Lincoln Educational Services Corp (LINC) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Third Quarter 2008 Lincoln Educational Services Earnings Conference Call. At this time, all participants are in listen-only mode. We will be conducting a question and answer session, and we will ask that you 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 website 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 risk 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 now like to turn the call over to Mr. David Carney, Chairman and CEO of Lincoln Educational Services. Please go ahead, David.

Thank you, Latrice. Good morning to everyone on the call, and welcome to the Lincoln Educational Services Third 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 detailed review of our third quarter results. We will then open the call for the question and answer session. Now, turning to our results from continuing operations.

During the third quarter, we continued to benefit from our strengthened organization and numerous growth initiatives including program diversification, expanded degree offerings, effective program replication, and campus expansions. We build upon the existing momentum in our business and once again, delivered strong results across many of our key metrics.

Revenue from continuing operations was $100.5 million in the third quarter up 16.1% year-over-year. This revenue growth was driven by the combination of new student starts growth of 8.6% during the third quarter, and a beginning carry-in population that was 14.7% ahead of prior year. We reported earnings per share from continuing operations of $0.22 in the third quarter, versus $0.17 in the same quarter last year.

Now, I would like to turn to our starts. Starts during the third quarter were 10,564 up 8.6% compared to the same quarter a year ago, and above our guidance of 5% to 7%, reflecting the ongoing benefits of our program diversification and improved marketing efforts.

Our growth in starts during the third quarter from the adult market, excluding starts from our high school program which I'll on in a moment, were up 17.5%, largely driven by the success of our health sciences programs including LPN and growth in our skill trades, hospitality services, and online. We continue to experience strong demand for these programs and expect this to continue in the fourth quarter and into 2009.

Now, let me turn back to our high school program, which as you know is still largely automotive and represents about 70% of the high school program starts for the year. During the third quarter this year, our high school starts were below prior year, but entirely due to the early high school starts which occurred in the second quarter this year.

On our last call, I discussed the fact that we had about 300 more student starts at out auto destination schools this year in the second quarter versus prior year which we attribute to improved processes. Therefore, when you eliminate the timing differences between years for our high school program starts, and look at the June to October timeframe which captures all of our high school starts, we will be up about 5% over prior year, which we are pleased with given the current issues surrounding the auto industry.

Now, moving to total student enrollment. Total student enrollment at September 30 reached a record of 22,404, an increase of 15.1% over the prior year, while average enrollment for the quarter was 20,665 up 13.6% from 18,185 for the same quarter a year ago.

Average enrollment increased in all five of our verticals during the third quarter compared to last year, marking the third consecutive quarter we achieved growth across all of our product groups. We also continue to benefit from a higher carry-in population during the third quarter, as you may recall, we started 2008 with an 8.5% higher carry-in population compared to 2007. That trend has continued throughout the year as we began the third quarter with 14.7% more students than in the prior year, and enter the fourth quarter with 2,900 students or 15.1% more students than last year.

This strong carry-in population growth can be attributed to our program diversification and the balanced growth we are experiencing across our verticals. As of 9/30/08, the average enrollment of 20,665 was divided between auto, 37% which increased from 35% in the second quarter, skilled trades 13%, health sciences, a strong 31%, hospitality services 10% and business and IT 9%.

I'd now like to take a few moments and update you on the progress we have made executing on our growth opportunities which include a diversified program mix, building out our online platform, and the further roll-out of our expanded degrees, acquisitions, and new campuses and campus expansions.

Let me begin with our program mix. We have significantly expanded our program mix over the past several years through a combination of intelligent organic program development and strategic acquisitions. Our program diversity is one of Lincoln's key strengths and has played a key role in the sustained starts and enrollment growth and strong financial performance we have generated throughout 2008. In addition, our program mix has resulted in more effective use of our campus facilities, as our average third quarter capacity utilization was 62% during the third quarter up from 55% last year.

We have built a strong presence in these five verticals each with attractive program offerings, tailored to address the needs of students pursuing high end demand careers. For example, in our health sciences vertical, the LPN program now accounts for 19% of the total enrollment. Moving forward, we will continue to both replicate these programs across our footprint to address local student demand, as well as introduce new programs to organic development or acquisition. Currently, we have applied for several additional states for approval of the launch of our LPN programs.

Now, let me turn to the recent announcement regarding our acquisition. As you know, on October 5, we announced that we entered into a definitive agreement to acquire Briarwood College for approximately $11.4 million in cash. We expect to close on this acquisition in December. This acquisition meets several of our strategic initiatives, such as expanding our degree-granting capabilities, increasing our offerings of higher-end programs, and establishing our first regionally accredited campus.

The college was recently accredited by the New England Association of Schools and Colleges, or NEASC, and currently offers two Bachelor's degree programs and 31 Associate degree programs. Connecticut will become our 11th state in which we offer a degree-granting program, and the acquisition will enable our existing Connecticut students the opportunity to advance their education with Associate's and Bachelor's degrees from Briarwood.

