Perdoceo Education Corp (PRDO) 2003 Q2 法說會逐字稿

Welcome to the Career Education second-quarter conference call. My name is Jonathan (ph) and I will be your coordinator. At this time, all participants are in listen-only mode with a question-and-answer session to follow. (CALLER INSTRUCTIONS) As a reminder, this call is being recorded for replay purposes. Statements made by CEC or its representatives on this conference call that are not historical facts are forward-looking statements that are subject to a variety of risks and uncertainties that could cause CEC's actual results in 2003 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of CEC. Such risk and uncertainties are more fully described in CEC's filings with the SEC. CEC assumes no obligation to update its forward-looking statements. Now I'd like to turn my call over to Mr. John Larson, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Good morning. With me today is Pat Pesch, our CFO; Nick Fluge, the President of our Online Education Group; and also, Jacob Gruver, President of our Colleges, Schools and Universities. We are pleased to share our great results for the second quarter. This is our 22nd consecutive quarter of record results. The results for the quarter demonstrate the strength of our system and our model. Revenues up 44 percent, net income up 90 percent, starts up 46 percent, and July student population up 55 percent. We also had improving margins. In addition, our two-for-one stock split that was announced shows our confidence in the future.

Let me highlight some of the events that produced our great results. Leads were up significantly, some (ph) 79 percent. This shows that there is strong interest in our programs and we have effective ways to reach our various markets. Our lease conversion rates were also up. We attribute this increase to having more admissions personnel and our effective automated enrollment sites. Starts were up significantly over last year. The major reasons for the increase were new programs, good show rates and the ability to reach a larger audience with people seeking different degrees, from diploma, associate degree, bachelor degree, masters, and now doctorate in more programs. Another reason for strong start is our ability to market on a wide basis. We separate our 1000 reps into local markets, out of area students, high school -- or recent high school graduates, international and Internet. This has proved to be very effective. Both the on-site and online groups have the ability to reach more markets.

The Colleges, Schools and Universities group and the online groups excellent quarter. Let me highlight some of their accomplishments. For the on-site group, many of our 50 new program transplants were started in the second quarter. Of course, more are yet to come in our summer and our fall starts. More technology was introduced in areas that will make us more efficient and productive, such as marketing enhancements, student sites and faculty and staff sites. Career placement rates remain strong at 93 percent. There are lots of jobs for people with the right skills. Our INSEEC Group is doing well and we expect excellent results for their September start. We are sharing study abroad, technology, new programs, to enhance their future performance. Leads, starts and population are excellent and book futures look strong for our on-site group.

Now let me discuss our online results. Student population is approximately 7000 students. Last period, we reported 4100. Also, we had very strong revenue and bottom-line results. Our new revenue projection for 2003 is 120 million. Leads and starts were much higher than planned, demand is very strong for our unique program. Several new programs have been added in the first and second quarters, and this also helped the start numbers. Many new technology innovations were implemented for more efficiency and to benefit our students, making our online technology the best in higher education. Placement is 98 percent. There are many jobs for graduates with the right skills and education.

Several other important areas that affect our company on a going-forward basis and currently is new school startups are going very well and according to schedule. In Las Vegas, here recently, our Las Vegas school started a Le Cordon Bleu culinary program that opened here in July and is off to just a very great start. Demand was ahead of plan and the future looks very exciting. Once again, though, the Le Cordon Bleu brand name is recognized everywhere for its excellence.

In Atlanta, another Le Cordon Bleu culinary school is scheduled to open in October, and recent enrollment looks very strong at this time. Also in Houston, another October start is scheduled for American Intercontinental University, AIU. Our first university expansion is also proving to be very strong. Also in Detroit, that is the school that we are also looking at opening for our international academy, and that also looks very good for leads and enrollment. We are very excited about the new school start-up expansion through utilizing our great brand names and programs to move into other markets. The nice thing about startups is they allow us to enter markets when we desire. Next year in 2004, we have identified six to eight markets that we believe hold great potential, such as Miami, another school in Las Vegas, San Diego, Dallas, San Antonio, Columbus, Nashville, Seattle, Sacramento and New York City.

The Whitman Education Group became part of CEC on July 1st. We did a lot of prep work before we closed and were able to set in motion many strategic initiatives that we knew would give us great starts -- or a great start in marketing, lead generation, management technology, facilities and new programs. And we also instituted a series of best practices that we use systemwide. Our main objectives early on with the system is to increase lead flow, which will lead to increased starts, expand facilities, add new programs, set up new marketing programs, add technology such as student information system, new web sites, and automated enrollment sites -- also reports and various other procedures.

The ability to add associate degrees to the UDS schools is very exciting. Sanford-Brown is a great system to add other programs to, such as Vis Com, Criminal Justice and other programs. We currently have 19 schools systemwide that have health-care programs. Also a number of schools in the CEC system that do not have health-care will be adding these programs. Colorado Technical University is another platform for our online education, and we'll start enrolling students in several masters degree programs starting on August 1st.

Our future looks bright for our system. Book futures are up to 46 percent. Last year at the same time, that was 27 percent. So we are very, very encouraged about our ability to enroll students and get them to start school. Just as a reminder, book futures are students that have enrolled in school, enrolled in the system, and our waiting to come in our summer and fall enrollment. Also please remember we have many ways to grow. There's internal growth, and that had certainly has been the main driver of our system. The new program transplants, and we'll do some 50 of those this year -- more to follow certainly next year. Our online group, our on-site group, new school startups, acquisitions, adding bachelor and masters degrees, our international system and program, satellite campuses, new curriculum, such as Criminal Justice, health-care and education. Now I would like to turn the call over to Pat Pesch.

