Laureate Education Inc (LAUR) 2003 Q1 法說會逐字稿

Please stand by, we're about to begin. Good day and welcome to the Sylvan Learning Systems First Quarter, 2003 Earning Results Conference Call. This call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to the Manager of Investor Relations, Mr. Chris Symanoskie. Please go ahead sir.

Thank you operator. Good morning everyone and welcome to Sylvan's Learning Systems First Quarter, 2003 Earnings Release Conference Call and Web cast. Before introducing management, I'd like to remind participants that during the Q&A portion of this call, we ask that each individual limit their Q&A session to one question to allow for broader Investor participation.

Next, I'd like to call your attention to the Safe Harbor language listed in the press release and remind you that both the release and this call may include information that could constitute forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements may involve risks and uncertainties. Although, the company believes that the expectations reflected in such forward-looking statements are based upon reasonable expectations, the company's actual results could differ materially from those described in the forward-looking statements. The following factor might cause such a difference. The proposed transactions described in the release are subject to customary conditions. There can be no assurance that the transaction will be completed. Among the conditions to completion of the transactions, are regulatory approvals, and consist of third parties that are outside their control. The company's operations can be materially affected by competition in it's target market's and among other factors, our overall market conditions.

The company's foreign operations, in particular, are subject to political, economic, legal, regulatory and currency related risks. Additional information regarding these risk factors and uncertainties, are detailed from time to time in the company's filings with the Securities and Exchange Commission. Including, but not limited to our most recent forms 10-K and 10-Q available for viewing on our web site.

This morning, I'm joined by Douglas Becker, Sylvan's Chairman and Chief Executive Officer, and Sean Creamer, Sylvan's Chief Financial Officer. Also available for questions today are Raph Appadoo, President of Sylvan International Universities, Phil Dennis, CFO and Chief Operating Officer of Sylvan International Universities, Paula Singer, President of Online Higher Education, and to answer questions regarding Sylvan's K-12 Business, Peter Cohen, President and Chief Operating Officer of Sylvan Learning Systems. Now, at this time, Sean Creamer will discuss our first quarter results. Sean?

Actually, it's Doug, I'm going to start us off and happy to a quarter that we think is very exciting, mostly in it's transitional nature though, as we begin to move towards the post K-12 transaction priority that we've really been focused on for ourselves. Many of you when we announced our K-12 transaction, we were excited and obviously our investment community was very excited by this news, but we did explain to everyone that, until that transaction closed, which we expect to be at the end of the second quarter, that we were going to still have a more complex story than we'd like. I guess the way I would describe it is, we're going as a company from highly complex to somewhat complicated, but our goal is to be simple and clear by the third quarter, and I really feel that we are well on our way to achieving that goal. We are obviously focused on getting this transaction completed.

This is the transaction in which our K-12 businesses and our ventures, non-core ventures assets will be sold. And, today's results that we're reporting include, really for the first time, our K-12 business, which is an important business historically, reported as discontinued operations. I want to just comment a little bit on what this transaction does to cloud the underlying performance of our company, so that we can make it clear, because I think the key point that we want everyone to take away is that, as we peel back all these layers of complexity, underneath of it, we think that our business is absolutely on track to the guidance that we provided recently, and that is pretty exciting guidance in terms of growth rate and outlook, both for this year and for next year. There are really 4 things that the K-12 and ventures transaction does that are a little complicated, but we need to look through.

First, it increases our seasonality. And that's because the first quarter of this year, is usually a very light quarter in terms of profits for our post-secondary business, but was always a very strong quarter for our K-12 business. As K-12 moves [Inaudible] , discontinued operations, we will find that, that increases the seasonality of the business. Secondly, charges related to the transaction obviously will complicate matters. That's really only relevant in the first and second quarter. Thirdly, our G&A, as Sean will describe includes all of the company's G&A including that, which should be a portion to our K-12 business, that will also go away as a phenomenon by the closing of this transaction, which is to say after the second quarter. And then lastly, the only remaining loss making portion of our ventured portfolio is a business we're very excited about, and that is a national technologically university, NTU.

As we've now moved NTU from being part of ventures into our online higher education business unit, we now have the losses from NTU, and that is expected to clear up by the end of the year. So, what you'll see really is, other than the increased seasonality, which is really going to be a permanent phenomenon and I think once people understand it, pretty harmless. The other element in complexity related to this transaction, pretty much will clear up by the end of the second quarter with a small component of NTU losses expected to clear up by the end of the year. The seasonality is pronounced in our post-secondary business because our 2 fastest growing assets, or amongst our fastest growing assets are, our Canter business within online higher education, and our university in Chile, are in essence, not doing much business in the first quarter. It's summer time for Chile and seasonally slow quarter for Canter always in the first quarter.

And the net result is, as those businesses grow, they have bigger cost basis, so they tend to lose more money in the first quarter each year as they get bigger, and then of course, make much much more money in the balance of the year, so that's the seasonality that will be more pronounced. There were also some currency fluctuations, and when you look at the break out in the performance geographically, it needs some explanations which I'll be happy to provide. Interestingly enough, I think fascinating to me, was that all the currency fluctuations made it out to having very little impact on our company as a whole. We had a very effective hedging affect of being in the multiple countries that we're in, and that worked out very well, but I think underneath of all of this, the fantastic news is that everything is on track for our plan and we came out recently with a revised guidance, which in order to make things as clear for Investors as possible, we described as if the K-12 transaction had occurred on January 1 of 2003.

And Sean will talk about this a little bit more in a moment. But, we came out with a revised guidance of 80-82 cents and the net result of that was that revenues would grow in the 22-23 percent range, and that operating income was going gross in the 50,55 percent range for the year. These are very, very strong growth rates for the year. Imbedded in that revised guidance, is the operating performance of our post-secondary businesses, which are absolutely delivering what they were supposed to do to be on track for the rest of the year. In fact, when we came out with the original guidance, before the K-12 transaction was announced, that was a range of a $1.11 to $1.13 before venture losses.

