Perdoceo Education Corp (PRDO) 2002 Q2 法說會逐字稿

Good day, and welcome everyone to the Career Education Corporation's second quarter 2002 earnings conference call. This call 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 differ 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 filings with the Securities and Exchange Commission. CEC assumes no obligation to update its forward-looking statements.

At this time I would 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 our second quarter results. Net revenues were up 42 percent, net income up 108 percent, starts up 32 percent, and the July student population up 29 percent. Let me share with you some of the reasons we've had a such a great quarter. First of all, the fundamentals in our business have never been stronger. Our programs appeal to all age groups, leads are abundant, and the cost per lead is lower than expected. Reenters are coming back at record numbers. The show rate on enrollments was better than planned.

Our program mixture is a vast demographic market in IT, bus com, business and the culinary arts. All of our six divisions Gibbs, University, Culinary, College, Academy and Online showed excellent growth. We offer a wide variety of educational outcomes, which the market finds appealing, Master's degrees, Bachelor degrees, Associates and diplomas. Culinary has been a huge demand program, and has performed very well. Placement is strong, and people realize the benefits of a great education. Our placement rate is about 93 percent, and frankly this is up from last year.

Also, let me share with you a little bit more specific information. Our new school startups are doing well from last year. Orlando and Philadelphia, after - are performing very, very excellent when it comes to enrollments, to population and from the financial aspect. Our three main lead categories are also up very dramatically. This would be leads from the Internet, and this has also pushed the starts up. High school leads have never been stronger, and of course this will help us in the summer and fall starts. And TV leads are also way up. The 15 new transplant programs that were scheduled to start at various schools this year had some starts in the second quarter, and will continue throughout the 2002 year.

Our acquisitions from 2001 have really done very well in 2002. Texas Culinary Academy, or Texas Culinary in Austin certainly has put in the Le Cordon Bleu program. We've undergone a massive expansion down there of the facility, and that has showed up very dramatically in the student population and starts. Also American Intercontinental University, those six campuses from AIU are up very dramatically in leads some 90 percent, starts are up 39 percent and the student population is up 25 percent. Also, Pennsylvania Culinary Institute, or PCI now has the Le Cordon Bleu program, and had a huge start in the June time period.

Our AIU Online Division had a large increase in leads and starts. The population for our full students is over 1,000 students, up from about 450 at the end of April. We expect a rapid acceleration throughout the 2002 year. AIU recently received approval for a new Master's in Education program, and again, education represents a major curriculum platform opportunity for us. Other recent successes, our startup schedule for 2002 looked great. Orlando, which is the, is Le Cordon Bleu culinary program, has opened on schedule and dramatically exceed - its our first start in July. Also in San Jose, California, Brooks College, it's scheduled to open in October, and has excellent growth in the enrollment area. But that is, has not started yet.

Our startup planning for 2003 is already underway, with a number of really excellent opportunities considered, such as Las Vegas for culinary program, Dallas or Houston for the AIU, you know, program, in Detroit for the International Academy of Design possibly, and San Diego for Brooks College, possibly in Atlanta for the Le Cordon Bleu culinary program, and in New York City with the possibility of a culinary program. Also a number of areas for satellite campuses in 2003 would be South Florida for AIU, the Chicago suburbs for International Academy, the New York suburbs for Gibbs, in Atlanta for AIU, and in Los Angeles for AIU.

Let me also talk about acquisition opportunities. They are very plentiful, there's a large number, we're in fact looking at a number of them right now. Our goal is still two to three acquisitions each year, and that's something that we feel very confident that we can do this year. And that has been historically what we, what we've done. In short, people want to be in school, and know the best jobs go to graduates who have the greatest skills. Our message has never been as well received by the potential students. At this time I'd like to turn it over to Patrick Pesch, our CFO.

Good morning everyone. As Jack indicated, we had an outstanding second quarter financial performance, with significant revenue growth and strong margin improvement. We also continued to aggressively make investments in new campuses, our online learning initiative, and infrastructure improvements, all of which should contribute to healthy growth in future quarters and future years. Revenue growth of 42 percent matched the first quarter growth rate, and includes same school revenue growth of 29 percent.

Operating margins increased 260 basis points from last year's reported second quarter. Adjusting for the impact of the required change in accounting for goodwill, the increase was a robust 170 basis points, which continued first quarter improvement levels. The combination of strong revenue growth, improved margins, and a lower effective tax rate for 2002 generated net income growth of 75 percent, and EPS growth of 69 percent, after taking into account the accounting change for goodwill.

Accounts receivable DSOs, or day sales outstanding of 34 days compares favorably to last year's second quarter DSOs of 36 days. Net cash generated from operations was approximately $30 million in the second quarter, and capital spending was approximately $13 million during the quarter. We've also in this, in our earnings release, raised our revenue and earnings guidance ranges for the third and fourth quarter, reflective of our strong current student population, and strong operating dynamics. We've maintained more modest margin improvement guidance, reflective of our planned growth investments in the fourth quarter, including an increased level of activity in our AIU online business.

Specifically, we expect full year 2002 revenue to be approximately 735 to $745 million. We expect year over year operating profit margin improvements in the third and fourth quarters to be approximately 50 basis points. We expect 2002 earnings per share for the third quarter to be 27 to 28 cents, and fourth quarter earnings per share to be approximately 57 to 59 cents. We also expect capital expenditures for the full year to be approximately 60 to $65 million. That previously we had, we had indicated that that level would be at about 60 million, we've increased the expectation there 60 to 65, with the strong growth we are looking at some situations where we think it may be opportunistic for us to start some projects a little earlier than previously planned.

With that, I'll turn it back over to Jack.

We'll take any questions at this time.

If you'd like to ask a question today, please press the star key, followed by the digit one on your touchtone phone. Once again, if you'd like to ask a question, please press the star key, followed by the digit one. We take our first question from with Legg Mason.

