Perdoceo Education Corp (PRDO) 2002 Q1 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone, and welcome to the Career Education Corporation first quarter 2002 earnings conference call. Today's conference is being recorded.

Statements made by CEC or its representatives on this conference call that are not historical facts are forward looking statements that are subject to a variety of risks and uncertainties that could cause CEC's actual results in 2002 and beyond to defer materially from those expressed in any forward looking statements made by or on behalf of CEC.

Such risks and uncertainties are more fully described in CEC's filing with the Securities And Exchange Commission. CEC has no obligation to update its forward looking statements.

At this time, I would like to turn the call over to the Chairman, President and Chief Executive Officer, Mr. John Larson.

Please go ahead, sir.

Good morning, I'm pleased to report on our great first quarter results. Net revenues were up 42 percent. Net income up 90 percent. Our quarterly starts were up 29 percent and the April student population was up 24 percent. Let me share some of the reason our results were so great. First of all and those are people who respond to our marketing message were up 64 percent for the quarter.

Another benefit was the cost per lead was down from last year. Internet, high school and TV were up dramatically. Also the leads that support our four areas of specialized recruiting, out of area, local high school and international all showed large increases. People responded to our marketing message as never before. Our message is very clear. It's very career specific and emphasizes, with a good education, you will prosper in the new economy.

To handle the higher number of leads, we have increased the number of admissions representatives 22 percent in the first quarter. We will adjust the number as needed. Also, our hours of operation are seven days per week with extended hours to meet customer demand in our admissions offices. Starts were up 29 percent. Students buy brand names, when choosing education. Some highlights for the quarter were out of town students were up 50 percent, which showed people will travel long distances for brand name schools in great locations.

We saw large increases with the percentage of international students. Our local markets were up 21 percent. Again, demonstrating student preference for the school of choice in their local markets. Our goal is to be number one on a city, regional or national basis in each market. Another nice situation was, that just proves our strong reputation among high school students with recent high school graduates, in January, we had more than expected number of students starting school.

It shows people are anxious to finish high school and enter college. Another real plus that the, was our show rate. That is enrollment to start. As a percentage, they showed a nice improvement from last year. People want to be in school. Also, we are seeing the benefits of our new customer service program we put into affect last year to improve our show rate.

Our student population was up 24 percent compared to last year at the end of April. This gives us nice visibility for much of our future revenue. Also, our population, which is 95 percent full-time students, allows us to earn at a higher rate and, of course, is a more serious student. which our students who dropped out of school at some point in the past and then returned to school was up 48 percent over last year. Again, people want to be in school.

The new transplanted programs from last year. These are programs that we cross-pollinated from school to school and, certainly, some of the new programs that we started this year had a very positive effect. This year, again as a reminder, we'll be starting as many as 15 new transplanted programs at some of our schools and colleges. Our 100 percent online degree efforts have really paid off.

Marketing and admissions objectives have all been overachieved. In the first quarter, we launched two new offerings, Masters Of Information Technology and MBA. Both were widely received. Our technology and no how is state of the art. We have a system that replicates a campus environment and takes the students through their entire life cycle from enrollment to financial aid through orientation and tech support and then, from course work to career services.

We're working on other degrees for fall 2002 and January in 2003 in Communication and a Masters in Education. Another very important trend is our book future, which are up 32 percent at the end of March, as we compare it to last year. Book futures are students who have enrolled in school, but are waiting to start school sometime at a later date.

We attribute the increase in book futures due to our strong program appeal and the excellent demographic trend with record number of high school graduates, young adults, and older students seeking diplomas, bachelor degrees, associate degrees and masters degrees throughout North America and abroad. The, the economy certainly has helped. The economy has made people even more receptive to just an excellent education.

Our quality shows up in many ways. Students find value in their education and are willing to come up with substantial dollars to fund their education. Our 90, 10 ration, that is the percentage of revenue from title four funds is 60, 40. So, 60 percent comes from title four funds, 40 percent would be cash out of people's pockets. We have one of the very best in the industry. To show students put a value on their education, they're willing to come up with a large part of their education paid in cash.

Our ratio is very typical, by the way, of how many students fund their education at major colleges and universities. Our default rate on a most recent pre-published basis is eight point three percent system-wide and is expected to actually go lower, down from last year. Our students find value in their education and have the ability to pay the student loans fast.

Graduate placement is holding very strong, our traditional 92, 93 percent placement rate. We expect even better trends as the year progresses. Our new school start-up efforts begun last year to expand our brand names in new markets, such as Orlando and Philadelphia, have done very well. In 2002, we will put a new program in Orlando and also in San Jose, California. Just a word on our Pennsylvania Culinary Institute, which we acquired in December of 2001.

PCI has made a nice transition, certainly making us the world's largest culinary group of schools in the world. Revenue is up, is up and leads and other types of P items show very strong progress. This time, I'd like to turn it over to Patrick Pesch.

