DeVry Inc. Q4 2008 Earnings Call Transcript

Aug.14.08 | About: DeVry Education (DV)

DeVry, Inc. (NYSE:DV)

Q4 2008 Earnings Call

August 15, 2008 4:30 pm ET

Executives

Joan Bates - Director, Investor Relations

Daniel Hamburger - President and Chief Executive Officer

Richard Gunst - Senior Vice President and Chief Financial Officer

Analysts

Amy Junker - Robert Baird

Jerry Herman - Stifel Nicolaus

Jeff Silber - BMO Capital Markets

Corey Greendale - First Analysis

Sara Gubins - Merrill Lynch

Mark Marostica - Piper Jaffray

Kevin Doherty - Banc of America Securities

Gary Bisbee - Lehman Brothers

Andrew Steinerman - JP Morgan

Jeff Lee - Signal Hill

Scott Schneeberger - Oppenheimer

Operator

Good day ladies and gentlemen and welcome to the DeVry 2008 Fiscal Year End Conference Call. My name is Jeremy and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions). As a remainder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call Mr. Joan Bates. Ma'am you may proceed.

Joan Bates - Director, Investor Relations

Thank you, Jeremy. 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. or its management has a view, objective for outlook that management "believes", "expects", "anticipates", "foresees", "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 SEC on August 24, 2007.

Telephone and webcast replays of the call are available until August 28. To access the reply dial 888-286-8010 for domestic, for international 617-801-6888 using the pass code 17793597. A replay is also available via the webcast through the IR portion of our website. As a reminder our press release and preliminary financial statements are available in the Investor Relations section of our website located at www.devryinc.com. You should also note the preliminary segment data is also in today’s release.

I will now turn the call over to Daniel Hamburger.

Daniel Hamburger

Thanks Joan. Thank you all very much for joining us today. I’ll provide a brief introduction and Rick Gunst will discuss our financial results and then I’ll come back and review operational highlights before opening up to everybody’s questions.

And let me start by saying that I think by any major DeVry had a very successful year. Most importantly academic quality was up at all our divisions. By keeping our focus on our student’s success the numbers tend to take care of themselves and the numbers were very good. And we delivered these results for the quarter and for the year while simultaneously investing for future growth to initiatives including DeVry University optimization, online growth and continued diversification in medical and healthcare education.

As we discussed last quarter our strategic plans has five priorities. They include in achieving the full potential of DeVry University; diversifying across multiple vertical curriculum areas; and diversifying through out the horizontal levels of the education; growing into international expansion; and lastly developing the infrastructure to support all this growth including online, technology, finance and human resources.

Throughout the year we made great progress in each of our strategic priorities and let me highlight, just some examples. First, we improved real estate capacity utilization at DeVry University. In charts 3, attached to the press release you can see our progress and in addition to DeVry University sale-leaseback transactions, we also colocated Chamberlain College of Nursing with DeVry University, and even found an opportunity to colocate Ross University's home office with DeVry University's North Brunswick, New Jersey campus. So I am pleased with the creative approach our team is taking.

Secondly, during the fiscal year we acquired Advanced Academics expanding and extending our presence at the high school level. This transaction closed in October 2007 and to date is well integrated into the DeVry. Of course we have also recently announced the acquisition of US Education, which is expected to close next month and expands our certificate and associate degree programs in high growth healthcare fields.

US Ed's two schools Western Career College and Apollo College also expands our Western geographic presence by adding 17 locations in some of the fastest growing markets in the US. To further our growth in medical and healthcare, we also announced the expansion of Ross University to Freeport, Grand Bahama, which is only about 50 miles west of Fort Lauderdale. And we continue to make investment in new technology and in people, that infrastructure that I have talked about.

Information technology to automate processes, enhance management decision making and improve customer service will help us improve productivity over the long-term. These technology initiatives are now being led by Eric Dirst our new Chief Information Officer, who joined the team in the fourth quarter. Eric was previously CIO of SIRVA, that's the parent company of Allied and North American Van Lines, among other things. And he has a proven track record of helping companies achieve the maximum return on technology investments.

Earlier this week, we announced the impending passing of the torch, the Olympic torch, I guess should say from Board Chair Dennis Keller to Harold Shapiro, effected at our Annual Shareholders Meeting in November.

Many of you know that Dennis has served as Board Chair, of course since Keller Graduate School of Management was founded back in 1973. Dennis will hand over the reins to Harold Shapiro President, Emeritus of Princeton University, who has been a Director of DeVry since 2001. Having served as President at the University of Michigan, Go Blue a leading publicly-funded university, and Princeton University, a leading privately-funded institution, he is an excellence choice to lead the board of the leading market-funded educational organization DeVry.

With that introduction, let me turn the call over to Rick for the financial results as well as progress on our overall financial strategy.

Richard Gunst - Senior Vice President and Chief Financial Officer

Thanks Daniel and good afternoon everyone. Well fiscal 2008 has come to a close and what a terrific year it was in just about every dimension. We reported record revenues of approximately $1.92 billion, an increase of 17% versus last year and our first billion dollar plus year on the top line.

Net income for fiscal 2008 also had a record level of a $125.5 million up about 65% versus last year. As previously discussed and further detailed in the release, these results include discrete items in both years from real estate transactions and last year's severance charges. Excluding the discrete items from both years, full-year net income of $127.8 million in fiscal 2008 increased by about 90% versus last year. Reported earnings per share for fiscal 2008 was a $1.73 and a $1.77 excluding the discrete items. Also representing record performance and up about 88% versus last year.

The company's pretax income margin that is operating income plus net interest income was 16.1% for the fiscal year up 640 basis points versus 9.7% last year, again excluding discrete items and just a 100 basis points shy of our all-time high of 17.1% recorded in fiscal 2002. And finally, all three business segments achieved double-digit revenue and operating income growth for the year.

Now fourth quarter results reflect the acceleration of our top line growth and continued operating margin improvement versus prior year. Revenue of $276.8 million was up a strong 18.9% versus last year. Net income of $24.6 million was up about 54% on a reported basis and up 30% excluding discrete items from last year. Reported earnings per share of $0.34 was up 31% versus last year excluding the discrete items and pretax income margin was 12% up about 120 basis points versus 10.8% achieved last year excluding those discrete items.

