Lincoln Educational Services Corp (LINC) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the First Quarter 2008 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 web cast 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 call may contain certain forward-looking statements relating 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 based on a 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, Grace Ann. Good morning to everyone on the call and welcome to the Lincoln Educational Services First Quarter 2008 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 review of our first quarter results. We will then open the call for the question-and-answer session.

Now turning to our results from continuing operations. We are very pleased with first quarter results and that we were able to continue the positive momentum we experienced in the last several quarters. We reported earnings per share from continuing operations of $0.02 in the first quarter, versus a loss of $0.04 in the same quarter last year.

Revenue from continuing operations was $84 million in the first quarter, up 10.3%. The revenue increase was primarily driven by new student starts, which grew by 7.5% in the first quarter, compared with the same quarter last year, coupled with an 8.5% year-over-year improvement in the carrying population at the beginning of the quarter.

The total student population at March 31 was 18,600, an increase of 10% over the prior year, while average population for the quarter was 18,459, up 9.3% from 16,885 for the same quarter a year ago. Now, equally important, the average population increased in all of our verticals versus the first quarter of 2007. Our first quarter results exceeded our previous guidance range for starts, revenue and earnings per share.

As we've discussed on prior calls, during 2007, we successfully executed on a series of initiatives aimed at improving the overall effectiveness of our organization. These initiatives addressed a number of functional areas such as student recruitment processes, sales organization and marketing efforts, product development. It also included the realignment of our organization and rationalization of our campus footprint.

The successful implementation of these initiatives resulted in our beginning 2008 with an 8.5% higher carry-in population compared to 2007. Due to a combination of start growth, including increases in recently launched new programs such as criminal justice and licensed practical nursing, coupled with improved retention, we continue that trend and began the second quarter with 1,700 or 9.3% more students than last year.

During the first quarter of 2008, we also continued to benefit from improvements in our marketing implementation over the past year. For example, our new website, launched in third quarter 2007 is providing us with a significant increase in leads versus our old website. And the conversion rate for lead to enrollment has now surpassed TV.

Overall, we are pleased to sustain the business momentum experienced during the second half of last year. Our primary focus in 2008 is execution as we look to build upon the strong foundation that we laid in 2007 by growing our student population, promoting further efficiencies across our organization, and converting our operating success into enhanced financial returns for the benefit of our shareholders.

We believe one key area of strength that will continue to drive starts and enrollment growth in 2008 is our expanded program mix. Over the past several years, our strategy has been to significantly diversify our program offerings through an effective combination of acquisitions, internal development and program replication. We believe this was the correct strategy, which has resulted in us being a much different and stronger company today.

We entered the hospitality services and culinary verticals through acquisitions in late 2005 and 2006 and rapidly accelerated our presence in the licensed practical nursing market through the acquisition of an LPN program from a school in New Jersey that was closing last year. On the program development side, we have introduced a number of new programs. Most recently, Criminal Justice and New Business and IT courses. We have also continued expanding our online offerings and just received approval for three fully online bachelor programs. And Shaun will cover this further in his discussion.

We have also replicated many of these growing programs including LPN, Criminal Justice, Collision Repair and Culinary across our campus footprint in a strategic manner. These steps are beginning to provide operating leverage as we increase our capacity utilization at many of our campuses. And we expect to see further improvement in subsequent quarters as enrollment improves.

Our focus on execution extends to additional growth opportunities including expanding several of our campuses, opening new campuses, potential acquisitions, building out our online platform and the further rollout of our expanded degrees. And Shaun will also provide further insight into our operations during his prepared remarks.

Now let me turn to our second quarter and 2008 financial outlook and guidance. For the full year, we continue to expect annual revenue of $355 million to $365 million and earnings per share 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. In terms of guidance for the second quarter, we expect starts to increase by 10% to 12% over the second quarter of 2007, revenue of $82 million to $84 million and diluted EPS of $0.02 to $0.04.

With that said, we are very encouraged by our starts in April and enrollment trends for the balance of the quarter. Based on these trends, we expect then the second quarter approximately 2,000 students ahead of where we were last year.

