Lincoln Educational Services Corp (LINC) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2010 Lincoln Educational Services earnings conference call. My name is Steve and I'll be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of today's call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. Now I'd like to turn the conference over to your host for today, Mr. Shaun McAlmont, President and CEO.

Thanks, Steve. Good morning, everyone, and welcome to the call. Before I start my prepared remarks, I wanted to remind you all of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995, which reads, statements in this presentation concerning Lincoln Educational Services Corporation's future prospects are forward-looking statements that involve risks and uncertainties. There can be no assurance that future results will be achieved and actual results may differ materially from forecasts, estimates and summary information contained in this presentation. Important factors that could cause actual results to differ materially are included, but not limited to those listed in the Lincoln Educational Services Corporation's annual report on Form 10-K for the year-ended December 31, 2009 and other periodic reports filed with the SEC. All forward-looking statements are qualified in their entirety by this cautionary statement.

With that read let me just say that joining me today is Cesar Riberio, our Chief Financial Officer. I'll provide an overview of our operations and Cesar will review our fourth quarter and year highlights and he'll also provide our outlook for 2011 and we'll then take your questions. As an overview, we're pleased to report very strong 2010 operating results. Our financial accomplishments were achieved as our institutions also managed through a year of political scrutiny, regulatory change, and a broad public battle over the impact of our industry on the lives of many Americans. Since 1946 Lincoln has been offering skilled training to young adults and those returning to the workforce.

I highlight the roots of the Company to let you know that our expertise has been honed over 65 years. Our model is straightforward and allows us the flexibility to adjust while still serving the need for training around the country. For the majority of our history, we've managed an open admissions policy where our programs have made a positive socioeconomic difference for thousands of students, This approach is being challenged both current and proposed Department of Education regulations. However, our confidence as a company lies in our ability to serve students and relies on the fact that demand will always exist for vocational and technical training in areas like nursing, medical office, automotive and the skilled trades.

In regards to our demographics, we're current -- we're confident that we offer vocational training in ways that give students in any community an opportunity to benefit their lives. We know the traditional education is not for everyone and there are outcome risks associated with students that haven't gone the traditional route. Not every student comes to Lincoln with a background and 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 53%, placement rate of 75% and default rate of 14% reflects the population we serve and presents an opportunity for improvement in all three measures in this new environment.

A large percentage of our students qualify for Pell funds and other types of Title IV aid based on lower-than-average income. This reality reflects their life circumstances, which categorize many of them as higher risk students. We've defined our highest risk student demographic as the ability to benefit student, or ATB. The higher the risk the more likely a student is to interrupt their study, which leads to higher default rates. Our goal in working with this often under-served population lies squarely in improving our earlier mentioned graduation placement and retainment rates for these students.

It was exactly a year ago in February 2010 that we received our draft default rate, which increased and ultimately showed us that we had to address issues relating to our repayment rates immediately in order to make long-term impact. We found that some ATB students struggled in our programs, which also affected their repayment, which ultimately led to revisions in our student acceptance process, which changed our business model. Not all students will take advantage of the training, put forth a full effort, or repay their debt to the government, but most well and they'll go on, in many cases, to do great things as we've seen the accomplishments of those we recognized in our alumni hall of fame.

We know there are not many traditional academic options for students which accomplish what we do in terms of vocational training. Many of these trades are not seen as glamorous. With this said, there are very few that can deliver this type of training as well as we do. While the current environment is causing us to retrench to some degree, in the long run we feel our institutions will continue to stand as the model for vocational and technical training in this country and internationally.

In regards to our fourth-quarter and year performance, we achieved significant milestones, including record revenue, operating income, and earnings per share. The efforts of our 4,500 staff and faculty were tremendous during a year filled with many challenges and uncertainties. Education has always been a regulated industry and our record shows that we've operated well under the Department of Education, state, and accrediting guidelines. We believe the Department's rulemaking process focuses on successful student outcomes, however regardless of the demographics served. While we agree with the Department's goal of ensuring all students succeed, the process itself created a great deal of uncertainty throughout the year and despite this uncertainty, we achieved impressive results.

