Lincoln Educational Services Corporation Q2 2008 Earnings Call Transcript

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Lincoln Educational Services Corporation (NASDAQ:LINC) Q2 2008 Earnings Call August 6, 2008 10:00 AM ET

Executives

Dave Carney - Chairman and Chief Executive Officer

Shaun McAlmont - President and Chief Operating Officer

Cesar Ribeiro - Senior Vice President and Chief Financial Officer

Analysts

Sara Gubins - Merrill Lynch & Co.

Gary Bisbee - Lehman Brothers

Amy Junker - Robert W. Baird

Kevin Doherty -Banc of America Securities

Operator

Welcome to the second quarter 2008 Lincoln Educational Services' earnings conference call. (Operator Instructions)

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

I would like to turn the call over to David Carney, Chairman and CEO of Lincoln Educational Services.

David Carney

Welcome to the Lincoln Educational Services second quarter 2008 earnings conference call. Joining me today is Shaun McAlmont, our President and Chief Operating Officer, as well as Cesar Ribeiro, our Senior Vice President and Chief Financial Officer.

Following my remarks, Shaun will provide an update on operations and Cesar will provide a detailed review of our second quarter results. We will then open the call for the question-and-answer session.

Now turning to our results from continuing operations, the second quarter was another strong quarter for the company as we continue to benefit from the continued growth initiative including new program offerings, program transplants, campus expansions, start-ups and strategic acquisitions. Along with the growth initiatives, we clearly are benefiting from the positive results from marketing and recruitment efforts and operating efficiencies. During the second quarter, we posted financial results and students start and enrollment growth that exceeded the same quarter a year ago as well as the guidance ranges that we provided on our first quarter call.

We reported earnings per share from the continuing operations of $0.05 in the second quarter versus $0.03 in the same quarter last year. Revenue was $85.1 million in the second quarter, up 13.8% year-over-year. Revenue growth was driven by a combination of new-student start growth of 20.9% during the quarter and a beginning carry-in population that was up 9.3% over the prior year. Now, turning to starts. Second quarter 2008 starts of 5,782 were up 20.9% versus the same quarter a year ago reflecting another strong quarter of year-over-year starts growth.

The strong performance was particularly gratifying as we experience positive start growth across all of our five verticals. We are also pleased with the early starts in the high school program principally in our destination schools which have multiple class starts of auto, diesel and related programs from June through September. We attribute the increased high school enrollment in the earlier classes to the effect over improved internal processes. We have made considerable progress in increasing the effectiveness of our organization including addressing key fundamental areas such as our student recruitment processes, sales organization and overall marketing efforts.

With respect to student recruitment, we have implemented various improvements of the financial aid packaging process as well as focus on increasing the stability and effectiveness of the admissions rep force. Our success in these areas resulted in our ability to achieve strong high school starts late in the second quarter principally at three of our destination campuses, in Nashville, Indianapolis, and Grand Prairie, Texas. Moreover, based on our visibility in the third quarter starts across all of our campuses, we are confident that total starts from this year's program which mainly spends the June through September timeframe will exceed prior year.

As we have discussed on previous calls, approximately 40% or over 10,000 of our annual starts occur in the third quarter and between 35% and 40% of those starts will come from our high school recruiting efforts. Needless to say, we are achieving our goals and the momentum is continued into the second half of the year. Moving to total student enrollment, total student enrollment at June 30 was 18,597, an increase of 14.7% over the prior year while average enrollment for the quarter was 18,540, up 12.3% from 16,509 to the same quarter a year ago.

During the second quarter, average enrollment increased in all of our verticals compared to last year. This marks the second consecutive quarter of year-over-year average enrollment growth across all product groups. We also started 2008 with an 8.5% carry-in population compared to 2007. That favorable trend has continued year-to-date as we begun the second quarter with 9.3% more students than in the prior year and then on the third quarter with 2,386 or 14.7% more students than last year.

