Lincoln Educational Services Corp (LINC) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-quarter and year-end 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 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 and 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.

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, Shane. Good morning, everyone, and welcome to the Lincoln Educational Services fourth-quarter and year-end 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 the operations and Cesar will provide a detailed review of our results. We will then open the call for the question-and-answer period.

Now turning to our results from continuing operations, revenue from continuing operations rose 18.9% to $107.3 million in the fourth quarter and included revenue of $1 million attributable to the acquisition of Briarwood. We benefited from a combination of strong carry-in population as well as new student starts growth in the fourth quarter of 17.1%.

Net income from operations was $12.8 million and diluted earnings per share was $0.49 versus $0.37 in the fourth quarter of last year. However, diluted EPS from continuing operations for the fourth quarter of 2008 included $0.02 of charges related to the Baran acquisition, which closed on January 20 of 2009.

For the full year, 2008 revenue grew by 15% to $376.9 million compared to $327.8 million for 2007. Net income from continuing operations was $20.2 million compared to $13.8 million for 2007. Diluted EPS from continuing operations was $0.78 in 2008, compared to $0.53 for the year ended December 31, 2007. Again, 2008's EPS of $0.78 included $0.02 of charges for the Baran acquisition.

Our performance during the fourth quarter capped off an outstanding year for Lincoln. We generated strong financial results, consistently strong starts and enrollment growth, and effectively advanced our various growth initiatives. We built upon the momentum and positive trends in our business and as a result, we believe we are well positioned for sustainable growth and profitability as we move through 2009.

Now, I will move through our start performance for the fourth quarter and the year. Starts during the fourth quarter were 5200, up 17.1% compared to the same quarter a year ago, and we generated start growth across all five verticals during the quarter. For the full year, starts totaled 27,175, up 12.4% over 2007. Our strong fourth quarter and full year starts growth reflect the benefit of a weakening economy, our diversified program offerings, and our strengthened organization due to the many operational enhancements we implemented over the past three years.

Now let me cover our student enrollment. Student enrollment on a same school basis at December 31 reached a record of 21,116, an increase of 17.2% over the prior year, while average enrollment for the quarter was 22,269, up 16.2% from 19,167 for the same quarter a year ago. We also continued to benefit from a higher carry-in population during the fourth quarter.

As you may recall, we started 2008 with 1400 more students than we had in 2007. That positive trend continued throughout the year and as a result, we entered 2009 with 3100 or 17.2% more students than 2008, excluding the effect of the recent acquisition. This significantly larger carry-in population can be attributed to continued strong growth across our product groups, especially in our health sciences programs. At December 31, 2008, our average enrollment of 22,269 was divided between health sciences 35%, automotive 32%, skilled trades 14%, business IT 10%, and hospitality services 9%.

While all of our verticals experienced year-over-year start growth in the fourth quarter, health sciences has been meaningful -- has shown meaningful growth and is now our largest vertical.

Now I would like to take a minute and update you on the progress we made on our growth strategy during 2008 as well as our plans for 2009. Over the past several years, our strategy has focused on a combination of new program development, program replications, new campus openings, strategic acquisitions, and building additional capacity at existing campuses where demand for new programs supported it.

During 2008, we continued to make progress by making a strategic acquisition, opening a new campus in an existing cluster, developing new programs particularly for the online business, replicating programs like LPN, and adding capacity at several of our campuses offering health sciences programs.

As we have indicated in the past, we have made and continue to make a concerted effort to diversify program offerings across our campuses and today with few exceptions, we have accomplished our goal. This is allowing us to increase our addressable market and as a result of our brand consolidation, we are seeing benefits in the marketing area as well. As a result of our start growth across the verticals throughout 2008, our capacity utilization increased to 60% at year-end, up from 53% at the end of 2007.

In 2009, we will continue to execute on our plan. We closed on our ninth acquisition on January 20 and are on track to open a new campus in Toledo, Ohio as part of our Southwestern College cluster this month. In terms of program replication, we have applied to several additional states for approval to launch LPN programs and have received approval in Pennsylvania and Ohio and expect to begin classes this year.

As we have mentioned on prior calls, our LPN program has been a significant catalyst since we acquired the program through acquisitions in 2005 and 2007. Our LPN program now accounts for approximately 6% of our total enrollments. As a result of our latest acquisitions, there are several new growth drivers that will begin to provide benefits from several of our markets over the next six to 24 months.

Now let me turn to those two recent acquisitions, Baran and Briarwood College. In January, we announced the acquisition of the Baran School Group. Baran is comprised of six schools that serve roughly 1900 students and offers associate and diploma programs spanning four of our verticals, automotive, skilled trades, health sciences, and culinary. We have closed on five of Baran schools and expect to close on the sixth school, Clemens College, after receiving approval from the New England Association of Schools and Colleges, or NEASC, this month.