The continued uncertainty in the rulemaking process, coupled with the Department's current default in 9010 regulations resulted in our decision to adjust our business model by limiting enrollment for the first time in the Company's history. These adjustments resulted in us denying enrollment to approximately 1,500 students in 2010 and contributed to the 0.9% year-over-year decline in student starts. As we continue to strive to improve student outcomes, we expect continued pressure on starts during 2011, which will produce short-term negative leverage in our business.

Now regarding our new student admissions, new student starts trended downward in the fourth quarter by 8.4%, in a similar fashion to the third quarter, as our efforts to manage our highest-risk students continued to take effect. In addition, we believe that the prolonged economic downturn has had an impact on our market and caused students and parents to hesitate in taking on debt and therefore, contributed to the decline in starts. Based on what we're seeing today, we believe that these consumer confidence issues will continue to impact our new student starts in 2011.

Regarding our high school recruitment program, the high school team recruited 6,800 new high school students to our schools in 2010, which was 3.4% off the prior year's performance, with the primary cause of this softness being economic issues for parents who were approved for the plus parental financing, but chose not to take the loan on behalf of their children. In January, we made slight revisions to our admissions process that required a more robust assessment of the a student's readiness for school through a strengthened career assessment process. Generally speaking, our admissions process is designed to provide an immediate response to those who inquire about one of our programs. For students who contact us about their education, we respond immediately and we continue to work closely with them throughout the enrollment process. It's a time-intensive process that requires motivation on the part of our admissions representatives and managers. We demand strict compliance with all applicable regulations in our process and have not hesitated in terminating employees who do not adhere to our guidelines.

Regarding incentive compensation changes, we're poised to make changes to the compensation of our admissions personnel, which will shift their compensation from variable to a fixed rate. We feel that our methodology will be fair and result in competitive salaries for representatives moving forward. Needless to say, questions remain regarding the broad application of these rules and so, we're considering a more conservative approach, which will include any employee working with students, including those in our corporate office who oversee areas covered by these rules. These changes may temporarily impact productivity.

In regards to market demand, based on what we are experiencing, we feel there's continued interest in our programs as our overall inquiries increased in 2010 by 15% over prior year. Embedded within these inquiries, however, are the higher-risk ATB students who fail to meet our more selective entrance requirements, in addition to the economically challenged prospective students who enroll but do not start. This has caused a decrease in the Company's start rate. We feel that as consumer sentiment shifts positively start rate will return to more normal levels. Our advertising cost metrics reflect some of the strain we're seeing on new student starts rates. In particular, our marketing and sales costs per start increased to $2,723 versus $2,336 prior year fourth quarter, representing a 16.5% increase.

In regards to our forecast for 2011 new starts, based on what we know today and considering the impact of our growth initiatives, we feel that the brunt of our year-over-year decline will be felt in the first half of the year. There are four major impacts on our first quarter starts against prior year. First, we're measuring against tough comps, as our first quarter 2010 reflected 19% growth. Secondly, we implemented our ATB reduction efforts about mid-March last year so that there was not much effect on ATB in the first quarter versus feeling the full effect of those efforts in this current quarter. Third, we didn't experience the same level of student affordability issues at this time last year. And finally, admissions representatives acclimating to the new admissions processes saw some hindered productivity versus last year first quarter. All of this said, multiple severe weather closures across many of our markets did not help.

So, in summary, we feel that the second half of the year will produce more moderate declines, as we complete the integration of processes and compensation changes, measure against more reasonable comps, and begin to feel the impact of growth initiatives, including new campuses and online. This bridges us from an expected 30% plus down first quarter to a 6% to 10% decline in new starts for the full year 2011.

