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ITT Educational Services, Inc. (NYSE:ESI)

Q4 2011 Earnings Call

January 26, 2012 11:00 AM ET

Executives

Kevin Modany - CEO and Chairman

Dan Fitzpatrick - EVP and CFO

Analysts

Kelly Flynn - Credit Suisse

Suzi Stein - Morgan Stanley

Jerry Herman - Stifel Nicolaus

Brandon Dobell - William Blair

Corey Greendale - First Analysis

Trace Urdan - Wunderlich Securities

Sara Gubins - Bank of America/Merrill Lynch

Gary Bisbee - Barclays Capital

Andrew Steinerman - JPMorgan

James Samford - Citigroup

Paul Ginocchio - Deutsche Bank

Peter Appert - Piper Jaffray

Jack Miller - Robert W. Baird & Company

Operator

Greetings, ladies and gentlemen, and welcome to the ITT Educational Services 2011 Fourth Quarter and Year-end Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

Joining us today from the management of ITT Educational Services, we have Kevin Modany, Chief Executive Officer and Chairman, and Dan Fitzpatrick, Executive Vice President and Chief Financial Officer.

Before we begin, ITT Educational Services Incorporated wishes to remind you this conference call may include forward-looking information. Actual results may differ from the information presented during this call. For additional information, please review the section on forward-looking information contained in today's news releases or in the company's public filings with the Securities and Exchange Commission.

Thank you. Mr. Modany, you may begin.

Kevin Modany

Thank you, operator. Good morning, ladies and gentleman. Thank you for joining us on our conference call to review our 2011 fourth quarter results. On the call with me this morning is our Executive VP and Chief Financial Officer, Dan Fitzpatrick. For our prepared remarks today, we will follow our standard format and limit our comments as to allot more time for your questions during the Q&A session.

We'll start the call with an overview of the fourth quarter marketing and advertising results. From there, we'll provide a few comments regarding the new student enrollment results in the fourth quarter of 2011 that we reported this morning. We will then review student retention and persistence results in the 2011 fourth quarter. At that point, we'll provide an update on the graduate employment metrics of our 2011 graduates. I will then provide an update on the execution of our strategic plan. Before, I turn it over to Dan, I'll discuss our efforts to facilitate additional private financing options for our students. Dan will then provide more insight on the financial results reported in this morning's press release. I'll then give a brief update on the federal student loan default prevention efforts and the related impact on our cohort default rates. And lastly Dan will discuss our share repurchase activity in the fourth quarter and the full-year of 2011. At that point, we will open up the call for your questions.

Let me begin by providing review of our 2011 fourth quarter marketing and advertising efforts. Advertising expenditures increased 9.7% in the fourth quarter of 2011 compared to the same period in the prior year. This was below our planned increase of 15% to 20% primarily due to our transition away from low-cost low-converting media sources and higher costs traditional media outlets to alternative media sources that generate higher rates of return.

Reallocation of media expenditures resulted in a reduction in the number of prospective student increase received in the fourth quarter 2011 compared to the same period in the prior year. However, we experienced an increase in the rate of which prospective student increase converted to new students in 2011 fourth quarter compared to the same prior year period.

As of December 31, 2011, we had 22% fewer admission representatives than we had at the same date in the prior year. However, the productivity of the recruitment staff increased during the fourth quarter of 2011 compared to the same period in the prior year.

We do not believe that the number of our admissions representatives at the end of 2012 will be materially higher compared to the end of 2011. For the second consecutive quarter as a result of self-directed changes to program offerings at select campuses, we experienced a more mature year-over-year decline in new student enrollment in the criminal justice programs in the fourth quarter compared to new student enrollment and other curricula.

The year-over-year decline in new student enrollment in the school of criminal justice represented approximately 80% of the year-over-year decline in total student enrollment for the quarter. The combination of the events I just described led to the 14.7% decrease in new student enrollment in the fourth quarter of 2011 compared to the same period in the prior year.

Moving onto a discussion of student persistence, the 270 basis points decline in our persistence rate as of December 31st, 2011 compared to the same date in 2010 was primarily due to an anticipated increase in the number of graduates in the fourth quarter of 2011 compared to the same academic period in 2010. The number of graduates in the three months ended December 31, 2011 increased approximately 20% compared to the same three-month period in the prior year. Student retention in the academic period that concluded in December 2011 was substantially similar to the student retention in the academic period that concluded in December 2010.

Now, a quick update on our graduate employment metrics. Our graduate employment rate continues to be impacted by the slow economy and the high unemployment rate. However, we continue to see signs of modest improvement. The graduate employment rate of our 2011 employable graduates as of January 24, 2012 was approximately 580 basis points higher than the graduate employment rate of our 2010 employable graduates as of the same date in 2011.

