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Executives

Joan Bates – Director, Investor Relations

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

Richard M. Gunst - Chief Financial Officer, Senior Vice President & Treasurer

Analysts

Jerry Herman – Stifel, Nicolaus & Company, Inc.

Jeffrey Silber – BMO Capital Markets

Corey Greendale – First Analysis Corp.

Gary Bisbee – Lehman Brothers

Kelly [Thorn] – Credit Suisse

Sara Gubins – Merrill Lynch

Brandon Dobell – William Blair & Company, L.L.C.

Analyst for Mark Marostica – Piper Jaffrey

Trace Urdan – Signal Hill Group, LLC

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

Edward Yruma – JP Morgan

DeVry, Inc. (DV) F3Q08 Earnings Call April 24, 2008 4:30 PM ET

Operator

Welcome to the third quarter 2008 DeVry earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Joan Bates, Director of Investor Relations.

Joan Bates

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 this conference call may constitute forward-looking statements subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by phrases such as DeVry, Inc.’s or its management beliefs, 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 1A, 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 May 8. The domestic replay for the call is 888-286-8010 and the pass code is 17578527. A replay is also available via webcast through the IR portion of our website. As a reminder our press release, preliminary financial statements and segment data are available in the Investor Relations section of our website located at www.DeVryInc.com.

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

Daniel M. Hamburger

Thank you all very much for participating in our fiscal 2008 third quarter conference call. Before opening it up to your questions, I’ll provide a brief introduction and Rick will discuss our financial results and then I’ll come back and provide a few operational highlights.

To sum it up, we had a great quarter. We continue to focus on executing our strategic plan with particular emphasis on investment in new student recruiting, responding to society’s unmet need for health care professionals and outpacing the market in online growth. DeVry University experienced its 10th consecutive period of positive undergraduate new student growth and our seventh consecutive period of positive total student growth in the spring.

While delivering results in the quarter we also continued to invest in future growth and we appointed new leadership throughout the organization, we opened new locations, we made progress in our real estate optimization plan and we expanded financing options for our students.

A few weeks ago our Board and senior management team completed an update of DeVry’s five year strategic plan which we update every two years. We’re focused on long-term value creation which is why we don’t provide quarterly guidance, but we do provide guidance on our long-term strategy.

Let me summarize it for you briefly here and we’d be happy to discuss any questions that you have and please refer to Chart 2 in our press release for an overview. Our strategy has four growth priorities achieving the full potential of DeVry University growing in adjacent vertical curriculum markets, horizontal educational levels and internationally, all underpinned by the infrastructure to support this growth.

The first priority is achieving our full potential market share in each market DeVry University serves. To do this we’ll increase our investments in marketing and recruiting as we build the DeVry University brand. An example of this is the new We Major in Careers campaign. Additionally we’ll re-balance our capacity with more but smaller campuses and additional new programs and we’ll deliver world class customer service including academic advising, financial assistance and career service.

The second priority is growth in the adjacent vertical curriculum markets. Here, we’ve done a good job of diversifying organically from technology into business and later through acquisition into health and medical. At Ross University we’ll continue to build the brand through improved academic outcomes and we’ll invest in additional capacity. We’re also looking at additional programs we can provide at the medical education level.

At Chamberlain College of Nursing growth will be driven onsite, online and through new programs such as a Masters in Nursing. IN furthering the health and medical area we plan to build a major presence in allied health curricula to meet society’s needs for professionals such as veterinary technicians, medical assistants and respiratory therapists. We’ve identified at least two other large vertical curriculum areas of focus for the long term and these are the applied arts and education or teaching degrees.

Our third growth priority is expansion into adjacent horizontal levels of education. DeVry’s degree programs are currently 90% at the Bachelors, Masters and Doctoral level. We intend to gain a significant presence in pre-[bacheloria] programs.

Some of the fastest-growing job categories are at the career college level and we see synergies between the career college and DeVry University and Chamberlain. Our strategy is to enter this market through acquisition of a career college with quality programs and a strong management team. We also like the online high school market and that’s why we recent acquired Advanced Academics and we intend to grow here aggressively.

Now the post-bacheloria education and training is the domain of course of Becker Professional Review and Becker’s priorities are to continue the terrific growth we’ve had in accounting and finance to roll out new products beyond exam review such as continuing professional education or CPE and to accelerate the growth of Becker International, which brings me to the fourth growth priority, growths in new geographies. Here our main focus is acquisition driven concentrating on Latin America as well as India and China.

These four growth strategies are supported by a fifth and we refer to this as the growth infrastructure including online, finance, technology and human resources. Our online strategy includes promoting our competitive advantage of all the convenience and flexibility of online learning with the quality and reputation of DeVry’s institutions.

Our combination of the coast-to-coast geographic presence and online strength are an advantage over regional players and online only competitors. Our financial strategy involves building our strong balance sheet to fully fund organic growth, support acquisitions and enhance shareholder returns from dividends and share repurchases.

Our technology strategy includes both student facing technology to enhance the learning process and back office systems to support student service such as our project DELTA which will ultimately replace our student information system. Most important is our human resource strategy. Our vision is to become the employer of choice in education. To accomplish this we are improving the recruiting process, enhancing our compensation and benefits and investing in management training and development to grow our own leaders of the future.

That is a very brief overview of our long term growth and diversification strategy. This diversification is consistent with the thesis that DeVry represent the best long term risk adjusted investment opportunity in education. And also consistent with this thesis is the dedication of DeVry’s employees to quality and integrity which has earned us a spot on the 2008 Audit Integrity Top 100 list recently published by Forbes.

