Lincoln Educational Services Corp (LINC) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second quarter 2009 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 that involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statements based on a number of factors and other risks, which are more specifically identified in Lincoln's filings with the SEC.

And, now, I would like to turn the call over to Mr. David Carney, Executive Chairman of Lincoln Educational Services. Please go ahead, David.

Thank you. And good morning, everyone, and welcome to our second quarter earnings conference call. Joining me today is Shaun McAlmont, our President and Chief Executive Officer, as well as Cesar Ribeiro, our Senior Vice President and Chief Financial Officer.

Following my remarks, Shaun will provide an update on our operations, including our 2009 priorities, and Cesar will provide an overview of our second quarter results. We will then open the call for the question and answer session.

Now turning to our results. During the second quarter our strong new student starts and enrollment growth resulted in record revenue, operating margin, and net income gains over the prior year. We believe our performance further demonstrates our ability to capture the leverage in our business model and the success of our efforts to expand our program portfolio and drive efficiencies across all key functional areas of our organization.

Revenue rose 50.6% to $128.1 million in the second quarter, and on a same school basis revenue increased by 34.9% to $114.8 million. Net income was $7.4 million, and diluted earnings per share was $0.27 versus $0.05 in the second quarter of last year.

We generated new student start growth for the eleventh consecutive quarter, including double-digit growth across all five of our verticals. New student start growth was 40.7% for the quarter and 33% on a same school basis.

Student enrollment on a same school basis at June 30, 2009 was 23,994, an increase of 29% over last year, while average enrollment for the quarter was 23,877, up from 18,540 for the second quarter of last year. The year-over-year increase in end of quarter enrollment and average enrollment occurred across all five verticals.

Our total population of 26,035 at June 30, 2009 was up 40% year-over-year and divided between health sciences 37%, automotive 32%, skilled trades 13%, our business and IT 9%, and hospitality services 9%.

All in all, our operating and financial results illustrate our success at building on our value proposition across our five verticals and the continued hard work and focus of our dedicated employees.

Our program diversity has proven to be a key growth catalyst, and coupled with our refined operations is resulting in improved performance that has driven increased capacity utilization, unlocked the leverage in our business model, and strengthened our growth profile and our outlook.

It's worth noting that we saw the benefits in the quarter from the solid execution of our admissions representatives, which not only numbered higher than last year but were also increasingly effective resulting from our efforts to minimize (sic) turnover and maximize training of our staff.

Our new student inquiry growth increased year-over-year, and this stronger admissions representative force was able to convert these leads at a higher percentage. So on top of our efforts to expand our program offerings and further improve our value proposition to students, we have also strengthened the blocking and tackling aspects of our business in a manner that will drive benefits over the long term.

Moving forward, our strategic plan is primarily focused on further broadening our program mix into high demand fields, replicating our stronger programs, such as licensed practical nursing, across our campuses, and continuing to implement our national branding strategy. We are executing this strategy from a position of strength as enrollment continues to grow, and we see further leveraging of the multitude of benefits provided by our enhanced operational platform.

We have spent the past several years examining and refining all key areas of our organization, including recruitment and sales and marketing, which has allowed us to execute our plan at a high level and maximize the returns from our business.

It has also allowed us to maximize the benefits of the current macro environment which is causing an increased number of individuals to seek quality education and training and improve their employment prospects.

With that said, we continue to evaluate our internal operations with the goal of further optimizing our approach. One area we are currently focused on is our career development and placement resources, due to the highly competitive and challenging employment environment.

Our longer term strategy, which Shaun will outline in greater detail during his prepared remarks, is to expand the depth of our degreed offerings which, in turn, will grow our addressable market, extend the student lifecycle, provide degree completer opportunities for students across the country, and offer students the opportunity to go from diploma to degree in the Lincoln family of schools and colleges. In addition, we remain on track to roll-out our regionally accredited online offerings in early 2010. We believe these initiatives will position Lincoln for long-term sustainable growth as the economic environment begins to recover and the volume of students seeking education and training begins to moderate.

In summary, we are continuing to strive to consistently strengthen the value proposition we offer current and potential students, from diploma to degree programs across all of our verticals. President Obama and the new Administration have demonstrated their strong commitment to advancing higher education in this country, a goal we at Lincoln strongly believe in as well.

