Perdoceo Education Corp (PRDO) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2004 earnings conference call. My name is Ann Marie (ph), and I will be your coordinator for today. At this time, I would like to read a statement from Safe Harbor. Statements made by CEC or its representatives on this call that are not historical facts 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 results in 2004 to differ materially from those expressed in or implied by these statements. These risks and uncertainties include, but are not limited to, costs and difficulties related to the integration of acquired businesses; risks related to our ability to comply with and the impact of changes in legislation and regulation that affect our ability to participate in student financial aid programs; cost, risks and effects of legal and administrative proceedings and government regulations; further financial and operational results; competition; general and economic conditions; (indiscernible) to manage and continue growth; and other risk factors relating to our industry and business, as detailed in our annual reports on Form 10-K for the year ended December 31, 2003, and from time to time on our reports filed with the Securities and Exchange Commission.

CEC assumes no obligation to update its forward-looking statements. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to Mr. Jack Larson, Chairman, President, and Chief Executive Officer.

Good morning. With me today are Pat Pesch, CFO, and Nick Fluge, President of the Online Education Group. We are pleased to share our great results for the first quarter. This is our 25th consecutive quarter of record results. Results for the quarter demonstrate the strength of our strategies. Revenues up 64 percent. Net income up 117 percent. First-quarter starts up 83 percent. April student population up 57 percent.

We also had improving margins and other very positive financial trends. Some noteworthy highlights that helped to produce our great results were leads have more than doubled. This shows a strong interest that potential students have for our program. We also have been effective in reaching broad markets at reasonable lead costs. We have a larger number of admissions personnel to handle the increased lead flow, along with improved automated enrollment sites that operated 24/7. There were positive lead trend in Internet, TV, direct-mail, print, high school programs. Also our referrals have increased.

Starts were also up in a very dramatic way because of increased lead flow. New programs implemented throughout our system in 2003 and 2004, new startup schools in 2003, improved performance of the former Whitman Group, and AIU Online and CTU Online. We offer more options and degree outcomes than ever before, from diplomas, associate degrees, bachelors and masters degrees. We're also attracting a very diverse age group, which has given us an even larger share of students. We are in more geographic on-campus markets than ever before, as well as our online options, and this has given us the ability to reach many more students.

Our strategies are sound and will have a tremendous impact on 2004. Let me now review some of these strategies with you. Acquisition. We continue to think strategically as we seek acquisitions which create good economic value for our Company. Program transplants. We will be rolling out new program transplants throughout 2004. The majority of the transplants are yet to come. 2004 will have more transplants than 2003.

Startup schools for 2004 are going very well and are expected to be open in the following locations -- International Academy of Design and Technology in Las Vegas -- that is currently open and that has done very well in its initial opening year in the last couple weeks. Le Cordon Bleu Miami, one of our culinary schools -- that will open in May. Our American InterContinental University at San Antonio -- that will open in July. American InterContinental University Dallas -- that will open in July. International Academy of Design and Technology will open in Nashville in July. International Academy of Design and Technology will open in Seattle in October; and International Academy of Design and Technology will open in Sacramento in October. All of these are expected to do very, very well, as our past startup schools have done.

Advanced degrees. Both online and on-campus are offering new advanced degrees -- associate, bachelor and master's degrees. This allows us to serve new markets and retain students for longer time periods. On the international scene, we have been pleased with our INSEEC Group. This past year has given us valuable experience and great results. We expect great future results from this operation.

Regional accreditation. Where this makes sense, we will continue to pursue this type of accreditation, depending on the educational missions of the college. Currently there are many of our colleges regionally accredited. Online education. I am referring to our American InterContinental University and Colorado Technical University Online programs. Both platforms are doing very well. This strong performance demonstrates the high demand for full online degrees from a quality higher educational provider with the latest in technology and customer service. We have raised our guidance for our online performance based on recent results and our confidence in the future.

Graduate placement continued strong for both online and on-campus education. People with the right educations get the best jobs. We continue to strive to meet the needs of business and industry. Let me share our recent online job fair, where we were able to give some 10,000 CEC students access to 5000 employers. The students had a chance to view approximately 20,000 job openings nationwide. The students in many cases had the ability to do online chat with employers. The job fair demonstrates how technology can work to enhance and broaden the exposure students have from a large system like CEC.

My last comment is a prime indicator of our future strength is our book futures. Book futures are people who have submitted an application, but are still waiting to start school. We are up over 48 percent over last year as of March 31. Now I would like to turn it over to Pat Pesch, our CFO.

Good morning, everyone. As Jack has indicated, we had an outstanding first-quarter financial performance, with significant population and revenue growth and strong margin improvement. We continue to aggressively make and plan investments in our online business, plan for new campuses, new program introductions and infrastructure improvements, all of which should contribute to healthy growth in the future.

