Lincoln Educational Services Corp (LINC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q1 2010 Lincoln Educational Services earnings conference call. My name is Kiana and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Jim Jacobson, Director of Investor Relations. You may proceed.

Good morning. Thank you, Kiana. I am Jim Jacobson, Director of Investor Relations for Lincoln Educational Services. With me today are Lincoln's Executive Chairman, Dave Carney, President and CEO, Shaun McAlmont, and CFO, Cesar Ribeiro. This morning, we will discuss our results for the first quarter of 2010 and provide our outlook for the second quarter and the full year. Then we will take your questions.

Before we begin, let me take care of a couple of administrative items. First, this call is being webcast and a replay will be available on our website for 90 days. Second, we will make statements considered forward-looking within the meaning of federal securities laws. These statements are based on our current knowledge and expectations, and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. For a discussion of such risks and uncertainties, see the risk factors section in our form 10-K for the year ended December 31, 2009 and in certain of our other SEC filings. The Company undertakes no obligation to revise or update any forward-looking statement. Now, I'll turn the call to Dave.

Thanks, Jim, and welcome everyone to today's call. To begin, let me introduce Jim. He joined us in March and brings nearly 20 years of investor relations and securities industry experience to Lincoln. He has conducted investor relations at multiple companies, including Dow Jones Industrial Component, DuPont, as well as smaller cap industry leaders, Ikon Office Solutions, and Meredith Corporation. Prior to that, Jim was a broker for Dean Witter and Paine Webber. We're excited to have Jim on board and to leverage his skill sets. More importantly, we are proud to add this position to our corporate staff. It's another key development for our organization and another sign of our maturation as a public company.

Now, let's turn to the first quarter. I trust you've all received our earnings release that was distributed earlier this morning. I'll provide a brief overview of our first quarter performance and Shaun will give you a more in-depth operations update. Cesar will review our financial performance in more detail and provide our outlook for the second quarter and all of 2010, and then we'll take your questions.

Now, let me move to the first quarter overview. We delivered an outstanding quarter generating record first quarter results. Clearly, we are demonstrating the ability to execute our strategies and continue the strong momentum we have generated in recent years. As a result, we are raising our earnings outlook for 2010. Cesar will provide a specific outlook for the second quarter and all of 2010 at the end of the prepared remarks.

And now, let me provide a couple of comments for helpful context. Inquiries for our programs remained healthy. Our strong student starts during the last several quarters has led us to take a more selective approach to our admissions standards. We expect these actions will reduce our start growth over time, but improve retention, student outcomes, and placement rates, as well as ultimately reduce bad debt expense and default rates. We implemented these efforts at the beginning of the year and therefore factored them into our 2010 outlook that we provided on our March 3 earnings call.

Accordingly, we are maintaining our full year student start expectations of 13% to 15% growth and our second quarter outlook is consistent with our annual plan. As you know, our third quarter starts represent 40% of our annual starts and a large component are from our high school program. I'm pleased to report today that our high school recruitment is ahead of both our internal plans and prior year, and Shaun will discuss these action in our high school recruitment momentarily.

Now, let me cover a few highlights from the first quarter. The revenue grew 28.6% to $152.5 million. Operating income rose to $25.3 million from $10.7 million. Operating margin improved 760 basis points to 16.6% and earnings per share grew significantly to $0.55 from $0.22 in the prior year. All were record results for the first quarter. We generated strong enrollment growth as well. New student starts grew 19.3% while both end of population -- end of period population and average enrollment grew at faster rates, 22.7% and 25.1% respectively.

We ended the quarter with a total student population of 31,402. In other words, we began the second quarter of 2010 with approximately 5,800 more students than we started last year's second quarter. Our population growth was broad-based across all five of our verticals. Health sciences remains our largest vertical and continued to perform very well.

Now, I won't go through the detail of our population mix. Rather, let me refer you to the new table in our earnings release that provides our population mix by vertical. And of course, Shaun will also comment on our verticals in more detail in a few minutes.

Now, let me comment on the recent sale of our shares and subsequent change of control as determined by two regulatory organizations. As most of you may know, our largest shareholder sold three million shares in early April, reducing its beneficial ownership to 20.1%. This transaction was viewed as a change of control by the Department of Education and the Accrediting Commission of Career Schools and Colleges, or ACCSC, one of four accrediting agencies for our schools. The three other accrediting organizations and respective state licensing agencies did not consider this transaction a change of control.

