Education Management LLC F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

Sep.10.08 | About: Education Management (EDMC)

Education Management LLC (NASDAQ:EDMC)

F4Q08 Earnings Call

September 10, 2008 10:30 am ET

Executives

James Sober - Vice President, Finance

John R. McKernan, Jr. - Executive Chairman and Chairman of the Board

Todd S. Nelson - Chief Executive Officer, President, Director

Edward H. West - Executive Vice President and Chief Financial Officer

Analysts

Reza Vahabzadeh - Lehman Brothers

Reed Kim - Merrill Lynch

Brian Krugg - Waddell & Reed

[Theresa Fox - Stone Harbor]

[Jane Galoranger] - Halcyon Asset Management

James Eustice - Churchill Pacific

Phil Kenney - Nomura Asset Management

[Yayin Shen - Metlife]

[Rob Sina - MJX Management]

Operator

Welcome to the Education Management fiscal 2008 fourth quarter and full-year earnings conference call. (Operator Instructions) I’ll now turn the conference over to James Sober, Vice President of Finance.

James Sober

With me this morning is Jock McKernan, Executive Chairman, Todd Nelson, President and Chief Executive Officer, and Ed West, Executive Vice President and Chief Financial Officer.

As has been publicly announced, Education Management Corporation the indirect parent of Education Management LLC filed a registration statement with the Securities and Exchange Commission in December 2007 in conjunction with the proposed initial public offering of its common stock. The registration statement has not yet become effective and these securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This conference call shall not constitute an offer to sell or a solicitation of an offer to buy any securities. In accordance with SEC rules regarding permissible communications by issuers during the registration process, we will not make any comments regarding the proposed initial public offering or the registration statement.

During today’s conference call we will begin with opening comments and then followed by a Q&A session.

Before turning the call over to Jock for his prepared remarks, I’d like to remind everyone that the cautionary statement included in last night’s press release also pertains to the comments on today’s call.

John R. McKernan, Jr.

As you can see from our release we had an excellent fiscal 2008 fourth quarter and full year. We continue to see positive leading indicators for student enrollment growth across all of our education systems. Our results are driven by maintaining our focus on the same elements of growth as we have in the past: New academic programs, new locations, more convenient delivery models and investments in online. This discipline has allowed us to produce consistent results for many years and it has demonstrated again in this quarter’s and this year’s strong top line growth.

I also want to point out that this performance is a tribute to the talented leadership we have at our company; people who achieve these results despite what we all know has been a challenging student lending market. Todd and Ed will discuss in more detail how we have minimized the impact of the changes in the availability of student loans on our students and potential students. But suffice it to say that we are very pleased with our growth rates this summer.

During our fiscal year 2008 our growth was driven by the development of 13 new academic programs, the introduction of 229 new or existing programs at our various campuses. Starting up eight new schools with three schools opened during June: The Art Institute International Kansas City, Argosy University Salt Lake City, and Brown Mackie College Boise. We also added almost 6,000 fully online students during fiscal 2008 bringing us to a total fully online student enrollment as of this past July of over 16,000 students. Since the beginning of our fiscal year 2009 in July we have begun marketing for two additional new schools: An art institute in Raleigh-Durham and a Brown Mackie College in Tulsa, Oklahoma.

We are accomplishing this growth while at the same time maintaining our commitment to quality and student and graduate success. We are still seeing strong demand for our graduates as evidenced by our graduate outcomes which are measured six months after graduation. So the latest quarter’s results are for graduates in the quarter ended last December where over 89% of the available graduates were employed in their fields of study or in related fields of study with an average starting salary of over $30,700.

We believe the investments that we’ve made and expect to continue to make will produce continued growth and provide excellent returns. We have the right leaders, the right faculty, the right staff and quality online and on-ground academic programs across our education systems that are attractive to both students and to their future employers.

So now let me turn the call over to Todd to discuss our recent July start and provide an update on the student lending environment.