Embedded in that, was post-secondary performance, which is identical to the performance which has been delivered, so underneath of all the complexity, you've got a business which is boiling up in growth and growth rate and performance to deliver the kind of high growth in this year that we were expecting, and that's obviously exciting for us, although frankly, we even more excited to get past this Q1 and Q2 and, as we talked about going from what used to be a 12 page earnings release to a 6 page earnings release on our way to a 3 page earnings release, and that's probably pretty good measure how we're doing along the way. Well, how did we do in the quarter? Revenues for the whole company, the continuing company, were up 28 percent. Now, organically, if you take on an apples to apples basis, that would have been about a 19 percent growth rate, because we do have some businesses that were acquired along the way, or existed in one quarter and not in the comparable quarter. Again, that's absolutely where it needs to be for us to deliver the accelerating growth in the balance of the year. That was divided between 26 percent growth for campus base, which is our SIU business, and 94 percent growth for our online business.

Let me just briefly amplify on those numbers. In the 26 percent growth for campus base, was really driven by Mexico and Chile, but when you look at the numbers, it looks like it was driven by our European assets. That is strictly a currency phenomenon. Basically, if you strip out currency, what you'll find is that the real growth inside, as expected, has come from the Mexico and Chile assets, even in a quiet quarter for Chile, our contributor in revenue growth. As an example, our Spain business, UEM (ph) , looks like it was up 32 percent, but if you take out FX, it was really up 6 percent. Our French business looks like it was up 33 percent. If you take out FX, it was up 8 percent, but our Mexico business looks like it was only up 3 percent, and it was actually up 23 percent. Again, the net result is, it all nets out to a correct overall number because of the affective basket hedging affect of being in multiple currencies that off balance each other out and that was really good. So, we're very pleased again.

Everything seems very much on track there. On the online higher education business, we're showing a 94 percent growth year-over-year. But NTU is included this year, and was not last year. If you back that out, it would have been a 72 percent growth rate, again very, very strong and we're very pleased with that. Now, that's the revenue picture. Profitability in the first quarter picture, as I mentioned, and Sean will mention as well, is really not that meaningful in the first quarter, given the low seasonality and some startup costs that relate to opening new campuses, small campuses in India and China and a few other things were all baked into the plan.

I think the big story for today, I really want to spend the next couple minutes on, is enrollment. I think we've gotten our Investors to follow our business, knowing that the first quarter and the third quarter are really low earnings quarters, but high news content quarters when it comes from enrollment news. And our second and our fourth quarter are really where we make our money. So, as an example, obviously, in the first quarter, the only University that we have that has a primary intake in the first quarter is Chile and we were absolutely thrilled and so proud when they reported a 35 percent increase in new students, which brings their total intake, I'm sorry, their total student body up by 42 percent on a year-over-year basis. And that is again, we just think fantastic results.

What that means for Chile is that we now will have over 17,000 students in our Chilean University, and when we acquired that business, they had, I believe it was about 5500 students, so we have essentially tripled the total enrollment in that business since the year 2000 and we're very proud of our team, and we feel that we've added a lot of value to them, they've added a lot of value to us, and these numbers just are phenomenon. We don't need that kind of enrollment growth to achieve the kind of numbers that we've put out to the street. And certainly, we don't expect many of our Universities to sustain the kind of hyper-growth that we'd had in Chile.

But, that doesn't mean we won't take it, and that doesn't mean we won't be very proud of it and we're very, very excited about that. Our estimate is that means that our Chilean University will have moved from, as I recall, about the 6th place in Chilean Universities when we started with them to this year by total intake, we believe it will be the top enrollment University, private University in Chile, so we're very, very pleased about that. There aren't any other primary intakes in the first quarter.

We do have a whole series of small secondary intakes in a variety of our other Universities, but our habit is not to report on secondary intakes, because they're really not big enough to be useful information. However, with that said, if you take the small intake and add them all up, and if you take the primary intake from Chile, the answer is that in our first quarter, we take in about 40 percent of our enrollments for the year. That means that about 60 percent of our enrollments for the year come in the third quarter, and third quarter's when Mexico, Spain, France, Switzerland, will all report results, and obviously, while none of them are expected to deliver the kind of growth that Chile delivers, we see all of them positioned as we can see it today to deliver the kind of enrollments that we were expecting based on the guidance that we've provided.

Now, in the third quarter, the big story's like hood (ph) will be Mexico. Mexico is a fantastic business. It's bigger than Chile and obviously because of that, is not expected to deliver the hyper-growth of Chile, but it has incredible growth prospects. We opened 2 new campuses in Mexico last year. We expected to open 2 new ones this year. Last year, we opened in towns called Quevela (ph) and Arbwastetientas (ph) , and this year we do have 2 more on the books to open. We'd like to open in the roughly 2 or 3 new campuses a year in Mexico. Part of the reason we're opening new campuses, and part of the reason why we're building new capacity in our existing campuses, is that the underlying demand in Mexico continues to be incredibly strong.

In fact, the government estimates that they will need 2 million more seats to meet their higher education requirements between now and the year 2008, so we think that we can have a great engine of growth in Mexico as we do in Chile. Those 2 businesses then actually feed our Spain business where we see low local demand, but we've actually gotten a tremendous interest from our students in Mexico and Chile to go spend time in Spain and we think that could become more and more material to our growth picture there, and then we would expect more modest growth in the rest of Europe, but that's fine, because it does provide a nice overall balance to our portfolio that we would like to be a truly global portfolio and balanced. Mexico is exciting. In an order to ready ourselves for Mexico, we added a very important new higher.

We were very proud to welcome Ceasar Morales (ph) who was the Director of the Mexico City Region for the Technological [Inaudible] array which many of you will know as being most famous and prestigious, largest private University in Mexico, for that matter, probably all of Latin America, and Ceasar (ph) has joined us and is helping provide academic leadership for us in that business. So, that gives a flavor of why we think Q3 enrollments should be on track. One of the fascinating things about our business is that the 4 year enrollment of our students, compared to the 2 year enrollment of the typical U.S. post-secondary companies, gives us a visibility that really can't be matched by anyone else in our field.

