Lincoln Educational Services Corp (LINC) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Lincoln Educational Services conference call. My name is Danielle and I will be your operator for today. At this time, all participants are in listen-only mode. And 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. Shaun McAlmont, President and CEO. Please proceed.

Thank you, Danielle. Good morning, and welcome, everyone. Joining me today is Dave Carney, our Executive Chairman; and Cesar Ribeiro, our Chief Financial Officer.

I will provide a brief overview of the current environment and then update on our operations, and Cesar will review our third quarter financial performance and provide our outlook for the full year. We will then take your questions.

Before we begin our presentation though, let me take a couple of administrative items to present to you 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 with the meaning of federal security 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, please see the risk factors section in our Form 10-K for the year ended December 31, 2009, and certain of our other SEC filings. The Company undertakes no obligation to revise or update any forward-looking statement.

Now, before I move on to talk about the current environment, I'd like to take a moment to highlight some of our third quarter accomplishments, including a 12.7% increase in revenue over prior year, which amounted to a record $167.2 million. We saw a 34.1% improvement in operating income, with a profit margin improvement to 19.4% versus 16.3% prior year. In addition, we had a 52% improvement in diluted EPS to $0.76, which included $0.05 from stock repurchases during the quarter. And we were encouraged by a 10.6% increase in average student population.

Now, regarding the environment. It's clear that the Department of Education is taking steps to lower student debt and ensure that private sector institutions are preparing students for career success. We shared the department's focus on these issues, however, we've also shared comments regarding our concerns around some of the parameters of the rules and the implementation timeline as proposed.

With the passage of 13 of 14 new rules governing private sector education in our country, there is a new educational landscape that we must acknowledge. Based on our preliminary analysis, we foresee minimal impact from these rules.

In regards to incentive compensation specifically, we anticipate shifting from a variable to fixed salary cost and do not anticipate any meaningful impact to our operations. We await the final rule and we're managing our Company based on the assumption that some version of the Department of Education's proposed gainful employment regulations will be enacted in 2011.

As I noted in the press release, we feel at this time that the enactment of the proposed rules does not pose a significant threat to our overall educational model. However, based on what we know today, we're taking actions that will improve our student outcomes which include reducing the number of higher-risk ATB students in our population, adjusting the debt profile of some programs, developing programs designed to recognize student success with a particular focus on graduation and we continue to execute our growth initiatives.

It's important for me to reiterate that Lincoln has an impressive regulatory track record and was founded more than 60 years ago on the principles of effective vocational and technical training. We began in 1946 by training returning World War II servicemen in automotive and skilled trades careers, and our hands-on training continues today with a more diversified portfolio of programs. Whether we're training servicemen, single moms, recent highschool grads or those looking for a career change, our mission has remained the same since 1946.

Our institution remains viable today and we continue to evaluate ways to increase shareholder value. I am pleased to report that during the quarter, we repurchased approximately $47 million worth of our common stock and in recognition of our strong cash flows, our Board of Directors has authorized a new annual dividend of $1 a share to be paid quarterly. This reflects our continued commitment to deliver value to our shareholders.

Now, regarding our demographics. For the most part, the students that we serve did not take the traditional route and often face numerous life challenges. Not every student comes to Lincoln with a background in education that will position them for academic success. But historically, we've committed to helping every student who wants to learn to succeed. Our graduation rate of 55%, placement rate of 75% and default rate of 14% reflect the population we serve and presents an opportunity for improvement in all three measures.

Approximately 71% of our students qualify for Pell funds and other types of Title IV based on lower-than-average income. This is much higher than their traditional counterparts and again reflects their life circumstances, which categorize many of them as higher-risk students. The higher the risk, the more likely they are to interrupt their study, which leads to higher default rates.

Our goals in working with this often an otherwise under-served population lies squarely in improving our earlier-mentioned graduation, placement and default rates.

Now, all of this said, the value proposition we deliver which is a rapid path to opportunity is the reason students continue to choose to enroll at Lincoln. Generally, in about a year, we prepare students to enter the workforce and assist them in obtaining positions where the starting salary is meaningfully greater than their earnings before they came to Lincoln.