Now shifting to outcomes where we have a critical focus. During 2011, we will focus on improving four outcome areas, including student persistence, job placement, loan repayment, and cash payments. And as a result, we've aligned our 2011 incentive plans for eligible employees to reflect a greater emphasis on these outcomes. In regards to persistence, we believe that we will see improvements in student retention based on our efforts. We're seeing signs of improved early persistence within the first zero to the 90 days in our schools, where we've made the earliest changes to ATB student admissions. Furthermore, in an attempt to improve communication to existing students, we've begun tapping into the expertise and resources of our marketing department to develop general communications, financial literacy, and career preparation tools for our students. We feel that strengthening this lifecycle approach to student communication will help us manage students toward their career goals.

In relation to job placement, managing services to students has always been a priority for our institutions. We begin the process of transforming someone's life from day one of the time with us until the day they're interviewing for a job. We invested specifically in our career services and job placement services in 2009 and early 2010, as we battle headwinds caused by a prolonged economic downturn. Year-to-date we're running slightly off last year's 75% pace; however, it's our objective to match or surpass last year's performance over the next four months, and so our efforts are focused and include a close assessment of our approach and leadership across the Company in this critical area.

In regards to cohort default, we received our draft rates which came in higher than our internal tracking indicated. We feel that there are numerous issues within the data in relation to the government's put loan, as already identified by others in our sector. Despite the put loan issue we're managing a number of actions focused on both short and long-term impact. We added local staff to high cohort default rate schools and replaced our third-party management company this year. Ultimately, our improved graduation rate will be the long-term solution in this area. Looking at the 9010 issue, as I mentioned last quarter, we're managing 9010 in a number of ways, including adjustments to program structure and the related Title IV debt profiles, increasing opportunity to work with local agencies and their student referrals, and increasing student cash collection. In summary, we're confident in what we do as a company and the thousands of graduate success stories we learn about continually strengthens that confidence.

As we look over the year, we will continue to manage our expectations as we've always done and our expenses; however, not to the detriment of our long-term goals to grow and improve student performance. And so, we do see some margin contraction, as we mentioned in our third-quarter call. In addition, we'll continue to build the foundation of this company by relocating facilities that we feel will benefit our long-term plan. We'll add student services and staffing in places with the greatest need to assist students outside of the classroom. We'll build our online programs, and even though the pace is slowed, online continues to develop and grow at a controlled pace. We'll seek to start up locations and acquisition opportunities using a filter based on the quality metrics we're aspiring to. And finally, we're in the process of modifying programs to help us manage and prepare for longer 9010 issues, as I mentioned earlier.

In 2011, the shape and face of our company might change slightly; however, the pride, effort and focus of our staff and faculty will not. We feel that shareholder value is tied to employee value, which is ultimately tied to student value. This critical relationship chain will be strengthened by the many efforts we're making.In regards to growth-related actions, we'll continue to manage our initiatives focused on the new campus locations, expansion, and online programs. We're on track to open three new Lincoln campuses over the next three months in Columbus, Cleveland, and Hartford. 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. We've added 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.

We continue to proceed with our plans to develop and launch online degree programs. We're currently operating under both national and regional accreditation with the ultimate goal of offering only fully regionally accredited programs in our online division. We expect the online population to approach 1,400 students or 3,500 course takers by year end. In conclusion, despite the uncertainty created by the current regulatory environment we believe that we're making the right adjustments to our approach, which will keep us positioned to deliver our strong value proposition to students through a rapid approach and path to opportunity and thus continue to deliver strong financial results for our shareholders. Now let me turn the call over to Cesar for a financial review of 2010 and our outlook for the first quarter and all of 2011. Cesar?

