Laureate Education Inc (LAUR) 2003 Q4 法說會逐字稿

Good day and welcome to the Sylvan Learning Systems 4th quarter and year-end 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 Director of Investor Relations, Mr. Chris Siminosky. Please go ahead, sir.

Good morning, everyone. Welcome to Sylvan Learning Systems 4th quarter and year-end 2003 earnings conference call. Before we start, I would like to remind listeners that both today's press release and this call may include information that could constitute forward-looking statements made pursuant to the Safe Harbor provisions 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 statements are based upon reasonable assumptions, the company's actual results could differ materially from those described in the forward-looking statements. The following factors might cause such a difference. The company's operations can be materially affected by competition in its target markets and among other factors by 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 as detailed from time to time, in the company's filings with the SEC, including but not limited to our most recent forms, 10K and 10Q, available for viewing on our website.

Our speakers this morning are Douglas Becker, Chairman and Chief Executive Officer of Sylvan Learning Systems; Sean Creamer, Senior Vice President and Chief Financial Officer; and Raph Appadoo, President of Sylvan Learning Systems. Also available for questions today are Bill Dennis, President of Latin America operations, and Paula Singer, president of Online Higher Education.

Now at this time I'd like to turn the call over to Sean Creamer.

Thank you, Chris. And welcome. I'm very happy today to walk you through the 2003 full-year and 4th quarter financial results and provide a review of our 2004 full-year guidance as well as some detailed guidance for the 1st quarter.

2003 was a very successful year for the company and we feel like we've positioned ourselves extremely well as we head into 2004. Through a combination of acquisitions and growth in our existing businesses we established a really strong presence in some very fast-growing markets. I'm pleased to report that the strong results virtually existed across the company in 2003, we posted revenues from continuing operations of $473 million for the year, which was a 41% increase over 2002. Our 4th quarter revenues increased 43% versus the same quarter last year, increasing $46.7 million to about $155 million for the quarter.

In addition, and more importantly, we more than doubled our operating income over last year, up $19 million to $34 million. And more than tripled our operating income in the 4th quarter versus last year. We achieved earnings per share of 47 cents in the quarter and 89 cents per share for the year. Assuming the K-12 transaction closed on January 1, 2003 and assuming our normalized tax rate of 25%.

I'd like to turn to a little more divisionally oriented detail. Campus-based revenues for the year grew 44% to $376 million. The revenues in the 4th quarter increased 53% from last year, in what is our seasonally strongest and most important quarter. While clearly some of this growth came from acquisitions, we're happy to report continued strong organic revenue growth from our existing businesses. Specifically, if you exclude the impact of acquisitions, revenues grew 23% on a year-over-year on an annual basis, and 26% on a quarter-over-quarter basis. This organic revenue growth was driven by a combination of solid enrollment growth and the pricing increases we spoke about last call.

In addition to the tremendous revenue growth, the campus-based business also saw significant EBIT growth and impressive margin expansion. Top line growth of 44%, EBIT margins expanded 370 basis points from the prior year. Operating profit grew 85% over the prior year to $64 million. Obviously, that's very pleasing, with this kind of growth, which is driven again by a combination of enrollment growth, campus maturation, as well as acquisitions. We will continue to open new campuses and expand existing ones, and during the year we successfully integrated new acquisitions such as the UNAB and Costa Rica acquisitions into our network.

Moving on to online quickly, revenues from online increased 29% over last year to $96 million. For the quarter, the revenues increased 17% over the same quarter last year, and operating profits grew 47% for the year. On an organic basis, which in online's case would be excluding the impact of NTU which was acquired in November 2002. The OHE operating profit growth was 64% for the year. This growth was driven primarily by an 82% increase in the total Walden students.

As expected, Walden's spectacular growth was offset by our anticipated 29% decrease in the non-Walden Canter students. Remember, Canter is discontinuing certain of the 3rd-party university partnerships in favor of emphasizing our most strategic partner university, such as Walden, so in short term as we said, the overall OHE enrollment growth is negatively impacted. But as we noted in last quarter's call, we believe the transition should be completed towards the back half of 2004, and the overall enrollment growth rates for OHE should return to the strong double-digit levels.

Given the nature of our business, we obviously have spent and spend a lot of time talking about what we do to actively manage the impact of foreign currency movements. Given that all of our revenues and expenses in a particular country are denominated in local currency, our exposure is really limited to the margins, also, since we are actively reinvesting our cash flow locally into high return projects, our real exposure is really translation risk for GAAP purposes.

Currently, the metric in peso is our largest currency contributor followed by the Chilean peso, the U.S. dollar, then the euro and the Swiss franc. Despite some significant FX movements over the past year in those currencies, there's only been a negligible impact to our bottom line in 2003. For the year, foreign exchange contributed roughly $2 million. Or less than 1/2 of 1% of our consolidated revenues. Mexico's revenues were up 14% in U.S. dollars but 26% in local currency. UBLA's revenues were up 60% in U.S. dollars and 55% in local currency. Obviously, this analysis is not meaningful in the case of UNAB which we didn't own last year. UEM's revenues in Spain were up 26% in U.S. dollars and 4% in local currency. Our hospitality revenues excludingly Glion, which again was acquired in 2002 were up 22% in U.S. dollars, and 6% in local currency.

And while it's not a perfect hedge, our diversified portfolio of currency continues to prove effective in sheltering us from significant volatility based on currency movements. As a testimony to this, the impact of foreign exchange to our full-year operating income was less than $300,000 in 2003. However, as you well know, past performance is no guarantee of future performance, nevertheless, we remain confident in our basket approach to currencies, but we'll continue to closely monitor our mix, and if necessary, take any appropriate steps.

As we mentioned in the past, for GAAP purposes, we accrue income taxes using our expected full-year tax rate based on our projected GAAP results, and as you know, the GAAP results for 2003 included a large number of nonrecurring items that were reported in the first half of the year, related to our restructuring, particularly the chief stock charge and the K-12 related gains and losses. As a result, our 3rd quarter GAAP rate, as I noted, was unusually high, and as you'll note the 4th quarter GAAP rate is unusually low, the 25% continuing operations tax rate that we provided in our guidance represents our 2003 normalized rate on continuing ops, excluding these unusual items and is in line with our reported year-end results.