We know that there are not many institutions offering technical training in the markets we serve that can provide such a service to challenged populations of students who are striving to make a difference for themselves, their families and communities.

We will continue to serve this population while at the same time raising our enrollment thresholds to restrict access to the higher-risk students. At the same time, we're also focused on broadening our demographics to include more on highschool-age students and working adults who will help improve the graduation and repayment rates for our Company. This will allow us to accomplish three important objectives. First, to fulfill our mission to students. Second, to work within the department's new rules. And third, to provide a return to our shareholders.

Key to our operations is the reality that effective students services and instruction requires a special ability to motivate challenged students and our staff and faculty do it well. Our overall student satisfaction remains high even as we introduced career default prevention and other student services into the early phases of instruction. We feel this will better prepare students for their responsibility in the educational and repayment process.

We continue to make improvements to our new student enrollment and orientation processes, and we've seen improvements in our new student persistence. Our pre-start orientation for high-risk students is proving beneficial and we feel it will begin to benefit overall retention numbers as these students advance through their programs of study.

Now, regarding our admissions process. It's important for me to note that our admissions process has operated under the Department of Education's Recruitment Safe Harbor since the inception of those parameters and we've managed our personnel closely through mystery shopping, observations and local management. In the case we find any individuals abusing the regulations, we've made prompt changes and we maintain a zero tolerance policy.

Our admissions personnel have adapted as we've made adjustments aimed at managing high-risk students and I feel that these employees will adapt yet again as we prepare for the removal of the Recruitment Safe Harbors. We feel that we will be able to manage through this change in an effective way and allow our admissions staff to continue to work with prospective students in a regulatory sound career advising capacity as we've done for the past 60-plus years.

In regards to market demand, based on what we are currently experiencing, market demand for our programs remains strong as our overall inquiries have increased year-over-year by 25% for the full year and 15% for the third quarter. Embedded within this demand, however, are students who fail to meet our more selective entrance requirements in addition to economically challenged prospective students who enroll but do not start.

We continue to see an increased number of non-starts due to financial hardship. Our third quarter starts were down against prior year by 8.8%, which represents a slightly negative highschool recruitment year, lower ATB starts and some deterioration of start rate based on consumer sentiment.

The highschool program was slightly down and did not meet our projections for the year. The primary cause of this softness was affordability on the part of parents who chose not to incur debt on behalf of their children. ATB starts continue to run below prior-year levels and consumer confidence is playing a role in the decision-making process for some adult students as well.

In summary, our ability to generate interest in Lincoln programs among adults and highschool students remains effective and although consumer sentiment affected start rates, we feel that if sentiment shifts, start rate will return to more normal levels.

Our advertising cost metrics reflect some of the strain we are seeing on new student starts. Our marketing and sales cost per start increased by 26% over prior year. Another important metric is our cost per inquiry which increased to $77 in this period versus $75 prior year, which represents an increase of 2.6%. So you can see we are generating inquiries in higher volumes at similar price. However, the rate at which these student starts school has deteriorated which is reflected in the cost per start.

In regards to growth-related actions, we will continue to manage our initiatives focused on new campus locations and expansions and online programs. We are opening three new Lincoln campuses over the next three months in Columbus, Ohio; Cleveland, Ohio; and Hartford, Connecticut.

In addition, we're moving our Denver Automotive Campus to a new state-of-the-industry facility and we're on track to open this new school in the summer of 2011. We have added incremental highschool staff at Denver in order to recruit over a larger territory and we also plan to add more programs to the new facility such as collision repair and skilled trades.

We continue to proceed with our plans to develop and launch online programs, and I'm pleased to report that we've now received approval for four regionally accredited online programs. This approval is an important step toward our long-term growth plan and it reflects 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.

Although our program approval timeline has been a little slower than anticipated, we're encouraged with the progress we're seeing in the development of Lincoln College of New England and the new Lincoln College online programs.

In conclusion, despite the uncertainty created by the current regulatory environment, we believe we're well positioned to continue to deliver our strong value proposition to students, generate strong financial results for our shareholders, and continue as a leader in offering vocational and technical training over the long term.

Now, I will turn the call over to Cesar for our financial review, including our outlook for the full 2010 year. Cesar.