As Jack has indicated, we had an outstanding second-quarter financial performance, with significant population and revenue growth and strong margin improvement. We also continue to aggressively make investments in new campuses, new program introductions and infrastructure improvements, all of which should contribute to healthy growth in future quarters and future years. Revenue growth of 44 percent was up from a 39 percent increase in the first quarter and includes same-school revenue growth of 38 percent. Revenues for the online business was over $32 million for the quarter, up from approximately 20 million for the first quarter.

Operating margins increased 290 basis points from last year's second quarter. This improvement was up considerably from the first quarter and the management guidance due to stronger than expected online revenue and the resulting improvement of online margins, which are now higher than the margins of our campus-based operations. The combination of strong revenue growth and improved margins generated net income growth of 90 percent and EPS growth of 82 percent.

Turning to the balance sheet, accounts receivable, DSOs, or days sales outstanding, of 33 days compares favorably to last year's June 30 DSO of 34 days. Bad debt as a percentage of revenue was 3.9 percent versus 3.6 last year and 3.8 percent last quarter. Deferred tuition revenue increased approximately 47 percent from last year's second quarter to about $63 million. We've raised our revenue and earnings guidance to reflect our improved expectations for our existing business, as well as the impact of the Whitman acquisition. Specifically, we expect full year 2000 (sic) in revenue to be approximately $1.139 billion to $1.145 billion, with full year 2003 earnings per share between $2.10 and $2.12. With respect to online, we expect full year revenue of approximately $120 million. Third-quarter revenue should be between 297 and 299 million, with earnings per share of 40 to 41 cents. Fourth-quarter revenue of approximately -- we expect approximately 340 to 344 million, with earnings per share of 89 to 90 cents.

We also would like to talk about the impact of Whitman on our guidance. We expect that the acquisition of Whitman will be about 2.5 cents dilutive to the third-quarter earnings, and about 3.5 cents accretive to the fourth-quarter earnings. The cause of the third-quarter dilution is really the activities which we must initiate to increase the revenue levels and the profitability of the school. So we will be making initial investments in marketing and also initial investments in upgrading their technology infrastructure in converting their systems over to our operating systems. In addition, I would note that averaging in the effect of Whitman's higher bad debt levels will likely increase bad debt as a percentage of revenue above 4 percent. We believe this to be an acceptable level, and it is incorporated into the above guidance.

We expect third and fourth quarter operating profit margin improvement to be substantially less than the first two quarters -- between 10 and 20 basis points year-over-year improvement versus third and fourth quarters of 2002. This reflects in large part the impact of the INSEEC and the Whitman acquisitions. I've described the impact of Whitman. There's plenty of information available on Whitman publicly in terms of their historical margin levels, which are lower than ours. In addition, I would point out for INSEEC that this group of schools has a very traditional academic calendar, which causes them to essentially go dark during the summer term, which predominately falls in our third quarter. Therefore, we've got operating losses associated with INSEEC during this period. This was contemplated at the time of the acquisition, and it has no impact on any of the previously provided information. I really highlight this just to note that it does have an impact on a year-over-year comparison of margins. We expect 2003 capital expenditures to be approximately 80 to $85 million. Approximately 5 to $7 million of that estimate is associated with the Whitman acquisition, and it includes about 3 to $4 million to upgrade their technology infrastructure.

I would also like to point out a couple additional items. With respect to Whitman, we had -- in our press release, we indicated that the population at July 31 was approximately 8200 students. We had at time of acquisition -- or at the time of announcement of the deal, indicated that they had a population of approximately 10,000. The difference between those levels is primarily attributable to a refinement essentially in the counting of the students under our methodology. We take a somewhat different approach than Whitman did in disclosing their population, in that we strictly report only earning students in our population. There were students counted in Whitman's previously disclosed information that were students that may have had an active status, but were not attending class at the time and earning revenue. So that is the primary reason for the change. It is not because there has been a drop in the population. If we looked at Whitman's previously reported population, on a consistent basis at June 30th on a year-over-year basis, they had an increase of approximately 14 percent. So I just wanted to point that out to you, the discrepancy between the information we reported before and that which we are reporting presently.

Moving on a little bit to provide some more specific commentary on our online revenue guidance. Online revenue in the second half will be affected by a lower number of earning days, particularly in the fourth quarter. At Career Education, we have recognized revenue based on the total number of instructional days in a term. We recognize the revenue pro rata over the term, and when a term overlaps a period, we do it based on the allocation of the days in the period that we are reporting. I could illustrate this probably more clearly in terms of the actual number of earning day in the quarter. Over the entire year, online will recognize revenue for 45 weeks of in-class sessions, basically 9 weeks -- I'm sorry, 9 terms at 5 weeks each, for a total of 45 weeks or 315 days. The number of days falling within each quarter for 2003 are as follows. In the first quarter, we had 79 earning days. In the second quarter, we had 84 earning days. The third quarter, 82, and the fourth quarter will be 70. That lower number in the fourth quarter largely attributable to the break time around the holiday season. It is important to note that this is a slightly different dynamic for online and our campus based operations, as most of our campus-based academic quarters are more evenly distributed in terms of earning days among the quarters.

I would also point out that in terms of sequential growth in population, that we would expect some moderation in the third and fourth quarters, not because of slow down in activity but just because of a higher level of graduations from the population. With the aging of that business, we're coming to a point that more and more of the population is graduating on a quarterly basis. That concludes my comments on the guidance. I will turn it back over to Jack.

We will be glad to take any questions at this time.

(CALLER INSTRUCTIONS) Greg Cappelli of CSFB.

My question will be around online. With starts coming in so much better than expected, Jack, maybe give us an idea how you've been ramping up your infrastructure in this area, even just over the past quarter or two, and what are the things that you watch most closely in this area to make sure that things continue to go smoothly going forward? And then just as a follow-up, Pat, you mentioned the graduations coming up. Is that term -- are people -- is the average still about a year or just slightly under a year that the student is going to be with the online program?