With respect to the Department of Education, we submitted a materially complete application to participate in Title Four. Currently, we are operating under a temporary program participation agreement until the DOE completes its review of our application. Now, it's important to note we have not experienced, nor do we expect any interruption of financial aid. Our schools are continuing to process financial aid using all of our customary procedures. We have submitted the post-closing application to ACCSC as well. In addition to this application, each of our respective schools will undergo an onsite evaluation within 180 days. In short, we expect no material impact on our operations from this transaction. We have completed all necessary applications and have continued to operate without any interruption to our licenses, accreditation, and financial aid.

Now, I'll turn to the regulatory environment and specifically comment on gainful employment. Recently, industry reports have indicated that the DOE has sent draft regulations to the Office of Management and Budget, or OMB. According to some of these reports, the previously proposed debt to income and repayment measures remain. Reports also indicate a new exemption may have been added for program completion and job placement. I'll just make two brief comments on this topic.

First, we have not seen any draft language from the Department of Education and clearly we will need to review the Department's proposed language before we can comment definitively on any impact the regulation may have on Lincoln. However, to put this in perspective, we did say on our last earnings call in early March that we believe gainful employment as proposed by the DOE at that time would impact less than 5% of our revenues. And secondly, generally speaking, we believe the regulation could potentially have less of an impact if it does contain exemptions for program completion and job placement.

So in summary, we delivered an outstanding quarter. While we continue to focus on the balance between student starts and quality student outcomes, demand for our programs remain healthy. As a result, we are very well positioned to continue our strong momentum. The long-term growth thesis for Lincoln remains firmly intact.

Now, I'd like to turn the call over to Shaun.

Thanks, Dave and good morning, everyone. I'm very pleased with our strong first quarter performance. I'll start today by discussing a few of the first quarter highlights. Then I'll review a number of the operational objectives that we feel will continue our strong momentum.

First, we delivered very strong population growth net income the quarter. This strength was broad based, as we saw growth in all five of our program verticals. And while we don't disclose the specific growth rates by vertical, sufficed to say the student population growth in each met or exceeded our internal expectations. In particular, our two largest verticals, health sciences and automotive, performed very well. As a percent of our total population, health sciences grew to 39.6% at March 31 from 35.9% same time last year. Auto was 29.7% of the mix at March 31, and while this was down from 30.7% a year earlier, we were quite pleased with the enrollment growth within automotive. Both health sciences and auto have strong demand characteristics and we believe each will continue to contribute meaningfully to our student growth going forward.

Second, our high school efforts were very solid in the quarter and year-to-date, and beat our internal expectation so far. High school enrollment has historically amounted to about 20% of our annual student starts and approximately 40% of our third quarter student starts. Therefore, getting off to a strong start early in the year is clearly important to our overall high school recruiting seasons.

Thirdly, we implemented a new national marketing and advertising campaign in the first quarter. The tagline of this campaign, Lincoln is your Success Story, capitalizes on our prior rebranding efforts to leverage the Lincoln name. We're delivering this campaign through a comprehensive media and communication platform, including newspaper, radio, direct mail, email, the internet, and local events, and will add television advertising in the near future. The early results from this campaign are very encouraging with lead generation up across the Company versus prior year.

Now, I'll review a number of the operational objectives, which are focused on continuing our strong momentum in 2010 and beyond. Our first objective is to continue to execute our growth strategies, which have resulted in record financial results in the recent quarters. We'll continue this fundamental blocking and tackling, and in short, we will continue to expand our areas of study by replicating existing programs throughout our system and introducing new programs. We will maximize the utilization of our existing facilities and expand those facilities when necessary. We'll expand our geographic presence by opening new facilities in attractive markets and we will grow our online and degree programs.

But we'll also continue to pursue strategic acquisitions. We'll look for schools that will provide the potential for program replication at our existing campuses, expansion of our degree program offerings, as well as geographic expansion. And I'm not implying that a deal is imminent. Rather, I'm reminding all of you that completing and integrating acquisitions is something that we do well and we'll continue to look for attractive opportunities. I should also point out that our prior acquisitions have been fully integrated as of the beginning of quarter one.

And the second operational objective relates to a conscious decision to take a more selective approach to our admissions standards for our programs. Specifically, we're taking steps to raise student admissions requirements for ATB students. The benefits of these efforts will be higher completion and job placement rates, as well as lower bad debt expense and default rates over time.