As an example, if in our third quarter, we were completely unsuccessful in achieving our goals, and instead of having a growth rate in new students, we simply were flat over the previous year in new students. We would still achieve 97 percent of our business plan for enrollments, also revenues for the campus based business this year, and 90 percent for next year. So, that's the tower of the pipeline that we build with the 4 year students and with the low attrition rate that we have compared to what U.S. comparables. Now, our online business is much more comparable to our U.S. companies. That is, focusing on the working adult with more like a 2 year length of stay.

Obviously, we as expect, a strong visibility, but certainly not as much as we have in the campus based basis. The next few quarters are going to be very important quarters as we complete the transition and pull the NTU involved in businesses from our ventures portfolio directly into the online hired station business. And in the process, that will undoubtedly complicate their numbers a bit. For example, we're not likely to maintain the relationships with all of Canter's partners, because we now can committee them more deeply to the alliance with Walden's (ph) , since Walden's (ph) now is going to be essentially operated as a more integrated unit. And so what that really means is you'll see Walden's (ph) growth going up and up and up but Canter's growth for the next 2 quarters will probably be a little lower as we phase out partners that we think serve regions that would be better served by Walden.

We expected by the third or fourth quarter that will pick up again and again, all of that baked into our plans, and very much on track. On terms of other highlights for the online higher education business, we did launch new programs that had their first enrollment intake in January, and that included our first ever bachelor's programs. Bachelor Sciences in Business Administration and in Information Systems. These are the first bachelor levels in these programs, and these are completion degrees, not 4 year degrees, so someone has to come to us with an AA degree in order to be eligible for them. And they're just getting started, but we're very excited. We did also introduce a new Masters in education, to it already is our education powerhouse for Canter. And this is in curriculum instruction and assessments.

And this new Masters program's had it's first intake at the start of January, so good highlights, good results, and a keying up of something that I think should be provide great excitement for Investors, with the Q3 enrollment news and with the Q4 earnings, and from there, I think we'll just transition to fly as we go forward. So, in summary, we're focused on getting this transaction done and we'll have Sean comment briefly on that. We're completely focused on building our enrollments, because we know that, that life time customer value of those students, creates a huge pipeline of backlog value that gives you the visibility as Investors that you like to see, and allows us to have a predictable and very profitable business. And then we also have important goals that will flow from those increased enrollments in revenue increases and margin expansion, and we had such a leverageable cost structure that you can pretty much see now and going forward for the visible future, our ability to grow our bottom line at roughly double the rate of that we grow our top line, and that's not including anything that we do with acquisitions, so we want to be very focused on making sure that we build the enrollments that will give us the revenues, we will continue to do a good job of increasing pricing faster than the rate of inflation.

That will generate revenue growth across a relatively stable cost structure, and that will create big margin expansion, all of which says, on plan, on target, and very excited to get this transaction behind us, and show everyone what we can do with this business. And with that, I'd like to turn it over to Sean, and then we're going to take questions.

Great. Thanks and good morning. As Doug indicated, I would like to take some time this morning to do a quick review of the financial performance on some of the points Doug's already referenced, but also give an update on the transaction [Inaudible] K-12 sale. In light of the transaction and the fact that our future focus is going to be exclusively on the post-secondary space, I'm highlighting the results of the business, and [Inaudible] going forward. And while, we didn't cover in detail in the release, the K-12 businesses results continued a 2002 trend strong performance and as Chris mentioned, Peter Cohen will be available to respond to any questions with respect to K-12 business, but again, I'm going to limit my remarks to the post-secondary results.

While, as Doug mentioned, the first quarter has been our weakest quarter for the last few years, depending sale of K-12 business, further amplifies the point, specifically utiliating? Canter will simply now account for a larger percentage of our results from the continuing operation. [Inaudible] is their weakest quarter, means it's now a bigger part of that, of the whole, and therefore, makes the impact on our seasonality a little bit more pronounced. Just a reminder, though, with respect to seasonality, the first and third quarter represent our primary intake periods for our campus based businesses, typically the first quarter for Chile and the third quarter for the rest of the network.

These intakes feed the pipeline for the new school starts in the second and fourth quarters. And for the year, we anticipate that roughly 80 percent of our operating profits will come in the second and fourth quarters. With the fourth quarter, allow an accounting for almost 60 percent of that total, so that just gives you a sense of the seasonality which is been the case for the past few years, but I think it's just further pronounced now that the K-12 operations are going to be in discontinued ops. Before reviewing the specific financial results, a quick update on the transaction. Pressing towards a closing on a sale to Apollo (ph) Management that we anticipate will occur before the end of the second quarter. All the necessary regulatory filings have been made and we are currently working on obtaining any required consensus (ph) to the transaction.

At this point, nothing has come to our attention that would suggest any modifications to our timeline. [Inaudible] ventures' assets. We are continuing our dialogue with an interest party [Inaudible] and we would expect to have further details on that with our second quarter call in the meantime, I'll provide updates as appropriate. As we mentioned at the time the deal was closed, we are confident that the transactions paved the way for a much simpler and more transparent story. We also indicated that it wasn't going to happen overnight, and specifically, we noted the first and second quarter results would be clouded by a series of one time gain in charges associated with the transaction. In addition, the operating results of the K-12 businesses, specifically the learning centers business, Sylvan Education Solutions, eSylvan and Connections Academy are now presented as discontinued operations. And finally, significant portion of our G&A is properly attributable to the K-12 business, roughly 60 percent of our total, included in it's entirety in our results and our results in from continuing operations is required by GAP, so that further clouds the picture of the true operating performances for the secondary business.

