DeVry Inc. F2Q10 (Qtr End 12/31/09) Earnings Call Transcript

Jan.26.10 | About: DeVry Education (DV)

DeVry Inc (NYSE:DV)

F2Q10 Earnings Call

January 26, 2010 04:30 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

Amy Junker - Robert W. Baird & Co.

Sarah Gubin - Banc of America Merrill Lynch

Mark Marostica - Piper Jaffray

Jeff Silber - BMO Capital Markets

Jerry Herman - Stifel Nicolaus & Company, Inc.

Andrew Steinerman - J.P. Morgan

Ariel Sokol - Wedbush

Trace Urdan - Signal Hill

Corey Greendale - First Analysis

Scott Schneeberger - Oppenheimer

Gary Bisbee - Barclays

Operator

Good day ladies and gentlemen and welcome to DeVry’s fiscal 2010, second quarter conference call. (Operator Instructions). At this time I would like to turn the presentation over to Ms. Joan Bates, Senior Director of Investor Relations and Media.

Joan Bates

Thank you Jeremy. With me today from DeVry management are Daniel M. Hamburger, President, 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, foresees, 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 DeVry’s most recent annual report on Form 10-K for the year ending June 30th, 2009, and filed with the Securities and Exchange Commission on August 26th, 2009.

Telephone and webcast replays of the call are available until February 9th 2010. To access the reply please refer to today’s press release for information. Daniel Hamburger will begin today’s call with a quick overview followed by a review of the financial results by Rick Gunst. Daniel will then provide an operations update before opening up the call for your questions.

With that, I’ll turn the call over to Daniel.

Daniel Hamburger

Thanks Joan and thank you all very much for joining us for our fiscal 2010 second quarter conference call. Since we saw many of you at our Education Day in November and today's announcement doesn’t include enrollment result, we’ll make an effort to be brief this afternoon and get to your questions.

So we are pleased to announce that the continued execution of our growth and diversification strategy and our focus on investing in academic quality has produced successful student outcome and another quarter of strong financial results and the increase that we saw in enrollment in December translated into exceptional revenue growth in the quarter, which drove margin improvement and record earnings. At the same time, we continue to invest in our programs and student services to drive future growth.

At DeVry's home office, this quarter has been a busy one for us as we recently moved into our new offices in Downers Grove and in Oak Brook, Illinois. And we moved our data center to its new location as well.

Our new home office is a co-location with the DeVry University Center and houses a classroom of the future. The new offices are designed to be open and collaborative with state-of-the-art amenities for our employees and our another part of our strategy to be, The Employer of Choice in education and we’d like to invite you to come visit us when you can.

I’d like to spend a few minutes here on our expectations for the rest of 2010 and beyond in the context of the overarching economic conditions that we are seeing. There certainly are some optimistic signs that the worst of this recession is behind us, but with the government announcement for example, the 85,000 jobs were lost in December, it remains clear that meaningful economic recovery is not a forgoing conclusion here in 2010.

As I outlined during our Education Day, we believe DeVry is well positioned in both good and bad times. Our confidence is bolstered by two factors. The first our operating philosophy, namely that Quality Leads to Growth.

At DeVry, our institution educates students for positions across a variety of industries, but they have one thing in common each provides high quality program in services to our student.

And as we continue to invest in quality, academic outcomes improve, to continued success of our student, drives enrollment and retention, which leads to financial growth and this is true in both good times and in bad times.

And we in turn put those earnings right back to work by investing them in the quality of our program, case in point, we’re planning to invest over a $100 million this year in capital expenditure on our program, services, and facilities.

In today’s world the state budget cuts and declining endowment this investment is an example of the important role that private sector schools like the DeVry are playing in today’s educational system.

And the second factor is our diversification strategy, which has us well positioned to deliver consistent and sustainable growth, again through both good and bad economic time. Some of our operations are pro-cyclical like Becker which has been negatively affected by the weak economy.

At the same time schools like those of U.S. education are more counter cyclical and in addition DeVry has schools such as Chamberlain College of Nursing and Ross University that entirely non-cyclical. In fact DeVry is the only publicly traded education provider that has a medical school or a vetenary school.

Taken as a whole the DeVry family of schools is best characterized as non-cyclical and so given our philosophy of quality leads to grow and our ability to mitigate risk, do our diverse family of school, I believe we’ll continue to experience sustainable growth when the economy recovers.

And it's just an illustration of this, I like to share with you how our larger school DeVry University grew during this strongest second economic recovery in the post war era the 90 and for this please refer to the chart that you will find in today’s press release.

If you could take a look at the chart you’ll see that the end of the recession in 1992 and moving forward for 10 years to 2001, the job market improved with unemployment falling from a high of 7.4% down to 4.2% over that period.

And taking a look at DeVry universities total enrollment over that same period our enrollment continued to grow, in fact the rate of growth increased and keep in mind that was in the 90s when we weren't as diversified as we are today.

I think a lot of people think we are more counter cyclical than we really are and this example demonstrates that we are able to grow in an economic recovery and so with that introduction let me turn the call over to Rick for the financial results.

Rick Gunst

Thanks Daniel and good afternoon everyone. I'm going to take the next several minutes to highlight our strong financial performance for the second quarter and first half of fiscal 2010.

I'm pleased and encouraged to see the very positive impact from our investments in academic quality and customer service, which have resulted in strong revenue growth along with significantly improved margins and profitability.

