Element Solutions Inc
Q3 2008 Earnings Call Transcript

Published: 23 Oct 2008

[Operator:]

Good evening, ladies and gentlemen. And welcome to the ITT Educational Services third quarter 2008 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded. Joining us today from the management of ITT Educational Services, we have Kevin Modany, Chief Executive Officer, Chairman, and President; and Dan Fitzpatrick, Senior Vice President and Chief Financial Officer. Before we begin, ITT Educational Services, Inc. wishes to remind you that this conference call may include forward-looking information. Actual results may differ from the information presented during this call. For additional information, please review the section on forward-looking information contained in today's news release or in the company’s public filings with the Securities and Exchange Commission. Thank you. Mr. Modany, you may begin.

[Kevin Modany:]

Thank you. Good morning everyone, and thanks for joining us on our third quarter conference call to review our operating and financial results for the three and nine months ended September 30, 2008. As usual Dan Fitzpatrick, our Senior Vice President and Chief Financial Officer will join me on the call this morning. And he will assist me in providing our prepared comments and in answering your questions. We would like to kick off the discussion by giving you a quick overview of the agenda for the call this morning. We plan to follow our regular conference call outline by providing you will updates in several key areas of the business. First, we will provide you with some additional color on the fantastic third quarter operating results reported earlier this morning in our press release. Then we will review the progress we have made in the execution of our growth strategy. We'll go from there to providing some additional insight on the student financial aid market with regard to our students’ ability to access federal and private student loans as we enter the fourth quarter of the year. At that point, I will turn the call over to Dan who will provide a few comments on the excellent financial results for the quarter. I will follow his remarks with a wrap up of our prepared comments and then we will open up the lines for your questions. With the administrative matters out of the way, let’s get started on the operating results for the quarter. As you’ve already read in this morning’s press release, we reported wonderful results that once again exceeded our internal goals due to another quarter of exceptional performance by our management, faculty, and staff. We believe that the challenging economic environment brings excellent opportunities for our business. We believe that our prospects for attractive levels of performance are very good as we head into the fourth quarter of 2008. Historically, we’ve experienced above average growth at our colleges during slow or recessionary economy, as if these periods motivated people to pursue additional education to learn new or upgrade existing skills in order to increase their employment prospects. We believe this is a special (inaudible) in the current employment market that places an ever increasing premium on skilled labor. These market dynamics, coupled with the strong performance in the third quarter and the robust outlook that we have for our key operating metrics, that led us to increase our internal 2008 EPS goal from the previous range of $4.65 to $4.75 to a revised range of $4.90 to $5.00. We continue to believe that we are well positioned to achieve our operating and financial goals for fiscal 2008. I would like to now turn to a brief review of our third quarter operating results. As you read in this morning’s press release, new student enrolment increased a very impressive 19.4% to 21,807 through the three months ended September 30, 2008 compared to 18,270 during the same period in the prior year. In increase in new student enrollment was fueled by continued strong demand for our program offerings across all six schools of study. Student interest in our programs of study in the third quarter was driven by a 7% increase in advertising expenditures in the third quarter of 2008 compared to the third quarter of 2007. The year over year increase in advertising expenditures in the third quarter was less than we originally planned, as we once again benefitted from the reduced advertising cost due to the declining demand in the general advertising market arising from the slowing economy. We believe that advertising expenditures in the final quarter of 2008 will be below our originally planned year over year increase in the quarter of between 10% and 15%, as we intend to continue taking advantage of lower advertising rates. Our advertising plan allocates sufficient amounts of marketing expenditures to support the opening of new colleges and the introduction of new programs of study throughout the remainder of ’08 and into 2009. The rate at which student increase converted to new students increased in the third quarter of 2008 compared to the same prior year period. We attribute some of this to the improved productivity of the student recruiters who were hired in early 2008. As many of you are aware, the lead conversion rates of student recruiters correlate with their tenure in the position. As a result, more experienced recruiters typically convert student increase at a higher rate than less experienced representatives. We believe that we enter the fourth quarter with a sufficient number of trained and experienced student recruiters to service an increasing number of perspective students who are expressing interest in our programs of study. At this point, we will turn our attention to student persistence. We are very pleased to report in this morning’s press release that our student persistence rate in the third quarter of 2008 increased 10 basis points to 72.5% compared to 72.4% in the third quarter of ‘07. That increase in student persistence was due to improved student retention in the third quarter compared to the same prior year period. That increase in student retention was offset by a solid increase in the number of graduates in the third quarter of ’08 compared to the third quarter of ’07. The increase in graduates was primarily due to improved student retention that we experienced and reported to you during 2007. As we look forward to the fourth quarter of ’08, we believe that student persistence will be approximately the same as the fourth quarter of ’07 after excluding the large increase in the number of graduates that we expect in the fourth quarter of ’08. The 19.4% year over year increase in new student enrollment combined with the improved student persistence led to an impressive 14.7% increase in total student enrollment to 61,556 as of September 30, 2008 compared to 53,675 at the same point in ’07. As of September 30, 2008, total student enrollment was higher in all six schools of study compared to the same point in the prior year. At this point, I would like to turn your attention to our graduate employment metrics. At September 30, 2008, the graduate employment rate of our ’08 employable graduates was approximately 3 percentage points lower than the graduate employment rate for our ’07 employable graduates at the same point in ’07. We believe that decline in the graduate employment rate was primarily due to the significant increase in the number of employable graduates in ’08 compared to ’07, as a result of the improvements in student retention that we experienced in ’07. Weekend conversions with organizations that hire our graduates have indicated to us the continued demand for employees with the types of skills that (inaudible) graduates. Nevertheless, due to the significant increase in the total number of graduates in 2008 compared to ’07, we do not believe that the graduate employment rate of our ’08 employable graduates will be higher than the graduate employment rate of our ’07 employable graduates. Just to remind everyone, 82% of our 2007 employable graduates had obtained employment by April 30, 2008 the cutoff date for our annual graduate employment calculation. As of September 30, 2008, our 2008 employed graduates reported an average annual salary that was approximately 4% higher than the average annual salary reported by our 2007 employed graduates as of September 30, 2007. We are optimistic about the employment opportunities for our 2008 graduates, but we remain mindful of the slowing economy. We intend to monitor the labor market conditions very closely over the next several quarters. We continue to believe that demand for skilled labor and increases in the average annual salary of our employed graduates are positive indicators that we can continue to increase the value proposition for graduates of our programs of study. At this point, I would like to provide an overview of our progress with a few of our key growth initiatives. The primary element of our growth strategy involves increasing the number of our colleges. We span geographically by adding new colleges, of which there are currently 103 and new learning sites of existing colleges of which there are currently none. We began operations at our 103rd college in Madison, Mississippi, a suburb of Jackson, during the third quarter of 2008. This new location marks the beginning of operations in our 36 states. We began operations at six new locations in the first nine months of 2008 and plan to begin operations at up to two additional colleges in the fourth quarter. As a result, we expect to meet the high end of our previously-stated goal of six to eight new locations in 2008. At this point, I would like to provide an update on our programmatic expansion efforts. In the nine months ended September 30, 2008 we added 153 programs that we are offering at new and/or existing ITT Technical Institutes throughout the United States. As a result, we have exceeded our originally-stated goal to add approximately 125 programs in 