Adtalem Global Education Inc.
Q2 2013 Earnings Call Transcript

Published: 7 Feb 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Fiscal 2013 Second Quarter DeVry Earnings Conference Call. My name is Keith, and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And with that, I would now like to turn the conference over to your host, Ms. Joan Bates, Senior Director, Investor and Media Relations. Please go ahead.

[Joan Bates:]

Thank you, Keith, and good afternoon, everyone. With me today from DeVry management are Daniel Hamburger, President and Chief Executive Officer; Tim Wiggins, our Chief Financial Officer; and Pat Unzicker, our Vice President of Finance. I'll now paraphrase our Safe Harbor statement. This call will contain forward-looking statements. Actual results could differ materially from those expressed or implied. We undertake no obligation to publicly update or revise any such forward-looking statements. Please consult our most recent 10-K and 10-Q filings for a more complete description of factors that could affect our financial results. Telephone and webcast replays of today's call are available until March 5. To access the replays, please refer to today's release for more information. I'm sure you noticed, we pushed our call back 30 minutes from the time we normally started. We did this in response to the feedback we've received from you, so we appreciate these suggestions and ask that you keep them coming. And with that, I'll turn the call over to Daniel.

[Daniel M. Hamburger:]

Thanks, Joan, and thank you, all, very much for joining us today. I'll begin with an overview, and then I'll follow -- ask Tim to -- and Pat to follow up on that with the financial results and then I'll wrap it up. And as you saw in today's results release, we made progress executing on our performance improvement plan this quarter. While revenues were down modestly year-over-year, operating expenses, including discrete items, were lower both sequentially and versus prior year, especially at our institutions in transition. The decline was driven by our operational excellence initiatives, the deferral of advertising expenses for the second half of the year and by costs that vary directly with enrollment levels. So let me update you on our progress with the performance improvement plan. As a quick reminder, the plan has 3 priorities

[Timothy J. Wiggins:]

Thanks, Daniel. Good afternoon, everyone. Before I walk through the enrollment and financial results in detail, let me start by commenting on our cost reduction efforts. At the end of last fiscal year, we committed to $50 million in cost reductions for fiscal 2013, then in the first quarter, we announced an increase to $60 million in reductions. We've been hard at work focusing on increasing efficiencies and creating value throughout the entire organization. And so I'm pleased to say we've now increased our target to at least $80 million of total savings to be delivered this year at our institutions in transition. Total costs and expenses for these institutions were $1.18 billion in fiscal 2012. So this means these costs should be $1.1 billion or less this year or about a 7% decrease. The cost savings are being driven by structural changes made to these institutions like revisions to staffing models, course scheduling and eBooks. They are also being impacted by costs that vary directly with enrollments like adjunct faculty, bad debt and books in light of lower enrollments at DeVry University. In the second quarter, total costs came in below our plan as a result of tight control and the deferral of some expenses into the third quarter. One key area of deferral was advertising, which was down nearly $7 million sequentially due to market conditions, efficient use of resources and the availability of quality inquiries. Looking to the third quarter, we now expect total costs and expenses to be up sequentially about 3% to 4%. The biggest driver is expected to be advertising spending for the third quarter, which should be more in line with first quarter levels. We also anticipate higher seasonal spending due to seating 2 sessions in the quarter versus just one in the second quarter and increased spending related to new campus openings. Turning to enrollments. At Carrington, new and total student enrollments grew this quarter. New enrollments were up nearly 13%, with total enrollments up slightly for the first time since the downturn. The Carrington team has worked hard to refocus the brand, reorganize the admissions function to better serve students and build upon its leadership position in allied health care education. Chamberlain, Ross and AUC continue to experience enrollment growth as the need for nurses, physicians and veterinarians in the U.S. remains high. Ross and AUC posted single-digit total enrollment growth in line with our long-term expectations. So you can see that the new investments we've made over the last few years are paying off. So our growth institutions continue to meet or exceed our expectations for enrollments, and we can now call the turn on Carrington new students. At DeVry University, while we don't expect to see new undergraduate student growth during the second half of this fiscal year, we're encouraged by what we're seeing in terms of conversions and start rates. It's the inquiries at the top of the funnel which continue to be challenging. So with that context, second quarter total revenues were $505 million, down about 4% versus the prior year. Year-to-date revenues were $998 million, down 5%. In the second quarter, revenues for our institutions that are in transition, DeVry University, Carrington and Advanced Academics, were $321 million, down about 13% versus the prior year. This was partially offset by our growing institutions where revenues increased 18% to $184 million. That was fueled in part by the acquisitions of Falcon, FBV, and FAVIP, as well as expansion at Chamberlain. Excluding the restructuring charge this year and the impairment charge last year, total operating costs and expenses for the quarter of $430 million declined 1% compared to last year. For the 6-month period, expenses were $867 million, down about 1% from $874 million last year. During the second quarter, total costs, excluding discrete items at our institutions in transition, were down nearly 9% or $29 million versus a year-ago quarter as a result of our continued cost management. During the quarter, we consolidated 3 facilities