Through the addition of Baran, we will be adding a state-of-the-art destination automotive and skilled trades campus with a strong New England presence; a growing diesel school in New Jersey that will benefit from our 60-year brand awareness in the New York City metropolitan area; a leading culinary school with outstanding facilities and a growing high school sales force; and an expanded presence in Florida with the addition of nursing programs and surgical tech. The acquisition of Baran dovetails with our overall growth strategy as it will strengthen our core offerings and expand our degree-granting capabilities.

In addition, assuming that our substantive change application is approved by NEASC this month, we will complete the acquisition of Clemens College, which would be our second regionally accredited institution and will provide a platform from which to launch higher-end hospitality degree programs.

In December of 2008, we closed on our acquisition of Briarwood College. Briarwood is recently accredited by the same accrediting agency, NEASC, and currently offers two bachelors degree programs and a number of associate degree programs. The acquisition of Briarwood is in line with our goal of expanding our addressable market as it bolsters our high-end program offerings including dental hygiene, deepens our degree-granting capabilities, and represents our first regionally accredited school.

The acquisition will also expand our student lifecycle as it will provide our current Connecticut students with the opportunity to further advance their education via the pursuit of an associate or bachelor's degree from Briarwood. Finally, Briarwood will serve as our online platform through the potential to offer regionally accredited programs.

Now turning to our 2009 financial outlook and our guidance. For the full year, we expect annual revenue of $476 million to $486 million representing an increase of approximately 26% to 29% over 2008; student starts on a same school basis to increase 13% to 15% over 2008; and diluted earnings per share of $0.90 to $0.95 or an increase of approximately 15% to 22%.

Our EPS guidance for 2009 reflects approximately $0.10 to $0.12 in dilution in connection with our acquisitions, with most of this dilution to occur in the first half. For the first quarter of 2009, we expect starts on a same school basis to increase 25% to 28% over the first quarter of 2008. We expect revenue of $112 million to $114 million and diluted earnings per share of $0.05 to $0.07.

Now let me just take a moment and update you on the student lending environment and the effect on Lincoln. First, the credit crunch that has impacted the credit markets continues to have little impact on our ability to enroll and finance our students. The legislation passed last year has helped 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.

The President's stimulus package has provided an additional $500 of Pell which will further assist our students in financing their education. And Cesar will comment further on our internal financing program in his prepared remarks.

Now finally as many of you are aware, in January we announced the next steps of our succession plan at the Company. Following the annual meeting with shareholders on April 30, Shaun will become President and CEO of the Company and I will become Executive Chairman. These changes are entirely in line with our succession plan and I will remain actively involved with the Company on a full-time basis through the end of 2010.

Many of you have gotten to know Sean during his tenure as COO and are aware of his many strengths. He possesses a tremendous amount of industry knowledge and experience and has been a great asset to Lincoln since joining the Company in 2005. I look forward to continuing to work with Shaun and the rest of the senior management team as we build upon the foundation of growth and success that Lincoln has achieved.

With that said, let me turn the call over to Sean for a review of operations.

Thanks, Dave, and good morning, everyone. Our fourth-quarter and full-year 2008 results demonstrate the benefits of our efforts over the past few years to diversify our Company. Although we continue to evolve in this regard, we are positioned well with multiple avenues from which to grow our business. Our new students start growth and overall population increases were achieved through improvements in our new student conversions. Our lead-to-enrollment performance has improved in addition to increases in our enrollment to start or our show rate conversions. These gains reflect the efforts of many in our organization that have supported nine consecutive quarters of new student start growth.

The accelerated growth seen in the fourth quarter and also anticipated for the first quarter of 2009 also reflects the impact of the current economic climate. Operational improvements over the past year have further bolstered the business and have given us a foundation from which we can launch the next phases of our strategic plan. We continue to build programmatic expertise within our Company and also deep in our management strength.

Our strategy over the next three years involves expanding the breadth of our program offerings, expanding the depth and validity of our degrees, continuing to rebrand under Lincoln, and further developing our online platform and also continuing to consider strategic acquisitions. This plan is designed to position the Company for long-term sustainable growth and also margin expansion. I will come back to the strategy in just a moment.

During the fourth quarter, we continued to execute on the three key priorities that I outlined at this time last year. I would like to take a few minutes to provide an overview of the significant progress we have made over the course of 2008 before I turn to our 2009 plans. The three key priorities for 2008 were 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.

Our high school efforts in 2008 builds upon the various improvements achieved in our successful 2007 recruitment campaign and resulted in a 5% improvement over the comparable prior year period. We were able to leverage a stabilized admissions representative force, which we have retained at an improved rate for the third consecutive year. This stability assisted us in improving our high school lead flow generated in the classroom and led to a record number of high school starts for the entire Company.

We further improved our student financing processes and continue to strengthen our relationships with key high school personnel. We were also able to develop our Lincoln Tech sales force, which allowed for continuous productivity in the face of a difficult automotive market at the time. Our relentless pursuit of performance in all facets of the program by our vice president of admissions and our five national directors of admissions led not only to the achievement of our 2008 targets but has also provided a strong head start on 2009, positioning us ahead of our year ago pace. We continue to look at high school recruitment as a long-term organic growth opportunity for all of our campuses.