Thank you, Shaun. Good morning, everyone.As we disclosed early this morning in our press release, and as Shaun stated in his prepared remarks, we are very pleased with our fourth quarter and 2010 full year results. Our fourth quarter results were positively impacted by entering the quarter with approximately 1,600 more students than we had in the fourth quarter of 2009. This larger carrier in population drove our 6.1% revenue growth. Other key highlights of the fourth quarter included our operating margin was essentially flat at 25.2% for the fourth quarter of 2010. If you exclude the impact of the goodwill impairment charge, our operating margin improved 250 basis points to 28.9% from 25.4% for the fourth quarter of 2009. Earnings per diluted share grew 26.8% to $1.04 from $0.82 from the fourth quarter of 2009, as we've benefited from increased capacity utilization and the leverage inherent in our business model.

We generated free cash flow of $37.5 million, up from the $15.2 million during the fourth quarter of 2009. During the quarter we paid a $0.25 quarterly dividend on December 31, 2010, and we finished the year with $66 million in cash and cash equivalents and $20 million of borrowings outstanding on our credit agreement. Bad debt for the quarter was 4.7% of revenue as compared to 7% for the fourth quarter of 2009. The improvement in our bad debt reflects our continuing effort to improve financial aid process through centralized administration.

Now turning to our full year results, revenues increased by $87 million or 15.7%; $639.5 million for 2010 from $552.5 million in 2009. Revenues were positively impacted during the year by us entering the year with approximately 7,600 more students than we had in January of 2009. This led to a 13.4% increase in average population as compared to 2009. Average revenue per student increased 2.1% for the year-ended December 31, 2010 from the year-ended December 31, 2009, primarily due to tuition increases, which averaged 3% during the year. Operating income margin for the year=ended December 31, 2010 increased in 19.2% from 16% for the year-ended December 31, 2009. The improvement in operating income was related to increase in our average student population, which resulted in capacity utilization of 65% at December 31, 2010 versus 61% at December 31, 2009. The increase in capacity utilization produced 80 basis point of leverage in educational services and facilities expenses, and 340 basis points of leverage in selling, general, and administrative expenses during the year.

Cost per start, as Shaun mentioned, increased 16.5% for 2010 to $2,723 from $2,336 in 2009. Cost per starts were negatively impacted during the year by our decision to limit the number of ATB students we would enroll in our schools. Bad debt expense for the year was 6.1% of revenue as compared to 6.7% for 2009. This decrease in bad debt, as previously mentioned, was primarily due to improved cash collections resulting from our continuing efforts to centralize the back office administration of our financial aid department. We expect that the current economic will continue into 2011, which we believe will lead to more students defaulting. As a result, we are forecasting that our bad debt expense for 2011 will deteriorate slightly in a range from 6.3% to 6.7% of revenues. All of the above factors resulted in diluted EPS for 2010 increasing to $2.79 from $1.82 in 2009.

Diluted EPS for the year includes a goodwill impairment charge at three of our reporting units of $0.25 per share. We generated cash flow from operations of $114.5 million for 2010, up from $73.2 million in 2009. Cash flow from operations for 2010 were negatively impacted by increased tax payments of $14 million. We finished the year with $66 million in cash and cash equivalents and $20 million of borrowings outstanding on our credit agreement.

Now to accounts receivable, at December 31, 2010 were $40.5 million as compared to $42.9 million at December 31, 2009. This decrease in net accounts receivable is primarily due to the improved cash collections previously mentioned. Net property and equipment accrued to $172.4 million at December 31, 2010, as compared to $149.3 million at December 31, 2009. Capital expenditures for 2011 include certain expenditures that are being carried forward from 2010 and are expected to range between 6% and 8% of revenue.

Now turning to our loan program, as of December 31, 2010, our loan commitments to our students continues to be very manageable and have not grown in line with our enrollment growth. Loan commitments to our students, net of interest that would be due in the loans to maturity, as of December 31, 2010 were $15.4 million as compared to loan commitments of $20.5 million at December 31, 2009. For 2011 we expect that these loan commitments will increase by $5 million to $10 million, as we intend to increase the financing gaps for many of programs to ensure our continued compliance with the 9010 ratios. As of December 31, 2010 we had capital lease obligations of $27 million, which were assumed in connection with our acquisition of the Barren groups of schools. We finished the year with shareholders equity at $222.5 million up from $218.6 million at December 31, 2009.Shareholders equity at December 31, 2010 reflects our repurchase of $50.1 million of our common stock and $22.2 million of dividends declared.