Additionally, we believe that Briarwood's programs will enhance our growing online initiative and broaden our reach by offering regionally accredited programs. This should accelerate our online efforts and provide all of our students with the opportunity to advance from diploma to Bachelors on ground and online. Shaun will discuss the benefits to our online business in greater detail in his remarks.

Another component of our growth strategy is the further rollout of our expanded degrees. In addition to the degree programs added through the acquisition of Briarwood, in September, our Lincoln Technical Institute Campus in Columbia, Maryland was awarded degree-granting status from the Maryland Higher Education Commission.

The campus was the first private career school in Maryland to receive Bachelor's degree-granting status, which is indicative of the high quality education our Columbia school provides and our stellar regulatory record. In total, we have received approval for two Bachelor's degree programs and two Associate's degree programs. These programs will allow our current students to pursue a higher degree level, and our Bachelor's programs will serve as degree completer programs for many students in Maryland that currently hold Associate's degrees, but cannot transfer the credits out of state.

We believe this will greatly increase our pool of perspective students in Maryland. More importantly, in the future, we will seek approval to offer these Associate's and Bachelor's programs online, creating the opportunity for all of our current and former graduates across the country in our auto, diesel, and skilled trades to continue their education.

Now, moving to new campuses. We opened our fifth Euphoria brand school in July in Aliante, Nevada. The campus currently offers diploma programs for high demand career fields such as cosmetology and aesthetics. Our first start date took place in July, and we remain on track to reach an enrollment of approximately 100 students by year end. Shaun will expand further on our operations during his prepared remarks.

Now, I'd like to turn to our 2008 financial outlook and guidance. For the full year, we now expect the annual revenue of $368 million to $372 million, representing an increase of approximately 12% to 13% over 2007; student starts to increase 9% to 11% over 2007 and diluted earnings per share of $0.69 to $0.71 or an increase of approximately 30% to 34%.

And finally, I'd like to provide a brief update on the current student lending environment and the effect on Lincoln. First, the credit crunch that has impacted the credit markets has had little impact on our ability to enroll and package our students. The recently passed legislation has helped us to greatly reduce the gap between tuition and the amount the students receive from financial aid.

Therefore, the students are benefiting in their ability to finance their education and the amount remaining, or the gap, has been reduced to a very manageable level. Cesar is going to cover our internal financing program and the Company's annual investment in greater detail in his prepared remarks.

Now with that said, let me turn the call over to Shaun for a review of operations.

Thanks, Dave, and good morning, everyone. As a company, we're focused on achieving our growth, performance and service targets in all facets of our operation. Our third quarter performance shows that program diversification has given us multiple opportunities to grow our business. Automotive starts and enrollment are slightly ahead of prior year and nine months, and we expect to finish the year slightly up in these programs. Growth from other programs continues nicely and we expect these trends to continue into 2009.

We have recently revisited our company mission and vision, and we feel that our diversification will continue to open new markets for our future growth in both ground and online. During the third quarter, we continued to build upon positive trends in momentum across our business and we have made significant progress executing on our three key priorities which are 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, we continue to capitalize on the various improvements made in our high school recruiting and sales organization, including a stabilized and more seasoned force of admissions representatives and managers. We have improved student financing processes and we have continued to develop key high school relationships around the country.

Our stabilized sales force has allowed us to increase high school starts 5% over prior year, without the need for significant ramp-up hiring and training that would otherwise be necessary with higher turnover. Our stability in the Lincoln Tech sales force has allowed for continuous productivity in a difficult automotive market. In addition, we continue to invest in our high school opportunities through incremental manpower. This stability and investment has not only allowed us to perform in 2008, but also positions us well moving into the 2009 high school year. As we did last year, we are managing the high school process both aggressively and proactively in order to achieve higher start rates for all of our schools.

As we overlap into the 2009 recruitment period, we believe we can leverage our high school relationships and the earlier recruitment that we have generated with junior leads collected in 2008. We have also launched a new multimedia in-school high school presentation with new recruitment collateral and a series of integrated support campaigns designed to use other media sources to support the ongoing efforts of our representative.

In summary, we are encouraged by our high school program and we see it as a long-term opportunity, for automotive growth in particular. In addition, we continue to execute on the key recruitment components of our program and have plans in place to aggressively package these students as we have done successfully for the past two years.

In regards to our online plan, our efforts remain centered on strengthening our staff, refining our technical infrastructure, obtaining higher levels of accreditation, and developing our online brand. We continue to gain expertise in our learning management platform and we have built a number of support functions around it, including a dedicated team of online staff who are knowledgeable in both technical and student services components. This team continues to develop the technical helpdesk functions, advising opportunities and career skill components of our online educational process.

In addition to student resources, we continue to build faculty resources including in-service training modules and course observation functions. These additions strengthen our foundation and also give us a scalable system that will support future growth.

As we discussed in our last call, we received approval to offer Bachelor's degrees in April and started small cohorts of students in May and July. Bachelor-seeking students make up only a small percentage of our online population today, which now totals approximately 500 students.

Our current Bachelor's programs include criminal justice, business and information technology, and we expect to launch graphic design in the fourth quarter of 2008 with starts expected in the first quarter of 2009. We believe we can accelerate the growth and profile of our online business by elevating the branding and accreditation for our degree programs. The acquisition of Briarwood College helps move us toward that goal, considering its regionally accredited degree-granting status.

