Covista Inc. (CVSA) Q1 2014 Earnings Report, Transcript and Summary

Good day, and welcome to the DeVry Education Group First Quarter Fiscal 2014 Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ms. Joan Bates, Senior Director of Investor and Media Relations. Ms. Bates, the floor is yours, ma'am.

Well, thank you, Mike, and good afternoon, everyone. With me today from the DeVry Education Group leadership team are Daniel Hamburger, President and Chief Executive Officer; Tim Wiggins, our Chief Financial Officer; and Pat Unzicker, our Vice President of Finance. I'll now paraphrase our Safe Harbor statement. This call will contain forward-looking statements. Actual results could differ materially from those expressed or implied. We undertake no obligation to publicly update or revise any such forward-looking 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. Telephone and webcast replays of today's call are available until November 21. To access the replay, please refer to today's release for more information. And with that, I'll turn the call over to Daniel.

Thank you, Joan. Thank you, all, very much for joining us today. Let me begin with an overview of first quarter and segment highlights. While the story for DeVry Education Group right now is at 1/2, DeVry University is still struggling, our other institutions are doing well and growing. DeVry University in Houston enrollments were better in September than in prior sessions. The turnaround plan at DeVry University is producing early signs of improvement. But we are operating in a challenging and choppy environment in U.S. business and technology education. And we expect these conditions could continue for a while. At the same time, we are investing in our growing institutions, particularly healthcare, professional and international education. Our long-term formula of quality plus diversification equals growth continues to help us work through the cyclical weakness in U.S. business and technology education. Our focus on quality drives solid student outcomes, and our diversification in high-growth career fields, degree levels and geographies positions us for long-term growth. So with that overview, let me touch on a few highlights within our segments. I'll begin with the Medical and Healthcare segment, where revenues and earnings grew nicely. In DeVry Medical International, new student enrollment grew 5.7% as expected. Long term, given market demand, we think a sustainable rate of enrollment growth in our medical schools is in the low single-digit range, with revenues and earnings higher than that. Let me provide some perspective on why medical education is so attractive and why it's such an important part of our diversification strategy. First, the supply/demand imbalance in medical education. In 2012, there were more than 45,000 qualified applicants at U.S. med schools. But given limited capacity, U.S. schools were able to accommodate less than half that demand. Second, it's projected that by 2025, the physician shortage in the U.S. alone will total more than 130,000, with more than half the shortage in primary care. Our graduates go into primary care double the rate of the U.S. average, so we're meeting the needs where the needs are greatest. And most importantly, our medical schools produce strong student outcomes. For example, our graduation -- our graduates retain high pass rates in Step 1 of the U.S. Medical Licensing Exam. At both Ross and the American University of the Caribbean, the pass rate is 96%. That's on par with U.S. medical students. Our medical schools also have very low cohort default rate, only 1.1% at both Ross and the UC. We have alumni practicing in every state, in every Canadian province and in nearly every area of medicine. At AUC, we'll open a new academic building in January. It will feature an advanced anatomy lab and simulation center, a large integrated clinical medicine lab, a lecture hall, and individual and group study spaces. Since we acquired AUC a couple of years ago, we've invested $35 million in academic quality and campus expansion to better serve our students and to meet the demand for well-trained physicians. Moving onto Ross University School of Veterinary Medicine. We recently announced that as part of our partnership with the Moredun Research Institute in Scotland, Professor Clare Hamilton has been appointed to a research fellowship in zoonotic infection. These are infections like rabies that can be transferred from animals to humans. Zoonotic research is a synergy that we can leverage by running both veterinary and human medical schools. Chamberlain College of Nursing delivered strong enrollment growth this quarter as the solid demand for nurses continues. I'm proud to say that Chamberlain now serves a record 15,000 students, which makes us one of the largest nursing programs in the U.S. Chamberlain is distinguished by a value proposition that's centered on academic quality and on service excellence that we call Chamberlain Care. Two of our recently launched graduate programs are helping to support our growth. These are the Family Nurse Practitioner and the Doctor of Nursing Practice. Increasingly, nurses are seeking post baccalaureate degrees to improve their career opportunities. To accommodate the demand for our qualified nurses, we're investing in Chamberlain's expansion. Mayor Rahm Emanuel recently helped us cut the ribbon on a major expansion in our Chicago campus. We hope you can come to our annual shareholders meeting next month so you can see it. Another expansion is underway at our Atlanta Campus, which will double the capacity of that location. We received approvals for our campus in Troy, Michigan that we expect to open in summer 2015, and we received the initial approvals from the New Jersey Board of Nursing for our new campus there. Chamberlain exemplifies our commitment to academic quality. In September, a number of Chamberlain faculty received one of the highest honors in nursing. Dr. Dee McGonigle, professor in our Masters program, was inducted as a fellow at the National League for Nursing Academy of Nursing Education. She was 1 of 28 distinguished nurse educators across the U.S. selected for that honor this year. Now moving onto Carrington. We're making good progress on our turnaround plan. Total enrollment was up for the fourth consecutive quarter. New student enrollment was down because of our academic calendar. During the quarter, we had one less start than we did in the same period last year. Tim is going to provide comparable enrollment data in a moment. Let me just note that we've now given 3 consecutive quarters of revenue growth and 3 consecutive quarters of expense reduction at Carrington. Next, the International and Professional Education segment. DeVry Brasil's revenues were up and total student enrollment increased. New students were down in the last semester. I've asked Tim to give you some more detail on enrollments that we hope you'll find helpful. DeVry Brasil's reputation is strong and growing, and we've really become an acquirer of choice in Northeast Brazil. Our 3 most recent acquisitions -- transactions were done on an exclusive basis, not through an auction process. We feel very good about the academic and economic value that we're able to create through acquisitions. Becker Professional Education also had a good quarter, with revenues