Element Solutions Inc (ESI) Q4 2007 Earnings Report, Transcript and Summary

Greetings ladies and gentlemen and welcome to the ITT Educational Services Fourth Quarter Earnings Calls. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. Joining us today from the management of ITT Educational Services, we have Kevin Modany, President and Chief Executive Officer; and Dan Fitzpatrick, Senior Vice President and Chief Financial Officer. Before we begin, ITT Educational Services Inc. wishes to remind you that this conference call may include forward-looking information. Actual results may differ from the information presented during this call. For additional information, please review the section of forward-looking information contained in today's news release on the company's public filings with the Securities and Exchange Commission. Thank you Mr. Modany, you may begin.

Good morning ladies and gentlemen and thank you for joining us to review our 2007 fourth quarter and full year result. As usual joining me on the call is our Senior Vice President and Chief Financial Officer. Dan Fitzpatrick. During the call, I will provide you with some additional details regarding our operating results and update on a couple of our growth initiatives and our internal EPS goals for 2008. I'll also touch on our prospective with the current status of the student financing landscape and attempt to correct any misconceptions if they exist with respect to the ability of our students to paying the necessary financing both from federal and private loan sources to save the cost of their ITT Technical Institute education. Dan will then follow with his comments regarding the financial results. Following our prepared comments, we will open the lines to take any questions that you may have. I would like to begin this morning with a review of the 2007 fourth quarter and full year results. As you read in this morning's earnings release, we had another outstanding quarter in terms operating and financial performance that once again exceeded our internal expectation. The impressive performance was a result of strong increases in new student enrollment and the continued improvement in our student persistence rate which was driven by improved student retention. We will provide additional comments regarding student persistence in a few moments. Turning to fourth quarter of 2007, we increased our advertising expenditures by 20% primarily to support the expansion of new colleges as well as the introduction of new programs of study at our new and existing institutes. As we look ahead to the first quarter of 2008, we believe that the pricing for advertising media that we utilize to generate student enquiries will remain at attractive levels and allow us to generate a sufficient amount of leads to meet our internal operating objectives. We believe that our advertising expenditure in the full year of 2008 were increased in the range of 10% to 15% over 2007 expenditures as we continue to support our growth initiative with the requisite amount of marketing resources. As we begin the first quarter of fiscal 2008, the demand for our programs of study as measured by our current level of enquiries is extremely robust. In order to service this increased level of prospective student interest, we employed 15% more recruiters at the beginning of 2008 and at the same point in the prior year. We believe the increase in the number of recruiters puts us in a very good position to take advantage of what we expect to be an increased number of prospective students, who are interested in attending an ITT Technical Institute. During the three months ended December 31, 2007, the rate at which our recruiters converted the increase leads to new student enrollment was strong. The conversion of the increased lead flow to a new student enrollment increase, up 13.1% in the fourth quarter of 2007 to 11,542 as compared to 10,208 in the three months ended December 31, 2006. We experienced an increase in new student enrollment in five of our six schools of study during the fourth quarter. New student enrollment in our school of business was basically flat compared with the same period in the prior year. During the three months ended December 31, '07, we experienced an increase in total student enrollment in all six schools of study as compared to the fourth quarter of '06. As we noted earlier in the call, we experienced another solid increase in student persistence during the fourth quarter of '07 as compared to the fourth quarter of '06 that exceeded our internal expectations. The student persistence rate in the three months ended in December 31, 2007 increased a 110 basis points to 77.3% compared to 76.2% in a three months ended December 31, '06. Improved student retention which was primarily driven by the continued implementation of the modified hybrid delivery model led to this solid increase in student persistence despite an increasing number of graduates that resulted from the student retention improvements in earlier period. Looking into 2008, we believe that we have an opportunity to continue to improve student retention which will positively impact our student persistence rate. However, we expect that any future increases in student persistence will be at much more moderate rates. As many of you know, student persistence is negatively impacted by students who do not continue their education in the subsequent academic quarters as a result of graduating from their programs of study. A higher number of graduates that we expect in each quarter of 2008 compared to the same prior year period will partially offset any increases in our student persistence rate resulting from improved student retention during 2008. As a result of a strong new student enrollment and solid increase in student persistence during the fourth quarter, the total student enrollment increased 13.1%, 53,027 as of December 31, 2007 compared to 46,896 as of the same point in the prior year. As we have done in the past during our yearend conference call, we would like to take a brief moment to remind every one of our historical operating and financial performance, a few other key metrics of our business. We will express each metric in terms of the compounding new growth rate for the period from 1994 to year of our IPO from 2007. During this period of time, new student enrollment increased at a rate of 9.0% and total student enrollment increased at 7.6%. Our revenue increased at a rate of 13.9%. Operating income increased at a rate of 28.6% and operating margin expanded at an average annual rate of 150 basis points. Net income increased at a rate of 29.0% and earnings per share grew at a rate of 29.9%. We believe that based on the resources that are currently available to us in taking full account, the current student financing environment, we can continue to achieve operating and financial results over the long term that are consistent with our historical performance. For the 12 months ended December 31, 2008, our internal goal for EPS is in the range of $4.50 to $4.60. Turning our attention now to a very quick update on our graduate employment metrics. We continue to experience a solid demand for our graduates of our programs of study from a variety of employers in a diverse range of industries. Based on our most recent conversation with companies who hire our graduates, we believe that employer demand for skilled employees and technology-focused fields will remain very positive well into 2008. Despite the recent year-over-year increase in a number of graduates mentioned earlier, the graduate employment rate for our 2007 graduates