Covista Inc. (CVSA) Q2 2012 Earnings Report, Transcript and Summary

Patrick J. Unzicker - Vice President and Controller Richard M. Gunst - Former Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer Daniel M. Hamburger - Chief Executive Officer, President and Director Timothy J. Wiggins - Chief Financial Officer, Senior Vice President and Treasurer Joan Bates -

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division Paul Condra Sara Gubins - BofA Merrill Lynch, Research Division Paul Ginocchio - Deutsche Bank AG, Research Division Peter P. Appert - Piper Jaffray Companies, Research Division Trace A. Urdan - Wunderlich Securities Inc., Research Division Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division Suzanne E. Stein - Morgan Stanley, Research Division Kelly A. Flynn - Crédit Suisse AG, Research Division James Samford - Citigroup Inc, Research Division Corey Greendale - First Analysis Securities Corporation, Research Division Gary E. Bisbee - Barclays Capital, Research Division Brandon Burke Dobell - William Blair & Company L.L.C., Research Division Peter Wahlstrom - Morningstar Inc., Research Division

Good day, ladies and gentlemen, and welcome to the Second Quarter Fiscal 2012 DeVry Incorporated Earnings Results Call. My name is Melanie, and I'll be your coordinator for today. [Operator Instructions] As a reminder, today's call will be recorded. I would now like to turn the call over to Joan Bates, Senior Director of Investor and Media Relations. Ms. Bates, please proceed.

Thank you, Melanie. With me today from DeVry management are Daniel Hamburger, President and Chief Executive Officer; Tim Wiggins, our new Chief Financial Officer and Treasurer; and retiring CFO, Rick Gunst; as well as Pat Unzicker, Vice President and Controller. I'll now review the Safe Harbor provisions of this results call. This call may contain forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements reflect, among other things, management's current expectations, plans and strategies and anticipated financial results, all of which are subject to known and unknown risks, uncertainties and factors that may cause the actual results to differ materially from those expressed or implied by these forward-looking statements. Please see our public filings with the Securities and Exchange Commission for more information about forward-looking statements and related risk factors. Telephone and webcast replays of today's call are available until February 3, 2012. To access these replays, please refer to today's release for information. With that, I'll turn the call over to Daniel Hamburger.