Fourth quarter results include expanse related to share-based payments of approximately $1.4 million pretax compared to about $1.1 million last year. For the year, option related expense totaled $5.7 million pretax versus $5.4 million for fiscal 2007. Our effective tax rate was approximately 27.1% for the year and 26% in the quarter. The effective tax rate from ongoing operations excluding discrete items was about 27.4% for the year, which is higher than the fiscal 2007 rate of 25.5% primarily by the increased DeVry University income.

The significant pretax income margin improvements of 16.1% this year was driven primarily by the revenue growth combined with the impact of our workforce reductions and the real estate optimization actions. Cost of educational services increased by only 3.4% for the full year and 6.1% in the fourth quarter, helping drive significant gross margin improvement. For fiscal 2009, we would expect to continue to improve gross margin but not to the extent we did in fiscal 2008.

Student services and administrative expanse increased by about 17.7% for the fiscal year and 32% in the fourth quarter. This higher spending level was largely driven by the investment spending we discussed a couple of quarters ago to support online growth acceleration activities, Chamberlain expansion into Illinois, Arizona and online, increased advertising, recruiting and brand building and investments in people and systems to build a our infrastructure to support future growth.

In addition, the spending associated with Advanced Academics was completely incremental, since Advanced Academics was not part of our portfolio a year ago. As we look into fiscal 2009, operating expenses are expected to exceed revenue growth in the first half of the year, but be inline with revenue growth over the course of the year. As you may recall, we had numerous open positions in the first half of fiscal 2008 and delayed spending from the first half to the second half that we will now be overlapping. Other factors driving the increase rate of spending in the first half of fiscal 2009 include again the addition of Advanced Academics, which was not part of the company until November 1st, and as lower revenue and higher spending during the first quarter of the year.

This current cost associated with Ross University's expansion in the Grand Bahama along with the impact of increased clinical costs, continued Chamberlain expansion and investments and the continuation of incremental advertising and recruitment expense to drive revenue growth in the future. We will also have the impact of US Eduction coming into our portfolio after the close in September, which you know, as we said a couple of weeks ago is expected to be dilutive by about a penny in fiscal 2009 based upon our preliminary estimates.

With that overall perspective let me now walk through some of the highlights of our business segments, the details of which are provide in our earnings release. All of our business segments delivered strong double-digit revenue growth in the quarter and full year. The DeVry University segment revenue was up 17.6% versus last year this quarter with full year growth of 15.5% driven by continue online expansion and proved campus enrollments in addition to Advanced Academics.

The medical and healthcare segment revenues were up 29.1% this quarter and 23.8% for the full year, bolstered by Chamberlain’s expansion into Illinois and Arizona, online acceleration actions and the enrollment growth at Ross University.

Professional and training segments revenue continued well with an increase of 13.1% in the quarter versus prior year with full year revenue up 19.4%. DeVry University segment operating income was up 11.2% for the full year despite investments in capacity at Ross University and geographic expansion at Chamberlain. While the professional and training segment delivered another record year with operating come up 31.4%.

We also ended the year with the strong balance sheet and overall financial position. Cash flow from operations for the year was almost a $199 million versus a $125 million last year due principally to our improved earnings and asset management. We ended the year with zero debt and the cash and marketable security balance of approximately $277 million compared to approximately $129 million a year ago.

Our net accounts receivable balance was $55.2 million versus $43.1 million last year. This increase was due to the 17% revenue growth, the addition of Advanced Academics and term related increase in receivables under our participation in the Federal Perkins Loans program. Receivables per student account within DeVry University continued to run below prior year levels.

I would also like to note that we recently implemented a new financial aid processing system. As with many transitions to a new platform we did experience some of the issues that caused the delay in student dispersement. In some cases we have advanced funds to students to accommodate them for a certain period of time until our team resolved the issues over the next two weeks or so.

Capital spending came in at $51.6 million this fiscal year excluding the purchase and immediate sale of our Alpharetta, Georgia Facility compared to $38.6 million last year. This is higher than we referenced last quarter as we purchased the facility in Wood Dale Illinois in the Northwest Chicago Suburbs here at the end of June to support the growth in our online operations in recruiting staffs.

Looking forward capital spending in fiscal 2009 is expected to be at 65 to $70 million range, excluding US Eduction. Due to spending on our student systems project called the Project Delta, spending associated with Ross's expansion into Grand Bahama, DeVry University spending on facility improvements and new centers and continued geographic expansion within Chamberlain College of Nursing.

Throughout the past year we continue to utilize our strong financial position to enhance shareholder returns. In July we paid semi annual dividends to shareholders totaling approximately $4.3 million and in April we completed our first share repurchase program. The total repurchases within this program totaled $35 million at an average cost per share of $38.53 per share. We have not begun to execute our second $50 million repurchase program due to consideration related to the acquisition of US Education.

So, as you can see we’ve delivered strong results and almost measures, improved our financial position and provided excellent shareholder returns. The bar has been raised and as we move forward into fiscal 2009, we are planning to continue to deliver strong top line growth while driving further operating margin improvements.

Our long-term financial objective from our five year strategic plan is to deliver double-digit revenue growth and roughly 20% compound annual earnings per share growth. There will likely be some fluctuations on a quarterly or even annual basis given timing of investments pending project work, filling open positions and new positions and so on.

The first half of fiscal 2009 will be a prime example given that we’re overlapping fiscal 2008 earnings of a 150%. You will recall we had not initiated much of our incremental spending actions and a number of key positions were unfilled in the first half of last year. So short-term results will not necessarily flow evenly, but we are taking a long-term view the business to drive quality, growth and increase margin.

Now, let me turn the call back over to Daniel to provide some additional prospective on our operating performance.

Daniel Hamburger - President and Chief Executive Officer

Thanks a lot Rick. As you have seen we have made significant progress in fiscal 2008. Particularly important are the significant strives we made, maintain and improve our academic quality, measured by retention, graduation and employment methods, as well as exam scores.