The average annual salary reported by our 2011 employed graduates as of January 24, was approximately 1% higher than the average annual salary reported by our 2010 employed graduates as of that same date in 2011. We remain cautiously optimistic about the progress we are making with our graduate employment rate, but we recognize that we have much work to do.

Updating our geographic expansion efforts, we began operations at five new ITT technical institutes in the fourth quarter of 2011 in Deerfield Beach, Florida, our second location in Grand Rapids, Michigan, Salem, Oregon, Overland Park, Kansas and our second location in Indianapolis, Indiana. As a result of opening our second location in Indianapolis, we discontinued operations at our Greenwood, Indiana learning site in the fourth quarter of 2011. Four of the five new locations obtained the requisite regulatory authorizations and time to enroll students for the academic period that began in December 2011.

DDSM for the contributions to our new student enrollment from our geographic expansion efforts, we have 10 more locations enrolling new students in the fourth quarter of 2011 and in the fourth quarter of 2010. Turning to new campuses that began operations in the fourth quarter of 2011, we had a total of 141 campuses and three learning sites in operation as of December 31, 2011. Our internal goal is to begin operations at 8 to 10 new locations in 2012, pending receipt of all of the requisite regulatory authorizations.

We continue to evaluate additional program offerings that offer the potential for attractive returns on investment for future graduates. We have several programs at study and various stages of research and development. Our future programmatic expansion efforts will likely be focused on academic offerings in technology and healthcare related disciplines that we believe offer an opportunity for a solid return on investment for our graduates.

We are teaching a set of new programs at 99 ITT Technical Institute locations in the academic quarter that began in September 2011. These new programs are at both the associate and bachelor degree levels and involve a modified delivery format, which reduces the amount of time required for a full-time student to graduate. In addition, the associate degree programs are comprised of few credit-offs, which reduces the total tuition cost of the program by approximately 6%.

Thus far we have obtained approximately 85% of the necessary regulatory authorization to offer one or more of these new programs at all of the ITT Technical Institute locations, I believe that we are on track with our planned implementation and rollout of these new programs.

An additional 12 locations began teaching one or more of the new programs in the academic period that began in December 2011 bringing to 111, the total number of locations teaching the new programs. We believe that the majority of the remaining 30 locations will begin teaching the new programs in an academic period that begins in 2012.

In early January 2012, Daniel Webster College received approval from the New England Association of Schools and Colleges to offer online masters, bachelor, and associate degree programs in business administration. We hope to begin teaching our first class of new students in these newly approved programs during the first half of 2012. There were no other material developments in any of the key elements of our strategic plan during the fourth quarter of 2011.

Our 2012 internal EPS goal is in the range of $7.50 to $8.50 and was based on the following assumptions, no tuition increases, no additional share repurchases, and no additional private student lending options. We currently have approximately 5.8 million shares remaining in our share repurchase authorization. We expect to repurchase additional shares of our common stock in the future depending on market conditions and other considerations.

We continue to have discussions regarding the development of additional private education loan programs to make available to our students, help to meet their gap financing needs. Given the volatility of the debt markets however, we cannot predict this time when any additional private education loan programs will be made available to our students. We will adjust our 2012 EPS goal accordingly on a quarterly basis depending on any changes that occur each quarter.

At this point, I'd like to turn the call over to Dan, who will provide an update on a few financial matters.

Dan Fitzpatrick

Thanks Kevin. I have a few brief comments before we open the line for questions. First I'd like to touch up on some of the key financial results in the fourth quarter of 2011. Revenue per student was down 20 basis points in the three months ended December 31, 2011 compared to the same period in the prior year as the amount of scholarships and other awards received by our students in the fourth quarter of 2011 increased to the same period over the prior year.

In the 12 months ended December 31, 2011 our students received approximately 87 million in scholarships and awards compared to 59 million in 2010. The decrease in revenue per student was offset somewhat by initial impact to the rollout of the new programs at a portion of our schools as Kevin had previously mentioned.

The courses in the new program offerings are 4.5 credit hours compared to the 4 credit-hour courses in the old program offerings. The additional one-half credit hour per course results in an earlier recognition of tuition revenue over the duration of the program of study.

Day sales outstanding decreased 3.5 days to 12 days as of December 31, 2011 compared to 15.5 days as of the same date in 2010. The decrease was primarily due to an increase in the amount of funds received from the private education loans available to our students in 2011, and an increase in the amount of scholarships and other awards received by our students in 2011.

