Lincoln Educational Services Corp (LINC) 2006 Q2 法說會逐字稿

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

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's conference, Mr. Dave Carney. You may proceed sir.

Thank you Jackie. Thank you operator and good morning everyone and welcome to the Lincoln Educational Services Second Quarter Earnings Conference Call. I'm joined her 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 an update on recent developments and review our progress in implementing our growth strategy. Larry will then provide some commentary on our marketing and recruitment strategies as well as recent enrollment trends and then Cesar will provide a detailed review of our second quarter financial results.

Turning to our results, during the second quarter the environment remained challenging, but we continue to witness the benefits of the various initiatives we put in place during the past year to support the company's enrollment growth, promote efficiencies across the organization and drive profitable returns for our shareholders.

Examples of these initiatives, which I'll comment on later in my prepared remarks include the opening of our auto school in Queens, New York, the launch of our first fully online program in June, our acquisition of New England Institute of Technology in Florida on May 22nd, and the completion of our 101,000 square foot building at our Grand Prairie Auto Campus.

While some of these projects including the Queens opening and the online launch did not occur as early in the year as we had expected, and therefore slowed first half growth. They're expected to contribute to our growth in the second half of the year. Essentially we're making up for the challenging environment short fall and organic growth rates by continuing to execute on a number of key initiatives, including our recent start up in Queens, our online launch and the company's expansion into Florida which was completed in the second quarter.

We generated strong revenues at 75.4 million in the second quarter, a 10.4% increase over last year's second quarter, excluding the effect of the recent acquisition in Florida and [euphoria] of the increase over last year was 5.8%.

Starts for the second quarter increased by 1.6% over last year, due primarily to the addition of the [abordiance] which closed last December.

And on an organic basis, starts just edged out the 2005 second quarter. This is an improvement over the first quarter, which showed a slight decline in organic starts.

In terms of average enrollment, second quarter 2006 enrollment increased 2.8% versus 2005, while on an organic basis we were down 1.9% versus the same period last year.

As we enter the second half of 2006, our most important enrollment period, we expect to see an acceleration of starts versus the first half and the return of positive growth. We are hopeful that this will reverse the trends we've experienced in the last year and allow us to continue to demonstrate enrollment growth in our business including the effect of our recent acquisitions.

In summary, as we have told you, our objective for the foreseeable future is for revenue and EPS growth of approximately 15%. We achieved this in 2005 in a challenging environment, and we believe that based on our numerous initiatives that I highlighted earlier that our overall targets can be sustained.

At the same time, due to the more efficient and effective marketing and recruitment programs that we're putting in place, as well as our focus on prudently managing operating costs, we're continuing to convert our top line growth into profitable returns.

During the quarter our operating income grew by 121.6% to 1.8 million. Our net income increased 1 million and our fully diluted EPS came in at $0.04 compared to zero for the second quarter of 2005.

Now, turning to our growth strategy. We have continued to implement a very robust plan to increase the growth potential of our company. Not withstanding the difficult environment that we've been operating in over the past 12 months, which slowed our organic enrollment growth. I am confident that we are taking the right steps to position the company for growth over the long term.

At the end of the day what's most important is our ability to drive capacity utilization at our existing schools in a profitable manner.

Given our growing footprint and diversified program offerings we are pursuing a range of opportunities to maximize the performance of our existing schools. Our organic initiatives naturally fall into two areas. First we are taking steps to improve capacity utilization at schools where we have sufficient room to grow.

And second, we are expanding capacity at a number of schools where we've essentially maximized our space to its full potential and demand for current and new programs is strong.

I'd like to give you an overview of some of these initiatives that are underway as well as an indication of when we expect to see the initial benefits of these initiatives.

Through acquisitions and internal development during the past three years we have gradually expanded our presence in several fast growing verticals. We now have an attractive opportunity to replicate a number of these programs in schools where there is ample room to increases enrollment. We now have 37 campuses in 17 states. Consider that less than three years ago we operated only 23 campuses in 11 states.

During the same period we have grown our program offering substantially both diploma and degree in our five verticals. We now have an opportunity to harvest the best of these programs, if you will, to drive growth in selected markets.

For instance, one area where we believe we are poised to grow considerably in the next two years is hospitality services, which we previously called spa and culinary services.

Through our acquisition of New England Technical Institute, [Bori] Institute and most recently the New England Institute of Technology in Florida, we have significantly increased our presence in this fast growing vertical.

For perspective, the hospitality services segment is expected to grow at approximately 14% between now and 2014 which is just shy of the automotive segment. However, annual job openings in the hospitality services segment are running at almost double the amount of annual openings in the automotive sector due to increasing interest among the baby boom generation in wellness and stress relief and the related growth and demands for culinary arts.

Another vertical where we see a growth opportunity is skilled trades. This segment is expected to grow by 14% through the next decade. Our efforts to replicate promising programs such as electronic systems technician, electrician and HVAC are being boosted by our acquisitions in Connecticut and Florida, which expanded our presence into this vertical to about 13% of our total enrollment up from about the 11%. While the absolute number of students increased just in excess of 23%.

Our research indicates that there is a severe shortage of skilled trades workers and the recent disasters along the Gulf of Mexico have only exacerbated the problem. We have always been very successful in training students for the skilled trades as demonstrated by our high placement rates of over 85%. But our challenge has been attracting students to pursue skilled trades.

We expect to be announcing in the coming quarter several new initiatives, which will further enhance our skilled trades programs.

We're also continuing to pursue opportunities to take advantage of our expertise in the automotive sector, which is expected to grow by 15% through 2014 as well as health sciences, which is expected to grow by 26% through the next decade.

