Lincoln Educational Services Corp (LINC) 2005 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Fourth Quarter 2005 Lincoln Educational Services Earnings Conference Call. My name is Megan and I'll be your coordinator for today.

[OPERATOR INSTRUCTIONS].

I would now like to turn the presentation over to your host for today's conference, Mr. John Buckley.

Thank you, operator. Before we begin today's call, the company would like to remind everyone that this conference call may contain certain forward-looking statements relating to future events, future financial performance, strategies, expectations, competitive environment, regulations and availability of resources. Such forward-looking statements are based upon current expectations that involve risks and uncertainties. Actual results may differ materially from those stated in a forward-looking statement based on a number of factors and other risks, which are more specifically identified in Lincoln's filings with the SEC.

Now I'd like to turn the call over to Mr. David Carney, Chairman and CEO of Lincoln Educational Services. Please go ahead, Dave.

Thank you, John. Good morning everyone and welcome to the Lincoln Educational Services fourth quarter earnings conference call. I am joined here by Larry Brown, our President and Chief Operating Officer as well as Cesar Ribeiro, our Chief Financial Officer. For our call today, I'll provide a brief overview of our results, as well as update you on our strategic progress in key growth areas. Larry will then provide an update on recent enrollment and marketing trends. And finally, Cesar will provide a more detailed review of our financial results and provide our guidance for 2006.

Turning to our results, revenues for the fourth quarter of 2005 grew 11.5% to $81.8 million. Net income for the fourth quarter was 12.4 million or $0.48 per diluted share. For the full year, revenues for 2005 grew 14.5% to $299.2 million. Net income for the year was 18.7 million or $0.76 per diluted share. Average undergraduate full-time student enrollment for the quarter increased 5.9% to 18,846 students. On an organic basis, which excludes New England Technical Institute and the recent acquisition of Euphoria, average student enrollment decreased 2%, in part reflecting a conscious effort not to chase unprofitable starts.

For the full year average undergraduate enrollment was 17,869 students which is 9.9% increase over the prior year. On an organic basis which once again excludes New England Technical Institute and Euphoria Institute, average student enrollment increased 3% in 2005. During the fourth quarter we continued to take steps to improve our business model, both short term and long term which included reducing less successful advertising, including limited spending around the traditionally slow holiday period. These and other steps taken, I believe, put us in a much stronger position entering 2006.

I would now like to update you on the success in executing our multi-prong growth strategy. We are continuing to pursue a robust pipeline of channels to position the company for growth over the long term. Our areas of focus include expanding capacity at new and existing facilities, program development, increasing the number of degree-granting programs, replicating attractive programs across our platform in a profitable way, acquisitions and our online initiative.

Now turning to expansions, first we continue to be successful in prudently expanding capacity in areas where there's a strong demand. In October, we announced the acquisition of an approximate 100,000-square-foot facility which will triple the size of our campus in Grand Prairie, Texas. The new facility is on track to open in the third quarter of 2006 and combined with the existing school will be able to serve approximately 2,400 students. In our Indianapolis campus, we started our third class in collision repair during the third shift, which we added earlier last year. We are currently evaluating expanding the capacity of this campus further to meet the demand for auto and collision in this market.

Now with regard to our Philadelphia expansion plans, we indicated in our last earnings call that we were continuing to work with the City of Philadelphia to obtain the necessary zoning approvals. Unfortunately, a mutually beneficial agreement could not be reached. And rather than needlessly delay our expansion plans, we elected to cut our losses and search for a new location. We'll keep you updated on our progress. However in the meantime, I should point out that our current Philadelphia campus continues to perform extremely well.

Given the fact that our Philadelphia expansion will be delayed by six to 9 months, we've elected to move forward the timing of our plans for relocating our Denver Automotive Diesel College to larger facilities and have identified a facility which should be ready for occupancy late this year, or at the latest, the first quarter of 2007. As in our other relocations and expansions we will further diversify our offerings and we will add skilled trades and a collision repair program.

Overall we view our facility expansion opportunities as low-risk growth initiatives, that enable us to leverage our existing management teams and build upon our strong brand recognition in these markets. Looking to 2006 and beyond, we anticipate adding capacity at additional campuses to accommodate growth in our existing programs, as well as to make room for new programs. And I'll touch on that further in a moment.

