Lincoln Educational Services Corp (LINC) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the fourth-quarter and year-end 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 (Operator Instructions). 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 forward-looking statements related to future events, future financial performance, strategies, expectations, competitive environment, regulations and ability 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 very much. Good morning, everyone and welcome to our fourth-quarter and year-end earnings conference call. I am here today with 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 2010 priorities and Cesar will provide an overview of our financial results. We will then open the call for the Q&A session.

I will begin with results from operations. The fourth quarter marked the culmination of another highly successful year for the Company. During 2009, we advanced our various growth strategies, successfully integrated two important acquisitions and further strengthened key functional areas of our organization. As a result, we consistently delivered strong enrollment gains and record financial results, including year-over-year enrollment growth of 35.4% and significant operating margin expansion.

During the fourth quarter, revenue increased 46.7% to $157.5 million and on a same school basis, revenue increased by 29.5% to $139 million. Net income was $22.3 million and diluted earnings per share was $0.82 versus $0.49 in the fourth quarter of last year.

New student start growth for total company was 31.8% for the quarter and 25% on a same school basis. The new student start growth during the quarter marks the 13th consecutive quarter we have increased our starts.

For the full year, revenue increased 46.6% to $552.5 million and on a same school basis, revenue increased by 31.2% to $494.6 million. Net income was $49.2 million and diluted earnings per share was $1.82 versus $0.78 in 2008. And earnings per share for 2009 included $0.16 of dilution due to the acquisitions of Baran and Briarwood.

Student enrollment on a same school basis at December 31, 2009 was 26,399, an increase of 25% over last year, while average enrollment for the quarter was 28,173, up from 22,269 for the fourth quarter of last year.

Now as many of you know, we have worked diligently to diversify our program portfolio over the past several years. Today, I'm pleased to report that 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 health sciences where our licensed practical nurse program continues to grow nicely.

Accordingly, 2009 average capacity utilization, excluding the recent acquisitions, was 70% compared to 56% last year. Our solid enrollment growth in 2009, which we experienced at all campuses, coupled with the increased capacity utilization, resulted in significant operating margin expansion as we continued to capitalize on the leverage in our business model.

Our operating margin for the year of 16% increased by 655 basis points versus operating margin of 9.4% in 2008. Our total population of 29,340 at December 31, 2009 was up 35.4% year-over-year and was divided between health sciences at 39%, automotive 31%, skilled trades 12%, business and IT 9% and hospitality services also 9%.

As a result of the strong enrollment growth during the year in both adult students and recent high school graduates, coupled with the effect of the acquisitions we completed early in 2009, we entered 2010 with 7,650 more students than we entered 2009.

Now looking at 2010, we are focused on building upon the many successes of 2009 and further implementing the key strategic initiatives that have been driving our success over the past several years. We also expect to see increased contributions from the recently rebranded Baran campuses and Briarwood College. Our team worked extensively to accelerate the rebranding of the campuses and we believe the implementation of our existing processes and systems will strengthen their performance this year.

We have also continued to execute our longer-term strategy to expand the depth of our degree offerings. We received the approval needed to establish our new Lincoln College platform and we expect to receive approval to launch our first fully online regionally accredited programs in the second quarter.

We are looking forward to advancing the prudent roll-out of our regionally accredited online programs this year. We believe our measured transition into advanced degree levels will offer us multiple growth drivers, including expanding our adjustable market, extending the student lifecycle and degree completer and degree migration opportunities.

Overall, we believe expanding our addressable market by advanced degree offerings, while also continuing to generate growth in our diploma and associate degree programs, will best position Lincoln for long-term sustainable growth and strengthen our position when the macro environment improves.

In summary, we had a very successful 2009 and are focused on capitalizing upon the momentum in our business and executing on our growth strategy during the coming year.

Now I would like to turn to the regulatory environment. As we indicated in our earnings release, and as I am sure most of you are aware, the current negotiated rulemaking process under the Higher Education Act has produced consensus on 9 of the 14 issues being deliberated. Of the five remaining open issues, we believe that the Department of Higher Education's proposed definition of gainful employment, which ties the definition of gainful employment to a debt to income ratio based on starting salaries, is problematic. We believe the regulation as currently proposed would lead to unintended consequences, which would ultimately hurt the students that benefit most from our education.

