Lincoln Educational Services Corp (LINC) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the First Quarter 2006 Lincoln Educational Services Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

And I would now like to turn the call over to Mr. David Carney, Chairman and CEO of Lincoln Educational Services. Please go ahead, Mr. Carney.

Thank you, Operator. Good morning, everyone, and welcome to the Lincoln Educational Services First Quarter Earnings Conference Call. I’m joined here by Larry Brown, our President and Chief Operating Officer; as well as, Cesar Ribeiro, our Chief Financial Officer.

On today’s call, I will provide a brief overview of our results as well as comment on recent developments; and our progress in implementing our business plan. Larry will then provide an update on recent enrollment and marketing trends, and finally, Caesar will provide a more detailed review of our financial results of the first quarter of 2006.

Now, turning to financial and operating results: During the first quarter, we generated record revenues of 75.5 million, a 6.6% increase over last year’s first quarter. In addition, operating income increased by 88% to 4.7 million, while net income for the first quarter was 2.8 million or $0.11 per diluted share verses $0.03 for the first quarter 2005.

Average enrollment for the first quarter of 2006, when you include our acquisition of Euphoria in December of 2005, essentially equal the quarter a year ago. While on a same-school basis we began the year with fewer students than last year, our first quarter new student enrollment approximates last years as we are beginning to see the positive results of our initiatives implemented in the second half of 2005. As in prior earnings call, I would like to report on our progress with respect to a number of the 2006 growth initiatives which we outlined in our fourth quarter and year-end 2005 Earnings Release.

Now turning to acquisitions, first at the close of the first quarter, we announced that we had entered into a definitive agreement to acquire the New England Institute of Technology at Palm Beach for approximately $35 million in cash, plus the assumption of the $7.2 million mortgage.

Through this highly complementary transaction, we will increase our geographic footprint and enter one of the nation’s fastest growing markets. New England Institute of Technology is the oldest and largest proprietary career college in Palm Beach County currently serving over 1,100 students through two divisions; New England Tech and the Florida Culinary Institute.

Their two campuses include premier real estate assets consisting of four buildings totaling 115,000 sq. ft. on 14.5 acres. New England Tech’s program curriculum includes Bachelors degree, Associates degree, and diploma programs in each of our verticals--culinary and spa services, automotive technology, skilled trades, health sciences, and business and IT.

I should note that the bachelor degree program will be the first for the Company; with our second campus, Lincoln Technical Institute, Columbia Maryland, expecting bachelor degree approval within the next year. In 2005, New England Tech generated revenues of approximately $19 million. The Institutions job placement rate exceeds 85% and more than 25% of their enrollment is generated by student referrals.

We remain on tract to complete the transaction in the second Quarter of 2006, as we bring our marketing, operating, and management resources into the fold, we believe we have a very attractive opportunity to build on New England Tech’s strong foundation, and develop a major destination school for several of our program offerings, including skilled trades, automotive, and culinary.

Now, I should note that we plan to rebrand New England Tech as Lincoln College of Technology. New England Tech will essentially serve as the kick-off in our broader rebranding strategy. In our drive to become a nationally known leading provider of quality post-secondary education, we see the need to consolidate several of our brands in order to project more cost effectively, a stronger image to our customers.

By focusing our financial and human resources into a few selected brands, we will be more successful in growing our business. Moreover, our online branding strategy will support and enable our online branding strategy to be more successful. In states where we offer degree granting, and the use of college is permitted, we will brand the school Lincoln College of Technology. Otherwise, we will use Lincoln Technical Institute. And we would expect to complete this process by the end of 2007.

Now let me turn to our new Queens startup. During the first quarter, we formally opened our new facility, and currently have an enrollment of 115 students. As a reminder, we lease 48,000 sq. ft. of a new 90,000 sq. ft. center for automotive education and training in Queens, from the Greater New York Automotive Dealers Association.

The campus has the capacity to instruct approximately 800 Lincoln Tech students. That is our 9th Lincoln Tech campus, and 35th campus overall. As we have previously discussed, this is really a very special and promising opportunity, given our relationship with the Greater New York Automotive Dealers Association.