2008. During the quarter, we continued our work to expand the number of our colleges that offer an associate degree in nursing. We currently offer the associate nursing program at our Indianapolis campus. Pending the receipt of the necessary regulatory authorizations, we anticipate the initial offering of our associate nursing program at three additional colleges in the academic quarter that begins in December of 2008. As we look forward into ’09, we are optimistic that our aggressive efforts to obtain authorizations to offer our nursing program at additional colleges will be successful. We remain very excited about the prospects of our nursing curriculum as a contributing piece of our growth strategy over the long term. In our academic quarter that begins in December 2008, we plan to introduce three new programs of study at a small number of our colleges. These new programs include new bachelor degree programs in software applications development and project management, and a new associate degree program in software development technology. As we enter the final quarter of 2008, we have several additional programs of study that are in various stages of research or development. These potential new program offerings are in both technology and non-technology areas of study that can be delivered both in resident and online. We plan to introduce several of these programs at one of more of our ITT Technical Institutes in the early part of 2009. We are also pleased to report that the number of our colleges offering bachelor degree programs has increased to 85. During the third quarter, all seven of our colleges in Texas received authorization to offer bachelor degree programs. Each of the seven ITT Technical Institutes in Texas have begun recruiting for our first class in at least one bachelor degree program to begin in the academic quarter that starts in December. We believe that the bachelor program offerings at our colleges in Texas will help attract a broader base of prospective students and provide our current students as well as the associate degree graduates from our seven Texas colleges with the opportunity to continue their studies at the same ITT Technical Institute location. Historically, approximately 33% of our associate degree graduates enroll into our bachelor degree program. At this point, I would like to provide an update on the student financing environment. We will begin with the market for private student loans. I think it is safe to assume that almost everyone listen on the call understands that the turmoil in the financial markets during 2008 has had a tightening effect on the availability of private student loan. The impact on our students’ access to private loans began in the first quarter of 2008 when lenders tighten their underwriting criteria for private student loan. Those actions reduce the number of our students who qualify for private loans as compared to prior period. While several hard profile developments in the financial services sector were reported in the press in the third quarter of 2008 and continue to be reported as we enter the fourth quarter of the year, our students’ access to private loan has not suffered any further limitation. In addition, lenders who provide private loans to our students have indicated to us that they do not intend to tighten their underwriting criteria any further in 2008. In addition, lenders who provide private loans to our students have indicated to us that they do not intend to tighten underwriting criteria any further in 2008. We continue to monitor the situation very closely and are meeting with private lenders to attempt to proactively address any future impact on our students and our operation. As an additional point of clarification, we fell compelled to reiterate our previously issued comments that Sallie Mae is not providing private loans to our students and has not originated private loans for our students since February of 2008. Any changes or modifications to the underwriting standards of Sallie Mae may have been to its private loan program did not have any impact on our students’ ability to access private student loans during the second or third quarters of 2008. Some of the current situation as it relates to the private student loan market, I would like to restate that we believe that the funding gap for students on a forward looking 12-month basis will be roughly 12% to 13% of our annual revenue. As we continue to gain more experience with private lender underwriting standards and collect more approval rate data, we expect to be in a better position to provide an estimate of the amount of our projected annual revenue that will come from private education loans made for our students. As we have previously communicated to you, we do not expect to have a sufficient amount of information to provide you with this estimate before January 2008. In addition, we continue to have discussions with several new potential lenders about the possibility of them providing private loans to our current and prospective students. Moving on now to an update of the internally-funded financing provided to our students. During the third quarter of 2008, we continued to provide internally-funded financing to eligible students who did not qualify for private educational loans as a result of the tighter underwriting standards currently used by private lenders. The criteria that we use to determine a student’s eligibility for our internal financing are similar to the criteria used by the lenders that make private education loans to our students before 2008. Student response to our internal financing has been overwhelmingly positive and we do anticipate making any changes to our student enrollment practices in the future as a result of providing internally-funded financing. Based on my earlier comments regarding the lack of data and experience to accurately estimate the amount of revenue that we expect to derive from private education loans, we are unable to accurately estimate the amount of internal financing that will be utilized by our students until we obtain a better perspective on that amount of private education loans that our students can expect to receive. That said, we are reaffirming our prior estimates that the total funding gap for our students will amount to approximately 12% to 13% of our annual revenue, and that some portion of that amount will be funded by third-party private education lenders to our students and the remainder will be funded through our internal financing. Our internally-funded financing has and will continue to result in day sales outstanding and bad debt expense that are higher than our historical ranges. While we are not providing guidance on these metrics at this time, we want to once again emphasize that any interest rated effect on our results that may be caused by the internally-funded financing that we provide to our students has been fully reflected in our revised 2008 EPS goal to the range of $4.90 to $5.00, and in our 2008 free cash flow estimate of $150 million. Reconciliation for this non-GAAP free cash flow measure to our comparable GAAP operating cash flow measure are posted on our website at www.ittesi.com. With that, I would like to turn our attention now to the Federal student loan market. In our July 2008 conference call, we reported that we experienced a delay in our FFEL loan disbursements, while we were integrating several new student lenders with our financial aid systems. Features that created a delay in the processing of our students FFEL loan disbursements were direct and successfully eliminated in the third quarter of 2008. Moving on the availability of FFEL loans, several student lenders are offering FFEL loans to our students and we do not anticipate any disruption in our student’s ability to access Federal student loans from FFEL lenders for the foreseeable future. Nevertheless, all of our colleges are prepared to immediately begin participating in the Federal Direct Loan program in the event that our students’ access to Federal student loans through the FFEL program is interrupted. At this point, we do not anticipate the need to aggressively move into the FFEL program, but we continue to monitor the situation very closely. To close off the student financing portion of our prepared remarks, let me just say that we continue to believe that the financial aid that is currently available to our students, including our internally-funded financing will provide our students with access to sufficient funds to pay the cost of their ITT Technical Institute education. Further, we believe that the financial aid options that are currently available to our students will allow us to achieve our 2008 goals. Now before I turn it over to Dan for the financial overview, I would just like to once again comment on our continued level of optimism for the business and our high degree of confidence in our ability to achieve our 2008 goals. We plan to continue focusing on our efforts on the things that we can control, including the efficient execution of our business model and growth strategy. We believe that the current environment presents several outstanding opportunities for our organization. We plan to utilize our ample resources and expertise to capitalize on those opportunities for the benefits of our shareholders and most importantly, our students and the employers who hire them. Lastly, I would like to congratulate our management, faculty, and staff for the recognition we received from Forbes, by being selected for its annual list of the 100 Best Mid-Cap Stocks in America. Out of more than 1,000 mid-cap companies reviewed by Forbes, we were selected as the 11th best by Forbes, based on its assessment of our growth, financial stability, and future prospects. On behalf of our entire organization, I thank Forbes for its recognition. Dan, I'll send it your way so that you can provide additional color on the amazing financial results in the third quarter.

