Lincoln Educational Services Corp (LINC) 2009 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Third Quarter 2009 Lincoln Educational Services Earnings Conference Call.

(Operators Instructions)

Before we begin today's call the company would like to remind everyone that this conference call may contain certain forward looking statements relating to future events, future financial performance, strategies, expectations, competitive environment, regulations and availability of resources. Such forward-looking statements are based upon current expectations that involve risk and uncertainties. Actual results may differ materially from those stated in any forward-looking statements based on a number of factors and other risks which are more specifically identified in Lincoln's filings with the SEC.

And now I'd like to turn the call over to Mr. David Carney, Executive Chairman of Lincoln Educational Services.

Please go ahead, David.

Thank you.

Good morning, everyone, and welcome to our Third 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 opening remarks, Shaun will provide a review of operations and Cesar will provide an overview of our third quarter results and then we will open the call for the question-and-answer session.

Now turning to our results from Operations, our record third quarter results demonstrate the continuation of the very positive trends we experienced during the first half of the year. The strong student demand generated by our diversified program mix and our improved sales, marketing, and recruiting operations put us in a position to capitalize in the favorable industry environment and derive outstanding results. We once again achieved strong new student start and enrollment growth which translated into record revenue and net income performance and further increased the leverage in our business model as reflected in our meaning operating margin expansion.

Revenue from continuing operations rose nearly 48% to $148.4 million in the third quarter, and on a same school basis revenue increased by 33% to $133.8 million.

Net income was $13.7 million and diluted earnings per share was $0.50 versus $0.22 in the third quarter of last year.

New students start growth for total company was 35.1% for the quarter and 19.5% on a same school basis, which exceeded the high end of our guidance by 250 basis points.

We generated new student start growth for the twelfth consecutive quarter, in the quarter that accounts for a third of our annual starts. Plus, we experienced positive growth across all five of our verticals.

During the quarter we also benefited from an increase in high school starts of over 17%. That is important as our high school program represents a significant component of our third quarter starts. For the full high school program, the starts covering May to October, we expect now to exceed prior year by about 10%.

Student enrollment on a same school basis at September 30, 2009 was 28,087, an increase of 25.4% over last year. While average enrollment for the quarter was 26,460, up from 20,665 for the third quarter of last year. The year-over-year increase in end of quarter enrollment and average enrollment occurred across all five verticals with the largest year-over-year gain in our Health Sciences programs.

Our total population of 31,509 at September 30, 2009, was up 40.6% year-over-year and was divided between Health Sciences 36%, Automotive 32%, Skilled Trades 13%, Business and IT 9%, and Hospitality Services 9%.

Moreover, the strong momentum we are experiencing is highlighted by the fact that we entered the fourth quarter with over 9,100 more students than we did at the same time a year ago. Our capacity utilization for the third quarter of 2009, excluding the recent acquisitions, was 73% compared to 58% last year.

Now based on projected enrollment at year-end, we expect our capacity utilization will level off at about 70%.

While our decision several years ago to diversify our product offerings across the five verticals at the campus level resulted in increased costs, we are now realizing meaningful operating leverage as we continue to increase our capacity utilization. We have implemented various strategies aimed at strengthening our growth profile and maximizing our results. These have included, rebranding of our schools, reducing admissions representative turnover, many marketing efficiencies and employee training. These initiatives have enhanced our national presence and have provided us with a more seasoned and capable admissions force which has largely contributed to our enrollment growth.

Moving forward, our strategic plan is primarily focused on further broadening our program mix and replicating our strongest programs, including high-end Health Sciences programs, across our campuses. And Shaun will provide an update on our program rollout in a few minutes.

We are also continuing to implement our national branding strategy, moving forward with the integration of our two recent acquisitions and refining key areas of our organization. Our longer-term strategy to expand the depth of our degree offerings remains on track, and Shaun will discuss our progress during his prepared remarks.

Our concerted push into advanced degree levels offers us multiple growth drivers including expanding our addressable market, extending the student life cycle, degree completer opportunities for students across the country, and the ability to offer the students the opportunity to migrate from diploma to degree across our campus footprint.

Overall, we believe our focus of expanding our addressable market best positions Lincoln for long-term sustainable growth and strengthens our position for with the macro environment improves and the volume of students seeking education and training begins to moderate.

In summary, we are continuing to seek avenues aimed at promoting efficiencies across our organization and remain committed to optimizing our program portfolio with the goal of efficiently capitalizing on student demand across our verticals. We are operating with a strategic focus on competitive labor markets and believe we offer an industry leading return on education investment to students. Moving forward, we strive to build upon the existing value proposition we offer current and potential students across our five verticals and expanding degree levels.

Now I will spend a moment on the lending environment and a quick regulatory update.

With regard to our loan programs, we continue to process federal student loans for our students through the FFEL program without disruption. We are fully prepared to migrate to the direct loan program system with a passage of the proposed legislation that would eliminate the FFEL program effective July 1, 2010.