Thank you, Shaun. Good morning, everyone. As we stated earlier this morning in our press release, our revenue increased 12.7% to $167.2 million in the third quarter of 2010 from $148.4 million in the third quarter of 2009. This increase was primarily due to a 10.6% growth in our average student population, tuition increases which ranged from 3% to 5% and a shift in program mix. Average revenue per student increased 1.9% to $5,233 in the third quarter from $5,134 in the prior-year quarter.

Operating income increased to $32.4 million in the third quarter from $24.2 million in the prior-year quarter. This strong operating performance reflects improved capacity utilization as we served a larger student population compared to the prior-year quarter. Capacity utilization increased to 66% in the third quarter of 2010 from 63% in the third quarter of 2009. Operating income margin improved to 19.4% in the quarter.

Our educational services and facilities expenses increased 9.8% to $63.3 million in the quarter from $57.7 million in the prior-year 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 third quarter of 2010 with approximately 3,900 more students than at the start of the third quarter of 2009. The increase in educational services and facilities expenses also reflects higher facility expenses in connection with facility expansions and related rent and property taxes as well as higher depreciation resulting from higher capital expenditures. As a percentage of revenue, educational services and facilities improved to 37.9% in the quarter from 38.9% in the prior-year quarter.

Our selling, general and administrative expenses increased 7.5% to $71.5 million in the quarter from $66.6 million in the prior-year quarter. This increase primarily reflects annual compensation increases for admissions representatives, an increased number of admissions representatives, and continued sales and marketing investments to enhance our growth. It also reflects our commitment to our students to assist them with their job placement and financial responsibilities with the addition of 51 career services, financial aid and default management personnel throughout 2010.

Our cost per start, as Shaun stated, was approximately $2,035 in the quarter, compared with about $1,607 in the prior-year quarter. This increase was due in part to our more selective interest requirements coupled with deterioration in consumer confidence from the current economic climate, which has resulted in students and their parents being more hesitant to assume additional debt. These factors led to deterioration in show rates during the quarter.

Our bad debt expense increased to $12.9 million in the quarter from $10.1 million in the prior-year quarter. During the quarter, we experienced an increase in defaults, which we attributed to the prolonged economic climate, which has produced higher levels of unemployment. As a percentage of revenue, bad debt expense increased to 7.7% in the quarter from 6.8% in the prior-year quarter. We continue to believe that bad debt expense as a percentage of revenue will range -- will be approximately 6.5% to 7% for 2010.

Number of days sales outstanding at September 30, 2010 increased slightly to 24.7 days compared to 24.4 days at September 30, 2009. As of September 30, 2010, we had outstanding loan commitments to our students of $18.6 million as compared to $20.5 million at June 30, 2010. Loan commitments, net of interest that will be due in the loans to maturity were $15.8 million at September 30, 2010 as compared to $16.3 million at June 30, 2010.

During 2010, we have seen a reduction in the loan commitments we offer our students to help them bridge the gap between the tuition charge for their particular program and the amount of grants, third-party loans and parental assistance each student receives. We believe that these reductions are due to increases in student loan limits available to students pursuant to the ensuring continued access to Student Loans Act of 2008 as well as an increase in Pell Grants.

As a result, greater percentage of students are able to finance their education entirely from financial aid sources. While this provides great opportunities for our students, it also severely impacts our ability to comply with the Department of Education's 90/10 rule.

Under this rule, a proprietary institution will be ineligible to participate Title IV programs if for any two consecutive fiscal years, it derives more than 90% of its cash basis revenue as defined in the rule for Title IV programs. Because of the increase in Title IV student loan limits and grants in recent years, it will be increasingly difficult for us to comply with the 90/10 rule without increasing tuition prices above the applicable maximums for Title IV student loans and grants.

As a percentage of revenue, selling, general and administrative expenses improved to 42.8% in the quarter from 44.8% in the prior-year quarter. Our income tax expense increased $3 million to $12.4 million in the quarter due to our profit growth. Our effective tax rate improved to 39.7% during the quarter due to a favorable permanent tax item.

Net income increased to $18.9 million in the third quarter from $13.7 million in the prior-year quarter. Diluted earnings per share grew to $0.76 from $0.50.

