Covista Inc. (CVSA) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to DeVry's Fiscal 2012 Third Quarter Conference Call. My name is Jeremy, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Ms. Joan Bates, Senior Director of Investor and Media Relations. Please proceed.

Thank you, Jeremy. With me today from DeVry management are Daniel Hamburger, President and Chief Executive Officer; Tim Wiggins, our Chief Financial Officer; and Pat Unzicker, Vice President of Finance. I'll now paraphrase our Safe Harbor language. This call may contain forward-looking statements. Actual results could differ materially from those expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any such statements. Please consult our most recent 10-K and 10-Q filings for a more complete description of factors that could affect our financial results. On today's call, we'll highlight certain non-GAAP financial measures. Further information about these non-GAAP financial measures, including reconciliations to U.S. GAAP can be found in our results release, which is available as an exhibit to our Form 8-K, dated April 24, 2012. Telephone and webcast replays of today's call are available until May 1, 2012. To access the replays, please refer to today's release for more information. I'll now turn the call over to Daniel Hamburger.

Thanks, Joan, and thank you all very much for joining us today in our fiscal 2012 third quarter results call. I'll begin with an overview of the quarter, followed by Tim and Pat, who will walk through the financial results, and I'll wrap it up with our perspective for the long-term. And we continue to navigate through a challenging environment, but it's an environment we're increasingly familiar with and understand. We're not satisfied with the results this quarter. They don't yet fully reflect our sense of urgency. This is not business as usual. We know strong efforts and changes are required for us to get where we want to go. And while we see progress that reinforces our confidence that we are on the right path, we also recognize that we've got a lot of work to do. It is going to take some time to reflect in our results. So on my upfront summary, let me cover the actions we have taken and are taking on our performance improvement plan where we see opportunities to make targeted investments to drive growth, the outlook over our 5-year planning horizon and our approach to capital allocation. So here's an update on our 5-point performance improvement plan. First off, we've made progress in more closely aligning our costs with enrollment levels. We have a task force of internal and external people working on this, and they've been doing a good job. Over the last 12 months, we've reduced our workforce generating about $25 million in annual savings with the vast majority of those reductions coming from DeVry University and Carrington. We've now identified an additional $50 million of cost savings from our fiscal 2012 full year cost base, again the majority of which is focused at DeVry University and Carrington. We're finding savings through reducing variable costs, centralizing processes and by reengineering processes, for example, using new technology. We've also identified revenue enhancement ideas. This is about value creation, not just cost reduction. I'll ask Tim to discuss our initiatives on point one of the plan in a little bit more detail. The second point of our performance improvement plan is enhancing the effectiveness of our recruiting efforts. Last month, we held additional training for DeVry University admissions and revisions to their performance management system. These revisions were driven by carefully listening to our teams and learning what's worked well and what could be improved. As a result, we believe our revision advisors and their managers are beginning to feel a little more comfortable with the new system and over time, these efforts should begin to have a positive effect on enrollment trends. We're also working on new technologies to enhance the student enrollment process and further strengthening our outreach to corporations and to community colleges as part of the recruiting process. The third point of the plan is to improve awareness building and marketing. At the tactical level of efficiency and effectiveness, we're cultivating higher-quality student inquiries through organic sources like an improved website and search optimization. We're focused on all forms of digital in a big way, including mobile, social and so on. And at the strategic level, we're building on DeVry's strong brand as a means of driving long-term growth and differentiation. DeVry's partnership with the U.S. Olympic Committee is an excellent example of enhancing our brand. The USOC selected DeVry as an official education provider to Team U.S.A. We're very proud of this partnership. We have 40 students athletes already enrolled in DeVry University. You may have seen a new series of Olympic-themed advertisements, which will be bringing additional awareness to the flexible delivery option and the student support services that we offer to our DeVry family of institutions. This relationship and this campaign are perfectly aligned with DeVry University's message to students: Let nothing stand in your way. We've provided a link to one of the ads in the press release, you can see it. Fourth, we're making targeted investments that are laying the foundation for future growth. During this quarter, DeVry Brasil acquired Faculdade Boa Viagem, which further expands our presence in the fast-growing region of Northeast Brazil. FBV currently serves about 5,800 students and offers both undergraduate and graduate degree programs, including business, law, engineering, information technology and that's at 3 campuses. FBV provides excellent academic quality to students and is one of the top-ranked colleges in this city of Recife. We now have over 21,000 students in 3 cities and 6 campuses in Brazil. We're driving significant synergies and adding value by transferring best practices in academics, admissions and student services. We're very excited about the growth opportunities in Brazil, both organic and through acquisition. Becker recently acquired Falcon Physician Reviews, which leverages Becker's expertise in exam preparation, as well as the healthcare expertise within the DeVry's family of institutions. Falcon establishes a platform to expand further into the healthcare education market through additional offerings. And we plan to leverage our international partnerships to expand this platform into new countries. This is all a part of Becker's strategy of expanding into new vertical markets, surrounding each one with a full complement of executive education and exam review services. We intend to pursue a strategy in healthcare that's analogous to what we've done in accounting, where students can move from DeVry University undergraduate to Keller Graduate School and on to Becker CPA Review, saving them time and money. A very strong and differentiated value proposition for students and very successful in accounting and to do it in healthcare. Further, we're targeting growth investments in new high-demand programs and in new locations. New programs include adding bachelor's and master's level degrees in areas like accounting, healthcare administration, public policy. New campuses, include Chamberlain locations in Houston and Atlanta. We're seeing strong demand for nursing. In fact, Atlanta set a record for new campus inquiries. We're on target to open 2 new campuses in January. We'd like to provide more information for you on the economics of new campuses and how that's impacting our cost structure. I'm going to ask Tim to do that in a minute. We often say that we're investing in quality and I want to share a specific example that illustrates what we mean. New graduate nursing residency programs in hospitals are highly competitive. While in St. Louis, Chamberlain graduates failed 33% of the residency positions within one our partner hospitals. The major hospital system in Columbus, Chamberlain grads filled 38% available slots. And at a Chicago health system, 50% of the nurse residency positions were filled by Chamberlain graduates. So when we say we're investing in academic quality, the return on that investment is qualified graduates. And lastly, the fifth element of our plan is continuing to invest in our people, in both good times and bad. This week, we're holding our Annual DeVry University Faculty Symposium. This is a forum for faculty professional development, which helps us improve the effectiveness of our curriculum and our teaching methods. Investing in our people, we also improve academic quality and service to our students. That's a brief update on how we're managing to our performance improvement plan, both to enhance our near-term results and, at the same time, to make targeted investments to drive future growth. We're confident we'll be leaner and more efficient and emerge on the other side of this sector-wide downturn in a better position. The plan addresses a most pervasive trend that we're seeing and that, frankly, all of higher education in the U.S. are seeing that potential students remain very cautious when it comes to making the investment for time, money and personal risk that's involved in the commitment of going to college or going back to college. Now, of course, the potential silver lining in this trend is that there remains demand for higher education and that once conditions improve, and potential students feel more comfortable making that commitment, or our DeVry family of institutions is well positioned to meet that pent-up demand. We believe the challenges we're facing are a short-term dislocation in an otherwise long-term trend of demand for career-focused education, so what's the outlook longer-term? We've recently updated our 5-year strategic plan for fiscal 2012 through 2016. And we view DeVry's performance in 3 phases because if you look at DeVry's performance in the last 5-year period, that was the performance phase. Organization was operating on all cylinders, averaging 20% revenue growth and 50% earnings growth each year. We were enjoying the benefits of strong enrollments and exceptional operating leverage. Second phase is fiscal 2012 and 2013, what we call the transition phase. Revenues, of course, are down this year and will probably be flat to slightly down next year. As everyone knows, given the lag effect, earnings will be down even if our revenues are flat. But this challenge also presents an opportunity. And this management team is energized and looking at our operations, driving productivity improvements, making the proper adjustments to transition the organization to the next phase. We think fiscal 2014 through 2016 will be the recovery in growth phase. Assuming modest enrollment growth at DeVry University, the recovery of enrollment to 2011 levels at Carrington and that our others institutions maintain their growth momentum in that period. So this phase will be in a strong position to benefit from operating leverage and to reap the benefits of the investments that we're making in quality and growth. So as we look at this planning horizon, even though we aren't seeing growth in fiscal '12 and '13, we anticipate a very attractive growth in earnings profile in the fiscal '14 through '16 period. I hope that gives a little insight into how we, as a management team and as a board, are thinking about the outlook. Before I turn it over to Tim, I'd like to briefly describe our approach to capital allocation to drive long-term value. We have 3 priorities here. Our first priority is to deploy capital to strengthen and to grow our core U.S. post-secondary operations. Because investments in academic quality and service excellence like our Student Central initiative has very high returns in learning and on investment. New programs and new locations also have high rates of return, so that's in this priority category as well. These are time-tested uses of investment capital, with very -- with relatively low execution risk. The second priority for the use of investment capital is diversifying beyond the core. Diversification drives growth, it mitigates risk and it helps us attract and develop talent across DeVry. And our third priority for capital allocation is to create long-term value for our fellow owners through dividends and share repurchases. Let me comment a little further on how that second priority, diversification, adds value for DeVry. The core university offerings have strong positions in good long-term growth prospects. At the same time, there are other parts of the educational spectrum with even higher rates of growth such as Brazil. DeVry Brasil is growing at 16% a year. And as we move into these new areas, we share best practices across our institutions that create value. This has worked very well in driving growth at DeVry Brasil, as well as sharing the DeVry brand itself, very effective. The diversification also mitigates risk. As an example, at the beginning of the century we were very heavily concentrated on technology programs. So when we experienced a cyclical downturn within the technology sector, that really demonstrated the value of creating a diversified group of institutions. So now, we've gone from 70% technology enrollments back then to a much more balanced array of technology, business, healthcare and other program areas. And then third, diversification helps us to attract, retain and develop DeVry's talent by offering a broader range of career opportunities to our people and in what is a people-based endeavor. This is invaluable. So with that overview, I'd like to turn it over to Tim for a further discussion of our financial results. Tim?