Now I'll turn to our outlook. I'll finish my prepared remarks by providing our current outlook for the year 2011 and the first quarter. Our guidance is based on our current expectations and reflects the impact of certain adjustments we made to our business in order to ensure we are prepared to meet what we believe are the Department of Education's focus on improving student outcomes. As a result, we expect revenue of $600 million to $615 million for the year, representing a decrease of approximately 4% to 6% over 2010. We expect diluted EPS of $1.65 to $2.00 a share, representing a decrease of approximately 28% to 40% over 2010. Diluted EPS for 2011 includes $0.28 per share of investments we are making in online, the three start-up campuses that Shaun referred to, and the relocation of our Denver campus to a new state-of-the-art facility. The decrease in expected student starts of 5% to 10% over 2010. Student starts are expected to stabilize during the last half of the year, as we expect more favorable comparisons and as we begin to benefit from the initiatives discussed earlier.

For the first quarter of 2011, we expect revenues of $142 million to $146 million, representing a decrease of approximately 5.5% over the first quarter of 2010, and diluted EPS of $0.34 to $0.40 a share, representing a decrease of approximately 33% over the first quarter of 2010. Guidance for the first quarter of 2011 is based on an expected decrease in students starts of 30% to 36% over the same period in 2010, which reflects the most challenging quarter comparison for the year. And finally, the board of directors has set the record obtainment dates for the dividend for the first quarter of 2011. The cash dividend of $0.25 per share will be payable on March 31, 2011 to shareholders of record on March 15, 2011. In conclusion, we are pleased to have delivered strong financial results for 2010. We will continue to balance our growth objectives and our responsibility to deliver quality education and to enhance student outcomes. And now we'll open the call to questions. And with that said, I'd like to turn the call back to the operator. Steve?

Certainly, sir.(Operator Instructions)And your first question comes from the Gary Bisbee with Barclays Capital.

Hi, guys, this is [Zach Thatum] for Gary. Question about countercyclicality. As the near-term focus is on the regulatory issues, how are you thinking about growing the business as the job market improves?

Zach, it's a good question and it's one that we think about almost every day. And I'll just say, as we said in our prepared remarks we will always have growth initiatives in play as a Company and so the three new campuses that we mentioned earlier and the expansion of Denver and online are positioned to contribute to our new student start growth in the last half of the year and in 2012. I would say that you should expect we'll always looking for acquisitions that makes sense for the Company and other startup opportunities. The only thing I'll say in relation to some of those growth-related initiatives is that everything is going to be put through a new filter, obviously, as we're looking at improve student outcomes for the Company. So with that said, we're always going to have a focus on growth opportunity and that that's how we'll manage through whatever real or perceived countercyclicality affects the sector.

Thanks a lot. And as a quick follow up, you've got $0.28 in investments next year, are there any cost initiatives in place to offset the increase in investments?

I'll let Cesar take that question.

Well, I think our guidance already reflects that. I think as we -- we always manage our expenses so we don't usually take charges because we manage them throughout the year, so I think what you're seeing in the guidance that we provided you, the $1.65 to $2.00, includes the impact of those $0.28. And again, these are startup campuses. Traditionally they suffer losses in the first 12 to18 months, or 24 months. So these, again, are investments that we're making today to make sure that we continue to grow this Company for the long-term.

Okay, thanks a lot, guys.

Thanks.

And your next question comes from the line of Jeff Silber with BMO Capital Markets.

Thank you so much. Just a question, also, about the guidance. I know you've made changes to potentially comply with the new government regulations, but does your guidance include any potential impact for gainful employment, let's assume gainful employment goes through as currently proposed?

