Lincoln Educational Services F4Q07 Earnings Call Transcript

Mar. 6.08 | About: Lincoln Educational (LINC)

Lincoln Educational Services (NASDAQ:LINC)

F4Q07 Earnings Call

March 6, 2008 10:00 a.m. ET

Executives

Dave F. Carney-Chief Executive Officer and Chair of the Board of Directors

Shaun McAlmont- President and Chief Operating Office

Cesar Ribeiro-Senior Vice President, Chief Financial Officer and Treasurer

Analysts

Sara Gubins -Merrill Lynch

Amy Junker-Robert W. Baird & Co., Inc

Jeff Silber-BMO Capital Markets.

Trace Urdan-Signal Hill Group LLC

Gary Bisbee -Lehman Brothers

Kevin Daugherty-Banc of America Securities

Operator

Welcome to the 2007 Lincoln Educational Services Earnings Conference Call. At this time, all participants are in a listen only mode. We will be conducting a question and answer session and we ask that you please limit your questions to no more than one and one follow up. This conference is being web cast and an audio version of the call will be available on the company’s website for 90 days. As a reminder, this conference is being recorded for today’s purposes.

Before we begin today’s call, the company would like to remind everyone that this conference may contain certain forward-looking statements related to future events, future finance and performance, strategies, expectations, competitive environment, regulations and availability of resources. Such forward-looking statements are based upon current expectations that involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statements based on a number of factors and other risks which are more specifically identified in Lincoln’s filings with the SEC.

And now I would like to turn the call over to Mr. David Carney, Chairman and CEO of Lincoln Educational Services. Please go ahead, David.

Dave Carney

Thank you Sereta and good morning everyone and welcome to the Lincoln Educational Services Fourth Quarter and Full Year 2007 Earnings Conference Call. Joining me today is Shaun McAlmont, President and Chief Operating Officer, as well as Cesar Ribeiro, our Senior Vice President, Chief Financial Officer. Following my remarks Shaun will provide an update on operations and Cesar will provide a detailed review of our fourth quarter and full year 2007 financial results. We will then open the call for the question and answer session.

Now turning to our results from continuing operations; our fourth quarter revenue rose 8.2% to 90.3 million as we benefited from the strong third quarter starts of 10.3% and the 7.7% improvement in year-over-year fourth quarter starts. Net income from continuing operations was 9.6 million and diluted earnings per share from continuing operations was $0.37 versus $0.38 in the fourth quarter of last year. However, diluted EPS from continuing operations for the fourth quarter of 2007 included $0.04 of additional charges including severance expenses and incremental sales and marketing investments.

For the full year 2007 our revenue grew by 5.5% to 327.8 million compared to 310.6 million for 2006. Net income from continuing operations was 13.8 million compared to 17.1 million for 2006. Diluted EPS from continuing operations was $0.53 in 2007 compared to $0.65 for the year ending December 31, 2006. Now, average enrollment for the fourth quarter of 2007 was 19,167 students a 5.4% increase versus the same period last year.

Now on our last call, we stated our plans to increase our sales and marketing spend during the fourth quarter with a goal of maintaining the overall business momentum generated during the third quarter. Now today, I am happy to report that those efforts proved successful as starts for the fourth quarter were 4,440, a 7.7% increase over the fourth quarter of 2006. Now with that said, it’s important to note that our cost per lead was flat during the fourth quarter as a result of a favorable shift away from the more expensive television leads, the more economical leads from our web site and other web based initiatives. Our 7.7% start growth of the fourth quarter follows a 10.3% growth we experienced during the third quarter of this year and represents the fourth consecutive quarter of positive growth for continuing operations. Overall starts for 2007 exceeded the prior year by 7.1%.

Finally, as a result of our strong fourth quarter and full year starts growth, our student population at the end of 2007 was 8.5% higher than that at 2006 year end. Now as a result, Lincoln entered 2008 with improved carry over population, over 1400 students and a healthier, more efficient company. As you know, we entered 2007 with a negative carry in population due to a short fall in starts during the third and fourth quarters of 2006. A lower population, carry in population last year, put pressure on revenues and our overall performance during the first half of 2007.

I am pleased that our enrollment and starts performance during the fourth quarter and the full year directly reflects the benefits we’re beginning to see from our re-branding. The year-over-year improvement in high school starts, our increased program diversification, our effective media advertising and improvement in our sales organization. More over, we were able to produce these results despite the overall operating environment remaining challenging.

Now let me turn to the steps that we’ve taken to improve our results in this challenging environment. In response to the slow down in student starts that our entire industry has experienced over the past 24 months, we analyzed all aspects of our business and implemented a number or strategic initiatives aimed at improving the effectiveness of our organization and I’d like to highlight a few of them.

One key initiative was to improve our high school recruiting process through a more efficient sales organization and completing financial aid packaging earlier in the process. Our efforts proved successful as we generated improved high school starts during our key high school recruiting period between May and October of 2007. In addition, following Shaun’s promotion to President and Chief Operating Officer in January of last year, we realigned our company into two distinct and focused operational groups; the Lincoln Tech group and the Lincoln Educational group. This realignment was in response to our having significantly diversified our program portfolio via acquisitions and organic program development over the past several years.

