benefiting from our commitment to high quality educational programs (inaudible) is International and Professional Education. We'll continue to leverage DeVry's capabilities in new markets around the world. In Brazil, for example, we serve 30,000 students in areas of high demand with medicine, business, engineering, and law.

Longer term, we see expansion across Latin America and in Asia. Becker is a leader in Professional Education, in 55 countries today with a great platform upon which we can add new programs and new countries. We'll continue to invest in our US Business and Technology programs with a focus on academic quality, student services, and new programs. DeVry Education Group's revenue now comprises about 50% US Business and Technology education, about 40% Healthcare education, and about 10% International and Professional education. As our Healthcare, Professional, and International offerings increase, our new name, DeVry Education Group, reflects this growing diversity.

It highlights the fact that we serve educational markets across many industries and geographies. To wrap up, our commitment to quality and our investments in diversification will drive our future growth. In fiscal 2014, we'll continue to focus on executing the turnaround plans at our institutions in transition while investing in the expansion of our Healthcare, Professional, and International institutions. Now, we're eager to hear your thoughts and questions. Joan, please turn it over.

Great. Mike, if you could please give our participants the instructions once again on how to ask a question?

(Operator Instructions Trace Urdan, Wells Fargo.

I wanted to ask about the scholarship. It seems as though it was pretty effective in this quarter. I know that this quarter has perhaps a disproportionate number of traditional high school students that are taking advantage of it. I wondered if you might speak to its relative effectiveness against the different kinds of students that come into DeVry? Meaning traditional high school students versus working adults and whether you perceived a difference between those two audiences? In particular, I'm wondering because earlier in the year you talked about having some difficulty with the high schools given that you're an evil, for-profit school and that they had been more resistant to letting you come in and talk to their students. I wondered if the positive start showing in September was a sign that maybe we're getting past some of that?

Thanks, Trace. I understand the question and I'd like to be able to be more enthusiastic about that, but I think it's a little early to say that. The analysis that we have shows that it was effective and it was effective in relatively similar proportion across the different segments of high school and working adults and for that matter, business or technology programs. It really didn't skew in any one direction or the other. It was pretty nicely effective across the board.

Just to follow up from that then, Daniel, the difference between the July start and the September start, which seems to be positive movement, do you think that represents a trend line? Is that a blip in a volatile, ever changing environment? How should we think about that?

Yes. Excellent. Thank you. I understand the question. Choppy. We expect November to be down, not like July. It's choppy like we said it would be. You had July down 20-ish, September flat, November down less, nothing like July, we don't think. I would say that we were doing better here for the November class, but in October we had this government shutdown.

Right.

Within days, we saw internet searches generally and our own inquiries in particular decline. In fact, many of you probably, online, saw Tuesday's Wall Street Journal. I didn't even realize -- I've always followed the Consumer Confidence Index. Gallup does now a daily index. To put it in perspective, at the end of May, the index was at negative 1.

It was the best reading since the financial collapse of five years ago. When the government shutdown hit October 1, the index plunged to negative 35 and troughed at the negative 43 as the shutdown persisted. This is a microcosm of this bigger macro trend is that lack of confidence. I think that we're seeing a little bit of an impact there on this November class that's forming.

Just to follow up on the follow up, did any amelioration of that since the government's gone back to work or is there a residual hangover from the lack of confidence in early October?

Mixed signals. We've seen some positive signals. I'm not from Missouri, but I'm sort of show me. There is some reason to think it did pop up again, even in days after the shutdown, sort of that relief. It is interesting how consumer confidence, particularly among the segments that we tend to serve at DeVry University, it's very sensitive to these things. We saw that back in August of '11 when we had the first debt ceiling debacle and meltdown. That's when things really started in this whole cycle. Maybe a little pickup, but we'll have to see.

Okay. Thanks for that.

Sara Gubins, Bank of America Merrill Lynch.

Could you help us think through the impact on revenue per student for undergraduate, given the scholarships? I estimate that it hit by about a little more than 2.5% this past quarter and I'm wondering if that's reasonable and if that's how we should think about it going forward or if it would have more of a negative impact?

