Laureate Education Inc (LAUR) 2006 Q1 法說會逐字稿

Good day, everyone. And welcome to Laureate Education's first quarter 2006 earnings results conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations and Corporate Communications, Mr. Chris Symanoskie. Please go ahead, sir.

Thank you, operator. Good evening, everyone, and welcome to Laureate Education's first quarter 2006 conference call. Please note that this call may include information that could constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statement 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 Securities and Exchange Commission including, but not limited to, our most recent Forms 10-K and 10-Q, available for viewing on our website.

Our speakers this evening are Douglas Becker, Chairman and Chief Executive Officer of Laureate Education; Rosemarie Mecca, Executive Vice President and Chief Financial Officer; Raph Appadoo, President; Paula Singer, President of Laureate Online Education; and Bill Dennis, President of Latin American Operations. Now at this time, I would like to turn the call over to Rosemarie Mecca. Thank you.

Thank you, Chris. And hello, everyone. I am pleased to report a strong start to our 2006 results. The Company has met or exceeded all Q1 guidance. As many of you know, this is a seasonally low earnings quarter for us, because our universities in the southern hemisphere are mostly out of session during the quarter. The southern hemisphere includes our universities in Chile, Peru, Ecuador and Brazil, which account for approximately 45% of our total enrollment. In addition to our significant growth at our large universities in Chile and Peru, our acquisition last year of Anhembi Morumbi in Brazil has added to the size of the southern hemisphere business, and thus, the seasonality. We only generate small amounts of revenue at those campuses during the first quarter. But we do have fixed costs related to those operations. You'll note that the Company slightly exceeded EPS estimates for the first quarter. The majority of the outperformance is based on timing of certain staff and marketing expenses, expected to occur in the first quarter, but are now anticipated to occur later in the year.

Moving to revenue. As a reminder, we announced a new weekly revenue recognition methodology effective January 1, 2006. With a continued emphasis on implementing best practices, Laureate voluntarily adopted an improved weekly revenue recognition methodology across the traditional campus-based institutions. This voluntary adoption has been reviewed and supported by our external auditors, Ernst & Young, who will issue the required preferability letter, which you will find along with the first quarter 10-Q in the investor relations section of our website, on or before May 10th. You will also find the 2005 and 2004 represented quarterly financials on our website which were filed with an 8-K in February of this year. In the financial table, you will note that the new recognition methodology negatively impacted the first quarter 2005 earnings by $0.05 per share.

Turning to the first quarter, 2006. The Company achieved diluted loss per share of $0.02 on 50.4 million shares outstanding. Excluding charges related to FAS 123R, expensing of stock options, earnings per share were $0.01, or 1 penny. For the first quarter, the Company generated revenues from continuing operations of $235 million, or a 32% increase over the same quarter last year. Excluding the impact of FAS 123R, which impacted income by $1.3 million, operating income decreased 23% over stated 2005 results.

Turning to some divisional level revenue detail, campus-based revenues increased 31% for the quarter, to $182 million. Our Latin American universities grew 48% for the quarter, while Europe revenues were up 7%. Underpinning revenue growth in the quarter, was a 32% increase in new enrollments, and a 36% increase in total enrollment. Weighted average price increase for the campus-based institutions of 5.1% also contributed to the increase in revenue. These increases were slightly offset by program mix.

Some additional comments on revenue for the quarter. Diversification continues to be very important to us. We are enthusiastic about each of the countries we serve, but we're more enthusiastic about delivering a broad and diversified range of services across many geographic markets, so that no matter what happens in any part of the world, we will continue to be strong, and to have the advantage wherever we operate. When you exclude the impact of acquisitions completed within the last 12 months, campus-based revenues grew 12% in the seasonally low quarter. Mexico and Central America revenues grew 21%, or 15% in constant currency. South American revenues grew 26%, or 18% in constant currency, all on an organic basis. On a year-over-year basis, the FX effect on revenue was neutral. The FX gain in revenues in Latin America was equally offset by the FX losses in Europe. European revenues on a constant currency basis, grew 8%. In dollars, European revenues decreased 3%, as the Euro weakened in the quarter.

The impact of foreign currency exchange on operating profits for the first quarter was a negative 1.9 million, and earnings per share were dampened by $0.03 compared to the prior year. This was due to a combination of the strengthening of the Chilean peso in a period when we have losses, and the weakening of the Euro, this year versus prior year. Some further details on income. At the operating income level, the campus-based income decreased 13% without the impact of stock option expense, and 23%, including 123R charges. Latin American margins decreased 153 basis points. The decrease is largely driven by the growth of our southern hemisphere universities, including Brazil, and the losses incurred during their summer sessions. European margins increased 243 basis points, with expanded margins at hospitality and UEM, our university in Spain. The combination of price improvement, along with revenue growth and management of fixed cost expenses, have all contributed to margin expansion. Campus-based G&A was 4.2 million, excluding stock option expense.

On to Laureate Online. Laureate Online grew revenues 34% in the first quarter. Growth was driven by 27% in new enrollments and a pricing increase of approximately 4 to 5%. Of note is the doctoral program increase, from 18 to 22% participation. You'll also note the significant margin expansion of 524 basis points from the first quarter of 2005, resulting in almost equal parts from the leverage of our fixed cost base, and the deferral of some expenses into Q2 through Q4 of this year. We are beginning to see the margin expansion after several years of investment in programs and in branding. Excluding FAS 123R, Laureate Online margins are 9%, and we expect margins to continue to expand to Q4.

As for nonoperating items, there are 3 major components. Interest income, interest expense, and minority interest. Minority interest, the largest component, is slightly under guidance due to lower than expected income from Cyprus during the quarter, and largely due to the timing of expenses. Interest and other income increased 1.3 million. This was offset by a 1.2 million increase in interest expense, the majority of which was related to acquisitions, a combination of local debt, and interest on deferred payment obligations to sellers.

