Covista Inc. (CVSA) Q2 2014 Earnings Report, Transcript and Summary

Good day, and welcome to the Second Quarter 2014 DeVry Education Group Results 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.

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 February 26. To access the replays, please refer to today's release for more information. With that, I'll turn the call over to Daniel.

Thanks, Joan, and thank you, all, very much for joining us today. The story for DeVry Education Group right now remains at 1/2 DeVry University, still struggling, while our other institutions are doing well and growing. We're operating in a challenging and uncertain environment in U.S. business and technology education. At the same time, we're investing in our growing institutions, particularly health care, professional and international education. Our long-term formula of quality plus diversification equals growth continues to help us and our focus on quality is driving solid student outcomes; and our diversification in higher-growth career fields, degree levels and geographies continues to position us for long-term growth. So let me turn to our segment highlights for the quarter and I'll begin with the Medical and Healthcare segment, where revenues and earnings grew nicely. At DeVry Medical International or DMI, total enrollment increased 5.6%. New student enrollment declined modestly. As we discussed previously, we had turnover in enrollment management and marketing position at Ross University School of Medicine, which has been addressed but it's taking time for the new team to improve operations in those areas. 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. At American University of the Caribbean School of Medicine, our new $30 million academic building opened in January. It features an advanced anatomy lab and simulation center, a large integrated clinical medical lab, a lecture hall and individual and group study spaces. But during the quarter, DMI's Medical Education Readiness Program, or MERP, completed its move from Freeport, Grand Bahamas to Miramar, Florida. MERP is a 1-semester program for applicants who benefit by extra preparation prior to medical school. The program is now co-located with our clinical site there. Not only is this a more efficient use of our real estate, the new location benefits these students academically, giving them an opportunity to interact with clinical students and faculty as part of their transition to medical school. Let me move on to Ross University School of Veterinary Medicine where we continue to make investments to support academic quality. Dr. Sean Callahan (sic) [Callanan] has joined us as Director of Postgraduate Programs. Degrees will be offered at the master's and Ph.D. levels, including zoonotic infectious diseases and conservation medicine. These new degree programs provide opportunities for students to gain advanced research experience that's relevant to important human and animal health issues in tropical and developing countries. Introduction of these new advanced degree opportunities aligns Ross Vet with the best international veterinary programs. At Chamberlain College of Nursing, we delivered strong enrollment growth this quarter, as the solid demand for nurses continues. We'd like to highlight how we're investing in Chamberlain's campus-based bachelor's programs. I'm happy to report that we successfully moved from preliminary approval to full approval at our first Houston location. In addition, the Texas Board of Nursing recently granted approval to open a second Houston area campus. Today, Chamberlain has 13 campuses with 3 new locations in the pipeline for fiscal 2015: Troy, Michigan; Las Vegas; and the second location in Houston. Further adding to our capacity, we completed the expansion of our Chicago campus this fiscal year and the build-out is underway at our Atlantic Campus. These projects will almost double the capacity of those 2 locations. On the post licensure side of Chamberlain, 2 of our recently launched graduate degree programs exceeded our expectations and those are family nurse practitioner and doctor of nursing practice. Our MSN program, which includes the family nurse practitioner, taught a record number of students last session. Chamberlain also exemplifies our commitment to academic quality. Chamberlain, Jacksonville professors, Sonia Maria Balevre and Park Balevre, were inducted into Great 100 Nurses of Florida by the Florida Nursing Association. Moving on to Carrington. We're making good progress on our turnaround plan with revenues growing 3% in the quarter. Part of the plan has been to bring the 2 colleges together. In early January, we announced the Carrington College California received conditional approval from its accreditor to add the campuses of Carrington College to its existing campus network. Just as a reminder, Carrington has been composed of 2 separate institutions. First, Carrington College California has 7 campuses and is regionally accredited by WASC Junior. The second institution, Carrington College, has 10 campuses and is nationally accredited through ACICS. Pending successful site visits and final approval by WASC, the result will be one regionally accredited institution with 17 campuses in 7 states. Academically, as one college, students will benefit from the unification of knowledge, experience and talents of the faculty and program directors at both institutions. Operationally, the combination will allow us to pool resources so Carrington can operate in a more efficient and effective manner. Once fully implemented, we estimate that we'll reduce expenses by $3 million to $4 million annually while improving the student experience. As the combination is completed, it's very important to note that quality continues to drive Carrington's turnaround plan and return to growth. In a most recent student satisfaction survey, Carrington's Net Promoter Score increased 6 percentage points from an already impressive level. At the same time, Carrington is doing well by doing good in its community. In December, Carrington students participated in the Central Arizona Dental