Now with respect to Queens, and turning to startups, we are pleased to tell you that our new Queens facility is scheduled to open any day, as we await approval of the fire safety plan and then immediately thereafter, the state approval. As a reminder, we leased 48,000 square feet of the new 90,000-square-foot Center For Automotive Education & Training in Queens from the Greater New York Automotive Dealers Association. The campus has the capacity to instruct approximately 800 Lincoln Tech students and will be our 9th Lincoln Tech campus and 35th campus overall.

We're very excited about the long-term growth potential of this facility and the benefit to our relationship with the Greater New York Automotive Dealers Association brings. The Queens market has limited competition, healthy demand and we are confident that we will be able to leverage the Lincoln Technical Institute brand which already has a strong presence in this region.

Also the relationship with the Greater New York Automotive Dealers Association is a huge benefit for our students and will provide us with unique marketing opportunities. The Association represents more than 650 dealers in the New York City region which represents a direct pipeline into a large pool of potential employers for our students. We're looking forward to seizing upon the opportunities this new campus provides our company, our students and automotive retailers in the greater New York area. And we'll keep you updated on our progress as the year unfolds.

Now turning to program development and replications. We continued to study potential new programs that offer opportunities for growth, as well as program replications where we believe there will be a strong demand and we have available capacity. We have narrowed the list of markets where we intend to replicate three of the programs we acquired from New England Technical Institute including culinary, licensed practical nursing and a skills trade program -- in this case, electrical. Our Columbia, Maryland, campus will be the first campus replication offering the culinary program.

We plan on adding 20,000 square feet to our existing 90,000-square-foot facility to house this program. Also our bachelors offerings and more shop space for our automotive program. We expect to launch this program in the fourth quarter of 2006. We also plan to add a culinary program in another market in 2007. We are looking to replicate our skill trades programs at both our Grand Prairie, Texas and Denver campuses and in 2007 at our Philadelphia campus. With regard to licensed practical nursing, we are currently evaluating several markets where we may add this program.

Now in terms of degree offerings, we also continue to make progress in expanding our associate degree offerings. These programs provide advantages for our students in the form of opportunities for promotion, as well as higher earnings potential. Associate degrees also extend the length of time students remain on our campuses which results in additional revenue and improved margins. We currently offer associates degrees at 17 of our campuses, bringing the total enrollment in degree programs to approximately 14.2% as of December 31st, 2005 versus 11.1% a year earlier. We expect our degree programs to have a meaningful contribution to our growth in 2006 and beyond.

Now turning to acquisitions. During the quarter we completed the second acquisition for the year 2005 of Euphoria Institute of Beauty Arts and Sciences in Las Vegas for approximately 9 million in cash. This acquisition provides us with fast entry into the growing high-end salon and spa services education segment and will serve as a foundation upon which we can develop a new vertical around beauty, wellness and spa management. The acquisition was also immediately accretive to our earnings. Euphoria possesses an excellent track record in the training of salon and spa services professionals, and a strong brand name in the markets it serves. In addition the market segment and demographic interest is attractive.

The cosmetology field is very much like the automotive and culinary fields in which students have a strong passion for their trade. And the same demographic trends that are driving growth in allied health are also driving demand in spas, skin care, massage therapy and other treatments designed to reduce aging and stress. In order to become a cosmetologist you need to be licensed and the unemployment rate in the cosmetology sector is near zero as the salon industry is a job-seeker's market with over 56% of the salon owners reporting at least one or two job openings available immediately.

The average income for a salon professional is $30 to $50,000 per year. We know we can immediately combine Euphoria's offerings with our massage therapy program at our nearby Henderson campus. And since we have degree-granting status in Henderson, our plans will be to move forward adding management courses to create an associates degree spa management program. And there are very few of these in the country today. In 2006, we expect to replicate our Euphoria programs in two of our other campuses, similar to what we are doing with the culinary and electrical programs from the acquisition of New England Technical Institute. These programs will further diversify our offerings. We also plan on adding Euphoria programs to additional schools in 2007.

Now with respect to our acquisition program, we currently have a number of acquisitions under consideration. Although we are occasionally unable to complete acquisitions for a whole host of reasons, we are comfortable that we will make one to two acquisitions this year and expect to update you shortly on our progress.