Let me run through our footprint and give you some examples of how we are taking advantage of our presence in these attractive verticals to better position the company for growth over the long term.

I'll start with the New England Institute of Technology in Florida, which we closed on midway through the second quarter and I'm happy to say we immediately rebranded to Lincoln College of Technology, it's much easier to say. Their bachelor's degree in culinary management will be our first bachelor program. The school's culinary programs, which fall under the Florida Culinary Institute brand, represent about 40% of our current enrollment at that school.

With ample additional capacity we believe we have an opportunity to further increase enrollment in this segment while supporting culinary program replications in several other markets.

Beyond culinary and hospitality services we plan to build the college into a destination school with strong programs in automotive, skilled trades, and health sciences. In fact one of the things we really liked about our Florida acquisition is it attracts virtually all of our verticals within one destination. So it really gives us a unique opportunity to fully tap our resources to support that growth.

Moving to our Georgia campuses. At our Marietta campus we're currently in the process of adding a degree program in electronic systems technician. We expect to launch the program later this quarter, which will not only improve margins but further increase our addressable market in this competitive market.

In Columbia Maryland we are in the process of adding a culinary program, which will represent the first replication for successful culinary program. We expect to launch the program by the first quarter of next year.

At the same time we are expanding the Columbia campus's shop space for our automotive program and we are adding classroom and library space for the bachelor's program in technology for which we expect approval in the second half of 2007.

As previously mentioned, except for the bachelor program acquired through the Florida acquisition. This will be our first bachelor program.

At our southwestern college campus in Cincinnati where we've done extremely well and are operating at full capacity, we are looking into acquiring more space to expand our health sciences hospitality offer.

Turning to our campus in Melrose Park Illinois, we're in the process of expanding the school to enhance our current automotive offerings. The demand for skilled auto technicians remains very health across the region.

We have a unique situation here where we are in control of an additional 20,000 square feet which can be drawn down in stages over the next few years and we expect to draw down some of this space this year to foster growth in 2007.

Likewise, in Indianapolis where demand for automotive and collision programs is very strong and where we currently are running a midnight shift, we are in the process of increasing our capacity to facilitate the expansion of our collision program. We expect to begin utilizing this space by 2007.

And in Grand Prairie construction is completed at our new 101,000 square foot facility and we were able to open the facility last month.

New facility combined with the existing school will be able to serve approximately 2400 students. This will give us an opportunity to expand our diesel and skilled trades programs including heating and air conditioning.

In Denver we're planning a new facility, which will allow us to relocate our existing facility and add additional programs in collision repair, skilled trades. I hope to have a new site open before the end of 2007.

Turning to New England, our 3 schools in Massachusetts which are principally focused on health sciences programs, we're taking steps to add skilled trades over the next year. This will allow us to increase our addressable market and attract a larger male population.

And in Rhode Island we moved from a 26,000 square foot facility to a 40,000 square foot facility in the past year. Enrollment has been strong and we're currently adding an additional 12000 square feet to the campus and bringing in cosmetology, which will be replicated, from Euphoria Institute in Las Vegas. This will represent our first of several replications following the Euphoria acquisition last December.

Beyond program replications and expansions I also want to mention that we continue to make progress in expanding our associate degree programs which are now offered in 18 of our on ground campuses. Our total enrollment in these programs is 17.6% at the end of the second quarter, up from 11% last year.

We expect our associate degree programs to continue to grow as a percentage of our total enrollment over time. Since this will have the effect of lengthening our programs and the time that the students stay in our schools this will increase revenue and improve margins.

Finally, I should also note that enrollment at our automotive school in Queens did open in March is growing and attracting very strong interest from our area dealerships.

At the close of the second quarter, after 3 months of operation we had a total of 165 students enrolled. We expect our enrollment to increase meaningfully by year-end.

Campus has the capacity to instruct approximately 800 students. We're really very pleased with the progress we're making in Queens and we're focused on working with our partners at the Greater New York Automotive Dealer's Association in developing this facility into one of the nation's premier auto schools.

Now moving to our online initiative. As I've indicated in the last 2 calls, we began offering an online degree completion program in health sciences and IT in the fourth quarter of 2005. In recent months we've embarked on a concentrated campaign to educate our on ground campuses and the value of continuing their education online and we expect this effort to result in increased interest going forward.

Now, June 26th we launched our first fully online program in health information technologies. 2 additional associate applied science degree programs, subject to receiving the appropriate approvals will launch in the fourth quarter of 2006 and we anticipate launching bachelor degree programs and programs unique to Lincoln online in 2007.

Our website is up and running and we're immediately transitioning it as part of our rebranding strategy LincolnCollegeOnline.com. With added online delivery components such as animation, self testing and voice.

In terms of our online marketing, the primary search is being driven through search trends by approval. Our advertising is currently focused on a single program however we are using multiple vendors.

Just a word on student satisfaction. Any first group of students becomes a test group, not by design but because they test all systems. First group of fully online students has given us high praise consistent with staff and expect to maintain a high level of customer service as we scale the operation.

Finally I'm pleased that we have a strong team led by [Sean McAllmont], recently appointed president of the online division. He has a successful track record for building an online business.

In summary, these are among the major initiatives we have underway to either expand campuses where we have reached fully capacity or to increase utilization of campuses where we still have room to grow. We believe we'll start to see the benefits of many of these initiatives during the first half of 2007.

These efforts highlight our focus on improving margins while at the same time maximizing our footprint by actively managing our portfolio and strengthening our exposure across a number of fast growing convertibles.