Now, an update on our third operational objective, which is to launch and develop regionally accredited ground and online programs. In the first quarter, we submitted an application for approval the New England Association of Schools and Colleges to launch our first completely online associate and baccalaureate degree programs at the new Lincoln College of New England. This pending application is also subject to approval from the State of Connecticut, which has slightly delayed the approval process. Currently, we expect both NEASC and the State of Connecticut will act on these applications by the end of June.

As we've said before, Lincoln College of New England will be the foundation for our future online operations and so we continue to take a prudent approach in this important process. Assuming approvals in June, we expect to launch our first higher accredited online programs in the third quarter. As a result, we anticipate a moderate increase in the online students relative to our overall student population in 2010.

Looking forward, we believe our online programs will be a key component of our longer-term growth as online and degree programs are a means for us to attract additional students and to deliver a quality education with more flexibility to meet students' needs. They also allow us to extend the student life cycle as we migrate existing students to more advanced degrees. And these online and advanced degrees represent tremendous up side for Lincoln, and over time these programs are expected to offset the counter cyclical nature of our business and sustain our long-term growth.

In conclusion, we're very well positioned to continue our strong momentum. And now, I'll turn the call over to Cesar for our financial review, including our outlook for the second quarter and 2010. Cesar?

Thanks, Shaun. Good morning, everyone. As we reported earlier today, revenue increased 28.6% to $152.5 million in the first quarter of 2010 from $118.6 million in the first quarter of 2009. This growth was primarily due to a 25.1% growth in our average student population, tuition increases by 3% to 5% and a slight shift in program mix. Average revenue per student increased 2.8% to $4,939 in the first quarter from $4,805 in the prior year quarter.

Operating income increased to $25.3 million in the first quarter from $10.7 million in the prior year quarter. This strong operating performance reflects improved capacity utilization as we enrolled a larger student population. Operating income margin improved 760 basis points to 16.6% in the quarter. During the quarter, we took a close look at our capacity utilization across all of our schools.

As a result, we added a number of shifts as some of our schools in order to maximize capacity utilization. Accordingly, we have adjusted the calculation of capacity utilization to include these additional shifts as well as the acquisitions of Briarwood College, Baran Institute of Technologies, and Clemens College. Under our revised calculation, capacity utilization increased to 68% in the first quarter of 2010 from 55% in the prior year quarter.

Educational services and facilities expenses increased 21.9% to $58.9 million in the quarter from $48.3 million in the prior year quarter. This increase was primarily due to higher instructional as well as books and tools expenses necessary to server our larger student population. We began the first quarter of 2010 with approximately 7,700 more students than at the start of the first quarter of 2009.

The increase in educational services and facilities expenses also reflects higher facility expenses due mainly to the relocation of two of our campuses to new facilities and an increase in depreciation resulting from higher capital expenditures. As a percentage of revenue, educational services and facilities expenses improved to 38.6% in the quarter from 40.7% in the prior year quarter.

Selling, general, and administrative expenses increased 14.5% to $68.3 million in the quarter from $59.6 million in the prior year quarter. This increase primarily reflects continued sales and marketing investments to increase our addressable market and to grow our student population. It also reflects our commitment to our students to assist them with job placement and to help us manage student defaults with the addition of 36 career services and default management personnel. This increase also reflects a higher number of sales in call center personnel compared with the prior year quarter.

Our cost per start was essentially flat year-over-year at approximately $2,600 per student on a much higher volume. Bad debt expense increased $8.5 million in the quarter from $7.2 million in the prior year quarter, primarily as a result of a our larger student population. As a percentage of revenue, bad debt expense declines to 5.6% in the quarter from 6.1% in the prior year quarter. The reduction in bad debt as a percentage of revenue reflects our improved financial aid packaging process, which resulted in more timely processing of financial aid and greater cash collections. Days sales outstanding decreased to 20.8 days at March 31, 2010 from 21.7 days at March 31, 2009. We are pleased bad debt as a percentage of revenue declined in the quarter, however at this point in the year we are still modeling bad debt as a percentage of revenue to range between 6.5% to 7.2%.

As a percentage of revenue, selling, general, and administrative expenses improved to 44.8% in the quarter from 50.3% in the prior year quarter. Net income increased to $14.5 million in the first quarter from $5.8 million in the prior year quarter and diluted earnings per share grew to $0.55 from $0.22 in the prior year. We generated strong cash flow from operations in the first quarter. Cash flow from operations was $21.2 million in the quarter compared with $2.3 million in the first quarter of 2009. Capital expenditures increased to $14.9 million in the quarter from $2.5 million in the prior year quarter.