Now I'd like to update you on the New England Technical Institute integration. We recently passed the 1-year anniversary since completing the acquisition in January of last year. It was a very successful year during which we strengthened the management team, the systems and marketing efforts. Additionally, in late 2005, we obtained options on an additional 20,000 square feet, 5,000 of which has already been taken down in the fourth quarter of 2005. This additional space will accommodate growth to existing programs and allow for new offerings. We feel very good about the growth opportunities at New England Technical Institute.

Now let me turn to our online strategy. We began to offer -- we began offering our online degree completion program in health sciences and business in the fourth quarter of 2005. And we expect the enrollment to grow during 2006, as seven of our diploma-only schools grads begin their online courses. Moreover we continue to move forward on our 100% online offerings and are on track to launch in the second quarter of 2006. We will begin with one program and expect to add two additional programs later this year. In terms of marketing, we will use an expansive online Internet strategy to market our online offerings, piggybacking many of our successful onground initiatives.

For our degree completer students, we've put together a plan to actively upgrade students in our non-associates degree schools so that they can complete their degree upon diploma graduation. We believe this plan will have an immediate impact on our ability to upgrade a portion of Lincoln's existing student body by offering them an enhanced solution that they would not have if it was not for online. Additionally, the cost associated with completing the associate degree is 30% of the cost to earn a diploma, so the value proposition should have a real impact on the diploma students.

On the recruiting side, we have a dedicated staff that'll focus on creating awareness within the diploma-only schools and will actively work with students to transfer from diploma graduation to associate degree start. We will also reach out to other non-Lincoln diploma-only schools and seek to create partnerships that emphasize transferability of credits from their programs to the online associate degree. We will update -- we look forward to updating you on our progress in this area in future calls.

Now I'd like to turn the call over to Larry, who'll provide a little more color on our enrollment growth as well as marketing initiatives.

Thank you, Dave. And good morning, everyone. For the full year, our average, organic enrollment growth was 3%. During the fourth quarter, organic average enrollment declined 2% which was below our expectations. This was primarily the result of a concerted effort to enhance our efficiency in starting fewer but larger classes as well as reducing our TV spend in favor of the more efficient Internet. I would now like to update you on our marketing initiatives and share with you what we have learned over the last year as well as where we are heading.

As you know, we have been very focused on improving the effectiveness of our advertising and marketing initiatives. Last year we changed advertising agencies at certain schools, made major changes to our creative and messaging and we also instituted a warm transfer program which is now employed in the vast majority of our campuses. We also took a hard look at where we were generating our leads and evaluating the impact of the Internet in comparison to other media, especially TV, our largest ad spend. During the fourth quarter, we also completed a transition to CUnet, a company that specializes in the Internet lead management in the education sector.

Given the weaker than expected environment, we decided to pause and examine our TV advertising expenditures and the associated results. Instead of spending incremental advertising dollars on TV spots and essentially chasing starts, we opted to increase our investment in the Internet arena where we were experiencing a higher return on investment. As we stand today, we believe that we have found our sweet spot in television advertising. Despite decreasing our TV spending we are seeing a more efficient television buy in that we are gearing our TV spend to stations and segments providing the least waste.

Going forward, we're dedicated to improving our marketing practices and capabilities through the use of various technologies. The Internet will continue to play a major role in our marketing and advertising, and we are implementing a number of new Internet initiatives to improve upon our effectiveness and utilizing the web to drive enrollment. We've incorporated Internet training into our Lincoln Academy and continue to refine our expertise through training of our admissions staff.

As we increase our national footprint we are reviewing and rationalizing our brands to leverage the strength and wide recognition of some of our stronger names. This process will be completed by the end of 2007. We believe our organic enrollment will rebound in 2006 and we are encouraged by the favorable trends in leads and enrollments to date. And as we have said before, we have been through periods of enrollment softness and volatility in the past. We will continue to make adjustments and adapt with the market in a prudent and cost-effective way and remain committed to pursuing profitable growth over the long term.

I would now like to turn the call over to Cesar. Cesar?

Thank you, Larry. Good morning, everyone. Revenues for the fourth quarter of 2005 grew 11.5% or 8.5 million, to 81.8 million from 73.3 million in the year-ago period. Net income for the quarter was $12.4 million, a 103% increase over the last year's net income of 6.1 million. Diluted earnings per share of $0.48 increased 78% over the last year's fourth quarter earnings per share of $0.27. Earnings per share include the charge of $0.01 respectively for both the fourth quarter of 2005 and 2004 related to stock compensation in accordance with SFASB Number123R share-based payment.