The Audit Integrity list recognizes the top 100 out of 9,000 publicly traded corporations that display excellence in transparent financial reporting and conservative corporate governance. DeVry was the only educational organization on the list.

Before I hand it over to Rick there continue to be many new stories in the area of student lending and I’d like to comment briefly on what’s been happening in the environment and its impact on DeVry students. Recent new legislation passed in the House and pending in the Senate appears to be positive for students in that it addresses potential challenges to student access to loans.

Also some lenders have announced they are exiting various loan programs for some schools as we outlined in our press release on Monday. We expect that these actions will not have a significant impact on our students just as the announcements over the past six months have not impacted our spring enrollment.

Here are five reasons DeVry is well positioned in this regard. First, increases in Federal loan limits have eased the need for private loans. In fact, use of private loans by DeVry students in the first nine months of this fiscal is actually lower than it was last year.

Second, DeVry’s focus is on high quality programs with excellent academic outcomes. Because our graduates have a great track record of employment outcomes lenders are available to help finance their education whether we’re talking about Ross physicians and veterinarians, Chamberlain nurses or DeVry University’s 90% plus employment statistics.

Third, DeVry students are eligible for most of the applicable state grant programs available again reducing their need for private loans. Fourth, DeVry students have a strong track record of favorable loan default rates. Fifth and finally, DeVry has provided internal financing for students called EDUCARD for more than 30 years and we have the ability to expand this program if needed.

In summary DeVry’s long term focus on quality has once again served us in good stead. We’ll continue to monitor and to manage this area closely to ensure we provide the full range of options to help students and their families finance their education.

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

Richard M. Gunst

We delivered outstanding results once again in the third quarter recording strong revenue growth and continue to drive operating margin improvement. Revenue of $291 million in the quarter marked another record level and was up 18.4% versus prior year. All three business segments achieved double digit revenue and operating income growth in the quarter. Revenue is up more than 16% year to date through the first nine months of the fiscal year.

Net income of $38.3 million in the third quarter was up 67% versus current year and earnings per share at $0.53 in the quarter compared to $0.32 last year. Reported net income for the nine months of the fiscal 2008 was $101 million compared to $60.2 million last year or up about 68%.

As previously discussed in further detail in our release these results include discrete items in both years. If you exclude these discrete items from both year net income for the first nine months totaled $103.2 million in fiscal 2008 versus $48.5 million in fiscal 2007 an increase of 113% while nine month earnings per share totaled $1.43 in fiscal 2008 versus $0.68 last year up more than double.

Also for your reference third quarter results include expense related share base payments of approximately $1.4 million pre-tax or $1.2 million net of tax which is just slightly higher than last year’s third quarter expense of approximately $1.2 million pre-tax or $1 million net of tax.

Our effective tax rate from ongoing operations decreased slightly in the quarter reflective of the higher portion of earnings from the DeVry University and professional 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 rate was approximately 28.1% in the third quarter bringing our year to date rate from ongoing operations to 27.7%. We continued to expand gross margin and achieve operating leverage in the quarter as costs of educational services increased by 4% versus prior year.

Student services and administrative expense however increased by about 21% in the third quarter. This higher rate of spending is in line with the increased investment spending we referenced during our conference call last quarter. Some expenses shifted from the first to the second half of the year, many open positions were filled during that quarter and we initiated incremental marketing, recruiting and student service spending actions to drive future growth. These initiatives included items such as online growth acceleration actions, Chamberlain’s geographic expansion and adding Ross capacity which is consistent with the strategic framework that Daniel just described.

We anticipate the fourth quarter will continue to reflect the impact of these shifts and incremental spend actions but we should still see operating income margin improve versus prior year in the quarter. Our year to date pre-tax income margin reached 17.5% excluding the discrete items reflective of our strong revenue growth combined with the impact of our workforce reductions and real estate optimization actions.

Attached to the earnings release is a breakout of our operating segment results. The key highlights are first, all of operating segments delivered strong revenue growth in the quarter with DeVry University segment which includes advanced academics up over 16%, medical and health care up 23% and professional and training up more than 30%.

Second, the DeVry University business segment continued to achieve significant year-over-year earnings improvement increasing segment operating income from $12 million last year to $27 million this quarter or up over $15 million driven by the revenue growth combined with labor and facility cost savings. Year to date segment operating income was approximately $75 million this fiscal year compared to about $18 million last year excluding discrete items up $57 million or about 4 times prior year level.

Finally our professional and training segment delivered exceptionally strong earnings results improved 60% versus last year while medical and healthcare segment earnings were up about 15%. Again all three operating segments recorded double digit top and bottom line growth in the quarter.

Our balance sheet financial position also remained strong this quarter. Cash flow from operations was approximately $73 million in the quarter and $205 million for the nine-month period.

The ending cash and marketable security balance was $310 million compared to approximately $136 million a year ago and we continue to have no outstanding debt. Included in these balances for the current year are approximately $58 million of auction rate securities. All these securities are high quality municipals that are backed by Federal and state government guaranteed student loans. Since mid-February the auctions on these securities have failed due to concerns with the auction rate mechanism but not the underlying creditworthiness. When this happens the rate is reset for generally another 35 day term.

So the near term issue is a lack of liquidity of these investments not the creditworthiness or yield. Given our strong cash position and debt capacity our plans are to hold these securities until the auctions successfully resume or until the securities get restructured. Net accounts receivable were $122 million this quarter versus $95 million last year. The increase is due to the addition of advanced academics and the timing of receipt of Federal funds the majority of which were subsequently received this month.