Let me begin with DeVry University including its Keller Graduate School of Management. Our academic quality continued to be strong here at DeVry University as an example. For the past year 92% of our graduates in the active job market were employed in their fields of study within six months after graduation, this at an average starting salary of almost $44,000. Year-after-year a thousands of our graduates begin their careers with top companies such as Abbott Labs and Hewlett Packard, and employees tell us that our curriculum and hands on training in educations prepares graduates to hit the ground running.

In December of 2008 new student undergraduate enrollment was up 19.3%. While on campus enrollment continued to show improvement, online was again the bigger driver. Total student enrollment was up 12.6%. One thing we have been keeping an eye on is the potential for more students to take a term off as we’re transitioning to eight week session from 15 week semesters.

Graduate course takers including Keller and the Master's program offered at DeVry University. In the July session we are up 14.2% and up 15.7% in May. And by the way last month Keller celebrated its 35th anniversary, which as you may recall laid the foundation for what it is today DeVry Incorporated.

An important component of our real estate optimization strategy is geographic expansion, and we met our expansion goals this past year by opening new location in Southfield Michigan, Louisville Kentucky, Farmville and Bakersfield California, National Tennessee and Chesapeake Virginia. In our next fiscal year we plan – or in this fiscal year ’09 that we are in already we plan to further optimize our real estate asset.

As we announced last quarter the University is locating its Decatur, Georgia campus for the downtown area and we have offered the existing facility for sale. At the same time we are also adding new programs, particularly online, in July we begin four new online degree programs to meet the growing demand for distance learning. These include an associate degree program in Electronics and Computer Technology, ECT, two Bachelor's degree programs in Electronics Engineering Technology, EET, and Computer Engineering Technology CET, and a Masters Degree Program in electrical engineering.

A noteworthy aspect of these programs is that we can maintain the hands on emphasis that DeVry is known for using state-of-the-art electronics equipment to create a home based lab. These new programs along with our existing offering produce solid growth in online course takers in July with enrollment up 24%, which is clearly faster than the projected market growth rate of about 17% according to EduVenture.

While we are proud of this growth we have been more proud of the fact that it’s been managed growth. Growth with quality is a hallmark of DeVry. And I would say although we were an early player in online we started slowly, and we are glad we did. It’s allowed us to build the infrastructure to support future enrollment growth, infrastructure and area such as academic advising faculty. Based on, what our faculty tell us, DeVry has the best faculty recruiting and training process, the highest academic quality, and the strongest quality assurance process in the online world. We are also fortunate to have very low online admission advisor and manager turnover significantly below the industry average, again this is emblematic of our steady, well managed approach to online growth.

Ross University. At Ross we continue to invest substantially in expansion. In addition to the branch campus in Grand Bahama that we’ve mentioned, Ross added six new affiliations for medical, clinical rotations in the US. This is in addition to our previously announced relationship with Synergy Medical Education Alliance in Saginaw, Michigan. As in other areas of our business Ross is benefiting now from the investments we made earlier. This is demonstrated by our May 2008 enrollments with new students up 15.6% and total students up nearly 8% from a year ago.

While enrollment is up, we also recently graduated the largest class in Ross’s history. 64% of those graduates plan to go into a primary care, which has double the average of US medical schools, and is significant because it fills a tremendous need in today's healthcare system for primary care physician. It's also significant to note that Ross is a leading producer of minority graduates. Ross is responding to the need to the huge unmet need for primary care and minority physician and we are doing it with excellent academic outcomes.

Like Ross, enrollment at Chamberlain College of Nursing is at in all time high, with summer enrollment of almost 2200 students, enrollment nearly doubled in physical 2008. In terms of academic quality license surpass rates at n Chamberlain has steadily increased both at the associates and bachelors degree levels.

Becker Professional Review had a exceptional year and experience strong growth internationally as well as here in the United States. A new AICPA study indicates that the supply of accounting graduates and demand by accounting firms will continue to be strong. During this fiscal year `08 Becker signed deals with nearly 300 new firms, and now works with 99 of the top 100 accounting firms.

Now, many of you have heard us mention that for two years in the row seven of the top 10 scorers on the CPA exam were Becker grads. While the latest results are in and we just learned at his time all 10 are Becker CPA graduates, a perfect 10 out of 10, further validation of Becker CPAs academic quality. We believe we can extend the strong Becker CPA brand beyond exam review and into continuing professional education was CPE.

Becker will launch a new online CPE course in September, initial indication from a pilot program that we conducted in June with more than 1000 participants have been encouraging. Another key opportunity for Becker CPA will be an International Financial Reporting Standard or IFRS. As CPA exam is starting in 2011 we'll include this subject area. Our goal is to make Becker the leading brand when you think of IFRS.

Recently Stalla Review for the CFA exam, announced the signing of an exclusive provider agreement between Stalla and the CFA Society of United Kingdom. We partnered with CFA UK to offer Stalla Review course to candidates in the United Kingdom.

Now before I wrap up my introductory comment, here I want to provide a brief update on where we stand in the areas of student lending. As we've said before to this point there has been no material impact on new student enrollment. You may have heard that last week Wachovia announced it will no longer accept new applications for private loans for undergraduate students. The decision doesn’t affect loans for existing undergraduate or graduate students, nor was there any impact on our July start.

Fortunately as we look at September a large percentage of students have begun or had completed the application process when this decision was made. We are not likely to seen an impact if any until next fiscal year, and we’re working to mitigate any impact by helping students find alternative lendings.

So to summarize we are extremely pleased by our performance in fiscal 2008. We improved academic quality and delivered strong financial results, while at the same time investing for future growth and building our team. We made good progress in our key priorities including DeVry University optimization, online growth and continued diversification in medical and healthcare education.

So I would just like to thank all of our employees, whose focus on our students helped to make it such a great year.

Joan lets go to the Q& A.

Joan Bates - Director, Investor Relations

Thank you, Daniel. Jeremy, we would like for you to take the callers and instructions, and we will take your questions.

Question-and-Answer Session

Operator

I would be to happy too. (Operator Instruction). And at this time your first question comes from the line of Amy Junker with Robert Baird. Please proceed.