as of December 31, 2007 was approximately 2 percentage point higher than the rate for a smaller number of 2006 graduates at the same point last year. As further support for our belief that the demand for graduates with technology based skills remain strong, the average starting salary reported by our 2007 employee graduates as of December 31, 2007 trended up from the third quarter 2007 year-over-year increase and was approximately 5% higher than the average starting salary reported by our 2006 employee graduates at the same point in the prior year. We remain excited about the career prospects of our 2008 graduates and continue to believe that the employer demand represents a positive leading indicator of our ability to grow total student enrollment over the next several years. Now for an update on a couple of our growth initiatives. As many of you already know, key part of the organic growth strategy involves increasing the number of locations in our systems. We expand geographically by adding new colleges of which we are now 97 and New Learning Sites of which they are currently none. As we reported in our earning release this morning, we began operations in our 96th and 97th colleges during the fourth quarter of 2007 with the opening of our new colleges in North Carolina in High Point, a suburb of the Greensborough; and Morrisville, a suburb of Raleigh. These two new ITT technical institutes brought to 10 the number of new colleges that began operations in 2007. This exceeds our previously reported goal of beginning operations at between 6 and 8 new locations in 2007. As was reported in our earnings release this morning, it is our internal goal to open between 6 and 8 new locations during 2008. Developing and introducing new associate and bachelor degree programs of study in both technology and non-technology fields that can be delivered both in residence and online is another key part of our internal organic growth strategy that we have deployed over the years. During the 12 months ended December 31, 2007, we had 246 programs of study at our colleges compared to 142 in 2006. As we entered the first quarter of 2008, we had several potential new program offerings in various stages of research and development. We expect to begin introducing several new programs of study at our ITT technical institutes during 2008. At this point we would like to provide some additional information regarding the student lending arrangements that we disclosed in our press release on Tuesday. As many of you know, we've had a long established and mutually beneficial relationship with Sallie Mae for more than 9 years during which Sallie Mae offered both private and federal student loans to our students. We have been reassessing our student lending arrangements during the past seven to eight months. As we saw changes in the federal loan legislation, turmoil in the credit markets and particularly the impact of that turmoil on the securitization markets, as well as a number of company-specific issues impacting Sallie Mae that were highly publicized. During this period we export a variety of other learning solutions for our students. One of these solutions was to identifying new lenders that could provide the most beneficial lending options to our students. That seven to eight month effort resulted in several attractive proposals to provide both federal and private education loans to qualified ITT technical institute students from a host of large and well capitalized lenders and have a sense of experience making and servicing educational loans. Of the many proposals that we received, we have selected three of the largest stable and most experienced financial organizations. These lenders have each offered to provide what we believe are very attractive and competitive loan solutions to our students, as we disclosed in our press release on Tuesday. As we originally intended when we began our reassessment these new lending arrangements were replaced to lending arrangements offered by Sallie Mae. After our press release on Tuesday announcing our new student lending arrangements, we received a letter from Sallie Mae on Wednesday notifying us that they were terminating the private loan arrangement offered to our students effective February 22, 2008. Since we have already made new funding arrangements with the three new lenders, the termination of our agreement with Sallie Mae would not have any substantive impact on the funding available to our students or on our anticipated operating results. We believe that the new lending arrangements coupled with some internally funded student financing will provide our students with all of the student funding options needed to pay the cost of their ITT technical institute education. It is likely that the internally funded student financing that I just mentioned will result in an increase in our day sales outstanding and bad debt expense. But we are not providing specific guidance on these metrics; we believe that in 2008 these metrics will gravitate towards the high end of our historical averages. Even if our DSO and bad debt rise to the high end of our historical averages, we believe that they will still be among the lowest in the industry. In addition any anticipated effect of our operating results that maybe caused by the internally funded student financing has been fully reflected in our 2008 EPS goal disclosed in our earnings release issued this morning and discussed early. We also do not intend to change any of our normal practices for the profile of our students as a result of our new student funding arrangement. We are genuinely excited about the new financing arrangements available to our students and believe that we have substantially improved the stability and, most importantly, the viability of the student lending options that we are now able to offer our current and incoming student. Lastly on this topic, we would like to remind everyone that our students have been borrowing money to help pay the cost to their education for over 30 years and have included periods of economic prosperity as well as market recession. Throughout that time we have taken a very active role in monitoring and analyzing that student loan portfolio. Our analysis of the performance of the loans made to our students over those years including the default rates has led us to a very confident conclusion that loans made to ITT Technical Institute students result in an extremely attractive return on investment over the period of repayment. Further we continue to believe that an investment in an ITT Technical Institute education results in an outstanding value proposition for our graduates as evidenced by the increasing average starting salaries reported by our graduates and the attractive graduate employment rates reported over the many years that we have been in business. So as you would expect, we have not altered our student enrollment outlook for 2008 and as a result of our new student funding arrangement and as evidenced by our 2008 EPS guidance, we believe that we will be able to continue achieving operating and financial results in line with our historical performance over the long term. Now as I prepare to turn to Dan for a review of the financial results, I just want to reiterate our confidence in the current market, more importantly in the ability of the current management team to continue to execute on our proven growth strategy to achieve our internal goals and to continue generating increases in shareholder value over the long term. I'll now hand the call over to Dan for his prepared comments regarding the financial results.

