Lincoln Educational Services Corp (LINC) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2010 Lincoln Educational Services earnings conference call. My name is Jasmine 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.

Thank you, Jasmine. I'm Jim Jacobson, Director of Investor Relations for Lincoln Educational Services. This morning, we will discuss our results for the second quarter of 2010 and provide our outlook for the third 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 over to Shaun.

Thanks, Jim, and good morning, everyone. I trust you've reviewed our earnings release that was distributed earlier this morning. With me today are Lincoln's Executive Chairman, Dave Carney; and CFO, Cesar Ribeiro. Dave will provide a brief overview of his thoughts on the current environment. I will then give a more in-depth operations update. Cesar will review our financial performance and also provide our outlook for the third quarter and all of 2010, and then we'll take your questions. Dave.

Thanks, Shaun. Good morning, everyone. As we know, pending government regulation has overshadowed our industry for some time now, with proposals for regulations that seek to strengthen our industry. The Department of Education is taking steps to ensure Title IV funds are used correctly, with student outcomes a primary focal point.

We share the department's view on accountability and the need for positive educational outcomes -- graduation, job placement, and debt repayment. But let me put this in perspective as it relates to the student population that we serve.

For the past 60 years, Lincoln has provided nontraditional students with education and training that help advance their careers and increase their earnings potential. Lincoln educators work closely with students and their families to help them achieve in the classroom, graduate, and build successful careers.

Our students face numerous life challenges and experiences that are different from those of most students at four-year traditional colleges. Not every student comes to Lincoln with a background in education that will position them for academic success. But historically, we have committed to helping every student who wants to learn to succeed.

However, that population that we serve generally requires, and is eligible to receive, more financial aid. At the same time, and because of their background and life challenges, they are a higher-risk student than the traditional student. The higher the risk, the more likely they are not to complete the program, which leads to higher default rates.

With that said, we're proud of our overall success graduating this challenging population and our placement rate, even in this economy, of approximately 75% for the most recent period. The value proposition we deliver, a [rapid-paced] opportunity, is the reason students choose to enroll at Lincoln.

Generally, in about a year we prepare students to enter the workforce and assist them to obtain a position where the starting salary is meaningfully greater than the earnings before they came to Lincoln. In short, our graduates enjoy a significant transformation from a limited earnings capability to a reasonable starting salary and the chance to continue to advance.

Now, with that as background, we must address the realities of the new environment and the proposed new regulations, which we take very seriously. Accordingly, as we communicated previously, we have raised our admissions standards to reduce the percentage of high-risk students in our population. As a result, there will be tradeoffs.

In the short term, our new student start growth will be limited by the actions we're taking to raise our student outcomes. Over time we believe these steps will lead to improved graduation and placement rates as well as lower bad debt and default rates. These actions contributed to essentially flat starts in the second quarter, and Shaun will discuss our second-quarter start performance momentarily.

Now, let me briefly mention the latest regarding gainful employment. Last week, as you know, the Department of Education updated proposed rules for gainful employment, which were published in the Federal Register. We plan to respond individually and as an industry through the Association of Private Sector Colleges and Universities within the 45-day public comment period. As such, we will comment as appropriate when the rules are finalized.

Finally, we are cognizant of the new regulatory framework we find ourselves in, and believe we are taking the appropriate actions to address many of their concerns. We are confident our long-term growth prospects are intact. Demand for our programs remains strong, and our growth strategies are proven.

We will continue to expand our geographic presence, add new programs, develop our online and degree initiatives, and pursue strategic acquisitions. As we execute these strategies, we look forward to continuing to deliver strong results to our shareholders while at the same time improving student outcomes.

And now I'll turn the call back to Shaun.

Thanks, Dave, and good morning, everyone. I'll begin today by mentioning that our business is strong. So we've added management talent in all key functional areas. We continue to strengthen our processes, and we've seen improved employee retention and impressive student satisfaction thus far in 2010.

As Dave mentioned, we produced a very strong second quarter. Our revenue, operating income, and earnings per share were all records for a second quarter at Lincoln.

Revenue grew 19.3%, to $152.8 million. Operating income rose to $23 million from $13.4 million. Operating margin improved to 15%, and EPS grew significantly to $0.50 from $0.27 prior year, same period.

End-of-period population grew 15%, and average enrollment grew 17.6% in the quarter compared with the prior-year quarter. At June 30, we had a total student population of 29,934. In other words, we began the third quarter of 2010 with approximately 3,900 more students than we started last year's third quarter.