Society Foundation's Mission of Mercy event, providing free basic care to 2,000 patients. We're confident in the future of Carrington, as we execute our turnaround plan and continue to move towards positive enrollment growth and positive economics. Next, the International and Professional Education segment. Let me remind you that within DeVry Brasil, we have 14 campuses across 6 institutions. At Facid, which was acquired in July and serves about 2,500 students in health care programs including a medical school, our integration has exceeded expectations. At Favip, I'm very pleased to report that just last week, we received official notice that the Ministry of Education has granted the institution Centro Universitário status. For those of you less familiar with the education system in Brazil, there are 3 categories of higher education institutions. First, faculdade, which is -- it's kind of a college and it's made up of approximately 2,000 smaller-sized institutions. There's also Centro Universitário, which is about 140 medium-sized institutions. And then there's universidade, university obviously, which is made up of about 200 larger institutions. This new status is a marker of quality and enables us to add programs and seats more quickly, including rolling out online programs. I'd like to congratulate the team who've worked hard for 7 years to realize this major accomplishment. At AREA1, please recall that last quarter, we described temporary enrollment restrictions in 3 programs and that we were confident we had a strong remediation plan in place. Well, we're happy to report that these restrictions were lifted in 2 of the 3 programs and that we expect the restrictions in the third program to be lifted soon. And finally in this segment, in December, we completed the divestiture of Advanced Academics to Connections Education, which is a part of Pearson. As part of the agreement, we formed a strategic partnership with Connections that establishes DeVry Group institutions as their preferred provider for postsecondary education, provides early college programs to their students and facilitates blended learning for Connections' students at our campuses. This transaction helps us tighten our focus right now and we're excited about the partnership with Pearson to help students cross the bridge from high school to college. Turning now to the Business, Technology and Management segment. One of the factors impacting demand at DeVry University, as well as higher education across the U.S., continues to be prospective students' lack of confidence in the economy and hesitancy to make the commitment to go to college. As a result, many institutions across the U.S. are experiencing declining enrollments and revenue. An analysis of fall enrollments by the Washington Post found that in Maryland, Virginia and the District, of the 80 institutions there, 50 of them have fewer students than they did a year ago. So as students today may be hesitating to enroll in college, we believe there may be pent-up demand building to be released as the economy improves. To improve our performance and to control what we can control, we continue to execute a turnaround plan at DeVry University. Let me update you on our progress. Our plan to increase enrollments include the strategic use of scholarships. In January, we announced our second call to action campaign of fiscal '14, providing a new Career Catalyst Scholarship of up to $20,000 for eligible students who are enrolling for the March session. This scholarship achieves 2 objectives: attracting new students and improving student persistence. We experienced good results from our first campaign in September. We believe this program, likewise, will help us attract students. And the scholarship provide students $5,000, $7,000 and then $8,000 as they earn a 4-year bachelor's degree in 3 years to encourage persistence. Our early read is that for students who receive the scholarship in September, their persistence was higher. You may be wondering why we aren't implementing the Career Catalyst campaign for every session. Well, our program for this fiscal year was to run one call-to-action event for September and one in March and then to assess the impact. And so far, we're pleased with the results. We'll continue to analyze what happens in March and we'll keep you posted. Our plan also includes sharpening DeVry University's value proposition, which is based, of course, on educational quality and is focused on career outcomes and exceptional student support. Core to this is providing our students with strong programs in high-growth fields. As we enter 2014, part of our strategy is an enhanced programmatic focus. This includes regularly assessing and adjusting our programs to better meet the needs of our students and employers. This may mean expanding our program offerings in some areas and decreasing programs in others. Even though our new student growth is negative, we're focused on our plan to turn that around. And here are some of the factors that give us confidence in our plan: the rate of decline is narrowing and we expect that to continue in the March class. Student satisfaction, as measured by Net Promoter Score, is up. We think this points to positive retention as well. Bad debt remains low and our career statistics are actually going up even in this tough job market. So the fundamental value that DeVry University students are receiving is solid and improving. Lastly, before I turn it over to Tim, I want to just mention that DeVry Education Group is gearing up for the Winter Olympics in Sochi, Russia in our role as the official -- as an official education partner of team USA. We're educating over 120 Olympic student athletes and 15 of them have qualified and are competing in these winter games. Maybe you've seen some of the events coverage in the New York Times or on the Today show. These students are amazing and they inspire us. We hope their stories inspire others who struggle with balancing school and work priorities. Hope that it inspires them to see that you can, indeed, accomplish both. And with that, I'd like to turn it over to Tim.

