Lincoln Educational Services Corp (LINC) 2007 Q3 法說會逐字稿

Good morning ladies and gentlemen. And welcome to the third quarter 2007 Lincoln Educational Services earnings conference call.

At this time, all participants are in a listen-only mode. We will be facilitating and question-and-answer session, and we ask that you please limit your questions to no more than one and one follow-up.

This conference call is being recorded and web cast. An audio version of this call will be available on the Company's Web site for 90 days.

As a reminder this conference is being recorded for replay purposes.

Before we begin today's call, the Company would like to remind everyone that this conference call may contain certain forward-looking statements related to future events, future financial performance, strategies, expectations, competitive environment, resolutions, and availability of resources.

Such forward-looking statements are based upon current expectations that involve risks and uncertainties. Actual results may differ materially from those stated in the forward-looking statements based on the number of factors and other risks, which are more specifically identified in Lincoln's filings with the SEC.

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

Please go ahead.

Thank you. Good morning everyone and welcome to the Lincoln Educational Services third quarter 2007 earnings conference call.

Joining me today is Shaun McAlmont, our President and Chief Operating Officer, as well as Cesar Ribeiro, our Senior Vice President and Chief Financial Officer.

Following my remarks, Shaun will provide an update on operations. And Cesar will provide a detailed review of our third quarter 2007 financial results. We will then open the call for the question-and-answer session.

Now turning to our financial results from continuing operations. Our third quarter revenue rose 5.7% to $86.6 million as we benefited from a 10.3% improvement in year-over-year starts. We reported net income from continuing operations of $4.4 million and diluted earnings per share of $0.17 versus $0.11 in the third quarter of last year.

Average enrollment for the third quarter 2007 was 18,185 students, a 2.3% increase versus the same period last year. Sequentially, average enrollment grew by 10.2% from 16,509 at June 30, 2007.

Starts for the quarter were 9,725, as I previously indicated, represented a 10.3% increase over the third quarter of 2006.

The year-over-year improvement resulted from increased high school starts across our campuses, principally in auto, skilled trades, and health sciences programs. We're also pleased that starts from our media advertising also produced year-over-year improvement in the quarter, which we consider very encouraging as we move to the next two quarters where we rely solely on starts from media advertising.

And Shaun will cover our progress in the marketing are in his remarks in a few minutes.

Finally, as a result of the strong third quarter starts, our student population at the end of the third quarter was 4.9% higher than the prior year and represented a new record high population for the Company. Sequentially, the total population grew from 16,211 at June 30, 2007, to 19,463 at September 30, 2007, an increase of 20%.

And now I'd like to turn to our 2007 business outlook from continuing operations.

While the operating environment remains challenging, the various initiatives we've implemented during 2007 have produced positive tangible results. We are encouraged by the start and enrollment growth we experienced in the quarter. And our expectations are for continued organic growth in the fourth quarter.

We have made additional commitments in sales and marketing as we entered our fourth quarter to ensure we carry that momentum that we attained in the third quarter to the fourth quarter of '07 and into 2008.

Now this second half growth in year-over-year starts will position us to begin 2008 with a positive carry-in population versus the negative position we were in at the beginning of 2007. We believe that this will greatly contribute to our ability to generate revenue growth and improved margins during the first half of 2008 as compared to the first half of 2007.

Further, we expect to continue to benefit from our sharpened operational focus and diverse portfolio program offerings throughout 2008.

Now turning to our fourth quarter outlook. Based on the strong enrollment growth announced for the third quarter 2007, coupled with the outlook for continued organic growth in the fourth quarter, the Company estimates that fourth quarter earnings from continuing operations will be in the range of $0.33 to $0.35 per diluted share.

Our estimate includes $0.04 of additional charges, including severance and additional investments and sales and marketing in the fourth quarter to ensure continued momentum.

And with that said, I'd like to now turn the call over to Shaun for a review of operations.

Thanks, Dave. And good morning everyone.

Our third quarter results are a direct reflection of our effectiveness in executing our 2007 strategy. The various operational initiatives we've launched year-to-date are producing positive results and we continue to benefit from the program diversification across our five verticals.

At the heart of our strategy, we implemented a number of initiatives aimed at improving our high school recruiting efforts and allowing us to more effectively operate in the current environment.

Additionally, our other growth initiatives across our campuses, including new program rollouts on our re-branding have also contributed to the improved start growth.

As Dave mentioned, the impact of these initiatives on the third quarter and the balance of the year should result in a positive carry-over population as we enter 2008, which will also provide year-over-year improved financial performance during the first half of 2008.