Amy Junker

Hi everyone good afternoon. If we could just start, with the expense line in the fourth quarter, I guess I just -- and Rick, thank you for all of the detailing going forward because that really is helpful for us. When you talked about the investments you plan to make, would you say the fourth quarter fell in line with what you had expected? Did you pull any of that expense forward? And I guess I'm asking just because you said you'd thought it was going to be slightly higher than the third-quarter overall spending and it came in a bit higher than maybe what we had anticipated. So I just want to understand that a little bit.

Richard Gunst

Yes, I think the timing between the third and fourth quarter, from what we said as we started out the second half of the year, we had more shift to the fourth quarter versus the third quarter. I think in total we were better in the third quarter by 3 to $4 million, and we made up that and then a little bit more in the fourth quarter as we were looking at things that had been working and have continued to invest in those things that make sense for the business long term.

Amy Junker

Can you just talk a little bit -- I know you give bad debt on an annual basis on the 10-K, but how that's been trending, and perhaps in talking a little bit about lending, if you have been lending more directly to students through your EDUCARD program, or what that's been looking like?

Richard Gunst

Yes, our bad debt trends have been very positive. Given the fact that we have been working on our receivables per account, as I mentioned, it's down now versus prior year. In fact, it's been down versus prior year for 28 months in a row. So when you make that progress and you're addressing some of the older balances, the bad debt results sort of follow. So we are actually down -- improved a little bit year-over-year across the organization on bad debt. And as a result, our balances on our EDUCARD are relatively flat, up a little bit because of the revenue growth.

Amy Junker

Okay. And then just last question and I'll pass it over. But again, on the margins, looking specifically at the professional and training, it looks like operating margins were down year-over-year. I'm just wondering what really drove that this year, given you've seen some pretty good growth there?

Richard Gunst

You're talking about for professional training for the quarter or for the year?

Amy Junker

For the quarter.

Richard Gunst

For the year, they were up, pretty nicely. For the quarter, they were down versus last year. But remember, last year, in the fourth quarter, it was really a phenomenal quarter. The earnings were up 56% versus prior year in last year's fourth quarter versus the prior year. And so if you look at it on a compound annual growth basis, over two years, we saw 27% compound growth, and margins improved on a two-year basis. So we just had all the stars align in the fourth quarter of last year. And as Daniel mentioned, we have been making some investments in the CPE program, and we opened the Hong Kong office, and we've been adding some key account people to focus on the growth opportunities. That brought up the operating expenses a bit.

Amy Junker

Great thanks.

Operator

And your next question is from the line of Jerry Herman with Stifel Nicolaus. You may proceed.

Jerry Herman

Thanks good afternoon everybody.

Richard Gunst

Good afternoon Jerry.

Jerry Herman

Just a couple of the follow-ups on the expenses in the fourth quarter. Rick, were there any year-end adjustments of any sort? And were there any costs associated with the acquisition in the quarter of a measurable magnitude?

Richard Gunst

Nothing on the acquisition of any measurable magnitude. And as every year end, there's things we true up, but nothing that was material. It was really the things that we've been talking about all along in the quarter. It's discontinuation of investments. And we feel good about what's going on. Our revenue growth was very strong in the quarter. We feel good about the student enrollments we're seeing. And so we are continuing to fuel that fire.

Daniel Hamburger

Jerry, it's Daniel. Just sounds like a couple of questions along these same lines. I would tell you that this is in line with our plan. We have set out a strategic plan and we are executing on our strategic plan. And it's very much inline with what we talked about, when you look at the second half in total very much inline, little ship between Q3 versus Q4, but we are following our plan, and we are making investments having good returns over the long-term.

Jerry Herman

Usually that line item is a pretty good source of leverage for the companies and the space, you indicated that it should be sort of flattish for the year even though the course of, there will be some impact on quarterly basis. When would you hope to capture some leverage in that line item?

Daniel Hamburger

You know, over the longer term, Jerry, its Daniel here. Yep, we can see that. Right now though any efficiency that we maybe generating in terms of, generating more interest on students and increase some potential students, we’re putting right back into driving more long term growth.

Jerry Herman

And then just one question for you, Dan, last question. The 17.1% margin bogey has been talked about a lot in recent years, now that the mix of the portfolio changes a bit. Have you thought about what the new margin target might be for the new portfolio businesses?

Daniel Hamburger

Jerry, it will be higher, we haven’t achieved, we haven’t planned that margin. So right now our goal, as we stated over the last couple of years is to climb that mountain and get back to the 17.1. And then certainly the landscapes look for a higher peak and probably can go higher than that.

Richard Gunst

Yeah, I think, you maybe alluding to the fact that what US education coming in, that does have a lower margin the 17.1, so, but we do think that there is some opportunity long term to improve that margin overtime as well. So we got a lot of moving pieces here, but that’s still our long term goal and we feel good that we’re going to continue to see operating margin improvement next year and beyond.

Jerry Herman

Thanks. I will turn it over.

Daniel Hamburger

Thanks.

Operator

The next question is from the line of Jeff Silber with BMO Capital Markets. Go ahead.

Jeff Silber

Thanks. I just wanted to circle back a couple of comments you made on the funding side, you talked about the potential impact of Wachovia, have you got any indication from any of your other lenders whether they are willing to step up and jump in and maybe replace Wachovia?

Daniel Hamburger

Yeah, we are working with other of our preferred lenders such as, just to name a couple of examples Sallie Mae or Chase examples -- Wells Fargo might be another on our preferred lender list to ensure that the students have the opportunity to take private loans where needed with those lenders. And again I guess, just for those as most people know this, but just in case anybody need the context on that, private loans overall are relatively small piece of the pie about 5% of our revenues. So we remain vigilant. Certainly, we share our students concerns and parents concerns about the whole lending environment and we’re not resting on laurels. But, we are overly concerned about being able to help our students finance for education.

Jeff Silber

Okay, great. And Rick in your comments and forgive me if I misheard you, I think you talked about some delay I don’t know it was an reimbursement or financial late processing, if you can go through that again and just give us a little bit more color that would be great?

Richard Gunst

Sure, yeah, I mean its really a delay in terms of getting the dispersement the money to the student for funding their tuition and refunds them to help in their living expense. And so, its basically an internal financial eight system processing that caused some delay in given that the money to a subset of our student, and what we have done is we’ve advanced some money to those student that are impacted so that they are not affected and then we expect to have this result in the next week or two.

