Perdoceo Education Corp (PRDO) 2002 Q4 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Career Education Corporation fourth quarter and year ended 2002 conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in listen-only mode. At the request of the company, we will open up the conference for questions and answers following the presentation.

Statements made by CEC or its representatives on this conference call that are not historical facts are forward-looking statements subject to a variety of risks and uncertainties that could cause CEC's actual results in 2003 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 SEC. CEC assumes no obligation to update its forward-looking statements.

I will now turn the conference over to Mr. Jack Larson, Chairman, President and Chief Executive Officer of Career Education. Please go ahead, Sir.

Good morning. Thank you. I have with me today from the company, Pat Pesch, Executive Vice President and Chief Financial Officer; also, Jake Gruver, president of university group and Nick Fluge. I am pleased to share great results for fourth quarter and 2002 year-end. This is 20th consecutive quarter of record results. The fourth quarter financial results were net revenue up 42%. Net income up 61%. For the year, net revenue up 42%. And net income up 76%. Also, over the year we had improving margins.

In 2002, it was a great year. We set many records in many key areas. Today we have over 51,000 students system-wide. A population increase of 21%. Career Education corporation is a global system serving many exciting markets. People who want a diploma, associate's degree and master's agree. People who are attracted to great programs like Vis-com, culinary, business, IT, health care, criminal justice and education. Students of all ages from local market, out of area and international.

These programs have given us the ability to grow at a time when people with the right education prosper. Our strategy is simple, make sure educational needs of students are aligned with the needs of business and industries. We have a compelling story of success.

We have two operating groups, colleges, schools and universities and online education group. Both groups had an outstanding year in 2002. And we are going to capitalize in opportunities in 2003. Let me cover the important highlights from 2002. We had abundant number of leads at reasonable cost. Leads are up 60%. People have been very responsive to our message. High school Internet and TV were the biggest sources in 2002. We had record number of starts in 2002, up approximately 24%. People were attracted by the opportunity available to them as they graduated.

January starts were up 28% over the last year. We saw the trend build from last year's lead volume as a strong number of book futures who wanted to start school in January. Another exciting highlight that we have achieved is the best placement rate in the history of our company at 94.1%. This shows a strong alignment between what students want and what business industry need. We are very proactive in increasing career services efforts at each college. We set up global websites which give us more exposure to more jobs to match the students' needs.

We had two new start-ups in Orlando and San Jose. Both are off to a great starts. The acquisition of Missouri College in St. Louis, put us in the health care field which we can now transplant to other colleges. The Le Cordon Bleu licensing agreement, which was completed in August, this agreement will give us added financial gains for many years.

The online education group really took off in 2002 and is on a very solid foundation to become one of the world's largest providers. Many new products and services were added and unique marketing strategies were implemented. Our current population is over 3000 full-time students seeking a degree on a 100% line basis.

Our college of schools and universities group the onsite group is largest on-campus provider for post secondary education in the world. We look at revenue. We implemented new strategy for internal growth in 2002 that will have bigger paybacks for the future in technology, new start-ups, online, new programs, new facilities and many more. The future looks strong. The big indicator that we're in excellent shape starting into 2003 is our book futures were up 68% as of December 31st. This shows strong indication that people have enrolled in school and are waiting to start sometime in 2003. Once again, a very strong indicator. 2003 has many ways to grow, internal growth, we have a proven track record. New programs and transplants, we will put in some 50 in 2003. The online group is prepared for dramatic growth.

We will have four new start-ups, as we go into 2003. We've got acquisitions planned. We plan on mplementing a number of bachelor and master's degree programs. We plan on putting in a number of campuses. We will add new programs.

I would like to turn over to Pat Pesch, CFO.

Thank you, Jack. As Jack indicated, we had outstanding fourth quarter and full year 2002 financial performance with significant revenue growth and strong margin improvement. As he indicated, we continue to aggressively make investments in new campuses, our online learning business and infrastructure improvements, all of which should contribute to healthy growth in future quarters and future years.

Revenue growth of 42% for the fourth quarter matched the growth rate for each of the first three quarters. Also, includes same-school revenue growth of 32%. Revenue for the online group was approximately $10 million in the fourth quarter and $21 million for the entire year of 2002. Operating margins increased 170 basis points from last year's reported fourth quarter. Adjusting for the impact of required change in accounting for goodwill, the increase was robust 100 basis points. These numbers for the full year were 210 basis points improvement over the prior year and adjusted for the accounting change for goodwill, 130 basis points.

The combination of strong revenue growth improved margins in lower effective tax rate generated fourth quarter net income growth of 53% and EPS growth of 48%, after taking into account the change for goodwill accounting. These numbers on full-year basis included net income growth of 60% and EPS growth of 53%. Accounts receivable days sales outstanding of 33 days compares favorably to last year's DSOs of 36 days. Bad debt as percentage of revenue was 3.7%, versus 3.7% for the fourth quarter last year and 3.9% for the third quarter of 2002.

What I would like to do now is review our guidance for the full year 2003. This is the first time we are providing specific guidance on the year. Specifically, we expect full-year revenue to be approximately $940 to $950m. We expect our online business contribution to that revenue to exceed $60m. We expect first quarter 2003 revenues to be between $218m and $221m.