The Association represents more that 650 dealers in the New York City region, which represents a direct pipeline into a large pool of potential dealership employers. This connection, combined with the fact that it is a state-of-the-art facility with an excellent teaching staff, should lead to exceptional job placement rates for graduating students, and a positive cycle of referrals that will reinforce the value of our programs.

With regard to expansions, late in 2005 we obtained options on an additional 20,000 sq. ft. of space at our New England Technical Institute in Connecticut, our January 2005 acquisition. Enrollment continues to be robust at that school, and this additional space will accommodate growth of existing programs and allow us to launch new offerings as well.

I should note that construction is also well underway on our new 101,000 sq. ft. facility in Grand Prairie, Texas; and, we expect this facility to open late in the second Quarter, and be able to begin receiving students in early third Quarter. The new facility combined with the existing school will be able to serve approximately 2,400 students and allow us to further diversify our program offerings.

Now on our last call, we indicated that our plan to expand our Philadelphia auto school had been delayed due to our inability to obtain the necessary zoning approvals. We continue our search for a suitable location and have a number of possibilities that are currently under review. With respect to our Denver Automotive and Diesel College expansion, we have identified several facilities, any one of which would be ready for occupancy during the first half of 2007. So, with this additional capacity we will further diversify our offering and we will add skilled trade and a collision repair program.

In addition to recent acquisitions and school expansions, we continue 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. As we previously communicated, we continue to monitor and evaluate the performance of our current program offerings with the goal of maximizing capacity at our facilities. In 2006, we will eliminate some of our weaker program offerings in selected markets, and we’ll replace them with programs that are fueling greater demand.

This is an on-going effort, and some programs perform differently from market to market. However, we manage our facilities on a classroom by classroom basis so we have the insight and flexibility to make changes as needed with an eye toward optimizing performance. We remain on track to replicate programs that we acquired from New England Technical Institute in Connecticut, including culinary and electrical. Our Columbia, Maryland, New England Technical Institute campus will be the first to offer the culinary program in late 2006, or at the latest, early next year. We are also looking to replicate the electrical program and both our Grand Prairie, Texas and Denver campuses.

With respect to our late 2005 acquisition of Euphoria, we are working on replicating their programs at several other campuses, including two schools in 2006. These programs will further diversify our offerings and incase our growth potential. We also continue to make progress in expanding our Associate degree offerings. And, we’ll roll out additional new programs in 2006. We now have approval to offer Associate degrees at 17 of our campuses, bringing the total enrollment to 14% as of March 31, 2006 verses 10.5% as of March 31, 2005. We expect our degree programs to have a meaningful contribution to our growth in 2006 and beyond.

Finally, let me turn to where we stand on our online offerings. As I indicated during our last call, we begin offering our online degree completion program in Health Sciences and Business in the fourth quarter of 2005. And we began to get [subtraction] during the first quarter of 2006. now to create awareness in the diploma-only schools, we have a dedicated staff that is working with students to transfer from diploma graduation to Associate degree start.

Accordingly, we expect the enrollment to grow during 2006, as additional diploma-only school grads begin their online courses. The launch of our initial 100% online program, or pure online program, is on track and is scheduled for June, with two additional programs later in the year. In terms of marketing, we are capitalizing on what is proving successful for our [inaudible] initiatives over the last two quarters using the expansive online internet strategy. And, we certainly look forward to updating you on our progress with our online initiative during our next conference call.

I have one regulatory matter that I’d like to bring to your attention. The Massachusetts Department of Education has raised some concerns regarding certain instructor approvals at our CEI [Brockton] campus. Our Brockton campus is small school of about 9,000 sq. ft. and represents less than 1.5% of our annual revenues.

Based on discussions, to date, we don’t expect a resolution of this matter to have a material financial impact. Nevertheless, we take these concerns very seriously and are working closely with the Department to assure them that their concerns are being resolved. We remain committed to the Brockton market, and we will continue our search for a larger facility which will enable us to expand our product offerings.

Now let me turn the call over to Larry, who will provide more color on our student enrollment levels, as well as, our marketing initiatives. Larry?

Thanks, Dave. And, good morning, everyone. For the first quarter, our average student enrollment was essentially equal to the 2005 first quarter, including the impact of Euphoria Institute. On an organic basis, our average student enrollment declined 1.6%; however, as Dave noted, we begin 2006 with fewer student than in 2005. While the environment remains challenging we are beginning to see the initial benefits of the various programs we put in place during the past year, to reignite our enrollment ground, an promote efficiencies in how we go about generating leads.

