Adtalem Global Education Inc (ATGE) 2015 Q2 法說會逐字稿

Good afternoon and welcome to the FY15 second quarter DeVry Education Group results conference call.

(Operator instructions)

I would now like to turn the conference call over to Ms. Joan Walter, Senior Director of Investor Relations. Ma'am, please go ahead.

Thank you, Jamie and good afternoon, everyone. With me today from DeVry Education Group leadership team are Daniel Hamburger, President and Chief Executive Officer; Tim Wiggins, our Chief Financial Officer; and Pat Unzicker, our Chief Accounting Officer.

I would like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of DeVry Education Group that involve risks and uncertainties. Various factors can cause actual results to be materially different from any future results expressed or implied. These factors are discussed under risk factors in our FY15 second quarter 10-Q and our FY14 10-K, both filed with the SEC and available on our website at www.devryeducationgroup.com. DeVry Group disclaims any obligation to update any forward-looking statements made during this call.

Additionally, during the call we may refer to non-GAAP financial measures, which are intended to supplement but substitute for our most directly comparable GAAP measures. Our press release, which contains the financial and other quantitative information to be discussed today as well as a reconciliation of non-GAAP to GAAP measures, is also available on our website.

Telephone and webcast replays of today's call are available until February 27. To access the replays, please refer to today's release for the information. With that, I'll turn the call over to Daniel.

Thanks, Joan and thank you all very much for joining us today. Before I review our second quarter results, I would like to pay tribute to Dr. Connie Curran, our board chair who passed away in November. Connie joined our board in 2003 and became board chair in 2013, succeeding Harold Shapiro. Her vision and experience in board governance was a tremendous asset to DeVry Group and what she contributed to the growth and success of our organization will continue to benefit us for many years to come.

I would also like to welcome Chris Begley as our new board chair. Chris has a passion for education and his tremendous business and board experience will continue to guide us.

While challenges remain at DeVry University, DeVry Group continued to see growth in new students during the second quarter. As we expected, we saw revenue growth at all our institutions except DeVry University and Becker Professional Education.

We announced two more acquisitions in Brazil and we also made progress on our two overarching strategic objectives. As a reminder, those are turn around and transform DeVry university and secondly to continue our growth by diversification. I'm going to provide an update on our progress toward these two objectives.

At DeVry University, November and January results were disappointing. We have the right plan and the right people executing the plan and the team continues to make progress on our goal of turning around and transforming DeVry university. As we look toward the March class, we expect an improvement in enrollment compared to January.

The turn-around plan starts with our enhanced programmatic focus. Students are attracted to institutions with differentiated programs, supported by a strong university brand. Over the years, we have built a strong and well recognized brand for DeVry University.

Now, we are focused on managing much more at the program level, ensuring each program is designed to best meet the needs of its students and employers and that we better communicate the value of proposition of each program at the local market level. We've now built the teams to support our programmatic focus across three areas: business, technology and emerging programs.

Let me share a couple of examples that illustrate what we are doing here to stabilize enrollment and compete more effectively. The first example is in accounting.

75% of CPAs are approaching retirement in the next five years. So that is a large opportunity that we are well positioned to help our students take advantage of as DeVry university is one of the largest universities with students studying accounting and has a terrific curriculum, including a partnership with Becker CPA Review. We have now embedded Becker content and its special teaching methodology directly inside our DeVry University undergraduate accounting courses. We are calling this Becker Built-In.

We believe leveraging Becker's strong reputation in the accounting world enhances our value proposition. Our emerging programs vertical includes our health sciences, media arts and technology and liberal arts and sciences and represents just over 20% of total enrollment.

Our programmatic team found that there is expected to be a shortage of 50,000 jobs in the medical records and health information field in the next 10 years. This insight led us to develop our first undergraduate certificate in medical billing and coding.

This program provides students with a lower cost pathway to begin their education at the certificate level and proceed to associate and bachelor levels over time. Our programmatic focus is also helping our speed to market. The team conceived, developed and brought this program to market in just 4 months.

Let me tell you a story that illustrates our confidence in the value proposition of DeVry University's programs. A friend of mine's son is a recent graduate with a bachelor's degree, who is a very bright and motivated student and completed his four year degree in just three years. Upon graduation, he had not one, but three job offers.

He ultimately close to work for one of the big four accounting firms in information security at a starting salary of more than $85,000. Historically, we have found that this kind of strength at the back-end works its way to demand at the front end.

The second part of DeVry University's turn-around plan is reducing our cost structure while striving to maintain and even enhance our service to students. On last quarter's call we announced an increase in our value creation bowl from $70 million to $90 million as we align our cost structure to enrollment levels at DeVry University.

One example of how we are approaching this area is our continued adoption of e-books for students. This provides value and savings for our students when compared to purchasing traditional textbooks while growing revenue.

This is why we use the term value creation. Reducing costs, enhancing revenue, improving service and value to students are all elements of our value creation process.

I'm seeing Rob Paul and his leadership team at DeVry University operate with a strong sense of urgency. Our programmatic teams, under our new Chief Marketing Officer, Melissa Esbenshade, are working hard to stabilize our enrollment and to compete more effectively.

This is the team that led the turn-around at Carrington College and I'm confident they'll do it again at DeVry University. We look forward to providing more detailed update on the turn-around and transformation plan next quarter.

DeVry Group's second overarching strategic objective is to continue our growth by diversification in our healthcare, international and professional institutions. At Chamberlain College of Nursing we are continuing to expand the number of campuses.