Now, moving to the lending environment. I'd like to provide just a brief update on the current student lending environment and the effect on Lincoln. And, perhaps for background, it's worth repeating some of what was discussed on our last call.

As we reported earlier this year, we, like others, received a termination letter for our tiered discount loan program provided by Sallie 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 received 80% of funding from Title IV, another 13% from state grants and cash payments, with a balance, or 7%, from the private loans.

By 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, SLM's decision to terminate its tiered discount loan program had a limited impact on Lincoln, as we had only used $500,000 at year-end 2007. Our current plan was and continues to be 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.

So with that as background, where are we today? To date, we haven't experienced any disruptions in our financial aid processing but have taken important precautionary measures to assure that we don't in the future. All of our institutions are eligible to participate in the Federal Direct Loan Program. We have piloted the program in several of our schools and are actually processing loans at six schools today.

Overall, we are confident that a switch to direct lending across our system would go seamlessly, while still allowing our schools to offer Title IV loans to students through the Federal Education Loan Program, or FELP, as it's know to students.

Very recently, Congress has recognized the need to assure that the slow of Title IV funds is not disrupted as well as the need to ease the burden of higher education costs for American families. In late April, the House and Senate passed an amended version of the Ensuring Continued Access to Student Loans Act of 2008, or H.R. 5715, aimed at mitigating the student loan crisis.

The bill increases unsubsidized Stafford Loan limits by $2,000 per academic year and allows the Federal government to create liquidity for Title IV lenders by establishing a secondary market for student loans. And yesterday, the President signed H.R. 5715 into law.

We are pleased with these efforts, which will go a long way towards eliminating the funding gap for many of our students. Now while the additional funding is helpful, we and others in our sector remain concerned about 90/10.

We will also continue to work with the Coalition of Career Colleges and the Career College Association to represent the interest of our students with Congressional leaders. However, we will also continue to look for other options for financing our students.

Finally, in our goal to continue to strengthen our executive team, I am pleased to announce that Steven Ace has joined our team as Vice President of Human Resources. Steve comes to us with 14 years of experience in the industry, as well as many years in managerial positions in another industry.

Steven's previous position developed board HR experience in a high growth environment, including leadership in HR compliance programs. Shaun, in his remarks, will also announce a new member of the executive team. So with that said, let me turn the call over to Shaun for a review of operations. Shaun?

Thanks, Dave, and good morning, everyone. As Dave outlined, we're off to a solid start in 2008 and we're very optimistic about our growth prospects for the remainder of the year. With our restructuring and turnover plan complete, our operation is now in full motion.

We improved year-over-year in new starts and overall population, which was driven primarily by improved media lead conversions. We've also reduced our admissions representative turnover. We have constant focus on student satisfaction. And we continue our efforts in building a strong team of executive directors and presidents for our 34 campuses.

I'd like to take a minute to focus on our priorities and give you an update on our first quarter and year-to-date operational progress. As I mentioned on our last call, in addition to day-to-day operations, there are three key priorities for 2008. First, to advance our high school plan. Second, to strengthen the foundation for our online strategy. And third, to continue to improve the execution of our basic functions.

In regards to our high school plans, our efforts in the high school market in 2008 focus on sustaining the momentum form last year and capitalizing on many of the prior year gains, such as stabilized rep force, improvements in our conversions and the further development of key high school relationships around the country.

We're optimistic about the high school market, as many of our evaluation metrics look promising. Year-to-date high school lead generations, enrollments, early student financing and early housing deposits for destination students are all up over prior year.

Our stabilized representative sales force has allowed for improvements in key sales conversion metrics, while also growing and maintaining key high school relationships, which will benefit 2008 and future effort.

Specifically, we've managed our high school manpower to the required levels necessary to achieve our target. Plus, turnover in this important group has been minimal.

Our Lincoln Tech schools represent 80% of our high school effort and enrollments for these schools are up over last year by approximately 15% year-to-date. Again, we're aggressively financing these students and collecting housing deposits at improved rates compared to prior year. And our destination schools, in particular, are performing well and are prepared to relocate students in June and throughout the third quarter.