Revenue growth of 64 percent versus last year's first quarter continued the strong performance we have reported in recent quarters and includes same-school revenue growth of 44 percent. Operating margins increased 450 basis points from last year's first quarter. This improvement was due to a significant increase in online revenue and margins, offset partially by lower average margins from the schools acquired from Whitman and significantly higher investments in startup campuses. On a same-school basis, however, our brick and mortar campuses improved margins on a year-over-year basis.

The combination of strong revenue growth and improved margins generated first-quarter net income growth of 117 percent and EPS growth of 100 percent. Accounts Receivable DSOs of 25 days compared favorably to last year's DSOs of 33 days. Bad debt as a percentage of revenue was 4.9 percent versus 3.8 percent last year and 5.1 percent last quarter. Deferred tuition revenue increased about 84 percent from last year's first quarter to approximately $120 million at March 31.

We also, as Jack indicated, have increased our 2004 guidance for revenue and earnings. Specifically, we expect full year 2004 revenues to be approximately $1.675 billion to $1.7 billion, and full year 2004 earnings per share to be approximately $1.75. We expect the Online Education Group's full year 2000 (ph) revenues, included in the preceding amount, to be approximately $325 million.

For the second quarter, we expect revenues to be approximately 405 to $410 million, and second-quarter earnings per share to be approximately 33 cents. Weighted average shares outstanding for the second quarter should be approximately 105.5 million shares. We expect full year 2004 operating profit margin improvement to be approximately 130 to 150 basis points, with lower improvement in the fourth quarter of 2004. The Online Education Group's margins, implicit in the preceding amounts, are expected to be approximately 40 percent for the full year, reflecting spending to support planned growth initiatives.

These initiatives include the launch of a third platform in late 2004 and the opening of a new customer service/recruitment center in Portland, Oregon in the third quarter. We have signed a lease for this space for approximately 40,000 square feet. We expect that this new location will provide a strong access to new employees in an additional market that will support staffing growth to serve our growing student population.

In addition, I would like to point out the following information. In yesterday's press release, we disclosed same-school population growth of 29 percent. This included the effects of our growth in our AIU online business. The CTU, or Colorado Tech, online population is expected to be approximately 1100 students at April 30, 2004. Using this information, along with information previously disclosed, would result in a calculation of bricks and mortar same-school population growth of approximately 11 percent. Factoring in the impact of some year-over-year changes in the INSEEC group extern population would result in a pro forma, or an apples-to-apples, calculation of same-school growth of approximately 12 percent. With that, I will turn it back over to Jack.

At this time, we will take questions. I would like to keep this to one hour. We ask that you limit your question to one. At this time, we will turn it over.

(OPERATOR INSTRUCTIONS) Howard Block of Banc of America.

Good morning and congratulations on an absolutely superb quarter. First question is with regards to all of the new greenfield locations you are opening this year, how are you sourcing most of the campus leadership at these locations?

There's a combination of things that we do. There is promotability from within our system. Also, going out and just searching for people that perhaps have done startup before or they're familiar with the area and they have either industry experience or they come from a similar industry, where they are used to giving good customer service and working with the marketing in a very competitive environment.

Okay. And on the same-school population, do you have targets for same-school bricks growth? And if we assume -- I guess Whitman is moving into same-school in the next reported enrollment number, I would guess that would have a pretty significant effect on that same-school population as well.

Howard, of course we have our internal targets. We certainly have strong budgeting process. We have indicated in the past that we would expect same-school populations to move along a similar trend to what it has been recently. With retrospect to the Whitman impact, you have seen the information from us. You have the specific numbers on Whitman population dating back to last July -- or I should say that those amounts have been previously disclosed. So you could fairly readily calculate the impact that that might have on the same-school comparison.

I would point out, just given the size of Whitman, while it should increase the same-school calculation when it enters that calculation at July 31, we are still talking about something that is roughly 12, 15 percent of our population today. So the impact won't be that dramatic.

Last question is the growth in cash from operations in the quarter was dramatic. Anything in particular that was extraordinary or non-recurring, or can we continue to expect strong improvement?

We certainly expect to continue strong cash generation from our business. I think there were a couple things that drove some exceptional improvement in the first quarter. One, we had one of our most sizable quarter-over-quarter decreases in DSOs in terms of a four-day decrease, and had some strong trends in our other working capital components. I would not expect that those would continue at that same level of improvement. In addition, our capital spending for the quarter was proportionately less than what we are expecting for the full year. Nonetheless, we do expect continuing strong cash from operations throughout the rest of the year.

Okay, thank you.

Greg Cappelli of CSFB.

Congratulations. Can you just clarify the number of starts that you actually had in the online division in the quarter, and then maybe talk about the schedule throughout '04? Then as a follow-up, Jack or Pat, just give a little more color on the new platform that you mentioned online going forward?