Now, let me turn to our cash flow. We generated very strong cash flow from operations in the first nine months of 2010. Cash flow from operations was $68.1 million in the nine months of 2010 compared with $42.9 million for the same period in 2009. This increase was primarily due to the growth in net income, partially offset by higher tax payments.

For the first nine months of 2010, capital expenditures were $33.5 million compared with $9 million in the first nine months of 2009. This increase reflects the facility purchased leasehold improvements, facility expansions and relocations, coupled with the addition of classroom and shop technology. We expect CapEx to range from 8% to 9% of revenue for 2010.

As far as our share repurchase, if you recall in June 2010, our Board of Directors authorized a repurchase of up to $50 million of the Company's outstanding stock during the period of one year. During the third quarter, we repurchased 3,889,438 shares of our common stock at an average price of $12.05 per share. As of September 30, 2010, we had repurchased 4,040,234 shares of our common stock at an average price of $12.38 per share and have fully utilized our authorization to purchase up to $50 million of our common stock.

We're pleased to announce this morning that our Board of Directors has authorized an annual cash dividend of $1 per share to be paid at $0.25 per share per quarter, reflecting the Board's confidence in the Company's financial strength and cash generation capability of our business. The first dividend will be payable on December 31, 2010 to shareholders of record on December 15, 2010. Lincoln anticipates paying a cash dividend in each quarter of 2011 with expected dividend payment dates in March, June, September and December. The establishment of future record of payment dates is subject to the final determination of our Board of Directors.

Turning to our balance sheet, total debt consisting primarily of capital lease obligations was $37 million at September 30 compared with $57.3 million at December 31, 2009. Cash and cash equivalents were $14.4 million at September 30 compared with $46.1 million at December 31, 2009. Net accounts receivable increased to $38.7 million at September 30, 2007 from $36.6 million at December 31, 2009 and net PP&E was $166.6 million at September 30, 2010, up from $149.3 million at December 31, 2009.

I will finish my prepared remarks by providing our current outlook for the full year. We're revising our previously issued guidance to give effect to our third quarter results and to incorporate our share repurchases during the third quarter. As a result, we now believe that student starts will be essentially flat to slightly negative for 2010. For the full year 2010, we now expect revenue to range from $635 million to $640 million and diluted earnings per share to range from $2.65 to $2.70 which represents an increase of 45% to 48% from $1.82 we earned in 2009.

Looking forward, we expect that our actions to improve outcomes and to ensure compliance with the proposed rules will cause our student population and our revenues to decrease modestly in 2011 from 2010 levels before gradually recovering in 2012. We expect that these decreases will create downward pressure on our margins over the next 18 to 24 months as we implement the aforementioned actions. Consistent with best practice, we will provide 2011 guidance when we report our year-end 2010 results next March.

In conclusion, we're pleased to have delivered a strong financial results for the first nine months of 2010. We will continue to balance our growth objectives with our responsibility to deliver quality education and to enhance student outcomes and now we will open the call up for questions.

Thank you. (Operator Instructions) And your first question will come from the line of Gary Bisbee with Barclays Capital. Please proceed.

Hey, guys. Nice job in the quarter. Can you -- within the starts this quarter, can you just quantify for us how much was the tougher standards around ATB students? Was that a big piece of it or would you say more of it was these other factors between the consumer confidence and the other factors you cited?

Yes. Good morning, Gary. I would think there were two primary factors. Just as we had last quarter, we had affordability and our ATB reduction, whereas last quarter ATB reduction was the bulk of the shortfall, that has really flipped this quarter and it's primarily because we had our large third quarter start, which had a number of highschool students in it whereas the second quarter did not. So because of the dynamics of that quarter, the shift occurred.

But I would say if you just flipped that we said two-thirds of the start last time was ATB impact. This time, I would think of it would be flipped and two-thirds would probably be more of the affordability issues. And mind you, affordability affected not only our highschool start, but also some of the adult start as well.

Okay. And then, it sounds like you're beginning to take some of the steps in addition to the admission standards changes to position yourself to comply with the regulations. I guess what level of cost growth should we expect over the next few quarters to make some of these changes you're talking about?