Record quarterly revenue of $473 million was up about 28% versus prior year. This is primarily organic growth as we've anniversary of the U.S. Education acquisition in September with revenue still up 25% in the quarter excluding our more recent acquisition of DeVry Brazil.

Revenue to the first half of the fiscal year was up about 34% and 25% when you exclude both DeVry Brazil and U.S. Education. Net income and earnings per share were both about 69% in the quarter and 64% year-to-date.

Earnings per share were $1 in the quarter marking the first time we've broken through the dollar threshold. It's also interesting to note that our earnings per share were only $0.61 for the entire year in fiscal 2006 just 3.5 years ago.

Pre-tax income margins for the first half was 21% up 470 basis points versus the 16.3% margin achieved a year ago.

Now, fiscal 2010 is really shaping up to be a breakthrough year and we expect to significantly surpass our historical peak margin of 17.1% this year. These results were driven by the head count, enrollment growth and retention results across our schools, while the professional education segment continues to be negatively impacted by the economy. The financials reflect the power of operating leverage, which is helping drive the significant profitability improvement.

For your reference, second quarter results include expense related share base payment are approximately $2.1 million pretax or $1.8 million net of tax, a bit higher than last year. Our overall effective tax rate was 33.6% in the quarter and 32.9% year-to-date, up from the 30.4% rate for full year fiscal 2009 primarily due to the continued increase in domestic source income. Properspective, we are now paying over $100 million in federal and state taxes on an annualized basis.

Costs of educational service expense increased by 20% verus prior year in the quarter and student services and administrative expense increased by 17%, both growing at double digits rates but less than the revenue growth with or without the acquisitions.

We continue to make prudent, targeted investments while still delivering leverage in efficiencies. With that as a highlight let me walk you through some of the operating segment results, which are further detailed in our earnings release.

First, the business technology and management segment achieved very strong top and bottom line results. Revenue was up 26% versus prior year in the quarter and 25% year-to-date, driven by the strong enrollment growth and increased retention driven by our focus and student services.

Segment operating income of $78 million in the quarter and $134 million year-to-date more than doubled verus prior year. This improvement was driven by revenue growth and the resulting operating leverage. The segment margin was 24.9% in the quarter and 22.5% year-to-date.

While we are continuing to make investments to support academic quality and customer service our incremental earnings flow through for this segment has been over 60% year-to-date. This shows the power of operating leverage and our cost base from the very strong top line growth.

Within the medical and healthcare segment, revenue was up 28% in the quarter driven by the enrollment growth and pricing in the Ross University and Chamberlain College of Nursing, along with continued good results at Apollo College and Western Career College.

Second quarter operating income for the segment of $31.2 million was up 17% versus last year. The margin was a bit lower than prior year driven by business mix within this segment with the addition of U.S education and very strong growth at Chamberlain both with have lower margins than Ross University.

Our professional education segment results continue to reflect the impact of the soft economy and the economy of finance professions. Revenue was down 6.3% in the quarter and down 4.6% year-to-date versus last year.

Operating income was down about 28% in the quarter and 21% year-to-date. Once again we don’t expect performance to improve materially in calendar 2010 or really until the economy recovery takes hold and positive impacts hiring and training within the economy and finance professions.

We are closely managing costs in the short term and we recently completed the consolidation of a number of positions in the marketing and sales area. But at the same time we are planning to cease the opportunity when the industry does rebound.

Lastly results of our other educational services segment reflect the top line contributions to growth from Advanced Academics and DeVry Brazil. This segment delivered operating income was $700,000 in the second quarter following the first quarter loss due to the seasonal flow of the segment.

Shifting to the balance sheet, our cash remarkable security balance is $334 million at the end of the second quarter compared to $263 million last year. Cash flow from operations for the first half was $267 million versus $139 million last year driven by our improved earnings in working capital.

These strong cash results enable us continue to decrease our outstanding debt to $45 million down from a $155 million a year ago and $105 million last quarter and also invest back in the business as capital spending to the first half of the year was $62 million versus $25 million spent last year.

This spending has been focused on project Delta, which we believe will further enhance our ability to provide best in class service to our students as well as on facilities improvements within DeVry University and U.S. education and expansion within Ross University and Chamberlain College of Nursing.

We are committed to investing in educational technology and capacity needed to serve our students, so total capital spending is still expected to exceed a $100 million this fiscal year.

Our net accounts receivable balance actually decreased to $135 million versus a $138 million last year. In fact if you exclude DeVry Brazil, our net receivable balance would have decreased by $7 million.

Receivables per count within DeVry University were down compared to the higher balances last year during the conversion of our financial aid processing system but they were also lower than our balances two years ago.

While we had some issues in Italy, the new processing system is having a positive impact. So this is a good example of how our investments in new technology are paying off in approved customer service and productivity.

Year-to-date our bad debt rate increased slightly versus last year to 3.2% fueled by the U.S. education and DeVry Brazil acquisitions we have not experienced any deterioration with bad debt in our legacy operations.

So our receivables per student are down and our bad debt rate is essentially unchanged. We see this as another marker quality and would like to recognize the outstanding performance of our teams in managing this area particularly during these tough economic times.

Finally during the quarter, we completed the execution of our second share repurchase program buying back $15 million of common stock over the last year or about 1 million shares at an average cost of $48.67 per share.

Our board of directors approved a third repurchase program in November of $50 million. We have not commenced this program yet since we have been in the close trading window but plan to begin repurchasing once again when the window opens up later this week.

So that concludes my overview of the very strong results for the first half of the year. We’re obviously off to a tremendous usurp and are confident in our ability to leverage strong top and bottom line results for the balance of the fiscal year, all driven by academic quality.