growing about 3%. During the quarter, Becker signed an agreement with EduPristine to offer our CPA test materials to exam candidates in India's largest cities. The CPA market remains steady, while the other 4 markets that Becker serve are good growth opportunities, namely, the U.S. Medical Licensing Exam, the Association of Chartered Certified Accountants, Project Management Professional and Continuing Professional Education. We turn now to Business, Technology and Management segment. One of the factors impacting demand in DeVry University as well as higher education across the U.S. continues to be prospective students' lack of confidence in the job market and hesitancy to make the commitment to go to college. The recent government shutdown didn't help. We saw a downturn in Internet searches across education and in our own inquiries within days of the shutdown announcement, many students worried that federal aid might be stopped and indicated they were going to wait until the uncertainty clear up. And put yourself in the shoes of a single mother who is thinking about enrolling in college or a government worker on a furlough or a military student. With the shutdown, you worried that federal aid might not be there. And this becomes one more reason to potentially put off the decision to go to college. We believe this is a micro-version of the larger macro story we've seen in the last 2 years. Enrollment has historically fared well during economic downturns, but the prolonged high unemployment has given many potential students pause, that they're just not sure the jobs are going to be there when they finish their program. To this point, the Career Advisory Board, which was established by DeVry University, recently conducted a study that said that nearly 40% of job seekers lack confidence that the job market would improve next year. We believe this is why we've seen even community college enrollments down 2 years in a row despite their low tax-subsidized price and why we've seen reports of many traditional independent institutions missed their enrollment goals by 10% or 20% or even 30%. It's not an issue isolated in only the private sector institutions, but it's an issue across post-secondary education in the U.S. All this leads us to think that there may be pent-up demand building to be released as the economy improves. Now our recent enrollment results at DeVry University improved in September, but we're still facing this challenging environment. In response, we've put in place a 5-point turnaround plan. And that's, number one, to further improve academic quality; two, align our cost structure with enrollment levels; three, regain enrollment growth; four, to make targeted investments to drive future growth; and five, to manage the change process while at the same time developing our team. Let me update you on our progress in some of these areas. First, academic quality. You may recall that in the past few quarters, we've announced academic milestones, including reaffirmation of DeVry University's institutional accreditation from the Higher Learning Commission and earning specialized accreditation of our business programs from the Accreditation Council for Business Schools and Programs. Well, during the first quarter, DeVry University achieved another academic success. The Accreditation Board for Engineering and Technology re-accredited DeVry University's on-site Bachelor's programs in Biomedical Engineering Technology, Computer Engineering Technology and Electronics Engineering Technology. We know there've been questions about accreditation problems at some other schools. We believe that if you deliver quality for students, it'll be recognized by accreditors. Second, in aligning our cost structure, we continue to manage aggressively. The entire organization is focused on increasing efficiencies. We've reduced costs through staffing adjustments, through consolidating certain functions and by lowering variable costs. We're still on track for at least $60 million in savings and value creation for fiscal 2014. Longer-term, we'll continue to optimize our real estate footprint. We're also working on process redesign and restructuring to both lower costs on a sustainable basis to make them more variable while improving service quality. As part 3 of the plan, regain enrollment growth. You'll recall that we're implementing a new approach to attracting students to DeVry University, including call-to-action events. These are integrated university-wide events to drive more internal and external energy at certain points in the year. The September call-to-action event included a new Career Catalyst Scholarship of up to $20,000. Now for this, we consolidated multiple smaller scholarships into a single bigger program to facilitate communications with a stronger impact. And we did a better job of telling prospective students about scholarships earlier in the process. Now it's important to note that our improved performance in the September class was about -- was more than just the new scholarship. Successful elements of this broader call-to-action event included a clear message with a benefit to students in the sense of urgency and included enhanced media to support that message, everything from traditional media, right down to changing out the literature in every rack, in every campus, simultaneously. It included a whole school approach, where every department played a role, training over 2,000 people on the initiative in 2 days and metrics to track the event on a daily and weekly basis. So I hope you can see that this is an integrated effort rolled out university-wide that generated momentum and got the whole team energized. And they did a great job. In point 4 of our turnaround plan, making targeted investments to drive growth, we're currently investing in the development of new competency-based degree programs. These will allow students who qualify for the programs to complete their degree more quickly and at lower cost. We realized competency-based programs are a hot topic right now, and what's new is a total competency-based program, but note that we've run competency-based courses for several years, so we really do have experience with this form of learning. So that's an update on DeVry University's turnaround plan. We used a similar approach at Carrington, where we launched a 5-point turnaround plan, put the right people in place to execute it, and the result enrollment was up in the last 12 months, even in a difficult market. So this is how we're responding, and this is why we believe we can control our destiny. Now lastly, before I turn it over to Tim, DeVry Education Group is gearing up for the Winter Olympics in Sochi, Russia and our role is an official education partner of Team USA. We're educating over 120 student athletes and can potentially have as many as 14 from our institutions competing for spots in these games. One athlete, Elana Meyers, is vying for a place on the U.S. Bobsled Team. She's also studying in for an MBA at Keller Graduate School of Management. Now when asked how she possibly have time to do both, she said, "The answer is Keller." Keller's program gives her the flexibility and support that her schedule demands. We're excited for her and proud to help her achieve her career aspirations while she reaches for her Olympic dream. So now, I'd like to turn it over to Tim.