In regards to our 2008 online plans, our efforts centered on strengthening our staff, refining our technical infrastructure, obtaining higher levels of accreditation, and developing our online brand. As a recap, a few years ago mentioning online and Lincoln in the same sentence would seem odd as we were known as a primarily automotive-based hands-on institution. As our Company has diversified, we saw opportunities emerge to deliver online courses. We began with degree completer options, which are short in length and allow diploma and certificate graduates to take required general education courses to finish their associate degrees.

In 2006, we received approval to offer fully online degree programs under national accreditation and we launched programs that were within our scope of approved associate degree programs offered through our ground campuses. We received approval to offer bachelor's degrees in 2008 and started small cohorts of students in May and July. These launches allowed us to offer fully online programs for the first time, develop related student services and build instructional expertise.

In late 2008, we began the final phase of our online development plan, which includes regionally accredited degree programs and the launch of a unique online website. I will discuss the timeline associated with both of those efforts in a moment.

In regards to the execution of our basic functions in 2008, we focused on improving our market presence and penetration, our employee training, and our student services. Our goals were very straightforward and aimed at improving metrics in each of these areas. We achieved our execution targets as we improved website optimization performance in leads, conversions, and starts. We retained our employees at improved levels and we improved our student retention for the full year.

Our 2008 marketing efforts produced a lead flow that exceeded prior year by 7%. Enrollment metrics also improved which contributed to our 12.4% increase in starts for the full year. We also saw improvement in our overall expense metrics as our marketing costs per start decreased by 9% year-over-year. We enhanced our main website with the goal of optimizing search results at higher rates and began working to generate improved lead volume and quality through examination of our customer search, viewing, and enrolling behaviors.

Our website inquiries steadily rose during 2008 with our website continuing to outperform other lead sources, generating an increased portion of our total leads, enrollments, and starts. Our overall web cost metrics have improved and most recently, we have seen a decrease in TV spots costs. We expect this trend to continue for adults and high school media across all of our verticals as we move forward into 2009.

We also implemented a series of advanced web lead generation initiatives focused on reexposing inquiries to Lincoln following their initial contact. We are very pleased with this effort and have demonstrated success as we are enrolling an increased percentage of these unconverted leads over time.

We continued to strengthen the Lincoln brand in 2008 and began grouping Lincoln and our non-Lincoln branded schools under a tag called the Lincoln Group of Schools primarily for our national advertising campaigns and for the long-term benefit of website optimization of Lincoln-related search.

We made continuous steps in enhancing our marketing efforts according to our 2008 development plan and also added elements of automotive industry education in late 2008 based on media coverage of the industry. Recently we have seen automotive activity pick up despite the negative OEM and industry news.

Finally, and as mentioned earlier, we have begun the development of our purely online website which we believe will attract students outside of our current demographic and provide a unique online user experience. Our development process included very specific market research that guided the development toward web features and images that distance the new site from our more hands-on vocational website. Our expected launch of the website's first phase is at the end of the first quarter of 2009. Our goal is to fully complete all phases of the site in late 2009 to coincide with our regionally accredited program launch in early 2010.

Overall, we are pleased with the sustained effectiveness of our marketing efforts and we look forward to continuing these gains in 2009.

In 2008, we were committed to providing our students with the best assistance possible to continually improve their overall education. We have commented numerous companywide processes to assist students. Some of these processes include and continue to refine systems that manage and promote student attendance as we have determined this to be one of the main factors in maintaining our positive population variance over prior year.

We continue to strengthen 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, integration of career services into the curriculum, and preparing students for their job search well before graduation. We are committed to aggressively generating placement opportunities with businesses within a 50-mile radius of our campuses and also with national accounts for larger industry employers within each one of our verticals.

Our 90 local career services professionals are preparing students to search for employment while in school and we continue to aggressively work with them as graduates. In this economic climate, some timelines have lengthened for students trying to find jobs; however, efforts within our two largest verticals, automotive and health sciences, are tracking close to prior year and we will report our full-year results in June.

Our student satisfaction rates have improved consistently over the past three years and have stabilized at a rate that we feel reflects the success of our service improvements. 94% of our students are satisfied, with 68% showing very high satisfaction. In addition, our total year student interrupt rate has improved by 60 basis points compared to the same period last year, correlating with our satisfaction scores.

We continue to make targeted program revisions to update our curriculum based on specific feedback from our industry advisors and we are considering future adjustments or additions based on economic opportunities and recent political actions. And I am proud to also mention that we continue our commitment to strong regulatory compliance at our campuses and maintain a strong regulatory performance record with all of our agencies.

Our 2009 plans will build on our expanded platform and our 2008 successes. Our strategic focus for long-term sustainable growth involves expanding our program breadth and degree depth to address a broader market and in doing so, we will build each vertical to withstand potential downturn in any one program area. In addition, increasing our degree options provides a path for students to migrate from diploma to degree within the Lincoln family of schools while also allowing prospective students to enter our schools at multiple degree entry points and to utilize transfer credits brought from other institutions.