Thanks, Daniel. Good afternoon, everyone. Before we get to the financial results, I'd like to take a few moments and discuss recent enrollment numbers, which plays such a key role at our institutions. We are parts of the organization like Chamberlain, DeVry Medical International, DeVry Brasil and Becker that are growing. Total enrollments were up at these institutions and are driving solid revenue growth. We have 2 institutions, DeVry University and Carrington, that are executing turnaround plans. You'll also hear us refer to these 2 schools as institutions in transition. Here's a quick update on each. At Carrington, this year is all about focus and execution. New and total student enrollments are stabilizing but were down modestly this quarter because we made the decision to narrow our program focus. If you exclude the programs and teach-out, new student enrollments grew 8.7%. It's also important to note that even though Carrington is still in transition, we're doing a good job of executing the plan. So good, in fact, that the revenues grew this quarter. However, at our largest institution, DeVry University, we're continuing to struggle in this difficult environment. November enrollments at DeVry University were down sequentially and versus prior year. While we experience a more modest decline in the January session, new student enrollments were still below prior-year levels. For the upcoming March session, we're expecting to see a sequential improvement in new student enrollments. This is based on the early response to the Career Catalyst call to action, which is encouraging. However, the current environment continues to be challenging and total enrollments will be lower than last year. We've been working hard to align our costs with these enrollment levels but there's more to be done. We think about our cost-saving strategies around 3 overlapping layers. The first layer covers near-term items, focusing on our staffing models and variable cost elements. As you'll recall, we've been successful at reducing costs through staffing adjustments and by lowering variable costs in the near term. That's what's drove a lot of the initial savings as we adjusted our cost model to enrollment volumes. The middle area comprises items to take a little longer to work through, things like our real estate footprint. Year-to-date at Carrington, we've consolidated our Antioch and Emeryville locations; and we're currently in Teach-out at our Portland campus. At DeVry University, we've announced the teach-out at our Louisville campus and sold our Decatur, Georgia campus. And as Daniel mentioned earlier, we completed the relocation of DeVry Medical International's MERP program to Miramar from Freeport. We'll continue to look for opportunities to optimize our real estate footprint. The third layer, which takes longer to realize savings, focuses on process redesign and restructuring. These are longer-term initiatives, which not only reduce costs, but it can prove service quality and shift cost to a more variable model. Recent examples include centralizing areas within human resources and accounting to leverage scale efficiencies. Our work continues to centralize key parts of student finance and we have been working to streamline other operations at DeVry University. Increased programmatic focus there will allow us to further reduce program complexity like what we're doing at Carrington. Year-to-date, we've generated more than $35 million in cost savings at our institutions in transition. As a result of our continued focus on costs and lower-than-expected enrollments at DeVry University, we've increased the total cost savings target for our institutions in transition to $75 million and that's up from $60 million initially planned in FY '14. The way I think about it is that total cost and expenses for the institutions in transition were about $1.17 billion in FY '13. With this new higher goal, we now expect those costs to be at or below $1.1 billion in fiscal 2014. I'll now turn to our financial results. In the second quarter of fiscal 2014, revenues from continuing operations were $491 million. Year-to-date revenues totaled $942 million. Revenues at our growing institutions increased 16% to $214 million. The increase was offset by a 12% decrease to $277 million in revenues at our institutions in transition. We continue to reduce cost at our institutions in transition during the quarter. Total cost, excluding special items at these institutions, were $270 million, down 6% versus last year; and year-to-date total costs were down 6.7%. Total second quarter costs, excluding special items at our growing institutions, were $156 million, an increase of 17.7%. These costs reflect new programs and campuses and recent acquisitions in Brazil. We had 2 special items this quarter: first, we recorded a $4.7 million pretax charge for restructuring activities. This charge relates to real estate consolidations with Carrington, DeVry University and DeVry Medical International and workforce reductions occurring during the quarter. Second, we recorded a loss from discontinued operations related to Advanced Academics. Excluding the special charges, total operating costs from continuing operations for the quarter were $428 million, a slight increase compared to last year. For the 6 months, total costs totaled $859 million, again up slightly from last year. Investments in our growth institutions are running slightly higher than cost reductions achieved at our institutions in transition. We reported a net income of $48 million for the quarter and $41 million for the 6-month period. This result in earnings per share of $0.74 for the quarter and $0.63 year-to-date. Net income from continuing operations and before special items was $52 million for the quarter. Earnings per share from continuing operations and again, excluding special items, was $0.80 this quarter. Our effective income tax from continuing operations was 14.7% for the quarter and 15.1% year-to-date. As a reminder, we expect that our effective income tax rate from operations for fiscal 2014 will be in the 15% to 17% range. With that overview, let's now shift to our operating segment results. Starting with the Medical and Healthcare segment, revenue of $190 million was up 13.5% in the second quarter. Segment revenue is up more than 12% over the prior year in the first half. Excluding special items, income from the Medical and Healthcare segment in the quarter was $40 million, representing an increase of 42.6% from the prior year. During the first 6 months, segment income grew 24.5%, excluding special items. This is largely driven by maturing campuses at Chamberlain and the continuing narrowing of operating losses at Carrington. 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. And if all goes as planned, Carrington should return to positive operating income in the fourth quarter this fiscal year. Turning now to the International and Professional Education segment. Revenue of $61 million increased 16.6%. In the first half, segment revenue increased more than 17%. At Becker, revenue grew 5%; and at DeVry Brasil, revenue was up nearly 29% in the quarter. The increase at DeVry Brasil was primarily driven by the recent acquisition of Facid. We continue to look for acquisition opportunities in Brazil, while we invest in new programs and locations to grow organically. The segment's income of more than $16 million increased nearly 8% as compared with the prior year, reflecting the near-term lower margins for recently acquired institutions and the impact of organic expansions in Brazil. Finally, within the Business, Technology and Management segment, revenues were down 14% during the quarter and 16% year-to-date. This is a result of lower enrollments and lower undergraduate revenue per student, which was down about 1% in the second quarter. Lower revenue per student reflects the higher use of scholarships over the last several sessions. As expected, the Business and Technology and Management segment returned to profitability this quarter. Excluding special items, the segment generated an operating income of $9.9 million compared to $39 million operating income last year. Now looking at the third quarter, we expect all our institutions to grow revenue, except DeVry University. Given lower enrollment levels, we now expect operating income margin in the Business, Technology and Management segment will be in the low single digits for the full year. We expect operating costs to be up sequentially in the third quarter based on investments in our growth institutions to take advantage of their strong market position and fuel future growth. We also anticipate higher seasonal spending to support 2 session starts at DeVry University, Keller and Chamberlain in the third quarter versus just one in the second quarter. I'll now turn the call over to Pat to talk more about our balance sheet and financial position. Pat?

