Adtalem Global Education Inc (ATGE) 2016 Q3 法說會逐字稿

Good afternoon and welcome to the DeVry Education Group third-quarter 2016 results conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Joan Walter.

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

I'd 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 could cause actual results to be materially different from any future results expressed or implied.

These factors are discussed under risk factors and elsewhere in our quarterly reports and Form 10-K for fiscal 2015 filed with the SEC and available on our website at DeVryEducationGroup.com. DeVry Group disclaims any obligation to update any forward-looking statements made during this call.

We may refer to non-GAAP financial measures which are intended to supplement though not substitute for 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 May 20, 2016. To access the replays, please refer to today's release for more information. And with that, I'm happy to turn the call over to Daniel.

Thanks Joan. Good afternoon, everyone and thank you for joining us. Our third-quarter earnings were stronger than expected, with solid academic performance and financial results coming in ahead of our plan. Our strategy of quality, plus diversification, plus long-term focus, is driving favorable results at most of our institutions. While obviously that's not the case at DeVry University, we are continuing to maintain positive economics there. The year-over-year overall revenue decline was in large part the result of our strategy to reposition DeVry University amid a tough competitive environment, as well as some enrollment challenges at Carrington. The good news is we saw continued growth in medical and healthcare as well as international and professional education, which in this case was aided by a strong quarter in our recently acquired Grupo Ibmec in Brazil.

So with that headline summary lets review our segment results starting with Business Technology Management, which of course includes DeVry University and Keller Graduate School of Management. So while we're repositioning DeVry University we expect further enrollment declines but third-quarter enrollments were a little lower than we would have liked. However, through our continued cost control initiatives, we were able to improve operating performance and continue to generate positive cash flow.

Enrollment is being impacted by a challenging, competitive environment and demand has declined as the unemployment rate is improved especially among working adult students. And to illustrate this trend, here is one fact, total enrollments for bachelors students 25 years and older is down double-digits for all colleges nationwide.

Now we are focusing on three strategies to help DeVry University compete more effectively. And that' s improving the student experience, addressing affordability, and improving how we market our programs. So first is the student experience, that's both what we teach and how we teach it.

The key to success is launching new programs. We are adding new programs in areas where there are skill gaps and supply demand imbalances. I recently announced medical billing and coding program has grown to nearly 2,000 students in just under a year. New certificates in web design and web programming are beginning in May along with a new specialization in software programming. We also have a new accelerated and more affordable Keller MBA program that's slated for the fall.

In terms of how we teach, we're improving the student experience in the classroom and in the services that surround the classroom. A better experience will help us both attract and retain students more effectively. So recently introduced a new student centric scheduling system, which recommends a course plan and optimizes the student's path to graduation. Following that we launched a quick-to-accept registration feature. This self-service capability presents suggested course offerings that is suited to each student's needs and then with one click they can automatically register for the next session.

These are the kinds of innovations that enhance the student experience, provide better service, and lower costs, since they are automated functions. Even though enrollments have declined, we've increased class sizes and increased average credits taken per student. The second element of the strategy is enhancing DeVry University's affordability and this includes better communicating that value to students as well. We're optimizing all the elements of affordability. Not just the price level, so that's the pricing structure, scholarships, books and fees, shortening the length of some programs and creating stackable degrees to make it easier for students to afford their education.

We introduced a new scholarship strategy during the March session. The new scholarship is being offered more broadly and is based on the students incoming GPA. And further, students can earn their way to more scholarships depending on their academic performance. So raise your GPA and earn a higher scholarship. With a maximum award of $25,000. We believe the positive impact will go beyond the financial benefits for students by also encouraging academic achievement and persistence. And I'm please report that this new scholarship has helped to drive a 10% increase in the new student start rate during the March session.

Now the third element of our strategy to increase DeVry University's competitive position, is by a strategic marketing. This includes a number of initiatives such as increasing our program specific marketing and more creative use of digital and social media, all supported by strengthening our University brand. An important investment here is what we call workforce solutions, which is how we partner with employers to help them better meet their workforce needs. This includes employers like Walmart, AT&T, Verizon, the federal government. Over 6,300 students currently attend DeVry University and Keller via our workforce solutions partnerships.

We have seen some impact from strategic marketing, which includes a focus on better competing at the local market level. Those markets that received our updated approach were down 8.8% on new students in the March session, which of course is much less in the University overall. Eight of these markets showed flat or increased new student undergraduate growth. These three strategies that I have just outlined are designed to make DeVry University more attractive to prospective students and to increase student persistence. We get it.