[Patrick J. Unzicker:]

Well, thanks, Tim, and good afternoon, everyone. Our liquidity and financial position continue to remain solid. Cash flow from operations for the first half was $180 million versus $219 million last year, reflecting our lower earnings, the cash and marketable securities balance of $219 million at the end of the quarter compared to $288 million last year and we continue to remain debt-free. Our cash and marketable securities balance is lower than last year, reflecting investments for acquisitions. Our net accounts receivable balance was about $140 million versus $145 million last year. The lower accounts receivable balance was a result of decreased revenues and our continued focus on collections management. Our bad debt rates continue to reflect the focus on the receivable collection process, with year-to-date bad debt expense down to 2.1% of revenue as compared to 2.3% last year, an indicator of the value proposition of our programs and our teams' disciplined execution in this area, even during these tough economic times. Capital spending for the first half was $48 million versus $63 million spent last year. Our capital spending was down, driven by our strong focus on capital deployment and a delay in spending on a couple of projects. Current year spending focuses on expansion within our Chamberlain College of Nursing, Ross University School of Medicine and the American University of the Caribbean. We expect total capital spending for the fiscal year to be in the $130 million to $140 million range as we reinvest our earnings in academic quality and targeted growth initiatives. Now during the quarter, we repurchased about 539,000 shares of our common stock for about $12.8 million or an average of about $23.84 per share. We completed our seventh $100 million program and began executing our eighth $100 million program in November. So we remain committed to a solid balance sheet, with strong financial flexibility to reinvest in quality and growth. Now let me turn the call back over to Daniel.

[Daniel M. Hamburger:]

Thanks, Pat. We look forward to your questions. And just before we open up the line, let me address some concerns we've heard about the regulatory environment and accreditation and some of DeVry's points of distinction. We understand there's a concern about gainful employment and will that come back and so forth. Well, under what was previously proposed, none of DeVry's programs failed the tests. We remain confident in the strong value propositions of our programs. Second concern we've read about lately is recourse on private loans. Across DeVry's institutions, private loans are a small percentage of our students' total financing, maybe 2%, and loans where we shared default risk are a very small percentage of those. So we have minimal exposure to this issue. Another concern people have asked about is accreditation. As you're aware, the Higher Learning Commission, the HLC, accredits DeVry University and Chamberlain College of Nursing. Chamberlain has recently been through reviews by HLC as part of the approval process in our new programs and campuses. HLC commended Chamberlain on the quality of our programs. DeVry University recently completed its visit with the HLC. And while we're awaiting the final report, the visit seemed to go well, and the visiting team was complementary. Also, Ross University School of Medicine recently received 5-year reaccreditation from its accreditor, the Dominica Medical Board. So it's always great to hear when accrediting bodies acknowledge our commitment to quality. Looking ahead in the regulatory front, most people think it's unlikely for the HEA reauthorization to get done this year. We agree with that, and we're using this time to have proactive dialogues with policymakers and other thought leaders. We continue to advocate that strong regulation is necessary in order to protect taxpayer and consumer interest. We believe regulation must be based on 2 pillars

[Joan Bates:]

We do have a number of callers in the queue. [Operator Instructions] So with that, I'm going to ask Keith to give our participants the instructions for the Q&A portion of the call.

[Operator:]

[Operator Instructions] And your first question is from the line of Jeff Volshteyn with JPMorgan.

[Jeffrey Y. Volshteyn:]

A housekeeping question, really. Given the new disclosure on enrollments, the recent disclosure enrollments, could you just walk us through different segments and talk about seasonality, as well as the differences in the number of starts between the year-ago period and upcoming quarters?