We are hopeful that the discussions with the Department and others regarding the concerns that we and others have with the draft regulation will be successful in correcting this problem. However, even in the unfortunate event that the proposed regulation is not altered or amended as we expect it will be, we anticipate that this regulation would be manageable for Lincoln.

Based on our interpretation of the proposal, if we were to apply the regulation today, we estimate that less than 5% of our revenues would be impacted and this is before we make any modifications to our programs. As a reminder, the DOE must publish the final regulations no later than November of 2010 and implementation would not occur until July of 2011.

Finally, while we share the Department's focus on quality, we are concerned about their approach. For over 60 years, our mission at Lincoln has been to provide our students a high return on their investment in education and this will remain at the core of what we do. Our training provides students upward mobility and multiple options for advancing their education and ultimately their income potential. We are proud of our history in making positive change in thousands of lives every year.

And now I would like to turn to the 2010 financial outlook and guidance. For the full year, we expect revenue of $645 million to $655 million, representing growth of 17% to 19% over 2009 with student starts increasing 13% to 15% over 2009. We expect diluted earnings per share of $2.40 to $2.50 representing growth of 32% to 37% over 2009.

Looking at the first quarter, we expect starts to increase 18% to 20% over the first quarter of 2009. We expect revenue of $145 million to $147 million and diluted earnings per share of $0.38 to $0.41. And with that said, let me turn the call over to Shaun who will discuss in further detail the results for the year and update you on the strategic focus for 2010. Shaun?

Thanks, Dave. Good morning, everyone. Our fourth-quarter results capped a successful year and continued our quarterly improvement. For the full year 2009, we successfully executed our operational plan and as a result, we entered 2010 with strong momentum. The demand for our programs remained high nationwide and our strength in infrastructure is helping us drive our overall performance and ultimately places us on solid ground to execute our 2010 institutional goals.

We continue to generate balanced growth across each of our program areas and we continue to focus on this diversification in addition to expanding our scope through higher degrees. Our faculty and administrative staff have produced one of the best years for Lincoln as we achieved record performance while also managing to high student satisfaction.

We continue to reinvest in our infrastructure, our employees, new programs and student support services. We continue to serve a diverse student population in our 43 campuses, which spans 17 states. We also believe that our programs provide access to thousands of students who otherwise wouldn't have pursued an education, which allows Lincoln to continue to emerge as a key player in the President's plan for expanded education in the United States. This said, we are very pleased with our overall progress and positioning for the future.

In reviewing our 2009 initiatives and related goals, we executed and achieved successes in the areas of student satisfaction, student recruitment, acquisition integration and capacity utilization. 2009 also presented a variety of challenges to our Company. As we mentioned in prior calls, our placement performance has been under pressure; however, we have added manpower to this important area and expect to end our year in the low to mid 70% range for all programs.

Also in the area of cohort default, we received our draft consolidated rate on February 8, which amounted to 14.7% compared to our prior-year rate of 13.6%. Now this rate was better than expected; however, we are still not pleased and we continue to strengthen our default prevention and management services in order to address this area. We added staffing in 2009 and will add incremental staff throughout 2010 at the centralized and campus levels as well. The staffing increases and career services and default prevention are accounted for in our guidance.

A review of our recruiting effort shows that in 2009 we were essentially boosted by our ongoing rebranding strategy, the continued strong performance of our main website and the efforts of our growing high school recruitment program. For the fourth quarter and full year, we saw media inquiry growth of approximately 40% and 37% respectively compared to 2008. A key driver of this year-over-year growth is the continued performance of our main website, which generated 43% more inquiries and approximately 45% more unique visitors during 2009 compared to 2008.

Additionally, the average time each visitor spent on the site in 2009 doubled against the same time metric in 2008. The main website consistently outperformed other inquiry sources during the year and produced meaningful overall cost efficiencies for the Company. These efficiencies played a major role in the reduction of our overall cost per new students start, which improved by 8.3% year-over-year.

Our collegiate and online website has proven successful in attracting student interests outside of our current demographic as we promote our distance learning programs. Although limited in scope today, we plan to continue to optimize this new site and drive Lincoln's online program awareness in preparation for the launch of our regionally accredited online programs later this year.