Thanks, Daniel, good afternoon, everyone. Let me start with the overall financial results. First quarter total revenues from continuing operations were $451 million. Revenue grew at all our institutions, with the exception of DeVry University. We also had 3 special items during the quarter. First, we recorded a $12 million pretax charge for restructuring activities related to a voluntary separation program and real estate optimization. The voluntary separation program was offered to DeVry University and our home office colleagues. Second, we recorded $1.9 million in pretax gain on the sale of the former DeVry University Campus in Decatur, Georgia, which was part of an earlier real estate optimization. Finally, we recorded an impairment charge related to the write-down of Advanced Academics' carrying value to its fair market value. In the first quarter, revenues from our institutions in transition, DeVry University and Carrington, were down about 16% versus the prior year. The revenue decline was partially offset by our growing institutions, where revenues increased almost 15% to $180 million. The acquisitions of FAVIP and Facid in Brazil continue to contribute positively to these results. Excluding the restructuring charge and gain on sale of assets totaling $10 million, total operating costs from continuing operations for the quarter were $431 million, essentially flat versus last year. During the quarter, we continued to reduce cost at our institutions in transition. Total cost, excluding special items, at our institutions in transition were $252 million, down 7% versus last year. Total first quarter cost excluding special items at our grow institutions increased nearly 17% to $137 million. This is driven by the investments we're making to support future growth. Costs of educational services increased by 1% during the quarter. Costs at our institutions in transition were down 8% year-over-year. This was more than offset by a 22% increase in costs at our growing institutions. The increase was largely driven by the impact of the Facid acquisition and higher costs to support enrollment growth at DeVry Medical International and Chamberlain College of Nursing this quarter. Student services and administrative expense decreased 1% compared to the prior year. Costs at our institutions in transition were down 5%, largely reflecting our cost reduction initiatives to match enrollment levels. As we discussed with you on our last results call, we shifted advertising spend at DeVry University into the first quarter to support the university's call-to-action. So without this change, cost would've been down even more. Costs at our other institutions grew nearly 6%, largely driven by the impact from acquisitions and supporting growth within Chamberlain. We reported a net loss of $7.1 million for the quarter and a loss of $0.11 per share. Net income from continuing operations and before special items was $14.2 million. Earnings per share from continuing operations and excluding special items was $0.22 this quarter. Our effective income tax rate from continuing operations was 17.3% for the quarter. We expect that our effective income tax rate from operations for fiscal 2014 will be in the 15% to 17% range. And this reflects an increased proportion of internationally sourced earnings. With that overview, let's now shift to our operating segment results. Starting with Medical and Healthcare segment, revenues of $176 million was up 11% during the first quarter. Excluding restructuring costs at Carrington, earnings for the Medical and Healthcare segment in the quarter were $26 million, representing an increase of 4% from the prior year and reflecting investments we're making in future growth initiatives. At Carrington, revenues grew 3.6% and total students were up 1%. Reported new student enrollment was down because we had one last session start in the quarter, 5 starts in fiscal 2013 and only 4 the fiscal 2014, and because we're in the process of teaching out several low enrollment programs. In this transition year, we expect Carrington revenues will grow in the low single-digit percentage range, and we expect expenses to be down year-over-year in the mid-single digit percentage range. If all goes as planned, that means that Carrington will exit the year with positive operating income. Turning to the International and Professional Education segment, revenue of $44 million increased 18% in the quarter. At DeVry Brasil, revenue increased nearly 36% this quarter. This was driven primarily by the recent acquisitions of FAVIP and Facid. We continue to explore growth opportunities in Brazil, both through organic expansion into new programs and locations as well as through acquisitions. Total students increased 11% at DeVry Brasil in September, again, driven by the acquisition of FAVIP and Facid. New students declined 9%, primarily because of temporary admissions restrictions for 3 programs at one of its institutions, Area1, located in Salvador. We're working with the Ministry of Education to have these restrictions lifted and expect that to occur in the near future. Segment earnings of $1.1 million declined by $2.3 million as compared to the prior year, reflecting investments for expansion and growth. Finally, within the Business, Technology and Management segment, revenues of $232 million were down 18% during the quarter versus prior year. New student enrollment at DeVry University for September 2013 session was up slightly compared to the prior year, with total students down 16.3%. DeVry University undergraduate revenue per student was down 3.7% in the of first quarter, primarily as a result of the higher use of scholarships over the last several sessions, including the impact of the Career Catalyst Scholarship and the first quarter. Excluding special items, total segment expenses for the first quarter decreased 8% compared to a year ago period. As expected, and excluding special items, the segment generated an operating loss of $5 million compared to $26 million of operating income last year. This was driven by lower enrollments and the planned shift of advertising and marketing spend to support the September call-to-action event. We expect DeVry University to return to profitability for the second quarter and for the balance of the year. Continuing our look at the second quarter, we expect all of our institutions to grow revenue except DeVry University. While total costs of expenses will be up slightly compared to prior year, we expect them to be down slightly on a sequential basis. Costs at our institutions in transition are expected to decline both year-over-year and sequentially. We expect total costs at our growth institutions to increase sequentially, in line with revenue growth. Now, I'd like to give you some additional perspective on what we expect in terms of margin performance in our BTM segment. Among other factors, let me discuss our strategy for scholarships, enrollments and expense management. We're focusing our scholarships on 2 overarching objectives: helping prospective students start college and improving their persistence once they're here. We're becoming more strategic in the use of our scholarships and in many cases reallocating money from one program to fund the other. Our current thinking is total scholarships for DeVry Group will be up about 30% in fiscal 2014, from the mid-$50 million to the low $70 million range. The majority of the increase is to support enrollments at DeVry University while we also work to shift dollars to increase effectiveness. With higher spend and lower planned revenue in fiscal 2014, scholarships as a percent of revenue will increase, putting downward pressure in revenue per student. Enrollment and expense management also impacts our margins. Declining enrollments have meant smaller class sizes and lower utilization of our campuses and faculty. Given the fixed nature of our expenses, this has resulted in negative operating leverage. Just a few years ago, BTM margins where in the mid-20%. Last fiscal year, BTM margins have declined to 9%. We're working to make our cost more variable, but given the nature of costs like real estate, it takes time to make the necessary adjustments. Last year, we achieved more than $100 million in savings and value creation at our institutions in transition. And this year, we're on track to achieve at least $60 million of additional cost savings and value creation. So near term, we'll continue to experience margin compression given revenue weakness and resulting loss of operating leverage. We expect BTM margins to be in the mid-single digit range in fiscal 2014. Longer term, our return to modest levels of enrollment growth in a stable pricing environment should produce margins in the mid- to high-teens range. I'll now turn the call over to Pat to talk more about our balance sheet and financial position. Pat?