Greg, just to clarify the question. When you talk about the number of starts, you are talking about the number of start dates or occurrences?

Correct.

I would just say, Greg, that in terms of AIU in our first quarter, we had a very similar number of starts -- three starts in our first quarter in 2003 and three starts in 2004. We also added two somewhat more modest starts with CTU in 2004 that, of course, we did not have as an entity in 2003. So our starts are somewhat similar. I guess I would say as we're moving toward the end of the year, we are looking at the possibility of a third platform.

We brought on the second platform, CTU, very, very seamlessly. It has moved very, very quickly, and here after six months we're doing some great things with it. So we absolutely feel we have other platforms in our future, and we think our next platform is probably late this year or early next year.

Greg, I would add one other elements there in terms of the starts. We did a report in our estimated population as of April 30. And I would point out that there is a difference in the AIU online calendar last year versus this year. Last year, we had an early May start, so the students that were recruited in that start were not in last year's April 30 population, obviously.

This year, as opposed to an early May, we had a late April start. So the April 30 population in comparison to last year has essentially an additional start. The total number of starts for the year will remain at 9, the same as last year. Other than that April/May difference, all other starts on a year-over-year basis are in the same month this year versus last year.

Okay, I understand. And of course there will be the same number of earning days as well, I am guessing?

Same number of earning days for the year although --

Earnings days trend up and down a little bit, although not dramatically.

But the total for the year is the same. But quarter-by-quarter, there are a few differences, and we provided that detail in a supplementary schedules to the earnings release.

Okay, great. One quick thing on the bad debt expense. Would you continue to model that sort of the high 4s, maybe 5 percent range as a percentage of revenue here over the next several quarters?

I would say we're continuing on the same path that we were that I talked about last quarter, that I was expecting that we would stay at somewhat higher than historical levels for a few quarters before we see a more substantive improvement.

Great. Thanks for the great job.

Richard Close of Jefferies.

Congratulations on a great quarter. Jack, I was wondering if you could comment or elaborate on your comment with respect to regional accreditation. And then also gives updates on the Gibbs Montclair and its accreditation progress here.

On regional accreditation, we look at this for certain schools being good accreditation to have, especially if they have certain types of programs that maybe students that go to those types of schools really prefer a school that is regionally accredited. And there's a number of schools that we have that have applied or are in candidacy for that currently. And we deal with just about every regional organization throughout the country, except maybe one or two, and so we have a lot of experience in this area.

But I think we have four or five schools that will be moving in that direction starting this year. And we certainly encourage them to do it if that is what they feel they need to do, depending on what the mission of the campus is. Sometimes with that you have some flexibility that you might not otherwise have, but other than that, it is the same type of process, if you will. And just a comment, just because it was in a press release last quarter on Montclair, we did receive a grant of accreditation here recently at Gibbs Montclair. So I think from an administrative standpoint, I think things are in very good shape.

Thank you very much. Congratulations.

Gary Bisbee of Lehman Brothers.

I will add my congratulations. Another outstanding quarter. Sort of a big picture question, if I could, for whoever wants to answer it. Do you have at this point any type of student and employer feedback for the accelerated format at AIU online? Specifically, what I'm wondering is do you think there's a risk at some point in the future that the accelerated format is going to be viewed as maybe not as substantial an education, and someone who took two years to get an MBA rather than one year. Do you feel that there is any quality issue in the future, or at least the perception of that, given how quickly the students go through the program?

This is Nick. I guess I would just add I feel that the quality is very, very excellent. When you look at our online programs, we have a lot of other great fellows who are out there doing these things, but I think we are doing some tremendous things. We have nonlinear multimedia courseware. Most people don't have that. We have a fully integrated virtual campus at its (ph) behavioral base. Most people don't have that. We have student advisers for every single student, virtual tutors, etc. So we do a good job in, in fact, that accelerated program. We also offer a course development by our people here at our home base, so faculty can be more coaches and mentors.

I will just say we had a recent survey, which some of the results came back wonderfully. I will just mention a few things. One question was the goals and objectives of the course were sufficiently clear. 96 percent agreed or strongly great. A few other just quick things. How about the course content? Ninety percent agreed that it was very good to very excellent. And of course we didn't have anyone who said it is average, so we did very good at that. In terms of quality of the course content, 93 percent of our students said they strongly agree or agree. In terms of is the information accurate, 92 percent were in that category. How often do you get those kind of numbers in any kind of survey? Is it interesting? 94 percent. Is it appropriate to subject matter? 92 percent.

And then one thing that was really great, the course allowed me to incorporate my professional or personal responsibilities into learning, 92 percent said yes to that. So again, we always do surveys. We have an entire institutional effectiveness site so we can look at that. So we think we're doing a really good job in terms of the quality of our programs, and we think the accelerated programs are doing well.