I can appreciate how with the students and revenues declining, there would be some negative leverage of your fixed cost. But are there also areas where you're expecting to layer in significant incremental costs as part of these strategies or should we just think primarily along the lines a bit the negative leverage that would happen from a declining topline?

Good morning, Gary. It's Cesar. I think as we said, obviously, we expect revenue -- well, we expect population to be flat and revenue to be flat in 2011 before it gradually recovers. With that is [going to come] pressure on margins.

I think as we said in our prepared remarks, we continue to invest in not only admissions personnel, but in order to improve outcomes, we are investing and will continue to invest in default management, career service and placement personnel. So there will be some incremental costs, which will create pressure on margins. However, as in best practices, we will provide our 2011 guidance in March once we have a better sense what those costs will be.

Okay. And then, I guess just the last one. If I remember correctly, the incentive compensation policies historically that you reps have had about more to do with completion rates or success as opposed to the numbers signed up. But you felt that was legal based on the Safe Harbors. Do you feel the need to -- I heard your commentary, but do you feel the need to make a major change there or do you think that there is more along the lines of tweaking the policies a little bit? Thank you.

Yes, I would just say this that we will go away from any kind of incentive-based compensation which includes graduation bonuses and we're moving from what's been a variable-based compensation of fixed, and so we see it more as an adjustment. Whatever we do will be done in fairness to the representatives and we don't think it will be a major impact to the Company. [No process].

Okay. Thank you.

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

Thanks so much. Just wanted to drill to the verticals a little bit. Can you tell us in terms of -- I don't know if you want to rank this for us but whatever easier way it is, where do you have the most exposure to ATB students and also where do you have the most exposure to your typical highschool graduates? Thanks.

I would say this, the ATB exposure is primarily in the non-automotive programs and the areas where we're focusing more are the longer programs or the associate degrees in that regard.

And as far as highschool, that's the opposite. It really affects our Lincoln Tech Group, which has been traditionally a larger proportion of highschool students, especially toward the third quarter. Although highschool students have been coming into our non-automotive programs as well.

Okay. Great. That's helpful. In terms of the share repurchase, it was great to see such a larger purchase, but I'm just curious how you're balancing that with some of the risks to the financial responsibility ratio?

Jeff, based on our models, we shouldn't have any problems with the financial responsibility ratio. We have lots of room to go.

Okay. Great. Can you also give us an update on where you stand on 90/10 and what risks are there maybe going forward when the temporary relief expires next July?

Well, I think as we disclosed before in an 8-K or in one of our press releases, we expect that for this year, one of our institutions will be above the 90% threshold. So that'll be one. We'll have two years to correct it. And we will be working hard to make sure that that institution is no longer above 90% come next year or any of our institutions are above 90%.

So in terms of the potential tuition increase that you discussed, is that something that you're thinking about in the near-term because of that?

Well, it might be something that we need to think about. Obviously, we need to see what the department or Congress does as far as some regulatory relief on 90/10. I think as you know, the $2,000 additional Stafford goes away as well as some part of the institutional loans in 2012.

To date, that has done a great deal to help institutions like ours to be able to comply with 90/10 as students have prevailed themselves to more and more financial aid to meet their educational needs. So we continue to monitor that, but for 2011 obviously we expect that one of our institutions will be above that threshold.

Okay. Great. And just a quick numbers question, in terms of your outlook for 2010 on EPS, what share count and tax rate are you assuming?

We are assuming the share count is roughly about 25.3 million shares.

And the tax rate?

The tax rate should be about 39.5%.

Great. Thanks so much.

(Operator Instructions) The next question is from the line of David Chu with Bank of America Merrill Lynch. Please proceed.

Good morning.

Good morning.

The press release mentions that you're making adjustments to some programs to improve debt-to-income ratios. Can you provide some additional details, please?

Well, at this point, let me just mention that as we've looked at the rules as they're stated today, we've planned based on our current realities and what we anticipate coming. And so anything we've done today as far as forward planning really is based on any visibility we have now with other assumptions made, again based on the portions of the rules we understand.

And at this point in time, we feel confident that a number of programs being shorter in length and not amassing a lot of debt actually will do well under the new regulations. We do have some programs that are a little longer and may have some debt profile that we need to adjust. And so I would say that -- I will give you a couple of examples.

