Lincoln Educational Services Corp (LINC) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2006 Lincoln Educational Services earnings conference call. My name is Cindy and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn to call over to Mr. Dave Carney, Chairman and Chief Executive Officer. Please proceed, sir.

Thank you, operator. Good morning, everyone, and welcome to the Lincoln Educational Services third 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 an update on our recent developments and review our progress with regard to various growth initiatives. Larry will then provide some commentary on our marketing and recruitment strategies, then Cesar will provide a detailed review of our third quarter financial results, then I will jump back in with some summary comments.

Now turning to our results. We generated revenues of $84.5 million, an 8% gain over last year's third quarter. On an organic basis excluding the effect of the acquisitions of New England Institute of Technology at Palm Beach and Euphoria, the gain over last year was 1%.

In terms of average enrollment, third quarter 2006 enrollment increased 2.2% versus 2005, while on a same-school basis, we were down 4.8%. Starts for the third quarter decreased by 12% from the third quarter of 2005, and on an organic basis, the starts were down 15.4% compared to the third quarter of 2005, principally due to our technical schools. Overall, these schools were down 23.8% mainly as a result of the shortfall in our high school starts, which historically account for large enrollment in our auto programs.

Clearly, the third quarter was one of the most difficult we have experienced. We believe the decline in our starts largely reflects the impact of the strong labor market and the decision by many high school recruits to seek immediate employment over education in the near-term. We are taking steps to address how we do business and approach the high school market, in particular given the continued difficult environment. I will discuss this further in my remarks.

First, let me take a step back and give you a thorough picture of the environment and what occurred during the quarter. As we entered our third quarter, we had a healthy level of futures with regard to our high school recruits. In fact, our futures were ahead of the prior-year period. We therefore believe that we would see continued year-over-year improvement in our starts.

Now I should point out that over 75% of our projected starts from our high school recruiting are for our technical schools and principally for the automotive and diesel programs. However, as the third quarter progressed, we experienced erosion in our student starts. We believe this is largely due to the solid economy which results in low unemployment rates. For perspective, the number of high school graduates across our markets rose by an average of approximately 3% during the past three years, while the unemployment rate in our markets dropped by an average of approximately 13% during the same period. In fact, unemployment rates across the country are now at a five-year low and unemployment dropped by 13% or more in seven of our markets. The New York and Florida markets were particularly affected with unemployment rates dropping 24% and 26%, respectively.

As a result of this environment, many of our high school students that had applied to our schools chose immediate employment rather than pursuing education in the near-term. Moreover, we believe the attractive job market further elevated sensitivity levels pertaining to the affordability of education, given the attractive alternative of immediate employment.

At the same time, we increased our third-quarter media advertising in an attempt to counter the effect that the negative environment was having on our high school starts. We relied more heavily on Internet leads which came in at a robust phase with a lower conversion into enrollment and starts. However, we believe there maybe some benefit from those third-quarter Internet marketing efforts during the current quarter, given longer lead times. While we believe many prospective high school students from the class of 2006 will not pursue career-oriented education in the short-term if their immediate employment needs are satisfied, demand from employers across our verticals remain solid, as does interest among prospective students. Further, our programs are highly effective as reflected by the strong and continuing interest among employers. In fact, job orders from our employers across virtually all of our verticals continued to exceed the number of students that we were graduating. Therefore, we will continue to invest in our schools and programs for the future. While expenses related to these initiatives have further impacted our results and the full benefits of our recent acquisitions have been delayed, we believe we're taking the right steps to position our Company to benefit when the environment begins to improve. Given the demand among employers for Lincoln graduates, we expect to see a turnaround in starts when the economy softens.

In the meantime, we will continue to execute on our initiatives. We're making adjustments in how we do business in several areas. Some of these initiatives began prior to the third quarter and are related to our recent acquisitions and program expansions and will be accelerated, while other initiatives are new and will be launched in 2007.

Now I would like to turn to our strategy. Specifically, we're taking steps to adjust and transition how we operate our Company in terms of how we go about developing and marketing our programs, recruiting students and utilizing our classroom space. We believe these initiatives, which will build on our assets and core strengths, will significantly change Lincoln both internally and externally for the better. Let me explain some of these initiatives more fully.