I believe these points for the balance growth across the verticals as well as the benefit of new program additions to the product groups. As of June 30, 2008, the average enrollment of 18,540 was divided between Auto 35%, Skill Trades 14%, Health Sciences 32%, Hospitality Services 10% and Business and IT at 9%. We continue to add programs to each of our verticals such as Licensed Practical Nursing to Health Sciences which is quickly grown to over 15% of our Health Sciences enrollment.

Similarly, collision is now nearly 15% of the enrollment on Auto product group. We are clearly seeing the benefits of our strategy to diversify the company's program offerings while at the same time providing our students with the opportunity to begin at the diploma or associate degree level and then continue with their education through our online division. We believe this provides our graduates with a highest return on their education investment and educational opportunities throughout their working careers.

Looking ahead over the remainder of 2008, we are focused on building upon the positive trends we have experienced during the first half of the year. We expect to continue benefiting from the various operational efficiencies we have achieved to date including our improved recruiting and sales organization and the strength in lead generation delivered by our redesigned website. Shaun will give you additional color during his prepared remarks.

We believe our expanded program mix will continue to be a key asset for Lincoln and help drive further starts and enrollment growth during the second half of 2008 resulting in increased capacity utilization across our campuses. In addition, we will continue replicating programs across our footprint with the goal of optimizing our campus offerings to best meet local student demand. We are carrying out this program in a prudent and concerted manner with a goal of supporting our growth over the long term maintaining our high ratings in student satisfaction and improving our profitability.

Our focus on our multi-pronged growth strategy continues to include growth opportunities such as expanding several of our campuses, opening new campuses, potential acquisitions, building out our online platform and the fourth further rollout of our expanded degrees. The seven acquisitions that we have made over the years have all provided either new program offerings or degree granting opportunities and all cases have expanded our footprint.

We see this strategy continuing to provide us with the additional growth vehicles including our objective or obtaining regional accreditation to strengthen our online business. Our most recent campus start-up, Aliante opened in Nevada in July; Aliante is our fifth Euphoria brand school. The campus offers diploma programs in cosmetology, anesthetics; two markets currently experiencing high demand. Our first start date took place in July and we expect to reach in enrollment of about a 100 students by year end.

At our online division, we remained dedicated to the effective launch in support of our bachelor degree programs and Shaun will provide further insight into our operations during his prepared remarks.

Now, we turn to our third quarter in 2008 financial outlook and our guidance. For the full year, we now expect annual revenues to be in the range of $360 million to $370 million or an increase of approximately 10% to 13% over 2007. Diluted earnings per share of $0.66 to $0.70 or an increase of approximately 25% to 32% on an increase in starts of 8% to 9% over 2007. In terms of guidance for the third quarter, we expect starts to increase by 5% to 7% over the third quarter of 2007, revenue of $94.5 million to $96.5 million and diluted EPS per share of $0.19 to $0.21.

Finally, I would like to provide an update on the current student lending environment and the effect on Lincoln. I will not repeat all of my comments from the last two calls except to say that despite serious concerns on our part and others today, we have not experience any disruptions in our financial aid processing but of course to take important precautionary measures to assure that we do not in the future.

With the President signing the Ensuring Continuing Access to Student Loans Act, or HR 5715, the bill increased the unsubsidized Stafford Loan limits by $2,000 per academic year. It allows the government to create liquidity for Title IV lenders by establishing a secondary market for student loans. We are in the process of repackaging students with the $2,000 and converting them from our company financing.

Finally, after five years of delay, Congress passed and the President is expected to sign into law HR 4137 reauthorizing the Higher Education Act. As you know, this is the bill that governs higher education in federal financial aid. The bill also modifies the 90-10 rule which states that for-profit institutions cannot generate more than 90% of revenue in federal financial aid. If they do they lose access to federal financial aid.

The new bill resolves the 90%-10% issues including allowing the recent $2,000 increase to federal loan limits to count towards the 10% for three years, allowing institutional loans for 2009 through 2012 to count toward the 10% and adding some other revenue sources to the 10% count.

We are very pleased with these changes which are important to us and many of our peers who derive a high percentage of revenue from federal financial aid to result in the students we serve. For the year ending December 31, 2007, the percent of revenue from federal financial aid for Lincoln was 80% and without these changes we would have been forced to raise tuition and provide additional internal lending to our students.