Thanks Kevin. As usual I'll begin reviewing the key financial highlights for the quarter and the full year. Revenue increased 11.7% in the three months ended December 31, 2007 to 230.4 million compared to 206.2 million in the same period in 2006. As we have projected on the third quarter conference call, the year-over-year increase in revenue in the three months ended December 31, 2007 was negatively impacted by a lower computer laptop sales to our students. Excluding the sale of laptop computers, revenue increased 14.2% in the fourth quarter of 2007 compared to the same period in the prior year. The revenue increase was driven by solid total student enrollment increase as of September 30, 2007, continued improvement in the retention during the quarter and a 5% tuition increase that begin effective in March 2007. Revenue per student exclusive of laptop sales increased 5.1% in the 12 months ended December 31, 2007 compared to the prior year. Revenues in the full year of 2007 increased 14.7% to $869.5 million compared to $757.8 million in the twelve months ended December ended 31, 2006. Operating margin in the fourth quarter of 2006 increased 280 basis points to 33.6% compared to 30.8% in the three months ended December 31, 2006. The increase in operating margin was primarily the result of further leveraging of our operating model and a variety of operating efficiencies resulting from the initiatives we began implementing in the third quarter of 2006. Cost of educational services as a percentage of revenues in the fourth quarter decreased 500 basis points, 38.3% compared to 43.3 % in the same period in 2006. In the twelve months ended December 31, 2007 the cost of educational services as a percentage of revenues decreased 580 basis points. The 41.3% compared to 47.1% in 2006. As a percent of revenue, student service and administrative expenses in the third... in the three months ended December 31, 2007 increased 230 basis points to 28.1% compared to 25.8% in the same prior year period. The increase in student services and administrative expenses was primarily due to increased marketing and advertising cost to support our geographic and programmatic expansion, and a 50 basis point increase in band debt expense in the three months ended December 31, 2007 to 2.1% of revenue compared to 1.6% of revenues in the same prior year period. We believe that we have one of the lowest bad debt rates in the post secondary sector and we'll continue to maintain that position in future periods. For the full year, student services and administrative expenses increased 190 basis points to 30.9% of revenue compared to 29.0% of revenue in 2006. Diluted earnings per share in the fourth quarter of 2007 increased 23.7% to a $20 compared to $0.97 in the same period of 2006. For the full year of 2007, diluted EPS increased 36.4% to $3.71 compared to $2.72 in 2006. Cash and cash equivalents, restricted cash and investments as of yearend were $317.2 million compared to $357.4 million as of December 31, 2006. As you read in this morning's earnings release, we repurchased approximately 300,000 shares of the company's common stock in the fourth quarter of 2007 for approximately $36.9 million on an average price of $122.93 per share. During the 12 months ended December 31, 2007, we repurchased approximately 2.7 million shares for $265 million on an average purchase price of $99 and 65% per share. As of December 31, 2007, we had approximately 5 million shares remaining under the share repurchase program authorized by our Board of Directors. Based on the current market conditions and subject to maintaining compliance with security regulations and the US Department of Education's financial responsibility ratios, we intend to be aggressive in the repurchase of our shares in the early part of 2008. Day sales outstanding as of December 31, 2007 were 6.0 days compared to 4.8 days as of December 31, 2006, an increase of 1.8 days. We believe that we have one of the lowest day sales outstanding in the post-secondary education industry and we expect to maintain a leading position in that metric throughout 2008. As Kevin mentioned previously, our internal goal for diluted EPS in 2008 is in the range of $4.50 to $4.60. In conclusion, in term of its importance, I want to repeat my comment made in this morning's earnings release that the fundamentals of the Company are incredibly strong right now. We reiterate that we have... we are confident that our students will continue to have sufficient access to financing and we believe that we are well positioned to achieve our internal, operating and financial goals for 2008. With that, I will turn it back to Kevin.

Thanks Dan. Hopefully you can tell that we are as confident as ever about our ability as an organization to achieve our internal operating goals. And we believe that we are very well positioned for continued success throughout 2008. At this point, I would like to ask the operator to open the lines so we may entertain your questions. Question And Answer

Thank you. Ladies and gentlemen at this time we will be conducting a question and answer session. [Operator Instructions]. Thank you. Our first question comes from the line of Gary Bisbee with Lehman Brothers. Please proceed with your question.