Revenue growth in the fourth quarter of 2005 could be attributed to the following. Approximately 4.9 million or 6.6% of the 11.5% growth is due to our acquisition of New England Technical Institute in January. In addition, tuition increases continued to range between 2 to 5% annually depending on the program.

For the fourth quarter of 2005 we reported operating income of 21.3 million, compared to operating income of 11.1 million for the prior year quarter. This led to an increase in our operating margin for the quarter from 15.1 to 26%. The increases in our operating income and operating margin for the quarter were driven primarily by decreases in educational services and facilities expense and selling and general administrative expenses as a percentage of revenue.

On an overall basis, educational services and facilities increased 5.5% to 30.4 million for the fourth quarter of 2005, compared to 28.8 million in the prior period. This increase was mainly attributable to facilities expenses which increased quarter over quarter, due to facility expansions at several campuses during the year, as well as rent in our new Queens, New York facility. The increase in educational services and facilities expenses is also attributable to increases in books and tools expenses to service student enrollment.

SG&A for the fourth quarter of 2005 decreased 3.3 million or 9.8%. A reduction in sales and marketing expenses for the quarter of 1.9 million from the prior quarter in 2004, represented 57.6% of the decrease. This reduction in sales and marketing expenses during the quarter, was due to our shifting more of our advertising dollars to the Internet, and the elimination of media buying in the fourth quarter during the holiday periods which have historically proved to be less productive.

Thus, while we continued media spend in the fourth quarter, in order to continue to drive student enrollments, we were more focused in our approach and refuse to continue to spend advertising dollars chasing starts. The remainder of the decrease in selling general and administrative expenses during the fourth quarter related to a decrease in administrative expenses of approximately 1.4 million due to lower levels of compensation and benefit expenses. SG&A represented 36.8% of revenues as compared to 45.5% on the prior quarter.

Our provision for income taxes in the fourth quarter of 2005 was 8.9 million or 41.8% of pretax income, compared to 4.3 million or 41.5% of pretax income for the fourth quarter of 2004. We continued to experience favorable trends in our day sales outstanding for the quarter ended December 31, 2005, our day sales outstanding were 15.7, compared to 16.1 for the quarter ended December 31, 2004. Our bad debt expense increased by 400 basis points from the fourth quarter of 2004 and as a percentage of revenue, was 3.8% for the fourth quarter of 2005 as compared to 3.4% in the prior quarter.

For the year ended December 31, 2005, our bad debt expense as a percentage of revenues was 3.7% compared to 3.5% in 2004. Our capital expenditures for the year ended December 31, 2005 were $22.6 million as compared to 23.8 million in the same period last year. The decrease in capital expenditures for the year is primarily attributable to the timing of the expenditures. We expect our capital expenditures to increase significantly in 2006 as we complete our expansion of the Grand Prairie, Texas, facility and expand other facilities to accommodate new program offerings.

Guidance. Finally, with respect to guidance, we are introducing our revenue and earnings per share guidance for the full year of 2006. Our guidance is based on current expectations. It is forward-looking and actual results may differ materially as a result of the factors outlined in our filings with the SEC. As we outlined in our press release earlier this morning, our guidance for the full-year is as follows. We expect revenue in the range of 340 to 345 million in 2006, and fully diluted EPS of $0.87 to $0.93, representing an EPS growth rate of 15 to 22%.

Before accounting for stock-based compensation expense of approximately $0.05 for fully dilutive share, the company expects EPS of $0.92 to $0.98. We are not providing specific guidance for the quarters. However, we believe that the 2006 earnings will follow the quarterly trends we saw in 2005 with improvement on a quarter to quarter basis. As a result, we would expect approximately 95% of our earnings to occur in the second half of 2006. We also expect margins to continue to improve by approximately 100 basis points per year.

Now, let me turn the call over to Dave.

Thanks, Cesar. Looking back at our performance in 2005, we were very pleased with all we accomplished. We executed against each of the growth initiatives we outlined in our IPO and took advantage of the flexibility of our business models to deliver profitable growth in what was a challenging environment for us in the industry. While we were not new to the public markets -- while we were new to the public markets in 2005, we certainly were not new to the education sector or operating during periods of slower growth. I think our experience showed.

