Lincoln Educational Services Corp (LINC) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter 2007 Lincoln Educational Services Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be conducting a 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 webcast and an audio version of the 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 may contain certain forward-looking statements related to future events, future financial performance, strategies, expectations, competitive environment, regulations 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 any forward-looking statements on a based 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, David.

Thank you, [Serita]. Good morning, everyone, and welcome to the Lincoln Educational Services Fourth Quarter and Full Year 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 fourth quarter and full year 2007 financial results. We will then open the call for the question and answer session.

Now turning to our results from continuing operations. Our fourth quarter revenue rose 8.2% to $90.3 million as we benefited from the strong third quarter starts of 10.3% and the 7.7% improvement in year-over-year fourth quarter starts. Net income from continuing operations was $9.6 million and diluted earnings per share from continuing operations was $0.37 versus $0.38 in the fourth quarter of last year. However, diluted EPS from continuing operations for the fourth quarter of 2007 included $0.04 of additional charges including severance expenses and incremental sales and marketing investments.

For the full year in 2007, our revenue grew by 5.5% to $327.8 million compared to $310.6 million for 2006. Net income from continuing operations was $13.8 million compared to $17.1 million for 2006. Diluted EPS from continuing operations was $0.53 in 2007 compared to $0.65 for the year ended December 31, 2006. Our average enrollment for the fourth quarter of 2007 was 19,167 students, a 5.4% increase versus the same period last year.

Now on our last call, we stated our plans to increase our sales and market expender in the fourth quarter with a goal of maintaining the overall business momentum generated during the third quarter. Now today, I'm happy to report that those efforts proved successful, as starts for the fourth quarter were 4,440, a 7.7% increase over the fourth quarter of 2006. Now with that said, it's important to note that our cost per lead was flat during the fourth quarter as a result of the favorable shift away from the more expensive television leads, the more economical leads from our website and other web-based initiatives.

Our 7.7% start growth in the fourth quarter follows the 10.3% growth we experienced during the third quarter this year and represents the fourth consecutive quarter of positive growth from continuing operations. Overall starts for 2007 exceeded the prior year by 7.1%.

Finally, as a result of our strong fourth quarter and full year starts growth, our student population at the end of 2007 was 8.5% higher than that at 2006 year-end. Now as a result, Lincoln entered 2008 with improved carry-over population, over 1,400 students and a healthier, more efficient company. As you know, we entered 2007 with a negative carry-in population due to a shortfall in starts during the third and fourth quarters of 2006. The lower carry-in population last year put pressure on revenues and our overall performance during the first half of 2007.

I am pleased that our enrollment starts performance during the fourth quarter and the full year directly reflects the benefits we're beginning to see from a re-branding, the year-over-year improvement in high school starts, our increased program diversification, more effective media advertising and improvement in our sales organization. Moreover, we are able to produce these results despite the overall operating environment remaining challenging.

Now let me turn to the steps that we've taken to improve our results in this challenging environment. The response for the slowdown in student starts that our entire industry has experienced over the past 24 months, we analyzed all aspects of our business and implemented a number of strategic initiatives aimed at improving the effectiveness of our organization. And I'd like to highlight a few of them.

One key initiative was to improve our high school recruiting process through a more efficient sales organization and completing financial aid packaging earlier in the process. Our efforts proved successful as we generated improved high school starts during our key high school recruiting period between May and October of 2007.

In addition, following Shaun's promotion to President and Chief Operating Officer in January of last year, we realigned our company into two distinct and focused operational groups, the Lincoln Tech Group and the Lincoln Education Group. This realignment was in response to our having significantly diversified our program portfolio via acquisitions and organic program development over the past several years. However, with diversity comes the need for addressing the different opportunities and challenges that our schools now face. The realignment and separation of our schools has enabled us to better manage our programs and improve our student recruitment processes.

Also, we made the decision to close three underperforming schools in 2007 whose financial results did not achieve our expectations. We concluded that the continuing operation of these campuses was inconsistent with our strategic goals. These are a few of the examples of successful changes that we have implemented. Shaun will provide further insight into other operational efforts during his prepared remarks.

Now turning to our 2008 outlook and guidance. Based on a positive carry-in population of 8.5% versus a year ago and an increase in student starts of 6% to 7% over 2007, we expect annual revenue of $355 million to $365 million and EPS of $0.62 to $0.66, representing diluted EPS growth ranging from 17% to 25% over 2007. Our outlook for 2008 does not anticipate any change to the current operating environment. Now in terms of first quarter 2008, we expect starts to increase 6% to 7% over the first quarter of 2007. We expect revenue of $81.5 million to $82.5 million and a diluted loss per share of $0.02 to a break-even EPS.