Briarwood does not currently offer full online distance programs, and so our plans include strengthening the base programs offered by the institution and having the school submit substantive change applications to the regional accrediting body, to offer new programs and distance delivery.

We anticipate that regionally accredited online programs will be delivered from this school in a 12 to 15 month timeframe. In the meantime, we will continue to offer our current online programs via our West Palm Lincoln campus and expect to maintain our current growth rate into 2009. In order to prepare for the launch of our regionally accredited programs and to help redefine our online brand, we are in development of a new and distinct Lincoln Online website.

We feel that the separate site will allow us to better manage the online user experience and meet the unique expectations of a purely online student. This separation of ground and online marketing and related customer experience is the next phase of development en route to our longer term strategies.

Overall, we remain encouraged by the foundation we've built, including our technical infrastructure and our learning management systems. We are also encouraged by the development of our Bachelor's degree programs and the additional growth opportunities they'll provide during 2009. When bolstered by regionally accredited programs and a new online website, our online programs will open new markets for Lincoln and provide a significant growth opportunity through expanded program reach.

In regards to our basic functions, we remain committed to improving our operational execution through consistent assessment, marketing and delivery of our products; and effectively managing the student experience. In regards to our marketing efforts, our third quarter lead volume improved by 11.5% based on a 5.6% increase in spending. Enrollment metrics also improved which contributed to our 8.6% increase in starts. We also saw improvement in our overall expense metrics as our marketing cost per start decreased by 8.3% year-over-year.

We have continued to make adjustments to our marketing campaign based on local and national media coverage of the automotive industry. We have added elements of industry education to our latest automotive advertising in an effort to separate from negative OEM news and demonstrate that job opportunities still exist across the country for automotive technicians.

Our web inquiries continue to rise with our website generating an increasing portion of all of our leads. We expect this trend to continue for adult and high school media across all of our verticals. We have continued fine tuning our main websites with the goal of optimizing search results at higher rates. We are also working to generate improved lead volume and quality through our customer's search, viewing and buying behaviors.

As mentioned earlier, we have begun the development of our purely online website with the expected launch of the first phase in the second quarter of 2009 to bolster our current programs. Our goal is to fully complete the site in late 2009 to coincide with our regionally accredited program launch in early 2010.

We have begun a series of advanced web lead generation initiatives focused on re-exposing inquiries to Lincoln School following their initial contact. And we have seen successes in enrolling an increasing percentage of these unconverted leads. As we have done in the past, we will also re-market to 2008 high school leads to generate additional sales in 2009. Overall, we are pleased with the sustained effectiveness of our marketing effort and we look forward to continuing these gains during the fourth quarter and into 2009.

In regards to our product and facility development plans, we continue to improve our facilities and expand our scope through upgrades to existing sites, adding new facilities and rationalizing our product offerings. We will continue to expand our facilities and campus footprint in a sensible manner to drive increased brand exposure.

Our West Palm Beach automotive and cosmetology expansions have been completed and the school is currently offering upgraded programs and improved facilities. We believe this will make our West Palm campus a more attractive option for a variety of students seeking career training. In addition, because it serves as a base campus for our online programs currently, the West Palm Campus has also started our first hybrid program with students taking online and on-ground courses simultaneously.

Even though they're online for a portion of their courses, these particular students are considered ground, not online or degree-completer students. And our sixth southwestern campus remains on track to open in the first quarter of 2009, which will allow us to expand our presence in the Ohio market. The Toledo, Ohio campus is on schedule to open with classes starting in April of 2009.

In addition, we remain committed to providing our students with the best assistance possible to continually improve their overall education. We have implemented numerous company-wide processes to assist students. Some of these processes include the continued refining of systems that manage student attendance, as we have determined this to be one of the main factors in maintaining our positive population variance over prior years. Our student interrupt rate has improved by 70 basis points, compared to the same period last year.

We continue to bolster vital student services geared at assisting high school students and their parents in the enrollment process at our destination schools. We continue to focus on corporate-wide placement assistance, the integration of career services into the curriculum and preparing students for their job search well before graduation.

And, we are making targeted program revisions to update our curriculum based on specific feedback from our industry advisors. In addition, I'm pleased to mention that our Nashville campus was invited to serve as a key location for the 2008 Odyssey National Alternative Fuels kickoff event. This campus has been at the forefront of the national alternative fuels discussion, and is helping advance the concept for the company. Over the past 9months, we have invested in hybrid vehicles and related training for all of our automotive facilities.

I'm also proud to mention that we continue our commitment to strong regulatory compliance at our campuses and maintain strong regulatory performance records with all of our agencies. Moreover, we have been recognized by one of our accrediting commission with School of Distinction and School of Excellence awards for our Hamden, Connecticut and Allentown, Pennsylvania campuses, respectively.

In summary, the execution of these basic functions will remain a focus, while we also work to build our strategic vision for a strong and diversified Lincoln. Our long-term strategy is to provide path from diploma to advanced degrees or simply "learning for life" opportunities for all students who will enter our schools in the future.

