DeVry Education Group (DV) Daniel M. Hamburger on Q2 2016 Results - Earnings Call Transcript

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DeVry Education Group Inc. (NYSE:DV)

Q2 2016 Earnings Call

February 04, 2016 5:00 pm ET

Executives

Joan Walter - Senior Director-Investor & Media Relations

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

Timothy J. Wiggins - Senior Vice President, Chief Financial Officer and Treasurer

Patrick J. Unzicker - Treasurer, Chief Accounting Officer & VP

Analysts

Peter P. Appert - Piper Jaffray & Co (Broker)

Trace A. Urdan - Credit Suisse

Paul L. Ginocchio - Deutsche Bank Securities, Inc.

Sara Rebecca Gubins - Bank of America Merrill Lynch

Jeffrey Meuler - Robert W. Baird & Co., Inc. (Broker)

Jeffrey Marc Silber - BMO Capital Markets (United States)

Operator

Good day, and welcome to the Q2 2016 DeVry Education Group Results Conference Call and Webcast. All participants will be in listen-only mode. After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference call over to Ms. Joan Walter, Senior Director of Investor Relations. Ms. Walter, the floor is yours, ma'am.

Joan Walter - Senior Director-Investor & Media Relations

Thank you, Mike, and good afternoon, everyone. With me today from DeVry Education Group's leadership team are Daniel Hamburger, President and Chief Executive Officer; Tim Wiggins, our Chief Financial Officer; and Pat Unzicker, our Chief Accounting Officer and Treasurer.

I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of DeVry Education Group that involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied. These factors are discussed under Risk Factors and elsewhere in our quarterly reports and Form 10-K for fiscal 2015 filed with the SEC and available on our website at www.devryeducationgroup.com. DeVry Group disclaims any obligation to update any forward-looking statements made during the call.

During today's call, we may refer to non-GAAP financial measures which are intended to supplement though not substitute for our most directly comparable GAAP measures. Our press release, which contains the financial and other quantitative information to be discussed today as well as a reconciliation of non-GAAP to GAAP measures, is also available on our website. Telephone and webcast replays of today's call are available until February 18. To access the replays, please refer to today's release for more information.

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

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

Thank you, Joan, and belated happy New Year to those of you we haven't had a chance to speak with yet this year. Thank you all for joining us. We had a busy second quarter with a lot of puts and takes, so let me get right into a review of our second quarter results which varied across our institutions.

On the downside, the challenging U.S. market, including strengthening employment, continues to pressure enrollment results at DeVry University and to some degree at Carrington. In the near term, we're also facing economic and political challenges in Brazil as well as the impact of the strong U.S. dollar on our results. At the same time, we're excited and pleased by many positive developments. Our diversification strategy continues to position us for long-term success as our healthcare institutions continued to grow and to produce strong academic results.

Becker Professional Education also performed well during the quarter. And we had the wonderful opportunity to acquire Grupo Ibmec, one of the top educational institutions in Brazil. In a few minutes, we'll walk you through the strategic rationale for that investment and our growth strategy.

Putting it all together, our revenues and earnings excluding special items were in line with the expectations we discussed with you last quarter. Apart from our efforts to reset DeVry University, each of our institutions grew during the second quarter, which is a strong validator of our strategy. Quality plus diversification plus long-term focus equals growth.

Now let's review our results by segment starting with Business, Technology, and Management which includes DeVry University and our Keller Graduate School of Management. As we discussed at our recent Investor Day, the investment thesis in this segment revolves around improving the competitiveness of the institution via three main strategies – one, improving the student experience, both what we teach and how we teach it; two, enhancing the affordability of our programs; and, three, improving how we strategically market DeVry University. At the same time, we're taking strong actions to preserve and extend positive economics at the University. So to improve our student experience, we're focused not only on what we teach but also how we teach it. We've added resources and focus to launch new programs in areas where there are skill gaps and supply demand imbalances.

A great example of this is our medical billing and coding program which has grown rapidly to more than 1,600 students since we launched it last May. We'll soon launch other new programs in area of supply demand imbalance in the job market, including a software development concentration, web design and web development stackable certificates, and an online stackable accounting associate's degree. I'm pleased with the increased speed and urgency with which our programmatic teams are developing new programs.

In terms of how we teach, we're totally focused on improving the student experience both in the classroom and in the surrounding services. We're deploying more personalized care and support powered by predictive analysis. We're enhancing the services available via the DeVry University and Keller mobile apps. And simplifying the course scheduling process with a click to accept automated registration.

Here's an example of improving the student experience. Students tell us they want to attend class when they want, and many attend online for this schedule flexibility. Yet, online is mainly asynchronous, and students also want more connection to their professor and their fellow students. So we think we've identified a segment of students who're looking for this combination of schedule flexibility and on campus real-time experience. And this is the insight that led us to partner with Cisco to develop a new connected classroom environment, directional microphones, telepresence, video technology, multi-way interactive smart boards, they're all combined so that students in multiple locations feel connected. This enhanced student experience is far beyond the capabilities of prior generations of video connected classrooms. Those of you who saw it at our Investor Day in Chicago complimented our team on applying technology in new and innovative ways.

So as an update, in January, we rolled out connected classrooms at 22 campuses. And the initial feedback indicates great satisfaction amongst students and faculty members alike. I should note that we see this innovation being relevant to our other institutions as well. In addition to the student benefits and persistence lift, this innovation is helping us achieve greater efficiencies in faculty utilization and instructional costs. So not only are we improving the student experience, we're improving our competitiveness and differentiation as we meet the needs of this segment of students in a way that no other college can today.

The second element of enhancing our competitive position is enhancing DeVry University's affordability and better communicating that value to students. As we discussed at Investor Day, we've been running a number of pilot tests taking a holistic look at all elements of affordability, not just the price level. These include pricing structure, scholarships, books and fees, shortening the length of some programs and stackable degrees, all to make it easier for students to afford the education they seek.

We had promised you an update within two quarters or three quarters, and today we're pleased to announce that we've launched a completely revised scholarship strategy that's in place now. These scholarships are based on a student's incoming GPA and are being offered more broadly. Further, students can earn their way to more scholarships depending upon their academic performance. So raise your GPA, and earn a higher scholarship with a maximum award of $25,000 per student in a bachelor's degree program. We believe the positive impact will go beyond the financial benefits for students by also encouraging academic achievement.

The third element of our strategy to increase DeVry University's competitive position is via strategic marketing. This includes a number of initiatives such as increasing our emphasis on local marketing, program-specific marketing, more creative use of digital and social media, and all supported by a strong university brand and academic outcomes.

And so today I want to focus on one aspect of strategic marketing that we call Workforce Solutions which is how we partner with employers to help them better meet their workforce needs. This includes employers like Walmart, AT&T, Verizon and the Federal Government from whom we cumulative have over 6,000 students. Of course, it also includes the U.S. Olympic Committee which currently has 125 Olympic and Paralympic athletes and hopefuls enrolled at DeVry University. We're proud to cheer on Team USA as they continue to train and educate themselves in preparation for Rio.

During the quarter, we hired a new Vice President of Workforce Solutions, and in his short time here, we've secured a new national educational partnership with Lyft, the ridesharing service, and also, we were named the exclusive educational provider for the Perkins & Marie Callender's restaurant chains.

Let me tell you a story that illustrates what we mean by the term Workforce Solutions. One of our employer partners is Optel Vision, a global provider of inspection solutions to the pharmaceutical industry. Their primary talent need is to add field service technicians nationwide, and recently, they needed to add 100 technicians to their workforce. So whom did they call? DeVry University.

Our Career Services team responded quickly with the talent they needed. We began partnering with Optel Vision just last year, and with their upcoming expansion in Brazil, we've expanded the relationship to include DeVry Brasil graduates. This illustrates the competitive advantage we have as the diversity of our educational offerings brings more value to our employer partners. And this is just one example among the hundreds of employers who hire our graduates year after year.

These three strategies are designed to make DeVry University more competitive, and we believe in this plan because it responds to what our students and employer partners need. And I'm confident in the leadership team we have that's working the plan with an incredible sense of urgency. Now we recognize that this is a long road toward recovery, and accordingly, we're taking a set of decisive actions to ensure that we maintain positive economics at DeVry University.

So here's an update on our progress in that regard. The actions to narrow our campus footprint that we announced in April have been implemented. As of December 31, there are now 62 campuses, which is a reduction of 25% year-over-year. Enrollments have been lower than we expected, and so we're increasing our fiscal 2016 cost reduction goal from $125 million to $150 million. These and other actions are helping us develop a more variable cost structure.

In fact, over the last two years, we've been able to recover over 90% of our revenue shortfall through disciplined and proactive execution. And in the second quarter, we recovered 96% of our revenue decline.

Now let's move on to our Medical and Healthcare segment. As a reminder, the Chamberlain thesis is bolstered by our confidence that the nursing supply/demand imbalance will continue and includes growth in both pre-licensure and post-licensure programs. So let's talk about how we executed against that thesis during the second quarter.

On the pre-licensure side, we plan to launch one to two new campuses per year, and in fact, we'll add three in fiscal 2016. We opened our Irving, Texas campus at the end of last quarter and our Charlotte campus in January. Both of these are off to a good start, and we're looking forward to opening one more this fiscal year pending approvals. On the post-licensure side, Chamberlain's brand reputation continues to expand and helped to drive record enrollment for the RN to BSN program this past session.

We expect continued long-term growth in RN to BSN, as well as our master's and doctoral level programs. We're very encouraged by the continued growth of our Chamberlain enrollments and by our ability to increase market share even in the face of a competitive environment.

We also believe that growth will be enhanced by students moving from the bachelor's to the graduate level. And, in fact, about 30% of our students who enter our master's programs previously completed their bachelor's degree with us, an excellent sign of the positive student experience our team is delivering.

The thesis at DeVry Medical International centers on the long-term trend of physician and veterinarian shortages. We're proud to help to address those shortages through a focus on high academic quality. Our expectations over our five-year planning horizon include a long-term enrollment growth trend in the low single digits, modest tuition increases, and moderating CapEx.

The success of our strategic focus on quality can be seen in our exam scores and residency placement rates across these professional schools. During the quarter, AUC's accreditation was renewed with unconditional accreditation for six years, which is the longest period their accreditor can recommend. I recently had the chance to attend a Board of Trustees meeting at AUC. While I was there, I led a town hall meeting with our colleagues, who told me that the best thing that ever happened to AUC was becoming a part of DeVry Group.

I also had an opportunity to talk to our students, who told me they're thrilled with our new academic building, with our high-tech anatomy lab, simulation center, small-group learning spaces, as well as the student services and other resources we have added. It's very clear that AUC's reputation continues to strengthen. If you're going to the Caribbean, let us know, and we'd love to host you at any of our beautiful campuses.

Now in the January session, new students were off our long-term trend of low single digit growth. As we said before, it's not uncommon to see some volatility in new student enrollments. Please recall that last May and September were well above trend. Total enrollments are more indicative of the long-term trend, and they were up roughly 3.7%.

At Carrington College, the thesis is focused on launching transplant programs across our campus network and new online offerings. Longer term, we also plan to selectively expand the campus footprint with new locations. This quarter, while revenue grew slightly, we had a number of challenges. Our certificate programs continued to grow, but not at the rate we expected. We had some operational issues that slowed enrollments in certain degree programs, and we experienced delays in approvals for some of our online and transplant programs. As a result, revenues were lower than planned. This, combined with higher costs to support new programs and to improve academic quality, meant that we were below our long-term strategic plan and together triggered an impairment charge, which Pat will detail a little bit later.

Looking forward, let me tell you why we believe Carrington remains a valuable institution to DeVry Group. We have a solid value proposition for our students, including small class sizes and very high-touch service. Also, there's still capacity coming out of the career college segment which positions us for share gains. And we've seen transfer students coming to Carrington.

Pre-baccalaureate degrees and certificates are the largest segment in higher education. And there's more job growth forecasted for those with such credentials than for those with a bachelor's degree. And so we value Carrington on its own, and we value it even more when we consider the synergies it shares with our other institutions, including co-locations and as the entry point to what we call our ladder of learning. That's where Carrington graduates often go on to pursue additional degrees at DeVry University and Chamberlain.

In international and professional education, I'll start with a review of Becker. The thesis on Becker is that it has a defensible niche with a strong brand, maintains a market-leading position in CPA review and has growth opportunities in continuing professional education and in healthcare. In addition to being a great performer in its own right with strong margins and a low CapEx profile, Becker also contributes as DeVry Group's platform for educational innovation and for global growth in non-degree education. Becker had a great quarter with revenue growth exceeding our expectations.

We think our performance is benefiting somewhat from the upcoming CPA exam change as Becker's strong reputation for staying up on the latest requirements of the CPA exam continued to resonate with students. And as a result, we think that Becker is taking share. Another growth driver at Becker is continuing professional education or CPE. During the quarter, we launched Becker's certified CPE courses in seven different areas. These programs respond to the trend we see in education toward micro-credentialing and badging. We have identified an opportunity where accounting and finance professionals are looking for shorter and more focused credentials, and we've launched these certificate programs to meet that demand. We also signed a contract to provide Lean Six Sigma Certification in partnership with Dartmouth's Thayer School of Engineering.

And now let's talk about DeVry Brasil and our recent acquisition of Grupo Ibmec. First, just a quick update on the FIES situation in Brazil. As we all know student enrollment decisions have been a bit delayed as they've awaited the outcome of a FIES schedule in each semester, which may add some choppiness in the short-term as the situation becomes more widely understood. We all know that the economic and political situation in Brazil is challenging, and it will impact our results in the short-term. However, we fundamentally believe in the medium and long-term opportunities.

And the thesis on DeVry Brasil rests on favorable long-term market dynamics driven by a growing middle class and public policies to increase college enrollments. There's a growing population and a growing participation rate in college. Brazil also has one of the highest returns on education investment in the world in terms of wages for college graduates. The Brazilian government recognizes the need for private sector institutions which serve more than 50% of college enrollments in Brazil. All these trends give us confidence in the long-term opportunity, and we see lower asset prices as opportunities to continue to deploy growth capital in Brazil. We have demonstrated a strong acquisition track record as we integrate and then grow high-quality institutions as part of our growing campus network.

And so it's in this context that we are so excited about the acquisition of Grupo Ibmec. Ibmec is just a unique institution among private sector colleges in Brazil. It has a strong brand reputation based on quality, academic outcomes, and excellent service to students. Founded in 1970, it's a very well-known high-end institution that commands higher tuition across MBA, business, and law programs. It attracts students from middle and upper income families who mostly self-pay, resulting in lower exposure to FIES. Even in the tough economy, we believe Ibmec should be able to limit downside risk because of the student segments it serves. Ibmec also strengthens us in the southeast region of the country, which of course is the largest.

We've followed them literally for over a decade hoping for an opportunity to acquire. This is a well-run operation with very positive economics. Grupo Ibmec serves about 15,000 students and generated approximately $78 million in revenue last year, and its EBITDA margin was about 20%. At the same time, we think we can improve the economics further still, with enhanced processes, expansion, and execution of synergies. We expect this acquisition to be accretive in fiscal 2016 and beyond.

Here are our growth strategies. First, we plan to launch new campuses and programs. São Paulo, in particular, is an excellent opportunity for us to enter the largest market in the country. Second, Ibmec completes our two-step strategy of acquiring Damásio, with its national distribution network, and now acquiring the high-end programs to distribute through that network. These also include test prep and graduate programs, two growth areas where we didn't have much exposure before the acquisitions of Damásio and Ibmec. Now these two areas are much bigger, and they have no exposure to FIES.

We also plan to grow corporate education. Ibmec's strong brand provides a near term opportunity to enhance and grow new corporate training relationships. The group also includes an institution called Metrocamp, which is very similar to the other acquisitions that DeVry Brasil has made over the last several years. We believe that by following the acquisition integration playbook we have done successfully many times before, that we'll drive further growth at Metrocamp. I'm confident that the team can integrate and execute on what needs to be done to take advantage of the opportunity given their proven track record.

And we believe Grupo Ibmec fits perfectly into DeVry Group's strategy of quality plus diversification plus long-term focus. From a capital allocation perspective, the acquisition is in line with our global diversification strategy, the smart use of our international cash to drive long-term growth. That's why we've kept dry powder available so we could take advantage when opportunities like this arise.

So with that, I'd like to turn it over to Tim.

Timothy J. Wiggins - Senior Vice President, Chief Financial Officer and Treasurer

Thanks, Daniel. Good afternoon, everyone. I'll start with an overview of the financial results then go through the reporting segments. In the second quarter of fiscal 2016, total revenue declined 5.9% to $456 million, which was in line with our previously communicated expectations. Of the 5.9% decline, a little more than half was attributable to the impact of currency from Brazil. Outside of currency, the decrease in revenues was mainly attributable to the decline in enrollment at DeVry University. The declines were partially offset by growth in the Medical and Healthcare and International and Professional Education segments.

We continue to focus on expense control. Total costs excluding special charges for the second quarter were $400 million, down 6% from the prior year period and in line with our expectations. Net income excluding special items was $44 million during the second quarter, which resulted in earnings per share excluding special items of $0.68. The effective income tax rate was a 13% benefit for the second quarter. Excluding special charges, our tax rate was 19%.

Now let's shift to our operating segments. Medical and Healthcare segment revenue of $234 million was up almost 10% during the second quarter, with growth driven by strong enrollment trends at Chamberlain. Operating income excluding special items for the segment in the quarter was $42 million representing an increase of 10.8% from the prior year. The increase was driven by strong enrollment growth and operating leverage at Chamberlain and DMI.

Chamberlain revenue grew 21% for the quarter as we continued to grow market share in a competitive environment. In November, new student enrollment grew almost 21% and total students grew 23%. Strong growth continued in the January session with new students growing nearly 17% and total students growing 21%. These results are driven by continued success and strong demand in our post-licensure programs. As Daniel mentioned, we admitted our first class in Charlotte in early January, and new campus openings are expected to contribute to future growth.

At DMI, revenue of $91.9 million grew 2% versus last year. New students declined 7.5% as a result of softness in application volume in the January class. Total students increased nearly 4%.

Turning to the International and Professional Education segment, revenue of $62 million increased 1.9% in the quarter. The decline in the Brazilian real as compared to the U.S. dollar reduced reported revenues by approximately $15 million. On a constant currency basis, revenue for the segment would have grown 27%. Operating income for the segment was $8 million during the quarter, down $2.6 million reflecting increased investments to support growth and currency impact.

At Becker, revenue increased 5.5% during the quarter. As Daniel noted, performance was driven by strong enrollments in CPA and increased momentum in healthcare.

For the quarter, DeVry Brasil revenue was roughly flat, but on a constant currency basis, revenue increased 38.5% driven by recent acquisitions and organic growth. Operating income on a constant currency basis was 6.3% lower than prior year, reflecting higher scholarships and discounts and softer-than-planned second quarter revenue at Damásio.

Business, Technology and Management revenue was down 23.8% to $160 million during the quarter as a result of our strategy to reset DeVry University in a more challenging market. As the number of DeVry University campuses has declined, we've been successfully reducing our costs in line with the revenue declines. Costs have been trending down the first six months of the year and resulted in 96% cost recovery of a reduction in revenue during that period.

As a reminder, two years ago, that cost recovery percentage was 50%, and last year, it was 90%, so it's an important continuation of that positive trend.

We are committed to achieving $150 million of cost savings, up from the previous goal of $125 million, and we remain committed to our goal of maintaining positive segment economics. The segment recorded operating income of $8.9 million in the quarter, excluding special items.

For an outlook, the third quarter of fiscal 2016 DeVry Group we expect revenue to decrease about 4% to 5%. The decrease is a result of the repositioning of DeVry University and declining revenue at Carrington which will be offset by revenue growth at DeVry Group's other institutions.

We expect operating costs in the third quarter to be down 3% to 4% year-over-year as a result of cost reductions at DeVry University offset by the acquisition of Grupo Ibmec.

We expect the effective tax rate in the third quarter to be approximately 20%, excluding special items. And for the full year, revenue is expected to be down 4% to 5%, and earnings before special items is expected to decline 5% to 6% as compared to fiscal 2015.

I'll now turn the call over to Pat to talk more about our balance sheet and financial position. Pat?

Patrick J. Unzicker - Treasurer, Chief Accounting Officer & VP

Thanks, Tim, and good afternoon, everyone. For the first six months of fiscal 2016, cash flow from operations was $76.5 million. Our cash and cash equivalents were $178 million at December 31, down from $380 million last year primarily as a result of capital deployed for our acquisition of Grupo Ibmec. Our net accounts receivable balance was $121 million, up 36% from the prior year primarily due to DeVry Brasil acquisitions, an extended reimbursement cycle from FIES and timing of receipts compared to the prior year. Our bad debt as a percentage of revenue remains one of the lowest in the industry at 1.9% versus 2.9% last year.

Now I'd like to discuss our special items from the quarter. We continued to execute on our cost reduction plans, resulting in a $13 million pre-tax restructuring charge related to real estate optimization and workforce reductions primarily at DeVry University. As we've said on prior calls, we do expect to incur additional restructuring charges in the second half of fiscal year 2016, but the charges were heavier in the second quarter as we exited a number of DeVry University campuses in the month of December.

Now moving on to the impairment charge at Carrington, as Daniel noted, revenue at Carrington increased approximately a half of 1% during the quarter, and enrollments came in lower than our expectations. New and total students decreased about 5% and 3%, respectively, in the quarter. Carrington revenue was up less than our forecast, driven in part by delays in approvals for some of our online and transplant programs. Now this impacted our valuation for Carrington based on our updated five-year strategic plan, resulting in a lower fair value of the institution requiring a non-cash $99 million pre-tax impairment charge.

Now I'd like to discuss our priorities for capital allocation. We received great feedback from our fellow owners about our balanced approach. Our priorities include the following – maintain academic quality by investing in our core operations, invest in new programs and new campuses where there is the greatest demand, maintain sufficient liquidity, make strategic acquisitions, and return capital to our shareholders through dividends and share repurchases.

Now investing in our existing growth institutions remains our top priority. Capital spending for the first half of the fiscal year was $41 million compared to $43 million last year. As noted before, we're targeting to keep our capital spending for fiscal year 2016 to be about flat, roughly in the range of $90 million. We'll also continue looking for diversifying acquisitions. Our acquisition of Grupo Ibmec is a good example of that.

Also, returning capital to our shareholders remains a priority, and during the quarter, we returned approximately $8 million to our shareholders through share repurchases and we brought our eighth share repurchase program to a close. In the second quarter, we repurchased 331,000 shares, which represented a 13% increase compared to shares repurchased during the first quarter. We also recently announced our ninth share repurchase program which allows DeVry Group to repurchase up to $100 million of its common stock through December 31, 2017.

Now with that, I'd like to turn the call back over to Daniel.

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

Okay. Thank you, Pat. Before we get to the Q&A, let me offer a few comments related to the FTC and education department actions. Regarding the FTC, we strongly believe in the merits of our case, and we intend to vigorously contest the suit. The suit is over ads. But the gist of it is about how DeVry University came up with the numbers that appeared in the ads, the graduate employment statistics. The heart of the controversy involves judgments, judgments about how the methodology for calculating the statistics was designed and judgements made by DeVry University Career Services personnel. The FTC's complaint is at least as noteworthy in what it doesn't contain as in what it does. It doesn't assert there was a scheme to defraud. It doesn't contend our controls were inadequate. It doesn't allege the statistics were systematically manipulated. It doesn't assert that we ran the ads knowing they were misleading. It doesn't indicate what the numbers should have been.

Let me say a few things about the methodology. First, there's not now nor has there ever been a national standard for calculating employment statistics. We've advocated for there to be one for all of higher education. In the absence of regulation, DeVry University designed a methodology for calculating the employment outcomes of its graduates over 40 years ago. 40 years ago. We believe it's a very sound way of doing it. Our view was reinforced recently when a task force of 40 attorneys general signed off on a methodology very similar to the one DeVry University has had in place for years, the one that's now being challenged. It's also worth mentioning that many colleges and universities advertise graduate outcomes, often with less detailed disclosure of their methods than what DeVry University provides.

As to the judgments of our DeVry University Career Services colleagues, let me just contextualize this by saying they were talking about hundreds of Career Services advisors working directly with tens of thousands of DeVry University graduates over a period of years. There are bound to be a few errors. But there are a handful of errors described in the complaint. But given the sheer size of the classes involved, for example, in 2012 there was over 12,000 graduates, it would take hundreds of errors to degrade the statistics in any meaningful way, not a handful. We provided the FTC with extensive research and corroborating data to demonstrate the strength of our case and the weaknesses in theirs. And we look forward to having these issues resolved by a neutral party in a fair way.

Regarding the education department, they've taken an administrative action based on the adequacy of the support for a marketing campaign that referenced graduate outcomes of DeVry University graduates since 1975. The basic assertion is that the substantiation that DeVry University provided for the statistic in the earliest years was not enough. We respectfully disagree. We provided campus by campus data for all the years from 1975 to present, and then even more data graduate by graduate for all the years from 1981 to present. From our point of view, we've supported our graduate employment outcomes, so we look forward to working with the department to resolve this.

I have underlined we're very proud of our quarter million DeVry University alumni, many of whom work at some of the most respected employers in the nation, including many at the Federal government. And I want to stress that we have the right people focused on addressing the government matters. So our operating teams are remaining focused on executing our strategy and are continuing to empower our students to achieve their educational and career goals.

So with all of that, let me wrap up our remarks here by saying that despite the current challenges we're facing, DeVry Group's second quarter financial results were in line with our expectations. We maintained our balanced approach to capital allocation through the acquisition of Grupo Ibmec and the authorization of a new $100 million share repurchase program. We believe our strategy of quality plus diversification plus long-term focus will enable us to deliver positive student outcomes, attractive long-term growth, and significant value creation.

And now let's get to your questions. Joan?

Joan Walter - Senior Director-Investor & Media Relations

Thank you. I'd like to ask our conference coordinator, Mike, to please give our – the instructions to ask a question.

Question-and-Answer Session

Operator

Yes, ma'am. We'll now begin the question-and-answer session. At this time, we'll just pause momentarily to assemble our roster. The first question we have comes from Peter Appert of Piper Jaffray. Please go ahead.

Peter P. Appert - Piper Jaffray & Co (Broker)

Thanks. Good afternoon. So, Daniel, the numbers obviously continue to deteriorate at DeVry University, and I guess this is somewhat obnoxious question, but just what gives you confidence that you're going to be able to stabilize this business in the context of the trends we've been seeing, and the continued trends we see? And then related to that, does it suggest that perhaps we need more radical approach to reduction in the footprint and the cost structure of DeVry University?

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

Sure. Peter, thank you for that question. And it's not obnoxious. I think that's a question that we're asking, that everybody is asking, and I would say what gives us confidence is that we're executing against a plan, and we're on track with those kinds of reductions that you just talked about. As I mentioned, we completed everything that we announced back earlier in 2015. Campus footprint is 25% down year-over-year. It is taking longer than we'd like to see better enrollments. The environment has not improved. In fact, there were some signs that perhaps the environment degraded a little bit even in our second quarter, you know, calendar fourth quarter of 2015. In fact, we saw some private sector colleges, universities, decline as much as 38% in recent reports.

We think that we have the right plan because it addresses the needs of our students, what they're looking for, and what our employers are looking for. And so that's the three-pronged strategy that I outlined. The student experience, enhancing the value proposition with affordability, and then doing a better job of our strategic marketing. Each one of those has a whole set of programs behind them.

At the same time, you know, we recognize that because it has taken a little longer, we need to take strong decisive action to keep the university in positive economic territory, and, you know, extend that – extend that to give those strategies time to take effect. And I guess then the final thing I would add onto that is that we have seen some signs, and we've seen some issues that are disappointing, but we've also seen some encouraging signs.

Most notably where we're a little bit further along in that programmatic focus, we're a little bit further ahead. And so, I mentioned the example of medical billing and coding. So that was an example of improving that student experience, making sure what we teach is addressing supply demand imbalances and defensible niches. And going from very few to 1,600 students in six months, seven months is an encouraging sign. I think we've got some other ones, cyber security I mentioned a few other programs that are coming along the pike. That process is encouraging. It's going faster, it's got more market focus. Things are working very well with a sense of urgency. So that's how we're doing things.

Peter P. Appert - Piper Jaffray & Co (Broker)

That said, Daniel, can you give us any color in terms of what we should be anticipating in terms of how the start numbers should look over the next several quarters?

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

Sure. And there's not a lot of visibility and of course you always caveat it. It is taking time for these strategies to work. Part of this is on the marketing side. We're transitioning from a national marketing strategy to more of a local strategy. And so as those two lines sort of cross and converge, we're likely to, you know, continue to see declines. And so I really don't have anything to report that's off the trend that we've been seeing.

Peter P. Appert - Piper Jaffray & Co (Broker)

And I'm sorry. Does that suggest the sort of similar kind of negative 30% kind of start numbers here in the second half of the year?

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

Similar to the trend that we've seen is what I would say. I think, looking at it also on a same campus basis by the way where it's doing a little bit better of narrowing the decline. But, again, I'm not trying to say that we're where we need to be, but it is a little bit better on that basis.

Peter P. Appert - Piper Jaffray & Co (Broker)

Okay. And just one last thing. In terms of the FTC suit, I know this is very quick after it's been filed, but do you see anything in terms of the real term numbers – real-time numbers, excuse me, that would suggest that inquiry levels or conversions are being negatively impacted by this?

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

No.

Peter P. Appert - Piper Jaffray & Co (Broker)

Okay. Great. Thank you.

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

Yeah. Nothing that we've seen, nothing that we can attribute anything to. No.

Operator

Next we'll have Trace Urdan with Credit Suisse.

Trace A. Urdan - Credit Suisse

Hey, good afternoon. I've got a...

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

Hi, Trace.

Trace A. Urdan - Credit Suisse

Hey. I've got a laundry list so bear with me here. Daniel, you referenced them when you were talking about the International medical new student starts, you suggested that there's a certain amount of volatility that's to be expected and we need to look at that on a smoother basis. Can you maybe dig in on that a little bit? What causes the volatility? Why is this market more volatile than others? Why should we think that the swings in new student starts are sort of nothing to worry about?

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

It's certainly not nothing to worry about, but I'm just saying that overall, when you kind of look at it over the fullness of a little bit longer trend, it's more in line with the low single digit trend that we've talked about and that we expect. I would say, we are concerned in the sense that we think we need to do better, and we can do better. In this case, we saw some softness in the application volume. The inquiries at the top were okay. We also saw some last minute drops, and I'd say we saw some underlying operational issues.

You can kind of see that, Trace, as within DeVry Medical International, we saw Ross Medical School a little bit weaker while Ross Vet and AUC Medical School performed better. So that's an example that I'm talking about. We've identified some operational improvements that we think can help us with the results. And again we're targeting low single digit enrollment trend over the long-term.

Trace A. Urdan - Credit Suisse

Okay. And then you had some nice things to say about pre-baccalaureate programs at Carrington, and I think of that as being a little bit of a shift from how at least DeVry University has always positioned itself. And I guess it makes me wonder whether you are rethinking or have thought differently or might think differently about those kinds of shorter term programs at DeVry University and whether that might be part of a potential initiative that might make a difference there.

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

Sure. I didn't mean to imply a shift, but you're right, Trace. You sort of put your finger on something we have identified at DeVry University is in the past, it's mostly bachelor's and master's programs. We do have associate degrees at DeVry University. But we've taken a fresh look. This is really part of that strategy number one of the student experience and what we teach and looking for supply demand imbalances, skills gaps, defensible niches in terms of programs where there's segments of growth available. And even though it is a tough environment, there are segments of growth out there. We're showing that. Well, as a group, obviously, we're showing that in nursing. And we're showing that in Chamberlain in the very same markets, in many cases the same physical co-located campuses growing much better. We're showing that with, I think, what you put your finger on good examples is medical billing and coding.

Before we had an associate degree at DeVry University in health information technology. And we noticed as we dug into the data that a lot of the demand there was probably for students who were really looking for medical billing and coding. And if we could offer something that was maybe more attuned to those needs, perhaps we could tap into that growing segment. And so we split the program. It's more stackable. We've got the certificate, and then we still have the associate degree later. And that's what's driven, I think, that growth that we saw over a thousand students in medical billing and coding. And that's in the certificate side.

So DeVry University is really sort of very open-minded. I think, the team now is more that way, driving with a sense of urgency more than ever before and saying what do we need to do to serve there, what we teach at DeVry University, the skills we provide, there is such a need for it. We just need to make sure we're a little bit more nimble in tailoring the programs to where those supply demand imbalances are. And I think that's a good example of it. In some cases, shorter programs are part of that.

Trace A. Urdan - Credit Suisse

Okay. Two more. The enrollment decisions being delayed by the FIES decisions, can you elaborate on that a little bit? What does that mean? How is that impacting you guys a little bit more specifically?

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

Sure. Jump in here if you have anything to add to that. I would just say that, yeah, I think what is happening is it's delaying the decision of prospective students and it's called FIES. It's an acronym, a Portuguese acronym for basically of a student loan program. And because there's been uncertainty about the program, the website where you access that has been – and the number of, they call them contracts, each award of FIES to a student, they call the contract. The number of contracts and how those are being allocated is sort of changing each semester. And so with that uncertainty or volatility, it's delayed students' decision to enroll. They want to wait and see what's happening and what's going to happen with FIES.

Timothy J. Wiggins - Senior Vice President, Chief Financial Officer and Treasurer

Couple other data points, Trace. One is that on a constant currency basis, we saw DeVry Brasil's revenue up over 38%. About 14% of that was from same store sales. So that we have continued organic growth largely from the momentum of a number of the programs. Having said that, though, we also have had to significantly increase the amount of discounting and scholarships. The markets are more competitive, the lack of FIES has students more price sensitive. So we expect to see that pressure on scholarships and discounts impacting our revenue per student through the balance of the year. So, it's more competitive. We have some underlying momentum. Of course the balance of that 38% growth came from acquisitions.

Other points I wanted to make when we're on DeVry Brasil is that now that we've added Grupo Ibmec, they're a larger organization, and they're impacting some of your historic models. You'll notice that that will add to the pressure in Brazil in 3Q and improve their results in 4Q. So as you look at our guidance for 3Q, it's down, but the full-year guidance remaining essentially the same. So what we're seeing now that we've bolted this on, is that it impacts our third quarter in terms of cost and will make our fourth quarter somewhat better. So those are some thoughts.

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

Yeah, changing the seasonality.

Timothy J. Wiggins - Senior Vice President, Chief Financial Officer and Treasurer

Exactly.

Trace A. Urdan - Credit Suisse

Okay. I'm sorry. My apologies. Last one. So, Peter asked about the impact on new students resulting from the FTC suit. I was curious about whether or not you had received any inbound calls from some of the other accreditors that you work with maybe at the state level, elsewhere? Have you sort of fielded any concerns from those guys? And what's the temperature there? Should we brace ourselves for potential other investigations that kind of flow off of this FTC issue?

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

Okay. Yeah, I mean, I certainly can't predict the future on that, but we've been very proactive communicating to all our state regulators, programmatic accreditors, institutional accreditors. Being very open and forthcoming with them. We had a whole communications plan that was executed very quickly. We got a lot of positive feedback appreciating that kind of proactive approach and being open and letting them know about that. So we certainly pride ourselves on strong relationships with regulators and accreditors. So that's what I can tell you without being able to – you know, I can't make any guarantees or predict the future.

Trace A. Urdan - Credit Suisse

Yeah, of course.

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

So that's what we've seen so far.

Trace A. Urdan - Credit Suisse

That's helpful. Thank you.

Operator

Next we have Paul Ginocchio of Deutsche Bank.

Paul L. Ginocchio - Deutsche Bank Securities, Inc.

Thanks. I think you had mentioned about some new scholarships at DeVry University undergrad. Can you just talk to that? Can you just remind us what the revenue per student was down in the December quarter? I was getting down about 7%. Is that going to change much in the back half of your fiscal year with these new scholarships? How does it impact that? Then I just had a couple other, kind of more numbers questions.

Patrick J. Unzicker - Treasurer, Chief Accounting Officer & VP

Sure. Paul, it's Pat. I'll address the revenue per student question first, then we can discuss the new scholarship program. With respect to revenue per student for the second quarter at DeVry University, undergraduate revenue per student was down about 3.5% versus the prior year. Just largely driven by increased scholarships as well as an increasing mix of medical billing and coding students. Of course that program is priced at a lower tuition rate.

For the second half of the year, we would expect revenue per student to be down around 2.5% to 3% driven in part by continued enrollments from MBC, so impacting the mix. Hopefully some positive uptake from the new scholarship program. But we are seeing some positive response with respect to the new scholarship program in terms of the greater scholarship is driven in part by the number of credit hours you take. So we have, and we would expect to see, some lift in our average credit hour in the second half of the year.

Paul L. Ginocchio - Deutsche Bank Securities, Inc.

Great. And then just as you talked about the nursing program, you've seen some good growth there. Is there any major difference between your online offerings, your RS to BSN versus the pre-licensure?

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

Go ahead.

Patrick J. Unzicker - Treasurer, Chief Accounting Officer & VP

I think, just from an overall perspective, the revenue mix if you look at that, it's holding pretty steady. Our revenue from our pre-licensure programs which would be the traditional on campus BSN should be about 45% of full-year revenues, consistent with our expectations. I think that we discussed at our first quarter call. Obviously then with 55% being post-licensure and we expect that to hold through this year. So what we're seeing is while we're still getting some very nice growth in our post-licensure, at the same time our most recent new campus openings, North Brunswick, New Jersey in May, our campus opening in September in Irving, as well as what we're seeing here in Charlotte in January, is also adding a very nice lift. But it's keeping that overall balance proportion pretty similar.

Timothy J. Wiggins - Senior Vice President, Chief Financial Officer and Treasurer

Paul, let me just add something else just to maybe cause you to recall last year and a word of caution. We've seen some really significant growth in our FNP program, which is part of our post-baccalaureate offerings. And so if you look at the last couple of class sittings, there's been significant growth in the teens and the twenties. What that means is that we've consumed some of our clinical capacity faster than we expect, and so we'll expect that program to grow again in the March set, but it would be more likely in the mid-single digits. So just, we saw that happen last year about this time, and just wanted to alert you as you run your models that we'll continue to grow, but we modulate the program based on clinical availability.

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

That's a good point, Tim, and I think, Paul, if you'll allow me, I'll just add one other point of color just because your question takes me about pre- and post-licensure, just the whole strategy. And we really like the strategy of being in both pre- and post-licensure and being both on-site and online. We do see, and this is true at other institutions as well, that where we have on-site presence, it helps our online awareness and growth as well.

In particular, in nursing, we do find that the graduate level potential nursing students, it's very important to them. The brand or the reputation of the institution and the fact that Chamberlain is – I'll say it this way, because that's the way I hear it from them – a "real" nursing school with a real pre-baccalaureate program, not just online only. It really has a lot of value, and I think, that's part of Chamberlain's success.

So they really go hand-in-hand, even though as you put your finger on, they've got some different economic characteristics or different trajectories in some cases, over the long-term, having those both together seems to us to be a real winning strategy.

Paul L. Ginocchio - Deutsche Bank Securities, Inc.

Great. And just two more. Just what was the – thanks for the 14% organic growth in Brazil in the second quarter, can you just remind me what it was in the September quarter? And then, Daniel, I know you've got some time on this, but what are your thoughts on Ross Veterinarian School getting through the gainful employment metrics? Is there a workaround? Is there a way to kind of solve the problem that might come – arise over the next two years or three years as the rules come into effect? Thanks.

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

Sure. Yeah, Ross University School of Veterinary Medicine is an excellent institution. It does have the risk of falling into the zone or longer-term failing to comply with the so-called gainful employment regulation. Yes, we have fantastic student outcomes, and in fact, student loan default rate is close to zero. Actually, in some years, it's literally zero; no defaults.

And so when you step back, it's an example where the regulation really doesn't fit and could have unintended consequences on a high-quality program like that. When you take a ratio from – everything from an associate or a certificate to a bachelor's to a master's to a doctoral professional level program, you can see how it doesn't make any sense. And just given that fundamental value, we do think there is solutions. For example, we could work with private lenders. We also think when you've got that strong of a case, perhaps there might be opportunities to work with regulators, work with legislators.

So the first set of measures are not scheduled to be published until January of 2017, and then program eligibility for loans would not be affected until January of 2018. So there's some time, there's some options. We're in the process of analyzing all those, and we'll keep you posted.

Paul L. Ginocchio - Deutsche Bank Securities, Inc.

Thanks.

Operator

Next we have Sara Gubins, Bank of America Merrill Lynch.

Sara Rebecca Gubins - Bank of America Merrill Lynch

Hi. Thanks. First a question on the FTC suit. Does it change your plans for share repurchase or M&A in the near-term?

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

Thanks, Sara. There's nothing that I can report on that. We'll just continue to watch and keep that in mind.

Sara Rebecca Gubins - Bank of America Merrill Lynch

Okay. And then second, could you provide some thoughts on margins by segment for fiscal 2016, really for International and for Medical?

Timothy J. Wiggins - Senior Vice President, Chief Financial Officer and Treasurer

Sure, Sara. As you see that our margins for Medical excluding special items improved sequentially in the second quarter. It was at 18%. We'd expect a seasonal increase as we move into the third quarter. And then for the full year, I think last year, we were at 17.9%, and we'll be somewhere in that zip code, maybe a little bit off of that just as we get a growing mix of Chamberlain as well as then obviously softer Carrington results.

For International and Professional, we'll see the margins for the second quarter excluding – or there were no discrete items – but the margins for the second quarter were 12.6%. Of course now seasonally, we'll see a dip in the third quarter, and that will be compounded by the addition of Grupo Ibmec, but then we'll see a nice pick back up and should see some very strong margins in the fourth quarter. Year-over-year, margins for Professional and International will be off a little bit from last year just as DeVry Brasil continues to grow as a proportion faster than Becker.

Sara Rebecca Gubins - Bank of America Merrill Lynch

Okay. Great. And then just to clarify, the outlook for the full year where you're forecasting earnings before special items to be down 5% to 6% year-over-year, is that earnings per share?

Timothy J. Wiggins - Senior Vice President, Chief Financial Officer and Treasurer

Yes, EPS.

Sara Rebecca Gubins - Bank of America Merrill Lynch

Okay. Great. Thanks a lot.

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

Okay. Thanks, Sara.

Operator

The next question we have comes from Jeff Meuler of Baird.

Jeffrey Meuler - Robert W. Baird & Co., Inc. (Broker)

Yeah, thanks. First, a follow-up on that last one. Just can you maybe hit it head on, what's changed in your guidance on the expense side? And I know there's some moving pieces because you're layering on the Brazil acquisition, but including that revenue didn't change much. And I think EPS went from flat to up to down 5% to 6%, so maybe if you could just address that directly/

Timothy J. Wiggins - Senior Vice President, Chief Financial Officer and Treasurer

So, yes, Jeff. Good question. If you step back big picture, as we said, DeVry University is doing a little bit behind our expectations as planned. Of course, we planned it to be down. FX, the real weakened more than we had expected versus the U.S. dollar, so that'll impact both revenue and the bottom line. And then Carrington being a little bit softer, that will be partially offset by the acquisition of Ibmec, because that was not considered in our full-year guidance that we provided in October. So the confluence of those would result in earnings being down in the 5% to 6% range on a full-year basis.

Jeffrey Meuler - Robert W. Baird & Co., Inc. (Broker)

Okay. Thank you. And then on the graduate statistics, is there any – just a question on your process. Is there any external validation or auditing of the data, or is it all just data that's gathered internally by DeVry personnel and reviewed internally by DeVry personnel?

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

Sure. Thanks. There's both. There's both. Our – the functional folk's internal audit. We have an external firm that does internal audit. We have an external audit that checks the internal audit. So there are layers upon layers of checking and controls process that has been overseen for years by our Board Audit Committee. This was stood up during the time of the former Comptroller General of the United States chairing our audit committee. So I think, there are many reasons for us to say that we've got evidence that we had a good procedure and we reinforced those procedures.

Jeffrey Meuler - Robert W. Baird & Co., Inc. (Broker)

That's very helpful. Thank you.

Operator

[Bill Dazella], Titan Capital Management.

Unknown Speaker

Thank you. Relative to Carrington, it seems on the surface that they had a modest miss that was really disproportionate to the size of the write-off being at $100 million. Would you talk about that, please?

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

Yeah. That's a very good question. Going into the year and in the quarter, we've been pretty explicit in our filings that of all of our institutions, Carrington had the least amount of headroom in terms of its fair value relative to its carrying value, i.e., it'd be at the greatest risk of an impairment should we miss our operating plans. So we had the confluence of a couple things. A, we had the least amount of headroom. B, we were expecting our revenues to be up more than 0.5%, in the mid-single-digits. So that combined with additional cost that we incurred to support the launch of these programs in advance of recruiting caused a pretty significant miss on our operating income. And then when you roll that forward into the future years in terms of the delays, et cetera, that does have an impact on the discounted cash flow and then the resulting impairment.

Unknown Speaker

And then not having compared the write-off to the disclosures you've made, is there an additional write-off that is possible, or have you written off all of the intangible amount?

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

There's about $77 million remains of intangibles or carrying value associated with Carrington.

Unknown Speaker

Great. Thank you.

Joan Walter - Senior Director-Investor & Media Relations

We're going to have time for just one more call.

Operator

Yes, ma'am. I'm sorry, that last question will come from Jeff Silber of BMO Capital Markets. Please go ahead.

Jeffrey Marc Silber - BMO Capital Markets (United States)

Thanks so much. I'll be really quick. Do you have what same school enrollment growth was at Chamberlain? Thanks.

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

Same campus at Chamberlain, we'll have to look that up and be in touch.

Jeffrey Marc Silber - BMO Capital Markets (United States)

All right. I'll follow up offline. Thanks so much.

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

Okay. Are there any other questions?

Joan Walter - Senior Director-Investor & Media Relations

So – nope.

Operator

That will conclude the question-and-answer session. And I will hand it back over to Ms. Walter for any closing remarks. Ma'am?

Joan Walter - Senior Director-Investor & Media Relations

Thanks, Mike. And I'd like to thank everyone for your questions, and again remind you that our next quarterly results call is scheduled for May 3 when we'll announce our fiscal 2016 third quarter results. Thank you for your continued support of DeVry Education Group.

Operator

And we thank you, ma'am, and to the rest of the management team for your time also today. The conference call is now concluded. At this time you may disconnect your lines. Thank you again, everyone, and have a great day.

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