Thanks, Tim. Good afternoon, everyone. Our liquidity and financial position continue to remain solid. Our cash flow from operations for the quarter was $140 million, and our cash and marketable securities balance was $312 million at September 30, 2013, as compared to $250 million last year. Now our bad debt rate continues to reflect the value proposition of our programs and our teams focus on student financial aid the collections process. For the quarter, our bad debt expense as a percentage of revenue was just 2.1%. While this was unchanged from last year, it is one of the lowest among private sector colleges and universities. Our net accounts receivable balance was $183 million versus $167 million last year. The higher AR balance was the result of revenue growth from our medical and healthcare institutions and from the impact of the Facid acquisition in Brazil. Now capital spending for the first quarter was $22 million versus $26 million spent last year. Our capital spending was down because of our continued focus on prudent capital deployment with targeted investments in healthcare and international. Now we expect capital spending for the first -- for the fiscal year to be within $115 million to $125 million range. Overall, our strong financial position and cash flow generation gives the DeVry Education Group the flexibility to reinvest in quality and growth. Now let me turn the call back over to Daniel.

Thanks, Pat. And before we open it up for your questions, I'd like to comment on our priorities for growth and diversification. Our first priority is to invest in the growth of our healthcare education offerings. With strong workforce demand in many healthcare fields, including projected shortages for doctors and nurses over the next decade, DeVry's institutions serve where the need is greatest, such as primary care physicians, nurses and medical assistants. And with strong student outcomes, including completion, employment and exam scores, our healthcare graduates are benefiting from our commitment to high-quality educational programs. That our priority is international and professional education. We'll continue to leverage DeVry's capabilities new markets around world. In Brasil, for example, we serve nearly 30,000 students in areas of high demand like medicine, business, engineering and law. Longer term, we see expansion across Latin America and in Asia. Becker is a leader in professional education in 55 countries today, with a great platform upon which we can add new programs and new countries. And we'll continue to invest in our U.S. business and technology programs with a focus on academic quality, student services and new programs. DeVry Education Group's revenue now comprises about 50% U.S. business and technology education, about 40% healthcare education and about 10% international and professional education. As our healthcare, professional and international offerings increase, our new name, DeVry Education Group, reflects this growing diversity and highlights the fact that we serve educational markets across many industries and geographies. So to wrap up, our commitment to quality and our investments in diversification will drive our future growth. In fiscal 2014, we'll continue to focus on executing the turnaround plans at our institutions in transition while investing in the expansion of our healthcare, professional and international institutions. So now, we're eager to hear your thoughts and questions. So Joan, please turn it over.

Great. Mike, if you could please give our participants the instructions once again on how ask a question.

[Operator Instructions] The first question we have comes from Trace Urdan from Wells Fargo.