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 third quarter results. During the quarter, we were positively impacted by beginning the third quarter with approximately 2,400 more students than we had in the third quarter of 2007.

This, coupled with student starts of 8.6% during the quarter, contributing to the overall 16.1% growth in revenue. Revenue was also positively impacted by approximately $0.4 million, due to additional tool sales to our students and interest income received on internally financed student loans. Average revenue per student for the quarter was up approximately 2.1% to $4,862 for the three months ended September 30, 2008 from $4,760 in the third 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 shift in student population to students enrolled in lower tuition programs. We finished the quarter with 22,404 students enrolled at our schools, up 15.1% from the 19,463 we had at September 30, 2007, and up 20.5% from the 18,597 students we had at June 30, 2008.

The increase in student population for the period led to increased utilization at our campuses. Our average capacity utilization was 62% at September 30, 2008, up from 55% at September 30, 2007. As a result of the increase in average student population during the third quarter of 2008 and as compared to the third quarter of 2007, we are able to obtain leverage from our business model as we've benefited from overall reduced expenses as a percentage of revenue versus the second quarter of 2007, while continuing to make investments in our business.

Our educational services and facilities expenses decreased to 41.4% of revenue for the third quarter of 2008, from 42.8% in the third quarter of 2007, as increased capacity utilization resulted in margin improvement in both our instructional and facility expense line items. Offsetting some of these gains were increases in our selling, general and administrative expenses, which increased to 48.3% of revenue in the third quarter of 2008, from 47.9% of revenue in the third quarter of 2007.

This increase in SG&A during the quarter is primarily due to a 100 basis point increase in our bad debt expense as a percentage of revenue to 6.3% as compared to 5.3% for the quarter ended September 30, 2007. This increase is in line with the guidance we've previously provided and is primarily due to higher accounts receivable during the period resulting from a 16.1% increase in revenue and due to increase the number of internally financed student loans.

The number of days sales outstanding at September 30 2008 increased to 26.3 days, compared to 22.8 days at September 30, 2007. The increase in days sales outstanding is also attributable to decision to finance the gap of student tuition not financeable by other sources through internal funding offset by better cash collections during the quarter as compared to the third quarter of 2007.

As a result of the above, for the third quarter of 2008, our operating income was $10.4 million, representing an improvement of $2.3 million from operating income of $8.1 million for the third quarter of 2007. The margin increase of 100 basis points reflects our long-term strategy to continue to grow margins and obtain leverage from our business model.

Now, turning to our balance sheet. At September 30, 2008, we have $6.1 million in cash and cash equivalents, compared to $3.5 million at December 31, 2007. Net accounts receivable at September 30, 2008 were $28.8 million, as compared to $25.4 million at December 31, 2007. Net property and equipment grew to $107.5 million at September 30, 2008, as compared to $106.6 million at December 31, 2007. The increase was due to purchase of capital expenditures of $3.4 million during the quarter, offset by depreciation expense.

As of September 30, 2008, we had no borrowings outstanding under our credit agreement, versus $5 million outstanding on our credit agreement at December 31, 2007 and September 30, 2007 respectively. Cash from operations during the third quarter of 2008 reached a record of $21.6 million, and for the nine-months ended September 30 2008, was $30 million. Our strong cash flows year-to-date reflect the operational improvements we have made to date in packaging our students, as well as amounts funded under our proprietary loan program.

Now, turning to our loan program. As of September 30, 2008, we had granted loan commitments to our students, net of interest that would be due in those loans to maturity of $15.4 million, as compared to $13.7 million and $11.3 million at June 30, 2008 and March 31, 2008, respectively. The recent passage of the Ensuring Continued Access to Student Loans Act, better known as HR5715, provided our students with access to an additional $2,000 of unsubsidized loans per academic year.

This additional funding, coupled with increases in overall financial aid provided by the Higher Education Act or HR4137, has reduced the gap between the amount of tuition funded by financial aid and alternative loans. Based on this additional funding, we have stated that based on our analysis, we expected that the dollar amount of loans we expected to have to internally fund would be reduced by approximately one-third.

Over the last quarter, we have further refined what we believe will be annual investment in net accounts receivable that will be required by Lincoln to assist its students in financing the gap. We now believe that our incremental investment in net accounts receivables starting in 2009 will not exceed $5 million per year.

With that said, I'd like to turn the call back over to Dave.

Okay. Thanks, Cesar. To summarize, I'm very pleased with our third quarter and year-to-date results in start growth, enrollment growth and financial results. As you know, our third quarter is very important to us as it represents approximately 40% of our annual starts. As we previously discussed, we are pleased with the year-over-year improvement, which will assure continued strong performance in the fourth quarter and well into 2009.

The initiatives we have been working on across the Company over the past two years are really beginning to pay dividends. While there are many initiatives that I could point to, certainly strengthening the management team, realigning our business units for greater focus, the rebranding, the new website launch and new program offerings such as LPN rank high in my view.