I guess two other things I would say. If you look at our retention numbers, which are at 70 percent, those are higher than many schools. So oftentimes in this world. we look at online and the retention is lower, the placement is slower; and online, we're actually higher and our placement rates are even higher -- 97 percent. So we think those numbers bear out the things we're doing in terms of quality and customer service.

So we feel pretty good about that at this time. We never want to sleep, so we are always improving those things, and we feel really, really sound about the quality of our educational product, even though it is an accelerated degree. But that's what adult learners are looking for, that is what people are looking for -- faster, better, anytime, anyplace education. so we feel really good about that.

Basically, just putting it in perspective too, the student that takes the online program are really students that see themselves as full-time students. I think that is the big differential here -- as opposed to seeing themselves as part-time students. So a lot of times it takes part-time students a long time to get through a given program. I don't think that means that they are getting any better education. You could make a thought process here that maybe they're taking too long. So I think it fits in with the student's lifestyle, if you will, and I think the real situation is that they want to be full-time students, period.

Thanks. One wrap-up question for Pat. Your balance sheet data you gave included long-term debt net of current. Did you have any current debt as of the end of March 31?

Nothing other than current obligations under capital leases, which are very modest.

So the 79 or so you had a quarter ago, you effectively used the free cash flow this quarter to pay that off?

That's correct.

Great, thanks.

Jerry Herman.

Just a question about the investment spending. Nick, I was hoping that maybe you would be a little bit more specific in terms of the type of platform you're looking at there, and maybe a quantification of the increase in enrollment counselors.

I guess I would just say -- and I might turn to Pat in a minute -- he can maybe elaborate. But we started off, as you know, just a couple of years ago at zero; we had a modest investment. We've done very, very well. But we do believe in investing for the future because we see this as a long-term competition, not just as a short-term one. And so we're growing with every month, with every week, with every year. And I think we will do wonderful, wonderful things. We will have great profit percentages every year. And yet, we will still be able to invest in various platforms.

So third platform, we think we can have 3, 4, 5 platforms someday. I do not want to say at this point what we think that third one could be, but we are looking and will work very hard to have that up and running by early next year. I guess I will say we do invest in a number of things. We're still investing as bit in CTU. We started that in October. Very, very few people can take on a new platform and have it up and running and being successful within months, and I think were doing that. So, we will do the same thing at the end of this year.

Other things we're doing to invest include investment in our infrastructure, which is very critical. We want to be the number one customer service university in the world online. We also are looking at doing some other things with our customer service center or recruitment center in Portland, Oregon right now. We are looking at adding admissions representatives out there and other people to add customer service things, and I think that will help our students. It will help us further enroll more students.

Number one, we look at our virtual enrollment opportunities. That is very, very critical. But we also know we need live people who are doing this. We can work out of a new time zone and we feel very, very comfortable with that. So we have some investments there, but I think will still be able to turn out good profit percentages, good growth, etc. The beautiful news, I think, to the market is we can say, look, we're going to be around with you for a long time. You can count on us. We are going to continue to grow. We are always thinking about the future. We don't sit on our laurels for long. We might be overachieving by a lot, but we're not going to sit for long, because we want to be on every single one of these calls talking about are we blowing away the numbers.

You also asked about the number of reps. Nick can tell you about that.

Sure, I'll talk about the number of reps. We think that virtual enrollments are important. We get maybe 20, 25 percent of our enrollments that way are virtual enrollments, or grobo (ph) rep, as we endearingly call that person. We take in 20, 25 percent of our enrollments that way. We're working on a very new tool for the near term where we will have virtual tour guides. And it could be Wendy (ph). We showed that at a recent conference. It could be military tour guides, high-school tour guides -- people who really come into the home like to (ph) have a live (ph) individual who helps you. So we're looking at upgrading that at all times.

But right now, we have probably in the vicinity of 500 representatives. And we move to the end of year, we could double that kind of number. We're looking at tremendous growth into the future, and we really think the world is our oyster. People say when you cut into the postsecondary market of 17 million people, I think in fact we will do that, and that's wonderful. All the online groups will do it. But from my viewpoint, we will go far beyond the 17 million, or the small percentage of that. I think there are 50 million people out there who need postsecondary education; they have never had the opportunity. We will cut into that; we will work with that.

So we will need more admissions reps. We will work out of different time zones. We will do a great job, and we are very, very excited about what we're doing.

Just a quick follow-up. The same school margins, or said differently, the margins and new campus startups -- can you give us any better quantification of what that improvement might have been?

Well, I have said that it is up year-over-year. I guess I would also say that the improvement there has been somewhat hampered. Most of our increase year-over-year in bad debt is essentially on a same-school basis, meaning Whitman and our online hasn't overly influenced that year-over-year change. So I would just say that we increased it on a year-over-year basis despite that higher bad debt burden.