Now turning to the regulatory area, the negotiated rule making sessions, which had been announced back in May by the Department of Education, began on Monday of this week. In May, they announced that there would be a panel formed to develop proposed regulations to maintain or improve the program integrity of Title IV Student Aid programs. We understand that there will be three, weeklong meetings ending in early 2010, and following those meeting the Department will publish draft rules for comments and then final rules in the Federal Register. Finally, any changes that result from these meetings would not take effect until July 2011.

Based on the topics that are under discussion, we are confident that based on our policies and procedures in place and our close attention to compliance at all levels of the organization, that any changes that may result from this review would be manageable and not have any inverse impact on our business.

And now let me turn to our 2009 Financial Outlook and Guidance. Given our strong performance during the third quarter, we are updating our full year guidance. We now expect full year 2009 annual revenue of $545 million to $548 million, representing an increase of approximately 45% over 2008 the same school student starts increasing 23% to 25% over 2008.

We expect diluted earnings per share of $1.65 to $1.70 or an increase of approximately 111% to 118% over 2008. Included in our full year guidance is $0.18 to $0.20 of dilution relating to the Briarwood and Baron acquisitions.

And as we have discussed, on our last call, we chose to accelerate our rebranding efforts and other changes in 2009 given our strong performance this year, as well as focus on maximizing our strategic position in a recovering economy. We believe the acceleration of our rebranding and operational initiatives at the acquired schools is prudent and will strengthen their performance in 2010 and beyond.

And with that said, let me turn the call over the Shaun, who will discuss the results for the quarter and our strategic focus for the remainder of the year, as well as 2010.

Thanks, Dave, and good morning, everyone.

During the third quarter, we continued to executive our 2009 operational plan and also plan on the momentum we experienced during the first half of the year. We believe our results reflect several positive, underlying trends in our business, including a strong demand for Lincoln's programs across the country and across our verticals.

Secondly, we are generating balanced growth due to our diversification and our Automotive programs showed substantial growth for the third consecutive quarter, while our Allied Health programs, once again, generated strong new student start and enrollment gains.

We continue to see the benefits of our expanded focus between vocational certificates and career-related Associate programs as our degree seeking population reached 22.1% of our population on a larger overall student base. We ended the third quarter with approximately 7,000 degree seeking students versus approximately 4,800 prior year.

Given this trend and our long-term strategy to expand our degree offerings, we are also focused on building our bench strength by adding leadership and expertise in key product areas.

Taking a closer look at our third quarter 2009 operational performance, we produced media inquiry growth of approximately 33% compared to the third quarter last year. A key driver of this year-over-year growth is the continued strong performance of our main website, which generated 60% more inquiries and about 102% more unique visitors during the third quarter compared to last year, and it once again outperformed other lead sources and produced overall cost efficiencies for the company. These efficiencies in the third quarter advertising efforts improved our overall costs per new student start by 7.2% year-over-year.

Also on the marketing front and as mentioned last call, we further advanced our brand strategy by co-branding all remaining non-Lincoln brands under the Lincoln Group of Schools umbrella. We are seeing multiple benefits from this approach, including increased brand awareness nationwide. We remain on track to complete the rebranding of all recent acquisitions by year-end.

We launched our purely online website at the beginning of the second quarter and it continues to play a role in attracting student interest outside of our current demographic, while conditioning the market for programs to come in preparation for the launch of our regional accredited programs in 2010. We are on schedule to fully complete all phases of the new site and late 2009 and as Dave mentioned, we are on track to launch our first regionally accredited online program at the end of the first quarter of 2010, pending the NEASC regulatory approvals.

Overall, we are pleased with the execution of our marketing initiatives, which have played a key role in our ongoing growth as we continue generating interest in both our certificate and degree offerings across the country.

Moving to our new student admissions performance, we posted notable same school new student start growth during the third quarter, which we believe illustrates the continued demand for our programs and the benefits of our strengths in Admissions and Financial Aid departments. We have worked tirelessly over the past three years to improve all aspects of our student admissions process.

In addition, between our operating units and our HR Department, we have implemented training programs across key functional areas, while also taking various steps to reduce employee turnover. The third quarter marks the 10th quarter out of the last 13 in which we have boosted our employee retention levels.

A primary area of focus for our turn over efforts has been our Admissions group and to that point our Admissions representative turnover is down double-digits year-over-year, which indicates the solid progress we are making. And the benefits are clear, the increased inquiries being efficiently generated by our marketing initiatives is being met by a highly trained and experienced Admissions representative for us. Taken together, the result is another quarter of impressive starts and enrollment gains.

Now turning to high school admissions.

As we've discussed on prior calls, high school recruitment remains a significant component of our annual enrollment picture and it's a long-term organic growth opportunity for each of our campuses. New students starts in this category are less volatile than media starts and are dependent on the recruitment efforts of each high school representative. These students amount to approximately 20% of our starts for the full year. Our activities in this area during the first half of the year focused on maximizing our recruitment efforts in high schools across the country, strengthening these important relationships and laying the foundation for a strong program in 2010.

