Covista Inc. (CVSA) Q2 2015 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the fiscal 2015 Second Quarter DeVry Education Group Results Conference Call. [Operator Instructions] Please also note today's event is being recorded. I would now like to turn the conference call over to Ms. Joan Walter, Senior Director of Investor Relations. Ma'am, please go ahead.

Thank you, Jamie, and good afternoon, everyone. With me today from DeVry Education Group leadership team are Daniel Hamburger, President and Chief Executive Officer; Tim Wiggins, our Chief Financial Officer; and Pat Unzicker, our Chief Accounting Officer. I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial conditions of DeVry Education Group that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied. These factors are discussed under risk factors in our fiscal 2015 second quarter 10-Q and our fiscal 2014 10-K, both filed with the SEC and available on our website at www.devryeducationgroup.com. DeVry Group disclaims any obligation to update any forward-looking statements made during this call. Additionally, during the call, we may refer to non-GAAP financial measures, which are intended to supplement, but not substitute, for our most directly comparable GAAP measures. Our press release, which contains the financial and other quantitative information to be discussed today, as well as a reconciliation of non-GAAP to GAAP measures, is also available on our website. Telephone and webcast replays of today's call are available until February 27. To access the replays, please refer to today's release for the information. And with that, I'll turn the call over to Daniel.