Let me kind of answer that and then I'm going to turn it over to Nick and Pat for any comments that they might have. But of course basically, we have known for some time this is a high-growth business. We've always made sure that we were probably a year or two in almost every single situation ahead on infrastructure, whether it be technology, whether it be in the administrative area, financial aid area, the marketing, etc., and I think that has really paid off. We certainly have not been surprised there because we knew this high growth was out there, and we have not been surprised by it from that standpoint. Certainly, it has exceeded our overall plan. But let me turn to Nick Fluge, the President of our Online Group, and he can talk to maybe some of the specifics and then Pat can comment on the length of the program.

You know, Greg, I really attribute it to three things and we keep a close eye on these things and these things have really driven our success. We've had lots up leads, and we have great acquisition costs, and that's because people need anytime, any place education. So I think that has been really, really outstanding -- that's number one. Number two, we have really revolutionary technology. Greg, as you know, most of the market know, I believe, we have proprietary virtual campus, course platforms, nonlinear multimedia courses. We are really ahead of the curve in terms of technology.

What that does, that allows us to scale -- and this is point number 3 -- for better margins, and most importantly, to deliver excellent customer (technical difficulty) that's what students are looking for -- customer service. And it also saves our valuable human resources. So we have a lot of automated processes. That saves our resources that are human to think about the big picture and take care of each student on an individual basis. So those three things are really driving our success.

With respect to the average length year, your statement is correct. It would be a little less than a year. And I think that in terms of looking at estimating graduations, if you look at our previously disclosed population information from a year ago, you could -- you can use that as kind of a rough proxy of the increasing level of graduations from second and into third and into the fourth quarters. It's not a perfect estimate, but it will be a reasonable one.

Great. Thanks a lot. And Nick, whatever you're doing, if you can send some of this way, that would be terrific.

Okay, Buddy. Will do. Thanks for your support.

Howard Block of Banc of America Securities.

Let me add a very sincere congratulations also on just a great quarter. Actually, I have a question that maybe won't matter (ph), but I actually think it has large implications in -- on the day that you disclosed, we can actually sort of back into the fact that you have about 2000 students at your three newest schools, which would be Las Vegas, Brooks and Missouri College -- those are the new school populations. About one year ago, obviously, there were no students in Las Vegas, none in Brooks and maybe 4 or 500 in Missouri. So it seems reasonable to assume that Missouri has perhaps more than doubled in about a year, which if true (ph), I think speaks favorably to your ability to drive growth in Allied Health School, which, by the way, happens to be your first. So, one, can you sort of confirm -- I guess my (technical difficulty) as well as maybe helping us understand how to extrapolate from your success at Missouri to your broader ownership of Allied Health Schools now with Whitman.

The Missouri College has just been a phenomenal situation. In fact, I was there just last week. And they basically have doubled their population. I think they've done a great job of certainly doing a number of marketing things that perhaps they were not doing before, some enhancements in terms of the facility and various other elements of the school, and it really has paid off. We have an outstanding management team there, and I think that's the other thing that made just a very significant difference, just in terms of being able to kind of see some of that growth. I'll let Pat comment on some of the other numbers there, but by and large, we have a lot of faith in what we are going to do with health care. But more importantly, I think it shows that we do have this long history of being able to take any and all of our acquisitions and just do very, very significant things with them, both over the short-term as well as the long-term. But let ask Pat now to comment on some of the numbers.

We would be happy to review some of the data with you off-line in terms of what we've disclosed previously and how you came up with your estimate. I will tell you it's a bit rich in terms of the year-over-year growth. As Jack indicated, we've had good -- very strong success with Missouri College and with the start-up campuses, as well, but we are not up to 2000. It is substantially less than that.

Okay, and then maybe you want to adjust (ph) my estimate on the other question, which is with regards to same-school growth, we can, I think, back into that as well, excluding online. And if we do that we come up with about 16 percent same-school excluding online in the quarter, which is a really strong uptick from the first quarter. Although maybe down a little bit from last year's levels. I was wondering what drove the sequential improvement in same-school excluding online and maybe what are your targets for same-school on-campus?

One, I would first comment that I think your basic analysis is pretty accurate. In terms of the sequential improvement, I think one of the things we talked about doing and we have done is significantly increase the level of new program introductions. And while -- and I think what we are seeing here is the first piece of that. Of the 50 programs that we're introducing, all of them have not had starts yet. But some of them did have -- have had starts so far this year. And we actually are marketing slightly in excess of 50 new programs at this point.

Okay. I'll jump back into the queue. Thank you. Richard Close (ph) of SunTrust Robinson Humphrey.

Congratulations on a very solid quarter. Jack, I was wondering if you could give us some clarity on the six to eight new schools you talked about next year, maybe breaking them up into the different groups of schools, whether it's health care or culinary and such?

Just to kind of give you a rough thing here, of course we're moving on a number of different tracks (technical difficulty) we've got to get approval and acceptance and it is a lot that is involved with the startup, but we are well on the way to -- we've done our market research. We certainly now have started the process of getting various approvals, et cetera. But basically in Miami, we are looking at putting in a culinary school. In Las Vegas, we are looking at possibly an arts and design school through Internal Academy. In San Diego, we are looking at an art and design school. That would be branched off, of course, another one of our art and design schools.

In Dallas we are looking at one of our American Intercontinental Universities. San Antonio, we are looking at possibly an American Intercontinental University. Columbus, we're looking at perhaps a Colorado Tech, and again, that is on the drawing board. In Nashville, we're looking at something in the U group again. Seattle (ph), once again, in the International Academy. Sacramento, possibly an art and design school. San Antonio, we're looking at perhaps there -- I've already mentioned (technical difficulty). And then in New York, we are looking at a culinary school. So those are -- that's what's on the drawing board right now, and we will do those here over the next year to maybe a little bit longer than that, just depending on whether we do six or eight next year.

