DeVry F4Q09 (Qtr End 6/30/09) Earnings Call Transcript

Aug.13.09 | About: DeVry Education (DV)

DeVry Inc. (NYSE:DV)

F4Q09 (Qtr End 6/30/09) Earnings Call

August 13, 2009 4:30 pm ET

Executives

Joan Bates - Investor Contact

Daniel M. Hamburger - President, Chief Executive Officer, Director

Richard M. Gunst - Chief Financial Officer, Senior Vice President, Treasurer

Analysts

Sara Gubins - Banc of America

Kelly Flynn - Credit Suisse

Ariel Sokol - Wedbush

Amy Junker - Robert W. Baird

Suzanne Stein – Morgan Stanley

Trace Urdan – Signal Hill

Paul Ginocchio – Deutsche Bank

Scott Schneeberger - Oppenheimer

Gary Bisbee - Barclays Capital

Jeff Silber – BMO Capital Markets

Mark Zgutowicz – Piper Jaffray

Todd Young - Morningstar

Jerry Herman - Stifel Nicolaus

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2009 DeVry Earnings Conference Call. My name is Jeremy and I will be your coordinator for today. (Operator's Instructions) We will be facilitating a question-and-answer session at the end of this conference. (Operator's Instructions) At this time I'd like to hand this presentation over to your host for today's call, Miss Joan Bates.

Joan Bates

Thank you, Jeremy. With me today are Daniel Hamburger, President and Chief Executive Officer, and Rick Gunst, Senior Vice President and Chief Financial Officer. Before we begin, please be advised that statements made on this conference call may constitute forward-looking statements subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by phrases such as DeVry Inc. or its management has a view, objective, or outlook, or that management believes, expects, anticipates, perceives, forecasts, estimates, or other words or phrases of similar importance.

Actual results may differ materially from those projected or implied. Potential risks, uncertainties, and other factors that could cause results to differ are described more fully in item 1A, risk factors, in the company's most recent annual report on Form 10-K for the year ending June 30th, 2008, and filed with the SEC on August 27th, 2008.

Telephone and webcast replays of the call are available until August 27th. To access the reply dial 888-286-8010 or for international, 617-801-6888. The pass-code is 19954322. A replay is also available via the webcast through the IR portion of our website.

As a reminder, our press release and preliminary financial statements are available in the IR section of our website and that's located at www.devryinc.com. With that I’ll turn the call over to Daniel Hamburger.

Daniel M. Hamburger

Thanks, Joan. Well, thank you all very much for joining us for our fiscal 2009 fourth quarter and year-end conference call. I'll provide a brief introduction and then ask Rick to discuss our financial results. Then I'll come back and review operational highlights before opening it up to your questions.

Well, this was truly a year of accomplishment at DeVry. We continue to enhance academic quality, which led to outstanding enrollment growth and ensured improved financial performance. Earlier in the year, DeVry's success was recognized when we were added to the prestigious Platinum 400 list of America's best big companies by Forbes magazine.

Now this quarter we celebrated another important milestone when DeVry joined the S&P 500 index, replacing General Motors on June 8th. Being selected to join the S&P5 500 is a testament to the success DeVry has achieved, by focusing on academic quality at each of our institutions. We recognize that we owe DeVry's success to our dedicated employees who are always striving for continuous improvement and who put our students first.

Consistent with our culture of doing well by doing good, DeVry is commemorating its entry to the S&P 500 by offering 500 scholarships to workers affected by recent layoffs. 2009 was also a year of execution, that is to say we had a banner year in executing on our growth and diversification strategy.

We added two new institutions this year, U.S. Education and Fanor, and in both cases the integration has proceeded very well. These operations offer growth opportunities for us in areas of unmet educational need. So overall, our diversification strategy has us well positioned to deliver consistent and sustainable growth through both good and bad economic times.

Some of our operations are tied to economic cycles like Becker, which has been negatively affected by the weak economy. And at the same time, schools like those of U.S. Education are more countercyclical. In addition, DeVry has schools such as Chamberlain College of Nursing and Ross University that are entirely non-cyclical. In fact, DeVry is the only public education provider that has a medical school or a veterinary school such as those at Ross.

So when you look at the balance of all our institutions combined, the net effect of our diversification strategy has been to mitigate the impact of the economic cycle which will serve us well as the economy improves.

As I have done for the last five quarters, let me provide an update on student lending. Back then when many of our stakeholders were focused on the credit crisis and its potential impact on student loans, we said that we didn't foresee any loss and ability for our students to finance their education at DeVry.

Well, it's turned out just as we said. Our students have been able to secure the financing they needed, and we haven't seen any material impact on our operations as a result of the student-lending environment.

Let me comment now on two pending matters in the legislative and regulatory environment. First, as we mentioned briefly when we reported earnings last quarter, there's the likely conversion from FFELP to a direct lending program. This potential conversion is more of an issue for lenders than it is for students or for the schools that they attend. We are prepared for the switch and don't foresee any operational issues, nor do we believe it'll have any impact on our students.

And second, the Obama administration has proposed an expanded Perkins Student Loan program. The expanded Perkins program would increase funding from $1 billion to $6 billion. Interestingly, DeVry University is one of the only market-funded education providers who participate in the Perkins loan program. Moreover, if you refer to chart two in our press release, you'll see that DeVry University is currently the number one administrator of Perkin's funds in the nation. So given this, taken together with the recent change to year round Pell Grant eligibility, we believe that there are good financing opportunities for our students.