With fewer inquiries in new students, we've got to do a better job with each student who inquires and with retaining each student we admit. And what's encouraging is that inquiry conversions are up. And we are seeing early signs that persistence is up as a result of these strategies. In a tough market, you have to control what you can control and I believe the DeVry University team is doing just that. We're also taking decisive actions to maintain and extend positive economics.

The team has reduced the number of campuses, developed a more variable expense structure, and they've achieved remarkable cost recovery this quarter. You might recall that in FY14, it was about 50%. Last year it was 90%, and this year cost recovery should be close to 100%. So even with all the challenges we face, even though DeVry University is much smaller than it was, it will generate about $41 million in EBITDA this year. This positive contribution of the University to DeVry Group is something I believe some investors have overlooked and we are focused on keeping DeVry University in positive territory.

Before we move on from DeVry University, I'd like to update you on the FTC matter. Earlier this quarter, we filed a motion to dismiss the FTC's case. This was a procedural step to challenge the sufficiency of their allegations and in fact, the process generated an important acknowledgement. The FTC conceded in it's filing that it quote, does not allege fraud, intent to defraud, or knowledge of falsity, end quote. We consider this to be particularly telling when considered together with the fact that the FTC has never challenged the value of a DeVry University education.

We view the FTC's case to be a difference of opinion about how colleges should calculate employment outcomes, even though there can be no clear-cut right or wrong answer, because there is no uniform federal standard for doing this. We believe DeVry University's graduate employment rate methodology was reasonable, rational, and transparently disclosed to prospective students.

Our outlook is also reinforced by the similarity between DeVry University's employment methodology and methodologies embraced by 40 Attorneys General, and by the National Association of Colleges and Employers and by others. DeVry University has long history of leading in best student practices and providing access to quality education and career opportunities to thousands of students. We know there's always more to do.

We take the issues of student access, debt, and quality education very seriously and we continue to address these issues at all DeVry Group institutions. We are maintaining an open dialogue with the FTC and the Department of Education to explore potential resolution. Parallel to these discussions we will continue to vigorously defend ourselves.

Let me move now to our medical and healthcare segment and I will start with Chamberlain. Chamberlain really highlights the success we can have when we optimize programs to serve educational needs in areas of skills gaps and supply demand imbalances.

Chamberlain had another excellent quarter. Driven by continued demand for our MSN and RN to BSN programs in particular. New student enrollment was up 12% compared to the March session last year.

The continuation of this growing enrollment trend puts us on track to deliver total enrollment growth in the high teens compared to FY15. We are also pleased to see strong enrollments at our new locations in Las Vegas, Detroit, and North Brunswick New Jersey.

We recently received approval to open our first campus in California, in Sacramento. Classes began there this month. Which brings our total footprint to 20 campuses in 14 states.

We expect positive growth for us to continue as the supply and demand imbalance for healthcare professionals, especially nurses, persists well into the future. Here are some statistics that speak to this well-documented shortage.

Nursing employment is expected to grow 19% out to 2024. Nursing is expected to be the number one job opportunity through 2022. The Institute of Medicine recommends that 80% of all nurses practicing by 2020 have a bachelors degree or higher. And there's projected to be a shortage of more than 500,000 nurses by 2020.

Last week I had the privilege of introducing the keynote speaker at the grand opening of our New Jersey campus. He's a member of the state legislature, and is very supportive of how we, as a private-sector provider, are increasing educational capacity, and providing that opportunity at lower cost to the taxpayers.

We also held one of our student focus groups. And here's what one student emailed me afterwards. Quote, Chamberlain has been my second family. I could not have chosen a better school. The compassion, devotion, and nurturing does not begin once I graduate and in the work field it begins every time I walk through those Chamberlain doors and I am grateful. You know when we talk about our culture of care, that's what we mean.

Let me move to DeVry Medical International or DMI. And I am pleased to report to you that Ross University School of Veterinary Medicine recently received a reaffirmation of its accreditation with the AVMA through 2018. We felt it might be helpful to share some color on what we are seeing and expecting with DMI enrollments. All last September's intake was strong. January was not as strong and as you know May is historically a smaller off cycle semester for DMI.

We've talked before about seeing some increased competition. And currently we're seeing some students delaying their decisions because of changes that were recently made to the MCAT exam. So I'm talking about the MCAT here. And with the introduction of a new MCAT, prospective students are no longer sure how their scores will measure up, relative to historical application standards and so let me give you example what I mean here.

Before, if you got a 26, you pretty well knew that you might want to look at international options but now if you get a 500, well, what does that mean? A lot of US schools, are also, sort of calibrating these new scores. So students are all holding off to see where they will get in. We think we will see this dynamic as we cycle through this first year of the new MCAT. The good news is that early indication for September are for a return to the trend. And there's no change to our view that the long-term outlook for total enrollment is low single digit growth at DMI.