Thank you, Joan. And thank you all very much for joining us today in our fiscal 2012 second quarter results call. I'll begin with an overview, followed by a brief introduction of our new CFO, Tim Wiggins. And then Rick and Pat will talk through the results before I wrap it up with a few operational highlights. Let me start by saying there's no doubt we're unhappy, as we know you are as well, with the enrollment results we've reported in recent terms. If you look back on 2011, it was a year of challenges. Two of those challenges continue to negatively impact us, mainly the adjustments we've made in response to the recent regulatory changes, and the effects of the weak economy. First, the regulatory environment. I think there's been some confusion about what impact the new regulations have had on DeVry. Let's take a moment to clarify that. Because there were 2 categories of regulation that came out last July, one in which DeVry needed to make changes and one in which we didn't. The first category was related to gainful employment, and this is where we haven't had to make programmatic changes. In fact, we have yet to find any of our programs that failed to meet the criteria of the new regulations. And so that was an area where we didn't have to make major business model changes. The second category where we did need to make changes was our performance management system, which we changed to comply with the new rules for employees and student recruiting and financial aid. I think our comments about not changing our programs but yes, changing in the performance management area may have caused some confusion, so I hope this helps to clear it up. But the greatest negative impact in our results continues to be from the uncertain economy. The prolonged nature of this downturn, and in particular the continued high level of unemployment rate, has had a negative impact on the psyche of prospective students that we talked to. And we aren't alone in experiencing declines. Just last month, a report from the American Association of Community Colleges showed the first decline in nationwide community college enrollment since unemployment rose 3 years ago. Potential students continue to be risk averse and quite cautious when it comes to spending or making a commitment to attend college. But the countercyclical trend that saw enrollments climb across all educational institutions has clearly reversed itself. Many students are simply putting off going to college or going back to college. Now with that reversal, it could be that we'll see more of a pro-cyclical pickup as the economy improves. We continue to experience these challenges mostly at DeVry University undergraduate in Carrington. We clearly understand the challenges we're facing. But even though these are -- there are external challenges here, we believe we control our destiny. And so above all, I want to make it clear that we have a strong sense of urgency to improve these results, stabilize enrollments and ensure that our cost structure is in line with our enrollments. To do this, we've put a performance improvement plan in place across the organization. The plan focuses on 5 key initiatives. First, closely controlling our costs. Along these lines, we've targeted $80 million in cost savings for fiscal 2012 versus our original plan. We've already realized about half this amount through the first 6 months of the year. And we have a team of internal and external resources in place dedicated to finding ways to further improve operational excellence and to optimize our cost structure. We're deferring spending where appropriate, leaving noncritical positions unfilled. We're gaining efficiencies through IT investments such as our Project DELTA system. Now it's true that our expenses are up year-over-year so far, but that's largely driven by acquisitions, targeted growth investments, such as new campuses, and other spending decisions made last year. Rick will discuss this more in a few minutes. But I want to assure you that we're taking actions to reduce spending where appropriate and that we'll continue to match our costs to our enrollment levels. Now the second element of our plan is improving the student recruiting process. As I mentioned earlier, we've made changes to our performance management system. We've had questions about that, so I'd like to give you a little color on that. The 4 major aspects of this new system are the time our advisors invest in reaching out to and serving potential students, the knowledge they demonstrate of our programs, the quality of their interviews of prospective students and continued demonstration of DeVry's TEACH values: T for teamwork and communication; E, employee focus; A, accountability plus integrity equals ownership; C is continuous improvement; and H, helping our students achieve their goals. We've put this system in place just 6 months ago. The changes not only impact employees in student-facing roles, but their managers also having to do some things differently. As many of you who work in financial services can probably relate to given Dodd-Frank and other regulations, when you change the way performance management is done, it can be a tough and distracting transition. We've definitely experienced distractions that have impacted performance. And as we work our way through the transition and refine the process, we expect to see increased effectiveness as our advisors become more comfortable in the new system. So third. We're improving marketing and further building our brands. DeVry is blessed with a number of very strong brands, which we believe will be increasingly important in the education marketplace of the future. A recent announcement with the U.S. Olympic Committee is a great example of this. The USOC has long been interested in finding a way for the athletes to pursue their education while maintaining their rigorous training regimens and competition schedules. Well, through this partnership, our Team USA athletes will be given a chance to pursue a degree through the many programs that DeVry institutions offer. Additionally, this partnership, with one of the world's most recognizable organizations, will further enhance our reputation as well, which really benefits everyone involved but in particular our country's athletes. Also, I think it's interesting that when Scott Blackmun, the Chief Executive Officer of USOC, was asked how he would answer criticism of having the USOC become aligned with a private sector, publicly-held educational institution, he was quoted as saying in the Chicago Tribune that "It is the fact that they are a private sector university that gives them the flexibility to support U.S. Olympic and Paralympic athletes in this way." At the more tactical level of marketing, to increase the quality and quantity of inquiries, we're refining the way that we communicate to optimize our marketing dollars. This includes better connecting with potential students through chat, text and social networking sites. This has meant fewer inquiries from web advertising and more from search engines, from social networks and from our website. Now the fourth aspect of the plan is driving growth through new programs and new locations. Some examples. At DeVry University, we've just begun offering a new bachelors degree program in healthcare administration, and we have a new Masters in Education. A new Masters in Public Health and a bachelors in accounting are on track to begin soon. We already have an accounting major in our business program, and we've enjoyed synergies between DeVry University undergraduate, Keller Graduate School and Becker Professional Education. So this new dedicated accounting degree builds on that success. At Chamberlain, we're planning to add 3 new locations in calender 2012, and we recently received approval from the Illinois Board of Higher Education for a Master of Science specialty track in Nursing Healthcare Policy. At Carrington, we're adding new associate degree programs in business and accounting in the coming months. We're building on the healthcare, allied health and associated programs at Carrington. Also, part of the plan is to grow Carrington online, which has a lot of upside opportunity. We recently opened our first Carrington campus in Texas in the Dallas Metro area. DeVry Brasil also continues to add campuses. The expansion of the Ruy Barbosa campus in Salvador is on track, as well as the launch of its new campus in Sao Luis. We've submitted applications to offer online degree programs to students in Brazil. So pending this approval, we'll be offering online courses in areas such as engineering, business administration and information technology. So we're very excited about the opportunities that exist for us in Brazil. These new programs and new locations are targeted investments that we believe are strong uses of investment capital. And then the fifth part of our plan is building on our team, our already strong team. We're excited to welcome Tim Wiggins to the CFO position, and you'll hear from him in just a minute. We're also very happy that Dr. Elaine Watson will join the team as Dean of Ross University School of Veterinary Medicine next month. And we continue to invest in our people even while our results are down. We'll support them with professional development, training and the resources to succeed. I'm confident in our plan, and I'm confident in DeVry's people to carry out the plan. Now let me briefly comment on what's happening on the regulatory landscape. The good news from our perspective is that last year's rule making process is over, and we know what the rules are. One of the positive outcomes from the last couple of years is that many more policymakers now know the vital role that private sector education plays in meeting our educational needs. They realize that there are high-quality providers in the private sector, but these institutions should be supported. There's also an increased recognition that the same rule should be applied across all institutions: public sector, private sector and independent. DeVry was recently asked to have a representative on a new Department of Education rule-making panel that's going to discuss student financial aid. As we've done many times in the past, we're pleased to have a seat at the table. We greatly appreciate that DeVry's views are sought out and valued. Even though our primary focus is inward right now on executing our performance improvement plan, we do continue to have conversations with policymakers, like the roundtable discussion that we had with Senator Harkin to discuss a new policy framework for higher education oversight. We've put forward a concept, applicable to all colleges and universities, that's based on 2 pillars: metrics of accountability; and standards of best practice. So those are the 2 pillars, metrics and standards. Now you may have seen that Senator Durbin held an event this week and introduced legislation to modify the 90/10 provisions. The senator's proposal, while maybe well intentioned, misses the mark. It doesn't advance reform and accountability and would limit -- it would limit veterans' and others' access to education. So we'll continue to work with Senator Durbin and others in an effort to advance meaningful reform based on student outcomes. So thank you for listening to that overview. Appreciate the opportunity to share that. With that, I'd like to introduce Tim Wiggins. After a very thorough and inclusive search, we're confident that we found the best person to serve as our new CFO. Tim comes to us with a tremendous amount of experience, having been a CFO in multiple industries, and he has a passion for education. We're very much looking forward to working with him as we execute on our performance improvement plan. Tim, over to you.

Thanks, Daniel. I'm delighted to be part of the DeVry team. Let me start by saying I look forward to meeting many of you on today's call in person. You'll be hearing more from Joan on that in the coming months. Let me tell you why I chose DeVry. A number of the reasons, I suspect, are very familiar to all of you: leadership; reputation; quality institutions and management. DeVry is well known for high-quality education in the space it serves, an important unmet and growing social need, the educator nation's workforce. Plus, I can tell you that DeVry has a sterling reputation in Chicago communities and has posted some pretty impressive results for a number of years. I really like the organization's position and diversified educational offerings. It's not often that you get a chance to join a leader in a dynamic industry that plays such an important role in our society. What's truly unique is when that opportunity also intersects with a personal passion, education. Before I joined, people told me great things about DeVry. In fact, I worked alongside many DeVry University graduates at Tellabs. During my final days there, a number of employees came up to me, wishing me well and telling me how they had graduated from DeVry University and what a great experience it was for them. And now I see why. I'd like to take a few minutes this afternoon to give you my initial observations as a person new to the organization. Clearly, DeVry's facing some short-term challenges. I could tell you without hesitation that this management team understands these challenges, has good instincts and has taken decisive and proactive steps to address the issues. On the other hand, we continue to make progress towards achieving our long-term growth goals. Ross University, AUC, Chamberlain, Becker and DeVry Brasil are all performing well. Continued growth will require investments to expand their offerings to meet the needs of the students they have now and in the future. Recently, we've experienced significant operational de-leveraging as our revenue growth has abated. In addressing the underlying issues, we have the opportunity to re-position the organization at a lower cost point. So when growth returns, we will be even better positioned for significant positive operating leverage. During my career, I found there's no better time to implement operational and financial improvements. At the same time, it's imperative that we strategically allocate capital in areas where we can achieve a good return on investment. And if we execute properly, we'll come through this period even stronger than when we entered it. Before I conclude, I'd like to thank Rick Gunst who's been a tremendous help to me in my initial transition. He's leaving quite a legacy at DeVry, and I wish him well as he enjoys his retirement. So to wrap it up, let me just say that I'm very confident this team will overcome the near-term challenges that we face, and I'm encouraged by our prospects for long-term growth. Again, I look forward to meeting you soon. Now I'll turn it over to Rick and Pat for the financial highlights.