I offer these examples of Perkins and Pell to illustrate that there's never been an administration or a Congress who is more supportive of education than our current ones. Just last month, President Obama unveiled a multibillion dollar proposal to boost enrolment in the nation's community colleges. We've received a few questions about this and how we believe it will impact our schools. The answer is we applaud this initiative. It's good for students and it'll get more people to consider going to college. What's great is the growing recognition that all segments of our diverse higher-education system add value, and are needed for the US to achieve our educational and workforce goal. And we've served many students who have community college credits or degrees at Chamberlain College of Nursing and at DeVry University. We look forward to serving future transfer students who choose a DeVry school to continue their education.

I've got several operational highlights that I want to share with you, but first let me turn the call over to Rick for the financial results.

Richard M. Gunst

Thanks, Daniel, and good afternoon everyone. Well, another fiscal year has come to a close and we are very proud of the strong financial results delivered as a result of our focus on academic quality. Full-year revenue hit a record $1.461 billion, up approximately 34% versus prior year. Revenue was still up about 20% versus prior year excluding the impact of the U.S. Education and Fanor acquisitions.

Net income for fiscal 2009 also hit a record level of $165.6 million, up nearly 32% versus last year. Reported earnings per share for fiscal 2009 were $2.28 per share and $2.36 excluding discrete items, also representing record performance and up 33% versus last year.

Excluding discrete items, our pretax income margin for the year was 16.8%, up 70 basis points versus 16.1% last year, and just shy of our all-time high of 17.1% in fiscal 2002. I would also like to point out that our pretax income margin would have been 17.3% excluding U.S. Education and Fanor from the results.

Fourth quarter results reflect strong organic growth. The impact of our recent acquisitions have boosted top-line growth along with continued focus on efficiency and margin improvement to increase the bottom line. Revenue of $396 million was up 43% versus last year and still grew 22.5% excluding the impact of U.S. Education and Fanor.

Net income in the fourth quarter of $37 million was up 51% versus last year with reported earnings per share of $0.51, up 50% versus last year. And the pretax income margin was 15% in the quarter, up 300 basis points versus last year excluding discrete items from both years.

Now the discrete item in the fourth quarter results is a litigation reserve of $4.9 million. This relates back to the Department of Justice inquiry associated with recruiter compensation disclosed back in May of 2008. You may recall the DOJ investigated the allegations with DeVry's full cooperation and declined to intervene. Then the US District Court dismissed the case. However, the case was then appealed by the plaintiff, leading to a potentially drawn out, costly, and distracting litigation process. We've participated in the required mediation through the Court of Appeals process where we were offered the opportunity for finality with as settlement.

The settlement, pending governmental approval, will bring closure to the matter, and we decided that focusing our resources on our students, rather than litigation, was the right thing to do.

And finally, and most importantly, DeVry did nothing wrong, did not violate the False Claims Act, and our recruiter compensation system has been, and continues to be, fully compliant.

Our earnings per share would have been $0.56, excluding this litigation reserve, or up about 65% versus last year in the quarter.

For your reference, fourth quarter results also include expense-related share-based payments of approximately $1 million pretax compared to $1.4 million last year. For the full year, share-based expense totalled $7.6 million versus $5.7 million for fiscal 2008. Our overall effective tax rate was approximately 30.2% for the year and 31.8% in the fourth quarter. The effective tax rate from ongoing operations, that's excluding the discrete items, was about 30.4% for the year, up from 27.4% last year, primarily due to the higher mix and growth of our domestic businesses as well as the addition of U.S. Education.

Cost of education service expense increased by 45% versus prior year in the quarter and was up (inaudible)% for the year, excluding discrete items. Cost of educational services would have been up by about 18.6% in the quarter and 15.6% for the year, excluding U.S. Education and Fanor, both lower than our revenue growth, driving improved gross margins.

Student services and administrative expense increased by 29% in the quarter or about 15% including U.S. Education and Fanor. The rate of growth of SS&A expense continue to grow at a lower rate than revenue, with or without the recent acquisitions. While we're still making investments to drive future growth such as marketing, recruiting, systems improvements, and new programs, we expect SS&A expense to continue to grow at a lower rate than revenue, again in fiscal 2010.

Now before going through our operating results, let me take a minute to walk you through our newly modified segment reporting classifications which reflect our current structure and portfolio of educational offerings.

First we added a new other educational services business segment that current includes Fanor in advanced academics. Advanced Academics was previously included in the DeVry University segment. The DeVry University business will now be reported under the renamed business, technology, and management segment, and the segment that included factor for professional review has been renamed professional education, to reflect our broader focus beyond exam preparation and review.

The medical and healthcare segment remains unchanged and include Ross University, Chamberlain College of Nursing, and U.S. Education.

Now, we filed an 8-K today concurrent with our press release which provides two years of segment results by quarter under this new alignment.

With that let's move to the secondary results. Revenue growth within the business technology and management segment was up 18.8% versus last year for the year and 21.6% in the fourth quarter driven by continued online expansion and improved on site enrolments.

Operating income was up about 57% for the year and nearly 150% in the quarter, excluding the discrete items, driven primarily by improved operating leverage from enrollment growth. As a result, the full-year segment operating margin increased by 330 basis points versus prior year to 13.7%. That's nice progress, but we still have significant opportunity for continued improvement in the future.

Within the medical and healthcare segment, revenue more than doubled in the quarter and the year, driven by the addition of U.S. Education. However, revenue was still up 32% for the quarter and 30% for the year, excluding the impact of U.S. Education, driven by expansion of both Chamberlain and Ross University.

U.S. Education continued to deliver strong growth as well, up 27% in the quarter. Operating income more than doubled in the fourth quarter and was up 75% for the year. Operating income would have been up about 41% for the quarter and 37% for the year, excluding the impact of U.S. Education.