As I've noted in the past, the geographic mix of our operations and the favorable tax rates in some of these countries allows us to hold on to more of our pretax dollars than our U.S. post-secondary peers. As I mentioned in the 3rd quarter call, our growth in Chile, including the UNAB acquisition, favorably impacts our overall tax rate. Our 2004 guidance assumes a 22% tax rate. Primarily as a result of having a full year of UNAB's financial results, and as I mentioned the last quarter, the projected tax benefit from the UNAB acquisition was included in the 10 cents accretion number that we projected from UNAB for 2004.

Given our current mix of operations, we're confident this 22% tax rate is sustainable. Our favorable tax structure combined with the impressive number of high return investment opportunities in these low tax jurisdictions allows us to reinvest a greater percentage of our cash flow.

Moving on to some quick balance sheet items, Sylvan remains in a very strong cash position with $109 million in cash and marketable securities at the end of the year. Total corporate debt was approximately $97 million at year-end. A quick point, the last $15 million of our convertible diventures that remained outstanding at the end of September were converted to common stock during the quarter. The decrease in cash from the September 30th number was primarily related to the final installment of tax due on the K-12 sale as I noted earlier.

Turning quickly to guidance before I turn it back to Doug, the first quarter and full-year guidance, the company anticipates total revenues of $120-130 million for the 1st quarter, and $590-625 million for the year representing growth at 25% or more. General administrative expenses are expected to be approximately $5 million in the 1st quarter of 2004, and between $20 and $21 million for 2004 full year, or roughly 3% of consolidated revenues.

Note that this is a significant increase from the 2003 levels during the transition to pure play an international post-secondary company. We have realigned some of our corporate resources and moved certain staff functions that previously reported within our campus-based business into the corporate buckets. Specifically, there were functions we added in campus based in anticipation of taking that company public. As you know, that is obviously no longer necessary, so we integrated the functions, as a result, roughly $2-3 million of costs that were formally reflected in campus based are going to be reported in corporate G&A in 2004.

We also will incur approximately $3-4 million of costs related to insurance increases, Sarbanes-Oxley compliance initiatives and audit fee increases, obviously the cost of being a public company has increased and we are bearing our share. In addition, given our predominant international footprint, we are projecting increased travel costs, we manage this business at the campus level, which requires a significant amount of time invested by our staff here in Baltimore in making sure we're living and breathing what's going on out in the field.

Despite all these increases, our operational performance should allow us to meet or exceed the previously furnished guidance. We anticipate diluted earnings per share to be break-even to 1 cent for the first quarter of 2004. Just to remind you, our Chilean schools are out of session in the 1st quarter and with the addition of UNAB, the percentage of operations coming from Chile is a larger percentage of the total and, therefore, has a more significant impact to our 1st quarter seasonality. In addition, as you know, the first quarter is Canter's seasonally weakest as well. We expect for the full year our earnings per share to be between $1.22 and $1.24 on fully diluted shares outstanding of roughly $47.7 million.

Quickly, on some divisional level detail, from a guidance perspective, campus- based revenues are anticipated to be $96-105 million for the 1st quarter of '04, and between $465 and $495 million for the full year. Division expects operating margins to be approximately 7 to 8% for the first quarter. And between 19 and 20% for the year. Just to note, roughly 80 basis points of campus-base margin improvements relates to the shifting of the administrative costs I mentions out of campus-based and into corporate.

Online higher ed anticipates total revenues to be between $24 and $25 million for the quarter, and between $125 and $130 million for the year. Division expects a slight loss in the 4th quarter, and year-end operating results to be 14 to 15% margins. As I noted on the last quarter's call, EPS is expected to be the lowest in the 1st quarter of the year, and again, it's primarily attributable to the fact that our fastest growing universities are out of session, in particular in Chile.

But consistent with 2003, we expect the 2nd and 4th quarters to remain our strongest again in 2004 with approximately 55% of the revenue for the full year generated in 2nd and 4th quarters, most importantly, that accounting for almost 70% of our operating income for the year again in the 2nd and 4th quarter. We expect to provide 2nd quarter guidance in 2005 guidance with the first quarter 2004 press release in April.

And with that, I'll turn it back to Doug for his comments.

Thanks very much, Sean. We have just an exuberant group of people in corporate headquarters based on the success that we've had in 2003, and the confidence that that's given us in our momentum going into 2004, and that's really -- it's a great feeling, we've all worked very hard to build the platform for growth, which we think can carry us forward for many, many years to come. And to see the business really doing everything that we had hoped and dreamed is just tremendously rewarding. Nine countries now, eight campus-based universities, two U.S. accredited universities which are online, 117,000 students, and really, the only owned international network of universities in the world. We feel very uniquely positioned for growth or for years to come.

I think we feel especially good about the markets that we've picked, whether it's market segments or geographic markets and how those markets have been performing for us, and the unique management competencies that we've built, that can drive organic growth at the campus level, at the country level, but also allow us to identify and conclude acquisitions that are very, very successful with very high returns and integrate those companies into our corporation. And I think the general feeling here is that while everyone is very busy and, of course, works extremely hard, that this is a team that's capable of running a much bigger business, and so seeing the business grow, it feels a little bit like the business is growing into the shoes that we've created for it.

In March, we announced 2003 guidance, this was last year, which would imply, if you sort of pro formed out all the K through 12 changes, about a 75% operating income growth in '03, on an apples-to-apples basis versus '02. And at that time we also released '04 guidance which implied a 40% growth in operating income over this very strong expected growth in '03. Obviously now that that growth in '03 has been met and exceeded, so we're very pleased about that, and we're in a position to reiterate the earnings expectations that we'd set out and slightly increased them in 2004.