As we've said in the past, our long-term financial objective is it to deliver earnings per share growth of roughly 20% per year. Our strong first half performance puts us in a position to exceed this goal as we believe earnings will continue to grow in excess of 20% over the balance of this fiscal year.

Now let me turn the call back over to Daniel for some color on the operating results.

Daniel Hamburger

Thank you Rick. Let me begin that operating review with our business technology and management segment, which is DeVry University and its Keller Graduate School of Management. And since we didn't have a conference call in December when we reported the fall enrollment, I'd like to comment on the strong growth that DeVry University experienced during that period with new undergraduate enrollment of more than 19% and total undergraduate enrollment rising nearly 23%.

These results and our continued strong execution position us well for the remainder of 2010 and it is important to note that we are seeing broad based DeVry University from online and onsite in both graduate and under graduate and across our business, technology and healthcare program.

This quarter, DeVry University continued to focus on its positioning as "the career university". Over the coming month, we plan to hire additional career advisors beyond the 150 we already have in place.

To further improve persistence, we are hiring more student coaches as we implement our innovative student central concept across our campus location. Student central brings all key services together in one place and proactively supports our students from the time they enroll to when they graduate.

Other growth initiatives include our plans to open new locations in Glendale, Arizona and Houston, Texas in the next few months.

At Keller Graduate School of Management, total course takers in the November session increase more than 16.5% from a year ago. As part of our initiatives to increase awareness of Keller, we will be investing a bit more in our communications campaign.

Our goal is align Keller more closely with our student familiarity with traditional business schools and to reinforce Keller's high quality reputation. We are very excited for this new campaign and it begins in the spring.

Moving onto our Medical & Healthcare segment, at Chamberlain College of Nursing enrollment in the fall increased 67% and we continue to invest in facilities to meet the huge demand for qualified nurses around the country.

In addition to our newest campus in Jacksonville that opened seven months ago, Chamberlain's New Chicago and Crystal City, Virginia location are on pace to open this summer pending approvals. And after 80 years, Chamberlain is also moving its St. Louis location to a brand new building in nearby Maryland Heights.

All four of these campuses are core locations with DeVry University, it is pretty interesting. In addition, we are launching a new RN to MSN bridge program in July. This program will be part of Chamberlain’s expanding online offerings and it provides a great option for RNs, Registered Nurses, who want to earn a Masters degree.

And in line with our emphasis on doing well by doing good, Chamberlain’s mission in November to Brazil was a great success as Chamberlain partnered with DeVry Brazil to set up a local clinic in the city of Madelena. A second trip is happening this week and we plan on expanding the program to three trips a year. Very proud of that.

In U.S. Education, that’s Apollo College and Western Career College, we continue to invest in new programs and to focus on integration and efficiency. During the quarter we launched a Physical Therapy Assistant program in Apollo College’s Mesa, Arizona campus. We expect to bring this program to other campuses pending approval and we have hired new program directors to support that goal.

Now that the integration of Apollo College and Western Career College is doing it’s final phase, we’re focusing on expanding student enrollment, both onsite and online. And we’re also looking at other areas of value creation.

As one example, we recently consolidated U.S. Education Service Centers in Phoenix and its accounting function in our mission vehicle office, which streamlines our operations and supports future expansion.

Another example, we’re also seeing efficiency due to higher capacity utilization. Notice that while we were very well utilized in the mornings, afternoon and evening classes were less so.

So, this led us to initiate aimed at helping students find the class time that worked best with their schedule. The result has been much more evenly dispersed classes in the afternoons and evenings and greater campus utilization.

So now, let me move to our professional education segment where the economy continues to dramatically affect the accounting and finance field that Becker served. During this quarter, Becker's CPA group piloted a zero percent financing initiative to help recent college graduates who are most effected by the current job market.

The initial results of this program have been pretty promising and could be expanded once we have a chance to thoroughly review the program. In December, at Becker we also signed an exclusive partnership with China Distance Education Holdings Limited to distribute our Becker's materials in China.

This partnership offers great potential to expand our CPA courses in China and could eventually include our Stalla CFA program as well, the Chartered Financial Analyst. While times are tough, it's tough for Becker's competitors too.

One key advantage for Becker is being part of a diversified organization that can support it for a long-term growth. Most of Becker's competitors are small and don’t have this advantage. So we believe this positions Becker very well for when the accounting and finance field starts (inaudible).

And our final segment, other educational services. As we announced at Education Day, what we've been calling Fanor, we are now calling DeVry Brazil, which includes three colleges. There is Fanor, there is Ruy Barbosa and AREA1.

Our people in Brazil see tremendous value in the DeVry name and are very excited about the change. We're also in a process of launching several new programs in high demand healthcare field such as nursing, physiotherapy, and nutrition plus it should be available beginning next month.

So to summarize, as you can see our diversification strategy and our focus our investing in quality continue to lead to growth, strong student academic outcomes, and another quarter of solid financial results. The investments we've talked about over the last couple of years are paying off.

From time to time, we heard feedback on occasion let's say, to be effective, I think you should invest less and show more near term margin that kind of thing. What we are demonstrating here is that by investing in quality, we are getting great academic outcome as well as growth and margin and some quality leads to growth.

And so I’d like to close by thanking the 114,000 students across all DeVry school. It’s truly our privilege to help them achieve their career goals. And I'd also like to thank the 17,000 members of the DeVry family for their dedication to our student and for the vital role that they play in our success.

