AMERICAN P UBLIC E DUCATION, INC.

(NNM: APEI )

July 31, 2009

Executive Management
Mr. Wallace Boston, Jr. joined APEI in September 2002 as Chief Financial Officer and,
since June 2004 has seiVed as President, Chief Executive Officer and a member of the
company 's board of directors. Prior to joining APET, from August 2001 to April 2002,
Mr. Boston seiVed as Chief Financial Officer of Sun Healthcare Group.
Mr. Harry Wilkins joined APET in February 2007 as EVP and Chief Financial Officer.
From December 2004 to February 2007, Mr. Wilkins seiVed as a member of the APEI
board of directors and from January 2005 to February 2007 he seiVed on the Board of
Tmstees of Ametican Public University System.
Ms. Carol Gilbert joined the company in May 2004 as Vice President, Progmus and
Marketing and was promoted to Senior Vice President Marketing in January 2005 and
was promoted to Executive Vice President Marketing in January 2009. Prior to APEL
Ms. Gilbert seiVed as Br.md Vice President at Marriott International where she led the
strategic plal111ing efforts for the SpringHill Suites' brand and directed business and
marlceting strategies for the Fairfield Inn brdlld, including the launch of the Fairfield
Ilm & Suites bnmd eA.1ension

Dr. Frank McCluskey, Ph.D. joined APET in April 2005 as Executive Vice President.
Provost. Prior to that. from July 2001 to April 2005, Dr. McCluskey served as Director
and Dean of Online Learning at Mercy College in Dobbs Ferry, New York.

Mr. Peter Gibbons joined APET in October 2002 as Vice President, Student SeiVices and
in January 2005 became Senior Vice President, Chief Operating Officer. In May 2007,
Mr. Gibbon's title was changed to Senior Vice President, Chief Ad1ninistrative Officer.

sterne
agee

Page 77

AMERICAN PUBLIC EDUCATION, INC. (NNM: APEI)

July 31 , 2009

[Ameil.can- PuiJHiEiiucaiion~7nc.--auai-liiiiiTncom_e_ statem-enT

_______________________________________________________________________________________________l

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Source: Company reports and Sterne Agee estimates

sterne

agee

Page 78

A MERICAN P UBLIC EDUCATION, INC. (NNM: APEI)

July 31 , 2009

Arvind !Jhatirt, CF:A

(214) 702-4001
American Public Education (APEI-NASDAQ) - CASH FLOW STATEMENT

($ millions, except per share)

FY06

3/2007

0612007

09/2007

12/2007

FY07

0312008

0612008

0912008

12/2008

FY08

2.5
2.0

1.5
0.6
0.1
(0.2)
0.5
2.6
0.5

0.5
0.1
0.0
0.4
(0.7)
0.3
0.3

3.8
1.3
(02)
0.3
1.3
6.5
0.2

3.0
0.8
0.0
0.0
0.1
3.9
(0.9)

8.8
2.8
0.0
0.6
1.2
13.3
0.0

3.4
0.9
0.0
(0.1)
0.6
4.7
1.3

3.9
1.0
0.0
0.9
0.4
6.2
(2.::?)

3.8
1.1
0.0
(0.2)
0.5
5.3
(23)

5.0
1.2
0.0
0.7
0.5
7.5
1.5

16.2
4.2
0.0
1,3
2.0
23.7
(1 7)

5.2
1.3
0.0
(02)
0.7
7.1
(::?.0)

(1.6)
1.4
1.7
0.0
4.5

3.4
(1 .5)
(1 .8)
(0.2)
0.5

(04)
0.1
0.1
2.9
9.4

(0.4)
0.0
1.2
(0.7)
3.0

1.0
0.0
1.2
20
17.5

(1 3)
0.9
0.0
1.3
7.0

1.8
(0 9)
0.0
0.1
5.0

3.3
0.0
0.0
1.5
7.8

(1.4)
0.0
2.8
(0.5)
10.0

2.5
0.0
2.8
2.5
29.8

(1 0)
16
(1 8)
2.4
6.3

(0.8)
0.0
0.0
0.0
(0.8)

(0.1)
(0.3)
0.0
0.0
(0.4)

(26)
0.1
0.0
0.0
(25)

(3.3)
(0.1)
0.0
0.0
(3.5)

(68)
{03)
0.0
0.0

(2.2)
(0.7)
0.0
0.0
(2.9)

(2 4)
0.3
0.0
0.0
(2 2)

(1 .9)
0.1
0.0
0.0
(1 .8)

(35)
(05)
0.0
0.0
(4.0)

(100)
(0.9)
0.0
0.0

(1 8)
(02)
0.0
0.0
(1 .9)

(2.0)
(0.3)
0.0
(0.1)
(23)

2.0
(1 9)
(00)
0.1
0.1

(2.0)
7.9
0.8
(0.1)
6.6

(2.0)

2.2

(0.0)
0.5
0.0
0.0
0.5

6.2
0.8
(0,1)
4.9

0.0
0.3
0.4
0.0
0.8

0.0
(0.2)
(0.2)
0.0
(0 4)

0.0
0.1
0.2
(0 1)
0.1

0.0
0.6
1.1
(0.2)
1.5

{0.3)
1g

0.0
0.6
(0.0)
0.6

Increase Decrease in Cash & ST Investments

6,2

4.2

(2.2)

71

6.2

15,3

4.8

2.4

6.1

7.4

20.8

5.0

Cash at Beginning
Cash at End

5.5
11.8

27.0
47.8

47.8
52.8

;
Operating
Net income
Depreciation, Depletion, & Amortization
Extraordinary Items & Discontinued Opers
Deferred Taxes
Other Funds
Funds from Operations
Aocounts Receivable
Inventory
Aocounts Payable & Aocrued Liabilities
Income Taxes Payable
Other Accruals
Prepaid Expenses, Other Assets & Liabilities
Net Cash Flow Operating
Investing
Capital Expenditures
Capitalized Program Dev Costs
Acqusitions, Net of Cash
Other Funds
Net Cash Flow. Investing
Financing
Payments on LT debt
Cash received from stock issuance
Excess tax benefit, stck based comp
Purchase of CIS
Net Cash Flow Financing

(06)
3,1
6.9
(1.0)
0:0
1.2
0.6
0.5
0.7
9.0
(4~
(.0~

(4,!i)

2.0
0.2
0.0

(7.'1)

11.8

no

(10.~)

0.8

1.4

0312009

Source: Company filings, FactSet

sterne
agee

Page 79

A MERICAN PUBLIC EDUCATION, INC. (NNM: APEI)

July 31, 2009

An iud Bhatia, CFA

(2J.I) 702-4001
A merica11 Public Educatioll (APEI-NASDAQ)- BALANCE SHEET
($ millions, except per share)
Report Basis Quarterly
Assets
Cash & Short Term Investment
Receivables
Inventories
Prepaid Expenses
Other Current Assets
Current Assets- Total

06/2007

0912007

1212007

0312008

06/2008

0912008

1212008

0312009

18.2
3.9

20.3
5.0

3 1.8
4.5

1.0
0.3
.23.5

1.1
0.4
26.7

27.0
6.0
0.0
1.6
0.3
34.8

1.7
0.6
38.5

34.9
6.8
0.0
1.6
0.7
43.9

41.4
8.9
0.0
1.7
0.9
5.2.9

47.7
7.5
0.0
2.2
0.6
58.0

53.0
8.0
0.0
2.3
0.9
64.2

9.8

0.0
10.8

0.0
14.7

0.0
16.1

0.0
16.9

0.0
20.1

1.5

1.2

1.3

0.0
19.6
30.3
10.7
1.2

Investments in Uncons Subsidi

Property Plants & Equipment PP&E Gross
Accum Depreciation, Deple
Other Assets
Intangible Assets
Total Assets

0.7

1.6

0.0
13.4
19.9
6.5
0.8

34.0

39.2

49.0

54.7

61 .2

71 .0

78.8

85.6

Liabilities & Shareholders' Equity

Accounts Payable
Other Accrued Expenses
Taxes Payable
Short Term Debt & Curr Portiot
Current Portion of L T Debt
Other Current Liabilities
Current Liabilities- Total

1.2
3.6
0.6
0.0
0.0
9.1
10.8

2.0
4.1
0.0
0.0
0.0
10.9
12.9

2.5
4.3
0.0
0.0
0.0
10.9
13.4

1.9
3.7
0.9
0.0
0.0
11 .7
14.5

1.6
5.7

4.3
6.4

0.0
0.0
13.7
15.3

0.0
0.0
16.0
20.3

4.9
7.1
0.0
0.0
0.0
16.7
21 .6

3.9
4.2
1.6
0.0
0.0
16.1
21.6

1.6
1.6

2.1
2.1

2.1
2.1

2.2
2.2

3.2
3.2

3.2
3.2

3.7
3.7

3.8
3.8

0.0
0.0
0.0
0.0
12.4

0.0
0.0
0.0
0.0
15.0

0.0
0.0
0.0
0.0
15.5

0.0
0.0
0.0
0.0
16.7

0.0
0.0
0.0
0.0
18.5

0.0
0.0
0.0
0.0
23.5

0.0
0.0
0.0
0.0
25.3

0.0
0.0
0.0
0.0
25.4

Non-Equity Reserves
Minority Interests

0.0
0.0

0.0
0.0

0.0
0.0

0.0
0.0

0.0
0.0

0.0
0.0

0.0
0.0

0.0
0.0

Preferred Stock
Non-Redeemable
Redeemable

0.0
0.0

0.0

0.0
0.0
0.0

0.0

0.0
0.0
0.0

0.0
0.0
0.0

0.0
0.0
0.0

0.0
0.0
0.0

Common Equity
Common Stock
Capital Surplus
Retained Eamings
Other Appropriated Reserves
Treasury Stock

21 .6
0.1
27.6
(6.1)

24.2
0.1
28.0
(3.9)

33.5
0.2
128.0
(94.7)

38.0
0.2
129.1
(91.3)

42.8
0.2
129.9
(87.3)

47.5
0.2
130.9
(835)

53.5
0.2
132.1
(78.5)

60.2
0.2
133.3
(73.3)

0.0

0.0

0.0

0.0

0.0

0.0

0.3

0.0

Total Stockholders Equity

21.6

24.2

33.5

38.0

42.8

47.5

53.5

60.2

Total Liabilities & Shareholders' Eq

34.0

39.2

49.0

54.7

61 .2

71.0

78.8

85.6

Deferred Taxes
Deferred Taxes- Credit
Deferred Taxes- Debit
LTDebt
LT Debt Excluding Capitalized
Capitalized Leases
Other Liabilities
Total Liabilities

1.3

Source: Company filings, FactSet

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DEVRY, INc. (NYSE: DV)

July 31 , 2009

Company Report

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Education

July 3 1, 2009 111 9 Pages

RA TJNG: NEUTRAL

DEVRY, I NC. (NYSE: DV)

INITIATING COVERAGE WITH A NEUTRAL
DIVERSIFIED MODEL, HIGH GROWTH,
AND
EXPANSION KEYS TO STORY

RscaiYearEndsJun

RATING;
MARGIN

Initiating with a Neutral Rating. We are initiating coverage

of DeVry Inc. (DV) with a Neutral rating. Although we are
not initiating with a price target, our valuation analysis
suggests DeVry equity fair value per share is ~$53.

Rating:

Neutral

Price:

$49.18

Price Target:

$38.19-$64.69

52-wk Range:
Market Capitalization (M):

$3,573.5

Shares Outstanding (M):

72.7

Diversified Model Mitigates Risk and Allows Steady

Growth. We believe DeVry' s business model that includes

Debt/Equity:

1192.1
18.5%

Enterprise Value:

$3,414

vertical. horizontal and geographic diversification not only

helps mitigate risk but should allow more steady ru1d
sustainable growth versus its peers. Over time, tlus could lead
to above avemge relative valuation for tl1e stock.

Anrind Bhatia, CFA

Luke Shagets

(214) 702-400 I
abhatia@stemeagee.com

(214) 702-4030
lshagets@stemeagee.com

Avg. Daily Vol. (000):

Recent Focus on High Growth Healthcare Segment. Most

recently, DeVry has been expanding its efforts in U1e high
growth area of Medical & Healthcare (16 of the top 30 fastest
growing occupations are in healthca re), including via its
acquisition of US Education last year. With huge shortages
for physicians and nurses continuing, DeVry is well
positioned to benefit from llus trend.

FYE Jun
Revenue (M):
Operating Income (M):

2008A
EPS:

P/E Ratio:

Q1
Q2
Q3
Q4
Full Year

Earnin s Summar
2009E
$1,441 .6
$233.3

2008A
$1,091.8
$162.3

$0.43
$0.51
$0.54
$0.35
$1 .83
26.9x

EPS & PIE Summar

2008 Previous
2009E 2009 Previous
$0.51
$0.61
$0.75
$0.53
$2.40
20.5x

2010E
$1,721 .1
$288.6

2010E

2010 Previous

$0.64
$0.77
$0.86
$0.65
$2.93
16.8x

Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification,
Investment Banking , Ratings Definitions, and potential conflicts of interest begin on Page I of the Appendix Section.

800 Shades Creek Parkway

Suite 700

Birmingham. AL 35209

Sterne, Agee & LeQCh , Inc. Is Member FINRAISIPC

205-949-3500

D EVRY, INC. (NYSE: DV)

July 31, 2009

o

Margin Expansion Potential Well Beyond mstol'ical Peak: With the

turnaround now complete, we expect the company to continue expanding
operating margins. We project the company will reach its historical peak
operating margin of 17.2% within the next 12 months. Furthennore, we believe
the company can achieve operating margins close to 21% in the next five years.
We are projecting revenue and EPS CAGR of 14% and 20%, respectively. over
the next five years.

Risk The biggest risk factors facing the company and the industry include: a)
risk of increased government regulation under the new administration; b)
potential slowdown in enrollment growth as the economy improves; c) increased
stt1dent lmm defaults; d) student financing issues; e) risk of losing accreditation
and; f) litigation risk.

Comna nv Over-view, Histor-v. Business segments:

DeVry Inc.. one of the largest publicly held. intemational. higher educational
organizations in North America. is the parent organization for DeVry
University. Ross University . Apollo College, Western Career College.
Chamberlain College of Nursing, Fanor. Becker Professional Review. and
Advanced Acade1nics. Inc. The company operates through 93 North American
locations as well as De VI)' University Online. The online graduate offering has
been available since September 1998 while the online undergraduate program
has been available since 2001.
Business Segments
DeVry University (-69% of revenue; - 50% of profits)- the university offers
associate, bachelor' s and master's degree progr'cllllS in technology. healthcare
teclmology, business and management. Undergraduate degree programs are
offered in the U.S. , Canada and online. Graduate degree programs in
management are offered through DeVry University' s Keller Graduate School of
Management. DeVry University has been accredited by the Higher Learning
Commission of the North Central Association of Colleges and Schools, which is
one of the six regional collegiate accrediting agencies in the U.S. The segment
includes 65,000+ students in Associate, Bachelor' s and Master's programs.
Programs are offered through 93 locations and online.

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DEVRY, INC. (NYSE: DV)

July 31, 2009

DeVt-y University offers, among others, the following Degree programs and
services:
Associate Degree Programs
Accounting

Electroneurodiagnostic & Computer Teclmology

Health Information Technology
Network Systems Administration

Web Graphic Design

Bachelor's Degree Programs
Business Administration
Biomedical Engineering Teclmology
Computer Engineering teclmology
Computer Information Systems
Electronics Engineering Technology
Game ~md Simulation Programming
Infonnation Technology
Network Conmnmications Management
Technical Management
Master" s Degree Programs
Educational Technology
Electrical Engineering

Accounting and Financial Management

Business Administration
Human Resource Management
Infonnation Systems Management
Network and Communications Management
Project Management
Public Administration

The Schools
Advanced Academics was fotmded in 2000 and opemtes online secondary
education to school districts thru the U.S. DeVry acquired the company in
October of 2007. Adv~mced Academics is accredited by the North Central
Association of Colleges and Schools and the C01muission of International ~md
mms-regional AccreditatioiL For repotiing JlUfJlOses, revenues of Advanced
Academics are included under the DeVry Univer-sity segment.
Fanor: Based in Brazil, Fanor offers undergraduate and graduate progrcuns in
business management. law and engineering through its three schools:
Faculdades Nordeste, Faculdade Ruy Barbosa, aud Faculdade FTE AREAl.
These three institutions operate five campus locations in the cities of Salvador
and Fortaleza, and serve more than 10,000 students. DeVry acquired Fanor in
March 2009. Under the tenns of the :final agreement~ DeVry purchased an 82.3
percent majority stake in Fanor, including real estate and also reducing Fanor
debt, for a total cash outlay of $40.4 million. Funding was provided f rom
DeVry ' s existing operating cash balances
Medical & Healthcare (~25% of eveoue; 36% of 1>rotits): This segment
includes Ross University. Chamberlain College of Nursing, Western Career
College/ Apollo College (US Education).

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DEVRY, INC. (NYSE: DV)

July 31, 2009

Ross University was founded in 1978 and is one of the largest providers of
medical and veterinmian education. The University is comprised of Ross

University School of Medicine and Ross University School of Veterinary

Medicine. Ross was acquired by DeVry in 2003. Ross Medical students
complete a four semester basic science and pre-clinical curriculum in classrooms
and labs on campus in Dominica followed by a one-semester class in clinical
medicine. Following the aforementioned classes, students can complete the
remainder of the 10 semester program by participating in clinical rotations under
Ross University direction, and conducted at more th~m 50 affiliate teaching
hospitals. The Ross medical prob'Tdm is modeled after the educational progrdms
offered at U.S. medical schools. but the Ross programs consists of three
academic semesters annually. This allows students to complete the progrdn1 in
less time th.:m they \Vould at U.S. medical schools. The program prepares
stt1dents for general medical practice a11d provides the foundation for
postbrrdduate specialty tr~ning primarily in the U.S. The medical School is
authorized by the Conunonwealth of Dominica to confer the Doctor of Medicine
De!:,>ree and the program is accredited as a University and School of Medicine by
the Dominican Medical board. The National Conmuttee of Foreign Medical
Education of the U.S. Department of Education has affirmed that standards of
educational accreditation that are comparable to those of the U.S. have been
established and are enforced. Ross Veterinarian students complete a sevensemester pre-clinical curriculum structured to provide a veterinary education
that is modeled after educational programs at U.S. veterinary schools. After
completing the pre-clinical work. students enter a clinical clerkship lasting
approximately 48 weeks at one of 21 affiliated U.S. CoiJeges of Veterinary
Medicine. The Veterinal)' School is accredited as a University and School of
Medicine by the government of St. Kitts and is chartered to confer the Doctor of
Veterinary Medicine.
Cha mberlain College of Nursing was founded in 1889 and was acquired by
DeVry in 2005. The CoiJege offers nursing degTee progra1ns at it four U.S.
campuses and online. Together with Ross University. Chamberlain makes up
DeVey's Medical and Healthcare segment. Chamberlain 's BSN (Bachelor of
Science in Nursing) program is a traditional on-campus baccalaureate pro!:,Tdln
but enables students to complete the coursework in 3 years of study mther than a
traditional BSN probrrdm which requires 4 years. The school also has progrdlns
that allow registered nurses to achieve BSN designation and for Licensed
Practical Nurses to Associate of Science in Nursing designation. Chamberlain
College is accredited by the H igher Learning Conmussion and both the BSN and
ASN programs are accredited by the National League of Nursing Accrediting
Commission.
Western Cateer College/Apollo College (US Education): Apollo College is a
leading provider of career-focused, outcome-based postsecondary education in
heatJ1care and related fields. The school has nine campuses t11roughout the
Western US. Western College is a leading provider of educational programs in
Northern California that lead to careers in fie lds such as nursing, dental hygiene,
dental assisting. medical assisting, phannacy teclmology, ultrasound technology,
veterinary technology, criminal justice and graphic conununications. There are
currentJy 18 educational progmms taught at 8 campus locations. Combined,
Western Career College and Apollo College have 9,000+ students.
Professiona l E ducation & Training (--6% of revenue; 12% of profits): This
segment includes Becker CPA Review, Becker CPE, Stalla CF A Review and
Center for Corporate Education. Becker Professional Review was acquired by
DeVry in 1996 ~md prepares candidates for the Certified Public Accountant and
Chartered Financial Analyst professional certification exams. The school also
offers continuing professional education progrdtns and seminars in accounting
and fu1ance. Becker offers classes at rougltly 300 sites, including 27
international locations.

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DEVRY, INC. (NYSE: DV)

July 31, 2009

Diversified Model Mitigates Risk and AIJows Steady Growth. We believe

DeVry 's model that includes vertical, horizontal and geographic diversification
not only helps mitigate risk but should allow more steady and sustainable
growth versus its peers. Over time, this could lead to above average relative
valuation for the stock. Vertical diversification refers to presence in various
verticals such as business, technology, arts, education and heaHhcare. Horizontal
diversification refers to educati.on at various program levels, including Doctoral,
Master' s, Professional, Bachelor' s. Associate and High School. Geographic
ex'Pansion is self-explanatory and is most recently exemplified by the company 's
acquisition of F~mor in Brazil.
Revenue T tend
The company bas posted impressive growth in revenue as can be seen fro m the
below c harts. We expect tlmt revenue will increase at a long-term CAGR of
13% from ~$505 million in FYOO to more t11an $2.7 billion in FY14. Revenue
growt11 wil1 be driven by continued strength in enroUment trends. execution on
t11e company 's healthcare initiative. and capitalizing on overall industry trends.

$3,000

$2, 500

~H

'I

CAGR- 13% (FYOO-FYl~E)

$2,000

$1, 500

$1 ,000

$500

so

n~

~r ..
,..

,..

I"

"~illi--

:.;

Souroe: Company reports. SAL estimates

Revenue Mix By Segemnt

Professional
and training, 6%
Medical and
Healthcare, 25%
DeV1y

University. 69%

Source: Company reports

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DEVRY, INC. (NYSE: DV)

July 31 , 2009

Growth Strategy/Margin Exuansion

Recent Focus on High Growth Healthcare Segment: Most recently, DeVty
has been expanding its efforts in the high growth area of Medical & Healthcare.
We note Ulis segment includes 16 of the top 30 fastest !,"rowing occupations in
tl1e US. The company 's recent acquisition of US Education has helped nearly
double its revenue in Ulis segment. Witl1 huge shortages for physicians and
nurses continuing, DeVty is well positioned to benefit from this trend. US
Education was purchased in September 2008 for $290M, which represented
~llX 1TM EBITDA. TTM revenues were $144M and operating margins were
~13.5% compared to -3 1% for DeVcy's existing healthcare business.
Management believes US Education operating margins will likely expand
significru1tly. potentially reaching DeVcy's existing healthcare margins in the
next two to three years.
Margin E xpansion Potential Well Beyond Historical Peak: With the
turnaround now complete, we expect t11e company to continue expanding
operating margins. We project the company wi ll reach its historical peak
operating margin of 17.2% witltin the next 12 montl1s. Furthennore. we believe
the company can achieve operating margins close to 21% in the next five years.
We are projecting revenue and EPS CAGR of 14% and 20%, respectively, over
the next five years.

Gross Man,rin, Onerating Magin Tend:

Operating Income Mlx By Segernnt

Professional
and training,
12%

DeVry
University, 50%

. _ ,/

Medical and
Healtltcare, 36%

Source: Company reports

Operating Margins
23.0%
21.0%

19.0%

17~0

17.0%

... ,;

15.0%
Jl.?IO IU%

14.6~ 15.1%

11.0%

r- r- r- -

9.0%

!- !- !-

7.0%

1- 1- 1-

- -

5.0%

13.0%

!- !-

1!.7~

--

- -

..

., ,.

' v

96

97

98

u ..,.

11..1'%

1-

r-

1- 1- 1- 1-

99 2000 01

-n-

!- !02

03

1-

r- r-

!- !- !- !-

!-

1 7. 1 ~

u.~

r- r-

16.5%

!- 1-

!- !!-

04

OS

06

--

11.ll!4

IM"

111~

3.0%
1994 95

)Previous
Peak

!1-

'-

!-

- - - ,.__
- - ,_
'--

!- !- !-

1- 1- 1-

- -

!-

!-

'-

1-

!-

f-

1-

1-

,_

1-

1-

--

r1f1-

07 2008 09E tOE liE l2E l3E 14E

Source: Company reports, SAL estimates

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Page 86

DEVRY, INC. (NYSE: DV)

July 31 , 2009

Enrollment T tend/Student Funding

While the majority of DeYry students are enrolled in Bachelor's program. one
can see from tl1e charts below that tl1e graduate degree progrdm enrollment is
growing at a faster rate. We expect tlus trend to continue due to the company 's
focus in the !ugh !:,rrowth healtl1care sector.
Percent of Enrollments b~ Degree
Fall 2007
Fall 2006
Doctoral
Master's
Bachelor's
Associate

6.5%
21.3%
61.7%
10.5%

6.8%
21.3%
61.4%
10.5%

Percent of Enrollments b~ Program

Fall 2006
Fall 2007
30.8%
Technology
32.5%
57.1%
57.6%
Business
Medical and Health
12.1%,
9.9%
Source: Company reporls

.\ Hra~{ Erll'olll-mnl (Summer. Fall, and

Sprin~)

Undergraduate, y-o-y grow1 h

FY09
45,907
FY08
43.727
FY07
39,401
FY06
37.763
FYOS
38,523
Graduate, y-o-y growth
FY09
16,017
FY08
15, 179
FY07
13,535
12,3 14
FY06
FY05
11,591
Online (inlcuded in undergrad/grad), y-o-y growth
FY09
44.503
FY08
40,339
FY07
32.020
FY06
24.779
FY05
16, 195
Source: Company reports

5~'o

11%
4%
-2,'o

6%
12%
10%
6%

10%
26%
29%
53%

As we highlighted in our industry report, a U.S. Department of Education

regulation known as tl1e ''90/ 10 Rule" states that if an institution derives more
tllan 90% of its revenues from federal financial assistance programs in any one
year, then the prognun will be place on provisional status for two fiscal years
following the violation. If the institution violates the mle for two consecutive
years, then the institution is unable to participate in Title IV frmding for at least
two fiscal years. DeYry's frmding sources by school are hlghlighted in the
below chart:
Fiscal \ (:u

DeVry University:
Undergraduale
Graduate
Ross University
Chamberlain College of Nursing
Source: Company reports

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I Y07

FY06

70%
65%
80%
70%

75%
60%
63%
35%

Page 87

DEVRY, INC. (NYSE: DV)

July 31, 2009

Valuation Analvsis
As the table on the following page shows. we detennined DV's fair value to be
suggesting the stock suggesting potential upside of ~8% from current
levels. Additionally, we detennined an average high and low range of $108 and
$36. respectively.

~$53

For our valuation a11alysis and target price derivation. we looked at a number of
methodologies on a 5 year historical basis including:
13.
14.
15.
16.
17.
18.

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Forward PIE Multiple Trends

PEG (PIE to Growth) Trends
Trends in Fotward PIE Multiple Relative to Market
EV to Sales Trends
EV to EBITDA trends
DCF

Under the first 5 methods, first we derived three different values for the
stock using its historical avemge, historical low and historical high
multiples.

Next, we assigned probabilities to the average, high and low case

scenarios. In general, we assigned either a very low or a zero
probability to the high case scenario (to be conservative). Specifically
for DV, we gave the stock a 50% probability of trading at its 5 year
historical average for each of the aforementioned methodologies. We
assigned a 50% probability of the stock trading at its historical low for
each methodolob'Y

Finally, we derived our fair value price by averaging the results from
the met11ods used above.

Page 88

DEVRY, INC. (NYSE: DV)

July 31, 2009

Valuation Analysis

Fonvard NTM PIE

PEG

Fonvard PIE
Relative to
S&P 500

Current
Historical Avg
Premium/(Disc) Vs Avg
Historical Low
Premium Vs Low
Historical High
Discount Vs High

16.3x
25.6x
-36%
13.9x
17%
36.6x
-55%

0.7x
1.4x
-49%
0.6x
17%
2.4x
-69%

l..lx
1.8x
-36%
l.Ox
17%
2.4x
-53%

2.43x
2.5x
- 1%
1.4x
70%
4.0x
-39%

.12.3x
LS.Ox
- 18%
7.7x
59%
24.1x
-49%

FOR PROFIT EDUCATION GROUP

Current
Historica I Avg
Premium/(Disc) Vs Avg
Historical Low
Historical High

18.6x
23.5x
-21%
17.2x
32.3x

0.8x
l.3x
-33%
0.8x
1.8x

l.3x
1.6x
-21 %
1.2x
2.5x

3.0x
3.2x
-9%
2.3x
4.6x

l2.2x
12.9x
-5%
9.6x
17.2x

0.9x
l.lx
-20%
0.7x
J.5x

0.7x
1.4x
-49%
0.6x
2.4x

0.9x
l..lx
-20%
0.7x
1.5x

0.8x
0.8x
9%
0.6x
0.9x

l.Ox
1.2x
-13%
0.8x
J.4x

Vto
Sales

Vto
EBITDA

5 Year

Vto
Sales

EVto
EBlTDA

Average

DV

-28%
36%
-53%

-18%

Company Relative to GROUP

Current
Historical Avg
Premium/(Disc.) Vs Avg
Historical Low
Historical High

Tarl!<"f l'l'in & l pside/ I>on nsid< Detennination

Forward NTM PIE

PEG

Fonvard PIE
Relative to
S&P 500

Current Stock Price (7/30/09)

Value At Historical Avg
Value At Historical Low
Value At Hi~1orical High

$48
$75
$41
$108

$48
$95
$41
$156

$48
$75
$41
$101

$48
$48
$28
$79

$48
$58
$30
$94

Probabilitiy for Each Scenario

Average
Low
High

50%
50%

50%
50%

50%
50%

50%
50%

50%
50%

0%

0%

0%

0%

0%

Pro babilitiy Weighted Value

$58

$68

$58

$38

$44

$53

Upside Value
Downside Value

$108
$4]

$156
$41

$101
$4]

$79
$28

$94
$30

$108
$36

Source: FactSet, SAL Estimates

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Page 89

DEVRY, INC. (NYSE: DV)

July 31 , 2009

Valua tion Char1s NTM PIE, NTM PIE Relative to S&P 500, NTM PEG,
Relative to the Group, 52 Week Range:
O Vr't,_..C (O'i)

_....1 .. lta) tl.t.,..lltttl'

,,......... ,.,..>.lf't'W~ioli\)
-~

~QJG

. .,.,._....v-.--..

jv\ ~j

\\

~.J~\;V .

Vr

...
--NTM PIE: The stock is tmding near the historical low on the basis of Price to NTM
.....

EPS. Over U1e last two years, DV has tmded as high as 32 .9x NTM PIE, as low as
13.9x, and at an avemge of23.2x. It's currently tmding at 16.3x.
OtWo, lllC.. tO'it
(' :&
-~~ ~ (~.-..
I'H!?tt. p,.,....~
-

l'Y...t~f_...

- o--

""""',..,_"""--~->

- . . . . .

---- .)1:11;-------

. --- ,. .

-- . ..... - -- -. ....
.

..

NTM PIE Relative to S&P 500: The stock is tmding at a slight premium relative to
the S&P 500 on a NTM PIE basis. Over tlle last 2 years. the stock has traded at an
average premium on this basis of 1.77x. The high premium was 2.40x while the low
was 0.98x. Currently. DV is trading at l.l4x the S&P 500 (on NTM PIE).

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Page 90

DEVRY, INC. (NYSE: DV)

July 31 , 2009

.,..

'""

- .=
..--,..,.

"'"

NTM PEG: On a NTM PEG basis, the stock looks cheap, trading near its historical
low on that basis. Over the last 2 years, the stock has traded as high as 1.7x, a low of
0.6x, and at an average of l.lx. Its current PEG ratio is 0.7x.
O.V'\'~L .OYi

..

. . .(.,......_,,.,.,

0'-Ut?l'OlJ;.t.~k'o

;:,.,.~~,..._ ,..~~~

1"...~.......;~ '''" ~--ot(,-...o..(t.t~. ,.. ........

..

..,.

~ 12% discount to t11e group

whereas over U1e last 2 years it trades at a~% discount. The high valuation relative
to the t:,'luup was l.l4x wllile the low was 0.73x

Relati\,e to the Grou1>: The stock is trading at a

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Page 91

DEVRY, INC. (NYSE: DV)

July 31 , 2009
D'lt"Ty In<:. {OV)
OV ;i:$169-)10:)

?2t:tc.t

,._~i

CO'flrtlOtt t"Xk.

i'&-.Air-20C.f so ~J:IIlO(:@ !Jtt ,:

- PTI(:e~JS())

sec

Jv..v

....

~-~~-

WH

:,~

- ~

.q_~

-:.o~.r..-.:A~o~

52 Week Range: The stock is ITading close to the mid-point of its 52 wk high and
low rdllge. It has traded as high as $62.63. as low as $39.03. and is currently at
$49.18.

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Page 92

DEVRY, INC. (NYSE: DV)

July 31 , 2009

Recent Results
DeVry reported their Q309 (March) quarter on 4/23. The company reported
revenues of $391. 9 million. which compares to $291 million in the prior year
period and to consensus of $388 million. Operating EPS were $0.70 compared
to $0.53 in the prior year period and bested consensus by $0.06. Results in the
q11arter \Vere driven by solid enrollment trends. Spring enrollment at DeVry
University increased 19% over the spring term last year to 53.259 students.
Courses taken online increased by 27% from 43,889 to 55,745. The company
ended the quarter with - $295 million in cash and -$135 million in debt for a net
cash position of - $160 million.

Track Record (Trailing 12 quarters EPS teported vs. consensus):

DeVry has beat consensus on an EPS basis in 4 out the last 6 quarters and beat
on sales in each of the last 6 quarters.

E arnings Per Share -Surprise

Fiscal Qtt
Q309
Q209
Ql09
Q408
Q308
Q208

Actual
$0.74
$0.59
$0.48
$0.34
$0.53
$0.49
S0.53
Sou rce: Factset

Consensus
$0.68
$0.59
$0.45
$0.37
$0.46
$0.41
SOA9

Smp
Amt
$0.06
($0.00)
$0.03
($0.03)
$0.07
$0.08
SII.O~

%
Sutp
9.2%
-0.7%
7.4%
-8.J%
15.2%
20.4%
7.2%

% Ptice
Impact
0%
- 12%
9%
-9%
11%
8 1%
13.3%

Sales (millions) - Sut:prise

Sutp
Fiscal Qtr Actua l
Q309
$391.90
Q209
$369.60
Q109
$303.70
Q408
$276.80
Q308
$291.00
Q208
$273.70
.\Hragl S317.78
Soutce: Factsct

sterne
agee

Consensus
$388.20
$363.80
$294.80
$272.40
$284.30
$267.70
S311.87

Arut

$3.70
$5.80
$8.90
$4.40
$6.70
$6.00
S5.92

%
Sutp
1.0%
1.6%
3.0%
1.6%
2.4%
2.2%
2.0%

% Price
Impact
0%
-12%
9%
-9%
11%
81%
13.3%

Page 93

DEVRY, INC. (NYSE: DV)

July 31, 2009

Executive Management
Daniel Hamburger - President and CEO - Mr. Hamburger joined De Vry in
November 2002 as Executive Vice President with responsibility for DeVry 's
online prof:,>rdms and Becker Professional Review division. In July 2004, Mr.
Hamburger was appointed President and Chief Operating Officer of De Vry. Mr.
Hamburger was appointed Chief Executive Officer in November 2006. Prior to
joining DeVry. Mr. Hamburger was Chairm~m and Chief Executive Officer of
Indeliq, a developer of simulation-based training software, which merged with
Accenture Learning in 2002. Prior to that, Mr. Hrunburger was President of the
Internet Commerce division of W. W. Gminger.
David Pauldine - EVP, DeVry and President, DeVry University -Mr. Pauldine
joined DeVt)' in October 2005. In July 2006. he became President of DeVry
University. Inc. Prior to joining DeVry. Mr. Pauldine was Executive Vice
President at EDMC and President of The Art Institutes. a market-funded
educational management company. from July 2001 to October 2005.
Thomas C. Shepherd - EVP. DeVry Inc. and President. Ross University -Dr.
Shepherd joined DeVry in October 2004 as President of Ross University. Prior
to joining DeVry. Dr. Shepherd was President of Bastyr University. a
Washington based university with offerings in healthcare education. He also cofounded Royale Healthcare. a hospital management company. and has served in
senior management roles for several hospitals and healt11care facilities.
Richard M. Gunst - SVP. CFO and Treasurer. DeVry Inc. -Mr. Gunst joined
DeVry in July 2006 as SVP. Chief Financial Officer and Treasurer. Prior to
joining DeVry, Mr. GmlSt served as Senior Vice President and Chief Financial
Officer of Sagus International, a manufacturer of school furniture, from 2005 to
2006. Mr. Gunst served as Senior Vice President and Senior Film1cial Officer
of ConAgra Refrigerated Foods Group. from 2003 to 2004. He was also Chief
Financial Officer of Quaker Foods and Beverages. from 2001 to 2003.
Insider Owner-shiu
Ilold<'l' :\mne
~_1;-ER, DENNIS.

r AYLOR, RONALD
H.~VIBU.RGER, Df...t'ITEL
PAULDINE, DA VlD
MCGEE, JULIA
MONTGOMERY, GEORGE
BROWN, DAVIO
GUNST, RICHARD
MCCORJ'v1ACK, ROBERT
KREHBIEL, FREDERICK
PARROTT, SHARON
TOTAL INSIDER OWNERSI-llP

Till<'

Director
Director
Pres ident/CE9
Executive VP
Director
Pres ident, USEC
Director
Executive VP
Director
Director
Senior VP

l'osilion

,?,566,0?_9
1, 147,515

) 1_.946
22,595
22,526
8,420
7,500
4,588
2,284
l ,700
l ,247
8,822,420

:\lkl \ a l
3~,9~8,616

55,356, 124
1,830, 515
1,089,983
1,086,654
406.181
361 ,800
221,325
I 10, 180
82,008
60, 155
425.593.541

/o ofOulshmdino

10.59%
1.61 %
0.0?~

0.03%
0.03%
0.01%
0.01 %
0.01%
0.00%
0.00%
0.00%
12.35%

Source: FactSet

sterne
agee

Page 94

DEVRY, INC. (NYSE: DV)

July 31 , 2009

r->~\ll)f;-liJ-~~-~-il~l1t~fljf-liJ-~<>liiE!-~i<i-~Eili1E!iii-------------------------------------------------------------------------------------------------------------------------------l

Arvind B h atia, CFA

21./- 701-1001
DeVry f nc. (DV-NYSE) Eami ngs M()del
(S millions. except pershaJe)
FY
05A

Tuition

Other educational

Total re\r('nue:
Cost of educationa1 se1vices
Loss (Gain) on sale o f asseiS

Student se1vices and administrative

Seperallon plan severance cos I~ otlter
T otal costs/e-xpen ses

l nco mt' from Operations

FY

FY

FY

F'Y

liE

12E

13E

ill.

Sl ,792,905
Sl47,227

S ~J4,9 82

s 1,590,526
$130,60 1
$ 1.72 1,127

S l ,9~0, 132

S2,020,754
s t65,937
$2,186,692

$2,264.342
Sl85,940
52,450,282

S2 ,521,9S3
$207,094
$ 2,729,048

S205 ,96 1 S201,397

so
so
$164.759 S l69,547
so
so
$370,720 S370,944

S781,942
so
$650,542
so
5 1,432,484

S871,749
so
S720,953
so
SI.S92,702

5971,601
so
$795,061
so
S l.766.662

Sl,076,469
so
S884.316
so
$1, 960,784

S l, l85.292
so
S979,658

$288,643

$347.430

S20.030

$489, ~9 1

$564,098

FY

FY

Q2A
Do c08

Q~F.

FY

OSA

Q IA
S opt0 8

QJA

07A

Ma~9

Juno 0 9

091(

S862.660
S70.813

Sl ,004,029
S87,804
SI,091,8J3

S279, 127
S24, 590
$303,717

S342, 0H
$27,571
$369,615

5360,629
$31,253
S39!,882

S350,595
$25.158
$376,353

Sl ,332,395
SI09, 172
$ 1,4.41, 567

S365.73 1 5399,077
S32,2t9
S32,168
S397.950 .S.t3J ,l46

S503,133
S3.743
S422.622
so
S929.498

5139,613
so
Sll7,292

S l67, 107
so
S l39, 968

S l7 5,757
so
$148,475

S256,905

$307,075

Sl78,201
so
$137,917
$3.977
5320,095

S324.232

S660,678
so
SS43,652
S3.977
Sl.208,307

s 18 1.339
so
$154 .973
so
S336,3 12

S l93,246
so
$ 161,263
so
5354,509

S102,287

5162.335

$46.812

$62.540

$71,787

$52,121

S23J,260

S61,639

S76.7J7

Sl,789

-$1.184

SJ.U2

$1.262

$3.129

Sl.SOO

51.500

s 1.500

S l, 500

$6,000

S7.000

$9.000

$11.000

S l3.000

$48,601

S61. 356

$7),049

$53.383

$236,389

563. 139

$78,237

$87,729

$65.538

S294,643

$354,430

$429,030

5500,491

$577,098

S737,132 5781,813
S59.694
S44.172
S78!.304 S841,507

S933,~7J

S44 1,508 S453,066 $486,72 1

-S45 1
-S20,8 12
so
$309,013 $323,0 10 S359.025
S6,252
so
so
S150,521 5715.625 $83 1,186
S30,78J

FY

I OF.

FY
06A

$65,882

QIE
S opt0 9

Q2E
Doc09

QJE
Mar10

Q4E
J u n o10

S420,501
S36,442
S456,949

S405,211
S29,771

S86.2Z9

$64.038

so
52.164.950

lntcrest and otller income. net

-$9,047

58.399

$2,653

$9,941

Inco me befol'e taxes

$21.736

$57,483

$104,940

$172.276

Income 1ro<

$5.794

$14.430

$28.152

$46,744

$13,77 1

$18,491

S22,l63

$16,196

$70,621

$18.942

$23,471

$26.3 19

$19.662

$88,393

$106.329

s 128.709

$150,149

$173.129

Net I ncome, As Rcportl

S1S.942

$43.053

S76.188

$125.532

SJ4.8JO

$~2.865

$50,886

$37,187

$165,768

S4 ~ . 1 97

$54.766

S61.410

$45.8 77

$206..250

$248,101

$300,321

S350,J48

$403,968

S0. 59

S0.70

50.5.1

52.29

50.61

50.15

$0.85

50.63

$2.8~

$3.42

54. 1 ~

$4.83

55.57

72,560

72.662

72.653

72,290

72.541

72. 54 1

72.54 1

72. 54 1

72,54 1

D iluted EPS

$0.23

$ 0.60

51.07

St.7J

5o.~s

Diluted Share count

7 0,59 1

7 1,400

71.400

72.406

72,560

72.662

12.653

72.290

72,5-1 1

13,011
1,810

0
$4,339
(45 1)
0

0
S5,428
0
0

0
5,724
3,743
0

53,110

Sl, 699

51.704
3.977

Sl,704

S8,2 17
S3,977

S3,266

Sl,784

s 1,789

S l .789

$8,628

$9,059

59,512

S9,988

S I0,487

S26,812
$0.38

S45.965
$0.64

SS0.129
$1.12

s IJ2,430
SI .SJ

S37.059
S0. 51

S44.052
$0.61

S54,843
$0.75

S38,374
S0. 53

Sl74,3 19
$2.40

S46,483
$0.64

S56.014
$0.77

$62,663
$0.86

S47, 129
$0.65

$212.290
$2.93

$254.443
$3.51

$306.9 79
$4.23

S357,339
S4.9J

S4 11.309
$5.67

tOO%
565%

lOO%

10004
S2. 1o

100%

tOO%
45.5%

lOO%
46.7%

100%
37 , 7~

JOO%
46.3%
39. 0%

100%

39 .5 ~~

96%
4/G
3%
27%
3%

92~'.

89%
11%

82%
ULl 0 /G
19%
300A.

86.2%
13.8%
14%
30%
IOo/o

84%
16.2 %
16.4%
30%
12%

10004
4S. l%
36.1%
81%
18.9/G
19%

44.~i

35%

lOO%
44.8%
37.4%
82%

45.4!-'o

3~~

100%
45.6%
38.9%
85%
lS. 5%
16%

lOO%

45.8%

JS%

100%
46.0%
39%

JOO%

S.l.S%

40~o

100%
43.9%
36.1%
80"4

JO~o

30%

37.2%
82%
17.9%
IS%
30%
13%

tOO%
44 .4!.'o
36.4%
81%
19.2/G
'20%

)0%
13%

37.8%
83%
16.8%
17.1%
30%
1'2%

36%
JSo/o
25%
32%
6So/o
SO%

32,.
3 1%
29%
30%
44%
32%
31/-.

J ?O,.
16%

17%
J6o/o
19%
16%

19%
!So/o
20%
19%
24%
22%
22iO

13 %
ll%
lto/o
11%

One/Non Cash time items:

Litigation
Stock based comp

O ther
Tax EOects

Net income~ NonG AAP

NonG AAP EI'S

~tARG I NS

Revenue
Cost of educa1jonal seJvices
Snd cnt services and administrative
Total costs/expenses
Opeatl ng Income
Income before taxes
Tax Rate
Net Income

S%

27%
9''o

46.J%
39%
85%
15/G
1S.S%
2 7%
12%

Rt.\'('OUC

8%

11%

J ?O,.

21%

Cost of educational services

Sh1dent services and administrative

3,.0

Jo/o

1.9/o

II%

18%

2~o

;,'o

12%
59%
6S%
63 1V-.

8%
7%
2S~o

II%

85~'.

15%
16%
28%
1 ~o

45.2%
33%
83%
17/G
17%
JOo/o
12%

14%

t'2'o

1 7.8 ~-b

18%

14,.~

85%

14.?%
JS%
30%
11%

100%
43.4~

20%

35.9%
19%
20.7%
2Jo/o

30~o

30,.'o

)~~

13%
Jlo/o
JO,.o
21'-o
2JO.
21%
21%

12%

JJ0/1)

11 ~~

JO,_,o
11%

zo.o,

GROWTH

Total costs/expenses

O perating Jncome
Net Income
NonGAAP EI'S

S%
3%
114%
7 1 ~

.,0

55%
74%
74%

19%

35/G
JS%
36o/o
3S%

3~.

33%

21%
10%

20%
19,Q

35%
36%
26%
33%
42%
39%
J9Cir-

soo,.

3 1%
30~o

32%
31%
32 ~

25%
lS%

IS~~

IS%
23%
27%
2 7/-.

16~G

IS%
14 '-~

200.4

14%
23%

14%
14%

ll~o

23,~

20%

20%
20%

ll%

17%
)7%

16%
16%

1So/o
JSO't,
IS%
1St:~/.,

Source: Company reports and Sterne Agee estimates

sterne

agee

Page 95

DEVRY, INC. (NYSE: DV)

July 31 , 2009

Arvl nd Bhatia , CFA

lf214) 5714401

Cash Flow Statement

Fiscal yr ends June
($in '000)
FY
2005

FY
2006

1QA
Sept06

2QA
De cOG

3QA
Mar07

4QA
June07

FY
2007

1QA
Sept07

2QA
Dec07

3QA
Maroa

4QA
June08

FY
2008

1QA
Sept08

2QA
Dec OS

3QA
Mar09

Net income
Stock based comp
Depreciation
Amortization
Refund provision
Deferred taxes
Gain (loss) on asset disposal
Unrealizaed net loss. other

17,752
13,011
42,353
15,213
43,521
(7,994)
803
0

43,053
4,339
37,616
10,492
47, 271
(2,941)
(260)
0

20,920
978
8,392
2,200
13,308
(3,652)
(19,724)
0

16,397
2,135
8,973
2,385
13,132
1,804
47
0

22,924
1,234
9,461
1,983
12,744
(886)
(898)
0

15,947
1,081
9,153
1,460
12,056
7,326
123
0

76,188
5,428
35,979
8,028
51 ,240
4,592
(20,452)
0

26,835
1,514
8,405
1,081
14,725
(6,785)
3,735
0

35,813
1,366
8,858
1,390
13,355
3,153
(5)
0

38,318
1,407
8,734
1,547
14, 117
(3,248)
30
0

24,566
1,437
8,811
1,048
9,684
9,990
122
0

125,532
5,724
34,808
5,066
51 ,881
3, 110
3,882
0

34,830
3,110
8,825
952
15,985
(923)
24
0

42,865
1,699
10,375
2,952
18,071
420
(31)
1,718

(77,695)
(4,809)
(19,200)
(3,904)
(34,056)
503
7
(1 ,718)

Restricted cash
Accounts receivable
Prepaid expenses
Accounts payable
Accrued sa lanes
Advance tu ilion payments
Deferred tuition revs
Other liabilities

(412)
(54,267)
2,153
2,852
12,465
(2,299)
40
2,367

(6,755)
(55,123)
(3, 141)
9, 172
(3,915)
1,888
9,069
57

(9,566)
(43,544)
(4,837)
(5,364)
16,946
2, 115
71 ,976
4

6, 104
3,303
(2,694)
(1 ,335)
(10,996)
(11 ,301)
16,205
5

(33,950)
(47,879)
5,255
1,307
6,519
4,936
47,114
(5)

43,565
40,381
(2,949)
8
533
2,037
(129,716)
(4)

6,153
(47,739)
(5,225)
(5,384)
13,002
(2,213)
5,579
0

(6,729)
(47,401)
741
(1 ,509)
(60)
390
85,067
0

11 ,396
(10,362)
(5,238)
4,161
(7,343)
(4,030)
(393)
0

(13,258)
(58,819)
(6,545)
(125)
8,996
10,625
71 ,330
83

18,965
56,630
(10,825)
33,470
(1 ,060)
(4,439)
(154,992)
(83)

10,374
(59.952)
(21 ,867)
35,997
533
2,546
1,012
0

(4,313)
(86,442)
5,835
9,091
2,706
(1 ,826)
108,964

(23,399)
(1 ,078)
(6,427)
(40,234)
2,819
24,542
7,663

27,7 12
87,520
592
31,143
(5,525)
(22,716)
(116,627)
0

Net cash from operating activities

87,558

90,822

50,152

44,164

29,859

1,001

125,176

80,009

52,121

73,192

(6,676)

198,646

96,818

41 ,955

(138,773)

Capex
Proceds from P PE sales
Acquisitions, net of cash
Marketable securities, net

(42,909)
0
(4,861)
0

(25,265)
1,798
(2,530)
0

(7,761)
34,778

(8,441)
0
0
0

(1 1,337)
1,864
0
0

(1 1,019)
0
0
0

(38,558)
36,642
0
0

(18,140)
38,528
0
(72,738)

(9,817)
0
(27,454)
(69,548)

(9,435)
14,043
(136)
80,862

(25,414)
0
(13)
(735)

(62,806)
52,571
(27,603)
(62,159)

(10,638)
0
(286,254)
(13)

(14,570)
0
(246)
(24)

25,208
0
286,500
37

Net cash used in investing activities

(47,770)

(25,997)

27,017

(8,441)

(9,473)

(11,019)

(1,916)

(52,350)

(106,819)

85,334

(26,162)

(99,997)

(296,905)

(14,840)

311,745

Proceeds from stck option

Treasury stock
Repurchase of common stock
Dividends paid
Tax benefit from options
Line of credit, net
Revolving credit facility, net
Repayment of debt

1,091
0
0
0
0
0
(25,000)
0

3,598
336
0
0
532
0
(90,000)
(10,000)

658
227
0
0
8
0
0
(40,000)

1,440
171
0
0
39
0
40,000
(75,000)

2,640
276
(5,317)
(3,545)
133
0
0
0

8,208
253
(5,217)
0
792
0
(50.000)
0

12,946
927
(10,534)
(3,545)
972
(10,000)
(115,000)

2,394
182
(5,402)
(3,557)
167
0
0
0

8,921
395
(4,785)
0
1,043
0
(1 ,895)
0

4,172
210
(10,019)
(4,283)
1,655
0
0
0

2,216
234
(4,259)
0
1,336
0
0
0

17,703
1,021
(24,465)
(7.840)
4,201
0
(1 ,895)

2,078
1,340
0
(4,282)
420
45,876
120,000

5,686
230
(5,358)
0
1,675
(752)
(10,000)

(7,764)
(1 ,570)
5,358
4,282
(2,095)
(45,124)
(110,000)
0

Net cash provided by financing activities

(23,909)

(95,534)

(39,107)

(33,350)

(5,813)

(45,964)

(124,234)

(6,216)

3,679

(8,265)

(473)

(11,275)

165,432

(8,519)

(156,913)

(283)

(531)

327

(98)

(684)

(454)

(587)

(80)

407

930

670

515

1,671

(2, 186)

15,596

(31,240)

38,063

2,700

14,475

(56,666)

(1,428)

20,856

(51,099)

150,668

(32,381)

88,044

(34,140)

20,267

13,873

130,583
168,646

168,646
171 ,346

171 ,346
185,821

185,821
129, 155

130,583
129, 155

129,155
150,011

150,011
98,912

98,912
249,580

249,580
217,199

217, 199
183,059

183,059
203,326

203,326
217, 199

FX impact
Increase in Cash
Cash at beginning
Cash at end

146,227
161,823

161 ,823
130,583

129, 155
217,199

Source: Company reports

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Page 96

DEVRY, INC. (NYSE: DV)

July 31 , 2009

DeVry Inc.
~ rvind Bhatia, CFA

214-702-4001
Summary Balance Sheet
Fisc al YE ends June
($in '000)
FY05

FY06

FY07

1QA
Sept07

2QA
Dec07

3Q.A
Mar08

4QA
June08

FYOS

1QA
Sept08

2QA
Dec OS

3QA
Ma r09

Cash & cash equivalents

Marketable Securities
Restricted Securities
Accounts Receivable, net
Deterred Income Tax, net
Prepaid e;:peoses and other
Total current

161 ,823
0
13,935
39,226
17,142
10,212
242,338

130,583
0
20,632
46,567
16,166
14,265
228,213

129,155
0
14,483
43,084
13,915
18,348
218,985

150,011
72,745
21 ,218
75,790
15,491
18,474
353,729

98,912
142,144
9,823
76,842
17,938
22,598
368,257

249,580
2,345
23,077
121 ,523
17,287
20,761
434,573

217,199
2,308
4,113
55,214
14,975
31,779
325,588

217,199
2,308
4,113
55,214
14,975
31 ,779
325,588

183,059
2,136
8,564
154,654
15,635
28,279
392,327

203,326
1,861
31 ,948
137,602
16,312
33,903
424,952

294,979
1,743
22,246
179,954
17,850
33,033
549,805

PP&E. Net
In tangible Assets, net
Goodwi ll
Perkins funds
Investmen ts
Other
Total Assets

286,767
73,699
289,308
13,290
0
4,633
910,035

272,926
63,762
291 '113
13,450
0
3,158
872,622

259,327
56,920
291 ,113
13,450
0
4,318
844,113

232,864
55,874
291 ,113
13,450
0
5,510
952,540

234,041
65,372
308,598
13,450
0
6,614
996,332

222,831
63,859
308,671
13,450
57,637
14,871
1,115,892

239,315
62,847
308,024
13,450
57,171
11 ,961
1,018,356

239,315
62,847
308,024
13,450
57,171
11 ,961
1,018,356

260,648
140,632
523,395
13,450
57,128
11 ,176
1,398,756

264,830
187,612
494,488
13,450
57,757
11 ,798
1,454,887

277,738
184,654
494,579
13,450
57,461
13,182
1,590,869

Debt, current portion

Accls payable
Accrued liabi lities
Advance tuition payments
Deterred tuition payments
Total Current

50,000
30,681
68,533
14,685
22,823
186,722

60,000
39,677
63,379
16,584
31 ,769
21 1,409

0
34,295
79,830
14,402
37,348
165,875

0
32,799
76,883
14,828
122,41 5
246,925

0
37,029
74,561
10,804
124,539
246,933

0
36,895
79,245
21 ,405
195,869
333,414

0
70,368
82,475
16,972
40,877
210,692

0
70,368
82,475
16,972
40,877
210,692

145,876
81 ,153
86,752
19,964
173,953
507,698

135,124
40,905
95,670
44,443
181 ,616
497,758

115,063
66,212
102,647
26,413
276,104
586,439

Revo lver
DeferTed income taxes, net
Deterred ren t and other

50,000
15,949
143,981

0
12,564
84,042

0
18,343
17,929

0
8,689
30,950

0
16,053
30,181

0
13,809
32,272

0
22,163
29,512

0
22,163
29,512

20,000
43,963
29,342

20,000
66,497
30,463

20,000
68,955
29,274

Total LiabiIities

396,652

308,015

202,147

286,564

293,167

379,495

262,367

262,367

601 ,003

614,718

704,668

Stockhold ers' Equity

Common stock
Add itional PIC
RIE
Accumulated Co mp income ( loss)
Treasury stock
Total Shareholders Equity

706
133,571
398,840
266
0
533,383

708
122,430
441 ,893
(424)
0
564,607

716
143,580
510,979
(918)
(12,391)
641 ,966

717
147,511
536,933
(1,550)
(17,635)
665,976

721
158,663
568,463
(1 ,788)
(22,894)
703,165

722
164,634
606,781
(2,644)
(33,096)
736,397

724
168,405
627,064
(2,963)
(37,241)
755,989

724
168,405
627,064
(2 ,963)
(37,241)
755,989

726
181,758
699,027
469
(41 ,811)
840,169

729
186,815
749,913
737
(51,993)
886,201

Total Liabilities a nd S E

930,035

872,622

844,113

952,540

996,332

1,115,892

1,018,356

1,018,356

601 ,003

1 ,454,887

1,590,869

Asset s

L ia bilities

Source: Company reports and Sterne ARee estimates

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Page 97

July 31 , 2009

CAREER EDUCATION CORP. (NNM : CECO)

Company Report

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Education

July 31, 2009 1119 Pages

RA TJNG: NEUTRAL

CAREER EDUCATION CORP.

(NNM: CECO)

I NITIATING COVERAGE WITH A NEUTRAL; F OCUS IN HEALTH

CARE SHOULD DRIVE GROWTH

Growth and Focus in Health and International Likely to

Lead the Way: CECO has experienced good growth and
improving margins in their health education segment in
recent quarters and has expressed their intent to focus
subsequent startup efforts in these segments by adding both
new schools and converting underutilized existing schools.
Continued demand for tmined healthcare professionals should
help drive strong enrollment trends. Additionally, strong
growth in international (student population up 19% y-o-y) is
likely to continue as the company nunps their global school
base.

Transformation More or Less Behind Them: The mid2000s were a diffi.cult time for CECO. The company was
plagued by lawsuits. compliance issues. bad publicity. and an
overall lack of execution at tl1e managerial level. We fee l t11e
company has made significant progress in addressing tl1ese
issues over t11e last couple of years and is positioned
relatively well to capitalize on the overall industry growth
going fonvard.

Stable Cash Flow to Fund Growth and Retum to

Shareholders: Free cash flow in Ql was $33.8 ntillion and
the company repurchased 1.7 million shares in the quarter.
Additionally in FY08. the company genemted $133 million in
FCF. CECO has annmmced its goal of generating $195-$235
million ($2.15-$2.60 per share) in FCF in 2010.

FYE Dec
Revenue (M):
Operating Income (M):

EPS:

P/E Ratio:

Q1
Q2
Q3
Q4
Full Year

$0.21
$0.15
$0.15
$0.38
$0.76
30.6x

Neutral

Rating:
Price:

$23.01

Price Target:

NA

52-wk Range:

$12.44-$26.53

Market Capitalization (M):

$2,094

90.2

Shares Outstanding (M):

Assets (M):

$1 ,385.6

Avg. Daily Vol. (000):

1,518.8

0.2%

Debt/Equity:

Anrind Bhatia, CFA

(214) 702-400 I
abhatia@stemeagee.com

Earnin s Summar
2009E
$1,716.6
$13 1.0

2008A
$1,708.1
$73.9

2008A

Fiscal Year Ends Dec

EPS & PIE Summar

2008 Previous
2009E 2009 Previous
$0.32
$0.19
$0. 15
$0.37
$1 .02
22.8x

Luke Shagets
(214) 702-4030
lshagets@stemeagee.com

2010E
$1,850.8
$211.8

2010E

2010 Previous

$1.54
15.1x

Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification,
Investment Banking, Ratings Definitions, and potential conflicts of interest begin on Page I of the Appendix Section.
800 Shades Creek Parkway

Suite 700

Birmingham, AL 35209

Sterne. Agee & LeQCh, Inc. Is Member FINRAISIPC

205-949-3500

CAREER E DUCATION C ORP.

(NNM: C E C O )

July 31, 2009

Online Platform and Growth May Lead to 0 1>er ating Margin Ex1>ansion: Over the
last couple of years, the company has made a concerted effort to expand their online
platfonn in order to o(fer a more flexible program to their students. Altl1ough the
company was somewhat slow to initially implement this platfonn, we feel they have
made significant progress in the last two years. We expect growth and focus in online to
facilitate enrollment growth and operating margin expansion.

Recent Results Draw Some Concern: As we mentioned above, we feel the majority of
the major transfonnation is behind the company but certain admissions policies,
advertising, and curriculum policies are still being fine-tuned. Recent results at the
University level have been somewhat lackluster. Again. we feel that once all the
reorganization passes, growth in this segment is likely to be more inline with the overall
industry but there are potential headwinds in getting there.

Valuation: As one can see beginning on page 7. we looked at CECO using a number of
valuation methodologies. We gave CECO a 75% probability of trading at historical
averages and a 25% probability of trading at historical lows ~md arrived at a fair value of
- $24 which is more or less inline with current prices. The $24 fair value equates to 23x
and 16x our FY09 and FYlO EPS estimates. respectively.

Comnanv Overview:

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Career Education is a for-profit postsecondary institution that has both on-ground and
online components. The compru1y operates more than 75 on-ground crunpuses located
throughout the U.S. and also has crunpuses located in France, Italy. and the United
Kingdom as well as three fu.lly online academic platforms. All of the companies U.S.
campuses are accredited by one or more accrediting agencies recognized by the U.S.
Department of Education.

The company is orgruuzed in 6 segments as follows:

>

Univer sity - includes the compru1y American InterContinental University

('AIU"), Colorado Technical University (" CTU'') and Briarcliffe College
schools. These schools offer regionally accredited academic programs in the
career-oriented areas of business studies, visual communication and design
technologies, healtl1 education. infonnation technology. crinlinaJ justice, and
education in an online, classroom. or lab setting.

>

Culinary Ais - includes the company ' s Le Cordon Bleu (" LCB") and Kitchen
Academy schools that collectively offer culinary arts programs in the careeroriented disciplines of culinary arts, baking and pastry arts. and hotel and
restaurant management. Classes are primari ly taken in botl1 a classroom and
kitchen setting.

>

Health Education - includes tl1e company' s Sanford-Brown schools offering

acadenuc programs in health education, as well as. certain programs in business
studies, visual coimutrnications and design technologies, and infonnation
technology in both classroom and lab settings.

>

Art & Design - includes the company's Brooks Institute, Brown College,
Collins College, Harrington College of Desii:,'1l a11d International Academy of
Design & Technology. These schools offer acadenuc progrdills in disciplines
such as fashion desigl\ gruue design, graphic design, interior design, film and
video production, photoi:,>raphy, and visual conmmnications. Classes are held in
both labs and classrooms and typically have an online component.

Page 99

CAREER EDUCATION CORP. (NNM : CECO)

July 31 , 2009

}>

International - includes the company INSEEC Group schools and Istituto

Marangoni schools which are located in France, Italy, and tJ1e United Kingdom
The schools offer programs in disciplines such as business studies, health
education, fashion/design. and visual communications and technologies in both
a classroom and lab setting.

}>

Transitional Schools- includes schools that are currently being taught out.

The below tables show the most recent student population by segment, student
population by core curricula, and by degree gnmting prognun:

Student Population h~ Segment:

As of Jan 3 1, 09 As ofJan 31,08
University
A1U Online
CTUOnline
On-ground
Culinary Arts
Health Education
Art & Design
On-ground
1ADTOnline
International
Subtotal
Transitional schools
Total Student PopuJation
Source: Company reports

Student Population

Y-o-Y Growth

16,800
18,600
10,300
9.600
17,600

]5,500
16,000
10,000
10.900
14,700

8%
16%
3%
-12%
20%

12,600
900
9.700
96, 100
1,900
98,000

13,800
400
8,600
89,900
7,200
97,100

-9%
125%
13%
7%
-74%
1%

h~

Age Group(% of total)

As ofDec3 1,08 As or Dec31, 07

19%
45%
36%

Under21
21 to 30
Over 30
Student Population

h~

20%
46%
34%

Core Curricula (%of total)

Business Studies
Visual Comm/Design Technologic~
Health E ducation
Culinary Arts
Info m1ation Technology

As ofDec31 ,08 As or
49%
16%
18%
!0%
7%

Dec31, 07
46%
19%
16%
12%
7%

Student Population by Degree Granting Progntm (%of total)

Doctoral, Master's, Bachelor's

Associate Degree
Certi fie ate

As ofDec31 ,08 As or
39%
44%
17%

Dec31, 07
4 1%
44%
15%

Source: Company reports

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Page 100

CAREER EDUCATION CORP.

(NNM : CECO)

July 31, 2009

What Haupened and Where is CECO Going?

From inception in 1994 through 2005, the company was in !,'Towth mode. Revenue and
enrollment growth rates were robust and the company had a high cost structure and was
making si!,'llificant investments in ex'Panding their can1pus base. In the mid 2000s.
growth began to slow as the company encountered regulatory, legal. and managerial
problems. As a result. margins came under pressure and financial results worsened. In
2007. a new management team was brought in to tnmsform the company, strengthen its
foundation. ~md accelemte growth. The Company tnmsfonnation included reducing high
employee turnover. focusing on operational efficiencies. ~md positioning the company for
sustainable growth. We feel the company has made solid pro!,'Tess ~md is currently in the
final phases of the transformation. Management ex'Pects the company to return to more
sustainable growth and double-digits margins going forward.

Recruitment, Admissions, and Tuition

Career Education seeks to recmit career-oriented students that are motjvated and have the
desire and the abiUty to complete their academic program of c hoice. Each school recruits
through a wide variety of marketing strategies. The on-ground campuses have an
admissions office whose staff is responsible for identify ing individuals that are interested
in enrolling. These admission reps are the prospective student's primary contact providing information to help t11em make decisions and assisting in the enrollment
process.

CECO uses targeted locaL regional. national, and Intemet based marketing programs
designed to facilitate interest in programs by prospective students. The below table gives
one an idea of the %of domestic students starts generated through the various marketing
sources:

I
Internet
Referrals
Television and Print
High school presentations
Direct mailings
Other
Source: Company reporls

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For the Years Ended

December 31 , 2008 December 31, 2007
70%
71%
14%
14%
9%
11%
2%
3%
1%
1%
1%
3%

In terms of admissions standards. each school that operates tmder the Career Education
name intends to identify students that meet the requirements of tl1eir chosen courses of
study. The company feels tl1at a "success oriented" student body ultimately results in
higher student retention and employment rdtes. increased student and employer
satisfaction. and lower student default n1tes on government loans. In generdl admission
requirements are a high school diploma or equivalent and certain schools and programs
have additional requirements. such as minimum assessment scores.

Page 101

CAREER EDUCATION CORP.

(NNM : CECO)

July 31, 2009

Growth Strategv
Career Education has outlined its strategy which is ultimately focused on educating
students for jobs in specific fields. The company's stmtegy revolves around five key
themes:

Grow Core Educational Institutions:

o

Enter New Markets:

o

In addition to expanding its presence, the company intends to continuously

improve their existing business by improving service and expanding
development of new curricula and programs.

Build ReJmtation and Extcmal Relationships:

o

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Another important component of the company' s growth strategy is establishing

new branch campuses. T hey define branch campuses as campuses that have
been instructing students for less t11an 12 montllS, including those campuses tl13t
have not yet opened for itlStruction. As of 12/31/08. tl1e company had four
campuses in fue "start up" phase. Career Education intends to grow t11eir
campuses through botl1 geographic and programmatic e>.-pansion - domestically
and inten1ationa1Jy.

lmJHove Academic and Operational Effectiveness:

o

The company's core schools of AIU. CTU. IADT. LCB, and Sanford-Brown
generate -70% of domestic revenue and operating income. The company plans
to focus its efforts and resources on these bnmds. AIU. CTU, and lADT offer a
100% online education which will enable these core bnmds to be rolled out both
domestically and internationally. Management intends to invest their resources
in these schools and particularly in tl1e online component. Additionally. the
company is expanding on the blending learning model which offers both an
online component and in-class learning that many students desire as it offers
both the flexibility of online lcaming as well as the benefits of in-class teaming.
CECO will also achieve growth by continually adding programs to tJ1eir existing
schools.

The company intends to have an industry best compliance program with rules,
policies, and standards to guide t11e behavior of their employees.

Page 102

CAREER E DUCATION C ORP. (NNM: CECO)

July 31 , 2009

Enrollment and Revenue Growth

From FYOl thru FY08, CECO has !:,rrown total student population at a 13% CAGR from
41.000 in FY01 to approximately 98.000 to end FY08. Going forward. tl1e company has
outlined its plan for student population to grow at a 6%-8% CAGR from 2007 to 2010
from a student base of ~97.000 to ~ 115,000-122.000 by 2010. Correspondingly. revenue
growth is ex'Pected to grow at a similar CAGR.

CECO- Total Student Population

180,000
160,000

140,000

.
CAGR (FYOl - FYl4E) -10.7%

120,000

........-:-=::- r-

100,000

r-

80,000
60,000
40,000
20,000
0

-:--

r- 1-~

HI-

~-

~ - r- r- ,___

:.....-

~-~

r- r-

-- -- - ---- -- -~

,..._

-----

,___.

r--

..--:::::::- r- -

~--

,._

r--

r- ..__
r- '--r- 1 r- ,___
r- r--

rr- rrr- r-

---

Source: Company reports

Ouerating Income/Margin Impmvement

Career Education reported operating margin of21% in FYOS, 14% in FY06, 4% in FY07,
and 4% in FY08. Operating margins by school as well as total can be found in the below
chart:
\largins

University
Culinary Arts
Health Education
Art& Design
Intemational
Total

B~

Sdwols

FYOS

FY06

FY07

FY08

33%
22%
1%
25%
20%
2 1%

25%
17%
1%
21 %
23%
14%

15%
13%
3%
12%
16%
4%

17%
-2%
9%
11 %
18%
4%

Source: Company reports

Company Operating Margin

2So/o

--

21%

20%

lS%

lOo/o

.16%

15%

f-..l-4

I.Jo/e
r-

II%

I--

8Yo

r- _

r-

1--

I--

1--

i--

i--

i--

FY13E

FYHE

S%

41o

f--

0%
FYOS

f06

4Vo

nn

F07

F08

i--

FY09E

FYIOE

FYilE

FY12E

Source: Con>l)llll)' reports

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Page 103

CAREER E DUCATION C ORP. (NNM: CECO)

July 31, 2009

Our model assumes operating margin improvement over the next several years from
FY08 levels to 8'Yo in FY09, 11% in FYlO, 13% in FYl 1, 14% in FY12, 15% in FY13,
and 16% in FY14.
Valuation Analvsis
As tl1e table on tl1e following page shows. we detennined CECO's fair value to
be ~$24 suggesting the stock is trading neaT fair value. Additionally. we
detennined ~m averdge high and low range of$43 ~md $15, respectively.
For our valuation analysis and target price derivation. we looked at a number of
methodologies on a 2 year historical basis including:
19.
20.
21.
22.
23.
24.

Sterne
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Forward PIE Multiple Trends

PEG (PIE to Growth) Trends
Trends in Fonvard PIE Multiple Relative to Market
EV to Sales Trends
EV to EBITDA trends
DCF

Under tl1e first 5 methods, first we derived tlrree different values for the
stock using its historical avemge, historical low and historical high
multiples.

Next, we assigned probabilities to the average, high and low case

scenarios. In generdl, we assibrned either a very low or a zero
probability to the high case scenario (to be conservative). Specifically
for CECO, we were slightly less conservative in our probability
weightings than other stocks in the group due to our belief that
accreditation and managerial problems (and the resulting depressed
valuations) are largely behind the company. We gave CECO a 75%
probability of trading at historical averages and a 25% probability of
trading at historical lows.

Finally, we derived our fair value price by averaging the results from
the met11ods used above.

Page 1o4

CAREER EDUCATION CORP. (NNM : CECO)

July 31 , 2009

Valuation Analysis
2 Year

Forward NTM PIE

PEG

Forward PIE
Relative to
S&P 500

Current
Historical Avg
Premium/(Disc) Vs Avg
Historical Low
Premium Vs Low
Historical High
Discount Vs High

17.4x
20.5x
-1 5%
l3.2x
32%
29.2x
-40%

1.2x
1.7x
-32%
l.Ox
14%
2.6x
-55%

l.2x
1.6x
-23%
l.Ox
22%
2.6x
-53%

0.93x
0.9x
3%
0.5x
102%
1.7x
-45%

9.2x
7.9x
17%
3.5x
164%
12.5x
-26%

FOR PROFIT EDUCATION GROUP

Current
Historical Avg
Premium/(Disc) Vs Avg
Historical Low
Historical High

18.6x
24.6x
-24%
17.2x
32.3x

0.8x
l.3x
-34%
0.8x
1.8x

1.3x
1.9x
-3 1%
l.2x
2.5x

3.0x
3.4x
-1 4%
2.5x
4.6x

l2.2x
\3.4x
-8%
10.4x
17.2x

0.9x
0.8x
11%
0.5x
l.l x

l.2x
1.7x
-32%
J.Ox
2.6x

0.9x
0.8x
11 %
0.5x
l.l x

0.3x
0.3x
20%
0.2x
0.4x

0.8x
0.6x
28%
0.3x
0.7x

EVto
Sales

EVto
EBITDA

EVto
Sales

EV to
EBJTI) A

Average

CECO

-1 0%
67%
-44%

-22%

Company Relative to GROUP

Current
Jolistorical Avg
Premium/(Disc) Vs Avg
Historical Low
Historical High

Tarl!<'f !'dee & ( pside/Don nsid< Detennination

Forward NTM PIE

PEG

Forward PIE
Relative to
S&P 500

$23
$27
$17
$39

$23
$34
$20
$5 1

$23
$30
$ 19
$49

$23
$22
$]]
$42

$23
$20
$9
$31

75%

75%

75%

75%

75%

25%

25%

25%

25%

25%

0%

0%

0%

0%

0%

Probabilitiy Weighted Value

$25

$30

$27

$20

$17

$24

Upside Value
Downside Value

$39

$51
$20

$49
$19

$42

$3 1

$11

$9

$42
$ 15

Current Stock Price

Value At Historical Avg
Value At Historical Low
Value At Hi~1orical High

Probabilitiy for Each Scenmio

Average
Low
High

$17

Source: factSet, SAL Estimates

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Page 105

CAREER EDUCATION CORP.

(NNM : CECO)

July 31 , 2009

Valuation Cha11s NTM PIE, NTM PIE Relative to S&P 500, NTM PEG,
Relative to the Group, 52 Week Range
C.ar r educ::.a.tfon C-orp. (CECO)
( ' r .C. Ul,.li>'iiM )1.13Uf>

I~Rrulti!U.!~

CSII:e.:wa~

.;~...M-~Iwlf.n'20C'!Ittwtlt.')

rne""E~'no

~r- ...._,""'JC

1;0f -

- - ;- -

* -

NTM PIE: CECO is trading at l6.3x NTM earnings and over the last 2 years has traded
as high as 39.8x, a low of ll.5x, with an average multiple of 23.5x.
C:ar. . r Eclv.u1ion Corp. (CECO)
CEC:Ct u~f~139 ,.413ft} ~Sx.ck llialbf C'ui'\II'ICII.'l$10:0.

v
-

Jut.l~D1~~e

n.u ;roa (O:!.It.O

PtIIOE;.vn!ftt"ttrMRei J~~k'&&.P~C - ~?

.,.

~~

I~V1

~~"" /r \1

1~ ~

'

l y
ll).l)T

""'

U)J

Relative to S&P 500: Relative to the S&P 500 on a NTM PIE basis. CECO has traded at
an aven1ge of l.58x that of the S&P. a high of 2.56x. and a low of 0.99x. The stock is
currently trading at l.2lx tl1at of tl1e S&P.

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Page 106

CAREER EDUCATION CORP.

(NNM : CECO)

July 31 , 2009

Cut er 6du.e1Uon Corp. (CEC-0)

("[~ '"11661Ci ll~l"*' ..4MCAQ~w. .. ~
:!I ,J ,._ XI(I.JK)'l'3-J\i' TIJC:~
-~til~

U'I -

<:.urrM!h"'$"'

~-Ifill

r~

-----~

'

16

tA::
,,.,.

1.11'0

--

to:$8

uu

----::
,m
~
.,~h..,.,a'JI'.....,

NTM PEG: CECO is currently trading at a PEG ratio on a NTM basis of I .2x whereas
its 2-year average has been I. 7x, with a high of 2.6x, and a low of 1x.
cueer ltdVcatJon corp (CECOJ
CEC ') U 1$6.S't!)

4H~ ~ f, ~O;:.Q$lo)t~-l. ~lo:tM

t.:<ln'Wr.ottlkltlo:

l.ru.,.::F ,., i9-J;:t.:i'OO'af::ln,

-

ftiL.-~ E~r-9'5 '"11M; ~~in(W.(( IerHI!'Ilo) ~_f;<JI;;. ~P'1 - - ..,.~gt

~j\

1J

:
::r

'"'

Compared to Peer Gnm1>: Relative to tl1e its peer group on a NTM PIE basis. over the
last 2 years. CECO has traded at an average of 0.84x that of the group. a high of l.llx.
and a low of0.51x. The stock is currently trading at 0.93x its peer group.

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Page 107

CAREER EDUCATION CORP.

(NNM : CECO)

July 31 , 2009

c-arr 'duc.Ut-on Corp. (CECO)

CECO

1.1.1& ~51 09

1U365

NASCMQSIXlc!!.lt,~l

n-J~Io2001 c~ ~t.f~CG :oun

C\l:!'l',m~nU>~

Fl?t

~1.t t.t-1 1 1~ t...'~:OJOI, .tq

P1(6(V80)

--~.M=
, ----~,m:~--~~~,----~~a~--~
1m:~--~.=r.-----~
,M
~
a-~~tJ.t:.fn,....

52-week r ange: The above charts shows how CECO has traded over the last 52 weeks at a high of$35. 74, a low of $11.74, and currently at $23 .01.

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Page 108

CAREER EDUCATION CORP.

(NNM: CECO)

July 31 , 2009

Recent Results

CECO reported its most recent quarter (Ql09) on 5/06/09. Overall, results were slightly
\vorse tl1an expectations. Revenue decreased 3.2% y-o-y from $451.9 to $437.4 million.
Opemt:ing EPS came in at $0.32 -an increase of 28% compared to the $0.25 reported in
the year ago period. Reported revenue and EPS botl1 missed consensus of $449 million
As on can see from the below chart, CECO has missed EPS
and $0.33, respectively.
consensus in 2 of the last 6 quarter and missed revenue consensus in 5 of the last 6.

Sales (millions) - Surprise

Fiscal Qtr
03/2009
12/2008
09/2008
06/2008
03/2008
12/2007
\\t>ragt>

Actual
$437.45
$431.77
$405.63
$4 18.84
$460.24
$437.16
S~31.8S

SUJ'P
Consensus
Amt
$448.6 1
($ 11.16)
$441.29
($9.52)
$407.44
($1.81)
($ 1.71 )
$420.55
$429.54
$30.70
$44 1.84
($4.68)
S0.30
S~31.SS

%
Sutp
-2.5%
-2.2%
-0.4%
-0.4%
7.1 %
- 1.1%
0.1%

% Pl'ice
Impact
- I%
15%
-6%
-2%
-7%
- 11 %
-1.9%

Source: Factset

Earnings Per S hare - Surprise

Fiscal Qt1
03/2009
12/2008
09/2008
06/2008
03/2008
12/2007

AchJal
$0.32
$0.43
$0.09
$0.12
$0.28
$0.34
Sll.26
Source: Factset

Const>nsus
$0.33
$0.25
$0. 11
$0.09
$0.21
$0.33
S0.22

Surp
Amt
($0.01)
$0.18
($0.02)
$0.03
$0.07
$0.01
S0.0-4

%
Surp
-3.0%
72.0%
-18.2%
33.3%
33.3%
3.0%
20.1%

% Priu
Impact
-1%
15%
-6%
-2%
-7%
-11 %
-1.9%

Balance Sheet Summarv

The company ended the quarter witJ1 net cash approximately $500 mil jjon ($5.55 per
share). had a current ratio of l.9x. and a tangible book value per share of $5.72. CECO
has a negligible $1.7 million in LT debt.

Ceaecr Ed'u;c.e1bn Go,rp.

tr::J eumn: imr>

tluield~Jifio

I 2x
1;a;

ZlOO'

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l).fl):i

fU:J7

12.'07

3,{18

Page 109

CAREER EDUCATION CORP.

(NNM: CECO)

July 31 , 2009

Cash Flow Summarv

Cash provided by operating activities was $48.7 million in Ql09. compared to cash
provided by operating activities of$35.5 million in Ql08.

CapEx decreased to $14.9 million in Q109 from $18.8 mil lion in Ql08. CapEx
represented 3.4% of total revenue during t11e first quarter of 2009.

The below chart details an11uaJ FCF since FYOl. As we mentioned previously, the
company has outlined its goal of generating FCF of $195-$235 mmion ($2.1 5-$2.60) in
FY10.

Historical Free Cash Flow (in millions)

$300

,...

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

$253

$233

$2Sj)

,...-r---

$200
$133

$147

$ 150

,---$100

so l

,...--

f-

f-

1-

1-

---(

f-

r---

1-

1-

---1

$45

$50

$ 133

Sl 44

f-

($3)

(SSO)

:FYOl

FV02

FYOJ

FY04

FYOS

FV06

.FY07

F08

Source: Company reports

Holders
Holder Naml'
MCCULLOUGH, GARY
GRAHAM, MICHAEL
BUDLONG, THOMAS
LENART, DEBORAH
AYERS, JEFFREY
GRA YEB, GEORGE
ROBERTS, TV
OTHE R
TOTAJJ INSIDER
SHARES OUTSTANDlNG

Postion
P resident CEO
Exec VP,CFO

SYP
SYP
SYP,_Genera1 Counsel
SYP
SYP of Art & Design

Position
3 19,722
56,824
49,155
43,384
38,569
35,566
22,700
103,087
669.007
90,06 1,000

Mkt Val
$6,663,006
$ 1, 184,212
$ 1,024,390
$904,123
$803,778
$741 ,195
$473,968
$2,148,333
$13.942.106
$1 ,876,871 ,240

/o 0 /S
0.36%
0.06%
0.05%
0.05%
0.04%
0.04%
0.03%
0. 11 %
0.74%
100%

Source: FactSet

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Page 110

CAREER EDUCATION CORP.

(NNM : CECO)

July 31, 2009

Executive Management
Gary E. McCullough, Pesident and CEO
Gary E. McCullough joined Career Education in March 2007 as its President and Chief
Executive Officer, and as a member of the Board of Directors. Prior to joining the
company. Mr. McCullough served as president of Abbott Laboratories' (NYSE) Ross
Products Division. a world nutrition leader. where he was responsible for managing 5.300
employees and more than $2.6 billion in armual sales.
Michael Graham, Executive VP, CFO
Mike Graham joined Career Education in September 2007 as its Chief Financial Officer.
Mr. Gral1am has served in several key financial positions in publicly-traded companies,
including R.R. Donnelley. Sears Roebuck & Co .. and Aegis Communications Group.
where he was Chief Financial Officer. At R.R. Dotu1ei1ey. a publicly-traded print and
print-related services provider with annual revenues of approximately $10 billion. Mr.
Gral1am served as Senior Vice President and Controller. managing a team of more U1an
100 professionals.

Jetl'rey Ayers, Senior VP, General Counsel

Jeffrey D. Ayers joined Career Education in December 2007. as Senior Vice Presidenl
General Counsel and Corporate Secretary. Mr. Ayers is an experienced chief legal officer
who has been a member of the executive teams ofNYSE-Iisted companies.

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Page 111

CAREER E DUCATION CORP. (NNM: C E C O )

July 31 , 2009

[ career-Educ
atlon -cori>~ -auarieii
.Y7ncomes-iatemenT

___________________________________________________________________________________________________________l

Career Etlucarioll (CECO-NASDAQ)

An/11 d Bltalif'l, CPA

(214) 70!-4001

FY05

FY06

FY07

Q!Q!!

Slli.!t

FY08

.Ql.g2

020911.

030911.

040911.

FY09E

FY10E

FY11E

FY12E

FY1 3E

FY1 4E

Total Revenue:

$1,964

$1 ,716
S79
$1 ,795

$1 ,653
S81
$1,735

$432
$20
$452

S404
S14
$419

$386
SlO
$406

$4 17
SIS
$432

S1.639
$69
$1,708

$420
$17
$437

$406
$14
$421

S391
SlO
$411

$432
$15
$447

S1.647
S69
$1,717

$1,776
$75
$1,851

S1.922
S81
$2,003

$2 .050
$86
$2,136

S2.239
$94
$2,333

$2,379
$100
$2,479

Operating Expenses:
Educational Services and Facilities
General and Administrative
Depreciation and amortization
Goodwill and Assellmpalrrnen1
Total operating e)(!)enses

S596
S918
S74
$3
S1,590

$558
$912
S77
$86
$1,632

$629
$916
S75
S28
$1,648

S167
Sl39
S20
S2
S428

$ 163

S1S9
S2 lZ

Sl7
so
S388

$658
S891
S76
S9
$1,634

$163
S22Z
Sl7
so
$402

$16 1
$219
SIS
so
S395

S162
S213
Sl 6
so
S392

$164
$214
SI S
so
SJ97

$651
$869
S66

$691
$881
$68

S871
$1,028
S85

S925
S1 ,067
S91

S1,586

$1 ,639

S747
$928
S73
$0
S1,748

$797
S967
$78

so
S404

S1 70
Sl1S
Sl9
S7
S411

$1 ,8 42

S1,984

$2,083

S373

$163

$87

S24

SIS

($9)

$43

S74

S3S

S26

$20

sso

$131

S212

$255

$293

S 349

$396

S19
(S1)
S5
S1

(SO)
$3
(SO)
so
(SO)

($3)
S4
(SO)
so
S2

$14
($1 )
S5
S2

(SO)
Sl
(SO)
so
(SO)

so
$2
(SO)
so
so

so
S2
(SO)
so
so

S6
(SO)

$6
($0)
$0

S6
(SO)

S6
($0)

so

so
so

so
so

S6
(SO)

ISO)

$1
S3
(SO)
so
(SO)

($0 )
S6
($0)

so
so

$19
($2)
S4
(SO)

(SS)
S3
(SO)

so

$14
$0

Pretax Income
lnoome tax e)(!)ense

S388
S147

$184
$91

$110
S34

S27
Sll

$19
$6

(S6)
(S6)

S4 7
$16

$93
$27

S36
$13

S27
SIO

$21
ss

Net Income, As reported

S241
S2.34

S92
$0.95

S76
so.so

$16
S0.18

Sl3
$0.14

(SO)
(SO.OO)

S31
S0.35

$67
S0.74

$23
SO.l6

$17
S0. 19

S14
S0.15

Sl
so
$0
$0
so
Sl

lSO)
Sll

($3)

(SO)

so
so
so
so

so

(S

millions, except per Vlote)

Revenue:
Tuition and registration fees
Other

Operating Income:
Other Income (E)(!)ense):
Discontinued Ops
lnteresllncome
lntereS1 E~pense
Share of Affiliate:
Other

EPS, as reported
One Time llems
Discontinued ops
Lease Charges
Severance
Goodwill and Asset impaMmen1
Other
TOTAL ONE TIME

$5

$222
$19

so

sz
(SO)
so

so

so

SS2

Sl9

$136
$49

$217
$78

S260
$93

$299
$107

S355
S127

S403
$144

$33
$0.37

S87
SO.%

$140
SJ.S-1

S167
S1.8J

S192
Sl.o9

S228
S2.47

S259
$2.79

so

(0 .1)
7.8
0 .0
0.0

0.0
0.0
0.0
0.0

so
so

$0

so

so
so

so
so

so
so

$4
$4

S236
$2.29
103.1

S69
$0.71
97.4

S79
$0.64
94.3

Sl9
S0.21
90.3

Sl4
$0.15
89.9

$13
SO.J5
89.7

Re,.-enue

100%

lOOC}
37%
S3%
4%

JOO%

IQ()O"(,

t oo4

JOOO'o

JO()O"(,

lOOO'o

39%

38%

39%

lOO%
37%

)00011
38%

S l ~'o

S2%
4%

5~/o

48,~

Sl ~'o

4%

4%

4%

~'o

Oo/o

95~

96%

49%
4%
0%
90%

39%
52%
4'o
1%
96%

37%

95~

42%
S4%
S%
2%
102%

37%

4i%

lOOC}
36%
S3%
4%
2%

100%

EducaJjon.al Servit~es and FacUlties

General and AdministnUive

100%
31%
Sl%
4%
S%
91%

~~.

10%

4%

s~.

0"/o

10%

S~'o

53%
S%

so

so
so
so

$29
S0.32
90.2

$17
S0. 19
90.3

Sl4
S0.15
90.3

$33
$0.37
90.4

$92
$1 .02
90.5

$140
$1.54
91 .0

S167
$1 .83
91.4

$192
$2.09
91 .9

S228
$2.47
92.4

$259
$2.79
92.8

JOO%

)00011
37%
46''o
4%

lOOC}
37%
4S%
4%

100"4

tOO%

370'0
44%

37%

S7
53
Sll

S2
S2

ss

S34
S0.38
89.9

$68
$0.76
89.9

190
19%

9%

5%

5%

)4%

7%

6%

4%
4%

Tax rate

38%
12%
12%

500/
5%
8%

3)~

39~

34%

36~

34%

4,.~

4,.~

o>

7%

6%

4%

3%
3%

Jo/o

7%

19%
14%

-9%
oo6%
I~
4%
3%

-3%
13%

7%
18%

-5'"~

5%

II ~

-2%

~14o/o

-2%
3%
10%
0%
-So/o

-S%

0%

1%

5%
6o/o
-S%
-12%

Net Income, ex impainne111

so

so
so
so
$0

so
so

Opernti.ng Margin
Opemting Margin. ex-impairment

Net rncome

so

ss

0%
Sl%

4%

so
so

so

$2

$2
$0
S4
$4

Depreclalion and amortization

Goodwill ilfld Asset Jmpail'mcm
Total opernt.ing expenses

so

($0)

($46)
($46)

30%

so

so

($8)
($8)

Net income ex one time

EPS ex one time items
Diluted Shares oul
MARG INS

so

so
so

(S5)
so
Sl1
S2
(SS)
$4

so

so

so

so
sa

0".4
SWYo

~~

~.

~.

95%

89%

92%

37%
48%
4%
G-/o
89%

S%
S%

II ~

s~.

JJ%

S%

6%
6%

lJ%

S%

28%

36%

36%

4%

;,0

4%

5%
S%

36%
3%
3%

36~.

..J~o

-2%

-3%

4%
~.

92%

4%

-;o~

4%
0%
85%

~.

~'o

87%

86~

JJ%

13%
)3%

14%
14%

15%

36%

36~

36%

36~

36'

5%
S%

8~

8%
S%

9%
9%

lO~o

8%

15~

10%

43%
4%
0%
84~'.

16%
16%
36%
10%
10%

CROW1' fl

Total Revenue
Edll(alional Services and Facilities
Oeneral and A.dministrntive

IS%

Depreciati()n and amortization

Total opcrnting.expenses
Opcratomg in<: orne
Operating income. ex-impaim1en1
Net lncome

38%
17%

EPS. ex~o n e limt

1%

4~..

3''-

0%

00/o

1%

4%

5%

~~

l%

5%

4%

. ) ~'o

-3%

~'o

I%
-22%
-2%
7 1%

..2~

~~
4%
~~

3o/o
1 3%
-3%

l~o

1 7%

-1%

-6'~

2~'o

56~

4;'0.4

28%

-34%

-54%

50%
-4S%

299%
299%

146%
-11 0%

170%
-2%

15%
-2.8%

46%
34%

32%

-62%

-1 ~0

-S3'o

115%

- 101''-

63%

JJ0/1)

-69%

1 7~"'1)

--37%

167%

-13%

16~/1)

-12.''-9%

-JS%
-S%

8%
6%
J%

8%
8%

7%

9%

~'o

so ..

4%

9%
6%

2~'.

8%

~~

9%

3%

7%

S%

S%

t5~

)9%
19%

326%
-1 148%

16%
16' o

77%

62%

7 Io/o

58%

62~o

20%
20%

lS%

4 ~o

36%

-1 J?SO'o

6%

3 1'-o

60'o

20~o

IS%

54%

16%

1%

-1%

34%

51 %

19%

14%

t9'o
18%

6%
6%
40'

6%
5%
14~

14%
13 ,~

13%

Source: Compruly repo1tS, SAL estimmes

Source: Company reports and Steme Agee estimates

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Page 112

CAREER EDUCATION CORP. (NNM: CECO)

July 31 , 2009

Arvind Bhatia , CFA

(214)- 702-4001
Cash Flow Stlltement
Fi.scal yr ends December
(S in millions)
FYOS

Opemting
Net Income
Goodwill and asset im pairmen t
D&A
Bad Debt Expense
Comp expense -s tck o ption
Loss (gain) on asset dis posal
Share of Affiliate, net of cash
Def taxes, oth er
Changes in o perating assets/liabilit ies
Net C ash Flow - Operating

F Y06

06/2006

09/2007

12/2007

FY07

03/2008

2.3
19.7
(0.7)
( 16.2)
{28.6)
17.9

30.0
0.0
18.8
8.4
3.1
0.0
0.2
0.0
28.5
89.1

5. 1
0.0
19.7
12.5
5. 1
(0.2)
0.0
0.0
(43.1)
(0.9)

15.6
0.0
19.3
11.1
3.5
(0.0)
(I .2)
0.0
56.7
105.0

8.8
36.8
20.4
14.6
3.8
0.1
(1.9)
(15.0)
(38.8)
28.8

59.6
36.8
78.2
46.6
15.5
(0.1)
(2.8)
(15.0)
3.3
222.1

16.4
6.6
2 1.4
11.8
3.0
(0.1)
0.9
05
(25 .0)
35.5

(0.5)
( 42.5)

(136.4)
205.0
(11.5)
0.8
57.9

(209.5)
187.0
( 16.&)
(31.4)
(70.7)

(79.2)
99.4
( 14.5)
(0.5)
5.1

(215.5)
236.5
(12.8)
(0.1)
8.1

(140.8)
2 17.3
( 13.5)
(0.7)
62.4

(645.0)
740.1
(57.6)
(31.7)
4.8

Financing
Purchase of Treasury stock
Issuance of common stock
Tax benefit, stck o ption
Borrowin g on revolving loans
Capital leases
Oth er
Net Cash Flow - Fin:1ncing

0.0
2.8
0.0
(0.4)
( 1.2)
0.0
l.l

(41.3)
29.0
18.7
(! .7)
(0,0)
0.0
4.7

(50.0)
7.1
1.9
0.0
(0.0)
0.0
(40.9)

(75.0)
3.8
0.6
0.0
0.0
(I .4)
(71.8)

(24.3)
3.7
0.3
0.0
( 1.4)
1.4
(20.3)

(75.0)
19.8
3. 1
(1.3)
0.8
0.0
(52.7)

(;224.3)

Effect of Exchange Rate on Cash

Increase Decrease in Cash & ST Investments

( 1.4)
47.9

5.6
86 .0

0.7
(21.8)

1.2
(66.4)

6.1
98.9

(1.3)
37.2

In vesting
Purchase ofmktble securities
Sales of mktble securiti es
Pucbase of PP&E
Oth er
Net Cash Flow - Investing

70.3
0.0
17.7
0.0
0.0
4.1
0.0
39
(5.3)
90.6

(2 19.5)
201.1
(2:~.5)

20.7
0.6
20. 1

03/2007

06/2008
12.7
0.0
19.6
10.1
3.8

09/2008

12/2008

F YOS

03/2009

0.0
(0.5)
(26.3)
18.2

(0.1)
70
19.0
11.5
3.2
(0.2)
0.0
00
64.3
104.7

31.2
0.0
17.6
10.9
1.5
0.6
0.0
(0.7)
(32.7)
28.3

(213.5)
177.6
( ll\.8)
0.4
(54.3)

( 125.4)
87.9
(7.7)
0.6
(44.6)

(131.4)
87.4
(D.4)
(0. 1)
(57 .5)

(110.6)
130.7
(14.0)
(0.5)
5.6

(58 I .0)
483.6
(53,9)
0.4
(150.8)

(225.6)
149.0
(14.9)
(0.3)
(91.8)

34.5
5.9
(1 .3)
(0.6)
0.0
(I R5.7)

(14.0)
0.8
0.0
1.0
(0.1)
0.0
(12.3)

(0.0)
1.2
0. 1
(1 .8)
(0.2)
0.0
(0.7)

(0. 1)
1.1
0.3
(0 .7)
(0.2)
0.0
05

0.0
0.2
0.0
(8.6)
(0. 1)
0.0
(8.5)

(14. {)
3.2
0.5
(10. I)
(0,6)
0.0
(21.0)

(40.2)
0.5
0.0
0.0
(0.1)
0.0
(39.8)

6.7
47.9

8.3
(22.8)

(6.6)
(33.7)

(4.5)
43.2

(4.9)
20.5

(7.7)
7.2

(2.9)
(85.7)

(U)

60.1
13.6
77.7
44.3
11 .5
(1,0)

0.9
(0.7)
(19.7)
186.7

23.3
0.0
16.8
9.9
3.2
0.3
0.0
0.0
(4.8)
48.7

Source: Company reports, SAL estimates

sterne
agee

Page 113

CAREER E DUCATION CORP. (NNM: C E C O )

July 31 , 2009

Career Ed ucation Corp.

~~LANCE SHEET, In millions

ind Bh atia, CFA

{!.!..f)-702-./001

12/2006

03/2007

06/2007

09/2007

12/2007

03/2008

06/2008

09/2008

12/2008

03/2009

447.8
56.2
16.7
29.5
112.2
662.4

449.8
52.8
18.3
42.2
88.0
651 .1

363.3
54.3
18.4
39.2
86.5
561.6

442.8
65.4
16.4
35.8
80.0
640.4

382.1
64.7
15.0
47.8
77.8
587.4

417.5
112.6
13.9
13.9
29.3
587.2

421.4
64.0
13.2
49.7
29.5
577.8

509.0
63.0
11.9
44.7
30.2
658.6

508.7
68.3
12.4
46.4
31.7
667.5

499.7
64.0
12.4
47.5
31.9
655.4

Assets

Cash & Short Term Investments

Receivables
Inventories
Prepaid Expenses
Olher Current Assets
Current Assets- Total
Investments in Uncons Subsidiaries
Property Plants & Equipment - Net
PP&E Gross
Accum Depreciation, Depletion & Amort
Olher Assets
Intangible Assets
Total Assets

0.0
349.4
616.5
267.0
413.8
383.7
1,425.7

341.6

342.0

339.3

329.1

319.2

303.0

450.5
428.7
1,430.2

0.0
332.2
690.2
358.0
445.6
428.2
1,365.2

453.6
425.2
1,446.3

450.6
426.0
1,354.1

449.5
427.7
1,365.7

449.9
427.2
1,346.9

29.9
78.5
0.0
12.1
12.1
270.5
312.5

27.5
103.5
19.6
12.8
12.8
279.0
338.9

26.7
114.4
4.6
11.3
11.3
260.2
302.8

33.6
85.9
5.3
11.6
11.6
324.6
375.1

26.0
100.4
19.6
11.8
11.8
313.2
370.6

26.7
93.8
28.6
13.6
13.6
272.3
341.3

16.5
16.5

16.2
16.2

16.3
16.3

92.1
92.1

2.8
2.8

3.3
3.3

3.3
3.3

98.0
429.8

98.7
457.1

100.1
422.5

3.5
0.6
2.9
23.7
494.4

(1 .3)
32.8
1.3
2.2
0.0
2.2
96.0
467.5

0.0

12.1
0.0

13.8
0.0

13.9
0.0

13.5

0.0
0.0
0.0

0.0
0.0
0.0

982.4
1.1
666.8
675.2

977.1
1.1
678.9
706.6

366.3

438.2
418.1
1,399.8

0.0
305.0
741.0
436.1
433.4
416.0
1,405.9

432.2
413.3
1,385.6

30.9
70.5
11.9
10.9
10.9
255.1
308.8

39.7
76.8
5.8
9.7
9.7
311.4
366.6

28.5
710
29.2
0.4
0.4
297.3
355.3

42.9
69.8
34.2
0.3
0.3
268.4
345.8

0.9
0.9

0.9
0.9

0.4
0.4

(1 1.4)

(1 1.6)

2.4
2.4

2.3
2.3

2.0
2.0

11.6
1.7
1.7

109.4
454.0

107.9
420.0

112.1
481 .2

11.4
1.9
0.0
1.9
111.6
457.4

119.7
455.6

11.6
0.0

11.5
0.0

9.3
0.0

6.2
0.0

0.9
0.0

1.7
0.0

0.0
0.0
0.0

0.0
0.0
0.0

0.0
0.0
0.0

0.0
0.0
0.0

0.0
0.0
0.0

0.0
0.0
0.0

0.0
0.0
0.0

917.8
1.1
688.6
710.0

921 .8
1. 1
696.1
725.4

886.1
0.9
207.3
736.6

900.2
0.9
211 .1
753.1

917.6
0.9
216.2
768.0

912.4
0.9
220.8
771.0

947.7
0.9
222.5
807.5

928.4
1.0
226.2
829.9

416.3

491 .2

515.6

75.0

89.0

89.0

89.1

89.1

129.3

995.9

977.1

917.8

921 .8

886.1

900.2

917.6

912.4

947.7

928.4

1.425. 7

1,446.3

1,3541

1,430.2

1,365.2

1,365.7

1,346.9

1,399.8

1,405.9

1,385.6

298.0

Liabilities & Shareholders' Equity

Accounts Payable
Olher Accrued Expenses
Taxes Payable
Short Term Debt & Curr Portion LT Debt
Current Portion of LT Debt
Olher Current Liabilities
Current Liabilities- Total
Deferred Taxes
Deferred Taxes - Credit
Deferred Taxes - Debit
LT Debt
LT Debt Excluding Capitalized Leases
Capitalized Leases
Other Liabilities
Total Liabilities
Non-Equity Reserves
Minority Interests
Preferred Stock
Non-Redeemable
Redeemable
Common Equity
Common Stock
Capital Surplus
Retained Earnings
Olher Appropriated Reserves
Treasury Stock
Total Stockholders' Equity
Total liabilities & Sha reholders' Equity
Source: Company reports, SAL estimates

sterne
agee

13.5

Page 114

July 31, 2009

Education

APPENDIX SECTION
IMPORTANT DISCLOSURES:

Price Target Risks & Related Risk Factors:

Investment risks associated with the achievement of the price target include, but are not limited to, a company's failure to
achieve Sterne, Agee & Leach, Inc., ean1ings and revenue estimates; Lmforeseen macroeconomic and/or industry events
that adversely affect demand for a company's products or services; product obsolescence; changes in investor sentiment
regarding the specific company or industry; intense and rapidly changing competitive pressures; the continuing
development of industry standards; the company's ability to recruit and retain competent personnel; and adverse market
conditions. For a complete discussion of the risk factors that could affect the market price of a company's shares, refer to
the most recent Form 10-Q or 10-K that a company has filed with the Securities Exchange Commission.

Valuation Methodology:
Methodology for assigni ng ratings and target prices includes qual itative and quantitative factors including an assessment
of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility;
financial condition; and expected total return, among other factors. These factors are subject to change depending on
overall economic conditions or industry o r company-specific occurrences. Stern, Agee & Leach, Inc., analysts base
valuations on a combination of forward looking earnings multiples. Sterne, Agee & Leach, Inc. believes this accurately
reflects the strong absolute value of earnings, the strong earnings g rowth rate, the inherent profitability, and adjusted
balance sheet factors.

Regulation Analyst Certification :

I, Arvind Bhatia, CFA, hereby certify the views expressed in this research report acclrrately reflect my personal views
about the subject security(ies) or issuer(s). I further certify that no part of my compensation was, is, or "viU be, directly or
indirectly, related to the specific recommendations or views expressed by me in this report.

Sterne, Agee & Leach, Inc. Disclosure Legend as of July 31, 2009:
Company

Applicable Disclosure

American Publ ic Education, Inc. (APEI- NNM):

Apollo Group, h1c. (APOL- NNM) :
Career Education Corp. (CECO - NNM):
DeVry, Inc. (DV- NYSE):

1
1
l
None

Disclosure Legend
1.
Sterne, Agee & Leach, h1c. makes a market in the shares ofthe subject company.
2.
Sterne, Agee & Leach, Inc. has, over the past 12 months, managed or co-maD aged a public securities
offering or provided other investment banking services for the subject company.
3.
Sterne, Agee & Leach, Inc. has various security accounts open for the subject company.
4.
Sterne, Agee & Leach, me. provides administration for 401(k) plans for the subject company.
5.
Sterne Agee Fi nancial Services, Inc. has c learing agreements with the subject company.
6.
The analyst who wrote tlus report owns a position in tl1e subject company.
Sterne, Agee & Leach, b1c.'s research analysts receive compensation that is based upon various factors, inc luding Sterne,
Agee & Leach, h1c.' s total revenues, a portion of which is generated by investment banking activities.

sterne
agee

Appendix Section, Page I

July 31, 2009

Education

Definition of Investment Ratings:

BUY:
NEUTRAL:
SELL:
RESTRICTED:

We expect this stock to outperform the industry over the next 12 months.
We expect this stock to perform in line with the industry over the ne>..i 12 months.
We expect this stock to w1derpcrfonn the industxy over the next 12 months.
Restricted list requirements preclude conunent.

Ratings Distribution:
Of the securities rated by Sterne, Agee & Leach, Inc., as of June 30, 2009, 35.3% had a BUY rating, 55.8% had a
NEUTRAL rating, 8.9% had a SELL rating, and 0% was RESTRICTED. Within those ratings categories, 2.04% of the
securities rated BUY, 1.94% rated NEUTRAL, 0% rated SELL, and 0% rated RESTRICTED received investment
banking services from Sterne, Agee & Leach, [nc., within the 12 months preceding June 30, 2009.

ADDITIONAL INFORMATION AVAILABLE UPON REQUEST: Contact Robert Hoehn at 1-212-338-4731.

Other Disclosures:
Opinions expressed are our present opinions only. This material is based upon information that we consider reliable. but
we do not represent that it is accurate or complete. and it should not be relied upon as such. Sterne. Agee & Leach. Inc.,
its affiliates, or one or more of its officers. employees. or consultants may. at times. have long or short or options
positions in the securities mentioned herein and may act as principal or agent to buy or sell such securities.

Copyright 2009 Sterne, Agee & Leach, Inc. All .Rights Reserved.
Sterne, Agee & Leach, Inc. disclosure price charts are updated within the first fifteen days of each new calendar quarter
per FINRA regulations. Price charts for companies initiated upon in the current quarter, and rating and target price
changes occtming in the current quarter, will not be displayed until the following quarter.

Price Chart(s):
To receive price charts on the companies mentioned in this report, please contact Sterne, Agee & Leach at
1-800-922-7739.

sterne
agee

Appendix Section, Page II

STERNE, AGEE & LEACH, INC.

sterne
agee

Founded in 1901. Sterne Agee bas been providing investors like you with high-quality investment opportunities for
over a century. During t11e early years, our founders prominently establis hed themselves in the f inancial securities
industry in tJ1e southeastern United States. Today, we have e><panded to serve all regions of the country. Sterne.
Agee is headquartered in Birmingham, Alabama with offices in 22 states including Alabama. Arkansas, California.
Florida. Georgia. Tilinois. Kentucky. Louisiana. Maine. Massachusetts. Minnesota. Mississippi. Missouri. New Jersey. New York.
North Carolina. Pennsylvania SoutJ1 Caroljna. Tennessee, Texas. Virginia, and Wisconsin. Sterne Agee is one of the largest
independent firms in tlle country. Sterne. Agee & Leach. Inc. is a division of Sterne Agee Group, Inc.. which also includes The Trust
Company of Sterne. Agee & Leach. Inc.: Sterne Agee Asset Management, Inc.: Sterne Agee Clearing, Inc.: and Sterne Agee Financial
Services, Inc.-www.stcmcagcc.com
EQUITY CAPITAL MARKETS ADMINISTRATION

Ryan Medo
Robert Lake
Karen Bell

Managing Dir., Eq. Cap. Mkts.

Vice President
Assistant Vice President

(205) 949-3623
(205) 949-3624
(205) 380-1766

David Lee
Chuck Carlisle

Director, Equity Products

Sr. Portfolio Analyst

(205) 949-3689
(205) 949-3571

EQUITY RESEARCH

Robert Hoehn

Director of Research

BASIC MATERIALS

Mark Connelly
Ashish Gupta
Jason Marcus

FINANCIAL SERVICES

Mng. Dir.
Analyst
Associate

(212) 338-4712
(212) 338-4721
(212) 338-4746

SVP, Sr. Analyst

Analyst
Associate

(617) 794-7851
(617) 281-6497
(205) 949-3622

SVP, Sr. Analyst

VP, Analyst

(973) 519-1019
(212) 763-8211

CHINA INTERNET & MEDIA

James Lee
Jiawen Zhou
Yan Chao
CONSUMER

Apparel Retailing & Toys

Margaret Whitfield
Jennifer Milan

Education I Interactive Entertainment

Arvind Bhatia, CFA
Luke Shagets

Mng. Dir.
Analyst

(214) 702-4001
(214) 702-4030

Footwear & Apparel

Sam Poser
Kenneth M. Stumphauzer

SVP, Sr. Analyst

Analyst

(212) 763-8226
(212) 763-8287

Mng. Dir.
Associate

(949) 721-6651
(949) 721-6651

Mng. Dir.
Analyst

(214) 702-4045
(214) 702-4004

James M. Schutz
John Schutz
William R. Griffin, CFA
Matthew Kelley
Mike I. Shafir
Matthew Breese
Edward D. Timmons
Brett Rabatin, CFA
Peyton Green
Michael Lipman
Kenneth James

Dir. of Fin. Ser.

Associate
Analyst
Mng. Dir.
VP, Sr. Analyst
Associate
SVP, Sr. Analyst
SVP, Sr. Analyst
Mng. Dir.
Analyst
Analyst

(864) 241-3384
(502) 420-4015
(800) 621-8635
(207) 699-5800
(212) 763-8239
(207) 699-5800
(800) 203-5332
(877) 457-8625
(877) 492-2663
(615) 269-7323
(615) 760-1474

Mng. Dir.
Analyst

(212) 338-4717
(212) 763-8293

Life Insurance
John M. Nadel
Jason Weyeneth, CFA

Mortgage Finance & Specialty Finance

Henry J. Coffey, Jr., CFA
John Sites, CFA

SVP, Sr. Analyst

Associate

(615) 760-1472
(615) 760-1470

GLOBAL INDUSTRIAL INFRASTRUCTURE (Gil)

Lawrence T . De Maria, CFA

Ben Elias, CFA

SVP, Sr. Analyst

VP, Sr. Analyst

(212) 338-4704
(212) 338-4706

Building. Power & Water Infrastructure

Restaurants
Lynne Collier
Philip May

Banks & Thrifts

Agriculture. Construction & Mining Equipment

Leisure & Entertainment

David Bain
Sherry Yin

(212) 338-4731

Michael J. Coleman, CFA

VP, Sr. Analyst

(212) 338-4718

Engineering and Construction

Chase Jacobson

ENERGY

Oilfield Services & Equipment

David S. Havens
Karl Sowislo

Mng. Dir.
Analyst

(212) 763-8238
(212) 338-4732

Exploration & Production

J. David Anderson, PE, CFA Mng. Dir.
Adam Aron
VP, Analyst

(212) 338-4749
(212) 338-4748

VP, Sr. Analyst

(212) 338-4753

Mng. Dir.
Analyst
Associate
Associate

(212) 338-4703
(212) 338-4705
(212) 338-4762
(212) 338-4729

Mgr., Res. Admin.

Editor

(205) 949-3618
(205) 949-3635

Multi-Industry
Nicholas P. Heymann
Samuel H. Eisner
lmmacolata Arlia
Jordan Calabrese

AoMINISTRA TION

Marianne Pence
Nathan Mitchell

Email Address for Sterne Agee Employees: first initial+ last name@sterneagee.wm (e.g., jsmith@sterneagee.com)

sterne
agee

SALES & TRADING

A TLANTA
Adam Aspes
Adam Kramer
Joe Maloney
Jamie Pennington
John T. Riley

NEW YORK (cont.)

DALLAS
(404) 812-3068
(404) 814-3902
(404) 814-3942
(404) 814-3948
(404) 814-3966

Jennifer Elkins
Dan Griffith
Candace Martin
Bob Nasi
Steve Pokorny
John Schwalenberg

(214)
(214)
(214)
(214)
(214)
(214)

702-4050
702-4044
702-4033
702-4017
702-4020
702-4010

BIRMINGHAM
Gary Hagstrom
Sam Haskell
Scott Hughen
Claude Preston
Amber Spitzer

(205) 380-1782
(205) 380-1781
(205) 380-1764
(205) 380-1762
(205) 380-1761

MILWAUKEE
Paul Kujawa
Rob Wirthlin

(414) 918-7954
(414) 918-7957

M INNEAPOLIS
John Regan Ill

(952) 841 -6408

B OSTON
Richard Gill
Tom Goode
Ted Sheehan
Mike Roncone
Nicholas White

(617) 478-5006
(617) 478-5008
(617) 478-5003
(617) 478-5001
(617) 478-5002

N EW ORLEANS
Henry Corder
Patrick Donnelly
Cheryl Grabert
John Regan, Jr.

(504)
(504)
(504)
(850)

636-4921
636-4902
636-4911
650-5676

(212)
(212)
(212)
(212)
(212)
(212)

763-8219
763-8247
763-8292
763-8268
338-4719
763-8251

CHICAGO
Mark Burrier
Scott Hallermann
Scott Hootman
Robert Hurley
Vesna Radovic
Dan Roesner
Curt Thompson

(312) 525-8425
(312) 525-8421
(312) 525-8426
(312) 525-8440
(312) 525-8429
(312) 525-8433
(312) 525-8427

N EW YORK
Jason Barber
Matt Soskin
Adam Cavise
Mike Cline
Tom Criscoula
Noel Cueto

Enrico DeMatt
Geri DeVito
Eric Dusansky
Mike Flanagan
Rich Gallagher
Brian Haise
Jeff Hood
Alex Jones
Carey Kaufman
Konrad Krill
Robert McGuire
Brian Mcllravy
Adam Merlo
John Moister
Jake Morton
Matt O'Kelly
David O'Shea
Jon Palan
Bruce Rae
Jon Schenk
Chuck Schroeder
Jason Scott
MikoTam
Scott Tashman
Ray Wardell

(212) 338-4724
(212) 763-8242
(212) 763-8231
(212) 763-8282
(212) 763-8260
(212) 763-8206
(212) 490-1453
(212) 338-4701
(212) 763-8274
(212) 763-8218
(212) 763-8236
(212) 763-8258
(212) 763-8232
(212) 763-8210
(212) 763-8261
(212) 763-8227
(212) 763-8260
(212) 763-8225
(212) 763-8271
(212) 763-8221
(212) 763-8264
(212) 763-8215
(212) 763-8252
(212) 763-8256
(212) 763-8272

SAN F RANCISCO
Tom Cervantez
Brian Huerta
Chris Larson

(415) 954-71 15
(415) 954-7121
(415) 954-7125

INVESTMENT BANKING
Mark Behrman, Mng Dir, Head of lnv Banking

(212) 763-8286

FINANCIAL INSTITUTIONS G ROUP

Michael J. O'Boyle, Mng. Dir.
Michael Perry, Mng. Dir.
Jeffrey W. Prochnow, CFA, SVP
D. Timothy Speegle, SVP
John McCrory, SVP
Robert Toma, VP
Horacio Barakat, VP
Andrew Stager, Associate
Nathan Strall, Associate
Jung Lee, Associate
Michael Stern, Analyst

Kimberlee Taylor, Admin. Asst.

(212) 338-4715

NON-FINANCIALS
(205) 949-3592
(212) 338-4736
(402) 778-5054
(205) 380-1 720
(205) 949-3664
(617) 478-5005
(212) 338-4768
(617) 478-5009
(617) 478-5010
(212) 338-4769
(212) 338-4756

John Bolebruch, Mng. Dir. - Industrials

Richard Cunniffe, SVP - Industrials
Everett Titus Ill, Mng. Dir- Energy
Will Brooke, Analyst- Industrials

(212) 338-4716
(212) 338-4713
(908) 730-7882
(212) 763-8278

EQUITY SYNDICATE
Craig B. Jampol, Mng. Dir.

Email Address for Sterne Agee Employees: first initial+ last name@sterneagee.wm (e.g., jsmith@sterneagee.com)

(212) 338-4708

sterne
agee

LOCATIONS

Corporate Headquarters
800 Shades Creek Parkway
Suite 700
Birmingham, AL 35209
(205) 949-3500
(800) 239-2408
(205) 802-1414 fax

13727 Noel Road

ylh Floor
Dallas, TX 75240
(972) 239-4806
(800) 404-2226
(972) 980-7125 fax

OTHER LOCATIONS

706 E. Washington Street

Greenville, SC 29601
(864) 233-6630
(864) 233-6630 fax

3475 Lenox Road

Suite 800
Atlanta, GA 30326
(404) 365-9630
(404) 812-3097 fax

8400 Normandale Lake Boulevard

Suite 920
Bloomington, MN 55437
(952) 841 -6410
(800) 949-4102

265 Franklin Street

Suite 310
Boston, MA 02110
(617) 478-5000
(800) 836-4616
(617) 443-0310 fax

123 N. Wacker Drive

Suite 1250
Chicago, IL 60606
(312) 525-8440
(800) 966-0815
(312) 525-8438 fax

411 East Wisconsin Ave

Suite 1260
Milwaukee, WI 53202
(414) 918-7954
(866) 827-8625
(414) 226-0267 fax

3100 West End Avenue

Suite 930
Nashville, TN 37203
(615) 269-7323
(615) 269-9223

639 Loyola Ave

Suite 200
New Orleans, LA 70113
(504) 299-1021
(888) 978-3763
(504) 299-0956 fax

2 Grand Central Tower

140 East 45th Street
18th Floor
New York, NY 10017
(212) 763-8224
(800) 966-0814
(212) 763-8201 fax

620 Newport Center Dr.

Suite 1100
Newport Beach, CA 92660
(949) 721-6651
(949) 721 -6652 fax

2 Union Street
Suite 403
Portland, ME 04101
(207) 699-5800
(207) 699-5888 fax

5609 Patterson Avenue

Suite B
Richmond, VA 23226
(804) 521-3224
(804) 521-3199 fax

1750 Montgomery Street

Suite 134
San Francisco, CA 94111
(415) 954-7125
(415) 391-7784 fax

Email Address for Sterne Agee Employees: first initial+ last name(f:Ysterneagee.com (e.g., jsmith@sterncagec.com)

EQUITY RESEARCH

BMO

Capital Markets

I U.S.

September 2009

Education and Training

US Edu catio n Research:

Jeffrey M. Silber
BMO Capital Markets Corp.
(212) 8854063
jeff.silber@bmo.com
Associate: Paul Condra
(212) 885-4176
paul.condra@bmo.com

Highlights

Our View

Est Market Growth:

The for-profit sector should continue to outperform

its not-for-profit peers. Although still small at roughly
8.5% market share (nearly $104 billion), the for-profit
sector has made a lasting impression within what was
once considered a "sleepy industry," especially in using
technology to enhance learning. We believe this
outperformance of the not-for-profit sector will continue,
and forecast combined revenues in the four for-profit
education sectors-childcare, K-12, postsecondary, and
corporate training-will increase at a 6.7% annual rate
over the next five years to over $143 billion in 2014,
equating to about a 9.2% market share at that time.

Attractive Segments:

Important Trends:

6.7% (3.1%-10% by subsector)

Childcare, K-12, Postsecondary and Corporate Training
Demographics, correlation
of education levels and
earnings, focus on quality
improvement and accountability, acceptance of online
education.

Many common themes exist within each education sector. Long term, we are very bullish on all the subsectors
within the education industry. In our view, for-profit education could gain positive momentum from factors such as
rising awareness of the advantage of more education to one's lifetime earnings potential, the growing importance of
accountability and education reform, and the expansion of addressable markets through technology (i.e. , distance
learning).

Economic cycles do matter. We believe the acyclical theory of education was proven wrong during and after the
2001 recession and debunked even further in the most recent downturn. Specifically, budget constraints have
adversely impacted spending in the K-12 and corporate training sectors; if history is any guide, these pressures
could last well after the recession ends. Conversely, demand has accelerated for most postsecondary providers
while their competitors (e.g., not-for-profit schools) face severe budget pressures limiting their ability to meet this
demand. While the "comps" are getting tougher, we note that after the 2001 recession, most for-profit schools did
not see meaningful enrollment slowdowns until 2004 and the stocks of the publicly held providers substantially
outperformed the market in both 2002 and 2003.

Changes under the Obama administration could be crucial. While education can come from non-government
sources (e.g. , parents, students, and corporations), governmental legislation and regulation play an important roleespecially in the K-12 and postsecondary sectors. President Obama has made education one of his top three
priorities (along with energy and healthcare) , raising the profile of this group to what could be unprecedented levels.
This could be both a blessing and a curse, however. New funding, such as nearly $1 oo billion earmarked for
education under the American Recovery and Reinvestment Act (the stimulus package), could help offset adverse
recessionary impacts and spur new innovation. However, increased attention on the for-profit postsecondary sector
has re-awakened fears of potential legislative and/or regulatory changes that could limit future growth.
Please refer to pages 357 to 358 for Disclosure Statements, including the Analysfs Certification. For Important Disclosures on
the stocks discussed in this report, please go to http://research-us.bmocm.com/Company Disclosure Public.asp.

Education and Training 2009

BMO Capital Markets

Table of Contents
Key Investment Considerations ... .. ..... .. ......... ......
. ........ ..... ............... .5
Education Industry Overview
.. ........ .... ...
.... ...... .... ........ 7
Risks ... .... ... .. .... .. ... ............. ... ....... .......... ........ ....... ....... .......... .... ... ....... ....... .......... ...... ...... .... 17
Early Childcare: A Small But Steady ....................................................................................... 20
Growth Drivers ............... ... .... .. .... ........ .......... ... .... ...... ........ .......... ... .... ...... ........ .......... .. 22
Largest Childcare Providers .............. .. ... .. ........................... ..... .............................. ..... ...... 32
Worksite Childcare ........... ......... ................................ ................................... ..................... 33
Backup Care ................ .... .... .. ... ...... ................ .... .......... .... .... ........ ....... ......... .... .... .......... .. 36
Characteristics of Superior Childcare Facilities ................................................................. 38
Operating and Valuation Metrics ............. ... .... .. .... ..... .................... ... .... ..... .....................40
International Childcare Market .. .. ...... ....... ................. .. ...... ....... ................. .. ...... ....... ....... .. 42
Mergers and Acquisition Activity ....... ....... ....... .......... ........ ....... ....... .......... ........ ....... .... .... 44
Risks ................................................................................................................................. 47
K-12 Education: Lots of Opportunities, But Beware of Politics .............. ... .... ...... ........ .......... ..48
Market Overview .......... ... ......... ................................ .......................... ......... ..................... 48
NCLB and Stimulus Package: Impact on K-12 Spending ..... .... ....... ........ ..... ............ ....... 51
Curriculum and Learning ............................ ................................ ............................... ,...... 59
Technology ................. ... ... .... ...... ..... .. .......... ... .... ...... ..... .. .......... ... ... .... ...... ..... .. ..... ... 67
Other K-12 Services ......................... .... .. .......................... ..... ........................... ..... ............ 71
Postsecondary Education: Strong Growth Drivers ........... .... .... ........ ....... ......... .... .... ........ ...... . 99
Postsecondary School Market Overview...... .....................................................................99
.. .. .. .. .. .... ...
...... ..... ... ....... 102
Postsecondary School Market Growth Drivers
For-Profit Postsecondary School Market Overview ......................................................... 107
Advantages of For-Profit Schools ....... ....... ...... .... .... .. ...... .............. ....... ......... .... .... ... .... ... 112
Growth Components for For-Profit Postsecondary Schools ............................................ 121
Postsecondary Schools Enrollment Growth Trends ... .. ... ............. ....... ... .... ..... ............. ... 121
Postsecondary Schools Funding Sources and Tuition Rate Trends ........ .. .................... 129
Postsecondary Schools EBITDA Operating Income, and Margin Trends ...................... 170
Postsecondary Schools Instructional Costs Trends ...
.............................. ....... .... 17 1
Postsecondary Schools Sales and Marketing Trends ..................................................... 176
Postsecondary Schools New Campus Opening and Relocation Trends ... .... ........ .......... 190
Postsecondary Schools New Program Trends .............. .. .... .. ......................................... 194
Postsecondary Schools Retention/Attrition/Persistence Rate Trends .. .. .... ........ ....... ... ... 199
Postsecondary Schools Completion/Graduation Rate Trends ....................................... 206
Postsecondary Schools Placement Rate and Starting Salary Trends .. .. .. .. .. .... ...
.... 214
Postsecondary Schools Legal and Regulatory Issues ................................................... 220
Online Postsecondary School Market ............................................................................ 247
Postsecondary Schools: Valuation Trends .... ... .......... ........ ....... ....... .......... ........ ....... .... .. 266
International Postsecondary Market.. .............................................................................. 273
Postsecondary Content Market ........................ ........ ................ .... .... ........ ................... ... 310
Postsecondary Technology Market .................................................... .......................... .. 313
Postsecondary Institutional Services Market. ..... ..... ..... ............ ....... ... ..... ..... ............ ..... 316
Corporate Training: Recession Alters Focus ....... ......................... ................................ .......... 319
Market Overview ......... ... .... .. .... .................. ... .... ...... ........ .......... ... .... ...... ........ .......... ... 319
e-Learning Overview ........................... ..... ........................... ..... .............................. .... .. ... 325
e-Learning Content .. ... .... .... .. .... ........ ....... ... .... ..... ..... ........ ....... ... ... .... ..... ..... ........ ....... ... 328
e-Learning Services .... ......................... .......... ......................... ................................ ....... 331
e-Learning Infrastructure Solutions
...... ..... ... ...
...... ..... ... ........... 332
Market Overview: Segmented by Content Type ............................................................. 336
Business Skills Training .. .. .... .. ...... ................ ... .......... .... .... ........ ....... ......... .... .... .......... 337
IT Skills Training .............................................................................................................. 341
Trends in Corporate Training ......................................................................................... 343
Competitive Landscape ... .... .... .. ...... ................ .... .... ........ ................ .... .... ........ ................ 352
Other Risks .... ................. ......... ....................... ... ......... ....................... ......... ................... 353
We would like to thank Trent Musso and Eva Wang for their invaluable assistance
in creating this report .

A member of BMO

Financia l Group

September 2009

Education and Training 2009

A m ember of BMO

Financia l Group

BMO Capital Markets

September 2009

Education and Training 2009

BMO Capital Markets

Key Inves tmen t Considerations

We believe the for-profit education industry will continue to gain share. Tlus nearly $104
billion industry-serving the ch.ildcare, K-12, postsecondary, and corporate training segments-is a relatively small component (8.5%) of the estimated $1.2 trillion to be spent on
education in tl1e US in 2009. However, the for-profit sector has not only made signific<mt inroads in recent years, but we believe has had a major effect on how traditional providers operate (e.g., traditional postsecondary schools offering more online programs). The for-profit sector should continue to outpace its traditional peers. and we project for-profit education
revenues will increase at a 6.7% CAGR over the ne>-1 five years, reaching over $143 billion in
2014, generating roughly 9.2% market share.
A number of growth drivers should d rive this performance. Long term. we are very bullish
on all the subsectors within the education industry. In our view. for-profit education could
gain positive momentmn from factors such as increased recognition of the benefits of early
childhood education. the growing importance of accountability and education refom1. rising
awareness of the advantage of more education to one's lifetime earnings potential, and the expansion of addressable markets tluuugh teclUlology (i.e., distance learning).
The economy does matter, however. We believe the acyclical theory of education was
proven wrong during and after the 2001 recession and debunked even more heavily during the
most recent recessiort Anecdotal evidence shows some companies have cut back on expanding their worksite childcare offerings. as recmiting and retention perks become less of a priority in a downturn. State and local budget pressures have forced severe education funding cuts,
limi ting what had been growth in services for K-12 public schools. Conversely, these same
limitations have halted some advances by not-for-profit postsecondary institutions (e.g..
online exp<msion) and made them weaker competitors just when demand for progrdllls which tends to be countercyclical - is picking up. Tlris has helped to accelerate growth for
for-profit school operators. Corporate training providers are seeing decljn:ing revenues as in
many cases this training is considered a discretionary expense.
Changes under the Obama administration could have a sizeable effect on the group.
Wlrile tl1e bulk of actual spending is done by parents. students. and corporations. legislation
and regulations may play a crucial role- especially in the K-12 and postsecondary sectors.
President Oban1a has made education one of his top three priorities (along with ener!,>y and
healthcare), raising the profile of this group to w hat could be unprecedented levels. This could
be both a blessing and a curse, however. New funding, such as nearly $ 100 billion eannarked
for education under tl1e American Recovery and Reinvestment Act (the stimulus package),
could help offset adverse recessionary in1pacts and spur new innovation. However, increased
attention on the for-profit postsecondary sector has renewed fear about potential legislative
and/or regulatOI)' changes that could linut future growtl1.
Technology could be a competitive advantage. Education providers tl1at use teciU1ology as
part of their service delivery s hould conllnue to outperfonn. In certain secto.rs, particularly
postsecondary, an online delivery model has become more acceptable and few quality-related
questions are being asked any longer (some argue that quality is better online owing to realtime updates and ability to customize product offerings). We do not believe online education
will ever fully replace classroom-based leanung, but think those traditional education providA m ember of BMO

Financia l Group

September 2009

Education and Training 2009

BMO Capital Markets

ers that smartly incorporate technology in t11eir existing offerings-known as "blended leaming"-will have a competitive advantage. Inroads have also been made in the K-12 sector by
"virtual schools" through providers such as Kl2 (LRN), although we do not envision the type
of online penetration seen in the postsecondary sector. We also see greater acceptance of the
blended learning concept in the corporate 11-aining world, although in that case, we believe it is
more of a replacement for the traditional instmctor-Ied model.
K-12 sector: lots of opportunities but also many risks. In recent years. we believe a fundamental change has occurred in the K-12 sector as the desire to improve school quality has
overtaken demo);.>raphics as a key growth driver. Given the worsening tmderperformance of
the US K-12 system relative to many other countries, this should continue to be a key growth
driver. An influx of federal funding. including a $4.3 billion Race to the Top package, could

help provide the financial resources to spur further innovation. This should help companies
supplying curriculum and learning (e.g., publishing companies), technology, and ot11er services (e.g., outsourced school administration) to this sector. However, state and local governments still fund over 90% of K -12 public spending and the recession has had a dmstic impact
on ftmding. lf history is any guide, this could continue even after the recession ends. In addition, K-12 could also be the riskiest inveslluent sector owing to heavy political pressures, as
seen with previous high-profile stmggles in the school-management sector.
Postsecondary sector is in the sweet spot now, but how long can that last? We believe
by now, most investors subscribe to the countercyclical theory, as enrollment growth continued to strengthen throughout tl1e 2008-2009 recession. It has been most apparent at the "lower
end" of the sector (i.e. providers of non-degreed programs such as a medical assistant certificate) where a sluggish employment market and limited competitive offerings have sent new
students to for-profit schools in droves. While tlle " comps" continue to get tougher, we note
that after the 200 I recession, most for-profit schools did not see meaningful enrollment slowdowns until 2004 and t11e stocks of the publicly held providers substantially outperfonned the
market in botl1 2002 and 2003. While fears of changes under the Oban1a administration may
not subside, we believe any actual legislative or regulatory changes will likely be on the margin (e.g. , changes to incentive compensation rules) and will have less of an impact on future
growt11 than most believe.
Corporate training: later cycle if history is any guide. The 2001 recession and subsequent
years showed that corporal.ions considered some training to be discretionary, reducing training
budgets as part of broader cost-cutting measures. Total spending bottomed in 2003 and remained somewhat flat until 2005 before beginning to grow again. The 2008-2009 recession
has had an adverse impact- which we think is likely to continue through at least 2010, if not
longer. Nevertheless, we stiJI believe this sector' s secular growth drivers. such as the importance of an education in moving up the career ladder and greater acceptance of life-long learning, are as strong as ever. In addition, the shift to less expensive models (e.g., software as a
service) could lessen the adverse economic impacts.

A m ember of BMO

Financial Group

September 2009

Education and Training 2009

BMO Capital Markets

Education Industry Overview

Much has happened within the education industry since our Back to School conference in
September 2008. Although some developments were predictable (e.g., accelerated M&A activity. which investment banks always seems to predict). others were not. Below. we highlight
some of the major developments by sector:

K-12: The US recession ~md arrival of the Obama administration has shifted the focus
away from No Child Left Behind and its various related controversies to tying federal
stimulus funding to improvements in K-12 education. Specifically, the $4.4 billion " Race
to the Top Fund" included as part of The American Recovery and Reinvestment Act of
2009 (Pub.L. 111-5 or the "Recovery Act" ), is the prize sought by states which, in essence, compete for funding based on criteria ranging from how t11ey fund charter schools
to their support for national common standards.

Postsecondary: In his first address to Congress on Febmary 24, 2009, President Obama
highlighted education as one of his chief policy priorities, and asked for every American
to commit to obtaining an additional year of higher education or training. He also set a
goal that by 2020, " America will once again have the highest proportion of college
graduates in the world." This surprised many and was contrary to speculation that higher
education might be ignored as the focus shifted more towards the K-12 sector.

Corporate training: The worsening of the US recession continued to take its toll on this
sector as many corporations deferred training-related spending that is often seen as a recruiting and retention tool.

Whi le the stocks of the traditional postsecondary providers had been the shining stars in the
early part of this decade, they underperfonned for the most part from 2004 through mid-2006,
mainly owing to the sector' s slowing enrollment growtl1. Since tl1at time. the !,'Toup has been
on a roller coaster ride, where improving perfonnance coupled witl1 recessionary fears (which
ultimately became reality) drove the stocks higher only to be subsequently pushed back by
funding concerns, legislative and regulatory fear (" there's a new sheriff in town" ), and the
dreaded " sector rotation" into more cyclical names. Nevertheless, the median perforn1ance of
the stocks in the whole "education industry outpaced the majority of the broad market indices for most of this decade (see Exhibit 1.).

Postsecondary
has led a rollercoaster ride in
terms of share
performance

Exhibit 1. BMO Capital Markets Education Index vs. Market Indices (2000-2009YTD)
Sector
PreK-12
Postsecondary
Corporate Training
E-Learning
International
Education industry

2000
32.6%
102.6%
3.4%
10.0%
5.0%
32.6%

2001
0.5%
52.4%
-19.6%
-79.7%
10.0%
0.3%

2002
-35.8%
22.9%
-50.9%
84.4%
-79.7%
-6.6%

2003
73.9%
54.1%
58.4%
3.1%
84.4%
56.3%

2004
-4.8%
0.9%
-12.9%
2.7%
3.1%
0.0%

2005
-1.8%
-17.3%
14.2%
25.8%
-2.7%
4.3%

2006
0.2%
12.3%
1.7%
34.0%
25.8%
10.8%

2007
-2.4%
44.7%
28.3%
-4.4%
34.0%
26.5%

2008 2009 (YTD)

-40.8%
13.2%
8.7%
6.3%
-57.7%
30.3%
-34.8%
61 .6%
-42.4%
40.8%
-33.4%
29.8%

S&P 500
Russell2000
NASDAQ

1.5%
-4.2%
-39.3%

-13.0%
1.0%
-21 .1%

-23.4%
-21.6%
-31 .5%

26.4%
45.4%
50.0%

9.0%
17.0%
8.6%

3 .0%
3.3%
1.4%

13.6%
-12.9%
9.5%

3.5%
-2.7%
9.8%

-38.5%
-34.8%
-40.5%

14.4%
17.4%
30.7%

Note: The BMO Capital Markets Education Index represents the median return for the following publicly traded education companies: APEI,
APOL, ATAl. BBBB, BPI, CAST, CECO, CEDU, COCO, CPLA, DL, DV, EDU, ESI, FC, GPX, HSTM, LINC, LOPE, LRN, LTRE, MBA, NED.
NLCI, REVU, RLRN, SABA, SCHS, SCIL, SKIL, SPRO, STRA, TUTR and UTI. All returns exclude dividends. 2009 year-to-date as of
September 9, 2009. N.A.- Not Available.

A m ember of BMO

Financia l Group

September 2009

Education and Training 2009

Diversity is an
attractive feature
of investing in
education

BMO Capital Markets

We maintain a very bu!Jish longer-tenu outlook for investment opportunities throughout the
education industry in generd! - the specific growth drivers for each sector will be discussed in
depth later in tlus report. In additiol.\ we believe the education industry is among tl1e most diversified witllln any vertical, providing tile opportunity for investors to choose different paths
based on tlleir beliefs about the direction of tl1e macro enviro1m1ent and other issues.

Size of the Education Industry

Education capital

Each year, the Office of Management and Budget (OMB) estimates the net wealth of tl1e US

of $57 tr illion

through what it calls the National Balance Sheet. An important component of the asset base is
what it calls "education capital," or tl1e cost of replacing the years of schooling embodied in
the US population aged 16 and over. This measures how much it would cost to reeducate the
US workforce at todays prices, rather t11an at its original cost. The OMB estimates that real
education capital (i.e., excluding inflation impact) was roughly worth over $57 trillion in
2008, slightly above 48% of the US net wealtl1, up from $6.8 trillion (as measured in 2008

r epresents n early
one-half of total
US net wealth;
has gr own at a
4.5% r eal CAGR

dollars; just below 33% ofthe US net wealth) in 1960. Tlus represented a real CAGR of 4.5%
(when measured in 2008 dollars) over that 48-year period.

since 1960

Exhibit 2. Education Capital as Percentage of US Net Wealth

(1960-2008)
Education capital
-+-As % total net wealth

$60

;;>
co

50

40

0
0

:s

50%
40%

Gl

3:
Qi
c
20% iii

30%

30

20

(/)

Qi
(/)

10%

10

0
?F.

(/)

<(

..

:E

0%
1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2006

2007

2008

Source: BMO Capital Markets and Office of Management and Budget.

Wlule most people may believe federal sources provided much of tll.is education capital, t11e
OMB estimates tllat only about 3% (roughly $1.6 trillion) was federally financed; the main
investors have been state and local governments, parents. and students tl1en1Selves (who forgo
earning opportunities to acquire education). As such, the education industry serves a large and
wide customer base, in our view.
Estimated total
sp ending: about

$1.2 trillion in
2009, growing
5.1% CA GR to
nearly $ 1.6 trillion
i n 20 14

A m ember of BMO

The education industry represents a significant amount of spending no matter how it is defmed. As shown in Exhibit 3. we estimate that just over $1.2 trillion will be spent on educational services in tl1e US in 2009. Tlus would represent roughly 7.9% of estimated GDP for
the year . Wlule growt11 rates slowed for most sectors leading into and just after tl1e 2001 US
recession (March-November 200 I) they picked up again as the economic expansion gained
strength. However, growth slowed again heading into the current recession and we expect it to
be somewhat sluggish in the near-tenn. We project the education industry will grow at
roughly a 5.1% annual n1te through 2014, when total spending is expected to reach nearly
$1.6 trillion (see Exll.ibit 3).

Financia l Group

September 2009

Education and Training 2009

BMO Capital Markets

Exhibit 3. US Education Industry Revenues (1993-2014E)

1993

1996

2002

1999

2005

2008

2011E

2014E

Source: BMO Capital Markets estimates, US Department of Education National Center for Education Statistics and Training Magazine.

For-profit sector:

Although the entire industry may be vast, the for-profit portion has only recently emerged.

estimated $104

T he past 15 years or so have seen the birth of the K-12 alternative school movement, tJ1e explosion of the for-profit postsecondary sector, and tile creation of the e-learning sector. Based
on data compiled from a number of different sources, we estimate that the for-profit sector
will generate about $104 billion in revenues in 2009, or roughly 8.5% of the roughly $1.2 trillion expected to be spent on US education for the year.

billion to be spent
in 2009 or 8.5% of
total education
spending

From 1999 to 2002, the for-profit component declined as a percentage of total industl)' revenues from 8. 1.% to 7.7%. Just before that downtum much of tile new for-profit investment
and excitement was concentrated in the corporate training sector- the area tl1at suffered the
most during and after the most recent US recession, in our view. However, tJ1e for-profit sector rebounded thereafter. growing at a faster rate than the overall education industry. From
2002 through 2008, the for-profit education sector grew at a 6.5% CAGR.
For-profit sector:

While certain economically sensitive sectors (e.g., K -12, corporate training) may see slower

projected 6. 7%

growth and could potentially shrink should the economic downturn be severe, we nevertheless
expect tJ1e for-profit sector to continue to gain market share over the next Jive years, d riven by
sizable gains in the postsecondary sector. We forecast for-profit education revenues will grow
at a 6.7% annual rate through 2014. reaching over $ 143 billion in revenues that year. Tllis
would equate to about 9.2% of the nearly $1.6 trillion in total education spending expected in
2014, up from the estimated 8.5% share captured in 2009 (see Exhibit 4).

CAGR through
2014, expanding
market share to

9.2%

Exhibit 4. US For-Profit Education Industry Revenues (19992014E)

-

$150
"2

125

:a

100

~
1/1
Ql

75

:::J

50

>
Ql

25

cQl

For ProfitI Spendn

1 g -+-For-Profit%
I

,.._

0::

1---

0
1999

2002

...-

10%

1--'"

- ---

.....-

9%

.Sen

o:o

- c
..... c

8%

Ql

Q.
~ 1/1

Ql
Ql

Q.

7%
2005

2008

2011E

2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates, US Department of Education National Center for Education Statistics, Training Magazine and Eduventures.

A m ember of BMO

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September

2009

Education and Training 2009

BMO Capital Markets

Investments and M&A Activity in the Education Industry

The number of publicly held education companies has substantially increased since 1994,
when only a handful of companies traded in US equity markets. Not surprisingly, t11e pace of
issuance accelerated during the dot.com heyday with ll IPOs in 2000, the bulk of them for
companies specializing in e-learning. Similar to most sectors, the pace of public offerings
slowed significantly thereafter, while concurrently. many of those dot.com prov iders disappeared from the public company landscape.
Over the past three years, however, we have seen a resurgence of lPOs for US education providers, some of which were among the few deals during the most recent slowdown in the public offerings market. A list of recent transactions can be found in Exl1ibit 5. As one can see,
the commonality of tl1ese companies lies in their online platfonn.

Recent
resurgence of
education IPOs

Exhibit 5. Recent Public Offerings of US Education Companies

(2006-2009)
Date

Company Name/Ticker

Description

Stock Market

Nov-06
Nov-07
Dec-07
Nov-08
Apr-09

Capella Education (CPLA)

American Public Education (APEI)
K121nc. (LRN)
Grand Canyon Education (LOPE)
Bridgepoint Education (BPI)

Online postsecondary provider

Online postsecondary provider
Online K12 provider
(Mostly) Online postsecondary provider
(Mostly) Online postsecondary provider

US (NASDAQ)
US(NASDAQ)
US (NYSE)
US (NASDAQ)
US (NYSE)

Source: BMO Capital Markets and Capital IQ.

In addition. there are other potential IPOs currently in registration in the US:

K-12 technology provider Archipelago Learning (proposed ticker ARCL)

Postsecondary school operator Education Management (proposed ticker EDMC), which

plans a return to the public markets after its June 2006 going-private transaction.

Non-US

There have also been a number of public offerings of foreign education companies in both the

companies going

US and in their domestic markets. A list of recent fo rei1:,'1l company transactions can be found
in Exhibit 6.

public as well

Exhibit 6. Recent Public Offerings of Non-US Education Companies (2006-2009)

Date
Com pany Name/Ticker
Sep-06 New Oriental Education (EDU)
Mar-07 Anhanguera Educacional Participacoes SA (AEDU 11 .BR)
Aug-07 Estacio Participacoes SA (ESTC11.BR)
Aug-07 Kroton Educacional SA (KROT11.BR)
Oct-07 Sistema Educacional Brasileiro (SEBB11.BR)
Oct-07 Noah Education Holdings, Ltd. (NED)
Nov-07 AI-Khaleej Training and Education Company (SASE:4290)
Dec-07 Early Learning Services Limited (ASX:ELY)
Dec-07 ChinaEDU Corp. (CEDU)
Jan-08 ATA Inc. (ATAI)
Apr-08 CIBT Education Group (MBA)
Jun-08 Chungdahm Learning, Inc. (KOSE:A096240)
Jun-08 Visang Education Inc (KOSE:A100220)
Jul-08 China Distance Education Holdings, Ltd. (DL)
Aug-08 Seigakusya Company, Limited (JASDAQ:2179)

Country of
Orig in
China
Brazil
Brazil
Brazil
Brazil
China
Saudi Arabia
Australia
China
China
China
Korea
Korea
China
Japan

Sector
Postsecondary
Postsecondary
Postsecondary
Postsecondary
K-12/Postsecondary
K-12
Corporate Training
Childcare
K-12/Postsecondary
Postsecondary
Postsecondary
K-12/Postsecondary/Corporate
K-12/Postsecondary
Postsecondary
K-12

Stock Market
US (NYSE)
Brazil (BOVESPA)
Brazil (BOVESPA)
Brazil (BOVESPA)
Brazil (BOVESPA)
US (NYSE)
Saudi Stock Exchange
Australian Securities Exchange
US (NASDAQ)
US (NASDAQ)
US (AMEX)
Korea (KOSDAQ)
Korea Stock Exchange
US (NYSEArca)
Japan (JASDAQ)

Source: BMO Capital Markets and Capital IQ.

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Education and Training 2009

Recent "going
private"
transactions

BMO Capital Markets

Whi le the past few years have seen new education companies become available to public equity investors, a number of companies in the sector went the opposite way via "going private"
tmnsactions. Several of those transactions are smnmarized in Exhibit 7.

Exhibit 7. Recent "Going Private Transactions" of Education Companies {2006-2009)

Com pany Name
Education Management

Description
Postsecondary school operator

Concorde Career Colleges

Educate

Postsecondary school operator

K12 supplmental education services
provider
e-learning provider
International postsecondary school
operator

eCollege
Laureate Education

Bright Horizons Family Solutions

Sum Total Systems

Worksite childcare provider

Corporate training provider

Buyer(s)
Providence Capital Partners and Goldman
Sachs Capital Partners
Liberty Partners
Investor group, including Sterling Capital
Partners and Citigroup Private Equity
Pearson Education (PSO)
Investor group led by CEO Doug Becker
and a consortium, including Kohlberg
Kravis Roberts & Co. (KKR), Citi Private
Equity, and SAC. Capital Management
Bain Capital Partners, LLC.
Vista Equity Partners

Transaction
Value ($ mil.)
$3,200

99
535
538
3,820

1,300
160

Source: BMO Capital Markets and company reports.

Private
investment has
rebounded since
2003

Private investment in this industry has also rebounded since 2003. As shown in Exhibit 8, the
$18 1 million of private investment in the education industry in 2003 was the lowest since
1994's $93 million and is off almost 94% from the nearly $3 billion invested in 2000. However, we have seen some recovery since then, with nearly $560 million invested in 2007 (2008
data was not available).

Exhibit 8. Private Investment in US Education Industry {19902007)

Vi
c

2,000

:ll
~
Cl

:;;

..

1,000

c.

Cl)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: Eduventures.

There have also been some landmark mergers/acquisitions within the industry in recent years.
These include:

A m ember of BMO

Childcare: The past few years have seen the rise and fall of Australian-based childcare
provider ABC Learning Centers (ABS.ASX). The company had been very active in both
the US and UK markets, acquiring (among others) The Learning Care Group (January
2006) for $153.5 million and La Petite Academy (January 2007) for $339.4 million. Unfortunate ly, the company ran into some trouble after this aggressive ex:pansion strategy
and, in late June 2008, sold 60% of its US business to Morgan Stanley Private Equity
(MS), using the proceeds to pay down debt. Unfortunately, this was not enough as the

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company collapsed into receivership (i.e.. bankruptcy) in November 2008. Since then. most
other units have been sold as well.

K-1 2: In December 2006, Irish educational software publisher Riverdeep acquired US

textbook publisher Houghton Mifflin for $3.4 billion, becoming Houghton Mifflin Riverdeep. In December 2007, it acquired the US business operations of Harcourt Education
from Reed-Elsevier (RUK) for $4 billion. The publishing company is now known as
Houghton Mifflin Harcourt.