Our starts this quarter reflect the sixth consecutive quarter of positive organic growth and reflect growth across our verticals and programs, again validating our strategy as a company to diversify our business to increase our addressable market. We are also pleased with our new online Bachelor's degrees and the recent approval of the Bachelor's and Associate degree program approval at our Columbia, Maryland campus.

These steps will help us fulfill our strategy of offering our current students and graduates the opportunity to continue their education from diploma to degree at Lincoln, or as Shaun said earlier, learning for life. We continue to look for ways to fuel our growth, and the recent announcements that we have entered into a definitive purchase agreement to acquire regionally accredited Briarwood College is further evidence.

Regional accreditation is an important distinction in the online education market, as it is viewed as more prestigious than the national accreditation, which should make our online program more competitive. The acquisition fits our long-term goal of expanding our scope of programs and degrees and attracting a new student demographic. We expect to finish 2008 in a very strong position, and we believe it positions us extremely well for a very successful 2009.

And with that said, we'd be happy to begin the question and answer session.

(Operator Instructions)

And our first question comes from the line of Sara Gubins with Merrill Lynch. Please proceed, ma'am.

Hi, thank you. Good morning,

Good morning, Sara.

Could you talk a little bit about the automotive market? Is the issue really just perception given what's been happening in Detroit, or are your students or graduates also finding it any harder to find jobs?

Well, Sara, I think that certainly, the news out of Detroit is impacting our starts to some extent. Our high school starts this year were, as we mentioned earlier, up 5% and we see continued interest in the program across our campuses. With that said, when we talked to our placement people and we look out into the market, we are seeing a shift in placements from dealerships to independent service centers to some extent.

As more consumers keep their cars longer, they are certainly going to require more service and maintenance. So I don't know whether it is all perception or not, but certainly, the end result is, overall new car sales. Many of the dealerships are cutting back particularly in the sales area, but I think overall there is still a very strong demand for automotive and we feel very good about it. And I guess the other point I'd make is that we have many of our schools offering in the automotive area other programs such as diesel and collision where the demand continues strong.

Okay, great. Thank you. And just as a follow up, Cesar, I think your last comments about how much you thought you would need to loan on your own balance sheet, I just wanted to make sure I understood it. Were you suggesting that you wouldn't need to do more than $5 million in new private loans from your own balance sheet in 2009, or did I misunderstand that?

That is correct. I think what we believe now is that starting in 2009, our incremental investment in net accounts receivable will not exceed $5 million.

Okay. And would that take into account students who have gotten loans in 2008 repaying them in 2009 or is that--?

Yes, that is the net investment. So that would include new loans granted, as well as repayments of existing loans.

Okay. And can you give us any sense of what you're expecting bad debt to be for the fourth quarter maybe in to '09?

We continue to expect bad debt to range between 6% to 6.5%.

And that's true for '09 as well?

We have not yet provided '09 guidance, but at this point, I would say that's probably still in that range.

Okay. Great. Thanks very much.

And our next question comes from the line of Kevin Doherty with Banc of America Securities. Please proceed, sir.

Thanks. Looks like the persistence improved pretty nicely year-over-year, could you just talk about what's driving that now and what to expect? And I guess just where I'm going with that, if you look into 4Q and kind of take the high end of your start growth, I think you also talked about the 2,500 more students to start '09, it kind of implies that persistence is going to be unchanged at least how we're calculating it.

So I guess what's the right way to think about persistence in 4Q and given the improvement, it looks like we saw this quarter why the change?

Well, let me start off, Kevin. I'll let Shaun jump in on the persistence rates. Actually, it's the fourth quarter, we expect to continue the strong quarter for us and with that said, it is really just the timing of graduates in the fourth quarter. So the number is not impacted by poor persistence but more importantly, by the graduations.

Shaun, do you want to just add --?

Yes, I will. I think persistence has actually improved pretty regularly over the last six months. And I would imagine that persistence would continue at a pretty strong rate, I don't think we're going to see a major change period over period. But I will say though, that we are pleased with our progress in reducing our net interrupts which is at the heart of our persistence rate. And at this point in time, I think the progress speaks to AR improvement and basic process, our instruction and then our overall program satisfaction.

Okay. And then, you guys, can you just touch a little more about the strategy with Briarwood, maybe what sort of investments do you think you will be making there and building our that operation and you are talking about online, how significant can that become?

Do you want to take that, Shaun?

Yes. The Briarwood opportunity really includes a number of critical steps that got to execute in order to position the college to basically achieve our long-term goals. And the steps include just first, closing on the transaction and working with the regionally accredited body to ensure that we get pass that particular point. Then secondly, applying to the same body, through its substance of change process for the change of ownership, new programs, and then distance delivery approval over a period of time.

We feel that these changes aren't going to require significant investments, it is really just a refocusing of the current business. Where I think investment will come is in the strengthening of some the programs offered at the school and in the preparations for online delivery which end up becoming a reality toward the end of 2009.

Ultimately, we will continue to bolster the staff there, the faculty and provide other resources, again aligning with this long term strategy. I mentioned that our online growth perspective remains reasonable in 2009 with our current approach. I think 2010, we'll start to see a more realistic online growth pattern with the addition of the regionally-accredited programs. At this point in time, we are not quantifying what that growth rate will be, but it will be accelerated compared to what we have seen over the last couple of years.