I'd like to spend a minute now, and talk a bit about the effective tax rate. The Company has recorded a tax expense of $233,000, which is obviously very low, due to the fact that we have minimal taxable income in the first quarter. The Company estimates the full year tax rate will be between 10% and 13%, but the rate is likely to fluctuate in the individual quarters throughout the year. Laureate continues to benefit from operations and investments in low tax jurisdictions. And for the foreseeable future, we intend to reinvest our profits locally, which would preserve our low tax rate.

Some color on the balance sheet. The balance sheet remains strong, with over $1.8 billion in assets, which includes cash and marketable securities of $145 million, and total Company debt of $212 million. For the quarter, cash flow from operations was $54 million, and depreciation and amortization expense was $15 million, capital expenditures were $32 million. These estimates at this point are unauditable. Some color also on frequently asked questions around the Chilean receivables. At March 31st, 2006, the gross long-term notes receivable related to our internal financing program in Chile, amounted to $49 million, which is down from the $52 million at the December 31st, 2005 close. On a net basis, which is after the bad debt provision, the balance at March 31st, 2006, was $39 million, which compares favorably to $43 million as of December 31st, 2005. Additionally in the next couple quarters, we do plan to raise funds through the issuance of permanent debt to meet our future cash needs, including capital expenditures, earn-out payments, and our planned expansion. With strong cash flows and over $250 million in unmortgaged real estate assets, we expect to raise debt on attractive terms, from new and existing sources.

Turning to the second quarter guidance. For the second quarter of 2006, we estimate total revenue to be $275 million to $300 million. Operating margins, pre-FAS 123R, are estimated at 13% to 14% for campus-based, and 14% to 15% for online. We anticipate G&A expenses of approximately $10 million. Minority interest will be approximately 20% of campus-based operating profits. Diluted earnings per share, before the impact of FAS 123R charges, are estimated to be $0.68 to $0.73 for the quarter. This estimate represents a 13% to 22% EPS growth over the represented 2005 Q2. Consistent with our previous guidance, the second quarter estimate for FAS 123R is negative $0.02 to $0.03 which is in line with our annual guidance of negative $0.10 to $0.12, bringing the second quarter EPS, including FAS 123R, to a range of $0.65 to $0.71. Based on the first quarter results and second quarter guidance, we reiterate our commitment to the full year EPS guidance of $2.05 to $2.15, and revenue of $1.08 billion to $1.15 billion.

As in the past years and for 2006, we have a significant list of pending high return projects, not included in our 2006 budget. Particularly network initiatives, working adult, and international online, in which we may invest any additional savings. Third quarter and 2007 guidance will be released with the Q2 press release in late July. In conclusion, we are pleased with the start of 2006, and we look forward to another exciting year of growth. I will now turn the call over to Doug.

Rosemarie, thank you very much. I'm very pleased with the quarter. And of course, the main story in this quarter, are the strong enrollments that we've had in our South America region. In a few minutes, I'm going to ask Bill Dennis to comment on the enrollments, and the business in South America and Latin America, which is really where almost all of the new intake activity in this most recent quarter took place. I want to start by just commenting on the use of the term South America. Many of you have known that in the past, we've talked about our Latin America business in 2 reporting pieces. Our Mexico, Central America region, and our Andean region, which would include Chile, Peru and Ecuador. With the recent addition of Brazil into our business, we want to stop -- start referring to the South American region, which would be all of those Andean countries, plus Brazil. Now for the next several quarters, you'll see Brazil reported separately in the acquisitions line items of our various enrollment and revenue reporting. But in the future, we want to create the placeholder for you to know that there will be a South American region. And for all intent and purposes, the South American and the Mexico, Central American regions are of roughly comparable size, although as Brazil grows, it will probably boost the South American region.

Anyway, I would like to start with my comments on the campus-based division, which just seems to be going from strength to strength. It's really amazing to me to see how far this business has come in such a short period of time, and how well positioned it is for the future. It's just incredible. And I have a number of comments I want to make about things that have just given us tremendous pride and confidence in the performance of our business and the way we're perceived. Obviously, the numbers alone give us that sense of confidence. 32% increase in new students for the campus-based division and 36% increase in total student enrollments are just very strong numbers. But the business goes much deeper than that. The performance really in all of our existing countries, has been very strong. Our progress and efficiency in designing, siting and building new campuses. We did report in this release, fore example, 2 new campuses in Mexico that are under construction now. The market entry and M&A activities that we have around entering new countries, all of that just seems to be at really historic levels of depth and strength.

Probably, that's rivaled, or even surpassed by the extraordinary strength that we're building in our management team. We're actually doing today's call from Miami, where we just concluded nearly a week of meetings of our senior management team from around the world. And we have now over 25,000 people that work for the Company. The top roughly 160 or 170 managers from our businesses around the world, come together every year, this year it is that size, 160, 170 people. And to be in these meetings, I think every member of senior management would join me in saying that we just are so proud and thankful for the quality of the management team that has been assembled around the world. These 170 people are responsible for what is now 53 campuses around the world, 226,000 students, including our online business, where we have tremendously strong team. And a business that of course, this year will generate more than $1 billion of global revenue.

A lot of what we talk about in our management meeting relates to ways of building and strengthening the business, of course. But a lot of sharing of best practices between countries. And a lot of work of building on the power of the Laureate network. Unique products that we have built, that allow our universities to exchange students, to grant double degrees, and a number of other very proprietary expressions of the network. Not only are we getting great financial results from this, but all of these efforts in strengthening the universities and their management's are really gaining us unprecedented recognition and respect for the quality of our universities around the world.

Keep in mind that unlike in the U.S., where our competitors are mostly focused on vocational, technical or working adult niches, at Laureate, we really have the opportunity to build truly mainstream universities. These universities are very central to the countries where we operate, and they really have the opportunity to become indispensable in each of these countries. And I'll just give you some examples of how we're seeing this happening. For example, in Europe, we noted in our press release, 2 very important accreditations that happened since we entered France. And it was a great recognition by the government of the quality of our institutions.

