Perdoceo Education Corp (PRDO) 2003 Q1 法說會逐字稿

Good morning. Welcome ladies and gentlemen to the Career Education first quarter 2003 earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for question and answers after the presentation.

Statements made on this conference call that are not historical facts including (inaudible) limitation statements about the future benefits of the merger with Whitman Education Group are forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on information currently available to us and involve risks and uncertainties that could cause our actual gross results performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements.

Such risks and uncertainties are more fully described in our filings with the SEC, including our form 10K filed on March 10, 2003. We assume no obligation to update these forward-looking statements.

I will now turn the conference over to Mr. Jack Larson, chairman, president and CEO of Career Education.

Go ahead, please, sir.

Good morning. With me today is Pat Pesch, our CFO, Jay Gruver, our President of our Colleges, Schools and Universities Group, and also Nick Fluge, President of our Online Education Group.

We are pleased to share our great results for the first quarter. This is our 21st connective quarter of record results. Results for the quarter demonstrates the strength of our system. Revenues were up 39 percent. Net income up 61 percent. Starts up 38 percent. And the April student population up 33 percent. We also had improving margins.

Let me highlight some of the events that produced our great results. Leads were up significantly, some 52 percent. This shows that there's a strong demand for our programs and effective ways to reach our market. TV and the Internet were the big drivers.

Our conversion rates on our leads were also up. I attribute this to having more admissions personnel in our new automated enrollment sites.

Starts were up over last year. Some major reasons why they were new programs, new startup schools, great show rates and the ability to reach a larger audience with people seeking diplomas, associate, bachelor and master's degrees.

Both our CSU Group and our Online Group have the ability to serve many more markets than last year.

Let me now give you several important key indicators two on operating group for the first quarter.

For the Colleges, Schools and Universities Group the placement rate was 94 percent. New program starts were up. Re-enters were up a lot; those are people that have left school at one point but are now returning. We had many new automated procedures implemented and there's more to come in the future. There are larger admissions teams in place to handle the lead flow and we have record student populations.

For the Online Education Group, student population is up very significantly to 4100 students. The placement rate is 98 percent. The revenue was outstanding for the quarter at $20 million. We have new projections now indicating that the revenue for the year will be $80 million and profitable. The lead starts in operations are going very, very well in this area. There's many new innovations in technology were implemented. We put in two new programs in the first quarter and the admission teams were in place to handle the greater numbers of leads.

Our internal organic growth is very strong. The strategies we implemented last year have really started to pay off this year and will only get stronger throughout the 2003 year.

Another really strong indicator of our future is that our book futures are up some 48 percent. Just as a reminder, the book futures are people that have enrolled in school or have filled out an application and are waiting to start school at some point in the future. So at the end of March, the book futures were up a whopping 48 percent. Last year, we reported 32 percent. So this a very strong future indicator of people wanting to start school.

Let me discuss a recent acquisition of the inseec group, our operations in France. They're poise for a record breaking year, the international market is vibrant and there are many processes that we're sharing with them in education, technology and marketing that will have future benefits.

The Whitman Education Group acquisition is on schedule and should close July 1, 2003. We have started the process of working with the CEC and the Whitman teams to implement changes that will make for a smooth transition and add operating leverage to the Whitman operations, much like we have done in the past with acquisitions.

We have a great history of being strategic in our acquisitions and being able to attain very attractive returns on those investments. Nothing has changed in terms of how we look at our returns on investments.

2003 has many exciting ways to grow, 50-plus transplanted programs system-wide, four new startup schools, acquisitions certainly with Enseek but also with Whitman soon, our Online Education Group, our on site education group, new bachelor and master's degrees and other new programs.

And now I'd like to introduce Pat Pesch, our CFO.

Good morning, everyone. As Jack indicated, the first quarter was an outstanding quarter financially. Revenue growth was up 39 percent in total and just under 36 percent on a same school basis. Income from operations grew 57 percent resulting in a 140 basis point improvement in margins. This revenue and margin improvement drove net income to $19.2 million, a 61 percent increase. Fully diluted earnings per share grew from 26 cents to 40 cents, a 54 percent increase.

As Jack indicated, our on-line unit performed at levels in excess of our previously issued guidance. We had indicated this business would be at or near a breakeven level with annual revenues of at least $60 million. With revenue for the quarter of approximately $20 million and profitable, this contributed very positively to our strong performance in the first quarter.

I should note that our campus-based operations remain strong with solid revenue gains in year over year margin improvements.

Net cash provided by operating activities of $27 million exceeded net income by $8 million. Differences from the prior year, besides the increase in net income, are primarily attributable to changes in the timing of certain normal recurring payments, particularly the payment of certain tax liabilities.

I also note an area often of interest is deferred tuition increase. Our deferred tuition increased 46 percent from the same time last year.

With respect to the guidance that we provided in the press release yesterday, we did update that guidance significantly with improved expectations for revenue growth and improved EPS performance.

I will note that the guidance in the press release also reflects a change in our classification of bad debt expense. As indicated in the press release, we had previously classified bad debt expense as a reduction of revenue to arrive at a net revenue number. This treatment was inconsistent with most of our peer group and we decided to make this reclassification to provide better comparability with our peers. The guidance in the press release reflects this updated classification, and I would indicate all of this information in terms of gross revenue, bad debt expense and net revenue, has been previously disclosed, although not reflected on the face of the income statement.