With this said, let me turn the call over to Shaun for a review of operations.

Shaun Mcalmont

As Dave outlined, during the second quarter we continued to build upon the positive trends and momentum in our business that we have been experiencing since the second half of 2007.

I would like to take a minute to focus on our priorities and give you an update on our second quarter and year-to-date operational progress. As I mentioned on our last call, in addition to day-to-day operations, there are three key priorities for 2008 and 2009 on which we have focused. First, to advance our high school plans. Second, to strengthen the foundation for our online strategy and third, to continue to improve the execution of our basic functions.

In regards to our high school plans, we are focused on capitalizing on many of the prior year gains such as a stabilized rep force, improvements in our conversions and the further development of key high school relationships around the country.

Our stabilized sales force has allowed us to manage enrollments to the levels needed to achieve our high school targets without large dips in manpower which can result in the need for significant ramp-up training. The stabilized force has also allowed for improvements in conversion metrics while also helping us maintain and grow our key high school relationships which will also benefit the 2009 campaign launching in three to four weeks around the country.

Our Automotive schools represent 80% of our high school efforts and year-to-date enrollments for these schools are all well up over prior year. Again, we have aggressively packaged these students and collected housing deposits at improved rates compared to prior year, and as Dave mentioned our destination schools in particular are performing well and will continue to start and relocate students throughout the third quarter.

As we did last year, we are managing the high school process both aggressively and proactively in order to achieve higher start rates for all of our schools. I know that you can all appreciate that there are uncertainties associated with high school starts. However, the aforementioned efforts are focused on mitigating these.

We feel confident in our results thus far in 2008 and also as we overlap into a new recruitment period and as we launch the 2009 high school program we will begin our efforts with a fully staffed and well trained sales force who will take advantage of our developed high school relationships and the early marketing that we have done concerning junior leads generated in 2008.

We have also launched a new multimedia in-class high school presentation, new recruitment collateral and a series of integrated support campaigns designed to use other media sources to support the ongoing efforts of our representatives.

In summary, we are encouraged by our high school program and we see it as a long term opportunity for Automotive program growth in particular. When you access the critical elements of our program, our year-to-date high school enrollments, our early student financing efforts and the collection of early housing deposits for destination students, they are all up over prior year leading to early increased starts. We will continue executing our approach while also adding representatives, where possible, to maximize our opportunities.

I should also take an opportunity to mention that although we have not seen any economic tailwind in our Media Automotive recruitment, we feel anecdotally that a challenging job market for high school students benefited our enrollment efforts. Our long term success as a company will be driven by a continued focus on high school enrollments and it is our goal to become the premiere high school recruitment force and high school education option for technical training in the country.

In regards to our online plans, our efforts remain centered on strengthening our infrastructure, the launch and growth of our new Bachelor's Degree programs and our ability to attract students in markets which are new for Lincoln. We continue to gain expertise in our learning management platform and we have built a number of support functions around it including a technical help desk, live orientations, 7-day a week advising, learning and library resources and a series of live lectures focusing on general career components and employability skills for students.

In addition to these student resources, we have built a series of faculty resources including asynchronous and live orientations, in-service training modules, course shadowing and observation functions as well as other instructional development resources. These additions strengthen our foundation and also give us a scalable enrollment and delivery system that will support future growth.

We received approval for three Bachelor's Degrees in April and started small cohorts of students in May and July. We expect that by the end of the third quarter, Bachelor seeking students will amount to 15% of our online population of approximately 500 students. Of the total online population, 75% are expected to be enrolled in fully online programs. Our current Bachelor's programs include Criminal Justice, Business, and Information Technology and we expect to launch Graphic Design and Visual Communications in the fourth quarter of 2008.

Our broader online strategy remains focused on securing approval for and launching additional Bachelor's Degree programs and also taking steps toward higher levels of accreditation to attract new markets for Lincoln. Our online value proposition currently relates to costs and contemporary versions of some programs.