In the case of our international school of business, which is called ESCE, the French government has allowed ESCE now to move from a 4 year program to a 5 year program. This is a very prestigious type of degree. It's equivalent to a master's degree. And it allows ESCE to now operate at the level of what's call a Grande Ecole. Really, the top schools in France are at that level. Our other Grande Ecole in France is ECE. This is a very important engineering school, and they were up for reaccreditation, and they earned a 6 year extension of their accreditation from the French government, from the arm of the French government that accredits engineering schools. And the 6 year extension represents the maximum length of time that the commission involved will allow the accreditation of an institution. And only 30% of schools in France receive an accreditation for that long. So very good examples of how strong the recognition of our importance and quality and prestige of these institutions is becoming.

Staying in Europe, I'll move to Spain. We have had a couple of interesting announcements. We announced something that in, I would say outside of the United States, is considered very big news. May not be so big in the U.S., and that's a partnership between our university in Madrid called UEM, and the football club, or soccer team as we would say here in the U.S., of Real Madrid. And many of you may not know Real Madrid, but it is the top grossing soccer club in the world. Actually even generates more revenue than Manchester United, which some of you may have heard of, is a huge sports franchise, and a publicly traded company. So Real Madrid is a very big deal, and big deal all over the world. In Brazil, for example, they're very excited about Real Madrid, because many Brazilians are star player on the Real Madrid team. Well we announced a creation of a new joint school with Real Madrid. It will be a school that focuses on sports management, on communications, and sports medicine. And we will be operating all over the world in partnership with Real Madrid. So that was just a source of great pride and excitement for us, and for all of our universities that will participate around the world in that.

We also have a wonderful event that just took place yesterday, where we gave an on honorary degree at UEM in Madrid to Mario Vargas Llosa, who is really the most famous author in Latin America. He is a Peruvian novelist and playwright, journalist and literary critic, and is immensely important in the Hispanic world. So for him to travel to Spain to receive an honorary degree from UEM, and he was accompanied by many dignitaries from Latin America, was again, just a wonderful experience for us. Other recognition that illustrates the point I'm making. In Mexico, we announced in our press release that we were selected recently by the Ministry of Education to be in what they call their Academic Excellence Program. This is a designation that only 6 universities in Mexico enjoy. And it is a recognition of quality, but it also means that the government permits more accelerated or streamlined approvals of new programs. And that's going to be very important and helpful to us.

Speaking of Mexico, and another illustration, really unprecedented illustration of the prestige that we're accumulating. Yesterday was also a big day for us in Mexico. Yesterday, Vicente Fox, the President of Mexico, came to our Lomas Verdes campus with his wife, Marta. He was joined by the Secretary of Education, by the Secretary of the Economy, by the Governor of the State of Mexico, and by the Rectors, the chief executives of over 100 private universities. And they all came together for some very important meetings that were held and hosted by our own UVM in Mexico. So we were incredibly proud. That's actually the first time that a president of that country, Mexico, has been to UVM. So we were very proud of that.

Speaking of university presidents, or speaking of country presidents, I should mention that we also recently had the President of Costa Rica, Oscar Arias, who was recently elected. This is actually another term for him. He was previously also the president in that country, came to our Interamericana University in Costa Rica to receive an honorary doctorate. And again, that was very prestigious for us. Oscar Arias, for many of you who may know, not only the country's president in Costa Rica, but also won the Nobel Peace Prize. So these are just not the kind of things that you would normally find in a vocational school, or a program that just serves working adults. These are the hallmarks of the importance of the brand, of the quality and the reputation that we're building through the Laureate network, really all over the world.

And I do want turn from my comments on the campus-based business to our online business, where we also have some tremendous progress and prestige and reputation and business results, as well. For Walden, this was a strong quarter. For our whole Laureate Online Education division, a strong quarter in enrollment growth, and in revenue and margins. Although it's a small quarter for us in terms of profitability. We believe, and feel very strongly about the positioning of our online business. We really are uniquely positioned as a leader in graduate education, and especially positioned for tremendous growth in the international markets, where of course, Laureate can bring so much strength to bear.

While the performance in the quarter was very strong, I do want to mention that, like everyone in our industry, our online division is managing in a very difficult environment for online leads, both the quality and the quantity of online leads. And so we're trying to be very cautious about making sure that we manage and ensure the highest performance in that business. And also to make sure that we signal to investors any concerns that we may have. We do anticipate a small slowing in the rate of new student growth in that division, and I'm going to ask Paula, in just a moment, to comment on that. But we do not anticipate any significant reduction in the growth in total students, or in the revenue or the earnings for the year. So this is a situation we're going to watch very carefully. But it is something that, at the moment, we feel is very manageable within the context of all the guidance that we've previously provided. So for some more detail on that, let me turn it over to Paula Singer, who is the President of our Online Education division. Paula?

Thanks, Doug. As Doug mentioned, we are experiencing a softness in our U.S. lead generation in Q1, which we do anticipate will impact our new student enrollment growth in Q2 and Q3. This softness was primarily related to U.S. leads generated from educational portals. As a result, we anticipate that new student enrollment for Q2 will be in the high teens, in the low double-digits for Q3, and then right back up to the high 20s by Q4. Full year new enrollments are expected to be in the high teens, low twenties, with total enrollment in the mid 20 range. While education portal leads in the U.S. were soft for us, there's really solid performance happening from other channels, that are closing the inquiry gap for us. The strong performers include our international lead generation, and our on the ground marketing, and our direct mail campaigns for the U.S. market. Both of these channels have a consistently high conversion rate. As you might imagine, we are accelerating the efforts in all of these proven channels for our programs.

We're also very pleased with our overall lead quality, particularly given the environment that we're in. That lead quality has significantly improved over the last 6 months. This improvement in lead quality has resulted in higher conversion rates for us, and also improves conversion velocity, how quickly we are able to convert those leads. And it's 1 of the reasons that we really believe that by year's end, we'll be right back up to our levels of expectation. I should also add that we are seeing excellent performance from our enrollment teams, which you all know we spent a lot of time investing in over the last couple of years. And I'm talking about the enrollment team's performance, both in the U.S. and now in our Amsterdam office, as well.