Good morning and congratulations on the quarter.

Thanks Gary.

Your first question is the... can you give us any sense... ballpark figure of how large you think your financing commitment's going to be?

From the three lenders or do you mean?

No, what you are talking about doing yourself on your balance sheet.

Sure, it's probably difficult for us to give you an exact figure on that right now. Because the underwriting criteria of these banks and of the lending institutions are... they differ from lender to lender. Of course, we have taken some data, historical data, and we have run it through some models and we have got a decent sense of what we think will be there. There's a possibility that there will be a gap. I am not saying that there definitely will be, but there is a possibility and so we've estimated that gap and we think it will drive our DSO up towards the higher end of historical ranges which is 6 to 8 days. So it will run in about 6 right now, you are looking at a couple of days on DSO, and ought to give you a little bit of color to kind of figure our what we are thinking about there.

Okay and can you review the mechanics of how the new agreement works. The initial change with Sallie Mae was you were going to actually take direct recourse. Is that happening, are you paying fees to get them to underwrite... how should we think about how that should work?

Sure, it's a good question. The current agreement does not include recourse, it does include risk-sharing, there are no fees that we are paying for any kind of origination, there is no, I guess, additional support from the company in any way and we are really not a party to the transaction. We are facilitating a transaction between these lenders and our students. And at this particular point, it doesn't create any kind of obligation on our part whatsoever.

Okay, that's good news. And then I guess just two other questions. There has been a sense lately that one area that companies might be able to defray some of the private loan cost, it would be getting more parents to co-sign loans for the platform. It looks like from your last 10-K 59% of students for 24 or younger. Do you have any sense what percent of students might have the parent co signing loans?

Well I tell you it's not as much as it used to be and I think it is an opportunity for us and probably for everyone in the industry to try to increase that percentage. We don't have huge expectations that will move the dial there. Over the last probably six years at least since I have been with the organization and in general and education that number has gone down a little bit quite frankly. So there's an opportunity there. In our model right now, though, Gary, we are not building a lot of that in. And we are certainly going after it. We think there are opportunities there and we are not anticipating it, if we get it that would be some upside for us.

And then just one last question which is... you said 10% to 15% growth in marketing spend, that's obviously a change from the last two or three years. Is it because you are expecting to open less campuses, you might not have as many new programs, are you seeing some change in mix or in the pricing or what changed that? Thanks a lot.

Thanks Gary. It's more the latter. Right now we are seeing some positive things with regard to stock cost and we always keep our eye on that. We are in a volatile situation as so that can move on us. Right now, we are comfortable with where we are at on the spot cost. We have also taken advantage of some mix issues and we continue to do that. We are always looking for the most efficient and effective way to get our message after the market and the team has done a great job putting a plan together that I think gives an opportunity to being more efficient with the marketing spend. But we are not planning on cutting back. Our plan is to make sure that we are providing marketing for all new schools, new programs, we are really not pulling back on that regard at all.

Thanks for the comment.

Thank you. Our next question comes from the line of Mark Marostica with Piper Jaffray. Please proceed with your question.

Thank you, nice job on the quarter.

Thanks Mark.

My first question relates to your Title IV exposure. Can you review for us where you ended the year as a percentage of revenue from Title IV sources versus private and then as you think about '08, is there a sense that you may be able to push the percentage from Title IV up some and if so how would you accomplish that?

Yeah Mark, this is Dan. We finished the year just slightly up from last year in the low 60% range as far as Title IV and the offset that we saw during the year actually even more so was relative to the private loan usage. And going forward because of the changes, some of these changes went into play in July this past year; some things took place in October. But the year one and year two loan increases, the increases in PELL, those are going to have a positive impact next year and the offset to that is traditionally been the private loans and we would expect it to be that way going forward.

So where do you think you will end next year if you were to guess exposure of private loans?

I would say, it would be right around where we are at this year or somewhat slower.

Okay. And then relative to your guidance I am curious what the low end and high end of your earnings guidance implies as to your bad debt level assumptions?

There was not a huge range in there. Again we are talking about going to the... when I say range, not on large range of volatility in terms of those two numbers for bad debt. What we are expecting is right now is to be at high end of our historical range. We've said previously that, that's about 1% to 3%. So you are looking at 3% being the high end of that range and that's the type of number that we update into those expectations.

And then to follow-up on your comment on new program introductions. For '08, do you feel that you'll be at the same level? I think you said 246 in '07, are you going to be below that, above that or how's that going to play out.

We had a pretty good year, no doubt this past year and if I had to sort of give you a little peak into our model, it's probably going be towards the range of '06 as opposed to towards the range of '07.

Got it. And then one last question, I will turn it over. On the laptop sales this quarter obviously it affected the revenue per student and the year-over-year growth in revenue, but can you give us a sense what laptop sales are generally as a percentage of revenue this quarter versus last quarter?

Maybe I'll express it this way Mark. It was in the neighborhood of $5 million last year; we had virtually none this year. So I mean and I think really the question underlying most of this, folks are going to say what about the risk share, the risk share was insignificant and perhaps some more key point there, in fact, goes away.