We used our strong cash flow to reduce our debt. We repaid the $20 million outstanding on our credit facility and as of March 31, 2010, we had no amounts outstanding under that facility. As a result, total debt, primarily capital lease obligations, declined to $37.2 million on March 31, 2010 from $57.3 million at December 31, 2009.

Cash and cash equivalents were $33.8 million at March 31 compared with $6.1 million at December 31. Net accounts receivable declined to $29.3 million at March 31, 2010 from $36.6 million at December 31, 2009 and net PP&E was $159.8 million on March 31, 2010, up from $149.3 million at December 31, 2009.

Now, let me cover our loan program. As of March 31, 2010, we had outstanding loan commitments to our students of $24.1 million compared with $28.9 million at December 31, 2009. Loan commitments net of interest on the loans through maturity declined to $18.1 million on March 31, 2010 from $20.5 million at December 31, 2009.

I'll finish my prepared remarks by providing our current outlook for the full year and the second quarter. We are raising our earnings outlooks for 2010. We continue to expect student starts will grow 13% to 15% in 2010. Our strong increase in student starts during the last several quarters allowed us to take a more selective approach to our admission standards. This approach was reflected in our prior outlook. Over time, we expect these actions will reduce our start growth but will result in higher retention, improved student outcomes, and higher placement rates, as well as lower bad debt expense for default rates over time.

For the full year 2010, revenue is expected to range from $650 million to $655 million. Student starts are expected to increase 13% to 15%. Diluted earnings per share are expected to range from $2.50 to $2.60, which would be an increase of 37% to 43% from the $1.82 we earned in 2009. For the second quarter of 2010, we now expect revenue to range from $151 million to $153 million. Student starts are expected to grow 8% to 10% and diluted earnings per share are expected to range from $0.42 to $0.45, which would be an increase of 56% to 67% from the $0.27 we earned in the second quarter of 2009.

In conclusion, we are very pleased to be off to a very strong start in 2010. With that said, we realize we must continue to perform well. I can assure you, we remain focused on continuing to execute our growth strategies, serving our students, and delivering results for our shareholders.

Now, we'll open the call up to your questions.

(Operator Instructions) Our first question comes from the line of Gary Bisbee of Barclays Capital. You may proceed.

Hey, guys. Good morning. I guess the first question, there's a line in the press release that says, although our first quarter expenses were favorably impacted by certain timing items. Can you clarify what those were and how much the impact was?

Yes, I'll let Cesar take that one.

Sure, Gary. We had originally budgeted certain expenses to be incurred in the first quarter of this year that they were off a couple days and they were incurred in the second quarter this year, and that was about $0.03 to $0.04. So it's reflected already in our second quarter guidance that we provided this morning.

Got you. Okay. And on the admissions selectivity point, it sounds to me like the right thing to do. Is this solely focused on the ATB segment of your population and can you remind me, in the back of my head I've got that it was something like 12% of students. Is that the right ballpark figure to think about?

Hi, Gary. This is Shaun. Yes, we've essentially increased our entrance test standards for ATB students at various schools and we've also restricted ATB enrollment in some associate degree programs. And we agree, it just makes good sense. We do think it'll have some short-term impact on start growth, as Cesar mentioned, we all mentioned in our comments. However, we feel the benefits really are meaningful in completion placement and default rates over time.

As Dave mentioned earlier, we're really trying to eliminate the highest risk students from our population ultimately. Our ATB rate throughout last year was about 12%. Today it sits at 11% and that will continue to come down. But I just wanted to also mention, though, regarding this sort of shift to some of the higher risk students that as we mentioned on our last call, we feel that sort of the offsetting event here is a focus on our high school students and high school recruitment.

As we look at their performance, the high school, the recent high school grads perform well in all of those outcome metrics that I mentioned earlier. And so, we're encouraged by our current progress being ahead of plan in our high school enrollment and we feel that that continued focus on the high school side will offset some of the short-term sort of loss of start growth on ATB side.

Okay. And then I guess this is the last question. I completely understand what you're trying to do with online. It makes sense to me, but it jumps out at me that every company that's got big or even moderate diploma and associate exposure, and so it potentially going to face counter cyclicality is holding out online as a real opportunity to try to offset that impact. Given that you're basically starting from a standstill here, what makes you confident that you can successfully execute this?