Our Amsterdam group is primarily responsible for the University of Liverpool product. And I need to tell you that they are following a growth path that is similar to the ones experienced by our successful Canter and Walden assets. So we're very pleased with that. Amsterdam has become our Online International hub, and will have an increasing role in marketing and selling our Walden products, beginning this spring.

As Doug mentioned, we do have our new -- I think he mentioned, our new CCNE accreditation. I don't know now that he was supposed to do that. We just got accredited by CCNE, which is the highest level of accreditation for nursing in the U.S. We received that last week, and we expect that this will have a significant impact on both our nursing leads, and our enrollment, throughout the back half of the year. I should also mention that we will be introducing 3 brand new programs in Q3 and Q4, and expect them to contribute significantly to our growth by year's end. So while our original guidance contemplated a revenue growth of somewhere between 27% and 36%. With these challenges, we expect to be at the low end of that range. Although I must add, that if we have continuing lead quality improvement, strong conversions, and a good program mix, we may be able to perform more strongly than that.

Lastly, let me just say that while quality inquiry generation, and I say that "quality" inquiry generation, is certainly a challenge for us and for the whole industry, we believe that we have the variety of unique tools in our toolbox, that will allow us to answer that challenge very effectively for the year. Doug, I'll turn it back to you.

Thanks very much, Paula. And I did not mention that CCNE accreditation, which I know your people worked very hard on. We're very proud of that. Again, I just want to emphasize that we don't anticipate anything in the online environment that would keep the Company from achieving overall enrollment, revenue or earnings guidance that we provided for the year. So, we just want to give some color as to what we're addressing in the field. And at this point, I'd like to turn the call over to Bill Dennis to talk about the recent South American intake, and then we're going to open up for questions.

Okay, Doug. Thanks very much. This is an important quarter for us with regard to enrollment. Laureate total enrollment, including recent acquisitions, has now reached 226,000 students, an increase, as I think was said earlier, of 34% year-over-year. New enrollments during the quarter from online and campus-based was over 48,000 students, an increase of 31% versus last year. Given our student length of stay of about 3.5 years, these 48,000 new students should solidify the visibility of revenues and earnings in coming years. You will recall that this quarter is the primary enrollment season for most of our institutions in South America. Our South America region includes our operations in Chile, Ecuador, Peru and Brazil. And at this time, I think someone else might have mentioned that the Brazil enrollment results are reported in the acquisition line, along with Cyprus and Honduras, in the data provided to you today in our release.

Let me provide a few highlights for this quarter. Looking first at total enrollments in Latin America, we are up 17% over last year in South America, excluding Brazil. In the Mexican region, a secondary intake period, we're also up about 16% versus last year in total enrollments. Turning to South America, our reported new enrollment growth of 5% per year, year-over-year, does not begin to reflect our success in this region. Our traditional universities are up 11% in new enrollments, and 18% in total students.

While on the other hand, AIEP, our technical vocational institute in Chile, is down 15% in new enrollments from 2005. This disproportionate influence by AIEP on the regional results, reflects our 2006 operating strategy for this institute. You may remember that AIEP is a 2.5 year diploma, at a price of about $1,500 per student per year. Since its acquisition, the business has had strong enrollment growth, but it has broken even or had moderate losses. Last fall, at the time of Laureate's budget reviews, we agreed as a management team to focus on redesigning AIEP's business model to position it for profitability in the long-term. This meant de-emphasizing enrollment growth in the short term. Though it is early in the year, we're confident that this plan is very much on track.

I would also like to mention that unlike others in the university sector in Chile, we tested a secondary student intake in August of last year, and the results in Chile were very encouraging. We expect to have a similar outcome this year, by placing additional emphasis on secondary intakes within the region. I should mention that in Chile, Andres Bello's prestige and reputation continues to strengthen. This is perhaps best demonstrated by the fact that for the second year in a row, we have the largest number of students with the highest test scores among all private universities. Let me remind you also, that Andres Bello was the youngest university last year to receive the highest accreditation awarded by the accreditation commission in that country.

We are also making great progress in Peru and Ecuador. They continue to perform well, and are active participants in the Laureate net work. Our network initiatives include opening the Glion Hospitality program in Peru this year, increasing student exchanges in both countries, and dual degrees with Spain. In addition, Peru is implementing a significant campus expansion in 2006, totaling approximately $14 million, and doubling capacity to 12,000 students. Likewise, Ecuador is in the last phase of building a brand new campus that will also double capacity to about 6,000 students.

The Mexican region is doing well. And its secondary enrollments are becoming more significant to Laureate. New enrollments are up 21% to about 11,000 students, and the region as a whole, has increased to almost 77,000 students. We continue to experience significant growth in this region. In Mexico, 2 new campuses have been launched. The first is in Mexicali, a city of roughly 650,000 people in the northwestern part of Mexico. The second is Cuernavaca, a city of 1 million people or more, about an hour and-a-half drive from Mexico City. The working adult segment in the Mexican region has now reached almost 8,000 students in just 2.5 years. As a result, we are beginning construction of a specific tower in our largest campus in Mexico City, purely dedicated to the working adult.

And in Central America, we've launched 3 downtown sites for working adult and post graduate programs. I couldn't be more pleased with the performance in Latin America. You will notice that I haven't said much about Brazil, but it's not that we're not doing a lot there. We are moving very well, and are currently preparing for our next major enrollment campaigns. All in all, we're very enthusiastic about our activities in Brazil. This concludes the part on enrollment, so I'd like to open it up -- open the call up for questions.

[OPERATOR INSTRUCTIONS] Mark Marostica, Piper Jaffray.

First question is related to the online operating margins. Trying to get a sense for how much of the strong margins this quarter were tied to the deferral of the marketing spend, versus the leverage on the platform. Perhaps quantifying the magnitude of the deferral would help.

Rosemarie, you want to comment on that?

Mark, hi, how are you? This is Rosemarie.

Hi.

In equal parts, that margin improvement came from the expansion, as our revenues grew and the absorption of our fixed costs, so a 50/50 basis between the absorption of fixed costs and the timing of expenses.