I'm sure all of you do recall we did end up taking up our guidance last year by a nickel and this year by a dime. Just related to the acquisition in Chile that we did of UNAB. Which has been very, very successful for us. All of these successes and this great positive feeling that we have here is really based on a very simple formula, which is increasing enrollment to existing campuses, raising prices faster than the rate of inflation and opening new campuses on a selected basis, period.

You'll hear us talk about a lot of other ideas and visions and dreams that we have for the future, whether it's new segments or entering new countries, anything else that we can envision, but the bottom line is that we should be able to deliver tremendous amounts of growth just following that simple formula. And it makes us very, very selective as to how and when we pull the trigger on anything that could possibly distract us from this very effective core mission approach that we've taken.

Just to get into a little bit more detail about the specific businesses, campus bases, you all know we announced after the 3rd quarter of 2003 that we'd had a 25% increase in new student enrollments, this is not including the affective acquisitions, just at existing universities, that drove our total student census at that time up 19%. That 19% plus a weighted average of a 7.5% price increase, that's what drives that simple formula that I described before, that has made such an impact on our top and bottom lines.

The greatest amount of that growth comes from growth in existing campuses, but we did bring in seven new campuses last year, bringing us to a total of 33. There were two in Mexico, one in Chile, one in Keto, Ecuador, which operates underneath of our Chilean university, one in Costa Rica, and one in Panama, both acquired and a new downtown campus in Madrid which is focusing really exclusively on the working adult marketplace, which is part of our enthusiastic growth story we think for the future.

While those six campuses did not contribute a lot in profits or revenues for the year, they create the pipeline for future growth to allow us to sustain this story for many, many years to come. All of this results in our ability to continue to reiterate guidance. In 2004, our guidance is predicated upon 18 to 20% increase in total student enrollments, and that is exactly where we came in last year with that 19% number, but obviously the 25% new students we got last year all goes well for our ability to achieve that 18 to 20% or more. 5% or more increase in price, we've always done better than that, makes up the formula, and then given the ability to add three to four new campuses, again, new campuses typically don't contribute to profits in the year in which they're open, but they certainly set us up for 2005 performance and beyond.

Given the high fixed costs of any post-secondary business and in some cases even more so in our case, given country level G&A and other costs we have, and the very high flow-through margin of incremental students, this kind of enrollment growth and price increases has a tremendous impact on margin expansion, we had 370 basis points of margin expansion in 2003 in campus-based and that's exactly how it should be.

I think that the online higher education business is also in our view a tremendously promising business, to some extent I know many investors look at that and are waiting to see it perform at the level that some of the U.S. online higher education businesses are performing, and I think our feeling is that in some ways it is, and in other ways it's certainly prepared for much better results as we get further into this year and years ahead. Obviously the growth of Walden's own program has been very strong, the transition of Canter students away from partners that we didn't control or weren't doing a good job for us to Walden which results in greater economics to us and a greater level of control, or in some cases to other strategic partners other than Walden, those were important accomplishments for OHE, our online higher education division in 2003.

We were able to stabilize our acquisition of NTU, which was a loss making, but very interesting and promising engineering school that stabilization resulted in the abatement of substantial losses that had been coming from that business as expected. That's really on track. And, again, part of the issue is, of course, that the transition away from nonstrategic partners to Walden and strategic partners has resulted in an overshadowing of the underlying good growth of our online business.

I think that what we came out with earlier in the year at the end of the second quarter, we predicted that this overshadowing would bring the total enrollment for online higher education down to the single digit growth rate for 3rd and 4th quarter of '03 and the 1st and 2nd quarter of '04. And then to move back to double-digit total enrollment growth rate in the back half of 2004. I can amplify that now by just telling you that based on our view of OHE's growth curve, OHE should become the fastest enrollment grower in our entire company by the time we work our way through and into the 3rd and 4th quarter of 2004. That will make it the fastest organic EBIT grower in the entire Sylvan company as well. So heading into 2005, we should really see OHE hit its stride and contribute in the ways that we've all expected and anticipated.

Like any business, we had some disappointments, although I have to say really remarkably few. Our growth rates in Europe are still lower than we'd like, and in some countries we have less critical mass than we'd like. And in Iraq, we'll address that in a few minutes. In the case of our hotel management business in Switzerland, it was based really on a strong currency. Our students coming to Switzerland pay in Swiss francs and yet they may come from countries whose currencies perform quarterly against the Swiss franc like China as an example or even the U.S.

But strong currency added more value than it took away in the case of our European business. And in the case of our Spain business, while we had very slight total enrollment growth, the new enrollment growth was positive and all goes well for '04 and beyond. And we actually had very nice bottom-line performance in that business, beyond what you would have expected from the top line based on really good cost management and re-engineering initiatives, so I think in total what I'd like to see in Europe is for Europe to become a more important part of our growth story. And Raph will briefly mention how it is that we expect that to begin to show in 2004.

Obviously, it is a disappointment to me to have this strong growth that we've shown in Walden overshadowed by this transition story. But investors have listened very carefully and we think really everybody does understand what's going on there. The bottom line is that at this point going into '03, Walden accounted for 32% of new student enrollment at Canter. And going into '04, Walden accounts for more than half of all Canter students. So at a certain point, the fast growth rates in Walden will completely drive the overall growth rates in the Canter business and that's, again, exactly as it should be.

We did have some regulatory set backs in India, a very minor part of our corporate financial picture. Many of you know we have a great passion for Greenfield prospects in India and China for the future. In this case, it's the future five, seven, ten years from now. But we've got to do things today to make those things possible. In the case of India, promises that were made to us about accreditation were basically just not kept. And the political and regulatory environment there makes us want to pull in our horns and retrench, spend less and wait for more favorable conditions in that market.

On the other hand, China has actually moved the other direction and Raph will briefly talk about some of the work we hope to do starting in the hotel management arena. The bottom line is, we can't build the 10 and 20-year growth story that we intend without making investments of this kind and they may impact our short term financial performance but they'll make a big difference in the long term.