In the fourth quarter of 2011, we received approximately 31.8 million of net disbursement of private education loans made to our students. Bad debt expense as a percentage of revenue increased 10 basis points to 4.7% in the three months ended December 31, 2011 compared to 4.6% in the same period in 2010.

At this point, I would like to provide an update on our default prevention efforts as they relate to students cohort default rates on the federal student loans. As a reminder, the US Department of Education, previously reported the official two-year cohort default rates for the 2009 federal fiscal year and it is expected to make available to post-secondary institutions their preliminary three-year cohort default rate for 2009 and the preliminary two-year cohort default rate for the 2010 federal fiscal year in February 2012.

All ITT Technical Institutes combined; the average two-year cohort default rate for the 2009 federal fiscal year was reported at 22.3%. We believe that the average preliminary 2010 cohort default rate for all ITT Technical Institutes combined will be in the range of 17 to 19% and the average preliminary 2009 three-year cohort default rate for all ITT Technical Institutes combined will be in the range of 34 to 36%.

In our January 2011 earnings call, we said that we believe that there may have been significant disruptions with respect to the put loans which are the federal student loans made under the old federal family education loan program that the department purchased from vendors.

We stated that we believe that the servicing disruptions may have had a significant impact on the two-year cohort default rates for the 2009 federal fiscal year. We subsequently noted that we believe that these same servicing disruptions could negatively impact our cohort default rates for the 2010 federal fiscal year and we now believe that they could have a similar impact on our cohort default rates for 2011 and 2012.

Institutions can appeal their cohort default rates on a variety of grounds including loan servicing. We appealed our official two-year cohort default rates for 2009 federal fiscal year in the fourth quarter of 2011 on the grounds that the put loans included in that cohort weren't properly serviced. At this point, we have not received the department's determination with respect to our appeal. But based upon the information we received in services at the put loans as part of the appeal process, we believe that the ITT Technical Institutes average official two-year cohort default rates for the 2009 federal fiscal year should drop from 22.3% to somewhere between 13.8 and 19.0%. If the loans are included in both the two and three-year, cohort default rates for the federal fiscal year 2009, we believe that exclusion of improperly serviced loans were resolved in a lower three-year cohort default rate for 2009.

As a result, we intend to file a loan servicing appeals over the 2009, three-year cohort default rate for ITT Technical Institutes. In addition, we intend to file loan servicing appeals for our cohort default rates for federal fiscal years '10, '11 and possibly '12.

Moving on to an update of our share repurchase activity, we repurchased 570,000 shares of our common stock in the fourth quarter for approximately 34.6 million on an average price of $60.71 per share. For the twelve months ended December 31, 2011, we repurchased approximately 4 million shares of our common stock for approximately $283 million on an average price of $69.98 per share.

With that, I would like to hand the call back over to Kevin.

Kevin Modany

Thanks, Dan. This concludes our prepared remarks. Operator, if you would please open the line for the questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. We ask that you please limit yourself to one question and one follow-up question. (Operator Instructions).

Our first question comes from Kelly Flynn of Credit Suisse. Please go ahead.

Kelly Flynn - Credit Suisse

First, so I wanted to follow-up on what you said about criminal justice basically, can you just qualitatively describe what's going on there? I mean why that's so weak? And then I know you said it accounted for 80% of the decline, but was that, I missed, was that total enrollment or starts? And then related to that do you think the starts decline should improve next quarter and just going forward in general? Thanks.

Kevin Modany

Sure. You are taking advantage of the lead of spot, Kelly. I'll see what I can do about these three questions. First, I believe was qualitatively, we'll talk a little bit about CJ and what's going on there and the 80% trying to sort of qualify that or give more color on that with regard to whether it was new student or starts.

On the CJ front, we talked a little bit about this in the last call and it's really not a material difference for us. We're constantly looking at student outcomes, salaries, EPG and we have internal expectations for those that we said based on the ROI calculation that we do for our students in terms of their investment in the tuition, expected increase in earnings over lifetime and a sort of hurdle rate ROI that we calculate.

And for several of our campuses, we are not seeing that required hurdle rate when we do the ROI calculation for those individual locations. So, we put some caps on that until we can get our student outcomes to where we want them to be.

As a result of doing that, we're seeing that's limiting the amount of new student enrollment that we are seeing in terms of the School of Criminal Justice. So, when I talk about 80% of the year-over-year variance being a result of lower enrollment, I was talking about new students. I'm talking about new students for this December, academic period, that we are reporting, and again 80% of the variant can be attributed to changes on a criminal justice front.