Thanks, Daniel. Good afternoon, everyone. Our third quarter and fiscal year-to-date results reflect the continued revenue deceleration at DeVry University and Carrington and the resulting impact on earnings. Third quarter revenue of $541 million was down 4% versus prior year, and down about 3% year-to-date. The acquisitions of AUC, ATC International and FBV contributed about 3.1% of revenue growth in the quarter and about 2.6% during the first 9 months. Net income of $67 million in the quarter declined 28% compared to $93 million last year and the earnings per share of $1 was down 24% versus $1.32 last year. Our overall effective tax rate on income from operations was 29.1% in the quarter and 28.7% year-to-date as compared to 33.1% for the full year of fiscal 2011. The tax rate on continuing operations was quite a bit lower compared to last year due to the mix of income sources, 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 in the 29% range. Turning to our cost for the quarter and year-to-date, cost of educational services increased about 5% versus prior year in the quarter and year-to-date. Taking into account acquisitions and the expansion of Chamberlain. About 3.8% of this growth came from acquisitions, another 1.2% was a result of expenses to support new campus expansion at Chamberlain over the past year. We saw a similar trend in student services and administrative expense, which was up 4% for the quarter and 6% for the first 9 months. The addition of AUC, ATC and FBV caused expenses to increase 2.4% in the quarter and 2.1% year-to-date. We have eliminated positions, cut discretionary spending and continue to aggressively pursue other short- and longer-term cost-saving initiatives. We will continue to pursue efficiency and effectiveness initiatives to improve our results, while still allocating capital for future growth where warranted. Over the past 12 months, we've reduced our workforce about 4%, generating about $25 million in the annual savings. As Daniel mentioned earlier, we have identified an additional $50 million of cost savings from our fiscal 2012 full year cost base. We expect to realize the full amount of these savings in fiscal 2013. These savings are primarily targeted at DeVry University and Carrington, our institutions experiencing enrollment declines and at the home office. On a year-to-date basis, overall cost at DeVry University and Carrington were down. In the fourth quarter, we anticipate cost for DeVry University and Carrington to fall sequentially and be lower year-over-year as we begin to realize the impact of these cost reductions. With that overview, let's shift to our operating segment results, which are further detailed in our release. Starting with the Business, Technology and Management segment, revenue was down about 10% versus prior year in the quarter and 9% year-to-date. The revenue decline has been principally driven by declines in total undergraduate enrollments. Enrollments continue to be impacted by weak economic conditions, persistent unemployment and the resulting hesitation on the part of some students to enroll in college, coupled with adjustments associated with new regulations. We still believe the supply-demand relationship and value proposition of our programs remain strong over the long term, but near-term results will be impacted by the enrollment declines of the past few semesters. We certainly wouldn't assume that the current negative enrollment growth trend goes on indefinitely, but we don't anticipate a turnaround at least through the fall. Segment earnings of $64.7 million in the quarter were down 35% versus prior year, driven by the enrollment and revenue declines and resulting margin compression. Year-to-date earnings were down 35%. Cost of educational services and student services and administrative expense were down year-over-year. We've been focused on reducing cost without compromising academics, compliance, new program development and targeted new location expansions. Within the Medical and Healthcare segment, revenue was up about 13% for the quarter and up 9.5% year-to-date, with varying performance among the institutions. Chamberlain College of Nursing delivered revenue growth of 27% in the quarter and about 29% year-to-date. The growth is being driven by new locations in Houston; Miramar, Florida; and Indianapolis, which just opened in March of 2012. This is partially offset by a slowdown for the online RN to BSN program due to increased competition. We continue to expand Chamberlain's geographic reach with Atlanta opening in May and Cleveland and Tinley Park as our next expansion targets, pending approvals. DeVry Medical International, which includes Ross Medical and veterinary programs and AUC delivered solid revenue growth of 31% year-to-date, largely driven by the acquisition of AUC. Meanwhile, Carrington results reflect the effects of double-digit enrollment declines reported last period. Earnings for the Medical and Healthcare segment in the quarter were down 11% versus prior year in the quarter and 18% year-to-date, excluding the Carrington impairment charge from the second quarter. Operating income growth at Chamberlain and Ross, along with the addition of AUC earnings more than offset an operating loss at Carrington. Within this segment, we have 5 distinct institutions that serve different student populations and are performing at different levels. So I thought it might be helpful to give you some additional color on the revenue contribution and margin performance for each of these institutions. At DeVry Medical International, which includes Ross University Schools of Medicine and Veterinary Medicine, and American University of the Caribbean comprise about 45% of year-to-date segment revenues with margins above the segment level. Chamberlain contributes about 30% of the year-to-date revenues in the segment with margins above the segment level. And lastly, Carrington contributes about 25% of the year-to-date segment revenues but is expected to remain unprofitable but improving over the next fiscal year. Finally, revenue within the International, K thru 12 and Professional Education was flat in the quarter but grew nearly 8% year-to-date. For the quarter, solid enrollment growth at DeVry Brasil and the addition of FBV was offset by revenue declines at Becker and Advanced Academics. Becker revenue decline was driven by the sale of Stalla and the shift in demand from the third quarter to the second quarter. Segment operating income for the quarter declined from $10.3 million to $7.2 million as a result of revenue declines at Becker and Advanced Academics and by new campus location costs at DeVry Brasil. Over the past few months since joining DeVry, I've had the opportunity to dive into the various institutions and get a sense of the areas where we can really focus on improving, as well as the areas where we can focus on driving growth. I find it helpful to think about our operations in 3 categories. Similar to the performance cycle Daniel discussed earlier, we really have 3 distinct life cycle categories that each institution fits into. The first, and biggest category, consists of the institutions that are in a transitional phase experiencing enrollment declines. DeVry University and Carrington fit in this category. The second category I'll mention is made up of DeVry Medical International, Becker and DeVry Brasil. This category is characterized by steady growth institutions or in the case of DeVry Brasil, high-growth, that are performing well, delivering solid operating leverage and earnings results. And finally, the third category is characterized by high-growth and high investments. The perfect example of this is Chamberlain where we're expanding rapidly and making significant investments in new campuses and new programs to meet the demand for nursing professionals. To give you a better sense of what exactly we mean when we say investments, let's take, for example, the cost scenario of opening a Chamberlain campus. A typical approval process requires us to make significant investments upfront. Construct the facility, obtain the patient simulators, other classroom and lab equipment and hire our professors and staff, while we await approval from the various state and accrediting bodies. Beginning with the preenrollment period, obtaining approvals and enrolling students, it takes about 2.5 years for these new campuses to breakeven. During that time period, we're underwriting about $2.5 million of operating losses until that campus is fully up-to-speed. Today, we have 6 campuses that are in this preenrollment stage that have been opened less than 2 years. We expect to open 2 to 4 campuses per year. So while Chamberlain's revenue is showing strong growth, it's not going to significantly contribute to our earnings results because most of what we make there is reinvested back into the campuses. Over the long term though, we believe these investments are going to create significant operating leverage in the building of competitive advantage as Chamberlain continues to grow and create a formidable position. Now I'll turn the call over to Pat to talk more about our balance sheet and financial position. Pat?