Okay. And then I know this has been a topic on another call today regarding online, but perhaps you could comment on online student retention trends.

Paula, you may want to comment. I should say, we've been focused enough on our own call, that we actually probably don't know that it's been a topic on somebody else's call today. So, Paula, do you want to comment?

Yes, actually we're very pleased about where our retention levels are right now. There's always a lot of room for improvement, but we have, I think as you well know, a very strong concierge service that has been dedicated to helping students through the whole retention process, and we continue to strength that, and expect that to be an important reason for growth in total enrollment.

I think actually part of why we think that the weakness in growth of new enrollments in the next couple quarters won't affect total growth that much, is that we're seeing reduced attrition. So that's actually a great topic for us. And we're also seeing, as Paula mentioned, very strong, improved conversion, so that we can do more with the leads that we are getting. So there's actually a lot of good news in our online area. We just know that investors are all very focused on this issue around leads. So we want to be very responsive in telling people what we are experiencing out there.

And then regarding -- Paula, I think you mentioned launching additional new programs in the back half of the year. Are those new programs, I suppose assumed to have a significant contribution to help you hit that low end of the range guidance in enrollment that you talked about? Can you give us a sense for perhaps what those new programs are, and how important those are to you to hit the guidance range?

I would tell you that they are a contributor to the enrollment, but they're not the major contributor to it. Just 1 of the many things that will help us -- that we're sure will help us get to those numbers. The programs are in a couple of areas. One is an anticipated launch of a public health degree with the University of Liverpool. And that one we're very excited about, because as I was indicating, we really believe that the work that we have done in Amsterdam, similar to the work that we did with Canter and Walden, have now positioned us for the same kind of growth that we've seen there. What we need, is new product to put down that pipe. And so we're beginning to put that -- get that set of new programs ready to launch, so that public health degree will be important. We also have a number of specializations that we're going to be launching, an accounting specialization, and an additional degree program in the health management area.

I think it's important in that international area, because while in Walden, we now have lots of products, and every year we anticipate routinely adding new ones, the Liverpool program, which is just doing extremely well, only had basically 2 products until recently an MBA and a MSC. And so if we're doing as well as we're doing with just 2, we really -- we were eager, with our partners at University of Liverpool, to expand that. The other thing that we're doing, is following right in behind the growth that we're seeing in demand globally for the British degree, by also offering an American degree, which is of course, our own Walden degree. And we're seeing very nice take up the international markets for that, too.

1 last question, and I'll turn it over. Turning to campus-based operations, how much of a leading indicator do you think is the secondary intake in Mexico? It looked like you had strong new student start growth. I'm just trying to get an idea of what that could portend for the upcoming primary intake period in Mexico.

I'll give you my thoughts. And Bill, you may add if you have any different thoughts. Which is that, we're very pleased with how we're doing in Mexico. We expected a strong intake for the secondary intake. So the fact that it is strong, it's where we thought it would be. And I think that positions us well to be where we thought we were going to be for the remainder of the the year, as well. Do you have anything else you want to add? Or Raph?

Yes, I think a lot of it has to do with the brand building exercise we've been going through in Mexico and other parts of the world. With Mexico, with some of the highlights that Doug mentioned earlier on, lots of awards being placed among the top 10 schools in the country. All of these add up. How does that -- does that have predictive power over the second? We can't quite say that, but the trend is definitely in the very positive direction.

Great. Thank you.

Matt Litfin, William Blair & Co.

My question is also about the campus-based operations. Can you comment on attrition, and I mean non-graduation attrition. Where has that been strong, and where has that been weak?

This is Doug. I think the general idea is that in the Latin American markets, attrition is generally higher than it is in the rest of our campus-based operations. In fact, some of our European campuses have single-digit attrition rates. So it's really much more of a factor in Latin America, and I would say in general, probably even higher attrition in the South American part, than in the Mexico, Central America. But attrition in Latin America for us has actually been -- we've been managing it down. But Latin America is growing so fast, that its impact on the overall mix of the Company is higher. But I think the important things would be attrition for us is stable or declining in just about all of our important markets. And I think that's probably the key message that we could offer at this point. Working adult does have an impact. Working adult does have a higher attrition. And while we're growing beautifully in working adult, it is still a pretty small part of our business though. So I don't think the impact on mix is that high.

Thanks. My follow-up question is, thinking ahead to your potential entry into China later this year, I would love to get an update there. And given the work that you've done on pricing over the years, and also how prices for at least non-educational property has moved in the past year, is it even possible to be thinking about an acquisition there that would be neutral to accretive to earnings?

That's a good question. I don't think actually it's -- it hasn't really even occurred to us that we would do any entry in China that wouldn't be at least neutral. I think that that's not to say we would never do a deal that was dilutive if we thought it was the right strategic decision for the Company. But it's actually just not even in our thinking right now. We're very fortunate. There is no one who can bring to the table the tools and resources and strength that we bring. We actually had a few guests from China, who came to our senior management meeting. And they were just absolutely so blown away by what they saw. And they felt that there is just nobody in China that could even touch it. So I feel like we have our choice of partners, and we're busy talking to some of the really terrific potential partners in China, and we feel like we're making great progress.

Now that said, we don't see the need to rush it. Everybody knows that our guidance for this year was -- is not predicated on anything other than spending money in China. Not based on getting any deal done. Our objective would be, we certainly would love to get a deal done over the next year. If it's in this calendar year or next calendar year. But my sense is that the unknowable part of that is, once we have finally selected our partner, and they've finally selected us, the amount of time that it would take for the government to provide all the necessary approvals. And that could be months, or it could be a year, or it could be longer. So again, the important thing is, when we look at our '06 results, our '07 guidance, even our business plan really throughout the 2010 period that we've given a vision for, China does not play a role in making that happen. So when we do bring in China, I think it should really give people a sense of confidence that it will really boost the momentum for the Company going forward.

Thanks, Doug.

Gary Bisbee, Lehman Brothers.