Thanks, Joan, and thank you all very much for joining us today. Before I review our second quarter results, I'd like to pay a tribute to Dr. Connie Curran, our board chair who passed away in November. Connie joined our board in 2003 and became board chair in 2013, succeeding Harold Shapiro. Her vision and experience in board governance was a tremendous asset to DeVry Group. And what she contributed to the growth and success for our organization will continue to benefit us for many years to come. I'd also like to welcome Chris Begley as our new board chair. Chris has a passion for education, and his tremendous business and board experience will continue to guide us. While challenges remain at DeVry University, DeVry Group continued to see growth in new students during the second quarter. As we expected, we saw revenue growth at all our institutions except DeVry University and Becker Professional Education. We announced 2 more acquisitions in Brazil. And we also made progress on our 2 overarching strategic objectives. As a reminder, those are turnaround and transform DeVry University; and secondly, to continue our growth via diversification. Let me provide you an update on our progress toward these 2 objectives. At DeVry University, November and January results were disappointing. We had the right plan and the right people executing the plan, and the team continues to make progress on our goal of turning around and transforming DeVry University. As we look toward the March class, we expect an improvement in enrollment compared to January. The turnaround plan starts with our enhanced programmatic focus. Students are attracted to institutions with differentiated programs supported by a strong university brand. Over the years, we've built a strong and well-recognized brand for DeVry University. Now we're focused on managing much more at the program level, ensuring each program is designed to best meet the needs of its students and employers and that we better communicate the value proposition of each program at the local market level. We've now built the teams to support our programmatic focus across 3 areas: business, technology and emerging programs. Let me share a couple of examples that illustrate what we're doing here to stabilize enrollments and to compete more effectively. The first example is in accounting. 75% of CPAs are approaching retirement in the next 5 years. So that's a large opportunity that we're well positioned to help our students take advantage of, as DeVry University is one of the largest universities with students studying accounting and has a terrific curriculum including a partnership with Becker's CPA review. We've now embedded Becker content and its special teaching methodology directly inside our DeVry University undergraduate accounting courses. And we're calling this, Becker Built In. We believe leveraging Becker's strong reputation in the accounting world enhances our value proposition. Our emerging programs vertical includes our health sciences, media arts and technology, and liberal arts and sciences, and represents just over 20% of total enrollment. Our programmatic team found that there's expected to be a shortage of 50,000 jobs in the medical records and health information fields in the next 10 years. This insight led us to develop our first undergraduate certificate in medical billing and coding. This program provide students with a lower cost pathway to begin their education at the certificate level and proceed to associate and bachelor levels over time. Our programmatic focus is also helping our speed to market. The team conceived, developed and brought this program to market in just 4 months. Let me tell you a story that illustrates our confidence in the value proposition of DeVry University's programs. A friend of my son is a recent graduate with a bachelor's degree who is a very bright and motivated student and completed his 4-year degree in just 3 years. Upon graduation, he had not 1 but 3 job offers. He ultimately chose to work for 1 of the big 4 accounting firms in information security at a starting salary of more than $85,000. Historically, we found that this kind of strength at the back end works its way to demand at the front end. And the second part of DeVry University's turnaround plan is reducing our cost structure while striving to maintain and even enhance our service to students. On last quarter's call, we announced an increase in our value creation goal from $70 million to $90 million as we align our cost structure to enrollment levels at DeVry University. One example of how we're approaching this area is our continued adoption of eBook students. This provides value and savings for our students when compared to purchasing traditional textbooks while growing revenue. And this is why we use the term value creation. Reducing costs, enhancing revenue, improving service and value to students are all elements of our value creation process. I'm seeing Rob Paul and his leadership team at DeVry University operate with a strong sense of urgency. Our programmatic teams under our new Chief Marketing Officer, Melissa Esbenshade are working hard to stabilize our enrollment and to compete more effectively. This is the team that led the turnaround at Carrington College and I'm confident they'll do it again at DeVry University. We look forward to providing more detailed update on the turnaround and transformation plan next quarter. DeVry Group's second overarching strategic objective is to continue our growth by diversification in our health care, international and professional institutions. At Chamberlain College of Nursing, we're continuing to expand the number of campuses. This year, we'll add campuses in Houston, Las Vegas and the Detroit area, and we'll co-locate with DeVry University in North Brunswick, New Jersey in May. This will bring us to 4 new campuses for the year and 17 in total. We continue to work on a pipeline of potential markets across the country. Chamberlain also continues to exemplify our commitment to academic quality. During the quarter, the Commission on Collegiate Nursing Education granted accreditations to 2 of our programs, our Bachelor of Science in Nursing degree, the BSN, was reaccredited for 10 years. And our Doctor of Nursing Practice degree received its first programmatic CCNE accreditation, that was for 5 years. As our featured institution this quarter, Tim and I would like to spend a few minutes focusing on Chamberlain, its strong value proposition and the bright future for nursing education. According to the Bureau of Labor Statistics, registered nursing is among the top occupations in terms of job growth. And it's projected that there will be 1 million additional nurses needed by 2022. So this is a sizable market for years to come. Here's the way we think about Chamberlain. We have a campus-based, pre-licensure and then the online post-licensure programs. On the pre-licensure side, we have 16 campuses that we expect to grow to nearly 30 by the end of the decade. We offer a 4-year degree that can be completed in 3 years, which is a tremendous value for students. We have strong clinical networks, which have competitive advantage and an indicator quality. Now on the post-licensure side, programs include the RN to BSN; the Master of Science in Nursing, or MSN; the Family Nurse Practitioner, or FNP; and then the Doctor of Nursing Practice, or DNP. These innovative programs are meeting the demand for nurses who need to obtain these credentials to keep their current jobs or to advance their careers. The one thing you might be thinking about in our RN to BSN program is how we have successfully sustained our growth in this highly competitive market. Well we believe this is due to our superior value proposition, strong brand reputation and our strong relationships with health care organizations. End market research shows that 60% of all new RNs have an associate degree or less, so we believe there will be -- continue to be a great number of associate level nurses, many of whom will need to go back to complete their BSN. And lastly, the real differentiator for Chamberlain is what we call Chamberlain Care. This is the care and support we give our students to help them achieve their goals and reach their dreams. And that's both the hardware, if you will, of service excellence, the processes, the metrics, technology. And also the software, which is fostering a deep, palpable culture of care and support and service. Students and colleagues tell us all the time that they were attracted to Chamberlain and remain here because of this culture of Chamberlain Care, and it's working. In 2014 alone, Chamberlain graduated nearly 10,000 nursing professionals, making us one of the largest producers of nurses in the U.S. Let me move on to DeVry Medical International. We were disappointed by the new enrollments in the January class. When we spoke to you last, we believe January was going to be better than the September class but we didn't achieve this goal. However, we believe the demand for medical education remains strong. Let me comment on some of the actions that we're taking to improve our new student enrollments. First, we're increasing the number of inquiries, the top of the funnel, if you will. We're starting to see better results here refilling the pipeline of inquiries. Second, we need to increase the number of qualified applicants because they weren't as many of those applicants as we wanted. Third, we're making organizational changes to provide more focus and support to each of the medical schools. And then fourth, we're enhancing our scholarship initiatives aimed at attracting and enrolling more students. We think we have a good plan and can support our long-term target of low single-digit enrollment growth. Then at the Carrington College, the consolidation under 1 institution is progressing well. We're seeing positive signs in markets such as Portland and San Jose, with several competitive colleges shut down and we were able to help those students to finish their programs. Carrington is growing, and we think that says a lot about our programs, value proposition and execution. We believe this segment offers good prospects for long-term growth and we continue to make selective investments. In San Jose, we're in the process of moving to a new 50,000 square foot location. The new location will have new equipment and learning facilities offering our students a great education. Our diversification strategy is also paying off at our International and Professional Education segment. During the quarter, Becker Professional Education launched a certified management accountant exam review course in India, through our relationship with our partner, EduPristine. We also announced a new partnership with the American Medical Student Association to help prepare medical students for success on the boards. Moving to DeVry Brasil. We announced 2 acquisitions during the quarter. First is Faculdade Ideal or Faci, which is a little easier to say, which we completed in January. It's located in the city of Belém, in the state of Pará in northern Brazil. Faci serves about 2,500 students and offers undergraduate programs in high-demand career fields such as law, education, accounting and engineering. Belém is an attractive market with a strong need for quality education. We've had our eye on the city for some time, and we're pleased we could bring Faci into our group of institutions. Second is Damásio Educacional. Damásio is a leader in bar exam test preparation with a network of approximately 220 learning centers and distant learning throughout Brazil. Damásio also operates a highly regarded law school with campuses in São Paulo and Rio de Janeiro. Our first presence in Southeast Brazil. It has a 44-year history in Brazil and serves more than 50,000 students. And we've included a map in today's release that shows our current footprint in Brazil. Strategically, this acquisition meets both of our top 2 priorities for acquisitions, namely diversifying globally and in professional education. Test preparation is a market we know well given our long experience with Becker. Note also that most of Damasio's revenue is in test preparation. So Damásio helps us diversify from government funding sources. And many of you may be wondering about the PS student loan program. The government has stated that it's supportive of this program, which is important to helping achieve the national goal for college graduates. But the country is having to make fiscal reductions across the board, and the education budget is no exception. So there will be changes that reduce the PS program such as only allowing students scoring at a certain level on the national college assessment exam to be eligible for PS. Other changes could include extending the payment period from the government to the colleges. We believe that the changes will likely increase our working capital but will have a relatively small impact on our enrollment. This is because our institutions are positioned at a high enough level that most of our students have qualifying scores on that college assessment exam. It's interesting, by almost every measure, academic results, enrollment results, student satisfaction, colleague engagement, we're on track to have our best year ever at DeVry Brasil. So to summarize our second strategic objective, our diversification in higher growth career fields, degree levels and geographies continues to position us for long-term growth. Let me now turn the call over to Tim and Patrick to review the financials and enrollment results.