Postsecondary: While IJ1e rate of school acquisitions by publicly held companies has

slowed somewhat from the "go-go" days earlier this decade, there have been many recent
examples of investments in privately held school operators. many of which were funded
by private equity fmns. Recently, a number of publicly held providers re-entered the acquisition market, mainly to diversify into different verticals, either geographically (e.g.,
the October 2007 creation of Apollo Global. a joint venture between Apollo Group
[APOL] and private equity finn The Carlyle Group, to focus on the international education market); vertically (e.g., in Jtme 2009, ITT Educational Services [ESI] acquired notfor-profit provider Daniel Webster College for roughly $21 million, its first regionally
accredited trniversity; or to diversify into other education sectors (e.g., in October 2007,
DeVry [DV] acquired Advanced Academics, which operated virtual high schools in six
states, for $27.5 rnillion).

Corporate Training: In May 2007. SkillSoft (SKIL) acquired NETg from Thomson Corporation for $270 million, creating one of the world' s largest providers of e-leaming content for the corporate sector.

We have provided detailed merger ru1d acquisition activity data for each sector in the respective sections throughout this report.

Impact of Economic Cycles

The econ omy still
matters

Interestingly, although many had tl1ought the perforn1ance of the economy had lil1.le correlation with the education sector, the experience over recent cycles has proven this to be wrong,
in our view.

Childcare. We believe workplace childcare has proved to be a relatively inexpensive way

to maintain employee momle in challenging opemting enviromnents. Corporatesponsored childcare also appears to be somewhat of a later-cycle play owing to the long
timeframe (as much as tltree to four years) between an initial sales contact and the opening of a new center. However, the closures of seven centers run by Bright Horizons Family Solutions in June 2007 and sponsored by United Auto Workers and the Ford Motor
Company (F) may have been the first sign that troubled companies could cut back on this
" perk" in times of economic distress. In addition. purchase decisions may often be delayed owing to budget constraints.

K-1 2. Although K-12 spending growth had been somewhat stable through most prior US

recessions. the sector did not do as weU during the 2001 recession and thereafter when
what was once taboo-culling state and local K-12 budgets-became fairly commonplace. For most of tlus decade, K-12 spending levels had gener.illy increased as tl1e economic exprulSion following the 2001 recession gained strength. However. FY2009 (yearended September 30, 2009) accelerated a slowing trend ,which beg~m in FY2008 as many
jurisdictions already experiencing fiscal difficulties were forced to make addit1onal
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spending cuts mid-year. In its June 2009 Fiscal Survey of the States. the National Association of State Budget Officers (NASBO) estimates that states will face a combined
budget gap of about $230 billion for FY2009-FY20 11. The suJVey also fotmd that state
spending is estimated to decrease 2.5% in FY2010, the largest drop in 32 years and worsening from the FY2009 estimated 2.2% decline - the two worst annual declines in the
sul\ley ' s history (began in 1979).

Postsecondary. During t11e 2001 recession and thereafter. the for-profit postsecondary
sector e:),:perienced some of its historical countercyclical traits (i.e., accelerating enrollment growth and lower attrition rdtes). Interestingly, while the recession ended in November 2001, most for-profit postsecondary companies were still exhibiting these countercyclical traits until mid-2004, when higher attrition rdtes and slower rates of
enrollment growtl1 became more commonplace. We attribute this to t11e length of tl1e
"jobless recovery." wltich left few viable options beyond attending classes. For-profit enrollment growth, for the most part, decelerated over the next two-plus years, especially in
the on-ground c~m1pus sector, where, in our view, the not-for-profit sector became a bit
more competitive after an improvement in state and local tax revenues to fund their
growth. However, by mid- to late-2007, enrollment growth accelerated once again ~md
remained fairly strong throughout the 2008-2009 recession.

Corporate training. Conventional wisdom was t11at t11e use of e-learning as a potential
cost-saving tool (e.g., less travel) could offset a cyclical downturn in corporate training.
Unfortunately, that selling point was not enough to save m~my " pure-play" e-learning
companies from the dot-com fallout. While the mid-2000s brought growth back to the
sector, the corpomte tmining market slmmk in the 2008-2009 recession as many companies view training as somewhat of a discretionary expense.

Regulatory Overview
Education, similar to healtl1care, is a highly regulated industry. While t11e private sector plays
an important role as a funding source - particularly in the childcare and corporate training
markets- federal. state, and local governments play an ever greater role in t11e K-12 and postsecondary sectors. Within the discussion of each of the industry sectors in tlus doctunent, we
outline the specific regulations applicable to each that we believe are important to investors.
Wlule we believe the re1:,'1llatory environment has actually been improving in recent years, the
arrival of a new administration under President Obama has increased some concerns. Conventional wisdom prior to his tenure was that the Obama administration would :focus more on the
K-12 sector than on the postsecondary sector and t11at a Democratic-controlled Congress
would be less favorable to tl1e overall for-profit education industry. The stocks of many of the
publicly held companies have gyrated wildly since November 2008, somewhat owing to these
views.
President Obama
has raised the
profile of the
education sector

Interestingly, President Obama raised the profile of tl1e education sector to a higher level than
most imagined during his first address to Congress on February 24, 2009, when he highlighted education as one of his chief policy priorities. along witl1 energy and healtl1care.
Among the more notable quotes were these (per the official White House transcript):

A m ember of BMO

"In a global economy where the most valuable skill you c~m sell is your knowledge, a
good education is no longer just a pathway to opportunity- it is a prerequisite."

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BMO Capital Markets

" It will be the goal of this administration to ensure that every child has access to a complete and competitive education- from the day they are born to the day they begin a career."

"But we know that our schools don' tjust need more resources. They need more reform.
That is why this budget creates new incentives for teacher performance; pathways for advancement, and rewards for success. We' ll invest in innovative programs that are a lready
helping schools meet lrigh standards and close aclrievement gaps. And we wiU expand
our commitment to charter schools.

"I ask every Americ~m to cotmnit to at least one year or more of higher education orcareer training .. .. we will provide the support necessary for you to complete college and
meet a new goal: by 2020, America will once again have the highest proportion of college graduates in the world.''

While much of the focus will likely be on the not-for-profit components in both the K-12 and
postsecondary sectors. we believe ll1e increased attention and funding for education overaU
will likely benefit the for-profit sector as well. In Exhibit 9, we have a snapshot of some of the
ch~mges and proposals that have come about since President Ob~m1a took office. Among the
more noteworthy items are the proposed elimination of the Federal Fmnily Education Lmm
Program (FFELP) and shift to 100% direct lending for Title IV funding (federal financial aid
for lrigher education). proposed increases to PeiJ Grants and Perkins loans, and ties for a federal State Fiscal Stabilization Fund to improvement goals mandated by ll1e Department of
Education (ED). We go into );.>reater detail on these issues within the respective sections of this
report.

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BMO Capital Markets

Exhibit 9. Changes and Proposals Potentially Affecting the Education Industry (2009)
FY2010 Budget

Potential Impacts on Education Sector

Postsecondary

Status

Chlldcare

K-12

May 7. 2009: Proposed by Whit~

House

All three: Keep i mding steady for the

Child Care and Oeve~pment Block

Modest lmding boosts: Whie H ouse

S1.5 billion to $64. 18 billton. House:

July 24, 2009: Passe<l HOlM

July 30, 2009: Passed Senate

Grant a1 S2.1 blloo. and ll'ovide a

S1.5 bllon 10$64.18 billion. Senate
S 122 ml lion increase in funding (Of'
5800 million to $63.45 billion.
Head Start to $7.2 billion. White House

above ln!adon. Making pennane<~t lhe

requested lmds for Trtle I Earty

Reinveslment Act of 2009 (Stimi.Cus)

Appropriations Comrritlee

Corporate Training

Make Pel I Grant m andatory, an

entilement and annual increases 1%

expa nded Hope Scholarship a s

enacted._ the American Recovery and

($2,500 y~r/ partialy refundable).

Childhood Grants and Early Learning

Chalenge Fund~not in House a

ModWythe Perkins loan Propm,

Senate version.

inelucflng increasing the annual size

from $1 bilion to $6 billion. Aloe-ale

S2.5 biiUon over he yea.rsto suppM

slate efforts to "'h~ low-income

students 1ucceed and comp&ete their

college eclJcalion"'

Si!Jled into law on February 17. 2009 $2 bion for the Child Care and
American Recovery and Reiwe:stment
Act {i.e. Pub.L. 111...5, ARRA or stimulus
Development fund
packoge)

$3.95 tillion addtional lmding for

$t4 billicn in Elementary and

Increase m a.XiiTI.Im Pell Grant to

Secondary Act tmding; $12.2 bilon in

IDEA (special educ-ation) funding) and
$53.6 bill ton in State Fascal
St:abilzalion Fund. inclufng 54.3
bilion "Race to the Top fund" and

S5.350 and S5.550 in 2009-2010 and Worl<fofce lnve<tmenl Acl Progr.~ms 10

tistricts and slates that can

S.abilz.ation Fund.

20 1 ~20 11

sdlod yean., r espectively.

prepa~ for green j o~. and other

American Opportunity Tax Credit.

emerging incklstries: SSOO milon for

increases lhe Hope ScholarV!ip for

heal th profession lli!iinilg programs;

2009 and 20t0 to a tOC11of 52.500 and $1.6 billon to e~and current Trade
$650 millon ~ innovation gants'" to expands credt to four from two years; Adjustment Assistance Pro~m s to
be awarded on a discretionary buis to CCM.IId beneit from State FlscaJ
lnWde servic-e \WI1<ers in addtion to
those in the m anufacturing sector

demonstrate areas of lmpcovement or

(postse<:oodary$ectcw could benefit as

higher aclievement among students.

weU)

Student Aid and Fiscal RHPQnsi>iity Act lnlfocklce<l in House on July 15. 2009
(H.R. 3221 or SAFRA)

5'.\ieh from FFELP 10 100% direct

lenditg; sirrilar fmcing ~creases for

Pell Grant as In ARRA but onry made a

quasi-end:fem ent; $3 billion aver ffve
years for Colege Ac<:ess and
Completion lnnovabon Fund; FAFSA

(financial aid form) simplification

Session I held

Negotiated RulemaU.g

tom fetruary-Apri

Sessicn 1: FNe learns ciscussing a

wide variety of issuM. rangi\g from 1he

2009, Session ll staled 10 be held tom

September-NOernber 2009

90/10 rule to job placement rates to

campus ucurity. Notice of Proposed
Ruk!m aking pd:llished in late July
2009. Session II: Public heari'lgs held
In June 2009; topics could include

satisfactory academic prowess:

incentive compensation: gaintll

employment in a recojJ'Iized
occupation; state authorization as a

component of institution..- el~ibility.

delntion of a credit hour. fiX purposes

of delermlning program ellgibity

status, particularty in the context of

awarding: Pell Grants; verification of

in form ation Wlcluded on student aid
applcations; definition of a high school
cfpl cma as a condition of receiving
Federal student aid.

Am erican Gnd.JaOOn lntiative Q.e..

Prcposed by President Obama on July

Obama's community college plan)._

15.2009

Rou~ly S12 bil ion is e~eded to be

spent over the next 10 yem.
lncludng: $9 bilon proposed to be
spent over 10years in ganl$to
community colleges awarded on a

compeOOve basis to promote plans

that m hance relationships Mh the
business community. provide
scholarV!ips and improve data
systems. among other things: $2.5
billion in seed money to be provided
for intastructure inprovements vddch
Is expected to finance up to $10 bill on
in brick and m ortar investments; an
additional $500 million to be anocated
separately toward de:veloping free

online cCM.I'Ses.

Source: Chronicle of Higher Education, Early Ed Watch Blog, Education Week, Inside Higher Education.

While on the surface most of these changes and proposals would benefit the sector, legislative
and regulatoty fears have impacted the perfonuance of many education stocks - specifically
those of postsecondacy providers. Whi le we do not believe l11ere will be any adverse changes
specifically geared to the for-profit sector, there could be changes made or proposed which
would more adversely impact the for-profit sector. For example_ any changes to l11e incentive
compensation mle - which limits institutions whose students are eligible for Title IV :ftmds
from using certain financial incentives to compensate t11eir recruiters (e.g.. enrollment counselors) based on the number of students that enroll in courses, or any other enrollment-related

Legislat ive and

regulatory fears
have hurt
postsecondary
stocks

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Education and Training 2009

BMO Capital Markets

metrics - would likely affect the for-profit sector to a greater extent as we believe they have
been more aggressive users of these tools.

Education Industry Growth Drivers

Common growth
drivers

Although some issues remain uncertain in t11e near tenn. we are very bullish about the longerterm growth opportunities for investing within all sectors in t11e education industry. Although
each sector has its own growth drivers and risks (which we discuss at length in the rest of this
report). we believe a number ohmderlying trends have a broad influence on the !,'Toup:

Importance of learning outcomes. We beljeve this theme plays across all four sectors.

Childcare providers are stressing the advantages of starting an education as early as possible to gain a head start before entering elementary school. K-12 providers are under
pressure to improve their academic perfonnance tmder mandated federal and state accotmtabilit:y regulations or face repercussions such as the loss of funding. Career-focused
postsecondary schools are trying to stay ahead of changing hiring trends to enhance students' marketability. Finally, corporate training buyers have attempted to quantify the
benefits derived based on potential skills improvement and otJ1er factors when justifying
tl1e purchases of their products.

Growth of "blended learning." This tenn often applies to the marriage of classroombased and online-learning approaches. We believe classroom-based training and online
learning each have their own merits and limitations. ln our view. a blended approach can
cater to the increasing student demand for greater flexibility. We have seen blended
learning approaches become well accepted in the postsecondary and corporate training
areas. While it may be more difficult in the K-12 and cruldcare sectors owing to the need
for closer personalized attention, there may be some areas witJlin both sectors where
blended leaming could be applicable.

Greater use of technology. While the use of teclmolO!,'Y is somewhat commonplace

throughout the en6re education landscape, we believe t11e implementation of new technologies will continue to have a substantial impact on the industry. Education, in particular the K-12 sector, is notoriously a follower (as opposed to a trailblazer) when it comes
to using technology. Given the post-dot.com shakeout, the sector may actually have had a
"late-mover's advantage" in tenns of getting access to better technologies at lower costs.

Greater focus on profitability, not just growth. Tlris theme applies to virtually every

industry where venture-backed funding drove some of the initial growtl1. Although in
most cases this change in investors' valuation priorities refers to companies with tec!U1ologically based products and services, in this case it also applies to "brick and mortar''
companies, such as K-12 private management companies. Tllis shift has also been felt in
the for-profit postsecondary sector as some companies that had followed aggressive enrollment, acquisition, and new campus addition strategies have had to " rightsize" what
they have before considering f11rther expansion.

Intersection of various sectors. Although we believe each sector witlrin tJ1e education

industry should be viewed on its own merits, we have seen selective instances where different sectors merge. Tlris could be another growth driver for t11e industry overall. Exmnples include childcare/K-12 (e.g., cllildcare providers extending their programs through
early elementary school), K-12/postsecondary (e.g., pre-college test preparation compaA m ember of BMO

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nies providing services to help K-12 schools acclimate to tl1e post-NCLB environment),
postsecondary/K-12 (e.g., acquisitions of virtual high schools by companies traditionally
specializing in the postsecondary area), postsecondary/corporate (e.g. , the increasing focus on working-adult students and the growth of specialized corporate universities), and
childcare/corporate training (e.g., childcare facilities catering to adult education programs
in the evenings to maximize facility usage).

Risks
We have identified specific risks we believe are inherent to each education sector within the
appropriate sections of this report. However, certain key risks apply to most sectors:
Regulatory risks. In our opinion, government regulation is by far the biggest risk to investing
in education companies, particularly those serving t11e K-12 and postsecondary markets. Although for-profit companies have expanded and should continue to expand their penetration
of this industry. the public sector still dominates, whether by providing competitive services
and/or potential funding. Companies generating a significant component of their revenues
from the public sector could be affected by decisions that may be based more on politics than
on business fundamentals.
Economic cyclicality. The past two economic cycles have revealed the benefits, and more
importantly, the disadvantages of economic cyclicality to the education industry, in our opinion. For example. during recent recessions postsecondary providers experienced accelerated
enrollment growt11 as a weak job market provided fewer options to graduating high school
students and greater numbers of older students went back to school to enhance their skills.
Conversely, providers to botl1 the K-12 and corporate sectors have seen revenues tmnble as
part of funding shortages and broader cost-cutting efforts. These roles reversed for the most
part during t11e expansion earlier tllis decade, witl1 some expectations of the same in the upcoming economic recovery.
Aggressive new entrants. We believe the increased focus on U1e for-profit education sector
has transfonned what was once a sleepy industry into one where competition has intensified.
In addition to new "pure-play" entries in virt11ally every sector, competition has increased
from traditional providers that expanded their reach (e.g.. trdditional universities growing
their online and continuing education prognuns, publishing companies broadening their corpon\te training exposure), as well as more fomlidable privately held entities funded by ptivate
equity firms and the like. Although the dot.com fallout eradicated many "new economy"
companies (e.g., e-leaming), those that sutvived have become fonnidable competitors in certain niches (e.g., corporate training). in our view.
Not-for-profit competitors. We caution investors that, in certain sectors, not-for-profits have
become tougher competjtors. This has already become apparent in the for-profit postsecondary
schoolmarl<et, in our view, where improved budgetary environments and a new focus on market-oriented programs (e.g., executive education, distance education) earlier tllis decade helped a
mm1ber of not-for-profit schools stem the tide of losing share to the for-profit sector. Another
example is in K-12 tutoring, where rulings had allowed a number of school districts to become
eligible for No Child Left Bellind funding for supplemental education setvices (i.e., tutoring) an area where many for-profit providers had expected a sizable windfall.
A m ember of BMO

Financial Group

17

September 2009

Education and Training 2009

BMO Capital Markets

Headline risks. Earlier tllis decade. we saw an increasing number of negative headlines unrelated to operating fundamentals, specifically the rise of allegations of impropriety against a
number of for-profit postsecondary providers. This, along with the filing of lawsuits, had adversely affected the stock performance of most companies in the for-profit postsecondary sector as vittually all have been tainted by association (although we acknowledge investors appear to have become more accustomed to this as the status quo and many companies have
apparently " cleaned up their acts"). Similar issues affected the for-profit K-12 school management sector (i.e., Edison Schools).
Impact of performance of comparable stocks. The stocks of education companies within a
specific sub-sector tend to move together. As a result. negative news-whether external or
opemtional-relating to one company could have a detrimental effect on the share prices of
ot11ers. Until investors truly segment the industry 's innovators from other publicly held competitors, this unwarranted negative association may continue.
Access to capital markets. An influx of private capital fueled much of the early growth in
the education industry. Earlier this decade, as these investors rationalized their current holdings, they were somewhat reluctant to mject fresh capital into the space. Although we have
seen a recent inflow of fresh capital in certain components of the industry (postsecondary),
otJ1ers have been limited owing to current sluggish business trends. This issue a lso impacted
the student loan market underlying the postsecondary sector as the loan securitization markets
dried up, constraining liquidity.
ln the remainder of this report, we analyze in detail the four major sectors in the education industry: childcare, K-12. postsecondary, and corporate training. A stm1mary of tl1is analysis is
found in Exhibit 10.

A m ember of BMO

Financia l Group

18

September 2009

Education and Training 2009

BMO Capital Markets

Exhibit 10. Summary of Education Sectors

Total
Spending
2009E

ForProf.
Rev.
2009E

ForProf.
Rev.
2014E

Childcare

$72.5

$14.0

$19.2

6.5% Demographics,
increasing awareness of
early education benefits,
tax incentives and other
positive legislation

Finding and retaining staff, competition, regulations

Potentially latercycle, although little negative impact

seen during last
recession

K-12

677.3

24.0

28.1

3.1% Focus on quality improvement and accountability, alternative school

movement

Budgetary constraints, regulations,

need to show academic improvement

Budgetary shortfalls hurt during

recession; should
improve as economic recovery
matures

Postsecondary

410.8

39.9

64.2

10.0% Demographics,
increasing demand for
skilled workers, proven
earnings premium,
continued influx of "older
students," greater acceptance of online education

Regulatory, increasing competition (traditional universities,

e-learning providers), economic expansion

Somewhat countercyclical (enrollment and tuition

increases during
and after a downturn)

53.9

29.7

32.0

4.5% Potentially tightening

labor market, an
accelerated pace of technological improvements,
need to remain competitive in an increasingly
global economy

Economic cyclicality,
shift from instructorled to e-learning,
increasing competition from other sectors (i.e. , postsecondary)

Potentially latercycle recovery, although apparently

more discretionary
than previously
thought

$1 ,214.5

$103.6

$143.4

($ Billions)

Corporate
Training

Total

CAGR
20092014E Key Growth Drivers

Risks

Effect of
Economic
Business Cycles

6.7%

Note: For-profit revenues may differ somewhat from the segments' for-profit projections within the remainder of this report as they may
exclude certain categories. Source: BMO Capital Markets estimates, US Department of Education National Center for Education Statistics,
Outsell Inc. and Training Magazine.

A member of BMO

Financia l Group

19

September 2009

Early Childcare

BMO Capital Markets

Early Childcare: A Small But Steady Market

While growt11 may likely be slower t11an in other educational sectors, we believe tllere are
solid investment opportunities available in t11e early education/cltildcare sector. Looking past
the recession, which we believe has adversely impacted funding levels, we expect several factors to drive growth., primary among them is the increased recognition by parents and politicians of the importance of high-quality early education. Other growth drivers include the recognition by corporations of benefits of childcare support for employees, favorable
demographics and evolving federa l and state legislation. The education-focused portion of the
childcare market, while small, has gained importance and should conti:nue to grow in the coming years.
Limited and
conflicting reports
re: market size

Information about the size of the current childcare market is limited. and as a result, the data
may be old and/or conflicting. According to the Cotmnittee for Economic Development's
2002 report called Preschool for All, total public and private spending on childcare was
roughly $52.5 billion in 2001. consisting of about $38 biUion in private pay and $14.5 billion
f-rom government sources. A May 2008 report by Research and Markets estimated ti1at the US
childcare industry includes about 40,000 commercial companies with combined annual revenue of $22 billion, and 25,000 non-profit organizations, with combined arumal revenue of $10
billion - a $32 billion market overall. The most detailed (although non-current) infonnation
we were able to find on the for-profit childcare sector was compiled by Eduventures, a leading education market research finn, which estimated the sector generated $13.8 biUion in
revenues in 2003 versus roughly $12.9 billion in 1999, representing a compound annual
growth rate (CAGR) of about 1.7%; we note tJ1at included the 2001 recessionary period.
For our estimates of the current and forecasted size of the for-profit cb.ildcare sector. we have
used Census Bureau datd as compiled by the Barnes Repot1s, a market research fmn. The
Barnes Report estimates that the Child Day Care Services industry (NAICS 62441) will generate roughly $25.3 billion in revenues in 2009. Using prior Census Bureau data (2002: latest
data available), rougllly 55% of the spending in this category was generated by taxable organizations, which we are using as a pro>.')' for the for-profit sector. Assuming that percentage
bas remained roughly the same, we estimate the for-profit ch.ildcare sector will generate
roughly $14 billion in revenues in 2009.

Projected 5%

We forecast steady but solid growth over the nex.1 few years, driven by an expected popula-

CAGR

tion growth, an increase in tJ1e number of two-working-parent fami lies, wage inflation which should drive continued tuition increases- and the growing efforts of legislators to fi.md
these programs. Using the Barnes Reports estimate as our base for market size, we forecast
for-profit childcare e>.'Penditures to grow roughly 6.5% a1mually. reaching $19.2 billion in
2014 (see Exlubit 11).

through
2014

A m ember of BMO

Financia l Group

20

September 2009

Early Childcare

BMO Capital Markets

Exhibit 11. For-Profit Childcare Market (2006-2014E)

c:::::::J For-profit chid care revenues

$20

-+-yly change

:c

15

"'41

r--

r--

r--

r--

r--

r--

10%
8%

- ....

10

12%

r--

......

6%

::J

c
41
>
41

a:

4%

41
0)

c
.s::

"'
0

"*"
~

5
2%
-;-

0
2006

2007

2008

2009E

0%
201 OE

2011 E

2012E

2013E

2014E

Source: BMO Capital Markets estimates and Barnes Reports.

T he early childcare market is lrighly fragmented and includes care based in homes and housed
by community organizations (e.g., churches, synagogues, YMCAs), as well as those funded
by state and local governments. According to the biennial Child Care Licensing Study released
in Febmary 2009 (produced by the National Association for Regulatory Administration
lNARA] and the National Child Care lnfonuation Center [NCCIC]), the bulk of licensed childcare programs are home-based businesses, which represent roughly 197,000 of about 325,000
licensed childcare providers. However, center-based programs have increased their share (to
33.9% in 2007 from 31.4% in 2005), while also increasing average capacity (to roughly 70 students from 63 in 2005), representing roughly 78% of total capacity- or about 7.4 million children (see Exhibit 12). While total licensed programs decreased at a CAGR of 1.5% over this period, total capacity increased 2.7% annually driven by growth in capacity of center-based
programs.

While total
programs have
decreased in
recent years,
capacity has
increased owing
to greater
concentration at
center-based
programs

Exhibit 12. Childcare Providers by Type (2005 vs. 2007)

No. of Program s
Type
Childcare Centers
Family Childcare Homes
Other Licensed Programs
Total
As% of Total
Childcare Centers
Family Childcare Homes
Other Licensed Programs

~
105,444
213,966
16110

335,520

Capacity

~
110,252
197,294
17 743

CAGR

2005

2.3%
-4.0%
4.9%

325,289

-1.5%

Avg. Capacity
CAGR

5.4%
-6.0%
-1.6%

~
62.9
9.0
27.9

~
66.9
8.6
24.5

Change

6,634,247
1,921 ,639
449 001

~
7,371,751
1,697,014
434 946

9,004,887

9,503,711

2.7%

26.8

29.2

4.3%

31.4%
63.8%
4.8%

33.9%
60.7%
5.5%

73.7%
21 .3%
5.0%

77.6%
17.9%
4.6%

100.0%

100.0%

100.0%

100.0%

3.1%
-2.1%
-6.2%

Source: BMO Capital Markets and National Association for Regulatory Administration's and National Child Care Information and Technical
Assistance Center's 2005 and 2007 Childcare Licensing Study

Number o f

As the NCCJC changed its survey meU1odology in 2005, it is difficult to compare U1is data to
prior infonnat.ion to gauge growth trends. However, from 1991 to 2004, t11e nwnber of licensed
ch.ildcare centers tracked by lhe NCCIC grew at a 2.4% annual rate (see Exhibit 13).

licensed center s
increased 2.4%

CAGR from 199 1

to 2004

A m ember of BMO

Financial Group

21

September 2009

Early Childcare

BMO Capital Markets

Exhibit 13. Number of Licensed Childcare Facilities (1991-2004)

140,000

..
C/1

120,000

No. of licensed facilities

....._%change

5%

~
c::; 100,000

..."'

3%

80,000

alC/1

..
c

"'

1%

40,000

'0

"'c

.1:!

60,000

:::i

'$.

20,000

-1%

0
1991

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Note: Survey was not conducted in 1992, making annual growth rates between 1991 and 1993 difficult to
calculate. Source: BMO Capital Markets and National Child Care Information Center.

As center-based cbildcare centers continue to take market share. we believe tb.is .is where most
business opportunities lie. Center-based cbildcare can take many different fonus, including preschools (nurseries), wotkplace centers (located onsite at the comp<my), lease-model centers (lo-

cated in a real estate developer's office building). back-up centers (a variety of on-site and off-site
back-up care programs), and family daycare facilities (located in someone's home or center).
Centers have
maintained share
of children under
five with worki ng

We believe the demand for center-based childcare services is strong, altl1ough t11ere is some
volatility. In its latest report on the childcare population. the US Census Bureau reported that
in spring 2006, the population of children under five years old with working mothers was 11.2
million, of which 6.5 million (roughly 58%) were in some kind of re!:,>ular daycare arrangement. While relatives sti ll provide the bulk of care, the number of t11ose children in daycare
centers increased to nearly 1.6 m illion (14.4% of total chi ldren under five with working mothers) in spring 2006 from just over L.1 mjllion (14%) in winter 1985 (see Exhibit 14).

mothers

Exhibit 14. Children Under Five with Working Mothers in Daycare

Centers (1985-2006)
.1:!

12,000

"' ~
,c .....0

11,000

With employed mother

- - - % in day care center

25%

e!

QI.J:!

::;):E

10,000

c"

9,000

=c.
s:; E

8,000

! ~
, 0

20%

c~

..

1 5~

~w

7,000

>.
0

6,000

~--~~~~~~~~--~~~-r~~~~~~~~~~~-+ 1 0% E

J3

1-

"'

Winter
1985

Fall
1988

Fall
1990

Fall
1991

Fall
1993

Fall
1995

Spring Spring Winter Spring Summer

1997
1999
2002
2005
2006

Source: BMO Capital Markets estimates and US Census Bureau's Report Who 's Minding the Kids (various
editions).

Growth Drivers
We believe a number of drivers fuel growth in the early childcare market:

A m ember of BMO

Growing recognition of tl1e importance of early education

Positive legislallon, tax incentives, and budgets

Demogmphics (e.g., more children aged five and younger)

Increase in working mothers witl1 young chjldren

Financia l Group

22

September 2009

Early Childcare

BMO Capital Markets

Increase in families with two working parents

Corporations recognizing tl1e work benefits of childcare setvices

Recognition of importance of early education. Several researchers on early preschool

education have conducted studies concluding what conventional wisdom has long held to be
true: early education offers multifold benefits. For ex~unple, a study issued by Center for
Early Care and Education (a collaboration of the Schuyler Center for Analysis and Advocacy
and Child Care. Inc.) concluded that quality early education increases the likelli1ood of cllildren obtaining higher education at lower delinquency rates and generating greater earnings
over their lifetime. while parents have more productive time at their disposal and the society
benefits from collecting higher taxes.
A number of studies have quantified ilie financial benefits of early education:

Studies
quantifying
financial benefits

of early education

In a 2003 economic report. the Fedenu Resetve Bank of Mllmeapolis estimated tlle annual rate of return on quality early childhood development for low-income youths was
L2.5% annually (adjusted for inflation) - a better investment than the stock market in
many years.

The High/Scope Perry Preschool study - perhaps the most famous study assessing the
benefits of quality early childhood development- presented even more dramatic results.
In 1962, 123 low-income three- and four-year-old African-Americans from Ypsilanti,
Michigan were assessed to be at high risk of school failure; 58 were randomly assigned to
a high-quality, early care education program while the rest received no preschool program. The students were tracked every year from age 3 to age 11, and at ages 14, 15, 19,
and 27. Forty years later, the group who received early intetvention had a higher median
annual income and significantly fewer arrests. Overall. the study documented a return of
more Ulan $17 for every public dollar invested in early childhood programs.

In May 2006, a report sponsored by the W.E. Upjohn Institute for Employment Research
projected that eve!)' $1 invested in universal preschool education would generate a present value of $3.79 tJlfough increased employment earnings, taxes, and other benefits.

An Economic Policy Institute study entitled Enriching Children, Enriching the Nation
(May 2007) concluded tllat tJ1e benefits of a voluntaty. high-quality, publicly funded targeted Pre-K education program serving the poorest 25% of three- and four-year-old children would exceed the cost of such a programs by a ratio of 12:1 in 2050.

There are qualitative benefits as well, in our view. Examples include Ule following:

A 2002 study conducted al the Frank Porter Graham Child Development Center suggests
that high-quality childcare programs have considerable long-term effects on such areas as
school achievement, cognitive skills, lan!,'llage ability, math skills, grade retention, ~md
social adjustment.

A May 2001 study in the Joumal of American Medical Association fmmd U1at 20-yearo lds who had attended Chicagos Chi ld Parent Center (CPC) -a comprehensive preschool program for low-income children- had higher high school graduation rales, lower
percentage had been classified as special education, and fewer arrests Umn their peers
who did not attend tllis prognUIL

A m ember of BMO

Financia l Group

23

September 2009

Early Childcare

BMO Capital Markets

Pre-K initiatives,
such as
"universal pre-K"
gaining in
popularity

Positive legislation and government involvement. We believe that many of tl1ese recent
positive studies in conjunction with coordinated lobbying by advocacy groups have raised political awareness and improved voter attitudes toward the benefits of early education. In a
March 2004 survey conducted by Peter D. Hart Research Associates, voters- by more than
two to one - wanted government to make pre-kindergarten (pre-K) available to all children as
a way to help improve K-12 education, as opposed to fixing K-12 education before offering
pre-K to all.
Additionally, with t11e entrance of a new White House administration and a president who has
been very vocal of his support for early education, there has been increased enthusiasm
among advocates of " universal pre-K" who expect more favorable legislation in coming
years. We believe this alignment of interests has the potential to lead to increased public fl.mding for early education as a number of initiatives are being funded while others have been introduced in Congress. Some data points include the following:

New
administration
plans to inject
billions of new
spending into PreKprograms

A m ember of BMO

According to t11e NallonaJ Institute for Early Education Research (NIEER)'s "The State
of Preschool 2008," 38 states have funded pre-kindergarten initiatives, enrolling nearly
1.1 million students in the 2007-2008 school year. The bulk of these programs are geared
to older preschoolers (i.e., four-year-olds), with these programs enrolling about 24% of
the nation' s four-year-olds (over 973,000). up from 14% in 2002. These programs enrolled about 162.000 t11ree-year-olds as well (up 6% from the prior year).

According to the aforementioned NIEER report, state Pre-K spending per child rose 5.3%
to $4,061 in the 2007-2008 school year from $3,857 in the prior year. While this is still
below the $4.586 spent in 2002. it is the second consecutive annual increase.

Per the smue report. states that serve a large portion of their population via state-funded
initiatives include Oklahoma (71% of four-year-olds), Florida (61%), Georgia (53%),
Vennont (50%). Texas (45%) and West Virginia (43%).

The advocacy organization Pre-K Now (funded largely by t11e Pew Charitable Tmst). in
its recent study Leadership Matters: Governors' Pre-K Proposals Fiscal Year 2010,
identified 14 governors natiomvide who have rec01mnended funding increases in investments in pre-K programs, while l3 are expected to maintain stable funding for FY2010.
Although this is lower than t11e 23 and 17 governors who reco1runended f11nding increases
in the prior two fiscal years. given the severe budget shortfalls in many states. pre-K advocates see this as a positive for the industry. Pre-KNow estimates that state funding for
pre-K progrmns will total $5.4 billion in FY2010 (ending September 30), up from $5.2
billion in FY2007.

On the le!,>islative side, several bills have either been reintroduced or newly introduced tllis
year that aim to increase the availability of federal funding for pre-K programs at botl1 t11e
state and local level. The largest of the bills - and we believe tl1e one wiili the most potential
to impact this market- is the federal Universal Pre-kindergarten Act (H.R. 555), which seeks
a $10 billion authorization in FY2008, and a total of $150 billion over the next four years (see
Exhibit 15). Willie we e>:pect tlus would have a substantial impact on the sector, we do not
foresee federally mandated universal pre-K taking shape and competing directly with those
that deliver directly to consumers or provide corporate services. Based on an analysis of several states that are pursuing pre-K initiatives, we believe public fi.mds will most likely be diFinancial Group

24

September 2009

Early Childcare

BMO Capital Markets

rected toward existing private providers (via increased subsidies for childcare costs or by direct purchase of "seats" at existing community-based childcare centers) rather than toward
building new infrastmcture to support childcare programs.

Exhibit 15. Overview of Federal Legislation Impacting Pre-K Education

Bill

Introduced

Funding

Ready to Leam Act (S. 240)

Jan. 14, 2009

"Such sums as may

be necessary"

Universal Prekindergarten Act

(H.R. 555)

Jan. 15, 2009

$10 billion in FY08

$150 billion through
FY12

Directs the Secretary of Health and Human Services to provide

grants to a designated state agency for development of
universal prekindergaten programs for all children three, four,
and five years old in the state.

"PRE-K" Act (H.R. 702)

Jan. 27, 2009

$1 billion annually for

FY10-FY14

Amends the Elementary and Secondary Education Act of 1965

to direct the Secretary of Education to award matching grants to
states to enhance or improve state-funded preschool programs.

Prepare All Kids Act

(S. 839; H.R. 2184)

April21, 2009 (S)

April 30, 2009 (H)

"Such sums as may

be necessary"

To assist states in making voluntary high quality universal

prekindergarten programs available to 3- to 5-year-olds for at
least 1 year preceding kindergarten.

Summary
Authorizes the Secretary of Education to award grants to states,
schools and other pre-kindergarten providers for full-day
voluntary programs that prepare four year olds for school

N.A. - Not Available. Source: BMO Capital Markets, Pre-KNow, govtrack.us, Library of Congress

Stimulus bill puts

billions toward
early care, but not
entirely clear
where money will

Additionally, the $787 billion American Recovery and Reinvestment Act (ARRA), i.e., " the
stimulus package" passed by Congress in Fcbmary 2009, has eannarked tens of billions of
dollars for education purposes. While the bill lays out general guidelines and allowable uses
of funds, we believe pre-K authorizations will ultimately be largely discretionary as funding
decisions are currently left up to the states, and not the federal govenm1ent

go
Given the severe budget crises facing most states, this should increase the potential for stimulus money to be used as a stop-gap for pre-K programs, as opposed to " new' investment; for
example, North Caroljna' s " More at Four" program- rated among the top pre-K programs nationally by t11e NJEER - faces a budget cut of roughly 25% - or $40 rrullion. One provision
tmder ARRA is the State Fiscal Stabilization Fund (a one-time appropriation of $53.6 billion
known as Title XIV) made available to state governors by application. The entitlement specifies that 81.8% of the state' s allocation must be used to support elementary, secondary. and
postsecondary education and "as applicable, early childhood education programs and services." As the main purpose of t!Us fund as it pertains to education is to restore state education
contribu6ons to at least their 2008 levels, we beljeve this bi ll will help lilrut U1e fallout from
the recession on pre-K programs.
Complicating tl1e issue further, we have seen several different organizations with different interpretations of how ARRA funds are to be spent, and we e>..'Pect tllis may slow the spending
of stimulus fw1ds as various interests use legal means to obtain their " fair share." While this is
not surprising considering the amount of money at stake. it does make an unbiased analysis
more complicated. Nevert11eless, in Exhibit 16, we have attempted to outline U1e provisions of
ARRA tl1at could directly benefit early child care programs. We expect a minimum of roughly
$3.4 billion will go directly to early childcare (tl1ough this could be substantially higher).

A m ember of BMO

Financia l Group

25

September 2009

Early Childcare

BMO Capital Markets

Exhibit 16. Overview of Expected Federal Stimulus Spending for Early Childcare
)epartment

Details

Stim u l us Spendi ng

Federal (Dept.
Head Start
o f Health and
Human Services)

Pr ogr am

Head Start and Early Head Start programs are administered by the Head Start Bureau.
They are child-focused programs that serve children from birth to age 5, pregnant
women and their families, and have the overall goal of increasing the school readiness
of young children in low-mcome families.

$ 1 billion for Head Start

$1 .1 billion for Early Head Start

Federal (Dept.
Child Care and
of Health and
Development Block
Human Services) Grant (CCOBG)

Provides monthly direct child care assistance to 1.7 million children of low-income
families when the parents work or part1c1pate in education or training.

$2 billion ($255.2 million to

improve quality Of lh1s, $93.6
million must be for Infants and
toddlers)

Many school districts support preschool programs with their Title I (Education for the
Disadvantaged) funds. Tille I preschool programs help more than 300,000 children in
high-poverty communities enter kindergarten with the skills they need to succeed in
school. A 2007 study found that roughly 2-3% of Title I spending is used for pre-K child
care and services.

$10 billion for grants and school

Federal (Dept.
of Education)

Title I Preschool

Federal (Dept.
of Education)

Individuals with
Disabilities Education
Aci(IDEA)

improvement funding to LEAs

(2%-3% of this is roughly $325
million)

IDEA is a United states federal law that governs how states and public agencies provide $400 million for part B (3-5 yrs)
early Intervention, special education, and related services to children with disabilities. It $500 million for part C (0-2 yrs)
addresses the educational needs of children with disabilities from birth to the age of 21.

Total

$3.3 billion

N.A . - Not Available. Source: BMO Capital Markets, Pre-KNow, Center for Law and Social Policy, US Department of Health and Human
Services, and US Department of Education.

Aside from stimulus spending under ARRA, ll1e federal budget for childcare-related issues
has remained relatively flat. While t11e FY2010 budget is still a work in process, we note both
the House and Senate budget proposals fund the Child Care and Development Block Grant
~md Head Start at the same levels at the White House version (see Exhibit 17 for tl1e Presidential budget request for FY2010). However, the Senate' s version of the budget does not appropriate any monies for fue Early Reading First program, a program geared to advancing preschoolers literacy skills.

A rn ernber

of BMO

Fin a n cia l

Group

26

September 2009

Early Childcare

BMO Capital Markets

Exhibit 17. Overview of Key Federal and State Funding Areas in Childcare
Department
Federal (Dept of
Education)

Program
Early Learning Challenge Fund

Details
Will provide grant funding to states to help in the administration and assessment of
slate-wide early learning programs

FY10 B udget
$300million

Federal (Dept of
Education)

Tille I Early Childhood Grants

Will make funds available to states that use Tille I funding to implement local early
childhood education programs

$500million

Federal (Dept of
Education)

Early Reading First

Grants to school districts and non-profit organizations to enhance verbal skills,

phonological awareness, letter knowledge, and pre-reading skills of children from birth
through age 5.

$162million

Federal (Dept of
Education)

Preschool Grants for Children

with Disabilities

The Preschool Grants Program, authorized under Section 619 of Part B of IDEA and
administered by the Office of Special Education Programs, was established to provide
grants to states to serve young children with disabilities, ages 3 through 5 years.

$374.1 million

Federal (Dept of Head start

Health and Human Early Headstart
Services)

Head Start and Early Head start programs are administered by the Head Start Bureau.
They are child -focused programs that serve children from birth to age 5, pregnant
women and their families, and have the overall goal of increasing the school readiness
of young children in low-income families.

$7.2 billion
$721 million

Federal (Dept of
Health and Human
Services)
Federal (Dept of
Health and Human
Services)

Childcare Entitlement to the

Stales (CCES)

Provides child care support for working parents, with 70% directed to TANF recipients.

$2.9 billion

Child care and Development

Block Grant (CCOBG)

Provides monthly direct child care assistance to 1.7 million children of low-income
families when the parents work or participate in education or training.

$2. 1 billion

Federal (Dept of Childcare Developmental Fund

Health and Human (CCDF)
Services)

CCDF assists low-income families, families receiving temporary public assistance, and
those transitioning from public assistance in obtaining childcare so they can work or
attend training/education. CCDF serves children younger than 13 years; however. some
states may elect to serve children age 13 to 19who are physically or mentally
incapacitated or under court supervision.

Funded
through the
CCDBGand
TANF

Federal (Dept of Temporary Assistance for Needy

Health and Human Families (TANF)
Services)

TANF provides grants to states, ternlones, or tribes to assist needy families wtth
children so that chtldren can be cared for in their own homes; reduce dependency by
promoting JOb preparation, work, and marnage; reduce and prevent out-of-wedlock
pregnancies; and to encourage the formation and maintenance of two-parent families.
states may transfer TANF funds to CCDF or directly spend funds on child care.

$17.1 billion

Federal (Dept of
Education)

Early Intervention Program for

Infants and Toddlers with
Disabilities

The Program for Infants and Toddlers with Disabilities (Part C of the Individuals with
Disabilities Education Improvement Act of 2004) is a federal grant program
administered by the Office of Special Education Programs that assists states in
operating a comprehensive statewide program of early intervention services for infants
and toddlers with disabilities, ages birth through two years, and their families.

$437 million
(appropriated
in 2009)

Federal (Dept of
Education)

21st Century Community

Learning Centers

This program is now a stale formula grant. It was formerly a discretionary grant program
under the Improving America's Schools Act. Under the reauthorized authority, funds flow
to stales based on their share of Tille I, Part A funds. states use their allocations to
provtde competitive awards to eligible entities. The purpose is to provtde expanded
academic enrichment opportunities for school-age children attending low-performing
schools.

Federal (Dept of
Education)

Title I Preschool

Many school districts support preschool programs with their Tille I (Education for the
Disadvantaged) funds. Title I preschool programs help more than 300,000 children in
high-poverty communities enter kindergarten with the skills they need to suoceed in
schooL A 2007 study found that roughly 2-3% of Tille I spending is used for pre-K child
care and servtces.

Social Services Block Grant

Provides a broad range of social services, including childcare, child welfare, and the
like.

Federal (Dept of
Health and Human
Services)
Federal (Dept of
Education)

(SSBG)

Child Care Means Parents in

School (CCAMPIS)

CCAMPIS supports the participation of low-income parents in postsecondary education

through the provision of campus-based childcare services. The program supports or
establishes campus-based childcare programs primarily serving the needs of lowincome students. Grants may be used for before- and after-school services.

$1 .1 billion

$12.9 billion
(2%-3%is
roughly $323
million)
$2 billion

$16 million

N.A. - Not Available. Source: BMO Capital Markets, National Child Care Information and Technical Assistance Center (NCCIC), US
Department of Health and Human Services, and US Department of Education.

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2009

Early Childcare

BMO Capital Markets

In addition. certain tax incentives are available to parents utilizing childcare programs. such as
the following:

Section 21 of the Internal Revenue Code provides a federal income ta.x credit (Child and
Dependent Care Credit) mnging from 20o/o-35% (increased in 2003) of certain childcare
expenses for "qualifying individuals." Wb.ile Obmna proposed raising this rate to 50%
during Ius campaign. the only changes to this rule have come as part of the stimulus
package, which lowered the income floor for eligible families $3.000 per year from
$8,500. As this will be in effect for two years, we expect no further adjustments will be
proposed over Ul1til tlus provision nears its sunset.

The Econonuc Growth ~md Tax Relief Reconciliation Act of 2001 created a federal employer tax credit for certain clllldcare expenses beginning in 2002. Employers can receive
a credit of 25% of their spending on the construction or rehabilitation of a childcare facility or on contracts with a tJurd-party childcare facility to provide childcare services to
employees.

Additionally, Title ll of tl1e Higher Education Act (enacted in August 2008), wluch governs
postsecondmy education. creates an opportunity for pro&Jfatns tl1at train early educators to access federal funding to improve teacher preparation programs. Title ll's Teacher Quality Enhancement Grant progratns provides grants to improve teacher preparation programs. The
grants go to "eligible partnerslups" between a college or university that operated a teacher
preparation program, and a high-need school or school district, including high-need early
education progmms. ARRA sets aside an additional $100 nullion for these partners!ups.

Stimulus will
boost funding
underHEA
reauthorization

Zero-to-five yearold population is

growing again

Improving demographics. The growing population of clllldren aged five years and younger
is one of the leading reasons for the e:..'Pected increase in demand for cbildcare services. Based
on Census Bureau estimates, the zero- to five-year-old age group in tl1e US reached roughly 25.2
miUion as of August 2009 and we project it could reach nearly 27 million by 2016- up about
6.3% (about 0.9% annually) over tl1attime (see Exhibit 18). This growth is a reversal from 1994
to 1999, when tills population shrunk slightly. Within tills cohort, the pre-primary school-age
population (consisting of cb.ildren ages tl1ree to five) is expected to be over 13.3 nllllion by
2016, up 6.9% from roughly 12.5 nllllion as of August 2009- growing at a slightly faster rate
(l%annuaJly ).

Exhibit 18. US Population of Zero- to Five-Year-Oids (1980-2015E)

Total: 0-5 Years

30

3%

Iii' 25

2%

~ 20
~

1% ~

c:

c:
0

~
3

"'c:

15

?!!

0% iO
:I
c:
-1% ~

10

Q.

n.

5
1980

1985

1990

1995

2000

2005

2010E

2015E

Source: BMO Capital Markets estimates using US Census Bureau prior annual growth projections based
on 7/1/08 actuals.

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..

28

September 2009

Early Childcare

BMO Capital Markets

Women have

Increase in mothers with young children in labor force. Women have increased as a percent-

increased their

age of the overaJI civilian labor force from 38.1% in 1970 to 46.5% in 2008 (see Exhibit 19).

presence in labor

Wllile this rate of ex.'Pansion is ex.-pected to slow, the Bureau of Labor Statistics estimates that
this percentage will increase slightly to 46.6% by 2016.

force

Exhibit 19. Civilian Labor Force (1970-2008)

65%

Ql

60%

u.

55%
50%
45%
40%
35% ~rT-r~rT-r~rT-r~rT-r~~~~~~~~-r~~-r~~-r~~

1970

1975

1980

1985

1990

1995

2000

2005

Source: BMO Capital Markets and US Census Bureau.

Women with

However, women with young children have significantly increased their presence in tl1e work-

children under six

force. In 2007 (latest data available), the labor force participation rate (either working or looking for work) for women with children under age six was 63.5%, up sharply from 39Yo in
1975. In fact, this rate exceeds the rate for all women of 59.5% (see Exhibit 20).

have higher labor

participation rate
than overall
female population

Exhibit 20. Labor Force Participation Rates (1970-2008)

~
a::
c::

0~

;:::

Q.t

., >

.~0

.!:! -o
t:: c::
C.U>

., .,
Ql .....

u Ql
~
0>
Oct

u..~

.,5

.&>

...J

80%
75%
70%
65%
60%
55%
50%
45%
40%
35%
1970

Men

1975

1980

1985

1990

1995

2000

2005

Note: Data for women with children under six only available through 2007. Source: BMO Capital Markets
and US Census Bureau.

Although more women are worlcing than ever before, recent studies suggest tl1at early maternal
employment may have negative effects on cllildren's intellectual development. The National Institute of Child Health and Human Development's study of early cllildcare found t11at children
of women working more than 30 hours per week did not do as well on school-readiness tests at
age nine compared with age three. In our view, this .finding demonstrates IJ1e need for improved
early education -potentially benefiting a number of the private sector providers.

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Early Childcare

BMO Capital Markets

Dual- income
families with
young c hildren on
the decline

Inc rease in percentage of dua l-income families. After increasing for three years following a
low point in 2004, the number of dual-income married families with young-children declined in
2008 to just under 6 million. We would consider an increase in this number to be a potential
catalyst to spur future demand for childcare services. As shown in Exhibit 21. there were nearly
6 million such families in 2008, roughly equal to 2004. However, tllis represented nearly 55% of
all married dual-income couples, stm up from w1der 53% in 2004.

Exhibit 21 . Dual-Income Couples with Children Under Six (19942008)

7.0

60%

Dual Income Couples w/Children Under 6

- - - % of All Dual Income Couples

E:;:::

58%

~ .. 6.5
Q.CO
:::J

-g

c:

41:::>

-=

..

E
u

..

56%

~<0-~

54%

6.0

:::J

~
:2 5.5

Q.

:::J

~0

-:E
~0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: BMO Capital Markets and US Census Bureau.

Studies have show n that more ~md more businesses are expanding their operating hours to early
monlings, evenings, nights, and weekends to adapt to the stmctural change toward a servicebased economy. As a result, many employees are working longer and non-traditional hours as
businesses add shifts or allow employees to work flexible hours. We believe parents pursuing
careers in greater numbers will continue to lead to an increased demand for these services.
Employers a re recognizing the need. We believe employers have taken note oftl1e demand for
and high costs of early cllildcare. In December 2005, Zogby International conducted a poll of
Fortune 1000 comp~mies measuring views by American business leaders on pre-K and the advantages to the economy. According to tl1e study, 88% of US business leaders agree that effective
childhood preschool programs are important for t11e US to remain competitive (see Exl1ibit 22).

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Exhibit 22. Zogby Poll Views on Presch ool Education

Select questions from poll
Children who receive pre-kindergarten education are more likely to start
school better prepared
Children who begin school better prepared are more likely to perform better
throughout their educational experience
Investments in effective preschool programs for children are important if the
U.S. is to remain competitive in the global economy.
Investments in effective preschool programs for children are important for
the long-term success of the U.S. economy.
Voluntary pre-kindergarten for all children would improve the workforce.

Agree
94%

Disagree
4%

Not Sure
2%

92%

8%

1%

88%

10%

2%

87%

10%

3%

86%

11%

3%

Investments in effective preschool programs for children are important to

remain competitive in the global economy
Public funding of voluntary pre-K for all children would improve America's
workforce.
Investments in effective preschool programs for children are important for
the long-term success of the U.S. economy
Pre-kindergarten made available to all children would improve the workforce

83%

14%

3%

81%

16%

3%

80%

17%

3%

75%

19%

7%

75%

20%

6%

68%
62%

30%
28%

2%
10%

Public funding that enabled all children to attend pre-K if their parents
wanted it would improve America's workforce
More highly educated workers are better workers
Workers who receive early childhood education like pre-kindergarten
programs will be better workers

Source: "American Business Leaders' Views on Publicly funded Pre-Kindergarten and the Advantages to
the Economy," (December 2005) by Zogby International for the Committee for Economic Development

Impact of recession on child care demand. While we believe the longer tenn outlook for child
care remains strong, the current recession appears to have created a considerable setback for child
care providers as state subsidies are cut and parents lose jobs, reducing both funding and demand
levels. While it is difficult to gauge the impact of tJ1e recession on company sp onsored child care
providers. tl1ere is plenty of anecdotal data showing tl1e adverse impact on not-for-profit and local
child-care centers, including that via an April 2009 survey conducted by tl1e Nation's Network of
Child Care Resource and Referral Agencies (NACCRRA).

Recession has
hurt funding
levels and
demand

Of participating Child Care Resource and Referral Agencies (CCR&Rs) representing 40

states, 74% said the number of families falling behind or unable to make childcare payments
increased between June and December 2008.

Half of agencies said that child care centers in their collllmmities had closed in that sLxmonth period, losing an average of sLx centers per community, or about 327 spaces.

Among child care centers still open, 65% of agencies reported an increase in vacancies during tlltlt time. Additionally, 48% said centers were closing classrooms while 41% said centers were laying off staff.

While this survey covered the period from June 2008 to December 2008, we admit there is littJe
beyond anecdotal evidence that describes the recession' s impact on childcare. Nevertheless,
NACCRRA maintains a database entitled "The Current Economy's Impact on Cbildcare" of links
to news articles describing cuts or reductions in childcare programs across the cotmt:ty primarily
owing to lack of funding and/or child attendance. As of August8, t11ere were 348 stories listed for
t11e period starting in November 2008. While Uris is by no means a scientific study, we believe the
extent to which localities and businesses are reporting such cuts underscores tJ1e recession's significant impact on the sector.
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Early Childcare

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Largest Childcare Providers

The childcare market is extremely fragmented, as it includes many not-for-profit providers. According to the 2009 Child Care Licensing Study, roughly 61% of the licensed childcare centers
in ti1e US in 2007 were opemted by family run businesses. Exhibit 23 contains ti1e top US forprofit cbildcare providers in tenus of capacity and munber of centers. As shown, no single forprofit company has more ilian a 2.4% market share (when including home-based businesses) or
3.1% (when only measuring center-based business).

Exhibit 23. Top US For-Profit Childcare Providers (Ranked by Capacity)

Company
Child Care Providers:
1 Knowledge Learning Centers
2 Learning Care Group
3 Bright Horizons Family Solutions
4 Nobel Learning Communities, Inc.
5 C hildcare Network
6 The SUnshine House
7 Mini.Skool Early Learning Centers, Inc.
8 New Horizon Academy
9 CCLC, Inc.
10 Minnieland Private Day School
11 Brightside Academy

12
13
14
15
16
17
18
19
20
21
22
23
24
25

C reme de Ia C reme

50

Sunrise Preschools
C hildren's Choice Learning Centers
C hildren's Friend, Inc.
C hildren o f America
Action Day Nurseries, lnc.JPrimary Plus, Inc.
Country Home Learning Center
Hildebrandt Learning C enters, LLC
C reative W ortd Schools
Steppong Stone School
Rainbow C hild Development Center
Pinecrest Schools
Ascendere, Inc.
Tot-Time C hild Development Centers
T he Malvern School
Rogy's Learning Place
Next Generation Children's Centers
C reative Playrooms, Inc.
The Children's W orkshop
Junior Academy C hildren's Centers
Valley C hild Care & Learning Centers/Cacuts Preschools
Bobbie Noonan's C hild C are
Kids Kare Schools, Inc.
The Kinderville G roup
Kid's Country
Southside C hristian Child Care
C hildren's Discovery Center, Inc.
C reative C hild C are, Inc.
Edui<Jds Earty Childhood Centers
U-Gro Learning Centers
Rainbow River Ch1ld Development Centers
G re tchen's House, Inc.
The Gardner Schools
Planet Kids
K.I.D.S. Day care
T he Kids' Place
New Horizons CDC
W oodcrest Preschool
C lockwork Learning Centers

1
2
3
4
5
6
7
8
9

National Child Care Franchising Organizations:

Goddard Systems, Inc. (The Goddard School)
Kids R Kids International
Primrose Schools Franchising Company
Kiddie Academy
Discovery Point Franchising Inc
The Learning Experience
C hildren's Lighthouse Franchising Company
Legacy Academy
Youthland Academy

26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49

Headquarters

Ownersh ip

Portland, OR
Novi, MI
Watertown, MA
WestChester, PA
Columbus, GA
Green'M>Od, SC
Scottsdale, AZ
Plymouth, MN
Sunnyvale, CA
Woodbridge, VA
Pittsburgh, PA
Green'M>Od Village, CO
Tempe, AZ
Richardson, TX
Warner Robins, GA
Delray Beach, FL
San Jose, CA
San Antonio, TX
Dallas, PA
Tampa, FL
Austin, T X
Lathrup Village, Ml
Sherman Oaks, CA
Lawrenceville, NJ
Plymouth Meeting, PA
Glenn Mills, PA
East Peoria, IL
Westford, MA
Soloni, O H
Lincoln, Rl
Colorado Springs, CO
Phoenix , AZ
Frankfort, IL
Fresno, CA

Private
Private
Private
Private

Montreal, Q uebec

Snohomish, WA
Louisville, KY
Maumee, O H
Bedford, TX
Buffalo, NY
Harrisburg, PA
Hermosa Beach, CA
Ann Arbor, Ml
Brent\>\OOd, TN
Lake Worth, FL
Wes1mount Quebec
W ilbraham, MA
Edmond, OK
Tarzana, CA
Stamford, CT
King o f Prussia, PA
Duluth, GA
AC"M>rth , GA
Bel Air, MD
Duluth, GA
Parsippany, NJ
Fort Worth, TX
Sugar Hill, GA
Cincinnati, O H

P rivate

Private
P rivate

Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private

Private
PriVate
Private
Private

Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
PriVate
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private

Private
PriVate
Private

Total

Capacity

Centers

231,673
162,940
73,000
28,000
23,312
20,867
19,600
13,009
12,427
12,025
7,840
6,000
5,811
5,769
5,642
4,320
4,250
4,180
4,170
3,300
3,199
3,131
3,000
2,976
2,672
2,311
2,241
2,182
2,031
1,924
1,872
1,839
1,700
1,840
1,524
1,523
1,470
1,448
1,367
1,147
1,140
1,044
976
970
955
942
872
727

Mkt. Share as "!. ofT otal

Capacity Centers

Mkt. Share as % of
Center-Based
Capacity Centers

660
558

1,746
1,105
675
178
163
157
111
86
104
101
49
20
29
33
39
24
20
10
38
20
18
9
11
21
27
17
19
9
7
18
30
10
13
11
18
11
15
8
12
11
10
12
9
5
6
11
8
11
5
6

2.4%
1.7%
0.8%
0.3%
0.2%
0.2%
0.2%
0. 1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

0.5%
0.3%
0.2%
0 1%
0 1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

3.1%
2.2%
1.0%
0.4%
0.3%
0.3%
0.3%
0.2%
0.2%
0.2%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

1.6%
1,0%
0.6%
0.2%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

40,000
38,500
35,066
14,376
12,100
9,322
5,914
5,000
3,780

336
155
200
99
55
57
24
23
18

0.4%
0.4%
0.4%
0.2%
0. 1%
0. 1%
0.1%
0.1%
0.0%

0.1%
0.0%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

0.5%
0.5%
0.5%
0.2%
0.2%
0.1%
0.1%
0.1%
0.1%

0.3%
0.1%
0.2%
0.1%
0.0%
0. 1%
0.0%
0.0%
0.0%

862,234

6,053

9.1%

1.9%

11 .7"/.

5.5"1.

Notes: All data as of January 1, 2009. Source: Child Care Exchange and BMO Capital Markets.

A member of BMO

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32

September 2009

Early Childcare

BMO Capital Markets

Worksite Childcare
Worksite childcare (i.e., employer-sponsored) consists of onsite childcare centers, located either witltin a corporate office building or its real estate complex and typically managed by external providers. There are roughly 8.000 employer-supported childcare centers in the count:ty
(per Sandra Burud of Bumd & Associates as cited by workfamily.com). According to the National Women's Conference Committee, in 1971, Stride-Rite became the first US corpordtion
to offer employer-sponsored ch.ildcare.
Has been growin g
in mid-single-digit
range

Employersponsored
c hildcare:
decreased in 2009

Although data regarding the size of this segment are limited, we believe roughly 5,000 employer-sponsored childcare centers can generate about $5 billion in annual revenues (average of
$1 million per center). According to Childcare Exchange, the employer-sponsored childcare
market had been growing at over a 10% arumal rate for most of the 1990' s but has slowed in
recent years to the low- to mid-single digit level. While there is not data to corroborate this,
we opine that market may be actually shrinking in the current recession.
Estimates on the number of companies offering worksite childcare vary . Work & Family
Connection says that in surveys of employers, 9% say they have onsite childcare while in surveys of employees, 11% say companies provide onsite childcare. According to the Society for
Human Resource Management's (SHRM) 2009 Benefits Survey Report, an even smaller percentage of companies (3%) offered subsidized on-site or near-site child care centers. This was
down from 6% who offered such services in 2008. While it is difficult to find statistical infonuation to corroborate Uus, we e:>i.-pect the recession has impacted companies' ability to offer these
services, with several anecdotal stories in the press regarding such closures. Based on these
small penetration rates, we believe a significant growth opportunity remains in this area once the
economy .rebounds and, and that worksite childcare is one of the more investable sectors in the
early clilldhood sector.
We believe the worksite childcare market is less fragmented than the indust:ty as a whole given
fewer companies provide tllis service. The largest by far is Bright Horizons Family Solutions
(taken private in May 2008 by Bain Capital Partners). which operated 660 worksitc clu ldcare
centers with a capacity of72,500 students as of July l, 2008 (see Exl1ibit 24).

Exhibit 24. Top 10 Providers of Worksite Childcare (Ranked by

Enrollment)
Organization
Bright Horizons Family Solutions
Children's Creative Learning Centers
Children's Choice Learning Centers
Hildebrandt Learning Centers
New Horizon Academy
Easter Seals Child Development Center Network
Imagine Early Learning Centers
Nobel Learning Communities (NLCI)

Ownership
Private
Private
Private
Private
Private
Private (non-profit)
Private
Public

Contracted Office Park

Centers
Centers
480
180
101
5
27
0

36
4
20
11

14

Capacity
72,500
12,245
4,880
3,450
2,551
1,801

635
539

Note: data as of July 1, 2008. Source: ChildCare Information Exchange and BMO Capital Markets

More expensive
than other forms

A m ember of BMO

Employer-sponsored cluldcare centers tend to be more expensive than other providers. although most employers provide some sort of subsidy. The subsidy may either come in the
form of a discounted price and/or the sponsor providing space, maintenance, and/or utilities,
which typically represent roughly one-tlurd of a center' s costs (per workfanlily.com). For example, average monthly tuition at centers run by Bright Horizons in 2007 (latest data availFinancia l Group

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able) -prior to any subsidy - ranged from $1.050 for preschoolers to $1.300 for toddlers to
$1,400 for infants. This compares with the average monthly center-based childcare costs for
2008 of $338-$973 ($282-$899 in 2007) for preschoolers and $380-$1,325 ($379-$1,216 in
2007) for infants (varies by services provided and geographic region), according to the data published by The National Association of Child Care Resource and Referral Agencies (NACCRA).
There are typically two distinct models for worksite childcare: 1) the management fee model
and 2) tJ1e sponsor model.
Management fee (cost-plus) mo de l. Under tJ1is model, the childcare provider typically receives a management fee from a corporate sponsor and an operating subsidy to supplement tuition within an agreed-upon budget. The sponsor typically provides the facility. pre-opening and
start-up costs, capital equipment, and facility maintenance. We believe many corporate sponsors
prefer U1e management fee model as it provides the option to readjust contracts witJ1 vendors to
suit their needs and empowers the corporate sponsor wiU1 a greater degree of control in tenus of
budgeting, spending, and opera6ons. The provider is responsible for maintaining quality standards, recmiting center directors and faculty, implementing curricula and prob>ran1s and interacting with parents. In geneml. contracts range in length from one to five years.
Profit and loss model. In this model, the childcare provider designs and operates a wmksite
childcare center in exchange for financial consideration fTom the sponsor. The provider maintains profit-and-loss responsibility and is subject to variability in financial perfonuance driven
by enroll ment levels. The sponsorship model is generally Classified into two subcategories:

Employer-spo nsored (spo nsor), where the company provides childcare on a priority
enrollment basis for employees of a single-employer sponsor. However, if the employer
is unable to fill the slots, then the provider can market its services to parents outside the
company.

Lease (consortium) mode l, where the company provides priority childcare to the emp loyees of multiple employers located within a real estate developer's property.

Exhibit 25 compares firumcial metrics for Bright Horizons (provided when it was a publicly held
company) under these various model types.

Exhibit 25. Example of Financial Metrics Under Various Childcare

Operating Models
Cost Plus
$1.5 mil.
12%-17%
N.A.
100+%
Customer
3-5 years

Revenue at maturity
Gross margin at maturity
Average investment
Average ROI
Enrollment risk
Contract term

Profit and Loss

Sponsor
Co nsortium
$1.2 mil.
$1.2 mil.
17%-25%
17%-25%
$50K-$250K
$1 mil.-$1.5 mil.
75+%
20+%
Provider
Provider
5-1 0 years
10-15 years

N.A. - Not Available. Source: Bnght Honzons Family Solutions and BMO Capital Markets

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Skewed toward
larger employers
owing to its costs

Great recruiting
and retention tool

Recent study
reveals employer
benefits

As would be expected. larger employers tend to be more willing to provide sponsored childcare
owing to its costs: according to the 2008 National Study of Employers by the Families and
Work Institute, 21% of large employers (defined as 1,000 or more employees) provide some
type of sponsored childcare at or near the worlcsite versus only 7% of small employers (50-99
employees). Interestingly, while the percentage of large employers offering tllis setvice increased from 17% in the 2005 National Study, the percentage of smaller employers offering U1is
service remained stable at 7%.
Employers sponsor childcare mainly as a recrui6ng and retention tool for Uteir workforce. More
than 25% of the companies listed as "The Best Companies to Wotk For" by Fortune Magazine
in 2009 provided some sort of onsite employer-sponsored clilldcare. Over the long tenn. we believe a re-emerging 'war for talent" may drive continued !,'TOWth for employer-sponsored clilldcare providers. In addition, tJtis may be an important tool to drive productivity and profitability.
This thesis is supported by a 2002-2003 study by Bright Horizons. which surveyed eight
companies to assess the diCferences between childcare center users and the general worksite
population in terms of employee retention as well as the advancement of women in the workplace. Some of the survey's key findings include the following:

60% of center users had been with tl1eir organization for more than five years.

The average voluntary turnover for employees who used childcare centers was nearly
50% less than tJtal of non-users. This reduced voluntary turnover resulted in an aggregate
$3.4 nilllion in annual cost savings for the eight organizations (tJ1e cost of replacing employees, lUring, and training).

The percentage of "top performers" who used the centers was nearly 22% more than the
overall workforce population.

Retention among top perfom1ers who used the centers was 97%.

25% of the surveyed centers were open for use by grandparents (as an estimated 70% of
people over the age of 45 are planning to work past the age of 65).

Employer-sponsored childcare: is it cyclical? We believe one of the most important debates

surrotmding worksite childcare facilities is its economic sensitivity. Tllis aT!,'lllnent centers on
whetl1er tllis care would be considered a "discretionary" line item for corporations that would be
cut in the event of an economic slowdown.
In our view, worksite childcare is not totally i1mnune from econonlic cycles as corporate layoffs
mean fewer employees and, thus, fewer clilldcare needs. However, we believe worksite childcare provides a relatively inexpensive way to maintain employee morale in challenging operating environments. In addition, the demonstrated ROI of these centers becomes more relevant in
tough tinles as companies focus their efforts on maximizing productivity.
While we believe this sector has likely scaled back as unemployment has risen dran1a6cally, little data is available as to the e>-1ent of the current recession's impact on this business. We believe the 2001 recession had little negative impact on tJtis sector, altJ1ough we note that recession
was mild compared to the current one. Additionally, the timeline for creating employeesponsored centers can of1en be lengthy and may lag economic circumstances as it can rdke up to
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two years to say "yes" and t11en another 12-24 mont11s before a center is up and running. However, we believe a robust economic recovery could lead to greater demand for this service, especially if another "war for talent" reemerges. As such, we would categorize worksite childcare
providers, such as Bright Horizons as " later-cycle" plays.

Back-Up Care
Fastest-growing
area of employersponsored care

We believe back-up care is t11e fastest-growing area within the employer-sponsored chi ldcare
sector. Back-up centers provide "emergency" ch.ildcare services to employees of corporations.
We believe the most common application of back-up care occurs when employees discover that
their re&rular childcare providers are unable to care for their child (i.e., this generally occurs
when a regular provider is sick or an existing center is closed). Usage of back-up care tends to
be higher when school is not in session and during holiday periods, when re&>tdar childcare providers are likely to also take vacations.
In our v iew. back-up care allows coiporatjons to increase profitability by reducing child-related
employee absenteeism, which is estimated to cost larger corporations roughly more than
$760,000 annual in direct payroll costs, and even more when lower productivity, lost revenue,
and the effects of poor mordle are considered. according to the 2007 CCH Unscheduled Absence
Survey (latest data available). We believe back-up centers offer a more cost-effective childcare
alternative for smaller businesses t11at may not sponsor their own center, as off-site centers do
not require the same type of overhead costs as an on-site center.

Relatively
underpenetrated

Nevertheless, we believe usage of back-up centers is stiU a relatively underpenetrated market.

According to the Families and Work Institute's 2008 National Study of Employers, only 6% of
companies surveyed offer back-up or emergency childcare. versus 9% of companies which offer
regular care at or near the worksite. In addition, recent data shows an increase in tlus offering.
According to the Society for Human Resource Management' s (SHRM) 2009 Benefits Survey,
t11e number of members providing backup cluldcare decreased to 5% in 2009, from 6% in 2008.
We note this statistic has varied wit11in what may be a statistically insignificant range over recent
years. as the number of organizations providing this service was 4% in 2007; this compares to
the 13-year survey averdge of 9%. ln our view. we believe backup child care usage has either
remained flat or is on the rise. as tllis requires little to no capital conmutment from corporations
and therefore, usage can be more volatile than on-site chjJdcare centers.

Exhibit 26. Percentage of Employers Providing Emergency

Childcare (1997-2008)

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: Society for Human Resource Management and BMO Capital Markets.

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BMO Capital Markets

Bright Horizons' November 2005 acquisition of Children First solidified its position as the top
provider in this nascent market, in our view, with more than 80 dedicated back-up care centers
(along with another 50 or so with have back-up care in a dedicated room or integrated into the
full service care progrdm) as of June 30, 2008 (latest data available). Despite having higher

Back-up care
could be more
profitable

overhead, the company' s back-up centers generate higher !,>ross maJb>il1S than its core childcare
centers. Exlribit 27 compares financial metrics for Bright Horizons' back-up care under its two
operating models (released when in was a publicly held company) ..

Exhibit 27. Example of Financi al Metrics Under Various Back-Up

Care Operating Models
Managed
$500K
15%-25%
N.A.
100+%
Customer
3-5 years

Revenue at maturity
Gross margin at maturity
Average investment
Average ROI
Enrollment risk
Contract term

Consortium
$1 .2 mil.
30%-50%
$500K-$1 ,500K
40+%
Provider
Annual

Source: Bright Horizons Family Solutions and BMO Capital Markets.

Economics of Operating a Childcare Center

Revenues. According to an April 2009 report by The National Association of Child Care Resource and Referral Agencies (NACCRA) citing 2008 data, the average annual fees for a fulltime cb.ildcare center range from $4,560 to $15,895 for an infant to $4,056-$11,678 for a fouryear old. A number of variables go into the amount tilat centers typically charge for cb.ildcare.
Among them are the following:

Location (Mississippi is tl1e least expensive, witl1 Massachusetts tl1e most costly)

Type of services provided (e.g., the more educational-oriented the progr'cll11, ti1e typicaJly
more expensive it is)

Child' s age (the yotmger a child is, ti1e more expensive ti1e program as ti1e caregiver/child
r'dtios are smaller)

Full-time versus part-time (part-time typically charges more when measured on a per hour
basis).

A 2008 poll conducted by Childcare Exchange shows ti1e average weekly fee for full-day childcare services for various regions in North Americ<J (see Exhibit 28).

Exhibit 28. Average Weekly Fee for Full-Day Childcare (2008)

Region
Canada
New England
The Mid-Atlantic
The Midwest
The South
The Southwest
The West

6-month-olds
$200
$225
$195
$185
$155
$180
$200

2-year-olds
$183
$215
$180
$160
$140
$150
$174

4-year-olds
$157
$180
$163
$145
$129
$140
$164

6-year-olds
$85
$160
$1 40
$125
$100
$94
$135

Source: BMO Capital Markets and Childcare Exchange.com's lnsta-Poll. Data downloaded in June 2008.

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Revenue sou rces. Funding for childcare services comes from a variety of sources. According
to U1e NIEER, in 2001, parents paid 50%-55% of childcare costs, the federal government paid
25%-30%, and state and local govenuuents paid 15%-20%. Corporate and philanthropic investments amounted to lo/o-5%. but were difficult to estimate. While this data is from200L we
do not believe it is dramatically different today.
Average costs per center. The Inside Child Care: Trend Report 2000 (latest data available) in-

dicated that the average annual cost of operating a typical childcare center serving 65 children
was approximately $5,100 per child, generating annual revenue of roughly $330,000 (see Exhibit 29). Although staffing costs were the largest expense (nearly 70% of a typical for-profit
center's budget), childcare staff typically get paid much less than the K-12 and postsecondary
counterparts-- an average of $ll.48 per hour, or $22,980 per year, versus $52,280 and $73,890
average annual salaries. respectively, in May 2008 (latest data available), according to the Bureau of Labor Statjstics.

Exhibit 29. Estimated Annual Budget for a Childcare Center

$330,000

Revenues

Operating Expenses

Labor
Occupancy
Supplies
Food
Other Expenses
Total

Net Income

Z27,700
42,900
26,400
13,200
6,600
$316,800
$13,200

% of Revenues
100%

69
13

8
4
2
96%
4%

Source: BMO Capital Markets estimates and Inside Childcare Trend Report 2000.

Economies of scale. We believe one of the key advantages to on-site versus offsite corporate
childcare is that on-site care does not require material occupancy costs. As such, we believe the
on-site providers are capable of generating higher margins. potentially providing higher staff
compensation. Per the National Child Care Information and Technical Assistance Center's
2009 Cbildcare Licensing Study, the indust:Iy average capacity is roughly 67 children. while the
average capacity for the 50-largest for-profit cb.ildcare companies was 156 children (2008 data
per Childcare Exchange's Top 50 list)- more than twice the indust:Iy average. We believe these
larger facilities benefit from economies of scale and can generate higher operating margins.

Characteristics of Superior Childcare Facilities

We believe investors should focus on the following attributes when investing in childcare facilities:
Quality. We believe that the ultimate measure of quality is accreditation from a nationally

recognized body. The ch.ildcare indusuy bas two fonus of accreditation: The National Association for the Education of Young Children (NAEYC), which accredits centers, and the Council
for Early Childhood Professional Recognition, which accredits caregivers. NAEYC accreditation has grown from 19 in 1986 to about 8,000 accredited programs in 2008,. While this number
bas decreased in recent years (from 10,000 in 2007), NAEYC attributes this to increased standards and more stringent requirements, which, in our view. may enhance the perceived quality
of this accreditation. .
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BMO Capital Markets

Low childfteacher ratio. We believe centers tl1at have low staff-to-child ratios typically provide
a higher-quality product, although generally at a higher cost. We believe the national
child/teacher mtio is roughly nine children per teacher. varying based on age and group size
(i.e., the younger the age group, the lower the required rdtio). The NAEYC reconuuended levels are shown in Exhibit 30.

Exhibit 30. NAEYC Recommended Minimum Staff/Child Ratios

GROUP SIZE
,AGE OF CHILDREN
Infant Accreditation Strand
(birth to 15 months)

1:3

1:4

10

1:3

1:4

1:4

1:4

1:4

1:5

1:6

12

14

16

18

20

1:7

1:8

1:9

1:8

1:9

1:10

1:8

1:9

1:10

22

24

Toddler and Twos Accreditation Strand

(12 to 36 months)
12-28 months
21-36 months
Preschool Accreditation Strand
2.5-year-olds- 3-year-olds (30- 48
months)
4-year-olds

1:6

5-year-olds
Kindergarten Accreditation Strand

1:10 1:11 1:12

Source: BMO Capital Markets and National Association for the Education of Young Children.

Educational focus. We believe au educational offering is becoming increasingly important. We

expect demand for these services to increase, as parents try to give their children a head start.
We also envision more funding-botll public and private-going to centers.
Wage rate
increases have
accelerated a bit
in 2009 to date

Staff pay rates. We believe childcare centers witll "veil-paid teachers and directors often
perform better. Hourly labor costs for chi ldcare providers have increased on avemge 3.5% annuaJJy since 1991. according to the data released by t11e Bureau of Labor Statistics (BLS) (see
Exhibit 31). Growth rates have increased in 2009, with average hourly earnings up 5.1%
through July 2009 (latest data available - using 12 month moving average). As t11e recession
disperses, we expect there will be pressure on iliis rate of increase over the near term Historically. there appears to be some lag between ~m economic slowdown and a sizable slowdown
in wage increases.

Exhibit 31. Year-Over-Year Percentage Change in Average Hourly

Childcare Labor Costs (1991-2009 to date)
6%

5%

-Y-o-ychanQe
- 1 2 - mo movmg average
- Average y-o-y change

4%
3%

2%
1%
0%
1 %
-2%
-3%

Jan-91 Feb-92 Mar-93 Apr-94 May- Jun-96 Jul-97 Aug~

Sep- Oct-00 Nov

oo

Dec Jan-04 Feb-05 Mar-06 Apr-{)7 May- Jun-{)9

oo

Note: Shaded areas represents recessionary periods. Source: BMO Capital Markets and Bureau of Labor
Statistics

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Early Childcare

BMO Capital Markets

We believe superior childcare operators recognize their e.\:posure to high tumover and subsequently " pay up" for tl1eir teachers and directors. ln addition to reducing turnover, we believe
increased pay for childcare professionals is key to maintaining better operating centers, owing to
increased employee satisfaction, effective recmitment. and improved continuity of care. We
note that higher staff pay rates is one benefit of the workplace model, as these providers can
typically pay t11eir staff a bit better as t11ey do not have to make real estate payments.
Low turnover. According to tlle Center for the Child Care Workforce. the national average for
teacher turnover in childc<tre faci lities is somewhere between 30% and 40%. Historically, childcare operators have long been plagued by high turnover, as employees sought better-paying al-

ternatives.
Utilization rates. We believe it is difficult for a childcare provider to be profitable if utilization

rates are low, especially if it is a smaller center. Among the larger childcare providers, we believe typical utilization rates (which approximate the number of full-time children based on
weighted averages; i.e., a child enrolJed for five half-days equates to 0.5 F1E) are in t11e mid60% area. Some centers have ex-panded their programs to increase utilization rcltes, as well as
revenues. with offerings such as after-school progrd.IIlS, summer camps, and t11toring pro!,>rdiDS.
Attractive facilities. We believe that attractive, child-friendly facilities are an important element

in fostering high-quality learning enviromnents for children. This "conununity of caring" is integral to ensuring t11e success of tl1e center. in our view. We note that maintaining attractive facilities is anotl1er key difference between the conswner-based and corporate-oriented operators,
as the cotlStuner-based operators tend to spend more on their facilities out of their own pockets.
For example. over the five-year period with publicly available data (1999-2004). leading consumer-focused childcare-provider, KinderCare Learning (acquired by Knowledge Learning in
January 2005), reduced its capital expenditures as a percentage of revenues from 15.8% to 6.8%,
while over the same period, workplace-based leader, Bright Horizons, reduced Uris percentage
from 7.4% to 2.4%. As such, the workplace model cle<trly lends itself to much stronger cashflow generation, in om view.
Alternative revenue streams. Research has found that the llighest-quality centers do not rely

solely on parents' n1ition fees. Public agencies, centers with public funding, and workplace centers subsidized by employers fall into this category. In most communities, t11e childcare market
is llighly competitive. which often results in price competition. As a result, companies need to
fmd alternative streams of revenue to adequately fund their day-to-day operations. Examples are
corporate sponsorsllips, charitable donations, and govemment funding.

Operating and Valuation Metrics

Nobel Learning Communities (NLCl) is tl1e only publicly held company of size trading on a US
exchange with exposure to the childcare sector (roughly two-thirds of revenues, although recent
acquisitions are continuing to shift the company more toward K-8). We have provided recent
operating a11d valuation metrics for that company in Exhibit 32.

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Exhibit 32. Trailing 12-Month Operating and Valuation Metrics:

Selected Publicly Held Childcare Companies

Rating
Price Target
Operating Performance
FY End
LTM Qtr. End
Revenue ($MM)
Gross Profit ($MM)
EBITDA ($MM)
EBIT ($MM)
Pretax Income ($MM)
Net Income ($MM)
Free Cash Flow ($MM)
Gross Margins (in %)
EBITDA (in%)
EBIT (in%)
Pretax Income (in%)
Net Income (in %)
Free Cash Flow Yield (in%)
ROIC: LTM
Valuation Metrics
FY End
LTM Qtr. End
Price (9/09/09)
Shares Outstanding (MM)
Market Cap ($MM)
Net Debt/(Cash) ($MM)
Enterprise Value ($MM)
CY EPS:
2008A
2009E
2010E
Two-Year CAGR
P/E:
2008A
2009E
2010E
EV/Rev. (LTM)
EV/EBITDA (LTM)
EV/EBIT (LTM)
EV/Free Cash Flow (LTM)

Nobel
Learn. Ctys.
NLCI
N.R.
N.A.
06
6/09
$220.1
29 .0
20 .3
10.3
9.4
5.7
5.3
13.2%
9.2%
4.7%
4.3%
2.6%
2.4%
6.8%
06
6/09
$10.32
10.5
$108.3
0.2
$108.5
$0.71
N.A.
N.A.
N.A.
14.5x
N.A.
N.A.
0.5
5.3
10.6
20.3

N.A . - Not Available. Source: BMO Capital Markets and FactSet Research.

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Early Childcare

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International Childcare Market

While tile for-profit childcare marl<et is more developed in the US than in most countries around
t11e world, we believe tJ1ere are also a number of growth opportunities overseas. While data are
limited, Exl1ibit 33 outlines tile degree of governmental involvement in early childcare services
in several countries. Additionally, we provide a synopsis of a number of key markets below.

Exhibit 33. Global Government Funding For Early Childcare

Services
Significant fund ing

Mod est funding

Very little funding

Austria
Estonia
Lithuania
Mexico
New Zealand
Singapore
Sweden
United Kingdom

Azerbaijan
Canada
Colombia
india
Jordan
Kenya
Malaysia
Moldova

Australia
Bangladesh
Belize
Brazil
Cameroon
China
El Salvador
Indonesia
iran
Iraq

Montenegro
Nigeria
Russia
Servia
United States

No funding

Korea
Qatar
Liberia
Lebanon
Nepal
Pakistan
Rwanda
Swaziland
Tajikistan
Tanzania
Turkey
United Arab Emirates

Source: Childcareexchange.com and BMO Capital Markets.

Australia: According to the Australian Bureau of Statistics Child Care Survey (June 2005:

latest data available), roughly 46% of Australian children aged 0-12 years receive some type
of clUldcare, with 21% of the total receiving some type of "formal care." The percentage is
low for children under one year old (7%). ti1en rises through three years old (53%) and then
decreases thereafter as children begin their fonnal schooling. On average, the largest portion
(47(Yo) use fom1aJ care for under 10 hours per week. However, the government has implemented a plan to provide universal early childhood education by 2013 . The plan provides 15
hours of pre-K education per student per week for 40 weeks of the year to be instructed by
tmiversity level grdduates. As of the end of 2008, the Australian commonwealth had committed roughly $955 million to the project.
According to the 2006 Australian Govemment Census of Child Care Services, the average
weekly cost of fonnal childcare was AU$233, up from AU$209 in 2004. While t11e majority of
"fonnaJ care" is paid out-of-pocket by parents, the Australian government does provide some
funding via a childcare benefit. All parents are eligible, but the maximum funding is available
for children of lower income parents. Per the 2006 Australian Govemment Census of Child Care
Services, roughly 90% of parents using fonnal daycare receive at least some benefit.
Similar to the US, the for-profit childcare market is somewhat fragmented. The clear leader was
ABC Learning Centres, which ran roughly 1,100 centers in Australia at the end of2007, witi1 an
estimated market share of 25%. However, the company ran into some trouble after an aggressive
expansion strategy outside Australia and, in late June 2008, sold 60% of its US business to Morgan Stanley Private Equity, using the proceeds to pay down debt. Unforttmately, tllis was not
enough as the comp~my collapsed into receivership (i.e., bankruptcy) in November 2008. Since
then, most other units have been sold as well. Otl1er for-profit providers include Childs Family
Kindergarten Ltd., Guardian Childca.re Alliance, KU Children' s Services, and SON Children' s
Services.

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Canada: According to Ca11ada's Childcare Resource and Research Unit (CRRU), there were

roughly 2 mill ion children under the age of 5 in Canada in 2007, with over 60% having mothers
working outside the home. In July 2006, the Universal Child Care Benefit a $100 per month
payment to parents of all children age 0-6 began. According to the CBC. the average monthly
cost for childcare is $541-$783, and as such, parents must bear the brunt of the costs.
While t11e largest portion of children in " non-parental care" are "outside the home with a nonrelative" (30% in 2002-2003; latest data available per Statistics Canada' s Child Care in Canada
report), the fastest-growing portion of the market is ' daycare centres where usage increased to
29% in 2002-2003 from 20% in 1994-1995. According to CRRU, there are roughly 750,000 licensed childcare centers in Canada, with about 80% of tl1e spaces run by not-for-profit providers. Among the larger for-profit providers in Canada is Bright Horizons Family Solutions.
India: According to a May 2008 article in The Wall Street Journal, the preschool industry in In-

dia is estimated to gross about Rs4.004 crore ($985 million). The sector is ex-pected to increase
at a 238% CAGR, reaching Rsl3,821 crore by 2012, according to estimates from brokerage finn
CLSA Asia-Pacific Markets. With nearly three-quarters of the country's population under the
age of 35. the demand for quality preschools is expected to only intensify. Of the 164 million
children in India between the ages of 0-6, it is estimated that about 32 million do not have access
to basic education and healthcare seiVices. While we do not expect private providers and franchisers will penetrate t11ese segments of society before the government does, we tl1ink this tmderscores the very long tenn potential of this marl<et. Among the larger providers are EuroKids
International Pvt Ltd. (450 centers with capacity for 30,000 students), Shetmock Schools (85
branches with 8,000 students), Kangaroo Kids Inc., (more than 55 centers) and Kidzee, an ann
of Zee Interactive Learning Systems Ltd. (more than 600 centers).
UK : According to market researcher Laing and Buisson, the England's day nursery market

(which represents roughly 40% of total childcare seats) was worth roughly 3.8 billion in
2007, an increase of 8% over the prior year. W hile parents spent an estimated 2.5 billion,
employers spent roughly 905 million and the central government spent an estimated 300
million directly on subsidies for 3 and 4 year olds in day nurseries. According to d1e VK's
Department for Children Schools and Fanlliies (DCSF), there were nearly 100,000 registered
childcare providers offering more t11an 1.5 million childcare seats in England in 2008. Exhibit
34 summarizes types of chiJdcare available in the UK along with totai seats offered, the number of providers, and est'i mated costs per child.

Exhibit 34. Childcare Seats, Providers and Cost in England (as of August 2008)
Facility
Childminders
Full Day Care/Nursery
Sessional Day Care
Out Of School Day Care
Creche Day care

Type o f Care
Operate business from home
Full time care
Care groups for a few hours per day
Holiday and after school sessions
Short duration care facilities (at gyms,
shopping centers, work places etc.)

Seats
295,300
635,600
206,300
371,500
47,200

Total

1,555,900

%of Total Provid ers

19.0%
63,600
40.9%
14,600
13.3%
8,200
10,700
23.9%
3.0%
2,800
100.0%

99,900

%of Total
63.7%
14.6%
8.2%
10.7%
2.8%

Cost/Child
3-5/hour
147/week
3-8/session
N.A.
3-5/hour

100.0%

Note: Data is for England only. N.A. - Not Available. Source: BMO Capital Markets, The Office for Standards in Education, Cobweb
Information Ltd.,.

A m ember of BMO

Financial Group

43

September 2009

Early Childcare

BMO Capital Markets

Additionally. the UK market is facilitated by childcare agencies that arrange placements for
rei:,>istered child caretakers. Parents pay the agency a finders fee of roughly 60-100 per
week, while au agency will charge fl ,OOO to fl ,500 to arrange a full time placement.
One driver of this market is the UK's 10 year plan instituted in 2006 to make early childcare
available for all parents. As a part of this plan, the government has promised free nursery care
to every two-year old child who needs it, in addition to 15 hours per week of fTee childcare to
every three and four year old (fully employed parents must pay a portion of t11e fees). According Laing and Buisson, UK nursery occupancy rates began increasing in early 2008, reversing
a trend of rising vacancy rdtes that began in 2002, when vacancy rates grew from 11% to
22.5% by tl1e beginning of 2007. However. some early research indicates the recession may
put a stop to this turnaround as a January 2008 survey found day nurseries observing a decrease in occupancy rates- tl\Ough slightly offset by increases attributed to more parents putting in longer hours at work.
By the beginning of 2008, Lang and Buisson estimated that roughly 300 major providers operating nursel}' groups (three or more nurseries) accounted for 18.7% of total UK seats, with
the top 20 providers accounting for about 8.4% of total nursery seats. The largest provider.
ABC Leaming Centres, accounted for about a 1.6% share. This is slightly above the findings
of a 2005 report, which found t11at the top 20 providers operated 5% of the UK' s centers and
managed 8% of its capacity .
We believe this consolidation wi ll continue, as four of the top five companies on this list were
recently acquired, including tl1e following:

No. l Nord Anglia Education Ltd., which was taken private by Baring Private Equity and
management in October 2008

No. 2 Asquith Nurseries, purchased in July 2007 by private equity finns Dawney, Day
Principal Investments and Swordfish Investments LLP

No. 4 Bright Horizons Family Solutions. acquired by Bain Capital Partners and management in May 2008

No. 5 Busy Bees, acquired in December 2006 by Australian provider ABC Learning Centres (witl1 recent speculation tlllit the company will be sold once again given ABC's recent problems).

Merger and Acquisition Activity

Over the past few years. the childcare industry has seen growing interest from the investment
community. Major acquisi!lons include t11e following:

In January 2005, Knowledge Learning (owned by Michael Milken' s Knowledge Universe)

undertook a leveraged buyout of KinderCare Learning Centers for over $1.04 billion to become the largest childcare provider in the US, serving roughly 200,000 children.

In December 2005, Australian childcare provider ABC Learning Centres (ABS.ASX) acquired US provider Learning Care Centres for $153.5 million in cash to marl< its entrance
into tJ1e US market. Since tJ1at time, the company expanded its presence in the US market
by acquiring Children's Courtyard in August 2006 for $66 million and La Petite Academies

A m ember of BMO

Financia l Group

44

September 2009

Early Childcare

BMO Capital Markets

in January 2007 for $339.4 milLion. among otJ1er deals. In addition. in May 2007. ABS annotmced it had raised $1 billion in debt and equity to continue its acquisition strategy. However, the company ran into some trouble thereafter and, in late June 2008, sold 60% of its
US business to Morgan Stanley Private Equity (MS) for roughly $420 million, using the
proceeds to pay down debt. The remaining assets went into receivership in November 2008
and are in tJ1e process of being sold.

In May 2008. Bain Capital completed the "going private transaction" of Bright Horizons
Family Solutions (fom1erly BFAM) for roughly $1.3 biUion.

rn addition, in September 2008, privately-held Knowledge Learning Corp. made an unsolicited

expression of interest to acquire publicly-held Nobel Learning Communities (NLCI) for $17 per
share in cash, valuing the company at roughly $158 million, or about 0.7x and 7.6x trailing 12month sales and EBITDA, respectively. This led NLCI to fonn an independent board commillee
to review strategic alternatives and tJ1e hiring of an outside investment banker to potentially pursue a possible sale. In March 2009 (following t11e marl<et crash), Knowledge Learning Corp.
Jowered their offer to acquire the company at $13.50 per share, valtting the company at roughly
$132 million. or about 0.6x and 6.lx trailing 12-month sales and EBITDA, respectively. This offer was subsequently rejected by NLCI.
Deals and proposals of tJus nature, we believe, have spurred greater investor interest in this sector. and imply further investment opportunities. Because of t11e llighly fragmented nature of t11e
industry, regional and small players seem to be pursuing a strategy of gaining critic<JI size and
market legitimacy. Following tlus strate!,'Y could lead them to qualify as acquisition targets by
larger investors or companies. A list of recent acquisition activity in the clilldcare sector can be
found inExlubit 35.

A m ember of BMO

Financia l Group

45

September 2009

Early Childcare

BMO Capital Markets

Exhibit 35. Recent Childcare Transactions

($ in millions)

Transaction

Anne.
Date
JuMJ9
Jur>-09
JuMJ9
Jur>-09
May-09
Apr-09
Apr-09
Feb-09
JaMJ9
Dec.()8
Aug-08
Aug-08
Mar-08
JaMJ8
JaMJ8
Aug-07
May-07
May-07
Feb-07
Feb-07
Jan-07
Dec-06
Oeo-06
Oec-06
Oct-06
Sep-06
Aug-06
Aug-06
Aug-06
Aug-06
Jur>-06
Jun-06
May-06
Apr-06
Apr-06
JaMJ6
Dec-05
Nov-05
Oct-05
Sep-05
Feb-05
JaMJ5
Jar>-05

Target

Acqulror

Montessori Corner at Princeton Meadows

Nobel Learning Communnies

Montessori Corner Country Day School
Nobel Learning Communities
C hildren's House ol the Windsors
Nobel Learning Communnles
Busy Bees Group
Knowledge Universe
Crayon Campus
Mini'Skool
Mothe(s Pride (50%)
AEZ lnfratech
Highpolnte Children's Academy
Nobel Learning Communnies
CouniJy Tyme Early Ed ucation Center
Nobel Learning Communities
Entervision
Good LHe China
Work Options Group
Bright Horizons Family Solutions
Ivy Kids Early Learni ng Center
Nobel Learning Communities
Wiz Korea
Riverside Gro up
ABC Learning Centres (Learning Care Group Division- Morgan Stanley Private Equity
Bright Horizons Family Solutions
Bain capital
Barnebygg (70%)
CapMan Oyj
Leapfrog Nurseries
ABC Learning Centres (Busy Bees Group)
ABC learning Centers (12%)
Everitt Investments (Temasek Holdings)
Barnstable Academy
American Educatoon Group
Nobel Learning Communities (One Preschool)
Undisclosed Preschool Provider
Forward Steps Holdings
ABC Learning Centres
Insight Schools
Apollo Group
Macquarie Leisure Services (55 C hrldcar e Centers}
ABC Learning Centres
La Petrte Academy
ABC Learning centres
Busy Bees Group
ABC Learning Centres
Discovery Isle Child Development Center
Nobel Learning Communities
Educate
MBO, Sterling Cap<tal, Citgroup Private Equity
College Coach
Bright Horizons Family Solutions
Education Station (Educate)
Knowledge Learning Corporation
Hutchison's C hild Care Services
ABC Learning centres
Childre n's Courtyard
ABC Learning Centres
Honor Roll School
Nobel Learning Communities
17 California Childcare Centers
ABC Learning Cent.res
Child Development Schools
Glencoe Capital
Primrose Schools
American Cap~al Stra tegres
Camelot Schools
Charterhouse Group
learning Care Gro up
ABC Learning Centres
SageWalk
Aspen Education Group (Warburg Pincus, Frazier and Sprout)
Ombudsman
Educational Services of America ( Trimaran Capital Partners)
Keystone Education and Youth Services
Universal Health Services
Childre nFirst
Bright Horizons Family SoluUons
Gateway Learning
Educate
Academy Chlldcare Group
Creative Education
KlnderCare Learning Centers
Knowledge Universe

Value
NA
NA
NA
NA
NA
$100.0
S1. 1
$ 1.3
NA
NA
S0.7
NA
$420.0
$1,274.8
NA
$62.9
$2,748.9
NA
$1.9
$48.1
NA
$51. 1
$339.4
$207.2
$12.0
$535.0
NA
S6.0
$63.3
$66.0
$3.0
$33.7
NA
$91.7
NA
$153.5
NA
NA
NA
$61.0

SS.O

$8.3
$1,040.3

Transaction Value I L TM

Revenue
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
1.7 X
NA
NA
3.8x
NA
NA
NA
NA
NA
0.8x
NA
1.2 X
1.6 x
NA

0.2x
1.9x
NA
NA
0.6x
NA
NA
NA
0.7)(
NA
NA
NA
2.0x
NA
1.2 x
1.2x

EBITDA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
12.7X
12. 1 X
NA
NA
15.6x
NA
NA
NA
NA
NA
10.1 X
NA
NA
15.2x
NA
NA
11.6x
6.1 X
NA
4,7 X
NA
NA
NA
14.3x
NA
NA
NA
NA
NA
NA
7.3x

Source: BMO Capital Markets and company reports.

A m ember of BMO

Financi al Group

46

September 2009

Early Childcare

BMO Capital Markets

Risks
Finding and retaining staff. With roughly a 30o/o-40% average annual turnover rate, this is a
constant challenge for childcare providers. in our view. In addition, many of these teachers are
tmderpaid. According to The National Prekindergarten Study by the Yale University Child
Study Center (2005). roughly 14% of prekindergarten teachers nationally earned a salary below
the federal poverty guidelines and nearly 71% earned a salacy below the threshold for "low income." These statjstics are notwithstanding the fact that 73% of these teachers had a bachelor' s
or hig her degree. About 19% of such teachers across the nation, worl< an e::...1.ra job for pay. In the
event of a tightening labor market, childcare providers may find it increasingly difficult to fill
job vacancies and retain their staff, especially at prevailing wages. Even in the current environment, a shortage of qualified teachers remains the top concern of center operdtors in a Jtme 2008
insta-poll by Childcare Exchangc.com. Should a cbildcare provider need to pay higher wages, it
may also need to substantially increase its tuition rates and, thus. could become too expensive
for many parents.
A weak economy/continued recession. In our view, a contrdcting economy creates the following risks: 1) corpordtions will likely seek areas to cut costs and childcare subsidies may be at
risk; 2) there would likely be more tmemployed parents with the time to watch their own children. and 3) there may be more parents witJ1 insufficient resources to pay for higher-ticket childcare.

Universal pre-K bypassing childcare providers. A significant movement supports providing

muversal Pre-kindergarten through public or private funds, although tlus may only impact the
older cllildcare segment and may not affect that in a meaningful way. Tlus could be considered
an altemative or substitute for certain four- and five-year-old cllildren who would have stayed an
extra year in cbildcare facilities. Some private sector providers are tapping into these dollars,
however, we believe government-funded pre-K could become an extension of primary public
schools and thus reduce the need for services from the private sector.
Government budget cuts. We believe roughly 40~,..50% of childcare funding ori!:,rinates from
t11e government. A cut in state or federal funding could have a detrimental in1pact on the industry's favorable subsidies and/or demand.
Regulatory risks. Companies t11at provide lower-qua.lity services and that do not have sufficient
revenues to meet rising standards may face greater regulatory risks. There are nunimum standards in the areas of staffing, nutrition, health protection, and safety. If those standards are signific~mtly rdised, some companies might be unable to meet the costs.
The fear of child abuse. We believe child abuse is less common in center-based care. However.
if a cllild or parent makes an accusation and tl1e dispute becomes public, both the facility and
staff members may lose credibility, which in turn could hurt future revenue fl ows. Tn addition,
the accusation a lone may be enoug h to put selling pressure on the stock given the highly
charged nature of t11e issue. The 1980s saw a number of major clu ld abuse allegations that
provided negative publicity for t11e sector. These included McMartin Preschool (1983), Fells
Acres Day Care (1984), Wee Care Nurse!), School (1985), Little Rascals (1989). and Breezy
Point Day School (1989).

A m ember of BMO

Financia l Group

47

September 2009

K-12 Education

BMO Capital Markets

K-12 Education: Stimulus Should Help a

Bit, Though Risks Abound
We believe the K-12 market presents the greatest investment opportunity within the four
educational sectors. It is by far tl1e largest of these sectors and continues to grow, benefiting
from the adoption of the No Child Left Behind Act (NCLB) in 2002, which spurred a new era
of school governance and improvement. In the near tenn, the recession has devastated state
and local budgets, which, we believe, will undoubtedly have a negative impact on the sector.
However, we believe tJ1e new administration 's federa l budget in combination with U1e
stimulus funding via The American Recovety and Reinvestment Act of2009 (Pub.L. 111-5 or
the "Recovety Act") should offset some of tllis. We believe comp~mies tl1at stand to benefit
the most are those that provide effective cost saving strategies tluough the use of teclmology.
comprehensive student assessment tools easily scalable across districts and states, affordable
and effective supplemental)' education products in tutoring and college prep, and suitable
teacher development programs. Additionally, t11e stimulus practically doubl.es funding for
special education, another potential growth engine. We caution investors, however, that the
K-12 sector is probably the riskiest of the four sectors as a result of its dependence on
government spending, lengthy sales cycles, and heavy political pressures.

Market Overview
The K-12 market consists of students in elementaty (usually kindergarten through grade 6)
and secondaty (grddes 7-12) schools. According to tl1e US Department of Education' s (ED)
NationaJ Center for Education Statistics (NCES), after growing at a 7.3% average annual rate
since the 1969-1970 school year, t11e K-12 school segment accounted for roughJy $631 billion
of expenditures in the 2007-2008 school year (most recent data available), equivalent to about
4.4% of the US annual gross domestic product.
K-12 industry
proj ected t o grow
4.7% CA GR

through 20172018

The bulk of the increased spending came early in this period, as average annual spending
increases have been in the 4%-6% range for most of the current decade. Considering the
impact of the recession, we believe the slower rate of spending increases should contlnue,
although we expect increased federa l spending on education along with fiscal stimulus
spending (outlined in more detail below) should somewhat help offset these setbacks. Based
on our estimates and projections from the NCES, we forecast K-12 spending will increase
4.7% CAGR to just over $1 billion by the 2017-2018 school year (see Exlubit 36).

Exhibit 36. K-12 Total Expenditures (1969-1970 to 2017-2018E)

:0

.:

~
Ill

:::>

..,c:
~

..

c.
X

$1,000
900
800
700
600
500
400
300
200
100
0
1969-70

Public

P rivate

--%chgyly

25%
20%

..

"'

15% ;

10% ~

>.

:;:.
5%

1977-78

1985-86

1993-94

2001 -02

2009-10E

0%
2017-18E

Note: Shaded areas represent US recessionary periods.

Source: BMO Capital Markets estimates and US Department of Education National Center for Education
Statistics.

A m ember of BMO

Financial Group

48

September

2009

K-12 Education

BMO Capital Markets

State and local

funding dominate
K-1 2 education,
although federal
portion increased

State and local funding has historically represented t11e largest portion of K-12 public school
spending. According to the NCES, in 2006-2007 (latest data available), the states' share of K12 public education funding was roughly 48%, local funding was about 44%, and feder.:ll
funding made up the remaining 9%. Willie the federal spending level increased from the 7%
level seen earlier this decade, following the passage of the NCLB, federal spending on K-12
education stayed relatively level at $47 billion in 2006-2007, reducing its " share" slighlly
from prior years (see Exhibit 37).

following NCLB

Exhibit 37. K-12 Funding by Source (FY1977-FY2007)

Dlocal

100%
90%
g' 80%
:0 70%
c
41
c. 60%
1/)
iii 50%
0 40%
~ 30%
0
~ 20%
10%

liState

DFederal

O%~~~~~~~~~~~yu~~~~~~~~~~yu~~~~~u,

1976-77

1982-83

1988-89

1994-95

2000-01

2006-07

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

Because education funding is so heavily dependent on government funding, economic growth

~md the tax revenues collected by federal, state, and local governments may be the biggest
determinant of public education spending. While the avemge annual growth in K-12 spending

K-12 spending
typically slows
during and after

across all sources has averaged in the 6%-7.5% range since 1977-1978. t11e low points in
spending increases, including two consecutive years of federal spending cuts in 1981-1982
and 1982-1983, occurred in COJljunction with, or just fo llowing, US recessions (see Exhibit
38). In addition. according to the Center on Budget and Policies. the 2001 recession prompted
34 states to cut K-12 education spending between 2002 and 2004- something that many had
thought would never occur at this level.

US recessions

Exhibit 38. Annual Change in K-1 2 Funding by Source (FY1978-FY2007)

D Local

20%

mstate

O Federal

15%

,~: ~~JhU.ltD~~~kllJUj.~.uJJil loJL

1985-86

-5%1

1989-90

1993-94

1997-98

2001-{)2

2005-{)6

-10%
-15%
Note: Shaded areas represent recessionary periods. Source: BMO Capital Markets and US Department of Education National Center for
Education Statistics.

A m ember of BMO

Financial Group

49

September

2009

K-12 Education

BMO Capital Markets

States facing

For most of this decade. K-12 spending levels have generally increased as the economic
expansion following the 2001 recession gained stren!,>th. However, FY2009 (year-ended
September 30, 2009) accelerated a slowing trend that began in FY2008 as many jurisdictions
already e>:periencing fiscal difficulties were forced to make additional spending cuts midyear. In its June 2009 Fiscal Survey of the States. the National Association of State Budget
Officers (NASBO) estimates states will face a combined budget gap of about $230 billion for
FY2009-FY20 11. The survey also found t11at state spending is estimated to decrease 2. 5% in
FY2010, the largest drop in 32 years and worsening from FY2009' s estimated 2.2% declinethe two worst atmual declines in ilie smvey's history (began in 1979).

most severe
financial crunch
in decades, as
budgets fall

Resulting in wide
cuts in K12 spend
-some more
severe than
others

Stimulus should
help, but probably
not enough to
avoid cuts

Stimulus will plug

budget gaps, but
also fund new
investment

Third-party
spending is only a
small portion of
K-12 expenditures

Estimated K-12
for-profit growth:
declining through
2010 then growing
4.4% CAGR

through 2014
A m ember of BMO

Willie K-12 education was ilie highest expense for states in 2008 at 20.9% of total state
spending, this sector has not been spared as govenuuents have trimmed budgets to close
massive gaps. NASBO found that 26 states cut K-12 program funds in FY2009, while 27
states have proposed to do so in FY2010. However. the degree of these progTam cuts varies
widely across t11e country, from rnild proposals such as Connecticut's proposed freeze on
FY2010 spending, to e>.treme cases such as in California. where 52,000 teachers (15% of ilie
public school teachers) could be laid off by tl1e start of FY2010.
Willie several state budget proposals included remarl<s that expected ftmds from the federal
stimulus package will offset some of t11ese shortfalls (initial proposed budgets did not include
the specific impacts of U1e stimulus owing to timing of the bilrs passage). we believe t11e
stimulus - which provides roughly $80 billion for elementary and secondary education - will
not be large enough to offset all of these losses. Additionally. tl1e stimulus is merely a onetime cash infttSion and will not sustain budget shortfalls tllat are e>.'Pected to persist for several
years.
We believe one of the challenges facing states as they receive stimulus aid - and facing the
federal govemment as it doles Uris money out - will be in determining whether to plug
funding gaps or support new programs and investment. While some provisions of t11e stimulus
package will go directly to slowing tl1e fallout from expected shortfalls. such as ilie $53 .6
billion state fiscal-stabilization fund intended to shore up budgets and restore funding cuts,
other provisions, such as the $4.3 billion "Race to the Top Fund" and $650 million in
"innovation grants." will be awarded on a discretionary basis by the Secretary of Education to
districts and states that can demonstrate areas of improvement or higher achievement among
students.
Willie the more than half-trillion dollars in annual spending (excluding recovery funds)
sounds impressive, tllis large SUlll may be somewhat misleading from an investment
perspective, as nearly 52% of total expenditures go toward teacher salaries and benefits with
an additional 11.% directed toward facilities and capital ouUays. We believe the amount spent
on tllird-party expenditures (i.e.. companies supplying goods a nd services to this sector)
represents a fraction -perhaps only 6%- of total e>.'Penditures.
Nevertl1eless. tl1e numbers are large even when attempting to measure the component of K-12
education spending to be allocated to third-party (i.e. , for-profit) providers. It is difficult to
find current and detailed data for the for-profit sector; therefore we are basing our projections
on those done by Eduventures, the education industry marketing and research firm, in
February 2006 (latest data available). Using tltis data, we estimate for-profit K-12 education
vendors generated roughly $25 billion in revenues in 2008 (2007-2008 school year). This is
Financial Group

50

September 2009

K-12 Education

BMO Capital Markets

expected to decline through 2010 owing to the recession and its aftennath before rebow1ding
again in 2011. Thereafter, we project tlus will increase to nearly $28.1 billion in 2014,
representing roughly 4.4% annual growth (see Exlubit 39). We note that these amounts reflect
only spending by institutions on educational tnaterial and services and do not reflect the
burge011ing segment of direct-to-consumer educational materials and services. which is
estimated to be a market of s imilar size.

Exhibit 39. K-12 Education Industry (2002-2014E)

$30

Curnculum and Learning

Ul

20

~
C)

c:

:cc:

.,

~~

c:

iii

Technology

10

Other Services

Q.

"'

0
2002

2003

2004

2005

2006

2007

2008

2009E 2010E 2011E 2012E 2013E 2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates based on
Eduventures The Education Industry. Learning Markets and Opportunities 2005 report (February 2006).

K-12 enrollment
growth rates have
been slowing,
though are
expected to
reaccelerate
slightly beginning
this fall (2009)

Another component of change in K-12 education expenditures is enrollment rates, which have
been almost purely driven by demographics. As shown in Exlubit 40, after bottoming at 44.9
million students in 1984-1985, K-12 enrollment increased roughly 23% to 55.4 nUllion in fall
2006 (latest data available), or about 1% annually. However, in recent years, K-12 enrollment
growth has been slowing somewhat, mainJy owing to lower birth rates among the 'baby-bust''
generation - a trend expected to continue, although increases from immigration may offset
some of tlus (especially if immigration refonn is enacted). According to the NCES, K-12
enrollment is expected to grow roughly 9.1% (0.8% armually) to about 60.4 million by the fdll
2017 school year. Interestingly, according to these projections, annual K-12 enrollment
growth is expected to reaccelemte slightly beginning in this fall (2009) school year.

Exhibit 40. K-12 Enrollment (Fall1969 to Fall 2017E)

65

3%

c:::::::::l K12 Enrollment - -% chg yly

;- 60

2%

1%

c.,"'

55

C)

c:

"'
"
~

.s::.

"'

(ij 50
N

.,

45
40

1970

1975

1980

~~~
1985

1990

1995

0%

1%
2%

iii
c:
c:

"'

<(

3%
2000

2005

2010E

2015E

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.
Note: Enrollment for fall of each year.

Other than

NCLB and Stimulus Package: Impact on K-12 Spending

scrapping title,

The No Child Left Bellind Act (NCLB), in its simplest form, was the reauthorized and
amended federal education program initially established under the Elementary and Secondary
Education Act (ESEA) of 1965. After fom1er President Bush signed NCLB into law in
January 2002, a fundamental shift occurred in t11e way states directed K-12 education
spending, resulting in faster and greater changes than any prior federal education K-12

Obama to leave
structure of NCLB
largely
unchanged
A rn ernber of BMO

Fin ancia l Group

51

September

2009

K-12 Education

BMO Capital Markets

legislation. in our view. While President Obama has not proposed any wholesale fundamental
changes to NCLB, the title of the program itself is conspicuously absent from the
administration's FY2010 budget proposal, which lists NCLB-related funding under its
ori!,>inallegislative title (ESEA). As NCLB had been very controversial, we believe tllis is a
deliberate move to get around the taboos associated with the program (there are reports that
the NCLB logo has been removed from government offices). However, other than tlris
"rebranding" initiative, the adnlinist.ration has been vocal in its support for NCLB 's testing
and accountability measures, and we expect many of the underlying aspects of the program
(e.g., increased accountability) to remain largely tmchanged.
We sununarize the key provisions of NCLB in Exllibit 41.

Exhibit 41 . Key Provisions of No Child Left Behind Act (NCLB)

Student
Perf ormance
Student Testin.g

Legislation
States set "proficiency levels" on reading and
math tests that indicate grade level
performance.
Test scores are reported for schools and
student sooio-demo,graphics.

Impact
States set student performance goals based
on test results from previous years.

Outcome
Student performance goals are raised on a
regular schedule between now and 2014.

By 2005..06, states test every student annually

in reading and math from grades 3 through 8
and at least once in these subjects in grades
10 through 12.

By 2007.08, slates must test students in

science at least once during grades 3-5,
grades 6-9, and grades 1012.

Teacher Quality

All teachers of core academic subjects must

be "highly qualified" by June 2006. To be
deemed highly qualified, teachers must have:
1) a bachelor's degree, 2) full state certification
or licensure, and 3) prove that they know each
subject they teach

States and districts must report annually on

their progress and on the percentage of
teachers getting professional development to
help them become highly qualified.

Parents must be notified if their child is taught

for more than 4 weeks by a teacher who does
not meet the law's definition of "highly
qualified. l1kely that thousands of schools will
miss this target at start of 2007..08 school
year.

School
Performance

Schools must demonstrate am10ally that all

students- and all groups of students- are
meeting state goals for grade-level work to be
counted as making Adequate Yearly Progress
(AYP).

Schools and districts will not be ccunted a$

making AYP if any one or the specific student
groups misses the performance goal.

If schools or districts do not make AYP for two

years in row, they are considered schools in
need of improvement!

Eligible parents will be able to transfer their

children to other public schools or get outside
tutoring assistance for them. Schools may also
provide tutoring services.

If schools receiving Title I funds ccntinue to fall

short of AYP, they wilt face more extensive
changes over the course of several years,
including possible restructuring, state
takeover, or management by private firms.

"School s In Need of Title I schools "m need of improvemenr are

Improvement"
supposed to receive financial and technical
assistance and to develop and implement a
school improvement plan that focuses on
programs and approache!! and have research
evidence to demonstrate the1r effectiveness.

Source: BMO Capital Markets and The Learning First Alliance.

In general, (paraph.rasing the ED) NCLB is supposed to work like this:

A m ember of BMO

Each state be!,>ins by setting a "starting point" based on the performance of its lowestachieving demograpllic !,'Toup or of the lowest-acllieving schools in the state, whichever
is lligher.

The state then sets the bar - or level of student achievement - that a school must attain
af1er two years to continue to show "adequate yearly prof,'Tess" (AYP). For a school to
show AYP, all students must meet or exceed that threshold.

Subsequent thresholds must be raised at least once every three years, with the goal that
after 12 years (by 2014), all students in the state are achieving at the proficient level on
state assessments in reading/language arts and math.

The initial goal was for all K-12 students to attain reading and math proficiency by 2014,
for aiL K-12 students to be taught by "lligb.ly qualified" teachers by the end of the 2005-

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BMO Capital Markets

2006 school year (later extended to the end of the 2006-2007 school year), and for all K12 students to gr'dduate f rom high school.
The NCLB legislation focused on four main themes to achieve these goals: 1) accountability,
2) flexibility , 3) localized control, and 4) an emphasis on doing what works based on
scientific research.
Student
benchmarks
measured by
assessment tests

Teachers
assessed as
"highly qualified"

Accountability was emphasized via assessment of students, teachers, and school

performance. The Jaw mandated that student progress and achievement be measured
(" assessed") by math and reading tests !,riven to every child in grades 3-8 every year and at
least once during high schooL beginning in the 2005-2006 school year. A science assessment
was to be added at least once in each of these grade spans (3-5, 6-8, 9-12) beginning with the
2006-2007 school year (later deferred to the 2007-2008 school year).
NCLB mandated that by the end of the 2005-2006 school year (later extended to the end of
the 2006-2007 school year), all teachers in all states must be 'highly qualified." The ntles
vary for teachers who are " new" or " not new" to the profession, depending on whether the
teacher received certification before or after July 1. 2002. While the details vary depending on
this classification, in general, to meet the " highly qualified'. requirement, the ED mandates
that teachers must have a bachelor's degree, fu ll state certification. a nd prove knowledge of
the subjects they teach, either by having an appropriate major (or credit equivalent), or
graduate degree. passing a state-developed assessment test (such as the High Objective
Uniform State Standard of Evaluation or "ROUSSE" for " not new" teachers). or receiving
some fonn of advanced certification by the state. We note that only one state- NorUl Carolina
-met tJ1e goal of having highly qualified teachers (HQTs) in its core subject areas by the end
of the 2006-2007 school year, while the US total was at 94.2%. However. t11e trend has
improved from 87% in the baseline year (2003-2004), while the most recent data (2007-2008)
showed 95% of schools had HQTs teaching core subjects.
Since FY2002. parents. citizens, educators. admin.istn1tors, and policymakers have been able
to access the results of school district assessments via the National Assessment of Educational
Progress (NAEP) or "annual report cards" that measure school perfonnance and district and
statewide progress. The perfonnance data- disaggregated according to students ' race. gender.
income levels, and other criteria - demonstrate not only student achievement, but also track
progress in closing the achievement gap between disadvantaged students and other groups of
students. In this way, parents can assess a school's progress toward A YP.

Disaggregated
data used to
assess school

performance

Sanctions may
lead to spending

Whereas in t11e past. progress was measured on an aggregate basis (i.e., the average scores of an
entire class for a school, a d.istric~ or an entire state) under NCLB's AYP, test score data are
segmented into race, gender. and otller socio-economic subgroups; schools are required to
demonstrate improving scores for all of these sub!:,>roups. Under initial NCLB ref,>ulations. all
students. including those with limited English proficiency and learning disabilities, were given
the same assessments and required to meet or achieve t11e benchmarks for these tests (the ED
has since relaxed t11e rules for non-English speaking students and learning-disabled students).
Flexibility was added by offering school choice and other services. Schools witJl student
subgroups t11at are not making AYP are classified as " in need of improvement" and face
s~mctions based on consecutive years of non-compli~mce; the entire school could be labeled
" in need of improvement" even if only one subgroup of students fails to make AYP. Tlris

A m ember of BMO

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K-12 Education

BMO Capital Markets

raises the probability that many schools could be deemed " in need of improvement." In fact.
while NCLB aims to achieve 100% student proficiency by 2014. some education e>..'J)erts
estimate that by 2014, 75%-99% of schools in the country will be " in need of improvement"
unless the definition is changed.
Funding for NCLB

In Exhibit 42, we have highlighted the various sanctions schools face if they are found not to

may create

be meeting AYP. While the initial ex-pectations of NCLB being " manna from heaven" for
third-party providers may have been a bit optimistic, we believe compliance with NCLB has
provided some opportllnities, specifically for companies that provide products and services
that enable assessment, data reporting, supplemental tutoring and continued teacher
development. As NCLB progresses and punitive measures begin to change school
management, charter schools and charter management organizations have also been areas of
opportunity, albeit to a lesser extent. Each of these services will be discussed in greater detail
later in this section.

various
opportunities for
third-party
providers

Exhibit 42. NCLB Sanctions and Impact

End of
Year: Sanctions
0
No sanctions, develop curriculum and
assessment
1
2
3

4
5

No sanctions; develop plan for

improvement
Provide option to transfer to successful
school within district
Districts must set up to 20% of total Title I
grants for combination of school choice and
supplemental education services
School restructuring and additional teacher
training
Transfer school to private management or
reopen as charter school

Comments

In 2006-07 school year, almost 120,000 of eligible

students transferred
During the 2006-07 school year, almost 530,000
students took advantage of the supplemental
services option.
Obama's FY2010 budget includes $3.5 billion to
improve teacher quality
Obama's FY2009 budget includes $236 million for
the Charter School Program . In 2008, 1.2 million
students attended 4,300 public charter schools.

. .

Note: Comments 1n this exh1b1t do not Include add1t1onal funding made available through the "Stimulus Bill".
Source: BMO Capital Markets and the US Department of Education.

Localized control enhanced. In addition to the options for parents, NCLB granted states the

ability to transfer up to 50% of their non-Title I budgets without governmental approval.

Thus, schools and districts are able to spend money on tlte areas they deem tl1e neediest.
Scientifically based research. According to NCLB, schools are required to use "scientifically

based research" strategies in the classroom and for professional development of staff. Tllis is
defined as having " reliable evidence tJ1a1 the program or practice works,' according to tJ1e ED.
Tl1e ED created the What Works Clearinghouse as a means of compiling which products meet
tlus criteria. Among the components of tllis effort was the creation of a federdlly funded
" Reading First" program to enable all students to become 'successful early readers."

A m ember of BMO

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BMO Capital Markets

Recent
performance
improvements
may show NCLB
is helping

The question is whether aU this additional oversig ht has improved academic perfonuance. The
~mswer has been fairly controversial, and we have no wish to engage in politicized debate
here. Nevertheless, historically, there has been little correlation between the amount spent on
K-12 education in the US and student perfonnance. Exhibit 43 compares per-student
expenditures in K-12 public schools with average national math and reading scores for
children in Grades 4 and 8, as reported by the NAEP's " Nation's Report Carel." Although
average per-student expenditures have increased by over JOYo f1om 1990 (in constant dollars),
average test scores have only begun to slightly improve in recent years, specifical ly in mat11
(2007 is latest data available). Even some of NCLB 's opponents acknowledge these
improvements following the law's enaction, although some attribute this improvement to
other reforms.

somewhat

Exhibit 43. K-12 Per-Student Expenditures vs. NAEP Math and

Reading Scores (1990- 2007)
$9,200

..

8,800

'g

8, 400

t;;
~

~ 8,000

- E xpenditure Per Student

0 Reading Score
Math Score

...

.. ..
0

IPre-NCLB

270

IPost-NCLB

260

..
0

250

VI

240 0~
u

tJ)

230

7,600
c:

220

c(

..

Q.

~ 7,200

210

6,800

200
1990

1992

1994

1996

1998

2000

20022003

2005

2007

Note: Per-student expenditures measured in constant 2005- 2006 dollars, using expenditure per pupil in
average daily attendance.
Source: BMO Capital Markets analysis, US Department of Education National Center for Education
Statistics and National Association for Education Progress.

We believe NCLB ' s impact on third-party providers presents a number of risks:

Unfunded mandate. Many have criticized the NCLB for its apparent Jack of federal funding,
which bas led to its derision as an " unfunded mandate." As shown in Exhibit 44. whi le the
federal government has increased its spending on K-12 education at roughly a 4.2% CAGR
since FY2001, much of that came early on as NCLB was being rolled out. Excluding stimulus
funding. NCLB-related spending by the federal government has remained relatively flat since

FY2004.

A m ember of BMO

Finan cial Group

lh

55

September 2009

K-12 Education

BMO Capital Markets

Exhibit 44. K-12 Discretionary and Recovery ("Stimulus") Spending in Federal Budget
(FY2001-FY201 OE)
(dollars in millions)
Pros ram

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY2008

FY2001Requested FY2010E
FY2010
CAGR

FY2009

Elementary/Secondary Education (K-12)

Elementaty and Secondaty Education .Act (ESEAl
Title I Grants to Local Educational Agencies
School Improvement Grants
Title I Early Childhood Grants
Early Learning Challenge Fund
High School Graduation l n~iative
Promise Neighborhoods
Charter Schools
Impact Aid
Improving Teacher Qualrty State Grants
Education Technology State Grants
21st Century Community Learning Centers
Striving Readers
Teacher Incentive Fund
Safe and Drug-Free Schools and Communities
English Language Acquisition
Reading First State Grants
Math NOW"
Math and Science Partnerships
Pell Grants for Kids'
State Assessments
Even Start
Adjunct Teachers Corps'
Advanced Placement
otherESEA"
Subtotal, ESEA

$8,762.7 $10,350.0 $11,688.7 $12,342.3 $12,739.6 $12,713. 1 $12,838. 1 $ 13,898.9 $ 14,492.4

491 .3
545.6
0.0
0.0
0.0
0.0
0.0
0.0
125.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
21 1.0
216.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1,188.2
1,243.9
1,240.7
993.3
1,229.5
1,228.5
1,228.5
1,143.5
1,265.7
2,887 .4
2,947.7
0.0
2,850.0
2,930.8
2,930.1
2,916.6
2,887.4
2,935.2
691 .8
267.5
450.0
496.0
695.9
272.3
272.3
269.9
700.5
845.6
1, 131.2
991 .1
981 .2
1,000.0
993.5
999.1
981 .2
1,0812
24.8
35.4
29.7
35.4
0.0
0.0
0.0
0.0
31 .9
0.0
0.0
0.0
0.0
0.0
99.0
0.2
97.3
97.3
644.3
666.4
674.2
515.0
696.8
672.0
568.8
577.4
513.4
446.0
664.3
683.7
681 .2
675.8
669.0
669.0
700.4
730.0
993.5
1,023.9
1,041 .6
1,029.2
1,029.2
0.0
0.0
286.0
900.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0 .0
0.0
0.0
182.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
407,6
0.0
387.0
384.5
390.0
411 .7
407.6
0.0
0.0
250.0
250.0
248.4
246.9
225.1
99.0
82.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
23.3
23.5
29.8
32.2
37.0
0.0
0.0
0.0
22.0
4,704.6
3,048.7
3,128.3
3 076.6
2,882.5
2316.2
2138.2
2944.9
2,582.9
22,012.7

23,625.2

24,309.3

24,350.3

23,333.2

23,487.4

24.417. 1

24,829.1

25,474.0

4.3%

6,339.7
1,022.9

7,528.5
1,065.9

8,874.4
1,082.3

10,068.1
1,092.6

10,589.7
1,083.9

10,583.0
1,070.1

10,783.0
1,019.9

10,947.5
1,034.4

11,505.2
1,066.4

11 ,505.2
1,066.4

6.8%
0.5%

Subtotal, IDEA

7,362.6

8,594.4

9,956.7

11,160.7

11,673.6

11,653.0

11 ,802.9

11,981 .9

12,571 .6

12,571.6

6. 1%

24,745.1

30,607. 1

33,581.9

35,470.0

36,023.9

34,986.2

35,290.3

36,399.0

37,400.6

38,045.5

4.9%

0.0
0.0
1, 100.0
1,471.8

0.0
0.0
1,180.0
291 .3

0.0
0.0
1, 192.2
339.1

0.0
0.0
1,195.0
277.5

0.0
0.0
1,194.3
312.1

0.0
0.0
1,182.4
295.3

0.0
0 .0
1, 181.6
296.1

33.7
0.0
1, 160.9
340.3

50.0
0.0
1, 160.9
327.3

50.0
100.0
1,160.9
340.4

N.A
NA
0.6%
-15.0"-'>

$27,316.9

$32,078.4

$35,113.3

$36,942.5 $37,530.3

$36,463.8

$36,767.9 $37,933.9 $38,938.9

$39,696.8

4.2%

Teacher Quality Partnership

State Fiscal Stabilization Fund
career and Technical Education State Grants
other K-12
Elementary/Secondary Education

4.5%
N.A
N.A
N.A
N.A
N.A
N.A
2.7%
N.A
- 15.4%
3.3%
N.A
N.A
-8.7%
5.6%
N.A
NA
N.A
NA
NA
NA
NA
NA
-6.9%

17,382.5

S(;!!!cial Education ! IDEAl

Grants to States (Part B)
other IDEA

Subtotal, ESEA and IDEA

$12,992.4
1,545.6
500.0
300.0
50.0
10.0
268.0
1,265.7
2,947.7
100.0
1, 131.2
370.4
517.3
283.6
730.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2,462.0

Source: BMO Capital Markets and Department of Education. Note: (*) Indicates line items not present in the FY201 0 Request. FY2008 and
FY2009 have been restated to reflect the historical budget as presented in FY201 0 request.

Recovery focuses
on tech, school
improvement, and
teacher
development

However, the stimulus package (Recovery Act) should provide significant relief to the states,
if only for one year, as they face severe recession-related budget crises this fall. Tn total, the
stimulus bill provides about $14 billion in new money for states to specifically support or
replace ESEA. When including the state fiscal stabilization fund, and other elementary and
secondary expenditures, the total approaches $80 billion (see Exhibit 44 above). We note that
some of the largest line items in the Recovery Act include ftmding for school improvement
($3 billion) and education teclmolob'Y grants ($650 million) that reflect the focus of the
Obama administration on education infrastructure and online capability. AdditionaUy. the
teacher incentive fund has increased by nearly seven times above FY2009 levels with a
proposed $5 17 million in tJ1e federal budget and $200 million in recovery funds, which
promises to boost professional development prognuus, in our view.
Standards are too strict. ln our view, as the compliance requirements get more difficult to

implement, more schools risk missing AYP. For example, at the current rate, we believe it
may be impossible for schools to demonstrate that evel)' child is taught by " highly qualified"
teachers and therefore, unless t11ere are large-scale changes to NCLB (or the mles are
relaxed), it is likely t11at every state will have a large number of schools "in need of
improvement." We believe the data supports this view, as the percent of Title 1 eligible
schools in the US that did not meet AYP standards increased to 35.6% for the 2007-2008

A m ember of BMO

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K-12 Education

BMO Capital Markets

school year. from 28.8% in the 2006-2007 school year. Unless changes are made, tJlis could
begin to trigger a number of punitive measures.
Lack of national standards. Since states have a great deal of flexibility in how they interpret
the laws. it is difficult for national third-party vendors to market and sell a one-size-fits-all
product. In addition - and somewhat ironically - where states initially complained about the
rigidity of the mles, they have now discovered ti1at in fact, there are loopholes in setting
everything from the trajectory of proficiency to the definition of a sub-group and even the
confidence intervals of tile measurable statistics. However, we beLieve tJtis is driving tile push
among state legislatures and the ED to develop internationally benclunarked cotrunon
standards. an undertaking agreed to by 46 states and three US territories. In addition.
Education Secretary Dunc~m has committed $350 milLion of ti1e Race to the Top Fund toward
the creation of assessment tests based on the internationally benchmarked standards.
State rebellions. As the states are given a gTeat deal of control over setting standards and

overseeing compliance, reactions have varied: some states (such as Massachusetts) have
embraced the NCLB process, wllile others (such as Connecticut) sued the fedeml government
to oppose it. However. as more and more schools trigger punitive actions for failure to comply
with NCLB, some experts warn that pushback could lead to rebellion, leading to wholesale
changes to tile law.
Controversy. The implementation of NCLB has also had its share of scandals. One of the

more high profile ones carne in May 2007, when a Senate report accused federal official,
Edward J. Kame' enui, of benefiting financially from a commercial reading program he wrote
and actively promoted willie serving as a lligh-level adviser to states during the
in1plementation of the Reading First program. We beLieve it was no coincidence that both the
House and Senate then proposed cutting funding for the Reading First program in their
FY2008 budgets. In fact, Reading First funds were eliminated altogether in t11e House and
Senate FY2009 preliminary budgets, and the program has been cut entirely fmm Obama 's
FY20 10 request
Additionally, the issue of school administmtors altering test scores in order to avoid possible
sanctions under the law continues to be a problem. Of the more recent cases, in June 2009 the
principal and assistant principal of an elementary school in Georgia resigned- and were later
arrested- in connection with a state investigation that found state math test scores had been
altered in four state schools in order to help them achieve AYP.
NCLB still up for
reauthorizationthough some new
"guidance" has
been given

The current NCLB expired in September 2007, although the original law included lan!,ruage
that maintains the authorization beyond tllis period until it is officially reauthorized.
Considering the politicized climate surrounding the NCLB since its implementation by a
Republican administration, we believe many expected a Democrat administration to either
scrap the program aHogeti1er, or change it dmmaticalJy - especially after its failure to be
reauti1orized in fall 2008. However, an analysis of the president's budget shows tllat several of
the NCLB-related prO!,'lCUllS will continue, willie some new progralllS have been added
(though we suspect several prognuns have simply changed in name). Additionally, we believe
the stimulus has had the effect of quieting those critical of the prognlm for being "unfimded."
We believe this reflects tl1e general posturing of the department of education under the new
Secretary of Education, Arne Duncan, who has expressed support for tite educational

A m ember of BMO

Financial Group

57

September 2009

K-12 Education

BMO Capital Markets

attaimnent and perfonnance assessment provisions outlined under NCLB. but has also voiced
concern t11at the program was too heavy handed in punishing underperfonning schools when
it should be supporting them. As such, we do not believe the current administration intends to
make drastic changes to tl1e law for the time being. and expect any plans to do so would have
been made public by now. However, on July 7. 2009, the secretary issued guidance" to tl1e
states with regard to NCLB. While by no mean an overhaul of the program, the draft pennits
states a greater amount of flexibility in how Title I stimulus money is spent. as well as relaxes
some of the rules issued in October 2008. The guidance includes the following:

Potential items for

reauthorized
NCLB

A m ember of BMO

NCLB mles require schools designated as " in need of improvement" spend 10% of Title
1 funds on professional development. The new t,'Uidance allows schools to obtain waivers
tl1at would relax tllls provision for Title I money coming from the stimulus bill.

The mles also require improvement schools to set aside 20% of Title I funding for
supplementary education services (SES). The guidance allows waivers for tlus with
regard to stimulus funds.

Under current rules, schools and districts in need of improvement cannot be providers of
tutoring services (SES) to students. This guidance allows schools to obtain waivers to
offer these services.

NCLB requires schools in need of improvement to give parents at least 14 days notice of
public transfer options. Waivers will be av~lllable for tllis mle as some schools can not
meet this deadline owing to testing schedules ~md vendor contracts.

While we have yet to see any new NCLB or ESEA legislation proposed, we would not be
surprised to see the new education secretary tackle tllis issue at some point during the
upcoming school year. Several recommendations to the program were hashed out in 2008 by
the House Education and Labor Cmmuittee and the Senate Health, Education, Labor. and
Pensions Comnlittee, which we believe are still likely to be on the table should Congress take
up tl1e issue of reaut11orization in tl1e near future. Among those potential changes were the
following (according to Education Week):

A movement toward national standards to elinlinate some of the confusion that has
occurred as each state sets their own standards (there seems to be some consensus support
for tills, although the "devil is in the details").

Giving states more flexibility to design t11eir own accountability system to track
improvement, including using "growth models t11at allow states to receive credit for
improving individual students' acadenlic perfonnance over time (the current law
compares test scores of groups of students against those of students in the same grade
during tlle previous year, to gauge whether tl1ey are making progress toward bringing all
students to proficiency).

Improve the quality of the assessment systems in place, such as including multiple
measures.

Provide states witll a better menu of corrective actions and allow targeted interventions to
those schools and districts witl1 greatest need.

Create incentives to bring teachers into high-need schools

better definition to measure teacher quality.

Financial Group

58

~Uld

districts and provide a

September

2009

K-12 Education

BMO Capital Markets

Provide more deference to the assessment detenninations of individualized education

plans (IEP) for special-education students.

Create more flexibility for testing new immigrant students.

Increase NCLB ftmding.

Curriculum and Learning

Using Eduventures' definitions, we have identified four categories within the curriculum and
learning segment ofK-12 education:
l.

Basal content,

2.

Supplemental content,

3.

Reference content

4.

Assessment

lt was difficult for us to peg ~m accurate current market size. as Eduventures no longer
provides these forecasts and its successor, Outsell Inc., compiles a different categorization.
Nevertheless, under these definitions, it is estimated that roughly $11.3 billion in revenues
will be generated from the K-12 curriculum and learning market in 2009. having shmnk from
2008 levels. While we project the market will continue to decline to roughly $10.9 billion in
2010, that decline should be " less worse." Thereaf1er, we forecast 4.5% CAGR growth,
reaching $13.3 billion in 2014. The strongest growth is expected to be in the assessment
segment, the smallest of the four categories, driven by additional testing requirements owing
to the demand for greater accountability (see Exhibit 45).

Curriculum and
learning:
expected 4.5%
CA GR through

2014

Exhibit 45. K-12 Curriculum and Learning Revenues (2002-2014E)

$15

Assessment
Reference Content
Supplemental Content
Basal Content

~ 12
.Q

"'~

c:

a;

0::

2002

2003

2004

2005

2006

2007

2008

2009E 201 OE 2011 E 2012E 2013E 2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.

Moving to digital
from tradit ional
textbook

A member of BMO

Most of the companies serving t11e curriculum and learning sector fall within the broader
publishing arena. The publishing market has been shifting to digital content for some time.
However, the move to educational digital content suffered a blow in April 2007. when an ED
study fmmd no meanin1:,rful statistical difference between the standardized-test scores of
students who used certain software-based reading and math programs in their classrooms and
those who used other methods. Nevertheless, we do not believe this will diminish the trend
toward more digital content and away from traditional textbooks, especially considering that
some state officials view digital curriculum as a cost-effective alternative in light of the
recession. Tn June 2009, for example, a bill passed in Texas tJ1at would allow more funding of
digital te>.1books, and California officials are debating similar measures.
Financia l Group

59

September 2009

K-12 Education

BMO Capital Markets

Unfortunately, t11e print publishing sector continues to shrink. According to The Association
of American Publishers (AAP), the K-12 (elementary-high school) book publishing segment
generated roughly $6.1 billion (about 25%) of the $24.3 billion in US publishing revenues in
2008. Tllis fel14.4% from 2007. "an improvement" from the 5.8% decline in 2006. As of June
2009, revenues had fallen another 24% year-over-year.

Print publishing
continues to
shrink

Wllile we could devote an entire report to an analysis of the publishing sector, it is beyond the
scope of this report. A brief sulUlllary follows.
The overall K-12 print publishing market is divided into two segments: basal and
supplemental. Historically, basal publishing has accounted for between 75% and 80% of the
total K-12 publishing market.
Basal content. Basal content consists of core curricular materials and is typified by the

traditional textbook but has been moving toward digital learning. According to Eduventures.
basal spending represents roughly 20% of total annual spending by K-12 schools nationwide.
Te>-.1:book publishers compete for the lucrative, state-allocated budgets, wllich typically have
vezy lengtl1y sales cycles (usuaJiy a six-year cycle) but can lead to multi-nlillion-dollar
opportunities in high-profile states, such as California, Florida, and Texas. Three companies
dominate the K-12 basal publishing market: Houghton Mifflin Harcourt (Houghton Mifflin
purchased Harcourt from Reed Elsevier in December 2007), McGraw-Hill (MHP), ~md
Pearson Learning (PSO). These three companies capture more than 85% of the total US K-12
publishing market. according to Eduventures.
The basal content market has tmdergone significant consolidation in recent years as larger
media and publishing companies acquire their way into the market. For example, Pearson
Education, the international media and education company, has made a number of
acquisitions in recent years to strengthen its K-12 publishing division. In addition, the move
toward digital content has favored smaller " pure plays" such as Apex Learning, although the
large publishing houses widely offer digital accessories such as CD-ROMs and websites to
supplement their core printed products. Nevertheless. owing to a number of issues- including
educator preferences, student access to teclmolo!,>y, and state and local te>-.1book adoption
practices- the K-12 digital content market has underperfonned most expectations.
New federal ~md state standards in reading, mathematics, and science help drive strong
demand for basal content earlier this decade. Otherwise, demand follows such tllings as
enrollment trends, new textbook adoption. although business tends to be a bit more cyclical as
it relies on state and local education budgets. In fact, during the last cycle, K-12 basal content
revenues did not trough until 2004 - nearly three years after tl1e end of the recession.
Basal content:
declining through
2010; expected
5%CAGR
thereafter through
2014

A m ember of BMO

Given the current recessionary enviromnent, the basal content market is shrinking - a trend
we expect to continue through at least 2010. before rebounding along with the economy
thereafter. Based on Eduventures prior estimates, we estimate the K-12 basal content market
generated roughly $4.8 billion in revenues in 2008. According to McGraw Hill (MHP), the
elementary-high school publishing market is expected to decline another 10%-15% in 2009.
Using these estimates as a base, we forecast basal content revenues will decline to roughly $4
billion in 2010 before increasing at a 5% CAGR to approximately $4.8 billion in 2014 (see
Exhibit 46).

Financial Group

60

September 2009

K-12 Education

BMO Capital Markets

Exhibit 46. K-12 Basal Content Revenues (2000-2014E)

$5
iii"
c

.2

..
....
a:

c::::::J Basal Content

r-

Ill

~
>

r-

r-

-----!-+'~--~v

Re ven ~

r-

""'
~"

- - -- ---

1 /

.....-% y/ychange

($ bil.

L.a.

"' 1\

~ -- - -

-- -

-v

...,..

- --

10%

5%

- -- - - ..

--

--

- 0%

-5%

2003

2004

2005

2006

2007

2008

Cl

.<::
u

:>.

:;,
;fl

-10%

-+- 2002

..
..

-15%

2009E 2010E 2011 E 2012E 2013E 2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.

English lan guag e

learners (ELL)
should help spur
growth

One aspect that could help tllis sector is the English Language Learners (ELL) market (i.e..
students who come from homes where English is not the native language). Unfortunately,
there is limited ti mely data available on this market. In the 2005-2006 school year (latest data
available). there were nearly 5.1 million K-12 students classified as ELL students,
representing 9% of the total K- 12 population. The ELL student cohort had been growing
faster Hum tl1e overall K-12 market: ELL student cohort growth was 5.4% CAGR from the
1991-1992 to 2005-2006 school years versus 0.7% for overall K-12 population (see Exhibit
47). We note, however, tl1at the number of ELL students in K-12 actually shmnk slightly in
the 2005-2006 school year.

Exhibit 47. English Language Learners as Percentage of Total K12

Enrollment (Faii1991-Fall 2005)
6

~~~~!~!!!~Ell

:::: 5

~::>

!!?

Enrollment

-As%oiK-12Enrollment

10%
9%
8%
7%
6%
5%
4%
3%

----::::--&

Iii 2
...J

-'
w

2%

1%
0%

0
1991

1992

1993

1994

1995

1996

199 7

1998

1999

2000

2001

2002

2003

2004

""

Ill
<(

2005

Source: US Department of Education National Center for Education Statistics and National Clearinghouse
for English Language Acquisition and Language Instruction Educational Programs.

An NCLB requirement for the rapid transition of ELL students to mainstream classrooms
should help drive future growth. According to CourseCrafters, some projections show tllis
percentage could increase to 40% by the 2030 school year, although the initial impact bas
been much smaller to date. It is also expected that some Title I stimulus ftmds could be used
for ELL purposes. While ELL student growth will likely impact otller verticals within K-12
(e.g., assessment), we believe it will have the greatest benefi t in the basal content segment.
Supplemental content. Tills market consists of instructional workbooks, videos, and digital
video products, e-learning, online, and other computer-based systems t11at augment traditional
in-school learning. In our view, many e-leaming companies t11at emerged in t11e late 1990s
failed because they were designed to replace the teacher. Now, these technologies are finding
a niche driven by the NCLB provision that schools provide supplemental materials to
tmderperfomling students to help narrow the acllievement gap.

A m ember of BMO

Fi nancia l Group

61

September 2009

K-12 Education

BMO Capital Markets

Supplemental
content: declining
through 2010;
expected6%
CAGR thereafter

Based on Eduventures' prior estimates, we estimate t11e K-12 supplemental content market
generated roughly $4.4 billion in revenues in 2008. While the recession is also impacting tllis
market, in our view, we believe some stimulus funding geared to Title 1 and IDEA could help
offset some of tllis decline. As such, we do not believe tl1e decline will be as steep as that seen
in the basal content market. We forecast supplemental content revenues will decline to
roughly $4 billion in 2010 before increasing at a 6% CAGR to approximately $5.1 billion in
2014 (see Exhibit 48).

through 2014

Exhibit 48. K-12 Supplemental Content Revenues (2002-2014E)

$6

c:::::::JSuppiem ental Cot

n ent Revenues ($bil)

_.

rl\r-

Iii' 5
c:

~ 4
~
Ill

..
;

>
0::

--

--

-- - - -

r-

r-

---

--

---

2
1

--

--

-+-o/co yIy c h ange

---~V
1\ ....v j
-

10%
;-

,_

8%

6%
4%

---

--

---

&

2%

c:
~

0%

:;..

:;.
-2% <!!
-4%
-6%

-8%
2002

2003

2004

2005

2006

2007

2008

2009E 2010E 2011E 2012E 2013E 2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.

Market has given

foothold to K-12

Wllile tl1e larger publishers such as Houghton Mifflin Harcourt Learning Technology
(formerly Riverdeep), Pearson (PSO). Plato Learning (TUTR), Renaissance Learning (RLRN)
and Scholastic (SCHL) have a strong foothold in this area, a good portion of the strength in
supplemental content has been digital, much of wluch is provided by smaller, stand-alone
companies, such as Autoskil l, Lexia Learning, School Specialty (SCHL) and Scientific
Learning (SClL). According to Eduventures, digital content represents less than 20% of the
total supplemental content market, altl10ugh it is expected to increase beyond 25% as these
products are increasingly being utilized to improve efficiency.

e-learning

We believe the supplemental education market has finally given K-12 e-leaming solid footing
fTom which to grow. Those companies with superior educational pedagogy and assessment
features will likely outpace those with tecJmological advantages, as schools choose companies
that can help tltem improve acadenlic performance wllile managing costs, which in our view
favors tlle electronic content providers.
Reference content. Finns in tllis segment provide non-instructional reference material such

as databases, encyclopedias, dictionaries, and atlases to K-12 schools and libraries. Witl1
emphasis on e-leaming solutions, digital products in the reference space command
approximately two-thirds of the market share, according to Eduventures. Educators are
increasingly seeking reference resources aligned witl1 the standards and classroom
instructional practices mandated by federal and state governments. While reference products
have traditionally been relegated to the school library, they are increasingly targeted to
specific age groups, topics, and standards for use through electronic access.
As tl1e resource most distant from the classroom. reference materials are typically the most
susceptible to budget cuts. We believe the companies that will be successful in tllis complex
and competitive segment are those that can customize resources toward their target audience.
Products are continuing to become increasingly age-appropriate, topic-based, and standardaligned.
A m ember of BMO

Financia l Group

62

September

2009

K-12 Education

BMO Capital Markets

T he ty pical reference publisher is generally a subdivision of a larger parent organization.

Companies in this space include EBSCO. Gale Cengage Learning and ProQuest, and
traditional encyclopedia providers, such as Encyclopedia Britannica and World Book. We
believe these companies face stiff competition from free reference material fmmd online.
Reference
content: declining
through 2010;
expected 3.8%
CAGR thereafter
through 2014

Based on Eduventures' prior estimates, we estimate the K- L2 reference publishing market

generated roughly $1.3 billion in revenues in 2008. We forecast revenues will decline to
roughly $1.1 billion in 2010 before increasing at a 3.8% CAGR to approximately $1.3 billion
through 2014 (see Exhibit 49).

Exhibit 49. K-12 Reference Content Revenues (2002-2014E)

1)
c::::::::J Reference c ontentRevenues ($ bL

$1 .5

.. ..

Iii
c:

1.0

..
....
a:
Ill

~f-., /
- - --- - -- _... --;-

r.;:

:::>

c:

>

;-

- --- - -- - --- \

-+-"AYly change

--

--

r-

--

\ jw v

0.5

-V

-::;;::

8%

;-

- -- --

--

;-

---

li

6%
4%

..

2%

~
1i

0%

>2% :;,
4o/o ';fl.
6%

0.0

-8%

2002

2003

2004

2005

2006

2007

2008

2009E 2010E 2011E 2012E 2013E 2014E

Note: Shaded area represents recessionary period . Source: BMO Capital Markets estimates and
Eduventures.

A member of BMO

Fina ncial Gro up

63

September

2009

K-12 Education

BMO Capital Markets

A list of recent transactions in the educational publishing space can be found in Exlribit 50.