First, branding. First, our rebranding effort is well underway. Beyond the strong job market, this is an increasingly competitive environment with career-oriented postsecondary institutions, online program providers and community colleges all vying for students. Therefore, we have to invest in and build the Lincoln brand. As with any rebranding effort, there's a transition period. We were able to change our name relatively quickly in television, media and the Internet, but it can take months for telephone directories and Yellow Pages to switch over. Consequently, it will take another six months to fully complete the rebranding process in the first group of schools.

The rebranding process, which spans 29 of our 37 campuses, is expected to be completed by the end of 2007, and to date, we have rebranded all but five campuses. Including our Florida acquisition, a total of 12 campuses, will be called Lincoln College of Technology, and 17 campuses will be called Lincoln Technical Institute. Excluded from the rebranding program are the Nashville Auto-Diesel College, our Southwestern College campuses and the Euphoria Institutes in Las Vegas.

Second, we were taking steps to better support our verticals. We are seeking to adopt more of a product development model along the lines of a consumer product company. We believe our diversification is a real asset and we intend on maximizing this benefit. We are aligning our program development, marketing and graduate placement resources within each of these verticals. This will allow us to develop more expertise in each vertical with a goal of accelerating our new product development and improving our capacity utilization.

Concurrent with this companywide initiative, we're taking steps to better utilize our capacity by introducing additional programs across our verticals. Given the current challenges we face with enrollments, we will further capitalize on our diversification. As we previously noted, the skilled trades, hospitality services and health sciences verticals are all expected to grow at double-digit rates over the next 10 years. As we realign and strengthen our organization by vertical, we will be in a better position to roll out programs in markets where there is strong demand and where other programs are not growing fast enough. For instance, this year, we started to take advantage of this opportunity by more aggressively marketing our skill trades programs. We expect to introduce several new programs in 2007 designed to maximize our assets and resources. We expect to be able to provide details on our next conference call.

Longer-term, we believe we have an opportunity to benefit from trends and lifelong learning. People from all ages and all walks of life are pursuing learning opportunities online and in the classroom. Given our program diversity and resources, we have the ability to tap into this market, primarily through our emerging online efforts. This is an area which we will provide more details on in early 2007.

Now turning to high school recruiting, the other area where we are focusing a considerable amount of attention is the process for recruitment of high school students. Given the strong employment market and the competitive environment, we're taking steps to better educate prospective students on the career opportunities and demand from employers across our verticals.

Finally, while we continue to invest in our verticals as well as review potential acquisitions, we will continue to operate as efficiently as possible. Our marketing and advertising spending during the third quarter is naturally not indicative of anticipated spending levels going forward. Further, as in the past, we continue to take steps to right-size our organization to reflect our current student population.

I should note that we have terminated an agreement we had to purchase a facility in Denver as development costs were coming in above budget. We are still committed to that market. However, in light of current marketing conditions, we will look for a smaller facility than originally contemplated.

So, despite the challenging environment, we're continuing to take a long-term view. We will invest in our programs and schools with a goal of improving our growth profile. As I mentioned, the benefits from our recent acquisitions and initiatives have been delayed primarily due to current environment, but we believe these initiatives will produce positive results in 2007. Our recent acquisitions have allowed us to further diversify with programs such as collision repair, electrical, LPN, and most recently, cosmetology and culinary, giving us the ability to replicate these programs across our footprint and improve our product mix.

Now the Florida full employment market has affected the initial expectations we had when we acquired New England Institute of Technology at Palm Beach this past May. However, we're continuing to roll out our initiatives at the school and we expect our investments in Florida to pay dividends over time, just as our other acquisitions have. We're enhancing our cosmetology program at the school through the expertise we gained at Euphoria, we are upgrading their auto programs to Lincoln standards and we're taking advantage of several programs that we acquired in Florida that uses a platform for online initiatives. With our rebranding in Florida recently completed, we're also increasing our marketing to high school and international students.

Finally, as in the past, our acquisition pipeline remains very active and we will continue to carefully review opportunities that expand our geographic footprint and add new programs to our verticals. Our progress at the Queens, New York facility has been delayed due to the tight labor market. We were confident that we are taking the right steps to better promote the facility in the current environment. At the close of the third quarter, we had a total of 263 students enrolled. We now expect our enrollment to reach approximately 300 students by year-end, down from our previous projection of 450. The campus has the capacity to instruct approximately 800 students. The Greater New York Auto Dealers Association, which is comprised of 650 dealers, recently confirmed that demand in their markets is in excess of 900 auto technicians per year.