My view of it is just that as everybody is focusing more and more on it and at some point when the state's finances get better and more state schools come online, this is going to be a hell of a lot more competitive than the campus-based business has ever been where geography is an obvious barrier to competition. So just any thoughts on how you're confident that you're going to be able to execute this over the next couple of years. Thanks a lot.

That's a good question and I'll just simply say that, first of all, we've always said that our online growth plan is one that is reasonable and moderate. We're also looking at it as a way to shore up our ground campuses and how we deliver curricula. And so, we feel very confident that, A, we can execute on the goals that we've set for 2010, 2011, and 2012. Secondly, we currently have online students in school under our national accreditation. And so, we've proven to ourselves that we can deliver programs online. The growth has been moderate.

We feel that the regional accredited versions of those programs as they come on and we teach out the nationally accredited versions will give us a little more accelerated growth in online. But all in all, we feel that the growth targets that we've set for ourselves for the short and long-term would allow us to execute in that crowded market and to do it well according to the sites we've set for ourselves.

Okay. Thanks a lot.

Our next question comes from the line of Jeff Silber of BMO Capital Markets. You may proceed.

Thanks so much. Wanted to circle back to the guidance in terms of starts growth. So by maintaining your full year outlook for starts growth and providing starts growth of about 8% to 10% in the second quarter, it looks like you're implying starts growth to reaccelerate in the back half of the year. Is that correct? And then also, wouldn't that be somewhat more difficult in the third quarter since you have such a large high school start that quarter?

Jeff, that's a good question and we -- as I mentioned in the prepared comments, the third quarter does represent 40% of the total starts and that growth in the third quarter certainly is important to achieving the 13% to 15%. And we're very confident and comfortable at this point that we are ahead of last year and our plan with respect to the high school recruitment. So at this point, we feel good about it and as I said earlier, including certainly the actual results for the first quarter and 8% to 10% in the second, it ties in well for the year. And I'll leave it at that, I guess, at this point.

All right. And just a couple numbers questions, Cesar, you mentioned about a $0.03 to $0.04 impact in terms of timing on the expense line shifting into the second quarter. Which line items would that be on?

It's educational services and facilities. It has to do -- we have to share with you, it has to do with sometime we -- classes can move a couple days between starts and that has an impact on the books and tools expense line item. And if it moves a day or two, if we have a lot of classes that are scheduled to start at the end of the month and if it was scheduled to start on the 26th or the 28th and then it started on the 28th, the shift of the expense on the books and tools because we hand out the books and tools a couple days later, gets to a different line item.

So it was just a timing difference and it's reflected in our second quarter guidance and it was about $0.03 to $0.04 a share.

Okay. Appreciate that. And what kind of share count and tax rate are implied in your guidance?

Share count is running about $26.6 million, $26.5 million and tax rate is going to run between 40% and 40.5%, around 40.25%, somewhere around there.

Okay, and then just one more quick one. In the past, you provided your long-term goals for operating margin expansion of about 100 to 150 basis points per year. Based on the guidance, it looks like you're going to be beating that this year. Is that correct and is your long-term outlook still valid given the change on the ATB side?

I would say yes, the long-term outlook is still valid. I think what we said is we hope to average 100 to 150 basis points of EBITDA margin improvement a year. Some years could be a little bit higher. Some years could be a little bit lower, but I think our goal is to still -- we see that thesis still intact. And in any case, we believe, I think as we said in our prepared remarks, that by reducing some of that ATB population would help our metrics, not make them worse.

Okay, appreciate that. Thanks so much.

Our next question comes from the line of Sara Gubins of Bank of America. You may proceed.

Hi. Thank you. Good morning. Could you talk a bit about what you're seeing in media costs particularly for TV and if you're seeing any changes on the internet side?

Hi, Sara. This is Shaun. Our TV spot costs did increase for the quarter about 8% to 10% over prior year and that was across all markets and nationally, national cable as well. On the internet side, we didn't see much of an increase and quite frankly, the overall cost per inquiry enrollment and start remained somewhat flat year-over-year for us total Company. So even though TV went up, it was balanced by internet and mixed shift, and so our overall cost metrics stayed pretty flat.

And throughout the downturn, how much did TV come down for you?

TV came down meaningfully between 2008 and the end of 2009. I can't really quantify what it came down over that period in time, but it was meaningful to us and I think we see a little bit of a trend the opposite way, although not alarming.