Exhibit 50. Educational Publishing Recent Transactions

(S in millions)
Anne.
Oate

Jun-09
Apr.Q9
Apr-09
Mar.Q9
Mar-09
Mar-09
Jan-09
Jan-09
Jan-09
Oec-08
Dee-08
Oet-08
Oet-08
Aug-08
Aug-08
Jul-08
Jun-08
Jun-08
Jun-08
Ap<-08
Fel>-08
Fet>-08
Dee-07
Nov-07
Aug-07
Jul-07
Jul-07
Jun-07
Jun-07
May-07
May-07
May-07
May-07
Mar-07
Met-07
Jan-07
Jan-07
Jan-07
Dee-06
Nov-06
Nov-06
Oet-06
Oet-06
Oet-06
Sep-06
Sep-06
Aug-06
Jul-06
JiJn-06
Jun-06
Jun-06
May-06
May-06
May-06
Ap<-06
Ap<-06
Ap<-06
Mar-06
Mar-06
Mar-06
Mar-()6
Fel>-06
Fet>-06
Feb-06
Jan-06
Oet-05
Oet-05
Sep-05
Aug-05
Aug-05
Aug-05
Aug-05
Aug-05
Aug-05
Jul-05
Jul-05
Jun-05
Jun-05
Jun-05
May-05
Ap<-05
Mar-05
Mar-05
Mar-05
Feb-05
Fet>-05
Feb-05
Jan-05
Jan-05
Jan-05

Target

Vo)'9ger Learnilg C<lmpany

OpCionetics
Proressiooal Development Software
WordNare Pubishing
Berttam Group
DVPMedia
Salem PtessConcept Media
Badger P\Jblishlng
HighBeam Research
Kane!Miller Book P\Jbisher>
The Sludy Gcoup
Medical Education Teehnologies

lntervetbum Group
Scholastic . Oirect-to-Hane Business
Pro Lilgus
P\Jbllcalions International (Chlklren's P\Jblishing Division)
Beijing Yanyuan Rapido Education
Princeton Review oi Ofange County
Pri'lceton Meda Associates
Assessment Technologies lnsliule
Test Services
Houg,ton Mimin College DMsion
lnterwrite leaming
Powe<-Giide
Harcourt U.S. Schools Education Business
Th.omson Prometrlc
Mgeles Group
elnstrudloo
.College (including Datomarl<)
TSL EdUcation
Thomson Learning and Nefsoo Canada
Harcoort AssMYnel"t. Harcourt Education
waters KJuwer Education
Leamilg Horizons
CarOOium Learning
study Island
Von Hoffmann
ProOuesl lnformauon and Learning
Houg,ton Millin
Apex Learning (Investment)
PMBR
Aspect Education Limited
Teaching Company
FSCreations
SchooiNel (ln;oestment)
Chenelere Education
Excethgence Learning
English language Learning &.Instruction System
Spell Read
Education lnsig,t
Questar Educational Systems
Sk115Tutor.oom
Tribeca learning
Nallor101 Evoluaiion ltems
Effective E<llcational Technologies
Granada leaming
Herman Method (Lexia leamlng Systems)
Philip .Man P\Jbllshers
Assessment Training lnst~ute
Schawl< (EdUcational P\Jblishing t'lv!sion)
Ha~on-Brown

SkiiCheek
lntetliTools
A'arissor
WebCT
Aced P\Jblishing
Larson Leaming
Oela Education
TechOnlne
Ugh! Reading
Chelsea House Publishers
Kidum Group
Turnleaf Solulioos
.Mlencan Guidance SeriAce
A:hievement Data
AlphaSman
F+W Publications
eMind
Kurzweil Edlcational Systems
EMC
Educational Tethnologies
Exploreleamin_g
Generation21 Learning Systems
Gateway learning
Teecher2Teacher
Voyager Expanded Leam1ng
Standard Deviants
Rainbow Bridge 1'\Jblishilg
Assessment and Evaluation Concepts

Acgulror

cambium learning
opCionsXpress Holdings
Elsevier
Jooes end BartleH Publishers
SmlbNews
Jones and Bartlett Pl!bllshers
EBSCO P\Jblishing
Cengage learnilg
Pandcn Books
Cengage Learnilg
EdUcational Development
Kaplan
Baird capital Partners
AAC Global, SanomaWSOY
.S.ndvik
Kaplan
Le<~ming Curve Brands
Hartcourt Companies

Prilcelon R~ew
HMP Communications
Providence Equity Partners
Princeton Re\fiew
Cengage Leomilg
elnstruction
K12
HM Riverdeep
EdUeetional Tesmg Service
Excelligence l eaming
Leeds Equly Panners
Pearson
Chartemouse Group
Apax Partners and OMERS Capital Partners
Pea~on

Bridgepoinl capital
Evolution capital Partners
Veroois SJhler stevenson
Providence Equity PaMers
R.R. Connelley
cambridge Information Group
HM Riverdeep
MKCapital
Kaplan
Kaplan
Brentwood Associates
elnstrucllon
car1y1e Group. Hamilton Lane, NYC lnveslment Fund
Transcontinental
Thoma Cressey Equity Partners
Pearson
Kaplan
Cookie Jar
Touchstooe .6Wied Science Associates
Hou!t\ton Mifflin
Kaplan
Pearson
Pearson
Veroois" SUhler Stevensm
Cambium Learning
Hachette-t.Me
EdUcational Testing Service
C/'oPS Group
National Geographic (School 1'\Jblishlng Oi\Asion)
First Advantage
Cambium Learning
Pearson
Ellaekboard
Andrews MeMeet
Houglllon Mimin
School ~ecioHy
CMPMedla
CMPMedla
Haights Cross
Kaplan
MeGcawHll
Pearson
Touchstooe ,Awlied Science A5sociates
Renaissance Learning
ABRYPartners
Kaplan
Cambium Le-arning
WoeKsGcoup
Trnes Publishing
ProQuest
Management Buyout
EdUcate
ARC Capital Development
ProQuest
Goldhl Home Media
Cookie Jar Education
Touchstone Appled Science Associates

Transaction
Value

$130.6
$32.9
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
$163.0
$3.5
$31.1
NA
NA
539.4
$750.0
NA
$4.1
$4,000.0
$435,0
$10.0
NA
$518.0
NA
$7,750.0
$950.0
$1.031.7
NA
$325.0
NA
$412.5
S222.3
$3.400.0
$6.0
NA
NA
NA

NA
$19.0
NA
$125.0
NA
NA
NA
$20.0
$18.5
555.5
NA
NA
$93.8
NA
NA
NA
$29.0
NA
NA
NA
$42.0
$178.0
NA
NA
$272.0
$5.5
$27.0
NA
NA
NA

$270.0
$1.7
$53.1
$500.0
NA
NA
$41,0
$14.3
NA
NA
$8.0
NA
$360.0
NA
NA
$0.1

Transaction Value I LTM

Revenue
EBITOA
1.3x

NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
1.5x
4.0x
2.4X
NA
NA
2.6x
3.3x
NA
NA
3.6x
1.4 X

NA
NA
9.4x
NA
NA
1.8x
2.4x
NA
3.3x
NA
NA
NA
2.7 x
NA
NA
NA
NA
NA
NA
NA
0.9x
NA
NA
NA
NA
NA
2.1 X
NA
NA
NA
NA
NA
NA
0.5x
NA
NA
NA
0.6x
3.8x
NA
NA
2.8X
1.8x
2.7~

NA
NA
NA
3.6x
1.0x
1.4 X
2.0x
NA
NA
1.2 X
NA
NA
NA
NA
NA
3.9~

NA
NA
NA

NM
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
17.5 X
NA
NA
NA
23.0 X
NA
NA
NA
12.5 X
NA
NA
NA
NA

NA
12.5 X
NA
NA
NA
NA
NA
NA
NA
14.5 X
NA
NA
NA
NA
NA
12.6 X
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
36.2 X
NA
NA
13.0x
6.9 X
10.4 X
NA
NA
NA
9.h
NA
8.7x
NA
NA
NA

NA
NA
NA
NA
NA
NA
9.5x
NA
NA
NA

NA - Not Available. Source: BMO Capital Markets and company reports.

A m ember ofBMO

Financial Group

64

September

2009

K-12 Education

BMO Capital Markets

Assessment

Assessment. Prior to NCLB. states were required to test ("assess") students in math and

market d riven by

reading at least three times from grades 3-8 and once in high school. These were summative
exams that indicated where students ranked against each other. NCLB changed the focus of
these assessment exams from "skills-based" to "standards-based" testing to detenuine if
students were being taught up to state-set standards and if schools were meeting adequate
yearly progress. NCLB also increased tJ1e frequency of testing, requiring tl1at by the end of tJ1e
2006 school year. states implement annual matJ1 and reading tests for elementary school
students (grades 3-8) and at least one test in high school (grades 10-12). Furthennore, by yearend 2007-2008, states were required to implement mandatory science assessments to be
administered at least once during grades 3-5, grades 6-9, and grades 10-12.

NCLB compliance
initiatives

Potential growth
driver s

This amounts to what we believe is unprecedented administration of annual testing. In May

2003 (latest available data), the Govenunent Accotmting Office (GAO) estimated that testing
would cost states $3.9 billion from 2002 through 2008 based on the (then) mix of multiple
choice and open-ended question exams that were offered. The munber of annually required
tests was expected to triple by the end of the decade, by some estimates.
While the recession has likely dampened that outlook a bi~ we believe the assessment market
still has some very strong longer-tenn growth drivers. For example. the additional testing
requirements as well as potential changes to the ESEA that could create alternative
assessment tests for certain subgroups (non-English speakers and learning disabled students,
for example) should continue to benefit the K-12 assessment market. In addition, an increase
in the number of subjects being taught under the Advanced Placement (AP) program, has also
provided anotJ1er growth driver: according to t11e College Board, roughly 25% of high school
students that gTaduated in 2007 (latest data avai lable) had taken at least one AP exam in their
high school career, up from 18.1% of those that graduated in 2002.
Surprisingly, the an1ount spent by schools on testing is still relatively low - even after the
NCLB implementation. According to Education Sector. an education think tank, in 2007.
states only spent about 0.25% of combined federal, state, and local public school revenues on
their statewide testing programs, or about $20 of the more than $8,000 spent per student. As
such, we believe the assessment sector could be one of the fastest growing within the K-12
landscape. as stimulus funding will help catch up with these federal mandates.

Assessment:
declining through
2010; expected
3.8% CAGR

thereafter through
2014

Based on Eduventures' prior estimates, we estimate the K-12 assessment market generdted
roughly $1.8 billion in revenues in 2008. We forecast revenues will decline slightly tlrrough
2010 before increasing at a 3.8% CAGR to approximately $2.1 billion through 2014 (see
Exhibit 51).

Exhibit 51 . K-12 Assessment Revenues (2002-2014E)

-+-% yty change

$2.5

VI

41

9%

1.5

!!

6%

Ill
41
:::J

a:

12%

2.0

c:

c:
41
>
41

15%

1.0

3%

0.5

0%

0.0

-3%

.."'
c:

.c:
u

<It

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.

A m ember of BMO

Financia l Group

65

September

2009

K-1 2 Education

BMO Capital Markets

A wide variety of companies provide assessment services. These run the gamut from major
test publishers (e.g., CTB/McGraw-Hill and Pearson Assessment [fonuerly Harcourt
Assessment]), test preparation companies (e.g., Princeton Review [REVUJ, and non-profit
organizations (Educational Testing Service and ACT Inc.). A list of some of these companies
can be found in Exhibit 52.

Exhibit 52. Leading Assessment Providers

Company (Parent )
ACT, Inc.

Ticker

College Board
CompassLeaming, Inc. (WRC Media, Inc.)
CTBIMcGraw-Hill and The Grow Network
(McGraw-Hill Companies)
Data Recognition Corporation
Educational Media and Publising G roup,
LTD (Houghton Mifflin Harcourt)
Educational Testing Service

MHP

Learning Express LLC

Learning.com
Measured Progress, Inc.
Northwest Evaluation Association
Pearson Educational Measurement,
Pearson Assessment, Pearson NCS, and
Pearson School Systems (Pearson pic)
PLATO Learning, Inc.

Questar Assessment
Renaissance Learning, Inc.
Scantron Corporation (subsidiary of
Harland Clarke Holdings Corp., wholly
owned by M&F Worldwide Corp.)
Study Island (Archipelago Learning)
The Princeton Review

PSO

Description
Non-profit organization that provides assessment services in the broad areas of education and workforce
development.
Offers student assessment and standardized testing, and administers the SAT, the PSATIN MSQT, and the
Advanced Placement Program (AP).
Products assess student performance, diagnose strengths and weaknesses, and prescribe specific instruction
targeting areas of non-mastery at the classroom, school, or district level.
Offers standardized and custom achievement and aptitude tests as well as assessment reporting for states and
large districts, including customized reports for teachers, parents, admimstrators, and students.
Provides customized services for large-scale statewide educational assessment programs.
Creates educational, cognitive, and developmental assessment products and offers platforms to help school
districts, administrators, teachers, and parents track student performance on state standards.
Develops both off-the-shelf a nd customized tests for district, state, and national usage. Also partners wrth the
College Board to develop the SAT. Announced intent to purchase Prometric from Thomson Corp. in July 2007.
Provides customized test-preparation materials for students and adults to improve their performance on
academic, licensing, and certification exams.
Provides web based curriculum and assessment products through partnerships with schools.
Designs and implements customized large-scale and local assessments for both general and special education,
and offers resources to guide educators through assessment issues.
Develops Measures of Academic Progress (MAP), a computeriZed adaplive assessment program that provides
educators with information they can use to tailor teaching to the individual student for academic achievement.
Provides customized and off-the-shelf online and print assessments, data management and collection solutions,
and reporting solutions for districts and states.

TUTR

Markets web-based solutions that assist in student placement, progress monitonng, a nd accountability through
diagnostic and prescriptive tests, simulated high-stakes tests, lesson-progress tests, and standards-based and
cumulative tests.
QUSA.OB Implements large-scale assessment programs through its research, psychometric, and test-development
services.
Develops assessment systems for read1ng, math, language acquisition, writing, and standards mastery to help
RLRN
districts satisfy state standards and achieve AYP objectives.
MFW
Offers a web-based assessment platform with a content-neutral structure and multiple delivery capabilities. Used
to manage tests, to develop new ones, to administer them online or on paper, and to report results.

REVU

Vantage Learning
WestEd
Wireless Generatioin

Markets online, state standards-based learning programs

Delivers online and pr1nt formative-assessment programs 1n math, ELLIESL, and reading, and will introduce
science and social studies assessments in the fall of 2006.
Provides scheduling, delivery, test content, scoring, and reporting tools for large-scale online assessments in
subjects such as math, reading, and writing.
Offers services in development, implementation, and evaluation of assessments on the school, district, state, or
national level In subjects such as literacy, math, and science.
Provider of K12 educational software a nd assessment products to schools and school systems

Source: BMO Capital Markets and Eduventures.

Assessment is
slowly becom ing
more computer based

Furthenuore, there is a push among state legislatures and the ED to develop internationally
benclunarked common standards. In June 2009. such an tmdertaking was agreed to by 46
states and three US territories led by the National Governors AssociatiorL In addition,

Efforts to keep
costs low

A member of B MO

We believe teclmology could be a dismptive force in this arena as the data capture and
reporting requirements under NCLB favor those companies that can leverage test
development. production, and administration with data-integration capabilities. Some
companies have already begun developing, partnering willt, or acquiring finns t11at have the
data-integration capabilities, and we expect tllis trend to continue. In addition, a move to make
online testing more available (as opposed to written testing) could also drive growth for those
companies with a technology focus. While there are still several obstacles to moving to purely
computer-based testing, the 2009 NAEP science assessment will use technology based
assessment tasks for a subsample of students, while the 2011 NAEP w riting assessment for
eighth graders is scheduled to be entirely computer based.

Fina ncia l Group

66

September

2009

K-12 Education

BMO Capital Markets

Education Secretary Duncan has committed $350 million of the Race to the Top Fund toward
the creation of assessment tests based on these intemationally benclunarked standards. Efforts
such as these are expected to reduce testing expenses as smaller states leverage their scale.
However, tllis could reduce the potential market size for assessment comparlies.
In addition. tllis sector has faced challenges from high-profile nlistakes by testing

Risks

~md

assessment providers. One of higher profile incidents involved t11e College Board' s March
2006 admission that it had reported erroneous scores for more t11an 4.000 students who had
taken the SAT exam in October 2005. Another caused the invalidation of the reading scores
on the fall 2006 Program for International Student Assessment (PlSA), when RYI
International. the private contractor responsible for adtuinistrdting fue exam, nlisprinted the
test booklets, directing students to the wrong pages for infom1ation related to specific
questions. OtJ1cr problems have occurred in Illinois, where a delay in scoring a spring 2006
grade-11 state exam caused t11e state to shift some assessment work to Pearson from Harcourt,
and in Virginia, where software problems were blamed for a snafu in statewide Virginia
Standards of Leaming testing nm in May 2007 by Pearson.
While the signillcant majority of the work provided by testing and assessment comparlies is at
a lligh level, in our view, problems such as these will likely remain a risk of investing in tills
sector. In addition, t11e significant amount of additional testing spurred by NCLB has not been
without controversy, with accusations of "teaching to tl1e test" and overtesting students. The
current Education Secretarys response to claims over too much testing has been mixed, as he
has taken tl1e view that if tests are effective at assessment, then they are worthwhile. In
addition, funding constraints will likely continue to prevent the e>-.1ension of mandatory
testing into oilier areas (e.g., llistOI)', civics, and geography, which had tentatively been
scheduled for t11e 2010 school year).

Technology
Under NCLB, the usc of technology in public education conllnues to shift from technologybased learning systems to data management teclmologies, driven by demand for better student
assessment, data collection, and learning content to help administrators meet expansive
reporting requirements. States and schools districts m-e expected to spend billions of dollars to
build data-management systems to capture and report tl1e results of the federally mm1dated
assessment exams and to monitor student progress throughout the school year to track student
development.

Technology
spending shifts
toward data
management

Technology and
data capture:
declining through
2010; expected
3.8% CAGR

Based on Eduventures' prior estimates, we believe spending by K-12 schools on technology

and infrastructure (i.e., hardware, software. and services) totaled $6.4 billion in 2008. We
think tlus likely declined to $6.3 billion in 2009 and will conllnue to decline slightly in 2010
before rebounding to grow at a 3.8% CAGR to approximately $7.3 billion in 2014 (see
Exhibit 53).

thereafter through
2014

A m ember of BMO

Financial Group

67

September

2009

K-12 Education

BMO Capital Markets

Exhibit 53. K-12 Technology Revenues (2003-2014E)

$8

~ 6
~

e4

.."
..
i
Ill

c:

Enterprise Software/Services

,
2003

Computing Hardware

I
2004

I
2005

2006

2007

2008

2009E

2010E

2011E

2012E

2013E

2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.

The K-12 technology market can be divided into two subsegments:

Computing hardware. Under this definition. the largest part of K-12 technolo!,>y spending

(roughly 70%) is still geared toward hardware spending (e.g., networking equipment, PCs), a
segment sel\led mainly by such global giants as Apple (AAPL), Dell (DELL), and HewlettPackard (HPQ), al1J1ough some niche providers (e.g., Educad Learning Solutions, EduMetry,
elnstruct:ion Corp., Wireless Generation) focus almost exclusively on the education market. In
addition, other companies such as Turning Technologies - a provider of interactive audience
response and polling systems- have fonnulated their product for the education industry.
Two federal programs provide the majority of K-12 technology spending: e-rate and Title liD of NCLB, also know as " Enhancing Education Through Technology" or EETT.
Additionally, the Recovery Act aJiocated $650 miJiion in education teclmology grants.
While we believe most schools are equipped with some kind of hardware, tile penetration may
still be lacking. In its May 2008 report entitled " Access, Adequacy and Equity in Education
Teclmolo!,>y." tl1e National Education Association (NEA) found tl1at tl1e vast majority (83.4%)
of educators reported having five or fewer computers in their classroom (or primary work
area) for student use, and more ti1an one-half (54.7%) reported having no more than two
computers. In addition. fewer than half (44.6%) of the educators cited their classroom as ti1e
main location where their students worked on computers for class assigru11ents. As such, we
believe there may be more potential for the K-12 computing hardware subsector beyond
replacement spending.

Penetration still
lacking

Additionally, as schools increase their use of teclmolo!,>y, we believe this presents

opportunities in several peripheraJ lines of business including training for instructors,
installation and help desk support. For example. a June 2009 article about the complexities of
digitizing textbooks in California as a way to cut costs quoted the San Francisco schools
superintendant. who said the district currently has roughly one technician for every 3,000
computers. While this is only one anecdotal example, we expect these kinds of service gaps
are widespread, and present substantial challenges :md opportunities as education teclmolo!,>y
grows.

A m ember of BMO

Financial Group

68

September

2009

K-12 Education

BMO Capital Markets

Based on Eduventures prior estimates, we estimate the K-12 hardware market was roughly
$4.6 billion in 2008. We forecast revenues will decline to roughly $4.5 billion in 2010 before
increasing at a 3.8% CAGR to approximately $5.2 billion in 2014 (see Exhibit 54). Although
the number of hardware units sold continues to increase by roughly 5% rumually. pricing
pressures have led to historically low mlit costs. However, reduced teclmolo!,>y budgets have
limited states' ability to increase spending on hardware fo r their schools. Nevertl1eless, as
hardware prices decrease (i.e., $100 laptop designed by MlT) and as schools that are
traditionally " later adopters" use newer technologies such as personal digital assistants
(PDAs) and other wireless networks, future demand for hardware in the K-12 sector could
increase.

K-12 hardware:
declining
through 2010
then expected
3.8% CAGR
through 2014

Exhibit 54. K-12 Computing Hardware Revenues (2002-2014E)

c:::::::J Co mpurtng Hardware Revenues ($b'lI . )

$6

r-

r-

- ---

-v

'

-~-

...... 1'--.r-

-+- 0/coyyc
I hange

5%
4%

r-

'-

:-'-

-- -- - -- -- -- - -\- ----- _....-- ~I

.J

--- - -- - ---

-..

2003

C)

2% c:

"'u

.&;

1%

0% ~
-1o/o eft
-2%

li
2002

..

3%

-3%
2004

2005

2006

2007

2008

2009E 201 OE 201 1E 2012E 2013E 2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.

Enterprise software and technology services. With lesson plan development driven by, and
reacting to, test scores and other data points t11at must be tracked and reported, we believe
schools are seeking solutions that help them capture and mine student data. This, in our
opinion. is affecting non-hardware teclmology spending at the K-12 level, especially for data
warehousing and student infonnation systems. According to Eduventures, some believe that
NCLB has led to a tenfold increase in the amount of student performance and demogmphic

K-12 software
and services:
expected 3.8%
CAGR through
2014

data that schools must annually monitor. Based on prior Eduventures' estimates, we believe
the K-12 non-hardware enterprise software and services market generated roughly $1.8 billion
in 2008. We forecast revenues will decline slightly through 2010 before increasing at a 3.8%
CAGR to approximately $2.1 billion in 2014 (see Exhibit 55). In our view, the enterptise
software systems market - specifically student information systems - could gain a significant
share of teclmoloi:,'Y spending, as states invest in data collection. data analysis, and data
reporting tools.

A m ember of BMO

Financia l Group

69

September

2009

K-12 Education

BMO Capital Markets

Exhibit 55. K-12 Enterprise Software and Technology Services

Revenues(2002-2014E)
$2.5

VI 2.0
c:

~
.

.."'
....
:::J

c:

1.5
1.0

>

0::

0.5

-;

r-

,.. ~r-

_[\ -- -- - --- - - - ~ - - - --- - -- - --\.

0.0
2002

2003

2004

2005

2006

2007

2008

...

r-

5%

~% ylychange

c:::::::J Enterprise Software a nd Tech. Services Revs. ($ bil. )

f_

) -- --

r-

-...

4%

..

3%
2%

.."'
c:

.:::;

1%

--

- --- - - - --

-1 %
-2%

2009E 2010E 201 1E 2012E 2013E 2014E

Source: BMO Capital Markets estimates and Eduventures.

Using Eduventmes' classifications, the K-12 enterprise software and teclmoloi:,'Y services
segment c~m be divided into three categories:
Human Resources, Finance, and Procurement S ystems (HRFPS). This segment includes
systems t11at help school districts manage and analyze back-office operations, as well as
administrative and transactional data. Traditionally, these enterprise level applications were
primarily opemted in isolation from instmctional activities and were reserved for larger
school districts with more than 25_000 students. Recently - and we believe NCLB bas
stimulated this change- the market an10ng meditun- to small-sized school districts has grown.
as schools look to integrate HRFPS and instructional data. T lus has reduced the deal size,
which was typically in excess of $1 million. Growtll is expected to be driven by tJ1e trend of
connecting entire districts, as well as the need for data-driven decision making (i.e., using the
plethom of data available at the K-12 level to measure academic progress and identify areas
for in1provement). Still, tl1ese complex business management systems have high switching
costs and therefore we project somewhat limited year-over-year growth. Leading providers in
this segment include IBM (IBM)_ Lawson Software (L WSN), Oracle (ORCL), Pearson
(PSO), and SunGard.
S tude nt Information S yste ms (SIS). This segment describes the software used to capture
student instmctional data (grades. attendance, and test scores) ~md demograpltic data
(ethnicity, special education, ~md socio-economic status) at the school level and bring tllem up
to district ~md statewide levels, as required by NCLB. Most of tlle purchase decisions on SIS
are stiU made at the district level, but we expect more states to mandate statewide systems, as
already done by Texas and CaliJomia. Currently, only a small pool of SIS providers control a
majority of t11e business, but mergers, acquisitions, and partnerships are enabling companies
to scale up to a level where they c~m offer statewide services, possibly in multiple states.
Services and training account for an increasingly high proportion of revenues as these
solutions are difficult to integrate. Large vendors in this segment include Pearson (PSO),
which purchased Apple Computer' s (AAPL) PowcrSchool and Chancery Software in 2006.
and AAL, SunGard, and Follett Software' s TetraData. Several SIS vendors are niche players
that provide these systems in addition to instructional management software, which is
included as part of data warehousing (see below).

A m ember of BMO

Fina ncial Group

70

September

>-

:>.

0% ~

2009

K-12 Education

BMO Capital Markets

Instructional Management Systems (IMS). Also referred to as "learning management

systems; these applications link teachers and administrato.rs with content and assessment,
enabling instmctors to prescribe standard-aligned content to students, based on individual
academic needs. Thus, IMS helps schools meet one of the key factors behind NCLB. Lesson
planning, content delivery, and curriculum management are key functions of this software
segment However, until research assessing the correlation between lMS and student
perfonnance improvements is complete, states are not fully adopting lMS as an integral
learning solution. Companies serving this market include Plato Learning (TUTR) and
Pearson' s (PSO) SuccessMaker, privately held Compass Learning, Moodie, and SchoolNet,
while fmns such as Blackboard (BBBB) and Citrix (CTXS) have migrated teclmolo!,'Y from
the postsecondary education market over the past five years and developed strong positions in
K-12. We believe these finns will benefit as more K-12 learning delivery goes online with
rising demand for professional development.
In our view, the end markets would prefer to have these three types of systems integrated with
one ~mother, but we realize this is more easily said than done. Nevertheless, that goal could
drive some M&A activity within this sector.

Other K-12 Services

Using Eduventures' definitions. we have defined three categories in the Other K-12 Services
segment within K-12 education:

l.

Professional development.

2. Tutoring and test preparation.

3.
Other K-12
services:
declining through
2010, then
expect ed 4%
CAGR through
2014

Outsourced school administration.

It was difficult to accurately assess t11e size of tltis market owing to classific<ttion differences.
Nevertheless, using prior Eduventures' estimates and more recent Outsell projections, we
estimate that roughly $6.5 bil lion in revenues was generated from the Other K-12 services
market in 2008. While revenues will likely decline through 2010, we forecast 4% CAGR
thereafter. reaching roughly $7.4 billion in 2014 (see Exhibit 56). The strongest growth is
expected to be in the professional development segment, driven by additional demands from
NCLB-related refonns.

Exhibit 56. Other K-12 Revenues (2002-2014E)

$8

Outsourced School Administration

'iii
c:

!!!.

..
....
Ill

5
4

::I

c:

>
a:

0
2002

2003

2004

2005

2006

2007

2008

2009E

2010E

2011E

2012E

2013E

2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.

A m ember of BMO

Fina ncial Group

71

September

2009

K-12 Education

BMO Capital Markets

Professional development. The original NCLB Act required school districts to provide
professional development training to teachers and to report on their progress toward making
all teachers " highly qualified" (HQTs) by the 2005-2006 school year; the deadline was later
ex1ended to the end of ti1e 2006-2007 school year. NCLB defines " highly qualified" as a
teacher with a bachelor' s degree and full state certification as well as the ability to
demonstrate knowledge in the subject areas taught
As a result of difficulties states had meeting the original deadline, the ED added some
tlexibility, loosening " highly qualified'' requirements for areas where states were having
difficulty complying with provisions such as for multi-subject teachers (typically located in
mrdl schools and or in science-related subjects) and special-education teachers. Here, the ED
allowed additional state-developed HOUSSE tests to be used or ex1ended the compliance
deadline. While t11e data seems to show some improvement in the percentage of HQTs (with
95% of schools reportjng HQTs teaching core subjects in 2007-2008. up from 94.2% in 20062007), it is still unclear what sort of accountabi lity measures will be enforced or proposed by
ti1e ED under the Obama administration, ti10ugh it has voiced general support for these
standards.
While enactment of these re!,'Ulations has obviously spurred some controversy, we believe
companies specializing in professional development should continue to benefit. Beyond t11e
NCLB requirements, we believe ongoing professional development is a key to improving
teacher retention, which would not only save costs but also likely improve the quality of
instmction. In a 2004 study published in ti1e Americ~m Te.achers Journal, turnover for firstyear teachers with "comprehensive induction," which includes targeted and ongoing
professional development, was only 9% versus 20% for those teachers witi1no induction.
Professional
development:
declining through
2010, then
exp ected 4.3%

TI1erefore, we believe the market for professional development will continue to be strong.
Using prior Eduventures' estimates, we estimate ti1at roughly $3.6 billion was spent on K-12
professional development in 2008. While spending may decline through 2010. we forecast
revenues will increase roughly 4.3% annually to over $4.1 billion in 2014 (see Exhibit 57).

Exhibit 57. K-12 Professional Development Revenues 2002-2014E

CA GR through
2014

c:::::::JP rof. Dvl pml Revenues ($ b'l)

I.

$5

~ 4
.2

"'~

2 -

c:

..
~

--

a::

r-

--

,__

r-

5%

_._o/c yy
f ch.~ge

r-

-;

I
r-

--V -- -- -- -- -- -- -- \ ... --- -- -- -- --- -j

r-

r-

2%

-- -

- -- - - -- -

2003

Cl

c:

"'

.s;;

1% u

<:-

-f - 0% >;!!
-1%

I+'
2002

4%
3%

-2%
-3%

2004

2005

2006

2007

2008

2009E 2010E 201 1E 2012E 2013E 2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.

Federal funding
has been stable
since FY2002though incentive
fu nd boosted in
FY2010

A m ember of BMO

While it was hoped the federal government would help drive some of this growti1, after some
promising early efforts, such support has been lacking. In FY2002. the fedeml government
allocated roughly $2.9 billion to a new Improving Teacher Quality State Grant, which school
districts could utilize for the professional development, recntitment, and retraining of teachers
and principals, among otl1er things. This grant was intended for teachers to gain proper
training, tl1ereby meeting the NCLB highly qualified teacher goal. Unfortunately, the annual
Financial Group

72

September

2009

K-12 Education

BMO Capital Markets

level of funding for tllis grant has been relatively stable since then and is unchanged in
President Obama' s FY2010 budget request at $2.9 billion (see Exhibit 58). However, we
believe this is offset by a substantial increase in the Teacher Incentive Fund, which amotmts
to $517 million for FY2010 (with an additional $200 million allocated through the Recovery
Act) versus $97 million in FY2009. While the incentive fund does not explicitly allocate
money toward professional development, we believe it could be used for these purposes as tJ1e
fund aims to " improve student acllievement by increasing teacher .. . effectiveness."

Exhibit 58. Improving Teacher Quality State Grants (FY2002FY2010E)

c:::J improving Teacher Quality State Grants($ bil.)

-+-yly change

$3.0

3%

,g

2.9

2%

en

2.8

1%

.c.
u

2.7

U)

:0

2.6

Ql

"'

<:>.

0% '$.

u..
2. 5 +-~~~--~~~-+-L-L~~~~~~+-L-L-~~~~~-+

-1%

!:)'),

~1>

Source: BMO Capital Markets and US Department of Education. Note: FY201 0 represents Vllhite House's
request.

Nevertlteless, there are other, albeit smaller, sources of funding for professional development.
Often tl1ese programs receive funding under the Higher Education Act (HEA), which governs
postsecondary education and was reauthorized in August 2008. The new authorization
includes severaJ grant programs to improve teacher quaJity ; some of which are available to K12 teachers.
ln our view, one of the greatest opportunities in tllis space lies in technology-based online
professional development. According to Eduventures, online training services on average cost

Online
professional

a school district in the range of $200-$500 per teacher per year. which we believe may be less
than haJf tJ1e cost of similar c lassroom-based training. Meanwhile, successful professional
development programs t11at meet state, district, and locaJ needs may become widely accepted
to complement or replace traditional classroom-based training.

development

Market participants in tl1e professionaJ development segment fall into one of three categories:
content providers. consultancies, and professional development organizations. Content
providers offer professionaJ development training that aligns with their core business of
educational content sales. Consultancies enter into contracts with the school, district, or state
to provide professional development services. Finally, professional development
organizations focus exclusively on providing development training.
Though the market remains highly frtl!,'lnented, professional development providers include a
range of publislling companies (e.g., Houghton Mifflin, McGraw-Hill. Pearson) and not-forprofit providers (e.g.. National Center on Education and the Economy or NCEE). In addition.
not-for-profit universities as well as certain for-profit schools (e.g., Laureate Education' s
Walden University, Apollo Group's University of Phoenix, Education Management's Argosy

A m ember of BMO

Financial Group

73

September

2009

K-12 Education

BMO Capital Markets

University) serve this segment of the market. A list of selected K-12 professional
development providers can be fotmd in Exlubit 59.

Exhibit 59. Leading K-12 Professional Development Providers

Company (Parent)
America's Choice (National Center on
Education and the Economy)
Canter (Laureate Education)
Classroom ConnecVeschool Online (part of
Harcourt Connected Learning, owned by
Houghton Mifflin Harcourt)
CompassLearning, Inc. (WRC Media, Inc.)
Education Development Center, Inc.

Ticker

Houghton Mifflin School Division (Houghton

Mifflin)

McGraw-Hill Professional Development,

SRA/McGraw-Hill,
The Grow Network. and
Wright Group (McGraw-Hill Companies)

MHP

Measured Progress, Inc.

PBS T eacherline

Pearson Achievement Solutions (Pearson pic) PSO

PLATO Learning, Inc.

TUTR

The Princeton Review

REVU

Renaissance Learning, Inc.

RLRN

Scholastic Corporation

SCHL

Sopris West Education Services (Cambium

Learning)
Success for All Foundations

Description
Provides teachers, schools, and districts with training courses, consulting, program reviews,
evaluations, and other services in literacy and math.
Provides online, self-guided, self-paced continuing education courses.
Offers professional development programs, courses, and online instructional materials
focused on incorporating technology into teaching and assessment.
Delivers customized on-site and online professional development services.
Develops and implements service offerings to help teachers and administrators deepen
content knowledge in a variety of subjects.
Offers online, on-campus, regional, and national workshops throughout the year where
educators can brainstorm, develop new strategies, and gain practical solutions to issues in
teaching and learning. Also trains teachers to become district-level coaches in math and
reading.
McGraw-Hill Professional Development- Provides video libraries and online programs to
support professional development for teachers and school administrators.
SRA/McGraw-Hill - Provides professional development for reading instruction.
The Grow Network- Provides professional development for teachers, school leaders, and
state and district leaders.
Wright Group- Provides conferences, on-site consu~ing, workshops, seminars, and online
courses.
Builds assessment literacy through workshops , customized programs for schools and
districts, training materials, and conferences.
Provides online professional development through facilitated and standards-based courses,
supportive and collaborative learning communities, and Internet-based resources. Funded by
a grant from the U.S. Department of Education.
Provides programs such as district professional development, distance and site-based
graduate courses, and master's degree programs. Division recently created by combining
Lesson Lab and Co-nect - acquired by Pearson at the end of 2005.
Offers customized in-person and online professional development services for schools and
districts.
Assesses teachers and then creates individualized training plans via content specialists in
small groups and one-on-one sessions.
Provides professional development services, online and print curriculum, and customized
classes for teachers and administrators.
Provides online courses, on-site workshops , videos, books, and other professional
development resources.
Offers workshops and training sessions to teachers relating to students requiring help with
behavior modification, social skills, or academic performance.
Provides support such as training sessions, on-site coaching, scheduled telephone meetings,
quarterly progress reports, and informal telephone support in math and reading.
Provides online courses , materials, and regional and national conferences for schools and
districts.
Focuses on professional development programs that helps teachers improve student literacy
rates, principally operating in the western United States.

Teachscape
WestEd

Source: BMO Capital Markets and Eduventures.

Tutoring and test preparation. Tlus market comprises tllird-party providers of test preparation

and tutoring services for students. with revenues paid by schools and school districts. These
" business to institution" tutoring sales barely existed a decade ago, as the space was largely
driven by a consumer market but we believe school districts are now motivated to acquire these
services to help t11em demonstrate adequate yearly progress (AYP). Growt.h has t11erefore been
strong in this market; roughly 17% CAGR from 2002 to 2006, per Eduventures.
We believe NCLB has been a key driver in boosting spending in tlus area because under its
mandates, if a school fails to demonstrate AYP, it is deemed " in need of improvement." After
two consecutive years under tlus classification, the school must use at least 5% and up to 20%
of its overall Title I funding to provide " supplemental educational services" (SES) to its
students. These services can vary, but we believe they ty pically consist of after-hours
A m ember of BMO

Fin an cia l Group

74

September

2009

K-12 Education

BMO Capital Markets

programs. in-school tutoring. or online instruction at the school or fTOm the student's home.
Furthenuore, we believe schools will offer tutoring to help improve test scores and address
the tremendous pressure to demonstrate progress on their annual assessment exams.
Some results

show positive
impact of NCLBtutoring

NCLB-based
tutoring still
mostly
underutilized,
while private
tutoring services
have grown

School-funded
K-12 tutoring
and test prep:
declining through
2010, then

While controversial, there have been some positive results. A study by the independent Rand
Corporation released in Jtme 2007 fotmd that students who participated in the NCLB tutoring,
on average, learned more in the first year of tu toring than they had in previous years. While
those academic gains were small. they tended to grow when students stuck with tl1eir tutors
for two years or more, and this perfonnance was better t11an for students who had transferred
to other schools under the NCLB choice provisions.
Despite some lofty e>.--pectations when NCLB was enacted. the SES market has not been a
goldmine for for-profit providers. In many cases, funds remain largely under-utilized, likely
owing to parents being unaware of their option to receive SES (providers must be sanctioned
by the state in which they operate. but are then to some extent at mercy of the school districts
themselves to market their se1vices to eligible parents). A January 2009 report prepared by the
American Institute for Research found that from the 2002-2003 school year through 20062007, the number of students eligible to receive SES increased " nearly si..x times" to 3.3
million, or roughly 13% of all students in Title 1 schools. However, while the estimated
number of students actually receiving SES nearly doubled over this period to about 500,000,
tile participation rate remained flat at about 17%. The low rate was attributed to several
factors, including absence of available SES, communication problems with parents, and
parents choosing not to participate. The report also fmmd that total spending on SES increased
to $375 million in 2005-2006 from $ 192 million in 2003-2004, and that averdge per-pupil
expenditmes remained constant at about $838.
NevertJ1eless, we believe there is still a viable market for school-funded K-12 tutoring and test
preparation services. Based on prior Eduventures' estimates, we estimate tllis market
generated over $1 billion in revenues in 2008. We project revenues will decline through 2010,
and then grow 3.6% annually to nearly $1.2 billion in 2014 (see Exlubit 60).

Exhibit 60. K-12 Tutoring and Test Preparation Revenues (20022014E)

expected 3.6%
CAGR through
2014

$1.5

r:::::::::lTutoring/Test Preparation Revenues ($ bil )

25%

iii
c

~ 1.0
~

..
..
Ill

::J

"

30"~

--+-% y/y change

0.5

r-

2003

2004

2005

r-

r-

20%

g,

c
15% ~
u

~t

~~

- - --- - --- - --- - --- 2002

r-

2006

- --~~~
- ~=4fi-:=4'1,-fk-:""2007

2008

~~

--- - --- - -- - - -

0%

2009E 2010E 2011E 2012E 2013E 2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.

For-profit
providers have
grown share over
school districts

A m ember of BMO

According to the 2009 American Institute for Research report, for-profit compmties have
continued to gain share in tJlis market over not-for-profit and state-run providers. While t11e
total number of tutoring service providers " more than tripled" to 3.050 between 2003-2008.
most of t11e increase was attributed to private providers. Between May 2003 and May 2008,

Finan cial Group

75

September

2009

K-12 Education

BMO Capital Markets

the share of private SES providers increased to 88% from 60%. wlri le the share of district and
school providers decreased to 10% from 32% (see Exhibit 61).

Exhibit 61. Approved Providers of Supplemental Education

Services (2003-2008)
3,000

0 Private providers II School districts and public schools 0 Other

2,500
VI

G;

"0

::;:

2,000

-...
Q.

1,500

CD

..0

E 1,000
:::J

500
0
2003

2004

2005

2006

2007

2008

Source: BMO Capital Markets estimates and US Department of Education.

But rules change

could increase
competition from
districts

Tn our view, the faster growth among for-profits is partially attributable to the way the law
was written, as NCLB prohibits districts that have been identified for improvement or
correction from becoming SES providers themselves. However, Education Secretary Duncan
hopes to repeal these provisions, which_ he writes. " limit competition among SES providers."
Waivers are already available to schools wishing to offer SES as this rules change will likely
not go into effect until the 2010-2011 school year. The secreta!)' also pointed out that both
district and private SES providers wiJI be held to the same state-level standards of approval.
While we believe this rules change could open the door to increased district-level
competition. it may also provide a funding boost to the tutoring market as allowing districts to
tutor their own students is likely to increase overall program awareness and participation.

Some negative

However, there have been instances of negative publicity where certain for-profit providers

publicity

have been accused of improprieties to gain SES contracts. For example, in October 2005,
privately held Newton Learning (a subsidiary of school operator Edison Schools. now
EdisonLeaming) was accused by the State of TIUnois of violating the state code of ethics for
tutoring providers by hiring district employees or members of the local councils that help
govern Chicago schools to be site directors or recmitment specialists. In March 2006.
privately held Platfonn Learning and Newton Learning were accused of offering cash to

surrounding f orprofit providers

principals and gifts to students in New York City to boost attendance in t11eir programs.
Also. a number of for-profit providers decided to exit this market, mainly owing to financial
reasons. In September 2006, Educate (at the time, a publicly held company) sold its Education
Station unit, which served about 30,000 students in more than 70 school districts, to
Knowledge Learning Corp. for $18 million, as it fmmd this business too " labor intensive." In
June 2006, Platfonn Learning filed for Chapter 11 bankruptcy, and was restmctured after
investments by private equity finns Ascend Ventures LP and B lue Wolf Capital Management
LLC.

A m ember of BMO

Financial Group

76

September

2009

K-12 Education

BMO Capital Markets

The larger institutional players - Kaplan (a subsidial)' of Washington Post [WPO]) and The
Princeton Review (REVU) - may have some competitive advantage as they may be better
positioned to invest in independent, research-based studies that dernonstrdte the incremental
benefits of their services on the academic growth of the student. Furthermore. these large
companies should be able to leverdge their long operating histories to demonstrate their
programs' historical success.

Larger companies
may have
competitive
advantage

One area of growth has been tl1e emergence of online tutoring and test-prep providers. While
many of t11e larger players (Sylvan, Princeton Review) have this capability, in recent years we
have seen the emergence of a number of " pure play" online providers - specifically those
located offshore. In addition. to the potential lower cost (a May 2007 analysis by the University
of Arizonas Eller College of Management) cited a tutor costing $100/hour in New York City
would cost roughly $20/hour in India - we expect this disparity has not changed much since
t11en), the potential availability of 2417 service provides greater flexibi lity, in our view.
However, off-shoring of educational functions does not come without risks. For example, in
September 2008, Kl2's (LRN) Arizona Virtual Academy chose to end the use of India-based
test !,'Taders and tutoring services providers after the pilot pro!,>Tam drew criticism from teachers
and parents, and increased scmtiny from regulators. Despite these hiccups, we believe online
tutoring and test-prep will continue to be anot11er growth driver for this categol)'.

Online t utoring &

test-prep is a
growth area

Companies that specialize in online tutoring and test preparation include domestic providers
such as Tutor.com and Smarthinking and offshore providers such as Edcomp Solutions and
TutorVista. We note that on June 24, 2009, Pearson Education (PSO) annotmced a $17.5
million joint venture with Educomp 311d a $12.5 million investment for a 17.2% stake in
TutorYista, perhaps providing some impetus for the future growth of the offshore tutoring
market. We have compiled a list of companies providing K-12 tutoring and test preparation
services in Exhibit 62.

Offshore tutoring
has attracted
recent investment

Exhibit 58. Leading K-12 Tutoring and Test Preparation Providers

Provider
A to Z In-Home Tutoring
Brainfuse Inc.
Catapult Learning
ClubZ! Inc.
Edison Learning
Failure Free Reading
Huntington Learning Centers
Kaplan K12 Learning Services
Knowledge Learning Corp.
Kumon North America
Newton Learning
PLATO Learning
Princeton Review
Sylvan Learning Systems
University Instructors Inc.

Ticker

WPO

TUTR
REVU

Type
SES/private
SES
SES
SES/private
SES/other public
SES/private
SES/private
SES/other public
SES/other public
SES/private
SES/other public/private
SES
SES/other public/private
SES/other public/private
SES/other public/private

Types of Delivery
Individual tutoring; small-group instruction
Individual tutoring; small-group instruction
Individual and online tutoring
Individual tutoring; small-group instruction
Individual tutoring; small-group instruction
Individual and online tutoring; large- and small-group instruction
Individual tutoring; small-group instruction
Large-group instruction
Large- and small-group instruction
Individual instruction; large- and small-group instruction
Large-group instruction
Computerized instruction
Large- and small-group instruction
Individual tutoring; online courses; small-group instruction
Individual tutoring; small-group instruction

Source: BMO Capital Markets and Eduventures.

Outsourced school administration. The past decade has seen an increase in tl1e number of

contracts and charters awarded to education management organizations (EMOs), which

manage traditional K-12 public schools on behalf of a school district ("contract schools") or
manage charter schools either as the charter holder (''charter schools") or tmder contract with
the charter holder ("contrdct charters"). 1n the early half of the 1990s. EMOs were mostly
contract schools, managing traditional K-12 schools on behalf of school districts. Later, as
A m ember of BMO

Financia l Group

77

September

2009

K-12 Education

BMO Capital Markets

public money became available for charter schools through the use of vouchers. these
organizations moved toward charter school management (typically managing schools for
another entity which held the charter) and contract charter management. More recently,
virtual K-12 schools have become a new alternative schooling method. In addition. the
Obama adm.inistr.:ltion' s support for charter schools has seemed to reaccelemte interest in tlJ.is
model.
NCLB sanctions
include outside
management of
schools - new
Education
Secretary pushes
"turnarounds"

Examples of
private
management via

We believe t11at a greater acceptance of altema6ves to the public school system will genemte
substantial growth in the for-profit EMO sector. In our view, alternative schools and
alternative management progrdllls provide a significant opportunity to improve the current
educational " product" and. as a result. potentially create profits for investors. Furthenuore.
NCLB potentially provides a growth driver as schools that fail to achieve AYP for four
consecutive years are subject to one of the following sanctions: I) replacement of all or most
staff, including U1e principal; 2) implementation of a new curriculum: 3) state takeover of the
school; 4) hiring an outside entity to manage the school, or becoming a charter school.
Additionally, Secretary Duncan wants to continue the pmctice of " tum<uound schools" where 100% of the staff of 311 underperfonning school is let go and new management is
brought in - that he implemented in his previous position as tl1e CEO of ClJ.icago Public
Schools. Duncan has said there are 5,000 "chronically underperfonning" schools in the US,
and believes such schools are susceptible to new management structures. WlJ.ile all of the
Chicago turnarounds (roughly 60 schools) were subsequently managed by state and non-profit
agencies. given the scale of such program on a national level, we expect privately managed
companies may have a seat at the table.
There have been a nmuber of examples in which states and/or districts have taken over school
management, and, in some cases, handed them over to outside private management finns (or
proposed to do so). These include:

takeovers

A m ember of BMO

In 2002, the state of Pennsylvania took over the underperfonning PhiladelpiJ.ia school
district and gave 45 elementmy and middle schools to seven private for-profit and
nonprofit managers to nm w1der five-year contrdcts.. with the bulk of the schools (20)
going to for-profit Edison Schools (now EdisonLearning). The decision was controversial
from the start, and in June 2008 tlle state co1mnission overseeing Philadelphia's schools
voted to take back control of six of the privatized schools (four controlled by Edison
Schools, now EdisonLeaming), while warning 20 others (12 run by Edison) that they had
a year to show progress or they. too. would revert to district control. A vote on renewal
contracts was expected in the summer of 2009, but has been delayed as regulators debate
tl1e merits of the schools, which have shown mi,ed performance results. However, while
tl1e plan has not been without critics, it has not been a complete failure. in our view. as
the current school-superintendant has presented a five-year plan to tum 35 additional
underperfonning schools into district-run charters or privately managed schools
beginning in 2010.

In June 2002, New York City Mayor Michael Bloomberg gained control of tl1e city
school system, which previously was managed jointly by the Mayor's Office, an
appointed Board of Education, and 32 locally elected school boards. Over tl1at time, a
number of reforms were instituted including more centmlized autl1orization via a Panel
for Educational Policy, more power and accountability given to school principals, a
sizeable increase in t11e number of charter schools (from 17 in 2002 to 98 in 2008).

Financial Group

78

September

2009

K-12 Education

BMO Capital Markets

EMOs: declining
thr ough 2010,
then expected
3.6% CA GR
through 2014

Following Hurricane Katrina in August 2005, the New Orleans school district was
reorganized, with the Orleans Parish School Board and the state-mn Recovery School
District (RSD) splitting oversight of it's the public schools. In the 2008-2009 school year,
the RSD managed 33 of those schools. while the remaining 33 were cl1arter schools. A
number of the charter schools were initially mn by private management ftnns, including
three for-profit providers (The Leona Group, Mosaica Education, and SABIS Educational
Systems).

In June 2007, the Washington D.C. Mayor's Office took control of the district's school
system and its 55,000 students, which was among the lowest performing tuban school
districts in the US.

In August 2009, the Board of Education of the Los Angeles Unified School District
approved a plan that cou.ld tum over 250 campuses - including 50 new mulli-m.illiondollar facilities - to charter groups and other outside operators.

For tJ1ese and other reasons, we believe Ute outsourced school administration market should
continue to grow. Based on prior Eduventmes' estimates, we estimate the EMO market
generated over $1.9 billion in revenues in 2008. Wlllie that may decline slightly through 2010.
we project that should grow 3.6% annually to nearly $2.2 billion by 2014 (see Exhibit 63).
Note that ti1ese numbers exclude K-12 proprietary (private) schools, which generate an
estimated $25 bi llion in annual revenues.

Exhibit 63. K-12 Outsourced School Administration Revenues

(2002-2014E)

...

2.0

c:

1.5

:::1

1.0

.."'
....
c:
>

-+- o/c Y/y c hange

sourced Scoo
h i Ad m1n.
' Revenues ($ bil )

$2.5

r-

;-

40%

35%
30%
25% ~
c:

;-

20% ~

<.1

3:

r- 1-6.
-- -- - --- - --- - - 1. .

a: 0.5

15%
10% <;t

,.

[-........

5%

~~

-- -

-- -- - --- - --- -

0.0

0%
-5%

2002

2003

2004

2005

2006

2007

2008

2009E 2010E 2011E 2012E 2013E 2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.

TI1e EMO segment has a number of different components:

Charter schools are nonsectarian public schools, designed and operated by community

groups or non-profit entit]es but sponsored by designated local or state educational

organizations that monitor their quality and integrity. In return for a large measure of
autonomy and freedom from regulation, charter schools are accountable for student academic
perfonnance. The length of time charters are gr<dll.ted varies, but most contrdcts r<d.Dge from
three to ftve years. ln many cases. the organization !,'Tlillted the charter hires an outside private
management fmu to ntn the day-to-day operations of the school. Willie many of those are forprofit entities. there has also been an increase in the number of not-for-profit Charter
Management Organizations (CMO) such as Aspire Schools and Knowledge Is Power Program
(KIPP). According to the National AUiance for Public Charter Schools. roughly 12% of
A m ember of BMO

Fina ncial Group

79

September 2009

K-12 Education

BMO Capital Markets

charter schools in the 2008-2009 school year were managed by CMO's, a slightly larger share
than the 10.6% managed by EMO's.
The NCES estimates t11at in the 2007-2008 school year. there were 3,560 charter schools
opemting in the US, setving just over 1 million students. As shown in Exhibit 64, charter
schools represents roughly 3% of all K-12 schools in the US and about 2% of total K-12
enrollment. However, in certain areas, charter schools have achieved much greater penetmtion
(in addition to New Orleans which one may cite as an exception); for example, according to
the National Alliance for Public Charter Schools in U1e 2007-2008 school year, charters
served roughly 54.5% of the students in the New Orleans Public School System and about
30.6% of students in the District of Columbia Public Schools.

Charter schools
represent about

2% of total K-12
enrollment...

Exhibit 64. K-12 Market by Segment: Number of Schools and

Enrollment (2007-2008 School Year)
Schools
#of schools total%
87,190
66.5%
21 .5%
28,220
2.7%
3,560
118,970
90.7%

Public
Private
Charter
Total

Enrollment
(x1000)
total%
47,432
87.5%
5,165
9.5%
1 047
1.9%
98.9%
53,645

Students
Per School
544
183
294
340

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

... but growth has

been impressive

T he Center for Education Reform (CER) has slightly different statistics, but has been tmcking
the charter school industry since its incepti.on. According to their statistics, there were 4.711
K-12 charter schools serving over 1.4 million students in the 2008-2009 school year. Using
tlleir data, tile number of charter schools ~md tlleir enrollment have grown significantly since
tile flrst charter schools opened ill the 1992-1993 school year. Since the 2000-2001 school
year, tile number of charter schools has grown on average roughly 11% annually, while
charter school enrollment has increased at over a 16% clip, clearly outpacing the less Umn 1%
avemge K-12 enrollment growtll over the same period (see Exhibit 65).

Exhibit 65. K-12 Charter Schools and Enrollment (1992-1993 to

2008-2009)
5,000

8.s::::"'
v
IJ)

1,500,000

IIIIIIIIIII!Schools
-+-Students

4,000

,.-

.s::::

3,000

1,250,000
1,000,000

,/

2,000

(.)

0
0
z

..-

750,000

......----

500,000

1,000

c.,"'
'0
u;"'
0
0

250,000

0
1992-93

1994-95

1996-97

1998-99

2000.()1

+
2002-03

2004-05

0
2006.()7

2008.()9

Note: Number of students in 1999-2000 school year and prior to 1995-96 school year was not available.
Source: BMO Capital Markets, Charter School Leadership Council and Center for Education Reform.

There are 10 states that have never allowed charter schools: Alabama, Kentucky, Maine,
Montana, Nebraska, North Dakota, South Dakota, Vennont, Washington, Md West Virginia.
An eleventh, Mississippi, which recently let its clmrter schools law expire. is ex'Pected to
adopt a new law when its Legislature convenes in2010.

A m ember of BMO

Finan cial Group

80

September 2009

K-12 Education

BMO Capital Markets

demand

In addition. according to the CER's Annual Survey of America' s Charter Schools (July 2008
version), 59% of the charter schools that responded to their survey stated they had significant
waiting lists, average nearly 200 students- an increase of 33% over the prior year- showing,
in our view the demand for charter schools is still strong.

Charter school

Not all charter schools have been successful. An historical analysis conducted by the Center

closures

for Education Refonn shows tl1at 657 charter schools have closed since 1992. However, the
report found that of these closures. only 14% were closed because of poor academic
perfonnance, while the majority (47%) were closed owing to lack of financial resources. As
such, we believe professional management is fairly cmcial.

Onerous

Charter school opemtors must typically fund real-estate-related costs on their own, as the perstudent funding provided by school districts usually does not include facility costs. This is made

Increase in
waiting list size
shows strong

financing and
regulatory issues

even more difficult by the fact tl1at charter schools typically receive less funding than their
traditional public school peers. According to a 2008 study by the US Census Bureau as cited by
tl1e Center for Educ<ttion Refom1, on average, cl1arter schools are funded at 61% of their district
counterparts, averaging $6,585 per pupil compared to $10,771 per pupil at conventional district
public schools. While the costs of mnning a cl1arter school (on a per-student basis) are relatively
lower- $7,625 versus $9,138 at a conventional district public school- these costs are still higher
tl1an tJ1e available funds. In addition, according to a September 2007 report by Education Sector,
25 states and the District of Colun1bia have some type of limitation on eitl1er the nwnber of
charter schools, the number of new charter schools opened annually, the number of charter
schools per authorizer and the number/percentage of students in cl1arter schools. Therefore,
despite the lofty statistics. we believe charter school growth has been somewhat constrained by
financing and regulatory issues. Nevertheless, we believe the cl1arter school movement is here to
stay.
In addition, charter schools l1ave generated more tl1an their fair share of negative publicity and
controversy in recent years. Teachers tLnions and educational activists complain that charter
schools, which are not regulated by NCLB, do not fall under the same levels of oversight and
accountability as traditional K-12 public schools. Both pro-privatization and anti-privatization
groups claim they have data to support their positions. There have also been instances where

Growth has not

been without
controversy

elected officials have thre<ttened to revoke or prohibit new charters if fi11ancial arrangements
appear to be structured in ways tl1at inflate expenses or add unnecessary layers of management
at the cost of investments in educational quality. Finally, the recent opening of Muslim- and
Hebrew-themed cl1arter schools in New York ~md Florida were not without their share of
opposition.
Obama

However, many believe the Obama administ:mtion has reignited interest in charter schools

administration

which could accelerate tl1e sector' s future growtll. Even during tJ1e presidential campaign,
Obama was a strong advocate of charter schools. WhiJe there has been limited movement so
far, some changes are apparent. For example, Education Secretary Duncan has fairly broad
authority in awarding monies from tl1e $4.35 billion " Race to tl1e Top" fund in the Recovery
Act and has stated publicly that the states tl1e ctLITently impose charter school caps risk being
at a " competitive disadvantage" for these funds. In addition, President Obama has pledged to

appears to be
strong charter
school proponent

double spending on the federal Charter Schools Program-a fund that provides startup money
for new charters-during his current tenn. The White Houses FY2010 budget requests $268
million for this program, up from $216 billion in FY2009.

A m ember of BMO

Financial Group

81

September

2009

K-12 Education

BMO Capital Markets

Academic
research is mixed,
as some states
outperform others

Acadenlic research on student perfom1ance outcomes in charter schools is highly varied. For
example, a June 2009 shtdy by Stanford's Center for Research on Education Outcomes
(CREDO)- the ftrst national assessment of charter school impacts- analyzed data on more than
70% of the nation' s charter school students in 15 states and the District of Columbia.
Researchers paired each chatter school shtdent with a 'virtual twin" in traditional public schools
which matched tlwt charter student's demographics, and tJ1en compared tJ1e learning gains of t11e
" twins". The study found tJ1at 46% of charter school students had math gains tJ1at were
" statistica!Jy indistinguishable" from their public school peers, while 17% of charter students
exceeded traditional shtdents and 37% fell below. However, the study also fotmd that certain
states performed better on average, and examined three causal factors of this variation.

Leanling gains of charter students were lower in states with caps on the number of charter
schools (and where at least 90% of the cap lwd been reached). Researchers suggested caps
may act as limiters of growth and development among charter schools.

States with multiple clwrter school authorizers had lower academic performance

~unong

charter students with the authors speculating tJ1at tllis enables sub-par charter schools to
choose more "pemussive" oversight en6ties.

States tJmt lacked an appeals mechanism for adverse decisions, applications, or renewals
also had poorer perfonning charter students. Researchers suggested tlus finding appeared
counter intuWve on t11e surface, and offered no explanation.

Ironically, some of tJ1e most vocal opponents of charter schools have gollen into the business
themselves; for example, the United Federation of Teachers operates 1:\vo charter schools in
Brooklyn. New York. and helped CMO Green Dot Public Schools open its first charter in
New York City in September 2008, with an additional New Yorl< City school slated to open in
September 2009.
In June 2009, teachers at tluee of Cllicago' s 12 Civatas International Charter Schools voted to
form a union, citing tJ1e need for more job security. There have also been efforts in some
states to unionize charter school teachers, but most charter schools do not use unionized
teachers, likely tied to cost-saving measures: The Center for Education Refonn estimated in
2006 that roughly 2% of charter schools were unim1ized, and we estimate this percentage has
remained relatively stable.
WhiJe not as common as they once were. contract schools are public schools operated by
private organizations based on management agreements with local school boards. Unlike
charter schools, contract schools do not require specific statutory authority but are created
through a contrdct between a school management company and a school board in accordance
with existing authority. However, like charter schools. contract schools are accounttlble for
student performance and the private management fim1s can lose their contracts if they fail to
meet specified standards. In addition, contract schools are typically less expensive to fund as
they often use existing facili6es and l11erefore do not require the somewhat onerous realestate-related fmancing required by chmter school opemtions. In addition, both organizations
are aJmost exclusively funded through public-pay (i.e., ta"-'Payer dollars), with these
companies attempting to generate profits by running the schools more efficiently t11an the
status quo and hopefully obtaining similar per-student funding.

A m ember of BMO

Finan cial Group

82

September

2009

K-12 Education

BMO Capital Markets

With the exception ofK12 (LRN) and Nobel Learning Communities (NLCI), ali of the major
EMOs (charter and contract school operators) are privately held, though not all are for-profit
(e.g., KIPP). A list of the top 20 for-profit and not-for-profit EMOs (ranked by enrollment)
can be found in Exhibits 66 and 67.

Exhibit 66. Top 20 For-Profit Educational Management Organizations (ranked by

students in 2007-2008 school-year)
Rank Company
1 EdisonLearning (formerly Edison Schools)
2 National Heritage Academies
3 K12. Inc. (LRN)
4 Imagine Schools
5 The Leona Group, LLC
6 White Hat Management LLC
7 Charter Schools USA
8 Mosaica Education
9 Connections Academy
10 Charter School Administrative Services
11 Victory Schools
12 SABIS Educational Systems
13 Helicon Associates
14 Non-Public Educational Services
15 CS Partners, LLC
16 The Romine Group
17 Global Educational Excellence
18 Pinnacle Education
19 Choice Schools Associates
20 Hamadeh Educational Services

Location
New York , NY
Grand Rapids, Ml
Herndon, VA
Arlington, VA
Phoenix, PoZ
Akron , OH
Fort Lauderdale, FL
NewYork, NY
Baltimore, MD
Southfield, Ml
NewYork, NY
Eden Prairie, MN
Trenton, Ml
Salem, MA
Hartland, Ml
Utica, Ml
Ann Arbor, Ml
Tempe, PoZ
Grand Rapids, Ml
Dearborn, Ml

Public Schools
Under
Management
80
55
24
43
54
54
14
36
12
14
15
7
12
17
10
5
9
8
10
3

That are
Charter
Schools
31
55
22
43
54
54
14
36
10
14
9
7
12
14
10
5
9
8
10
3

Students in
Managed
Schools
48,609
33,172
31 ,355
19,045
16,648
16,404
13,042
12,505
8,615
7,096
6,290
4,735
3,627
3,313
3,024
2,665
2,589
2,473
2,305
2,024

Source: BMO Capital Markets based on information compiled by Education Policy Studies Research Unit at Arizona State University.

Exhibit 67. Top 20 Not-For-Profit Educational Management

Organizations (ranked by students in 2007-2008 school-year)
Rank Organization

Location

1 Knowledge is Power Program (KIPP)

2 Aspire Schools
3 Cosmos Foundation, Inc.
4 America CAN
5 Green Dot Public Schools
6 Friendship Public Charter School
7 Innovative Education Management, Inc.
8 American Quality Schools
9 Concept Schools
10 Lighthouse Academies
11 Alliance for College-Ready Public Schools
12 Choice Education and Development Corp.
13 School of Excellence in Education
14 Edvantages
15 Uplift Education
16 High Tech High
17 Constellation Schools
18 UNO Charter School Network
19 YES Prep Public Schools
20 Partnerships to Uplift Communities

San Francisco, CA
Oakland, CA
Houston, TX
Dallas, TX
Los Angeles, CA
Washington, DC
Placerville, CA
Chicago, IL
Rosemont, IL
Framingham, MA
Los Angeles, CA
Mesa, AZ
San Antonio, TX
New Haven, CT
Dallas, TX
San Diego, CA
Parma, OH
Chicago, IL
Houston, TX
Burbank, CA

Charter
Schools
57
19
14
10
12

5
4

8
13
10
10
11

6
12

5
8
16

5
5
8

Enrollment
14,048
6,325
4,782
4,218
4,099
4,046
3,800
3,314
3,180
3,042
2,899
2,589
2,536
2,526
2,523
2,457
2,370
2,275
2,043
1,916

Source: BMO Capital Markets based on information compiled by Education Policy Studies Research Unit
at Arizona State University.

EMOs expanding
outside the US

A m ember of BMO

ln recent years. a number ofEMOs have e>:panded beyond the US, helping to manage schools in
a wide variety of cmmtries. Examples include:

Fina ncial Group

83

September

2009

K-12 Education

BMO Capital Markets

In Februruy 2003. Qatar hired US-based EMO Mosaica Education to help overhaul its K-12
educational system. The company currently manages 12 schools in Qatar and in the United
Arab Emirates, and is working on projects in China, Dubai, Egypt, and India~

h1 January 2006, private school operator Meritas acquired College du Leman, a private

international school near Geneva, Switzerland. In August 2006, the company purchased
l11Stituto San Roberto, a private K-12 school in Nuevo Leon, Mexico. In March 2009, the
company announced it will open the Leman International School in China in the fall2009.

In December 2007, Edison Schools (now EdisonLeaming) announced plans to open

Nations Academy, an international networlc of private schools. While the flrst two schools
are planned in the US (Betl1esda. Maryland and New Yolk City in fall 2010), the ultimate
goal is to have schools in 50-60 major cities across the globe using the International
Baccalaureate program, serving students ages 3-18, with a typical blend of 70% of students
fTom the locality and 30Yo international. Transferability between these schools is viewed as
an added recruiting incentive to attract students in gaining international exposure.

Virtual schools sometimes known as "online charter" or "virtual cha1ter" schools, offer an
internet-based curriculum outside of the conventional brick-and-mortar setting of traditional
public and charter schools. Tllis market is essentially divided between full-time online
schooling and supplemental online services where providers sell courses or ot11er services to
public schools. Where legislation has enabled full-time schools, state education dollars
typically pay for children who enroll in l11em. According to the Evergreen Consulting
Associates' Keeping Pace with K-12 Online Learning (published in November 2008), as of
fall 2008, 44 states offer significant online learning opportunities for students, including 21
states with full-tin1e online schools. Kl2 (LRN) is by far the most established company in the
space, operating in at least 23 states ru1d the District of Columbia in the 2009-2010 school
year (actual number not yet disclosed at time of publication).
While the models may differ, Evergreen Consulting categorizes l11em as follows:

Rapid growth in
virtual schools
and public online
coursetakers

State-led online initiatives that offer online tools and resources for schools in their state,
including aggregating courses from outside sources. instead of developing a11d offering
their own courses taught by teachers they employ. Exruuples include Wasllington Digital
Learning Commons, Oregon Virtual School Districts, and Massachusetts Online Network
for Education.

Full-time online programs (e.g., cyberschools) where students enroU and earn credit
toward acadenlic acllievement based on successful completion. Many of these are charter
schools.

TI1e virtual school market - or full-tin1e online market - while still relatively new has been
growing dramatically. According to the Center for Education Reform, as of January 2007
(latest data available), t11ere were 173 virtual schools witl1 total enrollment exceeding 92.000
students operating in 18 states, up from 60 such schools in 13 states in 2002-2003.
However, the supplemental market is also growing as districts expand online course
availability, and students are increasingly taking some of their classes in an online or blended
format. The Sloan Consortium estimates there were roughly 1.03 K-12 public school
enrollments in either fully online or blended cou.rses in the 2007-2008 school year (latest data

A m ember of BMO

Finan cial Group

84

September 2009

K-12 Education

BMO Capital Markets

available), a 47% increase from 700.000 students in t11e prior survey conducted in 2005-2006.
On average, respondents to the latest Sloan survey expect 23% growth in online enrollments
over the next two years.
Most of these students attend state-led prognuns. A list of some of the larger programs can be
fmmd in Exhibit 68.

Exhibit 68. Select State-Led Virtual Schools (2007-2008 school year)

Program Name
Alabama Access

Governance
State education agency (SEA)

Colorado Online Learning

Florida Virtual School

Independent non-government
organization with partial state
funding
Special school district

Georgia Virtual School

State education agency

Kentucky Virtual School

State education agency

Idaho Digital Learning

Academy
Louisiana Virtual School

Government entity with

governing board, outside SEA
Local education agency

Funding
State appropriations, federal, no
course fees
State appopriations, course fees,
other small grants
Public FTE funds, private grants
State appropriations, grants,
course fees
State appropriations

Course fees, enrollment funding

formula
State appropriations, federal
funds
Illinois Virtual High School State board contract with Illinois State appopriations, course fees
Math & Science Academy

Maryland Virtual Learning

Opportunities

Course fees, federal funds, Title

11-D

Michigan Virtual School

State education agency

Missouri Virtual Instruction

Program
North Carolina Virtual
Public School
North Dakota Center for
Distance Education
South Carolina Virtual
School
Virtual Virginia

Non-government organization

West Virginia Virtual

School

Grade
Levels
9-12
6-12
(courses
are 9-12)
K-12

Course
Registrations
18,955
1,931

Over 120,000

6-12

9,404

6-12

2,214

6-12

6,619

6-12

5,870

6-12

4,031

6-12
(courses
are9-12)
K-12

927

State education agency

State appopriations, course fees,

private grants
State appropriations
K-5 and 912
State appropriations
6-12

Over 11 ,000

State education agency

State appropriations, course fees

6-12

1,808

State education agency

State appropriations

6-12

7,389

State education agency

State appropriations

6-12

6,118

State education agency

State appropriations

6-12

1,705

Over 7,500
19,233

Note: Course registration is one student taking one semester-long course and may not reflect one FTE enrollment. Source: Evergreen
Consulting Associates and BMO Capital Markets.

Most of the students in online classes are at the high school level, which we expect is due to
the ski lls and temperament needed to succeed online and the greater demand for college prep
advanced placement (AP) courses (see Exhibit 69).

A member of BMO

Financia l Group

85

September 2009

K-12 Education

BMO Capital Markets

Exhibit 69. Percent of Students in Online Courses by Grade Level

(2008 Survey)
Grade
K-5
6-8
9-12

Other

Fully Online
21%
15%
64%
<1%
100%

Blended

Total

1%
20%
78%
<1%
100%

14%
17%
69%
<1%
100%

Source: Sloan Consortium and BMO Capital Markets.

Growth drivers for

virtual schools

We believe there are several reasons to expect continued f:,>rowth of the industry based on
larger educational trends.

Increasing K-12 sector enrollment (as previously delineated).

Increase in current expenditures per student. Tile ED projects that current

expenditures per student will increase (in constant dollars) roughly 27% to approximately
$11,582 in the 2017-2018 school year from about $9,099 in the 2004-2005 school year.

Performance and educator accountability, partially driven by changes made under

NCLB, the federal education reform which began in January 2002. Local school districts
are required under NCLB to provide alternative options to students enrolled in
underperfonning Title I schools. Under NCLB, virtual schools, better-perfonning
schools, and charter schools are acceptable transfer options. FurU1ennore, in February
2004. the US Department of Education issued specific guidance defining virtual schools
as acceptable for creating additional capacity for students wishing to transfer.

Increased government focus on the benefits of online education . We believe the

Obama achninistration will play a larger role than previous administrations in supporting
the use of online learning. ln June 2009, the ED released a comprehensive study of
empirical research on online learning from 1996 to July 2008. The study concluded that
"blended instruction ... had a larger advantage relative to purely face-to-face instruction
or instruction conducted whoUy online," and that " instruction conducted wholly on line
was more effective in improving student achievement t11an t11e purely face-to-face
instruction."

Cash-strapped states are looking to online solutions to cut costs. In California, the

governor has called for digital textbooks as a cost-culling measure in response to U1e
state' s fiscal crisis. A similar biiJ that could increase funding fo r e-books was recently
passed in Texas. Willie critics of such plans point to high switching costs, we believe the
recession has placed renewed emphasis on the use of digital curriculum and other online
services as a way to cut costs in the long term while enhancing assessment ability to help
meet federal standards. We expect similar plans will contribute to future technology
spend and virtual school development.

Increase in home schooling. According to the NCES, there were approximately 1.5

million students- roughly 2.9% of total K-12 enrollment- being homeschooled in spring
2007 (latest data available). This represents annual growth of roughly 7% over the
850,000 students- about 1.7% ofK-12 enrollments- in spring 1999. Other estimates put
the !,JTO\vth of homeschooling even higher. The National Home Education Research
Institute pegs ti1e number at 2-2.5 nilllion for the 2007-2008 school year, growing at an

A m ember of BMO

Finan cial Group

86

September

2009

K-12 Education

BMO Capital Markets

estimated 5%-12% annually. Per the NCES. most home school parents cited interest in
providing religious instmction (36%), concerns about the school environment (21%), and
overall dissatisfaction with academic instmction ( 17%) as reasons for home schooling
their children.

Increase in advanced studies learning. Providing students the opportunity to pursue

advanced courses is a major impetus behind the growth of virtual schools, in our view.
These students generally attend traditional schools and use virtual schools as a way to
take Advanced Placement (AP) courses or obtain college credits wllile in high school
through a virtual netvvork. According to the College Board, of schools that offer AP
courses, the percent with online classes has risen to 17% in 2009 from 13% in 2006.
Additionally. online AP courses can save money. as is the case for the Florida Virtual
School, where officials estimate online courses cost $1,000-$2,000 less than traditional
AP courses.
Other reasons students attend virtual schools include credit recovery (i.e. , students needing to
retake a class or take a class for the first time to ensure a smootJ1er transfer process between
schools), lack of available courses at one's school (more pronounced in rural locations), not
feeling comfortable in a traditional school environment, as well as appeal to "student
professionals" (e.g.. athletes, entertainers). Additionally, we believe online education provides
advantages for administrators and teachers in terms of increased assessment ability, potential
cost effectiveness, electronic tracking of student activity and parent involvement, and greater
ease in letting students move through coursework at tl1eir own pace.
Several states have taken recent action to ensure the continued growtJ1 of online schooling for
K-12 students:
Examples of

Florida passed legislation reqmnng all school districts to provide virtual learning
programs in grades K-8 by the 2009-2010 school year. Florida Virtual School had
120,000 course registrants by tJ1e 2007-2008 school year.

Alaban1a passed a law requiring all high school students beginning in the 2009-2010
school year to take at least one online or " teclmology enhanced" course in order to
graduate. Til.is is only the second state after Micll.igan to pass such a mle, where this
requirement has been in effect since the 2006-2007 school year.

Wisconsin passed Act 222 in response to a state court mling that a charter school was
ineligible to receive public funding. The legislation ensures virtual charter schools in the
state can operate with public funding.

progressive
states

Regulatory
hurdles, potential
funding cuts

A m ember of BMO

While growth has been strong to date, there have been some recent stumbling blocks. Most of
these setbacks are regulatory-related given that virtual schools are still mostly funded by state
taxpayers. However, during the 2008-2009 recession, several state officials sought to cut
funds for virtual schools as a way to fill huge state budgets gaps. For example:

In June 2009, Oregon passed a bill (Senate Bill 767) that placed a two-year moratorium
on online-charter schools, while limiting enrollment at existing online schools.
Proponents of tl1e bill cited outdated charter laws. and also wanted to prohibit online
schools from enrolling students in other districts.

Facing extreme budget gaps, the governor of Ohio introduced a budget proposal in Jl.ll1e
2009 t11at would have cut up to 70% from online school funding. The governor claimed

Financial Group

87

September

2009

K-12 Education

BMO Capital Markets

online schools had lower costs and therefore did not need as much as traditional brick and
mortar schools. However, a compromise was reached in July and the le!:,>islature passed a
bill with much smaller cuts in ftmding for all K-12 education.
According to the Sloan survey, public schools that offer online courses frequently contract out
this service, often using multiple service providers. The survey found tllat 83% of public
school districts use more than one ex1emal provider of blended and online content, while 39%
use four or more providers. Additionally, across content providers, independent vendors were
the third most conunon supplier offtllly online content, and the fourth most common supplier

Independent
vendors among
top providers of
K12 online
content

of blended programs (see Exhibit 70).

Exhibit 70. Online Content Providers to Public K-12 Schools (2008

Survey)
% of Districts Using Provider
Instruction Providers
Postsecondary institution
State virtual school in state (i.e., state-centralized K-12 courses)
Independent vendor
Education service agences (e.g., BOCES, COE, IU)
Another local school district or other district in state
District (i.e., delivered centrally from the district)
State virtual school in another state
Cyber (i.e., online) charter school in district
Other schools in district
Districts or schools in other states (excluding virtual schools)
Other

Fully Online
47%
41%
35%
29%
21%
17%
10%
9%
6%
5%
2%

Blended
27%
15%
18%
15%
19%
35%
2%
7%
5%
2%
2%

Source: Sloan Consortium and BMO Capital Markets.

While there are some similarities between operating virtual and brick-and-mort'dr schools,
there are differences as weiJ (see Exhibit 71).

Exhibit 71. Cost Types: Bricks and Mortar vs. Virtual Schools
Brick-and-Mortar School Only
Buildings and grounds maintenance
Security
Transportation
Energy
Computer and internet access for
every teacher
Substitute-teacher costs (for sick
days or professional development)
Athletics
Music program (e.g., band)

Online School Only

Space for offices and computer lab
for students
Course-management system
Course content
Computer and Internet access for
every teacher and student
Mobile-communication device for
teachers (e.g., cellphone) and
network
Technology support (e.g., help desk,
course updating, server
maintenance)
Marketing and advertising

Nursing services

Both
Administration
Teachers
Students
Professional development
Student-information system

State testing system

Textbooks
Courses and course outlines
approved by governing board
Access to computers
Special education services
Student support (counseling, library)
Network infrastructure
Telephones and network

Source: Sloan Consortium and BMO Capital Markets.

A m ember of BMO

Financial Group

88

September

2009

K-12 Education

BMO Capital Markets

Virtual schools should generate substantially larger profits for EMOs relative to brick-andmortar charter schools. as they typically receive tlle same amount of per-shtdent frmding
(albeit less than that given to " traditional" public schools), despite not having to support a
physical structure. An October 2006 report by consultants Augenblick, Palaich & Associates
estimates that start-up costs for a virhtal school serving 500 sntdents would be in the $1.5
million range. Annual FTE costs were estimated $7,200-$8,300 per fuH-time student
However. we believe there are a number of scale benefits similar to most technology-driven
businesses, allowing larger virtual school operators to generate sizeable margins.

Virtual schools
can be more
profitable than
brick-and-mortar
charter schools

ln many instances, the virhtal school model is similar to the charter school model, in which a
not-for-profit entity receives the charter and then hires a private management fmn to operate
the school. As such, we have seen &>rowth in EMOs providing such services. According to the
Education Public Interest Center, the number of virtual schools managed by EMOs increased
to 40 in the 2007-2008 school year, from 17 in the 2003-2004 school year, roughly doubling
their share to 7.5(Yo of all EMO-managed schools, up from 3.7% (see Exhibit 72).

Exhibit 72. Virtual Schools Managed by EMOs (2003-2004 to 20072008 School Years)
liiiliEii!l Virtual schools managed by EMOs -+-As % of total

45

8%

40

7%

(/)

0 35
0

.s:: 30
u

en

iij

iij

5%

25

4%

:::1

t:: 20

5
0

1-

0
~

3% ~

15

0 10

2%

1%

0%
2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

Source: Education Public Interest Center and BMO Capital Markets.

A list of some of the top virtual school managers can be found in Exhibit 73.

Exhibit 73. Top For-Profit Virtual School Managers (2008-2009 school year)
Company Name
Connections Academy

Type
Private

K12 Inc.

Publicly-held (LRN)

Insight Schools

Publicly-held (APOL)

iQ Academies

Private (KC Distance Learning)

Organization Type
Mostly charter schools, some
contract schools
Mostly charter schools, some
contract schools and some
license content for districts
Charter schools
Partners with districts and charter
operators

Grade
Levels
K-12
K-12

2008-2009 School Year

FTE
Enrollments No. of Schools
Abou115,000 15 schools in 14
states
About 55,000 24 schools in 22
states and DC

9-1 2

About 6,500

6-1 2

About3,000

11 schools in 10
states
Schools in 6
states

Source: Evergreen Consulting Associates and BMO Capital Markets.

A member ofBMO

Financia l Group

89

September 2009

K-12 Education

BMO Capital Markets

There bas also been some recent interest from operators of traditional schools to e>..'J)and into
the online market.

New entrants in
virtual school
market

In January 2007, Apollo Group (APOL) acquired Insight Schools, which served roughly
600 students in Washington State, for $15.1 million.

In May 2007, The Washington Post's (WPO) Kaplan acquired Sagemont Virtual
(operating as the University of Miami Online High School), and Virtual Sage. a
developer of online high school courses. Financial infom1ation was not disclosed. Tllis is
now part of Kaplan Virtual Education.

In October 2007, DeVty (DV) acquired Advanced Acadernics. which operated virtual
high schools in six states, for $27.5 million.

In June 2008, Edison Schools (now EdisonLearning) announced it had acquired Provost
Systems. a software provider that helps support two Pennsylvania online schools that
serve a total of 10,000 students. Financial terms were not disclosed.

Wllile we believe acquisitions such as these were me<mt to supplement the core businesses of
these companies. rather than to enter new business lines, having large competitors such as
these in one' s space does pose some threat to the existing players. in our view.
Special-education schools are specialty schools t11at serve children with special-educational

needs (e.g., autism. learning disabilities). Most of these shtdents are eligible for public
funding under the Individuals with Disabilities Education Act (IDEA), wllich was
reauthorized in December 2004 with most provisions taking effect in July 2005. The current
IDEA expired in June 2010.
Roughly 8.6% of
school age
population gets
special-education
services provided
by ED

A m ember of BMO

According to the ED, in the 2007-2008 school year (latest data available) nearly 6.7 million
school-age children in the US receive special-education services provided by t11e ED roughly 8.6% of the "school age" population. Tllis has increased at about a 1.9% CAGR from
the 1976-1977 school year when less than 3.7 million students (5% of school-aged
population) received such services. We note, however, tllis percentage has remained relatively
stable since t11e 2003-2004 school year (see Exhibit 74).

Finan cial Group

90

September

2009

K-12 Education

BMO Capital Markets

Exhibit 74. Students Served Under IDEA (1976-1997 to 2007-2008

School Years)
Eiiiiiiiiil Students served under IDEA (in mil.) --+--% of youth ages 3-21

9%
8% -c:

::?6

<I>

7%

6%

ct 5
w

....
<I> 4

"C

.......

5%

c:

::::>
"C
<I>

c:<I>

(/)

c.>

3% ~

::I

2%

~0

1-

1%

*-

1981-82

1986-87

1991-92

1996-97

2001-02

2006-07

Source: BMO Capital Markets and National Center for Education Statistics.

Rise in autism

One of the drivers of this growth has been the increase in those diagnosed with autism, as
roughly one out of every 150 children has Autism Spectrum Disorder, according to the Center
for Disease Control (2007 data). In addition, there has been a dramatic rise in the diagnosis of
" high functioning" autism and Asperger's Syndrome. It is estimated that these rising trends
will continue, likely driving further need for special-education programs and facilities.
According to austismspeaks.org, autism treatment costs the US over $90 billion annually- an
ammmt that is expected to double in the next 10 years.

$78.3 billion spent

It was difficult to obtain a current estimate of the size of the special-education market
According to the American Institute for Research Special Education E.Kpenditure Project
(SEEP), in the L999-2000 school year approximately $50 billion was spent on specialeducation services in the US or roughly $8,080 per special-education student. Another $27.3
billion was spent on regular education services for these students, while an additional $1
billion was spent on other special needs prognuus (e.g., Title 1, English language learners), for
a grand total of $78.3 billion. or about $1 2,369 per student. Given inflation along with the
continued increase in the special-needs population, it is likely that total spending is now
approaching the $100 billion level.

students in 19992000 school year

Much of tl1e government funding for iliese services is at tl1e federal level through IDEA.
While the budget proposal for annual funding has remained relatively flat - hovering around
$12 billion - since FY2005, tl1e Recovery Act practically doubles this allowance. with an
additional $12.2 billion in stimulus aid for IDEA (see Exhibit 75). This is expected to bring
the federal government' s special-education funding closer to the 40% (i.e., " full funding")
levels promised in the original 1975 IDEA legislation, as opposed to the 15% fw1ding of late.
Additionally. tllis boost in spend will provide states added flexibility in that tl1ey are allowed
to divert local funds in tlte an10tmt up to 50% of federal IDEA funds to other K-12 education
expenses.

Stimulus doubles
otherwise flat
funding

A m ember of BMO

~
0
1976-77

education

i:

.c:
4% ~

on special-

..

Financial Group

91

September

2009

K-12 Education

BMO Capital Markets

Exhibit 75. IDEA Funding; Including Stimulus (FY2001- FY2010E)

c:::J IDEA Funding ($ bil.)

$25

..,

-+-y/y change

if

20

-I

1:

.2

~
Cl

.!:

15
10

"0

1:
::J

u.

---

....--

....--

.... t:-::-- ....

--- - --- - ---

....--

....--

_j

--- -- --

100%
75%
Q!

Cl

50%~

.1:
0

25%~
0%
-25%

FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010
Source: BMO Capital Markets and Department of Education. Note: FY201 0 represents White House's
request.

Voucher
programs to fund
alternative school
providers

In our view, the increase in IDEA funding should relieve some pressure on states t11at have
otherwise been left to themselves to fund most of these special-education programs. In recent
years, this has led to the development of state programs to provide vouchers for specialeducation students to attend private schools, potentially providing new types of government
funding for providers of these programs. Among the programs:

Arizona's "Lexie's Law" Tax Credit. After the Supreme Court ruled in March 2009, that
Arizona's voucher programs violated church/state prohibitions, the state passed "Lexie's
Law" in May 2009 that provides $5 million in corporate scholarship tax credits to
organizations that provide scholarships to special-needs and foster children.

Florida McKay Scholarships for Students with Disabilities. This program, which
began in 2000. allows students to receive a voucher equal to Ute cost U1e public school
would have spent on U1e child; the averdge voucher is around $7,200.

Georgia Special Needs Scholarship. Created in 2007, tltis progTam pays up to about
$9,000 of the annual cost of private schools for special needs students, according to
Education Week. Roughly 1,600 students received funding in the 2008-2009 school year.

New York Students With Disabilities School Choice Act. Pending legislation (S-1984
and A-3259) introduced in January 2009 would allow parents with disabled c hi ldren to
receive scholarships to attend an alternative public or private school.

Ohio Autism Scholarship Program. Begun in 2004, Uris progTam offers vouchers of up
to $20,000 each in tuition assistance to students who have autism or an autism spectrum
disorder. An attempt made in 2008 to e>.1end this to other cllildren with special needs was
defeated by the Ohio le&>islature.

Utah Carson Smith Special Needs Scholarship Program. The program, launched in
2005, awards tuition assistance for private school based on the state's education funding
formula. In the 2008-2009 school year, the vouchers were as much as $6,442 per student.

Per Education Week, other states considering sinlilar options include Kentucky. Mississippi.
Nevada, Oklahoma, South Carolina, Texas. Virginia, and Wisconsin. However. we believe
the current econonlic environment has likely halted much progress on this issue.

A m ember of BMO

Financia l Group

92

September 2009

K-12 Education

BMO Capital Markets

The reauthorized IDEA attempted to align this law with NCLB by. for example, requiring
special-education teachers to be " highly qualified" through special certifications ~md tiuough
professional development, and by developing assessment standards for students with
disabilities. in line witi1 NCLB regulations (we acknowledge this "aligmnent" has not been
without contmversy). ln addition, recent provisions added to the ED' s testing policy for
learning disabilities will allow states to increase t11e number of students t11at can be annually
tested for special-education assessment f1om 600,000 to 1.7 million. FinaUy, a June 2009
decision by the US Supreme Court (Forest Grove School District v. T.A. (Case No. 08-305))
authorized reimbursements for private school tuition. even when a child never received
special-education services from a public school

Developments
that might spur
growth postrecession

For these and other reasons, there may be more oppommities for the for-profit companies
seiving this space, including:

Companies
serving the
special-education
market

Operators of alternative or special-education schools. such as privately held Aspen

Education Group, Camelot Schools, Community Education Partners, Educatjonal
Services of America, Specialized Education Services, Inc., and White Hat Management's
LifeSkills Centers, and publicly held Providence Service Corporation (PRSC) and
Psychiatric Solutions (PSYS).

Product and service companies that have offerings specifically designed for specialeducation students, namely publicly held Renaissance Learning (RLRN), Scientific
Learning (SCIL), and School Specialty (SCHS). as well as privately held Cambium
Learning and Spectrum Kl2 (fonnerly 4GL) School Solutions.

Therapeutic schools are specialty schools that focus on "at-risk" youth (e.g., drop-outs,
juvenile offenders or those students who have been expelled or dropped out). According to
Leave No Youth Behind, a publication of the Center for Law and Social Policy (CLASP),
there are a number of estimates of ti1e potential market for at-risk services, from 2.8-7.5
million youths. According to ti1e Education Commission of the States (ECS), in 2006 (latest
data available), roughly 8% of teens age 16-19 (the so-called "idle teen" rate) were not
working or attending school. Alll1ough the so-called "status dropout rate" - t11e percentage of
16-through 24-year-olds who are not enroUed in school and have not earned a high school
credential either a diploma or equivalency credential, such as a General Educational
Development (GED) certificate - has been declining in recent decades, in 2007 it still
represented 8.7% of this age cohort. or roughly 3.3 million people (see Exhibit 76).

Therapeutic
schools

A m ember of BMO

Financial Group

93

September

2009

K-12 Education

BMO Capital Markets

Exhibit 76. US Status Dropout Rate (1980-2007)

15%

12%

9%

6%

3%

0%~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

Source: BMO Capital Markets and Department of Education.

While a sizable munber of not-for-profit programs focus on this space (e.g., Job Corps, Big
Brothers, and Big Sisters), there are a number of for-profit providers tapped into this market
as well. many through t11erapeutic schools. The National Association of Therapeutic Schools
and Programs (NATSAP) classifies four types of tlterapeutic schools:

Boarding schools, which provide an integrated educational milieu with an appropriate

level of stmcture and supervision for physical. emotional. behaviordl, fmnilial. social.
intellectual m1d academic development. These schools grant high school diplomas or
award credits that lead to adlnission to a diploma-grm1ting secondary school. and can cost
$2.000-$6.000 per month.

Outdoor behaviordl health schools (i.e., wilderness programs), which subscribe to a

variety of treatment models that incorporate a blend of therdpeutic modalities. but do so
in the context of wilderness environments and backcountry travel. These tend to be
shorter-tenn programs, and as such are more expensive than boarding schools, running
$5.000-$10,000 per mont11.

Residential treatment centers. which focus on behavioral support and treat adolescents
with serious psychological and behavior issues. These programs can cost $4,000-$11,000
per mont11.

Home-based residential treatment centers, which are smaller, and typically integrate
participants in the local public or private schools in the area while others offer home
schooling.

NATSAP had over 170 member schools and served over 17,000 clients in 2007 (latest data
available).
Willie many of tl1e for-profit therapeutic school providers generate revenues from public-pay
sources, a number have expanded into areas focused on the private pay market. An example is
Aspen Education Group (a division of CRC Healtlt Group since November 2006), which
manages 38 alternative education programs or schools in 13 states and the UK. The programs
range from outdoor-based wilderness programs to residential schools to special-education day
A m ember of BMO

Financial Group

94

September

2009

K-12 Education

BMO Capital Markets

schools. In addition, in 2004. the company launched the Academy of t11e Sierras. described as
" the ftrst therapeutic boarding school in the cotmt:ty for ovenveight adolescents." Other
companies with t11empeutic schools include privately held C01muunity Education Partners and
Educational Services of America.
However, t11e therapeutic schools sector has also faced some controversy. In March 2005, The
Brown Schools filed for bankruptcy, following allegations of improper physical restraints at
the centers, ot11er questionable techniques. and lax regulation by state authorities. This was
followed in July 2005 by a high-profile expose on NBC' s Dateline, featuring the tragic deaths
of students at the schools. ln October 2007, the GAO issued a report entitled "Concerns
Regarding A buse and Death in Certain Programs for Troubled Youth " in which it cited
'thousands" of allegations of abuse beneen 1990-2007, including a number of doctmlented
deatllS. Altl1ough allegations such as these are not widespread. they do create a risk for
investing in this sector, in our view.
Edison's
experience may
have tainted
public equity
markets ... but it's
been a while

While a number of public companies sen1 ing t11e outsourced school admirustmtion space, with
the exception of Nobel Learning Communities (NLCI), t11ere are no " pure play" public
companies. We believe investors would appreciate the size and potential growth of this sector.
there may still be a bitter taste from the experience of Edison Schools (now EdisonLearning),
which went public with great fanfare only to stumble thereafter, more because of negative
publicity and high expectations t11an poor execution, in our view. Edison was taken private by
management and Liberty Part:t1ers in November 2003 . While there may be many investors in
publicly held companies with disappointing memories of that investment, enough time may
have passed to mitigate this opposition.
A list of recent transactions of K-12 schools and behavioral healthcare schools (i.e..
therapeutic) can be found in Exhibits 77 and 78, respectively.

A m ember of BMO

Financial Group

95

September

2009

K-1 2 Education

BMO Capital Markets

Exhibit 77. K-12 Schools Recent Transactions

($ in miUions)

Anne.
Date
Jur>-09
Jur>-09
May-09
May-09
May-09
Apr-09
Jar>-09
Dec-08
Dee-08
Oct-08
Aug-08

Transaction
Target

Voyager Learning Company

Specialized Education SeiVices
Lrttle New Star Education Group
Crayon Campus
Netmedia Education
Mothe(S Pride (50%)
SoftTouch
Princeton Review (K-12 Division)
Fusion Academy
Goalview Performance Information Systems
Southern Highlands Preparatory School

Ju~08

Cambridge Education

Jul-08

Shreiner Academy
Nord Angha Education
Theducation (16%)
Provost Systems
Sandcastie Private SChool
11 Charter SChools
Primrose SChools (84%)
Blue Ribbon Day School
leaming.com (51%)
Bearfoot l odge
Didaktus Skolor
World Class l earning Schools & Systems
uvs Gymnasium (Two Schools in Malm6 & Krlstlanstad)
Camelback Desert School
Jardlnes V~min a (40%)
Nackademin (Two Schools)
catapu~ learning
ABC Learning Centres Learning Care Group Divlsion(60%)
lrttle Sprouts
Justin Craig Education
lvyGien Schools
Bright Horizons Family Solutions
Mln ~Skool Early learning Centers
Advanced Academics
Leapfrog Nurseries
Power-Glide
elnstruction
ABC learning Centres ( 12%)
eColiege (including Datamark)
Barnstable Academy
Sage mont Virtual (Universrty of M1ami Online High School}
Virtual Sage
EC!ucatlon Direct
Nobel Learning Communtties (One School)
Forward Steps Holdings

Ju~08
Ju~08

Jur>-08
Jur>-08
Jun-08
Jun-08
Jun-08
May-08
Apr-08
Apr-08
Apr-08
Mar-08
Mar-08
Mar-08
Mar-08
Mar-08
Mar-08
Mar-08
Feb-08
Feb-08
Jan-08
Nov-07
Oct-07
Aug-07
Aug-07
Jun-07
May-07
May-07
May-07
Apr-07
Apr-07
Mar-07
Feb-07
Feb-07
Jan-07
Jar>-07
Jan-07
Dee-06
Dee-06
Dee-06
Oct-06
Sep-06
Sep-06
Sep-06
Aug-06
Aug-06
Aug-06
Jur>-06
Jun-06
Jun-06
May-06
Apr-06
Feb-06
Jar>-06

cambium learning

Enchanted Care Learning Center

Insight Schools
Macquarie leisure SeiVices
La Petne Academy
Busy Bees Group
Discovery Isle Child Development Center
Aspen Education Group
Educate
Children's Co.urtyar<l
College Coach
Education Station (Educate)
Hutchison's Child Care SeiVices
Honor Roll School
Nobel l earning Communities (Six Schools)
Gaifforma Chlidcare Centers (17 Schools)
Child Development Schools
camelot Schools
Primrose Schools
learning Care Group

Acquiror

cambium Learning
CGP, Prairie Capital & Twin Bridge Cap~al
Noah Education Holdings
Mini-Skool
Its Learning
AEZ lnffatech
AbleNet
CORE Education & Consulting Solutions
American Education Group
Public Consulting Group
Nobel Learning Communities
Knowledge learning
American Education Group
Barings Private Equity (Asia)
SkandrteK lndustrnoiValtning
Edison Schools
MinhSkool Early learning Centres
Imagine Schools

Roark Capital Group

Mini-Skool Early learning Centers (Audax Group)
Educomp Solutions
Mini-Skool Early learning Centers (Audax Group)
Anew learning
Sovereign Cap~ I Partners
F ramtidsgymnaslet I Goteborg
Nobel Learning Communtties
AXA & South Cone Administradora General de Fondo
Medstr6ms 10'1/est & Spinn lfl'llestment

JMI
Morgan Stanley Private Equity
American Education Group
Piper Private Equity
Nobel Learning Communities
Ba i nCap~ l

AudaxGroup
DeVry
ABC learning Centres
K12
leeds Equity Partners
Everitt Investments (Temasek Holdings)
Pearson
American Education Group

Kaplan
Kaplan
Penn foster
Private Preschool Provider
ABC Learning Centres
Veronis SuhJer Stevenson
Nobel Learning Communtties
Apollo Group
ABC Learning Centres
ABC Learning Centres
ABC Learning Centres
Nobel Learning Communities

CRC Heanh (Baln capital)

Cltigroup, StMing
ABC learning Centres
Bright Horizons Family Solutions
Knowledge Learning Corporation
ABC Learning Centres
Nobel Learning Communities
Private Preschool Provider

ABC l earmng Centres

Glencoe Capital
Charterhouse Group
American capital
ABC Learning Centres

Value

$130.6

NA
$16.6
NA

NA
S100.0

NA
$9.5
NA
NA
S1 .6
$30.0

NA
$357.4

NA
NA
NA
$82.0
NA
NA
$24.5
NA
$7.5

$75.0

NA
50.4

NA
NA
$100.0
S420.0
NA
NA
$2.1
$1,274.8

NA
$27.5
S62.9
$4.1
NA
$344.2
$518.0
NA
NA
NA

NA
$1 .9
$48.1
$325.0
$15.0
$15.5
S51.1
$339.4
$207.2
$12.0

NA
$535.0
S66.0

NA
S6.0
$83.3
$3.0
$2.0
S33J
NA

NA
$91 .7
$153.5

Transaction Value I LTM

EBITDA
1.3x
NM
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
0.3 X
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
2.3x
12.8x

R evenue

NA
NA
NA
NA
NA
NA
NA
NA
0.5x
2.3x

NA
NA
NA
NA

NA
NA
NA
NA

NA
1.7x

NA
NA
NA
NA
NA
4.0x
9.4 X
NA

NA
NA

NA
NA
NA
3.3 X
1.3 X
4.3x

NA
0.8x

NA
1.2x

NA
1.6x

NA
NA
0_2x
1.9x

NA
NA
0.6x
NA

NA
NA
0.7x

NA
NA
NA
NA
NA
NA
NA
NA
NA
11.9x
NA
NA
NA
NA
NA
12.7x
NA
NA
NA
12.1 X

NA
NA
NA
NA
NA
16.6x
23~0X

NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
10.1 X
NA
NA
NA
15.2x
6. 1 X
NA
NA
11.6x
NA
NA
4.7 X
NA
NA
NA
14.3x

Source: BMO Capital Markets and company reports.

A member of BMO

Financial Group

96

September

2009

K-12 Education

BMO Capital Markets

Exhibit 78. Behavioral Healthcare Schools Recent Transactions

(SIn millions)
Anne.

Target

Date

Jt.ll-09
Mar-09
Jan-09
Oec-08
Ncw-08
Oct-08
Sep-08
Mar-08
Aug-07
Jun.07
May-07
Mar-07
Mar-07
Oct-06
Sep-06
Sep-06
Sep-06
Sep-06
Jul-06
JtJ-06
Jul-06
May-06
Apr-06
Feb-06

Feb-06
Feb-06
Jan-06
Dec-()5
Dec-05
Dec-()5
Ncw.05
Ocl-()5
Ocl-()5

Sep-05
Sep-05
Sep-05
Jul-05
Jul-05
Jun-05
May-05
feb-05

Spedalized Education Services

Dementia Care Specialists

SotlTouch
Ps)djalric Solutions (5.7%)
care Resources
Family and Children's Services
Structure House
United Medical (5 1npatient Fadlities in Florida & Kentucky)
Bayside Marin Re<:oVe<y Center
Commur>ty EdUcation Centers (Investment)
CMGenics
camp Huntington
Residential Youth Trea1ment Fadllly
Crisis Prevention Institute
Aspen Education Group
National Trea1ment Network (Five d inics)
Sober Living by Sea
l<ids Beha-..;oral Health
SenadGroup
Rernuda Ranch
National Deaf Academy
AJtemative Behaviaal Sdenoes

HometOHn Oppcrtunities
Famity Based Strategies
CRC Health (North caslle. DLJ)
A to Z In-Home Tutoring
CorSolutlons
l<ids Behavioral Health ol Utah
Corphealth
SegeWalk
Ombudsman
Keystone Education and Youth SErvices
Drawbridges Counseling Services and oasis ComprehEI1sive Foster Care
Alphacare Resources
CNidrenFin;t
Alternative Behavlornl Counseling Services
Priory Group Limited (Doughty Hanson)
Ardent Health Services (20 Fadlities)
CNidren's Behallloral Health
Tregynon Hall and Arl1 Hall
Gateway Leaning

Ac:quiror

CGP. Prairie capital & Twin Bridge capital

Crisis Prevention lnstrtute
AbteNet
Daniel Alonso Grupo
Res-Care
CNidren's Beha-..;otal Health
CRCHealth
Psychiatric SolJtions
CRCHealth
LLR Partne<s, Primus capital Funds
Community EdUcation Centers
Aspen Education Grcx.v
CRCHealth
Riverside
CRC Health (Bain capital)
CRCHealth
CRCHealth
Acadia Healthcare
Three Delta
Haven Beha-..;oral Healthcare (Thoma cressey)
Ps)djalric Solutions
Psychialric Solutions
Rescare
Pro-..;dence Service
Baln capnal
Pro-..;dence Service
Malria Healthcare
Horizon Health
H~mooa

Aspen Education (Warburg Pincus, Frazier. Sproul)

Educational Services of America (Trimaran Capital Partners)
Ur>Yersal Health Services
Prcwidence Service
Providence Service
Blight Horizons Family Solutions
Rescare
ABNAMRO
Ps)djalric Solubons
Pro-..;denoa Service
SenadGroup
Educate

Transaction
Value

Transaction Value J l TM
Revenue

EBITDA

NA

NA

NA

NA

NA

NA
2.2x
NA
NA
NA

NA
13.7X
NA
NA
NA

NA
$103.0
NA
$10.0
NA
$120.0
NA
$53.0
$100.0
NA
S1.1
NA
$331.6
NA
NA
NA
$240.5
NA
NA

$250.0
NA
$0.4
$720.0
$1.6
$445.0
$9.9
$54,0
NA
NA

NA
$0.5
S4.7
$61.0
NA

$1,537.3
$566.7
$14.5
$22.9
$8.0

NA

NA

NA

NA
NA

NA
NA

NA

NA

NA
NA
NA
2.3x
NA
NA
NA
NA
NA

NA
NA
NA
14.8x
NA
NA
NA
NA
NA

NA

NA

1.3x
NA
NA
3.1 X
0.4X
3.7X
o.sx
NA

NA
NA
NA
NA
NA
11.7x
NA
NA

NA
NA

NA
NA

NA
NA
1.4X
2.0x

NA
NA
NA
NA

NA

NA

5.6x
1.9x
1.6x
NA

NA
NA
4.8x
NA

NA

NA

Source: BMO Capital Markets and company reports.

A member of BMO

Financial Group

97

September

2009

K-12 Education

BMO Capital Markets

A list offinancial and operating metrics for the pubticly held K-12 providers can be found in
Exhibit 79.

Exhibit 79. Trailing 12-Month Operating and Valuation Metrics: Selected Publicly Held
K-12 Companies

Rating
Price Target
Operating Performance
FY End
LTM Qtr. End
Revenue ($MM)
Gross Profit ($MM)
EBITDA ($MM)
EBIT ($MM)
Pretax Income ($MM)
Net Income ($MM)
Free Cash Flow ($MM)
Gross Margins (in%)
EBITDA (in%)
EBIT (in%)
Pretax Income (in%)
Net Income (in%)
Free Cash Flow Yield (in%)
ROIC: LTM
Valuation Metrics
FY End
LTM Qtr. End
Price (9/09/09)
Shares Outstanding (MM)
Market Cap ($MM)
Net Debt/(Cash) ($MM)
Enterprise Value ($MM)
CY EPS:
2008A
2009E
2010E
Two-Year CAGR
P/E:
2008A
2009E
2010E

K12
LRN

Plato
Learning
TUTR

Outperf
$22

Not Rated
N.A.

06
6/09
$315.6
118.6
43.2
22.3
21.4
12.3
(34.7)
37.6%
13.7%
7.1%
6.8%
3.9%
-11 .0%
7.8%

Princeton enaissance Scientific

School
Review Learning Learning Speciality
REVU
RLRN
SCIL
SCHS
Market
Not Rated Not Rated
Perform Not Rated
$3
N.A.
N.A.
N.A.

10

12
6/09
$145.3
85.4
8.8
4.8
(0.2)
(1.2)
(0.9)
58.8%
6.0%
3.3%
-0.2%
-0.8%
-0.6%
-1.0%

7109
$65.7
30.6
9.8
(10.6)
(10.6)
(1 0.5)
20.1
46.6%
15.0%
-16.2%
-16.2%
-16.0%
30.6%
-92.2%

12
6/09
$115.1
89.4
26.8
23.7
(25.0)
(32.4)
(5.6)
77.7%
23.3%
20.6%
-21 .7%
-28.1%
-4.9%
-107.6%

12
6/09
$44.4
32.8
0.4
(1.0)
(1 .3)
(1.4)
0.3
73.9%
0.8%
-2.3%
-3.0%
-3.1%
0.6%
-54.9%

GROUP
MEDIAN

04

7109
$998.6
398.4
107.1
71 .3
46.5
27.8
81.6
39.9%
10.7%
7.1%
4.7%
2.8%
8.2%
3.2%

52.7%
12.2%
5.2%
-1.6%
-2.0%
-2.8%
-28.0%

06

10

12

12

12

6109

7109

6109

6109

6109

$16.53
28.9
$478.2
(27.1)
$451.2

$4.65
24.1
$112.2
(14.2)
$98.0

$4.25
33.7
$143.3
0.0
$143.3

$10.18
29.2
$296.8
(17.3)
$279.5

$3.43
18.0
$61 .9
(2.4)
$59.5

04
7/09
$22.49
18.8
$423.6
400.4
$824.0

$0.40
0.48
0.67
29.8%

($3.85)
0.04
N.A.
N.A.

($0.15)
0.09
0.26
N.A.

($1 .20)
0.48
0.45
N.A.

($0.19)
(0.09)
(0.06)
-42.6%

$2.02
1.69
1.87
-3.8%

-3.8%

41 .6x
34.4
24.7

N.M.
107.3x
N.A.

N.M.
47.2x
16.7

N.M.
21.2x
22.6

N.M .
N.M.
N.M.

11 .2x
13.3
12.0

26.4x
34.4
19.6

1.4x
10.5
20.2
N.M.

1.5x
10.0
N.M.
4.9

1.0x
16.4
30.0
N.M.

2.4x
10.4
11.8
N.M.

1.3x
168.9
N.M.
223.5

0.8x
7.7
11.6
10.1

1.4x
10.4
16.0
10.1

EV/Rev. (LTM)
EV/EBITDA (LTM)
EV/EBIT (LTM)
EV/Free Cash Flow (LTM)

NA- Not Available. N.M. - Not Meaningful.

Source: BMO Capital Markets and FactSet Research.

A m ember of BMO

Financial Group

98

September 2009

Postsecondary Education

BMO Capital Markets

Postsecondary Education: Strong Growth

Drivers
Roller coaster ride
for stocks

More than a dozen companies in the postsecondal)' education sector trade in US equity markets.
The sector is the most developed in the education induslly from an investment perspective. in our
opinion. However, postsecondaty education stocks have been ex'tremely volatile over U1e past
decade, reacting to changes in emollment growth trends and other operating fundamentals, as well
as regulatory and funding-related concems. Willie this volatility may be inevitable for
shareholders of these companies, we believe the Jong-tenn outlook is very bright, owing to
the group's strong underlying growth drivers, unique pricing capabilities, and strong barriers
to entry.

Postsecondary School Market Overview

Postsecondary education (cmmnonly referred to as " higher education") includes prof,'T3mS
offered by colleges. universities. and similar facilities. The schools tend to be grouped under
three distinct categories:

Public not-for-profit schools (e.g., Petm State University);

Private not-for-profit schools (e.g.. University of Pennsylvania)~

P ri vate for-profit schools (e.g., Apollo Group's University of Phoenix) .

CAGR through

Using National Center for Education Statistics (NCES) data it is estimated U1at roughly 18.2
million students enroUed in degree-granting postsecondary instjtutions during the 2007-2008
school year (latest data available). NCES pr~jects that tllis enrollment will !,>row at roughly a 1.1%
rumual rate. reaclling roughly 20.1 million students in the 2017-2018 school year. This is less than
half the annual growth rate (2.5%) is the previous 40+ years (see Exhibit 80). We note that

2017-2018; their

historically the NCES projections have proven to be somewhat conservative.

NCES projects
postsecondary
enrollment to
grow at 1.1%

projections have
historically been
overly

Exhibit 80. Postsecondary Degree Granting Enrollment (1967-1968

to 2017-2018E School Years)

conservative

10%
8%

Ql
C>

c:

6%
4%
2%

"'

.s:
f.)

Ql
C>

~
c:

Ql

a.

1967-68

1977-78

1987-88

c:::::JTotal Enrollment

1997-98
-

2007-08

0%

iV

-2%

<(

:l

c:
c:

-4%
2017-18E

-Percentage Change

Note: Shaded areas represent US recessionary periods. Source: BMO Capital Markets estimates and US
Department of Education National Center for Education Statistics.

A m ember of BMO

Financia l Group

99

September 2009

Postsecondary Education

BMO Capital Markets

We were only able to obtain NCES projections for enrollment growth for four-year schools
(i.e., those tl1at provide mostly bachelor's degrees and above) and two-year schools (i.e., those
that specialize in associate' s degrees, such as community colleges): projections for less than
two-year schools (i.e., typically non-degree programs such as vocational institutions) were
unavailable. As shown in Exhibit 81. the bulk of students (about 11.6 million, or roughly
63%) attending degree-g:mntiug postsecondary institutions during the 2007-2008 school year

Four-year schools
enroll the bulk o f
degree-seeking
students

were enrolled at four-year schools, with the remaining 6.6 miUion (roughly 37%) enrolled at
two-year schools (e.g., community colleges). The NCES projects relatively similar growt11
rates for enrollment at each school type (1.2% and l.l% CAGR, respectively) through the
2017-2018 school year.

Exhibit 81. Postsecondary Degree Granting Enrollment by School Type (1965-1966 to

2017-2018E School Years)
21

II 4-year

02-year

18
15

:.

12

Cll

.
~

1:

6
3
0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

196566

1969-70

1973-74

1977-78

1981-82

1985-86

1989-90

199394

1997-98

2001-02

200506 2009-10E 2013-14E 2017-18E

Source: BMO Capital Markets estimates and US Department of Education National Center for Education Statistics.

Bulk of students
in undergraduate
programs;
graduate
enrollment
expected t o grow

million (roughly 2%) in 'lirst-professional (e.g., medical) programs. NCES projects graduate
students to grow at a faster rate relative to their undergraduate cow1terparts (1% vs. 1.5%
CAGR) through the 2017-2018 school year. boding well. in our view. for companies such as
Capella Education (CPLA) that specialize in higher-end de!:,Teed progr<cllTIS.

at faster rate

A m ember of BMO

Another way to segment the NCES enrollment projections is via those enrolled at degreegranting undergraduate programs (i.e., associate's and bachelor' s) versus t110se enrolled at
degree-granting graduate programs (i.e., master's and above). As shown in Exhibit 82, U1e
bulk of StlJdents (about 15.6 million, or over 85%) attending degree-granting postsecondary
institutions during the 2007-2008 school year were enrolled in undergraduate programs, with
roughly 2.3 million students (nearly 13%) in graduate prognuns, and the remaining 0.4

Financia l Group

100

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 82. Postsecondary Degree Granting Enrollment by Degree

Type (1965-1966 to 2017-2018E School Years)
21
El ~dega c1Jat e

0 First professional

OGraduate

18
15
~

12

"

~
c

w
6
3
0~~~~~~~~~~~~~~~~~.~~~~~~~~~~~~~~~

1969-70

1973-74

19n-78

1981-82

1985-86

1989-90

1993-94

1997-98

2001-02

2005-06

2009-10E 2013-14E 2017-18E

Source: BMO Capital Markets estimates and US Department of Education National Center for Education
Statistics.

Postsecondary
revenue has
su stained 8%
annu al growth for
nearly 40 years
We conservat ively
forecast 5%
annual revenue
growth through
2017-2018

Postsecondary is the second largest of the country's four education segments (behind K-12); it
generated roughly $386 billion in revenue in the 2007-2008 school year (latest data available),
according to the NCES. This level of spending represented roughly 2.8% of the US annual
gross domestic product ti1a1 year. Since tile 1969-1970 school year, U1e amount spent on
postsecondal)' education has increased at an 8% average annual rate.
When expected annual enrollment increases are coupled with increases in annual tuition
(assumed to be in the 4% mnge), we project total postsecond31)' expenditures should grow
roughly 5% annually, reaching au estimated $626 billion in the 2017-2018 school year (see
Exhibit 83). Tlus is somewhat slower than the lustorical 8% aven1ge a1mual growth rate --a
rate we believe benefited from a strong increase in college participation. especially in tile
1980s. Over ti1e past decade, postsecondary revenues have grown at a more "nonnaJ ized"
6.3% annual rate.

Exhibit 83. US Postsecondary Expenditures (1969-1970 to 20172018E School Years)

$700

~Total

16%

Expenditures --y/y% change

14%

600

:0
c

"'~

Ql

..

10% c01
.s::.
8% ()

400

"D

300

0..

200

cQl

12%

500

6%
4%

)(

w
100
0
1969-70

>-

>.

2%

1977-78

1985-86

1993-94

2001-02

2009-10E

0%
2017-18E

Note: Shaded areas represent US recessionary periods.

Source: BMO Capital Markets estimates and US Department of Education National Center for Education
Statistics.

A m ember of BMO

Financia l Group

101

September

2009

Postsecondary Education

Market is s till far

from saturated:
roughly 29.4% of
US population
older than 25

BMO Capital Markets

Despite the sizable increase in the number of students attending higher education facilities. we
be lieve the market is far from saturated. As shown in Exhibit 84, in 2008 (latest data
available), 29.4% of l11e US population older tha n 25 had a bachelor's degr ee or more. While
this percentage has increased significantly from 9.1% in 1964, we believe penetration rdtes
will continue to increase for a number of reasons detailed below.

holds a bachelor's
or higher

Exhibit 84. Percentage of US Population Older Than 25 with

Bachelor's Degree or More (1964-2008)
30%
liiii!ii!!l Percentage

1.2%

-+- yly change

25%

1.0%

!!!
.2 20%

0.8%

.t::

0.6%

.t::

0.4%

.,

~ 15%

.,

"'"'c

.t::

10%

0.2%

?ft

0.0%
0%~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

..().2%

2008

Source: BMO Capital Markets and Postsecondary Education Opportunity from data compiled by the US
Census Bureau.

Postsecondary School Market Growth Drivers

We believe a number of longer-tenn drivers exist for continued growth in postsecondary
education:

Empl oyers need

mor e educated
workers; master's
and doctoral/eve/

Increasing employer-driven demand for skilled professionals;

Increase in muuber of potential students (demographic drivers):

Continued influx of" older" students;

Increasing e mployee-driven demand as a result of the potential earnings premium:

Increased acceptance of online degrees (discussed in detail separate ly) .

Increasing demand for s killed professionals. As a result of teclmologica l advances and the
continued globalization of tl1e economy. we believe higher levels of education have become.
and will continue to be, a prerequisite for many positions. The Bureau of Labor Statistics
(BLS) projects that by 2016, roughly 2 1.7% of those employed will be required to have a
bache lor' s degree or hig her. up fr om 20.8% in 2006. Jobs for this segment of the population
are e>..rpected to increase by 15.3% over ll1is period (1.4% CAGR) - faster t11an the overall
employme nt market which is expected to increase at a 10.4% rate (1% CAGR). Jobs requiring
grdduate education - specifically a doctordl or master's degree- are projected to be the t\vo
fastest-growing categories, up 2 1.6% (2% CAGR) ~md 18.8% (1.7% CAGR), respectively.
Interestingly, jobs requiring a n1inimum of an associate ' s de!:,>ree are expected to rise almost

expected to be
two fastestgrowing
categories

just as fast - up 18.7% (1.7% CAGR: see Exl1ibit 85).

A m ember of BMO

Financi al Group

102

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 85. Employment by Education and Training Category

{2006-2016E)
Education Level
First professional degree
Doctoral degree
Master's degree
Bachelor's or higher plus work experience
Bachelor's degree
Bachelor's degree or higher
Associate degree
Postsecondary vocational award
Some postsecondary (below bachelor's)
Work experience in related occupation
Long-term on the job training
Moderate-term on-the-job training
Short-term on the job training
Total

Number
2006-2016E
% Chg.
2006
2016E
2,247
14.1%
1,970
2,025
2,462
21.6%
2,167
2,575
18.8%
7,117
9.1%
6,524
18,585 21,659
16.5%
31,271
36,060
15.3%
5,812
6,899
18.7%
7 ,901
8,973
13.6%
13,713
15,872
15.7%
14,579 15,889
9.0%
11,489 12,200
6.2%
27,230 29,248
7.4%
52,339 56,951
8.8%
150,621 166,220
10.4%

% of workforce
2006
2016E
1.3%
1.4%
1.3%
1.5%
1.4%
1.5%
4.3%
4.3%
12.3%
130%
20.8%
21.7%
3.9%
4.2%
5.2%
5.4%
9.1%
9.5%
9.7%
9.6%
7.6%
7.3%
18.1%
17.6%
34.7%
34.3%
100.0%
100.0%

Source: BMO Capital Markets and Bureau of Labor Statistics Employment Outlook, 2006-2016.

Potential earnings premium. The income premiwn associated with a postsecondary

education has been widely documented and we believe it has not gone mmoticed by the
public. According to economists at the Federal Reserve Bank of Chicago. for each additional
year of completed schooling, an individual's earnings increase, on average, by roughly 11 %.
This correlation between education and income is highlighted in Exhibit 86: in 2006 (latest
data available), the mean income of US employees with a bachelor's degree was nearly
double the mean income for those with only a high school education ($56,788 versus
$31,071).

College degree
has high return
on investment

Exhibit 86. Average Annual Earnings by Education Category

{2006)
$125,000

$103,944

$116,514

100,000
$70,358

75,000

$56,788

50,000
25,000

$20,873

$31 ,071

$32,289

$39,724

0
HighSchool High School
Some
No Diploma
Graduate
College, No
Degree

Associates

BacheiMs

Maste(s

Doctoral

Professional

Note: Data reflects mean income. Source: BMO Capital Markets and US Census Bureau.

Income gap has,

for the most part,
expanded over
time

A member ofBMO

The income gap between high school graduates and those with additional education has, for
most part, been expanding over time, especially for workers who have obtained a bachelor's
degree or higher. In 2007 (latest data available), the average annual earnings for an individual
with a bachelor's degree and one will1 an advanced degree were. respectively, 83% and 159%
higher tl1an a person with only a high school diploma. By comparison, tl1e same ratios were
only 57% and 113% in 1975 (see Exhibit 87). However, we note that this gap has narrowed a
bit in recent years, after peaking at 86% in 2005 and 173% in 2004, respectively, owing to
slower annual increases for the relatively highly-educated positions.

Financial Group

103

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 87. Average Annual Earnings Relative to Average Annual

Earnings of High School Graduates (1975-2007)
2.5x
2 .0x

Not a High School Graduate

some College/Associate Degree
Bachelor's Degree
- A d vanced Degree

1-......._____....------

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

Source: BMO Capital Markets and US Census Bureau.

Demog raphics . The rising muubers of working-adult students (i.e., relatively older college
students who worl< while obtaining their postsecondary education) has garnered much press in
recent years. Most postsecondary students, however, are still in the traditional 18- to 24-year-old
range; in the 2007-2008 school year (latest data available), roughly 10.8 mi!Uon in this age group
were enrolled in US degree-granting institutions, representing nearly 58% of all students and over
73% of ful l-time students, according to the NCES.
Number of 18- to
24-year-o/ds
slowing, though
expected t o grow
through 2012

This " traditional age" cohort is now growing again, as the "echo boom" generation (i.e., children
of baby boomers) has now entered this group, offsetting the decline that beg~m in 1981, as the
" baby bust" generation entered tlus cohort After troughing in 1996 at 25.4 nllllion, the number of
18- to 24-year-olds in the US population is now increasing at slightly less tlmn 1% annually and
is ex-pected to grow from 29.8 million in 2007 (latest data available) and reach its peak in 2012 at
over 30.9 mjUion- j ust above its prior peak (30.5 million in 1981). While the size of this group is
expected to decline tl1ereafter, tlus decline is e>..rpected to be short-lived (tloough 2018) before
rebounding once again (see Exhibit 88). Given the demographic trends, growth in tl1e
" traditional" postsecondary population should drive continued demand for postsecondary
education for t11e foreseeable future, in our view.

Exhibit 88. US Population : Age 18- to 24-Years Old (1981-2017E)

Total: 18-24 Years

32

3%

'iil

2%

1%

c 24

:E

Gl

.<=

~ 16
0

~~~~~~~~~~~~~~~~~r-~~~~~~~'"~7-~ 0% ~

l0

"'lij

-1% ~

8
-2%

0..

c
c

<(

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ -3%

1981

1985

1989

1993

1997

2001

2005

2009E

2013E

2017E

Source: BMO Capital Markets and US Census Bureau.

A member of BMO

Financia l Group

104

September 2009

Postsecondary Education

BMO Capital Markets

But it is not just demographics that drive postsecondary enrollment In some cases.
postsecondary enro!Jment continued to rise even when U1e number of 18- to 24-year-olds
declined. As shown in Exlubit 89, between 1985 and 1992, the number of 18- to 24-year-olds
shrank by 10.9%, yet postsecondary enrollment increased by 18.3%.

Exhibit 89. US Postsecondary Enrollment vs. 18- to 24-Year-Oid

Population {1985-1992)
c

15,000

30,000

14,000

~
:;
28,000 a.

UJ

13,000

26,000

12,000

24,000

11,000

22,000

>-

10,000

20,000 00

c.,

er::

0..

~_...,_

m=-=
'O:a

r::~

:::>
'0

'*

(/)

.,.,.:..

'<I'

0..

(/)

:::>

1985

1986

1987

1988

Postsecondary enrollment

1989

1990

1991

1992

--+- 18-24 year-old population

Source: BMO Capital Markets, US Department of Education National Center for Education Statistics, and US
Census Bureau

Catalysts beyond demographics. We believe a number of additional catalysts emerged in recent

decades that penuanently changed the dynamics of the postsecondary sector:

A m ember of BMO

Greater percentage of high school students enrolling in college. The percentage of

US high school students enrolling in college has increased since bottoming at 46.6% in
1973, according to the NCES. A substantial portion of college enroUment growth came
between faJI 1980, when 49% of lrigh school students enrolled in college, and fall 1991
when the percentage reached 62.4%, breaking the 60% tlrreshold for the first time. We
believe the accelemtion in US economic growth between fall 1997 and fall 200 1 had a
cotmter-cyclical effect on college enrollment growth, as penetrdtion rates fell from a peak
of 67% to 61.7%. Since t11at time, rates have increased. aJbeit not in a straight line, with
the 68.6% in fall 2008, matching fall 2005 's all-time high. Nevertheless, while the
current sluggish economic environment could accelemte participation mtes in the neartenn, we believe the percentage of high school students enrolling in college will remain
at the high-60% level for the foreseeable future, as it has become the norm for most high
school students to continue tl1eir education beyond high school (see Exhibit 90).

Financia l Group

105

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 90. Percentage of High School Students Entering College

(Fall 1960 to Fall 2008)
Percentage Attending College

75%

--%

yty change

5%
4%

~ 60%

3%

.!!

2%

0
en

.,

1%

.: 45%

~ 30%

..g>
..

0% "5

>.

:;,

-1%

J:!
~

-2%

:. 15%

-3%

-4%
-5%

1960

1968

1976

1984

1992

2000

2008

Note: Shaded areas represent recessionary periods.

Source: BMO Capital Markets, US Department of Education National Center for Education Statistics, and
Postsecondary Education Opportunity

Influx of "older" s tudents. An analysis of the percentage of "older" students that have
enrolled in degree-seeking postsecondary programs reveals an increase in the rising
numbers of working adult students in recent years. As shown in Exhibit 91, according to
the NCES, t11e number of 25- to 44-year-old students grew from 4.9 million in fall 1987
to 6.9 million in fall 2006 (latest data available), a total increase of over 42%, outpacing
the roughly 39% growth in the total number of students over l11at timeframe. The NCES
forecasts that an increasing percentage of this age cohort will attend college, as more
"working adults" see the benefits of postsecondary education. Sh1dents age 25 to 44 are
e>..-pected to increase 18.5% (1.6%) CAGR, reaching 8.2 million in fall 2017, relative to
the expected 13.1% increase (1.1% CAGR) for all postsecondary students; roughJy 9.4%
of all 25- to 44-year-olds are expected to be enrolled in postsecondary institutions by fall
2017, up from about 8.3% in fall 2006 (latest data available).

Exhibit 91. Number of 25- to 44-Year-Oid Students and as

Percentage of Population (Faii 1987-2017E)
Number of enrollees

-+-- % of population

[';
~-

.. ~-:!:

""""
r~ ro

r"

.
I

r-

.,..

10% 2:8%

lil
I

6o/o

"'

Q.

4%

g>
:0
c:

1987

1990

1993

1996

1999

2002

2005

2008E

2011 E

2014E

2%

ct

Oo/o

fl.

2017E

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

A m ember of BMO

Financia l Group

106

September 2009

Postsecondary Education

BMO Capital Markets

For-Profit Postsecondary School Market Overview

Headli nes earlier
this decade
revived memories
of a checkered
past

The most significant component within tJ1e for-profit postsecondary sector is the schools
market, formed of companies that run for-profit (also called proprietary) schools. In its early
days. this niche developed an unpleasant reputation owing to allegations of fraudulent
activities regarding government funding at certain correspondence ~md 'back-of-thematchbook" schools. Although headlines earlier this decade may have brought reminders of
those days, we believe the migration of most of t11e publicly held companies beyond their
original vocationally oriented roots (e.g., Career Education, DeVry), the introduction of more
professional numagement - m<my tluough private equity involvement, as well as regulatOl)'
changes, have helped to "cle~m up" the reputation of the for-profit sector.
For-profit postsecondary schools are e:-.'Pected to generate an estimated $25.9 billion in
revenues in 2009 (based on data compiled by Eduventures, an education market research
firm), or only 6.3% of the estimated $411 billion spent on postsecondary education during this
calendar year. Although this percentage appears small, it should be noted that for-profit
postsecondary revenues have increased at roughly a 16.6% CAGR since 1996, when only
$3.5 billion were genernted (roughly l. 7% of the total).

For-profits
rev enues
expected to
increase 10%
annually through

Wlllle growth rntes may slow as the economy e:".'Pands, we still project the for-profit sector
will gain share and forecast that for-profit postsecondary revenues will increase roughly I 0%
annually to $41.7 billion in 2014. At tl1at rate, for-profit institutions would capture
approximately 7.9% of the roughly $529 billion in postsecondary expenditures expected in
that year (see Exhibit 92).

2014

Exhibit 92. For-Profit Postsecondary School Revenues (20002014E)

$50

.,.:c

40

:. 30
0)

c:

20

c:
Ql

10

:0
c..

1/)

~!!!!!!!!!!~Fo r-profi t

revenues ($ bil.)

~Market

share

1, 1 , 1 , 1 , 1 , 1 , ~

~(;)

~"

~'),

~,.,

~<-.>

~~

~~~~'),<:5~~~

~'0
P><v (;)<v ~ 'l-<v
~ ~<::5 ~" ~" ~"

~<v

'),<::>"

9%
8%
7%
6%
5%
4%
3%
2%
1%
0%

<U

.t=

1/)

(ij
.;,:.

iii

:E

~"

Source: BMO Capital Markets estimates, and US Department of Education National Center for Education
Statistics, and Eduventures.

Wlllle the lines have blurred somewhat, for-profit postsecondary school operators have three
distinct business models: enterprise colleges, super systems, and internet institutions.
Enterprise colleges. These schools (including Florida Career College and New York Career
Institute) opernte a single campus or group of campuses willtin a region. According to the
Education Commission of tlle States (ECS), these colleges represent half of the institullons in
the sector and typically enroll fewer than 500 students at a single campus or 5,000 students at
multiple campuses. These schools usually have a career-oriented focus and benefit from
strong local ties witl1 employers. Enterprise colleges tend to be acquisition candidates for the
larger privately held and publicly held providers.

A m ember of BMO

Financia l Group

107

September 2009

Postsecondary Education

BMO Capital Markets

Super systems. Several publicly traded companies operate on this model. including Apollo

Group (APOL), Career Education (CECO), Corinthian Colleges (COCO), DeVry (DV), JTI
Educational Services (ESl), Lincoln Educational Services (LINC), Strayer Education (STRA),
and Universal Technical Institutes (UTI). A number of privately held companies are also
included in this group, such as Delta Career Education Corporation a nd Education
Corporation of America. These institutions offer multi-state, multi-campus programs, and
tend to operate both degree-granting as well as non-degree-granting schools. As with
enterprise colleges, most super systems are career oriented in their focus.
Internet institutions. Internet institutions, including American Public Education's (APEI)

American Military University and American Public University, Capella Education's (CPLA)
Capella University. and Laureate Education' s Walden University, represent the newest fonn
of for-profit postsecondary education. TI1ese institutions operate exclusively via "virtual
classrooms" and have no physical campuses. This is different from the super systems that may
provide an internet offering to complement the programs available at the ir brick and mortar
campuses.
According to the NCES. nearly 1.5 million students enrolled in the over 2.710 for-profit
postsecondary institutions (both degree-granting and non-degree granting) eligible for Title
rv (i.e. , federally-funded financial aid) as of fall 2007. A s izable number offor-profit schools
likely do not participate in Title IV programs, although the data is difficult to access. In
addition, as many for-profi t schools accept students on a rolling basis throughoutl11e year, this
"fall" snapshot may underrepresent tl1e for-profit's share of the market. According to the Fact
Book 2009, published by an arm of Career College Association (CCA), the trade association
for the for-profit sector, the for-profit sector enrolled roughly 2.3 million students in the 20072008 school year.
Although the for-profit sector represented nearly 42% of all institutions as of fal l 2007, it only
served 7. 9% of all postsecondary students, as for-profit schools tend to be much smaller than
tl1eir not-for-profit counterparts. The average size of a for-profit school was roughly 546
students, relative to the typical public institution at nearly 6,800 students and private not-forprofit schools, which average nearly 2,000 students each (see Exhibit 93).

For-profit
enrollment
represents 7.9%
of total
enrollment;
schools are
typically small

Exhibit 93. For-Profit as Percentage of Total Institutions and

Enrollment (Fall 2007)
Public
Private not-for-profit
Private-for-profit
Total

Institutions
Number %of Total
2,003
30.7%
1,810
27.7%
2,712
41.6%
6,525
100.0%

Students (in OOO"s)

Number % ofTotal
13,596
72.8%
3,595
19.3%
1,480
7.9%
18,671
100.0%

Avg. Size
6,788
1,986
546
2,861

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics
(NCES 2009-155).

Although tl1e bulk offor-profit institutions are non-degree granting (i.e., focus on diploma and
certificate progr'dlllS and not on providing degrees, such as associate's and bachelor's
de!,>rees), the m~tiority of for-profit students are enrolled in degree-granting institutions. As

Most for-profit
students attend
degree-granting
institutions

A member of BMO

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108

September 2009

Postsecondary Education

BMO Capital Markets

shown in Exlribit 94. most of the students at for-profit schools (over 80%) attend programs at
degree-granting institutions, with an average size of nearly 1, !50 students per institution.

Exhibit 94. For-Profit Institutions and Enrollment by Degree Type

(Fall 2007)

Degree granting
Non-degree granting
Total

Institutions
Number %of Total
38.3%
1,038
61 .7%
1 674
100.0%
2,712

Students (in OOO's )

Number %of Total
80.1%
1,186
19.9%
294
100.0%
1,480

Avg. Size
1,143
176
546

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics
(NCES 2009-155).

The largest portion of for-profit students attend four-year institutions (e.g., bachelor's
pro!,>rams), even though those represent the smallest number of for-profit institutions. As
shown in Exhibit 95, during the 2006-2007 school year nearly 63% of for-profit students
attended school at four-year institutions, even though those schools represented just over 18%
of all Title IV eligible for-profit institutions.

Most for-profit
stu dents atten d
four-year
in s titutions

Exhibit 95. For-Profit Institutions and Enrollment by School Type

(Fall 2007)

4-year
2-year
Less than 2-year
Total

Institutio ns
Number % of Total
18.1%
490
852
31.4%
1,370
50.5%
100.0%
2,712

Students (in OOO's)

Number % of Total
62.6%
926
321
21 .7%
15.7%
233
100.0%
1,480

Avg. Size
1,890
377
170
546

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics
(NCES 2009-155).

Pub lic not-forprofit s d ominate

h igher ed,
although for-

A further breakdown of enrollment by school type can be found Exhibit 96. Public not-profit
schools tend to enroll the bulk of students across all school types. except at first-professiona l
schools (e.g. , law schools) where private not-for-profits dominate and at less-than-two-year
schools, where for-profits dominate, with nearly 78% of all enrollments.

profits d ominate
at less-than-twoyear sch ools

A m ember of BMO

Financia l Group

109

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 96. Enrollment by School Type and Market Share (Fall 2007)
Public not-for-profit
Private not-for-profit
No. (OOO's}
~ No. {OOO's}
!!
Four-year schools:
Undergraduate
Graduate
First-professional
Subtotal
Two-year schools
Less than two-year schools
Total
Market share by school type:
Four-year schools:
Undergraduate
Graduate
First-professional
Subtotal
Two-year schools
Less than two-year schools
Total

5,813.8
1,210.3
142.6
7,166.7
6,374.2
54.6
13,595.5

64.7%
52.8%
40.7%
61.6%
94.6%
18.2%
72.8%

42.8%
8.9%
1.0%
52.7%
46.9%
0.4%
100.0%

2,437.0
895.2
205.9
3,538.0
44.8
12.3
3,595.2

67.8%
24.9%
5.7%
98.4%
1.2%
0 .3%
100.0%

27.1%
39.0%
58.7%
30.4%
0.7%
4.1%
19.3%

Private for -profit

No.(OOO's}
735.5
188.1
2.3
925.9
321.2
232.9
1,480.0

8.2%
8.2%
0.6%
80%
4.8%
77.7%
7.9%

!!

49.7%
12.7%
0.2%
62.6%
21.7%
15.7%
100.0%

Total
No.(OOO's}
8,986.3
2,293.6
350.8
11,630.6
6,740.3
299.9
18,670.8

!!
48.1%
12.3%
1.9%
62.3%
36.1%
1.6%
100.0%

100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics (NCES 2009-155).

For-profit
demographics:
skewed toward
female, older, and
minority

A m ember of BMO

A typical student at a for-profit postsecondary school is somewhat different from one who
attends a not-for-profit institution. For-profit programs tend to enroll more females (especially
for non-degree programs, i.e., less than two-year schools), older students, and non-white
students, though this can be largely dependent on program type and otJ1er factors. For
example, Corinthian CoUege' s Everest schools have a predominantly female population,
likely owing to their focus on allied healthcare programs, whi le Universal Techn.ica1Institutes
(UTI) skews more heavily toward male students, owing to its focus on automotive repair and
the like. In addition, for-profit students tend to be more broadly distributed among all three
program types (i.e. , diploma/certificate, two-year schools, ~md four-year schools), and skew
more toward attending full time (likely because they favor shorter duration programs) (see
Exhibit 97).

Financia l Group

110

September

2009

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BMO Capital Markets

Exhibit 97. Student Demographics: For-Profit vs. Not-For-Profit

Gender
(1)

Age (1)

Race let
hnicity

(1)

Annual
income
(2)

Attenda
nee (1)

For-Profit

Public Not-for-Profit

Private Not-For-Profit

Total: 35% male, 65% female

Total: 43% male, 57% female

Total: 42% male, 58% female

4-year school: 38% male,

4-year school: 45% male, 55%

4-year school: 43% male, 57%

62% female

female

female

2-year school: 37% male,

2-year school: 42% male,

2-year school: 33% male,

63% female

58% female

67% female

Less than 2-year school: 23%

Less than 2-year school: 40%

Less than 2-year school: 32%

male, 77% female

male, 60% female

male, 68% female

Average age (est.): 30 years

Average age (est.): 21 years

Average age (est.): 22 years

Younger than 18: 1%

Younger than 18: 5%

Younger than 18: 2%

18-24 years old: 36%

18-24 years old: 60%

18-24 years old: 59%

25-39 years old: 45%

25-39 years old: 25%

25-39 years old: 28%

40 and older: 17%

40 and older: 10%

40 and older: 10%

Total: 41% white, 38% non-

Total: 60% white, 31% non-

Total: 62% white, 22% non-

white, 21%

white, 9%

white, 16%

unknown/nonresident alien

unknown/nonresident alien

unknown/nonresident alien

4-year school: 40% white,

4-year school: 63% white,

4-year school: 62% white,

32% non-white, 28%

27% non-white, 10%

22% non-white, 16%

unknown/nonresident alien

unknown/nonresident alien

unknown/nonresident alien

2-year school: 47% white,

2-year school: 57% white,

2-year school: 61% white,

43% non-white, 10%

36% non-white, 8%

31% non-white, 8%

unknown/nonresident alien

unknown/nonresident alien

unknown/nonresident alien

Less than 2-year school: 38%

Less than 2-year school: 64%

Less than 2-year school: 25%

white, 54% non-white, 8%

white, 33% non-white, 3%

white, 65% non-white, 10%

unknown/nonresident alien

unknown/nonresident alien

unknown/nonresident alien

Dependent students:

Dependent students:

Dependent students:

Under $20,000:

26%

Under $20,000:

11%

Under $20,000:

13%

$20,000-$39,000:

28%

$20,000-$39,000:

17%

$20,000-$39,000:

19%

$40,000-$59,000:

18%

$40,000-$59,000:

16%

$40,000-$59,000:

19%

$60,000-$79,000:

12%

$60,000-$79,000:

15%

$60,000-$79,000:

18%

$80,000-$99,000:

6%

$80,000-$99,000:

13%

$80,000-$99,000:

12%

$100,000 and over: 10%

$100,000 and over: 27%

$100,000 and over: 20%

Independent students:

Independent students:

Independent students:

Under $10,000:

26%

Under $10,000:

22%

Under $10,000:

22%

$10,000-$19,000:

21%

$10,000-$19,000:

16%

$10,000-$19,000:

18%

$20,000-$29,000:

17%

$20,000-$29,000:

16%

$20,000-$29,000:

16%

$30,000-$49,000:

17%

$30,000-$49,000:

19%

$30,000-$49,000:

19%

$50,000 and over: 19%

$50,000 and over: 27%

$50,000 and over: 25%

Total: 79% full-time, 21% part-

Total: 57% full-time, 43% part-

Total: 75% full-time, 25% part-

time

time

time

4-year school: 74% full-time ,

4-year school: 73% full-time,

4-year school: 75% full-time,

26% part-time

27% part-time

25% part-time

2-year school: 89% full-time,

2-year school: 39% full-time,

2-year school: 70% full-time,

11% part-time

61% part-time

30% part-time

Less than 2-year school: 86%

Less than 2-year school: 53%

Less than 2-year school: 87%

full-time, 14% part-time

full-time, 47% part-time

full-time, 13% part-time

Note: Totals may not add to 100 owing to rounding. Sources: (1) National Center for Education Statistics Report 2009-155; Enrollment in
Postsecondary Institutions, Fall 2007 data. (2) Career College Association Fact Book 2009 using NCES data for 2003-2004 school year.

A member of BMO

Financial Group

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Postsecondary Education

BMO Capital Markets

Advantages of For-Profit Schools

Most for-profit schools focus on t11e undergraduate level and offer programs in which IJ1eir
students earn diplomas, certificates, and/or associate 's and bachelor's degrees. We believe the
undergmduate segment of the for-profit sector - both degree-!,'Tlillting (e.g. , associate' s.
bachelor' s) and non-degree gnmting (e.g., diploma, certificate) -- is highly attractive to

Advantages of
for-profit
undergraduate
schools

students owing to its pmgmatic, student-centered, and job-oriented focus. In our view, forprofit postsecondary providers capture the sweet spot in today's market by offering job
opportunities and career development for those who may not be interested in the more
traditional higher-education. white-collar path but have the ability to eam a solid income. In
addition, they tend to serve populations that are less focused on by trdditiona1 schools, i.e.,
lower-income and/or working adults.
Specifically, we believe for-profit programs are more attmctive to this population versus their
closest competition, community colleges, for a variety of reasons:

Greater focus on providing students with practical skills t11at are crucial to employers.
Ability to more quickly create and roll out new programs to better serve current market
demand.

Ability to finish programs at an accelerated pace (e.g., a recent study conducted by the
NCES showed that, on average. a student at a for-profit institution can complete an
associate's degree in 25.4 months versus 32 mont11s for the avemge student at a not-forprofit institution).

Better customer service and support systems (i.e., we believe quality customer service is
a key differentiating factor in attrdctjng students).

Larger budgets to support more expensive programs (e.g. , eqllipment needed for
instruction in auto repair courses).

Recent surveys
cited career
preparation as
important reason

Greater ability to create alliances with cotporations through advisory boards and other
programs (fewer conflicts of interests), thus potentially improving job placement rates
and establishing positive endorsements for their products.

The opportunity to offer stock options to faculty and staff. potentially providing a
competitive recruiting advantage.

We beLieve the mission of for-profit schools matches well against the reasons students choose
to attend college. Each year. The Chronicle of Higher Education surveys incoming freslunen
on a number of issues, and in prior years had asked them why they attend college (we believe
the bulk of those surveyed attend not-for-profit institutions). Even though the for-profit sector
typically attracts non-traditional (i.e.. older) students. the purpose of most for-profit schools
(i.e. , career training) fits well within what these traditional students are seeking. As shown in
Exhibit 98. three of top four reasons to attend have something to do with career preparation a consistent trend in the past eight annual surveys when tllis question was asked.

for attending
college

A m ember of BMO

Financial Group

112

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 98. Survey: Top Reasons Incoming Freshmen Choose to Attend College {19992000 to 2006-2007 School Years)
Reason
To learn more about things that interest me
To be able to get a better job
To get t raining for a specific career
To be able to make more money
To gain a general education and appreciation of ideas
To prepare myself for graduate or professional school

1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007

722%
766%
778%
77.5%
769%
768%
77 7%
76.8%
73.0%
71.6%
70.3%
71.6%
70.1%
71.8%
72.2%
70.4%
71 .8%
71.3%
71 .1%
70.0%
74.6%
69.4%
69.2%
72.0%
71.0%
70.0%
69.8%
70.5%
69.4%
70.1%
71 .0%
69.0%
65.4%
64.3%
64.5%
64.6%
65.4%
59.9%
65.8%
66.0%
55.8%
56.9%
57.4%
NA
NA
56.7%
58.1%
57.7%

Note: This question was no longer asked beginning in the 2007-2008 school year survey. Source: Annual freshmen survey conducted by The
Chronicle of Higher Education. N.A. -Not Available.

Even more

Enrollment management advisor Noel Levitz conducts an annual survey of college students

important for

called t11e National Student Satisfaction a nd Priorities Report, in which it detem1ines the level
of importance that students place on various aspects of their student ex-perience. As part of
this survey. the company asks students to rank the factors that drove the ir enroUment decision
and then segments that response by school ty pe. For the past five years, the top three factors
for students attending all types of not-for-profit institutions (public four-year, private fouryear, and public two-year) have ranked cost academic reputation and fmancial aid as their top

students at forprofit schools

three factors (in various order). Interestingly, students attending for-profit schools have rated
" future employment opportunities" as the top factor over the same period - a factor that was
not even in the top nine factors fo r students at not-for-profit institutions (see Exhibit 99).

Exhibit 99. Survey: Important Enrollment Factors for Students

Attending For-Profit Postsecondary Institutions {Fall 2004 to Fall
2008)
Rank
1
2
3
4
5
6
7
8
9

Factor
Future employment opportunities
Financial aid
Academic reputation
Cost
Personalized attention prior to enrollment
Geographic setting
School appearance
Size of institution
Recommendations from family/friends

2004
6.47
6.27
6.16
6.05
5.95
5.64
5.64
5.49
5.30

2005
6.48
6.32
6.18
6.09
5.99
5.66
5.68
5.56
5.35

2006
6.50
6.36
6.19
6.12
6.02
5.66
5.68
5.58
5.39

2007
6.51
6.37
6.22
6.14
6.05
5.67
5.69
5.59
5.45

2008
6.44
6.30
6.16
6.10
5.98
5.62
5.61
5.54
5.43

Note: Ranking based on a 1-7 scale, with 7 being very important and 1 being not important Source:
Annual National Student Satisfaction and Priorities Report survey conducted by Noel Levitz.

For-profit schools

ln February and March 2008, Peter D . Hart Research Associates conducted a survey for the

are more highly

CCA. While these survey results may be somewhat self-promoting, we nevertheless believe
they show a need for alternatives to a traditional four-year degree. As shown in Exhibit 100,
when Americans were asked l11eir opinion of what type of institution does the best job of
prov iding the Americ~m workforce with the specific career skills and knowledge necessary to
succeed in today's global economy, "career colleges" (i.e.. for-profit postsecondary schools)
was listed as the top altemative to traditional four-year college or university.

regarded for
workforce
preparation

A m ember of BMO

Finan cial Group

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September

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BMO Capital Markets

Exhibit 100. Survey Results- Best Skills and Knowledge

Preparation to Succeed in Today's Global Economy
50%

45%

40%
30%

23%

20%

11%

10%

1%

3%

None

Not sure/don't
know

0%
Career college

OJT (on the job

training)

Community
college

Military

Source: Hart Research Associates February-March 2008 survey for the Career College Association.

Taking share at

In addition. we believe the for-profit sector has been tl1e trailblazer in tapping into what had

graduate level,

been an unmet need for greater flexibi lity in graduate school programs (i.e.. master's level and
above). Although much of tltis has come through the greater acceptance of an online delivery
fom1at (to be discussed at length later in this report). we believe the for-profit sector- tlwugh
such schools as Apollo Group (APOL)'s University of Phoenix and Capella Education's
(CPLA) Capella University- has led the way in providing graduate-level courses in the fonuats
most desired by those who may have wanted to continue their education. but could never fmd
the time to do so. While tl1e not-for-profit sector has been catching up in recent years in tapping
into tl1is market (e.g., via continuing education programs), we nevertheless beLieve the for-profit
sector should be given credit for this phenomenon. While we do not have the data to support
tllis, we believe tl1e for-profit sector has taken share at the graduate level.

specifically via
online format

Also taking share

at associate's
level

Military and
veterans market prime opportunity
for for-profit
sector

Interestingly, one of Apollo Group' s newer schools- A.xia College- is trying to do the same
thing at the associate' s degree level and has been fairly successful to date. with the company
enrolling nearly 187,000 students in its associate' s program- virtually all online- as of May
31, 2009, up from 3,200 as of November 30, 2003. Others in tl1e industry have followed suit
(e.g., Career Education) likely helping the for-profit sector to take share at the associate's
level as well.
The military and veterans market is another area where we believe the for-profit sector has
made greater inroads t11an its not-for-profit cotmterparts. According to a 2009 report by
Radford and Wun, entitled A Profile of;\1/i/itary Services Members and Veterans in Higher
Education, in the 2007-2008 school year, active duty military, reservists and veterans made
up 0.7%. 0.4% and 3.1% of all undergraduates enrolled in US postsecondary institutions, at
roughly 650,000 students. We have se!,'lnented our discussion between active duty/reservists
and vetenms.
Active duty military and reservists. According to the US Department of Defense (DoD),
there were over 1.4 million personnel on active duty in the US armed forces (as of June 30,
2009) and another 850,000 on reserve in FY2009. Each year, about 300,000 new service
members are enlisted or commissioned to replace retiring or separating members. In addition,
a relatively small portion of the military enlisted population (i.e., non-officers) are college
educated; according to the DoD, in FY2008, slightly more than 13% of them held an associate
degree and 4.5% of them held a bachelor's degree or higher. Furthennore, roughly 66% of
rnilitary officers do not have a graduate degree. In addition, tnilitary servicemen and women

A m ember of BMO

Financia l Group

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September 2009

Postsecondary Education

BMO Capital Markets

are now encouraged to gain either associate's or bachelor's degrees for consideration in
promotions to the nex1 rank (and pay raises) in tJ1eir military career. As such, we believe this
market is relatively underpenetrated. In addition, we believe the demanding worlc schedules,
along witi1 ilie geographic distribution of tius population is ideal for an online delivery fommt
(discussed in greater detail later in tius section).
The previously cited Radford and Wun report analyzed which types of postsecondary
institutions where military undergraduates at1end. As shown in Exlribit I 01 , the for-p rofit
sector enroUed roughly 12% of all military undergraduates, a higher proportion that the
roughly 8% share the sector enrolled for all undergraduates.