As you may recall, in March we realigned our Company into two distinct operational groups. The Lincoln Tech Group, which is comprised of our primarily automotive and skilled trades campuses. And the Lincoln Education Group, which accounts for our non-auto campuses and online division.

The re-alignment of our Company has created operating efficiencies, promoted more effective management of our diverse program offerings, and improved our student recruitment processes.

This re-alignment has proven particularly effective with respect to our high school recruiting program and has aided in our improvements.

Over the course of 2007, we made concerted efforts to enhance our high school recruiting program through improved sales processes, flexible financial aid packaging, and more effective student services. These efforts proved successful in resulting in year-over-year growth in high school starts during the third quarter.

In addition to our focus on high school, we made the decision to close three campuses whose financial results were not achieving our expectations. Despite our belief that all three campuses offered valuable programs, we concluded that ceasing operations at those campuses was the appropriate course of action.

The closing of these campuses, which was completed in the third quarter, will allow us to more effectively manage our campus footprint and is in line with our long-term strategic goals.

In February, we completed our re-branding initiative well ahead of our initial schedule. The re-branding has strengthened Lincoln's brand recognition and successfully integrated our online and our on-ground educational offerings.

And while our re-branding created some confusion in our Philadelphia market, we quickly addressed the issues and as a result those campuses have returned to expected levels.

In addition to our various operational initiatives, we've also benefited from increased program diversification, generated through acquisitions and internal program development. Through the acquisitions of the New England Institute of Technology and the Euphoria Institute of Beauty Arts and Sciences, our program mix expanded significantly.

We've transplanted attractive programs in the areas of culinary, cosmetology, and spa management. In addition, we acquired a licensed practical nursing or LPN program from Harrison Career Institute earlier this year. This program has since been transferred to our Mount Laurel campus and we've been approved for other satellite locations in New Jersey.

We expect to begin LPN classes at two additional New Jersey campuses next month.

We've also developed a number of attractive programs including criminal justice and IT and are transplanting them across our system. In addition, our Florida campus provides us with the ability to develop multiple associate and bachelor's degree programs. We also have a number of programs scheduled to launch over the next several months for our online division.

We are also on schedule to begin additional skilled trades programs at our Grand Prairie campus later this quarter and in the first quarter of 2008.

We've continued to make progress in expanding our associate degree programs. These programs are now offered at 15 of our on-ground campuses as well as online. In addition, our total enrollment in these programs was 20.7% at the end of the third quarter compared to 16.7% at the same time last year.

We expect to continue building our associate degree program, primarily through our online division.

Now let me speak specifically regarding our four key priorities for 2007, as described in our first quarter call. To reiterate, these priorities include first enhancing our recruitment organization and process; second, redesigning existing programs and adding new programs to our lineup; third, developing our online platform while adding programs to it and fourth, improving our marketing and branding efforts.

I'd like to give you a brief update on each priority.

As mentioned earlier, we've taken and continued to take a number of steps to enhance our recruitment organization, including our re-alignment, training, and more focused corporate management. These enhancements have resulted in an increase of both high school and media starts for the total Company in the third quarter.

Specifically, as we've been discussing for the past three quarters, we've placed a concerted effort on increasing the volume of high school leads, the quality of those enrollments, and the number of starts. Our efforts proved effective, which resulted in improved high school starts for the high school recruitment period between May and October as compared to the prior year.

These starts are weighted more significantly toward our destination campuses, however high school increases were recorded across all school groups to varying degrees.

Our ability to convert TV leads into enrollments has remained steady compared to the prior year. However, the volume of TV leads declined primarily driven by reduced spending in the quarter as compared to last year.

As you may recall, during the third quarter of 2006, we significantly increased our marketing spend to try to offset the shortfall we experienced in our high school starts that year. Due to the reduced spending as compared to the prior year, TV enrollments declined on the reduced lead flow by approximately 22% for the quarter.

Offsetting the TV decrease was a 31% increase in web enrollments driven by higher converting leads captured via our new web site. The new site is generating more of these low cost, higher converting leads than last year. All Internet lead conversion and cost metrics have improved year-over-year as well, the most notable coming in at 17% increase in starts from this important lead source.

Changes in approach in conjunction with representatives Internet training has driven our ability to improve Internet lead productivity. Overall, these improving operational trends keep us optimistic for the fourth quarter year-over-year and related improvements as well.

Sales manpower remains at levels necessary to achieve our enrollment targets. Our voluntary turnover or our resignation numbers have decreased year-over-year for the second straight quarter as we worked to build the most effective sales team for the Company.

We're also considering new profiling tools to ensure that we are identifying and hiring the right person for these unique and important positions upfront.

The second priority outlined earlier in the year relates to re-designing existing programs and adding new programs to our lineup.