And does your guidance contemplate that continuing to rise for the rest of the year?

Yes, the guidance contains our estimates on what it would cost to market based on what we see -- what we saw at the end of the year, first quarter, and there forward in the full year 2010.

Okay. And I know that internet lead costs have been pretty flat throughout the downturn. Do you think you're going to start to see those increase as the market for advertising in general heats up more? Or is there any reason to think that internet lead costs might remain flat?

We're seeing flat right now. I would say, though, that as we look for -- to move into another sort of order of magnitude higher in lead volumes, we may see a little bit of pressure on those costs. However, because of where those lead costs sit today, we're not alarmed with minimal increases. But from what we've seen over the last year and what we've seen first quarter, internet remains flat for us and we feel good about where it sits.

Okay. And then just a quick question about gainful employment. You had said in your last call that less than 5% of our revenue would be impacted by the proposal that we've seen. Could you talk about what areas you think would be impacted by it? Is it your culinary programs? Is it other areas?

Sara, this is Dave. Yes, it is the culinary programs at a couple of our campuses and it is, in a couple of instances, situations where we have destination schools, where even with auto and diesel where they could be impacted because of the housing costs being financed as well.

Okay. And then just last quick question, on bad debt, could you talk about why you're expecting sort of full year to be where you had originally expected given how much better it was in the first quarter? And I'm trying to understand how much of that is you being conservative versus something unusual that helped the first quarter.

Well, I think we generated a tremendous amount of cash in the first quarter. However, I think one quarter does not a trend make. I think if you look at our bad debt over time, it is seasonal. I think if you take a look at 2009, first quarter was probably one of the best quarters of the year. So it is seasonal in nature. So we do expect it to ramp back up and we're not counting on 5.6% being bad debt, an average for the year. We do think that that amount will rise as the year progresses.

Okay. Thanks so much.

Our next question comes from the line of Trace Urdan of Signal Hill. You may proceed.

Hey, good morning. I wonder if you guys could comment more broadly on the process of enrolling students and how well you're able to tell or I guess what you're doing to try to better determine what the outcomes of those students are going to be. Over the last several years, as you've moved to online lead generation, has that provided you with data that you didn't used to have in the old days that you can correlate to completion? Are there other things that you've found that correlate to completion? What can you do when you're admitting students to sort of try to figure out who's going to make it and who's not going to make it?

Trace, this is Shaun. I'll just say that we're looking at it all. I mean we're looking at correlations between every metric that we can find and that's going to continue for us. That's just the new reality for our schools. But I will say in regards to the ATB population that we have noted that those that struggle with making the test score struggled early in their program and then attrited somewhere before the midpoint of their program. So with that said just as the base correlation to test score and persistence, we decided to look at the areas where we had sort of the most risk and increase those test scores, and then also limit those students from going into associate degree programs.

Now, that's just on the front-end. So we administer the test the way that it is intended to be administered. We raise the score and so we've been more selective in that regard. Once the student starts school, we have implemented an orientation that has a little more rigor. So the student understand their responsibility for the learning process, time commitment, et cetera. And we don't allow those students to just disappear into the student population. We also track them. And I think that the front-end effort on selectivity with the back-end effort on orientation, remediation, and tracking will help us in the long-term. And we've already had some pilots that have shown that that is the case.

But to go back to your original question, we're looking at correlations in every way we can. And over -- in subsequent calls, we'll probably give a little more color on what we find.

Great. Thank you for that. And then one -- just one other question. In seeking approval for online, I'm wondering, I know you don't have a tremendous amount of experience with the regional accrediting folks, but I'm inferring if you could just sort of tell us qualitatively what that process has been like for you. Did they -- have they made specific suggestions about the program or the approach to the program that you've needed to incorporate as you've gone forward? Can you give us any sense of tone and whether you -- sort of how you perceive that approval process.

Yes, I'll say that it's been an educational process for us. I also think it's been an educational process for the regional accrediting body and as I mentioned in my remarks, we continue to take a very prudent approach here. We're not trying to force anything. I think that the better we understand the standards that the regional accreditor expects and the better that we can perform against those standards, the better our success is going to be in the short and long-term.

One of the approaches that I'll just share with you that I think has been beneficial is the fact that we have been communicating with them all the way along the process. So we don't simply submit an application and wait to see what's going to happen. We're very communicative. We communicate back and forth prior to the submission. We get their advice on programs, how we're monitoring the standards, faculty, et cetera, and it's been a very helpful process.