Exhibit 101. Where Military Undergraduates Attend (2007-2008

School Year)
School Type
Public not-for-profit
Private not-for-profit
Private for-profit
Attended more than one institution

Percentage of Undergraduates
Military
All
56%
65%
21%
27%
12%
8%
9%

Source: Radfo rd & Wun's A Profile of Military Services Members and Veterans in Higher Education (2009

Most for-profit
schools provide
discounts to
military students

Each year the DoD allocates funding for "voluntary education" whereby military personnel
receive tuition assistance for roughly 100% of students' costs. For postsecondary classes, the
linut is currently $250 per undergraduate credit and $275 per gn1duate credit. witi1 a
maximum ammal benefit of $4,500. As tll.is is below tile price points of most for-profit
providers, many provide discounts to serve tll.is sector.
In FY2008, the DoD spent roughly $816 million for tuition assistance and operational costs,
up from $805 million in FY2007. The two largest users were the Anny ($307 million) and Air
Force ($284 mil!jon), fo llowed by the Navy ($153 miHion) and Marine Corps ($71 nl.iilion).
Roughly 450,000 troops enrolled in postsecondary courses, with 42,500 degrees and 4,000
certificates/licensures awarded during tile year. The bulk (roughly 64%) of courses were taken
online.

Students at forprofit schools are

large users of
military tuition
assistance; helps
stay below 90110
threshold

A m ember of BMO

A list of the largest providers of courses under the DoD tuition assis tance program in FY2008
can be found in Exhibit 102. As shown, wlrile t11e largest provider is public not-for-profit
University of Mary land University College, six of tJ1e ne:\i 10 largest providers are for-profit
schools, including American Public Educations (APEI) American Military U niversity and
Apollo Group's (APOL) University of Phoenix. We believe for-profit penetration will
continue to increase. as many of ti1ese schools are targeting tlus funding source to stay below
the 90110 threshold, which limits Title IV as a percentage of cash-basis revenue to 90%, as
DoD tuition assistance is excluded from the numerator (see more details in the Regulatory
Trends section later in this document).

Financia l Group

115

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 102. Top 20 Users of Department of Defense Tuition

Assistance (FY2008)
Rank School
1
University System of Maryland (University
of Maryland University College)
American Military University (APEI)
2

Year
Highest
Type
Founded Degree
Public not-for-profrt
1807 Doctoral

Location
Adelphi, MD

Courses

79,651

Charles Town , WV (online only) Private for-profit

1991

Mastefs

79,448

3
4
5
6
7
8
9
10

Central Texas College

University of Phoenix (APOL)
Embry-Riddle Aeronautical University
Park University
Troy University
TUI University
Coastline (CA) Community College
Columbia Southern University

Killeen, TX
Phoenix, I>Z
Daytona Beach, FL
Parkville, MO
Troy, AL
Cypress, CA (online only)
Costa Mesa, CA
Orange Beach, AL (online only)

Public not-for-profit
Private for-profit
Private not-for-profit
Pri vate for-profit
Public not-for-profit
Private for-profit
Public not-for-profrt
Private for-profit

1965
1976
1926
1875
1887
1998
1947
1993

Associate
Doctoral
Doctoral
Mastefs
Maste(s
Doctoral
Doctoral

71,283
51,820
42,250
33,509
30,841
28,955
22,955
18,424

11
12
13
14
15

Grantham University
Saint Leo University
Pierce College
Columbia College
NW Florida state College/Florida
Community College at Jacksonville
Excelsior College
Webster University
Liberty University
Tidewater (VA) Community College
Wayland Baptist Unwersity

Kansas City, MO
Saint Leo, FL
Olympia, WA
Columbia, MO
Tallahassee, FL

Private for-profit
Private not-for-profit
Public not-for-profrt
Private not -for -profit
Public not-for-profit

1951
1889
1925
1851
1933

Mastefs
Mastefs
Bachelo(s
Mastefs
Bachelofs

17,273
16,178
14,842
13,588
12,872

Albany, NY

Private not-for-profit
Private not-for-profit
Private not-for-profit
Public not-for-profit
Private not-for-profit

1971
1915
1971
1966
1908

Mastefs
Doctoral
Doctoral
Associate
Mastefs

11 ,217
10,747
10,464
10,305
10,202

16
17
18
19
20

St. Louis, MO
Lynchburg, VA
Richmond, VA
Plainview, TX

Associate

Source: Military Times Edge Magazine.

Veterans market served by forprofit sector

Veterans. According to the US Department of Veterans Affairs, there were roughly 23.4
million veterans in the US as of September 30. 2008. Historically, veterans have been eligible
for education benefits mainly t.luough the "GI bill," first enacted in 1944 as tl1e Servicemen's
Readjustment Act and t.l1en expanded in 1984 under the Veterans" Educational Assistance
Act (t.lte "Montgomery GI Bill"). However, very few of those take advantage of t.ltese

programs; according to an analysis by the US Veterans Administration, less t.11an 6% of

veterans use t11e complete amount available, and. on average, benefits are used for only 17
months of tJ1e 36 mont.11s of eligibility.
A 2008 analysis of US Department of Veteran Affairs data conducted by the Chronicle of
Higher Education shows a disproportionate munber of students eligible for t.llis ftmding attend
for-profit schools; while roughly 8% of postsecondary students attended for-profit institutions in
tlte 2006-2007 school year, 19% of those using GI bilJ benefits did the same (see Exhibit I02).

Exhibit 102. Where Students Use Gl Bill Benefits (2006-2007

School Year)

Community college
Four-year public institution
For-profit institution
Private institution
Undetermined

Where Students Use

Gl Bill Benefits
38%
36%

Where Students
Attend
34%
38%

19%

8%

6%
1%

19%
0%

Source: Chronicle of Higher Education and National Center of Education Statistics.

Exhibit 103 shows the top ten schools attended by students using the GJ Bill for FY2007
(latest data available). As shown, seven of t.l1ese schools are for-profit providers.

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Exhibit 103. Top Ten Colleges for Gl Bill Recipients (FY2007)

Rank School
University of Phoenix (APOL)
American Intercontinental University (CECO)
American Public University (APEI)
University of Maryland
Central Texas College
Colorado Technical University (CECO)
Kaplan University (WPO)
Strayer University (STRA)
9
Grantham University
10
Florida Community College

1
2
3
4
5
6
7
8

Type
Private for-profit
Private for-profit
Private for-profit
Public not-for-profit
Public not-for-profit
Private for-profit
Private for-profit
Private for-profit
Private for-profit
Public not-for-profit

Students
17,221
3,698
3 ,668
3,359
3,024
2 ,738
2,460
2 ,348
2,029
1,764

Source: US Department of Veterans Affairs.

New Gl Bill offers

another growth
opportunity

More funding for veterans education has recently become available, Likely spurri ng growth in
that segment. On June 30, 2008, President Bush signed the Post-9/11 Veterans Educational
Assistance Act of 2008, the so-called 'new GI bill," expanding education benefits for veterans
who have served on active duty since September 11, 2001 , including reservists and members
of the National Guard. According to the American Council on Education, tllis group has
roughly 2 million members.
The monies can be only used at a degree-granting school (i.e., associates degree or higher).
These benefits, which became available effective August 1, 2009. include the following:

Tuition up to the cost of in-state tuition at the most expensive public institution of bigher
education in the state where the veteran is enrolled. Private institutions that participate in
the Yellow Ribbon Program can waive up to half of the remaining charges and receive
the same amount f-rom the federal government.

Veterans receive up to $1 ,000 per academic year for books and otl1er education costs.

Veterans who are not enrolled in distance education programs may receive monthly
housing stipends.

Service members may transfer these veterans education benefits to family members (e.g..
spouses and children) under cettain restrictions.

Initial Congressional Budget Office estimates were that t11e " new GI Bill" would cost US
taxpayers roughly $100 billion in the firstlO years- up 170% from $37.2 billion which had
been budgeted under the "old GI bill" as the average monthly cost will likely be more tltan the
monthly allotment of $1,321 which had been provided to veter'dl1S with at least tl1ree years of
active duty and were now full-time students. While these benefits are available across the
postsecondary spectnuu. we believe the for-profit sector will capture relatively more of this
funding, given t11eir current disproportionate penetration of this market.

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September 2009

Postsecondary Education

For-profit
enrol/ment grew
at 11.1% CAGR
from 1997 to 2007
over 6x the rate
of not-for-profit
enrollment

A m ember of BMO

BMO Capital Markets

In our opinion. these and other reasons have allowed the for-profit sector to grab a larger
share of the overall postsecondary enroUment pie. In fall 2007, for-profits enrolled 7.9% of all
US postsecondary students (both degree grdllting and non-degree gmnting), as enrollments
had increased at an 11.1% annual rate since fall 1997. versus a 1.8% CAGR for the not-forprofit sector (see Exhibit 104). Interestingly, over that pe riod, the enrollment in the for-profit
sector grew at a faster rate at its degree-granting schools (13.7% CAGR versus 1.9<Yo for notfor-profits), which likely provided even greater financial benefits as these longer programs
tend to be more profitable as well as provide greater visibility into future perfonnance.

Financial Group

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BMO Capital Markets

Exhibit 104. Postsecondary Enrollment Market Share Analysis (Fall1997 to Fall 2007)
(in OOO's)

2003

2004

CAGR
1997-2007

2006

QQI

1,323

1,380

1,480

11.1%

1,011
312

1,066
31 4

1,186
294

13.7%1
4.5%

812
319
250

926
321
233

19.5%1
4.4%
4.4%

1997

1998

1999

2000

2001

2002

2005

518

553

629

673

766

853

984

1,187

329
189

364
189

430
198

450
223

528
238

594
259

703
281

880
307

156
210
152

188
216
150

240
229
160

258
229
186

321
242
203

383

461
285
238

620
317
252

751
319
253

For Profits
Total

IDegree granting
Non-degree granting
14 years and above
At least 2 years, but less than 4 years
Less than 2 years

Non-degree granting
14 years and above
At least 2 years, but less than 4 years
Less than 2 years

250
220

6.8%

13.7%

7.0%

13.8%

11.4%

15.3%

20.7%

11 .4%

4.4%

7.2%

10.9%
-0.2%

18.1%
5.2%

4.6%
12.3%

17.2"/o
6.9%

12.7%
8.6%

18.3%
8.6%

25.3%
9.2%

14.8%
1.6%

5.4%
0.9%

11.3%1
6.6%

20.5%
3.0%
-1 .2%

27.5%
6.1%
6.4%

7.8%
-0.3%
16.4%

24.4%
5.7%
9.0%

19.0%
3.5%
8.7%

20.6%
13.8%
7.9%

34.5%
11.3%
5.9%

2Ul%
0.6%
0.6%

8.1%
0.1%
-1.4%

14.1%1
0.7%
-6.7%

Total

14,383

14,413

14,577

15,029

15,568

Not For Profits

16,182 16,346 16,524

16,599

16,825

17,191

1.8%

Degree granting
Non-degree granting

14,174
209

14,185
228

14,361
216

14,862
166

15,400
168

16,017
195

16,198
148

16,392
132

16,477
123

16,693
132

17,062
129

1.9%
-4.7%

8,743
5,542

8,846
5,472

8,960
5,533

9,107
5,833

9,357
6,111

98

1m

9,701
6,391
91

9,947
6,321
78

10,106
6,339
76

10,249
6,295
55

10,429
6,332
64

10,705
6,419
67

2.0%
1.5%
-3.7%

4 years and above

At least 2 years, but less than 4 years
Less than 2 years
Annual %change:
Total

0.2%

1.1%

3.1%

3.6%

3.9%

1.0%

1.1%

0.5%

1.4%

2.2%

Degree granting
Non-degree granting

0.1%
9.2%

1.2%
-5.6%

3.5%
-22.8%

3.6%
1.0%

4.0%
15.9%

1.1%
-23.9%

1.2%
-10.8%

0.5%
-7.2%

1.3%
7.7%

2.2%
-2.3%

1.2%
-1.3%
-3.9%

1.3%
1.1%
-11.0%

1.6%
5.4%
4.7%

2.7%
4.8%
14.8%

3.7%
4.6%
-9.8%

2.5%
-1 .1%
-13.9%

1.6%
0.3%
-2.7%

1.4%
-0.7%
-27.9%

1.8%
0.6%
16.8%

2.6%
1.4%
4.3%

3.5%

3.7%

4.1%

For Profits as %of Total

4.3%
4.7%
5.0%

5.7%

6.7%

7.4%

7.6%

7.9%

Degree granting
Non-degree granting

2.3%
47.5%

2.5%
45.2%

2.9%
47.9%

2.9%
57 .2%

3.3%
58.6%

3.6%
57.1%

4.2%
65.5%

5.1%
69.9%

5.8%
71.8%

6.0%
70.4%

6.5%
69.5%

4 years and above

At least 2 years, but less than 4 years
Less than 2 years

1.8%
3.6%
60.8%

2.1%
3.8%
61 .4%

2.6%
4.0%
65.5%

2.8%
3.8%
67.9%

3.3%
3.8%
66.8%

3.8%
3.8%
70.8%

4.4%
4.3%
75.2%

5.8%
4.8%
76.8%

6.8%
4.8%
82.2%

7.2%
4.8%
79.5%

8.0%
4.8%
77.7%

32.2x

12.1x

2.3x

3.8x

2.9x

15.1x

19.0x

25.1x

3.2x

3.3x

4 years and above

At least 2 years, but less than 4 years
Less than 2 years

Total

For-profit vs. not-for-profit annual change

6.2x

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics. N.A.- Not Available.

Anecdotal

When furtl1er analyzing this "share shift" at degree-granting institutions, we believe some. if

evidence shows

not most is owing to the for-profit sector creating a new market, i.e. , tapping into a potential
base of new students that may not ot11erwise consider going to school. In our view, anecdotal
evidence for this can be found when comparing actual enrollment trends with projections
made by the US Department of Education (ED).

for-profits created
new share

ln October 2003, the ED released its Projections of Education Statistics to 2013, an update of
its periodic projections. While the 2003-2004 school year (fall 2003) had just beg1m when

these projections were published, the analysis used actual data through t11e 2000-2001 school
year (fall 2000). The ED recently released actual enrollment data for t11e 2007-2008 school
year (fall 2007), allowing us to compare seven years of projections with actuals.

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Unfortunately, the ED does not provide projections for for-profits on a stand-alone basis. but
we believe the data show the inlluence of the for-profit sector. As shown in Exhibit 105, when
using the middle alternative projections, the ED underestimated enrollments at degreegranting postsecondary institutions by roughly 4.5% over this period. While tllis is not an
indictment of the ED' s projection methodology, further a nalysis of the ..outperformance"
shows enrollment significantly exceeded the ED's expectations at schools with a larger forprofit focus: private schools (10.6% outperfonnancc) and full-time students (7.5%
outperfom1ance).

Exhibit 105. Actual vs. Projected Enrollment at Degree-Granting

Institutions (Fall 2001 to Fall 2007)
Actual (OOO's)
2003
2004
2005
16,900 17,272 17,487

Total

2001
15,928

2002
16,612

Public
Private

12,233
3,695

12,752 12,857
3,860
4,043

Full-time
Part-time

2006
17,759

2007
18,248

12,980
4,292

13,022
4,466

13,180
4,579

13,491
4,757

10,312 10,610
6,589
6,662

10,797
6,690

11,316
6,889

11 ,606
7,065

9,448
6,480

9,946
6,665

Total

2001
15,484

2002
16,102

Proj ected (OOO's)

2003
2004
2005
2006
16,361 16,468 16,679 16,887

2007
17,020

Public
Private

11 ,895
3,589

12,354
3,749

12,546
3,814

12,627
3,841

13,042
3,978

Full-time
Part-time

9,146
6,338

9,590
6,512

9,774
6,587

9,860
6,608

Total

2001
2.9%

2002
3.2%

2003
3.3%

Public
Private

2.8%
2.9%

3.2%
3.0%

2.5%
6.0%

Full-time
Part-time

3.3%
2.2%

3.7%
2.4%

5.5%
0.0%

12,786 12,942
3,893
3,945

10,008
6,671

10,160 10,272
6,727
6,749

% Difference
2004
2005
4.9%
4.8%

2006
5.2%

2007
7.2%

Average
4.5%

2.8%
11.7%

1.8%
14.7%

1.8%
16.1%

3.4%
19.6%

2.6%
10.6%

7.6%
0.8%

7.9%
0.3%

11.4%
2.4%

13.0%
4.7%

7.5%
1.8%

N.A . - Not Available. Source: BMO Capital Markets and US Department of Education National Center for
Education Statistics.

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Growth Components for For-Profit Postsecondary Schools

As show above in Exhibit 104, for-profit enrollment gTew at multiples of not-for-profit
enrollment each year since fall 1997, although tlle trends were somewhat volatile- highest in
the 1998-1999 and 1999-2000 school years and in 2003-2004 through 2005-2006 school
years. Although we believe the for-profit sector will continue to outpace its not-for-profit
counterparts, we believe t11e future rate for "share shift" may be more comparable to the 20062007 and 2007-2008 school years, where enroLlment growt11 in the for-profit sector was over
three-times that of the not-for-profit sector.
Long-term growth
rates: 8%-12%
revenues; 12%-

While the NCES projects a 1.1% CAGR in enrollment at degree-granting institutions through
the 2017-2018 school year. we have noted their prior projections have been overly
conservative. Assuming 1.5%-2% CAGR for the entire industry, we believe for-profit same
school" enrollment could increase at roughly three times that, or about 5%-6% CAGR. When
adding new campus openings and ex-pansions (estimated 1%-2% annual growth). we forecast
tolal for-profit enrollment can increase at a 6%-8% CAGR. W lule the rate of tuition increases
will likely decelerate to the 2o/cr4% range (see below for further det~Uls), this would yield
roughly 8o/o-l2% a1mual revenue !,>Towth. Assuming some maTgin expansion, we believe the
group could generate long-tem1 eaTnings growth of 12o/o-18% (see Exhibit 105). Companies

18% earnings

with a pure online model may likely grow at a slightly higher annual rate. We have provided
the specific underlying components of each of these factors in the body of this section.

Exhibit 105. For-Profit Postsecondary Long-Term Annual Growth

Expectations
Item

Annual Growth

Same school enrollment growth (includes

impact of program transplants)

5%-6%

New campus openings

0%-1%

Facility expansions, relocations

Subtotal (en rollment growth)

0%-1%
6%-8%

Tuition increases
Subtotal (revenue growth)

2%-4%
8%-12%

Comments
Roughly 3x the rate of the not-for-profit sector
Fewer campus openings; law of large numbers;
each new school has a lesser impact

Tuition at all-time highs; consumers still very price

sensitive. Competitive pressures could cap price
increases

Each 1% increase in incremental revenues

1.5x revenue growth increases operating profits by roughly 1.5%
12%-18%

Operating margin expansion

Total (earnings grow1h)

Source: BMO Capital Markets estimates.

Postsecondary Schools Enrollment Growth Trends

Enrollment at forprofit degreegranting
institutions has
in creased 11.2%
CA GR since fall

1976

A m ember ofBMO

Historical enrollment data for the for-profit sector only exists for degree-granting programs.
which enrolled roughly 1.19 million students in the 1,038 institutions as of faLl 2007 (roughly
1.48 million students were enrolled in the 2,712 for-profit postsecondary institutions eligible
for Title IV funding, including non-degree granting programs as cited in previously in Exhibit
94). The 11.2% average annual increase in l11ese students since fall 1976 is significantly larger
than the 1.6% average annual increase for all postsecondary students in degree-granting
institutions. Tllis has allowed the for-profit sector to dramatically increase its marl<:et share
since that time, when it taught only 0.4% of all students at US de!,>Tee-granting institutions
versus the 6.5% penetmtion reached as offal! 2007 (see Exllibit 106).

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Exhibit 106. US For-Profit Enrollment at Degree-Granting

Postsecondary Institutions (Fall1976 to Fall 2013E)
2,100

'EGl

1,800

1,500

cu;
tE2.
0
wo

11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%

Enrollment
-+-Penetration %

1,200
900

Q.

600

~
IL

300
0
1976-77

1985-86

1994-95

2003-04

>

0)~

c: "'
'U 'U
c:
c: 0
Gl

:t:

0
Gl

<(!!
~ ~

ll.

20121 3E

Source: BMO Capital Markets estimates and US Department of Education National Center for Education
Statistics

Projected 9.2%
CA GR through fall

2013

While annual growth mtes may slow, we project for-profit enrollment will grow at a 9.2%
CAGR, reaching over 2 million in fall 2013. capturing just under 10.5% of ali postsecondary
students in the US. While near-term gTowth mtes will likely be much higher, eventually a
forthcoming economic expansion will likely have a detrimental impact on mmual rates of
enroJlment growth.
Impact of Economic Cycles on Enrollment. We believe one of the most widely debated
matters for investors in postsecondary education stocks is their economic sensitivity. A 2003
study conducted by economists Harris Dellas and Plutarchos Sakellaris (using BLS data from
1968 to 1988) found that a 1% increase in the US unemployment rate led to roughly a 2%
increase in enrollments at US postsecondary institutions. This made intuitive sense (at least to
us), as enrollment growth should accelerate as the economy contracts (and labor markets
loosen) as the opportunity cost of enrolling in higher education is lower.

Posts econdary
education m ay
have some
counter-cyclical
tren d s

Enr ollm ent

growth rates:
inversely
correlated with
economic growth

The NCES data appear to corrobomte that thesis. As shown in Exhibit 107, while the trends
vary, for the most part. overall enrotlment growth in postsecondary schools begins to
accelerate in the year just before a recession. Growth remains somewhat strong during the
recession year, as well as in the year following the recession, before beginning to slow as the
economy expands. A similar pattern appears to be holding for the current recessionary period
as enrollment growth accelerated in the 2007-2008 school year, just prior to the beglnning of
the recession (December 2007).

Exhibit 107. Economic Sensitivity: All Postsecondary Degree-Granting Schools

Enrollment Growth
Prior Recessionary Periods
Oct. 1969- Mar. 1970
July 1974- Mar. 1975
Apr 1980- Sept 1980
Oct 1981 -Mar. 1982
July 1990 Mar. 1991
Mar. 2001 Nov. 2001
IAverase

Annual Enrollment Growth All Postsecondary Degree-Granting Schools

4 Years Prior 3 Years Prior 2 Years Prior
Year Prior
Year Of
Year After 2 Years After 3 Years After 4 Years After
NA
7.2%
N.A .
8.2%
8.7%
6.5%
4.3%
3.0%
4.2%
7.2%
4.3%
-1.5%
3.0%
4.2%
6.5%
9. 4%
2.5%
0.2%
0. 4%
-1 .8%
-1.5%
2.5%
.0.2%
2.8%
4.6%
2.3%
0.3%
4.6%
2.5%
2.3%
.0.2%
2.8%
0.4%
0.3%
1.8%
0.0%
2.1%
2.1%
2.3%
3.7%
2.1%
3.9%
0.9%
-1.3%
-0.2%
0.9%
0.0%
2.0%
3.5%
4.0%
4.3%
1.7%
2.2%
1.2%
1.0%
2.2%
1.7%
4.6%
4.3%
3.0%1
4.6%1
0.8%
0.5%1

Current Recession
I eee. 2007 ??

4 Years Prior 3 Years Prior 2 Years Prior

2005-2006
2006-2007
20042005
2.2%
1.6%1
1.2%

Year Prior
2007-2008
2.8%

Ylli.Q!
20082009E
NA.

Year After 2 Years After 3 Years After 4 Years After

2009-2010E 2010-2011E 2011-2012E 2012-2013E
N.A.
N.A.
N.A. I
N.A. j

Note: N.A. - Not Available.

Source: BMO Capital Markets, US Department of Education National Center for Education Statistics, and National Bureau of Economic Research.

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A 2003 paper by Dr. Sarah Turne r at the University of Virginia focused on the same impact at
for-profit institutions, concluding that "fo r-profit inst itutions may generate a greater
e nro llme nt res ponse to cyclical fluctuations t han counterparts in the not-for-profit and
public sectors ." citing evidence that shows these schools can be more flexible than their notfor-profit peers in responding to economic shocks (e.g.. as demand increases they can more
easily add classroom space and do not face budget constraints from lower tax revenues as tJ1e
not-for-profit sector does).

Even stronger
impact in forprofit sector

For-profit
enrollment growth
reaccelerated
after 2001
recession ended

As tJ1e historical data for t11e for-profit sector was not available prior to the 1976-1977 school
year, a similar analysis for the for-profit sector alone is somewhat limited. Nevertheless, we
believe, even witl1 the data available, one can see an analogous pattern just before and after a
recession. Interestingly, for-profit enrollment growth reaccelerated after the 2001 recession
(to 18.3% and 25.3% annual growth in the 2003-2004 and 2004-2005 school years,
respectively, from 12.7% in the 2002-2003 school year), owing to what we believe was a
dramatic increase in online enrollment and marketing spend (see E xhibit 108).

Exhibit 108. Economic Sensitivity: For-Profit Postsecondary Degree-Granting Schools

Enrollment Growth
Prior Recessionary Periods
Apr. 1980- Sept. 1980
Oct. 1981 - Mar. 1982
July 1990- Mar. 1991
Mar. 2001 - Nov. 2001
!Averag e

Annual Enrollment Growth- For-Profit Degree Granting Schools

4 Years Prior 3 Years Prior 2 Years Prior
Year Prior
Year After 2 Years After 3 Years After 4 Years After
lliLQ!
N.A.
17.5%
26.3%
8.3%
56.7%
36.3%
16.2%
8.9%
-1 .3%
17.5%
26.3%
8.3%
56.7%
36.3%
16.2%
8.9%
-1 .3%
31%
10.8%
-12.0%
15.4%
4.1%
-6.9%
7.8%
0.0%
1.5%
3.6%
7.9%
18.1%
17.2%
12.7%
18.3%
10.9%
25.3%
14.8%
4.6%
12.1%
10.7%
10.8%
7.8%
17.0"/ol
18.4%
25.8%
18.2"/ol
5.0"/oj

Current Recession
l oec. 2007- ??

4 Years Prior 3 Years Prior 2 Years Prior

2004-2005
2005-2006
2006-2007
25.3%
14.8%
5 .4%1

Year Prior
2007-2008
11.3%

Year Of
2008-2009E
N.A.

Year After 2 Years After 3 Years After 4 Years After

2009-2010E 2010-2011E 2011-2012E 2012-2013E
N.A.
N.A.
N.A.j
NAI

N.A.- Not Available.

Source: BMO Capital Markets, US Department of Education National Center for Education Statistics, and National Bureau of Economic Research.

We have long opined t11at enrollment trends at schools with shorter programs (i.e., less than
two year and two year) are more sensitive to economic cycles than trends at four-year schools.
Given the " lower-quality" student base, students at less t11an two-year and two-year programs
would likely be " less serious" in pursuing their education in a strong economic enviromnent.
Conversely, in a weaker economic environment, enrollment trends should improve at a
greater rate at these schools relative to their four-year counterparts.
Countercyc/icality is
stronger at
schools with
shorter programs

We believe tlte data bears tJlis oul. As shown in Exhibit 109, wllile enroiJment growth
accelerates, on average, during the tllree-year period encompassing a recession (i.e., before,
during, and after), the rate of acceleration appears a bit stronger the more one " moves down
the food chain," i.e., at botl1 two-year schools and less t11an two-year schools. However, this
volatility also exiends to the period tl1ereafter and the rate of decelerating growtl1 is strongest
at tl1ose schools tl1at grew tl1e prior three years. Recent anecdotal data of accelerdting
enrollment gro\\1h from some publicly held providers that specialize in non-degree programs
(e.g., Corinthian Colleges, Lincoln EducationaJ Services) may also corroborate the stronger
impact of a slowing economy on these " lower-skilled" providers.

A member of BMO

Financia l Group

123

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 109. Economic Sensitivity: Enrollment Growth by School Type

Annual Enrollment Growth- 4 Year Schools
I
Year Of
3.8%
3.5%
3.0%
1.1%
2.3%
3.3%
2.8%

I
Year After 2 Years After 3 Years After 4 Years After
1.7%
5.5%
1.4%
2.0%
1.6%
5.8%
-1.2%
-0.2%
1.1%
1.1%
-0.4%
0.0%
0.0%
1.1%
-0.4%
0.1 %
1.5%
0.7%
-0.3%
0.1%
4.2%
3.3%
3.0%
2.5%
0.9%
1.1%
3.0%1
0.7%1

Prior Recessionary Periods

Oct. 1969 - Mar. 1970
July 1974- Mar. 1975
Apr. 1980- Sept. 1980
Oct. 1981 -Mar. 1982
July 1990- Mar. 1991
Mar. 2001 - Nov. 2001
!Average

4 Years Prior 3 Years Prior 2 Years Prior Year Prior

10.6%
6.7%
6.6%
6.0%
1.7%
2.0%
5.5%
1.4%
-1.2%
1.6%
1.7%
-0.2%
1.6%
-0.2%
1.7%
3.0%
1.4%
2.1%
2.4%
2.5%
1.1%
1.4%
2.0%
1.8%
2.8%
3.2%
2.2%
2.3%1

Current Recession
IDee. 2007- ??

4 Years Prior 3 Years Prior 2 Years Prior Year Prior

Year Of Year After 2 Years After 3 Years After 4 Years After
2004-2005
2005-2006
2006-2007 2007-2008 2008-2009E 2009-2010E 2010-2011E 2011-2012E 2012-2013E
3.0%
2.5%
3.5%
N.A.
NA
N.A.
2.2%1
N.A.I
N.A.I

Prior Recessionary Periods

Oct. 1969- Mar. 1970
July 1974 Mar. 1975
Apr. 1980- Sept. 1980
Oct. 1981 -Mar. 1982
July 1990 Mar. 1991
Mar. 2001 Nov. 2001
!Average

Annual Enrollment Growth- 2 Year Schools

I
4 Years Prior 3 Years Prior 2 Years Prior Year Prior
~ Year After 2 Years After 3 Years After 4 Years After
18.6%
13.0%
14.1%
18.5%
15.3%
12.2%
11.2%
6.9%
9.3%
12.2%
11 .2%
9.3%
13.0%
16.6%
4.1%
-0.4%
6.9%
-2.2%
-1.0%
-4.1%
4.1%
1.2%
-2.2%
-0.4%
4.7%
7.3%
4.2%
4.1%
4.7%
7.3%
42%
1.2%
-1 .0%
-4.1%
-0.4%
0.0%
2.1%
5.7%
1.7%
2.1%
7.9%
1.2%
-2.7%
3.3%
-0.6%
4.5%
0.8%
-2 .1%
1.9%
6.4%
5.1 %
-0.5%
0.8%
-0.9%
6.1%
4.7%
8.6%
7.8%
1.6%
0.7%
4.9%1
7.8%1
0.6%1

Current Recession
IDee. 2007- ??

4 Years Prior 3 Years Prior 2 Years Prior Year Prior

Year Of Year After 2 Years After 3 Years After 4 Years After
2004-2005
20052006
2006-2007 2007-2008 20082009E 20092010E 2010-2011E 20112012E 20122013E
0.8%
..0.9%
1.5%
N.A.
N.A.
N.A.
0.5%1
N.A.I
N.A.I

Prior Recessionary Periods

Oct. 1969- Mar. 1970
July 1974 - Mar. 1975
Apr. 1980- Sept. 1980
Oct. 1981 -Mar. 1982
July 1990 - Mar. 1991
Mar. 2001 Nov. 2001
I Average

Annual Enrollment Growth -Less than 2 Year Schools

I
4 Years Prior 3 Years Prior 2 Years Prior Year Prior
Year Of Year After 2 Years After 3 Years After 4 Years After
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
NA.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
NA.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
NA
N.A.
N.A.
NA
NA.
N.A.
NA.
N.A.
N.A.
NA.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
NA
NA
12.4%
10.9%
1.5%
N.A.
-2.3%
-0.3%
2.6%
3.8%
-6.0%
-2.3%
12.4%
1.5%
3.8%
N.A.
10.9%
-6.0%1
..0.3%1
2.6%1

Current Recession
IDee. 2007 -??

4 Years Prior 3 Years Prior 2 Years Prior Year Prior

Year Of Year After 2 Years After 3 Years After 4 Years After
2004-2005
20052006
2006-2007 2007-2008 20082009E 2009-2010E 20102011E 2011-2012E 2012-2013E
3.8%
-6.0%
-4.5%
N.A.
N.A.
N.A.
1.8%1
N.A.I
N.A.I

Source: BMO Capital Markets, US Department of Education National Center for Education Statistics, and National Bureau of Economic
Research.

We believe this trend holds true whether tJ1ese schools are for-profit or not-for-profit. As
such, while companies trying to move upscale by adding more dcgreed-programs (e.g.,
Lincoln Educational Services) may reduce their economic sensitivity. others moving
downscale, such as Apollo Group (APOL) via its Axia College. may actually increase their
economic sensitivity.
Worst year-overyear declines for
"lower-skilled"
programs came
well after 2001
recession ended

A m ember of BMO

Given concerns regarding t11e impact of an economic recovery on enrollment trends, we

analyzed recent trends for three of the publicly-held companies - Corinthian CoUeges
(COCO), Lincoln Educational Services (LINC) and Universal Technical Institutes (UTI) that specialize in non-degreed programs, the area likely to be most affected by economic
cycles. We note that it was difficult to measure annual changes in enrollment just following
the 2001 recession owing to lack of data and restatements. Nevertheless, as shown in Exhibit
110, the worst 12 month declines in enrollment were 7.8% for COCO (12 months ended
December 31. 2005); 6.4% for LINC (12 months ended September 30. 2006); and 8.7% for

Financia l Group

124

September

2009

Postsecondary Education

BMO Capital Markets

UTI (12 months ended March 31. 2008)- aH well after tl1e 2001 recession ended and into the
economic recovery.

Exhibit 110. Annual Changes in Ending Enrollment for COCO,

LINC and UTI {March 31, 2005- June 30, 2009)
30%
25%
Cl)

01

c:

20%

.c:
(.)

"'

15%

ii
:I
c:
c:

10%

0%
-5o]}'l r-05

5%

"'

.........

'
Mar-08

Sep-08

Mar-09

-10%
--Corinthian Colleges (COCO)

- - Lincoln Educational Services (LI NC)

Universal Technical Institutes (UTI)

Note: Measures annual change in ending enrollment excluding acquisitions. Shaded area represents
recessionary period. Source: BMO Capital Markets and company reports.

While seasonality skews tlus result, the respective peak to trough enrollment declines were
12.7% for COCO (from March 31. 2005 to June 30, 2006); 18.2% for LINC (from September
30, 2005 to June 30, 2007); and 28.8% for UTI (from September 30, 2006 to June 30, 2008).
We beLieve UTI was the most impacted of U1eses three companies owing to its reliance on the
auto sector which faced its own issues in recent years.
Demand for
work ing-adultfocused programs

enrollment growth slow (mid- to late 2004). APOL and STRA were somewhat less affected.
We believe this reflects the nature of their older students, who may take a longer-term
perspective on the benefits of advanced schooling than the younger generation. In addition.
many of these students may have been required by their companies to gain more skills for
their current jobs, thereby providing a support level for continued demand, even as the luring
markets picked up. As an economic recovery matures and labor market tightens. employersponsored tuition reimbursement programs typically increase, potentially boosting enrollment
growth rates. Therefore, we believe programs aimed at working adults could be considered
somewhat cyclical, or at least not as counter-cyclical as other programs in the sector.

may act ually be

cyclical

We have smrunarized what we believe are the effects of economic cycles beyond enrollment
on tllis b'Toup in Exhibit Ill. On the whole, we believe an improving economy has a
detrimental effect on ilie for-profit sector in terms of potentially slower I:,'Towth rates and

Economic
expansion likely
means slower

margin expansion, although these changes tend to lag behind changes in economic cycles (i.e.,
enrollment growth for many for-profit providers did not begin to accelerate until the second
half of 2008, well after the recession began in December 2007). Conversely, a slowing
economy could benefit many companies. specifically those specializing in non-degreed
progr<mlS. However, we still believe these companies can continue to show both solid top-line

growth

A m ember of BMO

Companies with a larger working-adult student population, such as Apollo Group (APOL)
and Strayer Education (STRA), complicate U1e debate about the effect of economic cycles on
for-profit enrollment trends. When most for-profit publicly held companies began to see

Financia l Group

125

September 2009

Postsecondary Education

BMO Capital Markets

and bottom-line growth even during an economic expansion owing to the many secular
growth attributes cited earlier.

Exhibit 111. Analysis of Cyclical Affect on For-Profit Postsecondary Companies

Impact of Improving Economy

Im pact of Worse ning Ec o nomy

Acyclical Consideratio ns

Negative: Rate of enrollment growth

decelerates, as opportunity cost of attending
school (i.e., working) increases

Positive: Rate of enrollment growth

accelerates, as opportunity cost of attending
school (i.e., working) declines (school
becomes "safe haven" in the face of a
challenging economy)

Sizable financial aid ($162.5 billion in

2007-2008 school year per the College
Board) remains an attractive option for
students in both good and bad economic
times

Negative: Higher attrition (drop-out) rate as

students find it easier to find work without
higher education

Positive: Lower attrition (drop-out) rate

owing to fewer job alternatives

Continued education is advantageous:

in good economic times it is valuable in
pursuing promotions and crucial to
getting hired in a bad economic
environment

Negative: Competition from not-for-profits

intensifies as improving state tax revenues
result in budgetary increases and potentially
smaller annual tuition increases

Positive: Competition from not-for-profits

weaken as lower state tax revenues result
in budgetary cuts and hikes in tuition

High barriers to entry created through

grueling accreditation process

Negative: Tightening labor markets make it

more difficult to recruit faculty members

Positive: Loosening labor markets make it

easier to recruit faculty members

Negative: More expensive real estate

market and higher interest rates for
opening/expanding campuses (although
could lag changes in economic cycle)

Positive: Cheaper real estate market and

interest rates for opening/expanding
campuses (although could lag changes in
economic cycle)

Positive: Completion rates may actually

improve, as fewer students are forced to
work part-time owing to need

Negative: Completion rates may decline as

more students are forced to work part-time
owing to need

Positive: Job placement rates and graduate

starting salaries improve, providing a positive
datapoint for marketing to new students and
retaining current ones

Negative: Job placement rates decline and

graduate starting salaries stagnate,
providing a negative data point for
marketing to new students and retaining
current ones

Negative: Looser labor markets slow

Positive: Tighter labor markets spur
increases in tuition reimbursement programs growth in tuition reimbursement programs
(benefits working-adult focused programs
(hurts working-adult focused programs)
such as those run by APOL and STRA)
Positive: Lower default rates on student
loans (although data is published on a
lagged basis)

Negative: Increased default rates on

student loans (although data is published on
a lagged basis)

Source: BMO Capital Markets.

We have provided a summary of recent enrollment growth statistics for select for-profit
companies, including the following:

A m ember of BMO

Total enrollments (Exltibit 112),

Year-over-year total enrollment growth (Exhibit 113),

Year-over-year new student enrollment (i.e., starts) growth (Exhibit 114), w hich would
include the impact of recent acquisitions, but is nevertheless a good leading indicator of
future changes in total enrollment, in our view.

Financial Group

126

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 112. Select For-Profit Postsecondary School Operators Total Enrollment

(Fall 2000- YTD FY2009)
Company

Ticker

FYE

American Public Ed ucation

Apollo Group
Bridgepoint Education
Career Education
COOnthian Colleges
Capella Educatioo
DeVry (undergraduate only)
Educatio n Management
Grand Canyo n Education
liT Educational Services
Lincoln Educational Services
strayer Educatioo
Universal Technicall nst~ute
Washington Post
TOTAL

APEI
APOL
BPI
C ECO

12
8
12
12

coco

UNC

6
12
6
6
12
12
12

STRA
UTI
WPO

12
9
12

CPLA
DV
Private
LOPE
ESI

2000
NA
104,423
N .A.
29,000
21 ,560
N.A.
47,066
27,999
NA
28,639
NA
12,096
N.A.

!::!..&
270,783

~
N.A.
129,212
N.A.
41,100
28,372
N.A.
48,698
32,180
N.A.
31,815
N.A.
14,009

2002
N.A.
164,699
N.A.
50,400
39,437
N.A.
45,200
43,784
N.A.
33,799
N.A.

N.A.

16,532
N.A.

!ih..

!::!..&

325,386

393,851

Fall enrollment (CY)

2003
2005
~
NA
N .A.
N .A.
2 11,265
248,200
269,400
N.A.
N .A.
N .A.
81,900
99,500
96,200
66,831
57,580
62,960
13,308
7,923
11,086
43,383
39,450
38,546
58,828
66, 179
72,471
N.A.
N .A.
N .A.
36,947
42, 183
44,331
N .A.
N.A.
19,824
20,138
23,539
27,306
15,212
12,561
17,368
66400
1:::!.A
!ih..
530,525
612,180
728,113

2006
15,500
291,800
N.A.
99,800
62,352
16,374
40,434
80,324
10,216
48,155
18,556
31 ,372
17,523
69800
802,006

1QQZ

26,900

41,100

325,000
12,716
100,500
66,719

384,900

20,268
44,594
95,868
13,499
53,675
19,463
36,082
16,682
81800
913,768

30,547
98,700
74,265
24,063
52, 146
110,825
21,957
61 ,556
22,404
44,564
16,461
99700
1,083,208

YTD

YTD

EaQQl!

34 ,450
333,500
2 1,068
88,550
68,781
23,615
44,977
94,984
16,998
54 ,494
18,599
35,955
14,177
84300
934,435

5 1,600
401 ,100
43,765
96,450
80,310
28,717
53,383
11 2,947
28,008
67,374
25,812
44,277
14,938
108 700
1,157,379

Note: Enrollments are provided for the periods closest to fall of each calendar year. Career Education data not restated prior to 2007 so
comparisons may be misleading. Education Management was a publicly held company until being taken private on June 1, 2006. Year-to-date
enrollment represents quarterly averages for fiscal year. N.A.- Not Available. Source: BMO Capital Markets and company reports.

Exhibit 113. Select For-Profit Postsecondary School Operators Y-0-Y Change in Total
Enrollment (Fall 2000- Fall 2008; YTD FY2008-FY2009)
Company

Ticker

FYE

American Public Education

Apollo Group
Bridgepolnl Educatioo
Gateer Education
COrinthian Colleges
Capella Education
OeVry (undergraduate only)
Education Management
Grand canyon Education
ITT Educational Services
Lincoln Educational Services
Strayer Educatioo
UriversaI Techmcal Institute
Washington Post
MEDIAN

APEI
APOL
BPI

12
8
12
12
6
12
6
6
12
12
12
12
9
12

CECO

coco
CPLA

ov
Private
LOPE
ESI

UNC
STRA
UTI
WPO

2000
NA
19.7%
NA.
28.6"4
24.7%
N.A.
9.3%
14.3%
NA
1.9%
NA
9.4%
N.A.
N.A.
14.3%

2001
NA.
23.7%
NA.
41 .7%
31.6%
N.A
3.5%
14.9%
N.A.
11.1%
N.A.
15.8%
N.A.
N.A.
15.8%

2002
N.A.
27.5%
N.A.
22.6%
39.0%
N.A.
-7.2%
36.1%
N.A.
6.2%
N.A.
18J)%
N.A.
N.A.
22.6'A

Fall enrollment (CY)

2003
2004
2005
N.A.
NA
N.A.
28.3%
17.5%
8 .5%
N.A.
N.A.
NA.
62.5%
21.5%
-3.3%
46.0%
16.1%
-5.8%
N.A.
39.9%
20.0%
-4.0%
-9.1%
-23%
34.4%
12.5%
9 .5%
N.A.
NA.
N.A.
9 .3%
14.2%
5.1%
N.A.
N.A.
NA
21.8%
16J)%
16.9%
N.A.
21.1%
14.2%
N.A.
N.A.
N.A.
28.3%
16.9%
8.5%

:l!!!:.Q!!
2006
N.A.
8 .3%
N.A.
3.5%
-1.1)%
23.0%
4.9%
10.8%
N.A.
8.6%
-6.4%
14.9%
0.9%
5.1%
5.1%

2007
73.5%
11.4%
N.A.
0.9%
7.0%
23.8%
10.3%
19.4%
32. 1%
11.5%
4.9%
15.0%
-3.7%
16.9%
11.5%

2008
52.8%
18.4%
140.2%
-1.8%
11.3%
18.7%
16.9%
15.6%
62.7%
14.7%
15. 1%
23.5%
-2.4%
22.2%
17.7%

CAGR
N.A.
17.7%
N.A.
16.5%
16.7%
N.A.
1.3%
18.8%
N.A.
10.0%
N.A.
17.7%
N.A.
N.A.
16.7%

~
CAGR
N.A.
11 .6"~

N.A
.Q.2%
2.7%
21 .4%
7.2%
13.8%
NA
9.9%
N.A.
17.3%
20%
N.A.
9.9%

riQ

riQ

FY2008
63.3%
11.0%
171.3%
-0.7%
10.8%
20.8%
10.9%
18.2%
56.5%
11.0%
12.3%
19.6%
-6.9%
11.4%
11.9%

FY2()09
49.8%
20.3%
107.8%
8 .9%
16.6"4
21.6%
18.7%
18.9%
64.8%
23.6%
38.8%
23.1%
5.4%
28.9%
224%

Note: Enrollments are provided for the periods closest to fall of each calendar year. Year-over-year change includes acquisitions. Career
Education data not restated prior to 2007 so comparisons may be misleading. Education Management was a publicly held company until being
taken private on June 1 , 2006. YTD change measures average of annual change for quarters reported in current fiScal year over same period in
prior fiscal year. N.A.- Not Available.
Source: BMO Capital Markets and company reports.

A m ember of BMO

Financia l Group

127

September

2009

Postsecondary Education

BMO Capital Markets

Exhibit 114. Select For-Profit Postsecondary School Operators Y-0-Y Change in New
Student Enrollment (FY2000-FY2009 YTD)
Company
Amencan Public Education
Apollo Group
Bridgepoint Education
Career Education
Corinthian Colleges
DeVry (undergraduate only)
Education Management
ITT Educational Services
Lincoln Educational Services
Strayer Education
Universal Technical Institute
MEDIAN

Ticker
APEI
APOL
BPI
CECO

coco
DV
Private
ESI
LINC
STRA
UTI

FYE
12
8
12
12
6
6
6
12
12
12
12

Fiscal Year
FY2000 FY2001 FY2002 FY2003 FY2004 FY2005
N.A.
N.A.
N.A.
N.A
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
30.4%
40.9%
23.1%
60.5%
43.5%
0.7%
17.4%
34.8%
30.6%
30.8%
55.4%
4.0%
1.9%
85.4%
8.4% -11.1%
-4.9%
2.3%
16.7%
18.1%
3.7%
11.6%
14.3%
65.9%
7.4%
4.6%
7.2"A.
4.4%
16.6%
16.9%
N.A.
29. 1%
4.5%
24.2"-'>
38.9% 2 1.1%
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
17.4%
21 .1%
13.8%
23.7% 32.3%
4.2%

ill2Q!
N.A.
N.A.
N.A.
-17.5%
-5.7%
11.5%
5.5%
10.8%
-7.4%
N.A.
-3.2%
-3.2%

FY2007 FY2008
71 .3%
48.8%
19.3%
11 .5%
171 .2% 141.5%
13.4%
..0.6%
2.5%
13.0%
14.4%
9 .6%
22.9%
26.0%
9.3%
19.6%
7.1%
12.4%
N.A.
N.A.
-3.4%
-2. 1%
11.5%
13.7%

'00..08
CAGR
N.A.
N.A.
N.A.
17.9%
19.2"-'>
3.7%
19.8%
11.4%
15.4%
N.A.
N.A.
16.6%

'04-'08

~
N.A.
N.A.
N.A.
-1 .6%
3.2%
9 .3%
16.2%
11.7%
3.9%
N.A.
N.A.
6.6%

YTO
FY2008
46.2"-'>
8.7%
170.2%
0.1%
13.0%
-13.6%
26.0%
15.4%
13.9%
N.A.
-7.3%
13.4%

YTO
FY2009
33.1%
23.7%
85.3%
12.3%
17.1%
16.5%
27.2"A.
35.1%
41 .6%
N.A.
17.9%
25.5%

Note: Data for American Public Education represents change in new student net course registrations (company does not disclose new students).
Career Education data not restated prior to 2007 so comparisons may be misleading. Education Management was a publicly held company until
being taken private on June 1, 2006. YTD change measures average of annual change for quarters reported in current fiscal year over same
period in prior fiscal year. N.A.- Not Available.
Source: BMO Capital Markets and company reports.

A listing of key enrollment metrics cru1 be found in Exhibit 115.

Exhibit 115. Key Enrollment Metrics to Watch

Term

Definition

Postsecondary "Norms"

For-Profit "Norms"

Annual new student

Measures the annual change in the

All Institutions (1): 2.3%

enrollment

number of new students entering

Public 2-Year Institutions {1 ): 1.0%

Fiscal year-to-date change

for select for-profit providers

the school. Perhaps tile metric most

Public 4-Year Institutions (1 ): 3.1%

Private 2-Year Institutions (1): 0.6%

("starts") growth (1)

closely watched by the investment

community, as it is tile best
indication of the school's demand

(incl. acquisitions) (3):

16.6%

Private 4-Year Institutions (1): 3.7%

and near- to medium-term outlook

Annual enrollment

Annual change in total students

All Institutions: 1.9%

growth (2)

Degree-granting institutions:
13.7%

Public Institutions: 1.9%

Non-degree-granting
Private Institutions: 1.8%

institutions: 4.5%

Sources: (1) US Department of Education NCES, Digest of Education Statistics, 2008 Table 188 (CAGR from 1997-1998 to 2007-2008 for degreegranting institutions). (2) US Department of Education NCES, Digest of Education Statistics, 2008 Table 198 (CAGR from 1997-1998 to 20072008) (3) CAGR for median of publicly-held companies Fall 2000 to Fall 2008.

A member of BMO

Financia l Group

128

September 2009

Postsecondary Education

BMO Capital Markets

Postsecondary Schools Funding Sources and Tuition Rate

Trends
We believe the economics of for-profit postsecondary schools are very favontble. On the
whole. these schools are cash flow positive as stt1dents prepay their tuition prior to the start of
their coursework. In addition. as the bulk of frnancing for most of these schools comes from
federally funded financial aid (i.e. , Title TV), the credit risks, for the most part, are minimal.

Favorable cash
flow dynamics

Historically. investors in postsecondary stocks have been mostly concerned with Title IV
funding, which typically represents the largest fund ing source for students attending for-profit
schools. However, over the past two years, the focus has shifted to the availability of funding
from non-government sources. i.e., the private lenders, including such companies as Nelnet
(NNI) and SLM Corp ( ' Sallie Mae" SLM), as well as commercial banks such as Citigroup
(C) and JP Morgan Chase (JPM). We note tl1at many of t11ese companies provide bot11 private
and Title IV loans to students.

"Funding
concerns" from
private lenders

These lenders and servicers began facing pressure from two issues, in our view.

Cut in Title IV program profitabi lity. In late 2006 and early 2007, there was much

negative publicity regarding allegations that certain lenders involved in the Federal
Family Education Loan Program (FFELP), through which lenders provide Title IV
funding, may have provided perks to financial aid officers (at mostly not-for-profit
schools, altl1ough certain for-profit schools were implicated as well) to be listed as
" preferred lenders" by these schools. The public profile was raised by New York
Attorney General Andrew Cuomo and ot11ers, which alleged a number of instances of
abuse. This, among other issues, eventually Jed Congress to pass the College Cost
Reduction and Access Act (H.R. 2669 or CCRA), which became effective on October 1.
2007. This Act, in essence, made participation in FFELP less profitable for these lenders
by cutting interest rates on Stafford and other federally backed loans (from 6.8% to 3.4%
over t11e 2008-2013 period), lowering loan guaranty agency collection fees (from 23% to
16% of funds collected from loan defaults), and reducing t11e percentage of student loans
guaranteed by the federal student loan insurance program (from 98% to 95%), among
ot11er changes. We believe these cuts caused a number of lenders to review t11eir ent]re
student loan portfolio - including tlleir private loans - and concentrate even hmder on
ensuring their profitability.

Overall "credit crunch." The subprime-driven credit crisis only made things worse for

these lenders, in our view, as the environment caused most lenders to be much more risk
averse than they have been in some time. This was exacerbated by greater selectivity in
the securitization market, especially via failures in the auction rate securities market,
where it is estimated that roughly $80 billion of the $330 billion in total were backed by
student loans. This forced these lenders to be even more selective in tenus of tlle types of
students to which they were lending.
An analysis of revenue trends for a select group of for-profit providers can be found in
Exhibit116.

A m ember of BMO

Financia l Group

129

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 116. Select For-Profit Postsecondary School Operators Revenues (FY2000FY2009 To Date)
YTD

YTD

REVENUES- FISCAL YEAR

FYE

Company

Ticker

Amerielln Pubic Ed.Jcalion

Apollo Group

APEI
APOL

Btidgepoinl Educatioo
Career Education

BPI
C ECO

12
12
6
12
6

coco

Corinthian Colleges
Capella Ed.Jcation

C PLA
DV

DeVry

E<klcatioo Management
Grand Canyon EtlJcation

Private

1n EducatiooelseMce s

ES I
LINC

LO PE

lincoln Educational Services

strayer Education

STRA
UTI

Universal Technical Institute

Washington Posl
Total

W PO

12

12
12
12
12
12

~
NA.
NA.
$10.7
$17.8
$23.1
610.0
769.5
1,009.5
1,339.5
1,800.0
NA.
NA.
N.A
0.7
1.2
1,472.5
NA.
NA
549.7
1,178.0
775.2
170.7
244 .2
338.1
511 .4
29.8
49.6
8 1.8
11 7.7
15.9
784.9
490.6
568.2
648.1
679.6
307.2
370.7
500.6
640.0
853.0
NA
NA.
N.A
N.A
25.6
347.4
402.3
454.1
522.9
6 17.8
81.5
105.7
132.1
187.5
248.5
78.2
92.9
116.7
147.0
183.2
92.1
109.5
144.4
196.5
255.1
2!l.l!12U~~
~
$2,250.6 $2,858.3 $4,203.4 $5,871.0 $7,717.9

_e:mq

$28.2
2,251.1
8.0
1,828.5
929.0
149.2
780.7
1,019.3
51 .8
688.0
287.4
220.5
310.8

~
$40.0
2.477.5
28.6
1,805.8
907.8
179.9
839.5
1,170.2
72.1
757.8
310.6

.E:!lQQZ
$69.1
2.723.8
85.7
1,747.4
919.2
226.2

347.1

933.5
1,363.7
99.3
869.5
327.8
318.0
353.4

Zll&

W!&

$9,274.0

$10,056.4

$11,058.2

263.6

.E:aQ.Q!
$ 107,1
3,140.9
218.3
1,707.8
1,068.7
272.3
1,091.8
1,684.2
161.3
1,0 15.3
376.9
396.3
343.5
1 275.8
$12,860.3

Ml!!.
NA.
22.7%
NA.
NA.
25.8%
42.6%
10.5%
23.7%
NA.
14.3%
2 1.1%
22.5%
17.9"~

47.5%
22.6%

Ml!!.
46.7%
1 4.9"~

264.3%
3.8%
8.4%
23.3%
8.6%
18.5%
SM%
13.2%
11 .0%
21.3A>
7.7%
22.9%
16.7%

$48.2
2,309.5

$68.9

2.898.4
195.2
878.2
1,307.8
156.5
1,461.5
2.011.5
118.4
605.2
246.7
250.4
267.1

88.9
888.9

1,068.7
131.3
1,091.8
1,684.2
70.3
481.3
169.1
195.0
258.8
~
$9,056.8

lli.1
$11,235.0

YIY CHANGE IN REVENUES

Fiscal years

American Pubic EdJcation

APEI

~
NA.
22"A>
N.A.
N.A.
28%

Wll21

NA.
26%
N.A.
N.A.
43%

BPI
C ECO

12
8
12
12

Corinthian Colleges
Capella Ed.Jcation

cooo

CPLA

12

N.A.

88%

OeVry

DV
Private
LO PE
ESI

12
12
12
12

21%
18%
N.A
10%
N.A
12%
18%
N.A.

16%
21%
N.A
16%
30%
19%
19".4
19 1%
23%

Apollo Group
&idgepoint Education

APOL

Career EduC8tion (new)

Educatioo Management
Grand canyon Ed.Jcation

ITT Educational Services

line<*! Educational Services

LINC

strayer Education

STRA

Universal Technical Institute

UTI

Washington Posl
Median

WPO

12

18%

ww.
N.A
31%
N.A.
N.A
38%
66%
14%
35%
N.A
13%
25%
26%
32%
51%
32%

illW.
67%
33%
N.A
11 4%
51%
65%
5%
28%
N.A.
15%
42%
26%
36%
47%
39%

~
30%
34%
70%
25%
52%
44%
15%
33%
N.A.
18%
33%
25A>
30%
52%
33%

~
22%

25%
541%
24%
20%
27%
-1%
19%
102%
11%
16%
20%
22%
29%

22%

~
42'AI
10%
260%
-n~

-2%
21%
8%
15%
39"A>
10%
8%

20%
12%
19".4
13%

.Em.2I
73%
10%
199%
-3%
1%
26%

~
43'AI
25%
120%
1'A>
22%
19%
34%
19%
68'AI
26%

~
55%
15%
155%
2".4
16%
20A>

11%

17%

17%
38'AI
15%
6%
21'A>
2'A>
19%
16%

24%
62'AI
17%
15%
25%
,3%
25%

46%

28%
3'A>
30%
27%

19'A

N.A. - Not Available. Education Management was a publicly held company until being taken private on June 1, 2006. Source: BMO Capital
Markets and company reports.

Funding sources
for higher
education

Funding for all ty pes of higher education comes from mm1erous sources, including, but not
limited to, the following :

Student tuition and fees (most of which comes from Title IV financial aid)

Federal government funds (beyond Title IV fimmcial aid)

State and local government f1:mds

Endowments funds, gifts, and grants

Auxiliary funds and other income (e.g., businesses mn by schools, such as medical
imaging centers)

Tuition reimbursement programs (usually corporate sponsored)

We have summarized tJ1e funding sources for the publicly held providers in Exhibit 117 based
on both disclosed data and our estimates. We note a number of companies with high
percentages of private lending, specifically ITT Educational Services (ESI). have been
reducing their exposure to this funding source since the :ftmding crisis hit.

A m ember of BMO

Financial Group

130

September

2009

Postsecondary Education

BMO Capital Markets

Exhibit 117. Funding Sources for Publicly Held For-Profit Postsecondary School
Operators
Amer.
Public Apollo Bridgepoint
Career
Corinthian Capella
Group
Education Education
Colleges
OeVry
Educ.
Educ.
BPI
OV
APEI
APOL
CECO
coco
CPLA
FY2008 FY2008
FY2008
YTD 2Q09
FY2009
FY2008 FY2009
77%
78.5%
13%
87%
81%
75%
71%
9%
1SO%
24.1%
0 .5%
70%
67%
63.5%
64.6%
74.5%
60.7%
67%
68.9%
4.6%
3.9%
< 1%
1%
1%
3%
1%
2.5%
N.A.
<1%
5%
2.5%

Company
Ticker
Period covered

Title IV
Grants (mostly Pe.t)
FFELP:
Stafford Loans
PLUS Loans
Other TiUe IV loans/grants
Private ).oan Exposure
Non-reoourse loans
Reoourse loans
SUbprlme
Sallie Mae
Sallie Mae Non-subptime
Sallie Mae SUbprime
Other sources (incl cash)
Cash
Internally funded
Military tuition assistance
Employers
State grants

Education

Grand

Kaplan
Higher

ITT Educ.

Educ.

Mgmt.

Canyon

Education

Services

Services

Private

LOPE
FY2008
78.6%

WPO
FY2008
71%

ESt
FY2008
72-k
13%
59%

2.9%

5%

8%

FY2009
6S.5%
7.9%
58.7%
50. 1%
8 .6%
1.9%
13.1%

Lincoln
Strayer

Univ.

Educ. Tech.lnst.
LJNC
UTI
STRA
FY2008
FY2008
FY2008
79%
72%
72%
19%
8%
62%
55%

<2%

3%

4'4

2%
11-12%
3%

86%
21%

20%
10%

19.0%
14.9%

X
65%

25%

N.A.

24%

18%
17. 1%
1%

9%

19%

17%

20%
10'A.

2'%
20-25%

4%
N.A.
N.A.

17%

2%
10-1 5%

Cohort Default Rate'{FY2006)

(FY2007 Prelim.)

25%

13%

72%
9.3%

4.1%
13.2%

1.7%-14.-3%
2.5%-15%

3%
13.1%
-14.9%

1.6%
2.5%

7.3%

N.A

2.6%

1%

1.:2%-11.3%
L7%- t4.4%

1.6%
1.4%

9.3%-14.9% 5.5%-12.9% 5.7%-19.4%

9.7%-15.3%
NA

3.8%
N.A.

&.8%-S.O'A
N.A.

Source: BMO Capttal Markets and company reports.

Tn the rest of this section, we discuss the various revenue and funding sources for the
postsecondary sector.
Annual tuition

Tuition and fees. For most of their histozy, for-profit schools have had significant pricing

increases outpace

power, in our opinion, as they typically are protected by the "umbrella" of tuition rdte trends
at not-for-profit schools. As shown in Exhibit 118, according to the College Board, the cost of
higher education has increased significantly over the past 30+ years with tuition, room, and
board rising 7.4% annually at private institutions and 7.7% at public four-year schools and
6.9% at public two-year schools. Tbis is much higher than the 4.3% annual increase in
inflation over that period.

inflation

Exhibit 118. Index of Not-For-Profit Postsecondary Institution Tuition vs. Inflation (19761977 to 2008-2009 School Years)
1,100
0
0

,....

900

......

700

.,......,....

500

";-

<D

i(

Gl

= 300

---==--"

100
1'1'0>
,....

cJ:,

1'0>

0>
1'0>
,....

0>
,....

rO

0
(()

1'-

<

OCi

("')
(()

ll)
(()

1'(()

(()

0>

o;

0>
,....

0>
,....

0>
,....

0>
,....

-.1-

0>
,....
cJ:,

rO

<

<

<

0
<

c!..

(()

<

(()

<

(()

(()

("')

ll)

0>
0>
,....

0>
0>
,....

c!..

<
<

0>

-.1-

<
<

1'0>
0>
,....

cJ:,

<
0>

0>
0>

0>
,....

rO

<
0>

Private 4-Year --Public 4-Year - - Public 2-Year

0
0
N

0
0
0
N

("')

ll)

0
0
N

0
0
N

0
0
N

0
0
N

c!..

-.1-

1'0
0
N

cJ:,

0
0
N

<
0
0

(()

0
0
N

Inflation

Note: Shaded areas represent US recessionary periods.

Source: BMO Capital Markets analysis based on data from College Board's Trends in College Pricing

A member of BMO

Finan cia l

Group

131

2008 and

Bureau of Labor Statistics.

September 2009

Postsecondary Education

For-profit tuition ;
most expensive
for shorter
duration
programs

BMO Capital Markets

WhiJe comparable historical data was not avai lable for for-profit schools. we believe the
trends have been fairly similar. Over the most recent 12-year period (1995-1996 to 2007-2008
school years) and using a different data source (ED), average tuition at for-profit institutions
has increased roughly 6% (four-year schools) and 5.2% (two-year schools) atmually -fairly
close to annual increases in the not-for-profit sector (see Exhibit 119). We note tJ1at tuition
and fees at for-profit schools tend to be much more expensive than at not-for-profit schools
for shorter-duration progTams (i.e., non-degreed programs at less than two-year schools,
associate degrees). However, for the longer programs (i.e., four-year schools offering
bachelor' s and graduate programs), for-profit tuition tends to be less e:-.-pensive than at private
not-for-profit institutions, although more expensive than at public not-for-profit schools.

Exhibit 119. Average Annual Tuition and Fees by School Type (1995-1996 to 2007-2008
School Years)
1995-1996 School Year
Less t han
2-vear
Public:
In-district
In-state
Out-of-state
Private not-for-profit
!Private for-profit

$2,411
2,492
2,868
NA
N.A.

2-vear
$1 ,265
1,525
3,517
4,470
6,727

2007-2008 School Year

4 -vear

Less t han
2-vear

$2,801
2,802
7,185
9,528
7,412

$5,303
5,328
5,757
10,030
12,305

2-vear
$2,298
2,749
5,914
9,396
12,357

4 -vear
$5,747
5,730
13,595
19,047
14,908

CAGR: 1995-1996 to 2007-2008

Less than
2-vea r

2-vear

4 -vear

6.8%
6.5%
6.0%
NA
N.A.

5.1%
5.0%
4.4%
6.4%
5.2%

6.2%
6.1%
5.5%
5.9%
6.0%

N.A. - Not Available. Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

When inclu ding

all costs, forprofit s are fairly
ex pensive, with
similar rates of
increases to notfor-profits

A m ember of BMO

The anaJysis above excludes other costs beyond tuition such as books and supplies. room ~md
board. and transportation, which in many cases equal roughly the cost of tuition, especially for
those students not living with fami ly. As shown in Exhibit 120, when including oU1er costs,
the average price of attendance at for-profit schools ranks high for virtually all types of
progr'anlS and living arrangements. Arumal rates of increases at the for-profit schools have
been relatively similar to those at their not-for-profit counterparts since the 2001-2002 school
year (earliest data available).

Financial Group

132

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 120. Average Price of Attendance by School Type (2001-2002 to 2007-2008

School Years)
2001-2002 School Year
2007-2008 Sch ool Year
CAGR: 2001-2002 to 2007-2008
Less than
Less th an
Less than
2-Year
2-Year
4-Year
2-Year
2-Year
4-Year
2-Year
2-Year
4-Year
Public not-for::Qrofit:
On campus:
In-district
In-state
Out-of-state
Off campus (not with family):
In-district
In-state
Out-of-state
Off campus (with family):
In-district
In-state
Out-of-state
Private not-for::Qrofit:
On campus
Off campus (not with family)
Off campus (with family)
Private for::Qrofit:
On campu s
Off campus (not with family)
Off campus (with family)

N.A.
N.A.
N.A.

$7,877
8,003
10,077

$11,704
11,700
17,576

$11 ,661
11 ,747
12,081

10,150
10,486
13,081

12,746
12,744
18,470

7,229
7,315
7,649

5,118
5,454
8,049

N.A.
17,692
12,050
N.A.
17,423
12,179

N.A.
N.A.
N.A.

$10,681
10,931
13,349

$16,758
16,758
24,955

N.A.
N.A.
N.A.

5.2%
5.3%
4.8%

6.2%
6.2%
6.0%

$15,019
15,051
15,500

13,332
13,791
16,954

17,965
17,968
25,908

4.3%
4.2%
4.2%

4.6%
4.7%
4.4%

5.9%
5.9%
5.8%

7,224
7,222
12,948

9,592
9,624
10,073

6,810
7,269
10,432

10,180
10,183
18,123

4.8%
4.7%
4.7%

4.9%
4.9%
4.4%

5.9%
5.9%
5.8%

15,487
17,141
10,839

22,606
22,814
17,262

27,497
24,794
18,066

21 ,674
22,221
14,488

31,019
29,106
21,791

N.A.
5.8%
7.0%

5.8%
4.4%
5.0%

5.4%
4.1%
4.0%

18,952
19,038
13,982

23,192
20,860
15,504

N.A.
23,506
16,428

26,992
24,545
17,300

33,029
29,271
21,283

N.A.
5.1%
5.1%

6.1%
4.3%
3.6%

6.1%
5.8%
5.4%

N.A. - Not Available . Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

ln its annual Trends in College Pricing, the College Board breaks down the arumal cost of

attendance for undergraduate students (two-year and four-year not-for-profit schools) by their
components (similar data was not available for for-profit schools). While tuition is the largest
component at both private four-year schools and public four-year schools for out-of-town
students, room and board are actually the larger costs for students at two-year schools and "intown" at four-year schools (see Exhibit 121).

Exhibit 121. Average Undergraduate Budgets (2008-2009 School

Year)

Tuition and fees

Room and board
Books and supplies
Transportation
Other expenses
Total

Public Two- Public FourYear Year In-State

Commuter On-Campus
$2,402
$6 ,585
7 ,341
7,748
1,036
1,077
1,380
1,010
1.895
1.906
$14,054
$18,326

Public FourYear Out-of- Private FourState OnYear OnCampus

Campus
$17,452
$25,143
7 ,748
8,989
1,077
1,054
1,010
807
1.906
1.397
$29,193
$37,390

Source: College Board's Trends in College Pricing 2008.

We have provided revenue per student data for a select group of for-profit providers in
Exhibit 122. While there are many ways to calculate this, we are using trailing-12-month
(TIM) revenues divided by the averdge enrollments over that period. using five enrollment
data points (beginning enrollments for each quarter plus ending enrollments for tile last
quarter). Unfortunately, there was limited data available. Nevertheless, ti1e 4.5(Yo CAGR for
A m ember of BMO

Fin an cia l Group

133

September

2009

Postsecondary Education

BMO Capital Markets

increases in average revenue per student for this group fTom FY2000 to FY2008 is slightly
below the 5%-6% average annual increase for for-profit ins6tutions as measured by the ED.
We note that revenues per student val)' widely, with American Public Education as the lowest
(military focus. more pmt-time students) ru1d DeVry the highest (more full-time students.
albeit a bit misleading as enrollment data only includes DeVry Undergmduate and Medical
and Healthcare where revenues include the entire DeVry University systems p lus Medical and
Healthcare). In addition, schools that focus on working adults, such as Apollo Group's
University of Phoenix and Strayer Education's Strayer University tend to have lower annual
revenue per student given that numy students attend part time. In addition, changes in mix
shift (i.e., degree type, program type) can have an impact on this calculation.

Exhibit 122. Select For-Profit Postsecondary School Operators Revenue per Student
(FY2000-FY2009 To Date)
TIM Revenues/Student (5 qtr. avg.)
Company
Ticker
American Public Education
APEI
Apollo Group
APOl
Bridgepoint Education
BPI
Career Education
CECO
Corinthian Colleges
Capella Education
CPlA
DeVry
DV
Educallon Management
Private
Grand canyon Education
lOPE
ITT Educational Services
ESI
Lincoln Educational Services
LINC
Strayer Education
STRA
Universal Technical Institute
UTI
Washington Post
WPO
MEDIAN

coco

:.ll.!!.:!l!!

8Q.B.

8Q.B.

S2,891
9,369
9,341
18, 107
15,881
11,299
27,575
18,367
8,459
17,778
18,982
9 ,932
22,628
14 429
$15,155

N.A.

N.A.

4.5%

4.3%

Fiscal Year

FYE

2000

lQQ1

l!!J!l

12
8
12
12
6
12
6
6
12
12
12
12
9
12

N.A.

N.A.

N.A.

S6,584
N.A .

12,750
9,571

$6,892
N.A.

15, 112
10,482

$7,219
N.A.

17,250
11,333

N.A.

N.A.

N.A.

14,981
13,960

15,528
14,681

17,363
15,356

N.A.

N.A.

N.A.

12,822

13,592

14,213

N.A.

7,260
N.A.
N.A.

$12,750

N.A.

7,550

N.A.

8 .031

N.A.
N.A.

N.A.
N.A.

$13.592

$14,213

~
N.A.

$7,554

!!!!!
N.A

$7,929

N.A.

N.A.

17,534
12,765
10,824
19,090
15,858

19,026
13,806
11,115
22,396
15,916

N .A.

N.A.

15, 179

15,703

N .A.

N.A.

8,401

8,709
19,654

N .A.
N.A.

N.A.

$13,972

ylychange

$15,703

2005

$2,949
$8,658
9,096
N.A.
N.A.
9,453
20,442
19,992
18,969
14,237
14,597
14,910
11,249
11,127
11 ,351
23,455
25,511
26,540
17,605
16,480
17,221
7,750
8, 189
N.A.
16,291
16,770
17,268
16,257
18,095
18,797
8,947
9,260
9,598
20,337
21,239
22,055
13470
11335
12.822
$16,257 $14.597 $14,190
N.A.

$2,397
9,035

N.A.

N.A.

4.5%
6 .5%

-1.2%
3.6%
0.4%
5.3%
3.6%

N.A.

7.9%
3.5%
N.A.

N.A.

4.2%

3.2%

N.A.

N.A.

4.0%

3.3%
3.6%

N.A.
N.A.

4.5%

N.A.
3.6%

:!IQ
ill!!Q!!
$2,942
9,255
9,330
18,828
15,440
11,386
28,013
17,778
8,467
17,472
18,925
9,981
23,122
13687
$14,563

:t.!.Q
~

$2,846
9,648
9,218
17,990
16,299
11,240
27,608
18, 142
8,629
18,056
19,568
10,389
23,413
14 444
$15,372

Fiscal Year

Company
American Public Education
Apollo Group
Bridgepoint Education
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand canyon Education
ITT Educational Services
Lincoln Educational Services

Strayer Education
Universal Techntcallnstrtute

Washington Post
MEDIAN

Tlcl<er
APEI
APOl
BPI
CECO

2222.

coco
CPlA
DV
Private
lOPE
ESI
liNC
STRA
UTI
WPO

lQQ1

l!!J!l

2005

N.A.

~
NA.

!!!!!

N.A.

N.A.

N.A.

~
NA

4.7%

4.7%

4.6%

5.0%

9.2%

4.4%

~
~

230%
0.7%

-2.0%
3.0 %
-1.2%
-4.5%
6.5%
-0.5%
3.9%
4.3%
3.3%
3.0%
1.0%
3.5%
2.6%
7.1%
3.0%

-3.3%
4.2%
-1 .2%
-4.5%
5 .6%
-1.3%
-1.4%
2.0%
1.9%
3.3%
3.4%
4. 1%
1.3%
5.5%
1.9%

N.A.

N.A.

NA

N.A.

N.A.

N.A.

N.A.

18.5%
9.5%

14. 1%
8 .1%

1.6%
12.6%

8.5%
8.2%
2.7%
17.3%
0.4%

5.1%
3.1%
1.2%
4.7%
3.5%

2 .2%
2.5%
-1. 1%
8 .8%
4.5%

-7.2%
2.1%
2.0%
4 .0%
2.2%
5.7%
3 .0%
3.9%
3.7%
3.8%
5.1%
3.7%

N.A.

N.A.

N.A.

3 .6%
5.2%

11.8%
4.6%

9.9%
3.3%

N.A.

N.A.

N.A.

N.A.

N.A.

NA

6.0%

4.6%

6 .8%

3.5%

3.7%

2 .9%
11.3%
3.5%
4.4%
13.1%
4 .4%

N.A.

N.A.

NA

N.A

N.A.

4.0%

6.4%

4.6%

3.7%

N.A.
N.A.

N.A.
N.A.

N.A.
NA

N.A .
N.A

2.7%
3.5%

5.24,4

6.4%

4.6%

4.3%

N.A.

3.5%

N.A.- Not Available. Note: Revenue per student calculated using TTM revenues divided by enrollments over that period (five data points). Career
Education data not restated prior to 2007 so comparisons may be misleading. DeVry enrollment data calculated as a "calendarized" estimate of
DeVry undergraduate, and medical and healthcare enrollments. DeVry revenues exclude Professional Education segment. Education
Management was a publicly held company until being taken private on June 1, 2006. Source: BMO Capital Markets and company reports.

For-profits:
Tuition and fees
and key revenue
source

As most for-profi t postsecondary schools are elig ible for only limited direct federal and state/local
funding (outside of Title IV :ftmding for their students), they tend to rely mostly on shtdent tuition
and fees to :ftmd current ope.rations and grmvth. As shown in Exhibit 123. for-profit schools
received nearly 88% of their revenues in t11e 2005-2006 school year (latest available) from tuition
and fees. By contrast, the public and private not-for-profit schools, respectively, generated
roughly 17% and 29% of their revenues. respec6vely. from tuition and fees.

A member of BMO

Financia l Group

134

September

2009

Postsecondary Education

BMO Capital Markets

Exhibit 123. Funding Sources for For-Profit Institutions (2005-2006 School Year)
Public Not-for-Profit
($ In millions)

Tuition and fees

Federal funding
State/local funding
Endowments, investment income, gifts and grants
Auxiliary and other income
Total

2-Year Schools
Revenues %of Total
$7,264.0
16.6%
6,154.2
14.1%
24,080.5
55.2%
1,268.2
2.9%
4.886.4
11 .2%
$43,653.3
100.0%

4-Year Schools
Revenues
%of Total
$34,506.6
17.0%
28,849.8
14.2%
58,983.0
29.1%
16,878.4
8.3%
63,293.7
31 .3%
100.0%
$202,511.5

Tuition and fees

Federal funding
State/local funding
Endowments, investment income, gifts and grants
Auxiliary and other income
Total

2-Year Schools
Revenues %of Total
$318.5
53.6%
75.4
12.7%
30.0
5.1%
15.0%
89.2
81.4
13.7%
$594.5
100.0%

4-Year Schools
Revenues
%of Total
$43,944.8
28.9%
12.9%
19,607.9
2 ,045.8
1.3%
53,891 .9
35.4%
32,659.9
21 .5%
$152,150.2
100.0%

Tuition and fees

Federal funding
State/local funding
Endowments, investment income, gifts and grants
Auxiliary and other income
Total

2-Year Schools
Revenues %of Total
$2,791.0
80.6%
399.6
11.5%
1.0%
35.4
9 .8
0.3%
6.5%
226.5
$3,462.4
100.0%

4 -Year Schools
Revenues
%of Total
$8,225.7
90.2%
399.9
4.4%
31 .6
0.3%
38.2
0.4%
428.6
4.7%
$9,124.1
100.0%

All Schools
Revenues %of Total
$41,770.6
17.0%
35,004.0
14.2%
83,063.5
33.7%
18,146.6
7.4%
68,180.1
27.7%
$246,164.8
100.0%

Private Not-for-Profit
All Schools
Revenues %of Total
$44,263.2
29.0%
19,683.3
12.9%
2,075.9
1.4%
53,981 .0
35.3%
32,741.3
21.4%
$152,744.7
100.0%

For-Profit
All Schools
Revenues %of Total
$11,016.8
87.5%
799.5
6.4%
67.0
0 .5%
48.1
0.4%
655.2
5.2%
$12,586.6
100.0%

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

Financial aid biggest variable in

driving enrollment
growth

We believe very few students at for-profit institutions pay their tuition and fees directly owing
to a combination of the myriad financial aid sources and rising tuition costs. A 2001 study by
Professor David Morgan at the University of Oklahoma concluded that the variable witl1 the
biggest impact on enrollment is the amount of financial aid avai lable to students. As such, we
believe it is in a school 's best interest to maximize the amount of potential financial aid its
students can access.
In August 2009, Sallie Mae published a study entitled How America Pays for College, which
included a Gallup survey of college-going students and tl1eir parents to determine as to bow
they fimded their college education in the 2008-2009 school year. As shown in Exhibit 124,
the bulk of funding comes from "borrowed sources" including both Federal (i.e.. Title fV) and
private loans. although a sizable portion comes from savings as well.

A m ember of BMO

Financial Group

135

September

2009

Postsecondary Education

BMO Capital Markets

Exhibit 124. How America Pays for College (2008-2009 School

Year)
Source
Borrowed Sources:
Parent borrowing:
Federal PLUS loan {Title IV)
Private education loan
Home equity/line of credit
Credit cards
Other loans
Retirement account loan

%of Total
Fam ilies

Average
Amount

8%
5%
3%
5%
1%
3%

$7,664
8,401
8,028
3,886
5,471
5,762

25%
12%
5%
2%

5,327
7,516
2,812
5,819

Non-borrowed Sources:
Parent income and savings:
Current income
College savings plans
Retirement savings withdrawal
Other savings/investments

55%
11%
3%
14%

$7,175
7,312
5,318
7,776

Student non-borrowed sources:

Current income
Savings
Federal work-study
Other savings/investments

26%
25%
5%
2%

$2,639
3,791
1,893
5,749

Scholarships and grants:

Scholarships
Grants

40%
30%

6,907
5,109

17%

5,496

Student borrowing:
Federal loans (Title IV)
Private education loan
Credit cards
Other loans

Relatives and friends

Note: Total and subtotals do not add up to 100% as respondents could answer more than one category.
Source: BMO Capital Markets and Sallie Mae.

Students at forprofit institutions

have highest
percentage of
those receiving
financial aid

A m ember of BMO

Wlrile the survey did not distinguish between students attending for-profit and not-for-profit
instjtutions, students attending for-profit schools are likely heavier borrowers owing to the
relatively higher cost of attendance and their relatively lower income levels. This is supported
by data at the undergraduate level and is likely to be tme at lhe graduate level as well, albeit
to a lesser e"1ent. As shown in Exhibit 125, in the 2007-2008 school year, 90.6% and 98% of
undergraduates attending for-profit institutions received some type of financial aid - the
highest of any school type.

Financial Group

136

September

2009

Postsecondary Education

BMO Capital Markets

Exhibit 125. Percentage of Undergraduates Using Financial Aid

(2007-2008 School Year)
Institution Type
All undergraduates
Public:
Less than 2 year
2 year
4 year non-doctorate granting
4 year doctorate granting
Private not-for-profit:
2 year
4 year non-doctorate granting
4 year doctorate granting
Private for-profit:
Less than 2 year
2 year or more
More than one institution

Any aid
65.6%

Any
grants
51 .8%

Any
student
loans
38.5%

54.1%
47.6%
70.2%
71 .9%

44.5%
39.6%
52.5%
53.1%

17.8%
13.2%
43.4%
47.8%

N.A.
3.3%
7.3%
8.0%

1.0%
2.0%
2.4%
2.0%

0.5%
0.2%
3.9%
6.9%

79.6%
87.3%
81 .7%

59.8%
76.2%
70.7%

43.9%
61 .2%
56.5%

2.8%
23.2%
23.2%

1.2%
2.5%
1.3%

4.8%
8.4%
8.7%

90.6%
98.0%
68.9%

68.8%
70.9%
51.3%

77.3%
95.8%
44.7%

0.3%
2.5%
7.7%

0.9%
3.0%
2.8%

6.7%
4.7%
5.0%

Work- Veterans
study benefits
7.4%
2.1%

PLUS
loans
3.8%

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

Students at forprofit institutions

also receive more
financial aidespecially when
compared with
those attending
public not-for-

ln addition, these shtdents tend to receive greater amounts of financial aid - especially when
compared with shtdents at public not-for-profit institutions. As shown in Exhibit 126. in the
2007-2008 school year, students att ending less than two-year for-profit institutions had
roughly $8,500 in financial aid, versus only $4,700 for t11ose at1cnding less than two-year
public institutions. The comparisons narrow a bit at two year or longer schools, where
shtdents attending for-profit institutions average $11,400 in financial aid, while those
attending not-for-profits get anywhere from an average of $3,400 (public two-year schools) to
$ 19,000 (private four-year doctorate granting schools).

profit institutions

Exhibit 126. Average Amount of Undergraduate Financial Aid

(2007-2008 School Year)
Institution Type
All undergraduates
Public:
Less than 2 year
2 year
4 year non-doctorate granting
4 year doctorate granting
Private not-for-profit:
2 year
4 year non-doctorate granting
4 year doctorate granting
Private for-profit:
Less than 2 year
2 year or more
More than one institution

Any aid
$9,100

Any
grants
$4,900

Any
student
loans
$7,100

4,700
3,400
8,000
10,100

2,700
2,200
4,300
5,600

5,700
4,100
6,300
6,800

N.A.
3,000
2,500
2,500

N.A.
4,500
5,200
5,600

N.A.
4,800
8,000
10,000

7,800
16,000
19,000

4,000
9,300
11 ,100

7,000
8,400
9,900

2,000
1,900
2,200

N.A.
5,600
5,600

8,200
12,700
15,600

8,500
11,400
9,000

3,100
3,200
4,400

6,500
8,500
6,800

N.A.
3,500
2,200

4,700
7,600
6,100

6,800
9,900
9,900

Work- Veterans
study benefits
$2,400
$5,400

PLUS
loans
$10,800

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

A member of BMO

Financial Group

137

September 2009

Postsecondary Education

Percentage of
students with
loans has
increasedparticularly for
for-profit schools

BMO Capital Markets

The amount of student loans. specifically. has been increasing in recent years - especially
among students attending for-profit institutions. A JtLly 2009 report by Education Sector
highlights this trend. From the 1992- 1993 school year to the 2007-2008 school year, tJ1c
percentage of f1.lll-time. full-year undergraduate students who received ru1y student loans (both
private and Title IV) increased from 32.4% to 52.9%. For those attending for-profit
institutions, that percentage incre.ased from 52.5% to 91.6%, which was the highest across the
survey period across a U school types (see Exhibit 127).

Exhibit 127. Percentage of Students with Student Loans (19921993 to 2007-2008 School Years)
01992-1993 111995-1996 01999-2000 02003-2004 .2007-2008

100%
1/1

90%

Cll

80%

c:

0
....J

70%

"0
::l

60%

Q)

ii)

50%

0)

c:

:;:

40%

'Qj

30%

&l

0:::
~
0

20%
10%
0%
Public 2-year

Public 4-year

Private not-for-profit
4-year

Private for-profit

Source: BMO Capital Markets and Education Sector

Amount of
average loans has
increased as well

rn addition., the ammmt of ~mnual lmms has increased. When measured in constant dollars
(2007). from tl1e 1992-1993 school year to tl1e 2007-2008 school year, average amount of
loans (both private and Tille IV) received by full-time, full-year undergraduate students
increased from $5, 161 to $7,987. For those attending for-profit institutions, tl1at amount
increased from $6.138 to $9.611 (see Exhibit 128).

Exhibit 128. Annual Average Student Loans in Constant 2007

Dollars (1992-1993 to 2007-2008 School Years)
$10,000

0 1992-93 II 1995-96 0 1999-2000 0 2003-04 2007-08

9,000

..

8.000

0
....J

7,000

Oi

6,000

c:
c

5,000

::J

<(
41

a>

f!
41
>
<(

4,000
3,000
2,000
1,000
0
Public 2-year

Public 4-year

Private not-for-profit 4year

Private for-profrt

Source: BMO Capital Markets and Education Sector

A m ember of BMO

Financia l Group

138

September 2009

Postsecondary Education

BMO Capital Markets

Students

As such, students from for-profit schools tend to have proportionately more debt when

attending f or-

graduating. According to an August 2009 report by the College Board. students from forprofit institutions have tJ1e highest debt levels when compared witl1 t11eir peers when finishing
their respective programs (see Exhibit 129).

profit institutions
typically have
mor e debt when

Exhibit 129. Education Debt of Degree Recipients (2003-2004 and

2007-2008 School Years)

g raduating

All students/all sectors

2003-2004
2007-2008
School Year Sch ool Year %CAGR
$13,663
$15,123
2.6%

Bachelor's Degree
Public Four-Year
Private Four-Year
For-Profit

18,973
16,990
21 ,238
26,562

19,999
17,700
22,375
32,653

1.3%
1.0%
1.3%
5.3%

Associate Degree
Public Two-Year
Fo r-Profit

8,493
6,230
16,815

10,000
7,125
18,783

4.2%
3.4%
2.8%

Certificate
Public Two-Year
For-Profit

7,503
4,531
7,503

9,000
6,534
9,744

4.7%
9.6%
6.8%

Source: BMO Capital Markets and The College Board.

Students at forprofit sch ools

h ave
dispr oportionate
" unmet needs",
somewhat owin g
to l ow "expected
family
contribu tion "

A member of BMO

Despite this, a separ-c:lte study shows that students at for-profit institutions tend to still have the
largest mnount of "unmet need." Dr. Tom Mortenson, a postsecondary researcher. calculated
the averc:1ge unmet need by institutional type for full-time, dependent, single institution
undergraduate students in the 2007-2008 school year (latest data available). As shown in
Exhibit 130, the average unmct need percentage for students at for-profit schools was $5,632,
or roughly 20.4% of tJ1e average cost of attendance in that school year. This was tJ1e highest
across all school types. We note that tlus analysis may be a bit misleading given the largest
driver of tlus variance is tl1e student' s expected fanllly contribution (EFC). calculated based
largely on available income, given tl1at shtdents at for-profit institutions tend to skew more
toward lower income.

Financial Group

139

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 130. Funding Gap Analysis by School Type (2007-2008

School Year)

Average cost of attendance

Public 4-Year
Schools
$18,931

Expected family contribution

Financial aid:
Grants
Loans
Work-Study
Other financial aid
Total financial aid
Total available funding
Average unmet need/(surplus)
As % of average cost of attendance:
Average cost of attendance
Expected family contribution
Financial aid:
Grants
Loans
Work-Study
Other financial aid
Total financial aid
Total available funding
Average unmet need/(surplus)

Public 2-Year Private 4-Year

Schools
Schools
$11,961
$36,646

Private Less
Than 4-Yea
Schools
$21 ,378

For-Profit
Schools
$27,564

15,700

10,150

18,529

8,666

7,447

3,611
3,431
253
1,031
8326
24026
~

1,765
855
188
72
2.880
13 030
~

10,531
6,090
713
2.113
19 447
37 976
~

3,564
4,254
140
2.165
10.123
18 789
~

2,615
9,070
115
2,685
14,485
21,932

100.0%

100.0%

100.0%

100.0%

100.0%

82.9%

84.9%

50.6%

40.5%

27.0%

19.1%
18.1%
1.3%
5.4%
44.0%
126.9%
~

14.8%
7.1%
1.6%
0.6%
24.1%
108.9%
~

28.7%
16.6%
1.9%
5.8%
53.1%
103.6%
~

16.7%
19.9%
0.7%
10.1%
47.4%
87.9%

9.5%
32.9%
0.4%
9.7%
52.6%
79.6%

J2...l..:ra

.62./a

Source: Postsecondary Education Opportunity Report 203 (June 2009).

A discussion of the various types of funding sources follows .

Federal fu nds. The most well known of the many types of financial aid available are
federaUy funded student loans and grants. the bulk of which are regulated by Title IV of the
Higher Education Act, overseen by the US Depart1nent of Education (ED). According to the
College Board, the federal goverrunent provided roughly $88.9 billion in financial aid for
higher education in the 2007-2008 school year - a 6.7% increase from the $83.3 billion
available in the prior year - under the programs described in Exhibit 131 (this excludes any
education-related tax benefits). Given recent increases in Pen Grant and Stafford loan limits,
it is likely that U1e 2008-2009 school year saw an even larger increase.

A m ember of BMO

Fin an cia l Group

140

September

2009

Postsecondary Education

BMO Capital Markets

Exhibit 131. Types of Federal Financial Aid Available for Postsecondary Students
Total Available (20072008 School Year)
Program

Name

Type of Aid

Other Information

Annual Award Limits

(2009-2010 School Year)

Disbursement

Grant; does
not have to
be repaid

Undergraduates
only

Upto$5,350

School acts as the agent for

the us Dept. or Education

Grant; does
not have to
be repaid

Undergraduates
Upto$4,000
only; not a ll schools
can participate

Other Federal Grants (e.g., Grant; does

LEAP, ACG and SMART) not have to
be repaid

Various

Veterans

Various
loans and
grants

Military/Other

Federal Work Study

(FWS)

Federal Grants PeiiGrant

Federal Supplemental
Educational Opportunity
Grant (FSEOG)

Other
Loans/Gra nts

Work Study

Direct Loan and Federal Perkins Loans

Federal Family
Education Loan
(FFEL)
Programs

Other Gra nts

Non-Federal
Loans

(Sbil.)

% of total

$14.4

9.3%

School disburses funds to

students

0.8

0.5%

Various

Various

0.6

0.4%

N.A.

Various

N.A.

3.5

2.3%

Various
loans and
grants

N.A.

Various

N.A.

1.6

1.1%

Money is
earned; does
not have to
be repaid

Undergraduates and No annual limH

graduates; not all
schools can
participate

School disburses funds to

students

1.2

0.8%

Loan; must
be repaid

Undergraduates and
graduates; not all
schools can
participate

Undergraduate: up to
School disburses funds to
$4,000 annually and
students
$20,000 lifetime. Graduate.
up to $6,000 annually and
$40,000 lifetime (including
undergraduate loans)

1.1

0.7%

Subsidized Stafford Loans Loan; must

be repaid

Dept. or Education Undergraduate: $3,500pays interest while $5,500; depending on

student is 10 school grade level (lowest for first
year under-graduates).
Graduate:$8,500

School disburses funds to

students, funds provided by
federal government (direct
loans) or private lenders
(FFEL)

28.4

18.3%

Unsubsidized Stafford
Loans

Loan; must
be repaid

Borrower is
responsible for
interest for life of
loan

Undergraduate: $6,000$7,000; depending on

grade level (lowest for first
year under-graduates).
Graduate:$12,000

School disburses funds to

students, funds provtded by
federal government (direct
loans) or private lenders
(FFEL)

26.5

17.1%

PLUS Loans

Loan; must
be repaid

Borrower is
responsible for
interest for life of
loan

Cost of attendance minus

any other financial aid
received

School disburses funds to

students, funds provided by
federal government (direct
loans) or private lenders
(FFEL)

10.6

6.8%

Other Loans

Loan; must
be repaid
G rant; does
not have to
be repaid

Various

Various

Various

0.2

0.1%

Various

Various

Various

8.0

5.1%

Institutional (t.e. , school)

Grants

Grant; does
not have to
be repaid

Various

Various

Various

29.1

18.7%

Private/Employer Grants

Grant; does
not have to
be repaid

Various

Various

Various

10.4

6.7%

State Sponsored

Loan; must
be repaid

Various

Various

Various

1.5

0.9%

Private Sector

Loan; must
be repaid

Various

Various

Various

17.6

11 .3%

State Programs

Sources: US Department of Ed ucation Federal Student Aid Information Center and College Board's Trends in Student Aid 2008.

A m ember of BMO

Finan cia l

Group

141

September 2009

Postsecondary Education

BMO Capital Markets

Usage of Title N f inancial aid by school type was only avai lable for undergraduate students.
However, as they represent the bulk of students attending institutions of higher education, we
believe tlus analysis applies to t11e entire sector. As shown in Exlubit 132, in the 2007-2008
school year. a greater percentage of undergraduates attending for-profit institutions (83.4% at
less-than two-year schools and 95.8% at two year or longer schools) receive Title IV financial
when compared wil11 their counterparts at not-for-profit institutions.

For-profit
students rely
more on Title IV
federal financial
aid

Exhibit 132. Percentage of Undergraduates Using Title IV

Financial Aid (2007-2008 School Year)

Institution T e
All undergraduates
Public:
Less than 2 year
2year
4 year non-doctorate granting
4 year doctorate granting
Private not-for-profit:
2year
4 year non-doctorate granting
4 year doctorate granting
Private for-profit:
less t han 2 year
2 year or more
More than one institution

Federal
Federal
Smart campusGrants based aid
0.3%
11.7%

Federal St afford loans

Any
Stafford
SubsiUns ubloan
dized
sidized
29.7%
34.5%
22.0%

Any Title
IV aid
46.9%

Federal
Pell
Grants
27.3%

Federal
ACG
Grants
1.9%

38.4%
27.3%
52.1%
50.4%

33.8%
21.0%
29.8%
23.0%

N.A.
0.7%
3.1%
3.6%

NA
NA
0.5%
0.8%

4.8%
51%
10.8%
12.0%

14.6%
10.2%
38.9%
42.5%

13.6%
8.3%
31.7%
34.1%

11.3%
5.8%
23.3%
23.4%

71.0%
65.7%
58.4%

48.0%
29.7%
21.1%

0.5%
3.5%
3.6%

NA
0.5%
0.7%

17.4%
25.4%
27.2%

40.2%
56.8%
50.4%

37.8%
48.1%
43.2%

29.5%
31 .4%
24.1%

83.4%
95.8%
51.8%

65.5%
61.9%
27.8%

N.A.
0.4%
2.0%

N.A.
0.3%
0.3%

20.5%
21 .1%
11.0%

66.9%
94.2%
40.3%

64.1%
93.0%
34.1%

84.8%

55.5%
25.0%

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

ln addition, those students tend to get more Title IV financial aid each year- especially for
students attending less than two year schools. As shown in Exhibit 133, in tl1e 2007-2008

school year, students attending for-profit less than two-year schools received $6,700 on
average versus $4,200 for those attending not-for-profit institutions. The comparisons narrow
a bit at two-year or longer schools, where students attending for-profit institutions average
$7,700 in Title IV financial aid, while those attending not-for-profits get anywhere from an
average of $3,500 (public two-year schools) to $9,300 (private fom-year doctorate granting
schools).

Exhibit 133. Average Amount of Undergraduate Title IV Financial

Aid (2007-2008 School Year)

All undergraduates
Public:
Less than 2 year
2year
4 year non-doctorate granting
4 year doctorate granting
PriVate not-for-profrt:
2year
4 year non-doctorate granting
4 year doctorate granting
Private for-profit:
less than 2 year
2 year or more
More than one institution

Any Title
IV aid
$6,600

Federal
Pell
Grants
$2,600

Federal
ACG
Grant s
$800

Federal
Federal
Smart campusGrants based aid
$3,000
$2,000

Federal Stafford Loans

Any
Stafford
SubsiUnsub
loan
dized
sidized
$5,000
$3,400
$3,200

4,200
3,500
6,400
7,500

2,500
2,300
2,800
2,900

N.A.
700
800
800

N.A.
N.A.
3,000
2,900

200
1,900
2,100
2,300

4,900
3,700
4,900
5,000

2,600
2,700
3,600
3,700

3,100
2,700
3,400
3,600

5,100
8,300
9,300

2,600
2,800
2,900

N.A.
900
900

NA
3,200
3,400

600
2,200
2,800

4,600
5,100
5,200

2,800
3,800
4,000

2,700
3,500
3,700

6,700
7,700
6,600

2,600
2,400
2,600

N.A.
600
700

N.A.
3,200
2,800

400
800
1,900

5,000
5,600
4,900

2,700
3,000
3,400

2,900
3,000
3,300

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

A member of BMO

Financia l Group

142

September 2009

Postsecondary Education

For-profits are
more proactive in
making financial
aid available

BMO Capital Markets

Whi le the relatively higher cost of for-profit programs is one reason why students at these
instjtutions need relatively more financial aid, we note the for-profit sector does a better job in
educating its students about the availability of such aid, in our view. Tltis is apparent from a
February 2006 study by the ACE Center for Policy Analysis, which showed that students
attending for-profit schools are more likely than most to file a Free Application for Federal
Student Aid (F AFSA) fom1 to apply for Title TV funds; only 12.8% of eligible students at forprofit schools did not fi le to get such aid, relative to nearly 41% of the en6re postsecondary
universe as a whole. Wltile the percentage of students at other types of schools not fil ing a
F AFSA fonu has decreased since the 1999-2000 school year, the percentages are still much
higher than those attending for-profit schools (see Exhibit 134). Proposals to simplify the
F AFSA fonn may reduce these percentages, specifically at not-for-profit schools, in our view.

Exhibit 134. Percentage of Students Not Filing FAFSA (1999-2000

vs. 2003-2004 School Year)
80%

a 1999-2000 a 2003-2004
67.4%

70%
60%
50%
40%

30%
20%

10%
0% ~-'--

All postsecondary
schools

Public two-year

Public four-year

Private four-year

Private for-profit

Source: BMO Capital Markets and ACE Center for Policy Analysis's Missed Opportunities Revisited: New
Information on Students Who Do Not Apply for Financial Aid.

Tit le IV exposure
for for-profits will
likely continue to
increase

A member of BMO

We have provided historical Tille TV percentages for a select group for for-profit providers in
Exhibit 135. As shown, t11e median percentage has increased tlus decade from the nud-60<Yo
range to t11e low-70% range. A number of companies saw an increase in FY2008 given
increased annual Pell Grant limits effective July 1, 2008; as another increase went into effect
on July 1, 2009, these percentages could continue to increase.

Financia l Group

143

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 135. Title IV Contribution for Select For-Profit Providers (FY1999-FY2009)

Company

Ticker

American Public Education

Apollo Group (Univ. of Phoenix)
Bridge point Education (Ashford Univ.)
Career Education
Corinthian Colleges
Capella Education
DeVry (undergraduate only)
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services
Strayer Education
Universal Technical Institute
Washington Post
MEDIAN

APE I
APOL
BPI
CECO

coco
CPLA
DV
Private
LOPE
ESI
LINC
STRA

un
WPO

1999
NA
53%
N.A.
66%
73%
N.A.
69%
66%
N.A.
69%
N.A.
47%
NA
N.A.
66%

2000
NA
49%
N.A.
64%
77%
N.A.
69%
62%
N.A.
66%
N.A.
51 %
NA
N.A.
64%

2001
N.A.
48%
N.A.
60%
81 %
N.A.
64%
66%
N.A.
65%
N.A .
55%
N.A.
N.A.
64%

2002
N.A.
52%
N.A.
53%
82%
N.A.
65%
65%
N.A.
65%
74%
55%
65%
N.A .
65%

2003
N.A .
62%
N.A.
58%
82%
N.A .
64%
66%
N.A .
68%
79%
63%
68%
80%
67%

2004
N.A .
61 %
N.A.
58%
81 %
N.A.
63%
68%
N.A.
66%
81 %
67%
72%
81 %
68%

2005
N.A .
63%
N.A.
61 %
79%
67%
70%
67%
N.A.
61 %
80%
72%
70%
83%
70%

2006
N.A.
64%
N.A.
62%
75%
71 %
75%
68%
72%
57%
80%
71 %
73%
81 %
72%

2007
11%
69%
84%
63%
75%
74%
70%
57%
74%
63%
80%
72%
68%
73%
71%

2008
14%
82%
87%
69%
81 %
75%
75%
60%
79%
72%
79%
72%
72%
71 %
74%

2009
N.A.
N.A .
N.A.
N.A.
81 %
N.A.
N.A.
69%
N.A.
N.A .
N.A .
N.A.
N.A.
N.A.

N.A.

Note: Data reflects school or fiscal years and measures percentage of cash receipts, except for APE I where data reflects percentage of net
registrations. Education Management was a publicly held company until being taken private on June 1, 2006. N.A. - Not Available. Source: BMO
Capital Markets and company reports.

We have provided additional infonnation on the three largest types of Title IV funding - Pel!
Grants, Stafford loans, and PLUS Loans.
Pell Grants. In the 2007-2008 school year, roughly $20.9 billion in federal grants, i.e., aid
tl1at does not have to be repaid, was provided by tl1e federal govemment to students attending
TitJe TV eligible schools. The best known and largest is the Pell Grant, which provides grants
to low-income undergraduate and certain post-baccalaureate students based on "financia l
need." Per www.finaid.org, in tl1e 2003-2004 school year (latest data avai lable), nearly 98%
of Pell Grant recipients had a f~unily adjusted gross income of m1der $50,000.
After falling, Pell
Grants rose again

The amotmt of Pell Gr'd.llts provided annually had increased dnllllatically before peaking in the
2004-2005 school year at $13 .1 billion. up from $5 .8 billion in the 1996-1 997 school year.
While it fell tJ1ereafter, it rose again in the 2007-2008 school year as tJ1e US government
responded to the credit crisis and shortage of private lenders, providing $14.4 billion in Pe ll
Grants. representing 16.2% of total Title IV dollars spent t11at year (see Exhibit 136).

in the 2007-2008
school year

Exhibit 136. Pell Grant in Dollars and Percentage of Title IV Funds

(1996-1997 to 2007-2008 School Years)
$15
&liiiDPell Grants (in Sbil.)

25%

- - % of T~ le IV

12

:;;
.!:
~

20%

>

15% -;

10%

5%

J!l
c

C)

i=
....
0
:."

-.;
0.

0%

0
1996-97 1997-98 1998-99 1999-00 2000.01 2001-02 2002-03 20Q3.04 2004-05 2005.()6 2006-07 2007-08

Source: BMO Capital Markets and College Board's Trends in Student Aid.

Recent legislative
changes have
increased
maximum Pel/

In theory. the maximum arumal Pell Gmnt award per student can change each July 1 - the
beginning of the new fiscaJ year for Title IV purposes. After being mised to $4,050 for the
2003-2004 school year, the maxjmum annual award remained flat for tl1ree years unti l the
following changes were made:

Grant limits

A member of BMO

Financial Group

144

September 2009

Postsecondary Education

BMO Capital Markets

It was raised to $4.310 for the 2007-2008 school year as part of the Revised Continuing
Appropriations Resolution, 2007, (P.L. 110-5), signed into Jaw by President Bush on
February 15, 2007.

A combination of two laws- the Consolidated Appropriations Act. 2008. (P.L. 110-161)
signed into law on December 26, 2007 which established the maximum award for the
2008-2009 school year at $4,241 and the College Cost Reduction and Access Act
(CCRAA) (P.L. 110-84). enacted on September 27, 2007 - raised the limit for the 20082009 school year, by $490 for students enrolled full time. AnoU1er $119 from the FY2009
Omnibus Appropriations brought the maximum grant to $4,850 ($4,241 plus $490 plus
$119).

As part of the American Recovery and Reinvestment Act (ARRA) of 2009 (economic
stimulus package), the annuaJ maximum Pell Grant limit was raised by $500 to $5,350
for the 2009-2010 school year. with another $200 increase (to $5.550) effective for the
2010-2011 school year.

The maximmu Pell Grant limit is slated to fall to $5,050 in the 2011-2012 school year before
rising again to $5,450 for the 2012-2013 school year. However, the Obama budget for
FY20 10 includes a proposal increasing tll.is limit by 1% above the annual increase in tlle
Consumer Price Index (CPT) beginning in U1e 2011-2012 school year (effective July 1, 2011).
Similar legislation was included in the Student Aid and Fiscal Responsibility Act (SAFRA or
HR 3221) introduced on July 15, 2009.

Obamahas
proposed even
more changes

However, we note t11at this is the maximum award for f11ll-time students. The average actual
armual Pell Grant award has been trending well below tlus maximum. alt11ough it did increase
to $2,945 in the 2008-2009 school year as the annual maximum limit increased. Since the
1973-1974 school year, the average armuaJ Pell Grant awarded was roughly 60% of U1e
maxim11m annuallim.it (see Exlubit 137).

A m ember of BMO

Financial Group

145

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 137. Pell Grant Appropriated vs. Average (1973-1974 to

2007-2008 School Years)
--Maximum Approprirated - -Average Pell Grant

$5,000

4,000

3,000

2,000

1,000

o ~~~~~~~~~~~~~~~~-r~~-r~~~-r~~-r~

1973-74

1978-79

1983-84

1988-89

1993-94

1998-99

2003-04

2008-09

Source: BMO Capital Markets and www.finaid.org

In addition. the Obama FY2010 budget calls for making the Pell Grant program mandatory
and an entitlement (ensuring an annual minimum funding level as opposed to going through
the current annual appropriations process). The Congressional Budget Office estimates that by
making Pell Grants an entitlement would increase the cost of these grants by roughly $144
billion over the next 10 years. In addition, in May 2009, the President proposed changing Pell
Grant requirements to allow schools to consider a person's current financial situation (as
opposed to prior year's income levels) for Pell Grant eligibility.
Students at forprofits get a
disproportionately
higher amount of
Pel/ Grants - a
percentage that
has been
increasing

A member of BMO

For-profit providers have been among the largest beneficiaries of Pell Grants given tllat they
cater relatively more toward lower-income students when compared with tl1eir not-for-profit
peers. While tl1e bulk of Pell Grants still go to students attending public not-for-profit
instjtutions (65% in the 2006-2007 school year~ latest data available), grants to students
attending for-profit school made up 19% of all Pell Grants provided in t11e 2006-2007 school
year, increasing from 12.5% in the 1995-1996 school year (see Exhibit l38). This is
proportionately higher than for-profits ' percentage of enrollments (7.6% of students attending
degree-granting institutions in the 2006-2007 school year).

Financial Group

146

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 138. Pell Grant Distribution by School Type (1995-1996 to

2006-2007 School Years)
o 1995-96 81996-97 o 1997-98 m1998-99
70%

0 1999-00

60%

o 2003-04 2004-05 2005-06 m2006-07

2000-01

0 2001 -02

0 2002-03

Cl

50%

i!

40%

(!)

30%

....Cll

Qj

c..

0 20%
~
0

10%
0%
Public Not-for-Profit

Private Not-for-Profit

For-Profit

Source: BMO Capital Markets and College Board's Trends in Student Aid.

Under the reauthorized Higher Education Act (see discussion later in this section), PeU Grants
became available year-round, and students can now potentially receive more in a given year
than the traditionally defined maximum amount. Tll.is will likely help for-profit providers that
tend to have more " non-traditional" school years.
We have provided a list of the Pell Grant exposure (as percentage of revenues) for select forprofit providers in Exhibit 139. We note the companies that have a greater percentage of nondegreed programs (e.g., medical assistant) that cater to lower-income students, such as
Washington Post's (WPO) Kaplan Higher Education, Corinthian Colleges (COCO), and
Lincoln Educational Services (LINC) tend to have the greatest Pell Gnmt exposure among
this group. Given the recent and forthcoming increases in the a1mual Pell Gnmt limit, these
percentages will likely increase for most of the sector.

The "lower" the

program, the
higher the Pel/
Grant exposure

Exhibit 139. Pell Grant Exposure for Select For-Profit Providers (FY1999-FY2009)
Company
American Public Education
Apollo Group
Bridgepoint Education
Career Education (Title IV grants)
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services
Strayer Education
Universal Technical Institute
Washington Post (Title IV grants)
MEDIAN

Ticker
APE I
APOL
BPI
CECO

coco
CPLA
DV
Private
LOPE
ESI
LINC
STRA
UTI
WPO

1999
N.A.
N.A.
N.A.
N.A.
23.0%
N.A.
N.A.
7.0%
N.A.
12.0%
N.A.
N.A.
N.A.
N.A.
12.0%

2000
N.A.
N.A.
N.A.
N.A.
22.0%
N.A.
N.A.
6.0%
N.A.
11.0%
N.A.
N.A.
N.A.
N.A.
11.0%

2001
N.A.
N.A.
N.A .
N.A .
24.0%
N.A .
N.A .
6.5%
N.A .
12.0%
N.A.
N.A .
N.A.
N.A .
12.0%

2002
N.A.
N.A.
N.A.
N.A.
24.8%
N.A.
N.A.
7.0%
N.A.
12.0%
N.A.
N.A.
<10.0%
N.A.
12.0%

2003
N.A.
N.A.
N.A.
N.A.
24.5%
N.A.
N.A.
7.0%
N.A.
13.0%
N.A.
N.A.
10.0%
N.A.
11 .5%

2004
N.A .
N.A.
N.A .
9.2%
22.7%
1.0%
N.A .
9.0%
N.A .
13.0%
<20.0%
N.A .
9.0%
N.A .
9.1%

2005
N.A.
NA
N.A.
9.0%
20.7%
0.4%
N.A.
8.0%
N.A.
11.0%
<20.0%
N.A.
8.0%
25.0%
9.0%

2006
N.A.
5.3%
N.A .
9.6%
18.7%
0.4%
N.A .
8.0%
N.A .
11.0%
16.0%
N.A .
8.0%
21 .0%
9.6%

2007
N.A.
6.5%
N.A.
11 .5%
19.4%
0.3%
N.A.
8.0%
N.A.
12.0%
17.0%
N.A.
7.0%
20.0%
11 .5%

2008
N.A.
9.0%
N.A.
13.8%
22.7%
0.5%
N.A.
6.6%
N.A.
13.0%
19.0%
N.A.
8.0%
18.0%
13.0%

2009
N.A.
N.A.
N.A .
N.A .
23.3%
N.A .
N.A.
7.9%
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.

Note: Reflects Pell Grant as a percentage of cash receipts or cash basis revenues except for APOL, ESI, un and WPO where data is measured
as a percentage of reported revenues. All data reflects school or fiscal years. Education Management was a publicly held company until being
taken private on June 1, 2006. N.A. - Not Available.
Source: BMO Capital Markets and company reports.

A member ofBMO

Fin an cia l Group

147

September 2009

Postsecondary Education

BMO Capital Markets

Stafford lo ans . In the 2007-2008 school year. roughly $55 billion in Stafford loans were
provided by the federa l government to students attending Title IV eligible schools. Nearly a ll
students attending eli!,>ible schools are entitled to Stafford loans, regardless of their credit
history.
There are two types of Stafford loans - subsidized and unsubsidized. The primary difference
is that students obtaining subsidized loans do not pay any interest while t11ey are in school (or
during any loan defennent period). In addition. subsidized Stafford loans have lower interest
rates- fixed at 5.6% for the 2009-2010 school year and then declining to 4.5% and 3.4% for
the subsequent 1:\vo years - compared with unsubsidized Stafford loans, which are fLxed at
6.8% for that three-year period.
Stafford loans are

Stafford loans have consistently been the largest component of Title IV funding, representing

l argest Title IV

61.8% of the total in the 2007-2008 school year (see Exhibit 140).

fundin g source

Exhibit 140. Stafford Loans in Dollars and Percentage of Title IV

Funds (1996-1997 to 2007-2008 School Years)
$60

:0

.5
~

Loans (in $bil)

70%
-+-%of Title IV

50
65%

..

:::

40

"'c
"'

30

"E

20

~Stafford

60%

...J

.l3

"'

55%
10
0

50%
1996-97 1997-98 1998-99 1999{)0

200~ 1

2001.02 2002.03 2003.()4 2004-05 2005.()6 2006.07 2007.()8

Source: BMO Capital Markets and College Board's Trends in Student Aid.

Annual lim its for

Similar to Pell Grants. recent regulatory changes have increased annual Stafford Loan limits.

Stafford loan s
have been

Effective July 1. 2007 (2007-2008 school year), as part of the Higher Education
Reconci liation Act (HERA) of 2005, first-year students became able to borrow $3,500 in
both subsidized and unsubsidized Stafford loans (up from $2,625), while second-year
students became able to borrow $4,500 (up from $3.500). In addition, the annual
uusubsidized loan limit for grdduate students was increase to $12,000 from $10,000.

Effective July 1, 2008 (2008-2009 school year), as part of the Ensuring Contjnued Access
to Student Loans 2008 (HR 5715) which passed on May 7, 2008, the annual loan limit for
unsubsidized Stafford loans was increased by $2,000 for both dependent and independent
undergraduate students. Aggregate loan limits for undergraduates were increased as well.

increasing

The Stafford Loan limits effective in the 2009-2010 school year can be found in Exhibit 141.

A m ember of BMO

Financia l Group

148

September 2009

~
0

.,.

Postsecondary Education

BMO Capital Markets

Exhibit 141. Stafford Loans Limits (2009-2010 School Year)

Dependent Students
First Year
Second Yea r
Third Year and Beyond

Annual Loan Limits

$5,500 (up to $3,500 may be subsidized)
$6,500 (up to $4,500 may be subsidized)
$7,500 (up to $5,500 may be subsidized)

Independent Students
First Year
Second Year
Third Year and Beyond
Graduate or Professional

Annual Loan Limits

$9,500 (up to $3,500 may be subsidized)
$10,500 (up to $4,500 may be subsidized)
$12,500 (up to $5,500 may be subsidized)
$20,500 (up to $8,500 may be subsidized)

Lifetime Limits
Undergraduate Dependent $31 ,000 (up to $23,000 may be subsidized)
Undergraduate Independent $57,500 (up to $23,000 may be subsidized)
Graduate or Professional
$138,500 (up to $65,000 may be subsidized) or $224,000 (for Health Professionals)

Source: BMO Capital Markets and Student Loan Network.

Students at forprofits get a

disproportionately
higher amount of
Stafford Loans - a
percentage that
has been
increasing

Students at for-profit schools have received more in Stafford Loan funding than their
proportionate shares of enrollment, similar to Pell Grants. While the bulk of Stafford Loans
still go to students attending public and private not-for-profit institutions (47% and 34%.
respectively, in the 2006-2007 school year; latest data available), funding for students
attending for-profit schools have been increasing, reaching 19.5% of all Stafford Loans
provided in the 2006-2007 school year, weU above the 7.6% of students attending degreegrantjng institutions in the 2006-2007 school year that attended for-profi t schools (see Exhibit
142). As such, the recent increases in Stafford Loan limits have aJso disproportionately
benefited students attending for-profit schools, in our opinion.

Exhibit 142. Stafford Loans Distribution by School Type (19951996 to 2006-2007 School Years)
01995-96
&1998-99
0 2001-02
.2004-05

60%

Cl

c:

50%

.1996-97
01 999-00
0 2002-03
.2005-06

0 1997-98
.2000-01
0 2003-04
EJ2006-07

'0

c:

.a

40%

c:
nJ

...I
'0

30%

-....~

nJ
en 20%

10%
0%
Public Not-for-Profit

Private Not-for-Profit

For-Profit

Source: BMO Capital Markets and College Board's Trends in Student Aid.

PLUS Loans. In the 2007-2008 school year, roughly $10.6 billion in PLUS Loans (11.9% of
total Title lV funds) were provided by the federal government to students attending Title IV
eligible schools. These loans are not need-based but are geared toward parents of dependent
undergraduate students enrolled at least half time in an eligible program at an eligible school.
Parents must have an acceptable credit history. While PLUS Loans were initially only
available to parents of undergraduate students, they became available to graduate students

PLUS Loans

A m ember ofBMO

Financia l Group

149

September 2009

Postsecondary Education

BMO Capital Markets

meeting certain criteria effective July 1. 2006. There are no set annual or aggregate limits for
PLUS Loans, as borrowings are up to the f11ll cost of attendance, minus any oU1er financia l aid
received (including Direct Subsidized Loans, Direct Unsubsidized Loans, scholarships, and
certain fellowships). HR 5715 increased the time for payment deferrals to six months from 60
days after the dependent borrower leaves school.
The amount of PLUS Loans provided has increased dramatically from $2.4 billion in the
1996-1997 school year. and has increased as a percentage of Title IV funds over that period
(see Exhibit 143). We believe the 'spike.. in the 2006-2007 school year was driven by the
introduction of PLUS Loans for graduate students

Exhibit 143. PLUS Loans in Dollars and Percentage of Title IV

Funds (1996-1997 to 2007-2008 School Years)
$1 2

14%

1!!!!!11 PLUS Loans (in Sbil. )

-+-%of Tftle IV
12"-'>

:E

10%

.:
~

..
"'c

6%

....1
<J)

:::>

....1

4%

0..

..

8%
6

....
?ft

2"-'>
0

0%
199697 1997-98 1998-99 1999-00 2000.01 2001.02 2002-03 2003.04 2004.05 2005.06 2006.07 2007-08

Source: BMO Capital Markets and College Board's Trends in Student Aid.

For-profits' share
of PLUS Loans
has b een
declining

Students at for-profit schools have received more in PLUS Loan funding than U1eir
proportionate shares of enrollment. similar to other types of Title IV funding. Wlri le the bulk
of PLUS Loans still go to students attending private and public not-for-profit institutions
(38% and 50%, respectively, in t1le 2006-2007 school year; latest data available), students
attending for-profit schools received 13% of all PLUS Loans provided in the 2006-2007
school year, well above the 7.6% of students attending degree-granting institutions that year
that attended for-profit schools. Interestingly, t11e for-profit sector' s "share" of PLUS Loans
has declined since peaking at 17% in the 2001-2002 school year (see Exhibit 144). likely as
the number of independent students has grown (i.e., only parents are eligible at the
tmdergraduate level).

A m ember of BMO

Financial Group

150

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 144. PLUS Loans Distribution by School Type (1996-1997

to 2007-2008 School Years)
.1996-97
1111998-99
. 2000-01
[] 2002-03
.2004-05
11 2006-07

60%

C)

50%

t::
"0

t::

.2

40%

'E

!!! 30%

(!)

4i
Q.

';!.

20%
10%
0%
Public Not-for-Profit

Private Not-for-Profit

For-Profit

Source: BMO Capital Markets and College Board's Trends in Student Aid.

Stafford Loans and PLUS Loans are typically provided via two programs:

Lenders leaving
or reducing their
exposure to the
FFELP program

The Fedeml Family Education Loan Program (FFELP), which are provided via private
lenders.

The Fedeml Direct Student Loan Progmm (FDSLP or direct lending or DL), which do
not use a private lender since loan funds are provided directly to the schools by the US
government.

Historically, t11e FFELP program has dominated Title IV lending; in the 2007-2008 school
year, nearly 81% of subsidized and unsubsidized Stafford loans came via FFELP- an all-time
high, by our records. We believe many lenders were attracted to these programs owing to the
sizable profits and t:,'llar"cmtees available. However, the College Cost Reduction and Access
Act (H.R. 2669), which became effective on October l , 2007, changed all that and many
lenders withdrew from the FFELP program aml/or reduced their exposure. According to
FinAid, as of July 22, 2009, a total of 182 education lenders had exited or suspended their
participation in all or part of the federally-guaranteed student loan program (FFELP). Of this
group, 114 of the lenders had suspended participation in aH of FFELP and 68 have suspended
just consolidation loans.
A listing of the largest 50 FFELP lenders in FY2008 and FY2007 (year ended Jtme 30) can be
fotmd in Exhibit 145. We note that while the largest portion of fuese lenders are private
instjtut:ions (e.g. , Citi Student Loans) t11ere are also a number of non-profit entities (e.g.,
Kentucky Higher Education Student Loan Corp.) among t11em. Between FY2007 and
FY2008, there was greater consolidation among the larger providers, as the top 10 originators
increased their share to nearly 69% from 55%. Among the larger originators who have left
and/or reduced their FFELP e>.-posure were College Loan Corp. (to twenty-fust largest in
FY2008 from seventh largest in FY2007), Student Loan Express (to twenty-SL\.1h from
twelfth) and Pennsylvania Higher Education Assistance Agency (PHEAA) (to forty-third
from number nineteenth).

A m ember of BMO

Financia l Group

151

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 145. Top 50 FFELP Lenders (FY2008 and FY2007)

Rank Lender
1 Sallie Mae (SLM)
2 Citi Student Loans (C)
3 Wachovia Education Finance Inc. (WB)
4 Bank of America (BAC)
5 Wells Fargo Education Financial Services (WFC)
6 JP Morgan Chase Bank (JPM)
7 U.S. Bank
8 EdAmerica
9 Pittsburgh National Corp
10 Suntrust Bank (STI)
11 Access Group
12 National Education Loan Network (NELNET) (NNI)
13 Citizens Bank Education Finance
14 National City Bank/PNC (PNC)
15 Regions Bank
16 Fifth Third Bank (FITB)
17 College Foundation Inc.
18 South Carolina Student Loan Corp
19 Kentucky Higher Education Student Loan Corp
20 Key Corp (KEY)
21 College Loan Corp
22 Dollar Bank
23 Commerce Bank/TO North
24 Vermont Student Assistance Corporation (VSAC)
25 All Student Loan Corp
26 Education Lending Group (Student Loan Xpress)
27 Rhode Island Student Loan Authority (RISLA)
28 Carnegie Insurance Company
29 Collegelnvest (Colorado)
30 Northstar Education Finance
31 Discover Bank (DFS)
32 Union Bank & Trust Company
33 New Hampshire Higher Education Loan Corp
34 Walden University
35 Compass Bank
36 Arvest
37 New Mexico Education Assistance Foundation (NMEAF)
38 University of Phoenix
39 USC Credit Union
40 First Tennessee Bank
41 Associated Bank (ASBC)
42 Bank of North Dakota
43 Pennsylvania Higher Education Assistance Agency (PHEAA)
44 Louisiana Public Facilities Authority
45 Arizona Higher Education Loan Authority
46 Midwestern University
47 Illinois Student Assistance Commission/IDAPP
48 Bane First
49 Marshall & !Isley Bank (MI)
50 University Federal Credit Union

FY2008
Origination
Vol. (in $mil.) % of Total
$14,265.6
22.6%
6,201 .3
9.8%
5,127.6
8.1%
4,274.7
6.8%
3,935.2
6.2%
3,418.0
5.4%
2,278.2
3.6%
1,614.2
2.6%
1,268.8
2.0%
1,091.7
1.7%
1.7%
1,057.6
1,021 .8
1.6%
941 .6
1.5%
1.5%
929.7
834.1
1.3%
829.0
1.3%
1.3%
809.9
629.0
1.0%
575.6
0.9%
487.8
0.8%
380.4
0.6%
345.9
0.5%
339.8
0.5%
328.8
0.5%
326.2
0.5%
326.1
0.5%
318.4
0.5%
297.6
0.5%
265.0
0.4%
259.8
0.4%
244.7
0.4%
239.3
0.4%
201 .7
0.3%
175.6
0.3%
174.8
0.3%
171.3
0.3%
168.5
0.3%
160.7
0.3%
134.2
0.2%
130.2
0.2%
124.3
0.2%
115.4
0.2%
115.2
0.2%
110.8
0.2%
108.5
0.2%
107.6
0.2%
0.2%
106.4
106.3
0.2%
106.2
0.2%
0.2%
103.8

Top 10
Next 40
Top 50
The rest
Total

43,475.4
14.2096
57,685.0
5,515.0
$63,200.0

68.8%
22.5%
91 .3%
8.7%
100.0%

FY2007
Origination
Vol. (in $mil.) % of Total
$9,002.3
15.9%
4,764.3
8.4%
2,934.5
5.2%
3,261 .6
5.8%
2,954.8
5.2%
3,064.7
5.4%
1 ,332.5
2.4%
1,303.7
2.3%
1.5%
838.9
948.3
1.7%
1,124.9
2.0%
891 .5
1.6%
716.0
1.3%
457.3
0.8%
647.1
1.1%
567.2
1.0%
662.2
1.2%
490.9
0.9%
547.2
1.0%
330.8
0.6%
1,493.3
2.6%
348.2
0.6%
296.1
0.5%
298.9
0.5%
251.8
0.4%
1,020.5
1.8%
227.5
0.4%
514.7
0.9%
190.8
0.3%
1,062.1
1.9%
N.A.
N.A.
279.4
0.5%
198.1
0.3%
0.6%
353.2
78.2
0.1%
0.1%
82.4
140.7
0.2%
151.5
0.3%
131 .1
0.2%
99.1
0.2%
87.5
0.2%
90.1
0.2%
624.1
1.1%
86.6
0.2%
NA
NA
96.0
0.2%
395.5
0.7%
56.9
0.1%
81 .1
0.1%
N.A.
N.A.
31 ,236.6
16 584.7
47,821 .2
8.878.8
$56,700.0

55.1%
29.2%
84.3%
15.7%
100.0%

y/y%
change
58.5%
30.2%
74.7%
31.1%
33.2%
11 .5%
71 .0%
23.8%
51 .2%
15.1%
-6.0%
14.6%
31.5%
103.3%
28.9%
46.1%
22.3%
28.1%
5.2%
47.5%
-74.5%
-0.7%
14.8%
10.0%
29.6%
-68.0%
40.0%
-42.2%
38.9%
-75.5%
N.A.
-14.3%
1.8%
-50.3%
123.6%
107.9%
19.8%
6.1%
2.4%
31.4%
42.1%
28.2%
-81.5%
28.0%
NA
12.1%
-73.1%
86.6%
30.9%
N.A.
39.2%
-14.3%
20.6%
-37.9%
11 .5%

Sources: BMO Capital Markets and www.finaid.org

A member of BMO

Financial Group

152

September

2009

Postsecondary Education

BMO Capital Markets

The movement away from the FFELP program and toward direct lending received a jump
start when President Obama proposed to eliminate FFELP by July 2010, as part of the White
House's FY2010 budget (released February 26, 2009). The goal was to use savings from
subsidies paid to lenders participating in FFELP to increase available financial aid.
specifically steady annual increases in Pell Grants, as described above. Estimates of the
potential savings vary widely, from $41.4 billion (per the Office of Management and Budget)
to $94 billion (Congressional Budget Office). This morphed into House legislation under
Student Aid and Fiscal Responsibility Act (H.R. 3221 or SAFRA), which was introduced on
July 15, 2009.

Obamahas
proposed
eliminating the
FFELP program
effective July
2010

This, among other factors, have begun to shift the tide toward direct lending ru1d away from
FFELP. According to an analysis conducted by Student Lending Analytics Blog, in the 20082009 school year, direct lending had increased its "share" of Title IV loans to 25.5% from
19.3% in the 2007-2008 school year. When measuring by school type, the for-profit sector
was still more reliant on FFELP in 2008-2009, witl1 only 12% of all disbursements via direct
lending- below the 15% for ptivate not-for-profit schools and 41% for public not-for-profit
schools. However, those numbers increased from 6%, 11% and 33%, respectively, in the
2007-2008 school year.

Shift to direct
lending has
already begun

Costs to schools
should be
relatively minor

Wlrile the final outcome is unknown, and a number of compromises have been offered (e.g.,
lenders still act as servicers). most for-profit providers have been proactively preparing to be
ready to shift to 100% direct lending should t11e switch occur. The bulk of the changes are
administrative. e.g., changing software to enable processing via direct lending as opposed to
the FFELP lenders, with the costs relatively minor. A June 2009 smvey by the National
Association of Student Finru1cial Aid Administrators (NAFSAA) of 167 institutions that had
switched from the FFELP to direct lending witlrin the past year highlighted tlle following:

80% responded that t11e actual switch was easy and 73% said the switch was easier tllan
they had e;...rpected. Only 4% said it was more difficult.

80% said t11ey were able to convert within four mont11s. with 41% able to convert within
two months; 14% said it took longer than seven montllS.

61% said the administrative burden of administering the direct lending program is less
than administering t11e FFELP program; 24% said the administrative burden is the same;
and 14% percent said direct lending presents greater administrative burdeflS.

84% said they did not have to adjust their staff size after converting.

As these were virtually all not-for-profit providers, we believe the for-profit schools may be
even more equipped to handle tlris conversion. While the switch (should it be mandated)
clearly will not go smoothly for all companies, any "lriccup" to enrollment gTowth owing to
delays in fmancial aid packaging will likely be minor, in our view.
Federal
government also
added liquidity in
Title IV student
lending market

A m ember of BMO

Even beyond the shift to direct lending. a number of other measures to increase liquidity in
the Title IV student lending market have been enacted or proposed. For exan1ple, on May 21 ,
2008, the ED annotmced plans to create a specific package to use its authority gTanted under
the Ensuring Continued Access to Student Loans Act of 2008 (P.L. 110-227), which was
signed into law on May 7. 2008, to offer to purchase loans from lenders for the 2008-2009
academic year and to offer lenders access to short-term liquidity. ln addition, it a1mounced an
"enllanced lender-last-of-resort program" to ensure all students have access to FFELP loans,
Financial Group

153

September 2009

Postsecondary Education

BMO Capital Markets

as well as its capability to double the capacity of its Direct Loan program if needed (to $30
billion from the previous $15 billion capacity). This authority was extended to the 2009-2010
academic year as part of P.L. 110-350, signed into law on October 7, 2008.
"Dodged a bullet"
regarding Title IV
availability
Rates of tuition
increases have
outpaced
available financial
aid

While we crumot say the Title IV liquidity issues have been completely solved. we believe
these atld other actions by various anus of the Federal government have helped the sector
"dodge a bullet" - at least in tenns of Title IV funding availability.
Private loans. Unfortunately, we c-annot make the same conclusion regarding the private
lending side. Over the past decade. the amount of available financial aid (excluding private
loans and educational tax benefits) has grown at a slower rate t11an tuition levels. When
measured in constant dollars (2007). the amount of available financial aid increased 4.3%
mmually from the 1996-1997 to 2007-2008 school years per FTE student, versus average
annual increases of 5.7% and 5.6% for public and private tuition, respec6vely (see Exhibit
146). This "funding gap" had been widening in recent years. as the rate of financial aid
increases slowed dramatically.

Exhibit 146. Annual Growth in Financial Aid and Tuition in

Constant Dollars (1996-1997 to 2007-2008 School Years)

..
0
0

~
~
<
<
~

.,..
X

.:

190
180
170
160
150
140
130
120
110
100

-Public Tuition

Private Tuition

Financial Aid

1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003.04 2004-05 2005-06 2006-07 2007.08

Note: Financial aid excludes private loans and educational tax benefits. Source: BMO Capital Markets
analysis based on data from College Board's Trends in Student Aid, Trends in College Pricing and Bureau of
Labor Statistics.

Private loans had

been one of the
fastest-growing
sources of
financial aid...

... but declined in

the 2007-2008
school year

A m ember of BMO

Private loans have historically been used most often by students at for-profits institutions to
help mitigate this funding gap. Also known as "alternative loans" or nonfederal loat1S, tl1ese
loans became more popular in the 1980s as annual tuition rate increases accelerated and the
amount of federally funded financial aid was llnable to make up much of the difference (some
of tJ1at gap was diminished in t11e 1990s). The growing use of private financing occurred
despite the tendency for tl1e loat1S to be more expensive than those provided by tl1e federal
govenuuent.
However, owing to the credit crunch atld otl1er factors (to be delineated later in this section)
the amount of private loans used for postsecondary education has been shrinking. According
to the College Board, after rising roughly 24.2% CAGR to nearly $17.9 billion (11.6% of
total) in the 2006-2007 school year from $2.5 billion (3.1% of total) in the 1997-1998 school
year, private loat1S actually shrunk slightly to $17.6 billion (10.8% of total) in the 2007-2008
school year (latest data available; see Exhibit 147). That was despite an overdll 5.5% increase
in available fin<mcial aid that year.

Financial Group

154

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 147. Private Loans in Dollars and Percentage of Financial

Aid (1996-1997 to 2007-2008 School Years)
$18

-Private sector loans

12%

-+-As % of all aid

15

10%

8% $

Iii' 12

.s

1:

6/o 0

*'

4% ~

2%

0%

1997-98

1998-99

19992000

200(}.()1

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Source: BMO Capital Markets and College Board's Trends in Student Aid.

For-profit sector
more active user s
o f private loans

Similar to their usage of most Title IV loans and gnmts. students at for-profit institutions tend
to use private loans more often and borrow more than their peers at public not-for-profits, but
less often than students at private not-for-profits. We believe this makes sense, as for-profit
education tends to be more expensive than schooling at public not-for-profit institutions.
According to The Project on Student Debt, in the 2007-2008 school year, while students at
for-profit institutions made up roughly 8% of all undergraduates, they represented roughly
27% of all private loan borrowers (see Exhibit 148).

Exhibit 148. Undergraduate Students: Enrollment and Private

Loan Usage by School Type {2007-2008 School Year)

Public not-for-profit two-year school

Public not-for-profit four-year school
Private not-for-profit school
Private for-profit school
Other or attended more than one institution
Total

Undergraduate
Enrollment
40%
35%
16%
8%
2%
100%

Private Loan
Borrowers
12%
28%
22%
27%
10%
100%

Source: BMO Capital Markets and The Project on Student Debt.

Private loan exposure has increased across all school types. but most dramatica lly for students
at for-profit schools. According to a July 2009 report by Educa6on Sector (using a different
data source than The Project on Student Debt) , t11e percentage of students at for-profit
schools using private loans increased to 43 .1% in the 2007-2008 school year from only 1.5%
in t11e 1992-1993 school year (see Exhibit 149).

Percentage
exposure has
been increasing

A m ember of BMO

Financia l Group

155

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 149. Percentage of Students with Private Student Loans

(1992-1993 to 2007-2008 School Years)
0 1992-93 1!!11995-96 0 1999-00 0 2003-04 2007-08

50%
Cl)

c: 45%
OJ

.3

Qj

"0
:I

iii
.2!

40%
35%
30%

OJ

25%

0..

20%

Ol

c:
:;: 15%
'Qj
0

Qj

0:::

'#.

10%
5%
0%

Public 4-year

Private not-for-profit 4year

Public 2-year

Private for-profit

Source: BMO Capital Markets and Education

However, that trend could be reversing. Owing to a combination of pressures from the "credit
cmnch" and the reduction in profitability and increase in risk in Title IV programs fo llowing
the passage of the College Cost Reduction and Access Act (H.R. 2669), which became
effective on October 1, 2007, a number of private lenders have reduced their student loan
exposure. According to finaid.org, nearly 50 lenders have suspended private student loruJS.
including such large providers as Sallie Mae (recourse loans only) and Bank of America (see
Exhibit 150).

Private lenders
reducing their
student loan
exposure

A m ember of BMO

Financia l Group

156

September

2009

Postsecondary Education

BMO Capital Markets

Exhibit 150. Institutions That Have Reduced Their Private Student

Loan Exposure
A+ Funds/Medfunds Graduate Level
Academic Funding Group/Provincial Bank
Access Group
Astrive Student Loans
Axiom Student Loans
Bancorp South (BXS)
Bank of America (BAC)
Bremer Bank
Campus Door
Citi Student Loan Corporation (C)
College Loan Corporation
Comerica Bank (CMA)
Commercial Bank of Texas
Connecticut Student Loan Foundation
Education Finance Partners
FinanSure
GATE Student Loan Program
GMAC Bank Education Loans
G raduate Leverage
HELP Alternative Loans
IEFC
Iowa Student Loan
Kansas State Bank of Manhattan
Key Bank (KEY)

Loan to Learn
Medfunds
MHESLA (Michigan)
MOHELA (Missouri)
My Rich Uncle
National Education
NELNET, Union Bank & Trust (NNI)
NextStudent
NHHELCO [New Hampshire]
NorthStar/T.H.E. (Minnesota)
Sallie Mae (SLM)
South Carolina SLC
ScholarPoint
South Carolina Student Loan Corp.
Student Loan Xpress
TD Banknorth
The Educated Borrower
THE National Bank
Urban Ed Express
Wachovia Education Finance (WB)
Washington Mutual (WM)
West Des Moines State Bank
Zions Bank (ZION)

Source: www.finaid.org.

We believe the impact of this reduction has been felt more by students at for-profit
institutions, as tl1ey tended to have a greater portion of students considered "subpri.me
lenders," typically those with lower FICO scores. The "ceiling" to be considered subprirne has
moved up over the past two years, with anecdotal evidence showing a requirement of a score
of nearly 700 (sometimes lrigher) to qualify for a private student loan.
Companies with
more/owerincome students
and relatively
expensive
programs have
had more private
lending exposure

A m ember of BMO

Although most companies disclose the percentage of l11eir annual revenues obtained from
Title IV ft.mding, few (beyond Career Education, Education Management and ITT
Educational Services) have historically disclosed the percentage of funds from private thirdparty lenders or direct loans by the institutions themselves, altl10ugh we believe these loans
are somewhat common throug hout the industry. However, since t11e credit crunch lrit, as
investors have demanded more transparency. most of the publicly held providers have
provided some guidelines. In addition to three companies mentioned above, Corinthian
Colleges (COCO) and Universal Technical Institutes (UTI) also have relatively high levels of
private lending eAlJOsure (see Exhibit 151). What these companies have in common is
exposure to relatively lower-income students and fairly expensive programs, which
necessitated private le nding to fill this fundi ng gap.

Financia l Group

157

September

2009

Postsecondary Education

BMO Capital Markets

Exhibit 151. Private Lending Exposure for Select For-Profit Providers (FY2000-FY2009)
Company
American Public Education
Apollo Group
Bridgepoint Education (Ashford Univ.)
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand Canyon Education
ITI Educational Services
Lincoln Educational Services
Strayer Education
Universal Technical Institute
Washington Post

Ticker
APE I
APOL
BPI
CECO

coco
CPLA

DV
Private
LOPE
ESI
UNC
STRA
UTI
WPO

2000
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A .
N.A.
N.A.
5.0%
N.A.
N.A.
N.A.
N.A.

2001
N.A.
N.A.
N.A.
11.7%
N.A.
N.A.
N.A.
N.A.
N.A.
9.0%
N.A.
N.A.
N.A.
N.A.

2002
N.A.
N.A.
N.A.
25.0%
N.A.
N.A.
N.A.
8.0%
N.A.
14.0%
N.A.
N.A.
N.A.
N.A.

2003
N.A.
N.A.
N.A.
24.0%
N.A.
N.A.
N.A.
9.0%
N.A.
20.0%
N.A.
N.A.
N.A.
N.A.

2004
N.A.
N.A.
N.A.
24.3%
N.A.
N.A.
N.A.
11.0%
N.A.
25.0%
N.A.
N.A.
N.A.
N.A.

2005
N.A.
N.A.
N.A.
23.2%
N.A.
N.A.
N.A.
15.0%
N.A.
30.0%
N.A.
N.A.
N.A.
N.A.

2006
N.A.
N.A.
N.A.
21.8%
N.A.
N.A.
N.A.
19.0%
N.A.
34.0%
N.A.
N.A.
N.A.
N.A.

2007
1.0%
4.0%
1.9%
17.7%
13.0%
N.A.
5.0%
23.0%
5.1%
29.0%
7.0%
3 .0%
10.5%
9.0%

2008
1.0%
3.0%
1.2%
10.0%
11 .0%
<1%
6.0%
18.9%
2.9%
8.0%
4.0%
3.0%
11-12%
5.0%

2009
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
5 .0%
11.0%
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.

Note: Reflects private loans as a percentage of total revenues. All data reflects school years. Education Management was a publicly held company
until being taken private on June 1, 2006. N.A . - Not Available.
Source: BMO Capital Markets and company reports.

As more private lending restrictions were added. many of these for-profit providers have been
forced to replace those loans with their own 'institutional loans," i.e. , using their own balance
sheet to provide loans. Examples include t11e following :

Examples of
internal/ending
programs

Career Education (CECO). As of June 30. 2009. the company held approximately $31

million in gross outstanding balances under student financing agreements - up from $24
million at the end of lQ09 and $20 million at the end of 4Q08. Management reconfim1ed
prior guidance of new financing agreements of roughly $30-$50 million in 2009, or about
2%-3% of our 2009 revenue estimate. While this is higher that what was lent in 2008, we
note that management' s original funding estimates for 2008 of$45-$65 miiJjon were well
above what it now e>-.'}Jects for 2009.

Corinth ian Colleges (COCO). Management disdosed that total lending under its internal

lending program (cal led Genesis Discount Lending) for FY2009 amounted to $120
million (9% of revenues), and that it expects total lending for FY2010 to be roughly $130
million (8% of our revenue estimate). The uncollectable portion of student loans is
booked as a discount to revenues. Given shtdents' track record to date (some loans an: in
payback mode owing to the shorter-tenn nature of COCO 's programs), in FY4Q09
management increased the discount rate (percentage of loans written oft) to 55% for
FY2009 from the prior 50% as the company e>-'}Jerienced a mix shift toward more lower
credit-quality shtdents. The company plans on using a 56%-58% rate in FY2010.

ITT Educational Services (ESI). On its lQ09 conference call (April 23, 2009),

management disclosed that it plans to provide $50-$75 million in internal lending in

2009, a somewhat larger range than the $50-$70 million previously disclosed in an 8-K
filed Febma.t)' 24, 2009. While management did not disclose the amount of prior loan
conunitments, tlus would ~unount to roughly 4%-6% of tl1e consensus 2009 revenue
estimate of $1.3 billion. We note this company has historically had t11e largest exposure
to private lending and financed roughJy 10% of 2008 revenues from its internal lending
program. On its 2Q09 conference call (July 23, 2009). management disclosed that during
the second quarter it had advanced roughly $13 .9 million under a collateralized line of
credit agreement as part of an effort be!,'tlll in 1Q09 to convert its non-interest bearing
internal financing program (which was recorded as an accounts receivable) into interest-

A m ember of BMO

Fin ancia l Group

158

September 2009

Postsecondary Education

BMO Capital Markets

bearing student loans. In doing so. management expects to be able to augment its internal
loan program.

Lincoln Educational Services (LINC). As of June 30, 2009, LINC had outstanding loan
commitments to its students totaling $24.6 million versus $23.6 million as of March 31 ,
2009 and $24.8 million as of December 31 , 2008. Loan commihnents net of interest due
were $17 million as of June 30.2009, or roughly 6.9% of 1H09 revenues.

Universal Technical Institutes (UTI). Under UTI' s private loan progTam (First Centuty
loan program, launched in June 2008), t.lte bank originates loans for students who meet
specific credit criteria. UTI then purchases these loans on a monthly basis and assumes
all of the related credit risk. The loans bear interest at market rates: however, principal
and interest payments are not required until six months after the student completes his or
her program. After the deferral period, mont.llly principal and interest payments are
required over the related tenn of the loan. The company does not record any revenue
relating to t.ltese loans (tuition, loan origination fess, interest income) until t.ltey are paid
and, as such, does not establish a loan loss provision against them. As of June 30, 2009,
UTI had committed to provide $13 million in loans (up from $7.4 million as of December
31, 2008), which consists of roughly 2,300 loans representing an average student balance
of approximately $5,600 (compared with 1,278 loans at roughly $5,700 as of December
31 , 2008). Of this amount. approximately $1 I million has been funded to date. The total
program authorization is $20 million (roughly 5.5% of our estimated FY2009 revenues).
Management noted that roughly $39.000 of these loans had come due, and the company
had collected $25,000 of that. While still early, that roughly 36% default rate is lower
than the " 100% default rate" used given the company does not record any revenues until
collection.

A shift from third-party lenders to an internal lending program would likely lead to an
increase in bad debt ex-pense (in dollars and as a percentage of revenues). Some companies
such as DeYI)' (DV) had already been providing some internal lending prior to the "credit
crunch" and have therefore, historically had relatively higher bad debt expense. We note that
many of these companies t.llllt had relied on t.llird-party lenders had some recourse on lmms to
subprime students. These "discount rates" were typicaUy in the 25% range and this recourse
was usually recorded as bad debt ex-pense.
Bad debt expense
likely to increase
along with
internal/ending
levels

Most of the companies wit.l1 internal lending programs have used higher "discount rates" some such as COCO well over 50%. As such, even if the US economy had not entered a
recession, we believe bad debt levels would have increased (we note tllllt COCO records tllis
expense as net revenues, while most other companies record it as an expense - either in the
Instructional Costs and Services or SG&A line). It is likely this expense wiJJ continue to
increase, alt11ough t.lte rate of increase could slow a bit as the US economy begins to recover.
We have listed historical bad debt levels for the for-profit providers in Exhibit 152. Note tltat
companies witl1 relatively low levels of private lending (e.g. , American Public Education),
also have relatively low levels of bad debt expense as a percentage of revenues. Much of the
bad debt recorded (excluding those schools with internal lending programs) represented
students who have dropped out prior to being completely " packaged" (i.e.. financial aid
documentation completely in order). Given the current environment, it is not surprising tl1at
bad debt expense is increasing for most of the industry.

A m ember of BMO

Financia l Group

159

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 152. Select For-Profit Postsecondary School Operators Bad Debt Expense
( FY2000-FY2009 To Date)
ComP"ny

Tlcl<er

American P~lie E~cation

APEI

12

Apollo G<oop

APOL

Bridgepoint Education

BPI

Career Education

CECO

C<mthlan Colleges

cooo

C.pela Educalion

CPLA

12
12
6
12
6

DeVry

ov

EWcation Mana.gemenl

Privale

Grand canyoo Educabon

ITT Educaliooal s.,.;ces

LOPE
ESI

Uncoln Educalional s.,.;ces

LINC

Strayer Education

STRA
UTI

Uniwrsal Technical Institute

Total

FYE

12
12
12
12

N.A.

S7.8

NA.

S12.4

N.A.
N.A.

NA.
NA.

FY2002

FY2003

NA

N.A.

S15.8

S20.7

FY2004
S0.1
26.9

NA
NA

N.A.
N.A.

N.A.
N.A.

18.5
3.0
34.2
11.9

19.9
0.6
34.5
13.4

FY200S
S0.5
57.1
0.9

FY2006
S0.3
101.0
1.0

FY2007
S0.1
120.6

FY2008
S0.2
104.2

4.1

13.4

73.9

55.9

'XJ.7
1.4
35.5

46.9
2.3
43.5

46.3
2.9
47.3

42.2
52.6
3.6
51.2
280
6 .3
18.6
17.8
10.5

46.3
72.8
5.2
51.9
42.2
8.5
43.3
21 .6
12.7

'04.08

YTD

YTD '08-'09

FY2009

38.3%

CAGR
6.8%
40.3%

N.A.
N.A.

N.A.
N.A.

30.3%
10.0%
23.9%

24.1%
39.6%
10.0%
17.4%

S0.1
79.3
5.3
21 .8
72.8
2.5
51.9
42.2

S0.2
106.9
9.1
24.8
106.7
3.3
72.4

N.A.

N.A.

4. 1

30.6%

37.8%
23.7%
31 .8%
17.5%

16.6
9 .6
5.2

6 .6
32.8
15.9
9.3

23.9%

$314.6

83.6%
34.9%
71 .8%
13.7%
46.7%
32.7%
39.5%
71.8%
62.6%
97.6%
66.1%
79.4%
49.5%
62.6%

N.A.

8.8

14.0

N.A.

NA.

24.2
7.6

29.7
9 .3

22.2

28.0

22.9

N.A.

NA.

NA.

N .A .

N.A.

5.1

8.6

N.A.

NA.

