Covista Inc. (CVSA) Q1 2011 Earnings Report, Transcript and Summary

Yes. We actually think that the department decision to open up the process will allow for a little bit more dialogue and understanding the public comments that were submitted is a great thing. We applaud them for that. And yes, I would say that we have good dialogues. We continue to have dialogues, we continue to have meetings with the department as well as with the policy people in the White House policy areas. And yes, I think there is a genuine desire or on many people's part to listen and understand and try to get it right as we heard in the secretary's in many times it means that making sure that we have quality programs on the private sector they're vitally important to make our country's goals. And at the same time, make sure that if there are programs that are not providing quality that those programs are held to a comp and he had said many times that the quality programs in the private sector are part of the solution and poor quality programs are part of the problem and quality programs in every sector are part of the solution and not quality programs in every sector are part of the problem. So they've been very good about acknowledging that it's not about a rich-content private sector schools or something like that, and they're really trying to get this right.

One of your competitors has just said that the compliance of the 90/10 rule could prove a challenge. I think in 2012 are you seeing this as a challenge, and specifically a challenge at Carrington?

No. 90/10, overall, we feel that we're well within the comfort zone and we continue to monitor it. There are a couple of schools you mentioned one where it's a little bit higher. But at this point, we don't have a report like that to issue to you.

And next, we'll hear from the line of Paul Ginocchio with Deutsche Bank Securities.

It looks like the losses year-on-year a little higher in International or Advance Academics. Can you just talk about that? It's just the continued build out or just something else we should be thinking about?

For the first quarter of the year, it's sort of the lowest earnings for in effect loss for the segment because the summer period for high school, so you only have summer school enrollments and they were down very low and it's also a time where we spend the bulk of our investment in marketing and recruiting efforts for Advanced Academics and then down in Brazil, they are not teaching classes for the most of July. And so you have 2/3 of the quarter where we're teaching, and 1/3 were not. So you end up with a loss and that you make that up in the balance of the year. So it's more of the fact that a lot of the investment spending occurs during this period.

Last summer was really tough for a public school districts around this country and many of them are cutting summer school. So one of the things that Advanced Academics did and I'm quite proud of the team for doing that was offered free summer school courses online to Advanced Academics capability and that basically enabled students to take summer school courses who otherwise would have not been able to do so, but free means no revenue.

We assume that losses for the rest of the year would be lower than what we saw last year or how should we think about the rest of the year based on what we have seen here year-on-year for the first quarter?

We don't give guidance on that, but again, the first quarter tends to be the big loss quarter and then we'll show profits in the balance and again we don't give guidance on a segment-by-segment basis.

I'm sure you petition to speak at the public hearing. Have you been notified whether you're going to speak to them?

We have not yet.

Next, we have from the line of Jeff Silber with BMO Capital Markets.

I wanted a circle back to Ross. I'm assuming you have a positive outcome at this meeting in California next month. Can you just tell us what the next steps are?

Yes. What we are looking for is to continue to expand capacity across the Ross University School of Medicine System. And so I want to emphasize because I think a lot of attention and focus on Freeport, that's important, but Freeport is not the beginning and the end of our capacity capability at Ross. We can and expect to expand capacity in Dominica, in our Miami and our fifth semester location and then throughout the clinical network as well. So expanding capacity at Ross is a multifaceted approach, and so we are expecting as we used in line with what we said before that January will continue to be a modest decline in new students and then, in May, we should start to see growth again.

And that's regardless of the outcome in California?

Yes. That will be regardless of the outcome in California although, of course, a positive outcome would make things more positive.

In terms of the MPRM that we're were expecting of within the next few days, you talked about incentive comp are there any other items in there that might worry you in terms of having an impact on your business.

That's the main one. The so-called incentive so called because it's not like we're paying incentive comp now and suddenly we can't do it. We don't pay incentive comp now. And going back to the statute, in limiting the safe harbors would be acceptable to support that. It's where there is a further explanatory comment and the preamble that is trouble, for example, the idea of securing enrollments is redefined to include even retention and graduation. And so doesn't seem to make sense, especially when you look at K-12. K-12 where in raise of the top, and it's mandated. You have to hold people accountable for outcome. It should be banned in high red. It just doesn't seem to make sense. So we'd like to be able to hold our employees accountable for retention and graduation outcomes. So that kind of thing is what's very troubling to us and not just to us. Comments have been -- there has been a large number of comments on this from private sector, but also from public sector and independent schools. Take a look at some of the public comments submitted by Michigan State or Boston University or Indiana Wesley because again this rule applies to all schools public sector, private sector and independent. Just a little extra elucidation for you on that one.

Your next question comes to the line of Bob Wetenhall with RBC.

In the BTM segment, I think, you got operating margin close to 24%. Do you expect that to increase during the balance of the year?