Our professional education segment results have been negatively impacted by the economic downturn. Nevertheless, revenue was up 6% in the quarter and about 4% for the year. Operating income was down 3% versus last year in the quarter and down 9% for the year however, segment margins were still quite healthy.

Finally, results for the other educational services segment reflect the addition of Fanor in the quarter and also adding Advanced Academics to this new segment. Revenue in the quarter was just under $15 million, split about 60% Fanor and 40% Advanced Academics.

Operating income for the quarter was $1.4 million. Note that as we move into fiscal 2010, Fanor's seasonality is rather smooth throughout the year with an expected bump up in Q3 and Q4 with the start of the new class in Brazil. Advanced Academics will see a dip in revenue in Q1 of fiscal 2010 relative to the fourth quarter of fiscal 2009.

During the summer months when most high school students are off, Advanced Academics continues to advertise and recruit in advance of the school year, and this yields a sizable operating loss in the first quarter. I'd also like to point out that amortization expense related to Fanor was approximately $700,000 in the fourth quarter and will be about the same amount per quarter and about $3 million for the year in fiscal 2010.

Shifting to our balance sheet, the cash, marketable securities, and investment balances, totaled $225 million at the end of the fiscal year, compared to $276 million last year. The balance is lower due to the U.S. Education and Fanor acquisitions, higher capital spending, and share repurchase activity this year.

Cash is expected to be up marketable in Q1 with the cash inflow from the summer class. Net interest income and expense was $2.3 million in the quarter, below last year, due to lower cash balance and low interest rate environments.

Cash flow from operations for the year was about $250 million versus $199 million last year. We continue to use our positive cash flow generation to reduce outstanding debt to $125 million from $135 million at the end of the third quarter.

Our net accounts receivable balance was about $104 million versus $55 million last year. About 75% of this increase was the result of the addition of receivables for U.S. Education and Fanor. The balance of the increase can be attributed to strong enrolment and revenue growth in the quarter as receivables per account across our schools are generally in line or lower than prior year.

For example, DeVry University accounts receivable per account was down bout 14% versus last year thanks to the focus and efforts of our campuses and student services staff.

Bad debt expense was 2.9% of revenue for fiscal 2009 which is within our historical range of 2.5%-3%.

Capital spending was $74 million in fiscal 2009 versus $51 million spent last year, excluding last year's Alpharetta purchase and immediate sale leaseback transaction. Spending will continue to increase in fiscal 2010, driven by Project Delta, our new student information system, DeVry University and U.S. Education spending on facility improvements and new locations, continued geographic expansion within Chamberlain College of Nursing, and spending associated with our home office and data center moves. Capital spending for fiscal 2010 is expected to exceed $100 million.

Finally, during the quarter we continue to execute our share repurchase program buying back approximately 403,000 shares of our commons tock at a total cost of almost $18 million in the quarter or an average cost of $44.64 per share. We've been repurchasing shares more rapidly under our structured plan and we're about two-thirds of the way through our $50 million program as of the end of June.

So that concludes my overview for the very strong results for fiscal 2009. As we look to our new fiscal year we still feel comfortable with our long-term financial objectives to deliver double-digit revenue growth and roughly 20% compound annual earnings per share growth over the next few years. We'll be making investments in Advanced Academics, online expansion within U.S. Education, and spending on IT initiatives which are expected to be first-quarter hurdles, but we remain confident in our plan to drive quality, growth, and increased margins.

I'll now turn the call back over to Daniel for more on our operating results.

Daniel M. Hamburger

Thank you, Rick. Let me first highlight one change to our past practice, and that's based on feedback we have received from previous calls. I won't reiterate the enrollment figures that are found in the press release, but let me simply say that the very strong enrolment growth across all of our schools demonstrates the value that perspective students see in the education they receive at one of DeVry's institutions. And moreover, we saw improved retention, which shows that the quality of our programs is meeting or exceeding our students' expectations.

Let me focus first now on our business technology and management segment, which includes, of course, DeVry University and its Keller Graduate School of Management. Part of the value of a DeVry University education is its reputation among employers. They tell us how our graduates are making significant contributions to their companies and have the skills and work ethics to succeed.

As you can see from the dating the press release, 90.8% of our undergraduate students at DeVry University were employed in their field of study within six months of graduation, with an average salary of more than $45,000. While we're proud of these outcomes, we recognize that the sluggish economy and the higher US unemployment rates are going to apply downward pressure here. So we’re investing to further strengthen our career services offerings.

During the coming months we plan to hire 25 new career services advisors at DeVry University, taking us to 150 career services professionals in total. This will give us the largest career services offices of any market-funded bachelors degree granting university in the country.

We also recently held our first virtual career fair, which was a resounding success, attendance of more than 5,500 DeVry University and Keller alumni and students.

Last quarter we talked a little about the change in our academic structure at DeVry University which now organizes our various degree programs into five colleges. This is part of a larger initiative targeted at enhancing DeVry University’s brand, and aligning it more closely with our students' familiarity with traditional colleges and universities.

In addition, DeVry University is changing the images and messages of our communications to reinforce that DeVry University is the career university.

I'll now turn to our medical and healthcare group starting with Ross University. Ross delivered its largest May enrollment ever with higher undergraduate GPAs and better scores on the GRE and MCAT exams than ever before as well, and this is a great example of our operating philosophy, and that is that quality leads to growth.

Since we acquired Ross we invested over $60 million and raised academic progression standards. The result, an increase in academic outcomes such as our students’ performance on the medical boards, leading to growth in applications. In response to this growth we raised the entrance bar, and so again it's a virtuous circle where quality leads to growth.