Well, thanks, Tim, and good afternoon, everyone. Cash flow from operations for the first 9 months was $355 million versus $485 million last year. This cash generation drove our cash and marketable security balance to $332 million at the end of the quarter, as compared to $599 million last year. This balance was lower due to the acquisition of AUC in August 2011 and the recent acquisition of FBV in February 2012, along with higher share repurchase activity over the past year. During the quarter, we repurchased about 863,000 shares of our common stock for about $32.1 million or an average of $37.21 per share. We've completed about 1/3 of our seventh program, leaving about $67 million remaining under this $100 million program. We also continue to remain debt-free. Our net accounts receivable balance was about $255 million versus $224 million last year. This increase was mainly timing-related, which happens from time-to-time. We expect receivables to be back in line with year-ago levels at the end of the fiscal year. Receivables were in line aside from this timing issue that hit us right at the end of the quarter. 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 2.7% last year. The fact that our bad debt is among the lowest I think you'll see out there and trending down is an indicator of our students paying back their accounts even during these tough times and of the strong value proposition of our programs. We're proud of our teams' strong focus on receivables and cash management. Capital spending was about $92 million for the first 9 months of the year versus $91 million spent last year. Total capital spending for the fiscal year is likely to be in the $145 million to $150 million range. The spending is focused on expansion at Ross University and AUC, along with new campus openings at Chamberlain College of Nursing and DeVry Brasil. And it also includes capital investments on facility improvements to better serve students across all of our institutions. Now let me turn the call back over to Daniel.