Thanks, Daniel. Good afternoon, everyone. I'll start with the overall financial results and go through our reporting segments. Revenue from continuing operations declined 1.3% year-over-year for the quarter while increasing 0.5% for the first 6 months of the year. Strong growth at Chamberlain and DeVry Brasil mitigated the challenging environment at DeVry University. Given the challenges at DeVry University, we continued our cost reduction efforts during the quarter, resulting in the recording of a $10.2 million pretax restructuring charge related to real estate optimization. Excluding special items, total cost from continuing operations decreased 0.5% for the quarter and 1% for the first 6-month period reflecting these ongoing reduction initiatives. Offsetting our cost reduction initiatives this quarter were investments to support our growth. We reported net income of $42.4 million for the quarter and $62.9 million for the 6-month period, resulting in earnings per share of $0.65 and $0.96, respectively. Earnings per share from continuing operations, and excluding special items, were $0.75 for the quarter. Our effective tax rate was 12.5% for the quarter. We expect that our effective income tax rate for the year will be in the 14% to 15% range. With that overview, let's now shift to our operating segment results. Starting with the Medical and Healthcare segment, revenue grew 12% during the quarter and nearly 15% for the 6 months. All institutions in the segment grew revenue this quarter, with the strongest growth coming from Chamberlain which was up 32% for the 6-month period. Segment costs grew 16% in the quarter and 14% for the 6-month period given investments to support future growth and a larger share of home office costs that support our medical and health care institutions. As a result, operating income, excluding special items, for the Medical and Healthcare segment in the quarter decreased 3% but increased 19% for the 6-month period. At DeVry Medical International, new students in the January semester declined 3.8% and total students declined 7.9% for the reasons Daniel discussed. Chamberlain new student enrollment grew 9.5% in November and 5.7% in January over prior year periods. Total students grew 32.3% in November and 27% -- 27.1%, I'm sorry, in January. These increases reflect demand for our pre-licensure BSN and post-licensure RN to BSN programs. These increases were partially offset by a year-over-year decrease in our FNP program where we reached our clinical capacity much earlier than planned, staging enrollments to ensure a high-quality experience for our students while we work hard to increase clinical capacity. These enrollment results are contributing to another year of strong revenue growth for Chamberlain. We expect to end the year with more than $360 million of revenue, up about 25% and with operating margins close to the overall segment average. Adding on to Daniel's discussion of Chamberlain, I'd like to give you some additional context on the economics of opening new Chamberlain campuses and provide a framework for their growth going forward. As you know, we offer both pre-licensure and post-licensure programs at Chamberlain. About 45% of the revenue is generated from our campus-based pre-licensure programs with the balance, 55%, being generated from our post-licensure or online programs. The nature of our pre-licensure programs require us to make significant investments up front, typically about $4 million, as we construct the facility, obtain the patient simulators and other classroom and lab equipment, hire professors and staff, all while we await approval from the various state and accrediting bodies. It's a process, on average, takes about 4 years beginning with the preenrollment period, obtaining approvals and enrolling students. This is typically 1.5 years of preenrollment and then 2.5 years to get to breakeven once we actually open. During that time, we're underwriting about $4 million of operating losses until that campus reaches breakeven. Today, of our 16 campuses, we have 5 campuses that are in this preenrollment stage or have been opened less than 2.5 years. Over time, we expect that our pre-licensure programs will outpace the growth of our post-licensure programs, putting pressure on operating margins but increasing operating income dollars. Even though our post-licensure programs are less capital-intensive, there are bigger barriers to competition for campus-based programs, and we like that positioning. Moving to Carrington College. Carrington was profitable in the quarter at the institutional level for the third consecutive quarter. New students in the period increased 14.4% from the prior year driven by demand for medical and veterinary programs and a change in the timing of program starts from the first quarter into the second. Total students increased 1.2%. With additional help from effective expense management, our economics at Carrington continue to improve. Turning to the International and Professional Education segment. Revenue for the segment decreased 0.3% during the quarter as a result of anticipated revenue declines at Becker, but had solid growth of nearly 9% for the 6-month period. As Daniel stated, DeVry Brasil's having its best year ever. Revenue year-to-date has grown 23%. New and total enrollments are at record levels. At the institutional level, we continue to see solid organic growth. The integration of FMF is proceeding well and we've commenced integration of Faci and Damásio. At Becker, revenue declined 26% during the quarter. The decrease was primarily the result of a shift of about $4 million in revenue into the first quarter when we launched Becker One. Becker is also impacted by a continued softness in the number of CPA exam candidates. The segment's operating income decreased during the quarter, also driven by lower Becker revenue. And finally, within the Business, Technology and Management segment, revenue was down 12% during the quarter and year-to-date as a result of lower enrollments. Excluding special items, the segment generated operating income of $11.1 million for the quarter, up nearly 12% over last year and operating income of $11.2 million for the 6-month period. A key operational goal continues to be maintaining positive economics in the segment, which means positive segment margin and cash flow. During the quarter, we continue to focus on optimizing real estate footprint, consolidating 9 in-market campus locations. We'll meet and likely exceed our cost savings goal of $90 million for the year. Looking ahead to the third quarter, we expect revenue will be relatively flat versus prior year as anticipated declines at DeVry University will offset revenue growth at our other institutions. We anticipate that operating costs will increase about 4.5% sequentially. About 1/3 of the increase will be driven by campus expansion at Chamberlain, about 1/3 is related to recent acquisitions in Brazil and about 1/3 driven primarily by an increase in DeVry University advertising expense, all to support future revenue growth. I'll now turn the call over to Pat to talk more about our balance sheet and financial position. Pat?