Todd S. Nelson

We are pleased to report another strong quarter of strong enrollment growth and financial performance. We experienced excellent enrollment growth across all of our education systems, programmatic areas and delivery models. In addition we’re extremely proud to announce the Middle States Commission on Higher Education granted regional accreditation to the Art Institute of Pittsburgh which also includes the Art Institute of Pittsburgh online division. This achievement will not only benefit the students at the school but is a tribute to the leadership and dedication of the faculty and staff.

Total enrollment for the recent July start was approximately 91,600 students versus 78,700 students last year, an increase of 16.3%. Excluding the eight locations that are less than a year old, same school enrollment increased 14.6% to 90,200 students. Students enrolled in fully online programs across our three education systems grew 54.2% to 16,100 students.

I’d like to now provide just a brief update on the student lending issue. While the lending environment continues to evolve, we have seen some signs of stabilization beginning with the recently enacted increase in Stafford loan limits. As I stated on our last call, we have worked extremely hard to minimize the impact on our current and potential students. We identified additional financing options, established new lender relationships and completed system enhancements and training. In addition we recently launched our new internal student loan program and Ed will provide you with additional details on this program in his remarks.

I am pleased to say that with the recent Stafford loan increases and the various programs and changes we have and continue to implement, the current lending environment is impacting our current students and potential students less than we had originally expected.

So with that let me turn the time over to Ed to give you an update on our financials and the lending program.

Edward H. West

In my comments I will go over revenue, expenses, EBITDA, review selected balance sheet, cash flows and cap ex information, as well as certain credit ratios and then I’ll go over some of the general comments on private loans. As Jim previously mentioned we will not address any matters related to the S1 due to the quiet period.

For the fourth quarter ended June 30 revenues were $416.4 million up 19.8% versus prior year. This was driven by an 18.3% growth in students and an approximate 5% increase in average tuition rates which was partially offset by a change in mix. The growth in online students relative to our entire system was a contributor to the change in mix. At the beginning of the fourth quarter enrollments in fully online programs were approximately 15,800 students up 72.4% from prior year period while on-ground enrollments were approximately 79,800 up 11.4%.

Total expenses including depreciation and amortization for the quarter versus prior year were up 21.1% to $370.8 million. Looking at a couple of the expense categories, educational services were up 22.5% to $237.6 million. The increase was primarily a result of volume driven staffing needs, wage increases, new campuses and new housing expenses. Within that category rent expense was up 23.6% primarily due to the increased housing rent to support student housing growth, new campuses, expansions and normal increases at existing campuses. As a matter of interest, our total rent expense for the company was $35.7 million for the quarter and $135.4 million for fiscal 2008.

For the quarter bad debt expense represented 3% as a percent of revenue. As I mentioned last quarter bad debt has historically ranged in the 2% to 3% range.

General and administrative expenses were up 21.6% to $108.6 million versus the prior year quarter. The increase was driven primarily due to investments made in the marketing and admissions areas. Marketing and admissions expense represented 22.2% as a percentage of revenue versus 21% in the prior year period. The increase over prior year included both growth in advertising and ADA staffing levels. The principal driver was the investment in our online operations in startup locations.

Reported EBITDA was $70.2 million for the quarter versus $64.4 million last year up 9%. EBITDA margin was down approximately 168 basis points to 16.9% for the quarter. This decrease primarily reflects the investments in new campuses, marketing and admissions expenses across our system, and the timing of some of our spring starts where some revenue was recognized in the third quarter versus fourth quarter as compared to last year.

For the fiscal year 2008 revenues grew by 23.5% to $1.68 billion compared to $1.36 billion in the same period a year ago. This was driven by a 19.1% increase in average student enrollment and an approximately 5% increase in tuition rates slightly offset by a change in mix as previously stated. Reported EBITDA increased 14.1% to $363.8 million from $318.9 million last year. EBITDA growth tracked below growth in revenue due to our increase in investment in marketing and admissions in our online operations and our startup locations.