However, with diversity comes a need for addressing the different opportunities and challenges that our schools now face. The realignment and separation of our schools has enabled us to better manage our programs and improve our student recruitment processes. Also, we made the decision to close 300 performing schools in 2007, whose financial results had not achieved our expectations. We concluded that the continuing operation of these campuses was inconsistent with our strategic goals. These are a few of the examples of successful changes that we have implemented. Shaun will provide further insight into other operational efforts during his prepared remarks.

Now turning to our 2008 outlook and guidance; based on a positive carry in population of 8.5% versus a year ago and an increase in student starts of 6 to 7% over 2007, we expect annual revenue of 355 million to 365 million and EPS of $0.62 to $0.66 representing diluted EPS growths ranging from 17 to 25% over 2007. Our outlook for 2008 does not anticipate any change to the current operating environment.

Now in terms of first quarter 2008, we expect starts to increase 6 to 7% over the first quarter of 2007. We expect revenue of 81.5 to 82.5 million and a diluted loss per share of $0.02 to a break even EPS.

Finally, I’d like to take a moment to comment on the current student lending environment and the effect on Lincoln. As we reported back in January in our press release we, like others, received a termination letter for our tiered discount loan program provided by Sally Mae or SLM effective February 18, 2008. For the year ended December 31, 2007, approximately 7% of our revenue on a cash basis was funded by private loans including SLM recourse, non-recourse and opportunity fund programs. The termination letter we received from SLM relates only to its tiered discount program, which deals primarily with sub-prime credit; credit worthy students were not impacted. For Lincoln, approximately 67% of our private party loans or about 4%, 4.6% of our revenues were considered sub prime on a cash basis for the year ending December 31, 2007. Now for clarification, we received 83% of our funding from Title 4, another 13% from state grants and our cash payments, with a balance for 7% from the private loans. By the time we received the termination letter, we had already taken steps to minimize the use of SLM funds to finance our students education, due to anticipating changes in student financing as well as changes that SLM made to its’ lending practices. As a result, we believe that SLMs decision to terminate its’ tiered discount loan program will have a limited impact on Lincoln as we had only used $500,000.00 at year end 2007. Our current plan is to finance the students through internal funding and we are confident in our decision as the credit worthiness of our students has not changed. However, we will continue to look for other options for student financing.

And with that said, let me turn the call over to Shaun for a review of our operations. Shaun.

Shaun McAlmont

Thanks Dave and good morning everyone. I’d like to begin my remarks to day by providing you with an update on our 2007 priorities. Early in the year, I laid out a plan to address five key areas for our organization including high school sales, marketing, online growth, media sales and new programs. Regarding the 2007 high school plan, one of the most important areas within our 2007 initiatives focused on high school improvement as a means of organic growth. As a point of reference, high school performance issues in 2006 negatively affected third quarter 2006 high school starts, which in turn had a negative impact on 2006 and early 2007 financial performance. With a tremendous effort, the high school teams across our company caught up to prior year totals in leads and enrollment and effectively exceeded start rates; thereby improving year-over-year high school starts in 2007. Throughout the year high school sales manpower was ramped up and we trained these skilled field employees at higher rates than we’ve experienced in many years, keeping our momentum rolling into the 2008 high school recruitment year.

Regarding the 2007 marketing plan, 2007 was a banner year for our marketing team, as they increased our total lead flow by 6% over 2006 totals, with conversions and cost metrics remaining stable. For our most recent quarter television leads were approximately 20% of our lead total, while web sources produced 80% of our leads. For the full year all web base leads increased 10% over the prior year. As we managed this shift to higher numbers of web based leads, we executed our plan to develop and launch a new company website, which integrates the web presence of all our past brands into one unified Lincoln site. Moreover, it was developed with significant market research focus group influence and it is well optimized.

We define leads captured specifically by the website as non-duplicated inquiries with full name and contact information. These particular leads amounted to 29% of the total leads generated in 2007 and increased 36% over the website leads generated in 2006. TV leads remain expensive and continue to decrease, yet they remain an important part of our branding strategy. TV efforts will also be supported by a new Lincoln automotive infomercial in the coming weeks.

Other important components of our 2007 marketing plan included increasing third-party pay per lead advertising, redesigning collateral based on the re-branding initiative, increased newspaper advertising, new high school support media and new commercials featuring programs in each of our five verticals.

Regarding the 2007 online plan, our nascent online program continues to gradually advance into a more meaningful component of our student population. We ended December with 320 online students in both degree completion and full online programs. And as a reminder, we repositioned the online regulatory base from the close of NorthCross campus to our West Palm Beach campus and we ultimately delayed starts by doing this, however we gained the long-term opportunity to offer a broader range of programs. This transition also requires us to move to quarterly starts from monthly thereby changing our start frequency early in 2008. Our base operation, learning management system and online faculty are all functioning well and serving as a platform for future scalable growth.

Regarding 2007 sales development, we launched a campaign to improve our sales performance in 2007 into 2008 by spending rough turn over, improving conversions, fine tuning our training and adding resources for sales staff and managers. We’ve made significant progress in this initiative as reps were able to make gains in high school conversions and starts in the third quarter and also make gains in media starts in the fourth quarter. We’re also seeing year-over-year improvements in sales performance during the early months of the first quarter of 2008. All in all, this is an impressive accomplishment for the company in a challenging vocational market. This is clearly an area that will require continued attention and execution through out 2008.

