Lincoln Educational Services Corporation
Q3 2008 Earnings Call Transcript

Published: 20 Nov 2008

[Operator:]

Good morning and welcome to the third quarter 2008 Lincoln Educational Services’ Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session and we ask that you please limit your questions to no more than one and one follow up. This conference call is being webcast and an audio version of the call will be available on the Company’s website for ninety days. As a reminder, this conference is being recorded for replay purposes. Before we begin today’s call, the Company would like to remind everyone that this conference call may contain certain forward-looking statements relating to future events, future financial performance, strategies, expectations, competitive environment, regulations, and availability of resources. Such forward-looking statements are based upon current expectations that involve risks and uncertainties. Actual results my differ materially from those stated in any forward looking statements based on a number of factors and other risks, which are more specifically identified in Lincoln’s filings with the SEC. And now I would like to turn the call over to Mr. David Carney, Chairman and CEO of Lincoln Educational Services. Please go ahead, David.

[David Carney:]

Thank you, Beatrice. Good morning to everyone on the call and welcome to the Lincoln Educational Services’ third quarter 2008 earnings conference call. Joining me today is Shaun McAlmot, our President and Chief Operating Officer and well as Cesar Ribeiro, our Senior Vice President and Chief Financial Officer. Following my remarks, Shaun will provide an update on operations and Cesar will provide a detailed review of our third quarter results. We will then open the call for the question-and-answer session. Now turning to our results from continuing operation, during the third quarter we continue to benefit from our strength in organization and numerous growth initiatives, including program diversification, expanded degree offerings, effective program replication, and campus expansions. We built upon the existing momentum of our business and once again delivered strong results across many of our key metrics. Revenue from continuing operations was $100.5 million in the third quarter, up 16.1% year-over-year. This revenue growth was driven by the combination of new student starts growth of 8.6% during the third quarter and a beginning carry in population was 14% ahead of prior year. We reported earnings per share from continuing operations of $0.22 in the third quarter versus $0.17 in the same quarter last year. Now I would like to turn to our starts. The starts during the third quarter were 10,564, up 8.6% compared to the same quarter a year ago and above our guidance of 5% to 7% reflecting the ongoing benefits of our program diversification and improved marketing efforts. Our growth in starts during the third quarter from the adult market excluding starts from our high school program which I will comment on in a moment, were up 17.5% largely driven by the success of our health sciences programs including LPN and growth in our skill trades, hospitality services and online. We continue to experience strong demand for these programs and expect this to continue in the fourth quarter and into 2009. Now let me turn back to our high school program which as you know is still largely automotive and represents about 70% of the high school program starts for the year. During the third quarter this year, our high school starts were below prior year but entirely due to the early high school starts which occurred in the second quarter this year. On our last call, I discussed the fact that we had about 300 more student starts in our auto destination schools this year in the second quarter versus prior year which we attribute to improved processes. Therefore when you eliminate the timing differences between years for our high school program starts and look at the June to October time frame which captures all of our high school starts, we will be up about 5% over prior year which we are pleased with given the current issues surrounding the auto industry. Now moving to total student enrollment; total student enrollment in September 30 reached a record of 22,404, an increase of 15.1% over the prior year. While average enrollment for the quarter was 20,665 up 13.6% from 18,185 for the same quarter a year ago. Average enrollment increased in all five of our verticals during the third quarter compared to last year marking the third consecutive quarter we achieved growth across all of our product groups. We also continued to benefit from a higher carry-in population during the third quarter. As you may recall, we started 2008 with 8.5% higher carry-in population compared to 2007. That trend has continued throughout the year as we began the third quarter with 14.7% more students more than the prior year and entered the fourth quarter with 2900 students or 15.1% more students than last year. This strong carry-in population growth can be attributed to our program diversification and the balanced growth we are experiencing across our verticals. As of September 30, 2008 the average enrollment of 20,665 was divided between auto 37% which increased from 35% in the second quarter , skill trades 13%, health sciences a strong 31%, hospitality services 10% and business and IT 9%. I would now like to take a few moments and update you on the progress we have made executing on our growth opportunities which included diversified program mix, building out our online platform, and the further roll-out of our expanded degrees, acquisitions and new campuses and campus expansions. Let me begin with our program mix. We have significantly expanded our program mix over the past several years through a combination of intelligent, organic program development and strategic acquisitions. Our program diversity is one of