Cash from operations totaled $151.3 million for the 12 months ended June 30 down from $179.4 million in the same period last year. The primary driver for the decrease in cash from operations was related to timing of required interest payments on our long-term loan facility as well as our tax payments this year versus where we received actual tax refunds last year. Cash paid for cap ex was $150.9 million or 9% of revenue for the 12 months ended June 30 compared to $96.1 million for the same period last year. The growth in cap ex is directly correlated to the growth in new schools and campus expansions. In fiscal 2008 we had eight startups versus five in fiscal year 2007.

Looking at the balance sheet as of June 30, we had $236 million in cash. We borrowed $120 million on the revolving credit facility at June 30 and repaid it on July 1. Long-term debt was $1.9 billion. Looking at the credit ratios at quarter end, the interest coverage ratio was 2.4 times, well ahead of our required 1.55 and the leverage ratio was at 4.78 times, well below our required 7.25.

I would now like to update you on what we’ve been seeing on the student loan front. As you may recall from our discussion last quarter, the summer start was the first start for us in the new lending environment due to the termination of our previous student lending arrangement with Sallie Mae. We initiated a multi-faceted strategy to address the student loan lending issues. The areas we focused on were: One, operational changes and training at the campus level; two, programs to make sure that continuing students could be funded; and three, new lending programs to support our new student growth.

Now our continuing students for the quarter, those are the students who have already been enrolled in a school in prior quarters, have largely been covered from a financing standpoint due to their existing student loan relationships, operational changes that we put in place early on, or have been financed by Sallie Mae due to our agreement with them to fund continuing students this calendar year.

From a new student perspective, new student starts for the summer actually came in ahead of our expectations at the Art Institutes. We believe this is due to the operational changes that we made across the system and the new lending programs that we have put in place. Regarding these new lending programs, we presently have in place seven federal lenders and four private lenders. The vendors vary by campus.

We also finalized our agreements last month with the originator, lender and loan servicer for the Education Finance Loan Program. As we mentioned last quarter we are prepared to commit to invest up to $50 million during fiscal year 2009. It’s too early to declare a trend but based on the level of pre-qualifications for the program that we saw over the last two months, the demand has been less than we anticipated so far. Obviously this could change going forward.

As a matter of interest, the level of private loans that were awarded for July and August are down considerably for new students versus the same period last year. The increase in Stafford loans is the biggest driver and we’re also seeing a modest increase in the use of plus lines. We believe the level of private loans as a percentage of total receipts will be down in fiscal 2009 versus 2008 due to the federal loan limit increase and the operational changes that we have put in place. We are still prepared to commit to invest up to $50 million during the fiscal year for students who are unable to obtain funding and meet our underwriting criteria.

As we discussed on our last quarterly call, we continue to believe that as a result of the changes in student loan market place the additional lending fees combined with the incremental bad debt could negatively impact our EBITDA margin by several percentage points on a combined basis.

In summary, we will continue to drive the operational awareness as well as the alternative lending programs in an effort to mitigate the issues facing the private student loans. The results from July and August are a small sample size and two months doesn’t make a trend, but the early results are quite encouraging.

Todd S. Nelson

We’d like to go ahead and open it up now for some questions please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Reza Vahabzadeh - Lehman Brothers.

Reza Vahabzadeh - Lehman Brothers

As far as the student lending front is concerned, I’m sorry. I couldn’t hear you. Did you say that you are still committed to provide up to $50 million or $15 million of loans?

Edward H. West

That is $50 million as we mentioned last quarter that we’re prepared to commit to that this fiscal year.

Reza Vahabzadeh - Lehman Brothers

And when do you think you can reach that peak? Is it going to be in the first and second fiscal quarter or is it going to be later than that?

Edward H. West

The way we’ve structured our program is that disbursements will be made throughout the year and then we will invest in those loans once the final disbursement has been made. So the actual cash standpoint from an EDMC level where those funds will be invested will actually be later in the year and also roll into next year to the extent a student is staying in school. To the extent that they have their final disbursement during this fiscal year, that’s well invested. So it’s really more back-end weighted. Separately as I mentioned on the call, we are seeing a little less of the pre-qualifications earlier on than what we had originally anticipated.