I wanted to ask about the scholarship. It seems as though it was pretty effective in this quarter. And I know that this quarter has had perhaps disproportionate number of traditional high school students that are taking advantage of it. And so I wonder if you might speak to its relative effectiveness against the different kinds of students that come into DeVry, meaning traditional high school students versus working adults, and whether you perceive the difference between those 2 audiences. And in particular, I'm wondering, because I know earlier in the year, you had talked about having some difficulty with the high schools given that you're an evil for-profit school and that they have been more resistant to letting you come in and talk to their students. And I wondered if the sort of positive start showing in September was a sign that maybe we're getting past some of that?

Thanks, Trace. I understand your question, and I'd like to be able to be more enthusiastic about that. But I think it's a little early to say that. The analysis that we have shows that it was effective. It was effective. And it was effective in relatively similar proportion across the different segments of high school and working adult. And for that matter, business or technology programs. It didn't sort of skew in any one direction or the other. It was pretty nicely across-the-board.

So just to follow up from that then, Daniel, the difference between the July start and the September start, which seems to be positive movement. Do you think that, that represents a trend line? Is that a blip in the volatile, ever-changing environment? How should we think about that?

Yes, excellent. Thank you. I understand the question and -- choppy. We expect November to be down, not like July. So it's choppy like we said it would be. So we had July, down 20-ish; September, flat; November, down; last, nothing like July, we don't think. I would say that we were doing better here for the November price, but in October we had this government shutdown. And so within days, we saw Internet searches, generally, and our own inquiries, in particular, decline. And in fact, many of you probably online saw Tuesday's Wall Street Journal. I didn't even realized -- I've always followed the Consumer Confidence Index. Gallup does not have a daily Consumer Confidence Index. And by the end -- let's put it in perspective. The end of may, the index was at negative 1. It was the best reading since the financial collapse of 5 years ago. When the government shutdown hit October 1, the index plunged to negative 35 and then troughed at negative 43 as the shutdown persisted. So this is sort of, like I said, a microcosm of this bigger macro trend is that lack of confidence. So I think that received a little bit of an impact there on this November class that's forming.

And just to follow-up on the follow-up. Did any amelioration of that since the government has going back to work? Or so you think there is a residual hangover from the lack of confidence in early October.

Little mixed signals. We're seeing some positive signals. But I'm not from Missouri, but sort of show-me. So there is some reason to think that it did pop up again even in days after the shutdown sort of got released. So it is interesting how consumer confidence, particularly among the segments that we tend to serve at DeVry University, it's very sensitive to these things. And we saw that back in August of '11, when we had the first sort of debt ceiling debacle and meltdown. That's when things really kind of started in this whole cycle. So maybe a little picked up, but we'll have to see.

Next, we have Sara Gubins, Bank of America Merrill Lynch.

Could you help us think through the impact on revenue per student for undergraduate given the scholarships? I estimate that it hit by about a little more than 2.5% this past quarter, and I'm wondering if that's reasonable and if that's sort of how we should think about it going forward or if it would have more of a negative impact?

Sarah, it's Tim. Good question and certainly an important topic. We saw our revenue per student down 3.7% from the year-ago period. It's similar to the July, although there are some seasonality. But most of that came from the scholarships. And interestingly, the Career Catalyst Scholarship was about 20% of the impact. Now think about that because we use to scholarship in September. So we only had 1 month of the scholarship playing into it. A lot of the impact came from scholarships that we've been ramping up over the last several sessions, given the weakness that we're seeing. And those scholarships kind of -- some of them come home. They're not just a one-off. So we saw this adjustment of about 3.7%, most of it was scholarships. And most of it was not from the Career Catalyst Scholarship, but from some of the momentum we've seen in other programs.

I was just going to ask about Keller. We don't have start data there. But when we look at course takers, the declines have continued to accelerate there. Are you seeing anything that gives you hope that, that might begin to improve?

Yes. What gives me confidence is the Keller value proposition, and we're continuing to enhance that. We'll be rolling out more of what you might call an executive MBA or pending approvals, which is a shorter format for students who'd have a little bit more experience and can transfer in credits, if you will, other new programs at the graduate level and doing a better job of telling the Keller story. I think whenever we -- and we've done this a little bit more in the last couple of years, doing maybe a little bit more noise about Keller, which traditionally we did very little with, for example, broad-based media like television. People respond. So when we get to the plate, we have a very good batting average. We just need to get to the plate a little bit more often and tell the world a little bit more about the wonderful programs that we have at Keller.

Next, we have Corey Greendale, First Analysis.

First, I want to ask about student persistence, just based on the numbers. We can calculate, it looks like it declined in the quarter. But I realized we don't have all the data, you do. Did it, in fact, decline? And if it did, is there any you would attribute that to, particularly?

Persistence has been sort of in the -- it is actually trending up a little bit right now at DeVry University. It is at Chamberlain College of Nursing as well, doing well with Carrington. At DeVry University, the long story is sort of we're on a macro trend over the last several years of improvement through many of the investments that we've made in student services and academic quality and academic support, tutoring, support centers, all of those sorts of thing. And we did take a little bit of a blip in the first half of last fiscal year, then recovered a little bit and then a little bit of choppiness as we started this year, but feeling pretty good about it overall. So it does move around a little bit. But overall, not an area of concern. It's an area that we're pleased and want to see more improvement continue there.