[Dan Fitzpatrick:]

Thank you, Kevin. I would like to begin by reviewing the key financial highlights for the quarter. In the three months ended September 30, 2008, revenue increased 16.7% to $254.3 million, compared to $217.9 million in the same period in 2007. Revenue increase was primarily due to a 12.1% increase in total student enrollment as of June 30, 2008 compared to the same point in 2007, 5% increase in tuition that became effective with the academic quarter that began in March of this year. The revenue increase was also helped by a 10 basis point increase in student persistence in the third quarter of 2008 compared to the same period in the prior year as a result of the improved student retention during the quarter. Revenue per student increased 4.1% in the three months ended September 30, 2008 compared to the same period in the prior year. Cost of educational services increased $6.2 million or 7% to $95 million in the three months ended September 30, 2008, compared to $88.8 million in the three months ended September 30, 2007, primarily due to higher costs to support an increased number of students and to operate our new colleges. The increase in the cost of educational services was partially offset by the greater efficiencies realized in operation of our colleges related to the leverage we gain due to increased student census. As a result, the cost of educational services as a percentage of revenue decreased 330 basis points to 37.4% in the third quarter of 2008. This compares to 40.7% in the three months ended September 30, 2007. Student services and administrative expenses increased $12.3 million or 18.6% to $78.5 million in the third quarter of 2008 compared to $66.2 million during the period in the prior year. The increase was primarily due to the increase in bad debt expense to 5% of revenue in the third quarter of 2008 compared to 1.8% in the same period in 2007. The increase in bad debt expense was the result of the increased amount of internal financing that we provided to our students. The increase in student service and administrative expenses was partially offset by the efficient execution of our advertising plan during the third quarter of 2008, which resulted in only a 7% increase in advertising expenditures compared to the same quarter in 2007. As Kevin noted, we believe that we will continue to experience a favorable advertising market in the fourth quarter, which should lead to a year-over-year increase in advertising expenditures that is lower than the 10% to 15% increase that we originally planned for. Despite the 320 basis point increase in bad debt, student services and administrative expenses as a percentage of revenue increased only 40 basis points to 30.8% in the three months ended September 30, 2008 compared to 30.4% in the three months ended September 30, 2007. Due to the disruption in the private student loan market, we plan to continue providing internally-funded financing to our students. As a result, we believe that bad debt expense as a percentage of revenue could increase in future periods. However, we are not providing specific bad debt guidance at this time. As Kevin already reported, our revised 2008 EPS and free cash flow goals fully incorporate the anticipated effects of the internally funded financing provided to our students. Operating income increased $17.8 million or 28.4% to $80.8 million in the third quarter compared to $62.9 million in the three months ended September 30, 2007. Operating margin increased to 31.8% in the third quarter of 2008 or 290 basis points compared to 28.9% in the third quarter of 2007. As we have reported in our release this morning, diluted earnings per share in the third quarter of 2008 increased 30.6% to $1.28 compared to $0.98 in the same quarter of 2007. Cash, cash equivalents, restricted cash and investments were $287.3 million as of September 30, 2008, compared to $273 million as of September 30, 2007. Day sales outstanding increased 5.2 days to 12.1 days as of September 30, 2008 compared to 6.9 days of the same date in the prior year. The increase related primarily to the increase in the amount of internally-funded financing provided to our students. Once again, since we anticipate that we will continue to provide internal financing to our students in future quarters, the possibility exists that our DSO could increase in future periods compared to the same prior year periods. We repurchased 184,700 shares of our common stock in the third quarter for approximately $16 million or an average cost of $86.47 per share. We have approximately 4 million shares remaining under the share repurchase program authorized by our Board of Directors. Repeating my comments from this morning’s press release, as we look forward to the remaining part of the year and into 2009, we may repurchase additional shares subject to the changing and sometimes volatile market conditions. In closing, I would just like to note that we feel very confident about the prospect of the business over the next several quarters, as the economy conditions continue to develop we believe that we are very well positioned to take advantage of these opportunities. The financial metrics of the company continue to be very strong and we believe that the foreseeable looks very bright for the organization. With that, I'll toss it back to Kevin for closing comments.