At Ross we're continuing our physical expansion efforts to increase capacity, and for example at the veterinary school, two new 180 seat auditoriums are being built to accommodate more students. These facilities are expected to be completed this coming January.

As you may know, Ross Medical School is accredited by the Dominica Medical Board, and it was also the first international medical school approved by all four states requiring such approval. Ross graduates can, and do, practice in all 50 states, as well as in Canada and Puerto Rico, and in addition to this accreditation and these approvals, Ross recently reached another milestone, receiving full four-year accreditation by the Caribbean Accreditation Authority for Education in Medicine and Other Health Professionals. I know that's a mouthful, that's CAAM-HP for short. Full four year approval is very significant because the typical path for other CAAM accredited schools has been through provisional two-year approval. So this is a major accomplishment, and I’d like to commend the Ross med school team.

Secondly in the medical and healthcare segment, enrolment at the Chamberlain College of Nursing continues to be very strong as we look toward continued expansion in fiscal 2010. In terms of geographic expansion, Chamberlain plans on opening a new campus in Crystal City, Virginia--that's the D.C. area, which will be a colocation with DeVry University. We’re applied for the necessary approvals and intend to open in 2010.

And rounding out the medical and healthcare segment we're pleased to announce another quarter of excellent enrollment growth for U.S. Education at both Apollo College and Western Career College.

The biggest new development at U.S. Education this quarter was the launch of our new online bachelor's degree completion programs in medical imaging and respiratory care. Both of these are the first online and the first baccalaureate programs Apollo College has ever offered. Likewise, Western Career College is planning to launch online programs, adding four new associate degrees. Western has received approval for these programs and is accepting applications.

Rolling out these new online programs illustrates the synergies we're achieving through our diversification strategy and that's because we're leveraging DeVry's centralized online services group, including their technology platform, the curriculum development, instructional design, and student services.

Let me give you two more examples of the integration of U.S. Education and of the synergies that we're driving here. Western Career College has received approval to open a new campus in Pomona, California, and this will be a colocation with Devry University's existing campus there. And another example is the recent transitioning of Western's student financial aid processing operations from an external vendor to DeVry's internal central services group, which we expect to deliver meaningful cost savings.

So now I'd like to turn to our professional education segment. We used to think of Becker as an exam review provider. Increasingly, we’re redefining Becker as a provider of professional education and training to accounting, finance, and project management professionals. To better reflect this broader focus and to leverage the strength of the Becker brand, we've renamed the division to Becker Professional Education. Included in this change, by the way for all the chartered financial analysts on the call and everyone else, will be a transition from the Stalla CFA Review to the Becker name, over time.

Becker's quality reputation continues to grow. Each year the American Institute of Certified Public Accountants provides awards to the top 10 scoring students out of over 85,000 who take the CPA exams. This year, nine out of 10 winners were Becker graduates. And by the way, one of those nine was also a Keller student, illustrating another synergy area, in this case between Becker and Keller.

This quarter, Becker announced a partnership with Howard University. The partnership gives students from this premier historically black university who plan to take the CPA exam, access to Becker's world-class test preparation programs. Becker also continues to have a strong international presence and currently partner with 15 of the top 20 CFA societies in the world. During the quarter, Becker signed an exclusive provider agreement with the CFA Association of Taiwan to provide its CFA member candidates with our Stalla review for the CFA exams program.

And speaking of international, in the fourth quarter we offered the newest member of the DeVry family, Fanor, serving over 10,000 students in Brazil. Fanor's growth strategy includes new programs, new locations, and launching online courses.

When we announced the acquisition of Fanor we described the strong cultural fit with DeVry, and I think we may have even understate that fit because Fanor has completely embraced our mantra of doing well by doing good. As an example, Fanor has already teamed up with Chamberlain students to provide healthcare services to underserved areas in Fortaleza, Brazil, with plans to add trips to more parts of the country in the fall.

So in summary, in fiscal 2009 we delivered high-quality academic outcomes leading to strong financial results. We also executed key aspects of our growth and diversification strategy with the addition of U.S. Education and of Fanor.

At this point we've largely filled out the framework of curriculum areas, degree levels, and international diversification, that we originally laid out five years ago. So our acquisition focus will focus to building within this exiting framework, more so than expanding the framework itself.

As we look ahead to fiscal 2010, we’ll continue to execute on our strategy, with particular focus on six priorities: one, achieving the full potential of Devry University, enhancing academic quality, and building our brand value proposition; two, growing our medical and healthcare programs, responding to the tremendous need for healthcare professionals; three, redefining Becker in professional education; four, integrating and growing our Latin American presence; five, continuing our growth in high school programs; and finally, supporting our growth, by building our infrastructure in online education, in technology, and in human resources.

Now we're anxious to take your questions, but if you'll just allow me one last comment, I'd like to recognize the many awards and honors that our school has won this year. And I know I already mentioned the Forbes 400 and S&P 500, but I'm also very proud to announce that this year, Apollo College's Tucson campus received awards from the Arizona Private School Association for best community service, best school of the year, and it named instructor Marvonne Ebert as best teacher of the year.

These are the kinds of awards that pave the way for the S&P 500, and we've achieved this progress by virtue of our talented team of employees and their dedication to our students. So I'd like to thank all for them for helping to make it such a great year. And with that, Joan, let's take Q&A.

Question-and-Answer Session

Joan Bates

Wonderful. Jeremy if you could give the callers instructions we'll get that started.

Operator

Joan, I would love to. (Operator's Instructions) And your first question will be from the line of Sara Gubins of Banc of America. You may proceed.