As we did last year, we're managing the high school process both aggressively and proactively in order to achieve higher start rates for all of our schools. I know that you all can appreciate that there are many risk factors associated with high school starts. However, the aforementioned efforts are focused on mitigating these risks and we feel confident in our efforts thus far.

In regards to our online plans. Our 2008 efforts fit into our long-term online strategy and are centered on the launch and growth of our new Bachelors degree programs. We received approval for three Bachelors degrees in April, marking a new era for the Lincoln organization. The approved programs are Criminal Justice, Business and Information Technology.

As mentioned on our last call, the move to quarterly starts means we only have a shorter enrollment period for these Bachelors degrees before the next start in a couple of weeks. However, we do expect to start a small cohort of Bachelor students in May, with the first sizable group expected in July.

Early lead activity gives us confidence in the viability of these programs for Lincoln online. The online group added 150 students between January and April this year and is expected to add an additional 85 this month, while also graduating 75 for the first time, taking our combined online student population over the 400 mark for the first time.

Our broader online strategy is focused on launching additional Bachelor degree programs in the second half of 2008 and first half of 2009. This will allow us to continue to grow our current online student base, with the ultimate goal of building a larger online entity, consisting of additional fully-online and degree completion options.

We're encouraged by the foundation we've built, including our technical infrastructure and our learning management system. We're also encouraged by the recent Bachelors degree approvals. And we're aggressively moving forward with this important initiative aimed at our future growth.

In regards to our marketing efforts. Our first quarter lead volume improved by 4.6%, based on a 1% increase in spending. Enrollment metric also improved leading to our 7.5% increase in starts. We also saw improvement in our overall expense metric, as our marketing cost per start improved by 6.1% year-over-year.

Second quarter marketing efforts include advancing the sales technologies embedded in our website. We will also be launching infomercials to further penetrate our markets around the country. And we will be promoting our programs to high school aged students via media sources throughout the summer months.

Our website, which was redesigned and relaunched last year, was optimized from the ground up during the research and development phases and is capable of significantly higher degrees of search results than our prior site. In the first quarter, the website generated more leads than any other source for the first time.

Today, I'm also pleased to inform you that Lincoln's website recently won Ad Tech's prestigious award for its overall optimization design. This award is a result of a tremendous collaborative effort between our marketing group and our website development partner.

We anticipate that with our next phases of web development, the site will continue to optimize at higher rates, continue to generate improved lead volume to the site and provide us with greater intelligence regarding our customer search viewing and buying behaviors.

On our last call, I mentioned our focus on the execution of basic functions. We remain committed to consistently improving our basic operational executions. Specifically, we've been focused on delivering our product and assessing our effectiveness along the way. We also remain dedicated to effectively managing the student experience.

To assist us in our quest to improve, we've added a new executive to our team. We're excited to announce that Dr. John King has joined the Lincoln organization as Vice President of Academic Affairs. John comes with years of experience in both proprietary and traditional education and brings expertise in product development, online education, capacity utilization and scheduling efficiency. And he has experience with regionally accredited institutions and processes. Needless to say, we're looking forward to John's positive impact on the future of our organization.

In regards to our product development plans, we continue to improve our facilities and expand our scope through upgrades to existing sites, adding new facilities and new program rollouts. We recently completed the expansion of our Grand Prairie facility in the first quarter and have launched our two new skilled trades programs in Electrical and Welding. The facilities and new technologies embedded in these programs have received praise from many industry professionals who have visited the Texas site.

Our West Palm Beach automotive and cosmetology expansions are complete and operational and will offer upgraded programs in these new facilities, which will allow us to better compete in that local Florida market.

We expect our new Las Vegas Euphoria campus to open in the third quarter of 2008, adding a third cosmetology school to help strengthen and promote our brand and allow us to compete more effectively in the Las Vegas market.