So if I looked at let's say Q2 last year, Q3 and Q4, how did... looking at the year-over-year as we kind of go through this year, you said $5 million last year. What is that...?

No I was referring to the fourth quarter.

Okay.

So we saw... as laptops as they were rolled out, as they were available to students it was continuing in new students who are basically, let's call it available customers. We have anniversaried that. There the program is fully rolled out to all of our students. So you don't have it going forward. So it's not going to be... I can't imagine we are going to be talking about it much going forward.

Got it. Okay, appreciate the color. Thanks.

Thank you. Our next question comes from the line of Corey Greendale with First Analysis, please proceed with your question.

Hi, good morning.

Good morning.

Hi Corey.

And congratulations getting those new arrangements in place, kind of kind of that.

Thank you.

A couple of questions. First on the student lending front. Could you just... I know that you have got good experience in terms of your placement rate. Could you just maybe speculate a little bit given that you've had a positive experience why Sallie Mae would decide to pull away from you guys and what gives you the confidence that these new lenders aren't going to decide through the same thing at some point?

Well, it's going to be tough for us specifically to speak about issues inside of another organization but we will try to provide a little bit of color just to try to make some sense out of this for everybody on the call. I would encourage everyone to be thinking not just about industry issues and not just about issues within the credit markets or in any kind of legislative changes in there occurred over the past 6 to 12 months which you also need to be thinking about specific situations within company, so company-specific issues, think about availability of funding, so liquidity, where the sources of liquidity come from, access to those sources of liquidity and regardless of whether or not there is an extremely attractive investment opportunity for an organization. If you do not have access to liquidity, it's really difficult to take advantage of that. So again I don't want to speak specifically about any organization because I don't know their details but I am just pointing to I think some items and some variables that you might want to pay attention to that may help you make sense of what's happening here within our situation, does that help at all?

Yes, it helped somewhat. I guess the follow-up, I mean the internal funding, the internal financing problem that you are talking about. Is that going to only people at kind of the lower FICO score range you are going to have to access or give us a sense what percent of your population will end up using their internal financing program to some degree?

Well we do have a sense of that and let me tell it this way, we talked for a year at least maybe two years that we have a certain level where we accept students and we kind of correlated that you can look at the economic variables that's one of them, but we have correlated that to the ability for that individual to be successful in the program of study. And we've talk all long, we are not going to move that line because we know it works, we got 20 plus years of data that tells us that that's where you want that line to be as far admittance and not. It's really the ability to benefits from these programs and be successful. So that line is set. If by any chance the funding arrangements that we put in place do not fill the gap all the way through to that line, we will step in there and fill it. And of course we have some estimates on that and that's reflective in what we talked about in our DSO increase and again I think there's enough color out there for you to figure it out. There's no way for us to know for sure, underwriting arrangements are a little bit different from lending institutions to lending institutions but our model suggests that there could be a small amount there. So we actually included that in our expectations going forward.

Okay, and changing gears a little bit for Dan on the... another very strong quarter on the gross margin. I was hoping you might be able us to give just a little bit of color on how you actually drove the absolute dollars down year-over-year sequentially when enrollment is up strongly?

Well it's not unlike what we have been talking about in the last few calls. I mean the efficiencies that went into place or the initiatives that went into place in the third quarter of last year, those have had a significant impact, there's no doubt about it. That coupled with the improvement in persistence; and keep in mind, last year we were facing a little bit of headwind as far as the start up schools. This year that's not a headwind, it's a slight tailwind. So I mean that's really the things we've been talking about and there really hasn't been much of change in the fourth quarter from what you heard in the previous quarters.

And would you say the greatest impact of those would have anniversaried at this point?

Not safe to say.

Okay, one last one, I will get back in the queue. The new reps that you hired, what was the timing of that, was there a big step-up in the fourth quarter or is the fourth quarter cost kind of fully reflected, the fully loaded cost of those people going forward?

The ramp-up was towards the tail end of the year but I would say that it probably is fully reflected in the fourth quarter.

Okay. And any chance there would be sort of a downtrend in the conversion rate as those people get up to speed in Q1?

That's a great question Corey. Actually we see that on a regular basis and our focus on the recruiting side as well as working with our HR folks to put a couple of initiative in place, they have some... they are shown some preliminarily positive results in terms of getting people up to speed more quickly, we've actually implemented some techniques and technologies, I guess, to help us to make sure we're hiring the right people, and then once they're on board getting them up to speed more quickly so we still see that but that's been metered a little bit quite frankly.

Okay, thanks. I will get back in queue.

Okay. Thank you.

Thank you. Our next question comes from the line of Alex Paris with Barrington Research. Please proceed with your question.

Hi guys my congratulations as well.

Thanks Alex.

You mentioned about six to eight new locations in 2008, any commentary with regard to plans for learning sites in 2008?