Our third quarter efforts focused specifically on converting the high interest in our programs and to new student starts and today I am happy to report that our 2009 high school new student starts improved approximately 10% on a same school basis between June and October, beating our expectations. In addition, our high school program for 2010 has kicked off, impressively, and we are currently tracking ahead of the prior year period.

Our 2010 will be enhanced by a larger high school admissions force through incremental manpower in existing schools and from acquisitions. Our total high school force will increase by approximately 15% and we feel that the admissions representatives and managers joining us from the acquired schools will positively impact our high school efforts next year.

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 require academic assistance throughout their programs.

Our overall student interrupt rate remains strong compared to the prior year, considering a larger student base, which points to the success we are having supporting our students as they pursue their education. In our most recent institutional surveys, 95% of our students responded as satisfied with 77% showing very high satisfaction, which reflects the success of our dedicated service improvement.

Along with a strengthened corporate education team, our educational quality continues to grow as the move to new programs and higher degrees has given us the opportunity to hire impressively qualified facility across our system who have added value to a number of critical areas such as instruction, curriculum review and also new program development. We continue to provide intensive job placement assistance for our students as they approach and reach graduation.

As I mentioned on our last call, we are dedicating increased attention and resources 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. They are also exploring and cultivating new job opportunities in each of our job markets. At this point, we have increased our career services staff by 20% and by year-end we will be 25% ahead of the same time last year.

We are still finding that some timelines are lengthening for students trying to find jobs, given the prolonged economic downturn and particularly as we see higher numbers of nursing graduates who require a slightly longer period to certify before working in their field, as compared to some of our other program graduates.

This said, we remain confident in job prospects for our two largest verticals, Automotive and Health Sciences. Our Allied Health graduates continue to see employment opportunities due to the shortages of qualified health workers in the country, and in the Automotive sector we continue to see increased service opportunities which are helping offset the impact of dealership closings.

Considering the lack of significant change in the economic climate, we anticipate pressures will remain on our placement rates. Year-to-date 2009 results are still too early for us to forecast our full year results, as we will close the placement window in June of 2010. The fourth quarter will give us a better indication of where we will stand for the year.

Now, as we look forward to the remainder of 2009, our plans consist of the following -- first, driving additional improvements in all operational areas; and secondly, focusing on continued integration of our recent acquisitions. As many of you know, strategic acquisitions have served as a growth catalyst for Lincoln over the last few years. Through acquisition, we have expanded into new program verticals, strengthened our offerings in existing verticals, we have extended our campus footprint into new geographies, and finally, we have added degree options and accreditation levels.

Our track record of integrating acquisitions is proven as we have repeatedly demonstrated the ability to fold the acquired schools into our campus network, integrating the faculty and operation staff effectively into our organization and most importantly, meeting the needs and standards of each acquired student.

The integration of our most recently acquired schools is forging ahead. We are already, aggressively, moving forward with our efforts to leverage our systems across all functional areas to ensure the integration efforts foster long-term efficiencies.

We made the decision to accelerate the rebranding of these schools and we're on track to complete the process next month. This element of our rebranding strategy includes the alignment of marketing efforts, admissions personnel, event campaigns facilities, and also signage.

Regarding our longer-term strategy, I wanted to take a minute to reiterate the key components, which include a focus on strengthening our verticals, expanding and validating our degree offerings through the creation of a collegiate focus, and continuing to build our online platform with the addition of regionally accredited programs in 2010.

While Lincoln's core competency relates to best-in-class vocational career programs, we believe building degrees that are natural extensions of this base is a first step in a key component to our long-term growth. This strategy is aimed at increasing our adjustable market across various degree levels and will position the company for sustained growth and strong financial performance.

In regards to our current business, we feel that solidifying the foundation of each of our verticals will ultimately augment our ability to withstand a potential downturn in any one specific product area. We are currently directing our attention toward building out our Health Sciences vertical with programs including Surgical Technology at select locations. We also remain committed to bringing Practical Nursing to our schools in Ohio, Pennsylvania, and Massachusetts, while also adding LPN programs to existing locations in New Jersey and Florida, all over the next two years.

In September, we launched our first nursing program in Pennsylvania and we also received approval for our first program in Ohio.

In addition, our product teams are diligently working to update programs in Automotive and Skilled Trades verticals. Their efforts include the consideration of emerging technologies and evolving environmental standards in these fields.

Our plans for increasing our degree offerings continue to progress, as does the goal of further building our online platform. We anticipate that the percentage of our total population seeking degrees will increase at a moderate rate for 2010 and will accelerate with the addition of regionally accredited online and ground Associate and baccalaureate programs in 2011 and beyond.

As a part of the acceleration of integrating our acquisitions we have applied to NEASC, or the New England Association of Schools and Colleges, for approval to merge Briarwood and Clemens College into the new Lincoln College and create a new branch of this school in Hartford. This new entity will serve as our regionally accredited ground operation with three locations, each possessing student residences as well.