[Patrick J. Unzicker:]

Sure, Jeff, this is Pat. I'll take that question. As it relates to DeVry University, both the undergraduate and graduate programs, we have 6 sessions per year. Those sessions start in July, September, November, January, March and May. And there's really no, in terms of year-over-year comparisons, that's pretty much lockstep. For our Chamberlain College of Nursing, this year, for the on-site students, those students pursuing a baccalaureate science degree in nursing, we had 4 new start periods instead of a typical 3, and we're doing that to better align our calendar with other traditional schools. So we had a start in January, which we normally wouldn't have had. And then going forward, we would have normally had a start in March for the on-site students, but that start has been shifted back to May. And then going forward, for Chamberlain College of Nursing, again, just for the BSN students, the on-sites, we'll have new student enrollment periods in May, September and January. And then, of course, our online programs at Chamberlain, both the RN to BSN and the MSN, have the 6 session starts very similar to DeVry University. So I hope that helps. And then, of course, our DeVry Medical International, that is unchanged. Those new enrollment periods are September, January, May. And then Carrington student starts, there's basically 6 session intakes a year. And we did have a little bit of seasonality with those starts, and I can give you the number of start periods. One moment here. I'll follow up with you in our scheduled call later on that one.

[Operator:]

Your next question is from the line of Sara Gubins with Bank of America Merrill Lynch.

[Sara Gubins:]

You mentioned 21 schools saw positive start growth. I think it was for DeVry University. Any distinctive characteristics around those schools, geography or particular program mix that might help explain where the growth is coming from?

[Daniel M. Hamburger:]

Right. Those are -- Sara, those are metros, and I would say not a lot. It's really -- as a manager, you sort of appreciate the differences with local management sometimes. A little bit of strength in California, I would say. I think that's one area that the public sector colleges are a little bit constrained, and students tell us that they're not able to get a full schedule all the time. And, of course, they can get full schedule both on-site and online at DeVry University and graduate and many students do graduate in 3 years, let alone 4 or 5 or even 6 sometimes at other places. So I think that's probably the difference. What's encouraging to us is sort of at the beginning of the downturn, everything was down. And now, as a manager, you start to see things starting to come up in different areas. And you can start to share best practices and what are you doing here and what are you doing there that's working. And so that's actually a higher number of metros that are up here than I was able to report last quarter. So we're encouraged by the trend. We're not satisfied with where we are. Clearly, we hoped to be a little better by now. So that's where we are with DeVry University new student enrollment.

[Sara Gubins:]

Great. And then on the cost side, any chance you could help quantify how much you think costs will be down on a year-over-year basis for the full year. And maybe help us understand what the run rate is into fiscal 2014, given that it sounds like you're actually getting $80 million in '13 as opposed to that being a run rate.

[Timothy J. Wiggins:]

Right. So it's Tim. Sara, a couple of thoughts there. One that initially, as we looked at the year, we expected the $50 million of cost reduction in the institutions in transition, and that costs would be up at the growth institutions supporting the growth so that we'd have a net increase. It's now based on our current view at $80 million of savings, down slightly, not a lot, but we continue to work. We did see, by the way, some cost reductions at some of those institutions that are growing just based on this overall belt-tightening that we're working on. So as we exit the year, we're going to have a run rate a little north of $80 million at this point, but we're not done here. We have the second phase of our operational excellence programs that are focusing on more of these midterm structural issues. We'll continue to look at our real estate footprint. And then we have yet a third wave of those that are longer-term in terms of deeper operational efficiencies that we continue to look at.

[Operator:]

Your next question is from the line of Kelly Flynn with Crédit Suisse.

[Kelly A. Flynn:]

Question relates to DeVry undergrad starts. I'm hoping you can give us a little more color on what you might be expecting for the March session, and then you said a couple of times you don't expect them to grow for the year. I'm wondering what gives you pause on that, given that you saw such a nice improvement in January. And then I have one follow-up.

[Daniel M. Hamburger:]

Okay. Yes, I just -- I'm not saying it's impossible. We just think it's a little less likely that we'll see new students turn to positive during the back half of this fiscal year. And we've talked about that before, so I thought that was important to share that. We're encouraged on the positive side by conversion rates up, start rates up, I mentioned like the 21 metros. So everything that's happening inside the institution, including the graduate employment rates are strong, too, is good. It's overall inquiries sort of at the top that's the main issue. And, for example, we saw Google inquiries for all of education down 7%. So it's just the general -- it's the top of the funnel which is really driven more by the consumer sentiment that's out there that's affecting really all of higher ed, not -- and take DeVry out of it, take even the private sector out of it, you just look at all of higher ed, even community college is down a little bit. That's why I just want to sound a note of caution, we don't want to get ahead of ourselves.