Well, thanks, Tim. Good afternoon, everyone. Our cash flow from operations for the first 6 months of fiscal year 2014 was $113 million. Our total cash balance increased to $262 million at December 31, 2013, as compared to $217 million last year. Now our bad debt rate continues to be one of the lowest among private sector colleges and universities. Year-to-date, bad debt as a percentage of revenue was 2.1%, reflecting the value proposition of our programs and our team's focus on student financial aid and the collections process. Our net accounts receivable balance was $118 million, down slightly from the prior year. We expect capital spending for the fiscal year to be in the $90 million to $100 million range, which is lower than our original expectations, as we continue to identify opportunities to reduce our capital spend. Capital spending for the first 6 months was $33 million, with 75% of that being deployed to our Medical and Healthcare and International institutions to drive future growth. Overall, our solid financial position and cash flow generation at the end of the first half of this fiscal year gives us the flexibility to reinvest in quality and growth in the second half and beyond. Now let me turn the call back over to Daniel.

Thanks, Pat. Several weeks ago, the White House convened a summit on access to education among low-income students. We fully support the President and the First Lady on their commitment to expand college opportunity for low-income students. The only way the U.S. can meet the President's 2020 college attainment goal is by giving students the tools, access and opportunity to pursue higher education. We know these students can succeed in college and the workplace. We see it everyday in our student and alumni. We'll continue to work with the administration to make sure that the regulatory framework is consistent with providing access to quality programs. Now while there's this tremendous need to educate more people, a recent report issued by the Education Policy Center at the University of Alabama found that budget constraints have led to enrollment caps at various public institutions in 19 states and there continues to be a need for education and, at the same time, the public sector faces constraints. All this reinforces the long-term thesis on career-oriented, private-sector education. In stepping back and thinking about the actions we're taking to improve DeVry Group's performance, it's really been transformational. Over the last couple of years, we've narrowed our focus and streamlined the organization, including divesting Advanced Academics as well as Stalla CFA Review; exiting DeVry University Canada; consolidating over a dozen campuses and administrative locations; and reducing our cost structure by $175 million over fiscal '13 and '14. At the same time, we've invested in growth opportunities, including acquiring AUC, ATC, Falcon Physician Reviews, Facid, Favip and FBV. Also launching our outsourced services business integrated education solutions; and at Chamberlain, developing new programs, such as the family nurse practitioner and the doctor of nursing practice; and also opening 5 campuses in the last 2 years. So I'm proud of the sense of urgency of our team and believe the achievements, such as these, set a positive tone of execution as we pursue our strategic plan in the second half of the year. We'll continue to focus on executing the turnaround plans at our institutions in transition while investing in the expansion of our health care, professional and international institutions. Our formula of quality plus diversification will distinguish DeVry Group and will drive our future growth. Lastly, just before we turn the call over to your questions, I'd like to congratulate Dr. Connie Curran on her appointment as Chair of our Board of Directors. Connie has made significant contributions to the board since joining in 2003. I look forward to working with her in her new role, as do the other members of the DeVry Group team. So now with that, we're eager to hear your thoughts and questions. Joan?

Great, Daniel. Mike, if you please give our participants instructions for asking a question.

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

I wanted to ask a couple of questions, if I could. The first was on the BTM margins, did those come in where you hope they would be? Can you sort of characterize your feelings about where that -- where the operating margins are there? I know that your ambition is to improve them from here, but I'm wondering if you hit your targets for the quarter as far as those were concerned.

Trace, it's Tim. We -- yes, the first half was at or above where we expected to be, both in terms of revenue and cost. We were disappointed with the last 2 sittings, the November and the January, so it put some pressure on our second half and that's why you see us adjusting our outlook and also upping our cost-reduction targets. And we're not done. We're continuing work there. But as you know, the fixed-cost model makes it hard to keep up with those adjustments, so it changes in enrollments.

Okay, fair enough. And then I'm wondering, Tim, if you can also help us think about the application of the scholarship going forward in revenue-per-student terms.

Yes, so we saw some -- about a 1% reduction in revenue per student in this current quarter and we think 1% to 2% is about what you should be thinking about as we look out for the rest of the year.

Okay, great. And then last question for you, Daniel. I know I'd asked this question before so I apologize, but can you help us think about how to -- how we should be thinking about Ross and the growth opportunity for Ross, overall? Are we at a place in the market now where we're kind of stable and we really shouldn't be thinking about it as a growth business? Or is that not right?

We think when you look at all the market factors, including the need for physicians, the Affordable Care Act, particularly with the primary care physicians and our 2 medical schools serving the U.S., do tend to graduate a disproportionately high share of primary care physicians, while also graduating in the specialties, as well, the rate of physicians retiring. There's a lot of factors and if you net it all out, our analysis leads us to believe that the long-term sustainable enrollment growth rate is in the low-single digits, with then revenues and earnings higher than that.