This Lincoln College will serve as the base for our new online operation. As previously discussed our goal is to receive approval to launch our first fully online regionally accredited Baccalaureate Degree end of the first quarter 2010, again, pending regulatory approval.

As I mentioned on our last call, our current online platform continues to operate under our West Palm Beach campus. The platform primarily offers Associate Degrees in Allied Health and serves as a degree completer option for Lincoln Diploma grads. Our plan is to teach these programs out toward the end of 2010 as the new regionally accredited online programs emerge.

Our plans remain on track and I am pleased to announce that we have recently hired a President for our Collegiate and Online programs, who we believe will allow to advance these initiatives over the long term.

We are also focused on launching Associate Degree options for all Lincoln campuses over time. We are currently engaged in the application process in states such as New Jersey and Massachusetts, where we don't currently possess degree-granting status. 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 delivering high quality and in demand programs, generating successful outcomes for our students and expanding our addressable market.

We are building upon our strong, existing platform with the goal of strengthening our market opportunities and the long-term growth profile for the company.

We believe we are in a sound position to grown our top line, also expand our margins, and continue delivering strong returns to our shareholders.

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

Now, let me turn the call over to Cesar at this time for the financial review. Cesar?

Thank you, Shaun.

Good morning, everyone.

Before I begin my prepared remarks, I would just like to correct a typo we found in our press release earlier this morning. In the "Other Data" section of the press release, EBITDA for the three months ending September 30, 2009 is listed at $33,364,000, under the "Reconciliation of non-GAAP Financial Measures" it's $30,364,000; the correct number is $30,364,000. The 8-K that we filed this morning with the SEC, reflects the correct numbers.

Now, turning to my prepared remarks, as we disclosed in our press release early this morning and as Dave stated in his prepared remarks, we are extremely pleased with our record third quarter results.

Some key highlights for the third quarter include Revenues increased 47.7% to $148.4 million for the third quarter of 2009. The increase in Revenues was driven by an increase in average student population of 39.8% and an increase in average revenue per student of 5.6%, which was primarily driven by tuition increases which range from 3% to 5% and by a shift in student populations to students enrolled in higher tuition programs.

Our Operating Margin increased approximately 600 basis points to 16.3 or $24.2 million for the third quarter of 2009 from $10.4 million for the third quarter of 2008. This 600 basis point improvement was the result of our increased capacity utilization due to our continued starts and enrollment and our ability to unlock the operating leverage in our business model. Year-to-date, our operating margin has increased 700 basis points to 12.2% from 5.3 % in the prior year.

Educational Services and Facilities expenses was 38.9% of revenue for the third quarter of 2009, down from 41.4% for the third quarter of 2008. And Selling General and Administrative expenses decreased to 44.8% for the third quarter of 2009, from 48.3% in the third quarter of 2008.

Educational Services and Facilities benefit 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 Administrative expenses were positively impacted during the quarter by the increased capacity utilization and benefited from a decrease in student acquisition costs. Cost per start decreased 8% for the third quarter of 2009 to $1,607 from $1,747 in the third quarter of 2008.

We continue to benefit from reduced turnover in our sales force, which has produced improved conversion rates and investments in our marketing and our brand, which has produced greater efficiencies in increased lead volume across our footprint.

Capacity utilization was 73% during the third quarter of 2009, compared to 58% during the third quarter of last year.

Bad Debt for the quarter was 6.8% of revenue as compared to 6.3% for the third quarter of 2008. The increase in Bad Debt, while somewhat seasonal in nature, also reflects our consideration of current economic environment, which has resulted in increased unemployment rates.

As a result of these factors, in January 2009, we thought it would be prudent to increase our reserve on graduate receivables to 17% versus the 10% reserved in prior years. This has resulted in an increase of Bad Debt expense in the first nine months of 2009 as compared to 2008. We expect that Bad Debt expense for 2009 to range between 6.5% to 6.8% of revenues.

[Day sales] outstanding for the quarter decreased to 24.4% to 26.3% for the third quarter of 2008 as we continue to benefit from our back office finance centralization process.

Earnings by Diluted Share grew to $0.50 for the three months end of September 30, 2009 from $0.22 per share for the third quarter of 2008.

We generated Cash Flow from Operations of $42.9 million from the nine months, end of September 30, 2009 compared to $30 million for the same period in 2008. While our Net Income for the first nine months of the year has increased by approximately $19.5 million as compared to the first nine months of 2008, Cash Flow from Operations for the first nine months of 2009 were negatively impacted by increased tax payments of $15.2 million. We expect these strengths to accelerate in the fourth quarter of 2009.

We finished the third quarter with $38.1 million in cash and cash equivalents, and no borrowings outstanding on our credit agreement.