And so with that Joe we’re happy to take questions.

Joan Bates

Thanks Daniel. Before we move to the question-and-answer portion of the call, I'd just like to remind everyone that since our move to the new office, we also have new phone numbers. So if you don’t get your question today, for follow-up call you can reach Rick at 630-515-3137 and you can reach me at 630-353-3800.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Amy Junker -

Robert W. Baird & Co.

Amy Junker - Robert W. Baird & Co.

Can I just ask a question about Project Delta and at your Education Day, David Pauldine said that the bulk of the work was going to be done over the next couple of quarters.

You've obviously had tremendous results and so it’s hard to decipher here, but I am just wondering what percentage of that is really student phasing and have you seen any signs whatsoever that there is any productivity disruption as the enrollment councilors kind of become accumulated to the new system.

Daniel Hamburger

Regarding project Delta, we have not launched the book of project Delta so we haven't seen any impact on the operations because it hasn't launched and Rick was referring to a part of our overall systems, technology investment which was in the student finance area that we have seen have an impact.

And a positive impact and to be able to report that our accounts receivable is actually down in this economy really does speaks to not only the quality of fundamental value proposition that students are receiving but it also it takes a lot of processing, a lot of customer service to make that happen.

And so the systems investments that we've made have had a positive impact there and so as we look forward to implementing project Delta, we're looking forward to similar types of results.

But I would say and maybe there was little misunderstanding -- not the next couple of quarters I'd say it's a little bit longer term to net it's several quarters enrolling out. And the thing that I can assure you is that we're not going to roll any system out until it's ready.

Amy Junker - Robert W. Baird & Co.

Okay and then just the kind of the piece of that's potentially student facing how much is that.

Daniel Hamburger

Sure we can think of project Delta in -- if going forward here beyond the piece that we mentioned earlier in two main areas. One is the student information system, the SIS and the other is the constituent relationship management, the CRM, in some other institutes they call that customer relationship management but its similar concept.

Both of those areas have both back office you might say as well as student phasing or other constituent phasing components to them. So for example in the student information system, we tend to think of that as a back office system that helps you keep track of all your students and where they are in the program and everything like that.

There is also a self-service registration component that flows out of that and that directly is available to students and helps improve service levels, many students prefer to register themselves other than talk to anybody and we want to make that available.

So that has both in-house and customer phasing, likewise the constituent relationship management directly effects, both sides of the coin there, so it’s a big - the project is a big investment. We’re very excited about the customer service improvement, the student service improvement and the internal productivity and efficiency that we anticipate from that.

Amy Junker - Robert W. Baird & Co.

And then last question on this and then I’ll pass it on, but Rick if I recall correctly the bulk of that spend is going to show up in CapEX rather than on the PNL is that correct?

Rick Gunst

That’s correct.

Operator

Your next question comes from Sarah Gubin - Banc of America Merrill Lynch.

Sarah Gubin - Banc of America Merrill Lynch

I’m wondering if there is anything unusual in the business technology and management margins this quarter, they were much better than what we’re expecting and I guess I'm wondering if that 60% incremental margin is a good target for the rest of the year.

Richard Gunst

I don’t think there is anything unusual in the quarter, I think what's resulting in the growth rate - just with the operating leverage that we are able to obtain, given the strong enrollment results we announced in December, our retention still is very good year-over-year and the (inaudible) that we saw deteriorating a little bit has stabilized.

So all those things have added up to improving our revenue numbers and while we are still investing in operating expenses and academic quality and cost of the instruction, we’re getting a flow through and for the balance back half of the year it should be in that range, not too far distant from that.

Sarah Gubin - Banc of America Merrill Lynch

I’m wondering if you can comment on negotiated rule making proceeding them and particularly game for employment discussion and if you could talk a bit about your debt service-to-income ratio is given, is that a hot topic.

Richard Gunst

Sure Sarah, overall we see the negotiated rule making as a healthy collaborative process. We think that it’s good that there are many, many points you’ve represented there and we support that we feel honor to actually to have a representative and one of the teams and we are obviously engaged teams. So, it’s part of the normal process that the department has run for -- over the course of many, many years.

It is fluid process and we really can’t speculate, we won’t speculate on the final outcome other than to say it’s based on many years of past experience and several rounds of this and we had the benefit of Sharon Thomas Parrott’s experience at our education day. We do expect that common sense will prevail.

In terms of the debt loads and the value proposition, we feel very good about the value proposition that our students achieve at our school, it’s the right school. Like to give you an example of that.

Just consider a graduate of Chamberlain College of Nursing who would pay somewhere around $68,000 in tuition and fees leave school with debt of about $34,000 in average. Now here she would typically make about $55,000 a year and that’s starting, obviously it goes up from there, because they have excellent life long career prospects and that’s all enabled by the education that they received at Chamberlain.

So we have done an ROI, a return on education investment analysis of that and it comes out to about 28% return on educational investment over 30 year period, that is a very strong value proposition.

I don’t know about you but other than DeVry I don’t have anything in my portfolio or expect that kind of return. So some parents understand that and that that’s really what supports the value proposition of our schools.

Operator

Your next question comes from Mark Marostica - Piper Jaffray.

Mark Marostica - Piper Jaffray

Just wanted kick off Daniel, your opening remarks with the common on academic outcomes and just curious if you had the fresh data for us on placement rates.