Thanks. Good morning everybody. Jack, could you talk more specifically about online and what your goals are there? It seems like they may have been increased recently. And also the pricing structure of online programs versus on ground programs, as well as margin expectations and program offerings?

Yes. I mean, we've got a large variety of programs that we're looking at. They're anywhere from, you know, Bachelor degrees to, you know, MBAs, you know, things in the IT area, and it's certainly by adding this education product. And what we are finding is there's a vast market out there, there's a lot of people that want to take this program kind of any time, any place. At a recent conference we did indicate that we felt that revenues could certainly be between two and $300 million by 2005. And there's been a huge acceleration in this area. I think we really have some unique products and programs, and also have really figured out how to market these and be able to deliver these at a very cost effected method. We do expect over time that the margins will be higher on this part of our business than on our brick and mortar.

And is there a pricing premium on the online programs?

Not currently, but theses programs are accelerated in the sense that people can take them faster, so what we find is that we do earn more dollars and at a faster rate.

And is there some level of capacity applicable to the online programs, i.e., how many students could you have today, given the infrastructure in place there, including a technology infrastructure and admissions folks?

Yes. We've made sure that we have spent the necessary dollars to stay two or three generations ahead of what we need, just because of the demand. And these are things that we can ramp up, we've got them in a totally separate facility with plenty of expansion. There's lots of capacity in the IT area, the curriculum development area, the student services area. So this is something that we of course have modeled and have watched very, very carefully. So we have a lot of confidence that we can handle this increased demand because we expect, we fully expect it to increase dramatically here over the next number of months, and on over the next several years.

That's great. And Pat, question for you. The G&A had a little bit less leverage than what we thought. I'm assuming part of that is bad debt, the other part may be the increase in admissions reps, are those accurate, and is there anything else of influence there?

I mean, this basically continued to, if that's sort of the trend that you saw in the first quarter. One, specifically to the bad debt, the bad debt is not reflected there. We, as we've disclosed previously, our bad debt expense is netted against the revenue line. So that doesn't play a role, and specifically in terms of the increase year over year, there's basically two things going on there. There's actually been a modest decrease in our advertising admissions cost as a percentage of revenue.

So in terms of the additional reps, that's not having an adverse effect because it is more or less proportional to the increased revenue. But we have made additional investments, and I alluded to it earlier, in terms of the infrastructure. We are making investments in terms of new systems to support our growth, and really it is that spending, and kind of management infrastructure spending that's kept that level less leveraged as you would say.

OK. That's great. And Jack, one last question with regard to metrics. You typically talk about booked futures, is that something that you can share at this point?

Sure, yes. I was going to save it until the very end, but why save it? You know, basically what we're looking at right now is our booked futures are up 27 percent over last year. These are people that are waiting to start school basically in the summer and fall start. So that's really, really very excellent. It should give us just an outstanding summer and fall start.

That's great. I'll turn it over.

All right. Thank you.

We take our next question from , William Blair and Company.

Morning. I was hoping you guys could give us a little more color on the status of the two startup schools from April '01? I know you mentioned them briefly in the comments. What percent of capacity are they now running at in terms of enrollments, and have either of those schools hit the breakeven point yet?

No, you know, basically both schools of course have lots of room to grow. So what we do is we go and we kind of, you know, build a fairly large facility with the understanding that we'll expand it as time, as time allows. And in both locations we have taken on more space and new space, because the schools have done very, very well with their populations. This is something that was basically planned, it was part of leads, it was part of our facilities. And those have just turned out to be markets that we're going to do very, very well in. I'll let Pat comment on the, on the financial aspects of them.

Yes. They both have reached, have reached breakeven, and a little better than that. And the other thing, I mean, just kind of continuing Jack's comments, we have structured our lease arrangements to, you know, in a new location, to facilitate the expansion, you know, relatively early in the life of the, of the school.

Thanks, and congratulations.

Thank you.

We go next to , Piper Jaffrey.

Hi, thanks. It's with Piper Jaffrey. Congratulations on the great job on the quarter guys.

Yes. Thank you very much.

First question is on the revenue per student growth, was up quite markedly, 14 percent year over year. I'm wondering how much of that was attributable to you April tuition increase? And then if you could give us some color on what's driving that, you know, high level of growth?

One, in terms of it attributable to April increase, I mean, we have increases, you know, throughout the year at our different schools. All of the, all of our programs are not on the same schedule in terms of when increases go in. But certainly, you know, I would say, you know, better than, better than half of that would be attributable to pure price increase, and the remainder would be really attributable to kind of a mixed change in there, with programs growing at different rates. I mean, culinary is our most expensive program. It has had the, has had the strongest growth rate. And also things like AIU, you know, becoming a larger proportion of the population does have on average higher price points than the rest of the system.

OK great. And then on AIU Online, if you could give us some color on timing to breakeven, or a range of number of students to breakeven, that would be very helpful.

You know, one of the things to look at there is obviously that's a business that we want to grow. And what is, there's probably various times that we could breakeven if we wanted to. But one of our thoughts here is we want to put as many dollars as we can to really grow this business. I mean, it could be very profitable frankly at any time. But we're taking the excess dollars that we have frankly, and we're putting them back into the business. I mean, this is a really, really, it's a remarkable model.

Great. Yes, and obviously great growth achieved there. And then Jack on the acquisition front, when you look at the landscape, I'm just wondering what type of criteria you're, in deploying in selecting future acquisitions? Are you looking to enter new curriculum areas, are you looking to beef up any specific curriculum areas, wonder if you could give us a little more color on your strategy?