And then last, I think you were looking for a little bit of projection in terms of what we are thinking about new enrollment, what it's looking like for future periods? Still, we are looking like second-half of the year. I don't think we are going to see any increase over prior year and this upcoming quarter and I want to stop short of trying to get any kind of short-term guidance on enrollment, but probably one thing that I would encourage people to do is – may be take a look at like two-year comps, that's always been a pretty good parameter for us when you kind of look at last two years that we are combing on, add those together, see what that shows you in terms of the difficulty of the comp and I think what you will see there when you do that, that the second-half presents us with an opportunity maybe for an inflection point.

Then, I would just add to that. We are still in the midst of changing the marketing mix and reallocating dollars there and we haven't settled in on a sweet spot yet. We are cautiously optimistic though with what we are seeing, but we need a little more time to know for sure that the reallocation of dollars from traditional media sources and some of the lower converting media sources to some of these other alternative sources is going to generate the kind of rate of return we think it will.

So, as that played itself out, as we work our way through the second-half of the year to where the comps are little easier, quite frankly, it looks like the inflection point will occur there, and that's consistent with what we have been saying, but I just provided a little more color for you.

Operator

Our next question comes from Suzi Stein of Morgan Stanley. Please go ahead.

Suzi Stein - Morgan Stanley

Hi, can you just give a little more detail on how you are dealing with gap and funding given that you don't have a more permanent loan structure in place?

Kevin Modany

Sure. At this point in time, we are still doing everything off the balance sheet. So, let me give an update in terms of discussions and what's happening there and wind the clock back just a bit. In Q3, Q4, we were having those kinds of conversations as we had reported at that time, but quite frankly the debt markets were such that the spreads were a little wider than we had liked and they were widening as we went into Q4. So, it's just really wasn't a good time to be attempting to secure financing on any front quite frankly.

As the New Year began and then we've kind of started paying attention again to the debt market and see what was happening there. We are starting to see those spreads tighten a little bit. I think we're seeing other indications of where we think rates will be. The Fed made an announcement yesterday saying that rates are probably locked at these low levels up to 2014.

So, what that means is we're likely to see spreads tightening it again, that's a positive indicator for us. Likewise, as we see that happening, folks are coming back to the table and now we're having some constructive conversations right now. I don't know what that will lead to, but at least we're getting back into the Ball Park of where we need to be when we are having these conversations. So, I think positive progress there.

In the interim, we use the balance sheet, we've done it before during these transition periods, but we're cautiously optimistic about the opportunities there given what's happening in the general debt market.

Operator

Our next question comes from Jerry Herman of Stifel Nicolaus. Please go ahead.

Jerry Herman - Stifel Nicolaus

Just a sort of a follow-up to that Kevin, maybe you could talk about private loans and in your guidance you haven't really given much detail on what makes up the 750 to 850 in part because of lack of information on private loans, but let's say you get it, let's say you get private loans, can you just talk to how that will sort of push and pull on the P&L on the balance sheet? We are getting lot of questions on that.

Kevin Modany

Sure. Well, certainly Jerry, I know you understand, certainly we have a positive impact on the cash flow. We've targeted that in the range of probably around $100 million and just in terms of cash flow with and without, that's the variance that we're looking at. In terms of P&L that probably has a little bit of upside to it, quite frankly and we're not quantifying that at this point. But, there is probably a little bit upside if we get the private lending in. and then of course likewise talking about the impacts on the cash flow, the balance sheet obviously will be impacted accordingly where we won't see that built into DSO that will occur without. So, with and without is about $100 million variance. You're going to be pretty close there and then some upside on the EPS and then I'll just talk back to my comments. We're having some pretty good constructive conversations right now.

Operator

Our next question comes from Brandon Dobell of William Blair. Please go ahead.

Brandon Dobell - William Blair

Kevin in the past couple of quarters, you've given a little more color on, I guess, show rate variances or drivers as well as I guess taking a look at the whole enrolment supply chain, how different parts i.e., inquiry flow conversion rates those kind of things are starting to trend. I was wondering if you can give us a little more color from that perspective as well. Thanks.

Kevin Modany

Sure. Right now if you just take a step back and look at it from a macro perspective and you look at the inquiries and you look at conversions all the way to new student enrollments, we're seeing an uptick there. So, the conversion inquiry to start is up over the prior year. A lot of that has to do with allocation of the media dollars and we're, as I mentioned in the prepared comments, moving away from those large volume lower converting increase because it's fairly inefficient to do that. We've got a staff for that and we've got a service, I think you put all that volume to your systems. So, we're trying to really focus on the rate of return.

If I break it down inside of that and there is various parts moving around, but if we look at just inquiry to student applications that part of it is up. If we look at applications to start, we're still seeing degradation in the show rate there on a year-over-year basis. So, overall positive as it relates to the reallocation of dollars. Inside of those buckets not too much of a difference from what we've been seeing over the last couple of quarters.

