Laureate Education Inc (LAUR) 2004 Q2 法說會逐字稿

Good day everyone and welcome to this Laureate Education second quarter 2004 earnings results conference call. Today's conference is being recorded. And at this time for opening remarks and introductions, I'd like to turn the conference over to the Director of Investor Relations, Mr. [Chris Simonowski.] Please, go ahead sir.

Thank you. Good morning everyone, and welcome to Laureate Education's second quarter 2004 earnings conference call and webcast.

Before we start, I'd like to remind listeners both today's press release and this call may include information that could constitute forward-looking statements made pursuant to the Safe Harbor provision 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 is detailed from time to time in the Company's filings with the SEC, including but not limited to our most recent Form 10-K and 10-Q that are available for viewing on our website.

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

Now, at this time, I'd like to turn the call over to Douglas Becker. Doug?

Thanks, Chris. We're very excited about this quarter and what it augers for the rest of the year, and also very excited about today's announcement of our new relationship with Kendall College. I'm going to briefly talk about both of those and then turn the call over to Sean for a few minutes, and then I'll be back along with Paula Singer to talk some more about the business and then we'll open up for questions as usual.

This was a very big quarter for us in many ways. As many of you know, it was within the second quarter that we adopted our new name, which was very exciting. We had the occasion to open the NASDAQ market and announce our new name in that exciting way. And that really is, in many ways, the capstone of all of our transformational efforts to separate into a pure play post-secondary education company, which has worked out so well for us.

Also in the second quarter, we did receive the repayment of our seller note, arming us with approximately $60 million of additional cash, to which we have all sorts of good uses that we would intend to put that. And I'll talk a little bit more about that a little bit later in the call as well. I think probably the most important thing that has come out of this quarter has been the beginning signs, or I'd say maybe continuing signs, of the accelerating growth taking place in our online higher education division.

Many of you have been very patient with as we went through last year's restructuring of our partnerships with [Kantor,] and began to put more emphasis on Walden, and we told everyone that this year you'd begin to see the results. Well, in the last quarter, we had a 30% increase in new students but only a 1 or 2% increase in total students. In this quarter we're again seeing 28 or33%, depending how you calculate it, increase in new students in online, driving total census up 7%.

And you will begin to see continued acceleration in that total student body in online, such that by the end of the year we would like to see that number be certainly in the 20s, probably the high 20s percentage growth rate of total student body in online, as we lap the sort of, year-over-year impact of the changes in the online group. Sean and Paula will both briefly touch on that subject a little bit more.

But I would say if I had to pick the single most important data point in this press release, I would say look to how new student enrollment is beginning to flow through into total student enrollment in online. We've made it very clear our stated objective that our online division will be the fastest growing division in enrollment, in revenue, and in profitability by the end of the year. And that will position us for 2005, I think, extremely well.

Another very important point: acceleration in the development of our Mexico business. We have a fabulous business positioned extremely well in Mexico. Everything is really in our favor; a great management team, great demographics, and just tremendous momentum in the business that we have there. And we've decided to go with that momentum with the opening of two additional campuses.

We announced earlier in the year that we were going to open in Guadalajara, and that was very important because that's such a large market that that campus, in terms of expense and opportunity, probably count as two campuses in our view. But now on top of that, we're adding Saltillo, which is a town not too far from Monterey, a very important market in Mexico, and Ecatepec, which is on the outskirts of Mexico City.

In the case of Ecatepec, as we've indicated in the past, we've chosen to use a the build versus buy analysis in the case of a place like Guadalajara or Saltillo, that has led us to decide to build. But in the case of Ecatepec in the outer ring of Mexico City, we decided that we would actually buy an existing school, in this case Universidad Hispano Americana, a wonderful school with a great reputation, very highly ranked, but a small school compared to us, about 4200 students. So less than 10% the size of our Mexico presence but a very nice-sized campus.

And we will be rebranding Hispano Americana; it will not really operate as a separate university, per se, but will operate simply as the 19th campus of UVM. But they will bring some tremendous strength, especially in engineering where they are especially highly regarded. And we see many other places.

I think many of you heard us talk about the fact that out of the top 20 markets in New Mexico, we're still only in five of them and as we move into the other 15, we will need to accelerate our plans to open new campuses. And that often will include buy versus build as a consideration. This is costly. Hispano, we're buying it before, in essence, we go into the summer recess, so it will cost us a little bit in terms of earnings, but not a lot.

The opening in Saltillo will cost us a little bit in earnings, but not a lot, and the same with Guadalajara, all of which we can accommodate, and I'll talk about that and Sean will as well, in just a moment.

The third key point in the trending and development of our business is our acceleration in our plans and how aggressively we're pursuing our hospitality education business. Many of you note that early this year we announced plans to open in Shanghai, in China, a campus that will begin to take students in in September of this year and we're very optimistic about that; again, a startup campus.

We announced in this press release two program transplants; we are opening branches of our Swiss Hotel Management School, one in Mexico City in our Lumas Verdes campus, and one in Guadalajara. And we think that will be a very good market for our hospitality programs.

And then perhaps the biggest news, today's announcement of our partnership with Kendall College, an extremely well-regarded, small culinary school in Chicago that has very big plans. And Kendall College has, on their own, been intending to move into a very large, state-of-the-art facility that will probably be the finest culinary education facility in the country in downtown Chicago, a $45 million development that they have been leading.

And Kendall has permitted us to be their partner in making this happen by providing them some financing. We have also agreed that Kendall will become the Les Roches affiliate in the United States, offering our hotel management programs. Kendall students will have the chance to study in our locations in Switzerland and in Spain, and eventually in other parts of the world.

And our worldwide recruiting network will begin to recruit students that might like our less Roche program but might prefer to come to the U.S. to get it, as opposed to coming to Switzerland, and there are many students that would feel that way. While this initially starts as an alliance between Laureate and Kendall, we actually do have an option to convert the loans that we're making to them and assume their mortgage, and they would then be a wholly-owned subsidiary of Laureate at that time.

And we anticipate that will happen sometime in the next two years; it is structured as an option and until such time as we exercise it, they will continue to have the ordinary independence of governance that you would expect. So we're very pleased about that.

Many of you know we have some tremendous strength in our board in the area of hospitality, and in our news releases today you'll see quotes from [Wolf Hanks,] who is the president of Four Seasons hotel, and Wolf was very helpful in thinking this strategy through and very encouraging of Kendall's reputation and the market for Les Roches in the United States.

Also, Dave Wilson, one of our board members who chairs the Chaine des Rotisseurs, which is a culinary organization in the U.S. who gave us similar, very positive feedback. So in essence, acceleration and growth in OHE, acceleration and growth in Mexico with new campuses, and acceleration in the hospitality area, what do all these things have in common besides great news and exciting prospects for 2005?