Okay, and I could just sneak in a last one just on pricing. I know it is probably a little early now but I think last quarter, you talked about maybe 3% to 5% increase early next year, you know, any change there? And would you expect that to be closer to the 3% or the 5%?

Kevin, we'd expect it to be 3.5%.

Okay. Thanks, guys.

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

Thanks so much. I just wanted to go back to the guidance for the fourth quarter in the year. If I look at your starts growth guidance for the entire year, it implies a fairly wide range of starts growth guidance for the fourth quarter. And since it is a seasonally slower quarter, I just was wondering why you're providing such a wide range for that. Thanks.

Hi, Jeff. Year-to-date, nine months, we're at 11.3% over the prior year. October, we are encouraged by the starts there. Not knowing how we could potentially be impacted in November and during the holiday period in December, we believe we are being conservative by opening that up from 9% to 11%. We would hope to be closer to the 11%.

Okay. So nothing really more than conservativeness?

Absolutely.

Okay. Great. And then just taking it to the next step, if I look at the implied EPS guidance relative to the implied revenue guidance or revenue growth guidance for the quarter, it doesn't look like you are expecting much leverage there. Again, it is just conservativeness, is there going to be a ramp up in expenses that we should be expecting getting? Any color you can provide would be great.

Sure, I do think there is a small ramp up on operating margin improvement, however, the big unknowns always remain bad debt, as well as we do usually spend up a little more in the fourth quarter and more sales and marketing to prepare for the first quarter early starts. But we would expect to see continued operating margin improvement going into the fourth quarter.

Okay. Great. And just a couple of numbers questions and, again, this is just related to the fourth quarter, what would we be looking for capital spending for tax rate and the share count?

Capital spending will probably come in somewhere around $25 million for the -- $23 million to $25 million for the year. Tax rate should be around 41.8% to 42%, and the share count should be pretty much flat with what we have for the nine months.

Great. And just -- I'm sorry, the tax rate, was that guidance for the year or for the quarter? The 48 -- the 41.8 to 42?

It would be the same.

Okay. Great. Thank you so much.

And our next question comes from the line of Amy Junker with Robert W. Baird. Please proceed, ma'am.

Good morning, everyone. First question I guess, on Briarwood, do you expect to keep the brand name there, or is that going to transition over to a Lincoln brand?

That is going to transition over to a Lincoln Brand.

Okay. Great. And Cesar, if you can just touch a little bit on how we should be thinking about -- if you can update us on sources of revenue either in the quarter year-to-date, however you want to think about it, but coming from at this point, Title IV versus private loans versus how much you're internally lending and then other sources?

Sure. Well, actually we would expect that the revenues coming from Title IV will increase significantly for Lincoln, even though our 9010 will probably go down as a result of the new formula calculations.

Right.

The gap has been narrowed significantly. Through nine months, we will get -- be receiving a lot more money from Title IV. Lincoln is lending less money. And more importantly, not only is Lincoln lending less money, we had gone back and we packaged some of the loans that we had done, but more importantly, we are also seeing a shift in what we call the prime credit -- the alternative loans whereas in the past, we were getting about 2% good credit, that number has jumped up to 5%.

So what's happening is that students are looking for alternative loans or getting more and more co-borrowers to sign on for those loans. So we have seen a very favorable shift in the amount that students are being provided, not only from financial aid, but other sources, which has reduced what we originally thought our exposure would be.

Where we sit today based on the -- what we forecast out into the future, we expect that incremental amount that Lincoln will have to finance is very manageable. And when you take into consideration the net amount of what will actually hit our balance sheet, not what we will commit to, but what will actually hit our balance sheets offset by the cash collections on the portfolio that will exist as of December 31 is -- will not exceed $5 million. So, we feel very comfortable with those numbers today.

Great. And since you've been lending directly to your students for some time now, can you speak a little bit to -- has there been any change in the payback rate of those students or willingness or ability to payback those loans, or are those kind of consistent?

To date, there has not. There has not been any change whatsoever with the default rates that we have experienced -- they have remained consistent. There is one group of school that we have seen an increase in the default rate, but that has nothing to do with the -- our loan program, that has more to do with the growth in that school and the way the refund to Title IV calculations work.

So we attribute that more to just as a cost of doing business than any increase in default rate. Our default rates -- as you know, we run two data sets on a quarterly basis, they have remained fairly consistent and we are starting to run other data sets to make sure that does not change in any way. Obviously, if it does, we'll adjust our reserves accordingly. But to-date, we have not seen an experience that has been worse than what we've had in the past.

Thanks, and last question from me. Just last quarter, you talked about having 16 campuses that were offering Associate's and Bachelors degree, 21% of the students enrolled in those degree programs, any update to those numbers?

Well, it is 21.6% so it is a little bit -- a slight change, but the number of campuses remains the same, Amy.

Great. Thank you.

Except Maryland, and that isn't official yet.

Okay.

And our next question comes from the line of Gary Bisbee with Barclays Capital. Please proceed

Hey, guys, congratulations on the quarter.