Good morning. During the first quarter, we had an outstanding financial performance with excellent topline growth driven by continuing strong population growth. We had strong margin improvement, improved working capital management and also a decrease in our effective income tax rate.

The topline growth of 42 percent includes the benefit of acquisition and start-up campuses, but was driven by same school revenue growth of just over 32 percent. Operating margin improvement was two point three percent. This includes point nine percent from the change in accounting for good will amortization, but more importantly, the margin was up one point four percent on a true comparable basis after adjusting for the accounting change.

This improvement was driven by a better leveraging of our fixed cost base due to higher revenue as well as continuing attention to cost control. Not withstanding this improvement, we continue to invest in our infrastructure to insure our readiness for continued strong growth. G and A expenses were up point two percent versus the same period last year.

This reflects increased operational and financial staffing in our divisional management level, reflects increased regulatory compliance staffing in some of our schools and continued investment in information technology to support our growing operation. These increases were partially offset by lower marketing advertising costs at a percentage of revenue. I also indicated that we had decreased or effective tax rate. The rates during 2001 was 45 percent.

The rates which we have applied in the first quarter and expect to use for the remainder of 2001 is 41 percent. Approximately two point two percent of this four percent decrease is attributable to the change in accounting for good will amortization. The remainder is due to various tax saving initiatives which we have undertaken. This reduction is one point five percent greater than our original guidance for the first quarter of this year as well as the full year.

The impact of this one and a half percent change was just over a half a penny on the first quarter results, half penny per share. Our DSOs, our Day Sales Outstanding on accounts receivable has also continued to improve as expected and will continue to improve subject to seasonal fluctuations similar to those that we've experienced in the past. I'd also like to give a little bit of an update on our guidance for the remained of this year.

As indicated in our press release issued last night, we do expect full year 2002 revenue to be approximately 33 to 37 percent above 2001 levels. That will start, the second quarter should be at about 38 to 41 percent growth with reductions in that growth rate throughout the year. The change in the growth rate from the beginning of the year to the end of the year is reflective of a, of a diminishing impact on growth of past acquisitions and new school start-ups on the year-to-year comparisons.

We also expect the operating process to, margin improvement of about one percentage point in the second quarter and approximately a half percentage point in the third and fourth quarters. I should point out that, that margin improvement is on a comparable basis. So, it is in addition to any benefit that we will receive for the change in the accounting for good will. We also expect earnings per share growth between 47 and 52 percent for the full year 2002.

We expect growth for the second quarter to be between 64 and 73 percent in comparison to the prior second quarter, the second quarter in 2001. Again, I point out that this growth does include the effects of the adoption of the new standards for accounting for good will. The impact of that change is approximately two cents per quarter improvement.

I also, as I indicated before, we expect the tax rate for the full year to be approximately 41 percent. We also are affirming our previous guidance on capital expenditures for the year to be approximately 60 million dollars. With that, I'll turn it back over to Jack.

We'll take questions at this time.

Today's question and answer session will be conducted electronically. At this time, if you'd like to ask a question, please press the star key followed the digit one on your touchtone telephone. Once again, if you would like to ask a question at this time, please press star one. We'll go first to with Piper Jeffray.

Hey, guys. Congratulations on the great job in the quarter.

Thank you.

Thank you.

Hey, first question regarding the IT programs that we're hearing a lot of, you know, different talk about IT programs at different schools having some issues in enrollment and what are you seeing in terms of your IT programs?

Well, first of all, we've got a large variety of different types of IT programs. Anywhere from, you know, people working with computers, CC Net, CC LAN to masters degrees in Information Technology. So, I think what we're able to do probably is kind of expand the, the huge numbers of interest and job openings out there and we have found that, that has been something that has done fairly well.

Great. Pat, you also mentioned in marketing and advertising costs, the percentage of revenue coming down in concert, of course, with admission revenue, acceleration. I think, Jack, you mentioned 22 percent growth. Could you give some color as to what's driving the lower M&A costs?

Well, I mean, I mean primarily I think what we're finding is that we're able to buy a cheaper lead, if you will. If you're kind of a having a marketing that goes out through mainly technology areas and we're finding that the more traditional expensive leads is something that we're not having to spend quite as many dollars on this year.

Yeah, I think Jack had indicated a 64 percent increase over the prior in leads. I mean, clearly our spending is up in terms of absolute dollars, but with, you know, with the strong response to our marketing message, we're, we're basically just finding that those dollars are going a little farther.

Great. I'll ask one other question and then I'll turn it over. You know, clearly your operating margin expansion has been superb over the last several years. I'm wondering, on a long-term basis, you know, where you see operating margins.