Lincoln’s key strengths and has played a key role in the sustained starts and enrollment growth and strong financial performance we have generated throughout 2008. In addition, our program mix has resulted in more effective use of our campus facilities as our average third quarter capacity utilization was 62% during the third quarter up from 55% last year. We have built a strong presence in these five verticals each with an attractive program offering tailored to address the needs of students pursuing high-end demand careers. For example in our health science vertical, the LPN program now accounts for 19% of the total enrollment. Moving forward, we will continue to both replicate these programs across our footprint to address local student demand as well as introduce new programs through organic development or acquisition. Currently we have applied to several additional states for approval to launch our LPN programs. Now let me turn to the recent announcement regarding our acquisition. As you know, on October 5 we announced that we have entered into a definitive agreement to acquire Briarwood College for approximately $11.4 million in cash and we expect to close on this acquisition in December. This acquisition meets several of our strategic initiatives such as expanding our degree granting capabilities, increasing our offerings of higher end programs and establishing our first regionally accredited campus. The College is recently accredited by the New England Association of Schools and Colleges or NEAS and currently offers two bachelors degree programs and 31 associate degree programs. Connecticut will become our 11th state in which we offer degree granting programs and the acquisition will enable our existing Connecticut students the opportunity to advance their education with associates and bachelors degrees from Briarwood. Additionally, we believe that Briarwood’s programs will enhance our growing online initiative and broaden our reach by offering recently accredited programs. This should accelerate our online efforts and provide all of our students with the opportunity to advance from diploma to bachelors on ground and online. Shaun will discuss the benefits to our online business in greater detail in his remarks. Another component of our growth strategy is the further roll-out of our expanded degrees. In addition to the degree programs added through the acquisition of Briarwood, in September, our Lincoln Technical Institute Campus in Columbia, Maryland was awarded degree granting status from the Maryland Higher Education Commission. The campus is the first private career school in Maryland to receive bachelors degree granting status which is indicative of the high quality education our Columbia school provides and our stellar regulatory record. In total, we received approval for two bachelors’ degree programs and two associates’ degree programs. These programs will allow our current students to pursue a higher degree level in our bachelors programs and service degree completer programs for many students in Maryland that currently hold associate degrees but cannot transfer the credits out of state. We believe this will greatly increase our pool of prospective students in Maryland. More importantly on the future, we will seek approval to offer these associates and bachelors programs online creating the opportunity for all of our current and former graduates across the country in our auto, diesel and skilled trade programs to continue their education. Now moving to new campuses, we opened our fifth Euphoria brand school in July in Nevada. The campus currently offers diploma programs on high demand career fields such as cosmetology and aesthetics. Our first start day took place on July and we remained on track to reach an enrollment of approximately a hundred students by year end. And Shaun will expand further on our operations during his prepared remarks. Now I would like to turn to our 2008 financial outlook and guidance. For the full year, we now expect annual revenue of $368 to $372 million representing an increase of approximately 12% to 13% over 2007. Student starts to increase 9% to 11% over 2007 and diluted earnings per share of $0.69 to $0.71 or an increase of approximately 30% to 34%. Finally, I would like to provide a brief update on the current student lending environment and the effect on Lincoln. First the credit crunch that has impacted the credit markets has had little impact on our ability to enroll and package our students. The recently passed legislation has helped us to greatly reduce the gap between tuition and the amount the students receive from financial aid. Therefore the students are benefiting in their ability to finance their education and the amount remaining or the gap has been reduced to a very manageable level. And Cesar is going to cover the internal financing program and the Company’s annual investment in greater detail in his prepared remarks. And with that said, let me turn the call over to Shaun for a review of operations.

[Shaun McAlmont:]

Thanks, Dave, and good morning everyone. As a Company, we are focused on achieving our growth performance and service targets in all facets of our operation. Our third quarter performance shows that program diversification has given us multiple opportunities to grow our business. Automotive starts in enrollment are slightly ahead of prior year at nine months and we expect to finish the year slightly up in these programs. Growth from other programs continues nicely and we expect these trends to continue into 2009. We recently revisited our Company mission and vision and we feel that our diversification will continue to open new markets for our future growth both ground and online. During the third quarter, we continued to build upon positive trends and momentum across our business and we have made significant progress executing on our three key priorities which are

[Cesar Ribeiro:]