The new method we are implementing to drive student enrollment will take some time to bear fruit, but we see continual progress. A dramatic indicator of that progress is that during the first quarter web-based leads increased by 60% over the prior year. In fact, our first quarter 2006 is the first quarter in the Company’s history where our internet starts exceeded our TV starts. And just as important, these starts were significantly more economical than our TV driven student starts.

On a same-school basis, our first quarter starts in 2006 were essentially to those in 2005--reversing the trends experienced in the second half of 2005. As we discussed on our last call, we have decided to increase our investments in the internet arena, where we are experiencing a higher return of investment. Instead of spending incremental advertising dollars on TV spots, so essentially chasing starts, we have reduced our TV spend year-over-year and are now marketing in a much more efficient and effective manner.

In addition to training our staff, we are dedicated to improving our marketing practices and capabilities through the use of various technologies. Our warm-transfer program is off to a very good start, and we are on track to begin using predictive dialing at numerous campuses beginning in the current quarter.

This will allow our admissions representatives to spend their telephone time more efficiently, and during the third Quarter we will install a centralized information database that will link all of our campuses and our various data systems. This infrastructure will allow us to better organize and analyze key marketing related information and enhance our interaction with our prospective students.

In summary, we are gradually reaping the benefits of the new marketing programs we put in place last year. And, we are pleased with the trends we are seeing in the current quarter. We remain flexible in our strategy and will continue to make adjustments and adapt with the market in a prudent and cost effective way. We will not, however, sacrifice profits to pursue inefficient channels in the short term. Profitable growth is our mandate, and we are very comfortable with the steps we are taking to support a return to organic enrollment growth in 2006.

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

Thank you, Larry. Our revenues increased by $4.6 million, or 6.6% to $75.5 million in the first quarter of 2006; from $70.9 million to the comparable period in 2005. Of this increase, approximately$1.4 million or 2.1% was attributable to our acquisition of Euphoria Institute on December 1, 2005, while the remainder of the increase was due to tuition increases, which ranged between 2% and 5% annually depending on the program.

Our operating income for the quarter was $4.7 million, which represented an 88.3% increase compared to the first quarter of 2005. The improvement in operating income, [is just] operating efficiencies, as well as, to the leverage that we are able to obtain from our cost structure as we grow our revenues. On an overall basis, our educational services and facilities expenses increased by $3 million, or 10.5% to $32.1 million in the first quarter of 2006 from $29.1 million in the first quarter of 2005.

Our acquisition of Euphoria accounted for 3% or $900,000 of this increase. Instructional expenses increased by 4.6% over the comparable period in 2005 primarily due to increases in compensation and benefits. Books and tool expenses increased 20% over the first quarter 2005, primarily due to the timing of class starts as compared to prior year. The remainder of the increase in educational services and facilities expenses was primarily due to the facilities expenses which increased $900,000 for the year.

Educational services and facilities expenses as a percentage of revenue increased to 42.6% of revenues from the first quarter to 2006 from 41% for the first quarter of 2005. Selling, general, and administrative expenses for the quarter were $38.7 million, a decrease of $600,000 or 1.6% from $39.3 million in the first quarter of 2005.

Included in selling, general, and administrative expenses for the three months ended March 31, 2006 is approximately $400,000 attributable to our acquisition of Euphoria in December 2005. This decrease in selling, general and administrative expenses is primarily due to a $600,000 or 3.4% decrease in sales and marketing expenses, as a result of efficiencies gained through the better utilization of technology and due to as shift in advertising from television to Internet, which is more cost effective--

And, $400,000 or 1.9% decrease in administrative cost primarily due to decreased expenses associated with the timing and the efficiencies gained from the roll-out of our new student software and management reporting systems at some of our schools during the first quarter of 2006. As a result of the above, our operating margins for the first quarter of 2006 increased to 6.2% from 3.5% in the first quarter of 2005. Net income for the first quarter of 2006 was $2.8 million, or $0.11 per diluted share, as compared to $800,000 or $0.3 per diluted share for the comparable period in 2005.