2.1

1.6

6.9
5.7
1.8

12.0
9.2
4.2

!,;;

:u

6.1
7.4
2.6

2.6
10.7
11.2
5.5

;u

ll

4.7
10.9
15.6
7.6
Q

25.2%
6 .3%

$582

$76.9

$100.5

$107.8

$144.5

$287.2

$322.9

$358.9

$426.6

25.2%

fXZI!ll!l

fYl!!ll!

.E.Y2:!l.2

f.Yl!l.2Z

Bad debt as% of revenues

N.A.

N.A.

YTD

FYE

Company

Ticker

AmericanPI.f)licEducalion

APEI

12

N.A.

NA.

NA.

N,A ,

0 .5%

1.7%

0 .8%

0.2%

0 .1%

ApoloG<oop
8ridg09olnt Education

APOL
BPI

1.3%

1.6%

1.6%

1.5%

1.5%

career Education

CEOO

N.A.
N.A.

NA.
N.A.

N A.
N A.

N.A.
N.A.

N.A.
N.A.

C<mthianColleges
CapellaEducation

COCO

8
12
12
6

5.1%

5.7%

5.5%

3.9%

4.0%

2.5%
10.8%
4.0%
5.0%

4.1%
3.4%
3.1%
5.3%

4.4%
4.8%
2.4%
5.7%

3.3%
6.2%
2.7%
6.8%

CPLA

12

N .A.

NA.

6 .1%

0.8%

1.2%

1.5%

1.6%

1.6%

1.9%

OeVry

OV

4 .9%

S.2%

5.3%

5 .1%

4.5%

5.6%

5.6%

5.5%

4.8%

Educatioo Management
Gland canyon Education

Private
LOPE

2 .5%

2.5%

2.4%

2.1%

2.6%

2.7%

2.0%

2.1%

2.5%

NA.

NA.

N.A.

N.A.

ESI

12
12

N.A.

liT Educational 5.,.;ces

1.5%

2.1%

1.5%

1.2%

1.9%

5.1%
1.6%

6.5%
1.4%

6.3%
2.1%

5.2%
4.3%

Uncoln Educational Ser"-ACM

LINC

12

N.A.

NA.

4 .3%

4.0%

3.7%

3.9%

5 .0%

5.4%

5.7%

Slrayer Education

STRA

12

2.7%

1.7%

1.5%

1.8%

2.3%

2.5%

2.9%

3.3%

3.2%

UrivecsaiTechnical lnstitute
MEDIAN

UTI

2 .9%

1.3%

1.9%

1.3%

0.9%

1.4%

1.4%

1.0%

1.3%

2.7%

2.1%

2.4%

1.8%

2.1%

2.7%

3.1%

3.3%

3.3%

72.4

M
$465.5

YTD

~~
0.2%
0.3%
3.4%
3.7%
6.0%
4.7%

2.5%
6.8%
1.9%
4.8%
2.5%
5.8%
3.5%
5.7%
2.7%
1.3%
3.4%

2.6%
8.2%
2.1%
5.0%
3.6%
5.6%
5.4%
6 .4%
3.7%
1.9%
3.7%

Source: BMO Capital Markets and company reports. Note: Data reflects fiscal year. Career Education data not available prior to 2005 owing to
reclassifications. Corinthian Colleges data was not restated for discontinued operations (as of August 26, 2008) prior to FY2006. Education
Management was a publicly held company until being taken private on June 1, 2006. N.A. - Not Available.

Percentage of
companies
offering tuition
assistance has
declined since
2003, with trends
worsening the
past two years

A member of BMO

Tuition reimbursement/assistance programs. Bersin & Associates estimates that roughly

$16.5 billion was spent by global and US corporations on tuition assistance in 2008, spending
roughly $3,769 per employee - about three times what it spends for traditional corporate
training. However, it appears that fewer companies are choosing to offer this as a benefit for
their employees. According to the Society for Human Resource Management (SHRM), 63%
of employers were offering undergmduate educational assistance and 63% offer graduate
educational assistance in 2009. For the most part, these percentages continue a downward
trend since peaking in 2003 at 72% and 69%, respectively, witl1 the trend becoming more
apparent the past two years in line with the start of the US recession (see Exhibit 153).

Financia l Group

160

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 153. Percentage of Companies Providing Educational

Assistance (2003-2009)
80%

.:"'

i0

70%

....

80%

;:

50%

"'

72%

0 2003 82004 02005 02006 .2007 0 2008 112009

71%

67%

66%

68:.1>

66%

Q.

40%

0
....
0

30%

"'

..
..

!!
20%
c
I!
Q.

10%
0%
Undergraduate Educational Assistance

Graduate Educational Assistance

Source: BMO Capital Markets and Society for Human Resource Management. Note: Prior to 2003,
educational assistance was not separated into graduate and undergraduate.

An Eduventures study. released in February 2007. found that workers in the utilities.
manufacturing, and mining industries were the most likely to have employer-provided tuition
assistance, while those in retail; arts, entertainment, and recreation; and accommodations and
food services were least likely to receive tuition assistance. In addition. students in subjects
related to engineering, tmnsportation, or business were the most likely to receive employer
assistance.
We believe there is somewhat of a lag between econonuc cycle trends and the percentage
offered this assistance, as while one believes these programs would be more popular as labor
markets tighten (i.e., recmitment and retention benefits), they likely take some time to be
implemented. Anecdotal data show that during the 2001 econonuc downturn. few companies
actually disbanded these programs, but rather cut the amount of program funding or limited
employee participation either directly or indireclly (e.g., required multiple internal approvals,
changed policy to require employees to pay with reimbursement con6ngent on m.inimum
gmde levels).

Some cycl ical

sensitivity

However, there is some evidence of more onerous actions being taken in the current
recession. A Febmary 2009 survey by consulting fim1 Watson Wyatt found that 23% of
companies had reduced or eliminated programs such as tuition reimbursement with another
18% expecting to make similar changes. While many of U1ese have occurred in the public
sector (e.g., not-for-profit hospitals, municipalities), a nwnber of large corpomtions have done
so, including:

A m ember of BMO

The troubled auto industry was among the most aggressive in cutting these perks, with
Chrysler (July 2008), Ford (June 2008), and General Motors (November 2008) all
announcing steps to decrease their tuition assistance expenses.

In late J~muary 2009, Sprint Nex1el Corp. (S) announced it was suspending its tuition
reimbursement progmm for 2009 as part of a broader cost-cutting effort.

Financia l Group

161

September

2009

Postsecondary Education

Companies may
be restricting the
types of eligible
programs

BMO Capital Markets

We have also seen changes regardless of the economic environment. In November 2006. Intel
(INTC) restricted the number of colleges eligible for tuition assistance by restricting it to
business classes at schools accredited by the Association to Advance Collegiate Schools of
Business and engineering classes taken at institutions accredited by ABET. formerly the
Accreditation Board for Engineering ~md Technolo&ry. As such, about 100 colleges and
universities. including several for-profit institutions such as Apollo Group' s (APOL)
University of Phoenix and Capella University (CPLA) no longer qualify. An Intel
spokeswoman was quoted that this change was made after finding that employees were
attending institutions "that were not of the highest value to the company," ~md that m~my
employees left the comp~my after completing their education because their new degrees did
not improve their prospects at Intel. This could be the beginning of a trend where companies
focus on the type of programs eligible for tuition assistance, rather than just having openended programs, to ensure a better return on these investments.

New methods of
financing

New methods of financing are available to help support these tuition assistance programs.
Organizations such as CAEL have developed tools such as Lifelong Learning Accotmts
(LiLA's) - a sort-of 40l(k) program where employees use paycheck deductions, typically
matched by their employee, to further their education, which could continue to enhance the
availability of tuition assistance funds. Following in this mold, International Business
Machines (IBM) announced in July 2007 it would begin to offer " learning accounts" to its
employees, whereby employees wou.ld contribute up to $1,000 annually (and IBM would
match up to 50%) into these accounts for which the funds would be used to enh~mce skills.
LiLA legislation has gained popularity among lawmakers too. ln. May 2008, the Lifelong
Learning Accow1ts Act of 2008 (H.R. 6036) was introduced to (1) establish tax-exempt
lifelong learning accounts to pay certain educational expenses, including tuition. fees. books.
supplies, and information technology devices; (2) allow individuals between age 18 and 71 a
tax credit for cash contributions to their lifelong learning accounts; and (3) allow employers a
tax credit for contributions made to the lifelong learning accounts of their employees and for
administrdtive costs associated with small employer lifelong learning accounts. Unforttmately.
this bill expired before ~my vote was taken on it.
For those companies that focus on working adult students. such as Apollo Group (APOL) and
Strayer Education (STRA), corporate and government tuition reimbursement programs are an
important source of revenues. While neither of these companies breaks out the percentage of
revenues from these progr'd.IDS (i.e., many times students get the monies directly from their
employers and then pay the institutions without stating the source, making it difficult to trdck
the original source of f1.mds), we believe a sizable number of students at these companies
receive at least some fonn of t11Won reimbursement.
Discounting. We believe discotmting is fairly rampant in the higher education sector, as most
traditionaJ schools offer some fonn of scholarships. lndust:Jy consultant Noel Levitz publishes
an annual Tuition Discotmting Report for its private not-for-profit school clients. Ou average
provide discounts of slightly more tl1ru1 34% of their gross revenues (includes tuition, fees,
room, and board) iu the 2008-2009 school year (" 2008" per the report). This was the highest

Discounts are
very common at
not-for-profit
schools;
percentage has
increased in
current downturn

A m ember of BMO

percentage since the company began tl1is survey in 1998 (see Exlubit 154) and was likely
driven by the onset of the current recession.

Financial Group

162

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 154. Private Not-for-Profit Schools' Discounts as a

Percentage of Gross Revenues (1998-2008)
Ill
Q1
::J

35%
c:
Ql
> 34%
~

0
~
Ill

"'

33.7%
33.0%

33%

32.6%

32%

32.3%

32.8%
r-

33.3%
r-

33.5%

33.4%

34.1%
r33.1%
r-

33.0%
r-

r-:

Ill

'E 31%
::J

:
:
'

u
Ill

i5

30%
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Note: Shaded area represents recessionary period. Source: BMO Capital Markets and Noel Levitz.

To a Jesser extent
at for-profit
schools

Wlri le most of tlle publicly held companies do not disclose their discount amounts, the
exception to t11at is Apollo Group (APOL). which typically discloses tuition discounts as a
percentage of gross revenues in its public filings (see Exhibit 155). Willie it has not moved up
in a straight line, from FY2002 through FY2008, the company expanded its use of
discotmting. increasing to 5.2% of gross revenues from 2.2%. We believe the "spike" in
FY2008 was mainly owing to a reclassification begilming in FY1Q08 when t11e company
identified certain items tlmt should have been classified as discounts or refunds (reduction of
tuition and other revenue, net) as opposed to bad debt expense. As t11e first three quarters of
FY2009 show a downward trend (4.3% year to date), we believe that is the more normalized
level for the company. However, given the current economic environment, it would not be
surprising to see this percentage increase going forward.

APOL -one o f
few p ublic
companies that
discloses
discounting
exposure eac h
qu arter

A m ember of BMO

Wlri le we believe most for-profit companies also offer some discounting, it is likely not nearly
as high as their not-for-profit counterparts. We believe tlle most common discounts are for
mWtary students: e.g.. Capella Education (CPLA) offers military students discounts of I0%15%; in 2008, roughly 14% of its students received a US Anued Forces discotmt, and another
14% received a discount via its other marketing programs (e.g., corporate). However, many
companies have selective promotions (e.g. , waiving application fees) tlmt are periodically put
in place and available for all new sttrdents.

Financia l Group

163

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 155. Apollo Group: Discounts as Percentage of Gross

Revenues (FY2002-FY2009 YTD)
$180

-Discounts
-+-As % of gross revenues

6%
C/)

Ql

150
E

~
C/)

:::1

120

5% ~
>
Ql

90

4% ~

a::

:::1

0
0

C/)

-"*
(.!)

60

3X.

30

C/)

<{

2%

FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008

FY2008 FY2009
(thru

(thru

F3Q)

F3Q)

Source: BMO Capital Markets and company reports.

Price increases

Economic cycles and pricing trends. There appears to be some lag between economic

have accelerated

cyclicality and pricing trends. That is, the rate of annual tuition increases tends to accelerate
during a downturn and tl1en continues to accelerate for sometime after a recession ends. This
relationship was apparent using College Board tuition data for not-for-profit schools (both
public and private) in the four US recessions prior to the most recent one (see Exhibit 156).
We believe this occms as other revenue sources (e.g. , state and local appropriations,
endowment income) slow during a downturn, forcing these schools to charge higher prices.

into and after a

recession,
although this one
is a bit different
(at least for public
two-year schools)

A member of BMO

Interestingly, the trend in tJ1e current recession (at least so far) has been a bit different, as
average tuition increases in tl1e 2008-2009 school year - specifi cally for public not-for-profit
two-year schools (i.e.. community colleges)- were among the smallest since the 2001-2002
school year.

Financia l Group

164

September

2009

Postsecondary Education

BMO Capital Markets

Exhibit 156. Economic Sensitivity: Not-for-Profit Schools' Annual Tuition Increases

Annual Tuition Increase
Privat e Not-for-Profrt Four-Year Schools :
Prior Recessionary Periods
4 Years Prior 3 Years Prior 2 Years Prior
Apr. 1980- Sept 1980
NA
6.6%
9.6%
Oct. 1981 - Mar. 1982
6 .6%
9.6%
90%
July 1990 - Mar. 1991
13.6%
8.8%
5.9%
Mar. 2001 - Nov. 2001
6 .1%
6.7%
5.5%
Average
7.1%
7.2%
9.4%1

Year Prior
9.0%
12.2%
8.2%
3.6%
8.2%

Year Of
12.2%
13.7%
7.8%
8. 1%
10.5%

Year After 2 Years After 3 Years After 4 Years After

13.7%
12.8%
9.8%
9. 1%
12.8%
9.8%
9.1%
10.2%
5. 1%
6.5%
5.4%
6.5%
3.9%
4.9%
5.8%
4.7%
8.5%
7.5%
7.6%
8.9%1

4 Years Prior 3 Years Prior 2Years Prior

2004..()5
2005..()6
2006..()7
5.8%
4.7%
63% 1

Year Prior
2007..()8
6.4%

2008-09
5.9%

Public Not-for-Profrt Four-Year Schools :

Prior Recessionary Periods
4 Years Prior 3 Years Prior 2Years Prior
Apr. 1980- Sept 1980
NA
6.2%
5.0%
Oct 1981 -Mar. 1982
6 .2%
5.0%
7.3%
July 1990 Mar. 1991
7.3%
5.0%
6.3%
Mar. 2001 Nov. 2001
4.6%
4.4%
3.5%
Average
6.0%
5.1%
5.5%1

Year Prior
7.3%
8.9%
7.5%
4.3%
7.0%

Year Of
8.9%
13.1%
12.5%
7.4%
10.5%

Year After 2 Years After 3 Years After 4 Years After

13. 1%
13.4%
11.3%
7.0%
13.4%
11.3%
7.0%
7.3%
10.4%
10.8%
8.6%
6.7%
8 .8%
13.3%
10.4%
7.1%
12.2%
9.3%
7.0%
11.4%1

4 Years Prior 3 Years Prior 2 Years Prior

2004..()5
2005..()6
2006..()7
10.4%
7. 1%
5.7%1

Year Prior
2007..()8
6.6%

2008-09
6.5%

Public Not-for-Profrt Two-Year Schools:

Prior Recessionary Periods
4 Years Prior 3 Years Prior 2Years Prior
Apr. 1980- Sept. 1980
NA
8.1%
6.9%
Oct 1981 Mar. 1982
8.1%
6.9%
8.6%
July 1990 Mar. 1991
120%
8.1%
3.0%
Mar. 2001 - Nov. 2001
7.0%
-0.8%
6.1%
Average
6.0%
6.5%
7.4%1

Year Prior
8.6%
10.1%
5.3%
-0.4%
5.9%

Year Of
10. 1%
11.0%
7.7%
-2.1%
6.7%

Year After 2 Years After 3 Years After 4 Years After

11.0%
9.0%
11.6%
106%
9.0%
11.6%
10.6%
9.8%
-4.7%
11.6%
29.2%
5.2%
4.1%
14.0%
8.9%
5.0%
7.5%
10.7"/o
7.6%
13.3%1

4 Years Prior 3 Years Prior 2Years Prior

2004..()5
2005..()6
2006..()7
8.9%
5.0%
3.8% 1

Year Prior
2007..()8
4.2%

2008-09
1.7%

Current Recession
IDee. 2007 ??

Current Recession
IDee. 2007 ??

Current Recession
IDee. 2007 ??

2009-10E
N.A.I

2009-10E
N.A.I

2009-10E
N.A.I

2 Years After 3 Years After 4 Years After

2010-11E
201112E
2012-13E
N.A.
N.A.
N.A.I

2 Years After 3 Years After 4 Years After

2010-11E
201112E
201213E
N.A
N.A.
NAI

2 Years After 3 Years After 4 Years After

2010-11E
2011-12E
201213E
N.A.
N.A.
NAI

Source: BMO Capital Markets, College Board's Trends in College Pricing, and National Bureau of Economic Research. N.A. - Not Available.

Public not-forprofit schools

shift funding
increases t o
students in "bad
economies"

These schools
have been more
"sensitive" to
price i ncreases in
the current
recession

A member of BMO

Under nonnal circumstances, as public not-for-profit schools tend to rely on state and local
tax revenues for nearly 34% of their funding (in the 2005-2006 school year per the NCES;
latest data available). we believe the level of tllis funding may be the key driver for tuition
increases at these schools, i.e., when state and local budgets are under pressure, publk notfor-profit schools tend to impose sizable tuition increases. This can be seen by comparing
annuaJ changes in public not-for-profit tuition with annual changes in state appropriations to
higher education.
While annual data were only available for current decade, there appears to initially have been
an inverse correlation between tl1ese two data streams. The highest annual increase in public
coUege tuition (13.7% in t11e 2003-2004 school year) came during the same year as the
sharpest drop in state appropriations (down 2.7%), while the lowest annual increase in public
college tuition (4.8% in t11e 2006-2007 school year) came when state appropriations increased
the most (8.1%; see Exhibit 157). Tlus relationslup changed a bit in the 2008-2009 school
years, as tuition increased only 4.1% despite a meager 0.9% increase in state appropriations.
We believe most schools were very sensitive to the econonuc crisis and tried their best to
minimize tuition increases- a trend lhat likely continued for the 2009-2010 school year.

Financial Group

165

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 157. Annual Change in State Appropriations and Public

Not-For-Profit College Tuition (2000-2001 to 2008-2009 School
Years)
~~!~~!~~!!~ Annual

change in public college tuition -.-Annual change m state appropriations

16%
14%
12%
10%

10%

8%
6%
4%

8%

2%

6%
4%
2%

0%

..
..

"'

c:
c:,.,

.. ..a
Clo

.c: u

0~

:-.a.

~g.

-2%

0% ~-'"-+-

2000-01

2001-02

-4%
2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

Note: Shaded area represents recessionary period. Source: BMO Capital Markets, College Board's Trends
in College Pricing, and Illinois State University's Center fo r the Study of Education Policy.

Tuition in creases
at public not-f orprofit historically
tends to Jag
in creases in state
unemployment
rates

ln a 2003 paper, Dr. Sarah Ttm1er at the University of Virginia showed tl1at tl1e rdte of tuition
increases at public not-for-profit institutions is somewhat counter-cyclical, albeit with a lag. A

regression analysis of state unemployment rates, which most economists agree are " latercyc le" data, showed that a 10% increase in state unemployment rates was likely to lead to an
11% reduction in state appropriations to higher education and a 13% increase in state tuition
levels on average. The opposite should hold true as well, i.e., a decrease in state
tmemployment rdtes should lead to greater state appropriations to higher education and likely
a lower rate of increase in state tuition levels (we do not expect tuition levels to decline).
As it is likely that state unemployme nt rates will continue to increase in the near tem1, we
envision state appropriations for hig her education to increase at lower rates or potentially
decrease, l11ereby leading to potentially accelerating increases in tuition at public not-forprofit institutions. However, we believe many of these schools are sensitive to tl1e current
fm~mcial a nd economic crisis a nd will attempt to not increase tuition rates at more than
necessary levels.

Endowments have
shrunk in the
cu rrent recession

A m ember of BMO

Wlri le the for-profit sector competes against the private not-for-profit sector to a lesser degree,
the downturn has affected funding for private not-for-profi t institutions as well. As shown in
Exhibit 158, the average endowments at higher education institutions (mostly private not-forprofit) fell 3% in the year ended June 30, 2008, per tl1e National Association of College and
University business Officers (NACUBO) arumal survey. The results of a follow-up survey
show that endowments ' investment returns fell an additional 23% from July to November
2008, the first five months ofFY2009. While lhe market rebound in the spring 2009 may have
offset this to some degree. we believe many endowments will show negative returns for
FY2009.

Financi al Group

166

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 158. Annual Change in Higher Education Endowments

(Fiscal Years 2000-2008)
25%
20.7%
20% 17.3%

18.0%

17.2%
15.1%

15%

13.0%
11 .1%

E
::J

iii
::J
c
c

9.3%

10%
5%

10.7%

3.0%

<t

0%
1996 1997 1998 1999 2000
-3.0%

-5%
-10%

Note: Reflects years ended June 30. Shaded are represents recessionary period. Source: BMO Capital
Markets and National Association of College and University Business Officers (NACUBO).

There is limited historical data for tuiti.on changes at for-profit schools so it is dillicull to
ascertain any trends. Nevertheless. we have provided a similar analysis for the for-profit
schools in Exhibit 159 using NCES data.

Exhibit 159. Economic Sensitivity: For-Profit Schools' Annual Tuition Increases

4 Years Prior 3 Years Prior 2 Years Prior

An nual Tuition Increase

Year Prior
Year Of
Year After 2 Years After 3 Years After 4 Years After

Four-Year Schoo ls
Mar. 2001 - Nov. 2001
Dec. 2007 - ??

7.9%
8.5%

N.A.
4.5%

N.AI
3.6%

N.A.
5.5%

1.9"k
N.A.

5.8%1
N.A.

5.2%
N.A.

8.5%
N.A

4.5%
N.A.

Two-Year Schools
Mar. 2001 - Nov. 2001
Dec. 2007 - ??

6.3%
2.5%

N.A.
2.1%

N.A. I
0.6%

N.A.
6.9%

6.7%
N.A.

6.4%1
N.A.

6 .3%
N.A.

2.5%
N.A

2.1%
N.A.

N.A.
N.A

N.A.
8 .1%

N.A.I
4.9%

N.A.
10.4%

N.A.
N.A.

N.A.I
N.A.

N.A
N.A.

N.A
N.A.

8.1%
N.A.

Less Than Two-Year Schools

Mar. 2001 - Nov. 2001
Dec. 2007 - ??

Source: BMO Capital Markets, National Center for Education Statistics. and National Bureau of Economic Research. N.A.- Not Available.

" Pricing
um br ella" m ay be

closing a bit

A m ember of BMO

Even should tuition increases accelerate at public institutions, we believe the " pricing
umbrella" that many of the for-profit providers have claimed they have (i.e.. ability to mise
tuition ~umually by roughly 4%-6%), may be closing a bit. Indeed, we have seen recent
examples where these schools are becoming more sensitive, as many have reached pricing
points that have become somewhat prohibitive. A number of otJ1er for-profit providers have
stated they e>..'J)ect future rates of tuition increases to be slower than historical levels. While
some companies- most notoriously Apollo Group (APOL)- had historically mised prices at
certain programs based on changes in Title IV limits, tl1ey have become more sensitive to
public scrutiny and, as such, we do not believe tills is a viable long-term stmtegy.

Financia l Group

167

September 2009

Postsecondary Education

BMO Capital Markets

A listing of key tuition and fee melrics can be found in Exhibit 160.

Exhibit 160. Key Tuition and Fees Metrics to Watch

Term

Definition

Postsecondary "Norms"

For-Profit "Norms"

Average annual
tuition and fees (1)

Measures the amount it costs for

students to attend postsecondary
institution, excluding ancillary
costs (e.g., room and board)

Public Less Than 2-Year lnsts.:

In-district:
$5,303
In-state:
$5,328
Out-of-state:
$5,757

Less Than 2-Year lnsts.: $12,305

Private Less Than 2-Year lnsts.:

$10,030
2-Year Institutions:

$12,357

4-Year Institutions:

$14,908

Public 2-Year Institutions:

In-district:
$2,298
In-state:
$2,749
Out-of-state:
$5,914
Private 2-Year lnsts.:

$9,396

Public 4-Year Institutions:

In-district:
$5,747
In-state:
$5,730
Out-of-state:
$13,595
Private 4-Year lnsts.:

Average annual
increase in tuition
and fees (2)

$19,047

Annual change in tuition and fees Public Less Than 2-Year Institutions: Less Than 2-Year Institutions:
In-district:
6.8%
N.A.
In-state:
6.5%
Out-of-state:
6.0%
Private Less Than 2-Year
Institutions:
N.A.
Public 2-Year Institutions:
In-district:
5.1%
In-state:
5.0%
Out-of-state:
4.4%

2-Year Institutions:

5.2%

4-Year Institutions:

6.0%

Private 2-Year Institutions: 6.4%

Public 4-Year Institutions:
In-district:
6.2%
In-state:
6.1%
Out-of-state:
5.5%
Private 4-Year Institutions: 5.9%
N.A.- Not Available. Sources:
(1 ) US Department of Education NCES Report 2008-159, Postsecondary Institutions in the United States: fall 2007; data represents average
charges from the 2007-2008 school year.
(2) Data represents average annual change from 1995-1996 to 2007-2008 school years. 1995-1996 data from US Department of Education NCES
Report 2002-156, Postsecondary Institutions In the United States: fall2000.

A member of BMO

Financial Group

168

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 160. Key Tuition and Fees Metrics to Watch (continued)

Term

Definition

Average annual
Measures the entire amount it
price of attendance costs for students to attend
(1)
postsecondary institution,
including tuition and fees, room
and board, books and supplies
and others

Postsecondary "Norms"

For-Profit "Norms"

Less Than 2-Year Institutions:

Less Than 2-Year lnsts.:

Off-campus (w/o family):

$15,019 (public in-district);
$15,051 (public in-state);
$15,500 (public out-of-state);
$24,794 (private)
Off-campus (w/ family):
$9,592 (public in-district);
$9,624 (public in-state);
$10,073 (public out-of-state);
$18,066 (private)

Off-campus (w/o family) :

$23,506

Off-campus (w/ family):

$16,428

2-Year Institutions:
On-campus:

2-Year Institutions:

$10,681 (public in-district);

$10,931 (public in-state);
$13,349 (public out-of-state);
$21,674 (private)
Off-campus (w/o family) :
$13,332 (public in-district);
$13,791 (public in-state);
$16,954 (public out-of-state);
$22,221 (private)
Off-campus (w/ family):
$6,810 (public in-district);
$7,269 (public in-state);
$10,432 (public out-of-state);
$14,488 (private)

On-campus: $26,992

4-Year Institutions:
On-campus:
$16,758 (public in-district);
$16,758 (public in-state);
$24,955 (public out-of-state);
$31,019 (private)
Off-campus (w/o family):
$17,965 (public in-district);
$17,968 (public in-state);
$25,908 (public out-of-state);
$29,1 06 (private)
Off-campus (w/ family):
$10,180 (public in-district);
$10,183 (public in-state);
$18,123 (public out-of-state);
$21,791 (private)

Off-campus (w/o family):

$24,545

Off-campus (w/o family):

$17,300

4-Year Institutions:
On-campus: $33,029

Off-campus (w/o family) :

$29,271

Off-campus (w/o family):

$21,283

Sources:
(1) US Department of Education NCES Report 2008-159, Postsecondary Institutions in the United States: fall 2007; data represents average
charges from the 2007-2008 school year.
(2) Data represents average annual change from 1995-1996 to 2007-2008 school years. 1995-1996 data from US Department of Education NCES
Report 2002-156, Postsecondary Institutions In the United States: fall2000.

A member ofBMO

Financial Group

169

September 2009

Postsecondary Education

BMO Capital Markets

Postsecondary Schools EBITDA, Operating Income, and Margin

Trends
A summary of historical EBITDA and EBITDA margins, as well as operating income and
operating margins are found in Exhibits 161 and 162. respectively. We note that margins vary
across the spectnun, but that companies with a larger component of online enrollment (i.e ..
Apollo Group, Strayer Education) typically have higher margins since that delivery system is
typically more profitable. In addition, there are some scale benefits, with some of the larger
providers (i.e. , ITT Educational Services) also having relatively higher margins.

Operating
margins can vary

Exhibit 161. EBITDA and Margins for Select For-Profit Providers (FY2000-FY2009 YTD)
oo..os

'04-08

.f.llQ!!l!
$31.6

882.3

25.7%

~
65.3%
10.9%

35.9
166.9
107.0
56.6
217.4
363.3
24.3
335.1
56.7
148 .7
33.6

N.A.
N.A.

EBITOA FISCAL YEAR

Company

Ticker

FYE

American Public Educadon

ApolloGroop
Brfdgepoint Education
Career Education

APEI
APOL
BPI

12
8
12
12

cEco

Corinthian Colleges

CO CO

C.pela Education

CPLA

12

DeVry

DV

Education Managetner~t
Grand Canyon Education

Private
LOPE

ESI

Educaticnal SeMces

lincoln Educational SeMces

U NC

Strayer E ducation

STRA

Universal TechnicallnstitiA.e

UTI

Washington Post

WPO

12
12
12
12
9
12

TotaJ

fYlQ.!l1

N.A.
$141 .4

N.A.
NA.
28.2
(11.0)
104.7
59.4
N .A.
52.8
2 .1
33.0
13.0

N.A
$ 193.7
N.A
N.A
45.6
(11. 7)
128.4
75.7

N.A
53.8
(6.2)
36.2
15. 5

t!.A
$423.5

t!.A
$531.1

f:!l29'l
($1.2)
289.0
N.A.
N.A.
69.4
(2.9)
145.0
103.0
N.A.
68.3
11.9
44.9
25.9
N.A.
$753.2

~
~
$ 4.2
$4 .7
582.6
760.1
(7.3)
(4.9)
348 .8
N.A.
474.7
11 7.2
180.9
208.1
15.3
3.2
21.3
151.6
128.1
113.7
188.3
126.9
229.1
(13.5)
(0.9)
N.A.
94.5
119.5
165.5
27.4
49.5
39.2
55.5
70 .9
87.0
42.0
58.8
65.6
!!!l.'t
1QM
~
$1,093.9 $1,848.3 $2, 268.3

fYlQ.!!1
$2.1
427.6
(1.9)

fll2.!!.
$8.3
765.3
(4.1)
345.1
114 .9
30.2
120 .7
253.1
9.1
184 .6
46.5
95.5
60.8

~
$18.5
750.8
5 .2
211.3
81.5
43 .1
142.6
318.5
11.7
24 7.1
43.5
116 .3
53.4

!ill

1Qll!

$2. 156.9

$2,199.1

$2,663.8

EBITOA MARGINS FISCAL YEAR

Company

Ticker

Am erican Public Education

APE I

FYE
12

Apollo Groop

APOL

Bridgepoint Education

BPI

12

CECO

12

career Education

Corinthian Colleges

COCO

C.pela Education

CPLA

12

DeVry

OV

Educatia1 M anagem e~

Private

Grand Canyon Education

LOPE

12

ITT Educatia1al Sei'\Aces

ESI

12

lincoln Educational Services

liNC

12

Strayer Education

STRA

Universal Technieallnstit!Ae

UTI

W ashington Post

WPO

Median

12

9
12

~~fXZW..E.'aW.~.E::!.Wi~~~
N.A.
N.A,
-11 .3%
11 .6%
18.3%
16 .8%
20 .8%
26.8%
29.5%
23.2%
25.2%
28.6%
3 1.9%
32.4%
33.8%
30.9%
27.6%
28.1%
N .A.
N.A.
N.A.
256.8% 395.5%
-92.1%
14 .2%
6. 1%
16.4%
N .A.
N.A.
N.A.
N.A.
23.7%
26.0%
19.1%
12.1%
9 .8%
20 .5%
8.9%
16.5%
18.7%
22.9%
23.3%
22.4%
12 .7%
10.0%
19.1%
5.3%
10.1%
20.3%
N .A.
39.1%
13.0%
14.3%
16.8%
21.3%
22.6%
14.4%
19.9%
22.4%
13 .8%
19.3%
14.6%
15.3%
19.3%
20.4%
20.6%
19.8%
22 .1%
22.5%
21.6%
23.4%
21.6%
N.A.
N.A
N.A.
N.A.
52.7%
-1.7%
11.8%
15.4%
12.6%
15.2%
13.4%
15.0%
18.1%
19.3%
24.1%
24.4%
28.4%
33.0%
15.0%
9.0%
14.6%
15.8%
17.2%
15.0%
2 .6%
5.9%
13.3%
36.6%
42.2%
38.9%
38.4%
37.7%
38.7%
39.4%
36.2%
37.5%
14.1%
14.2%
17.9%
21.4%
23.1%
21 1%
17.5%
15.1%
9 .3%
N .A.
N.A.
N.A.
18.0%
19.0%
13.5%
14.8%
15.2%
15.9%
17.9%
18.7%
19.2%
18.5%
19.3%
19.2%
17.2%
15.3%
18.2%

N.A.

18.1%

N.M.
9 .6%
25.4%

N.A.
26.0%
51.1%
20.7%
12.7%
N.A.
23.1%

N.M

-16.8%
-12 .3%
38.7%
9.4%
17.9%
N .M

29.4%
9.6%
20.4%
-13.1%
17.4%
14.2%

vro vro '08'09

f:a!!!!!!
$14.0
660.0
15.6
107.0
10 7.0
24 .1
217.4
363.8
10 .2
160.4
14.1
80.2
27.5

$21.3
971.1
54.5
1 18.0
187.6
34.3
309.3
431.1
27.1
236.7
37.7
104.5
23.1

100.1

$1,901.4

$2,685.8

vro

Yro

~
29.0%
28.6%
17.6%
12.3%
10.0%
18.3%
19.9%
21.6%
14.5%
33.3%
8 .3%
41.1%
10.6%
16.9%
17.9%

fX.W.2

~
52.0%
47.1%
249.1%
10 .3%
75.3%
44.8%
42.3%
18.5%
165.0%
47.6%
168.0%
30 .3%
16.0%
28.9%
46.0%

30.9%
33.5%
27.9%
13.4%
14.3%
22.3%
21.2%
21.4%
22.9%
39.1%
15.3%
41. 7%
8.6%
16 .8%
21.9%

Note: Data represents fiscal years. Data used for Career Education and Corinthian Colleges excludes discontinued operations where available.
Education Management was a publicly held company until being taken private on June 1, 2006. We have removed stock-based compensation
costs where disclosed. N.A. - Not Available.
Source: BMO Capital Markets and company reports.

A member of BMO

Financia l Group

170

September

2009

Postsecondary Education

BMO Capital Markets

Exhibit 162. Operating Income and Margins for Select For-Profit Providers (FY2000-FY2009 YTD)
OPERAllNG INCOME FISCAL YEAR
~
:!Wii
m
m~
mg,gz
Company

Ticker

FYE

!lmeric:an Public EduC<IIion

Apollo Grrup
Bridgepcinl EdJcation
career EdJcation
C<nlhl"" Cdleges
Capella EdJcation
DeVry

APEI
APOL
BPI
CECO
COCO
CPLA

12
8
12
12
6
12

Educafioo Management

GrMd Canyon EdJcation

liT EdJcational S<Nices
Llncdn Educabonal SefYices
Slreyer Education
Urlve<sal Technical Institute
Washington Post

rN
Private

LOPE
ESI
LINC
SlRA
UTI
WPO

12
12
12
12
9

12

Total

N.A
$11 4.1

.EYW.1
N.A

$161.0

.E.'!12.2l
(50.2)

253.9

N.A
N.A

NA
NA

NA
NA

24.4
(12.0)
79.5
38.3

40.8
(13.7)
96.3
49.7

62.7
(6.0)
111.4
69.0

N.A

NA

NA

52.8
2.1
30.9
9.7

53.8
(6.2)
33.5
11.6

68.3

$348.1

$435.9

3.6
41.2
22.0
27.6
$653.5

EXZ.Q.Q.Il

.EXZ.W

.E:a!ll!Z

~
$1.8
387.3
(1.9)

N.A

~
S3.6
5S0.5
(5.0)
291.3

103.8
4.1
87.7
92.7

SH
714.5
(7.8)
395.9
171.9
14.9
43.1
168.6

156.3
9.9
89.2
133.0
(14.6)
N.A
(3.3)
119.5
165.5
94.5
28.8
36.4
17.5
65.5
80.3
51.1
38.2
50.1
55.8
58.4
93.4
ill
$933.2 $1,571.4 $1,916.6

~
S6.4
698.0
(4.8)
251.1
75.6
22.0
68.2
223.0
5.7
184.6
31.6
88.4
46.6
100.7
$1,797.1

S15.7
679.7
4.0
117.6
38.4
33.3
93.2
227.9
8.1
247.1
27.7
107.8
34.7
125.6
$1,761.0

.m2Q!
$27.4
803.0
35.0

N.A

27.6%

N.A
N.A

77.7

62.2
44.4
171.8
263.5
19.5
335.1
38.8
138.0
16.0
168.8
$2,201.2

12.4%
N.M.

10.1%
27.2%

~
66.5%
9.9%
N.M.

28.1%
-20.6%
45.7%
17.8%
18.6%

N.A

N.M.

26.0%
44.1%
20.6%
6.5%
45.6'4
26.1Pk

29.4%
7.7%
20.5%
24.8%
15.9'->
16.9%

Ticker

!lmerican Public Education

Apd lo Grrup
Bridgepcint EdJcaUon

APEI
APOL
BPI
CECO

career Educatioo
cainthi8fl Colleges

Capella EdJcation
DeVry
Education Management
Grand canyon EO.Jcation
ITT E<klcational 5el'\fices

lincoln Educatiooal Services

Slrayer Education

coco
CPLA
Private
LOPE
ESI
LINC
STRA

lkliversal Technical Institute

UTI

Washln!Jon Post

WPO

54.3%
49.5%
255.5%
15.7%
11 7.6%
53.8%
46.2%
21.Cl'4
203.8%
50.7%
412.4%
30.2%
30.2%
31.3%
50.1%

OPERAllNG MARGINS FISCAL YEAR

Company

.m2Q! ~
S12.1
S18.6
600.9
898.3
14.6
52.0
40.2
46.5
135.4
62.2
18.2
28.0
171.8
251 .3
263.5
318.8
7.8
23.7
149.2
224.8
5.1
26.4
75.2
97.9
14.3
10.0
83.6
109 7
$1 ,518.8 $2,241.3

FYE

12
12
12
6
12
6
12
12
12
12
9

12

Median

N.A

N.A

18.7%

20.9'->

2.0%
25.1%

N.A
N.A

N.A
NA

N.A.
N.A.

14.3%

16.7%

N.A

NA

16.2%
12.5%

17.0%
13.4%

18.5%
12.1%
17.2%
13.8%

.E:a!1.QJ
10.4%
28.9'4
-259.9%

N.A
20.34
5.0%
12.9%
14.5%

N.A

NA

N.A.

N.A

15.2%
2.6%
39.5%
10.5'4
14.7%
14.7%

13.4'4
5.9%
36.1%
10.6%
5.5%
13.4%

15.0%
2.7%
35.3%
15.3%
11 .0%
15.0%

18. 1%
9.3'4
34.8%
18.4%
15.9%
15.2%

f.mM

15.4%
30.6%
399.3%
19.8%
20.2'4
8.4%
11.4%
15.6%
57.1%
19.3%
11.6'4
35.7%
19.6%
16.7%
16.1%

12.1%
31.7%
98.3%
21.7%
18.5%
10.0%
5.5'~

16.5%
-6.3%
24.1%
12.7"4
36.4%
17.9'4
10.7%
14.6'k

.Er2.2D.

15.9'~

22.8%
25.0%
4.6%
6.7%
4.2%
14.7%
10.0%
16.7%
8.2%
28.4%
8.5'4

25.5%
25.6%
16.0%
4.5%
5.8%
16.3%
15.7%
15.6%
12.1%

28.2%
16.8%
1 3.9'~

8.3%
12.2%
8.1%
19.1%
7.9'~

24.4%
10.2%
33.5%
13.4%
11.8%
12.8%

33. 9'~

9.8%
12.3%
11.1 %

YTD
~~

25.0%
26.0%
16.5%
4.6%
5.8%
13.9%
15.7%
15.6%
11.1%
31.0%
3.0%
38.6%
5.5%
14.1%
14.9%

33.0%

10.3%
34.8%
4.7"->
13.2%
15.7%

27.0%
31.0%
26.7%
5.3%
10.4%
17. 9'~

17.2%
15.8%
20.1%
37.1%
10.7%
39.1%
3.7%
14.3%
17.5%

Note: Data represents fiscal years. Data used for Career Education and Corinthian Colleges excludes discontinued operations where available.
Education Management was a publicly held company until being taken private on June 1, 2006. We have removed stock-based compensation
costs where disclosed. N.A. - Not Available.
Source: BMO Capital Markets and company reports.

Postsecondary Schools Instructional Costs Trends

The direct cost of educating students, known as instructional costs or cost of educational
setvices. is typically one of the largest expenses among for-profit schools. As shown in
Exhibit 163, in FY2007 (latest data available) ll1ese costs at for-profit schools represented
roughly 33% of revenues at schools that were less than two years, 29% of revenues at twoyear schools. and 18% for four-year schools-- lower percentages than typically incurred by
the not-for-profit sector that potentially show greater efficiency of the for-profit sector, in our
view (although some claim less of a focus by the for-profits on tltis line item).

For-profits have
relatively lower
instructional
costs than notfor-profits

Exhibit 163. Instructional Costs as a Percentage of Revenues (FY2007)

Public Not-for-Profit

Revenues
Instructional costs
Gross marg1ns
Non-instructional costs:
Academic and inst. support, and student svces.
Research and public service
Auxihal)' enterpnses
Net grant aid
Other expenses (includes hospital services)
Total non-instructional costs
Surplus/deficit (i.e. operating margins)

Private Not-for-Profit

Private For-Profit

Less than
2-Year
100.0%

2-Year
100.0%

4-Year
100.0%

Less than
2-Year
100.0%

2-Year
100.0%

4-Year
100.0%

Less than
2-Year
100.0%

2-Year
100.0%

4-Year
100.0%

51 .2%
48.8%

35.5%
64.5%

23.0%
77.0%

63.4%
36.6%

85.0%
15.0%

22.6%
77.4%

33.1%
66.9%

29.0%
71.0%

18.0%
82.0%

23.9%
0.2%
1.2%
0.0%
18.8%
44.0%

27.9%
1.5%
4.6%
0.0%
19.9%
53.9%

15.6%
150%
7.4%
0.0%
24.1%
62.1%

25.3%
4.3%
3.6%
0.0%
3.3%
36.5%

43.2%
1.6%
7.0%
2.1%
7.7%
61.5%

20.4%
8.7%
6.8%
0.4%
9.4%
45.6%

40.1%
0.3%
2.4%
0.1%
16.1%
59.0%

50.3%
0.1%
2.6%
0.3%
9.1%
62.3%

57.3%
0.0%
2.2%
0.6%
7.6%
67.7%

4.7%

10.7%

14.9%

0.2%

-46.5%

31 .8%

7.9%

8.8%

14.3%

Note: Academic and mshtuhonal support and student serv1ces compnse a number of different expenses, 1nclud1ng academic support (e.g.,
libraries), institutional support (e.g., administrative), and student services (e.g., admissions). Data follows FASB for private not-for-profit and private
for-profit schools and GASB for public not-for-profit schools. Source: BMO Capital Markets and US Department of Education National Center for
Education Statistics.

A member of BMO

Financia l Group

171

September

2009

Postsecondary Education

BMO Capital Markets

It was difficult to accurately compare t11e instructional costs across the landscape of the
publicly held for-profit companies, as many companies categorize instructional versus noninstmctional differently (i.e., some included occupancy costs as instmctional, others include it
as non-instmctional). With that caveat we have made comparisons anyhow.

From FY2000 to FY2008, total instructional costs for the larger publicly held for-profit
postsecondaty companies grew at roughly a 19.4% CAGR, slower tha n revenues, wh:ich
increased over the same period at roughly a 22.6% CAGR. As such. instructional costs as a
percentage of revenues have decreased to 40.7% in FY2008 from 55% in FY2000 for the
median of this group (see Exhibit 164). This leverage has continued for most companies in
FY2009 to date. We note the wide range of spending on this line item. as companies with
more 'hands-on programs" such as auto tech (e.g., Corinthian Colleges, Universal Technical
Institutes) tend to spend more as a percentage of revenue on instructional costs, and those
with a greater online presence (e.g., Bridgepoint Education, Capella Education) would likely
spend less given t11ey have lower real-estate related costs.

Most companies
have gained some
leverage off this
line item

Exhibit 164. Total Instructional Costs and As a Percentage of Revenues for Select For-Profit
Providers (FY2000-FY2009 YTD)
INSTRUCTIONAL COSTS- FISCAL YEAR
Company
Ticker FYE
American Public Education
APE!
12
ApolloGra~p

Bridgepdnt Ewcetion
career Education
Corinthian Colleges
capella Ewcation
oevry
Educatioo Management
Grand Canyon EWcatlon
ITI Ewcelional SeMces
lincdn Educatia~ at Services
strayer Ewcation
Uriversal Technical Institute
Total

APOI.
BPI

CECO

coco
CPLA
rN
Prrvate
LOPE
ESI
LINC
STRA
Un

AS % OF REVENUES - FISCAL YEAR

Company
Ticker
American PIJblic Education
APE!
Apollo Gra~p
Bridgepdnt Ewcetion
career EWcalion
Corinthian Colleges
Copello EWcation
OeVry
Ewcation Management
Grand Canyon EWcatlon
ITI E<Ncational SM!ices
lincoln EducatiCI1al Services
strayer Ewcation
\k'IJversal Technical Institute
Medi an

APOI.
BPI
CECO
COCO
CPLA
rN
Private
LOPE
ESI
LINC
STRA
Un

12
12
6
12

6
12
12
12
12
9

FYE
12
8
12
12
6
12
6

12
12
12
12
9

FY2000
N.A
S352.9
N.A
N.A
92.8
12.4
269.7
201.2
N.A
200.5
37.1
28.2

FY2001
NA
$410.1
NA
NA
131.5
20.5
304.5
242.3
NA
237.6
53.0
33.7

ru

ru

$1,243.2

$1,492.8

FY2002
$5.5
498.5
N.A
212.0
175.1
27. 2
348.0
325.0
NA
256.7
61.6
41.6

$2,022.0

FY2003
S8.6
6 12.9
0.3
316.1
251.4
43.8
366. 1
417.6
NA
280.0
78.6
53.1

$2,520.9

mlm
N.A
57.8%
N.A
N.A
54.3'A>
78.0%
55.0%
65.5'A>
N.A
57.7%
45.5'A>
36.0%
52.7%
55.0%

NA
53.3%
NA
NA
53.9%
68.7%
53.6%
65.4'A>
NA
59.1%
50.1'A>
36.3%
54.4%
53.9%

51 .7%
49.4%
N.A
38.6%
51.8%
55.0'A>
53.7%
64.9'M
NA
56.5%
46.6%
35.6%
49.0'M
51.7%

48.4%
45.8%
47.6'A>
26.8%
49.1%
53.5%
53.9%
65.2%
NA
53.6%
41.9'A>
36.1%
47.0%
48.0%

FY2004
$10.9
781.4
1.4
453.6
398.7
58.9
420.1
546.1
19.7
298.7
97.4
63.9

.w.z

$3,267.7

FY2005
$13.2
956.6
5.5
S31.4
497.6
71.2
437.3
640.4
28.1
328.3
11 4.2
76.2

$29.4

1.224.1
29.8

636.2

505.8
82.9
451.2
636.8
31.3
356.9
129.3
90.5

526.6
99.0
485.0

1Z.U
$4,150.9

47.0'M
42.5%
69.1%
29.1%
53.6%
47.7%
56.0%
62.8%
N.A
47.7%
39.7%
34.5%
46.7%
47.4%

FY2007

563.2

$3,845.1

~~

47.3%
43.4%
111.9'A>
30.8%
51.4%
50.0%
53.5%
64.0%
N.A.
48.4%
39.2%
34.9%
45.7%
47.8%

FY2006
$17.9
1.100.2
12.5

729.9

39.0
358.6
139.5
108.2
m.Q
$4.588.3

FY2008
$43.3
1.350.3
62.8
6$4.3
622.9
119.0
501.3
901.1
52.7
383.8
153.5
129.8

1!!U
$5,160.9

frn.Q2

.E.YZW

44.6%
44.4%
43.7%
31.2%
55.7%
46.1%
53.7%
54.4%
43.4%
47. 1%
41.6%
34.3%
49.6%
44.6%

42.5%
44.9'M
34.8%
36.4%
57.3%
43.8%
52.0%
53.5%
39.3%
41.2%
42.6%
34.0%
51.8%
42.6%

40.4%
43.0%
28.8%
38.3%
58.3%
43.7%
45.9'M
53.5%
32.7%
37.8%
40.7%
32.8%
54.2%
40.7%

:wl

CAGR

CAGR

NA
18.3'A>
NA
N.M.
26.9%
32.7%
8.1%
20.6%
NA
8.5%
19.4%
21.0%
18.3'A>
19.4%

41.1%
14.7%
159.4%
9.6%
11.8%
19.2%
4.5%
13.3%
27.9%
6.5%
12.0'M
19.4%
12.4%
13.3%

FY2008
$20.3
991.9
25.7
327.1
622.9
59.1
501.3
901 .1

24.0
187.2
72.6
64.0

lli..Q.
$3.936.1

m~
FY2009
~
$26.9
32.3%
1.134.7
14.4%
48.1
87.5%
338.0
3.3%
751.0
20.6%
64.2
8.7%
33.1%
667.3
1.067.7
18.5%
38.2
59.0%
211.9
13.2%
99.4
37.0'A>
79.2
23.6%
l.U.!i
3.3%
$4,670.1
20.6%

Y!Q

Y!Q

fi2Q2i
42.1%
42.9'M
28.9'A>
37.6%
58.3%
45.0%
45.9%
53.5%
34.2%
38.9%
42.9%
32.8%
53.7%
42.9%

39.0%
39.1%
24.7%
38.5%
57.4%
41 .0'M
45.7%
53.1%
32.3%
35.0%
40.3%
31.6%
53.8%
39.1%

Note: Data represents fiscal years. Data used for Career Education and Corinthian Colleges excludes discontinued operations where available.
Education Management was a publicly held company until being taken private on June 1, 2006. Restated line item data was not available for
Lincoln Educational Services for 2005. We have removed stock-based compensation costs where disclosed. N.A.- Not Available.
Source: BMO Capital Markets and company reports.

Companies with
more " hands-on
programs" spend
more on

instructional

Increasing class sizes. We were tmable to obtain average class size data for publicly

held companies or the for-profit industry as a whole. According to tl1e NCES. the avemge
class size in the not-for-profit sector in t11e 2005-2006 school year (latest data available)
ranged from 19.2 (public) to 21.6 (private) for two-year institutions, and from 12.2
(private) to 14.8 (public) for four-year institutions.

costs

A member of BMO

Besides adding more students to leverage the fixed (or at least semi-variable) components of
instructional costs. there are a number of ways these companies have generated leverage off
this line item. Among the metl1ods used are these:

Financia l Group

172

September 2009

Postsecondary Education

BMO Capital Markets

There is typically a trade-off between average class size and quality, with l11e perception
that a smaller average c lass size yields a higher quality education. However, schools with
smaller class sizes are typically more costly as they require a greater number of faculty
per student.

Trade- off between

class size and
quality

Class sizes may vary by type. For example, classes for associate degree students are
typically larger than l11ose for doctoral degree students as they contain more basic
introductOI)' classes (e.g.. English composition). In addition, online classes are typicaUy
smaller than campus-based classes, as tJ1ey require more student/teacher interaction (i.e.,
you can' t just sit in the back of class and fall asleep as many online classes have
minimtml requirement for class participation).
We believe online

Shift mix toward online a nd "blended programs." We believe the online delivery
model has higher gross margins (i.e., lower instructional costs) than the campus-based
model owing to the lack of facility-related costs. which cou.ld offset higher compensation
costs from smaller classes. Unfortunately, none of the publicly held companies disclose
gross margins by delivery type, although Apollo Group (APOL) did so prior to the
August 2004 repurchase of its UOPX tracking stock. As shown in Exhibit 165. the
company's online instructional costs as a percentage of revenues were lower than at its
on-ground campuses, despite having smaller average class sizes.

programs have
lower
i nstructional
costs (i.e., higher
gross margins)

Exhibit 165. Apollo Group: Instructional Costs as a Percentage of

Revenues by Segment (FY1997-FY2004 First Three Quarters)
70%

D On-ground IIIOnline

60%

"':::s
Ql

50%

1:
Ql

>

40%

30%

';!.

"'

20%

<(

10%
0%
FY1997

FY1998

FY1999

FY2000

FY2001

FY2002

FY2003

FY2004*

Note: FY2004 data for first three quarters; full-year data not available as company repurchased its UOPX
tracking stock in August 2004. Source: BMO Capital Markets and company reports.

In addition, we believe Apollo pioneered the concept of a " blended learning" model - a
hybrid of on-ground and online- t11at many in tlte industry have now co-opted. Under the
company's FlexNet prograrn, sh1dents attend classes at an on-!,>round location for the first
and last week of a course, with the classes between the first and last (typically three weeks
for tmdergmduate and four weeks for graduate) conducted online. Apollo initially began by
opening FlexNet-only campuses in such smaller markets such as Boise, Idaho; and Wichita,
Kansas- areas un1ikeJy to have opened traditional University of Phoenix (UOP) on-ground
campuses because populations are spread-out over a wider area.
In addition to improving capacity utilization by allowing a greater number of students to be
cycled through its on-!,>round campuses, we believe FlexNet allows the school to
accommodate t\vo- to three-times the number of course offerings without increasing facility

A m ember of BMO

Financia l Group

173

September 2009

Postsecondary Education

BMO Capital Markets

costs. While th.is may be somewhat offset by increased faculty costs (we believe FlexNet
class si:z.es resemble pure online classes rather than the larger on-ground size), we
nevertheless believe the addition of FlexNet has helped and should continue to help the
company e>..-pand its overall margins.

Shi ft to more

Shifting from fu ll-time facu lty to adjunct (part-time) facu lty. All else being equal, a
school with a greater proportion of full-time faculty should have lower instructional costs
as a percentage of revenues, provided those faculty are being used efficiently for
instructional purposes. For most not-for-profit providers, however, given many of their
full-time faculty have tenure and may have other duties beyond instmction (i.e. ,
research), it is typically less costly to use adjunct faculty for instmction as they are
typically less seasoned and therefore less e>..-pensive (although there may be quality tradeoffs). In recent years, most not-for-profit providers have expanded their use of adjunct
(part-time) faculty as a means of adding nexibility. as well as saving costs (e.g.,
employment-related benefits). As shown in Exhibit 166, the ratio of part-lime to full-time
faculty increased from 0.28 as offalll970 to 0.91 as offall2005 (latest data available)

adjunct faculty
can save costs

Exhibit 166. Part-time to Full-Time Faculty Ratio: All Postsecondary

Institutions (Fall 1970- Fall 2005)
1.0
0

0.9

:; 0.8
0::
~

0.7

~ 0.6

~ 0.5

.2 0.4
Gl
. 0.3
";'

i
0..

0.2
0.1
0.0

Source: BMO Capital Markets and National Center for Education Statistics.

Most for-profit providers rely more heavily on adjunct faculty; in fact, adjuncts typically
outnumber fu.ll-tin1e faculty by a wide margin. A comparison of the mtio of part-time to
full-time faculty for a select group of for-profit providers can be found in Exhibit 167.
As shown, the part-time to f1ill-time faculty ratio has increased for most companies in
recent years, allowing them to shift some of their instructional costs to variable from
fixed.

A m ember of BMO

Financia l Group

174

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 167. Part-Time to Full-Time Faculty Ratio for Select Group of For-Profit Providers
(FY2000-FY2009)
Company
American Public Education
Bridgepoint Education
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services
Strayer Education
MEDIAN

Ticker
APE I
BPI
CECO

coco
CPLA
DV
Private
LOPE
ESI
LINC
STRA

1999

2000

2001

2002

2003

2004

2005

2006

N.A .
N.A.

NA.
N.A.

N.A.
N.A.

N.A.
N.A.

1.7
2.8

1.4
1.1

N.A.
N.A.
N.A.

2 .9

1.6
2.5

NA.
N.A.
N.A.

N.A.
N.A .

1.9
3.2

N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.

1.1
5.7

2.0
5.5

N.A.
N.A.
N.A.

N.A.
N.A.
N.A.

0.4

0.4

0 .9

0 .8

0.8

N.A.

N.A.

N.A.

N.A.

N.A.

6.6
2.5

2.9
2.2

3 .2
2.9

4.0
2.1

5.0
1.3

1.3
0.3
4.9
1.3

1.2
0.4
7.2
2.0

2007
4.7
N.A .

1.4
2 .3
6.0

1.3
2.3
5.8

N.A.

N.A.

2.2

2.5

N.A.

N.A.

2 .3
0.6
6 .6
2.3

3.4
0.5
9.4
2.9

2008
5.2
20.0
2.8
2 .0
5.4
0.0
2.6
9 .6
N.A.

0.8
12.1
4.0

2009
NA.
NA.
N.A .

2 .2
N.A.

0.1
2.7
N.A.
N.A .
NA.
N.A.
N.A.

Note: Data represents fiscal years. Education Management was a publicly held company until being taken private on June 1 , 2006. N.A . - Not
Available.
Source: BMO Capital Markets and company reports.

Some school s p ay

Use variable instructio nal pay. While this may not necessarily help in margin
percentages. it certainly can help maximize margins in doiJars. American Public
Education (APEI) uses this model, paying instructors $130 per student in undergmduate
courses and $150 per student in gmduate courses. The maximum pay per course is
$2,500. Given the majority of its faculty are adjtmct, rather than full-time professors, it is
relatively easier for the company to follow this policy.

Optimize real estate costs. Over the past two years, DeVry (DV) has made significant
strides in this line item. reducing its "Cost of Educational Services" as a percentage of
revenues to 45.7% in FY2009 from 52% in FY2007 (excluding allocated stock-based
compensation). One method employed was its "real estate optimization" program, in
which DeVry relocated a number of progr'd.IDS and administrative staff together in
existing underutilized fac ilities. Also, IJ1e company used a number of sales/leaseback
transactions, which in and of themselves, may have increased cost of educational services
(rent may be higher t11an depreciation and amortization on the fac ility), altl1ough the
added interest income on the cash received, as well as the ex.'tra financial flexibility it
provided, should boost overall profitability.

Incorporate o nline books. The company we believe has made the biggest strides in tlus
area is Apollo Group (APOL). In March 2004, Apollo finished rolling out rEsource, its
online delivery method for course materials. While the roll-out was not wil11out
controversy. rEsource has now become Apollo's primary delivery method of course
materials. Wlule there are a number of advantages for students (e.g., real-time updates),
we estimate margins on rEsource are signi:fic~mtly higher than those made on traditional
book sales, which benefits the company. A number of otl1er companies in the space have
since rolled out their own ''e-book" options, helping reduce t11eir instructionaJ costs as a
percentage of revenues.

faculty on the
b asis of class
sizes

A listing of key i.J.lstructional cost metrics can be fmmd in Exhibit 168.

A m ember of BMO

Financial Group

175

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 168. Key Instructional Costs Metrics to Watch

Term
Instruction al costs
(i.e., educational
service s) as % of
reven ue s (1)

Definition

Postsecondary " Norms"

For-Profit "Norms"

IPEDS (Dept of Education) definition:

Includes general academic instruction,
occupational and vocational
instruction, community education,
preparatory and adult basic education,
and regular, special, and extension
sessions. Also includes expenses for
both credit and non-credit activities.

Public less than 2-Year

institutions: 51.2%

Less than 2-year institutions:

33.1%

Public 2-year institutions: 35.5%

2-year institutions: 29%

Public 4-year institutions: 23%

4-year institutions: 18%

Public company definition varies.

Student/
teach er ratio
("class size") (2)

Records the number of faculty per

student; this serves as a key metric for
quality of education. Should this ratio
spike, it could have a negative impact
on customer satisfaction. Conversely,
schools typically can improve
profitability by increasing class sizes.

Private less than 2-year

institutions: 63.4%
Private 2-year institutions: 85%
Private 4-year institutions: 22.6%

For-profit public companies

most recent annual average:
39.1% (YTD FY2009)

Public 2-year institutions: 19.2

Public 4-year institutions: 14.8
Private 2-year institutions: 21 .5
Private 4-year institutions: 12.2

Adjunct to fu ll-time Measures the ratio of adjunct (partfaculty ratio

time) faculty to full-time faculty
Note: We believe some of the higher percentage of instructional costs as a percentage of revenues for the publicly held companies reflects a difference
in accounting methodology rather than the entire amount representing a substantially higher cost structure relative to the privately held for-profit
providers.
Sources: 1) US Department of Education NCES Report 2009-155 Tables 3 and 4 (FY2007 data) and public company reports; 2) US Department
of Education NCES Digest of Education Statistics 2007- Table 237 (fall 2005 data).

Postsecondary Schools Sales and Marketing Trends

Sales and
mark eting
expense - above
25% of r evenues

for many
providers

Competition
intensified during
r ecent economic
expansion

A member of BMO

Sales and marketing expenses are a large ~md growing cost for companies in the for-profit
education space. Wllile not all companies disclose this data. it runs above 25% of revenues for
many publicly held companies, with almost half of that spent on el\.1ernal promotions and
advertising, and the remainder on internal enrollment management and direct sales expenses.
We believe this overall spending level dwarfs what not-for-profit postsecondary institutions
spend (reliable data is difficult to obtain) and is likely higher than the spending levels of most
consumer goods companies.
Nevertheless. for-profit school providers mostly have been more adept at marketing to new
students, which is a major reason we believe their enrollment growth has outpaced that of
their not-for-profit peers. However, \-ve believe the competition for new students intensified
during the most recent economic expansion driving marketing expenditures at for-profit
schools higher than in previous years. This competition not only exists between the publicly
held providers, but is also from the following:

A number of for-profit entities tllllt received funding from private equity firms (e.g. ,
Arlington Partners' Brightstar Education Group, Gryphon Investors' Gryphon Colleges),
allowing them to accelerate expansion plans.

A munber of not-for-profit providers (e.g., The Franciscan University of the Prairies, now
Bridgepoiut Education' s Ashford University) that ran into financial problems were taken
over and converted to for-profit entities, whereby marketing expenditures accelerated
dramatically.

Financial Group

176

September 2009

Postsecondary Education

BMO Capital Markets

Some of the larger public companies tlmt have been taken private (e.g., Education
Management) have actually increased marketing spend after becoming private given the ir
freedom from having to meet analysts' quarterly earnings targets.

As state and local tax collections improved, the not-for-profit sector had more capital
available to target new students, making it a more fonnidab le competitor than it has been
in many years, in our view.

Because not all the publicly held companies in tll.is space provide detail about their sales and
marketing expenses. we have analyzed total non-instmctional costs (i.e., those not directly
related to teaching students) to help set the stage for our discussion (with the caveat that not
aU these companies follow identical e:>i.-pense classifi.cations). From FY2000 to FY2008, tota l
non-instructional costs for the larger publicly held for-pro:fit postsecondary companies grew at
a 26.9% CAGR (see Exhibit 169), faster than revenues, \vhich increased over tl1e same period
at nearly a 22.6% CAGR While tll.is expense had increased as a percentage of revenues - to
38.4% in FY2007 from 28.8% in FY2000 for tl1e median of tll.is !,JToup - it remained relatively
stable in FY2008 and has fall en year-to-date in FY2009 as many companies began to gain
leverage on both selling and markellng e:"~.-penses and general and administrative e>.'J)enses.

Non-instructional
expenses had
been growing at a
faster rate than
revenues, though
that trend has
reversed recently

Exhibit 169. Total Non-Instructional Costs and as a Percentage of Revenues for Select
For-Profit Providers (FY2000-FY2009 YTD)
NON~NSTRUC110NAL

COSTS FISCAL YEAR

Company

Ticker

.American Public EWcatioo

APE I

12

Apollo Group
Bridgepoint EdJcatlon
career Education
Comtllian Colleges
Capella EdJcation
DeVry

APOL

CPLA
DV
Prtwle
LOPE
Est
LINC
STRA

8
12
12
6
12
6
6
12
12
12
12

un

Educa.tion Managemmt
Grand Canyon Education
liT Educatiooal Sei"Aces
Uncdn E<klcational seMces
Strayer Education

lkliversal Teclv'lical lnstitute

Total

BPI

CECO

coco

FYE

.E:!l!1Ql
S5.4
257.1
NA
NA
100.4
28.3
188.7
106.6
NA
129.1
66.9
33.9

~
67.3
338.3
2.3
NA
156.2
34.0
225.8
129.7
NA
148.3
91.4
42.8

.E:a!lM.

NA
$143.0
NA
NA
53.6
15.5
141.4
67.7
NA
94.2
42.3
19.1

NA
$198.4
NA
NA
71.9
23.0
167.3
78.7
NA
110.8
59.0
25.7
~

ill

$610.8

$773.2

$967.9

$1,245.0

$2,423.1

FY2000
NA
23.5%
NA
NA
31.4%
97.7%
28.8%
22.0%
NA
27,1%
51.9"h
24.4%
36.8%
28.8%

FY2001
NA
25.8%
NA
NA
29.5%
77.2%
29.5%
21.2%
NA
27.5%
55.8%
27.6%
35.0%
29.5%

FY2002
50.3%
25.5%
NA
NA
29.7%
57.1%
29.1%
21.3%
NA
28.4%
50.7%
29.0%
35.7%
29.4%

ru

58.6
468.1
4.8
738.4
220.2
49.0
275.6
173.9
20.6
199.5
122.2
53.9

~~
$11 .5
$15.8
579.9
679.3
10.3
20.9
924.0
1,004.5
259.5
326.4
63.1
75.0
300.2
320.1
210.3
310.4
27.0
35.1
194.2
216.3
136.8
149.7
64.0
84.7
112.2
.1.2.2
$2.890.8 $3,366.3

ill.Q.gl
524.0
819.9
51.9
998.0
354.2
93.9
355.3
405.9
52.1
263.8
160.5
102.1

m..z

$3,817.3

~
S36.4
987.6
120.4
966.9
383.5
108.9
418.7
519.6
89.1
296.5
184.6
128.5

llU
$4,382.2

COfnP8/IY

Ticker

FYE

APEI
APOL
BPI
CECO

12
8
12
12
6
12
6
6
12
12
12
12
9

CPLA
DV
Prtvate
LOPE
Est
LINC
STRA
U11

YTD

YTD

YTD '08.'09

f:a9.Q!

~
$23.4
865.5
95.0
493.6
421.4
64.3
542.9
625.0
56.4
168.5
120.9
73.3

~
47.5%
20.8%
95.6%
1 .6%
9.9%
19.1%
29.7%
20.3%
46.8%
16.3%
32.3%
31 .5%
7.6%
20.8%

$15.9
716.8
48.6
501.7
383.5
54.0
418.7
519.6
38.4
144.9
9 1.4
55.8
1QM.
$3,094.7

AS % OF REVENUES FISCAL YEAR

American Public Education
ApolloGcoup
Bridgepoinl EdJcaticn
Career Education
Comthlan Cdteges
Capella EdJcation
OeVry
Education Management
Grand Canyon EduC<Ition
ITI EdJcallonal SeMces
Lincdn Educational SeMces
strayer Educaticn
Unive<saiTechnicallnsfitute
Median

coco

'00.08
'04.08
~~
NA
43.4%
27.3% 20.5%
NA 123.8%
NA
7.0%
27.9%
14.9"h
27.6%
22.1%
11 .0%
14.5%
29.0%
31.5%
NA
44.3%
15.4%
10.4%
20.2%
10.9"h
26.9"h
24.3%
19.5%
12.5%
20.5%
26.9%

FY2003
41.1%
25.3%
312.3%
NA
30.6%
41.5%
33.2%
20.3%
NA
28.4%
48.8%
29.1%
34.6%
33.2%

FY2004
37.3%
26.0%
387.4%
50.1%
28.4%
41.6%
35.1%
20.4%
80.2%
32.3%
49.2%
29.4%
34.6%
35.1 %

FY2005
40.8%
25.8%
129.1%
50.5%
27.9"h
42.3%
38.5%
20.6%
52.2%
28.2%
N.A
29.0%
35.4%
36.9%

FY2006
39.5%
27.4%
73.1%
55.6%
36.0%
41.7%
38.1%
26.5%
48.7%
28.5%
48.2%
32.1%
36.9"h
38.1 %

FY2007
34.7%
30.1%
60.5%
57.1%
38.5%
41.5%
38.1%
29.8%
52.5%
30.3%
49.0%
32.1'A>
38.4%
38.4%

FY2008
34.0%
31.4%
55.2%
56.6%
35.9%
40.0%
38.4%
30.9%
55.2%
29.2%
49.0%
32.4%
41.2%
38.4%

FY2008
32.9%
31.0%
54.6%
57.7%
35.9%
41.2%
38.4%
30.9%
54.7'A>
30.1%
54.1%
28.6'A>
40.8%
38.4%

1.1ll
$3,663.9

m
FY2009
34.0%
29.9%
48.7'A>
56.2%
32.2%
41.1%
37.2'A>
31.1%
47.7'A>
27.8%
49.0%
29.3%
42.5%
37.2%

Note: Data represents fiscal years. Data used for Career Education and Corinthian Colleges excludes discontinued operations where available.
Education Management was a publicly held company until being taken private on June 1, 2006. Restated line item data was not available for
Lincoln Educational Services for 2005. We have removed stock-based compensation costs where disclosed. Source: BMO Capital Markets and
company reports.

For-profits now
spend more on
"non-instructional
costs" than notfor-profits

A member of BMO

Wll.ile at one-time, for-profit schools spent less on non-instmctional costs tl1an tl1eir not-forprofit peers, this may no longer be tl1e case, especially when one strips out hospital seiVices
expense from the not-for-profit schools, a service that most for-profits do not provide. As
shown in Exhibit 170, when looking at the category entitled academic a nd institutional
support and student services, a typical for-profit postsecondaty institution spent40.1 %-57.3%
of revenues on this line item in FY2007 (latest data available) - hig her than the not-for-profit
schools which spent anywhere from l5.6o/o-43.2% on avemge.

Financia l Group

177

September

2009

Postsecondary Education

BMO Capital Markets

Exhibit 170. Non-Instructional Costs as a Percentage of Revenues (FY2007)

Public Not-for-Profit

Revenues

Private Not-for-Profit

Private For-Profit

Less than
2-Year
100.0%

2-Year
100.0%

4-Year
100.0%

Less than
2-Year
100.0%

2-Year
100.0%

4-Year
100.0%

Less t han
2-Year
100.0%

2-Year
100.0%

4-Year
100.0%

51 ,2%
48.8%

35.5%
64.5%

23.0%
77.0%

63.4%
36.6%

85.0%
15.0%

22.6%
77 4%

33.1%
66.9%

290%
71 .0%

180%
82.0%

23.9%
0.2%
1.2%
0.0%
18.8%
44.0%

27.9%
1.5%
4.6%
0.0%
19.9%
53.9%

15.6%
15.0%
7.4%
0.0%
241%
62.1%

25.3%
4.3%
3.6%
0.0%
3.3%
36.5%

43.2%
1.6%
7.0%
2.1%
7.7%
61.5%

20.4%
8.7%
6.8%
0.4%
9.4%
45.6%

40.1 %
0.3%
2.4%
0.1%
16.1%
59.0%

50.3%
0.1%
2.6%
0.3%
9.1%
62.3%

57.3%
0.0%
2.2%
0.6%
7.6%
67.7%

4.7%

10.7%

14.9%

0.2%

-46.5%

31.8%

7.9%

8.8%

14.3%

Instructional costs
Gross margins
Non-instructional costs:
Academic and inst. support, and student svces .
Resea.rch and public service
Auxiliary enterprises
Net grant aid
Other expenses (includes hospital services)
Total non-instructional costs
Surplusfdeficit (i.e., operating margins)

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

We believe the bulk of this difference is driven by higher sales and marketing expense at forprofit schools. Willie not all companies report this expense (which includes advertising,
compensation for enrollment counselors, and other associated expenses) as a separate line
item, we believe the analysis on those that do is apropos for analyzing trends across the entire
sector.

percentage of

As shown in Exhibit 17 1, sales and marketing e>.'J)enses for these companies (where historical
data was not available) grew at a 30.8% CAGR from FY2000 to FY2008. While this e>.'J)ense
had increased as percentage of revenues- to 25.5% in FY2007 from 18.8% in FY2000- it
remained relatively stable in FY2008 and has declined for most companies in FY2009 as
many companies began to gain more productivity from recent recmitment !tires. benefited

revenues

f-rom less turnover ('"U1ere was no place else to go''), and lead costs began to moderate.

Sales and
marketing
expense is now
declining as a

Exhibit 171. Sales and Marketing Expense as Percentage of Revenues for Select ForProfit Providers (FY2000-FY2009 YTD)
SALES AND MARKETING FISCAL YEARS
UQ ~
~
~
m
Company
Ticker
FYE

American PubUc Education

Career Education

APEI
APOL
BPI
CECO

Corinthian Colleges

coco

Capella Education

lincoln Educab01al Services (est.)

CPLA
EDMC
LOPE
UNC

Strayer Education

STRA

Apollo Group

Bridgepoinl Education

Education Manageme.Grand Canyon Education

12
3
12
12
6
12
6
12
12
12

Total

~
NA
$96.5

.E:a!llU

NA.
N.A.
37.2
3 .2
N.A.
NA.
N.A.

N.A.
$150.3
N.A.
N.A,
52.3
13 .6
N.A.
N.A.
N.A,

~
$150-4

lZ.
$223.9

.E:a2.2.!!

N.A.
15.3%
N.A.
NA.
21.3%
51.5%
N.A.
N.A.
NA.
10.3%
18.3%

N.A.
19.5%
N.A.
N.A.
21 .4%
45.7%
N.A.
NA.
N.A.
13 .5%
20.5%

~
$1,4
193.9

N.A.
N.A.
70.7
15.6
NA.
NA.
N.A.

~
$2.3
2n.3
0.0

N.A.
106.5
22.2

N.A.
N.A.
N.A.

ZZ&

$303.4

$426.7

~
13.2%
19,7%

~
15.9%
20.3%
0 .0%

m!l9!
$2.2
333.1
2.3
327.6
169.9
35,1
N.A.
9.7
N.A.
~
$959.3

~
$4.0
435.5
4.1
454.0
212.0
45.6

f.X.?.!!!!S
$4.9
542.4
12.2
519.4

N.A.
14.0
N.A.

239.2
56.3
201.4
20.1
59.2

~
$1,259.3

$1,647.6

az.

~
$6.7
656.0
36.0
437.2
247.6
69.1
260.7
35.1
60,5

$1,353.6

.E:!Z!lQ!

$12.3
301.3
31.0
449.3
275.4
31 ,9
354.3
64.2
69.7

N.A.
30.3%
N.A.
N.A.
28.4%
33.3%
N.A.
N.A.
N.A.
31.4%
3D.3%

ru

$2,195.4

AS '14 OF REVENUES FISCAL YEAR

Company

Tlcl<er

FYE

American PubUc Education

career Education

APEI
APOL
BPI
CECO

12
3
12
12

Corinthian CoUeges

coco

capella E<klcallon
Grand Canyon Education
lincoln Educational SeMces (est.)

CPLA
EDMC
lOPE
UNC

Strayer Education

STRA

12
6
12
12
12

Apollo Group
Bridgepoinl Education

Education Management

Medlan

N.A.
NA.
20.9%
31.4%
N.A.
NA.
NA.
14.4%
19.7%

N.A.
20.3%
27.2%
N.A.

N.A.
N.A.
15.5%
13.1%

Wll!!i
9.5%
21.3%
13Ul%
22.3%
21.9%
29.3%
N.A.
38.0%
NA.
16.1%
22.1%

~
14.3%
21.6%
51.3%
24.3%
22.3%
30.6%

N.A.
27.1%
NA.
13.4%
23.3%

~
12.2%
21 ,9%
42.7%
23.3%
26.3%
31.3%
17.2%
27.9%
19.0%
19 .6%
24.1%

~
9.7%
24.1%
42.0%
27.9%
26,9%
30.6%
19,1%
35.4%
13.5%
18.9%
25.5%

~
11.5%
25.5%
37.1%
26.3%
25,3%
30.1%
21.0%
39.3%
18.5%
19.0%
25.6%

~
53.6%
20.3%
144,9%
8.2%
12.3%
23.6%

N.A.
60.3%
N.A.
26.5%
25.0%

~
S9.4
S4.8
579.4
693.9
33.4
63.4
236,6
239.3
275.4
293.0
40.5
43.2
441 .3
354.3
40.2
27.5
N.A,
N.A,
.;\U
.;lU
$1,535.9 $1,864.3

m!!ll!

YTO

YTO

W2!a

W2!a

9.9%
25.1%
37.6%
27.5%
25.3%
30.3%
21.0%
39.1%
NA.
16.1%
25.3'14

13.7%
23.9'4

~
97.9%
19.7%
39.5%
1,5%
6 .4%
19.0%
24.6%
46.4%

N.A.
27.0%
24.6%

32.5%

26.3%
22.4%
30.8%
21.9%
34.0%
N.A.
15.9%
23.9'14

Note: Data represents fiscal years. Data used for Career Education and Corinthian Colleges excludes discontinued operations where available.
N.A.- Not Available.
Source: BMO Capital Markets estimates and company reports.

A m ember of BMO

Financia l Group

178

September

2009

Postsecondary Education

BMO Capital Markets

The admissions process is often described as a funnel. whereby schools generate inquiries or
leads, which then are whitlled down until the potential students are admitted, ti1en enrolled,
and then actually show up for class. A graphical depiction of tllis process is found in Exllibit
172.

Exhibit 172. Admissions Funnel

Inquiry

Visit

Application

Acceptance

Enrollment

Source: BMO Capital Markets.

A number of different met.rics are used in an attempt to measure the effectiveness of sales and
marketing spending at points along tills funnel:

Cost per lead (CPL) - costs for admissions, recruiting, and marketing divided by the

ntunber of leads.

Cost per applicant - costs for admissions. recruiting. and matketing divided by the

number of applicants.

Conversion rate (" inquiry to applicant" ratio) - measures the percentage of leads that

actually are converted into applications.

Cost per accepted (CPA) - costs for adnlissions, recmiti.ng, and marketing divided by

the number of students accepted.

Lead-to-start rate ("inquiry-to-start" ratio) - measures the percentage of applications

that are converted to new shtdents.

Show rate ("yield rate") - measures the percentage of those accepted that actually enroll.

calculated as the number of enrollments divided by the number of acceptances.

A m ember of BMO

Financia l Group

179

September 2009

Postsecondary Education

BMO Capital Markets

Cost per start (CPS) (cost per enrolled, cost per new student, student acquisition
cost) - costs for admissions, recruiting, and marketing divided by tJ1e number of new

students enrolled.
We obtained benclunark data from the ~umual National Association for College Admissions
Cmmseling's (NACAC) State of College Admissions reports for not-for-profit schools on a

Not-for-profit
schools have

number of the metrics mentioned above. As shown in Exhibit 173, these costs tend to be higher
at private not-for-profit than at public not-for-profit schools, likely owing to the greater
selectively at the private schools. Nevertheless, costs have been increasing dramatically at botJ1
types of schools - although moderating a bit for the fall 2007 class- proving (at least to us) how

increased their
marketing
spending

much more aggressive the not-for-profit schools are becoming in tenus of student acquisition.

Exhibit 173. Costs to Recruit and Enroll (Fall 2004- Fall 2007)
Cost per Applicant

Total

$432

Public College
Private College

.l!lM

$442

W&

$614

Cost per Admitted

.wi

2004

2005

2006

$578

$651

$714

$880

Cost per Enrolled

.wi

.l!lM

2006

.wi

$836

$1 ,684

$1,753

$2,350

$2,366

470

594
2,146

667
2,167

1,083
2,802

1,002
2,895

217
533

324
720

343
668

299
805

328
867

463
1,034

9n

Change from prior year:

Total
N.A.

2.2%

39.0%

-5.9%

N.A.

9.7%

23.2%

-4.9%

N.A.

4.1%

34.1%

0.7%

N.A.
N.A.

13.5%
-0.9%

49.5%
35.1%

5.7%
-7.2%

N.A.
N.A.

10.0%
7.7%

41 .1%
19.4%

1.5%
-5.6%

N.A.
N.A.

12.3%
1.0%

62.20~

29.3%

-7.4%
3.3%

191
538

Public College
Private College

N.A.- Not Available. Source: NACAC (National Association for College Admission Counseling) Annual State of College Admissions.

Unfortunately, it was difficult to obtain similar benclunark data for the for-profit sector.
However, we attempted to calculate cost per start (CPS) for the publicly held for-profit
providers where infom1ation was available (i.e., sales and marketing expenses and number of
starts). While we acknowledge the linlltations of tlris ~malysis (i.e., sales and marketing
expenses in one year may actually lead to starts in the following period. only a handful of
companies report both starts and sales ~md marketing data), we nevertheless it can y ield some
meaningful insights.
Costs per start
vary dramatically;
APE/ is lowest
owing to military
focus

As shown in ExJubit 174, cost per start in FY2008 varied dramatically from a low of $334 for
American Public Education (APEI) to a high of $4.596 for Education Management (estimated).
Wlrile tl1e data for APEI represents the cost per new course registration, as opposed to new
student (i.e., if a student takes two courses. it is considered two course registrations), we
nevertheless believe APEI's costs per start are dnunatically lower thru1 the other publicly held
providers~ APEI's mil itary focus helps it gain marketing efficiencies, in our v iew, in that it
targets Education Service Officers. who serve on military bases as cenlral repositories for
educallon-related sources, as opposed to the military personnel themselves. While we expect
APEI's cost per start to continue to rise as it focuses on e>.."J)rulding its presence in the civilian
market (it has in FY2009 to date). it will not likely approach the levels of the other publicly held
providers. We note that costs per start for most otl1ers in the group have declined in FY2009 to

date.

A member of BMO

Financial Group

180

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 174. Cost per Start for Select For-Profit Providers (FY2000-FY2009 YTD)
Company

Ticker

Am erican Public Education

APEI
APOL
BPI
CECO

AponoGroup
Bridgepoint Education

career Education
COfinthian College-s
Education Management (est).
linc~n

Educational s.er...iees (est.)

coco

FYE
12
8
12
12
6

$1,629

N.A.
N.A.
N.A.
N.A.
$1,875

EOMC
LINC

N.A.

N.A.

N.A

N.A.

N.A.

N.A

2,504
2,196
5,717
2,764
4,045

12

JUt.

JUt.

JUt.

JUt.

JUt.

JUt.

N.A.
N.A.
N.A.
N.A.
$1.510

$1,510

MEDIAN

N.A.
N.A.

N.A.
N.A.
N.A.
N.A.

$1,574

$1,574

N .A

N.A.

$1,629

$1,875

N.A.
N.A.
N.A.

N.A.
N.A.
N.A.

$4,123
2.311

S2.99a

1,925

$2,461

$3,217

$338

$2,620

$272
2,538
2,386

4,729
2.791
4,260
,U!l;),

$2,536

$334

2,782
2,224
4,388
2,748
4,596
~

$2.748

:9.2:Ql!

:2..:!!!!

CAGR
N.A .
N.A.
N.A

CAGR

ll!l

N.A.

N.A.

FY2008
$292
2.825
1,973
5.119
2.748
4,596

JUt.

:J...Uf.

JUt.

N.A.

7.8%

7.8%

-0.6%
5.4%
0.7%
12.4%
0.3%

.0.4%

$2,787

ll!l

FY2009
$434
2,734
2,018
4.489
2,497
4,499

JUt.

ll!!ll,
48.6%
3.2%
2 .2%

12.3%
9.1%
2.1%

JUt.

$2,615

2.7%

Note: Data represents fiscal years. Data for American Public Education represents costs per new course registration . Data used for Career
Education and Corinthian Colleges excludes discontinued operations where available. N.A. - Not Available.
Source: BMO Capital Markets estimates and company reports.

On the whole, we believe costs per start peaked for the industry over the past two years and have
been trending downward since. This can be attributed to two factors, in our view:

Co s ts per s tart
h ave s tarted to
declin e

Lower advertising costs (at least on a per-start basis)

Greater internal efficiencies

Wlri le advert)sing tends to be less than half of the total selling and marketing budget, it has
gotten the most investor attention in recent years as it appears to be escalating at a faster rate
than most other expenses. Fortunately, several companies report their advertising costs on an
annual basis - even those that do not break out sales and marketing expenses. As shown in
Exhibit 175, willie there is limited historical data, advertising expenses increased dnunatically
in tllis decade, rising as a percentage of revenues to a medi~m 11.5% in FY2008 from 5.3% in
FY2000. By comparison, consumer goods !:,riant Procter & Gamble (PG) spends roughly 10%
of revenues on advertising costs. We note this percentage has decreased for many
postsecondary providers in FY2009 to date, owing to a softer advertising market.

Advertising - on e
of fastest growing
sales and
marketing costs

Exhibit 175. Advertising Expense and as a Percentage of Revenues for Select For-Profit
Providers (FY2000-FY2009 YTD)
ADVERTISING COSTS FISCAL YEARS
Company
American Public Education

Ticker

APEI
APOL
BPI
CECO

Apollo Group
Brldgepolnt Education
career Education
Coronthian Colleges
Capella Education

FYE
12
8
12
12

coco

CPLA

12

DeVry
Education Management

DV
Private

6
6

Grand Canyon Education

lincoln Educational Services
Universal Technical Institute
Total

LOPE
LINC
UTI

12
12
9

~~
N.A.
N A.
N,A.
$94.5
N.A.
N.A.
N.A.
N.A.
$31.7
43.8
N.A.
8.7
N.A.
N.A.
20.5
29.2
N.A.
N.A.
N.A.
14.3
5.0
5.7
$57.2
$196.2

~~
N.A.
$0.7
$126.5
174 .6
NA
N.A.
N.A.
164.7
63. 1
104.6
12.2
17.8
N.A.
NA
35.0
46.2
N.A.
NA
17.5
22.3
7.9
12.0
$262.2
$542.9

~
$ 1.8
224.0
1.5
218.0
133.3
22.9
88.2
63.5
3.4
25.6
16.2
$798.3

~
N.A.
N.A.
N.A.
N.A.
13.0%
N.A.
N.A.
5.5%
N.A.
N.A.
4,6%
5.5%

FY2003
N.A.
9.4%
N.A.
N.A.
12.3%
15.0%
N.A.
5.5%
N.A.
9.3%
4.0%
9.4%

~
3. 1%
9.7%
NA
11.2%
13.5%
15.1%
NA
5 4%
NA
9.0%
4.7%
9.3%

~
4.5%
9.3%
17.5%
14.4%
16.3%
16.8%
12.8%
7.8%
6.5%
9.3%
6.6%
9.3%

$1 .8
231 .6
5.0
260.7
148.4
30.3
107. 1
91.4
4.7
28.9
22.8
$932.7

mQ.2
E!lQQl
$2.9
$6.4
277.7
325.4
15. 1
26.9
255.8
250.5
156.0
152.8
35.1
42.5
112.6
135 1
132.4
180.8
10.2
18.5
31.1
33.8
27.3
26.4
$1,053.0 $1,202.3

AS % OF REVENUES FISCAL YEAR

FYE
12

Company

Ticker

American Public Education

Apollo Group
Brldgepoint Education
Career Education
Corinthian Colleges
Capella Education

APEI
APOL
BPI
CECO
COCO
CPLA

DeV~

DV

Education Management
Grand Canyon Education
lincoln Educational Services

Private
LOPE
LINC

12
12

Universal Technical Institute

UTI

Median

8
12
12
6

12

~
N.A.
9.4%
N.A.
N.A.
13.0%
17.5%
N.A.
5.8%

NA.
10.8%
3.9%
10.1 %

6.2%
10.0%
18.9%
11.9%
14.3%
15.3%
11.3%

6.2%
6.6%
8.9%
5.2%
10.0%

E!lQQl
4.2%
10.2%
17.6%
14.6%
16.6%
15.5%
12.1%
9.7%
10 .3%
9.5%
7.7%
10.3%

mQ.2
6.0%
10.4%
12.3%
14.7%
14.6%
15.6%
12.4%
10.7%
11.5%
9 .0%
7,7%
11.5%

~
~
72.9%
16.8%
N.A.
11.1%
10.5%
24.3%
N.A.
40.6%
N.A.
11.0%
21.8%
19.3%

mQ.2
NA
NA
$1 1.8
130.8
156.0
NA
135.1
180.8
N.A.
NA
20.2
$634.7

N.A
N.A
$ 18.3
141 .9
150.0
N.A
179.4
218. 1
N.A.
N.A.
18.4
$726.1

r!Q

r!Q

FY2008
N.A.
NA
13.3%
15.0%
14.6%
NA
12.4%
10.7%
NA
NA
7.8%
12.8",>

~
N.A.
N.A.
9.4%

:.u..!Jg.
NA.
NA.
55. 1%
8.5%
-3.8%
N.A.
32.8%
20.6%
N.A.
N.A.
-9.1%
14.6%

16.2%
11.5%
N.A.
12.3%
10.8%
N.A
N.A
6.9%
11.2%

Note: Data represents fiscal years. Data used for Career Education and Corinthian Colleges excludes discontinued operations where available.
Education Management was a publicly held company until being taken private on June 1, 2006. N.A. - Not Available. Source: BMO Capital
Markets and company reports.

A m ember of BMO

Financia l Group

181

September

2009

Postsecondary Education

APOL and ESI are

among largest US
media spenders
across all
industries

BMO Capital Markets

These increased spending levels have raised the ranking of certain for-profit companies among aJI
US companies. Each year, Advertising Age lists the Top 200 Megabrands, a ranking of goods and
services under the same brand name by measured media spending in t11e US. Apollo Group's
(APOL) University of Phoenix firSt made the list in 2003. joined by m Educational Services
(ESI) in 2005. Over those periods, University of Phoenix has moved from number 177 (2003) to
munber 128 (2008), while m Educational Services has moved from munber 192 (2005) to
nwnber 124 (2008) (see Exhibit 176). In the 2008 (latest) ranking, EST and APOL spent $137
million and $134 million, respectively, more than such household names as Domino's Pizza ($124
million) and Pfizer's Viagra ($121 million).

Exhibit 176. Apollo Group (APOL) and ITT Educational Services

(ESI) Media Spending (2003-2008)
0 University of Phoenix (APOL) I!I ITI Educational Services (ESI)

$150

e
~

120

C)

c:
'5
c:
~

..
..
:;
....

90

<II

'i:E

60

"0

30

:E

2003

2004

2005

2006

2007

2008

Source: Advertising Age.

We believe some of the increase in advertising expense tllis decade is related to the overaJI increase
in advertising costs, which is typicaJly cyclical. As shown in Exhibit 177, US advertising spending
grew at a 3.3% CAGR to $204 billion in 2007 from $167.8 billion in 2001. However, the US
recession has taken its toll on this indust:Iy - and will likely continue to - with revenues ex-pected
to decline to $157.9 billion (8.2% CAGR) in 2010 before rebounding t11ereafter. Much of U1is
decline is exacelbated by pricing pressure as advertising providers attempt to hold on to gained
share (or potentiaJly gain share) at the ell:pense of their competitors.

Chan ges in
advertising costs
are cyclical

Exhibit 177. US Advertising Spending (1980-2014E)

~!~~!~~!~Total

$250

advertising -+-yly% change

20"-'>
15%

:0
.5
~

"'c

..

200

10%
5%

150

0%

:0
c

0.

"'c
"'u

100

-6%

VI

1
0
1-

..

-10%

50

-15%
0

20%

Note: Shaded area represents recessionary period. Source: MAGNA Media Advertising Forecast.

A member of BMO

Financia l Group

182

September 2009

Postsecondary Education

But online
advertising is still
growing

BMO Capital Markets

However. Uris masks U1e secular trend of the increase in online advertising - an iJ1dustry that really
only began to develop in the mid-1990s. WiU1 the growU1 in search engines and other related tools,
online advertising has been able to !,>row through the last two recessions (albeit at slower rates
during the downturn) and is projected to generate $23 billion in revenues. or roughly 14.3% of
total US advertising spending in 2009 (see Exlubit 178).

Exhibit 178. Online Advertising Spending as Percentage of Total

(1996-2014E)
ll!l!lliiOnline advertising

~As %

of total

$35

25%

30
20%
:Q

.:

25

"'c

20

X.

15

10

15%

"'

,....0

~
0

:0

;;e
10%

<

5%
5
0

1996

2000

2002

2004

2006

2008

201 0E

2012E

2014E

Note: Shaded area represents recessionary period. Source: MAGNA Media Advertising Forecast.

Internet - fastest
growing source of
new students

Over the past decade, we have seen a dramatic increase in the usage of online advertising
sources by for-profit schools. A number of t11e publicly held companies disclose their new
student enrollment by source. As shown in Exhibit 179. t11e internet has been t11e fastest growing
source of new sttJdents, taking share from such old media sources as TV, print, and radio, as
well as referrals. We believe the intemet will likely become the top source of leads for most
companies in tlris sector over the ne)..1 few years (it is already for tl10se companies with a larger
online presence, such as APOL and CECO).

A m ember of BMO

Financia l Group

183

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 179. Sources of New Students for Select For-Profit

Providers (FY2002-FY2009)
~

TV/Print/
Radio

Referral

High
School

Direct
Mail

27%
36%
44%
63%

25%
26%
20%
12%

21%
20%
19%
16%

10%
6%
4%
3%

9%
6%
4%
2%

66%
68%
70%
71%

16%
15%
11%
9%

12%
12%
14%
14%

3%
3%
3%
2%

Corinthian Colleges (COCO):

FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009

6%
10%
18%
21%
28%
32%
33%
35%

46%
41%
34%
32%
29%
26%
26%
25%

30%
30%
28%
29%
27%
28%
27%
26%

Education Management (private):

FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008

25%
25%
30%
35%
57%
68%
73%

20%
20%
16%
12%
5%
3%
3%

32%
32%
30%
30%
9%
7%
6%

Period
Career Education (CECO):
CY2002 (old CECO)
CY2003 (old CECO)
CY2004 (old CECO)
CY2005 (old CECO)
CY2005
CY2006
CY2007
CY2008

(new CECO)
(new CECO)
(new CECO)
(new CECO)

Other

Total

8%
9%
4%

100%
100%
100%
100%

2%
1%
1%
1%

1%
1%
1%
3%

100%
100%
100%
100%

N.A.
N.A.
N.A .
N.A.
N.A.
N.A.
N.A.
N.A.

9%
6%
6%
5%
5%
4%
4%
4%

9%
13%
14%
13%
11%
10%
10%
10%

100%
100%
100%
100%
100%
100%
100%
100%

18%
18%
17%
17%
22%
18%
15%

3%
2%
2%
2%
3%
1%
1%

2%
3%
5%
4%
4%
3%
3%

100%
100%
100%
100%
100%
100%
100%

60,(,

Source: BMO Capital Markets and company reports.

Advertising costs
had been
increasing
dramatical/y
earlier this decade

But recession has

moderated this
trend

A m ember of BMO

While advertising costs have always been an import~mt component in the cost stmch1re of forprofit companies, in mid-2004 many of the public companies began noting increasing
advertising costs as a source of earnings pressure. This was partially attributed to the
presidential, state, and local election frenzy at that time, but it is apparent that the trend began
before the election and continued thereafter. Given that most for-profit school operators then
had already begun to shift a greater portion of their advertising budget to the internet- along
with many other consumer-focused industries - it is not surprising that advettising costs
remain a greater component of the marketing mix.
However, over the past year or so. many providers have cited relatively lower advertisingrelated costs. Not onJy has this been apparent for those purchased via traditional media
internet leads, but even for internet leads as well, as economic pressures have many thirdparty advertisers increasing their exposure to the education sector- one of the largest buyers
of interactive leads- with this increased competition holding back increases in lead prices. As
sucl\ costs per lead for m~my companies have been flat and, in some cases. even declined.

Fin an cia l Group

184

September 2009

Postsecondary Education

Some companies
"backward
integrated" by
purchasing leadgeneration
providers

BMO Capital Markets

In addition. other companies have taken actions on their own to rein in these costs. Among the
most aggressive is Apollo Group (APOL), which arguably spends more on internet
advertising than any other company in the space and is one of the top internet advertisers
overall. Prior management publicly stated plans to reduce selling and promotional expense to
21%-22% of revenues (tll.is metric, excluding stock-based compensation peaked at 25.5% in
FY2008, wll.ile we project it will decline to 24.4% in FY2009). In October 2007. APOL
purchased online advertising network Aptimus for $48 million in a move to essentially insource this spending and keep a lid on these costs (tllis purchase also signaled to us that its
February 2006 decision to enter into an exclusive relationship with Advertising.com' s affiliate
network may not have worked out as initially hoped). Since then, other "lead-generdtion
providers" have been purchased by postsecondary providers, including the October 2007
purchase of CourseAdvisor by The Wasll.ington Post Company (WPO). owner of Kaplan
Higher Education.
We note the trade-off between advertising spending and enrollment growth could be
substantial, and those companies that focus on managing these costs for the near term could
be sacrificing future top-line growth. Nevertheless. ""''hile the for-profit sector was once
notorious for its " if you spend it, tl1ey will come" mentality, we no longer believe that to be
the case.

Cost per lead and

conversion rates
can vaty

A m ember of BMO

Historically, most investors were concerned with costs per lead (CPL), wllich have been rising
by specifi.c media type along with increasing advertising rates. The CPL varies based on U1e
type of student being targeted (e.g., online versus campus, allied health versus MBA) and how
targeted tl1e schools wish to be (e.g., certain zip codes, age, etc.). While it may be misleading to
show specific rates, in a July 2008 presentation by Gragg Advertising, a full-service directresponse marketing agency t11at specializes in the career college sector, CPLs and conversion
rates were provided based on the company's recent experience by school type. As shown in
Exhibit 180, there is a wide range of costs and lead conversion rates by school ty pe.

Financial Group

185

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 180. Cost per Lead and Conversion Rates for Career
Schools (2008)
Cost per lead
Type
Onli ne undergraduate
Onli ne graduate
Ground undergraduate
Ground graduate
Total
Conversion rates
Type
Interactive lead
Pay per lead: online
Pay per lead: ground

Average

Low

High

$60.00
$89.00
$47 .00
$67.00

$32.50
$37.50
$32.50
$37.50

$87.50
$112.50
$87.50
$89.50

$69.00

Average

Low

High

9.0%
3.0%
6.0%

3.0%
1.3%
2.0%

33.0%
5.0%
13.5%

Source: Gragg Advertising.

At one time. internet CPLs were less than half the rates of U1ose from traditional lead sources. but
that price gap has narrowed as internet CPLs have increased in recent years (up nearly 200% from
2005 to 2008. according to one school representative we spoke with). Typically, as intemet leads
are considered lower quality (i.e.. student less focused on one particular school), admissions
representatives must work harder to convert these leads, taking up more of tl1eir time per lead,
likely making t11ese folks less productive when measured by tl1e number of leads they converted
witl1in a specific timefnune. As such, internet leads typically convert at lower rates when compared
witl1 leads from traditional media sources.
Conversion rates for intemet leads tend to vary ~md f'dllge between 3% and 9%, depending on
whether the lead is generated by networks that obtain single leads for multiple schools (known as
co-ref:,>istered), which have lower conversion rates, or obtain leads from a school's website, which
tend to convert at higher rates as these students are likely more focused on attending a specific
school. Many companies provide leads for postsecondary schools (to be discussed in detail later in
this report), aiU1ough a number of school operators have stated the quality of these leads can vary
greatly.
Willie advertising has gotten the most attention. non-advertising costs, such as enrollment
management, marketing, and direct sales, are roughly half of total sales ~md marketing
expense for postsecondary providers. according to Eduventures. An analysis of t11e data for
ilie public companies t11at disclose both sales and marketing, and advertising expense shows
that non-advertising expenses have increased at a 22.1% CAGR from FY2005 tluough
FY2008 ~md for most companies represented more than half of sales and marketing expenses
(see Exhibit 181). Therefore, we believe it is important for investors to understand trends in
these expense components.

A m ember of BMO

Financia l Group

186

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 181. Non-Advertising Expense as Percentage of Sales and Marketing and

Revenues for Select For-Profit Providers (FY2001-FY2009)
:.Q..:Q!

NON-ADVERTISING EXPENSES

Company

Ticker

American Public Education

APEI

Apollo Group
Bridgepoint Education

FY2001

FY2002

FY2003

12

N.A

N.A.

N.A.

APOL

N.A

$104.4

$ 145.8

FY2004
$1.5
208.5

BPI

NA.

N.A.

N.A.

NA

N.A.

N.A.

26.9
6.9

43.4
10.0

162.9
65.3
17.3

N.A.

N.A.

N.A .

FYE

FY2005
$23
261.5

Career Education

CEOO

12
12

Corinthian Colleges

coco

Capella Education

CPLA

12

NA

Education Management

Private

N.A.

Grand Canyon Education

LOPE

N.A .

N.A.

NA

10.6

LINC

12
12

NA

Lincoln Educational Services

N.A.

NA

NA

N.A.

NA

N.A

$20.6

N.A

2.6
236.0
78.7
22.8

FY.2006
$3.1
310.8
7.2
258.7
90.8
26.0
110.0
15.4
30.3

FY2007
$3.8
378.3

94.8

FY2008
$5.9
476.4
54.1
198.8
119.4

34.0
128.3
24.9
29.4

39.4
173.5
45.7
35.9

20.9

231.4

CAGR

FY2008

FY2009

37.0%
22.1%

N.A .

N.A .

175.9%
-5.6%
14.9%

N.A.

$21 .6
108.5
119.4

N.A.

$45.1
93.7
143.0

20.0%

N.A.

N.A .

173.5

62.6%

N.A.

N.A.

N.A .

N.A.

N.A.

N.A.

N.A

N.A.

223.2

22.1%

Median

AS A% OF SAlES AND MARKETING EXPENSE

American Public Education

APE I

12

N.A

N.A.

N.A.

Apollo Group

APOL

N.A.

52.5%

53.6"-'>

67.5%
54.4%

Bridgepoint Education

BPI

12
12
6
12
6
12
12

N.A.

N.A.

N.A

N.A.

Career Education

CECO

Corinthian Colleges

coco

Capella Education

CPLA

Education Management

Private

Grand Canyon Education

LOPE

Lincoln Educational Services

LI NC

Median

N.A

N.A.

N.A.

39.4%
NA

38.1%
44.3%

40.7%
44.9%

49.7%
38.4%
49.2%

56.6%
53.9%
63.2%
52.0%
37.1%
49.9%

N.A.

N.A.

N.A

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

75.6%

NA

N.A.

NA

NA

NA

39.4%

44.3%

44.9%

49.7%

53.9%

6.4%
11.6%

62.8%
57.3%
59.1%
49.8%
38.0%
46.2%
54.6%
76.7%
66.3%
57.3%

56.6%
57.7%
58.1%
47.5%
38.3%
49.2%
49.2%
70.9%
54.1%
54.1%

47.9%
59.4%
66.8%
44.2%
43.3%
48.1%
49.0%
71.1%
44.0%
48.1%

7.6"-'>
12.5%
25.2%
14.3%
10.0%
14.4%
9.4%
21.4%
4.0%
12.5%

5.5%
13.9%
24.4%
13.2%
10.3%
15.0%
9.4%
25.1%
3.4%
13.2%

5.5%
15.2%
24.8%
11.6%
11.2%
14.5%
10.3%
28.3%
3.5%
11.6%

N.A.

N.A.

64.7%
45.4%
43.3%

71.1%
39.8%
48.8%

N.A .

N.A.

49.0%

50.6%

N.A .

N.A .

N.A.

N.A.

47.2%

49.7%

AS A% OF REVENUES
American Public Education

APEI

Apollo Group

APOL

Bridgepoint Education

BPI

Career Education

CECO

Corinthian Colleges
Capella Education

COCO
CPLA

Education Management

Private

Grand Canyon Education

LOPE

Lincoln Educational Services

LINC

12
8
12
12

N.A.

N.A.

N.A.

N.A.

10.3%

10.9%

N.A.

N.A.

NA

NA

N.A.

N.A.

N.A.

8.5%

12
6
12
12

NA

8.0%
13.9%

8.5%
12.2%

11.1%
8.4%
14.7%

8.1%
11.6%
32.4%
12.9%
8.5%
15.3%

N.A.

N.A.

N.A.

N.A.

N.A.

Median

N.A.

N.A.

N.A

N.A.

20.5%

NA

N.A.

N.A

N.A

N.A.

8.5%

10.3%

10.9%

11.1%

12.9%

N.A .

N.A .

N.A.

N.A.

24.3%
12.5%
11.2%

23.1%
10.7%
10.9%

N.A.

N.A.

10.3%

11.1%

N.A.

N.A.

N.A.

N.A .

11.8%

11.0%

Note: Data represents fiscal years. Data used for Career Education and Corinthian Colleges excludes discontinued operations where available.
NA- Not Available. Source: BMO Capital Markets and company reports.

While most public companies in this space have some sort of national marketing function that
typically aids research, strate!,>y, and national recmitment efforts (e.g., high school recmiting),
this is typically supplemented with on-site directors of admissions and recmitment staff at
each campus. We believe the largest portion of non-advertising sales and marketing expenses
relates to compensation for recruiters (sometimes caiJed admissions or enrollment advisors or
represenlatjves). According to Eduventures, Ute typical recruiting staff person working for a
for-profit postsecondary provider interacts with 500-1,500 leads per year :md is expected to
convert 10%-15% of these prospects into students.

A member of BMO

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187

September

2009

Postsecondary Education

Sales and
marketing s taff
costs for not-forprofits are up
2.8% annu ally
since FY2005;
likely higher for
for-pr ofits

BMO Capital Markets

We were unable to obtain typical salary data for tl1e marketing functions at for-profi t
companies. However, the CoUege and University Association forHmnan Resources (CUPAHR) compiles an arumal salary smvey for the non-profit sector. We have compiled some of
the data related to what we believe would be employee categories included in sales and
marketing expense in Exhibit 182. As shown, the median costs for these positions rose, on
average, 2.9% annually between FY2002 and FY2008 (2.8% over t11e past four years). We
believe these salaries provide a proxy for salaries in the for-profit postsecondary space,
alt11ough it is likely that the for-profi ts would pay somewhat higher salaries commensurate
with the greater importance they place on recmiting new students. As a reminder, both forprofit and not-for-profit institutions whose students are eligible for Title IV funding (federally
fm<mced student lmms and grants) are prohibited from providing incentive compensation to
their employees based on enrollment levels.

Exhibit 182. Median Salaries for Typical Sales and Marketing Positions (FY2002-2003 to
FY2008-2009 School Years)
Title/Category Number
Director, Marketing (8054)
Chief Admissions Officer (1044)
Associate Director, Admissions (2076)
Director, Admissions and Registrar (2077)
Director, Admissions and Financial Aid (2081)
Chief, Enrollment Management (1045)
Admissions Rep-High School Relations (2576)
Median

FY2002.03 FY2003-04 FY2004-05 FY.2005-06 FY2006-07 FY2007.08 FY2008-09

N.A.
N.A.
$65,394
$68,250
$72,100
$74,940
$77,126
$66,978
$70,000
70,216
75,000
75,920
78,978
83,294
46,221
47,000
49,110
51,945
52,316
53,150
54,785
64,721
62,960
62,899
68,108
67,440
69,431
70,065
75,022
78,250
83,757
90,000
94,700
91,776
93,953
N.A.
N.A.
96,250
99,920
104,000
106,322
112,044
29,916
30,160
31,544
32,049
32,392
33,139
33,957

CAGR
FY02-03 to
FY04-05to
FYOB-09
~
N.A.
4.2%
3.7%
4.4%
2.9%
2.8%
1.3%
2.7%
3.8%
2.9%
N.A.
3.9%
2.1%
1.9%
2.9%
2.8%

Note: Data represents fiscal years. N.A. - Not Available.

Source: College and University Association for Human Resources (CUPA-HR) Annual Salary Survey.

A number of different tenus are used when measuring the effectiveness of sales and
marketing expenses. We have outlined them in Exhibit 183 below a long with some typicaJ
bencbmarked costs.

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Postsecondary Education

BMO Capital Markets

Exhibit 183. Key Sales and Marketing Metrics to Watch

Term

Definition

Postsecondar y " Norms"

For -Profit " Norms"

Sales and marketing

expenses as % of
revenues (1)

Public company definition varies, but typically

includes compensation for enrollment advisors
and corporate marketing, advertising costs,
production of marketing materials, and other
selling and promotional costs.

N.A.

For-profit public
companies most recent
annual average: 23.9%

Lead flow

Measures the number of leads generated from

media (new and traditional) and referrals.

N.A.

N.A.

Cost per lead

Costs for admissions, recruiting and marketing

divided by the number of leads.

N.A.

All non-profit institutions: $578

Cost per applicant (3) Costs for admissions, recruiting and marketing
divided by the number of applications.

$32.50-$112.50 (2)

N.A.

Public college: $343

Private college: $668

Conversion
rate (4 )

Measures the percentage of "leads" that actually

are converted into applications. Also known as
the "inquiry to application" ratio .

Public 4-year institutions: 33% (up

from 22% in 2001 )
Private 4-year institutions: 13% (up
from 9% in 2001)

N.A.

Acceptance
rate (4)

Measures the percentage of students that apply

to a school that are actually accepted.
Calculated as number of acceptances divided
by number of applications. Also known as a
selectivity ratio or "applications to admit" ratio .

Public 4-year institutions: 66%

N.A.

Costs for admissions, recruiting , and marketing

divided by the number of students accepted.

All non-profit institutions: $836

Cost per accepted

student (3)

Private 4-year institutions: 71%

N.A.

Public college: $470

Private college: $977

Lead t o adm it rate (4) Measures the percentage of applications that

are converted into admitted students. Also
known as the "inquiry to admit" ratio . Can be
calculated by multiplying "inquiry to applications"
ratio by "application to admit" ratio .

Public 4-year institutions: 22%

Show rate (4)

Measures the percentage of those accepted that

actually enroll. Calculated as number of
enrollments divided by number of acceptances.
Also known as a yield rate or "admit to enroll"
rate.

Public 4-year institutions: 38% (down

from 46% in 2001)

Costs for admissions, recruiting , and marketing

divided by the number of new students enrolled.
Sometimes referred to as "cost per start," "cost
per enrollee," or "student acquisition cost."

All non-profit institutions: $2,366 (3)

Cost per start (new

student)

N.A.

Private 4-year institutions: 9%

N.A.

Private 4-year institutions: 31%

(down from 40% in 2001)

Public college: $ 1,002

Private college: $2,895

For-profit public companies

most recent annual
average: $2 ,615 (YTD
FY2009) (1)

Note: N.A. - Not Available. Sources: (1) BMO Capital Markets calculation for FY2009 to date based on company reports. (2) Gragg Advertising July
2008 presentation. (3) National Association for College Admissions Counseling (NACAC) State of College Admissions Report (2007-2008 data) (4)
2008 Admissions Funnel Report conducted by Noel Levitz.

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BMO Capital Markets

Postsecondary Schools New Campus Opening and Relocation

Trends
Opening new locations and/or expanding existing locations is a common method used to
foster organic growth. As there are some regulatory restrictions (e.g., obtaining state licensing
approval). the process may take some time, especially when entering a new state.
Most for-profi t "campuses" are relatively small (typically 20,000-40,000 square feet),
typically located in existing facilities rather than stand-alone locations. and average a few
hundred students; as such, they usua lly require minimal capital expenditures. However, for
certain progr<ci.IDS, such as auto tech, locations are larger (well over 100,000 square feet) and
greater capital outlays may be needed to properly equip the facility. For example, a typical
new campus for auto-tech education provider Universal Technicallnstitutes (UTI) requires an
initial capital outlay of roughly $4-$5 million, with about half spent prior to opening and tJ1e
remainder during U1e first year of opera.tions.

Min imal capital

outlays except for
certain programs

In Exhibit 184, we have provided a list of the capital expenditures as a percentage of revenues
for a select group of for-profit providers. As shown, the median capital expenditures as a
percentage of revenues declined from FY2004 to FY2006 (from 9.1% to 5.3%) as many
companies in the space were focused on backfilling existing capacity ra.tber than adding new
seats. (We note the data may be a bit skewed by including Grand Canyon Education [LOPE]
on this list for the first time in FY2004 which was a heavy investment year for the company:
excluding LOPE, t11e median for the group was 7.7% in FY2004). While t11e percentage
spiked a bit in FY2007 as some companies began to invest again (perhaps anticipating the
oncoming recession and likely increase in demand), the median has remained in the low 5%
r.mge since then. We note that comp<mies that offer capital-intensive programs, such as the
auto-tech programs offered by Universal Teclmical Institute (UTI). tend to have higher capital
expenditures as a percentage of revenue (although a slowdown in investments by UTI has
brought their level closer to the industry median in recent years).

Capital spending
varies by program
type; more
"hands-on"
programs (e.g.,
au to-tech) are
higher

Exhibit 184. Select For-Profit Postsecondary School Operators Capital Expenditures as

a Percentage of Revenues (2000-2009 YTD)
Company
American Public Education
Apollo Group
Bridgepoint Educatton
career Education
Corinthian Colleges
capella Education
DeVry
Education Management
Grand canyon Education
ITT Educational Services
Lincoln Educational Services
Strayer Education
Universal Technical Institute
Washington Post
MEDIAN

Ticker
APEI
APOL
BPI
CECO

coco
CPLA

rN
Private
LOPE
ESI
LING
STRA
UTI
WPO

FYE
12
8
12
12
6
12
6
6
12
12
12
12
9
12

FY2000
N.A.
5.7%
N.A.
N.A.
2.4%
28.2%
8.3%
16.3%
N.A.
8.5%
2.7%
5.6%
3.5%
N.A.
5.7%

FY2001
N.A.
6.8%
NA
N.A.
5.1%
17.7%
131%
12.8%
N.A.
5.4%
6.9%
6.8%
5.0%
N.A.
6.8%

FY2002
1.6%
3.6%
N.A.
11 .1%
5.6%
7.8%
13.2"A.
9.1%
NA
7.5%
2.7%
14.7%
8.2"A.
N.A.
7.8%

FY2003
23.2%
4.2"A.
0.7%
8.5%
6.7%
4.5%
6.4%
12.6%
N.A.
7.7%
7.0%
4.7%
5.9%
5.7%
6.4%

FY2004
11 .3%
6.1%
21 .0%
9.7%
9.6%
6.4%
5.5%
9.5%
95.1%
5.7%
9.6%
6.0%
6.7%
8.8%
9.1%

FY2005
17.7%
4.2%
4.1%
6.9%
8.2%
6.1%
5.5%
7.0%
1.6%
6.8%
7.9%
5.6%
14.7%
6.8%
6.8%

FY2006
12.3%
4.5%
4.8%
3.8%
6.2%
8.5%
3.0%
5.6%
3.3%
5.6%
6.2%
5.0%
13.3%
4.2%
5.3%

FY2007
10.4%
3.8%
4.2%
3.3%
7.7%
7.1%
4.1%
70%
7.5%
3.2%
7.6%
4.7%
13.2%
4.3%
5.9%

FY2008
10.2"A.
3.3%
7.3%
3.2%
5. 1%
5.3%
5.8%
9.0%
5.2%
3.5%
5.4%
5.2%
5.2%
3.8%
5.2%

YTO

YTO

FY2008
10.6%
3.5%
2.1%
3.0%
5. 1%
5.4%
5.8%
9.0%
5.7%
4.4%
7.4%
5. 1%
5.2"k
N.A.
5.2%

FY2009
7.1%
3.3%
6.2"A.
3.4%
3.8%
5.1%
51%
7.5%
9.4%
2.3%
2.4%
5.2%
5.4%
N.A.
5.1%

Note: Data represents fiscal years. Education Management was a publicly held company until being taken private on June 1, 2006. N.A. - Not
Available. Source: BMO Capital Markets and company reports.

Most new campuses accrue start-up losses prior to opening from fi t-out costs and premarketing before t11e first student enrolls. These locations tend to be profitable within a few
months after opening, but cumulative breakeven points are generally reached within a few
months (e.g. , campus relocations \Vhere some students already exist) to over two years (e.g. ,
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large new auto-tech faci lities). While we believe the IRR of a new campus (usually over 30%)
is typically higher than that of an acquired facility , it may be advantageous to make selective
acquisitions for faster entry into a geographically or programmatically hot market.
Companies must consider a number of issues when opening a new school or relocating an
existing facility:
Lease versus buy. Typically real estate issues (e.g., price, financing options) come into

p lay here, but in certain instances tax credits become avai lable when locating a campus in
IQ'I.ver-income areas.
Hub a nd spoke. We believe Apollo Group' s (APOL) University of Phoenix (UOP)
pioneered this concept witb its " learning centers." The learning centers differ from
campuses in that they are primarily classroom facilities witb limited on-site
administrdtive staff. They are usually located in cities where the company already has

existing campuses, but are placed where a large facility may not be financia lly feasible
owing to lim.ited demand and/or :financial constraints (i.e .. inner c ity with high rents).
For-profit school s

Size of campus. When a campus is in a hot geographic market and/or offers a hot
program, it generally pays to have a larger facility to leverage a greater amount of fixed
costs. The average for-profit school served 546 students in the 2007-2008 school year,
increasing at a 10.5% average ammal rate since 2000-2001, although that rdte has slowed
in the past three years (see Exhibit 185). By comparison. the avemge public and private
not-for-profit schools, wllile much larger (at 6.788 and 1,986 students, respectively), only

have expanded
much faster than
their n ot-for-profit
counterparts

grew at average annual rates of 2.7% and 3.3%, respectively, over t11e same period. We
believe the faster increase at for-profit schools is related to more aggressive expansion
strategies. as well as a rnix shift toward more degree-granting schools that tends to be
larger than non-degree granting schools.

Exhibit 185. Average Size of For-Profit Postsecondary School

{2000-2001 to 2007-2008 School Years)
Avg. Size (in students)

600

Ja 500

546

-g
;;;
'0
0

400
300

16%

- - y/y% cha_;
ng;...
e _ _~
12% ~
c

..

348
271

307

.s::;

8%

200

.;,
~ 100

4%.

*'...

"'
E

ct

200001

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007.08

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

However. a campus expansion strategy can be haunting should demand begin to slow.
Tlus is what happened to DeVry (DV) in the early part of tll.is decade as the "tech wreck"
slowed demand for its IT programs and capacity utilization fell sharply at its "big box"
locations, creating more overhead tl1an it could easily absorb. DeVry has since shifted its
strategy away from the "big box" and toward smaller DeVry University Centers,
allowing it to expand more rapidly and witl1 relatively less risk. UniversaJ Techn.ical

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BMO Capital Markets

Institute (UTI) has been facing similar problems at some of the newer campuses it opened
in recent years, owing to slowing demand for auto-tech programs.

Temporary versus permanent Corinthian Colleges (COCO) tdkes this strategy one step
furtl1er by typically opening relatively small locations, starting \Vith a handful of students,
and targets reaching 400 students after two years. If enrollments approach those levels

and the company believes there is still urunet demand, it eitlter moves the campus to a
larger location or remodels or enJarges the existing facility. In FY2009. COCO
remodeled, relocated, or e>.-panded 10 of its 89 schools.

Shared services. Education Management followed shared-services strategy earlier this

decade in which more than one school occupies a single location, increasing campus
utilization (e.g.. day and evening) and taking greater advantage of fe\ed-cost leverage
(e.g., administrative services such as human resources and fmance). Management
believes this strategy allowed it to reach breakeven earlier, saving roughly $400,000 in
tlte first year of operations and about $1 million annually thereafter. However, under its
current management team, it no longer aggressively pursues this strategy.
Public companies
are present in all
top 50 MSAs in

A number of investors cite concerns about the rapid opening of new campuses in recent years,
potentially leading to a for-profit school ' on every street comer.' In our view, we have not
reached those levels yet, but see certain geographic locations (e.g., some Florida markets)
where tJ1ere may be a preponderance of schools run by larger providers. In Exhibit 186, we
list companies with locations in the top 50 US metropolitan statistical areas (MSA). As
shown, there is at least one for-profit school run by t11e larger providers in each of the top 50
MSAs. with a munber of areas hosting schools nm by nine of these 12 comp~mies. In addition,
Apollo Group (APOL) and ITT Educational Services (ESl) have the largest penetrdtion.
respectively covering 47 and 46 of the top 50 MSAs. While these companies may not

the US

compete head to head in every market owing to different program offerings, we believe this is
a useful tool to show current penetration and also identify potentjal targets for new campuses.

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Exhibit 186. Select For-Profit Companies Penetration in Top 50 MSAs

I

Population
CAGRfrom

Rank MSA

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
36
39
40
41
42
43
44
45
46
47
48
49
50

New Y 011<-NoMem New Jersey-long Island. NY-NJ-PA

Los Angeles-long Beach-Santa Ana, CA
Chicago-NapefVille-Joliet, I L-IN-WI
Dallas-Fort Worth-Atlinglon, TX
Philadetphia-Camden-Witmlnglon , PA-NJ.DE-MD
Hruston-9.Joar land-Ba'Jtown, TX

Mami-Fort lauderdale-Pompano Beach, Fl

AUanta.Sandy Spcings~Mari etta, GA
Washlngton-Artington-Aiexanclia , DC-VA-MD-WV
Boolon-Combridge-Quincy. MANH

Detroit-Warren-livonia. Ml
Phoenix-Mesa-Scottsdale. AZ
San Francisco-Oakfancj..fremont. CA
Riverside-San Bernardino-Ontario. CA.
Seatue-TecomaBellewe. WA
Minneapdisst. PauiBi oani n~on . MN-WI
Son Diego-C..rfsbod-San Marcos. CA

st. Lruis . MO.IL

Tampa-St. Petersll<Jrg-Cieorwater. Fl
Baltim ore-Towson. MD

Denver-Aurora. CO
PiUsb<Jrgll. PA
Port lan~Vancouver-Beavertoo.

OR-WA

Cincinnatj..Midcletown, Otf..KYIN
Sacramento-Alden-Arcade--Roseville. CA
Clevetand-Elyfio Mentor, OH

Orlando-Kissimmee. fl
San Antonio. TX
Kansas City. MO.KS

Las Vegas--Paradise. NV
San Jose-Sunnyvale-Santa Claro. CA
Columb<Js.OH

Indianapolis-Carmel. IN
Charfotte-GosloniaConcord. NC SC
Virgilia BeachNorlolkNewporf News. VA-NC
Auslin -Rrund Rock. TX
Providence-New Bedford-Fall Rivet, RIMA

Nash\41Je.Oa\lidson-Murfreesborc>-Franklin, TN
M lwaukee.Waukesha-West AJiis, WI
Jacksonville, Fl
Memphis. TN-MS.AR
LouiSIIille/Jefferson County, KY-IN
Richmond, VA
Oklahoma City, OK
Hartford -West Hartford-East Hartford, CT

New Orteans.Metairie,.Kenner, LA
Buffato.Niagara Fats. NY
Birmingham-Hoover, AL
Salt lake City, UT
Raleigh-Cary, NC
Top 50 MSA's Penetrated

7/ 1/2008
19,006,798
12,872,808
9,569,624
6,300,006
5,838,471
5,728,143
5,41 4,772
5,376,285
5,358,130
4.522.858
4.425.11 0
4.281.899
4.274,531
4.115.871
3.344.813
3.229.878
3.001.072
2.816.710
2.733.761
2.667.11 7
2.506.626
2.351.192
2.207.462
2.155.137
2.109.832
2.088.291
2.054.574
2.031.445
2.002.047
1.865.746
1.819.198
1.773.120
1.715.459
1.701.799
1.658.292
1,652,602
1,596,611
1,550.733
1,549,308
1,313,228
1,285,732
1,244,696
1,225,626
1,206,142
1,190,512
1,134,029
1.124,309
1,11 7,608
1,115,692
1,088,765

2000
0.4%
0.5%
0.6%
2.4%
0.3%
2.4%
0.9%
2.9%
1.3%
0.3A>
~. 1%

APOL
X
X
X
X
X
X
X

X
X
X
X

3.4%
0.4%
2.9%
1.1'A>
1.0%
0.8%
0.5A>
1.6"M
0.5%
1.7%

X
X
X
X

~.4%

1.7%
0.8%
1.9%

X
X
X

~.4'A>

2.7%
2.1%
1.0%

X
X
X
X
X
X
X

3. 7%

0.6"M
1.1%

1.4%
3.0A>
0.6%
3.4%
0.1%
2.1%
0.4%
1.9%
0.8%
0.8%
1.4%
1.2A>
0.4%
1.8%

BPI

coco

X
X
X

X
X
X
X
X
X
X
X
X

X
X
X
X

X
X
X

X
X
X

CECO
X
X
X
X
X
X
X

X
X
X
X
X
X

X
X
X

X
X

X
X
X
X
X

X
X
X
X
X
X
X

X
X

X
X
X
X

X
X

X
X
X
X

X
X

X
X

X
X
X

X
X

X
X

X
X
X

X
X
X

X
X

un
X

X
X

X
X
X

X
X

X
X
X

X
X

X
X

X
X
X

X
X

X
X

X
X

X
X

X
X

X
X

X
X

X
X
X
X

X
X

X
X

6
7
9
8
9
8
8
9
8
8
7
9
7
8
6
6
5
5
8
5
9
8
6
7
7
6
8
6
5
8
5
7
6
6
5
5
3
8
5
7
4
5
3
3
1
2
1
3
6
4

X
X
X
X
X

X
X
X
X

TOTAL

X
X

X
X

WPO

X
X

STRA

X
X

X
X

LOPE

X
X
X

X
X

X
X
X
X

X
X
X

~.5%

0.7%
1.7%
3.9%
1.0%

X
X
X

X
X

X
X
X
X

LINC
X

X
X
X
X
X

X
X

ESI

X
X
X

X
X
X
X
X

X
X

EDM C
X
X
X
X
X
X
X

X
X

X
X
X

DV
X
X
X
X
X
X
X

X
X
X
47

X
X

X
1

33

29

X
41

X
X

33

X
X
46

X
X
X

18

21

25

Note: Population estimates as of July 1, 2009. APEI and CPLA have no phys1cal campus locations. Sources: Census Bureau, BMO Cap1tal
Markets and company reports.

ln Exhibit 187, we highlight recent new campus opening and relocation trends for the publicly
held companies. While Apollo Group (APOL) has recently slowed its new campus openings.
lTI Educational Services (ESI) and Strayer Education (STRA) have accelerated theirs. In

addition, DeVry (DV) has been fairly active; however, it switched ils model from t11e " big
boxes" to smaller DeVry University Centers.

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2009

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Exhibit 187. Select For-Profit Postsecondary School Operators New Campus

Openings/Relocations ( 1999-2009)
Company
American Public Education
Apollo Group
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
ITT Educational Services
Lincoln Educational Services
Strayer Education
Universal Technical Institute
Washington Post
MEDIAN

Ticker
APE I
APOL
CECO

FYE
12

coco

CPLA
DV
Private
ESI
LINC
STRA
UTI
WPO

12

8
12

6
6
12
12
12

9
12

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

N.A.

N.A
3
0
2
N.A.

N.A.

N.A.
4
2
4
N.A.
2
0
4
0
3

N.A.
10
4

N.A.
11
4
(13)
N.A.
11
2
3

N.A.

N.A.

N.A
3
3
(2)
N.A.

N.A.
N.A.
4
0
N.A.

N.A.
N.A.
N.A.

6
0
0
N.A.

0
0
3
N.A.

0
0

0
0
2

5
2
4
N.A.
7
2

N.A.

N.A.

0
N.A.
3

N.A.

6
N.A.
3
0
3

0
5

0
5

0
N.A.
3

1
N.A.
3

4
(7)
N.A.
13
4
7

0
5
N.A.

9
(11)
(1 4)
N.A.
3
2
11
1

9
0
N.A.

7
10
(2)

10

9
0

0
N.A.
3

8
2

N.A.
3

0
N.A.
3
4
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.

Notes: Campus openings exclude acquisitions and are net of closures. Data represents fiscal years. Education Management was a publicly
held company until being taken private on June 1, 2006. N.A. - Not Available. Source: BMO Capital Markets and company reports.

ln recent years. a number of companies that own larger campuses (e.g.. DeY!)', Universal
Technical Institutes) employed sales/leaseback techniques to extract some value from these
somewhat under-utilized assets and take advantage of what might have been peak real estate
values in certain markets. However. t11e vast majority of campuses run by the publicly held
companies are leased, not owned, somewhat limiting this strategy. ln. addition, tlle current
downturn in the real estate market may have made this option less attractive.

Sales/leaseback
transactions

Some not-f orprofits open new

locations far from
their base

Historically for-profits bave been much more aggressive in their campus expansion strategy
than their not-for-profit peers. However, we have seen examples of some not-for-profits
(typically private not-for-profits) physically expanding beyond tJ1eir base geographical
location, albeit at a much slower pace. In addition to the international locations cited later in
this report, examples include these:

Drexel University opened a Center for Graduate Studies in Sacramento, California in

January 2009. far from its base in Philadelphia, Pennsylvania. The school hopes to build
a larger undergraduate campus nearby in suburban Roseville, California.

In 2002, Carnegie Mellon University established its Silicon Valley location by offering
software engineering programs at Moffett Field, California. the site of NASA research.

The University of Pennsylvania's Wharton School of Business established its Wharton

West cmnpus in San Fnmcisco in 200 l.

Postsecondary Schools New Program Trends

Another growth area among for-profit providers is the addition of new programs, whetJ1er
created from scratch or transplanted from existing locations. As most of l11e publicly held
providers have a centralized curricula development department, we believe this provides a
competitive advantage versus their not-for-profit peers as they cru1 create new program
offerings at faster rates (sometin1es within a few months). In addition, the un.i:fonnity of these
pro!,'l<Uns makes tl1em easier to roll out across all company locations. with usually only minor
modifications based on certain state requirements.

Centralized
cu rricula
development:
faster creation
and rollout

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We believe another competitive advantage is t11at t11e programs provided by for-profit

providers tend to be more in tune with current and expected supply/demand imbalances within
the labor force. Exhibit 188 contains a list of the ex-pected fastest-);.'TOwing occupations
through 2016. As show~ the vast majority of these jobs are either in healthcare/social
assistance or infom1ation technology and require at least some schooling to be eligible for
employment.

Fastest-growing
occupat ions health and
technology

Exhibit 188. Expected Fastest-Growing Occupations (2006-2016E)

Ran~

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

Title
Network systems and data comm. analysts
Personal and home care aides
Home hearth aides

Computer software engineers, applications

Veterinary technologists and technicians

Personal financial advisors

Makeup artists. theatrical and performance

Medical assistants
Veterinarians

Substance abuse and behavioral disorder counselors

Skin care specialists
Financial analysts

Social and human service assistants

Gaming surveillance officers and gaming investigators

Physical therapist assistants

Pharmacy technicians

Forensic science technicians

Dental hygienists
Mental health counselors
Mental heatth and substance abuse social Vo/Orkers

Marriage and family therapists

Dental assistants

Computer systems analysts

Database admlnlstJators
Computer software engineers. systems software

Gaming and sports book wr~ers and runners

Environmental science and protection technicians, i ncl. health

Manicurists and pedicurists

Physical therapists
Physician assistants

Emploved ooos
2006
2016E
262
402
767
1, 156
787
1, 171
507
733
71
100
176
248
2
3
41 7
565
62
84
112
83
38
51
221
295
453
339
9
12
60
80
285
376
13
17
167
217
100
130
122
159
25
32
280
362
504
650
119
154
350
449
18
24
36
47
78
100
173
220
66
83

Change
No.
% Required Education/Training
140
53.4% Bachelor degree
389
50.6% Short-term o~the-job training
384
48.7% Short-term oo-the-job training
44.6% Bachelor degree
226
29
41 .0% Associate degree
41 .0% Bachelor degree
72
1
39.8% Postsecondary vocational award
148
35.4% Moderate-term o~the-]ob u-aining
22
35.0% First professional degree
34.3% Bachelor degree
29
13
34.3% Postsecondary vocational award
75
33.8% Bachelor degree
114
33.6% Moderate-term or>-the-job tJaining
3
33.6% Moderate-term on-the-job training
20
32.4% Associate degree
91
32.0% Moderate-term on-the~job training
4
30.7% Bachelor degree
50
30.1% Associate degree
30.0% Masters degree
30
37
29.9% Masters degree
7
29.8% Masters degree
82
29.2% Moderate--term on-the.job training
146
29.0% Bachelor degree
34
28.6% Bachelor degree
99
28.2% Bachelor degree
28.0% Short-term or>-the-job training
5
10
28.0% Associate degree
27.6% Postsecondary vocational award
22
47
27. 1% Masters degree
18
27.0% Masters degree

Field
Information technology
Hea~hcare and social assistance
Healthcare and social assistance

Information technology
Healthcare and social assistance

Other
Other
Hea~hca re

and social assistance

Healthcare and social assistance

Hea~hcare

and social assistance

Heatthcare and social assistance

other
Hea~hcare

and social assistance

other
Hea~hcare

and social assistance

Healthcare and social assistance

Other
Healthcare and social assistance
Hea~hcare

and social assistance

Healthcare and social assistance

Hea~hcare

and social assistance

Healthcare and social assistance

Information technology

Information technology
Information technology

Other
Healthcare and social assistance

Other
Healthcare and social assistance
Hea~hcare

and social assistance

Source: Bureau of Labor Statistics, BMO Capital Markets, and company reports.

Community
college focus
matches well with
fastest-growing
occupat ions

A member of BMO

As tl1e bulk of the expected fastest-growing occupations require less th~m a bachelor degree.
we believe community colleges and for-profit schools will provide most of the schooling for
these jobs. According to the American Association of Community Colleges (AACC),
community colleges provide postsecondary education and specialized training programs to
roughly 46% of all US undergraduates. Community colleges are also at the foref-ront of
educating and training many of the "first responders" on the front line of our nation' s health
care and security - ex'Pected to continue to be areas of future job growtl1. According to the
AACC, community colleges educate 59% of new nurses and the majority of other new
healthcare workers. In addition, close to 80% of firefighters, law enforcement officers, and
EMTs are credentjaled at community colleges. Exhibit 189 lists the lop 15 " hot programs" at
community colleges. While t11e list is from 2004, we believe it has not changed dramatically
since then.

Financia l Group

195

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 189. Top 15 "Hot Programs" at Community Colleges

(2004)
Rank

1
2
3
4
5
6
7
8
9

10
11
12
13
14
15

Program
Registered Nursing
Law Enforcement
Licensed Practical Nursing
Radiology
Computer Technologies
Automotive
Nursing Assistant
Dental Hygiene
Heatth Information Technology
Construction
Education
Business
Networking
Electronics
Medical Assistant

Field
Heatthcare
Criminal Justice
Healthcare
Healthcare
Information Technology
Skilled Trades
Healthcare
Healthcare
Heatthcarellnfo. Tech.
Skilled Trades
Education
Business
Information Technology
Information Technology
Healthcare

Source: BMO Capital Markets and American Association of Community Colleges.

For-profit
schools' focus
also matches well
with fastest-

Similar to community colleges. the top 20 programs at for-profit schools (i .e., career colleges,
see Exhibit 190) appear to match up fairly well with the fastest-growing occupations, as they
are also dominated by healthcare and infonnation teclmology prognuns. albeit the latter to a
lesser e>..1ent f:,>iven the slug[:,>islmess in IT-related hiring for most of this decade.

growing
occupations

Exhibit 190. Top 20 "Hot Programs" at Career Colleges (2005)

Rank Program

.El!lli!

Healthcare
Business
Business
Healthcare
Information technology
Other
Healthcare
Healthcare
Healthcare
Business
Art & design
Business
Law enforcement
Electronics/engineering
Information technology
Healthcare
Information technology
Information technology
Information technology
Information technology

2
3
4
5

6
7

8
9

10
11
12
13
14
15

16
17
18
19

20

Medical/clinical assistant
Business administration and management, general
Accounting
Medical administrative/executive assistant and medical secretary
Computer systems networking and telecommunications
Massage therapy/therapeutic massage
Pharmacy technician/assistant
Medical insurance specialist/medical biller
Medical insurance coding specialist/coder
Administrative assistant and secretarial science, general
Web page, digital/multimedia and information resources design
Legal assistant/paralegal
Criminal justice/law enforcement administration
CAD/CADD drafting and/or design technology/technician
Computer software and media applications
Dental assisting/assistant
Information technology
Computer engineering technology/technician
Computer technology/computer systems technology
Computer/information technology administration and management

Source: BMO Capital Markets and Career College Foundation.

The top degrees gmnted by US postsecondary institutions do not necessarily match up with
the expected fastest-growing occupations, except at the associate degree level where students

Health and
technologyamong most
popular associate
degrees

A m ember of BMO

may be more career-focused as opposed to those attending master and graduate programs,
where they may be more degree-focused. As shown in Exhibit 191, health and teclmologyrelated degrees comprise four of the top six most popular associate degrees - the highest of
any field of study. We note the most popular associate degrees tend to be liberal arts/general
studies as it has become more common for students to fulfill their basic requirements at a less
expensive conununity college and then transfer to another school to focus on their major.

Financial Group

196

September

2009

Postsecondary Education

BMO Capital Markets

Exhibit 191. Most Degrees Offered by Field of Study: All Postsecondary Institutions
(2006-2007 School Year)
Rank Associates
Liberal arts and sciences, general
studies, and humanities
2
Nursing, RN and other
3
Health sciences, other

Masters
Education

Social sciences and history

Education

Business
Health professions and related
clinical sciences
Public administration and social
services
Engineering

Business administration and

Health professions and related
management
clinical sciences
Engineering-related technologies Psychology

Computer and information

sciences
Criminal justice and corrections

Personal and culinary services

Bachelors
Business

Multi-Interdisciplinary Studies

Design and music

10

Mechanics and Repairers

Visual and performing arts

Psychology

Biological and biomedical

sciences
Communication, journalism, and
related programs
Engineering

Social sciences and history

Computer and information
sciences
Visual and performing arts

English language and

Biological and biomedical
literature/letters
sciences
Liberal arts and sciences, general English language and
studies, and humanities
literature/letters

Doctors
Health professions and related
clinical sciences
Education
Engineering
Biological and biomedical
sciences
Psychology
Physical sciences and science
technologies
Social sciences and history
Business
Computer and information
sciences
Theology and religious vocations
Visual and performing arts

Source: BMO Capital Markets and National Center for Educational Statistics.

Mo st popular
degrees at forprofit schools are
bu siness and
business-related

We were unable to obtain tlus same information for tl1e not for-profit sector. However, the
CCA ' s lmagine America Foundation provided a list of the most popular degrees awarded at it
for-pro:fit schools. We note this excludes diploma/certificate programs (i.e.. non-degreed
programs). As shown in Exhibit 192, business and business-related degrees are among the
most popular at for-profit schools across all degree types, although health-related degrees are
the top among associate progrdms.

Exhibit 192. Most Popular Degrees Awarded by Field of Study:

For-Profit Postsecondary Institutions (2005-2006 School Year)
Rank
1

Associates
Health professions and related
clinica l sciences

Business, management, marketing Computer and information

sciences and support services
and related support services

Education

Computer and information

sciences and support services
Visual and performing arts
Personal and culinary services

Health professions and related

clinical sciences
Psychology
Computer and information
sciences and support services

4
5

Bachelors
Masters
Business, management, marketing Business, management, marketing
and related support services
and related support services

Visual and performing arts

Security and protective services
Health professions and related
clinical sciences

Source: BMO Capital Markets and National Center for Educational Statistics.

We find it noteworthy that while doctor. musician. and lawyer remained the top three career
preferences for college-bound students over the past five years, areas such as
nursing/healthcare, art. and criminal justice provided by career colleges have grown in
popularity (see Exhibit 193).

A m ember of BMO

Financia l Group

197

September

2009

Postsecondary Education

BMO Capital Markets

Exhibit 193. Top Career Preferences Among College-Bound Students (2002-2008;

Ranked by 2008 Preference)
Career
Medical Physician
Music
Nursing/ Heallh Care
Lawyer/Legal Services
Art
Psychology/Psychialry
Business Owner/E ntrepreneur
Teaching/Educalion
Alhlelics/Coaching
Law EnforcemenVCriminal Justice
Engineering (Mechanical)
Drama/Thealre Arts
Child Care/Developmenl
Com puter Sciences
Business Adminislralion
Archileclure/Drafling
Velerinary Medicine
Dance/Choreography
Sports Medicine
Mathematics

2008 SurveJl
Rank
%
1
5.0%
4 .8%
2
3
4.2%
4
4 .1%
4 .0%
5
3 .0%
6
7
3.0%
8
2.9%
9
2.9%
10
2 .8%
11
2.8%
12
2.3%
13
2.2%
14
2.1%
15
2.1%
16
2.0%
17
1.9%
18
1.8%
19
1.7%
20
1.6%

2007 Survell
Rank
%
1
5.1 %
4.8%
2
4
4 .1%
3
4.5%
5
3.9%
6
3.2%
8
2 .9%
7
3.0%
9
2.9%
10
2.8%
11
2.8%
13
2.3%
14
2.2%
12
2.3%
17
2.0%
16
2.0%
15
2.1%
18
1.7%
19
1.6%
20
1.6%

2006 Survell
Rank
%
1
5.6%
4.4%
3
2
4.2%
5.1 %
4
6
3.5%
9
2.8%
10
2.8%
8
3.0%
7
3.0%
11
2.8%
12
2.8%
16
2.2%
14
2.4%
13
2.6%
18
2.0%
15
2.4%
17
2.2%
19
1.9%
1.7%
21
35
1.1%

2005 Survell
Rank
%
1
5.2%
4.6%
3
4
4.3%
2
5.1%
3.3%
5
7
3.1%
8
3.0%
12
2.6%
6
3.1 %
11
2.7%
10
2.8%
15
2.0%
13
2.5%
9
2.8%
1.3%
26
14
2.3%
17
1.9%
16
1.9%
19
1.7%
35
1.1%

2004 Survell
Rank
%
1
5.4%
4.5%
3
4
3.8%
2
5.2%
5
3.3%
7
3.2%
9
3.0%
10
2.7%
8
3.0%
13
2.4%
11
2.6%
15
2.0%
12
2.4%
6
3.2%
24
1.5%
14
2.2%
16
1.9%
17
1.8%
18
1.7%
36
1.1%

2003 Survell
Rank
%
1
5.2%
3
3.8%
4
3.7%
2
4.5%
8
2.8%
7
3.2%
10
2.4%
6
3.5%
11
2.3%
16
1.9%
13
1.9%
15
1.9%
12
2.0%
3.6%
5
2.6%
9
14
1.9%
17
1.6%
25
1.3%
1.5%
21
35
0.9%

2002 Survell
Rank
%
1
5.3%
6
3.3%
9
3.1 %
2
5.1 %
8
3.2%
4
3.4%
7
3.2%
3
3.5%
10
2.9%
14
2.4%
11
2.6%
13
2.4%
12
2.5%
5
3.4%
18
2.0%
17
2.0%
16
2.1%
1.5%
25
15
2.2%
36
1.1%

Source; National Research Center for College & University.

There has been much talk about developing pro!,>raiUS for "green jobs", for instance. those
dealing with altemative e nergy. energy conservation, and t11e like. In an October 2008 report
conducted for the US Conference of Mayors. consulting firm Global Insight estimated there
will be more than 2.5 million "green jobs' by 2018, up substantia Uy from 750,000 in 2006.
However, there have been few of these progratus developed so far, although there has been
some reports of progr'cllllS involving wind ttubines. solar panel installation and environmental
stt1dies. Nevertheless, we do believe tllis could be a focus for futt1re program development likely an area where the for-profit sector could take the lead. We highlight some potentia l
areas for future development as per a July 2009 article in Career College Central in Exhibit
194 below.

Exhibit 194. Top "Green" Industries and Jobs to Watch

"Green" Industries to Watch
Advanced biofuels
Building retrofitting
Geothermal industries
Green chemistry
Green manufacturing
Source: Career College Central July

"Green" Jobs to Watch

Energy engineer
Environmental engineer
Sustainability director
Wind construction project manager
Wind energy developer

2009 " The Reality of Green.

In addition, a late August 2009 article in the Chronicle of Higher Education cited these five as
" college majors on the rise:"

A member of BMO

Service science (i.e .. study of services industries).

Healt11 informatics.

Computational science (i.e., the use of computer modeling and simulation to advance
other fields).

Sustainability (e.g. , enviromnental science).

Financial Group

198

September 2009

Postsecondary Education

BMO Capital Markets

Public health.

In Exhibit 195. we provide a list of major program offerings for the publicly held for-profit
providers.

Exhibit 195. Select For-Profit Postsecondary School Operators Fields of Study Offered
(as Percentage of Enrollments)
Comean~ Name

Ticker
APE I
APOL

Art& Auto Tech/

Criminal Justi ce Culinary/
8ectronics
Health & Human
Design
Trades
Business Legal & Safe~ Hos~y Education & Engineeri_!!g
Services

American Public Education

AeolloGrouE
Btid~epoint Education
Career Education

BPI- -

"C''rin~Qe$

coco

CECO

- --m,

13~

~
12%

c apella Education
OeVry= - - - -

CPLA- -

Education Management
Grand Canl!:!n Education
ITI Educational SeJVices
Lincoln Educational Services
Strayer Education
Universal Technical lnstitute
WashingtoO Posi

Private
LOPE
ESI
LINC
STRA
UTI

ov

WPO

19%

1%
8%
19%

59%
44%

53%
25%
45%

12%
20%- 47%
6%
20%
20%
5%

10%
14%
20%

X
4%

8%

4%
52%

20%
9%

--- ~

26%
6%
20%
20%
60%
40%
- -27%
14%
14%
5%
37%

IT

11 %

Social
Sciences O,!he!.. Total

21%
8%
14%

7%
20%
26%
1%

8%

- -2%

X
10%

30%
5%
__
16%_ _ _

14%
~

100%

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
N.A

Note: X- offers programs although percentage of enrollment not available. N.A. - Not Available. Source: BMO Capital Markets and company
reports.

Postsecondary Schools Retention/Attrition/Persistence Rate

Trends
ln our June 2000 latmch report on the education sector, we stated the following:

'As for-profit education providers realized enrolln1ent growth was a key valuation driver. we
believe certain companies may have diluted their student population by attracting lessdesimble students with higher attrition rates. As such, these companies have been forced to
amortize their recmiting (i.e., "acquisition") costs over shorter time periods. minimizing perstudent profitability. Although enrollment growth is important, we believe investors should
focus on what we call student 'stickiness" (i.e., retention of students). With improved student
stickiness, education companies can enhance revenue streams as well as profits."
At trition/retention
now gaining
greater in vestor
focus

With apologies for the dot.com reference. we believe attrition (i.e .. drop-out) rates and their
complementary retention rates (100% tn.inus the attrition rate) began to garner greater investor
attention in early 2006, after a number of companies cited higher attrition rates as one of the
reasons for their decelerating growth. It has continued to gain focus, as many companies have
cited the beneficial impact on profitabi lity via increase in retention. Altl1ough definitions vary,
we will use t11e fo llowing tenns:

Retention rates describe the percentage of students still enrolled fTom school year to

school year.

Persistence rates describe the percentage of students still enrolled intra-year (i.e., from

semester to semester).

Attrition (drop-out) rates describe the complements (i.e., 100% minus the rate) for both

retention and persistence rdtes.

A member of BMO

Financial Group

199

September 2009

Postsecondary Education

BMO Capital Markets

Despite recent

Retention/attrition rates. The first year of student programs is typically when retention rates

rebound for two-

are the lowest, or conversely, when attrition/drop-out rates are the highest. According to ACT,
the average retention rate from freshman to sophomore year in the 2007-2008 school year was
69.3% for four-year institutions and 53.9% for two-year institutions (see Exhibit 196). Willie
retention levels have rebounded somewhat from the 2006-2007 school year, they are still
below historical levels. Retention rates continue to decline at four-year institutions, and, in
fact, reached a new low in 2007-2008.

year institutions,
retention rates
remain well below
historical levels

Exhibit 196. Postsecondary School Retention Rates, Freshman to

Sophomore Year (1982-1983 to 2007-2008 School Years)

Ill

'5
:!:::

1ii

..~

76%

58%

75%

57%
0

55%~

73%

54% t;

.!:

: 72%

56%

74%

71%

53% :0
~
52% N

70%

51%

69% +-+-+-+-+-+-+-+-+-+-+-+-+-+-+-+-+-+-+-+-~~~~~-+ 50%

198283
-

1987-88
1992-93
1997-98
2002-03
4-year institutions (left scale) -2-year institutions (right scale)

2007-08

Source: Analysis of ACT Institutional Data File as compiled by Postsecondary Education Opportunity.

Retention rates
decline as job
market improves

We had sunnised t11at retention was somewhat countercyclical and during an economic
expansion, a strong job market entices students and potential students, thereby reducing
retention rates as the US unemployment rate drops (and conversely, increasing retention as
the unemployment rate rises). TI1ere appears to be some support for tllis thesis, especially in
the most recent post-recession period (following the 2001 recession), when retention rates fell
fairly dramatically at both two-year and four-year institutions (see Exhibit 197).