The net impact is that the GAP presentation is somewhat of an apples to oranges comparison. And, this will be the case through the second quarter as well. In the meantime, we've tried to assist folks in waiting through these complexities by also presenting our results on a pro forma basis, as if the transaction had closed on January 1st of this year. This hopefully clears away some of the distractions presented by the gain in charges, and the mismatch of the income and the G&A expenses. In the body of the release, we provided a reconciliation of our first quarter actual and our full year forecast to these pro forma results.

A little bit of color on the charges in the first quarter. We recorded a pretax charge of 14.5 million, to write down the carrying value of the non-core ventures assets, non-strategic assets that are currently held for sale. This charge is reflected as a component to the non-operating results for the company for the quarter. In addition, we wrote down the carrying value of our K-12 assets. They're not included in the sale to Apollo (ph) Management, specifically the learning center, assets in the U.K., France and Spain. The result in pretax charge of 15.3 million is recorded as a component of the discontinued ops for the quarter. In the second quarter, we expect to report a gain, likely, significantly in essence of $100 million on the K-12 sale.

There will also be a non-cash charge estimated to be less than $2 million relating to the extension of the exercise period for options held by Sylvan employees who are going with the K-12 business. This is obviously an estimate. It's based on the current stock price levels. The actual charge itself is based on the Sylvan stock price at the time of the extension, so we will update you on that, but expect that, that number to be below 2 million and clearly non-cash. In addition, we announced in March that we will be converting the outstanding SIU options held by certain SIU employees in the Sylvan options.

With the plan for a separate IPO (ph) that SIU made, unnecessary by the transaction, we want to ensure management was inline with our shareholders and that our equity comp plans were tied solely to Sylvan stock. The conversion requires a non-cash charge under GAP, estimated to be roughly $25 million based on current stock levels, that's consistent with the figures we announced earlier in March. The conversion itself is contingent on the transaction closing, and therefore, the exact amount of charges, not yet known. But it's clear that the second quarter will be equally cloudy, but again, we think it teases up for a very clear story going forward for Q3 and beyond. Moving on some quick review financial highlights for the quarter.

Again, focusing on just the post-secondary results, total revenues from continuing ops were 108.7 million, an increase in 28 percent compared to revenues of 84.9 million in the first quarter of '02. Campus based revenues totaled 90.8 million for the quarter, versus 72.2 million in the same quarter of 2002, which is an increase of 26 percent. Our online revenues, which now include Canter, Walden, and NTU, were 17.5 million for the quarter, a 94 percent increase from the same period in 2002. Operating profits for our campus based businesses were 8.4 million for the quarter, up 6 percent. This certainly masks the robust underlying growth at the University's level. [Inaudible] was roughly breakeven for the quarter as we expected, which is down roughly 800,000 from the prior year. We continue our Greenfield investments in India and China that impacted our quarterly results by roughly a half a million dollars. And finally, as Chile continues its growth, the loss it has in its quiet period grows as well, understandably. If you sort of adjust that growth number for all those factors, it shows that the operating profits were up 26 percent, which is really in line with the top line growth for the universities themselves.

Online operating profits were down, as expected, by approximately $700 thousand from the prior year. NTU losses included in the first quarter were 1.4 million and certainly account for more than all of that negative variance since we did not own NTU in the first quarter last year. We do expect NTU to be at a break even run rate by the end of this year. Pro forma income from continuing ops for the quarter was 1.5 million, or four cents per share on basic shares outstanding of 40.5 million. The inclusion of common stock equivalents is anti-dilutive at this level of income and, therefore, the EPS calculation is done using basic rather than filly diluted shares outstanding. That will change as we move into the second quarter. The quarter's results show our post-secondary business is exactly on track for our full year guidance and the strong enrollment results in Chile bode very well for us for the future.

A quick additional thought on foreign currency exposure relative to Doug's earlier comments that despite the volatility in certain currencies in the quarter, specifically the Mexican peso and the--the weakening of the Mexico peso and the strengthening of the euro, our results were not materially impacted. In fact, the net impact from a bottom line due to currency versus the same quarter last year was a positive $200 thousand. So we feel very comfortable with the current mix of currencies and their relative correlation to the U.S. dollar. Since we are currently reinvesting our local currency profits, we don't have any conversion exposure per se. Rather, we're exposed on the margin. So far the basket of currencies approach has provided an effective edge for us. To the extent we feel that the mix or the volatility profile of our currencies adversely changes, we obviously would consider alternative hedging strategies.

Moving on to some balance sheet information, total cash and marketable securities at the end of the quarter stood at roughly 117 million. Corporate debt was approximately 69 million, which excludes the 95million of convertible debentures that are outstanding as of the end of the quarter. It's important to note with respect to the closing of the transaction that convertible debenture could be reduced by as much as 60 million. And finally, as Doug alluded to, we are reiterating our previously announced 2003 pro forma guidance, again assuming the transaction closed on January 1st of this year. And we have also provided a reconciliation from the projected GAAP results to this pro forma in our earnings release. We anticipate total revenues of 450 to $475 million in 2003. Of that, campus based revenues are expected to be between 345 and 365 million, with operating margins of 15 to 16 percent, online revenues estimated to be between 105 and 110 million, with operating margins at 12 to 13 percent. And again, just bear in mind the online results now include Canter, Walden and NTU and included in those margins is the assumption that NTU will lose between 4 and $5 million in 2003.

G&A expenses full year run rate for the post-secondary business forecasted to be between nine and ten million for the year and our pro forma EPS from continuing ops is anticipated to be 80 to 82 cents on fully diluted shares outstanding of between 45 and 46 million. And just to reiterate Doug's point, the four cents on a pro forma basis that we reported today puts us dead on track to hitting that 80 to 82 cents. It's difficult in a quiet quarter like we have to discern a lot of meaningful information from the numbers, but we want to just reiterate the fact that we're exactly where we want to be at this time.

That concludes my remarks. At this time I'd just like to ask the operator to get things started with the Q&A. Operator?

Thank you, sir. If you'll like to ask a question on today's call, you may do so by pressing star, 1, on your touchtone telephone. Again, that is star, 1, to ask a question. If you are on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star, 1, if you'll like to ask a question. We'll pause a moment to assemble our roster.