Daniel Hamburger

Yes, I'm sorry, we don’t have fresh data but I can comment on what - we like to say career statistics so I'm going with career statistics. The job market is tough, we are continuing to invest in that area, I mentioned 150 real services advisors, one of the largest career services offices of any university that you can find and we are going to add even more on top of that but we don’t have an update.

The next update on the statistics will be on our next conference call which will be in April and that again in August when we report year end and this is a good opportunity Mark, I'm glad you raised this because I would like to give everyone heads up that, from that point forward we are going to be reporting statistics on an annual basis.

The reason is the statistics don’t really change dramatically from period to period but we spend a lot of staff time going through all of that, getting ready for that reporting. So it's not really worth it, so as an increase to staff productivity and reduces the amount the collateral materials that are produced from each locations at three times a year to one time a year.

So you'll still get an update, look for an update in April, look for another one in August and then it will be annual in August from thereafter.

Richard Gunst

Yes and just to be clear that collateral material is really within DeVry University with a need to the locations provided, and so it's really, from a school perspective, trying to make life simpler and easier for them.

Mark Marostica - Piper Jaffray

Also you mentioned that you'd be hiring some additional enrollment counts first, over the 150 I believe you said, could you give us a sense how many you'll be hiring and timing of those ads?

Richard Gunst

I don’t think it's anything that’s going to be material in your models, but we’re doing that as we speak. And I don't have a specific number for you.

Mark Marostica - Piper Jaffray

I just want to make sure I understand the year-over-year decline in other educational revenue this quarter?

Richard Gunst

Decline? No, no it was an increase.

Daniel Hamburger

Other educational services, there was an increase going -

Richard Gunst

17.1-

Mark Marostica - Piper Jaffray

I'm just looking at the P&L going from 27.6 million to 24.0 million in the income statement.

Richard Gunst

Are you talking about the line on the revenues?

Mark Marostica - Piper Jaffray

On the P&L.

Richard Gunst

That’s our fees. We changed the structure of our revenue, and when we did our tuition pricing a year ago, we reduced some of our nuisance fees and so that’s why that’s going down. And also some of the Becker materials are in that line as well, and obviously Becker is down.

Daniel Hamburger

I think the dominant factor is the shift in addition to the fees.

Richard Gunst

I thought you're talking about the segment numbers.

Mark Marostica - Piper Jaffray

No, no, no I got it. So for modeling purposes, going forward we should be kind of looking at this new, I guess, other ad as a percentage of net revenue as a guidepost going forward?

Richard Gunst

Yes, I guess I would look at the total revenues as the way to best manage that.

Mark Marostica - Piper Jaffray

Okay, I understand. Thank you.

Operator

Your next question comes from Jeff Silber - BMO Capital Markets.

Jeff Silber - BMO Capital Markets

I wanted to focus on the business management and technology area. There was a report released last week by the higher education research institute where they are seeing a slow down in the number of freshmen that are choosing to go into business.

I know that they focus mostly on traditional schools, but I am just wondering, are you seeing any of that in either your under graduate classes or your graduate classes?

Richard Gunst

No Jeff, we are not. We are seeing strong interest in business programs and I am seeing that at the bachelors and the master's degree level. I'm just trying to think if there is any other color I can give you. No, we are not seeing that at all.

Jeff Silber - BMO Capital Markets

That is good to hear. I just wanted to double check. Just to shift gears, to focus on another regulatory issues, this will be cohort default rate. I know next month you will be getting your cohort default rates for fiscal year '08, but you probably have some indication how those are turning out. I am just wondering if you can comment on that.

Richard Gunst

No, we really can’t. I don’t have any color to give you there. I think we are planning to release those when they are final. So, that has always been the tradition and we have invested the right thing.

The number should be recorded when they are numbers, when they are final. And in recent times, for various reasons, maybe that tradition or something about a part of that tradition, but I think you are going to see people get back to that tradition unless there is some specific reason or something - organizationally specific reason why somebody feels compelled to do that, you should expect to see all the schools report that with their final numbers.

Jeff Silber - BMO Capital Markets

Just one quick numbers question, I guess for Rick. I know the tax rate has been moving up because you have seen more of a shift towards your domestic income. Should we be seeing that continuing over the next few quarters or have you kind of aniversaried the major aspects of that shift?

Richard Gunst

Well, the rate that we have implicit in our year-to-date results, of just under 33%, it should be a good barometer of what it should be for the full fiscal year at this point. That’s how we try and estimate it.

And then as we go forward, it is just again, how big of a growth factor do we see in the profits in the Business Technology and Management segment, within Professional Education and within the domestic pieces of Medical and Healthcare relative to our University.

And so as that shifts more domestic, that would continue to inch that tax rate up a little bit over time.

Operator

Your next question comes from Jerry Herman - Stifel Nicolaus & Company, Inc.

Jerry Herman - Stifel Nicolaus & Company, Inc.

Good afternoon everybody. First question is actually about NegReg, but actually the other team, the Foreign Medical Schools team, is there any thing that came out of that language or out of those sessions that you think will affect your business in any way or the competition?

And then, maybe just as part of that, is there anything changing or different on the competitive landscape for Ross?

Daniel Hamburger

Yes, in terms of the negotiator rule making sessions, and again, we were honored to have Dr. Nancy Perry as one of the team members. When it’s in flux, there is nothing to really comment on. So, we won’t.

And in terms of increased competition, no, we really have not seen significant levels of new competition. Ross University School of Medicine is now inviting more new positions to the United States residency system than any other school.

By the way this past year we vaulted to the number one ranking for African-American physician, number three ranking for Hispanic American physician, number one ranking for Primary Care physician.