Now let's move briefly to Carrington College. As I mentioned previously, Carrington enrollments and revenue were lower year-over-year. Many institutions in the career college sector are experiencing similar or worse declines, some as much as 10% to 15% down. Our strategy to improve our results includes rolling out or transplanting programs across our campus network.

This quarter we rolled out new version of pharmacy technology, veterinary assisting, and medical billing and coding. Other programs are scheduled to launch throughout the spring and summer sessions. In addition to new programs we focused on enhancing the value we provide to students and in this regard, I am very happy to say that Carrington's employment and persistence outcomes are up.

In international and professional education, we had another strong quarter, despite some of the macro challenges in Brazil. DeVry Brazil continued to perform well in a low organic growth environment, which is resulting of course from Brazil's current volatile economic climate as well as the impact of changes in the FIES student loan program.

We grew new and total student enrollments during the quarter, even when you exclude the impact from the Ibmec acquisition. Ibmec itself delivered solid results in it's debut quarter with us, which continues to support our confidence in the long-term opportunities that this acquisition represents.

In recent conversations with investors, some have noted that what DeVry Group does in Brazil is very different from other investments they're familiar with like manufacturing or export businesses, that are really struggling to compete in Brazil. For DeVry Group it's in an in-country operation with the no imports or exports. So our reported results in dollar terms aren't as good as they would be if the dollar weren't so strong. But in constant currency, we are up 51% year-over-year for the quarter.

The DeVry Brazil is consistently delivering quality academics. And is one of the top private-sector providers in Brazil for student outcomes, as measured by the National exit exams. Student satisfaction at DeVry Brazil is also at an all-time high. Which helped drive improvement in persistence of nearly 400 basis points year-over-year.

And finally moving to Becker Professional Education. Becker's results were roughly flat compared to the prior year, with some ups and downs. Our programs in CPA test prep and continuing professional education continued to grow, offset by lower enrollment in healthcare programs. The CPA exam is undergoing a major overhaul in 2017. For Becker, this creates another opportunity to further extend our position as the clear leader in CPA exam review. Our scale and leading market share provide the resources and capabilities and not only implement the required updates, we'll also launch major educational innovations in our CPA review product.

In this month we expect to fund a small equity investment in an education provider in India, called EduPristine. We've worked with this partner for some time and the investment is consistent with our strategy of continued growth in international and professional education. Professional education remains an attractive long-term opportunity for us. And we will continue to evaluate opportunities to expand in this area. And so with that, let me turn it over to Tim.

Thanks Daniel. Good afternoon everyone. I'll start with the overall financial results and go through our operating segments.

In the third quarter of FY16, total revenue declined 3.2% to $474.2 million. A little more than half of the decrease was attributable to the impact of currency from Brazil. The remainder of the decrease was driven by the decline in enrollment at DeVry University, as well as enrollment challenges at Carrington. The declines were partially offset by growth in our other institutions.

As Daniel noted, we're doing a good job of controlling what we can in a difficult environment. Total operating costs, excluding special items, for the third quarter were $414.4 million, down 4.4% from the prior year and were a little better than our expectations. We are also pleased to see that net income excluding special items increased during the quarter. Net income up $45.6 million during the quarter resulted in earnings per share, excluding special items, of $0.71. Better than expected. The effective income tax rate was 12.7% for the quarter. Excluding special items, our tax rate was 22% for the third quarter as a result of a shift toward more US sourced earnings.

Now shift to our operating segment results. Business Technology and Management revenue was down 23.3% to $156.4 million during the quarter. New undergraduate students in the March 2016 session declined 28%, while total undergraduate students declined 22%. On a same campus basis, new students declined a little less a 23% and total students declined 17%. The number of graduate course takers in the March 2016 session declined 20%, compared to last year. We've been successfully reducing our costs in line with the revenue declines.

We achieved cost reductions of approximately $48 million at DeVry University compared to the third quarter of last year. These reductions resulted in 102% cost recovery, which is up sequentially compared to 96% last quarter and represents our strongest quarter of cost recovery to date. We expect cost management initiatives to continue in the fourth quarter and have revised our cost savings target for the full-year, to at least $170 million from $150 million, as we remain committed to our goal of maintaining positive segment economics. The segment recorded operating income of $6.4 million for the quarter, excluding special items.

Medical and healthcare segment revenue of $246.8 million dollars was up almost 10% during the third quarter, with growth again driven by strong enrollment trends at Chamberlain and continuing growth at DMI more than offsetting the revenue decline from Carrington. Operating income, excluding special items for the segment in the quarter, was $52.8 million, representing an increase of 15.2% from the prior year. The increase was driven by operating leverage at Chamberlain and DMI.