We'll take our first question from Bob Craig at Legg Mason.

Morning, everybody.

Hi, Bob.

Just a couple of questions for you. You spoke about some programmic (ph) additions in the online portion of the business. I was wondering if there might be some applicable comments regarding either new programs or program transplants on the SIU side?

I don't--I don't think that we tend to think so much at this stage about program transplants, although that is a very interesting possibility going forward and we do a little bit of it. I think we tend to look at, in that case, the building block of growth is going to be more opening new campuses or adding capacity at our existing campuses. In online, the building block of growth, because there are no campuses, is just basically adding new programs. So I think--while I'm sure we could talk about interesting sort of academic exchanges that take place, I don't think it's really material to our numbers at this point.

You mentioned, Doug, earlier about adding two campuses in Mexico, I guess my question is to when those openings might occur and if you could give some flavor for what kind of campus potential that you see in Mexico in terms of numbers.

I think that in terms of opening dates, we're typically looking to open in the August timeframe to allow new student intake in September. In terms of impact on our numbers, I think we baked into our guidance an estimate for a certain kind of intake and those new campuses have very little impact on it. One of the things about our business, we have that longer pipeline, we have that longer visibility, but it also means that our campuses, while they don't really lose much money when we first open them, it takes them longer to become a meaningful contributor to profitability. So, frankly, the campuses that we open this year are probably meaningful contributors to our profitability in '05. The campuses that we opened last year are probably a bigger part of our '04 story.

OK. And campus potential ultimately in Mexico?

How many campuses?

Yes.

Bill Dennis is here who's been working closely with Raph and beyond that. Bill do you--what would you say...

Well...

... be 14 now.

We have 14 now and we are conservatively looking at two campuses per year. We've got an additional two for this year on the drawing board that we haven't finalized yet because we're, of course, as Doug said, pushing very hard for the August intake. We're looking very, very--we're very much concentrated in and around Mexico City and are looking at the Northern Mexico marketplace that starts in Monterey which, as you all know, is a huge population center, and others north of there. So we've got a lot of opportunities we could--you know we will continue at a very aggressive rate in the very near term.

I think two to three for as long as we can see, but I also think it's important to note we add much more capacity in routine expansion of seats in our existing campuses than is added by the opening of new campuses every year. And I'm going to guess that probably 75 percent of the capacity that we're adding this year is in existing campuses as opposed to new campuses. So even more important part of the story is how many seats are we building into our existing campuses.

That begs another question; what rough percentage expansion in total seats are you looking at this year?

I think, again trying to be pretty careful about what kind of information we've given out, we probably should think about when and how we want to give that information out, but we're definitely building in anticipation of what we believe very conservatively can be attained in enrollment.

OK. I noticed in last year's first quarter you did announce a percentage increase in new students at Walden. Was there a comparable figure this year that you're willing to disclose?

There was and there is and it was--it's very strong. I think what we're trying to do, and give us between now and next quarter to think about it, is we're really trying to think about the right way to report the new integrated online higher education and to some extent, is it really meaningful to report Walden when, for example, an increasing percentage of Canter students are enrolled through Walden as opposed to two third-party universities. And we start getting into very weird things like, well, the non-Walden Canter students were up X and it becomes pretty tortured. So our current thought right now is we have really, in terms of Canter and online in general, have reported total enrollments. The difference between new and total is not as big as it is in the campus based business because of the difference in length of stay and if we decide to approach--a different approach to disclosure, we will certainly--we'll certainly work on that and think about it for the next quarter.

Yes, understood. One last question and I'll turn it over. I take it from your earlier comments, Doug, student retention or attrition has been minor at this juncture; there's really no change in trend there at all?

Well, I wouldn't say it's minor; what I would say is our attrition is, in our campus based business, we estimate about half the rate of our U.S. bricks and mortar competitors. But that doesn't mean that it isn't actually a real opportunity and that there is--it also doesn't mean that there's not real variance between and amongst our businesses. So our businesses that grow the fastest, as you can imagine, are probably a little sloppier with what they do with retention, and our businesses that have less opportunity to bring in new students, for example in Europe, tend to probably be a little bit more developed in how they reduce attrition. So I actually think there's some pretty exciting opportunities for us to cross-pollinate ideas on reducing attrition. But the direct answer to your question is, attrition has certainly not gotten any worse than it's been historically and it is, it think a benchmark in our entire industry in terms of how low our attrition is.

Great. Thanks a lot.

Once again, that is star, 1, to ask a question. We'll take our next question from Jennifer Childe with Bear Stearns.

Hi, Jennifer.

Good morning. Given that margins came in a little bit weaker than we were expecting in SIU, what gives you confidence that you'll be able to make it up during the balance of the year? And does your 15 to 16 percent guidance include the one-time items that you mentioned?

The one-time items really don't affect SIU with the limited exception of the cheap stock charge, the 25 million which actually shows up as a separate line item on the P&L and not...

Well, I meant on that big Greenfield charge that you mentioned, the...

That is included in the numbers that we presented; I simply wanted to give you guys some details on what was included in that number. It was roughly 500 thousand for the first quarter for both India and China.

Yes, there is really nothing in the SIU margins in the first quarter that deviates in any material respect from what we expected in building our full year plan, and that includes the loss. We point out India and China because it didn't exist last year, not because it's a variance from plan this year.

OK. I thought you had guided to about 10 percent, but maybe I'm wrong there. What about--two more questions. WSI, it really surprised us on the top line, but also what surprises is it's only at break even. Should we expect sequential--similar sequential increases throughout the year or is this a seasonal business [Inaudible] ?

I think the way we've described WSI and we've obviously been, I think deliberately pretty quiet on it, WSI has been a painful and expensive challenge for us for awhile. The good news is it does not--it doesn't lose money, it's positioned to make a lot of money if we can do some basic things to improve their revenue base. Al lot of the revenue increase that you saw I think has a lot to do with the strengthening of the euro, although even on an FX adjusted basis, it did have a nice revenue increase year-over-year and I would just describe that as something that we're working on. And frankly, you know, in our multi-year business plan, we project Wall Street essentially as flat and EBIT break even essentially.