As an organization we were originally founded upon the premise of providing students with a high quality education that will secure them an attractive position within a formidable career field. That original mission still drives us today. We remain dedicated to providing the education and tools needed by our students to improve their lives and become members of this country's skilled workforce.

Now, let me turn to and spend a moment on updating you on the regulatory and student lending environment. Last month the House Committee on Education and Labor passed the Student Aid and Fiscal Responsibility Act, or H.R. 3221, among other things proposing the following -- beginning in July 2010 all new Federal student loans originate through the Direct Loan Program. This change has been expected for some time and, as we have mentioned on earlier calls, all of our campuses currently have a Direct Loan Program in place and we will be prepared to transition to the Direct Loan Program at that time.

The proposal also includes an extension for one year to July 2012 of the exclusion from the 90/10 calculation of the $2,000 increase in the Stafford Loan passed last year. Additionally, the new Perkins Program would be increased from $1 billion to $6 billion, potentially benefiting many of our students, and would also be excluded from the 90/10 calculation.

As mentioned earlier, we are pleased with the President's education initiative to increase the level of investment in the education of our nation's young people and anticipate it will benefit all of the institutions providing post secondary education.

Finally, the legislation passed last year has helped to greatly reduce the gap between tuition and the amount that students receive in financial aid. Our students continue to benefit as the amount remaining or the gap has been reduced to a very manageable level. This also allows us to continue to limit the amount of internal loans going forward and limit our bad debt exposure. The proposals in H.R. 3221 will allow these benefits to continue, while complying with the 90/10 limits.

Now, let me turn to our third quarter and 2009 financial outlook and guidance. We believe our outlook for the third quarter and the full year is very promising, fueled by the strength of our carry-in population, the continued strong start growth across all five verticals, the benefit of our rebranding, our experienced and stable admissions team, and the current macro environment. Finally, we are encouraged by our July starts and enrollment trends for the balance of the quarter. Based on these trends we expect to end the third quarter on a same school basis approximately 5,000 students ahead of prior year.

Given our strong performance during the second quarter and our current outlook for the full year we are raising our full year guidance. We now expect full year 2009 annual revenue of $518 million to $525 million, representing an increase of approximately 37% to 39% over 2008, with student starts increasing 20% to 22% over 2008. We expect diluted earnings per share of $1.40 to $1.45 or an increase of approximately 79% to 86%.

Included in our full year guidance is $0.18 to $0.20 per share in connection with our Briarwood and Baran acquisitions, resulting from dilution and the acceleration of our rebranding efforts and other operational changes we are making.

Given the strong overall performance we're experiencing this year, we chose to accelerate our branding efforts and our other changes in 2009, which we believe will strengthen the 2010 performance of the acquired schools.

The third quarter of 2009 we expect starts to increase 15% to 17% over the third quarter of 2008, and we expect revenue of $134 million to $138 million, and diluted earnings per share of $0.34 to $0.36.

And, with that said, let me turn the call over to Shaun, who will summarize the results for the quarter and discuss our strategic focus for the remainder of the year. Shaun?

Thanks, Dave. And good morning, everyone.

Our second quarter results demonstrate our ability to execute our 2009 operational plan and build on the momentum we experienced through 2008 and the first quarter of this year. Our results also show that the demand for Lincoln's products remain strong across the country. When we last reported we saw good improvement in our April starts. We beat our internal expectations for the remainder of the quarter as our automotive programs continued to rebound and showed impressive growth for the second consecutive quarter and our Allied Health Programs again posted healthy gains.

Looking at our broader program portfolio, we experienced growth across all of our verticals, a fact that continues to prove our strategy of diversification as an effective one. We continue to see the benefits of our expanded focus from vocational certificates to career related associate programs as our degree seeking population reached 22.1% of our population on a larger overall student base. We ended the second quarter with 5,302 degree seeking students versus 3,961 prior year. Considering this trend and based on our long-term strategy to expand into new markets with higher degrees, we continue to strengthen our management team by adding expertise in key product and growth areas.

Taking a closer look at our second quarter 2009 operational performance, we produced media inquiry growth of approximately 44% compared to the second quarter last year. One major contributing factor to this increase was the performance of our main website, which generated 50% more visitors during the second quarter compared to last year. While our website outperforms other lead sources, it also continues to produce overall cost efficiencies as our advertising cost per new student increased by 13.6% for the same period year-over-year.