Well, again, as I've said before, we don't give segment guidance and the only prospective we're giving is that we expect to see some margin improvement across over the balance of the year, but nearly to the extent that we've have to date, and I'm talking about the balance of the year on average.

And then Medical and Healthcare segment was 240 basis points lower year-over-year. Can you break out just to provide a little clarity in this quarter that just passed kind of what explains the delta there?

Part of the delta is just the mix. We've got lower growth within Ross that tends to have higher margins compared to Carrington and Chamberlain results. Chamberlain has been growing nicely, but we've been expanding and we have start some costs for the Chicago in Arlington campuses in there that's driving it down. And making the investments in academic quality across the line for each of the institutions, and then the name change for Carrington with some carryover spending in the quarter for the name change from was the Carrington. Those are the main factors.

So with the ramp up and the needed investment just to maintain and enhance quality standards, is just that going to mean that margins are going to be flattish, effectively?

As we look at the guidance we didn't give for the year was we expected profitability for the segment to be flat to down. So with revenue growth, so we're going to see margin deterioration throughout the year.

And Your next question will be from the line of Brandon Dobell from William Blair.

Have you noticed any change in the tone or conversation with the accreditors and advance the program integrity rule changes or any change in conversations with your counterparts there's about the market environment, about what they expect from you in terms of program quality or interaction, those type of things?

Accreditors both institutional and programmatic are tough and that's their job to be tough, and appropriately so. But in terms of pronounce your significant change and tone or something like that, no, I really don't have anything to report there.

Within BTM any start differences in terms of how online or conversion rates have you mentioned some kind of broader issue, but I'm trying drill a bit into the mix of modality you've seen a stark change in momentum in the ground gun versus online or lead costs conversion rates, those types of things?

No. I really [indiscernible] within the DeVry University undergraduate, we don't have any color to give you in terms of this program versus the program or online versus on-site or anything like that. It was more of a general, and again, a lot of these were operational factors, so that's really the way I would characterize it, Brandon.

Your next question is on the line of Gordon Lasic with Robert W. Baird.

First, I just want to move back to Rick's, I think, earlier comment that the uncertain economic environment is financially driving some sluggishness in start. I'm wondering how to think about that. Should we take that to mean that potentially some of your students are giving push back or kind of reluctant to take on additional debt, given the prolonged high-unemployment rate, if you could just give a little bit more color there?

Yes, and I commented that quite a bit. It could be that and we don't have definitive data on this, but it could be that when you have a recession that goes on this long and this unemployment at this level for this long that whatever counter cyclicality maybe you got earlier, it goes away a little bit. And yes, that maybe some students are a little bit more reticent about taking on debt to go to school and go to that cycle. So that could be a factor, but we don't have proof for that, but we're deciding that is a possibility.

You've had a very, very strong persistent growth over the last couple of years, and you certainly made comments at some of that is internal initiatives that you've implemented. I'm just wondering how much headroom do you think you have in terms of persistence in getting that to continue to grow that you've seen over the last 12 to 18 months?

Sure. We think that there is opportunity for us to continue to improve persistence and graduation rates across the different members of the family of schools. So this is not just DeVry University but also Carrington and Chamberlain, down in Brazil and sort of across the board we're constantly finding ways to improve the quality to curriculum and the quality of the supporting student services which is a really key part, especially for many of the non-traditional students that many of our schools served. So we do think there is additional opportunity there, and we're going to continue to invest our resources in support of our students and helping them graduate.

Were going to wrap up the Q&A.

Thanks for all those questions and I just want to remind everyone that our next conference call is scheduled for January 25 of the new year and we will announce second quarter results then. Thanks for your continued support at DeVry.

Thank you for your participation in today's conference, ladies and gentlemen. This does conclude the presentation and you may now disconnect. Have yourselves a wonderful day.

Good day, ladies and gentlemen, and welcome to the DeVry's First Quarter Fiscal 2011 Results Conference Call. My name is Jeremy, and I will be your coordinator for today. [Operator Instructions] At this time, I would like to turn the presentation over to your host for today's call, Ms. Joan Bates, Senior Director of Investor Relations. Ma'am, you may proceed.

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 Litigation Reform Act of 1995. Forward-looking statements generally can be identified by phrases such as DeVry, Inc. or its management has a view, objective or outlook, or that management believes, expects, anticipates, foresees, forecasts, estimates or other words or phrases of similar importance. Actual results may differ materially from those projected or implied. Potential risks, uncertainties and other factors that could cause results to differ are described more fully in Item 1A, Risk Factors in the company's most recent annual report on Form 10-K for the year ending June 30, 2010, and filed with the Securities and Exchange Commission on August 25, 2010. Telephone and webcast replays of the call are available until November 2, 2010. To access the replays, please refer to today's press release for more information. I'll now turn the call over to Daniel Hamburger.