Moving to our new student admissions performance, we posted notable same school new student start growth during the fourth quarter and for the full year. We believe the consistency with which we grew the new student starts during the year demonstrates the strong continued demand for our program and the benefits of our commitment to program diversity.

Our new student growth for 2009 was also positively impacted by the earlier mentioned media recruitment efforts and a maturing admissions organization. Our efforts to drive efficiencies across this key functional area continue to pay dividends as did our investments in admissions training and a strong commitment to reducing employee turnover.

The fourth quarter marked the 11th quarter out of the last 14 in which we have boosted our admissions employee retention levels. Turnover management has been a long-term focus for us and we saw a 40% improvement compared to the 2008 full-year rates. This is a noteworthy accomplishment and the benefits are clear as a highly trained and experienced admissions force enrolled new students at impressive rates throughout the year. In addition, well-trained and tenured admissions staff have helped Lincoln remain a compliant and regulatory sound institution for years.

Now turning to our high school admissions. Our activities in this area during 2009 focused on maximizing our recruitment efforts in high schools across the country. We also focused on strengthening important local high school relationships and laying the foundation for a strong program for years to come. Our long-term initiatives matched with the dedicated efforts of our high school admissions force have produced three straight years of improvements over prior-year performances.

In addition, our 2009 high school new student starts improved approximately 17% over 2008, which exceeded our expectations. The 17% [beat] breaks down to approximately 11% from high school representatives and 6% from media-driven high school efforts.

We are also pleased to report that our high school program for 2010 is currently tracking ahead of the prior-year period. In addition, we have enhanced our institution's overall high school central management approach and plan to expand our efforts in coming years. Our experience tells us that recent high school graduates who attend Lincoln programs are quite committed and show outcomes that, in many cases, surpass those of adults returning to high school; thus, the increased long-term focus in this area.

In regards to our broader educational efforts, we are committed to fostering strong academic performance and continually striving to maintain strong student persistence. This focus is critical as many of our learners are not self-directed and require academic assistance throughout their programs.

After three years of continuous year-over-year improvement, we saw a slight deterioration in persistence as the Company grew to a much larger student population in 2009. This said, we believe our overall educational quality improved during 2009 due to the efforts of our corporate and campus education teams and the companywide focus on program quality. In addition, bringing on higher degreed faculty across our system continues to provide valuable assistance and curriculum review and new program development.

In our most recent institutional surveys, 98% of our students responded as satisfied with 85% showing very high satisfaction. These are some of the highest numbers we have seen and ultimately reflect the success of our dedicated service improvement and efforts to support our students.

Looking forward as we position the Company to provide a greater benefit to our students, we are revisiting our entrance requirements for our vocational and technical programs, while at the same time continuing our trend toward recruiting higher numbers of recent high school graduates. We feel that this gradual shift will ultimately reduce some of the burden on the admissions process for less qualified students, but also free up student services time for all students and improve our overall student outcomes. For those in need of academic support, we will be adding developmental courses across our organization to aid in the transition to college-level courses for some of these students.

In regards to our acquisitions, during 2009, we successfully integrated the Baran and Briarwood schools into the Lincoln family. We moved aggressively to leverage our systems across all functional areas to ensure the integration efforts produce long-term efficiencies. We also accelerated the rebranding of these schools, which included the alignment of marketing efforts, training of admissions personnel, name change event campaigns and new signage for the seven facilities.

Now as we look forward to 2010 and beyond, our plans consist of the following -- driving additional improvements in all operational areas, reinvesting in our physical infrastructure, continuing the roll-out phase of our collegiate and online platform and strengthening our existing program verticals.

A long-term operational improvement area is student career services as I mentioned earlier. Our progress was challenged for a good part of 2009 and as we have added manpower, we have seen improvement. We'll continue to provide intensive job placement assistance for our students as they approach and reach graduation. We have also dedicated increased attention and resources to these services for both graduates and current students.

At December 31, our career services staff was approximately 30% larger than at the same time in the prior year, not counting acquisitions. In addition to the increased staffing, we feel confident in the job prospects for graduates of our two largest verticals -- automotive and health sciences. Considering the lack of significant change in the economic climate, we anticipate pressures will remain on other program areas and therefore continue to pressure our overall placement rates.