Full year 2003 operating profit margins should improve by approximately 50 basis points, with stronger improvement in the first and second quarters of 2003. Earnings per share for the full year should be approximately $1.80 to $1.82, with first quarter earnings per share between 34 and 35 cents. We also expect our effective tax rate income tax rate for the year to decrease from 41% to 40.5%.

Capital expenditures for the year should be between $75 and $80m dollars, which as percentage of revenue is consistent with the levels that we had during 2002. With that, I will turn back to Jack.

At this time, we will take any questions.

Thank you. The question-and-answer session will begin at this time. If you are using speaker phone, please pick up the handset before pressing the numbers. Press * 1 on your push-button telephone to ask a question. To withdraw, press * 2. The questions will be taken in the order they are received. Please stand by.

Our first question comes from Howard Block with Banc of America Securities. Please state your question.

[Missing text and audio to be provided by CCBN]

Thank you. The next question comes from Gregory Cappelli with Credit Suisse First Boston.

Great job. On enrollment front, where do you think on the brick and mortar front, enrollments could level off over the next year. Given you will be opening 6 new schools per year, are we likely to see that be in the mid-teens area over the time period? I know Pat commented on leveling off before.

The brick and mortar enrollments remain strong. The start-ups, we did a number of acquisitions in prior years and those really start kicking in in a dramatic way starting about now. So, there's a lot of factors that drive us. The majority of our leads come out of brick and mortar schools. Those have been up in a very dramatic way. Looking at it, there is seasonality to when students want to start school. But, you know, we have a lot of confidence we will see dramatic numbers in 2003.

Okay. Just as it relates to online growing rapidly, point of of larger roll here. Any sense of can bolization from brick and mortar schools and how many starts do you expect to have?

Let me turn over to Nick. Before I do, these are very different markets and students. They have their own unique methods of marketing and how they do that. We share certain types of leads, but that is mainly students that perhaps don't want to start in a brick and mortar school the student.

I would say we feel confident we are marketing to a new audience that is untapped prior to this. We are expanding the customer base at Career Education. We feel that this is a market that needs any time, any place education. They live a distance from our schools that are brick and mortar or they work and do other things. So, they need to attend any time, any place. We really feel there is no canabolization. They are full-time degree-seeking students. None of the numbers online are going part-time. So, very much we don't do that. We see other groups who talk about numbers from 2 to as high as 50%. We don't do that. In terms of first quarter starts, I won't quote a number, but would just say that I think we will be really pleased moving into the future. We're very excited about the market. The market does not stop at any state or national border.

Just a follow-up. Nick, did you have grating students this quarter and what is the placement rate looking for those?

Yes, we did. We had graduates in 2002. Depending on the acreting body, we ara crediting. I am proud to say we will report 100% number on January 31, in terms of graduate placement.

Impressive. One more quick one, Jack, if I could ask a question on the financial aid front. I not to get feelingot availability of funds. I think for your online, obviously accelerated program and I think students are eligible for double financial aid grant in the year for that. I just want to check on that. Also, do you feel like funding is still plentiful for students or do you have to increase the level of perhaps loans that you guys provide or credit you extend for students throughout '03?

You know, student funding is always one of those areas of opportunity to help as many students as you can. There are plenty of dollars out there, in fair state growth basis. There is certainly third-party loans available. And also, a lot of our students certainly have a lot of cash they are willing to pay, also. It is a combination of these things. We have found something as simple as helping student when is they come to school, get a part-time job can make a difference in a lot of students making monthly payment obligations. There is probably more dollars out there than has ever been out there before in the history of post-secondary education. We work hard to make sure that we get all of the funds available for students. Over to Nick, I think the second question had to do with online.

We are excited about this at online. We have really, really sound packaging, we feel. We have high packaging start dates and you know, the interesting thing, while we get title 4 money and cash, we have ever-growing tuition reimbursement programs growing all the time. They are very vibrant. I will also say we do have alternative financing, none are recourse. In fact, we would say that our payment plans we have limit at 12 months out of school. So, again, we think down the road that will be really sound.

Thank you, guys.

Thank you. Our next question comes from Matt Litfin with William Blair. Please state your question.

Good morning. My question is on the profitability of Nick's online business. I know it has been running at a loss, given all the investments in growth, but with this recent flood of new students when do you expect it to roll into the black with growth investments?

This is Pat. One of the reasons the guidance we had provided for the fourth quarter on margin improvement, we obviously beat that guidance. One of the reasons was really kind of an improving profitability picture of the online business as the revenue -- student population and revenue is ramping up there. So, you know, we did very well in the fourth quarter. It gives us a high level of confidence that in the 2003 period we're looking at that as approximating break-even for the full year. And frankly, I think the only thing that will keep that from being profitable is just the rate of growth. If we slow down the growth and we have said this before, if we slow down the rate of growth for the business, we think we could be showing bottom line positive during 2003. Obviously, if we continue to do well, there is the possibility with stronger revenue than included in the guidance, that there could be profits there this year. One other thing I will mention, just because we will talk about how it impacts the overall company. With online becoming a larger percentage of our total revenue, and with presumption of near break-even performance for the year, that actually has a -- while that is good financially, it has a dampening impact on the overall margin improvement. So, the dollars may be there on the bottom line. Again, a larger proportion of total dollars at low margins, it actually makes the year-over-year comparisons and margin improvement look a little bit worse. If anyone wants to discuss that math with me on a -- separately, feel free to call me.