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

The Medical and Healthcare margins, excluding charges, were up nicely in the quarter on a year-over-year basis. Could you give us some color on that? And do you think that, that would continue? When I look at costs in that segment for the quarter, they were flat sequentially, even though revenue was up by $15 million, so I'm wondering if we're sort of at a steady run rate on cost or if that should begin to ramp up again.

Sure, Sara. This is Pat. Good question. As Tim noted in his remarks, the Medical and Healthcare margin was up, driven in part by the maturing of our Chamberlain campuses. So we're getting the benefit of those campuses that we've opened in the past, say, 3 to 4 years as those continue to grow. We're also getting very good growth within our Chicago market here, as well as a continued growth in our postsecondary programs, which are online and add nicely to the margin mix. As we look into the second half of the year and as we move the second quarter to the third quarter sequentially, we'll have 2 session starts at Chamberlain, so we'll have some higher costs there and then we'll start to see some cost increases at Chamberlain as we ramp up and anticipating opening our new campus locations in FY '15.

Right. And the other thing I would add is, of course, as we make progress on the Carrington turnaround plan, they're reducing their operating loss and that's a big contributor to that op as well.

So do you think that margins for Medical and Healthcare could be up for the year in fiscal '14?

Slightly up, but...

You can't see us shaking our head no, unfortunately.

Sorry, I just want to make sure I understood. So slightly up, is that fair?

No.

No, not slightly up. Okay, down. Okay. Got it. Okay. And then around new student starts for undergrad in the next term, you mentioned that they should be up sequentially. Do you have any confidence that they might actually be up year-over-year? Or are you just expecting the declines to narrow?

Yes, it's too soon to tell. When we did the Career Catalyst in September, you'll recall that we were up just barely, slightly positive. So that would certainly be a delightful outcome, it's just too soon to tell at this point. We do believe that it will improve over our January, which was down about 8%. So that's our current outlook and we'll keep our fingers crossed.

Great. And then just last question, how are you thinking about the potential for more aggressive campus shutdowns in the DeVry University segment, given current trends?

We're thinking -- we take a look at each of the campus locations and they contribute. The vast majority of them are positive contributors. So it really makes sense to continue. But we continue to take a look at that, and so that's -- to your question, that's how we evaluate it, campus by campus.

Next, we have Suzi Stein of Morgan Stanley.

I'm not sure if I missed this, but did you say what the organic growth was in Brazil? And also, how big were the programs that had operating constraints? Should we expect a big move in this next quarter?

Suzi, it's Pat. The revenue growth for the second quarter for DeVry Brasil was 29% and our acquisition of Facid, which would be the only acquisition that would be anniversarying or haven't anniversaried yet, added about a percentage point of revenue growth.

For the company.

For the company, yes. For, overall, DeVry, Inc.

Okay. And then how big were those programs that had constraints that were lifted?

The AREA1 programs -- well, I think it'd be hard to see it in the enterprise level here, but...

Yes, but one thought on that, we did have a negative new student growth there as a result of those programs and we haven't and won't announce the results for a couple of months. But based on where we are, we think it will be positive again. So we've got 2 out of 3 back online and so we're expecting to get back into positive growth there.

And then I didn't catch the details of what you're doing with Pearson. Can you just elaborate on that?

Sure. What we're doing is we've gotten together and so the operations of Advanced Academics now are with Pearson's Connections Education. And they, I think, are proving to be very good home for our colleagues and for the students in these schools that are being served. So that's the most important near-term priority. And then we've also reached a strategic alliance, whereby DeVry Group's postsecondary institutions are the sort of preferred provider of postsecondary education for the graduates of the Connections students as they graduated out of high school, as well as we have opportunities for early college program for their Connections high school students. And increasingly, they see opportunities for blended learning where they need to teach, not 100% online, but some on site and with our coast-to-coast network of campus facilities, then opportunity for better utilization of our campuses and great opportunity for solving their need for on-site or blended learning. So those are the 3 main areas of the alliance. We also -- we both have opportunities to help out with educating Olympic athletes at both the postsecondary but also there's -- especially some of the snowboarders and skiers and some of the other athletes who participate at the high school level, they need to go to high school online and we've got a solution for that, so working together with the -- with team USA is another opportunity. So a number of aspects of that strategic alliance with Pearson Connections Education.

And if I could just sneak in one more. Can you maybe comment on the FTC issue that was announced?

Yes. Basically, I can tell you that we only just recently received the request within the last couple of days. So our intent here was to inform everybody and be as transparent as we can. And beyond that, we certainly intend to comply with their request for information. Like I said, their observation is, I think, in life, not just in education industry but in other industries, seems to become -- becoming an increasingly common occurrence to get requests for information. So we'll certainly comply with that.

Next, we have a Paul Ginocchio of Deutsche Bank.

I see your ad spend was up 10% in the December quarter and you talked about seasonally higher spend because of more starts. Would that 10% number be a good thought for advertising the back half of the year? Or do you think that accelerates?

So we think that the fourth quarter will be somewhat -- I'm sorry, that the third quarter spend will be up slightly or in line with what we saw in the second quarter. In part -- well, driven in part to support the Career Catalyst program within DeVry University.