We actually submitted a number of applications prior to the online application and those related to the acquisitions, the name change, the merger, branch location, which all were approved. And I think that in that process, the regional accreditor gained confidence in us and how we go about our process. And we, again, learned more about them.

As far as online goes, there is also a state application process that runs beside the regional accrediting process and we were delayed a little bit on the state side, and the regional accreditor looks for that state approval prior to their approval. And so we feel that we've learned a lot. We are right in the process to continue to achieve our goals in 2010, although we're slightly delayed.

And the ultimate goal here is to launch the very first one or two regionally accredited programs in the third quarter, gain that confidence, another level of confidence from the regional accreditor, and subsequently launch additional programs in the future once we have that confidence set. But good question and we've learned a lot along the way.

Thanks, Shaun. That's very helpful.

Thank you.

Our next question comes from the line of Amy Junker of Robert W. Braid. You may proceed.

Good morning. I just have a couple of quick follow-ups. One just going back to the starts for the second quarter, I just want to clarify that the deceleration to the 8% to 10%, is that entirely due to your more selective admission standards? Or are you starting to see perhaps some headwinds as the economy is stabilized and tougher comparisons?

Amy, this is Dave. No, I don't -- frankly, we have really no evidence of any slow down. I mean the increase are still strong. Part of it is being more selective with respect to the ATB students. Part of it is the comps. Part of it is there's always some movement, and I think you can probably recall from year-to-year, between high school starts in the latter part of the second quarter versus the third quarter. So that's basically all it is. We're still seeing strength across all of the program offerings. And frankly, that's pretty much what we assumed when we prepared the original guidance that led to the 13% to 15% for the year.

Okay. Great. And thinking about the full year guidance, given that the first quarter you beat the midpoint of your guidance by $0.15. Now, you mentioned a couple of pennies of that are just some timing on the line items, but full year guidance only raised by $0.10, is that again due to these selective admission standards weighing on that? Or is there incremental spend from when you first gave the guidance that you hadn't anticipated?

No, I think the $0.03 or $0.04 that Cesar talked about earlier is certainly factored in the switch between first and second quarter, and beyond that, it's really just -- it's early in the year. And there are a lot of moving parts. It's conceivable we might want to spend up in a particular area. We do expect bad debt to come back up a little bit. So we're just trying to be smart about our guidance for the year. Hopefully, it'll turn out to be conservative.

Okay. Appreciate the color. And then last question, I'm sorry if I missed this, but did you provide or could you provide the current percentage of your students that are enrolled in degree programs today and where you think that that might trend over the next couple of years as your strategy to grow that plays out?

22%, Amy. And how will it play out over the next couple of years? Hopefully, with the online, it'll gradually increase. But it would be premature for us to -- hopefully the overall population will be increasingly nicely as well.

And are you seeing many of your diploma students matriculating into the degree programs at this point? Or is that still you think more of an opportunity on a go-forward basis?

It's an opportunity. I think today we don't see that much of it, but again, we're not ready to promote it as heavily yet. And so we're still developing what that matriculation process will be. But it is an opportunity.

Great. Thanks. Appreciate it.

Our next question comes from the line of Kelly Flynn of Credit Suisse. You may proceed.

Thanks. A couple of questions. First, following up on Sara's question about TV spot rates, I think you said up 8% to 10% in this quarter. What are you expecting for the second quarter?

We think they've essentially stabilized at that rate and quite frankly, our TV today is about 15% of our total inquiry flow. And so it's all -- it's relative. But I will say, though, that the spend, TV is about 35% of the spend. And so it is still a little more of an expensive way to generate inquiries. But I don't think that that trend is going to continue to accelerate. I mean we've been watching it sort of week by week throughout the first quarter and I think it's somewhat stabilized.

Okay, but on a year-over-year growth basis could the comps make it accelerate because the other companies, frankly, that have talked about it have said that it will accelerate in the second quarter. So I just want to understand if that's squarely not what you're seeing.

It could, but again we've made a concerted effort to -- well, I'll say this. The way we look at TV is partially lead generation and partially branding. And so, depending on how much of each we do, we could see different realities in that spend. And I would say based on what we're planning to do and what we're currently doing in the second quarter, we're not seeing it accelerate that dramatically. However, later in the year as we continue to promote our new marketing campaign, we could see that jump up.