As a percentage of our quarter-end enrollment, Health Sciences was the largest vertical at 39%. Automotive was second and represented 32%. Skilled Trades was third at 11.3%, while Hospitality and Business and IT verticals were approximately 9% each.

Now regarding managing risk and our second-quarter start performance, as previously communicated, we continued to take steps to manage the risk profile of our students. We started at the beginning of the year by no longer allowing high-risk students to enroll in degree programs or nursing. Toward the end of the first quarter, we raised entrance requirements and took further actions to reduce the number of high-risk students in our population.

Our second-quarter start performance was impacted to a great part by these particular actions. To be specific, we're administering a two-step process to reduce this risk. As mentioned during last quarter's call, we raised the admissions test scores in certain markets for Ability-to-Benefit students. We also added pre-start orientation and remediation programs across all institutions for these students, aimed at identifying those who we believe will not complete our program successfully.

This two-step process not only assesses academic ability via the admissions test; it assesses students' early motivation and persistence capabilities as well. Students must achieve all pre-start objectives before officially starting school. This is the new process for our schools and a critical one focused on early efforts which will impact longer-term outcomes. It does have the potential to impact start rates while being implemented. And while these actions will affect new student enrollment in the short term, we feel they will ensure long-term student and company success.

In regards to market demand, based on what we're currently experiencing, market demand for our programs remained strong, as our overall inquiries have increased year over year. Embedded within this demand, however, are students who failed to meet our more selective entrance requirements, in addition to economically challenged prospective students who enroll but do not start.

We saw an increased number of non-starts due to financial hardship. These affordability issues affected our overall enrollment-to-start rate and at this point, we feel, continued to impact our third- and will impact our fourth-quarter starts to some degree.

On the positive side, we anticipate that our investments in high school recruiting, our national brand campaign, online programs, and geographic expansion will more than offset high-risk students and economic challenges long term.

These efforts are focused on improving persistence, graduation, and placement rates, which we feel will equate to gainful employment and ultimately lower default rates. As we take these actions to improve student and institutional outcomes, we're moving Lincoln away from its roots as an open-enrollment institution.

This said, I'm pleased with our early efforts. And even though we've only had a short period of time to measure, early dropout rates for our high-risk population improved from the prior year. These results will bode well for our long-term outcomes.

One of our key outcome metrics continues to be graduate job placement rates. For calendar 2009, our placement rate was a very solid 75% for the total Company. Now, while this rate was down from 77% in 2008, it was in line with our expectations and reflected the audience we serve, the difficult overall economic environment, and the elevated national unemployment rate.

Our two largest verticals, Automotive and Health Sciences, finished at 80% and 75%, respectively. During the past year, we invested in our students by adding incremental placement personnel to assist our students to secure jobs in this economy. Looking forward, we'll focus on continuing to improve our placement rates, and we're encouraged by the early progress in our 2010 efforts.

A key indication in our effectiveness as an institution is our student satisfaction rate. As a part of our ongoing effort to focus on quality metrics and deliver a valuable educational experience, we conduct satisfaction surveys twice per year. And I'm pleased to report that 96% of our students responded as satisfied with Lincoln programs in our most recent survey. This result compares with 97% in the comparable survey in 2009.

As we look forward, Lincoln's growth prospects remain strong. We will continue to grow through geographic expansion, program introduction and replication, campus startups, acquisitions, and the development of our online degree programs.

Currently, we have schools in only 17 states. We have little or no presence in the West, South, Midwest, and Mid-Atlantic. Clearly, there is room to expand geographically.

We have a strong record of introducing new programs that are in demand and replicating those programs throughout our system. A good validation of this track record is the growth of the Health Sciences vertical. At the end of the second quarter, 39% of our nearly 30,000 students were in this vertical, compared with only 7% of the 9,200 average student enrollment in 2002.

We're opening two new campuses in 2010 -- one in Columbus, Ohio, and the other in Cleveland. We plan to accelerate this growth vehicle to potentially three to five new campuses per year in the future. As we do so, we will create geographic clusters around our existing schools in order to leverage existing administrative infrastructure, and also we'll consider new geographies.

In addition, we're moving our Denver automotive school to a new state-of-the-industry facility, and we're on track to open this new facility in the summer of 2011. This month we're adding incremental high school recruiting staff at Denver in order to recruit over a larger territory. We also plan to add more programs to the new facility, such as Collision Repair and Skilled Trades.

As a reminder, we've completed nine acquisitions since 1999, adding 25 schools. We continue to examine potential targets. In particular, we look for the ability to enter a new market, add programs that can be replicated through our system as well.