Thank you, Shaun, good morning everyone. As we disclosed in our press release earlier this morning and as Dave stated in his prepared remarks, we are very pleased with our third quarter results. During the quarter, we were positively impacted by beginning the third quarter with approximately 2,400 more students than we had in the third quarter of 2007. This couple with student starts of 8.6% during the quarter contributing to the overall 16.1% growth in revenue. Revenue was also positively impacted by approximately $0.4 million due to additional tool sales to our students and interest income received on internally financed student loans. Average revenue per student for the quarter was up approximately 2.1% $4,862 for the three months ended September 30, 2008 from $4,760 in the third quarter of 2007. Average revenue per student for the quarter reflects price increases that went into effect at the beginning of the year offset by a seasonal shift in student population to students enrolled in lower tuition programs. We finished the quarter with 22,404 students enrolled at our schools up 15.1% from 19,463 we had at September 30, 2007 and up 20.5% from the 18, 597 students we had at June 30, 2008. The increase in student population for the period led to increased utilization at out campuses. Our average capacity utilization was 62% on September 30, 2008 up from 55% on September 30, 2007. As a result of the increase in average student population during the third quarter of 2008 and as compared to the third quarter of 2007, we are able to obtain leverage from our business model as we benefited from overall reduced expenses as a percentage of revenue versus the second quarter of 2007 while continuing to make investments in our business. Our educational services and facilities expenses decreased to 41.4% of revenue for the third quarter of 2008 from 42.8% in the third quarter of 2007 as increased capacity utilization resulted in margin improvement in both our instructional and facility expense line items. Offsetting some of these gains were increases in our selling general administrative expenses which increased to 48.3% of revenue in the third quarter of 2008 from 47.9% of revenue in the third quarter of 2007. This increase in SG&A during the quarter is primarily due to a hundred basis point increase in our bad debt expense as a percentage of revenue to 6.3% as compared to 5.3% for the quarter ended September 30, 2007. This increase is in line with the guidance we have previously provided and is primarily due to higher accounts receivables during the period resulting from a 16.1% increase in revenue and due to increased number of internally financed student loans. The number of day sales outstanding on September 30, 2008 increased to 26.3 days compared to 22.8 days on September 30, 2007. The increase in day sales outstanding is also attributable to the decision to finance the gap in student tuition, not financeable by other sources through internal funding offset by better cash collections during the quarter as compared to the third quarter of 2007. As a result of the above, for the third quarter of 2008, our operating income was $10.4 million representing an improvement of $2.3 million from operating income of $8.1 million for the third quarter of 2007. The margin increase of a hundred basis points reflects our long term strategy to continue to grow margins and obtain leverage from our business model. Now, turning to our balance sheet. At September 30, 2008, we had $6.1 million in cash and cash equivalents compared to $3.5 million at December 31, 2007. Net accounts receivable at September 30, 2008 were $282.8 million as compared to $25.4 million at December 31, 2007. Net property and equipment which grew to $107.5 million at September 30, 2008 as compared $106.6 million at December 31, 2007. The increase was due to purchase of capital expenditures of $3.4 million during the quarter offser by depreciation expense. As of September 30, 2008, we had no borrowing that is outstanding under our credit agreement versus $5 million outstanding on our credit agreement on December 31, 2007 and September 30, 2007 respectively. Cash from operations during the third quarter of 2008 reached the record of $21.6 million and for the nine months ended September 30, 2008, was $ 30 million. Our strong cash flow is here to date. We expect the operational improvements we have made today in packaging our students as well as amounts funded under a proprietary loan program. Now turning to our loan program. As of September 30, 2008, we had granted loan commitments to our students net of interest that would be due on those loans to maturity of $15.4 million as compared to $13.7 million and $11.3 million at June 30, 2008 and March 31, 2008 respectively. The recent passage of the Ensuring Continued Access for Student Loans Act better known as HR5715 provided our students with access to an additional $2, 000 of unsubsidized loans per academic year. This additional funding coupled with increases in overall financial aid provided by the IRI Dictation Act or HR4137 has reduced the gap between the amount of tuition funded by financial aid and alternative loans. Based on this additional funding, we have stated that based on our analysis, we expected that the dollar amount of loans we expect to have to internally fund will be reduced by approximately one third. Over the last quarter, we have further refined what we believe will be the added investment in net accounts receivable that will be required by Lincoln to assist its students in financing the gap. We now believe that our incremental investment in net account receivable starting in 2009 will not exceed $5 million per year. With that said, I would like to turn the call back over to Dave.