Earning per share includes a charge of $0.01 per share for the first quarter of 2006 and 2005 respectively, resulting from our use of the fair value method of accounting for stock based compensation as prescribed by Statement of Financial Accounting Standards No. 123R "Share-Based Payment." Our bad-debt expense increased by 100 basis points, for the first quarter of 2006 from the first quarter of 2005. And as a percentage of revenue, was 4.2% as compared to 3.2% in the first quarter of 2005.

Some of the increase in bad-debt expense for the quarter, as compared to the first quarter 2005, can be attributable to the Company’s loan recourse agreement with Sally-Mae to provide private recourse loans to qualifying students. Under the recourse agreement, we are required to fund 30% off all loans disbursed into a Sally-Mae reserve account. We establish an allowance for 100% of this deposit. As of March 31, 2006, we have disbursed $3.3 million under this agreement to qualifying students.

As of March 31, 2006, we had $41.4 million in cash and cash equivalents, compared to $50.3 million as of December 31, 2005. We continue to experience favorable trends in our [day] sales outstanding for the first quarter of 2006 our day sales outstanding were 15.1 compared to 16.3 in 2005. As of March 31, 2006, our stockholder’s equity was $139.4 million compared to $136 million as of December 31, 2005, with a change resulting primarily from net income from the period and stock-based compensation expense.

Finally, with respect to guidance, we are reaffirming our guidance of revenue growth of approximately 15% in 2006, an EPS of $0.87 to $0.93 representing an EPS growth rate of 15-22%. Before accounting for stock-based compensation expense of approximately $0.05 per full-diluted share, the company expects EPS of $0.92 to $0.98. 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.

Now, let me turn the call over to Dave.

Thanks, Cesar. In summary, we continue to execute on a very robust multi-pronged plan to increase the growth potential of our Company over the long term. We have a flexible business model that has allowed us to continue to deliver profitable growth and improve margins. We are committed to further developing and refining our new marketing strategies with a goal of reigniting our organic enrollment growth and further increasing efficiencies across our company.

We will also continue to pursue acquisitions where we believe we can expand our student enrollment and drive returns for our shareholders. And, we will continue to pursue a host of initiatives from new program development and replication to the development of our online and degree-granting programs. Looking ahead, we’re pleased with the current trends we’re seeing. The initial results from our marketing initiative are taking hold, and we believe Lincoln will be increasingly stronger and a more competitive company as a result.

We have a diverse portfolio, including an attractive mix of start-ups, developing, and mature properties spread across several geographic regions. In 2006, we’re particularly excited about the development of our Queens campus, integration of Euphoria, the acquisition of New England Tech in Florida and our expanding online initiatives. We remain dedicated to our long-term approach to building value; and we remain steadfast in executing our strategy; and we look forward to updating you on our progress.

Now, at this point, I’d be happy to take your questions. Operator?

Thank you, sir.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Sara Gubins with Merrill Lynch. You may proceed.

Hi. Good morning.

Good morning, Sara.

A question on the enrollment trends, it starts basically flat on a year-over-year basis, but organic enrollment, excluding the acquisition was down. I’m wondering whether or not that was due to the timing of starts in the quarter, or if persistence rates were down in the first quarter.

Well. Let me see if I can address it this way, Sara. First of all, the enrollments on the same-school basis, as you point out, are flat. I don’t necessarily think it’s timing within the first quarter. But, I think more importantly, we are seeing the benefit of a much more effective advertising campaign between the internet and TV. And the [lead] flow is favorable, the enrollments are favorable and at this point, I think the one remaining piece we need to work harder on would be the conversion rate from enrollment to start. I don’t think in really has anything to do with persistence rates or anything.

Okay. So you didn’t see a decline in persistence rates in the quarter?

They’re actually favorable

Yes. They’re favorable, Sara.

Okay. Just a follow-up regarding costs, given the trend that we saw in the first quarter with SG&A, would you expect [inaudible] cost actually to be down year over year a dollar basis, and within that, what are you thinking about in terms of marketing, and then how much of the decline on a year over year basis was related to timing that was mentioned in the press release regarding administrative expenses?