Exhibit 197. Postsecondary Retention Rates vs. US

Unemployment Rate (1982-2007)
12%
1:=::1 2-year institutioos
75%

'

70%

11111114-year lnstitutioos

us UlempiC7)'ment Rate
10%

~~~

~~
\

I'

~IV'~

..
c..
,..

8% -.;;

0::

1\

~~

~~~

""

v""'"' "'

6%

""

ic
::>

,A

.;

4%

:;j

2%

50'~

rr

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

r
2002

r
2004

rr

0%

2006

Note: Shaded areas indicate recessionary periods. Source: BMO Capital Markets, Bureau of Labor Statistics
and ACT Institutional Data File.

A member of BMO

Financia l Group

200

September 2009

Postsecondary Education

Student s at forprofit schools

may have higher
attrition (dr op-out)
rates

BMO Capital Markets

In July 2008. the NCES published a report (Descriptive Summary of 2003-04 Beginning
Postsecondary Students: Three Years Later) that measured retention rates for postsecondary
students after three years. Based on tilis data, it appears that students attending for-profit
schools have relatively hlgher attrition (i.e. , drop-out) rates than tl10se attending not-for-profit
institutions. As shown in Exhibit 198, anywhere from 41.5% (at less than two-year
institutions) to 52.6% (at two-year institutions) of students at for-profit schools had no degree
and were not enrolled after three years (" no degree - not enrolled"), the highest attrition rate
of any school ty pe. On a positive note, the students from the for-profit schools have the
hlghest gmduation mtes ("attained degree - not emolled" ) as well. Tllis may be partially
attributed to a greater portion of students entering these schools with prior credits (we discuss
gr'dduation mtes in tl1e nex.1: section). Additionally, as this research follows students three
years following enrollment, it may be skewed as students attending four-year programs would
be excluded in the graduation rates (i.e., the rate of students with no degree but who are still
emolled after three years is considembly higher at not-for-profits).

Exhibit 198. Postsecondary Schools Retention Rates After Three

Years (entered in 2003-2004 School Year)

All schools
Public not-for-profit:
Four-year institution
Two-year institution
Less than two-year institution
Private not-for-profit:
Four-year institution
Two-year institution
Less than two-year institution

Private for-profit:
Four-year institution
Two-year institution
Less than two-year institution

Attained
degree, not
enrolled

Attained
degree, still
enrolled

No degree,
still enrolled

No degree,
not enrolled

8.9%

7.0%

50.7%

33.5%

3.2%
5 .5%
51.8%

2.4%
10.1%
11.3%

77.2%
39.8%
6.9%

17.3%
44.6%
30.0%

4 .0%
18.3%

76.8%
29.6%

N.A.

3.1%
12.7%
N.A.

N.A.

16.1%
39.3%
N.A.

8.5%
25.6%
41.3%

9.7%
8.5%
9.0%

34.3%
13.2%
8.2%

47.6%
52.6%
41.5%

Source: National Center for Education Statistics' (NCES 2008-174) Descriptive Summary of2003-04
Beginning Postsecondary Students: Three Year Later.

We were unable to fmd trend data for retention rdtes of not-for-profit schools. However, ti1e
Accrediting Cotmcil for Independent Colleges and Schools (ACICS) provides placement rates
for the schools that it accredits. As ti1e bulk of ACICS-accredited schools are for-profit

For-pr ofit
ret ention rate
trend s appear

providers, we use U1is as a proxy for trends in tile for-profit sector. As shown in Exllibit 199,
retention rates for ACICS-accredited schools began to pick up just after the most recent US
recession (March-November 2001). rising in both 2002 and 2003. but falling thereafter. and
reaclling a low of 70.8% in 2006, and remaining flat at roughly 71% since. We believe tilis
metric's climb during the tough post-recessionary labor market, wllich did not begin to
improve for nearly two years after the 2001 recession in 2003. is anotl1er indicator of its

somewhat
countercyclical

countercyclicality. As such, it is likely that retention rates wiU increase when the 2009 data is
released.

A m ember of BMO

Financia l Group

201

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 199. Annual Retention Rates for ACICS-Accredited

Schools (1997-2008)
74.7% 74.7%

75%
738% 74.0%
73.5% ~
73.2% 73.2%
r-

r-

73.4%

r-

72.2%

ell

70.8% 71.0% 71.0%

Q)

r-

0::

.Q

70%

'E
Q)
Qj
0::

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Note: Shaded area represents recessionary period. Beginning in 2007, retention rates were rounded to the
nearest percentage. Source: Accrediting Council for Independent Colleges and Schools (ACICS), Annual
Summary of Key Operating Statistics.

A deeper analysis of this data (see Exhibit 200) shows that ACICS retention rdtes have
improved somewhat in recent years for the "lower-end" degree progrdillS such as associate's
degrees, while retention mtes for "higher-end" bachelor's- and master's-degree programs
have dropped somewhat. While non-degree retention rates decreased in 2008, they were still
considerably higher than the rates for other degree levels.

For profit
retention rates
increased at
"lower end"
programs and
decreased at the

Exhibit 200. Retention Rates for ACICS-Accredited Schools by

Classification (2001-2008)

"higher end"

78%

o 2001

m 2002

o 2003 o 2004

2oos

o 2006 o 2007 o 2ooa

76%
ell

74%

CD

~ 72%
0::

.~ 70%
'E
CD 68%
Qj

0::

66%
64%
62%

~~LL~~~~~LL~-m~~~LL~~~~~~~~~~~~~~LJ,

Non-Degree

Occupational
Associate's
Degree

Academic
Associate's
Degree

Bachelor's
Degree

Master's Degree

Source: Accred~ing Council for Independent Colleges and Schools (ACICS), Annual Summary of Key
Operating Statistics.

A m ember of BMO

Financia l Group

202

September 2009

Postsecondary Education

BMO Capital Markets

At the June 2008 National Dialog on Student Retention held by Education Dynamics. Dr.
George Kuh, d irector, Center for Postsecondary Research, Indiana University, highlighted
some of the common factors that drive hlgher attrition rates (see Exhibit 201).

Common reasons
for attrition

Exhibit 201. Factors that Threaten Retention and Graduation from

College
Academically underprepared for college-level work
First-generation college student
Gap between high school and college
30+ hours working per week
Part-time enrollment
Single parent
Financially independent
Children at home
Source: Education Dynamics National Dialog on Student Retention.

Additionally, a June 2009 stllVey conducted by AcadernicMAPS found that 72% of students
leave a college for customer satisfaction related issues. Essentially, the study showed that
students who have a difficult time "navigating the system" are less likely to continue.

"Cu stomer
service" may
drive attrition

Potential drivers of poor " customer service" include the inability of students to manage a
school 's bureaucracy, difficulty selecting l11e correct courses and setting up an academic plan,
or not being contacted by (or able to get in touch with) financial and enrollment counselors.
Increasingly. schools are beginning to realize the importance of reducing attrition rates not
just from the perspective of student outcomes, but also from a revenue perspective. In a May
2007 article in Career College Central it was estimated lost revenue from attrition can be as

A ttr ition is higher

earlier in student
lifecycle

much as $3,000 per student if the student drops out in the first quarter. Most research
concludes that retention rates increase over l11e life of a student (i.e., the longer a student
matriculates, the greater the chance that he or she wiU continue to be enrolled); in a May 2008
survey by Education Dynamics of higher education administrations, 70% said the retention
challenge is greatest during the first year of any program.
Unfortunately, only two companies (Career Education and Education Management) disclose
their retention/attrition rates on an annual basis (see Exhibit 202).

Exhibit 202. Select For-Profit Postsecondary School Operators Annual Retention Rates
(FY1999-FY2009)
Company
Career Education
Education Management (all schools)

Ticker
CECO
Private

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

77.0%
N.A.

76.0%
N.A.

75.0%
N.A.

73.0%
N.A.

67.3%
70.2%

65.9%
68.0%

65.2%
67.4%

66.2%
72.3%

67.7%
71.0%

66.7%
68.0%

N.A.
66.0%

Source: BMO Capital Markets and company reports. Note: Education Management was a publicly held company until being taken private on June
1, 2006. Data represents fiscal years. N.A.- Not Available.

Common methods
to improve
retention

Owing to increased student-acquisition costs, both not-for-profit and for-profit providers have
been paying more attention to in1proving their retention rates as a mea.llS to spread the acquisition
costs over a longer period (potentially increasing margins for the for-profit providers). While
there is no panacea among the common methods being implemented are these:

A member of BMO

Improving data analysis to detennine which "entry" variables lead to higher retention
rates (e.g., SAT scores, financing needs).

Financia l Group

203

September 2009

Postsecondary Education

BMO Capital Markets

Establishing college readiness progTams to better prepare students for college (both
academically and socially).

Improving the 'onboarding process' when students first start classes to ensure they are
more comfortable and not isolated from a school's bureaucntcy.

Making first-year students have mandatory meetings witl1 academic advisors.

Better tracking of students while they are enrolled to improve identifying "at-risk"
students, (i.e., an "early warning system").

Improving communication between students and administration. For example, in 2006,

Apollo Group (APOL) began to incentivize its academic counselors based on stt1dent
retention - a technique also employed by Grand Canyon Education (LOPE). While Apollo
does not disclose specific metrics. it claims this has helped increase interaction between the
company and its students and improved its retention rates.

Better use of technology (e.g., making lectures available online to help students who may
have missed class).

Improving data analysis to dctennine which "entry" variables lead to higher retention
rates (e.g., SAT scores, financing needs).

Creating a position of responsibility for retention (e.g., director of retention).

Persistence rates. We have created what we call a " sequential persistence rate" (persistence
is the more proper term used to show intra-year movement) for the for-profit companies that
disclose their periodic enrollment and new student enrollment (i.e., start) data. We
acknowledge the limitations of this analysis, as it can be skewed by acquisitions (artificially
inflates persistence unless acquired students are backed out), as weU as the fact that "attrition"
includes both grnduates as well as drop-outs (can artificially deflate persistence rntes in
periods with large numbers of graduates). Nevertl1eless, we have provided the available
sequential persistence rates for the publicly held companies in Exhibit 203. As shown. \Vhile
the sequential persistence rates may be somewhat seasonal (we have calendarized the data to
make comparisons more meaningful), the median rate has improved year over year for the
past five quarters.

Sequential
persistence rates
for the publicly
held companies
have been
increasing for the
most part

Exhibit 203. Publicly Held For-Profit Postsecondary School Operators Sequential

Persistence Rates (CY1Q07-CY2Q09)
Company
American Public Education
Apollo Group
Bridgepoint Education
Career Education
Corinthian Colleges
DeVry (undergraduate only)
ITT Educational Services
Lincoln Educational Services
Universal Technical Institute
MEDIAN
YfY change

Ticker
APE I
APOL
BPI
CECO

coco
DV
ESI
LINC
UTI

FYE
12
8
12
12
6
6
12
12
9

1Q07
88.9%
81 .3%
N.A .
N.A.
66.7%
73.6%
78.0%
70.3%
79.6%
78.0%
0.5%

2Q07
74.0%
82.5%
N.A.
68.7%
63.8%
66.5%
74.7%
67.6%
69.9%
69.3%
-2.1%

3Q07

4Q07

89.0%
78.4%
N.A.
81.8%
63.1%
86.4%
72.4%
60.1%
76.6%
77.5%
0.3%

82.8%
81.7%
N.A.
72.2%
66.9%
N.A.
77.3%
69.7%
72.8%
72.8%
-1.6%

Calendar Year
1Q08
2Q08
74.0%
92.0%
81.6%
82.9%
74.4%
84.5%
70.1%
68.1%
67.5%
64.2%
73.2%
67.8%
76.1%
73.9%
72.0%
68.9%
76.6%
70.0%
76.1%
70.0%
-1 .9%
0.8%

3Q08

4Q08

1Q09

85.6%
80.8%
79.8%
80.5%
63.8%
92.7%
72.5%
63.7%
76.5%
79.8%
2.3%

82.0%
82.5%
80.4%
75.1%
67.1%
N.A .
76.5%
71 .3%
71.7%
75.8%
3.0%

86.4%
82.5%
79.9%
73.4%
69.5%
76.9%
75.3%
72.8%
79.3%
76.9%
0.8%

2Q09
78.7%
83.8%
73.5%
68.9%
67.2%
74.4%
75.3%
70.0%
73.6%
73.6%
3.6%

Source: BMO Capital Markets estimates and company reports. N.A.- Not Available. Note: We have attempted to remove the estimated impact of
acquisitions to calculate sequential persistence for these companies.

A m ember of BMO

Finan cia l Group

204

September

2009

Postsecondary Education

Online programs
have lower
persistence rates

BMO Capital Markets

We believe online programs tend to have lower persistence rates than campus-based
programs, as many online students prefer that mode owing to its flexibility (i.e., can take
classes based on their schedules, not the school's). As Career Education (CECO) is the only
publicly held company that provides both starts and enrollment data for its online and
campus-programs, we have compared the sequential persistence for these programs since
2Q05 (only data available). While the issues CECO has been facing - specifically tJ1e
negative publicity affecting its American Continental University (AIU) online and campus
locations through much of tlus period - may make t1us analysis a bit misleading, CECO's
online c<mlpuses have had consistently lower sequential persistence rdtes than its c<mlpus
locations (although that was not the case in 2Q09, likely owing to continued issues at some of
its campus locations (see Exhibit 204). APOL management has stated in the past that the
difference in persistence between its online and campus locations is "a couple of percentage
points."

Exhibit 204. Career Education Sequential Persistence Rates

(1007-2009)
100%

.$
~

DOnline EI Campus

90%
80%

Ql

70%

Ql

iii

60%

Ql

50%

Q.

iii

:g
~

40%
30%

0"

20%

1/)

10%

Ql

0%
1007

2007

3007

4007

1008

2008

3008

4008

1009

2009

Note: This analysis begins with 1007 as numerous restatements make historical analysis a bit more difficult.
Source: BMO Capital Markets and company reports.

A m ember of BMO

Financia l Group

205

September 2009

Postsecondary Education

BMO Capital Markets

A listing of key retention met:rics can be found in Exlribit 205.

Exhibit 205. Key Retention Metrics to Watch

Term

Definition

Postsecondary " Norms"

Retention rate

Measures how successful schools AII2-Yearinstitutions: 53.9% (1)

are at retaining students (typically
measured annually for two- and four- All 4-Year institutions: 69.3% (1)

For-Profit " Norms"

All institutions: 71% (2)

year schools); provides important

insight into the effectiveness of the
programs. 11\ihen this is measured
within the same year, it is knows as a
"persistence rate."

Attrition rate (after

three years) (3)

Students no longer enrolled who

Public not-for-profit

4-year institutions: 47.6%

have not attained a degree

All 4-year institutions: 17.3%

2-year institutions: 52.6%

All 2-year institutions: 44.6%

Less than 2-year institutions:

41.5%

Less than 2-year institutions:

30%
Private not-for-profit
All 4-year institutions: 16.1%
All 2-year institutions: 39.3%
Less than 2-year institutions:
N.A.
N.A.- Not Available. Source: 1) BMO Capital Markets, based on methodology used in Postsecondary Education Opportunity Number 134 (8/03)
between freshman and sophomore years. Data for 2007-2008 school year: 2) 2008 ACICS Annual Institutional Report; 3) National Center for
Education Statistics' (NCES 2008-174) Descriptive Summary of 2003-2004 Beginning Postsecondary Students Three Years Later. Data includes
students who transferred to another institution and may have completed their degrees at that location.

Postsecondary Schools Completion/Graduation Rate Trends

Roughly half of all
students
complete their
b achelor d egrees

A m ember of BMO

What we believe most investors in this group may not realize is that a large portion of
students who enroll at postsecondary institutions - whether they are for-profit or not-for-profit
- do not actually complete their programs. A historical analysis of completion rates (i.e ..
graduation rates) is somewhat difficult, owing to classification changes made by t11e Census
Bureau in the early 1990s. Nevertheless, as shown in Exlubit 206, completion rates for those
in school four years or more remained within a narrow range of 49%-54%from 1964 to 1991.
Using the more recent classification (based on degree completion and not time in school),
bachelor degree completion rates (typically four-year programs) have increased to nearly 52%
in 2008 from a low of just under 45% in 1994.

Financial Group

206

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 206. Postsecondary Schools Bachelor Degree Completion

Rates by Age 25-29 {1964-2008)
55%

~ 50%
c
0
~

a.

E
0 45%

40% ~~~-++-~+-r+~~~+4~~-+~~+-~~~~~~~~~~+-~~

1964

1971

1978
-

1985

1992

1999

2006

4 Years or More -Bachelor's or More

Note: Shaded areas represent recessionary periods. Prior to 1992, the Census Bureau measured educational
attainment in terms of time in school; completing four years of college constituted graduating from college with
a bachelor degree for this analysis. Since 1992, educational attainment has been measured in terms of
highest degree completed.
Source: Analysis of US Census Bureau data as compiled by Postsecondary Education Opportunity.

International
graduation rates
vary and may
often be higher
than US rates

Graduation rates vary substantially across countries. This is a function of the support given to
students by their respective countzy's educational system, the characteristics of the programs
and their costs. While it is frequently argued that US progr'dDlS are often ahead of the cmve in
tenns of teaching efficiency and student services, the US also has tl1e highest cost of
education: according to a recent UNESCO study. the annual cost of roughly $24.000 per
student in t11e US is the highest among G-8 members.
Graduation rates for US higher education students are slightly below average, according to
OECD data, at 35.5%, below the OECD average of 37.3% for the 2006 school year (latest
data available; see Exhibit 207).

A member of BMO

Financia l Group

207

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 207. International Graduation Rates {2006 School Year)

65%
60%

55%
50%

...

- 45%

;; 40%

35%

.2
10

30%

~ 25%
~

C)

20%
15%
10%
5%
0% +J....J_,..L...l-.-L..J..,.-'-'-.-1-'

Source: OECD (Organisation for Economic Cooperation and Development).

Completion rates
may actually
increase as
economy
improves

Similar to tl1e relationship with both enrollment and retention trends, changes in economic
cycles tend to affect completion rates, however, in somewhat of a counterintuitive way. Using
the "old" completion f'dtes defrnition, we have analyzed trends in completion rates before and
after the seven recessions prior to the most recent one (i.e .. beginning December 2007). As
shown in Exhibit 208, completion rates, on average, declined in the year of and in the year
after a recession, before rebounding as the economy strengthened. This was the opposite of
what we believe conventional wisdom would have dictated. However. while we believe
enrollment trends benefit from a weaker economy (i.e.. more students go back to school or
continue their education), weak economic conditions may force more students to work part
time and therefore reduce completion rates. With regard to the current recession, completion
rates in the 2008-2009 school year increased slightly (albeit at a slower rate than in the year
prior to the recession), breaking from historical trends.

Exhibit 208. Postsecondary Schools Completion Rates- Before, During, and After US
Recessions
Completion Rates
Prior Recessionary Periods
April1 960 Feb. 1961
Oct. 1969 Mar. 1970
July 1974 - Mar. 1975
Apr. 1980- Sept. 1980
Oct. 1981 -Mar. 1982
July 1990 - Mar. 1991
Mar. 2001 -Nov. 200 1
Average
Annual Change
April 1960- Feb. 1961
Oct. 1969- Mar. 1970
July 1974 - Mar. 1975
Apr. 1980- Sept. 1980
Oct. 1981 -Mar 1982
July 1990- Mar. 1991
Mar. 2001 - Nov 2001
Average
Most Recent Recession

Dec. 2007 - Present

Annual change

4 Years Prior 3 Years Prior 2 Years Prior

N.A.
N.A.
N.A.
49.7%
50.6%
53.2%
51. 1%
52.7%
50.3%
53.8%
52.8%
50.2%
52.8%
50.2%
49.8%
51.8%
50.9%
50.6%
47.3%
48.7%
48.6%
51.2%
50.7%
50.6%

N.A.
3.5%
-0.8%
1.2%
-2.6%
.0.3%
0.7%
0.3%

N.A.
3.5%
.0.8%
-1.0%
-2.6%
.0.3%
-1.4%
-0.4%

N.A.
-2.6%
2.4%
-2.6%
-0.4%
1.2%
1.3%
-0.1%

2004-05
49.5%
-0.3%

2005-06
50.1 %
0.6%

2006-07
49.1%
.0.9%

~ 2 Years After 3 Years After 4 Years After

.Yill.f!.l2!

:lliLQ!

N.A.
51.5%
52.2%
49.8%
50.3%
53.3%
49.8%
51.2%1

N.A.
52.4%
51.6%
50.3%
49.3%
53.2%
48.9%
51.0%

N.A.
51. 1%
52.6%
49.3%
50.5%
51.2%
50.6%
50.9%1

51 .5%
50.3%
53.8%
50.5%
51 .8%
N.A.
49.5%
51 .2%

N.A.
52.7%
52.8%
51.8%
50.9%
N.A.
50. 1%
52.1%

511%
52.2%
50.2%
50.9%
50.7%
N.A.
50.7%
51 .0%

N.A.
0.9%
-0.5%
-0.4%
0.5%
1.5%
1.2%
0.5%1

N.A.
0.9%
-0.6%
0.5%
-1 .0%
-0. 1%
-0.9%
-0.2%

N.A.
-1.3%
1.0%
-1.0%
1.2%
-2.0%
1.7%
-0.1%1

N.A.
.0.8%
1.2%
1.2%
1.3%
N.A.
-11 %
0.4%

N.A.
2.4%
-1.0%
1.3%
-0.9%
N.A.
0.6%
0.5%

N.A.
.0.5%
-2.6%
.0.9%
.0.2%
N.A.

2008-09
51.9%
0.6%

2009-10
N.A.
N.A.

2010-11
N.A.
N.A.

2011-12
N.A.
N.A.

2012-13
N.A.
N.A.

2007-08
51 .3%
2.2%

O.S"A.
-0.7%

N.A. - Not Available. Source: Analysis of ACT Institutional Data File as compiled by Postsecondary Education Opportunity and National
Bureau of Economic Research.

A member of BMO

Financial Group

208

September 2009

Postsecondary Education

BMO Capital Markets

Comparing completion rates across schools can be somewhat misleading given many students
do not complete their degrees at the institutions where t11ey first begin. A 2006 NCES study
(latest data available) measured completion rates, taking into account the effect of transfers

Completion rates
at for-profit
schools are

between institutions. As shown in Exhibit 209. by 2001. only 43.2% of students who entered
postsecondary institutions in 1995-1996 seeking a degree or certificate had actually earned that

higher than at
public not-for-

credential at tl1at same insti tution (i.e., a 43.2% graduation or completion rate). Although 6.2%
of the group was still enrolled at the same institution six years later (i.e., had not yet completed
the program), 19.2% had transferred to another institution during that period (of t11at 19.2%,
11.1% had completed their programs at the other institution). The remaining 31.4% had dropped
out (i.e.. attrition rate) of postsecondaty education altogether. Interestingly, the for-profit sector
bad a higher completion rate at the first institution (60.9%) than at its public not-for-profit peers

profit peers

(25.1% for two-year institutions and 51% for four-year institutions).

Exhibit 209. Six-Year Completion and Attrition Rates: For-Profit vs. Not-For-Profit
Institutions (1995-1996 through 2001)

Public not-for-profit (two-year)

Public not-for-profit (four-year)
Private not-for-profit (four-year)
Private for -profit
All institutions

Completed Program
At 1st
Institution Transferred Completion
(a)
(b)
Rate (c=a+bl
13.7%
38.8%
25.1%
51.0%
10.7%
61 .7%
75.6%
65.6%
10.0%
60.9%
4.5%
65.4%
43.2%
11.1%
54.3%

Still Enrolled
At 1st
Institution

(d)
7 .1%
8.7%
3.3%
0.5%
6.2%

DroppedTransferred Still Enrolled out/Attrition

(e)
(f=d+e)
Rate (1=(c+f)l
10.2%
17.3%
43.9%
8.4%
17.1%
21.2%
9.1%
5.8%
15.3%
2.9%
3.4%
31.2%
8.1%
14.3%
31.4%

Source: ACE Center for Policy Analysis using data from BPS Study for 1995-1996 school year entrants as complied by the US Department of
Education.

For-profit

When drilling down a bit furtl1er (and using a different data set), for-profit schools seem to do

graduation rates

a relatively better j ob graduating their students at their "shorter' institutions (i.e. , less than
two-year and two-year institutions) than at t11eir four-year institutions (see Exhibit 210). This
may be because for-profits tend to have a disproportionate number of lower-income students
who, for fmancial reasons, may fmd it exceedingly hard to complete tl1ese longer programs. ln
addition, we note the 60% graduation rate for students attending for-profit two-year
institutions is much higher than the 21 .9% rate at public not-for-profit institutions (i.e.,

are higher at their

"shorter"
institutions; also
relatively higher
than at

community colleges), potentially mitigating some of the benefits of additional funding for
the conununity college sector.

community
colleges

Exhibit 210. Graduation Rates by School Type (Cohort Years 2001

and 2004)

Public not -for-profit

Private not-for-profit
Private for-profit
Total

less than 2-year

institutions (cohort
year 2004}
70.2%
74.7%
64.9%
65.8%

2-year institutions
(cohort year 2004}
21 .9%
50.2%
60.0%
30.9%

4-year institutions
(cohortyear2001)
53.5%
63.7%
43.7%
56.1%

Note: Data measures graduation rates w1th1n 150% of norma l time, 1.e. three years for two-year programs and
six years for four-year programs. Source: BMO Capital Markets and US Department of Education's National
Center for Education Statistics (publication 2009-155).

A m ember of BMO

Financia l Group

209

September 2009

Postsecondary Education

Higher completion
rates at for-profit
schools within
three years of
enrollment

BMO Capital Markets

Additionally. for-profit schools appear to have an advantage among students who complete
programs of shorter duration. Data that looked at attainment .levels :for a 2003-2004 cohort of
students thre e years after they enrolled found that students who attended associates and
certificate programs at two- and four-year institutions were more likely to have completed
these programs at for-profit schools (see Exhibit 211). We believe tllis makes sense
considering for-profits generally have been more aggressive in expanding their range of
offerings of certificate- and associate-level programs.

Exhibit 211. Percentage of Students Who Received

Degree/Certificate After Three Years by School Type (Cohort Year
2003)
Inst itution
4-year institution:
Public
Private not-for-profit
Private for-profit
2-year institution:
Public
Private not-for-profit
Private for-profit
Less-than-2-year institution:
Public
Private fo r-profit

Any

Progra m Type
Ce rtificate Associate's

5.5%
7.1%

0.6%
1.0%

2.4%
3.6%

18.2%

1.3%

15.9%

15.5%
31.0%

5.5%
10.2%

10.0%
20.8%

34.1%

15.8%

18.4%

63.1%

62.3%

0.6%

50.3%

50.2%

0.1%

Note: Data measures degree/certificate attainment rates of students as of June 2006 who entered an
educational program in the 2003-2004 school year. Source: BMO Capital Markets and US Department of
Education's National Center for Education Statistics (publication 2008-17 4).

Tim e to complete
correlates with
program level

A m ember of BMO

The lower one is on tl1e ladder (i.e., in a non-degreed program), the faster one would expect to
complete this program. As shown in Exllibit 212. for those surveyed in 2004 (latest data
available) with certificates (i.e., non-degree) from vocational probrrams, it had taken them on
average 1.7 years to complete their program, versus 9.8 years for t11ose wit11 doctoral degrees.
Given the higher-end degrees generally skew toward o lder students who are more likely to
attend part-time, this makes intuitive sense to us. Interestingly, when compared to 1996, timeto-complete rates were fairly stable. except for vocational prognuns, where we believe a
number of shorter-tenn offerings (e.g., medical assistant) have increased.

Financia l Group

210

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 212. Time to Complete by Program Type (1996 and 2004)

9.7 9.8

01996 1!!12004

10
9
8
eli

ID

1i 6
'ii

E 5
0

2
~

3
i= 2

0
Vocational
certificate

Associate

Bachelor's
only

Bachelor's
plus

Master's

Professional

Doctorate

Note: Bachelor data not available for 1996. Source: BMO Capital Markets and Postsecondary Educational
Opportunity (Number 189).

For-profits appear
to have relatively
quicker
completion
rates ...

Nevertheless. according to infonuation compiled by the Career College Association (see

Exhibit 213), the for-profi t postsecondary sector's lobbying group, students in these shorterterm programs have a better chance of faster completion at a for-profit school (12.5 months
for a certificate. 25.4 montllS for an associate degree) than a not-for-profit school (20.4 and 32
months, respectively).

Exhibit 213. Average Months to Complete Certificate and

Associate Program
c:

40

.Q

Qi

a.

ocertificate

30

.s
.s::
c"'0

32.0

25.4

20.4

&Associate's Degree

20
10

::!:

For.Profrt

Not.for. Profit

Source: Career College Association.

In addition, students at for-profit schools also complete their bachelor's program faster than
those at not-for-profit schools- regardless of the measurement period (see Exhibit 214). We
believe this may reflect the fact that students at for-profit schools skew older and likely have
earned some college credits prior to entering these institutions.

A member of BMO

Financia l Group

211

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 214. Average Months to Complete Bachelor's Degree

(Cohort Year 2000)
0 Public not-for-profit II Private not-for-profit 0 Private for-profit

Cil

70
61

.s::.

c0

60

50

..

65

50

Ql

.=IV

40

= 30
IV
Ql

!!!
~ 20

'1J

Ql

10

j::

0
Four year rate

Five year rate

Six year rate

Note: Rate measures the total number of completers within the specified time to degree attainment divided by
the revised cohort minus any allowable exclusions. Source: US Department of Education National Center for
Educational Statistics.

Nevertheless, we find this interesting, as it appears that for-profit schools attract " riskier"
students than their not-for-profit peers. In addition., this gap may be widening. ln November
2004. NCES published a study called College Persistence on the Rise in which it compared
student populations from two years of "fresluna.n it had studied in depth,'' the 1989-1990
fTeshman class and the 1995-1996 freslunan class. One of the metrics measured was the
percentage of students that had any of the characteristics that had previously been identified
as increasing tJ1e risk of not completing postsecondary school (e.g., delaying enrollment after
high school, being financially independent, etc.).
... d espit e
enrolling "riskier"
students

A m ember of BMO

As shown in Exhibit 215. students attending for-profit schools had the largest percentage of
risk factors: 80.7% for the 1995-1996 school year. l.n addition, the for-profit sector was the
only one tJ1at showed the " risk percentage" increasing over tJ1e six-year timeframe of tJtis
study. We believe this and otJ1er anecdotal data show that t11e for-profit sector tends to focus
more on having its students complete their degree. W1ti le this focus may not be totally
altmistic (i.e., students are more profitable the longer they stay in school, providing a greater
length of time over which to "amortize" acquisition costs). it is nevertlteless an advantage the
for-profits may be able to use to recmit students.

Financia l Group

212

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 215. Percentage of Entering Students with Risk Factors

(1989-1990 and 1995-1996 School Years)
100%

i:
.,"'

80%

"0

60%

01989-90

111995-96

76.7%80.7%

(i)

.....
0

40%

~
0

20%
0%
Any institution

Public 4-year
institution

Private not-for-profit
4-year insmution

Public 2-year
institution

Private for-profrt
institution

Source: National Center for Education Statistics' College Persistence on the Rise (NCES 2005-156).

A listing of key completion/graduation metrics can be found in Exhibit 216.

Exhibit 216. Key Completion/Graduation Metrics to Watch

Term

Definition

Postsecondary "Norms"

Completion!
graduation
rate (1)

Measures the percentage of

Public not-for-profit less than two-

students that complete the program; year institutions: 70.2%

year institutions: 64.9%

in non-degree programs students

receive a certificate or diploma; in
associate and bachelor programs
they receive a degree. Data
measures graduation rates within
150% of normal time (i.e., three
years for two-year programs and six
years for four-year programs).

Private for-profit two-year

institutions: 60%

Private for-profit less than two-

Private not-for-profit less than

two-year institutions: 74.7%
Public not-for-profit two-year
institutions: 21.9%
Private not-for-profit two-year
institutions: 50.2%
Public not-for-profit four-year
institutions: 53.5%
Private not-for-profit four-year
institutions: 63.7%

Time to complete (2) Time period (in years) between a

student beginning a program and
completing it.

For-Profit "Norms"

Vocational certificate: 1.7

Private for-profit four-year

institutions: 42.1%

NA

Associate's degree: 4.4

Bachelor's only: 5 .8
Bachelor's plus: 5.2
Master's: 7. 1
Professional: 6
Doctorate: 9 .8

NA - Not Available. Note: Data measures cohort year 2004 for attendees at less than two-year institutions and at two-year institutions and cohort
year 2001 for attendees at four-year institutions. Source: BMO Capital Markets and 1) US Department of Education's National Center for
Education Statistics Report 2009-155 Enrollment in Postsecondary Institutions, fall 2007 and 2) Postsecondary Educational Opportunity (Number
189) -2004 data.

A member of BMO

Financia l Group

213

September 2009

Postsecondary Education

BMO Capital Markets

Postsecondary Schools Placement Rate and Starting Salary

Trends
One of the selling points that for-profit providers have over their not-for-profit counterparts is
a focus on preparing students to get jobs once they have finished their progrdms. That is not to
say that students graduating from not-for-profit institutions are not ready for the working
world, but that for-profit schools tend to stress placement rates as a selling point to potential
students, which is something rarely, if ever, seen in the not-for-profit sector. This metric may
become more important as the recent reauthoriz-ation of the Higher Education Act (HEA),
along with upcoming potential rules changes, stresses accountability metrics for all for-profit
and not-for-profit schools.
lt was difficult to obtain placement infonnation across the postsecondary landscape because
of various definitions of the metrics. In addition, few of the publicly held companies disclose
placement rates. Furthennore, for companies such as Apollo Group (APOL) and Strayer
Education (STRA), placement rates are somewhat meaningless, g:iven working adults
comprise the bulk of their student bodies and pursue their education not necessarily to get a
job, but rather to advance at their current place of employment.

We were unable to find trend data for placement rates for not-for-profit schools. However, the
Accrediting Council for Independent Colleges and Schools (ACICS) provides placement rates
for the schools tlmt it accredits. As the bulk of ACICS-accredited schools are for-profit
providers, we use this as a proxy for trends in the for-profit sector. As shown in Exhibit 217,
placement rates for ACICS-accredited schools fell just after the most recent US recession
(March-November 2001), and continued to decline through 2003 owing to what we believe
was t11e "jobless recovery." Placement rc:1tes crept up a bit through 2005, owing to the cyclical
nature of this statistic, in our view. However, they began to fall again in 2006, and despite an
improvement in 2007, fell to 71% in 2008 - the lowest we have on record since 1997 coinciding with the current recession. Considering the boom in tmemployment over the past
year and t11e countercyclical nature of this metric. we believe placement rates could continue
to decline in the near tenn.

Placement rate
trend s appear to
be cyclical, but
generally are
trending down

A m ember of BMO

Financial Group

214

September

2009

Postsecondary Education

BMO Capital Markets

Exhibit 217. Annual Placement Rates for ACICS-Accredited

Schools (1997-2008)
85%
81 .7%
r-

82.5%
r-

80.9%
-

81 60L
10
_

80%

80.3%
r-

2"'

"'

0:::

~%

76.5%

77.2% 7~%
r-

,---

74.0%

75%

72.2%

QJ

lJ

"'

0::

71.0%
r-

70%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Note: Shaded area represents recessionary period. Data rounded to nearest percentage point beginning in
2007. Source: Accrediting Council for Independent Colleges and Schools (ACICS), Annual Summary of Key
Operating Statistics.

Placement rates
are highest for
master's and
associate's
degrees- though
have dropped for

A deeper analysis of this data (see Exhibit 218) shows t11at when measured by credential
levels, placement f"dtes decreased between 2007 and 2008 across all probrrams (e.g., nondegree through master' s) except at the associate-degree level, which was flat. Historically,
associate's degrees and master's degrees tend to have the highest placement rdtes. Placement
rates for bachelor's degrees fell considerably in 2008 to 65%, representing the lowest rate of
any degree category for all the years for which we have data (back to 2001).

almost all types in

current recession

Exhibit 218. Placement Rates for ACICS-Accredited Schools by

Classification (2001-2008)
100%

[) 2001 112002 [) 2003 [) 2004 .2005 [) 2006 l!il2007 [) 2008

90%
80%
41

1ii
....

E
41
E

"'

0:::

70%
60%
50%
40%
30%
20%
10%
0%
Non-Degree

Occupational
Associate's
Degree

Academic
Associate's
Degree

Bachelor's
Degree

Master's
Degree

Source: Accrediting Council for Independent Colleges and Schools (ACICS), Annual Summary of Key
Operating Statistics.

A member of BMO

Financia l Group

215

September 2009

Postsecondary Education

BMO Capital Markets

A list of t11e placement metrics for t11e for-profi t companjes that dis close tJlis data can be
found in Exhibit 219. As shown, placement rates feU for most companies after the 2001
recession and then rebounded as the economic recovery gained stren!:,>tll later in t11e decade.
We note it is likely that placement rates will fall in the near-tenn owing to the recession.

Exhibit 219. Publicly Held For-Profit Postsecondary School

Operators Annual Placement Rates {1999-2008)
Company

Ticl<er

Career Education
Corinthian Colleges
OeVry
Education Management
ITT Educational Services
Lincoln Educational Services
Universal T echnical lnstiMe
MEDIAN

CECO

coco
ov
Private
ESI
U NC
UTI

~
91.8%
86.0%
95.1%
90.1%
90.0%

~
9:l6%
86.0%
94.7%
90.7%
90.0%

~
92.1%
83.0%
86.5%
86.6%
77.0%

N .A.
N .A.

N .A.
N .A.

N.A

90.1'/,

90.7'/,

89.0%
86.6%

~
94.1%
82.0%
82.3%
87.3%
73.0%
83.3%
90.0%
83.3%

~
93.0%
81.0%
83.4%
88.9%
69.0%
84.6%
87.0%
84.8%

lQQ

N .A.

N .A.

N.A.

N .A.

N.A.

79.4%
84.7%
87.8%
71.0%
86.7%
89.0%
84.7'k

82.0%
86.1%
891%
76.0%

84.0%
91.9%
89.6%
81.0%

83.7%
92.8%
90.1%
82.0%

78.1%
91 .0%
89.1%

N .A.

N.A.

N.A.

91.0%
85.1%

91.0%
89.6%

91.0%
90.1%

1!!2

N.A.
N.A
N.A.

89.1 %

N.A. - Not Available. Note: Data represents calendar year for most companies. Education Management was
a publicly held company until being taken private on June 1, 2006. Source: BMO Capital Markets and
company reports.

Starting salaries
have been
increasi ng
roughly4%
annually, though
li kely lower in
cu rrent recession

A member of BMO

Each year, tl1e National Association of Colleges and Employers tracks starting sala ries for
graduates of selected bachelor's, master's and doctoral programs through its annual Salary
Survey. Unfortunately, the data is not segmented by school type. Nevertheless, we believe an
llistorical analysis is valuable. As shown in Exhibit 220, salaries across a number of degrees
averaged roughly a 4% annual incre.ase between fall 2005 and fall 2008. While the smmner
2009 data- wllich shows declines in average salaries among most categories- is more recent,
we note it is preliminary. Nevertheless, when the fall 2009 data is released, it will likely show
the adverse impact of the current recession.

Financia l Group

216

September

2009

Postsecondary Education

BMO Capital Markets

Exhibit 220. Average Starting Salaries by Discipline: Selected

Bachelor's Master's and Doctoral Degree (Fall 2004- Fall 2008; Summer
2008- Summer 2009)
CAGR:
Bachelors Degree

Fall 2005 Fall 2006

$40,593 $41,911

Fall 2007 Fall 2008

$44,164 $47,517

Fall 2005 Fall 2008

4.0%

SUmmer SUmmer % Annual

2008
2009 Change
$49,693 $49,307
~.8%

By d scipline:
Business:
P4:counli'lg
&siless .AdmilistrationiManagement
Economics/Finance
Ecooomics
Fi'lance
Hospitally seMces Management
Management lnfOfmation systems
Marlceting/Markellng Management

42,940
39.480
41.994

44.928
41 ,155
44,588

46.292
43.256

48.020
46,171

2.8%
4.0%

NA.

NA.

N.A
N.A
N.A.

1,9%

48.085
45,915

48.993
44.944

-2.1%

NA.
NA.

NA.
NA.

30,643
43.653
36,409

32.213
45.391
37,19 1

47,782
46,442
38.588
47,507
39,269

51,062
48,158
43.437
51.489
41,506

9.1%
4.2%
3.3%

50,507
48,547
42,100
51.350
42,053

49,829
49.940
40,151
50.275
43,325

-1.3%
2.9%
-4.6%
-2.1%
3.0%

COfl')uter Science:
Computer SCience
Information Science/Systems

50.664
43,902

50.744
47,182

53,051
49,966

61 ,11 0
52.322

4.8%
4.5%

60.416
52,418

61 .407
52,089

1.64
-0.6%

Educabon:
8ementary Teacher Education

30.904

32,110

33.533

34.059

2.54

34.071

34.789

2.14

53.639
43.774
52,242
51,773
49,678
50.175

56,269
46.084
53.096
53.500
51,469
51.808

59.218
48.998
55,920
55,333
54,585
54,057

63.773
51.780
60,280
57,803
57,740
57.024

4.4%
4.3%
3.6%
2.7%
3.8%
3.3%

63,165
51.632
59,576
56,9 10
57,943
57.009

64.902
52.048
61,738
60,125
58,358
58.766

2.74
0.8%
3.6%
5.6%
0.7%
3. 1%

31,451
31,739
32.985
30.073
31 ,368
30,938

31,185
33.071
33,094
30.369
31.096
28,721

31,924
35,092
35.261
31,857
32,161
30,174

35,453
38,056
38.844
34.095
35.434
35,073

3.0%
4.6%
4.2%
3.2%
3.1%
3.2%

34,327
37. m
38,179
33,564
34,796
35,571

34,704
37.861
38.096
34,264
33,280
34.224

1.1%
1.7%
-0.2%
2.14
-4.4%
-3.8%

31,713
38,635
43.304
41.060

32.880
39,804
44,672
45.347

33,944
41,820
46.547
45.04.5

35,522
43,951
49.759
50,280

2.9%
3.3%
3.5%
5.2%

35,042
45,106
49,736
51,644

33,254
39.897
47.807
49.18 1

-5.1%
-11.5%
-3.9%

$46,460

$48,680

$50,850

$54,044

3.9%

$54,718

$51,484

-5.9%

45.992
48.667

47,003
52,026

49,723

50,124

2.2%

49.596

49,786

0.4%

N.A.
N.A.
N.A.

N.A.
N.A.

N.A

N.A.
N.A.

Bl ~neering:

Chemical Engileering
CMI Engineering
Computer Englneemg
EJectricaiiEJectrooics Engineering
lnckJsltiaVManufacturing Engineering
~hanical Engineering
Humanities and Ll)eral hts:
English Language and Uerature
History
Pollical Science/Government
Ps)':hology
Sociology
Vlsual and Perfonnlng Ms
SCiences and Health:
Biologicei/Ufe Sciences

Chemistry
Mathematics and statistics
Nursing
Masters Degree
Business:
.Accountilg
Ecooomicsn=inance
Economics
Filence

MBA (&lsiness Mninistration)

N.A.
N.A.

N.A.
N.A.

N.A.

N.A.
46,550
61 ,539
71.347

6.1%

4.8%

54,409
78,9 19

39,000
58,233
72.250

7.0%
-8.5%

56.383

52,472

56,483
60,100
62.671

64,840

71,185

65,463

73,826

3.3%

73,360

69,407

-5.4%

37,744
31,729
36.445

42,505
37,326
35.001

43,069
33,717
38,233

43,817
41,747
44,738

3.8%
7.1%
5.3%

35,830
39,678
48.230

38,200
38,378
38.017

6.6%
-3.3%
-21.2".4

48,619
64.781
60.223

50.953
66,687
61 .234

51.297
68.247
63.209

56,300
72.814
65.121

3.7%
3.0%
2.0 %

55,021
72.135
64.589

54,163
71 .455
66.158

-1.6%
-0.9%
2.4%

46,345
35. 212
32.888
40,575

46,873
40.952
35, 102
42,220

45,279
39.808
42,522
42,930

48,391
39,099
42.643
52,605

1.1%

2.7%
6.7%
6.7%

48,834
51.950
37.444
56,052

52,544
39.009
36,667
49,000

7.6%
-24.9%
-2.1%
-12.6%

$60,331

$62,316

$63,564

$71,035

4.2%

$67,599

$66,907

-1.0%

66,500
65,000

81,438
58,875

90.625

91,734

8.4%

89,043

82,849

-7.0%

NA.

NA.

NA.

NA.

74,731

95.500

N.A.
N.A.

N.A
N.A

N.A.
N.A.

COI'l'IC>uter Science:

Computer Science
Ed.Jcetion:
Education Administration/SUpervision
Bementary Teacher E<llcadon
Special EduC8tion
8'1gineermg:

CMt Engineering
8eCCricall8ectrooics Engineering
~hanical Engineering
Humanities, Health and Sciences:
Health and Related Sciences
Human lilies
~hology

Social Sciences
Doctoral Degree
Business:
Busi'less Mmill.stration/Management
Economics/Finance
Ecooomics
Ed.lcation:
Education Administration/SUpervision
Engineering:
Chemical Engi'leering

CMI Engineering
BectricaliBectrooics En_gineering
Mechamcal Engineering
Humanities and lberal Arts:
English Language and U erature
~hology

Social SCiences
Sciences and Health:
Biological and life SCiences

Chemistry
Computer Sciences
Mathematics

NA.
N.A.

54,789

51.527

63,691

80,498

10.1%

73,600

74,518

73.317
59.216
75.066
69.757

75,659
63,100
81.297
69.034

76,688
62,275
77.860
70.928

82,419
60,981
85.045
72,068

3.0%
0.7%
3.2%
0.8%

83.844
59,057
79,717
70.397

90.899
59,043
88.893
75,119

50,105
45.188
46.838

41 ,404
49.374
48.487

42.017
45.163
49.225

55,600
46,677
56.509

2.7%
0.84
4.8%

53.400
48.423
58.088

42,609
48.293
54.491

-20.2"4
0.3%
-6.2".4

43.9 16
55,874
84,025
55,047

43,195
68.458
76,830
63,952

39.054
61 .822
79,086
56.727

44,956
66,985
87,216
68,095

0.6%
4.6%
0.9%
5.5%

38.479
68,933
89,924
65.881

37.038
61 ,954
83,582
70,500

-3.7%
-10.1%
-7.1%
7.0%

1.2%
8.4%
0.0%
11 .5%

6.7%

N.A. - Not Available. Note: The Fall survey data represents the graduating class from the prior year, e.g., Fall 2008 is
the 2007-2008 class. Source: BMO Capital Markets and National Association of Colleges and Employers.

A m ember of BMO

Financia l Group

217

September 2009

Postsecondary Education

BMO Capital Markets

We were unable to obtain recent data for starting salaries of associate degree categories.
However, as shown in Exhibit 221, starting salaries vary widely by type of associate degree,
some of tllis owing to geo);.>rapllic locations.

Exhibit 221. Average Starting Salaries for by Discipline: Selected Associate Degree
(Graduating Class of 2004)
Major
All Disciplines

Average

Minimum

Maxim um

$29,042

$16,449

$42,507

Business Management, Marketing and Related Support Services:

Accounting
Administrative AssistanVSecretarial Sciences, General
Bus1ness Commerce, General
Business Administration and Management, General
Management Information Systems, General
Other

25,340
25,384
21,902
25,948
26,477
30,000
26,193

12,000
14,000
12,000
18,720
14,000
30,000
16,120

43,000
37,710
31,200
34,902
40,000
30,000
43,000

Computer and Information Sciences:

General
Software DevelopmenVProgramming
Systems, Networking and Telecommunications
System Administration/Administrator
Web Page, Digital/Multimedia & Information Resource Design
Other

29,142
27,700
29,325
28,990
29,631
26,038
31,780

15,080
15,080
18,720
16,640
16,640
17,400
18,720

48,410
45,000
45,000
48,410
45,864
35,000
45,000

Education:
Early Childhood Education and Teaching
Teacher AssistanVAide
Other

19,022
19 ,041
17,100
20,619

12,272
11,253
16,640
12,272

31,200
29,994
20,238
31,200

Engineering-Related Technologies:
CAD/CADD Drafting and/or Design Technology/Technicia n
EET!Eiectrical Electronic and Communications Engineering Technology/Technician
Mechanical Engineering/Mechanical Technology/Technician
Other

28,798
24,764
30,472
32,504
26,954

16,000
17,460
16,000
17,680
18,720

47,840
36,784
40,000
4 7,840
43,680

Family and Consumer Sciences/Human Sciences:

Child Care Provider/Assistant
Other

20,132
19,632
21,026

11,960
11,960
14,040

31,200
25,688
31,200

Health Professions and Related Clinical Sciences:

Dental HygienisUHygienist
Licensed PracticaiNocational Nurse Training
Medical/Clinical Assistant
Medical Radiological Technology/Technician
Nurse/Nursing AssistanVAide and Patient Care Assitant
Nursing/Registered Nurse
Physical Therapy Assistant
Other

34,936
47,893
27,561
23,223
31,685
40,679
39,015
29,746
28,314

14,560
24,336
16,245
15,340
17,910
20,509
20,000
22,200
14,560

62,400
62,400
42,370
31,200
48,000
45,781
58,573
41,600
43,118

Law Professional and stUdies:

Legal Assistani/Paralegal
Other

23,391
23,395
23,314

16,640
16,640
22,000

36,000
36,000
32,510

Liberal Arts and Sciences, General Studies and Humanities:

liberal Arts and Sciences, liberal Studies
Other

22,443
26,037
21,064

13,520
18,000
17,680

31,990
41,995
28,000

Mechanic and Repair Technologies:

Automobile/Automotive Mechanics Technology/Technician
Computer Installation and Repair Technology/Technician
Electrical and Electronics Equipment Installer and Repairer, General
Other

25,047
21,447
23,771
28,125
27,617

13,520
13,520
16,640
20,259
14,560

41,600
30,000
32,627
41,592
41,600

Personal and Culinary Services

Culinary Arts/Chef Training
Other

22,504
22,429
22,963

12,000
12,000
16,245

30,196
30,196
26,000

Security and Protective Services:

Corrections
Criminal Justice/Police Sciences
Other

26,806
28,776
26,410
27,360

14,560
14,560
14,560
15,288

43,680
38,064
40,768
43,680

Visual and Performing Arts:

Commercial and Advertising Art
Graphic Design
Other

22,793
23,605
23,296
19 ,729

12,480
19,000
12,480
14,560

35,000
26,208
35,000
29,120

Source: BMO Capital Markets and National Association of Colleges and Employers.

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Postsecondary Education

BMO Capital Markets

As many of t11e companies in this industry serve the working adult sector. they do not disclose
typical startjng salary date. However, we were able to obtain some data for t11ose companies
that specialize in career-oriented pro);.'1<llllS and degrees (see Exhibit 222).

Exhibit 222. Select For-Profit Postsecondary School Operators Average Starting

Salaries (1999-2008)
Year of Salary Data

Company

Ticker

FYE

1999

2000

2002

2003

2004

DeVry (undegraduate only)

Education Management
liT Educational Services

DV
Private
ESI

6
6
12

N.A.
N.A.

N.A.
N.A.

N.A.
N.A.

N.A.

N.A.

N.A.

$25,450

28,100

27,600

$27,600
27,300

28,500
26,940

27,500
27,453

2005
$39,000
28,700
28,700

2006
$41,348
29,500
31,000

2007
$43,635
30,600
32,400

$45,486
30,200
32,800

Source: BMO Capital Markets and company reports. N.A. - Not Available

A listing of key placement and salary metrics can be found in Exhibit 223.

Exhibit 223. Key Placement and Starting Salary Metrics to Watch

Term

Definition

Postsecondary " Norms"

For-Profit " Norms"

Placement rate

Measures the percentage of students

that obtain employment in their field
of study within six months of
graduation.

N.A.

All institutions: 71% *1

Fall 2008 average starting salary and

CAGR change (Fall 2005 - Fall
2008)

Bachelor's degree: $47,517 (4%)

Starting salary .3

Publicly held companies: 89.1% 2

N.A.

Master's degree: $54,044 (3.9%)

Doctoral degree: $71,035 (4.2%)

Note: 1) For ACICS accredited institutions (2008); 2) Based on median of publicly traded for-profit institutions that reported placement rates in
10-K (2008 calendar year for most companies). *3) Based on data compiled from the National Association of Colleges and Employers annual
Salary Survey. N.A. - Not Available.
Sources: (1*) ACICS, (2) Company reports, and BMO Capital Markets.

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Postsecondary Schools Legal and Regulatory Issues

The US postsecondary education market is highly regulated. Most postsecondary schools must
meet the requirements of three regulatory bodies to be eligible for Title IV funding (i.e .. federal
financial aid): regional or national accreditation for degree programs, state approval for
licensing, and federnl regulations regarding financial aid eligibility.

through

Navigating through these regulations poses something of an entry barrier to new schools and
some unique risks. We believe schools U1at master the process can gain a competitive advantage.

regulations could

In tlus sectioiL we summarize t11e m~uor regulations affecting t11is sector.

Navigating

be barrier to entry
Accreditation and degree approval. Accreditation is a process in wluch a school submits to
ongoing reviews by an organization of peer instihltions ("c01muissions") that examine the

school' s academic quality and its admiJustrative and financial operations. GeneraJiy. a grant of
accreditation is viewed as confinnation that the school's programs meet generally accepted
academic standards and that it has U1e resources necessary to perfonn its educational mission.
Typically, accreditation is given for a 10-year petiod, and a thorough review is conducted near
t11e end of the period before accreditation is renewed.
A list of officially recog~1ized accrediting agencies can be found in Exlubit 224.

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Exhibit 224. Accrediting Agencies Recognized by the US Department of Education

Category
Regional Accrediting Agencies

Accrediting Agency
Middle States Association of Colleges and Schools, Commission on Higher Education (MSCHE)
New England Association of Schools and Colleges (NEASC)
Commission on Institutions of Higher Education
Commission on Technical and Career Institutions
North Central Association ol Colleges and Schools (NCACS)
Commission on Institutions of Higher Education
Commission on Accreditation and School Improvement
Northwest Commission o n Colleges and Universities (NWCCU)
Southern Association of Colleges and Schools, Commission o n Colleges (SACS)
Western Association o f Schools and Colleges fYVASC)
Accrediting Commission for Schools
Accred~i n g

Commission for Community and Junior Colleges

Accred~i n g

Commission for Senior Colleges and Unive rsities

National Accrediting Agencies

Acupuncture and Oriental Medicine

Accreditation Commission for Acupuncture and Oriental Medicine

Allied Health

Accrediting Bureau of Heatth Educatio n Schools

Art and Design

National Association o f Schools of Art and Design, Commission o n Accreditation

Bible

Association for Biblical Higher Education, Commission on Accreditation

Business

Accrediting Council for Independent Colleges and Schools

Career Schools/Occupational

Accrediting Commission o f Career Schools a nd Colleges ofTechnology/Council on Occupational Educatio n

Chiropractic

The Co uncil o n Chiropractic Education, Commission o n Accreditation

C hristian

Transnational Association of Christian Colleges a nd Schools, Accreditation Commission

Continuing Education

Accrediting Council for Co ntinuing Education and Training

Cosmetology

National Accred~ing Commission of Cosmetology Arts and Sciences

Dance

National Association o f Schools of Dance, Commission on Accreditation

Dental and Dental Auxiliary Programs

American Dental Association, Commission on Dental Accreditation

Dietetics

American Dietetic Association, Commission on Accreditation ApprOV"al for Dietetics Education

Distance Education and Training

Distance Education and Training Council, Aocred~ing Commission

English Language Program

Comm ossion on Enghsh Language Progmm Accreditation

Funeral Service Education

American Board of Funeral Service Education, Committee on Accreditation

Healthcare Management

Commission o n Accreditation of Hea~hca re Management Education

Law

American Bar Association, Council of the Section of Legal Educatio n and Admissrons to the Bar

Uberal Education

American Academy for Liberal Education

American Association for Marriage and Family Therapy, Commission on Accreditation fa Marriage and Family Therapy
Education

Marriage and Family Therapy

Massage Therapy

Comm ossion on Massage Therapy Accreditation

Medicine

liaison Committee on Medical Education

Midwifery

Midwifery Education Accreditation Council

Montesson

Montessori Accreditation Council for Teacher Education, Commission on Accreditation

Music

National Association of Schools of Music, Co mmission on Accreditation

Naturopathic Medicine

Co uncil on Naturopathic Medical Education

Nuclear Medicine Technology

Joint RevieoN Committee on Educational Programs in Nuclear Medicine Technology

Nurse Anesthesia

Council on Accreditation of Nurse Anesthesia Educational Programs

Nurse-Midwifery

American College of Nurse-Midv.ives, Accreditabon Commission for Midv.ife ry Education

Nursing

Commission on Collegiate Nursing Education/National League for Nursing Aocred~ing Commission

Occupational Therapy

American Occupational Therapy Association, Accreditation Council for Occupational Therapy Education

Optometry

American Optometric Association, Acaedrtation Counc1l on Optometric Education

Osteopathic Medicine

American Osteopathic Association, Commission o n Osteopathic College Accreditation

Other

New Yak Slate Board of Regents, the Commissioner of Education

Pastoral

Association for Clinical Pastoral Education, Inc., Accreditation Commission

Pharmacy

Accreditation Council for Pharmacy Education

PhysiCal Therapy

American Physical Thempy Association, Comm ossio n on Accreditabon in Physical Therapy Education

Podiatry

American Podiatric Medical Association, Council on Podiatric Medical Education

Psychology

American Psychological Association, Committee on Accreditation

Public Health

Co uncil on Education for Public Health

Rabbinical and Talmudic

Association of Advanced Rabbinical and Talmudic Schools, Accreditation Commission

Radiologic Technology

Joint Review Committee on Education in Radiologic Technology

American Speech-Language-Hearing Association, Council on Academic Accreditation in Audiology and Speech-Language
Speech-Language Pathology and Audiology Pathology

Teaching

National Council for Accreditation ofTeacher Education/Teacher Education

Theater

National Association o f Schools of Theatre, Commission o n Accreditation

Theology

Commissio n o n Accrediting of the Association of Theological Schools

Veterinary Medicine

American Veterinary Medical Association, Council o n Education

Accred~ation

Council, Accred~ation Committee

Source: BMO Capital Markets and US Department of Education.

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Regional

A List of the accrediting bodies overseeing the schools run by the publicly held for-profit
providers can be found in Exltibit 225. As shown, the bulk of schools are nationally accredited,
as opposed to regionally accredited. Although it tnay be incorrect re);.>ional accreditation is
typically viewed as the higher form of the two. as the bulk of well recognized not-for-profit
schools (i.e., Ivy League) are re);.>ionally accredited institutions. One reason for this view is the
relative ease in tem1s of credit transfers between regionally accrediting institullons when
compared to transferring fmm a nationally accredited to regionally accredited institullon

accreditation is
viewed as the
higher form of
accreditation

Exhibit 225. Accrediting Agencies for Select For-Profit Postsecondary Schools

Ticker

Company

School

Americ-an Public Education

APEI American Military University

Apollo Group

APOL The UnPversity of Phoenix. (including A.xi a College)

American Public Unhfersity

Bridgepoint Education

BPI

A ccrediting Agency
Higher learning Commission o fth e North Central Assoc. of
Colleges and Schools (HLC)
HLC
HLC

The U niversity of Phoeni x/Business

Associaton of CoUegiate Busiless Schools and Programs

The Univetsity of PhoenlxK::ounseling

The Universfty of PtloeniXItllurs~g
The University of Phoenhc/Teaching
The College for nuncial Planning Institutes Corp.
Western t'ltematlonal University

Council for Accre<liatlon of Counseling and Related EcllcatlonaJ

Pro~ m s (CACREP)
Comm. on Cole~ate Nursing EducatiOn (CCNE)
Teacher Accret:itation EclJc.ation Council (TEAC)
HLC
HLC

Ashford UnNersity
University oflhe Rockies

Regiona l National
X
X
X
X
X

X
X
X
X

HLC
HLC

Capella EducaUon

CPLA Capella University

HLC

Career Education

CECO 14 sdlools (incluclng branch campuses)

Accreditng Comm of Career Schools and Col eges of Technology

(ACCSCT)
Accrediting Council for t'ldependent Colleges and Schools
(ACICS)
Middle States Assoc. of Colleges and Schools (MSACS)
New England Assoc. of Schools and Colleges. Comm. on
Technical and Career Institutions (NEASC)
HLC
Southern Assoc. of Colleges and Schools (SACS)

48 schools (including branch campuSe$)

2 schools (including branch campuses)
1 school
5 schools (including branch campuses)
6 schools (Including branch campusM)

coco

Corinthian Coleges

43 schools
39schools
S schools
2 schools

ov

OeVry

Apollo Colege
Advanced Academics
Chamberlain Colege of Nursing
OeVry UnNersity (includes KeUerGraduate School)
OeVry University (baccalaureate electronics en~neering
technology programs)
OeVry UnN"ersity (associate degree health information
t~hnol ogyprograms)

Fa nor
Ross University
Vetennary School
Western Career College
Education Management

Private Algosy University ( 19 1ocations)

The Att Institute (8 k>C11tions)
The Art Institute ( 14 locations)
The Art Institute (2 io~bons)
The Art Institute ( 12 locations)
The Art Institute (3 lo~tions)
The Art Institute of Vancouver
8rO'Wfl Mackie Cotege (2 locations)
Srov.n Mackie College (20 locations)
lllilois Institute of Art (2 locations)
Miami International University of Art and OesiSJl, Miami f l
New England lnstiwte of Art, Boston MA
South University (&locations)
Western University College of law

Gland Canyon E~cati on

LOPE Grand Canyon UnNersity

CoUege ofEclJc-alion
Ken Blanchard College of Business

ITI Educational Services

ESI

lincoln Eckleationa:l Services

LINC

Strayer Education

un

Washington Post (US schools)

ACICS
HLC
HLC
HLC
Technology Accreditation Commission of ABET
Commission on Atcredi1atlon for Health fnfonnatics and
fnforma6on Management Eel~ cation
Brazilan Ministry of Education
Dominican Medical Board, US Uason Commiaee on Medical
EclJcation
Government of federation of St. Christopher and Nevis est Kitts)
Westem Association of Schools and CoUeges
HLC
ACCSCT
ACICS
Northwest Comm. on Coleges and Unrversities (NWCCU)
SACS
HLC
PrN-ate CareerTtail'ilg lns6tutions Agency of 6ti1ish Columbia
(PCTIA)
HLC
ACICS
HLC, ACCSCT
SACS
NEASC
SACS
Western Association of Schools and Colleges. American Bar
Association

X
X
X
X

X
X

X
X
X

X
X

X
X

X
X
X
X
X
X

X
X
X

X
X
X
X

X
X

X
X
X

X
X

College of Nursing and Health Sciences

HLC
Arizona Slate Board of Education
Associalon of CoUegiale Busness Schools and Programs
(ACBSP)
Comm. on Collegiate Nursing Education (CCNE)

nT Institutes (AI Ioca:lions)

ACICS

15 schools (inclucing branch campuses)

19 schools (lnclucing branch campuses)
B<iarwood College

ACCSCT
ACICS
NEASC

MSACS

STRA StrayerUniversily

Universal Technica: l lnst~ute

ACCST
ACICS
Accreditilg Council for Continuing Education and Training
(ACCET)
HLC

Universal Tt(hnieal lnstiMe

Motcyele Mechanics Institute
Marite Mechanics lnst~ute
NASCAR Technical Institute

ACCSCT
ACCSCT
ACCSCT
ACCSCT

Concord Law School

Accrediti'lg Comm. of the Distance Education and Training

Council (OETC)
HLC

W PO
Kaplan University

Other

X
X
X

X
X
X

X
X

X
X
X
X

Source: BMO Capital Markets and company reports.

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State licensing. Postsecondmy institutions must seek licensing fTom each state in which t11ey
operate. The intensity of the review process varies by state m1d can sometimes take more than
one year. Once granted, however, licenses are typically renewed with little fanfare, barring any
major changes. such as to curricul~ or t11e existence of any prior regulatory concerns.
Federal regulation. Schools must meet certain eligibility requirements for students to access
Title TV (i.e., federally funded) fil'lt<tncia1 aid. In addition, the accrediting body and state agency
tJ1at approve the school's operations must also certify t11e institution's eligibility for financial aid.
The ED certifies institutions to participate in Title TV programs for a fixed period of time,
typically t11ree years for a provisionally certified institution and six years in most ot11er instances.
The terms and conditions of an institution's participation in Title IV progrdllls, including ~my
special tenus and conditions by virtue of a provisional certification, are set forth in a program
participation agreement ("PPA) entered into between the ED a11d the institt1tion.
The ED automatically places an institution on provisional certification status when the
institution is certified for the first time or when it undergoes a change in ownership. (A 1998
amendment to t11e Title IV regulations allows institutions undergoing a change of ownership
to continue to receive Title IV funding willie tl1e chm1ge approval is reviewed. As acquisition
activity was limited when the original regulations were enacted, we believe t11ese mles have
helped accelerate consolidation within this sector.) The ED may also place an institution on

Provisional
certification

provisional certification status under ot11er circumstances, including if the institution fails to
satisfy certain standards of financial responsibility or administrative capability.
Students attending a provisionally certified institution are eligible to receive Title IV program
ftmds to the same ex1ent they would were the certification not provisional. Dming this period, an
institution must comply with any additional conditions imposed by the ED and must seek and
obtain the ED's advance approval before adding a new location. In addition, the ED may more
closely review a provisionally certified institution if it applies for renewal of certification or
approval to add an educational program, acquire anotJ1er school or seek to make ot11er
signi:ficm1t changes. If the ED detennines that a provisionally certified institution is unable to
meet its responsibilities tmder its PP A, the ED may seek to revoke the institution's certification
to participate in Title lV progr'dlTIS.
Program reviews

Periodically, tl1e ED conducts a program review to ensure each institution's cont:imting

compliance and ability to meet certain criteria. However, other issues, including an increase in
student-aid recipient complaints, can trigger major program reviews by t11e ED.
The following is a synopsis of some of the major criteria tJ1e ED review to ensure Title IV
compliance.
Loan-default ceilings (i.e., cohort default rates). This measures the percentage of borrowers
who enter repayment on certain Direct Loan and Federdl Family Education Loan (FFEL)
progrdlns (e.g.. Stafford) during a particular fiscal year and then default witllin the same or t11e
next fiscal year. Although t11e regulations vary by t11e type of financial aid, an institution can
lose its eligibility to participate in Title IV programs should its loan-default rates (known as
"cohort-default rates" or CDR) exceed certain thresholds. These rates are measured by campus.
not by the institution as a whole. CDR data is published each September witl1 a two-year lag (the
2007 data released in September 2009 is for borrowers who began repaying their loans between

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October 1, 2006 and September 30. 2007. and who defaulted before September 30. 2008),
allhough preliminal)' data is disclosed to the campuses the prior Februal)' (interestingly for the
first time, the ED released smmnary preliminary FY2007 data to the public in March 2009). The
thresholds for most progmms are as set forth in Exhibit 226.

Exhibit 226. Student-Loan Default Ceilings

Cohort Default Rate

Consequence for Institution

10% or more for one year

Delayed cash disbursements for first-year, first-time

undergraduate students

More than 20% for one year

Must develop a default management plan to reduce defaults;

institution's operations nor its students' ability to utilize student
loans are restricted.

25% or more for three

consecutive years

Becomes ineligible for participation for the fiscal year in which

the ineligibility determination is made and for the two succeeding
fiscal years.

40% or more for one year

Begins immediate limitation, suspension, or termination

proceedings from all federal aid programs.

Note: For Perkins loans, the thresholds are as follows: Between 20%-30%: reduced annual federal
contribution. Greater than 30%: cannot receive any new federal contributions.
Source: US Department of Education- Higher Education Act.

default rates

For-profit institutions usuaJly have higher student-loan default rates than t11eir not-for-profit
peers, as tl1ey tend to have a relatively higher percentage of low-income ru1d minority students.
According to a June 2006 report by tl1e National Center for Educational Statistics (NCES),
income level and mce (along with the actual size of debt) provide tl1e highest correlation to

(CDR)

CDRs (e.g., the lower one's income, the higherone s CDR).

Although they

However, unlll recently, CDRs for for-profit providers had been tTending down over time, witl1
t11e " gap" above not-for-profit default rates narrowing for t11c most part. As shown in Exhibit
227. tl1e average CDR for for-profit schools fell to 7.3% in 2003 from 26.4% in 1991. outpacing
tl1e declines in tl1e same period for botl1 public (to 4.3% from 8.7%) ~md private not-for-profit
institutions (to 2.8% from 6.4%).

For-profit schools
tend to have
higher cohort

have declined
dramatically since

1991

Exhibit 227. National Cohort Default Rates by Institution Type

(FY1991 - FY2007)
30%
25%

.1991
01 997
0 2003

0 1992
111 1998
0 2004

0 1993
0 1999
0 2005

0 1994
0 2000
0 2006

. 1995
112001
0 2007

.1996
112002

20%
15%
10%
5%
0%
All schools

Public Not-For-Profit

Private Not-For-Profit

Private For-Profit

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

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be slightly

The historical declining rate of default ruay be a bit misleading. In January 2004. the ED 's
Office of Inspector General (OlG) issued a report sta6ng that the following changes in the

misleading

calculation methodolO!,'Y have helped reduce cohort default rates for many schools:

But reduct ion may

In 1998. Congress e"1:ended by three months (to 270 days from 180 days) the length of
time before the govenunent declared a delinquent borrower to be in default. That
extension delays the moment at which the government must take responsibility for a bad
loan and repay the bank that made t11e loan.

In recent years, many colleges have pushed former students in danger of defaulting to
seek defennents or fotbeanmce from lenders. If the defennent or fotbearance is received,
the students are not required to make payments on their lo~ms. are not in danger of
defaulting, and are tl1erefore excluded from the default rate caJculation. Anecdotally, a
recent audit (released May 2008) by the ED' s Office of I11spector General accused
privately held Teclmicai Career Institute of " improperly" paying off loans for some of its
students to reduce its CDR in the 2005 school year.

CDRs are now on

the rise ... a trend
likely to continu e

The long-tenn trend of declining CDRs has reversed in recent years, with the current recession
(and tl1e period leading into it) likely to blame. In addition, we believe tlus was compounded by
a reduction in default rate management services from lenders in response to subsidy cuts
follow ing tl1e passage of the College Cost Reduction and Access Act (H.R. 2669) which became
effective on October 1, 2007. The average CDR for aJI schools reached 6.9% in FY2007
(preliminary) - the highest since FY1998 - while t11e average rate for for-profit schools
increased to 11.3%, its highest since FY1999. When drilling down a bit further into recent
trends, CDRs have increased across all school types since FY2005 (see Exhibit 228). Given the
continued deteriordtion of the economy since tl1en (remember this data is released on a lagged
basis), it is likely that CDRs for most schools will continue to increase in t11e near tenn.

Exhibit 228. Cohort Default Rates by Institution and School Type

(FY2005- FY2007)
FY2005 (Official) FY2006 (Official)

FY2007 (Draft)

Public
Less than 2 years
2-3 years
4 years+

4.3%
5.2%
7.9%
3.0%

4.7%
6.4%
8.4%
3.4%

6.1%
7.6%
10.2%
4.5%

Private
Less than 2 years
2-3 years
4 years+

2.4%
9.0%
6.7%
2.3%

2.5%
10.0%
6.1%
2.4%

3.8%
13.0%
8.1%
3.7%

Pro prieta ry

8.2%

9.7%

11.3%

8.9%
9.3%
7.2%

10.9%
11.1%
8.4%

12.5%
12.7%
10.0%

Foreign

1.0%

1.2%

2.2%

Total

4.6%

5.2%

6.9%

Less than 2 years

2-3 years
4 years+

Source: BMO Capital Markets and US Department of Education

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CDR
measurement
period to change

BMO Capital Markets

More CDR trouble likely awaits. regardless of the economic environment. After a multi-year
process, on July 31 , 2008, Congress reauthorized the Higher Educa6on Opportunity Act (HEOA
or HR 4137), which was signed into law on August 14, 2008. This new law included a provision
to ex.1end the CDR measurement period from two years to three years. The new defmition began
with borrowers who had a last date of attendance on March 30, 2008, and be&rins with the
FY2009 measurement period (i.e., borrowers who enter repayment between October 1, 2008,
and September 30, 2009 and default on or before September 30. 2011 under the current formula,
the default period would end on September 30, 2010).
Wllile this could change, as of now the release dates are as follows:
o

These new " three-year rates" are plmmed to be released beginning with the FY2009
measurements, with the institutions receiving preliminary data in Febmary 2012 and the
final data released to the public in September 2012.

During a " transi6on period" from FY2009 tl1rough FY2011 (fmal data to be released in
September 2012, September 2013 and September 2014, respectively), both two-year and
three-year rates will be released.

The new 30% threshold will be applied to all three-year mtes published on
September 2014.

~md

after

Extending t11e CDR measurement period will likely increase the chances for more schools to
approach t11e default thresholds. given tl1is longer period. According to research published in t11e
Journal ofStudent Financial Aid in 2006, most students default in tJ1eir second, tl1ird, and fourt11
years of repayment, rather than their first.

Extending CDR
measurement
period could
increase default
rate risk

A compromise was reached to increase the 25% three-year threshold for non-compliance to 30%
(and the 10% threshold for delayed disbursements to 15%. willie the 40% threshold remains),
but it may not be enough to prevent some schools, especially in t11e proprietary sector, from
breaking the 30% threshold. For example, if a t11ree-year window had been applied to t11e
FY2004 cohort, t11e defauJt rate at proprietary (for-profit) institutions would have nearly doubled
from 8.6% to 16.7%, according to an tmofficial analysis the ED prepared for Congress in early
2008. The rate of increase would have been even !,>reater at less than two-year proprietary
institutions (from 8.9% to 18.5%). As such, any schools with current cohort default mtes above
15% could be at greatest risk to break t11e 30% ilireshold under the new definition.
We have provided cohort default rates for a number of for-profit providers in Exhibit 229.

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Postsecondary Education

BMO Capital Markets

Exhibit 229. Select For-Profit Postsecondary School Operators Annual Cohort Default
Rates (FY1998-FY2007E)
Company
(range and/or median rate)
American Public Education
Apollo Group
Brldgepolnt Education
Capella Education
Career Education

Ticker
APEI
APOL
BPI
CPLA
CECO

1998
NA
4.1%-5.9%

1999
NA
4.6%-9.6%

2000
N.A.
5.2-h -6.4%

2001
N.A.
4.0%-5.8%

2002
NA
4.1%-6.4%

2003
NA
2.4%-6.5%

NA

N.A.
1.7%1 6.9'- '
6.7%-25.0%
9.0%

0.0%
0.0%15.4%
13.0%
8.9%
7.8%
N.A.
4.5%-17.5%
2.3%
1.2%16.6%
4.7%
6.7%15.6%
0.0%.0.0%
6.3%

0.5%
1.9%18.6%
2.7%-21.2-h
7.8%
6.7%
N.A.
4.8%12.7%
2.8%
0.0'--15.2-h
4.3%
4.4%-8.1%
0.0%.0.0%
8.3%

2.8%
2.2%24.2%
0.0%-20.4%
7.3%
6.2%
N.A.
2.1%12.0'-'
1.9'h
0.0'--14.3%
3.7%
7.4%11.2-h
1.6%18.1 %
8.6%

1.8'h
2.9%21.9%
4.0%-15.6%
5.7%
5.1%
1.2-h
4.5%-10.2%
1.2%
1.7%-15.4%
2.7%
5.9%10.0%
1.2%15.2%
7.7%

1.4%22.0%

Corlnlhlan Colleges
coco
OeVry (UnlversKy only FFELP) OV
Education Management
Grand Canyon Education

ITT Educational Services

Laureate Education
Lincoln Educational Services
Strayer Educatlon
Universal Technical Institute

Washington Post (Kaplan)

MEDIAN

2.4%-23.2%
12.7%
Private
10.2%
LOPE
N.A.
N.A.
ESI
Private
N.A.
UNC
N.A.
STRA
12.1%
UTI
N.A.
WPO
N.A.
12.5%

8.4%

N.A.
N.A.
N.A.
N.A.
5.6%
N.A.
N.A.
11 .1%

2004
NA
5.6%7.5%
2.4%-5.5%
2.2%
4.4%23.8%
3.6%-17.5%
6.5%
5.8%
1.4%
5.7%11. 1%
0.7%
3.1%19.5%
4.5%
6.7%1 1.9'-'
1.1%19.7%
8.9%

2005
N.A.
7.3%11 .4%
0.0%-4.1%
2.3%
3.2%22.0%
2.5%-17.6%
6.6%
0.0%14.1%
1.8%
5.8%12.6%
0.6%
4.6%14.6%
3.9%
4.7%7.0%
0.6%19.2'-'
8.7%

2006
NA
7.2<--27.4%
0.0%-4.1%
1.5%
1.7%14.3%
3.4%-18.8%
7.3%
1.2%11.3%
1.6%
5.5%-12.8%
0.7%
5.7%-19.4%
3.8%
6.5%8.0%
2.1%26.1%
9.8%

(Preliminary)
2007
N.A.
9.2-h (UoP)
13.2%
2.5%
NA
NA
NA
1.7%14.4%
1.4%
9.7%-15.3%
N.A.
N.A.
NA
NA
NA
N.A.

Note: Education Management was a publicly held company until being taken private on June 1, 2006. Laureate Education was a publicly held
company until being taken private on July 9 , 2007. N.A. - Not Available. Source: BMO Capital Markets and company reports.

"90/10" rule. A for-profit institution that derives more t11an 90% of its cash-basis revenues
f1'om Title IV funding for any two consecutive years cannot participate in these programs the
following two years. lf a school exceeds the 90% threshold for one year, the ED will place it
on provisional certification for at least two years. The measurement periods were changed as
part of the aforementioned HEOA (AU!,'llSt 2008) since what was previously a one-year
eligibiJity rule is now a two-year program participation rule. Prior to this, an institution faced
an immediate " death penalty" for exceeding the 90/10 tllreshold after one year. This data is
typically measured on an institution' s fiscal year and is usually :reported in each company's
annuallOK.
To avoid these onerous sanctions, for-profit providers must pay closer attention to ensure that
at least 10% of their cash-basis revenues are generated from non-Title IV sources. These can
include (but are not limited to):

A member of UMO

Cash payments, including those from non-TiUe IV eligible students (e.g. international) in
eligible programs,

Loans from sources outside of the institution (i.e., third-party or altemative loans),

Payments on institutional loans (i.e .. tl1ose provided by the school itself).

Sale proceeds on nonrecourse loans and/or receivables,

Department of Defense tuition assistance, and

State grants.

Financial Group

227

September 2009

Postsecondary Education

90110 rule only

applies to forprofit institutions,
providing an
artificial

BMO Capital Markets

As this rule currently applies only to for-profit institutions ("Section 102 institutions"). We
believe this regulation has put an artificial constraint on tl1e sector. Not only has it limited
enrollment growth as schools need to be more creative to obtain e>..1emal fmancial aid sources,
but, in many cases, it forces these institutions to raise prices faster tl1an intended to ensure tl1e
'wiggle room' to collect enough cash-basis revenue from non-title IV sources.

constraint

However, there has been some recent and proposed relief to this regulation.
Recent and

The aforementioned reautJ1orized HEOA included a provision to classify the $2,000

increase in the unsubsidized Stafford loan limits (effective July l , 2008 under Continued
Access to St11dent Lmms Act of 2008; HR 57 15 or ESCALA) as part of tl1e 10% (i.e.,
non-Title IV revenues) tlrrough the end of tl1e of 2010-20 11 academic year (June 30.
2011). In addition, institlltional aid (i.e., school lending) and scholarships will also be
included in the LO% through tlle end of the 2011-2012 academic year (June 30, 2012).
We believe tlus was done to help for-profit instjtutions avoid raising tuition rates just to
maintain compliance with the 90/10 rule, as the increases in unsubsidized Stafford loans
and Pell Grdnts (effective July 1, 2008) may have otl1erwise pushed some institutions into
non-compliance

On July 21, 2009, the House Education and Labor (HELP) Conunit1ee passed an
amendment as part of the markup of tJ1e Student Aid and Fiscal Responsibility Act (H.R.
3221 or SAFRA) that could provide additional 90/10 relief. The amendment. as proposed
by Congressman Robert Andrews (D-NJ), would extend by one year (tJ1rough June 30,
20 12) the period in which tl1e $2,000 increase in unsubsidized Stafford loans (autl1orized
under ECASLA) is treated as non-Title IV revenue. In addition. the same mle would
apply to borrowing under the new Fedeml Direct Perkins Prof,ram (increased to roughly
$6 billion per year fTom the current $1. 1 billion) as proposed in the White House's
FY2010 budget on May 7, 2009. Most importantly, however, it would extend the noncompliance period to three years from two years (as well as extending the tirneframe to
be under provisional certification to two years from one year). Willie we note this
amendment is far from becoming finalized, as it passed through a heavily Democraticcontrolled cotmuittee by a vote of 42-5, it gives some hope that tlus (or something
similar) could become law. It is hoped that the House will vote on its version of SAFRA
in mid- to late-September 2009. Following considemtion in the House. the bill will next
move to the Senate Health, Education, Labor, and Pensions Co1ru11ittee for debate.

potential
regulatory relief

Limits on

Recruiter-based incentive compensation (" incentive-compensation rule). This mle bans

providing

institutions whose students are eligible for Title IV funds from using certain financial
incentives to compensate their recmiters (e.g., enrollment cmmselors) based on tl1e number of
students that enroll in courses or any other enrollment-related rnelrics. Initially, tllis rule was
the bane of many school operators owing to its ambiguity. In November 2002, the ED
clarified the regulation, setting up 12 " safe harbors" that would not violate the incen6vecompensation mle (see Exlubit 230).

incentive
compensation to
recruiters

A member of BMO

Financial Group

228

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 230. "Safe Harbors" for Incentive-Compensation Rule

Safe
Harbor # Issue
1
Adjustments to employee
compensation

Details
A school may make up to two adjustments (upward or downward) to a covered employee's annual salary
or fixed hour1y wage rate within any 12-month period without the adjustment being considered an
incentive payment, provided that no adjustment is based solely on the number of students recruUed,
admitted, enrolled, or awarded financial aid. One cost-of-living increase that is paid to all or
substantially all of the school's full-time employees will not be considered an adjustment under this safe
harbor. In addition, wijh regard to overtime, if the basic compensation of an employee is not an incentive
payment, neither is overtime pay required under the Federal Fair Labor Standards Act
A school may provide incentive compensation to recruiters based upon their recruitment of students
who enroll only in programs that are not eligible for FSA funds.

RecruUment into programs that

are not eligible for (Federal
Student Aid) FSA program
funds

Payment for securing contracts

with employers

Profit-sharing or bonus
payments

Compensation based upon

students completing their
programs of study

Payments to employees for pre- A school may make incentive payments to individuals whose responsibilities are limited to preenrollment activities
enrollment activities that are clerical in nature. However. soliciting students for interviews is a recruitment
activijy, not a pre-enrollment activity, and individuals may not receive incentive compensation based on
their success in soliciting students for interviews. In addition , since a recruiter's job description is to recruij,
it would be very difficull for a school to document that it was paying a bonus to a recruiter solely for clerical
pre-enrollment activities.
The incentive payment prohibijion does not extend beyond first line supervisors or managers. Direct
Compensation paid to
managerial and supervisory
supervisors are included in this prohibition because their actions generally have a direct and immediate
employees not involved in
impact on the individuals who carry out these covered activities.
Token gifts
The maximum cost of a token, noncash gift that may be provided to an alumnus or student is $100,
provided that: the gifts are not in the form of money; and no more than one gift is provided annually to an
individual. The cost basis of a token noncash gift is what the school paid for U. The value is the fair market
value of the item. A high value item for which the school paid a minimal cost would not be considered a
token gift
Profit distributions
Profit distributions to owners are not payments based on success in securing enrollments or awarding
financial aid. Therefore any owner, whether an employee or not, is entitled to a share of the organization's
proms to the extent they represent a proportionate share of the profits based upon the employee's
ownership interest
Internet-based recruiting
This safe harbor permits a school to award incentive compensation for Internet-based recruitment
activijies
and admission activities that provide information about the school to prospective students, refer prospective
students to the school, or permit prospective students to apply for admission online.
Payments to third parties for
A school may make incentive payments to third parties for other types of services , including tuitionservices to the school that do
sharing arrangements. marketing, and advertising that are not covered by the incentive compensation
not include recruitment
prohibition.
Payments to third parties for
If a school uses an outside entity to perform activities for it, including covered activijies, the school may
services that include
make incentive payments to the third party without violating the incentive payment prohibition as long as
recruitment activities
the individuals performing the covered activities are not compensated in a way that is prohibited by the
incentive payment compensation rule.

10

11

12

This safe harbor addresses payments to recruiters who arrange contracts between a school and an
employer, where the employer pays the tuition and fees for Us employees (either directly to the school or by
reimbursement to the employee). As long as there is no direct contact by the school's representative with
prospective students, and as long as the employer is paying at least 50% of the training costs, incentive
payments to recruiters who arrange for such contracts are not covered by the incentive payment
prohibition, provided that the incentive payments are not based on the number of employees who enroll,
or the amount of revenue generated by those employees.
Profit-sharing and bonus payments to all or substantially all of a school's full-time employees are not
incentive payments based on success in securing enrollments or awarding financial aid. As long as the
profrt -sharing or bonus payments are substantially the same amount or the same percentage of salary or
wages, and as long as the payments are made to all or substantially all of the school's full-time professional
and administrative staff, compensation paid as part of a profit-sharing or bonus plan is not considered a
violation of the incentive payment prohibition. In addition, such payments can be limited to all or
substantially all of the full-time employees at one or more organizational levels at the school, except that an
organizational level may not consist predominantly of recruiters, the admissions staff, or the financial aid
staff.
Compensation that is based upon students successfully completing their educational programs, or one
academic year of their educational programs, whichever is shorter, does not violate the incentive
compensation prohibition. Successful completion of an academic year means that the student has
earned at least 24 semester or trimester credit hours or 36 quarter credit hours, or has successfully
completed at least 900 clock hours of instruction at the school _(Time may not be substituted for credits
earned.) In addition , the 30 weeks of instructional time element of the definition of an academic year does
not apply to this safe harbor. Therefore, this safe harbor applies when a student earns, for example, 24
semester credits, no matter how short or long a time that takes.

Source: Knutte & Associates.

A m ember of BMO

Financial Group

229

September 2009

Postsecondary Education

BMO Capital Markets

Nevertheless. we note t11at a number of for-profi t providers (e.g.. Apollo Group, Bridgepoint
Education, DeVry, Grand Canyon Education) have faced accusations of violating this
provision (see details later in tlris section).
The "incentive-compensation mle" has recently come back into prominence because on May 26.
2009 the ED annmmced it would be reviewed as part of its negotiated rulemaking session (see
details later in this section). Should any changes be made, we believe some providers may have
to rework their compensation policies. which could create increased recmiter turnover and have
some negative implications on enrollment grow th. However, we believe any such effect would
be short-lived.

Negotiated
rulemaking
session could
change these
regulations

Return of funds. The 1998 amendment to the HEA that took effect October 2000 increased

the onus on the schools themselves to reftmd Title IV f"Unds for students who withdrew from
their programs prior to completion. Under the return-of-ftmds provision, if a student
withdraws during the first 60% of any payment period. he/she can use only a pro-rata portion
of the T ille IV Program funds for which he/she would otherwise be e ligible. The institution
must refund any TiUe IV ftmds tlwt it receives on behalf of a withdrawing student in excess of
the an10unt the student can use for such a period of emollment. Monies are due witltin 30 days
after the student's withdrawal date.
While institutions can try to collect these "excess ftmds" from students, in many cases, they
do not. One immediate effect of this change was to compel most for-profit providers to
increase their own bad-debt reserves.
Financial responsibility standards. A blended score of three financial ratios - equily
(measures the institution's capital resources. fimmcial viability. and ability to borrow; 40%
weighting), profitability (measures the institution' s profitability or ability to operate; 30%
weighting), and reserve strength (measures the institution's viability and liquidity; 30%
weighting)- is used to ensure the institution is financially viable for its students to be eligible
for Title IV fund ing. An institutions fi:nanciaJ ratios must yield a composite score of at least
1.5 (of a possible 3.0) for it to be deemed financiaJly responsible without the need for further
federal oversight. Institutions that do not meet tllis ntinimtml are typically reqtlired to post a
letter of credit with the ED based on a percentage of the prior year's Title IV disbursements,
may be placed tmder provisional certification status, and/or become subject to heightened
cash monitoring, wllich, in essence, delays the receipt of future Title IV funds.

A listing of historical :financial-responsibiljty ratios for the publicly he ld providers is found in

Exhibit 231.

A member of UM O

Financial Group

230

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 231. Select For-Profit Postsecondary School Operators Financial-Responsibility

Ratios (FY1999-FY2009)
Company
American Public Education
Apollo Group
Bridge point Education (Ashford Univ .)
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand Canyon
ITT Educational Services
Lincoln Educational Services
Strayer Education
Universal Technical Institute
Washington Post
MEDIAN

Ticker
APEI
APOL
BPI
CECO

1999

2000

2001

2002

2003

2004

2005

2006

NA

N.A.

N.A.

N.A.

N.A.

NA

N.A.

N.A.

3.0

3.0

3.0

3.0

3.0

3.0

3.0

2.9

N.A.
N.A.

N.A.
N.A.

N.A.
N.A.

N.A.

N.A.

NA

N.A.

N.A.

coco

3.0

3.0

3.0

2.5
3.0

2.6
2.6

2 .8
2.1

2.7
2.1

CPLA
DV
Private
LOPE
ESI
LINC
STRA
UTI
WPO

N.A.
N.A.
N.A.
N.A .

N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A .

N.A.

N.A.

N.A.

1.4

> 1.5

> 1.5

3.0
1.8
3.0
> 1.5

2007
3.0
2.6
< 1.5
> 1.5
1.7
3.0
> 1.5

N.A.
N.A.

N.A.
N.A .

N.A.
N.A.

N.A.

N.A.

2.4

2.3

2.3

2.2

2.8

2.9

N.A .

N.A.

N.A.

N.A.

N.A.

N.A.

3.0

3.0

N.A.
NA.

N.A.
N.A.

3.0
<1 .5

3.0
<1 .5

3.0
<1 .5

3.0
<1 .5

3.0
2.5
3.0
>1.5

> 1.5
2.2
1 .7
3.0
>1 .5

> 1 .5
1.9
1.8
3.0
>1 .5

NA.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

NA.

3.0

3.0

3.0

3.0

2.7

2.9

2.8

2.9

2.6

2.6

2008
3.0
2.7
< 1.5
> 1.5
2.0
3.0
> 1.5
< 1.5
> 1.5
2.5
1.8
N.A.

>1 .5

2009
N.A.
N.A.
N.A.
NA.

2.6
N.A.

> 1.5
< 1 .5
N.A.
N.A .
N.A.
N.A.
N.A.
N.A.
N.A.

Note: Education Management was a publicly held company until being taken private on June 1, 2006. N.A.- Not Available. Source: BMO
Capital Markets and company reports.

" One-day" rule (previously the "12-hour" rule). Tbis mle, wbich was implemented in
November 2002, requires a student to register for one day of course work per week to receive
full federal financial-aid benefits. This amendment replaced the " 12-hour'' rule, which had
required students to be enrolled in 12 hours of course work per week to be eligible. Although
the details of what exactly constitutes "one day" remain somewhat ambiguous, we believe this
change creates more flexibility for non-traditional (i.e.. online) education, making it easier for
such students to meet the nlinimmn requirements.
The 50% rule. Tbis rule was repealed as part of the Higher Education Reconciliation Act

(HERA) signed by President Bush on February 8, 2006, and effective July l , 2006. Prior to
the repeal, institutions witl1 at least 50% of courses offered via "telecommunications courses"
were ineligible for federal financial aid. Unfortunately, t11e definition of a
"telecommunications course" encompassed internet-based schooling. We believe the 50%
mle negatively affected the growth of online lligher education, as those companies with
blended-learning approaches (grotmd~based and online) needed to manage the growth of their
online component so as not to violate this rule.
Repeal of 50%

A number of the "pure-play'' intemet instjtutions (e.g., Capella University) and those owned
by public companies (e.g., Apollo Group' s University of Phoenix Online, Career Education' s
AfU Online, Laureate Education' s National Technological University, and Walden
University) were provided special exemptions via the ED' s Dist~mce Education
Demonstrdtion Prognun (DEDP) and were allowed to offer Title IV fimmcial aid. Eight of the
24 participating institutions in t11e DEDP were for-profit providers -a much larger proportion
than their actual market share- showing, in our opinion, the great strides this group has made.
The repeal of tl1e 50% mle. however. did not help these companies. in our view. as they
needn' t have worried about the cap. One could argue it actually hurt them by potentially
attracting new and stronger online competitors that no longer operate under tl1e mle's
constraint. An example is online school operator American Public Education (APEI) where
growth accelerated just after its schools became eligible for Title IV funding in November
2006 - somet11ing it could not have done had the 50% rule still been in effect.

rule may have

actually hurt
some for-profit
providers, while
helping others

A member of UM O

Financial Group

231

September 2009

Postsecondary Education

CLC debacle has

limited broad
school closures
for Title IV noncompliance

President Obama
wants greater
access to higher
education...

BMO Capital Markets

Underlying these risks are fears tJmt t11ese companies would lose eligibility for TitJe IV funding,
which would in essence put most of them out of business. The chances of that happening are
remote, in our view, given the experience of Computer Learning Centers. In January 200 l , the
company ftled for bankruptcy after the ED ordered it to rettm1 $187 million in Title IV funds.
mainly because t11e school lli1d violated the incentive-compensation restrictions (which. as we
noted earlier, have since been modified). The public relations backlash against t11e ED was
strong, especially in light of its mission to provide access to higher education. Therefore, we do
not believe there will be any broad closures of school systems, although sanctions against a
limited number of schools are possible.
However. t11e arrival of a new Presidential administmtion and increased power of a Democratic
Congress in 2009 llfJs exacerbated fears of additional re&ulatory oversight for and/or negative
bias against the for-profit sector. Interestingly, in his first address to Congress on February 24,
2009, President Obama highlighted education as one of his chief policy priorities and asked for
every American to commit to obtaining an additional year of higher education or training. He
also set a goal tllat by 2020, " America will once again lmve the highest proportion of college
graduates in t11e world." Promoting greater access would w1doubted1y be beneficial for t11e entire
higher education landscape- for-profits and not-for-profits, alike.
Nevert11eless, t11ese fears were exacerbated, in our view, by the ED appointments of MartJ1a
Kanter as undersecretary (announced April 11, 2009) and Robert Shireman as deputy
undersecretary (announced April 20, 2009). While we believe botJ1 are highly qualified
individuals, their respective backgrounds (chancellor of the Foothill-De Anza Col11Ulunity
College District and fOtmder of lnstitt1te for College Access and Success. most known for its
Project on Student Debt) may increase the focus of connnunity colleges as alternatives to forprofit schools and highlight the relat]vely higher program costs and student debt levels at forprofit schools.

... butthenew
Obama
administration
has brought
regulatory and
legislative
uncertainty

To date, it appears to us these fears may be a bit overblown. Wl1ile there could be some changes
that have an inherent negative in1pact on fue for-profit providers (e.g., changes to incentivecompensation regulations where we believe for-profits may be heavier users of incentive
compensation for t11eir recruiters when compared to not-for-profit providers), we do not believe
tllere will be any major legislative or regulatory changes solely focused on tJ1e for-profit sector.
Nevert11eless, in addition to the potential migration to Direct Lending (see t11e Funding Sources
and Tuition Rate Trends section), there are some areas of potential change under the Obama
administration tllat we believe investors should monitor.
Negotiated rulemaking ("neg reg"). Each time tlle Higher Education Act (REA) is

reaut11orized (or Congress makes substantial cllimges to the law), a round (or rounds) of
negotiated rulemaking follows. This is a process tJ1at brings together representatives of
various interest groups and a fedeml agency (in this case, the ED) to negotiate the text of a
proposed rule. The goal of a negotiated mlemaking proceeding is for the committee to reach
consensus on the teA't of a proposed rule, producing a Notice of Proposed Rulemaking
(NPRM), typically published in the Federal Register. Conunents on the NPRM are then
collected (usually over a 30-day period) prior to a draft and then fma1 mling being issued over
the subsequent months. The entire process can take well over a year as the new rules are
typically implemented at the beginning of the following fiscal year.

A member of UMO

Financial Group

232

September 2009

Postsecondary Education

BMO Capital Markets

Since t11e most recent HEA reauU1orizalion (the Higher Education Opportunity Act rHEOA or
HR 41371, which was signed into law on August 14, 2008), there have been the following
negotiated mlemaking sessions:

Negotiated
rulemaking
process adds to
uncertainty

Spring 2009. From February-April 2009. three sets of meetings were held to discuss a

wide variety of issues. There were five teams ruscussing a wide variety of issues, f'dllging
from the 90/10 rule to job placement rates to campus security. Teams T (LoansLender/General Loan Issues). II (Loans-School-Based Loan Issues), and ill
(Accredita6on) reached consensus, while Teams IV (Discretionary Grants) and V
(General and Non-Loan Progr.unmatic Issues) rud not. All told, the group reached
consensus on 29 of the 31 items. Two NPRMs were published on July 23 and July 28.
2009, respectively.

Summer and fall 2009/winter 2010. This rotmd of " neg reg" has caused some

constema6on within t11e investment community. On May 26. 2009. the ED annow1ced
plans for two more teams of negotiated mlemaking, focused on integrity issues and
foreign schools. Three rounds of public hearings were held in mid- to late-Jtme 2009 in
Denver. Little Rock. and Philadelphia. While there were initial concerns of a focused
attack against the sector, that rud not occur, though there were some issues raised (e.g.,
low graduation rates, hig h tuition rates, sizable student debt). Furtl1er color was provided
on September 9, 2009. The actual committee hearings are slated to be held over three
five-day meetings tentatively scheduled fro m November 2009 to February 2010. It is
hoped t11e regulations can be finalized by November l. 2010 to ensure adoption effective
July 1, 2011 (2011-2012 school year). A list of the potential topics can be found in
Exhibit 232.

A member of UM O

Financial Group

233

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 232. Potential Topics for Negotiated Rulemaking

Committee Meetings
Team I - Program Integrity Issues
Satisfactory academic progress
Monitoring grade point averages
Incentive compensation
Gainful employment in a recognized occupation
State authorization as a component of institutional eligibility
Definition of a credit hour
Verification of information included on a Free Application for Federal Student Aid (FAFSA)
Definition of a high school diploma for purposes of establishing eligibility to participate in Federal student aid programs
Misrepresentation of information provided to students and prospective students
Ability to benefit
Agreements between institutions of higher education
Retaking courseVIIOrk
Term-based module programs
Institutions required to take attendance for purposes of the Return of Title IV Funds requirements
Timeliness and method of disbursement of Title IV funds
Team II -Foreign School Issues
United States Generally Accepted Accounting Principles (US GAAP) financial statements (section 493(b) of the HEOA)
Compliance audits (section 493(b) of the HEOA)
Definition of a foreign school
Non-profit status for foreign schools
Public foreign schools and financial responsibility
Consolidation of select Title IV requirements on a countrywide basis
Deferments for eligible non-citizens
Non-degree programs
Issues specific to foreign medical schools:
New eligibility criteria for foreign medical schools (section 102(a)(1)(B) and (b) of the HEOA)
Clinical sites of foreign medical schools in other countries
Basic science locations of foreign medical schools in other countries
Eligibility requirements for foreign veterinary schools
Eligibility requirements for foreign nursing schools (sections 102(a)(1)(A) and (D) of the HEOA)
Foreign medical and veterinary schools certified separately from larger school

Note: Topics may be added or removed as the process continues. Source: Federal Register- September 9,

2009.

Proposed influx of
fundin g to
community

American Graduation Initiative (i.e., President Obama's community college plan). On July
15, 2009, President Obarna announced a plan to use community colleges to help revitalize the
US economy, with a goal of adding five million new community college graduates by 2010.
Roughly $12 billion is ex'J)ected to be spent over the next LO years. Among the specifics are the
following:

college system ...

Proposed spending of $9 billion over 10 years in grants to community colleges awarded

on a competitive basis to promote plans that enhance relationships with the business
community, provide scholarships, and improve data systems, among other things.

Seed money of $2.5 biiJion to be provided for inf-rastructure improvements, which is

expected to finance up to $10 billion in brick and mortar investments.

An additional $500 million to be allocated separately toward developing free online

courses.

While the details are far from finalized, it has been speculated that for-profit schools may only
be eligible for the $500 million devoted to free online courses.

A me mber of UMO

Financial Group

234

September 2009

Postsecondary Education

BMO Capital Markets

As the current recession bas created a dire environment for most community colleges (strong
increase in demand but sizeable funding constraints), any influx of f1.mding would likely be
beneficial. However, we opine it will take some time before the funding makes its way
through the system and the new programs/infrastmcture improvements are developed. ln
addition, the $900 million proposed a1mual increase ($9 billion over 10 years), is relatively
small, in our view; according to the National Center for Education Statistics, for the 20052006 school year. roughly $43.6 billion was spent on community coUeges. We therefore
estimate this proposal could boost spending on community colleges by roughly 2%-3% per
year- helpful, but likely not something catastrophic for the for-profit sector.

... likely not

catastrophic for
the for-profit
sector

FY2010 Federal Budget. On May 7, 2009, the White House proposed its FY2010 federal

budget. The House passed its version of the budget on July 24. 2009, while the Senate version
passed through its Appropriations Committee on July 30, 2009. Still a work in progress,
among the issues important to investors in this space will be the amount ofPell Grant funding
and potential changes to the program. The White House budget includes a proposal to make
the progr'dm mandatory and an entitlement (ensuring an atmual minimum funding level as
opposed to going tllfough tl1e current annual appropriations process), and increasing this limit
by 1% above tlle annual increase in tl1e Consmner Price Index (CPI) beginning in t11e 20112012 school year (effective July 1, 2011). Other potential benefits in the White House budget
include I) making pennanent t11e expanded Hope Scholarship as enacted in t11e American
Recovery and Reinvestment Act of 2009 (Stimulus) ($2,500 year/ partially refundable); 2)
modifying the Perkins Loan Program including increasing tl1e annual size from $ 1 billion to
$6 billio14 ~md 3) allocating $2.5 billion over five years to support state efforts to " help lowincome students succeed and complete their college education." If history is any buide, it is
Likely that the FY2010 budget wiJI not be fina lized until sometime after the fiscal year begins
(October 1, 2009).
A summary of the various components t11at wou.ld affect the higher education sector can be
found in Exhibit 233.

A member of UMO

Financial Group

235

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 233. Higher Education Components of FY2010 Federal Budget- White House,
House and Senate Versions
Agency/Program

2009
2010 Obama
Appropriation Budget Request

EDUCATION DEPARTMENT
Student assistance
Pell Grants (discretionary)
Supplemental Educational Opportunity Grants
Work Study
Perkins Loan cancellations
Leveraging Educational Assistance Partnerships
Academic Competitiveness /SMART Grants
TEACH Grants
Institutional aid
Strengthening Institutions
Strengthening Tribally Controlled Colleges and Universities
Strengthening Alaska Native/ Native Hawaiian Institutions
Strengthening Historically Black Colleges and Universities
Strengthening Historically Black Graduate Institutions
Strengthening Predominantly Black Institutions
Minority Science and Engineering Improvement
Developing Hispanic Serving Institutions
Promoting Postbac Opportunities for Hispanic Americans
Strengthening Asian American and Pacific Islander-serving Institutions
Strengthening Native American-Serving Nontribal Institutions
Tribally Controlled Postsecondary Voc-Tech Institutions
Gallaudet U.
National Technical Institute for the Deaf
Howard U.
HBCU Capital Financing Loans
International education/foreign language
Fund for the Improvement of Postsecondary Education
Model Postsecondary Programs for Students With Intellectual Disabilities
Demonstration Projects to Ensure Access for Students With Disabilities
Teacher Quality Partnerships
Career and adult education
State Grants
Tech Prep
Adult Education
Student Support
T RIO programs
Gear Up
Child Care Access Program
Graduate education
Byrd Scholarships
Javits Fellowships
Graduate Assistance in Areas of National Need
Thurgood Marshall Legal Educational Opportunity Program
Other Education Department offices
Research and statistics
Office for Civil Rights
Inspector general
LABOR DEPARTMENT
Adult job training
Dislocated Worker Assistance
DEPARTMENT OF HEALTH AND HUMAN SERVICES
National Institutes of Health
Health professions programs
Children's Hospitals Graduate Medical Education
CORPORATION FOR NATIONAL AND COMMUNITY SERVICE
AmeriCorps

2010 House
Passed

2010 Senate
Committee
Passed

$17,288,000
757,465
980,492
67,164
63,852
0
0

$17,495,000
757,465
980,492
0
63,852
0
0

$17,783,395
757,465
980,492
49,701
63,852
0
0

$17,495,000
757,465
980,492
0
63,852
0
0

80,000
23,158
11 ,579
238,095
58,500
n/a
8,577
93,256
n/a
2,500
n/a
7,773
124,000
64,212
234,977
10,354
118,881
133,667
n/a
6,755
50,000

84,000
24,316
12,158
250,000
61,425
7 ,875
9,006
97,919
nl a
2,625
2,625
7,773
120,000
68,437
234,977
20,582
118,881
47,424
n/a
6,755
50,000

84,000
36,021
18,010
283,172
61 ,425
13,727
10,000
136,938
10,500
4,575
4,575
8,162
120,000
68,437
234,977
20,582
128,881
133,916
n/a
10,755
43,000

84,000
24,316
12,158
250,000
61 ,425
7,875
9,006
97,919
n/a
2,625
2,625
7,773
126,000
68,437
234,977
10,354
118,881
86,324
14,000
6,755
48,000

1,160,911
102,923
554,122

1,160,911
102,923
628,221

1,160,911
102,923
628,221

1,160,911
102,923
628,221

848,089
313,212
16,034

848,089
313,212
16,034

868,089
333,212
17,034

848,089
313,212
16,034

40,642
9,687
31,030
3,000

40,642
9,687
31 ,030
3,000

40,642
9,687
31 ,030
3,000

42,000
9,687
31 ,030
3,000

617,175
96,826
54,539

689,256
103,024
60,053

664,256
103,024
60,053

679,256
103,024
60,Q53

861 ,540
1,183,840

861 ,540
1,183,840

861 ,540
1,183,840

861 ,540
1,183,840

30,325,224
392,726
310,000

30,766,988
528,098
310,000

31,266,988
529,708
320,000

30,758,788
460,098
315,000

271,196

372,547

331 ,547

372,547

Source: Inside Higher Education.

A member of UMO

Financial Group

236

September 2009

Postsecondary Education

State oversight

BMO Capital Markets

In addition to federal oversighl a number of states have their own oversight of the for-profit
sector. In fact, according to Career College Central, in 2008, the National Association of State
Administrators and Supervisors of Private Schools was considering creating regulations so that
states may share information on for-profit schools and improve their own collaboration. Among
the more noteworthy recent state developments, according to the Career College Association
and other news sources, are t11e following:

California. On June 30. 2007, the Califomia Bureau of Private Postsecondary and
Vocational Educalion (CBPPVE), which had overseen t11e for-profit sector, shut down
because lawmakers could not a!,>ree on how much authority a reorganized bureau should
have. A tempormy bill allowing continued oversight expired Jtme 30. 2008. As such. the
for-profit sector was operating in essence without specific state oversight thereafter. ln
June 2009, t11e California Assembly passed AB48 which wou.ld re-establish t11e CBPPVE.
The bill was placed on suspense by the Senate Approprialions Committee in August
2009. The cuiTent version of the bill exempts regionally accredited institutions from this
oversight. There was some initial controversy regarding the annual licensure fees to be
charged to for-profit institutions; compromises have reduced that amount to a max.imtml
of $25,000 per institution.

New York. In Januaty 2006, t11e New York State Board of Regents imposed a

moratoriwn on approving applications for new for-profit colleges in the state and for
expanding e>-isting ones, citing negative publicity for certain schools (e.g. , Interboro
Institute) and wishing to ensure that proper accotmtability measures were in place. ln
December 2006, these restrictions were modified and the moratorium was lifted.
However, the Board of Regents and the New York State Education Department were
given authority to withhold permanent degree-granting authority for new for-profit
colleges for up to five years. during which time state officials can closely monitor the
colleges. The new rules also require the state to approve any change of ownership of a
for-profit college.

Ohio. On June 30. 2007, Ohio Governor Ted Strickland si!,'lled a biennimn budget bill

that retained the state' s tuition-grant program, the Ohio College Oppommity Grant
(OCOG), for students attending for-profit schools. The program funds roughly $30
milLion in annual grants. Although an initial proposal would have baiTed students at forprofit schools fTom participating in this program, under a compromise, students at these
schools will remain eli!:,>ible for FY2007-FY2008. However. in FY2008-FY2009. the
second year of the biennial budget, only students attending colleges that have been
approved by the Board of Regents were eligible. The FY2009-FY2010 Ohio state budget
eliminated t11e OCOG.
Since November 2003, when the first allegations of a wrongful tenuination lawsuit against
Career Education (CECO) were made, the negative aspects of the sector (i.e., " headline risks")
once again have been in the limelight. Allegations ranged from fraudulent enrollment (e.g.,
Career Education), misleading students regarding credit transfer abiUty (e.g., Corinthian
Colleges), violalion of the incenlive-compensation rule (e.g., Apollo Group, DeVty. Grand
Canyon Education), to securities-related shareholder class-action lawsuits (numerous). Although
at one time the stock of the affected company (and typically its closest peers) would move
wildly on this type of news, there appears to be less of an impact (albeit still some) as the Street
sees them to some extent as part and parcel of investing in the sector. In addition, to t11eir credit,

Headline risk

A member of UMO

Financial Group

237

September 2009

Postsecondary Education

BMO Capital Markets

a number of t11e companies have resolved many of these issues. and, in some instances, the
complaints were proven not to be justified.
Nevertheless, tbe regulatory and legal issues faced by several of the publicly held companies are
numerous and are in a constant state of flux. In Exhibit 234. we have a list of regulatoty-related
issues companies in the sector currently face. As shown. the different accrediting agencies tl1at
oversee academic standards and compliance are conducting the bulk of lhese investigations.

A member of UMO

Financial Group

238

September 2009

>
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Type

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IRS Audl

Apollo Group (APOL}

C)

S~tember

2006

March 2007

Phoenix

Issue
Audit. Cove-rs Fiscal years 2(()3..2005, related to improper deductions from stock optJons

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a.
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Certification. Awaiting recertific;,tion to participate in Student Financ::iiJI Aid, Title IV Funding Per FY3Q09 100, ellgiblhty contfnues on a month--to-month basis until a decision on the
applic~ion i$

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fincal.

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Mar-o9

lntemationaJ
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D11te

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N.A.

Department of Education Unlwl'$ity of

! ED) R..,;ewCertificiltion

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Apollo Group (APOL)

R..,;ew- Program

University of
Phoenb<

February 2009

Program Re>Aew. The EO perfom~ed an or'dlnary eourtoe. focused program revfew of

Univsity of Phoenb<'s pOlicies and procedures invol\4ng Tit!& IV programs.

Per FY3009 100, APOL has not received the final program review.

EO Office oflnsped:or
Gener.ol (OIG) - Audit

AShford Unlversky

May 2008

OIG Audit. The scope of the ;~udit covers administration of Title IV program funds and
compliance y.,(th other program tegulations.

Per September 3, 2009 prMs release. drat\ report from OIG is expected within 30 days.
Findings could indude : compenSirtion policies and practices relating to eoroUment a.cMsor$;
calculation of returns of Title IV program funds; timeliness of retums ofTiele IV program
fi.Jnds: student al.llhorizations to re.taln credit balances: disbursements of uneamed TIUe IV
program funds; a.nd maintenance of supporting documentation for students' leaves of
a,b$enoe.

EDOIG-Audl

Capello Uni""rsily April10. 2006

ED

Review

Bridgopoint Education
(BPI)

Certifietrion. Awalttng reeert.ifteatton to partldpate In Student Financial Ald. Title IV Funding Per FY3009 100, elig1bflity continues on a montht<:>-month basis until a decision on the
prog~m
application Is final.

t:
"0

Capella Education
(CPLA)
Gr~nd

C-anyon Education EO OIG Audit

Gr.ond Canyon

August 14, 2008

(LOPE)

OIG

~dit.

iS'
::l

To determine whether CPt.A did nQt proper1y~tculateits retum of Title IV fund$. Per2Q09 lOQ. Capella responded to the final report on AprilS, 2008 and is awaiting final
findings.

Investigation. OIG Issued as subpoena to the compa.ny requiring it to p(O\'Ide certain records Per 2009 100, LOPE is OOQPerating with. the re-.Aew. This is related to the Qui TM11awsuit
and lnfOt'fl"'ation (tfated to pfonnance re\llews and salary adjustments.
which has entered settlement negotiations.

Souroes: Various pre$$ refea$es, company reports and BMO Capital Marl(ets

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Postsecondary Education

Recent settlement
could make
accreditors more
"gun-shy"

BMO Capital Markets

Interestingly. in June 2006 the Sout11ern Association of Colleges and Schools (SACS)
Commission on Higher Educallon agreed to re-accredit t11e Edward Waters College after the
school sued t11e accreditallon body for unfairly withdrawing its accreditation in December 2004
after it allegedly plagiarized material from anot11er college in a document crucial for its
reaccreditation bid. It is believed the accreditor settled rather than risk losing the lawsuit and
then being told by the court how to resolve the problem. Many in the industry believe this ruling
has made some accrediting agencies a bit more "gun-shy" about imposing regulatory
constraints.
Although much of the oversight in tl1e higher education sector is at a federal level (e.g., ED,
accrediting bodies). there is increased scmtiny from state agencies. which are investigating
various for-profit schools after receiving accusations of impropriety. In addition, many of these
schools were investigated by state agencies as part of a broader investigation into improprieties
between lenders and institutions of higher education. Although we believe these organizations
are doubtlessly trying to protect their states' cillzenry, we think another (altl1ough smaller)
motivation may be the potential settlements these schools could pay. Recent settlements include
the following:

State oversight
has increased

The October 2005 agreement between the California attorney general's office and ITT
Educational Services (ESI) for the school to reimburse $725,000 to the state for Cal
Grants erroneously awarded to students after the company improperly calculated tlteir
grades.

The July 2007 settlement between Corinthian Colleges (COCO) and the Califomia
Attorney General's office, following allegations that the company's schools in tlte state
caJculated and reported placement rates improperly. It was also alleged that its
advertising and marketing misled applicants and violated California Business and
Professions Code ~md California Education Code. The settlement amount was roughly
$6.5 million.

The August 2007 "assurance of voluntary compliance" between Corinthian Colleges

(COCO) and the Florida Attorney Generdl's office following allegations beginning in
November 2005 that the company's Florida Metropolit~m University had misleading
advertising and marketing practices. The settlement amount was "immaterial" according
to the company.

A list of incidences of state scmtiny still open is found in Exhibit 235.

A member of UMO

Financial Group

240

September 2009

>
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Exhibit 235. Summary of State Agency Investigations and Contingencies

!1'.

Company

Typo

Sch ool

D-ate

Issue

Education
Management
(PRIVATE)

State Attorney GeneraJ

Investigation

New England Institute of Art

June 2007

Clvllln'Vesti gatlon. The Massachusetts StateAttomey General

Per FY200910K, In Febl'\lary2008, the AG informed NEIA
conducted a re\liew of alleged submission$ of ~lse clajms by NEIA to the itslnw<Stlgatlon furthttr.
Commonwtallh of Massachusetts and alleged unfatr and deotptive
$lUdent lending and marketing pr;,ctice$,

8l0

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th,c~t

it does not plan to purs-ue

0,...
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Education
State A"omey General
Art lnit~u te of Portland and
Management
ii'YV'e$tigiltion
schools in ltnnois
(PRIVATE)
SoureM: Various press rttleases, company reports and 8MO Capital Mal"ks.

Ongoing

Civil Investigati on. Reques:ts for information from the Attorney General
Per FY2009 10K, the company Is cooperating with the ongoing Investigation
addressing the relationships b~en the schooJs and pro'Yfders of loans to

students ;~tt endlng Ihe schools.

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BMO Capital Markets

Given t11e frequency of aJieged violations. t11ere are also a significant number of civil lawsuits
against many oftl1e publicly held companies, summarized in Exhibit 236.

A member of UMO

Financial Group

242

September 2009

>
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O*l.e of Filing &

Comp1ny

tltr

School(s )

V'tnu

ApoUo Group (A.POL)

Umlltd StMoiAmetJCBex,.l

Urwel$!lyotP~m

Mtl"dl 7, 2003!US Violations otthe False Claims Act/Qui Tltn TM I&'I'fSUiila!l&g&'Jina.tUPXIII'Pnerr~otlola.Md

Dlsanet C(lurt
fecJ&fal stuclei'C r.nanc1a1ad l.lndlno. ar~lno 11 v;,tatecl orre--tmetiU or the l"e rv H1Qhet
Eastern Dtstnct Of Edue&!JOO Ad "'91f'(!lf'l0 recruiter C:Oti\OMSillt<

Hem/ow v Unr191SrfY ol Phot9n ~UPX

laault.INI.t urt ot Cue

Curr.nt Court St.ndlng

P..- FY3000 IOO,etntldfllehM bttnsot PMMarchot2010encfO,~ry s
Prot~

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lrt te Apoi'IO Group /ltt:O(fJO-f81Mi,

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Apt11 S,2009!

Unwerssty

-~ Photnll

COhVIl.tSS.iM V UtlNIHSifyd
PIKi&ll,./fJC,

Wage and HourCitss Acllon. The

~l iS Sl')ll&Oas aeiass ad.onand

aiEQ&SVenou5

w&9& ltld nour <f&Jns t)r I~Wute 10 peymnuYli.MTIYt8Q&9 aM overt me_radure 1~ pi'O'W\CJ6 rest tJM
toUit LOS~IH mealpeto<S, end I~&IO(If'Ope:tfyrt>()O(t W49&S etloO&amlnQS:

CaIO(l'l8 state

Stpttmber2S.
2005: OS Olsl'lc.t
CoUI1-J!.Iqorta

Stcuritl Clat Melon ,~ APOl 'Violated SrKUflttei lew& ttyml d"Cios""' a

dema-7no 2003. g~emment report ~rtm9 comP9f1sebonpr.U!ce$

pot~nb.sil)'

Title VII Ol&el'lmlnatlon Attlon lnt U.W$Uil abtgM &tn01'\9othertn.ngs lhat lo-fmet empl~es
l'l'tre O!Senmlf'l6t.td&Qa!llSf t>eeeus.e ln&ywt ~ ~M~nb6n 4i INtCn~~th ot J&1us CM:st ol
latter..cSay sa.n~s

Per FV3009 100, anttclpa!td loss esvmlll&cl Wtwt.n 10 and $119 6 m..,n

Ptf' F'l'3009 IOQ,.s p.-c of es4l11nPMC. IMUrweiSII)'OfF'hQilnwpatlnF't1009

a~~.:n.e;ely $1 t moiiO!"' to tht chJS-S rl\'tfTII>ers and an e11t10nal tO 1 mtlhon '"
&ttom&y'S Jt.-s The UhOot Will 8llO I)I'O't'id& ado<t:bOO.all~ aM OeRighiiO lbe
ElY~

P..- FY3QOt 100,.6POl Htd ..,~tfd""Y'I"'!1iiiCf~O<nMey-\, 200CInd r""OYe<l

In& cest to 1\'9 Federe Olstn Coat'" Los P(l9ele&

Apollo Group (APOt.)

A!tQ&ii Run, Sh8Wrt MatM,

Nttf8he Jnorwn vs ,.polio Gx!D
snd The UIIIVflt&f)'ol Ph0flf1bi.

A,pollo Group (.A POL)

Bsmetl v John StQ.rtt81

APollo GroLl!)
unwet'Sity OC PnO&tiiiY

Un!V9r9IY ot Photfll'o

April 2A, 200S

Mzon.l!l Stale
~Ot Coult

ApoUo GfOup (APOL)

Te&mS.I&ISLOC8161TPIJrtSJOII &

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/n(;eftf
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Apollo G~"'P (APOI..)

BambooPMt,.env Nelsolletlll Urwtn;ty

D-9J11ti-Ve11CIJfl9 S.J\tiCU

~Ph0'9nll

U1Yt'&f"5tly~ Ph0enl1

ltltefMt/OIIfll, Ytc Y Tbe

Ul?~oiPfto.flrw<.l~
Apdlo G~. Inc, Ct1"1e
EdtrabOII COMPI&Af, l.Aul$0/$
EdUClUIOII, Inc 8lld WBM.&h

Oepertm&tll <1111$ H'll!n& e.M~pus

SWdtn' Loan Clus Action Alki"GH lnli Ytiof\ r-oeftl to sludet'Cs -wf'IO <JOI)I)flt ll'om tl'l&l' '<9"5.H P_, FV3009 100,lt'ld IIWI Oistnt:l Co~H W'l'illll SChMIAing Ordii,INIIS.UI Iof
US Orstna Co~ shotllye!\ar(m'OIInv. Unov~y or Pfl.oenix .mprwel1yt9Uned the entire emOOf( oliN sll.lderts AuQuU 2010 ln& ml!lltetiS.<u'"tUyll'l<hWy
C~rtrl Osii'Ct ol
U1ds0Vr&!"d 19Cti>,.1Nn Md& to theMncl9r
CCIIIto~

F'bruary, 2oot;

Shanholdr 011ntlu Action, Tht tomploll'!l ~on~~~ ol APOL ..lege$ III"'~IJI Officers
br&ad'led !hell' nduetay 4.11~-s and 11\84: det&ndenls v.ere uty~~SIIy eMCh&cJ bytllW receipt of
tled<oat&d stoCk optoon 9(8niS

P..- F't'3oot IOO, If'tt t>ec.kdilti"''Q tSSW hJ$ bMn dtsmrssOCI buC ~II"'!J ~11 doJ.I~
ut jor the matt' ' rti9Jr~g bf(l.l(.h or lidt.~~:IE'Iry4c/;y(per FY300Q tOO)

NovemDr2. 2006 SPierellotderDei'IYetlve Aetlon, CtusAetion. lheCMIPiafiC*OO'Ineel181nAPOt:swrrenl Pet FYJ009 100,1 ~ 15,2009. CS&f~enfs ft&4SB04n&tmoi>Oti10~IStnisstne
Anz.ona OSincl
.,d lonnr dtre<:IOf1. "d officers Yiolat~4 ~UIIIis ltJWS o-y rn,...,ii"'!J msr.pqtlfllte!lon-s
S&eondAm&nd&d Coml'llalrt wNtn iS eurrelllly e>Md"9 Yt!lh the ((kll'l
Cwr1
cone'"""" stOCit ~ and releted aocounti'IQ

Augut 15, 200S: Shartholdf0rl\la.tlv e A1on. The(.(MI'Ipi.af'll ~GntlthellofAPOL!oes. el'longottttw

us Dstoct C.ol.t'l thtingS. th81 cena~n ~~~ off:.Cers txeaehed lhe~ tt:tuoaryMies w.~n regi:Yd to 1he pef'IOGI\9
.AlUM&
I&~Mfal S&CUMI&S etas"! 810n 181'1 SUitS

P~FY3009 10Q,on~~tCh

11. ~- 1T!otCOUI1dJlftSW<Stns atloonwrl~ptjucke

Wllhout oosts tq e~l'let party

Mrth 3, 2008: US Ptn~ lntrlngtmtnt l..ltlgftlon. Al!~e& ~~OLand UPX. aJOniJ mn CeP$11a ducal-on
~~ FY3009 100, a~nat s scneOUed l(lt Nov&mt> 7 201 1 APOL flle1J a mot!Oft 10
Coo'opany. lau,..ele Edu~ l'lc ~ WP:len UrweMy tne ere n ~ng_no on p&enk re~no to lransl venu& ..om lhtEastam C.Stnec o f Te:tas to Weshi"910n. 0 C onfebtuary 21,
Olstntl Coort Eestem ()stna o l m..,....,!.,g CO(I'UW9
2009
Tete;.

SOurOH VIKIOU$ Ot&SS ~~s;s.-~0mP8'(,y repons and BMO Ctlp!l al Ma~t~&fs

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Exhibit 236. Summary of Legal Proceedings and Contingencies

oateot F11ing &

Company

TiUe

Venue

Issue/Nature of Case

Current Court Standing

Career Educiltion

AmadorvCalifornia Culi!'llry
Californil Culinilry
Academy and CarHr Edt.A!a!lon Academy

September 27.

Student liUgation. Putauve Class Acbon. The $*.Ht alleges that CCA made;_vanety of
MISJtprese.ntab'on$ to tl'le pla.intill dan relatmg to the $CI'lool's rtputatlon and the value of the

dlscus.sloM.

Corporation; AdatN, v. CiJIInia

Superior Court,
San Franci5CO

(CECO)

School(s)

Culinary Academy and CaffH.tr

Edvcation Corporation.

Career Education

IJitey et al. vCatHt Educar1on

(CECO)

Corp.

Career Education

Schustf(. er IIi.

(CECO)

C<Ainary ln#Huto, Ud. n<J

ClrMt Education Cotp011tion.

Career Education
(CECO,

2007: California

Sanford Brcwn College February 11, 2008: Student Litigation. Cia$$ Adlon 'TM plaintift"s <1.1& students who anege that CECO
Cirevit Court of
misreprennted tran~ferabUit)' of credits. job pl1cement potential and quality of ef11c:ation and
Madi-son County, ll Instruction.

v. w~.stern

Per 2009 100, the p(lrties htwe been eng~ged in mechtion Se$Sions ~.nd 5ettlement

eclu~tion,

Per 2009 100, the coort grMted Oetenda.nts' motton to d1smss the hudulent omisSion
ctalm, and denied Oefendanl$' motion to dls.mlssthe ltlinoi'S Consumer FraJJd AJ;t Claim.
On Juty 17, 2009 Defendants filed their amended ilnswer and affirmative defense$,

Westem Curlnary
Institute

MarCh 5, 2008:
Student Lldgatlon, Putativ~ Class Action. Plall\titts a.lltge aeceptiw aot'S 1neJua~ng
Oregon C1rcuit
m1s.represenbngjob placement ;nd pos.t.gradualion salary potentia_!and CJ,~ality of educ:ation a.nd
Coun. Multnomah lnstructiOI'I.
County

Pet 2009 100. the parties ate j)(esenuy engaged In dscowry on das-s lssues and tl'le
hearing on Plaintllr.s mctJon tor clasc'S o!ftillcaliOn Is scheduled for October 23. 2009.

Unlt8d Sr.t~& of Am&tiea v.

A(l)(l(icltt lrt~rConfinentll
UttJ'vtK!Iy.lnc.

American
lntereontti'IMtal
Unwer$1ty

July 28, 2009: US Student li6gation,

OislrictCol.lrt
Northetn Oistl'ict ot

Pet' 2009 100, on July 27, 2009, the Court ordtffd tne complaint unse.al~d as the U.S.
Ol!partment of Justice declined to Intervene.

career Education

Dii iiO v. American

(CECO)

J'ltorcontmerntll (,I!Jivf!rdy. tne.

1nd CarMI Education Corp.

Amenean
lntercontinentill

Marth 19, 2008:

Superior Court or
Georoa. FUlton
County

Putativ~ Class

Action. Alleges violation'S of the Fal-se Claim'S Act.

Geor~'

Uniwrsiry

student Libgalion, Putativ~ Class Action. AJieges s~ral ml~eprest-nt-atlons relab.ng to the
school'S reputation :and the Vitlue of its educaton

Career Education
(CECO)

Blake v. Care&t Educltiott Corp. Sanford Brown COLlege May 8. 2008:

Student Litigation. Clan Adlon. Alleges mat sse aarust~ons rtprMentat~s made mateliat
Circuit Court of St. mi~representations to prospective students.
LOUI'S County, MO

Career Education

VasqvEtz:, 81. v. Caltoml8

Caltforma School of
SchoOl Of Cuiii'Jiry Air~ ifJC. nd Culinary Arts
Car1r Educ8f1Qn Corp,

(CECO)

Pet' 2009 100, the motion for clu'S certil'ieation was denied, a.nd the case Is automatically
stayed pending the outcome of the appeal to this ruling. A decisions is required by
Oecember I, 2009.
Pet 2009 100. de~ndants ftled a motion to dsmiss the amended complaint on Febluary
27, 2009, and it is currently pending before the Court.

June 23, 2008: Los Student Litigation. Cia$$ Adlon. The suh alleges that defendants committed fraud andv1ofated Per 2009 100, the partie$ are engaged 1n cia$$ discovery. The Court has not yet set J
Angeles County
the COllifomia: Unfair Competition Law and the Califofnia. Consumer legal Remedies Act.
brieftng schedule or a hea.ring date.
Superior Court

sources: vanous press relea~'S. company reports and 8MO capital Mark~ts .

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Exhibit 236. Summary of Legal Proceedings and Contingencies

Date of Filing &

lnueiNature of C~n

Company

Title

School(s)

Venue

Corinthian Colleges
(COCO)

Tfl~.

Florida Metropolitan
unrvers1ty FMU, nk;a

March 8, 2004 ;~nd Student Litigation. Cla.si Action. AJiege' FMU concealed that it i$ not accredited by the
Apri11 S, 2005.:
Commiss.lon on Coll~g~s of the Sooth em Association or Coll~g~s and SchOols (SACS) and tl\at
Circuit Court ofthe FMU credit$ are not transfera.ble to other ms.bWtioni.
Stlte of Floridil

Alsn Alvarez. Satz v.

Rhodtu CoJ1eges, II)C.,
Cc.rirrthian Coler;~. Inc. a.ncl

ewrecst cone-ge

Flotfda M$tropoljan UnJY&t'Sity

wyotecn

Corinthian Colleges
(COCO)

Rivera v. s~oJa EducariOtJ Inc.

and Corinthian Co!Mges lttc.

Corinthian Colleges
(COCO)

Collet and Dlvila, OeriVifjveft on N A.

bth" of Corilflhln Co/logos,
lrtc., v. David M()()ffl, Mal.

.,
N

Current Court Standing

Per FY200910K, the Company and all of the named plaintiffs have resolved the
c:onsolid4!ted Alvarez and Travis matters for an emOl.lnt thetis immaterial to the

CompanY's financial posllton a.nd results of opf'rabons.

May 28, 2008: The Student Litigation, Clan Action. AJiegei fr.:~ud and intentional deceit, ne~igent
Per FY2009 10K, the company will deli!nd aga.inr>t the allegations. No oth~r lntormation as
AmMcan
mlsrepre~fltation , breach or contract and unJust Mrichment related to all~ged d~tlci~ndes and
to court "'oceedtngs was provdecl.
Arbltr\ltlon
misrepresentil_lioni reg;m:ting the HVAC program at Wyoteeh Fremont and Oclk:land. The plaintiff$
Association
s~ek to certify a class.

July 2, 2004:
Shareholder Derivative Action. Accuie former ofllcers ;~nd directors ofbreacn offiducary duty, Per FY2009 lOK, A memorandum of understanding was executed, pencing court
appc-oval, and on August 6, 2009, the Court ol'd~red fl.Jith~r briefing on the faime-u of the
Orange County
a.buse of control, gro$$ misman;~gement . was.te of corporate Uiets, unjus.t enrichment, and
Catiromla Superior vtoJations of the California corporatioM' code.
$etllement.
Court

01

Corinthian Colleges

Ploiller. MAMnEdwarcls, and NA.

L.oriC.bset, derNafivelyonbeh8ff
of Corinthl4n Col/!!gM ;nc., v.

Shareholder Oerivativ ~ Action. The lawsuits allege vtolation of the s~cui1Ues and E)(change AJ;t Per FY2009 10K, on July 6, 2009 the United States District Coun fort.he Central Oisbict of
of 1934, 'lliolf!tion of the Califomif! CorporJtions Code, unju$t enrichment and rebJm of une;~med Califomla prtlimlnarl~ appro... ed a setUtment of the consolidated actions.
compensation. and bf'ea ch of 1\duci aty duties.

David Mooto elf.

August 2, 2006:
Federal O$tnct
Court Centtal
District Cilrrfomif!

Col'lnthlan Colleges
(COCO)

Adolf1nd Gunket derNatrvoJy on N A.

behiK of nominal defendant
Cotitrthlan CoJ1eg&&, Inc. v.
OaVJd Moore, or 11.

August 2, 2006:
Shar~hol der Derivative Action. Accuses eurr~nt and former COCO otr'.em and directors of
Or'iinge county
breach of fidUCiary duty ;~nd unJust ennchment related to opbon grant practices..
Cillifomi;~ Superior
Court

Corinthian Colleges
(COCO)

Unifed States of AfTII1rica, ex rei. N A.

October 3, 2007:
US District Court
for the Middle
District of Florida

(COCO)

Nyoka Lett and f8/ala M$hujl v.

Corinthian CoJ1egM, /I)C.

Employee Litigation, Qui Tam. Allege-s CECO violated the hlgh~r EdJeatlon Act r~gat'ding th~
manner in YA'Iidl ;~dmi$$ioni personnel are compen5ated.

P~r FY2009 10K, LM court prer.m.nanly appt~d a settlemMt ol th~ consobdat~d

aotions.

Per FY2009 10K, The Company has: filed a motion to dis.mi$$ the l.ee complaint.

Sources: Various p~u reteases. company reports and 8MO Capital Markets.

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Exhibit 236. Summary of Legal Proceedings and Contingencies

Date ot Filing &
Company

Title

School(s)

OeVI)'(DV)

08ghliatt v. Ott VI)' UnJ'wtdy, Inc OeVty Univtl'$lry

Venut.

Issue/Nature of Case

Current Court Standing

Oectmber 23.

Student l itigation. Class Action. Alleges OeVry failtd to comply-Mth diselosure requirements

Per FY2009 10K, plaintiffs appe-aled after CUI! was dismtssed In 2007. On July 31 , 2009,

200S: US Oi,ITict under the California Education Code n!latlng to tl'insferabillty of credits and made untrue or
Court- Ctntl'al
misleilding $taJements to prospective $tudents.
Oi$trict of California

OeVI)'(DV)

NA.

Oevry unwer$1ly

May 2008: US

District Court.
Northern Illinois
Easltm DIVIS:tC>n
Grand Canyon
Educotion (LOPE)

NA.

Grand Canyon

8)

Employee Litigation~ Qui Tam. Alleges tnat Devrys compensation plans for admis$ion
representatives vioiM.ed the Hightr erucatlon Aet and regulations ~latlng to recruiter
compensation.

the appei11 ~s di$mi$$ed.

Per FY2009 1OK, On June 23. 2009, a. settlement in principle w-~s reached tlereby DeVry

would $land by its consi$tendy.held po$ition denying any "M"Ong doing and pay $4.9 mlnion
to finally resolve the matt!r. The s-etlltmtnt is pending approval of the Department of
JU$tlce.

September 2008: Violiltions of the False Cfajms Act/Qui Tam. The laW$uit alleges that LOPE improperly obtained Per an 8K filed 914109, the Company h-ils entered settlement negotiations and noted
US District Court. federal $tudent financial aid funding in Violation of requirements of the Title N Higher Education
similar seutemt.nts rn such cues In tht range of $4.9- S7 m111ion.
Arizona
Act regarding recl\littr compensation.

Sources-: Various pres-s- releases, company reports- and 8MO Capital Mal'ktts.

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Postsecondary Education

BMO Capital Markets

Online Postsecondary School Market

Willie online higher education may have been looked down upon once, we believe it bas
become well accepted over the past decade - by students, schools, re!,'lllators, and even
employers. In our view, improving use of technology, widespread internet access, a favorable
regulatory climate, and a growing awareness about t11e convenience and quality of online
education will drive future enrollment growth online. Tn our view, online education has
transfonned from a niche growt11 opportunity to a mainstream driving force within the overall
postsecondazy marl<et. In fact, it is now fairly c01mnonplace for most higher education
institutions - both for-profit and not-for-profit - to have at least some online courses, as the
sector moves to what is cotmuonly known as a "blended learning" model, in which students
have greater flexibility to learn where and when they want.
The Sloan Consortium, an educational research group, defines tJ1e onJine postsecondaty market
as follows (see Exhibit 237).

Exhibit 237. Delivery Method Classifications

Proportion of Content
Delivered Onlin e
0%

Type of Course

T ypical Description

Traditional

1%-29%

Web Facilitated

30%-79%

Blended/Hybrid

80+%

Online

Course with no online technology used - content is deliVered in writing

ororallv.
Course which uses web-based technology to facilitate what ts
essentially a face-to-face course. Uses a course management system
(C MS) or web pages to post the syllabus and assignments, for
example.
Course that blends online and face-to-face deliVery. Substantial
proportion of the content is delivered online, typically uses online
discussions, and typically has some face-to-face meetings.
A course w here most or all of the content is delivered online. Typically
have no face-to-face meetin<;Js.

Source: "Staying the Course: Online Education in the United States", Sloan Consortium 2008.

Projected 11.2%

Eduventures forecasts there were nearly 2.2 mi!Jion students enrolled in fully online

CAGR in online

postsecondary programs in 2009, or about 12.1% of all students enrolled in de!,>ree-f:,>ranting

postsecondary institutions that year by our estimates. Tllis share is up significantly from
approximately 1.3% in tl1e 2000-2001 school year. Altl1ough US postsecondary enrollment is

enrollment 20092014

expected to increase at roughly a 1.1% rate over the next decade (per NCES projections). we
project that online enrollment will increase roughly l 1.2% annually to over 3.7 million in 2014
which would represent about 19.3% of total postsecondaty enrollment in that year (see Exhibit
238).

A member of UMO

Financial Group

247

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 238. Postsecondary Online Schools Enrollment (20002014E)

Iii

4,000
3,500
3,000
2,500
2,000
1,500
1,000

0
0
0

'E
Ql
.

ec:
w

Ql

=c

Enrollment (in OOOs)

-+- Percentage of total postsecondary

15%

..c:-

'0

c:
0

Ql

10%

~0

Q.

5%

500
0

20%

0%

0
<f.

"'

<C

Source: BMO Capital Markets estimates and Eduventures.

Eduventures estimates tlJat roughly $11.7 billion was spent on online higher education in the
2007-2008 school year (or 2008. latest data available). Using that and Eduventures forecast as a

Projected 17%
CAGR in online

base, we project this market will grow at roughly a 17% CAGR through 2014, reaching over
$30.2 billion in revenues tlmt year (see Exhibit 239). This assumes about a 4%-5% increase in
average tuition annuaJly over t11at time. Online higher education would represent about 5.9% of
tl1e estimated $515 billion expected to be spent on postsecondary education .in tl1at year.

revenues 20092014

Exhibit 239. Postsecondary Online Schools Revenues (20002014E)

$30

6%
Revenues

25
:;;
~
Ill

"'c:
"'>
0::
"'
::J

-+-Percentage of total postsecondary

20
15
10
5
o ~~r-~~~~~--~~~--~--~~~~---r~~~~--~~ 0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E2011E2012E2013E 2014E

Source: BMO Capital Markets estimates and Eduventures.

Not-for-profit
institutions
dominate online
higher education

A member of UMO

Wl1at may surprise many investors is that tl1e not-for-profit sector dominates the online highereducation market. According to Eduventures, in fall 2008, the public not-for-profit sector had
over l million :ftilly online students, or about 53% of the all fully online students, followed by
tlle for-profit sector with roughly 625,000 (32% share), and the private not-for-profit sector with
275,000 (14% share; see Exh.ibit 240). Nevertheless, t11e for-profit sector has a disproportionate
share of this market, given it has only about 7% slm.re of all postsecondary students (online and
campus-based).

Financial Group

248

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 240. Online Enrollment by School Type {Fall 2008)

~Higher education

80%

market share c:::::J Online market share -

74%

Online headcount
1,200,000

70%

1,000,000

60%
800,000

l!! 50%

"'
"'
Qi
~
:E
"'
~

40%

600,000

30%

400,000

c
w

20%
200,000

10%
0%

0
Public not-for-profit

Private not-for-profit

Private for-profit

Source: Eduventures.

While bachelors
programs
dominate online
higher education,
masters programs
have a
disproportionate
share

As bachelors programs dominate traditional campus-based higher education, t11ey also domi1mte
online higher education, albeit to a lesser extent. According to Eduventures (see Exhibit 241),
roughly 4 7% of students enrolled in online higher education are enrolled in bachelors progf'dlllS,
although tlus is less than tl1is degree's 59% sl1are of campus-based programs. A relatively higher
proportion of masters students attend online classes (28%) when compared to this degree's share
of campus-based programs (11%). This makes sense, in our view, given the flexible nature of
online programs that cater more toward o lder non-traditional students, typically those more
likely to seek n1asters degrees. In addition, this jives with demographic infom1ation t11at a typical
online postsecondary student is older (average age of 38 per geteducated.com) witl1 most
holding full-time jobs.

Exhibit 241. Online Enrollment by Credential {Fall 2008)

0 Online II Campus-based

70%

59%

60%
50%

l!!

"'

"'

40%

Qi

28%

.:.:

lii 30%

28%

:E

20%
10%
1%
0%
Associates

Bachelors

Masters

Doctoral

Source: Eduventures.

A member of UMO

Financial Group

249

September 2009

Postsecondary Education

Growth in online
associates
programs

Military service
learners are a
significant
segment and
growth driver for
online education

New Gl Bill only

provides housing
allowance for
ground-based
students

BMO Capital Markets

In addition. penetration at the associates level was also fairly high -- nearly 29% taking at least
one online class in faJl 2006 (latest data available). While data is li1nited, it appears that area is
the fastest-growing sector within online education. Much of that, we believe, is due to the 2005
launch of A'.:ia College (now part of University of Phoenix) by Apollo Group (APOL), which
provides associate def,rrees in an online fonnat focused on adults with little to no college
experience. Career Education (CECO) followed suit in early 2006 with a similar school caJied
Stonecliffe College Online as part of its Colorado Technical University. AHl1ough these
programs are still aimed at non-traditional students (i.e., not those directly out of high school),
we believe they are, in essence. being seen as "online conununity colleges" and will therefore
attract a yotmger demographic than the other online schools at these companies (e.g., University
of Phoenix bachelors ~md graduate prohrrams, American Intercontinent:dl University Online). A
number of public institutions have begun offering online associate degree programs as well: one
gamering a sizable amotmt of publicity is the Michigan Community College Virtual Leaming
Collaborative, which coordinates distance learning for the state's community colleges and
oversees the state's progrmns. which requires high school students to take at least one online
course before graduating. We believe President Obmna's proposed American Graduation
Initiative, aimed at promoting both attendance at cotmnunity colleges as well as providing free
online courses could help continue to spur growth in this area.
Another segment of learners particularly well served by an online fonna t, in our view, are
members of t11e military, which we discussed early in tltis section. Learners can take courses
online willie on deployment or while on bases located throughout the world. The Army has
attempted to make the online learning process easy for active duty members via eArmyU, which
was launched in 200 l. In FY2008, roughly 96,000 "unique" soldiers registered for over 200,000
courses. The program partners with roughly 140 "Letter-of-Instruction" (L01) schools. include
both for-profit (e.g., American Public Educations [APEn American Military University , Apollo
Group' s [APOL] University of Phoenix, Career Education 's [CECO] American Intercontinental
University), Bridgepoint's [BPI] Ashford University (effective October 1, 2009) and not-forprofit (e.g., Uruversity of Alabama. University of Maryland-University College) providers.
Research by the Sloan Consortimu shows that for-profit schools are more than twice as likely
(23.9%) to have onJine programs designed specifically for milital)' students as public not-forprofits (9.2%).
However, while distance learning has been a popular choice among tl1e military, under t11e new
GI Bill, which went into effect in August 2009, only students enrolled more tl1an half-time in
hrrotmd-based pro!,>:ran1S are elit:,>ible for the housing allowance provision (about $1,250 per
month). While some have speculated this may have a negative in1pact on the growth of
attendance at some online schools by military students using the new GI BilL, we believe it is
still too early to tell, and expect military enrollments in online programs will continue to be
strong going forward.
Several organizations have long-standing relationships with military students and curricultml.
including for-profit providers. such as American Military University (APEI) and Grantham
University. ~md not-for-profit providers such as Centml Texas College and University of
Maryland University College. Altl1ough many of these military-focused programs have been
around for some time, other players are getting involved in tlus attractive market - specifically
for-profit schools in an attempt to stay below t11e 90/10 threshold (limits Title rv Exposure to

A member of UM O

Financial Group

250

September 2009

Postsecondary Education

BMO Capital Markets

90% of cash-basis :revenues). As such, we believe t11e military market will continue to be
competitive- particularly via an online fom1a1.
We believe the primary catalyst for growth of miline postsecondary schools will be the benefits
offered to both users (i.e.. students) and providers (i.e .. tl1e schools themselves). Some of tl1ese
benefits are highlighted in Exhibit 242.

Exhibit 242. Benefits of Online vs. Traditional Postsecondary

Schools
Users

Cost benefits - saves travel-related and opportunity costs from time saved
Personalized- can tailor content and delivery to virtually each individual learner
Convenience - can learn on your own time, "anytime, anywhere"
Real-time updates- can make learning experience more relevant
Self-paced - can review until information is fully grasped 'Mthout "holding up" the
class; asynchronous platform reaches students that may not respond to
synchronous learning
Efficient- potentially faster and higher completion rates, according to some
anecdotal evidence
Expands community - can interact with others in different geographic locations
and enroll in programs that may not be available at local schools
Greater oversight- via better tracking and management capabilities

Providers

Scalability - offers cost-effective way of increasing potential revenue base

Penetrate new markets- can offer access to services beyond geographic
boundaries
Consistent quality - although customizable, quality may improve through
consistency
Higher tuition- certain providers (e.g., University of Phoenix Online) charge more
on a per-credit basis for their online offerings as they believe students get extra
value relative to their ground-based offerings

Source: BMO Capital Markets.

In recent years, the rei:,'lllatmy environment bas become more favorable to providers, potentially
spurring online growth. On February 8, 2006. the Higher Education Reconciliation Act (HERA)

The r egulatory
climate i s more
fav orable

was signed, eliminating the 50% nde, a 1992 law preventing institutions from receiving federal
financial aid if more than half their courses were offered via distance leaming. This went into
effect July 1, 2006. Although the removal of this "cap" will likely help spur growth for the
miline postsecondary sector, we believe much of the growth will come from schools in tlte notfor-profit sector where stronger brdllds and quality reputations will likely be used to expand
presence beyond campuses.
Tn addition, we believe the elimination of this mle helped spur the trend of not-for-profit
conversions - re-capitaliz ing underftmded schools (often by way of private equity) and
expanding them online as for-profits since this strategy requires less capital than a ty pical
campus-based expansion sll-ate!,>y. Among the conversions are Bridgepoint Education, Grdlld

A member of UMO

Financial Group

251

September 2009

Postsecondary Education

BMO Capital Markets

Canyon University. and TUI University (fonnerly Touro Intemational University). (See further
details in the Valua6on Trends sec6on.)
Surprisingly, most
online students
tend to be local

Seemingly, a school's advantage from adding an online offering would be the opportunity to
attract students from outside its geographic area. This would likely be more appealing to public
not-for-profit schools since they could potentially charge higher "out of state" or "out of district"
tuition prices to these students. However, in an April 2007 study, Eduventures noted tl1at 64% of
students enrolled in an online program lived within the same geographic area as the institution
offering the program m1d 36'% of them Jived within 50 miles of it; only 27% of online students
live in a different geogmphic area than the institution in which they are enrolled. We believe this
is partially a result of schools with online proi:,T'd.tnS targeting their marlceting efforts in specific
geographies, despite a student's ability to attend the online schools from anywhere in the
country. For example, schools such as Bridgepoint Educa6on (BPI) and Grand Canyon
Education (LOPE) anchored their online platforms to physical campuses that were well known
regionally.
Willie admissions are open nationally, we believe schools have considerably higher exposure
near tl1eir physical locations. which should also enable them to marlcet tl1eir "blended learning"
approach, something we believe is increasingly attractive to students as it allows them to alter
delivery methods when needed. Additionally, we believe tll.is shows tlwt cost benefits and
convenience may be key drivers for students. We believe the benefit from saving travel costs
becomes more important during periods of rising gas prices, as anecdotally, a number of
providers - botl1 for-profit and not-for-profit -cited increased demand for tl1eir online courses
when gas prices reached record highs during 2008.

Most popular
online programs

A member of UMO

Although virtually all types of programs are offered online, the most popular appear to be those
with fewer " hands-on" requirements, for instance, tl1ose more attuned to an online delivery
fonnat. eLeamers.com measures the most frequently searched programs on t11eir site. As shown
in Exhibit 243, the most popular progrmns (based on searches on its website) tend to be in
business administration, psycholoi:,>y, and nursing.