And we're in the process of building our sixth southwestern college campus in Ohio to open in the first quarter of 2009, which will allow us to expand our brand presence and open in a new Ohio market. These expansions and new programs are geared at positioning us for growth into 2009 and beyond.

In an effort to manage our own quality assurance in our student development, we've implemented company-wide processes designed to assist students at all stages of their educational experience, which in turn will also help improve our business operations.

Some of these processes include the continuation and refining of systems and manage our student attendance, as we've determined this to be the root factor in maintaining our positive population variance over prior year.

We continue to add vital student services geared at assisting students and their parents in starting classes during the summer and fall months. We continue to 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.

During the first quarter, we continued to see benefits from our focus on improving our basic operational executions. As a reminder, our student satisfaction survey results steadily improved during 2007 and we anticipate seeing a continuation of the positive trend in satisfaction into 2008.

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 managing process improvements reflects in our overall student satisfaction, which has improved over the last couple of years.

In summary, we're pleased with our progress to date and we're positioning our company for accelerated growth in the coming months. We expect our growth to continue into the second quarter with a solid contribution from all program verticals.

In the second half of 2008, we expect high school starts to continue to drive our Lincoln Tech School starts to year-over-year gains, while media efforts will continue to drive higher starts in our Lincoln Education Group programs. Needless to say, our momentum is continuing and we're looking forward to a great year for our company. Now, let me turn the call over to Cesar for our financial review.

Thank you, Shaun. Good morning, everyone. As we disclosed in our press release earlier this morning and as Dave stated in his prepared remarks, we are very pleased with our first quarter results. Not only did we achieve record revenue for the quarter, but we also exceeded our expectations of operating income and earnings per share.

During the quarter, we were positively impacted by beginning the year with approximately 1,400 more students than we had in the prior year. This coupled with student starts of 7.5% contributed to the overall 10.3% growth in revenue.

Average revenue per student for the quarter was up approximately 1% to $4,553 for the three months ended March 31, 2008 from $4,511 in the first quarter of 2007, but was down 3.4% from average revenue per student of $4,711 in the fourth quarter of 2007. Average revenue per student for the quarter reflects price increases that went into effect at the beginning of the year offset by a seasonal shift in student population.

We finished the quarter with 18,600 students enrolled at our schools, up 10% from the 16,902 students we had at March 31, 2007 and up 3.3% from the 18,013 that we had at December 31, 2007. The increase in student population for the period led to increased utilization at our campuses.

Our average capacity utilization was 55% on March 31, 2008, up from 53% at December 31, 2007 and 51% at March 31, 2007. We expect our capacity utilization to continue to increase during the second half of the year.

During the quarter, we were also able to obtain leverage from our business model, as we benefit from reduced expenses as a percentage of revenue, versus the first quarter of 2007 or continuing to make investments in our business.

Our educational services and facilities expenses decreased to 43.6% of revenue for the first quarter of 2008 from 44.8% in first quarter of 2007. And selling general and administrative expenses decreased to 54.9% of revenue in the first quarter of 2008 from 56.7% of revenue in the first quarter of 2007.

For the quarter ended March 31, 2008, our bad debt expense as a percentage of revenue was 4.8% as compared to 4.7% for the quarter ended March 31, 2007. This increase was primarily due to higher accounts receivable during the period due to a 10.3% in revenue.

The number of day sales outstanding on March 31, 2008 increased slightly to 23.9 days compared to 23.5 days at March 31, 2007. This increase in day sales outstanding is directly attributable to the decision to finance the gap in student tuition, not financed by other sources to internal funding offset by better cash collections during the quarter as compared to the first quarter of 2007.

As a result of the above, for the first quarter of 2008, our operating income was $1.2 million, representing an improvement of $2.4 million from a loss from continuing operations of $1.2 million for the first quarter of 2007.

Now turning to our balance sheet. On March 31, 2008, we had $5.6 million in cash and cash equivalents compared to $3.5 million at December 31, 2007. Net accounts receivable on March 31, 2008 were $22.1 million as compared to $24.9 million at December 31, 2007.