In addition to program replications and expansions, we continue to make progress in expanding our associate degree program, which are now offered at 19 of our on-ground campuses. Our total enrollment in these programs was 17.2% at the end of the third quarter, up from 15% the same time last year.

Now I would like to comment on our online strategy. Our primary objective for 2006 has been focused on creating a technological infrastructure and developing an operational system, including the management team and Web technologies, while building our online enrollment. We are leveraging recently developed technologies that will allow our students to enroll, finance, orient and begin courses in a seamless and electronic process.

Furthermore, our instructional management team and staff are onboard and trained in these support and delivery technologies. We have developed and built 25 interactive courses for online delivery and we will build an additional 60 courses in 2007. We are currently educating 200 online students and expect another 100 by year-end. Now the unanticipated delay of the accrediting commission and receiving program approvals has had an effect and delayed our buildup in enrollment in 2006.

We're also in the regulatory approval process for five new fully online and 13 online degree completer programs for rollout in 2007. Having developed the requisite technologies and with a staff in place, we're confident that we will see growth in our online population from 300 students at year-end to approximately 1000 students toward the end of 2007. Our newly-expanded degree completion program will offer the opportunity for ground students at all 37 Lincoln campuses to advance into associate- and bachelor-level programs. We feel that this will be in differentiating factor for Lincoln schools against competitors in the auto, skilled trades, and medical diploma areas.

As I mentioned on our last call we have put a strong team in place, led by Shaun McAlmont, our recently appointed President of the Online Division, who has a successful track record in building an online business.

Now I would like to turn to call over to Larry. Larry?

Thanks, Dave, and good morning everyone. I would like to focus my remarks on 3 key initiatives, each designed to increase our average enrollment. Our focus on high school recruitment takes center stage in our 2006/2007 initiative. To that end, we have dedicated additional resources at the school level as well as in our corporate staff. We have 19% more admissions representatives focusing on high school recruitment this year versus last year. We have dedicated a 20-year veteran to focus on this effort in four of our largest schools, representing 45% of our budgeted high school starts. Through the end of October versus prior year, we were seeing the benefits of this focus with a high school buildup increase exceeding 40%.

Secondly, we're taking the steps to address the workplace pressures facing these high school graduates. By enhancing our financial aid message, providing more clarity in the financial aid presentation and ensuring a more timely packaging process, we believe that we can improve our start rate despite a full employment marketplace.

These steps, along with our admissions focus on selling a career versus a job, should contribute to our growth going forward. With a larger expected high school buildup and our financial aid packaging strategy in place, we anticipate a successful 2006/2007 recruiting year.

Finally, we maintain that diversification will facilitate our growth. Our focus on integrating our product development and marketing strategy with our verticals will allow Lincoln to tap these resources.

Let me be more specific. As Dave mentioned, automotive recruitment is being impacted by the low unemployment rate. 66% of our auto schools are diversified with skilled trades programs, as well as auto programs. We are seeing demand for our skilled trades programs overall on both the employment side in terms of job orders per grad, and on the student interest side as well in terms of a more favorable cost per lead in the media. There's also less competition for these programs in the marketplace.

We will increase our advertising for our skilled trades programs to allow them to grow at a higher rate while enhance our messaging to that automotive market regarding career opportunities in the automotive industry. Plus, there is little cost involved in expanding the skilled trades programs within these schools. We are seeing benefits in our strategy now as skilled trades enrollment is up 10% year-over-year at the end of the third quarter. With our realignment within our marketing and education departments along our verticals, we believe the marketing messaging and product development efficiency will strengthen both our recruitment costs and our student-teacher ratio. We are confident that these strategies will have an increasingly favorable impact over the next several quarters and contribute to our growth.

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

Thank you, Larry. As communicated this morning in our press release, our revenues increased by $6.1 million, or 7.9% to $84.5 million in the third quarter of 2006 from $78.4 million for the comparable period in 2005. Of this increase, approximately $1.3 million and $4.1 million, respectively, was attributable to the acquisition of Euphoria Institute on December 1, 2005, and the acquisition of New England Institute of Technology at Palm Beach on May 22, 2006, while the remainder of the increase was due to tuition increases.