Chamberlain revenue grew 20.7% for the quarter, driven by continued demand for nursing degrees. In March, new student enrollments grew 12.1% and total students grew 19.8%. These results are driven by continued success and strong demand in our post-licensure programs. At DMI, revenue grew 3.7% versus last year. At Carrington, revenue decreased 6.7% during the quarter. New student enrollment for the quarter declined 5.9% and total enrollment declined 6% compared to the prior year. Carrington certificate programs continued to grow but not at the rate we expected. We had some operational issues that slowed enrollments in certain degree programs and we experienced delays in approvals for some of our online and transplant programs.

Turning to the international and professional education segment, revenue of $71.7 million increased 17.4% in the quarter. The decline of the Brazilian real as compared to the US dollar, reduced reported revenues by approximately $9 million. On a constant currency basis, revenue for the segment would have grown 31.7%. Operating income for the segment, excluding special items, was $4.6 million, equal to the prior year. At Becker, revenue was roughly flat compared to last year at $23.7 million.

DeVry Brazil revenue increased 28.2% to $48.1 million, excluding acquisitions and currency impacts revenue would have increased 5.3%. As you can see in the enrollment table included in our results release, excluding Ibmec, new student enrollment increased 4.2% compared to last year, while total student enrollments increased 7.2%. Given the changing market conditions, we've broadened the use of scholarships, which has resulted in revenue per student declining. This will impact margins in the near-term but it's an important aspect of our strategy to maintain and grow our leadership position in Brazil.

For DeVry Group as a whole in the fourth quarter of FY16, we expect a continuation of the revenue pattern we've see with a decrease of about 2% to 3%. Again this is a result of declining revenue at DeVry University and some near-term challenges at Carrington which will offset revenue growth at all of DeVry's other institutions.

We expect operating costs excluding special items in the fourth quarter to be down about 3% to 4%, as a result of cost reductions at DeVry University offset somewhat by growth investments. We are seeing -- as we see a mix shift toward more US sourced earnings, we expect the effective tax rate to be approximately 23%, excluding special items.

With that I will now turn the call over to Pat to talk more about our balance sheet and financial position.

Thanks Tim. And good afternoon everyone.

For the first nine months of FY16, our cash flow from operations was nearly $220 million. Our cash and cash equivalents were $330 million at March 31, down from $402 million last year. The decrease was the result of capital deployed for acquisitions, including of course Grupo Ibmec in December. This was partially offset by the sale of DeVry University's Fremont California campus, for nearly $25 million during the third quarter.

We've continued to focus on managing our excess real estate. In the last year alone, we've reduced our footprint by 475,000 square feet. Now the sale of Fremont, frees up capital that we can use to invest in academic quality and student services.

Our net accounts receivable balance was $170 million, up 13.7% from the prior year, due to DeVry Brazil acquisitions and an extended reimbursement cycle from FIES. Our bad debt, as a percentage of revenue, remains one of the lowest in the industry at 2%. Which compares favorably to 2.5% last year.

Capital spending for the first nine months was $51 million, compared to $64 million last year. We are now expected capital spending for FY16, to be in the range of $75 million to $80 million. We will continue to invest capital for the long-term and infrastructure to support our quality and diversification strategies. As we've indicated on prior calls, we expect to incur additional restructuring charges in the fourth quarter of FY16.

During the quarter, we invested approximately $8 million in share repurchases. We repurchased 401,000 shares, which represented a 21% increase compared to the second fiscal quarter. The average purchase price was $19.63.

Now stepping back, our priorities for capital allocation include, first, maintaining academic quality by investing in our core operations and investing in new programs and new campuses where there is the greatest demand. Second, growing via diversifying acquisitions and finally, increasing economic returns via dividends and share repurchases.

Now I'd like to say these three priorities live within a context where we have some conservatism right now. We like our strong balance sheet and having liquidity. We have $330 million of cash on hand, and access to an additional $400 million through our line of credit that we renewed in March of last year.

We received positive feedback from our fellow owners about our balanced approach to capital allocation. And despite these challenging times, both our EBITDA margins and free cash flow generation remain stable. Last year, we generated $291 million of EBITDA, representing a 15% margin before special charges. Also last fiscal year, we generated $114 million of free cash flow, resulting in a yield of 6%, on par with many companies in the S&P 500. With that, I'd like to turn the call back over to Daniel.

