Laureate Education Inc (LAUR) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to this Laureate Education's third quarter 2004 earnings results conference call. Today's 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 Symanoskie Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to the Laureate Education third-quarter earnings conference call. Before we begin, please note that this call may include information that could constitute forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements may involve risks and uncertainties. Although the Company believes that the expectations reflected in such 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 may cause such 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 Forms 10-K and 10-Q, also available for viewing on our website.

This morning our speakers are Douglas Becker, Chairman and Chief Executive Officer of Laureate Education; Sean Creamer, Senior Vice President and Chief Financial Officer; also available for questions today are Paula Singer, President of Laureate Online; Raph Appadoo, President of Laureate Education; and Bill Dennis, President of Latin American Operations.

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

Thanks very much, Chris. We are very excited about our quarter and about our enrollment results, which everyone knows are very important to us. This is the most important season for new enrollments, and we have done just outstandingly well there. And I'm going to tell you a little bit more about that.

In general, the entire network of Laureate Education is now up to 154,000 students. That is a 39% increase over the same period for last year, on a combined basis between campus-based and online. And significant growth in new enrollment has driven that growth, and some acquisitions. We have worked very hard to break out the contribution of acquisitions so that you can see that acquisitions are not that important to the kind of growth that we're driving; that much of our growth is coming from universities and institutions that we have owned for a full year or more.

Before I go in depth into enrollment, I do want to just talk about overall progress that we have made with the Company, especially things that have been amplified in the third quarter. In Mexico, we have continued the expansion of our campus network. We announced the openings of our Salteo (ph) and Guadalajara campuses, and also acquired a new campus outside of Mexico City -- or in the outer ring of Mexico City, which is the Hispanoamericana, which is part of our approach to look at acquisitions when they would be more cost-effective than opening a new campus.

In France, we extended the presence that we have with the acquisition of a very prestigious engineering school, (indiscernible) Ecole there where we have acquired the company that manages that engineering school called ECE.

And in Spain, we announced a small acquisition of a business school which is expanding the scope of our UEM activities in evening and graduate programs, which is very important. And I'll talk quite a bit about working adult and graduate programs and the rising importance of those programs to us. In that attention to Mexico, France and Spain, you can see our primary concern and focus, which is the growth of our existing countries. And we have been very clear that really we don't need to enter new countries to sustain the kind of growth that we're currently enjoying, given the platform that we currently have. However, when we do see a new country that is very attractive, and we feel that all the indicators are green, we can pounce on it. Such was the case with our acquisition of a wonderful, very prestigious school called UPC in Lima, Peru. And we're very excited out that market.

Peru is a market that is about twice the size of Chile, in terms of population and student enrollment. And I would say if you were to income adjust the education market, it's probably about the same size as Chile. So, given how well we have been doing in Chile over many years now, we think this is a very exciting opportunity -- outstanding, successful university there, and a warm welcome in that country that we've received, including actually, I just received yesterday a congressional resolution from the Congress of that country, welcoming us and congratulating UPC for being selected by us in that country. So that was very exciting.

We did announce in July the planned sharing agreement, and eventually an impending acquisition of Kendall College in the United States. That will bring us to our first brick-and-mortar campus-based activity in the U.S. within the specialty niche of hospitality management and their very high-end culinary programs at Kendall. And that will really round out the activities that we think are such a powerful platform in hospitality education, based on our campuses in Switzerland and Spain, and just recently in China.

China is also exciting for us. We announced that we would begin instruction in China. We began with very small rented premises with a program of approximately 100 students. But are really waiting for our purpose-built facility, which is going to be on the campus of a major Chinese University. And that will open in March, at which point we'll have the capacity to take in a lot more students and that could begin to become relevant to us.

And so campus-based overall, the focus on existing countries is quite strong. The occasional selection of a new country is clearly a competency of ours, and we're just delighted with how they are doing.

The online business has also, I think, really shown tremendous results and progress in the third quarter. And this is the quarter where we're really rebranding what we used to call OHE, Online Higher Education, into Laureate Online. And Laureate Online will allow for the convergence of these previously disparate assets of Walden NTU, Canter, and K.I.T. into one unified organization. And we have made tremendous progress on that, and I will talk more about that with respect to enrollments as well. But of course, that included as its centerpiece the acquisition in the third quarter of the 49% of Walden that we did not own, which is really going to unleash us to grow in lots of ways.

There have been some program announcements in Walden that we're pretty excited about, including an MS in nursing that we recently announced. We had over 3000 inquiries for that program -- very new program, and we've just taken in 40 or 50 students to start with. But once we are confident that the program is structured to take in a lot of students, we have no doubt that we will take in a lot of students in that program.

Also, we've had some great success with another doctoral level program, an EDD. Now, doctoral programs are already a great strength of Walden. About roughly a quarter of all of Walden's students are at the doctoral level, which I'm sure, makes us a leader in that field. But an EDD, which is very practical, applied doctoral programs for primarily administrators in the education field, is a new product for us, and we now have about 270 students in that brand new program. And doctoral programs have a length and a fee associated with them that make them relevant to us. And we think our program is an exceptional value and great return for our students as well. So all of that, I think, to say that we are really just thrilled with how the company is doing from a strategic and organizational perspective.