In some cases, we will become another online option for students to select via the menu of choices they are exposed to online. With our current approach, we expect to maintain reasonable online growth. However, we feel we can accelerate this growth once we elevate the branding and accreditation for our Bachelor's Degree programs.

As I have mentioned on our previous calls, we welcomed a new Vice President of Academic Affairs last quarter who possesses considerable online and accreditation experience which we believe will help us move forward our online strategy in the desired direction.

Overall, we are encouraged by the foundation we have built including our technical infrastructure and our learning management systems. We are also encouraged by the recent Bachelor's Degree approvals and the growth opportunities they will provide during 2009. When bolstered by accreditations and additional Bachelor's Degree programs, our online division will open new markets for Lincoln and provide a significant growth opportunity for our company in the future.

In regards to our marketing efforts. Our second quarter lead volume improved by 2.3% based on a 2% increase in spending. Enrollment metrics also improved which contributed to our 20.9% increase in starts. We also saw improvement in our overall expense metrics as our marketing costs per start improved by 9% year-over-year.

We are continually adjusting our media marketing campaigns in response to realities we are experiencing in our markets. We have added an element of industry education to our new Automotive media advertising to offset potential perceptions regarding negative automaker news. Our reality continues to be, that job opportunities do exist for auto technicians around the country.

Our web inquiries continue to rise with our website generating 34% of all of our leads. We expect this trend to continue for adult media across all of our verticals and also for our high school media leads which typically come in between June and October.

We are further developing our website with the goal of optimizing at higher rates, continuing to generate improved lead volume to the site and generating greater intelligence regarding our customer search, viewing and buying behaviors.

We will launch a series of advanced web lead generation initiatives focused on re-exposing inquiries to Lincoln following their initial contact and as we have done in the past we will also re-market to existing high school and media leads generated between January and June to generate additional sales in 2008.

Overall, we are pleased with our marketing efforts thus far and we look forward to continuing these gains through the remainder of 2008 and into 2009. In regards to our basic functions, we remain committed to improving our operational execution through consistent assessment of our product and effectively managing the student experience.

In regards to our product development plans, we continue to improve our facilities and expand our scope through upgrades to existing sites and adding new facilities and new program rollouts. We will continue to expand our facilities and campus footprint in a rational manner driving increased brand presence and improving the educational experience of our students.

We opened our Aliante Euphoria campus in Nevada with a starting class on July 7th. This new campus will further strengthen our presence in the Las Vegas market. This allows for better advertising efficiency and a stronger high school approach and a broader general competitive presence in the area. We completed the Skill Trades expansion of our Grand Prairie facility in the first quarter and we are currently training students in electrical and welding at that site.

Our West Palm Beach Automotive and Cosmetology expansions are complete and operational and will offer upgraded programs in these new facilities which will allow us to better compete in that local Florida market. The West Palm campus has also started our first hybrid students taking online and on-ground courses simultaneously.

Our sixth southwestern campus remains on track to open in the first quarter of 2009 which will allow us to expand our brand and campus presence in the Ohio market. These expansions and new programs are geared at positioning us for growth into 2009 and beyond.

In addition, we have implemented company-wide processes designed to assist students at all stages of their educational experience as we are focusing on managing quality in our student development. Providing our students with the best assistance possible and improving their educational experience should also help us improve our business operations. Some of these processes include the continued refining of systems to manage our student attendance as we have determined this to be one of the real factors in maintaining our positive population variance over prior year.

We continue to add vital student services geared at assisting students and their parents in starting classes during the summer and fall months. We continue to focus on corporate-wide placement assistance, integration of career services into the curriculum and preparing students for their job search well before graduation.

Now that we are fully functional in the system-wide use of our student information systems, we will enhance our knowledge and use of the systems in order to enable reporting functions for staff and data access for students. And finally, we are making targeted program revisions to update our curriculum based on very specific feedback from our industry advisors.

In summary, the execution of these basic functions will remain a focus as we continue to enroll the more technologically savvy student with high expectations for their training.

Now let me turn the call over to Cesar for our financial review.