Than just a quick follow-up. Do you have satellites in the plan as well? You've mentioned those in the past. Are some of these satellites?

Let me ask Jacob Gruver to perhaps make a comment on that. He is the President (technical difficulty). But we do certainly look at adding some satellites for next year, which has been a very efficient (ph) way of expanding markets in given carriers where we're doing well with schools, especially in large geographic areas. And he might just in context be able to talk about what our plans are there.

This is Jake, Richard. A satellite is not included in what Jack just talked about -- those are specific startups. Those are totally separate operations with a separate management team. A satellite, in our definition, branched off of a main campus in a major metropolitan area, such as Chicago, L.A. and in the Phoenix area we've done some -- Fort Lauderdale in Florida, as well. So, we've got several others on the drawing board, and with the merger, we're looking at a couple more. But again, those are in addition to what we've referred to as the startups.

Thank you and congratulations again.

Gary Bisbee of Lehman Brothers.

My congratulations, as well. I guess in addition to your comment about the profitability of online now being above that of the campuses, I wonder if you could talk about the capital efficiency with which you are looking at that business, both (technical difficulty) next year or two, your CAPEX guidance as a percent of revenues was like a percent lower, I guess, than the guidance you gave a quarter ago. And I guess I wondered if you could comment on how that is driven by online and maybe also if Whitman, other than the initial IT investment, will actually be a more capital efficient model than some of the campuses you've been running -- ?

Let me address it generally and then I'll turn it over to Nick a little bit to talk about online. I think this has been an area of focus for us in terms of improving the leverage of our capital spending. Part of the general decrease you see there as a percentage of revenue is just that focus that we've brought to the area. With respect to Whitman, we do not expect Whitman to be a larger consumer over time than the rest of the schools. It should be very consistent as a percentage of revenues. We do have an initial investment of a few million dollars that I would look at it as somewhat being first time or incremental. But I'm not looking at that as an extraordinary level of investment.

I guess lastly before I kind of turn over to Nick, not just from a CAPEX standpoint, but from an overall capital standpoint, is at this point in time, our online business is cumulatively net cash positive from inception. So we -- at this point, we really have no net investment from a cash standpoint in that business. Nick, do you want to comment a little bit on --?

Perhaps just a couple things. I would say we are really proud that we had a modest investment to get us started, that CAPEX every year has been very modest, perhaps even a little less than some of the other schools. So we feel really good about that. We've done wonderful things in technology to build without spending a lot of money, and that is because I think we put our heart and soul into it in-house. So we are a dot-net house. We have redundant load balance servers. We have a very sound facility, and yet the costs are very reasonable. And so yes, the CAPEX budget is very, very reasonable. And yes, we're scaling very dramatically into the future, so we just feel really good about that.

If I could just sneak one quick follow-up. Do you plan on giving us an average online students per quarter, given that the starts are more frequent than once a quarter? Because it seems like the 4100 students from last quarter is not a good number for us to drive a revenue estimate off of, assuming that the starts later in the quarter were significantly higher.

In terms of what we expect to do, we expect to report the population consistently as we have in the past. I think we certainly are -- as this business grows, we are certainly looking at what additional information needs that you have and how we can help you understand the business. I would comment a little bit on the April through July increase in population. We have for the entire business 9 starts over the course of the year. And the April through July period is really the only population reporting period in which we had three consecutive months of starts. So we had starts in May, June and July. So it was -- it was aided a bit by that concentration of starts. The other quarters of the year would be more of two starts in between.

Okay, thanks.

Mark Marostica of US Bancorp.

Congratulations again on the quarter. First question, and Pat, I want to thank you for the additional color on the operating margins for online being north of your campus-based operation. In the past, you've talked about the potential to get to UOP online (technical difficulty) margins, and I'm wondering, just based on your experience this quarter, could you update us on when you think you will get there in terms of number of years?

To be honest, I don't think we're looking at (technical difficulty) numbers. I think it is really -- at this point in time, it is really a function of generating -- continuing to generate strong revenue growth and also a function of what level of investment we make in the business. For instance, we are planning in the third and fourth quarter to be ramping up a new online platform. We are introducing a Colorado Technical University online platform. We actually will begin marketing those programs within the next couple weeks, with an expectation of a first start in the fall. And so, it is really initiatives like that may -- that will put somewhat of a short-term damper on margins. But we are absolutely not years away from reporting that level of margin performance.

Fair enough. Question to Nick or someone else regarding the increase again in sequential enrollments or population online. Where are those students going in terms of programs? Are these largely students enrolling in some of the newer programs or existing programs? And perhaps tied to that, have we seen much of a change in the student mix by programs since your Investor Day? I think a large concentration --

(indiscernible) I think at Investor Day, we were talking about Q1 rollouts. And so we've seen really nice success in the Masters of Education, in our Bachelors of Fine Arts -- those were the two new disciplines we moved into first quarter. I'll say, however, IT remains very strong, business remains very strong. So we are really seeing across-the-board successes, and I feel very comfortable that they're coming in all of those areas. As we move into the next quarter, as you know, in August, we are adding six concentrations, we are adding health care. I really see some nice percentages across the board. So I wouldn't say anything is not succeeding very, very well. I would say everything is exceeding well and I think the future is incredibly bright, and I feel very good about it.

Lastly, if you could update us on a couple of metrics (technical difficulty) quick. You'd disclosed in the past retention for online, I think around 75 percent.

Sure. Completion rates are 75 percent. Placement rates are 98 percent. And literally, that is the entirety of the grads from 2000. We have a six-month window, as our crediting department of that body suggests, and we absolutely report the 98 percent placement rate. So not only are we doing good things for our students, for our revenue, for our profit, for the stock, we are also doing great things, most importantly, for our students. We're having great outcomes -- as Jack says, that's a moral report card and we feel very, very proud about that.