[Dave Carney:]

Okay. Thanks Cesar. To summarize, I am very pleased with our third quarter and year-to-date results in start growth, enrollment growth, and financial results. As you know, out third quarter is very important to us as it represents approximately 40% of our annual starts. As we previously discussed, we are pleased with the year-over-year improvement which we will assure continued strong performance in the fourth quarter and well into 2009. The initiatives we have been working on across the Company over the past two years are really beginning to pay dividends. While there are many initiatives I can point to, certainly strengthening the management team, realigning our business units for greater focus, the rebranding, the new website launch and new program offerings such as LPN ranked high in my view? Our starts this quarter reflect the sixth consecutive quarter of positive organic growth and reflect growth across our verticals and programs again validating our strategy as a Company to diversify our business to increase our addressable market. We are also pleased with our new online bachelor’s degrees and the recent approval of the bachelors and associates degree program approval at our Columbia, Maryland Campus. These steps will help us fulfill our strategy of offering our current students and graduates the opportunity to continue their education from diploma to degree at Lincoln or as Shaun said earlier learning for life. We continue to look for ways to fuel or growth and the recent announcement that we have entered into a definitive purchase agreement to acquire recently accredited Briarwood College is further revenues. Regional accreditation is an important distinction of the online education market as it is viewed as more prestigious national accreditation which should make our online program more competitive. The acquisition fits our long term goal of expanding our scope of programs and degrees and attracting a new student demographic. We expect to finish 2008 in a very strong position. And we believe that position is extremely well for a very successful 2009. With that said, we would be happy to begin the question-and-answer session.

[Operator:]

(Operator Instructions) Your first question comes from Ms. Sara Gubins - Merrill Lynch & Co. Please proceed ma’am.

[Sara Gubins:]

Could you talk a little about the automotive market? Is it just really a perception given what is happening in Detroit or are your students or graduates also are finding it harder to find jobs?

[Cesar Ribeiro:]

Well, Sara I think that certainly the news at Detroit is impacting our starts to some extent. We had our high school starts this year which I mentioned up by 5% and we see continued interest in our program across our campuses. With that said we talk to our placement people and we look at the market we are seeing a shift in placements from dealerships to independent service centers to some extent. Where consumers keep their cars longer would certainly going to require more service and maintenance so I think the automotive resolved perception or not but the certainly the end result is lower automotive car sales many of the dealership are cutting back particularly in the sales area but I think over all there is a strong demand for automotive and we feel very good about it. I guess the other point I’d make is we have many schools that are offering the automotive area and other programs such as diesel inclusion where the demand continues strong.

[Sara Gubins:]

Okay great, thank you. And just another follow up, Cesar I think your last comments about how much you thought you were need to loan on your own balance sheet, I just want to make sure I understood it. Were you suggesting that you would not need to do more 5 million in new private loans from your balance sheet in 2009? Or do I misunderstand that?

[Cesar Ribeiro:]

That is correct. I think what we believe now is starting in 2009 our incremental investment and net account receivable will not exceed 5 million.

[Sara Gubins:]

Okay and with that taken into account? Students who had gotten loans in 2008 repaying them in 2009? Or is that --

[Cesar Ribeiro:]

Yes that is the net investment so that would include new loans granted as well as repayment of the existing loans.

[Sara Gubins:]

Okay.  Give us me some sense of what you are expecting bad debt for the fourth quarter to begin to 2009?

[Cesar Ribeiro:]

We continue to expect bad debts to range 6% to 6.5%

[Sara Gubins:]

And that is for 2009 as well?

[Cesar Ribeiro:]

We have not yet provided our 2009 guidance, but at this point I would say that probably is still be on that range.

[Sara Gubins:]

Okay. Thanks very much

[Operator:]

Your next question comes from Kevin Doherty - Banc of America Securities. Please precede sir.

[Kevin Doherty:]

Looks like the persistence improved pretty nicely year-over-year. Could you just talk about what is driving that now and what to expect? I guess I am going with that. If you look into 4Q and come and take the high end in your start growth, I think they also want to talk about the 2,500 more students to start in 2009. It kind of implies that persistence is going to be unchanged at least that what we are calculating in. So I guess what is the right way you think about persistence in 4Q and given the improvement that we saw this quarter while the change.