Net accounts receivable would have actually decreased 4% versus prior year excluding these items and I’d also like to point out that DeVry University’s receivable per student that is the receivables that come from our EDUCARD program have improved over prior year for 27 consecutive months reflective of our focus and management of collections.

Year to date capital spending was just under $26 million versus $28 million spent last year. This excludes the advance academics acquisition as well as the purchase of our Alpharetta facility that was immediately sold for the same price in the first quarter. Although the pace of spending should pick up in the fourth quarter it does appear that we’ll likely spend $40 to $45 million for the full year versus the $50 million amount referenced last quarter.

Finally during the quarter we repurchased approximately 214,000 shares of our common stock at a cost of about $10 million bringing our total share repurchases in our program to date to $31 million at an average cost of $37.46 per share. We also paid out a semiannual dividend payment in January which represented a 20% increase per share from the amount paid last year.

That concludes my overview of the very strong results for the third quarter and first nine months of our fiscal year. With one more quarter to go fiscal 2008 is looking like a year in which we will deliver exceptional results while at the same time make necessary investments to drive long term growth.

Now with that let me turn the call back over to Daniel for a bit more color on our operating results.

Daniel M. Hamburger

I’ll begin the operations review with DeVry University including its Keller Graduate School of Management. As Rick described we’ve been making investments in marketing and human resources to drive growth with quality. As a result our academics, financial, enrollment and employment outcomes are all improving.

New students were up over 12% and total students were up more than 10% to 44,814 students. By the way the largest class in over five years. Total graduate course takers of 17,377 in the January 2008 session was an all time record up nearly 14%. In the mark session total course takers were up over 15%. Online course takers in March were 43,889 up 25% from last year and this is compared to a 2008 market growth rate of 17% according to EduVenture’s projections. So our online growth continues to outpace the market.

Unemployment statistics also continue to be strong. The DeVry University value proposition centers around what we call the 90/40, that is at least 90% of our graduates are employed in their field of study within six months at an average starting salary of $40,000. We’re the only university that we know of with a 33-year average over 90% and for the most recent reporting period our 90/40 was nearly 93/40.

In terms of human resources investments in February we named John Birmingham Chief Marketing Officer for DeVry University. We recruited John from the Tribune Company here in Chicago. Additionally we hired several new deans and other operating executives most from other educational institutions. These managers are attracted to DeVry University’s strong brand and upside opportunity and also to the DeVry culture and reputation for integrity.

DeVry University’s real estate optimization program continues to unlock economic value and to free up resources to redeploy to new locations so please keep in mind that this includes both reducing space in certain campuses and also adding new locations. This strategy will better enable us to gain our full potential market share by offering more points of presence for students to reach us.

This quarter we sold our large campus facility in Houston and then leased back a portion of the space. This yielded $14.5 million of gross proceeds and will improve net income by approximately $200,000 a year. Our 100,000 square foot campus in the Atlanta suburb of Decatur, Georgia will be moving to a better location in downtown Decatur with approximately 50,000 square feet. And so accordingly we’ve offered the existing campus for sale.

In terms of new locations this quarter we opened centers in Louisville, Kentucky and Palmdale, California and we plan to open five to six new DeVry University locations for the year in total. So I think you can see from all the activity this quarter that we’re being pretty aggressive in pursuing the optimization strategy.

Turning now to our medial and healthcare segment, Ross experienced an outstanding semester with new students increasing 11% and total students increasing 7% to an all time record of over 4,000 students. In particular January’s enrollment produced the largest veterinary class in Ross’ history.

We’re working hard to expand capacity which includes increasing the number of our teaching hospital partner sites where students complete their clinical training. We added four clinical partners in the quarter for a total of 61 affiliations which will expand clinical capacity for about 130 students. I should mention that the costs associated with these affiliations are increasing due to competition for clinical training slots.

At Ross we’re also investing in educational technology. For example a new clinical skills laboratory at the vet school is being added allowing students to practice surgical techniques in a simulated environment.

At Chamberlain College of Nursing we opened two new campuses this quarter, one in the Chicago suburb of Addison and the other in Phoenix. Both of these are co-located with DeVry University campuses which is another way we’re improving capacity utilization. We now have four locations at Chamberlain as we make progress on our vision of becoming the first national college of nursing.

In the professional and training segment Becker’s performance continues to reflect strong demand for accounting and finance professionals and the results of our efforts to strength relationships with firms and professional societies. We now have 94 of the top 100 accounting firms as clients.

In the third quarter we added several key management positions with a focus on accelerating the growth of the Becker Professional Review finance business in building a Stalla brand. Carla Carey, formerly with Wrigley and Pillsbury was hired as Vice President of marketing and business development and Brad Shively from Kaplan joined us as Vice President of Key Accounts.

In a new position Matt [Kinnick] formerly with Career Education was hired to be Vice President and General Manager of the Stalla’s CFA Review with overall responsibility for driving the Stalla product line.

During the quarter we opened a new regional office in Hong Kong to expand our presence in the Asia Pacific market. We’re also piloting a continuing professional education distance-learning course for international financial reporting standards.

As we announced during the quarter Becker launched a new Scholarships for Success program and granted Becker CPA Review scholarships to 50 students who need financial assistance to prepare for the CPA exam. This program enables us to expand our reach to more colleges and universities and is an example of how we’re giving back or as we like to say doing well by doing good.

In summary our strong results for the first nine months of fiscal 2008 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 asset management. We continue to invest in future growth in accordance with the strategic plan that I just outlined. Most importantly we continue to build the DeVry team.