Thank you, Pat. One additional operating highlight I should add, I'm very pleased to report, and I think this press release just crossed the wire today, the Becker Professional Education has once again been recognized as a top organization in preparing students to pass the CPA exam. The AICPA presents an award to candidates who obtain the highest scores among all 100,000 worldwide test takers. And in 2010, there were 19 award winners and all 19 prepared with Becker, 100%. This success is not only the extraordinary accomplishment by our students, but it's also a testament to the quality of our course, our instructors and the dedication of the entire Becker organization. So I'd like to give special congratulations to the Becker team and thank them for pursuing DeVry's purpose, which, of course, is to help our students achieve their educational and career goals. So finally, let me say that we're intensely focused on managing through the current short-term discontinuity in the long-term growth trend in U.S. postsecondary education. I'd like to take a moment to highlight why we strongly believe in the future prospects for the education sector and for DeVry specifically. While continuing demand for career-oriented education is a long-term secular trend, the number of jobs, for example, that require postsecondary education continues to increase. It used to be 1/3 of the jobs back in the 70s, it's 2/3 today. And yet public sector colleges are not able to meet this demand alone, especially given the budget and capacity constraints. The Cal State system recently announced they're freezing enrollment in the spring, wait-listing all applicants in the fall, while again cutting enrollments by over 20,000 seats. We have no doubt that quality private-sector institutions will continue to play an increasingly vital role in preparing students to fulfill the demand for highly skilled employees across the nation and around the world. And this is partly because these institutions can provide the needed capacity to educate students at a significantly lower cost to taxpayers. So within this large and growing global market, what is it that makes DeVry successful? What's DeVry's competitive advantage? Well, the answer is 3 things: career-oriented education, excellence in student service and the use of technology in the educational process. These cut across all DeVry's institutions: medical school, the business, engineering and so forth. And together, these are the 3 things that which we can be the best. Many students are attracted by our focus on career-oriented education. Examples include Chamberlain College of Nursing where our curriculum, our faculty and our leading use of patient simulation empowers Chamberlain graduates to hit the ground running and to earn a 4-year BSN degree in 3 years. Or the fact that DeVry University graduates are employed at 95 of the Fortune 100. Providing excellent student services is a distinct advantage in higher education. Many of our students need a high level of support to help them navigate college and persist to graduation. One way we provide service excellence is providing the best of both. So that's the best of both on-site and online courses in student services with a coast-to-coast physical footprint. This is a competitive advantage over a regional college or the latest online-only startup. And the use of technology in education is a third strategic competitive differentiator for DeVry's institution. This has long been the case with technologies like online learning and patient simulation. What's next? We believe adaptive, mobile and social technologies will be transformative in education. And we're focused on ensuring that DeVry's institutions stay on the cutting edge of these trends. So in summary, we're very focused on improving our near-term performance and on positioning DeVry for long-term growth. We've experienced great deals of success at DeVry in recent years and I'm confident that we have the right strategy and the right people in place to address our challenges. The 365,000 worldwide alumni who've graduated from DeVry institutions are truly a testament to DeVry's position as a leader in providing high-quality outcomes to our students. And with that, we'll be happy to take your questions. Joan?

Great. We're going to begin the Q&A shortly but before we do that, we'd like to call your attention to the schedule of announcements in today's release. They're labeled as Charts 1 and 2. Beginning with our announcement in August, we're going to be changing how and when we report our enrollment data. Now we'll be communicating with you in more detail prior to reporting our year-end results but overall, we believe the change will give greater transparency and alignment to how our enrollment periods impact our quarterly results. Now, over the last several months, we solicited feedback from many of you on how we can help you do a better job with your analysis of DeVry. You probably noticed that we took that feedback seriously and we tried to provide greater insight into our operations and results in our commentary today. We'll continue to do so and as always, we certainly welcome any additional feedback if the added color was helpful to you. So with that, I'm going to ask Jeremy to give our participants the instructions for the Q&A portion of the call.

[Operator Instructions] Our first question comes from Suzi Stein with Morgan Stanley.

One of the things that I didn't you hear talk about is what you're seeing as far as competition, either from traditionals or other for-profit. So I'm just wondering as you look across your schools, how you would characterize that now? And then separately, can you just give us a sense of how much tuition discounting or scholarships that you've been using for your various schools and how that compares with say, 2 years ago when starts in enrollments were up in the double-digit rates and sort of how you expect that to trend over the next couple of quarters?

Okay. Thank you, Suzi. And it's a good question on competition. And yes, there is more competition and it's interesting because I remember being asked that question when I first started at DeVry about 9.5 years ago. And I answered it the same way then, too. Boy, there seems to be more competition. So I think like every other industry, competition is increasing. And what's most important for us is how do we respond to that, how do we compete. And that's why as I mentioned, we really think those 3 aspects of career-oriented education, service excellence to students and technology in education is key. And then we customize that to each institutions. So, for example, how does DeVry University compete with public sector colleges that are -- have heavily subsidized tuition, often lower than our tuition? And so our DeVry University version of those 3 flavors would be small class sizes, hands-on, very career-oriented learning, flexible schedule, including that best of both online and on-site that I talked about, that students can get a 4-year degree in 3 years. So those are some of the ways in which DeVry University would compete. Chamberlain likewise with its 120-year history, high-quality academics, strong support services, real-world focus with patient simulation, community service-based learning, those are ways that, that career orientation comes into Chamberlain's value proposition. So the key is how do we compete. It's always going to be competitive, don't expect that to ever stop. In terms of tuition discounting and how that's trended, why don't I ask -- Pat, you want to comment?

Scholarships are very important given the student population that we serve. We continue to use scholarships very prudently and strategically. And given the current economic downtrend, I think you could safely say that those scholarships are far more important than ever. So they are certainly up. Over the past couple of years and last year, we granted about $29 million in scholarships.

Can we go back to the issue of competition because I guess my question isn't so much what are you guys doing to compete. It's more -- have things changed competitively. So are you seeing other schools moving it more into your markets or are you moving up market into their market? So I'm just wondering if at the margins, some of what you're seeing in terms of diminished demand is coming from increased competition or if a significant amount of that is coming from increased competition?