Okay, and then the second question, Jeff had asked you about implied second half starts growth guidance and I didn't really understand your answer. Let me ask it another way. Can you give us a sense of kind of where you think starts might be growing at the end of the year? Are you in fact implying an acceleration or do you think there may be a modest deceleration as we move from Q2 into the second half?

Kelly, I guess let me articulate a little bit differently. I mean, you obviously know what the first quarter is and the second guidance. The third quarter, again, is 40% of the year and we are assuming that that's going to be at a higher rate than the second quarter, certainly, and it carries a lot of weight. And quite frankly, we would expect the fourth quarter to look more like the second quarter. So overall, for the year, you can do the math and it works out to about where -- it's in the area of the guidance that we've given for the year. It's a big quarter.

All right, and then for the third quarter, the acceleration, is that pretty much driven by the strength you're seeing at high school?

All the visibility we have.

Yes, as Shaun just said that's really all we can bank on at the moment because that's the buildup that takes months to incur. And we are very pleased with what we've seen so far.

Okay, great. And then final question again relates to counter cyclicality. I know you've been asked about it and you said you're really not seeing an impact yet. But can you tell us, I mean what are you assuming the impact will be both in the second half and even as we think about next year? I know you're not giving guidance, but just kind of high level. Do you still think your business is pretty counter cyclical and that you may see an impact even net of the online push? Or what are you generally expecting from counter cyclicality?

Well, I guess as we've talked about this for -- we've been thinking about it just as you have, what will happen. And as we look at the various components of each of our verticals, we've -- not only are we assuming that online is going to be part of the answer. But also the extent to which we've been developing "higher end" programs within some of the verticals, particularly in health sciences, we see those as being less counter cyclical than an entry level program such as medical assisting might be in health sciences. And LPN and other programs to come are less counter cyclical. They certainly -- we had those back in 2005 and 2006 with waiting lists.

So under the assumption that demand will continue there, which we believe it will, we think that will go along way in offsetting the change in the economy that we all know will come. But are we going to continue to grow at 20%, 25% a year as we were a couple years -- no, certainly not. I think the 13% to 15% or something slightly less than that is probably more in line with the future.

Okay. Thanks a lot. I appreciate it.

Our next question comes from the line of ScottSchneeberger of Oppenheimer. You may proceed.

Thanks. Just one more follow-up on the second quarter to third quarter starts. Will you be doing anything differently between those two quarters with regard to new admission standards?

No, everything we've talked about has already been implemented and no other changes to admission standards. I think the only thing that we'll see internally is a more aggressive approach in our high school marketing process. But those in school efforts and also the high school media efforts as well.

Got it. Thanks. And Shaun, you mentioned some -- it seems fairly aggressive with regard to a discussion of acquisitions and then you threw in the caveat of nothing imminent. Can you just refresh on uses of cash and how you're thinking of the prioritization there? Thanks.

Well, obviously we finished the quarter with $33.8 million. We're going into a slow cash period. We'll start building up our cash again come July. So we guided CapEx for the year to about 8% to 9%. So first and foremost is to pay our CapEx. With that said, obviously we expect to be in a nice cash position at the end of the year, which lets us do a lot of things, whether it be acquisitions, or treasury buy backs, or a whole host of things. Come year end, we'll be in a good position to reassess how to invest our cash.

Okay, thanks. And then finally, you mentioned in the fourth quarter given the environment, placement performance seeing a little pressure. Can you just give us an update on what you're seeing out there and how the outcomes are for those who leave the programs?

Well, just -- you mentioned placement. I mean our full year results from 2008 were 77.8%. We're trending toward the mid-70s for 2009. We -- I would say that we added manpower specifically to manage our placements and I think that that has had a positive impact in just shoring up the 2009 year results that will be final at June 30. And I would also say, though, that Cesar mentioned in his remarks the additional staff in default management. I think that we -- the way that we're looking at all of our outcomes is on a school-by-school basis and then a corporate centralized basis with each having their own processes focused on those outcomes.

And I think that it's safe to say that we've got our arms around them. We expect to see good progress in those measurements. And some of those measurements come, as you know, in a lag fashion. But our own internal measurements track them on a weekly and monthly basis, and we feel good about the direction we're seeing.

Great. Thanks.

With no further questions in the queue, I would now like to turn the conference over to Mr. Dave Carney for final remarks.

Okay. Thank you very much and thank you all for joining us today. We look forward to updating you again on our progress in early August on our second quarter earnings call. Thanks very much 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.