Reza Vahabzadeh - Lehman Brothers

You said that the impact of providing this $50 million student financing is several hundred basis points. What is that as a percentage of? Plural revenues or something else?

Edward H. West

Just backing up on that, what we mentioned was really the combined impact of the whole student loan implications that we’ve seen where we now have new loan fees that we’re paying Sallie Mae as it relates to some of the continuing students as well as increase in bad debt that we anticipate just one, given the overall macro economy but also as a result of investing these loans, we think the combined impact of all those items could be several basis points, several percentage points to margin.

Reza Vahabzadeh - Lehman Brothers

And that’s EBITDA margin?

Edward H. West

That’s right. So that would be as a percent of revenue.

Reza Vahabzadeh - Lehman Brothers

This last quarter was the first quarter I think in a very long time where your cost of services as a percentage of revenues actually rose. Is that because of a change in your cost drivers or is that because of a change in accounting and expense classifications?

Edward H. West

I think where you saw some of the investments, again hiring that’s been taking place in the business as well as we had an increase in bad debt year-over-year to 3 percentage points versus prior year and then other areas, again the growth in campuses where our rent expenses are up year-over-year higher than what we have been seeing.

Reza Vahabzadeh - Lehman Brothers

A couple of housekeeping questions. Rent expense for the year was how much?

Edward H. West

$135 million.

Reza Vahabzadeh - Lehman Brothers

The new cap ex guidance that you’re providing, how many campuses can that provide for you? Is it like eight to 10?

Edward H. West

Yes.

Operator

Our next question comes from Reed Kim - Merrill Lynch.

Reed Kim - Merrill Lynch

I was wondering, in the quarter if you kind of adjusted out for tuition increases and facility and program expansions, what your organic year-over-year enrollment growth was?

Todd S. Nelson

Are you talking about this prior year or going forward?

Reed Kim - Merrill Lynch

The fourth quarter and also going forward; that would be helpful.

Todd S. Nelson

Everything that occurred in that quarter basically as we see you get 14.6% of our same school enrollment which was very healthy and then combined enrollment growth is 16.3%. And again as far as going forward, you know we don’t really give guidance on enrollment growth.

Reed Kim - Merrill Lynch

I guess you’ve added so many programs and facilities that I was just wondering on a capacity basis, same facility, same program basis what the additions were.

Todd S. Nelson

Sure. Jock mentioned the over 200 new programs that were rolled out to existing campuses. That is a very inexpensive process because you have the facility in place and typically when you start marketing in a particular location, you roll out several programs and then as you add faculty and curriculum there you’re able to do it. But the program itself is only created once centrally so it’s a very inexpensive process and if that fluctuates even as much as another 100 over what it was the prior year, you wouldn’t see much if any impact at all. And as far as the opening of new campuses and new locations, this is very consistent with what we’ve seen over the last couple of years. So you don’t really see any huge increase percentage wise over what we’ve done in the past.

John R. McKernan, Jr.

One of the things I mentioned in the opening was the way we grow, and the way we grow existing campuses in large part is with the addition of new programs at that location. So we don’t really distinguish between the programs that are currently being offered and the ones that we add because we expect schools to add at least one if not two new programs each year to make sure that they’re responding to the needs of employers and to the market place. So we think of that combination as being our organic growth.

Reed Kim - Merrill Lynch

And another question on your in-house loan program. I don’t know if you’d maybe be willing to specify a little bit more, but when you say a few percentage points, is that low single-digit percentage points or higher single-digit? If you could be a little more specific?

John R. McKernan, Jr.

As close as we can it’s lower single-digit.

Reed Kim - Merrill Lynch

And I guess that includes costs just as far as new personnel and costs related to administrative? And on that note I was wondering, are you using any outside experts or consultants to help you design underwriting standards and implement that and so forth?