This year we'll add campuses in Houston, Las Vegas and the Detroit area and we'll co-locate with DeVry University in North Brunswick, New Jersey in May. This will bring us to four new campuses for the year and 17 in total. We continue to work on a pipeline of potential markets across the country.

Chamberlain also continues to exemplify our commitment to academic quality. During the quarter, the commission on collegiate nursing education granted accreditations to two of our programs, our Bachelor of Science in Nursing degree, the BSN, was re-accredited for 10 years and our Doctor of Nursing Practice degree received its first programmatic CCNE accreditation. That was for five years.

As our featured institution this quarter, Tim and I would like to spend a few minutes focusing on Chamberlain, its strong value proposition and the bright future for nursing education. According to the Bureau of Labor statistics, registered nursing is among the top occupations in terms of job growth.

It is projected there will be 1 million additional nurses needed by 2022. This is a sizable market for years to come.

Here's the way we think about Chamberlain. We have the campus based pre-licensure and then the online post-licensure program. On the pre-licensure side, we have 16 campuses that we expect to grow to nearly 30 by the end of the decade. We offer a four year degree that can be completed in three years, which is a tremendous value for students. We have strong clinical networks, which are a strong competitive advantage and an indicator of quality.

On the post-licensure side, the programs include the RN to BSN, the Master of Science in Nursing or MSN, the Family Nurse Practitioner or FNP and then the Doctor of Nursing Practice or DNP. These innovative programs are meeting the demand for nurses who need to obtain these credentials to keep their current jobs or to advance their careers. The one thing you might be thinking about in our RN to BSN program is how we have successfully sustained our growth in this highly competitive market.

We believe this is due to our superior value proposition, strong brand reputation and our strong relationships with healthcare organizations. Market research shows that 60% of all new RNs have an associate degree or less. So we believe there will be continue to be a great number of associate level nurses, many of whom will need to go back to complete their BSN.

And lastly, the real differentiator for Chamberlain is what we call Chamberlain Care. This is the care and support we give our students to help them achieve their goals and reach their dreams.

That is both the hardware, if you will of service excellence, the processing, the metrics, technology and also the software, which is fostering a deep, palpable culture of caring, support and service. Students and colleagues tell us all the time that they were attracted to Chamberlain and remain here because of this culture of Chamberlain Care and it is working. In 2014 alone, Chamberlain graduated nearly 10,000 nursing professionals, making us one of the largest producers of nurses in the US.

Let me move on to DeVry Medical International. We were disappointed by the new enrollments in the January class. When we spoke to you last, we believed January was going to be better than the September class, but we didn't achieve this goal. However, we believe the demand for medical education remains strong.

Let me comment on some of the actions that we are taking to improve our new student enrollments. First, we're increasing the number of inquiries, the top of the funnel, if you will. We are starting to see better results here refilling the pipeline of inquiries.

Second, we need to increase the number of qualified applicants, because there weren't as many of those applicants as we wanted. Third, we are making organizational changes to provide more focus and support to each of the medical schools.

And then fourth, we are enhancing our scholarship initiatives aimed at attracting and enrolling more students. We think we have a good plan and can support our long-term target of low single digit enrollment growth.

At Carrington College, the consolidation under one institution is progressing well. We are seeing positive signs in markets such as Portland and San Jose, where several competitive colleges shut down and we were able to help those students to finish their programs.

Carrington is growing and we think that says a lot about our programs, value proposition and execution. We believe this segment offers good prospects for long-term growth and we continue to make selective investments.

In San Jose we are in the process of moving to a new 50,000 square foot location. The new location will have new equipment and learning facilities, offering our students a great education.

Our diversification strategy is also paying off at our international and professional education segment. During the quarter, Becker Professional Education launched a certified management accountant exam review course in India through our relationship with our partner at EduPristine. We also announced a new partnership with the American Medical Student Association to help prepare medical students for success on the boards.

Moving to DeVry Brazil, we announced two acquisitions during the quarter. First is Faculdade Ideal or Faci, which is a little easier to say, which we completed in January. It is located in the city of Belem, in the state of Para in northern Brazil.

Faci serves about 2,500 students and offers undergraduate programs in high demand career fields such as law, education, accounting and engineering. Belem is an attractive market with a strong need for quality education. We have had our eye on the city for some time and we are pleased we could bring Faci into our group of institutions.

Second is Damasio Educacional. Damasio is a leader in bar exam test preparation with a network of approximately 220 learning centers and distance learning throughout Brazil. Damasio also operates a highly regarded law school with campuses in Sao Paulo and Rio de Janeiro, our first presence in southeast Brazil. It has a 44 year history in Brazil and serves more than 50,000 students.

We have included a map in today's release that shows our current footprint in Brazil. Strategically, this acquisition meets both of our top two priorities for acquisitions, namely diversifying globally and in professional education.

Test preparation is a market we know well, given our long experience with Becker. Note also that most of Damasio's revenue is in test preparation. So Damasio helps us diverse identify from government funding sources.

Many of you may be wondering about the [PS] student loan program. The government has stated that it's supportive of this program, which is important to helping achieve the national goal for college graduates.

But the country is having to make fiscal reductions across the board and the education budget is no exception. So there will be changes that reduce the PS program such as only allowing students scoring at a certain level on the national college assessment exam to be eligible for PS.