[Kelly A. Flynn:]

What about for March? I mean, do you expect it to be down at a slightly less -- a lesser rate, if you will, or maybe similar rate?

[Daniel M. Hamburger:]

At this point, I'm not prepared to give sort of a number on that but just x sort of overall sense.

[Kelly A. Flynn:]

Okay. And then I had a question about revenue per student for DeVry University. I think you said it was flat year-over-year based on your calculation. I was wondering if you could give us a little help on what to expect for that for the remainder of the year. And also, why is it not worse, given some of the scholarships? I think you had last time said you expect to be down a little bit.

[Daniel M. Hamburger:]

Okay. Why is it not worse, right?

[Kelly A. Flynn:]

Yes, I mean, it's good, but I'm saying what's helping out there?

[Daniel M. Hamburger:]

Okay. Pat?

[Patrick J. Unzicker:]

Good question, Kelly. This is Pat. For DeVry undergrad, as you had pointed, our -- as we had said, our revenue per student was flat year-over-year, driven by a couple of things. So we had an increase in average course load year-over-year, and that pretty much offset our increase in scholarships, as well as the other behavior we saw based on the change of our pricing structure. Now as we move forward into the second half of the year, we would expect our revenue per student at least from a sequential basis to decrease and likely be down versus the prior year as well.

[Operator:]

Your next question is from the line of Bob Craig with Stifel, Nicolaus.

[Robert L. Craig:]

I was just wondering where you think we are in the spectrum of cost savings. Obviously, going from $50 million to $80 million, a huge jump. How much of the heavy lifting has already been done? And what I'm trying to get at here is, what might some of the carryover be in the fiscal '14 on an incremental basis?

[Timothy J. Wiggins:]

Well, Bob, one of the things that, I guess, is kind of a 2-edged sword is one of the reasons that our cost savings increased is that we're seeing enrollments that are softer than we expected at DeVry University. So we continue to execute on these more structural elements, but as I mentioned, some of the variable costs impacted us as well. But we've set a multiyear objective here to have our cost increases, the biggest installment we thought would be this year, but we have expectations that continue to drive meaningful savings in the following 2 years. And we're working under those assumptions, and we don't see anything based on the work we're doing that won't allow us to continue to drive some of these structural changes, like real estate, for example.

[Robert L. Craig:]

Okay, that's helpful. And this is a follow-up. I think, Daniel, you might have mentioned last quarter, you're looking at potentially doing some other things or increasing the level of scholarships. Where are you in terms of that investigation? And could we see some action later on in the year?

[Daniel M. Hamburger:]

Yes, I think our scholarships are up over the prior year but in line with our expectation. And we are conducting a very careful scholarship test at DeVry University. And so that analysis is ongoing. So I'm not able to give you a future expectation yet. I just want to emphasize that rather than just roll something out as important as that, DeVry has a very strong culture of test and control to make sure we really understand the implications before we roll it out. So it takes a little longer, but in the long run, that's always served us very, very well.

[Operator:]

Your next question is from the line of Gary Bisbee with Barclays.

[Zachary Fadem:]

It's Zach Fadem for Gary. Can you tell us or give us some information about how your completions and job placements are going at Chamberlain? And I ask for a couple of reasons. You've seen such rapid growth there, and you should be having some -- quite a few grads by now. And we've seen some negative reports -- or not negative reports but just reports that's showing that new nursing school grads are having a more difficult time securing employment. So curious if you could comment on that.