Well, we've previously indicated and continue to support the notion that we will get a half a point to a point improvement in operating margin, you know, on an annual basis for the foreseeable future. You know, looking at that, you know, over, you know, the next four to six years, you know, an increase of four to six percent is clearly something that we could expect.

It's a level that we have a lot of confidence that we can reach really based on two parameters. One, it's, it would be reaching a level that, that is clearly not unprecedented in our industry. It is also a level then when you look at the maturity of our campuses. Our more mature campuses are significantly more profitable than our less mature ones and really that margin of improvement is really a confidence that our less mature campuses will just, over time, move up to the profitability levels of the older campuses.

Great. Thank you.

We'll take our next question from with Credit .

Hi, guys, it's Greg and Eric.

Hi, how are you?

Good, thanks. Jack, I just want to follow one of Mark's questions. What actual percentage would you say you now attribute to an IT enrollment. And if you could just distinguished between your viscom, which I think is pretty broad and a little bit different than people think in terms of traditional IT compared to your peer IT programs.

Well, I mean, keep in mind that our spread of programs in our schools is about 45 percent visual communication. It's about 20 percent IT. You know, approximately 20 percent for business and then it's around 15, 16 percent for the culinary arts. So, you know, we kind of, you know, have a number of different programs on, you know, obviously that we offer. So, you know, as pure IT programs, that only makes up about 20 percent of our .

OK, I got it. And then, Pat, just on the G and A, which you mentioned was up. Did any of that result from, you know, extending the marketing maybe to higher levels. Just spending more dollars on marketing and advertising or on reps?

No, no, no. As I indicated, I mean, actually as a percentage of revenue, marketing and advertising are down slightly from last year.

OK, I missed that comment. Sorry.

Yeah, so that actually was an offset to some of the other areas that I talked about.

OK, and then, I just, I heard you mention, you know, graduation rates. I wanted to ask about student loan default rates, Jack, if you have an updated data on that.

Yeah, our pre-published right now is eight point three percent and, you know, that's down from about eight point five. Those are pre-published. So, actually those rates could have the possibility of going lower and we clearly expect them to both now and in the future.

OK, just two more quick ones. With the enrollment growth certainly coming down to a more normalized levels, we, you know, as you track as an acquisition. Where, where would you guys envision, you know, pre any future acquisitions sort of it leveling off. Obviously, you had the same school that was, was strong at 21 percent. I just kind of want to get your thoughts, you know, over the next year where you think things could settle up.

You know, I think on of the reasons, Greg, we've always provided information on a same school basis was really to allow people to kind of differentiate between the growth that we were receiving from acquisition and that was organic growth or same school growth. You know, the number that we put out on population increase was about 21 percent.

The revenue growth we talked about on a same school basis was just over 32. If you look at the next few quarters, well maybe I've got to take a step out a little bit. The long-term guidance that we provided in terms of same school growth has been in the 20 percent plus notion with about five to six percent of that being from price increase and in a mid-teens growth in terms of population increase.

The difference between that long-term growth and what we're experiencing today is, you know, it's a strong market. We're doing extremely well and our near term guidance really suggests that we'll continue to perform closer to current levels than that long-term guidance. Implicit in any of the guidance is kind of trending over time to that long-term growth guidance that we provided.

OK, that's helpful. Final question, just can you give us an update of how, EduTrek is performing in general.

Yes, I mean, EduTrek is doing, you know, exceedingly well. It certainly has, you know, starting out over the last year, certainly beaten all of our expectations. And as we started this year, it certainly continues. Seeing an increase in leads, enrollments, starts, all the key item, you know, indicators. Revenue is up dramatically and the bottom line is up dramatically.

Thanks a lot, guys. Nice quarter.

Thank you.

We'll take our next question from with .

Hi, good morning. I understand you don't get the enrollments by, specifically, by programmer or school, but I was hoping maybe you could just give us a little granularity in terms of where you're seeing strength, in particular, by geography or by program or by academic institutions to help us better understand the mix of the business.

Well, I mean, keep in mind that, you know, one of the things that we do and what gives us kind of, you know, I mean, an advantage out there is that we do have a lot of different platforms. You know, we, we certainly appeal to men and women equally. Our, our split is 50, 50. You know, when you look at the variety of programs that are offered out there, you know, throughout the country, you know, about 35 percent of our students do come from outside the area.

So, I think, you know, that gives us an advantage to have people that we can bring in from other locations and places. And, you know, so I guess, you know, overall, we're very pleased with this first quarter. As I said, we found that, you know, our show rate was better. That we found that we got more students from out of town that were willing to move long distances. Our number of international students, you know, increased.

And, you know when you look at all the three, the four areas that we basically measure, you know, that's the out of town students, the local student, the high school student and international student. You know, all of those areas were up pretty dramatically from where they were a year ago.