Number one, the rate at which a student attends school during a week might have to shift in that if a student attends more hours per week, the program length and the amount of debt can be adjusted favorably. And so that's just an example of something we could do.

Now, this is all for planning purposes. And we will have a more detailed guidance when we do our sort of year-end call and we can give you a little more detail and at that point in time, we'll probably have more clarity into the actual rules as well. But that's just a quick example, David, as to what we can do programmatically for any program that we feel fits into a gray area.

Okay. Thanks. And in regards to ATB students. In trying to achieve your 10% goal, what percentage of prospective students are being turned away?

I'm not going to quantify that for you today and again in our year-end call, I can give you more details on what we saw for the full year, but I'll just say this. The way we're looking at it is, any school that has an ATB population that today is above 10%, we're managing that school to a number below 10%. Any school that is currently below 10%, we're managing that school to stay at their particular rates that are sub-10%.

The reason the 10% number is significant to us is because we feel that sitting below 10% offers the campus a good threshold number to manage these students effectively. So you are managing an added burden, if you will, students who need a pre-orientation of tracking and other services throughout school. And we feel that managing the 10% number helps us have those students approach higher graduation rates -- persistence and graduation rates over time. So we're using a number of elements to help do that; the test score, the pre-orientation and in some cases, we will have to manage start numbers for the schools that are up over 10%.

Okay. And one last one. So are you seeing some students self select out or is it more that you guys are managing that rate?

Yes, David, we are seeing some students self-select out. Our pre-orientation is a mandatory time frame where the student has to show a behavioral change, if you will, before they are counted in our population. To the extent that a student can't handle it upfront in the pre-orientation, they'll self-select themselves out of the process. And so it's one in the other. I mean we've set up a structure that will force the self-selection, but students are voting with their feet in that regard. We rather them do that before they come into the population.

Okay. Thanks, guys.

Your next question will be from the line of Kelly Flynn with Credit Suisse. Please proceed.

Looks like Kelly Flynn just dropped the line. The next question comes from the line of Amy Junker with Robert W. Baird. Please proceed.

Hi, thanks guys. Can you first talk a little bit -- your decision to pay a dividend, obviously viewed very favorably. How sustainable do you think that $1 per share dividend is? And maybe Cesar, if you can talk about in the context of your expectations for free cash flow both in this year as well as next year, given you have less than $2 a share in free cash flow. Just would like a little bit greater clarity on that. Thanks.

Sure. Well, obviously, I mean I don't want to speak for the Board, but when the Board decided to institute this dividend, we believed the dividend [is probably] sustainable.

I can just put a couple of things into perspective about what our cash flow has been out this year. We have -- we bought back stock in late December for $22 million. We purchased $50 million of stock during the year. We so far have purchased $34 million of CapEx.

So a $23 million dividend per year, I don't think, is something that we feel is not unmanageable under any circumstances since we've been buying more stock than that every single year. So we believe it's very sustainable as we go forward and we don't see that as much of a problem in context of our cash flow.

As far as our cash flow for the first nine months of this year, we've already generated $68.1 million. Obviously, free cash flow is only sitting at about $35 million, but I think you'll see that number ramp up nicely for the rest of the year in line with historical trends.

So I think we feel very good about the Company's cash generation abilities and we intend to deploy the cash that the business generates to not only invest in the business, but to provide our shareholders with returns.

And with net income being down next year with margin degradation kind of occurring, can you still see growth in cash flow next year? I mean are there other things you can do to the business to help increase that or would you expect cash flow to kind of mirror what net income does?

No, I mean I think it's a little bit too early to say, but I mean obviously I think I would expect cash flow to mirror what net income does. But with that said, I mean, there's still a lot of room not only within our net income and our cash flow to be able to support not only our investments but the dividends that we just announced as well as stock repurchases.

Great. Thanks. And then just one question on margins, can you just give us a little bit more color on the magnitude of the degradation that you expect? If we look back to '07, margin got as low as roughly 8%. Given everything that's happening, I mean do you think we see that level again or do you think it won't be quite as severe this time around?