As of December 31, 2008, our degree mix included 21% of our students enrolled in associate degrees while approximately 1% were enrolled in bachelor's programs. Our 2009 efforts towards this strategy will include new program launches, program replications, and engaging in the regional accreditation approval process for new degrees.

Our 2009 plans also includes the integration of acquisitions. As many of you know, Lincoln has grown over the past several years through a combination of organic growth initiatives as well as select acquisitions. In each of these cases, we demonstrated the ability to smoothly integrate the acquired schools and also programs under the Lincoln umbrella. We believe we have a strong track record in this area and that the integration of Baran and Briarwood will be successful as well.

We will leverage our corporate platform by applying functional area expertise. We will apply marketing processes, rebrand the schools with the Lincoln brand, introduce management information systems, assist local management with new student admissions and retention processes as well. The aggressive integration of Baran and Briarwood will further increase our addressable market and therefore expand our growth profile.

Our 2009 online plans are focused on accelerating the growth profile of our online platform through Briarwood. We anticipate that fully online regionally accredited 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. When bolstered by regionally accredited programs that will validate our offerings and also a new online website that will allow us to better manage the online user experience and also meet the unique expectations of a purely online student, we feel our online platform will provide a significant and sustainable future growth opportunity.

In summary, our operational improvements provided great strength to the organization in 2008 and have given us a foundation from which to advance our longer-term strategy for sustained growth and profitability.

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

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 fourth-quarter and 2008 full-year results. Our fourth-quarter results were positively impacted by our entering the quarter with approximately 2900 more students than we had in the fourth quarter of 2007. This larger carry-in population and the 17.2% student start growth we generated during the fourth quarter drove our approximately 19% revenue growth.

Other key highlights for our fourth quarter include, we generated free cash flow of $19.9 million compared to $13.3 million during the fourth quarter of 2007. Our operating margin improved 100 basis points to 19.8% from 18.8% for the fourth quarter of 2007. Earnings per diluted share grew 32.4% to $0.49 from $0.37 per share from the fourth quarter of 2007 as we benefited from the increased capacity utilization and the leverage inherent in our business model.

We closed on the acquisition of Briarwood College on December 1, 2008 and funded the purchase price of $10.5 million net of cash acquired with cash on hand. We finished the year with $15.2 million in cash and cash equivalents, and no borrowings outstanding under our credit agreement. And bad debt for the quarter was favorably impacted by strong cash collections and was 5.4% of revenue as compared to 5.7% for the fourth quarter of 2007.

Now let me turn to our full-year results. Revenues increased by $49.1 million or 15%, $376.9 million for the fiscal year 2008 from $327.8 million for 2007. Approximately $1 million of this increase was as a result of our acquisition of Briarwood on December 1, 2008. Excluding Briarwood, the increase in revenues was primarily attributable to a 13% increase in average student population, which increased to 19,983 for the year ended December 31, 2008 from 17,687 for the year ended December 31, 2007.

Revenues were also favorably impacted during the year by tuition increases, which averaged from 3% to 3.5%, and increases in tool sales and interest income collected on student loans which increased by $0.7 million and $0.8 million respectively for the year ended December 31, 2008. Average revenue per student increased 1.5% for the year ended December 31, 2008 from the year ended December 31, 2007, primarily due to tuition increases offset by a shift in our student population to lower tuition programs.

Operating income margin for the year ended December 31, 2008 increased to 9.4% from 7.9% for the year ended December 31, 2007. Improvement in operating income was related to the increase in our average student population, which resulted in capacity utilization of 60% at December 31, 2008 versus 53% at December 31, 2007. This increase in capacity utilization enabled us to leverage our educational services and facilities expenses during the year. Accordingly, the additional revenues from increased student population contributed to the increase in operating income margin.

Our educational services and facilities expenses increased by $14 million or 10.1% to $153.5 million for the year ended December 31, 2008 from $139.5 million for the year ended December 31, 2007. Briarwood accounted for $0.5 million or 0.4% of this increase. Excluding Briarwood, the increase in educational services and facilities expenses was primarily due to instructional expenses and books and tools expenses which increased by $6.1 million or 8.4% and $3.6 million or 20.9% respectively over the prior year.

This increase was attributable to a 12.4% increase in student starts for the year ended December 31, 2008 as compared to the prior year and the overall increases in student population and higher tool sales during 2008 compared to 2007. We begun 2008 with approximately 1400 more students than we had on January 1, 2007. And as of December 31, 2008, our population was approximately 3600 higher than as of December 31, 2007.

The remainder of the increase in educational services and facilities expenses was due to facilities expenses which increased by $3.8 million for the year ended December 31, 2008 over prior year. This increase was primarily due to increase in depreciation expense of $2.7 million resulting from higher capital expenditures during 2008 and 2007. The remainder of the increase in facilities expenses was due to higher utilities, rent, and repairs and maintenance expenses on our campuses.