Think, Tim. Good afternoon, everyone. Our liquidity and financial position remain solid and differentiates DeVry Group from others in private sector education in the U.S. Cash flow from operations for the 6-month period was $92 million. Our cash and cash equivalents were $380 million as of December 31, an increase of $118 million over last year's cash balance. Our net accounts receivable balance was $89 million, down 24% from the prior year as a result of lower revenue at DeVry University and increases in reserves. Year-to-date, bad debt as a percentage of revenue was 3.2%. DeVry Group continues to be an efficient user of our shareholders' capital. We take a balanced approach to capital allocation, with our main priority of maintaining academic quality through investments in our core operations. Our other capital allocation priorities include investing in new programs and new campuses where there is the greatest demand. A great example is the addition of Chamberlain campuses this quarter where we're investing in growth, where we have a proven track record of generating solid returns. In addition, we will continue to make strategic acquisitions. We recently committed approximately $107 million for the acquisition of Faci and Damásio. Our final priority is share repurchases and dividends, which amounted to $23 million for the first 6 months of the fiscal year. Capital expenditures for the first 6 months were $43 million. For the year, we expect capital spending to be in the range of $95 million to $100 million, with approximately 80% being deployed to our Medical and Healthcare and international institutions as we invest in new programs, locations and infrastructure. I'd like to turn the call back over to Daniel.

Thanks, Pat. I'd like to take a moment to address the President's recent proposal on community colleges. First, we applaud solutions to address our nation's workforce needs, and more students going to community colleges can be a good thing for our institutions. Many community colleges' graduates seek a 4-year degree, and we have articulation agreements with many of the largest community college systems across the country. These students tell us they're looking for the kind of care and support to small classes, individual attention and career services that our institutions are known for. So whatever the outcome of this proposal, we'll continue to partner with community colleges, working together to meet the country's workforce needs. And before we open the call to your questions, I'd just like to sum up by saying that we are committed to our long-term vision of becoming the leading global provider of career-oriented educational services. While not satisfied with where we are, I do see progress in turning around and transforming DeVry University, with the team working incredibly hard to stabilize enrollments and to position DeVry University to compete more effectively in the long term. We're also focused on investing in the expansion of our health care, professional and international institutions given our strong cash flow and financial position. So with that, we're eager to hear your thoughts and questions. Joan?

Great, Daniel. I'd like to ask Jamie if you could please give to our callers the instructions on how to ask questions.

[Operator Instructions] And our first question comes from Nick Nikitas from Baird. Nick Nikitas - Robert W. Baird & Co. Incorporated, Research Division: Just looking at Chamberlain and the growth deceleration over the past 2 start periods. Can you just talk more about the competitive dynamics that you're seeing across that industry? And also, just any differences in maybe the trends between online versus on-ground growth?

Sure. Thanks, Nick. And one of the things to note is that the -- in the last couple of years, when you see larger percent growth numbers -- of course, first of all, you have a lower percent and the law of large numbers goes along. I think we all understand that. But the other thing is some of those numbers were driven by a couple of new programs that were introduced, the DNP and the FNP that we talked about. And so those won't recur, and that gives you those big percentage growths. Further, as Tim mentioned, we put a self-imposed restriction on the number of new enrollments in the FNP program just to make sure that we're keeping up the very high-quality experience that we're providing for our students. And that was mainly because we just had so much more demand than we had anticipated that we reached our clinical capacity a little bit earlier than we planned. So that's a little bit about what we're seeing there. In terms -- in the overall market that you asked about, the first part of your question, we talked about the size and growth of the overall nursing profession. Interestingly, the Institute of Medicine has called for an increased number of nurses with advanced degrees. They've called for 80% to have a bachelor's or higher by 2020. And so what you see is with an aging population, improvements in medical technology expand the treatment that nurses can provide to patients, the Affordable Care Act expanding power given to nurses with advanced degrees, all of those factors kind of lead to a market growth. And in particular, the associate market continues to grow and that bodes well for Chamberlain because many of them are going to have to go on for a bachelor's degree later. And a really sweet spot for us is the RN to BSN program. So that's a little bit of color on what we're seeing in the nursing area. I hope that covered what you're looking for.

I'd just add one thing, Nick, that as I mentioned, we're seeing significant revenue growth for Chamberlain this year. Second largest institution in our portfolio. As we look into 2016, we expect to see significant growth again in the mid- to high teens. So I think as Daniel mentioned, and we've been I think pretty straightforward to say, look, we knew the growth rate would decelerate just on the rule of high numbers. But when you think about kind of the momentum that the institutions have and the -- we expect that the FNP situation will return to growth by the end of next year. And then when you think about the doubling essentially of the campus footprint, we think there's a lot of room here to create additional growth and support the need for various kinds of nursing degrees in the market. Nick Nikitas - Robert W. Baird & Co. Incorporated, Research Division: That's helpful. And just one more. Tim, just looking at the margins for Medical and Healthcare. Year-over-year, you saw a little bit of a downtick in Q2. Looking at the back half and with the growth of the new campuses, would you expect that to be able to remain flat on a year-over-year basis or should we see some contraction?

Well, there are couple of things going on there. One is, is that the Medical and Healthcare segment grows as a larger percent of the institution, they're taking a bigger load of the home office cost. And so that's certainly one of the impacts. We've tried to ask the institutions not to grow their expenses at a rate greater than their revenue growth. But sometimes, we'll get some opportunities like particularly in this second quarter, we had a lot of start-up costs with these new campuses at Chamberlain. I think in terms of the overall margin for the sector, I think we're in the right ZIP code. So I think it's down a little bit partly on this additional load, but I think this is something that we'll be in that same ZIP code for the rest of the year.