[Kevin Modany:]

Thanks, Dan. From our perspective, it is much the same story that we told in the July conference call. We continue to experience very favorable macro-trends and as a result, have a lot of confidence with regard to our ability to achieve our internal financial and operating goals. The financial markets remain a challenge, but this is a challenge that we as an organization are very well positioned to successfully navigate. We have no plans to change what we do or who we serve. We see an outstanding opportunity to fulfill our mission to increase access to high quality post-secondary education for all who are academically qualified. As always, we remain committed to delivering the high quality education to our students and increasing the value proposition for ITT Technical Institute graduates across the country. We solemnly believe that shareholder value will be created and delivered over the long terms through our efficient execution of the business model and our singular focus on increasing student success. At this point, I would like to ask the operator to open up the line and we will entertain your questions.

[Operator:]

(Operator instructions) Thank you. Our first question today is coming from the line of Jerry Herman of Stifel Nicolaus. Please go ahead with your question, sir.

[Jerry Herman:]

Okay. Hi, guys. I guess we will go right to (inaudible) first as you might expect. Just to be clear, the internally-funded numbers are in accounts receivable, correct, Dan?

[Dan Fitzpatrick:]

That is correct.

[Jerry Herman:]

And the relationship there seems to suggest that those numbers at least at this juncture are pretty low, if you just look at the change in AR either sequentially or year-over-year as a relationship to revenues generally, is it actually coming in less than what you guys thought earlier on, and is the gap filled by private lenders, maybe coming in more favorably than what you thought earlier on?

[Kevin Modany:]

Well, again we are not giving a lot of guidance there, Jerry, but let me try to give you a little bit of color. I mean, we have really kind of went at this, looking at these underwriting standards and we really don’t have a lot of detail about – we don’t know what the underwriting standards are, but we really have to process transactions through those underwriting standards to get a general sense of where things are coming out. As we look at what we are seeing right now, we are hesitant to project forward this as a longer term expectation. That being said, I think if you look at our comments, we said during the fourth quarter based upon our conversations, we are not expecting a big change there. We just want to make sure we get a couple of quarters of new students through the underwriting standards, get all of the continuing students through the repackaging efforts through there, because as we understand it, the underwriting standards actually incorporate on where you are in academic period, so if you are further along, you may actually get higher approval rates than not. So we want to make sure we get full class through there and then we will kind of digest – I don’t want to say that we are pleasantly surprised or that we are not one way or the other right now. But it is fully reflected. Everything that we are seeing right now is fully-reflected in that AR, and you know, after we get through one more quarter, I think we are going to have a better sense of what we should expect on a full year basis and we will try to give you more color on that.

[Jerry Herman:]

And just a follow up, maybe you will answer similarly, but given the consumer condition, the economic condition, have you changed your assumptions in any way. Some of the numbers we run would suggest that maybe you have at least from the second quarter to the third quarter, but are the charge-off assumptions changing in any way, growing more conservative, getting lower?

[Kevin Modany:]

We have mentioned this before in the last call and I'll reiterate it again. We are being as conservative as we possibly can within the accounting pronouncements. So, you can incorporate changes you are seeing in the market condition in your estimates and in your expectation. So, we are on the conservative side of the estimates, and again, our third party accounts are involved in everything we are doing here and we are inside of the lines of what is allowable, but we are being as conservative as we can be.

[Dan Fitzpatrick:]

Hey, Jerry, one other thing too. When you compare to the second quarter, a little bit of a change relative to the reserve impact at that time, do you remember we were talking about the fact that any of the additional monies for the unsubsidized loans, we weren’t able to draw those monies down to July 1, and therefore, monies due related to that wouldn’t give the same sort of reserve obviously if other monies just they are going to be collecting over time.

[Jerry Herman:]

Right. And then just one final one and I'll turn it over. Can you guys give us any parameters on the actual loan programs, i.e. duration, size, rate, when a student has to start paying back loans for the stuff that you guys are directly involved in?