Well they all do have some modest costs going forward and I'm very pleased that the underlying operational performance of our business is such that we can cover all that. And we can actually do these important strategic moves that we feel are the right thing to do for our business without having to take our guidance down for the year.

And for us, we're very pleased about that. And in fact, also very conservative in the way we're estimating, because, in fact, we begin to see accelerating enrollments in these new campuses, some of the startup costs may be less than we've anticipated and we actually could be in a position to do better than the information, the results that we're currently anticipating.

So with that, I'd like to turn it over to Sean for a little bit more information, and then Paula and I will be speaking a little bit further and then we'll take your questions.

Great. Thanks, Doug. As he mentioned, obviously, there's some exciting things going on from an operational perspective. Today I'm happy to report a very strong financial quarter for the company.

We posted revenues from continuing operations of 158 million, which represents a 36% increase over the same quarter last year. On a year-to-date basis we're up 37% on revenues over last year. And our combined divisional operating margins expanded versus the same period, quarter and year-to-date results last year by 320 and 200 basis points, respectively, driven largely by the continued campus maturation and solid enrollment increases that Doug alluded to.

We generated fully diluted earnings per share for continuing ops of 50 cents in the quarter, but obviously, some big nonrecurring items we had previewed last quarter accounted for roughly 13 cents of that outperformance, and I'll give you a little bit more color on those in a second.

As you know, on April 27th, we were repaid, as Doug mentioned, the full $55 million principal plus the accrued interest outstanding on the 12% note that we had received in 2003 as partial consideration for the sale of our K-12 business. As you may recall, we reported that note on our books at a discount, and that discount was being accreted back into income over the term of the loan. So the early repayment resulted in the acceleration of the remaining unamortized discount as interest income in the second quarter.

Specifically, the second quarter results include incremental interest income of approximately $6.8 million after tax, representing the net of the income that was accelerated as a result of the repayment, less the foregone interest that would have otherwise been due on the note over the balance of the quarter.

Bear in mind that now that we've been repaid, we're no longer going to be accruing interest on that note, obviously. For the full year, the repayment is significantly accretive; however in the third and fourth quarters we're negatively impacted as a result of the foregone interest and the OID income to the tune of roughly 3 pennies per quarter.

And our guidance was based on the assumption that the note would remain outstanding for the entire year; therefore, the third and fourth quarter guidance has been adjusted to reflect the repayment. Our 2005 guidance similarly contemplated that the seller note would remain outstanding for the entire year, and included in our guidance numbers was roughly $5 million after tax, or 10 cents a share of earnings associated with the seller note.

Obviously, if the roughly $60 million in proceeds are simply invested at today's modest interest rates versus the notes coupon rate, there's negative arbitrage. In order to replace this foregone income, we will need to redeploy the capital effectively. And we feel good about high-return projects we have to choose from, as the proceeds will likely be deployed into strategic acquisitions with returns well above the seller note coupon.

However, we don't make a practice of issuing guidance on the assumption that we will complete acquisitions, so we've reviewed our alternatives and we feel very confident that we have options completely within our control that would fill the gap in 2005 created by the repayment. Examples include repayment of certain of our higher interest rate debt, the flexibility that we feel we have to increase our ownership stakes in some of our existing universities at previously negotiated, attractive prices.

The $6.8 million after-tax gain from the repayment was reduced by roughly $600,000 after-tax charge, relating to a one-time noncash charge, relating to the modification of the administration of our stock option exercise procedures. An additional $900,000 after-tax charge was recorded for this issue as a component of our discontinued operation.

So to summarize, the net impact of these items was to increase our results from continuing ops by 13 cents for the quarter and 7 cents for the full year, after adjusting out the foregone interest for the balance of the year. So the 50 cent reported guidance after adjusting out for the 13 cents was roughly 37 cents, versus the guidance we issued on a comparable basis of 30 to 32 cents.

Now, a portion of the outperformance relates to our tax rate. The large, one-time items in the quarter are fully taxed at the U.S. tax rate, roughly 40%. However, our operational results in our lowest tax jurisdictions continue to be our best performers, which is driving, as we've indicated, our tax rate from continuing ops down, particularly in the second quarter, which is a very seasonally strong quarter, in particular in the lower tax countries.

As I mentioned, this benefited our operational results for the quarter to the tune of about 3 or 4 cents, some of which is timing and some of which, by the end of the year, we would hope if the operations continue to be as strong in the lower tax jurisdictions, could have a benefit to our results on a permanent basis.

Now, normally we would increase our guidance to reflect that for the balance of the year, but as Doug had mentioned, we have some very exciting initiatives that we intend to reinvest in, and the balance of this outperformance will be targeted towards those projects in the second half of the year to position our hospitality business and our operations in Mexico, in particular, for strong growth in 2005 and beyond.

Doug mentioned to you some of the initiatives in the new campus expansion efforts in Mexico. Some examples of our aggressive expansion plans for hospitality include the previously-announced campus in Shanghai, today's announcement of the Swiss hospitality the program transplants to two campuses in New Mexico, and the U.S. hospitality entry via the Kendall agreement. And all of these initiatives entail investments in marketing and startup expenses that I think we have the luxury to reinvest our outperformance without adversely affecting our full year results.

Turning to some divisional level detail, campus-based revenues grew 41% over last year to 124 million. Certainly, some of that growth came from acquisitions, but we are pleased to report continued strong, organic revenue growth from our existing businesses. In particular, if you exclude the impact of our acquisitions, namely, those that were not in place in the second quarter of last year, revenues grew 19% on a quarter-over-quarter basis. And that organic growth was driven by a combination of solid enrollment growth as well as pricing increases.

Operating margin trends are exciting both in total and on an organic basis. The reported quarter results for campus-based business reflecting 92% increase in operating income, from 12.9 million last year to 24.8 million this year, and strong 540 basis points increase in margins when compared to the second quarter 2003. Excluding the impact of acquisitions, campus-based operating income grew 52%.

And obviously, when you're growing your bottom line faster than your top line, it implies margin expansion and in fact, on an organic basis, margins increased from 14 to 18% in the campus-based business. So the plan is to continue to open new campuses and expand existing ones while successfully continuing the integration of our new acquisitions into our network.

Online revenues increased 25% over the same quarter last year to 35 million. That growth is primarily driven by a 33% increase in new online students. That number is 28%, if you exclude the impact of the KIT acquisition. Underlying this growth was a 72% increase in total with all the students, which was offset, as expected, by roughly 42% decrease in the total students at Kantor from our non-Walden partners.