Thank you Pat, before we conclude here I'd like to mention that we recently renewed our partnership with the US Olympic Committee, the USOC. We provide scholarships to olympic and paralympic athletes, so that they can continue their education while they are training. To date, so far we've had 241 members of the Team USA Family who have enrolled in one of our programs and 49 have completed their degree so far. Anticipate more than 15 DeVry University student athletes will make the team and go to Rio. We'll also be sending students from our College of Engineering and Information Sciences to help the Olympic IT team deploy their IT systems that are needed to support the athletes. So these lucky students will walk away hands-on, real-world career experience at one of the biggest events in the world.

So before we open up the line for your questions, I'll summarize and let me do that by saying that you can think of DeVry Group in two parts. DeVry University is about one third of our revenues and less of 15% of our EBITDA excluding special items. We are working our plan and while it's taking longer than we'd like to stabilize enrollments in a very challenging environment, in the meantime we continue to keep the University as a positive EBITDA contributor to the Group. The other 2/3 of the revenues are in Healthcare, Professional, and International education which are growing nicely.

Overall, DeVry Group is differentiated from other post-secondary higher education providers by virtue of our quality, diversification, and long-term focus. And we have strong fundamentals. You can see that in our better-than-expected quarter and our continued focus on quality student outcomes. Strong fundamentals and a long-term focus see organizations through regulatory issues and swings in the economy. For our fellow owners, there's opportunity and value in these strengths. We are confident that we have a strong team executing a strategy that will deliver positive student outcomes and create significant value over the long term. So now let's get your questions.

Joan?

Great, Daniel. I'd now like to ask Amy to please give our callers the instructions to ask a question.

(Operator Instructions)

The first question comes from Trace Urdan at Credit Suisse.

I wanted to ask, dive right into the healthcare segment, you're obviously seeing such incredible strength in the nursing front, Daniel, and you outlined some positive statistics about what's happening in nursing hiring. But in the medical assisting front, it just feels dead there. It's not just Carrington. I think other providers that share enrollment data in the medical assisting area are equally weak.

And I wondered if you have any thoughts about that disconnect. Is there some saturation in that part of the market? But higher demand with a higher end piece of it? Or what is going on there in your estimation, and when do you think it will change?

Excellent question. I can understand why you would ask that with dichotomy within healthcare world. But remember that the medical assisting and certificates -- basically these are certificates, are at that shorter end of the market, that entry level: much, much more countercyclical, whereas nursing over the long-term, we've seen, has been fairly acyclical really.

And so with the low unemployment environment, that's probably the biggest driver that we see. One observation that I would make and I don't have data on this, this is very anecdotal. But I'll just share the color since you're asking. And it's early, but the team is telling us that -- Carrington, is telling us that, more and more they're hearing from their employers. They are very close with the employers of the graduates. And the employers are saying, gosh we're having a hard time finding these medical assistants, or medical technician, surgical technicians, pharm tech, those kind of programs and are offering incentives for -- to hire those folks.

And historically as you know, watching this industry for so long, that backend if you will, finds it's way to the front end, and so no way to make a prediction there, but that's been the historical pattern.

Do you -- are there opportunities for you to partner with the larger employers to address those needs directly? I think that you have a reputation for being at the very high end on the quality spectrum. Have you had any discussions like that?

We have. That fits into what I mentioned, workforce solutions. I know it's a term that might not be readily apparent to everybody so when we say we want to be a workforce solutions provider, it's exactly that. It's partnering with the Big Pharma retailers, the CVS, Walgreens, Walmart for example, in this particular example, to say, hey, maybe you're struggling to find the pharmacy technicians that you need. How can we partner such that -- we've always been a workforce solutions provider, and access our career services. Increasingly though, it's more of a close collaboration where hey, come and collaborate on the curriculum.

Tell us what you're going to be looking for over the next few years, the kind of skills that you need, and we will actually customize the curriculum. So getting much more -- and then continuing education opportunities for your existing employees that you already have. So bringing our continuing education and our career services together as one integrated solution offering, that's what we mean by workforce solutions. So we're very much focusing on that opportunity.

Okay and then Daniel I just wanted to ask a regulatory question. We are coming up - we're starting to approach the more meaningful deadlines on gainful employment, and I know you have discussed in the past that there's this issue with respect to the veterinary school, and that you have expressed at various times your hope that you could get the regulators to see reason on that front. And I wondered if there's anything on that that you could share with us in terms of discussions or your thoughts and whether your thoughts have changed about what might happen there?

Not a real change, and unfortunately I can't give you a lot of gory details. I'll apologize in advance which for what may seem like not the greatest responsive answer to your question.