Great. And then just a follow-up on that FTC question, we did a quick Google search. We haven't seen the FTC involved in anything but maybe back in 1997, they were -- they looked into a school. But have you -- is - have you seen FTC involvement in anything besides this one?

This is the one that I'm aware of. This is the one that we're dealing with.

The next question we have comes from Corey Greendale of First Analysis.

I want to touch on the March DeVry University start one more time. And given that you're bringing the scholarship back and it's an easier year-ago comps, sort of all else equal, I would think you have a good chance for you to go positive there. So the fact that you're being cautious, can you just talk a little bit about the whole enrollment pipeline and maybe where you're seeing continued deterioration year-over-year, whether it's in terms of response rates to ads or the show rate, or where exactly do you think the weakness is?

A little bit in the high school. We did -- as part of the plan here, we are reallocating resources and that's part of their whole turnaround plan. And so we did reallocate resources in the high school program in some markets that had sort of a lower effectiveness there. So that's an area that you still -- you're going to have a year-over-year anniversary issue. So that's an example. I would say, overall, it's just incredibly choppy out there. I think that as you look sort of more medium term and certainly long term, the future, we think, brightens. We also note that the 2-year or career college in the 2-year and shorter areas seems to be doing a little bit better. And that's true in our case as you see the better results at Carrington College. That seems to be the case with some of the others who are out there reporting data on the career college segment enrollment. And historically, the career college segment has led to 4-year segment. So let's hope that history repeats itself in that regard.

And that actually leads right into what I was going to ask you next, which is given that and given what it appears gainful employment will look like and being sort of differentially biased against 4-year programs, does that lead you to want to change your programmatic mix and maybe emphasize 2-year programs or shorter programs going forward?

I'm not -- at this point, I would not say that. Our strategy has -- of diversification served us really well. It's one of the reasons that we like Carrington so much and what they do so well in that area, as well as the 2-year programs that we do have at DeVry University. So we think that the overall mix within the group is -- looks pretty good. And as we go forward, changes like that and the diversified position that we have, we think, is a strength that allows us to then maybe take advantage, if you will, of situations like that as they might develop. But we'll have to see how that develops.

Okay. And just one last quick one for Tim. I think you said you expect total operating expenses to be up sequentially in Q3. We have been modeling up like $1 million. Can you just give us a sense of how -- what the magnitude of that increase might be?

Sure. While our institutions in transition, Corey, will be down year-on-year, but they will up sequentially. And if you look across, we think -- well, as Pat mentioned, there was a couple of 2 starts versus one and that affects both DeVry University and Chamberlain and that's, order of magnitude, maybe $4 million to $5 million. But we're also and I think maybe from your models, is you're not picking up the spend where we're really investing pretty briskly in our growth institutions where we have good positions and good prospects. We think this is the right time to do that. So that's where I'd look in your models in terms of -- but it will be up significantly more than $1 million. Maybe you got to put 0 on that, Corey.

Tim Connor of William Blair. Timothy Connor - William Blair & Company L.L.C., Research Division: Trying to understand why you think Medical and Healthcare margins are going to be down this year, given what seemed like really strong segment quarter trends and then the potential for some consolidation savings at Carrington maybe later in the year.

Timo, it's Pat. In terms of the -- when we said down, we said down slightly sequentially. So if you're looking at the 21.1% that the segment generated in the second quarter, given what Tim had said about the 2 session starts and some continued investment there, partially offset by the narrowing of the Carrington loss. Relative to that, it'll be down but still pretty impressive in the second half of the year. Timothy Connor - William Blair & Company L.L.C., Research Division: Got it. So for the full year, though, the expectation is that, if current trends continue, Medical and Healthcare margin should be up year-over-year.

Yes. Timothy Connor - William Blair & Company L.L.C., Research Division: Okay. Got it. And same thing on Business, Technology and Management margins. It sounds like you're increasing your cost-cut target and seeing some better turns in new enrollment and sounds like persistence is getting better, as well, you're seeing sometimes there. Those all seem like good things for margins. I just wanted to understand the view and maybe the change in what you're thinking about there.

Yes. So in the BTM, we're still struggling with keeping costs tracked into the revenue, so we're seeing our revenues decline at about twice the rate that we're getting cost out. We're trying to be aggressive with that and stay on top of it. Certainly, stronger enrollments are very helpful in that regard. So to the extent that we have a solid Career Catalyst in March, it'll help. But we're looking at segment margins for that segment down from 9% a year ago to low-single digits. And that's really a function of just the negative leverage that we're experiencing here. But as we mentioned, we're working on these longer-term initiatives. Our -- the programmatic focus, we think, holds some promise. So we got to continue to be vigilant, but that's kind of our outlook based on the enrollments that we have, particularly the November and January classes, which roll through the rest of the year. Timothy Connor - William Blair & Company L.L.C., Research Division: Okay. Got it. And then final one. What would a more sustained use of scholarships in BTM do for average revenue per student in the long term? And then persistence, what kinds of opportunities are there to increase persistence that might balance out the top line impact? And just how do you view those 2 things together?