Other changes could include extending the payment period from the government to the colleges. We believe that the changes will likely increase our working capital, but will have a relatively small impact on our enrollment. This is because our institutions are positioned at a high enough level that most of our students have qualifying scores on that college assessment exam. It is interesting by almost every measure, academic results, enrollment results, student satisfaction, colleague engagement, we are on track to have our best year ever at DeVry Brasil.

To summarize our second strategic objective, our diversifications in higher growth career fields, degree levels and geographies continues to position us for long-term growth. Let me now turn the call over to Tim and Patrick to review the financials enrollment results.

Thanks, Daniel. Good afternoon, everyone. I'll start with the overall financial results then go through our reporting segments. Revenue from continuing operations declined 1.3% year over year for the quarter, while increasing 0.5% for the first 6 months of the year. Strong growth at Chamberlain and DeVry Brasil mitigated a challenging environment at DeVry University.

Given the challenges at DeVry University, we continued our cost reduction efforts during the quarter, resulting in the recording of a $10.2 million pretax restructuring charge related to real estate optimization. Excluding special items, total costs from continuing operations decreased 0.5% for the quarter and 1% for the first 6 month period reflecting these ongoing reduction initiatives. Offsetting our cost reduction initiatives this quarter were investments to support our growth.

We reported net income of $42.4 million for the quarter and $62.9 million for the 6 month period, resulting in earnings per share of $0.65 and $0.96 respectively. Earnings per share from continuing operations and excluding special items were $0.75 for the quarter.

Our effective tax rate was 12.5% for the quarter. We expect that our effective income tax rate for the year will be in the 14% to 15% range.

With that overview, let's now shift to our operating segment results. Starting with the medical and healthcare segment, revenue grew 12% during the quarter and nearly 15% for the 6 months. All institutions in the segment grew revenue this quarter with the strongest growth coming from Chamberlain, which was up 32% for the 6 month period.

Segment costs grew 16% in the quarter and 14% for the 6 month period, given investments to support future growth and a larger share of home office costs that support our medical and healthcare institutions. As a result, operating income, excluding special items for the medical and healthcare segment in the quarter, decreased 3%, but increased 19% for the 6 month period.

At DeVry Medical International, new students in the January semester declined 3.8% and total students declined 7.9% for the reasons Daniel discussed. Chamberlain new student enrollment grew 9.5% in November and 5.7% in January over prior year periods. Total students grew 32.3% in November and 27.1% in January.

These increases reflect demand for our pre-licensure BSN, and post-licensure RN to BSN programs. These increases were partially offset by a year-over-year decrease in our FNP program where we reached our clinical capacity much earlier than planned. So we're staging enrollments to ensure a high quality experience for our students while we work hard to increase clinical capacity.

These enrollment results are contributing to another year of strong revenue growth for Chamberlain. We expect to end the year with more than $360 million of revenue, up about 25% and with operating margins close to the overall segment average.

Adding on to Daniel's discussion of Chamberlain, I would like to give you some additional context on the economics of opening new Chamberlain campuses and provide a framework for their growth going forward. As you know, we offer both pre-licensure and post-licensure programs at Chamberlain.

About 45% of the revenue is generated from our campus-based pre-licensure programs with the balance, 55%, being generated from our post-licensure online programs. The nature of our pre-licensure programs require us to make significant investments up front. Typically about $4 million as we construct the facility, obtain the patient simulators and other classroom and lab equipment, hire professors and staff, all while we await approval from the various state accrediting bodies.

This process on average takes about four years, beginning with the pre-enrollment period, obtaining approvals and enrolling students. This is typically 1.5 years of pre-enrollment and then 2.5 years to get to break even once we actually open. During that time, we are underwriting about $4 million of operating losses until that campus reaches break even. Today, of our 16 campuses, we have 5 campuses that are in this pre-enrollment stage or have been open less than 2.5 years.

Over time, we expect that our pre-licensure programs will outpace the growth of our post-licensure programs, putting pressure on operating margins, but increasing operating income dollars. Even though our post-licensure programs are less capital intensive, there are bigger barriers to competition for campus-based programs and we like that positioning.

Moving to Carrington college, Carrington was profitable in the quarter at the institutional level for the third consecutive quarter. New students in the period increased 14.4% from the prior year, driven by demand for medical and veterinary programs and a change in the timing of program starts from the first quarter into the second. Total students increased 1.2%. With additional help from effective expense management, our economics at Carrington continue to improve.

Turning to the international and professional education segment, revenue for the segment decreased 0.3% during the quarter as a result of anticipated revenue declines at Becker, but had solid growth of nearly 9% for the 6 month period. As Daniel stated, DeVry Brasil is having its best year ever. Revenue year to date has grown 23%. New and total enrollments are at record levels.

At the institutional level, we continue to see solid organic growth. The integration of FMF is proceeding well and we have commenced integration of Faci and Damasio.

At Becker, revenue declined 26% during the quarter. The decrease was primarily the result of a shift of about $4 million in revenue into the first quarter when we launched Becker One. Becker is also impacted by continued softness in the number of CPA exam candidates.

The segment's operating income decreased during the quarter, also driven by lower Becker revenue. And finally, within the business technology and management segment, revenue was down 12% during the quarter and year to date as a result of lower enrollments.

Excluding special items, the segment generated operating income of $11.1 million for the quarter, up nearly 12% over last year and operating income of $11.2 million for the 6 month period. A key operational goal continues to be maintaining positive economics in the segment, which means positive segment margin and cash flow.

During the quarter, we continue to focus on optimizing real estate footprint, consolidating nine in market campus locations. We'll meet and likely exceed our cost saving goal of $90 million for the year.