Jeff Silber

Okay great thanks. I will jump back in the queue.

Daniel Hamburger

Sure. Thanks Jeff.

Operator

And your next question comes from the line of Corey Greendale with First Analysis. Go ahead.

Corey Greendale

Hi good afternoon.

Daniel Hamburger

Good afternoon Corey.

Corey Greendale

First, I just wanted to clarify a couple of things that you said, Rick, I believe you said that you would next year operating expenses to grow inline with revenue, just to make sure I know what line item you’re talking about, but you’re talking about operating margins will likely be flat in fiscal `09 excluding impact from the US education group acquisition?

Richard Gunst

No, I am glad you asked that, because now I was talking about the student services and then sort of expense line, that line is growing sort of inline with revenues, we still expect to get margin improvements on gross margin which is revenue the cost of educational service. So in suspicion the pretax income margin, which still show improvement year-over-year.

Corey Greendale

Good. And the second line, this is more reading between the line, but you said something about how the first half of next year would be an example of accelerating investments, were you suggesting that EPS growth could be below the 20% target for the first half of next year?

Richard Gunst

Its possible that could the case, yes, that’s because you know, again we are overlapping growth in the first half of last year that was 150% above prior year levels. So, we still expect to get good growth over the last year, but we have got some big hurdle in terms of that growth rate that we are overlapping. So it could be below 20% in the first half and then but we are still targeting to be roughly 20% this year and for the next several years on a compounded basis.

Corey Greendale

Okay. And can you update us specifically on the ERP system investment, what kind of expense ran through Q4 associated with that, where that’s heavily you would expect to see rolled out in '09.

Daniel Hamburger

Yeah, there was some project related expense. We are in the process right now of really the so many evaluation stage I guess, is that way I put it. We haven’t picked a vendor in closing that process, so until that point most of these expenses hit the P&L and then once we have made the decision and start the implementation phase, a lot of the expenses would be capitalized.

Corey Greendale

Okay. So you expect to actually start rolling out some modules next year or is it going to be more investing before that would happen?

Daniel Hamburger

It would probably be the later half, where we could start to phase in, but you know, there are other things like this financially processing system that I refer to is which will fit into that system that we rolled out most recently and that will probably be on the heels of that something later part of this fiscal year.

Corey Greendale

Okay. And one last quick one. The margin in the medical and healthcare segment has been coming down somewhat, how much of that is being driven just by Chamberlain becoming a bigger part of the mix. And can you give us some sense of what the relative operating margins is for Ross versus Chamberlain?

Richard Gunst

We don’t split that out between Ross and Chamberlain, what I can tell you is, you know, we have been making the investments to expand geographically in Columbus last year, Columbus in fiscal '07 and Phoenix and Illinois in fiscal '08 and so we are -- as those mature those margins will improve. We have also been making investments to support our online growth in both recruiting and advertising. So Chamberlain which is maybe been brining down the margin a bit in the past that should start to help show some nice margin improvement this year and in the future. And within Ross, we have made investments in capacity expansion and the cost of the clinicals throughout fiscal '08 that tampered the margins there a bit as well, but still very healthy margins.

Corey Greendale

Okay. Thank you.

Daniel Hamburger

Yeah, just a quick piece of color on that, and it applies to professional and training, because the question was asked about margin percentages there too. We tend to focus more on the absolute dollars than just the margin percentage, because we are making investment to growth the business pretty much larger and so we think about having maybe a little bit lower margin on a much bigger business in more absolute dollars of margins than just the percentage.

Corey Greendale

Okay. Thanks.

Operator

And your next question comes from the line of Sara Gubins with Merrill Lynch. You may proceed.

Sara Gubins

Hi thank you.

Daniel Hamburger

Hi Sara.

Sara Gubins

The new undergraduate enrollment growth, you mentioned that online was a key driver of that, but by program area did you see much difference between IT versus business programs?

Daniel Hamburger

Yeah Sara, we did see good growth in both technology, you said IT, so that includes IT and also electronics as well as in the business programs, it was really in both. So, which is encouraging.

Sara Gubins

And I know its early, but any read on fall enrollment trends?

Daniel Hamburger

Yeah, you know, we are continuing to see improvement in our high school recruiting results. We are going and visiting thousands of high schools and improving the number of schools we see, the productivity of that group, where its not reached its full potential yet. But it is moving in the right direction, continuing to invest in the working adult segment as well, in particular those who are seeking online studies and talked about that, so its just good continued study progress.

Sara Gubins

Okay, thanks. And then the 20% long-term growth does that include the impact of the recent acquisition?

Daniel Hamburger

Yeah, that would be our sort of long-term strategic planning outlook.

Sara Gubins

Okay. And I guess Rick, your comment regarding expenses in 2009, same sort of question. Does that include the impact of the acquisition?

Richard Gunst

No. I was looking more at a run rate. But as we roll that in, I think the same results will come forth, because we're not going to have them in our portfolio until the end of this first quarter, and then it will be in the second quarter and then carry on from there. So I think we'll see the same net impact that we've talked about.

Sara Gubins

Okay and then just two last quick questions. One, what is the interest rate that you're getting on your cash right now?

Richard Gunst

Well, rates are down versus prior year, so the cash that we have in our taxable portfolio is anywhere from 2.5% to 2.9, in that range. And then, we've got those auction rate securities, as you know, and the bad news is we don't have liquidity. The good news is we're earning tax-free rates that are above 3% on that piece of the portfolio.

Sara Gubins

Okay. And then just a last question -- given the U.S. Education acquisition, what's your appetite for further acquisitions in the near term, either in the US or internationally?

Daniel Hamburger

Sure, Sara. In line with our strategic plan, the other area that would make a lot of sense for acquisition is international and other geographic expansion. So we still do have an appetite for that. We have activities going on in that regard and are mindful of the number of opportunities, particularly in Asia and Latin America, and I would say Latin America as the top priority for us right now. So those would be continued areas of acquisition activity.

Sara Gubins

Okay thanks very much.

Daniel Hamburger

Sure.