Full year revenue growth, we expect to approach $1.029 billion to $1.038 billion for the full year of 2003. We expect earnings per share to be approximately $1.90 to $1.92. This represents about a 9 cent increase from the previously issued guidance; 5 cents of that is attributable to the performance really in the first quarter. The remaining 4 cents is attributable to the second through fourth quarter increased expectations.

I should also point out in terms of our expectations for the second through fourth quarter, that this does reflect the inclusion of the Enseek Group, our French acquisition ,in the numbers. I would point out to people that the Enseek transaction, the schools in France are largely dark in the third quarter of the year, meaning that most of the students are off for the summer and therefore limited revenue in the third quarter. While that does have, by itself, a dilutive effect on third quarter earnings, the overall Enseek transaction for 2003 will be accretive.

Specifically for the second quarter, we expect revenue between $241 and $243 million and earnings per share, fully diluted earnings per share of 30 to 31 cents. Third quarter revenue we expect at $253 to $256 million and fully diluted earnings per share of 37 to 38 cents. Fourth quarter revenue between $290 and $294 million and fully diluted earnings per share of 81 to 82 cents.

All of our previously provided guidance remains intact. I should point out, however, that none of this guidance reflects the Whitman transaction . We will provide updated guidance with respect to the impact of that transaction when it closes.

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

We will now take questions.

Thank you.

Ladies and gentlemen, the question and answer session will begin at this time. If you're using a speaker phone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your push button telephone. If you wish to withdraw your question, press star two. Your question will be taken in the order they are received. Please stand by for your first question.

Our first question comes from Howard Block, from Banc of America Securities.

Please state your question.

Good morning, Jack and Pat. Again, congratulations on just a superb job on the quarter.

Thank you.

The first question is with regards to this start data in the quarter, it significantly exceeded our expectations, I'm guessing everyone's. I was wondering if you could elaborate on the performance a bit and maybe offer some order of magnitude between on-line's contribution to start, new schools, maybe new programs at existing schools and maybe existing programs at existing schools to help us better understand the drivers?

Yeah, one of the things I think that is important to understand, we had of course, announced in our when we did our fourth quarter that we were leaving December 31st last with some 66 more book futures year over year. So we were in a very strong position to certainly do a great job of having students start school in the first quarter. I think that was the biggest driver I think there was a lot of things we had done last year in preparation to have students start school. Certainly, they all have an impact. That's why we move in a lot of different areas where we've got new school startups from last year. We certainly had new programs both in the colleges, schools, and universities group as well as the on-line group. All those things have a real significant impact on what we're doing. You know, I guess I would turn to Jake Gruver, the President of the College of Schools and Universities Groups and also Nick Fluge is with me today and see if they have any comments on that.

Hi, I do. This is Jake. The new programs did out-perform the first quarter. We were able to get a few of them rolled out earlier than anticipated. And that resulted in part of that overachievement as well.

Howard, I guess I would just add -- Nick here - that we're real excited about our two new programs for the first quarter. BFA, MED. We continue to see plenty of interest on line and on-line had a really sound quarter.

Okay. And then the as usual, Pat, the guidance appears conservative, which we appreciate. And in particular though, it's a bit sort of challenging building out the revenue estimates and keeping it as conservative sort of as low as you've got it to. One variable that we can play around with a bit is the revenue per student. I was wondering if there's anything in the insect contribution in terms of their population that may sort of stem the growth in revenue for student over the neck couple of quarters?

Yeah, I would say that the insect students are at a significantly lower average earnings or revenue per student. You know, with, at an annualized basis at approximately $23 million in revenue and 3700 students, and that number fluctuates a little bit depending on externships and things like that. But 3700 to 4,000 students on that base, you can see that that is significantly less than the domestic operations. So I think you have the data to kind of look at the impact of that in terms of average revenue per student.

Okay. And then last question is just with regards to Jack's opening comments about the growth and admission reps. Can you give us a sense of as to how that scales, meaning, as lead flow grows 60 percent, how do you need to sort of scale the human capital component to your admissions rep?

That's going to vary by school. And you know, there's a difference between some of the different ways that we do market. But you know, we've got some ratios that we look at and you know, we've been very successful in coming up with the right rep productivity per rep and those actually have done very, very well there, basically ahead of plan. So I think that we're in very good shape there.

Thank you, and again, congratulations.

All right, thank you very much.

Thank you our next question comes from Kelly Flynn (ph) from UBS Warburg, please state your question.

Thanks. The question relates to re-enter. I think, Jack, you mention something at the beginning about those being particularly strong. I was hoping you could just elaborate on what's been going on there, perhaps how that impacted starts and enrollments and have there been any material changes in trends there and if so, why? Thanks.

Yeah. You know, the re-enter program, we've had very strong efforts in they're area. Each one of our operations you know very significantly tries to get students to come back to school that might have dropped out for personal reasons or other reasons. And I would say we've had a lot of success here in the last several quarters of getting people who want to return to school. So it's a special program that we have, we have special, you know, marketing efforts, if you will, to contact those people and see fits ready to have them come back to school.

Let me turn it over to Jake Gruver at this time.

