Lincoln Educational Services Corp (LINC) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter Lincoln Educational Service earnings conference call.

My name is Carrissa and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

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

Thank you very much.

Good morning everyone and welcome to the Lincoln Educational Services fourth quarter 2006 earnings conference call.

Joining me today is Shaun McAlmont, who was elected President and Chief Operating Officer on January 24th.

As most of you know, Larry Brown, formerly President and Chief Operating Officer and a member of the Lincoln organization for over 30 years, has assumed the new role of Vice Chairman and is working closely with Shaun to assume -- assure a smooth transition. And will also be focusing on establishing strategic partnerships and alliances across our verticals.

In addition, I promoted Scott Shaw, previously a Senior Vice President, to Executive Vice President, reflecting his continued strong contribution to our business. He will add Legal and HR to his current responsibilities, which includes Strategic Planning and Business Development.

Shaun, who was previously Executive Vice President and President of our Online division and earlier a Group Vice President, has assumed responsibility for all of Lincoln's operations, including leading us through the next stage of the Company's growth and development.

I've asked Shaun to provide a thorough review of his plans for the Company following my opening remarks.

As always, Cesar Ribeiro, our Chief Financial Officer, has also joined us today and will provide a detailed review of our fourth quarter 2006 financial results and will also comment on our financial guidance for 2007.

Now let me turn to our financial and operating results.

As we reported earlier this morning, our fourth quarter revenue of 86.1 million represented a 5.3% gain over last year's fourth quarter. Excluding the effect of the acquisitions of New England Institute of Technology at Palm Beach and Euphoria, revenue would have declined by 1.2%.

Net income for the quarter was 9.6 million or $0.37 per diluted share, a decrease of 22.9% compared to 12.4 million or $0.48 per diluted share for the same quarter a year ago.

Diluted EPS for the fourth quarter of 2006 included the impact of $0.02 per share incurred in connection with our re-branding initiative.

Operating margins declined in the fourth quarter of 2006 to 19.6% compared to 26% for the fourth quarter of 2005, reflecting lower average enrollment on a same school basis and increased costs related to our 2006 initiatives.

In terms of average enrollment, fourth quarter 2006 enrollment equaled 2005 while on a same school basis we were down 6.7%. Starts for the fourth quarter increased by 6.6% from the fourth quarter of 2005, however on a same school basis they were 4% below fourth quarter of 2005.

I should point out that in the fourth quarter of 2006 we experienced a same school quarter-over-quarter improvement in our starts. For the fourth quarter of 2006 our starts declined by 4% from the fourth quarter of '05, however this was an improvement from the 15.4% decline we experienced in the third quarter of 2006 versus the same period in 2005.

What was also encouraging was the fact that the auto starts increased in the fourth quarter of 2006 versus the same quarter in 2005.

For the full-year 2006 our revenue grew by 7.4% to 321.5 million compared to 299.2 million for 2005. Excluding the acquisition of New England Institute of Technology and Euphoria, revenue increased year-over-year by 2.2%.

EPS of $0.60 on a diluted basis decreased from $0.76 for the year ending December 31, 2005. And again, diluted EPS for 2006 included an impact of $0.02 per share incurred in connection with our re-branding initiative.

Now I'd like to address in some detail our fourth quarter and annual results.

As you will recall, we have historically been a second half company with over 40% of our starts occurring in the third calendar quarter and about 60% in the second half.

This results from large starts during this period from our recruiting in the high schools, which begins in August of the prior year.

Secondly, we have always experienced higher starts from media advertising each year in the August to September timeframe as it's traditionally when people return to or begin school.

In 2006 our ability to achieve our important third quarter start goals was impacted by several factors.

First, as we mentioned on our last call, we believe we were affected by a tight labor market. And this was confirmed by a survey of students who canceled with a majority saying they would remain on their jobs or start a new job and put off starting school.

This clearly impacted us in our high school recruiting both in our destination schools and locally, however more so for our destination schools where relocation is required.

Secondly, the show rate for media recruited students was lower than in prior periods.

It's important to note that while the recruiting environment has been difficult, our potential student base has not eroded. We are continuing to see strong demand for our programs from potential employers as well as healthy interest from potential students.

In fact, job orders from our employers across virtually all of our verticals have continued to equal or exceed the number of students we are graduating.

Given the attractiveness of our programs, the mission of course is to improve upon our ability to recruit and convert potential students into starts.

Execution. Since we can't count on improving economy over the short-term, we have to make changes to how we go about recruiting high school students, including developing closer interaction with them and fostering a more streamlined enrollment process.

Shaun will provide an overview of the steps we are taking to improve the efficiency and effectiveness of our high school recruiting process later during his prepared remarks.

A second factor impacting our results was related to financing. This ties into the need to finalize the packaging for high school students as early in the season as possible. And in retrospect we did not do a very good job in that area this past year and it undoubtedly affected our show rate. Shaun will outline the plan in place for this year.

Third, increased competition in several of our markets for similar programs also impacted our enrollment and a delay in getting new programs approved for those schools hurt us in the second half of 2006.

Finally, in addition to the factors impacting our high school and to a lesser extent our media starts, our 2006 performance was also affected by delays in our ability to fully benefit from several key strategic initiatives.

They include the ramp up of our Queens automotive campus, our acquisition of the New England Institute of Technology in West Palm Beach, and the launch of our Online Program. Let me touch on each of these initiatives briefly.

First our Queens automotive school, as we mentioned on our earlier calls, the new campus in New York opened in March of 2006. The ramp up of student population, which was slower than we would have liked, created a much greater loss than originally anticipated.

However, the campus turned profitable in the fourth quarter of 2006 and ended the year with nearly 300 students. Accordingly, we expect enrollment to continue to grow throughout 2007 and the campus to be profitable in each of the four quarters, creating a favorable swing in revenue and income year-over-year.