Lastly, we should be modeling 20,000 in annual revenue for student sales -- is that true?

I would say that is the minimum of what you might do.

Okay. Thank you. I'll turn it over.

Kelly Flynn (ph) of UBS.

I'm sort of drilling on the same issue that a number of people have on the success you had in adding enrollments in the quarter at AIU. I think you just alluded to this in your last answer, but I just hoped you could clarify a few things. You said you added a couple programs in the second quarter, and as you look towards the third quarter, I want to understand what is the incremental change in the number of programs. You said you are adding six concentrations. Does that mean six programs in Q3 versus Q2 at AIU?

And then I was wondering on the same issue, could you give us a sense of kind of overall employee head count at AIU and how that has evolved over the past few quarters, and perhaps what you expect there generally for the remainder of the year? Thanks.

I'll kind of kick this off. Our plan called for adding a certain number of programs on our online program. And we are very much in line with that. So I think those have proven to be very productive, very positive. But certainly the other programs that we have had over time are doing exceedingly well, too. So I just wanted to put that part of it in perspective, so it's not all new programs are driving the growth. It is certainly a combination of both, just like in our brick and mortar schools where we've added some 50 different programs this year that will cross-pollinate. Those certainly are a big driver, but that is not the main driver of our business. So I'll let Nick comment on those in more specific thoughts, and then also talk just in very rough cut about what the numbers of employees are out there at the online corporate headquarters.

I guess I'll just say that we feel really good as we look -- we look at the mix every week really, and certainly every six weeks as we start, and our new programs are really doing well across the board. We don't have any sense of uncomfortableness with any of our programs. They are all pretty vibrant, so across the board they are doing well. Clearly our new programs assist us, but by no means do they lead what we are doing. We feel very good about traditional programs we've had, our BIT, our MIT, our associate programs we launched with, etc. So we feel very good about those. I think those will only continue in the future.

We add health care in the future. I always like to add new programs, new opportunities, but I wouldn't say that at all is driving our numbers, but certainly enhances them. I would say in terms of employees, we started the year at about 300 to 400 employees including faculty, and today we have about 700 including faculty. So as you can see when you look at population numbers, we're doing a really good job with scaling our operations because of our tremendous technology and customer service. And that leads to great profit bottom lines, and it also leads to great customer service. And it is borne out, can we do it, are the services doing it. I'd say we are if we keep completion rates high and placement rates high, then in fact are scaling is working very well.

Okay. Maybe just a quick follow-up on the margin at AIU. You gave a nice amount of color there. Could you give us a sense on the revenue levels that you're targeting for this year maybe a little bit more detail on what margin your overall EPS guidance implies for AIU? Thanks.

Well, I've given the color you need in terms of we talked about reported revenue for first and second quarter, given you the full-year revenue and also a sense of why there may be some moderation in the growth in the fourth quarter, in terms of the earning days. In terms of the margins, I mean we are basically expecting margins to kind of -- what's implicit in the forecast is that they continue at current levels, recognizing that we will be making some investments in an additional platform for Colorado Tech.

Okay.

Keep in mind these aren't the traditional investments you might see in other groups. They are modest, they are judicious, and they're very successful.

Thank you very much.

Matthew Litfin of William Blair & Co.

Question for Nick. Nick, I wondered if you had any way of measuring student satisfaction either in current students or within graduates of AIU Online program, in the way that you guys traditionally have done across the ground-based campuses?

Sure, Matt, I'll say that I think we are very, very vibrant in terms of what we do in terms of surveys. We had a couple of recent surveys we sent out to our entire population. We sent out to book futures, interested students, etc. We sent out some our recent surveys over the last two months actually. One was on satisfaction. Another was on do you shop other people, how does that look, why do you pick us. And if I could just say sort of some highlights out of that, we've had excellent, excellent results. We've had between 1000 and 1500 students respond back to us on these surveys. How often do you get those kind of numbers in surveys? Not always.

Our first survey told us people had a satisfaction rating in the 80 to 90 percent range in many things we did from teachers to course content, etc. But here's a big one, 94 percent of our students said they would recommend a friend to AIU Online. I think that's powerful, powerful stuff. I would next say our next survey talked about, do you shop other people, do you look at other competitors. I would say that 79 percent of our students fully shopped one of the largest players in the industry, and we were very, very successful because all of those 79 percent chose AIU Online. Another small percentage chose that other group. So 79 percent shop that other group, and we feel very proud of those numbers.

That's great. Thank you very much.

Jeff Silber (ph) of Harris Nesbitt Gerard.

I'm going to shift gears a little bit and ask a question about Whitman. Pat, your were kind of enough to give us sort of the seasonality in the online business, and I was wondering if we could do the same for Whitman, if there would be any impact next year? And as a follow-up, would it makes sense to take the estimated 3.5 cents you are projecting in accretion for the fourth quarter and just annualize that to see what the accretion would be for next year? Thanks.

In terms of the general seasonality of the business, if you look at Whitman historically, is probably the best initial proxy that you could get in terms of seasonality. I would tell you that over time, though, there may be a change there. We've throughout our campuses made an active effort in terms of recruiting recent high school graduates. So to the extent that we introduce more aggressive marketing toward recent high school grads, that will actually -- could increase the level of seasonality, because most of your high school grads really start school in the summer and fall. And so in that respect, over time, I would expect the seasonality at Whitman to closely resemble that which we have in our existing operations.

And the second question, in terms of analyzing the fourth quarter accretion, I would suggest that that is not an appropriate measure or appropriate means to do that. I think the best way -- at this point, we haven't provided 2004 guidance. The best way for you to look at that would be to take the Whitman results that you've seen in their historical information and make some reasonable growth projections into next year. And I would really look at kind of a pro forma calculation for the additional shares that we issued in the deal for the debt that would be associated with it.