Financial Group

252

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 243. Most Popular Postsecondary Online Programs (2008)

Top 10 online programs:
1. Business Administration and MBA
2. Psychology
3. Nursing
4. Early Childhood Education
5. Accounting
6. Criminal Justice
7. K-12 Education
8. Health Administration
9. Engineering
10. Management

Top associate's degree prog rams:

Criminal Justice
Early Childhood Education
Business Administration and MBA
Top bachelo r's degree prog rams:
Business Administration and MBA
Accounting
Psychology
Top master's degree programs:
Business Administration and MBA
Nursing
Psychology
Top doctoral programs:
Psychology
Educational Leadership
Educational Technology

Source: elearners.com and BMO Capital Markets.

We have heard many investors questio n the quality of an online degree. As a result, we have
obtained infonnation fro m four constituencies to furtl1er study this issue; the students, l11e
institutions themselves. hiring managers, and third-party study results. In short. although
postsecondary institutions and students seem to perceive increasing quality of online higher
education, hiring managers still seem to attribute less value to online degrees.
Postsecondary institutions (perception improving a bit). We believe it is important to
tmderstand how the instjtutio ns themselves judge online learning -- especially in t11e not-forprofit sector - to help determine how much of a competitive threat these schools may be to t11eir
for-profit peers. Much of our data was derived from recent Sloan Consortium surveys.

In three of the Sloan Consortium surveys, academic leaders have been asked about faculty
acceptance of online learning at their schools. In each year, the vast majority of those surveyed

Public not-forprofits have

have answered " neutral" when asked if tl1eir faculty accept the value and legitimacy of an online
educallon. Interesllngly, in two of the three years (2003 and 2006), a slightly higher percentage
of t11ose surveyed at public not-for-profit schools- relative to their for-profit peers- agreed tlmt
their faculty had accepted the value and legitimacy of an onLine education (see Exhibit 244). In
fact, at a recent Eduventures conference, a number of representatives from prestigious not-forprofit schools stated tlmt the advent of the online delivery model and its advantages (e.g., realtime updates) had forced t11em to improve t11eir on-ground programs.

somewhat
accepted online
education

A member of UMO

Financial Group

253

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 244. Faculty Acceptance of Online Learning Programs (2003-2006 Surveys)

Faculty Accept the Value and
Legitimacy of Online Education
Agree
Neutral
Disagree

Public Not-for-Profit
2005
2006
2003
34.2% 36.4% 32.3%

Private Not-for-Profit
2003
2005
2006
20.2% 20.6% 20.3%

Private For-Profit
2003
2005
2006
28.8% 42.1% 31 .5%

63.2%
2.7%

67.6%
12.2%

63.3%
7.8%

58.6%
4.9%

58.9%
8.8%

62.1 %
17.3%

60.5%
19.2%

52.9%
5.1%

50.9%
17.6%

Note: The fall 2007 survey asks the chief academic officer their opinion of what the faculty may think. We did not believe this was comparable
to asking the faculty this question directly as in prior surveys and thus have omitted this data . Source: Sloan Consortium.

Although academic leaders at public not-for-profit schools had harsher opinions when asked to
measure learning outcomes, these views appear to be improving, albeit slightly. As shown in
Exhibit 245. the largest portion of this group says that tl1e learning outcomes in online learning
are tl1e same as in face-to-face (i.e., classroom-based) teaching, although a sizable portion say
online learning is somewhat inferior. However, tl1e percentage citing at least some superiority in

Percentage citing
some superiority
in online
outcomes has
been increasing

online learning has been increasing in more recent surveys.

Exhibit 245. Learning Outcomes Online vs. Face to Face (2003-2006 Surveys)
Learning Outcomes Online vs
Face-to-Face
Superior
Somewhat superior
At least some superiority
Same
Somewhat inferior
Inferior
At least some inferiority

Public Not-for-Profit
2003
2004
2006
0.5%
16.9%
-

0.7%
12.7%

1.8%
18.1%

Private Not-for-Profit
2003
2004
2006
0.3%
6.7%

1.3%
7.0%

Private For-Profit
2003
2004
2006

2.8%
13.7%

2.0%
10.0%

0.0%
4.3%

0.0%
12.0%

17.4%

13.4%

19.9%

7.0%

8.3%

16.5%

12.0%

4.3%

12.0%

57.6%
21.0%
3.9%

62.0%
22.0%
2.5%

53.7%
24.1%
2.3%

32.8%
43.8%
16.5%

35.5%
36.8%
19.4%

37.1%
31 .1%
15.1%

39.6%
32.6%
15.9%

78.3%
13.0%
4.3%

42.2%
40.7%
5.2%

24.9%

24.5%

26.4%

60.3%

56.2%

46.2%

48.5%

17.3%

45.9%

Source: Sloan Consortium.

Analysis of
empirical
research favors
online education

A study released in June 2009 by the ED tl1at compiled tJ1e results of empirical research dating
back to 1996 drew positive conclusions about the effectiveness of online education While the
study was intended to help guide onJine education policy as it pertains to K-12 education, just
nine of the 99 studies used (out of an initial 1.132 studies relating to online outcomes) involved
K-12 leamers, while the rest involved higher education and adult learners. Additionally.
researchers noted that their findings were similar when fue nine K-12 st11dies were removed and
only the higher education research was examined. Of several key findings, the analysis found
that "students who took all or part of their class online performed better, on average, than those
taking the same course through traditional face-to-face instruction." In our v iew, tl1is resuJt will
likely have a positive impact on furtl1er solidifying tl1e credibility of online education.

Public not-forprofit most likely

to recognize
online learning as
important to
future strategy

A member of UM O

ln addition, not-for-profit schools (at least tl1e public colleges and universities) are the most
likely to recognize online learning as important to their future strategy, witl1 about 70% agreeing
in 2007, up from 66% in 2002 (although down from a peak of 74% in 2006). In ilie for-profit
sector, 53% cited online as important to tl1eir future strategy in 2007. up from 35% in 2002 (see
Exhibit 246). While both tl1e private not-for-profits and for-profit schools showed the greatest
increases in tlus belief over tl1e five-year timeframe. tl1ey still lag behind public not-for-profit
peers in this area.

Financial Group

254

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 246. Importance of Online Education to Long-Term

Strategy (Fall 2002-Fall 2007)
02002 612003 02004 0 2005 .2006 0 2007

80%

70%
60%
50%

40%
30%

20%
10%
0%
Public not-for-profit

Private not-for-profit

Private for-profit

Source: Sloan Consortium and BMO Capital Markets.

Transparency by
Design - an effort
to improve
accountability of
online programs

In an attempt to provide greater transparency into onJine higher education, in October 2007 a
consortium of institutions launched Transparency By Design, to provide program-specific
outcome data that allows students to make infonned decisions about their education investment.
This was followed by the August 2009 launch of a website called College Choices for Adults
(http://www.collegechoicesforadults.org/) in which these institutions provide infonnation,
including outcome-related data through a common set of reporting guidelines. While the initial
group only includes 12 institutions (most of which are for-profit), we hope this effort gains
additional traction to help improve tl1e perception of tllis delivery method.

Lack of discipline
is biggest
challenge for

Online programs must addiess several other hrndles in addition to general concems about
quality and acceptance. According to the fall 2006 Sloan Consortium survey of academic
leaders, the biggest challenge is a greater need for students to stay disciplined, as more than 80%
of respondents stated it was either " important" or "very important" -by far the largest of all the
" barriers" to widespread adoption of online leaming (see Exhibit247).

students online

Exhibit 247. Most Cited Challenges for Online Programs (Fall 2006)
Barriers to Wides~read Ado~tion of Online Learnin!:l
Students need more discipline to succeed in online courses
Lack of acceptance of online instruction by faculty
Lower retention rate in online courses
Higher costs to develop online course
Higher costs to deliver online course
Lack of acceptance of online instruction by potential employers

Not Somewhat
lmQQrtant lm(!ortant
4.1%
15.4%
8.8%
14.7%
14.7%
18.3%
23.8%

30.2%
29.2%
29.4%
31.8%
36.6%

lmQQrtant
42.2%

Very
lm(!ortant
38.3%

36.9%
35.1%
37.2%
33.3%
27.8%

24.2%
21.0%
18.7%
16.6%
11.7%

Note: Data adds to more than 100% as multiple answers were allowed. Source: Sloan Consortium.
Other cite lack of
support staff

The lnstmctional Technology Council (lTC) has surveyed administrators of distance-teaming

pro!:,TcUns at community colleges for the past five years. Interestingly, in each year the group has
cited resource constraints such as staff and operating budgets as the biggest growth impediment,
rather Ulan faculty and student acceptance (items ranked in order of importance with one being
tlle greatest challenge; see Exhibit 248).

A member of UMO

Financial Group

255

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 248. Greatest Challenges for Administrators of Distance

Education Programs (2004-2008)
Chall enge
Support staff needed for training and technical assistance
Adequate student services for distance education students
Operating and equipment budgets
Adequate administrative authority
Faculty acceptance
Adequate space for training and technical assistance
Organizational acceptance
Student acceptance

2004

2005

2006

2007

2008

2
3
5

5
2
4
3
7
6
8

1
3
2
4
5
6
7
8

1
2
3
5
4
6
7
8

1
2
3
4
5
6
7
8

4
7
6
8

Source: Annual survey conducted by Instructional Technology Council.

Students (solid online demand). It appears tl1at potential students have become more attracted

to an online delivety format. In November 2006, Eduventures published a report entitled

"Expanding Demand for Online Higher Education" in which it released results of a survey of
2,000 people in the US \"Vho indicated they were planning to attend college. Among the results
are the following:

Roughly half of those smveyed wanted at least some online courses when they attend
coiJege (19% said they wanted to earn a degree completely online, 18% wanted to enroll
in a program that was primari ly online with some face-to-face instruction, and L4% said
they wanted equal time online and on campus).

As would be expected. the level of interest varies by age group. Younger students just out
of high school prefer a traditional college education, complete with all the experiences
one gets from living on a campus, wllile the older potential students are more likely to
want to earn their degrees online as a matter of convenience. This trend peaked for adults
aged 35-55, with students older than that preferring a traditional education.

Most of those surveyed were wiJling to assess individual online and on-campus programs
on their merits. mther than solely in terms of delivery mode. However. there was a
sustained skeptical minority that continues to equate online delivery with poor quality.

The website www.onlinedegreereviews.org claims to be an tmbiased rdllking of online degree

programs by current and fom1er students. Although we take rating services such as tJ1ese with a
grain of salt, we have shown the recent list of top 10 schools rated on this website (see Exlubit
249). It is interesting to note that half of these schools are online only, and five of the top 10Columbia Southern University, Henley-Putnam University, TUI Utuversity, Grand Canyon
University (LOPE) and American Military University (APEI) - are for-profit providers.

A member of UMO

Financial Group

256

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 249. Top 10 Online Colleges as Ranked by Current and

Former Students (September 2009)
Rank Name
Andrew Jackson University
1
2
Boise State University
Seton Hall University
3
Norwich University
4
5
Columbia Southern University
6
Henley-Putnam University
7
TUI University
8
University of Massachusetts (UMassOnline)
Grand Canyon University (LOPE)
9
10
American Military University (APEI)

Type
Private not for-profit
Public not for-profit
Private not for-profit
Private not for-profit
Private for-profit
Private for-profit
Private for-profit
Private not for-profit
Private for-profit
Private for-profit

Online
only?
Yes
No
No
No
Yes
Yes
Yes
No
No
Yes

Title IV
eligible?
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes

Ranking
(1-10}
9.6
9.2
9.1
9.0
9.0
9.0
9.0
8.7
8.5
8.1

Source: www.onlinedegreereviews.org as of September 9, 2009 and National Center of Education Statistics.

Employers (mixed response). TI1ere appears to be a mixed response to tl1e quality of online

education from employers. In a December 2007/January 2008 poll conducted by Excelsior

College/Zogby International, roughly 83% of business executives swveyed stated that an online
degree was as credible as one earned through a traditional campus-based program. However,
quality may be more of an issue to hiring managers, and therefore more important to those
thinking of using online education to get a new job, as opposed to moving up in their current
position.

It appears that hiring managers may not give much value to online degrees. Career publisher
VauH has been conducting surveys of hiring managers to gauge their acceptance of online
degrees. Among the Jtme 2008 survey findings: although online degrees are becoming more
conunonplace. hiring applic~mts witl1 those degrees may not be. While 49% had encountered an
applicant with only an online dei:,>ree- up from 34% in tl1e 2005 survey - just 19% had hired ~m
applicant witl1 only ~m online degree- roughly tl1e san1e as the 20% in 2005 survey.

Traditional degrees are sti ll favored, as 63% of those surveyed stated they prefer one- up
from 54% in tJ1e 2005 survey.

Online degrees may be losing some credibility, as onJy 23% stated an online bachelors
degree was as credible as an " offline" degree - down from 32% in the 2005 survey.
Graduate degrees did only slightly better, with 28% stating those were as credible, down
slightJy from 30% in the 2005 survey.

Nevertheless, 83% stated online degrees were more acceptable that they were five years ago,
giving some indication that acceptance will continue to improve.
Employers prefer
online education
from a "traditional
university"

Although we have no updated data to corroborate this, we believe employers would prefer an
online degree from a not-for-profit provider as opposed to a for-profit one, all else being equal,
owing to tl1e perceived " lower quality" of the for-profit sector- rightly or wrongly. In surveys
conducted by the Online University Consortium in 2003 and 2004, 65.3% of responding hmnan
resource managers preferred a " traditional university" versus only 14.3% who preferred a forprofit school.

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Financial Group

257

September 2009

Postsecondary Education

BMO Capital Markets

In general. we believe online postsecondary education is more profitable than its campus-based
counterparts -primarily owing to t11e lack of facility -related costs. In addition, many online
programs have relatively larger class sizes online than at their campuses, also helping to increase
profitability. Unfortunately. only one publicly held company (Career Education) segntents its
online versus on-grotmd operating perfomtance, making it difficult to compare the profitability

Online schools
are more
p rofitable than
their traditional
counterparts

of the two delivery channels (Apollo Group did so until recombining its UOP Online tracking
stock in FY2004, while Laureate Education d id so before going private in August 2007).
We provided comparative information in Exhibit 250 for t11e on-ground (i.e., campus) and
online perfonnance at two of Ute comp<my's schools in its University division - American
Intercontinental University (AlU) and Colorado Technical University (CTU). We acknowledge
tlus may be a bit misleading as the on-ground locations have been operating at a loss owing to
numerous internal issues. Nevertheless. we believe this is valuable to compare online and onground performance for the same school system.

Exhibit 250. Online vs. Campus Operating Margins for Career

Education's AIU and CTU (2007-1 H09)
30%

II Online DOn-Ground

20%

10%

"'

:E

.~

0%

iii

8. -10%

-20%
-30%
Source: BMO Capital Markets and company reports

We believe one for-profit company, Apollo Group (APOL). set tl1e standard for online higher
education. Unforttmately, the company no longer breaks out its enrollment between online <md
campus-based. We estimate that well over 300,000 of its 420,000+ students (over 75%) are
enrolled as exclusive online students, mainly through its University of Phoenix Online. receiving
degrees across the entire spectnun (associate through doctorate). This represents mind-boggling
growth from 1997 when about 4.300 students were enrolled in t11e company 's online programs.
Although Apollo remains the clear leader in for-profit online hlgher education, virtually all the
publicly held for-profit universities have rolled out online initiatives, albeit with varying degrees
of success. In addition, pure-play online tmiversities have emerged, such as American Public
Education's (APEI) American Public University and American Military University, and Capella
Education's (CPLA) Capella University, and several public not-for profit universities have
become large players in the space. It is somewhat difficult to create an online market share
<malysis for the for-profit sector, as certain companies, such as DeVry (DV), only disclose
online coursetakers (i.e., one student taking two courses online would be considered two
coursetakers) and not students. However. after Apollo. we believe the larger for-profit players as
measured by fu lly online students are American Public Education (APEl) and Bridgepoint
Education (BPI) (see Exhibit 251).
A member of UMO

Financial Group

258

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 251. Comparison of Online Presence of Select For-Profit Postsecondary

Education Providers (Sorted by Size)
Online as %
Postsecondar11 Schoollsl

Ownershlo

University of Phoenix Online

Axia College Online

Apollo Group
(APOL)

American Public University

American Milllary University

Latest Online
Enrollment

2!..!21!!.
Enrollment

Estimated
Market Share

Online Only
Degree
PrQJUams

DQllfees

Ke Offerlnas

Arts/Sciences, Business, Criminal

8 Verticals/ 107 Certificate, Associate's,
Justice, Education, Human
Programs
Bachelor's, Master's. Doctorate Services. Nursing/Healthcare.
Psychology, Technology

N.A.

N.A.

N.A

American Public
Education (APEI)

53,600

100%

2.4%

97 Programs

Associate's, Bachelo~s .
Mastefs, Certfficate, Diploma

Business, IT, Criminal Justice,

Education, Homeland Security,
History, Military Studies, Political
Science, Emergency Management

Ashford University
University of the Rockies

Bridge point
Education (BPI)

45,000

99%

2. 1%

27 Programs

Associate's, Bachelo~s.
Mastefs and Doctoral

Education, Business,
Hea~h Sciences, Psychology

Concord Law School

Kaplan University

The Washington
Post(WPO)

43,600

45%

2.0%

9Verticals/
78 Programs

Juns Doctor. Executive Juns

Doctor, Maste~s. Bachel o~s.
Associate's, Certfflcates

l aw, Busi ness, Criminal Justice,

Paralegal Studies, Information
Technology, Education, Nursing
and Education

American Intercontinental University

Career Education
Colorado Technical University
(CECO)
IADTOnline

39,700

43%

1.8%

Busi ness, Criminal Justice,

Certificate. Maste~s, Bachelor's
Hea~h care, Education, Visual
12 Verticals/
and Assoctate Degree and NonCommunication and Design,
106 Programs
Degree and Diploma Programs
Information Technology,

l aureate Online Education B.V

National Technological University
WaJden University

l aureate
Education

33,000

7%

1.5%

8 Verticals/
45 Programs

Capella University

Capella Education
(CPLA)

29,281

100%

1.3%

5 Verticals/
Mastefs, Bachelo~s. Certificate, Business, IT, Education, Human
107 Programs and Ph.D
Services, Psychology, Leadership

strayer University Online

Strayer Education
(STRA)

26,728

63%

1.2%

6 Verticals/
92 Programs

Assoctate's, Bachelor's,
Mastefs, Certfflcate, Diploma

Accounting, Business
Administration, Economics,
Education, Mathematics,
Marketing, MIS, Paralegal

Grand Canyon Univershy

Grand Canyon
Education (LOPE)

26,234

95%

1.2%

4 Verticals/
91 Programs

Certificate. Bachelor's and

Mastefs

Business, Education, Humanities

and Social Sciences, Nursing and
Hea~h Sciences

The Art Institutes

Argosy
South University

Education
Management

26,200

23%

1.2%

53 Programs

Associate's, Bachek>r's and

Mastefs

Media, Business, Design,

Education, Health Services, IT,
Criminal Justice

Everest Online

Corinthian
Colleges (COCO)

15, 157

18%

0 .7%

16Programs

Associate's, Bachek>r's.
Mastefs

Accounbng, Business, Criminal

Investigations, Legalstudres,
Medical Billing , Computer
Information Systems

Grantham University

Pnvate

9,500

100%

0.4%

3 Verticals/
23 Programs

Associate's, Bachelo~s .
Mastefs, Certfflcate

Business Admrnistration,
Computer Science, Criminal
Justice, Education

TUI University ( formerty Touro

University International)

Private

8,200

100%

0 .4%

Business Administration, Heatth

Masters, Bachelo~s . Doctorate
5 Verticals/
Scrences, Education and
104 Programs and Certificate
Information Technolo~

Northcentral University

Private

7,760

100%

0.4%

4 Verticals/ 133 Bachel o~s. Maste~s. Doctorate. Business Administration,

Programs
Education and Psychology
Certificate Programs

Jones International University

Glenn R. Jones

N.A.

N.A.

N.A

2 Verticals/
Bachelofs, Maste~s. Doctorate, Busi ness, Education, Health Care,
54
IT, Marketing
Certnlcate
Specializations

Rasmussen College, Dettak Edu

Private

N.A.

N.A .

N.A.

5 Verticals
75 Programs

Certificate, Bachel o~s. Maste~s Education, Nursing, Public Polley,

and Ph.D
Busi ness, IT/Engineering

Bachelofs,

Maste~s

Business, Accounting, Education,

Hea~h Care, Criminal Justice, IT

Note: Estimated market share based on Eduventures 2009 forecast of roughly 2.2 million students enrolled in fully online programs. APOL no
longer discloses online enrollment; latest online enrollment data was 186,300 as of May 31 , 2006. A POL's University of Phoenix is widely
acknowledge as serving the most online postsecondary students. Source: BMO Capital Markets, company reports, Eduventures and US News
and World Report.

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Although a number of traditional universities entered the online sector in the late 1990s. many
early ventures ended with mixed results. A number of for-profit online programs by traditional
not-for-profit w1iversities, such as Columbia, New Yotk University, and Temple have all either
closed or scaled back over the past few years. However, that does not mean the not-for-profit
sector has gone away; in fact, there are a munber of not-for-profits with a sizable online
presence, including the following:

Not-for-profits
have been
emerging online

University of Maryland' s University College (UMUC) with roughly 190.000 course

enrollments in FY2008.

University of Massachusetts (UMass Online) with 40,020 enrollments in FY2009 .

Western Governors University with mOJe th~m 12,000 students enrolled in FY2009

Other traditional schools, such as the University of North Carolina (via UNC Online) have also
been building up their online presence and we believe tlus trend will continue. For example, in
November 2008, Minnesota State Colleges and Universities (MnSCU) - tJ1e system comprising
the state's 32 colleges and universities -announced plans to increase t11e percentage of online
credits awarded annuaJiy to 25% by 20 15 from the current 9%.
Increasing push
toward free online
content

Additionally, tl1ere is a growing movement to increase the prevalence of free online courses
developed by educators and posted online to be used by anybody. Such progmms are already
being pioneered by Carnegie Mellon University's Open Learning Initiative and MIT's Open
Courseware progmm, which lists I,900 free online courses. These resources have led to the
development of the free University of the People, scheduled to in fall 2009, which uses open
source courses and social net'lotking to offer tuition-free degrees (excluding nominal
enrollment and exrun fees likely under $100). Willie the U11iversity of the People is not yet
accredited (and we ex-pect accreditation issues will present major hurdles for these types of
progrc11n), we view tlus as a noteworthy development in the evolution of online education.
This is the fundamental idea behind President Obama 's proposal to spend potentially $500
million over the ne"1 10 years to develop free online courses specifically catered toward
providing basic job skills and training. While it was not clear what enti6es would be responsible
for creating and certifying these courses, it has been speculated that for-profits would be eli!:,'lble
to create potential course content, further legitimizing the role of online education in the
postsecondary education market, in our view.
We expect over t'ime that tmditional schools will gain more tmct'ion online versus for-profit
competitors owing to the ability to levemge stronger bmnd names and (in many cases) less
expensive progmms. Many are taking a page out of the " for-profit le:\1book" and identifying
new revenue sources, particularly in tl1e "bachelor's completion" ~md "executive education"
mad<ets. where tl1eir stronger brdlld names resulting from long-operating histories and a highproflle presence in tl1eir conummities will likely entice more adults to choose tl1em over most

Not-for-profits
expected to gain
more share
online...

for-profit competitors. When potential students are surfing for online programs, chances are they
will migrate to schools t11ey have at least heard of before.

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Postsecondary Education

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Conununity colleges - wlrich account for roughly one-third of all postsecondary enrollments and
are often viewed as immediate competitors to for-profit schools- are also increasing U1eir online
offerings. However, while traditional schools have the time and resources to develop
comprehensive online divisions, it appears community colleges are adding online courses more
as an immediate response to student demand rather tbau as part of a long-term strate1:,ry.
According to a March 2009 survey by the League for Innovation in Community Colleges, 89%
of school chancellors or presidents surveyed said they were increasing online course availability
to meet demand, while only 39% said they hoped it would reduce education costs.

... while
community
colleges struggle

Additionally, surveyed school directors opined that developing effective online education is not
a simple propositio11. They noted that online courses not only have similar faculty demands. they
also add continuing teclmolo1:,ry, help-desk and administrative-related e:-..-penses, whereas
infrastructure improvements for campus classrooms and parking lots are more or less sunk costs.
In a speech given in June 2009, David Gray. fonner CEO ofUMassOnJine, said that tuition cost
for the online versions of traditional cotLrses " .. .are in many instances equal to, or a bit higher,
than the classroom-based equivalents." (while UMassOnline is not a community college, we
believe th.is thought may nevertheless still apply). Therefore, we believe for-profit online
educators wit:b developed prof:,>nuns and the infrastmcture in place to quickly increase capacity
have a distinct advantage over community colleges, while traditional universities pose a greater
threat in t11e long tem1.
There have also been many examples of not-for-profits working togeU1er to expand their online
presence while sharing costs. For exmnple, the Online Consortium of Independent Colleges and
Universities, spearheaded by not-for-profit Regis University in 2005, has expanded to 77
colleges in the 2008-2009 school year from the original 39, with more than 1,800 course
enrollment during U1e most recent school year. Members pay a one-time fee of$3500 to join the
consortium plus an annual fee of $1.000 to cover administrative costs. According to Inside
Higher Ed, in 2008, of the approximately $1 ,350 in tuition for a three-credit course, about $500
would go to t11e provider school - essentially e>..trd cash for a course that was already being
held- and $700 would remain at the student's home college, which would incur no additional
cost. We note, however, tlwt other consortia have disbanded. such as the Utal1 eLearning
Connection (June 2009). owing to funding issues and lack of interest

Examples of notfor-profits
working together

Although we do not e>..1Ject every not-for-profit school to expand online (i.e., Ivy League schools
are lmown for their exclusivity; online expansion would not fit well with Umt mantra, in our
view), the sheer size of t11e not-for-profit sector- 17.1 million students in tl1e 2007-2008 school
year - makes these schools formidable competitors, even if only a handful of them exp~md
aggressively online, in our opinion.
For these and oU1er reasons, t11e not-for-profit sector should continue to gain share in the online
sector. According to Eduventures. online enrollment for public not-for-profit schools is e>..-pected
to grow over 14% CAGR to over 2 million students in fall 2013 from over 1 million students in
fall 2008, increasing its share to 58% from 53%. Over t11e same period. online enrollment at forprofit schools are expected to grow roughly 11% CAGR to over l million students from 620,000
students. actually losing share (to 30% from 32%). The private not-for-profit sector is e>..1Jected
to lose the most share (to 12% from 14%). as its online student base only grows 8.6% CAGR to
roughly 416,000 from 275,000, likely owing to the exclusivity factor outlined above (see
Exhibit 252)

Public not-forprofit schools

expected to gain
share online

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Exhibit 252. Online Enrollment Market Share by School Type (Fall

2008- Fall 2013)
70%

D Fall 2008 El Fall 2013

58%

60%

53%

50%

I!!
C'CI

.r. 40%
<II

4i
.:.:.

:v

32%
30%

:E
20%

14%

10%
0%
Public not-for-profit

Private not-for-profit

Private for-profit

Source: Eduventures.

List of10

For tl1e past two years, the Online Education Database has published a ranking of the top online
colleges. While rankings such as these may be somewhat subjective and may not truly reflect
the quality of the institutions, we have nevertheless provided the 2009 ranking in Exhibit 253.
The ranking criteria are acceptance rate, financial aid, graduation rate. peer web citations,
retention rate, scholarly citation, student/facully mtio, and years accredited. As shown, willie the
top 10 schools are dominated by private not-for-profit institutions, two for-profit providers Grand Canyon Education' s (LOPE) Grand Canyon University and Salem Intemational
University -made that list. In addition, for-profit schools dominate the remainder of this list,
including a nwnber rw1 by publicly held companies.

to~

ranked online
colleges is
dominated by
private not-forprofit schools

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Exhibit 253. Top Online Colleges (2009)

Rank College
1 Nova Southeastern University
2 Regent University
3 Champlain College
4 Upper Iowa University
5 LeTourneau University
6 Liberty University
7 Grand Canyon University (LOPE)
8 Dickinson State University
9 Western Governors University
10 Salem International University
11 Keiser University
12 Fisher College
13 National University
14 Walden University (Laureate Education)
15 Tiffin University
16 Westwood College
17 Post University
18 ITT Technical Institute (ESI)
19 Colorado Technical University (CECO)
20 Everglades University
21 Everest University (COCO)
22 Kaplan University (WPO)
23 Capella University (CPLA)
24 Rasmussen College
25 DeVry University (DV)
26 Berkeley College
27 Granite State College
28 University of Phoenix (APOL)
29 Peirce College
30 Herzing College
31 South University (Education Management)
32 City University
33 Florida National College
34 York Technical College
35 Western International University (APOL)
36 Darton College
37 Franklin University
38 Northcentral University
39 Ashford University (BPI)
40 Baker College
41 Bellevue University
42 National American University
43 Jones International University
44 American InterContinental University (CECO)

Type
Private, not-for-profit
Private, not-for-profit
Private, not-for-profit
Private, not-for-profit
Private, not-for-profit
Private, not-for-profit
Private, for-profit
Public, not-for-profit
Private, not-for-profit
Private, for-profit
Private, for-profit
Private, not-for-profit
Private, not-for-profit
Private, for-profit
Private, not-for-profit
Private, for-profit
Private, for-profit
Private, for-profit
Private, for-profit
Private, not-for-profit
Private, for-profit
Private, for-profit
Private, for-profit
Private, for-profit
Private, for-profit
Private, for-profit
Public, not-for-profit
Private, for-profit
Private, not-for-profit
Private, for-profit
Private, for-profit
Private, not-for-profit
Private, for-profit
Public, not-for-profit
Private, for-profit
Public, not-for-profit
Private, not-for-profit
Private, for-profit
Private, for-profit
Private, not-for-profit
Private, not-for-profit
Private, for-profit
Private, for-profit
Private, for-profit

Rating

9.213
11.663
13.290
13.479
14.001
14.195
15.502
17.269
17.398
17.483
17.538
18.723
19.136
19.390
21.573
21.597
21.701
21.894
22.097
22.458
22.930
23.105
23.390
23.582
23.647
23.777
24.141
25.577
26.289
26.456
26.512
26.560
26.648
26.668
26.721
26.792
27.356
27.370
28.008
28.124
28.975
29.889
30.152
31.655

Note: Each school was ranked on eight criteria with 1 being the highest score; rating is an equal rating of each
ranking . Source: Online Education Database and National Center for Education Statistics.

Characteristics of Superior For-Profit Postsecondary Schools

We believe investors should focus on additional mlique attributes when investing in specific
proprietary postsecondary institutions:

Types of programs offered. As most students use higher education to help increase their
marketabi lily, we believe that schools geared toward job markets where demand outstrips

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Postsecondary Education

BMO Capital Markets

supply have the greatest chance of enrollment growth and increasing retention rates.
These programs currently include auto repair, business, criminal justice, education,
heaJthcare, massage therapy, and sciences. We believe drivers for demand vary by
student segment (i.e., the underg.m duate population may be more focused on what sector
is "bot" today, while the working adult se!,>ment is more focused on building skills that
will be attractive throughout a career).

Degree versus non-degree. We have long believed that degree-based programs are
vastJy superior to non-degree programs from an investment standpoint as they are longer
programs and can incur recurring revenue streams. However, we aJso believe the vaJue of
the actuaJ degree itself is less important than the trclUSfer of knowledge/skills and the
ability to possess the necessary skills to find a job and/or enhance one's career.
Nevertheless, we believe schools with degree programs have more " serious" students and
tl1erefore are less likely to feel the potential adverse effects of a maturing economic
recovery (e.g., slower enrollment growth, higher attrition rates). In addition, the longer
length of stay of degree programs tend to make these a bit more profitable per student
(i.e., longer time period over which to absotb recruiting costs). However, as these schools
likely compete more heavily with not-for-profit schools for degree-seeking students, the
for-profit sector could be at a branding and quality disadvantage.

Student-loan default rates. A lower default rate presumably implies a higher caliber
student witl1 a greater chance of finishing the entire program, tl1us ma.'l.imizing revenue
per student.

Job placement rates or change in salary. A high job placement percentage could
indicate the markefs belief in a school's product. For those schools that target working
adults, the difference in annual salary before and after finishing the program would be t11e
more appropriate indicator, in our opinion.

Percentage exposure online. We believe tl1e online seTVice delivery model can be more
profitable than campus-based classes, given the potential leveragability of fixed costs
over what could be a wider audience. In addition, growth rates for online prognuus are
expected to be much higher than those for campus-based ones.

Accreditation. We believe that accreditation can demonstrate the quality of a school' s

programs. thus providing a marketing advantage. In addition. accreditation is an essential
factor in a university ' s ability to offer government-backed financial aid. A regionally
accredited school is typically held in higher esteem by investors than one that is
nationally accredited, given the fonner tends to have more positive attributes (e.g. , more
accepted for tuition reimbursement prob>ra1us, easier to transfer credits).

A surnrnaty of tl1ese factors for a select group of publicly held postsecondary institutions is
shown in Exhibit 254.

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Postsecondary Education

BMO Capital Markets

Exhibit 254. Key Characteristics of Selected US Postsecondary Institutions

Company/
Ticker

American
Public
Education
(APEI)

Apollo Group
(APOL)

% of Rev. from

Enroll
FY

mant

Primary Programs Offered

12

Associate's ( 13%)
Badhelo(S (61%)
Master's (26%)

14%

N.A.

Univ. of Phoenix: lkldergrad Business

(41%), Grad Business (18%). Technology
420.700 (1 1%). General/Prof. S1udies(8%),
Educatioo (8%). Sociai/Behav. Sdences
(8%), Health & Nursing (6%)

Associate's (44%)
Badhelo(s (37%)
Master's (17%) Doctoral
(2%)

82%

University of PhoeniX
(7.2%: Prelim. 2007:
9.2%)
N.A.
Western tnrl University
(27.4%)

Associates (10%)
Badhelo(s (80'.4)
Master's (90%)
Doctoral ( 1%)

87%

Ashford Uliversity
(4.1%: Prelim. 2007:
13.2%)

Certificate (18%),
Associate's (44%),
Bachelo(s/Maste(s/
Doctorate (38%)

69%

Diploma (64% ~
Associate's (31%),
Bachelo(s (4%).
Master's (1%)

12

Business (44.3%), Education ( 19.4%~

45.504 Psychology (16.4%). Sodal Science
(14.2%), Health ( 5.7%)

career
Education
(CECO)

12

92.300

Heallhcare (60%), Crimi nal Justice (14% ~

86.088 Business (12%), Mechanical and Trades
( 12%). Miscellaneous (2%)

(COCO)

capella
University
(CPLA)

OeVry
(DV)

Funding

Job
Placement

Public Salety, National and Homeland

Security (53%), Arts and Sdences (21%),
53.600
Business Management and Technology
(19%). Professiooal Stuctes(7%J

Bridgepoint
Education
(BPI)

COiintl1ian
Colleges

T~loiV

Degree Type

Cohort Default Rate

(FY2006)

12

29.281

64,034

Business S1ud1es (51%), Visual

Commullcation and Design ( 13% ~ Health
Educatioo (20'A.), CUlinary Arts ( 10%), IT
(7%)

Health and HUman Services (40%),

Educatioo (20'.4), Business and
Technology (40'A.), Public Service
Leadership ( N.A.)

Doctoral (36%).
Master's ( 46%),
Badhelo(s (18%)

Business (47%~ Technology (26%),

Medical and Health (27%)

Diploma/Cert. (1 1%)
Associate's ( 15%)
Badhelo(s (52%)
Master's ( 17%)
Doctorate (5%)

N.A.

Online
Enrollment/%
of Total

Student Profile

1.4% (Under 20)

48.7% ( 2~29)
34.6% ( 3~39)
12.8% ( 4~49)
2.4% (50-64)
0.1% (Over 65)

53.600:
100.0'.4

14% (22 and under)

34%(23-29)
N.A

31%(~)
15%(~49)

6% (50 and older)

AvgAge: 35
Male(29%)
Female (71%)
MinOiity (40'.4)

45.006:
98.9%

Mectan of 7. 7% (range
N.A.
of 1.7%-14.3%)

19% (under 21)

45%(21-30)
36% (over 30)

39,700: 42.6%

81%

Coosolidated Avg. of
13.1% (range of 3.5%- 78.1% (2008)
18.9%)

0Ver25 (Ava-age Age)

15,157; 17.6%

75%

1.5% (Prelim. 2007;

2.5%)

N.A.

4% (24 and under)

16%(2$-29)
N.A.

36%(~9)
27%(~9)

29.281:
100.0'A.

17% (50 and older)

DV Universi!)!: 7.3%
Keller Graduate

3 1.1% (24 and under)

52.4% ( 25-39)
16.4% ( 40 and over)
0.1% (unknOHn)
54.7 (Male)
45.3% ( Female)

N.A

69.1% (2008)

Average of 28 years old

26,225: 23.3%

N.A.

27% Male, 73% Female

11.6% ( 18-24)
30.5% (25-32)
21.7% ( 33-42)
10.7% ( 43-47)
16.5% ( 46+)

26.234: 95.0'.4

~1 . 4%

75%

Ross Univ.
91.0% ( 2008)
(Medical t 0.1%
(Vet.): 0.1%
auuub~diaio !.&II~ 21
~1.8%

Design (23% ~ Mecta Arts(22%). Health

Sciences (14%), Behavioral Sdences
112.698 (tel%), CUtinary (8%), Fashioo (8%),
Business (6%). Education (4%), Legal
(4%), Info. Technology (1%)

Diploma/Certificate
(9%), Associate's
(27% ), BacheiO(S
(50%). Master's (7%).
Doctoral (8%)

Grand Canyon
Educabon
(LOPE)

Educatioo (52%)
Business (20'.4)
27.622
HealtMiurnan Services (14%)
Liberal Arts (14%)

BadheiO(S (50%),
Master's (49%),
Doctoral (1%)

ITT
Educabonal
12
SeMces (ESI)

IT (30%). Electronics (20% ~ Drafting &

69,127 Design ( 25% ~ Business/cnminal Justice
(20'k), Health (5%)

Lincoln
Educational
SeMces
(LING)

Health Sdences (37%). Auto(32%),

26.035 Skilled Trades ( 13% ~ Spa Ctlinary (09%),
ITI Business (9%)

Education
Management
(Private)

60%

Mectan5%
Range 1.2%-11.3%
(Prelim. 2007:
Mectan8. 1%
Range 1.7%-14.4%)

79%

1.6% (Prelim. 2007;

1.4%)

Associate's (80'.4),
Bachelo(s/Masters
(20%)

n%

Mectan of 9.4%:
range of 5.5%-12.8%
(2007 Prelim: 9. 7%15.3%)

Diploma/Certificate
( 78%): Associate's
(21%): Bachelo(s ( 1%)

79%

Median of 11.8%
N.A.
(range of 5.7%-19.4%)

Badhelo(s (56%).
Master's (27%).
Associate's(11%),
Undedared (5%),
Diploma/Certificate
(1%)

n%

3.8%

Associate's
Diploma
Certificate

n%
71%

13% ( 19 and younger)

12

S1rayer
Educabon
(STRA)

12

42.516

Universal
Techrical
tnstiMe (UTI)

Autanotive Tedmidan and Cdlislon

14.28 1 Repair( 75%), Molcrcyde and Marine
Techllcians (25%)

Wasnngton
Post's Kaplan
Education

(WPO)

Business/Economics/Aocounting (73%),
lnformatioo Systerns(16%). Other (9%)

Healthcare. Business. lnformatioo

12 114,100 Technology, Education, Criminal Justice,
Paralegal

37%(~24)

82.0% ( 2007)

26%(2$-30)
24% (31 and over)
76%Male
24%Female
20'A. (High School)
80% (19 and older)

BadheiO(S
Masters

N.A.

Average age Is 35: 60%

Female 40% Male: average
inoome Is $35,000

26.n8: 62.9%

Mectan of 7,7% (range

91.0% ( 2007)
016.5%-8%)

60% (recent high school

graduates.18-21)
40'.4 (adtAtteamers. >25)

N.A

Mectan ol13.8%
N.A.
(range or 2.1%-26.1%)

N.A.

43.600 (As of
YE2008):
45.2%

N.A.

Certificate

Associates

N.A

Note: Enrollment from most recent quarter. Source: Primary programs, degree type, Title IV funding and student profiles from most recent 10K, analyst presentations or other company reports. Cohort default rates from Department of Education website.

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Postsecondary Education

BMO Capital Markets

Postsecondary Schools: Valuation Trends

When compared with firms in other education sectors, postsecondary institutions have a longer
track record as publicly held companies. We have compared the median return for the stocks
comprising the BMO Capital Markets For-Profit Postsecondary Index to tlmt of the S&P500
since December 31, 1995. W1l.ile there bas been some volatility, an investment in tllis Index

Though volatile,
postsecondary
stocks have
outperformed the

through September 9, 2009 would have returned nearly 14 times the original investment, versus
a 68% return for the S&P500 (see ExJ1ibit255).

S&P 500 over time

Exhibit 255. BMO Capital Markets For-Profit Postsecondary Index vs. S&P 500 (12/31/959/9/09)
1,900

BMOCM Postsecondary Index -

S&P 500

1,700
1,500
0

0
.....

II
It)

1,300
1,100

.....

~
.....

-g
)(
Ql

"0

900
700
500
300
100
-100
'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

Note: Shaded area indicates recessionary period.

Source: FactSet and BMO Capital Markets.

Current median

In Exhibit 256, we compare the median forward-looking PIE multiples for the group of publicly

forward-looking

held for-profit postsecondruy school operators (BMO CapitaJ Markets For-Pro'fit Postsecondat)'
Index) since December 1995. As shown. this multiple has been somewhat volatile. bottoming
recently at 15.lx in May 2009 - likely reflecting investor fears regarding regulatory scrutiny
tmder the Obruua administration- and peaking at 49.4x in August 1996 (albeit there were only
three publicly held providers trading at the time). The current forward-looking PIE multiple of
16.5x compares with the llistorical averc:1ge of 26. 9x.

PIE well below

historical average

Forward-looking PIE Milestones:

As of 9/9/09. 16.5x versus 14.5x for S&PSOO

All-time median. 26.9x
Prior to and during 2001 recession :

Peak. 49.3x (Auf,'USt 7, 1996: all-time peak)

Trough. 15.3x (Apri1 20, 2000)

Prior to and during 2008-2009 recession:

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Peak. 31.3x (November 8, 2007)

Trough. 15.1 x (May 28, 2009; all time trough)

Financial Group

266

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 256. Forward-Looking P/E: BMO Capital Markets For-Profit Postsecondary Index
vs. S&P 500 (12/31/95-9/9/09)
55

a.

45

40

1/)

35

a:

c
0

30

Q)

25

I-

BrvlOCM Fbstsecondary Index -

S&P 500 -

Median

50

20

"'0

....

u.

15
10
5

.,---r----r---r----r---r----r

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

Note: Shaded area indicates recessionary period.

Source; FactSet and BMO Capital Markets.

Postsecondary stocks have historically trdded at a premium to the S&P 500. When measured on
fmward-looking earnings, the average premium has been roughly 49% since December 31,
1995. At September 9, 2009. the group was trading at only a 4% premium to the S&P 500. near

Postsecondary
stocks typically
trade at a

its 2008-2009 recession low (see Exltibit 257). By comparison, this premium peaked at213% in
July 1996 (albeit there were only three publicly held providers trading at the time), while t11e
group's biggest discount was 38% in April2000.

premium to the
S&P500

Relative forward-looking P/E Milestones:

As of 9/9/09. 4% premium
All-time median. 49% premium

Prior to and during 2001 recession:

Peak. 213% premium (July 30, 1996; all-time peak)
Trough. 38% discount (April 20, 2000; all time trough)
Prior to and during 2008-2009 recession:

A member of UMO

Peak. 180% premium (December 1, 2008)

Trough. 4% premium (September 8, 2009)

Financial Group

267

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 257. Relative PIE: BMO Capital Markets For-Profit Postsecondary Index vs. S&P
500 ( 12/31/95-9/9/09)
--PS Index -

50x

PS Rei. to S&P - - Median

3.0x
2.5x

40x

Ql

a.

2.0x E

Ql

a.
:&:>

"'

30x

:;:

..,_--~L'ft~blij i-~---f'--'-RJUI,.,-Ii-fi''i...""''.P-''---=---\-."'""i~..-:-::-:A-.;;q!l'-"'-'lf.~t:r;.r~llt--t

'3
:;;

1.5x

Ql

~ 20x

>

1.0x

&

10x

O.Sx

Ox +----...---.---.,---.---..----..---......---..---.----....----.---.....----,..--'- O.Ox
12/95
12/96
12/97
12198
12199
12/00
12/01
12/02
12/03
12104
12/05
12106
12107
12108

Note: Shaded area indicates recessionary period.

Source: FactSet and BMO Capital Markets.

Most of the transactions in this space are typically priced at enterprise value (EV) to trailing 12
month (TIM) EBlTDA multiples. As shown in Exhibit 258. as of September 9, 2009, the
b'Toup's median EVffiM EBITDA multiple of l2.8x was below the b.istoricall4.3x multiple.

Using EV!TTM

EBITDA, our
Postsecondary
Index is trading

EV/ TIM EBITDA Milestones:

below its

As of9/9/09. 12.8x versus 8.3x for S&P500

historical median

All-time median. 14.3x

Prior to and during 2001 recession :
Peak. 27.3x (March 2, 1999; all-time peak)

Trough. 7.3x (April19, 2000; all time trough)

Prior to and during 2008-2009 recession:

Peak. 19.5x (November 9, 2007)
Trough. 7.6x (March 31, 2008)

A member of BMO

Financial Group

268

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 258. TTM EV/EBITDA: BMO Capital Markets For-Profit Postsecondary Index vs.
S&P 500 (12/31/95-9/9/09)
30

BMOOV1 Postsecondary Index -

S&P 500 -

rv1edian

25
~

20

t-

eo

15

La

5
0 +---~~--~----~----r-----r

'96

'97

'98

'99

'00

-,'01

'02

'03

'04

'05

'06

'07

'08

'09

Note: Shaded area indicates recessionary period.

Source: FactSet and BMO Capital Markets.

We provide recent operating and f1mdamental statistics for a number of publicly held companies
in Exhibit 259.

A member of BMO

Financial Group

269

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 259. Trailing 12-Month Operating and Valuation Metrics: Selected Publicly Held
Postsecondary School Operators
American
Public

Apollo B<ldgepolnt

DeVry
Ql!

Canyon
LOPE

Uncoln
Universal
ITTEduc. Educational
Strayer Technical
Services
Servlces Education
In st.
ESI
LINC
STRA
Ull

Outperf
$25

Outperf
$63

Out perf
$24

Not Rated
N.A.

Out perf
$30

Out perf
$250

Outperf
$25

12
6/09
$1,7 10.2
1,009.0
201.8
131.5
96.5
67.7
127.2
59.0%
11 .8%
7.7%
5.6".4
4.0%
6 .4%
7.6%

06
6/09
$1,307.8
554.1
172.0
119.9
117.1
71.1
149.2
42.4%
13.2%
9.2%
9 .0%
5.4AI
9.0%
13.6%

06
6/09
$1,461.5
794.2
297.0
246.5
237.4
165.6
165.5
54.3%
20 .3%
16.9.4
16.2%
11.3%
4.5%
19.4%

12
6/09
$209.4
143 .6
28.7
28.7
26.4
16.2
23 .0
68.6%
13.7%
13.7%
12.6%
7 .7%
3 .1%
29.0%

12
6/09
$1,139.2
730.8
428.6
405.7
403.3
247.1
196.2
64.1%
37.6".4
35.6".4
35.4%
21.7%
5.1%
81.2%

12
6/09
$454.5
274.1
77.6
57.0
52.7
31.7
42.2
60.3%
17.1%
12.5.4
11 .6%
7.0%
7.3%
14.7'.4

12
6/09
$451.7
305.4
165.3
152.9
152.9
92.5
66.8
67.6".4
36.6".4
33.9%
33.9%
20.5%
2.3%
54.0%

09
6109
$351.7
160.5
25.2
7.7
7. 7
4.7
14.8
45 .6%
7.2%
2.2%
2.2.4
1.3.4
3 .2%
4.6%

12
6/09
$23.20
85.2
$1,975.7
1389.1)
$1,566.6

06
6109
$19.02

06
6/09
$ 51.60

12
6/09
$16.62
44.6
$741.2

12
6/09
$102.78

12
6/09
$21.6 7
~
$581.8
$611.4

12
6/09
$206.56
14.0
$2,890.4
~
$2,800.0

09
6/09
$19.65
23.7
$465 .9
~
$406.6

Career Corinthian
Colleges
Education
CECO
coco

APOL

Education
BPI

Capella
Education
CPLA

Out perf
$42

Out perf
$92

Out perf
$26

Perform
$70

Out perf
$30

12
6/09
$12 7.8
72.6
37.3
32.3
32.3
19.4
20.7
56.8%
29 .2%
25.3%
25 .3%
25.3%
3 .2%
35.4%

08
5109
$3 ,729.8
2 ,216.8
1,153.9
1,060.3
1,236.4
736.4
847.9
59.4%
30.9%
28.4.4
33.1%
19.7%
8 .3%
89.4%

12
6/09
$324.6
239.4
74.8
27.7
28 .0
19.6
98.5
73.8%
23 .0%
8.5%
8 .6%
6.0%
11.9%
21 .2%

12
6/09
$297.5
172.4
67.1
53.8
25 .6
34.8
13.7
57.9%
22.5%
18.1.4
8.6%
11.7%
1.3%
24.5%

08
5109
$66.63
153 .2
1ll
$638.1 $10,208.7
(! 286.3)
(&1l
$8 ,922.4
$581.0

12
6/09
$15.56
53 3
$829 .9
11 220)
$707.9

12
6/09
$64.16
16.7
$1,072.7

Education

Group

APEl

Grand

GROUP
MEDIAN

Market

Rating
Price Target
OperaUng Performance
FY End
LTMotr. End
Revenue (SMM)
Gross Profit (SMM)
EBITDA (SMM)
EBIT(SMM)
F\'etax lnene (SMM)
Net Income (SMM)
Free Cosh Flow (SMM)
Gross Marg:ns (in%)
EBITOA (in %)
EBIT(il 0h)
F\'etax Income (in%)
Net income (In %)
Free Cosh Flow Yield (tn %)
ROIC: LTM
Valuation Metrics
FY End
LTM Otr. End
Price (9109109)
Slleres OUtstanding (MM)
Market Cop !SMM)
Net Debli(Cash) (SMM)
Enle<p<ise Value (SMM)
CYEPS;
2008A
2009E
2010 E
Two-Year CAGR
PI E:
2008A
2009E
2010 E
EV!Rev. (lTM)
EVIEBITDA !LTM)
EVIEBIT (LTM)
EVIFree Cosh Flow (lTM)
Student Metr1cs (TTM)
Tolaf student P<lpuleUon
Revenue/Student
EBITOA/student
Operating ProliUStudent
Free Cosh Flow/Siudent
tv/Student

12
6109
$35.08

illill
$925.9

l.ill&l

$3,740.9

ru

70.5%

$0.78
1.45
1.80
52.4%

$ 5.67
7.48
9.40
28.7%

$0.16
0.6 7
0.86
132.9%

36.9%

26 .2x
19.6
14.9
0.9
7.9
12.1
12.5

36.9x
16.2
12.7
1.2
8 .9
12.7
10.2

26.6x
19.0
15.4
2.4
12.0
14.5
21.6

83.1x
24.7
16.6
3 .5
25.8
25 .8
32.2

19.7x
13.3
11 .4
3.3
8.7
9.2
19.1

27.9x
14.9
12.0
1 .3
7 .9
10.7
14.5

36.4x
27.6
22.0
6 .2
16.9
18.3
41.9

124.3x
29.5
22.9
1.2
16.1
52.7
27.5

33.8x
19.3
15. 2
2.4
10.7
15.8
20.3

92,300
$18,529
2,187
1.425
1.378
17,190

86,088
$15,192
1 .998
1,392
1 .733
17,717

$1.66
2.35
3 .00
34.4%

$0.89
1.18
1.56
32.6%

40.8x
28 .4
21 .0
4.5
15.6
18.0
28.1

21.2x
14.9
12.1
2.4
7.7
8.4
10.5

31.1x
15.3
11.4
2.2
9.5
25.5
7 .2

38.6x
27.3
21.4
3 .1
13 .8
17.2
67.4
29.281
$10,161
2,290
1,838
470
31,623

$739 .9

:&1.

$3,875.6

$5,22
7.75
9.05
31.7%

$0.50
1.02
1.36
65.0%

45.504
$7,133
1.643
610
2.164
15,557

$1,52 5.2

rul
$0 .20
0.6 7
1.00
123.9%

$3 .14
4.48
5 .51
32.5%

420.700
$8,866
2,743
2 ,520
2.015
21.208

ill
$3 ,672.1
~
$3 ,566.2

!ru.I.l

$1.94
2.72
3 .34
31.3%

$0 .86
1.24
1.6 7
39.3%

53,600
$2,384
695
603
386
10,839

ill
$1,656.9

59.2%
21.4%
15.3%
12.1%
9.5%
4.8%
17.0%

$0 .52
1.18

!.SO

64.034
$22,82 3
4.638
3,850
2.584
55,692

27,622
$7,581
1,040
1,040
832
26.787

69.127
$16,480
6.200
5,869
2.838
54,11 6

26,035
$17,458
2.980
2 ,191
1.622
23 .483

42.516
S10,624
3 .888
3,597
1.572
65,856

14,281
$24,629
1,767
540
1,035
28 ,475

49, 552
$12, 908
2,239
1,631
1, 597
25,135

N.A.- Not Available. N.M. - Not Meaningful. Source: BMO Capital Markets and FactSet Research.

A member of UMO

Financial Group

270

September 2009

Postsecondary Education

BMO Capital Markets

There have been two recent IPOs in this space.

Two recent IPOs

On November 20, 2008, Grand Canyon Education (LOPE), which operates Grand
Canyon University, \-vent public at $12 per share. The initial company valuation was
roughly $523 million. Tlus was the first IPO on a US exchange since August 2008.
ending one of the longest lPO droughts in the market's history.

On April 15, 2009, Bridgepoint Education (BPI), which operates Ashford University and
University of the Rockies. went public at $10.50 per share. The initial company valuation
was roughly $558 million, or about 9x EV!ITM EBTTDA (through March 31 , 2009).

This contrasted a prior trend of publicly held companies going private.

Three publicly
held companies
were taken private

in 2006 and 2007

Education Management was acquired by Providence Capital Partners and Goldman Sachs
Capital Partners on Jtme 1, 2006. The takeout price was roughly $3.2 billion. or about
ll.4x EV/TTM EBITDA (based on the data available at the time of the announcement).
Interestingly, on December 21 , 2007, the company filed to go public again although no
deal has been completed at the time of tlus publication;

Concorde Career Colleges was acquired by Liberty Partners on September I, 2006, for
roughly $99 million, or about l2.9x EV/TTM EBITDA (based on the data available at the
time of the atmotmcement though likely calculated off a depressed ("trough") EBITDA
base);

On August 17, 2007, Laureate Education completed its merger with a private investor
group led by its CEO Doug Becker and a consortium of finns. including Kohlberg Kravis
Roberts & Co. (KKR), Citi Private Equity, and S.A.C. Capital Management. Wlten the
tnmsaction was initially announced (Januaty 28, 2007), the $3.8 billion price ($60.50 per
share) was 18.7x EV/TTM EBITDA, according to management's presentation. Once the
price was raised to $62 per share ($3.82 billion), this implied a takeout value of roughly
15.5x TTM EBITDA (through June 30, 2007), by our estimates.

A listing of recent acquisition activity of postsecondary school operators can be found in Exhibit
260.

A member of UMO

Financial Group

271

September 2009

Postsecondary Education

BMO Capital Markets

Exhibit 260. Postsecondary School Operators Transactions (2006- 2009)

($ in millions)

Anne.
Date
Aug-09

Aug09
Aug-09
JtA-09
J'-"09

Tarset
Ashwo~

College
Vina del Mar University

National Amerie3f'l Univet'Ky

Two Jordanian S<:hools
Kr<><on Educational (28%)

Aegulror

Sterl.,g partners
Laureate Education

camden leamin.g
First E~cation HoldO>g

Advent lnternatfonal

Jl.l"'-09
J'-"09
May-09
Apr.(JfJ

Aston Education

sou

Wal Stre-et lns.tllute International

Mana_gement Bu)IOtJt

American Institute of Allied Health

BPP Holdings

ATI Enterprises(Ri-side)
Apollo Group

Apr-09

Edutech tvidtle East (55%- 80%)

Connecticut School of Broadcasting (11 Schools)

Navis Capital PartnetS

Pnvate Investor

NTI Nedet1ands Tafen lnstituut

Comelsen Vertagsholding

Apr..OO
Apr.(JfJ
Apr.(JfJ
Apr-D9
Apr.(JfJ
Apr-09
Mar-09
Mar-09
Mar-09
Mar-09
Mar-09

Mar..()9
Mar-oo
Jan09
Jan-09
Jan-09
Jan-09
Oec-08
Dec:-08
Dec-08
Dec-08
Oec--08
Nov-08
Oct-09
OCI-09
OCI-09
Oct-09
Oct-08
~09

Sep-09
Sep-09
Aug-08
Aug-08
Aug-09
Aug-09
Aug-09
JtA-Oa
JtA-Oa
JIA-09
JtA-Oa
JtA-08
JtA-Oa
JtA-Oa
J""08
J""08
J...-.-08
May-08
May-08
Apr-()8
Fet>-09
Feb-08
Jan-08
Jan-08
Dec-07
Oeo-07
Oec-07
Dec:-07
OCI-07
0C(,07
Sep-07
Sep-07
~-07

JtA-07
J'-"07
Ma)'-07
Apr-07
Mar-07
Mar-o7
Mar-07
Mar-07
Mar-o7
Feb-07
Feb-07
Jan07
Jan-07
Nw-06
Oci-06
OCI-06
Od-06
Sep-06
Aug-06
Aug-06
JtA-06
JtA-06

J ....oe

lnstiMe oiTechnology Australia

Daniel Webster Colege
Santo Tomas Unlversily(57%)
Wal Street lnstlute (Chinese Oi..,;sion)
AI Maarol Scllool (UAE)
Mctrison Uriversity
Faculdades Nordeste {82%)
Career step
Aaida Technical College
Piccolo International University
Javetn TechnicaJTralnO>g Center
OemEfls Colege
Baran lnsUtlte ofT echnology
BrighiSiar
West of England Language Services
Sociedade Educacional Ml'leira
Fronter
Alteon Training
American University of Anligua
J ~a Yue Investment & Tianyi College (80%)
Northwood's CoUege & CUlinary School and CaiTig NIXSes lnsilute
Tulsa Wek:ling School
lnstituto de Ensino. PesquiD e Atl~dades de Extens~o em Direito
Medical Transcription Education Center
lllfa.rwood Collejje
Northcentral Uni-..ersity
tnstihJut Schoevers
Platt College (los Angeles)
lnstitulo Oinatos
Cofi!gio Pont-a Verde
INTI Uriversal (Remain_,g 49%)
lnstilule of Medical & Denial Technology
Anew Lea.mi'lg
Uniwrsldad Lamoamericana S.C. (65%)
U.S. EducaUon
Pro Ulgus
NewScllool ofArchllect\Jre and Design
Kendell College
lntemationai Academy of Design & Technology Toronto
ParcA\fiation
Universidad T ecnologica de Mexico
Aefd Sl\ldies Center of New YO<i<
Melbourne E~cation & Auslralin lns!Me of Pubic Safely (75%)
Ponce Paramedical Colege
Cllan~Jor Uni'N!sty (lka Myers Unlversay)
Estacio P2rticipacoes (20%)
Berks T echnlc Institute (ForeFront Education)
Universidad de Artes, Ciencias y Comunicaei6n
South Texas Vocational Tec:hnieal lnsti:ute
BiTS(76%)
Pacific language lnSO:ute
Susi'less School Sao Paulo
Sprod.Shaw Community Colege
Foreign Trade & Business Col5ege (SO%)
Bryan! & Slralton Collejje
Advanced Academics
P(ll"ter & Chest.-lnsllute
Ccforado School of Professional P-sychology
INTI Universal Holdings (51%)
Schller International Uni'A!!f"Siy
Touro UnNers~y International
FCC Hol<ings (Florida career College)
eCollege (i'icludlng Dalamark)
Regis (51 Cosmetology Schools)
Thomson ( Education Direct)
lnstluto de Sanca yComercio
National Colege of Business&. T ethnology
EduK
Hanison Career Institute (NI.I"'Sing Program)
Princeton Re'oAew (Actnissions Services OMsion)
WestMed Collejje
laureate Education
lstituto Mara.ngonl
IS!anbul Bigi Unlvers~y (50%)
Beclctield Collejje
PMBR
Sierra Nevada Colege
Coocorde Career Col5eges
Boslon un~w,.;ty Corporate Educallon
Study Group International
Pan Am lnternal!onal (Flight Simuta!or IJMsionj
Coonedicut School of Broadcasting
EducatiOf'l Management

Kip McG<aJh Education Centres

m Technical lnstltute

Apollo Group
Pearson
Flrsi Educatfon Holding
TCI Education
OeVry
BB&T Capital & OW Healthcare Partners
EduKGroup
Maple Mol.l'ltai'l P\lmpkins & Agriculure
Excellere Partners
lincOO Educational Services
lin*> Educa.tlonal Services
Kaplan
Kaplan
Sistema Educacionaf Brasileiro
Pearson
Sichuan HAITE High-tech
Manlpal E~catlon Medical Group
laureate E<l.Jcation
Healthcare ofToday
Summer Street Cap1t.,. Partners
Sistema Educaciooal Bfasieiro.
Webmedx
lin*> Educational Services
Rockbridge Growth Equity
Astor Participaties
CalliJs Equily
Sistema Educaci6nal Brasileiro
Sistema EducacionaiBrasileiro
laureate.Education
Ross Education
AcadeMedia
Apollo Group
O..V<y
Kaplan
latlreate Eclucatfon
Laureate Ecl.lcatlon
RCC lnstrtute of Technology
Oxford A\'ialion Academy
laureiJ!te Ecklcation
WoridS!rldes
Na\oitas
EduKGroup

SijJ'Iffleanl Veotures
Moena Parti~aooe-s
Della career Education (Gryphon lnvo.tors)
Apollo Group
ATI Enterprises
Laureate E<l.Jcation
Kaplan
laureate Education
CIBT Education Group
ChinaCast Education
Parthenon Capilal
O..Vry
TOOma Cressey 6ra\IO
Bfidgepoint Education (Warburg Pincus)
laureate EducatkM'l
Knowtedge Investment Partners
Summit Partners
Greenhi l Capital Partners and Abrams Capital
Peam.on
Empire Beauty Schools
Penn Foster (.Wicks Group)
leeds Eq.Oty
Leeds Equity
leeds Equrty
l.ioc<*'l Educational Ser.ices
Em ball<
NaUonal Unl-.lly
KKR, SAC, Citi, Sterling
Career Education
laureate Education
Quad Partners
Kaplan
Knovdedge Universe
liberty Partners
T~hSk11s

CHAMP. Petefsen Investments

American CaplaJ Slrateg!es
Ol J, Knightstone Media
Gotdman Sachs. Providence Eqt.ity

Transaeclon
Vatue
NA
$18.3
$162.0
$14.0
$112.7
$2.5
NA
NA
$537.8
NA
$1.0
NA
NA
NA
$57.0
$145.0
NA
NA
$40.4
NA
NA
NA
NA
$2.8
528.3
NA
NA
$2.9
$23.8
$17.6
NA
NA
NA
NA
$4.9
NA
$11 .
NA
NA
NA
51.3
$2.9
$32,5
NA
$156.9
$47.0
$290.0
NA
NA
NA
NA
$52.1
$230.0
NA
$2.1
NA
$18.3
$153.4
NA
544.0
NA
NA
NA
55.7
$11.9
$64.9

NA
$27.5
NA
NA
$32.0
NA
$190.0
NA
$518.0
NA
NA
NA
NA
NA
NA
$7.0
NA
$3,543. 1
$40.0
NA
NA
NA
$15.0
$98.9
NA
$141.4
$58.0
$50.0
$3.253.3

Transaction Value / lTM

Revenue

EBITDA

NA
NA
2.7x
NA
2.2x
NA
NA
NA
2.2x
NA
NA
NA
NA
NA
NA
2.1 )(
NA
NA
1,6x
NA
NA
NA

NA
NA
17.6.
NA
129x
NA
NA
NA
13.4 )(

NA
NA
NA
NA
NA
NA
NA

NA
NA
NA
NA
NA
NA

NA

NA

NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
1.2 X
NA
NA
NA
NA
NA

NA
NA
NA
NA
NA
NA
NA

1 ~4 X

NA
1.1x
NA
2.0x
NA
NA
NA
NA
0.4)(
NA
NA
NA
NA
NA
1.2
NA
NA
NA
NA

NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
7.5x
NA
NA
NA
11.7x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
123
NA
NA
NA
NA

NA

NA

NA
OAx
NA
NA
NA
NA
NA
1.8x
NA
NA
NA
9 .4x
NA
NA
NA
NA
NA
NA
0 .5.

NA
4.0x
NA
NA
NA
NA
NA
10.8x
NA
NA
NA
23;0.
NA

NA
NA

NA
NA

NA
NM

NA

NA

3.1 )(
NA
NA

16.6)(
NA
NA
NA

NA
NA

NA
1. 1 )(
I'IA

o.a.
NA
NA
2.9X

NA
NA
122x
I'IA
7.7x
NA
NA
11.3X

Source: BMO Capital Markets and company reports.

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Postsecondary Education

BMO Capital Markets

One of tile more recent trends have been the acquisition of a not-for-profit institution by either a
private equity fim1 or for-profit institution. Many of tJ1ese transactions incorporate a not-forprofit conversion to a for-profit entity. Institutions that have been acquired are usually facing
some financial issues. limiting tl1eir viability. We believe the repeal of the 50% rule effective
July L 2006 (which had limited institutions to have under 50% of comses offered via
"telecommunications courses" (i.e., online) or else lose TitJe TV eligibility) has Likely increased
interest in these type of transactions. as the new enllty typically uses the acquired platfonn (and
often regionaJ accreditation) as a base to dramatically e>:pand its online presence. Exhibit 261
contains a list of recent acquisitions of not-for-profit instihttions.

Exhibit 261. Select List of Transactions Between For-Profit and

Not-For-Profit Institutions (2004- 2009)
Fe~HJ4

Target
Grand canyon University

Comments
Acquirer
Grand canyon Education (LOPE) LOPE 'Ment public in November 2008

Oct-04
Mar-05

Post University
The Franciscan University of the Prairies

Generation Partners
Bridgepoint Education (BPI)

Apr-Il>

Salem International Univers~y

Palm Ventures LLC

Nov-re

Barat College (DePaul University)

Apr..Q7
Aug..Q7
Sep..Q7
May-08

Heald College
Touro lnternatKJnal University
Colorado School of Professional
Psychology
Myers Univers~y

American College of Education

(Best Associates)
Palm Ventures LLC
Sum m~ Partners
Bridgepomt Education (BPI)

Apr-09
Jun..Q9

John F. Kennedy University

Daniel Webster College

National university System

ITT Educational Services (ESI)

Acquires 1st regionally accredited institution

Jui..Q9

College of Santa Fe

Laureate Education

Lease with purchase option

Date

Significant Partners, LLC

Subsequently renamed Ashford Univers~y;

BPI went public in April 2009

Subsequently renamed TUI University

Subsequently renamed University of the
Rocktes; BPI went public in April 2009
Subsequently renamed Chancellor
University; to launch Jack Welch
Management Institute

Source: BMO Capital Markets and company reports.

International Postsecondary Market

International
"market" is much
larger than US
market

We reaJize there is no such tiling as an international postsecondary " market" since each count!)'
has its ow n growtl1 drivers and risks~ still. we group togetl1er all postsecondary opportunities
outside the US under tJus framework for discussion purposes. Using UNESCO statistics, we
estimate nearly 135 million students attended postsecondary instihttions outside tl1e US in 2007
(i.e.. t11e 2006-2007 school year. latest data available). compared to roughly 17.8 111illion enrolled
at US institutions.
We believe t11e intemallonal postsecondary education market has some features differentiating it
from tl1e US market. In Exlubit 262. we compare tl1e US and international postsecondary
markets on several key metrics.

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Exhibit 262. International vs. US Postsecondary Market

International
Pricing flexibility (i.e., annual tuition increases)
Attrition rate
Campus size
Program length
Primary source of financing

5%-10%

4%-6%

11%

>20%

1-10K

1-2K

4-6 years

1-3 years

Private

Title IV

Source: Laureate Education and BMO Capital Markets

We believe the postsecondary market is much more fragmented overseas than in the US. The
competition for postsecondary students overseas is relatively limited, as governments, such as
those in France and Spain, have only recently allowed private universities to begin operations.
We believe many of the existing for-profit schools are relatively small 'Arith limited access to
capital. In addition. most state-run univers.ities are overcrowded and the lack of a structured
financial aid program makes it more difficult for students to attend institutions away from home.
This is one reason we believe most of the existing universities overseas tend to be congregated
in major urban areas. providing for-profit universities with a potential expansion opportunity.
Wllile we believe the US is still recognized as the world' s leader in higher education by most, the
market is becoming more globalized. Each year, Shanghai Jiao Tong University publishes its
Academic Ranking of World Universities, which ranks institutions of higher education on a
number of criteria, including U1e quality of education, faculty, research output and size. While
some may argue with the specifics, we highlight the cotmtries witl1 the most "top 500"
tmiversities over the past six years to show the growth of top universities in a number of locations
outside ilie US (see ExlJibit 263). Specifically, China has tripled its "share" on tll.is list, with 30
" top 500 universities" in 2008, up from 10 in 2003, while U1e US has declined slightly over the
same period to 159 from 170. WIJ.ile the US still dominates this list and will likely continue to do
so for some time, we believe it will graduaUy lose some share as ot11er countries invest in t11eir
higher education systems. Other "up and coming" cotmtries include Singapore. China. Malaysia.
South Korea, and India

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BMO Capital Markets

Exhibit 263. Academic Ranking of World Universities: Share of

Top 10 Universities (2003-2008)
o 2000 a 2004 o 2005 o 2000 2001 o 20oa

35%

30%

.~
~
., 25%

.:.
520%
0

g.
!:
0

1/l

15%

10%

[fJ)].[)I)],[fJJJ.rcll.[IIJ]JIJll.[IJJ] .ri111.miJ .~

5%

0%

Note: Share represents percentage of top 500 universities. Source: Shanghai Jiao Tong University.

Internat ional
"market" has
grown 57% since
2000, vs. 20% in
the US

Based on UNESCO data, g lobal tertiary (i.e., postsecondary) enrollment (excluding the US)
grew at a roughly 5.2% annual rate from 1970 to 2007 (see Exhibit 264). More recently -from
2000 to 2007- tllis rate increased to 6.6% as total enrollments increased 57% to 134.7 million
from 86 million. Tilis compares to US tertiary enrollment, which bas 2.2% and 2.6% annual
rates (20% in total since 2000) over the san1e respective periods. According to UNESCO, the
US lost considerable share of total enrollments during tllis period, as US share of global tertiary
enrollments decreased to about 12% in 2007 from 28% in 1970.

Exhibit 264. Tertiary Enrollment in the US vs. Rest of World (19691970 to 2006-2007 School Years)
c:::::::::J US Enrollment

1!1!1!1!!!1 Rest of World Enrollment

-II- US Share of Total

u;

160

140

120

s:::
Ql
E

100

20% ~

80

15% ~

60

10%

s:::

s:::
w
iij

.c
0
(3

30%
25%

40

:;)

5%

20
0

VI
Cl)

+-------~--------~--------r--------r--------+0%

1970

1980

1990

2000

2005

2007

Source: UNESCO Institute for Statistics, US Department of Education National Center for Education
Statistics, and BMO Capital markets.

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BMO Capital Markets

However. enrollment growth is somewhat uneven across geographies (Exhibit 265). with some
of the fastest growing regions being Sub-Saharan Africa (12.4% CAGR), East Asia and the
Pacific (11.3%), South and West Asia (8.6%), Latin America and the Caribbean (7.9%) and the
Arab States (7.3%). Higher international growth rates may result from the fact that most regions
are starting from a smaller base, but we still believe these data are enlightening.

Exhibit 265. International Postsecondary Enrollment CAGR (19992000 to 2006-2007 School Years)

..
.. "

.g

15%

"~

..
11

-~
~~

Ill

..

10%

..

!!

i
5%

..

0%

Note: Regional growth rates based on countries in the region that reported data in the 1999-2000 and 20062007 school years. Source: UNESCO Statistical Yearbook, US Department of Education.

Exhibit 266 lists those countries with a sizable postsecondary enrollment that have still outpaced
1:,rrowth in most other countries. including Cuba. China, Vietnam, and Romania. where
postsecondary enrollment has grown at double-digit rates this decade (through 2006-2007
school year. latest data available).

Exhibit 266. Countries with Fastest-Growing Postsecondary

Enrollment (1999-2000 to 2006-2007 School Years)

Rank
1
2
3
4
5
6
7
8
9
10

Country
Cuba
China
VietNam
Romania
Brazil
Chile
Bangladesh
Turkey
Colombia
Greece

Region
Latin America and the Caribbean
East Asia and the Pacific
East Asia and the Pacific
Central and Eastern Europe
Latin America and the Caribbean
Latin America and the Caribbean
South and West Asia
Central and Eastern Europe
Latin America and the Caribbean
North America and Western Europe

2007 Enrlmnt.
(OOOs)
864,846
25,346,279
1,587,609
928,175
5,272,877
753,398
1' 145,401
2,453,664
1,372,674
602,858

CAGR
00-07
27.4%
19.3%
11 .7%
10.8%
9.6%
7.6%
6.7%
6.4%
5.7%
5.2%

Note: Countries chosen have more than 500,000 enrolled in postsecondary institutions in the 2006-2007
school year and enrollment had grown more than 5% CAGR since the 1999-2000 school year. Source:
UNESCO Statistical Yearbook and BMO Capital Markets.

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Postsecondary Education

BMO Capital Markets

developed

As postsecondaty enrollment in many regions has grown at a faster rate than the US.
postsecondaty penetration (i.e., U1e percentage of tJ1e eligible school-age population actually
enrolled), has aJso improved substantially - though less developed re!:,>ions (e.g., sub-Saharcm
Africa) still lag dramatically behind more developed regions. As shown in Exhibit 267, global
penetration rates have increased to 26% in 2007, from 9% in 1970, with the bulk of this growth

regions

occurring in recent decades as this rate has doubled s.ince 199os 13%

Global
penetration rates
on the rise, but
well below

Exhibit 267. Global Postsecondary Penetration Rates (1969-1970

to 2006-2007 School Years)
80

0 1970
71

70

1111980

0 1990

0 2000

0 2007

62

1i 60
0

~ 50

~
c:

.g

.,

34

40

31

26

30

26

23

!:! 20

~ 10

Q.

North
America
and
Western
Europe

Central
and
Eastern
Europe

Latin
America
and the
Ca ribbean

Central
Asia

East Asia
and the
Pacific

Arab
States

South and
West Asia

SubSaharan
Africa

World

Source: UNESCO Institute for Statistics and BMO Capital markets.

participation rate

Exhibit 268 looks at the growth of penetration rates in select countries. As shown. witJ1 roughly
82% of eligible students taking at least some postsecondary courseworl<: in 2007 (latest data
available). the US nmked SL'\1h in the world behind Cuba (109%), Republic of Korea (95%),
Finland (94%), Greece (91%), and Slovenia (85%). (We have doubts about the Cuba number

per UNESCO

given the sizable penetration rate increase and the 2007 data point above 100).

US has the sixth

highest
postsecondary

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BMO Capital Markets

Exhibit 268. Postsecondary Education Penetration Rates by Selected Countries {19981999 to 2006-2007 School Years)
~ Q!1.till!Y
1
CUbo
ReptA)Ii~; of Kofea

2
S
4

Gteece

SkM!nia
United States

Denm.tl

Newzeend

9
10
11

Ukraine
Norway
lilhuania

12
13

SWeden

14

Auuraia
Russian fedenMion

15
16

Iceland
Latvia

17

Hun g<~~l'j

18
19

Spain
Belarus

20

Italy

21
22
23
24

Poland
ESionia

25

Ireland

26

Israel

'Z7
28

Nethe.tands

29

Romania
Japan
Macao. Chna

30
31
32
33
34

latin America 111d the C.OObetrn

East AVa Mdthe Pacific
North Ameriea and Wesem Europe
North Ameriea an d Westem &Jrope
Central and Eastern 8Jrope
NocUl Amertca and Western Europe
North America an d WeUem Europe
East Asia .-.dthe Pac:ik
Central an d Eastern Europe
North America an d Western Europe
Central and Eastern Europe
North Ameriea andWHCern 8Jrope
East Asia Mdthe Paciit
Central and Eucem &.ope
North America and WeUem Europe
Central an d Eastern Europe
CentfJII an d Eastern Europe
North America an d Western Europ9
Cenltal and Eastern Europe
North Ameries sndWeuern Europe
Central and Eastern Europe
Central and Eastern Europe
latin Amenta and the Caritbean
North America and Western Europe
North America and WeUem Europe
North America and WeUem Europe
North Ameriea an d Western Europe
North Amerlea and Weuern 8Jrope
Central and Eastem Europe
East Asia and the Padit
East AU Mdthe Pac:ik
North America and Western Europe
North America and WeUern Europe
Central an d Eastern Europe
Latin Ameriea and the Cari:lbean
latin Ameriea end the Cari:lbeen

f inletld

UruiJ~il)'

Belgium

United ~dom

Portugal

france

36

Czech Republic
Barbados

36

Chit&

.1!!l!i .w!l! 12Q!

.!!5illQl:!

37
38

lebanon

At1Jb~es

Kazalchstan

39

lwstn.

40
41

Slovo!Oo
Bulgaria

42

ThaUnd

43
45
48

Mongolia
SWitzerland
Palestinian Ai.Jtonomous Triories
Croatia

Central Asia
North America and Western Europe
Central an d Eastern Europe
Central an d Eatitem Europe
EaR Asia .,dthe Pacik
Central Asia
North Ameriea and Weuem Europe
AlabStales
CentfJII an d Eastern Europe

47

Kyrgyzstan

Cetmii Asil

R~lie of Mold:MI

Central an d Eastern Europe

44

48
49

50
51
S2

53
54
56
58

57
58
59
60
61

Jordan
Georgia
Bosnia and Herzegovina

Ani>Sto1H

Turkey
C)prus

The form YugolbvRep. orMioedtria

Ecuador
Armenia
Hong Kong (Ctlina). SAR
Atube

Colomtia
Iran, tslamic Republc of
liechtenstein

Central Asia
Central and Eastem &.ope
Central and Eastern Europe
North Ameries andWeuern Europe
Centnd an d Eastern Europe
latin Ameriea and the Carilbean
CentndAsia
East A:rA and the Pac:if'le
Latin Ameriea and the Catlbbean
latin Ameriea and the Cari:lbean
Saulh and West Asia
North Amerlea and Wescern Ewope

62

Tunisia

Anb.st.tn

63
64

&ozi
Moko

latin America and the Cwf:t,ean

latin Arnerka and the Caribbun

65

Omon
Algeria

AnbStale.s

China
El Salvador
Tajikistan
Guatemllla

East A5ia end the Padit

Latin Ameriea end the Cari:lbean

66
67

68
69
70

71

At1Jb~es

Indonesia

o.<v

73
74
75
76

Brunei Oarvsulem
Guyana
lao People'S Oemoeratie Reptblie

78

Moroc:c:o

79

U:bekistm

00
81
82

CapeVerct.
Saint lucia
COte d'lvoire

93

~ngtadesh

84
85

88
89
90
91
92
93

Cametoon
Senegal
Ghana
Cambodia
etw-tan
Togo
Pakktan
Mall
Oemoeratie Rep.~bUe of the Congo
Mautiaria

!M

Kenya

95
96
97
98
99
100

Ma&igascar
Ethiopia
Ojiboub
SunGna Fuo
Borunci
United Rep.tllle of T8rllZ8tlia

10t

Nig

86
~

Azefbaijan

Nepal

Central Asia
latin America and the Cari:lbean
EaR Aa. .,dthe Pacik
1-nJb State$
EaR Asia .,dthe Padlit
Central Asia
Latin Ameriea and the Cartilean
East Asia and the Pacifle
South and West Asia
Central Asia
&b-Saharan Africa
latin Arneric and the Cari;i)ean
&b-Saharan Africa
Saleh end West Asia
Stb-Saharan Afriea
&&Saharan Afi1ea
Stb-Saharan Afiiea
East Asia 111dthe P11dfM:
ScMh and W8$tAsia

&b-Saha'an Africa
Soulh and W8$tAsia
Stb-Setwan Alriea
SUb-SeMran Afiiea
AntbStates
SIJ~Set\atan Afi1ea
Sui> Saharan Afiic:a
&A> Saharan Afiica

~
21222828
73
78
63
87
82
83
84
8&
47
51
59
66
53
56
61
67

89
87
73

sa

5&
90
90
80
72
82
74
86
6&

1Q2!!.

1Ql!l.
109
95
94
91

81

88
93
93
9&
83
82
80

82

8<)

80

611

73
78
76
79
73

78
78
76
7&
7&
15
73
71
69
611

63
91

92
90
79

73

69

70

80

58

60

63

82
67

84

6S
52

69

71

41
66

66
49
69

70

51
74

61
79

79

78

44

so

$7

62

sa

13

76

82
74

84

82

12

73
11
70
75
65

76
76
NA
46
48
54
50
56
63
67
33
37
40
45
57
59
61
62
&1
&3
56
58
47
49
52
S$
45
50
56
58
50
56
60
62
34
NA.
NA
NA
&7
58
59
60
46
49
50
54
48
50
52
51
49
52
54
&6
60
58
59
63
22
24
28
32
4$
47
49
51
28
27
47
65
45
48
51
53
52
53
54
53
2 8 2 9 31
3&
33
38
37
N.A
38
37
NA
41
33
34
39
41
24
28
34
39
54
56
57
47
28293032
45
44
43
40
33
35
39
41
29
33
34
26
36
37
39
41
25
26
28
30
31
31
33
36
29
35
40
43
33
33
32
32
NA
29
NA
33
64

67

6&
NA
40

66
NA

70
67
NA

65
62
71
&2

84
60
59
60
84
NA
61
&5
&7

56
63
36
&2

77
5&
&5
37
NA
43
41
44
48
34
41
42

69
68
75
60

66
62
63
62
6&
NA
62
58
57
&7
60
40

82

66
84
65
84
66
NA.

62
56
56
&9
56
45

54

56

68
56
56
43
NA
43
44
47

60
5&
56
48
NA.

48
46

49
36

52
49
41

41
44
39
45

44
46
43
45

34

38

41

39

N.A.

40
33
37

40

43
41
36
40
46
NA
31
33

36
44

72
73
74

69
67
66
67
66
6&
NA.
63

59
58
60
59
52
51
57

55

46
43
44
43
39

N.A.

NA

NA

NA
24
2&
21
NA
26
NA
28

NA

28

2.4
19

24
20
21

27

29

31

23
2&

24
NA

27
30
31
NA

23

Zl
22
19

28
23
19

30
24

NA
17
14
18
NA
14

NA.
19
16
20
NA
NA.

6
18
14
NA
NA
23
12
16
N.A.
2

NA
9
13

2
NA

8
17
14
NA
NA
NA.
13
16
NA
3
4
9
13

2
NA

20
NA
21
18
21
NA
16

N.A
23
20
22
14
18

10

IS

17
13
NA
14
19
14
16
NA
3

28

32

27
NA
25
31

26
22
23

15

14
19
16
18
1&
10
16

18

17

14
16
NA.
4

14
15
7
&

17
14

10

10
13

10
f4

NA
NA
6

NA
NA
6

5
II
14
4
13
NA.

30
NA
28
32
33

29

30

24
24
16

25
25
18

20
18
19
16
NA

11
19
15
15
10

17
19
15
15
11

6
6

25
24

22

23

11

NA.
11

14

10

6
14
NA

7
13
NA.

N.A.
3

NA.
3

NA
3

&

5
&
3

6
6

3
NA
NA

2
t

5
NA

3
NA
NA

2
N.A.
N.A.
3

3
NA
NA

2
NA.

NA.
NA.
3

2
NA

3
3

3
3
NA
NA

3
3
NA.

1
I

t
NA

1
NA
NA

I
I
N.A.

1
N.A.

NA.
NA.

20
18
17

ts

15
15
12
12

15

12
9
NA
12
10
8
10

N.A

2
2

2
1
2

3
2
2

11
11
10
9
9

7
7

7
7

7
6

&
6
&
&

NA
NA

16

&

3
3

NA.

22

19
9
17
19

3
3
NA

21

&

3
3

30
27

22

26

35
34
34
33
32
31
31
31

20
20
17
NA

32

36

21

NA
NA

38
38
NA
3&
33
NA
NA
32
33

55

25

&

58
56
&7
56
56

51
51
50
50
48
47
46
46
43
41
40
37
37
36
36

34
41
41
NA.
29
36
28
NA
26
31
28

22
24
NA
25
NA

62
81
60
60
59

$1

42

23

67
6&
64

50
45
46
46
47

41

20
23
NA
24
NA

sa
sa

53

39

22

82
8<)

&3
$2
52

38

21
22
NA
24
NA

86

56
50
NA.
47
48

36

I
Africa
Afiies
Afiiea
A/ries

:ll!Q!~

56

Ar-.,.st.tn
&,C).Saharan
Stb-Set\aran
SlJb..Saharan
&&Saharan

~
34

4
NA
4
NA

3
2

3
3

NA
I

Note: N.A. - Not Available Source: UNESCO and BMO Capital Markets.

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Financial Group

278

September 2009

Postsecondary Education

Internat ional
postsecondary
market has great
potential

BMO Capital Markets

We believe a key driver of recent and future growth in international postsecondary enrollment
has been the relative rise of a middle class and concurrent recognition of the wage premium
associated with a higher degree - trends that began much earlier in the US. Nevertheless,
postsecondary penetration rates outside the US are still drdmatically below US rdtes. We
attribute the disparity mainly to a lack of relevant available prob>nuns (i.e.. most schools are run
by the public sector with limited enrollment). Many countries with traditionally low penetration
rates have witnessed sharp increases; however, they still significanUy lag U1e penetration rates of
the US. Among some of the highly populated countries, h1dia has shown relatively little
penetration and growth. while China's penetration jumped to 23% in 2007 from 6% in 1999.
and Brazil increased to 30% from 14% over the same period- though both are still considerdbly
lower than the US (82%). Exlubit 269 lists the postsecondary participation for the world's 10
largest countries outside the US.

Exhibit 269. Postsecondary Penetration Rates in Select Countries

(1998-1999 to 2006-2007 School Years)
Rank COUNTRY
1 China
2 India
3 Indonesia
4 Brazil
5 Pakistan
6 Bangladesh
8 Nigeria
7 Russia
9 Japan
10 Mexico
United States

Population
(Million)

1,338.6
1,156.9
240.3
198.7
174.6
156.1
149.2
140.0
127.1
111.2
307.2

1999
6
14

16

2001
10
10
14
18

N.A.

N.A.

N.A.

5
6

2002
13
10
15
20
3
6

N.A.

N.A.
N.A.

N.A.
N.A.

N.A.
N.A.

45
18

47
20

49
21

51
22

2003
16
11
16
22
3
6
10
65
52
23

73

69

70

80

82

N.A.
N.A.

2000
8
10
N.A.

2004
18
10
17
24
3
6
10
69
54
24

2005
20
11
17
25
4
6
10
71
55
25

2006
22
12
17

82

82

2007
23
N.A.

5
7

17
30
5
7

N.A.

N.A.

72
57
26

75
58
27

82

82

N.A.

N.A. - Not Available. Source: UNESCO, US Census Bureau and BMO Capital Markets.

Key drivers: risin g

per capita income,
and i ncreased

tends to have a larger impact on those workers from lower-income countries. As shown in
Exhibit 270, average wage increases for U1ose "~th postsecondary education are much higher in
countries such as Chi11a and Brazil than they are in the US.

accessibility of
education

A member of BMO

Rising per capita income in emerging-market cotmtries tends to result in higher per capita
spending on postsecondary education, so we e:-.:pect the penetn1tion gap to decline fastest in
countries with faster-growing economies. In addition. the attaimnent of postsecondary education

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Postsecondary Education

BMO Capital Markets

Exhibit 270. Average Wage Increases for Workers with

Postsecondary Education
250%
>200%
200%
150%
150%

124%
,----

171%
,----

r---

,----

100%
50%

62%

0%

u.s.

Mexico

Chile

Brazil

China

Source: College Board Education Pays 2004, Valora Consultants (Mexico), ECLAC (Chile and Brazil), and
Laureate Education analysis.

Additionally, we believe the " massification" of higher education has helped increase
accessibiLity in poorer cotmtries. as these countries have continued to increase t11eir total share of
global enrollments. Essentially, this refers to how providers of higher learning (both governments
and private enterprises) have commodified and scaled up educational offerings to meet t11e :flood
of new demand primarily from emerging economies. We believe this trend will likely continue.
as higher education becomes more available to people of v arying income levels, rather than just
the affluent class. For example, historically, 80% of Chile's university students have come from
the wealthiest 40% of t11e population (per the Chronicle oj'Higher Education). According to
UNESCO, low-income and lower-middle-income countries have consistently accumulated
global share of enrollments since 1970, however this trend has accelerated since 1995 as total
share among these cmmtries increased to 48% in 2007 from 34% in 2000. The opposite has been
the case among high-income countries, where total share was 30% in 2007, down from 46% in
1995 (see Exhibit 271).

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280

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BMO Capital Markets

Exhibit 271 . Global Postsecondary Enrollment Distribution by

Income Level (1969-1970 to 2006-2007 School Years)
&I lower middle -income countries

D low-income countries

D Upper middle-income countries D High-income countries

100%
90%

....!:
Ql

ew
!:

-;;;

80%
70%
60%
50%

..0
0

(5

0
;,!!
0

40%
30%
20%
10%
0%
1970

1975

1980

1985

1995

2000

2005

2007

Source: UNESCO Institute for Statistics and BMO Capital markets.

High secondary
participat ion rates
may i ndicate
stronger deman d
for postsecondary
programs

In its 2009 Global Education Digest, UNESCO presents tJ1e argwnent tlmt a potential indicator
of demand for tertiary education is the supply of students corning out of pri111ary and secondary
schools. As participation in secondary education grows. it follows that demand for
postsecondary programs will increase. One way to measure the impact of this is by comparing
the participation rate of secondary enrollments to that of postsecondary enrollments. 1n general,
the wider the disparity (i.e., the more students at the secondary level), the greater the likelihood
demand for postsecondary education wiJI increase.
Using global data provided by UNESCO (see Exhibit 272), we can see that from 1999 to 2007,
participation rates in upper secondary programs (defined as secondary schooling intended to
prepare graduates for tertiary programs) increased in all regions of the world except in North
America and Western Europe (where participation rates were near 100% already). When
looking at the multiple of tllis rate to the tertiary participation rate. one sees the disparities across
regions. For example, the upper secondary participation rate in Sub-Salmran Africa in 2007 was
4.7x its tert)ary participation rate. This is lower limn 1999' s 5.3x, but we believe it implies tlmt
growt11 potential for postsecondary education is likely stronger rela6ve to more developed
rebrions such as North American ~md Western Europe, where tl1e multiple is much lower: only
l.4x in 2007 (vs. 1.6x in 1999). This analysis is by no means a perfect predictor of
postsecondary demand, and tl1e data is likely skewed by variations in population growtl-., yet in
general, we believe it serves as a reasonable pro:-.-y for identifying long-tenn postsecondary
growth trends.

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BMO Capital Markets

Exhibit 272. Global Tertiary Penetration Rates(1970-2007)

Upper Secondary
Participation Rate
1999
46.5%
80.1
82.8
46.3
61 .6
98.2
30.6
19.4
45.5

Region
Arab States
Central and Eastem Europe
Central Asia
East Asia and the Pacific
Latin America and the Caribbean
North America and Western Europe
South and West Asia
Sub-Saharan Africa
World

2007
52. 1%
85.4
89.2
62.9
73.5
52. 1
39.3
26.3
54.3

Upper Secondary as Mutliple

of Tertiary Participation
1999
2007
2.4x
2.4x
2.1
1.4
3.7
4.5
2.4
3.3
2.9
2.1
1.6
1.4
4.2
3.4
4.7
5.3
2.1
2.6

Source: UNESCO Institute for Statistics and BMO Capital markets.

While the international opportunities are expansive, in our view, we have identified a few of the
more intrib'l.ting opportunities in tlus section.
China houses the
world's largest

China. One of tl1e key drivers behind t11e stellar growth in tl1e East Asia and Pacific region
according to UNSECO data, is China, where 25.3 million students attended postsecondary

irlSlitulions in the 2006-2007 school year. Per UNSECO, China overtook t11e US as the home of
tlle world' s largest postsecondary population in tlle 2003-2004 school year and has since
con6nued to widen its lead.

postsecondary
population

Growth expected
to be sizeable

Many have identified tl1e Chinese postsecondary marlcet as one of the greatest investment
opportunities witllin all of education. In 2008, China had a population of 1.3 billion people, witl1
400 million between tl1e ages of 5 and 29 - the prime age for education. According to tl1e
Na6onal Bureau of Statistics of China, in 2007 (latest data available), China 's population of2029 year-olds - a prime target for postsecondal)' education- was approximately 155 million or
13% its total popula!lon. According to data supplied by China-based CTBT School of Business
and Teclmology (MBA), tl1e estimated market for private universities in Cllina is expected to
grow more t11an tenfold to $45.8 billion in 2012 from $4.1 billion in 2002.
Following completion of secondary school, many Chinese students take tl1e National College
Entrance Examination, which is held annually in July and detennines college admission.
According to CTBT, the Ministl)' of Education classi.fies Chinese post-secondary educational
instjtutions into three levels:

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Levell universities are tl1e top universities in the country, with well respected educators
and records of educational and scientific achievements. These are generally controlled
dir-ectly by the national govenunent ar-e generally funded by the national financial pool.

Level IT universities are generally less exclusive and prestigious. These are generally
controlled ar1d supported by provincial governments. financiaJiy supplemented by fundraising projects initiated by the universities themselves.

Level ill universities are post-secondary vocational and technical schools. These are
usually sponsored and financed by town ~md village governments or by ir1stitutional
sponsors

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September 2009

Postsecondary Education

Policy changes
spurred growth in
postsecondary
enrollment

BMO Capital Markets

According to tJ1e National Bureau of Economic Research (NBER), between 1999- shortly after
the country' s leaders decided to focus on e.11.'Panding access to higher education and improving
its quality as one tool to propel China as a leading global power-- ~md 2007, the munber of
tmdergraduate and grdduate students earning degrees from China's colleges and universities
more than quadrupled, rising to 4.5 million from 850,000. New enrollment !,>rew even faster
over tlmt period, with 1J1e number of entering new students growing to nearly 5.7 million in
2007, fom 1.6 million in 1999.
Using data from the National Bureau of Statistics of China (different definition than UNESCO),
there were rougll.iy 18.9 million students enrolled in institutions of higher education in China in
2007. representing about an 11.3% annual growth rate from 1978-2007 (see Exhibit 273; latest
data available). The bulk of this growth has come in recent years as the average annual !,>rowth

Chinese
postsecondary
enrollment grew
at 21% CAGR
from 1999 to 2007

rate from 1999 to 2007 was about 21%. While the growtJ1 rate is " slowing," it is still likely faster
than in most developed countries.

Exhibit 273. Total Enrollment in Institutions of Higher Education

in China (1978-2007)
-

20

Total enrollment

35%

- - % yly change

16

41

12

30%
25%

2c::

"0

20">1.

u;"'

15%

.c
E

10%

:;;

z"'

5%
0%

-5%
1978 1980

1982

1984

1986

1988 1990

1992

1994

1996

1998 2000 2002 2004

2006

Note: Data not available for 1979, 1981-1984. Source: National Bureau of Statistics of China.

The number of new students in these schools has been rising. Using data from the National
Bureau of Statistics of Chin.:'!, there were roughly 5. 7 million new students enrolled in
institutions of higher education in China in 2007, representing about a 9.5% annual growth rate

Chinese
postsecondary
new enrollment
grew at 17%
CAGR from 1999
to 2007

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from 1978-2007 (see Exhibit 274; latest data available). The bulk of tJus growth has come in
recent years as the average annual growt11 rate fmm 1999 to 2007 was over 17%. While this
growth rate is " slowing," it is stili likely faster than in most developed countries.

Financial Group

283

September 2009

..

..

Cl

.<:
u

?ft.

Postsecondary Education

BMO Capital Markets

Exhibit 274. New Enrollment in Institutions of Higher Education in

China {1978-2007)
-

I
.l!l
,..c

Ul
'0

New enrollme nt
50%

-+-% yly cha nge

45%
40%
35%
30%

25%
20%
15%
10%
5%
0%
-5%
-10%
-1 5%

::;)

:.

.c

E
::;)

0
1978

1980 1982

1984

1986 1988

1990 1992

1994 1996

1998

2000 2002

2004

..

..
"'

0)

c:
0

.."'
~

2006

Note: Data not available for 1979, 1981-1984. Source: National Bureau of Statistics of China.

Rural population
driving some
growth

New enrollments
may be slowing,
as econom ic
crisis impact s
hiring

The countzy 's sizable mral populat)on has driven much of this enrollment growth; mral students
make up 53% of newly admitted students in 2005 up from less tl1an 47% in 1998. The
government is continuing a push to increase the number of students coming from lesser
developed western regions of tl1e country. announcing a plan in July 2009 to increase university
quotas for students from tl1ese areas of the cmmtry by 60,000.
However, China's higher education sector may be seeing growing pains. In June 2009, it was
reported that tl1e number of new students taking the college entrance exams declined about4%
from 2008 to about 10.1 million. This has been attributed to bleaker job prospects and
competition fTom overseas programs, wllile we expect tl1e slowing growth of China's school-age
cohort (see more details below) is also to blame.
To cum the impact of tl1e economic crisis on the countzy 's university graduates- 1 11lillion of
whom are ex-pected to be unemployed over the ne:-1 three years- tl1e government is offering
training programs and loans to companies tl1at hire graduates or to otl1ers who wish to start a
business. This is a dramatic shift from only two years ago when China's Ministry of Education
annmmced in January 2007 that it would limit higher-education enrollments to only 5% annual
growth in an attempt to reduce the pressures on universities. which have been stmggling to
accommodate record numbers of students.

Demand ou tstrips
supply

In 2005 (latest data available), the Ministry of Education estimated tl1at 100 million Chinese
citizens were eligible for higher educat)on, but public facilities could only acconunodate 15
million. We beli.eve Ulis has spurred growth for private institutions in the country. According to
National Bureau of Statistics of China, in 2007, there were more than 1,900 institutions of
lligher education in China, a dramatic increase from about 600 in 1978 (see Exllibit 275). Much
of this growth bas occurred in the current decade - spurred by the government's move in 1999 to
expand lligher education - as tl1e number of postsecondary schools was relatively unchanged at
1,000 throughout tl1e 1990s. Roughly 53% (1.015) of these 1.900 + schools are vocationaJ and
technical coUeges, of which, about 26% were private. The number of vocational and technical
schools has increased 43% since 2003's 711, many of these new schools we believe are private
institutions.

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284

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Postsecondary Education

BMO Capital Markets

Exhibit 275. Number of Chinese Institutions of Higher Education

( 1978-2007)
2,500

.,..~

2,000

:J

"w...

20%

llii&il Regular Institutions of Higher Education _..._% y/y change

Ill

c 1,500

15%
Q)

0)

10% c

.~
~O):J

"'

Q)

-:I::;:
Ill

-0 c

1,000

5%

Gi

1\

..0

E
:J

500

1982

1986

1990

>~

0%

1\

1978

1994

1998

2002

2006

Note: Data not available for 1979, 1981-1984. Source: National Bureau of Statistics of China.

Funding for
Chinese
postsecondary
enrollment grew
at 23.6% CAGR
from 1996 to 2006

Funding for this boom in higher education has also kept pace. According to data from the
National Bureau of Statistics of China, total higher education funds (which includes government
appropriations, funds from social organizations, donations, tuition, research fees, and ot11er
income sources. increased to 306 bill.ion yuan (roughly $45 biLlion using current exchange rates)
in 2006 (latest data available) from 37 billion yuan in 1996, representing an a1mual growth mte
of roughly 23.6% (see Exlubit 276).

Exhibit 276. Total Higher Education Funding in China (1996-2006)

350

Total

1998

1999

-+-%Change

300
250

'2

200

150

:.0

"'
>-

:J

100
50
0
1996

1997

2000

2001

2002

2003

2004

2005

2006

Note: 2001 data not available. Source: National Bureau of Statistics of China .

We believe the private sector is playing an increasingly vital role in meeting the growing
demand for higher education in China. A deeper analysis of available funding data reveals the
increasing role of student-paid tuition and social organizations in funding higher education while
government contributions continue to lose share. In 2006, government appropriations accounted
for roughly 43% of total higher education ftmding. down fTom 79% in 1996 (see Exhibit 277).
On the other hand, ftmding from student tuition and teaching research gained share, increasing
to 42% of the total from roughly 15%. We believe tllis can be partially attributed to tl1e growth
of private schools in the country, as private tertiary education institutions rose to roughly 16% of

Private sector
playing greater
role

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285

September 2009

Postsecondary Education

BMO Capital Markets

all regular institution of higher learning in 2007 from about 2% in 1995. As private school
students are not eligible for most government subsidies, Chinese students often must fund a
large portion of their education on their own. It is estinmted tl1at in 2005, Chinese families paid
on average 65% of student costs from savings, although new student-lending programs have
been emerging in recent ye~us.

Exhibit 277. Components of Higher Education Funding in China

(1996-2006)
OGovt. Appropriations II Social Organizations 0 Donations Fund Raising 0 Tuition & Research Other Funds

100%

"'c:
c:
..,u.
'5

80%

42%

:::J

60%

.J:.

:I:

"'

40%

20%

43%

'$.

1996

1997

1998

1999

2000

2001

2002

2003

2004

2ore

2006

Note: 2001 data not available. Source: National Bureau of Statistics of China .

However, increasing tuition rdtes could be a potential growth obstacle. According to a separate
January 2007 report issued by the China Youth and Children Research Center, annual tuition at
the country's universi6es had grown 25-fold since 1989, ranging between $650-$1,300 (in US
$) - far outstripping growth in perso113l income and making it difficult for many students to pay
for their education. Additionally, a 2009 OECD report found tl1at private higher education
institutions can cost 1:\vo to four times as much as a public school. As such, the govemment has
been e>.lJanding its role, especially in tl1e vocational schools area.
Longer-term

Over the longer term. a greater threat may emerge. The major age cohort for postsecondary

threat- declin ing

students, aged 18-22 years, is expected to decline over the next several years as a result of tl1e
country' s population control policies (i.e., tl1e " one child" policy), suggesting tertiary
enrollments could decrease in coming years if growtJ1 in tl1e participation rate is not strong
enough to offset tlris decline. As such, according to the Organization for Economic Cooperation
and Development (OECD) 2009 Reviews of1'ertimy Education; China. the Chinese government
aims to increase tl1e tertiary education participation rdte to 30%, from tl1e current 22%.

stu dent
p opulation

Participation rat e
i ncreases could
offset th is

Exhibit 278 outlines tl1e OECD 's population growth estimates for tllis age cohort, and possible
participation rate scenarios (based on UNESCO enrolment estimates). As shown, tl1e cohort
population is e;.,:pected to decrease at an average rate of roughly 3% over tl1e next 12 yean;.
Under tlus scenario, the p<uticipation rate would have to &,>row to 31% by 2020 to maintain the
roughly 27.5 million enrolments ex1Jected in 2008. However. considering the tertiary
participation rate was as low as 6.4% in 1999 (witl1 tl1e current 22% rate representing roughly a
17% CAGR since that time), we believe it is likely China \-Viii be able to meet, if not exceed, a

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BMO Capital Markets

31% participation rate by 2020. Additionally. we note these scenarios incorporate only one
portion (18-22 year olds) of the adult-learner market.

Exhibit 278. Participation Rate Scenarios (2008-2020)

Year

Projected populat ion

18-22 years (millions)

Enrollments at current
participation rate of
22% (million)

Participation rate
needed to maintain
enrollments at 27.5
million

2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

124.8
119.2
113.5
107.9
102.2
96.5
95.3
94.1
92.9
91.7
90.4
98.2
88.0

27.5
26.2
25.0
23.7
22.5
21.2
21.0
20.7
20.4
20.2
19.9
21.6
19.4

22.0%
23.1
24.2
25.5
26.9
28.5
28.9
29.2
29.6
30.0
30.4
28.0
31.3

Source: OECD Reviews of Tertiary Education: China 2009

Government
bureaucracy may
be a barrier

An additional barrier, in our view, is government bureaucracy. Demand is typicaJiy stronger for
higher education in China that has been officially sanctioned, given those degrees m-e often
required for highly desired jobs at state-owned or multinational corpordtions. Nevertheless, the
government can act counter to tllis. For example, in May 2008, the Ministry of Education
announced that it would curb admission growth in its doctoral programs to fewer than 2%
annually to offset a poten6al glut of doctoral degree holders.
As many overseas entities eye China's higher-education market as a potential opportunity,
government regulations require tl1at foreign educational entities have a Chinese institution as a
partner to operate in the com1try. In recent years. China's Ministry of Education has been
slowing down approval of foreign higher education programs owing to concerns over quality
and cost. For example, in May 2005, the University of Montana announced plans to open a
Chinese campus in fall2006. while in May 2006. Kean University announced it hoped to open a
b.ranch of its university in Wehzhou in September 2007. Both schools were stiU waiting for final
approval at the time of tlris publication.

Examples of notfor-profit schools

expandi ng in
Chi na

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As such, US-based institutions initially entered China via joint degree programs witl1 local
institutions. The Observatory of Higher Education cites tile 1987 MBA joint venture between
Oklahoma City University and the Tianjin University of Finance and Economics as the first.
However. recently a number of non-for-profit US institutions of higher education have moved
forward on their own programs geared toward the Chinese market. In April 2009, US Secretary
of Education Arne Duncan tmvelled to Clrina to rummmce a new c01muit:ment to enhance
educational partnerslrips between the t\vo cotmtries ru1d promote cross-border educational
exchanges. Some exan1ples of current programs include tlte following:

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Postsecondary Education

Examples offorprofit schools

BMO Capital Markets

In May 2006. the UK 's University of Liverpool and Nottingham opened the Xi ' an
Jiaotong-Liverpool University as an independent stand-alone institution, becoming the
first foreign higher education institution to receive approval from the Chinese Ministry of
Education. The campus can house 2.850 students and enrolled roughly 800 students in
the 2007-2008 school year.

In October 2007, the New York Institute of Technology (NYIT) announced a venture
with Nanjing University of Posts and Telecommunications to open an American-style
undergraduate school in mainland China. The aU-English program initially offers four
degrees and hopes to serve 6,000 students. NY1T had already offered an MBA program at
Jiangxi University of Finance and Economics and a master's degree program in human
resource management at Shanghai' s Tongji University.

In Febmary 2008, the University of Arizona announced it had signed an agreement to be

tl1e primary academic service provider to the soon-to-be-buiJt Nanjing International
University, wiU1 hopes of enrolling up to 10,000 students. Students taking tJ1ese courses
will be eli!,>ible to obtain a University of Arizona degree while still studying in China.

In March 2008. the University of Massachusetts signed an agreement to become the first
foreign university approved to offer online education courses and degree programs in
China through its UMassOnline school. T he venture is affiliated with China 's Tsinghua
University. The goal is to have 40 courses. four certificate programs and one master's
degree program available witJtin one year.

In August 2008, the School of Transnational Law at Peking University opened with 56
students. Tlus is an American-styled law school which plans to seek accreditation from
the Americ~m Bar Association so that graduates could sit for the New York State bar
exam. The school operates separately from Peking University's existing law school.

In 2008, Utah State University (USU) started offering bachelor's degrees in economics to
Asian students through its three partner universities in China and Hong Kong. Tuition
costs are shared between Utah State and the partner universities. Roughly 560 students
were enrolled in spring 2009. with plans to increase participating Asian mriversities and
raise enrolJments to over 1,000. The programs are taught by teachers in Asia, but the
curriculum and finaJ grading lies with the lead professor at USU.

In April 2009, Columbia U1uversity announced il would build six to eight research
institutes around the world to facilitate \vork with local experts on geographical issues.
One of these "Coltuubia Global Centers" in Beijing will study global risk. preparedness
and response to major disasters. Additionally. Columbia's architecture school is creating
a Beijing desi!,'ll studio.

In addilion, many US-based for-profit providers have expanded in China as well, including t11e
following:

expanding in

China

In 2004, Laureate Education opened the Les Roches Jin Jiang IntemationaJ Holel
Management College to address the rapidly !,'Towing demand for skilled hotel and
hospitality executives in China. The college offers programs and certificates in hotel

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Postsecondary Education

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administration. hospitality leadership. and hotel ownership designed to develop the

competencies needed for the international hospitality industry.

CIBT Education (MBA) has agreements with a number of educational services providers,
including Corinthian Colleges' (COCO) Wyotech. whereby CIBT has licensed curricula
to offer their programs in China.

In November 2007, Washington Post' s (WPO) Kaplan Inc. purchased a majority stake in
ACE Education, which provides preparatory classes for entry into UK universities at
centers across China, in addition to postsecondary and professional training at Shanghai' s
Sino-British College. The company also provides professional trdining in finance and
economics in cooperation with the Southwest University of Finance and Economics in
Chengdu in western China.

There are a number of publicly held companies trading in the US with sizable exposure to the
Chinese postsecondary and corporate training markets, including:

Companies with
Chinese
postsecondary
exposure publicly

AT A, Inc. (ATAI) provides computer-based testing services in China, used for

professional licensure and certification tests in various industries, including infonnation

technology, services, banking, teaching, securities, insurance, and accounting. It also
offers career-oriented, test-based educational progrdlllS, including single course

traded in US

programs, degree major course programs, and pre-occupational training programs; and
test preparation solutions, such as test preparation and training platfonns for the securities
and banking industries and test preparation software for tJ1e teaching industry.

China Distance Education Holdings Limited (DL) is a leading provider of online

education in China focusing on professional education. The courses offered are desit:,>tled
to help professionals and other course participants obtain and maintain tl1e skills, licenses,

and certifications necessary to pursue careers in China in the areas of accounting, law,
healthcare, construction engineering, infonnation technology, and other industries.

ChinaCast Education Corporation (CAST) provides e-leaming and training services

to educational institutions, government agencies, and corporate enterprises in China. TI1e

company's Post Secondary Education Distance Learning Services division enables
universities and other higher leaming institutions to provide distance learning services
and serves 15 universities with over 131,000 students. ChinaCast also serves the K-12
and VocationaVCareer Training Services sectors, as well as provides English language
training.

ChinaEdu Corporation (CEDU) provides online educational technical and consulting

services to the online degree programs of schools ~md universities in China. The company
also operates private primary and secondary schools in China and offers online

interactive tutoring services to primary and secondary school students through a

separately branded program. In addition, it markets and supports international
postsecondary and English language curriculum programs to established learning
institutions and secondary schools, and international polytechnic programs to vocational
schools. including program development and implementation. English teacher
recmitment and administration, and other ancillary services.

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CIBT Education Group, Inc. (MBA) is an education management company in China

and Canada. It operates technical and career training schools; and delivers Canadian,
Chinese, and internationally accredited business and management de);.'Tee progf"cl.tnS,
automotive, diesel. and marine maintenance prognuus, information technology programs.
and career/vocational prognuns to students and corporations.

New Oriental Education & Technology Group, Inc. (EDU) provides private
educational services in China in six areas: language training. test preparation: primal)'
and secondaty school; educational content, software, and ot.her technology development
and distribution; online education; and other services and products.

We provide recent operating and :ftmdamental statistics for a number of publicly held companies
based in China but trnding on US exchanges in Exhibit 279.

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Exhibit 279. Trailing 12-Month Operating and Valuation Metrics: Selected Publicly Held
International School Operators
China
Cibt
New Oriental
Distance
Chinacast
Education- Education Chinaedu
Education Ed & TechAta Inc Ads
Adr
Corp
Corp -Adr
Group Inc Adr
ATAI
DL
CAST
CEDU
MBA
EDU
Rating
Price Target
Operating Performance
FY End
LTM Qtr. End
Revenue ($MM)
Gross Profit ($MM)
EBITDA ($MM)
EBIT ($MM)
Pretax Income ($MM)
Net Income ($MM)
Free Cash Flow ($MM)
Gross Margins (in %)
EBITDA (in %)
EBIT (in%)
Pretax Income (in %)
Net Income (in %)
Free Cash Flow Yield (in%)
ROIC: LTM
Valuation Metrics
FY End
LTM Qtr. End
Price (9/09/09)
Shares Outstanding (OOOs)
Market Cap ($MM)
Net Debt/(Cash) ($000)
Enterprise Value ($000)
CY EPS:
2008A
2009E
2010E
Two-Year CAGR
PIE:
2008A
2009E
2010E
EV/Rev. (LTM)
EV/EBITDA (LTM)
EV/EBIT (LTM)
EV/Free Cash Flow (LTM)

Not Rated
N.A.

Not Rated
N.A.

Not Rated
N.A.

Not Rated
N.A.

Not Rated
N.A.

03
6/09
$33.8
19.5
N.A.
4.8
N.A.
4.5
N.A.
57.8%
N.A.
14.1%
N.A.
13.2%
N.A.
32.1%

09
6/09
$28.0
13.0
2.9
2.9
2.9
2.6
N.A.
46.5%
10.3%
10.3%
10.3%
9.2%
N.A.
5.7%

12
6/09
$45.8
24.7
20.1
13.7
13.6
8.1
39.2
53.8%
44.0%
30.0%
29.8%
17.7%
85.5%
5.0%

12
6/09
$49.6
29.7
13.4
10.1
(0.2)
(5.3)
3.6
59.8%
26.9%
20.3%
-0.4%
-10.6%
7.2%
-5.1%

08

05

5/09
$44.5
27.2
3.1
1.6
1.4
0.2
3.8
61 .1%
7.0%
3.6%
3.1%
0.4%
8.5%
1.2%

5/09
$292.5
112.0
N.A.
61.0
68.1
61.0
112.8
38.3%
N.A.
20.9%
23.3%
20.9%
38.6%
18.8%

12
6/09
$6.90
16.1
$111 .1
(45.5)
$65.7

03

09

6109

6109

$6.73
22.9
$153.8
(44.2)
$109.6

$7.84
34.7
$272.0
(57.2)
$214.8

12
6/09
$6.14
35.8
$219.6
(3.6)
$216.0

$0.20
0.20
0.25
12.4%

$0.11
0.08
0.25
51 .5%

$0.21
0.41
0.51
56.5%

33.7x
34.1
26.7
3.2
N.A.
23.0
N.A.

61 .2x
86.8
26.7
7.7
74.3
74.3
N.A.

29.2x
15.0
11.9
4.7
10.7
15.7
5.5

Noah
Education
HoldingsAdr
NED

GROUP
MEDIAN

Not Rated Not Rated

N.A.
N.A.
06
6/09
$98.3
50.5
N.A.
2.8
14.2
14.2
N.A.
51.4%
N.A.
2.8%
14.4%
14.4%
N.A.
7.9%

08

05

06

5109

6109

$0.52
63.8
$33.2
(7.0)
$26.2

5/09
$71 .58
38.0
$2,723.6
(315.2)
$2,408.4

$4.61
40.2
$185.3
(113.6)
$71 .7

($0.33)
0.20
0.24
N.A.

($0.02)
N.A.
N.A.
N.A.

$1 .65
1.96
2.64
26.4%

$0.53
0.41
0.49
-4.3%

N.M.
34.5x
28.8
1.3
4.9
6.5
18.3

N.M.
N.A.
N.A.
0.6
8.4
16.4
6.9

43.4x
36.6
27.1
8.2
N.A.
39.5
21.4

8.7x
11 .2
9.5
0.7
N.A.
25.6 #
N.A.

53.8%
18.6%
14.1%
12.4%
13.2%
23.6%
5.7%

26.4%
33.7x
34.3
26.7
3.2
9.6
23.0
12.6

N.A.- Not Available. N.M. - Not Meaningful. Source: BMO Capital Markets and FactSet Research.

13 million students enrolled

2006 (latest data

Sizable market

India. With nearly

but low

available per UNESCO), India is t11e tlurd-largest postsecondary marl<et behind China and t11e

penetration rate

US. However, given its sizable population and reputation for quality education at its elite

in postsecondary education in

muversities, one would think its postsecondary population would dwarf both countries -- or at
least that of the US. Unfortunately , the postsecondary penetration rdte has been mired in the
low-double digits for some time, as most Indians are shut out of higher education because of
differences in caste and social groups as well as a limited number of schools (estimated

18,000

institutions per t11e Institute of International Education) to serve this large populat)on.

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Elite vs. non-elite

universities

BMO Capital Markets

Higher education in India is probably most known for its elite schools. such as its seven.
government-subsidized Indian Institutes of Technology (liT) and its seven Indian Institutes of
Management (liM). as well as other high quality schools such as Amity University. For
exrunple, ITT is considered among the best engineering schools in the world, and many of their
alumni are in top positions in multinational corporations. In April 2008, a record 320,000
applicants took the entrance exam for fewer than 7,000 seats.
The majority of Indian institutions are less elite state institutions. For the most part. they provide
a lower level of education. According to Institute of Interna6onal Education, only 1Oo/o-25% of
);.>raduates from these schools are considered employable.
But even the elite schools have their issues. In June 2008 tuition at liT nearly doubled to $5.000
for a four-year degree, up from $2,700 --only the third increase since their establishment in the
1950s, as the government enticed tJ1ese schools to become more self-sufficient. For t11e first time
in the school's history. ITT held a second round of admissions in May 2009. as many successful
applicants rejected t11eir offers in favor of alternatives as students opted for tJ1e chance to study
their first choice of subjects over the institutes' "brand name." (Most educational institutions
across India admit students in phases. Top students are invited fust and can choose their course
of stt1dy. If vacancies remain, students on a second-tier list may select t11eir course, then a third,
and so on.)

Room for
penetration rate to
increase

Nevertheless. we believe demand for postsecondary education is strong in India. even if capacity
is not tJ1ere to meet it, as evidenced by t11e country's relatively high secondary to tertiary
enrollment multiple, which has hovered in the 3.5-4x mnge of for several years (see Exhibit
280). Additionally. we believe India may experience even higher postsecondary growth if the
country is able to increase the peneu-ation rate at the secondary education level. It is estimated
tlmt onJy 23% of eligible 1Ot11 and 11th graders actuaJly attend secondary education programs.

Exhibit 280. India Participation Rates (1 999-2006)

-

Tertiary Participation Rate c::::::IUpper Se<:ondary Participation Rate

--Secondary as Multiple ol Tertiary

10
~

"'c:

45%

"'

"g30%
a.
0

t:

8!

15%

2
0

1999

Source: UNESCO Institute for Statistics.

Since India gained independence in 1947. govemment policy has focused on subsidizing higher
education to make it accessible to everyone, regardless of income. Still, there are several voices
calling for change to this system, which is seen as not serving the majority of t11e country 's
population.

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New
developments in
response to
criticism

BMO Capital Markets

The main push for change has come not from the govenunent itself. but from a govenunentappointed National Knowledge Commission (NKC). It has issued scathing critiques of the
higher-education system, " calling it stifled, outmoded, and focused on memorization rather than
tmderstanding" per an April 2008 article in the Chronicle of Higher Education (Community
Colleges Take On Global Challenges). The NKC recommended that India should have 1,500
universities by 20 15, almost a three-fold increase from the present 350.
The situation may have also changed dramatically with the May 2009 appointment of Kapil
Sibal as the new minister in charge of higher education. Wlule only in office for a few montl1s,
his efforts have been notable, including the following:

New higher
education
minister leading
the charge

In June 2009. Mr. Sibal announced that he would make renewed efforts to expand foreign
access to India's higher-education market. and work to get consensus to pass the Foreign
Educational Institutions bill. Currently, foreign universities are prohibited from opening
schools in India. In August 2009. Mr. Sibal qualified this position a bit by stating and
foreign-based schools would have to follow the government's quota policies that reserve
almost 50% of all seats at higher-education institutions for members of econonucally
disadvantaged castes and classes.

In July 2009, the govenm1ent announced that it would invest heavily in higher education
with a focus on increasing its postsecondary participation rate to 21% by 2017. T he
country plans to build 12 new central universities. 30 " world-class" universities, eight
new Indian Institutes of Technology (TIT) and seven Indian Institutes of Management
(liM).

In the near tenn, it increased its higher education budget by 40% to $3.1 billion for the
2009-2010 year.

In July 2009, the country 's main investigative agency launched a sweeping crackdown on
its regulator of engineering and management colleges (All India Council for Technical
Education). fil ing charges of corruption against ll1e regulator's chainnan and arresting a
top official in the act of taking a bribe to grant recognition to ~m engineering school.

A concurrent effott to improve India's higher education system was documented in a March
2009 report by the advisory committee on the "Renovation and Rejuvenation of Higher
Education" (appointees from the office of tlle Minister of Human Resources Development). The
report called for a dramatic overhaul of India' s higher education system if it was going to be
competitive and to provide greater access to its citizens. A key provision included an overhaul of
the system of accreditation and regulation, which by several accounts is frdgmented and
inconsistent. In fact. observers have noticed an increasing trend among business schools in India
to register as private companies rather than schools in order to avoid the scrutiny and oversight
of regt~ating bodies that are seen as hampering growt11.
More students
leave India to
study in US than
vice versa

Despite tl1e potenllal opportunities, foreign universities are currently prohibited from
establishing campuses of a university in India. This imbalance is noliceable as according to the
Institute of lntemational Education' s Atlas of Student Mobility, in 2008, there were roughly
154.000 Indian postsecondary stt1dents studying outside their country, including 94,000 in the
US in 2008 (15% of all foreign students). but only 614 American postsecondary students in
India in 2007 (latest data available; and roughly 3% of foreign students). By some estimates,

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Indian students spend $4 billion per year abroad on education. providing a strong impetus for
government to find ways to increase enrollment within its own borders.
As such, any foreign institution interested in serving the Indi~m population must currently work
through a local partner. According to the Chronicle. at least 130 forei!,'11 providers have forged
partnerships with local, mostly unaccredited, private institutions iu India. The local institutions

Examples of US
not-for-profits
working in India

have themselves circumvented the law -- one that says they can't call themselves universities or
offer degrees unless recognized by regulators. Instead, they call themselves institutes.
academies, schools, and foundations, and they offer diplomas instead of degrees.
Others are doing more, includiug the followiug:

In August 2009, the Indian Institute of TechnolO!,'Y at Kharagpur, one of India's premier
engineering schools, announced plans to open a medical college and hospital in
partnership with the University of California at San Diego. The institute plans to finance
the project with an initial $170 million and is seeking an additional $213 million for
further expansion, with a goal of serving 20.000 students by 2020. up from 8,000
initially.

In August 2009. IBM ex.1ended its collabordtions with si.x engineering and teclmology
colleges to create a platfonn for development of software skills. The project, where fBM
provides technologies and faculty training, has lead to the establislunent of IBM Centres
of ExceUence for students to learn skill-sets on IBM software products.

In July 2009. the University of Florida and t11e International Crops Research Institute for
tl1e Semi-Arid Tropics (ICRISAT) - an Indian non-profit that conducts science and
agricultuml research- agreed to set up a dist~mce education center in India that will offer
certificate course programs in geogrdphical information systems. landscape analysis and
bioenergy products.

In November 2008. Yale announced the $30 million Yale India Initiative to build course
offerings and faculty expertise in India as well as expand recruitment, research
partnerships and student exchanges.

In January 2007, tl1e business schools at Columbia and Stanford Universities signed
agreements with the Indian Institutes of Management. in Ahmedabad and Bangalore.
respectively, to start student-exchange programs.

In July 2006, the Indian Institute of Teclmology Kharagpur opened the Rajiv Gandhi
School of InteUectual Property Law. aided by George Washington University Law
School which helped desi!,>n the curriculum and trdin its faculty.

However, foreign universities wishing to have a greater prese11ce have been stymied under the
current system. For example:

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In 2004, Laureate Education abandoned a small engineering program it had opened in

Andhra Pradesh, a state typically friend]y to foreign providers, because of difficuHy
getting necessary pemtission to offer degrees.

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Champlain College has run a campus in Mumbai with the International CoUege since
2001, offering four-year degTees in business, hospitality management, and software
en!,>ineering. In 2007, the partners apptied for accreditation from the All India Council for
Technical Education. Nearly two years after submitting their application. they are still
waiting.

In June 2007, the Georgia Institute of Technology signed a memorandum of

understanding with the government of the southern Indian state of Andltra Pradesh to set
up an offshore campus there. It will initia lly offer undergraduate degrees in three or four
disciplines. However, until the law is changed to allow foreign universities in the country,
this campus opening has been stymied.

Latin American

Latin America a n d t he Cari bbean . We believe enrollment !,>rowth in the Latin American

markets are

and Caribbean region (7.9% CAGR from 2000 to 2007) may be understated, as two of the
region's largest countries (i.e .. Venezuela and Argentina) did not report data to UNESCO for
this survey for the latest year. While the area has seen sizable increase in penetration rates - to
34% in 2007 from 21% in 1999, among the fastest of any re!,>ion (see Exhibit 281) - most
count1ies are still vastly tmderpenetrated, although tllis has been improving. Only four counties
in the region had reported penetration rates above 50% -- Argentina (67%; 2006 data), Barbados

strong but still

vastly
underpenetrated

(53'Yo; 2007 data), Chi le (52%; 2007 data), and Venezuela (52%; 2006 data). In our view, this
relative lack of penetration offers sizable expansion opportunities.

Exhibit 281. Postsecondary Penetration Rates by Region (19992007)

CAGR
Region
Arab States
Central and Eastem Europe
Central Asta
East Asta and the Pacffic
Latin America and the. Caribbean
North America and Westem Europe
South and West Asia
Sub-saharan Africa

~
19
38
18
14
21
61
NA

lQQQ
20
41
20
15
23
60
9
4

~
20
44
21
17
24
61
9
4

2002
20
48
23
19
~6

67
9
4

~
19
51
24
21
27
69
10
5

~
21
54
24
22
29
69
9
5

~
22
57
24
23
30
70
10
5

~
22
60
25
25
32
70
11
5

lQQZ .2 000.2007
22
62
24
26
34
70
11
6

1.8%
6.4%
3.6%
8.0%
6.0%
1.7%
NA
5.4%

N.A. - Not Available. Source: Census Bureau, UNESCO and BMO Capital Markets.

We believe part of wbat makes this ref,>ion attractive to education companies is its relatively
rela.xed regulatory enviromuent with regard to private education, which has considerable share
of the total education market. Research compiled by the Program for Research on Private Higher
Education (PROPHE) shows that in several Latin American countries, the majority of
enrollments in many countries are at private institutions (see Exhibit 282).

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Exhibit 282. Private Enrollment & Institutions in Latin America as

Percent of Total {2002-2007)
Cou ntry
Chile
Brazil
El Salvador
Costa Rica
Peru
Columbia
Guatamala
Venezuela
Mexico
Argentina
Panama
Cuba

A s% of total higher educat ion :

Enro llment
Institutions
77.6%
92.8%
74.6%
89.1%
66.3%
83.3%
54.6%
47.1%
51.1%
N.A.
49.6%
70.6%
48.1%
90.0%
41.6%
56.8%
32.7%
62.3%
23.9%
53.5%
18.3%
83.1%
0.0%
0.0%

N.A. - Not Available. Source: Program for Research on Private Higher Education (PROPHE) and
UNESCO. Available data is for a range of years between 2002-2007.

Brazil- Latin
America's largest
postsecondary
population

Still vastly
underpen etrated

One of the region's more entrenched areas is Brazil. Witl1 a population of nearly 199 million in
2009 (according to the latest CIA World Factbook estimate), Brazil is the world' s fifth-largest
country. In 2007, tl1ere were nearly 5.3 million st11dents enrolled in higher education in the
country (per UNESCO: latest data available), also giving the coun.lly the fifth largest
postsecondary population in tl1e world (behind China, the US, India and the Russian
Federation), and t11e largest in Latin America.
Willie tl1e com1try 's public universities are - for tl1e most part - free. many students were shut out
of a postsecondary education owing to lack of seats. According to Morgan Stanley, a muuber of
re);.'ltlatory changes have helped spur growtl1 in the sector.

In 1996, the new LDB (Guidelines and Basis Law of Education) gave private institutions
the power to create curricula witl1out having to go through the lengthy Ministry of
Education (MEC) authoriz-ation process, among ot11er things.

In 1997-1998. the fust private, for-profit, post-secondary institutes started throughout the
cmmtry. In addition, the Centro Universitarios were created throughout BrdZil, which
have fue same power and freedoms as traditional universities without many of their
obligations, such as having to perfonn research.

In 2004, the ProUni (Programa Universidade para Todos) Program was created, designed
to increase access to all educational fie lds for people with low or very low incomes.
ProUni works by providing private institutions tax breaks if they devote 10o/cr20% of
their spots to scholarships for low or very low income st11dents.

The for-profit sector took advantage of tllis framework and by 2006, represented roughly 90% of
t11e country 's postsecondary institutions, according to postsecondary provider Kroton
Educacional SA. While the postsecondary penetration rate of30% in 2007 (latest data available)
per UNESCO was in line with the federal government's target of 30% enrollment by 2010, (as
part of the BrdZilian National Education Pl~Ul), we believe there is still room for growth as some
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estimates put the actual participation rate at much lower t11an 30%. For example, the k !inisterio
da Educa9iio (Brazilian Ministry of Educ<ttion; MEC) estimates tJ1at only J1.3% of t11e school
age population was enrolled in post-secondary institutions in 2005. Still, 30% is a relatively low
penetration rate when compared to more developed countries. and we believe considerable
brrowth oppot1tmities still exist.
While the for-profit sector has gained dramatic share, it has been driven by a large number of
relatively smaJler schools. According to data published by Hoper EducacionaL in 2004, the
average number of students enrolled in U1e 20 largest private postsecondal)' institutions was
approximately 37,000, whereas the average enrollment in the other 1,769 private institutions
was approximately 1,300 students. This could provide an oppommity for a larger provider(s) to
consolidate the sector and gain scale efficiencies. The larger for-profit providers include the

Many small forprofit providers

following:

Anbanguera Educaciona l S.A.. (BOVESPA.AEDUll) with more than 264.000 students

at 53 campuses as of June 2009.

Estacio Participa9oes S.A. (BOVESPA.ESTCll) with 202,000 students at 80 locations as

of June 2009.

Kroton Educacional S.A. (BOVESPA.KROTll), with more than 43,000 students at 28

locations as of June 2009.

Objetivo/University Paulista (UNIP), with an estimated 160,000 students (at least)

Sistema Educacional Brasileiro S.A. (BOVESPA.SEBBll). owner of COC Colleges.

with more than 9,200 students at three locations as of June 2009.

Universidade Positivo (Positivo University ), owned by the Positivo Group - a

conglomerate with a focus on the educational. printing & publishing, and computer
hardware & software industries

Brazil is a lso increasing its appeal as a location for international acquisitions by US for-profit
providers. In April 2009, DeVry (DV) acquired Fanor for $40 million. The school offers
tmdergraduate business, law and enb>ineering programs to roughly 10,000 students at five
campuses.
Mexico - growing
but still
underpenetrated

One of t11e region's mme exciting opportunities, in our view, is Mexico, where according to the
Chronicle ojHigher Education , the number of coLlege-going students had increased eighty-fold
since 1950, witJ1 enrollments doubling fmm 1.3 million in 1993 to 2.5 rnillion in 2007 (using
UNESCO data). Public universities, supported by the state, dominate t11e landscape wiU1 roughly
87% share of stt1dents. At a penetration rate of 27% and a strong upper secondary enrollment
mte of 62% (2007; per UNSECO), we believe this presents sizable e:-.:pansion opportunities.
Part of the problem is lack of access to public facilities, where demand vastly exceeds supply .
According to UNESCO data, of the 41% of students who complete upper secondary programs
and are eligible to enter tertiary education, only 34% of t11ose actually enter such programs. a
Januaty 2007 presentation by Mexican University Teclmologico de Monterrey. estimated t11at
each year roughly 160,000 students do not get access to public tmiversities. Additionally, the

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country faces severe quality issues. In a 2009 report the World Economic Forum ranked
Mexico 74 of 134 economies in the competitiveness of its higher education and trnining system
based on the poor perfonnance of its students on international tests.
Tllis has not gone mmoticed by the for-profit sector, especially given that Mexico is the country
bordering the US. The most aggressive company has been Laureate Education, which entered
Mexico through its purchase of Universidad del Valle de Mexico (UVM) in November 2000.
The UVM nenvork now has 35 campuses throughout the country, including 10 locations in
Mexico City , and nine throughout central and southcm Mexico. Other for-profit providers wiU1
exposure in Mexico include Apollo Group's (APOL) University of Phoenix, which operdtes as
the Instituto de Estudios Superiores de Phoeni" opened in a location in Juarez Mexico in 2005.
and private equity finn The Carlyle Group, which purchased Universidad Latinoamericana, a
private university witl1 campuses in Mexico City and Cuernavaca, Mexico in 2005. In August
2008, Carlyle sold 65% of this enllty to Apollo Global, a joint venture it owns with Apollo
Group.
However, some Mexican institutions are heading north as well, trying to tap into the sizable and
growing Hispanic population in the US, as well as former students who may have settled in the
US before completing their de&>rees. The National Autonomous University of Mexico (UNAM),
Latin America's largest public university, has maintained offices in t11e US for a nun1ber of years
with the idea of expanding cross-border scholarly exchanges. However, in recent years, the
institution has increased its activity in heavily Hispanic cilles in the US and Canada by offering
language courses and seminars on culture and politics. Cities include Los Angeles, San Antonio,
Chicago in the US, and Gatineau, Quebec in Canada.
United Kingdom. A number of foreign for-profit entities have begun to enter the UK market.

For-profits
entering UK

In March 2008, Malaysia' s for-profit Limkokwing University of Creative Technology opened in

the UK. offering for English-language certificate and degree courses in architecture, business.
communicallon, infonnation technology, m1d mulllmedia studies. The school markets itself to
non-UK students, mostly from Soutl1east Asia and enrolled roughly 300 students in its first year,
complementing tl1e roughly 20,000 students it has in none other cotmtries (mostly in Southeast
Asia). The school charges about 20% less than typical British universities (wllich avemge about
8,000 British pounds), but does not offer aUK-degree. rather one fTom Malaysia.
In July 2009. Apollo Group (APOL) completed a roughly $607 million acquisition of BPP
Holdings pic (BPP), Europe's leading provider of professional education. In September 2007,
BPP announced that its subsidiaty, BPP College ofProfessional Studies (BPP College) had been
granted degree-awarding powers. becoming the first for-profit private sector company to have
been awarded such powers. BPP College now offers postgraduate courses in business and law
related subjects-- including financial and actuarial services, finance, and markellng.
Otl1er companies that have followed suit, or plan to enter the UK market. include The
Washington Post's (WPO) Kaplan Intemallonal, which already provides non-degreed business
and financial training in tl1e region.
In ~m August 2009 mticle in The Observer David Willetts. the UK Shadow Universities
Minister, was quoted as stating that a Conservative Govenunent would encourage increased

compelltion from private players in t11e UK higher educallon sector, including "a new genemtion
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of profit-making education companies both domestically and internationally." Government

encouragement such as this could spur furU1er involvement in the sector.
Boom in middleeast campus
expansion may be
slowing as
economy worsens

Middle East. In conjunction with the rising fortunes and growing populations of several
middle-eastern and Persian gulf states. western style private universities have spnmg up over
recent years to cater to the growing demand for higher education. These schools take many
forn1s but essentially have involved a joint venture between established western universities and
local organizations or ruling families. As several schools (or perhaps more aptly school-cities)
are stm in planning stages and oU1ers have only recently starting enrolling students, it' s a bit
early to judge the success of these programs. However, we believe the economic downturn bas
likely slowed admissions and len1:,>thened the payback period of some of the more ambitious
proposals. We list some of these projects below:

In Abu Dhabi, the ruling family is funding an expansion of New York University, where
the first class is expected to start in the fall of 2010. In addition, MIT is working with
Mubadala, an investment fund controlled by Sheikh Mohamed bin Zayed Al-Nahyan, the
crown prince of Abu Dhabi, to open the Masdar Instill.tte of Science and Teclmology, the
first graduate-level research university devoted entirely to fostering renewable. clean, and
sustainable sources of enerl:,>y. Set to open in fall 2009 witl1 a few dozen students and
faculty members, t11e school aims to eventually enroll800 master's and Ph.D. students.

In Dubai. it is expected that 30 colleges will eventually occupy tJ1e Dubai International
Academic City (DIAC). Michigan State University and the Apollo Group's (APOL)
U Diversity of Phoenix are among schools operating in the center. It is expected that the
decrease of the ex-patriot population in Dubai as a result of tl1e economic downturn will
likely slow enrollment growth at DIAC.

In 1999, tJ1e Kuwaiti government began allowing private universities to enter tl1e country so
long as they had a "meaningful" foreign partnership witl1 an existing university acceptably
ranked by US News and World Reports or The Times Higher Education Supplement. By
2009, the cotmtry had eight private colleges enrolling roughly 13,000 students. Partnerships
include Amelican University of the Middle East with Purdue University; The Gulf
University for Science and Technology with the University of Missouri at St. Louis; and the
American University of Kuwait wit11 DartmouU1 College.

Qatar's 'Education City ' is home to six American institutions including Carnegie Mellon.
Cornell, Georgetown, Northwestern, Texas A&M, and Virginia CornmonweaH11
U Diversities.

However. in a sign of what can go wrong in the region, in Febmary 2009, George Mason
University withdrew its sponsorship of a UAE branch campus which opened in 2005 after low
enrollments and disagreements witl1 the school' s local benefactor over funding and
administrative control. While expectations were for 2,000 students by 2011. U1e campus
reportedly has enrolled only 180 students.

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Although ot11er for-profit postsecondary school providers have identified t11e intemationaJ
market, we believe Laureate Educallon has made t11e most inroads internationally; it operated 45
for-profit universities and professional institutions in 20 countries as of July 2009. Other forprofit providers with a significant overseas presence include Apollo Group (APOL), The
Washington Post's (WPO) Kaplan Education, DeVty (DV) and Career Education (CECO).
Most ot11er US for-profit providers have limited their international penetration strategies to
Canada (at least so far). Exl1ibit 283 contains information about the international penetration of
selected US-based postsecondaty providers.

Laureate
Education has the
most international
exposure among
the for-profit
providers

Exhibit 283. US For-Profit Operators' International Exposure

School Operato r
Apollo Group (APOL)
Career Education (CECO)
Corinthian Colleges (COCO)
OeVry (OV)
Education Management (Private)
Laureate Education (Private)
Washington Post (WPO)
Whitney International (Private)

Countries With Campus es

Brazil, Canada, India, Mexico, The Netherlands, Oubai
France, Italy, United Kingdom
Canada
Canada, Dominica, St. Kitts/Nevis, Brazil
Canada
Australia, Brazil, Chile, China, Costa Rica, Cyprus,
Ecuador, France, Germany, Honduras, Malaysia, Mexico,
Netherlands, Panama, Peru, Spain, Switzerland, Turkey
Hong Kong, Ireland, Singapore, China, UK
Columbia, Brazil

International
Campuses

International
Enrollment

N.A.

N.A.

13
17

1,400

3
1

47

N.A.
N.A.
N.A.
500,000

(worldwide)
27
4

48,000
-40000

Note: Enrollment data as of end of 2008 except for Laureate, where data is most current off its website (August 2009) and CECO from latest
1OQ (quarter ending June 30, 2009). Source: Company reports and BMO Capital Markets. N.A. - Not Available.

International
postsecondary
has inherent risks

A member of UMO

In addition to the risks typically accompanying any type of international expansion strategy
(e.g.. sovereign, currency), cenain risks are inherent within the international postsecondaty
markel in our view.

Regulatory changes. While we believe most investors in US-based postsecondaty

stocks are somewhat aware the re!:,>ulatoty issues inherent domestically, the intemational
postsecondary education is also highly vulnerdble to regulatoty changes, in our view. For
example, in 2001, Spain's Bureau of Education increased the admissions standards for its
postsecondary students by raising t11e passing threshold on its national entrance
examination (known as, "selectividad"). We believe t11is change in policy made higher
education far less accessible in Spain and subsequently reduced the prospects for the
country's near-tenn enrollment !,JfOWth.

Maturing markets. The overdll intemational postsecondaty landscape remains highly

fragmented; however, we believe some markets have seen rapid growth and recently have
shown signs of maturation. Following several recent acquisitions as well as strong
organic growth, Laureate Education now possesses an estimated I0% share of the overall
Chilean postsecondaty market. By contrdst, no US for-profit opemtor possesses more
th~m 2% of t11e total market.

Financing education. Most cotmtries outside the US do not have a governmentsponsored financing system similar to the Title IV system in the US. In addillon, private
student loan financing is also virtually non-existent except in the US and UK, and
increasingly China. While the majority of state-run higher institutions are fee or fairly
ine>.lJensive, students at private institutions of higher education get little financial

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support. In recent years. there has been some progress in securitizing student loans in
countries such as Brazil, Chile, and Peru, which we believe has helped spur enroUment
growth in those countries, albeit to a limited ex1ent.

Competition from the not-for-profit sector. Another risk for the for-profit providers has

been the rise of not-for-profit schools in tllis market. In recent years, a sizable number of
not-for-profit providers have expanded t11eir presence overseas, mainly via partnerships
with existing institutions. According to a December 2006 report by the US Govenunenl
Accountability Office (GAO), US universities and colleges offer degree programs in at
least 40 countries. We believe tllis is a sizable threat for for-profit providers, as tl1e brand
recognition for many of these schools is likely stronger than that for most for-profit
providers. Exhibit 284 provides some examples of US-based not-for-profit schools with
international branches and/or joint ventures outside the US.

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Economic downturn. While some demand aspects of education may be counter-cycli.cal.

we believe the current economic downturn will likely have a negative impact on more
speculative educational ventures t11at took place over the last several years. In particular,
we expect reduced demand in Persian Gulf states as foreign workers return to their
cmmtries as a result of a weakened economy and lost jobs. Additionally, budget
constraints around the globe are likely to delay or reduce investments in education at least
in projects where the net present value is not positive, while cash-strapped students may
increasingly prefer less expensive programs. Nevertheless, countries with stable studentlmm firumcing systems are likely to withstand tlle recession better as laid-off workers ~md
new students can obtain the financing needed to enroll in educational prognuns.

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Exhibit 284. Examples of US Not-for-Profit Postsecondary International Ventures

Country

Educational ProqramNenture

Country

Educational ProqramNenture

Austrnlia

Heinz School al carnegie Mellon (PA), Adelaide

Panama

Aonda State lkliversily (FL), Panama

Austria

Webster Universily (MO), Vienna

Qatar

Bulgaria

City Ur>versity (WA), Pravitz and SOfia

China

Benedictine College (KS), Hong Kong and Shanghai

Cily Ur>versity (WA), Betjing
Col ~bia (NY), Beijing
Fordham Ur>versity (NY), Beijing
Johns Hopkins(MD), Nanjing
Missoui State (MO), Liaoning
Towson State (MD), Shanghai
University of Dayton (OH), Shanghai
University or Maryland. College Park (MD). Shanghai and Beijing
University ci Michigan (MI), Shanghai
Washington Universily (MO). Shanghai
Ulah State Ur>versity (UT), Beijing. Jilin City. Hong Kong

Carnegie Mellon Uriversity (PA), Qatar

Cornell UniVersity (NY), Qatar
TexasA&M UniVersity ( TX), Qatar
Virginia Commonwealth University (VA). Qatar
Georgelown UIOversity (DC), Qatar

Romania

City University (WA). lnst Bancar Roman

Frnnce

Georgia Institute or Technology (GA). Lorraine

Greece

University of lndianapolls(iN). Trtpolls

City Ur>versity (WA), Piraeus

Hong Kong

Baruch College (NY). Hong Kong

C81rtornia State lkliversily (CA), Hong Kong
George Washilgton University (DC). Hong Kong
Indiana Universily (IN), Hong Kong
Northwesteom University (IL), Hong Kong
Ohio UniVersity (OH), Hong Kong
University of Northetm Iowa (lA). Hong Kong
University of Iowa (lA), Hong Kong

Senegal

Suffolk UniVersity (MA), Dakar

Singapore

Carnegie Mellon Uriversity(PA), Singapore

Cornell lkliversity (NY), Singapae
Duke Universily (NC), Singapore
Georgia Institute ci Technology (GA), Singapae
Johns Hepkins (MD), Singapore
Massachusetts Institute or Technology (MA). Singapore
New York University (NY), Singapore
UniVersity or Chicago (IL). Singapore
UniVersity of Illinois, Urbana-Champaign (fL), Singapore
UniVersity or Nevada (NV~ Singapore

Spain

Suffolk UniVersity (MA), Madrtd

Slovakia

City University or Seatue foil/A), Trencin

Switzerland

Webster UniVersity (MO). Geneva

Taiwan

Baruch College (NY). Taiwan

Thailand

Webster UniVersity (MO), Cha-am

Ohio UniVersity (OH), Bangalore

Missoui State UniVersity (MO). Madras
Virginia Tech UIOversity (VA). SP Jain lnsL
University of South Flortda (FL), Inil, lnst of IT

Netherlands

Webster UniVersity (MO). Lei den

United Arab Emirates

George Mason Umversity (VA), Ras AI Khaimah

Israel

Baruch College (NY), Israel

Un~ed

UniVersity of Chicago (IL), London

Webster UniVersity (MO). London

Japan

Temple lkliversily (PA), Tokyo, Osaka and Fukuoka

India

K ingdom

Houston Community College ITXl. Saigon

Vietnam

Source: American Council on Education and BMO Capital Markets.

Foreign
institutions in US

Foreign students
represent roughly
1.8% of worldwide
postsecondary
enrollment

The number of
foreign students
coming to the US
is rebounding

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We are not aware of any foreign institution that has established a campus in the US. Britain's
Open University sought to operate in the US. but ended tl1e effort when enrolLments did not
materialize. In J1me 2005, Canada' s Atbabascau University - a distance learning specialist became the first Canadian institution to receive accreditation by the Middle States Commission
on Higher Education (MSCHE). In tl1e fall 2007, INSEAD, the international business school
headquartered in France established an " Americas" office in New York. We beljcve most
foreign institutions use t11eir study abroad programs to market to US students. although believe
in the corning years, distance education will also be anot11er platfonn.

Student mobility. According to UNESCO' s Global Education Digest 2009, over 2.8 million
students were enrolled in higher education institutions outside their country of origin in the
2006-2007 school year (latest data available) -about 1.8% of worldwide tertiary enrollment.
This represents a 5.5% average annual increase from 1.8 million in the 1998-1999 school year
and an 11.7% annual increase from roughly 82,000 in the 1974-1975 school year- well
outpacing growth of worldwide tertia!)' enrollment over that period.
Historically, the US has attracted a large number of students from outside the countl)' - typically
a benefit for tl1ese institutions as many of these students are not eligible for Title IV funding and
tend to pay "ftill price." While tllis pipeline had been shrinking in the first half of this decadelargely attributed to limitations placed on foreign st11dents who wish to trdvel to the US in tl1e
post-September 11 environment - this trend has been reversing recently.

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Foreign student s
represent roughly
3.5% of total US
postsecondary
enrollment

BMO Capital Markets

According to the Institute of International Education (ITE). there were nearly 624.000 foreign
students enrolled in US postsecondary institutions in the 2007-2008 school year, up 7% over the
prior year. Growth accelerated from the 3.2% growth in the 2006-2007 school year, which was
the ftrst year of solid growth followed four years of sluggish to negative growth. Forei!,>n
students represented approximately 3.5% of the total US postsecondary student population in
2007-2008. While below t11e 3.7% peak reached in the 2001-2002 school year, t11ough tlris share
has increased over the last t11:ree years (see ExJubit 285).

Exhibit 285. Foreign Students as Percentage of US Postsecondary

Enrollment (1984-1985 to 2007-2008 School Years)
650,000
600,000

J!l
c

550,000

U)

500,000

...,"'
:::J
0
Q;

.<>

E
:::J

Foreig n Students
-+-%of Total

4.0%

c
.E"'
~

3.5%

w
~

3.0%

...,"
c
0

450,000

"'

.'!l
VI
0

400,000

2.5%

350,000

CL
If)
::;)

0
'<[!.

300,000

2.0%

Source: Institute of International Education and BMO Capital Markets

~md

Factors driving

We attribute the recent rebound growtl1 primarily to improvement in tl1e visa process

th is growth

stronger recruitment efforts by US schools (e.g.. increase usage of paid recruiters), and to a
lesser extent, the declining US dollar. However, in addition to t11ese " pull" factors, we believe
there are several " push" factors that drive foreign students to the US. Among these are t11e often
limited and low quality of educational options in a student's home cotmtry, and tl1e increased
availability of student financing along witl1 higher fanilly incomes enabling travel abroad.
However. competition among countries for students is increasing, and will likely intensify as
countries continue to invest in their educa6onal systems. Some of t11e pressures on foreign
enrollment growt11 include:

Countries trying to ho ld o nto their own stude nts. A number of fore ign governments
have implemented policies to entice their potential postsecondary population to stay at
home rather than go abroad. For example. China has dramatically increased its spending
on postsecondary education (one of tl1e reasons we believe its participation rate increased
as cited earlier), wlrile in December 2006. South Korea created an English-only town
with the express purpose of giving students a chance to Jearn English without having to
study abroad. According to a March 2007 report titled. The Race to A ttract International
Students by Education Sector and the US General Accountability Office General (GAO),
otl1er countries, such as New Zealand and Gennany, have introduced comprehensive
marketing campaigns. In addition. European countries hope to fonu t11e "European
Higher Education Area (i.e., the Bologna Process) by 2010, which would allow for

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BMO Capital Markets

greater student mobility and degree comparability within the EU. thereby potentiaJiy
reducing the number of foreign students wishing to study in IJ1e US.