We have a vibrant business, doing exceedingly well, has certainly beat our expectations in every regard. It is kind of a nice situation to really have to be able to have a business that basically is growing itself, where it paves its own way. I think as we share some of the numbers with you, I think you will see this is going to be one of the biggest providers of online education anywhere.

I might add from an accounting practice standpoint, we have certainly with all the new programs that Nick has introduced in his business, have had a lot of development activity. We've not been capitalizing any of those costs. All of our development efforts in term of curriculum, etcetera have all kind of run through our operating results today.

Also, those development costs are very, very modest and we are turning out really ground-breaking kinds of programs and just encourage everyone to stay tuned in terms of that profit figure because I think we are going to see a lot of nice things in the future.

Very helpful. Thank you.

Our next question comes from Gary Bisbee with Lehman Brothers. Please state your question.

Hi, guys. Great job on the quarter. A couple of questions if I could. To followup on that last one briefly, If the development costs for programming or the courses for online are not that high, I was wondering generically, what would be making up the $60m of costs that you are expecting to offset the revenues? Is that mostly hiring more admission people to handle the increased lead flow, could you give us a sense of what that cost breakdown is?

Let me throw out a few things, as you are growing something, and keep in mind, we grew this from scratch going back a year and-a-half ago. But there is a ramp-up that takes place. You have to build infrastructure and have facilities and hire people. Marketing is certainly a part of that. There is course development, payroll, etcetera. As you go along, it is built on a sound foundation. And I think we found as you look at a brick and mortar school as you build it up, you have to spend money in the beginning to get it to the size you want to get it and decide at what point that you want to have the type of margins that you want. So, you know, it is all kind of built on a very solid plan.

Obviously we are growing the business dramatically. I don't think any group has seen this kind of growth. Our first start was less than two years ago. I have to remind everyone, we are talking about $60m and perhaps that is a conservative estimate for the year. A lot is in market, admissions and of course in teachers and in academic support taking care of our students. We feel good about the expense structure.

Okay, great thanks. If I could follow-up on an earlier question specifically to enrollment growth rates at campuses. If you pull out the impressive online numbers, looks like 15% growth year-over-year, which I think is really strong growth. But, that is down from what it has been. The question is are you willing to give us a sense as to what in percentage terms growth would be reasonable excluding future acquisitions moving through 2003?

Gary, I think what I suggest is what is implicit in the guidance for the year is kind of that mid-teens level of growth.

Okay.

Obviously we have always approached guidance with a conservative slant. That is basically what is implicit in the numbers.

We are a system that huge, huge majority of students are full-time students, very few part-time, less than 5%. And certainly a lot of our students are taking longer programs and staying longer.

Okay. One last quick one, if I could. You know, you haven't done acquisitions or a big one in a while. You know, I know it has been great in terms of margin leverage and allowing you to showcase free cash flow, which was spectacular this quarter. Is there any reason you have waited or are you waiting for pricing pressure or not seeing as many acquisitions in the markets you want? Is there any reason it has been really two years since you have done a large deal?

We did a number of large deals in 2001 and we finished a major one in December of that year with our school in Pittsburgh. I think we had done four others in that area. There are different opportunistic things as you look at different deals. It ebs and flows. There is a fair number of deals out there. You know, we don't feel under any pressure to have to do a deal. We do them when it is right, strategically and want to make sure it has the qualifications we are looking for. That has been our success. So, you know, it is one of those things some years we have done a dramatic number of deals and other years we have done as few as one. You shouldn't read anything into that. There is plenty of deals out there and they kind of flow in when it is time to flow in.

Gary, I would remind you, we recently completed a new financing facility, we replaced a $90m credit facility with a $200m facility, given our cash flow, we feel comfortable that we generated enough cash from operations for -- to sustain our internal growth. The primary reason to have a larger facility there is to support our acquisition activity and obviously I wouldn't want us to have a larger than necessary facility and pay the cost associated with that if we didn't have some reasonable expectation that we would use it.

Okay. Great. Thanks a lot. Congrats on a good quarter.

Our next question comes from Jerry Herman with Legg Mason. Please state your question.

Thanks. Good morning everybody. Jack, question about the front end of the pipeline and clarification. You indicated leads were up 60%, that applys to the full year? What was fourth quarter, if that is true?

Yes, the full year was 60%. The fourth quarter was 42%. And of course, that was based on a tremendous fourth quarter from the prior year. So, it was very, very strong. So, we felt extremely good about that.

The other numbers jump off in terms of strength at front end is booked futures 68% and January starts up 28%. January start of 28% relative to 19% growth for the quarter, what do you attribute the start strength and book futures strength to and is there any or could you describe the relative influence of online in those metrics?