We demonstrated that we will not chase starts with unwise advertising spending and as previously mentioned we recognized that it was time to pause to properly analyze the evolving media landscape and to adjust our practices accordingly. We also demonstrated our focus on managing our business carefully and making changes when necessary. We've always evaluated our cost structure, resources and program offerings not just on a school-to-school basis but on a classroom-to-classroom basis. As we evaluate programs in each of our schools, we will not hesitate to eliminate underperforming programs with low margins in order to open up capacity for more profitable programs.

In addition, we are always looking to diversify the program offerings available at our campuses. This is normal course of business for us at Lincoln, but as our results demonstrate the effects of these initiatives are more apparent from the market environment is more challenging. We have seen these periods of weakness in the industry in the past. They are temporary. And we know how to adjust accordingly.

Looking ahead, we like what we see. The initial results from our initiatives in 2005 are very encouraging, and we believe Lincoln will be a stronger company in 2006 as a result. We have a diverse portfolio, a good mix of startups, developing and mature properties spread across several geographic regions. In 2006 our Queens campus, our Euphoria acquisition, our online initiatives and our acquisition pipeline all represent future revenue and earnings growth drivers.

I'm particularly excited about a number of the new programs that we are currently beginning to replicate. We remain dedicated to our long-term approach to building value and we will continue to execute our strategy accordingly. We believe the steps we took in 2005 have put us in a much better position to execute and produce tangible results over the next 12 months. And we look forward to updating you on our progress.

And now at this point, we'd be happy to take your questions. Operator?

Thank you, sir.

[OPERATOR INSTRUCTIONS].

And the first question will come from the line of Sarah Gubbins with Merrill Lynch.

Hi. Thank you. Good morning.

Good morning, Sarah.

I'm hoping just to talk a little bit more about your expectations for 2006. And I'm wondering if you can start by giving us a sense for the revenue growth expectations. How much of that is organic whether or not that includes any acquisitions aside from Euphoria? And then if you can give us any sense of what you're expecting for enrollment growth, particularly coming from the existing campuses, that would be great.

Okay. Well, first of all, in terms of the revenue growth in 2006 over 2005, as you point out, Sarah, it does include Euphoria, which probably represents maybe 2% of the increase -- two points, I should say. Tuition increases typically are traditionally another 3 to 5% so the balance would represent same school growth, organic growth of 8 to 10%. It does not include any additional acquisitions that might occur in 2006.

I should point out that within that organic growth, we have several initiatives that I just talked about before certainly including the opening of the Queens campus and the ramp up there during the year as well as the online initiative so -- and of course, the replications of other programs to additional campuses. As far as the overall enrollment growth, you know, other than the Euphoria growth that we're basically on track there.

Okay. And then if I look at it throughout the year, with a decline of 2% in the fourth quarter in your enrollment, I guess I'm trying to understand how you then get to such positive enrollment growth. And I know a lot of that is coming from new initiatives. So any sense that you can give about what the underlying enrollment growth that you're assuming -- taking out Queens and some of the program expansions, would be helpful.

Well, let me just approach it this way. First of all, the decline -- the decline of the fourth quarter -- let me just speak to that a little bit. As we mentioned even back on the third quarter earnings call, we basically wanted to pause and take a much harder look at the mix between our TV spending and our web initiatives. And frankly, the TV spending through the first three quarters ran much higher than the same period in the prior year and for -- and the result in fewer starts.

Having recognized the fact that the web initiatives were certainly a very positive move, we wanted to basically spend some time and analyze the benefits of cutting back on TV advertising where we could and moving more of that toward the web initiatives. So while we may have suffered a little bit in the fourth quarter, I don't think it was really meaningful.

We built that into our -- we recognized that and we built our plan for 2006, and essentially the enrollment trends that we've been experiencing in January and February and carry into March are very encouraging and the Queens initiative that you talked about will certainly account for some of the growth but it's -- but the primary growth drivers will come from the same campuses last year. And namely smarter class starts in our quote-unquote "non-auto schools" where we in the past might have had smaller class starts, we'd now -- we're now going to perhaps eliminate some of the less profitable programs in favor of offering fewer programs and starting larger class starts.

Okay. Are there specific programs that you're thinking about eliminating?

Sarah, really, it -- it really varies by school. I mean, and I'm principally speaking about our -- the non-auto schools where we rolled out so many programs over the last three years in some markets, certain programs are much more beneficial and stronger than in other markets. Basically it comes down in some cases to nothing more than just competition.