Next, our acquisition of the New England Institute of Technology at West Palm Beach was completed in late May of 2006. Now in 2007 we will not only realize the full-year effect versus only seven months in 2006, but we'll also benefit from the growth in revenue and net income from our initiatives to date.

Next in our online business we launched our first 100% Online Program in June and a second program late in the fourth quarter. Delays in program approvals at the accrediting commission negatively impacted our 2006 results and Shaun in his remarks will cover his plans for 2007 and beyond.

Another initiative in 2006 that will provide additional growth in 2007 was the opening of our new 101,000 square foot facility in Grand Prairie, Texas in July, adding to our existing 45,000 square foot campus.

There is no question that the relocation in mid-year affected of our starts and our retention. We are now well established in our new facility and enrollment in one of our new programs, collision repair, is already building very nicely. We expect 2007 to be a very strong year for Grand Prairie, bringing enrollment levels back to at least the 2005 levels.

Our acquisition of Euphoria in December of 2005 has now been fully integrated into the Company. And we expect growth at the two existing campuses, plus we will open a third campus in the Vegas market in the third quarter of 2007.

While the expenses related to these initiatives impacted our 2006 results, we did not see the corresponding level of enrollment that we were expecting. However, we believe we are taking the appropriate steps to extract the full value of these assets and expect to begin realizing the true benefits in 2007 and beyond.

We expect all of these initiatives to contribute to our EPS growth in the current year.

So to sum it up, 2006 was a very challenging year. Our results were impacted by the shortfall in the high school enrollment as well as delays in the benefits from several of our strategic initiatives. However, 2006 was also a year in which we made strategic investments in our business that should benefit our organization in the years ahead.

Most notably our program mix, while still skewed to our technical schools, has expanded significantly, driven largely by our Florida and Euphoria acquisitions. We have further diversified with fast growing programs such as collision repair, electrical, licensed practical nursing, cosmetology, and culinary.

In 2007 we also plan to add dental assisting and additional business and IT courses while expanding our Associate degree programs, primarily through our online division.

We are also moving forward in replicating these programs across our footprint in a concerted manner.

One final comment on our program development, we just completed a small acquisition, which we announced earlier this week, to acquire the LPN, or licensed practical nursing program, from Harrison Career Institute, which is located in Deptford, New Jersey who is closing their location.

We will establish a branch location of our Connecticut school in that location in New Jersey and assume about 30 of their current students. The purchase of this curriculum, which is approved by the New Jersey Nursing Board and ACCSET, is expected to save us 18 to 24 months in being able to offer the LPN program in other of our New Jersey campuses.

Within a few months we will transfer this program to our current Mt. Laurel campus.

Given the huge market opportunity being driven by an aging population and our strength in providing quality education, we're committed to growing our health sciences vertical. In particular we plan to offer LPN programs in as many sites as practical.

According to the Department of Labor there are twice as many LPNs employed, as there are medical assistants.

Finally we currently have 400 plus licensed practical nursing students at our Connecticut campuses. And we have a 95 plus percent pass rate for the national test that every student must pass in order to become an LPN. We are confident that we will achieve the same level of success in all of our markets.

And now turning to our 2007 guidance, while we're optimistic that we will see growth through the year as outlined earlier, the first half and in particular the first quarter will remain challenged largely due to the result of the effect of the poor third quarter 2006 starts.

While we were encouraged by the results that our marketing efforts have produced to date, the fact of the matter is we began the year with fewer students than a year ago.

However, the combination of the year-over-year increase in revenue and profitability from our 2006 initiatives, Queens, Online, the full year effect from our Florida acquisition, along with improved organic growth in the second half of the year, is expected to result in meaningful growth in revenue and net income.

Accordingly for the year 2007, we are forecasting revenue of 340 to 350 million or approximately a 5.8 to 8.8% increase over 2005 with EPS of 62 to $0.68 representing diluted EPS growth of 3.3% to 13.3% over 2006.

And Cesar will comment further on this later and also talk about our quarterly guidance in his remarks.

And now I'd like to turn the call over to Shaun, who will provide a detailed overview of our strategy going forward. Shaun?

Thanks, Dave. And good morning everyone, I appreciate the opportunity to address all of you today.

Despite the difficulties we faced in 2006, I'm optimistic about Lincoln's long-term growth prospects. While we certainly have a good deal of work to do, this is an experienced organization with an outstanding track record on multiple fronts. And I believe that we have the resources to return the Company to growth.

There is no question that we've made, and continue to make, the changes necessary to position ourselves for future successes.

Our 2007 operational priorities are as follows.

First and foremost we will enhance our recruitment organization.

Second, we'll redesign existing programs and add new programs to our lineup.

Third, we'll take advantage of the online infrastructure we've built by adding programs to it.

And fourth, we will improve our marketing and branding efforts.

With this said, there's no question that the environment we operate in has changed. And so we have to make adjustments in the way we do business. Going forward, it's truly a matter of execution and focus for our team in terms of marketing and recruiting students, replicating programs, effectively utilizing our capacity at current campuses, and building out our online resources.

Our key focus in 2007 will be student recruitment. Over the past few weeks, as I've transitioned with Larry Brown, we have analyzed the past 24 months of recruitment and marketing data to determine our strengths, our weaknesses, and ultimately to develop a list of lessons learned and a way to stimulate our growth.

With this said, there are six key areas within our recruitment organization that we've begun to address and will continue to address aggressively to improve our sales operations.

First is our call center, USA 800. In February we worked collaboratively with our call center partner to shorten our script and increase our transfer rates from inquiry to admissions representative. We feel that these changes will position the call center and our representatives for the most efficient live transfer of leads possible.

We're encouraged by the increase of our transfer rates from approximately 75% to 83% for the entire organization over the last three months.