Regarding the 2007 new programs, in 2007 we were able to take advantage of our diversification and acquisitions as we launched and transplanted programs in multiple campuses. These new programs included: the launch of cosmetology in Rhode Island; the launch of culinary in Columbia; the upgrade of allied health programs in our southwestern schools; the launch of licensed practical nursing in our New Jersey schools; the launch of online business programs; the approval of electrician and welding programs in Texas for launch in the first quarter of 2008; the approval of online IT programs which are in development to launch in the second quarter of 2008; and the approval of IT programs and launch for 16 ground campuses that began in the fourth quarter of 2007 and will continue through the second quarter of 2008. We feel that these launches will aid in the future organic growth of the company and also in capacity utilization moving forward.

Now let me turn to our 2008 priorities. Now over the course of 2007 we made significant progress in executing our various operational strategies and entered 2008 a more efficient and well run organization. With that said, our work is not done, as goals for 2008 are to build off of the strong foundation we laid during 2007 and continue to drive growth and capacity utilization. There are three key priorities for 2008 and they are first to advance our high school effort; second, to launch a broader online strategy; and third to continue to improve the execution of our basic functions. Our 2008 high school plan is geared at sustaining the momentum we gained in 2007 while taking advantage of a stabilized rep force, improvement in our conversions, increased lead flow and the further development of key high school relationships around the country. As media automotive starts remain flat, we expect high school starts for automotive schools to show gains over prior year. As mentioned earlier, year-to-date automotive high school lead and enrollment totals are encouraging against prior year numbers. These students will start school between the months of June and October with heaviest impact in the third quarter.

Our 2008 online plan is targeting the launch and growth of our new bachelors degrees in business, criminal justice and information technology. With the shift of the base accreditation to the West Palm Beach campus, first quarter starts shifted to quarterly delivery to align with West Palms delivery model. And although we won’t reach the 500 student mark in the first quarter, we’re making progress with our operation and a transition through the changes necessary to manage forward. We’ve received approval for online bachelors degrees in criminal justice, business management and information technology and these programs will be offered in May. These programs will also be offered as a part of the growth plan for online and the growth plan for our business and IT vertical.

In regards to our focus on 20087 basic executions, we’re committed to continuing the management of our basic operational execution to higher levels of excellence. Specifically, we’ve been focused on consistent instructor training and improving the delivery of our growing number of diversified programs. We’ll be vigilant in the ongoing management of the student experience through the development of informational and motivational orientations, helpful financing, meaningful class time and constant assistance toward student graduation.

We’re improving our facilities through upgrades to existing sites, new facilities, new program build outs and the addition of other student resources. We’ve implemented company wide prosthesis to manage student attendance, as we’ve determined it to be our root factor contributing to solid retention and graduation rates.

We continue to add vital student services to maintain our population. We focused on corporate wide placement assistance and preparing students for their job search well before graduation. And finally, we’re making targeted program revisions to update our curriculum based on very specific feedback from our industry advisors. We’re already seeing progress related to this improved execution. Our student satisfaction survey results steadily improved during 2007 and we expect this improvement to continue through 2008. We measure student satisfaction in terms of high satisfaction, or scores between eight and ten on a ten point scale and low satisfactions were scored between one and three on the same scale for a series of 65 questions. High scores have increased by 3% points year-over-year and low scores have decreased by 1.4% for the same period, giving us notable improvement in both areas. This metric is a great indicator of our progress in the earlier mentioned areas of execution. Our ability to provide a positive learning experience while also fulfilling our mission reflects in our satisfaction scores.

Another area of focus for our basic operations will include: continued sales development with efforts looking at attention given to our stratifying of representative levels, revising our compensation, updating performance standards based on a changing lead environment, new local team structure and updating reward and recognition systems. We will continue to advance our 2007 marketing initiatives into 2008 as well. Attention will be given to advancing the sales technologies embedded in our website, launching infomercials to further penetrate our vocational markets, promoting our emerging industry partnerships, increasing our presence in national high school skills competitions and new methods of promoting our campuses in each one of our local markets.

In summary, we’re encouraged by the progress we’ve seen in 2007. Our employee moral is high and we’re seeing a great team orientation toward improving our operations and growing our business. Our restructuring a year ago is providing a setting that allows for more effective management, expeditious problem solving and distinct strategy development for each of our operational units moving forward.

Operationally our guidance assumes a first half of continued growth in non-automotive programs and flat automotive starts over prior year. In the second half we expect high school starts to impact total automotive starts to year-over-year gain, while media starts will continue to drive higher starts in non-automotive programs. Needless to say, we’re looking forward to a great year for our company.

At this point, I’d like to turn the time over to Cesar for the financial review.

Cesar Ribeiro

Thank you, Shaun. Revenues increased by 17.1 million or 5.5% to 327.8 million for 2007 from 310.6 million for 2006. Approximately 7.4 million of this increase was a result of our acquisition of New England Institute of Technology of Palm Beach Inc. or Florida on May 22, 2006. The remainder of the increase was due to tuition increases. The year ended December 31, 2007, our average undergraduate full time student enrollment increased 1.7% to 17,687 students compared to 17,397 for the year end December 31, 2006. Excluding our acquisition of Florida, our average undergraduate student enrollment decreased by 0.4%, 16,682 from 16,757 in 2006.