We also look for an attractive valuation. The current regulatory environment has created some uncertainty, which has affected transactions. However, we believe the ability to execute transactions will improve once the regulatory uncertainty clears.

We continue to proceed with our plans to develop and launch online degree programs. I'm pleased to report that we received approval for our first regionally accredited online program in July. This approval is an important step toward our long-term growth plan.

As importantly, it speaks to our adherence to the standards of the New England Association of Schools and Colleges, or NEASC, and the positive relationship we're building with the regional accrediting body and the state of Connecticut. Although our program approval timeline is slower than anticipated, we're encouraged with the development of our ground and online operations at Lincoln College of New England.

In conclusion, despite the uncertainty created by the current regulatory environment, we believe we are well positioned to continue to deliver strong value proposition to our students in a rapid path to opportunity. And we continue to generate strong financial results for our shareholders.

Now I'll turn the call over to Cesar for our financial review, including our outlook for the third quarter and all of 2010. Cesar.

Thanks, Shaun. Good morning, everyone. Revenue increased 19.3%, to $152.8 million in the second quarter of 2010, from $128.1 million in the second quarter of 2009. This growth was primarily due to a 17.6% growth in our average student population, tuition increases of 3% to 5%, coupled with a shift in program mix. Average revenue per student increased 1.4%, to $4,934 in the first quarter, from $4,865 in the previous-year quarter.

Operating income increased to $23 million in the second quarter, from $13.4 million in the prior-year quarter. This strong operating performance reflects improved capacity utilization as we served a larger student population compared with the prior-year quarter. Capacity utilization increased to 68% in the second quarter of 2010, from 58% in the second quarter of 2009. Operating income margin improved to 15% in the quarter.

Educational services and facilities expenses increased 13.7% to $58.1 million in the quarter, from $51.1 million in the prior quarter. This increase was primarily due to higher instructional as well as books and tools expenses necessary to serve our larger student population.

We began the second quarter of 2010 with approximately 5,800 more students than at the start of the second 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 facility expansion, as well as higher depreciation resulting from higher capital expenditures. As a percentage of revenue, educational services and facility expenses improved to 38% in the quarter, from 39.9% in the prior-year quarter.

Selling, general, and administrative expenses increased 12.8% to $71.7 million in the quarter, from $63.6 million in the prior-year quarter. This increase primarily reflects annual compensation increases for admissions representatives, an increase in the number of admissions representatives, and 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 their job placement and financial responsibilities, with the addition of 60 career services, financial aid, and default management personnel compared with the prior-year quarter.

Our cost per start was approximately $3,250 in the quarter, compared with about $2,600 in the prior-year quarter. This increase was largely attributable to our more selective interest requirements, in combination with higher sales and marketing expenses I just discussed.

Bad debt expense increased to $10 million in the quarter, from $8.6 million in the prior-year quarter, primarily as a result of our larger student population. As a percentage of revenue, bad debt expense declined to 6.6% in the quarter, from 6.7% in the prior-year quarter. Days sales outstanding increased to 23.6 at June 30, 2010, from 22.7 at June 30, 2009. At this point in the year, we are modeling bad debt as a percentage of revenue to be approximately 6.5% for 2010.

As a percentage of revenue, selling, general, and administrative expenses improved to 46.9% in the quarter, from 49.6% in the prior-year quarter. Our effective tax rate for the second quarter was stable at 39.9%.

Net income increased to $13.2 million in the second quarter, from $7.4 million in the prior-year quarter. Diluted earnings per share grew to $0.50 from $0.27 in the prior-year quarter.

We generated strong cash flow from operations in the first six months of 2010. Cash flow from operations was $24.9 million in the first half of 2010, compared with $9.8 million in the first half of 2009. This increase was primarily due to growth in net income, partially offset by higher tax payments.

For the first six months of 2010, capital expenditures were $24.1 million, compared with $5.8 million in the first six months of 2009. This increase reflects a facility purchase, leasehold improvements, facility expansions and relocations, coupled with the addition of classroom and shop technology. We continue to expect CapEx to range from 8% to 9% of revenue for 2010.

Now let me turn to our share repurchase. In June 2010, Lincoln's board of directors authorized the repurchase of up to $50 million of the Company's outstanding common shares during the period of one year. In the second quarter, the Company repurchased 150,796 shares at an average price of $20.89, for a total of approximately $3.1 million.

Turning to our balance sheet, our total debt, consisting primarily of capital lease obligations, was $37.1 million at June 30, compared with $57.3 million at December 31, 2009. Cash and cash equivalents were $28.2 million at June 30, compared with $46.1 million at December 31. Net accounts receivable declined to $33.7 million at June 30, 2010, from $36.6 million at December 31, 2009. And net PP&E was $163.5 million at June 30, 2010, up from $149.3 million at December 31, 2009.