[Daniel M. Hamburger:]

Sure. Our nursing graduates are doing very well. I don't have specific figures for you, but they are doing very well. They are getting jobs. I'm quite comfortable about that. May not always get the first choice job, but they're getting positions in nursing. And sometimes you have to work for a year or something to get the shift you want or the hospital you want or the department you want, that kind of thing. I know what you're talking about. We've seen those kinds of stories all the time. You tend to see those every economic cycle as the economy weakens. Historically, it's been the case that more nurses who may have left the workforce reenter the workforce, perhaps, in some cases, a spouse who lost her job, or they up their hours. So maybe their hours had been part-time, they take it to full-time, that kind of thing. And, therefore, you always get articles that say, "Oh, there's no more nursing shortage anymore." And then what traditionally has always happened is many of the nursing schools sort of back up and say, "Oh, there's no more shortage," which could sort of add to the cyclicality of this very issue. And that's one of the reasons we have a nursing shortage in the country. And at the same time, last data I have is 100,000 qualified applicants turned away from the nation's nursing schools, and that's one reason that we think it's important that we add capacity that help do our part to solve that shortage. And I'm glad to say that we do that without the taxpayers funding into that capital expenditure. So it's a great deal for the taxpayers, it's a great deal for the student and it's a formula that's working very well at Chamberlain right now.

[Zachary Fadem:]

Okay. And just a follow-up question. Can you tell us a little bit about how your new tiered pricing structure is having an impact at DeVry University and whether you think that it will help you drive new student growth at some point?

[Daniel M. Hamburger:]

Not a big change there. And so I wouldn't set any expectations around driving a lot of growth. So it helps to encourage students to enroll full-time, and it's actually having that effect. As Pat mentioned, we have a little bit higher courses per student, which is good, that's what we want to see. And it helps incent the student to keep going and accelerate the pace of completing their degree. So that's more the impact that I think it has.

[Operator:]

Your next question is from the line of James Samford with Citigroup.

[James Samford:]

I understand obviously the cyclical factors in terms of job market being a factor for people not willing to sign on the dotted line and take on the next stage of their growth. And we all obviously think the, call it, value of a college degree is certainly worth the tuition for most of the schools out there. But I want to push back a little bit on the fact that it seems like everybody is also very adverse to debt right now, and I think that's a risk factor. I was wondering, where do you think you are in terms of relative pricing, relative to traditional colleges? And is there a room for improvement in terms of at least getting the value to be more obvious to students to drive growth?

[Daniel M. Hamburger:]

That's a great question. We are concerned about student debt as everybody is, and we've taken steps to help control that rate of growth. We try to lower that debt for our students. So that's important. In terms of affordability, DeVry University, just to use one example, is in the bottom 1/3 of private college tuition. And in terms of what are we doing to try to make college more affordable, I got to tell you, we take every opportunity to keep down costs, increase the ROEI, not just the ROI, the return on educational investment for students. Examples of that are students can finish a 4-year bachelor's degree in 3 years. That saves them money. They earn an extra year's salary, starting their career earlier. We have a long track record of holding our rate of tuition increase below the rate of public sector and independent colleges in the United States. In recent years, we've even frozen tuition in many programs. We offer institutional scholarships, $40 million, $50 million, I think, we've noted this past year to help students. And we also help students connect with outside sources of financial aid. We try to accept -- we try to be very transfer credit-friendly educational, military experience for credit. We also allow students to test out our courses through examinations to save them time and money. And we talked about the reduced credit hour rates for students who attend full-time. So those are a few examples of the kinds of things that come to my mind about how we're trying to help improve affordability for our students.

[James Samford:]

And just a quick follow-up on the international side. Any other sort of market opportunity that you're looking at outside of Brazil? Or is right now the focus primarily Brazil?

[Daniel M. Hamburger:]

Sure. Brazil showed up as the #1 opportunity through our analyses that we did 5, 6 years ago, and we took a couple of years to find the right opportunity. We're very careful about that, but we knew it was important even if it took a little longer to find the right partners. And we feel we did. And every time we rerun that analysis, Brazil continues to come out, along with United States, as the top most attractive market. After that, we look to Asia, Southeast Asia, in particular, as a place that we continue to look at. We have been in India, for example, since 1997 with Becker, and we'd like to extend that in other forms of education. So I'd say probably Southeast Asia.

[Operator:]

Your next question is from the line of Paul Ginocchio with Deutsche Bank.

[Paul Ginocchio:]

Just, Daniel, I guess you don't want to try to reoffer any guidance when you think you'll turn back positive on new enrollment in DeVry undergrad. Is that right?

[Daniel M. Hamburger:]

Yes, that's right. We're not there yet, but we'll keep you posted. We understand the need for that. So...

[Paul Ginocchio:]

Okay, great. And then just on the RN to BSN, I know that's a very competitive online offering with a lot of the public schools getting in. Just wondering how you sort of were able to reaccelerate that, given all the new competition.