On a new student basis, Walden increased 65%, and that was offset by a 25% decrease in the non-Walden Kantor students, new students. So the solid improvement in both the new and total student enrollment reflects the diminishing impact of Kantor's discontinuation of the third party university partnerships that we had mentioned, and really signals the acceleration of enrollment growth we have been forecasting for the balance of the year.

As expected, the transition accounts for the drop in margins from 19% in the second quarter of '03 to around 15% to Q '04. Bear in mind that 15% margin for the quarter is in-line, in fact, at the top end of the guidance we gave for margins for online, so fully expected. Excluding the impact of the Kantor decommissioned partners, if you will, the margin from an organic basis was actually a 150 basis point improvement from 13% to 15%.

On the FX front, as you may have noted, we've included in the body of the release this time a table that summarizes our revenue growth by location, in both U.S. dollar and local currency. When you exclude the impact of currency, consolidated revenues increase 35% for the quarter. Said another way, currency added roughly $1.9 million of revenue to the top line.

On a full year basis, the increase, adjusted for currency, would have been 34 % year-to-date, and from a bottom line perspective, very modest contribution, less than $700,000 in after-tax income, as a result of currency for the quarter. And while we continue to say this, it's not a perfect hedge, but certainly, the diversified portfolio continues to prove effective for us in sheltering us from any significant volatility based on currency movements.

Balance sheet, obviously, strengthened from a liquidity perspective with the repayment of the seller note. We ended the quarter with a cash position of roughly $160 million, and total corporate debt was around 90 million. And obviously, the increase in the cash balances was primarily due to the repayment of the seller note.

We today increased our full year 2004 guidance, really, to reflect the benefit from the one-time items, the 7 cent full year impact from the repayment of the seller note, and we are introducing guidance for the third quarter of 2004. Keep in mind that the third quarter, all of our campus-based locations, other than Chile, are on summer break for some portion of the quarter. And so it is, I think, today now, our second weakest quarter in the calendar year because of that.

We anticipate consolidated revenues of 130 to $145 million, which would represent growth of at least 22% for the quarter over quarter. Our G&A costs are expected to be approximately 5.5 million, and our diluted earnings per share guidance is 18 to 19 cents for the third quarter. Divisionally, our campus-based division anticipates total revenues between 100 and 110 million, with operating margins of 16 to 17%, and online projects revenues in the 30 to $35 million range, with margins in the 13 to 14% range.

That concludes my comments comments. At this point, I pass it along to Paula for her comments on the online business. Paula?

Thanks, Sean. As you're aware, in 2003 we made the decision to accelerate the decommissioning of a number of Kantor, non-Walden partners in favor of focusing on Walden. With Walden we have control over key factors necessary for scale and for building brand.

Factors such as the number and timing of new products launched, the efficiency and responsiveness of student services, and the technological infrastructure. While we knew this decision would temporarily impact the division's total enrollment growth, we believe that this move would strengthen our long-term position. I'm pleased to report that this process is on schedule and will be completed by year end.

By the end of 2004, Walden will represent over 60% of Kantor's degree revenue, up from 13% at the end of 2002. I'm also happy to report that this transition to Walden, and really, to a fully online delivery model, had no negative impact on our industry-leading graduation rates of 95%. Those graduation rates held strong during that transition.

Since investing in Walden, we have brought market six new degree products, including the launch of an EDD this spring, a program which is being enthusiastically received. We are currently developing three additional new products to be launched over the next six to nine month period.

We have also added seasoned product management to the K-12 team. [Linda Lestrick] joined us several months ago as vice president of marketing and product management for K12. Linda actually comes out of Johnson and Johnson, where she was responsible for the successful launch of the Splenda product, so I think all of you out there that are on the Atkins diet might recognize that product.

We also continue to be very pleased with the growth of our traditional Walden programs, particularly our Ph.D. offerings, which account for almost 25% students at Walden. These Ph.D. programs, which typically cost between 50 and $60,000 and have a length of stay of five to six years, are experiencing a 37% growth rate.

These programs offer students access to important opportunities not easily found elsewhere with our competitors, and provide the division with important financial visibility and predictability. With NTU we continue to lay the groundwork which we believe will yield the same kind of dramatic growth we saw first at Kantor and now experiencing at Walden.

One significant step forward this year is our increased use of owned, versus licensed courses, which allows NTU to offer multiple starts and to provide a much higher level of student support. Now that NTU is better positioned for growth, you should expect to see us begin to invest significantly in sales and marketing in this area.

KIT, our new international online arm, is integrating very well into the OHE division. We are fortunate to have a strong team in Amsterdam, which is being supported by a very experienced OHE divisional leadership group, particularly in the areas of marketing and recruitment. We expect to launch one new degree at KIT in Q3 and are evaluating several additional opportunities for 2005.

We believe that having a UK degree in our arsenal will be extremely helpful to OHE's success in the international marketplace. In summary, the year is moving ahead as expected and as we've indicated in the past, we expect total enrollment growth to climb to the high 20s by year end with a solid uptick in Q3. Let me turn it back to you now, Doug.

Thanks very much, Paula. Just a few brief comments on Q3 and Q4. As we look to Q3, obviously, the big news will be enrollments. We are right in the middle of our recruiting efforts in Mexico region and Europe, and of course continuous enrollment associated with online higher education as well. This is a very important season for us and we know that investors will look with great interest at the Q3 enrollments.

When you take our Q3 new student intake and combine that with the very strong intake we announced, roughly 30% growth that we experienced in new and total students in the Chile region, you'll be able to figure out what our enrollment growth is for the entire company, new feeding total, and total, obviously, feeding four or five years of visibility associated with the performance of our company. So this is just a pivotal, pivotal importance.

We indicated in the last call that a new student growth rate of as little as 12% in the remaining regions to report, would allow us to achieve the 18 -- the low end of the 18 to 20% enrollment growth guidance that, in total students, that is the building block of our financial guidance. In fact, that number is even lower now as we continue to build OHE enrollments.

So it's really hard to conceive that we would not have performance in the current intake that would at least allow us to perform in the guided range on enrollment. So we're very pleased with how that is looking. However, obviously. the results themselves will be reported in our Q3 numbers and I think just tremendously important for investors to watch for.

I think the key component of where there could be upside in enrollment is going to be in this continued growth in higher education, numbers that Paula just talked about, and the benefit that could come from this more aggressive effort on our part to open new campuses in Mexico.