Our operating income for the third quarter of 2006 was $4.6 million, which represented a 41.4% decrease compared to the third quarter of 2005. The reduction in operating income is due to lower-than-anticipated student enrollments during the quarter and higher expenses. On an overall basis, our educational services and facility expenses increased by $4.3 million, or 13.2%, to $36.8 million in the third quarter of 2006, from $32.5 million in the third quarter of 2005. The acquisitions of Euphoria and Florida accounted for $800,000 and $2.1 million dollars respectively of this increase. Excluding these acquisitions, instructional expenses increased by 4.6% over the comparable period in 2005, primarily due to increases in compensations and benefits.

Books and tool expenses increased 3.5% over the third quarter of 2005 due to higher costs of books and tools. The remainder of the increase in educational services and facility expenses were primarily due to facility expenses which increased $400,000 for the period. Educational services and facility expenses as a percentage of revenues increased to 43.5% of revenues for the third quarter of 2006 from 41.5% in 2005.

Our selling, general and administrative expenses for the third quarter of 2006 were $43.1 million, an increase of $5.1 million, or 13.5%, from $37.9 million in the third quarter of 2005. Included in selling, general and administrative expenses for the three months ended September 30, 2006 is %400,000, and $1.9 million, respectively, from our acquisitions of Euphoria and Florida. Excluding Euphoria and Florida, our selling, general and administrative expenses increased 7.6% as compared to the same period in 2005. This increase was due to a $3.2 million, or a 20.2% increase in sales and marketing expenses, offset by a $400,000, or a 1.3% decrease in administrative costs.

For the quarter ended September 30, 2006, our bad debt expense was 5.7%, as compared to 4.2% for the same quarter in 2005. This increase is due to several factors, including higher accounts receivable balances at September 30, 2006, as compared to September 30, 2005; loans to our students under a recourse agreement we entered in 2005 with student [marketing] association, Sallie Mae to provide private recourse loans to qualifying students and normal seasonal patterns in our business.

Accounts receivable at September 30, 2006 includes five new campuses that did not exist in the prior period -- our two Euphoria and two Florida campuses, as well as our new Queens, New York campus. Under the terms of the Sallie Mae agreement, we are required to fund up to 30% of all loans disbursed 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 the amounts on deposit. As of September 30, 2006 we had reserved $1.5 million under this agreement, which represents an increase of approximately $1.1 million from amounts reserved at December 31, 2005.

As a percentage of revenues, selling, general and administrative expenses increased to 51% from 48.4% in the prior period. As a result of the above, our operating margin for the third quarter of 2006 decreased to 5.5% from 10.1% in the third quarter of 2005. Net income for the third quarter of 2006 was $2.2 million, or $0.09 per diluted share, as compared to $5.5 million, or $0.21 per diluted share for the comparable period in 2005. Earnings per share includes a charge of $0.01 per share for the third 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.

Now let me turn to our balance sheet. At September 30, 2006, we had $12.4 million in cash and cash equivalents, compared to $50.3 million at December 31, 2005. The reduction in our cash balance is primarily attributable to our acquisition of Florida and the seasonality in our business. At September 30, 2006, our stockholders equity was $144.2 million, compared to $136 million at December 31, 2005, with the increase resulting primarily from net income from the period and stock-based compensation expense.

And, finally, with respect to guidance -- while we remain committed to a 15% growth rate on average over the long term, given the current industry trends and the difficult operating environment, we will obviously not reach this goal in 2006. We expect revenue for the balance of the year to approximate our first nine months increase versus prior year. Also, while we expect fourth-quarter net income to be strong, it will be down from last year mainly due to the shortfall we experienced in the third quarter as well as the effect of our initiatives, all of which we expect to have a positive affect on 2007 earnings.

Now let me turn the call over to Dave.

Thank you, Cesar. Larry and I have been involved in the education space for over 30 years, and we have witnessed firsthand a number of difficult periods similar to the one that the industry is currently experiencing. While this is obviously a challenging period for our Company, we are confident that we're taking the right steps to address the current challenges and improve the growth profile of the Company. Employer demand in our verticals remains strong, prospective students remain interested in the value proposition our education provides and our high placement rate indicates the quality of education that we provide.

Finally, as you know, we have numerous initiatives. However, in the near term, we will narrow our focus to those key to our near-term growth. To that end, I'm pleased with the recent reorganization and additions to our senior management team and the focus it brings to our key objectives for 2007. As we build to our online business, we now have Shaun McAlmont as President of Online with a solid track record of having built an online business for another postsecondary education company. We also recently brought on a chief marketing officer, [Piper Jamieson], with over 12 years of experience in the industry, again, with an excellent track record.