No, Sara. We would not expect SG&A costs to be down year over year. Marketing cost, I think we have said before, sales and marketing, we budget at 20% of revenues. We have been experiencing favorable variations in our marketing costs, just as a result of the shift of the TV to internet which is a more cost effective lead. And, that’s really the reason for the decrease in marketing and sales in the first quarter is that we were still getting the leads and we’re spending less. Thus, we had a favorable cost per start in the first quarter compared to the first quarter of last year.

Okay. So, I guess I’m wondering if given the trend that you’re seeing in terms of moving marketing [inaudible] to the internet, and seeing that trending favorably, I’m wondering if you think you’d be able to actually spend less in marketing and advertising during the course of the year than last year as you’re making that shift.

That’s possible, Sara. But, I think at the moment we’re watching it very closely. I think it’s safe to say that we’re still spending a significant amount on TV; but, we have been able to reduce it in favor of the web initiatives, in many cases. And as a result, have an overall benefit from a cost per start point of view. We made the assumption, at the moment, that we’ll continue basically at the same rate for the balance of the year in terms of the mix. Larry, you want to add anything to that?

As the opportunities, present themselves, Sara; we intend to spend less on TV and more on the internet. It varies by market. But overall, I would say that our spending, at least as we sit here today, probably will be as we predicted it would go over the course of the year.

Okay, great. And then, just lastly, on the timing of that administrative expense, is that [inaudible] shift into the second quarter?

The timing of the administrative expenses, as far as the roll-out of the student management system?

Yes.

No. What happens, Sara, is that--I think as you know, we started last year rolling out a campus view, which is our new student management system. And, as we continued the roll-out, we obtained a lot of efficiencies--not only in the use of the software, but also we’ve learned as we’ve gone, that we’re rolling them out a lot more efficiently than we did in the first quarter.

Alright. It’s not that there was something that you expected to spend in the first quarter, that’s getting shifted to the second.

That is correct.

Okay, Great. Thanks. [I’ll get back with you.]

You next question comes from the line of Howard Block with Banc of America Securities. You may proceed.

Unidentified Audience Member Hi, Guys. It’s [Jason] for Howard.

Hi, Jason. How are you doing?

Good. Good. A quick question about the leads, you mentioned that they increased by 60%--just a [function] or just buying more? Was there anything that you changed in terms of how you generated those leads?

Jason, those leads are a reflection of our website, as well as our web initiative—our pay-per-lead program. And, the answer is that both have gained. We’ve been able to increase the leads so that they’re going to our website, as well as, acquiring more pay-per-lead basis.

Alright. And, a quick question back on persistence, are you noticing any difference between an internet lead verses one of you traditional leads in terms of the persistence rates you’re seeing?

No.

Okay, thanks. On to Euphoria, is Euphoria profitable?

Yes, it is.

Would you be willing to disclosed how much of the quarter’s profit was attributable to--

It’s negligible compared to the quarter profits, Jason.

Okay. And that would be—should we expect that to be comparable through fiscal ’06?

In relation to the total profitability, yes.

Okay, great. And, you mentioned that the books and tools expense increased due to the timing of starts compared to the prior year. I was wondering, if we excluded the timing issue, what would the expense margin have been?

The expenses would have been a lot less. Basically, we recognize expense when we hand out the books and tools to students, so many days after star--30- to 60 days. So, the increase in that expense is just the result of timing between one year verses the other year. This year we handed out books and tools during this quarter. If you take a look at the annual expense it wouldn’t change. It just when we actually give out those books and tools to the students [inaudible] expense.

I guess what I’m getting at is, we appreciate the additional insight for [inaudible] within the [EPS] line; I was just wondering if you could offer maybe the margin contribution as percent of revenue for instructional expenses, books and tools, and [inaudible].

We really don’t disclose that Jason. I think we disclose total educational services and facilities as well as total selling, general, and administrative expenses; and we do give you the reasons within our MD&A, Management, [inaudible], and Analysis as to why the increases or decreases within those specific components.

Okay. Alright. One last question, and them I’ll jump back into the queue. You spoke a little bit on the call earlier, as well as last quarter, about maybe eliminating some programs in 2006 that weren’t as profitable. Have you eliminated any thus far, or are there any that you can mention--any color you can offer on that?

Yes. We’ve eliminated at selected campuses certain allied health programs to free up capacity and optimize class sizes in the other programs.