[Daniel M. Hamburger:]

Yes, actually, that's exactly what we've done, and we've had a record class here. And even though people say, "Well, it's more competition. How can you grow with competition?" Well, you can. You offer a very strong value proposition, and then you execute very carefully through the whole process of serving your students from helping them enroll to helping them stay in college and graduate and then gain employment and repay their loans, that whole cycle. In particular, I think Chamberlain has just continued to improve its reputation or brand, if you want to use that term. The kind of partnerships, partnering with the NLN, partnering with Sigma Theta Tau International, these are significant -- these are sort of head-turners in the world of nursing. So we're very proud of those partnerships, and we're going to do everything we can to live up to and honor those partnerships. Partnering with hospitals and working with them to educate -- put Chamberlain's value proposition for the RN to BSN, as well as our MSN and now doctoral, DNP program, in front of their nursing staff who wants -- who want to continue their education, those are some of the levers that I would say we're pulling that are contributing to that success.

[Paul Ginocchio:]

If I can stick one in about the advertising, was there any certain brands that you -- I think you said advertising was down year-on-year, 7%. Was there any certain brands where it's down more than others or it's across the board?

[Daniel M. Hamburger:]

At DVU, a little bit of timing there, which I think was alluded to -- we alluded to that. And we're just -- we're feeling confident that -- I know there has been some big giant increases in advertising some other people talked about. We're pretty confident in the strength of our brands and our ability to get more efficient. And we really held ourselves accountable to get more efficient, use social media, digital media and things like that to improve our efficiencies in marketing. So we continue to grow the reputation and the brand presence while being efficient with the use of those resources.

[Operator:]

Your next question is from the line of Jeff Meuler with Baird.

[Jeffrey P. Meuler:]

I want to ask a follow-up on that last question with DVU. It sounds like most of the front-end metrics are good with the exception of inquiry flow. So just wondering your thoughts on why not increase advertising expense. You guys have had 2 quarters in a row now of deferred advertising expense. It seems to me like if you increase the ad expense, you could drive some of those inquiries. I just wanted to know your thought process around that.

[Daniel M. Hamburger:]

The reason is, we want to be very careful stewards of capital, of our owner's capital and our resources. Where we see those opportunities, we'll do that, and there have been past quarters where we even had surprises and apologized for not getting it up in advance, but it happened very quickly. We saw an opportunity and we took advantage of it here. We just want to make sure we don't spend it just to spend it. Where we see opportunities, we'll do that. We'll usually test it and then roll it out. So we're testing a lot of things, and we won't be shy, Jeff, I would say, where we see an opportunity to increase the advertising spend. Whether that's going to be a productive way to attract and educate more prospective students about the opportunity of a DeVry University degree, we'll do that, and that would apply to all the institutions.

[Timothy J. Wiggins:]

And I would add, Daniel -- it's Tim, Jeff -- that we anticipate sequentially increasing that spend around 11%. So it's a function of where we see the opportunity, and we don't want to waste it. But we also want to position ourselves where we need to position ourselves.

[Jeffrey P. Meuler:]

Okay. And then just wanted to ask you a question on your philosophy regarding how you communicate the expense savings to the Street. When you say at least $80 million, is that $80 million a conservative number of things that you've already identified and are pretty confident that you should -- you can capture and you're continuing to look for additional opportunities? And as you find additional opportunities, you would increase that target. Is that how we should think about it?

[Timothy J. Wiggins:]

Well, we certainly have been able to do that so far, and we did use the words at least. So we're comfortable with the $80 million, and we're continuing to look. The things that could derail that is if we had a sudden influx of new students that would flip those variable costs the other way. But I think you'd -- if that happened, you'd be happy about it.

[Operator:]

Your next question is from the line of Jeff Silber with BMO Capital Markets.

[Jeffrey M. Silber:]

You both alluded to the fact that the issue with DeVry University seems to be inquiries at the top of the channel being challenging. I'm just curious how you're changing your message to students -- prospective students to make it less challenging to entice them to enroll.