A couple questions. Just following-up on this online area. I guess Doug or Paula, whoever, what do you attribute the more difficult environment to? If we go back a couple quarters, you were clearly calling for 30% growth, then it was 25, now it's a little bit slower. I mean, is this a competitive issue? Is it some of your larger competitors are just spending a lot more money? And then the second one on that note is, what makes you so confident that is bounces back so strongly by the fourth quarter?

Paula, you want to -- ?

Fair enough. Essentially, what we're really seeing, it's not so much that our competitors are spending a lot more. Frankly, what's happening, is that on the education portals, there's just a lot more competition. Most of it coming from the traditional universities spending large shares of their marketing budget, following the for-profit's playbook, if you will. And so last year at this time, when we had maybe 6 or 7 competitors on those education portals, we now are experiences 60 to 65 competitors on those education portals. So we anticipated this, and we frankly, began working on trying to diversify our channel mix. And more importantly, to be sure that we were using channels that were going to be targeted to the programs that are most important to us, specifically the Ph.D, which we have been able to grow very strongly.

So it's really an issue of inventory, and the competition for that. I do want to emphasize the fact, that we're not seeing that problem at all on our international lead generation. And so what we need to do is make an adjustment to emphasize that more, and we're prepared to that. In terms of the confidence of being able to move forward with the expectations we're setting. Again, we've got -- we've never been a 1 channel organization. We've always focused on conversions. We've always focused on quality retention. This business, while very difficult, is all about conversion and retention. And we have a number of good products we can put down the pipe that we have before. And I guess lastly, we've done this with Canter. We've done this with Walden. We're going to do it again with Liverpool. And we're going to find -- I believe we've got the tools to make it work. Not that it's going to be easy, but we're on it.

I think for a while as people have asked us about this, we've mentioned that the cost per inquiry was increasing. And we were seeing that really, for more than a year. But because we were starting from a pretty immature platform and structure, that our conversion rates were rising actually at a faster rate, or at an equal rate, so that our overall cost to enroll a student was pretty flat, even at a time when our competitors were really seeing a lot of pressure. I think our issue is, we just don't want to chase bad leads. And we got to a point where we felt that we could buy growth at the expense of margin, at a time when we really felt that this is the time for us to deliver on margin, and this is the time for us to really build those excellent underpinnings, so that this business can grow and grow, and be the platform for Laureate globally for online. And to just cater to a few quarters by blowing unnecessary money on the budget and marketing, just didn't make sense. So from our perspective, Paula's efforts -- I have a lot of confidence. We're seeing great results out of direct mail. We're seeing great results out of a lot of on the ground marketing activities that we're doing. Sending people into hospitals to talk about nursing programs. Sending people into schools to talk about education programs. And I think that our goal is just to continue to diversify down exposure to online leads in the U.S., and then just grow, grow, grow internationally, where we have a runway that nobody else can touch.

Are you willing to give us a sense as to how big that international chunk within the online is today? And whether the profitability there matches up versus the U.S., or how it does?

I think we've always talked in general, on the international piece was running around 10% of the business. 8.5 Paula is saying. So it's a small piece, but it is growing at a much faster rate. I mean, there was a time when Walden was 8.5% of the division, and Canter was the other 90%. So we are seeing growth rates on the international side, that dwarf anything that we or any of our U.S. peers are seeing. And we're seeing it in ways that nobody else could really get at, because we have this incredible global network of universities that is giving us a footprint all over the world for the promotion of online outside of the U.S. that nobody else can touch. That's it. I have to tell you. I think it will be years before international online is a major, major part of our business. But I think it will certainly blunt the effect of the leads issue in the U.S. for -- certainly for the next several years.

Okay. Great. Moving on to the second question, I guess. I know you've got a bunch of these earn-outs or contingent liabilities coming due. And I know you commented that you were still planning to debt finance some of that. Can you give us any more color on the timing of likely taking on some more debt, what form that's going to take? And then the timing, particularly for this $82 million that you -- earn-out that is due. It said in your 10-K it was due in March for UDLA, and how you'll finance that?

Certainly. This is Rosemarie. The high yield markets at this point are very attractive, and particularly attractive for a company with the stature and the track record of Laureate. And I think that you will likely see us act within the next couple of quarters. I think the next part of your question was really around, when are we due to pay the 82 million? And to your point, if you looked at what we've disclosed, we've disclosed a series of payments that are due to minority sellers over a period of time, including '06 and '07. That payment would nominally be due at the end of the second quarter, the beginning of the third. But it is contingent upon us agreeing with our minority partner to the amount, and right now, we are in the middle of those discussions.

I should also mention, that $82 million is -- we're expected to find a methodology and provide an estimate. But the truth is that there is a very protracted and complex negotiation around what the final number will be. And we're certainly -- we don't want to put that number out there and say that's the amount that the final number is going to be. It's just -- we have a lot of discussions and negotiations with our partners to have. And if we can resolve this on the expected timetable, I think as Rosemarie says, that probably would result in a payment at the end of the second or the beginning of the third quarter. If it takes longer, it will just take longer. We have a process for arbitration where theoretically, it could be a year. We'll just -- our goal will be to come to a constructive, fair agreement with our partner on the amount and then -- ?

Can you give us any sense as to how that might vary? Or is it just too tough for you to estimate that right now?

I think it's -- that's a very hard question, because obviously, if there's a negotiation involved, it's a very sensitive matter. I think I certainly can't imagine a scenario where there's a material increase over that amount. But we certainly feel, in the negotiations, that there are arguments for why that amount should be materially less. But let us do our work on it, and come up with an equitable resolution, and we'll come back and let you know where that was.

Okay. Great. And then just 1 last one. The -- it sound like the loan program on a gross basis in Chile, was down slightly sequentially. But can you give us any update on the process to potentially sell a portion of that, or all of that? And it's hard not to notice that the growth, even ex this AIEP thing, has slowed a bit in Chile, as you've dramatically in '05 grown the amount of those loans. Is continuing to grow in that market, largely dependent on continuing to find outside financing? Are you having to move down below sort of the upper middle class who can afford it on their own? Any color on those issues would be helpful. Thanks a lot.