Our operating income for the year ended December 31, 2007 was 25.9 million, which represents a 15.4% decrease compared to the year ended December 31, 2006. The reduction in operating income was due primarily to lower average enrollments between years. The loss of revenue from these students coupled with the high fixed costs of operating our business led to lower margins.

Our educational services and facilities expenses increased by 10.2 million or 7.9% to 139.5 million for 2007 from 129.3 million for 2006. Our acquisition of Florida accounted for 3 million or 29.4% of this increase. Excluding Florida, instructional expenses and books and tools expenses increased by 1.1 million or 1.7% and 1.8 million or 11.9% respectively over the prior year primarily due to increased compensation and benefit expenses and due to higher volumes of sales for books and tools. The remainder of the increase in educational services and facilities expenses was primarily due to facilities expenses, which increased 4.3 million over the prior year. Of this amount, approximately 3.7 million represents increases in facility costs and 0.6 million represents additional depreciation expense during the year over prior year.

The increase in facility costs is due to a $1 million increase in rent expense in 2007 due to our expanded facilities out on Rhode Island, Southwestern and Indianapolis campuses. We also experienced increased cost for insurance and real estate taxes which increased approximately 0.5 million from the prior year, utilities, which increased approximately 0.5 million over the prior year and from repairs and maintenance expenses which increased approximately 1.4 million over the prior year. Approximately 0.8 million of the increase in repairs and maintenance was due to higher than normal repairs and maintenance expenses at one of our schools.

Educational services and facility expenses as a percentage of revenues increased to 42.6% for 2007 from 41.6% for 2006.

Turning to our selling, general and administrative expenses for the year ended December 31, 2007, there were 162.4 million, an increase of 11.3million or 7.5% from 151.1 million for 2006. Approximately 4.1 million of this increase was attributable to our acquisition of Florida. The remainder of the increase was primarily due to:

A. A 1 million or 3.3 % increase in sales expense resulting mainly from yearly compensation increases.

B. 8.6 million or 2.1% increase in marketing costs, as a result of increased advertising expenses associated with student leads and enrollment, and

C. A 5.2 million or 7% increase in administrative expenses over prior year.

The increase in marketing expenses during 2007 included a shift from television advertising to internet based initiatives and the re-launching of our website. These initiatives increased student leads at a lower cost per lead. Included in administrative expenses during the year are an upfront non-cash charge of 0.5 million, incurred in connection with the termination of certain leased agreements and a 0.6 million charge incurred in connection with severance payments related to the separation of employment of two executives. The remainder of the increase in administrative expenses was attributable to a higher provision for bad debts for 2007 as compared to 2006, bad debt expense, excluding Florida, in 2007 increased 1.8 million from 14.9 million in 2006 to 16.7 million for the year ended December 31, 2007. This increase was due to higher accounts receivable balances throughout the year as compared to prior year, resulting from increased loans to our students. The remainder of the increase in administrative expenses is due to the early compensation increases to existing personnel and higher benefit costs during the year.

As a percentage of revenue, selling, general and administrative expenses increased to 49.5% for 2007 from 48.7% for 2006. As a result of the above, our operating margins for the year end December 31, 2007, decreased to 7.9% from 9.9% in 2006.

Net income from continuing operations for the year end December 31, 2007, was 13.8 million or $0.53 per diluted share as compared to 17.1 million or $0.65 per diluted share for 2006.

Now let me turn to our fourth quarter operating performance.

For the fourth quarter, revenues increased by 6.8 million or 8.2% to 90.3 million for the fourth quarter of 2007 from 83.5 million for the comparable period in 2006. Revenues for the fourth quarter of 2007 were positively impacted by a 7.7% increase in student starts and an increase in our average population of 5.4%. For the fourth quarter of 2007 our average population was 19,167 students compared to 18,193 students in the fourth quarter of 2006.

Our operating income for the fourth quarter of 2007 was 17 million which represented a 1.2% decrease compared to the fourth quarter of 2006. The reduction in operating income was due to the increased investments and marketing during the fourth quarter of 2007 and the severance related charges.

Educational services and facilities expenses increased by 1.7 million or 5.3% to 34.9 million for the fourth quarter or 2007 from 33.2 million in the fourth quarter of 2006. Approximately 0.8 million of the increase in educational services facilities was due to yearly compensation increases to our instructional staff, increases in books and tool expenses resulting from annual cost increases and higher volumes of sales for books and tools. The remainder of the increase is due to additional rent expense in the fourth quarter of 2007 due to our expanded campus facilities at our Rhode Island, Southwestern and Indianapolis campuses and higher depreciation expense during the year. Educational services and facilities expenses, as a percentage of revenues, decreased to 38.7% for the fourth quarter of 2007 from 39.8% in the fourth quarter of 2006.

Our selling, general and administrative expenses for the fourth quarter of 2007 were 38.3 million, an increase of 4.8 million or 14.6% from 33.5 million for the fourth quarter of 2006; of this increase, approximately 1.8 million relates to increases in advertising during the fourth quarter of 2007 as compared to the fourth quarter of 2006.