But yes, Ross Vet School could be in the zone, or not past. And what's interesting is we have fantastic student outcomes, whereas this so-called gainful employment metric is supposed to predict that a graduate will struggle to pay their loans back because of the income, debt to income ratio. The actual cohort default rate at that Ross Vet School most years is between 0% and 1%.

So the actual loan payment performance seems to trump the so-called predicted ratio. And it just seems to us that when you've got that kind of performance, that excellent performance, that seems to be a program that does provide gainful employment to its graduates. And so, we think with those kinds of fundamental values that there should be solutions that can be found, and we're continued to pursue those with our regulators and other policymakers in a very collaborative fashion so we have that kind of dialogue.

At the same time we see operational things that we can do to continue to do what we need to do in the Vet School. Just as a note, the first set of GE measures are not scheduled to be published until January of 2017, and the eligibility for student loans, if they were in effect, wouldn't happen until January of 2018.

So we still have some time here. We have a number of options and we'll keep you posted for sure.

Okay, thank you.

The next question is from Peter Appert at Piper Jaffrey.

Thanks, good afternoon (multiple speakers). Daniel, you outlined some interesting initiatives and programs to try to get DVU on the right track. And I think that it's consistent with what you've talked about for the last couple quarters. And not meant as criticism, but just observation, it doesn't seem like it's really having very much traction yet, in terms of the performance of DVU from the start perspective.

So what are you looking at in terms of metrics that gives you some confidence that we going to see an inflection? And do you think we could see that inflection, not necessarily getting positive, but maybe getting meaningful less negative in FY17 for example?

Sure. It's a great question and some of the metrics that we look at are: what is the impact on new student performance particularly in the markets that have had more of the strategic marketing treatment for the longest. And in those markets, we saw that they were down a lot less than University overall. So they weren't flat, but they were down single digits.

And in fact, within that group we had eight markets that were flat or up. And some up in really nice percentages. Got a long way to go. But that is certainly an encouraging sign. And then the second thing that I would point to, is other operational metrics.

We know that we have to do a better job with every inquiry that we get. And so how is the inquiry conversion of a prospective application? Well that's up. And then we know that for every new student who we do attract, we have to help them persist to graduation even better. And that persistence is up, based on these specific interventions in the student experience that I talked about.

So I see the team executing the strategy. I think it's the right strategy. I think it's the right team. And we do see those encouraging metrics, but there's no question that it is taking longer than any of us would like. And that's why at the same time, during all those amazing things, they've also got to focus on keeping our cost structure in line with the enrollments and extend those positive economics. And so the fact that they were able to achieve 100%, 102% cost recovery, enables us to do that and let those three strategies that I outlined take effect.

Right, that's helpful thank you. And actually that brings up an interesting point for Tim perhaps. You've done such Yeoman-like work here 2016, I'm always nervous that maybe there's nothing left to do. So as we think ahead, how much room is there left for continued movement on the cost front?

Yes, it's -- yes, seemingly it gets harder, but our actual recovery is getting better. So necessity is the mother of invention, right? So I have to credit the team at DeVry University.

They are rethinking how they approach the student. They are using technology. Daniel mentioned some of the innovations we've come up with that help. And Peter, we believe that we can maintain those positive segment economics as we go forward. We have pretty good visibility into FY17 and we feel good about doing that.

And we will continue to work with the team to find more effective and efficient ways to deliver that quality education. So for now, we're -- we continue to produce the right kind of results in that area, and we've got good visibility to FY17. Not saying it's easy, but we have got a path toward it.

Got it. And then Tim one other thing, on the -- I think Daniel mentioned -- a somewhat more generous scholarship program at DVU. Does that have some measurable implications in terms of how we should be thinking about revenue per student?

Good question Peter. The revenue per student undergraduate at DeVry University for the third quarter was down about 0.8%. So just under a full percentage point, compared to last year.

That was in line with our expectations. Looking forward to the fourth quarter, we see a little bit more pressure on revenue per student, probably down about 1.5%. And that would probably continue perhaps down to the 1.5% to 2% range as we move into FY17.

A couple of factors that are influencing it and Daniel's remarks noted our strategic use of scholarships. And then we also have a very positive response in the marketplace from our students on our medical billing and coding. And of course that has a lower credit hour. So the confluence of those two, as we continue to get an increased mix of our medical billing and coding students, as well as the more strategic use of scholarships, we think will see year-over-year pressure moving into next year and the 1.5% to 2% range.

Actually if I can jump in, Peter, it's Daniel. I would say it's another metric that you are asking about before, I think I mentioned that the scholarship did have a nice impact on our start rate. And that's very important for us to see.