Now let me cover our loan program. As of June 30, 2010, we had outstanding loan commitments to our students of $20.5 million, compared with $24.1 million at March 31, 2010. Loan commitments, net of interest on the loans through maturity, declined to $16.3 million at June 30, 2010, from $18.1 million at March 31, 2010.

I'll finish my prepared remarks by providing our current outlook for the full year and the third quarter. In light of the current regulatory and economic environment, as well as our actions to reduce the percentage of high-risk students in our enrollment and to raise student outcomes, we are revising our previously issued guidance. We now believe student starts will be essentially flat for the remainder of 2010.

For the full year 2010, we expect revenue to range from $645 million to $650 million, and diluted earnings per share to range from $2.40 to $2.50, which would be an increase of 32% to 37% from the $1.82 we earned in 2009. Student starts are expected to increase approximately 4% for the full year.

For the third quarter of 2010, we expect revenue to range from $165 million to $170 million. Diluted earnings per share are expected to range from $0.60 to $0.65, which would be an increase of 20% to 30% from the $0.50 earned in the third quarter of 2009.

In conclusion, we are pleased to have delivered strong financial results in the first half of 2010. While our actions to raise outcomes will impact us in the short term, we believe our increased admissions standards will assist us in achieving the department's overall objectives by improving our graduation and placement rates as well as having a positive impact on our overall population and future profitability by lowering our bad debt and default rates. We will continue to balance our growth objectives with our responsibility to deliver quality education and to enhance student outcomes.

Now we will open the call to your questions. Jasmine?

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

Hi, guys. Good morning.

Good morning, Gary.

Yes, I guess the first question, so last quarter I think you'd told us about tightening your standards around ATB students and maybe not letting them into associate or nursing. It sounds like you're doing more than that. Can you just give a little more detail on exactly the types of things you've done to tighten the standards?

Gary --

And I guess maybe more simply, what's a high-risk student? You used that term a bunch of times. How do you define that?

Gary, this is Shaun. High-risk students, as we're defining them today, are embedded within our ATB population. And the growth expectation that we anticipated -- the 8% represented about 650 new student starts in the second quarter.

Our decision to raise standards accounted for approximately two thirds of that number. It's a proactive approach that we're taking to graduate more students and based on where we need to be as an institution in 12 to 24 months. The increased test score is one component.

To your question, we've also added a pre-start orientation, which we feel is a critical step for us to achieve the persistence necessary for these high-risk students. And while we implement, we feel that there will be a start rate impact as we experienced in Q2, and we're forecasting that for the remainder of the year. Now, we do feel that that will level out as this becomes more of a standard operating procedure for the Company.

Outside of the increases in test scores and the pre-orientation, the balance reflects a reduction in start rate from both media and high school, in which our estimation's caused by some economic hardships on students and their families.

And just as a quick example, one of our leading indicators is financial aid packaging, which we attempt to have complete well before a student starts classes. Our indicators showed that we had a number of these students not start in the month of June. And I think that that was one of the unexpected circumstances we saw in the quarter.

How that will affect us moving forward we factored into our forecast, as Cesar mentioned. But I think, in all, to answer your question specifically, we added the pre-start orientation again, which we feel is a critical component for early persistence, which leads to longer-term outcomes.

Okay. And then on the cost side, clearly I think this sounds to me like the right thing to do, but I think we'll see revenue decelerate significantly over the next year. How should we think about costs? Are you prepared to cut back on G&A, or can you slow SG&A expense anywhere near the rate at which revenue is likely to decelerate heading into early 2011? Or should we not be surprised to see margins really give up some of the recent gains as we move forward beyond the next quarter?

Gary, we always manage the expense side of the house to make sure that it's in line with the revenue growth and the student population that we have. So obviously, as we -- we reduced our revenue outlook for the rest of the year to basically model out [and start] growth. I think even within that framework, we continue to expect to see margin improvement as we continue to improve our processes and get more leverage out of our operations.

I think when it comes to 2011, I guess we'll take a look and assess where we are at 12/31/09, and obviously we -- 12/31/10, and we will continue to model out. Our long-term growth is to improve margins, and we will run our business accordingly to ensure we meet those objectives.

Okay. I mean, I guess just digging into the full-year guidance, it seems pretty clear that -- and given the third quarter, the fourth quarter you're looking for margins to be down more than 100 basis points.