[Dave Carney:]

Let me start off Kevin and let Shaun jump off on the persistence rate. Actually the fourth quarter we expect to continue to be strong quarter for us with that said it is really the timing of the graduates in the fourth quarter. The number is not impacted by poor persistence but more importantly by the graduations.

[Shaun McAlmont:]

Yes I think persistence has actually improved pretty regularly over the last 6 months and I would imagine that persistence would continue at a pretty strong rate. I do not think we are going to see major change period-over-period, but we will say that we are pleased with our progress in reducing our net interrupt which is in the heart of our persistence rate and at this point in time I think the progress speaks to AR improvement and basic process, our instructions and then our over-all program satisfaction.

[Kevin Doherty:]

Could you discuss a little more strategy at Briarwood? Maybe what sorts of investments do you think you will be making there and building out that operation and you talk about it online how significant could that become?

[Shaun McAlmont:]

The Briarwood opportunity really includes a number of critical steps that we got to execute in order to position the college to basically achieve our long term goals. The steps include just first closing on the transaction and working with regionally accredited body to ensure that we get pass that particular point. Then secondly, applying to that same body through acceptance of change process for the change of ownership, new programs and then distance delivery approval over a period of time, we feel that these changes are not going to require significant investments, It is really just a refocusing of the current business where I think the investment will come is in the strengthening of some of the programs offered at the school and the preparation for online delivery which end up becoming a reality towards 2008 and 2009. Ultimately we will continue to bolster the staff there, the faculty and provide other resources again aligning with this long term strategy. I mentioned that our online growth perspective will remain reasonable in 2009 with our current approach; I think 2010 will start to see a more realistic online growth pattern with the addition of the recently accredited programs. At this point in time, we are not qualifying in that growth where would it be but we will be accelerated compared what we have seen in the last couple of years.

[Kevin Doherty:]

How do you speak in the last one in pricing? It is probably a little early now but the last quarter you have talked about maybe 3% to 5% increase early next year. Any change there and would you expect that to be closer to the 3% or the 5%?

[Cesar Ribeiro:]

Kevin we expected it to be 3.5%.

[Operator:]

The next question comes from Jeff Silver with BMO Capital Market. Please proceed.

[Jeff Silver:]

Thank you so much. I just want to go back to the guidance for the fourth quarter and the year. If I look at your starts growth guidance for the entire year, it implies a fairly wide range of starts growth guidance for the fourth quarter in the sense seasonally slower quarters I just wondering, why you are providing such a wide range for that? Thank you.

[Dave Carney:]

Hi Jeff! Year-to-date for 9 months was 11.3% over prior year. We are encourage by the starts there not knowing how we can potentially impacted in November and during the holiday period in December we believe we will be conservative by opening up 9 to11% we hope to be closer to the 11%.

[Jeff Silver:]

Okay so nothing is more than conservative than this?

[Dave Carney:]

Absolutely.

[Jeff Silver:]

Great! And just taking it to the next step, if I look at the implied EPS guidance relatively applied revenue guidance or revenue growth guidance for the quarter. It does not look like you are expecting much leverage there again is it a conservativeness, is there going to a ramp up in the expenses that we should be expecting and again any color you can provide will be great.

[Dave Carney:]

Sure. I did think there is a small ramp up in offering more than improvement; however, the big unknown always remain bad debt as well as we do usually spend up a little bit more in the fourth quarter to sales and marketing to prepare for the first quarter early starts but we would expect to see continue operating margin improvement going into the fourth quarter.

[Jeff Silver:]

Okay, great. And just a couple numbers of question and then again this is related to the fourth quarter. What would you be looking for capital spending for tax rate and the share count?

[Dave Carney:]

Capital spending would probably come in from $25 million for the $23 to $25 million for the year. Tax rate to be around 41.8 to 42 % and the share counts would be pretty much flat like what we have for the 9 months.

[Jeff Silver:]

Great! I am sorry the tax rate, was that guidance for the year or for the quarter, the 41.8 to 42?

[Dave Carney:]

It would be the same

[Jeff Silver:]

Thank you so much.

[Operator:]

The next question comes from Amy Junker of Robert W. Baird.

[Amy Junker:]

Good morning everyone. First question I guess is from Briarwood. Do you expect to keep the brand name there or transition over to Lincoln brand?

[Dave Carney:]

That is going to transition over to a Lincoln brand.