And Peter, you, you know, we have provided information periodically on a historical basis relative to the break down of our student count by the, you know, within the four major curriculum areas that we offer. And if you look at that information over time, you'll see that the strongest growers have been culinary and visual communication, but that, you know, that information is available historically.

Right. I'm, I was getting to more specifically right now. What's driving and I think what I hear from Jack is that he's saying that it's a pretty broad base and, you know, he's not identifying particular geographies or programs that are driving the enrollment growth.

Yeah, yeah, one of the things that we look at, you know, and I think it's a real key to, you know, the health of any educational organization. Is you've got to be able to generate large numbers of inexpensive leads that are pretty well qualified to start school. And I think that we're very pleased with where we are with that, you know, this year.

And I think that's been probably the main driver that really has put us in a nice situation. Not only in the first quarter, but as you look at the book futures. That we are in a very nice position as we head into the rest of the year.

Right, right. One other follow up. Do you see any evidence, Jack, that the local not for profits are getting any smarter from a competitive standpoint?

No, I mean, they've always been out there. Obviously, they have a large part of the market share, but you know, we've grown dramatically over the last seven or eight years and I think I guess I just would say that, you know, we have taken that primarily from the, you know, the public two and four year colleges.

So, you know, they have kind of a different mission I guess than what kind of college and schools and universities, you know, such as our do. I think that the market kind of speaks with her feet and I think that's why we're, we're growing and probably a lot of them have leveled off.

OK, this is the really the last question. The, some of the players out there have been a little more aggressive this year from a pricing perspective. It looks like you're being pretty consistent. Am I reading that right or might you be taking advantage of, perhaps, an opportunity here to be slightly more aggressive from a pricing perspective?

Yeah, from a pricing standpoint, I mean, we really evaluate pricing market by market, program by program. And absolutely where we see there's an opportunity to increase prices above, you know, kind of a standard five or six percent, we absolutely will, you know, take advantage of that opportunity. So, selectively, we're, we're doing that where it makes sense.

Great. Thank you.

Thank you.

We'll take our next question from with William Blair.

Good morning, gentlemen. Jack, I wonder if you could give us an update on your reporting structure actually. How many regional managers or regional teams do you have now and is that still the main layer that you have on a, management layer between the school presidents and I guess Jake.

Right. We really boosted up our overall infrastructure starting, you know, last year in the early fall. And that was to really be able to take advantage of some of the unique platforms that basically we have out there. Where we've got six divisions. There's our culinary division, which is our world famous LCB Schools or the Le Cordon Bleu Program number one in the world.

And also, with the gifts colleges or gift schools the most, you know, widely recognized brand name out there. Our international academy top design schools, that's another division. Our university division which is AIU or American Intercontinental University, you know, gives us kind of a base in the US and abroad. Again, a very specialized area senior colleges.

Our college division, which are unique colleges and schools with long histories and great, you know, types of reputations. Then, certainly our online division, and that really serves the needs of students any time, any place, anywhere and that's a really growing market. So, what we've done is there's divisional teams that really have the day to day oversight over each one of those areas of opportunity.

And we've been very pleased with the performance of what they've done to handle that. We've also have increased our, our overall corporate staff where, you know, our management team here to really have the needed oversight and to help implement the various strategies.

Great. Maybe if I could, one more question. You mentioned with replacement rates that remain consistent in the low 90s and that you think that things could even get better this year. Is there, are you basing that on anything that you were doing internally or is that more based on the expected labor market recovery that we're maybe starting to see here.

You know, it's really in both areas. We, we've expanded our operations or our people at the local school level to help with placement efforts. We've established some things to really help them, which is like a, a national Web page. So, we can be on an online basis to let employers know the graduates. You know, that has been very successful in helping students to locate employment.

And another advantage that we find that we have out there because of the large numbers of outside students that are coming into our schools from out of the area, that we're able then to export those students, you know, kind of back from where they came from or other areas. And also, we just expect, as the year goes on, that, that usually the employment market heats up and there's more people hired.

OK, great, maybe one more here. Could you just give us any sort of an update on the Save Our Students retention initiative that you had on. I'm jumping off the phone now.

Right, OK, very good. Yes, you know, we started last year a new customer service program, SOS. And it was really designed to help with the large volume of business that comes into our schools. People that enroll that are waiting to start school as we find they have got special needs. They need help with financial aid, housing, kind of just getting through maybe the, the butterflies of starting college or school.

And by having special people at each one of our locations that are there to serve them, we have found that in the last year, we've really been able to identify some very positive areas of opportunity and have been very pleased both in the fall as well as here with our first quarter and a fairly dramatic improvement in getting more, more students to start school as a percentage.

So, this gives us tremendous leverage because, at the end of the day once you've enrolled a student and they're waiting to start school, you know, the more students obviously that you get to start, the higher the revenue is going to be. So, so in my opinion, that's been very, very positive.