What have we accomplished? I mentioned a few disappointments, but the accomplishments are just, I think, really staggering, we now look at ourselves in terms of our ability to be a number one or number two player in any field in which we compete. In the international university's arena, clearly there's no one else doing what Sylvan is doing to any measurable level.

In Mexico, in the past couple of years, we've moved from either the number three or number four spot into the number two spot in terms of private university enrollments or revenues in that country. In Chile, the university that we acquired originally, which would have been I think the number eight university in that country ended up at number one in the country in terms of enrollments, and our UNAB university would be the number two university in that country. So we're number one and number two in that country in private university enrollments or revenues or really probably almost any metric you could imagine.

In the U.S., it's a little hard to tell where everybody stands, we think of ourselves as the number two online education company in the U.S. Obviously people with bricks and mortar who have the ability to implement hybrid programs are likely to be able to achieve greater enrollments than we, but in our market, submarkets that we've picked, such as education, teacher training, we're clearly the number one player, we're number one in online doctoral programs, and then back at the campus-based level, we are absolutely the number one player world wide in the hotel management and hospitality education arena. So lots and lots of things to be proud of, and great positioning for future growth.

What's the next phase of our development, our focus in 2004 and 2005 continues to be optimizing existing countries. We're looking at new countries from time to time, and when everything looks right, and it's the right place at the right time we'll go, but we just don't need it to allow us to make our numbers. We'll look at strategic acquisitions on a selected basis, but we just don't need them to make our numbers, and that is a really good feeling, because it lets us make good choices without the pressure of concern about short-term results.

So optimizing existing countries is absolutely critical. Within those existing countries, part of that optimized performance will come from expansion into these new segments of working adult, the sort of 25-year and older student which is, of course the mainstay of the U.S. market. But just a nascent market outside of the U.S. As well as some work that we're doing in the technical and vocational training arena. I mentioned new countries on a selected basis, expansion in the U.S. continues to be of great interest to us, we just see opportunities albeit in niches as opposed to mainstream.

And then lastly, I think a very interesting category, would be the area of network products which I'm going to talk about in just a few minutes. But before I do that, I wanted to ask Raph Appadoo, our President to just comment a little on the success that we've had in the new segment and also talk about [inaudible] and what it means to be in the right place at the right time. Raph?

Thank you, Doug. Let me add these comments which pertain as Doug just said on growth opportunities and some of our strategic developments around the world. Our main market and focus, as we've always emphasized is the traditional market of 18 to 22-year-old students. We have also explained in prior meetings that the post-secondary market outside the U.S. is much bigger and that there are several underserved market segments.

During 2003, Sylvan made some very significant strategic moves in the campus-based business. We launched our entry into two new segments, namely the technical vocational and working adult segment. With the acquisition of UNAB in Chile, we gained access to the technical vocational segment through IEP [ph] which has a total enrollment of approximately 5,000 students. Students -- that's 5% of our total number of students world wide. That starts to be significant in our first year.

In the working adult segment, we enrolled some 1,700 new students, that's about 7% of our total overall new student intake in three locations. We got the 1,700 students in three locations, that is Chile, Mexico and Spain. These new platforms will certainly help us scale the experience gain and so we expect to expand our presence in these two segments in the markets just mentioned and also, in the additional new markets around the world where we already operate.

Now the very critical strategic objective is to strengthen our presence in the countries and regions where we currently operate. Doug just mentioned that. Last year this type of expansion and consolidation, if you want to call it, of our operation focused primarily on Latin America, where we now have some very large operations in some very significant countries.

In 2004, we turn our attention to Europe, where we intend to build scales with a variety of actions that we have already identified, along the lines of new campuses, new products and a new segment expansion including postgraduate. Our European expansion is a real priority, and we have a team in place to make this happen.

As part of this European expansion, we plan to turn our Swiss hospitality business into a real world wide business. We will add a U.S. presence to this truly global line of business and also launch a [inaudible] school in China. And perhaps one more in another location.

Finally, in terms of priority, as Doug mentioned, I want to reemphasize, we continue to look at new country entries, we most likely will announce one or two new countries to our slate, but that's really the last on the list of priorities. So overall, we have lots and lots of strategic actions in the pipeline.

Thanks very much, Raph. I think the last point in terms of things that interest us for the long term is this concept of network products. And network products really mean that while our success rate now has been driven by success in country. Being a leader in Mexican higher education or Spanish higher education or Chilean higher education, the network is really about bringing this international network of universities together in a way that gives each individual university an advantage in its territory.

Examples of network products that would accomplish this would be our ability to recruit students from one country to go another country. As an example, we know that the second most desirable destination for U.S. students to study abroad is Spain. And we have a beautiful university in Madrid with the capacity to handle and serve and really delight those kinds of students. That could be a very lucrative business for us and something that we're working on.

Just as an example, a study abroad can be anywhere from one semester to a year. They can come from internal sources, such as our Mexican students that would like to go spend a semester in Madrid, which is something that most of our competitors in Mexico simply can't provide, or the study abroad students can come from external sources.

Another example of network products would be coordinated or double degrees, the ability to study programs in a French and a Spanish university and get degrees joint or double or dual degrees from both. The ability to study in Mexico and take 25% of your courses in English in a certain way, and end up with a double degree with in essence a U.S. degree and a Mexican degree. In that case it would be called a coordinated degree, that is something that, again, our competitors are just not in a position to be able to provide.

The opportunity to bring common course wear between countries. 100,000 of our students come from Spanish speaking markets, and over time, English speaking markets will be the other major common language across all of our markets. Our ability to invest in and develop course wear which can be used in cross markets can give us a competitive advantage, a quality advantage and ultimately reduce instruction of costs too.

Lastly, online would be an example of a great network product. Here we have this very sophisticated online higher education group in the U.S., and the online market almost doesn't exist outside of the U.S. There really is no University of Phoenix online, if you will, for the rest of the world, although I'm sure they would like to be that. We would too, and I think we are in many ways positioned better than anyone to be able to make that happen in terms of accreditation, market experience and presence, as well as the technology we have. So taking online international will be another seed that you'll see us plant in 2004.