Sure, I can... I'll give some color there. It looks at this point like these are all once again going to be new colleges but I'll tell you we're certainly on the lookout for new learning sites and there's a possibility that you'll see some opened in 2008 and if by chance you don't just begin on, we've got these assorted out based upon prioritization as far as what we think the return opportunities are and then real estate comes into play I think all together. But there's really possibility that you'll see some in '08 and if you don't more than likely you are going to see them in '09 and I think you'll see that growth initiative begin to, so to speak, start to roll again.

Okay, also any comment as to outlook for pricing in 2008?

Sure, at this one, we expect a 5% price increase to be initiated in March 2008.

Okay and last cleanup sort of question, you mentioned the placement rate improved 200 basis points, what was the actual number for the '07 graduates and then likewise for starting salaries?

We will actually report that in our April earnings release.

Okay.

We will come out with the actual numbers at that time.

Fair enough. Again, thanks very much. Congratulations.

Thanks Alex.

: Thank you. Our next question comes from the line of Edward Yruma with JP Morgan, please proceed with your question.

: Thank you, this is Neha Manthuria [ph] Edward Yruma today. First one, share repurchases, how does the ED financial responsibility ratio restrict your ability to repurchased shares?

Well it will have an impact going forward. It's something we've talked about for the last several calls, the simplest way to think about it is we are in a position now, the equity we create primarily net income is what we can use to repurchase shares. So that's really how we will have to handle it going forward?

: Okay, and one more. Would you reconsider an increase in scholarships to help reduce your reliance on private lending?

That's another good question. Actually we have done that in the past and actually we initiated some additional scholarship throughout the year. That's a regular part for our business. Again there will be a little bit of uptick in there. But quite frankly it's not enough to register in terms of the macro view.

: Thank you, great quarter guys.

Thank you.

: Thank you. Our next question comes from the line of Jerry Herman with Stifel Nicolaus. Please proceed with your question.

Good morning everybody. Hey guys good quarter.

Thanks Jerry.

I am wondering if you could just get clear... we can get clarification on the Sallie Mae business that was eliminated. For most of the other guys, it was a sub prime component. Can you clarify in that in terms of what was terminated and also what sort of portion of that 34% that represents and what portion of extra gain replaced by the new group?

I think I can answer this pretty quickly. The entire agreement that we have for private lending, it was an all inclusive agreement and that agreement has been terminated as a result of a letter we received on Wednesday. That's not to give any kind of an indication of the credit worthiness of status of the students within that private agreement whatsoever and it's just with an encompassing agreement because of the way we structured it and the fact that we had a risk sharing component on the entire pool. So that's really is what it lead to? In terms of really talking about the credits status of our students, there are couple of things we will say there. First of all I am not sure how people define sub-primary and I think people look at it at a different ways. Quite frankly, we are not going to get into the details of exposing the credit status of our students. I don't think that's appropriate quite frankly. But we will try to give you some color and I think the most important point is that we have lending agreements in place that will provide us with the funding that we need for our students going forward. I think that says a lot about maybe some of the questions or provide some answers for some of the questions you may have. We really feel confident that we have what we need in place. There may be some internal funding that we have to put in place. We are not sure of that, but we are trying to give you a little bit of color on that as well. That's about as far as we are going to go into the details on that.

Well Kevin, it... I mean it sounds like actually the new agreement represents less risk to you guys and you mentioned what it means to the providers. I am wondering what it means to the students in terms of what their average borrow rate is for a comparable FICO score. Is it more costly to students from an interest rate perspective?

So that... the rates that we have got from the lenders, this is part of our fiduciary responsibility we feel. We've certainly made sure that those are competitive market rates based upon the offerings that are out there today. They are probably you might be looking at a 50 basis point, 75 basis point differential compared to the current agreement but nothing substantial quite frankly and once again and most importantly we find them to be extremely competitive as a result of the RFP process that we conducted.

Okay and then just one final question. You guys are doing a great job of framing your long-term performance and the number that people are asking a lot about is pricing and when you look at your historic revenue growth of just under 14% and your historic total volume growth of just over 7.5% in light of some of the things you are talking about with scholarships and the whole funding issue. I am wondering what you feel about that additional growth driver on a going-forward basis relative to your history, I mean there is a pretty healthy component that somehow represents price or realization.

I will tell you again without getting into specific guidance we are trying to paint a framework that we think we can operate within. We feel very comfortable about the pricing increases and the reason for that as you heard us saying many, many times before we look at pricing in terms of the value proposition. That's a component of it and as long as the value proposition is in play and we can continue to drive increasing graduate salaries which we have been doing over the past couple of years we got an opportunity to price the products accordingly. So we are comfortable with that and we are comfortable with our enrollment expectations and again we are not giving specific guidance, we are giving you some ranges such as those things position us, we believe, very well to achieve the overall operating results and at the end of the day we always talk about the bottom line to achieve the overall operating results that we have historically achieved. So we don't have a lot of concerns in that area. Clearly there is an opportunity to be up or down and we say that all the time. We could be North of the historical ranges or South of historical ranges when you look it in a short-term. But when you look over the long-term and we've got a good comfort level and high degree of confidence that we can perform within those historically ranges.

Great, thanks guys. Nice quarter.

Thank you.

Thank You. Our next question comes from the line of Suzy Stein with Morgan Stanley. Please proceed with your question.