Just to put it in perspective, the prior year, last year we had the same call and were at 29% on book futures, going into the year. I think we are in a stronger position and better position. We have been able to capitalize on the leads flowing in this year. People don't always want to start school the day the leads come in. A lot of times they defer that. Students will enroll from 3, 6, 9 months maybe a year in advance. That is positive. It is typical of how people look at higher education. As we look at January start of 28%, I mean, I just think that a number of the new programs we put in 2002, those kind of just got a start and the first start would have been in October. We are able to capitalize on those for January. Plus, it is a great time to start school. People want to start the new year off right. I think we were successful in being able to work our leads and close those leads. Last year, you know, really had three drivers that drove the lead flow. Internet was spectacular. The demographics and the number of students pouring out of high schools was huge. Of course, television, people are looking for something to do and they sit home and watch TV. I don't think if that has to do with unemployment rate. We are very attractive alternative for people that are looking for things in general. Online is very appealing for people. I think we did extremely well in our brick and mortar schools.

Could you help us put in context the 50 program transplants less introductions this year, what is the approximate base in terms of combination of programs and schools?

Let me turn over to Jake Gruver, the president of college, schools and universities. If I understand right, you are saying if a school has 2 programs are they adding a third or something like that?

Right.

Hi Jerry. And it is a combination and when we talk in new programs, we are looking for segments of the market that maybe we are not drawing from right now. So, it is meaningful they will gain substantial numbers of population, rather than just diluting what they are attracting or the flux of disciplines attracting.

We could add many, many more programs to our schools, we just want to be judicious and do it in a timely way. You know, I guess kind of putting it in perspective. We could probably easily add another 50 programs. In the spring up through all the disciplines . We got criminal justice, various design programs, educational programs even our culinary school are putting in new programs.

Jerry, this has been a question historically trying to define what this means. We are now basically in the campus-based operations teaching at five basic major curriculum areas. Each curriculum area has more than one program. So, you know, if a school has got visual communication and IT programs, we could add an additional Visual Communication program. A school teach necessary two or three major curriculum areas, doesn't mean we can't add a good number of programs. Like VisCom can include photography, design, graphic art programs. There are a variety of different programs that could make up the major curriculum areas.

Might the existing base be 300 or 350 in terms of existing combinations?

We could add many more programs for a lot of years. That number is probably not out of line based on the numbers of locations.

Great. Thanks very much.

Thank you. Our next question comes from Richard Close of SunTrust Robinson Humphrey. Please state your question.

Congratulations on a good quarter, guys. Couple of questions on the online to finish up there. Do you have any targets for operating margin down the road in that unit? Then, on the revenue side for online, you are saying $60m plus for 2003. I remember average tuition or annual tuition being $26,000 if I am correct. Wouldn't it put higher, $78m run rate on that front?

Two things. One, the latter part first. In terms of the run rate. $20,000 per student is probably a better round number. You have to -- we have individual programs that cost more than that and everything. But, if you look at the reality of what we are earning on an annual basis per student, it is closer to $20,000 right now. In terms of profit margins, I mean, we have indicated that as we look at this on a long-term basis, we clearly see a stronger margin profile for this business over the long haul than our campus-based operations. With significant leverage in terms of occupancy costs and in terms of marketing and student services with their being an efficiency of scale of doing a lot of those things online. You know, we look at this as having at least a 10 basis point margin opportunity over our brick and mortar campuses, but that is at a future date.

Okay.

Does that address the questions?

That is good. On the admission and marketing reps for online. Where are you guys at now and where do you expect to be, I guess, toward the end of the year?

You know, I guess that I would just say that we have a significant number of admission reps right now. We have great programs of training and great programs of succession and developments. We feel very good about them. I would rather not right now talk about the specifics in terms of the productivity per rep. But I will say tremendous rep productivity, tremendous group of admission representatives and I would say we have enhanced that with what we call our virtual enrollment center. It is 24/7 enrollment site. It is producing up to 20% of our enrollments for us in a virtual sense. We continue to add admissions reps. Online is about automation and the future and about customer service. We are doing a lot along the lines of automation and 24/7 enrollment sites. We feel sound about scaling this. We feel comfortable we will move into the future as we gain more and more students through our processes.

Something to keep in mind, too, we have found that this balance, if you will, between having live representatives and having an automated enrollment site has given us tremendous leverage and benefit both in terms of how to handle the customer in the conversion rates and the ability to work with the students at the time they want to look at our schools.

I will add one other point. We have a significant business where we scale very well. We are always scaling for the future and not just for now. I will say we have over 300 employees. We work out of 80,000 square foot facility. Many opportunities to scale both in the tech infrastructure, employee infrastructure and we feel good. We have a big business right now. It is going to expand. We are working ahead in all areas and trying to plan 5 to 10 times ahead. How do we accommodate not just the 3000 students today but the 10 or 20,000 tomorrow.

Richard, in terms of some forward looking information, we intentionally gave you a base level and said we expect to exceed $60m. We are going to look at in terms of growing the employee base overall and admission reps, we will do it based on how the business is moving and growing. And we're basically trying to be flexible there. We want to grow at a strong rate and yet we want to do that with a level of discipline that we maintain quality and control over the process. So, you know, we will do that as fast as we can intelligently and profitably do so.

$60m is very conservative. We try to be conservative on our numbers. We think moving forward in the future, there is lots of opportunities.