[Kevin Modany:]

Sure, well, the way it is structured right now is a little bit different than what it was and it will be so let me talk to what it is going to ultimately be, because we are setting up the infrastructure, the charge interest on these loans, and once we do, they really be 10-year term and so it would be very similar to what the students had in the prior program, and the interest rates will be similar. So in the current market, it will be very attractive pricing quite frankly, because at the present time, we don’t anticipate increasing the interest rates for the current environment, which would suggest that we should do so. So, similar pricing as the old program, similar terms and duration on the notes, really almost mimicking that old program.

[Jerry Herman:]

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

[Kevin Modany:]

Okay, thank you.

[Operator:]

Thank you. Our next question is coming from the line of Brandon Dobell with William Blair. Please proceed with your question.

[Brandon Dobell:]

Hi, thanks. I want to see if I understand this correctly. You guys talked last quarter about delayed disbursement timing, and it sounds like that issue got fixed, but in the context of deferred revenue being down – I think it was 26% in the quarter, is there something else going on with deferred, is it a timing issue or last year’s comparison was strange. I don’t understand why it was population growth and revenue growth and the disbursement issue seemingly out of the way – how do we get our arms around what that deferred revenues doing this quarter?

[Kevin Modany:]

Brandon, we have talked about this before whenever we started the internally financing program, what you would have seen prior to the internal financing program is cash receipt in advance of recognition for the private loan programs. Now we are not getting that cash in advance, so that is going to have an impact on the deferred revenue. There is still a little bit of delay on, so we didn’t yet get all of that. We have got the issue corrected, but there is still a little bit there. But the majority of that, of what you are seeing is the impact from not collecting private lending in advance of revenue recognition. That is going to be the case going forward.

[Brandon Dobell:]

Okay.

[Dan Fitzpatrick:]

Brandon, another thing to point out too in terms of the fact that we are not collecting some of the private loans upfront, but as you shift from private to Federal too, there is a cash flow impact. Private loans tend to be disbursed upfront, where Federal loans are disbursed at each academic quarter.

[Kevin Modany:]

And the other thing too is as Dan said, the Federal loans, if you have addition – the $2000 in un-sub that we are getting as additional money, we may be getting those monies 30 days delayed as well. So, that has a timing impact. So there is a couple of things going on there I guess is what we are saying.

[Brandon Dobell:]

Okay. So, but net-net – what happened with deferred this quarter wasn’t a surprise to you guys, you expected to skip in all the changes on the sources of funds –

[Kevin Modany:]

Absolutely, yes. No surprise there.

[Brandon Dobell:]

Okay, that is fair. I also want to get a sense of where you are seeing enrollment growth, relative strength or absolute strength; you know different kinds of programs or different perhaps geographic areas. Anything you can point out to us to give us a sense of what some underlying trends might be.

[Kevin Modany:]

Sure. Just to talk about the resident side of the business for a second, the core programs very strong, so our electronics, information technology, tracking and design, we are still seeing good results there, so good results in the quarter in criminal justice. As I said the last couple times, business is growing, but at a slower rate than the other programs, and the health sciences is too small to really have any kind of impact. When we look at online, it is really a continuation of the same story we have been talking about. The majority of our growth is coming from our resident schools. There is simply no doubt about that. However, our online school is growing, it is growing at a nice rate, and it continues to contribute. And so, Brandon, if you look at this quarter and you look at the last couple of quarters, there is nothing that is fixed out in terms of program-specific, nothing unusual going on here. We are continuing to see strong responses to the core programs and as long as we see that, we are going to do pretty well.

[Brandon Dobell:]

Okay, all right. Thanks.

[Operator:]

Thank you. Our next question will be coming from the line of Corey Greendale with First Analysis. Please proceed with your question.

[Corey Greendale:]

Hey, good morning.

[Kevin Modany:]

Good morning, Corey.

[Corey Greendale:]

I just wanted to follow up kind of couple of things you said in your comments. First of all, the fact that the placement rate was down a bit. Do you think that it (inaudible) remind us what the experience was on that metric in half downturn, is it similar? And secondly, do you think it might be that given that you add more graduates, you want to be adding more career people who are building relationships and building a pipeline of the jobs, or do you think it is fairly economic and there is nothing internal you can do about it?

[Kevin Modany:]

Well, I actually think it is more execution than it is economic right now. I'm not suggesting that there won’t be any economic impact; that is not what I'm trying to say. What I am saying is when we look at the detail, when we look at the data, we can see that there is shift year over year, the 3 percentage points really is concentrated in a handful of schools, and there is a handful of schools that have this significant number of grads, and so it is isolated to us executing in those particular schools as opposed to us seeing anything systemic across the entire network that would be more indicative of some economic change. Again, I tried to say in my prepared comments, we are paying attention to that, we don’t have our head in the sand here. We see what is going on, we are constantly looking at the unemployment rates – skilled versus unskilled. We are seeing those skilled unemployment rates still holding on, they have ticked up maybe 10 or 20 basis points from the last couple of months, but they still are very attractive. And the feedback we are getting from our employers is that there are still opportunities there. So, we are not seeing the economic impact yet in these numbers. This is just pure execution and we really – we know where the schools are, we know what we have to do to go after it and improve on it. What we are going to see, however in graduates is even a greater increase in our fourth quarter. We have our largest increase year over year for the quarter coming in December, and that is going to put in some added pressure on this as well. So, right now, it is about the number of graduates for us, and in some specific schools, where we need to execute more effectively. But we are being mindful of what is going on in the economy and paying attention to it.

[Corey Greendale:]

Okay. And then I also wanted to ask about pricing, where first of all, I think you said your committed to doing 5% for next year; but could you just remind me if that is still true? And secondly, I know you have tied pricing to the ROI to the students; if starting salaries start to moderate because of the economy, would that change your pricing plans?