Hi, Kelly. Yeah, to Jack's point, as populations get bigger, our retention rate, maintains itself but we have more people we can work with. And you know, because of the increasing population pool to work with, we have focused on it much more aggressively in getting students back in school and we have personnel, that that's their only assignment. So again with the increased population, increased pool and creased focus, we're showing some significant increases because of that activity.

You know, I mean, the bottom line, too, people, when at the leave school find they have less choices out there without having a good education. I think they see that it's good to come back to school. Let me turn it over to Pat.

Yeah and Kelly, part of your question, I think it's very important to note what we consider re-enters, those are not counted in our start statistics. If someone has dropped out of school and we make efforts to bring them back into school, while it does show up in our population numbers it has no impact on the reported starts.

Okay. That's very helpful. Thanks. And then also just another question on AIU on-line, I think last quarter did you some nice detail on kind of the demographic profile of the student base. Could you just update us on that and maybe speak to perhaps a target mix of working adults versus younger students and how you sigh that evolving over the next three to five years?

I'll ask Nick to take that. He's the head of the group.

Sure, I would say, Kelly, 94 percent of our students work, so that's really great in finding them opportunities to pay for education. We don't see any barriers there. Our typical age is 32 years of age we have students from 50 states and 25 foreign countries, we're really proud of that large, large mix in just two years.

Two years ago today, we had our first start with AIU on-line, so we're excited about that. I'll say that we have just slightly more than 50 percent of our population is male and the rest female. We have a really nice mix, 50 percent of our students are in bachelor programs. 20 percent in masters, 30 percent in associate. We as we look to the future, yes we'll have a lot of people who found themselves with associate degrees or higher and they want to get more education, so they come to us a little later in life. That's great. But I also believe as we look to the future, we'll see en-geners (ph), people who are 25 or younger, who have lived with the internet, computers et cetera, and I think that will be a great new student for us as we move into the future so I see sort of unlimited opportunities. We also see those internationally. We see a lot of interest throughout the world.

By the year 2005, there will be 1 billion people connected to the internet. So you can imagine the opportunities there with on-line education.

Okay. Thank you very much.

All right. Great. Thank you.

Thank you. Our next question comes from Mark Marostica from Piper Jaffrey. Please state your question.

Hey, Guys. Congratulations on the quarter.

Thank you.

The first question relates to the AIU on-line, that is I wonder if you can help us understand the characteristics of the operating margin or operating income for AIU on-line now, a year now and five years from now. What would target ranges be?

Mark, we really haven't changed our expectations there. We believe that ultimately our on-line business will perform at stronger margins than the campus-based operations. And we believe margins, you know in the you know, well into the 30 percent range are absolutely achievable and essentially what we've seen with the ramp up in this business and revenue growth so far, we are nothing, nothing other than encouraged that that will remain, that that is a absolutely the case.

Great and a question for Nick. Have you seen any significant change in the program mix today versus at your analyst day?

Mark, you know, I guess I would say that during analyst day, we're just in the process of launching two new one VIZ (ph) com and one education offering, so we have seen those do very, very well in the first quarter, but we still have a very significant business and also IT mix of students, but yes, VIZ com and education will continue to move into that mix of students. But still, very, very strong in the area of IT. Very, very strong in the area of business. And I would just say by virtue of the fact overachievement with these new programs and our existing programs, we continue to have very strong mix there.

Would you say that it would be fair to say that the increase of about I guess a thousand some odd students was largely due to the new programs of VIZ com and education offering.

You know, I don't know if I would want to specify that at this point. We had very, very sound starts in the first quarter in those two new offerings, but you know, I don't know, Pat, if I want to go further there.

A majority of that increase was not due to those new programs. It was certainly meaningful.

Yeah, I guess I would say across the board. Great new program growth, also great existing program growth.

Okay. Great. And then, Nick, I'll hook up with you after this one, but I recall at the analyst day you talked about additional new programs coming down the line in health care, I believe criminal justice.

Absolutely.

Can you give us an update on how those are track and when you expect those new programs to launch?

Sure, I believe we will begin marketing possibly in the June time frame. And I would say in the August to October time frame we will launch six new programs which also include health care. And these are in the bachelor and master levels, six new programs in totality, a couple in health care, so we'll move into our fifth discipline. Then I would say we will also begin marketing during late summer early fall for January starts and we will move into criminal justice as well. A lot of opportunities in the future.

Great. Thank you.

We're actually on target.

Thank you very much.

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

Good morning, everybody. I would like to pursue the revenue per student issue if we can understanding that you guys did the re-class on revenue. The revenue still was better than ours and I think most people's expectations there anything in there with regard to mix or timing that drove either revenue per student or just revenues generally?

No. Jerry, in terms of the change in the bad debt, again, that's something that if you just go, the information is all out there historically to determine exactly the impact of that. We included in the press release a table that showed that information. So you can go back into prior periods and basically see the exact impact that that would have had on the revenue per student. You know, I would say the only thing in terms of mix change, it's clear that the on-line student body is increasing at a stronger rate than the rest of the population. With that being, with their programs having higher average revenue per student that clearly is a mix change element. Outside of that, I wouldn't, would not, would not characterize there being anything unusual in the numbers.

Okay. Great. Nick, could you refresh us on the start, the number of starts there were in this quarter and how many there will be or I should say last quarter and how many there will be this quarter.