Net Accounts Receivable on September 30, 2009 were $39.4 million as compared to $26.2 million at December 31, 2008. The increase in Net Accounts Receivable is primarily due to the addition of nine new campuses of the first half of 2009 as compared to December 31, 2008 and in the increase in student population.

Net Property and Equipment grew to $139.2 million on September 30, 2009 as compared to $108.6 million at December 31, 2008.

Now turning to our loan program, as of September 30, 2009, our loan commitments to our students continues to be very manageable and have not grown in line with our enrollment growth. Loan commitments to our students, net of interest that would be due on the loans' as of September 30, 2009, were $17.7 million up $0.7 million from loan commitments of $17 million at December 31, 2008.

As of September 30, 2009, we had capital lease subligations of $27.3 million, which were assumed in connection with our acquisition of the Baron Group of schools.

In conclusion, we remain in a very solid position. We finished the third quarter with $38.1 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.

With that I would like to turn the call back to the Operator to begin the q-and-a session.

Operator?

(Operators instructions)

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

Hey, guys, congratulations on another terrific quarter. I guess since the quarter pretty much speaks for itself, I'll just ask a couple of macro questions.

The first is, with the utilization getting up to 73%, I am sure it is uniform across all the schools, so how should be think about if and when you are going to have get a little more aggressive adding capacity to support growth? And should we pencil in some incremental expense for that in 2010 relative to this year?

Gary, with regard to the capacity, the good news is that the start growth that we have been experiencing has been across all the verticals and we particularly benefited in the Automotive area this year, in contrast to the last couple of years. So it is fairly well distributed.

With respect to moving forward, we are already in the process of adding capacity in two or three of our schools, as we speak; taking advantage of the real estate market, quite frankly, during this period. And along with that, we have also found other was to become more efficient with our capacity in offering afternoon shifts and moving toward a change in delivery models in some cases.

So I don't think in the near term you should be thinking in terms of major CapEx in order to be able to handle the increased demand that we expect over the next 12 months.

Okay. And then just digging a bit further, at some point here demand in a bunch of the program areas is going to level off and if history is right, maybe decrease a little bit, whenever unemployment comes down a lot. Maybe it is not for a year or two, but have you given any thought to getting in a situation where you have a pattern of opening new units, not just expanding existing units, on maybe a more regular basis?

And the reason I ask the question, when I look at the last 10 years with the publicly traded companies, the ones that have had the most consistent enrollment growth -- good economy, bad economy, whatever -- are the companies that have had sort of a systematic approach to adding new units each and every year. You can do it with acquisitions, but is there anymore thought, looking forward the next three to five years, to getting in a more regular pattern of startup campuses?

Gary, that is a great question. And we, obviously, have been successful with the acquisitions, but as we look at some of the markets where - that we are currently servicing, such as Ohio and Kentucky, and so on, we are beginning to see opportunities as we have seen in the past in some of the other markets where we, basically, can capitalize on marketing efficiencies and so on.

So in addition to continuing to grow through acquisitions when they present themselves, I think that you could probably see us looking at an expansion program along the lines of what you described over the next few years.

But on smaller units individually, offering Health Sciences programs, particularly, moving more toward the LPN programs and above that.

Okay. And then just, I think I heard you say it, but I wanted to confirm that you are still absorbing the $0.18 to $0.20 of dilution from the acquisitions this year. Or is part of the upside this quarter and in the guidance based on better enrollment at those acquired schools for that number has dropped? And I am just trying to think about how we should think about this comparison (inaudible)?

No, you should think about the dilution as being in the $0.18 to $0.20 range and being built into the $1.65 to $1.70 that we are guiding to.

Great, thanks a lot.

You're welcome.

Your next question comes from the line of Paul Condra with BMO Capital Markets.

Please proceed.

Hi, great thanks.

I just wondered if you could talk about your loan commitments. They have been relatively flat over the last two quarters, the loan commitments to the students. And I wondered if you had any thoughts on how that might look going forward?

Cesar, do you want to take this?

Sure.

Well, I think we continue to benefit from the increases in financial lay that have come about in the last 18 months. So those increases have more than offset the tuition increases that have been put into place. So, for Lincoln itself, I think the gap has significantly narrowed to the extent that the lower level diploma programs, you know, a lot of students qualify, fully, for financial aid for those programs.

And I think that is why you have, even though we have grown 40% in population, you have not seen our loan commitments grow along the lines of those populations. Because there are students are finding the number of dollars they need to fund that gap has become a lot smaller. We would expect that to continue as we look out ahead.

So as you students shift to more higher tuition program, you don't expect that to expand?

No, because as we get into higher degree programs we expect that those students will have a much higher credit profile and that they will be able to finance a greater portion of their education as opposed to applying for financial aid.

Great, thanks.

Then, I also wanted to ask about your [cohort] default rates. Could give us any data on what you might expect for 2008 in a [draft rate]?