Well, that would be correct on a quarter-by-quarter basis. Obviously, our objective is on a yearly basis, not necessarily on a quarter-by-quarter basis. And when we first provided guidance, we were looking at 13% to 15% start growth. We're now looking for 4% start growth.

Yes. Okay, let me move on. Just one final question, which is -- I appreciate not wanting to make a whole lot of commentary around the gainful employment stuff. But you mentioned a couple of times the salary levels and the, you think, solid ROIs. Can you give us a sense where those salary levels are? And if you're willing to comment like you did last quarter about -- I think you said only 5% of programs might have an issue with the gainful -- or with the debt to income. Any update on that? Thanks for all the color.

Gary, Dave Carney. Well, yes, I think that as we look at the new proposal, it's reasonably complex, to put it mildly. And as we previously discussed, or I certainly mentioned in my remarks, that we really wouldn't comment any further at this time.

However, we did make a comment earlier regarding gainful employment based on the initial draft, which is certainly a lot different than the one we have today, which was based on BLS salary data. And I guess the only way we could put it without understanding the new regulations completely that, based on that information at the time, the extent to which the BLS data is a proxy for the salary data. The information that we disclosed at that time wouldn't be a whole lot different.

Can you give us a sense on the salaries?

I can't. We don't have access to the data.

Okay. All right. Thanks a lot.

Yes.

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

Thanks so much. I just want to make sure I'm clear on your guidance. When you say starts are going to be essentially flat for the rest of the year, you're talking about year-over-year growth rates, not necessarily staying at the 8,000 level for the third quarter; is that correct?

That is correct.

All right, just wanted to clarify that. In terms of the verticals in the impact of some of your new admissions standards, which one of the verticals is it impacting the most? I'm just doing the math. It looked like it's Skilled Trades. Is that correct?

Skilled Trades has seen some impact, but it was on a smaller quarter. I think by year end you'll see more of the impact in Health Sciences.

And in terms of the relative profitability of the program, is it possible for you to rank them or just give us some indication how it would impact margins?

All the programs delivered the same margins, assuming the same capacity. That's how we build our programs, Jeff, so they're all priced to be able to produce the same margin.

Okay, great. I think, Shaun, you had said that you expect starts to remain relatively flat until this becomes -- I think you used the word "standard operating procedure." Do you have a rough timeframe when that might be?

I think we look at some of this impact affecting third and fourth quarter because we've been rolling it out pretty aggressively. I think through the end of the year we'll see this operating the way it should in every single school. And I will say that we're also looking at opportunities for those students who don't make it through the first round of some of these procedures we've set up. I mean, we may look at a side orientation that is a little longer in length that allows a student to get their basic skills up and they can then work their way back into our more aggressive process. But until those pieces are in place, we think the next two quarters will show the impact, and then from there on it'll become a little more standard.

Okay. And just one question just on the quarter itself, just trying to back into retention rate. It looks like it's declined a little bit on a year-over-year basis, and that's different from what we've been seeing from your company the past few quarters. Can you comment on how retention is going, and if it did decline, what were the reasons for that?

Yes. I would say persistence -- first of all, persistence was off slightly year over year. Now, that's following two years, eight or nine quarters of pretty significant improvement, as you mentioned, for the Company. The good news in that number is that the high-risk-student early persistence is tracking positively with fewer drops in 30, 60, and 90 days, indicating that some of the efforts that we're looking at are gaining in traction.

To achieve our outcomes and other objectives along the same lines, we're going to focus basically on the full student lifecycle by looking at cohort persistence from start all the way through graduation. Every once in a while we may have a quarter that shows some pressure, but the goal is a long-term cohort retention.

To get back to your question, yes, persistence was off slightly overall but was better in the short term for the high-risk student.

Okay, that's helpful. Thanks so much.

Your next question comes from the line of Sara Gubins with Banc of America-Merrill Lynch. You may proceed.

Hi, thank you. I had a question about ATB as a percentage of the total, and I'm just trying to understand the lower starts versus your expectations. If I remember correctly, ATB's about 11%, 12% of your population typically. Is that right?

That's right.

So was it that pretty much all ATB students coming in either didn't make it through the test or got put into the orientation program?

No. No. Like I said in my comments, the ATB students or the higher-risk portion of the ATB students affected probably two thirds of that shortfall. I think the ATB students as a percent of total will come down over time, as we said in prior calls. We just haven't quantified what that will be over the next few quarters, and we'll give more indication of that on future calls.

But I think that part of the shortfall, as I mentioned earlier, was affected by affordability, and to the extent of probably one third. And this may be a timing issue as some families are taking a slightly longer time to decide on when to start and looking at their financing options. But I will give you just one little indication that we saw on affordability related to the direct lending program.