Okay, thanks, Tim. And good afternoon, everyone. Our second quarter and first half results reflect the continued revenue deceleration and resulting impact on earnings. Second quarter revenue of $524 million was down 5% versus prior year and down about 3% through the first half of the year. The acquisitions of AUC and ATC International contributed about 300 basis points of revenue growth in the quarter and about 240 basis points for the first half of the year. Reported net income of $9 million in the quarter compared to $89 million last year, and earnings per share of $0.13 was down versus $1.25 last year. Results for the second quarter fiscal 2012 were impacted substantially by 2 discrete items. First, a goodwill and an intangible asset impairment charge of $55.8 million after-tax for Carrington; and second, a $2.2 million after-tax gain related to the sale of Becker's Stalla CFA review operations. During the first half of fiscal 2012, enrollment challenges have continued at Carrington stemming from the prolonged economic downturn, transition issues from the Carrington name change and recent regulatory changes. This resulted in a lower estimate fair value for the institution. And accordingly, DeVry recorded an impairment charge of $75 million pretax and about $56 million after-tax, or about $0.82 per share, in the quarter. Excluding these 2 discrete items, net income of $62 million in the quarter was down 30% versus prior year, and earnings per share of $0.92, down 26%. A reconciliation of these earnings results is included in the financial section of today's release. These results reflect the slowdown of topline growth driven by lower enrollments within DeVry University and Carrington reported in December and a resulting margin pressure. Our overall effective tax rate and income from operations was 29.1% in the quarter and 28.5% year-to-date as compared to 33.1% for the full year fiscal 2011. The tax rate on continuing operations was quite a bit lower compared to last year due to mix of domestic-source income stemming from earnings declines at DeVry University and Carrington combined with earnings growth at DeVry Brasil and the addition of AUC. We expect that our effective tax rate on income from operations for fiscal year 2012 will be relatively consistent with the year-to-date number and around in the 29% range. The tax benefit associated with the impairment charge at Carrington is not comparable to our effective tax rate on income from continuing operations because of the impact of non-deductible acquisition goodwill at Carrington. As a result, the tax benefit from the impairment charge carries an effective tax rate of only 25.7%. Cost of educational services increased by about 5% versus prior year in the quarter and first half. About 340 basis points of this growth in the second quarter and 260 basis points of growth in the first half were driven by the AUC and ATC acquisitions. Our focus in matching our costs with revenues, new locations over the past year within Chamberlain and DeVry University were the main drivers of the year-over-year increase. Student services and administrative expense was up 4% for the quarter and about 7% for the first half versus prior year. More than half of this increase in the quarter was driven again by expenses from the addition of AUC and ATC, which were not part of our organization last year. The remainder of the increase in the quarter was for incremental inquiry generation and new locations supported at Chamberlain and from the impact of inflation, changed management activities and the flow-through of hiring from prior year. We continue to prudently deploy resources to improve academic quality and enhance student services while, at the same time, reduce expenses where revenues are not consistent with the cost structure on a location-by-location basis. We've eliminated or deferred hiring, cut discretionary spending and continue to aggressively pursue other short- and longer-term cost initiatives. We will continue to pursue efficiency and effectiveness initiatives to improve our results while still allocating capital for future growth where warranted. So with that overview, let's now shift to the Operating segment results, which are further detailed in the release. Starting with Business, Technology and Management segment, revenue was down about 12% versus prior year in the quarter and a little more than 8% year-to-date. The revenue decline has been principally driven by the 12.8% decline in fall total undergraduate enrollment reported last month. In addition, revenue per student was impacted primarily by increased scholarships and mix along with slightly lower academic progression of students. Weak economic conditions, persistent unemployment and heightened competition continued to impact enrollment results, coupled with adjustments associated with the new regulations. We still believe the supply-demand relationship and strong value proposition of our programs will remain strong over the long term, but near-term results will be impacted by the enrollment declines over the past few semesters. Segment earnings of $57.8 million in the quarter were down 42% versus prior year, driven by the enrollment and revenue declines and resulting margin compression. Year-to-date earnings were down 35%. We've been focusing on reducing costs where appropriate without compromising academics, new program development and targeted new location expansions, the benefit of which we'll see in fiscal 2012 and beyond. Within Medical and Healthcare segments, revenue was up about 8% for both the quarter and year-to-date, with varying performance among the institutions. Chamberlain College of Nursing delivered revenue growth of 24% in the quarter and about 30% year-to-date. The growth is being driven by our on-site locations, new locations in Houston and Miramar, Florida, with some slowdown for the RN to BSN program due to increased competition. We continued to expand Chamberlain's geographic reach, with Atlanta and Indianapolis, our next expansion targets, pending approvals. DeVry Medical International, which includes Ross medical and veterinary programs and AUC, delivered solid revenue growth driven by the recent enrollment results. Meanwhile, Carrington results reflect the effects of the double-digit enrollment declines reported last period due to prolonged poor economic environment and hesitancy of prospective students to pursue an education at this time. We continue to address admissions- and marketing-related opportunities, along with cost and efficiency initiatives. Earnings for the Medical and Healthcare segment in the quarter were down 25% versus prior year in the quarter and 21.5% year-to-date, excluding the Carrington impairment charge. Operating income growth at Chamberlain and Ross, along with the addition of AUC earnings, were offset by declining results at Carrington. Finally, revenue within International, K-12 and Professional Education increased 16.5% in the quarter and 12% year-to-date. Revenue growth for the quarter benefited from the strong enrollment results at DeVry Brasil, accomplished primarily through sharing best practices that has occurred over the past 1.5. years. Revenue also grew at Becker, while Advanced Academics experienced a slight decline. Operating income for the quarter grew 51% as a result of the revenue growth and operating leverage, which more than offset increased investments in new campus location costs at DeVry Brasil. So given our enrollment results and the first half earning results, it's obvious that the fiscal 2012 revenue and earnings will be below prior year levels. As Daniel stated earlier, aggressive performance improvement plans are underway to reverse the enrollment trends and mitigate the earnings decline through cost saving action plans. So while we're not happy to report the declines in revenue and net income and we're very focused on improving our operating results, it's important to keep things in perspective because these declines follow a 5-year period of above-trend growth with revenue growing about 20% per year on average and earnings growing 50% per year over this 5-year period. Our balance sheet, financial position and conservative capital structure serve us well to manage through these challenging times and still have the capacity to make prudent investments for long-term growth. And now this is my last call with all of you. And as I move on to the next phase of my life post DeVry, it's been a great experience the past 5.5 years as CFO of this tremendous organization. I'm very proud to have been part of this great team and contribute in various ways to help drive our strong performance results over the past few years. I really wish I was going on a stronger note. But as a continuing shareholder, I'm confident the enrollment and earnings growth will return in the not-too-distant future given the quality of our programs, people and values across DeVry. I wish -- I will miss working with you, and I wish you all the best. And with that, let me turn the call over back over to Pat for our balance sheet and financial results.