[Amy Junker:]

Okay, great. Cesar, if you can just touch a little bit about on how we should be thinking if you can update us on sources of revenue either in the quarter year to date; however, you want to think about it but coming from a this point title 4 versus private loans versus how much internally lending and then other sources.

[Cesar Ribeiro:]

Sure. Well, actually we would expect the revenues coming from title 4 will increase significantly to Lincoln even though our 9010 would probably go down as a result of the new formal calculation. The gap has been narrowed significantly through 9 months we were receiving a lot more money from title 4. Lincoln is lending less money and more importantly not only Lincoln lending less money we had gone back and we package some of the loans that we have done the more importantly we are also senior shift in what we call the prime credit, the alternative loans, whereas in the past we were getting about 2% good credit, that number has jumps up to 5%. What is happening is those students looking for alternative loans or getting more and more co-borrowers to sign on for those loans. So we seen a very favorable shift in the amounts that students are being provided not only for financial aid but other sources which has reduced what we originally thought our exposure would be. Where we sit today, based on the what we forecast out in the future, we expect that incremental amount that Lincoln will have to finance is very manageable and we will take into consideration the net amount of what will actually hit our balance sheet not what we commit to but what will actually hit our balance sheet offset by the cash collection on the portfolio that will exist as of December 31 will not exceed $5 million we are still comfortable with those numbers today.

[Amy Junker:]

And since you have been lending directly to your students for some time now, can you speak a little bit to if there has been any change in the payback rate of the students or willingness or ability to payback those loans or those kind of consistent?

[Dave Carney:]

To date there has not been any change whatsoever with the default rates that we have experienced that will have make consistent. There is one group of school that we have seen an increased in the default rate that has nothing to do with our loan program that has more to do with the growth in that school and the way they refund to Title 4 calculation work, so we attribute that more just from the cause of doing business than any increase in the fault rate. Our default rate as you know we run to date assessment quarterly basis they had remained fairly consistent and we are starting to run other assessment to make sure that does not change in any way, obviously if does, we will adjust the resource quarterly. But today we have not seen an experience worse than we have in the past.

[Amy Junker:]

Thanks you. Last question from me, just last quarter you talked about having 16 campuses that were offering associates in bachelor’s degree, 21% of students enrolled in those degree programs, any updates to those numbers?

[Cesar Ribeiro:]

Well it is 21.6%, that is a little bit slight change but the number of campuses remained the same.

[Cesar Ribeiro:]

Except Maryland that is not official yet.

[Operator:]

Your next question comes from Gary Bisbee - Barclays Capital. Please proceed.

[Gary Bisbee:]

I guess a couple of questions since let me make sure I have this right, so the net investment in the account receivable that you are referring, the $5 million, is that net of the reserved that your taking in P&L and also net of amount that has been repaid? Is that right what I think about it?

[Cesar Ribeiro:]

Yes it is Gary.

[Gary Bisbee:]

I guess the second question is can you give us the sense of revenue and profit for Briarwood in, just sort of in some sense, do you that expect to have much of an impact on your P&L or it is that going to be largely non-diluted, not really accretive either?

[Cesar Ribeiro:]

In 2009 Gary it will be slightly diluted probably a penny a share and after that it will be positive.

[Dave Carney:]

And again Gary that is obviously due to the purchase accounting amortization, etc. that will run off about 12 months or so.

[Gary Bisbee:]

I guess this is the last question, Dave in your remarks you said that campus utilization is running at 62% up from 55%, that is still a pretty load number and historically I thought that the rules of thumb in this industry was that there was not a need for a huge amount of new campus expansion until school will get certainly above 80%. I guess I am trying to get the sense where that is. Do you have a bunch of schools that are in 70s, 80s, 90 percent range and then a couple maybe some of the auto ones where you have got substantial excess capacity or is there enough throughout the system that with maybe a new campus here and there but still substantial growth opportunities for the business over the next 18 months from filling the existing pots.

[David Carney:]

I think certainly the campuses that are offering health sciences program and some of the quote on quote, not all of programs have grown very nicely in the account for the increase in the capacity utilization versus prior year. With that said, we are still ample room we continue to grow back to your point of giving up to 75% or 80%, makes sense. The auto schools, they vary from school to school to some extent and some are certainly ahead of the 62% capacity rate. Overall, the overall capacity utilization in most schools has only moved up 2 points 59 to 61 versus prior year. There is still ample space to grow without any additional capital expenditures over the next couple of years. Did that answers your question?