[Kevin Modany:]

Couple of things you asked there, I'll see if I can hit them all. Pricing increase for March of 2009, yes, that is the plan. Do we tie it to the ROI? Yes, we absolutely do. I mentioned in my prepared comments that the salaries were up 4% year to date, so we are still seeing good increases in salary, and expect that to continue. So we are still on a positive front there. Let me just remind you as a way of answering your question about the salary, there were also a lot of other favorable changes to the variables that go into the calculation of ROI, including increases in programs, including reductions in the interest rate, including increases in low-cost loans, that offset higher-cost private loans. So, there are several positive factors that go into that calculation of the ROI that are moving in the right direction and that quite frankly, we expect to move in the right direction over the next couple of years. So some of the (inaudible) increases in the interest rate reductions, those are on a five-year track as a part of the college cost reduction. So, we still feel pretty good about that and at this particular point, and you can never look too far out, but at this particular point, we would not anticipate changing our pricing strategy.

[Corey Greendale:]

Okay, and just one little one, if I could. There have been some reports about a more traditional amount [ph] private schools; some students switching to part-time status as a response to the credit crunch, are you seeing that at all or is it something you would anticipate?

[Kevin Modany:]

Thankfully, we have not seen that as of yet, and I think the reason is that we have the internal financing program. So we are able to provide the financing pursuits. We also know that there is a correlation between full-time status and success rate. So we always try to promote that and a vast, vast, vast majority of our students are full time, they have been, they continue to be so. We haven’t seen that, and I would not anticipate that being a factor for us going forward.

[Corey Greendale:]

Okay. Thanks and congratulations on good quarter.

[Kevin Modany:]

Thank you.

[Operator:]

Thank you. Our next question will be coming from the line of Gary Bisbee with Barclays Capital. Please proceed with your question.

[Gary Bisbee:]

Hey guys. Great job on the quarter.

[Kevin Modany:]

Hey, Gary. Thanks.

[Gary Bisbee:]

I guess I would just add one more question on deferred revenue. Is it safe to say today that most of the balance remaining on the balance sheet is from the prepaid title 4 in most or much of this prepaid from the higher selling A [ph] program has already been worked off?

[Kevin Modany:]

Well, that is probably true, quite frankly. We are seeing new originations in the private program bettering there as well, Gary, but just from the basis of what we have talked about in terms of what the gap is, we talked about a great gap of 12% to 13% in revenue, and some portion of that is coming from private lending. But then you compare that to the favor portion, there is probably 60% or so, 70% coming from just the Stafford loan program. We have a vast majority of title 4.

[Gary Bisbee:]

So in other words, the big drop the last two quarters, which was clearly the rundown of the Sallie Mae, as they stopped making those loans and the majority of that is down I guess is what I'm getting at. So there is the –

[Kevin Modany:]

You know, that is probably true.

[Gary Bisbee:]

Okay, all right. Great. The lower advertising expense, clearly, that is in a real positive. Is it more due to spot rates dropping on the various media you are spending on or just an increased return on the spend, like you get more leads for spots based on the economy and so you are taking less spots, or is it really just a combination of the two?

[Kevin Modany:]

Both had an impact on the quarter, but I would say that there is more to the spot cost reductions right now.

[Gary Bisbee:]

Okay. You know I think you floated the idea in the past and I realize it is early so you don’t have any concrete details, but if there was an opportunity to sell some these loans down the road, maybe you would be more a track of opportunity to do it for kids who have graduated nor employed that you would consider that. Any thoughts on that yet or is it just with the current credit situation way too early to tell who might want to do it and how they can?

[Kevin Modany:]

I can tell you we are round with it and you know, it’s probably not as far along as I would like to be, but we have had conversations with people who have expressed interest in doing that. We have really not gotten into the details of figuring out exactly how we would just because we are preoccupied with setting up the infrastructure or our originations in meeting the interest rate going and getting servicing in place. That has really been our focus, but we have started from those conversations and people are interested. I would say they use it just based upon those very preliminary discussions that I would say the questions are not whether or not we are going to be able to. So, it’s not a question of if, it’s more a question of when. When I say when, I mean we are at an academic cycle. We have to wait till they graduate, somebody take it before that. So, it’s kind of a question of when and then the biggest question is at what price? And of course the pricing right now is very expensive. Money is very expensive. We have not gotten into details on either one of those two key questions, but again, there are multiple parties who have expressed interest in acquiring the asset. So, we are cautiously optimistic there. It’s just – we’re going to have to see what price it is. I will tell you this much, we wont to do a (inaudible). We are not going to sell these assets at buy or sell prices because we don’t think we need to do that. But if there is a price that makes sense and we will do that. And we are optimistic that we could create some sort of liquidity at some point in time down the line.

[Gary Bisbee -- Barclays Capital:]

Okay, great. And then just – you are not yet charging interest I think I’ve heard you say in the past you are optimistic some time sort of early in ’09 you might have all of the approvals you want that in place to do that. Is that still something that can happen next year?

[Kevin Modany:]

Yes. That’s still correct. Early ’09 is our goal.

[Gary Bisbee -- Barclays Capital:]

Okay. And just one more question on that. Will you be charging the student – there won’t be a cash interest (inaudible) but it would likely be accruing interest --?

[Kevin Modany:]

That’s correct.

[Gary Bisbee -- Barclays Capital:]

Okay. Great, thanks for the call.

[Kevin Modany:]

Okay, Gary.

[Operator:]

Our next question will be coming from the line of Trace Urdan with Signal Hill. Please proceed with your question.

[Trace Urdan:]

Thanks. Hi. Kevin, the third party loans that you guys are – that your students are able to access, are they coming disproportionately from a single lender.