[Daniel M. Hamburger:]

Sure. We're really focusing on DeVry's long-time reputation for being the career university. I know that some other people may have talked about that or are trying to do that for the first time. We've been at this for decades, and we've got a long track record of a data, third-party review data back to 1975. And since that time, we've had graduates in the active job market who had been employed within their field of study within 6 months of graduation. So that's the kind of message that we think is important to tell. And we're trying increasingly to work with the employers. More and more of the employers particularly in areas like IT, I mean, it's amazing out there. There's not a lot of unemployment among programmers, sys admin [system administrators], DBAs, infrastructure. And we continue to do a better job of demonstrating that to the prospective student. But it's just a little more challenging right now because even with that data, we see our back-end, if you will, being very strong. Just on the margin, many students and their families are just hesitating on that. And it's interesting. It's not just in education. I just saw a Wall Street Journal/MSNBC poll that was in The Wall Street Journal a couple of weeks ago. They polled American public, and 60% of people said they saw the coming year, this year, as a time to hold back and save because harder times are ahead. So it's just that hesitancy that's out there. So -- but that's the career message that we're emphasizing to try to counteract that, Jeff.

[Operator:]

Your next question is from the line of Trace Urdan with Wells Fargo Securities.

[Trace A. Urdan:]

Two enrollment-related questions, Daniel. I wonder if it's possible to describe the DeVry undergraduate sort of weakness and then relative recovery from that weakness in terms of IT versus other disciplines and maybe specifically business. That's the first question. And then the second question is, I wonder if you could put some of the comments you made about the market environment in context relative to Ross Medical. Are you seeing that the economy is impacting demand in that particular school? Or is that more a situation where you've got sort of capacity restrictions still that mute the pace of growth in that business?

[Daniel M. Hamburger:]

Okay. And I am looking forward to the day where someone pronounces your last name properly, but I appreciate that question. And I would say for DeVry University undergraduate, not a lot of trends to report to you. On the margin, just online, a little bit better than on-site. Health care technology -- and technology, a little bit better than business. Business is a little weaker. But not major trends, just sort of a little bit on the margin as I looked at the data. Let's see, one interesting -- we have a new -- relatively new bachelors in health care administration. So that's a relatively new program. That's an example of kind of investing in a new program to drive growth that we mean when we say that third plank of our platform in the performance improvement plan. In terms of Ross, the market environment at Ross University School of Medicine, same for American University of the Caribbean School of Medicine, the top level demand continues to be very strong. And I would say that we have added to our capacity, along the 4 years of medical school, both the foundation for medicine the first 2 years and the clinical clerkships in the third and fourth year of medical school. And I would say that Ross University School of Medicine is not capacity-constrained. Right now, we can grow.

[Operator:]

Your next question is from the line of Peter Appert with Piper Jaffray.

[Peter P. Appert:]

So, Daniel, this is a bit of a follow-on to what Trace was just asking. But I'm noting the dichotomy in the start performance between Carrington and DeVry University, and it's particularly noteworthy since I think, and maybe I'm wrong in this, that the demographics of the student populations for those programs would be similar. So can you sort of compare and contrast why is one doing so well and the other not?

[Daniel M. Hamburger:]

Sure. And part of it is the -- what did they say? The bigger the boom, the bigger the bust or the bigger the bust, the bigger the boom. So Carrington had a bigger downturn than DeVry University, and it is a different demographic among many of the segments of students. DeVry University is mainly bachelors and graduate school program, as well as Keller, a little bit of associate degree, whereas Carrington is mainly associate degrees and certificates. In fact, certificates are a little bit bigger than associate degrees. So those are shorter-term programs, kind of start -- career-starting programs. Many of those students do go on later to a bachelor's degree maybe at Carrington or DeVry University or somewhere else. So it is a little bit different demographic. And I would say, the shorter -- in general, shorter-term programs tend to be more cyclical and more subject to the consumer sentiment than longer-term programs are.

[Peter P. Appert:]

Okay. And then, Tim, a bunch of people have asked you about the trajectory in cost. Let me ask you this way. I think given the trend in enrollments, it would be reasonable to expect you could report up margins in fiscal '14 versus '13?

[Timothy J. Wiggins:]

No, Peter, what -- the way I'd have you think about it is, is that DeVry University, Daniel mentioned, that our enrollments are running about 2 quarters or so behind where we expect to be. And one of the unfortunate things is it drives revenue down in the current year, but it also is emptying out the pipeline. So that puts us kind of behind where we'd like to be. And so we're going to likely see further erosion of total students because we haven't crossed over to the growth mode yet, and that's going to be putting pressure on margins next year.