We'll take our next question from with Bank Of America Secured.

Congratulations, guys, just a superb quarter.

Yeah, thanks.

The first question, Jack, you said a minute ago or a few minutes ago actually that the show rate was a nice improvement from last year. Can you elaborate at all? Maybe quantify it a bit or if you're not ready to.

Well, we traditionally haven't, you know, haven't released those, but let me just say this. That it's a meaningful number and, you know, for every percentage that you have a positive show rate. What we find is that, you know, you're able to leverage that more. Your cost per start obviously goes down very dramatically and you have a chance to get a lot more, you know, revenue.

So, what we're finding out there just kind of, just specifically that people are anxious to start school. That people are ready to start school who never before. Maybe they have fewer choices out there. Maybe they're much more in tuned to what the economy is doing. And I just think, in general, that we seem to be very successful marketing to a lot of different groups and, you know, in much larger numbers than what we've seen in the past. They want to start school.

OK, and then with regards to the book futures, I, what I believe that, that number is, there's some seasonality in it, but my understanding is that that's a student that intends to start within the next 12 months. Has there been any shift year to year in terms of how that number may be front or back loaded with regards to the commitments of those students?

Well, you know, I mean, I think that, you know, students have certain needs, you know, prior to starting school, but I guess I, I, I will say this. It has been a predictable number. You know, we got a lot of history and understanding what that, you know, what that is, is going to be. I would say what we're seeing kind of this year that we probably have not seen in maybe some prior years is a very strong type of indication that students are trying to make their decision earlier.

And, you know, therefore I think there is a stronger type of commitment there. You know, certainly, there is the commitment that we get up front in terms of registration fees and, you know, other types of fees and, you know, students seem to be very willing to pay those and they're ready, willing and able to start school.

And, Howard, just, you know, just in terms of the financial guidance we provide, we certainly take into account the historical trends and the seasonality of those numbers, as well as more recent trends. And, you know, we kind of make those into numbers. You know, we will, as I've indicated before, you know, we'll always keep a conservative slant to our forward looking guidance. And that's, you know, that area is one that we look at in a somewhat conservative fashion.

OK and in terms of the, I think you said 15 programs that we transplanted in '02. Can you elaborate on that a bit in terms of the 15, the types of programs?

Yeah, they'll be, some will be things like the culinary arts area. You know, some will be and, you know, of course a lot in the visual communication and IT areas and some of the business areas. So, I mean, if it's as diverse as some of our programs like criminal justice and, but mainly it will be in viscom, IT and the culinary arts.

And, and Pat, with regards to the explanation on the same store revenue growth that was up 32 percent and guidance is more in the 20 range or a little on the lower 20s. Can you just offer an example of a school, perhaps, where there is a change underway and where the same store revenue is in the high 20s, but it's on its way to 20. In terms of that difference being driven by marking to market an existing program or is it the introduction of a new program or is it an equal mix between those two variables.

No, I, to be honest, I would say it's really not those factors that's driving it. I would say they're, you know, we have continued, you know, throughout our history as a public company in the 30 plus percent, you know, year over year revenue growth on a same school basis. The element in there in terms of the longer term growth being at a less substantial level is an element to conservatism

It's an element of, you know, the future is less predictable than the past. You know, when we look at our current performance, I cannot lay out any particular reasons as to why we couldn't continue to perform at these levels for the foreseeable future.

OK, and just he last question. With regards to the out of town growth, is there a type of program that perhaps is drawing more from out of town. Is it the culinary programs? Is it a brand like the Cordon Bleu that has greater success in drawing out of town students?

Yeah, there's two areas that we have found, you know, from the past that mainly draw out of town students. It's the visual communications program and it's the culinary arts programs. And, now, certainly that they do come in other areas too like our, but those are the ones that have the strongest growth from out of town.

Right and I'm sorry. Last question, Pat. in the quarter.

in the quarter was approximately 14 million dollars.

Right. Again, congratulations, guys.

Thank you.

We'll go next to with Robinson Humphery.

I offer my congratulations as well. First question, you mentioned online masters in Education I believe. If you could talk a little bit about that, the development of that program and the opportunity that exists there.

Sure, I mean, we could find a lot of, you know, market research looking at, you know, various areas of opportunity. And, of course, our online division, you know, really gets it roots from American Intercontinental University, which already has, you know, an MBA program and already has the Masters Of Information Technology. So, we're really, you know, taking it from, you know, one of brick and mortar schools and putting it on an online basis.

Certainly, using the very latest in technology. I think everybody would be very impressed, you know, with it. And, but as we've gone forward and we've looked at other areas of opportunity, you know, certainly again we're leaders in the visual communications area and, you know, some of the next programs that we put on an online basis. There's a huge demand out there for it and, also, you know, looking at the Masters Of Education is also something that, you know, if a very growing area.