Great, thanks.

Bradley Safalow of J.P. Morgan.

Just as a follow-up on the margin side for the outside candidates on a same-school basis, as you anniversary Whitman and as these new branch campuses start to ramp in profitability, what are your goals or objectives in terms of (technical difficulty) in the next 2, 3 years and the margins on-site?

I guess I would backtrack, really, a couple years, if you will, before our online business got to the scale that it's at now. We had really consistently talked about increasing our margins 50 to 100 basis points per year for the next several years. So I would continue to tell you that that is our expectation going forward. If we took the online effort and put it aside and we looked at it as a brick and mortar segment, I would tell you we expect that kind of improvement, 50 to 100 basis points per year, for the next several years.

So realistically, is that more of a target in '05, given the number of growth initiatives you have this year?

I guess what I would say for '04, I mean, we still would have that same goal on a same-school basis. And really what you have is you have the Whitman acquisition, which doesn't mean our margins are going down; it just means we are averaging in lower-margin campuses to the mix. And that's one of the reasons I said on a same-school basis we have seen improvement on a year-over-year basis this year.

Sure. Just another kind of longer-term question on the on-site enrollment trends. It's 11 to 12 percent. Is that your benchmark over a longer-term basis that you are targeting for growth?

If you look at our performance there historically, it is varied. That 11 or 12 percent is less than where we were at several years ago. However, we have a lot more campuses in the mix and a lot more mature campuses in there. We would expect to be in that ballpark in the near future.

Keep in mind, too, that some of this is a bit seasonal, but our business is in very good shape. There's a lot of leads coming into the system. There's lots of book futures. And we feel very good about the overall state of where we are and certainly where it's going.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Mark Marostica of Piper Jaffray.

Congratulations on the quarter as well. I wanted to ask a question on the new platform -- not to beat it up like a dead horse, but I wondered if you could give us some additional qualitative thoughts around. Are you talking about a new set of curriculum, a new geography? How does this new platform in any way, shape or form differ from the existing platforms at AIU and CTU?

Mark, I guess I would say that we have not made a final determination. We're looking at several opportunities. It could be teaming, partnering with one of our sister schools in existence today. It could be some small acquisition into the future. But I guess I would look at it, as we move from AIU online, what did we have there? A lot of program opportunities. We had accelerated programs. We had a number of interesting things there. We offered one course for every half quarter and two courses over the period of a quarter, because we believe adult learners learn better with fewer courses at a time rather than more courses at a time. So in business, someone might take cost accounting or media (ph) accounting and a more beginning type of accounting course. So we have fewer courses.

At CTU, as an example, it is less accelerated. It still moves pretty quickly, but (indiscernible) something where people are taking two courses over a half quarter and then four courses over the quarter. As we look to a third platform, we would probably look to opportunity where we could offer additional types of programs and maybe at a different type of pace. So we are not really prepared at this time to say exactly what that would be, but we are always looking at how to move out to gain more of the market audience. So we have a big audience. The world, as I have said, is our oyster. So if we can go out and offer more accelerated, less accelerated, normal pace programs, if we can offer these types of degrees, those types of degrees etc., then ultimately, we will capture a large share of the entire market.

So we're taking our time. We're going to be very judicious. But we think by the end of the year or early next year, we will have a tremendous third platform which will augment what we do -- not take away from what we do but augment what we do, and will be very successful. It will help carry us even further into 2005.

Please keep in mind that our AIU brand and our CTU brand, those have enormous opportunities for growth. And when we mention this third platform, it is only by way of indicating that we are always looking for other types of opportunities. But the real engine certainly is our AIU and our CTU brands. So that is probably an important perspective to keep in mind.

That is very, very helpful. Thank you. Just one follow-up. Jack, you mentioned -- you gave us some color on program transplants, that the majority's yet to come for the balance of this year. I'm wondering if you can comment on how transplants you've done year-to-date, how many perhaps you plan for the year. And I think you did 50 last year, if you could kind of confirm that as well.

Last year, it was 50 plus actually, and this year we're looking at doing more than 50. In the first quarter, there was probably something around 15 or so that went into effect, and we have more that we will do in the second quarter than that number. We will have more in the third quarter, and then we will settle back in the fourth quarter. So I guess the second and third quarters, as well as the fourth quarter, certainly have more than we have done in the first quarter.

Perfect, thank you.

Kelly Flynn of UBS.

Sorry to waste the question on this since Greg already asked it, but I just want to clarify that the population number you gave for online as of April 30, that reflects three starts and there were two in the year-ago quarter? And then now you expect two in each of the subsequent quarters this year?