Capital expenditures in 2008 included the renovation and conversion of our former auto school in Grand Prairie, Texas to a skilled trade school, as well as the opening of our new campus, Aliante, in North Las Vegas, Nevada. Educational services and facilities expenses as a percentage of revenues decreased to 40.7% of revenues for the year ended December 31, 2008 from 42.6% for the year ended December 31, 2007.

Our selling, general and administrative expenses for the year ended December 31, 2008 were $187.7 million, an increase of $25.3 million or 15.6% from $162.4 million for the year ended December 31, 2007. Approximately $0.3 million or 1.2% of this increase was attributable to Briarwood. Excluding Briarwood, the increase in our selling, general, and administrative expenses for the year ended December 31, 2008 was primarily due to a $1.9 million or 13.4% increase in student services, a $4.8 million or 7.4% increase in sales and marketing, and an $18.3 million or 22% increase in administrative expenses as compared to the prior year.

The increase in student services was due to increases in compensation and benefit expenses attributed to additional financial aid and career services personnel as a result of a larger student population during the year ended December 31, 2008 as compared to the prior year. In addition, we expanded a pilot program which we began in 2007 to centralize the back-office administration of our financial aid department in an effort to improve the effectiveness of our financial aid processing. This resulted in the hiring of additional financial aid representatives during 2008.

The increase in sales and marketing expense was due to, one, annual compensation increase to sales representatives; two, the hiring of additional sales representatives; and three, increased call-center support for the year ended December 31, 2008 as compared to the prior year. In addition, we increased our marketing investments in an effort to continue to grow our student population.

The increase in administrative expenses was due to, one, a $9.8 million increase in compensation and benefits resulting from annual compensation increases including increases in employee bonuses, stock compensation expense, and the cost of benefits provided to employees. Two, a $4.2 million increase in bad debt expense; three, $0.2 million that was refunded to US Department of Education resulting from a program review at our Southwestern College; four, a $0.6 million increase in software maintenance expenses resulting from increased software licenses for our student management system; five, $0.9 million of acquisition-related expenses relating to the Baran acquisition in accordance with financial accounting standards statement number 141(R) business combinations. And finally, a $0.9 million of expenses incurred in connection with two registration statements on Form S3 filed with the SEC during 2008 and other related expenses.

For the year ended December 31, 2008, our bad debt expenses as a percentage of revenue was 5.7% as compared to 5.3% for the year ended December 31, 2007. This increase was primarily attributable to higher accounts receivable due to an increase of 13% in average student population for 2008 as compared to the same period in 2007. The number of days sales outstanding for the year ended December 31, 2008 decreased to 25.4 days compared to 27.7 days for 2007, primarily due to the timing of collection of Federal funds.

As a percentage of revenues, selling, general, and administrative expenses increased to 49.9% of revenues for 2008 from 49.5% for 2007. Net income from continuing operations for the year ended December 31, 2008 was $20.2 million or $0.78 per diluted share as compared to $13.8 million or $0.53 per diluted share for 2007.

Now let me turn to our balance sheet. At December 31, 2008, we had $15.2 million in cash and cash equivalents compared to $3.5 million at December 31, 2007. Net accounts receivable at December 31, 2008 were $26.2 as compared to $24.9 million at December 31, 2007. Net property and equipment grew to $108.6 at December 31, 2008, as compared to $106.6 million at December 31, 2007. The increase is due to the purchase of capital expenditures of $20.2 million during the year, offset by depreciation expense.

As of December 31, 2008, we had no borrowings outstanding under our credit agreements versus $5 million outstanding under our credit agreement at December 31, 2007 and December 30, 2007 respectively. Cash from operations during 2008 reached a record of $54.2 million compared to cash from operations of $15.7 million during 2007. Our strong cash flows for the year reflect the operational improvements we have made to date in packaging our students.

Now turning for a loan program, as of December 31, 2008, we had granted loan commitments to our students net of interest that would be due in the loan to maturity of $17 million as compared to $15.4 million and $13.7 million at December 30, 2008 and June 30, 2008 respectively. The passage of the Ensuring Continued Access to Student Loan Act, better known as HR5715 provided our students with access to an additional $2000 of unsubsidized loans per academic year.

This additional funding coupled with increases in overall financial aid provided by the Higher Education Act or HR4137 reduced the gap between the amount of tuition funded by financial aid and alternative loans. Based on this additional funding, we have previously stated that based upon our analysis we expected that our annual investment in net accounts receivable that will be required by Lincoln to assist its students in financing the gap in 2009 will not exceed $5 million per year.

Finally, in February, we completed a secondary offering of [6,325,000] shares of our common stock at a price to the public of $14 per share. Of these shares, approximately 1,150,000 were sold by the Company and 5,175,000 were sold by selling stockholders.

With that, I would like to turn the call back over to Dave.

Thanks, Cesar. To summarize, we are extremely pleased with our fourth-quarter and full-year results. We delivered record financial results and generated consistent starts in enrollment growth over the course of the year. We continued to see the benefits of the many operational initiatives we have implemented over the past several years. In addition, we further diversified our program offerings and continued building a strong presence in the five verticals that possess attractive employment prospects.