Moving on, our focus on strengthening our infrastructure will result in the opening of four new facilities this year in St. Petersburg, Florida; Mt. Laurel, New Jersey; Paramus, New Jersey and Columbus, Ohio. We are also in the process of constructing a new Denver technical facility and we are in search of a new Philadelphia technical site. Columbus is a startup campus. Mt. Laurel is a new lease and provides us additional space, while the new Paramus and St. Petersburg campuses replaced tired facilities and all four will open later in 2010.

Our new Denver technical campus will replace an existing tired facility and will be a destination campus opening in 2011. There are another eight renovation projects underway at existing campuses. Our long-term goal is to invest in our facility development over time in order to provide innovative learning environments for our students and position ourselves more competitively to gain marketshare in new geographies.

Turning now to our longer-term strategy, our focus is on strengthening our verticals, expanding and validating our degree offerings through the creation of the collegiate focus, and continuing to build our online platform with the addition of regionally accredited programs in 2010. We are very pleased to report that we received approval from NEASC or the New England Associations of Schools and Colleges in December to merge Briarwood and Clemens College into the new Lincoln College of New England.

We also received approval to launch a new branch of this school in our existing Hartford downtown facility. The new combined entity will serve as our first Lincoln-branded regionally accredited ground operation with student residences at each site.

The new Lincoln College will also serve as the base for our online operation. With all of this in mind, we have taken a careful approach in working with the Commission in order for them to build confidence in our approach and our ability to manage regionally accredited programs.

We have also recently applied for approval to launch our first fully online regionally accredited baccalaureate degree program. This program will appear on the agenda for the March meeting and we look forward to an approval allowing us to launch the first program shortly thereafter. We plan on launching additional fully online regionally accredited programs as the year progresses pending the Commission's comfort with our progress.

Our new President over the collegiate and online programs along with our Chief Academic Officer have developed a good working relationship with the Commission and will continue to take a prudent approach in these matters to create a strong foundation from which we can launch our collegiate organization.

We anticipate that the percentage of our overall 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. This said, we have the opportunity at this starting point to introduce programs that we feel will offer students an opportunity to find employment, which will equate to a compelling return on their education investment.

We will also actively introduce programs across all of the verticals this year as we believe strengthening the foundation of each of our verticals will ultimately enhance our ability to withstand a potential downturn in any one product area.

We will continue to direct efforts toward building out our health sciences vertical with programs, including surgical technology at select locations. We will also anticipate introducing our R.N. program this year and our LPN program continues to be greeted with healthy demand and we are bringing practical nursing to our schools in Ohio, Pennsylvania and Massachusetts, while also planning to add LPN programs to existing locations in New Jersey and Florida.

In addition, our project teams are busy updating programs in automotive and skilled trades verticals given the emerging technologies and evolving environmental standards in these fields.

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 were we don't currently possess degree-granting status such as New Jersey and Massachusetts and we estimate a two-year process to accomplish this objective.

In summary, 2009 was a successful year for us in a number of ways. We executed our growth strategy ahead of plan, our programs continue to resonate with potential students, and our enhanced operations continue to pay dividends. We are building upon our strong existing platform with the goal of strengthening our competitive position, capitalizing on market opportunities and also continuing to deliver strong return to our shareholders. Now let me turn the call over to Cesar for the financial review.

Thank you, Shaun. Good morning, everyone. As we disclosed in our press release early this morning, and as Dave stated in his prepared remarks, we are very pleased with our fourth quarter and 2009 full-year results. Our fourth-quarter results were positively impacted by entering the quarter with approximately 9,100 more students than we had in the fourth quarter of 2008. This larger [carrying] population and the 31.8% students start growth we generated during the fourth quarter drove our 46.7% revenue growth.

Other key highlights for our fourth quarter include our operating margin improved 560 basis points to 25.4% from 19.8% from the fourth quarter of 2008. Earnings per diluted share grew 67.3% to $0.82 from $0.49 from the fourth quarter of 2008 as we've benefited from increased capacity utilization and the leverage inherent in our business model.

We generated free cash flow of $15.2 million, down from $19.9 million during the fourth quarter of 2008. The decrease in free cash flow from operations was due to increased capital expenditures for the fourth quarter of 2009 as compared to the fourth quarter of 2008 of $13.7 million.