Second is the military market. I've worked in this industry for about 17 years and have seen consistent attempts made to penetrate this important market of prospective students. I'm pleased to announce that we've engaged in an exclusive partnership with a military recruiting organization to provide training to discharged veterans and National Guard troops.

The organization promoted the successful Helmets to Hardhats branded operation and has now broadened their scope with the Hire a Hero brand where they provide employment and training opportunities to soldiers leaving active duty who register with their service. We look forward to advancing this relationships in the coming months.

We will designate and train military admission staff to work with these veterans. And will direct the enrolled students to either our online programs to our large destination campuses, which are equipped to handle housing and related relocation processes.

Although the relationship is in its infancy, we will keep you posted on our progress.

Third is our national recruitment effort. Our national branding efforts have given us an opportunity to organize a national admissions team for the first time, who will work with media inquiries that fall outside of our immediate campus territories.

This team will grow according to our lead generation efforts; especially in relation to our broad cable advertising and web lead generation strategies.

Fourth is our representative training. Our web leads have increased over the past 24 months and so we've worked closely with our lead generation partner, CUnet, to learn as much as we can about the role of the Internet in sales process and relating buying behaviors.

Basically we're operating in a new technological environment. Now based on this collaboration, we've accelerated our training development plans to better prepare our representatives to work with these leads in contact, response time, information exchange, enrollment, and ultimately follow-up service.

Fifth is our recruitment and sales management strategy. As I have examined our organizational structure, it's clear to me that in addition to the recent hire of an experience Chief Marketing Officer, we also need the focus of a senior level Vice President of Recruitment and Sales. We're in the process of searching for this position. And our process will not be limited by specifically seeking prior industry experience.

It's important that this individual come with a keen understanding of the changing environment in which we operate and that they come well versed in call center and Internet technology. We feel that that this will strengthen our position for growth in this environment.

And sixth, as Dave mentioned earlier, high school recruitment, our 2006 processes failed in relation to start or show rate. As many of the high school grads that we had enrolled chose other options, including work last minute before attending school.

As a result, we've established metrics, which will give us confidence that we're progressing toward our goals. An example of one of the key metrics that we track relating is relating to housing deposits for out of territory futures, who will ultimately attend one of our destination schools.

Our deposits year-over-year through February are higher. Approximately 8% of our out of territory futures in 2006 had deposits in. While this year we see a three-fold increase in the number of deposits for the same category of futures.

I should also take a moment to mention that as an insurance policy of sorts, we hired additional high school admissions reps at the end of 2006 in order to push our enrollment volume opposite any potential turnover this year and to ensure adequate customer service for enrolled students through their start dates.

We're currently making changes with regard to how we work with students and their parents during their decision making process.

Students and parents have to evaluate more schools and program choices than ever before. Ultimately a strong labor market, the influence of the Internet, and the potential for immediate gratification have further complicated the decision making process related to continuing one's education.

Additionally, a major area for concern for students and their parents is affordability. We are in the process of altering multiple aspects of our financial aid packaging process with the end goal of increasing students' comfort levels with their financing option.

Our goal is to accomplish this as early as possible in the decision making process. We're making the financing process more flexible and adjusting components of the steps in order to secure commitment from students at an earlier stage.

Now beyond improving marketing and recruitment processes, I believe we also have an attractive opportunity to replicate programs from recent acquisition. This will include both campus based programs and online programs.

In regards to campus based replications, as Dave mentioned, through our Florida and Euphoria acquisitions, we added a number of programs with excellent growth potential including culinary arts and cosmetology. We are well under way in replicating these programs at established campuses where we have excess capacity and an opportunity to increase enrollment.

For example, we'll add cosmetology to our Lincoln Rhode Island campus and culinary arts to Columbia in Maryland in the second quarter.

Additional development efforts related to other replications, new online programs, and efficiency re-development are also in process.

Restructuring our health sciences curricula to position more common courses between programs will be an important process in maximizing capacity within our non-automotive facilities. Other 2007 development opportunities include expanding our business in IT offerings, replicating collision repair and skilled trades, and creating online programs.

To accomplish these goals there will be some slight restructure of processes and staffing to facilitate the efforts.

We see a clear opportunity to utilize our Florida resources for the expansion of our online and associate degree programs. We intend to use our online platform as a launch pad for several degree programs through 2007 and 2008.

All told, our Florida campus provides us with the ability to efficiently develop multiple Associate and Bachelor's degree programs, which will be available to new and current students in all of our markets. Some of these programs include automotive service management, HVAC management, healthcare management, and culinary management.

Our online effort has been in development for the past two years and has been focused on developing a learning management system and programs that Lincoln can offer fully online in addition to degree completer programs for Lincoln graduates.

We've also developed technologies that allow for online admissions, online financing, and e-signature capabilities.

We closed the year with 200 students enrolled in our online programs, which includes the degree completer and full online.

We launched our second Associate of Applied Science degree program in late 2006. And we anticipate launching two additional Associate degree programs in the second quarter and a Bachelor's degree program unique to Lincoln College Online in the third quarter of 2007.

Online programs will allow for the expansion of our business and IT vertical, it will support degree completion for current students, and ultimately they'll become a growth engine for the Company. We expect approximately 600 students in these programs by year-end.

Our online efforts are now guided by two individuals with online experience within the industry and with experience in online learning management systems. The operation is based in Nevada utilizing available space in our Henderson, Lincoln, Nevada campus.

We are currently offering health information technology and criminal justice online. We've submitted regulatory applications for business and medical coding and billing degrees. And we anticipate approval for these programs in quarter two with the ability to enroll for starts in quarter three.

Additional fully online programs are in preparation for the second half of the year.

I'm pleased to announce that we received approval from ACICS last week for 10 online Associate degree completion programs that will allow Lincoln students at all 37 schools to complete Associate degrees online.