Looking ahead to the third quarter, we expect revenue will be relatively flat versus prior year, as anticipated declines at DeVry University will offset revenue growth at our other institutions. We anticipate that operating costs will increase about 4.5% sequentially, about a third of the increase will be driven by campus expansion at Chamberlain, about a third is related to recent acquisitions in Brazil and about a third driven primarily by an increase in DeVry University advertising expense, all to support future revenue growth.

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 remains solid and differentiates DeVry Group from others in private sector education in the US. Cash flow from operations for the 6 month period was $92 million. Our cash and cash equivalents were $380 million as of December 31, an increase of $118 million over last year's cash balance.

Our net accounts receivable balance was $89 million, down 24% from the prior year as a result of lower revenue at DeVry University and increases in reserves. Year to date, bad debt as a percentage of revenue was 3.2%.

DeVry group continues to be an efficient user of our shareholder's capital. We take a balanced approach to capital allocation with our main priority of maintaining academic quality through investments in our core operations.

Our other capital allocation priorities include investing in new programs and new campuses where there is the greatest demand. A great example is the addition of Chamberlain campuses this quarter, where we are investing in growth where we have a proven track record of generating solid returns.

In addition, we will continue to make strategic acquisitions. We recently committed approximately $107 million for the acquisitions of Faci and Damasio. Our final priority is share repurchases and dividends, which amounted to $23 million for the first 6 months of the fiscal year.

Capital expenditures for the first 6 months were $43 million. For the year, we expect capital spending to be in the range of $95 million to $100 million with approximately 80% being deployed to our medical and healthcare and international institutions as we invest in new programs, locations and infrastructure.

I would like to turn the call back over to Daniel.

Thanks, Pat. I would like to take a moment to address the president's recent proposal on community colleges. First, we applaud solutions to address our nation's work force needs. More students going to community colleges can be a good thing for our institutions.

Many community colleges' graduates seek a 4-year degree and we have articulation agreements with many of the largest community college systems across the country. These students tell us they are looking for the kind of care and support, the small classes, individual attention and career services that our institutions are known for. So whatever the outcome of this proposal, we'll continue to partner with community colleges, working together to meet the country's work force needs.

Before we open the call to your questions, I would just like to sum up by saying that we are committed to our long-term vision of becoming the leading global provider of career-oriented educational services. While not satisfied with where we are, I do see progress in turning around and transforming DeVry University with the team working incredibly hard to stabilize enrollments and to position DeVry University to compete more effectively over the long-term. We are also focused on investing in the expansion of our healthcare, professional and international institutions given our strong cash flow and financial position.

So with that, we are eager to hear your thoughts and questions. Joan?

Great Daniel. I would like to ask, Jamie, if you could give our callers instructions to ask questions.

(Operator Instructions)

Nick Nikitas from Baird.

Thanks. Looking at Chamberlain and the growth deceleration over the past two start periods, can you talk more about the competitive dynamics that you are seeing across that industry? Any differences in the trends between online versus on ground growth?

Sure, thanks Nick. One of the things to note is that in the last couple of years, when you have seen larger percent growth numbers, of course first of all, you have a lower percent, a lot of large numbers goes along. I think we all understand that. But the other thing is some of those numbers were driven by a couple of new programs that were introduced: the DNP and the FNP that we talked about.

So those won't recur and that gives you those big percentage growths. Further, as Tim mentioned, we put a self-imposed restriction on the number of new enrollments in the FNP program, just to make sure that we are keeping up the very high quality experience that we are providing for our students. That was mainly because we had so much more demand than we had anticipated that we reached our clinical capacity a little bit earlier than we planned.

So that's a little bit about what we are seeing there. In terms of the overall market that you asked about in the first part of your question, we talked about the size and growth of the overall nursing profession. Interestingly, the Institute of Medicine has called for an increased number of nurses with advanced degrees. They have called for 80% to have a Bachelor's or higher by 2020. So what you see is with an aging population, improvements in medical technology, expanded treatment that nurses can provide to patients, the Affordable Care Act expanding power given to nurses with advanced degrees, all of those factors lead to market growth.

And in particular, the Associate market continues to grow and that bodes well for Chamberlain because many of them are going to have to go on for a Bachelor's Degree later and a really sweet spot for us is the RN to BSN program. So that is a little bit of color in what we are seeing in the nursing area. I hope that covered what you were looking for.

I'd just add one thing, Nick. We are seeing significant revenue growth for Chamberlain this year, second largest institution in our portfolio. As we look into 2016, we expect to see significant growth again in the mid to high teens. So I think, as Daniel mentioned, and we have been I think pretty straightforward to say look, we knew the growth rate would decelerate just on the rule of high numbers.

But when you think about the momentum that the institutions have and we expect that the FNP situation will return to growth by the end of next year. And then when you think about the doubling essentially of the campus footprint, we think there is a lot of room here to create additional growth and support the need for various kinds of nursing degrees in the market.

Okay, thanks. That is helpful. And just one more. Tim, looking at the margins for medical and healthcare, year-over-year saw a little bit of down tick in Q2. Looking at the back half and with the growth of the new campuses, would you expect that to be able to remain flat on a year-over-year basis or should we see some contraction?