Thanks, Rick. And good afternoon, everyone. Cash flow from operations for the first half of fiscal 2012 was $219 million versus $274 million last year. This cash generation drove our cash and marketable security balance to $288 million at the end of the quarter as compared to $462 million last year. This balance was lower due to the acquisition of AUC in August 2011 and higher share repurchase activity over the past year. During the quarter, we repurchased about 1,250,000 shares of our common stock for about $47.6 million or an average of $37.95 per share. We completed our sixth $100 million-program right at the end of the calendar year and began executing our seventh $100 million-program. We also continue to remain debt free. The net accounts receivable balance was about $145 million versus $153 million last year. This lower AR balance was a result of decreased revenues and our students' ability to pay back their accounts based on positive student outcomes as well as our teams' continued focus on student service and collections management. The bad debt rates continue to reflect the focus on the receivable collection process with year-to-date bad debt expense of 2.3% of revenue, down versus 2.9% last year, again an indicator of our students paying back their accounts even during these tough times and the strong value proposition of our programs. We're proud of our teams' strong focus on receivables and cash management. Capital spending for the first half was $63 million versus $54 million spent last year. This spending was focused on facility improvements to better serve our students, expansion at DeVry Brasil and also within Ross University, AUC and Chamberlain College of Nursing so we can help meet society's needs for more doctors and nurses. Total capital spending for the fiscal year is likely to be in the $150 million to $160 million range, lower than what we told you last quarter as we carefully scrutinize the deployment of incremental capital. Now let me turn the call back over to Daniel.

Thanks, Pat. And before we open it up to your questions, let me mention a few operational highlights from the quarter. In the Medical and Healthcare segment, integration of American University of the Caribbean is on track. We're beginning to benefit from the sharing of best practices in the same way that we've done with DeVry Brasil and other acquisitions. In International, K-12 and Professional Education segment, we successfully completed the sale of the Stalla CFA business, which will allow Becker to place greater focus on expanding our core global accounting business into high-growth markets. ATC International, which we acquired last May, has helped expand Becker into accounting products and new international markets. And in fact, recently, ATC was given Gold Approved Learning Partner status by the Association of Certified Chartered Accountants, which speaks to the level of quality these courses offer students, and we're quite excited to receive this designation. I'd also like to note that in keeping with our commitment to the military, we've made it a priority to help them and their families pursue their educational goals. At the suggestion of the White House Office of Public Engagement, we recently partnered with the U.S. Chamber of Commerce to offer military spouses career guidance and resume writing assistance. In mid-January, we hosted the nation's largest career forum and hiring fair that's geared specifically towards supporting U.S. Military spouses. So we're quite honored to do that. And Dr. Herman DeVry earned a citation for training the military in World War II. So we've been proudly serving military students for 70 years. As a wrap-up, I'd like to emphasize that despite being disappointed in our near-term results, the fundamental need for the educational programs we provide remains very strong. Long term, there's growing demand for education globally and a great need for increased participation from the private sector. In the meantime, we're very focused on executing on our performance improvement plan using our resources to maintain and enhance quality for our students and delivering value to our shareholders and all our stakeholders, to continue to have a strong balance sheet and to generate the strong cash flow that will allow us to fund and to grow our operations, to pursue targeted acquisitions that fit our strategic plan and to return value to shareholders through share repurchases and through dividends. And in the long run, we're confident that our growth and diversification strategy will continue to position DeVry well to meet the needs for skilled employees in the U.S. and other high-growth countries around the world. Finally, let me offer my congratulations and thanks to Rick Gunst. Rick, you've been an absolute pleasure to work with and a true partner. While most people think of CFOs as numbers people, you are a CFO with a heart and a passion for our students. I look forward to continuing to work together on educational causes like communities and schools while you're on the board. I know everyone at DeVry will miss you. And on behalf of them, and for me personally, let me say thank you for all you've done for DeVry and for our students. And now with that, Joan, let's go ahead and we'll be happy to take everybody's questions.

Great. Before we start the Q&A, I just like to call everyone's attention to the chart that's located at the end of today's press release, which details our quarterly conference calls for the year. You'll notice that, or perhaps you'll notice, that the call for fourth quarter and year-end results has changed. It's now going to be on August 9, which is a change from what we've previously published. So Melanie, if you could please give our participants the instructions, we'll begin the Q&A.

[Operator Instructions] And our first question comes from the line of James Samford with Citigroup.

Just I wanted to ask about Rick's comment about earnings and enrollment growth will return in the not-too-distant future. And I'm just wondering if you could help us think through how far distant future we might be looking at here.