Administrative expenses during the quarter accounted for an additional 2.7 million of the increase. Included in this increase is approximately 1.8 million in additional bad debt expense. The increase in bad debt expense is primarily due to the increase in day sales outstanding to 25.1 days from 22.8 days in the fourth quarter of 2006. This increase was due to higher accounts receivable balances throughout the year as compared to prior year, resulting from an increase in funding of loans to our students. Included in the administrative expenses for the fourth quarter of 2007 is a 0.6 million charge incurred in connection with severance payments related to the separation of employment of two executives. The remainder of the increase in administration expenses, as well as selling and general administrative expenses, is due to yearly compensation increases and increases in the cost of employee benefits.

For the quarter ended December 31, 2007, our bad debt expense was 5.7% as compared to 3.9% for the same quarter in 2006.

As a percentage of revenue, selling, general and administrative expenses for the fourth quarter of 2007 increased to 32.4% from 40.1% for the fourth quarter of 2006. As a result of the above, our operating margins for the fourth quarter of 2007 decreased to 18.8% from 20.6% from the fourth quarter of 2006.

Net income from continuing operations for the fourth quarter of 2007 was 9.6 million or $0.37 per diluted share as compared to 9.8 million or $0.38 per diluted share for the comparable period in 2006.

Turning to our balance sheet, at December 31, 2007, we had 3.5 million in cash and cash equivalents compared to 6.5 million at December 31, 2006. The reduction reflects our continued investment in our business. At December 31, 2007, our stockholders equity was 162.5 million compared to 151.5 million at December 31, 2006, with the increase resulting from net income for the period of stock based compensation expense.

And with that, I’d like to turn the call back to Dave.

Dave Carney

Thanks, Cesar. In summary, 2007 was a successful year for the company on many fronts, as we implemented a number of structural and operational changes that reignited our growth and fostered a sense of optimism across our operations. As a result of our growth and starts in 2007, we entered 2008 with a positive carry over population and in a significantly stronger position. I’m also encouraged by first quarter starts to date. And as indicated earlier in our guidance, we expect the quarter to represent the fifth consecutive quarter of positive growth.

In 2008 we expect to further sharpen our operational focus and continue driving program diversification through the introduction of new ground and online programs across our five key verticals. In addition, we look to capitalize our improved position and drive margin expansion through increased capacity utilization during the second half of the year.

Finally, organizationally we are much stronger today because of the succession planning, which has resulted in a young, energized management team , coupled with the establishment of two distinct operational groups: The Lincoln Tech group and the Lincoln Educational group.

And with that said, we’d be happy to begin the question and answer period. Operator.

Question-and-Answer Session

Operator

Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press star followed by two. Questions will be taken in the order received. Please press star one to begin.

And your first question comes from the line of Sarah Gubins of Merrill Lynch. You may proceed.

Sara Gubins -Merrill Lynch

Hi, good morning.

Dave Carney

Morning, Sara.

Sara Gubins -Merrill Lynch

Could you talk a little bit about enrollment trends by program area. And then, within auto, any thoughts on why high schools improving, but media is still struggling?

Dave Carney

Well, let me start with the trends across the five verticals. I would say that all of the verticals, with the exception of auto, are trending favorably based on our media advertising. Auto is still flat. We contributed to, or attribute it to basically the inability to compete with the job market and we’re making changes in our advertising to become more effective and try to reach those folks. The high school side of it is very encouraging. And Shaun mentioned the fact that we expect to be flat on the auto side in terms of starts for the first half, the build up year-over-year is pretty encouraging and I think that really relates to the fact that we have a much stronger sales force and they see the career opportunity, the high school graduate.

Sara Gubins -Merrill Lynch

Great and then any color on health care and other programs, skilled trades, that sort of thing.

Dave Carney

Well the skilled trades programs, as we mentioned, we’re very encouraged by the build up increase. We just rolled out the electrical and welding in the Grand Prairie, Texas facility, with our first class starting February 29, very encouraging. We expect that to continue nicely over the balance of the year. So, that’s a vertical with a lot of upside from our standpoint. As far as health sciences goes, the introduction of the LPN program in New Jersey is building nicely, the medical assisting continues to grow well and as far as hospitality services and so on, we’re encouraged there as well, Sara.

Sara Gubins-Merrill Lynch

Ok and then just follow-up questions. Can you talk about your plans for price increases next year?

Dave Carney

We would expect, we’ve already increased prices effective January 1, in many of our schools by about 3%, 3 to 3.5%.

Sara Gubins-Merrill Lynch

Alright thank you, I’ll jump back in the queue.

Dave Carney

Okay.

Operator

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

Amy Junker-Robert W. Baird & Co., Inc.

Good morning everyone.

Dave Carney

Good morning.

Amy Junker-Robert W. Baird & Co., Inc.

Just a couple of quick clarification questions with respect to this private lending; can you clarify what percentage of your students actually get some sort of private loan to help them pay. And would the percentage of sub prime that you talked about, you know, the 60, I think you said 67% be roughly the same there of the percentage of those students?

Dave Carney

Yes, about 50% of our students receive private loans. And the 4.6% that we mentioned earlier in terms of sub prime, that basically equates to roughly a commitment of using 2008 revenues, so probably $17 million. And while you haven’t asked, we’ll tell you, we mentioned that that’s incorporated into our guidance for next year to the extent of about $0.03 per share.

Amy Junker-Robert W. Baird & Co., Inc.