In terms of enrollment, which is really the big news for today -- and Sean will follow me in talking about the financial performance in the third quarter. Overall, the new student intake in our campus-based universities was up about 28%, at organic schools that we have owned for at least a year. If we add in acquisitions, that would be up 45%. That drove total growth of about 20% for campus-based without acquisitions, and about 41% with acquisitions. Now, what's important there is the fact that new is growing faster than total, all goes extremely well for continued growth in total as students work their way through that four or five or six-year pipeline of length of stay that we have with many of our students. So that is very, very important for us, and very, very pleased with those results.

Online had a 20% increase in new student, which drove a 20% increase in total students. The 20% increase in total students was really exactly what we were expecting, and a great accomplishment. As many of you know, total students increased in Online by only about 2% in the first quarter of this year. And only about 7% in the second quarter of this year, as we were working our way through the restructuring of our distribution and partnership arrangements in favor of doing more business with Walden, which has, I think, now been borne out to be a great decision as we have completed the acquisition and now own 100% of Walden. So to see that number climb from 2% growth to 7% growth to 20% growth shows that we really have anniversaried out the impact of those changes and are really positioned for excellent growth going forward.

The 20% new is actually a little bit lower than what we've seen in previous quarter. We had a 30% increase in the first quarter, a 28% increase in the second quarter. But it's something that's actually a little bit of an optical allusion -- we are introducing for the first time a new November intake for our Walden programs. And as a result, as that's been heavily marketed as an option to our students, there's a certain number of students that have opted into the November intake that did not exist last year. And I'm quite confident that when you combine the new intake in the third quarter and the new intake in the fourth quarter, that our online group will show substantial acceleration in new student growth over any of the prior periods this year. So, we are just thrilled about that. In many ways, the online division has been one where we've had to just say “be patient, be patient, you'll see the results." And the 20% growth in total, and the impending growth in third and fourth quarter combined in new, says that that patience, I think, will have been rewarded very well.

So if you combine Online and campus-based, that has grown our new students at 43%, combined campus-based and Online, including acquisitions. And our total student growth in the same method would be up 39%. And again, new growing faster than total, which is exactly what we hope for to auger for growth that is not yet seen but is in the pipeline. All of that is just fantastic.

Just a little country commentary -- Mexico was obviously just a huge success, a 29% growth in new students. That did not include the Hispanoamericana School, which is an acquisition, but it is an acquisition that was made in lieu of a new campus. We could've spent that same money and ended up with a new campus that had no students in it. So there is a school of thought that would say that that really should have been included. And that would have driven that growth even more substantially. However, really just to be conservative, we've pulled that out and included it in acquisitions, even though I think that's probably not the fairest way to look at it, and certainly the most conservative way to look at it. And that's the direction that we're trying to go in, in today's environment.

Chile -- new student was previously announced before already new. That was up approximately 29%. Spain is almost done, but we do have to provide an estimate, as we do with Chile, because it includes Ecuador as well, which is not entirely done. But we're within close enough to be able to make a pretty accurate estimate. We think Spain will be up about 19% in new student. That is driven by growth in postgraduate and in working adult programs. There really is not a lot of growth in undergraduate in that market. And frankly, I think that's fine. Our belief in Europe as a whole is that working adult and graduate studies are going to be where we will see a lot of growth.

France -- a little bit of growth, not that large of a business for us at this point. But as we begin to wrap in the ECE acquisition, that will become more relevant. Very important that we can make a few more subsequent acquisitions in France so that we can actually bring together the kind of management team necessary to get the results in that country commensurate with what we've seen in other countries. In hospitality, very nice growth in new students, but we do have the historic effect of some weaker previous intakes, which is why total growth is really not up very much. And that's the same pace in Spain as well. So, again, as long as we see new growing faster than total, we know with great certainty what the future holds there.

Just a few more comments before I turn things over to Sean. I wanted to just comment on some trends that we're seeing in the business. One that I think is very important has to do with mix. We known, for example, for years Chile was our fastest-growing business. And we know that Chile was one of our lowest price offerings, in terms of the pricing in that country, which does not mean the margins are not great in that country; it just means that, compared to other countries, they charge a lower tuition. As Chile's growth has pooled a little bit, and as are Online in Mexico growth has accelerated where we have higher price points, I think that is generally positive for us from a mix perspective.

Within Chile, we've seen a lot of growth in our new vocational technical programs, which have a little bit of a lower price point. So that's a little bit of a negative from a mix, but more than offset, as I say, by the overall country mix effect of growth in Mexico and growth in OHE. OHE, of course, we now say Laureate Online, U.S. and European programs that can be literally four or five times what we see in some of our other countries outside of the United States.

So I would say in general, I think that mix as a trend is a positive for us. But it is a very important thing to take a look at, because you'll see it will affect results within specific countries. In Spain we have great growth in postgraduate, but a lower price point for that product. In Chile, I mentioned vocational and technical, a lower price point. As an overall, though, I can tell you we think mix is going to be very positive as we head into 2005. And that's really driven by Mexico and Online.

I guess another trend that I wanted to bring to your attention, which I think investors will find very positive, is the trend towards having more intakes. Many of you know that our international operations have one big primary intake, which will usually account for 70, 80, 90% of their intake of our students for the year. And then they will typically have one secondary, smaller intake, which is generally not that important. What we've found is there have been some new intakes, for example, in Mexico, that growth in postgraduate has caused us to introduce an altogether additional, or third intake, although it takes place fairly close to the second intake. So that's helpful. In Walden, we've actually moved from three intakes to six intakes this year. And I mentioned earlier the effect of that new November intake will have had in accelerating our fourth-quarter growth as well.