So, Suzi, I think, competition is a factor. But in terms some of the new competitors that have been in the news lately are in many cases going after segments of students that are not as competitive with us. So if we look at some of the free online, like, MITx or Stanford or Cornell and some of the programs there, those are -- there's no instructors -- it's really self-paced learning and then you take a test. Most of the students that we're serving in -- and then maybe you might say, "Well, it overlaps because it's in computer science and DeVry University teaches computer science at the bachelor's level or the master's degree level. But most of our students aren't really looking for that kind of self-paced, they're looking for much more hands-on, they're looking for an instructor, a professor who -- a real progressive who's actually teaching the course, not just content. So it gets a lot of headlines, but something like that, I don't think it's as big of a factor. We have cited areas like the RN to BSN where there's a little bit more overlap, so that would be an example. And then in terms -- are we moving into other peoples? I think that in some cases, we are. We are taking a little bit of share, particularly at the graduate school level. I would say that Keller Graduate School level -- Keller Graduate School of Management even though we're down a little bit, many other graduate schools have reported much more significant declines. And in the master's, the science and nursing and the doctorial level programs in nursing, those are newer for us. And so at some level, we'll be moving into somebody else's backyard. So it cuts a little bit both ways and that's a little bit of perspective on that one.

Our next question comes from Corey Greendale with First Analysis.

So first of all, all the additional commentary was quite helpful. Following up on some of those comments, so first of all, you talked about some of the cost-saving opportunities and some incremental opportunities, could you just square those numbers you provided with the $80 million versus your original budget that you had talked last quarter about looking to get in fiscal '12?

Sure. Corey, this is Pat. The $80 million that we talked about was relative to our FY '12 business plan, so as we had entered the year. Given that we're 3 quarters through the year, you get much more visibility on our FY 2012 fixed cost or cost base rather, we thought it be more relevant or another data point to give you would be our cost savings that we identified and have taken to date and expect to realize relative to our current expense run rate.

Okay. So the $50 million that you're expecting in fiscal '13, that's over and above that $80 million that you talked last quarter?

Two different things. The $80 million was relative to plan. The $50 million that we expect to realize in FY 2013, that is off our current FY 2012 full year total expense base.

Right. That is -- and Daniel, it's also quite helpful, the perspective you gave on the 5-year strategic plan and what you expect for '13 and '14 through '16. I was hoping not to push our luck on this, but I was wondering if you might be able to put some parameters around how much of an earnings decline you might see in fiscal '13 as a base that you'd grow off of in fiscal 2014?

Corey, it's Tim. Let me help you maybe -- or one way to think about it. It's -- I think the best way to think about the cost and the challenge we have at DeVry is that we have these 3 growth cycles in our business. We have institutions that are delevering. At DeVry University and Carrington, we have kind of 2 types of growth. We have the high-growth, high investment in Chamberlain and then we have the rest of the businesses that are growing solidly and producing good results. So we try to put it in these buckets so that we could help folks understand what's going on here because we're making investments in these growth areas, which you'd expect us to do. As you think about these cost reductions that Pat talked about, the $50 million and even the $25 million reduction around, headcount reductions, largely, those are targeted at these institutions where we're seeing this deleveraging. And so we talked about seeing costs down year-over-year. We talked about sequential cost reductions at those institutions for 4Q. And as you think about modeling fiscal '13, we'd expect to see cost down at both DeVry University and Carrington and that's where we're targeting those things. I think we mentioned that targets are those 2 institutions in the home office. So I think that -- I think if you begin to think about it that way, that will help you as you look into the 2013 year.

Okay. If I can just ask one more quick one, Tim, I think in your commentary, you said something about don't expect meaningful improvement in enrollment trends through the fall. Can you just qualify whether you were talking about new student trends or total enrollment? And just talk about what you're seeing kind of the early portions of the student enrollment process as far as application rates, financial aids forms, that sort of thing?

Yes, I think what we're trying to say is that based on the visibility that we have that we don't expect any significant change in what we're seeing. So we're trying to give you some sense of that, while we're hoping for it, we're not seeing it at this point.

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

This is David Chu for Sara Gubins. Enrollment at Keller now turned negative. Do you think that gets worse before it gets better?

I'm sorry, enrollment where?

At Keller.

No, I think that we're in a steady pattern at the graduate school, DeVry University at Keller. Not happy to see that as nobody is. But I don't think that there is significant movement within a range. Unfortunately, on the upside but also I don't think on the downside. One thing to note is there is a nationwide decline in applications to MBA programs. The number of students taking the GMAT entrance exam in 2012 is at a 5-year low, just as a data point. So this -- that's across higher ed and across graduate schools nationwide.

Okay. So how much are your applications down?

It's pretty much in line with what you're seeing there in terms of the course takers. At that same those level.

Okay. And one follow up, starts for Ross and AUC were down. And I know in the press release you mentioned capacity issues. So I mean should we expect similar type trends going forward for the foreseeable future based on capacity issues?

Yes. So the issue within DeVry Medical International and for anyone on the call who may be newer, to the story, I know it's a little bit alarming to see that big negative 20.5% number on new. For those who have been a little more familiar, they are sort of seen that scary pattern and what's happened is it's a matter of arithmetic and math here. Those class sizes on the new side will continue to oscillate a little bit as we're managing through capacity constraints that we have and start to build capacity. So for example, we do expect growth in new student enrollment in the next, in the May term. So in other words, it's not -- the concern is not a market demand issue. It's not a matter of applications. It's not a matter of that. It's more a matter of working through the capacity and a couple of years ago, when we had to get down -- deal with that, and sort of set up a series of big ups and big downs so just to give you a sense of that, so you just saw that big down in January. It was of 2012, it was down 19.9% but in September it was up, about 35%, and May prior it was up 38%. But the prior January was down 8% and the prior September was down 26%. So you've got a lot of oscillation around the new. But through that period, the total has been much more in the range of mid-single digits, let's just say. So obviously, the total being what drives revenue and economics is a little bit less volatile than those numbers you're seeing on the new side. So I just wanted to elaborate there to give you that background.

Our next question comes from Peter Appert with Piper Jaffray.

So Daniel, given the challenges you're seeing at Carrington and arguably maybe just demographically that might perhaps be a less attractive business, can you just talk a little about the strategic importance of Carrington to the overall enterprise?