Operator

Our next question comes from Corey Greendale of First Analysis. Please go ahead.

Corey Greendale - First Analysis

First of all, Kevin, you sort of answered this question already but when Kelly asked her question, but I think I heard something different in your response there from what you said at the beginning of the call, I just want to clarify, the criminal justice change, did you say that it accounts for 80% of the difference in new students or total enrollment? And the second part of that is when was that, was there a specific time when that change was implemented, but we can look for that to start anniversary?

Kevin Modany

It was new students for the current quarter and we started making these changes in the last quarter. So, if you noticed in my prepared comments, I said for the second consequent quarter. So, we've got another two quarters that's kind of wash out a little bit and we're taking that into consideration as we try to look forward to see what we might expect from a new student enrollment perspective.

Operator

Our next question comes from Trace Urdan of Wunderlich Securities. Please go ahead.

Trace Urdan - Wunderlich Securities

Would you all expect in having these conversations with prospective new third party lenders that they would have the expectation of being able to see what the performance of PEAKS I has been? As you think about prospective terms, would you anticipate there would be any implications for PEAKS I resulting from a PEAKS II deal?

Kevin Modany

Yes, to the first part. No, to the second part.

Dan Fitzpatrick

Yes, Trace one thing to keep in mind too as far as the performance on the PEAKS loans to-date, the vast majority of those loans are just students who are still in school. There is not like there is a whole lot of information there, but nonetheless they would certainly be wanting to see that.

Operator

Our next question comes from Sara Gubins of Bank of America/Merrill Lynch. Please go ahead.

Sara Gubins - Bank of America/Merrill Lynch

Going back to student starts, do you think that the decline should get worse before they get better, given the changes that you are making to criminal justice and other areas? And then also persistence, I know it's a function of both graduations and retention, on average it was about, down about 200 basis points in 2011. In that about the right rate that we should think of circling down in 2012? Thank you.

Kevin Modany

Sure. In terms of run rate on new student enrollment, does it get worse before it gets better, just because of changes in some of the things we're doing in criminal justice relative to student outcomes? I would say, right now if I just look at the upcoming quarter, we're kind of in a similar run rate as we're seeing on a year-over-year basis as we saw in the results in the December quarter.

So, we're down 14.7% or down a little north of 10% on applications right now. How that plays itself up for the rest of the quarter is yet to be seen, but it doesn't look like it's going to get materially worse before it gets better. And then we get into the second half of the year and hopefully we'll see some inflection points there. That's at least what it's looking like right now.

In terms of retention and persistence, breaking those two things out, persistence being broking out a, retention, b, in graduations. We expect to see similar levels of student retention in 2012. So, if you model that flat, you will probably be in good shape.

In terms of graduates, we probably see fewer graduates than we saw in 2011 as we start to see some of the impact of the winding down of the larger new student enrollment group that we saw like two years ago. So, there should be some opportunity for little bit upside there just from the graduate perspective and again holding retention fairly flat.

Operator

Our next question comes from Gary Bisbee of Barclays Capital. Please go ahead.

Gary Bisbee - Barclays Capital

I guess the question, you know revenue was up slightly on a sequential basis versus 3Q, but cost of educational services expense fell by $10 million. I guess, could you give some color on how you are able to do that and maybe how should we think about the ability to cut more costs within this or other line items as we look at the next couple of quarters?

Kevin Modany

We are certainly trying to be as efficient as we possibly can as we manage our way through what we believe is a transition period on the enrollments and still we're being efficient on all fronts. I wouldn't say it was any kind of one-time thing and there is nothing really overly unusual and the cost structure that you are looking at for the fourth quarter. So, I think your question is getting to try and understand how we move this forward.

I think if you look at fourth quarter run-rate on expenses and I'm just talking in total right now, it's a reasonable trend line to use on a year-over-year basis. If you apply that year-over-year trend line to the remaining quarters in 2012, all four quarters in '12, you should be in pretty decent shape. If you also factor in that we'll make some additional investments in media, so media will be up a little bit and then maybe some more in the 10% to 15% range, at least that's we're going to plan for it at this point.

And then also I would say we're going to make some investments on the Daniel Webster College. I made the comment about gaining approval for the online programs that we're setting up operations, Student Support Center, all the equipment and technologies necessary for that. So, there is going to be some investments in those types of growth opportunities. If we take the current run rate, add in couple of additional dollars for some growth, I think you'll see that that expense rate kind of price into the internal goals on EPS that we put out there.