Increased enrollment from high school recruiting is of utmost importance as we grow since it supports our objective of increasing our enrollment and degree granting and the financing profile that's favorable for dependent students. This will be a top priority for our Company. In the area of product development, we have reorganized the group by vertical, also under Shaun McAlmont, with the objective of developing programs in each of the verticals while redesigning the curriculum to create efficiencies that will improve student-teacher ratios and translate into higher margins.

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

At this point, we would be happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS). Sara Gubins, Merrill Lynch.

The first question I had -- are you finding that the recent high school graduates who are not coming to your program are actually getting jobs in the automotive sector? Or, do you get the sense that they are just going somewhere else?

We get the impression they're going, yes, somewhere else. Let me just give you a little more color on that. Obviously, with the erosion in starts that occurred during the period, we actually had an outside firm do a survey of a sampling across two or three campuses. And what we heard was, number one, they have chosen to stay on the job or take a job. Number two, they may be deciding to go to a community college. And then number, three there, is no indication that they have enrolled in another proprietary school at this point.

Okay, I guess what I'm wondering is, are automotive dealers and other potential employers hiring people and doing more of the training by themselves?

That is (multiple speakers)

That's not what you are seeing?

I think with the skill set that is required, that is not the case, Sara.

The second question I had is, you talked about some of the initiative to improve high school recruiting. Given that we are now in November, I would assume -- I just want to confirm -- that the rest of the year, that it will be tough to make much of a dent in the rest of the year, and that those efforts are really targeted towards next fall. Is that correct?

You're talking about the high school (multiple speakers) for the summer of '07 start.

That is right.

That's correct. Basically, while we have a few high school starts remaining in October, or were remaining for October, this period -- this season is essentially over.

Okay. And then the last question -- can you give us any sense of how your working adult recruiting efforts went, and any numbers that you can put around what kind of growth rates you saw among that population?

Well I guess one way of laying that out would be to extract the high school start from the overall numbers. So starting with that, our average -- our third quarter starts would be down approximately 7%, excluding all the high school starts.

Okay, so it wasn't just a high school market issue, it was also the working adult market as well?

Well, that's true, but that would also fall into the -- that would apply to the verticals across the board. Although, as we indicated before, we see growth, for example, in the skilled trades area and in collision repair, for example, within the auto vertical in a couple of the schools. And then, if you just break out all of the non-auto schools, at least using that classification that we traditionally use, we would be down on starts approximately on a same-school basis about 6.3%. So, 7% overall, 6.3% in non-auto.

Among the working adult market?

That is correct.

Jeff Silber, BMO Capital Markets.

I just want to clarify a couple of things. First of all, in terms of your revenue guidance, and maybe guidance is the wrong word, but what you said about revenues for the fourth quarter, the growth rate year-to-date in revenues is a little over 8%. Is that what you were expecting for the fourth quarter?

Yes, Jeff.

Okay, I just wanted to clarify that. And also, I may have missed this at the beginning. Did you say what the decrease in starts for the entire Company was in the quarter?

I'm not sure. I think I did in my remarks. We were down 12% overall, and 15.4% on a same-school basis.

Okay, great. Do you have that data for the prior quarter?

I sure do. On a prior period, starts were on a same-school basis down 0.2%, and for total Company, up 1.6%.

Okay, and again, that is for the second quarter numbers?

That is for the second quarter.

Okay great, thank you for that. Just to kind of drill down by vertical, you said your skilled trades enrollments were up. Should we assume that the other three larger verticals were all down kind of in the same rate, or is the auto business really dragging down the others?

The auto is dragging down the others. I will give you some sense. The medical, the overall health sciences, is actually positive. The skilled trades is positive. And as a matter of fact, other than the small-business and IT vertical, the auto would be the culprit.

Okay, that is actually helpful, thanks. And should we assume that, when I look at the vertical, that auto is more exposed to high school recruiting than the other, or is it pretty much the same across the board?

No. Without a doubt, about 80% of the high school program relates to automotive starts.

Okay, great, one more and I will let somebody else jump in. Just kind of stepping back, you mentioned in terms of the growth strategy potentially looking at future acquisitions. Do you think it might make sense to put that on hold until we get things moving in a positive direction for the Company?