Let’s go to the Q&A.

Joan Bates

We’re happy to take the next half hour or so to answer your questions so Erica if you’ll give the instructions for the callers we can begin.

Question-And-Answer Session

Operator

(Operator Instructions) Our first question comes from Jerry Herman - Stifel Nicolaus.

Jerry Herman – Stifel, Nicolaus & Company, Inc.

I guess we’ve got to start with the funding question if we can. You knew that was going to come. Daniel, you guys early in the week issued a release indicating there wouldn’t be a material impact based on some of the recent changes. You’ve also previously identified the six lenders that you’re working with. Can you summarize where they stand now and what their relationship with you guys is on a self and/or private lending basis?

Daniel M. Hamburger

As you can see our new student recruiting capability is not being impacted as we just saw in spring. We are proud and have received tremendous feedback from people in the industry about the way we’ve gone about this and I want to give kudos to our student finance professionals across the DeVry operations for that.

In terms of running an RFP process for preferred lenders resulting in these premier institutions, the six that are working with us, and that does include in addition to Sally Mae, Bank of America, Chase, Citibank, Wachovia and Wells Fargo. So we’ve got the six working with us. Overall we are very happy with those relationships, they’re giving us a nice breadth of products to offer to students, both on the [felt] side, in other words the government or Title IV student loan program and the private loans and we continue to work with these lenders to make sure that we’ve got the financing in place for our students.

Jerry Herman – Stifel, Nicolaus & Company, Inc.

Just to be clear then, they’re fully active with you guys on both sides, the felt program and the private loan side? Some of them have obviously announced that they weren’t going to be, that’s in part why I asked the question.

Daniel M. Hamburger

That’s right. Well, we have had a disruption with Wachovia but we do see that as a temporary disruption, if you will, while they’re changing their guarantee agency. But that’s a matter of weeks, probably not beyond that. To go through lender by lender some particular issues that have happened, but none of them have been something that’s affected us in any kind of a material way so we do anticipate the ability to provide our students with both the Federal loans and the private loans that they need to finance their education.

Jerry Herman – Stifel, Nicolaus & Company, Inc.

I know you guys want to move quickly. High school recruiting update and then I’ll move on.

Daniel M. Hamburger

High school update is that our efforts there are going well. We are committed to the high school channel just as we’re committed to the working adult segment of the population. We’re adding resource, integrating people both presenters and educational advisers themselves and growing the number of high schools that we’re reaching and then doing a better job of penetrating each one of those high schools. We’re reaching about three quarters of a million high school students per year with our high school presentations and that’s an investment that we like because it pays dividends in the particular class that we’re recruiting for but it also pays dividends long term because it’s a brand building event. We’re making good steady progress. It’s not at its full potential but it’s moving in the right direction.

Operator

Our next question comes from Joe Filber - BMO Capital Markets.

Jeffrey Silber – BMO Capital Markets

I’m going to apologize for starting with some funding questions as well. In terms of any particular movement to the direct lending program, is that something that you’re thinking about and if so, roughly how long would that take and what would be involved?

Daniel M. Hamburger

It’s not an active strategy for us. We have done it in the past. We have all the pipes and all of the processes and all the computer systems and those are active, we can move to that. In terms of the effort if we did need to move in that direction or chose to move in that direction, it would probably be a matter of I would just characterize it as it wouldn’t be years or quarters or months, it would be more like weeks probably to be able to pull something like that off. But again it’s all hypothetical. At this point, there’s no plan or perceived need to do that.

Jeffrey Silber – BMO Capital Markets

Moving back to the core operations, Rick, I think in your prepared remarks you talked a little bit about advanced academics. I know you’re been reluctant in the past to give us some metrics in terms of size, I just want to double check, are those numbers included in the enrollment data that you provided today or are they completely separate and also if you can give us some gauge of the impact of that unit on your results this quarter I would appreciate it.

Richard M. Gunst

The advance academics results are not in our enrollment data so the enrollments we gave today were for DeVry University just undergrad and graduate and for Ross. As far as the segment results though they do roll up within that segment and in terms of the revenue growth it’s worth about 150 basis points of the growth and not really material at the bottom line.

Operator

Our next question comes from Corey Greendale - First Analysis.

Corey Greendale – First Analysis Corp.

First question, last quarter you talked about the incremental investments you were going to be doing Q3 and Q4 and I think the number you gave was $9 to $12 million per quarter impact. If you look at the investments that you actually ended up making where within that range of $9 to $12 did it come in in Q3 or below the range?

Richard M. Gunst

If you look at the total that we gave I think the numbers that we gave out we were pretty darn close, I think within about $1 million overall of that total what we’ll call timing, seasonality and investment spend as we go forward next quarter it’s going to continue on that rate. Daniel mentioned a number of initiatives and positions that have been filled so that will carry forward in that run rate so it will probably move up a little bit but it’s obviously paying dividends.

Corey Greendale – First Analysis Corp.

In looking out beyond just the next couple quarters did those investments, the new information system, etcetera, the run rate in Q3 is a result and we’re not going to see things bump in 09? Is there anything like that?

Richard M. Gunst

I guess a way to characterize it is our plan long term is to continue to drive top line growth and achieve leverage and operating margin improvement in the next few years. We’re going to balance making the right investments for the long term with delivering the near term results and there could be come quarter to quarter anomalies but our goal is to drive that top line growth and continue to get the leverage in the P&L.

Corey Greendale – First Analysis Corp.

Daniel, in your comments you mentioned enhancing the compensation package to get the best people possible. Is that the sort of thing we’re going to see in the P&L’s overall labor cost going to be increasing and above market rate for a while?