Well, Amy, at this point, I would just say, we expect to have pressure in our margins. We expect revenue to be flat in 2011 but at this point, we're not prepared to give 2011 guidance. We will do that in March. We will provide not only our full year, but our quarterly guidance at that time.

And then last question from me and I'll pass it up if there are any more. But on persistence, was up significantly this year according to our calculations over 500 basis points. Can you just talk about what really drove that? Is that because of fewer ATB students or something else that's going on? And if you feel that that level is sustainable -- that level of improvement is sustainable on a go-forward basis?

Well, thank you for that. I -- we all look at persistence in different ways. And the only way I can respond to that is we are always cognizant of efforts to help our students, A) persist, and B) graduate. And of course, in this environment, we are focused on that to an even greater degree.

Our early efforts with the challenged population are not enough where we can quantify the impact on the full organization yet at this point. And so it's tough to break it down for you, but I think that what we will see long term is probably over the next 18 to 24 months, just sort of continued economic pressures affecting some of the students who are along the way in their program and some of that pressure will be offset by improvements we see with our challenged population on the front.

And so I would hope that we can maintain the persistence rates that we're seeing and we've got all of our efforts are geared to do that, not only on the students' part, but also as we look at recognition and reward for our staff and faculty. We are all focused on getting students toward graduation and persistence, we think, will come along with that.

Great. Thank you, guys.

You're welcome.

Your next question will be from the line of Kelly Flynn with Credit Suisse. Please proceed.

Sorry about that before. A couple of questions about these actions that you are implementing to raise outcomes. First of all, can you just clarify because you mentioned some of these last quarter. What have you added to this effort since last quarter?

Well, if you recall, when we first started this effort, we really focused on the schools that had higher ATB populations. And so for example, we limited access to certain degree programs for ATB students early on. We focused on schools that had ATB population. And what we've added over the last quarter was an expansion of this process and program to every school that admits ATB students.

Now, we have five schools that do not admit ATB students, but every other school has some element of this program in effect at this point in time.

Okay, great. And then, I guess just following up on that, I wanted to drill down on the timing of each of these initiatives and what metrics if any you think they may impact. So for the ATB thing that you're doing, I mean would you say that you've seen the full impact already of the -- on the starts and that we can just assume once that annualizes, it will -- the impact will flatten out or do you think you'll have to expand it more and you may see incremental impact?

It's hard to say at this point in time. I would say that -- as I mentioned to you, is we've expanded this program across the Company, we feel that we're doing the right things to help impact the longer-term outcomes. But I can't speak to how this will affect our start and start rate moving forward. But again, as Cesar mentioned, we will probably give you more guidance in our full-year call.

But in addition to that, I think that ultimately we won't see the full impact on the outcomes until students make it through the cycle a couple of turns. And that's one of the reasons we feel that some of our metrics will be impacted 18 to 24 months out. But we feel confident with some of the early returns that we're seeing and feel that persistence and all of our metrics ultimately will be benefited by these actions.

Okay. And then just on the other stuff you listed, including the action to reduce student debt and improve debt-to-income as well as improve graduation rates. Have you started that stuff yet, just to be clear and if so when did you start it and if not when will you start it?

Well, all of the efforts toward student graduation as it relates to start process orientation, et cetera, are in process. Other changes to programs that we feel where it might be necessary are in the planning stage and will be implemented as we feel it makes best sense.

Of course, some of this does relate to the final version of some of these rules and so we're trying to be as proactive as possible in determining what we might have to do. And we're keeping a close eye on the timing of the final rule and between that time and now, we will figure out how much -- how aggressive we have to be in some of those plans.

Okay, great. Thank you so much.

You're welcome.

Your next question will come from the line of Scott Schneeberger with Oppenheimer. Please proceed.

Thanks. Yes, just following up on those last questions, I just want to clarify with ATB, you mentioned five locations do not have any ATB students, so you are not applying that -- the test program. But at those that haven't, have you now proliferated it to every student coming through beyond ATB, just to be clear on that? Thanks.

No, Scott, we have not and that is not in our foreseeable future. I mean, this effort really is focused on our -- the highest-risk students that come into our schools.