Finally, I'd like to take a moment to comment on the current student lending environment and the effect on Lincoln. As we reported back in January in our press release, we, like others, received a termination letter for our tiered discount loan program provided by Sally Mae or SLM, effective February 18, 2008. For the year ended December 31, 2007, approximately 7% of our revenue on a cash basis was funded by private loans, including SLM recourse, non-recourse and opportunity fund programs. The termination letter we received from SLM related only to its tiered discount program, which deals primarily with sub prime credit. Creditworthy students were not impacted.

For Lincoln, approximately 67% of our private party loans or about 4.6% of our revenues were considered sub prime on a cash basis for the year ending December 31, 2007. Now for clarification, we receive 80% of funding from Title IV and of the 13% from state grants and our cash payments with a balance for 7% from the private loans. But the time we received the termination letter, we had already taken steps to minimize the use of SLM funds to finance our students' education due to our anticipating changes in student financing, as well as changes that SLM made to its lending practices.

As a result, we believe that SLM's decision to terminate its tiered discount loan program will have a limited impact on Lincoln, as we had only used $500,000 at year-end 2007. Our current plan is to finance the students through internal funding and we are confident in our decision, as the creditworthiness of our students has not changed. However, we will continue to look for other options for student financing. And with that said, let me turn the call over to Shaun for a review of our operations. Shaun?

Thanks, Dave, and good morning, everyone. I'd like to begin my remarks today by providing you with an update on our 2007 priorities. Early in the year, I laid out a plan to address five key areas for our organization, including high school sales, marketing, online growth, media sales, and new programs.

Regarding the 2007 high school plans. One of the most important areas within our 2007 initiatives focused on a high school improvement as a means of organic growth. As a point of reference, high school performance issues in 2006 negatively affected third quarter 2006 high school starts, which in turn, had a negative impact on 2006 and early 2007 financial performance. With a tremendous effort, the high schools teams across our company caught up to prior year totals and leads of enrollment and effectively exceeded start rates, thereby improving year-over-year high school starts in 2007.

Throughout the year, high school sales manpower was ramped up and we framed these skilled field employees at higher rates than we've experienced in many years, keeping our momentum rolling into the 2008 high school recruitment year. Regarding the 2007 marketing plans. 2007 was a banner year for our marketing team, as they increased our total lead flow by 6% over 2006 totals with conversions and cost metrics remaining stable. For our most recent quarter, television leads rose approximately 20% of our lead total, while web sources produced 80% of our leads. For the full year, all web-based leads increased 10% over the prior year.

As we managed this shift to higher number of web-based leads, we executed our plan to develop and launch a new company website, which integrates the web presence of all of our path brands in the one unified Lincoln site. Moreover, it was developed with significant market research, focus group input and it is well optimized.

We define leads captured specifically by the website as non-duplicated inquiries with full name and contact information. These particular leads amounted to 29% of the total leads generated in 2007, an increase of 30.6% over the website leads generated in 2006. TV leads remain expensive and continue to decrease. Yet they remain an important part of our branding strategy. TV efforts will also be supported by a Lincoln automotive infomercial in the coming weeks.

Other important components of our 2007 marketing plan included increasing third party pay-per-lead advertising, redesigning collateral based on the re-branding initiative, increased newspaper advertising, new high school support media and new commercials featuring programs in each of our five verticals. Regarding the 2007 online plan, our nascent online program continues to gradually advance into a more meaningful component of our student population. We ended December with 320 online students in both the group completion and full online programs.

And as a reminder, we repositioned the online regulatory base from the closed Norcross campus to our West Palm Beach campus. We ultimately delayed starts by doing this. However, we gained the long-term opportunity to offer a broader range of programs. This transition also requires us to move to quarterly starts from monthly, thereby changing our start frequency early in 2008. Our base operation, learning management system and online faculty are all functioning well and serving as a platform for future scalable growth.

Regarding 2007 sales development, we launched a campaign to improve our sales performance in 2007 into 2008 by stemming rep turnover, improving conversions, fine-tuning our training and adding resources for sales staff and mangers. We've made significant progress in this initiative, as reps were able to make gains in high school conversions and starts in the third quarter and also make gains in media starts in the fourth quarter.

We're also seeing year-over-year improvements in sales performance during the early months of the first quarter of 2008. All in all, this is an impressive accomplishment for the Company in a challenging vocational market. This is clearly an area that will require continued attention and execution throughout 2008.

Regarding the 2007 new programs. In 2007, we were able to take advantage of our diversification and acquisitions as we launched and transplanted programs in multiple campuses. These new programs included the launch of cosmetology in Rhode Island; the launch of culinary in Columbia; the upgrade of Allied Health programs in our Southwestern schools; the launch of Licensed Practical Nursing 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 second quarter of 2008 and the approval of IT programs and launch for 16 ground campuses that began in the fourth quarter of 2007 and will continue through the second quarter of 2008. We feel that these launches will aid in the future organic growth of the Company and also in capacity utilization moving forward.