Okay and then, I guess regarding the students that you’re lending directly to, roughly how many students are you lending directly to. And how, is that a big change versus say a year ago, so have you really ramped that up in the last say, six, nine months?

Dave Carney

You want to take that Cesar?

Cesar Ribeiro

Yes, we are lending to a lot more students. Basically what happened during 2007 is we stopped utilizing the Sally Mae program, as we deemed it to be too expensive. We picked up the gap that we used to fund, that used to be provided through our opportunity loans. So, we’re funding about $15 million, or we have commitments of about $15 million out there as of December 31. We would expect that to eventually turn into, about 50% of that we’ll turn into receivables over a year period. And that probably represents I think, as Dave said, roughly about 50% of our students get some sort of gap financing.

Amy Junker-Robert W. Baird & Co., Inc.

Okay and then just, as we think about bad debt expense for 2008, what do you think is a reasonable level given your ramp up here; should we think it continues to trend towards 6% or in excess of that through 2008?

Cesar Ribeiro

I would expect that bad debt expense will continue to increase. However with that said, I think as Dave said, we baked about $0.03 into our guidance. But while bad debt expense as a percentage of revenue will continue to increase, we also expect some of that to be offset by additional revenue from student financing. So net, net we have incorporated about a $0.03 charge for the year.

Amy Junker-Robert W. Baird & Co., Inc.

Okay great, thank you.

Operator

And your next question comes from the line of Jeff Silber of BMO Capital Markets. You may proceed.

Jeff Silber-BMO Capital Markets

Thanks so much. Just a quick follow up on the last question. So, the $0.03 per share is basically an increase in bad debt expense offset by some income from student

financing, but does it assume any kind of disruption or fluctuation in enrollment trends at all?

Shaun McAlmont

No absolutely not Jeff.

Jeff Silber-BMO Capital Markets

Okay, going back to the performance in the quarter. You talked a little about some of the performance by vertical. Can you just remind us, in terms of your population auto versus non-auto, how that breaks down?

Shaun McAlmont

You know we talked in general about our automotive and skilled trades representing about half of our population.

Jeff Silber-BMO Capital Markets

Okay, great. And you had mentioned Dave, in your remarks, that you thought the reason that the starts had been somewhat flat was because your, you think you’re still competing with the job market. I mean, it looks like the job market is weakening, people are expecting it to continue to weaken. When do you think that’ll start impacting you beneficially in terms of enrollment?

Dave Carney

I wish I knew Jeff. I mean I think, you know, as I mentioned in my remarks, we’re not assuming any change in the economy that would behave, react, would give us a favorable impact in 2008 so…

Jeff Silber-BMO Capital Markets

Let me ask, I’m sorry, I’ll ask the question another way. You’ve been doing this a long time.

Dave Carney

I have.

Jeff Silber-BMO Capital Markets

Historically how much of a lag has there been?

Dave Carney

I haven’t been doing it a long time in automotive, but I would hope that as the unemployment rate continues to increase that we would begin to see some benefit from it within the next six months to a year.

Jeff Silber-BMO Capital Markets

Okay that’s fair; just a couple quick numbers questions. Historically you’ve given us some associate degree student data. I don’t know if you gave that this quarter, if we can get that, that would be helpful.

Dave Carney

We didn’t, but it’s about 21%.

Jeff Silber-BMO Capital Markets

21% and that’s relative to last year, how much was that?

Dave Carney

It’s been increasing. I get, over the last two years we doubled it. It was around 11% a couple years ago Jeff, it’s creeping up to the mid-teens last year, so it’s up around 21% at this point.

Jeff Silber-BMO Capital Markets

Okay great and in terms of capital spending in the quarter and also what you’re looking for, for 2008?

Cesar Ribeiro

Yes, in the quarter, well our total capital expenditures were, for the year were 24.8 million. And for 2008 we’re looking to spend somewhere between 25 and $30 million.

Jeff Silber-BMO Capital Markets

Alright great and what should we be expecting for D&A in 2008? Depreciation

and amortization, I’m sorry.

Cesar Ribeiro

It’ll be more than $15 million.

Jeff Silber-BMO Capital Markets

And how about a tax rate we should be using?

Cesar Ribeiro

41.8 to 42%.

Jeff Silber-BMO Capital Markets

Alright that’s great. I’ll jump back in, thanks so much.

Operator

And your next question comes from the line of Trace Urdan of Signal. You may proceed.

Trace Urdan-Signal Hill Group LLC

Hey, good morning.

Cesar Ribeiro

Good morning.

Trace Urdan-Signal Hill Group LLC

I’m sorry to keep going back to this tired issue, but I’m wondering Dave or Cesar if you could give us some sense of, as you’re looking at the bad debt expense based on your level of lending going into 2008 are you, how are you thinking about defaults relative to, I don’t know what, relative to history. You know, I’m not asking you to give us that number unless you’re comfortable, but how are you thinking about what that number should be as you evaluate what the impact on your earnings are going to be going forward?

Dave Carney

Go ahead Cesar.