Okay. Two quick final questions and then I will turn it over. Jack, you are the only company that really gives out these book futures. Can you talk a little bit about what you guys historically have seen as the conversion rate in those futures? You know, people say they are coming, how many actually do come? And then maybe on the transplants, if we could get a sense of health care is 10%. What is the major curriculum area that you are adding?

Just speaking on book futures. Booked futures are indicator of the number of the people at a given time point. 12/31 is the end of the year and going into the new year. Being up 68% is something we felt very excellent about, certainly it was up dramatically over the prior year. It shows people have an interest and have enrolled in school and made an application and want to start at some point in the future, could be January or April, could be the fall or could be the summer time. You know, these people -- there is historical basis. They show at various rates depending on whether they are local students, high school students, out of town, international students. But, we feel very comfortable with the numbers that are out there. You know, we always work with the each student to make sure school is ready for them when they get ready to start school. But it's very, very positive situation. On the conversion rate, that is going to vary by lead source. But again, there is an abundant amount of leads out there and they translated into enrollment or we wouldn't have some 68% more enrollment than last year at the same time, getting ready to start school. I think with our new automation systems, I probably might even look for higher conversion rate this year than we have seen in past years. Let me ask Jake Gruver to comment on the 50 new transplants and the timing on that and the main curriculum areas.

Hi Richard. Before I do that, on the booked future, I will add with these new programs and push for more bachelor's degrees, high school futures is a big number increasing, a lot of activity with higher degrees. As far as the mix, criminal justice is generating a lot of activity out there. As we talk about design programs to Pat's point earlier, we are talking about digital film making, media arts, photography, game design, in addition to fashion. Also, take those two the bachelor's level. Even in the culinary, hospitality, restaurant and management, and baking rotissery are some new programs that are gaining interest and helping beef up those enrollments.

One final point on booked future. There is seasonality to it. Jake kind of eluded to it, this is a heavy high school recruiting time of year, you know, high school students are making their decisions now and that kind of influences the book futures. So, there is seasonality there.

Okay. I will slip one final one in. Is the four schools you are opening, can you talk about what areas they will be in, colleges, schools and universities?

Sure. Las Vegas will be starting culinary school, that is scheduled for July. Atlanta will be looking at a culinary school. In Detroit, will be looking at one of our international academy of design. In Houston we will be looking at a university, American InterContinental University schools.

Okay. Great. Thanks. Congratulations.

Thank you.

The next question comes from Trace Urdan with Think Equity Partners. Please state your question.

Thank you. Good morning. Nick, my first question is for you. I think of you guys as being close to your customers during the lead process in the conversion process. I am wondering what you guys are seeing in terms of comparitive shopping. Is there comparitive shopping taking place as you try to convert these guys or not? Is there a change there?

You mean in terms of --

--looking at other schools in addition to AIU Online.

We have students are very well studies and that look to competition. In many ways, they choose us and we feel good about our tools, Trace. I know you have seen our dynamic virtual campus and our platform we created for in-house multi media presentations. A lot of those things I think are the reason students come to our schools. We also offer a lot of customer service throughout the school year from financial aid online that cuts out a lot of messy paperwork, tech support 24/7, award winning cyber, ecetera. I think we are able to offer to students a lot of tremendous value for what they are getting. So, I think when we talk to them and interact with them, we find they are shopping many competitors and choosing AIU Online and we feel really good about that.

Another way to put this in perspective at all our schools, online is no different. We are basically schools and colleges of choice for people that have a choice. In almost every case, these people certainly shop around because they are very aware of what they want. They are paying a lot of money and I think what they end up doing is going to the school with the best product that suits their needs are.

Very good. Pat, you all mentioned third party lending in your discussion. I am wondering if there has been a change there? Has there been a greater use of third-party lending? Are you getting close to third-party lendors, is there a dynamic happening there?

Well, in terms of the relationships there, we've had relationships with Sallie Mae and Educate, which is part of Wachovia Securities, for a number of years now. We announced a relationship with Sallie Mae about four years ago at the end of our first year as a public company, we announced the beginning of that relationship. So, we've as everyone in the post-secondary market, not just the four profit players, everyone has really looked to alternative loan sources. You know, we're no different. Those two relationships are things that we have kind of clear line into those companies in terms of credit review and approval process by the institutions. So, we really facilitate that relationship. But, you know, there are other lendors that we are talking to just to make sure our students have the widest variety of options available to them.

Secondly, it is fair to say there hasn't been significant movement in the use of third-party lendors from what you have seen historically?

I would say the basic process is not any different. Probably as proportion of the total funding, the level of alternative lending has probably increased. But, the process is not dramatically different than it has been.

Fair enough. I wonder if you all might be able to offer any kind of update on -- you had spoken of maybe forging a partnership in the health care arena that would be comparable to the Le Cordon Bleu process.

There is nothing to report at this time. That is a concept that we have and are exploring it and continue to do that. As something materializes in the future, we would certainly share that.

Thanks.

Okay.

Our next question comes from Mark Marostica with US Bancorp Piper Jaffray. Please state your question.

Thanks. Nice job on the quarter.

Thank you.

First question on placement rates. You mentioned picked up in the quarter. I am wondering what drove this in particular and if you could comment on placement rates of IT graduates, I than is 20% of student population. How are those trending?