Now let me turn to our 2008 priorities. Over the course of 2007, we made significant progress in executing our various operational strategies and entered 2008 a more efficient and well-run organization. With that said, our work is not done as goals for 2008 are to build off of a strong foundation we laid during 2007 and continue to drive growth and capacity utilization. There are three key priorities for 2008. And they are first to advance our high school efforts, second, to launch a broader online strategy, and third, to continue to improve the execution of our basic functions.

Our 2008 high school plan is geared at sustaining the momentum we gained in 2007, while taking advantage of the stabilized rep force, improvements in our conversions, increased lead flow and the further development of key high school relationships around the country. As media automotive starts remain flat, we expect high school starts for automotive schools to show gains over prior year. As mentioned earlier, year-to-date automotive high school lead and enrollment totals are encouraging against prior year numbers. These students will start school in the months of June and October with heaviest impact in the third quarter.

Our 2008 online plan is targeting the launch and growth of our new Bachelor's degrees in Business, Criminal Justice and Information Technology. With the shift of the basic accreditation to the West Palm Beach campus, first quarter starts shifted to quarterly delivery to align with West Palm's delivering model. And although we won't reach the 500-student mark in the first quarter, we're making progress with our operation and a transition through the changes necessary to manage forward. We've received approval for our online Bachelor's degrees in Criminal Justice, Business Management and Information Technology. And these programs will be offered in May. These programs will also be offered as a part of the growth plan for online and the growth plan for our business and IT vertical.

In regards to our focus on 2008 basic executions, we're committed to continuing the management of our basic operational execution to higher levels of excellence. Specifically, we've been focused on consistent instructor training and improving the delivery of our growing number of diversified programs. We'll be vigilant in the ongoing management of the student experience through the development of informational and motivational orientations, helpful financing, meaningful class times and constant assistance towards student graduation.

We're improving our facilities through upgrades to existing sites, new facilities, new program build-outs and the addition of other student resources. We've implemented company-wide process to manage student attendance as we have determined this to be our root factor contributing to solid retention and graduation rates. We continue to add vital student services to maintain our population. We focus on corporate-wide placement assistance and preparing students for their job search well before graduation. And finally, we're making targeted program revisions to update our curriculum based on very specific feedback from our industry advisors.

We're already seeing progress related to this improved execution. Our student satisfaction survey results steadily improved during 2007 and we expect this improvement to continue through 2008. We measure student satisfaction in terms of high satisfaction, or scores between eight and ten on a ten-point scale and low satisfactions were scores between one and three on the same scale for a series of 65 questions. High scores have increased by 3 percentage points year-over-year and low scores have decreased by 1.4% for the same period, giving us notable improvement in both areas.

This metric is a great indicator of our progress in the earlier-mentioned areas of execution. Our ability to provide a positive learning experience while also fulfilling our mission reflects on our satisfaction scores. Another area of focus for our basic operations will include continued sales development with efforts looking at attention given to our stratifying of representative levels, revising our compensation, updating performance standards based on a changing lead environment, new local team structures and updating reward and recognition systems.

We will continue to advance our 2007 marketing initiatives into 2008 as well. Attention will be given to advancing the sales technologies embedded in our website, launching infomercials to further penetrate our vocational markets, promoting our emerging industry partnerships, increasing our presence in national high school skills competitions and new methods of promoting our campuses in each one of our local markets.

In summary, we're encouraged by the progress we seen in 2007. Our employee morale is high and we're seeing a great team orientation toward improving operations and growing our business. Our restructuring a year ago is providing a setting that allows for more effective management, expeditious problem solving and distinct strategy development for each of our operational units moving forward.

Operationally, our guidance assumes a first half of continued growth in non-automotive programs and flat automotive starts over prior year. In the second half, we expect high school starts to impact to automotive starts to year-over-year gains, while media starts will continue to drive higher starts in non-automotive programs. Needless to say, we're looking forward to a great year for our company. At this point, I'd like to turn the time over to Cesar for the financial review.

Thank you, Shaun. Revenues increased by $17.1 million, or 5.5%, to $327.8 million for 2007 from $310.6 million for 2006. Approximately $7.4 million of this increase was a result of our acquisition of New England Institute of Technology at Palm Beach, Inc. or FLA on May 22, 2006. The remainder of the increase was due to tuition increases.

For the year ended December 31, 2007, our average undergraduate full-time student enrollment increased 1.7% to 17,687 students compared to 17,397 students for the year ended December 31, 2006. Excluding our acquisition of FLA, our average undergraduate student enrollment decreased by 0.4% to 16,682 enrollments from 16,757 enrollments in 2006.