Net property and equipment grew to $108.2 million at March 31, 2008 as compared to $106.6 million at December 31, 2007. This increase was due to capital expenditures of $7.4 million during the quarter offset by depreciation expense.

As of March 31, 2008, we had made loan commitments to our students of $16.5 million as compared to $15.7 million at December 31, 2007. Loan commitments, net of interest due on the loans through maturity were $11.3 million at March 31, 2008 as compared to $10.8 million at December 31, 2007.

Now turning to our guidance, as Dave previously mentioned for the second quarter of 2008, we expect student starts to increase 10% to 12% over prior year. We expect revenue of $82 million to $84 million and earnings per diluted share of $0.02 to $0.04. Now, I'd like to turn the call back over to Dave.

Thanks, Cesar.

To summarize, we entered 2008 in a significantly strong position than last year with a positive carry-over population and strengthened infrastructure. During the first quarter, we built upon last year's successes. We generated positive start growth from continuing operations. And we continue to benefit from the improved student retention, which as resulted in an expansion of our student population.

We are encouraged by the continued benefits of our new website, improvements on our sales organization, the build-up in high school enrollments for this summer starts, as well as our second quarter starts to date. We remain confident of our growth opportunities over the balance of 2008 and our ability to improve our capacity utilization.

We will continue to generate value through the diversification of both our on-ground and online program offerings. And we will continue implementing initiatives aimed at improving the efficiency of our operations. And with that said, we'd be happy to begin the question-and-answer period. Grace Ann?

(OPERATOR INSTRUCTIONS)

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

Hi, thank you. Good morning.

Good morning, Sarah.

Just one quick numbers question. Cesar, do you have the ending population at the end of the second quarter of '07?

Yes, I do. It was 16,211 students.

Great, thanks. And then a question about your guidance for the second quarter and the second half of the year. It looks like you're not expecting much margin expansion or even, potentially, some operating margin contraction in the second half. And I'm trying to understand if that's just taking a conservative approach to the guidance or if there's something more fundamental going on in terms of your costs.

Well, let me take that one and Cesar can jump in. I think, Sarah, as you know, we guided to 6% to 7% starts overall for the year. We're pleased with where we are in the first quarter. And we're even more pleased with the acceleration in the trends into the second quarter.

And therefore, we increased the start guidance in the second quarter. And while we're encouraged by even what we see into the third quarter, we're going to wait and see and talk more about our overall guidance and any adjustment to it in our second quarter earnings call.

Okay. But there aren't any plans for dramatic ramp ups and spend throughout the year, are there?

No, there aren't.

No, not really.

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

Your next question comes from the line of Kevin Doherty of Banc of America Securities.

Great, thanks. Just a follow-up on the starts. I know -- could you just clarify what you had said in the press release about the student lending legislation accelerating your starts in the second half of the year? I'm just trying to reconcile that with the 6% to 7% outlook for the whole year.

Well, I think what we're pleased with is with the additional unsubsidized loan. It's going to allow us to be able to enroll students and not have them have to face the private loan that we would otherwise sign them up for, which would cause them to have to begin make payments immediately, which is basically our approach. So, with the $2,000 unsub, which is, in our case, for a program such as auto, that amounts to probably about $3,800 over the program length.

So, students have the ability to wait six months until after they graduate to begin to make the payment. So we feel that any affordability issue that the students are currently looking at as they go through the enrollment process with us will be eased.

But, I guess, in prior quarters you had said that you didn't see any negative impact on starts in the lending situation. So, I guess assumedly implied that there'd be an acceleration going on.

We would hope so. Yes.

And then how does this -- I know you guys put through a price increase earlier in the year, but how does legislation make you think about pricing going forward, particularly, maybe to deal with some of the 90/10 issues?

I know the 90/10 issue will cause some folks to think about that, right now. I mean I think that we're pretty much sticking to our guns as far as probably not increasing our prices until this time next year or January of next year. Well have to look at that on a case-by-case basis if need be. But there are no plans to do it at this time as a result of the 90/10.

Thanks, guys.