Additional second quarter progress related to our marketing activities include the further advancement of our national brand strategy through co-branding all remaining non-Lincoln brands under the Lincoln group of schools umbrella. We're seeing multiple benefits from this approach, and as an outcome seeing strong appeal for our brand.

Secondly, the further inclusion of positive automotive service industry data to our marketing efforts continues to offset negative media coverage and is having a positive affect, as we've seen an uptick in interest in our automotive programs.

And, lastly, the launch in March of our purely online website has begun attracting students outside of our current demographic, while also providing a unique online user experience. The design was pursued with the mindset of distancing it from our more hands-on vocational website in preparation for our launch of regionally accredited programs in early 2010. We remain on track to fully complete all phases of the site in late 2009 and launch our first regionally accredited program in the first quarter of 2010.

We're moving forward with plans to rebrand our most recent Lincoln acquisitions, at Lincoln Technical Institute and Lincoln Colleges as appropriate. Overall we're pleased with our marketing initiatives which are positioning Lincoln as a viable and attractive vocational and degree educational option for students nationwide.

Moving to our new student admissions performance, new student starts increased impressively on a same school basis during the second quarter, which we believe illustrates our ability to satisfy an increasing demand for quality education. We are very pleased with the performance of our admissions, financial aid, and student services Departments. Over the past several years we've worked diligently to improve the hiring and training of these key employees.

Most importantly, we've dramatically reduced the Company wide turnover rate in our admissions area. During the second quarter we once again realized an impressive retention level, giving us nine quarters of year-over-year turnover improvement out of the last 12. As a result, we are addressing our markets with a more experienced, trained and tenured admissions representative force that achieved improved new student starts for the eleventh consecutive quarter.

Our high school admissions efforts during the second quarter focus on maximizing our recruitment visits around the country prior to the end of the high school year and strengthening these important school relationships across the country.

We're tracking ahead of our prior year progress in high school enrollments, and we expect these new student starts to improve between 5% to 7% for the year. High school recruitment remains a significant portion of our annual enrollment picture, as well as a long-term organic growth opportunity for all of our campuses.

As I mentioned on our last call, new student starts in the high school category are less volatile than media starts and are dependent on the recruitment efforts of each high school representative, and amount to approximately 20% of the starts for the full year.

Our future high school growth will be bolstered by a larger admissions force moving into the 2010 campaign, which kicks off later this month. On a same school basis we're recruiting with 8% more admissions representatives this year than last, and we're in the process of increasing and integrating representatives from our acquisitions to our national recruitment effort, which will add an additional 10% to our total representative force going into 2010. We feel that the admissions representatives and managers joining us from the acquired schools will strengthen our national approach and positively impact the 2010 campaign.

In regards to our educational efforts, we're committed to fostering strong academic performance, providing learning and other resources, and continually striving to maintain strong student persistence rates. This effort is critical as many of our learners are not self-directed and do require assistance along the way.

Our overall student interrupt rate improved by 20 basis points over prior year and on a larger basis students indicating continued progress in how we educate and support our students. In our most recent institutional surveys 97% of our students responded as satisfied, with 84% showing very high satisfaction, which reflects the success of our dedicated service improvement.

Our satisfaction scores also improved over the prior period and prior year. Along with a strengthened corporate education team, our educational quality continues to grow as the move to new programs and higher degrees has given the opportunity to hire impressively qualified faculty across our system, who have added value to a number of critical areas, such as instruction, curriculum review, and new program development.

As our students graduate we continue to provide job placement assistance, and, as you can imagine, we have dedicated increased attention to these services for both graduates and current students. Our local and corporate career services professionals are aggressively working to ready students for their job search, while also cultivating new job opportunities in each of our markets.

As we discussed on our last conference call, we are seeing some timelines lengthen for students trying to find jobs given the prolonged economic downturn. However, our two largest verticals, automotive and health sciences, are still tracking close to prior year.

The qualified healthcare worker shortage in this country has continued to result in strong employment opportunities for our Allied Health graduates. And in relation to automotive we continued to see increased service opportunities, which are helping to offset the impact of dealership closings. Our final calendar year 2008 placement rate is 77%. Our automotive placements finished slightly over 80% with approximately 30% of our students working at dealerships.