Our operating income for the year ended December 31, 2007 was $25.9 million, which represented a 15.4% decrease compared to the year ended December 31, 2006. The reduction in operating income was due primarily to lower average enrollment between years. The loss of revenue from these students coupled with high fixed costs of operating our business led to lower margins.

Our educational services and facilities expenses increased by $10.2 million, or 7.9%, to $139.5 million for 2007 from $129.3 million for 2006. Our acquisition of FLA accounted for $3 million or 29.4% of this increase. Excluding FLA, instructional expenses and books and tools expenses increased by $1.1 million or 1.7% and $1.8 million or 11.9%, respectively, over the prior year primarily due to increased compensation and benefit expenses and due to higher volumes of sales for books and tools.

The remainder of the increase in educational services and facilities expenses was primarily due to facilities expenses, which increased $4.3 million over the prior year. Of this amount, approximately $3.7 million represents increases in facility costs and $0.6 million represents additional depreciation expense during the year over prior year. The increase in facility costs is due to a $1 million increase in rent expense in 2007 due to our expanded facilities at our Rhode Island, Southwestern and Indianapolis campuses.

We also experienced increased costs for insurance and real estate taxes, which increased approximately $0.5 million from the prior year, utilities which increased approximately $0.5 million over the prior year and from repairs and maintenance expenses, which increased approximately $1.4 million over the prior year. Approximately $0.8 million of the increase in repairs and maintenance was due to higher than normal repairs and maintenance expenses at one of our schools. Educational services and facilities expenses as a percentage of revenues increased to 42.6% for 2007 from 41.6% for 2006.

Turning to our selling, general and administrative expenses for the year ended December 31, 2007, they were $162.4 million, an increase of $11.3 million, or 7.5%, from $151.1 million for 2006. Approximately $4.1 million of this increase was attributable for our acquisition of FLA. The remainder of the increase was primarily due to, A) a $1 million or 3.3% increase in sales expense, resulting mainly from yearly compensation increases; B) a $0.6 million or 2.1% increase in marketing costs as a result of increased advertising expenses associated with student leads and enrollment; and, C)a $5.2 million or 7% increase in administrative expenses over the prior year.

The increase in marketing expenses during 2007 included a shift from television advertising to internet-based initiatives and the re-launching of our website. These initiatives increased student leads at a lower cost per lead. Included in administrative expenses during the year are an upfront non-cash charge of $0.5 million incurred in connection with the termination of certain lease agreements and a $0.6 million charge incurred in connection with severance payments related to the separation of employment of two executives.

The remainder of the increase in administrative expenses was attributable to a higher provision for bad debts for 2007 as compared to 2006. Bad debt expense, excluding FLA in 2007, increased $1.8 million from $14.9 million in 2006 to $16.7 million for the year ended December 31, 2007. This increase was due to higher accounts receivable balances throughout the year as compared to prior year, resulting from increased loans to our students. The remainder of the increase in administrative expenses is due to yearly compensation increases to existing personnel and higher benefit costs during the year.

As a percentage of revenue, selling, general and administrative expenses increased to 49.5% for 2007 from 48.7% for 2006. As a result of the above, our operating margin for the year ended December 31, 2007 decreased to 7.9% from 9.9% in 2006. Net income from continuing operations for the year ended December 31, 2007 was $13.8 million, or $0.53 per diluted share, as compared to $17.1 million or $0.65 per diluted share for 2006.

Now let me turn to our fourth quarter operating performance. For the fourth quarter, revenues increased by $6.8 million, or 8.2%, to $90.3 million for the fourth quarter of 2007 from $83.5 million for the comparable period in 2006. Revenues for the fourth quarter of 2007 were positively impacted by a 7.7% increase in student starts and an increase in our average population of 5.4%. For the fourth quarter of 2007, our average population was 19,167 students compared to 18,193 students in the fourth quarter of 2006.

Our operating income for the fourth quarter of 2007 was $17 million, which represented a 1.2% decrease compared to the fourth quarter of 2006. The reduction in operating income was due to the increased investments in marketing during the fourth quarter of 2007 and the severance related charges. Educational services and facilities expenses increased by $1.7 million, or 5.3%, to $34.9 million for the fourth quarter of 2007 from $33.2 million in the fourth quarter of 2006. Approximately $0.8 million of the increase in educational services and facilities was due to yearly compensation increases to our instructional staff, increases in books and tool expenses resulting from annual cost increases and higher volumes of sales for books and tools.

The remainder of the increase is due to additional rent expense in the fourth quarter of 2007 due to our expanded campus facilities at our Rhode Island, Southwestern and Indianapolis campuses and higher depreciation expense during the year. Educational services and facilities expenses as a percentage of revenues decreased to 38.7% for the fourth quarter of 2007 from 39.8% in the fourth quarter of 2006.