Now let me turn to our rebranding strategy for a moment. As we continue to expand our footprint we have an opportunity to become a nationally recognized leader in the post secondary education industry.

With a 60-year operating history we have built a very solid reputation in our industry and our job placement record speaks for itself. We currently operate in 17 of the nation's 75 largest markets including nine in the top 20. However our schools are identified by multiple brands. While we have a strong local presence in each of our markets we are not as well known as we should be at the national level.

By consolidating the majority of our brands under the Lincoln umbrella we believe we can better capitalize on our legacy and track record, more efficiently promote our image to students and the potential employers to effectively integrate our online classroom based offering.

As I noted in our previous call, the Florida acquisition would essentially serve as the kick off in our rebranding strategy. The initial phase began in July with a rebranding of 10 campuses. Including board campuses under the new Lincoln College of Technology brand, 6 campuses under the Lincoln Technical Institute brand.

Rebranding process, which spans 31 of our 37 campuses, is expected to be completed by the end of 2007. Including our Florida acquisition, a total of 12 campuses will be rebranded as Lincoln College of Technology, 17 campuses will be rebranded as Lincoln Technical Institute.

Excluded from the rebranding program are [Nashville oda] Diesel College, our southwestern college campuses and the Euphoria institutes in Las Vegas.

Now, while I've already mentioned the Florida acquisition several times in my comments. Let me just cover a few other points. As mentioned, we completed the acquisition on May 22nd [borrowing] the assets for 32.8 million and assumed a mortgage of 7.2 million. With this acquisition we acquired premier real estate assets consisting of 4 buildings totaling 115,000 square feet on 14.5 acres. These assets have been appraised for amounts in excess of 20 million.

I'd like to briefly recap our plans for the Florida operation over the next 2 years. With available capacity of approximately 20,000 square feet, we will add additional programs including health sciences and skilled trades plus open up additional capacity to grow their successful culinary program.

In terms of auto, we will also add additional capacity and we're currently evaluating space availability. As previously mentioned we are encouraged by the opportunity to recruit out of state several of the programs and we will pursue that aggressively.

Finally, we have acquired a strong management team, which is always key in being successful in any business. We look forward to updating you on our progress on the Florida acquisition in future calls.

As I mentioned on the last call. The Massachusetts department of education raised some concerns regarding certain instructor approvals at our [Brogden] Massachusetts campus where we operate a small school of about 9000 square feet, representing less than 1.5% of our annual revenues.

We met with the department and agreed to take certain steps to address their concerns. We also agreed to cease recruiting new students in May and June while we addressed their concerns. During this period all of the department's concerns were satisfactorily addressed and we have reinstituted the recruiting program [inaudible].

One final note on regulatory and accreditation. Just received word last week that our Euphoria Institute campuses have been accredited by ACICS. You may recall that these schools were not accredited and therefore did not have title 4 funding at the time of the acquisition in December of 2005.

Now having access to title 4 going forward will create additional growth opportunities for these schools. Now I'd like to turn the call over to Larry who will provide more color on our student population levels as well as our marketing initiatives.

Thanks Dave. Good morning everyone. For the second quarter our average student enrollment grew 2.8% over prior year including the impact of recent acquisitions.

On an organic basis, our average student enrollment was down 1.9% from last year. As Dave mentioned, organic second quarter starts were essentially flat with prior year. However this is an improvement over the first quarter, which slowed a slight decline in starts.

We are continuing to focus our advertising efforts on the channels that are driving results and away from the channels that are not working. During the second quarter, our web based leads increased by 59% over the prior year. This follows a 60% year over year increase in the first quarter. And once again our Internet starts exceeded our TV starts in the quarter. And just as important, these starts were significantly more economical than those obtained from television advertising.

Specifically we are focusing our efforts on search engine optimization through reassessment of content and architecture of our website, our landing pages and sponsored listings.

We have continued to expand our use of pay per lead programs in an economical way with the support of CU net and their analysis software and expertise. Further we are continuing to expand our web opportunities through several initiatives currently in their early stages.

Beyond advertising, we are utilizing a host of PR and marketing initiatives in each of our local markets to connect with our target audiences, principally our current and prospective students, their guidance counselors as well as potential employers. We are striving to better highlight and communicate our resources within the communities we serve. Let me give you some examples.

During the second quarter we hosted a round table discussion on training and alternative fuels technology at our Nashville Auto Diesel College campus. This was chaired by Tennessee senator Lamar Alexander.

Through a well-orchestrated media outreach around the event, we garnered over 2 million media impressions including print and broadcast across 3 states. We attracted interest from new students, industry and political supporters.

Further, I want to describe some of the positive effects Lincoln has had - has on acquisitions and why we've been successful in these efforts. Our West Palm Beach schools were acquired in late May. Since that time our marketing department has assumed the television buy using one of our 3 buying services. We have installed our lead tracking system allowing us to monitor the results of our commercials in the same manner as with other Lincoln schools.

The school is now on our warm transfer system. Their web initiatives are now being purchased through CU net, allowing complete analysis down to cost per start. All advertising now has trackable phone numbers plus we have created 3 new television spots in that time.

Additionally, in our Florida culinary school, we are working to reach out to the community and tap into the strong interest in cooking and food preparation. Among other initiatives we are hosting seminars and workshops that are focused on educating other food service teachers and professionals on new cooking techniques and key trends. Our PR team is also working to position our academic being as a food expert in local media including local Palm Beach TV stations.