Sara, it's Tim. Good question and certainly, an important topic. We saw our revenue per student down 3.7% from the year-ago period. But similar to the July, although there's some seasonality, but most of that came from the scholarships and interestingly, the Career Catalyst scholarship was about 20% of the impact. Now, think about that, because we use the scholarship in September, so we only had one month of the scholarship is playing into it. A lot of the impact came from scholarships that we'd been ramping up over the last several sessions, given the weakness that we're seeing.

Those scholarships -- some of them come home. They're not just a one-off. We saw this adjustment of about 3.7%. Most of it was scholarships and most of it was not from the Career Catalyst scholarship but from some of the momentum we've seen in other programs.

Thank you. I was just going to ask about Keller. We don't have start data there. But when we look at course takers, the declines have continued to accelerate there. Are you seeing anything that gives you hope that might begin to improve?

Yes. What gives me confidence is the Keller value proposition and we're continuing to enhance that. We'll be rolling out more of what you might call an executive MBA, pending approvals, which is a shorter format for students who have a little bit more experience and can transfer credits, if you will, other new programs at the graduate level, and doing a better job of telling the Keller story. I think whenever we've -- and we've done this a little bit more in the last couple of years -- made a little bit more noise about Keller, which traditionally, we did very little with, for example, broad-based media like television, people respond. When we get to the plate, we have a very good batting average. We just need to get to the plate a little bit more often and tell the world a little bit more about the wonderful programs that we have at Keller.

Thank you.

Corey Greendale, First Analysis.

First, I wanted to ask about student persistence, just based on the numbers. We can calculate and it looks like it declined in the quarter, but I realize we don't have all the data that you do. Did it, in fact, decline? If it did, is there anything that you would attribute that to, particularly?

No, persistence has been -- it's actually trending up a little bit right now at DeVry University. It is at Chamberlain College of Nursing as well, doing well at Carrington. At DeVry University, the long story is we're on a macro trend over the last several years of improvement through many of the investments that we've made in student services and academic quality and academic support, tutoring, support centers, all of those sorts of things. We did take a little bit of a blip in the first half of last fiscal year, then recovered a little bit and then a little bit of choppiness as we started this year. But feeling pretty good about it overall. It does move around a little bit, but overall, not an area of concern. It's an area that we're pleased and want to see more improvement continue there.

Okay. I hate to ask you a DC question, but I will. When I read the proposal for the new gainful employment regulation before the [neg reg], I immediately thought of DeVry given that they went back to the 10-year repayment period. It looks like the potential unintended consequence hurting schools focused on bachelor degrees. Could you comment on the proposal and whether you think that's something your programs could get cross-wise with the regulation, unintended or not, if it's in the form they're proposing?

You make a good point about unintended consequences. Of course, the real answer is, we don't know because we don't know what the final will be. We always made it a practice of not really commenting on pending legislation or regulation. But in general, we want high standards. The key is, we have to get it right, just like Secretary Duncan has said many times. It's important that we get it right, so that we don't have unintended consequences, just like you said, and harm students who are in quality programs. My favorite example is the last time around, at 1.0, when they issued repayment data and it showed that Harvard Medical School would have failed the test.

That showed you that sometimes maybe the test is a flawed test. It wasn't a flaw in the program. I think we'd all agree. That's what we're hoping and expecting to see here. We certainly are very actively engaged in the dialogue with policy makers and our main message is we want high standards, not arbitrary standards, high standards and we want to get it right so there's no unintended consequence.

All right. Thank you.

Jerry Herman, Stifel.

The question is about the front end of the pipeline and starts in particular. Daniel, can you give us a little bit more color in terms of the funnel, if you will, i.e., leads and conversion rates and maybe some help just in terms of what the Catalyst scholarship did to get students over the hump?

Sure. Inquiries. We like to use the word inquiries.

Sorry about that.

Yes, sure. We're actually, I think, down a little bit, but you've got to really peel that onion very carefully and we do. We have metrics to look at this, what we call higher quality, more likely, more motivated-type student inquiries. We're up. That was a direct result of working our plan, doing a better job of a sharper message, more media to support that message, stronger digital, better website techniques and technologies to help move those prospective students along in the process or conversion, if you will. That all came together with a lot of hard work and excellent student service excellence from our people to produce the result that we saw.

Okay. As a follow-up, can you talk to us about the participation rates of that program; i.e., sort of the percentage of new students that are accessing or opting in? Then a higher level question, you mentioned weakness in demand for technology programs generally. You guys focus on bachelor programs. But in this market, it would appear that students are focusing on maybe lower end credential or diploma programs for a more rapid turnaround. Can you talk to market share, your feelings about your market share relative to potential changing market dynamics?