You know, perhaps I'll turn it over to you. I guess I would just start by saying, I think our start growth was really very, very sound, we felt very good about it in the first quarter. And I think we continue to look good as we look to the future in terms of book futures and with that Pat Pesch maybe.

Jerry, I think you're driving to the --.

The number of months.

We had starts in January and February. We did not have starts in March. Okay? Maybe you want to comment about the starts for the year.

Yes, if I could, Jerry, we start nine times this year, we actually had starts, I'll correct you a bit, Pat. January, February, March.

Sorry.

Then in April, redid not have a start, we'll have a start in May, June, July. So again, Jerry, we have nine starts throughout the year, roughly once every six weeks.

That's great. And Jake, I got one for you as well. Looking at the overall margins of the company, trying to get a feel for understanding on-line is pretty small right now and probably not impacting the margin, not to be nitpicky but with your reclassification your margins are sort are at the lower end of the peer group. What is the March potential for the on ground side of the business?

You know, I don't think the on-line -- I don't think the on ground potential is any different than what we've talked about. We've clearly spoken about you know Apollo group margins which are with the exception of Strayer at the, near the top. And we've indicated that those are absolutely margin levels that we see being attainable over time in our campus based operations.

Okay. Great. Thanks very much. I'll turn it over.

Good. Thank you.

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

Good morning. Congratulations from me as well.

Thank you.

Maybe one for Nick. Nick, maybe can you address the affect that graduations will have now going forward within AIU on-line on that net number of students now that we've reached the two year mark since the launch of AIU on-line and the first programs are coming to an end?

Yeah, you know, I would just say that we will certainly continue to graduate considerable numbers of students throughout this year. But we are absolutely doing a great job with starts. And I think our populations will continue to do very well throughout the end of the year and I think everyone will be very pleasantly surprised.

Great. Maybe one more for Jake. Jake, how many of the 50 program transplants that you have planned for this year occurred in the first quarter?

Right now, I can say the majority of them are being marketed as far as the actual start there was a handful of those that actually had starts in the first quarter, but the majority of them are currently being marketed going forward.

Good to hear. Thanks very much.

Thank you.

Thank you our next question comes from Gary Bisbee from Lehman brothers, please state your question.

Thanks. I'll add my congratulations as well. A couple of questions. Can you first comment on the seasonality of the schools in France. I know that you mentioned that the summer is or the third quarter is relatively quiet period. But why did you -- why was it 3700 students versus the 4,000 you announced when you made the acquisition two months ago?

Yeah, when the-the reason for the change, we only count on our population you know really earnings students and so the difference there is students departing on externships. So the students haven't necessarily dropped, but they've kind of left the earning population for a period of time.

Okay.

So that would be the reason. And so I wouldn't read a trend into that number.

Right.

In terms of a drop rate it's just, it is a normal seasonality issue there.

Okay. And just following up on that one, could you refresh for me what the likely trend in starts. I assume there's one start period that's a lot bigger than the rest, but what is that going to look at those schools over the next year?

Yeah, well, this is Jack. Let's kind of look towards the fall because that's the more traditional time to start. Those look to be very, very good right now. Stronger than last year in terms of people you know kind of, that have basically made application and are looking forward to starting. So it's a very positive trend.

Okay. But so fall is the big one. But are there start periods each of the other quarters excluding the summer?

There are some starts throughout the rest year at some of the schools, but the great majority of the starts occur in the fall.

Okay. And I guess one more on this. Really small piece of the business. But can you elaborate just a little bit on the strategies you're planning to follow to grow these schools and my sense of the market place in Europe is that demographics are not as strong as they are here and focus to date at least has been more on the traditional 18 to 23 year olds. So leads me to believe you're going to have to gain market share from existing players or try to branch out and find new people, maybe working adults. But can you give us a sense of what, I'm not talking quarter to quarter, but the next two to three years, but what the real opportunity is for you to -- strategy to grow that business?

Yeah, actually, we're very excited about some of the opportunities there. Certainly there's a huge element here of opportunity in the study abroad program. Something that we've been very successful with our London school. We feel that same opportunity exists for the schools in France and you know they do have some study abroad right now, but we feel it could be much more vibrant if you will and there's some know how we bring to that that is going to be tremendous. We have some very attractive locations in Paris, Leon and Bordeaux. We feel there will be literally probably many, many American students that will want to go over there and take that.

Also there's some things in the marketing area that we feel will be very helpful especially things having to do with web and internet as we look at that, that's kind of where some of our schools were maybe two or three years ago. We've got to the know how and we can bring that to bear almost immediately. So we're very excited about that. There's also some curriculum and program things we can share with them that are going to have a tremendous impact also. The on-line part of the business I think, is something that can very dramatically increase the numbers of students. So we're very excited about it.

Yeah, it certainly sounds like a good opportunity. Could I just ask one final question. You mention a second ago, Pat, the potential for Apollo type margins at some point in the next few years. It seems to me you guys would have to slow down the acquisition strategy in and you know either focus on more internal growth or slower growth overall to attain that type of margin any time soon. I guess just if you have any general thought on your appetite for top-line growth versus leverage and how that's going to shake out over the next couple of years?