Thanks, Gary.

I guess a couple of questions, Cesar, let me just sure I have this right. So the net investment in accounts receivable that you're referring to, the $5 million, is that net of the reserve that you are taking in the P&L and also net of amounts that have been repaid? That's the right way to think about it or --

Yes, it is, Gary.

Great. I guess the second question -- can you give us a sense of revenue and profit for Briarwood, and just some sense as do you expect that to have much of an impact on your P&L or is it going to be largely non-dilutive, not real accretive either?

In 2009, Gary, it will be slightly dilutive probably $0.01 share. And after that, it'll be positive.

And again, Gary, that is obviously due to the purchase accounting amortization et cetera that will run off for about 12 months or so.

Okay. All right, good. And then I guess just the last question. Dave, in your remarks, you said that campus utilization was running at 62% up from 55%, that is still a pretty low number. And historically, I always thought the rule of thumb in this industry was that there wasn't a need a huge amount of new campus expansion until school's got certainly above 80%. I guess I'm trying to get a sense where that is.

Do you have a bunch of schools that are in the 70s, 80s, 90% range and then a couple maybe some of the auto ones where you've got substantial excess capacity? Or, is there enough throughout the system that with maybe a new campus here or there, but still substantial growth opportunities for the business over the next 18 months from filling the existing boxes?

Yes, well I think certainly, the campuses that are offering health sciences programs and some of the "non-auto" programs have grown very nicely and account, frankly, for the increase in the capacity utilization versus prior year. But with that said, there is still ample room to continue to grow. In fact, to your point of getting up to 75% or 80% makes sense.

The auto schools, while they -- it varies from school to school, to some extent, and some are certainly ahead of the 62% capacity rate. Overall, the overall capacity utilization in those schools has only moved up two points, 59% to 61% versus prior year. So there is still ample space to grow without any additional capital expenditures over the next couple of years, if that answers your question.

Yes. And are there more opportunities to shrink the auto footprint and add more skilled trades as I know you did in Texas and a couple of other places? Is that something in your plans for 2009, or is there still enough opportunity in the existing footprint to grow students in all of the schools without more of that?

Well, I think certainly, we are looking at opportunities to continue to put in additional programs. Certainly, adding a collision program in one of our campuses is already in our plans for next year which will certainly change these numbers and increase the profitability.

So we believe that our auto growth will continue although maybe not at the same rate that some other programs are growing, but with the capacity for, and the opportunity to continue to grow skilled trades in many of these schools that have automotive, we should see in increase over the next couple of years.

Okay. Great. Keep up the good work.

Thank you.

(Operator Instructions)

And our next question comes from the line of Trace Urdan. Please proceed, sir.

Hi, thanks, guys. I'm sorry to take you back here because I know we've covered this, but I want to ask you again about the perception that perspective automotive students have about what an automotive program holds for them? Because you talked about the shift in the employment rate, but the employment rate still being strong. But, I'm wondering if you have some anecdotal evidence that it is this apprehension about sort of car sales in general that is holding students back from enrolling.

Because it feels like we went right from the strong employment with an obstacle to automotive enrollment, now all of a sudden, we are -- the economy is actually too weak and that is an obstacle to automotive enrollment. So I'd like if you could maybe elaborate on that a little bit.

Let me start off and Shaun could certainly jump in on this as well. You're right, and I think what we observed at least as we enroll the students, there is a difference between, let's say our high school program and our ability to continue to grow there, versus some of the challenges that we see on the media side. And we attribute that, Trace, more to the fact that we have more of an opportunity -- a greater opportunity to change their perception and alter by virtue of getting closer to them in terms of the interview and the buying committee.

So while that part of the business for automotive has continued to grow, the media part of it has been challenged. And, Shaun and his group had been taking steps to change that perception and put out additional marketing material and so on which --.

Shaun, why don't you -- maybe you can highlight that?

Yes. I think simply said, the perceptions really are strong. I think when you see automotive industry news on a daily basis in some parts of the country on a weekly basis in others, those perceptions become very strong whether it is for the student or for their significant others who help in the decision making process or parents in the part of highs school students.

But because of those perceptions, we address them in our marketing, we address them with our representatives, and thus the representatives end up addressing it with the students again on a daily basis in our appointments and that is factual. I would say that our lead flow today has been down slightly in the quarter, but it is up in the month of October.

And the good news is that in this challenging market, our automotive lead flow enrollments and starts are holding steady for the year with really no signs of deterioration for the remainder of the year. That said, we continue to focus one it very strongly, we feel that the high school program bolsters our opportunity for automotive sales, and as Dave mentioned, for that one on one sales process where we can offset any perceptions that might be out there.

But I think it is also worth mentioning on this point that in our markets, for us to remain viable as a company, we will see fluctuations up and down in a number of areas overtime, but because of that, it supports our move towards a greater product diversification and increased degree levels moving forward.

And is this perception challenge that you guys face, is there a meaningful difference between the challenge for high school graduates, versus the challenge for folks who have been out of high school for a while who are coming back to school?