Cesar Ribiero

As we disclosed in our press release earlier this morning, and as Dave stated in his prepared remarks, we are very pleased with our second quarter results. We achieved record revenue for the quarter. It exceeded our expectations and our previously issued guidance of starts and EPS. More importantly, we are obtaining leverage from our business model as we increase our capacity utilization.

During the quarter, we were positively impacted by beginning the second quarter with approximately 1,700 more students than we had in the second quarter of 2007. This coupled with students starts of 20.9% during the quarter contributed to the overall 13.8% growth in revenue.

Average revenue per student for the quarter was up approximately 1.3% to $4,588 for the three months ended June 30, 2008 from $4,527 in the second quarter of 2007 and was up 0.8% from average revenue per student of $4,553 in the first quarter for 2008. Average revenue per student for the quarter reflects price increases that went into effect at the beginning of the year offset by a shift in student population.

We finished the quarter with 18,597 students enrolled at our schools, up 14.7% from the 16,211 we had at June 30, 2007 and essentially flat with the 18,600 students we had at March 31, 2008. The increase in student population for the period led to increased utilization at our campuses. Our average capacity utilization was 56% at June 30, 2008, up from 50% at June 30, 2007. We expect our capacity utilization to continue to increase during the second half of the year.

During the quarter, we were able to obtain leverage from our business model as we benefit from overall reduced expenses as a percentage of revenue versus the second quarter of 2007 while continuing to make investments in our business. Our educational services and facilities expenses decreased to 42.2% of revenue for the second quarter of 2008 from 44.6% in the second quarter of 2007 and selling, general and administrative expenses increased to 54.6% of revenue in the second quarter of 2008 from 52.8% of revenue in the second quarter of 2007.

For the quarter ended June 30, 2008, our bad debt expense as a percentage of revenue was 6.5% as compared to 5.6% for the quarter ended June 30, 2007. This increase is primarily due to higher accounts receivable during the period due to a 13.8% increase in revenue.

The number of Days Sales Outstanding at June 30, 2008 increased slightly to 26.4 days compared to 25 days at June 30, 2007. The increase in Days Sales Outstanding is directly attributable to the decision to finance the gap in student tuition not financeable by other sources through internal funding offset by better cash collections during the quarter as compared to the second quarter of 2007.

As a result of the above, for the first quarter of 2008, our operating income was $2.7 million, representing an improvement of $0.7 million from operating income of $2 million for the second quarter of 2007. Now turning to our balance sheet.

At June 30, 2008, we had $8.9 million in cash and cash equivalents, compared to $3.5 million at December 31, 2007. Net accounts receivable at June 30, 2008 were $24.7 million as compared to $24.9 million at December 31, 2007. Net property and equipment grew to $108.4 million at June 30, 2008, as compared to $106.6 million at December 31, 2007. The increase was due to capital expenditures of $12.6 million during the six months ended June 30, 2008 offset by depreciation expense.

On April 1, 2008, our Board of Directors approved the repurchase of one million shares of our common stock. During May of 2008, the company repurchased 600,000 shares of common stock for $6.4 million at an average price of $10.63 per share. As of June 30, 2008, we had loan commitments and that interest would be due when the loans to maturity of $13.7 million as compared to $11.3 million and $10.8 million at March 31, 2008 and December 31, 2007, respectively.

The passage of the Ensuring Continued Access to Student Loans Act, better known as HR 5715, provided our students with access to an additional $2,000 of unsubsidized loans for academic year. This additional funding is expected to reduce the amount of loan commitments the company will make to our students by at least one third.

With that said, I would like to turn the call back over to Dave.

David Carney

To summarize, during the second quarter we further built upon the foundation laid during the second half of last year. Looking ahead, we are poised to continue benefiting from our program diversity to further build out of our online offerings and the many improvements and efficiencies implemented across our sales and recruitment and marketing organizations.

We remain confident in our growth prospects for the remainder of the year and look forward to updating you on our progress.

With that said, we'd be happy to begin the question and answer period.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Ms. Sara Gubins from Merrill Lynch.

Sara Gubins - Merrill Lynch & Co.

Given the very strong start growth in the second quarter in particular within the high school market, do you get the sense that some of those starts were pushed forward versus when they might of come in the third quarter and I guess I am wondering if that explains why the start guidance for the third quarter is so much lower?