Another PR effort includes the positioning of our new Queens automotive facility in the local press and the New York metropolitan area. This new school was featured on 2 New York television segments that showcased our training areas, auto bays and classrooms outfitted with the latest digital teaching systems.

Students, instructors and the executive director were interviewed about the employment opportunities that the school is providing for our graduates and the need for auto skills on both national and local levels. These are just some of the examples of our efforts to build mind share in the communities we serve.

In addition, beyond local advertising, we believe we now have an opportunity to begin to better promote our schools at the national level. Our schools are identified by 9 different brands across 17 states. This will change as we move foreword in consolidating the majority of these brands under the Lincoln name. Doing so will give us a viable platform to more effectively market our schools at the national level.

In conjunction with our rebranding campaign, we have begun implementing a concerted marketing program to reach out to all of our audiences to educate them on the significance on the Lincoln brand. We believe this effort will add to the pedigree of the education we provide and help build awareness of the value proposition we offer to our students.

In summary, while we continue to operate in a challenging environment, we are optimistic that we are taking the necessary steps to continue to grow our company. We are pursuing a broad range of cost effective marketing, public relations and recruitment programs. We remain flexible in our strategy and will continue to make adjustments and adapt with the market with the goal of generating profitable growth.

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

Thank you Larry. Our revenues increased by 7.1 million, or 10.4% to 75.4 million in the second quarter of 2006 from 68.2 million for the comparable period in 2005.

Of this increase, as Dave previously stated, approximately 1.2 and 1.9 million respectively was attributable to the acquiring of Euphoria Institute on December 1st 2005 and the acquisition of Florida on May 22nd 2006. While the remainder of the increase was due to tuition increases.

Our operating income for the quarter was 1.8 million, which represented 121.6%, increase compared to the second quarter of 2005. The improvement in operating income is due to 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 10.3% to 32.6 million in the second quarter of 2006, from 29.6 million in the second quarter of 2005.

The acquisitions of Euphoria and Florida accounted for 700,000 and 900,000 respectively of this increase. Excluding the acquisitions, instructional expenses increased by 1.9% over the comparable period in 2005, primarily due to increases in compensation and benefits.

Book and tool expenses increased 10.6% over the second quarter of 2005, primarily due to the timing of class starts as compared to prior periods. The remainder of the increase in educational services and facility expenses was primarily due to facilities expenses, which increased 900,000 for the year - for the quarter.

Educational services and facility expenses as a percentage of revenues remained flat at 43.3% of revenues for the second quarter of 2006 and 2005.

Our selling general and administrative expenses for the second quarter of 2006 were 41 million. An increase of 3.1 million or 8.2% from 37.9 million in the second quarter of 2005.

Included in selling, general and administrative expenses for the 3 months ended June 30th 2006 is approximately 0.4 million and 0.7 million respectively from our acquisitions of euphoria in Florida. Excluding euphoria and Florida, our selling general and administrative expenses increased 5.4% as compared to the same period in the prior year. This increase was primarily due to a 0.4 million, or 2.9% increase in sales and marketing expenses. A 1.7 million or 9% increase in administrative costs, which were primarily due to increased bad debt expenses during the period.

For the quarter ended June 30 2006, our bad debt expense was 5.7% as compared to 3.6% for the same quarter in prior year. This increase is due to several factors including higher accounts receivable balances at June 30, 2006 as compared to June 30th 2005. Loans to our students on their recourse agreement we entered into in 2005 with student marketing association, Sallie Mae, to provide recourse loans to qualifying students and normal seasonal patterns in our business.

Accounts receivable at June 30, 2006 includes 5 new campuses that did not exist in the prior year. Our 2 new Euphoria and 2 Florida campuses, as well as our Queens New York campus, which opened on March 27 2006. Under the terms of the Sallie Mae agreement we are required to fund up to 30% of all loans dispersed into a deposit account. Which may ultimately be utilized to purchase loans in the fall.

Since recoverability of such amounts is questionable we reserve 100% of amounts on deposit. As of June 30, 2006 we had reserved 1.4 million under this agreement, which represents an increase of approximately 1 million from amounts reserved at December 31, 2005. As a percentage of revenue, selling general and administrative expenses decreased to 54.3% from 55.5% in the prior period.

As a result of the above, our operating margin for the second quarter of 2006 increased 2.4% from 1.2% in the second quarter of 2005.

Net income for the second quarter of 2006 was 1 million, or $0.04 per diluted share as compared to zero for the comparable period in 2005.

Earnings 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, number 123R share based payment.

Turning to our balance sheet, as of June 30, 2006, we have 5.5 million in cash and cash equivalents compared to 50.3 million at December 30, 2005. The reduction our cash balance is attributable to the acquisition of Florida and to normal seasonal patterns.

As of June 30, 2006 our stockholder's equity was 141.3 million compared to 136 million as of December 31, 2005. With the change resulting primarily from net income and for the period in stock based compensation expenses.

Finally, as you already know, we do not provide quarterly guidance and only provide broad parameters of our annual expectations. As we have stated in the past, our goal is to achieve revenue and EPS growth of approximately 15% over the foreseeable future. While we remain optimistic about our ability to generate organic growth in the second half of the year, the challenges that we in the industry continue to face have caused our organic growth rates to come in below our expectations. We believe the numerous initiatives discussed earlier by Dave will allow us to reach our goals.

However, it is important to note that in line with our expectations of achieving approximately 15% EPS growth for the full year, the EPS growth trends we experienced in the first half of this year are naturally not sustainable and we do not anticipate quarterly trends in the second half of 2006 to be comparable to prior year.

Now, let me turn the call over to Dave.