And I guess the other component of trending with respect to intake, is that the secondary intakes in our international universities are becoming of greater importance. And that's important as we think through our business. I don't know whether it will be next year or the year after, but at some point we're going to begin breaking out the results of intake, even secondary intakes. In the past, they were so small that we felt it would be confusing to investors to even talk about them, and they were not necessarily directional as to how they augured for the primary intake that might follow them. But our feeling is that they are becoming of greater importance, and that we are likely to talk a lot more about them as we go forward. In fact, we've put a footnote in our enrollment table that showed that there were about 6000 students in the total student enrollment that came from secondary intakes earlier in the year that were not reported separately. So that is growing in importance.

Why is that important to investors? Because I think investors have always felt that having more intakes throughout a year gives a management team more ways to recover from what might be a weak intake. And while we really have not had many, or almost any, weak intakes in the way we've managed or business, I think it is nice to know that there are more bites at the apple as we go ahead.

I guess another trend that many of you know and are following with great interest is the growth in working adult and graduate education. And that is what's driving the trend towards more intake, be it Walden or in the international universities. Today, just in the international campus-based universities, we now have almost 11,000 students that would be either executive working adult students that are in undergraduate programs or traditional graduate programs. And we have really seen a lot of growth in both of those areas. Just as an example, executive undergraduate has grown to almost 4000. That is roughly quadruple what we had last year in that same period. And that is primarily a Mexico/Chile phenomenon. So very, very pleased with that as well. So overall, results in enrollment are excellent; results in our financial performance, as Sean will indicate, are also very, very strong. And it gives us great confidence as we look to our guidance for 2005.

Another point that Sean and I and many of you have focused a lot on has been this issue of the $0.10 gap -- where our original guidance assumed that the seller note from our K-12 sell last year would be in place for years to come, and they prepaid that this year. And our job has been to redeploy that money in a way to generate enough accretion to offset the loss of income associated with that $0.10. I am pleased to say that the acquisitions that we've announced so far this year, especially the Peru and the ECE in France, but to a smaller extent, even Hispano in Mexico, have closed much of the gap of that $0.10. And as we finish off the remaining gap through reinvesting capital, whether we choose to pay down debts, do subsequent acquisitions or anything else, we have total confidence that we will fill that $0.10 gap. However, until we have filled that $0.10 gap, its seems reckless to us to do anything with our guidance, which is why we have not changed our guidance.

As soon as we've finished our budgeting period, which will take place in early December, and as soon as we have filled that $0.10 gap, we will revisit guidance. And, obviously, these strong enrollments that we have seen lead us to believe that there is a good possibility that guidance can grow, albeit I would think we would do that in a very, very conservative fashion. As many of you know, our first goal is to reinvest our performance in things that will allow us to sustain our growth for years to come. But if, after making good decisions in that area, there is still an opportunely to increase guidance, of course, we, like anyone, would do so.

So with that, if I could turn it over, Sean, to you. And you can talk about the third-quarter financial results.

Thanks, Doug, and good morning. Pardon my somewhat froggish voice this morning. As Doug mentioned, obviously we're very pleased with the enrollment intakes this fall. And for that matter, throughout this entire year. But we're also very, very happy with the strong financial performance that we've been able to deliver. Our average length of stay, the length of that, makes the strength of this enrollment intake valuable for years to come, and validates our confidence in our future prospects and the performance of our business. The combination of the sizable enrollment gains, the pricing increases that we've been able to implement, and the addition of new programs and new campuses is really the basis for our sustainable post-secondary growth strategy.

For the quarter, in terms of some financial results, quarter and year-to-date, we reported total revenues from continuing operations of approximately $146 million and 437 million respectively. This represents a 37% increase quarter-over-quarter as well as year-over-year.

Combined divisional operating margins, before G&A, expanded versus the same period quarter and year-to-date results last year by 308 and 236 basis points, respectively. Driven primarily by continued maturation of our campuses, and again, these solid enrollment increases that we've been able to implement.

We generated earnings per share from continuing ops of 19% in the quarter on fully diluted shares outstanding of 49.1 million. You should note that the share count for the quarter includes the weighted impact of the additional 2.5 million shares that were issued in connection with the Walden minority interest buyout that we previously disclosed.

Turning to some divisional level detail on the campus-based side, revenues grew 35% for the quarter to 111 million, and 38% year-to-date to 342 million. If you exclude the impact of acquisitions that were completed within the last 12 months, campus-based revenues grew 23% for the quarter. And this organic revenue growth was driven, again, by a combination of solid enrollment growth and the pricing increases.

We've certainly indicated in the past it is our intention and our goal to implement pricing increases during the year at a rate that is 1.5 to 2 times the rate of inflation in the markets that we work in. For the year, our weighted average price increase was roughly 5% across the campus-based network, as well as including Online. And that compares to a composite inflation rate in those markets of about 3.2%. We certainly were able to achieve that goal in terms of increases versus inflation.

Significant positive operating margin trends continued in total, as well as on an organic basis. Reported quarter results for campus-based reflect an 88% increase in operating income and approximately 480 basis point increase in margins from 12.3% to 17.1%. When compared to the third quarter of 2003, now. Excluding the impact of acquisitions, again, within the last 12 months, campus-based operating income grew 87% and margins expanded 640 basis points.

Our plan would be to continue to open new campuses, as I mentioned, and expand our existing ones, while successfully integrating acquisitions into the network. We'll do this while leveraging the existing management team, which should drive further margin expansion as we grow.