Edward H. West

Back to the program itself. The costs that we are relating to there were several percentage points to margin as a percentage of revenue really is encompassing the loan fees and the bad debt. The actual operating costs of the program itself are not that material relative to everything else. We did structure this program obviously to be able to scale. We wanted a program to where we could centrally manage and also where loans could potentially at some point in time depending on market conditions be securitized at some point in time in the future. So it is in a very robust way and also with quite strong and experienced partners that we have between the originator, the servicer and the lender of record.

Reed Kim - Merrill Lynch

As we model that going forward, we would look at the additional costs probably coming through the educational services line and then probably build our AR balances as we project forward?

Edward H. West

Right. And we’ll show on the balance sheet investments that we’ve made into the lending program.

Reed Kim - Merrill Lynch

As you try to minimize losses obviously on the new exposure there, are you seeing an ability to add more co-signers to your loans and can you maybe share on the private loan side typically what portion of loans you have a co-signer that might benefit the quality there?

Edward H. West

We don’t want to get too specific in terms of the number of co-signers we have right now but clearly that was a big force of some of our operational training and drive and changes that we made across the campuses on the front end on the financial aid processing and admissions is really working on co-signers, bringing more co-signers to the table, having families involved, so we have seen the percentage of co-borrowers go up. It’s also part of some of the criteria in the loans that we’re prepared to invest in as well. And there’s clearly a distinction and difference of the approval rates in the private loan market for individuals that come forth with a co-borrower to the extent they do not have strong credit. So that is an increase that we’re seeing. We think we’ll continue to have that as a front and center focus.

Todd S. Nelson

Although as Ed said it’s a little too early to get very excited about this, we are pleasantly surprised that at least out of the blocks initially that it is having less impact on the new student enrollment as well as the slight decrease in what we originally projected of the number of students in our student loan program as well as just the percentage of those using private loans. So early indications are again early but good.

Operator

Our next question comes from Brian Krugg - Wadel and Reed.

Brian Krugg - Wadel and Reed

Could you kind of talk to me about the incremental losses? I know when you guys have a lot of new facilities, you have a lot of startup costs, etc. Could you talk about the incremental losses that you experienced in this quarter versus a year ago?

Todd S. Nelson

We don’t really see much difference at all in the loss on a per campus basis because we’ve done this for many years and again we’re very careful in looking at the return investment as we open these new campuses. It does fluctuate again on the number that you have in a quarter and again that’s typically, although you try to do that as smoothly as possible over a year, you do have to be accommodating to licensures as well as accreditation issues that may cause those startups to occur and maybe a couple in a quarter versus the prior year there might not have been as many. But not a lot of variability on a case-by-case basis; just the timing of the year when you do it.

Brian Krugg - Wadel and Reed

Can you give me more of a sense of incremental losses, because I know generally they lose money for the first few quarters and then they start to break even and then they are profitable? Can you kind of talk about the cap ex that is maintenance versus expansion? It kind of would imply that you guys are confident the student loan thing is not a big deal since you guys are continuing to invest a high level. Can you comment on that as well?

Edward H. West

Let me come back to the first point there. We have not disclosed the level of investments that are being made other than the fact that right now we have, as we just mentioned, eight new startups this past fiscal year. We had five the previous year. And we had even fewer in the previous year before that. Typically if you look at one of the Art Institutes as we’ve talked about where we’re starting up, we just announced we had a few others startup this past quarter, it’s a typical break-even in a two-year period. So you can imagine just from the growth there you’re seeing more losses this year versus last year on a combined basis.

Separately as it relates to cap ex on average, maintenance cap ex level is roughly 3% of revenue across the system with the rest of that being growth and the growth really investments are driven by the number of new campuses that we’re opening up, the expansions because of the level of growth we’re seeing at existing campuses so we’re having to continue to expand, investing in infrastructure here and specifically on our online operations so that it can continue to grow and scale. We obviously monitor the market every day. It’s something we pay a lot of attention o and look at as many different facets as possible. And as we said here today we’re confident about the level of investments that we have here going forward into this next year.

Operator

Our next question comes from [Theresa Fox - Stone Harbor].