OK, with respect to new campuses, I was wondering if you could give maybe a little bit more color with the ones that opened last year. As well as an update on maybe the opening for this year and how that's trending so far with expectations. Maybe even potential openings for the following year.

Let's address the first part of that in terms of last year's campus openings. You know, population from our two campuses that opened last year is in excess of 700 students. You know, that is, you know, very consistent with our plans and expectations. A little better than what our expectations would have been for those and we would expect those campuses to continue to grow at a very rapid rate over the next couple of years.

With respect to our initiatives for this year, last year both of those campuses had their first start in April. This year, we have a culinary school that is opening in Orlando. The first student starts will be in July. We are recruiting, actively recruiting, students for that class now. That is going extremely well.

We are quite pleased with the activity, the enrollment activity there. I'm not sure what else to say about that, but just beating our expectations. Then, the other school that we would opening would be a Brooks College branch in San Jose. The original Brooks College location is in Long Beach, California.

You know, we are enrolling students for that as well, but that would be for a late fall start. So, it's a little early on in the process, but so far, we're happy with the leap flow in the activity related to that initiative as well.

One final question. You made some expansions last year. I know I think that Brooks Institute Of Photography in Santa Barbara, Ventura. Can you talk a little bit about any expansion plans for 2002?

We, I mean, last year we basically opened a couple satellite type locations and I guess the difference between what we call a start up and a satellite. The satellite would basically be in, you know, relatively close geographic proximity and would be under some common management with the base school. We started a satellite that you mentioned, Brooks Institute Of Photography. We opened a satellite location in Ventura and that's going extremely well at this point.

We also opened satellite off of our Brown College, formerly Brown Institute, in the Minneapolis area. That also is doing well. We're getting the candidates desired results there. We're basically increasing capacity, broadening our reach within a general market and while essentially keeping control over the level of cost invested in the expansion efforts.

We would expect that we would probably do a couple of satellites, you know, later in this year and early into next year. Probably, you know, top on our list now would be the AIU campuses.

OK, great. Thanks a lot and, again, congratulations on a great quarter.

Thank you.

We'll go next to with Legg Mason.

Thank you. Good morning, everybody. John, my question about the student pipeline, if you will. The leave flow was a huge number it seemed in the first quarter and I'm wondering, if there's any reason to believe that conversion ratios should be expected to change here. I guess one might suggest that, with a 22 percent increase in admissions reps, that it might be challenging to keep up with that leave flow, but could you comment on that please?

Well, I mean, there's somewhat of a seasonal flow to, you know, different types of leaves. You have a, you know, marketing mix in there. I mean, you might get, you know, like, a lot, you know a lot of high school leaves in the first four or fives, six months of the year. And, of course, that would slow down over the summer, obviously, with schools being off. But, you know, what we have found historically is a relationship between the numbers of representatives that you have out there, the numbers of leaves that they get and, you know what their productivity is.

And, you know, this is something that we look at very closely. We keep a lot of statistics on it and, as we need to fluctuate that number, we will raise it or we could lower it. But right now, the indication is as the year goes on, we will actually raise it.

OK, any specific measure of retention or improvement in retention? Some of your peers have been talking about students sticking around longer. Can you offer any metrics on that aspect of the business?

Well, certainly, you know, a lot of students are taking longer programs. You know, I think that the other thing that we found is that people have maybe dropped in the past have come back in higher numbers. We kind of have a special program to try and attract them back and that's been very successful this year and I guess I would say, overall, probably we're probably somewhat flat with last year. You know, although last year, we were very pleased with what our overall retention rate was being somewhere in the ballpark around 75, 76 percent.

OK, great. And just by way of clarification, Jack, the placement rate you cited was over what period?

It basically covers a years worth of graduates on a six month lag basis. I mean, we, we.

OK.

We measure six months after graduation

OK, so roughly last fall-ish. Those graduates, correct?

Well, actually, I mean, the data we put out was really through the middle of the summer as of the end of the year.

OK, thanks Pat. And then, one final question, can you give us an update on the AIU online, maybe offering some numbers there.

Yeah, in terms of student count, we're, you know, approximately 450 students. That is a measurement 100 percent online credential seeking students. That does not include any students that are, you know, taking a course or two as part of their overall bricks and mortar presence.

I mean, probably even more dramatically, though, we have found, you know, it takes a while to develop the marketing programs. It takes a while to get things improved. It takes a little while to develop the programs, but now that we're really in full swing. I guess the thing that we have found is that it certainly is beating all of our expectations in terms of leave generation.

The ability to get students started in school in very large numbers and, you know, this is just some of the tip of the iceberg and, you know, this is a very different market. And as we look forward, we kind of stated this publicly, but we really expect that year over year over the next five years that we'll be able to, you know, basically go up 100 percent from prior year. So, you know, this will add dramatically. We're expecting, you know, a minimum of a hundred million dollars in revenue here between now and the end of 2005.