On the Online side, revenues increased 45% over the same quarter last year to 35.2 million. And that growth was driven primarily by the 25% increase in new Online students, 20% if you exclude the impact of K.I.T. students that were acquired. The solid improvement in both new and total, as Doug mentioned, reflects the completion of the transitional impact of Canter's discontinuing certain third-party relationships in favor of Walden, and is consistent with the guidance that Laureate Online's total enrollments would end the year growing at double-digit levels. And as Doug mentioned, the introduction of this new November intake provides us an additional opportunity to accelerate growth in total enrollments prior to year end.

For the quarter's margins, we're 14.5% versus 17.1% in 3Q '03, slightly better than our Online margin guidance for the quarter of 13 to 14%. The anticipated year-over-year margin decline is due to, primarily, the inclusion of K.I.T.'s results, which is currently generating revenues with virtually immaterial margin impact.

Looking at a snapshot of the campus life cycle that we like to update people with on a quarterly basis, we now have a total of 41 campuses around the world. As many of you know, we classify those campuses as new, developing, and fully performing. As of the end of the quarter, we had nine new campuses, 11 developing, and 21 fully performing locations in our network. And again, campus maturity is the key component to this continuation of the margin expansion trend that I think you've seen this year. And for the foreseeable future, we expect to add new campuses, always considering a build versus buy opportunity analysis, and ultimately grow them regardless of how we end up implementing them into fully performing campus locations.

Some FX color -- we again this quarter included in the body of the release a table that summarizes our revenue growth by location in both U.S. dollar and local currency for those universities that we've owned for the last 12 months. For the quarter, the effects of currency positively impacted our revenue by roughly $2.8 million. And for the nine months, added about $10 million.

Mexico's revenues were up 15% in U.S. dollars, but 22% in local currency. Chile's revenues were up 38% in U.S. dollars, and 26% in local currency. UEM in Spain, revenues were up 50% in U.S. dollars and 38% in local currency, admittedly off a smaller base in its seasonally weakest quarter.

Revenues in Switzerland were up 8% in U.S. dollars and down about a percentage point in local currency. This diversification of our currency portfolio that we frequently talk about has again proven to be effective in sheltering us from any significant volatility upward or downward, based on currency movements. In fact, for the quarter, the positive impact on our EBIT, as a result of FX, was roughly $1 million. On a bottom-line impact after minority interest, after taxes, etc., was less than half a penny. And it should -- and so obviously had no impact in our ability to achieve our guidance. We should remember that when we are issuing our guidance, we are contemplating rates in existence at the time versus last year's rates. So, any outperformance that comes as a result of FX is largely contemplated at the time we are issuing or guidance up front.

Quickly moving to some balance sheet detail. Obviously, we're ending the quarter again in a strong cash position with about $121 million in cash and marketable securities. Corporate debt was about 115 million. The decrease in cash during the quarter was primarily related to the deployment of funds for the previously-announced acquisitions. And is a reflection of the fact that cash flow during the third quarter generally are seasonally weakest. It is our lowest, and a large percentage of our CapEx is spent in the third quarter as we prepare our northern hemisphere universities for the start of the new fall session.

Some guidance. We today reiterated our full-year guidance for '04 -- $1.31 to $1.33, which, again, incorporates a $0.07 full-year positive impact from the repayment of the K-12 seller note. We are also reiterating our 2005 guidance, as Doug mentioned, of $1.60 to $1.65, which implies a roughly 30% increase in EPS from our recurring 2004 EPS projection of $1.24 to $1.26. Obviously, we have backed out of that, that non-recurring gain to give a true apples-to-apples comparison.

As we've indicated in the past, that early repayment did create the $0.10 gap that Doug mentioned, and was included in the guidance that we issued prior to the repayment. When we reiterated our guidance back in July, despite that gap, it was a clear indication of our comfort level with our ability to effectively redeploy the capital by year end. And I will just reiterate what Doug had mentioned, the recently-announced accretive acquisitions and the success of this enrollment intake period really give us a tremendous amount of confidence in our ability to complete the filling of that gap.

We historically issued our detailed guidance following approval of the annual budget, which is a process that is currently underway and generally concludes in December. And at that time, we expect to outline the status of the gap. And we'll be in a position to assess, as Doug mentioned, any upward revisions to our 2005 guidance.

We are also introducing guidance for the fourth quarter of 2004. Keep in mind that during the fourth quarter, all of our campus locations are in session for the entire quarter. And therefore, it's our seasonally strongest from a financial standpoint.

On a consolidated basis, we anticipate revenues of 190 to 205 million, which would represent a growth of 22% or more. G&A expected to be approximately 5.5 million for the fourth quarter of 2004, which, again, reflects the increasing compliance costs relating to Sarbanes-Oxley compliance. We anticipate diluted earnings per share of $0.57 to $0.59 for the quarter on estimated fully diluted shares outstanding of 50.9. And again, this contemplates the entire 2.5 million in the share count for the fourth quarter that were issued in connection with the Walden buyout.

And then finally, from a divisional perspective, campus-based, we expect revenues between 155 and 165 million for the fourth quarter, with margins between 25 and 26%. While our Laureate Online division projects total revenues to be between 35 and 40 million, with margins approximately 23 to 24%.

So in summary, obviously very pleased with the strong operating results for the quarter. Our enrollment success during this really critical intake puts us right where we want to be as we head into this seasonally strongest financial quarter, and I think bodes extremely well for us in future years.

That concludes my comments. At this point, I think we can open it up for questions. Operator?