We finished the year with $46.1 million in cash and cash equivalents and $20 million of warrants outstanding under our credit agreement. Bad debt for the quarter was 7% of revenue as compared to 5.4% for the quarter, for the fourth quarter of 2008. Increases in bad debt reflects a slight deterioration of our portfolio resulting from the current economic environment and is reflective of the demographics that we serve.

Now let me turn to the full-year results. Revenues increased by $175.6 million, or 46.6%, to $552.5 million for 2009 from $376.9 million in 2008. The acquisition of Briarwood and Baran resulted in approximately $58 million of this increase. Revenues were positively impacted during the year by a 37.2% increase in student starts and a 39% increase in average population as compared to 2008.

Average revenue per student increased 6.7% for the year ended December 31, 2009 from the year ended December 31, 2008, primarily due to tuition increases, which averaged from 3% to 5% and from a shift in our student population to higher tuition programs. Operating income margin for the year ended December 31, 2009 increased to 16% from 9.4% for the year ended December 31, 2008. The improvement in operating income was related to the increase in our average student population, which resulted in capacity utilization of 70% for the year ended December 2009 versus 56% in 2008.

The increase in capacity utilization produced 140 basis points of leverage in educational services and facilities expenses and 420 basis points of leverage in selling, general and administrative expenses during the year. Cost per start decreased 9% for 2009 to $2,336 from $2,567 in 2008. We continue to benefit from reduced turnover in our admissions personnel, which has produced improved conversion rates and investments in our marketing and our brand, which have produced greater efficiencies increased inquiries across our footprint.

Bad debt expense for the year was 6.7% of revenue as compared to 5.7% for 2008. The increase in bad debt reflects our consideration of the current economic environment, which resulted in a slight deterioration of our portfolio and is reflective of our student population. As a result of these factors, in January 2009, we thought it would be prudent to increase our reserve for graduate receivables to 17% versus a 10% reserve in prior years. We expect that the current economic environment will continue into 2010 and expect that our bad debt expense for 2010 to range from 6.7% to 7.2% of revenues.

All of the above factors I have just mentioned resulted in diluted EPS for 2009 increasing to $1.82 from $0.78 in 2008. We generated cash flow from operations of $73.2 million for 2009, up from $54.2 million in 2008. Cash flows from operations for 2009 was negatively impacted by increased tax payments of $23.2 million.

We finished the year with $46.1 million in cash and cash equivalents and $20 million of borrowings outstanding under our credit agreement. Net accounts receivable at December 31, 2009 were $42.9 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 during the first half of 2009 as compared to December 31, 2008 and the growth in student population that we experienced. Net property and equipment grew to $149.3 million at December 31, 2009 as compared to $108.6 million at December 31, 2008.

Now turning to our loan program. As of December 31, 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 in the loans to maturity as of December 31, 2009 were $20.5 million, up $3.5 million from loan commitments of $17 million at December 31, 2008. As you may recall, loan commitments are not accounts receivable and based on historical trends, we would expect that less than half of these commitments will ever be recognized as revenue.

As of December 31, 2009, we had capital lease obligations of $27.2 million, which were assumed in connection with our acquisition of the Baran group of schools.

We finished the year with shareholders' equity of $218.6 million, up from $174.9 million at December 31, 2008. Shareholders' equity at December 31, 2009 reflects our purchase of 1.250 million shares of common stock from our principal shareholder for $26.2 million in December of 2009.

In conclusion, we remain in a very solid financial position. We expect to continue to further strengthen our financial position during 2010. With that said, I would like to turn the call back over to the operator for the Q&A session. Operator?

(Operator Instructions). Paul Condra, BMO Capital Markets.

Great, thanks. Hi, guys, great quarter. I just wanted to ask, in your first-quarter guidance, if you can give any more detail about what that might imply for operating margin? What kind of assumptions are you making there?

Well, Paul, as you know, we don't give guidance on operating margin, but our long-term goal has always been to grow our margins 100 to 150 basis points a year and I think the guidance that we provided for 2010 accomplishes those goals.

Okay, great. Thank you. And then another question I had was the current default rates, if you -- were you able to get any kind of graduate (inaudible) default rate? Information there?

You mean on the draft, 14.7% two-year rates?

Yes.

Yes, based on all of our analyses, our graduate default rates are less than 10% as a company.

And then you also mentioned that you had one school that was touching 25%. Is that still the case?