[Kevin Modany:]

We’ve got one lender who is a bigger piece in (inaudible), so they are north of 50%.

[Trace Urdan:]

I had heard that Chase was moving pretty aggressively to pick up market share in this space, and I guess that – the reason I am asking is that I am wondering whether the behavior you are seeing maybe from the single lender might be anomalous, in other words, might that lender not be raising their criterion in order to pick up share and might that behavior be different from what some of the other lenders are doing out there. Is that – can you comment on that?

[Kevin Modany:]

Well, I would say that every lender that we are dealing with has changed their underwriting standards from most to pretty severe degree. So, the degree to which each of them has changed is pretty close. Yes, you have some variations, but probably not as much as you might be insinuating in the question I think. They’ve all moved. Now there are some that will be more aggressive than others, but not by a wide margin.

[Trace Urdan:]

You kind of suggested in your remarks that there was no sequential change. So, basically you saw instead of a onetime change in standards and nothing has changed since then. And is that – is it fair to say that everybody that you are working with is behaving that same way?

[Kevin Modany:]

Yes. It is fair to say that.

[Trace Urdan:]

Okay. And then, kind of back to Jerry’s question. We can help ourselves; we are going to be going through these exercises trying to figure out whether – there kind of two ways to try to get at what you guys are lending, and one of them is to look at the accounts receivable and try to figure out how it’s different from what it might have been otherwise. And the other way is to look at the deferred revenue account and try to figure out how that might look different from what it would otherwise look like given the growth you’ve seen in revenue. I am wondering, Dan, given that that exercises (inaudible) going on whether you guys can help it or not. Can you offer any guidance as to which avenue you think might be more productive or whether there is some other change going on in either those two accounts that we should be aware of as we are trying to go through that exercise.

[Kevin Modany:]

Yes. This is Kevin.

[Trace Urdan:]

Okay.

[Kevin Modany:]

I would say that’s former rather than the latter would probably get you a better estimate of it. You looked at the AR and (inaudible) hesitant to try to give any kind of clarity on that because I don’t know if that’s what it’s going to be like going forward in fact. If you just trying to look at the quarter and trying to see what’s there and you’ve got a general sense of what the historical rate has been. And you see where we are at today. And you can do that both on the DSO and on the bad debt and look at the differences between the two. You are not going to be too far off of what occurred in the quarter. Now, is that representative of what’s going to be going on going forward for a longer term, you know I would one more quarter of data before I say yes to that. But that’s the best in it. But doing that you have the best information available and it is the same information that I have, quite frankly.

[Trace Urdan:]

Okay. And then – does that make perfect sense in terms of the volume. I am wondering if that comment about the past doesn’t necessarily reflect the future might also apply to the discount that you guys are using. Are you pretty comfortable, the discount you are using is the discount you will continue to use?

[Kevin Modany:]

We are being really conservative there. I think (inaudible) reflective of the market conditions that are out there right. So, you start with historical and then you get a conservative (inaudible) within the guidelines of the accounting pronouncements, and you go from there. Do I expect major changes from what we are doing now given the level of conservatism, no I really do not, to be honest with you. So, I would say at the present time I think what you are seeing in terms of the reserve levels being consistent. Now the only thing that could impact that is if there is a change in the amount of third party financing. Thus, the more they take, then of course the higher we reserve because just default reserve (inaudible) as they are going to obviously be “creaming of the top,” that’s not a bad thing but actually it’s the calculation itself. But again, things stay constant, the methodology and the way we are going about reserving and looking at that default rate based on historical and in fact doing in conservative estimates based on condition, I don’t think that changes.

[Dan Fitzpatrick:]

I think it’s hard to point out. We do have a lot of data there. I think some folks may not have a lot of the history but we get plenty there that we are just winging [ph] there.

[Trace Urdan:]

We know you have more than we do so --. All right thank you.

[Kevin Modany:]

Okay. Thanks.

[Operator:]

Our next question is coming from the line of Mark Marostica with Piper Jaffray. Please proceed with your question.

[Morris Katog:]

Hi guys, it’s actually Morris Katog [ph] for Marostica. (inaudible)

[Kevin Modany:]

Thank you.

[Morris Katog:]

Just maybe if I may just one final question on the bad debt. I am just curious what you might attribute the sequential move to a fact that you don’t have this third party service that is in place yet.

[Kevin Modany:]

I not sure I understand the question to be honest with you.

[Morris Katog:]

I there if you look at all your baseline bad debt levels and look at sort of what that may have or that may have exiting the quarter, just curious if you have – if there is some capitation fees taking place that are short term in nature that might be resolved with the third party servicer that you are talking about having –

[Kevin Modany:]

The reserve that you are seeing is an estimate. So, there is not anything added to that bringing kind of inefficiency as a result of our current system. That may happen down the line that we may see some upside if you saw better performance in terms of servicing and collection and whatnot. But those would be adjustments you would make down the line. So, no there is not (inaudible) in the current numbers.

[Morris Katog:]

And then just in terms of the cyclicality question I am just curious if had begun to see any increase coming in that are cyclical related and what you might anticipate based on the past as to when you might (inaudible) see that?

[Kevin Modany:]

Nothing more cyclical or seasonal than what we normally see. There is a seasonal pattern to the business and demand. And the third quarter is one of the high peak seasons of course when traditional schools open and when people think about going back to school. But aside from that we are not seeing anything unusual there.

[Morris Katog:]

Okay, great. Thanks guys.

[Kevin Modany:]

Okay. Thank you.

[Operator:]

Thank you. Our next question will be coming from the line of Kevin Doherty – Banc of America Securities. Please go ahead with your question, sir.