Operator

And your next question from the line of Mark Marostica, of Piper Jaffray. Go ahead.

Mark Marostica

Thank you. This question is related to Q4 and the investment that was made in Advanced Academics. Could you give us a sense for the dollar value of investment that came incrementally in Q4 from the acquisition?

Richard Gunst

Again, Advanced Academics, when you compare year to year, wasn't in our portfolio last year, and so we had advertising spending and recruiting spending for Advanced Academics in the quarter. And the magnitude, we don't disclose that information, but it's part of the driver.

Mark Marostica

Okay. And then in regards to, Rick, your comments on the first half of '09, I appreciate the color on earnings growth or income growth. But I'm wondering, when you look at the first quarter, should we assume that the SSA spend that you recorded in the fourth quarter, should we assume that is the now current run rate of that line item as we look at the first quarter? Or is that not the right way to look at how we should model the business?

Richard Gunst

That's probably a good indicator of the run rate, yes.

Mark Marostica

Okay. And then seasonally, I looked back for the last few fiscal years, and typically, looking at the dollar value of SSA again, you typically see a ramp from Q1 to Q2. Is that still seasonally true, or is there something that has fundamentally changed in the model that we should see SS&A be more of a flat dollar value as we kind of run-rate it through the year?

Richard Gunst

You will see another ramp-up if things go as we expect. I think, between Q1 and Q2, it has ramped up in the past, and it should probably ramp up again this year. I guess the one comment I would have, again more color on the timing of expenses, if you look back to fiscal '07, our SS&A expense in the first half of the year was just about half of the total year. This past year, in fiscal '08, it was only about 46%, much more skewed towards the back half of the year because of some of the shift in spending and some of the open positions we have heard about. This year, as we go forward in fiscal '09, I expect us to return more to the historical measures of, again, a 50/50 or 49/51 type of split.

Mark Marostica

And then, where did you end the year in terms of admission rep headcount? And if you look ahead in terms of your plans for this coming year, where do you expect to end the year in fiscal '09?

Richard Gunst

Well, we don't give the prognosis going forward, but we did increase the recruiting head count I think in our 10-K last year was about a 1000, this year its up about 200 and top of that.

Mark Marostica

And would it be a correct assumption that you would, you know, ex the acquisitions of US Eduction would we expect that you would continue to add admission reps at the same rate?

Daniel Hamburger

Maybe a slight moderation I would say on that rate.

Mark Marostica

Okay. And then one last housekeeping item, just on stock based comp, how should we think about stock based comp for this coming year or should we model it about the same run rate I think it was 1.4 million you said in the quarter?

Richard M. Gunst

Well you know, we -- exactly is comp, the counting for that now is based upon the value of the great answer, the full value of shares we have and we have had a nice improvement in our shareholder return this year. So the cost is probably going to be higher than it was in the past. We are in fact in the process of figuring out the guarantee of those options or awards sort of as we speak. But it will probably an increase versus prior year.

Mark Marostica

Okay, fair enough. Thank you.

Daniel Hamburger

Okay. Thank you, Mark.

Operator

And next you have a question from the line of Kevin Doherty with Banc of America Securities. You may proceed.

Kevin Doherty

Thanks. If I think about your longer term top line growth target, could you just talk about what the expectations are there between organic growth and acquisitions?

Daniel Hamburger

That’s essentially at organic, so the long-term outlook. So acquisition would be up on top of that.

Kevin Doherty

Because you mentioned on the operating side it would be including acquisitions, I am just kind of curious why one would be different than the other?

Richard M. Gunst

Doherty, you are looking more to -- you know, if you are looking at earnings growth, I think we have expected -- if we grow our organic business roughly 20% per year if we acquire something you know, expectation would hopefully be, we will be able to find something that’s going to grow at a comparable rate overtime. I think what Daniel is saying that when we look at the revenue growth, given our existing base, we are looking at double-digit revenue growth. If we add something to the portfolio that will add to our top line and accelerate that revenue number more than the earnings.

Daniel Hamburger

Right, we are talking about a long-term view.

Richard M. Gunst

Yeah, long-term view.

Daniel Hamburger

Any one year will you add that?

Richard M. Gunst

It will be incremental.

Daniel Hamburger

Yeah I will be incremental.

Kevin Doherty

Okay. And in the last quarter you had mentioned looking at maybe applied arts in teaching degrees or some of the other longer term focuses, what's your appetite for that right now and you know, would that presumably more of an acquisition strategy like you have been pursuing in healthcare?

Daniel Hamburger

You know, Kevin that’s a good question and the answer is, it should be both. We can add and we have been adding program that approach the intersection of let's say technology and eduction, with the master in educational technology, we have done that organically. We have add web and graphic design in the associated degree program, sort of the intersection technology, you could argue. So we have done that organically. At the same time -- so we will continue to get into those new vertical curriculum areas organically where it make sense and then where we are seeing the opportunity to accelerate that growth with quality then we might pull the trigger on an acquisition.

Kevin Doherty

Okay. And then separately, I know, you had talked about kind of some of the escalating cost of these clinical trainings at the hospitals, I know there is an article out there couple of weeks ago that Caribbean School signing $100 million contract with some of the New York hospitals. Could you just maybe talk about how significant those costs are for you, does that primarily get passed on to the student and are there any kind of head winds moving some of the students through your programs in terms of just availability of this training slots?

Daniel Hamburger

The cost of the clinical rotations that are students at Ross University go through are going up that is something that we have noted and we have talked about several times over the last few quarters. And in terms of the availability we are working hard to make sure that our students have the ability to go to the clinical rotations that we need. So we are confident we will be able to continue to do that.

Kevin Doherty

But you haven't really seen any headwinds in terms of your students being able to move on to that part of their program?

Daniel Hamburger

Not in a significant way, not a headwind. Certainly it's competitive, and we have to work hard at that. We have added resources to our clinical team to ensure that we have that. So the challenges are certainly there. But we have been able to meet that and our students are moving through the program.

Kevin Doherty

Okay thanks very much.

Daniel Hamburger

Yes.

Operator

Your next question comes from the line of Gary Bisbee with Lehman Brothers. Go ahead.

Gary Bisbee

Hi guys afternoon.