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

Hi, guys. Congratulations on the quarter.

Thank you, Gary.

Thanks, Gary.

Let me just follow up on that one. Can you give us any -- I know it's early and the legislation was just signed into law. But can you give us any sense, either directional or in absolute terms, sort of what percent or what types of students within the company are likely to get a substantial benefit from that loan limit increase? I know the auto programs are relatively high-priced.

It would seem likely that many of those students would be able to take advantage of much of that increase. Are there pockets like health care where maybe the prices are such that the 90/10 issue and such, that they're not likely to need or to be able to get much of that? How should we think about it overall? Thanks.

Well, Gary, I think with the automotive students, you're correct. And we would say that over the two-year program -- 1.6 academic years in our case for automotive -- that an independent student, between Pell and the additional effect of on sub -- could avail himself or herself of about $3,800 to $3,900. On the health side, with the program costs being lower, it will provide the opportunity for roughly another $3,000, but there could be, in some cases, issues with the 90/10 as you point out.

So overall, over your entire student base, would it be reasonable to think that maybe the students would get half of that $2,000 increase? Or are you not comfortable giving us direction?

No, anyone that applies for financial aid is entitled to financial aid. At this point, we would expect that most of our students -- 80% of our funding now comes from Title IV, so I would expect that this would benefit most of our students. With that said, we'd have to keep a tight eye on 90/10 to see how that is going to impact us going forward.

And we're hoping the legislation that's pending will alleviate some of that. If not, we'll have to look at other options, including possibly raising tuition to meet those 90/10s. But it's still too early in the process to figure out what's going to happen there.

So for now, we would expect that most of our students will be able to avail themselves to the new funding limits -- not only the ones that went into effect on 07-01, but the ones that were signed into law yesterday by the President.

Okay. Thanks. I guess the next question -- I think your largest shareholder, or majority shareholder, put out a filing a couple of months ago. I just wanted to confirm. Was that to register stock that previously was unregistered? And in talking and giving any sense about timing or willingness to sell part of that or is there not much of anything on that at this point? Thanks.

Well, there was a shelf registration filed, which is good for three years. So I mean, I think that there's likely to be series of events over some period of time in the next two to three years. But there's certainly nothing at the moment.

Okay. It sounds like you're trying to be conservative with the guidance, just giving all the variables. And I think that's the right way to be. But I guess I want to drill down a little more on the margin. Given that you're going to be doing some lending yourself, is it reasonable for us to assume that bad debt expense is going to climb fairly substantially in the remainder of this year and going forward? And maybe is that one reason that the guidance seems to imply less aggressive margin gains than you had this quarter?

Well, let me start on that. Just to go back to the original guidance that we gave for the year. And that did assume that bad debt would increase to some extent. So that was included in our overall guidance for the year. So I think this additional funding would actually, hopefully, help us to some extent.

Yes, Gary, the additional funding, obviously, would create less of a need for us to fund students ourselves. I think as Dave said, the guidance we gave for the year included about $0.03 a share impact from us having to impact from us having to finance our students.

And yes, we do expect bad debt expense to go up as a relative number. However, we also expect the revenue -- included in revenue is interest income from those students. So while we'll have a higher bad debt expense, we'll also have a higher interest income from the students, which will hopefully offset themselves, leaving basically the $0.03 a share that we talked about.

Okay. Good. And then just one last question. Can you clarify that last point and give us a little more color on how you're accounting for these loans? It sounds like the kids will pay interest while they're in school on loans you make. It sounds like you're going to run that through revenue. Are there any other -- and then, I guess have an offsetting bad debt expense for the reserve you'll take against default.

That's correct. Student receivables are reserved in the normal course of business. We recognize tuition over the course of the program period. So if it's an $18,000 tuition over 12 months, we recognize $1,500 of revenue per month. And the loans that we give to students they're required to -- they're amortized over up to a period of seven years.

Students are required to make payments while they're in school. There is no deferred payment of PNI. Should a student withdraw prior to that time, the student get a return to Title IV calculation, which would tell us the amounts that we're allowed to keep and the difference would be refunded, either to the government agencies to the extent that the student was in a deferred position or to the student. So that's the way that we account for that, at this point.