Daniel M. Hamburger

It will show in our expenses, there’s no way for me to quantify that for you right now. We’re still developing some of our strategies there. But that’s an investment that we’re absolutely confident will pay great dividends as will these investments in marketing. I want to go back actually to the question that you were just asking Rick.

Just to maybe underline what Rick was saying and what we were just talking about and that is as I just mentioned I went through the strategy discussion that in particular DeVry University’s strategy does include now that we’ve moved largely through that turnaround period and we’ve turned around the marketing process and the effectiveness and productivity in the recruiting function. There’s still more room to go to be sure but we’ve turned that around.

Now with that confidence that we are ready to invest even more in our marketing and recruiting efforts knowing that as we are doing that our efficiencies are holding or even improving. Another way to look at it would be in contrast to a situation where you ultimately get to a point of diminishing marginal returns we’re far away from that. That tells us that we can continue to invest and do so with positive outcomes.

In other words invest more in marketing and recruiting and attract more students and then get positive academic outcomes. Those are positive investments that you’re already starting to see some of that top line growth come through, very strong top line growth here in the quarter and the first nine months and we like that and we want to invest in more of the same.

Corey Greendale – First Analysis Corp.

You’re talking about the career college market and doing acquisitions there, what would a likely target look like in terms of size and would it be something like Ross that when you bought it was growing rapidly or it could it be a more steady state asset that you would then accelerate with say your internal initiatives?

Daniel M. Hamburger

I would say that what it would look like is the right combination of quality programs, strong management team and the right price for the acquisition. There’s many other stars that have to align for us to pull the trigger but those would be the three biggest super novas in the galaxy there and whereas we’ve been talking about doing this for the past couple of years. We’ve been disciplined in our approach and we’ve looked at a lot more obviously than we’ve executed on.

I think in this environment the stars are getting more in alignment and that give you some sense for what it would look like. Quite likely to look from a program [inaudible] perspective to be in two of the buckets or growth priorities that I just outlined. In other words in the vertical curriculum area would be heavily weighted toward allied health programs and from a horizontal educational level perspective it would be oriented toward the pre-bach associated degrees and below primarily.

In terms of what growth trajectory it’s on it just depends on the particular company that we find. But given the environment there is good growth so I would expect it to be an organization that is achieving growth and that through combining our efforts, the new organization and DeVry that is, we could accelerate that growth and also improve the results, the other outcomes, both financial and academic. I’m glad you asked about that because we have had a number of questions, hey does that still make sense in that environment and I just want to emphasize we firmly believe that it does for this environment and for the long term

Operator

Our next question comes from Gary Bisbee - Lehman Brothers.

Gary Bisbee – Lehman Brothers

Looking at that slide you put at the end of the release with the strategic plan or the areas you want to get into, the first take away for me was wow there’s a lot there. You’re talking about maybe acquiring a career school, probably internationally, you would make acquisitions, getting into new curriculum areas, etcetera, etcetera. I know this is a five-year plan, can you give us a roadmap how you’re thinking about it, what would likely come first or if you don’t want to talk about the timing just sort of how you’re thinking about what you’ve done more background work on and what you’re likely to do first as opposed to wait?

Daniel M. Hamburger

Roughly speaking in priority here, our top priority remains to achieve our full potential in our largest segment, in our largest operation, DeVry University and there’s still so much potential in front of us. That is top priority and we will not take our eye off that ball. At the same time there are tremendous growth opportunities in verticals particularly that focus on health and given our current positioning with 90% of our degree enrollment at the bachelors level and above we’re not serving the full range of educational needs that we can serve effectively.

And then international is a little bit further out there. I guess also I would point out to your question that it’s actually not radically different. In fact it’s really an evolution of the strategy that we outlined two years ago. Again we do a five year strategic plan and we refresh it together with our Board every two years sort of on a rolling basis to keep it fresh. This is not that different from what we articulated starting two years ago with the last strategic plan.

Gary Bisbee – Lehman Brothers

Can you give us an update thought on how you’re thinking about whether you’d be willing to do dilutive deals to do the right deal? How do you think about that? Can it be dilutive day one or are you demanding things be accretive?

Daniel M. Hamburger

No almost everything we do is dilutive day one. If you think about it when we buy a new computer system, dilutive day one and then we get the benefits later when we invest more money in marketing and recruiting those investments in new students are typically not accretive until the second year when we invest in a new campus or new location.

That typically isn’t accretive until the second year or so. That’s normal and frankly the only way to think about this wonderful and highly regulated and critically important focus on quality business that we’re in is to manage it for the long term. If it’s dilutive in the near term period but incredibly positive from an economic value perspective and you look at that as a cash owner from an NPD perspective then that makes sense to us. We think that’s a great way to deploy our fellow owners’ capital.

Gary Bisbee – Lehman Brothers

The professional and training business just continues to do phenomenally well, in both the margins and the top line growth. Could you give us some sense how much room there is to go there or how much higher can the margins go? How long can you keep the growth up like this? I know you were pretty bullish about it at your Investor Day last year but sort of guarded about how long we could expect the recent performance to go and it’s just continuing to kill. So any thoughts.

Daniel M. Hamburger

We have the same reaction every month and every quarter that you do which is just a reaction of extreme joy and pleasure in the results that we’re getting from an academic as well as financial perspective and kudos to the Becker Professional Review team for their great relationships they’re building, that’s really what’s driving that.