Let me take the second part first and then maybe Pat will give us color on the percent that got the scholarship. I think it was 20%, 25%. We have not -- I hear your hypothesis about shorter programs being more attractive and I think there are a lot of people who have said that. But we haven't really seen the associates and certificate segment of the market pick up in a major way. Carrington is doing better. We think we're retaking our share within a fairly weak market. We do think that concept makes a lot of sense and one of our strategies to tap into that, because we think that's a long-term strategy, a long-term trend, of starting with a shorter program and moving up the ladder of learning.

Internally, we call that vertical DeVry. Start at Carrington and then we have articulation agreements sent to Chamberlain College of Nursing, to maybe start with an Associates and move to the Bachelors of Nursing or start at Carrington and then move on to DeVry University. We have teams working very hard on that. We've seen some nice flow-through, if you will, and it what gives us confidence is that we've done it before. We have a very nice cadre, cohort of students who start at DeVry University with a Bachelors and move on to the Master's degree level at Keller Graduate School of Management.

That's a pretty significant flow through for us now. It took a long time to get there and we're very proud of that. That's how I kind of think about that. In terms of participation rate, so that's what percentage?

About 25%.

Yes, about 25%, Jerry, of the new were able to qualify and take advantage. Remember, you had to qualify for the Career Catalyst scholarship, test into it and so forth and some criteria to qualify.

Great. Thanks, guys.

Paul Ginocchio, Deutsche Bank.

On AUC, when that new building opens in January, would we expect to see a bigger enrollment in that period? Maybe higher than the mid-single digits or do you think you will grow that building or extra capacity slowly? Second, in Brazil, is it a regulatory restriction in what caused that or what's the actual cause of the restriction? Thank you.

AUC, and first we show the DMI in total, DeVry Medical International, and we think that a nice responsible growth rate is in the low single-digits for enrollment and then revenue and then earnings growth, respectively, would be higher than that. There's just continued steady demand for medical education. No, I wouldn't expect a sudden increase with the new building, but just part of a nice steady plan. With Brazil, the restrictions were a result of a periodic review that the Ministry of Education conducts. It affected some of our engineering programs.

It also, I should note, affected many similar institutions; both private sector and traditional institutions. The good news is, we've taken remediation steps and we've received a positive report from the Ministry. Now we're sort of waiting simply for an administrative process to get the final approval to move forward. We're working with the Ministry, expect a positive outcome on that in the near future.

Thank you.

Jeff Volshteyn, JPMorgan.

Daniel, can you comment on maybe diversions and direction between the retention and persistence or are they kind of moving in tandem with each other currently and going forward?

I'm sorry. The difference between retention and persistence?

Right. Underlying retention and persistence, the way we can calculate it. In other words, either material change in the number of graduates that will be coming through the system or declining?

No. I don't see a bubble or a spike there. Nothing out of the ordinary that I'd be putting into the model.

As a follow-up, we haven't discussed it in a while. What's the general state of clinical spot availability for medical students and residency spots for your graph?

Sure. That's always an area that we pay a lot of attention to and we have to be very, very careful and very diligent there. We do, in some specialty areas, there is some tightness. But in the end, we're able to provide the clinical education that our students need and then our graduates, then, move on into the residency match. That did come down a little bit. There were some changes in the match system that had some impact. We've got a plan in place and our deans are working hard on that to help our graduates be better prepared for the match and compete with certain segments, in particular, of the US schools, as well as the osteopathic schools, as well as the non-US citizen international students and we think our graduates can go toe-to-toe and compete with anybody.

Thank you.

Peter Appert, Piper Jaffray.

Tim, you gave some helpful comments on normalized margins or where the margins can go for the Business and Technology unit. I was wondering for the Company, overall, if you could talk about what you think reasonable expectations might be for margins over the next couple of years; sort of the pace at which you could get to that level? Thanks.

Okay. For the organization overall, we like to say, Tim, do you want to comment on that?