Okay. And then I hate to ask you a DC question, but I will. When I read the proposal for the new gainful employment regulations before the Neg Reg, I immediately thought of DeVry given that they went back to the 10-year repayment period. It looks like the potential unintended consequence turning school's focused on bachelor degrees. Could you comment on the proposal, and what do you think that some of your programs could kind of get crosswise with the regulation unintended or not, if it's in its -- the form they're proposing?

Well, you make a good point about unintended consequences. And of course, the real answer is we don't know because we don't know what the final will be, and we always made a practice of not really commenting on pending legislation or regulation. But in general, we want high standards. The key is we have to get it right, just like Secretary Duncan has said many times. It's important that we get it right so that we don't have unintended consequences, just like you said. It harms students who are in quality programs. My favorite example is the last time around at 1.0, when they issued repayment data, and it showed that Harvard Medical School would have failed the test. So that kind of showed you that sometimes, maybe the test is a form of test or in the form of program. I think we'd all agree. So that's we're hoping and expecting to see here. We certainly are -- in fact, we're very actively engaged in the dialogue with policymakers. And our main message is we want high standards, not arbitrary standards, high standards. And we want to get it right so there's no unintended consequence.

The next question we have comes from Jerry Herman of Stifel. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Question is about the front end of the pipeline and starts, in particular. Daniel, can you give us a little bit more color in terms of the funnel, if you will, i.e. leads and conversion rates, and maybe some help just in terms of what the Catalyst Scholarship did to sort of get students over the hump?

Sure. Inquiries, we like to use the word inquiries. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Sorry about that.

Yes, sure. We're actually, I think, down a little bit. But with it, you got to really peel that onion very carefully and we do. We have metrics to look at this, what we call higher quality, more likely, more motivated type of student inquiries, we're up. So if that was a direct result of working our plan, doing a better job of a sharper message, more media to support that message, stronger digital, better website techniques and technologies to help move those prospective students along in the process or conversion, if you will. And that all came altogether with a lot of hard work and excellent -- student service excellence from our people to produce the result that we saw. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And as a follow-up, can you talk to us about the participation rates of that program, i.e. sort of the percentage of new students that are accessing or opting in. And then a higher level question, you mentioned weakness in demand for technology programs generally. You guys focus on bachelor programs. But in this market, it would appear that students are focusing on maybe lower-end credential or diploma programs for more rapid turnaround. Can you talk to market share, your feelings about your market share relative to potential changing market dynamics?

Okay. Let me take that second part first, and then maybe Pat will give us the color on the percent. I forgot the scholarship, I think, about 20%, 25%. We have not -- I hear your hypothesis about shorter programs being more attractive, and I think there are a lot of people who've said that. But we haven't really seen the associates in the certificate segment of the market pick up in a major way. Now Carrington is doing better, but we think they're sort of retaking our share within a fairly weak market. We do think that, that concept makes a lot of sense, and one of our strategy is to tap into that. So I think that's a long-term strategy, long-term trend of starting with a shorter program and then maybe moving up the ladder of learning. And internally, we call that vertical DeVry, so start at Carrington and then we have articulation agreements set to Chamberlain College of Nursing, so they may start with an associates and then move to the Bachelors of Nursing or start at Carrington and then move on to DeVry University. So we have teams working very hard on that, and we've seen some nice flow-through, if you will. And it gives -- what gives us confidence is that we've done it before. We have a very nice cadre, cohort of students who start at DeVry University with a bachelors and then move on to the masters degree level at Keller Graduate School of Management, and that's a pretty significant flow-through for us now. And it took a long time to get there, and we're very proud of that. So that's how I kind of think about that. And then in terms of participation rate, yes, about 2,000 students. So that's what percentage?

About 25%?

Yes. About 25%, Jerry, of the new were able to take -- were able to qualify and take advantage of -- remember, you had to qualify for the Career Catalyst Scholarship, test into it and so forth and some criteria to qualify. Thanks.

The next question we have comes from the location of Paul Ginocchio of Deutsche Bank.

Just two questions. On AUC when that new building opens in January, would we expect to see a bigger enrollment in that period, maybe higher than the sort of mid single digits? Or do you think you will grow that or building or extra class just slowly? And then second, just in Brazil, was it a regulatory restriction and what caused that, or what's the actual cause of the restriction?

Okay. So AUC, I think you should -- because we show that DMI in total, DeVry Medical International, and we think that a nice, responsible growth rate is in the low single digits for enrollment. And then revenue and then earnings growth, respectively, will be higher than that. There are just continue steady demand for medical education. So no, I wouldn't expect sort of a sudden an increase with the new building, but just part of a nice steady plan. With Brazil, the restrictions were a result of the periodic review that the Ministry of Education conducts. It affected some of our engineering programs. It also, I should note, affected many similar institutions, both private sector and traditional institutions. The good news is we've taken remediation steps, and we've received a positive report from the ministry. So now, we're sort of waiting simply for an administrative process to get the final approval and move forward, and we're working with the ministry and expect a positive outcome on that in the near future.

The next question we have comes from Jeff Volshteyn of JPMorgan. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: Daniel, can you comment on sort of maybe diversions and direction between the retention and persistence, or are they kind of moving in tandem with each other, currently and going forward?

I'm sorry, the difference between retention and persistence? How do you [indiscernible]? Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: That's right. Underlying retention and persistence, the way we can calculate it. In other words, either material change in the number of graduates that will be coming through the system or declining?