I think where the caution came in wasn’t so much from a hey this just we can’t do anymore, it was more from a percentage margin basis and the way we think of it is at the end of the day you don’t put dinner on the table with margin points you do it with margin dollars and if you think of it, just to use an illustrative example, would you rather have a $200 million business with 30% margin than a $100 million business with 40% margins.

We’d rather invest even if the margin percentage comes down a little bit because we’ll be investing in growing the organization to be a larger organization meaning it’s serving certainly the accounting and finance professions but not just from an exam review perspective which was the historical basis at Becker, but also from a full life cycle perspective all the educational needs of an accounting or finance professional from accounting primers to exam review to continuing professional education as an example.

Those investments could certainly make margin percentages come down in any near term period, but that would be in the service of growth and bigger margin dollars. I hope that clarifies what we did.

Operator

Our next question comes from Kelly Thorn - Credit Suisse.

Kelly Thorn – Credit Suisse

Can you talk about other sources of tuition funding, i.e., cash and credit cards as well as corporate reimbursement? If you could maybe break out what percentage of sales those provide and are you seeing any hints of weakness in any of those? What are you hearing from students on those fronts?

Daniel M. Hamburger

We’re really not seeing any weakness or even noticeable changes in terms of corporate tuition reimbursement for example, self pay, cash pay, other third party reimbursement, TA, tuition assistance from the military which is a significant part of our operations. We do and we are proud to serve active duty military personnel and their families. All those other elements of the mix haven’t really changed in any significant or material way as a percentage of the mix. It’s been a lot of buzz, a lot of noise and then we look internally here and it doesn’t really look different from how it looked six months ago.

Richard M. Gunst

Kelly, the mix isn’t that different from what we’ve been talking about and as far as the credit that’s out there and our EDUCARD program the good news is I talked earlier our accounts receivable as we measure it looking at it per student at the undergraduate level is actually down versus prior year and has been down for the past 25 months.

Kelly Thorn – Credit Suisse

Following up can you talk about retention? I imagine I’m looking at this the wrong way but how should we think about new enrollment growth at DeVry University being so much stronger than total student enrollment growth? Is there a retention read through there and if not, could you just speak more specifically to retention?

Daniel M. Hamburger

No, there’s not a slippage in retention. In fact we have a lot of resources focused as part of this strategy I think into this level of detail at DeVry University on improving retention and part of that is by delivering the world class customer service that I did talk about and we’re seeing some early signs of improvement there in fact. If you take a look at that the chart in the press release we’ve got the new in total.

Remember that lag affects, we had the new go up a lot but it took a while for that total to catch up and now you start to see those dark bars to the right hand side of those pairs of bars start to really catch up. Now in any one period you might see them close together and then you might see them diverge a little bit. At any time that you’re starting to invest a little bit more growth you’ll see the new go up a little bit faster and that’s a good thing because that’s adding to growth that we’re going to see in subsequent periods.

Operator

Our next question comes from Sara Gubins - Merrill Lynch.

Sara Gubins – Merrill Lynch

Given the investments that you’re making in sales and marketing is it reasonable or does the model suggest that you continue low double digit undergraduate new student enrollment growth? I mean new undergraduate enrollment growth?

Daniel M. Hamburger

Yes. We could continue that and that’s why we’re continuing to invest in marketing and recruiting in order to continue to drive reasonable growth and growth with quality.

Richard M. Gunst

The only thing I would add to that is that we are getting the double digit growth but it’s going to start to overlap the prior periods and while the absolute amounts might be comparable the growth rate over time will likely come down a bit but we feel confident that these investments will pay off.

Sara Gubins – Merrill Lynch

But near term low double digit doesn’t seem unreasonable?

Daniel M. Hamburger

I don’t want to put any particular number on that at this particular point in time but the kind of performance if you maybe average it out over the last three or four periods might not be unreasonable.

Sara Gubins – Merrill Lynch

Then one other model related question, given the investments that you are making in sales and marketing, is it reasonable to think that there is still enough room for efficiency in the rest of your student services and administration expense that we could see leverage in that line item next year in terms of the whole year in spite of the increased sales and marketing spend?

Richard M. Gunst

It’s possible for the whole year. I think again there’s probably going to be anomalies as we look quarter to quarter but we’re expecting and targeting to get operating margin improvement for the whole year and so that’s either going to come through leverage of the student service expense and/or the direct costs. I think it’s going to be a combination of the two.

Daniel M. Hamburger

As long as we see the opportunity to continue to invest there in marketing and recruiting, you said sales and marketing but we say marketing and recruiting. As long as we see the opportunity to invest there with the metrics not deteriorating, so in other words not getting to that point of diminishing returns, again our data and our analysis and our research says that we’re pretty far away from that point.

We’re going to continue to do that and in any given period since investments in new student recruiting aren’t accretive really more a year or two, then you would see like we did in this quarter a higher rate of growth in the marketing and recruiting side but then you’re going to get that revenue coming through in the next period.

Operator

Our next question comes from Brandon Dobell - William Blair.

Brandon Dobell – William Blair & Company, L.L.C.

Rick, a quick model question for you. You’ve mentioned early on the contribution for advanced academics, was that in relation to DVU revenues or was that in relation to the total revenue growth that you quoted?

Richard M. Gunst

The DVU segment, the DeVry University segment.

Brandon Dobell – William Blair & Company, L.L.C.

For either of you, if you could give us some color on the trend that you see within the faculty in terms of adjunct versus full time course loads, that kind of thing, and also in terms of class sizes if you’re generating any more leverage from extra people in different classes or better class scheduling of the DVU facilities? I’m just trying to look at the different points of leverage you might have in the operations.