[Theresa Fox - Stone Harbor]

I know you touched on this but I need some clarification on the new loan fees. Is that exclusive of the $50 million loans that you plan to originate? Is it a fee for Sallie Mae to continue processing the loans already in existence?

Edward H. West

That is correct. These are fees separate from the loans that we will invest in and this is an arrangement that we mentioned last quarter that we struck with Sallie Mae to continue to provide loans to continuing students, those are students who are already enrolled for the rest of this calendar year, who would not have been approved under their normal underwriting criteria which they’re utilizing today. So they were approved in historical years. Today they may not qualify for the loan from underwriting criteria but they’re willing to do that and we’re paying them a fee to do so. Obviously the credit profile of those students improves and the quality as they continue to persist and pursue their education and move toward graduation.

[Theresa Fox - Stone Harbor]

What percentage of revenue would that amount be?

Edward H. West

Just stepping back on our overall, if you look at continuing students, roughly continuing students is approximately 60% and obviously this is a minor share of that.

[Theresa Fox - Stone Harbor]

And your increase in bad debt, is that a build-up in the accounts receivable or do you automatically take it off the top of the revenue line? Do you make assumptions going in?

Edward H. West

Are you speaking towards the new loan program or just in general?

[Theresa Fox - Stone Harbor]

The new loan program.

Edward H. West

When a student is approved and qualified through our new program and is disbursed by the lender on that, we have a commitment to purchase that loan into the future. At that point in time we will reserve an expense associated with that that will go through as bad debt.

[Theresa Fox - Stone Harbor]

So it is booked as revenue?

Edward H. West

Yes. We will recognize the revenue because this is a service like the service we perform for everyone else.

[Theresa Fox - Stone Harbor]

And then a corresponding expense.

Edward H. West

And it will have an expense associated with that.

[Theresa Fox - Stone Harbor]

And a point of clarification. The $50 million of loans that you had intended to originate, you have not seen a demand for that? But should you see a demand for that, your EBITDA margin would be hit by several hundred basis points or that’s including the new $50 million loans including the loan fees that you agreed to take on by Sallie Mae and including the bad debt expense? That’s the EBITDA margin hit?

Edward H. West

That’s right. It’s the combined impact of these new lending fees that we have from Sallie Mae as well as the potential and the investment up to $50 million in bad debt associated with that plus a bad debt expense just given the overall macro economic conditions in the economy and whatnot, we do expect as we’ve seen bad debt levels to trend up a little bit as you’re seeing everywhere else.

Operator

Our next question comes from [Jane Galoranger] - Halcyon Asset Management.

[Jane Galoranger] - Halcyon Asset Management

Given the current environment, is the education market behaving in a typically counter-cyclical fashion? And in that vein, can you speak to the experience of your financial aid directors sequentially in each of July, August and September month-to-date? How has the private loan experience changed really sequentially over these last few months?

Todd S. Nelson

Let me address your last question first. As Ed said, what’s happened is we’ve done a lot of training and also system enhancements to allow these financial aid employees to be able to adequately address the changing needs of the students, and they’re prepared to discuss not only the different loan options but also encouraging them to have co-signers and use Plus loans and every other option that reduces the demand in the private loan area. We’ve found that as Ed said that probably based on our expectations not using our internal loan program as much as we expected. Co-signing is a little bit ahead of where we expected but in general we were pleased that it’s not having the impact that we thought on possibly eliminating some of the students from enrolling. Obviously as we said it’s too early to tell.

And your first question was?

[Jane Galoranger] - Halcyon Asset Management

The counter-cyclicality, is the market behaving as it has in other cycles? Do you think you’re seeing an accelerated growth in enrollment due to increased unemployment?