I'll just say generally, Jeff, that as we look at our operations there were changes that we made that were related to our cohort default rates that we received last February. We thought that those changes would not only benefit long-term cohort default but what also have related benefit for other gainful employment rules. So when it's all said and done we're trying to improve our student outcomes, which will impact all of the departments areas of focus positively over the long term. Cesar?

Yes, I would agree. Some of the changes that we're looking at making will be designed to reduce student debt levels to some extent, which will have a positive impact on gainful employment metrics, assuming they come out as they're proposed. However, at this point it's still a guess but we do believe that our guidance includes the steps that we've taken to prepare ourselves for the proposed regulations.

But the bottom line is we don't know what they are and we can't really even speculate, but to the extent we can we're making the steps, as Cesar described, to better our outcomes.

Okay, that's what I understand and I appreciate that. You also mentioned a pretty sizeable dividend for the Company. Considering, unfortunately, the deterioration in starts and the potential impact on margin and cash flow, how confident that you're going to be able to make those dividend payments?

Well, Jeff, the board declared $1 dividend in the fourth quarter to be paid quarterly, so we're very confident in making those dividends. Obviously, when the board declared the dividend they took a look at the financial strength of this Company. We generated $150 million in cash flow from operations this year, we finished the year with $66 million in cash, so we have a strong balance sheet with literally zero debt. So we're very comfortable that at $1.65 to $2.00 a share the cash flows that we will generate will be more than sufficient to be able to pay any dividends that the board chooses to declare.

Okay, great, and then just one more follow up on that guidance. What kind of tax rate and depreciation and amortization should we put into our models?

Tax rate is 40% and I believe depreciation continues to run at about 5% or so.

Okay, great. All right, I'll get back in the queue. Thanks so much.

Thanks, Jeff.

And your next question comes from the line of David Chu with Banc of America-Merrill Lynch.

Thank you, good morning.

Good morning.

So 2011 you guys mentioned that the charge -- sorry, the $0.28 for the three campus openings, the relocation and online, so if I assume about $1 million for each campus opening and relocation suggests about $6 million for the online investment. Just hoping you can provide some more color on this investment, as it seems pretty sizeable?

Well, we're not going to provide colors on the specific losses for investment. However, I will tell you that the relocation of the Denver campus, which is going from 60,000 square-foot facility to $200,000 square -- 200,000 square-foot facility, as well as losses that we incur in startup campuses are more than $1 million per year. In total, the math is we're expecting to have additional losses this year of about $10.5 million pre-tax on the investments that we're making.

Okay. Can you give us a little color on each campus opening, the costs associated with that?

They'll -- they usually average from $1.5 million to $2.2 million as we staff these campuses and start enrolling and recruiting until they break even.

Okay, great, and one follow up. I know 4Q results were significantly better than expectations given a better margin profile and just wanted to see if you can talk a little bit about what accounted for this difference?

Well, a significant difference, obviously, we had forecasted, revenue came in better than we had expected so that contributed to it. Additionally, we did a much better job in our cash collections then we ever believed we would achieve. I think, as you saw, receivables for this year were actually down from receivables at 12/31, 2009 by $2 million on $87 million more of revenue. So we really stepped up our cash collection efforts and I think that resulted in the 4.7% bad debt percentage from 7% last quarter, which was really meaningful to the bottom line.

Okay, thank you very much.

Thank you.

And your next question is from the line of Scott Schneeberger with Oppenheimer.

Thanks, good morning. Could you guys touch a little bit on the changes of going from variable to fixed with regard to compensation? Just take us a little bit deeper with regard to how it is affecting more than just enrollment counselors and the types of switches you made?

Yes. I'll just say as we analyzed how we would look at the new rules, Scott, we thought to ourselves that we wanted to take a more conservative approach, which means that any employee that works directly with a student we feel is a covered employee, which is our internal definition. With that said, all employees that work at campus level will move to a fixed salary. In addition, anybody working with a functional area that's considered covered, whether it's financial aid, admissions or career services, at our corporate level and regional level will also move to a fixed salary. It's as straightforward as that.