And just to put a little perspective on that in round numbers. I think in October, when we released the October population information, we had on the ballpark of 150 students. So, the rate of growth is clearly significant. And as we've added additional programs, we would expect that to pick up.

And one final question, what is their average course load for those students?

These are basically full-time students.

Great. Thanks, guys, nice quarter.

Thank you.

We'll take our next question from with Barron Capital.

Yeah, hi guys. Congratulations again.

Hey.

Most of the stuff's been answered, but just on the AIU online further. The average program that people are taking now is how long and how much are they paying for that? And is there anyway, Jack, that you care to kind of say. If you have 450 students, our opportunity is whatever per program or anyway to put more context to it than the 100 million dollars in a handful of years.

And also, if you guys can just address the acquisition environment. What's out there? Are you still interested and what kind of schools would they be?

OK. You know, in terms of program length, I mean generally the students that would be coming in would, you know, I would say would have about two academic years to the program. Although, they may be in bachelors programs. They may already have some level of college credit. And so, there's the notion there of completing their, say their bachelors.

So, on average, we'd look at about two years. And, you know, the price for those programs is roughly on par with the AIU tuition. We would expect, in the near term, that we'll actually be charging the premium to our on campus programs.

So, what is that? What is that? Is that 20,000 or so for type program?

You know, in an academic year, you'd be talking 12 to 15 thousand per academic year.

Uh, huh, OK. Uh, huh, OK.

So, in the neighborhood of 25,000 plus and that should be going up.

You know, several programs are actually higher than that. More, more towards 28,000. You know, what we actually find is we earn a little bit more dollars on a per student basis through the online. And, you know, students apparently are willing to pay more for, you know, for the convenience of being able to do it anytime, any place.

OK, great.

You know, I mean, in terms of acquisitions. Once again, you know, very full pipeline out there. We continue to be very picky. I think we've shown a good history of being able to be very judicious, strategic in our, in what we're looking at. But, there's a variety of opportunities out there as there always is and, you know, we have found that that's probably as strong as it's ever been.

Terrific. One other question, if you don't mind. The, I'm surprised how strong the start ups. How many students are in those two start up universities. Over time, how big can those schools be?

You know, those schools certainly have the opportunity to be just as big as, you know, any of our other college and schools. So, and if you kind of look at it this way, they could certainly in the next, you know, three to four years have, you know 1,500 or 2,000 students in them. And you figure that could present an opportunity of anywhere from, you know, maybe 20 to as much as 35 million dollars in revenue.

That's per school?

Yeah.

Amazing. Good going. Thank you.

Thanks.

We'll go next to with First Analysis.

Yeah, good afternoon. Good morning and congratulations. Could you give us a little more sense of what kind of resources are going into AIU online. Just in terms of people marketing and however you care to quantify it. You know, a sense of what kind of resources are going into the growth there.

Sure, I mean, first of all, I mean, it's a very, you know, serious endeavor. We've looked at this for quite some time. We obviously started funding it about a year and a half ago and we're very much in full swing right now. We've been just extremely pleased with, you know, with the gross and the revenue and what's coming out of that.

You know, they've go their own facilities. You know, they probably have upwards of around 40 people that work out of that operation. And certainly, they have all the support that's needed to really, to provide a world class, you know, product.

OK and could you just give us a sense, also, on the square footage to be added this year. I know you talked a little bit about satellite campuses. I know you share a metric from time to time on kind of square footage additions in the existing base.

Well, in terms of the historical information, you kind find kind of historical trends in, you know, in our disclosures in the 10K

Right.

In terms of expectation, you know, for this year, you know, in very round numbers, you should expect about, you know, about a 20 percent increase. I mean, we're, we're basically, you know, kind of keeping pace with the growth in our student population and the growth in our staffing.

Right. OK and last question. Could you just share what kind of the current rate on the debt? I know you don't have a lot, but just what you're paying right now.

Basically our rates and this is kind of, the rates are disclosed in the 10K. Our, we basically pay at prime for live or flux about 75 basis points. And, you know, it's kind of option in terms of borrowing. The live or flux 75 is clearly the lower rate right now, which you know on the high side is in the three percent range right now. It's a little lower than that.

Got it. Thanks a lot.

Thank you.

Mark, one other thing in terms of interest expense, when we're looking at interest expense for the company. That is on our borrowings. Of course, we do have interest related to capital lease, which generally is at fixed rate that we're in place at the time those leases were initiated, which would be, you know, probably in excess of double that rate.

Once again, if you would like to ask a question at this time, please press star one on your touchtone telephone. We'll go next to with J.P. Morgan.

Gentlemen, the question I have is how many of your campuses, of the 42 you have, do you consider to be mature?