(OPERATOR INSTRUCTIONS). Mark Marostica, Piper Jaffray.

First question relates to the Mexico enrollment growth in the quarter. I was wondering to what extent the working adult focus helped the growth rate that you produced in the quarter? in Mexico?

I'll ask Bill Dennis to respond to that. He is sitting right here.

Well, Mark, it did have a big effect for us. I think Doug mentioned here earlier that we have in this executive program that you're familiar with, where we take 25 years and older students who have a full-time job and most often a family -- we've reached almost 4000 in Mexico and Chile, half of which was in Mexico. You know, we just launched that program, barely got it started a year ago, so you can almost look at that full 2000 or 1800 or so students that we had in Mexico. So, it helped us a lot.

But moreover, we had in our traditional programs incredible growth. And we had incredible growth because we have continued to tighten up and strengthen our marketing analysis and understanding who our students are. We have done much more work in demographic, geographic profiling of our students, which makes us much more effective in sending the right message out. We've done a much better job of creating champions for various product lines. We've created champions for that executive working adult. We've created champions for that unusual group that we have in Mexico -- what we call the preppa (ph), which is the last couple of years of high school. And we've also created champions for product lines like our postgraduate area. So all of those taken together have made a huge difference for us and contributed to a very, very strong, very successful results in Mexico.

Mark, this is Doug, I would just though, I wouldn't say that -- it's a little hard to read into that number because there is a little bit of cannibalization that we find when we offer working adult undergraduate degrees that, in the midst of our tens of thousands of students, there are some students that we were getting that were working adults that were willing to mingle with the younger students. And now that we have programs just for them, they come out of it. So I think it's obviously hugely positive, but I would not read into it that half of the growth of Mexico comes from working adult. It's not that big.

Okay, additionally regarding online, I'm wondering with online now, one single unit and Walden pulled into the fray, I'm wondering to what extent had you rolled out any online programs to Mexico or Chile -- and likely is early on that front, but I'm wondering from a planning perspective, should we expect to see a bump in enrollment growth from a roll out of online more aggressively to these international locations?

You know, it is not something that is being done today. They are very, very small experimental programs in online in Mexico and in Chile. They are really not coordinated by the people here in Baltimore. So actually that means they are, in some ways, inventing some new things that will probably be very useful for us. But in other ways, they're not able to capitalize on some of the immense knowledge that we already have here. That is something that we're focused on now. We want to put some people in place to help us have a more coordinated response and approach to the market.

The truth is, until there is a working adult market of addressable size, online is not going to find much traction in those markets. So I think we're going about it the right way, which is to develop out and create a base in working adults, and then to add to them, for their convenience, Online as an option. I think it's something where we'll make a lot of notable progress in '05, but I think it is something that will not really make a financial contribution to us until '06 or '07. And I think, frankly, that will come in handy. Five years from now, someone is going to be saying " gee, have you tapped out a lot of your sources of growth?" And we're going to say, "look, Online is actually just beginning to take off in the rest of the world." And undoubtedly, we're better positioned for Online outside of the United States, I think, really than anyone.

Then last question, Doug, regarding China and your early establishment of the Les Roches business in Shanghai. I'm wondering whether or not, based on what you've learned so far, you've altered your strategy in China to perhaps pursue more aggressively or wait before establishing a more broader-based presence there. If you could comment on that, that would be great. Thanks. And I will turn it over.

I think the general answer is it is too soon to tell. But let me ask Raph to make a few more comments.

Yes, it is a bit too soon to tell, because the schools that we opened is really a temporary site. We do have a site coming up in March on a full campus adjoining an existing large university. So next year will be the real test. Nonetheless, we had to get our names out there, and we started this year. We are not -- again, this is only hotel management. We have other plans for other programs, and we expect next year we could announce an expansion of this particular initiative. In other words, we believe we want to broaden our offering from hotel management to other programs. And next year we're working on projects that will take us there. We are very bullish on China, and this initial step is just a learning process for us, and everything is positive for us. We want to go forward and expand it even more in China.

Trace Urdan (ph), Robert W. Baird.

Just a note, Doug, I think you want to be careful about those working adults that are willing to mingle with the younger students.

Well, especially if it is you.

Remember those cheerleaders at UVM.

We'll leave that aside.

I wanted to just clarify one point that I think I heard you say. Did you say to us that the Ecuador students were included in the Spain count?

No, in the Chile count.

I'm sorry. I must have misheard that.

That would not make a lot of sense.

I didn't quite get it, so I just wanted to ask. I'm wondering if you -- how you're thinking about opportunities for working adults in Europe. I guess, by that I'm really thinking about Spain.

The question is working adults in Europe, and especially Spain. What's the approach to that market? How are we thinking about it?

Clearly, as we've said before, we believe that our focus in Europe has to be on working adults. We've declared our strategy in Europe, which is to buy very strong brands in the traditional area. And clearly, we're not attracted by just the traditional area, it's the base from which we are going to attack the working adult. We are building the foundation. We have some good brands, and we announced one more this year and we expect to announce more. So the approach is to get the foundation and then to attack the working adult.

At this stage, our focus has been on post graduate. We find it easier to get working adults in the postgraduate area. That's where people can make the trade off between cost and return a lot easier. In the undergraduate area, it is going to be a bit slower, but we still believe there are opportunities there. So our focus, to answer your question directly, is that we focus on the postgraduate side of working adults. And it is working for us in Spain, and we expect to do it in France.