Thank you, Joan and thank you all, very much, for joining us today for our fiscal 2011 first quarter conference call. I'll do a brief introduction, and Rick will discuss our financial and enrollment result. And then, I'll provide a few operational highlights in the quarter, and then we'll up to questions. During the first quarter our continued focus on academic quality produced excellent student outcomes and strong financial results. In particular, our diversification strategy has enabled us to perform well throughout economic cycle and to be well positioned in these uncertain regulatory times. Let me step back and spend a few minutes in the vital role of private sector colleges in our higher education system. Because 20 years ago, the U.S. was first in the world in college attainment. Today, we ranked 12. Clearly, we're falling behind in terms of producing college graduates and part of the reason for this is insufficient educational capacity at our colleges. Is lack of capacity comes at a time when more good jobs have never require a college degree. President Obama has recognized the need to regain our educational leadership and recently said an ambitious goal of getting the U.S. back to number one in college attainment by increasing the number of people with college degrees by more than 8 million by 2020. Where is the capacity going to come from to educate America's work force? One of the great strengths is of the American System Higher Education is that the public sector, the private sector and independent universities also different niches that provide diversity of choice for students. In particular, the U.S. has a vibrant private sector that has shown a great ability to nimbly add capacity, good quality outcomes at a lower net cost to taxpayers. Last year, 54% of all new allied health workers and 10% of new nurses received their degrees from private sector colleges and universities. As you can see from Chart 1 of the press release, our public sector colleges cost tax payers $15,500 per student, private sector colleges cost taxpayers only $2,400 per student and this is after accounting for the cost of student loan default. And in fact, the private sectors schools pay taxes. This data, by the way, comes from an August 2010 study by Sonocom and it demonstrates the concerns about disproportionate assistance to private sector schools are misplaced. So increasing capacity is critical. The debt capacity must be of high quality. When it comes to measuring the outcomes, the students are in players evaluate the quality base in a new institution. Tax status for its lending source. Clearly, they don't. They look at measures like test scores or graduation rates and employment outcomes. In terms of employment outcomes, at DeVry University, we hold ourselves accountable to a goal that nine out of 10 graduates in the active job market will find employment in a chosen field of study within six months of graduation and we don't always hit the goal. This last year with a tough economy as you can see in today's release, 88.9% of DeVry University's graduate in the active job market were employed in their field of study within six months of graduation. Over the past 35 years, we have averaged over 90% and we hold ourselves accountable and do everything we can to help our students graduate and achieve their career goals across all our schools. If, for example, Karen Tater [ph] is one of several students we featured in our 2010 annual report. She recently the graduated with the BSN from DeVry Chamberlain College of Nursing. In credit to the support, she received from Chamberlain faculty and staff as being a major influence on her, as she prepared to enter the nursing profession. Karen is now employed as a trauma nurse at the Grant Medical Center in Columbus, Ohio. She's a greater representative Chamberlain's graduate. Another example is Shamsa Chaudhry who earned her bachelor's in Business Administration from DeVry University in 2002. She comes from an immigrant family and needed a school that will give her a quality education and the flexibility to work full-time. She found that DeVry University enable her to combine her creativity with technology in the digital world, and the result, she's the founder and CEO of Mojo Inc. and Interactive ad agency. These students are often called non-traditional, but they make up 75% of today's college graduates in today's college students. DeVry University has two campuses ranked in the top 10 schools producing African-American Bachelor's Degrees in Business. So DeVry and other private sector colleges are increasing access to many students who otherwise wouldn't have the opportunity, and we recognize that there is concerns with some private sector programs. We respect the students pay a lot of tuition and deserve value and the taxpayer dollars are involved. But it's critical that regulatory changes be done right and need to be based on facts and analysis and the need to consider the student population being served. Solutions must not unintentionally penalized quality programs and in so doing actually reduced access for students in this time of need. As a matter of policy, we should treat all students and all schools with the same standards of accountability and that's quality outcomes. No matter of the funding source. When we support the Education Department's recent announcement of increased enforcement resources, enforcement is an important way to accomplish the goal to holding all schools accountable for delivering quality programs. Now in terms of the ongoing regulatory process, recently the department extended a timeline for the proposed gainful employment regulation. That makes sense. As it's essential for the department to get a balanced view and to hear from schools like the DeVry that have a track record of delivering programs that lead to employment and to long-term careers for our students. We continue to have meetings to discuss our comments with the department, including the Secretary Duncan and with other department and administration officials. We appreciate this thoughtful approach by the department to allow for further dialogue to help ensure we get it right. In concurrent with looking with the department, we also have teams developing strategies to where we might need to make adjustments based on the new regulation depending on how they evolved. However, we aren't making large operational changes in anticipation of the new rules. Part of the reason for this is that DeVry is always focus on quality even though that it meant slower growth sometimes. For example, DeVry University is not an open enrollment institution. So we already turned away applicants who don't meet our admission standards. It's not like we're now for the first time having to implement these kinds of quality standards and having to go through a long process of figuring out what works. We feel very good about the value proposition offered by all our schools. So again, DeVry's focus on quality while servicing good stead over the long run. So with that introduction, let me turn it over to Rick for a review of DeVry's financial highlights.