I think the bottom line on our network products is that if it doesn't allow us to grow share, vis-a-vis local competitors, or to raise prices by increasing the value to our students, then it just doesn't count. And that allows us to bring the same sort of quantifiable objective management approach to network products as to the way we manage each campus, one campus at a time.

So this basic formula of existing in new campus performance combined with new segments, new countries and the network is really becoming a bigger and bigger contributor to the profits and competitive edge that we have. That's why we feel that we're going into 2004 with such great momentum, that's why with our first quarter results we'll be in a position to release 2005 guidance in a similar way that we did last year, taking advantage of the four-year length of stay that most of our international students have when they sign up for an undergraduate degree, gives us visibility and momentum for years to come.

So I thank you all very much for listening patiently. I'm sorry it was a little bit long. And at this point, if we can open for questions, operator, we'd like to do so.

Thank you. Today's question-and-answer session will be conducted electronically. To ask a question, please press the star key followed by the digit one on your touch-tone telephone. If you're on a speaker phone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that's star one to ask a question. And we'll go first to Jerry Herman with Legg Mason.

Thanks. Good morning, everybody. Good quarter, guys. Just a question, I guess for Sean at least initially, on the revenue guidance for '04, the implication was 24 to 32%, and that's relative to enrollment growth of 18 to 20%, obviously a component of the differential is price, but is there something else that makes up the difference?

No, I think we've been fairly consistent in talking about 2005 in terms of this 20 to 25% top line growth which was going to be the combination of 18 to 20% enrollment growth and the balance in pricing. So I think that's consistent with what we've been saying pretty much since last March.

You mean in '04.

Yeah, in '04. Sorry.

We're not quite ready to talk about '05. That's coming.

Okay. And question with regard to OHE and NTU specifically, I think you guys were talking about $5 million in operating losses in '03 in that business. Did that prove to be a pretty accurate number? And, more importantly, exiting '04 is it now break-even?

What we had indicated was we thought we would have $4-5 million in operating loss and it would be at break-even run rate by the end of the year. In fact, we ended up the year with closer to $3 million in operating loss through some aggressive cost containment exercises, but clearly at the break-even point heading into 2004.

I think we should say break-even in that business, as is the case in many of our businesses, there's a seasonable component. So we're saying sort of on an annualized basis it should be break-even, but it still could lose money in a particular quarter based on seasonality.

Great. And, Doug, you guys gave a great overview, but I'm wondering you would maybe just mention some of the regulatory or legislative updates, maybe on a world wide basis, i.e. I know you talked in the past about some changes in Spain. And also any movement or changes in Chile relative to for-profit operations.

I'll comment, and then maybe Raph can add to it. But I think in general, while we're very alert to regulatory environment, there really are not things on our radar today that I think we would view as being a big material issue or a big material opportunity. It's a pretty quiet set of factors. We have some interests in seeing some things change here and there, but nothing I that think really has us overly concerned or exercised.

I think that's part of the reason why when we saw a regulatory environment in India that actually did not match up with what we've seen everywhere else in the world, it made us want to retrench, because we really are looking for markets where the regulatory environment is stable and manageable and doesn't cause us surprises or concerns. So I'm not sure, Raph, if you want to add a few things?

Yes. Maybe just two points, there's nothing in terms of accreditation that's causing us any worry or any major change that we see. However, in Europe, you mentioned Spain. In Europe, there is this whole area of the Bolonia treaty, the Bolonia accord regarding education. That's something in a state of flux. The countries first need to get their understanding and, perhaps, some new legislation which we don't think will affect us in any of our schools in Europe in any dramatic fashion, so there are things that haven't settled into any form.

The same thing in Chile, there is a lot of talk about accreditation, you may have picked that, but there's nothing that has been finalized, there are issues along the lines of whether there is some motion will go to Congress, but even that seems to be still very much up in the air. So there are things we are following, but nothing that's settling into any form.

I think the summary I'd offer is we tend to look at how many things out there that if they happen, would be helpful to us, and how many things out there if they happen would be negative. In Chile, for example, there's a real movement towards more government loans for students. That would obviously be fabulous for us, there's a movement towards accreditation and ranking, that would be very helpful to some of our universities and less helpful to others, I think when we add it all up right now I think it looks like a pretty balanced situation for us around the world.

Thanks. I know you have a long queue. Thanks.

Thank you. Next question, please?

We'll go next to Fred McCrea with Thomas Weisel Partners.

Hi, Fred.

Good morning, everybody. Quick question in terms of the Spanish market. You talked about certainly the initiatives in Raph's comments, what do you anticipate specifically there this year, is this more of the same in terms of more of the business oriented working-adult campuses, is this getting into other more vocational programs? Maybe you could elaborate in terms of your expansion opportunities and plans there in that market.

Yes, Spain, we have launched a downtown campus, we expect to get more to see a lot more traction this year, so it's not more of the same, it's more of the new things that we've done. Postgraduate is a big area and getting bigger, the undergraduate traditional, we expect to be able to show some additional momentum. Also, Spain's economic environment is improving and we, in an environment where you can go to government school for free, the economic side does help us.

And then following up to that, would you anticipate acquisitions in that market during '04 and '05?

I think we'd rather not say what we want to do one country to another. I think it would be fair to stay that Europe in general, we'd like to have more critical mass, and in general, it would be our preference to do something in a country before we do something in a new country. In an existing country over a new country. In that regard, it would logical for us to do that. I'm really not sure that anything will present itself in the time frame that impacts us this year.

Okay. Great. I'll pass it on to the next caller.

Thanks, Fred.

We'll go next to Mark Marostica with Piper Jaffray.

Thank you. Good job on the quarter. First question relates to Chile and you mentioned, Doug, student financial aid, in terms of government sponsors, student financial aid might be something that on the horizon might occur. I was just wondering if you feel that that's been a gating factor at all to enrollment growth. I know you've had great enrollment growth, but as you look into the future. And then I know with regards to third party private financing of student loans, that's something that's being piloted, if you give us an update on effort there, and how much of a percentage of Chile's revenue comes from that source.