It has had an interesting impact on parental loans for us, and we're finding a higher level of approval. However -- which is positive, but where the parents don't want to take on a loan for whatever reason, whether it's an older dependent child or they've got some economic hardships, the loan can become unappealing. And the real issue here for us is in the case a parent's approved, it disqualifies the student from other forms of Title IV. And so we did see a little bit of an impact regarding affordability in the month of June, and we're looking at that forward in our start forecast as well.

Okay. And sorry, just to go back to ATB though, if two thirds of the change was related to ATB, it still sounds to me like almost all of the -- or at least a good portion of the ATB students are being required to go through that pre-start orientation.

Yes, no, I'm sorry. All ATB students are required to go through the pre-start orientation.

Okay.

Yes, so the --

Okay.

The two-part process is that not all ATB students will have the higher test score. That's in certain geographies where we have more ATB students than we feel comfortable, and the outcomes may be challenged. And so we are managing those ATB populations down to an acceptable level. All ATB students, though, will go through the pre-start orientation.

Okay, and can you describe the orientation? How long is it, and were they all going through it this past quarter?

They were all going through it this past quarter. The orientation is five full and intense days. The students are required to I guess achieve a number of academic pieces in those five days, and they're required to be present for the full days through the entire week.

Now, in the case that a student shows any weakness in that early persistence or we identify academic challenges, the students will be taken out of the start number -- or, I'm sorry, out of the group that's potentially going to start. And they at this point in time will have an opportunity to go through it again at a future date, and that doesn't guarantee that the student will still be waiting to go through that process. But in the future we'll have a better indication of those trends as well.

And can you give any indication of what percentage of the students going to the pre-start orientation then went on to start?

I'll give you that on a future call. Remember, we've put this process in place, and as we've ramped it into every school, certain schools have only had a short experience with it; others have had it a little longer. And so we'll have those metrics together a little better next quarter.

Okay, great. And then just last question, how are you changing your marketing practices given that you're making some changes to the types of students that you're trying to attract?

Right now we continue to market the same way. The demand continues to be strong, as our inquiries have been up year over year. And as I mentioned, embedded in that demand are some of these academically challenged students, and also students facing financial hardship. They're just not evident within the inquiry base, and so we're still going through the inquiry flow as we would otherwise. And we've sort of made adjustments to our phone process and our interview process to assess the level of students' potential academic achievement.

Now, as we move forward, we'll probably score our leads a little differently to try to get a better sense up front, but as of today we haven't changed our process dramatically.

Okay, thank you.

Your next question comes from the line of Trace Urdan with Signal Hill. Please proceed.

Thanks, good morning.

Hi, Trace.

Shaun, I'm wondering -- and maybe it's premature for this question, but I'm wondering whether your current orientation towards new program starts is causing you to think differently about any of the locations that you're currently in. I know you're going to continue to expand in the next year, but I'm wondering if there may be any locations that you might want to kind of remove from your footprint.

Well, let me answer the question this way. The location does have an impact, and as we look at how we expand, we are taking location into consideration as a significant component in that feasibility. As we look at our current existing footprint -- I'll just give you an example. We may have a school today that is of a certain size, and that school may become smaller as we look at improving the entrance requirements for the students in that particular geography.

And so I don't think we will ever -- not essentially walk away from a market that we're currently in, but the dynamics will change such that the school's metrics might look different. And so I guess I'm saying that we're not going to move out of a particular geography today, but in the future we will look at that as we expand.

Okay. And then with respect to the share repurchase, I know you can't make specific comments about your intentions, but I'm wondering if you might comment in terms of the overall timeframe you have in mind for the authorization the board's given you. Is it fair to think you might go through that authorization in a 12-month or 18-month timeframe?

Well, the authorization that we have from the board, Trace, is for one year. So it's only valid for that one year. I mean, as you know, we have an active repurchase. We were in the market last quarter, and we will continue to be opportunistic in buying our shares.

Okay. And then I'd like to give you guys an opportunity to address some of the practices that were detailed in the GAO's report yesterday, in terms of enrollment counseling, some of the scripts that were in both the report and we saw in the videos. Could you guys just sort of comment on some of the stuff that we all saw there yesterday with respect to your own approach to enrollment counseling?

Well, let me just say -- yes, I'll comment on our process. I can't comment on anyone else's, but we have a very detailed and what we consider to be a very clean admissions process. And I'll say that our representatives are trained regionally and nationally in what we call Lincoln academies. They're also on-boarded locally. And whether it's the phone call with an initial prospective student or the interview, it is a very scripted and well-organized process.