Our next question comes from Sara Gubins from Bank of America Merrill Lynch.

Could you talk about what undergraduate revenue per student did in the quarter? And are you still expecting 1% to 2% declines for the fiscal year?

So DeVry University undergraduate revenue per student was up about 1.5% during the quarter, largely due to little lower utilization on the scholarships than what we had anticipated as opposed to the last time that we spoke. For the balance of the year, revenue per student will likely be flat.

It will be flat for the balance of the year so it will end up being up for the full year?

Could be, yes.

Okay. And are you doing more to try to promote the scholarship or is it less of a priority?

No, we're very actively promoting the scholarships. As we saw -- and with our current campaign on the degree-completer, our degree-completer scholarship program. And again, our scholarships were designed to promote new student enrollments as well as to help students persist and pursue that educational goal. And we'll continue to use that with that 2-pronged approach.

Great. And then, Daniel, you mentioned as you looked towards the March class for undergrad that you expect an improvement in new student enrollments. Do you have any indications based on lead flow or sign-ups already that's happening?

Yes. Sure, Sara. What we're -- I think -- and this kind of ties to your previous question about degree completers. We put a big emphasis on that. And the reason is that there's a huge number of people, there's actually 31 million people who started college but have yet to graduate, so they -- and we've emphasized that you might have seen that -- some of our communications that are out there. And degree completion programs are the core competency at DVU. It's a sweet spot for us. We do -- we take care of these students really well. And one of the things that gives me confidence is that where we're further along in executing our plan, we're doing better. So we put an emphasis on accounting, and it was actually up in January. We put an emphasis, to your question, on our degree completion program and it was up in January. So it's early. We have a long way to go, but I'm encouraged by these early signs of success.

Great. And then just last on Brazil. Last quarter, you talked about revenue to be above $150 million for the year. Could you update that for the 2 recent acquisitions?

Sure. So likely, revenue will be in the $160 million range for this year. And then, again, growing as we would annualize the larger Damásio acquisition as well as Faci and FMF, revenue could grow in the 30% range for the FY '16.

And that includes the impact of those acquisitions or that's on top of the -- that's an underlying growth rate or that's kind of adding in for the acquisitions?

That's all in. That would include organic growth as well as the acquisitions. For the second quarter that we had -- of course, we acquired FMF on October 1. And so the second quarter growth was about 1/3 benefited from the impact of the FMF acquisition and 2/3 organic growth.

Our next question comes from Paul Ginocchio from Deutsche Bank.

Just some questions on persistence. It looked like it took a little bit of a hit at DVU. Any comments? The same for Ross, it looks like persistence is down for the last 2 quarters. What are you seeing there? Then finally, on just Ross and new enrollment declines. I think Saint George's has a new ownership. Are they more competitive now in that market? Or are you still seeing competition from like the DO degrees in the U.S.?

Okay. Kind of a lot to unpack there, but let me give it a try, appreciate your question. Hold me accountable, if I don't cover everything, remind me. In terms of persistence, undergrad persistence at DeVry University improved in November, slightly down in January. But if you kind of level that out, measured over trailing 6 sessions over the year, persistence has been relatively flat. And so okay, but not good enough. And our goal and part of -- a key part of the turnaround plan is improvement in persistence, good, steady improvement. And there's a number of actions we're taking to do that, so I have confidence there. At DMI, steady persistence. So pickup line, whatever, you might be seeing -- maybe we can help you with that. And I would say that -- I'm not going to comment on 1 particular competitor because we have many competitors in the U.S. and internationally for medical school. But a couple of comments more broadly on -- you mentioned DO schools and that kind of thing, there is a position shortage today and it's expected to persist. And just to give you some color on that, the U.S. faces a shortage of more than 130,000 physicians by 2025 and that's from the AAMC, American Association of Medical Colleges (sic) [Association of American Medical Colleges]. And so even though there has been growth in seats from U.S. allopathic schools and growth from the osteopathic schools, it doesn't appear that that's going to close the gap. And we've seen quite a bit of growth among the osteopathic, the DO schools, but it looks like that growth has flattened recently, so we think we've seen most of the impact that we're going to see, but time will tell. And we really appeal to those students who want an MD versus a DO degree. So a little bit of color on the competitive dynamic there.

Maybe if I could sneak one in for Tim. That 30% growth rate in fiscal '16 for Brazil, does that include the impact of the government -- the changes in government regulations?

It does. And that compares with about 30% -- a little bit over 30% growth this year as well, all in with the acquisitions.

Our next question comes from Corey Greendale from First Analysis.

First, just a quick clarification. Tim, when you said you expect operating costs to be up 4.5% sequentially, were you including the restructuring charges in Q2 or excluding those?

Excluding. Corey, if you look at our spend, it's been remarkably consistent over the last 4 quarters. Total expend, 425, 426, 424, 425. And there are a lot of moving pieces. If you think about it over the last 12 months, we've had decreases at DeVry University. And so we thought the best way to say is, look, it's moving out of that pattern for some very specific reasons. And the 2 key reasons are new campus openings at Chamberlain and the acquisitions at DeVry Brasil. But we've also seen an opportunity to accelerate some spend at DeVry University in the marketing area to further some positive things that we're seeing there. So 3 buckets. The third bucket is not completely DeVry ad spend, but those are the 3 ways I think you should think about it. And we see those cost being with us maybe slightly less as we go into the fourth quarter. But it's kind of a new setpoint for a little while as we kind of work through some of these moving pieces.