Okay.

So we're -- I can't -- I wouldn't want to be specific. It'll vary by market but there are not a lot of programs. It's more a case of the frequency of class starts in those programs than it is eliminating them.

Okay. Great. And then just one last question. On the cost side, particularly within SG&A, can you talk about how much of the lower cost will translate going into 2006?

I think, Sarah, the answer to that is we adjusted our SG&A and our expenses across the board in 2005 to enrollment levels so I -- my response to that would be that -- we built SG&A and other expense levels into our 2006 plan to support the enrollment growth and revenue growth that we've shared with you in terms of our guidance. So I -- we will spend up and properly to the revenue projections.

Great. Thank you, very much.

You're welcome, Sarah.

[OPERATOR INSTRUCTIONS]

And your next question comes from the line of Howard Block with Banc of America Securities.

Good morning, everybody.

Hey, Howard, how are you?

I'm fine, thank you. I hope you're well. My questions probably start with Larry, I guess. You had mentioned in your comments that I guess your preference for I think the efficiency of Internet advertising was in part to blame for the enrollment shortfall in the quarter. I was wondering maybe if you could just revisit that and elaborate a bit.

Well, it really was not -- it didn't contribute to the shortfall. Basically we reduced our television advertising in the fourth quarter of the year to find that sweet spot which we believe we accomplished. And that's carrying into '06 as well. Quite frankly, we increased the Internet spend which was really not a material number, but our results increased substantially in terms of Internet starts in the fourth quarter, compared to the fourth quarter of '04. So it wasn't -- the Internet was not to blame for the shortfall in the quarter. In fact, it mitigated to some degree the short -- the shortfall that might have occurred otherwise because it grew so nicely.

Okay. So in the fourth quarter it sounds like you're still trying to -- or were working on perhaps approaching the ideal mix of media to generate the leads, so that you did cut TV which may have hurt population results and you did increase Internet which is helping but maybe not enough to compensate for declines from TV?

In that quarter, you are right on.

That's correct.

And you are right on.

Okay. And so can you quantify either in terms of dollars or some other metric the return on investment that you mentioned that's favorable for the Internet relative to TV? Cost per start or anything like that?

It's a substantial -- it's substantially favorable to television in terms -- in the cost per start basis.

And just to follow up on that, I mean the extent to which we can continue to reduce TV spending in favor of web initiatives we will.

Okay. But you can't give us a -- an order of magnitude --?

It's a very favorable relationship but --

Okay. And then --

It would vary by market, Howard.

Is CUnet acting as sort of an agent for you in terms of your lead vendors and what you're buying from them for Internet?

Yes. Yes, they are.

And do they get paid based on how much you spend on the Internet and -- so would they be advising you to lower your TV spend in order to sort of boost their own revenue?

Well, we've never had those discussions with them --

Yes, we really don't -- that's independent of our decisions on TV. I mean, we basically look at each market and we balance out between the effectiveness of TV spend in that market relative to what we can do with web initiatives. The extent to which we can move the mix toward web initiatives and cut back on TV, that's exactly what we do.

Okay. So they're not sort of a media agent for overall media, it's just for around Internet?

That's correct.

Correct.

Okay. And then the school in Maryland -- the culinary program -- it sounds exciting but I imagine it's somewhat expensive to build out. What -- and then that regard, what will the CapEx guidance be I guess for '06?

CapEx for '06 should be about 13 to 15% of revenues.

13 to 15% of revenue?

That's correct.

Okay. And any sense of how -- what percentage of that or what proportions are -- maintenance versus growth?

Usually we are -- all of our CapEx we try to limit the maintenance to about 4% of the year. The rest all represents growth initiatives.

Okay. And then the last question, and I'll actually jump back into the queue is, any campuses that you're targeting for some of the electrical programs that you know are quite bullish about and have written about extensively?

Yes, absolutely. Well, as you know, we -- with the acquisition of New England Technical Institute we acquired the electrical program. We're putting that into the Grand Prairie, Texas campus which will open in the third quarter. We will be putting that and perhaps other skill trade programs into the Denver auto diesel college campus as well as Philadelphia when that opens in 2007. And I just would point out, Howard, that we also will be looking to -- at additional skill trades programs that we can build and install in some of our campuses going forward.

Great. Thank you, very much.

You're welcome.

[OPERATOR INSTRUCTIONS].