Thanks, Daniel, and good afternoon, everyone. As you see in our press release, we delivered very strong results in the first quarter of fiscal 2011. Quarterly revenue of $521 million was up about 21% versus prior year, all organic growth. After tax net income of $74 million increased 34% and earnings per share of $1.03 increased about 36% versus last year and our net income margin was 14.1% in the quarter, up 140 basis points versus the 12.7% margin achieved a year ago. We referenced first quarter results including expense related Share-Based Payment of approximately $5.3 million pretax or $4.6 million net of tax higher than last year driven by an increase in the number of retirement eligible awards. Our income tax provision this quarter was approximately $39 million and we had $23 million of capital spending, which we use to invest in our schools. Our overall effective tax rate was 34.5% in the quarter, up from 32% rate in the first quarter last year and 32.1% for the full fiscal year 2010, primarily due to the increase in domestic source income. Cost of Educational Services expense increased by 16% versus prior year and student services and administrative expense increased by 17% in the quarter. Both lower than revenue growth and driving improved margins due to operating leverage. And just to note that educational service expense or cost of construction was approximately four times that of the advertising. We continue to make targeted increases to drive act them with quality and enhance student services consistent with our philosophy of quality leads to growth. Advertising expense, as a percentage of revenue, was 11.9% for the quarter. Now let me walk you through some of the key highlights of our operating segment results which are further detailed in our release. First, the Business Technology and Management segment revenue was up about 25% versus prior year driven by summer enrollment growth coming from continued online expansion, improved campus enrollments and increased persistence as a result of our focus on student services. Segment earnings were $84.5 million in the quarter, up 51% versus prior year driven by the revenue growth and the resulting operating leverage. Well, of course, take your enrollment for the September session, the Keller Graduate School of Management was up 14.1% versus prior year continuing the strong trend. We will report fall enrollment for DeVry University in December and while we expect Keller to maintain this trend, we expect to report a modest decline in new student enrollment for undergraduate students in this period. This is driven by continuing tough comps with fall 2009 growth of 19.4% on top of growth in fall of 2008 of 19.7%. Assuming a modest decline this fall, new student enrollment would grow at a compound annual rate of 11% to 12% over the past three years. It's also important to note that the new student enrollment will still be near record levels this term. During the recent period, we've seen decreased volume of higher quality increase coupled with lower conversion. One potential factor could be the difficult in uncertain external economic environment. Another factor contributing this is that we are below the number of admission advisers, we'd like to employ to serve our new and prospective students. We're actively hiring advisers to ensure we're meeting those students needs. And lastly, DeVry University shifted its advertising mix over the past year to include more internet related advertising. This channel hasn't provided as many inquiries as we anticipated and we're making adjustments to maximize our returns in this investment. Further, we believe the upcoming elections have crowded the TV airwaves with political ads making other advertising less effective. Once elections are over, we hope this phenomenon will subside. We do expect DeVry University undergraduate total student enrollment growth to be in the mid to high teens this fall. Our focus on academic quality and student services has continued to improve student persistence and is further aided by the roll out of student central across the system. We still believe that supply-demand relationship in value proposition for our programs remain strong over the long term and see no evidence that the deceleration is a long-term trend. Shifting to the Medical and Health Care segment, revenue was up about 17% in the quarter driven by the strong demand for Chamberlain Nursing programs and the opening of two new campuses during the quarter in Chicago and Arlington, Virginia. Segment earnings of $28.2 million were up about 4% versus prior year, generally as expected. As discussed during our last call, we moderated enrollment at Ross Medical School while working to add capacity. September term new student enrollment at Ross University was down 26% and total enrollments were down slightly versus prior year. We report near record enrollments in Carrington in December. However, early indications are that new student growth continues to decelerate and should moderately decline versus prior year. We expect a decrease in new student enrollments at Carrington in the mid-single digits and a decrease in total students in the low-single digits. In addition to the same type of external factors cited for DeVry University, Carrington continues to ramp up its new brand strategy and associated awareness effort while making internal changes, to complement this new strategy. While the initial feedback on the new name has been encouraging, the change to more brand advertising versus direct response did result in lower inquiry volume this past turn. The same change coupled with other internal changes we've made have contributed to near-term softness in enrollments. However, we're confident these initiatives will strengthen Carrington for the long term. Meanwhile, at Chamberlain College of Nursing, enrollment growth remains strong driven by the supply-demand in Dallas for qualified nurses. Within our Professional Education segment, revenue was up 4% versus prior year and segment earnings down just 1% in the quarter. Trends are better than what we saw a year ago, but we believe some of these recent revenue growth is attributed to activity in advance of the CPA exam change that is occurring January 2011. Lastly, our other Educational Services segment revenues were up 5% and segment earnings down about $1 million versus prior year. Advance Academic revenues were up primarily due to declines in summer school enrollments and the impact of safe budget deficits. Meanwhile, DeVry Brasil news students enrollment were up 9%, resulting from some of the admissions improvements made over the past year. Shifting to cash flow and balance sheet. Cash from operations was $196 million versus $177 million last year. The strong cash generation drove our cash and marketable securities balance to $453 million at the end of the quarter compared to $340 million last year. We also remain debt-free during the quarter compared to having an outstanding debt of $105 million last year. Our net accounts receivable balance was $161 million versus $157 million last year. This increase is attributable to revenue growth in the quarter as receivables per account across our schools are generally in line or lower than prior year. Receivables per account in DeVry University were also down compared to two prior years ago due to our efforts and focus of our campus and online student services staff. And I'd like to take a second to recognize the outstanding performance of our teams in managing this area, particularly during this tough economic times. Related to this, bad debt was 3% of revenue in the quarter compared to 3.4% a year ago. Another indicator of our students paying back their accounts during the tough times and a strong value proposition of our programs. As I mentioned earlier, capital spending was $23 million during the quarter versus $26.5 million spent last year, a bit lower just due to timing of spending between quarters. Spending was focused on Project Delta, facility improvements to better serve students within the DeVry University, Carrington and DeVry Brasil and expansion within Ross University and Chamberlain College of Nursing. So we could educate more doctors and nurses in this great time of need. Total capital spending for the fiscal year is expected to likely be in the $150 million range. Finally, during the quarter, we completed our third share repurchase program and seamlessly began executing our fourth program. For our third $50 million program, we repurchased approximately 972,000 shares, an average cost of $51.43 per share. Under the fourth program, we repurchased about 266,000 shares an average cost of $43.95 per share with about $38 million of authorized demand outstanding. So that concludes my overview of the strong results for the first quarter. We're up to a good start and our first quarter results put us in a good position to deliver our goal of roughly 20% earnings growth for fiscal 2011. With that, I'll turn the call back over to Daniel for some more color on our operating results.