David Carney

Yes. Although we cannot quantify the exact number, certainly as we pointed out in the call, a number of our initiatives help accelerate the starts in some of the destination campuses and particularly in the South where graduations take place earlier.

Our guess is it is probably, we may have experienced maybe 250 to 300 more student starts in the second quarter than, because of the efficiencies and if you do the math that probably would reduce the 20.9% growth starts in the second quarter to maybe something like 15% to 16%, and if you move that into the third quarter it might add, because it is such a larger base, it might add 3% to 4% to what our guidance would have been had that not occurred.

Sara Gubins - Merrill Lynch & Co.

Looking at your guidance it does not look like you are expecting much operating margin expansions second half of the year, if any, and I am wondering if there is something that is driving that or are you just trying to take a conservative approach?

David Carney

There is nothing in particular driving it other than the fact that we have experienced nice growth over the last several quarters and we are taking one step at a time. So, our answer really is we will revisit our guidance at the end of the third quarter. I think the only thing that potentially would be in there that we do not have an exact stat on would be bad debt expense which might continue at a point higher than we would have otherwise expected.

Sara Gubins - Merrill Lynch & Co.

So there are not any particular unusual costs in there?

David Carney

No.

Cesar Ribiero

No. I think our yearly guidance reflects, overall for the year, of an improvement of about 100 basis points as compared to last year.

Operator

The next question comes from Gary Bisbee from Lehman Brothers.

Gary Bisbee - Lehman Brothers

The G&A, if I pull out bad debt expense and think about that separately the SG&A spend was up a bit more than I thought and sort of mid-teens year-over-year growth. I know part of it was advertising. It looked like there was a lot of G&A though. How should we think about that? Is it likely to grow off of this level or was there much that was sort of opportunistic one time in nature and I guess I saw in the press release you had the $200,000 item. Anything other than that?

Cesar Ribiero

Well basically, Gary SG&A grew by $5.1 million from the prior period if you will. What is included in SG&A this year is obviously the additional facilities that we built since the prior period which about $3.1 million of that increase relates to compensation, benefits, and projected bonuses which, based on where we are at this year, obviously they have increased this prior year.

There is $1.4 million of additional bad debt over prior year and there's a $200,000 refund. So that $200,000 refund is one-time. We are optimistic that bad debt will, as a result of the $2,000 additional funding, will come down to the levels that we expect and as far as the compensation, the additional growth in G&A is just due to new programs that we introduced such as LPN, the new campus in Aliante, the skill trades facility. As you know, all of the administrative costs of those campuses are reclassified as part of SG&A in our financial statements.

Gary Bisbee - Lehman Brothers

And then I am just trying to gauge a little better the impact of the $2,000 loan limit increase. Is there, I think you said that you thought that the loan commitment could fall by a third. Is that the right way to think about overall how much less you are going to have to be fronting the students? Is that a forward-looking statement or just is that from repackaging?

David Carney

No. That is a forward-looking statement.

Cesar Ribiero

I think if you recall in the past we said that we funded about 4.6% of our students and we would expect to fund about 4.6% based on historical data. The additional funding takes that amount that we need to fund down by at least a third so the student gap has gone down considerably.

Gary Bisbee - Lehman Brothers

So it is going to be well less than 5% of revenue then? Is that the right way to think?

Cesar Ribiero

Yes, that is correct.

David Carney

Yes.

Gary Bisbee - Lehman Brothers

The CapEx it sounded like that bumped up quite a bit. Was that $12 million number you said year-to-date?

Cesar Ribiero

That is a year-to-date number.

Gary Bisbee - Lehman Brothers

Was something else happening with your cash flow? I know you have not given the cash flow statement but it looked like the debt balance was up $10 or $12 million sequentially.

Cesar Ribiero

Well actually our debt as of June 30 was $21 million. That compares to about $21.5 million that we had at June 30, 2007. As you know, we are seasonal in terms of cash and we start paying back cash in the third quarter so debt was actually $0.5 million down from June 30, 2007 but included in that we also purchased treasury shares for about $6.4 million.