Thanks Cesar. In summary, we continue to aggressively and systematically execute a concerted plan to increase the growth potential of our company over the long term. We are pleased with our progress to date across the majority of our growth initiatives as well as the integration process of our most recent acquisitions in Nevada and Florida.

As we continue to execute on our plan we believe it will allow us to increase our adjustable markets geographically as well as diversification of product offerings and more advanced degrees. Our online launch provides us with a new growth driver and will further provide support - further support our on ground growth.

And our branding initiative will allow us to more effectively leverage our marketing efforts across the markets we serve today and in the future. In addition, our acquisition pipeline remains active and we hope to complete at least 1 transaction per year.

Overall as we grow our business we remain committed to delivering profitable growth and improved margins. We're very optimistic that the initiatives we are undertaking will lead to enhanced returns for our shareholders over time.

At this point we'd be happy to take your questions. Operator?

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Sarah Gubbins from Merrill Lynch. You may proceed.

Hi good morning.

Good morning Sara.

Just starting on your expectations for enrollment growth in the second half, given that you're continuing to face a challenging environment, still not really seeing much growth in terms of starts on an organic basis. I guess I'm trying to understand where the confidence that we should see organic enrollment growth in the second half comes from. And now that you are in the - starting to get into the more prime season, could you give us any sense of what you're seeing so far.

Sarah, this is Larry. Well, the atmosphere is certainly choppy in the environment we're dealing with. Television advertising as you know we're attempting to move our advertising from the television to the Internet, as it is prudent to do so. Television still remains problematic for the company and I guess what I can say to you is this, that we are moving forward, step by step, piece by piece with every aspect of both of those media which represent roughly 90% of our lead acquisition strategy as a company.

So in the internet environment we're moving ahead with a concerted effort to optimize our websites, optimize the quality, the density, the links and so on within the content of all of our websites and sponsored links and if we do the right things on a step by step basis and continually focus on the details of that and our television advertising which we've done for a long time. We believe that we will move forward to move out of this particular situation.

In terms of visibility on the second half, on the starts they're in - I mean we're cautiously optimistic. We have - it's going to be hard work. We have again a television environment that is very unpredictable. We are looking at the details of that environment on a weekly basis. And analyzing the results in detail. And will continue to do so and if its to be maximized, we will maximize all of that and all of the opportunities available to us.

Okay, is it fair to assume that your expecting mid single-digit organic enrollment growth in the second half, which would of course mark quite an improvement from the first half.

Yes, let - let me take that one. This is Dave. Good morning Sarah again.

We're really looking at the - we're coming off of the very challenging first half and we are looking at the third quarter in particular as opportunity to see an acceleration in starts and while we have some visibility naturally, it July, August and September lie ahead. So I think to be perfectly frank we would hope that it certainly get a show of improvement over the first and second quarters and some of that is incorporated into our expectations for the year. But it's a difficult environment. We're working with each of our schools and with each of our markets to improve our advertising effectiveness.

Okay. Great. Thank you. Could you discuss the lead flow trends a bit and then - I know that you've been working on improving admission turnover and I think last quarter there had been a mention that admissions reps may have been the gating factor in terms of enrollment growth in that you probably could have got more leads but you need to make sure that they'd be able to convert. So any detail on both the lead flow trends and kind of where you are with respect to your admissions reps would be helpful.

Our lead flow overall is up, principally driven by our web efforts. We're really seeing great results on that. Right now we're working hard to ensure that our website and our organic web efforts are maximized by virtue of the content within the websites as I had mentioned.

We're working hard on the conversion effort. It's challenging in this environment, the economy is good and we are-- it varies by school. We are seeing some schools that are doing a superb job in maximizing that efficiency and others that are not. And I think it depends on the economy within the environment of that local school.

But in answer to your question, leads are up. The conversions are varied by school and again by area of lead acquisition that is TV and web.

Okay great. And then admissions rep turn over level.

We're favorable on a year over year basis.

Okay. A question about your outlook for the year. I think in the last quarter you had - call, you had talked about 15 to 22% EPS growth which was consistent with the guidance that you'd given earlier in the year. I guess what I'm hearing is that you're expecting that to be closer to 15% versus 22% and potentially somewhere in the 15% range. Is that the right way to interpret it?

Sarah, let me respond to it this way. I think I mentioned some of this in the comments. We - we look at our growth opportunities over the long term as being able to achieve approximately a 15% increase of revenue as well as EPS. I think as you look at 2006 we mentioned that we really, since we're experiencing a slow down in organic growth, particularly in the first half, that we're literally falling, relying on a mix of initiatives to be able to achieve our overall results, of course in this case would also include the asset initiative part as well as the impact on Queens in the second half as well as the growth in online. So it's a cumulative effect of those.

Okay, got it. Just last two very quick questions and then I'll turn it over. Can you tell us about how many students were at Palm Beach in the second quarter?

I think just shy of 1000.

Okay. And then these are on the tax rate, I saw that it went down I the second quarter. Can you give us a sense of what you're expecting for the full year?

It should stay around the 40, 40.5% level. The reduction of the tax rate for the quarter is strictly due to stock based compensation expense, the mix between [isos] versus non-qualified stock options.

Okay, so 40 to 40.5 for the full year?

That's correct, about 40.5%.

Great, thank you very much.

And you r next question comes from the line of Gary Bisbee from Lehman Brothers, you may precede Gary.

Hi guys, how you doing?

Morning Gary.

I guess a couple questions, not to beat on this one too much. But Cesar did I hear you in your last comment say that the earnings in the back half might not match last year, or the EPS growth rate?