Again, I think we've been saying it's going to be a little choppy in the near term. And it's -- so we're beginning to see some visibility, some positives, but it's really hard to make a call in terms of when that rate of decline will turn to a positive. So we're -- or as Daniel said, I'm encouraged that we're making good progress on our plans but not in a position to say exactly when that's going to turn. We don't have a crystal ball on that one.

Our next question comes from the line of Trace Urdan with Wunderlich Securities.

I was hoping one of you gentlemen could comment a little bit more fully on the revenue per student decline, maybe addressing, first of all, what your -- sort of what the -- describe the scholarship strategy that you have in place right now and how we should think about that going forward. And then what would be the mix shift? And what would account for the sort of lower credits during the term than we had seen last year?

Sure, Trace, I'll give that a shot. And certainly, if others want to jump in here, Rick and Pat, please do. And so you have a number of factors. The principal factor is scholarships and mix. When we say mix, military students and students who are at corporations and taking advantage of corporate tuition reimbursement programs to go back to school and earn a degree or go on to a Masters degree. There's quite a lot of Keller students who fall into that category. For some of those large employers, the Verizons of the world or the IBMs of the world who we've had long relationships with, we do provide a preferential tuition rate. So nothing new there, but maybe just a slight change in mix that has an impact on the revenue per student.

Yes. And just to be clear, I had said that it had a downward pressure on it. We did have a tuition increase last July, and so you would have expected to see probably a 2% to 3% per -- increase in revenue per student. We didn't see that because of these other factors.

And do you think this pattern will continue for the remainder of the year?

It could. I don't see it as a major category, but could be a bit of a dynamic there. We're keeping an eye on it.

Our next question comes from the line of Suzi Stein with Morgan Stanley.

I know this hasn't been a huge issue for you, but can you provide any insight on 2- and 3-year CDRs and kind of what we can expect in February with the draft rates? Are there any areas of concern there?

Not really an area of concern. It's something that recently watch, and we're very focused on that. But I don't have a lot of color to give you on that at this point other than to say that, yes, we do focus on ensuring financial literacy, is one of the biggest areas that we've added resources. And so that has been an area where there have been some costs, to make sure that we are counseling students as they're coming in the door, to make sure they understand their financial obligations and understand how a student -- how the student finance system works, grants and loans and everything else. And then on the back end, if you will, at the end of the process, if they're leaving before graduation, then there's counseling involved. And then certainly for the graduates, we have increased the levels of counseling to those students to make sure they understand their financial obligations. And we think that through those efforts, those are things that we can do to manage and be proactive about managing that situation. Because there are some factors, there are external factors, like the economy, which has led to increased cohort default rates, or CDRs, for colleges and universities across the land. Whether public sector or private sector colleges, they've all seen increases there with a weakening economy. So there are some external factors, but we -- we're focused on controlling the things that we can control, and that's what we've done.

Our next question comes from the line of Gary Bisbee with Barclays.

I guess just 2 questions for me. The -- first of all, you mentioned the incremental cost efforts you're taking. But should we think of that as likely to actually lead to costs declining year-over-year in the back half of the year? Or is that just more likely to offset some of the other areas you cited, which clearly sounded like proactive investment and growth of costs?

Yes. So -- and again, jump in here, but I'll start off with that. We're very focused on that. And yes, so we did cite those numbers relative to our original plan for the year, but we're not stopping there. We have put in place a team who's focused on operational excellence, which is something that we've been increasingly focused on, not just this quarter but for sometime coming. And that is -- has both near-term and long-term implications. Long term, we see the opportunity -- we're pretty good in terms of operational excellence. We need to go from good to great on that one. And that means being able to run processes more quickly, roll out new initiatives with better cost and better speed and better quality for students. So that's the long-term aspect, building that capability. And from a near-term perspective, yes, the team is quite focused on additional cost savings in addition to that which I just referenced. And so examples could include using internal resources to support upgrades to our financial aid packaging software and further student financial aid communications. That project saved us over $1.5 million as compared to before when we used outside firms. We've done a number of -- eliminated a number of facility upgrades, which some people might consider nice to have as opposed to must have. And those have driven about $3 million in savings. So these are just a couple of examples to give you some color, kind of cost reduction measures that we've taken to result in the magnitude of savings that we're talking about, and we're continuing to look at that.

And to -- and just to follow on to that, Gary, specifically looking on a year-over-year basis for the second of the year. Likely that costs would be down at DeVry University where we have a large number of cost reduction measures in places, as Daniel had said, some benefit from the targeted reductions of force, very small, that we did earlier in the year to rightsize our revenue on a location-by-location basis. But in institutions where we're growing, such as Ross, Chamberlain, DeVry Brasil, we likely will see cost increases driven by new location openings or, in Ross' case, additional student enrollments coming through and associated costs with that. So net-net, it'll be like slightly up in the second half of the year driven by investments in our growing institutions, partially offset by savings at DeVry.

Okay. And then the quick follow-up. Any commentary on why nursing -- new student starts in nursing fell in the December term? I realize you've had increasingly tough comps given the incredible growth there last year. But any comment?

Yes. And Gary, yes, and we've commented on it before. Just remind everybody, that was really driven by the RN to BSN program, specifically. So the pre-licensure students who are going, if you will, from scratch to become a nurse for the first time, so getting a Bachelor of Science in Nursing. Those continue to grow. Our Masters of Science in Nursing program continues to grow where we had the challenge in the tough comps but also increased competition of the other factor that I would cite, was in the RN to BSN, that's the program for nurses who are out practicing. They have an RN. They're a registered nurse. But maybe they did that on the basis of an associate degree, for example. Maybe from a community college some years ago. Now they're working and they want to go back and get a Bachelor's degree. And that's the program that saw some tough comps and some declines.

Our next question comes from the line of Peter Appert with Piper Jaffray.

So Daniel, just expanding a little bit on your comment regarding competitive dynamic. I'm interested in a little more color on how you things -- how you see things evolving more broadly, and the extent to which more intense competitor pressures beyond nursing, maybe in business, technology and some of the other disciplines, might be contributing to the enrollment declines? And how you see that playing out over the next couple of years, and the implications for that in terms of student acquisition costs going forward?