I'm happy to. I would tell you that financing that we do do in Chile, we're fortunate to be in a country that has a very strong culture of credit. And otherwise, we would not be as a Company in the student financing business in Chile or anywhere else. To your point, what frequently happens here, with those loan balances, is the direct impact of FX. And at some point, the FX impact on that balance may be as much as 14%. And I haven't checked for the quarter, but I certainly can do that. Again, , those are long-term note receivables for the students, and it will be many years before those are due. There is a piece of that, that is the principal, and then there is a piece of that that is [inaudible].

So we feel confident that the students will repay, based on the fact that we have this principal payment, and the installments, and we would normally not let a student have the opportunity to finance in their subsequent years, if that installment payment hadn't been met. I think the idea in front of us has always been in the future, to look at selling this financing to a bank or some other interested party. And you can see why many, many, financial institutions would be interested in holding this debt. But it is a matter also of watching and allowing some time for this -- for our cohorts to graduate and start to repay. So we feel confident that at some point in the future, we will, through conversations which we obviously have on an ongoing basis, sell the debt there locally.

We could sell a lot of the debt if we wanted to. I think what we're thinking is that there is an optimal moment, where the debt has seasoned and performed at a level where we can get a good price for it. And that at the moment, we think that there's still a -- lets let's say there's more opportunism on the part of banks in saying, gee, a company like you would probably love to get rid of some of that debt, so here is a lower price for it. And the truth is, we don't really mind. We're getting a reasonable amount of interest. We generally feel good about the way we're approaching, managing the credit. And I think, while we don't want to be in that business, we're not going to let anybody take advantage of us. So we're just going to take our time. But eventually, we will lighten up on our participation in that.

I want to make 2 other very quick comments. You are right, that that is a market where students are expecting credit, and it's becoming a much more regular part of how universities, all universities, including government universities are doing business. And I think that is something that we should be prepared for. But as long as we believe that the credit reporting bureaus, and the consequences of nonpayment are very serious, then I think we can make it work. We have not -- you indicated, do we have to go to a lower audience to make our growth. We actually tightened our credit criteria this year. And still have received overall growth in the market. So I think that actually was encouraging to us.

Great. Thanks for all the color.

Bob Craig, Stifel Nicolaus

Just a couple of questions for you. 1, some averages. And this may be difficult to answer, given your geographic breadth. But if you look over the entirety of your campus-based network, is the overall trend in student acquisition costs, down, up substantially, in line with your expectations? If you could provide some color on that.

Raph, you want to comment on that?

I think we haven't seen anything to indicate it's going up, or pretty much sideways. In fact, in some parts, we are seeing more efficiency in the sort of advertising cost. And in Europe and Spain we had a good year last year, and our overall costs went down some. So I would say generally overall, it's sideways.

Okay. And another average question. If you look at the average cost of seat expansion across your network. I'm not really in tune with real estate prices, et cetera in a lot of these regions, but any material change there?

I think it's probably more in line with commodities prices, which of course you know, steel and concrete go up. In many of the Latin American countries, real estate is a great investment. And it goes up, and the good news is, we're on both sides of that transaction, because we own a lot of real estate. So I think it would be fair to say that every year, we have always seen increases in the cost to build a seat. But I would say that in general, we probably have raised our prices in line, or in some cases, faster than -- there's probably some cases where it's not quite at the same rate. But it's not a worry, based on our current business model, at all.

Okay. I was wondering if you could amplify on the business model changes that you alluded to that are being made at AIEP?

Bill, you want to comment?

Sure. Sure, Bob. Well, we're doing several things. First of all, we're looking at the number of programs that we've been offering. You know, when we acquired Andres Bello, AIEP was a part of Andres Bello, and had just recently been acquired by them. It was very small. But a large number of programs. And so we're looking at the profitability of those programs. There are some 35 programs all in all, 30 to 35. And so we're taking a hard look at that, to see which ones we're making money out of, and which ones we're not.

The second thing that we're looking at obviously, is facilities, and how effectively we are using those facilities, both for scheduling, as well as just optimal size. Third is -- third, after the academic model review and the facilities review, is we're looking at management costs. And we're looking at the type of management that we need to drive this business. You know, we have great experience in Peru at [Cibertech]. It's doing very well, it's very profitable. And we're also -- you all are all aware that we're looking at a low price, 4 year degree program in Mexico. So we've done a ton of research, and we're feeling pretty good about it. But at this point, AIEP is a small business. And our focus there has been, and will continue to be, mostly on our full universities. The reason we, of course, had to address it today, was because the fact that we planned to have no growth in student enrollments, and perhaps even declines in growth until we got our arms around that business, of course was affecting the overall view of South America. But other than that, it's a small business. It's never been a big financial impact on us, at all. But we would like for it to be, and so we really need to get our arms around it.

Okay. That's helpful. Last question. Doug, I haven't asked this for a while. But where in the pecking order for uses for cash are the potential buy-ins of other minority stakes?

I think you know, we're just tremendously quantitative, analytical types. And I think from our perspective, it's just returns driven. The good news is that when we're looking at buying in equity in some of our minority operations, we know what we're buying. And there's no management complexity around upping our share in an existing country. But we also know that we can drive really high returns, putting our money into new campuses or new universities that we can acquire around the world. So again, it comes down to a matter of patience. We have great partners around the world, and periodically one of them will raise their hand, and say, would you like to buy a piece of my interest? And we just look at the numbers, and we let the numbers do the the talking for us.

Okay, great. Thanks for the color.

Jennifer Childe, Bear, Stearns.

Just a couple of housekeeping. Why were shares lower this quarter than your guidance?

We're getting you an answer.

This is Rosemarie. What happens in the first quarter in terms of the share count, is the fact that our earnings were negative in the first quarter. And so the impact of the options are excluded from the share count. And the fully diluted shares, at that point, are basically equal to the basic shares outstanding. So since we had a loss in the first quarter and it's minimal, there is little impact, or no impact to the EPS. In the second quarter when we return to a profitable position, our fully diluted shares for the second quarter and the full year are expected to be back at the 53.6 million. So it's a function of having that negative, or that loss in the first quarter.