Well, Paul, the 2007 final rate was 13.4%, just as a point of reference. And although we are still gathering information, the most preliminary, draft cohort rates come out in February, so I would call these pre-draft cohort default rates. But the best information that we have at this point is that the number might move up slightly. Might be 14%, 14.5%. And with --.

And I guess I am asking specifically because you had a couple that were up above the 20% range, couple of schools.

And the answer to that question is, as we look at the 2008 rate, there would be one school that would touch 25% at this point.

Okay, great thank you.

And that's the same school that was slightly over 20% in 2007.

Thank you very much. Okay. And then --

You are welcome.

-- just one last one. In terms of increasing the graduate receivable rate, bad debt rate is 17%, I am just kind of curious how you came up with that number. You went from 10% to 17%.

Well, certainly, I think that the fact is that we consider when establish our reserves is we look at our stats, and our stats still show our grads defaulting at about 10% to 11%.

When we take a look at what we thought would be prudent based on all the external economic factors, we basically decided that a 6% would be more in line with that. And that was based on a whole bunch of data from taking a look at CDR rates, the increase in CDR rates, et cetera. And based on that, we came up with weighted average of about an additional 6% to 7%.

Thanks a lot. That was it.

Sure.

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

Please proceed.

Hello and thank you and great job on the quarter.

Morning, Sara.

Could you give us an update on your student mix by degree level? I'm sorry by program type, you gave us by degree level?

As I mentioned in my remarks, Sara, basically, Health Sciences accounts for about 36% of the overall population, Automotive is about 32%, Skilled Trades is 13%, and then the last two are each 9%.

Okay. Sorry if I missed that.

No, it's okay.

I know you are not giving guidance for 2010 yet, but I am trying to think about the impact of an improving economy on those various program areas. Presumably, growth would slow and I guess the question is do you think some programs where it might actually turn negative? And if so, do you think that might be more Automotive oriented than other areas?

That is a tough question to answer.

I mean, I would say that as we look at our program mix today and what we have experienced and the demand for Automotive of late, certainly compared to the last several years, when I think back to 2003, 2004 period and so on, Automotive, the demand remained robust. So I really don't see any real decline there moving forward, and I certainly don't see it turning negative.

I think if you look at Health Sciences, we are making a conscious effort in that vertical to move toward more high-end programs, specifically LPN and Shaun mentioned Surge Tech and some of the other programs. And those tend not to be a cyclical as some of the lower-end programs.

When I think back to the acquisition we made in 2005 up in Connecticut, the Licensed Practical Nursing program there had a waiting list to get in, and that continues today. You might make an argument for maybe Culinary or one of those programs, maybe being slightly less in demand, but that tends to be more of a passion program.

I think the overall answer, Sara, is that we don't see any indication, any sign today of any decline in demand, lead flow across any of our verticals or any of the programs for that matter. But as we've mentioned, and it is a conscious effort on our part as well, and that is really to offset any moderation that starts going forward with higher-end programs, in particular building out our collegiate model and our online platform.

Okay, great.

And then, just two questions that are more related to the topics being discussed in negotiated rule making. Could you talk about how you compensate enrollment advisors? The rules around that?

And then second, given the discussion around gainful employment, could you talk a bit about how you think about tuition versus salaries of your graduates?

Sure. Well let me take the gainful employment question first, and then Shaun can comment on the compensation.

I know -- I guess that discussion is taking place today, but as we think of gainful employment, and as we look at -- and Sara, you know the program offerings. They are pretty specific, pretty related to end jobs. I mean, Automotive, Automotive Technicians, LPN, Licensed Practical Nursing programs. And in all cases when we develop a program in any particular area, we really look at the student outcomes and the value proposition associated with that program offering. And -- with the goal to having a high return on education investment for the student.

So, for example, take a Licensed Practical Nursing student who before they enrolled in our program was in a job making $8 to $10 an hour and they enroll in our programs and, let's use $28,000 as the tuition and it is a 15-month program, they graduate from the program, they have the certification and they start at a meaningful salary as a LPN with a $44,000 to $46,000 beginning salary. So the payback on that is huge and very meaningful.

Similarly, with Automotive Technicians, the tuition might be $23,000 to $25,000. It's, again, a short program, 60 weeks, 13 months or whatever and they are starting at, at least, $25,000 or in that range.

And all our programs are pretty much designed with that goal in mind. And there are rare exceptions to that in our program mix today. So I think we are in pretty good shape in that regard, Sara.

Okay.

Sara, regarding compensation for representatives, it's a pretty straightforward process. We have starting salary ranges based on types of positions within admissions. We perform annual reviews on performance. We give annual increases based on performance as well. And the incentives that we provide are based on graduates.

And we make sure that it is review by compliance and our entire compensation policy sits in very close alignment with the Department of Education, Safe Harbors. I will also say that the compensation policy we have is a corporation-wide plan that doesn't vary by location. So that is the nature of it.

Great, thanks very much.

(Operator's Instructions)

Your next question comes from the line of Kelly Flynn with Credit Suisse.

Please proceed.

Thank, I have a couple questions.