Yes. The draft rate is about 26%.

Just for that one school?

That's correct.

Thank you. And just one more. When you spoke about these entrance requirements that you are considering implementing for some of your courses, do you have any more detail about that? Is there any kind of timeline or what students might be affected by that?

I will just say that our approach on looking at entrance requirements is a gradual one. We look at offsetting and so if we tighten our entrance requirements, it may, for example, affect ATB students and lessen that population over time. But we offset that with an increase in our recent high school grad population. And we feel that that particular offset gives us better outcomes, a student that is more committed and it really does relieve the burden on some of our entrance processes. And so you'll probably hear more from us in coming calls on that process.

Okay. So as I understand it, it is not one program that will be (technical difficulty)

No, no. It is general entrance requirements that relate to testing for incoming students.

Okay. Thank you very much.

Kelly Flynn, Credit Suisse.

Thanks. I appreciate all the comments on gainful employment and I just had a follow-up question on that. I think, Dave, in your comments about the 5%, you said based on your interpretation of the proposal.

Right.

Could you give us a little more color on what your interpretation is specifically? Are you assuming that the proposal would require you to reflect prior debt balances aside from what the students get at Lincoln schools, although it's probably not a big issue?

Yes, it is. It is not a big issue for us, but that is the assumption.

Okay. And then can you give us any more figures around average debt balances for students or any other numbers you have worked through that might be helpful as we do our analysis?

Well, I don't think I am going to get into the detail. I can tell you that we examined, over a three-year period, the average debt level for all of our students, compared that to three years of salary data and applied what we believe to be the items that were excluded. So we put in all debt, minus -- plus loans and so on and [Pell] and based on all of that, we have come up with a number that is less than 5% of our revenue and that is applying it to the current mix of students as of two weeks ago.

Okay, great. And then the second question, unrelated, relates to the seasonality of starts growth. I know given the seasonality of high school starts in the past, there has been some seasonality in starts growth. Can you help us out on that a little bit just so that we avoid modeling incorrectly and setting you guys up for a problem later in the year?

Well, I mean, again, the high school starts come in between May and October. The lion's share of them in the third calendar quarter and we wouldn't expect that pattern to be any different than it has been in the past. The only thing that we are hopeful is that the high school starts will become -- will continue to become an increasingly larger portion of the starts. So I don't (multiple speakers).

Would it make sense [if] that group grows at a slower rate, so we should model slower growth in that quarter?

Yes, I would say that is the case, yes. That would be -- it would be a similar pattern to last year, Kelly.

Okay, thanks a lot.

Sarah Gubins, Bank of America.

Hi, thanks. I am sorry if I missed this, but did you give a year-end capacity utilization? I know that I heard average, but I am wondering what the year-end was.

We gave average.

We gave average.

The end of the year was about 72%.

Okay. And what do you think would be kind of a reasonable goal to get to in terms of capacity utilization? I know that it can't really get to 100% or you don't have a lot of flexibility, so what are your targets for that?

Well, we have always said that we wouldn't expect to go above 80% and when it certainly gets anywhere near that in a particular campus, we would take the appropriate steps to increase capacity.

I think as far as this coming year is concerned, compared to the average, which we just talked about of 70% for the year, we might move up to 75%. But I would also mention to you, Sarah, that, as Shaun pointed out before, are adding selected additional square footage in a number of our schools and that would be baked into these numbers as well.

Okay. And then in your opening comments, in talking about the gainful employment proposal, you suggested that you thought that it would be amended versus what is currently being proposed. And I am just wondering, based on your conversations with people in Washington, maybe with people in the DOE or in Congress, what gives you the confidence that it will in fact be amended versus the current proposal?

Well, I wouldn't say -- we are hopeful that it will be amended. And what we are basically saying that -- if it is not, this is the impact it would have on us. I think as -- we and others feel pretty strongly about the fact that the way it is drafted at the moment, it is problematic, at least on intended consequences, as we have said. And we are hopeful that conversations that will take place with representatives in the Department and elsewhere will be able to get that point across and it would end up being either -- it will either go away completely or would end up being amended in some form, which would be -- which would make sense for all of us in the postsecondary sector.

Okay, thank you.

(Operator Instructions). Amy Junker, Robert W. Baird.