I guess my only comment there was that there is an active pipeline, and historically, we have made one acquisition a year. And while I take your point, I think we are well organized and in a position to continue to look at attractive acquisitions. We have had excellent performance for each of the acquisitions, notwithstanding the fact that the Florida acquisition is impacted by the market conditions down there at the moment.

Howard Block, Banc of America Securities.

I wanted to ask you, when you said that the population in the quarter was a disappointment relative to the future, is that another way of saying you had a disappointing show rate.

Yes.

You mean for the high school starts?

Well, overall.

Overall, yes.

And can you quantify what the show rate --?

I'm sorry?

Can you quantify the show rate for us?

Well, for the high school starts, we typically -- I think historically last year, it was around 50%, and this year, it's more in the 30s.

Okay. And for the working adult?

Let may make sure that we're -- that I understand --

Well I guess I would call it the sort of the total population that was included in your enrollment number that you shared, divided by the total enrollment or applications that you received.

We basically, believe that the starts, at least from enrollment to start (multiple speakers) it's overall about 60%.

Overall 60, and that is versus -- what was it last year?

Let's see.

While you are looking that up, maybe -- go ahead.

Let me clarify. Enrollment starts on a same-school basis overall is slightly over 61%. It's about the same as it was last year.

It's about the same?

(multiple speakers) Yes.

Because it sounded like you were somewhat surprised I guess based on the futures. It sounded as though your show rate was a disappointment. But if it was the same as last year, am I misunderstanding your comments?

Larry, why don't you clarify that?

Yes. I mean, on a year-over-year basis, we are essentially flat overall, which means that our adults, our media actually contributed favorably, and we did not experience a shortfall in that start rate. It was the high school program.

Okay. And then you said something, I think Larry, and I missed the opening part, but you said something about 45% of your budgeted high school starts in the context. My note-taking here is bad, but something about --

Yes we -- it was in relation to this individual who has a long history with the Company of successful high school development. And that individual was put into a brand-new position of focusing exclusively on high school starts. Now the high school starts he is focusing on are in four of our largest schools, representing 45% of our budgeted starts. So we believe that her focus on the high schools can achieve some significant gains as she brings those well over prior year, which is in fact is what is happening on average.

Okay, so that's what I want. So 45% of your budgeted high school starts for the Company come from only four high schools?

Four of our schools.

Oh, from four of your schools? Okay. And so if we look at the skilled trades, which seems to be I guess one of the bright lights, which skilled trade is it -- is it HVAC, is it the electronics, is it any one of the programs in particular?

Well, it's EST, which you're familiar with, and HVAC. There is obviously -- although we don't have the electrical programs in more than basically one campus at this point, but that is also a bright light. But the HVAC is up meaningfully over last year and we have an opportunity as we pointed out earlier to basically repurpose space in our technical schools to the extent to which the demand is there, and that's exactly what we intend to do. We intend to use our diversification as an asset. So with the electronics systems technology program, HVAC, electrical, which we will replicate into other schools going forward, as well as other skilled trades programs. There is less competition in this area and it's more of an adult market and it's something that we have a lot of experience with.

Okay. And one last question and then I will jump back into the queue. So if you look -- if you were -- I have asked this question differently before -- but if you were sort of running some sort of a regression analysis to explain the variance and the performance between your schools, it sounds as though program probably has more explanatory power than employment rates or anything else? Is that what it is, or is it -- to which would you attribute I guess more of the variance, the variability I say? Is it the program or employment rates of the market, or something else?

I would say it's more -- the auto -- at least and our experience -- I mean it is more related although it will vary to some extent by market -- it is more related to the employment, full employment situation in the particular markets.

Okay, so having skilled trades in more places would not necessarily have had much of an effect?

Well, I think it would, because the automotive students are the ones that are more inclined to take the construction jobs and so on because we can cite places now where we're down in automotive and we are up in skilled trades. But those programs ride next to the automotive programs in those particular schools. (multiple speakers) enrollment up 10 or 12%, automotive is down.

Gary Bisbee, Lehman Brothers.

This is [Brian Maguire] on for Gary. My first question was -- have you received any feedback from admissions reps saying that students are complaining about pricing, or that the gap between what they're able to borrow and what the programs are offering? I know you guys have been trying to find some alternative financing sources, but is there any thought to limiting the price increases you have or maybe even lowering it at some of the automotive programs?