Our selling, general and administrative expenses for the fourth quarter of 2007 were $38.3 million, an increase of $4.8 million, or 14.6%, from $33.5 million for the fourth quarter of 2006. Of this increase, approximately $1.8 million relates to increases in advertising during the fourth quarter of 2007 as compared to the fourth quarter of 2006.

Administrative expenses during the quarter accounted for an additional $2.7 million of the increase. Included in this increase is approximately $1.8 million in additional bad debt expense. The increase in bad debt expense is primarily due to the increase in day's sales outstanding to 25.1 days from 22.8 days in the fourth quarter of 2006. This increase was due to higher accounts receivable balances throughout the year as compared to prior year, resulting from an increase in funding of loans to our students.

Included in administrative expenses for the fourth quarter of 2007 is a $0.6 million charge incurred in connection with severance payments related to the separation of employment of two executives. The remainder of the increase in administration expenses as well as selling and general administrative expenses is due to yearly compensation increases and increases in the costs of employee benefits.

For the quarter ended December 31, 2007, our bad debt expense was 5.7% as compared to 3.9% for the same quarter in 2006. As of percentage of revenue, selling, general and administrative expenses for the fourth quarter of 2007 increased to 42.4% from 40.1% for the fourth quarter of 2006. As a result of the above, our operating margin for the fourth quarter of 2007 decreased to 18.8% from 20.6% in the fourth quarter of 2006.

Net income from continuing operations for the fourth quarter of 2007 was $9.6 million, or $0.37 per diluted share, as compared to $9.8 million, or $0.38 per diluted share, for the comparable period in 2006. Turning to our balance sheet, at December 31, 2007, we had $3.5 million in cash and cash equivalents, compared to $6.5 million at December 31, 2006. The reduction reflects our continued investment in our business.

At December 31, 2007, our stockholders' equity was $162.5 million, compared to $151.8 million [corrected by company after call] at December 31, 2006, with the increase resulting from net income for the period and stock-based compensation expense. And with that, I'd like to turn the call back to Dave.

Thanks, Cesar. In summary, 2007 was a successful year for the Company on many fronts, as we implemented a number of structural and operational changes that re-ignited our growth and fostered a sense of optimism across our operations. As a result of our growth in starts in 2007, we entered 2008 with a positive carry-over population and at a significantly stronger position. I'm also encouraged by first quarter starts to-date. As indicated earlier in our guidance, we expect the quarter to represent the fifth consecutive quarter of positive growth.

In 2008, we expect to further sharpen our operational focus and continue driving program diversification through the introduction of new ground and online programs across our five key verticals. In addition, we look to capitalize our improved position and drive margin expansion through increased capacity utilization during the second half of the year.

Finally, organizationally, we are much stronger today because of the succession planning which has resulted in a young, energized management team coupled with the establishment of two distinct operational groups, the Lincoln Tech Group and the Lincoln Educational Group. And with that said, we'd be happy to begin the question-and-answer period. Operator?

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Sarah Gubins of Merrill Lynch. You may proceed.

Hi, good morning.

Good morning, Sarah.

Could you talk a bit about enrollments trends by program area. And then within auto, any thoughts on why high school is improving but media is still struggling?

Well, let me start with the trends across the five verticals. I would say that all of the verticals with the exception of auto are trending favorably based on our media advertising. Auto is still flat. We contributed to basically, the inability to compete with the job market. And we're making changes in our advertising to become more effective in trying to reach those folks.

The high school side of it is very encouraging. And well, Shaun mentioned the fact that we expect to be flat on the auto side in terms of starts for the first half. The build-up, year-over-year, is very encouraging. And I think that really relates to the fact that we have a much stronger sales force. And they see the career opportunity at the high school graduate.

Great. And then any color on healthcare and other programs, skilled trades and that sort of thing?

Well, the skilled trades programs, as we mentioned, we're very encouraged by the build-up increase. We just rolled out electrical and welding in the Grand Prairie, Texas facility with our first class start February 29th, very encouraging. We expect that to continue nicely over the balance of the year. So that's a vertical with a lot of upside from our standpoint. As far as Health Sciences goes, the introduction of the LPN program in New Jersey is building nicely. The medical assisting continues to grow well. And as far as hospitality services and so on, we're encouraged there as well, Sarah.

Okay. And then just one follow-up question. Can you talk about your plans for price increases next year?

We would expect -- we've already increased prices effective January 1st in many of our schools by about 3% to 3.5%.

Okay, thank you. I'll jump back in the queue.

Okay.

And your next question comes from the line of Amy Junker of Robert W. Baird. You may proceed.