Considering the current economic climate, we expect continued pressure on placement rates. However, year-to-date 2009 results give us confidence at this point that we are not experiencing a continued decline. Overall, we're very pleased with our ability to educate our students, provide real career skills and prepare them for the workforce.

Now, as we look forward and plan for the remainder of 2009, our plans consist of the following -- driving additional improvements in all operational areas and also focusing on continued integration of our recent acquisitions.

Strategic acquisitions have served as a growth driver over the past several years for our Company. We've used such acquisitions to strengthen current and add new program verticals, expand into new geographies, and also add degree options and accreditation levels.

With each acquisition we've demonstrated the ability to smoothly integrate the acquired schools under the Lincoln brand. We've also proven to be highly capable in integrating the faculty and students of the acquired schools into the Lincoln family.

We believe the integration of our most recently acquired schools will extend our strong track record, and we're already aggressively moving forward with our efforts to leverage our systems across all functional areas to ensure that we integrate for long-term efficiency.

As Dave mentioned, we've also made the decision to accelerate the rebranding of these schools, to be completed by the end of the year. This effort will include the alignment of recruiting efforts, admissions personnel, and other marketing campaigns. We're pleased with our progress thus far.

I wanted to take a moment to reiterate our long-term strategy, which includes focusing on developing and rationalizing our programs, to strengthen and diversify our verticals, expanding the depth and validity of our degreed offerings, and also further building our online platform with regionally accredited programs.

For years our strength has been focused on vocational career programs. We will continue to be world class in this sector, and we also intend to build degrees that are natural extensions of this vocational base. We believe this long-term strategy will position Lincoln for sustained growth and profitability as we increase our addressable market over time.

By continuing to build a stronger foundation in each of our verticals we will also be in a better position to withstand a potential downturn in any one specific product area. We're currently focusing on building our health sciences vertical and specifically planning to add practical nursing to schools in Ohio, Pennsylvania, Florida, Illinois, and Massachusetts, with additional programs being added to locations in New Jersey and Connecticut, all over the next two years. We will launch our first Pennsylvania nursing program next month.

Our teams are also working to update programs in automotive and skilled trades verticals, to consider new technologies and emerging environmental standards in these fields. Overall, we remain focused on optimizing our entire program portfolio to ensure we are in a strong position to continue generating healthy results once the macroeconomic environment improves.

Our plans for increasing the degree options we offer, current and prospective students are moving forward, along with the additional goal of further building our online platform. We anticipate that the percentage of our population seeking degrees will increase at a reasonable rate for 2009 and 2010 and will accelerate with the addition of regionally accredited online and ground associates and baccalaureate programs thereafter.

As a part of the acceleration of integrating our acquisitions, we are in the process of applying to the New England Association of Schools and Colleges, or NEASC, to merge Briarwood and Clemens Colleges into a new Lincoln College. This new entity will serve as our regionally accredited ground operation with two locations, each possessing student residences.

This Lincoln College will also serve as the base for our new online operation, which will be presented to NEASC at its winter meeting for approval to launch our first fully online regionally accredited baccalaureate degree in the first quarter of 2010.

Our current online platform continues to operate under our West Palm Beach Campus, offering primarily associates degrees in allied health and criminal justice, and as a degree completer option for Lincoln diploma graduates. These programs will be taught out toward the end of 2010 as the new online programs emerge.

Although many of our schools have associate degree granting approvals we have not yet launched the degree options for all of these programs at these campuses, so over time this opportunity will also become a reality for the majority of our schools, thus, we're engaged in processes to apply for degree granting status in states where we do not have such approvals, like New Jersey and Massachusetts, and we estimate a two-year process to accomplish this objective.

So, as Dave mentioned in his opening remarks, we are intensely focused on executing our plan and continuing to improve our long-term growth profile so that we can deliver the highest quality programs and also generate successful outcomes for our students. We're also focused on ensuring that we have the right platform in place to grow our top line, deliver a quality education, and improve our margins over time.

Given our progress to date and the strategic roadmap that we have in place, I remain very optimistic about our outlook.