I think the theme that you describe of student financing is a very important theme. If you think about our business, let's say in a 10-year horizon, the creation of student financing would take away the single biggest limiting factor to our growth, and it's really amazing if you think about how much growth we get in an environment where our students really -- their families have to go out-of-pocket to fund their entire education. But it isn't something that we think is going to have any material breakthrough in the short term.

What they're talking about in Chile, even if everything went the best for us possible. Would not make a material impact on our business in the short term. We've piloted a few commercial loan programs, certainly from what I can tell today, we're learning a lot. We're making good progress, it's helpful, but not in material learnings.

So I think right now, I don't want to set an expectation internally or externally, that student financing is needed to achieve our plan or is likely to kick in and help us succeed our plan. I think you can expect to see us do a lot of work to crack the code. And one of the challenge really is it's not just a lack of government financing, but as you mentioned in the case of commercial financing, there's just not really a lot of consumer finance expertise in general in these countries, and there's not a lot of consumer finance activity in these countries. So I'd love to see us make some progress on that, it's on our 2004 list of objectives, is to make some hires in this area, and to really start learning a lot.

What I would tell you is, if we can actually come up with a formula that shows what kind of students we should extend credit to, and what the repayment rate is associated with those students, if we can ever get that in a format, even on a very, very small base of data that would be appealing to a commercial lender, we would not only crack the market open, but we'd do it in a way that's probably fairly proprietary and, obviously, the best of all worlds would be if student financing comes in in a way that is just not available to everyone, but would be especially effective in the case of our own institutions. So that's the way we're currently thinking about it.

Thanks for the color there. Regarding Chile enrollment intake period, I know that it started in earnest at the very beginning of December, I was wondering if you could give us a sense for the progression of the intake period this time around, relative to last year, just give us a sense for how things are trending.

Right. We don't want to provide data with any different regularity than we have in the past. I think what we can say is it we're putting out detailed guidance for the year, we do that based on, basically a complete revisiting of every factor in our business as of -- think of it as sort of 5:00 p.m. last night, and everything that we see makes us think we're very much on track to achieve the kind of objectives that we've laid out in our guidance this year, and Chilean enrollment is a critical factor in that. So I think on track is probably the right way to put it.

One last follow up and this is for Sean. The same color that you provided for the fiscal '04 guidance and the higher G&A, could you give us a sense for the $3.5 million of G&A in the 4th quarter, what amount was due to the reclass?

In the 4th quarter of 2003?

Yeah.

There was no reclass in 2003. This is starting in 2004, it's going to be reclassed over.

Okay. It looked like it was just a little higher than our model. Is there anything to point out there?

Well, I think there was included in there some of the costs associated with India that Doug touched on briefly that came through as part of the G&A.

Got it. Okay, thanks, I'll turn it over.

We'll go next to Howard Block with Banc of America.

Good morning, everybody, congratulations on the successful close of a really important year for you.

Thank you.

The first question is, at your investor day you provide us with this really great slide that was sort of a lifecycle chart of all your campuses. Can you sort of update that a little bit? I know you don't have time to go into all the details for all 33 campuses, but can you give us a sense on that pipeline? The numbers from, I guess it was new to mature.

Just looking at the data we have, because, obviously, when we release something that we haven't released publicly, we want to make sure we're very clear on where we are on that. Out of the 33 campuses that we have right now, we currently would classify 20 of them as being in the fully performing category. Eight of them as being in the developing category, and five of them as being in the new category, and again, just a reminder to folks that the threshold for that generally speaking is, a new campus is going to be typically under two years old, under 1,000 students and probably losing money or breaking even. A developing campus would be over 1,000 students, making some money, but typically not a lot. And a fully performing campus would be over 2,000 students, typically more than three or four years old. Because it takes four years to get our first-year freshmen to become last-year seniors, by that point they should be running EBIT margins at the campus level of at least 20%, and in some cases can be doing 40% or even more. So that would be the --

Okay.

The revenue contribution is one thing that doesn't make sense on the chart I'm looking at. So we'll have to look at that next time, but it does look like --

Typically, I guess at the investor day we said roughly 50% of our campuses were fully performing and they were contributing 90% of the revenue, we're now at 60%. So it's 90% plus of the revenue contribution.

And the progression through that time line is based more on population than it is necessarily just time?

Well, I think generally time is the key variable. But we do have some that surprises us, and they can in some cases surprise us on the very positive side, and in some cases after three or four years, either still in the developing category, because there's a management issue or a product issue or local competitive issue, so I'd say time is the key variable in 90% of the cases, but there are a few exceptions that, as you can imagine, sort of go on to somebody's special project list.

Okay. And then is there a desirable mix that you hope to maintain? Relatively speaking.

I think the challenge there is, that with 33 campuses and a continued goal of opening let's say no more than three or four right now. As the campus count grows and you don't see us adding a greater number of new campuses, you'll see new campuses becoming a lesser and lesser percentage. That doesn't really disturb me, because if you run that out for years to come, there's still so much that you gain from the movement from new and developing and developing into fully performing that we should have just a tremendous amount of wind in our back. The only thing that would change that, however, would be our entry into a new country. And if you think about it, we went into Mexico and went from 10 to 16 campuses which will be 18 campuses by the end of this year, entering a new country whether it's this year or next year, would sort of reset the clock, and allow us to, instead of opening three new campuses a year, maybe we could be opening five new campuses a year. Does that answer your question?

Yes, it does. Thank you. And then just one last one on online. I don't know if you touched on this earlier or not. I thought in a prior call you mentioned that you felt that in the second half of '04 or after the anniversary of the change in the model, you felt that 30 to 40% of enrollment growth was sort of an achievable target. I think you said this morning, strong double-digits. Are those as consistent?

Yeah, it is consistent, absolutely. 30 to 40% should be the total enrollment growth rate. Let's call it as we exit the year. Whether that happens, it's probably much more likely to be showing in the 4th quarter than the 3rd quarter, because there's quite a mathematic progression involved.