During 2008, we made considerable progress expanding our addressable market by strengthening the overall breadth of our program offerings and accelerating our concerted push into higher degree levels. Our efforts in these areas will serve to extend our student lifecycle as well as offer degree completer opportunities.

The recent acquisitions of Baran and Briarwood are consistent with this strategy. As a result of our efforts and continued successful execution of our growth strategy, Lincoln today is a much stronger and balanced Company positioned for sustainable and long-term growth.

With that said, we would be happy to begin the question-and-answer period. Thanks.

(Operator Instructions) Kelly Flynn, Credit Suisse.

It's [Patrick O'Gravelly] for Kelly. Can you give some updated thoughts on how you view the economy impacting enrollments? And perhaps also, do you have any reason to believe that a weak economy won't continue to help enrollments if things worsen further?

Well, I would say that the first part of your question, certainly we are seeing the benefits of the increased unemployment particularly over the last couple of quarters. The trends certainly have continued into the first quarter of 2009. I would say that given the fact that we are watching placement rates very closely and we have programs that are focused on high demand markets and job opportunities, we feel pretty comfortable that a continued weakened economy assuming it doesn't last forever, we are pretty well positioned to deal with that.

I guess as a follow-up to that without asking you to predict the future, what assumptions about the economy if any are reflected in the '09 guidance?

I would say this. You saw our overall guidance for the year. You have seen the guidance for the first quarter in terms of start growth. We are pretty mindful that two quarters don't make a year, so basically we see the impact. We are very pleased with the trends in the first quarter. But overall for the year, we are assuming that as you can tell from the first quarter, the 25% to 28% and the 13% to 15% overall for the year. So we are not attributing the last three quarters to a continuation of this trend, a more conservative view.

I think when we speak to you that next quarter perhaps we will update our guidance based on what we see. But at the moment our visibility is pretty well limited to the next quarter.

Thank you.

Gary Bisbee, Barclays Capital.

Congratulations on the quarter and the outlook. I guess first question, can you give us some sense what the contributing factors to the $0.10 to $0.12 dilution from the acquisitions is? What part of that might be just the amortization versus -- are these businesses actually losing money today versus what level of investments you plan to make in them over the next couple of quarters?

I will let Cesar talk about the accounting side and everything else, but I'll give you an overall view, Gary. In terms of the acquisitions and basically five of the six schools, we have owned for 60 days. Our operating people have been into the schools, had access over the last 60 days. They are very excited about the upside and the potential and with that said, they have identified a number of opportunities that we want to be able to take advantage of sooner rather than later. And for that reason, we are providing ourselves the opportunity to do that in terms of the $0.10 to $0.12. Cesar?

Yes, Gary, the acquisitions basically -- this is all as a result of acquisition accounting especially on the 141(R). There is a significant amount of fair value items that need to be valued and amortized into the P&L and all those come below the line. So a lot of those are charges related to that. And -- but as far as the EBITDA level, all these acquisitions were profitable. It is just that acquisition-related amortization of intangibles, student contracts, etc. become dilutive the first year.

And how long does the amortization go or how quickly does it fall off? I know you --

They will be accretive in 2010.

Okay, so --

It's usually 12 to 15 months, 12 to 18 months is usually the amortization period on a lot of these items, but starting in 2010, these acquisitions will be accretive to earnings.

Okay, all right, great. Bad debt was down quite a bit in -- I know you talked about the year, but in the quarter relative to the last couple. Can you give us any color on that and how should we think about this trending in '09? Is the annual number for '08 a decent proxy give or take a little bit for how we should think about that?

Well, I believe we have continued to model 6% to 6.5% of bad debt expense. I think what you are starting to see, and it's too early to tell at this point, but I think you are starting to see a lot of the benefits that we made within our financial aid packaging and our cash collection starting to come home. However with that said, one-quarter of excellent cash collections, particularly from our cash flow from operations, I'm not ready yet to predict the year. So I would still stick with the 6% to 6.5%. And as we go through the first quarter or second quarter of the year, we will update that accordingly if we see better trends.

Okay, great. Obviously on the front end, starts are doing great and obviously the market, one of the big fears as we get deeper and deeper into the current jobs recession is that placement is going to get tougher. So can you give us some sense how are you feeling about the ability to place kids, particularly one that I feel like I don't have a good handle on and a lot of investors don't is the skilled trades programs. Are there lots of jobs? I mean, with the implosion of the housing and commercial real estate in terms of new building, a lot of people wonder if a lot of those jobs will still be out there.

How are you thinking about it and how confident are you in the ability to continue to place these kids going forward.

This is Shaun. I will take that question. We have always been very aggressive in placing our students and we will continue to do that. Just as background, we have got 90 career services professionals at our schools that work on a local basis with students and we start with them from day one all the way through finding a job and we will stay very aggressive in that regard. We will increase that number as necessary.