We will advertise to graduates and current students for enrollment beginning in quarter two. We will brand these programs as Lincoln management programs with the tag line, Lifelong Learning for Successful Careers, which we feel will be our differentiating factor in auto and skilled trades areas against direct competitors.

These programs will be presented to incoming, current, and graduated students by licensed admissions representatives at each of our campuses.

Let me turn now to a review of our marketing efforts.

As announced last week, we recently completed a major phase of our nationwide re-branding initiative, well ahead of our initial plan. We have now consolidated 29 of our 37 campuses under the Lincoln banner, including eight campuses now operating as Lincoln College of Technology, and 21 campuses operating as Lincoln Technical Institute.

This re-branding initiative projects a more powerful, unified image of Lincoln schools to our constituents. It focuses our resources for continued growth, and more effectively integrates our online and residential educational offerings.

The recent hire of Piper Jameson as Chief Marketing Officer gives us the opportunity to advance our marketing abilities. Piper has studied our marketing approach. She's conducted research. She's also created a campaign that we have branded, Lincoln -- Your Future, Now. An integrated approach including television commercials, sales collateral, newspaper, and radio ads will promote this campaign over the year.

You'll begin to see phases of the new creative as early as next week in some of our auto school markets.

Let me take a moment to expand on the broader marketing plan and its key component.

The first component relates to our brand evolution effort. This segment of our marketing approach focuses on the brand development of Lincoln's name across all 37 schools, developing our brand positioning, advertising campaign tag lines, and promoting our competitive advantage.

The second component is ensuring that all marketing and advertising is successful in the messaging to drive branding, student recruitment, and to attract new industry partnerships to our Company. We are currently creating new marketing materials, which allow each of our schools to instantly customize brochures for the students' interest. We've elevated our commercial productions using computer animated graphics, testimonials, and third party commentary that engage and speak directly to our target audiences.

We are in early development of our new web site, which is the third component of our plan. Our web strategists are building the site with online behavioral marketing, which moves users down a directional path with specific messaging based on the user's key word search methodology.

We're very excited about the development of a comprehensive and intelligent web site to assist with branding, our sales, and ultimately supporting our growth.

In order to advance the concepts of intelligence based advertising, our fourth component; we're developing new recording systems. We will be able to effectively measure, report, and analyze campaigns while setting our metrics to measure quality and quantity of leads from first contact through enrollment to start and even through graduation.

The new reporting system will provide very comprehensive analytics.

In summary, we've set five priority areas for marketing in 2007.

Number one, development of new sales and advertising collateral, number two, development and launch of new and intelligent Lincoln web site, third, new TV commercials, newspaper ads, and web ad production. Fourth, focused and performance based media buying and fifth, year round marketing support for our high school recruitment effort.

To sum up my comments today, we are focused on growth related tactics and longer term strategies. I hope the information I've provided on today's call will help you chart our progress in the year ahead. As I've mentioned, I'm very optimistic about our growth prospects over the long term.

I believe we're taking the right steps to address the issues that impacted our performance in 2006. And I believe you will begin to see tangible results from our efforts in the second half of the current year.

Now let me turn the call over Cesar for the financial review.

Thank you, Shaun. Good morning everyone.

I will start my comments talking about the fourth quarter and then move on to the year-end results.

Revenue for the fourth quarter of 2006 increased by 4.4 million or 5.3% to 86.1 million from 81.8 million for the comparable period in 2005, of this increase, approximately 1.1 million and 4.3 million respectively was attributable to our acquisitions of Euphoria and West Palm Beach, which I will refer to as Florida.

On a same school basis, revenue decreased by approximately 1 million from the fourth quarter of 2005 due to lower average student population during the quarter. For the fourth quarter of 2006, excluding these acquisitions, our average population declined by 6.7% to 17,539 students from 18,804 students in the fourth quarter of 2005.

Our operating income for the fourth quarter of 2006 was 16.9 million or 19.6% of revenues versus 21.3 million or 26% of revenues in the fourth quarter of 2005.

This 20.8% decrease in operating income is due to the continuing effect of lower than anticipated student starts during the second half of 2006 and higher expenses including approximately 700,000 incurred during the quarter in connection with our re-branding initiative.

On an overall basis, our educational services and facilities expenses increased by 4.7 million or 15.5% to 35.1 million in the fourth quarter of 2006 from 30.4 million in the fourth quarter of 2005.

The acquisitions of Euphoria and Florida accounted for 0.9 million and 1.7 million respectively of this increase.

Excluding the acquisitions, instructional expenses increased by 8.8% over the comparable period in 2005, primarily due to increases in compensation and benefits and due to lower capacity utilization at our campuses.

Books and tool expenses increased 7.7% over the fourth quarter of 2005 mainly due to the higher costs of books and tools.

The remainder of the increase was due to facilities expenses, which increased 0.4 million for the fourth quarter.

Educational services and facilities expenses as a percentage of revenues increased to 40.7% for the fourth quarter of 2006 from 37.1% in 2005.

Our selling, general, and administrative expenses for the fourth quarter of 2006 were 34.6 million, an increase of 4.5 million or 15% from 30.1 million in the fourth quarter of 2005. Included in selling, general, and administrative expenses for the three months ended December 31, 2006 is 0.3 million and 1.5 million respectively from our acquisitions of Euphoria and Florida.

Excluding Euphoria and Florida, our selling, general, and administrative expenses increased 9% as compared to 2005. This increase was due to a 1.2 million or 17.7% increase in sales and marketing expenses. And a 1.7 million increase in administrative costs, which included approximately 700,000 incurred in connection with our re-branding initiative.

Additionally, for the fourth quarter of 2006, our bad debt expense was 3.9% of revenues as compared to 3.8% in 2005.

As a percentage of revenue, selling, general, and administrative expenses for the fourth quarter of 2006 increased to 40.2% from [36.8%] in 2005.