Our strategy of quality and diversification is really paying off enabling us to perform in a more consistent steady pattern throughout economic cycles and to be well positioned in uncertain regulatory times as well. Despite the potential softness in the fall that Rick described, both Keller Graduate School and Chamberlain expect to report continued solid growth rates and student persistence is up because of the investments we made in academic quality, which continues to drive solid growth in total enrollments. And recent example of this is in our Business Technology and Management segment. This is the continued investment we've made in our student central initiatives which provides students with a one-stop destination for curricular, career and financial services. The program has helped drive an increases in student persistence and are near completing our goal of having student central in every DeVry University location. We've received a lot of positive feedback on the career services we offer DeVry University undergraduate students and many have asked us to expand it to our graduate level. Well, we listened and in the first quarter, we began offering career services to all of our Keller graduate Schools of management student as well. DeVry University recently opened a new co-location in Pomona, California with Carrington College. In our first tri-location is a new word there between Ross University, DeVry University and Chamberlain is in the planning stages in Miramar, Florida. Let me move on to our Medical and Healthcare segment. At Ross University, enrollments were in line with our expectation as we work to expand capacity at Ross Medical School to help ease the growing physician shortage. We're still working to the approval processes with the next step being the medical board of California November meeting regarding our Freeport, Grand Bahama's location. We continue to invest in academic quality at Ross and we are currently constructing new large-scale academic centers both the medical and veterinary school at our campuses in Dominica and in St. Kitts. Chamberlain College of Nursing continues to deliver strong result as the demand for highly skilled nurses has never been higher. Our students continue to value the quality of the course work and the flexibility that Chamberlain's programs provide. In September, Chamberlain launched an RN to MSN option that Masters of Science in Nursing. For RN, we already have an associate degree or a diploma in nursing to go up to the master's level. Chamberlain also submitted an application for a new location in Houston to be open in spring of 2011 pending approval. The new campus will be co-located in DeVry University. At Carrington, we continue to invest in academic quality and additional capacity. In addition to the new Pomona co-location campus that I mentioned, we expect to open a new campus in Muskie, Texas, which is just outside of Dallas, by the middle of next year pending approval. We're also expanding our program offerings with the launch of physical therapy programs across several new locations and four additional online associate degrees have already begun. Now turning to our Professional Education segment. We also continue to make investments in Becker's offering. In order to best position Becker to benefit when the economic climate and financial job market improved. Beginning in November, we'll be offering our revamped courses for the new 2011 CPA exam. We believe this new exam is a great opportunity unlike many of Becker's competitors most of whom are small. We believe our ability to make investments even during this down-cycle is a competitive advantage. This is a recurring theme for Becker. Whenever there's a change in the exam, Becker has a competitive advantage given its industry leadership and its access to the resources of DeVry. Becker also recently announced a new three-year partnership with London-based ATC International that will expand Becker's CFA and CPA program offerings into Central and Eastern Europe as well as into Central Asia. And finally in our other Educational Services segment, DeVry Brasil delivered solid growth in new student enrollments. When we first started our operations in Brazil, we saw a lot of potential. The team we have in place is doing an exceptional job implementing the processes, programs and facilities that are producing growth that's outpacing the overall Brazil market. As part of our long-term growth and diversification strategy, we'll continue to invest in Brazil. During the quarter, we increased the number of admission campus to better serve our current and prospective students. We also focused on expansion as we broke ground on a new campus for our verbose [ph] school. So in summary, our strategy are focusing on academic quality and our diversified growth continues to position us for sustainable long-term value creation. We remain extremely confident in our ability to meet our performance goals over the long term as we continue to focus on academic quality and successful student outcomes. With that, we'd be happy take your questions. Joan?