Yes. I would say that the perceptions emanate to both groups, but the way we address it is different. We address it through our direct response marketing for the adult population as best we can in our interviews.

And on the high school side, again, we have an opportunity to speak to high school classes, a very captive audience, and then we have an opportunity to enroll those students on a regional basis and in their homes. And so, the message is a much stronger and focused message and proactive message on the part of the high school presentation.

So yes, our methodology is different based on the audience we have.

Okay. And then just one other question, I wondered with respect to building out online, I think you made reference to the opportunity that you had to go back to your graduates and offer them an ability to continue their education through online, and I'm wondering if you have again maybe some anecdotal evidence of the opportunity that's represented by that or any sort of actual research that you may have done of your Lincoln grads.

Our main priority with the Lincoln graduate is to get them into a job related to their career aspiration and their program. I would say that we offer the opportunity in any way we can to all of those graduates to advance their degree as well.

We feel that down the road, I mean it not only helps with their current job search, but also their abilities to advance in their careers down the road. So we will continue in that vein. I'll tell you today that approximately 40% of our online students are ground student graduates, and we feel that that percentage of our entire online student population will continue.

Okay. Thanks.

And our next question comes from the line of Jennifer Childe, Credit Suisse. Please proceed.

Thank you. Can you give us a little color on what percentage of your operating margin overall is attributable to your automotive students?

We do not segment our business --

Operating profits.

Yes, we do not. But I think what we have said in the past is that all of our verticals assuming the same capacity utilization would be producing or capable of producing the same margins. However, I will comment that obviously, the automotive side of the house has reduced margins overall, and when we see an increase in that population to more normalized levels -- our start growth, we will see a significant ramp up in margins.

Okay. And what was the mix shift that drove the revenue per student deceleration?

Well, I think what we're experiencing is that we're experiencing a -- while starts are growing nicely, but we are seeing instead of overall start growth across all of our verticals, say of 10% -- let's just throw out that number, you're seeing a lot more coming in to the health sciences verticals. And a lot of those programs tend to be lower priced programs than say an auto student would.

So you're comparing a $15,000 program to a $23,000 or $25,000 program.

Okay. And is that also what might be driving the change in your self-funded loan guidance?

That's also part of it. Obviously, the lower earning tuition students have much less gap or no gap at all in a lot of cases, but even that said though, the automotive students have also seen a significant decrease in their gap financing that they would be required to fund.

What changed since the last call which was post the $2,000 loan increases that has led to your change in guidance?

Well, I think what we have done is obviously, since July 1 -- all of this came on July 1, we have gone back and analyzed the amount of loans that we have granted. And I'll be happy to share with you that as of September 30, the loans that we have granted have only gone out to 14% of our population. So only 14% of our students actually have loans from Lincoln.

So we've made a fair analysis of our loan portfolio. We have also made a fair analysis of how that loan portfolio has gone over time, the average balances that we are committing to our students as well as the repayment history, and looking out into future, what our growth expectations are and the incremental amounts that we will have to fund in light of the financing that is available, and we feel very comfortable that it's a very manageable level.

When you take into consideration obviously what I have given you, I think -- as I believe Gary asked, is in that number. So obviously, that includes expected repayments as well as reserves.

Great. And then just last question, could you share with us what you have actually loaned out year-to-date?

What we've actually loaned out?

Yes.

Well, that number changes on a daily basis so it is really not a meaningful number, but that number as of September 30 would probably approximate $7 million. That number as of October could be $8 million or it could be $ 4 million, as the students go in and out of receivables and into [unearned] tuition. So it is really not a meaningful number until the time that a student graduates.

Okay, I think I got it. Thanks.

And our final question comes from the line of Amy Junker with Robert W. Baird. Please proceed, ma'am.

I just have a quick clarification question as you were talking about the media starts in automotive, you said the overall media starts were up 17.5%, are we to understand that automotive was -- media starts were down if they're challenged year-over-year, and so the media starts and the other areas would be significantly higher than that 17.5%? Am I thinking about that the right way?

The split that I made there, Amy, was between high school and all media. So the 17.5% includes auto just to clarify. And I think if you would look at that for the particular quarter, it would be slightly higher than the 17.5% because the media starts for automotive were just slightly below prior year in that quarter.

Okay. So both high school and media starts in the quarter for automotive were down.

That's correct, but I just want to clarify the only reason that the high school starts were down in the third quarter was because we had about 300 students who in 2007 started in the third quarter in this year started in the second quarter.

Understand, and that same phenomenon did not necessarily occur in media so media just kind of remain tough.

Media -- we're not that smart to figure that one out. No, that's just a function of how it fell. But just one last comment on automotive just so we all are in the same place. I think that high school has -- we are pleased with where we ended up for high school in automotive this year. When we finish the year in automotive for both -- as a result of high school recruiting as well as media, we expect to be up 1% to 2% year-over-year, that's about where it's going to be for starts.

Very helpful. Thanks.

You're welcome.

And there are no further questions at this time, I would like to turn the call back over to management for closing remarks.

Okay. Well, thanks, everyone, for joining us today on the call and we look forward to updating you on our progress early next year. So have a great day. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. Have a great day.