Net income for the fourth quarter of 2006 was 9.6 million or $0.37 per diluted share as compared to 12.4 million or $0.48 per diluted share for the comparable period in 2005.

Earnings per share included a charge of $0.01 per share for the fourth quarter of 2006 and 2005, respectively, resulting from our use of the fair value method of accounting for stock-based compensations.

Earnings per share for the three months ended December 31, 2006 also includes a charge of $0.02 per share in connection with our re-branding initiative.

Now let me turn to the year-end results.

For the year, revenues increased by 22.3 million or 7.4% to 321.5 million for 2006 from 299.2 million for 2005. Approximately 5.4 million and 10.4 million respectively of this increase was a result of our acquisitions of Euphoria and Florida. The remainder of the increase was due to tuition increases, which ranged between 2 and 5% annually, depending on the program.

For the ended December 31, 2006 our average undergraduate full-time student enrollment increased 1.2% to 18,081 students compared to 17,869 for the year ended December 31, 2005.

Excluding our acquisition of Euphoria and Florida, our average undergraduate student enrollment decreased by 3.8% to 17,176 students.

Our educational services and facilities expenses increased by 15.1 million or 12.4% to 136.6 million for 2006 from 121.5 million for 2005, our acquisitions of Euphoria and Florida accounted for 8 million or 53% of this increase.

Excluding Euphoria and Florida, instructional expenses, and books and tools expense increased by 4.9% and 9.3% respectively over the prior year primarily due to increased compensation and benefit expenses and due to higher costs of books and tools.

The remainder of the increase was due to facility expenses, which increased 2.6 million over the prior year. Of this amount, approximately 0.8 million represented additional rent expense in 2006 as compared to prior year due to our expanded campus facilities in Rhode Island and Connecticut as well as from normal rent escalation clauses.

During the year we also experienced increased costs for insurance and real estate taxes, which increased approximately 0.4 million from prior year, utilities which increased approximately 0.5 million over the year ended December 31, 2005, and from repairs and maintenance at our facilities, which increased approximately 0.4 million over prior year.

The increase in our facility expenses also resulted from an increase in student meal plan expense of approximately 0.2 million due to cost increases in the meal plan as well as a new cafeteria facility at our Grand Prairie, Texas facility.

Educational services and facility expenses as a percentage of revenues increased to 42.5% for 2006 from 40.6% for 2005.

Our selling, general, and administrative expenses for the year ended December 31, 2006 were 157.3 million, an increase of 12.1 million or 8.3% from 145.2 million for 2005.

Approximately 1.5 and 4 million of this increase was attributable to our acquisitions of Euphoria and Florida respectively. The remainder of the increase was due to one, a 4% increase in self-expense resulting mainly from incremental compensation and benefit expenses related to additional sales representatives. And two, an 8.2% or 2.3 million increase in marketing costs as a result of increased advertising expenses associated with student fees and enrollment.

Additionally, for the year ended December 31, 2006 administrative expenses excluding Euphoria and Florida increased by 2.9 million over 2005. This increase includes approximately 0.9 million of re-branding costs incurred during the year.

The remainder of the increase is attributable to higher bad debt expenses in 2006 as compared to 2005. Bad debt expenses in 2006 increased by 4.4 million from 11.2 million in 2005 to 15.6 million for the year ended December 31, 2006.

This increase is due to several factors including higher accounts receivable balances throughout the year as compared to prior year, loans to our students under a recourse agreement we entered into in 2005 with Sallie Mae to provide private recourse loans to qualifying students, and the effect of increasing the payment terms on the self-financed portion of student tuition for some of our students from five to seven years.

Accounts receivable throughout the year also included five new campuses that did not exist in 2005 - our two Euphoria campuses, our two Florida campuses, as well as our new Queens, New York campus that opened in March 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 openly be utilized to purchase loans in default.

As of December 31, 2006, we had reserved 1.5 million under this agreement, which represented an increase of 1.1 million from amounts reserved at December 31, 2005. Funding under this agreement terminated by its terms on June 30, 2006.

These increases were partially offset by lower expenses incurred in rolling out our campus management and reporting systems, as well as lower compensation expense primarily resulting from decrease in annual bonuses.

As a percentage of revenue, selling, general, and administrative expenses increased to 48.9% from 48.5% in 2005.

Our provision for income taxes for the year ended December 31, 2006 was 11 million or 41.4% of pre-tax income. Compared to 11.9 million or 38.9% of pre-tax income for the year ended December 31, 2005.

The increase and effective tax rate for the year ended December 31, 2006 is attributable to the recognition of a tax benefit of approximately 0.8 million in 2005 related to the favorable resolution of a tax contingency.

Now let me turn to our balance sheet.

At December 31, 2006 we had 6.5 million in cash and cash equivalents compared to 50.3 million in December 31, 2005. The reduction in our cash balance is attributable to our acquisition of Florida in May of 2006 as well as the pay-down in the fourth quarter of all amounts outstanding under our credit agreements.

At December 31, 2006 our stockholders' equity was 151.8 million compared to 136 million at December 31, 2005 with the increases resulting primarily from net income for the period and stock-based compensation expense.

I will now turn to enrollments and metrics.

Our average student enrollment for the fourth quarter of 2006 was 18,840 students, essentially flat with the fourth quarter of 2005. Excluding the acquisitions of Euphoria and Florida, our average student enrollment decreased 6.7% as compared to the fourth quarter of 2005.

Starts for the fourth quarter of 2006 were 4,218, representing a 6.6% increase from starts of 3,955 in 2005. Excluding our acquisition of Euphoria and Florida starts were 3,789 for a 4% decrease from starts of 3,947 in 2005.

For the full year, average student enrollment for the year ended December 31, 2006 was 18,081 students representing an increase of 1.2% from the year ended December 31, 2005. Excluding the acquisitions of Euphoria and Florida, our average student enrollment decreased 3.8% as compared to the year ended December 31, 2005.