First, with respect to the organics source growth guidance, I think you mentioned some issues related to this in your comments, but I am hoping you can elaborate on the slowdown that is implied for the fourth quarter. What are the drivers there? Is that partly high school? And does it also have some type of implication on your assumptions about the impact of the economy? And is there anything else going on there or are you just being conservative?

Thanks.

Okay, Kelly. Let me start with the conservative question you asked about.

You know, I guess that -- we've certainly have had some comments regarding our guidance throughout the year since we have been in uncharted waters. So I would say that when you look at, first of all, coming off the first quarter which had a large high school component in it, we had guided originally to roughly 17%, we beat it by, you know, we're at 19.5%.

And similarly, in the original second quarter guidance folks were asking about the fourth quarter and that was pretty far out.

My answer to your question is, yes, we hope we are being conservative as we have throughout the year. We are not reflecting anything as a result of any concern we have over a slowdown in the economy or any change in lead flow or whatever.

We have visibility into October, we have some, certainly, into November. December and in particularly the fourth quarter tends to be a little bit tricky from year to year. So without any real visibility, and as you know most of our starts, the visibility is only about 30 days out. So I would go back to the last part of your question and hopefully we are being somewhat conservative. But overall the guidance for the year of 23% to 25% we feel pretty comfortable about and hopefully we are at the high end of that.

Okay, great, and then a couple more. You mentioned that 10% improvement in high school starts. You said July to October. I just wanted to clarify what you are talking about there. Is that a sequential change or are you talking about a year over year?

I think I said may to October and Shaun may have said June to October, but basically, it does fall in that period because some of our destination schools in the South and so on start programs as early as late May and they run through October.

The bulk of the starts occur in the third calendar quarter, which is the one that we reference where we say we grew by over -- by 17%. And I guess I point out that the timing changes from year to year in terms of starts that might be in the last part of June versus July in another year, and I think we went through some of that last year.

So the real number to take away from all of this is we originally through they were going to grow the high school program by 4% to 7% year over year, and year over year now, we are feeling like it is more like 10%, 10% to 11%.

So yes, but just to clarify, that is a year over year?

Yes it is.

Not May to October of the same year?

Oh, no, no, no. No, it is May through October of 2009 versus the prior year.

Okay, great.

And then, going back to your comments about bad debt and specifically about basically assumptions on graduate defaults or bad debt accruals. I guess I was a little surprised that you didn't include dropout accruals as well. What's implied as far as any changes in assumptions about the rate at which your dropouts default, cause I would assume there would be more risk there?

No, we haven't seen any change at all within our dropouts. They continue to -- well, we continue to reserve significantly high on them. And the fact of the matter is that our dropouts are usually unemployed, so the job market hasn't really impacted them as much.

It is the graduates that we felt that, because they were out in the working world, to an extent the high unemployment rate increase, we need to be prudent and provide some extra reserve on those for the possibility that they might become unemployed.

However, we have not seen any changes whatsoever as far as our interrupts. As you know, we measure that on a quarterly basis. Should we see any changes to those numbers, we'll obviously adjust accordingly in that quarter.

Okay, great.

And then finally, also related to negotiated rule making, can you give us an updated on ATB, basically percentage of students, and also any thoughts that might relate to the negotiated rule making process?

Well the percent of ATB students in -- at Lincoln as of September 30, 2009 was 11.6%. And as it -- and I guess I'd make the comment that we have had ATB students at the company and the campuses for years. The number hasn't really ever been much higher than it is right now, nor would be contemplate it going any higher. And of course, we understand all of the regulations that surround that in terms of independent testing and all of that. That's all in place.

And I guess I'd make another comment and say that, in many cases, the programs that we do enroll ATB students in have similar population and demographic to what we serve overall in the schools, such as an Automotive program or another skilled trades type program.

So, I would only add to that, that as far as testing and all of that we will certainly embrace all new technology that is associated with that as far as computerized testing and so on.

Okay, but is it safe to say you are not planning on changing your strategy with respect to how many ATBs you are willing to enroll or anything like that that -- ?

I would say it is a fairly modest number now. I think it is fair to say that it will not increase and we might look to decrease it in certain markets.

Okay, great. Thank you very much.

You're welcome.

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

Please proceed.

Thanks, good morning.

First, if I could just ask a quick follow up to Sara's question about your enrollments turning negative. When we look back -- you know, if you look back to starting in 4Q of 2005, on a same school basis, you did have a negative enrollment during that period though really the third quarter of 2007. And I am just wondering, your comments to say you wouldn't expect that to happen, is that because you are not expecting the environment to get better? Or, do you think there is something fundamentally different than what occurred at that time that you wouldn't expect to repeat that?