Sara Gubins - Banc of America

Hi, thanks, good afternoon. I wanted to ask about the growth at Chamberlain which has been phenomenal over the last year, and I'm wondering if you would expect to continue to grow at such a rapid pace, or if we would expect that to slow down a lot given the size that you’ve now reached already?

Daniel M. Hamburger

Well thanks, Sara, and clearly as you get larger — large numbers yeah, as a percentage I would expect that over time it's going to come down, but we'll continue to grow because we have to. We have to do our part to contribute to solving the nursing shortage, as I say in this country, but really around the world. Fanor has got a nursing program too and we look forward to growing that as well.

I mean we're growing our pre-licensure programs and this is important because there are some others who have bachelors degree completion programs like we do, but for those who have an RN, but don't have a bachelors degree, and that’s an online program for us which is a distinction. But we also have one of the largest pre licensure programs. So that's where you as a student are going from scratch to getting your RN licensure, mainly at the bachelor's level. Most of our programs are BSN, we do have one ASN program.

So we are growing that pre-licensure program mainly by adding new locations and I talked a little bit about that in my comments so that continues. Growth in that degree completion program at the bachelor's level continues. And then we're pleased that we've rolled out a master's degree program, an MSN, masters in nursing with two tracks, one for nurse administrators and one for nurse educators.

So we see continued growth across those dimensions, other programs that we can rule out, geographic locations, and then continued online growth.

Sara Gubins - Banc of America

So is there anything that — I mean this year you added almost 1,900 students to the total based on a year-over-year basis, is there anything to suggest that that would slow down next year just in terms of that affluent number?

Daniel M. Hamburger

No. I think on a percentage basis it's always going to come down, but absolute growth can continue.

Sara Gubins - Banc of America

Okay. And then I wanted to ask about the comment about expecting longer term to be able to continue to grow revenue double digits and earnings about 20%. Given the more challenging comparisons that you have from this year, do you think that's an achievable target next year? And I'm also just wondering about the seasonality of that, given your comments about some initiatives presenting hurdles for the first quarter — I'm wondering if you're expecting margins to actually be down year over year in the first quarter.

Daniel M. Hamburger

Let me take a shot at that, and I might ask Rick to comment as well just so you are getting all the perspectives here. That is a long-term perspective and that has been consistent and we have never given quarterly guidance since being the first school system to go public back in 1991, and that practice continues. And there's a very good reason for that which is that this endeavor that we are embarking on only works for the long term and so we just don’t' think that that’s congruous with short-term quarterly guidance.

However, we give long-term guidance and probably give more guidance on our strategic plan than some others do. So that's how we think about it and so what Rick mentioned in the comments earlier was our long-term aspiration and goal for revenue in earnings growth, all of that being driven by our aspirations in maintaining and improving academic quality. And we've always said that within that long-term journey that we're on, there will be fluctuations year-to-year and quarter-to-quarter.

Richard M. Gunst

Yeah. I think you hit the nail on the head. As far as the year goes, our long-term goal is just that and we think next year we'll be in line with those goals. And for the first quarter we got some hurdles. Could the margin be down versus prior year in any one quarter? I think that could be the case, but for the year I thin we’re expecting to improve our margins, but we're not managing it as annual say, quarter to quarter.

Sara Gubins - Banc of America

Okay, thank you.

Joan Bates

Let me just interrupt for a minute. We're going to limit probably everyone to just one question at first and then if you could just hop back into the queue. I'm told we've got a long list of people in the queue so we want to answer everyone’s question so if you could do that, that would be great. Thanks.

Operator

And your next question will come from the line of Kelly Flynn with Credit Suisse. You may proceed.

Kelly Flynn - Credit Suisse

Thank you. On bad debt, I know you only give it out annually, but given that investors are pretty focused on that can you give us any more color on kind of how it progressed throughout the year and also just what you're seeing there? Are you seeing people who drop out less likely to pay or any impact from the economy that you could speak to qualitatively? Thanks.

Richard M. Gunst

Sure. Kelly, I think as I mentioned in my comments, we've done a really good job at the campus level and within our central service group of really communicating well with the students, staying on top of any issues, business by business, sector by sector. So we got a couple new businesses in our portfolio now with U.S. Education and Fanor that have a little bit higher bad debt as a percent of revenue than what was the case within DeVry University, but as you look at it business by business we've been able to stay within the range and have really not seen any movement up because our accounts receivable per account have remained relatively flat as well.

Kelly Flynn - Credit Suisse

Thank you.

Operator

And your next question will be from the line of Ariel Sokol with Wedbush. You may proceed.

Ariel Sokol - Wedbush

Hi, guys. In the last call you talked about some internal process changes to improve persistence at DeVry University, but it appeared to have materially (inaudible) this quarter. I'm just curious to find out how much runway is there for improving persistence at DeVry?

Daniel M. Hamburger

Thanks, Ariel. I mean there is always opportunity to improve persistence and we always try to do that. That is the goal. I mean, improving the academic quality in the classroom and then also the more we go along the more we learn how important it is to surround that with outstanding world-class customer service that surrounds the classroom. And that' particularly important for many of the students who our schools are serving who may be first in their family to go to college, for example. And when that's the case and you're someone who doesn't have as much of the college-going culture or grown up with it, you might need a little bit more support, student services, academic advisement, housing services, part-time job — all these kinds of services. And career services are part of that because they help get you part-time jobs while you're in school, not just to help advise you when you graduate.

So some of the investments we've been making over the last couple of years here that we've talked a lot about have been in these areas of student services. We talk a lot about having world-class customer service. That's part of job one, priority one, that I mentioned at the end of my prepared remarks. Our first priority remains achieving the full potential of DeVry University, and in turn within that, the priorities are academic quality and world-class customer service so that we can continue to maintain and enhance the retention. Thanks, Ariel.