Hi, good morning. Thanks. If we could -- if I could just ask a question about the revenue per student trends and persistence, looking at your guidance for starts and then trying to get to the revenue guidance from there, it seems as if revenue per student would have to either be down and/or persistence would have to come down. I am just wondering which of those two things or both are you seeing and what are the trends you are expecting as we go through the year?

I'll let Cesar take that one.

No, I think our -- we are modeling in that our revenue per student we will continue to increase about 3% per year based on our numbers and I think we are assuming that persistence will remain relatively flat.

Well, I guess we can take this off-line, but with starts being up 32% in the fourth quarter and you are guiding another 19% start growth in the first quarter, but guidance growth of roughly 23%, the math just doesn't work there. So are you just trying to be maybe conservative with your revenue or is there something --

Are you talking about for the first quarter or for the year?

Well, for both, but first quarter in particular to start with.

I guess we could take it off-line, Amy. I don't see the numbers that you are seeing.

Okay. And just I guess a follow-up on the gainful employment, to Kelly's question. I guess what we are trying -- when you say a 5% impact in revenue, is that a similar percentage on a program basis? Is that kind of how you are thinking about it with the number of programs that would be impacted?

No, no, actually it is fewer programs. And specifically at Lincoln, for the most part, it is impacting a handful of programs and like others have mentioned on other earnings calls, culinary again, because of the definition and starting salaries being problematic, culinary tends to have a lower starting salary, but the income potential comes later and that is not part of the equation. So that is one of the programs that would be impacted here. It is not a huge number. And then we have other associate degree programs where the starting salaries themselves are not high enough to pass the test, but certainly the income potential after that would be and it is certainly not recognized. So that is basically the answer to that one. So we can across all five verticals. We can spend a lot of time talking about it, but it is a handful of programs and that is it.

And if it is passed in its current state or whatever it looks like, if there were some programs that wouldn't pass the test, would you be more inclined to teach those out or lower tuition in order to try and meet that pressure or how would you think about that on a going forward --

I think about it this way. First of all, we trying to give direction in terms of what the impact would be today. What we haven't been able to get our arms around completely yet is -- let's use the culinary example. We are not so sure that, based on the definition as we understand it, that our graduates from those programs wouldn't make the -- be paying at a higher than (inaudible) percent rate. I should be saying default at less than a 10% rate and excluding forbearances and deferments. So that would be one of the areas that we would look at.

And secondly, as it relates to some of the degree programs, our total focus as a company anyway is to continue to move more toward and increase our high school starts and we have been successful at that. So some of those degree programs that are impacted today, based on historical data that we have used for this test, we have to take a look at going forward. It's premature, but we have got our arms around it and we know what direction we need to take if appropriate.

Okay, great, thanks.

And finally, there could be a couple of one-offs where we would switch out or teach out the program, but it wouldn't be a big number.

Okay, great. Thank you.

Scott Schneeberger, Oppenheimer.

Thanks, good morning. A couple -- what type of employment or labor market trends do you have built into your guidance for the year for starts and just overall enrollment? How did you think about that when you put that together? Thanks.

I would say that we don't see any major economic trend this year and so that is not necessarily baked into what we forecasted.

Okay. And with regard to -- you had made mention of new developmental courses for new entrants. Could you take us a level deeper there and what you are thinking along those lines?

Yes, I will just mention that developmental courses aren't necessarily new to our industry or education in general and essentially they give students a chance to transition from a starting point, getting into the more heavy technical courses. And so for example, a student that has been out of school for a while would come back to school and essentially take one or two developmental courses in some basic skill area, maybe English and math, before they got into their heavier technical classes. And we feel that that helps with persistence, it helps with overall student confidence and ultimately with their other outcomes.

Okay, thanks. One more if I could. Cesar, could you give us a little bit of insight with regard to what you are thinking about for CapEx for the coming year? Thanks.

Yes. CapEx, because of everything that Shaun mentioned about all the school locations that we have and the program expansion, this year, we will range between 8% to 10% of revenue.

Okay, thank you.

With no further questions in the queue, I would now like to turn the conference back over to management for closing remarks.

Okay, thank you very much. Thanks, everyone, for joining us today and we look forward to updating you on our progress at our first-quarter earnings call, which will be in early May. Thanks and have a great day.

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