Thanks, Daniel. Before we get the Q&A started, I'd like to point out to everyone that we have changed the date for our fall enrollment announcement. Those results will now be released on December 7 rather than December 9 as we had previously indicated. So again, mark your calendars for December 7 and take it off December 9. So now as we move into the Q&A we're going to ask everyone to limit themselves to one question and just one small follow-up. We have a lot of people in the queue and we want to try to get to everyone as quickly as possible in the time we've allotted. So Jeremy, if you can give everyone the instructions, we'll start the Q&A.

[Operator Instructions] At this time, your first question will be from the line of Peter Appert with Piper Jaffray.

So Daniel, the decline in new undergraduate enrollment anticipated you cite lower conversion and lower high-quality leads and they sound like they're more than perhaps one quarter phenomenon. How are you thinking this is going to play out over the next several quarters?

Is really not possible to speculate on that, Peter. We don't see it as a long-term trend. And in general, most of the factors that we cited are -- many of the factors that we cited are internal as well as the external factors. So we do think that we can continue to follow our longer-term mid- to high-single digit Houston enrollment growth.

You cite below plan on the number of advisors. Can you give us any color on that in terms of what led to that outcome?

Really an operational management challenge, I would say. That we have, I think, good plans in place to turn that around, and we just got a little bit behind the ball and filling some open positions and that left us with less ability to follow up on some of these new student inquiries that we did receive than we should have and led to a little bit lower conversion rate. So something that we think we got our arms around and we expect to over the next quarter, and we'll keep you posted.

And your next question will be from the line of James Samford, Citigroup.

Just a quick question on the competitive environment from a marketing perspective. We've seen a few companies announced, moving upstream in the marketing channel in terms of targeting your students. I was wondering if you could talk about what you're seeing from a competitive perspective on the marketing channel as well.

That's not a characterization is moving upstream or doing something like that. As I mentioned earlier, DeVry schools are not open enrollment schools. It's not to say that if somebody is open enrollment that's a bad thing or a good thing. It's just a fact. And so we already have a number of those kinds of processes in place. So we don't anticipate major operational challenges and hurdles for us to go through jumping to hoops over the next period of time. In terms of the competitive environment, it's always competitive. And in fact, most of our competition comes from the public sector schools the state schools as well as some of the independents that are out there. Only about 10% of the students that we survey at DeVry University specifically report, considering another private sector or proprietary school, quite interesting. So certainly competitive, but not a real drastic change there.

And your next question is the line of Sara Gubins with Bank of America Merrill Lynch.

Rick, I think you mentioned that you saw confidence that you'd be able to grow operating income 20% year-over-year at fiscal year '11. And given the expected declines in admission enrollment at the underground level on the fall, I'm just wondering where that confidence is coming from in terms of revenue and margin expectations?

I'm talking for the full fiscal year. So as I've mentioned, the fact that we're off to a good start with 34% increase in net income in the first quarter gets to puts us in a good run rate to be able to deliver 20% for the year. So the growth will probably subside, would still be good growth in the balance of the year to come in roughly around 20% for the full year.