Sure. I mean, I mean what I was looking for, you know, situations that strategically really fit in with what we're doing, that we can really step in and basically enhance, that will add to the, you know, the broad depth of our, of our overall system. And so we always try and find schools that are schools of choice obviously, but we've found certainly, you know, numbers of opportunities that, as they say that historically I would expect that we would do this year what we did in the past number of years. And, you know, they're just good quality schools I guess is the best way of putting, that we feel that we can come in and, you know, add an element, and see something pretty dramatic happen, both in the near term, you know, as well as the future.

OK. And then last question on cost per leads, you mentioned Jack as it starts that it was, you know, marking down to lower levels here. And I'm wondering if you look at your source of leads according to mix, how that's changing over time, and is that the key driver of lower cost per leads? And I guess give us a view to the future. Do you expect that to continue to decline based on mix shifts from different lead sources?

Yes. Some of it certainly has to do with the mix. Others are, have just shown that even in some traditional, you know, methods of advertising, such as television or whatever, that that is below what we planned. You know, you look at areas like direct mail and so on, again those are below what we had budgeted. So it's not only to the Internet, which has been very, very efficient for us, and certainly we would look at that continuing, but, you know, I think it's just better, you know, better ways of advertising, better ways of kind of making buys and modifying things. And I would expect for the foreseeable future that all of our sources of advertising would do very well. They certainly are being met with a lot of response from the, from the market.

Great. Thanks. I'll turn it over.

We take our next question from with Lehman Brothers.

Hi guys. Another stellar quarter. Couple questions if I could. You mentioned for '03 startup opportunities, I think you mentioned five or six possible. And I know you'd been talking in the past of about two new startup schools per year. Has that changed, or are you just trying to let us know that you see lots of good opportunities?

Yes. You know, basically just to let you know that we see lots of good opportunities. You know, we certainly want to do a lot more market research. There's a number of other things. This is just to try and give everybody the idea and understanding that we're starting this process a little bit earlier. It's currently underway, and that's, you know, we always look at the most excellent opportunities. We've shared with you at various conferences that there's probably some 40 different markets that over time, that we'd like to put other schools in. But no, I mean, I don't think anything has fundamentally changed. I just think we are real excited with what we see out there, and we'll pick the very best ones.

OK. So you're, so you're unlikely to open five or six next year obviously.

That's correct.

OK. I guess a follow-up on the earlier question about the revenue per student growth, can you give me any sense as to maybe the sustainability of that growth beyond pricing? I understand close to half of that's pricing. And you've a mix shift with culinary and since you've acquired AIU, but I think it's something like ten straight quarters where you're, where you're revenue per student's been growing north of ten percent. Is that something that you feel comfortable commenting on going forward?

Yes. Let - yes, let me suggest a couple things. One of the, one thing that's continued to be kind of a feeder there has been, has been kind of a mix change. And the, you can look at this and say boy, it has been for such a extended period of time, how can that continue. Well it's really because we've continued to feed acquisitions, or acquired campuses into the mix. So every time we acquire volume at some level, we kind of add that, add that into the mix. And then there's usually a dynamic in place at the acquired campuses that provides an opportunity.

And one of the most common areas of opportunity there is really the course load for the students. Often the campuses we acquire have a reasonable mix of part-time students. And over time we shift that to generally virtually full-time, 100 percent full-time. We probably have now in our system about 95 percent full-time. So on a prospective basis with a, if you have a no acquisition assumption in terms of modeling, you would have to over time kind of moderate the tuition increase/mix change.

OK.

As long as we continue to make acquisitions though, there will still be some element of upside from that mix change.

OK. I guess two more quick ones if I could. I think you mentioned cash flow from operations around 30 million?

Yes.

That leads me to believe you probably generated some nice cash from working capital this quarter, and I wondered if you would comment on that as we look forward? I know the DSO came down somewhat, a couple of days this quarter. Is that something that, you know, year over year going through the rest of this year you're comfortable with, and you think that working capital can either, you know, stay flat to maybe even produce positive cash from here?

Well we, yes. When you actually look at the quarter, DSOs were actually, you know, up on a, on a sequential basis.

Right.

Now, you know, on a, on a seasonal basis we normally have an up tick from first to second quarter. Which is why I gave the year over year comparison. You look at the, at the working capital component for the second quarter, the trend in receivables did not contribute positive dollars to that.

Right.

You know, but we did, by keeping that in line we had a very modest investment in receivables in terms of, in terms of the growth.

Yes, I guess I'm just looking at ...

I think to answer your question on a ...

Yes.

... go forward basis, if you look at the first six months to the year, there certainly was some working capital benefit that would be hard to replicate at the same level prospectively.

OK.

But we do think with tight management of receivables and the working capital component that, you know, that our investment in working capital on a go forward basis will be more modest than it had been historically.

OK. Great. That's very helpful. And then, I guess just one last question. I've been getting a lot of questions from investors, and I wanted to make sure that I understood this correctly. But can you explain to me exactly what your bad debt expense is, or what it means, and how does that relate to refunds?

Well I guess in terms of what it is, I mean, it's going to be non-collectible amounts ...

Right.

... and really for the most part relating to kind of the student pay portion of tuition.

OK.

Recognizing that you do have a portion of your revenue that's from Title IV sources, which certainly doesn't have any credit risk associated with it.

Right.

In terms of how it relates to refunds, you know, the process, you know, the issuance of refund upon the drop of a student, the dollars refunded are not necessarily, do not necessarily contribute dollars to bad debt.

OK.

It can be a return of essentially unearned tuition.

Yes.

OK. And a portion, you know, there is a possibility, and it depends on when in the term someone drops and things, that upon the drop of a student you could have a refund issue, and then you could have a remaining balance due from a student that would be a collection issue. We ...

That would ...

... we reserve those dropped students quite conservatively.

OK. Great. Thanks a lot. And again, great job on the quarter.

The thing to realize of course. We're in very good shape in that area. And, you know, there's nothing that we see that historically, you know, gives us any concern.