Well, you know, I wouldn't look at it being a couple year process. I mean, I look at it, you know, probably more in the, five year type range. And you're absolutely right, the rate of acquisitions and operating performance of those acquisitions clearly will influence the consolidated margins. In terms of appetite for top-line growth, we continue to look at our growth opportunities as being both same school, new campus startups as well as acquisitions. And know the acquisition piece is one that will continue to look at opportunistically. Where the opportunities are there, where we think we can add shareholder value, we'll go forward with them. But we don't have a specific revenue growth target associated with acquisitions.

Okay. Great. Thanks a lot and congratulations again.

Thank you.

Thank you. Our next question comes from Craig McGray from Thomas Wiesel Partners. Please state your question.

Good morning, great performance. Congratulations.

Thank you.

First off, a question, Jack, I want that talk a little bit about the overall funding environment and in particular maybe you can give us some comments about what you see out there in terms of appetite for third party lending and where you think the pre-authorization might shake out?

There's lots of dollars out there, our students fundamentally finance their education like any typical college bound student or student that's in college. We have found that certainly because we're private schools, students understand that they're going to be more expensive. I think they're willing to come up certainly with more resources as they look at those choices. They feel they're better choices they're willing to pay for them. There's kind of a long history that people kind of appreciate what they can get out of private education, some of the benefits. But what we've seen is that people are willing to do what's necessary to fund that you know there's a vast array of Title IV programs for the most needy students. There's certainly grant money, then there's lots of third party lending out there that's done.

Students also bring, you know, at lot of their own resource in terms of being able to make monthly payments, a lot of high school students certainly would have lot of parent support and things like that. So basically it's a very, you know, I mean good environment out there right now. I mean with a lot of the funding issues please keep in mind it's not a budgetary thing that Congress sets every year because most of the dollars that students usually go to school are dollars they borrow from a bank or a third party lender and they do have to be paid back and all the government is really doing is guaranteeing those loans. And then, the smaller part certainly of what would go to a private school might be students that do get some grant money but that's a pretty small percent.

Great. Quick follow-up for Jake. Maybe you can review some of the program areas where you saw particular levels of strength and then also if there's any highlights in terms of the shorter or longer types programs.

Yeah, some of the rollouts that we're doing are across the board but some of the new areas, criminal justice is doing well for us at some of the campuses, but at the same time, our existing programs in the design areas continue to do well for us. And we are also seeing a resurgence in the business programs. Again, direct lit associate and bachelor levels that we're focusing on and we see the growth there.

With respect to that program mix, there's not been a significant change at all in the bachelor/associate mix. Although gradual increase in bachelor level is really in process.

Great. Thanks so much.

Great. Thank you.

Thank you our next question comes from Richard Close from SunTrust Robinson Humphries.

Mr. Close?

Yes. Congratulations on a good quarter, guys. Just a quick follow upon the Apollo margin question. Are you looking more at, you know, attaining, Pat, the 25 percent level that the Apollo is currently at or maybe something like the 35 to 40 percent mature margins going forward?

Well, when we talk about comparison, I mean we're talking about a mix of our own campuses. I mean we already have existing campuses above that 25 percent level. So I guess I'm looking at this in terms of kind of getting to where their average margins are at and frankly when we get there we'll be looking for higher numbers because you know we know that that's possible on the mature campuses.

Okay. Good answer there. You know, with respect to the book futures. I was wondering if you guys could give us some details on maybe the relation to starts you know to book futures maybe in terms of on a percentage basis so we can get a feel of how large the future opportunity is.

Well, I mean that's going to vary by the type of student that's enrolled, high school versus out-of-town student versus international student versus local students. We've got plans in place at each campus to go after these markets. We have a very calculated number that we know traditionally shows from these areas and we've got some great stitch-in programs to ensure that those happen. But I guess the real strong thing here is we feel real good about this because this puts in a position we want to be to have all these book futures and people waiting to come to school. So we're currently working with them, doing things like packaging, helping them with housing, making sure they're getting a lot of their student services, Matt, and you know, we expect that there will be some tremendous upcoming starts here as we get into the summer and fall starts.

So you don't necessarily see any correlation between, you know, a percentage of starts to book futures or anything like that?

Well, there is one, but I mean it varies by a program, it varies by the type of students that they are and I guess we typically don't give out what those start percentages are.

Richard, this is Pat. It is hard from the data we give you to drive a very specific correlation because a lot of it has to do, as Jack indicated, the type of student and what type of lead time that student has between the time of enrollment and when they book. For instance, high school students will be in a booked futures category for longer than others. So we have just given that data to give as long -- as well as like lead growth to give you a general feeling for the market activity not so much that it really provides you much in the way of modeling information.

I guess one thing, the strength of the group, last year we kind of reported we were 42 percent ahead at the same time. This year, we're reporting 48 percent. It's a good trend.

Okay and then just one final one and I'll turn it over. Jack, you mentioned the four new campuses. Maybe if you could just elaborate, just make sure that the satellite campuses that you're planning are not included in there? Maybe some details on specific expansion efforts an then a tie-in to that, you mentioned in the growth initiative some new degree programs for future growth and just wanted to make sure those were not included in the 50-plus programs that you've stated.

Well, I mean we, kind of different questions here, let me answer it this way, our four new start-up campuses will be in Las Vegas, Atlanta, Detroit and Houston. You know, those are under way and they're in various stages of either you know actually implementing those, putting them in place or getting the needed approvals. But you know, we feel very good about those and you know, those would be different from this transplanting of programs there. Certainly some of the new areas that we've kind of looked at would be the medical area, you know, the criminal justice as Jake had mentioned, there's other programs in VIZ com to IT areas that we're cross pollinating from school to school.