Operator

Our next question comes from Andrew Steinerman of JPMorgan. Please go ahead.

Andrew Steinerman - JPMorgan

My question is again on educational services line. I was wondering if we are in the midst of increasing class sizes as a source of efficiencies and are we adding, subtracting, or keeping instructor count kind of steady or is it changing?

Kevin Modany

No material changes on the section sizes as in fact we go down a little bit obviously when the enrollment is trending downward like we're seeing right now. So, no, no, I wouldn't say any major changes there. You might see a student or two change on a year-over-year basis, but not upward or downward.

And in terms of faculty count, there have been no changes on the educational cost side of things relative to faculty or resources. If anything, we are making more investments there as opposed to less, so you are not seeing any kind of qualitative adjustments that should have any kind of major impact on any of our educational services, practices or operational practices I should say.

Operator

Our next question comes from James Samford of Citigroup. Please go ahead.

James Samford - Citigroup

Just to touch on service starts per campus kind of look, I guess it was down roughly 22% roughly 22%. I'm trying to think of as you roll out more campuses, is there a sort of mix shift issue here with new versus mature or how your matured campuses performed, any color on regional basis where you're seeing some pockets of strength or weakness will be helpful too?

Kevin Modany

Sure. Geographically, not necessarily seeing any kind of spikes or troughs relative to any particular region of the country at this point. We certainly due to look at that and we're seeing fairly consistent behaviors in terms of enrollment trends on a relative basis across the country and so, nothing really to point out there.

As we look at new campuses versus matured campuses, I would tell you we're seeing equivalent kind of fall-off on both and it stands to reason because of the things we're doing that we believe are impacting the new student enrollment right now.

We like making major changes to marketing, advertising strategy, reallocating dollars. Those things happen across the board. So, you would expect that to happen across the board and that's what we're seeing.

I will say just to specific schools more may be impacted or specific schools may be impacted more than the general population, if in fact student outcomes are not where they need to be in particular programs. That's where we put those caps on their ability to enroll.

But aside from that we're really not seeing anything stick out on a campus basis, whether we do new to mature or whether we talk about geographic regions.

Operator

Our next question comes from Paul Ginocchio of Deutsche Bank. Please go ahead.

Paul Ginocchio - Deutsche Bank

First, can you give us any view on 2010 three-year CDR since you are commenting on and I believe that would be great. Do you think it's going to be above 30% also? And then could you speak on the bad debt? It looks like it kicked up for the first time in six quarters. Could you comment on that? Thanks.

Kevin Modany

Sure. On the three-year 2010, obviously the further out we get, it's gets a little more difficult for us to project that. We're cautiously optimistic about what's going on with the 2010 three-year cohort default rate and I'll tell you on a couple of fronts.

First and foremost, with regard to the investments we've made in the default management, we like what we see there and the trending that we're seeing and the result and impact that the activity is having on the CDR. We're getting our arms around that.

And then I would also add-in that the appeals process that Dan mentioned in the prepared comments, I think that presents us with an opportunity to have these rates adjusted potentially even further than and one we might be able to do with the default management efforts.

So I would say generally speaking as an organization we feel pretty good about that. Obviously it's going to take some more to go through all the appeal process and what not, like we did with the two year 2009. But we try to give you those numbers and the data on the two year 2009, to give you a sense of what we think might be possible for the other calculations.

We should know, and we didn't mention this in the prepared comments; the only default rate calculation that we could appeal at this point is the two year 2009. So, there're certain windows to appeal.

When we get into next year around this time, fourth quarter of '12, let's say, we'll appeal the three year 2009, and likely the two year 2010, even though it's somewhat meaningless at this point.

But, again I'm just trying to give you some color on what we think is possible. We made comments before about the fact that servicing disruption, we believe impacted these rates. We're finding that to be the case as we go through the appeals process. So, again, hopefully we just gave you a little color on how we see things moving directionally.

Dan Fitzpatrick

As far as your question on bad debt, it did pick up slightly. But if you look at throughout the year, you're going to get a little bit of movement based upon the mix at year end in-school versus out of school. But keep in mind as we're stating it here right now, we really don't have a third party private loan program, which some of that finance was going to, when you said, I think you mentioned going back about six to seven cores. Well it's been about that long to we have third party private loan program, so, you see it tick up just slightly.

Operator

Our next question comes from Peter Appert of Piper Jaffray. Please go ahead.

Peter Appert - Piper Jaffray

Thanks. So, I was hoping you could give us a little more color on what the impact of the program structure change might be in revenue per student numbers in 2012. And then unrelated to that, on the Daniel Webster investment, can you just talk a little bit about how you see the scale of that opportunity and how quickly you might see some traction there? Thanks.