Now, let me turn the call over to Cesar at this time 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 extremely pleased with our record second quarter results. Some key highlights for the second quarter include revenues increased 50.6% to $128.1 million for the second quarter of 2009. The increase in revenues was driven by an increase in average population of 42% and an increase in average revenue per student of 7.2%, 4.8% on a same school basis, which was primarily driven by tuition increases which ranged from 3% to 5% annually and by a shift in student population to students enrolled in higher tuition programs.

Our operating margin increased approximately 730 basis points to 10.48% or $13.4 million for the second quarter of 2009, from 3.16% or $2.7 million for the second quarter of 2008. This 730 basis point improvement was a result of our increased capacity utilization and the leverage inherent in our business model.

Educational services of facilities decreased to 39.9% of revenue for the second quarter of 2009 from 42.2% for the second quarter of 2008. And selling and general and administrative expenses decreased to 49.6% of revenue for the second quarter of 2009 from 54.6% in the second quarter of 2008.

Educational services and facilities benefitted during the quarter as we were able to obtain meaningful leverage in instructional costs which were positively impacted by higher student population and increased capacity utilization at our schools.

Selling, general and administrative expenses were positively impacted during the quarter by the increased capacity utilization and benefitted from a decrease in student acquisition costs. Costs per start decreased 18.5% for the second quarter of 2009 to $2,454 from $3,011 in the second quarter of 2008.

We benefitted from reduced turnover in our sales force, which produced improved conversion rates and investments in our marketing, which has produced greater efficiencies and brand recognition across our footprint.

Capacity utilization was at 66% during the second quarter of 2009 compared to 56% during the second quarter of last year.

Bad debt for the quarter was 6.7% of revenue as compared to 6.5% for the second quarter of 2008. The increase in bad debt is seasonal in nature, and we would expect bad debt for the year to still range between 6% to 6.5% of revenues.

Days sales outstanding for the quarter decreased to 22.7 from 26.4 days for the second quarter of 2008 as we continued to benefit from our back office finance centralization process. Earnings per diluted share grew to 27% for the three months ended June 30, 2009 from $0.05 per share for the second quarter of 2008.

We generated cash flow from operations of $9.8 million as compared to $8.4 million during the first quarter of 2008, while our net income for the first six months of the year has increased by approximately $11.5 million as compared to the first six months of 2008.

Cash flows from operations for the first six months of 2009 were negatively impacted by increased tax payments of $11.8 million. We expect significant increases to our cash flows from operations in the second half of 2009.

We finished the second quarter with $12.6 million in cash and cash equivalents and $5 million in borrowings outstanding on our credit agreement.

Net accounts receivable on June 30, 2009 were $32 million as compared to $26.2 million at December 31, 2008. This increase in net accounts receivable is primarily due to the addition of nine new campuses in the first half of 2009 and the latter part of 2008, as compared to December 31, 2008.

Net property and equipment grew to $141 million at June 30, 2009 as compared to $108.6 million at December 31, 2008.

Now, turning to our loan program, as of June 30, 2009 we had granted loan commitments to our students net of interest that would be due on the loans to maturity of $17 million, flat with loan commitments of December 31, 2008.

As of June 30, 2009 we had capital lease obligations of $27.3 million which were assumed in connection with our acquisition of the Baran group of schools.

In conclusion, we remain in a very solid financial position. We finished the quarter with $12.8 million of cash on hand and minimal debt. We expect to further strengthen our financial position over the remainder of 2009 as we capture the benefits of our strong new student starts and enrollment growth and increased capacity utilization.

And, with that, I'd like to turn the call back to the Operator to begin the Q&A session. Operator?

(Operator instructions.)

Your first question comes from the line of Gary Bisbee of Barclays Capital.

Hey, guys, good morning. Congratulations on the quarter.

Good morning, Gary.

Hi, Gary.

Hey, can you give us a little bit of color of maybe what makes up the $0.18 to $0.20 of dilution from the acquisition and how you're confident that that falls away in 2010? Is a big chunk of it amortization or is a big chunk of it sort of onetime costs related with employee changes or branding that ends, or what exactly is that? Thanks.

Well, let me -- Cesar can give you some of the individual pieces, particularly the amortization and so on, but in terms of our decision to accelerate some of these activities, as you know, Gary, we've made a number of acquisitions over the years. This particular acquisition had a number of different brands and geographies.