The problem with annualizing the fourth quarter is one, the fourth quarter does tend to be a disproportionately profitable quarter. And in addition to that, you've really got to look at your expectations for next year's business overall to get the math right in terms of the impact of the additional shares outstanding.

That's very helpful. Thanks a lot.

Fred McCree (ph) of Thomas Weisel Partners.

Great quarter. Just actually as a quick follow-up, maybe we could talk a little bit about the expectations for Whitman enrollment -- 14 percent kind of on the numbers that Pat shared earlier on the enrollment growth. What are the expectations going into next year there, especially with the (indiscernible) in the third quarter?

Let me make a general comment and then I will turn it to Jacob Gruver. I don't know if we're prepared to give any specific numbers. I guess I will say that as we have (technical difficulty) -- the other acquisitions that we've gone in and done the same thing at, where we've added more marketing dollars, different programs, updating different things. Certainly Whitman had a very strong marketing team. And we look for even better results than what they've done in the past. It's early on here because we've only owned them since July 1st (ph), but we've been very pleased with what we see occurring out there in terms of the ability to generate leads. At the various schools, we've enhanced a few things out there, either through technology or spending money on direct response marketing. Certainly we've added to the numbers of representatives that we have in each one of the locations. And this is very similar to what we did certainly when we purchased AIU, or American Intercontinental University, and I think this will go somewhat along those same lines. So we are extremely encouraged by it, and I think we'll see some very excellent numbers that we will be able to report in the future.

I just want to say that first of all, they had some very solid programs and some very good internal controls. And we are leveraging them by incorporating some of our marketing expertise on those existing programs, looking for areas of opportunity. We've transplanted some of our personnel in with their personnel. It's been very well received. We are ramping up our marketing efforts, along with the staffing and the training of that staff, and looking again at additional programs, but also just expanding their market presence. Again, what we've seen so far has been very positive. It is ramping up, and we expect it to catch up quickly with the rest of our operations in some of the similar growth, as well.

Just one quick follow-up in regards to any guidance for the next two quarters in depreciation and amortization, and then what can we expect of the amortization composition out of (indiscernible)?

In terms of -- you should expect, obviously, the depreciation amortization to be going up. I think you could get a good proxy for the basic depreciation levels at Whitman just by looking at their historically reported information. In addition, we do -- our capital spending for this year is somewhat back-end loaded. And that is just a function of the timing of various projects. So that would be pushing our D&A cost up at the back half of this year. With respect to the amortization associated with Whitman, as you know, there is no longer amortization of goodwill. However, there are other intangible assets that are amortizable. At this point, we have not completed our opening balance sheet allocation to those assets. So I can't give you a specific number. I do not expect it to be a large per period charge.

So the time frame you expect to be fairly long, then?

Well, I expect one, kind of a fairly limited dollar amount of the total purchase price allocation to be in amortizable assets. And then the period associated with that, it should be a reasonable time period, yes.

Thanks so much.

Jerry Herman of Legg Mason.

Good morning, everybody. Good job, guys. First question on Whitman. Pat, you mentioned -- or just by way of clarification, did you say that it would be up 14 percent under the normally stated way they count their enrollments -- is that what you said?

June 30th to June 30th, under their historical reporting practice, it would be approximately up 14 percent.

And would the difference between the way you guys count it and the way they previously counted it be proportional throughout the year? In other words, is there any seasonality to the effect of that change that you're aware of?

I would say not in large part. There could be some seasonality dependent on the timing of graduation and (indiscernible) and when the reporting period is. I would not expect it (technical difficulty) take a big influence from that.

Great. And you guys are doing such a good job, and online, your 200 to 300 million by '05 is quickly getting obsolete. A couple of related issues or questions. Number one, would CTU be included in that metric on a going-forward basis? And number two is, as you exit the year, you will probably be at a level of students that those other guys were at when they did their tracking stock IPO, when they started to talk about enrollment growth as opposed to revenue growth. Can you share some insight there?

Let me just start out and then I'll turn it over to Nick and Pat for any comments that they might have. But certainly, we have always stated that we felt we had a great model, (technical difficulty) a unique program, had the very best technology available and said we really had done a lot of research prior to getting into this space. And of course, we've always stated, too, that these were very, very conservative numbers. So we went -- I guess this still indicates that, and as time goes by here, I'm sure we will update those numbers.

I guess I would just add to (indiscernible) -- this is Nick -- that CTU, we begin marketing here on August 1. Our first start is in October. We have Masters degrees right now; we'll have Bachelor degrees in January. It'll take us a while to put together the great infrastructure we have. We have a lot of experience with that. As you well know, we've ramped very dramatically in a couple of years from zero to where we are today. So I think we're going to have a brilliant future there. I would just say give us a few months to start reporting numbers to see how we are doing, etc. But I think it's going to be a lot of success equally with CTU as there has been with AIU over time.

Jerry, the question of reporting of the information. You know, the CTU information will be included in what we present as our online base, because what we are contemplating here is exclusively online students. I'd also mention that we've just kind of failed to indicate at sometime over the course of this call, we are expecting that the initial program instructions for CTU will be at a somewhat more modest pace than the existing AIU offering. So some differentiation between the brands, if you well.

With respect to the tracking stock question, you know, at this point, I would say we don't have any current intention to offer a tracking stock. We certainly, as this business grows, will continue to look at what are the best options available to us to maximize really the interest of our shareholders. And clearly, one of the things that we think will be of continuing interest to our shareholders is a higher level of information about the online business. And that will include more detailed reporting. Not prepared at this time to say exactly what that would be.

Thanks, guys.

Corey Greendale (ph) of First Analysis.