Starts for the year ended December 31, 2006 were 23,545 representing a 3.5% decrease from starts of 24,394 in 2005. Excluding our acquisition of Euphoria and Florida starts were 22,601 for a 7.3% decrease from starts of 24,368 in 2005.

With respect to our guidance, Dave provided you with our yearly guidance and I will now provide you with some quarterly guidance as the [correlation] relates to the first half of 2007.

For the first half of 2007, we expect the first quarter of 2007 revenues to range from 76 to 78 million. And we expect an EPS loss ranging from $0.05 to $0.10 per diluted share.

For the second quarter of 2007 we expect revenues of 76 to 79 million and we expect EPS of breakeven.

The balance of revenues and earnings, as Dave previously stated, will occur in the second half of the year.

Now I'd like to turn the call back over to Dave.

Thanks, Cesar.

Just in closing I'd like to thank Shaun for his overview in terms of the Company's plan for 2007. And just make a final comment.

While we continue to operate in a difficult environment, our focus in 2007 is very clear. We're strengthening our foundation, we're prioritizing our initiatives, and we're going to work on improving the effectiveness of our sales and marketing organization to increase conversion rates and drive enrollments.

And in turn we expect to see improved margins as the year progresses.

And with that I'd conclude and be happy to take questions. Operator?

[OPERATOR INSTRUCTIONS]

And your first question comes from the line of Sara Gubins of Merrill Lynch. Please proceed.

Hi, good morning.

Good morning, Sara.

I wanted to start out with just some questions about your guidance for 2007. And I guess the first question is, is there any way to give us a sense of what the incremental costs are going to be for the various initiatives that you outlined?

Cesar, you want to?

I would say that the incremental costs that we expect to incur for the initiatives will be more that offset by the increases or the benefits that we will gain from the initiatives we made in prior years, primarily our Queens facility, our online, and our West Palm facility.

So we feel comfortable that there will still be - the old initiatives will still produce a net benefit even after we take into consideration whatever limited investments we're going to make in the initiatives that Shaun outlined.

Okay. So it's not necessarily that we'd see a big jump up in your cost structure from these initiatives?

That is correct.

That's right.

Okay, and then just regarding the quarterly guidance, I'm trying to understand between the first and second quarters the revenue guidance is fairly similar from one quarter to the next. And yet the EPS guidance shows an improvement in the second quarter.

So I'm wondering, is there some sequential decline in operating expenses that you're thinking about for the second quarter? Or I guess another way to ask that is there anything unusual in the first quarter?

Yes, there is.

I mean basically the ramp up that these initiatives take hold in the first quarter. And they start producing meaningful results in the second quarter of the year. That is the difference between our EPS guidance.

Okay, so we would actually see sequential decline in costs between the first and second quarter?

Correct.

Okay, and then just last question on guidance.

I'm trying to understand your assumptions for the second half of the year. Just maybe within enrollment growth, kind of broadly speaking. Are you looking for mid single, mid to high single digit enrollment growth?

And are you expecting some of that or I guess what portion of that are you expecting to come from your existing campuses versus some of the new initiatives?

Well, I think we have taken a very conservative approach in what we have provided you early this morning. I think we're expecting some significant turn around from our initiatives including, I think as Dave stated earlier in his remarks, you're going to have the full-year effect of our Florida acquisition. You're going to have the full-year effect of Queens, which as of December 31 had 300 students. So that will ramp up nicely throughout the year.

I think Shaun mentioned the Online Program and the programs that are coming online. So you'll have the full-year effect of that operation.

We'll have the full-year effect of our Grand Prairie, Texas operation. As well as additional programs that we're opening, including cosmetology in Rhode Island and a culinary school in Columbia, Maryland.

So we feel that what all those initiatives, what a full year of operation at break even or better of those initiatives that we'll be able to achieve our revenue targets.

Additionally, we have projected to increase tuition for the year ranging between 2 to 4% starting on April 1st of this year.

As far as organic growth, we have budgeted in very modest organic growth except for certain facilities where we have either increased or expended our facilities or putting in new programs.

Okay. The 2 to 4% tuition increases in April, was the last tuition increase that you took in April of last year?

No. It was really at the beginning of the year.

And then I'm just a little bit surprised because I think on the last call you talked about not doing much by way of tuition increases given the tough environment. What drove that decision?

That is correct. Well we revisited the environment in each of our markets and made this decision.

Okay. Just a couple of quick housekeeping questions and then I'll turn it over.

Can you give us the percentage of your students in Associate degree programs in the fourth quarter?

Yes. We're at about 17.2% at the end of the year.

Okay. And sometimes you give the breakdown of students by program area.

Yes, we have done that in the past. Let me just see if I can get my hands on that. Do you have it over there?

Yes, we have about at the end of the year we have about 40% of our students in automotive and -- just making some quick calculations -- and about 30% in health sciences along with about 15% in construction or skilled trades with the balance in hospitality services and business and IT.

Okay. I'll jump back into the queue. Thank you.

Your next question comes from the line of Jeff Silber of BMO Capital Markets. Please proceed.

Good morning. Can you hear me?

Yes.

Okay, great. It sounds like Sara and I had the same question list. I only have a couple of more follow-ups.

Just a little bit more color on the enrollment guidance. Based on the new initiatives that you're putting through, do you think that the Company will start to see starts growth by the third quarter?

Yes, we do.

Okay. And you mentioned that auto starts were up in the fourth quarter. Is that because of the new Queens campus? If we pull that out I'm just curious how auto starts were tracking.

The Queens campus contributed a little bit of that. But on overall the increase in automotive starts, I mean it wasn't a big number, Jeff, but it was certainly quite a dramatic swing from where we were in the third quarter.

Okay, great. And just a few more guidance issues. For 2007, what kind of tax rate should we be using?