We have a zero tolerance for representatives moving outside of that process. We manage that through the local director of admissions, but we also manage a very aggressive mystery-shopping program. And I'll say that it's a three-part program. Number one, we shop our phone calls to make sure that our representatives are sharing the accurate initial information. Number two, we have an in-person mystery-shopping program where shoppers will go in and sit with a representative and they'll measure the representative's process against our regulatorily approved internal process. And thirdly, we shop against local competition as well just to make sure that we're doing things as best we can.

Overall, our admissions process is really geared at identifying the students that can do well by our programs. And I'll just say on this note that there's really no mystery in what Lincoln does and who we do it for, and when a student comes into our doors, they pretty much know what we do. And we treat them with respect, and we share the options that we have available in that particular school. And so we feel very, very solid about what we do.

And I will say, Trace, that in the case that we have a representative that's not following our procedures and we learn about that, there's an immediate action to terminate, and we have no hesitation in that regard.

Okay. Thank you, Shaun.

You're welcome.

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

Hi, good morning. Thanks. If I could just ask a couple of follow-up questions, first to Gary's question on the guidance. I know your guidance is really for the full year and the third quarter, but, again, as we back into fourth quarter, I guess I'm trying to understand, if you're expecting starts to be flat in both the third and fourth quarter, why we should expect margins to be up still in third quarter and down so significantly in the fourth quarter. Is there some spend that you're planning towards the end of the year that would cause that happen? Or just help me understand that maybe a little bit better.

Well, the impact of the starts in the third and fourth quarter don't really impact much of 2010 per se. What they do have an impact is on 2011. Third-quarter starts, all you're going to get is a month and a half's revenue benefit from those starts. And then fourth-quarter starts, again, you will have the three months, but that is why we reduced our revenue guidance by $5 million, because that's what we expect that impact to be on our revenue. And accordingly, we will adjust our cost margin accordingly to ensure we meet the guidance that we provided.

But I think at this time we feel that, based on those flat starts, the impact that those starts will have on 2010 -- and we're still starting the third quarter with 3,900 more students than we had last year. We continue to obtain leverage in all of our educational service facilities and SG&A, as you can see, and we expect that to continue. $5 million on a pre-tax basis, we think that's very manageable.

That's helpful, thanks. And then just, Cesar, your comment that those starts will then in fact impact 2011. I know you're not prepared to give guidance at this point, but you've historically targeted 100 to 150 basis points of EBITDA margin expansion. Given everything that you're doing in this year, is that still possible in 2011, or should we perhaps manage our expectations down a bit that it's going to be something less than that, and potentially even negative?

Well, I guess I'll answer your question this way. At this point, we are in an uncertain environment. We hope we're being conservative with our historic guidance. We'll have to see exactly where we sit at 12/31/10 in our average population. We were hoping that what we are doing -- again, we look at average population, not necessarily starts. So to the extent that starts might be flat but average population continues to increase, that's a good answer for us. And as long as we continue that metric to improve, we will be able to continue to increase our margins.

So I think from where we're sitting at today, I think what we're doing is to make sure that our average population and student persistence and our outcomes continues to increase. That should bode well for bad debt and should bode well for other expense line items. That should help us to continue to improve our margins.

Great, and then, Shaun, if I could just ask a follow-up to your question about the -- or your comments about the enrollment counselors, can you talk a little bit about what kind of oversight you have in place to ensure that the types of things we saw in the video yesterday are not happening at Lincoln? Because I know some companies are arguing that these could be just rogue enrollment counselors. How can you prevent that kind of thing from happening?

Well, we have a very aggressive observation practice. And whether the observation's done via phone or visually, that's an important piece of this. But more importantly, I believe that the training element is critical here -- how you on-board the representative and then the type of training they have.

And so we have a group of national or, in some cases, regional admissions folks who have a long tenure with the Company. They sit with our regulatory department consistently, and there's no question about what is acceptable and what's not. And so whether it's the regional and national folks or the local director of admissions and executive director or school president, there's a lot of oversight in admissions.

We increased our mystery shopping and added the third component of shopping last year, and since then, there are -- every once in a while, there is a case where we find somebody that just doesn't -- they either can't get the process down or they may have a different take and they'd like to use their own methodology, and we have no tolerance for that. And we usually pick that up pretty quickly.

So I think the processes we have in place today are very capable of picking up rogue rep activity. And the most important piece of this, as I said before, is we have no tolerance for it. And so when we find it, we terminate immediately.

Thanks a lot for the color.

You're welcome.