Congratulations again on the results. Wanted to ask you, you continue to get nice increases in revenue per student. Just wondering what your expectations are for tuition increases throughout the system and particularly if there is anything you would highlight about online or Whitman or INSEEC as being different. Also, as I look at that number, trying to weight in the effect of Whitman, is it reasonable to think that that number -- the gross in that number would moderate or maybe even go negative as that comes in?

This is Jake, Corey, and I'll answer that. We expect on an average of 5 to 7 percent annual increases going forward here. There's still great value added -- our placement rates are still at record highs and continue to do very well. And to answer your second question, along with the new acquisitions, no, I don't expect that to dampen that whatsoever. Again, they have some solid programs. They do have some upside (ph) for their tuition rates and we expect to leverage that as we increase our marketing and expand our market share.

Just one thought there. In terms of Jake saying the impact of acquisition -- yes, we expect to have that pricing power with those acquisitions as well. The INSEEC transaction in particular is at low -- is currently at lower kind of average revenue per student, so you will see just the mix change effect associated with that will cause the year-over-year numbers to be affected. But again to Jake's point, that is more mix change than fundamentally a difference in terms of our ability to continue to raise prices.

Right, that's actually what I was alluding to. And actually, if I could just do one quick follow-up. Pat, that was useful on the earnings days breakout you gave. Were there any meaningful changes in that breakout from last year?

There would be some. It would be negligible, really, because most of the differences is driven by break periods and you do have that fourth quarter holiday period, really.

Okay, thank you.

Brad Safalow of J.P. Morgan.

Just wanted to ask a question, maybe from a more strategic perspective, with AIU. It sounds like, at least next year, you're planning on accelerating the rate at which you open branch campuses in Texas certainly, and in Nashville. Forward, how important do you think it is to have a more significant on-site base for AIU as you try and increase the brand awareness of AIU Online. Certainly you've seen the space between Phoenix and Strayer, for example -- considerable synergies or symbiotic relationships develop between their on-site and online ops.

Let me just answer that by saying that certainly people feel good about the fact that we have a significant presence with our on-site group. These are nationally, regionally recognized universities. They like the fact that we have a presence internationally. They like the fact that we have a presence certainly on an on-site basis here the U.S. And the AIU brand is very powerful, very strong, I think based on the fact of what they offer. And so the two kind of feed off of each other.

I guess students like the fact that perhaps there is an online capability. Students like the fact -- that are taking online -- perhaps that there's on-site. But they are very, very different markets and that is why we kind of separated them, and we have entirely different marketing activities, administrative activities. There are some best practices that are shared. But that has worked out very, very well for us. And as we go forward in the future, like all of our brand names, we plan on doing more expansion in various markets (technical difficulty) country.

I would just add we do market to entirely different audience than does brick and mortar, so we do really well working together. And I guess I would say online currently has students in school from 50 states and 25 foreign countries. So we do well in those states where we have AIU presence, but the fact is we're doing very well in all the other states as well and in other foreign countries. So I really think we market to entirely new audience, which really enhances the opportunities at CEC overall.

That was helpful. And then just to follow-up with AIU Online. Nick, have you seen a significant increase (indiscernible) or any traction with corporate tuition reimbursement programs? I know that's an issue you guys have been working on maybe the last 12 months.

You bet. I'll just mention this. We have a pretty vibrant corporate partners program that moves out and interacts with corporations throughout the country. We're doing very well. That's increasing all the time. And I'll also say that our tuition reimbursement program now affects about 15 to 20 percent of our total students, and that is increasing every single month, every single day really. So I think as we move into the future there'll be more tuition reimbursement opportunities, and we're doing really well in that area.

Just so I'm clear on that -- that's 15 to 20 percent gets some form, not 15 to 20 percent of revenues?

That's right, that's right.

Okay. Thank you very much.

But they're growing every day. Thank you.

Bill Brady (ph) (indiscernible) Management.

Great quarter. Got several questions. Can you lay out by quarter your 50 program starts? And then how many -- can you say how many Whitman programs will be introduced this year and next to your current (indiscernible)?

Well, we certainly schedule those 50 throughout the year for the on-site group, and we've never kind of released exactly how many that we do each (technical difficulty). And the plans are being developed for Whitman, and we're not prepared to share that at this time.

Okay, and then, is there any possibility that you could have a summer school at INSEEC and start gaining revenue those months you lose?

I'll turn that over to Jacob Gruver, President of our On-Site Group.

Definitely (technical difficulty) got a program in London. We are looking at the opportunities for a summer program. Certainly it's possible, and again, we're looking at that as we build our strategies for 2004 and going forward here.

Okay. You said leads were up 79 percent.

If we could limit it to one question. We appreciate your comments.

One more question?

Go ahead. Certainly.

You said leads were up 79 percent and conversions were also up. What was the conversion percentage, and was that up from what you normally see?

We don't release that information.

Thank you.

Trace Urdan of ThinkEquity Partners.

I wondered if you could comment briefly on the extent to which you are offering blended programs -- that it is sort of online options to onground students across your schools, and whether that's upticked, and sort of what your overall planes are for that element of online in your business?

I'll just mention, Trey, that we do have a C-Core (ph) opportunity. It is a way that we sort of serve our resident sister schools -- single subject courses that students can take maybe one or two of. It is still sort of a modest program. We do have several thousand course registrations. I do want to make -- really emphasize the point, none of those numbers are included in the online numbers. So it's really sort of a service. It's a working together, a partnering with brick and mortar -- Jake and I do that very well. And it helps our brick and mortar schools be more flexible. They can market that, they can enhance retention. It can also save dollars in terms of scaling classrooms and teachers, etc. Very, very nice program. We do have that going, but we never mention those numbers in our online numbers.

This is Jake, Trey, and to that point which Nick's talking about is generally some (technical difficulty) that we do offer online, the total class is online, we do leverage and take advantage of some of the technology that Nick's group has offered for the brick and mortar students, for the CTU students. And we are every quarter add another school or two, so it is building as we speak, where it makes sense for the programs that have those classes.