Sure, Peter, very strategic question, something that we think about quite a lot. So in the big picture, is there more competition? Yes. But I can remember coming here 9 years ago and getting asked that question, "And is there more competition?" Yes. So I think there's always more competition. And I really can't think of too many industries where that's not the case. And just because there's not -- there's more competition doesn't mean that you can't grow. I think DeVry Brasil is experiencing quite a lot of competition, and we've found ways to take some share. It's just one example. And I think Keller has seen that as well, Keller Graduate School of Management. A lot of people have talked about increased competition in the graduate school market, both from public sector and private sector colleges. But Keller has performed very well and, I think, taken some share. So we don't view it as a given, that just because there's more competition that means that you can't grow. But it certainly does create more challenges. And in some cases, in periods of time, it can be a factor, like the RN to BSN that I just cited. Student -- the cost to recruit new students, is the way we like to talk about that, I think some of those costs could see some upward pressure, particularly this year. It is -- every 4 years you get the presidential election, and you get the Olympics. And so there's increased advertising activity, increased -- and that tends to raise advertising rates. So that wouldn't be shocking if we saw that because we're going to be participating as a partner in the Olympic process. So we're quite excited to, we think, benefit from that attention. But I think that to the extent that that's a factor, I wouldn't put that in the -- sort of the major factor category. So I think it could be a factor, but I'd put it there.

Our next question comes from the line of Paul Ginocchio with Deutsche Bank.

On new enrollment for DeVry undergrad in Carrington, the comps do get easier as we go into the spring quarter. And we have -- so it looks like you're seeing some stabilization in the year-on-year declines for those 2 divisions over the last sort of 2 terms or semesters. Do you think that the sort of year-on-year trends get a little bit better from here, or at least don't get worse?

Yes, I think that's not a bad way to think about things. We have -- here's the way I would put it. We are seeing some early indicators. We are seeing that slowing rate of decline that you talked about. For example, Carrington College inquiries this year, in the early part of Q3, are improved. But it's also possible that we could bump along the bottom for a while. So we just feel that it's just a little too early to call the churn. We have a good plan in place. I feel good about the people we have executing that plan, seeing some of those indicators. But notwithstanding, just being conservative, I wouldn't stand here and start waving flags to call the churn.

And you've -- have you seen monthly improvements in enrollment counselor productivity? Is that -- or are we past the worst there?

There, we continue to work on that. We -- and I think we entered that later than some others. Some others, even as much as a year before July 1, put in place new performance management systems. We chose not to do that. We wanted to wait and see what the final rules were. We took the time to put in place what we think are some very, very responsible risk management safeguards to be prudent, and did some piloting of that. And so maybe the price we paid for that was to then fully roll out at July 1 rather than some others who entered it earlier. So that's the bad news, is that maybe we're a cycle behind some of the others. And we recognize that, and that's a fair criticism, if anybody wants to give me a bop on the head for that. But the good news on that is that we think we did it in a very, very high-quality way and a very conservative way, with risk management very much in mind. And yes, we think we're working through that transition. It's an important transition. We take it very seriously. And as a senior management team, we're all very invested in that. I'm personally invested in working with our team to find better ways and pursue our value of continuous improvement. And we do think that as we work through that, that our teams will get more comfortable with the performance management systems and that our performance will improve. So I hope that's helpful.

Our next question comes from the line of Sara Gubins with Bank of America.

I think I heard in your prepared remarks a comment about slightly lower academic progression, and I was hoping you could expand on that. And then also, given the, I think, mentioned increase in scholarships and discounts, are you seeing a big increase in the number or percentage of your students that are coming via corporate partnerships?

So let me take it in order. In terms of the academic progression standards, it's not a major change, Sara. It's just part of continuous improvement. Like all universities, we're always looking to strike a balance between access and student outcomes. So we took a look at that and monitored our academic progression standards at DeVry University undergraduates, specifically, and tightened those up a bit. So it's not a major factor. The bigger factor there in revenue per student was the mix and the scholarships, the mix of corporate partnerships and military students and so forth. That was the major factor. In terms of an increased participation or corporate partnerships, yes, we certainly hope and expect to see that because we've put resources into beefing up our corporate outreach activity. We call that the Keller Center for Corporate Learning, KCCL. And we have really strengthened our team there. And we have had great partnerships with the Intels and IBMs, GEs, Verizon Wireless, Accentures of the world, and are putting more effort into that. And I would expect to see more students coming from those kinds of partnerships.

Our next question comes from the line of Kelly Flynn with Credit Suisse. Kelly A. Flynn - Crédit Suisse AG, Research Division: A couple ones unrelated to DeVry University. First of all, on the International, K12, Professional division, the growth there accelerated. I think the year-over-year growth was 16.5% versus more like 7% last quarter. I know there are a number of things going on there. But high level, should we model a similar growth rate in the second half? And I guess another way to say it is, should we expect a typical strong seasonality in the second half for that business?

Sure, Kelly. Good question. What really drove a lot of the growth that we saw in the second quarter in terms of an acceleration in the growth rate was the really strong enrollment results at DeVry Brasil. It's lapping year-over-year comparisons. And then Becker in particular had a very strong quarter. Part of that, we changed the schedule at Becker and had a much larger number of classes that we taught in December than we have in the past. So that may accelerate some revenue, that we would normally get those students in this coming quarter ended March 31 into the second quarter. So I wouldn't necessarily model that same trajectory going forward. But we still continue to expect some pretty robust growth out of that segment. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay, that's very helpful. And then just a related question on the margin for that business. And this is sort of key because of the diversification point you guys make. It was down 500 basis points year-over-year in the first quarter, and then up 500 basis points in the second quarter. So just based on the recent trend, it's hard to know how to model that going forward. Could you just give us a little help on the basis points of margin expansion in second half?

Sure. Really, for this segment, the year-over-year comparisons, I think, are more relevant than sequential. At DeVry Brasil, they do not teach classes in the first month of the quarter, so the month of July. So from a U.S. GAAP perspective, we have no revenue recognition. Basically, the same thing with Advanced Academics where the traditional high school year starts in September. So in your first quarter of our fiscal year, 2 of our educational institutions there have only 2 months of revenue as compared to the third -- or the second quarter of this year, where we'd have a full 3 months of revenue. Kelly A. Flynn - Crédit Suisse AG, Research Division: But on a year-over-year basis, I mean, it -- I was looking at year-over-year, and it's still difficult to see a trend. I mean, basically, should be model a similar year-over-year improvement in the second half to what we saw in the second quarter, which is something like 500 basis points?