Todd S. Nelson

Typically what happens is that, and I know it’s been a standard in the industry, in a more difficult economy it tends to impact enrollment in a positive way. And one of the very nice things about EDMC is we have enough different programs that we tend to have programs that tend to expand in a weaker economy but we also have other programs that are very consistent regardless of what’s going on in the economy. So we are continuing to see strong demand both in our inquiry flow as well as those who are enrolling in the programs. So I would say that in general we get a slight bump in an economy like we’re seeing right now but frankly we also see strong enrollment demand when the economy’s a little stronger. So again I would say the best way to characterize it is a slight positive bump and we’re seeing that, but that’s mostly because we have a very wide variety of programs that the demand stays strong regardless of the condition of the economy.

[Jane Galoranger] - Halcyon Asset Management

What percentage of revenues do you anticipate in Q109 will come from federal funding sources and how close do you expect to be to the limit?

Edward H. West

As I mentioned in my points earlier, from July and August what we saw was a pretty impressive growth in the federal loans and Stafford loans because of the increase in the loan limits that the government put forth earlier and a reduction as a percentage of total receipts as it relates to private loans. I think this is driven as I mentioned in two parts because of the federal loan limits but also because of the training and operational changes that we’ve had in place because we also saw an increase in Plus loans through the period. Looking from an overall 90/10 metric, which I think you’re probably referring to in the latter part, that’s measured at year end and you really have to look at that over a 12-month period and can’t make any conclusions from a two-month period.

Operator

Our next question comes from James Eustice - Churchill Pacific.

James Eustice - Churchill Pacific

If you were going to look at the percentage of your private loans or however you usually segment it out in your 10K, how would you break that down? In other words, if you look at the percentage of your revenue, X comes from federal funding and then D comes from private and state sources.

Edward H. West

What you’ll see in the 10K, the percentage of receipts that are received that are coming into all of our campuses from student aid whether that’s from a federal source, state aid, as well as private loans coming in total receipts and that is compared as a percentage of those receipts as well as a comparison as a percentage to our net revenues. We’ll illustrate that so you can see that and how that’s changed on a year-over-year basis.

Operator

Our next question comes from Phil Kenney - Nomura Asset Management.

Phil Kenney - Nomura Asset Management

I had a question about results from July and August. You said they were encouraging. Can you give us some idea, are you seeing enrollment continue to grow and is it growing at similar sorts of rates as it grew in 2008?

Todd S. Nelson

We see strong enrollment across all of our education systems as well as the different delivery models. You would expect as we continue to go at close to 100,000 students that you would start to see the percentage of growth start to slow to some degree, and you’re basically seeing that. But the good news is as you look at us as a company compared to our peers that we continue to have frankly better growth rates than many of the education companies that are much smaller than we are. So yes, we feel very good about the year-over-year growth but at the same time yes, we would expect that the percentage of increases is again slightly decreasing over prior years as you continue to deal with the law of large numbers.

Phil Kenney - Nomura Asset Management

You said that tuition was up 5% but it looks like revenue per student was only up 2.9%. Are you seeing students take fewer classes?

Todd S. Nelson

We’re not necessarily seeing across the board. We are seeing a little less as far as the credit hours that they’re signing up for. Some of that though is seasonality issues that you deal with and a better indication would be over the next couple of quarters to see if we’re seeing an overall trend there.

Edward H. West

The biggest difference for the year-over-year, your point there, on a revenue per student is really the change in mix. As I mentioned in my comments, as a percentage of total enrollment online is growing faster so it’s a larger mix and a typically credit load of an online student is lower than an on-ground full-time student.

Phil Kenney - Nomura Asset Management

How much lower would you say it is?

Edward H. West

Double-digit percentage points different in terms of the average credit loads.

Phil Kenney - Nomura Asset Management

It looks like cap ex spiked pretty dramatically. I know you opened three new campuses in the quarter but you’ve opened five in the first three quarters of the year and cap ex was pretty dramatically lower. Can you just provide some clarity there?

Edward H. West

It really relates to the timing of the construction and the work at the campuses versus when we have the market in start. The timing throughout the year when those are opened plus we’re now working on campuses that we’ll be opening this next fiscal year in fiscal 2009 where we begin investing in those in the fourth quarter. So it’s really just timing of that throughout the system and the expansions that we’ve seen at the locations across the company, which has been fairly broad in nature.