Dan Fitzpatrick

Sure, Peter. I'll start with the first part there. As far as revenue per student, as we roll out the new programs and Kevin gave you some color on that in his prepared comments; and basically keep in mind for those schools that are offering that now that's for new students coming in.

But as you roll through that in 2012, you're going to see a slight increase in revenue per student, because the other things that pressured that, primarily the internal scholarships and awards, we've already talked about the fact we're comfortable with the pace we're seeing right now. So you'd see some of that picking up this year. When I say this year, I mean going through 2012.

Kevin Modany

Then to the second part of your question with regard to Daniel Webster College and expectations from a contribution perspective, it will be a modest ramping. You will see cost incurred and we'll ramp up the infrastructure. That will provide us with a scalable operation to grow based upon what we see in terms of student response.

But we're not anticipating any aggressive material increase there and quite frankly if we look at our 2012 numbers there's modest very, very modest contribution from that, and for the most part it's a cost.

So at the end of the day the opportunity to go after this part of the college's strategic plan will ultimately put more burden on the EPS for 2012, but not, but again it's a growth opportunity for us. So, again giving you a sense of the expected contribution levels, though it'd be pretty modest.

Operator

Our next question comes from Jack Miller of Robert W. Baird & Company. Please go ahead.

Jack Miller - Robert W. Baird & Company

First, I guess could you guys just verify that the third party private lending programs are not available to year one students in terms of what you guys have in place at this point? And then I'm not sure how granular you want to get on this, but any order of magnitude that you can provide in terms of in the recent quarters, what percentage of your non year one students have been tapping into the private lending programs?

Kevin Modany

Yes, sure. The way the process works and I don't want to get too granular here, but students are packaged or go through the financial aid process once every nine months, most of our programs, a majority of our students are pursuing a 2 year 24 month academic program. In the new model, it will be slightly less than that. It will be closer to 21 months academic program with the changes we've made.

So the student is typically getting packaged and again I'm focusing on associate degree program because that's the majority of our students, three different times, once for the first nine months, once for the second nine months, and a third time for the residual period after their academic program study.

When a student goes through that for the very first time, for their first nine-month period, they are not eligible to participate in private financing programs unless they are transferring in a substantial amount of credits, which is a vast, vast, vast minority of students who transfer in enough to qualify.

So, to the second part of your question very, very few of the first year students who would be not a first year vote secondary institutions that can be first year with us, would be participating in those loan programs.

Only when they come to us to get packaged for the second nine months; so they would have completed three academic quarters of their program of study with us, are they eligible to participate. Basically they would not be packaged prior to that point.

So it's really a function of the process and how we do it and once again just to clarify a very, very small percentage of students who would not be entering the fourth academic quarter are participating on private loan programs. I appreciate that question because I think there has been a lot of confusion on that.

Dan Fitzpatrick

I think he was also asking about the percentage utilization of private loans where our students generally, on average about 60% to 65% of our students seemed to need some form of GAAP financing, and traditionally that's covered in their second year, as Kevin just mentioned about private loans.

Operator

(Operator Instructions). And we do have a follow-up from Corey Greendale of First Analysis. Please go ahead.

Corey Greendale - First Analysis

Hi, thanks for taking the follow-up. I'll try to squeeze in, two actually. The first is, can you just comment on the change in the Pell, the expected family contribution range, and what kind of impact you might expect from that?

And secondly, I think your expectations in terms what you might get in a PEAKS appear to have shifted somewhat, but could you just comment on that a little, and I realize you're in negotiations, you are not going to get too granular but can you comments on that a little bit, and if you could get terms that were identical to PEAKS flow and if you do that at this point?

Kevin Modany

Sure. Change in Pell grant as a result of some of the changes in the program rules; we modeled that out based on all the information we have and it looks like a very minor impact for us, nothing that would even register on the scale. So, we feel pretty good about that at this particularly point, based again on the data we have available.

In terms of a PEAKS II, as it being referred, I think just get down to your question Corey, you were saying if we had similar terms for PEAKS I would we do that type of a deal.

Again, I don't want to comment on that because we're negotiating, but I think we're moving towards an opportunity to get something done, but we can't guarantee that, we can't promise that. The markets are volatile, they can shift on us, but spreads are coming into ranges, that make sense, and give us an opportunity to get something done that will work for us and work more importantly for our students.

Operator

And we have another follow up from Trace Urdan from Wunderlich Securities. Please go ahead.

Trace Urdan - Wunderlich Securities

Kevin, your initial comments about enrollment counselor count, I didn't quite follow. I think you said that they were down year-over-year, but then you made a comment about what you'd expect them to look like on a full year basis. Can you just repeat that maybe and clarify?

