DeVry Education Group Inc DV
Q2 2010 Earnings Call Transcript

Transcript Call Date 01/26/2010

Operator: Good day, ladies and gentlemen and welcome to DeVry's Fiscal 2010 Second Quarter 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 this conference. (Operator Instructions).

At this time, I'd like to turn the presentation over to Ms. Joan Bates, Senior Director of Investor Relations and Media.

Joan Bates - Senior Director of Investor and Media 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 provision of the Private Securities and Litigation Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as DeVry Inc. or its management as a view, objective, or outlook or that management believes, excepts, 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 and DeVry's most recent Annual Report on Form 10K for the year ending June 30, 2009 and filed with the Securities and Exchange Commission on August 26, 2009. Telephone and webcast replays of the call are available until February 9, 2010. To access the replay, please refer to the page Press Release for information.

Today Daniel Hamburger will begin today's call with a quick overview, followed by a review of the financial results by Rick Gunst. Daniel will then provide an operations update before opening up the call for your questions.

With that I'll turn the call over to Daniel.

Daniel Hamburger - President and CEO: Thanks, Joan and thank you all very much for joining us for our fiscal 2010 second quarter conference call. You know since we saw many of you at our Education Day in November and today's announcement doesn't include enrollment results we'll make an effort to be brief this afternoon and get to your questions.

So we're pleased to announce that the continued execution of our growth and diversification strategy and our focus on investing in academic quality has produced successful student outcome and another quarter of strong financial results. And the increase that we saw in enrollments in December translated into exceptional revenue growth in the quarter, which drove margin improvement and record earnings.

At the same time, we continue to invest in our programs and student services to drive future growth. At DeVry’s home office, this quarter has been a busy one for us, as we recently moved into our new offices in Downers Grove and in Oakbrook, Illinois. And we moved our data center to its new location as well.

Our new home office is a co-location with the DeVry University Center and houses a classroom of the future. The new offices are designed to be open and collaborative with state-of-the-art amenities for our employees and our another part of our strategy to be the employer of choice in education and we’d like to invite you to come visit us when you can.

I'd like to spend a few minutes here on our expectations for the rest of 2010 and beyond in the context of the overarching economic conditions that we're seeing, because there certainly are some optimistic signs that the worst of this recession is behind us. But with the government announcement, for example of the 85,000 jobs were lost in December, it remains clear that meaningful economic recovery is not a foregone conclusion here in 2010.

As I outlined during our Education Day, we believe DeVry is well positioned in both good and bad times. Our confidence is bolstered by two factors. The first, our operating philosophy, namely that quality leads to growth. At DeVry institutions educate students for positions across a variety of industries, but they have one thing in common. Each provides high quality programs and services to our students. And as we continue to invest in quality, academic outcomes improve. The continued success of our students drives enrollment and retention, which leads to financial growth. And this is true in both good times and in bad times.

And we in turn put those earnings right back to work by investing them in the quality of our programs. Case in point, we're planning to invest over $100 million this year in capital expenditures on our program, services, and facilities. In today’s world of state budget cuts and declining endowment, this investment is an example of the important role that private sector schools like DeVry are playing in today’s educational system.

And second factor is our diversification strategy, which has us well positioned to deliver consistent and sustainable growth, again through both good and bad economic time. Some of our operations are pro-cyclical like Becker, which has been negatively affected by the weak economy. At the same time, schools like those of U.S. Education are more countercyclical. And in addition, DeVry High School such as Chamberlain College of Nursing and Ross University that are entirely non-cyclical. In fact, DeVry is the only publicly-traded education provider that has a medical school or a veterinary school.

Taken as a whole, the DeVry family of schools is best characterized as non-cyclical. And so, given our philosophy of quality leads to growth and our ability to mitigate risk through our diverse family of schools, I believe we'll continue to experience sustainable growth when the economy recovers. And it’s just an illustration of this.

I'd like to share with you how our larger school DeVry University grew during this strongest economic recovery in the post-war era, the '90s. And for this, please refer to the chart that you'll find in today’s press release.