Your next question comes from the line of [Glen Sussman] with [SC Advisors].

Good morning. I have a couple of questions. Did the reduced ad spending in the fourth quarter impact leads in the first quarter?

No. No, it did not. In the first quarter of '06?

Correct.

No. No it didn't. The reduced spend in the fourth quarter of '05 was just that. And as we pointed out earlier, while we cut back on TV spending, which is why the dollar amount is what it is, the web initiatives -- we went forward with those as well. But going into '06, our lead flow inquiries from TV and the balancing of TV with web initiatives has been very favorable for us.

Okay. And then the degree students at 14,2%, I think that's down sequentially it was 15% in the prior -- in the third quarter?

Yes, you're absolutely right. It is down slightly. That's just the impact of the effect of the seasonal change in the overall population.

Okay. And you talked about expecting that to increase as a percentage in '06 --

I did.

-- and will we see that -- I don't know the first and second quarter trends. Should that be jumping up nicely?

No. I wouldn't say it'll jump up materially in the first two quarters, but you'll see it increase in the second half of the year.

Okay. Thank you.

You're welcome.

Your next question comes from the line of Brian McGuire with Lehman Brothers.

Hi everyone, this is Brian in for Gary Bisbee.

Hi, Brian, how you doing?

Good. Congratulations on the quarter.

Thank you.

Thank you.

I just wanted to ask about the Euphoria acquisition -- it seemed a bit of a departure from your traditional program offerings and I was wondering the -- one to two acquisitions you're looking at for '06, will those also be kind of new -- differentiated from your existing program offerings or are they going to be more complimentary?

No, they'll -- well, I would -- first, I'd point out that I think Euphoria was a strategic acquisition in the standpoint that it represents an opportunity for us to continue to build and combine that with our massage therapy programs and replicate that at other campuses and create the new vertical which also will no doubt include culinary in as well. But -- so I think -- having responded to that, in terms of the acquisitions that we're currently looking at, they -- using your term, they will be more complimentary to our current program offerings.

Okay. Thanks for the color.

You're welcome.

And then regarding more organic growth, could you talk a little bit about how the starts are -- leads are looking for the Queens campus and are you already enrolling students there? And just how that's going.

Okay. Let me address. No we are not already enrolling students there. We really can't until we get the final quote-unquote "piece of paper" from the State Department of Education which we hope to have any day now. In terms of the interest level however, it's extremely high. We've had for months now people that -- well, let me just back up and first of all tell all of you that the Queens facility -- the Queens campus is ready for students.

It's completely equipped, staffed and it's a very, very handsome facility. So the day we get the approval, we'll be able to begin enrollment. Having said that, we've been touring families and their sons and there's a high degree of interest and we're very, very excited about our ability to be able to enroll students and start them within 30 days of our approval.

Okay. Thanks.

You're welcome.

And then just on the Philadelphia expansion. Could you talk a little bit more about the delay there and what your plans are? You mentioned that there would be 6 to 9 months delay so are you looking at different sites in the Philadelphia area that are more --

Yes.

-- that are zoned already?

Well, basically, let me tell you what happened with the current site. I mean, we worked with the City of Philadelphia for a long period of time trying to get the zoning -- the appropriate zoning approval. And while we might even be able to continue to -- to attempt to gain that, it could be another six, nine months or beyond that, so we basically elected to move on.

We are looking at other sites in the Philadelphia market and actually have identified potentially a couple of locations. So in terms of the delay, our original plan was to open the new Philadelphia campus at the beginning of '07, so we're -- we now would estimate that that would be six to nine months later. And could even be a built-to-suit that would meet that timetable for us.

Okay. Great. Thanks for the comments. I'll jump back in the queue.

You're welcome.

And you have a follow up question from the line of Howard Block with Banc of America Securities.

Hi guys, sorry. It's Jason. Howard just had to jump onto the Apollo pre-announcement call.

Oh, Okay.

So a couple of quick follow-ups for you guys.

Well, I guess we understand.

You know, with regard to the online initiative, have you guys started enrolling students for that and will you be ramping up online only admissions counselors or will the current enrollment advisors handle queries for the program?

We have -- what we have right now are degree completers in the program. The 100% online launch is scheduled for the second quarter, probably in the May to June timeframe. And that initiative will be handled by a separate admissions staff.

Okay.