And remember, I mean, for 60-plus years, we've been an open enrollment institution, giving any student in our communities that we serve the opportunity to better their lives. And this new environment really is affecting access to some of the higher-risk students. And so that's where we've really aimed these efforts at this point in time.

Okay. And is that a consideration maybe to proliferate in the future? Is that a wait and see or do you really -- you don't anticipate that occurring?

Tough to say at this point in time, Scott.

Okay. Thanks. And then, just on initiatives on student graduation rates, I don't know I missed it if you did cover it in that last question. But you mentioned in the press release, tying Company goals accountability to student outcomes, could you just elaborate a little bit more on that? Thanks.

I'll just tell you this. We feel that all of our focus should be aligned on helping our students graduate. I mean, our mission really is about the return on the students' education investment. And to the extent that we can have everyone in our organization tied to that, we feel that we'll have a better chance of achieving those goals.

Now, there are very specific things that we have in mind to tie our Company accountability to the students' level of accountability and will unveil some of those as time goes by. But you get a sense for where we're going with it generally from our comments.

Okay. Thanks very much.

Welcome.

Next question is from the line of Trace Urdan with Signal Hill. Please proceed.

Hey, good morning, guys.

Good morning.

Good morning.

A couple of questions. One is, I am just wondering the price sensitivity and some of the apprehension that you mentioned among prospective students, can you give us a sense of how that manifests itself? Are you -- does it show itself in terms of the types of leads that -- and lead efforts and outreach that are effective? Is it something that comes up more in terms of the qualitative interaction with recruiters? Can you give us a little bit more of a flavor of sort of how you know the market is feeling these things?

Yes, I'll give you a quick indication. So our interest in our programs remains high. We've seen that. I mean, as our inquiry rate has improved year-over-year, we still get a good amount of interest in what we do for most of our locations.

Also, the number of students who enroll in our programs is also encouraging. What we saw was a student who might have otherwise been enrolled and financially packaged not start school. And when we dug down into that, we found that in many cases in the third quarter, you're dealing with a highschool population and you're dealing with students' parents who are helping them finance their education.

And in many cases, parents were approved for loans at higher rates because of the direct lending program and parents in many cases were surprised by their approval and in lots of cases didn't want to take on the debt. And that was a recurring theme across many of our schools. And so again, Trace, we are dealing with a population that's probably feeling the economic impact a little more than others and a little hesitant.

The fact that we've got good interest and good enrollment activity keeps us positive though that as sentiment changes and the economic picture shifts and continues to shift positive we'll see those start rates come back.

Okay. The next question I have is the orientation efforts that you've been engaged in, do you have any results to suggest that this is having a meaningful impact at this point on retention and persistence, or is it too soon to be able to see exactly what effect it's having?

We've been tracking the schools very closely that have implemented the pre-orientation especially and we continue to see good results in early term retention. Now, I think that that is one indicator.

For us, it's life circumstance affects these students all the way through their program and so, yes, it's a great early indicator for us. But the services that we've also put into place throughout the students' program and our instructors' focus will also help guide the students toward graduation.

So at this point, we are seeing a positive impact on the very front-end, but we know that that's not the full story. We've got some other pieces that need to be just as effective on the back-end for the student.

Okay. And then final question, Shaun. I know you guys have historically been pretty effective at encouraging students to pay cash, while they are in the program. And I'm wondering if in the current regulatory environment whether you've stepped back from that at all? And whether there's any -- whether that -- I mean that's always been one lever against 90/10 and I'm wondering if that's sort of less true now than it has been in the past.

I would say nothing's changed in that regard. The students' financial aid packaging is what it is and to the extent that they've got a gap or the gap increases, that will always be a part of the reality. So I don't see a significant shift at this point, but that's not to say that as we make adjustments to programs based on potential new rules, we won't see the gap shift and the payment picture change. But as of this point, no significance.

Okay. Thank you.

Thank you.

At this time, I would like to turn the call back over to Mr. Shaun McAlmont for any closing remarks.

Thank you, Danielle, and thank you to everyone for joining us on the call today. As you can see, we're taking important steps to improve our 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 we are well positioned to continue to deliver our strong value proposition to our students and 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 full-year results and laying out our 2011 guidance in early March. Thanks and have a good day, everyone.

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