Well, I would say that we have a different program mix today than we did back then in many of our schools, Amy, and higher-end programs, so that when we were back in the 2004, 2005 period just beginning ramping up in some of the lower end, if you will, Health Sciences programs versus coming off strong years in IT, we had challenges there. Of course, Automotive, that was a whole different breed, whole different situation there which we've, again, continued to diversify our technical schools so that when you think about Automotive, we only have one school I can think of, maybe two where we are limited to Automotive. We diversified away and we have Skilled Trades programs and in some cases Health Sciences and Culinary for that matter. So, I guess that is my reference point.

Okay, so you think there is enough? I guess I haven't gone back to look at the exact mix, but there is enough higher-end programs? I mean, cause when you look through most of your programs, regardless of Bachelors, which are still pretty small, I mean I think Associates and diploma programs are still pretty countercyclical. But you think by the time the economy turns around, your mix will be such that it will be able to prevent that from declining?

Amy, that is our plan. Absolutely.

Okay. Thanks, I just wanted to get clarification on that.

Can you just talk a little bit about perhaps the investments that are required for your Lincoln Collegiate programs?

And also, I am assuming that those are going to be regionally accredited because that will be from the acquisitions that you did. And in that case, if that is the case, what regulatory approval or process is required and how long might you expect that to take?

Sure. Shaun is intimately familiar with this entire process, so I will turn this over to Shaun.

Amy, there are a number of questions in your question. I will start with the regionally accredited process.

We started working with NEASC, the accrediting agency, at the time of the acquisition. And I would say that the key element of that interaction was to layout the plan for our collegiate strategy, just so knew what was coming from us down the road as far as applications go. The word we got back from them was that they appreciated the information and they gave us their thoughts about how we would move forward.

And the process we came about from that interaction was a step-by-step application approval process that would do two things. Number one, solidify the collegiate base. When we purchased the two schools that were regionally accredited, the goal was to strengthen them by merging them and changing the name and essentially shoring their programs up. And so that's the first application milestone, if you will, that is on the table at the meeting that the agency will be having next week, actually.

Second step would be to add Bachelor's degree-level programs for ground and online deliver that's done in a combination of applications between this meeting and the meeting that happens in March. We feel that between November meeting and March, we'll have approval for both of those components of our strategy. And it is always pending the Commission's approval, but we feel good about that timeframe.

And so, what that means for us is at the March meeting we would expect to have all of the name changes and merging done with an additional branch in our Hartford location for that college division on ground and our first Bachelors level online program ready to go for regional accreditation.

Subsequent to that process, we would have to give the Commission comfort that we are operating the way that meets their standards which we are very comfortable that we can do and we plan on adding three additional programs through the application process through the remainder of 2010.

And so, that is the basic framework for accreditation. We recently hired a President for this collegiate initiative and online. Someone who comes with online experience, multi-school experience, et cetera, and we feel they will help us guide toward the outcomes that we see as possible here.

As far as investment, we will, on our next conference call as we layout our 2010 and beyond forecasts, quantify what some of that investment will be. But I'll say that most of that investment will be in online for staffing and product development. And we don't feel that will be significantly different from the investment we are currently seeing this year.

And so we feel very comfortable with the approach we are taking and the opportunity that we have to really build a strong foundation here as we launch this new initiative forward.

Perfect, thanks so much.

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

Please proceed.

Hey, good afternoon.

I was hoping you could speak a little bit to the strength in revenue per student. If I am not mistaken, you said for about three quarters now you have been outpacing, maybe, pricing increases. So there is some kind of a positive mix-shift taking place. And I know the gradual trends that you have addressed toward the higher-end programs, but we are talking about some pretty sizable increases year-over-year. And I am just wondering how to think about, when we start to anniversary those increases and maybe the mix-shift trends that you have seen and what could happen when we start to anniversary the strength in the first quarter of next year.

Yes, Trace, I think what we have experienced is, in addition to the 3% to 5% tuition increases, I think if you listen to the population breakdown, over time we have seen Health Sciences really grow as part of this company. And what's really growing is the higher end programs, the LPN programs, which drive a higher revenue per student.

Additionally, I think what we have experienced this year is that there has been a significant rebound in the Automotive student. That Automotive student is also a much higher revenue per student.

So what we have seen as a shift in higher-end Health Sciences programs coupled with a shift in return, if we should say, of Automotive students. And that I think is what we have seen the strong revenue growth outpace the tuition increases.

I think, as we continue to move towards higher-end programs, I would expect that shift to continue to increase, specifically in 2010.

Okay, so just so I understand, I think the trend towards to higher-end Health Sciences program sounds like more of a long-term secular trend, but maybe the resurgence in the Automotive enrollment, maybe when we anniversary that it might ebb a little bit? Is that -- I don't want to put words in your mouth, but -- ?

Yes.

Okay, all right. Thank you, that is helpful. Thanks.

Bye, Trace.

There are no further questions in the queue. I would now like to turn the call back over to Mr. David Carney for any closing remarks.

Thanks, Keisha.

Thanks, everyone, for joining our call today and we look forward to updating you on our progress on our fourth quarter and annual call earlier next year. So hope you all have a great day, thanks.

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