Well really, in Spain, almost all of the growth that you see in new students is coming from a very, very high rate of growth in graduate and working adult and a very, very low rate of growth in undergraduate because of the demographic circumstances there. There are a few things we can do to get undergraduate growing in Spain, which is a corollary to the question you're asking. We can bring more students from Latin America to Spain, which is actually going very well for us. And we can open another campus in parts of Spain that are still under-served, which there are. But that has proven to be very difficult from basically a zoning situation. So we are working on those, but obviously postgraduate has carried the day in generating growth in new students in Spain.

Does that mean that you're actually focusing marketing messages on people that, for instance, may not have completed their degree? And you offering classes in the evening as well in Spain?

Yes, we have. And we have opened a downtown campus. That is exactly the reason. And obviously, it's already paying off. So we have a downtown campus and a suburban campus in Spain. So the strategy is in place.

They do have nighttime courses. Really, most of our campuses now offer that. But in terms of a marketing message, it is a marketing message typically to a different audiences. So in Spain, for example, we have a lot of graduate studies programs as opposed to in Latin America, where working adult is usually a working professional who is going back to finish their undergraduate degree. So there are some differences in the market in that respect as well.

And just one more quick one, Doug, how did Kendall do with its fall enrollments? And can you tell us -- I realize that this probably won't be very material, but where do you plan to park the revenue that you get from Kendall in this initial phase of your relationship?

Kendall, as many of you know, we have an option to acquire, which started in, essentially, July of this year and runs for two years. We loaned them money to finish out their new campus in Chicago, which is truly magnificent. And we had a few investors ask if they could go visit it. And I've gotten just exceptional reports from what they found. So we do encourage investors to go see this. And because -- it's almost a certainty that we'll exercise that option. It would be very surprising if we chose not to. So during that period, it is a bit of an awkward period, where they are an independent entity. So for example, I don't feel comfortable announcing their enrollment information, because we do not own them today. I can tell you that they certainly grew their enrollment, and our expectations were met. But I just don't know enough about what their own disclosure policies are until such time that they are owned and integrated by us.

In terms of revenues from them, we have actually not gotten any yet. We are launching a new program which will, in essence, take their existing hotel management program and replace it with the Les Roches Hotel Management curriculum, at which point we'll begin to get a royalty from them. And I would anticipate that by the time that royalty is any material amount, we'll exercise our option. So as you surmise, I don't think it will be a material factor for us.

Jerry Herman, Legg Mason.

Couple of questions. Your P&L is a little bit different from the other postsecondary guys. Doug, maybe you could address the issue of student acquisition trends -- going up, staying stable --

I guess I would start with -- from a campus-based perspective, I think many investors have come to learn that our approach is very different, and I think actually very positive and its different. In the international side, our students are mostly undergraduate, bachelor's degree students who come into us at 18 years of age. So those students are almost all acquired by going and visiting and calling on high schools, where we know that rising seniors are going to graduate and come to university. In that respect, it's a sales-drive, highly-targeted activity. We've refined it, I think, to a real science in our business, especially in Mexico and Chile. We have exceptional systems and approaches there that our competitors, I think -- we are considered the envy of the industry.

And the cost per student, while I don't think we've broken it out, I'm think it would be fair to say that it would be less than any of our competitors, even on a percentage of tuition basis, which is the right way to look at it because our tuition per student is lower. So we would want to look at it that way. And I'm certainly not aware of -- and Bill, I'm assuming on your side too -- there's not been any sort of material change in that number. It's kind of we are acquiring more students, but we're spending on a per-student basis similar amounts of money to do so. Percentage term really is not changed.

Paula, from your perspective, maybe you could comment a little on where we get our leads, why they're not all in that online category, and what you're seeing in terms of CPE.

Sure, I'd be happy to comment. A couple of things -- I would say that, of course in our mature business, the K-12, or previously referred to as Canter business, we have a lot of expertise in direct-mail, and we've seen very steady CPEs on the direct-mail side. Very stable, steady kinds of results. I know you're all aware that Web advertising costs are going up, so we're very fortunate in the sense that we are kind of early on in this stage. So what we've been able to see and been able to do is, to see as costs for CPI go up a little bit for the Web, our conversion rates are climbing. And so we have been able to offset any major impact on CPE. I do think that, as they add a larger percentage of new products, you might see a bit of a change there, because new products require a little bit more advertising and so forth, but right now we are very comfortable that we've been able to control that CPE for our programs.

I'm guessing that this is much more of an issue our concern to companies that have attained a full, mature margin level. In our case, our marketing, I think, is excellent, but as Paula says, our conversion rates, because we are newer in the market, we have newer products, is a lower conversion rate. And so I think that we are -- any increase that we would see in cost per inquiry should be more than offset by reductions in the cost to close students, to convert them into a sale. And from our perspective, I think, we don't see this as something that we're concerned about.

Paula, while you're on there, just a couple of quick questions on Online. One thing that struck me was the numbers for K.I.T., or the former K.I.T., seemed to be flattish sequentially. Maybe you could address that. And also, is there any way to quantify the additional impact of the additional intake at Walden for November?

Let me start with K.I.T. And with K.I.T., I would say to you that we acquired that in April. They had not been advertised at all during the due diligence period, if you will. So really what we did was get the business with very little inquiries in the pipeline. And so I think that's really why I think you are seeing them look rather flat; there had not been the investment. As you know, the inquiry pipeline has to start about six to nine months out in order to be able to see that pick up.