And that doesn't mean that the management team of Wall Street is going to be permitted to deliver that way, it means don't expect that to be an operating downside to our overall story. It is, if anything, probably a real upside and there were some very bright spots. Our biggest business in Wall Street is in Italy and our team there had an absolute bang up first quarter and I think that there's some nice opportunities. But generally speaking, it's such a small, and becoming smaller, portion of the business that we're really just suggesting that we don't spend a lot of time or attention on it.

OK. And then finally, would you be prepared to give us any Q2 guidance on a pro forma basis?

I think first quarter results demonstrate the fact that it's a somewhat tortured exercise. And I think rather than put you guys through it, we've given sort of the seasonality of our business, telling you what percentage of the EBIT is going to be attributable to each quarter. I think the third quarters we're going to get back to the discipline that we had in giving advance guidance for the quarter, but the second quarter's numbers are just still up in the air because many of the charges are still to be determined based on things that we cant control, like stock price and other things like that. So to avoid even having to get into that, I think we're going to stick to just our full year guidance at this point and issue third quarter guidance with our second quarter release.

OK, thanks.

Once again, that is star, 1, to ask a question. We'll take our next question from Mark Marostica of U.S. Bancorp Piper Jaffray.

Yes, thank you. I want to follow up on the last question on guidance. Last quarter you gave Q1 guidance for the campus based business, you gave us revenue and operating profit range and also for online higher education. Would you be willing at least to give us that kind of divisional guidance for Q2?

I think what we should do is digest that. Again, what we've really been focused on is, is the business on track, are the enrollments on track, is our transaction moving forward to conclusion, which you can imagine is--takes a tremendous amount of our attention. I think it's a reasonable request and Jennifer made the same request. Let us digest it and if we think we can do it, we'll issue it in the form of a press release.

Fair enough. Just a question on the results for the quarter relative to organic growth. Doug, is there a way we could look at organic growth for the quarter or the way you're anticipating disclosing that going forward for campus based in particular?

I want to make sure I understand specifically, in the case of organic you mean excluding acquisitions?

Excluding acquisitions or perhaps excluding new campus openings this quarter. You know, is there a way to give us an apples to apples, you know, same number of campuses year-over-year type revenue or enrollment growth for the campus based operations for the quarter and what would that look like going forward?

Yes, I think, you know in the beginning of my remarks I mentioned that the 28 percent revenue growth for the entire company, which includes the online higher education business, if you took out anything that pertained to acquisitions, that was apples to apples, in other words to ensure apples to apples year-over-year, that 28 percent became 19 percent. I think that differential will become less pronounced as you get throughout the year because you'll end up with--there are very few acquisitions that were made and so they occur less and less as you get throughout later in the year.

In terms of new campuses, I think the new campuses are not a material contributor to profitability. If anything, probably break even or even modestly loss making and very small in the way of revenues. Again, until a campus achieves its first year or two in our case, it just isn't a real meaningful contributor. And so it means that we're building campuses today to make an impact on our '05 numbers as opposed to '04's. It's a little different from the U.S. business where you open a campus and you can fill it up with--pretty quickly and with multiple levels of people coming in.

But in our campus based business, we build a campus and then in the first year you're really only taking in freshman and then in the second year you open up to a second year class and the third year and the fourth year. The good news is we really don't lose much money when we open them, but it does--it is a slower build towards I think a more powerful backlog. So I don't think that would make a difference in the numbers to any material extent, Mark.

And in those markets where we already exist, we kind of view the expansion in those markets as, first--both increasing seats or capacity at existing campuses as well as new campuses to be, somewhat organic because in the markets we have other M&A opportunities. In other words, we've got three different ways to grow our business; Mexico's a perfect example of that. There's a lot of consolidation that's occurring in Latin America, for example, and there are many, many opportunities. We have a very strong pipeline for acquisitions over and above just expanding existing campuses and building new campuses that are in newer markets.

So we can look at that on an ROI basis and say are we better to increase capacity in this zone, adding seats in our existing campus there by building a new campus without acquiring somebody, and just figure out what's going to deliver the highest returns.

So, Doug, just to summarize it, the metrics we can expect going forward to measure the performance of the campus based business would be total new student enrollment growth and total enrollment growth with total enrollment growth being a good proxy for organic growth because the new campuses don't materially add a significant amount of new students in the first year?

Well, I think that answer to that is yes, but I will say again, we're new to repositioning ourselves as a pure post-secondary company. And just as I commented earlier about our openness to considering second quarter guidance on a pro forma basis, I'm open to your suggestions and if there are other metrics that'll be helpful to you, if we see for example, the opening of new campuses having any material impact that would be useful to you, we can certainly start breaking that out. And if there are other metrics you'd like to see, let us know.

Fair enough. And I'll just end it with one last question. You touched on price increasing and I--price increases as part of the model and I want to make sure I've got this down right. What is your kind of, you know, price increase that you have embedded in your guidance and in your kind of long term operating model?

Well, I think the overriding issue for us is really what is it--what is the inflation in the countries that we're operating in because in every case we expect somebody's doing something wrong if we're not increasing prices at, let's say at least one and a half and sometimes we'd like to be growing at two times the rate of inflation. That's a macro answer to your question. In terms of specific answers, I think in this year's budget we were expecting pricing increases in, let's say eight percent range on a blended basis and that is for the campus based business only.

Great. Thank you, I'll turn it over.

And in the online business about five percent.

Oh, great. Thanks.

Thank you. And please do get back to us on ideas for other metrics that you'd be interested in.

Operator, next question?

We'll take our next question from Gary Bisby (ph) with Lehman Brothers.

Hi, Gary.