OK.

All right.

Thanks a lot.

We take our next question from , Credit Suisse First Boston.

Hi Pat and Jack. Great job. Just a, I guess a follow-on to that bad debt caution quickly. You know, looking at the current level that it's at, is that something Pat that you think we should, we should model in going forward, in terms of a percentage?

Yes. And I'll kind of reiterate exactly what I said last quarter, that I would expect bad debt as a percentage of revenue to remain in this range. No one should be surprised to see, you know, ten or 20 basis points, you know, movement one way or the other. But roughly speaking we should expect to see it in this range, you know, for the immediate future.

OK. And I'm assuming, you know, no changes to the reserve policy or ...

Right.

... write-off issues.

Correct.

And then I heard you give out the operating cash flow. Did you actually give out a cap ex number for the quarter? If not, can we get it, and then I just want to get an idea of what the free ...

Yes, I said ...

... what your free cash is for the quarter?

... yes, I said it was approximately 13 million.

13 million, OK. That's great. Quick question for Jack. You know, on the lead flow that you talked about, sounds like you actually saw an acceleration in lead flow per school in the quarter. And I'm just wondering if that's economy driven you think, or is just due to the fact that you've been marketing a lot, and you're adding new programs to the mix?

Yes. No, it's all in the, a lot of combination of different things. I mean, when we put together our marketing plans, we do it kind of on a historical basis. But what we do is we look at, you know, the new strategies that we were putting in, are there new programs? Maybe we've added Bachelor degrees or Master's degrees in certain areas. Maybe we're trying different types of media that they've not done in some of those markets before. So, I mean, it's, you know, it's a large combination, certainly in terms of real dollars we've spent more, you know, more money, and I think there just a huge response out there right now from the market by and large, and every segment of it, because people are very interested in going to school.

OK. You know, I also wonder if you could just comment on the pricing environment right now, certainly the issues surrounding state colleges, and maybe how that's impacting your business? And also, you know, do you worry at some point that perhaps financially it won't be able to keep up with some of the price hikes? I'd like to get your thoughts.

Yes, one of the things to realize is when people look at a private college, they know that it's going to be a lot more dollars than a public school and, you know, I think the odd, you know, I mean the other factor too is they know that they're going to have to use a lot of their own resources. And then typically if you kind of look at our breakdown of Title IV funds, you know, based on revenue to cash, you know, we're right at about 60/40. And so, really what this says is that, you know, students are prepared, they're capable of doing it and then that's pretty much in line with what people look at as they look at going to a, you know, a private four year school. So, I mean that's an area that we feel very good about. Again the biggest decision somebody every makes, and we have a number of different ways that we can help them, there's a Title IV programs, there's third party loans and, you know, other various forms of aid for various students.

OK. And then just in terms of your, you know, graduation rates and job placement rates, any update there?

Yes. On the job placement, we're actually running right now a little bit stronger than what we did, you know, just about a year ago. You know, we're at 93 percent overall and we really see, you know, that's ticking up here right now frankly. So, you know, that's something that's, you know, that's, you know, really very, very excellent. You know, this year we'll have the largest number of graduates in the history of our, of our school, so I think we're finding that we, we're graduating people at very excellent rates.

OK. And then one final for Pat. Pat, just going back to the free cash flow. You know, looks like it's, you know, stronger than it's been in a while. I'm just wondering, you know, if you expect it to continue at that rate, or whether there's going to be, you know, perhaps a little bit more working capital going to the next several quarters?

Well as, you know, as I indicated in response to question, you know, there is, there's some level of moderation in terms of the benefit from bringing working capital down, but I do expect on a go forward basis that our investment in working capital to support our growth will be, you know, at lesser levels than it had been, you know, in prior years. So I do expect continuing strong cash from operations.

OK, excellent. Thanks guys.

Thank you.

We take our next question from , Suntrust Robinson Humphrey.

Yes, here. Congratulations on a good quarter. First question, wanted to touch base on is, on AIU Online, those 1,000 plus students, are they full-time students?

Yes, these are full-time students. And 100 percent online, they take no bricks and mortar classes.

OK, and so, you know, based on that am I right in thinking that that's about, you run about a $26 million run rate now, on the online unit?

That's in the ballpark.

OK. Second question is, you know, you reiterated your guidance on the operating margin improvement for the third and fourth quarters at about 50 basis points and, you know, you're coming off some really strong performance in the first and second quarter. You touched on it, I think in your comments earlier. If you can just maybe give additional details, why do you, why you think that's going to drop off some in the third and fourth quarters?

Well, you know, I did touch on it, I could elaborate a little bit more. There's a couple things. One, you know, the third and fourth quarters are, you know, traditionally stronger, higher margin quarters than the second quarter, so kind of the opportunity for improvement in terms of leveraging the cost is a little bit less. Secondly, you know, we are expecting, you know, with our online unit ramped up to a, to a higher level than it has been, you know, a continuing level of investment in that business.

So even, you know, if you just kind of do the math, even without can more dollars being invested in there, the fact that you got a higher revenue base there at, you know, not at the same margins, kind of brings down the absolute percentage improvement in the margins without necessarily meaning less dollars are coming through to the bottom line. This is why I think you still see, you know, that we're looking at strong EPS grow.

OK. Another question with respect to the satellite campuses, you really haven't talked much about that in the past. We know you've done that, I guess, at Brooks Institute of Photography, put in another campus down in Ventura there. If you could maybe just talk about the plans on the satellite, how much, how big would the satellite campus be, lets say, AIU in the South Florida area, or maybe additional details?