We've been sending a great deal of time, first and foremost, at K.I.T., putting in the right kind of recruitment groups. So we are very confident that we upgraded tremendously the enrollment advising team. We wanted to do that first before we really put a deluge of leads in there, because we wanted to be sure they could be handled appropriately. So you will see that over time pick up appropriately.

Your second question was about?

November intake. I think it probably wouldn't be wise to speculate on an intake that hasn't taken place it. But I think the fact that any new students that come in the November intake will be entirely additive because there wasn't one last year. And almost any way we do the math, when you combine the third and the fourth quarter, that will have a higher growth rate than either the first or the second quarter in terms of new students. So I think the trends are all very, very positive.

And I would just say, these multiple starts, particularly for our teacher group of students, is very important. If you think about it, in September -- September is a very tough time for a number of our teachers to begin a degree program. They're going back to school with their own professional work at hand, so we had some requests to have a fall enrollment opportunity that would be not just September, but we would have a couple of options there. So, we look to that to be very positive.

Great. And then last question, Doug, just flipping back to the campus-based operations. You guys are obviously doing a very good job in terms of the new student metrics. Can you address and quantify the trends in persistence -- that's certainly kind of a hot topic in our domestic guys, but could you take a look at that for the international business?

Really, no change of any magnitude. Really, no change. In our case, attrition is very low. It's an industry low in our Online group and it's an industry low in our campus-based group. I think not just because, hopefully, we are good at what we do, which I think we are, but also because we have different kinds of students in our Online group. For example, we have a lot of teachers who are guaranteed a pay increase if they complete a degree. So it's good targeting of students that should drop out with less frequency.

In the Online group, we deal with traditional 18 to 22-year-old students -- excuse me, in our campus-based group, we deal with traditional 18 to 22-year-old students that are in countries where it's still a privilege to go to university. And they drop out with less frequency. And in addition to that, I think compared to our direct peers, we feel that we have comparable or better statistics in attrition, because we do things like counseling and advising to keep students from leaving and all sorts of interventions to try to make sure that we keep the students that we've gone to the trouble of enrolling, and who have gone through the trouble of starting their studies with us. So I think the quick answer is really no change, and a great positive for us compared to our direct competitors or our peer group.

Mark Hughes, SunTrust.

How much more capital, generally speaking, do you think you'll need to fill the rest of that $0.10 gap that's left, in round terms?

Do you want to comment, Sean?

Yes, I think we obviously got roughly 16 million, if you exclude the Walden transaction, which I think really certainly covers its own proceeds with accretion so that that's really, in 2004, leaves a modestly accretive transaction. We deployed about 50 million of the 60 million in capital. I think we feel comfortable that redeploying just at 60 million will allow us to fill the gap.

I guess I would assume that your acquisitions will be getting a slightly lower return in the near-term than that note, sort of the 60 million plus the good enrollment gets you to the guidance and overcomes the gap? Is that fair?

Not entirely. I think our feeling was, first, that redeploying 60 million in almost anything, we thought we could close a lot of that gap. Initially, we were very reluctant to say we were going to do acquisitions because, of course, acquisitions don't conveniently close when you want them to or sometimes at all. Our feeling was we could close a lot of that gap just by paying down debt in our lowest tax jurisdiction countries or things like that. Then as the acquisitions began to come in, we saw them as being accretive enough to more than compensate. And I think the answer is, they actual returned a better return than what we are getting on that note, even though there is a terminal value assumption in the IRR. Even on a current basis, they should be returning better than that. So I think the feeling is, if there are any more acquisitions that we announce, that should polish off the remaining $0.10 gap well within that $60 million number that Sean described. And there would not be the need for outperformance from enrollment.

What that would then do, Mark, in bring us to a question of -- there will certainly be outperformance because of enrollment. You can all see the numbers today. Our question will be, and I would hope investors would want us to do this, what should we be spending that performance on before we raise our guidance? Should we be moving from three new campuses to four new campus in Mexico next year? Should we be hiring more salespeople to cover the high schools that we serve? Should we be introducing some new degree programs in Online? Should we be investing more money in this K.I.T. operation that -- the previous question was that it doesn't appear to be growing yet. As so, it's really only in the sort of December timeframe that we will be able to come to an answer on all those questions. But direct answer to your question, we don't need enrollment outperformance to close that $0.10 gap, I don't believe.

Very Good. And then final question -- the same campus growth in Mexico, are you tracking that still?

Sure. So that basically would be growth if you were to exclude new campuses. And if you just give us a second, we will get that --

And while we're waiting, what does the share count look like for the fourth quarter when we take the extra shares into account?

50.9? 50.9, Mark. Mark, in UBM, new student growth, if you take out new campuses, would have been in excess of 20%, instead of the 29% that we announced overall.

Right, so it's still very strong.

Very strong.

Jeff Siber, Harris Nesbitt.

I had a question about your guidance for the fourth quarter. If I look specifically at the campus-based operating margins, the low end of the guidance range would actually put you below your fourth-quarter '03 operating margins in that unit. Is it because of the recent acquisitions you just made at the end of the quarter, or are there other reasons as well?

No, that's primarily the reason. I think the other partial contributor is, we did in fact open more campuses than we had originally projected. And obviously, a new campus has a negative marginal impact in the early part of that. So I think it was a reinvestment that will contribute to significant margin expansion going forward. But those two factors really explain that phenomenon on the guidance.

Okay. Great. And just a follow-up to Mark's question about -- I guess it was the impact of Walden on the share count. What was the impact of the Walden acquisition? What would be on the minority interest calculation? How should we be calculating that going forward?