Just a quick follow-up on that. Satellite campuses. I know you're doing some of those, I think Minneapolis is one if I'm not mistaken, but maybe an update there.

Sure. Let me turn to Jake Gruver because that's certainly in the college schools and universities group.

Yeah, and they're going very well. Florida, Chicago, L.A., are a few of the other community we're looking at. Phoenix, Tempe, area.

And those aren't separate from the new school startups that we indicated.

Okay. Great. Thanks a lot, guys. Congratulations again.

Great. Thank you.

Thank you. Our next question comes from Brad Safalow from J.P. Morgan.

Hi, good morning, let me add migration. If you could just comment on conversion rates particularly for internet leads. I know you guys have gotten significant amount more leads from that direction and have been making a more concerted effort in showing better conversion rates, maybe on a nominal basis how those have improved?

Let me answer that in a couple of ways. One of the things is internet has been out there for some time but I think the abundance of leads flowing in, the different methods to attract people have changed dramatically here in the last year-and-a-half. And I think we're much, much better prepared today to deal with those leads as they come in to either our on-line group or our onsite group and I think we've been very successful in setting up groups to deal with those internet, you know, inquiries, we're able to respond to them very quickly and get them the materials that they need. Also there's a lot that we've done in the last six to nine months where we've automated a lot of the sites so people can get into them instantly, try to figure out what they need to figure out. Find out about school and that they can make the decision basically to enroll and do other activities that relate to getting them to show up for school. So that's been very productive and very positive. And has probably really had a dramatic impact on the overall conversion rates, both those areas. Plus we have many more people out there today working these things and they're very confident in what they do.

And in terms of comparing that to, let's say, conversion rates for your more traditional advertising or recruiting mediums, how much more improvement do you have yet to go and should we anticipate conversion rates overall continue to increase as you've kind of they've come down as you first started to the get a lot of leads from internet and now perhaps you read the inflection point there going back up to more normalize levels. Is that fair to say?

Yeah, let me say, we're very, very pleased with the internet conversion rates. They've done very well and all of this stuff has had a tremendous impact on it so I think in the future it probably is going to show improvement.

My last question is maybe best directed to Nick in terms of infrastructure for AIU online well as admissions personnel, administrative personnel. As far as what the platform can support in terms of enrollments today versus how much you may need to add in the future. I know your guidance is now saying 80 million in revenues which roughly equates to 4100 or 4,000 students on a run rate, how many students, theoretically could you support with the infrastructure you have currently.

Yeah, thank you. You know, I guess I'll say we always scale five to ten times ahead of our current growth. So if you look at that and look at the number we presented today I think we could accommodate 20 to 40,000 students and I'm talking about our technology infrastructure, our servers, our DS3 lines, things like that. I'm talking about our personnel. And primarily, we can do that because we create some great technology and automated processes that deliver good customer service in-house and also we we're always looking ahead.

Also we always look ahead six months, 12 months, a couple of years, so technology infrastructure, personnel infrastructure, we feel it's there. We're growing so rapidly, we realize we have to think about five to ten times ahead of current growth. We feel really, really if about that. And as we have grown dramatically in just two years, using that kind of method has really always put us ahead. So we have basically minimal to no down time. We have great customer service to our students. And that all plays out when we look at some of our great numbers in terms of student outcomes and in terms of outcomes in terms of some of our other great numbers at AIU online. So we feel good about our scaling opportunities.

One of the things to keep in mind, too, is that we have upwards of 300 employees and a lot of these people are in student support and technology areas of the operation. It's a separate group from our onsite group and that is really given a lot of strength here.

Nick's comment doesn't mean he won't have to add additional staff to service five-fold increase, but the plans and the groundwork have all been laid to you know, to be able do that.

Yeah. I just assumed that. I just wanted to get a better sense of the operating leverage as you add more students. Thank you very much.

Great. Thank you.

Thank you. Our next question comes from Mark Farano from First Analysis. Please state your question.

Good morning and congratulations.

Thank you.

Maybe just to follow-up a little bit on the last topic there. When I know you did tell us online had been profitable and gave us the revenue run rate. Should we be thinking that the profitability then of it increases throughout the year or is that not a realistic thing to expect?

I guess we could say we wouldn't expect to -- you shouldn't expect the profitability rate to increase significantly. That is going to be influenced by the rate of revenue growth. We've date indicated we would be in excess of $80 million, or at least $80 million. Obviously, you know the stronger that revenue growth the more rapidly the margin's going to improve, but part of what we're looking to do here is to continue to invest strongly in the growth, invest strongly in the future and while we're very mindful of the profitability of the business, we're looking at that much more economically than from a current GAAP basis. So we'll make investments you know to continue to scale that business without necessarily the objective of maximizing the short-term profitability.

Okay. And then the 75 to 80 million cap-ex for the year, that's given in the context of being before Whitman. Should we expect that number to go up with Whitman in the second half or not much?

I would expect an increase associated with it's acquisition of Whitman. You shouldn't expect something disproportionate.

Okay. And then lastly, in terms of the book futures, would you be willing to make a comment just generally on how the booked futures look for the high school category?