But your guidance -- I mean not to dwell on this, but your guidance was for negative earnings, so was it just an oversight? With the share count guidance?

It's because of the FAS 123R. So yes, you could conclude that it was an oversight.

Okay. Second quarter Latin American margins, your guidance suggests that there is going to be a pretty healthy spike, year-over-year. Any color on why you're expecting that?

I think it's really a function of volume.

Yes, and everything being back in operation again. We're going to -- I think we've seen very, very strong volume growth in those high margin operations. South America, of course, has always taken the lead, in terms of higher margins. And excluding that AIEP situation, if you look at that, that's still a very solid growth. And I think with expansion in some other areas, we should see very solid enrollment.

Jennifer, I get that it's no different than our campus-based businesses are. I want to make sure that I correctly communicated something. Our campus-based margins for the second quarter, are expected to be between 24 and 25%. And so they're both -- the logic of that, obviously, is both of them are moving together in the totality of the campus-based business.

Both what? Both regions.

The Latin American, as well as the total for the campus-based.

Full quarter.

That help, Jennifer?

Yes, I mean, your guidance is -- for Europe is the same as it was last year. So the improvement in the whole campus-based is largely being driven by Latin America.

If I think about some of the other changes, we would have Brazil this year, that would have -- does that not factor in in the second quarter?

No.

Okay.

Okay. And then Rosemarie, just 1 other -- which line items did the option expense hit?

The question Jennifer is asking is which line items did the option expense hit?

Yes.

It's going to hit all of them. So it's going to hit in the margins that we've quoted. It's going to, obviously, hit in our G&A. But if you look at the impact to the first quarter, it's negligible. You can't even see it. And you likely will find the same situation on a full year basis, with the exception of our corporate G&A.

Okay. So the majority of it will be in corporate G&A?

Correct.

Okay. Thank you.

Just to be clear, it does go back, and it is accounted for in each of those areas, whether it's the Latin American, the Europe margins, the campus-based G&A or the corporate G&A. But you will not -- you're likely not to see the impact of that in upcoming quarters, just like you didn't in this quarter, until you get to a full year look at the corporate G&A number.

Okay. Thank you.

I would also say -- I would just add before you get off, Jennifer, that 1 other factor that you're going to see the impact of in the second quarter, are some very solid price increases that we made in the beginning of the year. If you look at Mexico, this secondary intake is quite large. And we raised prices in Mexico, and we've raised prices in Chile. And so you're seeing the benefit of that, in that margin for the second quarter.

Yes, Jennifer, the number we quoted on the price increase was about 5% on the average. So you will see different -- .

More of that in Latin America.

-- depending on the geography of the university.

We also, when we get off the call, we're going to thumb wrestle over Brazil. Because I think, while we guided that Brazil was not expected to be accretive for the year, that's not the way it works by quarter. So when we're done, we'll have an arm wrestling over whether that a material part of the answer.

Okay. Thanks much.

Operator, we have time for 1 more question.

Brandon Dobell, Credit Suisse.

2 quarters in a row, squeezing in right at the end. I appreciate you giving me the opportunity. I'm not sure if this is better for Bill or for Raph or for you, Doug. Any other schools out there that you think might have the same issues, or I guess, opportunities, if you want to position it that way, as AIEP in Chile? Where you think there could be either better profitability if you scale back growth a little bit, or it might need some change, maybe they're mature schools that could use a little bit of freshening up, or there are some schools where you thought you would see some progress, but haven't been as pleased as you thought you would be? And then secondly, I know a couple quarters ago we talked a little bit about you guy's perspective on the opportunity in France. Want to see if we can get an update there. Thanks.

Let me comment first on the AIEP question, and then maybe Raph can give a quick comment on France. Although, I don't think a lot has changed. But with respect to AIEP, I think it's important to note, there are really only 3 places today where we have technical/vocational, non-bachelor's degree degrees. And those are more like an associate's degree. And that would be in Chile in AIEP, in Peru in this program called [Cibertech], and then we have a program in Honduras of this nature. And I don't think there's any other place where we do that.

Not degrees.

Not degrees. We do certificate and executive education, but generally, in terms of associates degree at the technical/vocational level. And I think the answer in general is, we're really -- in the rest of our business, we have a very clear business model. And we know exactly how to apply it. And I don't think there's any place where we feel that we need to invent or reengineer the business model. I think it's much more just about applying the business model that's working so well for us all over the world. In the vocational/technical side, we're really trying to get our arms around it. It's a small part of our business. And we want to decide, is this going to be an important part of how we grow or not. It certainly is not important from a financial perspective, right now. But we want to make sure we have an R&D process to figure out where growth can come from in the future. So AIEP is something that worked from the day we bought it. We felt that it was sort of an experiment for us, to learn this business with some great assets that they really -- that they've put together. So our goal will be to see if we can't put that into a mode where we can make it be profitable, and have profitable growth. And if we can, I think we'll be kind of excited about it. And if we can't, I don't really think it's going to make an impact in any of the guidance or growth or performance of the business. So this is a bit, in our view, of all up side from our perspective. Raph, was there anything else on France you wanted to add?

Yes, France [inaudible] transition year. Lots of good things are happening, but you won't see it in the bottom line. We have announced the acquisition -- a long-term lease for our engineering and working adult schools. But they don't come onstream until next year. So as a result, we'll have more capacity. We are really sort of at bottleneck capacity in the engineering school. We just got this -- we mentioned the Grande Ecole status for our business school. And then third, in the working adult itself, we also have been able to have an agreement with a French university, that would allow us to, if you want, tie all our seminar type or shorter courses into a longer course to create a degree program. So lots of good, positive things in the right direction, including capacity and constraints that we are addressing. So I'd say, this year is transition, and next year is our real turn around.

Okay. Great. Thanks a lot.

Thanks to everyone for the call, and we'll look forward to speaking with investors as time goes on.

Thank you. Again, that does conclude today's conference call. We appreciate your participation, and you may now disconnect