You should continue to model around 41.5%.

Okay, and in terms of stock-based compensation, what are you looking for for the year?

Probably about 1.8 million, somewhere around there.

Okay, and how about the capital expenditures?

10 to 14% of revenue.

Okay, fantastic. Now again, I know it's a little bit early. But given that the guidance is so backend loaded, can you comment in terms of how the high school recruiting is going so far?

Yes. We have staffed up, as Shaun mentioned earlier, to basically as an insurance policy. And we're tracking approximately where we were at this time last year, perhaps slightly ahead.

However, I think the real indicator in terms of success will be our ability to be able to package the students a lot earlier. And some of the benchmarks that we're looking at such as, Shaun mentioned in terms of housing deposits and so on, are encouraging.

And so I think we're comfortable we're going to have the proper staffing. And we're also very comfortable that we've got the right processes in place to basically effect a much, well an improved conversion rate or show rate, which is really the key success measurement here.

Okay, great, and then one final question.

I believe it was Shaun that was commenting about the military initiative. I know some of the other companies in the States have tried to step their foot in that area and have commented about some of the, somewhat onerous discounts you have to supply to current military students.

Can you comment on that and what impact you think that'll have on your business?

Sure. Shaun, you want to - that's your initiative.

Yes, thanks very much for the question.

I think that we're very encouraged about the relationship that we have in front of us.

We are doing things a little differently here. We're working with a company that currently recruits military I guess veterans for employment and training opportunities.

And so they've created a five-year database of interested participants.

What we will do is partner with them to be the preferred trainer of those prospective students, which gives us a little more confidence than the typical marketing approaches that are a little more arm's length relationship.

In addition to that, we assess their level of VA benefit along the way. And it looks like we will probably have, just to let you know, a military scholarship. But it will not be a meaningful amount. We will rely on their ability to finance through regular Title IV fund processes and utilize their VA benefits.

Okay, that's helpful. Thanks again. I'll let somebody else jump in.

Your next question comes from the line of Gary Bisbee of Lehman Brothers. Please proceed.

Hi, guys. Good morning.

Hi, Gary.

A couple of questions, I know that I'm probably beating this one a little much here following in the other questions.

But can you give us a sense maybe on a percentage basis or just some color on specifically how much of the improvement you're expecting in the earnings base in '07 is coming from maturation of the '06 initiatives versus a turn around in organic growth in other portions of the business?

Yes, I think, to be quite honest, we believe '06 is a rebuilding year from an organic base. Our goal is to stabilize our organic -- I'm sorry, '07 -- is to stabilize organically.

So we're not expecting much from the organic business in '07 with the exception of some of the ones that I highlighted. We do have select markets that are doing extremely, extremely well. We expect them to continue to do extremely well.

And in other areas, I think I mentioned Lincoln, Rhode Island; Columbia, Maryland, a couple of other select schools within there where we're expecting to do extremely well.

But with that said, I think a lot of what we anticipate is that all of these initiatives, which we have already demonstrated in the fourth quarter in December and so on, will produce very positive results in '07, which will produce a meaningful turn around in earnings. As well as there is some anticipation that our high school efforts this year will produce a better show rate than they did last year.

But even in that aspect, we're not trying to exceed '05 levels. We're just hoping to get back to '05 levels.

Okay. All right, that's good.

So would it be safe for me to sort of couch how you're talking about this as thinking that this isn't wildly optimistic? You feel like you've seen enough to have a good sense that the '06 initiatives are definitely going to pay off this year. And you're optimistic you can get some improvement in sort of the organic as we move through the year.

That is correct.

That is a good way to look at it.

Okay. That's very helpful. Thanks.

On the auto starts you said maybe not up a whole lot but a lot improved from last quarter. Can you give us any sense as to why you think that is? Is it better execution on recruiting front? Is there anything on the funding front that's changed? Or just maybe modest weakening in the relative strength of the employment markets? What caused this?

I think first of all we're talking about the prior quarter, the third quarter compared to the prior year was certainly impacted largely by the shortfall of the high school. The fourth quarter, which I'm talking about, is primarily based on media recruiting.

And part of the auto is also includes collision repair, which is growing in our new campuses as well.

So I think that's basically the contributing factor.

Okay, great. And then maybe a question for Shaun based on your experience with the online business. It seems to us just taking a look at the overall industry here that online programs in general continue to get more competitive. There's a lot more programs.

I understand completely your opportunity to offer the degree completion to current students and past graduates of the program.

But realistically as we look over the next couple of years, how optimistic are you that you can start to take a piece of the market share in the overall industry that's developing for Associate or you mentioned launching a Bachelor degree program?

Right. And just remember our starting point here. I mean we're starting from scratch.

And what we're looking for is a growth opportunity for the Company. We're not looking to have it grow wildly out of control, but be a meaningful part of our operation.

I think that there, from what we're seeing now, there is enough interest for us to populate those programs to the expected levels that we have for the next three years. And remember, I mean online for Lincoln is a new initiative. From the historical programs that Lincoln typically offers it is a little different.

And there's a little bit of a lag in that we have to develop these programs that are online ready, get approval for them, and then launch.

As we launch them we're noticing that it's your ability to advertise your operation. How do you appear on the web? What is your customer service like, et cetera?

You can appear to be, and position yourself, as a legitimate online option because so much of it is web based and exposure.

Because of that as sort of backdrop, we feel that we'll be able to exceed our own expectations. But again, we're not looking for some of the growth that we've seen in other organizations.

Okay, great. And then just two clean up questions, if I could.

I think the balance sheet data you gave us had long-term debt. Is that total debt or did a portion of what last quarter was long-term move into the short term?

Well I guess I'll just clarify. I mean as of December 31 we had no long-term debt. We had $188,000 of capital leases.

There's one item out there that's the finance obligation that we really don't consider debt. We consider that more as deferred income even though it's booked with debt. That was the gain on the sell lease fact that will be recognized in 2015.