Daniel Hamburger

Hi Gary

Gary Bisbee

A couple questions. Since it sounds like the SG&A is sort of the new run rate, I wondered if you could help us understand what were the components of the 9 or $10 million sequential increase in that expense line item. I know you'd said earlier in the year that you were behind some people, so presumably part of it is salaries. But I'm guessing more than that was probably incremental marketing spend to help drive the good starts. Just I guess any color on why that grew so much would be helpful.

Richard Gunst

I think you pretty much have hit the basic summary. We've increased spending for inquiry generation, brand-building. And within Becker, we talked about advertising, the website development for this new CPE program. Chamberlain, as we rolled out into the new campuses, there is continued spending for leads for the new locations and recruiting, as well as accelerating our online development. And then there's the headcount pieces as well, that we are filling positions throughout the second half of the year, and that tends to carry forward.

Daniel Hamburger

Yes, and I would like to just emphasize that all of those investments and all that spending that Rick has just outlined are all in line with our plan. There's no surprise there. And these are things that we have been talking about and we are executing on that, and we are seeing good results from it. If we were to get to a point where we didn't see good results from those investments, well, then, we would change course. But as long as we see the growth and the quality improvements that we are seeing, we like -- that's our job, is to put our owners' capital to work on those positive ROI projects.

Gary Bisbee

Are you seeing any easing or benefit in terms of the spot rate costs for TV and other marketing areas, based on the weak economy? And particularly what I'm hearing is a big pullback from the auto company spending. Several of your peers have cited improved marketing rates. Are you seeing that at all?

Daniel Hamburger

That may be. I'm not aware of that personally. Maybe after the Olympics are over and the presidential campaign is over, often you see that. From past experience I can say that. But no, I would love to be able to report that, but pretty much in line or not a major change there.

Gary Bisbee

Can you give us an update sort of

Daniel Hamburger

I'm going to go and turn around and call my advertising agency as soon as the phone call is over, based on that information. So thank you for that.

Gary Bisbee

A year ago at your -- whenever your investor day was, you talked about sort of the long-term potential for the Becker or the testing -- professional testing and training business. Can you give us any sense how we should think about that? It looks like the revenue growth -- and I realize you had a tough comp, but the revenue growth slowed a bit this quarter. The margin, after what had been a pretty terrific two years of going a lot higher, eased a bit. Is this still a business that can do double-digit growth in moderately improving profitability from here? Or how should we think about that right now?

Daniel Hamburger

Probably should think about it is the way we think about it. The way we think about it is that we would rather have a $250 million business with a little bit lower margin percentage than a $100 million business with a little bit higher margin percentage. It's the absolute dollars that matter. And it's driving growth with quality that matters. Yes, we think it is a business that can continue to grow the topline revenue in the double-digit range and do that with very, very nice profitability, based on delivering great academic outcomes to students.

Richard Gunst

Yes, and I would add, just like I said for fiscal '09, there could be fluctuations on a quarter-to-quarter basis. Same thing is true with Becker. They were overlapping, as I mentioned earlier, the 56% growth that they had in the fourth quarter of last year. And while their margin was down in the fourth quarter, you've got to look at it over a longer-term perspective, because the margin for the year was up pretty significantly, 90% revenue growth, and operating income was up over 31%. So for the year, a great year by any measure, and we still expect to see, through new products and through continued development, Becker to continue to grow and show good operating income growth.

Gary Bisbee

Okay, and then just one last one. Did I hear you say for the undergraduate business, you are going from the typical three semesters a year to six terms? Or was that a reference to graduate? And if so, when?

Daniel Hamburger

Yes, that is a reference to undergraduate academic calendar at DeVry University moving from a mix of 15- week semesters, or three trimesters, if you will, to a mix of that and eight-week sessions to increase -- moving more and more toward and ultimately getting to all eight week sessions.

Richard Gunst

Overtime.

Daniel Hamburger

Overtime. We're still not there yet, but increasingly, students are voting with their feet. And we are seeing academic benefits of doing that. We're seeing improved academic outcomes as this academic calendar progresses. So it's a good thing. And as that happens, I was just commenting that it could make it more likely for somebody to stop out for a session, for example, in the July session that we're in right now in the summertime, and it's only eight weeks. Hey, let me take an eight-week quick break. We're being vigilant and watching out for that.

Gary Bisbee

There was a substantial, like, one-year impact when the graduate business did the same thing a couple -- I think it was before your guys' time there. But I remember it was a year where it really got hammered. Any sense as to what caused that and why you don't think that will happen with the undergrad business? Thanks a lot.

Daniel Hamburger

Yes. The reason -- I do know all about that. I know the history on that. The reason I don't think there's going to be a big hammering of the operations, or whatever you've said, is that that's not what we're talking about here. That was going from a 10 week to an eight-week session at Keller Graduate School of Management. That's not what we're talking about here. Here we're talking about, in the old days, it was all 15-week semesters. Then we started to introduce eight-week sessions within that time bucket, so you had an A and a B session. And then what's happened is students have voted with their feet, and increasingly it has gone more and more toward the eight-week session. We have academic studies that show students who might do two session-based courses at a time rather than four semester-based courses at a time tend to do better academically. And we are probably roughly 75%, 80% of the way there already.

So we're just talking about shifting the final piece of it. So we don't expect any sort of disruption in the process. The one thing we're keeping our eye on is it could be a little bit more one-session stopouts along the way, especially in a July session like we're in right now over the summertime. So that's all I was trying to allude to.

Gary Bisbee

Okay thank you.

Daniel Hamburger

Good, thanks. Good question. You know the history, so that's a good question.

Operator

The next question is from the line of Andrew Steinerman with JP Morgan.

Andrew Steinerman

Hi Daniel, Rick. When you talk about filling out positions, you weren't specific to say if those are in all three business units. I'm particularly interested, is DVU also an area of increased investment? What type of people might you be filling out within DVU?