Okay, thanks. Shaun, could you update us on the ATB students, what percent of total, is 10% still the target? Any updates with strategy there?

Yes. No, the strategy remains the same. The strategy we laid out last year at this time said that we had a two-part approach to managing ATB students. One was an increased test score, the other was a pre-orientation for the behavioral side to make sure that the students were persistent before they even got into our population. That continues. I will say that overall the two-part process is now effective across our entire Company, as we were rolling it out over the last three quarters. But it continues to do what it's meant to do. I would say right now that the overall population is somewhere around the same as it was in Q4. However, we do see -- we forecast that dropping off over the next three quarters a little more significantly. The goal really is to take the schools that have been well over 10% down to 10% but any schools that were operating below the 10% level prior, we didn't want them to go over their run rate. So ultimately, we see that number going over 10% for the full Company.

Okay, thanks, two more quick ones -- separate ones, and I apologize if I missed it. What type of tuition increase is embedded in the guidance? And then, finally, any updates with regard to contact with the Department of Education on any discussions you may have had or any appearances you may have in the future? Thanks.

Well, I'll take the last one first. We have no scheduled appearances with the Department of Ed. We reach out when we have questions, especially in relation to the new rules. There hasn't been a lot of guidance so we await the dear colleague correspondence that the sector anticipates. But other than that we have nothing scheduled.

Yes, our guidance includes 3% revenue -- tuition increases.

Okay, thanks very much.

(Operator Instructions)Your next question comes from the line of Gordon Lasic with Robert Baird.

Hi, thanks for taking my questions. First, just on starts, we certainly appreciate the commentary on what is driving that in the first quarter, but can you help us segregate by order of magnitude the 30% to 36% decline relative to some of the things you mentioned?

Well, I think that -- one of the reasons we mentioned the four or five contributing factors is that we really aren't going to quantify today just what percentage of each factor affects that start decline. But I will say that between our internal efforts and affordability issues, the percentage impact is probably still the same as we saw last quarter, so somewhere a 60/40 split, 60 being affordability. The other pieces of impact we feel are probably more transitional than anything in shorter term, so first and second quarter we'll see some of those. But as Cesar said, and as I said in my prepared remarks, we feel that those declines will stabilize in the second half and because they'll be positively affected by some of the growth initiatives, as well.

Great, appreciate that.And then just another question on margins, wanted to come back to that a little bit for the year. I think by our math the midpoint of your revenue and EPS guidance implies somewhere around 800-basis points of operating margin retraction. Obviously, you're making the investments in campuses and online, but can you provide a little bit more color on how much contraction you would expect on a gross margins versus SG&A lines? It seems like most of that would be gross margin, is that correct?

That is correct. Obviously, as we right size the Company it takes quite a longer time to on the instruction level so we need to -- as class size gets small it takes a little bit longer for that, so I think we're -- we'll see pressures on the educational services and facilities line items, which will correct itself over time.

Great, and just one more quick one. On free cash flow for 2011, any color there? Should we expect a similar decline relative to net income, or is there something else we --?

Yes, I think you should. Traditionally our cash from ops runs about one-and-a-half times net income so I would continue to expect that same metric.

Great, thank you very much.

Thank you.

At this time there are no further questions in queue. I'd like to turn the call back over to Lincoln Educational Services President and CEO, Mr. Shaun McAlmont.

Thank you, Steve. 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. We remain steadfast in our desire to provide all students with the best education and return on their educational investment. There are proposed regulations that make it difficult to ensure that all students will receive the same opportunity, though. But nevertheless we are confident in our opportunity and ability to successfully adapt to any regulations Department promulgates and while the changes may create some short-term pressure on our revenues and earnings we believe that our long-term strategy and growth plans remain intact.

As we indicated earlier in our remarks the Company is healthy and well positioned to continue to deliver our strong proposition to 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 on our first-quarter results in two months. Thank you and have a good day, everyone.

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