Well, I think both Gary and I think we grew 300% in the first half of the year, so I would caution you not to expect the same growth rates in the second half of the year. And I think what we have said continuously is that our goals is to grow both revenue and EPS at approximately 15% per year on average. That's the only thing we're highlighting.

Okay all right. And I guess just - I realize there's a lot of uncertainty here but to get 15 for the year you would actually have to have the second half slightly above the second half last year. Is that reasonable or should we take a more conservative approach than that at this point given what you're seeing?

We believe now that based on the initiatives that we talked about that 15% targets are sustainable.

Okay. All right. And if I could just bury a little bit into how you're thinking about the cost. You've done a great job of driving your sum amount of enrollment growth through down or only modestly growing marketing expense. Do you see some point now that you've done that for 3 quarters in a row where you're going to have to start spending a lot more or is the way you've done as a percent of revenues, your marketing spend, is that something that you think you can - or that you're targeting?

Well, I think we have said in the past that ourselves in marketing traditionally has been roughly 20%.

Yes.

We have - I think as we said in prior calls. We have experienced favorable trends as a result of the favorable mix between web and TV. As we said before a web lead is a lot more cost-effective lead than a TV lead. We hope to continue to experience those trends to the extent that we see a changing environment or an environment where we can purchase off on media, we certainly will do so.

Okay, so its not - it doesn't sound like you're expecting a dramatic increase in the second half unless those web leads become less productive or something like that.

Yes, I mean our spend should not change but based on what we have said which is somewhere between 19, 20% on the -- revenue.

Yes, okay. Moving on to the bad debt expense. Can you give us a sense of how much of the increase there was due to the two acquisitions and was Euphoria not having the title 4 capability, has that been a big portion of it?

None of the bad debt expense was due to the 2 acquisitions.

So this was all sort of same store? --

This was all same stores. There really is very little bad debt on Euphoria and West Palm Beach obviously as part of the purchase accounting, all accounts receivables were fair valued. So the increase that you see in the bad debt expense for the period - obviously there is some of it that has to do, as you're probably familiar are our bad debt methodologies, our formerly driven methodology based on gross accounts receivable. So there could be some component of it because we do have five new campuses that we did not have in prior period. Mainly the two Euphoria's, West Palm and Queens.

As well - but I think the majority that you're looking at, a lot of it has to do with the recourse loan for Sallie Mae which was about a million dollars increase from the December numbers.

Okay. And are you doing those loans because you feel like to attract the incremental students you have to offer them?

Well, we're doing these loans because as we and others have spoken in the past, it is getting more difficult to finance our students as the gap between he amount of financing provided by title four and the private loan itself pay gets wider.

By being able to provide these loans with some recourse to the company, we are able to give opportunities to more students to take advantage of the education that we provide.

So we are willing to take some recourse, hopefully obviously these students will become successful graduates and will pay off their loans, that's obviously our hope.

Okay, and so is it reasonable then, since it sounds like you're going to continue to use those programs that we should expect the bad debt to be more in this 5 to 6% range going forward or is it 3 or 4% range?

No, no. As you know, -- I do expect to see an up tick in our bad debt expense over prior years, but our bad debt is also seasonal in nature. As we get the prime starts, the second half starts that come into our school, a lot of those are - tend to be more of a high school population which is a higher credit worthy population because usually they're supported by co-borrowers and parents.

So usually we do see a decline in the second half of the year in our bad debt expense. We would expect that those trends would continue. However on an overall basis we're still looking to see a slight up tick on a year over year basis.

Okay, and then just lastly. Maybe sort of more of a big picture question if I could. As you talk about launching a few more online programs and building that out over the next two to three years, it's a space that I guess my view is getting increasingly crowded and its challenging from a marketing perspective to differentiate your programs versus all the different programs that are popping up.

So from a big picture perspective, I guess how do you think about the market. What segment of the online market or student type are you looking forward to target and how are you thinking about driving the brand in differentiation going forward as you grow that offering. Thanks a lot.

Gary this is Dave. I - first of all we're just in the launch of our initial program in health information technology. As I mentioned we intend to offer two additional programs beginning later this year targeted more toward the adult population and those that couldn't otherwise attend our on ground campuses. So we expect this to ramp up nicely over the next couple of years and become more of a meaningful part of our overall involvement. Albeit not a significant part of our total company.

So I - I think as we find our brands and be able to leverage more under the Lincoln umbrella that would also be a helpful advantage for us as we ramp this up.

Okay and is the thought that a primary group to target is your prior grads who might want to take a diploma, upgrade to an associate or take a diploma and upgrade to a bachelor?

Yes, Gary, that's a key part of it. We have the-- we have the degree completion component in place now and as we continue to add more and more campuses, we have the opportunity to provide the opportunity for them to transfer into our online college. Get their associate degree program and then ultimately we'll be offering bachelor programs that they can also move into as well.

Okay.

And ultimately there'll be the opportunity for a hybrid programs which is one of the reasons that we're spending more and more effort in lining up our curriculum so that it matches both on brand and online both float.

All right. And so is it too early-- it probably is, but is it too early to tell how that direct marketing to your former graduates-- if that message is being well received?

Well, as I mentioned in my comments. I mean, we're-- we've got a campaign going on. It's been to some extent, to be honest with you, sort of the best-kept secret throughout the company. So now we've got people that are dedicated to getting that message out to our on ground campuses. So we look at that as an opportunity going forward.

And the extent to which they hear about it, there is increased interest.

Okay. Thanks a lot.

You're welcome.