Operator

And your next question will be from the line of Amy Junker with Robert W. Baird. You may proceed.

Amy Junker - Robert W. Baird

Hi, good afternoon everyone. Daniel, I was hoping you could maybe take a moment and try and rank order the priority of the investments across your portfolio? And I don't mean immediate term necessarily more over the next year or two, where you see the most opportunity, and specifically I'd be interested in hearing any comments around expanding out to high school which you mentioned is part of your strategy, what your strategy is there and how big you think that can get? That would be helpful.

Daniel M. Hamburger

Sure. Thanks, Amy. And I would rank it as number one is achieving the full potential of DeVry University. That is why I listed it first because there still remains a lot of opportunity there to achieve our full potential to service all the students within each geographic market that we're serving our fair market share.

Another very important priority is continuing to grow in our medical and healthcare program, and that's because there is such a huge need. We all know about the nursing shortage. There is a growing physician shortage. Believe me, you are going to be reading more — we already have been reading more and more about the veterinarian shortage, particularly among large animal vets. You are going to see continued stories about the shortage among the other healthcare professionals that you might go to the doctor's office or hospital and meet with a doctor, meet with a nurse, and then there is two or three or four or five other professionals — respiratory therapist or maybe you need physical therapy — we are serving dentistry — dental assistants, dental hygienists — so medical and healthcare is definitely a huge priority for investment.

And then you asked about high school, that continues to be very important to us. It's very strategic from a couple of dimensions. One is obviously our largest area of service is in the post-secondary level and somebody a lot smarter than me back in the early '70s at DeVry figured out that before they go to college, they're in high school, and so we started the high school recruiting program, which was really at the time very, very much the first of its kind. Now we visit over 8,000 high schools. We see nearly a million high school students a year and we are educating them on post-secondary opportunities and careers. And part of that is service to the community and part of that is also helping to recruit them to DeVry University and then we also have programs like that at Chamberlain College of Nursing and Apollo College and Western Career College.

And that's why our move a couple of years ago to direct running of high schools like the DeVry University Advantage Academy with its outstanding results and the Advanced Academics online program is synergistic with that. So we've got a strategic interest in high school programs from a couple of perspectives so that is something that we will be investing in here for the long term and then in particular, as I think Rick mentioned, we are in investment mode with Advanced Academics. It's very high growth, but we're not managing it for near term earnings, we're managing it for academic quality and for long-term growth. I hope that helps give you a sense of maybe ranking of investments.

Amy Junker - Robert W. Baird

Thank you.

Operator

And your next question will be from the line of Suzanne Stein with Morgan Stanley. You may proceed.

Suzanne Stein – Morgan Stanley

Can you break down the $100 million of planned CapEx for 2010? Just trying to think of how much of that is one time and how much would be ongoing and also if you could just comment on what you’re seeing as far as course load for students?

Richard M. Gunst

Okay. You've got two questions in there sneaked in, but as far as the capital spending, the $100 million that we're looking at, part of it is we've got Fanor and we've got U.S. Education in for the full year so we've got the annualization of spending for both of those businesses . We've got our Project Delta, our student information system project that we said is going to be a multiyear project. Next year that’s probably going to be in the neighborhood of $20 million, the low twenties.

We have, as I mentioned on the call earlier and as we disclosed a few months ago, we are moving our home office and while we've got a great deal, there is some capital spending associated with that move — purchasing of furniture and constructing a facility, that's going to be in the $10-$12 million range. And then the rest of it is due to some of our expansions with Chamberlain expanding in Jacksonville which just opened and there's some spending continuing with that as well as the new facilities that we planned for this year for them as well as U.S. Education and DeVry University making up really the biggest parts of that.

Daniel M. Hamburger

Credit hour load really quickly, Suzy, just to say that while our revenue has grown pretty nicely, because the credit hour load per student is down that just takes away a little bit. So it's a little bit lower revenue growth than we would have gotten if the credit hour load had been at historical levels and that' probably a little bit of a function of the economy as some students choose to take maybe one less course per term than perhaps they might have in times past. So not a major, but a bit of a factor.

Suzanne Stein – Morgan Stanley

Okay, thank you.

Operator

Your next question will be from the line of Trace Urdan from Signal Hill. You may proceed.

Trace Urdan - Signal Hill

Hi, good afternoon. I was hoping you could comment on the competitive dynamic at Ross University specifically, and I'm interested whether you’ve seen any kind of change there as a result of the economy and if it's changing, how students are looking at prospective medical programs? And I'm also interested, if you could, maybe characterize how you compete against other offshore medical schools, whether that's a relevant comparison — do students look across the schools and choose you? How does that work?

Daniel M. Hamburger

Sure. Trace, the economy has virtually no impact on Ross. Unlike some other — maybe a very short program, nobody sort of gets laid off from a job and then says okay, I'm going to go to medical school. You know what I mean, it just doesn’t work like that. This is something people almost from the age of six have been running around with a stethoscope toy medical kit and they want to be a doctor. It's that kind of a long-term focus.

So I would say to the first part of your question, really no impact on the students. In terms of more competition, yeah, it's a little bit more competitive perhaps than it used to be. And then in terms of how we differentiate or how students look at us, yes they do compare Ross University, a school of medicine as well as school of veterinary medicine, to other international schools, and there is also a dynamic where they might compare us to an osteopathic school. Perhaps they applied first to allopathic, an MD school, and if they didn't get into the first choice or if they didn't get in or they are waitlisted, then they might consider oh, I have some choices and reapply — I got to wait another year because all US medical schools have just one intake a year. So one advantage that Ross has is three intakes per year.