And we're -- you know, we're very excited about that. And I think that's going to be a great initiative for us going forward.

Okay. But no enrollments as of yet?

No enrollments as of yet, that's right.

Okay. And how about for Grand Prairie -- have you -- you know, sort of the same deal? No enrollments yet but --?

Just to clarify your -- the point there, what we're doing there is we've purchased a 101,000-square-foot facility, construction on that started a couple of weeks ago. That will be ready in the third quarter. We will -- third quarter of this year. We will transfer our current student body over to that school, add additional programs, retrofit the original -- the existing facility and then have capacity for roughly 2,400 students in total. So it's not a question of not being able to enroll. It's more a case of -- in fact, we have -- we are -- with a high school admissions force, we're actually enrolling for that campus for the summer at this point.

Okay. Great. Now with respect to the warm transfer, is -- are all the schools on that now and has that meaningfully affected conversion rates?

Yes. All the schools but just -- all but two basically. So the lion's share of the schools are on warm transfer and yes, it has really enhanced the ability for the individual schools and the admissions staff to be able to spend time on what they do well and that's enrolling and interviewing prospective students. So, yes --.

Okay. Great. I know you mentioned in the past, you're seeing intense competition for allied health. I think in your last call you mentioned there were low barriers of entry in the vertical. Is this just from for-profits or also from community colleges? Just maybe a bit more on that?

Well, I guess it depends. You know, in a particular market it could be from a community college as well. But I think our approach in the allied health -- in our allied health schools or schools that principally offer allied health at this point will be to as I said earlier -- to look at the individual program offerings, potentially either eliminate one or two programs that may not be performing as well as others, change the -- maybe change the frequency of the class starts in some cases. And which will also give us additional capacity for the new programs that we will be rolling out.

And finally, I think what's important in some of the -- in our allied health schools is really to add programs such as we had in our New England Technical Institute where we have the licensed practical nursing program which is an extremely successful program for them. And as I mentioned earlier in my comments, we're evaluating additional campuses to potentially add that in the future. Which I think is a differentiator in terms of allied health programs versus competition.

Great. Just a few more quick ones if I can. Can you give an update on the Union negotiations that Nashville Auto Diesel College and maybe --

The college --

-- when you expect to reach an agreement on that.

Yes, the contract was signed in -- at the end of -- mid-November, Larry?

Yes. [inaudible] quite a while and it's been ratified and signed.

Okay. Great. And last quarter you mentioned certain geographic areas experiencing a little weaker organic growth. Is that still the case this quarter and maybe just -- how's capacity utilization across the school division?

Well, I think you -- I think what you're referring to is maybe some of the challenges that we had in particular media markets. And I would say to you today that based on all the initiatives that we put in place in the second half of 2005 along with rationalizing the TV spend in those particular markets and balancing that out with the web initiatives, that I'm happy to say is not an issue today for us.

So your answer -- your question in terms of capacity, if you look at some of our markets, particularly the non-auto schools. I mean, we struggled for part of -- if not all of -- you know, for the balance of -- better part of 2005 and 2006 given our confidence level in our advertising and spending at this point we feel very good this will be a year basically we would get the enrollment back that we lost in 2005 and go forward from there.

Great. And just one last one. I don't know if you can comment but how is attrition in the quarter and with respect to prior periods?

Favorable.

Favorable?

Favorable.

Yes.

Great. Well, thanks a lot, guys.

You're welcome.

You're welcome.

We now have a follow up question from the line of Brian McGuire with Lehman Brothers.

Hi guys. Just a quick one. I was wondering if you could provide us with the share count in the quarter and also what share count estimate you're using for the '06 guidance?

Cesar?

Sure, the share count in the quarter fully diluted was about 26 million. 25 million 980. And the share count for the share guidance is roughly -- give me one second -- it's about 26 million -- about 26 million 100,000.

Okay. Great. Thanks a lot.

Ladies and gentlemen, that concludes the question and answer portion of today's call. I will now turn the presentation back over to management for closing remarks.

Okay, well, thank you very much. Thanks everyone for joining the call today. As I think you can tell by our comments and -- we're very excited about 2006. I've been in this industry, working in this for 25, 30 years and we've been through periods like this before. Larry feels the same way -- we're sort of pleased that 2005 is history and we're very excited about 2006. So thanks for joining the call and we look forward to seeing you and talk -- bringing you up to date in the future. Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.