Good morning, everyone.

Good morning.

Good morning.

Just a couple of quick clarification questions with respect to this private lending. Can you clarify what percentage of your students gets some sort of private loan to help them pay? And would the percentage of sub prime that you talked about, I think you said 57%, be roughly the same there of the percentage of those students?

Yes, about 50% of our students receive private loans. And the 4.6% that we mentioned earlier in terms of sub prime, that basically equates to roughly a commitment of using 2008 revenues of probably $17 million. And while you haven't asked, we'll tell you that we've -- we mentioned that that's incorporated into our guidance for next year to the extent of about $0.03 per share.

Okay, and then I guess regarding the students that you're lending directly to, roughly how many students are you lending directly to? And is that a big change versus say a year ago, say, if you really ramped that up in the last, say, six months or nine months?

Do you want to take that, Cesar?

Yes. We are lending to a lot more students. Basically, what happened during 2007, as we stopped utilizing the Sally Mae program, as we seen it to be too expensive, we picked up the gap that we used to fund -- that we used to be providing to opportunity loans. So we're funding about $15 million, or we have commitments of $15 million out there as of December 31st. We would expect that to eventually turn into -- about 50% of that would turn into receivables over a year period. And that probably represents, as Dave said, roughly about 50% of our students get some sort of gap financing.

Okay. And then just as we think about bad debt expense for 2008, what do you think is a reasonable level given your ramp up here? Should we think it continues to trend toward 6% or in excess of that in 2008?

I would expect that bad debt expense will continue to increase. However, with that said, I think, as Dave said, we baked about $0.03 into our guidance. But while bad debt expense as a percentage of revenue will continue to increase, we also expect some of that to be offset by additional revenue from student financing. So net-net, we have incorporated about a $0.03 charge for the year.

Okay. Great. Thank you.

and your next question comes from the line of Jeff Silber of BMO Capital Markets. You may proceed.

Thanks so much. Just a quick follow-up on the last question. So the $0.03 per share is basically an increase in bad debt expense offset by some income from student financing. But does it assume any kind of disruption or fluctuation in [roaming] trends at all?

Absolutely not, Jeff.

Okay. Just wanted to clarify that. Going back to the performance in the quarter, you talked a little about some of the performance by vertical. Can you just remind us in terms of your population, auto versus non-auto, how that breaks down?

Well, we talk in general about our automotive and skilled trades representing about half of our population.

Okay. And you had mentioned, Dave, in your remarks that you thought that reason that the starts had been somewhat flat was because you think you're still competing with the job market. I mean it looks like the job market is weakening. People are expecting it to continue to weaken. When do you think that will start impacting you beneficially, in terms of pick-up enrollment?

I wish I knew, Jeff. I mean I think, as I mentioned in my remarks, we're not assuming any change in the economy that would give us a favorable impact in 2008. So -- ?

I'm sorry. I'll ask the question in another way. I know you've been doing this a long time.

I have.

Historically, how much of a lag has it been?

I haven't been doing it a long time in automotive, but I would that if the unemployment rate continues to increase, that we would begin to see some benefits from it within the next six months to a year.

Okay. That's fair. Just a couple of quick numbers questions. Historically, you've given us some associate degree student data. I don't know if you gave that this quarter. If we can get that, that would be helpful.

We didn't. But it's about 21%.

21%. And that's relative to last year, how much was that?

It's been increasing. Over the last two years, we've doubled it. it was around 11% a couple of years ago, Jeff. It's creeping up. It was in the mid-teens last year, so it's up around 21% at this point.

Okay, great. And in terms of capital spending in the quarter and also what you're looking for 2008?

Cesar?

Yes. In the quarter, well, total capital expenditures for the year were $34.8 million. And for 2008, we're looking to spend somewhere between $25 million and $30 million.

All right, great. And what should we be expecting for D&A in 2008? Depreciation and amortization, I'm sorry.

It'll be north of $15 million.

And how about a tax rate we should be using?

41.8% to 42%.

All right, that's great. I'll jump back in. Thanks so much.

You're welcome.

And your next question comes from the line of Trace Urdan of Signal Hill. You may proceed.

Hi, good morning. I'm sorry to keep going back to this tired issue. But I'm wondering, Dave or Cesar, if you could give us some sense of, as you're looking at the bad debt expense based on your level of lending going into 2008, how are you thinking about defaults, relative to -- I don't know -- relative to history? I'm not asking you to give us a set number unless you're comfortable. But how are you thinking about what that number should be as you evaluate what the impact on your earnings are going to be going forward?

Go ahead, Cesar.

Yes. Basically, I think as we said back in our press release, we don't expect our default rates to change. Our students have not changed, only their financing options. So we expect defaults to remain constant because we have the same population. We continue to reserve based on historical trends. We have very accurate trends going back for several years.