Program approvals and additions to date include the launch of cosmetology in Rhode Island; the launch of culinary in Columbia, Maryland; the upgrade of Allied Health programs across all schools; the approval and launch of LPN programs in our New Jersey schools; the launch of online business programs; the approval of electrician and welding programs in Texas for launch in the first quarter of 2008; the approval of online IT programs, which are in development to launch in the fourth quarter of 2007 and first quarter of 2008; and the approval and launch of IT programs for our 16 ground campuses to launch during first and second quarters of 2008.

Our program diversification has proven beneficial for our Company as much of our new program activity in 2007 has come from replication opportunities. The diversification in the Lincoln Education Group as well as the addition of new programs all contributed to the 10.3% start growth we experienced in the third quarter, proving that continued diversification is a long-term strength for Lincoln.

Regarding our third priority of advancing the online division, we continue to work on our long-range plans. We've pushed our year-end population target of 600 students into the first quarter of 2008 due to admissions representative licensing delays for degree completer in certain states and the launch timing of our important fully online IT and graphic design programs.

Additionally, due to the closure of our Norcross, Georgia, campus, where our fully online programs were accredited, we had to pause in order to transfer the accreditation to West Palm Beach for new programs and to our Marietta, Georgia, campus for our existing students to continue uninterrupted.

Even with these interruptions, we still expect online start contribution in the fourth quarter.

Approximately 200 starts were attributed to these delays, which again will push our 600-student target into the first quarter of 2008.

With this said, we continue to be encouraged by our online opportunity and will remain focused on adding new programs. Four new online IT programs are in development, one of which will launch in December. The other three will launch in the first quarter of 2008.

Online graphic design and web design, which was targeted as a fourth quarter start will start in the first quarter of 2008. And we also expect our first online bachelor's degree option in business IT and criminal justice to also launch in the first quarter as well.

2007 has been a developmental year for online operations as we've managed through licensing and accreditation delays. Although new to Lincoln and a developing core competency, we're committed to increasing our internal expertise and building sound online offering.

With that said, we have increased our population and expect our growth to continue at a steady pace with contributions to the overall population increasing throughout 2008.

Regarding our fourth priority, improving our marketing and branding efforts, we launched our new web site and continue the re-branding of collateral materials under the Lincoln brand in the third quarter. The new Web site has been built to optimize Internet search processes, maximizing lead flow to the site.

The web site replaces multiple sites for each of the previous brands and represents all Lincoln program verticals. The site is built so that search terms will directly lead candidates to the specific vertical, campus, or program page of interest.

Since launching the site on July 1, leads flowing directly to the Lincoln site have tripled, positively effecting our overall cost per lead, giving us confidence moving into the fourth quarter.

In addition to these key four priority areas, we've also seen year-over-year improvement in our student services metric. Notably, our student satisfaction survey results improved year-over-year. We measure student satisfaction in terms of high satisfaction or those scores attained, which fall between eight and 10 on a 10-point scale, and low satisfaction or scores between one and three on the same scale.

High scores have increased by 2.9% year-over-year while low scores have decreased by 1.4% for the same period, giving us notable improvement in both areas.

In summary, our focus on key priority areas over the past year has improved results. And we've done that in almost every measurable area, giving us confidence into our fourth quarter.

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

Thank you, Shaun. Good morning everyone.

As previously reported on July 31, 2007, our Board of Directors approved a plan to cease operations at three of our campuses. As a result of the above decision, the Company reviewed the related goodwill and long div assets for a possible impairment in accordance with SFAS142, goodwill and other intangible assets, and SFAS144, accounting firm impairment or disposal of long-lived assets.

As a result of that review, we recognized a non-cash impairment charge related to these three campuses of approximately $2.1 million as of June 30, 2007. Additionally, under SFAS144, long-lived assets were tested for recoverability and we determined that certain assets would not be recoverable at June 30, 2007, and recorded a non-cash charge of $0.9 million to reduce the carrying value of these assets to their estimated fair value.

As of September 30, 2007, all operations have ceased at these three campuses. And accordingly the results of operations of these campuses have been reflected in the accompanying statements of operations as discontinued operations for all periods presented.

Total loss from discontinued operations for the three and nine months ended September 30, 2007, was $2.3 million and $5.5 million respectively.

The following discussion of operations that follows focuses only on continuing operations of the Company. For the three months ended September 30, 2007, revenues increased by $4.7 million or 5.7% to $86.6 million from $81.9 million from the comparable period in 2006.

The increase in revenue for the quarter was attributable to a 2.3% increase in average student population, which as previously mentioned by Dave, increased to 18,185 for the quarter ended September 30, 2007, from 17,774 for the quarter ended September 30, 2006.