Cesar Ribeiro

Yes basically I think, as we said back in our press release, we don’t expect our default rates to change. Our students have not changed only their financing options. So we expect defaults to remain constant, because we have the same population. We continue to reserve based on historical trends. We have very accurate trends going back for several years and we run concurrent models that we update regularly, that talks about how every student that’s come to our school performs over time. And based on that, we know what our graduates have paid us when they left owing us money, how they’ve performed. We know how our students that interrupt owing us money have performed. So, basically our reserve methodology takes into consideration three categories of students: Active students, interrupt students and graduate students, and reserve for all three buckets of those students based on models that we update on a quarterly basis to make sure that there hasn’t been any shift in the performance of those categories.

Trace Urdan-Signal Hill Group LLC

Okay and as you look at those models, those historical models that you’re using for this, is it not the case that fluctuations in the economy make a difference or are those differences on a historical basis pretty minimal?

Cesar Ribeiro

We have not seen any differences based on our historical data, maybe 0.1, 0.2, but very insignificant differences over time. We have not seen any shift in the performance of our cohort rate, if you want to call it that.

Trace Urdan-Signal Hill Group LLC

So the most significant driver of default performance is really related to, I guess, the student continuing on in the program versus not, is that fair?

Cesar Ribeiro

That is correct.

Shaun McAlmont

That’s absolutely right Trace.

Trace Urdan-Signal Hill Group LLC

Okay, that’s very helpful, thank you.

Operator

And your next question comes from the line of Kevin Daugherty of Banc of America Securities. You may proceed.

Kevin Daugherty-Banc of America Securities

Great thanks guys. I know you mentioned in the release a bit more of a focus on acquisitions. I just want to see if you can elaborate there, you know kind of what your appetite is. And, you’ve obviously made a lot of efforts to cross pollinate some of your programs, maybe just how far along are you? I mean just where I’m going for with this, what’s the balance between internal growth versus M&A?

Dave Carney

Let me answer it this way, we’ve made seven acquisitions over the last several years. They’ve added 17 campuses so today those acquisitions, which have all been extremely successful, have brought us new programs and have certainly helped us expand the footprint. We continue to have a pipeline of potential acquisitions. We think the market, or the environment is favorable for making acquisitions so I think it’s likely that we’ll make another acquisition in the near term.

Kevin Daugherty-Banc of America Securities

And any particular areas or programs where you’d be more focused, or geographies?

Dave Carney

Well I mean, we certainly want to expand our footprint, so you can see where we probably would be going in that respect. But, as far as, you know we’re going to stay within our five verticals, I can tell you that. We’re always interested in regional accreditation and certainly to some extent degree programs and last but not least certainly schools that would have online opportunities as well to support what we’re doing.

Kevin Daugherty-Banc of America Securities

Okay and just another question about those three schools that you shut down. Can you maybe just explain that processing of how were you able to do it so quickly? I know… just in your pairs you tend to do more of a lengthy teach out in some circumstances. So just what gets you able to do that quicker versus…

Dave Carney

First of all we have had a lot of experience and have excellent relationships with the regulators. So we made the decision, we offered students the opportunity to complete their programs, in some cases at other campuses or with schools that were in the immediate area. And we were successful in accomplishing that in real time. And more, probably the majority of the credit really goes to the team of people that we have in our company that have made us successful when we make acquisitions and likewise when we have to handle other less comfortable areas like this.

Kevin Daugherty-Banc of America Securities

Okay and then just one last question. I just wanted to circle back on some of the loan issues. As you’re doing more of these loans yourself, how have you been maybe adding some resources to handle that process? Who ultimately services these loans and maybe just more basically from the student’s standpoint how does that process differ?

Dave Carney

Sure, we’ve always provided some type of loans to our students. Just for comparison purposes, at 12/31/06 we had about $4 million of commitments out to students. We utilize a third-party service provider, so when the students actually sign the notes and the loans they do not know that it’s coming from Lincoln, it’s coming from someone else. We also have the capabilities in house. We have a separate accounts receivable team that focuses on nothing but collections and making sure that the students stay timely. So we also have the availability to bring that in house if we so choose to. For now we do have that function.

Kevin Daugherty-Banc of America Securities

Thanks for the color.

Dave Carney

You’re welcome.

Operator

As a reminder ladies and gentlemen, please press star one to ask a question. And your next question comes from the line of Gary Bisbee of Lehman Brothers. You may proceed.

Gary Bisbee -Lehman Brothers

Hey guys good morning.

Dave Carney

Morning, Gary.

Gary Bisbee -Lehman Brothers

You know I heard you comment on the lead cost and moving mix to the internet to keep that flat. Can you give us any sense what the total student acquisition cost was. And I guess what I’m wondering is, you’ve talked about beginning that progress, bringing down the turn over of your rep force a bit. Is that starting to really drive efficiency or is that more something you hope can happen in ’08?

Shaun McAlmont

I’ll take the efficiency comment. We found that turnover has affected us negatively in the past and especially in the area of high school recruitment. If you look at the difference between our high school staff and our media staff, the high school represented a responsibility is to go out into the high school and build a relationship, one that’s a relationship of trust and one that will allow them to get into the classroom and develop lead flow. We found that in retaining those particular field representatives at higher rates over the last year, they’ve been able to generate significantly more leads and that‘s what gives us confidence moving into 2008. So our efficiencies are giving us a lot of confidence in that particular area. As far as overall acquisition costs directionally speaking, yes the move to the web is giving us a much more efficient and well converting lead flow. And so we would expect those efficiencies to continue to get better over time and cost measures. So I’ll let Cesar talk specifically to the cost.