And we've been so successful with our overall rebranding initiative for the balance of the Company that as we began to integrate this and look at some of our initiatives, particularly high school and marketing, new websites and everything else, we just decided to bite the bullet now and go through this rebranding.

And that is all based in 2009, the balance of 2009. And that involves write-offs, new signs, collateral materials, local marketing events, all the things that made us successful as we rebranded our, you know, the core business. So that accounts for the increment from the $0.10 to $0.12 that we talked about earlier in the first call.

And, Cesar, do you want to--?

Yes, Gary, the $0.10 to $0.12 is a pure dilution from the acquisition and is consistent with our original announcement. The additional $0.08 that we're talking about are onetime nonrecurring costs concentrated on primarily rebranding and grant introduction into that market, as well as additional changes that we're making to personnel. But those would be onetime. If you'll recall, we had said that we expect the acquisition to be neutral to accretive in 2010 and we still expect that to occur. Now to a greater impact since we are accelerating some costs that would otherwise would have been incurred in 2010.

Okay, great. So next question, I clearly understand how you can get big benefits from the national branding and having a similar brand in terms of media efficiencies and what-not, but I guess the question is how does this help given you've got a somewhat disparate set of programs and schools?

And I ask from the perspective of recently having seen one of the Lincoln tech commercials for the northern New Jersey auto and skilled trade schools. And I'm just wondering how from that spot you're able to leverage brand across maybe a school that's more focused on healthcare and degrees and what-not? Or is it all just about having people hear the name Lincoln and gaining some familiarity with it?

Shaun, you want to take that?

Yes, I'll take that. I think you hit the nail on the head in the latter part of your comment. If you look at how we generate our lead flow, 80% of it comes from internet sources, and we have over the last two years since launching the new website, optimized the Lincoln name. And so any search term involving Lincoln and education, or geo targeted names plus Lincoln, has given us a real boost in our lead flow. That's helped us nationally in also recruiting high school students. It's helped us locally, as well.

We feel that if we continue to optimize the Lincoln name we'll generate lead flow that not only can be converted on a local basis but can also be repurposed in some of our other locations. So that's at the heart of it.

Ultimately, though, as we continue to stretch our brand into new areas the brand will take on meaning based on Lincoln Tech, Lincoln College, and then a higher Lincoln College name down the road. And our programs will be aligned with those particular brand names.

But overall the goal is to continue to support our locations across the country, support online lead recruitment in the future, and also our destination efforts. And so that requires a continual optimization of the Lincoln name.

To promote a brand that is separate from Lincoln is not as efficient, and we just don't -- we're not able to leverage our marketing dollar, as well, considering the fact that we see online recruitment and internet sources continuing to be the majority of our effort down the road.

Okay, and so is it safe to say right now you're doing a decent amount of targeting for the different types of schools in addition to just blasting the Lincoln name out there, or is that still--?

Yes, we're blasting the Lincoln name, but we also geo target, and so for example again if you are putting a search term into Google and it's schools in New Jersey or technical schools with a particular geography, we'll capture those leads for that particular geography. We'll continue to geo target as long as we have schools in various states. But on top of that we are leveraging that dollar with our national recruitment efforts and also supporting our high school brand out there across 48 states.

Great. Thanks a lot.

Your next question comes from the line of Sara Gubins of Bank of America, Merrill Lynch.

Hi, good morning. Thank you.

Good morning, Sara.

Good morning, Sara.

Could you -- I was actually a little bit surprised that the loan program wasn't more given our strong enrollment growth. Could you give us some more details about that and maybe where students are getting their funding from?

Well, I think what we've experienced, that last year when the amount of funding available to our students increased our gap was significantly reduced, and so I think what you're seeing is that the amount of money we used to fund the students, say $5,600 now is down to $3,600. So while we're funding more students we're funding less dollars. Additionally, if you remember, we have been at this for awhile so there's students that are consistently coming out of the pipeline as new students are added.

So I guess in the end the funding gaps have significantly narrowed, which have limited the amounts that we need to fund. And should the Perkins become available in the future we expect to take full advantage of those additional $6 billion to further narrow the gap of what we need to finance our students.

Okay. Great. And are they getting third-party loans from other sources or is it really just they're getting more money through Federal financial aid?