And Jason, on that note, it really varies on a school by school basis, even within the same markets. So, we have cluster schools where it’s more successful in one school than the other. This is really a school by school decision, and I don’t think you can say that across our Company we’ve identified any one program of study that we’ve eliminated.

It is a regional thing? Is it maybe a cluster of school in one region that—

No. No. It can vary [inaudible] people in the same market, in terms of their recruitment for that particular program. So, we make those decisions, as Dave said earlier, on a very particular basis with regard to the school where we’re having the negative effect. And, similarly, where it’s really working well, we attempt to work to enhance the number of new students that go into that program.

Alright, great. Thanks a lot.

You’re welcome.

Your next question comes from the line of Gary Bisbee with Lehman Brothers. You may proceed.

Good morning, Gentlemen. It’s [inaudible] standing in for Gary Bisbee.

Good morning. How are you?

Very good, thanks. The first question would be in regards to you 100% online initiative, which is still on tract for the second quarter; I ‘m wondering if you started marketing for this program, and if so what sort of response [inaudible] have you been getting so far?

Great question. That’s why I said in the call that, I look forward to updating you on our next call. The class start is scheduled for June 26th and we’re just beginning the marketing this week for that class start. So, I really can’t give you a whole lot more than, "stay tuned." But, we’re really excited about the opportunity.

Okay, great. And, just as a follow-up--different topic--you mentioned that Euphoria is added at two of your schools; I was wondering what the outlook is for adding key components of that program to the rest of your schools at the moment.

We’ve made a decision--we’ve selected two locations to introduce the Euphoria programs, and they’ll sit along side of existing schools in two markets. At this point, and as we go forward, that is slated for 2006; and, we are at this point, evaluating opportunities for two or three additional campuses over the next 18 months.

Okay, great. And, just one last question before I get back in the queue; I understand that you haven’t closed yet, but I was wondering if you could comment on enrollment trends at New England Institute of Technology given some of the problems [of] competitors with experience in the Florida market.

You’re right. We haven’t closed yet. Although we’ve done due diligence and we’re in contact and they’ve kept us up to speed in terms of enrollment buildup for the next class start—and I think if varies a little bit by program for them; but I think over all your question is probably geared more toward Florida, hurricanes, and some of the things that have troubled other companies. They don’t feel that that’s really impacting them at this point. They have a build-up which would at least approximate or equal where they were a year ago, if not, maybe slightly better.

Alright. Thanks for the call.

Your next question comes from the line of Avram Fisher of Harris Nesbitt. You may proceed.

Hi. Good morning. This is Avram.

Good morning, [inaudible].

I have a quick question on the ES&F line. It looks like the acquisitions, and books and tools—those are more kind of one-time items,--is that right? I mean, book and tools, is that sort of a big expense in one quarter and then it levels off?

Did you get that?

I’m sorry. We--

Could you repeat that?

Sure, I’m sorry about that. It sounds like on the ESF line, you have acquisition, and books and tools contributing to the increase. I’m wondering if--acquisitions are obviously a one-time item--are books and tools a once a year, like a big—

No. That’s not. Basically, what we do is when we [inaudible] by line item. We always back-out our acquisition so that we’re giving you the apples. So, for example, we bought Euphoria. We’ll give you what the total cost of Educational Services and Facility for Euphoria, and then we talk about the same-school business and where the increases and decreases were.

As far as to question #2; no. Books and tools happen throughout the year. We have start classes every month and the students get books and tools within a certain time after they start, but that’s a continuous factor. However, the shift in expense, it has somewhat to do with class starts. If you hand out books and tools, let’s say, 30 days after student start, and in the prior year you had a class that started a little bit earlier, that expense might have hit December ’05, verse January ’06.

Have you disclosed, or could you disclose how many starts there were this—

No. We do not disclose starts.

Following on that, do you expect a better [leverage] the ES&F line for the remainder of the year. [Inaudible] increase in the percent of revenues this year—in this quarter year over year? Do you still expect to see better leverage going forward?

We would expect the leverage to remain. If you recall, we hire up ahead. I think we said this before, we’re very seasonal. A lot of our costs come in way ahead of our students. So as we get past the second quarter, we would expect that some of those costs would level off.