Cesar Ribeiro

Yes Gary. For the year, for 2007, when we talk about cost per start obviously we refer to it as book sales and marketing cost to bring in the student. Our cost per start for 2006 is 2,700 and $2,726.00 because of the shift that Shaun’s talking about, we actually reduced our cost per start in 2007 by 1.5% and that number was $2,684.00 for 2007 for 2007.

Gary Bisbee -Lehman Brothers

Okay thanks. Just in terms of the lending thing, I guess two more questions there. Are you going to charge the students, have you historically or are you going to charge the students interest while their in school or will interest accrue on that but you’re actually not going to make them make payments until after the programs over? And then secondly on that, is this going to flow through and has it been flowing through revenue, or is it going to flow through your interest income line?

Shaun McAlmont

Those are good questions. Yes, go ahead Cesar.

Cesar Ribeiro

First of all, when the student signs up the student signs a promissory note; we finance our students based on their ability to pay up to a maximum of seven years. They are required to make payments starting on the 31st day both P&I. We do not accrue for interest; we require interest on the cash basis that goes to interest principle. The not has, is irrelevant to the way we record revenue. We record revenue based on student tuition amortized equally from equally from the date of start to the date of graduation. The interest income we require on a cash basis and reserve for those receivables just like we would for any other receivable.

Gary Bisbee -Lehman Brothers

Okay thanks.

Cesar Ribeiro

Does that answer your question?

Gary Bisbee -Lehman Brothers

Yes definitely, thanks. And then just in terms of the extra, I don’t know if extra is the right word, but the increase in sort of, you know, one time marketing costs in the fourth quarter to make sure you got ’08 off to a good start, how should we think about that extra trend spending as we get into the first half of this year. Are you going to continue to prime the pump a little more than you might normally plan or are you confident that things are getting better so it might follow a more normal spend?

Dave Carney

Gary I think it’s, we’re back on a quote unquote “more normalized trend”. I mean I think the, you know the purpose in the fourth quarter was two fold. One to drive starts into the fourth quarter and secondly to protect or assure that we would have a nice class start in our quarterly schools in the early part of January and as I mentioned earlier we were successful in doing that. So on a go forward basis, certainly for the next three quarters including the first; we’d be on a more normalized basis. We’ll look fourth quarter next year and see where we’re at and if it makes sense to spend up we’ll do that again.

Gary Bisbee -Lehman Brothers

Okay great, thanks for all the color.

Operator

And your last question comes from the line of Sara Gubins, which is a follow up, of Merrill Lynch. You may proceed.

Sara Gubins -Merrill Lynch

Hi thank you, just a couple more student lending questions. The first is on titles for funding. Are you expecting any change in that given the liquidity concerns in that market and do you participate in the direct lending program, is that something you’re looking into?

Dave Carney

First question, no we don’t expect any change. And I guess I‘d just add one other thing there too Sarah. As I mentioned earlier we are at 82% on the Title 4. This is a case where the demographics and profile of our students’ works in our favor, 16% I guess is Pell participation as well. So one, we don’t expect that to change and I would say that, what was the second part of your question?

Sara Gubins -Merrill Lynch

I’m just wondering given, kind of the concerns about third-party lenders in the federal lending program.

Dave Carney

Yes with direct lending, I’m sorry, I forgot which --- meaning direct lending. We, all of our schools are approved for direct lending and we’re in the process of piloting two schools to just safeguard against the unlikely event that should we have to move to direct lending and others in the foreseeable future we’d be prepared to do that.

Sara Gubins -Merrill Lynch

Okay and sorry, one other lending question on the private lending side. It sounds like you’re assuming that you’ll be funding all of the loans that would have gone through the Sally Mae recourse program previously, are you expecting any change from, I guess it’s about the 3% of your revenue that was coming from private loans, but that weren’t considered sub prime. Are you seeing underwriting standards increasing there or are lenders willing, kind of the lenders willingness to fund your students in private loan?

Dave Carney

No I have not. Our students were either below those thresholds or above those thresholds. We do not have a lot of that 3% population that was in that 20, you know 620 to 640 gap, so that should not have much of an impact on us and at least to date, our students have no problems, credit worthy students, have no problems getting private loans. There are plenty of sources available for those types of loans.

Sara Gubins -Merrill Lynch

Are lenders giving you any indication that would make you think that the underwriting standards are going to increase enough that it would impact that population that hadn’t previously been considered sub prime?

Dave Carney

No, we have not gotten that indication. I mean we’ve heard just like everyone else that maybe they’ve gone to 625 to 640 or 650, but again today, when we assess our population and where our demographic sits it’s really not an issue for us. And even if they go to 650, there’s not, we don’t have a big group of demographics that fell in that area, that fell in that 620 to 650 FICO score.

Sara Gubins -Merrill Lynch

Okay thanks a lot.

Dave Carney

You’re welcome/

Operator

Ladies and gentlemen, this concludes the time that we have for questions and I would now like to turn the presentation back over to management for closing remarks.

Shaun McAlmont

Okay thanks, Sereta and thanks everyone for joining us today. We’re obviously very pleased with our results for the first, fourth quarter of 2007 and the year 2007 and we’re very optimistic about 2008. So we look forward to updating you on that progress on our first quarter earnings call in early May. With that I say thank you and good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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