So one choice I have is wait again another year, another choice is DO, another choice is look at international schools. So now we've sort of funneled our way down to that level of decision-making and the student is saying well, there is Ross University and there is some other schools international, what is the distinction?

Well, Ross University has outstanding academic outcomes. Ross University has an incredible faculty. Huge investment, I mentioned $60 million, it's evident in our patient simulators and the educational technology. The fact that they don't need to conduct their rotations outside the US. They have only 16 months outside the US and then they're coming back into the US and I can do all of their clinical rotations in the US. They can practice and do — we have alumni that we can introduce them to in all 50 states as well as in Canada and Puerto Rico.

These are some of — I can go on and on, but these are some of the competitive differentiators for Ross.

Trace Urdan – Signal Hill

And if I could just ask about price in that evaluation process?

Daniel M. Hamburger

Price is not really all that different. I mean, it's expensive to go to medical school. People who want to be a doctor know that. The IRR if you will, the value that you gain is a lifetime earnings relative to that investment. So if you think of it as an IRR, we calculated it, it's very high. Students understand that and so we help them. Obviously we're one of the few — there’s only three international schools that are eligible to participate in the student loan programs that we're all familiar with, and Ross being one of them is obviously a huge advantage.

Operator

And your next question will be from the line of Paul Ginocchio with Deutsche Bank.

Paul Ginocchio – Deutsche Bank

Hi. Just a question about some of the grants for students. Have you had to reserve against Ohio — and what are you thinking about some of the other states like California that you’ve looked at, or what you have already done? Thanks.

Daniel M. Hamburger

No reserve or anything like that. And what we're finding is the state-budget crunches are certainly having an impact and there are reductions in the state grants. We're not seeing that impact our ability to attract new students. We're not seeing any impact on retention or anything like that. It's just kind of like I mentioned five quarters ago or six quarters ago there was a reduction in private loan availability and a lot of people sort of asked a lot of questions, a lot of angst about whether students would stop going to school and we said no, we don’t see that. It's sort of like that. We'll work our way through it and help students finance their education. And we will do that by increased availably of federal money. I mentioned Perkin, I mentioned Pell, Stafford Loan, so that's an offsetting factor as well.

Paul Ginocchio – Deutsche Bank

So even in Ohio where it sounds like the governor gave the grants and then took them back, you still haven't had to write anything off there either?

Daniel M. Hamburger

No write-offs.

Paul Ginocchio – Deutsche Bank

Great, thank you.

Operator

And your next question will be from the line of Scott Schneeberger with Oppenheimer. You may proceed.

Scott Schneeberger - Oppenheimer

Thanks. I was wondering could you guys give us an idea of by degree, your mix now? I think, for instance, associates was, in last year's K, about 10%. I imagine that's gone up a bit with the new acquisition of U.S. Education, but any one where that is now and where that might be trending going forward?

Richard M. Gunst

Yeah, sure. If you look at the percent by degree, you're talking about doctorate, masters, bachelors — bachelors is still majority. It's a little over 50%, where associate and certificate are about 25%, masters about 15%-17%, and then doctorate about 5%. And across the different programs, with the addition of U.S. Education, our medical and healthcare is almost 30% of our degrees, business being about half and then technology being the remaining 25% or so.

And there will be a specific breakout in our 10-K that we will be filing in another week or so.

Scott Schneeberger - Oppenheimer

Great, thanks.

Daniel M. Hamburger

Scott, it's quite illustrative of the diversification that we've achieved through our strategy relative to where we were a few years ago and I think it's really going to serve us well. So thanks for that.

Operator

Your next question will be from the line of Gary Bisbee with Barclays Capital. You may proceed.

Gary Bisbee - Barclays Capital

Hi, guys. Good afternoon. Given all the opportunities and I guess room for investment that you've talked about throughout the call in the US, I guess I'm just trying to gauge how aggressively you're thinking about or planning for filling out the Latin American footprint? And one thing that investors, I think have been fearful of for a lot of years around Latin America is that the schools in many cases look much more like traditional colleges in the US, i.e. much higher levels of CapEx so the return on invested capital is inferior. How aggressive will you be and can you do so in a framework that's somewhat similar from an investment perspective to what you've done with your US business? Thanks.

Daniel M. Hamburger

Sure, Gary. Love to address that because we don't agree with the assessment that some others that you cited there have. I guess that's just not been our experience or maybe not been the kind of school that we looked for as we conducted our two or three year search for the quality programs and strong management team that we found at Fanor.

The economic returns that you’re talking about we don’t see as sort of a significant difference. It's not similar to some traditional with all the accoutrements or museums or other sort of capital things that some might see — no. So we don’t see that at all. These are very much career — it fits and we know — it's very much in line with what we've done for a long time here. So I know it always sounds so far away and it's very difficult but it's amazing, you go down to Brazil and there is students and there is classrooms and there is computers and there is professors writing on the white board and there is a library and a computer lab and it's very, very similar, and we think we can add value to that by replicating some of the practices that we have here in North America, there in South America.

And for all those reasons I would answer the question bout how aggressive — we're going to be reasonably aggressive and continue to grow at an appropriate rate just the same way we've done up here. The first focus is making sure that the academic equality is there and then that quality leads to growth.

And in particular with Brazil. Brazil has nearly 200 million people, tenth largest economy, not even gone into recession. Can you imagine, during this whole worldwide economic crisis, they have not, to my knowledge, not had a quarter of negatives. They have not been in recession. And it's a very supportive government and regulatory environment which we appreciate. So we're very happy with the Fanor acquisition and with the management team especially.