Kevin Modany

Sure, absolutely, Trace. We're down, if you just look at a point in time, December 31, 2011 versus 2010, we're down slightly more than 20%. So we saw a 20% reduction from 12/31/10 to 12/31/11.

As we look out and we say what does the plan look like, what does our model look like? We model all the way down to admission's counselor head count. And on a relative basis, we're not looking at major increases there. We might see high single very, very low double digit increases there.

So maybe I'd say, maybe 8% to 10%, but we're going to be adding locations as well. So you're going to see that head count increase there.

I think what we're trying to say there is we're hopeful and we're planning for some efficiency opportunities there, as a result of the reallocation of media and as a result of some other things we're doing in the model.

So, again 22% year-over-year, December 31, '11 to '10; on a relative same school basis, it's not a material increase in 2012 plan at this point, but an increased plan for any new location.

Operator

And we have a follow-up from Jerry Herman of Stifel, Nicolaus. Please go ahead.

Jerry Herman of Stifel, Nicolaus

Kevin, just a clarification again with regard to expense structure and your comments about sort of the run rate. Let me make sure I understand, you guys were down like 500 basis points this quarter and the fourth quarter. Is that sort of what we should think about for '12?

Kevin Modany

Yeah, I think that plus some of those investment opportunities I mentioned, I think we can carry that out. And let me just say it another way, there is nothing unusual there. We're are certainly being efficient, we're certainly watching cost, but we're not cutting into the bone, we're doing everything we can to be efficient through a transition period.

You take that run rate, you run it forward in '12, you add on media, a little bit of extra media and some of the growth investments that we have with Daniel Webster and a few others and you should be in the ball park.

Operator

Our next question to follow up from Gary Bisbee, Barclays Capital. Please go ahead.

Gary Bisbee - Barclays Capital

Hi, guys. I hate to go back to the lending thing, but just one more question. So, just to clarify, as of today there is no capacity left in these external programs.

So, all of the GAAP funding until and unless you announce a new third-party program comes from you. So, we should expect revenue to go up, bad debt to go up, and the DSO to build pretty significantly relative to what your financials look like in 2011. Is that right or am I missing something?

Kevin Modany

So, I would agree with everything you said. Be careful on a significant portion of that, but yes you're going to see bad debt tick up as we put more on the balance sheet here. You're going to see DSOs tick up of course until or if we get an additional third party program.

So, yeah I think you got, there is no additional capacity at this point. We have exhausted capacity. There are some miniscule amounts that will trickle in. I'm talking less than $5 million that will trickle in Q1 as a result of delayed disbursements. Some states have delayed disbursement requirement. So, some of that, but for the most part you are not going to see any private lending come through until we talk about a new third party program.

Operator

Our next question is a follow up from Paul Ginocchio of Deutsche Bank. Please go ahead.

Paul Ginocchio - Deutsche Bank

Just another question on the bad debt. Should we expect bad debt expense to go back towards the levels you had at the end of 2009 before PEAKS I?

Kevin Modany

Yeah. I think we'll trend in that direction as the year goes, if we don't get an additional third party lending program. But that's big if which is precluding us from giving any kind of specific color on guidance there. We would typically talk to you a little bit about bad debt and talk about DSO and give you some ranges.

We'd like to see a few things shuttle our here in the next quarter or so based on conversations we're having, and once we get a little more clarity on where we think we are with the opportunity for third party lenders to step-in, we may give some more guidance on that. But, just directionally I think it sounds as if you all understand it.

Operator

And we have a follow-up from Kelly Flynn of Credit Suisse. Please go ahead.

Kelly Flynn - Credit Suisse

Sorry to get back to PEAKS again, but could you talk about I guess where you are on your year-end audit and how you would advise us on whether or not it's likely that you may have to take a charge on PEAKS just related to kind of what the credit market dynamics are showing.

Kevin Modany

Sure. Well at this point we haven't finalized the audit, which is typical for us. It typically goes a couple of weeks after our board meeting and earnings call. But at this point we're substantially through the process and don't anticipate any unusual adjustments there at all and so we feel pretty comfortable with what we have on the financials. So, I guess, I would answer your question saying no. We're not anticipating anything there at all.

Operator

And this concludes our question and answer session. I would like to turn the conference back over to Mr. Modany for any closing remarks.

Kevin Modany

Thank you, Operator. I just want to thank everyone for their participation on the call today and look forward to talking to you all at the conclusion of the first quarter when we provide results at that time in April. So, thanks, again everybody, and look forward to talking to you soon.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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