Okay. Great. Thanks a lot.

Okay.

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

Hi, good morning. I'm sorry to go back to the guidance again. And I'm going to be a little more specific with my question. But in the second quarter guidance, in particular, you look at your first quarter, which was very strong. You had some good revenue growth. And you really got some good margin and some leverage there.

Second quarter guidance, you're kind of guiding towards, again, pretty strong revenue growth, 10% to 12%. But then the bottom line really implies either no margin expansion or kind of on the high end or a deterioration in margin versus a year ago. And just help us rectify what's happened between first quarter and second quarter.

Well, obviously, I think as you all probably know, our second quarter is traditionally our weakest quarter of the year. The guidance that we're giving for the second quarter of the year, basically $82 million to $84 million, $0.02 to $0.04, pretty much consistent with the results that we achieved in the first quarter this year, which is traditionally a stronger quarter.

I think that last year, we put in some initiatives that are impacting our margins in the first half of this year, including the rollout of new programs such as Criminal Justice, LPN, Business and IT, which will produce more leverage in the second half of the year. So the guidance we are providing on the first half of the year includes the costs associated with the rollout of those programs.

And that's why you're not seeing margin expansion at this point. However, with that said, we do expect to see margin expansion in the second half of the year. So it's really just the timing of when these programs and the costs are being incurred, versus being rolled out.

And so it sounds like most of that, since you did get margin expansion in the first quarter, should we assume that most of that is actually hitting within the second quarter?

Yes.

Okay. Great. That's helpful. Cesar, can you just speak to of the schools that are participating in the Direct Lending Program, the six schools, what's the experience been there so far? If you can talk about, is there incremental costs that you're seeing or cash flow coming through at a slower pace? Can you just talk a little bit about that?

Our experience has been very, very good. We're not seeing any impact whatsoever from being in the Direct Loan Program. There is a slight administrative burden that, in other words -- it's the same. You have to administer the loans as though they were Pell. So it's just an extra process that we have to do. But we have not seen any interruptions on cash flow or service. We're having very good experiences with the six schools.

We have six schools that are currently doing it, as well as providing FELP. There's no requirement that you do one exclusive of the other. So we're doing it for both. And those six schools are pulling down both the FELP as well as the Direct Loans. And our experience to date has been extremely positive.

Okay. And then Shaun, you mentioned in hiring Dr. King. You mentioned his experience dealing with regional accreditation. Is that something that you guys are looking to achieve in either some or all of your programs?

That's a great question. You know, I talked about our online strategy. And where we are today is building out our Bachelors degree programs, which we feel will take us to the next level of growth. I think looking forward to the future of online, that's definitely part of our long-term strategy. But I can't give you a definitive timeframe with how long that will take or what approach we'll take in getting there. But that is on our horizon and that was a good pickup in his background.

Amy, I think that, in addition to that, we were not necessarily looking at regional accreditation for ground programs. We think that we're structured pretty well for the demographics that we serve. But as you know, the online student has a little bit of a different profile. So we think that'll probably be a great long-term game for us.

Great. That's helpful. And then, last, just housekeeping for Cesar. The tax rate came in the quarter at 38.7%. Is that kind of a good number to use for the full year? And that's all I have. Thanks.

No. We had a benefit of some state tax, several items. I would say to expect to use about 41.5% as the effective rate for the year.

Great. Thank you.

Your next question comes from the line of Trace Urdan of Signal Hill.

Hey, good morning. Cesar, you referred to some makeshift issues that impacted revenue per student in the negative. Can you elaborate a little bit on what some of those were?

Sure. Obviously, we have, I think, we have five verticals. And as the population grows, auto and skilled trades force is traditionally a second half of the year program as a result of the high schools coming in. So we get negative leverage, even though we're growing starts where the Health Sciences and other verticals are a less-tuition program than some of those more higher expense programs. So that negatively impacts the average revenue per student during the period.