Sure. We've come down from an operating margin perspective from the teens to the street currently is looking at high single-digits. I think, really, it's a function of getting enrollment stability at DeVry University. We're excited that when we get that, that really allows us to stabilize our results and allows the growth that we're seeing and we're really encouraged about in our other parts of our organization to really drive our results. I think, really, the open question is how and when can we get that stabilization at DeVry University and then that really unleashes the overall institution's operating leverage.

Let me put words in your mouth, then. You basically said mid-teens operating margins, I think, for Business and Technology, which is essentially DeVry University, right?

That's right.

So if the existing business stayed where it is currently, might that not imply mid- to high teens margins for the enterprise overall?

You could run the math. We don't provide the forward guidance. But we're excited about the prospects of even modest growth and what that does for us at DeVry University.

Got it. Okay. One follow-up on the Brazil situation, the restrictions, does that have an affect on the profitability on a near-term basis? How quickly could you get back to enrollment growth there, do you think? Just one last thing on that, what's the opportunity for further acquisition? Should we be anticipating something in the next 12 months, potentially?

Maybe I'll take the last part and then -- we are continuing to look at acquisitions at DeVry Brasil. If you're asking me specifically about an acquisition, you'll always get the same answer, which is we don't comment on a potential acquisition. But, in general, I can tell you that we have a good pipeline. We have strong resources in terms of our team that is out having those conversations and that I really do feel good about the work that this team has done to put us in a position of being what's often called a quote-unquote acquirer of choice, in that we have direct private conversations with owners of institutions there who are looking -- maybe is there's a generational transfer. That kind of thing.

Having a direct conversation rather than having to go through an auction process and all that disruption and sometimes price implications. The value -- it's hard to put a number on it. I can tell you there's tangible value to be ascribed to the work that our team has put in there in that regard and their ability to drive value academically and economically through acquisitions in Brazil. We feel very, very good about -- is there a near-term margin growth outlook?

One of the nice things about DeVry Brasil, in addition to the growth, is that we've seen nice leverages as the institutions from grown from -- by the way, they're very tax effective, but we've seen low teens operating margins grow to the mid-teens. We're in a pause period where what's really happening is at AREA1 is it's just slowing our organic growth. We're also making some investments to make sure we have the platform to grow again. But we think this short pause -- by the way, one of the recent acquisitions had a little lower margins, but we're really, again, excited about the growth. I think of us in kind of a pause, a very well-run organization as we digest these regulatory changes or issue and then I think we can continue with modest growth in terms of our operating margin there.

Thank you.

Jeff Meuler, Baird.

On the DVU, Daniel, since all we really have externally is a starts number and it's been bouncing around like crazy for a while now, could you just help us? How much of this improvement this quarter do you think is catching some favorable variance? How much of it can you more specifically pinpoint to your turnaround plan? I mean things like you stepped up your marketing spend. How much can you attribute to better response rates after you hit the gas on marketing spend? How much of it seemed to be driven by people calling about the scholarship? Just any way you could help us out figuring out how much is volatility, how much is end market, how much is your turnaround plan?

I think that it's more internally driven right now. We really didn't see any particular change in the overall external market. As you look across private sector and public sector and independent institutions who are competing for similar student demographics, I think you'd find that to be the case. The data does seem to indicate that the team executed very well on the plan and that was the main driver of the September performance.

How important is the increased marketing spend in Q1 to that? If it is important, why not continue it at that level?

What we've done and will continue to do is spend on marketing and communications to tell the world about our wonderful institution where we see opportunities to do that productively and with an economic, with positive [NPV], if you will, and we're disciplined about that. We won't go beyond that. Certainly, that's not our intent to go beyond that and I think some others have maybe done that and then they pull it back. We're a little bit more planful and consistent in that regard. Where we see those opportunities, we're going to go ahead and do that. We did a planned shift into the first quarter. We think that was effective.

We did execute on this call to action event, including the scholarship, but not limited to that, as I described earlier. It was much more than the scholarship. That had a positive impact and as we've analyzed the economics of it, it's a positive investment. It wasn't just growth at any cost, if you will. We're encouraged by that.

At the same time, we want to make sure, like anyone, that you don't saturate things by doing those events every single time. Then it loses something in the process. It's a balance. We're looking at other call to action events for other points in the year, as we speak. We'll definitely keep you posted on that.

Okay. DVU persistence, just based on the rote math calculation, it looks like it's quite a bit lower this September than it's been in past Septembers. It sounds like you never had a bubble or spike in terms of graduates. I thought you said persistence was trending up. Was there anything in terms of timing of on-ground starts or anything like that, that would have impacted that?