We'll take it in reverse order and I'll try on the -- to answer your question. On the persistence impact, our early results are encouraging in that the students who received the Career Catalyst Scholarship at DeVry University, both at the undergraduate and the graduate level at Keller Graduate School of Management, do appear to have higher rates of persistence than those who didn't receive the scholarship. And we're in the process of analyzing that lift. And we've got an analytics team, big data analytics, all of that, slicing and dicing it grad, undergrad, on-site, online, by program. And every cut shows an improvement in persistence. So it's quite encouraging. And in some cases, more of a lift. For example online, which is, again, an early read but intriguing to us. So that's sort of the persistence side of it in terms of -- do you guys want to add anything?

Sure, yes. So Timo, a couple of things to think about. One is, in our last call, I believe, we talked about our total DeVry Group scholarship program would be in the low $70 million range. We now think that's going to be in the high $70 million range. And so what we're trying to balance here is managing through some of the choppy environments. We've targeted these scholarships to do 2 things. We want to drive new student enrollments but, also, at the same time, drive persistence. So we've been working with adjusting the mix, moving scholarship money around, adding scholarship money. And as we said early, the Career Catalyst back in September did both those things and got us to a flat enrollment year-on-year. And so we'll see how it plays out here. But we think a combination of adjusting scholarship money and adding to the pot or the pool is the right thing to do, given the current environment. And so we talked about some pressure on our revenue per student at DeVry University undergrad for the second half.

Next we have Peter Appert of Piper Jaffray.

So I was hoping you might be able to provide us with some granularity in terms of the programmatic enrollment trends at DeVry University. I asked this in the context of trying to better understand if maybe certain components of the business actually have turned positive already and whether that we could read into that, that there are competitive issues that might represent more secular challenges in other parts.

Sure. There weren't major differences in program area to report. I would say technology was a little bit better than business, in general. Just to really get granular, I'll give you an example. Network communications was a stronger program. That makes sense. I know here in the Chicago area, just talking to employers personally, I can report they're reporting virtually no unemployment in technology field. They're really struggling to find programmers and network people and so forth. And boy, those -- that strength at the back end, if you will, historically, has found its way to the front end. It -- that cycle is just taking a little bit longer in this economic cycle than we've ever seen before. And we think it's because of the higher -- the longer duration of the high unemployment that we experienced and sort of general malaise that's out there, there's just sort of a -- it's taking a little bit longer for the prospective students to see that connection. And where they do see that connection, it does a little bit better, I think. And nursing would be a good example. The connection is clearer and we do a little bit better there. So that's our job and that's a big part of the turnaround plan and increased programmatic focus of doing that program by program and making sure that each one, the value proposition of that program, the components of the curriculum, the way it's packaged, the way we go to market, the way we describe it, the way we partner with employers by each program is optimized, is going to be part of the DeVry University strategy that you'll hear us talk about a little bit more as we move forward. So that's a little bit of what we're seeing, Peter.

And the scholarship programs are not as specific to program areas, correct?

Correct. Yes, that applies across all the programs, undergrad and grad, at DeVry University.

Got it. And can you remind me the mix between -- for DU between tech and business or however you break it up?

Let's see. We're roughly -- not far off half and half business and technology at the undergraduate level for DeVry University. It's surprising to a lot of people because they think of us as in the old days, but we've grown the business, accounting, marketing, programs like that to the point where DeVry University is about half business program. It's quite interesting.

And last thing. Do you -- in terms of, I guess, metrics investors who care about in terms of conversion rates or inquiry rates, you -- based on what you said earlier, I guess you're not seeing significant differences between those 2 programmatic areas?

Yes, I would say, overall, that within that pipeline of metrics, the conversion's up. We're happier with the conversion. We just need -- we would like to see more raw interest at the top of that funnel.

Across both. I was asking specifically about one -- tech versus business.

I think the inquiries are up a little bit more in the technology area, but the conversion's a little bit better on the business side. So when you get both to do this -- well, if we could take the best parts of both, then -- and that's what we plan to do, that's when you'll start to see better results.

Jeff Volshteyn of JPMorgan. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: I just wanted to clarify on the scholarships. Do they apply to full-time students and part-time students? And what is the tuition for full-time and part-time students, net of the scholarships, on average?

I'm not sure -- I don't know if I have the exact detail and -- yes, John, can follow up. It's on our website, of course. But it is -- the first part of your question, yes, it's for full-time students. And they do have to apply for the scholarship and tests at the standard level and so forth. There are some other stipulations that apply. And again, all the details, obviously, are disclosed in our website for everybody to see. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: And approximately, what percentage of the DeVry University students are full time?

I don't have a number for you at the top of my head. Let's...

Again, I can follow up.

Yes, we can certainly follow up. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: Okay. Just one more maintenance question. Bad debt expense in the quarter, what was it?

Year-to-date, 2.1%.

The next question we have comes from Jerry Herman of Stifel. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: I was hoping maybe to start with recycling an old question and that, in particular, is your thoughts on positioning on the new dialogue around gainful employment; and in particular, maybe how you think about that for Carrington and DeVry.