They're getting more money through Federal financial aid, so the amount that they get between Pell and Federal financial aid approximates tuition in a lot of cases, and so the amount of gap that they need is a lot smaller. In a lot of cases students do choose, I think we talked about before about 13% of our students choose to pay cash as they go, so they make monthly payments from start date through graduation. So to the extent that the gap is smaller they're willing to instead of taking out a loan just pay as they go and pay $100, $150, $200 a month instead of taking out the loan.

Okay, and do you have concerns that you might bump up against 9010 anytime in the near future?

Well, we're always concerned with 9010. Obviously, and the fact that the $2,000 Stafford counts as cash, the bill that's in the House that passed the labor, obviously will extend that 9010 for another one year, as well if the Perkins will count as 9010 I think we will be okay, but that's something we're always very mindful of is 9010. To date I think we have some flexibility in 9010, but it's something we always keep an eye on to make sure that we don't cross that threshold.

Okay, great. And then just a last question, when you think about your potential underlying operating margins, you're obviously getting a lot of leverage right now. I'm wondering where you think those could go to over time? Obviously, a longer term goal is by next year?

Well, I think what we've always said consistently is that we intend to grow our margin 100 to 150 basis points a year over the long term. That has not changed. Utilization increased significantly over the capacity utilization increase, and we're benefitting from higher margins.

We still believe over the long term we're going to continue to grow our margin 100 to 150 basis points, and I think we've always said we believe we can get into the high teens, the low 20s at least at the EBITDA level. There's no reason why we can't do that. And operating income level I also believe we can certainly get them to the mid to high teens.

Great. Thanks a lot.

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

Good morning. Thanks. If you could just spend a couple of minutes perhaps on the starts and particularly going forward? Obviously, much better starts this quarter than you had guided for, at least on a same school basis. So I'm hoping you can touch on was it strength that came towards the end of the quarter?

And then looking forward your guidance implies a bit of a slowdown in the third quarter. It sounds like maybe that has to do in part with maybe the high school starts being a little slower, but then the full year guidance really implies a meaningful slowdown into the fourth quarter. I'm kind of coming to mid single digits. So can you just talk through the trends across second, third, and fourth quarter, and maybe you're just being conservative but I kind of want to understand your train of thought there?

Sure, Amy. Well, first of all, the guidance for the first and second quarters, we've remained optimistic and we haven't seen any change in the momentum. So, frankly, the latter part of the second quarter continued extremely strong, which we had limited visibility when we initially put out the guidance for the second quarter.

Auto remains very strong for us, has for the first half. If you recall, last year we were basically flat year-over-year with auto starts, with an uptick during the fourth quarter of last year. And that continued very nicely through the second, through the first half of the year, frankly. While health sciences has -- is growing at a much more rapid rate.

With all that said, when we look at the third quarter, you're absolutely right. Number one, the third quarter is our largest quarter, you know, 35% to 40% of the year. It does have a large high school component in it, which as Shaun mentioned in his comments grows we expect to grow at 5% to 7%.

So, with that confidence which we do have in bringing home the automotive start, which is a large part of the high school, in the third quarter we nevertheless feel good about July. To date we've seen the starts for the month. We have a good deal of visibility into our media or adult starts in August, but very limited visibility quite frankly into September at this point. So, with that in mind, that's what our guidance reflects.

And just one final comment -- the third quarter high school start represents roughly a third of the third quarter starts. So, with that said, we hopefully are being somewhat conservative with the third quarter guidance as it relates to the media, given the limited visibility.

And as far as the fourth quarter that's still way out there, and so perhaps we're also being a little bit conservative.

So there's nothing trend wise that you would -- you're anticipating in the fourth quarter?

No.

Okay.

Amy, Shaun could tell you more about it, I mean the (inaudible) flow continues strong across all of our programs, high school starts looks great, and even the trends within the third quarter, to the extent to which we have visibility remains very positive. So hopefully we're being conservative, I leave it at that.

Great. And then I appreciate that color. That's really helpful. And just a follow-up, how should we be thinking of starts for the acquired companies? And Cesar, I don't know if you know what -- how many starts there were for those schools in maybe third quarter of '08 as a reference point? Just trying to understand the seasonality and how that -- it looks like you've had between 400 and 500 the last two quarters from those schools, and just trying to understand how much more that could be in the third quarter?