Our operating income for the third quarter 2007 was $8.1 million, which represented a $2.5 million increase from income from operations of $5.6 million for the third quarter of 2006. The increase in operating income is due to the leverage in our business model, which provides for higher contribution margins as our population increases.

Our ending population as of September 30, 2007 stood at a record of 19,463 compared to an ending population of 18,556 at September 30, 2006.

Our educational services and facilities expenses for the quarter ending September 30, 2007 were $37.1 million, representing an increase of $2.1 million or 6% as compared to $34.9 million for the quarter ended September 30, 2006.

The increase in educational services and facilities expenses resulted from, one, books and tool expenses which increased by $1.2 million or 23.8% as compared to the quarter ended September 30, 2006, primarily due to higher tool sales during the period; and, two, due to facilities expenses, which increased by approximately $9.9 million over the same period in 2006.

Approximately $0.5 million of the increase in facilities expenses was due to additional square footage at some of our facilities to accommodate new programs and higher utility, insurance, and property taxes.

The remainder of the increase was attributable to higher repairs and maintenance expense at our facilities, approximately $0.2 million, and overflow housing expenses, approximately $0.2 million at one of our destination campuses over the same period in 2006.

As a percentage of revenue, educational services and facilities expenses for the second quarter of 2007 increased to 42.8% from 42.7% in 2006.

Our selling, general, and administrative expenses for the quarter ended September 30, 2007, were $41.4 million, consistent with the quarter ended September 30, 2006. For the three months ended September 30, 2007, our sales and marketing expenses decreased by approximately $2 million from the same period in 2006.

This decrease is the result of the additional marketing expenses incurred in the third quarter of 2006 in an attempt to compensate for the shortfall we experienced in the high school market coupled with the shift in mix between television, advertising, and web-based initiatives.

Offsetting this decrease in sales and marketing expenses is an increase of $2 million in administrative expenses. The increase in administrative expenses during the quarter is due to the hiring of additional personnel in anticipation of higher enrollment levels and due to yearly compensation increases to existing personnel.

Additionally, during the quarter we entered into a lease agreement with a vendor for certain equipment. We incurred an upfront, one-time, non-cash charge of $0.5 million in connection with this agreement.

As a percentage of revenue, selling, general and administrative expenses for the third quarter of 2007 decreased to 47.9% from 50.5% in 2006.

For the quarter ended September 30, 2007, our bad debt expense was 5.3% as compared to 5.7% for the same quarter in 2007 -- I'm sorry -- for the same quarter in 2006.

Net income from continuing operations for the three months ended September 30, 2007, was $4.4 million or $0.17 per diluted share as compared to net income of $2.8 million or $0.11 per diluted share for the three months ended September 30, 2006.

Earnings per share from continuing operations during the quarter included non-recurring, non-cash charge of $0.01 per share incurred in connection with a lease agreement I mentioned before.

For the nine months ended September 30, revenues increased by $10.3 million or 4.5% to $237.5 million from $227.2 million for the comparable period in 2006. Included in revenue for the nine months ended September 30, 2007 is an increase of approximately $6.5 million over the corresponding period from our acquisition of Florida on May 22, 2006.

The remainder of the increase in revenue during the period is attributable to our Queens facility, which we opened in March 2006. This facility was a start-up facility in 2006 and only contributed six months of earnings while the nine-month period ending -- for the nine-month period ending September 30, 2006.

For the nine months ended September 30, 2007, the Queens campus was in operation for the full period.

Revenue for the period was also impacted positively by tuition increases, which averaged 3.5% for 2007 and a 0.4% increase in average student population, which increased to 17,193 for the nine months ended September 30, 2007, from 17,132 for the nine months ended September 30, 2006.

Our educational services and facilities expenses for the nine months ended September 30, 2007 were $104.5 million representing an increase of $8.4 million or 8.8% as compared to $96.1 million for the nine months ended September 30, 2006.

The acquisition of Florida resulted in $2.5 million of this increase. The remainder of the increase in educational services and facilities expenses was primarily due to, one, instructional expenses, which increased $0.5 million or 1% due to yearly compensation increases; two, books and tools expenses, which increased by $1.7 million or 15% as compared to the nine months ended September 30, 2006, due to higher tool sales during the period; and, three, facility expenses, which increased by approximately $3.7 million over the same period in 2006.

Approximately $1.7 million of the increase in facilities expenses was due to additional square footage at some of our facilities and higher utility, insurance, and property taxes. The remainder of the increase was attributable to higher repairs and maintenance expenses at our facilities, approximately $1.3 million; an increased appreciation expense, approximately $0.5 million over the same period in prior year.