And we run concurrent models that we update regularly that talks about how every student that comes to our school performs over time. And based on that, we know what our graduates have paid us when they left owing this money, how they performed. We know how our students that interrupt owing this money have performed.

So basically, our reserve methodology takes into consideration three categories of students -- active students, interrupt students and graduated students. And we reserve for all three buckets of those students based on models that we update on a quarterly basis to make sure that there hasn't been any shift in the performance of those categories.

Okay. And as you look at those historical models that you're using for this, is it not the case that fluctuations in the economy make a difference? Or are those differences, on a historical basis, pretty minimal?

We have not seen any differences based on our historical data. Maybe 0.1,0.2, but very insignificant differences over time. We have not seen any shift in the performance of our cohort rate, if you want to call it that.

So the most significant driver of default performance is really related to, I guess, the student continuing on in the program versus not? Is that --?

That is correct.

That's absolutely right, Trace.

Okay. That's really helpful. Thank you.

And your next question comes from the line of Kevin Doherty of Banc of America Securities. You may proceed.

Great. Thanks, guys. I know you mentioned in the release of you had more of a focus on acquisitions. Just wanted to see if you can elaborate there. What's your appetite? And you've obviously made a lot of efforts to cross-pollinate some of your programs. Maybe just how far along are you? So you'll know where I'm going with this, what's the balance between internal growth versus [M&A]?

Well, let me answer it this way. We've made seven acquisitions over the last several years. They've added 17 campuses. So today, those acquisitions, which have all been extremely successful, have certainly brought us new programs and have certainly helped us expand the footprint. We continue to have a pipeline of potential acquisitions. We think the market, or the environment, is favorable for making acquisitions. So I think it's likely that we'll make another acquisition in the near term.

And any particular areas of programs where you'd be more focused, or geographies?

Well, I mean we certainly want to expand our footprint. So you can see where we would probably be going in that respect. But as far as -- we're going to stay within our five verticals. I can tell you that. We're always interested in regional accreditation and certainly to some extent, degreed programs and last but not least, certainly, schools that would have online opportunities as well, to support what we're doing.

Okay. And just another question about the three schools that you shut down. Could you maybe just explain that processing of how you were able to do it so quickly? I know your [competitor]. Your competitors tend to do more of a lengthy teach-out in some circumstances, so to speak.. What gets you able to do that quicker versus a longer -- ?

Yes. Pretty simple. First of all, we have had a lot of experience and have excellent relationships with the regulators. So we made the decision. We offered students the opportunity to complete the programs, in some cases, at other campuses or with schools that were in the immediate area. And we were successful in accomplishing that in real time. And probably, the majority of the credit goes to the team of people that we have in our company that have made us successful when we make the acquisitions and likewise, when we have to handle less comfortable areas like this.

Okay. And just one last question. I just wanted to circle back on some of the loan issues. As you're doing more of these loans yourself, how have you been maybe adding some resources to handle that process? Who ultimately services these loans? And maybe more basically from the student standpoint, how does that process differ?

Sure. We've always provided some type of loans to our students. Just for comparison purposes, at December 31, '06, we had about $4 million of commitments out to students. We utilize a third-party service provider. So when the students actually sign up the notes and loans, they do not know it's coming from Lincoln. It's coming from someone else.

We also have the capabilities in-house. We have a separate accounts receivable team that focuses on nothing but collections and making sure that students stay timely. So we also have availability to bring that in-house if we so choose to. For now, we do have outsource our functions.

Thanks for the color.

You're welcome.

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And your next question comes from the line of Gary Bisbee of Lehman Brothers. You may proceed.

Hi, guys. Good morning.

Good morning.

Good morning, Gary.

I heard you comment on the lead cost and moving mixed to the internet to keep that flat. Can you give us any sense what the total student acquisition cost was? And I guess what I'm wondering is you've talked about beginning that progress, bringing down the turnover of your rep force a bit. Is that starting to really drive efficiency, or is that more something you hope can happen in '08?

Shaun?

I'll take the efficiency comment. We found that turnover has affected us negatively in the past and especially in the area of high school recruitment. If you look at the difference between our high school staff and our media staff, the high school representative responsibility is to go out into the high school and build a relationship -- one, a relationship of trust and one that will allow them to get into the classroom and develop lead flow.

We found that in retaining those particular field representatives at higher rates over the last year, they've been able to generate significantly more leads. And that's what gives us confidence moving into 2008. And so our efficiencies are giving us a lot of confidence in that particular area.

As far as overall acquisition costs, directionally speaking, yes, the move to the web is giving us more efficient and well-converting lead flow. And so we would expect those efficiencies to get better over time and cost metric. So I'll let Cesar talk specifically to the cost.