So we are encouraged by that and we are just rolling it out. So we are hopeful that we can see increased impact from the use of the scholarship. And the other thing about it that's so nice is, it's structured to encourage positive academic performance and persistence. So it just -- the whole structure of it just seems to fit us very well.

Understood. Thank you.

Our next question is from Sarah Gubins with Bank of America.

This is David Cui for Sara Gubins. Just a clarification question, Daniel did you say that undergrad starts were up 10% for the month of March?

No. The start rate I think was what I was talking about. As I was mentioning from the scholarship, we saw an increase in the start rate. So that's the percentage of students who've applied and then being accepted to University who then ultimately go and start. That rate had a lift of about 10%.

Okay. Great.

If you want to look at the starts, the starts themselves, are in the chart in the press release. You can see the exact rate on that.

Got it. Okay, that's helpful. And can you discuss what you saw in terms of demand for undergrad for the month of April?

Yes. I think it's a little early. We don't have a lot of visibility on forward. We'll be reporting that for April, would flow into our May session. And so we'll be reporting that next quarter.

Okay and Tim, in increasing your cost-saving targets, in what areas are you able to find these additional savings?

Well, it's really across the board. We look at, for example not filling open positions in our -- for our colleagues. We're looking at real estate optimization. We are looking at a whole series of costs around IT and the overhead. All the factors, so it's -- I mean in the past, when we think about the full year, it's about 50% staffing, 25% real estate and other, and then the balance 25% is in marketing.

Okay great. And then just lastly, it sounds like you have some visibility into FY17. Should we see an acceleration in operating profit or just some margin expansion for BTM, or should we just think of it as maybe like flat at this point?

Yes. I think that's a safer bet.

We anticipate continued total enrollments to decline. It takes over a year from the time new starts go positive before you get to total enrollments positive. So we know that our total student numbers will be down next year. And so we're really kind of turning around that very single digit breakeven mark and wouldn't expect any real leverage. Really the trick is to keep it positive. We hope to get the leverage when we get the enrollments going positive.

A bit more room on the EBITDA side, which we tried to give you a little bit of insight into that a few minutes ago.

Got it. Thank you very much.

The next question is from Denny Galindo at Morgan Stanley.

On the medical and healthcare margin. It looks like it came out at little bit better than we had thought for the quarter. This is usually the seasonally high quarter. Any advanced look on how this will trend next year? Should it still continue to come down little bit due to new campus openings, or is this kind of the right level for it to stabilize that?

Yes Denny it's Pat. Since you point out the third fiscal quarter is the seasonally high quarter in terms of our operating income margin for the medical and healthcare segment. So we would expect that seasonally it would trend downward into the fourth quarter, but we would expect some margin improvement compared to the fourth quarter prior-year.

Stepping back on your question as we look at FY17, probably flattish net net. So probably right around 18% or so, similar to what we did last year and comparable to probably what we'll do for the full-year this year.

Okay that's helpful. And then secondly, it seems like there's a market for educational institutions with declining enrollments, double-digit, a lot of potential bidders. At what point would you consider exploring alternatives for DeVry University? And how do you weigh the trade-off between looking at doing something with it now, or letting starts continue to fall at this double-digit rate for the next couple years?

Well, we are certainly mindful of all of our options here. And we will continue to look at those.

The direction you are going is not our plan right now. So we think we've got a plan to continue to create academic and economic value at DeVry University, in particular, and all our institutions for that matter. At the same time, there is nothing that is sacrosanct here and we look at all the options. So that's something that we continue to get guidance from from our board, as well. And so we will keep you posted.

And then along similar lines, are there opportunities to accelerate some of the changes you're undergoing at DeVry University through acquiring someone else that might also be struggling, but might have an interesting program or an interesting asset to invest, or to accelerate that change? Or is that not something you'd look at?

Yes, that is something. A lot of those opportunities can come across the desk. We also see opportunities to help out. We've seen some other institutions that have failed, or closed, or shut down. And many of those transfer students have come over to DeVry University or to Carrington College. That's actually been an opportunity.

The people who are in charge of looking at those things, public policy people, or their consultants know us and we have a good reputation so we are often on the list on the institutions that they call to see if we can help out, so that's there. From an acquisition perspective, I would just reiterate what I said before, which is, our priority is really in professional and international education and that's where you've seen us allocating capital, such as the acquisition that we made of Grupo Ibemec in December.

And then, there is a Wall Street Journal article on paying for clinical clerkships. So that's in New York. But can you discuss your policy on playing for these clerkships? And is this getting harder to find enough slots to keep growing that DeVry International and if you could comment on the regional distribution of where your graduates end up going. That would be helpful as well.