Hi. One quick question. Wondering about the economics in terms of the difference between Walden being the partner for Canter and the existing partners. You've previously talked about the revenue recognition change that you've made, but you know, how does the--how do the economics look today? And then I mean specifically what's the--sense it to where the top line number is in each case and then what the margin potential is in each case, or I guess where it is today and what the potential is as you look forward.

Well, let me give you an answer and then ask Paula to amplify on it. I think the important history for people that aren't as familiar with it, Canter originally started as the equivalent of a school of education without its own accreditation. And so they joint ventured with a whole series of universities, colleges really, that had the right to issue a Master's Degree in teaching. Generally speaking, they were operating on 65/35 type split...

No, 55 percent.

55/45, us getting 55 percent--thank you, Paula--and the partner getting 45 percent of the revenues. And when--and there were two reasons why we wanted our own accreditation. Really three reasons. First, we think we're building a more valuable business if we are more self sufficient in that regard. Secondly, some of the smaller partners were constraining our growth because they actually couldn't grow with us. We would have great stories of going and finding unopened applications in the registrar's offices of some of the colleges we were partnering with, a hundred unopened applications and we knew what that was worth to us,. And thirdly, because it's more lucrative for us to keep the students ourselves.

I want to hasten to add that some of the partners that Canter has are fantastic partners and we have no interest in replacing them. But the partners on the margin are not--you know, have to be seriously revisited; that's 45 percent of revenues that we could be taking and more growth we could be having if we had more control.

So we really have decided to back out of a few of our relationships and that will reduce growth in the non-Walden Canter student body and obviously that could have a couple quarters where it reduces total growth in online students. But then Walden's growth rate becomes absolutely pivotal because as it continues to take up the slack, we'll get the benefit of that.

I think the best answer to your question is that we're paying out about 45 percent and you don't even see that on our numbers because it's actually taken off the top by the partnering institution. So the recognized revenues that we show for Canter are basically 55 percent of the total revenues that are being collected from that student. But when a Walden enrollment takes place, it's basically, well really it's a hundred percent between Walden and Canter, so--of the revenues being divided. So that's--in terms of margins I think I'd like to make sure we think through how we want to describe that just in terms of some proprietary information about which partners we work with and which we might not work with. But I hope that's reasonably responsive. Paula, is there anything you'd want to add to that?

I think that's pretty well put, but I would say one indicator of our focus on Walden being that super partner is that we actually had--that Walden represented 10 percent of Canter's revenues last year at this time; 25 percent of their revenues this year and it would be about 40 percent of the revenues by the end of 2003.

And frankly, if we were being more aggressive about decommissioning some of our partners, it could be 80 or 100 percent; I think we're just being very cautious and we're being very good partners because like some of these colleges that we work with very much.

OK. Let me ask you--and thanks for the answer, but let me ask it a little bit differently in that what--under the partner agreement, the way you've done it historically, what costs are you paying versus what costs would the partner have paid? And then, you know, obviously I think it's pretty straightforward on you'll be handling all the costs under the Walden model, but again, we can talk in terms of functions. What I want to be careful about is I don't want to give a set of numbers and then suddenly have five of our partners feel that because their cost structure's too high that they're going to get cancelled tomorrow.

No, no, I don't even--I'm not even talking about the numbers, but just directionally, what types of costs.

I think what we can say generally--Paula, why don't you talk about what are the functions that Canter provides and what are the functions the partner provides and then obviously when it's Walden, we do it all.

Right. Actually, Canter's focus has always been on the production of the program, producing that degree program. So taking the course content and all of the materials of course work that is associated with that, and providing that course, that degree program at a distance, a distance product to our university partners. And of course they're paying for all of the marketing and recruitment that is associated with it. So it was producing the programs, Canter paid, and was responsible for producing those degree programs, their marketing and for recruitment. And then the partner university takes over the payment of faculty and all of the things that [Inaudible] was delivering, giving the grade and giving credit.

OK.

In this case the faculty cost is not as high as you would normally see with other programs because the programs have a higher self paid content. So frankly, they have a lot of costs in functions that pertain to registrar, bursar, financial aid, real, I guess I would call them back office functions that again, there would be a pretty big difference between and amongst our partners as to how efficiently they do that.

OK. And then you know, my quick commentary on metrics that I think we use when thinking about the post-secondary businesses, and I know you're still trying to figure out how to handle the intake periods that aren't the primary one, but one of the metrics everyone talks a lot about is revenues per student. And as you figure out how you're going to give your student numbers going forward, I think it would be increasingly helpful for the university, or the campus based piece of the business, to have a quarterly student number. If not at all of the schools, at least in aggregate that we can use to think about, you know, here's where we are in students and here's the revenues that are being generated per student. So I'm sure you'll figure that over time, but that certainly would be helpful for us.

I think it's a great point. I think what we--the only hesitation we've had on those pointes, revenues per student varies so much based on income level per country, so we can literally have a doctoral program in Walden where the annual revenue would be maybe 10 thousand a year. We have our hospitality business in Switzerland where the annual revenues might be 15 thousand per year, and then we've got it--programs that--actually I think at the low end, probably some of our lower end vocational programs that could be maybe $1,200. So that's the issue with revenue per student. But it's something we'll work on. Again, I think it's a very good point; there ought to be a meaningful number we can give you.

Total census per quarter, our only concern there is that if we get to a point where someone tries to extrapolate how a new intake is going based on the information they get from the preceding quarter, because in some cases intake takes place over two quarters, I think people could make some disastrously bad assumptions because in some cases the intake all comes at the end and other things like that. So we've had good reasons for not doing it, but we I think we've demonstrated in the past six or nine months we want to be real leaders in transparency and disclosure. If we think it's meaningful and useful to you, we will disclose it.

Yes, now that's great. I guess what I would say just on, you know to ease your fear on the intakes, the way I think about it, and I'm not--won't speak for everyone else, but I tend to look at starts from the U.S. schools on a rolling four quarter basis because I agree with you that looking at one particular start isn't as meaningful as when you've got eight or however many start periods in the total population. So I think people will differentiate between intakes and total student population. But I should probably continue the rest of this offline and let you get back to the questions.