Let me speak to it this way. We have -- I mean, obviously, that is always an option. We have experimented in one market, not in automotive, but in another program, so we've reduced the tuition. And while it had some immediate impact or affect, it was not a meaningful impact. I guess where we're at right now is, we're probably inclined at this point, given the environment going forward in 2007 to probably limit the tuition increases or do it more by market than by program, but probably not put through the increases that we have in the past, which have ranged from 3% to 5%. So probably, remain flat, let's say, for automotive, for the most part.

Okay. And then my next question is, I was wondering if you guys could provide an update on range of utilization at some of the campuses? I know that's a topic that you have been focusing on improving. It sounds like with a tough environment, that has been a continued challenge. It sounds like what you're doing with the Denver campus makes sense maybe to a smaller campus. But just as a follow-up to that, I was wondering if you could comment on any perhaps asset utilization strategies that might involve reducing capacity?

Well, yes. First of all, let me give you some capacity numbers, the current ones. For the automotive schools, which again just to clarify, automotive -- that is why I refer to them now as technical schools because they for the most part have more than one discipline. Overall, those schools right now are at about 60% of capacity, and the balance of the schools at about 40. So overall as a Company, we're at about 50%. When I mentioned the 60% for the technical schools, that includes the additional capacity that we added for Grand Prairie and for the Queens campus last year.

Now moving forward and thinking in terms of Grand Prairie, for example, we're reproducing space there for the purpose of installing new skilled trades programs. So the case of Melrose Park where we have additional space, we will likely add a skilled trades program. In the case of Denver, which we may have talked about earlier on an earlier call, particularly the size of that capacity -- that building, we were actually looking at a 161,000-square-foot facility, which as I mentioned earlier, that particular opportunity is gone. And at this point, we'll be more inclined to look for something in the area of 100 to 110,000 square feet, which would allow us to put in an automotive program, collision repair and skilled trades programs. So on the flipside of it, on non-auto, it would be our plan -- for the non-auto schools, it would be our intention where we're practical and we have programs earmarked for those, to install skilled trades programs as well.

Thanks. That's very helpful. And just my final question. In the past, you have shared your outlook for sales and marketing as a percentage of revenues being in the 20% range. It sounds like it was a little closer to 22% this quarter. Is that something that we should expect to continue to accelerate due to the marketing initiatives you have talked about, or are we at kind of a good run-rate here?

No, I think you should continue to look at it as 20% overall.

Okay, thanks for the color.

(OPERATOR INSTRUCTIONS). Amy Junker, Robert W. Baird.

Just a follow-up on the last question with respect to the spending levels. We saw SG&A as a whole north of 50% the last three quarters. Would you expect that to be the same? I know seasonality, typically we see that dip in the fourth quarter. But given your initiatives, if you could give a little more clarity on that, it would be appreciated.

Cesar, can you take that?

We would expect that SG&A in the fourth quarter to come down, as it historically has. I think as we said earlier, we chose to -- made a conscious effort to increase our advertising expenses in the third quarter to mitigate some of the shortfall we experienced in the high school market. Obviously, we're not doing that in the fourth quarter.

Additionally, I think if you take a look at the SG&A that we have been investing with our initiatives, that would also flatten out in the fourth quarter. So I would expect SG&A to come down in the fourth quarter.

Okay. And then also just Cesar on the bet that, given the agreement with Sallie Mae, is that something that is going to be permanently higher than it has been historically, or do you think you can get that back below 5% at some point?

We are -- one of our plans is to really concentrate on the high school market for next year, which will improve the overall financing options to our students, especially if they have a co-pay. As you know, I think next year, there is the financial aid -- does improve a little bit. So the gap should go down. So I would expect that -- while I don't expect it to go back to the 4% ranges we had historically, I would expect it to go down somewhat next year, to probably flatten out somewhere around 5%.

Okay and then --?

Can I just add one comment?

Sure.

Also, as we've mentioned, our overall initiative is to continue to increase the number of degree granting programs that we have for the Company. So to the extent to which we're able to do that and we have shown that we're up to about 17 -- I think it was a little over 17% of our students at this point -- that also translates into a favorable financial aid profile for the students. So that, along with high school, is -- I think will have a favorable effect on the bad debt rate.