Of the $1.3 million increase in repairs and maintenance expenses, as of September 30, 2007, $0.8 million was due to repairs and maintenance expenses at one of our campuses during the first quarter of 2007.

As a percentage of revenue, educational services and facility expenses for the third quarter of 2007 increased to 44% from 42.3% in 2006.

Our selling, general and administrative expenses for the nine months ended September 30, 2007, were at $124.1 million, representing an increase of $6.4 million or 5.4%, as compared to $117.7 million for the nine months ended September 30, 2006. Included in the $124.1 million is an increment of $3.3 million or 51.6% related to the acquisition of Florida.

On a same school basis, selling, general and administrative expenses increased by $3.1 million from the comparable period in 2006 due to increases of $0.9 million in sales expenses resulting from yearly compensation increases and a higher number of sales representatives as compared to the same period in 2006; $1 million decrease in marketing expenditures; a $0.5 million increase in student services; and a $2.7 million increase in administrative expenses.

The decrease in marketing expenses for the nine months ended September 30, 2007, is the result of the additional marketing expenses we incurred in the third quarter of 2006 in an attempt to compensate for the shortfall we experienced in the high school market, coupled with a shift in mix between television and advertising and Web based initiatives.

The increase in administrative expenses during the period is due to yearly compensation increases and increased expenses associated with paying centers.

Additionally, during the three months ended September 30, 2007, we entered into an agreement with a vendor for certain equipment for our campuses. We incurred an upfront one-time non-cash charge of $0.5 million in connection with this agreement.

As a percentage of revenue, selling, general and administrative expenses for the nine months ended September 30, 2007, increased to 52.2% from 51.8% in 2006. For the nine months ended September 30, 2007 and 2006 our bad debt expense was 5.2% and 5.2% respectively.

At June 30, 2007, as previously mentioned, we recorded a non-cash charge of $3 million related to impairment of goodwill and other long-term assets due to the planned termination of operation at three of our campuses.

Our net interest expense for the nine months ended September 30, 2007, was $1.7 million representing an increase of $0.8 million from the nine months ended September 30, 2006. This increase is primarily due to the decrease in our average cash balances during the period as compared to the nine months ended September 30, 2006.

For the nine months ended September 30, 2007, we recorded a provision for income taxes of $3 million or 41.7% of pretax income as compared to a provision of $5.1 million or 41.1% of pretax income for the nine months ended September 30, 2006.

The increase in our effective rate for the period is primarily attributable to the tax benefit associated with the exercise of stock options coupled with the effect of the Florida acquisition. For federal tax purposes, Florida is a separate C corporation.

Now turning to our balance sheet. At September 30, 2007, we had $3.5 million in cash and cash equivalents compared to $6.5 million at December 31, 2006. During the quarter we repaid $16.5 million of amounts outstanding under our credit facility. At September 30, 2007, we had $5 million outstanding under our credit agreement, which has been subsequently repaid.

At September 30, 2007, our stockholders equity was $152 million compared to $151.8 million at December 31, 2006, with the increase resulting primarily from stock-based compensation expense.

With respect to guidance, we are issuing fourth quarter guidance to reflect the closure of the three campuses in the third quarter of 2007 as well as previously announced charges. We are adjusting our forward guidance to reflect continuing operations.

Accordingly, as Dave previously mentioned, our EPS guidance from continuing operations for the fourth quarter of 2007 is expected to be in the range of $0.33 to $0.35 per diluted share.

This revised guidance reflects the elimination of the closed campuses, the charge associated with separation agreements, and the additional investments we are making in sales and marketing in the fourth quarter to ensure continuing momentum in the fourth quarter and into 2008.

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

Thanks, Cesar.

In summary, as we've stated on prior conference calls, 2007 will be a rebuilding year for the Company. As today's results indicate, the attention paid to improving the efficiency of our operations and our decision to further diversify our program offerings have proven successful as we generated positive starts and enrollment growth.

As a result of our efforts year-to-date and our outlook for continued organic growth for the balance of 2007, we will enter 2008 with a larger carry-over population and primed for continued growth and improved margins as we improve our capacity utilization.

Finally, we also strengthened our senior management team over the course of 2007. Shaun was appointed President and Chief Operating Officer in January. And in March two of our group vice presidents were appointed presidents to head up the Lincoln Tech and the Lincoln Educational Group that Shaun referenced earlier.

Additionally, we've recently promoted Scott Shaw to the position of Chief Administrative Officer.

These changes follow Piper Jameson joining Lincoln as Chief Marketing Officer in mid 2006.

So in summary, I'm very pleased with the talent that we have amassed. And I believe that the current senior management team positions Lincoln for continued growth and success.