We will. Thank you very much.

Thanks a lot.

Appreciate that. Operator, next question, please.

We'll take our next question from Fred McCrea with Thomas Weisel Partners.

Hi, Fred.

Morning, gentlemen, how are you?

Fine thanks, how are you?

Good. Quick question, Doug, on terms of the Wall Street Institute business.

Yes.

Maybe you could walk us through your five biggest markets and kind of which are the two or three most profitable and then which are the ones with the room for some opportunity for improvements?

Sure. Well, the key is that going into this year we had five company owned countries and we had 21, I think, franchise countries. And it should be clear that even within a company owned country, we might ourselves have individual franchisees. But in the other countries, we have a master franchisee and then they may have sub-franchisees. So the--by definition, the most important revenue generators for us are company owned countries.

Those countries were, and one changed, they were, in order of size, Italy, Portugal, Germany, Argentina and Brazil. At the beginning of this year we actually franchised out Brazil which was very small and was not profitable for us and which could be a fabulous market, and we franchised it to a very strong operator that we like a lot. So now we're really Germany--sorry, we're really Italy, Germany is getting to be as big or bigger than Portugal and is doing extremely well, Portugal and then Argentina. Argentina, with all the terrible things that have gone on with Argentina, has actually done remarkably well in terms of just sort of holding up and being stable and not losing a lot of money in a terrible, you know, crisis that appears to be easing somewhat over there. But it's not really relevant to our numbers. Brazil is no longer relevant to our numbers. So you really then boil it down to Italy, Germany, Portugal; and of those, in terms of growth potential and profitability, Italy and Germany as the top markets.

In terms of our top franchised markets, we get a lot less revenue and we have a lot less costs associated with the franchise business, but at this point I think our top franchise countries by royalty income stream would probably be--France would be a top one, Switzerland would be a top one, and then the Asian countries, Taiwan, China and Honk Kong would be top ones, but not that--not big in absolute terms, just big in relative terms.

In terms of the dynamics in, say the German and Italian markets, are they different enough so that we--are market dynamics different enough so we wouldn't expect to see the same type of incidence that we saw in Spain?

Oh, I think, frankly, there isn't a country in the world where you have the conditions that would likely result in what happened in Spain. In Spain at this point, Wall Street, which we sold to the management team, is really the only English language chain of any size still standing. Berlitz (ph) is there with a couple of centers, but just about every major chain has gone bankrupt because of this just unbelievable, I think thousand year storm associated with the bankruptcy of a large chain, which created almost a run on the banks and the banks stopped lending and Spain had the highest percentage of prepayment associated with consumer financing. So at this point, I really don't think--I don't think even Spain will ever see what happened in spending again. Otherwise, frankly, we would have sold Wall Street long ago if we thought it really had the potential for another Spain.

But, that said, Wall Street does not measure up to our post-secondary business in terms of the length of the student stay that we get, the revenue generated per student, and we really need to see some improvement in Wall Street over the next year for us to decide that it would be an important part of our continuing story.

Great. Thanks so much.

We'll take one more question, operator.

We'll take our next question from Brandon Dobell with Credit Suisse First Boston.

Hi, Brandon.

Morning, guys. Snuck in here right at the end. I guess in terms of structural or regulatory issues, anything recently that's changed in any of the countries for SIU? And then kind of a [Inaudible] question would be any change in the recent financial aid trends? I know most of the markets are dominated by kind of small local banks loaning money to students and families. Has there been any kind of push from you guys or from Sallie Mae or from Educator (ph) or any of those other kind of companies to kind of piggyback what's gone on here in the U.s. with financial aid into those new markets or is the structure just different enough and the tradition's just enough that it's just not going to work in near term?

I think as far as regulatory, there really isn't a change anywhere that I'm aware of that's been--that's a change in condition that we're worried about or watching. Raph, are you aware?

well, we've had a few re-accreditation, they're fairly of a routine nature. That's all and everything on track, everything up to expectations.

Good. and then in terms of student financing, I think most of our listeners know that the vast, vast majority of SIUs enrollments are from students who pay monthly or bi-semester or in advance and don't get any financing. They get no financing from us. They generally get no financing from government and they may get, to a small extent, financing from local banks that see that as a nice consumer business, but really to a very small level. It's something--we would love to see more financing options for our students, but it's not keeping us from generating 35 percent new student growth in Chile, it's not keeping us from generating great results around the world. My view is years from now that'll be a great exciting growth story when you see someone like Sallie Mae going to the market or when you see a country like Mexico introduce a federal student loan program that mirrors the U.S. But I don't see it on the horizon and I don't think we need it and frankly, what we don't get, can't be taken away from us. So I'm happy with it the way it is.

OK. And then one final quick one, maybe for Sean. In terms of the options conversions, is that--all that information going to be in the proxy when you file it or is there going to be separate kind of disclosures so we can get an idea of, you know, ownership's take of management and the conversion prices and things like that?

Yes, it was a 2003 event, so I think technically it's going to be in the next proxy. But I think in terms of information, we attach--we attach when we file the transaction documents a variety of other agreements, including the agreement on the option conversion which details the specifics. And I certainly, offline, can talk to anybody about the GAAP requirements we followed in making sure that we structured the conversion in a way that would give us a fixed accounting answer as opposed to a variable accounting answer. But there is some public information certainly out there already and I'm happy to spend as much time as you guys need individually to walk you through that.

We can also provide some disclosure on that with the second quarter information which is when its next change is likely to become effective anyway.

Yes, that would be helpful.

Great.

OK, thanks.

Thank you for your questions and thanks to everyone for your questions, your patience. I'll know we've done our job when we start getting our conference calls over in 30 and 45 minutes. We certainly didn't succeed today; we'll do better next time and from the third quarter on, we should be in much better shape for that. Again, thank you all very much for your attention.

This does conclude today's conference call. At this time you may disconnect.