Thank you gentlemen and your next question will come from the line of Jeff [Silber] from BMW Capital. You may proceed Jeff.

Actually this is Avram Fischer on the line for Jeff. Thanks for taking my call and good morning.

GMW. Good morning.

BMO, BMO Capital market.

Oh right. Hi.

Just want to start off with just some quick bookkeeping questions. Can you give us the share count, the operating cash flow and CapEx for the quarter?

Dilutive shares were 26 million 84. Operating cash flow I believe - just give me one second here. I don't have those, I believe it was about 13-- 13.4 million cash used in operations for the six months.

Okay.

And I'm sorry, what was your other?

And the CapEx?

CapEx.

CapEx was 8.6 million for the quarter.

8.6 million for the -

I'm sorry, for the six months.

For 6 months. Thanks. How much is the - what is the balance of the website on the high school population. Do the high school - does the high school population get your schools through the website or through high school visits and what do you think the impact is of prior quarters turn over in recruiters might have on this coming high school intake period.

Well, first of all most of our high school population comes from high school presentations and a small amount of other peripheral advertising to get to them. Some of the high school students come from television, some come from direct mail, some come from the website but clearly the preponderance comes from our hundreds of recruiters that are out in the schools working the high schools which we've done for many, many years.

Our rep turn over has actually been favorable, for the last - on a year over year basis for the last couple of quarters so we're doing well in that respect. And we're paying quite a bit of attention to our admissions representatives to be sure that they have the tools necessary to do their jobs and that their management is sensitive to their needs and yet we're all accountable for results. So it's a balancing act, but quite frankly I think we're doing quite well in that respect.

Okay great. Your tuition increases appear to have been strong, roughly 6%. Do you expect to see that in 3Q and going forward?

They're typically - average about 5% a year.

Okay, so you're holding them steady. And just one final quick question, you talked about making one acquisition per year, possibly.

Yes.

Should we expect to look at the debt levels to go up or at least to use a little bit more leverage in the model even about - up from where we are now?

Yes, we are forecasting - I think we - as we had indicated on earlier calls, we have a very strong capital expenditure program going on. So we do still anticipate spending quite a bit of money in the last six months of this year. So yes, I would expect that we would be probably be taking on some more cash by the end of the year.

As you know, we had $10 million outstanding under our credit agreement. I would expect that to go up some - a little bit. To the extent that we want to do another acquisition, obviously that would also have to be leveraged through out working capital facility.

Okay. All right. Thanks for the question.

You're welcome.

And your next question will come from the line of Howard Block from Banc of America Securities. You may proceed Howard.

Thank you operator. Good morning everybody.

Good morning Howard.

I was wondering if you might be able to just comment on any material variation in, lets say performance in starts or overall population across any programs, schools, geography?

Well, its not - we've had no differences in performance by geography, the differences in starts on a school by school basis are due to local market conditions. Typically if TV is performing well and the web is always performing well quite frankly with very few exceptions, then the school does well. Overall, I think its just pretty much diversified amongst all of our various operations.

So there's no schools or programs or areas that you feel particularly excited about or particularly concerned about, I mean its sort of a - again, there's no material variation in anything across the whole network?

About - go ahead.

One of the things I guess I'd add to that Howard when you ask about particular programs. I mean I think we're mindful that depending on the particular market there's increased competition for some of the health sciences programs and we're taking steps to diversify even within those schools to add for - as I mentioned earlier, lets say skilled trades programs. So that not only are we not as dependant on strictly heath sciences programs. But more importantly we can also diversify and increase the male population in those markets. Though I - other than that, its more market by market.

So--

I think-- Howard, one more thing. I think the - you ask about what we're excited about. I mean we are working very diligently on optimizing our ability to take advantage of the website results and the web results. That--we're delivering large quantities of leads to the schools which are - as we've talked about previously, they're different and as a result of that we have to figure out ways of maximizing the efforts to work those leads.

We have nine schools at this point that we've put on - we've hired our company to screen those leads if you will from the web. And basically turn those web leads into a warm transfer telephone call to make them look as much like TV, which is the most desirable lead from an admissions rep standpoint as possible.

So we're excited about that opportunity, but as we always do, we'll never throw the baby out with the bath-water. We don't put all of our schools on any system all at once for fear of risk of an unknown glitch. So, so far we're pleased with the results of that effort. We're studying it carefully and then if, as and when that works we would then put the rest of the system on that type of work edge network.

And we believe this will further enhance our ability to retain admissions representatives who are not as excited about chasing the web lead, which is as we know a shopper and all. So we believe that that will provide opportunities for all our schools.

Okay. And maybe I'll just ask it one other way, one last time. So if I look at your auto programs, your schools in the Midwest, your schools in the north east and think about the enrollment data that you reported, there would be nothing misleading about those statistics if I thought about any 1 school in particular? Those are meaningful statistics, the averages that you reported on a school-by-school, program-by-program, region-by-region basis?

Well we-- I'll try to. We don't report statistics on a school-by-school basis, we report statistics of the company overall and I think that the statistics that we reported obviously are for the company. So I'm not sure exactly what the question is, but obviously the numbers that were reported is for the company as a whole and its based on average population for the company. Both in an organic and excluding acquisitions. So I'm not exactly sure what the question was trying to ask.

Well I guess just curious that it seems almost implausible to think that every school - that there aren't some schools in your network or certainly part of your network that aren't - there isn't a meaningful variation.