And with that, I'd be happy, we'd be happy to begin with the question-and-answer session. So I'll turn this back to the operator.

Thank you.

(OPERATOR INSTRUCTIONS)

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

Hi, good morning.

Good morning, Sarah.

When you reported last year, you were kind enough to give us the start growth in June and July. And I'm wondering if you could give us a sense of what start growth was for August, September, and October.

Well, what we -- I think what you're referring to, Sarah, was we were -- as we moved into the second quarter we saw year-over-year improvement in high school starts in June. And then that accelerated in July.

And I think we advised at that time that at the end of the period, at least for high school, we expected to see a year-over-year start growth in the low double-digits. And I can confirm that that is the case.

What I also like to mention, though, that as we look at the automotive schools and then the balance of our schools, the other 24 campuses, it's really quite a different story in terms of the third quarter starts.

As we've previously mentioned, our Lincoln Tech Group, which consists of those 10 schools, about 70% of all our high school starts reside in those 10 schools.

And so year-over-year we had nice growth there. At the same time we continue to be somewhat challenged on the media side. So there was some offset there. However, overall for the quarter, which we normally wouldn't talk about but just to give you some sense.

In terms of automotive starts, they're up in the high single digits. So we're pleased with that overall. I think what I'm -- I think we as a group here are extremely excited about, however, is the diversification that we've been able to accomplish over the last couple of years and the impact that that's now having for us.

As we look at the third quarter growth, which principally still comes from media advertising in the non-auto schools. And that was up nicely.

So that's why we feel confident that over the next couple of quarters, while we will not have the benefit of high school starts, we'll continue to see nice organic growth.

Okay, great. And actually then just a follow-up on your comment about the automotive starts being up in the high single digits. It sounds like there was strength in or more strength in the non-automotive programs. Were there particular areas, healthcare versus skilled trade, that were stronger?

Basically, we had with the exception of health sciences, which were overall for the quarter about flat with last year, all the other verticals showed growth, obviously including automotive.

Okay, and then a question about your guidance. Can you talk about a bit what you're expecting in terms, broadly speaking in terms of enrollment growth and revenue growth in the fourth quarter?

Well, I think terms of start growth in the fourth quarter our goal, Sarah, is to be able to sustain the momentum that we experienced in the third quarter. And obviously we're going to be doing that without the benefit of high school starts.

So our objective is to capitalize on some of the marketing events that have been very successful for us. And that's why we're increasing the spending in the principally in some of the other across the board to support starts in some of the other campuses.

So I would say the answer to that is expect to see start growth at least in the high single digits for the fourth quarter.

Great. Thank you, just one last quick question and then I'll jump off.

The increased marketing spend for the fourth quarter, can you give us a sense of what the magnitude of that is? And whether or not that's more of sort of a normalized level given perhaps less by way of spending last fourth quarter? Or if you really view it as incremental, we wouldn't necessarily see that going forward.

Let me answer it this way. I guess what I was just talking about a minute ago, but I didn't make it clear enough.

Really we've been wrestling with the marketing over the last couple of years. Between TV, Internet, and basically cost per start, we're beginning to develop a higher level of confidence. I'll let Shaun speak to this in a second, but principally some of activities that have recently produced nice enrollment growth in many of the campuses relate to re-branding activities, open houses, surrounded by a build up in radio advertising and so on.

So I don't know whether I'd say it's incremental, but it's certainly something that we feel confident about. And we want to capitalize on to be, to give us a higher level of confidence for third quarter starts and certainly more importantly to also drive some of our early first quarter starts.

Shaun, do you want to just add something?

Yes, to give a little more I guess specificity, we added some manpower strategically, especially for our high school initiatives in 2008, although not to the same levels of increase as we did last year.

We also are developing additional high school support materials that we typically have not utilized in the past, collateral, electronic presentations, et cetera. And as Dave said, our local event marketing really has become a focus for us.

And the re-branding efforts that we engaged in for the Philadelphia market really showed us the benefit of focusing multiple media sources on an event, which ultimately drives leads; attendance to the events, and then also starts.

And we use a combination of radio, direct mail, newspaper, TV, and web again focused on the event. Where in a typical quarter we would probably just increase one particular lead source.

And as Dave said, the goal really is to maintain momentum in the absence of significant high school starts in the fourth quarter while also preparing to support our first quarter.

And just final point, those events that we both just mentioned really will be focused on our Columbia campus, which has started a culinary program, Grand Prairie with the new skilled trade, Lincoln Rhode Island where we've added cosmetology, and our Boston cluster of schools.

And so it's a very focused approach, but there will be incremental spending for those multiple lead sources.

Great, thanks very much.