[Operator:]

Your next question is from the line of Corey Greendale with First Analysis.

[Corey Greendale:]

Listening to the commentary about the advertising spend, I think I heard that one reason that you didn't spend as much, and maybe you start [indiscernible], you just didn't think the opportunities were there. So question is, is it sort of -- is you attitude the students will go to school when they are ready to go to school and the economy will determine that? Or do you think there are things you could do to maybe start serving students who might not have otherwise, be it technology or added services, anything like that?

[Daniel M. Hamburger:]

Sure. Our attitude is definitely not the first part of that, not just we're just going to have to wait. And so that means launching new programs and then there's advertising associated with that. But I think what you saw is just a little bit of timing. Some of the projects that we're working on at DeVry University marketing weren't quite ready, and we wanted to make sure we used the resources most effectively and efficiently as we could. So there was a little bit of timing. Tim pointed out that's going to come back. So we've given you a little bit of a heads up there. So, no, I think there are opportunities. We're just being careful to make sure that we align those resources against the best opportunities.

[Corey Greendale:]

Okay. And then I just had a quick follow-up on your commentary about the MOOCs, and I agree with everything you said. But looking forward, one would think that if there were curriculum areas where the MOOCs could be a threat to traditional schools and also traditional proprietary schools in that camp, would be technology just because there's ways to, via objective assessments, tell whether people have obtained the skills they need to do certain jobs. So just to push back on that a little bit, do you think a couple of years out, do you foresee that there might be more of a threat for MOOCs? And is there anything you could do strategically about that?

[Daniel M. Hamburger:]

We're recently watching it, and we've run -- if you want to think of that, we've run MOOCs for quite a long time. Students who are not accepted to DeVry University, for example, are not just turned out onto the Street, they're offered free remedial courses, not really a MOOC because they're offered on-site and even with a facilitator and despite that the students just ask for more people, more facilitation or more professor time. So what we -- we just see this idea of self-paced content. So in other words, if you think -- so is the Internet going to do to education what's it's done to other media segments, newspapers or songs or movies or something? I guess if you define education as media, something that someone just consumes, sort of a one-way street, that's one way to think about it, but that's not really education. Education is a 2-way street. It's a relationship. You're not just consuming. So there's a professor. There's supporting services. There's career services. There's interaction with other students. There's student life. And so it's not just a matter of consuming that, almost like cramming it into somebody's head or taking the blue pill, the red pill in that movie, whichever one it was. And so for students who need and are looking for a career and a credential and a degree to get that, it's hard to see how self-paced, free, no resources to be able to fund the kind of support services is going to meet that need. I'm not saying it doesn't meet any need, it may, but not really the targeted student that we've traditionally focused on. So I just see having less of an impact there.

[Operator:]

The next one is from the line of Brian Karimzad with Goldman Sachs.

[Brian Karimzad:]

On the high school students, I know in fall of '11, you said that the inquiries and interest there had fallen off pretty dramatically, and that impacted the starts this last fall. How did the high school channel perform in terms of general interest this past fall? And I have a follow-up.

[Daniel M. Hamburger:]

Sure. I think not much news to report there. It's an area that we like to see do better. We did reduce some of the coverage of markets where we have the high school presenters and the people who went out to the high schools. Just as part of being as efficient as we can, it's still a good thing to do, it's part of our outreach to the community. But in times like these, we have to be that much tougher with our deployment of resources. So kind of more of the same there.

[Brandon Burke Dobell:]

Okay. And then just to refresh us, what percent of the DVU students are typically taking the course load that could get them to graduate in 3, 4 years? And generally, what percent of those actually do graduate in that time frame?

[Daniel M. Hamburger:]

I think of our graduates, I believe it was around 20% of the graduates graduated in 3 years, the last time I saw that data. But that's off the top of my head, so please don't hold me to that. Well, I'll go look that up and we can follow up. And actually, much higher percentage at Chamberlain. But I think that's the number for DVU. So I think we have to stop there, but I would like to thank everyone for your questions and remind us that our next results call is scheduled for April 23 when we'll announce third quarter fiscal '13 results and March enrollments. Thanks, everyone, for your continued support of DeVry.

[Operator:]

Ladies and gentlemen, that will conclude today's conference. Thank you very much for joining us, and you may now disconnect. Have a great day.