Let me answer your question in the broad sense and I will ask Jake Gruber to comment. We really beefed up our career services area with the combination of adding more people out there to work with students and make contact employers. The other thing that made a significant difference is this past year we did a lot of stuff on a global web thing. We rent career fairs. We probably have an advantage is that 35% of students come from out of town. A lot of students then want to relocate back. So, takes pressure off there. Because they can go back to their local community or they are willing to travel outside of the area that they went to school. We found that has made a significant difference, also. But, some of the other particulars, let me ask Jake to make comments on that.

Sure. Mark, especially in the IT area, the job outlook is very strong for our graduates. One of the things we have done this past year, is been active in pursuing job orders, rather than sending students out there looking. Going out to the community, as Jack said, on the Internet with our virtual job fair and placement sites, that helps nationally, as well. Again, as far as the IT, we have not seen a decrease. There is still lots of jobs for our folks out there.

Okay. Great. Then secondly, you commented on bad debt improving in the quarter sequentially. At last quarter I recall student retention kicked down a bit. I am wondering how does student retention fair this quarter and how does that relate to your bad debt experience?

Let me address a piece of that and then I will turn it over to Jake. What I mentioned last quarter was that we were down a couple of points year-over-year. You know, there's no change in the fourth quarter from that statement. That continued. And I would tell you the presumption in terms of our guidance going forward is that we would stay at approximately the current levels. However, with it being down, we certainly are giving attention to it. Jake, maybe you want to talk about the things we are doing there?

Retention, we are proud of our results, but never take it for granted. We never settle for good enough. Any time we have a drop, I feel like we haven't done our job. But to address it, we have instituted new and innovative initiatives to address customer service and student satisfaction, in all areas of operation from student services departments, student resource to faculty and staff training. We are updating the way we do business by incorporating some of the current technologies that are available to help us stay connected with students. In addition to the funding side of things, we are also being aggressive in providing part-time jobs for the in-school students. That has been well received to help them overcome any obstacles, as well.

I would say it starts with financing. I feel we are doing a great job. Pretty much all of our students are completely packaged in their first week of the start. They will stay in school. But, we really have good online retention numbers. It starts with our dynamic virtual campus. That alerts us to students and that keys academic advisors, who work with students all throughout the year, every step of the way. They will help that student. Our faculty are really great faculty and have terminal degrees, which means they are experts in their field and expertise. Finally, our virtual learning labs have been launched and that really makes students successful learners in any areas they are having a concern with. Those things are going to make us, we really compare favorably and are a leader in the online world. I think we will take that over as number one this year, without doubt, if we are not there already.

Okay. Thank you very much.

Our next question comes from Brad Safalow with J.P. Morgan. Please state your question.

Hi. Good Morning. Just a quick question on the student demographic at AIU Online. You referenced it is expanding your reach. In terms of how that maybe differs the type of student you are getting versus your core schools?

Sure, again, let me give you a couple of quick stats. In our short year and-a-half we have students from 50 states and 20 foreign countries. We have a dramatic reach out there and we do not canabolize from our smaller given city markets. We have students from all over. We have about 55% male, 45% female demographic and the female market is growing with our new education and VFA offerings. 94% of students are full-time working students. We find they can complete very successfully the online programs. The average age is 32. The average income is $44,000 per year. We have really nice mix, about 50% of our students are business, 50% IT. We are seeing no fall-off in IT student coming into our school or in graduation. We are feeling good about that. This common education are going to add to those numbers of course. We are proud about 50% of students are taking bachelor programs. 20% master's and 30% associate and moving into plus 2 junior and senior year bachelor programs. We feel our demographics are really sound and driving a really great student into our school.

And in terms of the allied health programs you talked about introducing, what type of degree programs would they be?

You know, I won't get into all the specifics. There are a lot of health care programs available to us. We are looking at creating applications for those right now. We feel we could move into those at the end of this year or early next year and also criminal justice and very clearly, doctorate programs.

Thank you very much.

You bet.

Our next question comes from Austin Millage with Goldman Sachs. Please state your question.

Yes, couple of bookkeeping questions and couple of specific questions. Could you provide us with deferred tuition revenue balance on the balance sheet as of 12/31?

As of 12/-- I want to make sure I heard the question. 12/31, you want the deferred tuition revenue number?

Yes, I want granularity on the balance sheet as far as deferred tuition balance.

Approximately $53m dollars.

Okay. You have the breakdown of A/R between students and other?

You know, we are not providing that level of detail right now.

That will be in the K, I guess?

Yes, it will be.

On the A/R side, will you give us the breakdown on the accounts at year end?

That information will be provided in the K.

Okay. Could you give a little profile on the average student --

I can tell you this, our allowance for doubtful accounts has not been reduced as percentage of the total receivables.

Yeah. I guess what I am trying to understand is, it looks like your revenue per average student is up about 16% year-over-year. Your average population is up about 22% year-over-year. And yet it looks like year-over-year revenue growth shows decline of 20% on year-over-year basis. I was hoping maybe you could give us color on your average student profile because you have got --

Could you explain the last statement, I don't know how you can say looks like revenue is going down.