Sure. And there's two pieces of your question just to unpack that, because you said graduates. The clerkships is the third and fourth year of medical school, or the last three semesters of Vet school. So that's while they are still a student. Those are what we call clerkships. Back in the old days they used to call them internships. They call them clerkships.

And then you mentioned graduates. That's when they graduate and then they go on for -- in the medical world, go on for residency. In the veterinary world they generally go straight into practice, there are some residencies.

So in each case, we're feeling pretty good about how our students and our graduates are doing, in those areas. The article that you talked about, I'm not sure I saw that one, but I know the issue. People have asked about providing resources, -- I can't understand why there's an issue. It seems to make perfect sense that if we are sending our students to a teaching hospital, that we would partner with that hospital to provide the resources to teach the students.

And we also provide resources, in some cases, to help build simulation centers or do other things that help that hospital serve it's community. That's a good thing.

So those hospitals that we've worked, some of whom we've worked with for decades actually, really view us very positively as a partner in medical education. And of course once our students complete a clerkship in the third or fourth year with a teaching hospital, oftentimes they will put that hospital on their list for the residency match, or that hospital may put them on. And that's what the whole match is about.

So once they get to know each other, either it works out really well for meeting their workforce needs and we become a workforce solutions provider. And so in March we saw the residency match. The real March madness, as opposed to the basketball. This is one that really counts, making sure we have the doctors we need.

And we saw our two US serving medical schools put more than 1,000 new residents into the match. And I think our two together are probably the single largest provider of new positions to the US residency system. So, we feel pretty good about what DeVry Medical International is doing, and think it will continue to serve those students and that societal need for the future.

That's it for me. Thanks

Good, I tried to parse the two pieces out there for you.

Next question is from Jeff Meuler at Robert W. Baird.

Yes, thanks. This Nick on for Jeff. Looking at Chamberlain, I think you said -- 12% was the new students growth core. But did you give an organic, like a same campus number if you strip out the new campus locations?

Sure, good question. In this start, it was only post-licensure. So there were no campus starts.

Just from an overall enrollment perspective, we have campus starts in the month of May, September, and January and then we have post-licensure starts every six weeks. So, we would have July, September, November, January, March, and May. So the 12% is a good apples to apples number.

Okay great thanks and then just Chamberlain performance has continued to be really solid. New enrollment has decelerated a little bit over the past few starts though. So just looking forward, do you think it should stabilize here around in the low teens rate, or how should we think about that over the next few quarters?

Yes, -- the way I think about it Nick, is that of course as Chamberlain gets larger, as any institution gets larger, or any organization or company gets larger, the law of larger number starts to kick in and the percentages will be a little bit lower.

We like Chamberlain's strategy of having both on ground pre-licensure and online post-licensure programs. They reinforce each other and give us a strategic advantage.

Many students tell us in the post-licensure world that they really look for a -- I'll say it the way they say it, a quote, unquote real nursing school. They feel that a nursing school that has pre-licensure, on-campus programs is a real nursing school. Chamberlain's -- being around for over 125 years, it gives that sense of solidity, as well.

So we just think there's going to be continued supply demand and balance there in the world nursing. And therefore we see continued growth. And we haven't given a specific number on that, but gives you a sense of how we're thinking about it, I hope.

Okay thanks. You mentioned the increased scholarships within DV Brazil, is that just primarily related to the FIES changes or any other competitive dynamics that are going on there?

Yes. It's a little bit more competitive there. Overall demand is not a strong as it was, just given the economy, the political situation, and so forth. And so we are focused as Tim said in the long-term, on preserving and enhancing our share and our stature there. One interesting fact about the FIES and it's FIES for those following along with the Portuguese acronym for the student loan system there, is -- for those who have been following we had an investor day last fall and Carlos Filgueiras, who we call Degas, he is the President of DeVry Brazil.

He said that he expected that while the government was going to cut the number of FIES contracts in half, and people had heard that and got a little bit concerned. At the same time the government was going to prioritize those toward high-quality institutions and we've got strong academic outcomes and I mentioned some of those. And on the Northeast where we are strong and in healthcare and engineering, where we are strong.

And as a result, we expected to double our share of contracts and double the share of half the number of contracts resulting in a neutral impact on the number of FIES contracts and that's just what we saw. So I'm feeling really good about the team that we have in DeVry Brazil. They really have their finger on the pulse and doing what needs to be done to enhance educational opportunities down there in Brazil.

Great thanks for taking the questions.

Thank you

I think we can wrap it up. So we'd like to thank everyone for your questions, and remind you that our next results call is scheduled for August 23, when we announce our fiscal 2016 fourth-quarter and year-end results. We'd like to thank you for your continued support of DeVry Education Group.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.