Hi, I wanted to know what the cancellation clauses are on these new agreements. I mean this go the way that the Sallie Mae agreement went, and I don't mean to sound so pessimistic but I'm just trying to think as part of the downside here.

No, it's an absolutely good question, and it requires a little bit of an explanation. The agreement we have at Sallie Mae was an agreement between our organization and their organization. So it included the termination clause. We really have agreements with these three lenders that we talked about to offer programs to our students. So we really not a party to the transaction but they are basically saying that these are the programs that we can make available to your students and there is not a termination cost per se and what I can tell you is when you work inside of those arrangements and you're not dealing with an agreement between the institution and the lender typically those are for academic year periods and you typically see those stay in place for the academic year. So we've talked in our release and will add here again that these agreements really cover the academic period through the rest of the '07 and '08 year and then into '08 and '09... through the '08, '09 period. So that's kind of how that typically works and hopefully gives you a little bit of color on sort of the term that exists.

Is it your sense so that these lenders will be much more strict about our credit requirements for the students than they have in the past. I mean I'm just trying to get a sense of whether or not we would see any kind of a change in enrollment growth essentially from this?

Well as we've mentioned earlier, it's our sense based upon the information we have from the lenders and also running our student profile through those underwriting criteria from a model-end perspective in going from that work, no, we're not expecting a change in what we see. We are clearly not going to change our enrollment practices and that line that we draw relative to students who are accepted is not going to change. Our model suggests there could be a little gap there that we intend to fill. We are not sure if that will exist or not, but it could be there and if it's there we fill it. So I think it's a best way we can describe it right now to say that we think that the financing we need to hit our internal goals, hit our historical performance is in place.

Okay, and just one final question. Would you be willing at this point just to give us a little more clarity on the way your population compares to others? Would you be willing to talk about specifically the graduation rate, current average salary, mix of students between associate and bachelors, things like that?

No, no, we talked about those things --

But not directionally, I mean more specifically.

We have specifically talking about those things.

Okay.

Associate bachelor was 75% associate, 25% bachelor. We talked about our graduate employment rates; we talked about out graduate salaries. We give those every year, we'll give them again in April and they are trending upward but we released those once a year. We've talked with those numbers. You can come back and see what the value proposition in the calculation for return on investment is. All that information is publicly available and out there. And if you take a look at what we have provided and you do the calculation, what you are going to come to is an incredibly attractive return on investment for our graduates of our programs of study. We say that without a single bit of hesitation because the numbers are there and the calculation is there for you to do and it stands by on it's own. And regardless of what other commentary you may hear from anybody else, we are absolutely confident in that regard and that's not a statement we make just on the basis of data over a couple of years. That's 20 plus years worth of data. We are confident in that.

Okay, thank you.

Thank you.

Thank you. Our next question comes from line of Brandon Dobell with William Blair. Please proceed with your question.

Thanks guys. Dan, couple of housekeeping question for you. Initially, looking at your EPS guidance for '08, any change to tax rates, share account, interest that we should be aware of or have you built any share repurchase assumption in your guidance for next year?

Yes, as we have in the past, they are share repurchase guidance and I think what I... by the comment I had earlier in terms of what you... how far we can go on share repurchase and still be compliant with the FRS rules that you could back into that. Interest, it should be in line with what you saw this year. Obviously this year changed from last year because of the instrument that's in place. What was the other one you were asking?

Tax rate.

Tax rate? We are projecting it to be in line with where it's at now. But as I've said before with the new rules in place and I do not getting into all details. There's more volatility potential there, right. That's not baked into that but right now I need to, I guess, offer that caveat.

Okay, that's fair. And then from my accounting perspective, one question on bad debt versus cohort default rate, what the delta is there and then maybe for Kevin related question as you think about the potential change to put the definitions on for default rates going from a certain time period to a year longer, does that change anything about how you think about the business or your regulatory standing or what it might do to the industry, I guess, overall?

Brand, as far as the cohort default rate comparing it to bad debt, there is really not a direct correlation there. I know... and if you go back and you would track those for us, I think, you will see that.

Okay.

And over the years, I mean, they come down dramatically as far as cohort default rates when you are talking back 10, 15 years.

Right.

I don't know that you can really track to that.

Okay.

As far as the other measures.

Sure, when... I believe you are asking about changes, potential was legislation that could change the calculation of the cohort default rate.

Right.

Now with the... for the most part has been publicly reported, I think we would agree with increase of cohort default rate for all institutions and in terms of whether or not that changes, the way we think about the business model that absolutely does not. And we think our business model will withstand any of those changes. Of course, there could be impact relative to timing of disbursements and things of that nature and that I want to caution everybody, this legislation is basically in a proposal. It hasn't even hit the house floor yet. So... and then we would have to go to the committee and really be discussed. So we are a long way off from that. However there could be changes on disbursements but it would not change our business model. We think we've got again a very stable business model, one that we've used for 20 plus years and we are confident in the types of programs we offer and in the value proposition.