So clearly there is a need and we are hoping to fulfill that need but the level of competition is certainly there, plenty of competition we’ll see material change in that competitive dynamic.

Jerry Herman - Stifel Nicolaus & Company, Inc.

And then one for Rick. It's about margins, Rick. Usually your third quarter margins are bit higher than your second quarter margins. The second quarter margins were pretty high but I guess there is also some influences on the business i.e, Fanor and some others. Is it fair to assume that sequentially margins will be better in the third versus second?

Richard M. Gunst

I guess I characterize it, usually the first and the fourth quarter margins are little bit lower than the second and the third. So my expectation would be that our margins in the third quarter shouldn’t that to somewhere from what we had this quarter then they should go down in the fourth quarter.

Operator

Your next question comes from Andrew Steinerman - J.P. Morgan.

Andrew Steinerman - J.P. Morgan

My question is about persistence, GDU's persistence (inaudible) was up quite a bit. Could you talk about the sustainability of persistence and opportunity for increasing persistence?

Daniel Hamburger

Yes, we are very focused on that across all our schools including DeVry University to mention. And there are things that we do inside the classroom and there are things we do outside the classroom.

And you can have the greatest curriculum in the world and the greatest professors in the world, and we certainly think very highly of our curriculum and of our professors, but if you have that, and you don’t have the supporting student services to surround the classroom, to support the student then especially with working adult student or other non traditional student in the same deposit, you need both in order to support those students and help them to succeed and persist and graduate.

And that’s why we are investing in areas like Student Central, which provides the kind of support services in a very clear, easy to access kind of format for our students, and many others sorts of curriculum changes and academic changes as well to keep that focus.

So when we talk about investment, this is one of the most important areas that we are constantly looking for ideas from our professors and from our service people. Give us ideas, give us projects so we can pile up the capacity of investing, those are the highest return projects that we can invest in. So those are the kinds of things that we are doing to keep looking on persistence.

Andrew Steinerman - J.P. Morgan

Dave, could you talk about some of that quantitatively? I’m asking persistence was up significantly year-over-year in DBU, I’m asking can is there anything unusual about the elevation? Do you think you can continue to improve on this? Will DBU's persistence continue to rise near term and intermediate term?

Daniel Hamburger

That certainly our goal, is that the persistence can continue to rise, but I don’t have specific numbers to give you Andrew, but yes that is our goal that persistence can and that is our goal that it will continue to rise.

Andrew Steinerman - J.P. Morgan

And do you think labor markets when they approve will be a head win to precessions?

Daniel Hamburger

It could be but I don't think that so much shows that we won't be able to continue to grow the enrollments at our universities and that's why a sort of provided that example and it's just the example that I have from a very strong period of the 90s even though the unemployment rate might down the economy not stronger we were still able to continue to grow our enrollment.

Andrew Steinerman - J.P. Morgan

Now it sounds like you're pretty confident on the direction of precessions.

Daniel Hamburger

Yes.

Operator

Your next question comes from Ariel Sokol - Wedbush.

Ariel Sokol - Wedbush

So a question regarding acquisitions, you paid down debt in the quarter and it looks like you're almost done with the last one. So couple of questions, one, what does the pipeline look regarding future acquisitions.

And how may have it changed over the past couple months and two the regulatory environment and perhaps (inaudible) employment variable for either you as the buyer or alternatively is it a variable for potential sellers that you're having conversations with?

Richard Gunst

We're certainly looking at acquisitions all the time and we have a very strong, we feel like we built over the last couple of years of very, very strong function there of internal resources and external resources to assess potential mergers, acquisition to do very, very thorough due diligence and then to apply very focused acquisition integration once the school becomes part of the DeVry family.

And so we feel very good about those resources and our track record in this regard and we continued to look for acquisitions in the future one of the things that I've commented on recently on Education Day was to get education they would - over the last couple of years, we are sort of building the framework for the house and now we’ve largely built that with the focus that we’re shifting a little more to kind of filling in the framework that we built.

So those are the kinds of acquisitions that we might see. So continued filling out of the international framework, continued filling out at the pre baccalaureate level and those kinds of things.

In terms of an impact from the current discussions that are going on and negotiating room making process, I can’t say that I’ve seen that have a significant impact one way or the other in our review of potential acquisitions.

Operator

Your next question comes from Trace Urdan - Signal Hill

Trace Urdan - Signal Hill

Thanks guys. Daniel you used the Chamberlain example and I'm returning to this because you kind of opened the door here, but you used the Chamberlain example which is a terrific example, it comes well underneath the 3% threshold that the department is talking about, but normally what you talk to us about is the $45,000 that is earned by the DeVry graduates which would fail to meet that threshold.

So I'm wondering what do you do with that example or how you think about that or do you think - when you make the statement that you think common sense will prevail, is it your feeling that the criterion here will move to accommodate schools like DeVry?

Daniel Hamburger

Essentially yes, we think common sense will prevail and DeVry University started in 1931 approaching its 80th anniversary, I don’t think its going to suddenly go out of business in its 81st year whatever. I don’t think that there is going to be a problem.

Trace Urdan - Signal Hill

Could you share with us maybe what the lifetime cohort default rate looks like for DeVry?

Daniel Hamburger

Lifetime, no we don’t have figures like that to share.

Trace Urdan - Signal Hill

Do you know offhand what is -- including deferment in the cohort default rate does, to the numbers maybe without getting specific, but just order of magnitude?