Let me just review, Kelly, and I understand the question. We have -- for the AIU platform, we have nine starts per year. And last year, we had three starts in the first quarter and then two in each of the subsequent quarters. And this year, it is the same, but the difference is that the second-quarter starts this year are in April and in June. Last year, they were in May and June. It was a late April versus early May last year.

Okay, so those 15,600 reflect three starts since January 1 (ph)?

It reflects an April start this year, okay? So there have been three starts since we last reported population at the end of January.

Okay, great. Could you just speak to pricing online. From our calculations, it looked like it might have been down. Nick, could you speak to what happened this quarter and what's going on in general?

I will be happy to. We continued to add periodic and reasonable tuition increases. As you look out in the online world, some people are higher than the brick and mortars, some people are a little lower, and ours is somewhat comparable. But our general programs -- let's say of we offer a two-year degree, a plus two, an associate, a bachelor -- all those are equivalent to about two years. The price ranges are probably between 22 and $30,000 a year. I guess I would say, in my mind, there is upside opportunity in that, that we can move into in the future. We feel that is a nice even type of range right now.

I think there's other opportunity as we move in the future in that area. We haven't really found too much resistance in terms of pricing. Keep in mind we're also able to package relatively successful. Seventy percent of our students are at the bachelor and master level, which means in terms of loans, that they are getting between $10,500 and $18,000 for an academic year; whereas many schools in this segment are at the associate level, and they are getting about $6600 an academic year.

So we feel there's opportunity there. Ninety four percent of our students work. The average income is in the $40,000 range. So again, we think there is opportunity there because our students perhaps can afford a little more. But at this point we feel that we are very comfortable with those price ranges. As you know, all of our students are (ph) full-time degree-seeking students that are earning in excess of $20,000 a year. You have seen our profit percentages. So we are not in a super big rush in terms of increasing those tuition rates at this time. We feel they're very, very comparable to a lot of other good people out there in the industry.

Okay, that's really helpful. Thanks.

Fred McCrea of Thomas Weisel Partners.

Good morning, everybody. A quick question for Pat. In terms of the segment breakout that you have included in the supplemental disclosure in the press release, looking at the corporate and other line, a fair amount of variability there. Maybe you could kind of walk us through the components that played into that over to the previous few quarters.

I guess I would tell you I would expect to see that having a fair amount of variability, and it's because some of the -- when you move past basic database services that we provide to the campuses, there is, I guess I would call it the most amount of project work, the most amount of activity that might be subject to periodic accruals or provisions for certain expenses. As an example, in the first quarter, you know, we made certain provisions related to litigation etc., and those are the kind of things that don't have the normal business flow to them in terms of expenses.

I would tell you that our guidance incorporates that kind of expectation, and I would tell you on a full-year basis, we would not expect you to see that number move dramatically -- or move dramatically relative to the size of our business. But at the same time, it won't be a real steady number from quarter-to-quarter.

Okay, thank you very much.

Matt Litfin.

Do you believe that you have now sufficiently integrated Whitman's so that you could get interested in another large platform acquisition near-term?

Certainly, Whitman has done extremely well. We had a number of almost nine months now to put them into the system. We have been extremely pleased with their performance. Basically, a good group of schools, well-run in many ways. And a lot of things that we did was just to probably strengthen some of the stuff that they already did pretty well, as well as put our own kind of stamp on there, if you will, in terms of accounting and financial aid and student information systems, things like that, as well as giving them the resources that they need and different strategies.

We feel very comfortable with where we are right now. Certainly if we were to look at another opportunity out there, we feel comfortable that we could take on that opportunity, because we always kind of scale our business about a year in advance of where we are currently. So yes, we have a lot of confidence if something were to come along and strategically it made sense and had economic value to us that we could execute an acquisition strategy.

Thanks. And does the overall acquisition pipeline look more full domestically or internationally?

The international thing is somewhat new to us, because up until probably two years ago we were not really that mindful of what was happening perhaps internationally. But we are now just because I think we made our business when we went out to look for acquisitions. And there is a fair amount out there. Europe is a big place. The Pacific Rim is a big place. South America, places like that. So we do continue to look there. Certainly there's still a lot of acquisitions here in the U.S. and in fact throughout North America, and we have a pretty full pipeline that we analyze and look at things.

Thanks, Jack.

Trace Urdan of ThinkEquity.

Good morning. You characterized the performance of INSEEC, I believe, as strong, and I'm wondering if we could get some more color on that, either in terms of what kind of enrollment you're seeing there, what initiatives you have undertaken to move the needle in that school and what you see the potential as being there?