Great. Again, congratulations and thanks.

Thank you.

We'll go next to Trace Urdan with Think Equity.

Hi, Trace.

Good morning. A couple things, one is, I wondered if you could give us a little bit of color on the online business, and how, sort of where you're seeing pockets of strength, maybe you'd feel comfortable sharing with us what the mix of graduates and undergraduate students is in the Walden make-up or whether there's a program area that's coming on stronger than another one?

I'm going to ask Paula Singer who heads that division to comment on that. A couple areas of real positive growth we're excited about. The doctoral programs have just been outstanding for us. We continue to see great strength in all four of the verticals, it's amazing quarter after quarter, and we're just I think beginning to get our stride there. We're pleased about that. And, of course, we're seeing a lot of the continuing growth in the teachers side of the business. The partnership between Canter and Walden is allowing us to do a couple of things that we wanted to do and couldn't do with partners that were not strategic. Specifically, this year we'll be bringing on board three new specializations and two brand new degree programs, and I think that's really where the major strength is for us for the unit.

I think long term we're still very excited about some healthcare initiatives, especially the nursing arena, but that's really -- it takes a while to get the content built, we're making a big investment in content this year. Interestingly enough for the first time, we're beginning to develop content where the multimillion dollar content investment on the part of OHE, is designed from the beginning to yield curriculum that can be used in the international campus bricks and mortar initiative, and I'm pretty excited about that, just nursing would be a good example.

We have nursing programs in Spain and Mexico and Chile now. And in all three of those countries, the kind of curriculum that OHE would develop just doesn't exist in any university. So it would be great to see those product development investments begin to carry over in the campus base as well.

Not to drag you off on a tangent, but are the restrictions around nursing degrees as severe in these countries you operate in as they are in the U.S.?

Definitely not. In fact, I don't think there's really any regulatory restriction in the countries we operate in that would be as difficult as what everybody finds in the U.S. Nursing would be a critical example of that where state licensure is very hard to accomplish, and where there are some national additional accreditations that are required to be accepted in the employment community. I actually think the net result of that is that the product that will develop in the U.S. is going to be incredibly strong and is going to be very well received in other countries.

And we even have in other countries such as Mexico, interest in a track of nursing that would be for nurses that would like to come and work and live in the U.S. There's a lot of visa relief for people that would enter the U.S. in order to bring their nursing skills to the country.

Right. I apologize if you mentioned this. I don't think you did. I wonder if you can give us an update on the Wall Street sale?

That's a good question. We're in process, and expect to be out with a sort of formal published document for interested buyers in the March time frame and our objective would be to have a conclusion to a sale by the end of the year, we do have a view on what we think that business should be worth, and have been assured that if we think if the process needs to drag on in order to give us the chance of achieving the most productive valuation that we have that flexibility. And that's important so that buyers really don't feel that we have an urgent requirement to dispose of it in the short term.

That said, there's no question from an objective perspective, it will be best for that business and best for us if it was put in its new hands as quickly as possible. And we're proceeding on that line.

Good enough. Last question, then I'll let you move on. Sean, you touched on tax rates briefly, could you just describe, are there any circumstances that you can foresee over the next few years that would cause your tax rate to change in a material way?

No. Our current mix, obviously, the beauty of it is, our fastest growing businesses are now in the lowest tax jurisdictions. So in the current mix, if there is a trend without acquisitions included, if there's a trend it could be a trend downwards, unless there's an acquisition in the higher tax jurisdiction, we think this is a long-term sustainable tax rate that has the opportunity to go down, but we're certainly not going to suggest there's going to be a dramatic change downward.

I think it's a key point though if we were to make unexpected acquisitions of size, in a higher jurisdiction, higher tax rate jurisdiction, that would make it go up. But that certainly is not as likely as it going the other way.

Presumably it would be part of the calculus of making the acquisitions in the first place.

Absolutely right. I think one of things that a lot of people may not think of with tax rate is to also consider that we've got most of our headquarters costs based in the U.S., which is our highest tax rate jurisdiction, and yet, obviously our fastest growth businesses are earning profits in lower taxable jurisdictions. So it's actually an incredibly optimal and long term advantage that we have. And to the extent that investors who are just getting comfortable with international envision the risk associated with international. Certainly in my own mind, the advantage of keeping such a greater piece of each pretax dollar profit seems like a real permanent offset to any perception of international risk that could be leveled at us.

Great. Thanks, all.

We'll go next to Brandon Dobell with Credit Suisse First Boston.

Hi, guys, good morning.

Hi, Brandon.

I was wondering if you could touch a bit on the capacity and utilization look at the schools, I know you talked earlier about looking at new -- how new students might come from the U.S. and transfer over, how you're looking at kind of internetwork student transfers. And in the context of where your investment dollars are going, maybe touch on how the money is working to expand capacity or just to make the capacity more efficient?

I'll try that and then I may need Sean or Raph to chime in. I think generally speaking in our fastest growth rates, with respect to where we're adding seats, generally when we see it's about -- is it 85% utilization, is when we start triggering Capex spend so we can build and be ready for the next intake of students. And so as long as we're growing at our current rates, we actually can never enjoy what would be huge profits from capping off and filling up to a 95 or 100% rate because we don't want to miss the chance to take in new students and improve our share in the market. So that's I think that's the way you should think of it is, you're not likely to see our fast-growing markets having more than an 85% utilization.

Obviously, our European assets have more capacity. We know that in Spain undergraduate enrollment growth has been tepid, although postgraduate's been very strong, but postgraduate doesn't really use the same facilities at the same time, so the peak hours are different, and the net result is that when I mentioned for example, study abroad, Spain would be perfect because we have capacity there and probably utilization and that campus is no more than 60, 65% something like that, Raph?

Close to 70%.

Close to 70%. But again, without explosive growth that would make us sort of jealously guard utilization, we could take Spain up to 100% utilization and not likely disappoint any new students coming in. So that's the way I think we've been thinking about it, and in some of our discussions previously, we've given a sense of the cost per seat.