Daniel Hamburger

Yeah, well I think we have given information recently in the last couple of months that, so people have seen that and there is the nucleus certainly when you go from two years to three years.

But none of our institutions does that trip any wires or create a major problem. It’s something that we are concerned about, it’s something that we are actively working, with students, with lenders to ensure that we educate students and parents on their responsibilities.

These are the kinds of activities that have proven over time to help improve the performance and repaying those financial obligations and thereby reducing default rate. So we’ll continue to manage that. But, I want to be very clear to everybody that there is nothing sort of trip the wire or anything like that.

Trace Urdan - Signal Hill

I mean to not to press this point too much, but looking at those three year numbers which have not (Audio gap) like that that can help students, with the help of the students and yes I think that would probably be a positive. In your weight or size or percentage of your students that could avoid defaults through income based repayment program.

Daniel Hamburger

Not of the top of my head, sorry I just don’t have a number to give you at the top of my head.

Operator

Your next question comes from Corey Greendale - First Analysis.

Corey Greendale - First Analysis

Wanted to start with the question of I would have be in the first run out of (inaudible) five years ago which is just how, how enrollments went in the fall start for the younger high school population versus the working it out students.

Daniel Hamburger

We are - in terms of our high school and I got to thank you for that question, thank you for brining us back to just talking about students and education, it is refreshing.

I would say that as an overarching point on that Corey, we do feel very good about lieu like the traditional, out of high school traditional college age student segment and we like the working it out segment and we clearly like the fact that our strategy encompasses offering from services to both of those overall segment of students and we find a lot of synergy and a lot of benefit in having programs that responds to the needs of both those segments, not just one or the other.

We are actually investing and focusing even more of the weight on the high school segments and we expect to see synergies from our K-12 program at Advanced Academics in fact is helping that.

And also the fact that we run high school recruiting program, high school educational program at not just DeVry University but also at Chamberlain College of Nursing, and at Apollo College, and Western Career College that really are additive to the whole.

So we feel good about the high school program, and I think we'll see continued improvements there. And Rick you want to add anything to the high school question?

Richard Gunst

Yes, I guess, the only thing I would add is when you look at your enrollment growth, like we just closed back in December, we've seen a nice balance in the growth rates between onsite and online.

If you go back five years, you would have seen onsite actually experiencing some declines and online really driving some of the growth. Whereas now, given our best of both philosophies, we’re seeing growth both in online and onsite in pretty equal proportions.

Corey Greendale - First Analysis

And is online still primarily a working adult model or is it the younger traditional student, that is getting online as well now?

Richard Gunst

It's still primarily the working adult but increasingly the traditional college age student coming out of high school is taking online courses, so it's really a mix and match. And I think that’s really the best of both, online and onsite is where the market is going. That’s where the demand from students is going.

And we've been saying that for over 10 years. That’s why we've never separated the online and the onsite, we never gave separate numbers. We've always talked about it in terms of total online course takers and it's for that very reason.

So that’s the dynamic that we’re seeing.

Corey Greendale - First Analysis

At the education day, you talked about long-term targets for each of the segments and could you just put that in perspective? Obviously you're well above the targets particularly in the business technology and management segment.

Will the goal be to meet those targets year in and year out or would you consider the victory as the compound annual growth rate ends up being at those levels in the year-for-year below that rate compounded over this year when you are going to move (inaudible) rate?

Richard Gunst

I guess I would say that the success for having this year, the strong results are going to have us exceed the goal in fiscal 10, I don’t think would lead us to believe that we would then be below that for the next couple of years to average it out, if that’s what your asking, I think we feel good about being able to deliver roughly 20% earnings growth going forward after this year as the base.

Daniel Hamburger

Yeah, so we challenge ourselves to continue that even though we set a higher bargain like that.

Operator

And your next question comes from Scott Schneeberger - Oppenheimer.

Scott Schneeberger - Oppenheimer

Thanks and congratulations on your quarter. The first question I have is last quarter there was a lot of talk of real nice margins and there was talk about some branding and marketing spend that was delayed in the first quarter.

And I think its already being covered in the Q&A today that your looking for comparable margins, 3Q versus 2Q, but could we go down to the lead a little bit, can you talk about some of the investments that you are making currently including marketing?

Richard Gunst

Sure I'm going to start and Daniel is going to add to it, but the investments, when we talk investments, we are talking both spending as expense and spending that is capitalized, capital spend we talked about the project deltas I think a piece of that along with spending within DeVry University for makeovers and expansion and some real estate optimization activities, expansion at Chamberlain, expansion at U.S. Education.

The types of things that hit expenses are in the areas of academic quality, brand quality, and just growth initiatives. Academic quality will be things like our students central rollout since the (inaudible) behind the career services advisors that Daniel mentioned or more student services to work with student throughout the time they - when they first enroll to they graduate.

Brand quality in terms of the things that Daniel mentioned on Keller awareness and we launched initiatives at certain locations to really get some resurgence in locations that, maybe need a little jumpstart.

And then growth and adding more admissions advisors in (inaudible) for example, the more we grow, we need people that can work with the students advising them upfront. So, those are the types of things that we’re investing in.

Scott Schneeberger - Oppenheimer

Fair to say, Daniel mentioned earlier that you have really been investing a lot in the past couple of years and people would mention that you are not showing the, perhaps some of the margin expansion that others had seen and certainly putting that up now. So, is it a nice measured pace now or could there potentially be some more impetus going forward?