Turning to Q4, of course Q4 for us is an earnings quarter. It's the one quarter in which all of our universities are in session for nearly the entire quarter. We don't have a lot of enrollment growth, although we will have OHE enrollment growth to report. And again, that will be very important, because that should be the sort of final proof that the OHE enrollment have become, or are close to becoming, the fastest growth component of the overall company. So that will be very important component to look for in Q4, as well as earnings.

We are anticipating that we could conclude a sale of our Wall Street Institute business in Q4, although that certainly could drag into Q1 of '05 or it could happen earlier than Q4, but we are well under way in a professional, investment banker-lead sale process and have received extremely strong interest in that business so we're very pleased about that.

That will obviously produce cash that we can invest to grow our business, as we also will focus on the reinvestment of the 60 million that was just repaid to us from the K-12 sale. Now, Sean did mention the investment of the $60 million. It is very important, and I want to be clear, we have no concerns at all about our ability to replace the foregone interest income that would have come from that seller note in 2005 and beyond.

As Sean mentioned, anything from repaying our highest cost debt in our lowest tax countries to increasing our ownership in existing countries to strategic acquisitions could more than replace, as a range of opportunities, the foregone interest income associated with that $60 million.

And then, really, as we start looking to 2005, I think everything we see continues to make us very comfortable with the guidance that we've provided, that $1.60 to $1.65 earnings guidance. If you take out the one-time affect of the repayment of the note, that is better than the 30% growth rate over the guidance that we expect to anticipate for this year.

So all of that makes us very excited about the coming quarters and next year, and at this point, I'd like to open up for any questions that we can answer. Thank you.

Thank you. [Operator instructions.] Our first question will come from Fred McCrea with Thomas Weisel Partners.

Hi, Fred. Operator, maybe we'll take our next question.

One moment. And Mr. McCrea, your line is open.

Good morning. Can you here me?

Hi, Fred.

Quick question in regards to the Mexico market. You'd mentioned the significant opportunity in terms of [inaudible]. Which are those? Could you kind of give us maybe the top five that you're not in right now in that location?

I think for that I would ask Bill Dennis to comment, who heads our Latin American region. Bill?

Yeah. Well, we are actually -- and some of you that joined us back in March in Mexico, we got an opportunity to describe how we're approaching the overall Mexico market. And we basically divided it into three rings for the moment. One is Mexico City, second ring, two, is the suburban area surrounding Mexico City, and then third, the balance of the country.

There are two major areas out in ring three that we are most interested in. One is to the northeast, which is Monterey, and that's a very large population center. Monterey represents about 3.5 million people. And we are beginning with Saltillo, our first move into that market area. Saltillo, about 650,000, 700,000 students, and we're going to be going there right out of this year.

The other area that we looked at was the second largest city in Mexico, which is Guadalajara. We've talked about that before. We are looking at the northwestern part of Mexico, south of Arizona and in that area, as being a large opportunity for us as well. So we have a number of areas beyond those campuses that we've got on our plans for the moment.

I think in many ways it reminds me a lot, our Mexico business, of the University of Phoenix business years ago, when they were at that sort of inflection point where they realized that simply opening was in many cases 90% of the battle. They had a unique offering, there would be lots of customer demand for and they just needed to go get those campuses opened.

And that's part of why our progression of opening one to two campuses a year is just not really moving at the rate that we think we can accommodate. And that's why this year we already have announced three now. And, in fact, given the size of the Ecatepec and the Guadalajara campuses, that's really probably more like four or five campuses of financial opportunities. So very excited about that.

Then a quick follow up for Sean. In terms of the guidance, can you walk us through, are you considering for Q2 as a component of the full year, are you considering the 37 cents or the 50?

We increased the full year guidance by the 7 cents, so in effect, however you look at it, we don't need that 7 cents to hit our guidance.

But it is the 50 cents -- you're taking in the 50 cents and netting out foregone interest, and that's bringing you to the $1.31 to $1.33.

Thanks for the clarification.

Thank you.

And our next question will come from [Mark Marostica] with Piper Jaffray.

Hi, Mark.

Hi there. Clarification regarding former guidance you gave around revenue and operating profit mix among the quarters. With the acceleration of the Mexico campus expansion and also the investment in hospitality, is it still the case that we should expect 55% of revenue and 70% of operating profits to be represented in Q2 and Q4 in this year? And then as you look to fiscal '05, would that be the case as well?

Yeah. Obviously, the guidance assumes, as we mentioned, probably two to three new campus openings per year in Mexico. And the impact of a new campus opening, if it's in the fourth quarter, could have a negative impact because there is some startup losses associated with it. But not enough to materially swing that range of percentages.

So I think we're still comfortable with the second and fourth quarters combined accounting for in the ballpark of what we had earlier said.

Okay, Sean. Also, just to follow up on your comments concerning the tax rate in the quarter, looking to Q3 and Q4, what effective tax rates should we be modeling?

I think in the third quarter it will be back to roughly 21, 22% rate that you are used to seeing. And that's a seasonally weak quarter in which the lower tax businesses aren't earning as much money. And I think my point was by the fourth quarter, which is a big quarter, we will have a better sense of how much of this tax rate is actually of permanent benefit to us.

And we do expect, as I said before, going forward there is a downward trend on that rate, because we continue to see the highest growth in our lowest tax jurisdiction. So for the balance of the year, at least certainly for the fourth and third quarter, I would assume a rate consistent with the guidance rate of 21, 22%.

And remember, that is calculated after taking into account minority interest. We now are presenting that both ways in our queue, so it's either 17%, if you exclude minority interest, or 21% if you include.

Okay. Thanks for that color. And last question. You mentioned that the total enrollment growth at OHE should reach the high 20s by year end. How should we expect operating margins to perform Q4 or by year end? And then if you could give us a sense for what '05 operating margins for OHE will be, that would be helpful.

I know we have not broken out operating margin guidance by quarter for Q4. And I don't think -- did we break out OHE operating margins for '05? We gave just company wide. That's all information we need to provide, but I'm not sure that today's the day that we're ready provide it, Mark.

Perhaps just to ask it a little bit differently, should we continue to see sequential expansion in operating margins on a quarterly basis in OHE, or is there some seasonality to take into account?

I don't think it's so much a function of seasonality. And the reason I want to be thoughtful in giving good information to everyone is obviously, the faster we grow OHE, there is some front loading investment associated with recruiting students and marketing costs that, to some extent, actually hurts your margins the faster you grow. But what I can tell you is this idea of OHE getting into the the high 20s in its total enrollment growth by the end of the year, that is planned.

So the margins we've already given you for '04, we're saying we're sort of giving incremental proof that we're on plan for OHE. We're not really saying we're off plan for OHE at all. We're not saying we're ahead of plan in enrollment growth, and we're not saying we should be below plan for margins.