But we continue to watch each local market very carefully and each vertical and we feel like today there is some pressure on numbers as we compare to our prior year total 83% placement rate. And what we see today are some lengthening timelines for students trying to find jobs, maybe some employers pushing start dates out of it. But this said, our students are still finding positions.

For our two largest verticals, they are holding well, automotive and health sciences very close to last year's periods of date numbers. We in the skilled trades place a number of our students into HVAC positions which continued to see demand. We don't place that many in real estate, to tell you the truth, especially residential; commercial real estate, we were placing a few. We feel that there's an advantage coming in the stimulus package infrastructure, a development that will be happening on many state levels.

So as of today, we are not necessarily concerned about the school trades, but we will continue to just look at it very specifically as we do all the verticals. Also, I just wanted to mention that we report our full-year numbers in June and I can't tell you what we anticipate for all the verticals along the way, but we feel very confident that the numbers we are seeing today are not varying too much from what we saw last year.

Okay, great, then just one last one. I assume -- I don't think you said exactly -- I assume that auto, you said all five verticals had starts growth, auto probably a lot slower. So several of the other verticals probably a lot quicker than the number you reported in the fourth quarter in total. When we think about the capacity utilization, how much room is there in the schools that are teaching the curriculum that is in strong demand today relative to schools that might have more modest growth?

I know a big strategy has been putting skilled trades into the auto schools where you had a lot of excess capacity. But is much of that excess capacity still in the schools that were traditionally auto or do you have enough that you are real confident you can grow capacity utilization even if healthcare continues to be the dominant part of your growth over the next year? Thanks a lot.

Gary, as of December, we are at 60%, and that is pretty much across the board, 57%, 58% is auto. 62% is health sciences. And that's pretty much spread across all of the schools. It's an average, but it's also pretty much where all the schools stand. So we feel we have ample capacity. I think we've said in the past that not until we get to about 75% or so do we really need to continue to invest in capacity.

So I think that there are lots of opportunities there. We have a long way to go. You know, we hope that as we went from 53% to 60% this year and we hope to accomplish the same thing next year or better.

Great, thanks a lot, guys. Keep up the good work.

Jeff Silber, BMO Capital Markets.

Thanks so much. In your remarks you talked a little bit about the funding environment and the potential increase in Pell grants and the stimulus plan. If that does go through, does that change any of your thoughts in terms of lending or in terms of revenue guidance, enrollment growth, etc.?

No, Gary, it does not. I mean obviously to date, I think as we said in our prepared remarks, we really haven't seen any issues as far as being able to finance our students. So it wouldn't affect enrollment growth at all because it hasn't impacted it today. You know, there's a $500 right now on the table for additional Pell. That will probably cover 3%, 3.5% tuition increases, so I would expect it to be pretty much just status quo. Obviously there might be a couple hundred dollar benefit which will be positive, but I don't think it's going to have a meaningful impact.

Okay. Great. I just wanted to clarify something on your guidance. You are looking for -- I guess we call it same school starts growth of about 25% to 28% in the current quarter. What would be the impact of both Baran and Briarwood on that number?

Let's see, I would say Baran starts in the first quarter are probably in the 300 or 400 range.

I don't think we have an answer. We will have to get back to you, Jeff.

Okay, no problem. Do you have what the Briarwood impact was on the fourth quarter in terms of starts?

Zero.

Okay, just wanted to double check that as well. And again, just some modeling-related questions. What should we be looking for for capital spending and taxes in 2009?

Capital expenditures will be, I'd say between $25 million to $30 million. Taxes you should probably model in 40% to 41%.

In terms of D&A, depreciation and amortization for the year?

It continues to run about I would say about 4%.

And that's including the additional amortization from the acquisitions you mentioned?

No, that's on a same school basis.

Same school basis, okay. And do you have again -- we are just trying to model for the entire company what the incremental amortization would be for the year? With the acquisition?

Not yet, and only because we are still in the process of having as you might appreciate January 1, we have a new basis of accounting that was introduced. Everything needs to be valued so we have made preliminary estimates on what those valuations are, but they are still subject to completion and we have --. There are valuation people in the field today trying to revalue everything in accordance with 141(R). So we have an estimate but we preferred to hold off until we have the final valuations completed.

And roughly when will that happen?

That should happen by -- we will have that by the second-quarter results. I'm not sure we'll (multiple speakers)

Just in terms of your balance sheet right now post this acquisition, what does it look like?

Well, we have obviously zero debt. We had borrowed money to fund the acquisition of Baran. We used the proceeds from the offering to pay that off, so to date, we continue very healthy with zero debt.

And the availability on the credit line?

It's $100 million.

Okay, great. I just wanted to double check that. Thanks so much.

Trace Urdan, Signal Hill.

Good morning, could you speak to the improvement at the educational services line? Is it solely due to the increased enrollment or were there other items in there that may have contributed to that sort of year-over-year improvement at the educational services line?

No, it's really due to increased enrollment. As you know, we get a lot of leverage. A, our facility costs are fixed, so as revenue grows up, we get a little leverage from facility costs and the main benefit comes from the instructional costs as we increase capacity, our student teacher ratios increase and we obtain leverage from that line item.