Fair enough, and then just a quick on. In the Whitman numbers, is there any appreciable turn in demand for IT programs at Colorado Tech that you all saw in this quarter?

We're not prepared to release that. We are too early into -- we've only been operating the school now for several weeks. But they've got some very, very strong programs there. It's a regionally accredited institution. They have anywhere from a Bachelor's (indiscernible) to a Master's to a Doctor's degree. We are real excited to be able to work with them, and we really feel that you'll see the population grow there very substantially. So we will have more flavor on some of this stuff next quarter.

Thank you.

Jerry Odening (ph) of Jeffries & Co.

Jerry Odening Jeffries & Co: Nice set of numbers. Question on online. How many students -- let's say the enrollments at AIU -- do you actually reject because they don't have the wherewithal to get through the program, and where do they go, if you send them to any place?

I guess I would say we feel because of the type of delivery that we offer, we can in fact accommodate a majority of the population. We absolutely look at the student's credentials before they come to our school, so if a student comes into an associate degree program, they need their high school diploma or a GED. If they go in our Bachelors Plus Two, they need their Associates degree, etc. So we absolutely keep a close eye on that. We have advanced, outstanding coordinators who spend a lot of time ensuring students are in the right programs. But we feel with our behavioral based virtual campus or academic advisers or virtual learning labs or credentialed instructors, we can accommodate most people. We can also do it through our very dynamic multimedia courses. And some degree of students, that doesn't work for them. And there are other options out there for them -- community colleges. And then later, they come back to us in advanced degree programs.

Obviously, the nature of the program, we do look for a disciplined learner, somebody that certainly has the background. That's why we're finding that probably the average student in (ph) the program, 34, and they probably have had something like at least eight to nine years' worth of serious work experience.

Jerry Odening Jeffries & Co: Fair enough. Thank you very much.

Greg Cappelli of CSFB.

Real briefly, Pat, you had mentioned the bad debt expense in the DSO. I'm just assuming we should take that up into the 4s just for modeling purposes, like you mentioned for Whitman. Is there any guidance on whether -- you said above 4 -- is that low or mid 4s, and then DSO I'm assuming would maybe trend up just a little bit as well because of the acquisition?

If you look at -- I mean I'm looking at low 4s. We're really talking about the kind of the averaging up impact of this. If you look -- I think from an overall receivables management standpoint, our DSOs are down a day. Our deferred revenue, which is associated with cash collection efforts, is up a little stronger than our revenue growth. And we've not changed anything in terms of our reserving methodology for bad debts. So I think all the indications have been fairly stable. But I think there's been a lot of discussion about our bad debt levels, and I really just wanted to prep people that they could see a 4 in front of that number next quarter.

Is Whitman something that is a business that for some reason would continue to run at a higher level than your core business, or is that something that you think you can get into a level where your historic operation is (ph)?

I expect that it will continue at a higher level than our average core operations today. Within our existing operations today, not all of our business units are at equal levels. And this is just a -- I think a business profile that has a little higher bad debt characteristic to it, which is not good or bad. It's just a matter of fact.

Thanks a lot.

Howard Block of Banc of America Securities.

With regards to the transplants, the new programs at some of these schools or existing programs being taken to a new school, is there a meaningful difference between the -- let's call it the first class size of a program depending on program type?

That's a great question. Let me turn that over to Jacob Gruver.

No, (indiscernible) these programs are very well received in some of the new markets we are taking them to. We do look for blocks of 20, 40, 60 students, but we make sure we have the (indiscernible), we have the instructors, we have the department chairs to handle those. And it depends on the demand and how well they are received. There is no restrictions or limitations on those.

Another way to look at this over time, we kind of look at this as certainly adding a dimension that the school does not have, and also to add a meaningful number of students. And just based on some past history sometimes, these can add anywhere -- let's say over an annualized basis, as many as 2 to 500 students. So -- but every school is different, every program is different.

Okay. And then I guess maybe this is for Nick. Just with regards to the online, can you help us understand, I guess, the boundaries, if any, that may exist between marketing two commonly owned and commonly managed but separately branded online campuses?

Howard, can you identify that question just a little more?

Gladly. With regards to maybe trying to understand the opportunity, let's say out of market, outside of -- if I'm sitting somewhere in the middle of the country, not near Colorado and not near AIU.

(multiple speakers) how you might look at it.

I'm sorry?

Do you see both of those how you might look at it specifically?

In terms of your marketing initiatives with both. I mean, how -- ?

Okay, yes. I will just say, we have dedicated teams to CTU coming up, so we will have competitive opportunities. Our senior management team will take charge of every team, but we have absolutely dedicated teams to CTU as we did have for AIU -- as we do have. I think that will really drive a lot of competition, which will be healthy and great. I think also we will have the opportunity to use a lot of our technology and our great thinking in terms of marketing will carry that over to CTU, but clearly brand it that way.

And I will also say, as we begin, we have Masters in -- we have Masters in science, in management programs right now for CTU. Our programs will be slightly different from one to the other. And then finally, Howard, I would say, as you know, very accelerated degree programs, which have been very well-received in AIU -- 10 to 13 months. At CTU, we have slightly less accelerated model of 15-month programs. So again, I think there will be opportunities to pick and choose. I think we'll do some things in different ways. And I think we will have another very strong and vibrant program to report over time. And I think as we move into years in the future, you will see others, as well.

Great. Thank you all very much, and again, congratulations.

That concludes our questions then at this time. I just want to let everybody know that we've got a lot of confidence in the future. There's many, many positive trends out there certainly that we've talked about here this morning. And I think you see that we do have the strategies to continue our growth. So, thank you very much for listening.

Ladies and gentlemen, this concludes your conference call. We thank you for your participation. You may now disconnect.

(CONFERENCE CALL CONCLUDED)