Yes. Happy to because we believe in Carrington. We believe the -- a career college segment. Which we define career college is 2-year, so associate degrees and shorter. So associate degrees and certificates. And it's a big, growing and job-laden space. So it's actually the largest part of higher education in the United States. It's actually growing. Right now, we're seeing a discontinuity in trend, but long-term trend, it certainly calls for growth. And there will be more jobs requiring an associate degree or lower even than there will be requiring a bachelor's degree or higher, based on all the projections that we see and that the government gives as well. So strategically, it makes a lot of sense for us to participate in that part of the higher education spectrum. It's very career-oriented, those student need a lot of support services, there's a lot of opportunity for technology. So those 3 competitive advantages we have also fit very well. So strategically it fits. And then finally, there's the ladder of education, if you will. So moving students, helping students move from high school to maybe a certificate or 2-year program, then to the bachelor's, to the master's, to higher levels. We've proven our ability to do that with DeVry undergraduate to Keller, to Becker Professional Education. We're seeing opportunities to do that in other areas as well. And so that's a third reason that strategically it fits in the DeVry family of institutions. So yes, we do think it fits strategically. We're seeing both the sector-wide downturn impact us. And I think in the case of Carrington, more so with then DeVry University, we've also had more than our own fair share of internal execution issues there, so that's the bad news. The good news is as we execute our turnaround plan at Carrington and fix those internal execution issues, we expect to have a faster rate of recovery than just that which you'd expect from the market.

Okay, that's helpful. And in the context of the cost reductions you're implementing, can you give us a thought in terms of, what do you need to get the enrollments back to, to get that to profitable again?

Well, with Carrington, our plan, our strategic plan, this 5-year planning horizon, only assumes it comes back not even to its peak but to where we were in FY '11 to the end of what we call the performance period, the performance 5-year period. And so we are not making an assumption that we -- that we as moonshot or that is doing something that's never been done before in human history. Those are not good assumptions to be making, we don't think in this environment. So it is a recovery. It is a turnaround. But it's getting back to where we were before.

Got it. And one last thing, Daniel, can you just comment on, please, the profitability, the Brazilian business and then how you see the scale of the opportunity there?

Well, we think that the scale of the opportunity and the economics are very favorable. It's also favorable from a bottom line after-tax margin perspective, so please keep that in mind. In terms of the growth opportunity, we have done and as part of this 5-year planning process, we redid it again. We did a scan around the world for the most attractive markets, size, growth rate, population, college going percentage and trend, regulatory environment, all the factors that you'd expect us to factor into that, country risk -- and by the way, United States country risk is a little higher than it used to be relative to other countries. And I guess, and guess what, Brazil came out #1 again as it has before. So we are very, very happy with the strategy that we've been pursuing there. We see growth opportunities both organic and through acquisition. I mean I can go on for a long time and I'm really looking forward to a trip in a few weeks to see our newest member of the DeVry Brasil family, FBV. But very, very bullish, and it is an area that is going to -- that we think has the opportunity to provide a very good growth opportunity and with very attractive economics for us for a long time to come.

So margin similar to what you do in the U.S.?

Yes. And actually, again on a bottom line after-tax basis, fully comparable.

Our next question comes from Andrew Steinerman with JP Morgan. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: This is Jeff for Andrew. Could you talk about what you see in student retention within DeVry University? It seems that the continuous students' population is declining there. How much of it is student retention versus graduations?

Sure. So retention, and we don't, like most provide specific retention metrics, but let me try to give you some background here. The overall rates are historically pretty high, although we are seeing some softness from those historical peak levels which you picked up on, so you're right. So what's happened is over the last few years, we've made investments in the academic quality and student services like Student Central that's helped to drive the significant increase in retention but now we are backing off of that. We think largely, driven by the same economic factors that have been weighing the new enrollments. There are higher numbers of graduates, driven by the higher enrollments that we saw in the past enrollment cycles. But not a major factor, but it's a factor. And the other is there's more part-time students than in the past. And so for those who follow the DeVry story since being the first to go public back in 1991, and many have followed us for all that time. Relative to those days, where it was mostly full-time students, move through in 3 years, now there's a lot more part-time students who are moving through over a longer period of time, certainly many students still graduate in 3 years and that's exciting. But there are more part-time students in the mix and that smoothes the enrollment a little bit. So hopefully that's helped as you think about how you think about retention. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: And are you able to put any quantitative parameters about the number of graduates over the next couple of years?

Let's think about that and see how we can be -- I appreciate that request, and that feedback. And we're going to keep working on that. So I don't have anything for you today but we will take and get back.

Our next question comes from Gary Bisbee with Barclays.

It's Zack Fadem for Gary. Your DeVry University segment revenue fell at a slower rate than it did last quarter, despite the slightly weaker enrollments. Can you give us a sense of what's going on there and why that is?

I'm sorry, what fell at a slower rate, Zack?

The revenue at DeVry University, your BTM segment?

Okay.

This is Pat, Zack. I'll take that one. So during the third quarter, the revenue per student at DeVry University was up versus prior year due in part as a result of tuition price increase and some other things that influenced revenue per student in terms course load, student retention, et cetera. So that's what's driving that or softening a bit of that enrollment decline.

Okay. And during your commentary you said that you would expect revenue to be flat to slightly down in fiscal '13, which seems to imply a reversal in enrollment. How confident are you in this?

That's revenue for DeVry Inc. So within that, again, the trends, you still have a decline in new student enrollment, so it's still negative assumed next year in that -- that's an assumption behind that outlook. Narrowing declines, one would expect, but still not assumed -- so all of that is not even assuming a true turnaround back to positive for DeVry University. But you've got to -- we always keep in mind that we've got growth at Chamberlain College of Nursing, growth at Ross University School of Medicine, growth at Ross University School of Veterinary Medicine, growth at American University of the Caribbean, growth at DeVry Brasil, growth at Becker, so there are -- those are the countervailing factors there.

Great. And if I could sneak in one last question on DeVry Brazil, are you -- do you consider yourselves still an investment mode there or would you -- or is it profitable today?

It is. Sure. It is profitable today. Notably, I mean, after-tax bottom line basis.