Gary Bisbee - Lehman Brothers

And then just one last one on the student growth, how much historically at this point of the high school population would you have enrolled and it sounds like you pulled a couple of hundred in maybe students forward but it is still pretty small. It is no more than a quarter of the total high school would have come normally in the second quarter. Is that the right way to think about that?

David Carney

Yes. I mean that is the right way to think about it Gary. I mean it is fairly evenly divided throughout the third quarter. You know, July, August and September and I guess you could, since these particular campuses that had the benefit of earlier class starts, they do have multiple class starts throughout the period. So my guess is that it is probably impacting July. We would expect the same basically the same flow throughout the quarter.

Operator

Your next question will come from Amy Junker from Robert W. Baird.

Amy Junker - Robert W. Baird

Can you just touch a little bit, I know you said strength across the board but I am just wondering order of magnitude, what are the areas where you saw the most improvements? Was it specifically Automotive? Can you talk about maybe some of the other areas and trends you have seen there?

David Carney

Yes. Certainly Automotive was one of them. When we talked about improved start growth across all of the verticals but clearly along with Automotive, health sciences grew very, very nicely during the quarter principally the result of the success that we had in our Licensed Practical Nursing program which at this point Amy, in just a little over a year we have had, I do not mind telling you, we have had 400 or 500 students in our three schools in New Jersey which was non-existent a year ago along with the continued growth in the schools up in Connecticut.

Medical Assisting and other programs in those schools also benefits from the fact that we have the higher-end program. So we are pleased with that. Hospitality Services grew. Business and IT as well essentially the result of online which rests in there to some extent along with our Criminal Justice programs. So overall, across all and I do not mean to exclude skills trades that also grew nicely. So it is pretty evenly distributed.

Amy Junker - Robert W. Baird

And can you just update us on in terms of the ramp of your Associates programs. You know how many campuses right now are offering Associates Degrees and perhaps the percentage of students enrolled in those programs?

David Carney

Well the percentage enrolled in them is, I think 21.3% if I am not mistaken, and the number of campuses, I want to say 15% but I am not totally sure. I will have to check that one out.

Amy Junker - Robert W. Baird

Cesar, just on housekeeping, if you said this, I am sorry I missed it but the tax rate expectations for the year where would you, what are you kind of thinking?

Cesar Ribiero

We are still targeting 41.5% to 42%.

Amy Junker - Robert W. Baird

Dave, you had mentioned I think acquisitions in your prepared comments. Can you just talk a little bit about kind of how the pipeline looks and the particular areas you may be more focused on looking to fill in at this point?

David Carney

The pipeline is full. We continue to have discussions with a number of attractive opportunities, folks that would represent attractive opportunities. The focus principally is to fill in, we did mention that, schools and companies where they have additional Health Sciences programs and also higher accreditation because that is something we are going to need to really drive our online business. So that is the focus. As always, we are looking to increase our footprint and clearly new programs that we can then transplant across other campuses including other higher-end Health Sciences programs would be the key to us. And we have 16 campuses with Associate Degrees.

Operator

Your next question comes from Kevin Doherty from Banc of America Securities.

Kevin Doherty -Banc of America Securities

I know you gave some commentary around the 3Q starts but if you look at your full year guidance it implies a further deceleration in 4Q. I am just curious if you can just talk about that? Are you being a little overly conservative or what is the reason why you might see a step down in the growth rate in 4Q versus 3Q?

David Carney

Well if you look at the first quarter it was 7.5%. The second quarter 20.9% which admittedly are about in total, half of the third quarter, which we are at this point guiding 5% to 7% growth. The fourth quarter is another small quarter and we are assuming although we did not give guidance but probably in the 6% to 7% range.

So you run all those numbers you are probably at the high end of what we are guiding for, for the year, but we are still in the middle of the third quarter, Kevin, so we are perhaps being a little bit conservative.

Kevin Doherty -Banc of America Securities

And would you see any pull through even from the strength you saw now that might flow through into the fourth quarter or do you think if there is any pull through it was only impacting 3Q?