Daniel Hamburger

Sure, Andrew. Very good question. And I guess it does apply to DVU, DeVry University. One example would be we have added to the roles in order to provide increased levels of customer service to our students, and that is important to differentiate competitively. It's important academically to help students stay in school and improve retention, student finance professionals to advise students. It's good that we started that process a couple of years ago. We were either lucky or good, because we put that in before all the lending headlines hit the newspapers. And that's why -- the one reason why -- one reason that we have been able to improve our student accounts receivable on a per-account basis, as Rick had alluded to, 28 months in a row. So that's a good example -- more recruiters, more recruiting advisors and then the managers who oversee them, more people in marketing, all in line with the kinds of investments that we have been talking about.

Andrew Steinerman

Right. And how about regional managers, like somebody who manages a whole region for DVU? Are you still filling out people there? I don't -- you might call them -- I don't know what the title is, but are you filling out sort of regional managers?

Daniel Hamburger

Yes, yes, we are, and we recruited some outstanding new ones from other school systems who thought the grass was greener over here at DeVry, and we are pleased that we were able to do that. So the ranks are pretty well filled out there now. But you are right. Over the course of the last year, those happened. So this year we will see the full-year impact of some of those hires.

Andrew Steinerman

Sure. But we already see that in the fourth quarter, right? So this is kind of with that load in it.

Daniel Hamburger

Yes, and that's why, to the earlier question that Rick was saying, you should see that as -- where, as we go forward, a continuation of that trend until it anniversaries out.

Andrew Steinerman

Right, so we're still on a pretty strong margin trajectory expansion mode in DVU, even with the investment as we move forward?

Daniel Hamburger

Well, there's certainly a lot of opportunity to improve margins and operating leverage at DeVry University, particularly on the on-site side of things, because we can add more students without having to add a lot more cost.

Andrew Steinerman

Right. And just to sneak one last in, same subject, when you build in Chamberlain colocated and when you put in USEC colocated, and that's improving the utilization of the facility, will we see that margin enhancement at DVU, or we get to see that in medical? Where would you put that?

Richard Gunst

What we do in that case is, if one entity shares a location with another, we share that cost. So if the cost was fully absorbed by DeVry University in the past, that will now be a portion of that shared with the other business. So it's really in both.

Andrew Steinerman

Got it. Thanks very much

Operator

And your next question from the line of Jeff Lee with Signal. You may proceed.

Jeff Lee

Hi good afternoon. Could you guys talk a little bit about what your expectations are for and what drivers are for average revenue per student growth on the various segments? And I'm sort of looking specifically at the medical and health segment, where it's been pretty erratic over various quarters in the past.

Daniel Hamburger

Well, revenue per student has been driven by -- and Rick, jump in here,

I'm sure you'll have something to add -- the tuition increases that we've put in place. In some cases, there can be offsets to that. If we've had a mix shift to more part-time students than full-time students, then you might see a degradation in revenue per student, and that's a dynamic and mix shift that we have been experiencing for some period of time, particularly at DeVry University. And then the other dynamic could be the credit hour load per student within that rubric. So those would be some of the drivers.

Jeff Lee

Okay, and then on retention, and according to our calculations, undergraduate retention was down about 1 percentage point this quarter. Anything you see driving that, behind that?

Daniel Hamburger

No, in fact, it was improved.

Jeff Lee

Okay. Thank you.

Daniel Hamburger

Thanks.

Operator

Next question comes from the line of Scott Schneeberger with Oppenheimer, go ahead.

Scott Schneeberger

Hey good afternoon this is Alla for Scott, congratulations on a strong year.

Daniel Hamburger

Thank you.

Scott Schneeberger

First, I just want to clarify, with the shifting of scheduling, is it just with your undergraduates program, or are you doing that with other programs?

Daniel Hamburger

That is -- thank you for that question. It is really the undergraduate that we're talking about, the change to the academic calendar.

Scott Schneeberger

Okay, and do you think-- is there any costs, for example, the enrollment counselor, any other costs that's going to happen or change, meaning shift within that, together with that?

Daniel Hamburger

No, we really wouldn't expect any material change in our cost structure as a result of that academic calendar shift. And again, just to be clear, we're already about 75% or 80% of the way through that shift. So whatever we have seen has already been seen for the most part. Thanks.

Scott Schneeberger

Okay, thank you. And another question about your back office, you're opening Hong Kong. Just wondered what would be the next step for that, and how aggressive do you plan to pursue the China market? And also, given that, with that, you probably will have some acquisitions in Latin America, I just wondered if you can comment on the acquisition market over there, and how does that compare to the US? Thank you.

Daniel Hamburger

Okay. Well, the first part was about China, and we do business in China today. We're talking about the Becker Professional Review. In both the CPA and the Stalla Review for the CFA, we have business in China and it's growing. One of the fastest-growing markets for the CFA exam is candidates from China. Opening the Hong Kong office is an investment that we're making in order to accelerate our growth in the Asia-Pacific region, generally speaking, not just in China. And we do plan to pursue that growth aggressively and appropriately. In terms of Latin America, we think that the acquisition market is good. There are opportunities across the region, and we are looking at pursuing those acquisitions, as long as we can find strong management teams, quality programs academically speaking, and get a deal done at a responsible price. Thanks.

Scott Schneeberger

Okay. And then lastly, if I can sneak in, about share repurchase, when do you think you may resume that? Is it going to be after the U.S. Education acquisition closed, or since you are considering other acquisitions, when should we expect that to pick up again?

Richard Gunst

Yes, the new share repurchase authorization we got in May, we've been in the closed window and we have this acquisition pending, so we haven't begun the execution of that. We're going to close U.S. Education in September and then we will evaluate that as we go forward, as we look at our capital structure capital structure situation and other alternatives.

Joan Bates

Okay. We have to time for just one more question. Jeremy.

Richard Gunst

Jeremy.

Joan Bates

Okay. Well, maybe there's no one left in the queue. So do you want to just wrap it up, Daniel?

Daniel Hamburger

I'm glad we had so many questions. We do appreciate your time here. So, Jeremy, we're going to go ahead and just remind everyone that our next conference call is going to be held on October 23, where we will discuss our first-quarter results. And just a reminder, our next enrollment announcement is scheduled for early December. Thanks everyone, we will talk to you in October.

Operator

Thank you for your participation in today's conference. Ladies and gentlemen this does conclude the presentation. And you may now disconnect. Have a wonderful day.

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