Your next question comes from Paul Ginocchio with Deutsche Bank.

Daniel, I'm picking up maybe a bit more confidence in your tone today. Am I hearing you correctly? And then I have one follow up.

Okay. You are correct that I'm very confident that we have the right plan, this 5-point improvement plan. We've got the right people running the plan and working the plan. And that's what I'm confident in. And that's what I'm comfortable with. I am not comfortable and I'm not happy and I'm not satisfied with our current results.

Okay. And just a follow-up would be, it sounds like there's really at least as you talked about, maybe DeVry underground like no change in the trend on what looks like easier comps. That would suggest like near-term, we're not seeing any turn. So I'm just trying to understand where the confidence comes if we're not seeing any turn near-term?

Well, because we're working the plan on both sides of the ledger and we are confident that we're seeing opportunities to be more efficient and to create value, both in terms of cost reduction and some other forms of revenue enhancement. So there is that. We are seeing some signs of improvement in the conversion rates, in the adjustments to new regulations. We're listening to our people. We put a tremendous amount of resources into training in supporting our people in the enrollment function, for example. So -- but yes, and so I'm also very confident about the mid- and long-term outlook. We're just saying that in terms of calling the turn, if you will, it's just-- don't have the visibility to be able to do that for you.

Great. And just one more on DeVry undergrad. If you look at the various channels, the corporate military referral, high school and purchase leads, which is the channel within DeVry undergrad that's maybe the weakest and which ones are strongest?

We've had some weakness in the high school channel. And actually, that's an interesting piece of color, I guess, is that the impact that we had as we adjusted to the new regulations in the recruiting function hit us the hardest starting in July 1 of '11 and a little bit before as everyone was gearing up for that. Well, that is right when you're going into the high school recruiting process. And so there is a little bit of a lag but that's kind continue to hit us here in this July and September because that's when the bulk of high school students traditionally show up. So unfortunately, I would have to say that that's an area of a little bit of weakness for us.

Again can you just remind us what percentage of-- how big channel is versus everything else?

It's not the biggest and I don't have a specific number for you. But it's just -- it's one factor.

Our next question comes from James Samford with Citigroup.

I just want to dig on Chamberlain just a little bit. I think you mentioned that the online RN to BSN is slowing down or actually was down this quarter due to competition. And what's sort of going on there? And how do you feel about the demand for the pre-licensure versus RN to BSN at this point?

Sure. Thank you. That's exactly the best way to look at it. It's post licensure and the pre-licensure and in that RN to BSN, we do see a little bit more competition. There are more traditional, I will call them, 8 schools are independents, so public sector or independent colleges who have launched some programs there. And so I think that is a factor. On the pre-licensure side, we see huge demand. We have a very strong value propositions there. Excellent student academic outcomes. We've had very strong reviews from the various reviewers, be they accreditors, or institutional, accreditors, programmatic accreditors, state licensing bodies have been quite complementary of the work that we do there. We've had very, very good success with colocations and almost all of the Chamberlain campuses are colocated with DeVry University campuses and that has been a home run for us in terms of service to students, but also in terms of efficiency and economics, frankly. And so the pre-licensure side is where and that's why we asked Tim to think about how we could provide some more color and with his fresh perspective, he came up with a great way to do that because you're going to see that, the new campuses in the near term, do dilute the margin. But each one is an individual economic project, if you want to look at it that way. It's very, very high return on investment. So that's what we're seeing there on the 2 sides.

And for just a quick follow-up on Carrington. How long has that business been sort of in the red? And what sort of the nature of that? Is it, primarily just fixed cost and sort of not being able to ratchet down the cost structure there or is there something structurally challenged, whether it's the pricing mismatch or something else that we're missing?

Yes, it's really been this year and next, so '12 and '13, the transitional phase, as we called it earlier. And we don't expect that to continue beyond that. And yes, we're in a high fixed costs, high-operating leverage economics, which is wonderful on the upside but we all know can be painful on the downside. It does take some time, you have to serve students over a period of time. So it takes a little bit of time. And I think that it's also fair for us to be self-critical and say that we could have done a better job maybe be faster, maybe be faster but I think even more so be we did start pretty quickly but maybe we could have been more aggressive and you're seeing that now.

The next question comes from Peter Wahlstrom with Morningstar.

And perhaps without looking too far ahead, as we look to the recovery phase, as you're planning today and making some cost cuts today, how much of those costs -- are being -- are permanently removed versus how should we think about those costs that are being taken out today that might flex back with enrollment increases?

Well, it's an excellent question. I appreciate that and it's a little difficult to answer with precision. Because as we also -- in the long run, how much of your cost are fixed, how much is variable in the long run, everything is variable, right? So but as we regrow enrollment, I would expect quite a lot of operating leverage and positive leverage as we go up. And we demonstrated that very, very dramatically in the last 5-year period, we had 20% revenue growth and 50% earnings growth annually, compounded average annual growth. So I would expect. But the one thing that is always important to mention in that regard is that as our enrollments grow, we must and we will ensure that we have the support, academic support, and student service support to serve those enrollment those student enrollments as we bring them in. But you will be able to do that on the margin pretty effectively because then you'll have sort of the incremental, the next row in the classroom is sitting there and you don't need to add another professor, as an example, just take it down at the classroom level, that microeconomics.

Very good. And maybe staying on the macro theme for a second, most of the industry players continue to place an increased emphasis on building out corporate partnerships and relationships. And I was wondering if DeVry has had to become a little bit more aggressive here or maybe just being an incumbent act as a slight barrier? And as a follow-up to that, how are some of the corporations that you're working with and partnering with, how they've been willing to expand their relationships given the, I guess, the current economic environment?

That's an excellent question, and I think that's an area that we probably haven't told the story as much as we've last would. What did people miss about the -- we have a big presence with the large corporations out there. Our graduates are employed at DeVry University. Specifically, graduates employed at 95 of the Fortune 100. We have quite a large and effective team that goes under the banner of the KCCL, the Keller Center for Corporate Learning. The Keller brand is quite effective in the corporate world, either off looking for MBAs and graduates but also -- don't be deceived, that also provides a lot of undergraduate degrees for the corporate employees as well. And also KCCL operates with the military, with government, so with all of those channels. And in the military, DeVry has been serving the military for 70 years. I mean Dr. Herman DeVry himself was training the army instructors, army air corps on electronics and radar during World War II. We're one of the first colleges approved under the GI Bill. So we have a lot of credibility with the military. We're not sort of a Johnny-come-lately when we're on base and so forth. So it's a very important area for us to serve that need, and one of the things that we have seen is that corporate tuition reimbursement has been relatively robust. You can see examples here and there, somebody might adjust it in the downturn but it really is -- we as a rule find that it's one of the more stable employee benefits. That it's very attractive as an employer. And it helps to upgrade the skill set of their employees. So we haven't seen that being cut.