Now, as we look to next year, it may be that if this acceleration continues, that we actually want to look at operating margins being a little lower. We just have to work our way through that and I think at this point, we're really focused on profitable growth in that business and we're achieving it.

Thank you. I'll turn it over.

Thank you.

And our next question will come from Howard Block, Banc of America Securities.

Morning, everybody. Nice job on the quarter. Sean, just one quick question on this noncash stock compensation. I thought in the 10-K you said about 2 million for the year, and I think the first quarter was about 700 and the second quarter was a pretty big number, 2.3 million. Do we need to just rejigger our estimate on that noncash item?

That noncash item that we announced as part of our guidance related to the conversion of SIU, former SIU options into Laureate options that triggered a gain, that number is unchanged. What we announced today was a different charge that candidly related to an inadvertent error in the implementation of our stock option exercise profits. It has nothing to do with anybody's compensation.

It has more to do with the protocol for exercising options and the fact that the mine field you have to wade through in doing it correctly was misstepped, and we triggered an inadvertent charge that once we identified it we resolved it, but we're sort of stuck with that --

Which is a one-time charge.

-- which is a one-time charge.

Okay. So then if we look at the 10-K disclosure, we should be okay for the rest of the year?

That's right. Yes.

And then on the interest income side, I understand it's sort of controlling for the $55 million, but I was just sort of having trouble getting to the 8 million -- the other nonoperating stuff is in there. I mean, it just seemed with the cash balances, I just couldn't get to the 8 million "other" number.

If you're starting with the roughly 16 million that shows up --

Right.

-- included in that 16 million was, roughly, 13 million of gains. The number, the roughly 11.4, is net of foregone interest, so the gain itself was closer to 13. And obviously, we had significant cash balances before, but the infusion of an additional 60 million increased the interest income as well. So I think that's probably the missing piece.

Okay. That's helpful. And then the question I always like to ask and that you guys aren't always ready to disclose it on the conference call is any update, just in terms of this new, developing, and fully performing account in terms of the universities, what states they are in, as of June 30th?

The data we have right now, we have ten campuses now in the new category. Would that be updated for the two we announced before that? And that includes also the China one. There are eight developing campuses and there are now 20 fully performing campuses.

Okay.

And the revenue contribution is for the full year. Trailing 12 months, new would account for about 6%, trailing 12, but those ten new campuses account for 6% of trailing 12-month revenue, developing account for 9% of trailing 12-month revenue, and fully performing, the 20 full performing campuses account for 85%.

So obviously, those new continue to provide a drag to our current earnings and obviously, tremendous fuel for our future growth.

Okay. And then the last question I guess would be for Bill would be -- and I'll probably mispronounce it again -- but this program [inaudible], is that an initiative that will be sort of under that brand forever in Mexico?

And this is an initiative that you intend to be the number one growth driver for the Mexican market, and we can think that maybe in three to five years, half of the students will be enrolled under sort of that brand?

First maybe you could explain what it is.

Well, just to bring everybody, Howard, up to the same page. Our working adult -- that is, most of our students are from 18 to 22 years of age. We have initiated, both in Chile and Mexico, Mexico being the second location for introducing a program for those that are 25 years and older, those folks that have not gotten a degree, perhaps never completed a degree, never had a chance to get a degree, to come during the evening, during the week, and then on Saturday morning, and to get a regular bachelor's degree, but in a much compressed time frame, not sacrificing their work schedules or their family life.

And that has been received very strongly in those markets, both Chile and Mexico. We are seeing huge, huge response in the market. And we believe that that new segment for us is going to be an incredibly big growth opportunity. Whether it's five years, Howard, I don't know for sure, whether that will represent 50% or not. Certainly, the demographics are there, the demand is there. We're in the very, very beginning stages of it, we just began this last August.

Right now, the early signs of this particular recruiting process is very encouraging for us for this year. And so we expect that to be very profitable because it enables us to leverage the existing facilities, it also enables us to leverage our existing staff, and we think it's going to be a real margin driver. And we're confident it's going to continue to grow, whether it will be 50% or not.

Now, Raph had a couple of other comments he wanted to make on that since this really is his vision for the future.

Let's not forget, we continue in Mexico to expand through campus locations. So in the next five years there are two big drivers, the working adult, plus campus expansion. We haven't exhausted Mexico at all.

I was just going to add, I think the reason why so much more of our efforts in working adult and results have been in Chile, is that in Chile, in most of the geographic areas, we now have a campus. And in most of the areas we've received really tremendous market share. So while there is a very, very strong continued growth in students going to college -- so that will help us -- our growth rate in Chile is gradually reverting to, let's say, the growth of the market.

Now, in the past ten years, by the way, the growth of the market in Chile was 6% per annum for private universities, so that's in the a bad rate to revert to. Not clear, obviously, what that would be in the next ten years. But in order to do better than that, working adult is absolutely pivotal.

In Mexico, working adult is very much the sort icing on the cake, because the cake itself is, our existing campuses are growing very nicely, we've got these 15 new major cities that we want to go to that would allow us to literally quadruple our enrollments if we were to achieve simply the same share in those markets that we have in our current five cities.

And so in many ways we can do both, Howard. But I would say it'll be quite a horse race, and I would be very surprised to see in Mexico working adult be 50% in five years, not because it isn't a great opportunity but because we have so many other great opportunities.

Okay, great. Thank you very much.

And our next question will come from Bob Crane with Legg Mason.

Good morning, everybody.

Hi, Bob.

Just a couple of questions for you. Doug, you mentioned a couple of occasions of the potential for ownership increases in some of your campus-based assets. Could you sort of prioritize that for us, and where might Walden stand in that?

Well, we've got as many people now, we've got minority stakes outstanding in Chile, in Mexico, and at Walden; those are really the important ones. We also have a very long-standing minority stake outstanding in Spain. And we have very different views about all of those, because they are all in various different stages. In the case of Chile, for example, our minority partner is also pivotally involved in management. In the case of Mexico, our minority partner is involved in management, but in a different role. In the case of Spain and Walden, our minority partners are not involved in management at all. In the case of Walden, we enjoy a very, very good and long-standing trusted relationship with that partner.

In the case of Spain, our partner is, in essence, partner by dent of being the one person that didn't sell when everybody else sold, so we can't really say he picked us or we picked him, it just kind of worked out that way. So we have very different views towards all of them.

I'd be uncomfortable telling you what the priority would be, because obviously, we're in discussions with various people at various times and need to represent our shareholders well in those negotiations. I will tell you over time, it's likely that all of those minority interests go to zero, it's just a function of what time level you apply.