I think it might be a little aggressive. Year-over-year, we saw some very impressive leverage from DeVry Brasil with the flow-through of the strong -- benefiting from the strong enrollment growth. We will be making some investments at DeVry Brasil in the second half of the year as it relates to various program rollouts and other expansion initiatives that may have a -- will have a depressing impact on that margin. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay. And then just lastly on Medical and Healthcare, similar question about margin. Should we assume similar declines in the second half to what we've seen so far this year?

Kelly, it's Rick. I mean, that one's a lot tougher just given the mix of institutions there, because you have Chamberlain and Ross and AUC that are performing nicely and showing improvements, and that's being offset by the deteriorating results at Carrington, which actually went from an income last year to an operating loss in this last quarter. So the pace of the recovery at Carrington and the turnaround at Carrington is -- will be a large determinant in terms of how that -- quickly that margin rebounds. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay, that's fair. Can I just throw in another one quick to Daniel? I think Paul asked about what you're seeing for new student enrollments for DeVry University. And I think you said kind of bouncing along the bottom, not calling kind of an inflection point yet. But in answering that, you referenced Carrington, so I just want to make sure that a comment about kind of bouncing along the bottom applies to DeVry University as well.

And yes, I think you could apply that to both. The other thing, by the way, on your seasonality question, really, which Patrick, I think, really addressed, just one other little piece of color is Becker -- for those who've been following us for a long time, Becker used to be a little more seasonal than it is a year today. And so it's just -- it's quite a bit more balanced across the 2 halves of the year than it used to be.

Our next question comes from the line of Corey Glen -- I'm sorry, Corey Greendale with First Analysis.

I want to go back to the cost question. And Daniel, in your prepared remarks, I think you mentioned that you're targeting $80 million in cost savings relative to your original plan. Two questions. Can you give us a ballpark estimate of how much of that $80 million annualized you had achieved in Q2? And secondly, I think in answering Gary's question, you gave some examples. But if you add those up, it's quite a ways off of the $80 million. So I was hoping you might be able to give us a little bit more color on what bridges the gap to get to that larger number.

Yes. So -- and Patrick may want to dive in here as well. I would say about half of it is deferred hiring and targeted reductions in force. So that's a much bigger category. And then I gave some other examples just to give you some color. And I would say it's about half and half, first half of the year and second half of the year.

Okay. So you had about a $40 million run rate exiting the first half?

Yes. About $40 million and $40 million, yes. Yes.

And then in a similar note, this isn't bopping you over the head, but the comment in the press release about being disappointed. I think you're referring not just to the enrollment results but also kind of operationally. But can you elaborate a little bit on that, specifically what internally it is that you found disappointing?

I think it's, what we're mainly talking about here, Corey, is that our enrollments are down at DeVry University undergraduate and at Carrington. And we're, as I know you are, impatient, and we'd like to see a quicker improvement in that performance. Particularly Carrington, which really is in full turnaround mode. And we have a strong 5-point turnaround plan in place -- we have a strong leadership team. We've made a number of changes there. We have a new head of Carrington Colleges Group, we have a new head of Carrington Colleges, which is outside California. We have a new VP of marketing there, we have a new head of finance who's really, by the way, a boomerang, some of the workforce in the past come back to help us out. So it's largely quite a bit of a new team and a strong plan. And so I'm very confident that we've got the right plan and the right team. I'm disappointed that it's not happening a little bit faster. But life is long, and we're here. And our -- the fundamental need for what we do is strong. And so that's the part that gives me continued confidence that we will continue to do well. And the other piece is our diversification helps us out. So that's the part that's going well. But those are the parts that I meant when I said we're disappointed.

Our next question comes from the line of Andrew Steinerman with JPMorgan. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: This is Jeff for Andrew. I wanted to follow up on Corey's question on cost savings and just kind of look at it from the 2 expense line items. when I look at student services, it seems the number came down sequentially. Generally, it goes up. Is this the line where most of the cost savings are? And how should we think about it in -- for the second half?

Well, I think, no, it's not where all the cost -- it's really across all expense areas. I mean, we're looking under every stone here, Jeff. So I appreciate your question, and it's a good opportunity to emphasize that there are opportunities in both. You have to match -- we're going to, we are matching our resources to our student enrollments. And so -- and it's also other volume-driven things. In fact, even beyond the 80, there's other things that are volume driven which we didn't even count. For example, you have fewer students, so we spend less on textbooks. Obviously, that's there. And those come naturally, so we didn't talk about that or tried to take credit for those kinds of cost savings, if you will. But no, it's across the board. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: Do you think it'll be coming back to more of a normal seasonality in the second half of the -- specifically the student services line?

I think Patrick gave us some color on that before.

Yes, I think in terms of seasonality, we'll follow our normal trends, but we're looking for cost savings, as Daniel said, in all line items. But... Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: Okay. Okay.

Be careful of the seasonality, too, because compared to our past, we've got different pieces in the puzzle here now, such as AUC. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: Understood. And let me just ask you a quick one on tuition increases. Sort of given the President's comments lately and possibly increased price sensitivity from students. How do -- how should we think about them going forward?