Compared to last year. There has been acquisition impact there, I understand that. I am saying the rate of change, growth rate is decelerating at the top line. And AIU is making up some of that, but I am trying to understand the average age of -- can you give us profile on the type of students coming in? They are paying you a lot more money and it sounds like there is a large component of them coming straight out of high school. And you know, what kind of -- sounds like there is a lot of high school grads that have a lot of cash out there, looking to go to school--

In terms of the price increase, pure price increase is much more modest, you know, somewhere in 5 to 7% range. Most of that increase in revenue per student is really a mix change.

Can you give clarity on what that mix change is?

Well, for instance, you know, our revenue kind of revenue per student for culinary, which has been our fastest growing curriculum area outside of the online business is our most expensive price point programs. The online business is on revenue per month or revenue per quarter basis is more expensive than the others. So, you are seeing revenue per student go up that is a large component is mix change, not pure pricing increase on a same-program to same-program basis.

Okay. Can you -- maybe if you could tell us who is hiring your students? You said 94 -- amazing placement rate. Can you tell us who is hiring all these chefs and graduates?

There is no concentration per se, but Jake, can you comment on that?

It goes across the board from local companies, international companies, premiere hotel chains that hire our chefs when it comes to culinary, depending on how far the graduate wants to go and willing to relocate. We are again, with some large companies, smaller companies and all these areas.

Probably the majority of students that get hired go with smaller to medium-sized companies. That is nice about the model we set up. We don't rely on any one area in order for it to work. Plus, being kind of international, there is the ability to have people work at different parts -- different areas. So, a lot of our students look at American and spend $400b eating out every year. Culinary arts area is booming in spite of what the mainstream economy is doing. When you look at IT jobs, there are a lot of them out there. I think what they are, is what we are training people in the area that IT people need currently. When you look at business, that has been vibrant. We do secretarial science to MBAs, there is a very full mix there. When you look at Visual Communications area, almost every product service, whatever has something to do with web or Internet or somewhere along those lines. So, we've tried to really look at what business and industry need and made that statement very strongly. It has matched up very, very well with what students want in the new programs. It is certainly what business and industry need.

Sounds like it is going well. Can you provide us and tell us about the scale and the placement side, because it sounds like majority of placements and grads are going out to smaller companies. How are your placement guys getting a hold of these smaller companies and reaching out to the world and saying, "Hey, we've got what you need."

Keep in mind, many school vs been in local areas for 50, 60, 70, 100 years. We are part of the local communities. Then, on top of that, we've got kind of local reputation, regional reputation and national reputation in some cases. With the advent of putting different things on the web and the Internet, you know, actually running like virtual job fairs, we've been very successful in going out and connecting students with employers looking to fill specific needs.

And Jack, we also have about 50% of students who secure jobs while they are on externship programs, especially in Le Cordon Bleu. That is really dynamic. Students are getting jobs even before they finish their externship program.

To go out and recruit job orders, new programs or existing programs have an advisory committee made up of local folks from the industry and provide a network to get the word out that we leverage -- what we have coming out of our programs.

One final question. Could you give us the average loan balance of a student when they graduate? I mean, between you and title 4, obviously. How much do they come out of school with as far as student loans, money they owe you and the government?

I don't know if I can quote an average. That varies. You know, I mean, the majority of the students are not on an extended payment plan with a balance due when they graduate.

I think it certainly is reasonable that the students can find the funding to go to school. They have a reasonable amount of debt when they leave school. What I cite here is the fact we have one of the lowest default rates of any system in our industry, whether you compare it to people within the industry are certainly as you compare it to a lot of the local, state colleges and universities. So, it just shows there is a lot of value there. People are able to go out and get jobs and pay back the necessary loans.

Average students comes out with extended payment, it just happens to be with Sallie Mae or one of the other lendors.

Yes, that is true for us and probably every college.

Oh yeah. I am just try tog clarify or understand if it costs say $20 or $40 thousand dollars to get a degree at the culinary institute or other programs, how much money will I come out or is the average student going to come out with as far as student loans because to the extent you can place students and keep them in work for more than a year then they come out of the default rate. So, I am just trying to understand what is the average that the student has when they come out?

We could address off line some of the basic provisions of the title 4 programs and what kind of dollars are available and things like that. But Feel free to call us separately.

Okay. Thank you.

One other point, on the notion of the decelerating growth and you said acquisitions have an impact. I can tell you for the full year of 2002, our same-school revenue growth excluding the impact of our online business, okay, same-school revenue growth, excluding the online piece was 30%.

Okay. What was it last year?

Last several years between 32 and 34%.

So, it is decelerating?

Couple of points there but also its based on the way we calculate same-school, that is associated with the lack of recent acquisitions, as well.

Right. That is same school. Okay. Thank you.

Thank you.

The next question comes from Mark Farano with First Analysis. Please state your question.

Good morning. Congratulations on a nice quarter.

Thank you.

Couple of quick questions. One, I know you said several times that all your online students are full-time degree-seeking students and I appreciate that. But, was curious if you are giving thought at some point to expanding the online platform to offer, Apollo calls it – flex net type of offerings, and your other areas of study or the different schools and rolling out an on-line capability to the International Academy or some of your other schools.