So the more the non-automotive programs outpace automotive, we will see that pressure?

Under revenue per student basis, correct. You could have $17,000 programs versus $23,000 programs.

Within Health Sciences, for example, LPN is a much more expensive, so is cosmetology and some of the other ones. But on average, because of such a strong second half automotive and skilled trades population, those are higher revenue-producing, tuition-generating students.

Okay and then I wanted to ask, specifically about your experience with Euphoria in the quarter and whether the weakness in the Las Vegas economy is likely to impact your performance in that division.

Trace, we haven't experienced any impact, at this point, one way or the other. But we're watching that closely as the year progresses.

So in the quarter, their performance is in line with your expectations?

Yes, it is.

Yes, it was.

Yes, it is.

Okay. Thank you.

You're welcome.

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Your next question comes from the line of Frank Atkins of BMO Capital Markets.

Hi, this is Frank in for Jeff. In the past, you've disclosed the Associates degree program as a percent of ending population. Do you have that percent?

Yes, we do. That was 20%

20.3% to be exact.

Okay. Great. And turning to the marketing or advertising environment, was there any trends you saw in terms of quality or pricing in any of the medias there?

Shaun, you want to address that?

Yes, I'll answer this one, Frank. We're really encouraged by the lead volume that we're seeing under the improvement of 4.6%f or the quarter, about 1% spend over prior year. But the one trend we're seeing is that the website continues to perform well, actually outperforming our other lead sources for the first time ever in quarter one.

Our TV expense continues to increase while the leads decrease. However, we will not move aggressively away from TV because, as of this point in time, TV drives about 33% of our web lead volume. So the two are sort of inextricably tied. But the website performance also gives us some benefit on our cost metrics, as well. And that's a trend that we're happy to see.

Our marketing costs per start improved by more than 6% year-over-year and that was driven by the website performance. But I'll also say, in regards to the web performance, I think that some of the additional products that we've added, the diversification of our program mix and now expanding our brand presence will also help drive leads and give us a little more confidence when we begin to the second quarter and the second half of the year.

Okay. Great. And finally, are there any major changes to CapEx projection for the balance of the year?

No, there are not. We still expect capital expenditures to come in at 8% to 10% of revenue.

Great. Thanks so much.

Your welcome.

And your next question is a follow-up question from the line of Sarah Gubins of Merrill Lynch.

Hi, thank you. Just a couple of quick ones. Can you talk about the enrollment mix by program area?

Well, Sarah, I will tell you this. That in terms of average population with the increase year-over-year, quarter-over-quarter, it improved across all our verticals. The mix between auto and the others has remained pretty much the way it was in the past. Automotive and skilled trades is still about just a little over 50% of our overall population. And Health Sciences is in the 30% range with the balance made up between Business, IT and Hospitality.

Okay. Thank you. I know that you implemented a share repurchase program. I'm just wondering what the plans are for that?

We have approval and we'll be looking at it on a day-to-day basis.

Obviously, while it was approved by the Board of Directors, our window opens now. So we will take a look at how the stock price is. And as we see fit, we'll go into the market.

And make a decision.

Okay. I'm jumping around a little bit, but could you share with us where you're expecting bad debt for the year, what you've built into your guidance?

About between 5.6% and 6%.

Okay. And then last question, if you could talk a bit about the acquisition pipeline and how acquisition multiples are looking right now.

Well, we continue to have an active pipeline of potential acquisitions. We have -- again, it just sort of ties back to one of the questions that came up earlier about what do we look for in an acquisition. And we continue to look for some of the same things as in the past.

Regional accreditation would be a nice addition and certainly expanding our footprint geographically. As far as the multiples are concerned, the folks that we have talked to, basically are still looking at EBITDA multiples of ten, 12 times and standing pretty firm on that at the moment.

Okay. Thank you.

And you have no questions at this time. I will now turn the call back to management for closing remarks.

Well, thank you all for joining us today. We look forward to providing you with an update on our progress on our second quarter of 2008 earnings call in early August. We wish everyone a good day. Thank you.

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