We, as you know, are waiting to see what the final rules look like and we can't comment on the impact that they might or might not have an us until they're final. What I can just say, generally, is we think that regulations in higher education are a good thing as long as they're the right regulations. And those would be, basically, one set of rules for all colleges and universities. And those rules would be based on 2 -- that would rest on 2 basic pillars: one is hold us accountable for the outcomes and the other is hold us accountable for best practices and professional practices. So the outcomes would be, are the students learning, graduating? Are they repaying their loans? Are they employed in their fields? Are good they going to grad school or -- and passing their license? And all those kinds of outcomes metrics. And then on the professional practices, I think all colleges should be held accountable for professional recruiting students, whether those are athletic students on scholarship or those are any kind of student, that there's professional recruiting practices, marketing, full disclosure, robust disclosure to students, those kinds of things. And if those rules are applied to all colleges and universities, I think we'd have a very strong accountability framework in higher education that we and I'm sure many others would sign up to. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Daniel, with regard to Camp Carrington and the rationalization of programs there, was that at all related to gainful employment? And also sort of separate but related, as I recall, once upon a time, that business generated whatever $20 million in operating income and, at the trough, it maybe lost $30 million. Can you guys kind of frame where are on that continuum, if you will, in 2014?

Sure. And I would say that the programmatic rationalization was not driven by gainful employment. Certainly, we're mindful of those kinds of consideration. As we always have been. We have always thought about our programs at DeVry University or Carrington, or the other institutions for that matter, in the United States and in Brazil. What is the outcome that the students are getting? And what is their return on educational investment? We've always had that definition of gainful employment. But the main driver of the programmatic strategy at Carrington has been to tighten the focus and do one thing really, really well, which is the starting point for careers in health care. So the vast majority of the programs are focused on health care. There are still a few other programs, legacy programs, not in health care, but the vast majority now are there. So that was really the driver. And do you want to provide a little color, Pat, on the journey?

Sure. The journey, Jerry -- so for Carrington, last fiscal year FY 2013 on a fully loaded basis, that institution lost about $25 million of operating income. For FY '14 from a full year perspective, we expect to cut that in half. But as we noted in our comments on the call, as we exit this fiscal year, so the fourth quarter, we would expect that institution to return to profitability.

The next question we have comes from Jeff Silber of BMO Capital Markets.

I know it's late. I'll just ask a quick one. Can you just go over in terms of the calendar for the third quarter and fourth quarter, are there any major difference in starts when we look at it on a year-over-year basis across your schools?

Let's see. For the third quarter, DeVry University and Chamberlain College of Nursing, we will have 2 starts for our on-site pre-bachelor's program at Chamberlain and 2 starts for both DVU, obviously, January and March. And in the fourth quarter, there'll just be one start in May. So from a year-over-year or -- year-over-year, they'll be the same but sequentially, they will be different.

Great. I was just wondering if March maybe had dovetailed into the fourth quarter, but I guess it doesn't?

No.

Next question is Jeff Meuler of Baird. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: On the Medical and Healthcare business, there was kind of a long-term, multiyear trend of margin contraction. I'm sure there was a lot of going on there with Carrington losses that you guys covered but also probably mix shift and investments in Chamberlain. In total, it seems like we've kind of hit the inflection point over the last 1.5 years. I was wondering if you guys could talk about the longer-term, multiyear margin outlook for that segment.

So, yes, Jeff, we certainly think that we've hit the inflection point in FY '14. We'd expect the operating margins for that segment to increase over the prior year. Going forward, we will have the benefit of Chamberlain campuses as they continue into maturity. But we also, there will be opening -- continue to open Chamberlain campuses and we may increase that rate of growth in the outer years, which could dampen that a little bit. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then with Chamberlain, can you just talk about the strategic importance of the ground campus? And I ask that from the standpoint that the online growth on the business has been terrific and requires a fairly low capital outlay, high returns on capital. But just wondering how tied together the online-only growth is to the growing campuses.

Yes, it's really insightful question, really, Jeff, because we believe that they're tied together and it's a real advantage. For the nursing school in the community, among nurses who are looking to, at the post-licensure side, add a credential, whether that's an RN to BSN; so again, they're an RN but they want to get to BSN or move on to the master's or doctoral level. Many of those nurses are interested in going to a nursing school that is -- and I'll quote, unquote, "a real school." And I'll say that because I've actually heard people say that in focus groups. And what do they mean by "real school"? Well, you have a pre-licensure program, you -- you're actually contributing to the professional with that -- profession at that level as well. So we think it helps us. We also think that our research does show that we get more online student enrollments in markets where we have an on-site campus. It helps to build awareness and brand and reputation. So those are a couple of reasons and there are others that we believe having both is a strategic advantage in that as we build out the network here over the next few years, for example, here in Chicago now having 3 campus locations and strong clinical network and so forth, that it really forms a competitive advantage for us relative to some new entrant trying to come in. So thank you for that question. I could talk about Chamberlain all day.

Well, great. Daniel, I'd like to ask you to make your closing comments.

Do we have any other questions in the queue?

Nope.

You sure? Okay. Want to make sure we got everybody. Great. And my closing comment is an important one because it's a big thank you. Thank you to everyone for your questions and for your continued support of DeVry Education Group. Our next quarterly results call is scheduled for April 24. We'll be announcing our fiscal 2014 third quarter results. Thanks, again, everyone. Have a great evening.

And we thank you, sir, and to the rest of the management team for your time today. We thank you, all, for attending today's conference call. At this time, you may disconnect your lines. Thank you, and have a great day.