That the standard deviation I guess would be that narrow that there's not some rays of hope or concerns at other schools as we sort of think about the best way to deploy capital in terms of programs and regions and so forth. I would think that you would have some different levels of enthusiasm or concern as you looked across a network, which is pretty varied, if you will, again by region and program.

Well Howard I would-- response to that is I mean if I had to cite a school or identify a school in particular that - where we are excited number 1 that we're going to relocate that campus, that would be the Denver Auto Diesel College, which is - if you remember the history, we acquired that, it was our first acquisition back in 2000.

And it was a tired building then and its even more tired now. Its roughly a 70,000 square foot facility and so we're excited about the opportunity to relocate that campus and hope to have that completed by mid to the end of 2007. Be able to add additional programs and I think that's going to improve the results which I think currently were somewhat a little bit more challenged there than some of the other campuses. And we've made, we've made some management changes there. So that--

I would point to Queens as well. I mean Queens is ramping-- I mean, talk about deployment of capital. It's ramping up nicely. We expect that it will be close to half capacity by the end of the year. Which given that it started in late March, we feel is a real opportunity.

Our Texas campus, which basically, they moved in just recently. We're very optimistic about. We've been unable to start the collision repair program as of yet and that will come within the next couple of months. That will provide meaningful growth to us.

So we've deployed capital in a number of different facilities and continue to do so, that are performing nicely and we expect those to grow significantly.

That's helpful Larry thanks. And so on the line of Queens, if-- were the Queens starts included in the organic comments in terms of starts?

Yes.

Okay, so without the Queens starts, organic starts would have been negative in the quarter?

Yes.

Okay. And if we look at the - I guess the bad debt in the quarter. So, it seems that the price hike or the growth in revenue from pricing was almost - I didn't do the math exactly but I would guess its somewhat approximate to the growth in bad debt in the quarter, which may suggest that without Sallie Mae's generous program you wouldn't have been able to finance the new students who came into the schools this quarter.

No, that's not necessarily the case. I mean obviously we prefer to use Sallie Mae's money versus some other sources of funds, but we would have financed those students as soon as they were as equally qualified so I'm not sure that that's necessarily correct. However, Sallie Mae is somewhat more of an expensive option than other traditional financing methods because we are reserving for the full, for our full recourse amount under that and only after several years will we know if whether or not those reserves were too high or not.

Okay. Well it seems as though certainly you've been exceptionally thoughtful about branding and rebranding and your branding strategy. And I was just wondering how thoughtful you're being about pricing and was wondering if you've ever considered maybe lowering prices and not looking for so much growth in earning rate per student in order to perhaps extend the addressable market and generate some real organic growth.

Well, those are all things that we constantly look at Howard. I guess the question is to the extent that we can still drive students in the door and to the extent that we can minimize the bad debt in the door and to the extent that we can minimize the bad debt, obviously there's a better opportunity for us. If we were to lower tuition our bad debt might be lower but we'd never have an opportunity to recover any of those costs.

So those are always things that we are constantly looking at on a market and geography and school-by-school basis to see whether or not we're competitive and whether or not there's opportunities to increase our growth rate in those markets and that's certainly one of the factors that we consider.

All right. Larry has anyone looked [inaudible] as an external consultant or internally looked at some of the pricing sensitivity of your market?

We're doing that internally. I mean as we speak. And we're doing it regionally as well.

Okay. And last thing, in Queens, I believe as you know someone from my team just visited the school and it seems as though there was like class graduating, I imagine it was a pretty small class graduating this month. That would be sort of a short program I would imagine. Is the school going to have shorter programs?

No, those students that are transferring this month were the students that initially started in [Motawata] New Jersey -

Oh, I got you. Okay.

Yes.

Great well thank you very much.

You're welcome Howard.

[OPERATOR INSTRUCTIONS]

And your next question comes from the line of Trey Cowan from Stanford Group. You may proceed Trey.

Thank you. Good morning gentlemen.

Good morning Trey.

Quick question, when you look at what your revenue mix is by programs right now. Could you sort of give us what that looks like and then as you roll out our programs online over the next 2 years. Where do you think that mix is going to?

Well Trey, this is Dave. Let me just speak to where we are in terms of on ground. In terms of our - approximation in terms of total enrollment. I would say they're probably in the 55 to 57% range between automotive and skilled trades and another 30, 32% in health sciences. And then in our hospitality services, maybe it's probably around 12%. And the difference of the-- the balance would be IT and business. I would say--

Okay.

I would say over the next couple of years as we ramp up our online. Most of the increase in online would fall into the combination of the Business and IT and to a lesser extent into the health sciences.

Okay that's great.

There's some degree completers on automotive but it wouldn't be significant.

And then as you look at this investment going forward, looking at it as far as adding faculty, in the short turn is that going to be those slots for online faculty, is that going to be filled internally and then later on as you get more breadth of students, hire more faculty, how does that look?

Well, I think right now we're basically using internal folks and I guess as we ramp up we'll evaluate that going forward.

Okay, and still just hitting on that just a little bit just to get a better understanding of it. As far as looking at the rolling out online programs, where do you think the point is where you start to enhance your margins as a result of rolling out those programs? How long do you think it takes to get there? Or as far as students, how many students do you think. Something along those lines?

It would probably 12 to 18 months I would venture.

Okay. Well great. Thanks a lot gentlemen.

You're welcome.

And at this time sir you have no further questions so I'd like to turn the call back to management for closing comments.

Well thanks very much for joining us today and we look forward to updating you on our progress and on our future calls. Thanks very much everyone. Good day.

Ladies and gentlemen, thank you for your participation in today's conference, this does conclude today's presentation. You may now disconnect and have a wonderful day.