Okay. Helpful. And then, Daniel you've been very hopeful in giving your perspective on the market more broadly over the past multiple quarters. And just taking a step back on the DeVry University business. I know that last quarter, you had said you thought that January was going to be better. You were disappointed. Can you just talk us through visibility in that business, where in the funnel -- was it that you weren't able to generate enough inquiries? Was is that students didn't actually end up showing up to class? Where is the weakness? And what are you seeing more broadly in the market?

Sure. So I'll take it in that order. And thanks, it's a great question. It's sort of the $64,000 question, I guess. We are in a time of limited visibility. There is a lot of uncertainty. But we're seeing indications that the turnaround plan is gaining traction. I mentioned to Sara a couple of those, I've referred to that. Applications are up year-over-year for the March class, but it's still early. So I really want to add that caveat. But those early indications give us some confidence that we could see better results in the class. And then more broadly, we just continue to operate in a cyclical -- a period of cyclical weakness, which is having an impact across higher education. It's interesting, if you saw the Wall Street Journal front page last Thursday, the emergence of a 2-tiered U.S. economy, with wealthy households advancing while middle and low income Americans still struggle. And we serve a large population of middle and lower income students who come and get their education so they can move up. And more prospective students just still lack confidence in the job market and they're hesitant to make that commitment to go to college. And now there's a misperception that these factors are only impacting private sector institutions, but many independent public sector institutions are being impacted as well. In fact, the latest numbers from the clearing house are in. I know you saw this, but just for everyone's benefit, overall post-secondary enrollments in the fall decreased 1.3%. And that's 3 years in a row. I know every generation is supposed to get more education than the one before, but we're now going the wrong way. That's total enrollments in United States from Harvard to community college, everything in between down, community colleges down even more. Break that out for adults, 24 and older, which is obviously a key consistency for DeVry University, that decreased 2.8% year-over-year. So this is the environment. But while there is still some hesitancy to go back to the school, there's lots of indications that consumer confidence is slowly starting to come back. And here's why we're optimistic about the future. More than 31 million people enrolled in college in the last 2 decades but they left without earning their degree, and we serve these students very well. So we're just going to continue to work our turnaround transformation plan at DeVry University, and that's a little bit of color.

Our next question comes from Denny Galindo from Morgan Stanley.

The -- you mentioned that you were going to increase advertising, and that was part of the driver of the increased expenses. Are you focusing at advertising on any particular segment, maybe completers, grad students, any particular vertical?

Yes. There was a focus on the completers. So if you saw, or if anybody wants to see it, just send us an email, we send you a link if you want to see, for example -- an example of the communication, a television piece that really talks about these 31 million Americans in the last 20 years who have attempted college, but they didn't complete. And so there's 31 million reasons to complete that degree and what's yours. And it's really a well-integrated program, like #reasonstocomplete and there's social aspects. You go into any one of DeVry University campuses and you'll find a big board with post-its there. Put a post-it, just like in the TV spot, put a post-it of what's your reason to complete and sort of reinforce that reason: for my kids, for my family, to make more money, to improve my life, to get that degree I've always wanted. And so yes, that is a particular emphasis for us right now. And I've had a question that, well, we'll see about that because a lot of people talk about people going back to school isn't that common. And that's true, that's a big part of our market. But we -- for example, we've noticed with this program and focus that a lot of students are going to one of our programs, that's not exactly designed for degree-completers. And if we can to a better job of designing that program, make sure it really meets the needs of those students and the employers they serve and then do a better job of communicating that value proposition, we should be able to do even better in the degree completion area. And in fact, we're starting to see some improvement there. So that would be the area of focus.

And did it lead to a quantifiable impact on the January starts? Or do you think January was too early to see a benefit from this focus?

I think January was too early to see the total benefit, but there were some indications. For example, there's 1 program I'm thinking of where we do have a lot of degree completers, was actually up year-over-year in the January class. So in the middle of an overall decline, there was a bright spot. And accounting, as I mentioned before, was another bright spot with some positive numbers in front of it. So those are some of the indications that we're making some progress on the turnaround plan.

Okay. And then a couple of questions on medical. You mentioned all the start-up expenses associated with the medical, with the new medical campuses at Chamberlain. Could you quantify exactly how much start-up cost you would've had in this quarter? I guess you had 1 new campus but then you were probably also getting ready for the 2 January campuses as well and maybe even you spent a little bit to get ready for the co-location campus?

There was -- the way I think about it is a little over $2 million spike over kind of the normal spend that was related to these 2 openings. So a little bit out of the ordinary in that second quarter.

And then lastly, just thinking about how the co-location works. How does this show up differently than just as a stand-alone campus in terms of expenses, in terms of maybe margins or any other factors that you guys look at when you're thinking about when to do a co-location campus versus a stand-alone campus?

The co-location -- our analysis shows kind of on the bookend of collocating versus opening a stand-alone campus in the same area. I'd been in the sites of the campus and whether it's leased versus owned, the bookends, the synergies are on the low end of $400,000 and up to $1.1 million on the high end. Obviously...

Per year.

Per year. And we let -- the location that best suits the institution drive that decision, but if we're in the same market we want to certainly leverage that investment in our fixed assets.

And we have 16 co-locations?

16 Chamberlain locations, of which 14 are co-located. We have co-location, of course, in Miami where we have DMI, Chamberlain and DeVry University, and then we have a couple Carrington co-locations as well.

Right. 2 Carringtons. That's why I think of it, 14 Chamberlain, 2 Carrington plus a DMI with a Chamberlain as a bonus. Okay.

And then lastly just on Brazil on the recent acquisitions. Are these degree mixes that will increase a metric like revenue per student, decrease it or about the same?