No. I don't see a bubble or a spike there, nothing sort of out of the ordinary that I'd be putting into the model. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: And as a follow-up, we haven't discussed it in a while, what's the general state of clinical spot availability for medical students and residency spots for your grads?

Sure. It's always an area that we pay a lot of attention to, and we have to be very, very careful and very diligent there, we do. In some specialty areas, there are some tightness. But in the end, we're able to provide the clinical education that our students need. And then our graduates then move on into the residency match. They did come down a little bit. There were some changes in the match system that had some impact. And we've got a plan in place, and our deans are working hard on that to help our graduates be better prepared for the match and compete with certain segments, in particular of the U.S. schools, as well as the AICPA schools, as well as the non-U.S. citizen international students. And we think we can -- our graduates can go toe-to-toe and compete with anybody.

Next, we have Peter Appert of Piper Jaffray.

Tim, you gave us some helpful comments on normalized margins or where the margins can go for the Business and Technology unit. I was wondering for the company overall, if you could talk about what you think reasonable expectations might be for margins over the next couple of years sort of a pace at which you could get to that level?

Sure. So for the organization overall, we'd like to say. Tim, you want to comment on that?

Sure. I think we've come down from an operating margin perspective from the teens, three [ph] currently is looking at high single digits. I think, really, it's a function of giving enrollment stability at DeVry University. And we're excited that when we get that, that really allows us to stabilize our results and allows the growth that we're seeing, and we're really encouraged about in our other parts of our organization to really drive our results. So I think really the open question is how and when we can get that stabilization at DeVry University, and then that really unleashes kind of the institution -- overall institution's operating leverage.

Well, so let me put words in your mouth then. So you basically said mid-teens operating margins, I think, for Business and Technology, which is essentially DeVry University, right?

That's right.

And so if the existing business stayed where it is currently, might that not imply mid- to high-teens margins for the enterprise overall?

Well, you could run the math. We don't provide the forward guidance, but we're excited about the prospects of even modest growth and what that does for us at DeVry University.

Got it. Okay. And then one follow-up on the Brazil situation, the restrictions. Does that have a significant impact on profitability on a near-term basis? And how quickly could you get back to enrollment growth there, do you think? And then just, sorry, one last thing on that, with sort of opportunity for further acquisitions, should we be anticipating something in the next 12 months, potentially?

Well, maybe I will take the last part and then -- we are continuing to look at acquisitions at DeVry Brasil. If you ask me specifically about the acquisition, you'll always get the same answer, which is we don't comment on potential acquisition. But in general, I can tell you that we have a good pipeline. We have strong resources in terms of our team that is out having those conversations, and that I really do feel good about the work that this team has done to put us in a position of being what I often call sort of the "acquirer of choice", and that we have sort of direct private conversations with owners of institutions there who are looking -- so maybe there's a generational transfer, that kind of thing, and having direct conversation then wouldn't have to go through an auction process and all of that disruption and sometimes, price implications. So the -- it's hard to put a number on it. But I can tell you, there's tangible value to be ascribed to the work that our team is putting there in that regard and their ability to drive value academically and economically through acquisitions in Brazil. We feel very, very good about on it. So the near-term margin growth outlook, Tim, can you...

Yes. So Peter, one of the nice things about DeVry Brasil, in addition to the growth, is that we've seen nice leverages as the institutions have grown from kind of the -- and by the way, they're very tax effective, but we've seen kind of low-teens operating margins grow to the mid-teens. We're in a pause period where what's really happening is at AREA1 is it's just slowing our organic growth. We're also making some investments to make sure we have the platform to grow again, but we think the short pause -- and by the way, one of the recent acquisitions was -- had a little lower margins, but we're really, again, excited about the growth. So I'd think of us in kind of a pause, a very well-ran organization as we digest these regulatory changes or issue, and then I think we can continue with modest growth in terms of both -- well, modest growth in terms of our operating margin there.

Next, we have Jeff Mueller of Baird. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: On DVU, Daniel, since all we really have externally is the starts number, and it's been bouncing around like crazy for a while now, could you just help us? How much of this improvement this quarter do you think is kind of catching some favorable variance? And then how much of it can you more specifically pinpoint to your turnaround plan? And I mean, things like you stepped up your marketing spend, how much can you attribute to better response rates after you hit the gas on marketing spend? How much of it seem to be driven by people calling about the scholarship? Just anyway you could help us out in figuring out how much is volatility, how much is end market and how much is your turnaround plan.

Well, I think that it's more internally driven right now. We really didn't see any particular change in the overall external market. And as you look across private sector and public sector and independent institutions who we are competing for similar student demographics, I think you'd find that to be the case. So it does -- the data does seem to indicate that the team executed very well on the plan, and that was the main driver of the September performance. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: And how important is the increased marketing spend in Q1 to that? And I guess, if it is important, why not continue it at that level?