No. We're kind of scratching our heads how you got that, so maybe offline we can try to help set things straight on that.

Okay. Thank you.

Tim Connor, William Blair.

As you look at Brazil, it seems like there's been a pretty unique set of circumstances that's created a favorable environment for growth. Are there other countries, internationally, that you think have similar set of circumstances where regulation could be a tailwind or there's a real area in the market that's open for-profit investment?

Yes. Tim, that's a great question because you're right. Brazil is one of the most attractive markets besides the United States for running private universities and graduate schools and professional schools, but it's taken a long time to get here. It was three years of investigation and analyzing and looking at potential entry vehicles and then it's been another three or four years since then to get us to the position where we have the platform that we have today. I think would be quite difficult for others today, at a standing start, to maybe replicate that. Then looking beyond that, there are other countries across Latin America and there are some natural synergies that you could think about why we would say that and then you look to Asia, where there's tremendous growth for the long-term, a need for education increasing, rates of college-going behavior and countries that are welcoming to private sector participation as part of the solution to meeting their education needs. I'd say Latin America and particularly, Southeast Asia.

Okay. Thanks. Then in the healthcare field, you've got a number of brands and you've got a number of careers covered. Are there areas within healthcare that you feel like you need additional coverage or that you could add additional coverage in?

Yes, there are. We are looking at broadening the participation in other graduate -- in Bachelors level, but the number of graduate programs that look interesting. Yes, there are definitely other opportunities within healthcare.

Okay. Thank you very much.

Paul Condra, BMO.

I just wanted to follow up on the shutdown. You mentioned DeVry University impact, but did you see the same kind of impact at the other schools, at Carrington and Chamberlain?

Yes, we did. We saw Chamberlain have an impact there. Not so much the at the pre-licensure level, but a little bit at the post-licensure level, some of the online programs there. I would say it was mainly those two institutions -- Chamberlain College of Nursing and DeVry University.

Okay. Thanks. Maybe a little noise from that then next quarter?

Yes. Unfortunately, I think that's going to be the case. We're working very, very hard to offset that. Like I said earlier, when Trace was asking some reasons for -- some positive signs, but I've just learned from painful experience that once you have a little glitch like that, it can be hard to recover your momentum quickly within days. It's a little bit of a nailbiter on forming that November class.

Okay. I wanted to know if you can talk a little about capacity at DeVry University? I imagine there's some empty seats there and I just wonder how you're thinking about that over the next year, how you're going to use that space?

Sure. I would just say that the main headline there is, you're right, there's a lot of capacity, that means that there's a lot of opportunity for margin expansion as we fill that relatively fixed cost platform. That's how we're thinking about it. At the same time, where we think that there is enough of that, it's not going to be filled on a timely basis. We are taking action and that's part of the real estate optimization activity that we've reported on and that'll continue.

Maybe the space availability is kind of centered in certain geographic areas or is it evenly distributed?

Yes, more evenly distributed. We have a number of opportunities within markets where we have multiple locations where maybe, as we have consolidated a couple of locations that are nearby and we're still able to retain the vast majority of the students and serve students in that metro. Those are some opportunities that we see.

I'll just add a couple things. It's Tim. I would say that our capacity is less than 50% utilized. The challenges that, as we look at optimizing the real estate, we find that many of these locations are incrementally positive contributors. We have, really, the dilemma of how do we support or students? If we were to make changes or reduce locations, you end up having revenues go out the door at similar amounts to the savings. I think it's something that we need to continue to work on and there is no silver bullet here. I think other than doing a good job of articulating our value proposition and getting enrollment and get the positive operating leverage back, hopefully, that's helpful.

Yes, okay. Thanks a lot.

This concludes our question and answer session. I would now like to turn the conference back over to Mr. Daniel Hamburger for any closing remarks. Sir?

Okay. Thank you, Mike. I'd like to thank everyone for your questions and remind everyone that our next quarterly results call is scheduled for February 4, when we'll announce our fiscal 2014 second quarter results. I just want to thank everyone for your continued support of DeVry Education Group. Have a great afternoon.

We thank you, sir, and to the rest of the management team for your time. The conference call has now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Take care and take care, everyone.