And so what we've tended to do is having a clearing price that says if you take management participation out of the equation, there's a clearing price that would represent almost a standing offer in many of those countries, that if we could get it for X we would take it and if we couldn't, we're happy to just keep waiting. But where you take management into account in the case of Chile and Mexico, obviously, there's a lot more to consider than just their ownership.

So that's -- it's complicated, but I want everybody to understand if you take a snapshot five years from now, at least three out of those four, I think it's highly likely, would be -- we would have acquired back. And in many cases, we have contracts that specify what the multiple will be and those multiples are extremely attractive.

But you think the likelihood of acquiring at least one of them in '05 is quite high?

I think we're working on multiple ones, and it would be very surprising to me if we didn't get a deal done out of those four in that period of time.

Okay. That's helpful.

One other thing I'd say is unlike other acquisitions, which of course we have a pretty active pipeline, entering new countries and other things, the one nice thing about buying back shares in an existing business is there no, generally speaking, there's no incremental management component to it; it's already being managed.

And so in that regard, it actually -- we're typically more constrained by management bandwidth and our very conservative stance than we are with capital.

That's helpful. Sean, you indicated before that you expect roughly 6 cents dilution from the lost income on the repaid note in the second half of the year.

Yeah.

Just wondering, also, with the combination of Kendall, the New Mexico facility and the acquisition that was just made, what are those three in combination likely to, I take it dilute numbers by in the second half of the year? In aggregate?

Well, I think what our point was we had some malperformance in the second quarter that will cover off that plus reinvestment initiatives to the tune of 3 to 5 cents.

Okay. That's helpful.

And again, I think we're being appropriately cautious when we go into those markets we want to make sure we have the firepower to spend and very conservative expectations for new enrollments. Even in the case of Kendall, where we haven't bought it per se, we've got foregone interest on the cash that we just laid out and we have marketing expenses to start launching the partnerships. So it does add up.

What would your priorities be for campus openings next year? I take it the Mexico and Chile would still be hot on the list, and is it very plausible that you would have something in the neighborhood, potentially, of 10% seat expansion next year?

Well I'd be nervous about giving a seat expansion number, because, again, we want to really think it through before we release a new metric. I can tell you with expectations to 18 to 20% enrollment growth this year and a similar kind of number for next year for total enrollment, seat expansion will probably have to be more than 10% just to seat the rising tide of our existing student body. On top of that, we can open new campuses.

Mexico is absolutely our top priority, but there are other places we have identified campus opportunities, in Costa Rica, in Panama, there are still one or two opportunities in Chile, although that's less of a priority there. Europe is very important us. We continuously try to open a new campus in Spain and one day, I think, just by pure perseverance we'll get that done. We actually do now have a downtown campus open, which is off to a good start.

And we're very interested in continuing to densify in France because we already have one very small business there that we need to spend our time -- if we're going to spend time on a country, we need to have more critical mass in that country. And then, of course, there's entering new countries, altogether new countries. But I think if you tease all that apart, Mexico is clearly the priority. And again, two to three new campuses next year. We would be surprised if we didn't do at least that much.

Okay. That's great. Last question, you mentioned you're coming up on a major northern hemisphere intake. Could you comment either qualitatively or quantitatively and give and color on how that process is going either in terms of student inquiry levels or lead flow, it may be early in that process.

I think I'd rather hold our fire on that, only because there have been many times where if I tried to guess the end of the movie based on extrapolation, I would have been wrong. What I can tell you, certainly, we haven't seen anything that makes us uncomfortable with our guidance for this year or for next year.

And I think that, obviously, from our perspective, if we didn't feel great about enrollment and our earnings, we wouldn't be opening all these new campuses. If people could choose to look at this release as why aren't they taking their earnings up in the second half of the year,

I'd look at this release as we have such confidence in how the businesses going that we're prepared to open more campuses and more money because we know it won't impair our ability to make earnings this year ,and most importantly, next year.

Okay. Great. Thanks, guys.

And our next question comes from Jeff Sillburn with Harris Nesbit.

Hi, Jeff.

Good morning. I just wanted to clarify something, Doug, that you had said in your remarks and you just faded out on me. Are you guys reiterating your $1.60 to $1.65 EPS guidance in '05?

Yes.

Okay. Great. Just wanted to clarify that. In terms of the second quarter numbers, Chile seemed to be a bit higher than what we had been modeling. Was there any seasonality impact maybe from the [inaudible] acquisition or something like that?

There's a little bit of seasonality there. One of the things we found was it was modestly stronger in the second quarter than we had expected and likely modestly weaker in the third quarter. So it's really a little bit of a flip-flop as opposed to expected full year annual outperformance.

But the business is performing very, very well. We're just coming up on the one-year anniversary of owning the assets, so we're feeling our way around the seasonality a little bit.

Sure.

And it has been contemplated in the Q3 guidance as well.

Okay. That's helpful. Getting back to minority interest, I know you were talking to Bob about that before hand, but I think it would, given prior guidance to model about 22 to 23% of operating income. It was little bit higher this quarter. Should we be using the higher number going forward?

I think our guidance was that works on a full year basis. There is difficulty in the quarters because in a particular quarter for the universities out in session, it does impact the minority interest. So I think in the full year ,you're still okay in that range.

Okay. Fair enough. One more quick question. Did you give out your organic growth in the online business?

Enrollment growth?

I think you gave out enrollment, I'm not sure if you gave out revenues.

We gave out enrollment; we didn't give out revenues. But candidly, it was an immaterial difference, KIT'scontribution at the revenue line would not have a significant impact on the total percentage.

Okay. That's helpful. Thanks a lot.

And we'll go next to Trace Urdan with Think Equity.

Hey, good morning.

Good morning, Trace.

Couple of things on the Hispano Americana, that's an easier thing to say than the place where its located, when did you guys take control and are you in charge of the enrollment process? And then, is there any capacity at that campus available to you for the fall?

It's a great question. I'll give a little comment and Bill, maybe you can add some color to it. Interestingly enough, in general, we would never want to take an existing campus over in the summer because we'd be taking over the losses. But the main reason to do it is exactly what you say, which is to take control of the enrollment process, which is where we feel we can add a lot of value.

In this case, I think we are having the ability to have some impact on enrollment but later in the season than we would like. But we feel very good about that location and it's an extremely well-run school and I think in the long-term, there's no question it will benefit from the UVM name and from our marketing. In terms of exactly when we took it over and any other comments, Bill?

We actually formally took it over at the end of June. We have been working with them during the course of June, obviously, with the marketing people there. As Doug said, the reason we jumped in there and not waited is because we do want to affect the August, September enrollment cycle.