Okay. And I just want to clarify something. I think Kevin earlier said there is really no standing obligations right now in terms of how the lending agreement that you have entered into now or set up. Is there anything that would change that meaning if you saw either cohort default rates or bad debts or payment behaviors hit a certain inflection point that there would be a trigger in those agreement or is there nothing like that built in?

There's nothing like that build in.

Okay, thanks guys.

Thank you.

: Thank you. Our next question comes from the line of Corry Greendale with First Analysis. Please proceed with your question.

Hi. Just a couple of quick follow ups. The -- with Sallie Mae, is there -- is that terminated for existing students as well or is there a sort of tail where there is going to be an impairment... people that already have arrangements in place?

Without getting in this specifics, there is certainly is a transitional period there, I will be very comfortable in saying that Sallie Mae, they are changing their business model but certainly they are going to pay attention to students needs and they have communicated to us and we certainly believe their commentary that we are going to do what we need to do to transition students needs. So we don't anticipate disruption there based upon their commentary and we feel confident we'll be able to make the switch in lending.

Okay. And could there be a little bit of residual impact in... from your risk sharing, in terms of they are still servicing those students that were already in place.

In terms of... are you saying operationally or financially or...

It could effect the... your revenue per student if you have to... if you're still... if the agreement is still there in terms of students who are already in place, so the risk sharing for those students.

No we don't anticipate that at all.

Okay. Second question. The 10% to 15% growth in marketing expense that you mentioned assumed kind of you've seen in the past from election cycles and the effect there on media rates?

It's safe to assume we are factoring all of that in.

Okay. And Dan is there any chance that or a likely chance that you're level of debt would change through the year, either that you pay it down or have to take on more along with repurchases?

Did you say level of debt?

Yes.

We do have more availability under the recent agreements that we re-upped. The only way we would do that... we would increase that would be to offset the impact of success and again that gets into the mechanics of the calculations. So there's no real need when we don't need it to finance our share repurchase program.

And last question is there any reason to assume any kind of front-end or backend loading in the timing of new campuses opening?

You know what, they are pretty even this year, actually if there's any kind of spike it might be in midyear more than anything else.

Okay. Thanks very much.

Thank you.

Thank you. Our next question comes from the line of Trace Urdan with Signal Hill. Please proceed with your question.

Hey, good morning.

Good morning Trace.

Kevin, how long have you been working with these vendors that you described in your press release and what kind of sort of experience level do they have with your students?

We have worked with some of these lenders in the past, not all of them at various times and quite frankly still have loans with... some students have loans with them right now. So they have experience relative to our student base. And of course we share data with them and help them analyze what the expectations are.

Okay. That's great. And then I'm sorry to drag you back to this because I know you talked about it, but I still... I'm clear exactly what the... sort of why there was a spike in the marketing spend in the December quarter and then why that level of spending won't be... won't persist in the subsequent quarters? Can you just get me through that again?

Sure. I don't believe there was any spike in this...

I'm sorry, as a percentage of revenue it was higher in this quarter than you are describing it's going to be going forward.

Sure. That was based on plan. I think if you go back to our third quarter script and you listen to the transcript there, you will see that we were saying we anticipated a 20% increase in spend coming into the fourth quarter which is exactly where we came out. We are saying going to the full year 2008, our anticipation is that it will come down to 10% to 15% range and we were asked earlier on this and we basically said there's couple of things going on there. We got some opportunistic situations developing with regard to some of those spot costs we take and so we like what we are seeing there. Always a situation that needs to be managed but we like what we are seeing there. In addition we have been able to work with some of mix and take advantage of that a little bit. And then really lastly we... and I didn't mention this earlier but we are looking at very positive response rates right now that are helping us a lot. And so that's factored into our plan as well.

So relatively to that last point why... what would be the reason for not... sort of pressing harder and allowing that to translate in the higher enrollment level?

I think our plan right now puts us in a position where we can grow the business in line with our comfort level, in line with our operating plan, and there are certain situations in the marketing spend. I don't want to get into too many details there. But you certainly can get a diminishing rate of return on additional spend. And so we are very mindful of that and the team does a great job there. They think right now with this spend and with this mix that we get the most efficient return on the investment and actually maintain growth rates within the ranges of our expectation that allow us to continue achieving our historical operating performance. So there's a model here that we utilize that we have been very effective with and based upon that model this is what it's telling us that we need to do, what we want to do in 2008.

Great. Well your model seems to be working well enough. So thank you.

Thank you Trace.

Thank you Mr. Modany, we're out of time today. I'll like to turn the call back over to management for any additional or closing comments.

Okay. We would like to thank everybody for their participation on the call today. I think you can tell that the management team here, we're confident in our ability to take advantage of the opportunities that exists in the marketplace. We feel like we have the necessary resources available to us to do, and what we expect to do and to achieve our internal goals and that we will continue focusing on student success rates and improving student success as we go forward. We'll look forward to talking all of you in April as we have our earnings call to talk about our first quarter 2008 results. Thank you very much and I hope you all have a great day.

Okay, this conference is concluded. Thank you for your participation. You may disconnect your lines at this time.