And yes, we do expect to raise tuition at varying levels across our institutions. There are some where we may take a pause. But broadly speaking, we do expect to see that, likely at the lower end of historical ranges. And one thing I would point out, just as an example, one that I have at hand is DeVry University. DeVry University undergraduate tuition is in the lowest third of 4-year private sector and independent colleges. So we are very mindful of the President's comments. And even before the President brought that up Tuesday night, we've been looking at ways in which we can -- that's part of this operational excellence. And that's why we've been thinking about working on that even before this more recent downturn in our results, just a knee-jerk reaction to that, we've seen that trend. And we need to do a better job of being efficient in the way we operate so that we can continue to grow and meet our objectives here, even if there is an environment of lower tuition increases than in the past. And that's not a foregone conclusion, but we certainly want to be prepared for that. And then if it's better than that, then that'd be upside. I think what many people are referring to, and I -- whether the President was referring to this specifically or not, I don't know, but when many people talk about the high rate of tuition increase, along those lines, they're usually referring to the public sector or the state schools, which, of course, is over -- well over well 70% of all college students. So it's by far the bulk and the lion's share. And last year, according to the College Board, collectively, they raised tuition about 8.2%, 8.3%. And I think we raised -- DeVry University undergraduate, to stick with that example, I think it was 2.8% and 2.9%. So that's what I mean. So the rate of increase that we have is probably lower. And in fact, it's allowing the state schools to sort of catch up. We used to be -- I always used to say, "Well, think of it as we're here in Illinois." So we're more than the in-state tuition of University of Illinois because we don't have that tax subsidy that they have, but we're far less than the out-of-state tuition for University of Illinois. We're more efficient and there's other factors. Well, now, they've increased some -- we're -- it's almost a parity. The in-state tuition of University of Illinois and DeVry University of Illinois are very close to each other today. And that's quite different from what it was even 5, 6 years ago. So that's some of the dynamics that we're seeing in tuition. I probably went a little beyond what you're asking, but I wanted to give you some color here on tuition dynamics.

Our next question comes from the line of Paul Condra with BMO Capital.

I just wanted to ask about the online opportunity in Brazil. How developed is that? Or is there much competition? Do your students have access to computers? I just wondered if you could talk about that and just kind of give your vision there.

Sure. And I'll try to be a little quicker here because I know we're -- I want to get all the questions we can. Online, think of online a little bit differently in Brazil. It's really more of a hybrid or mix-and-match that we always talk about here. And so it's not 100% online. There's, for the foreseeable future, going to be an on-site component as well. But it does enable us to expand our geographic footprint more quickly and a little bit more nimbly. We're quite excited about that. Very early days, but a nice medium-term, long-term opportunity for us in Brazil.

Our next question comes from the line of Peter Wahlstrom with Morningstar.

Following up, I guess, on online. Could you provide a little bit of an update on general enrollment trends that you're seeing online versus in-campus and performance? Maybe some of the trends in markets where you have a physical campus presence versus your ability to attract and retain students and what's become more a virtual environment as well?

Okay. So I think the big trend there, the mega trend is toward best of both, Peter. In other words, the best of online and on-site studies and online and on-site student services. Even things that maybe as mundane as, "Hey, you can buy your book online, come to the bookstore and return it." Or go to a physical graduation ceremony even though you went to -- you did your studies online. And we think that scenario, strategically, we're very well positioned, particularly at DeVry University with a coast-to-coast physical footprint and a very strong and high-quality online capability as well. And we think that the ability to cater to that very clear need and desire that we see from students for that mix-and-match, and to be able to do that very flexibly and to do that coast-to-coast, and be able to tell the world about it or market it in national media, which is something you can't do if you're a regional prayer or an online-only competitor, we think is, long term, speaks to a very strong strategic positioning that we enjoy and we want to continue to build on. I would say that's the biggest mega trend with online.

Okay. And then quickly, are you still currently on track to open, roughly, 10 campuses this year, given the updated capital plan, capital spending plan?

I think we've said 8 to 10, and I think we'd be probably a little bit towards the lower end of that range. If we can do more, then we will. But I think we're a little bit more conservative. We're taking a very disciplined look at that in light of this whole performance improvement plan.

Our next question comes from the line of Brandon Dobell with William Blair. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: I'll make this quick as well. Guys, how different do you think the curriculum mix at Carrington and DVU will look in like another couple of academic years from now? Are you making major changes in the direction of those institutions? Or are you going to kind of keep what you've got and just hope that the economy starts to come more in line with the kind of consumer confidence perspective view that you've had?

Yes. Certainly, the last part of it is not the plan. Just hope that things come back. That is, hope is not a strategy, and we understand that. Even though there are external factors at play here, we're the master of our fate. We firmly believe that. And so some of the strategies that we're taking programmatically, which was the core of your question, will change the character of Carrington College a little bit more than, I would say, DeVry University. DeVry University, though, and Carrington College and our other schools as well, collectively, we are adding resources and have added resources to speed up our new program development process that is a part of our strategy. It's not mega resources, so I don't think that's going to be a major thing to model in your cost structure, in your model. But it does -- it is a very leveraged way for us to add growth opportunities. What I'm saying is with Carrington, because we were so heavily -- have been so heavily focused on allied health and ancillary care programs, medical systems, respiratory care and so forth in nursing, by adding business programs, accounting, technology programs, network, those kinds of things, that would make Carrington look a little bit more different than DeVry University might look. And by the way, we used to have more of those in the past, so it's not a complete change for Carrington. It's something that we're familiar with doing. So we're quite confident that we can pull that off successfully.

Our next question comes from the line of Jeff Meuler with Baird. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Just one quick follow-up on the student recruitment process. Just to be clear, are you guys done with the major changes that you're planning to make, and you're just kind of waiting for people to get used to the new systems and processes and expect improvement from there? Or are you still in the process of implementing the changes and maybe you still have people that are normally on the frontlines that are pulled up for training? And then secondly, in terms of the third-party aggregators that you guys were using, and I know you guys turned some off because they weren't able to demonstrate that they were up to the DeVry standards a couple of quarters ago, how much of an impact do you think that, that had? And how many of them have you brought back into the fold at this point?

On the second part, I would say that has more of an impact in the first half of the year. And we're -- we've worked our way through most of that, so I don't think that has a major impact. And then on the changes that we've made, yes, we've implemented those. I would say that we still have quite a bit of training to do. And but I wouldn't -- I would say we're going to make adjustments. We're going to continue to perform our continuous improvement, which is one of our values, one of our TEACH values. But yes, we have implemented the system itself. And so I'd say we're sort of in the middle of the 2 ends of the spectrum that you painted in your question. And I know we went about 10 minutes over. We tried to squeeze in as many questions as we could. I'm sorry if I got a little verbose at times and if your question wasn't answered. But please let us know and we'll do our best to provide that color for you. I would like to thank everyone for your questions and remind you that our next quarterly results call is scheduled for April 24 when we announce third quarter results for that period. And thank you very much for all your questions, and thank you for your continued support of DeVry. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.