Yes, you know, the nice thing about a satellite is there's not a lot of investment. What you do is you pick an area of the city that looks like that there's a population base that you're currently not getting to come to your school. And what we have found, and we also did this in Minneapolis last year, that it doesn't pirate from the main campus, and you end up with a much bigger market share. So, you know, this is something that we've studied a lot, we've looked at, we implemented it last year, we'll do more implementation, you know, this year and, you know, I think as we enroll that, that the purpose here is to gain greater market share, especially in these big mega markets where you've got, you know, literally tens of millions of people, and they all can't come conveniently to a single location. And certainly the cost is far, far less then if you branch your campus, because there just is not as much things that you have to do to prepare that.

Yes, I mean, the, I mean the difference in terms of when we talk about a satellite versus a branch, a satellite we're really talking about basically managing the additional location, you know, with the same management team and with the same basic infrastructure. So, it is, it is just, it is really facility expansion in a more efficient manner. And as Jack says, really allowing you to kind of hit a little, a segment of the market that otherwise isn't going to travel to your school.

OK, and then one final question to put you guys on the hot seat. How long do you think you can keep up the really strong same school population growth?

You know, really, I mean, our feeling, I mean, all along has been for a very long, long time. I mean obviously we look at strategies a year or two in advance, you know, we put a lot of firepower into these things. I think our strategies have proven over time to be just very, very successful state of the art stuff, cutting edge stuff, things that frankly most other schools and colleges don't do. And, you know, we have a lot of faith in what we do, we have a lot on the drawing boards, and I guess that I would tell you that we've got a lot of excess capacity in just many, many of our areas here for a long time to come.

OK, thanks a lot guys. Thanks for helping turning the tide here today.

Great, glad to do it.

We go next to with JP Morgan.

Morning. Couple of questions, and a follow-ups. Jack, it's been eight years and 23 acquisitions, mostly which you've done for cash. You've got over 75 million I take it, at least in dry powder for acquisitions. Is there any change in the way that some of the sellers would like to have their compensation for the school, either in cash or stock, and as the stock improves of career education, are you interested in doing a combination of cash and stock?

I mean, I would say like on smaller deals, certainly cash is king. You know, if it was a larger deal it may be something that we would have to use stock in. And I think a lot of times a preference for many school owners is to do cash, just because they sincerely want to retire and I guess they just want the piece of mind that - there's only been one deal where we have done stock, and that turned out, you know, very well obviously. But, so, you know, I guess when we do it, we kind, we stay flexible on it and it gives us, you know, probably a lot of different flexibility that we can go, you know, with different sellers. So I think it's only going to help us here as we move forward in the future.

there's never been any institutional bias on our part as ...

Right.

... preference one way or the other. It has always been a matter of the specific deals and the negotiation and where the, you know, where in negotiating the arrangement the best perceived value was, or the best way to get the transaction done. But we have been, and will continue to be willing to use stock if it makes sense.

OK. And then, we talked a little bit about it in this conference call about how the mix change has led to a higher revenue per student. Your acquired campus is providing a higher course load by the students, et cetera. Has the average length of stay, both from either retention or from the length of the desired program, helped out, and are students staying longer than say two, three years ago?

Yes, definitely there. I mean, we have many more schools that have Associate degree programs, many more certainly that have Bachelor and Master's degrees. And I think there's been a kind of a gradual, I mean, you know, that they've basically moved in that direction. So from year to year, yes, that's probably up fairly dramatically.

And that would be the larger contributor from a retention standpoint of a few years ago we had, I would say that was a large contributor but that's moderated.

OK. And just to make sure, I mean, you're talking about a 95 percent rate of full-time equivalence across system-wide, so wouldn't you have had four or five years ago, with primarily, you know, Gibbs and Associate degree programs, pretty much the same 90 percent full-time equivalent load?

Well, there's a number of schools though that probably brought that down. I think when we first got the Academies, the huge majority of their population was part-time basically. And, you know, you had a lot of the Gibbs schools that had shorter programs. In fact, probably the majority were taking the diploma programs. So that's only been probably in the last two to three years that people have gone the other way on that stuff.

OK.

And also, you know, I mean other things where we've, certain culinary schools have had large proportions of part-time. Also ...

On the west coast.

... things like Briarcliff College and Macintosh College that we've acquired over the years had, you know, at the time of acquisition, had very large part-time populations.

OK. And then last, just a forward looking statement. Can you talk a little bit about what the enrollments look like for the international locations for the fall? I mean, in specific, any tumultuous goings on throughout, political situations around the world are affecting any leads?

You know, the school in Dubai, you know, is at an all time high, and that looks like that's going to continue, so just nothing but positive news there. Our London school continues to grow, we have a lot of U.S. students going over, you know, this summer and scheduled to go over in the fall to take the study abroad. London's market is probably 95 percent of it comes from outside of the U.K. and, I mean, that looks, you know, very excellent. Our Canadian schools have done very well on that front, and we will have record breaking numbers of international students coming over to our U.S. schools this summer and fall also, at some programs we started a couple years ago. And our goal has been to double that population every year. I know it's not a huge population but ...

Right.

... you know, we'll probably have four or five percent of our students that will be from an international base that will come from outside of the U.S. this next year.

But you're encouraged at least for the international locations, the fall ...

Yes, yes, yes. Very much so. Yes, I mean, those have done, you know, just exceedingly well.

OK. Thank you very much.

All right, thanks.

We go next to with First Analysis.

Good morning, and congratulations again.

Thank you.

I think I'm interpreting the press release correctly, but it says that your information technology programs, enrollment in those are, is up year over year?

Oh yes, yes. No, I mean those have done well, and those are certainly double-digits.

OK. Can you give us a sense of how you're, you know, managing to grow those when nobody else is?

Well, I mean, first of all, we don't have all of our eggs in one basket. And it gives us the ability really, to offer probably, maybe a wider variety of programs because we have different types of schools anywhere from, you know, Master's of Information Technology down to somebody that actually fixes the stuff in a PC NAT or PC LAN program. And, you know, I think that the jobs are abundant out there, I think the opportunity for people are as abundant as they've ever been, and I think frankly the interest that people have to take IT is just extremely high.