I would say Flex Net, I am familiar with that, there are a couple of thousand students with that in Phoenix, I believe. We feel that the numbers we report with online are full-time accelerated degree-seeking students --

Right. I know that.

--very separate from our other audience. I would say, if I could, we have another opportunity for brick and mortar schools which is called SeaCore, we do offer a bit of online opportunities, single-subject, to those students very different from the online education.

If I understand the question right, I think what you are wondering is do we see a market for people who want to take a part-time program? We definitely do. It is something on the drawing board. Because of the demand, we went out with full degrees because we found a huge number of people who are working adults and want any-time, any-place degree. They want to be accelerated, a bit. There is probably opportunities for people to do it on a slower basis.

The way I look is to decelerate opportunities in the future.

The other part is will an online capability eventually become an additional option or growth driver for Gibbs or International Academy?

Mark, it is today. A good number of our campuses, the SeaCore program that Nick mentioned it is offering of general education classes, just in brick and mortar students. That exists today on a number of campuses and will exist on all of our campuses.

Okay. And then, just in terms of the guidance could you just give a little more sense of why you are thinking there will be more margin expansion in the first half, rather than the second half?

I eluded to this earlier. It is kind of as online business grows as percentage of total revenue, while that business is at more of a break-even level, that has depressing impact on the margin calculation.

Okay.

So, it's not that there is a big shift in the profitability improvement in the other campuses, it's just the math.

That shift would be more than enough to offset the idea that I assume if you think online would be break-even for the full year then it loses money in the first half and goes profitable Q3 and Q4?

I would not look at it that way. We are reinvesting back in the business on a regular basis. So, there is not a dramatic difference in the bottom line over the course of the year. It's more the top line.

Okay. Lastly, some of the older school networks you have, are networks you have owned for a longer amount of time, like Gibbs and International Academy. In a qualitative sense, how are those performing in terms of their growth rates, say relative to the average ground campuses?

It probably depends on the location, every school has different opportunities. I will tell you as you track those since we purchased them, those have done just extremely well. Every so often, different locations or schools go through reinvention, but there are a lot of exciting things happening in both areas. Couple of new start-ups have been with the academies. They have been with Gibbs and the academies. Gibbs and the academies are adding some of the most programs in 2003 than in any of our other schools. Of course, when you look at the brand name of Katherine Gibbs, I mean, that does extremely well. The Academy, the majority of those have the bachelor degreed already. So, we really see some great opportunities out there.

Okay. Thanks a lot.

Thank you.

Our next question comes from Jeffrey O’Denny with Jefferys and Company. Please state you question. JEFFREY O’DENNY: Good morning. I had to jump off, so, you can ignore this question if it has already been asked. There are obviously thousands of new students on online that will begin to potentially strain the technology platform for everybody in the online space. Although, given a very conservative outlook for EPS outlook, I am interested what you are looking to do for really the platform itself and making a decision if it is going to be as big as you think it is, do you go with a Microsoft collaborative learning effort that their getting started with the recent acquisition commitment or do you say, "We need someone really big like IBM to support us."

Let me turn it to Nick.

I guess I would say I could answer this in a lot of ways. Number one, we are always scaling ahead of where we expect to be. We’re ahead of where we are today by maybe 5 or 10 times. You know, I can toss out a few things. We are moving to dot-net, Microsoft ability. That sort of running together on the technology and it speeds development and drives integration and enhances scalability. Perhaps that is part of your question. JEFFREY O’DENNY: Right.

I will also say we created our own learning platform in-house. We do not lease that from any other group, allowing us to customize it in-house. We created VC in-house. Virtual campus is in-house. Again, we do a lot of things in-house and we also have about 30% of Broadband users today. Although, we definitely test everything in 56K modem environment, we are comfortable with our Internet connectivity. We utilize DS-3 line. It enables us to have the delivery opportunities of about 30 T1s. Also, you know, we feel our server environment, which sort of based on the lines of NT Technology, really enable us to accommodate technology as we move into the future. So, I really talk about the different elements, not knowing exactly what you are looking at. But we feel we are ready for the future. JEFFERY O’DENNY: I was just thinking if you really see this being as large as the $300M or $400m business that perhaps its better to have integrated platform and go with one vendor that can support you in all those characterizations you have.

In terms of vendors, I am not exactly sure what you are talking about, again, we create most of these things in-house. They sit on our campus 2000 base database. We have campus 2000 as our base of data. Then, we create all the other items off of it inhouse, that sit on a second tier of data, if that answers. JEFFREY O’DENNY: Yes. I will follow-up with you, Nick.

Thank you. As reminder, should anyone have further questions, press * 1 at this time.

All right. I will make a last comment here, if I might. I want to indicate that we thank everybody for their questions today. We've got a lot of confidence in the future and we feel the company is in a good position. We got off to a great start this year. Both our on-sites and on-lines have some tremendous things planned for this next year that we are currently implementing and we look forward tosome really great numbers. We want to remind everyone on February 12th, we have an investor’s day at our corporate headquarters and that is certainly available. There is information out there. Thank you.

You may access the call by dialing 973-709-2089, with id number of 282588. This concludes our conference call for today. Thank you all for participating and have a great day. All parties may now disconnect. (Normal Termination.) The call ended at 11:17. Robber --- 0