There are a couple of things going on there. One is that as the medical and healthcare segment grows as a larger percent of the institution, they are taking a bit of a bigger load of the home office costs. So that's certainly one of the impacts. We tried to ask the institutions not to grow their expenses at a rate greater than their revenue growth. But sometimes we'll get some opportunities, like particularly in this second quarter, we had a lot of start up costs with these new campuses at Chamberlain. I think in terms of the overall margin for the sector, I think we are in the right zip code. So I think it's down a little bit, partly on this additional load. But I think it's something that will be in that same zip code for the rest of the year.

Got you. Thanks guys.

Sara Gubins from Bank of America Merrill Lynch.

Hi, Sara.

Thank you. Could you talk about what undergraduate revenue per student did in the quarter? Are you still expecting 1% to 2% declines for the fiscal year?

DeVry University undergraduate revenue per student was up about 1.5% during the quarter largely due to a little lower utilization of the scholarships than what we had anticipated as opposed to the last time that we spoke. For the balance of the year, revenue per student will likely be flat.

It will be flat for the balance of the year so it will end up being up for the full year?

Could be, yes.

Are you doing more to try to promote the scholarship? Or is it less of a priority?

No. We are very actively promoting the scholarships. As we saw with our current campaign on the degree completer and our degree completer scholarship program. Again, our scholarships were designed to promote new student enrollments as well as to help students persist and pursue that educational goal and we'll continue to use that with that two-prong approach.

Great. Daniel, you mentioned as you look toward the March class for undergrad that you would expect an improvement in new student enrollments. Do you have any indications, based on lead flow or sign ups already that that's happening?

Yes. Sure, Sara. I think this ties to your previous question about degree completers. We have put a big emphasis on that and the reason is that there is a huge number of people, it's actually 31 million people who have started college, but have yet to graduate. And we've emphasized that, you might have seen that in some of our communications that are out there and degree completion programs are a core competency at DVU. It is a sweet spot for us. We take care of these students really well.

One of the things that gives me confidence is that where we are further along in executing our plan, we are doing better. So we put an emphasis on accounting and it was actually up in January. We put an emphasis, to your question, on our degree completion program and it was up in January. So it's early, we have a long way to go, but I'm encouraged by these early signs of success.

Great. Last on Brasil, last quarter you talked about revenue to be above $150 million for the year. Could you update that for the two recent acquisitions?

Sure. So likely revenue will be in the $160 million range for this year and then again growing as we would analyze the larger Damasio acquisition as well as Faci and FMF, revenue could grow in the 30% range for FY16.

And that includes the impact of those acquisitions or that's on top of the, that's an underlying growth rate or that's adding in for the acquisitions?

That's all in. That would include organic growth as well as the acquisitions. For the second quarter that we had, of course we acquired FMF on October 1. So the second quarter growth was about one-third benefited from the impact of the FMF acquisition and two-thirds organic growth.

Thank you.

Paul Ginocchio from Deutsche Bank.

Thanks, just some questions on persistence. It looked like it took a little bit of a hit at DVU. Any comments? The same for Ross, it looks like persistence is down for the last two quarters. What are you seeing there? Then finally, on Ross new enrollment declines, I think St. George's has new ownership, are they more competitive now in that market? Or are you still seeing competition from the DO degrees in the US? Thanks.

Okay. A lot to unpack there, but let me give it a try. Appreciate your question and hold me accountable if I don't cover everything, remind me. In terms of persistence, undergrad persistence at DeVry University improved in November, slightly down in January. But if you level that out, measure it over a trailing six sessions or the year, persistence has been relatively flat. So okay, but not good enough. And our goal and a key part of the turn around plan is improvement in persistence. Good, steady improvement. And there is a number of actions we are taking to do that. So I have confidence there.

At DMI, steady persistence, so take off-line whatever you might be seeing, maybe we can help you with that. And I would say that I'm not going to comment on one particular competitor, because we have many competitors in the US and internationally for medical school. But a couple of comments more broadly on, you mentioned DO schools and that kind of thing. There is a physician shortage today and it's expected to persist. To give you some color on that, the US faces a shortage of more than 130,000 physicians by 2025. That is from the AAMC, American Association of Medical Colleges.

Even though there has been growth in seats from US allopathic schools and growth from the osteopathic schools, it doesn't appear that that's going to close the gap. We've seen quite a bit of growth among the osteopathic, the DO schools, but it looks like that growth has flattened recently and so we think we have seen most of the impact that we're going to see. But time will tell and we really appeal to those students who want an MD versus a DO degree. So a little bit of color on the competitive dynamic there.

Maybe I can sneak one in for Tim, that 30% growth rate in FY16 for Brasil, does that include the impact of the changes in government regulations?

It does. And that compares with about 30%, little bit over 30% growth this year as well all in with the acquisitions.

Thanks, Paul.

Cory Greendale from First Analysis.

Good afternoon.

Hi, Corey.

First a quick clarification, Tim, when you said you expect operating costs to be up 4.5% sequentially, were you including the restructuring charges in Q2 or excluding those?

Excluding. Corey, if you look at our spend, it's been remarkably consistent over the last four quarters, total expend: [4.25%, 4.26%, 4.24%, 4.25%]. There are a lot of moving pieces, if you think about it over the last 12 months. We had decreases at DeVry University, so we thought the best way to say it is look, it's moving out of that pattern for some very specific reasons. The two key reasons are new campus openings at Chamberlain and the acquisitions at DeVry Brasil.

But we also see an opportunity to accelerate some spend at DeVry University in the marketing area to further some positive things that we're seeing there. So three buckets, the third bucket is not completely DeVry ad spend, but those are the three ways I think you should think about it. And we see those costs being with us maybe slightly less as we go into the fourth quarter, but it is a new set point for a little while as we work through some of these moving pieces.