So from a debt perspective we're basically debt free at December 31. We had the full amounts available under our credit facility.

Okay. And then can you share with us what cash flow from operations was for 2006?

Yes, that amount was $15,757,000.

Great. Thanks a lot.

Your next question comes from the line of Amy Junker of Robert Baird. Please proceed.

Good morning everyone.

Good morning, Amy.

One more question on the guidance. And I just want to make sure I'm clear. For the first quarter the 5 to $0.10 loss, how much of that or is there any impact from the re-branding effort kind of bleeding into that? We saw a $0.02 impact in the fourth quarter.

No. That should be past tense. There's nothing in there for that.

Okay. And just on re-branding, what were you able to do more quickly versus when you last spoke about it in November you kind of talked about that you could change the names pretty quickly but there are other factors that took a little bit longer.

I guess what accelerated that?

Well we kicked it off last June. We planned on it running about 18 months to completion.

And quite frankly with the, with Piper Jameson joining us on the marketing side and the opportunity to begin to get some leverage in terms of national marketing, we made the decision to accelerate it. It's been pretty well accepted across the markets, so we decided to jump the gun.

Secondly, the extent to which we wanted to get into the high schools and talk about Lincoln as opposed to so many different brands just drove the decision.

The only thing that lingers a little bit is signage to be very honest with you, just trying to get all of that in place.

So we completed the re-branding initiative at the end of the year. And now I think it's probably safe to say as we revisit it, just one final comment. We're probably going to do some additional introduction of the new brand in some of our markets just to clarify things, which shouldn't add appreciable expense.

Okay, great.

And last quarter you talked about you had terminated your agreement to purchase the larger facility in Denver. You were looking for a smaller facility. Any update there, have you found a facility yet that you're interested in?

We're continuing to look but we haven't found anything as yet.

Great, that's all I had. Thanks.

Okay.

[OPERATOR INSTRUCTIONS]

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

Hello?

Hello?

Hi, good morning. This is Aramie Dimm for Howard Block.

Just a quick question, as you look ahead to 2007 and the potential for organic enrollment growth, which of the verticals and the new initiatives that you discussed are most likely to be significant contributors to growth in order of magnitude, if you can?

Well I think the fact that we're so focused on improving the packaging aspect on the sales side for high school is likely to generate, in my view, the largest favorable effect.

Packaging the students early, getting their housing deposits in place and signing them up and basically eliminating the question in their minds in terms of affordability. And that's I think the opportunity we have versus last year.

And that could drive the, the third quarter is a significant quarter for us, as you can tell by our history.

Great. And then again on high school, what happens to starts if we excluded the high school starts in the fourth quarter?

Well they're not in the fourth quarter. It's principally in the third quarter. But we generally don't break that number out.

Okay. And just also in terms of show rates on the high school. I thought that it had been in the 30% range. Has there been any significant shift there?

Well, we're hoping there will be, yes. Based on the initiatives that we have in place we would hope to improve on those versus last year. They will vary school by school and destination school versus local and so on.

But overall we are assuming that we're going to have an approved show rate year-over-year.

Okay, but there hasn't been anything that happened in the past quarter that would have changed that at all?

Yes, well the only - the principal, the majority of the high school starts are in the June to October timeframe, principally in the July through September timeframe. So we don't have, all we can do is make assumptions at this point. And those are what I described to you.

Sure. Appreciate it.

And then just in terms of conversion show rates, Shaun had mentioned an improvement in the live transfer rates on the enrollment reps. And have you seen that translate into any conversion rate improvements? Or it's too early?

That's an indicator for us, however I'd rather not comment on conversion rates at this point. But we have a number of indicators that we're encouraged by. However it is too early to give anymore than that.

Okay, and then just a quick final question on advertising spending in the past quarter and any trends that you may expect as you look into the next several quarters?

Well as far as the spending in the last quarter, that was more or less in line with the same quarter a year ago. As far as trends are concerned, the only thing I would say at this point is. And it's so early in the year that I hesitate to even make the comment, but the lead flow and so on is for the first 6 weeks of the year has been somewhat encouraging.

But it varies by market. So I think what we would probably would be a smarter thing for us to do is to update you in early May when we have our first quarter earnings call.

Okay, great. Thank you.

You're welcome.

Your next question comes from the line of Sara Gubins of Merrill Lynch. Please proceed.

Hi, thanks for taking my call, just three quick follow-up questions.

Sure.

The first is Cesar, what are you expecting for the bad debt rate going forward?

Well I would love to say 3.9, but I don't that's realistic. So I think it's around 4.25, 4.3%.

Okay.

I know that one of the issues last year was just some delays in getting program approvals and any reason to think that that would be an issue in '07?

It's always a question, Sara. But the one thing I would say clearly is that that is one of our key initiatives really is to get the programs completed here and get them into the accrediting commission as quickly as we can. And Shaun and his group are all over that at this point.

So I'm hopeful that some of the delays that we've experienced in the past will not continue.

Having said that we're at the mercy to some extent, the staffing at the accrediting commissions. But that's why we'll accelerate the submissions.

Okay. And then just last question; you typically do one to two acquisitions per year. Are you thinking about that for '07? Or is '07 more focused on the assets that you have now?

Well it certainly -- our focus is definitely on the assets we have now without any question. It's not to say that we've stopped looking at acquisitions, particularly the ones that we've been successful with in the past.

But our focus is internal and growing what we have.

Okay, so we wouldn't necessarily expect to see an acquisition in '07?

Not necessarily.

Okay. Thanks very much. I appreciate it.

You're welcome.

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

Okay, thanks very much. We appreciate everyone joining us today. And as I mentioned a couple of minutes ago, we will be having our first quarter earnings call in early May and look forward to talking with you at that time.

Thanks very much and have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.