Operator

(Operator's Instructions) Next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed.

Jeff Silber - BMO Capital Markets

Gary's question, when you mentioned earlier about your acquisitions in the future that you’re going to be, I guess, filling out within the framework you have, within Latin America do you think the focus will be mostly on Brazil or should we expect acquisitions in other countries as well? Thanks.

Daniel M. Hamburger

That is our main focus. It's the biggest country. It's got probably the most opportunity that we see, so I would expect the results to be in line with the opportunity.

Jeff Silber - BMO Capital Markets

And since that was such a question I was hoping I could sneak one more in. In terms of the litigation settlement, what was the amount of the claim in full relative to the settlement that you have? Thanks.

Daniel M. Hamburger

No. What we disclosed is the number that we can disclose.

Jeff Silber - BMO Capital Markets

Okay. Just thought I'd try. Thanks.

Operator

Next question comes from the line of Mark Zgutowicz of Piper Jaffray, please proceed.

Mark Zgutowicz - Piper Jaffray

Hi. I was just hoping you could tell me what ad expense was in the quarter with and without U.S. Education and then talk about what your anticipating for growth there in FY10 versus '09 and also if you can include your expectation for salary growth if you're expecting that to be reasonably higher in 2010 versus '09? Thanks.

Daniel M. Hamburger

For salaries for our graduates?

Mark Zgutowicz - Piper Jaffray

No. Salaries in the expense line.

Daniel M. Hamburger

Well, let me take sort of a broad shot at it first to give you more color just to say that we are going to continue to invest in marketing and advertising as appropriate. And the nature of that is — what is the reason for that and why? We actually are seeing very good results from the enhancements to the marketing and advertising that we've done recently.

A good example of that is at DeVry University. You’ve all seen some of the results in terms of the new student recruiting that had come from that, and that’s both a numerical process as well as a qualitative — or the nature of it has changed and that is to emphasize the brand enhancement and the brand positioning of DeVry University as the career university. So as things go on, I think you'll see some changes and enhancements to the marketing and advertising that had led to both an improvement in the productivity or the outcomes numerically as well as allowing us to fund more brand enhancement.

Is there anything else you want to add to that?

Richard M. Gunst

No. I guess in answer to your question about the advertising expense for the year, for the year, advertising expense was about $179 million with both U.S. Education and Fanor and it would be about $166 million without those two acquisitions.

Mark Zgutowicz - Piper Jaffray

Okay, great. Thanks.

Operator

Next question comes from the line of Todd Young from Morningstar. Please proceed.

Todd Young - Morningstar

Yes. Looking at the total enrolment with U.S. Education, looks like on a sequential basis that there was some decline that doesn't seem to be seasonal when I look at the other March to July numbers. Could you comment on that some?

Daniel M. Hamburger

Well, there was no decline in U.S. Education enrollments.

Richard M. Gunst

Well are you talking about specifically U.S. Education?

Todd Young - Morningstar

Yes. The number is the 10,644 compared to 10,928 I believe in March of 2009.

Richard M. Gunst

Yeah. What happens with U.S. Education, given their short-term programs and most students having a big start in the fall, we have graduates that fell out of the total in June and July and new students help make up some for that slight, but typically there is a falloff between the March period and the July period.

Todd Young - Morningstar

Oh yes, I am sorry. I thought you were talking about year over year. There is a seasonality.

Richard M. Gunst

Yeah, seasonality because of the graduates.

Daniel M. Hamburger

Yeah. And think of the reason for that because the traditional fall start is the biggest. Anybody who starts in the fall and is in one of the shorter programs will come out within about nine or 10 months.

Todd Young - Morningstar

Okay. Because I was just looking at it compared to the July to March last time. It didn't seem like either was that seasonal effect. It seems like things still increased so I was just wondering if there is something that changed in that.

Richard M. Gunst

Well, I think about again, a year or 15 months ago was when U.S. Education started to see some of the benefit of the softer economy so that had a much bigger impact 15 months ago, a year ago, then it did most recently as things are starting to overlap.

Todd Young - Morningstar

Okay, thank you.

Operator

Next question comes from the line of Jerry Herman from Stifel Nicolaus. Please proceed.

Jerry Herman - Stifel Nicolaus

Good afternoon, everybody. I got a couple of sort of backend of the pipeline questions including a follow-up to that one. Can you talk about exit metrics at U.S. Education, i.e. graduation placements? And also maybe update us on the clinical situation at Ross, as I know there were some challenges there that you guys alluded to in the last quarter?

Daniel M. Hamburger

Okay. At U.S. Education, both Apollo College and Western Career College, the graduation and employment statistics — we don't see placements, employment statistics are well in excess of the industry average, the career college average, the benchmarks as set by the industry and by creditors so we feel very comfortable with that.

And then in terms of the clinicals at Ross, I would not say that there’s any real change from the previous comments that we've made and that is that it has been and just continues to be an increasingly competitive environment, and that goes back to the question that Trace asked as well which I appreciate. So because of that the costs have gone up there and that continues. So as you’ve seen we've been able to manage the rest of our operations in order to preserve our margins, but it is a challenge that we face and so far we've been able to meet that challenge, but yeah, that is one of the challenges that we have.

Jerry Herman - Stifel Nicolaus

Thanks, guys.

Operator

And there are no further questions at this time, sir.

Daniel M. Hamburger

Okay, very good. Well, I just want to remind everybody that our next conference call will be held on October 27th and we'll be announcing the first quarter results and enrollments for that period. So thanks, everyone, we'll talk to you next time.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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