Yes, Gary. For the year, for 2007 -- when we talk about cost per start, we refer to it as both sales and marketing costs to bring in a student. Our cost per start for 2006 was $2,726. Because of the shift that Shaun's talking about, we actually reduce our cost per start in 2007 by 1.5%. And that number was $2,684 for 2007.

Okay. Thanks. Now just in terms of the lending thing. I guess just two more questions there. Are you going to charge the students, or have you historically and are you planning to charge students interest while they're in school? Or will interest accrue on it, but you're actually not going to make them make payments until after the program is over? And then, secondly, on that, is this going to flow through and has it been flowing through revenue? Or is it going to flow through your interest income line?

Those are good questions. Yes, go ahead, Cesar.

First of all, when the student signs up, the student signs a promissory note. We finance our students based on their ability to pay up to a maximum of seven years. They are required to make payments starting on the 31st day both [P&I]. We do not accrue for interest. We record interest on a cash basis that goes to interest. The note is irrelevant to the way we record revenue. We revenue based on student tuition amortized equally from the date of start to the date of graduation. The interest income we record on a cash basis and reserve for those receivables are just like we would for any other receivables.

Okay, thanks.

Does that answer your question?

Yes, definitely. Thanks.

And then just in terms of the extra -- I don't know if extra is the right word -- but the increase in one-time marketing costs in the fourth quarter to make sure you got '08 off to a good start. How should we think about that extra spend trending as we get into the first half of this year? Are you going to continue to prime the pump a little more than you might normally plan? Or are you confident that things are getting better, so it might fall a little more normalized spend?

Yes, I think we're back on a more normalized trend. And I think the purpose in the fourth quarter was two-fold -- one, to drive starts into the fourth quarter and secondly, to protect or assure that we would have a nice class start in our quarterly schools in the early part of January. And as I mentioned earlier, we were successful in doing that. So on a go-forward basis or certainly for the next three quarters, including the first we would be on a more normalized basis. And we'll look at fourth quarter of next year and see where were at. And if it makes sense to spend up, we'll do that again.

Okay. Great. Thanks for all the color.

And your last question comes from the line of Sarah Gubins, which is a follow-up of Merrill Lynch. You may proceed.

Hi, thank you. Just a couple more student lending questions. The first is on Title IV funding. Are you expecting any change in that, given the liquidity concerns in that market? And do you participate in the direct lending program? Is that something you're looking into?

Okay. First question, no we don't expect any change. And I guess I'll just add one other thing there, too, Sarah. As you know, as I mentioned earlier, we're at 80% on the Title IV. This is a case where the demographics and profile of our students works in our favor -- the 16%, I guess, is Pell participation as well. So one, we don't expect that to change. And I would say that -- what was the second part of your question?

I'm just wondering, given the concerns about third-party lenders in the federal lending program -- ?

Yes, the direct lending. I'm sorry. I forgot which what you asked me as far as direct lending. All of our schools are approved for direct lending. And we're in the process of piloting two schools to just safeguard against the unlikely event, but should have to move to direct lending and others in the foreseeable future, we'd be well prepared to do that.

Okay, great. And then, sorry, one other lending question. On the private lending side, it sounds like you're assuming that you'll be funding all of the loans that would have gone through the Sally Mae recourse program, previously. Are you expecting any change from, I guess it's about the 3% of your revenue that was coming from private loans, that weren't considered sub prime? Are you seeing underwriting standards increasing there or lenders willingness to fund your students in private loans?

No I have not. Our students were either below those thresholds or above those thresholds. We do not have a lot of that 3% population that was in that the 620 FICO score to 640 FICO score gap. So that should not have much of an impact on us. And I believe, to-date, our students have had no problems -- creditworthy students have no problem getting private loans. There are plenty of sources available for those types of loans.

Are lenders giving you any indication that would make you think that the underwriting standards are going to increase enough that it would impact that population that hadn't previously been considered sub prime?

No, we have not gotten that indication. I mean we've heard, just like everyone else that maybe they've gone through 625 FICO score to 640 FICO score or 650 FICO score. But at the end of the day, when we assess our population and where our demographics sit, it's really not an issue for us. Even if they go to 650, we didn't have a big group of demographics that sell in that area, in that 620 FICO score to 650 FICO score.

Okay, thanks a lot.

You're welcome.

Ladies and gentlemen, this concludes the time that we have for questions. And I would now like to turn the presentation back over to management for closing remarks.

Thanks, Serita, and thanks everyone for joining us today. We're obviously very pleased with our results for the fourth quarter of 2007 and the year of 2007. And we're very optimistic about 2008. So we look forward to updating you on that progress on our first quarter earnings call in early May. With that, I'd say thank you and good day.

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