Yeah, those are very strong. I mean year over year, we showed some real positive growth there and that's one of our big drivers, that's certainly a big amount of leads that we generate through our high school programs will do probably some upwards of 25,000 presentation in various schools. We do generate a lot of leads, the demographic trends are absolutely true. There are record breaks of students coming out of high schools currently. It certainly shows up in our enrollments.

So to the extent you have data on the high school market for this year, it looks positive?

Yes.

Okay. Thank you.

Great. Thank you.

Thank you. Our next question comes from Trace Urden from Fink Equity Partners. Please state your question.

Good morning. I wanted to maybe explore in a little bit more detail what other online initiatives you guys might be considering at this point. I know that we can't to Colorado tech you have discussed wanting to maintain that separately. This morning, you've been talking about the potential for online in terms of Europe, I'm sort of wondering what the broader strategy is with respect to online and whether you might be thinking about building brands on-line brands with some of your other properties.

Sure. Let me comment on that. Then I'm going to turn you over to Nick here. But look at this. Tremendous future in on-line and I think the market finds good credibility. Employers find good credibility and technology is absolutely right to do the on-line programs. You know, we look at probably approaching this a number of different ways. There's certainly a very vibrant market here in North America, but also, there's good opportunities on kind of a world wide basis because the nice thing about on-line is it really doesn't know any borders. I think people love this type of education. I think they want to take it. I think it does answer the needs of a lot of students that perhaps can't travel long distance to be able to take those programs and Nick kind of pro-filed the types of students that have really turned to this thing and what they're wanting is this any time any place education and they do tend to be you know, higher -- a you know, learner that probably has had a certain amount of education in the past and they have a certain amount of work experience to go along with that. I think one of the nice opportunities with Colorado tech is the fact that there is kind of a platform here. It offers us another platform to perhaps go out and offer, you know, an array of other programs and perhaps do it under a different name and of course as you know they do have a doctorate degree and we're also looking at bringing on a doctorate degree as we look at our on-line group AIU group. So Nick let me turn it over to you.

Yeah, I would just mimic a number of things Jack said. Gosh, new program opportunities, absolutely, we've been very aggressive there. We'll continue to be so. I think that's done great things that's really enhanced our growth over the last two year period. We'll add new programs, we're looking at a host of them. I mentioned some of them today.

New platforms, I think a tremendous opportunity there. I think everyone knows we focused on accelerated degree students and we found no barriers there, no limits. So we're moving ahead with that. I think that's super. But what about other people who might say, gosh, can I take a normal accelerated program I think there are opportunities there. Opportunities there with new programs. It could be CTU, it could be others.

We are excited about CTU because it's a regional accredited institution. They have one program now, sort of a modest number of students, but tremendous opportunity. We look forward to sharing best practices with them in the future.

International, we've moved out, I mentioned we have students from 25 countries, but we are talking in discussion now with several groups throughout the world and we think there's a lot to be done there. I mentioned the one billion students - or people connected to the internet within the next few years, that means there's a lot of opportunities for Self-Checkout indication. Corporate work, international work. Products, E books, marketing. There's so many things people can do on-line, but I think all I see in the future is great growth. We talked about it the last two years, we've delivered on a lot of that and I'm looking forward to a tremendous next five year period.

Nick, do you Guys have anybody on the ground outside of the U.S. bringing in enrollments or are you just handling that all through your central organization?

We have some people now, we are absolutely moving ahead in terms of partnership opportunities in terms of group opportunities, et cetera. We're developing those as we speak. Although that's really been in the works for some time. So we do expect to see some significant opportunities over the next year.

Okay. Great. Pat, I just had one question for you and I don't mean to focus undue attention on this because it isn't really a particular area of concern for me, but I did notice that the bad debt expense came up slightly in the quarter. I guess I wanted to ask you know are there meaningful differences in terms of the bad debt by school or by program area? And are there pockets of this that you feel are sort of at you know the rate that they will always be at or are there other pockets where you feel like there's room to attack it and improve the figure and how do you guys think about that?

Okay. One, in terms of the increase in the quarter, yeah, very consistent with the guidance that we've provided that I don't expect it to be you know kind of a rock solid number, the exact same number, quarter in and quarter out. So I look at the quarter performance as being you know within an expected range. In terms of opportunities here, I mean we clearly look at there being opportunities for improvement here. We will, you know, from an operating standpoint, you know, any category that is that large an expense is an opportunity for improvement.

At the same time, you know, I have point out before some of the changing in our Title IV funding has put upward pressure on that number and you know I don't expect that funding proportions to change significantly.

Then finally, in terms of you know pockets of -- you know, clearly in any operation where you're in multiple locations, some locations perform better than others. But I would say there's nothing kind of systemic in place that makes any one school or group of schools substantially higher or lower than the others.

Okay. Thank you.

Thank you. Our next question comes from Jerry Odening from Jefferies Company.

I'll be mercifully brief. Who is going to be heading up the whit man operations and how you staff it up? And then, Pat, it looks like Whitman was undergoing a significant upgrade of its facilities that got started and wouldn't you anticipate that with regulatory approvals you probably would continue to accelerate that process in early 2004 for Whitman?