It's a big opportunity for us. That's about a 2.5 million population area that Doug talked about, as a suburb of Mexico City, and more importantly for us, our target clients there, our target student in that middle-income range is growing at 8% per year. So we really need to be in that market, it's very exciting. We have a great rector there, he's very well-known and respected all across Mexico.

So the job ahead of us now, once we get past this enrollment cycle, is to inject new programs and build that area. We have the capacity in existing facility and we have -- we can grow there over the next year or two, and think we're going to make a very, very big difference in that university that's been a stand alone.

It's going to be able to piggy back all of UVM's marketing and advertising in Mexico. So I think it's going to be very successful.

But in the current summer enrollment, we are not really counting on much enrollment growth because we're taking it over so late, Trace.

I hear you. And then the second question, congratulations on Kendall, by the way, I've had the opportunity to see that site and I think that's just really outstanding.

Thank you.

Can you give us a little bit of color -- maybe this question is for Sean -- in terms of the, what are they paying you as interest on the loan, and is there any kind of material benefit from the licensing arrangement that they'll have with Les Roches?

In terms of the loan, it does have a fixed interest rate at 8% and ultimately, along with the agreement, we have an option agreement. And the loan itself and any accrued interest on that would ultimately, if we chose to exercise that option, be creditable to the purchase price. In terms of the license agreement --

There is a royalty paid based on the Les Roches program. There's also probably bigger money will be in student transfers if we recruit a student for them from our agent network around the world. We do have a lot of students that would be very interested in the Les Roches program but really view Switzerland as let's say, maybe, too safe of a destination. They want something really exciting, and the U.S. would be exciting. Obviously, we also have parents that in some cases want the least exciting destination for their kids, so think of that as sort of the "home dinner table" battle.

But for those people where the parents lose that battle, we lose that student, and the chance for those students to come to Chicago represents not only a great chance to build Kendall's value, and we have our option to buy them locked in at a fixed price, but also, I think, there is transfer pricing to our benefit there.

The same goes the other way, in terms of being able to recruit Kendall students to come take capacity -- we have plenty in Switzerland -- and deliver a very unique product for those students as well. I'd say sort of watch this space; Kendall could be very important for us. It is not a profit earner. It's not even intended to be because it's currently a nonprofit organization.

So I don't think it's in any respect a material part of our profit picture for 2005, but it is a pivotal part of turning our hospitality business from a flat growth business to really being in a growth stance. I don't know, Raph, was there's anything more you want to add on that?

Yeah. Clearly, we won't have -- Kendall itself doesn't impact us, except the fact that it makes our network of hospitality schools really more competitive, more attractive, and we also have Shanghai locations.

So when you put all of these together, we become the most committed group in the world in the hospitality education landscape. So that is exciting for students. As you know, Trace, because of the travel and tourism industry being down, being not so attractive as a result of war and SARS and all that stuff, clearly, students are not too keen.

But our long-term perspective on that market is still very, very, very, very upbeat. And so we expect a lot in the next few years and this Kendall piece adds a tremendous appeal for the group of students that might be interested.

If any of our investors on the call, or analysts, have occasion to be in Chicago and would like to see that site, Kendall has not fully occupied their downtown campus site yet, it's still under some construction. But it is a truly state-of-the-art, world-class facility, and so we encourage people to just call us and we'll be happy to set up a visit there.

Yeah, I was going to say at a minimum, it should be the site of your next investor day. Anyway, I'll let you guys go. Thank you.

Thank you. It would be convenient for you, I know.

And we'll go now to Gary Bisbee with Lehman Brothers.

Yeah. Hi, guys. Congratulations on a strong quarter. I guess just three quick clean up questions. What did you pay for the small acquisition in Mexico this quarter? What was the purchase price?

Approximately $9 million.

Okay.

That does not include real estate; there is a lease for the property.

Okay. Secondly, Sean, did you say that the annual cost you'd had in your guide -- or annual interest benefit you had in your guidance, prior to this quarter from the seller note, was around 5 million?

For 2005.

Oh. For 2005?

Yeah.

Okay. And then why --

5 million after tax.

Oh. Five million after tax. Okay

Yeah.

And then why not buy Kendall outright? I understand, especially internationally, one of the reasons to leave a minority interest out there when you do that kind of thing is to get management.

But in this case why do this structure where you're not generating a lot of revenues directly from that asset? Is it because it was a not-for-profit and that was going to be challenging?

We just -- it's uncertain exactly how quickly they can be converted, although it is absolutely certain they can be converted in less than two years. And so the truth is with this option structure, we could convert tomorrow if we want to, or we could have up to two years, so it just gave us flexibility.

But we certainly don't expect to wait the full two years to affect the conversion. We also wanted to be very clear to their community that we would take our time and make sure that nothing impacted them, their accreditation, the quality of their programs, because they're also going through this huge change of moving from a small campus in Evanston to this tremendous, expensive, and state-of-the-art facility in downtown Chicago.

So it just seemed like so many moving parts, what's the least risky way for us to go into this, and this seemed to be the best structure.

And the option period gives us a tremendous perch for continued due diligence during that option period.

Okay.

Although I just would add I think we've done so much diligence that the likelihood that we would ever choose not exercise the option is incredibly small but in theoretical sense, obviously, there is option value to an option that you don't have to exercise.

Right. Okay. Thank a lot.

Operator, we're running a little bit behind. If we could just take two more questions and then we'll wrap up.

And our next question will comes from [Rick Sing with Karsh Capital Management.]

Good morning.

Mr. Sing, your line is open.

Hi. Just want to ask you a couple of questions. You have clearly a lot of opportunity in Mexico. What is the reason for accelerating? You had had a plan at the beginning of the year, now you're choosing to accelerate.

Is this opportunities you hadn't seen before or are you doing better than expected on your initial expansions? What was the reason for the acceleration?

I think the easiest answer, and correct answer, is the company is making more money and we can afford to expand more aggressively without hurting our earnings. There's also a very delicate balance of running a company for the best long-term results we can achieve, but also being very good about delivering predictable results that investors can count on.

And if we were to suddenly get very aggressive at the expense of earnings, that would send a message that I think would make investors uncomfortable. So we have a plan for how we're going to do, and then we typically have a plan for what we're going to do if we're doing better than plan.

And I think the great message implicit in everything we're saying is we've kicked on the after burners because the company is really doing, internally, ahead of plan in many material respects.

Okay. And then in the second question is outside of your core regions, Mexico and Chile, you've talked about one potential growth in China. Can you address where you are in that and your progress, and then second, if there are any other new countries on your horizon.