Well, what we've done and will continue to do is spend on marketing and communications to tell the world about our wonderful institution, where we see opportunities to do that productively and with an economic, positive NPV, if you will. And we will discipline about that. We won't go beyond that. Certainly, that's not our intent to go beyond that. And I think some others have sort of maybe done that, and then they pull it back. We're a little bit more planful and consistent in that regard. So where we see those opportunities, we're going to go ahead and do that. We did plan, did a plan shift into the first quarter, and we think that was effective. We did execute on this call-to-action event, including the scholarship, but not limited to that, as I described earlier. It was much more than the scholarship. And that had a positive impact. And as we've analyzed the economics of it, it's a positive investment. It wasn't just sort of growth at any cost, if you will. So we're encouraged by that. At the same time, we want to make sure, like anyone, that you don't saturate things by doing this event every single time, and then it loses something in the process. So it's a balance, and we're looking at other call-to-action events for other points in the year as we speak. And we'll definitely keep you posted on that. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then DVU persistence, just based on the roadmap calculation, it looks like it's quite a bit lower this September than it's been in past Septembers. And it sounds like you never had a bubble or a spike in terms of graduates. And I thought you said persistence was trending up. Was there anything in terms of timing of ongoing starts or anything like that, that would've impacted that?

No. And we're kind of scratching our heads of how you got this. So maybe we -- offline, we could try to help set things straight on that.

Next, we have Tim Connor of William Blair.

As we look at Brazil, it seems like there's been a pretty unique set of circumstances that's created a very favorable environment for growth. Are there other countries that you think, internationally, that you think have similar set of circumstances, where regulation can be a tailwind or there's a real area in the market that's open for full profit investment?

Yes. Tim, that's a great question because you're right. Brazil is one of the most attractive markets, besides United States, for running private universities and graduate schools and professional schools. But it's taken a long time to get here. I mean, it was 3 years of investigation and analyzing and looking at potential entry vehicles, and then it's been another 3 or 4 years since then to get us to the position where we have the platform that we have today. I think it'd be quite difficult for others today who are trying to start to maybe replicate that. And then looking beyond that, there are other countries across Latin America, and there's some natural sort of synergies that you could think about why we would say that. And then you look to Asia where there's just tremendous growth for the long term, a need for education and increasing rates of college going, behavior and the countries that have -- that are welcoming to private sector participation as part of the solution to meeting education needs. So I'd say Latin America and strictly Southeast Asia.

And then in the healthcare field, you got a number of brands, and you've got a number of careers covered. Are there areas within healthcare that you feel like you need additional coverage or that you could add additional coverage in?

Yes, there are. And we are looking at broadening the participation in other graduates and bachelors level. But it's the number of graduate programs that looks interesting. So yes, there are definitely other opportunities within healthcare. [Audio Gap]

Comes from Paul Condra of BMO.

I just wanted to follow-up on the shutdown. You mentioned DeVry University impact, but did you see the same kind of impact at the other schools like Carrington and Chamberlain?

Yes, we did. We saw Chamberlain have an impact there, not so much at the pre-licensure level, but a little bit at the post-licensure level, some of the online programs there. And I would say it was mainly those 2 institutions, Chamberlain College of Nursing and DeVry University.

Okay. So maybe a little -- I don't know, a little noise from that then next quarter, I guess.

Yes. Unfortunately, I think that's going to be the case. We're working very, very hard to offset that. Like I said earlier, when Trace was asking, some reasons for -- some positive signs, but I've just learned from painful experience that once you have a little glitch like that, it can be hard to recover your momentum quickly within days. So it's a little bit of a nail-biter on forming that November class.

Okay. And then one follow-up. I wanted to know if you can talk a little about capacity at DeVry University. I imagine there's some empty seats there, and I just wonder how you're thinking about that over the next year, how you're going to use that space.

Sure, and if you want to add. I would just say that the main headline there is, you're right, there's a lot of capacity that means that there's a lot of opportunity for margin expansion as we fill that relatively fixed cost platform. So that's how we're thinking about it. And at the same time, where we think that there is enough of that, it's not going to be filled on a timely basis, we are taking action, and that's part of the real estate optimization activity that we've reported on and that'll continue.

So it's -- maybe the space availability is kind of centered in certain geographic areas, or is it kind of evenly distributed?

Yes, more evenly distributed. We have a number of opportunities within markets where we have multiple locations, where maybe as we have consolidated a couple of locations that are nearby. And we're still able to retain the vast majority of the students and service students in that metro. Those are some opportunities that we see.

Paul, just to add a couple of things. It's Tim. I would say that our capacity is less than 50% utilized. The challenge is that as we look at optimizing the real estate, we find that many of these locations are incrementally positive contributors, so we have really the dilemma of how do we support our students. And if we were to make changes or reduce locations, you end up having revenues go out the door at similar amounts to the savings. So I think it's something that we need to continue to work on, and there is no silver bullet here. But I think other than doing a good job of articulating our value proposition in getting enrollment and get the positive operating leverage back. So hopefully, that's helpful.

Well, this concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Daniel Hamburger for any closing remarks. Sir?

Okay. Thank you, Mike, and I'd like to thank everyone for your questions and remind everyone that our next quarterly results call is scheduled for February 4, when we will announce our fiscal 2014 second quarter results. And I just want to thank everyone for your continued support of DeVry education group. Have a great afternoon.

And we thank you, sir, and to the rest of the management team for your time. The conference call has now concluded. We thank you, all, for attending today's presentation. At this time, you may disconnect your lines. Thank you, and take care, everyone.