That's helpful. And, finally, last question. For '07, do you think that a 15% revenue in earnings -- you know, 15% growth, is achievable in '07, or do you expect we need to see a change in the labor market in order to achieve that?

You know, I guess -- I've mentioned before the fact that as we think about tuition increases and so on, it's probably not likely that we'll increase tuition 3% to 5%, which has been a component of the overall 15%. So I think it's premature for us to be talking about 2007, but I would say that, given the current environment, I think it would be very challenging for us.

Howard Block, Banc of America Securities.

Do the recruiters at the high school, are they selling all of the programs? Is there still focus proportionate to your capacity? How does that work?

Larry, do you want to take that one?

Yes. Our recruiters sell all of the programs that occur within that particular school. Automotive has become -- has been the preponderance of our high school buildout. We're actually taking steps to ensure that we highlight the skilled trades programs where those occur to a greater degree now, given our experiences with that being a favorable discipline. It's easy, quite frankly, to make that story when you have the Katrina effect and construction and all that around the country. So I think that is a real asset that we possess.

So the show rate from the high schools where all programs are being sold, if I may call it that, is actually better for skilled trades than for auto? So it's not an age-driven [approach]?

No, but auto has assumed the preponderance of the preenrollment because it was the highest-flying program, if you will, within our offerings.

Okay, but there's no disparity in terms of the show rate by program in high schools?

No. It's really the economy and the low unemployment and the value proposition of going and getting immediate gratification at a job, because they are readily available as the unemployment rate shows, and versus committing to an expense going to school. So we think that is (multiple speakers).

I mean, the reason I asked the question is I'm trying to reconcile that with what David said earlier, which is -- you would have done better if you had had more skilled trades in certain markets, but yet, you're telling me, the skilled trades show rate was not any better. So what with the mix, it would not have made a difference, it sounds like.

Well by -- I think first of all, we're not sweeping skilled trades into high school programs.

Skilled trades, we're just going to highlight in our high school presentation the skilled trades to a greater degree than they were highlighted previously.

Okay. And then it sounded as though you increased Internet advertising in the middle of the quarter as you saw enrollment falling short of expectations. Is that true?

During the third quarter, we increased our advertising to try to counter some of the effect of the erosion in starts in the high school program. That is correct.

And so, when you turn on the switch for more Internet advertising, is that done when you see the show rate eroding? I mean, I'm trying to understand the timing of it, or how realistic your ambition was with regards to improving an enrollment number on such a short cycle?

Well, two things. One, we stepped up, increased the advertising during the third quarter earlier than later in the third quarter. And then, secondly, Howard, as I mentioned, while we've made that commitment, we didn't necessarily expect all of enrollments and/or starts to occur in the third quarter. In fact, to that point, we have seen some of that benefit the fourth quarter, particularly October at this point, which is -- while it's no -- I would not want to predict the future based on October, but it is actually -- we actually have positive starts in the month of October.

And so the enrollment advisors that are managing the leads via by the Internet are not the same people as recruiting in the high school. That is correct?

That is correct.

So, if you have the capacity in your enrollment advisor ranks and you have the capacity in schools, why wouldn't you just have had the heightened spending in Internet advertising irrespective of the results that you were seeing from high school?

Well, we were at a particular level pre- the third quarter that made sense relative to the staffing between managing between TV advertising and the Web -- that was predetermined. And working with the Web affiliates, they had given us input in terms of what they could reasonably buy and with a predicted conversion rate. Now when we increased the spending, although we had -- we went to those folks and we asked them in particular markets the extent to which they could increase the spending, we get that feedback. However, it's fair to say that the conversion rate from that exercise is not as favorable, not nearly as favorable, as the overall conversion rate from the Web initiatives, absent that in the third quarter.

Okay, all right, great. Thanks for your patience.

Ladies and gentlemen, this does conclude the question and answer portion of our call and I will now turn it back to management for any closing remarks.

Well thank you very much. As you can see, we have a number of initiatives that are focused on improving our profitability not only in 2007, but building a strong company long-term. We have a strong management team, including the recent additions that we have made, and we believe we are following the right strategy for the long-term growth of the Company. So with that said, I would like to thank all of you for joining us today and I look forward to updating you on our progress on future calls. Thank you.

Thank you for your participation in today's conference. This concludes today's presentation and you may now disconnect your lines. Everybody have a great day.