You do the first, I'll do the second.

Yeah. We have launched our school in Shanghai; it's a hospitality school. And the enrollment period is really July to September. So we are right into the process and it's going well. We have good support from our partner over there, which is the largest hotel chain in China. So everything is on track.

Obviously, one of the things most exciting about that is it gives us an "on the ground" experience in China. We already have one from our Wall Street Institute business there, which is immense and successful, although franchises are not directly relevant to us.

And now we have this new experience, and the goal is we want to have full scale universities all over China, but that's probably a 10- or 15-year plan, and it has to start somewhere. So this is where we're starting.

In your initial phase -- just to give us an understanding of magnitude -- how many students do you think you can have within a year, potentially?

Why don't you talk about what you think the size of that campus can be, irrespective of the time frame.

The campus is being built on the site of an existing university, so we're getting our own unit within the university and within a year, once we've established it, who knows? I mean, China and the Olympics are coming; a lot of hotels are there but we are being very conservative in our expectations. I hate to give you a number now, but the campus can take anywhere between 800 and 1200 students over a three-year period.

-- [inaudible] starting small.

And I know the Les Roches campus in Switzerland is one of your most expensive campuses; I think it's like $20,000 compared to a Chilean student or Mexican student for $3,000. Where is the price point of the China Les Roches opportunity?

$4,000.

$4,000.

$4000 per year.

But our goal is after two years that they would then go to Switzerland.

So this is something that's happened in China, as you probably know. In the past we had been -- the Chinese market has been a good source of students for Switzerland. Starting last year with SARS, and wars and visa issues, the Chinese market has become very wary.

So this is, in a way, our response, we are late by a year because of SARS but this is our response to bringing the overall cost of having an international education significantly down. So all the students will almost cut in half. So the students will do two years in China and we expect a lot of them to come to Switzerland. So this is part of the revival of our hospitality sector.

Yeah. Another key part of that is that we're doing the same thing in Mexico. These Guadalajara and Lomas Verdes sites, where we're building a Swiss school within the Mexican school, they will charge $4,000 for that program, so more than the existing tuition in Mexico.

And at the end of two years, students will have the chance to transfer. Although, probably, we're not expecting huge numbers to do that. Whatever they do, the impact to us is much greater on the student who transfers, even than on the students in that existing country. Does that make sense, Rick?

Yeah. And then the U.S. Les Roches that you're opening in Chicago, what price point will that be at?

About 20,000.

In line with most schools in that --

20,000. Okay.

18 to 20,000.

Per year.

And then other opportunities in the rest of the world?

Well, the whole hospitality thing has a strategy called "feeder school" strategy and what you're seeing here is the deployment of that strategy worldwide. Feeder school means we penetrate a market by giving them a way to access our offerings and then they move to Switzerland.

So where else would we be? This is a terrific way to enter a market than sometimes it's been the lead product that we come in, like in China. So it gives us an edge on how we enter markets where startups are very usual.

In Chicago, the new Kendall campus will have capacity for almost 4,000 students. We don't expect them all to be culinary or all to be hotel management; it will probably be a nice mix and a few other programs to boot. We also don't --in our own projections -- ever expect that they even need to get to 4,000 for this to be a wonderful transaction. Their currently enrollment around 5 -- ?

Six hundred.

--six hundred. So almost no matter where they go from 600, between 600 and 4,000, at their price point,that could be wonderful.

We do think that we could open another one or two Kendall boxes, similar in size to the one that they have, Kendall Les Roches boxes, perhaps one on the East Coast and one on the West Coast. And if you think about -- if you could think that optimistically, of three boxes at 4,000 students each, 12,000 students at a $20,000 price point, you could have a heck of a business. Maybe not as big as the U.S. competitors, per se, but thought of, in our niche, far bigger, and thought of as part of the constellation of Laureate companies, could be a really important profit contributor.

And then those students can have a chance to go spend some time in Switzerland or other places where they get a material competitive advantage over students that study just in one country. I think we probably just have time for one more question, Operator.

Our final question will come from Bradon Dobell with CSFB.

Good morning, Bradon.

Just sneaking in here. The last question would be on the KIT acquisition, if you could talk a little bit about how you view the opportunity in Europe with KIT, any restrictions on what you can or can't do with the university there that you're associated with. And kind of what schedule or time frame you would envision for kind of penetrating either the continent or the U.K. with that asset?

Sure. Well, there's two elements to -- I guess there's really three elements to KIT. One is it's a British degree. We have a wonderful, long-term agreement with University of Liverpool that is a terrific partnership in terms of economic opportunities for both partners and giving us the chance to take the lead on the things we know how to do well.

And they've really given us that latitude. And that is a world-wide opportunity to be offering British degrees. We're talking about British degrees that could be on campus and not online, online British degrees, and all sorts of things that emanate from that.

So one part of what we got from KIT is this wonderful relationship with Liverpool and our very fervent belief that a British degree is a product category in and of itself. The second thing for us is the component of online in Europe and the rest of the world. And KIT there is a platform to help us go to the rest of the world, and that could include taking our existing Walden NTU products.

When they run an ad and somebody calls and says, gee, let's see, this exact product from Liverpool didn't meet my needs; maybe there's a product from Walden or NTU that does, maybe some of those people would prefer and American degree to a British degree. I do think in Latin America there's a chance to have Spanish degrees, meaning degrees from Spain, and having a Spanish university, and the KIT infrastructure would that make possible.

And then lastly, everywhere, we think there's a chance for people in their home country to want to get a degree of their home nationality. And so there, KIT and the rest of the OHE apparatus, is going to really help our campus-based business figure out how to get into online. And when you add all that up, we're at the very early stages, but you can see how compelling it was for us it make that acquisition. And we've just owned it for a few months so I don't want to overstate where we are.

We have a great team there in Amsterdam and we really have a lot of confidence that they will help us transform online into a global business, just as Kendall in some ways helped us transform the U.S. from being only an online business to now being both bricks and mortar and online.

Okay. Is there any -- modeling wise -- is there any major seasonality in how the enrollment to revenue flows work for KIT?

I don't think any differently from the rest of online. Paula are you --

No. From what we've seen so far from looking at it, it's a pretty even state.

Is it five intakes a year, Paula?

It's actually seven.

Seven intakes a year, which is even more than our online business and will help us balance the fact that we typically only have one or two intakes in our campus-based business.

Okay. Perfect. Thanks a lot.

Thank you all and again, thanks everyone for your patience. We ran a little over this morning but we had a lot to talk about. Thanks for your interest and we'll look forward to speaking to you next quarter.

Thank you for your participation in today's conference call. You may disconnect at this time.