But what probably gives us a, you know, bit of an advantage there is, you know, that we, you know, sell other programs also, and I think the combination of being able to show that we're kind of a full service, you know, college if you will, probably lends people to come in and, you know, look at different programs and pick different things.

And then I think I'm recalling this correctly, but as I recall there was an upgrade either recent or on the way to your basic, the student information system? And could you just give us a sense of where that was?

Sure.

Yes, you know, we began implementation of a, of a new system or conversion over to a new system in actually in late 2001, and that has continued throughout the year, you know, several, you know, several campuses a month. We would expect by the end of this calendar year to have all of our campuses on that new student system.

OK. And is that the same system that's used for online as well?

It's basically, it's the same software vendor.

It's been modified slightly.

But it's the same product.

OK. And then last question, I don't suppose you'd care to share with us just kind of what the online loss was in the quarter, so we could compare, you know, the operating growth, kind of ex that, what it would have been? I mean, I understand you're investing for growth. I guess I'm just trying to get at the underlying growth rate as well.

Well we, you know, the only thing we've indicated on that is that, you know, for this year we would, we would expect the contribution to be, you know, comfortably kind of in to seven digits but not reaching eight, that's for sure.

OK.

That's an annual number.

All right. Thanks very much.

Great, thank you.

We go next to with Baron Capital.

Hi guys, congratulations.

Thanks.

Just a little further on the online business, because it's astounding that you're at a 1,000 students. Jack is that 1,000 students actually taking classes now, or is that a futurist number, and if there is a way to have a futurist business for starts in this, in online, is there any sense on what the futures in that business is? Where are the, where are those 1,000 students, in which degree programs are you having the most success? And what other new programs are you about to roll, it sounds like, you seem excited about the educational offerings, what else is there, and just a little more to flesh out how we're growing so rapidly?

Yes, I mean, it's definitely 1,000 students that are in school taking 100 percent of their online programs that we've had some really great growth since April. That actually has accelerated here in recent times as we go forward, so, you know, it's like any other business, people, you know, that they respond to some type of advertising, they basically enroll in school and they start school shortly after. We're finding that in many senses it's a little bit easier, students who perhaps work with than our brick and mortar student. Maybe it's a more serious student or because they're working, that they're working adults, that a lot of it is employer paid so I guess there is a certain, you know, dependency that they have to take the program and finish it.

There's something in it for them, and that is they want to, you know, get an upgrade of their skills frankly, most of them stay working for the companies that they, that they currently work for. So it's like any other business, we have a lot of visibility out there, we know our lead flow, we know the enrollment, our booked futures in that business are up many, many percent over, you know, certainly where they were a year ago just because we really, we're just starting the business end. But, you know, really, really outstanding numbers are on the way, and I guess as we report for the third quarter, I think you'll be equally as amazing and surprised as you are today, just to show you the strength that that business has.

OK. And then a little softness is there. Are any particular programs being better received or have a big, a bunch of these enrollees now? And what other programs are coming, and why are you so excited about the educational offering?

Sure. You know, the MBA business was really met with a lot of, you know, you know, people really liked that program, you know, our technology programs have done just exceedingly well. I think people wanting those MIT degrees, we've done very well in the, in the various Bachelor degree programs that we offer, both in business as well as IT. And the other thing, of course, that we're looking at, and then this education degree, you know, if you look at it there's millions and millions and millions of teachers out there, people that want an upgrade of skills, it's an industry that if people have a higher upgrade of skills that they earn more money.

I think there's a shortage of teachers, you know, throughout the country. And people want a kind of any place, any time, you know, place to basically get these degrees. They don't want to be dependent on having to go to a school because they don't have the ability to really travel there and take the time off to do these things. So they can keep their current job, and a lot of it will be in education and get these upgraded skills and then go on and do even better. Also, we see it as a great platform for not only our online, but for some of our brick and mortar schools too, just because of the increase in interest in the whole education area. So we truly look at being leaders in that area here over the next several years.

You know, also we will look at putting out a visual communications degree, that should be coming out here shortly sometime prior to year end. And, you know, I've said this before, everybody smiles a little bit, but I truly believe that we will probably have here in the next six months a degree, or a program is probably a better way to term it, in the culinary arts area.

Great. OK, well congratulations.

Great, thanks. You know, you know, probably the other thing to realize about online is there's no limits. I mean the technology is there now, you can almost do virtually anything a few years ago that you really couldn't, and I think that the credibility is really there too, both with the student as well as with the employers. So that's what makes this just such a neat, neat area.

How much of the, how much is in employer sponsored, or paid for, of your enrollees now Jack?

You know, right now it's probably in the area of around 20 percent but, you know, that's without us really working at it. And we, there's whole programs we put together now, I would like to say here within the next year that we'll get that up to at least 50 percent, and I wouldn't be surprised if it climbed dramatically after that.

Great, thanks.

We take our next question from with Barrington Research.

Hi guys. I have two questions. One a follow-up. Within IT you had great enrollment growth in the quarter, and that stands out in sharp contrast to some of your competitors. Just a little further on that, how are the placement rates within IT, are they above or below the corporate average of 93 percent? And are they higher or lower than a year ago, and what about starting salaries within that discipline?

You know, you know, all those areas have done really well, I mean, we've really watched that, we beefed up our whole placement area, we put on more placement people at our colleges, schools and universities. We put on our world wide, you know, Web center. We've really gone out there and kind of conducted a whole lot of marketing campaign. And what we're finding is there's still lots of jobs, the placement rates are holding very strong. You know, it really depends on the part of the country as you look at the starting salaries, but I would say by and large that they have done, you know, just very well. So, you know, we're real pleased with what we see, and we see it frankly on the second half of the year here getting stronger.