I guess if that's kind of driven to the, my comments earlier in terms of margin performance in that. I mean, roughly, you know, roughly I'd say, you know, half of the campuses are probably in the, in kind of the mature range. I'd say there's varying levels of maturity though.

You know, I mean, you really have kind of a continuum from, you know, brand new in the system to, you know, reasonably mature within the system to very mature. You know, if you look at our acquisition history and the timing of them. You got that full range over the last eight years.

You know, Jerry, though, all of the campuses, every year would certainly have strategies that we would challenge them to, you know, get beyond you know 20 percent revenue gross. And even, you know, campuses that have been with the system for, you know, six, seven, eight years, probably even have more capacity to be able to achieve those goals just because there's so many platforms and areas of opportunity.

And, you know, what, what's different and unique about our model, of course, is that it's got the ability to grow because of the different product. You know, going after men and women equally. Taking students from out of town, international. You know, we've got a very aggressive high school market and I think this is one of the areas that has given us the opportunity to, you know, year over year, you know, I mean bring in lots of revenue.

And, you know, the larger a school gets, the better that they usually do with their operating margin.

Oh, I understand and then my only other question will be mercifully with one other question. The online students, are they assigned to a particular campuses for reporting their same store numbers or are they their own division?

All of the online students that we talked about, you know, are basically a stand alone entity. You know, it's the AIU online division. You know, for purposes, so, I mean, I'm not sure how further to answer the question. Other than, it's one entity.

You know, Jerry, one of the ways of looking at it. Like as an example, we have students and some of our brick and mortars that take general education program. You know, we don't look upon them as being, you know, as part of the online division. The online is a, you know, kind of free-standing business that we've broken out that we support. That, you know, is capable of generating the large revenue and large numbers as it goes forward in the future. So, but it's a very separate division.

Thank you.

Great. Thanks.

We'll go next to with Lehman Brothers.

Hi, guys. Again, my congratulations on a good quarter. Two quick questions, if I could. As you continue to expand AIU online and the offerings you have there, can you give us just a quick update on exactly what, how you're marketing this and what your plans are going forward.

I mean, is this something that you can leverage the marketing that you're doing. You know, throughout your network or do you have, you know, a differentiated marketing strategy. And I guess, you know, how and whom are you trying to target?

Yeah, I mean, basically what we're doing is we are certainly leveraging existing operations. You know, we last year, generated over a million leads. You know, this year, we expect to generate about one point five million at some of our brick and mortar schools along. And what we find sometimes is by offering students, you know, maybe the opportunity that, you know, if they can't or don't want a brick and mortar, you know, would they want an online program?

So, that's another way of kind of, you know, leveraging a lead that we've already purchased. At the same time, we have a separate marketing type of campaign because this is a unique market to go out and generate large volumes and very inexpensive leads. And I will say this, the online leads are actually, you know, a bit cheaper than our brick and mortar leads.

And we found that we've been very, very successful in being able to generate these in very large volumes and very inexpensive, you know, costs. So, by kind of leveraging both , I guess we're finding we're almost flying twice as fast.

OK, and then, second question was in terms of your international strategies, you've talked a lot about trying to attract international students to your domestic campuses. Can you give us any sense into what the, you know, medium term outlook might be in terms of expanding internationally. And I guess, two ways.

Number one, through more on the ground campuses and, number two, through actually, you know, would you consider having marketing reps placed overseas to drive leads either towards the online business or your domestic campuses?

Well, I mean, certainly the benefit of online is it's any place, anytime, anywhere and so that's obviously an area of opportunity, but basically, what we look at our international efforts as being people that would come here to North America. And each one of our schools, but several years ago, put on an international representative. There was a whole serious of campaign things that we do to try and, you know, let people that we're around.

But by having so many attractive schools in unique areas, we find there is a large demand for people that do want to come to various US cities and take certain types of programs. And we also do have some representatives that we, it's more on a contract basis, that we contract with on an international basis to send students to various, you know, colleges and schools.

And then, certainly, we have, you know, large numbers of students that would go to our London school from the US actually on the study abroad program because we have many agreements with a lot of different colleges and universities.

OK, great. Thanks a lot.

Thank you.

That concludes today's question and answer session. At this time, I'd like to turn the conference back over to Mr. Larson for any additional or closing comments.

Yeah, just one last comment here as we close out. I mean, we're well positioned now and for the future. Our brand names and program have a very wide appeal in a growing market. Each one of our six divisions are very unique educational platforms and we believe have the potential to achieve 500 million dollars in revenue over the next number of years.

And they are, of course, our culinary division, our division, our international academy, our university division, our college division and the online division. We believe in 2002 we will have the most revenue of any other brick and mortar schools or systems in our industry. And our online division is coming up very, very strong. Thank you very much.

That concludes today's conference call. We thank you for your participation. You may now disconnect.

END