If you take a look at that chart, you'll see that the end of the recession in 1992 and moving forward for 10 years in 2001, the job market improved with unemployment falling from a higher 7.4%, down to 4.2% over that period. And taking a look at DeVry University’s total enrollment over that same period, our enrollment continued to grow; in fact, the rate of growth increased. And keep in mind that that was in the '90s when we weren’t as diversified as we are today. I think a lot of people think we're more countercyclical than we really are. And this example demonstrates that we are able to grow in an economic recovery.

And so with that introduction, let me turn the call over to Rick for the financial results.

Richard M. Gunst - CFO and Treasurer: Thanks, Daniel, and good afternoon, everyone. I'm going to take the next several minutes to highlight our strong financial performance for the second quarter and first half of fiscal 2010. I'm pleased and encouraged to see the very positive impact from our investments in academic quality and customer service, which are resulted in strong revenue growth along with significantly improved margins and profitability.

Record quarterly revenue of $473 million was up about 28% versus prior year. This is primarily organic growth as we’ve anniversaried the U.S. Education acquisition in September with revenues still up 25% in the quarter, excluding our more recent acquisition of DeVry Brasil. Revenue through the first half of the fiscal year was up about 34% and 25% when you exclude both DeVry Brasil and U.S. Education.

Net income and earnings per share were both up about 69% in the quarter and 64% year-to-date. Earnings per share were $1 in the quarter, marking the first time we broken through the dollar threshold. It’s also interesting to note that our earnings per share were only $0.61 for the entire year in fiscal 2006, just 3.5 years ago. Pre-tax income margins for the first half was 21%, up 470 basis points versus the 16.3% margin achieved a year ago.

Now fiscal 2010 is really shaping up to be a breakthrough year and we expect to significantly surpass our historical peak margin of 17.1% this year. These results were driven by the excellent enrollment growth and retention results across our schools, while the Professional Education segment continues to be negatively impacted by the economy.

The financials reflect the power of operating leverage, which is helping drive the significant profitability improvement. For your reference, second quarter results include expense related to share-based payments of approximately $2.1 million pre-tax or $1.8 million net of tax, a bit higher than last year.

Our overall effective tax rate was 33.6% in the quarter and 32.9% year-to-date, up from the 30.4% rate for full year fiscal 2009, primarily due to the continued increase in domestic source income.

For perspective, we're now paying over $100 million in federal and state taxes on an annualized basis. Cost of Educational Service expense increased by 20% versus prior year in the quarter and Student Services and Administrative Expense increased by 17%, both growing at double-digit rates but less than the revenue growth with or without the acquisitions. We continue to make prudent, targeted investments while still delivering leverage and efficiencies.

With that as a highlight, let me walk you through some of the operating segment results, which are further detailed in our earnings release. First, the Business, Technology and Management segment achieved very strong top and bottom line results. Revenue was up 26% versus prior year in the quarter and 25% year-to-date, driven by the strong enrollment growth and increased retention, driven by our focus on student services.

Segment operating income of $78 million in the quarter and $134 million year-to-date more than doubled versus prior year. This improvement was driven by revenue growth and the resulting operating leverage. The segment margin was 24.9% in the quarter and 22.5% year-to-date. While we're continuing to make investments to support academic quality and customer service, our incremental earnings flow through for the segment has been over 60% year-to-date.

This shows the power of operating leverage and our cost base from the very strong top line growth. Within the Medical and Healthcare segment, revenue was up 28% in the quarter driven by the enrollment growth and pricing in the Ross University and Chamberlain College of Nursing, along with continued good results at Apollo College and Western Career College.

Second quarter operating income for the segment of $31.2 million was up 17% versus last year. The margin was a bit lower than prior year driven by business mix within the segment with the addition of U.S. Education and very strong growth at Chamberlain, both which have lower margins than Ross University.

Our Professional Education segment results continue to reflect the impact of the soft economy on the accounting and finance professions. Revenue was down 6.3% in the quarter and down 4.6% year-to-date versus last year. Operating income was down about 28% in the quarter and 21% year-to-date. Once again, we don’t expect performance to improve materially in calendar 2010 or really until the economy recovery takes hold and positive impacts hiring and training within the accounting and finance professions.

We are closely managing costs in the short term and recently completed the consolidation of a number of physicians in the marketing and sales area. But at the same time, we're planning to seize the opportunity when the industry does rebound.