[Gary Bisbee:]

Yes. Are there more opportunities to shrink the auto footprint and add more skill trade as I know you did in Texas and a couple of other places? Is that something in your plans for 2009? Or is there still enough opportunity in the existing footprint to grow students in all of the schools without more of that?

[Cesar Ribeiro:]

Yes. Certainly, we are looking at opportunities to continue to put in additional programs. Certainly, adding a collision program in one of our campuses is already in our plans for next year, which will certainly change this numbers and increase the profitability. We believe that in our auto growth will continue, although maybe not at the same rate that some of other programs are growing. But, with the capacity and the opportunity to continue the growth skill trades in many of these schools that have automotive, we should see the increase over the next couple of years.

[Operator:]

(Operator Instruction) Your next question comes from Trace Urdan - Signal Hill Group. Please proceed sir.

[Trace Urdan:]

I am sorry to take you back here because I know you have covered this but I want to ask again about the perceptions that prospective automotive students have about what an automotive program holds for them. Because, you talked about this the shift in the employment rate, but the employment rate still being strong, but I am wondering if you have some anecdotal evidence that it is this apprehension about. Sort of car sales in general that is holding students back from enrolling. Because it feels like we went right from strong employment was an obstacle to automotive enrolments. Now, all of a sudden, where the economy is actually too weak and that is an obstacle to automotive enrolment. So, I would like if you could maybe elaborate on that a little bit.

[David Carney:]

Let me start off and Shaun could certainly jump in on this as well. You are right. I think, what we have observed at least as we have enrolled the students, there is a difference between, let us say, our high school program and our ability to continue to grow there versus some of the challenges that we see on the media side and we attribute that, Trace, the fact that we have a greater opportunity to change their perception and alter it by virtue of getting closer to them in terms of the interview and the buying committee. While that part of the business for automotive has continued to grow, the media part of it has been challenged and Shaun and his group, but then, taking steps to change that perception and put out additional marketing material and so on, which – Shaun, why do not you maybe highlight a bit.

[Shaun McAlmont:]

I think simply said, the perceptions really are strong. I think when you see automotive industry news on a daily basis in some parts of the country on a weekly and others. Those perceptions become very strong, whether it is for the student or for their significant others who help on the decision making process or parents in the part of high school student. But because of those perceptions, we address them in our marketing. We address them with our representatives and thus the representative end up addressing it with the students again on the daily basis in our appointments. That is factual, I would say that our lead flow today has been down slightly in the quarter, but it is up in the month of October. The good news is that, in this challenging market, our automotive lead flow enrollments and starts are holding steady for the year with really no signs of deterioration for the remainder of the year. That said, we continue to focus on it very strongly, we feel that the high school program bolsters our opportunity for automotive sales and as Dave mentioned for that one on one sales process where we can offset any perceptions that might be out there. I think it is also worth mentioning on this point that, in our markets, for us to remain viable as a Company, we will see fluctuations up and down in the number of areas overtime. But because of that, it supports our move toward greater product diversification and an increased degree level moving forward.

[Trace Urdan:]

Is this perception challenge that you guys face, is there a meaningful difference between the challenge for high school graduates versus the challenge for folks who have been out of high school for a while who were coming back to school?

[David Carney:]

Yes. I would say that the perception emanates to both groups. But the way we address it is different. We address it through our direct response marketing for the adult population and the best we can in our interviews. In our high school side, again we have an opportunity to speak to high school classes, a very captive audience and then we have an opportunity to enroll those students on a regional basis and in their homes. The messages are much stronger and focused message and proactive message on the part of the high school presentation. Yes. Our methodology is different based on the audience we have.

[Trace Urdan:]

Just one other question, I wondered, with respect to building out online, I think you made reference to the opportunity that you had to go back to your graduates and offer them to continue their education through on line. And I am wondering if you have again, maybe some anecdotal evidence of the opportunity that represented by that or any actual research that you may have done of your Lincoln grad.

[David Carney:]

Our main priority with the Lincoln graduates is to get them into a job related to their career aspiration and their program. I would say that we offer the opportunity in anyway we can to all of those graduates to advance their degree as well. We feel that down the road, it does not only help with their current job search, well also their ability to advance in their careers down the road. So, we will continue on that vein. I will say today that, approximately 40% of our online students are ground student graduates, and we feel that that percentage of our entire online student population will continue.