I'm going to have to just to interrupt because we're running really short on time. I'm just going to ask the rest of the participants to please keep your question short and keep it to one.

And you should have given me the feedback to keep my answers shorter, which I apologize have been going on too long. So we'll do that. So Jeremy?

Our next question comes from Jeff Meuler with Baird. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: When you said that you would expect earnings to be down in 2013, even if revenue is flat. Is that aside from the $50 million in cost savings that you guys are pushing through or once you factor that in, would earnings be up with flat revenue?

It would still be down, but certainly flat.

But to be clear, that we haven't factored that in when we gave you that forward outlook. We factored the impact of the $25 million that we talked about and the $50 million of savings. Those are both factored into that analysis.

And our next question comes from Kelly Flynn with Credit Suisse. Kelly A. Flynn - Crédit Suisse AG, Research Division: Just 2 quick ones. On the revenue per student for DeVry University, someone asked the question about this earlier and you explained kind of why it wasn't down as much. But do you expect it to be up slightly again in the fourth quarter? And I don't know if you have time, but if you wanted to talk through some of the issues you mentioned last quarter, like people taking progressing at a slower rate and how some of those things have changed, that will be helpful. And then this one is easy, but it was helpful the color you gave on the fourth quarter expenses, but can you just clarify, if we were to compare total expenses in the fourth quarter to total expenses in the third quarter? Should they be about the same, down or up?

Kelly, this is Pat. There's a number of factors that drive revenue per student, including year-over-year tuition price increase comparison, credit hour loads, scholarships, mix, in terms of military students KCCL, et cetera, which may have lower tuition rates. So I don't expect the revenue -- the tuition per student to be dramatically different in the fourth quarter. There is some seasonality impact to that. But it could be up a little bit. It could be down relative to where we -- saw in the third but nothing dramatically different. Kelly A. Flynn - Crédit Suisse AG, Research Division: But you don't -- in the second quarter was down something like 4%. I just want to make sure we're not going to kind of go back to that. I'm talking year-over-year. So if we model year-over-year, should we kind of assume maybe flat to up slightly on the revenue per student basis?

I can't give that guidance. In the second quarter, there were a couple of factors that we did reference in terms of tighter adherence to academic standards, et cetera, that may have impacted or that did impact that. So you'd expect some of that to be flushed out of the system. So plus or minus I think will be third quarter.

Right. And then Q4 expense.

Q4 expenses, there is some seasonality to our expenses as it varies with enrollment levels. We think it's probably more relevant to look at expense on a year-over-year basis. And year-over-year, we will be up due to the impact of acquisitions and the continued growth at Chamberlain, but looking at DeVry University and Carrington Colleges, where we've had a lot of focus in terms of our operational excellence initiatives, total expenses will be down both year-over-year, as well as sequentially there for those educational institutions.

There you go. I hope that helps, Kelly.

Our next question comes from Jeff Silber with BMO Capital Markets.

I was hoping to talk a little about placement rates at your school, specifically at Chamberlain.

Sure. So career outcomes, graduation outcomes, graduate employment statistics are very strong for Chamberlain. I know I keep getting asked this question because some of you have seen an article that nurses can't find jobs. We -- our graduates are finding jobs. We have services in place to help them. And the employers -- like I gave you a little bit of an example of that in the upfront statement, we talked about how the high percentage in some of the hospital partners that we've seen of the nurse residency positions being taken by Chamberlain graduates. Again, the -- and also the graduate employment statistics for DeVry University are also holding up pretty strong, still in the 80%, we're not meeting our 90% goal, but it's still holding up very well. It's more a factor of prospective students, which is not seen among their environment or the neighbors or the friends in the popular press that's just causing that hesitation on the front-end, but the good news to help us spread the word is, graduates of institutions are doing quite well.

Our question comes from Jerry Herman with Stifel, Nicolaus. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: It's about Carrington. You guys seem to be sort of underperforming the competitors in this space. You've talked about execution issues. Is any of this at all related to just focused on improved outcomes and gainful employment? Have you had to reduce or call any programs along the way?

No, Jerry. It's really not a factor of that and actually the data we've looked at, there are definitely some career colleges doing better than we are. No doubt about it. But there's also quite a number doing about the same or even worse. I'll put us more in the middle of the pack, which is really nothing to crow about but I don't think that we are lagging everybody. It really is more of the execution issues. It was the name change had a bigger impact than we expected it would. It's factors like that. So we are starting to see some improvement. We are seeing our new marketing team doing a very nice job and being more interest in inquiries coming into Carrington. So we do expect to see a turnaround in performance. It will take some time. But we're confident of the turnaround path for Carrington.

And our next question comes from Brandon Dobell with William Blair. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: In DBU, the last, let's call it, several enrollment terms, have you seen any real difference or distance between Business, Technology and Management in terms of how they've perform from a new enrollment perspective? I guess, and also embedded within that, any real trends between how associate and bachelor programs are performing these days?

No, it's bumped around where -- across Business, Technology and then Healthcare Technologies, the other growing part of DeVry University. So nothing and I keep looking for that but nothing that's a real trend. It's more particular programs within those broad categories, Brandon, but nothing that I would say you can model or take to the bank there. And in terms of associates, and the bachelors level, again, not a real trend there. Just unfortunately, pretty even amount of underperformance across each.

Guys, that's the last question.

Was that it? listen. Sorry, we're running over time, but we wanted to get in as many questions as much as possible. I do want to remind everyone, and thank everyone for your questions, I want to remind everyone that our next quarterly results call is scheduled for August 9. We'll announce fourth quarter and year-end results, along with the summer enrollments. Thank you for your continued support of DeVry. Bye, everybody.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.