Okay, that is helpful. And then Daniel, you have been very helpful in giving your perspective on the market more broadly over the past multiple quarters. Taking a step back on the DeVry University business, I know last quarter you had said you thought that January was going to be better. You were disappointed, can you just talk us through visibility in that business? Where in the funnel was it that you weren't able to generate enough inquiries? Was it that students didn't actually end up showing up to class. Where is the weakness? And what are you seeing more broadly in the market?

Sure. I'll take it in that order and thanks, it's a great question. It's sort of the $64,000 question I guess. We are in a time of limited visibility. There is a lot of uncertainty. But we are seeing indications that the turn around plan is gaining traction. I mentioned to Sara a couple of those. I would refer to that. Applications are up year-over-year for the March class, but it's still early so I really want to add that caveat.

But those early indications give us some confidence that we could see better results in the class. Then more broadly, we just continued to operate in a period of cyclical weakness, which is having an impact across higher education. If you saw the Wall Street Journal front page last Thursday, the emergence of a two tiered US economy, with wealthy households advancing while middle and low income Americans still struggle. And we serve a large population of middle and lower income students who come and get their education so they can move up.

More prospective students still lack confidence in the job market and are hesitant to make that commitment to go to college. There is a misperception that these factors are only impacting private sector institutions, but many independent and public sector institutions are being impacted as well. In fact, the latest numbers from the Clearinghouse are in and I know you saw this, but for everyone's benefit, overall post secondary enrollment in the fall decreased 1.3%. That is three years in a row.

I know every generation is supposed to get more education than the one before, but now we are going the wrong way. That is total enrollments in the United States from Harvard to community college, everything in between, down. Community college is down even more. Break that out for adults 24 and older, which is obviously a key [contingency] for DeVry University, that decreased 2.8% year-over-year. So that is the environment.

But, while we still sometimes while there is still some hesitancy to go back to school, there is lots of indications that consumer confidence is slowly starting to come back. Here's why we are optimistic about the future: more than 31 million people enrolled in college in the last two decades, but they left without earning their degree. And we serve these students very well. So we're going to continue to work our turn around transformation plan at DeVry University and that is a little bit of color.

Thank you.

Sure, thanks.

Denny Galindo from Morgan Stanley.

Good afternoon, guys. You mentioned that you were going to increase advertising and that was part of the driver of the increased expenses. Are you focusing that advertising on any particular segment, maybe completers, grad students, any particular vertical?

Yes. There was a focus on the completers. So, if you saw it or if anybody wants to send us an e-mail, we'll send you a link if you want to see, for example the communication, a television piece that really talks about these 31 million Americans in the last 20 years who have attempted college, but they didn't complete. So there's 31 million reasons to complete that degree and what is yours?

It is really a well integrated program with hashtag reasons to complete and there's social aspects. You go into any one of DeVry University's campuses and you'll find a big board with post-its there. Put a post-it, just like in the TV spot, put a post-it up, what is your reason to complete? Sort of reinforce that reason for my kids, for my family, to make more money, to improve my life, to get that degree I have always wanted. Yes, that is a particular emphasis for us right now.

And I had a question; well, what's new about that? Because a lot of people talk about people going back to school, isn't that common? And that's true. That is a big part of our market. But for example, we've noticed with this program and focus that a lot of students are going to one of our programs that is not exactly designed for degree completers.

If we can do a better job of designing that program and make sure it really meets the need of those students and the employers they serve and then do a better job of communicating that value proposition, we should be able to do even better in the degree completion area and in fact, we are starting to see some improvement there. So that would be the area of focus.

Did it lead to a quantifiable impact on the January starts? Or do you think January was too early to see a benefit from this focus?

I think January was too early to see the total benefit. But there were some indications, for example, there's one program I'm thinking of, where we do have a lot of degree completers, was actually up year-over-year in the January class. So in the middle of an overall decline, there was a bright spot. And accounting, as I mentioned before, was another bright spot with some positive numbers in front of it. So those are some of the indications that we are making some progress on the turn around plan.

Okay and then a couple of questions on medical. You mentioned all the start up expenses associated with the medical, with the new medical campuses at Chamberlain. Could you quantify exactly how much start up costs you would have had in this quarter with, you had one new campus but then you were probably also getting ready for the two January campuses as well? And maybe even you spent a little bit to get ready for the co-location campus.

There was, I think about it as a little over $2 million spike over the normal spend that was related to these two openings. So a little bit out of the ordinary in that second quarter.

And then lastly, thinking about how the co-location works, how did this show up differently than a stand alone campus in terms of expenses, in terms of margins or any other factors you guys look at when you are thinking about when to do a co-location campus versus a stand alone campus?

The co-location, our analysis shows kind of the book ends of co-locating versus opening a stand alone campus in the same area. Depending on the size of the campus and whether it's leased versus owned, the book ends, the synergies are on the low end of $400,000 and up to $1.1 million on the high-end.

Per year.

Per year. And we let the location that best suits the institution drive that decision, but if we are in the same market we want to certainly leverage that investment and our fixed assets.

We have 16 co-locations?

16 Chamberlain locations of which 14 are co-located. We have a co-location of course in Miami where we have DMI, Chamberlain and DeVry University and then we have a couple of Carrington co-locations as well.

Right, 2 Carrington, that's what I was thinking of, 14 Chamberlain, 2 Carrington plus a DMI with a Chamberlain as a bonus.