[Operator:]

Your next question comes from Jennifer Charles – Credit Suisse.

[Jennifer Charles:]

Can you give us a little color on what percentage of your operating margin overall is attributable to your automotive students?

[David Carney:]

No. We do not segment our business.

[Jennifer Charles:]

Your operating process?

[David Carney:]

Yes. We do not. But I think was what we have said in the past is that, all of our vertical assume the same capacity utilization would be capable of producing the same margins. However, I will comment that obviously, the automotive side of the house has reduced margins overall, and when we see an increase in our population to more normalized levels or start growth, we will see a significant ramp up in margins.

[Jennifer Charles:]

What is the mix shift that drove the revenue per student deceleration?

[David Carney:]

I think what we are experiencing is that we are experiencing a, while starts are growing nicely, but we are seeing instead of overall start growth across all of our verticals, say of 10%, let us just throw out that number, you are seeing a lot more coming into the health sciences verticals and lot of those programs tend to be lower priced programs than, say in auto student, with. So, you are comparing, say at $15,000 program to a $23,000 or $25,000 program.

[Jennifer Charles:]

Is that also what might be driving the change in your self-funded loan guidance?

[David Carney:]

That is also part of it. Obviously, the lower earning to which in students have much less gap or no gap at all in a lot of cases. Even that said though, the automotive students have also seen a significant decrease in the gap financing that they would be required to fund.

[Jennifer Charles:]

What changed since that last call, which was post the $2,000 loan increase that has led to your changing guidance?

[David Carney:]

I think what we have done is, obviously, since July 1st, all of this came back July 1st. We have gone back and analyzed the amount of loans that we have granted and I will be happy to share with you that as of September 30th, the loans that we have granted have only gone out to 14% of our population. So, only 14% of our students actually have loans from Lincoln. So we have made a fair analysis of our loan portfolio. We have also made a fair analysis of how that loan portfolio has grown over time. The average balances that we are committing to our students, as well as the repayment history and looking out into the future what our growth expectations are and the incremental amounts that we will have to fund in light of the financing that is available, and we feel very comfortable that is a very manageable level. When you take into the consideration, obviously what I have given you, I think as I believe Gary asked is in that numbers. Obviously, that includes the expected repayments, as well as reserves.

[Jennifer Charles:]

Could you share with us what you have actually loaned out year-to-date?

[David Carney:]

What we have actually loaned out?

[Jennifer Charles:]

Yes.

[David Carney:]

Well, that number changes on a daily basis. So it is really not a meaningful number, but that number as of September 30, would probably approximate $7 million that numbers of October could be $8 million or could be $4 million, as the students go in and out of receivables and into in tuition. So, it really not a meaningful number until the time that a student graduates.

[Operator:]

Your final question comes from Amy Junker - Robert W. Baird

[Amy Junker:]

I just had a quick clarification questions. As you were talking about the media starts on automotive, you said, the overall media starts were up 17.5%. Are we to understand that automotive with media starts were down if they are challenged year over year? So, the media starts in the other areas with the significantly higher than that 17.5%? Am I thinking about that the right way?

[David Carney:]

The split that I made there Amy was between high school and all media. So, 17.5% include auto, just to clarify, and I think if you would look at that for the particular quarter, it would be slightly higher than the 17.5% because the media starts for automotive was just slightly below prior year in that quarter.

[Amy Junker:]

So both high school and media starts in the quarter for automotive were down?

[David Carney:]

That is correct, but I just want to clarify that the only reason that the high school starts were down in the third quarter was because we had about 300 students who, in 2007 started in the third quarter and this year started in the second quarter.

[Amy Junker:]

Understand. And that same phenomenon did not necessarily occur in media. So, media just kind of remain tough.

[David Carney:]

We are not that smart to figure that one out. No, that is just a function of how it fell. But just one last comment on automotive just so we all are in the same place. I think that high school has, we are pleased with where we ended up for high school in automotive this year. When we finish the year in automotive for both, as a result of high school recruiting as well as maybe we expect to be up 1% to 2% year over year. That is about where it going to be for starts.

[Operator:]

There are no further questions at this. I would like to turn the call back over to management for closing remark.

[David Carney:]

Okay. Well thanks every one for joining us today on the call and we looked-forward to updating you on our progress early next year. So, have a great day. Thank you.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation. Have a great day.