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

Good morning, everyone, first a quick clarification just on the guidance for the fourth quarter. You had indicated, I just wanted to make sure I heard this correctly, $0.04 were related to one-time charges? Is that right?

That's correct.

Go ahead, Cesar.

The $0.04 are related to one-time charges as well as the additional investments in sales and marketing in the fourth quarter.

Oh, so that's entire. How much is just for the one-time charges of that $0.04?

It's probably about $0.015.

Okay, perfect. That's what I was looking for. Great.

And then Cesar, do you have what the average enrollment was in the fourth quarter of '06, stripping out those three campuses? So as we look at our model --

In the fourth quarter of '06?

Yes.

Was 18,193.

Perfect. And then I guess one question just for Shaun. Looking at your online population, how would you classify or what are the percent of students there that are, that perhaps are former Lincoln students or grads that are looking to do degree completers versus new students?

And are you noticing any difference in either the age of the students or type of student meaning working adult versus high school than what you're seeing in your ground campuses?

That's a good question, Amy. And at this point in time we typically aren't breaking out our degree completer and full online population. We'll probably start doing that in 2008 as the population becomes more meaningful.

But as of this point in time, the fully online population has grown to exceed the degree completer population. And that's the trend that we will probably continue to see through 2008.

I would say regarding average age that for the degree completer students, again, you had mentioned it. It really mirrors our ground population as they're continuing their diploma studies.

For our fully online population we have seen an increase in the average age. And so as we decide to start adding specific bachelor's programs and really moving out of the traditional Lincoln diploma programs, we expect that demographic to really start changing and the average age to start creeping upward, really sort of mirroring online student demographics in other companies.

Great. That's helpful. And then the last question and I'll pass it over is just any plans for tuition increases in 2008? What those might be and the timing on those?

Our last increases were effective April 1 of last year. They were in the range of 3.5%. I think at this point that we're anticipating a similar increase at the beginning of the second quarter of this year.

Perfect. Thank you.

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

Please proceed.

Good morning, guys.

Good morning.

A couple of questions, if I could. First of all can you tell us how much the three schools that you've closed actually earned in the fourth quarter of '06?

Oh, sure, in the fourth quarter of '06?

Yes, or were they losing money? Or since that's seasonal --

I actually do not have the information for the fourth quarter of '06.

I can tell you that for '06 the schools lost $0.06 a share, those three schools. I do not have that broken out by quarter, though.

Okay. All right. I think a quarter ago you commented when you were seeing the good start activity in June and then early in this quarter you just reported that there was some sense you may have pulled forward demand a little bit by just doing a lot better job on the marketing front. And maybe things wouldn't be quite as strong in the fourth quarter.

Did that end up happening? I guess if you said you expect high single digits starts growth you think it'll continue to be pretty strong, but just trying to get a sense of timing relative to last year.

No. And I think we're really focusing on the momentum we had in the third quarter. And certainly from a media-advertising point of view I don't think there's anything really pulled forward to any great extent.

So we just feel pretty good about our advertising and the benefit from the web site and some of the other things that Shaun mentioned before.

So that's what gives us the confidence for the improvement year-over-year.

Okay. As you look to '08 and start focusing more on growing the online business, what niche of the market, how are you targeting the brand to try stand out in what seems to be an increasingly crowded market? I guess is it building off of the Lincoln brand, as people know it today? Or are, what's sort of the angle you're taking?

That's a very good question and one that we've wrestled with regarding online.

We still are in a developmental phase. And as far as degree completer, it really does link to our ground programs and the niche that we're currently in. As I mentioned in my prepared remarks, we really are building a new core competency. And as we've acquired schools that have differing degrees and different program types than what we're used to, we're starting to take that new core competency and move it into online.

West Palm Beach gives us an opportunity to increase those associate degrees. And then also add our first bachelor's degrees in 2008.

So at this point in time we're going to focus on IT, graphic design, criminal justice. The same programs that we've built expertise in on the ground. And as far as differentiating factors, we're going to focus on service. I mean, it's one of the differentiators that we saw in our high school program, better contact, better financing, managing our rep turnover.

Those service metrics we think are really going to be what sets us apart.

As far as advertising, we can generate the lead flow. We've seen it early as we've worked with online. And we actually anticipate the lead flow getting stronger as we add programs to it. So we're very confident about what we see for 2008 in that regard.

Gary, this is Cesar. Just to add, we were able to get some more information while Shaun was talking.

Those schools lost $0.01 a share in the fourth quarter of last year. And this year they were expected to be positive in the second half of the year.

Okay, all right, great. That's helpful.