I think it's a very interesting sense of how our business works in countries like Mexico and Chile, generally speaking it costs us in the range of let's say, around $4,000 or $4500 to build a new seat of capacity. And that would be in a new campus. And it would typically be less expensive than that to add a seat in an existing campus, because you are leveraging a building or a piece of land that we may already lease or own. And that seat is typically going to be able to be used by more than one student because of day part. So we typically use as a benchmark somewhere in the range of about $2,500 as a cost per student of capacity when we're building a new campus, so a new campus with the 4,000 student capacity could be about a $10 million level.

In the case of Mexico and Chile, you're talking about average tuitions that would range from let's say $2,500 to $4,000 per year, so the pay back on building a new campus is very good. I would say probably -- it may not be quite up to what your really inexpensive buildout of working adult facilities in the U.S. would be, but a very, very high return nonetheless.

On an annual basis you're talking about $200 to $400 per student. Again.

On an annualized basis.

On an annualized basis, yes.

Yeah, if you amortize it over the life of that seat. It's a very good point, because a seat can be used for 20 or 30 years, so in fact, one of the interesting things, we've looked at things like automating our curriculum and expecting students to have computers and what you find is, the cost of a computer in Mexico or China or the U.S. isn't that different. The cost of construction between Mexico or China and the U.S. is usually different. So it's sort of counter-intuitive as to the fact that there's an incentive to build seats. You think about someone like ITT that's so adeptly figured out how to increase their utilization of their seats through computers, that really wouldn't be possible right now in the countries in which we operate.

Okay. Kind of a similar question in terms of how you look at student returns. Some of the U.S. schools have quoted numbers for how they look at acquisition costs of students, maybe you could give us a call on how you think about that number, and if there's a wide variance from country-to-country, maybe you could touch on that as well.

I'm not sure what we released in terms of student acquisition costs, it's a metric we're all over internally but I want to be a little cautious about releasing a new metric that we haven't disclosed before. I'm pretty sure that our costs of acquiring a new student will be less than just about anybody else that you're aware of in terms of the campus-based in the business. Part of that's because we spend money to acquire them, and they stayed twice as long as they otherwise would have. Part of it is because they're very targetable.

We know that in our traditional student market, all of our students that we want to get in this summer are currently seniors in high school. And to the extent we can target and identify those high schools, it's a lot easier than trying to guess which 35-year-old would like to go back and get an M.B.A., so I'm sure it's an advantage. In order to best market that advantage, we need to crunch the numbers and be prepared to release some information on that.

Fair enough, one last one, you mentioned the hotel school in terms of U.S. presence. Given that the hotel schools there already have -- I believe it's some degree of U.S. accreditation, we're the only hurdler just getting a state license and figuring kind of figuring out what area might make sense, or is there something else there I'm missing.

Both of our Swiss schools have New England regional accreditation, so you're right it would make it easier to come to the U.S. and state licensure, depending on where you want to go is usually very doable. In our case, I think it's been our preference to see if we could identify an acquisition, because you could end up getting into a facility that's already got some students in utilization, in something either directly in hotel management or related to the hospitality field.

We've actually found quite a number of very attractive prospects, but we are not interested in having a dozen of these in the U.S., we're interested in just having a small number, but doing a lot of revenue out of them. So we're still doing our work on vetting and picking, and it would be on our 2004 to do list to get this done this year.

Okay. Thanks. I'll turn it over.

Thanks. And given the time, operator, we would like to take one more question, and then we're going to need to wrap up.

Our final question today comes from Jennifer Childe with Bear Stearns.

Hi, Jennifer.

Hi. Good morning. A couple of things, the organic revenue growth rate, was that before the impact of foreign exchange?

I think the answer is yes, I have to check that. Yes.

Yes, that is right.

Okay. And then just some housekeeping, cash flow from operations, D&A, shareholders equity. And Capex guidance for '04.

Well, Capex guidance is something we haven't historically done, because we don't approve in advance a Capex budget. I think consistent with what we said in the past, it's going to hold true in 2004, which is we would expect to reinvest the majority. Close to 90 to 95% of our free cash flow or cash flow in Capex projects. From a shareholder's --

Provided that they exceed our --

The high return project, that's right. As far as, you said shareholder's equity, I think we're ending the year at about $650 million in shareholder's equity. I can't remember the --

Cash flow from operations.

Yeah, we don't have the full cash flow done, typically the timing is tight. I think what you see in the cash balance change from the 3rd quarter to the 4th quarter is largely significant cash flow from operations reduced by a significant sort of nonrecurring cash payment of our taxes on a K-12 assets, so excluding that, and sort of nonrecurring as would be expected our 4th quarter is a very, very strong cash flow positive quarter for us.

Okay. And maybe I can slip in one more. It looks like the SAU margin is going to drop year-over-year in the 1st quarter, I was a little surprised given the G&A shift. Would that be a result of the seasonality and the addition of UNAB?

Exactly.

Okay.

The Chile, it's a essentially a loss-making quarter during their summer, and Chile itself has essentially doubled in size because of that acquisition, plus is our highest organic grower.

Okay, got it. Thanks a lot.

Okay. One other thing, Jennifer brought up was sort of balance sheet items, we did want to also mention, we try to have our debt denominated as much as possible in the functional currency that the debt relates to, and to the extent that some of our debt is in euros, it's actually increased in the way we now state it as dead amounts.

Increased only as the way it's presented in U.S. dollars on our financial statements. Obviously, if it's Mexican peso denominated debt or, more importantly in this case, euro denominated debt, there's no increased exposure to us, we're going to repay that in the same euro. But clearly the debt balance from the 3rd quarter to the 4th quarter looks like it went up, when in fact it really remained pretty much constant. And the reason for the change is simply the euro strengthening and the translation of the balance sheet accounts.

Well, again, we've taken a lot of time. I want to thank everyone for their patience and interest today. We look forward to speaking with you in the future. Thank you.

This concludes today's conference call. We thank you for your participation, you may disconnect at this time.