Lastly on Brasil on the recent acquisitions, are these degree mixes that will increase a metric like revenue per student, decrease it or about the same?

I would say it's mixed. Faci could be a little bit higher. Those are degree programs very, very similar to the other, most of the other acquisitions that we've made. Parenthetically, let me just add, if you will allow me, that is a great model. Because where it is a step and repeat of a well worn acquisition integration plan, a team that's done it many times, we feel very comfortable with the acquisition integration process and the lower degree of risk that you are always thinking about when you make acquisitions.

That is working very, very well and we want to keep a good thing going there. Damasio, with the test, the exam review portion for the Brazilian version of the bar exam, it's called the OAB, but we just call it bar exam. That would be a little bit lower revenue per student. So that's in the mix and that is the majority of their revenue relative to the law school, which law school would be pretty similar to the law programs that we have at the other DeVry Brasil institutions.

Okay, thanks for taking my questions.

Trace Urdan from Wells Fargo.

Thanks. I would like to go back to the contraction of margins in the medical part of the business. It looked like revenue per student declined there and I'm not sure that I heard you address that specifically. So I wonder if we could start there.

Revenues per student would decline as we have a greater proportion of Chamberlain students, which would obviously have a lower revenue per student than our medical and veterinary school, as well as we saw some nice growth from Carrington. And from there, their revenue per student would be the lowest.

Did that business come out the way that you expected? Daniel made some reference to Ross not being as strong as you had hoped. From your perspective, did the revenue come in late relative to what you thought it was going to do? Or is this exactly sort of on plan?

One thing to note is that we are still sitting large classes at DMI. To put it in context, we were off about 20 students from last year. We have been flat to last year with 20 more students.

In terms of the revenue, Trace, it was very close. We have a lot of momentum because those are multi-year classes and we have the clinicals and a lot of other things. It is really the new student and then the total student that will impact us going forward. But I think right at this point, it is still tracking pretty close to where we expected.

And when you reference the healthcare business taking on a greater share of the overhead, is this an explicit reallocation that took place in the quarter or is this just the natural way that those costs are attributed based on, I don't know, student population or based on revenue?

It's a little bit of both. Our cost drivers are largely based on enrollments, based on seat licenses and everything that would require support from the home office from an IT, student, financial aid perspective as well as in colleague headcount for HR and other benefits related costs. So as Chamberlain as an institution is growing from a student as well as a colleague perspective, they are consuming a higher proportion of home office services or at a faster rate than the other educational institutions.

Just a quick comment Trace, that is an area that we obviously spent a lot of time focusing on. And part of the challenge here is as DVU gets smaller and the medical and healthcare gets bigger, there is a reallocation. But I would tell you we are very closely managing the costs at the home office and the target's been to have those declining as a percent of revenue.

We are having a little bit of trouble with that this year as we deal with an FTC investigation and you'll notice that comment in our MD&A. So those are costs that we didn't expect to have and are putting some pressure on the home office. But we are very focused on keeping those costs as a declining percent of our overall revenues.

Okay. But if I could pin you down a little bit more on this, was there a material one-time shift from one segment into, presumably from DVU into medical this quarter?

This year. When the year is all done, there was a fairly significant change. This quarter, it's just tracking along. And we started that at the beginning of the year.

Okay.

We make the changes at the beginning of the fiscal year.

Got it. All right and then just a clarifying question. I think, Tim, I heard you say that operating expenses were going to be up 4.5% sequentially, is that right?

That is correct.

And then I think I heard you respond, I wasn't totally clear, I'm not sure it's going to be clear in the transcript either, but with respect to the medical and healthcare margins, are we looking to be somewhat around flat? Is that what you meant by zip code on a year-over-year basis?

Yes.

So taking into account the weakness this quarter, by the time we get to the year end we should be more or less in the same general vicinity?

Correct. Thanks for clarifying that.

Thank you. I'll let you move on.

Yes, Tim is good with analogies and zip code is one of them. So that is good.

I didn't know if it was the zip plus four.

(Laughter) Yes, exactly, how precise do you want to get? Thanks, Trace.

Jerry Herman from Stifel Nicolaus.

A question about the visibility you alluded to, Daniel. Can you give us some idea of what percent of applications or enrollments for DeVry University's March term are typically received by now?

It's early. It won't shock anyone that students, whether they are your teenagers or your college kids or working adults tend to procrastinate. So things do tend to come together at the last minute a little bit. So it is more heavily weighted to the back half of the cycle and we are just entering that.

I would say and maybe this is sort of an add on to an earlier question about where the issues seem to be, we have really done a good job, I commend the teams in improving the conversion rate, if you will, from those who inquire to those who make applications and those who subsequently enroll. And that is true at DeVry University, Keller Graduate School of Management, I think we were doing really well at Chamberlain.

So a pretty broad comment there, but DeVry University specifically, which I think you are asking, the biggest thing we need there is a little bit more at the top of the process, the beginning of the process, the top of the funnel, if you will. So that is what we are working very hard to generate. And then we are working extremely hard to do everything that we can to control what we can control -- once someone does inquire with us, I think our teams are doing a terrific job.

That is a positive indication to me to see that those who inquire with us are responding positively. They like what they see. The value proposition is strong. It resonates with that prospective student and their family. That is good. We just need a little bit more at the top.

Jerry, it's Tim. One of the things that, there is a lot of data here and one of the things that we do, do is have a lot of data in terms of how are these inquiries tracking compared to the same period and to the same session last time. What's a bit different and what creates the visibility problem is that there is some discontinuity in the data.