Can you clarify your expectations around Keller enrollment? I didn't quite understand if that meant that you expect Keller course taker enrollment to be flat versus recent trends on the numerical basis or if you're expecting the gross rate term in the same year-over-year basis?

With Keller, of course, we report total course takers and that's what we're seeing. We expect that to be roughly similar to the trends that you're seeing.

Meaning the growth rate not the number of course takers?

Right. The growth rate and total course takers, yes.

Next, we have Gary Bisbee, Barclays [Barclays Capital].

How can you or can you be certain or do you have a sense what just sort of reputation overhang from all the awful publicity around proprietary schools has had on your enrollment? Is that possible that, that's been something that's hurt your conversion rate?

It's certainly possible, but we just don't have any data or evidence to that other than anecdote. We tend to be kind of analytical types like data and analysis. So we're certainly trying to assess that and doing some market research to see if that's a factor. But again, we have not seen that and if it is, it's certainly possible. If it is a factor, we wouldn't expect it to be a factor for the long term.

Can you give us any thoughts on what might have to happened with incentive comp policies across your schools? I mean, is the number of students signed up currently part of the formula and any sense how you think about changing that based on the proposed rule?

Well, thanks for asking that because that gives me a great opportunity to a clarify in case anybody thinks that we pay a bonus or an incentive payment to our admissions advisors, the answer is no. We don't. We pay a base salary and we expect to continue to pay them a base salary. I don't think they're going to work for free. So no, we do not pay incentives or bonuses. That's one of the things that is so unfortunate about some of the reporting that's out there. Again, based on anecdotes and stories and not based on fact. The fact is that incentive compensation has already been, has been since 1992. There could be changes. We may need to make changes in our evaluation processes depending on the rules that are forthcoming, but we're going from situation where before you are paying a commission and after you're not. You have to make this massive adjustment. That's not the case.

Can you clarify the change in the salary? Is it all impact that has been by success in signing of student? Is that something that impact the change in salary?

We do a performance evaluation for admissions advisors just like we do for any other employee. And just like we do for any other employee, we look at the effectiveness of that person in their job. And since the recruiter's job is to recruit, we certainly do take it into account, did they recruit any students and that is a consideration which is compliant with the statute and the regulations.

Next, we have the line of Andrew Steinerman with JPMorgan.

You had great operating margin leverage at the beginning of the year. My question is, how do you see operating margin through the balance of the year to make that 20% goal? And also, just to clarify is that 20% net income growth or 20% EPS growth?

I said it in our last call. We are expecting to see a differential between the pretax income growth and the after-tax income growth because of the fact that our tax rate is going to be higher this year than last because of the domestic source income. So it's going to be right around 20% for both, the pretax income we expect to be a little bit higher and the after-tax income should be right around 20% might be just below, but we're off to a good start. As I mentioned before with our first quarter results, we still expect to see for the balance of the year margin expansion but, albeit probably not the same level of expansion that we've seen last year or even for this quarter that will lead us to, again, roughly 20% growth give or take for both pretax and after tax.

Did you say why the margin expansion will be less in the balance of the year than in the beginning of the year?

Well, I think that we're going to see our total revenue growth come from north of 20%, probably south of 20% as we go through the year given the tougher comps and given some of the softness in the new students for DeVry University in Carrington. And we'll still be making investments in academic quality, so that differential between revenue growth and expense growth will narrow.

Next, we have the line of Kelly Flynn [Crédit Suisse].

Question about the placement read language that you put in the press release, I just wanted to clarify because the language looks a little bit different than what you've included in the past. Have you changed the methodology there? And also, you put in something about how it includes people who are already employed in their field of study. Can you give us an estimate of what portion of the people are already employed?

Just to clarify, we always talk about employment statistics rather than placement and it's just important to note that because we assist students with life-long career schools and we assist them in finding employment, but we don't place student or place graduates. And the wording were just to clarify that yes it does, so if the students find a job, many students do find employment while they're in school. And they're first or second, freshman or sophomore or junior year, help them gain skill that help them gain employment in their field of study and they retained that employment after graduation, and so that's included. I don't have a figure of a percentage of the students who are like that, who came in with a job and kept that job all the way through school, for you, but I think we have that available. I just don't have that close at hand.

And just to note, this is consistent with the way we've been reporting it all along. We're just clarifying it for everybody's purposes, but it's consistent with how we reported in the past.

Right, no change in methodology.

On Carrington, I think you said some of the reasons for the negative new student growth were similar to the ones you cited for DeVry University. Can you just clarify what role the economy is playing because you said the bad economy is hurting DeVry University, but a couple of quarters ago counter cyclicality came up. Where are we as far as how the economy is impacting Carrington for good or bad?