Let me just answer the Whitman/CEC thing. We're in various stamps of kind of determining certain things but Whitman has a very good team in many ways, we're got a number of members of our team that were put in different divisions for the purpose of, as we you know, as we did this major acquisition so I think we're in good shape, we have very seasoned team of people that are set up to help with this and have a certain amount of oversight. At the same time, there's some very strong members of the Whitman team that will also share in this responsibility.

Jerry, with respect to our comments on the cap-ex earlier, I wouldn't expect a you know, a disproportionate change in capital spending. I mean currently, we do spend more on cap-ex than relative to say revenues in Whitman has historically.

Specifically looking at 2004, not necessarily 2003.

And you know, I guess at this points, I would say it's a little bit premature to provide specific guidance.

Okay. Thanks a lot.

All right. Thank you.

Thank you our last question come again from Matt Litfin from William Blair company. Please state your question.

Just a follow-up for Pat. Could you maybe address the filing of the mixed shelf registration last month? What are your plans for that or is that any? Or is that just dry powder for the future

With respect to the universal shelf registration that we filed, I indicated really at the time that we filed that that this was something that we thought about for a period of time, it was something that we felt was a prudent filing to put in place to allow ourselves to opportunistically look to raise capital. There are no specific plans for use of the shelf right now. We don't need to draw anything off of that shelf related to the Whitman transaction. We don't need to draw anything from that shelf to sustain existing operations. It would be much more prospectively if we saw an acquisition or other business opportunity that necessitated raising capital. It is just to be able to move quickly if we need to in the future.

That's great. Congratulations again.

Thank you.

Thank you I do have one more question coming from Greg Cappelli from Credit Suisse first Boston. Please state your question, sir.

Hi Guys, one quick one. Jack, if you could just maybe talk about in terms of the competitive landscape out there. In any areas or geographies does is it seem like some of the for profits are running into each other? If so, what are the most competitive programs that you know, you're recruiting for?

You know, let me answer that why by saying that the biggest part of the competition out there by far and away is the public school system and other private you know non-profit colleges and schools. Certainly, in given markets, there's competition from other schools in our industry, but a lot of times they offer different programs than what we offer or they might offer parts and pieces of programs that are different from what we do. So I think it's something that's always been out there, I don't think it's any better or worse than it ever is. We certainly with our numbers show that worry able to gain market share from you know a variety of different areas at you know any time any place whether it's onsite or on-line.

Okay. Andy then just one quick follow up, maybe for nick. Are you, well, all of you guys, are you getting your students asking you, you know, you know, perhaps if they can do, they can do more of a flex type program where they would like to do some of it on line and some of it offline?

You know, we really don't have questions like that at on-line. People come to us. That's the great news about on-line and CEC, there's no bastardization, there's no taking of students from onsite programs into on-line programs. We feel good about that. We market to entirely different audiences, that's why we're in 50 state, 25 foreign countries. Students come on line because you need flexibility as to time and place. So we don't have a question as to that. Certainly we have a service center and none of those are reported in the numbers we report on-line, but they offer gen-ed on-line to the brick and mortar schools. So the brick and mortar schools and Jake's group all have the opportunity to take some on-line courses, have the latest technology, be more flexible. So they have that opportunity, absolutely. But in terms of on-line. All that is pure 100 percent on-line. Those are students who are a different market who need that flexibility. Jake?

If I could add to that, Greg, to nick's point here, the brick and mortar, CSU group, we do offer some gen-eds on-line. That's a service that Nick's group does provide. It's totally separate from the full-time degree seeking students but we see that enhancing and growing, so again our current site based students can take one or two classes per term on-line given that flexibility and still be a full-time degree seek resident student.

Okay. That makes sense.

One of the important things to keep in mind here is we've really looked a this very hard. Of course, we ran a number of pilot programs way back when, but these are very, very distinct markets both of the guys just described there's different ways they can work but we've built an economic model here that addresses the fact that have a very separate market for people that want the on-line program versus the people that are going onsite. I think that's one of the reasons we've been very successful with that is that we've not kind of mixed the two and I think that's probably a mistake earlier on that a lot of people that got into this base made as they looked at different as suspects of the education part of it but they doesn't build a very good economic model.

I understand. Actually just one final question for Pat. Another follow-up on the margin. Is there any reason when you look at some of your mature schools, we heard some of the other companies in space talk about how you can see school level margins, some of their more mature schools literally in the 30s sometimes approaching 40, would there be any reason that one of you're traditional land based schools or campuses couldn't achieve a similar type of margin.

I mean, the general answer is no. I'll say one of the factors that would influence someone's ability to get to that is the market they operate in and therefore the size potential for the school. Do you have to get a decent scale of operations to get to those margins.

I mean, but it's safe to say, we have schools that have a history they have reached some of those margins. So it is something that is very much out there and they are operations that run very smoothly.

The rumor is that Nick is capable of getting there.

All right. Thank you, Greg.

I think the rumor is true.

Thanks, Guys. Congratulations.

Thanks a lot.

, Ladies and gentlemen thank you your for your question, I'll turn the conference back to Mr. Jack Larson to conclude.

I just want everybody to know we have a lot of confidence in the future, we have a history of success, we're executing plans and there are many positive trends out there I want to thank everybody for listening today. Thank you very much.

Ladies and gentlemen if you wish to access the replay for this call you may call 973-709-2089 with an ID number of 289245. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.