Lastly, results of our other Educational Services segment reflect the top line contributions to growth from Advanced Academics and DeVry Brasil. The segment delivered operating income of $700,000 in the second quarter following the first quarter loss due to the seasonal flow of the segment.

Shifting to the balance sheet, our cash and marketable securities balance was $334 million at the end of the second quarter compared to $263 million last year. Cash flow from operations in the first half was $267 million versus $139 million last year driven by our improved earnings and working capital. These strong cash results enable us to continue to decrease our outstanding debt to $45 million down from a $155 million a year ago and $105 million last quarter and also invest back in the business, as capital spending to the first half of the year was $62 million versus $25 million spent last year.

The spending has been focused on Project DELTA, which we believe will further enhance our ability to provide best in class service to our students, as well as on facility improvements within DeVry University in U.S. Education and expansion within Ross University and Chamberlain College of Nursing.

We're committed to investing in educational technology and capacity needed to serve our students, so total capital spending is still expected to exceed $100 million this fiscal year. Our net accounts receivable balance actually decreased to $135 million versus $138 million last year.

In fact, if you exclude DeVry Brasil, our net receivable balance would have decreased by $7 million. Receivables per count within DeVry University were down compared to the higher balances last year during the conversion of our financial aid processing system. But they were also lower than our balances 2 years ago. While we had some issues initially, the new processing system is having a positive impact. So this is a good example of how our investments in new technology are paying off in improved customer service and productivity.

Year-to-date, our bad debt rate increased slightly versus last year to 3.2% driven by the U.S. Education and DeVry Brasil acquisitions. We have not experienced any deterioration with bad debt in our legacy operations. So our receivables per students are down and our bad debt rate is essentially unchanged. We see this as another marker of quality and would like to recognize the outstanding performance of our teams in managing this area particularly during these tough economic times.

Finally, during the quarter we completed the execution of our second share repurchase program by buying back $50 million of common stock over the last year or about 1 million shares at an average costs of $48.67 per share. Our Board of Directors approved the third repurchase program in November of $50 million. We have not commenced this program yet since we have been under closed trading window but plan to begin repurchasing once again when the window opens up later this week.

So that concludes my overview of the very strong results for the first half of the year. We're obviously off to a tremendous start and are confident in our ability to deliver strong top and bottom line results for the balance of the fiscal year, all driven by academic quality.

As we've said in the past, our long-term financial objective is to deliver earnings per share growth of roughly 20% per year. Our strong first half performance puts us in a position to exceed this goal, as we believe earnings will continue to grow in excess of 20% over the balance of this fiscal year.

Now, let me turn the call back over to Daniel for some more color on the operating results.

Daniel Hamburger - President and CEO: Thank you, Rick. Let me begin then operating review with our Business, Technology and Management segment which is DeVry University and its Keller Graduate School of Management. And since we didn’t have a conference call in December when we reported the Fall Enrollment, I'd like to comment on the strong growth that DeVry University experienced during that period with new undergraduate enrollment up more than 19% and total undergraduate enrollment rising nearly 23%. These results and our continued strong execution position us well for the remainder of 2010.

And it’s important to note that we're seeing broad-based contributions at DeVry University from online and onsite in both graduate and undergraduate and across our business, technology and healthcare program. This quarter DeVry University continued to focus on its positioning as The Career University. Over the coming months, we plan to hire additional career advisors beyond the 150 we already have in place.

To further improve persistence, we're hiring more student coaches, as we implement our innovative Student Central concept across our campus locations. Student Central brings all key services together in one place and proactively supports our students from the time they enroll to when they graduate.

Other growth initiatives include our plans to open new locations in Glendale, Arizona and Houston, Texas in the next few months. At Keller Graduate School of Management, total course takers in the November session increased more than 16.5% from a year ago. As part of our initiatives to increase awareness at Keller, we'll be investing a bit more in the communications campaign. Our goal is to align Keller more closely with our students’ familiarity with traditional business school and to reinforce Keller’s high quality reputation. We're very excited for this new campaign and it begins in the spring.