Good. And then the other question, non-related. I think you guys have publicly spoken about perhaps getting into an additional line of business, so to speak. I think specifically there were some comments made about allied health care as a potential, that you might enter that field or you probably would enter that field through acquisition. What are, what's the attraction of allied health care, and what are the dynamics there?

Yes. I mean, certainly what we're always doing is we're always looking for other ways to grow the business. I mean, we have a lot of confidence that with each one of our current six divisions, that between now and 2006 that they are fully capable, and it's on our strategic plan to get to a half a billion dollars each. And some of them frankly I think, will actually be larger. So we'll be a much, much bigger company here over the next five to six years. But having said that, what we like to do is we like to plan ahead and look at other opportunities that are part of the new world, or the new economy, or the world economy, and certainly allied health or the health care industry is one of those.

Americans spend about a trillion dollars each year on health care, and so we're studying that very carefully right now, you know, not only in the allied health but, you know, anything from nursing to other medical types of programs. Certainly the traditional ones that you would think of, which would be medical assisting, you know, et cetera. So, you know, that is something that we know that we can run as a separate division, or we could run certainly within conjunction with our current locations.

So based on the planning ahead, and if you like to sow your seeds a couple years before harvesting them, we would, we shouldn't expect any big moves in allied health care, or health care among the next two or three acquisitions that are going to occur over the next 12 months?

Well I mean, we're always looking at different things in the pipeline, and certainly, you know, a way of studying, you know, what does the future look like is you do start looking now. Part of it is studying to see what the economic model looks like and the benefits, but part of it is also going out and kicking the tires of possible opportunities.

this is Pat. I mean, the one thing that we've always said in terms of growth is that in the area of acquisitions we would be selective about what we would acquire. And whether or not we would look at an additional curriculum area, health care, you know, generally we just look at it as being such a large part of the overall economy. And then the long-term prospects for continuing growth in health care spending are such that we just think it has the kind of prospects that would support a growth model over time. And that's one of the reasons it's of interest to us.

OK, great. Thanks a lot guys.

Great. Thank you.

We take our next question from , Bank of America Securities.

Maybe I was so far back in the queue because they had my name wrong.

Yes, right.

Let me add my congratulations belated to a great quarter.

Thank you.

What was deferred tuition revenue at the end of the quarter?

As of June 30th it's about approximately $43 million.

OK. So that number looks like it contributed a little bit to the cash flow, because normally we see more of a sequential dip. Is there any reason why we didn't see that modest sequential dip this time around?

Well it's very directly related to efforts made in terms of cash collection.

OK.

And so the efforts you make to bring, you know, to manage your receivables level also result in collection of amounts that are essentially in advance kind of payments for certain students, so they're really very directly related.

OK. And then ...

And frankly that is one of the reasons why I indicated on a go forward basis that we believed we could, we could manage our investment in working capital with our growth, is because you do have that dynamic in place, besides your receivables growing, you do have the ability to also to kind of grow your collection in advance.

OK. And Jack, you spoke enthusiastically but somewhat quickly at the beginning with regards to some of these transplants for '03 and new campuses. Can you recap that information? I think you mentioned you start with Las Vegas, a culinary program and then you sort of went quickly, I was trying to keep up with you and maybe you can point out which ones are actually new locations and satellites versus just new programs?

Yes. I mean, I mean certainly there's going, there's a number of ways of looking at this. I mean, we will start new transplanted programs and we'll move those from school to school. Next year maybe we'll do like 20 of those, but that's a little bit different, I think what you're asking about are the actual startup campuses or branch campuses. And in the things that I cited here is the fact that we'd probably very seriously, you know, nothing's been set in granite yet but we've really studied these things, and we know there's great opportunities. But there's certainly a lot of enthusiasm that we have for Las Vegas in putting in a culinary program.

And then in Dallas or Houston, it's probably not going to be both, it's probably going to be one or the other, over time it'll be both, but probably for next year it'll just be one. The possibility of either Dallas or Houston for one of the American Intercontinental University, you know, campuses. And then in the Detroit suburbs, looking at the International Academy of Design, so putting something up there. In San Diego we're seriously looking at doing something with Brooks College in the San Diego area, I mean, keep in mind we've got something in Long Beach now, the new school startup in San Jose, California, and then kind of a next natural thing would be, with the abundant population there, would be in the San Diego area.

And then, just there's a couple more here, then in Atlanta we're seriously looking at a Le Cordon Bleu culinary program somewhere in the Atlanta area, keeping in mind that we have two locations there now with our John Woody School and then our college in, our AIU school in Buckhead also. So that's a market that we really understand and feel that we do very, very well there. And of course we always do a lot of market research prior to kicking off any of these things to make sure the demand's there. And then in New York City the possibility of putting in a culinary program there, again with, that's a market that we feel that we'd just do extremely well there with a Le Cordon Bleu brand name.

When you look at the satellite campuses for 2003, possibility again of South Florida, we've done very, very well with our Fort Lauderdale school, and that's going gangbusters and we really feel that if we had somewhere else that was outside of the area there that that would do extremely well too. Then in the Chicago suburbs, I mean, we've got our International Academy of Design school, downtown Chicago. It does very well, its grown rapidly, but there's certainly a market here in the suburban area that would also do very well, you know, based on that.

We're also considering in the New York, kind of suburbs, a possibility somewhere like White Plains of putting in a Katherine Gibbs school there. It's kind of a satellite campus off of our New York City school. In Atlanta again, looking at perhaps a third AIU campus in that area, because those programs have made a lot of strong demand there. And then in the Los Angeles area where we've got a lot of different locations, of putting in a AIU satellite campus.

Great. That's very helpful. And then in terms of the bad debt Pat, is there any way you might be able to attribute some of the erosion, a percentage of the erosion for us, to the Title IV rule change versus attributing some of it to the decreasing amount of revenue from Title IV?