Can you comment, Cesar, on -- I don't even know if you have something like this, but how much of your capacity has been diverted from auto into other areas on a year-over-year basis?

None. As you know, we had 10 auto schools and those auto schools were basically -- they were not auto. Our schools are all diversified, so we had other programs in there and --. But we still classified those schools as auto schools as part of our auto capacity. So even if we introduced a new program, it's still part of that auto capacity. But the latest program we introduced to an auto school was our Columbia Culinary School, and that was at the beginning of 2008.

Okay, all right. I think I understand. Thank you.

[David Shue], Banc of America.

Congratulations on the quarter, guys. Just a question on -- in your prepared remarks, you mentioned a recent pickup in auto. Can you just elaborate a little bit on that?

Well, I would say that based on a number of the changes in our messaging we have seen increased lead flow and positive trends. We mentioned we had positive start growth in the fourth quarter of 2008. We would attribute a good part of that to overcoming some of the negativity out of Detroit. And I would say further that we are seeing very positive trends in the first quarter of 2009 as well largely due to the fact there is the weakening economy, but more importantly as it relates to automotive, we are getting the message out that the jobs are still in demand.

Okay, so no change -- I mean you guys had mentioned no change in the job outlook. I mean I guess going forward, do you expect that to continue?

Are you speaking specifically about automotive?

Yes, just jobs -- outlook for autos.

Yes. Let me just say a couple things on automotive. You know, as we prepare technicians, we are all looking at the same statistics about the age of the vehicles on the road today that continue to increase and there's a number -- there's turnover in technicians out there as well. But we feel very confident about the outlook for automotive technicians, although dealerships are going through some struggles. We are finding that dealerships are also increasing their service hours and looking to gain greater revenues from their service parts of their business. So that bodes well for our graduates moving forward.

We met recently with our Greater New York Auto Dealers Association executive director and he shared the same news, that dealerships really are turning to more aggressive service while independent shops are also seeing their business boom and also related tool companies. And so for our direct auto placements or related auto placements, we feel very confident that they will continue strong.

Okay, one more question. The conversion of that auto school to a skill trade school, what is the difference between that and your general I guess strategy of just kind of adding skilled trades to your auto schools?

Well, nothing really. We had the opportunity to refurbish the smaller automotive school that we had in the Grand Prairie market, the Dallas market. It's -- I don't know, I think it's 0.8 miles or 0.8 mile away from the main facility, so it's just a dedicated facility with welding, HVAC, [EST] and so on in one particular building under the same management so not a difference.

Okay, thanks, guys.

(Operator Instructions) Gordon Lasic, Robert Baird.

Thanks, I just wanted to dig a little deeper into the sales and marketing expense line. You mentioned the hiring of additional sales reps contributed to that. I wonder if you can quantify that increase and what are your thoughts for 2009? How comfortable are you with the number of reps you have? And then kind of an offshoot of that is, is your guidance assuming a ramp in productivity of those sales reps? And if so, how much?

Gordon, I'll take that. This is Shaun. We probably increased our representative salesforce by 5% year-over-year and those representatives also saw increases in conversions. We feel that there's additional upside in their ability to convert from lead to enrollment and enrollment start. And so we don't see significantly increasing that representative force into the subsequent year. We have had better retention and so again, we continue to see their productivity increase and we see that there's additional upside there.

But I also mention that an added benefit from the acquisitions gives us a well-trained representative force representing automotive and nonautomotive programs especially from the Baran acquisition. And those representatives are local and we also have a team of national representatives as well that will add to our high school force. And so we feel very good about where we sit today in our sales force and feel that there is upside without having to increase the number.

Are you going to be making any cuts to the salesforce of your acquisitions?

You know, we always look at opportunities to rationalize the salesforce. We don't see cuts but we do see a revision of territory. And we feel that that's probably the first opportunity that we have to continue to address the market that we currently serve and also to move into new markets. And so you will probably see the same total and shifting focus geographically.

Okay, just a little bit of a longer-term question. Right now you talked about 21% of your students are associates, 1% are bachelors. As we think about the ramp of online and some of these upstream programs, as we think about two to three years out, can you give us any kind of thoughts on where you think associates and bachelors can trend over that time frame?

I think we will provide more clarity on where we see our degree mix. I would say two to three years out. We feel very confident we can move from the 20%, 22% range to approximately 35% and our opportunity really does relate to how quickly we can add regionally accredited degrees. We feel that there is a competitive advantage to having a valid or validated associate and bachelor's option out there and so our ability to work with NEASC especially will give us that opportunity on a quicker basis.

I will remind you that our first regionally accredited programs are expected to be offered on ground in Connecticut and also online 12 to 15 months and so that will give you a little bit of our time frame.

Thanks a lot.

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

Okay, thank you. Thanks, everyone, for joining the call today and we look forward to updating you on our progress on our next call in early May. Thanks very much and good day.

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