Richard Gunst

Well, we’re always going to take advantage of opportunities. We’re not going to be shy for making investments in academic quality or other quality initiatives we would think that is wanted. So, could there be some more impetus? Without a doubt. We’re not managing this for the quarter, we’re managing this for the long term.

But, I think we have proven in field that as we make these investments, that they will pay out over the long-term. And so, when you look at it on a year-to-year basis, we think it, again, should be pretty consistent in terms of our 20% earnings growth on a compound annual basis.

Scott Schneeberger - Oppenheimer

You guys did a nice job of talking ahead of time about seasonality in the first half of the fiscal year with regard to the other educational services segment. Anything to look out for in the second half there?

Richard Gunst

If I recall, the third quarter is going to be pretty close to what we saw in the second quarter, the revenue continued to build. But then in the fourth quarter you do have I think June (inaudible) some weeks where we don’t have class. So you end up having the revenue not being large in the fourth quarter because of that Advanced Academics for example, high school ending in early June.

Operator

Your next question comes from Gary Bisbee - Barclays.

Gary Bisbee - Barclays

Can you give us any sense how as we think about the huge margin expense in the Ruy University segment, how much of that over the last few years has been driven by mixed shift ingrowth your online business and secondly how much of that has been driven by the full concept of the co-located schools, I think it's a company expense, paying some rent expense or other payments to that segment to use those facilities?

Daniel Hamburger

Well, I'll give it a short here. Rick. I'm certain they have more color but I would say that the biggest drivers (inaudible). In terms of mixed shift, I think that slow down as a percentage over the last little while relative to what it's been a couple of years ago. Co-locations are a wonderful strategy.

They are paying off in excess of our expectations and so we continue to look for those opportunities. I just mentioned four Chamberlain co-locations here in the period of about a year and we are also looking at Apollo College and Western Career College opportunities to co-locate with Chamberlain and with DeVry University. So all of those have been good factors.

Richard Gunst

Yes and I would just say that all lines have got good, attractive incremental margins by the nature of online, but onsite given where we are today as we either through the co-locations utilizing the facility or through the strong enrollment results we’ve had, where you have students sit in empty chairs that are within facilities a bit more than is already existing that leads to that strong incremental flow through that we’ve been experiencing here short-term. And we still have the available capacity as we go forward, so for the not too distant future we should continue to see good leverage.

Gary Bisbee - Barclays

And when you laid out the long-term plans at your investor today, it seem to include not only moderate pricing growth for this segment but also clearly the expectation of some moderate leverage as you grow with it.

Can you give us any sense as to what the upper balance might be? Obviously today with the terrific growth, it seems like it has been pretty easy the last couple of years. But it’s got to be getting somewhat tougher particularly if one expects enrollments to slow down maybe in fiscal '11 or '12 towards that long-term target, I guess are you comfortable with all the leverage as you see them that you can continue to get over the next several years listed on this fiscal year?

Richard Gunst

Sure Gary I would say that, we’ve been working pretty hard even the last couple of years and our people have worked incredibly hard, and really these results are a testament to the team's hard work.

And if we continue to do that and keep the focus on our students and their academic success, we really don’t see any reason that we can’t continue to achieve the targets that we’ve laid out, Investor Day and at Education Day.

And while there maybe something that get a little bit harder. There are some other things that we haven’t really even pulled the lever on it. And the earlier question that Amy asked about Project Delta is an example of that.

We’re investing in this new system for a reason, better service and better productivity for our students and that hasn't, haven’t ruled out yet, so we will expect that to be a lever. We're certainly gearing up and looking for other ways to be more efficient and more effective in many areas throughout the operations.

So and that, that’s sort of the nature of management. We’re always finding, you pursue this particular initiative and that kind of maybe ran its course but it continues to payoff for you and then you move on to the next one and we see plenty of opportunities here to keep a good thing going.

Gary Bisbee - Barclays

I think you mentioned earlier you might do some more actual branding work with Keller and I know that something that got mentioned a couple of times at the Investor Day larger percent of your ad spend on branding.

Can you give us a sense as to what type of format are you talking television commercials like we've seen a couple of your online competitors doing or how are you thinking about more time on branding?

Richard Gunst

Sure and we like to, instead of using that word we're trying to use the word identity and so that's really what I was talking about. Yes we’re building the identity, building the awareness of Keller.

One of the things I think we talked about back at the Education Day was, on the Under Graduate side DeVry University has quite a high awareness and we need to work on its consideration. Whereas Keller specifically the Graduate School of DeVry University has when you know about it it’s very high consideration it’s just none of the people know about, so we need to increase the awareness.

So that's the strategy there. In terms of some of the tools that we’d use to increase that awareness and identity, we would use a very -- not a lot of new inventions under the sun here, we'd use the same sort of identity building activities that traditional universities you might see billboards or televisions ads or online ad.

Certainly the social media, social marketing is a newer area and we are very well versed in the opportunities there. So those are all of the kinds of opportunities that we have, one opportunity we don't have that some of the judicial have of big time sports team we can't pull that lever real hard but pretty much everything else you'll see us doing.

Gary Bisbee - Barclays

Well Phoenix named a football stadium so I suppose you could always try and do that but anyway thanks.

Richard Gunst

Not going happen, thanks. Okay listen, thanks everyone for your questions and our next conference call which is April 22nd we will be reporting the third quarter financial results and the spring enrollment number. So I really like to thank everyone on this call for your continued support of DeVry. Thanks very much have a great afternoon.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. And at this time this concludes the presentation. You may now disconnect. Have yourselves a wonderful day or evening.

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