I think what I said last quarter was it was -- we had originally been talking about a 20 to 22% of EBIT related to minority interest. Backing out Walden, which was a significant component to the minority interest, it should bring that overall percentage down to sort of an 18 to 20%.

Okay. Great. You were kind enough to give us organic revenue growth on the campus-based. I believe it was about 23%. Can you break out the FX impact of just that number alone? I'm just looking for organic constant currency growth.

Say the question again?

Okay, I'm sorry. In the campus-based business looking at revenues, I believe you said organic revenue growth was about 23%?

That's right.

Is it possible to back out the foreign exchange impact of that?

Well, we said the foreign exchange impact for the quarter was $2.8 million, and that really would always be attributable only to the -- (multiple speakers)

And again, it wouldn't be any foreign exchange impact really on the Online business? It would just be on the campus-based business?

Immaterial.

And then one more question -- you guys were kind enough, also, to give us the enrollment at the acquired schools, both on a new student and total enrollment. Is it possible to break out those numbers between the different campuses or between the different regions? I think it just makes it easier to model that way.

I would like to think about that. One of the things that we're trying to balance, as you know, is too much information versus inadequate disclosure. And we also want to model where we stand from a competitive perspective. Clearly, as we get into owning these schools for a full year, they will start showing up in our enrollment data. But then there is going to be a question of where we group them into. For example, Chile and Ecuador combined, not to give less information to investors, but to manage the amount of information. The University of Phoenix does not break out enrollment by Ohio and Illinois, for example. So we're just wrestling with that. But I understand the request, and if you give us some time to think about it, I think you'll see a progression of thoughtful increased disclosure, really, every year with us.

Okay, that's fair. One more quick one, and then I'll turn it over -- can you possibly give us D&A and capital expenditures for the quarter?

For the quarter, D&A was about $28 million. I'm sorry, D&A was approximately $10 million.

Say that again.

Depreciation and amortization was about $10 million for the quarter. And our CapEx was around 25.

Operator, we probably could take one more question, please.

Gary Bisbee, Lehman Brothers.

Thanks for letting me sneak in at the end here. And congratulations on a real strong intake. A couple of questions -- given the strong enrollments, the fact that the fourth quarter is seasonally your best for the campus-based business and the recent acquisitions, why is the guidance for revenues from the campuses substantially slower year-over-year growth rate than you just reported for this third quarter?

I think some of the phenomenon on the third quarter is that it is generally off a smaller basis, so as a percentage increase, if you look at Spain as an example, it was up 50% in U.S. dollars. It's just, I think, the large numbers. Spain, just as an example because I think it's a good part of your answer, is -- they happened to have gone from a very small summer revenue base of summer school type activities to a bigger summer school program. But summer school at its biggest is never going to account for anything that big in the course of a year. So I think that really is your answer.

Can you help me -- I'm just trying to make sure I'm thinking about this right. Help me understand how we go from last year this quarter -- so, third quarter of '03 your press release reported 74,000 students in the campuses, all-in including acquisitions. And this year, when we look at the year-over-year number, it was 95,000, is what you reported for last year. What's that 20,000 gap, and where's that coming from?

A lot of that comes from the acquisition that we made in Chile, UNAM (ph), the second university that we owned in Chile. And that acquisition was made, I believe, in May of last year. And it was not included in the previous release because, just as this year we've broken acquisitions out separately, we wanted people to have an apples-to-apples number to compare against.

So the 74,000 last year did not include students from UNAM?

That's correct. And I'm guessing that there might have been -- I don't know if there is any other.

(indiscernible)

That's it. It is 20,000 students from UNAM.

And I guess just two other quick ones -- in terms of '05, I respect the fact that you'll give us full guidance later. Any early indications on how the operating margins of the two businesses are going to look? I assume that you feel pretty good about the ability to expand the margins in online. And then, given that this quarter that you're guiding for less margin expansion from the campuses, what's a good range to be thinking about?

I guess at this point, until we have a chance to provide fuller guidance, I'd rather just stick with what we have already said. The fact that we are guiding earnings growth of about 30% on revenue growth -- I guess it was 25% -- indicates that we clearly expect you'll see continued margin expansion there. The only thing that would offset that would be investment in the business. The opening of new campuses would represent a drag on margins; introduction of new programs in Online, those are really the only things. And frankly, those are already baked into our thinking, because otherwise, 25% revenue growth would probably drive more than 30% earnings growth.

But I would say, once we get our arms around all of this and can come out with a very thoughtful update to guidance, I think that's when we can get you your best answer.

And just one last one -- I think you said that Peru, in terms of the market opportunity of enrollments, is about two times the size of Chile right now. Then you made a comment, you said on an income adjusted basis, the market opportunity was about the same. Could you clarify exactly what you mean?

Sure. Peru is just a poorer country. So the GDP of Peru, I think, is roughly around the same as Chile, or even a little bit less, even though it's population is more than double, or approximately double, their population. So that was the rough content of what I am laying out.

And are tuition rates half the level?

Not at our school. Actually, our school that we acquired is higher, which is part of why I made that point. If we look at Peru as a market as we look at all market, where eventually we could have a low-end offering that might be vocational/technical, a medium marketplace for -- let's call it large numbers of university students -- and a high-end institution. In this case, we're entering with the high-end institutions, and they charge more than we do in Chile.

Great. Thanks a lot.

Thank you very much, and thanks to everyone for participating in our call today. Operator, thank you.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect at this time.