Daniel M. Hamburger

There is some leverage there, Brandon. We’re looking at that. In particular we’re focused on improving the course load per student. That’s the metric we look at internally here very, very closely and there’s a lot of focus on that because it really helps a student to achieve their educational and career goals more quickly and so where it’s appropriate and they’re able to take an extra course and take a bigger academic load we will advise them as such and that is showing some early signs of improvement but that’s pretty recent investment.

I think there’s a lot more in front of us on that one and that’d probably be the biggest particular area of focus. There are some areas where we could do some scheduling adjustments to improve efficiencies as well both onsite and online in addition to the course load project that I just described.

Brandon Dobell – William Blair & Company, L.L.C.

I just have a follow on to that, if you look at the average students per class or students per faculty member, are you happy with where you are or do you think the trend continues to push upwards? How wide is the distribution around that metric? I’m just trying to get some sense for if you’ve hit a wall there or if there’s more room to push higher.

Daniel M. Hamburger

We’ve definitely not hit a wall and we’re not happy with where we are. There’s a lot of upside opportunity in driving that a little bit better.

Brandon Dobell – William Blair & Company, L.L.C.

Do you think you’ve got a good handle on how to balance the financial opportunities that you see with those students per course metrics with what the implications for retention or student course loads would be?

Daniel M. Hamburger

Yes, absolutely. We would never push those class sizes to a point where it in any way shape or form would jeopardize the quality of the DeVry education. That applies to Chamberlain and everybody else. But given where we are in the onsite operations in particular we’re still pretty far away from that so we have opportunity as we improve these enrollment results that you saw here from a total enrollment perspective that will naturally flow through and you’ve certainly seen some of that leverage flowing through here in this quarter and the year to date.

Brandon Dobell – William Blair & Company, L.L.C.

Ross, you talked about the expansion in clinical space, but in terms of the actual infrastructure down in the Caribbean where do you stand? What should we think of the next 12 months in terms of capital requirements or are you going to hit a near term headwind in terms of enrollment space and how much space you have down there?

Daniel M. Hamburger

There are capital requirements. That is one of the things that’s going to increase our capital expenditures. I wouldn’t be surprised to see us invest a little bit more CapEx next year as opposed to this year and that would be and that would be part of what’s driving that. Parenthetically here another driver of capital expenditures would be our project DELTA as we move into the next phase of that.

The investments in capacity involve the core science program which is at a medical school in Dominique and the vet school in St. Kitts. It’s also in our fifth semester in our Miami location [inaudible] clinical medicine that many of you have seen at our last Investor Day and then beyond into the semester six through 10 in the clinical. A lot of people tend to think of the capacity as the buildings that you have in our core science programs or in that fifth semester program, but it extends throughout the whole 10 semesters of Ross University.

Operator

Our next question comes from Analyst for Mark Marostica - Piper Jaffrey.

Analyst for Mark Marostica – Piper Jaffrey

I just had a couple follow up questions on the lending front. First off, I’m just curious if you expect your exposure with Sally Mae and the private side to come down in a meaningful way over the next few quarters being replaced by any of your other funding relationships?

Second if you could just speak specifically to your relationships with Citi and Chase? Just curious if they’re announcements last week had any impact on you or do you anticipate any potential changes near term with either of those two lenders?

Daniel M. Hamburger

Chase is unchanged. The Citibank relationship continues. All of DeVry institutions are continuing to work with Citibank. There are some changes at the DeVry University undergraduate side with Citibank where we’re not going to be proactively touting them as a preferred lender. That’s the one area that is a change but if students want to work with Citibank that will continue and Citi will support that and we’ll support that. And by the way it’s not going to be an issue because we’ve got the other five preferred lenders. Chase is unchanged. You asked about more exposure to Sally Mae private loans. Sally Mae continues and our relationship is moving forward with no change.

Analyst for Mark Marostica – Piper Jaffrey

Speaking specifically to the concentration I know in the past you’ve indicated that they’re clearly your largest lender on the private side. Just curious if you look over the next few quarters do you continue to see them as having a significant presence there or do you see a little more diversification amongst your private lenders?

Daniel M. Hamburger

It probably will be a little bit more diversified because we do have more preferred lenders. At the same time the Sally Mae relationship is very strong and by the way they’ve confirmed that DeVry is only one of two organizations where they’re going to continue the discount loan program for our continuing students and that’s based on DeVry’s superior performance to provide students superior performance whether you’re looking at other market funded institutions or not.

For all those reasons we really don’t see a big change there and those are all. I guess more color on the overall statement that we made that we don’t expect any of these recent announcements to have any material impact on our ability to attract new students and our students’ ability to obtain the financing they need to go to school.

Operator

Our next question comes from Trace Urdan - Signal Hill.

Trace Urdan – Signal Hill Group, LLC

The comment you made, Daniel, about you get asked a lot about this acquisition strategy and you think this is a good time. I guess that makes sense in terms of price but it would certainly in terms of the programs you’re talking about getting involved in would drag you much further in to the midst of some of the credit challenges that other companies do have that big exposure to the associate and certificate and diploma market are facing. So it sort of begs the question how much you’ve really thought about that in the context of the comments you made today. I just wonder if you could sort of address that specifically.

Daniel M. Hamburger

We thought about it a lot Trace and I would disagree with the premises of your question. Career college programs does not equal lower quality programs. Shorter programs does not equal more risk. You have to look at the combination of program quality, program outcomes, program length, tuition levels relative to the length of that program. You have to look at the whole compliments of those factors and we have the expertise to do that kind of analysis and we are doing that analysis as we’re looking at these potential acquisitions.