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

Thanks. Just a couple more questions on the start's guidance. The flattest target for the remainder of the year, can you just specify -- what does that mean for Q3 versus Q4? I mean, should we be looking at more of a bigger reduction in Q4, or you think it'll be flattish in both?

No, we think it'll be flattish in both.

Flattish in both.

Okay, but I mean, if you said you're kind of just rolling some of these new initiatives out and they'll be kind of fully in place by Q4, why wouldn't there be a bigger hit in Q4 than in Q3?

I think we've rolled the majority of these out. And I think the comment related to the fact that some schools have had it a shorter period of time; other schools have been doing it a little longer. And so the way we're looking at the impact is that the third quarter will be flat in its own right; the fourth quarter will be flat against prior year as well in its own right. And we're just, again, looking at the impact of the new procedures in addition to some affordability issues that we're seeing out there as well. But we don't see the fourth quarter being hit any more intensely than the third quarter.

Okay. And then for fiscal '11, I mean, I think you touched on this in answering one of the questions, but I mean, you feel pretty comfortable starts should be no worse than flat in fiscal '11 also?

Yes, we actually -- we see an improvement in starts in fiscal '11. And now it won't be the same rate that we've seen in prior years, but we do think that the Company will grow in starts.

Okay. And just related to that, I mean, I think you made it pretty clear that the macro-driven market demand is very strong. But I mean, if the labor market improves slowly from here, I mean, wouldn't you expect kind of an incremental hit from that next year? And, again, I mean, why in the context of that would you think starts would be up?

Well, yes, I mean, there could be. However, we have a number of growth initiatives in place that we feel will offset that. We continue to add programs. We'll continue to add school locations. We are looking at online programs coming on line in 2011. And so we feel that the growth strategies that we have in place will offset some of that.

Okay, great. And then if you could just clarify one other thing, you said that thing about the 650 students I guess that were impacted in the second quarter and then two thirds of that related to some of these initiatives. Could you just go over that again in more detail, kind of what was the two thirds, and what's the other third, and anything else related to that?

Right. That was the detail. But I'll just say that the way we looked at the impact in the second quarter and the impact on the second half of the year is that there are a couple of pieces. The first piece relates to the standards that we are increasing. One piece of that is the test score, and the other piece is the pre-orientation, and that is about two thirds of the impact.

The other third we're anticipating -- and it's based on our current experience with our June starts -- is that there is some affordability effect, and that's the other third of the impact.

Okay, that makes sense. Thanks a lot.

You're welcome.

Your next question comes from the line of Scott Schneeberger from Oppenheimer. You may proceed.

Thanks. Just following up on that thought, the only students being considered for orientation, that roughly 11% that are ATB currently, would that be expanded going forward? And how is that baked into the guidance?

Today, the students who are automatically put into that pre-orientation are the high-risk students, the 11% or 12%. In the case that a local school feels that they need a student to go through the pre-orientation for any other reason, they can do that today, and we've seen that happen in some of our schools. But all of that is baked into our forecast for Q3 and Q4.

Okay, thanks. And in that second-half forecast, what are other broader assumptions? Are you looking for a stable labor market, anything unique in the macro environment?

Yes, we're looking at the macro environment not changing much from what it reflects today.

Okay, thanks. And then with regard to expansion plans next year, are you looking to step that up? Obviously, you're going to have some top-line pressure with these proactive initiatives, and you just mentioned on the last question expansion and online. Incremental expenses year over year, perhaps in CapEx, are there other things to think about as we look out to 2011?

I'm not sure that they'll be incremental, Scott. I mean, obviously, this year we had a pretty aggressive CapEx budget, 8% to 9%. I mean, I think we would expect that to come down. We had some pretty expensive initiatives.

And a lot of the things that we look to expand -- I think Shaun said four or five new locations a year -- they would probably be just -- we'd take some small square footage in office buildings and then we -- with options to increase. So we take small spaces. As the school grows, we will increase the space. So we try to manage the cost of that type of -- in that way.

Okay. Thanks.

Ladies and gentlemen, this concludes our question-and-answer period for today's call. I would now like to turn the call back to Mr. Shaun McAlmont, President and CEO. Please proceed.

Well, thank you, everyone, for joining us on the call today. As you can see, we're taking important steps to improve student outcomes while at the same time continuing to execute our various growth initiatives. As we indicated earlier in our remarks, the Company is healthy and well positioned to continue to deliver strong value propositions to our students to assist them in gaining jobs in their chosen field and to generate strong financial results for our shareholders. We look forward to updating you on our third-quarter results in early November. Thanks and have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.