Well, yes, starts for the second quarter for the acquired companies were about 444 students. That was the Q2. Q3, I -- at this point, I don't have those numbers.

Okay, and maybe I can just follow-up with you? I just want to get some sort of sense of are they typically seasonally stronger similar to you guys, so we would expect that number to higher?

Well, Cesar has some numbers there. But I think when you think of the East Windsor Campus or the Baran institute of Technology, soon to become Lincoln Tech, that's a destination school that operates in a similar fashion to some of our other destination schools. So they have a high school program, and that will deliver 500 or 600 students I think roughly in the third quarter this year.

Great. And then just a last question on cash flow for you, Cesar. You said that you expect cash flow from ops to be up meaningful in the second half. Can you just give us a sense of maybe what you're expecting for the full year, both cash flow from operations and CapEx, some sort of range would be really helpful? Thanks.

Well, we do not provide guidance on cash flow from operations. However, I will tell you we expect to significantly exceed last year's, obviously.

CapEx, we're still looking at between 5% and 6%. CapEx is really just timing of when we get things done, but we're still targeting 5% to 6% of revenues for our CapEx for the year.

Okay, even with the increased revenue guidance, that's still a good number?

Yes, between 5% and 6%, depending on it could move a point here or there but that's about -- that's still a good number.

Perfect. Thanks so much, guys.

(Operator instructions.)

Your next question comes from the line of Jeff Silber of BMO Capital Markets.

Thanks so much. I wanted to shift gears to talk about your plans online. Can you go through some of the milestones that we should be expecting over the next few months in order to get that up and running? And I'm not sure if you've disclosed exactly what type of programs you're going to be launching early next year, if you can give us some more color on that, that'll be great? Thanks.

You got it. I'll just say we're focusing on the -- our new online or our re-launch. The first milestone is our approval to offer distance learning through the New England Association, and that application will go into their winter meeting in November.

And I'll also say that the online plans are also tied to our product, as you mentioned, and so the first application that goes in later in September is an application to merge the two regionally accredited schools in Connecticut, rename them Lincoln College, and also offer a couple of baccalaureate programs, one of which will be offered through distance education in the first quarter online. And that program is health information management.

So to go back to your original question, the milestones are the September meeting on the name change and the merging of the two regionally accredited schools under our Lincoln brand. November or late November the NEASC application for distance learning. And then quarter one the launch of the first regionally accredited program which will be health information management.

Subsequent to that first launch, our goal is to launch additional baccalaureate programs that are, I guess we say natural extensions of what we offer today. And so criminal justice would be one, an IT program, and then in the future a bachelors in nursing, a BSN, and other programs again that fall within our current verticals with our higher level learning programs.

Okay. Great. That's helpful. I appreciate that. I know you're not giving us guidance for next year, but I'm just curious if you could just maybe from a qualitative perspective, what will the impact on your business model be with this launch in terms of incremental expenses, et cetera?

I'll say this, I think that in subsequent calls we'll probably outline a little more what our cost structure will be. At this point in time, for 2009 we feel that all expenses related to our plans are already encompassed in our model and our guidance. And probably our fourth quarter call we'll give more detail on what the investment will look like for 2010 and beyond.

Okay. Great. I appreciate that. Just a couple of numbers questions. Dave, I think you alluded to some of the progress or what you've made in terms of the starts in July, did you give a number on that, how that's been tracking?

No, I didn't, Jeff.

And will you be willing to do that?

I would say it's in line with what we've been experiencing for the first two quarters on a same school basis.

Okay. Great. And from a numbers perspective can you tell us when are we anniversarying the acquisitions?

Well, it'd be the first quarter of '10.

Well, Briarwood will be the fourth quarter and Baran will be the first quarter.

Great. And then just a couple quick numbers questions. Can you give us in terms of your guidance for share count and tax rate for the remainder of the year?

Share count is about [27.4] and tax rate is going to be somewhere around 40.5%.

Okay, and will that be the same for the third quarter, as well?

Yes.

All right. Great. Thanks so much.

There are no further questions. I would now like to turn the call back over to Management, Mr. David Carney.

Okay, well, thanks very much, everyone, for joining us today. We look forward to providing you with an update on our progress on our third quarter 2009 earnings call, which will occur early in November. Thanks very much, and have a great day.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect.