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DeVry Inc. (NYSE:DV)

F2Q08 (Qtr End 12/31/07) Earnings Call

January 24, 2008 4:30 pm ET

Executives

Joan Bates - IR

Daniel Hamburger - President and CEO

Rick Gunst - SVP and CFO

Analysts

Amy Junker - Robert W. Baird

Bob Craig - Stifel

Sara Gubins - Merrill Lynch

Trace Urdan - Signal Hill

Suzi Stein - Morgan Stanley

Kevin Doherty - Banc of America

Corey Greendale - First Analysis

Brandon Dobell - William Blair

Brian McGuire - Lehman Brothers

Scott Schneeberger – Oppenheimer

Operator

Good day, ladies and gentlemen, and welcome to the DeVry's fiscal 2008 second quarter Earnings Call. My name is Eric, and I'll be your coordinator for today. (Operator Instructions).

I will now like to turn your presentation over to your host for today's call, Ms. Joan Bates, Director of Investor Relations. Please proceed.

Joan Bates

Thank you, Eric. With me today from DeVry management are Daniel Hamburger, President and Chief Executive Officer; and Rick Gunst, Senior Vice President and Chief Financial Officer.

Before we begin, please be advised that statements made on today's conference call may constitute forward-looking statements subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by phrases such as DeVry, Inc. or if management believes, expects, anticipates, perceives, forecasts, estimates or other words or phrases of similar import. Actual results may differ materially from those projected or implied. Potential risks, uncertainties and other factors that could cause results to differ are described more fully in Item 1-A, Risk Factors, in the Company's most recent annual report on Form 10-K for the year ending June 30, 2007 and filed with the Securities and Exchange Commission on August 24, 2007.

Telephone and webcast replays of the call are available until February 8th. The domestic replay number for the call is 888-286-8010, and the pass code is 43311656. A replay is also available via webcast through the IR portion of our website.

As a reminder, our press release and preliminary financial statements are available in the Investor Relations section of our website, located at www.devryinc.com. I'd also like you to note that in our continuing effort to be more responsive to the feedback we receive, we've changed the format of our press providing a bit more information earlier in the process, hopefully making it more organized and a little easier for you to read. And like last quarter we've again provided our preliminary segment data.

So, with that I'll turn the call over to Daniel Hamburger.

Daniel Hamburger

Thank you, Joan. And thank you all very much for participating in our fiscal 2008, second quarter conference call. I'll provide a brief introduction and Rick will discuss our financial result and then I’ll come back and provide a few operational highlights in the quarter before opening up the question.

During the second quarter we continued to focus on executing our strategic plan with particular focus on improving performance at DeVry University, continuing the momentum at Becker and Ross and accelerating the growth of our online operations through the acquisition of Advance Academics. We increased our dividend, opened new locations and at DeVry University delivered our 9 consecutive period a positive undergraduate new student growth and 5th consecutive period of positive total student growth.

We also experienced robust growth at DeVry University’s Keller Graduate School of Management. As you know fall enrollments drive financial results in the second quarter and we’re benefiting from the impact of higher enrollments in all operations and from tuition increases.

Increased revenues readily flow through the earnings due to the significant operating leverage inherent in our operation, particularly at DeVry University. Our earnings were strong in the first half of fiscal 2008 and we expect them to continue to grow. We don’t expect the growth rate to be as high as it was in the first half. Rick will elaborate in a few minutes, but let me provide a little bit of color on the two main reasons for this. Some of it is simply timing, in that expenses slated for the first half are now expected to fall into the second. The other reason has to do with investments in marketing, recruiting and other areas to drive growth and quality over the long-run.

Now, before I turn the call over to Rick, recently there has been a lot of news coverage on the student lending environment. And since we receive many questions in this area we though it would be appropriate to answer a few of those questions here on the call. The most frequently asked question is: what percentage of DeVry’s revenues come from private loans? Well, of course, the overwhelming majority of financing for our students comes not from private loans, but from federal and state loan and grant programs, which are not affected by recent announcement.

Private loans to our students in the first half of fiscal 2008 were about $55 million, that's approximately 10% of DeVry's revenues, now about half of that is tuition related, while the other half is dispersed to the student for living expenses, and other non-tuition related costs. So, it's very closer to 5% when you consider the portion that directly corresponds to our revenues.

And of that, the portion that's affected by recent events is well under 1% of revenues, which I'll back to in a minute. But let me address the second question, we've been asked which is, what's our overall perspective on what's going on in the student lending industry?

I'll start with the scope of this call to go into all the changes happening in the lending industry. Here are the factors, we think most relevant. First, lenders are analyzing the profitability of each of their loan programs.

They are also reevaluating their processes for judging borrower's credit worthiness, as they do this, lenders are paying closer attention to factors like institutional quality, graduation rates, post-graduation employment statistics and covert default rates.

While lenders may discontinue some programs that they deem less profitable. They will continue to find attractive opportunities to make loans to students. And we fully expect students of organization like DeVry with longer, higher quality programs, and with excellent employment results to continue to be attractive for lenders.

Now, what Sallie Mae told us is entirely consistent with this outlook. As we described in the press release Tuesday, they are discontinuing their discount loan program. They typically served higher credit risk students.

They told us that their decision applies to all colleges and universities, where there are publicly funded states schools, privately funded colleges or market funded universities like those DeVry operates. So this is not unique to market funded schools. Sallie Mae has also confirmed that this position does not affect any other loan program provided to DeVry students. So, it doesn't affect Federal student loans and it doesn't affect the vast majority of the private loan that they provide to our student.

This program comprised approximately $2 million in loan volumes for us in the first half of this fiscal year, well under 1% of revenue and only about 4% of our private loan volume. So, again to try to dimensionalize this for you, private loans are about 10% of the size of DeVry's revenues overall. And actually about 5%, when we look at the tuition related portion. And the program we are talking about that serves the less credit worthy loans was well under 1% of our revenues.

Now, leads to the last question we've been asked and that is: whether our students are less able to gain access to loans? And particularly private loans and: is that hurting our ability to start to new students? Or in other words: is DeVry going to suffer in its ability to grow? And the answer is: “no”. And that we are currently seeing no impact on starts, and we believe that despite the recent buzz on student lending, it should not have a material impact on our students.

DeVry students should continue to have access to the funding they need to finance their education for many reasons, including the following five. First, increases in annual Federal loan limits for freshman, sophomore and graduate students have eased the need for supplemental private loan like those previously available through this discount loan program.

In fact, use of private loans by DeVry students in the half of this fiscal year is actually lower than it was last year. Second, DeVry is heavily weighted toward longer duration degree programs. We are 90% bachelors, masters and doctoral level degrees. These kinds of programs often translate into higher incomes for students enabling them to meet their financial obligations after graduation.

Third, DeVry University students are eligible for most of the state grand programs available, due to our regional accreditation and again bachelors level programs. Fourth, we provide extensive financial aid counseling for our students. For example: education them on getting [co-buyers] and helping match their academic load to available financing.

We also ensure that they understand the repayment responsibilities after graduation and as a result of all this factors and our focus on quality, DeVry students have a strong track record in meeting their financial obligation. As noted in our press release Tuesday, where you can see the loan default rates for DeVry's institution.

And finally, DeVry University has provided internal financing for students, for more than 30 years and has the ability to expand this program, which we call EDUCARD. The performance of this internal loan portfolio has been good and in fact we’ve managed steady improvement in our receivables, which I know you have heard us described on this calls over the past several quarters. So, while we’re monitoring and managing this area closely we’ve seen no impact on recruiting to date and as you have seen new student growth has continued its positive trends.

To sum it up, certainly we’re not immune to what’s happening in the marketplace, but we believe our position is less risky given our long-term focus on quality. In the educational programs we deliver and in the academic and career outcomes our student achieve. Our overwriting objective is doing what’s best for students and their families, including how to best finance their education. That’s what we’ve always done and that’s what we’ll continue to do.

So with that introduction let me turn the call over to Rick for the financial results.

Rick Gunst

Thanks Daniel and good afternoon everyone. We delivered outstanding results once again in the second quarter recording strong revenue growth and realizing the benefit of our cost management efforts to achieved very strong earnings results. Record quarterly revenue of $273.7 million was up 16.2% versus prior year versus prior year with all three business segments, once again achieving double-digit revenue growth.

Revenues are up 15.2% through first half of the fiscal year. Net income of $35.8 million in the second quarter was more than doubled prior year results, and earnings per share of $0.49 in the quarter, compared to $0.23 last year.

For the first half, reported net income was $62.6 million, compared to $37.3 million last year, or up 68%. However, last year's results included the first quarter gain from the West Hills facility sale, which was $11.8 million after tax, and this year's results included the net upfront loss of $2.3 million after tax from the sale-leaseback transactions completed in the first quarter.

Excluding these discrete items from both years, results in net income of $64.9 million for the first half, up over $39 million versus last year. And earnings per share of $0.90 versus $0.36 last year or up about two and half times.

Also for your reference, second quarter results include expense related to share-based payments of approximately $1.4 million pretax, or $1.1 million net of tax. This is lower than last year's second quarter expense of approximately $2.1 million pretax, or $1.6 million net of tax, due to the timing of our annual stock-option grant occurring in the first quarter of this year, versus the second quarter last year.

Our effective tax rate from ongoing operations increased in the quarter reflective of the higher portion of earnings from DeVry University and the profession and training segments, which are subject to full federal and state income-tax rates, compared to our Medical and Healthcare segment income, which is taxed at lower overall effective rates.

Our overall effective tax rate was 27% for the first half, composed of a 27.5% of rate on continuing operations, offset by the tax benefit on the loss from the sale and leaseback activity at a 39.1% rate.

We continue to achieve operating leverage in the quarter as cost of educational services increased by less than 3% versus prior year. We are realizing the savings from last year's workforce reductions, along with the impact of our real safe optimization actions.

Student services and administrative expense increased by 10.4% in the second quarter, higher rate of spending, but still less than revenue growth.

This operating leverage produced a pre-tax income margin of 17.1% for the first half, excluding discreet item which is coincidentally our peak full year margin level from fiscal 2002. Now, while we are very pleased with this progress, we've only completed half of the year. And as Daniel pointed out earlier, the second half should not see the same magnitude of leverage or improvements.

Let me provide a bit of additional perspective on the reasons why. First, we expect to see an increase in direct cost of educational services due to normal seasonality of about $4 to $5 million in the third quarter. Also, as Daniel mentioned we have a number of timing related shifts, such as moving some local and national marketing spend and IT projects from the first to the second half and filling the number of positions that still remain open.

These timing shifts are expected to add another $4 to $5 million per quarter in direct costs and operating expenses. Lastly, we are planning to make other investments in incremental marketing, recruiting and student services to drive and support growth in the future, such as, online growth acceleration actions, chamberlain expansion and building Ross capacity. We expect these actions will add another $5 to $7 million per quarter versus our current run-rate.

Turning now to our secondary results, here are a few key headlines. First, revenue within DeVry University segments which includes Advanced Academics was up 14.9%. Medical and healthcare up 20.5%, and the professional and training segment up 21.5%. Advanced Academics which was acquired on October 31st positively impacted the DeVry University segment growth rate but by less than 100 basis points in the quarter.

Second, the DeVry University business segment showed the most significant year-over-year earnings improvement. Increasing segment operating income from $6.8 million last year to $28.2 million this quarter were up over $21 million driven by revenue growth combined with labor and facility cost savings.

Finally, our professional and training segment delivered exceptionally strong earnings results and grew almost 70% versus last year due to robust shipments of CD-ROM materials, while the medical and healthcare segment earnings were up 9%.

Our balance sheet and financial position remains strong this quarter. Our cash flow from operations was approximately $52 million in the quarter and a $132 million for the first half with an ending cash and short-term investment balance of $241 million compared to a $171 million a year ago.

We also had no outstanding debt this quarter versus $50 million at the end of the second quarter of last year. As a result, our net interest income was approximately $2.8 million this quarter compared to only $200,000 last year.

Net accounts receivable were $76.8 million this quarter versus $60.4 million last year. Primarily due to the addition of Advanced Academics and a time in a federal funds receivables.

Net accounts receivables would have been 7.5% versus prior year excluding these items, well, below our revenue growth rate of 15%. I would also like to point out that the DeVry University receivables per student that is the receivables that come from EDUCARD have improved over the prior year for more than 20 consecutive months, reflective of our highly focused and improved management of collections.

Our year-to-date our capital spending was $16.8 million this year versus $16.2 million spent last year. This excludes the Advanced Academics, as well as the purchase of our Alpharetta facility that was immediately sold for that same price last quarter.

We expect the pace of spending to pick up during the balance of the year, primarily due to investments to expand facilities within our Medical and Healthcare segments and to support systems improvements at DeVry University. Even with this pick up, total capital spending will likely be around $50 million plus or minus, versus the $55 million to $60 million range previously communicated.

Finally, during the quarter, we repurchased approximately 96 shares of our common stock, at a total of about $4.8 million bringing the total share repurchases in our programs to-date to $20.7 million at an average cost of $34.16 per share.

That concludes my overview of the very strong results for the second quarter and the first half of our fiscal year. While we expect to continue to make progress in the second half of the year, the rate of improvement versus prior year will likely not be as dramatic due to the timing shifts increments investments.

Nevertheless, fiscal 2008 is shaping up to be a tremendous year, and we're well-positioned to achieve our long-term goals of driving top line growth, while at the same time improving margins.

With that let me turn the call back over to Daniel for bit more on the operating results.

Daniel Hamburger

Thanks, Rick. I'll begin the operations review of DeVry University, including its Keller Graduate School of Management. I'd like to highlight the investments we're making in three areas marketing, human resources and information technology.

The next phase of our marketing campaign emphasizes the value proposition of DeVry University education. The course is centered on preparing students for career success. This campaign in fact is called we major in careers, and was unveiled during the first week of January.

This is a good example of cost that were shifted to the second half of the year, as the campaign wasn’t really ready in the first half, but now that it is, we plan to ramp up the spending on it in the second half.

It's also a good example of an investment that will impact second half earning yet support future growth. Central to this value proposition is the employment success of our graduates and the statistics continue to be strong. In most recent three terms, 92.6% of our graduates obtained employment in their field of study within six months of graduation, at an average starting salary of $42,805.

In terms of human resource cost, we have several senior level positions that were open in the first half that we expect to be filled in the second, including a Chief Information Officer, a Chief Marketing Officer at DeVry University and other positions.

We'll also be hiring online admissions personnel and increasing marketing spend in DeVry University, which are investments to support the growth at the universities online division.

In Information Technology, our largest investment is Project Delta, which will ultimately implement a new student information system to improve the efficiency in customer service. We've begun ramping up the spending level here in Q3, bringing on a focused team of subject matter experts, and the teams are now diving into improving processes and ensuing better data quality, while also issuing the RFP's to the vendors for a student system.

Just a brief update on DeVry Universities real estate optimization program. We benefited in the first half from some of the actions we've been taking to rebalance our capacity to better fit local market demand. While part of this rebalancing involves reducing space in certain locations, another part is the continued expansion in new markets. So, to that point we opened our first Louisville, Kentucky location and just this month began offering classes at our Chesapeake, Virginia Center.

During the quarter we also relocated our Bellevue, Washington and Elgin Illinois sites for better location.

Looking ahead we plan to open 5 to 6 new locations for the year in total. Of course because of DeVry University's trimester system this quarterly report doesn't include new enrollment information just a quickly recap the fall 2000 enrollment we reported last month we saw increases across the Board. New students increased 10.7% and total students increased 10.3%, Keller Graduate School of Management of course takers includes increased 12.5%. And total number of online undergraduate and graduate course takers increased 28%.

At our medical and healthcare segment, we're continuing to investment in our facilities and our faculty to address our growing student population at Ross and the continued strong demand part of our capacity expansion evolves increasing the number of sites where students complete their clinical training.

We're in the process of signing affiliation agreements with two teaching hospitals which will expand clinical capacity for about 200 students. I should mention that the cost associated with this affiliation are increasing due to competition for clinical training slots and we'll begin to see the impact of this higher cost in the second half of the year.

A Chamberlain College of Nursing, we recently discontinued the online delivery of the associated science and nursing program at our St. Louis campus and that will be effective this coming October.

The decision was based primarily on student outcomes, again specifically in the online program in St. Louis, this students had challenges in obtaining this acceptable pass rates on the state board exams. Our pass rates are currently over 90%, unfortunately this hadn't been done consistently over the past two years and because of our commitment to quality we've previously decided not to admit new students to this program as of last September and we work closely within the Missouri Board of Nursing to make this subsequent decision to just continue delivery of the program. The decision affects approximately 70 students.

Our students are our number one priority, and we're communicating with each of them individually during the transition. Some maybe eligible to enroll in our Bachelor of Science in Nursing program.

This decision affects one delivery method of that one program at that one location, that's the online delivery of the associate program in St. Louis campus. Students enrolled at the associate program at our Columbus, Ohio location are not affected, and the bachelor's programs are not affected, as these students have achieved excellent pass rates consistently.

Bachelor's programs represent over 80% of the total Chamberlain student population. And now for and expansion update for Chamberlain, we're very happy to report that we have recently received approvals to offer Chamberlain's programs in Phoenix, Arizona and Edison, Illinois, both collocated at DeVry University campuses with plans to launch classes in March of this year.

So this brings us to four locations, as we made progress on our vision of becoming the first national college of nursing. We hold an open house a couple of weeks ago at the Phoenix campus and the response is overwhelming. In the Arizona Board of Nursing, was very complimentary in the process. They told us we were the first new bachelor's program in nursing proved in that state in 30 years.

Our goal is to open at least one new Chamberlain site per year, and now here we suddenly exceed that goal by opening two. So what's the color on that? Of course, we can't always control the pace of new openings because of the licensing, approval process.

We're often asked, when will we open new locations for Chamberlain, and we know you understand why we're not able to provide that information, because we're in the midst of approval processes. We have several more applications in the queue, and we'll report progress as soon as it becomes appropriate.

In the professional education and training segment, Becker's performance continues to reflect the strong demand for accounting and finance professionals, and the result of our efforts to strengthen relationships with firms and with professional societies. At Becker's CPA Review, this quarter, we established new relationships with Wipfli, one of the top 25 accounting firms and the American Society of Women Accountants, which is significant because 60% of all CPA candidates are women.

In addition, we renewed our relationship with RSM McGladrey, one of the top six accounting firms. At the Stalla CFA Review, which is a special interest to all the CFA's in this call. We renewed our relationship with one of our largest partners, the CFA Society of Washington DC, whereby we provide course work to their membership.

And finally in this segment, internationally, we established new relationships with the CFA Societies in Belgium and in Luxemburg.

So, in summary, our strong fiscal 2008 second quarter and first half results were driven by solid enrollments across all our operations, both onsite and online. Our earnings benefited from significant operating leverage as well as from effective cost and asset management. We welcome the newest member of the DeVry family through the acquisition of Advanced Academics. And we believe the investments we are making in the second of 2008 will drive even greater momentum in the longer term.

So, Joan lets go to the Q&A.

Joan Bates

Wonderful, thanks Daniel. We are excited to take your questions and as we did last quarter, we are allowing for some extra time in order to answer all of your questions. So, Eric, if you can give the instructions we'll begin the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Amy Junker with Robert W. Baird. Please proceed.

Amy Junker - Robert W. Baird

Hi, everyone. Thanks for taking my question. I guess first question just within DeVry University, Daniel, now that we have the fall enrollment numbers, can you give us a little bit more color in terms of if you saw really a meaningful pickup in the high school students in that class or at this point if the growth is really still being driven by working adults? And then along that vein, have you started recruiting at the high school for next fall yet and any early feedback in terms from the high school market you could share with us?

Daniel Hamburger

Sure. Thanks Amy and we’re pleased with the progress we’re making in revitalizing our high school, in recruiting efforts with relatively new leadership and new high school presentation, visiting more high schools and reaching more high school students where we reach about three quarters of a million high school students per year with that program. Yes, we did see an increase in the fall in both Ross segments both the high school graduate segment and the adult student segment. It’s going in the right direction, not where we wanted to be within the high school market, but we’re committed to the high school market.

We’ve done some recent work looking at the [asset] program and based on that analysis and based on that work we’ve re-committed to that and we’re committed to that high school segment. And the early indications for the future classes continue to move in that same positive direction. So thanks a lot for asking about that.

Amy Junker - Robert W. Baird

Great. And I think if I can ask a quick follow up with respect to Sallie Mae, I am just curious if their recent decision has impacted your thoughts or strategy at all going forward on adding more associate degrees to your repertoire or if that’s changed at all?

Daniel Hamburger

No, it hasn’t. We continue to look at our portfolio and recognize that we don’t have as much presence at the pre-baccalaureate level as we should; it’s a huge market, it’s a growing market for education, educational services, and has a tremendous need. And as we've always said, our intent is in the opportunity that we see there for a player who is a high-quality positioned player at the pre-baccalaureate level.

So associate degrees and diplomas and certificates, those were main attractive segments. You really have to, and actually I would encourage you to, listen to what Sallie Mae said at their big meeting yesterday; I'll encourage you to read that.

They must have said a dozen times that you can't make broad-brush assessments, you have to look at the quality of the student outcomes and that's why we were trying to provide a little insight into that. Here, you have to look at the cohort default rates, you have to look at the employment statistics, you have to look at the quality of the programs, you have to look at the efforts that are put in place to educate students on their financial responsibility, and so there are definitely opportunities to do that at all levels of the educational spectrum. And so we continue to be excited about continued growth at the pre-baccalaureate level.

Amy Junker - Robert W. Baird

Great. I appreciate the thoughts. Thanks.

Daniel Hamburger

Thanks, Amy.

Operator

Your next question comes from the line of Bob Craig with Stifel. Please proceed.

Bob Craig - Stifel

Good evening, everybody. Congratulations on the quarter.

Daniel Hamburger

Thanks, Bob.

Bob Craig - Stifel

Just a couple of questions for you: One on the lending side; Sallie is not the only lender you use on the private side, or are they?

Daniel Hamburger

They are not the only one, correct.

Bob Craig - Stifel

Okay. You have how many?

Daniel Hamburger

We have numerous lenders. Traditionally we've had preferred lending arrangements with three big lenders. We're in the process of doing the RFP, we've had responses from over two dozen lenders by the in that process, and so we haven't made any announcements about who we're going to select, but looking at least in accordance with the new guidelines, there will be at least three preferred lenders.

Bob Craig - Stifel

Has Sallie been the…

Daniel Hamburger

Just because - wait, I just want to be clear.

Bob Craig - Stifel

Yeah.

Daniel Hamburger

And I know you know this, but just incase anybody is not aware. Just because you have three or four or whatever number of preferred lenders, it doesn't mean those are the only lenders you deal with. We'll deal with any lender that a student wants us to deal with in order to serve that student.

Bob Craig - Stifel

Okay. Sallie being the largest…

Daniel Hamburger

Lenders.

Bob Craig - Stifel

Yeah, Sallie being the largest, Dan?

Daniel Hamburger

The largest in the private, yes, they will be the largest.

Bob Craig - Stifel

Okay. A couple of questions on the increased spending in the second half, I know, you guys don't breakout marketing costs specifically, but is it possible to quantify the increases year-over-year in marketing spend that you will be incurring in the second half? And/or compare that with the first half?

Rick Gunst

Yeah, I mean, that's right, as I tried to portray in my comment - this is Rick talking. We talked about some of the investments we are making in fact, both marketing and recruiting.

Bob Craig - Stifel

Right.

Rick Gunst

That will increase sort of the run-rate of expenses in the third quarter and fourth quarter.

Bob Craig - Stifel

Okay, because in terms of percentage increase year-over-year, you don't want to go there?

Rick Gunst

Prefer not to.

Bob Craig - Stifel

Okay. And, have you estimated, I can't recall it that you estimated the total cost of project Delta?

Daniel Hamburger

Yeah. We've talked about that in the $40 to $50 million range in broad stokes, over a several year period.

Bob Craig - Stifel

Okay.

Daniel Hamburger

And that's our – it’s very early - so that's a broad range guess.

Bob Craig - Stifel

Okay. And last quick one. Can you disaggregate the growth in revenue in the professional and training segment between price and volume?

Daniel Hamburger

I'm sorry?

Bob Craig - Stifel

Disaggregate the 21.5% revenue growth in the professional and training segment between volume and price?

Rick Gunst

Oh, it's mostly volume, under 5% or approximately 5% pricing increase. So you can see the majority is volume. The other piece is the dynamic beneath that volume and just in case it’s helpful is a real focus on providing a full solution to this students, especially at the Stalla Review for the CFA we’re finding more and more students who are interested in the full Stalla study solution. As opposed to those who are interested in just buying a book and then studying on their own and that increases the amount of revenue per student so we're pretty focused on that.

Bob Craig - Stifel

Great thanks guys.

Rick Gunst

Sure.

Operator

Your next question comes from the line of Sara Gubins with Merrill Lynch. Please proceed.

Sara Gubins - Merrill Lynch

Thanks. Good afternoon.

Daniel Hamburger

Hi Sara.

Sara Gubins - Merrill Lynch

Just to clarify Rick's comment about the increased expense. Are those off of run rates of the second quarter? I am just wondering in particular because of the student’s services and administration - it was obviously a big swing between the first and second quarter. So are we talking about 106, 107 in student services expense in the third quarter is that how we should read that a little bit more than that?

Rick Gunst

We’re working off the second quarter run rate is what I was referring to.

Sara Gubins - Merrill Lynch

Okay. And then the Sallie and other lenders have talked about lowering borrow benefits within the federal financial aid - I am just wondering if you expect that to have any negative impact on your students or on your enrollments?

Rick Gunst

No, we don’t Sara. Nothing that we’ve seen.

Sara Gubins - Merrill Lynch

Okay. And then last if you can just give us a quick update on real estate in terms of how much more there is to go on that?

Rick Gunst

Sure. We’ve addressed about a third of the portfolio of large campus facilities so far through a sale of leaseback or a sale and moved to another facility, co-location and so forth, all the different levers that you can pull.

There is probably another third of the portfolio that we're focused on pending the economics and deals coming together. The remaining third, we're broadly speaking in pretty good shape for now, and we're always looking at it, but those are probably in better shapes. We're focused on the other third at the moment.

Sara Gubins - Merrill Lynch

Okay. And then last quick question. Within your fall enrollment, can you talk about the demand for IT programs versus business and healthcare programs?

Daniel Hamburger

Yeah. We continue to see good growth across the board. I don't think there is anything really noteworthy that there was a huge influx in one vertical curriculum area relative to the other. So nothing of a particular note there, Sara.

Sara Gubins - Merrill Lynch

Okay. Great. Thank you.

Operator

Your next question comes from the line of Trace Urdan with Signal Hill. Please proceed.

Trace Urdan - Signal Hill

Hey, good afternoon. I appreciate those comments Daniel about the lending environment. I am wondering if you could help us understand maybe just even with respect to DeVry, how it is that the lenders are gathering this data about the schools that at least Sallie has identified it as being kind of critically important? Do you sense from Sallie, for instance, that they are collecting more information from you guys about those metrics that they've suggested are important?

Daniel Hamburger

No, Trace. Sallie Mae knows DeVry, and all the DeVry institutions not just DeVry University. But they know our cohort default rates from DeVry to Chamberlin to Ross where it’s 0.2%, very well. So I don't think they need to collect any more information in particular.

Certainly we work cooperatively with all the lenders that we work with, not just Sallie Mae, to work cooperatively to analyze data, analyze trends so that we can all do a better job of helping students finance their education. That's the goal, is to try to help as many students as we can, finance their education with the appropriate package of Federal loans, private loans, Federal grants, State grants, scholarships, the whole gambit. But, no, I don't there is any new sort of data probing that's going on there. They already know the data pretty well.

Trace Urdan - Signal Hill

Well, here is a reason for my question, because, in my arena, their remarks suggested that they were kind of taking a swipe at non-traditional students across the board. And you're contending that they are drawing distinctions between higher quality institutions and lesser quality institutions. Then I'm just trying to figure out, how that's going on? You and I know what's DeVry represents versus another schools and I guess, I'm asking how it is that the lenders are making those distinctions?

Daniel Hamburger

I think they are making those distinctions based on not necessarily new data, I mean, they themselves said they weren't paying attention to the data that they had as well as they should have. Or may be not so much paying attention to data, but they weren't as disciplined in some of their policies and practices as they used to, may be got away from some of the classic policies, perhaps.

Those are the kind of things that we should obviously let them answer to. But they did, to the other part of your question, take great pains to state that this is not unique to the market funded as we call it, market funded sector of education, such that they are going to somehow negatively discriminate against those schools or the students of those schools that are funded by market investment capital, though they are funded by the states or funded by some on profit activities.

So when I say traditional or non-traditional - they were talking about programs that have poor outcomes because there is a correlation between poor outcomes and then the default rate.

Trace Urdan - Signal Hill

I am sorry to persist with this but I am trying to sort of counter or at least address some of what I perceive is been some of the short seller issues in the market place - but in your estimation, do you think there is a scenario in which the student with a strong FICO score but who is sort of enrolling in an institution that has traditionally poor default rates might find it difficult to attract a loan? In other words, they're going to start to sort of pay more attention to institutional quality and less attention to just pay more credit scores going forward would you say?

Daniel Hamburger

I would say that they are going to do a better job looking at that whole picture because they do look at the individual student information and they look at the institutional information.

And to the extent that your trying to counter those who have short sighted view of this, let me lock arms with you Trace, because I think we clearly believe that this is not a long-term and there is a lot short-term reactions going on out there but they're still a very good business here for the lenders to lend money to students so that they can go and finance their education and thereby generate the earnings to, and improve earning power, to go pay back those loans; pay back to business is still a very good business and it should be because it’s performing a vital function in our society.

That's not going away because some near-term dislocations and some things in the long run it’s probably creating opportunities and that's what this short-term dislocations often do is create long-term opportunities. So, we’ll continue to keep a long-term focus and keep the focus on doing what's right for the students.

Trace Urdan - Signal Hill

Okay. Thanks for taking the leadership to help us understand the situation better, Daniel.

Daniel Hamburger

Okay. You're welcome. Thank you. Appreciate the questions.

Operator

Your next question comes from the line of Suzi Stein with Morgan Stanley. Please proceed.

Suzi Stein - Morgan Stanley

Hi. Going back to the cohort default rates, and just thinking about how they have become much more important, I guess in the past as long as you were near 25%, we didn't really pay that much attention to it, but and thinking about how that is becoming more important for lenders going forwards, what are you doing as an organization to manage that, with students after graduation, is that something that you are investing more time in?

Daniel Hamburger

Yes. We are. We've always invested time there and I think the result show it with the cohort default rates that were in the press release we put Tuesday, is low as less than a 1% for some of these institutions.

What we're doing even more so is the education that we do with students in the counseling. I mentioned some of those things, for example, helping to educate students and the importance in many cases of getting a copower, power to signup with them that can help them get more and better financing and more attractive rates.

We do counseling and educational programs with students to prepare them and make sure that they understand their repayment responsibilities after graduation. And we do work with the lenders to provide that kind of education, and many other trust and activities and investments that we make, all of which has paid off, and once again our DeVry's long-term focus on quality has served us in good stat. So these were some of the activities.

Suzi Stein - Morgan Stanley

Okay. And just one more question, can you talk a little more about EDUCARD, I guess I was always under the impression that this was used mostly for out-of-pocket expenses for students as opposed to tuition, is it your intent going forward, if the changes to use this in a different way?

Daniel Hamburger

Not necessarily to use it in a different way Suzi. It has always been there for students’ cost of education, including both tuition and non-tuition related charges. This is nothing new there at all. We have had this program for 30 years. The performance of that loan portfolio, if you want to look at that way, has been fine and improving by the way in the recent environment and continues to improve. So despite all the buzz and all the noise, the performance is improving. We are adding resources to ensure that continues to be the case.

And yes, strategically, we are prepared to use our strong balance sheet and use this capability that we have, if needed at greater levels. So far we don’t see a need to do that, but we are prepared to do that and I think strategically for the long-term we'll need to keep that facility in place so that if there's any short term dislocation we are prepared to handle that.

Suzi Stein - Morgan Stanley

Okay, thank you.

Daniel Hamburger

Sure.

Operator

Your nest question comes from the line of Kevin Doherty with Banc of America. Please proceed.

Kevin Doherty - Banc of America

Great, thanks for taking my call. I just had a follow up on that last question. Could you maybe just say what the size of the EDUCARD receivable was at the end of the last quarter?

Daniel Hamburger

Well the receivables balance was, just a second I'm looking for that. You have that Rick?

Rick Gunst

Yeah. The total receivables - the net receivables within DeVry US was about just under $55 million to $60 million, in that balance.

Kevin Doherty - Banc of America

And how is that really trended over the last few years?

Rick Gunst

Well again that - when you look at any point of time, as you are looking at during the term versus the end of the term, it will go down dramatically. So, it’s like at the end of last year I think we were down to $17 million dollars at the end of the last fiscal year, which is really the data point, you got to look at because students will be financing things during the term and then what we trying to do is, to get them to pay it off while they are in school in that term before they go into the next semester.

Kevin Doherty - Banc of America

Okay. And what would be some of the maybe the interest rates that students would be paying on that program versus what they maybe saying from some other private loans, I mean, how comparable with those 2 funding sources?

Daniel Hamburger

It's really comparable, I mean, it's as we stated in our 10-K it’s a percentage point each month so about 12% annually.

Kevin Doherty - Banc of America

Okay. And just to switch gears I know you have talked in the past about some shifting in the average course loan for student - how does that vary between DeVry and Keller? I am just kind of the maybe where the mix of full time versus part time students would play out as well.

Daniel Hamburger

Yeah mainly, the course will pursue into it, first within Keller its remain relatively stable there has not been the driving force of change it’s been more that we've seen overtime over the past few years a decrease in the course load on the undergraduate side with a mix of more online or more adult student tend to take fewer classes that’s began to stabilize and in fact most recently we've seen both of we flat to the prior term.

Kevin Doherty - Banc of America

And have you broken out that mix of part time and full time between Keller and DeVry University?

Daniel Hamburger

Yeah, we didn't breakout the Keller but we don't make the full time-part time mix numerically you've never broken that out but I can assure you that as Rick just said its bothering me out and that's because there is a real focus on that we seen opportunity in increasing that credit our per student static and that's a good thing of students because they finish sooner, they actually paid less.

Rick Gunst

Yeah.

Daniel Hamburger

In total, for their program, they started earning faster so the value proposition is stronger, and it's better for DeVry as well.

Rick Gunst

You know it goes back that value proposition in this overall financing story with the students, if you can complete your degree in three or four years versus stretching that all over four, five, six years, obviously start earning that higher salary quickly and your overall cost of your education is much less.

Kevin Doherty - Banc of America

Okay, thanks for your comment there.

Daniel Hamburger

Sure.

Operator

Your next question comes from the line of Corey Greendale with First Analysis. Please proceed.

Corey Greendale - First Analysis

Hi, good afternoon.

Daniel Hamburger

Hi, Corey.

Corey Greendale - First Analysis

First for Daniel, if I could ask you to put a macro add, not a large have been the macro add, do you think even looking at the DeVry's history, would you say that the economy at this point over the next six months is your friend or your enemy?

Daniel Hamburger

We think the economy is our friend. One of the things that you see in the macro picture, which was in respond to your question there, then most people on this call, certainly understand is that the acyclical nature of educational programs is a little bit more pronounced, it was shorter programs where there is a little bit more of a dynamic of some potential students, who might have gone to certain jobs where those jobs may not be there than going back to school.

That dynamic is much less pronounced or non-existing with most of the longer programs and professional level programs, so an obvious example would be medical school applications, have no correlation whatsoever that we can find to the economy, nursing programs, veterinary programs, accounting - accounting actually was down through the boom times of the 90s sort of almost without explanation and then started booming actually during the soft economy post-2001, probably more co-related with Sarbanes-Oxley obviously and things like that. And so, there’re many of these programs, these verticals curriculum areas tend to be on their own cycle, rather than tied to the economy. So, when you look at the DeVry's portfolio as it is today, relative to some others, I think we are much less, either cyclical or counter-cyclical and so you may call us acyclical.

Corey Greendale - First Analysis

Okay. And actually, you mentioned Ross, do you have any updates on the timing of some of your expansion efforts there when you might be able to increase the capacity?

Daniel Hamburger

Yeah, at Ross there are some things that are in process that we are just not able to comment on at this point and the real issue is the capacity at the Medical School in the September term, not so much in January and May and its not so much an issue at the [Med] School, but we do have a number of irons in the fire, including physical capacity, teaching capacity and the human capacity in terms of the high faculty that we have and we’re building on. As well as the capacity beyond the science program that happens in Dominica, 60% of the time they actually spent in the US at rotations in teaching hospital, partnerships that we have, we’re adding to those partnerships, I made a comment on that in the prepared remarks.

And this is one where, it’s a high class problem I guess, but if we had a fault, we were probably too slow to expand the capacity, but I guess, our focus has been on ensuring that academic quality because we know that quality leads to growth, quality underpins growth in the investment that we’ve made in improving a quality academic outcomes at Ross is evident by the outstanding US medical life insurance exams boards score that they have has lead to the surge in applications that we’ve had. So that’s about the colors that I can give you, I can't give you a lot of detail on timing just this point yet.

Corey Greendale - First Analysis

Okay. And lastly Rick if I can just go back to some of those cost increases that you have - is the best majority, is that going to be in the DeVry University segment?

Rick Gunst

Yes, just because the DeVry University is the biggest piece of our portfolio I would say so but it’s across the board, because there are things going on within Ross Daniel mentioned, as well as our professional training segments so Chamberlain.

Corey Greendale - First Analysis

Okay. And within those buckets, how much would say or could you take a guess at how much it would be more kind of project based or temporary as opposed in perpetuity hiring’s that you’re doing?

Rick Gunst

I don’t want to even take a guess at that because it’s as we make some investments, when we take an example we mentioned the online expansion that something you could say that's a one timer, but as we if we prove that that continues to long-term dividends we'll continue to do more of that in the coming years. So a lot of it depends on the payback we get from these investments and we evaluate each one as a play out.

Corey Greendale - First Analysis

Okay. Thank you.

Operator

Your next question comes from the line of Brandon Dobell with William Blair. Please proceed.

Brandon Dobell - William Blair

Thanks. Rick, couple of quick housekeeping questions for you. Speaking about tax rate the next couple of quarters that they are balanced around little bit should we trend at the same way, like the first half of the year?

And then also the acquisition you guys made quite pretty immaterial contribution to this quarter’s results and how should we think about the contribution for the next few quarters?

Rick Gunst

Sure. On tax rate - our tax rate is something we try and as we're doing our rates for each quarter try and do a projection of what the year is going to be, so it all depends on the mix of what's going to be domestic versus international business. So, our first half rates should be a good estimate for the full year.

Brandon Dobell - William Blair

Okay.

Rick Gunst

And as far as Advanced Academics, with somewhat percentage it was in terms of basis points for the first - excuse me, for the second quarter there was only two months in our business - and so you can try to extract data from that for competitive reasons, we prefer not to give exact numbers on Advanced Academics and from our earnings perspective, while we'll be making money sort of at EBITDA level we do have amortization of goodwill. So it's sort of immaterial at the profit line for the balance of the year.

Brandon Dobell - William Blair

Okay.

Daniel Hamburger

And Brandon, I'm sorry, it's Daniel has jump in. Yeah, I want to make sure you understand, we're not trying to be evasive, we are not trying to do anything, which is -- this online high school market is growing very quickly, it's very attractive. There is a huge need for it. And there're a lot of people, who would like to know a lot about what we're doing.

Brandon Dobell - William Blair

Yeah.

Daniel Hamburger

And so that's the reason we just aren't disclosing much there.

Brandon Dobell - William Blair

Got your point. And then, maybe kind of combining a couple of questions and comments you guys made. I'm trying to reconcile, how we should think about the extra second half of the year spending, which you guys laid out nicely with your comments, Daniel about, we're only kind of third of the way, maybe a half way through some of this real estate optimization structure we see.

If you look at the run rate expenses here in second quarter, which is the baseline we're using to add up or increase spending going forward in a numbers of areas, is there a corresponding or somewhat of an offset from real estate perspective, which you think about as well that will play into, how we should think about back half of the year, and primarily cost of that services?

Daniel Hamburger

You know, I think, not really. Certainly there could be announcements of actions that we are taking, but their P&L impact would be hard to forecast at this point.

Brandon Dobell - William Blair

All right.

Daniel Hamburger

And then, probably not, you know, highly material to the third quarter since we are already partly in the third quarter and we are not announcing anything. So, probably not a big impact there.

Brandon Dobell - William Blair

Okay. And then a final question. Generally looking at the last couple of year seasonal revenue trends in the different business segments, anything from a timing of starts or launch of programs or anything like that that would be different as you look out to the margins in the June quarter from what we've seen in the past couple of years or is the past couple years a pretty good guide for how quarter-to-quarter revenue trend should look like this year as well?

Rick Gunst

You are talking about, at the top line with revenue? It really shouldn't be anything dramatically that affects the seasonality of our revenue across our different business segments, with DeVry University. You know things tend to be a little smoother than they were maybe historically several years ago as we more the session to become a bigger piece of our business within the professional and training segments.

Q2 is typically softer but we've been seeing a nice increase as we have demonstrated by the results in this quarter that's tend to this smoothened out as well, especially given the change in the way to CPA exam is administered, as well. And Ross and Chamberlain, those are - shouldn't change much in terms of seasonality. In Chamberlain, we are going to see pickups given the expansions that are going on with the new facilities.

Brandon Dobell - William Blair

Okay, great. Thanks a lot.

Rick Gunst

Sure.

Operator

Your next question comes from the line Brian McGuire with Lehman Brothers. Please proceed.

Brian McGuire - Lehman Brothers

Hi, guys. Congratulations on a great quarter.

Daniel Hamburger

Thanks very much.

Brian McGuire - Lehman Brothers

I just want to get back to the EDUCARD program. I was wondering if you might provide some data and what the average repayment period or the average borrowing amount per student might be?

Rick Gunst

Again, the average amount varies throughout the term and the goal being that for students since school we try and have them pay off their balance by the end of the term to start the next term, but there are things that carryover and it varies. I think some students we have a go beyond a term, but in total it’s usually around $1000 per student.

Brian McGuire - Lehman Brothers

Okay. But by the time the students graduated, their balance is expected to be paid off?

Rick Gunst

Yeah, and again there are cases where some students pass it on beyond graduation, we try and keep that down as part of our collection activity.

Brian McGuire - Lehman Brothers

Okay, great. And then Rick just to clarify your comments on incremental costs in the back half of the year, I just wanted to be clear on that, is that a $10 million increase over the second quarter in each of the next two quarters, the third and the fourth. Could you just clarify that?

Rick Gunst

I'd put it into three buckets, one with just seasonality because of the business will have some increase in revenue too in the third quarter so that’s part of the direct cost. And then yes, the timing shifts will likely add 4 to 5 in both directly and operating expenses in both quarters and then depending upon the timing of our investment set we will probably be around this 5 to 7 per quarter as well. So you have those relative.

Brian McGuire - Lehman Brothers

Okay great. Then just one last one. Given some comments in the past about some M&A activities - especially in some of the technical vocational segment of the market - I was wondering if you might just provide an update on the M&A pipeline what you guys are seeing there, what you are thinking about?

Daniel Hamburger

Yeah that continues to be strong and we have a strong corporate development-business development group, also outside advisors that are helping with us that. We continue to look at the pre-baccalaureate level so that’s associate degrees, diploma certificate, particularly with the focus on allied health programs, and when we say allied health, we delineate the primary caregiver being for example a doctor or a nurse or any animal medical world, the veterinarian, whereas the allied health might be the person who is allied with that primary caregiver, so that tax was in medical assistant.

So that's the focus international markets, are a focus for our M&A investigations as well, and there is still many, many good opportunities out there.

Brian McGuire - Lehman Brothers

Okay, great. Thanks guy.

Operator

Your next question comes from the line of Scott Schneeberger with Oppenheimer. Please proceed.

Scott Schneeberger – Oppenheimer

Hey good afternoon and congratulations.

Daniel Hamburger

Thank you, Scott.

Scott Schneeberger - Oppenheimer

First question, could you speak a little bit to pricing, just your forward outlook within the DeVry University and within Chamberlain competitive pressures, anything in light of the lending environment that changes how you are going to go forward there?

Daniel Hamburger

No, nothing that we have seen in this any of the lending environment has impacted our outlook on next year's tuition increases. We are in that process of analyzing that now, and I would expect no radical departure from our past practices.

We continue to look at that, from a competitive standpoint we are looking at what the market is doing, what the publicly funded schools are doing, what the privately funded schools are doing. What are the market funded schools are doing, and that's really the main input into that analysis in that pricing strategy.

We are also looking at their structure of pricing, or trying to take a look are there any ways that we could do a better job there in terms of the ways it's packaged and the structure of it and that's part of our strategic plan over the next couple of years to do some tests and some pilots to see if we can do things that are a better form of pricing, not just the level but the structure of it. But overall levels, we would expect at this point to be along the same lines that we've seen over the past few years.

Scott Schneeberger - Oppenheimer

Okay, thanks. And I assume you are speaking very broadly across DeVry University and may be in the medical bit. Specifically in Chamberlain are you seeing any pricing pressure form added competition?

Daniel Hamburger

No.

Scott Schneeberger - Oppenheimer

No, okay. Thanks.

Daniel Hamburger

No, no, not all.

Scott Schneeberger - Oppenheimer

Okay. And then just a question going back last year you had some head count reduction, you had forecast about a $10 million operating margin impact annually going forward. Just curious to hear, was that estimate accurate? Are you seeing more positive results in your financials, negative? Is the timing on - how is that tracking for the guidance you gave prior?

Rick Gunst

Sure, this is Rick. That number that we gave when we took those actions in the fourth quarter of last fiscal year were based up on our estimate of the savings from the positions that were eliminated net of any add backs of positions we've have to make to go forward and I think what we found is that the timing of the some of the add backs may have taken a bit longer, that some of the positions that we talked about earlier that haven't been filled. So, in reality for this fiscal year it probably going to be a little bit bigger number than that. The gross amount was not right on target from what we thought but the net amount was probably a little bit higher.

Scott Schneeberger - Oppenheimer

All right, thanks very much.

Rick Gunst

Sure.

Operator

We're showing no more questions in queue at this time.

Joan Bates

Very good, well thank you all for your questions and I want to remind everyone our next conference call will be held on April 24th - the net announcement is not just third quarter results but also the spring enrollments at DeVry University and Ross University. So thanks again everyone, we'll talk to you next time.

Operator

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have good day.

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Source: DeVry F2Q08 (Qtr End 12/31/07) Earnings Call Transcript
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