And then I guess the other question is just going back to the online. I know you're working with a marketing partner to help drive some of that lead generation. But can you also just give us sort a high level sense as to how you're thinking about marketing that? Is it likely mostly web based? Are you doing banner ads? What types of stuff are you doing to market the online business?

At this point in time it is predominantly web based. We focused for probably the last couple of years for ground and online on the third party vendors and paid search although, as I mentioned earlier, the new Web site really is allowing us to increase our organic lead flow.

Now I told you that the organic lead flow had tripled year-over-year since the start and launch of the new Web site. That also has impacted online leads positively as well.

So we will continue to focus on organic leads through search terms, those leads that flow directly to our Web site. In addition to that we will continue our third party paid search direction.

And, but you know, we also will look at other ways to advertise online as we start adding new programs. I mean TV's not out of the question and tagging some of our commercials with online options, et cetera.

Okay, and then just one last question. I know historically there have been going back like five years a pretty big presence in technology programs. And then as those got a lot tougher you closed a lot of those.

We're hearing you now talk about re-launching IT both in online and a bunch of the campuses. Can you give me a sense of what you're teaching? Is it largely like the graphic design stuff you mentioned? What are you teaching in IT and how confident are you that the market is now ready to support both those programs and also employment for your grads after? Thanks a lot.

We had an IT program that we were offering over the last couple of years. It didn't go away for some of our schools. And it was a network system administrator program.

And that program we thought was a little outdated in the skill sets that we were preparing students in. But we still saw increased demand. And so with that increased demand that we were seeing from the market, we upgraded the program to a network communication and information systems program that is a base with four areas of emphasis including security, et cetera.

And so we made the program a little more contemporary in the technologies that we're using. But it's still a program that will be attractive on the diploma level and also associate degree level with a bachelor's degree option to come in the first quarter.

But at this point in time we see the demand. We know that some of our competitors are seeing the demand increased. So we've upgraded the program and we'll launch it full board into the first and second quarters of 2008.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS)

And your next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed.

Thanks so much. Just a few numbers questions -- and I think we've all been trying to get at this. Is it possible for you to release the restated historical numbers from continuing operations so we can get sort of a base to model going forward?

We have not gone back and restated the first and second quarter. We are in process of doing that but as of yet we have not done that.

Is that something you think you'll have in the Q?

No. Not for the first and second quarter. No we will not have that on the Q.

I mean, I can give you revenues. I have revenues. Q1 '06 was $72.8 million; Q2 '06 was $72.5 million. However, we have not gone back at this point and restated the prior quarters.

And how about revenues -- the same thing for 1Q and 2Q '07?

Q1 '07 was $76.2 million; Q2'07 was $74.7 million.

I don't want to waste people's time on the call. If this is something -- even the enrollment data -- if that's something you could just send out to the analysts I think that would be very helpful.

That's not a problem.

I appreciate that.

Just looking, going back to the third Q starts you were kind enough to give us some color on some of the different verticals. I know this is your big push in terms of high school, but what percentage of your starts came from high school versus the media?

What percent came from high school versus media? Well, in the case of the Lincoln Tech Group about 70% of the starts came from high school.

And in the Lincoln Education Group, well let me answer it this way, Jeff. We traditionally have said that about 40% of our starts come from high school in the third quarter. And we're right in line with that overall.

That's fair. That's all I needed. Cause we're trying to pull the high school starts out going forward for the next quarter just to see quote, unquote what a normalized number might be.

Got it. Okay.

Fine. In terms of capital expenditures for the quarter, do you have that handy?

Yes, I do. Capital expenditures for the quarter were $5 million -- $6 million.

$6 million? And what are you looking for in the current quarter?

We're probably looking about $6 million to $7 million.

And I know you're not giving guidance for next year, but just based on your plans so far, do you think cap ex will be going up in '08 versus '07?

We're not sure yet. We're still in the process of putting our away capital budget together. Obviously I think as we said before our maintenance cap ex averages about 4% of our revenues. And then the additional -- whatever additional investments we will make in some of our facilities, we're still going through that.

So I'm not sure what answer to give you right now. But obviously we do expect revenues to go up next year. So the maintenance cap ex will increase just because it does stay constant 4% to 4.5% of revenues.

Okay, fair enough. Just one more numbers question. You had mentioned you expected start growth year-over-year in the fourth quarter. Can we get what 4Q '06 starts were just to get that base?

Yes, you may. They were [4,122]

All right, great. And again, if you could send out any historical information we'd really appreciate it.

We'll do, Jeff.

Thanks so much.

I would now like to turn the call over back to management for closing remarks.

Thanks everyone for joining us today. We look forward to updating you on our progress in our next call, which will take place early next year. And thanks for being with us today and good day.

This concludes the presentation and you may all now disconnect.

Good day.