Yes. I mean what, you know, at the time last, you know, last fall when this was a, call it a hot issue or having a lot of discussion here, we indicated the process we had gone through in initially evaluating the impact of the rule changes on the refund policy. We had originally estimated the impact of that about 30 basis points, and my belief at that time was that it was probably a little bit north of there, maybe more like 40 basis points impact on us. So it is a contributor, you know, to a change in the bad debt level but not, you know, certainly not the full, the full cause of it.

OK. And then with regards to AIU again, Jack, is there a percentage of enrollment at AIU that you would disclose that are IT related?

They've got a fairly large IT population.

OK.

And it'll certainly do very, very well in that, both on a brick and mortar as well as on an online basis.

But that's also recognizing the first programs that we kicked off there were IT.

OK. And then the last thing is sort of a follow-up to your comment earlier Jack, which was, it's an interesting thesis about the reason why you're doing so well with IT is because you market as a full service school when students come in, and perhaps are, end up enrolling in IT without necessarily that being their intent when they came to visit. I was wondering, at what schools is there a, is there an array of offerings that are approximate enough to IT to believe that that thesis in fact is valid? I'm sort of thinking of some locations where the content choices are somewhat stark and can't imagine a design person going to IT, but maybe you could just offer a location where there are choices that are approximate enough to validate the thesis.

Yes, I mean, if you look at our Katherine Gibbs schools, I mean, they're basically business schools, they're visual communication schools and they have IT also. So, you know, many times, you know, I mean, I mean this has got to tell you, when a student walks in they have a general idea, and they kind of want to be sold on their future and, if you will, I think they kind of pick the program sometime that best fits them. And sometimes, I mean, a big part of looking at education, students come in sometimes with preconceived notions that I will tell you, the majority of the time there's no preconceived notion.

I mean, they might be good at certain things, they might like certain things, they might do certain things as a hobby, they may feel comfortable with certain things, but I think what they want to do is they want to know hey, what does the future look like, would I be good at this, and what are some of the opportunities not only upon graduation but later on in life? You know, when you look at, you know, a school that's as diverse as our, as our Collins college in Phoenix, that's got a very large type of IT program, yet the huge majority of that student or the identity of that school is more of a visual communications school. You know, when you look at Brown College, when you look at Briarcliff College, I mean, I could name probably five or six or ten other schools, but that's just been what, you know, our experience has really been.

Very helpful. Thanks a lot, and again congratulations.

All right, thank you.

We go next to with Bank of America.

Good morning.

Morning.

Can you talk, can you talk about your latest acquisition of Pennsylvania Culinary Institute? I believe you had 900 students enrolled when you acquired that. How does that stand today? And also, is this a franchise that you could envision satellite campuses from?

Yes, this, I mean, that's a massive school, you know, they've done just very, very well. We had to put a lot of changes in there and, you know, today it's got, you know, over 1,100 students in it. So, you know, it's grown a lot, you know, I mean, you figure that we've only had that for, you know, about six months and, you know, we are not disappointed with what we've seen at that school. I mean, they had some great systems in there, it was a school that, you know, really had done a very good job and so many opportunities.

But I think the thing that we tended to bring into it is probably a more focused approach to marketing, a few more marketing dollars. We were able to do a lot of stuff in the media area that they probably had not done prior. Some things in the area, some things in the high school area and, I mean, I think the best is yet to come. But that school has just done, just exceedingly well, and we are very, very pleased with it. It probably is culinary schools, is way ahead of any other culinary school that we've ever had.

OK.

And I think your other question was about branching. It's got a great brand name, and I think that we could either branch that name to other places because there's an ability now in branching a school, that you don't just have to use the name of the school that you're branching it off of. So if we wanted to branch it off of there but call it Le Cordon Bleu culinary program, that we could do that also. And certainly if we found there was benefit to the PCI name, which I believe that there is, that we could also, you know, to do that.

I mean, just as an example, just to show you the strong, strong brand name, last month in "Food and Wine Magazine" they put out an article on the ten best chefs that they've picked for last year. These are young chefs, just, you know, somewhat recent graduates over the last number of maybe four or five years. And of course a PCI graduate was one of those people that really had that high esteem, you know, honor. So, I mean, it's just a great, great school.

OK. Great. Thanks a lot.

We take a follow-up question from , William Blair.

Yes. Do you have any authorization to repurchase shares at this point, and where does that option rank in the pecking order of potential uses of cash for you?

We do not have an authorization to repurchase shares. And in terms of the pecking order, when we look at, you know, our uses of cash, our plans in terms of potential investment in the business and acquisitions, it is not at this time, you know, kind of high in the list. Of course, dependent on what goes on in the market on a prospective basis in, you know, where stock prices are and where they stay, that would be something we would always look at as conditions change.

I mean, you will be, you know, I mean, I mean basically we have a lot of great uses for our cash, and I think as time unfolds here, especially this year and on into next year, you know, I think it's going to be really some spectacular things that comes as a result of rolling out some of the strategies that we have set in motion.

Great. Thanks so much.

There are no further questions at this time. I'd like to turn the call back over to Mr. Larson for any additional closing comments.

Great, just one final comment. I just wanted to let you know that our prospects look bright, our population is at an all time high, which insures future revenue, to some extent, gives you a lot of visibility. The new school startups are coming along as planned, in fact ahead of plan. Students waiting to start school are up 27 percent over last year, and this certainly looks great for the summer and fall starts.

The economy is working in our favor, our message is being responded to from our various advertising forums at record levels. More of our new program transplants will be starting, which we had planned on in the third and fourth quarter. And then just another strong statement that I want to make is we will have the largest revenue from brick and mortar in 2002, and our online is coming on very, very strong. Thank you for everybody's time and have a nice day.

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