Okay, thank you. On the Mass. Department of Education situation, what kind of resolution do you expect, if you can give a little more color on the--

I’d like to but we’re actually in discussion with them at the moment. The only thing that I will say is that we take anything like this extremely seriously. But, saying anything further than that, right now since we’re in discussion, wouldn’t be appropriate. As we reach resolution, we will certainly keep you up to speed and cover it on the next call. That’s for sure.

Okay. And one other quick question, you’ve been leveraging the marketing expense line well, generating at least flat starts on declining selling and marketing costs; how long do you expect that to continue before you start ramping up the spending again? Thanks very much.

To the extent that we can continue to spend less on television and more on the internet, we expect this will have a very favorable effect on or cost per start and our overall expenses in marketing. And so, the answer is that it’s a school by school decision, the extents by which we can acquire more leads over the internet and reduce our TV spend; we intend to do that.

I’d like to add something in general to that. For those of you who listened to our fourth quarter call, and so on, and listened to us describe our initiative in terms of moving away from TV, because frankly it has been extremely expensive each quarter last year, and we got to the point where we were "chasing starts;" and that certainly didn’t look like a productive thing to do going forward.

So, as a result, we sort of paused in the fourth quarter, implemented and refined, the web initiatives backed off a little bit on TV, and as a result we’ve come out of--we’ve started 2006 a lot stronger from the standpoint of our ability to tweak, if you will, TV spending verses the web initiatives. We feel good about it. While the starts are flat, or approximate the same level as last year, that’s a reverse in a trend that we experienced during the second half of 2005; and certainly the TV spending year-over-year was significantly favorable verses the trends that we’ve experienced during last year.

So, as we end the first quarter, and we look into the second quarter, the trends are favorable for us. So, we’re frankly pleased with what we did in the fourth quarter and we continue to very optimistic about the second quarter, and the balance of the year.

Your next question comes from the line of [Bob Bennett] with [Groundswell Management]. You may proceed, sir.

Yes. You guys broke out your advertising lead by a direct website hit, verses paid per lead cost. I was wondering if you really are seeing a difference both in terms of the volume, for those different types of leads, and also for the costs on a relative basis?

The volume of both has gone up. The website cost is negligible, basically. But, we have seen a light increase in our cost per lead on our pay-per-lead program; and I would expect, as we continue to increase the affiliates we’re using, that we’ll see a slight cost.

So once again, on a relative basis, Bob, the cost per lead on the internet is so much more favorable than TV, that we have quite a bit of room in that scenario to allow some increased costs to increase the volume of internet leads. Because the commensurate cost per start is just head and shoulders above TV.

I totally understand that. I just wondered on a relative basis, what’s the volume percentage difference on direct lead costs--is it like 10 to 1, 5 to whatever--is there a general number in terms of the ratio of leads?

They’re almost equivalent.

Is it? Okay.

Yes. I mean, our website is very healthy. We continue to refine the website; to work on the architecture of the website; continue to--enhance the return there because the returns there are even, on a relative basis, far better than our costs on a pay-per-lead program. So, we work very hard on our website to ensure that we maximize the return on it.

Thank you.

You’re welcome.

Your next question comes from the line of [Glenn Susman] with [SC] Advisors. You may proceed.

Good morning. All the comments that you’ve been making [inaudible] ’06 expectations for marketing and mix, are those dependent on the conversion rates that you saw per internet leads in the quarter, or do you need to improve from here? And then as a follow-up; if you do see improvement, what does that do for you expectations on spending?

We’ve identified opportunities within the conversion of the internet leads to enhance the return on that investment. Those opportunities for us reside in our start percentage. Once again, without a [multi-rule] start percentage, the cost per start is still very favorable there.

But, we’re working on that diligently to increase the cost--pardon me, to increase the start rate. That is, the number of students who started as a result of the enrollment buildup. To the extent we do that, it’s just going to result in increased starts overall. We don’t intend on reducing the spend on the internet, quite the contrary. To the extent possible, we want to increase it; and we will do that going forward as much as we possibly can.

Just so I understand, in the estimates that you put out of revenue and earnings, do you need to reach those assumptions in improvement in the conversion rate of internet leads, or are you baking in what you saw in the first quarter?

We’re comfortable with the trending that we see in our business; and that’s what’s tied into the guidance we gave at the beginning of the year.

Okay, thank you.

You’re welcome.

Your next question comes from the line of Sara Gubins with Merrill Lynch. You may proceed.