Trace Urdan – Signal Hill Group, LLC

When you talk about allied healthcare programs are you not talking about the typical 10 month certificate medical assistant programs that we’re accustomed to looking at?

Daniel M. Hamburger

Well, we are. If you have a 10 month certificate in respiratory therapy and you get out and earning $35 grand and have multiple job offers, that’s a great value proposition for a lender to lend to you, you as a student.

Trace Urdan – Signal Hill Group, LLC

You’re not talking about serving the same kind of population though that’s a typical medical assistant program serves I gather then because in those situations, the population is predominately a no credit or low credit group.

Daniel M. Hamburger

Not necessarily. An issue from a student lending prospective, sure some of the students that we serve now are students that don’t have a credit score that you or I have. That doesn’t mean that you can put together a funding package that helps them go to school and achieve their educational and career goals. That’s our purpose, it’s why we’re here. That’s why I get up every morning and plot it out 30 miles on a toll way to get to work is to help provide those opportunities for students.

Many of those students are eligible for Pell Grants, federal aid as well as yeah there may be a piece of that financing puzzle that comes from private loans but in many cases that’s very small. So, it’s just not as simple as and I know you know this but many people don’t so I’m sort of providing a little more color on it. It’s just not as simple as if it’s a short program it’s a low quality program.

Trace Urdan – Signal Hill Group, LLC

What about from the other side then in terms of your own balance sheet and the need to sort of borrow in order to acquire something that’s a sizeable? There’s not new obstacles in that front from your perspective?

Richard M. Gunst

Right now as I mentioned earlier we have got a very strong cash balance that we can tap in to. We have no debt currently but we have the credit facility with some very good institutions that we’ve established that we amended a year ago that gives us the ability to tap in to $275 million, up to $275 million if we needed to. So, I think we’ve got the wherewithal to do a pretty sizeable deal if one comes along that makes sense as Daniel outlined.

Operator

Our next question comes from Amy Junker - Robert W. Baird.

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

I had a quick clarification question for Rick to start off, just in the incremental spend that you’d expect in the second half of the year, last quarter you kind of guided us to or suggested that the spend was going to be $13 to $17 million up in the third quarter versus second quarter and I think you got kind of $13.5 there.

Then, you said in the fourth quarter because you don’t have that $4 to $5 million in that seasonality that kind of translates to $9 to $12 million in the first quarter versus second quarter and I just wanted to make sure that was still what you were thinking? Because Rick, I think you made a comment earlier that you said you would expect spend to be up and I wasn’t sure whether you meant versus third quarter which would mean even more than we previously thought.

Richard M. Gunst

Well, I think the numbers we gave you before we came in before within spitting distance of then total expenses and some of them did occur in the third quarter, we’ve added positions, people during the quarter and some just recently that will add some expenses in Q4 so it wouldn’t surprise me if Q4 and total expenses was up slightly in the absolute compared to what it was in the third quarter but probably not dramatically but it could be up a little bit.

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

Daniel, I know you don’t want to talk specifically which states you’re looking to get approval for in Chamberlain but maybe more broadly how many states you have approval out there pending? And, I realize it might take two years to get those approvals but how many states are you currently working on at this point?

Daniel M. Hamburger

Amy if I may just go back to the prior question about the comments Rick had made in the previous conference call about increased spending, how close we came in terms of delivering exactly what we said. I just want to give some kudos to Rick and his finance and accounting team for just taking our game to the next level in terms of our ability to forecast and to make these investments and that gives us that much more confidence to go ahead and make those investments. So, thanks for indulging me for a second or two to do that.

In terms of Chamberlain, just because it is such a highly regulated environment we have been taking great care, as we do in all aspects of operations, but particularly so here not to get ahead of our regulators and creditors in terms of saying publically that which is not ready to be communicated publically. But, what we have said and what I would emphasize is it is our goal to open up at least one new location per year. We did two in one quarter, was not necessarily strategy but we thought an indication that we have a number of irons in the fire so that when one takes hold we can go ahead and move forward and execute on that.

Then, to give you a final piece of color on that, I know we’re over the time but we do want to answer all the questions is that this co-location of the Chamberlain campuses together with the DeVry University campuses, it’s still early days but I think its exceeding our expectations. Just how productive that is and what a good relationship that is turning out to be for both institutions. So, that really is more than just the dollars and cents of the improved utilization it’s really turning out some great benefits and we can talk at more length perhaps at our next investor day on that. I’d like to maybe hold it where we have that and everyone can see that for themselves.

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

Have you set a day for that next investor day?

Joan Bates

It will be sometime mid spring next year.

Operator

That last question comes from Edward Yruma - JP Morgan.

Edward Yruma – JP Morgan

You lowered CapEx guidance now twice this year pretty significantly. Was there a project that you deferred? And, maybe just give a little more color on CapEx plan for next year. I know you talked a little bit about it.

Daniel M. Hamburger

Yes, the project delta where once that moves forward it’s going to be a pretty big lump of CapEx there, probably the biggest factor in that shift. That’s taking a little bit longer than we had originally planned and that’s just fine by me because this is something that is much more important to get it right than to be overly gain driven particularly at this stage of a project like that based on our experience. So, that is probably the biggest piece of delay there.

Thank you and with that it falls to me to remind everyone that our next conference call will be held on August 14 and we’ll have year-end results and enrollment across our operations. Thank you so much for your questions and your interest in DeVry. We’ll talk to you then.

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Source: DeVry, Inc. F3Q08 (Quarter End 03/31/2008) Earnings Call Transcript
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