Year-over-year, they had an increase in enrollments. We typically don't give, certainly, what that increase is based on individual school levels. But we were very pleased with what they did to be able to attract business. They are looking at putting in some new programs. They've relocated some of their locations. They are going after new markets. We put in a study abroad program to have students from the U.S. and other parts of the world go over to the French schools. And we are able to give them, perhaps, some marketing procedures that we have found successful here in the U.S., whether it is to more dramatically increase some of the things that they did in their Web area, to share different parts of the curriculum that might enhance what they've done -- and they have already had some very good programs. But we just find with perhaps the more marketing know-how and resources, that they were able to, frankly, have a very excellent year and I think they will have an even better year this year.

Just one follow-up. Do you see the potential for taking that asset them and sort of improving it? Does it compare with the similar kind of performance when you buy something in the U.S., or is it a little more muted because the European market is more conservative?

I would tell you, based on performance to date, it compares very well. We clearly have, at this point, some strong visibility into population growth and profitability improvement.

Perfect, thank you.

Jennifer Childe of Bear Stearns.

Two quick ones. What percentage are international students relative to your overall online mix? And I was curious why you're on-ground population decreased sequentially.

In terms of online, I would just say we are now in 37 foreign countries after only three years, so we are really proud of our international interaction. I would say that the percentage of those students is relatively small today, which I think is good news, because I think that is a tremendous opportunity as we move into the future. We are working right now -- we have worked over the last year with a number of larger groups in terms of partnering with other groups in other countries to really move up those numbers. So again, from my perspective, we have many millions of individuals who do, in fact, want to partner with us in the other countries.

And I think given the opportunities we have to scale, the opportunities we have with our profit percentages, I think this is going to be a tremendous new market for us in the future. We are working it today. We have some dedicated reps in this area. We have dedicated marketing sites. We have marketing sites -- while we don't have our courseware in these languages today -- we may some day -- but we have 13 different most used languages in the United States that we use in our marketing sites. So we absolutely look for this to be a big opportunity in the future, and will have more of that to share in the future with you.

Therefore, with respect to the population, if you actually go back historically and look at our population trends, when you look at the public information or you look at some of total numbers, there has frequently been a level of acquisition noise in there. But I would tell you historically that the annual cycle with respect to population is really that we look at significant increases in our population late in the third quarter and early in the fourth quarter. And generally for the remainder of the annual cycle, we look at flat to somewhat declining populations this time, because our level of graduations and our level of attrition tends to match up fairly well with the level of new students starts. And that is just because the start cycle or recruiting cycle is heavily weighted in that third and fourth quarter.

So it is seasonally similar to historical trends?

Yes. If you look at the numbers, sometimes we have been flat, sometimes we been down a little bit. It is not an unusual trend.

Okay, thanks.

Jeff Silber of Harris Nesbitt Gerard.

Just a quick modeling question. Looking at some of the spending that you're going to be doing for the growth initiatives online, which line item would that be booked in on the income statement?

If you look at it, there would be a bias in that level toward the G&A line. But look at investment in that new facility, as an example. Our occupancy costs are up above in that educational and service line, so you have some cost up there. That is not a large driver in our online business, but initially what we are looking is really increasing customer service and the recruitment activity there. So that would be a disproportionate hit to G&A.

Great. Just a follow-up on that new center in Portland. I'm assuming also another benefit is getting probably lower wage rates and higher unemployment rate in that area. Is there any concern about having a unit like that so far away from your corporate headquarters?

I guess I would say we are centered in Chicago. We do have a recruitment center/customer service center about 20 miles away today. Obviously, 20 miles is different than 2000 miles, but we have to do a lot of the same things. We think in terms of recruitment admissions, we can do that very effectively from a distance. We are moving into Portland in a different time zone; higher unemployment. It's sort of in the tech corridor in Portland, which the tech area has not done as well lately. We think we will really attract some really solid individuals. We think we will have some very nice metrics. So we are very, very pleased about this. We will have more to tell you late.

I guess I would just say, as I look at online overall, and I say it every time, I am very excited about our opportunities and I think we will deliver some tremendous results. But we feel pretty good about it.

One of the things, too, we want to let you know is as we have looked at this, we certainly have a plan that we feel is going to be able to be successful. We have taken one of our very senior managers somewhere in our organization and they will be heading this up on a day-to-day basis, so we feel that that gives us a lot of confidence. We certainly are used to running operations that might be many hundreds or thousands of miles from the main corporate headquarters, so we feel we know the various management things that we have to put into that to make sure it works on a day-to-day basis.

Fair enough. Thanks a lot.

Sara Gubins of Merrill Lynch.

Two quick questions. First, for the onground campuses, are you seeing any particular strengths or weaknesses in terms of enrollments in particular fields or degrees? Second, could you give us an update on Western in terms of the attempt to accredit the seven or so programs that turned out not to have been accredited?