Hi, Sara.

In terms of the enrollment trends, could you give us a sense of what you’re seeing in your automotive and technical programs verses the allied health and business programs?

I don’t think there’s really much of a difference between the two, at this point, as far as media advertising, which is basically the driver of the health sciences programs, as well as, auto--other than the high school starts in the summer. It just isn’t that different, Sara. Both web initiatives, as well as TV, were seeing that across the board satisfactory lead flow with almost every school, and conversion rates that are not that different between auto and any of the other programs within our verticals.

Okay. And then, presumably enrollment growth is impacted by some of the more recent acquisitions like Southwestern and New England Tech, and the Indianapolis expansion; could you give us a sense of how those generally trended? I’m guessing that there were also schools that had a negative enrollment trends; and whether or not there was any pattern you could detect from that?

Well, first of all, we’re pleased that Southwestern College continues to perform extremely well. New England Tech--it’s been a little over a year since we made the acquisition; that’s performing well; Indianapolis that you mentioned is as well. And then, it basically varies by school after that.

There’s some that are obviously more challenged than the other; and I think we--one of the comments that was made earlier, one of the reasons we look at the programs that are currently being offered in certain markets and with a view toward replacing them, that is one of the drivers to basically beef-up the enrollment in some of these schools that are heavily dependent upon allied health or health sciences programs.

Okay. So, it doesn’t sound like there were any clear regional trends in terms of where school might have been performing better or worse?

No. And then, just one other comment, as far as the Queens school—our Queens campus, the assumption there was that it would have opened earlier in the first quarter; and that has come on in March. And, all indications are that the school is going to perform extremely well and ramp-up very nicely over the course of the year.

And then, just a couple of numbers questions; Cesar, can you give us a share count at the end of the quarter--a diluted share count?

Yes. The share count was $26,037,000.

Okay. That’s diluted share count?

That is diluted. Yes.

Okay. And then, CapEx in the quarter?

CapEx was $3.5 million.

Okay. And, any changes to what you’re expecting for CapEx for the rest of the year?

No.

Okay great. And then, I’m sorry if I missed it; but, do you have cash flow from operations?

Cash flow used in operations was $3.7 million for the first quarter compared to $2.5 million for the comparable period in 2005.

Okay, great. Thank—

--Let me just add, that was primarily driven by the tax statements that we—the estimated payments that we made for fourth quarter taxes as well as first quarter taxes.

Okay. Okay, thank you.

You’re welcome, Sara.

[OPERATOR INSTRUCTIONS]

Your next question is a follow-up from the line of Howard Block with Banc of America Securities. You may proceed, sir.

Hi, guys. Just one follow-up. You talked about your number of campuses that offer associate degrees or associate programs and 14% of enrollment, how do you guys think about that? And how does this quarter compare to your expectations? Do you have a target that you’re hoping to reach in terms of percent of enrollment by the end of the year, or just going forward?

The way we think about it is, number one, we continue to pursue adding degree programs and getting associate degree status for schools that we don’t currently have it in. So, as we mentioned, we have 17 of the schools. We’re aggressively pursuing applications for additional schools--that’s number one. We think it makes a lot of sense for us, it also ties in nicely with our online initiatives.

As far as the actual percentage goes, the way we think about it is that is we can add three or four more months of revenue to the current tuition level after the acquisition costs. We already have some costs that make a lot of sense for us. So, we’re going to continue to try to increase that number going forward.

I couldn’t give you an exact number of where we expect to be; but, we’re looking at it, and we’re aggressive working with each of the schools to work with the students and we see that as an opportunity.

And, with the roll out of the Euphoria program, which might not be as long as some of the ones that would extend [inaudible], is that going to be sort of a negligible impact on the total effort to increase [inaudible], or are they going to offset each other for awhile?

That would be negligible.

Great. Thanks a lot.

You’re welcome.

At this time, sir, there are no further questions in queue. And I would like to turn the presentation back over to Mr. David Carney for closing remarks.

Thank you, very much. And thanks everyone for joining us on today’s call, and we look forward to updating you on our future calls. Thanks very much.

Ladies and gentlemen, I would like to thank you for your participation in today’s presentation. This now concludes the conference. You may all disconnect and have a wonderful day.