Operator

Our next question comes from [Yayin Shen - Metlife].

[Yayin Shen - Metlife]

I apologize if you answered this before, but the increased fees you’re paying to Sallie Mae, are those on loans that were generated through their discount loan program, the old program they’ve since discontinued?

Edward H. West

Some of those would have been students who were in that loan program before under the discount loan program who were approved under that and now who do not meet their current underwriting criteria and quite candidly because credit underwriting criteria in the market has gone up so much it may also include students who are not in the old discount loan program but who would not have been approved under their current underwriting criteria. So those have been covered with that as well.

[Yayin Shen - Metlife]

Can you quantify, how much are the increased fees that you’re paying? Less than $5 million a year? Less than $10 million? What’s the order of magnitude there?

Edward H. West

We do not discuss that. It’s all captured in that several percentage points as a percentage of revenue.

Operator

Our next question comes from [Rob Sina - MJX Management].

[Rob Sina - MJX Management]

I wasn’t sure if you said that the bad debt expense rose from about 2% to 3% for the year or was that just for the quarter?

Edward H. West

Year-over-year for the fourth quarter it rose from 2.2% to 3% on a year-over-year basis for the quarter. For the fiscal year the number was about 2.5%.

Operator

Our next question comes from Reza Vahabzadeh - Lehman Brothers.

Reza Vahabzadeh - Lehman Brothers

On the enrollment numbers in this quarter or the beginning of your September quarter as far as the growth looks respectable, but is it accurate to gauge the numbers as showing slower growth than preceding quarters on a year-over-year basis? And I’m talking actual number of students in enrollments as opposed to percentages.

Todd S. Nelson

Yes. As I said we’re very pleased with the overall enrollment growth not only in online but also our on-ground program and our same-store locations as well. We are and did expect that you would continue to see a slight decrease in that percentage of growth year-over-year and I would say that it is certainly within the range of what we had expected. The good news is we also see going forward that we’re continuing to add infrastructure in particular to online. We were behind in our ADA hiring. Our enrollment accounts are hiring for a couple of quarters and we now have that back up to where it should be. So we see that also should have a nice impact going forward as well.

Reza Vahabzadeh - Lehman Brothers

Do you think your marketing spending per new student enrollment is stabilized or still rising or can you talk about that particular trend?

Todd S. Nelson

I think that because as a percent of revenue online is typically more heavily focused in the enrollment area and so as a result of that becomes a bigger portion of our revenue, you would expect to see some impact increasing that having an impact that way but also we are continuing to invest in that area. So I think you’ll see slight increases and then over the next year I think you’d start to see that stabilize.

Reza Vahabzadeh - Lehman Brothers

I guess my question was holding the channels constant, is the cost per enrollment still rising modestly?

Todd S. Nelson

The good news there is that it is a slight increase if any but nothing significant. You’ve seen over the last few years that it tends to be a little bit in the way those expenses go up more of a stair step type expense increase, but in the period we’re in right now it looks very stable.

Reza Vahabzadeh - Lehman Brothers

Ed, did you mention what was the increase year-over-year in marketing spend?

Edward H. West

Are you talking about for M&A as a percentage of revenue?

Reza Vahabzadeh - Lehman Brothers

Yes.

Edward H. West

Year-over-year for the quarter is up 120 basis points.

Reza Vahabzadeh - Lehman Brothers

And it was how much in this quarter? 22%?

Edward H. West

Yes.

Reza Vahabzadeh - Lehman Brothers

So was that a little under 21% last year?

Edward H. West

Right.

Reza Vahabzadeh - Lehman Brothers

And for the year?

Edward H. West

As a percent of the revenue, it was 21%.

Reza Vahabzadeh - Lehman Brothers

Versus what in 07?

Edward H. West

A little above 19%. 19.1%.

Operator

That does conclude the question and answer session portion of our call.

Todd S. Nelson

Again we thank you for joining us and we do look forward to speaking with you again when we complete our next quarter. Thank you very much.

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