Let me talk about the on-campus side of business in terms of some of the opportunities there. Enrollments are up very dramatically this year. When you look things that drive the business, certainly things like the Internet, TV leads are up dramatically in a very nice way -- referrals, direct-mail. And there's a lot of different programs that we put out there. But one of the strengths over the last number of years is probably based on the economy in general. But I think we're finding a lot more students are turning towards business programs -- that is now perhaps our biggest or one of our biggest areas.

Culinary field continues to be extremely vibrant, because I think people are attracted to that. We are going to be offering bachelor degrees in four of our schools this year, which is very new to us. I think that will have a very, very positive impact. The industry really has asked us to consider and put in something like that.

The design programs continue to be extremely vibrant. I think, again, people see themselves doing that. It fits in with their real-life background and experience. One of the areas of opportunities certainly is game design and development. And I think that's going to have the same effect that a number of years ago that graphic design had, where there's so many uses for it throughout the economy, whether it be education or defense or design or medical or whatever, and I think that's another area of opportunity that is going to really take off. But we continue doing many things in the whole design area.

Information technology, there's still a lot of demand out there for that in terms of computer security systems, the computer technical support, management information systems, network design and administration. And that is something that is expanding. Legal studies is another area of opportunity. And then with our new endeavor, which is in the healthcare area, we find that we've upgraded a lot of things from certificate to associate degree programs. And also we're looking at various elements of bachelor degrees. We really look at taking some of our nursing programs too and expanding those to a lot of our medical areas. I think we find that there is a high demand for everything in the healthcare area.

In referencing Western, we are moving along there, working with the various regulatory groups. We're getting a lot of cooperation from those different groups, and we are moving forward to serve the students well. I think at the state that we are at right now, we feel very good about the progress that has been made.

And just a clarifying point there. The individual programs are not accredited. The school is accredited and the program is approved. So the one thing with these programs, we have assembled what we consider appropriate applications for approval of all of these programs, and submission of those programs is in progress, and we would expect a response from the accrediting agency at some point.

But the one other thing I would mention, which we haven't talked about on the call here, we do not expect a significant financial impact on the organization as a result of this, and we have made what we consider adequate provision for any exposure on that during the first quarter.

Great, thank you very much.

Corey Greendale of First Analysis.

Thanks for letting me sneak in. Pat, looking at the CSU segment operating margins over the past several quarters, if you adjust for acquisitions and startups, does this give a pretty good sense of the seasonality you would expect, or what is the seasonality you would expect in that segment?

Yes, it does. As disclosed, we have had the historical trend where really fourth quarter was very much our strongest margin quarter. The second quarter tended to be the weakest quarter of the year, with the first and third quarters in between. And so even adjusting for the acquisition activity, that same pattern is there and we would expect it to continue.

In the segment profits, which segment contains the affiliate earnings?

The CSU piece. The affiliate earnings relate to the Dubai campus, which is a CSU operation.

A follow-up from Gary Bisbee of Lehman Brothers.

Want to follow up on my earlier question. Nick gave a bunch of great metrics on some surveys you've done. Do you have any data like that from employers or can you give us a sense of where you are in terms of getting employers to either directly reimburse or reimburse their students who are going to the school? And any pushback to date on price, specifically from the players, given that you are charging -- at least over the course of a year -- 2X what a lot of the competitors are -- specifically to online.

I guess I would just say we do have number of surveys. I don't have those results with me, but they come back very, very strong. We have an entire institutional effectiveness site. So, in fact, we do surveys with faculty, with students, with employers. We put all those numbers up, etc. I don't have those specific numbers with me. But as you know, we place 97 percent of our students.

I guess I will also say, in terms of placement, we're really having no pushback. We've increased -- just over the last year, we had our online corporate partners. So we have now over 100 people within this roughly one year time period from Abbott Labs to Coca-Cola to Boeing. Verizon, for example, has 143 corporate partners. We're just getting started with these people. I think it's a big opportunity for the future, so we're looking forward to that.

In terms of working with some of our corporate partners, we do work with them in terms of a very, very modest 5 percent incentive to have their students come and take their programs with us. But we do very well. We still have a high profit percentage obviously. The employers like us. The students, when they finish with us, they get even better jobs in their companies or in new companies. So we feel we do really good with those corporate partners.

And how about the military? I guess you probably think of that as one corporate partner.

Military, we also have a freedom scholarship, as we call it, which is 5 percent, which sometimes adds to our corporate partner type of deal. But we are doing very well there. About 20 percent of our students are active or are recently retired military, so we're doing very well with that. We're going out to military bases and signing up entire bases, and we feel very, very solid about that partnership.

Thanks a lot.

We have no further questions.

Very good. I just want to read one last statement, if I could. I just want to let everybody know the future is bright. We're in the best position in the history to execute our strategies at a time that demand for higher education is at an all-time high and growing. We're able to meet that demand on-campus and online, which puts us in an excellent position to achieve our goals. Thank you very much for listening.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.