Moving on to our Medical and Healthcare segment; at Chamberlain College of Nursing, enrollment in the fall increased 67% and we continue to invest in facilities to meet the huge demand for qualified nurses around the country. In addition to our newest campus in Jacksonville that opened seven months ago, Chamberlain’s new Chicago and Crystal City, Virginia location are on pace to open this summer pending approval. And after 80 years, Chamberlain is also moving its St. Louis location to a brand new building in nearby Maryland Heights.

All four of these campuses are co-locations with DeVry University, pretty interesting. In addition, we're launching a new RN-to-MSN bridge program in July. This program will be part of Chamberlain’s expanding online offerings and it provides a great option for RN registered nurses who want to earn a Master's Degree. And in line with our emphasis on doing well by doing good Chamberlain’s mission in November to Brasil was a great success as Chamberlain partnered with DeVry Brasil to set up a local clinic in the city of Madalena. A second trip is happening this week and we plan on expanding the program to three trips a year, very proud of that.

At U.S. Education, that’s Apollo College, Western Career College we continue to invest in new programs and to focus on integration and efficiency. During the quarter, we launched the physical therapy assistant program in Apollo College’s Mesa, Arizona campus. We expect to bring this program to other campuses pending approval, and we have hired new program directors to support that goal.

Now that the integration of Apollo College and Western Career College really in its final phase, we're focusing on expanding student enrollment both onsite and online, and we're also looking at other areas of value creation. As one example, we recently consolidated U.S. Education service centers in Phoenix and its accounting function in our Mission Viejo office, which streamlines our operations and supports future expansion.

Another example, we're also seeing efficiency through higher capacity utilization. Notice that while we were very well utilized in the mornings, afternoon and evening classes were less so. So, this led us to initiate a program aimed at helping students find the class time that work best with their schedule. The result has been much more evenly dispersed classes in the afternoons and evenings and greater campus utilization.

So now let me move to our Professional Education segment, where the economy continues to dramatically affect the accounting and finance fields that Becker served. During this quarter Becker CPA Group piloted a zero percent financing initiative to help recent college graduates who are most affected by the current job market. The initial results of this program have been pretty promising and could be expanded once we have a chance to thoroughly review the program. In December, at Becker we also signed an exclusive partnership with China Distance Education Holdings Limited to distribute Becker’s material in China. This partnership offers great potential to expand our CPA courses in China and could eventually include our Stalla CFA program as well, the Chartered Financial Analyst.

While times are tough, it’s tough for Becker’s competitors too. One key advantage for Becker is being part of a diversified organization that can support its long-term growth. Most of Becker’s competitors are small and don’t have this advantage, so we believe this positions Becker very well for when the accounting and finance fields starts to recover.

And our final segment Other Educational Services, as we announced at Education Day, where we have been calling Fanor, what we have been calling Fanor, we’re now calling DeVry, Brazil, which includes three colleges. There is Fanor, there is Ruy Barbosa, and �REA1.

Our people in Brazil see tremendous value in the DeVry name and are very excited about the change. We’re also in the process of launching several new programs in high demand healthcare field such as nursing, physiotherapy and nutrition, plus you should be available beginning next month.

So to summarize, as you can see, our diversification strategy and our focus on investing in quality continue to lead to growth, strong student academic outcomes and another quarter of solid financial results. The investments we have talked about over the last couple of years are paying off. From time to time, we’ve heard feedback on occasion let’s say to the effect of – you know I think you should invest less and show more to your near term margin, that kind of thing. What we are demonstrating here is that by investing in quality, we are getting great academic outcome, as well as growth and margin. In sum, quality leads to growth.

And so, I’d like to close by thanking the 114,000 students across all DeVry schools. It’s truly our privilege to help them achieve their career goals. And I also like to thank the 17,000 members of DeVry’s family for their dedication to our students and for the vital role that they play in our success.

And so with that Joan, we are happy to take questions.

Joan Bates - Senior Director of Investor and Media Relations: Thanks, Daniel. Before we move to the question and answer portion of the call, I just like to remind everyone that since our move to the new home office, we also have new phone numbers. So if we don’t get to the question today, for follow up call, you can reach Rick at 630-515-3137 and you can reach me at 630-353-3800. So with that Jeremy, if you could give the callers the instructions, we’ll begin.

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