That's an excellent question. I know it can be confusing sometimes when you talked about economic and cyclicality or counter cyclicality. And the big picture for the DeVry family is that overall our diversified family of schools helps us perform well in good and bad times because we do have some schools that are a little bit counter cyclical and Carrington would be one. On the other hand, we have other schools that have performed better in good times, Becker or Advanced Academics or other thing and then some that really are not cyclical one way or the other like nursing programs being the only publicly held organization with a medical school, veterinary school. That something that's unique to DeVry, that's non-cyclical. With regard to the counter cyclical impact that maybe we saw before, one of the things that we wondered and I think we talked a little bit about this is what happens if a recession persists and we really do not have a President for this. Since the Great Depression when Dr. Herman DeVry started DeVry University back in 1931. So we just have not seen the prolonged recession and the prolonged level of high unemployment to this extent for. So it could be that when it extends this long that the counter-cyclical boost that perhaps Carrington got earlier, maybe that's waning, and you're not seeing that anymore. One other comment on Carrington is that some of its programs are more countercyclical like the certificate level where other programs which has been the focus of our growth initiative at Carrington at the associate degree level and other programs like dental hygiene are not cyclical. So those programs should do well in good times and bad as well. So even in our most countercyclical school which is Carrington, our strategy is to reduce that cyclicality and have more of a steady performance in good times and bad.

Next up, you have the line of Corey Greendale with First Analysis.

At the risk of asking a little bit of a silly question, when you refer to a high-quality lead, could you just elaborate on what you mean by high-quality? I think what we're all trying to grapple with here is, whether we should be concluding that if everyone is moving up -- if everyone is looking at high-quality in the same way, how effectively the market opportunity diminish because some percentage of the population is no longer being viewed as attractive as candidates proposed secondary education.

No, I wouldn't characterize it that way, Corey and I don't think it's a silly question. I think what we were -- let me give a little bit color on that with regard to DeVry University specifically. Something you hear us -- and Dave Pauldine at our Education Day back in Phoenix talk quite a bit about this. We had gone into a marketing strategy about two years ago of putting more of an emphasis on brand marketing, relatively speaking and actually taking a strategy of driving a smaller number of higher quality leads but high-quality in the sense that they're more responsive, they're more likely to respond and to start. That was the thing that they are more less academically qualified something like that, and that cycle led to improved efficiency in our marketing process and then we took those extra resources and fold them back to academic quality initiatives and that cycle worked very well for us a couple of years ago. It worked very well for us last year, and we're just in the recent period of time seeing that didn't translate quite into the same effectiveness as we've seen before. That's where we're having to make some operational adjustments and management adjustment in the marketing operations in the buying that we're doing, but that's what we meant by the quality of inquiries. It is more of the responsiveness and not the sort of academic preparedness.

About placement, I think there is some skepticism, specifically in general about the validity of placement rates. Can you just talk through how those rates are audited? I don't know if HLC looks at those or does your auditor look at them or how can you have confidence that those rates are thoroughly embedded and valid?

And again, we talked about employment rates rather than placement rates just for everyone's identification and we do have those audited both our internal audit team goes through and we have an external audit firm who goes through and validates and audits our processes. We have done it on a consistent basis over many, many years and HLC being a regional accreditor does not review that, but national accreditors do. And so our school that has national accreditations which will be Carrington College as the State of Carrington College in California is nationally accredited and ACICS [Accrediting Council for Independent Colleges and Schools] has a process of review and a set of standards for how those employment statistics are tracked and the survey methodology. So there is, there's actually a whole body of knowledge. There's a whole established set of processes which we think, by the way, a great way of measuring gainful employment, and we have proposed that as an additional set of rules that regulators might want to consider using when they measured gainful employment. So we have very high degree of confidence in the processes and in the audit that goes on top of those processes in the area of employment statistics.

And next, we'll take the line of Trace Urdan with Signal Hill.

I wanted to follow-up on Corey's excellent question and just press you a little bit further. I think that you might agree that we that have been qualified in some way as students that are highly focused in their academic goals are highly academically qualified are more valuable in the marketplace at large. And I think what Corey was alluding to is that many other schools in the private sector are bidding for those leads. And so the question is, are you seeing that type of specific competition? Is it becoming more expensive to acquire the leads that you believe are going to lead to a successful DeVry enrollment and graduate or are you not seeing anything necessarily different in that particular marketplace relative to competition?

I understand your question and I would say at this point well that's certainly possible at this point we have not seen that phenomenon. I would also just like to remind everyone that we use the term inquiries for respective students who inquire with us.

Next, we'll hear from the line of Ariel Sokol with UBS.

My understanding is the Department of Education is speaking with most of the publicly traded institution maybe the last week or this week or perhaps next week for half an hour. Just curious to find out what are the nature of these discussions? Are there any signs of receptiveness on their part to make adjustments to ensure unintended consequences don't occur?