I would say it's mix. The Faci is -- could be a little bit higher and those are degree programs, very, very similar to the other -- most of the other acquisitions that we have made. And parenthetically, let me just add, if you'll allow me, that's a great model because we're at a step-and-repeat of a well-worn acquisition integration plan, a team that's done it many times. We feel very comfortable with the acquisition integration process and the lower degree of risk that you're always thinking about when you make acquisitions. That is just working very, very well and we want to keep a good thing going there. Damásio with the test -- the exam review portion for the Brazilian version of the bar exams, called the OAD, but we'll just call it bar exam, that would be a little bit lower revenue per student. And so that's in the mix, and that's the majority of their revenue relative to the law school, which would -- law school would be pretty similar to the law programs that we have at the other DeVry Brasil institutions.

Our next question comes from Trace Urdan from Wells Fargo.

I'd like to go back to the contraction in margins in the medical part of the business. It looked like revenue per student declined there, and I didn't -- I'm not sure that I heard you address that specifically, so I wonder if we could start there?

Revenues per student were declining as we have a greater proportion of Chamberlain students which would, obviously have a lower revenue per student than our medical and veterinary school, as well as we saw some nice growth from Carrington. And from there, their revenue per student would be the lowest.

And did that business come out the way that you expected? I mean Daniel made some reference to Ross not being as strong as you had hoped. So did -- from your perspective, did the revenue come in light relative to what you thought it was going to do so? Or is this exactly sort of on plan?

One thing to note is that we're still seating large classes at DMI. And to put it in context, we were up about 20 students from last year. So we would've been flat last year with 20 more students. That just gives you a little bit...

Yes. In terms of the revenue, Trace, it was very close. We have a lot of momentum because those are multiyear classes, and we have the clinicals and a lot of other things. It's really the new students and then the total student that will impact us going forward. But I think right at this point, it's still tracking pretty close to where we expected.

And when you referenced the Health Care business taking on a greater share of the overhead, is this an explicit reallocation that took place in the quarter? Or is this just the natural way that those costs are attributed based on, I don't know, student population or based on revenue?

Sure. It's a little bit of both. Our cost drivers are largely based on enrollment, based on seat licenses and everything would require support from the home office from an IT student, financial aid perspective, as well as in colleague headcount for HR and other benefits-related costs. So as Chamberlain as an institution is growing from a student as well as the colleague perspective, they're consuming a higher proportion of home office services or at a faster rate than the other educational institutions.

Just a quick comment, Trace. That's an area that we obviously spend a lot of time focusing on. And part of the challenge here is as DVU gets smaller and the Medical and Healthcare gets bigger, there's a reallocation. But I would tell you, we're very closely managing the cost at the home office, and the target's been to have them declining as a percent of revenue. We're having a little bit of trouble with that this year as we deal with an FTC investigation, and you'll notice that comment in our MD&A. So those are costs that we didn't expect to have and are putting some pressure on the home office. But we're very focused on keeping those costs as a declining percent of our overall revenues.

Okay. But if I could just pin you down a little bit more on this. Was there a material onetime shift from 1 segment into -- I guess, presumably from DVU into Medical this quarter?

This year. When the year is all done, there was a fairly significant change. This quarter, it's just tracking along. And we started that at the beginning of the year. So we make the changes at the beginning of the fiscal year.

Got it. All right. And then just a clarifying question. I think, Tim, you -- I think I heard you say that operating expenses were going to be up 4.5% sequentially. Is that right?

Yes, that's correct.

And then I think I heard you respond, it wasn't totally clear, I'm not sure it's going to be clear in the transcript either. But with respect to the Medical and Healthcare margins, are we looking to be somewhat around flat. Is that what you meant by ZIP code on a year-over-year basis? Or...

Yes. Yes.

Okay. So taking into account the weakness this quarter, by the time we get to the year-end, we should be more or less in the same general vicinity?

Correct. Thank you for clarifying that.

Yes. Tim is good with analogies, and ZIP codes is one of them. So that's good.

I didn't know if it was a ZIP+4.

Exactly. How precise do you want to get?

Our next question comes from the line of Jerry Herman from Stifel. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: A question about the visibility you alluded to, Daniel. Can you give me some idea of what percent of applications or enrollments for DeVry University's March term are typically received by now?

It's early. It won't shock anyone that students, whether they're your teenagers or your college kids or working adults tend to procrastinate. So things do tend to come together at the last minute a little bit. So it is more heavily weighted to the back half of the cycle, and we're just entering that. I would say, and maybe this is sort of an add-on to an earlier question about where does the issue seem to be. We have really done a good job and commend the teams in improving the conversion rate, if you will, from those who inquired to those who make application and then those who subsequently enroll. And that's true at DeVry University, Keller Graduate School of Management, I think we're doing really well in Chamberlain. So a pretty broad comment there. But DeVry University specifically which is, I think, you're asking me, we just -- the biggest thing we need there is a little bit more at the top of the process, the beginning of the process, top of the funnel, if you will. So that's what we're working very hard to generate and then we're working extremely hard to do everything that we can to control -- what we can control. And once it gets -- when someone does inquire with us, I think our teams are doing a terrific job. And that's a positive indication to me to see that those who inquire with us are responding positively. They like what they see. The value proposition is strong. It resonates with that prospective student and their family. That's good because it [ph] gets little bit more at the top.