David Carney

I would like to think that we are going to continue to experience nice growth in the fourth quarter as well. It is a tricky quarter with the holidays and now the election and all that so but I can tell you from a media advertising point of view. I guess it is safe to say we are feeling a tailwind, seeing some tailwind. And I see no reason why we would not continue to experience nice growth in the fourth quarter it is safe to say we are being a little conservative. That is a long way out at this point.

Kevin Doherty -Banc of America Securities

And then you had mentioned about the 90% to 10% changes from the ETA reauthorization. Were there any other surprises in there that might have impacted you guys and could you maybe just touch on the year round PELL grants, what percent of your students might benefit from that?

David Carney

Well let us see. First of all, I do not think there are any particular surprises in the higher authorization act. As far as, if I am not mistaken, I think about 17% of our revenue is from PELL. A large percentage of our students receive PELL. We have multiple starts throughout the year so I would say a large percentage of our students would benefit from the year around PELL, Kevin.

Operator

Your next question comes from Paul Condra, BMO Capital.

Paul Condra - BMO Capital Market

I just wanted to follow-up on the CapEx. It noticed that it came down a little bit this quarter so, I wondered, is that a more normal run rate or can you give any guidance to CapEx for the year?

Cesar Ribiero

Yes. I think that we still expect CapEx for the year to be 8% to 10% of revenues. So, somewhere between $25 million to $30 million.

Paul Condra - BMO Capital Market

And then my other question was given the decrease in the funding gap, how does that impact your plans for tuition or increasing tuition going forward?

David Carney

Our plans for increasing tuition going forward remain consistent 3% to 5% and that would probably take place at the beginning of this year, at the beginning of 2009.

Operator

Your final question is from Sara Gubins from Merrill Lynch.

Sara Gubins - Merrill Lynch & Co.

Could you talk about demand in the Working Adult category coming from media leads?

Shaun Mcalmont

Sara, across all verticals, as Dave mentioned, we saw increases in our starts and if you work backward into our leads we saw increases in leads across the board. The only thing I can say that was a little bit of an anomaly or a continuing anomaly is the fact that TV leads have gone down but they have been made up sufficiently on the internet side.

Our conversions remain strong. Our sources, even within the web category, remain strong and our ability to start the student or enrollment start percentages are also strong and up over prior year. The demand looks good to us. I would say that if we separate the verticals we saw increases in media leads across all verticals. We do feel that there is a little bit of a tailwind in some verticals versus others but our marketing is looking at all those realities and adjusting along the way. But demand looks strong at this point in time. We expect that to continue.

Sara Gubins - Merrill Lynch & Co.

And sorry, when you talk about a tailwind in some verticals, can you give a little bit more color around that?

Shaun Mcalmont

Well if you go back to Dave's comments and you look at Health Sciences, Hospitality, Business and IT, we have seen very, very good media demand. If you look at Automotive I would say that it is not where we want it to be but it also appeared strong against prior year especially in that second quarter.

In the case of Automotive, I mean we have got a number of initiatives looking at addressing some potential market cloudiness regarding automaker news but that is just that the new environment that we operate in. We expect that to be strong. It is just a different approach that we will take in that regard but we are happy with what we are seeing overall in our media lead generation and demand.

Sara Gubins - Merrill Lynch & Co.

There has been some sort of anecdotal talk about students perhaps not coming to school because concerns around gas prices. Have you seen any changes in retention or has that been an issue for your students at all?

David Carney

I will let Shaun weigh in on that as well but I have not seen anything. We have a constant dialogue with the schools. The retention is fine.

Shaun Mcalmont

Dave, you are right. Our retention is as strong as it was last year. But Sara just as you know, we are very sensitive to that and so the schools have been very proactive in ensuring that students know that there are car pooling opportunities, et cetera. But at this point we have not seen any negative impact in our ability to retain students or start them.

Operator

At this time, there are no any further questions in queue.

David Carney

Well, thank you all for joining us today. We are very pleased with our results we talked about today on the call and we look forward to providing you with an update on our progress on our third quarter earnings call in early November. So thank you and have a great day.

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