Sometimes things don't play out when we look at from this point to the end, how many of those students are actually going to come and enroll. That is what creates a bit of the visibility. But when we are giving you a sense of what we are seeing, it is always based on how we track compared to last year, how's the team on the ground thinking they are going to deliver this thing. So there is a fair amount of data. The fact is that we are predicting consumer behavior, which is hard to do sometimes.

Okay. And then just a quick question on cost. You guys previously increased your cost reduction figure from $70 million to $90 million. In light of the slightly weaker than expected volumes at DVU, it was noteworthy that it didn't go up again this year. That begs the question, is there anything left to cut or are you cutting into the bone at this juncture?

No, absolutely not. I was, I hope, very clear about our goal of maintaining the economics in this sector or the segment. And we are very involved with the team, thinking about the balance of this year, but we are really thinking about 2016, in terms of what are the things that we need to do. And we are thinking about the business model and we are thinking about the basic things, Jerry, that we need to cut.

We need to deal with real estate, we need to deal with marketing costs, we need to deal with excess capacity. And so stay tuned. We just gave a big increase, we know we need to continue to do it to make the numbers work. So we are working on that and I think we'll have more to talk about with you guys next call.

Great, thanks. I'll turn it over.

Thanks, Jerry.

Jeff Silber from BMO.

Hey, good evening, guys. It's Henry Chien calling in for Jeff. I had a question on Chamberlain. Would you be able to share with us for the new students in the November and January session, the mix between pre-licensure and post-licensure?

I don't think we are breaking that out. I would like to give you some sense of -- Patrick?

I was going to say in terms of the impact of the FNP, we saw double digit growth in both of those, the campus based and the non-FNP and FNP was negative. There is still some significant strength there in both those segments or sectors. It's the FNP where we need to stage these new student enrollments so that we can manage the clinicals on the back side while we work to increase the capacity.

Right. Just to clarify, the FNP was a negative growth rate because of our own choice to limit the number of new student enrollments that we took. The demand is there.

We talked to the team about that and as we look into next year, we'd expect to see FNP enrollments grow again once we have sorted through this kind of big wave of students that really, we were way beyond our expectations in terms of how popular the program was. So we wanted to make sure that we could manage all the clinical stuff in the second half of that, what is usually a three-year program.

Yes. I want to add on to that, what Tim had said earlier on the call and his remark itself with respect to mix, think about it from a revenue mix perspective. 45% of the revenue is generated from our campus pre-licensure program with the balance of the 55% from post-licensure or online programs.

Got it, thanks. I know, Chamberlain, there's the new campuses and there is some margin pressure there. I was wondering if you have any thoughts on what normalized margins would be with the campuses ramping up and from a longer-term perspective for Chamberlain? Thanks.

Sure. We think that one of the key drivers here is, well there is a number of them, but maturity of the campus, the size of the campus, but the number of new campuses that are in the mix. So we expect that the campus margins will be depressed for some time, because we are talking about essentially doubling from 16 to near 30. So, it carries a load.

These campuses in aggregate are profitable and contribute significantly. I think that in a more normalized growth mode, expect a low double digits kind of campus contribution. And that would still include some campuses that were being bolted on. Today it is less than that, as we have a significant load from all these new campuses that are growing.

Got it.

And certainly our large scale campuses would do significantly better than that.

Got it, thanks so much. I'll turn it over.

Thank you.

Michael Tarkan from Compass Point.

Thanks for taking the questions. Did you guys mention what the Carrington new start growth number would look like if you didn't have the extra start date?

We did not. And I don't think we have that breakout.

Right, no.

We can follow-up with you. We like to think of it from total students were up about 1.2% for the quarter and revenue was up as well. So I think if you look at it from a total, from quarter and for six months is a good way to help model that.

That is fine. On the balance sheet or on the statement of cash flows, I should say, I noticed that operating cash flow, looks like for the quarter, was down or was a negative $49 million or so if you back out the first quarter. I'm wondering what that dynamic is. I know it is a seasonally light quarter, I'm curious if you can talk to that.

You said the magic word, is the seasonality of our cash flow. Our strongest quarters in terms of operating cash flow are our first quarter as well as our third quarter. The reason being with our first quarter we have our new session starts for DeVry University, Chamberlain as well as DMI in September, our medical and healthcare institution.

So there is a large amount of cash coming in, in that first quarter and then a fewer number of session starts in the second quarter, this quarter here. And then obviously the third quarter cash flow with an increase again with the large session starts for DeVry University and Chamberlain in March, and then the large DMI sessions start in May.

Is there any dynamic though from a year-over-year basis that we should be aware of? It looks like it was down about $20 million year-over-year. And I looked and that deferred tuition number looked like it was a little high this quarter. I'm wandering if you can talk on that. Thank you.

There was a dynamic of about $20 million of cash that we normally would have received in December that did shift to January of this year at DMI and that was just based on the timing of the session start at Ross Med. It started about a week later in January than normal. So as a result, instead of that cash coming in, in advance, which would have been December, it came in, in January this year.

Understood. Thank you.

Wow. We've got an eagle eye.

That was very perceptive. Well done.

Well, I believe that is all the questions we have. Is that right?

That's right.

Okay. Then I would like to thank everyone for your questions. Our next quarterly results call is scheduled for April 23, when we'll announce our FY15 third quarter results. Thank you for your continued support of DeVry Education Group.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.