Jerry, it's Tim. One of the things that -- there's a lot of data here. And one of the things that we do, do is have a lot of data in terms of how are these inquiries tracking compared to the same period and to the same session last time. What's a bit different and what creates the visibility problem is that there's some discontinuity in the data. Sometimes things just don't play out when we look at from this point to the end how many of those students are actually going to come and enroll. And so that's what creates a bit of the visibility. But when we're giving you a sense of what we're seeing, it's always based on how are we track and compare to last year, how's the team on the ground thinking they're going to deliver this thing? So there's a fair amount of data. The fact is it's just -- we're predicting consumer behavior, which is hard to do sometimes. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: And then just a quick question on cost. You guys previously increased your cost reduction figure from $70 million to $90 million. I guess in light of the slightly weaker than expected volumes at DVU, it was noteworthy that it didn't go up again this year. And I guess that begs the question is there anything left to cut? Or are you cutting into the bone at this juncture?

No, absolutely not. And I was, I hope, very clear about our goal of maintaining the economics in this sector or the segment. And we are very involved with the team thinking about the balance of this year, but we're really thinking about '16 in terms of what are the things that we need to do. And we're thinking about the business model, we're thinking about the basic things, Jerry, that we need to cut. We need to deal with real estate. We need to deal with marketing cost. We need to deal with excess capacity. And so stay tuned. We didn't -- we just gave a big increase. We know we need to continue to do it to make the numbers work. So we're working on that. I think we'll have more to talk about with you guys on our next call.

Our next question comes from Jeff Silber from BMO.

This is Henry Chien, calling in for Jeff. I had a question on Chamberlain. Would you be able to share with us for the new students in the November and January session the mix between pre-licensure and post-licensure?

I don't think we're breaking that out. I'd like to give you some sense of -- Patrick? Well, I was going to say in terms of the impact of the FNP, we saw double-digit growth in both of those, the campus-based and the non-FNP. And the FNP was negative. So there's still some significant strength there in both those segments or sectors. And it's the FNP where we need to stage these new student enrollment so that we can manage the clinicals on the backside while we work to increase the capacity.

Right. Just to clarify, FNP was a negative growth rate because of our own choice...

Exactly.

To limit the number of new student enrollments that we took. The demand is there to do that.

Right. And we talked to the team about that. And as we look into next year, we'd expect to see FNP enrollments grow again once we've sorted through this kind of big wave of students. So really, we were way beyond our expectations in terms of how popular the program was. And so we wanted to make sure that we can manage all the clinical stuff in the second half of that, what's usually a 3-year program.

Yes. I just want to add on to that. Just what Tim has said earlier on the call in his remarks itself, that with respect to mix, think about it from a revenue mix perspective, 45% of the revenue is generated from our campus pre-licensure program, but the balance of the 55% from the post-licensure or online programs.

Got it. And then -- I know Chamberlain, there's the new campuses and there's some margin pressure there. I was wondering if you have any thoughts on what normalized margins would be with the campuses ramping up in maybe from a longer-term perspective for Chamberlain.

Sure. We think that one of the key drivers here is -- well, there's a number of them but maturity of the campus, the size of the campus. But the number of new campuses that are in the mix, so we expect that the campus margins will be depressed for some time because we're talking about essentially doubling from 16 to near 30. So it carries a load. These campuses, in aggregate, are profitable and contribute significantly. I think that the -- in a more normalized growth mode, expect a low double digits kind of campus contribution. And that would still include some campuses that were being bolted on. Today, it's less than that as we have a significant load from all these new campuses that are growing. And certainly, our large and scale campuses will do significantly better than that.

And our next question is from Michael Tarkan from Compass Point. Michael Tarkan - Compass Point Research & Trading, LLC, Research Division: Just real quick. Did you guys mention what the Carrington new start growth number would look like if you didn't have the extra start date?

We did not. And I don't think we have that breakout.

Right. No. But we can follow up with you. But we like to think of it from total students, we're up about 1.2% for the quarter and revenue was up as well. So look at -- I think if you look at it from a total -- from quarter and first 6 months, it's a good way to help model that.

Yes. Michael Tarkan - Compass Point Research & Trading, LLC, Research Division: Okay, that's fine. And then on the balance sheet or on the statement of cash flow, I should say, I noticed that operating cash flow it looks like for the quarter it was down or was a negative $49 million or so if you back out the first quarter. I'm just wondering what that dynamic is. I know it's a seasonally light quarter, I'm just kind of curious if you can kind of talk to that.

Sure. You said the magic word, is the seasonality of our cash flow. Our strongest quarter just in terms of operating cash flow are our first quarter as well as our third quarter. The reason being with our first quarter, we have our new session starts for DeVry University, Chamberlain, as well as DMI in September, our Medical and Healthcare institution. So there's a large amount of cash coming in, in that first quarter and then a fewer number of session starts in the second quarter, this quarter here. And then obviously, the third quarter, cash flow with an increase again with the large session starts for DeVry University and Chamberlain in March. And then the large DMI session start in May. Michael Tarkan - Compass Point Research & Trading, LLC, Research Division: Is there any dynamic though from a year-over-year basis that we should be aware of because it looks like it was down about $20 million year-over-year? And I looked in -- the deferred tuition number looked like it was a little high this quarter, I'm just wondering if you can talk on that?

Yes. There was a dynamic of about $20 million of cash that we normally would have received in December that did shift to January of this year at DMI. And that was just based on the timing of the session start at Ross Med. It started about a week later than January than normal. So as a result, instead of that cash coming in, in advance, which would have been January...

December.

Or December it came in January this year.

Wow, we've got an eagle eye.

That was very perceptive.

Well done. Well, I believe that's all the questions we have. Is that right?

That's right.

Okay. Then I just would like to thank everyone for your questions. Our next quarterly results call is scheduled for April 23 when we'll announce our fiscal 2015 third quarter results. Thank you for your continued support of DeVry Education Group.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.