[Kevin Doherty:]

Thanks. As we think about the moving part from the financing side, how much of that benefit have you seeing from the higher Stafford loan limits coming through in the quarter. I guess how of that 2000 have they started to be able to access. And then what’s just the timing of the repackaging of some of your continuing students start to access those funds?

[Dan Fitzpatrick:]

Kevin, basically the way that works is that 2000 is available per academic year. So, for each – yes, for academic year, for each academic quarter they will be entitled to $667. For those students that we were able to get back a repackage for a March quarter potential you could receive the entire $2,000 because you would have had March, June, and September’s impact there. In terms of how it is going to play out as far as the student population it would depend on when they started and when they are scheduled to be repackage a student, are repackaged on a nine-month basis, three quarters. So, folks starting in June they would have got their initial dispersion there. But they would get their next log, if you will, as the repackage then coming out. That would be in March of next year.

[Kevin Doherty:]

So, how much of that population do you think has been impacted.

[Dan Fitzpatrick:]

In our system, if you are asking about how much of an impact it has on total student population, we would guesstimate it in the mid-90% of our students are going to be able to utilize the $2,000

[Kevin Modany:]

Kevin, I think that goes back to our original estimate, we’re originally looking at a 25% gap, that got cut into half to basically 12%, 12.5% and that’s how we factored in that number. If you are asking how much of that is showing in the current quarter, all the new students, we’re repackaging with the additional dollar. So, all the new are there would get some portion of the continuing. So, we were able to go back and get some funding for some of those people. But you won’t see a 100% of it impacted before a couple of quarter.

[Kevin Doherty:]

Right. I guess, that’s my question. How much of that repackaging of the continued students came through this quarter, how much can we expect as we go through the next few quarters?

[Kevin Modany:]

Yes, I mean for the new you got all of them for the continuing, and you are going to see probably a third of the dollars coming through for maybe 50% of them. Somewhat that range should give you a rough estimate.

[Kevin Doherty:]

Okay. And then just, as we think about you’re the start demand that came through in this quarter, what’s the profile of some of those incremental students? Has that changed at all, I mean are those students who have maybe lost their jobs, is their profile any different from the typical ITT student?

[Kevin Modany:]

No, we are not seeing that. Still 80% of our students are currently working. It’s the same profile average 26 years old. Probably 30% to 40% of them have firm experience in education. These are people working in unskilled position. And most are still there. We are not seeing (inaudible) people coming to us are big incremental push [ph] of people coming to us that are unemployed or being affected by the employment rate as of yet. That may occur, but we are not seeing that yet. If you look to the profile of the student right now that we saw just in the September quarter it would not be materially different that what you saw in September ’07.

[Kevin Doherty:]

Okay. And can you just talk about the mix shift, any shift between the associate and bachelor students? And I guess as we think about more students coming back in on the frontend or they may be staying a little longer and moving on to a bachelor program in a greater degree?

[Kevin Modany:]

Sure. Couple of things. We are seeing pretty strong demand on the frontend of the associate level. So, the mix on that now is we are at about 80% in associates, 20% bachelor. We are a couple of quarters, probably a year or two back 75-25. But the associate demand has been very strong. So, we’ve done well there. So, the flip side just this quarter, we saw very strong associate to bachelor matriculation. That was quite frankly in total north of our historical average. We’ve not seen that for quite some time. That was nice quite an impact. Now it is not huge numbers relative to the total number of new students that we are talking on, when you are talking about 20,000. But still yet, the percentage was nice and (inaudible) same people continuing and going into the bachelor program. So, strong demand on associates and, yes we are seeing a little, just this quarter for the first time, pretty strong associate to bachelor matriculation over historical rate.

[Kevin Doherty:]

And is that something that’s had enough to move the needle for stock (inaudible) or something that you can articulate on?

[Kevin Modany:]

No, not really. Not yet.

[Kevin Doherty:]

Okay, thanks guys.

[Operator:]

Our last question will be coming from the line of Suzi Stein with Morgan Stanley. Please go ahead with your question.

[Suzi Stein:]

Thank you. Are you students getting private loans without co-borrowers, do you know?

[Kevin Modany:]

The students that get a private loan for us are getting them without both (inaudible) for the most part. I mean these are – assume they are 26 years of age, that’s the average age, those of them are independent. They really don’t have anyone to co-sign with them. Occasionally, you will get somebody who have the stars [ph] or family member that will. But the vast majority are doing this without the co-singer.

[Suzi Stein:]

Okay, great. And can be a little more specific with what your experience with advertising rates. Is it mostly TV and radio or is the reduction in pricing across the board to other channels. And I can’t remember if you’ve provided this, but do you have any detail on the breakdown of adverting by channel?

[Kevin Modany:]

Two questions, I will try to handle both. We are seeing on TV bigger impact than elsewhere. But we are seeing it across the board. (inaudible) are down and again more prominent on the television side than anywhere else. In terms of where our mix is we obviously don’t give details on that because of the proprietary aspects of it. But we have said that the vast majority of our dollars have been allocated to television as opposed to anywhere else.

[Suzi Stein:]

Okay, great. Thanks.

[Kevin Modany:]

Thank you.

[Operator:]

Mr. Modany, we are out of time for today. I would like to turn the floor back over to management for any additional or closing comments.

[Kevin Modany:]

Okay. I appreciate everyone participating in the call, and we look forward to talking with you again in January. At that time, we hope to provide you a little bit of additional color on the financing. We understand that’s the key issue here and we are getting very close to the point where we are comfortable enough to start talking about that in some detail. So, again, thanks for participating in the call. And we look forward to talking to you on January of 2009. Thank you.

[Operator:]

This concludes today’s conference. Thank you all for your participation.