A member of UMO

Increasing competition for foreign students. A number of other cotmtries have taken
advantage of this opportunity to more aggressively court international students. Tlus
competition has particularly been intense from English-speaking countries, such as
Australia, New Zealand, and the UK, with educators indicating that in light of the
recession. international student recruitment is even more important Even other countries.
where English is not the native language, such as Finland, have been expanding their
English-language offerings to entice these students. In 2009, the non-profit recruiter
certification group The American International Recruitment CounciL was created to work
toward bringing more clarity ~md common standards to the business of recmiting
overseas. In addition, Europe' s move to adopt the Bologna Process, whereby its schools
will offer three-year bachelor' s degrees beginning in 2010 wiiJ likely intensify this
foreign competition. Countries such as Canada and the UK have recently enacted rules
enabling foreign students to stay and work in their countries for a few years after
graduation. hoping to entice more foreign students to their schools. Another example is
UK's University of Surrey wluch, in November 2007, announced plans for a "global
network" whereby students would be able to spend each year of their coursework in a
country of their choosing. and still finish with a University of Surrey degree.

The "Great Recession." The 2008-2009 recession has forced many US institutions to
raise prices and cut costs. Given most foreign students are not eligible for Title IV funds,
we believe tl1ey may be more sensitive to tuition increases at US institutions as they
cannot rely as much on financial aid sources. In addition, schools may be less likely to
provide stipends for graduate students. Interestingly, the sluggish US job market has
taken its toll on recmiting some foreign students: an August 2009 article in The Chronicle
of Higher Education cites a 31% decline in student visas from India from October 2008
through June 2009. owing to poor job prospects in the US. Research from the Council for
Graduate Schools shows that. for the first time since 2004, the munber of offers of
admissions of foreign graduate students to US institutions fell, decreasing by roughly 3%
in 2009. Additionally. growth in foreign applications to graduate programs slowed for the
third consecutive year.

Flu epidemic. While it is difficult to gauge the long-tenn impact of the HlNl influenza
("swine flu") outbreak. Mexico has reported that its forei!,>n student enrollment has
decreased by 30% since the outbreak hit the headlines. Some of the country' s universities
report that up to 60% of foreign students have left the country in addition to the
cancellation of summer programs. According to t11e Consortium for North American
Higher Education Collaboration, more than 50 US colleges canceled or curtailed study
abroad programs in Mexico, while several Asian universities are doing the same. We are
optimistic tl1e situation does not take a tum for the worse. as we would expect a similar
reaction in any region where tlle outbreak appears concentrated.

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BMO Capital Markets

As shown in Exhibit 286, while the US still has the largest nwnber of inbound foreign enrollees
(roughly 596,000 in the 2006-2007 school year, using UNESCO data), the 3.5% annuaJ grow th
rate from the 1998-1999 school year is among the lowest when compared to the other top 15
host cmmtries. However. when compared to this same group, the disparity in the US between
inbound student growth and total tertiary enrollment growth is relatively small (3.5% vs. 2.6%

US is largest
destination
among foreign
students, but
other markets

annually). Over the same period, a number of countries have seen much higher growth rates for
foreign students than in totaJ tertiary enrollment, including Korea (35.2% vs. 1.5%), New
Zealand (21.6% vs. 4 .8%), and ItaJy (11.8% vs. 1.6%), as these countries have become more
aggressive marketers in attracting foreign students.

growing faster

Exhibit 286. Top 15 Student Destinations (1998-1999 to 2006-2007

School Years)

..

600,000

l!l lnbound Students

500,000

+ Inbound Student CAGR ( 1999-2007)

400,000

40%

'C

~ 300,000

~
....

A Total Tertiary CAGR ( 1999-2007)

200,000

100,000

0%

compared with 12,000 scholarships it gives Chinese students to study abroad.

foreign students

We have done a bit more analysis on the leading count:Jies of origin for those postsecondary
students choosing to come to the US. As shown in Exhibit 287. the most popular countries of
origin in the 2007-2008 school year were lndia, China, and South Korea, which together
represented nearly 40% of all foreign postsecondary students studying in the US. We note tl1at
since the 1995-1996 school year, tl10se three countries had gained tl1e most " share" of foreign-

in the US

sourced students, at the e>.:pense of Japan, Taiwan, and Thailand, among others.

of origin for

A member of UM O

Financial Group

305

20%

10%

While China's totaJ tertiary growth rate of 19% over this petiod was the fastest among the group
by a large margin. histotical comparisons of inbound student growth were not available due to a
lack of data. However, inbound students grew roughly 16% from 2006 to 2007, and we expect
tl:ris growth rate bas been relatively consistent given China' s efforts to attract foreign enrollment,
such as providing 10,000 scholarships a year for foreign students to study at its tmiversities.

Korea are most

25%

5%

Source: UNESCO and BMO Capital Markets

popular countries

30%

15%

o~~~~~~~~T-

India, China and

35%

September 2009

0::

(!)
c(

Postsecondary Education

BMO Capital Markets

Exhibit 287. Leading Countries of Origin for US Inbound

Postsecondary Students {1995-1996 vs. 2007-2008 School Years)
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

1995-1996 School Year

Count ry
Market Share
Japan
10.1%
China
9.3%
South Korea
8. 1%
India
6.7%
Taiwan
6.7%
Canada
5.0%
Malaysia
3.2%
Thailand
2.9%
Indonesia
2.7%
Hong Kong
2.4%
Germany
2.0%
2.0%
Mexico
Turkey
1.8%
United Kingdom
1.6%
Brazil
1.3%
65.7%
Top 15

Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

2007-2008 School Year

Count ry
Market Share
India
15.2%
13.0%
China
South Korea
11 .1%
Japan
5.4%
Canada
4.7%
Taiwan
4.6%
Mexico
2.4%
1.9%
Turkey
Saudi Arabia
1.6%
Thailand
1.4%
Nepal
1.4%
Germany
1.4%
Vietnam
1.4%
United Kingdom
1.3%
Hong Kong
1.3%
Top 15
68.3%

Source: Institute of International Education and BMO Capital Markets

The most popular destinations for these students are typically "brand name" not-for-profit
institutions, both private (e.g., USC, NYU, Columbia) and public (University of Illinois, Purdue
University, University of Michigan; see Exhibit 288). Many states are fmming their own
consortia, such as Study Washington and Study Oregon, fotmd in 1992. to atttact overseas
students to their states.

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BMO Capital Markets

Exhibit 288. Most Popular Destination for US Inbound

Postsecondary Students (2007-2008 School Year)
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Institution
University o f Southern California
New York University
Columbia Umverstty
University o f Illinois- Urbana-Champaign
Purdue University - Main Campus
University of Michigan - Ann Arbor
University o f California - Los Angeles
University of Texas - Austin
Harvard University
Boston University
University o f Pennsylvania
SUNY University at Buffalo
Indiana University- Bloomington
Ohio State University - Main Campus
Michigan State University
University o f Florida
Texas A&M University
Arizona State University - Tempe
Cornell University
University of W isconsin - Madison
Stanford University
Pennylvania State University - University Park
University o f Minnesota - Twin Cities
Georgia Institute of Technology
University o f Houston
Top25
Other schools
Total

Locat ion
Los Angeles, CA
New York, NY
New York, NY
Cham paign, IL
West Lafayette, IN
Ann Arbor, Ml
Los Angeles, CA
Austin, TX
Cambridge, MA
Boston, MA
Philadelphia, PA
Buffalo, NY
Bloomington, IN
Columbus, OH
East Lansing, Ml
Gainesville, FL
College Station, TX
Tempe, AZ.
Ithaca, NY
Madison, W I
Palo Alto, CA
University Park, PA
Minneapolis, MN
Atlanta, GA
Houston, TX

Institu tion Type

Private not-for-profit
Private not-for-profrt
Private not-for-profrt
Public not-for-profit
Public not-for-profit
Public not-for-profit
Public not-for-profit
Public not-for-profit
Private not-for-profit
Private not-for-profit
Private not-for-profrt
Public not-for-pro fit
Public not-for-profit
Public not-for-profit
Public not-for-profit
Public not-for-profit
Public not-for-profit
Public not-for-pro fit
Private not-for-profrt
Public not-for-profit
Private not-for-profrt
Public not-for-pro fit
Public not-for -profit
Public not-for-pro fit
Public not-for-profit

Total Inti.
Enrlmt.
7,189
6,404
6,297
5,933
5,772
5,748
5,557
5,550
4,948
4,789
4,610
4,363
4,287
4,259
4,244
4,228
4,094
3,979
3,928
3,910
3,898
3,860
3,756
3,616

M2Q
118,639
~

623,805

As % o f
Total
21.5%
14.5%
25.3%
14.4%
14.8%
14.0%
14.3%
11.1%
24.8%
14.9%
19.2%
15.9%
11.2%
8.1%
9.2%
8.3%
8.8%
7 7%
19.8%
9.3%
24.6%
8.9%
7 4%
19.3%
9.9%
12.8%
2.9%
3.4%

Source: Institute of International Education and BMO Capital Markets

Many countries
are more " forei gnstu dent" friendly
than the US is

An October 2007 study by the ObseiVatory on Borderless Higher Education identified the
comparative advantages which various countries have in attracting fo reign students (see Exhibit
289). As shown, U1ere are a number of countries - such as New Zealand and Canada - Umt are
more "foreign-student friendly" when compared with the US.

Exhibit 289. Competitive Advantages of Countries in Recruiting

Foreign Students
Student v isa not
required for study
Moderate tuition
of less than 3
Low tuition (up to ($5.000 - $15,000
months
$5,000 a year)
a year)
Low living costs
Australia

Moderate living
costs
X

Britain
Canada

X
X

Germany

Japan

Malaysia

X
X

u.s.

France

Singapore

X
X

China

New Zealand

Programs to
prepare foreign
students before
they start classes

Source: UNESCO and BMO Capital Markets .

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Postsecondary Education

China is largest
student exporter:
US sending and
receiving
students at
roughly same rate

BMO Capital Markets

Similarly. we believe it is wortl1while to look at which countries are supplying the highest
number of outbound students, as tJ1ese countries are essentiaJly driving the growth in student
mobility (i.e., these cmmtries are exhibiting the push factors). As shown in Exhibit 290, China is
by far tJ1e largest supplier of outbmmd students with 421,000 in the 2006-2007 school year. and
the fastest growing with annual growth of 15.1% since the 1998-1999 school year. However,
this is slower tJ1an the country 's 19% annua l growtJ1 in tertiary students. India has also been
exporting students at a comparably high rate of roughly 14.8%. which we estimate is far above
the country' s tert1ary growth rate, which was 5.3% CAGR from 1999-2000 to 2005-2006 school
years (latest data available). The US is also exporting students at a rate slightly higher tlmn its
tertiary growth rate (3.5% vs. 2.6%, respectively; we note the US inbound rate equals its
outbound rate).

Exhibit 290. Top 15 Student Exporting Countries (1998-1999 to

2006-2007 School Years)
450,000

II Outbound Students

375,000

+CAGR (1999-2007)

..

J!l 300,000
c

15%

...,

E 225,000

U)

D
0
.....

20%

.& Total Tertiary CAGR (1999-2007)

150,000

10%

5% 0

.- ------------- ~- -------------------------------- 4-

75,000

a:
~

O'k

Source: UNESCO and BMO Capital Markets.

~malyze

study-abroad trends for US-

Study abroad

We have drilled down a bit further into the US mruket to

programs-

based students. According to the liE's Open Doors project, roughly 242,000 US postsecondary
students studied abroad in t11e 2006-2007 school year. increasing at an 8% CAGR from the
roughly 48,400 students in tJ1e 1985-1986 school year (see Exhibit 291).

outbound US
students

Exhibit 291 . US Postsecondary Students Studying Abroad (19851986 to 2006-2007 School Years)
...,

250,000

!!!!!!!!!!~ No.

of students

-+- yly% change

e"'

16%
14%

~ 200,000

12%

01

10%

150,000

8%

..

~
U)
::;)

50.000

?ft.

~ 100,000

...,

..

.,g>

6%

I I

0 -1-"'4--+'"'+--11-"'"-t1 -t-1""YI-+"'"4-"'"-t-1"4-"'4_.+ --+-..,-+-+-+

1985-1986
19881989
1991-1992
1994-1995
1997-1998
2000-2001
20032004

4%
2%
0%
2006-2007

Source: Institute of International Education and BMO Capital Markets

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Financial Group

308

September 2009

Postsecondary Education

UK most popular
destinat ion for US
students but Italy
and China gaining
share

BMO Capital Markets

The UK has remained the top destination for outbound US students over the past decade. likely
because of similar language and its strong reputation. However, its " market share" has declined
to 13.5% of outbound US students in the 2006-2007 school year from 22.5% in the 1995-1996
school year. as a number of countries have become more popular destinations since. including
Italy (share increased to 11.5% from 8.8%) and China (share increased to 4.6% from 1.6%; see
Exhibit 292).

Exhibit 292. Leading Destinations for US Outbound

Postsecondary Students (1995-1996 vs. 2006-2007 School Years)
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13

1995-1996 Sch ool Year

Country
Market Share
United Kingdom
22.5%
Spain
9.1%
Italy
8.8%
France
8.7%
Mexico
7.0%
Germany
4.0%
Australia
3.7%
Costa Rica
2.6%
Japan
2.3%
Israel
1.9%
Ireland
1.8%
Russia
1.7%
China
1.6%
Top 13
75.4%

Rank
1
2
3
4
5
6
7
8
9
10
11
12
13

2006-2007 School Year

Country
Market Share
United Kingdom
13.5%
Italy
11.5%
Spain
9.9%
France
7.1%
China
4.6%
Australia
4.4%
Mexico
3.9%
Germany
3.0%
Ireland
2.4%
2.2%
Costa Rica
Japan
2.1%
Argentina
1.5%
Greece
1.4%
Top 13
67.7%

Source: Institute of International Education and BMO Capital Markets.

Most US institutions (at least the not-for-profit institutions) offer some type of study abroad
opportunities for their students. According to the American Council on Education's (ACE)
Mapping Internationalization on U.S Campuses: 2008 Edition, the proportion of institutions
offering education abroad opportunities increased to 91% in 2006 from 65% in 200 l.
However, there appears to be a disconnect between the types of programs students want (shorter
term) and the types of programs available al campuses outside the US (longer tenn).

Disconnect
between what
students want and
what institutions

According to JIE's most recent Open Doors report. 53% of US students participate in
short-term study abroad trips (i.e., summer, January tenn, or any program of eight weeks
or less during the school year). The "semester abroad" model now attracts 37% of those
studying abroad, while only 6% spend a full academic or calendar year abroad. Similarly,
54% of institutions surveyed in liE's 2009 report on expanding study-abroad capacity,
said they expect short-tenn programs will be the main driver offuture growth.

The vast majority of responding host campuses to the ACE study offer longer-term
programs for their non-de!:,Tee seeking international students: approximately 85% of all
responding institutions reported that they offer programs lasting a full academic year
while 89% offered programs for at least one academic session (e.g.. a quarter, semester.
or tenn). Only about 38% offer programs of two months or shorter duration, a categOI)' of
study-abroad duration (i.e.. "short-tenn").

offer

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309

September 2009

Postsecondary Education

Proposal t o
i ncrease fundi ng

BMO Capital Markets

Nevertheless. the popularity of t11ese programs should increase. in our view. as more students
recognize the benefit of having some global ex-perience before t11ey start to work. Increased
goverrunent fcmding could play a role: in June 2009, the US House of Representatives passed
the Foreign Relations Authorization Act (HR 2410). which included funding for the Senator
Paul Simon Study Abroad Foundation Act (this was previously passed in June 2007, but never
became law). The Simon fund would appropriate $80 million to create a foundation whose goal
would be to send 1 million American students abroad each year witllin tile nex1 10 years. The
bill is cw-rently in committee in the Senate (S. 473).
Willie there are a number of not-for-profit companies that assist students in their study abroad
programs (e.g.. Institute for the International Education of Students). there are also for-profit
providers such as Education Dynamics studyabroad.com setving this market as well. Tlus

Opportu nities
exist for service
providers for

market became a bit more competitive in May 2009, witl1 IDP International, Australia's largest
and most successful international-student-recruitment company. entering the US market and the
announcement by Hobsons, a major educational services company, to expa11d into this niche.

study ab road
programs

However, we caution investors that stt1dy-abroad services have nxently attracted negative
publicity. In August 2007 and March 2008. the New York Times published articles comparing
study abroad providers to student lenders in terms of providing petks to attract students to t11eir
program. New York State Attorney General Andrew Cuomo launched an investigation into t11is
industry shortly thereafter. The Connecticut Attorney General's office subsequently followed
with its own investigation. We believe bot11 investigations are still ongoing aJt11ough there has
been little update since the initial aiUlotmcernent.

Postsecondary Content Market

While we could devote an entire report to t11e postsecondmy publishing sector, we have brie1ly
summarized our t11oughts here. According to Eduventures, an estimated $8 billion will be spent
on postsecondmy content in 2009. We note tllis forecast was made in 2006 before the onset of
t11e current recession: as such, revenues could be even lugher than this spurred by accelerating

Posts econdary
content market :

6.6% CA GR
thr ough 2014

enrollment growth trends. Nevertheless. based on tlUs estimate and Eduventures forecasts. we
project this spending will grow at a 6.6% CAGR, reaching $11 billion in 2014 (see Exhibit 293).

Exhibit 293. Postsecondary Content Services Markets (20062014E)

$12

Reference

Custom

Textbooks

10
Ci)

.Q

@.
1/)

8
6

Ql

::J

cQl

>
Ql
lr

4
2

1111111
2006

2007

2008

2009E

2010E

2011 E

2012E

2013E

2014E

Source: BMO Capital Markets estimates and Eduventures.

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310

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Postsecondary Education

BMO Capital Markets

Eduventures segments the postsecondary content market into three groups:

Postsecondary
textbook market:
4.9% CAGR
through 2014

The textbook market is the traditional market of books created for courses and use in fonnal
settings. It also includes accompanying materials, CD, workbooks, but excludes the used-book
market. This is the largest of the three types of content markets. with an estimated $5.4 billion
spent in 2009. As this projections was made in 2006, prior to the 2008-2009 recession, it is
likely the market is larger than this~ we note tJ1at, according to the Association of American
Publishers (using a different data series), higher education publishing revenues have risen 46.6%
year to date through June 2009. Nevertheless, based on Eduventures estimates and forecasts, we
project this spending will grow at a 4.9% CAGR, reaching $6.8 billion in 2014.
The postsecondary te>..'tbook market is dominated by the major publishing companies- Cengage
Learning (fornlerly Thomson Learning. which acquired the Houghton-Mifflin College Division
in June 2008), McGraw Hill Higher Education (MHP), and Pearson Higher Education (PSO).
However. there are ot11er companies. such as Bedford. Freeman, and WortJ1 Publishing, W.W.
Norton, and Wiley Hjgher Education that specialize in iliis area.
The American Association of Publishers claims the average college stlJdent spends $644 per
year on te>..'tbooks, or about 5% of the annual cost of higher education - a rate. according to
them, which has been dropping in recent years as inflation in tuition and others items has
outpaced that of textbook pricing. While this infonnation varies based on factors such as course
load and subject matter. students spent an average of $702 on required course materials during
t11e 2006-2007 academic year (latest data available), according to t11e National Association of
College Stores (NACS) Student Watch 2008 report. Required course materials can be any type
of book or media required or recommended by faculty for classes and include new or used
te.-.1books, reb>ular or general books, as well as coursepacks/readers/customized materials or
digital/electronic educational materials.
A July 2005 report by tl1e US Government Accountability Office (GAO) cited most of t11e 6%
average annual increase in textbook pricing since 1986 was driven by extra features (e.g.,
supplemental materials like CD-ROMs), which accompany the core textbook. Nevertheless,
there bas been much publicity regarding t11e !ising cost of college textbooks, which has driven
growth in t11e used te.-.'tbook market, enhanced by a number of online resellers such as Amazon

Rising costs of
textbooks has
created
alternatives

(AMZN), eBay (EBA Y), and niche providers as well. According to NACS' College Store
Induslly Financial Report 2009, the average price of a new te,.1book is $57, while a used one is
$49.
There are also a number of companies which offer te>..'tbook rentals (e.g., Chegg.com,
BookRenter.com, CampusBookRentals.com) as well as those that offer free te>-.1books (e.g..
Freeload Press, Prqject Gutenberg). typically using an advertising model (although their
offerings may be Limited). We believe tJ1ese altcmat1ves have been making some inroads, as on
August 13. 2009, Cengage Learning anmunced t11e launch of CengageBrain.com, offering to
rent textbooks at 40%-70% below t11e suggested retail price. 1t is hoped tllis option will be up
and running in December 2009. Cengage claims it is the first higher education publisher to offer
a print textbook rental option directly to students. Other companies expanding their te>..ibook
rental presence include McGraw-Hill via Chegg.com and bookstores Follett Higher Education
Group and Barnes & Noble College Booksellers.

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Postsecondary Education

Tax credit
expansion could
provide small
boost

BMO Capital Markets

In addition. the textbook market got a small dose of positive news under the American Recovety
and Reinvestment Act of 2009 (tl1e s6mulus package) signed into Jaw on Februazy 17, 2009. As
part of tllis act, changes were made to The American Opportunity Tax Credit, which expanded
and renamed the already-existing Hope Credit. increasing the annual credit for tl1e 2009 and
2010 tax years to $2,500 from the prior $1,800 linUt. The credit is calculated as 100% of tl1e flrst
$2,000 spent and 25% of t11e next $2,000 spent. The new law aJ lows e.-..l)ands t11e term "qualified
tuilion and related expenses" to include expenditures for "course materials." Such as books.
supplies and equipment needed for a course of study whether or not the materials are purchased
from tl1e educa6onal institution as a condition of enrollment or attendance. We note iliere are
income linlitations for tlris credit ($90,000 of modified adjusted I:,rross income for single filers
and $180,000 for joint filers). Wlrile tllis expansion may in and of itself do little to spur te>.'tbook
sales, it was a posi6ve development, in our view.
We have also seen t11e rise of eTextbooks -specifically in the for-profit sector, as schools such
as Apollo Group's (APOL) University of Phoenix create their own curricula, thereby genera6ng
profits tl1at at one time were shared only by ilie publishing houses ~md college bookstores (numy
run by iliird-party entities). In 2007, a group a major publishers - including Pearson Education.
Cengage Learning, McGraw-Hill Higher Education, Houghton Mifflin, Jolm Wiley & Sons,

eTextbooks

Bedford, Freeman & Worth, and Jones & Bartlett- founded CourseSrnart LLC which brings
toget11er thousands of textbooks across hundreds of courses in an eTextbook fonnat on a
common platfom1. Applications were made available on t11e iPhone in t11e summer of 2009. In
fall 2009, Amazon (AMZN) set up pilot programs witl1 six higher education institutions Arizona State University, Case Westem Reserve University, Pace University, Princeton
University, Reed College, and the University of Virgliua's business school- to offer te>.tbooks
on its newest version of Kindle, its ebook product.
In addition, the 2008 reauthorization of t11e Higher Education Act (HEA) requires textbook
publishers to disclose prices in any marketing materials sent to faculty members as they decide
what books to require. The act also forces publishers to "unbundle" materials like CD's and
workbooks tl1at are typically packaged wiili textbooks. It is believed that selling those items
separately should lower tl1e cost of required tex1books.
The custom-content market comprises companies that develop and package content
specifically for an instructor or ins6tution. Custom-designed books, case studies. and
coursepacks are included in this segment. According to Eduventures, an es6rnated $1.1 billion
will be spent on postsecondary custom content in 2009. While tlus is the smallest of the tlu-ee
types of content markets. it is also tl1e fastest I:,rrowing. Based on tills estimate and Eduventures
forecasts, we project tills spending will grow at a 16.3% CAGR, reaching $2.4 billion in 2014. A

Postsecondary
custom content
market: 16.3%
CAGR through

2014

number of t11e te!l.ibook providers cited above. as well as the custom-content providers that
specialize in t11e corporate sector (see the " Corporate Training' section of this report) serve t11is
sector as well.
Postsecondary
reference content
market: 3.7%

postsecondaty reference content in 2009. Based on this es6mate and Eduventures forecasts. we
project t11is spending will grow at a 3.7% CAGR, reaching $1.8 billion in 2014. This segment is
expected to be t11e slowest growing of t11e three content segments, as many open source

CAGR through

2014

A member of UMO

The final sei:,'lllent consists of providers of reference-material content. This includes

companies that provide non-instructional materials such as print and online periodicals, journals,
and subscription databases. According to Eduventures, an estimated $1.5 billion will be spent on

Financial Group

312

September 2009

Postsecondary Education

BMO Capital Markets

alternatives and t11e intemet are taking a larger share of available reference revenue.
Nevertheless, many of U1e publishing companies cited above also sell reference materials to the
higher education, along with traditional reference providers, such as Encyclopredia Britannica.

Postsecondary Technology Market

Similar to the K-12 sector. a l~uge number of teclmolof:,>y providers serve the postsecondary
sector. According to Eduventures, an estimated $7.8 billion will be spent in the postsecondary
teclmology market in 2009. We note this forecast was made in 2006 before t11e onset of t11e
current recession; as such, revenues could be even higher tJ1an this spurred by accelerating
enrollment growth trends. Nevertheless, based on this estimate and Eduventures forecasts, we
project this spending will grow at a 6.7% CAGR. reaching $10.8 billion in 2014 (see Exhibit
294).

Postsecondary
t echnology
market: 6.3%
CAGR through

2014

Exhibit 294. Postsecondary Technology Service Market (20062014E)

$12
10

2006

2007

Academic Computing
Administrative Computing
Infrastructure Computing

2008

2009E

201 OE

2011 E

2012E

2013E

2014E

Source: BMO Capital Markets estimates and Eduventures.

EduventtJres sef:,'111ents the postsecondary tecbnolof:,>y marl<et into three groups:

A member of UMO

The infrastr ucture computing market comprises companies that provide teclmologies
that support the connection of computer systems, voice, video, data storage, data security,
and data analysis. According to Eduventures, an estimated $5.5 billion wiU be spent on
postsecondary infrastructure computing in 2009, making it the largest of tJ1ese three
segments. Based on tllis estimate ~md Eduventmes forecasts. we project tllis spending will
grow at a 6.7% CAGR. reaclling $7.6 billion in2014.

The administrative computing market comprises companies that provide teclmology

that facilitates ilie delivery, processing, and analysis of data for institutional
administrative functions. According to Eduventures, an estimated $1.9 billion will be
spent on postsecondary administrative computing in 2009. Based on tJlis estimate and
Eduventures forecasts. we project tllis spending will grow at a 6.3% CAGR, reaclling
$2.6 billionin2014.

The academic computing mar ket comprises companies that provide teclmologies that
support t11e learning objectives of an institution. According to Eduventures, an estimated

Financial Group

313

September 2009

Postsecondary Education

BMO Capital Markets

$388 million will be spent on postsecondary academic computi ng in 2009. While this is
the smallest of the three types of content markets, it is also the fastest growing. Based on
this estimate and Eduventures forecasts, we project tills spending will grow at a 7.8%
CAGR. reaching $565 m.illionin2014.
The two larger technology markets - academic and administrative computing - are served by
traditional hardware and software providers, such as Apple, Cisco, Dell, Hewlett-Packard, IBM,
Oracle. Sun. and Sw1Gard. In addition. they are supported by such large consulting and
professional service fim1S such as Accenture and IBM. In addition to U1e course management
systems providers (to be discussed below), other technology companies that focus exclusively
on the education sector include Embanet (provider of online program design and development.
marketing and enrollment and technolob'Y support services) and Jenzabar (provider of enterprise
software and services).
For purposes of this report, we have chosen to drill down a bit further into U1e academic
computing market, a market somewhat unique to the education sector and expected to be the
fastest b'Towing of the three postsecondary teclmology markets.
Course management
system (CMS)

We believe the largest component of tl1e academic teclmology market consists of those
companies that specialize in providing course management systen1S (CMS). These systems
provide Web-based platfon11S and front-end tools (i.e., collaborative) to augment traditionaJ
instruction. course design services and consulting, digital course materials (i.e.. online bulkpacks, Web-based library), content and research engines, and ASP hos6ng. According tl1e 2008
Campus Computing Survey, tl1e percentage of college courses that use a CMS rose to 53.% in
2008 from 14.7% in 2000. The dominant providers are Blackboard (BBBB, which acqtlired
Prometheus in January 2002, WebCT in February 2006 and ANGEL Leaming in May 2009)

providers form the

academic
technology market's
largest component

and Pearson's (PSO) eCollege (acquired in July 2007), and with competition from smaller
players (e.g., Desire2Leam) and open source providers (e.g., ATutor, ETUDES, Moodie, and
Sakai).
Wlrile it was difficult to estimate the size of the CMS market, we believe it represents tlle bulk
of tl1e academic computing market and should grow at tlle high-teens rate projected for all
academic computing services.
We believe CMS are at the core of tl1e phenomenaJ growtl1 generated by postsecondary online
schools, as tl1ey allow t11em to augment instruction with web-based tools and manage tlle
learning environment online. We also believe professors have become more comfortable
adopting online teaching aides now tl1at it has become clear that technolob'Y will be used to
augrnent rdther tllan replace traditionaJ learning. In addition to online courses, it is now expected
tl1at students at many postsecondary institutions will at least access course n1aterial online (i.e..
notes, syllabi, qllizzes, and supplemental reading materials), as well as chat witl1 professors,
assistants, and other students, and track grades online. All of this is enabled by CMS.
Pearson's entry into
CMS space could

change market

We believe Pearson's entl)' into t11e CMS sector wiU1 its purchase of eCollege I1as had some
impact on the market dynamics. Many industry observers l1ad been waiting from some time for
tl1e entrance of one of tl1e larger enterprise resomce providers (ERP) (e.g., SAP) or technolob'Y
service finns with a higher education focus (e.g., lBM) to enter the CMS market to augment

dynamics

their suite of product and/or services offerings. WhiJe Pearson's move was somewhat swprising,
in hindsight, it may not have been, given some of the company 's other moves in adding
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314

September 2009

Postsecondary Education

BMO Capital Markets

teclmology specialties within t11e education sector (e.g., September 2000 acquisition of National
Computer Systems, an educational data and management systems company, May 2006
acquisition of Apple's PowerSchool, a provider of student infonnation systems). Nevertheless,
tllis acquisition brought a larger competitor into tlte space. and it could expand eCollege's
presence beyond the distance learning niche that had dominated its clientele. Nevertheless,
Blackboard still dominates this sector.
There has been a strong movement by a number of schools to use "open source" course
management systems, such as Moodie (an acronym for " Martin's Object-Oriented Dynamic
Learning Envirorunent") and Sakai (built by four institutions - The University of Michigan,
Indiana University. MIT, and Stanford University) and bypassing third-party vendors such as
Blackboard. According to the 2008 Campus Computing Survey, Moodie and Sakai together
captured roughly 13.8% of the course market share, up from 7.2% in 2006. In addition, 24.4%
of the respondents stated they wouJd be highly likely to migrate to an open source CMS by
2013. Interestingly, in July 2008, Blackboard anmunced it was part11ering with Syracuse
University to develop a way to integrate Blackboard with Sakai, in an attempt, we believe to
begin improving relationships witlt the "open source community." Tllis is likely an attempt to
mitigate further market share erosion. as per the 2008 Campus Computing Survey, Blackboard's
market share fell to 56.8% in 2008 from 66.3% in 2007.

Use of open source

systems is a
growing threat

However, using an open-source provider comes witl1 its own issues, in our view. A list of issues.
as compiled using Moodie's website can be found in Exhibit 295.

Exhibit 295. Issues Relevant to Open Source CMS Providers

10 Questions Regarding Open Source Providers

1. Once they are stable, will they begin licensing fees?
2. Will you need a full-time technical staff to support the open source provider
3. Are open source systems and software as compatible with existing system~
4. Do open source providers have enough of a track record or experience?
5. Is installation difficult and does it include the features needed?
6. Is documentation and technical support as good as the third-party vendors~
7. What are the costs when support and training are included?
8. Will it work for a large institution? Or in all education segments/niches?
9. What are the costs and effort to switch from an existing provider?
10. Over the short term and long term, what are the real costs?
Source: Moodie company website, Chronicle of Higher Education.

fn addition, there was some recent controversy in tllis space, when in July 2006, Blackboard
(BBBB) annmmced it had been issued a US patent for " teclmolo!,'Y used for intemet-based
education support systems and methods .. . [covering] core technology relating to certain systems
and methods involved in offering online education, including course management systems mtd
enterprise e-Leaming systems." Corresponding patents were granted in a number of ot11er
countries. The company subsequently sued one of its rivals, Desire2Learn, for patent
infringement, with ot11ers fearing that the broad nature of this patent could hurt competition and
lead to further such lawsuits. In Febmary 2008, a federal jury in Texas mled in Blackboard' s
favor, and in May 2008, ordered Desire2Leam to pay $3.3 million in damages. On July 27,
2009, the US Court of Appeals for the Federal Circuit affinned in part. reversed in part. ~md

Patent infringement
battle

A member of UMO

Financial Group

315

September 2009

Postsecondary Education

BMO Capital Markets

dismissed in part this decision. The company plans to appeal. Other complaints have been filed
with t11e International Trade Commission (ITC) and FederaJ Court of Canada. The battle
continues.

Postsecondary Institutional Services Market

This is a fairly broad category, ranging from marketing services providers to teacher
development. According to Eduventures, an estimated $7.4 billion will be spent in the
postsecondaty institutional services market in 2009. We note this forecast was made in 2006
before the onset of the current recession; as such, revenues could be even higher than Uris
spurred by accelerating enrollment growth trends. Nevertheless, based on this estimate ~md
Eduventt1res forecasts, we project tlris spending will grow at a 17.3% CAGR, reaching $16.4

Postsecondary
institutional
services market :

17.3% CA GR
through 2014

billion in 2014; t1us is by far the fastest growing of t11e three "other services" markets (see
Exhibit 296).

Exhibit 296. Postsecondary Institutional Services Market (20062014E)

$18
Academic Services

Administrative Services

15
iii
c
.Q

12

!B.

Cll
Q)

:::1

cQ)

>
Q)
0::

2006

2007

2008

2009E

2010E

2011E

2012E

2013E

2014E

Source: BMO Capital Markets estimates and Eduventures.

Eduventures segments the postsecondary institutional services market into two groups:

The administrative services ma rket comprises professional service firms that help
institutions address their non-instmctional objectives in areas such as marl<eting, financial
aid, and IT support. According to Eduventures, an estimated $6.3 billion will be spent on
postsecondary administrative services in 2009. Even though it is the larger of the two
markets, it is also the faster growing. Based on lhis estimate and Eduventures forecasts,
we project tlus spending will grow at an 18% CAGR, reaching $14.5 million in 2014.

The academic service s market comprises professional service fmns that help
institutions suppott teaching and learning objectives such as online educational and
facility recmitment services. According to Eduventures, roughly $1 billion will be spent
on postsecondary academic services in 2009. Based on tlus estimate and Eduventures
forecasts, we project lhis spending will grow at a 13% CAGR, reaching roughly $1.9
billion in 2014.

A member of UMO

Financial Group

316

September 2009

Postsecondary Education

BMO Capital Markets

While definitions of t11e postsecondmy institutional services mmi<et may vary. Education
Dynamics has defined t11e services underlying what it calls the education student lifecycle,
aimed at four different target matkets (see Exhibit 297).

Potential students and their parents (e.g., college planning. test prepamtion)

Current students (e.g., transferring to other schools)

Colleges and universities themselves (e.g., lead generation)

Gmduates and employers (e.g., career planning)

Exhibit 297. Postsecondary Student Lifecycle Services

Other areas of
outsourced

Student/Parents

EDUCATION LIFECYCLE SERVICES

College Transition
College/University

Graduate/Employers

p ostsecondary

College Planning

lnfOfmation Portals

List Procurement

Career Planning

Test Prep

Transcript Exchange

Direct Marketing

Resume Services

Essay Services

Application Management

Lead Generation

Career Advising

services

Financial Aid
Scholarship Information

Lead Management

Job Placement

Agency Services

Internships

Recruitment Services

Loan Servicing

Enrollment Management

Continuing Education

Call Centers

Alumni Development

CRMIERP
Retention Services

Financial Aid Management

Payment Processing

Source: Education Dynamics.

Some lifecycle services functions are covered in other sections of tlus report (i.e.. test
prepamtion in the K -12 section) and others we believe are beyond the scope of this report. One
area t1mt lms attracted much investor attention is student enrollment management, which
incorporates a nwnber of " Lifecycle services" to the colleges and universities themselves. Many
schools outsource aJl or portions of t11eir marketing funcllon to companies tlmt help genemte
new students. TI1ese companies provide students with the tools to conduct searches for programs
and provide postsecondary institutions with an organized and specialized way to build and
process leads. Wlille it was difficult to obtain estimates for the size of the emollment
management market, we believe it is one of the larger components wit11in t11e postsecondary
administrative services market (estimated $6.3 billion in 2009). Companies that provide
enrollment management services include specialists, such as Education Dynamics Goa1Quest,
Hobsons, Intelliworks and Noel-Levitz, along with infonnation technology providers (e.g.,
Datatel, StmGard).

Enroflment
management/
outsourced lead
generation

For-profit school s
led the way

A member of UMO

Although not-for-profit schools have not marketed to potential students in the traditional sense,
we believe the environment lms clmnged, as t11ey have seen their for-profit competitors quickly
gain slwe, often as a result of marketing practices typically foreign to this sector. While forprofit schools had long advertised via traditional media (e.g., television, newspapers, billboards),
it is now fairly coiUIUonplace to see not-for-profit schools advertise tl1ere as well (take a look
nex1: time you' re in an airport). In addition, for-profit providers were quick to embrdce the online
advertising model -not only quicker than their not-for-profit peers, but also quicker than many
other industries.

Financial Group

317

September 2009

Postsecondary Education

BMO Capital Markets

Although t11e market stiU appears to be evolving. there are currently t11ree types of sources of
online enrollment leads:

The schools' own websites, which may be self-managed or managed by ru1 outside fmu
to help process leads.

Online education directories (OED) manned by such companies as ClassesUSA.com and

eLeamers.com, among others. The core function of OEDs is to funnel traffic from a
variety of sources to a directory that provides infonnation on online programs and serves
as a means for institutjons to obtain contact infonnation. Institutions typicaJiy pay a fee
for each prospective student that OEDs direct to them.

Affiliated networks of smaller providers, managed by larger finns such as CUnet,

PlattFonu Advertising (an AdVenture lnteractive company), ~md QuinStreet, among
others.

fn addition, companies such as Datamark and PlattForm not only help co!Jeges obtain
enrollment leads, but more important help shape a school' s overall marketing strategy and
provide assistance in other areas such as media placement ru1d admissions suppmt.
ln our discussion of sales and marketing trends, we showed how the for-profit schools are now
generating the bulk of tl1eir enroUment leads via online sources. Willie we do not ex-pect tl1e not-

for-profit sector to exactly folJow suit, we do believe they will increase their focus on online
lead generation. Given ll1e sheer size of the not-for-profit sector (17 million students in fall
2007, or nearly 92% of total postsecondary enrollment), even if only a small portion of t11ese
schools move more of ll1eir lead genemtion online lllis should portend continued strong growth
for this sector.

A member of UMO

Financial Group

318

September 2009

Corporate Training

BMO Capital Markets

Corporate Training: Recession Alters Focus

While the corpordte training market has lagged behind other education sectors, it continues to
represent a viable investment opportunity, in our view. However. just as the indus!Jy had
started to stabilize relative to more volatile times earlier this decade, the recession has taken
its toll as corporate budget trimming has forced companies to favo r necessary services over
discretionary ones, in our view. Nevertheless. while the recessionary setbacks are further evidence of the cyclical nature of tlris business, we believe the advances within the industry over
recent years will continue to present investment opportunities in the long nm. While the instmctor-led training (lLT) segment is still the largest component witllin corpordte tmining. we
believe trends in corporate training are moving toward a more " holistic" approach, which
combines a blend of newer technology driven areas - including services and infrastructure wit h traditional ILT in ways that can incorporate the infonnal and organic learning networks
that emerge witlrin companies over time.

Market Overview
US training
market may be as
large as $134
billion, though
research shows
decline in 2008

Outsourced
training spending
decreased for the
first time since
bottoming in 2004

From an investment perspective, we believe tl1e size of the market should be calculated net of
internal corporate spending on salaries, facilities, and overhead to arrive at a figure that we
believe quantifies total spending on outsourced corpomte training services. According to
Training magazine, roughly $15.4 billion was spent on outside products and services in 2008down 5.5% from the $16.3 billion spent in 2007. This was the first annual decrease spending
since 2004, when it bottomed following and lagging the 2001 recessioiL
We believe this sector is among the most cyclical within the education industry, and history has
shown some lag following prior downtums. Nevertheless, assuming the US recession ends in
2009, we believe the sector will bot1om in 2010 before growing thereafter. We forecast the outsourced training market should grow at roughly a 6.3% CAGR from an estimated $14.1 billion
in 2010, reaclring $18 billion in 20 14 (see Exllibit 298).

We forecast
growth to begin
again in 2011

A m ember of BMO

Whi le t11e size of the corporate training market varies depends on the tenus one uses to define
it, most measures show a recent contraction. According to the American Society for Training
and Development's (ASTD) 2008 State of the industry Report, an estimated $134.4 billion
was spent on corporate training in 2007 (latest data available), with nearly two-thirds ($83.6
billion) of that spent on the internal learning function (i.e., salaries and benefits for an internal
training department) and tl1e rest ($50.8 billion) on external services. Research by Bersin and
Associates fo r Training magazine, which excludes governmental spending, estimates that US
corporations spent roughly $56.2 billion on training in 2008, down about 3.9% f rom 2007's
$58.5 billion - the greatest decline since 2002' s 4.6% drop.

Finan cial Group

319

September 2008

Corporate Training

BMO Capital Markets

Exhibit 298. Total US Corporate Training Expenditures (19992014E)

Em Total Training Expenditures -+-Spent on Outside Products and Services

$25 !l
u
::::~-=
20 "8 :a

$70

(II

l!!

::I

=
-g

60

Ql

c.-

:E

r-

50

.-1--

40

30

(ij

Q:

-8 ~
(II

10 0

...

-~

15

(II

Ql

'S .g

CIS::

.=c -

1--

c:

5~

-"O

~IV

c c

Note: Shaded area represents recessionary period. Source: Training Magazine and BMO Capital Markets
estimates.

Evidence t hat
train ing is one o f
the first casualties
of an economic
slowdown

Training e>.'}Jenditures are somewhat discretionary. in our view. ~md we believe the decrease in
spending on training is further evidence of tl1is. According to a November 2008 study conducted by Expertus and Training magazine, only 17% of interviewed corporate and government training professionals expected training budgets to increase in 2009. while 48% expected budget decreases in 2009 (compared witl14l% in 2008). This supports an April 2009
smvey by Novations in which 41% of comparues said their training and development budgets
had not increased in the past two years. One of fue areas we believe has been affected is in
outsourced training spend. In its May 2009 Training Service Provider Survey, IDC and CLO
Magazine found tJ1at onJy 45% of respondents are using external providers to support their
training functions this year, down fmm 66% in 2005 (see Exhibit 299).

Exhibit 299. Use of External Providers to Support Training

Functions (2005-2009)
68%

70%
60%

62%
r--

,....---

(jj

58%

"0

:;: 50%

55%

45%
r---

c.
(ij

40%

Ql

><
Ql 30%
C)

c;; 20%
::I
~
0

10%
0%
2005

2005

2007

2008

2009

Note: Shaded area represents recessionary period. Source: IDC and CLO Magazine Training Service Provider Survey.

A m ember of BMO

Financia l Group

320

September

2009

Corporate Training

BMO Capital Markets

Average spending
per employee is
cyclical, though
lagging

We believe analyzing historical trends for training expenditures per employee can a lso validate some of the cyclicality inherent in tlris business. According to the ASTD' s Benchmarking Fonun, the average training expenditure per employee peaked at roughly $1,50 l in 200 l ,
during the recession that year as it is likely budgets were set the prior year before. While lagging t11e downturn somewhat, this metric bottomed at $1,299 in 2003, and then grew at a
5.5% CAGR to reached a new high of $1 ,609 in 2007 (latest data available)- just prior to tJ1e
start of the current recession (see Exlribit 300). When measured as a percentage of payroU,
this expense increased to 2.7% in 2007, U1ough it was still below the prior peak of 3.4%
reached in 2000. The industries that spent the most per employee in 2007 were government, at
about $1,545. and teclmology, at about $1,492; while those that spent the least were health
care, at $688, and trade, at $553.

Exhibit 300. US Corporate Training Expenditures per Employee

( 1999-2007)
- Training expend~ure per employee - - Percentage of payroll

$1 ,800

a.

4%

1,600

E
w

1,400

:;;

1,200

800

C)

600

3%

a.
1,000
ci.
)(
c::

c:
'(ij

2"-'> ~

0
';/!.

1%

400

e>-

200
0

0%

1999

2000

2001

2002

2003

2004

2005

2006

2007

Note: Shaded area represents US recession. Source: BMO Capital Markets and American Society for
Training and Development (ASTD).

Using a different data source for which historical information was not available shows spending per employee decreased in 2008. According to Bersin and Associates, average training
expenditures per learner decreased 10.6% to $1,075 in 2008 fTom $1,202 in 2007, with the
greatest decline in spending among midsize companies, which saw a 48% drop in spending
per employee (see Exhibit 301).

Exhibit 301 . US Corporate Training Expenditures per Employee

(2007 vs. 2008)
$1 ,600

2007 2008

1,440
1,174

1,400
1,202
1,200

1,129
1,037

1,075

944

1,000
743

800
600

400
200

0 -!----'----'
All Companies

Small (1 00-999
employees)

Midsize (1 ,000-9,999
employees)

Large (1 0,000+
employees)

Source: BMO Capital Markets, Training Magazine and Bersin and Associates.

A m ember of BMO

Financia l Group

321

September 2009

Corporate Training

BMO Capital Markets

Training may be a
lagging indicator

Stimulus funds
may boost some
training
expenditures

While we believe the longer-tenn trends for the corporate training sector will continue to provide investing opportunities, this sector is among the most cyclical within the education industry, in our opinion. In addition, if history is ~my guide, it takes tllis sector a bit longer than
others to rebound from an economic slowdown, as training appears to be a lagging indicator.
However, some relief may come from provisions in the American Recovery and Reinvestment Act (tl1e "St)mulus" bill) passed on February 17. 2009 that will make roughly $4.9 billion in funding available to states for training purposes (see Exhibit 302). This funding is
slated to support training and education probrrams geared toward helping unemployed and
displaced workers as a result of tl1e recession, as opposed to aiding corporate-based employee
training programs. However, while the majority of funding will be via state grants ~md may be
spent by the public sector itself, we believe private sector suppliers that have established public/private partnerships with local governments and state and community colleges could benefit.

Exhibit 302. Stimulus Bill Training Related Funding (2009)

Department of Labor
Employment and Training Administration:
State grant funding for adult employment and training
State grant funding for youth activities
State grant funding for dislocated workers' employment
and training activities
Dislocated national reserve
Youth Build activities
Competitive grants for high growth industries ($500
million under Green Jobs Act)
Community Service Employment for Older Americans:
Worker Training
State Employment Service Operations:
Worker re-employment services

millions

$500
1,200
1,200
200
50
750
120
120
200

Department of Energy
Electric Delivery and Energy Reliability:
Worker training in these industries

100

General Services Administration

Federal Buildings Fund:
Training and apprenticeship programs for federal
buildings repair and upgrade

Department of health and Human Services

Health Resources and Services Administration:
Training/grants to address healthcare workforce
shortage
Children and Family services:
Training services

500
100

Department of Transportation
Federal Highway Infrastructure Investment:
Worker training support

20

$4,900

Total

Source: BMO Capital Markets, American Society for Training and Development

A m ember of BMO

Financial Group

322

September 2009

Corporate Training

BMO Capital Markets

Corporate Training & Development A dvisor (CTDA. fonnerly L(felong Learning M arket Report) publishes an annual list of U1e top corporate training finns. This includes mul6national
publishing companies (e.g., Illfonua plc) along with pure-play corporate training providers. In
addition, while at one time it was fairly easy to segment the group between business and IT
skills providers, this is no longer the case as most of the larger providers setve both markets.
Although this is one of U1e bet1er lists out there, it may sti ll be incomplete as many entities
provide training as part of their overall client setvice and may not break out training revenue
separately. With that caveat, we have listed the top 10 providers in Exhibit 303. As shown,
this is still a fmgmented market, with the top 10 providers holding an estimated aggregate
market share of under 25% in 2008.

Exhibit 303. Largest Corporate Training Providers (by 2008E Revenues)

(SIn Millions)
Training as I
2005
2006
2007
I
I
I
Ticker
Primary Service
Revs. Mkt. Share Revs. Mkt. Share
Company .....................................
lnforma pic
New Horizons
Global Kno\\.iedge Netv.Qrk
SkiiiSoft
American Management Association
Learning Tree Inti.
ExecuTrain
Element K (1)
Dale Carnegie
Franklin Covey
Top 10

INF.L
NEWH.PK
Privately held
SKI L
Privately held
LTRE
Privately held
NII TLTD.NS
Privately held
FC

..

No
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
No

$705
368
204
212
163
152
142
123
N.A.

ill
N.A.

Total Market

$10,147

s:sok..
3.6%
2.0%
2.1%
1.6%
1.5%
1.4%
1.2%
N.A.
11%
N.A.

$ 1, 160....
363
273
216
178
154
150
133
116
122
$2,866

100.0% $11 ,967

. 9.7%
3,0%
2.3%
1.8%
1.5%
1.3%
1.3%
1.1%
1.0%
1.0%
23.9%

225
196
167
161
146
134
138
$3,175

100.0% $13,016

2 .5%
1.7%
1.5%
1.3%
1.2%
1. 1%
1.0%
11%
24.4%

2008E

281
206
192
184
161
145
145
$3,502

100.0% $14,116

I 2005-2008E
......."J'oCAGR
26.6%
2.8%
2.7%
20.7%
2.5%
2.0%
9.8%
1.5%
8.2%
1.4%
8.2%
1.3%
9.0%
1.1%
9.3%
1.0%
NA
1.0%
7.5%
24.8%
N.A.
100.0%

11.6%

N.A. - Not Available. Note: As Simba defines the market differently than IDC, its total market revenue estimates differ from those of I DC.

Market Overview: Segmented by Delivery Channel

Corpomte learning is deLivered to the end user Ulfough two primary methods: traditional instmctor-led (i.e., classroom) and distance learning. which can be done over the internet (e.g..
e-learning) or via other methods (e.g., CD-ROM or podcasting). The bulk of corporate training remains classroom-based and is known in the industry as instructor-led training (ILT), although, distance learning, the smaller. faster-growing component is tl1e one t11at gets the most
press and, ty pically, the most investor attention.
IL T makes up 67%
of the training
market, and has
regained share for
the last two years

A m ember of BMO

According to Training magazine, ILT represented 67% of the corporate training market in
2008. While this is down from 77% in 2001, it increased for the second consecutive year from
its 2006 trough of 62%. Meanwhile. distance lean1ing, whether done with or without an i.nstmctor, accotmted for 24% of the market, up from 16% in 2001, but receding from the 2007
peak of 30% (see Exhibit 304). While the reasons for tlris reversal are not entirely clear. we
believe this is partially attributed to companies having made the initial investments in elearning systems t11at are now investing in more "social learning" projects which seek to find
optimal delivery blend. Additionally, we believe companies facing staff and budget cuts are
seeking less costly coaching, on-t:l1e-job training and paper-based tmining methods. While we
do not expect ILT will regain the prominence it had earlier in the decade, we believe trends
will likely continue to fluctuate over the coming years as optimaJ delivery blend continue
evolve.

Financia l Group

323

September

2009

Corporate Training

BMO Capital Markets

Exhibit 304. Corporate Training Methods as % of Total Training

Hours: 2001 vs. 2008
Training Delivery: 2001

Training Delivery: 2008

0 Instructor Led
(Classroom)

S Instructor Led
(Distance
Learning)

0 By Computer (No
Instructor)
OOther

Source: Training magazine.

Costs and
benefits: IL T vs.
technology-based
delivery; although
delivery largely
determined by
available cont ent

The costs and benefits of each delivery method (i.e. , ILT and technology-based training) vary,
in our view. Although a company using an instructor-based model may be able to license content more cheaply. it would also incur greater real estate and staffing (e.g.. instructors) costs
than a technology-based provider. Concurrently, e-leaming requires high fixed costs but is
more scalable and. consequently, generates greater margins. For example, Skii!Soft (SKIL), a
business and IT skills e-learning content provider, generates gross margins in the high 80%
range. Furthermore, although ILT tends toward better retention of the training material, technology-based trc1.ining learning has improved, aided by better workforce perfomJancemanagement tools (WPM).
In addition, in the 2008 Business Intelligence Board survey conducted by Chief Learning Of
fleer magazine and IDC showed that ILT was used nearly twice as often for business skills
training when compared to IT skills training. However, according to the same survey, the
largest determinant of delivery modality among Chief Learning Officers (CLOs) is content
availability, suggesting they are at tin1es limited in their selection of delivery methods based
on the appropriateness of available tmining (see Exhibit 305).

Exhibit 305. Drivers of Training Delivery Modality (2008)

Determined by available content
Entirely instructor prescribed

1------------------....,j
""'""".;.;..;..;.;..;.;..;.;.,;.;..;,j

Mostly instructor prescribed

Dont offer blend

__j

:=::J

Mostly students choice :-]

Entirely students choice ,_

10

20

30

40

50

60

70

Source: IDC's CLO Business Intelligence Board Survey and BMO Capital Markets.

A m ember of BMO

Financia l Group

324

September

2009

Corporate Training

BMO Capital Markets

Companies
moving toward a
more blended
"holistic"
approach

Although we believe no single solution has demonstrated the perfect mix of cost and benefits.
we see signs that the market is moving toward a blended solu6on tl1at incorporates both 1LT
and teclmology-based training with a company's specific irrfonual or social learning network.
Ultimately. tlus "holistic" approach to leanling should provide a more seamless learning environment where leamers can move among various delivery modalities in an intuitive way that
best suits tJ1eir purposes.
Leanling consulting finn Bersin & Associates believes that more than 35% of corporate training programs are now blended in some way, although a lmost 75% of organiza6ons still do not
believe they have a sound and complete blended-learning strate&'Y for their corporate training
programs. Blended leanling is perceived as being able to raise the level of content retention
and provide leamers with material that can be used outside of the classroom. Employees can
access teclmology-based training on a just-in-time basis for their most pressing needs, yet rely
on an ILT model when they need to obtain greater depth, hands-on experience. a11d when they
can afford the time to do so.

e-Learning Overview
Clear long-term
shift in learning
hours moving
toward
technology,
though share has
receded in recent

While there has been a gradual move to technology fromlLT when measured by the meU1ods
of training (as shown by the Training magazine data cited earlier), there has been a sinlilar
shift when measuring the number of teaming hours. According to ASTD's 2008 State of the
Industry Report, instructor-led real-time training had fallen to 58% of totalleanung hours in
2007 from 78% in 1999- though t11is was an increase from 54% in 2006- wlule technologybased training had increased its " share" to 35% from 14% in 1999- though this was down
from 2006' s all time high of 40% (see Exhibit 306).

years

Exhibit 306. Average % of Learning Hours by Delivery Channel

( 1999-2007)
80%
0 Instructor-led real time II Technology-based

70%
~
0

60%

:::J

50%

Ol

c
;:: 40%
(ij

~
0

30%
20%
10%
0%
1999

2000

2001

2002

2003

2004

2005

2006

2007

Source: ASTD's 2008 State of the Industry Report and BMO Capital Markets.

A m ember of BMO

Financia l Group

325

September 2009

Corporate Training

BMO Capital Markets

While many corporations scaled back the ir early investments in e-leam ing as the ROI did not
twn out as well as initially expected, we believe the ROI on a weU implemented e-Jeaming
strategy still can be attractive to organizations of all sizes.
Improved outlook
for corporate eJearning recovery

e-/earning market:
projected 8.6%
CAGR through
2014

Although we do not believe the spending frenzy of the late 1990s will return., we do expect a
" leaner and meaner" environment that favors larger vendors with single touch-points to the
customer that can implement an overall blended-learning approach a longside a WPM strategy. Growth in e-learning will likely be driven primarily by the demand for increased training
efficiency. The flexibility tl1at e-learning provides should a lso benefit organizations as many
continue to customize content to fit their specific needs. In addition, with the US representing
75% of e-learning subscribers, we see faster growth outside the domestic market over the ne>.t
five years, perhaps in the double-dib>it range, particularly the EMEA and APAC (Asia Pacific)
markets.
Whi le estimates from International Data Corporation (IDC) differ from those of other sources
and are typicaUy more optimistic than ours would be, we nevertheless used IDC data because
of its thorouglmess to help frdme our segmented discussion of the corporate training market.
According to IDC. the US corporate e-learning market is expected to generate roughly $13.1
billion in 2009 revenues, growing at roughly an 18% CAGR from $3.5 billion in 2001, although annual growth has slowed each year since peaking at 27% in 2006. Based on IDC estimates, we forecast growth should continue to decelerate s lightly to roughly an 8.6% CAGR,
with revenues growing to $19.8 biUion by 20 13 (see Exhibit 307).

Exhibit 307. Corporate e-Learning Revenues {2001-2014E)

Corporate e-Leaming

$20

30%

-+-- y/y% change

c:
:c

15

"'c:

10

'6
c:

tJ)

20%

.g>

15%

-5"'

10%

.<::>.

25%

5%
0

0%
2001

2002

2003

2004

2005

2006

2007

2008 2009E 2010E 2011E 2012E 2013E 2014E

Note: Shaded area represents recessionary period . Source: BMO Capital Markets and IDC.

According to Bersin & Associates, there are four clear stages of evolution in the e-learning
process (see Exlubit 308). Most companies currently faU into stage two (expansion) or three (integration and alignment). As each stage has very unique characteristics, we believe organizations can use this model to assess the maturity of their learning programs and prepare for the
next stages.

A m ember of BMO

Financia l Group

326

September 2009

Corporate Training

BMO Capital Markets

Exhibit 308. e-Learning Stages

Stage

Characteristics

Stage 1: Getting Started

Cost savings, off-the-shelf courses, LMS implementation

Stage 2: Expansion

Blended learning, rapid e-learning, greater use of

LMS, custom courses

Stage 3: Integration and Alignment

Governance, HR integration, performance management

Stage 4: Learning on Demand

LCMS, performance support, search

Source: Bersin & Associates and BMO Capital Markets.

As with any technology-driven industry. e-learning is constantly changing. A number of current trends include:

Podcasting. A podcast is a series of digital-media files which are distributed over the
Internet using syndication feeds for playback on portable media players and computers
and is one of Ute newest trends in deLivering e-Ieaming content. eMarketer estimates there
were roughly 17.4 million people in 2008 that downloaded podcasts monthly. Furthermore. that audience is projected to increase to 37.6 million in 2013 (16.7% CAGR), representing approximately 9% of total internet users in 2008 and 17% in 2013. As such.. organizations have begun and will likely continue to embrace podcasting teclmology as a
medium for delivering on-demand training.

Mobile learning. Willt an estimated 3 billion mobile phones deployed worldwide and the
continued advance of 3G networks and smartphones, the wireless phone is becoming a
new delivery cham1el for e-learning. We believe this channel may be especially popular
in developing countries where mobile communication devices are the preferred coimuunication method owing to lack of infrastructure.

Social networking. Whi le "collaboration" has always been a strength of thee-learning de-

livery channel, it has come into its own, in our view, via the social networking trend. Social networking is the grouping of individuals into specific );.'TOups and tl1e advent of the
internet has significantly driven the growth of tllis trend. Willie fuere are a number of external social networking sites (e.g., Linkedln, MySpace, Facebook) that have learningrelated networks, a number of corporations are starting to facilitate internal idea generation and sharing through their own internal social networking sites.

A member of BMO

Gaming. While the evolution of game-based training can partially be attributed to the
need to attn1ct and retain ymmger workers who have come to expect some form of careerrelated interactive or Web 2.0 ehlJerience. it is also increasingly seen as an effective way
to model complex organizational ~md market systems in a way that impru1s strategic
knowledge to employees. According to CLO magazine, simulation-based leanling experiences can help trainees master new subjects up to 40%-70% faster, and can reduce
the time needed for new employees to reach a level of competent perfonna:nce by 80%.

Financia l Group

327

September 2009

Corporate Training

BMO Capital Markets

Virtual environments. While the techi10logy is stiiJ emerging. online 3-D environments
are increasingly being utilized by corporations as " destinations" for company events- including trdining exercises. Probably the most well known virtual environment, Second
Life. has become home to dozens of large international corpomtions seeking ways the
technology can add efficiencies to operations. However, while virtual environments may
offer unique solullons to online learning and content delivery for training., we beHeve tJ1e
technology is still in its nascent stages and expect tJmt in a recessionary environment corporations will not make substantial new invest111ents in unproven technologies will10ut
clear cost-savings potential.

"Self-published content." According to Bersin.. about 70% of all corpomte learning takes

place through on-the-job experiences. As such, corpordte employees may be a valuable

source for knowledge transfer. While blogs (self-published webpages) and wikis (selfpublished webpages that aJiow anyone to edit them) first gained acceptance outside the
corporate environment, they have become more mainstream in many corporations, in our
view. Companies have found they are useful tools in sharing knowledge throughout their
fmns, although they probably do need to be monitored to ensure they conform to the corporate viewpoint. Bersin believes this type of self-pubHshed collaboration is the next
wave of e-leaming, i.e.. e-learning 3.0 :following online courseware (e-leaming 1.0) and
live e-learning (e-leaming 2.0).
According to IDC, the e-leaming market can be segmented into three categories: content, infrastmctme. and services.

e-Learning Content
Corpomte e-learning content companies create, package, and deliver their own content libraries to clients. Typically, the content is delivered in the form of a "course" that covers a variety
of subjects, r'cillging from infonnation teclmology to business skills to project management.
This content can be "off the shelf" or customized for/by the end user. The e-leaming content
segment is tJ1e largest of tlle three e-leaming segments
Corporate e-learning was initiaHy mainly delivered via CD-ROM or videotape, but in the late
1990s, the internet emerged as the primary medium for delivering online training. In our view,
web-based e-learning is vastly superior to CD-ROM-based instmction because it provides
customers witl1 a richer, non-linear learning experience. In addition. we believe web-based eleaming empowers the content provider with the ne:dbility to constantly update and/or
clmnge certain learning modules, thus creating a more complete teaming experience for the
end user.

Internet has
emerged as
primary medium

ln the early days of the e-learning content market (way back in the late 1990s), a battle
emerged between companies tl:tat specialized in custom content (i.e., meeting specialized
needs. such as teaching customers how to use the nuances of their clients' products) versus
the off-the-shelf content providers (i.e., non-custom). The custom-content providers (e.g.,
DigitaiThink, acquired by Convergys (CVG) in March 2004) were the sexier of tJ1e two
groups. initially attracting greater investment attentjon and capital

When the downturn in corporate spending began, however, custom projects were considered
more discretionary and were one of the first areas to be cut. Off-tl1e-shelf content providers,
although not totally spared in these cutbacks, were somewhat more protected owing to their

Off-the-shelf or
customization?

A m ember of BMO

Financial Group

328

September 2009

Corporate Training

BMO Capital Markets

relatively lower cost of content. In addition, the higher fixed-cost component of the customcontent providers-their consultants, or the people that actually do the customization-also
hurt these companies more (on a relative basis). We believe many organizations that installed
off-the-shelf solutions were surprised by the amount of additional work involved in integrating the solutions with existing network infrastmctures (i.e. , no such thing as " plug and play").
Although most vendors changed tJ1eir product offerings to require little or no customiz.ation,
tmfortunately, this has led to a view t11at much of the e-learning content market is a commodity, wlrich has spurred significant price competition and corporate discounts.
e-Learning
content market
could grow at an
11.4% CAGR to
$13 billion in 2014

From 2001 through 2009 (estimated), thee-learning content market increased at a 17.5%
CAGR to $7.6 billion from $2.1 billion. with much of that growth coming from 2006 through
2008, where mmual growth rates were in the mid- to high-20% range. Using IDC data, we
forecast that growth will slow a bit from recent levels, but nevertl1eless be robust, with the
corporate e-leaming content market increasing at roughly an 11.4% CAGR to $13 billion in
2013 (see Exhibit 309).

Exhibit 309. Corporate e-Learning Content Revenue (2001-2014E)

$15

) skills

30%

-+- yty o/o change

25%
20%

.,

15%

g>

10%

-5"'

5%

'$.
>-

>:.

0%
..So/o
-10%

2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets and IDC.

Later in tlus section, we discuss the growth drivers that w1derlie tl1e business skills and IT
skills training market overall. In the late 1990s, investors initially favored IT e-learning content providers more than the business skills companies (e.g., the Sma.rtForce versus SkiliSoft
debate), owing to hyper-growth in IT inf1<1structure build. the perceived supply drought of
skilled workers, and the assumption that IT training would best migrate to the e-leaming envirorunent. Although opportmuties in the sector may still be significant. we believe IT-focused
e-learning content companies were particularly harmed during the sector' s downturn earlier
tlris decade owing to reduced demand for TT training; budgetal)' cuts in lT departments; offshoring of IT workers: and costs associated with systems rollouts (often in the mid- to highsix-figure range). Meanwhile, we believe business skills learning took on greater importance
for companies, especially as compliance demands escalated. However, we believe that gap
has narrowed and both subsectors should grow at roughly the same rates over the next five
years.

IT more affected
in this decade's
downturn

Customers'
preferences for
content
components have
changed

A m ember of BMO

After what was a frustrating start for some, we believe customers have re-entered t11e eleaming content market. a penny and pound wiser. We believe that customers prefer to seek
single-source vendors to help t11e1n manage as much of the entire process as possible. Although it may be unlikely that one provider could ably handle the entire e-learning needs of a
customer, we believe content providers w ill need to broaden their content. and/or btmdle and
Financia l Group

329

September 2009

Corporate Training

BMO Capital Markets

build a lliances with larger vendors to capture share. In our view. several other key ingredients
appear critical to growing an e-leaming content business in both good and bad economic periods. In order of importance, we have highlighted some of these key elements:

A large content library. In our v iew, e-learning content providers must maintain large libraries to maximize their attr'dctiveness to their clientele. We believe customers demand a
tremendous breadth of content to serve the needs of their organizations.

Low-ticket items. Content companies tJ1at are faring relatively well, such as SkiliSoft

(SKIL). are selling products witJ1 an average-annualized ticket price in t11e low-$100,000
range. By contrast, we believe some of the customized content companies, whose offerings were at one time priced in the seven figures, have seen sales deferred more often.

Flexible architecture. This provides customers with the ability to customize content and

infrastructure requirements, thus facilitating delivery and reducing implementation time.

Modular courses. These courses allow students to quickly absom a specific topic via
discrete pieces called "learning objects." We believe customers prefer "learning objects"
as they enable students to better pinpoint the pieces of information they need without going through an entire course. This is one reason we do not believe completion rates are as
important for e-leaming courses when compared with ILT courses.

Strong third-party resellers. In tough times, resellers may provide a solid supplemental

revenue stream and may be particularly helpful in overseas expansion (where products
are typically localized to the target country' s language), where it may not be practical to
maintain a direct sales force. However, in cettain cases. we have seen some weakness in
third-party sales as companies concentrate on selling their own products before reselling
those of other providers.

Conformance to standards. Although there is still more t11a.n one " standard" to conform

to (e.g., SCORM), we believe most companies do not wish to be locked into using products that lack the capacity to be interoperable with others.
Skii/SofUNETG
merger created
world's largest e/earning content
provider

T he e-learning content segment is very fragmented. including a wide variety of companies

such as consulting fmns to "pure-play" publishers. In May 2007, SkillSoft (SKJL) completed
the acquisition of Thomson NETg to become what we believe is the world' s largest provider
of off-the-shelf e-leaming content. However, with an estimated $309 million in CY2009
revenues (most of which is content-related), SKTL would only represent roughly 4% of the estimated $7.6 biiJion in e-leaming content revenues estimated to be generated in 2009. Other
well-known providers of e-learning content include Allen Intemctions, Cengage (fonnerly
TholUSon), Corpedia, NUT 's (NllTLTD.NS) Element K. Leam.com, PDI Ninth House, Australia-based SAl Global (ASX:SAI), OK-based Thirdforce (AIM:THF) and Washin!,>ton
Post's (WPO) Kaplan Financial, in addition to general corporate education publishers such as
the American Management Association, Franklin Covey (FC), Harvard Business School Publishing and The Ken Blanchard Companies.

A m ember of BMO

Financia l Group

330

September 2009

Corporate Training

BMO Capital Markets

e-Learning Services
This segment refers to the services that vendors offer to assist companies in developing, designing, integrating, and supporting their training goals, and managing the outcomes. This is
the second-largest component in e-leaming, foLlowing content. The e-leaming services providers range from global consulting firms such as Accenture (ACN) and IBM (IBM), to
smaller firms such as Bersin & Associates.
The solutions within this segment tend to fall in two categories: business services and technical services.

Business services - describes the consulting services vendors provide that address educational needs (e.g., who needs to learn. and what system best delivers this need). content
development (e.g., how to tum 'knowledge capital" into a training module) and other logistical goals, such as purchasing ~md transaction processing. The content creation part of
tlus service is a substantial portion of tlus segment and involves original material, not
customized versions of off-the-shelf software.

Technical services - describes tJ1e consulting work surrounding an overall strategy of

software analysis (e.g.. what software meets our goals?), network planning (e.g .. what
network configuration do we need to meet our learning goals?), systetns integration (e.g.,
how do we integrate content from different vendors?), and hosted learning (e.g., should
we outsource some/all of the teclmology?).

A growing portion of the e-leaming services segment involves long-tem1 outsourcing of an

entire training function, more conunonly included in a broader business processing outsourcing (BPO) service. wluch we discuss in detail in the next section.
We believe tl1at e-leaming services is the fastest-!,rrowiug sub-segment of the e-leamiug market. Two consequences of the vast investment in e-leanling during its " hot" phase were overspending by clients/users tl1at now needs to be rdtionalized ~md saturation in ilie market by
vendors and suppliers. In the wake of the recession, we believe organizations now want guidance on how to use their infrastructure investments more effectively, clarity in dealing with
multiple vendors. and a simple stntcture to integrate their existing systems. We believe t11ese
three issues will drive demand in ilie services business.
According to IDC estimates, the corporate e-learning services segment grew at a 19.7% CAGR
to ~m estimated $4.2 billion in 2008 from $985 million in 2001. However. much of tlus growtl1

e-learning
services sector:

came in 2003 through 2007 when this market was still in its infancy, as growth slowed to 2% in
2009, likely O\\~ng to t11e recession. IDC projects t11at growth should accelerate somewhat once
tlle recession ends. altllOugh will like ly not reach its prior levels. Based on IDC forecasts. we
project e-learning services revenues will grow roughly 2.7% mmuaLiy to roughly $4.8 billion in
2013 (see Exhibit 310).

projected 2.7%
CAGR through

2014

A m ember of BMO

Financia l Group

331

September 2009

Corporate Training

BMO Capital Markets

Exhibit 310. Corporate e-Learning Services Revenue {2001-2014E)

$5

35%

-+-yly % change

30%
25% ~
c:

20% ~
u

15%

10% ~
5%

o +J~~=-~2-rL~rL~-=~-=~-=~~~~~~-+~~~~~-+ o%
2001 2002 2003 2004 2005 2006 2007 2008 2009E2010E2011E2012E2013E2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets and IDC.

e-Learning Infrastructure Solutions

Building an e-learni.ng system from scrdtch typically requires an e-learni.ng infrdstructure and
service that turns infonnation into lesson plans, prepares it into learning modules, delivers it
to the user, reports on user perfonnance, and evaluates the success of the course. Ideally, in
our view. it would also include a feedback loop that enables the user to participate in improving tl1e overdlllearni.ng experience. Contrary to its title, we have defmed e-leam.ing infrastructure to exclude hardware. routers, and otl1er network infrastructure equipment involved in delivering the modules to the user. This is the smallest of tl1e three components within e-lea.rning,
follow ing content and services.
According to IDC, thee-learning infrastructure solutions market grew at roughly a 16% CAGR
to an estimated $1.4 b illion in 2009 from $422 million in 200 I. Based on tl1eir forecasts which
shows growth slowing a bit going forward, we estimate spending in this categmy should increase roughly 8.2% annually (CAGR), reaching nearly $2.1 billion by 2014 (see Exlubit 311).

e-/earning
infrastructure:
projected 8.2%
CAGR through
2014

Exhibit 311. e-Learning Infrastructure Solutions Revenue {20062014E)

$2.5

lii&EI Management systems

c::::::J Authoring systems

30%

c::::::J Communication systems c::::::J Other

-+- yly% change

25%

2.0
:0

.!:
!!!.

"'
Ql
:::l

c:
Ql

20%
1.5
15%

10% >.

>
Ql

0.5

5%

0.0

0%
2006

2007

2008

2009E

2010E

2011E

2012E

2013E

2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets and IDC.

Financia l Group

-5"'
~
>-

1.0

a:

A m ember of BMO

Ql
C>

c:

332

September 2009

Corporate Training

BMO Capital Markets

The e-leaming infrastructure segment can be broken into four sub-segments:

LMS i ntegrates eJearnin g content

Management systems,

Communication systems,
Autltoring systems,
Other e-learning infrastructure.

Management systems (e.g., LMS). This category includes leaming management systems
(LMS), which refers to the software tltat integrates and assembles content from various eleaming publishers, ad1ninisters, tracks, a11d reports on lessons (online or classroom based),
and provides trdck:ing and assessment. Additionally, the LMS provides data about tr-dining activities and enables companies to correlate training outcomes with performance.
According to the 2009 Corporate Learning Factbook, Bersin believes that roughly 40% of all
US training organizations have some fonn of LMS - up slightly from 38% in 2008. Wlule
more than 80% of large enterprises have some LMS in place, only 36% of smaH businesses
are using an LMS. In our view, this presents the best growth opportunity as the LMS market
for large and mid-size businesses is more saturated. However, as most large organizations
have on averdge 16 different sources of e-learning content. each with its own software interface, we believe there will be continued demand for integr-<1tion and incremental enhancement
of l11is content.
Available pricing data shows costs for tltese systems are widely varied, but are generally
priced for volume and contract length discounts, wluch, we believe, makes Ute investment
more prohibitive for smaller companies. Exhibit 312 contains average price data compiled by
Bnmdon Hall research for both locally installed and vendor-hosted (SaaS) LMS systems.

Exhibit 312. Vendor Hosted (SaaS) and Local LMS Prices (2009)
SaaS
Size/Learners
500
10,000
25,000
100,000

1-year
Avg . Price Per Learner
$31, 136
$62.27
129,286
12.93
232,898
9.32
570,625
5.71

3-year w/ maintenance
Avg. Price Per Lrn/Per yr
$68,977
$45.98
10.48
314,444
568,201
7.58
1 ,288,053
4.29

Local
Size/Learners
500
10,000
25,000
100,000

1-year
Avg . Price Per Learner
$31,221
$62.44
155,599
15.56
286,768
11.47
738,192
7.38

3-year w/ maintenance
Per Lrn/Per yr
Avg. Price
$48,230
$32.15
260,568
8.69
486,076
6.48
4.02
1 ,204,941

Source: Brandon Hall Research and BMO Capital Markets.

Wlrile changes in data definition makes historical and forecasted trend comparisons difficult, we
believe that, after a solid start, the early part of this decade was a difficult one for many LMS
providers. While business did improve steadily over the past few years, we believe the current
recession will have a considemble impact on the industry in the near tenn. According to a survey conducted in March and April 2009 by Learning Circuits and eLearning News, 44% of organizations were plan11ing to keep tl1eir current LMS system, while only 24% were planning on
upgrading. (We note the survey did postulate tlus could be t11e result of a !ugh satisfaction rate,
A m ember of BMO

Financia l Group

333

September

2009

Corporate Training

BMO Capital Markets

and not solely related to the economic downturn). As such. LMS providers will likely see slowing growth in the near tenn, until corporate technology spending is reinvigorated.
Management
sys tems p roj ected
to increase at a

According to Bersin & Associates, mid-size companies are driving most of the current growth in
the segment as tl1ey utilize SaaS learning platfonns for HR infmstmcture projects. Bersin estimates tl1e LMS market will generate $817 million in revenues in 2009. up 8.4% from $754 million in 2008, slowing from 10.6% annual growt:J\ in 2007. Based on IDC forecasts, we project
management systems revenues will grow roughly 8.3% annually to over $1.1 billion in 2014
from an estimated $762 million in 2009 (see Exhibit 313).

8.3% CA GR

through 2014

Exhibit 313. Management Systems Revenue (2006-2014E)

Management systems

$1 .5

:c
.!:

25%

-+-yly% change
20%

10%

Ql
Ql

c::

15%

Cl)

"'c::

Ql

C>

1.0
0.5

>
Ql

5%

0::

2006

2007

2008

2009E

2010E

2011E

2012E

2013E

>.

>.

2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets and IDC.

Most LMS

Initially, most e-leaming buyers were convinced they needed an LMS as the backbone of their

system s ar e

e-learning strateb'Y to maximize the benefits of their programs. However, we believe customers have underutilized LMS for a number of reasons. including a rush to purchase systems
without fully understanding their uses, inherent complexities, and the lack of compatibility

currently
underut ilized

with the content. According to Online Learning magazine, " despite the million-dollar price
tags associated with purchasing and customizing an LMS. less than 20% of any company's
employees will actually use the system." In our view, along with the impact of the recession,
the msh to invest in these systems is also to blame for the current cooling off that the industry
is experiencing as budget-strapped companies renew tlleir focus on ensuring maximum ROI.
Continuing

We believe LMS are an important component of corpomte e-leaming, but the complexities of

rat ionalization

integrating these systems with the content and coursework, t11e high (often hidden) costs, and
cUent aggTavation at dealing with multiple vendors may result in near-tem1 spending and roiJout delays. As such, we expect continued rationalization in the industry, along the lines of the
March 2004 merger of Click2Leam and Docent to fonn SumTotal Systems and its subsequent
October 2005 acquisition of Pathlore, ilie May 2005 acquisition of learning solutions provider
ThinQ Learning Solutions by Saba (SABA) and ilie May 2007 acquisition of NETg by Skill-

within this
segment

Soft.
Still a fragmen ted
indus try

Nevertheless, t11e LMS space is still somewhat fragmented. However, we note tllat SumTota1
Systems (taken private by Vista Equity Partners in July 2009 for $160 million) and SABA are
now at ~mnual revenue run-rdtes above $100 million mrd some of the large players that dominate the ERP segment (e.g., Omcle, SAP,) have recently made sizeable inroads in tllis market.
Other LMS providers - besides StunTotal Systems ~md Saba - include privately held Certpoint, ComerstoneOnDemand, GeoLeaming, Leam.com, Meridian, Mzinga, Outstart, P lateau
and Softscape.

A m ember of BMO

Financia l Group

334

September

2009

Corporate Training

BMO Capital Markets

Co mmunication systems (i.e., l ive or virtual classrooms). These are applications designed

to have individuals or groups interact via distance learning and are sometimes referred to as
collaborative or "webconferencing" companies. We believe collaboration is a core aspect for
learning, in general and over the internet, as it allows businesses to host "net meetings" or
other types of simulations with audio and video capabilities with both internal (e.g., employees) and external (e.g., clients and customers) partjes.
In our view. collaborative tools represent a cost-effective option for corporations to conduct
classroom presentations and/or hold any type of meeting. Although the fear of travel resulting
from the September 11 fallout was one of the key drivers for an initial pick-up in interest in
collaborative learning, we think the pace of teclmological development and the growing
prevalence of Web 2.0 products has fueled sustained growth in tll.is area. According to IDC estimates, the communications systems learning sub-segment was roughly $298 million in 2009
and, based on U1ose estimates, we forecast growth of 8% annually to $437 million by 2014 (see
Exh:ibit314).

Communication
systems market
projected 8%
CA GR through

2014

Exhibit 314. Communication Systems Revenue (2006-2014E)

Communication systems

$0.5
:0
.5
~

.,
Ql

:::J

c:

20%

-+-y/y% change

0.4

15% 8,

0 .3
10%

-5"'

5%

c:

0.2

Ql

>
Ql
0::

0.1
0.0
2006

2007

2008

2009E

2010E

2011E

2012E

2013E

2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets and IDC.

Most collaboration products provide similar functionality, including application and file sharing, private- and public-chat features, Q&A sessions, wh:iteboarding, audio, and video. However. we believe certain nuances within the products can enhance their specific offerings. For
example, Saba's Centra Live collaborative tool allows participants to interact simultaneously,
while other "live" e-learning software programs only allow one person at a Hme to use tJ1e
wh:iteboard function. Although Uus may seem like a minor difference. we believe issues of
usability are cmcial in any attempt to recreate a classroom experience over the internet.
Attractive in both
good and bad
times

We believe e-learning collaborative software is an attractive product for corpomtions in good

economic times. and that it may serve even greater value in challenging times as a result of its
cost-saving capabilities. For example, many collaboralive e-Jearning companies provide
voice-over-fP features in Lheir web-based platfonns. Tlus capabi lity not only provides a richer
environment for a distance meeting (compared with a voice-only conference call), but is also
typically more cost effective than long-dist~mce phone calls.
Recent years have seen a number of larger compru.ues enter the e-learning collabomtive sector
via acquisition. including: MicroSoft' s (MSFf) purchase of Placeware (April 2003: now renamed as Live Meeting), Saba' s (SABA) purchase of Centra Live (October 2005), Cisco Systems' (CSCO) purchase of WebEx (May 2007), AT&T's (T) purchase of Interwise (November 2007). Although these providers may modestly differ in fue makeup of tl1eir products

A m ember of BMO

Financia l Group

335

September

2009

Corporate Training

BMO Capital Markets

(which typically sell for $5.000-$30.000), we believe that they a ll fal l under the same umbrella through their belief that communication is the key to e-leaming.
Authoring systems. Authoring systems refer to software to help create e-learning content
and nmge from simple tools (e.g.. no need to write programming code) to the complex. According to IDC estimates, the authoring systems sub-segment may be the fastest growing within
the e-leaming infrastmcture segment This segment was roughly $220 million in 2009 and based
on IDC estimates. we forecast it will grow roughly 8.4% annually to $329 miLlion by 2014. A
number of companies provide e-Jeaming authoring tools, including Adobes Captivate, Articulate's Presenter, Assima, Omcle's (formerly Global Knowledge' s) OnDemand, Mzinga's (formerly KnowledgePlanet) FireFly and Trivantis' Lectora.

Authoring
systems market
projected 8.4%
CAGR through

2014

" Other" e-learning infrastructure. Tll.is is a catchall of important "add-on" tools, such as the
following:

Learning content management (LCMS), which enables companies to create and deliver
customized and personalized leaming modules. This was formerly a segment of LMS but
has since been broken out. The content development functions associated with LCMS are
more prevalent in the "services" segment of the business (see below).

Training analytics applications, wll.ic h analyze and evaluate corporate-training performance. It is a component of the overall workforce perfonnance-management (WPM)
software space.

Competency management solutions (CMS), wll.ich can identify skill gaps in personnel
and intervene through tmining and simulations. This is similar to t11e above in t11at it is a
sub-segment of the workforce perfonnance management.

Market Overview: Segmented by Content Type

At one time, sebTJ.nenting the training market by learning content was fairly easy as there were
a number of vendors that specialized in each area. However, in recent years, most providers
have broadened their range of product offerings, making tll.is segmenta tion somewhat more
diffi.cult. Nevertheless. we have attempted to segment the corporate training market by learning content as follows :

Business skills training content: a wide rdnge of generdl and industry specific training
topics sector (i.e., managerial training, professional development, and other ..soft skills"
delivered to managers and general employees),

Business skills
training should
grow at higher
rates than IT skills
training in the
near term

A m ember of BMO

IT skills training content: focused on subjects relating to infonnation technology (i.e..

more traditional rules-based training mainly delivered to technical staff).

Wllile the IT skills training marl<et had dominated in the 1990s, the "tech wreck" had an adverse impact on tllis type of spending, allowing business skills trdining to overtake it in 2002
-a trend that has continued to date. Wllile we believe this "share shifting'' will continue in the
long-mn, we tJunk the recession will cause ll.igher near tenn growth in business skills development such as supervisory. management and leadership related traitling as Uus is seen as
more necessary in an economic downturn. Nevertl1eless, our long tenn forecast includes
growth in IT training spend, though at lower levels (see Exhibit 315).
Financia l Group

336

September 2009

Corporate Training

BMO Capital Markets

Exhibit 315. US Corporate Training Expenditures (2000-2014E)

$32

IT Skills Training Spending

:0

(/)

16

())

:J

c:
>
())
())

0::

I
I
I
I
I
I
I
I
I
IIIII

Business Skills Training Spending

24

'2

0 +---~--r---r---~~--~--~--~--~--~--~---r---r--~--~

Source: BMO Capital Markets and IDC estimates.

Business Skills Training

Since 2000, the business skills segment has grown faster than the IT skills segment. While the
addressable market for business skills training may be larger than that for IT skills training (i.e..
entire corporations may need soft skills tmin.ing although only a select portion may need specific
IT skills sets) whet11er owing to the Jaw of large nwnbers or other reasons, we no longer believe
that is the case.
Using data fTom the May 2006 IDC forecast on US training (latest available), the business
skills training market size is expected to be roughly $15.4 billion in 2008. or about 60% of all
corpordte training spending. This represented roughly a 6.3% CAGR from the $8.9 billion
spent in 2000. We note these projections do not reflect the 2008-2009 recession and are likely
overly optimistic. Based on IDC forecasts, we believe that business skills tmining will grow at
roughly a 6.5% CAGR to roughly $21 billion in 2014. At that point, business skills training
would comprise roughly 65% of the $32 billion total US training expenditures in 2014, up
from roughly 45% in 2000 (see Exhibit 316).

Business skills
training: 6.5%
CA GR to $21
billion in 2014

Exhibit 316. US Business Skills Training Spending (2000-2014E)

$20

Business Skills Training Spending

-+-yly% change
c:

:0
C)

=c:

12%
10%

15

(I)

8%

10

6%

-5

"0

4%

(I)

[!;

.,g>

2%

Note: Shaded area represents recessionary period. Source: BMO Capital Markets and IDC estimates.

A m ember of BMO

Financia l Group

337

September 2009

Corporate Training

BMO Capital Markets

We believe the recession has heightened companies' focus on cultivating more "soft" business leadership and administrative skills as these are seen as central to navigating a volatile
business envirorunent, whereas the " hard" technical skills trajning is viewed as somewhat less
vital to survival. An April 2009 survey by Novation shows that business skills trajning. such
as supervisory/management and leadership/executive development training were cited most
fTequently as areas where corporations would increase funding in 2009 (see Exhibit 317). Tlris
was simi lar to the study results regarding expected 2008 training spend, which coincided with
the weakening of the economy at the end of 2007.

Recent survey
i ndicates
continued
pref erence for
business skills
train ing i n soft
economy

Exhibit 317. Expected Change in Funding Relative to Prior Year

{2009)
Category
Supervisory/management skills
Leadership/executive development
Employee Career development
Executive/Management Coaching
Communications
Change management
Technciai/Professional Skills
Project management
Diversity & inclusion
Interpersonal/Teamwork
Strategic Planning
Global Management Skills

Type
Business skills
Business skills
Business skills
Business skills
Business skills
Business skills
Business/IT skills
Business skills
Business skills
Business skills
Business skills
Business skills

More
56%
43%
38%
36%
35%
34%
29%
29%
25%
22%
22%
9%

Sam e
28%
40%
41%
34%
40%
29%
43%
40%
52%
59%
40%
20%

Less
10%
11%
11%
13%
8%
18%
18%
13%
9%
11%
9%
6%

Source: Novation, Inc. and BMO Capital Markets.

However, even when looking past the impact of the recession, we believe business skills
training will continue to outpace the size of the IT skills training sector driven by several factors including:

Need to improve general skill sets. Despite the billions spent on education in the US

each year, many workers are ill-prepared for the basic skills needed to compete in a
g lobal marketplace. In the Workforce Readiness Scorecard published as part of a 2006
study by the Conference Board, HR executives were asked to assess the attributes of new
entrants into the US workforce by educational attaim11ent. As shown in Exhibit 31 8,
while skills sets appear to improve based on the level of academics achievement, for the
most part a sizeable portion of these new workforce entrants were judged to be deficient
on basic skill sets such as communications. professionalism/work ethic and critical thinking/problem solving- the types of skills taught in many business skills training programs.
While tlris study was conducted three years ago, we believe its conclusions are still valid
today.

A m ember of BMO

Financia l Group

338

September 2009

Corporate Training

BMO Capital Markets

Exhibit 318. Workforce Readiness Scorecard for New Workforce

Entrants (2006)
High School Graduates
Deficiency
Written Communications
ProfessionalismNVork Ethic
Critical Thinking/Problem Solving
Oral Communications
Ethics/Social Responsibility
Reading Comprehension
Teamwork/Collaboration
Diversity
Information Technology Application
English Language

Excellence
80.9% None
70.3%
69.6%
52.7%
44.1%
38.4%
34.6%
27.9%
21.5%
21.0%

Two-Year CollegeJTechnical School Graduates

Excellence
Deficiency
Written Communications
47.3% Information Technology Application
Writing in English
46.4%
ProfessionalismNVork Ethic
31 .3%
Lifelong Learning/Self Direction
27.9%
Creativity/Innovation
27.6%
Critical Thinking/Problem Solving
22.8%
Oral Communications
21.3%
Ethics/Social Responsibility
21 .0%
Four-Year College Graduates
Deficiency
Written Communications
Writing in English
Leadership

Excellence
27.8% Information Technology Application
26.2% Diversity
23.8% Critical Thinking/Problem Solving
English Language
Lifelong Learning/Self Direction
Reading Comprehension
Oral Communications
Teamwork/Collaboration
Creativity/Innovation

25.7%

46.3%
28.3%
27.6%
26.2%
25.9%
25.9%
24.8%
24.6%
21.5%

Note: Highlighted areas are related to leadership training. N.A. - Not Available. Source: The Ken Blanchard Companies and BMO Capital Markets.

Deve loping le ade rs, succe ssion planning a nd tale nt manage me nt As corpomtions
have shifted their emphasis to retaining, developing, and grooming new managers for flllure leadership positions. business skills training has grown in importance, in our opinion.
The Bureau of Labor Statistics predicts that between 2006 and 2016, 24.2 million people
will leave the labor force, many of whom are in senior leadership positions -the greatest
number over one decade in t11e country's history. According to a 2007 study by Deloitte.
79% of companies report a big gap in their talent pipeline, and 40% of executives rate the
problem as "acute." While there is anecdotal evidence the recession has slowed the mte
of retirement as older workers face depleted retirement accounts and more uncertain futures - possibly lessening the severity of a labor shortage - we do not believe this has
significantly altered the overall corporate focus on leadership training. In the annual Corporate Issues Survey conducted by The Ken Blanchard Companies, this focus was cited
as a top management issue in each of ilie last six surveys (see Exhibit 319). As such, we
believe le-adership-related training will continue to be a priority for most corporations.

A m ember of BMO

Financial Group

339

September 2009

Corporate Training

BMO Capital Markets

Exhibit 319. Top Management Issues (2003-2009)

Issue
Managing change
Creating engaged workforce
Reducing costs
Developing potential leaders
Selecting and retaining key talent
Customer loyalty
Communicating mission, vision, values
Aligning culture with strategy
Increasing innovation
Succession p lan ning
Employee flexlbllity/responslveness
Managing a virtual workforce
Managing a shri nking talent pool
Understanding generational influences

2003
N.A.
47%
58%
74%
55%
46%
N.A.
N.A.
32%
48%
39%
N.A.

2004
N.A.
48%
49%
58%
55%
45%
NA
N.A.
31%
36%
44%
NA

2005
N.A.
48%
50%
58%
53%
41%
N.A.
N.A.
32%
34%
35%
N.A.

2006
N.A.
53%
45%
63%
57%
41%
N.A.
N.A.
36%
42%
39%
N.A.

2007
N.A.
54%
43%
64%
62%
48%
N.A.
N.A.
25%
38%
26%
NA

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

2008
55%
58%
38%
53%
50%
38%
39%
37%
29%
27%
22%
11%
18%
11%

2009
59%
57%
52%
50%
39%
39%
35%
33%
31%
26%
25%
14%
13%
12%

Note: Highlighted areas are related to leadership training. N.A. - Not Available. Source: The Ken Blanchard Companies and BMO Capital Markets.

Continuing education. Virtually every professional designation (e.g.. CPA. MD) re-

quires some continuing education. typically a minimal number of hours annually, alIJlough these requirements may vary by state. We believe the trend is moving toward increasing requirements. as clients demand that professionals stay at tJ1e cutting edge of
their specialties. We aJso believe that professionals wilJ increasingly want to acquire
some form of continuing education to improve their lifetime income stream. As such,
continuing education should continue to drive demand for business skills training (owing
to reb'Ulations), IT trdining (owing to new teclmologies), and healthcare training (owing
to such developments as HIPAA [Health Insurance Portability and Accountability Act] as
well as for advanced medical devices). Among t11e publicly held providers, Healthstream
(HSTM) is a leading player witl1 an online platfonn for providing training on medical
products ~md continuing education, while DeVry 's (DV) Becker Professional Review
segment specializes in training for professional licensing in both accounting (CPA) and
financial services (CF A).

Managing risk. Earlier this decade, when 1J1e outsourced training market was shrinking,

training budgets declined across all industries, except in finance and banking. During a
period when the stock market was declining, tlus industry alone increased training budgets owing to, we believe, the implementation of programs to tran1, initiate, ~md maintain
compliance with new regulations adopted after the Spitzer settlement and Srubanes-Oxley
(SOX) regulations. Although many of these programs required a one-time investment,
most require ongoing updates.
To manage compliance risk, we believe companies need to establish efforts to enforce
codes of conduct that communicate proper and legal conduct relative to ethics, conflicts
of interest, se~'ltal harassment. workplace safety, and security. States such as California
have established regulation that mandates supervisory staff to undergo two hours of harassment training eve!)' two years. Although much of this c~m be taught using "off-theshelf' packages. some wiU likely require custom-built lesson plans. Either way, we believe that risk management will drive much of the growth in business skills training over
the next two to three years. Examples of companies tJ1at specialize in this area include
privately held Corpedia, which provides off-the-shelf business management and compli-

A m ember of BMO

Financia l Group

340

September

2009

Corporate Training

BMO Capital Markets

ance training via e-Ieaming courses. as well as a number of companies that are part of
Kaplan Professional, owned by The Washington Post (WPO).
In addition, corporate sentencing guidelines were modified in November 2004 to add ethics to what was largely seen as purely compliance-based standards. Many of the major
conflict-of-interest cases brought by ex-Attomey Geneml Spitzer involved practices that
seemingly passed muster when viewed through a compliance lens, but would not have
done so when analyzed against an ethics framework. as they involved breaches of trust
and other blatantly unfair activities. This, we beLieve, has created another major area for
corporate tmining.

Productivity. We believe increasing worker productivity and decreasing downtime are

key drivers to corporate learning. Although perceived as difficult to measure, new analytics, such as dashboards, should enable companies to analyze the returns on their investment in training programs as tJ1ey would any other investments. Dashboards can be
used to measure penetration of training, alignment of skills with roles, and overall performance.
Many stories exist about the value of focused. well managed corpordte training (and the
waste from ill-conceived programs). For example, Century 21 Real Estate Corporation
recently sought to increase the effectiveness of its salesforce by providing sales training.
This involved training more than I00,000 sales associates worldwide. The company
adopted an e-leaming approach that reduced the time its associates waited for training, as
they no longer had to wait for classes to be scheduled in their territory. After implementing the training, Century 21 conducted a study that revealed trdined employees closed
14% more deals than those who were not trained.

IT Skills Training
IT skills trc1ining is typically marketed to technical staff that develop, install. and/or use hardware, software, systems, and networks (i.e., operating systems such as Unix, Windows, and
Windows NT); networking (LAN/WAN routing and switching and network security); and
internet skills (e.g., Java, HTML, Web server, and internet development tools). Per IDC's
March 2009 forecast, the US lT skills training market is expected to generdte roughly $10.4
billion in revenues in 2009, up from its trough of $7.8 billion in 2003, but still below its peak
of nearly $11 billion generated in 2000.
IT sk ills traini ng:
1.2% CA GR to $1 1
b illion in 2014

A m ember of BMO

Just as the industry was starting to pick up folJowing the severe slowdown after the " tech wreck'.
and the ensuing growth in off-shoring technical labor, we believe the recession has been another
setback for Lllis sector. While certain pockets of strength have emerged enabling some growt11 in
tllis segment over recent years, given the adverse impact of the recession and likely lagged recovery, we estimate the IT skills training market should grow at a relatively slow (when compared to previous estimates) compound annual rate of l.2% reaching roughly $11 billion in
2014, roughly equal to its 2000 peak (see Exhibit 320).

Financia l Group

341

September 2009

Corporate Training

BMO Capital Markets

Exhibit 320. US IT Skills Training Spending (2000-2014E)

IT Sk1lls Training Spending

$12

10%

-+-yly% change
5%

"'c:
"'

.r::.
u

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E2010E2011E2012E2013E2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets and IDC estimates.

IDC breaks down the IT skills training market into three segments: application development
and deployment, system infrastructure. and applications (see Exhibit 321).

Exhibit 321. US IT Skills Training Spending by Primary Market

(2000-2014E)
$12

;:

:a

Application development and deployment

Applications

System infrastructure software

ID

..
:::>

c:

2000

2001

2002

2003

2004

2005

2006

2007

2008 2009E 2010E 2011E 2012E 2013E 2014E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets and IDC estimates.

The applications segment, while t11e largest of the three at an estimated $5.5 billion in 2009, is
expected to be the slowest growing of the group, increasing at an 0.9% CAGR from 2009 to
2014 to reach $5.8 billion in revenues. While this segment incorporates the implementation of
enterprise-wide training programs (e.g., content and ERM applications) to enhance and integrate sales ~md other internal processes, it is also driven by compliance tmining for Smbanes-

Applications is
largest segment

Oxley. the USA Patriot Act, HIPAA, the Government Paperwork Elimination Act, and other
regulatory issues.
Software as a
service (SaaS)
model becoming
popular

Software as a service (SaaS), where an application is hosted as a service and provided to customer across the internet. is becoming increasingly more recognized as a delivery model for
these types of applications. A November 2008 Gartner repmt cited tl1at nearly 90% of organizations expected to maintain or grow usage of SaaS over the next years. While tllis survey
was conducted in June a nd July 2008 - before the fuU onset of the current recession - we
nevert11eless expect SaaS to be a continued growth driver in lllis segment owing to its inJ1erent
lower cost and ease of use, as there is essentially no deployment or end-user rollout training
needed.

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Somewhat stronger growth (1.7% CAGR) is expected in t11e system infrastmcture software
training segment. While, overaU demand for this segment has slowed, growth is expected to
be driven by the continued emphasis on IT security and privacy issues, and the growing demand for ITIL (Information Technology Infrnstmcture Library) management systems. We expect the market to reach just about $3 billion in 2014- up from the $2.7 billion estimated for

Training in
system
infrastructure
software and
applications

2009. Application development and deployment is also expected to be a faster-growing subsegment in the IT skills training space, increasing at a roughly 1.6% CAGR through 2014,
reaching nearly $2.3 billion in ll1at year- up from $2. 1 billion estimated in 2009. Growt11 for
tilis segment is mainly driven by demand in database management and elsewhere, however,
we expect the recession has caused companies to delay or forego system-wide changes that
would require comprehensive training programs.

expected to be
faster growing

Certification - a
growth driver in IT
skills training

W1rile the growth drivers in the IT skills market are similar to t110se in t11e business skills market, we believe one stands out -certification. No matter where we are in a labor cycle, in our
view, employers can use standardized IT certification to provide a benclunark for quality and
quickly assess ti1e skill level of job candidates. However, much of the growth in IT certification occurred prior to 2000, when there was a severe IT skills shortage. According to IDC
data, IT certificate testing grew roughly 75% from 1998 to 2000 when it peaked, and ti1en declined roughly 10% annually tJ1rough 2003. In August 2008, IDC estimated total US IT certification revenue to reach about $973 million in 2009. and grow at a roughly 5% CAGR to
$1.1 billion in 2012, althoug h given the severity of the downturn since then, these projections
will likely prove to be aggressive.

Trends in Corporate Training

A number of trends have emerged wifuin the corporate training sector in the past few years trends we believe will continue for some time.
Outsourcing all or parts of training functions. We believe outsourcing of aH or parts of
corporate training funct)ons is gaining greater acceptance. In tJ1e last three Training magazine
annuaJ Industry Reports, users were asked which functions they were currently outsourcing.
As shown in Exhibit 322, instruction (60%) and custom content development (39%) were the
top two cited in 2008 - sinillar to 2007 - ti10ugh ti1e percent of companies outsourcing custom
content development in 2008 declined somewhat versus tile prior year.

Outsourcing
instruction and
custom content
development
most popular

A m ember of BMO

Financia l Group

343

September 2009

Corporate Training

BMO Capital Markets

Exhibit 322. Component of Training Outsourced {2006-2008)

c 60%

0 2006 1!12007 0 2008

:g

c 50%

:::J

01

40%

:::J

VI

'S 30%
0

VI
Gl

'2 20%

()

10%

0%
Instruction

Custom content LMS ops/ Hosting Learner support

LMS
administration

Source: Training Magazine and BMO Capital Markets.

ln its annual Business Intelligence Board survey, ICD and Chief Learning Officer magazine
have asked CLO's why they outsource training functions. As shown in Exhibit 323, the pri-

Scalability and
access are

mary reasons in l11e 2007 survey (latest available) were scalability (29%) and access (23%).
While it was difficult to compare responses to smveys of prior years owing to changes in the
survey answer ty pes, we note it was interest-ing that "cost reduction," which was cited by 38%
of the respondents in the 2005 smvey, was only cited by 9% of the respondents in the 2007
survey. A February 2008 article in Chief Learning Officer magazine cited a minimum of a
20% cost savings is typically expected when outsourcing training ftmctions. 1t is likely that

reasons for
outsourcingalong with cost
reduction

cost reduction will be cited by a greater number of respondents when the 2009 survey results
are released.

Exhibit 323. Reasons for Outsourcing Train ing {2007 and 2005)
2007
To deliver more training than internal resources can provide
To gain access to better technical and/or training expertise
Other
To increase speed to market
To better align learning function and business strategy
Cost reduction

29%
23%
15%
14%
9%
9%

2005
To increase speed to market
Cost reduction
Other
To better align learning function and business strategy
To move training from fixed to variable cost
To increase competitiveness
Not a core competency

41%
38%

31%
27%
27%
20%
20%

Source: IDC's CLO Business Intelligence Board survey and BMO Capital Markets.

A m ember of BMO

Financia l Group

344

September

2009

Corporate Training

BMO Capital Markets

Ou tsourcing
trainin g as part of

BPO

In addition. we believe outsourcing of the entire l!aining function is becoming more commonplace and fits well within the mega-trend of business process outsourcing (BPO) as it allows companies to focus on their own core competencies, reduce costs (e.g., real estate, utilities, administrative support. and payroll costs). and obtain better access to world-class
capabilities. BPO setvices have become commonplace in many areas (e.g., payroll) as corporations have long used external vendors to provide training. Based on IDC estimates, t11e US
market for BPO services is expected to grow at annual rate of 9.4% from roughly $67 billion
in 2009, to about $105 billion in 2014.
WlriJe outsourcing of the corporate training function is still in its nascent stages, in our view,
it has grown dramatically in recent years. Per IDC. outsourcing traitring BPO is expected to
generate roughly $2.8 billion in 2009, up 21% CAGR from 2005' s $1.4 billion. However, the
impact of the recession is expected to take its toll, wit11 growth slowing to a 4% CAGR before
reaching $3.5 billion in 2014 (see Exhibit 324).

Exhibit 324. US Training BPO Spending (2005-2014E)

$4

US Training BPO --y/y% change

45%
40%
35%
30%

25%

8,

c:
~
u

20% eft.

15% ~
10%
5%
o +-~~r-~~--~~--~-+--~-r_L~~~--~~==+=~==~~~ 0%
2008
2009E
2010E
201 1E
2012E
2013E
2014E
2005
2006
2007
Note: Shaded area represents recessionary period. Source: BMO Capital Markets and IDC estimates.

After evaluating the number of pros and cons surrouncling the decision to outsource a training
function (see Exhibit 325), we believe the benefits could outweig h the risks. However, given
the proprietary nature of many training courses, we do not believe outsourcing the entire training department will reach the same level of outsourcing as other types of HR functions.

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Exhibit 325. Pros and Cons of Outsourcing Training Function

Pros

Cons

Desire for standardization of training

practices

Internal opposition (i.e. , current training

department may not wish to put itself out
of business)

Vendors benefit from attractive econo- Current training may involve multiple demies of scale not available to corpora- partments, making it difficult to truly outtions
source
Ability to transfer fixed costs (e.g., staff, May be difficult to create performance
infrastructure) for corporations into vari- benchmarks for vendor
able costs for vendor
Training is not a core competency for
most companies

Current training may include proprietary

information which corporations may be
unwilling to outsource

Most companies lack expertise and/or

do not have access to state-of-the-art
procedures

Little industry success to date

Most companies are not as familiar with Greater risk of cost overruns
external vendors and their product offerings, leading to the need for third-party
assistance
Source: BMO Capital Markets and IDC

A Jist of the top 20 training outsourcing companies as ranked by TrainingOutsourcing.com

can be found in Exhibit 326.

Exhibit 326. Top Companies in the Training and Development

Outsourcing Industry (2009)
Company

Ticker

Headquarters

Accenture
Adayana Inc
Affiliated Computer Services, Inc
CGS - Computer Generated Solutions
Convergys
Delta College Corporate Services
Development Dimensions International
Expertus
General Physics Corportion
Geo Learning
IBM
Intrepid Learning Solutions
KnowledgePool
Logica
MicroTek
NIIT, Ltd./Element K
QA
Raytheon Professional Services
RWD Technologies
The Training Associates

ACN
Private
ACS
Private
CVG
Private
Private
Private
GPX
Private
IBM
Private
Private
LOG.L
Private
NIITLTD.NS
Private
RTN
Private
Private

New York, NY
Indianapolis, IN
Irving, TX
New York, NY
Cincinnati, OH
University Center, Ml
Bridgeville, PA
Mountain View, CA
Elkridge, MD
West Des Moines, lA
Armonk, NY
Seattle, WA
Berkshire, UK
London, UK
Downers Grove, IL
New Delhi, India (World Headquarters) Rochester, NY (USA)
Slough, UK
Dallas, TX
Baltimore, MD
Westboro, MA

Source: Traininglndustry.com and BMO Capital Markets.

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Indian e/earning
offshoring
industry to grow
at15% CAGR

Organizations still
dissatisfied with
performance
measurement
analytics

Offshore development of e-learning projects. We believe another emerging trend is one of

US companies offshoring their e-learning projects. According to the Corporate Learning
Factbook 2007, roughly 11% of companies offshore their custom content development. Similar to other outsourcing efforts. the principal driver of offshoring. in our view, is cost savings.
According to consulting fim1 Bersin & Associates, savings from offshore development is estimated to be roughly 20%-40% in most cases and even exceeding 40% in some cases. Companies that can provide offshoring assistance include SlFY Limited (SIFY) and Tata Interactive Systems, both of which are India-based companies. According to ValueNotes research,
the Indian e-leaming offshoring industry is expected to grow at an ammal rate of 15% from
roughly $341million in 2008 to $603 million in 2012- though growth is e:.\.'Pected to be more
subdued through 20 10 owing to the recession.
Providing performance measurement tools. Training providers are now more often asked
to prove the ROT of their offerings. and it is somewhat difficult to measure perfonnance improvement following training. According to CLO magazine 2009 Business Intelligence Survey, 58% of organizations were either dissatisfied or very dissatisfied with their organizations
learning and development measurement efforts, while only 24% are satisfied or very satisfied.
As such, many training providers are now offering Workforce Perfonuance Measurement
(WPM) tools, al so known as " learning analytics" as part of their training offerings. While
these tools are typically used tluoughout t11e entire human capital management process (i.e.,
beyond the training component), we believe vendors such as training providers are helping to
increase interest in adopting these tools as a way of justifying the sales of their own products.
IDC estimates tl1at the WPM marl<et will generate an estimated $1.9 billion in sales in 2009,
up 18.7% (CAGR) from the $665 million generated in 2003. While growth is expected to
slow over the next five years- to 11.1% CAGR reaching over $3.3 billion in 2014- we
would sti II expect training providers to offer U1ese tools going forward.
Software as a service (SAAS). Many corporate training providers - including Cornerstone
onDemand, GeoLeaming, Learn.com. Mzinga (formerly KnowledgePlanet) and SkillSoft
(SKIL) are marketing their offerings via a software as a service (SAAS) model. Under this
model, an application is hosted as a service provided to customers across the internet. Customers benefit in tem1s of reduced software maintenance. ongoing operation. and support as
t11ere is no need to run these programs on t11eir own system, while software vendors can better
protect their intellectual property and establish an ongoing revenue stream. Tn addition, this
model has helped these and other companies ex'Pand adoption into smaller and midsize clients
whose budgets may be better suited to purchase training products tlus way.
New types of corporate funding . 1n recent years, we have seen the development of new
methods of financing available to help support corporate training initiatives. Organizations
such as CAEL have developed tools such as Lifelong Learning Accounts (LiLA s) -a sort of
40l(k) program where employees use paycheck deductions, typically matched by their employee. to further their education. which could continue to enhance the availability of tuition
assistance funds. While the LiLA Act (HR 6036) was introduced in May 2008, it was not
passed ~md to date it has not been reintroduced in the current session of Congress. In addition,
in late July 2007, IBM (IBM) announced it would begin to offer " learning accounts" to its
employees, which will be modeled like 40l(k) plans in that employees, wouJd contribution up
to $1 ,000 annually (and IBM would match up to 50%) into these accounts for which the funds
would be used to enhance skills. While much of these funds may be directed to def,'J"ee-

A m ember of BMO

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Corporate Training

BMO Capital Markets

oriented programs run by postsecondary providers. we expect corporate training providers

could benefit as well.
Postsecondary schools developing corporate universities. The term "corporate university" refers to the in-house training ~md education departments of corporations. In our view.
the purpose of corporate universities can be categorized into three types: 1) reinforcing and
perpetuating current cultures and competitiveness, 2) agents to manage and implement
change. and 3) a force to drive and shape the future strategy of the organization.

Corporate universitjes are not a new concept. They have existed since the 1940s and gained
some prominence in 1955 when GE (GE) opened its first training facility. Prominent corporations with universities include IBM (IBM). Microsoft (MSFI). Motorola (MOT), Oracle
(ORCL), SAP (SAP), and Sun Microsystems (SUNW).
In the late 1990s, the corporate university concept became more accepted, as companies used
this as a differentiating factor in attracting and retaining employees. While data are limited,
Corporate University Xchange estimated that the number of corporate universities grew to
more than 2,000 corporate universities in 2001, from only 400 in 1988, with roughly 40% of
the Fortune 500 companies operdting a corpordte university. In 2001, the Xchange estimated
that by 2010 the number of corporate universities would exceed 3,700.
However, we believe the traditional model of the ''corporate tLniversity" - where employees
take courses related to required job skills for college credit -has changed substantially. Today, the Xchange estimates this model isn' t very prevalent, rather, corporate learning has
evolved toward providing specific skills to employees that coincide with the company 's strategic goals through a more adaptive combination of leaming methods specific to the company. Tlus view is reflected in research by Bersin & Associates, wluch found organizations
are changing training methods from the centralized university model to one based on shared
learning services. a method of learning in which the cotLrses and content are delivered to the
conswner. We a lso believe t11at corporate-sponsored degrees, in which at least a portion of
tuition costs are covered by the corporation, may be another factor that slows the );.'Towth of
corporate muversities.
We believe existing postsecondary institutions could play a key role in that migration. In our
analysis of trends in the postsecondary sector, we cited the working-adult segment as a key
driver for future growth. We believe a nwnber of wotking adults may choose an accredited
instjtution (i.e., college or university) over a non-accredited training provider when seeking to
fcuther their education to gain the added portability of a de);.>ree.

Postsecondary
schools should
play a key role

In addition, we believe a number of postsecondary institutions are now aggressively marketing their own corporate training capabilities. According to the Xchange, postsecondary
schools- particularly the for-profit schools- are well positioned to provide the kind of nimble and adaptive training programs today's corporations require. While Ulis is more accepted
in the diploma/certificate area (e.g., Universal Technical Institute provides technician training
programs for a number of original equipment manufacturers, such as BMW and Toyota
(TM)), it is becoming more popular for higher skilled positions as well. Many schools see this
market as one that could provide another funding source in an environment when traditional
funding sources (e.g., state and local tax revenues) are still under pressure. It is fairly com-

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BMO Capital Markets

monplace now. for traditional colleges and universities to market their "continuing education"
or " professional development" programs.
Other
corporations
entering the fray

rn addition., we have seen companies not normally associated with training providing such
services for cozpordtions. Although many of these companies are using the "distancelearning" angle to enter tilis sector, others are entering via more traditional methods. These
include a number of staffing companies, such as Manpower (MAN), that are using training as
a metl10d to recruit temporary employees. As these companies are actually providing tJlis service for free or at minimal cost (in exchange for certain minimum hours worked), we believe
this may further exacerbate pricing pressure on the industry.

One-stop

Battle between one-stop shopping and point solutions. From a vendor point of view. one of

shopping may be

ti1e ongoing battles has been choosing ti1e optimal selling strate!,'}', focusing on one specific
product line (e.g., content) or attempting to sell a multitude of products under one umbrella. A
study by IDC indicated that one-tllird of all buyers of learning infrastructure went to purchase
this through a single vendor. Although we believe most customers would prefer a single vendor
to potentially obtain volume discounts and maintain one key sales and customer-service focal
point, in practice. we have fatmd tlus "one-stop shopping" strategy to be less successful.

preferred in
theory ...

... But it rarely

works in practice

It may work within

specific verticals

In fact, we have found few, if any, industries in which tl1e one-stop shopping provider has the
best (or among the best) products and services across all the verticals in wllich it sells. Cozporate e-learning has not been an exception to this rule. in our view. In addition. we believe selling content and selling inf-rastmcture are two vastly different processes, typically selling into
two different points within an organization., such as content to human resources and infrastmcture to an IT department with the latter typically requiring more technical expertise. We
believe this was one of the flaws underlying Smart.Force' s original plan to become a one-stop
shopping provider within this segment.
This is also one of tl1e reasons we believe the SkiUSoftiNETg merger (completed in May
2007) has succeeded. While the combined company does offer a number of its own services
and infrastructure, the main focus is on its off-ti1e-shelf content products. In our view, tllis is a
much easier "one-stop" sell. as tl1e aspects of tlle sales process and product integrdtion are virtually identical, regardless of ti1e type of content being sold.
Battle between "pure-play" and traditional providers. Since the advent of the e-learning

industry in the late 1990s. pure-plays have faced the constant threat of entry from more " traditional'' providers. In the content segment, this would include traditional publishing companies
(i.e., Pearson [PSO]) and teclmolo!,>y providers (i.e. , ffiM), ~md even some of the larger consulting firms in tl1e custom-content arena (i.e., Accenture). In ti1e infmstmcture area. tllis
would include ERP providers, such as SAP and Or.:1cle (ORCL). Willie tl1ere have long been
fears that one of the larger technology companies (Microsoft (MSFT), Yahoo (YHOO), and
recently Google (GOOG)) would aggressively enter this space. their entrance to date has been
fairly limited.
Industry
slowdown has
allowed external
players to be
more cautious
A m ember of BMO

However, as ilie slowdown in corporate spending on training earlier tllis decade slowed the
pace of competitive entry from companies outside the sector. we expect tl1e recession has created further setbacks to possible new entrants. On the upside, however, we believe, these
companies now have more of an opportunity to gauge the landscape of tJlis sector and choose
whether to enter the market through internal start-ups or acquisitions. Many external compaFinancia l Group

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nies have partnerships with " pure-play" providers that we believe are means for these companies to become familiar with one another, poten!lally leading to more pennanent relationships.
NETg sale shows
strategy reversal
from one
traditional
publisher

rn addition, there was a recent " high profile" retreat by a traditional publisher from ti1e corpordte tmin.ing area after much time and money was spent building a business. In October 2006.
Thomson (TSO) annotmced its would be selling its Thomson Leaming division. which provided education and testing services in the higher education and corporate area. As part of tllis
dives!lture. it sold its NETg corporate training business to SkillSoft (SKIL) - a business for
which growtJ1 had been supplemented through a number of prior acquisitions, including FinancialCampus (March 2004), Education To Go (March 2004), NetLearning (June 2004),
KnowledgeNet (August 2004) and ARC Publislling Co. (September 2004).
However, this does not mean mergers and acquisition activity in the sector has slowed. On the
contrary, we have seen a number of high-profile deals "vitllin the industry, as companies enhance ilieir service offerings as well as involving external players. Among ti1e more notable
transactions:

A m ember of BMO

In May 2009, private equity finn Accei-KKR (KKR) mmounced plans to acquire SumTotal Systems (SUMT) for approximately $124 million. This put the company "in play" and
it ultimately af:,Teed to be acquired by ~mother private equity finn. Vista Equity, for $160
million later that month. That deal c losed in July 2009.

In May 2007, SkiiiSoft (SKIL) acquired NETg from Thomson Corporation for roughly
$270 million in caslt

In Auf:,'11St 2006, India-based global leaming solutions provider NUT (NIITLTD.NS) purchased content provider Element K for roughly $40 millioiL

In December 2006. private equity :firm Thoma Cressey Partners acquired Excelligence
Learning for roughly $125 miiJion.

In May 2006, Affiliated Computer Services (ACS) acquired Intellinex, an Ernst & Young
enterprise. to enJ1ance its learning solutions HRO capabilities. The purchase price was
roughly $75 million.

In October 2005, Saba (SABA), known m<linly as an LMS provider, acqtlired Centra,
known for its webconferencing services. for roughly $43 million.

In May 2004, custom-content provider DigitalThink was acquired for $120 million
(roughJy 3x revenue and a 30% market premium) by Convergys (CVG), a company better known for its integrated billing, employee-care, and customer-care services, a lthough
one making greater inroads into the outsourced e-learning business.

In March 2004, SumTotal Systems (SUMT) was created via the combination of
Click2Learn and Docent. two publicly held companies that mainly specialized in LMS.

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A list of recent mergers and acquisition activity in the corporate LTaining sector can be found
in Exhibit327.

Exhibit 327. Corporate Training Recent Transactions

($in millions)
Anne.
Date
Jun-09
Jun-09
May.Q9
May.Q9
May-09
May-09
Apr-09
Apr-09
Apr-09
Mar-09
Dec-08
Dec-08
Dec-08
Dec-08
Dec-08
Nov-08
Nov-08
Nov-08
Oct-08
Aug-08
Aug-08
Jul-08
Nov-07
Aug-07
Jul-07
Jun-07
May.Q7
May.Q7
Jan-07
Dec-06
Dec-06
Nov-06
Nov-06
Oct-06
Oct-06
Oct-06
Oct-06
Oct-06
Sep.Q6
Sep-06
Aug.Q6
Jul-06
Jul-06
Jul-06
Jun-06
Jun-06
Jun-06
May.Q6
May.Q6
May.Q6
May.Q6
May.Q6
Apr.Q6
Apr.Q6
Apr.Q6
Mar-06
Feb-06
Jan-06
Dec-05
Oct-05
Sep-05
Aug-05
Jul-05
Jul-05
Jun-05
Jun-05
May-05

Acguiror

Targ et
lnfo2People
Aston Education
Americas Best Real Estate Education Corporation
Americas Best Distance Education
National Dental Network
Techniques.org
Listen Up Group
Virtual Heroes
SumTotal Systems
Corporate Dynamics
Enb Consulting
Fronter
JSL Communications
Atteon Training
Chamber Corporation
Connected Learning
Zenos
Care Resources
Wealth Advisor Institute
Edu-Performance
lnterverbum Group
Credu(2%)
LaserGrade
Shared Insights
Thomson Prometric
Lominger
Mindleaders
Finsia Education
Advantage Performance & Real Learning
Amencan Graphics Institute
Psychological Services
Richardson Group (Investment)
Novations Group
Thomson NETg
Intrepid Learning (Investment)
American Safety & Health Institute
Cnsis Prevention Institute
Pan Am International (Flight Simulator Division)
Advantage Performance & Real Learning
Home Study Educators
Manugistics Group
ElementK
Excelligence Learning
Bioniche G lobal Learning
Ocean Systems Engineering
Education lns1ght
Learning Annex (Minority)
Matrixone
Peters Man agement Consultancy
Centra Software
Tribeca Learning
lntellinex
Datastream Systems
Manugistics Group
A Consulting Team
Matrixone
Centra Software
Datastream Systems
NEON Systems
Pathlore
Creative Learning Media
Plumtree Software
Epic Group
American Guidance Service
IIRGiobal
eMind
THINQ Learning Solutions

Twice IT Training
SOLI
360Training
360Training
360Training
Regis Learning Solutions
SAl Global
Appl1ed Research Associates
Vista Equity
Retail Business Development
Moody's Anatytics
Pearson
American Safety & Health Institute
Sichuan HAITE High-tech
New Mountain Partners
PEQ Consulting
Melorio
Res-Care
Advisors Forum
Parta Growth Capital
AAC G lobal, Sa noma
Korea Investment Trust Management
Psychological Services
Mzinga
Educational Testing Service
Kom Ferry
ThirdForce
Kaplan
BTSGroup
Aquent
ABRY
Clearlight Partners
MCGGiobal
SkiiiSoft
Investor Group
Riverside Company
Riverside. Company
Amencan Capital strategies
BTSGroup
36otraining
JDA Software Group
NIIT
Thoma Cressey Equity Partners
Unrted BioSource
Apogen Technologies
Cookie Jar Education
Apax Partners
Dassault Systemes
GP strategies
SABA Software
Kaplan
Affiliated Computer Services
lnfor Global Solutions
JDA Software Group
Helios & Mason
Dassault Systemes
SABA Software
lnfor Global Solutions
DataDirect Technologies
SumTotal Systems
T hirdForce
BEASystems
Huveaux
Pearson
lnforma
Kaplan
SABA Software

Transaction
Value
NA
$2.5
NA
NA
NA
NA
NA
NA
$1600
NA
NA
$23.8
NA
$17.6
NA
$1.6
$50,5
NA
NA
$1.3
NA
NA
NA
NA
$435.0
$24.0
$18.0
$29.7
$24.0
NA
NA
NA
$913.0
$269.7
$1 1.7
NA
NA
$58.0
$24.0
NA
$247.6
$40.0
$125.0
NA
$53,0
NA
NA
$310.3
NA
$68.3
$55.5
$75.0
$157.7
$247.6
$1 1.4
$310.3
$43.1
$157.7
$51.3
$47.7
$10.3
$136.0
$39.4
$270.0
$1,400.4
NA
$90

Transaction Value I L TM
Revenue
EBITOA
NA
NA
NA
NA
NA
NA
NA
NA
1.4x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
1.4 X
NA
1.0 X
NA
NA
NA
NA
NA
NA
1.7 X
NA
NA
NA
NA
1.1 X
NA
NA
0.3x
0.9x
NA
NA
NA
NA
NA
NA
2.5x
2. 1 X
0.9x
22x
1.4 X
0.4x
2.6x
1.1 X
1.6 X
2.5x
2. 1 X
2.0x
1.4 X
1.5 X
3.6x
2.5x
NA
0.6x

NA
NA
NA
NA
NA
NA
NA
NA
54.2x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
8.2x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
10.9 X
NA
NA
NA
14.5 X
NA
NA
NA
NA
NA
NA
15.5 X
12.6 X
NA
NA
10.0 X
12.1 X
NA
NA
12.7 X
NA
41.5 X
NA
NA
7.3x
9 1x
NA
NA
0.9 x

NA - Not A v ailable . Source: BMO Capital Markets and company reports.

A member of BMO

Fin a n ci a l G r oup

351

September 2009

Corporate Training

BMO Capital Markets

Competitive Landscape
As the corporate training market is very fragmented and crosses a number of different sectors
(i.e., publishing, tradilional universities), we believe it is important for these vendors to understand what their clients seek when choosing a training vendor. In the aforementioned May
2009 IDC ~md CLO Magazine Training Service Provider Survey, the three most important
qualities in choosing a training provider were:

Training expertise

Subject matter expertise, and

Acting as a business partner.

These were the same top three items cited in the 2008 survey.
In addition to the characteristics cited above, we believe the better training providers - especially in the content area - have the following characteristics:

A m ember of BMO

Superior educational pedagogy. We believe the best training providers are tJ1ose that
have developed proprietary methodologies proven to enhance learning outcomes. This
should provide these companies with a competitive advantage, as we believe customers
are increasingly demanding proof of perfonnance improvement prior to purchasing training products and services.

Proven return on investment (ROI). Tllis is the key driver to ~my major corporate e>.-penditure today, in our view, especially considering the economic enviromuent as companies renew their focus on ROl. We believe training providers with strong leaming analytics tools
tJ1at can quan6tatively demonstrate how their products and services enhance a client's bottom line will have a competitive advantage.

Certified. To measure the effect)veness of a service, results need to be measured and

based on objective criteria. Certification provides individuals and employers with a standardized measurement of one's tmderstanding of a technical area. We are confident companies that market the effectiveness of their product with the use of objective data will
increase market share.

Blended "holistic" learning ability. While the intemet will continue to reduce the cost
of corporate training over time, we think the line between e-learning and lLT will continue to be blurred as buyers place higher importance on the effectiveness of training, regardless of delivery method. W11ile pressure to keep costs low will persist, we think vendors that can effectively combine multi-modal training products with t11e individualized
needs of a company's informal corporate learning environment will have a competitive
edge.

Breadth and depth of services. A company that provides a wide array of quality services should have a distinct advantage in this fragmented market.

Offering "hot" courses. We believe those companies offering IT training know the pain
in going from "hot to not." Given the sizable amount of fixed costs in tlus business (e.g..
real estate, full-time employee salaries), it is important to be flexible in one's product offerings (altJ1ough we acknowledge t11e start-up time needed in course development). We

Financia l Group

352

September 2009

Corporate Training

BMO Capital Markets

believe current " hot" courses include security (including infonnation security). regulatory
compliance (e.g., HJPAA, Sarbanes-Oxley), and manageriaVsupervisory skills.

Brand name. A quality reputation should go a long way in a market wit11 more than
5,000 providers. We believe that training companies that supplement their content with
strong marketing and advertising campaigns will increase their visibility and improve
their brand awareness.

Recurring revenues. Companies with long-tem1 contracts have historically been less
susceptible to market fluctuations. This !,>reater sense of flmmcial stability should enable
management to spend more time focusing on future growth strategies.

Other Risks
In addition to an intense competitive environment, other risks are inherent in investing in a
corporate training provider. in our opinion.

Continued recession. We believe corporate training companies are very adversely impacted
by econom.ic downturns. As this year has shown, when budgets are cut, training is usually one
of the first areas hit. We hate to categorize this expense as discretionary, but recent experience
shows this label may be somewhat valid, with the caveat that companies that can provide
training that is viewed as more "necessary" will fare better than others.
Aging labor force. The earlier in an individual's career that training is provided, the longer a
company should benefit fTom a more productive employee. It stands to reason that as the baby
boom generation (representing a majority of the labor force) ages, corporations may be less
willing to fund training for these employees.
Decline in average tenure. Because training can be seen as an investment in future productivity, corporations that provide training typically wish to hold on to their employees for as
long as possible to maximize the net benefit. In a tight labor market. employees historically
have been more likely to change jobs. Although that concern may have lessened in the current
environment, as the economy improves, corporations may be reluctant to enhance their training ex-penditures if they fear they may not reap the benefits.
A list of fmancial and operational metrics for the publicly held corporate training providers
in Exhibit 328.

c~mbe found

A m ember of BMO

Financia l Group

353

September 2009

Corporate Training

BMO Capital Markets

Exhibit 328. Trailing 12-Month Operating and Valuation Metrics: Selected Publicly Held
Corporate Training Companies
Revenue ($MM)

Corporate (traditional)
Franklin
GP Learning
Covey Strategies
Tree

f.
Rating
Price Target
Operating Performance
FY End
LTMQtr. End
Revenue ($MM)
Gross Profit ($MM)
EBITOA ($MM)
EBIT ($MM)
Pretax Income (SMM)
Net Income ($MM)
Free Cash Flow ($MM)
Gross Margins (in%)
EBITDA (in%)
EBIT (in%)
Pretax Income (in %)
Net Income (in %)
Free Cash Flow Yield (in%)
ROIC: LTM
Valuation Metrics
FYEnd
LTM Otr. End
Price (9109109)
Shares Outstanding (MM)
Market Cap ($MM)
Net Debtf(Cash) ($MM)
Enterprise Value ($MM)
CY EPS:
2008A
2009E
2010E
Two-Year CAGR
P/E:
2008A
2009E
2010E
EV/Rev. (LTM)
EV/EBITDA (LTM)
EV/EBIT (LTM)
EV/Free Cash Flow (LTM)

.!:!BE

Corporate (e-leaming)

GROUP
MEDIAN

Not Rated Not Rat ed Not Rated

N.A
N.A.
N.A.
08
5109
$148.0
84.6
3.5
(3.9)
(2.4)
(4.0)
(4.6)
57.2%
2.4%
-2.7%
-1.6%
-2.7%
-5.0%
-3.4%

12

6109
$236.3
35.0
19.2
16.0
0.3
(32)
20.1
14.8%
8. 1%
6.8%
0.1%
-1 .3%
8.5%
-3.4%
12

09
6109
$145.0
80.7
16.8
10.4
8.4
5.4
8.1
55.6%
11.6%
7.2%
5.8%
3.7%
5.6%
70%

HealthBlackboard stream
8888 HSTM
~
Not
Rated Rated
N.A.

MM

SmartPros
Ltd

fBQ

GROUP
MEDIAN

CORP.
TOTAL
MEDIAN

57.4%
17.0%
8.2%
8.2%
8.4%
11.8%
25.9%

56.4%
12.9%
7.0%
3.0%
2.0%
9 .9%
24.3%

Not Rat ed
N.A.

12
6109
$55.4
29.7
9.4
4.5
4.5
4.7
6.5
53.7%
17.0%
8.2%
8 .2%
8.4%
11 .8%
12.2%

05
5109
$102.8
59.0
6.2
0.1
(0.5)
(2.4)
10.6
57.4%
6 .0%
0 1%
-0.5%
-2.3%
10.3%
-4.8%

01
7109
$318.9
284.9
119.0
95.9
86.0
66.8
108.3
89.3%
37.3%
30.1%
270%
21.0%
34.0%
25.9%

12
6109
$35.55
32.0
$1,137.6
94.4
1,231.9

12
6109
$3.93
21 .4
$84.2

01
7109
$8.78
95.9
$842.3

$76.6

05
5109
$3.93
29.2
$114.9
125.4)
$89.4

$0.13
0.17
0. 17
14.2%

($0.09)
0 .25
0.25
N.A.

$0.40
0.62
0.62
25.5%

$0.32
N.A.
N.A.
N.A.

25.5%

14.2%

30.2x
23.2
23.2
1.4
8.1
16.9
11.7

N.M.
15.6x
15.6
0.9
14.4
1259.6
8.4

22.1x
14.1
14.1
2 .7
7.3
91
8 .0

11.9x
N.A.
N.A.
0.7
4.8
7.6
7.1

26.2x
19.4
19.4
1.4
8 .1
16.9
8.4

22.1x
19.4
19.4
0.9
7.7
9.3
8.4

55.6%
8.1%
6.8%
0.1%
-1.3%
5.6%
-3.4%

$7.40
15.8
$116.7
$115.4

09
6109
$1 1.10
14.2
$157.2
160.6)
$96.6

$0.14
(0.17)
(0.17)
N.M.

$0.47
0.50
0.50
3.1%

$0.59
0.33
0.33
-24.8%

-10.8%

$0.09
1.32
1.32
283.0%

39.2x
N.M.
N.M.
0.9
39.9
N.M.
N.M.

15.7x
14.8
14.8
0 .5
6 .0
7.2
5.7

18.8x
33.3
33.3
0.7x
5 .8
9.3
12.0

18.8x
24.0
24.0
0.7
6 .0
8.2
8.8

395.0x
26.9
26.9
3.6
17.4
71 .2
15.6

.!..Ul

Not Rated
N.A.

SkiiiSoft
SKIL
Market
Perfo rm
$10

12
6109
$346.7
207.4
70.7
17.3
(4.8)
1.0
78.9
59.8%
20.4%
5.0%
-1.4%
0 .3%
22.8%
0.2%

08
5109
$5.49
16.9
$93.0
46.7
$139.7

6109

Saba
Software

!1.1

UQ
$869.4

12
6109
$19.4
9.9
2.8
1.7
1.7
1.7
1.8
51 .2%
14.2%
8.9%
8.9%
9.0%
9.5%
14.8%
12

6109
$381

ll
$19.4

!2.11

$13.1

N.A.- Not Available. N.M. - Not Meaningful.

Source: BMO Capital Markets and FactSet Research.

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Othe.- com1>anies mentioned (l>riced as of Se1>tember 9, 2009):

Accenture (ACN, $34.75 : Not Rated)
Affiliated Computer Services (ACS, $45.05: Not Rated)
Alcoa (AA, $12.81: Not Rated)
Altria Group (MO, $ 18.25: Not Rated)
American Public Education (APET, $35.08: OUTPERFORM)
Apollo Group (APOL, $66.63 : OUTPERFORM)
Apple (AAPL, $ 171.14: OUTPERFORM)
Aptech (APTECHT.NS, $268.75: Not Rated)
Baxter Health (BAX, $55.82: Not R ated)
Blackboard (BBBB, $35.55 : Not Rated)
BMO (BMO, $47.55: Not Rated)
Boeing (BA, $50.53: Not Rated)
BP (BP. $54.95: Not Rated)
Bridgepoint Education (BPI, $ 15.56: OUTPERFORM)
BT (BT, $22.21: Not Rated)
Canon (CAJ, $38.4 1: Not Rated)
Capella Education (CPLA, $64.16: MARKET PERFORM)
Career Education (CECO, $23.20: OUTPERFORM)
Cisco Systems (CSCO, $22.23 : Not Rated)
Citigroup (C, $4.66: Not Rated)
Citii-x (CTXS, $35.95: Not Rated)
Coca cola Company (KO, $50.22: Not Rated)
Convergys (CVG, $11.20: Not Rated)
Corinthian CoUeges (COCO, $19.02: OUTPERFORM)
Credit Suisse (CS, $51.74: Not Rated)
Dell (DELL, $15.92: Not Rated)
Delta Airlines (DAL, $7.33: Not Rated)
DeVry (DV. $5 1.60: OUTPERFORM)
Dow (DOW, $22.92: Not Rated)
Dupont (DD, $31.36: Not Rated)
Ford Motor Co. (F. $7.39 : Not Rated)
Franklin Covery (FC, $5.49: Not Rated)
Goldman Sachs (GS. $170.27: Not Rated)
Google (GOOG, $463.97: Not Rated)
GP Str<1tegies Corp (GPX. $7.40: Not Rated)
Grand Canyon Education (LOPE. $ 16.62: OUTPERFORM)
Healthstream (HSTM, $3.93: Not Rated)
Hewlett Packard (HPQ. $45.90: OUTPERFORM
ffiM (ffiM. $116.76: OUTPERFORM)
ITT Educational Services (ESI. $102.78: Not Rated)
KornFerry (KFY. $14.31: Not Rated)
Lawson Software (LWSN. $6.22: Not Rated)
Learning Tree International (LTRE. $ 11.10: Not Rated)
Lincoln Educational Services (LlNC, $21.67: OUTPERFORM)
Lockheed Martin (LMT. $73.13: Not Rated)
Lucent (LU, $2.55: Not Rated)
McGraw HiJl (MHP. $27.06: Not Rated)
Merck (MRK, $31.55: Not Rated)
Microsoft (MSFf, $24.78: Not Rated)
Monsato (MON. $83.48: Not Rated)
Motorola (MOT. $7.85: MARKET PERFORM)
Nobel L earning Communities (NLCI. $10.21: Not Rated)
NYSE (NYX. $27.98: MARKET PERFORM)
Oracle (ORCL. $22.57: Not Rated)
Pearson (PSO, $12.56: Not Rated)
Pfizer (PFE. $ 16.41: MARKET PERFORM)

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Plato Learning (TUTR, $4.65: Not Rated)

Princeton Review (REVU, $4.25; Not Rated)
Procter and Gamble (PG, $53.76: OUTPERFORM)
Providence Service Corporation (PRSC, $11.15: Not Rated)
Psychiatric Solutions (PSYS, $27.83: Not Rated)
Raytheon (RTN, $46.44: Not Rated)
Reed Elsivier (RUK, $3 1.07: Not Rated)
Renaiss~mce Learning (RLRN, $10. 18: Not Rated)
Saba (SABA, $3.93: Not Rated)
SAP (SAP, $50.48: Not Rated)
Scholastic (SCHL, $23.88: Not Rated)
School Specialty (SCHS, $22.49: Not Rated)
Scientific Leaming (SCIL, $3.43: MARKET PERFORM)
Siemens (SI, $9 1.72: Not Rated)
Skillsoft (SKIL, $8.78: MARKET PERFORM)
Strayer Education (STRA, $206.56: OUTPERFORM)
SumTota1 (SUMT, $4.85 : Not Rated)
Time Warner (TWX, $16.76: OUTPERFORM)
Unisys (U1S, $2.54: Not Rated)
UAL Corp. (UAUA, $6.45: Not Rated)
Universal Health Services (UHS, $59.15: Not Rated)
Universal Technical Institutes (UTI, $19.65: OUTPERFORM)
Verizon Communications (VZ, $30.89: Not Rated)
Viacom (VIA, $25.67: MARKET PERFORM)
Vodafone (VOD. $23 .06: Not Rated)
Washington Post (WPO, $435.45: Not Rated)
Wells Fargo (WFC, $27.68: Not Rated)
Xerox (XRX, $8.86: MARKET PERFORM)

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Important Disclosures
AnaJyst's Ce1tification
I, Jeffrey M. Silber, hereby certi (y that the views expressed in this report accurately rellect my personal views about the subject securities
or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this report.
Analysts who prepared this report are compensated based upon (a mong other factors) the overall profitability of BMO Capital Markets
Corp, BMO Nesbitt Burns, and their affiliates, which includes the overall protitability of investment banking services. Compensation for
research is based on eJTectiveness in generating new ideas and convincing clients to act on them, perfonnance of recommendations,
accuracy of earnings estimates, and service to clients.
Company Specific Disclosures
For Important Disclosures on the stocks discussed in this report, please go to http://rcsearch-us.bmocm.com/Company _Disclosurc_Public.asp.
Breakdown of Rating Distribution and Banking Clients
(As of June 30, 2009)
% of total BMO Capital Markets Corp. coverage vvithin rating category
%of stocks within rating category for which the F irm
provided banking services over the past 12 months

Buy
29.2%

Hold
65.0%

Sell
5.8%

Unrated
0.0%

12.9%

9.3%

8.7%

0 .0%

BMO Capital Markets Corp. Rating Syst('m

OP = Outpc1form : We believe the stock's total return, including dividends, will exceed the S&P 500's return by more than 15%.
Mkt = Market Pe1form: We believe the stock's total return wi ll generally match that of the S&P 500.
Und = Undcrperf01m: We believe the stock' s total return will fall short of the S&P 500's rctum by more than 15%.
NR = Not rated.
(R) = Restricted: Dissemination of research is currently restricted.
In addition. apart from our stock ratings, we apply the Speculative investmenl (S) postscript to those companies that have de minimis revemte
and whose emerprise value appears to be co111inge11t upon unprovable assumptions (e.g.. the future approval of a drug or the successful
completion ofan oil well).
SECTOR RATINGS
OUTPERFORM- We believe the sector wi ll outperform the S&P 500 Index.
MARKET P ERFORM - We believe the sector's ret11m will generally match that of the S&P 500.
UNDERPERFORM- We believe the sector wi llunderperform the S&P 500 Index.
Priot BMO Cnpitlil Markets Cotp. Rati ng System (pdor to June 19, 2006)
Our rating system prior to June 19, 2006, compared a stock's expected performance with that of an index of comparable companies over a
9-15 month horizon. Our sector ratings were based on the expected performance of the sector compared with that of a broader market index
over the same time period. Additionally, before June 19, 2006, we did not usc the ($)-Speculative postscript
PRIOR STOCK RATI NGS
OUTPERFORM- We believe the stock's total return, including div idends, will exceed the group average by over 15%.
NEUTRAL- We believe the stock's total retum will generally match the group average.
UNDERPERFORM- We believe the stock's total return will tall short of the group average by more than15%.
PRIOR SECTOR RATI NGS
POSITIVE- We believe the sector wi ll outperform the S&P 500 Index.
NEGATIVE- We believe the sector will undcrpcrform the S&P 500 Index.
Othet Impo ttant Disclos ures
For more specific information. please refer to http://research-us.bmocapit:almarkets.com. For lmportant D isclosures on the stocks disc ussed
in this report, please go to http://rescarch-us.bmocm.com/ Company_Disclosure_Public.asp, or write to Editorial Department, BMO Capital
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http://researchus.bmocapitalmarkets.com/ConOict_Statement_Public.asp.

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Gener a l Disclaime1
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BMO Nesbitt Bums [nc. and BMO Nesbitt Burns Ltee/Ltd. in Canada (collectively "BMO Nesbitt Burns"), and BMO Capital Markets Ltd
in the Uni ted Kingdom. Ibis information is not intended to be used as the primary basis of investment decisions, and because of individual
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C OPY RI G HT 2009 BMO CAPITAL MAR KETS C ORP.

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R. Jackson Blackstock, CFA

Capital Markets

Director of Equity Research

212-885-4113

US Equity Research Directory

B usiness & Professional Servi ces

Financial Institutions Group

Education/Staffing
Jeffrey M. Silber
Paul Condra

212-885-4063
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Marketing Services
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212-885-4029

Banks
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Virginia Chiarello

Discount Brokerage/Exchanges/Trading Services

404-926-1580
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404-926-1581

Capital Goods
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Avram Fisher

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212-885-4016
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Broadline Retail
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404-926-1 590
404-926-1 592
404-926-1591

212-885-4109
212-885-4108
212-885-4066
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Real Estate Investment Trusts

Paul E. Adornato, CFA
Richard C. Anderson
Mark Lutenski
Earnest Sweat

212-885-4170
212-885-4180
212-885-4197
212-885-4172

Specialty Finance
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212-885-4179
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212-885-4146
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212-885-4017
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Energy
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212-885-4031
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713-546-9756

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Alison D. Byron-Brown. Managing Editor

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WED BUSH
(I)

0
z

tn

::s

'C

-c:

Equity

Research

Education
March 25, 2009
Ariel Sokol
(212) 668-9874
ariel.sokol@wedbush.com

Weak Sentiment Presents a Great Opportunity

Initiating Coverage of APOL, DV, LOPE and STRA with BUYs

We are launching coverage of what we termed the Market-Funded Postsecondary Education Sector and are
initiating coverage on Apollo Group (APOL), DeVry Inc. (DV), Grand Canyon Education (LOPE), and Strayer
Education (STRA) with BUY ratings. We believe that the recent approximate 20% pullback in select market-funded
postsecondary stock prices since February could prove an attractive entry point for investors. To be clear, no tangible
evidence exists regarding either a sharp deceleration in enrollment growth rates or rising customer acquisition costs, the
two most important measures we use to evaluate the health of these businesses. Despite the concerns and speculation
created from recent headlines regarding the regulatory environment, rising student cohort default rates, and enrollment
practices at institutions, we see little likelihood of a meaningful downward estimate revision. If anything, we believe that
consensus earnings estimates for most companies are conservative and achievable over the next two years.

Apollo Group - We are initiating coverage of Apollo Group with a BUY rating and 12-month price target of $90.
Our target reflects a -12 EV/EBITDA multiple to our calendar year 2009 EBITDA estimate. We are hard pressed to find
companies like Apollo in the current economic environment that grow revenue by 20% and trade at a free cash flow yield of
roughly 7%. Simply put, Apollo is a cash flow generating machine, which in our view mitigates downside risk with respect
to the stock price. We believe that Apollo could continue to benefit from the challenging macro environment given its
exposure to countercyclical Associate's and Bachelor's degree programs. We expect operating margins to expand as
sales and marketing costs decline due to the acquisition of marketing firm Aptimus. As well, operating margins could
benefit from internal cost cutting efforts.

DeVry Inc. - We are initiating coverage of DeVry Inc. with a BUY rating and 12-month price target of $58. Our
target reflects a -14x EV/EBITDA multiple to our calendar year 2009 EBITDA estimate. We believe that DeVry can
expand operating margins from 16% to over 20% in the next three years due to operating leverage, as increased
enrollments results in higher utilization rates at facilities. As such, we think that consensus expectations for the company's
fiscal 2010 could be conservative, in our view.

Grand Canyon Education - We are initiating coverage of Grand Canyon Education with a BUY rating and 12month price target of $20. Our target reflects an -18x EV/EBITDA multiple to our calendar year 2009 EBITDA estimate.
Grand Canyon's experienced management team remains the company's strongest asset, in our opinion, as the executives
successfully launched and grew Phoenix Online. We believe that Grand Canyon's strong brand and traditional ground
campus could prove compelling differentiators among the array of online offerings available to consumers. In our view, a
traditional ground campus with Division II athletic teams could provide an aura of legitimacy to potential applicants
unmatched by other online operators.

Strayer Education- We are initiating coverage of Strayer Education with a BUY rating and 12-month price target
of $210. Our target reflects a -17x EV/EBITDA multiple to our calendar year 2009 EBITDA estimate. We believe that the
25% collapse in Strayer's stock price over the past three months presents an unprecedented opportunity to acquire shares
in one of the best managed education companies in business. We acknowledge investor concerns regarding potentially
declining corporate tuition reimbursements; however, we note that Strayer does benefit from the increased number of
employees who previously had access to but are only now taking advantage of tuition reimbursement benefits given the
job insecurity stemming from the challenged economy.
Exhibit 1: Market Funded Postsecondary Company Ratings, Target Prices, and Select Valuation Metrics
% to

Company

Ticker Rating

Target
Price

Current
Price

Target

Rev Growth

American Public Ed
Apollo Group

APEI
APOL
CPLA
DV
LOPE
STRA

$42
$90
$66
$58
$20
$210

$4266
$76.52
$51.54
$48.32
$16. 20
$174.78

(1.5)%
17.6%
31.9%
20.0'A
23.5%
20.2%

41%
21%
20%
28'A
56%
25%

capella Education

Devry
Grand Canyon
Strayer Education

HOLD
BUY
BUY
BUY
BUY
BUY

CY2009
PEG
EV/EBITOA FCFYield
0.9x
0.6x
0.6x
0.6x
0.1x
1.1x

17.6x
10.0x
10.4x
11.0x
14.0x
13.6x

2.1rA
7.1%
5.7%
5.8'/o
3.5%
3.8%

Note: Priced as of 3125109; Source: Wedbush, company filings, and thomsononeim.com

Wedbush does and seeks to do business with companies covered in its research reports. Thus, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. Please see page 104 of this report
for analyst certification and important disclosure information.

VVEDBusw---------------------------------------------TABLE OF CONTENTS

Sector Thesis & Key Trends ................................................................................... 3

Market & Operating Assumption ................................................ ... .... ................. ..... 5
Sector Risks ......... ...... ......... ......... ...... ......... ......... ...... ......... ......... ...... ......... ........ 6
Valuation Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 7
Industry Review. .................................................................................................

15

Financial Review.................................................................................................. 22
Countercyclicality. .. ...... ...... ......... ... ...... ...... ......... ... ...... ...... ............ ..................... 25
Tuition

Review.....................................................................................................

Student Loan

Review..........................................................................................

26
28

Regulatory Environment. ........ ...........................................................................

32

Framework for Analyzing Education Companies Financial Results . . . ... . . . . . . . . . . . . . . . . . .

35

Apollo

Group......... .................. ...... .................. ...... .................. ...... .................. ...

37

DeVry Inc..................... ........................ ........................ ........................ ............... 52

Grand Canyon Education ....................................................................................... 64
Strayer Education................................................................................................ 76
American Public Education... ..............................................................................

93

Capella Education................................................................................................ 98

2 I Ed ucation

Ariel Sokol (212) 668-987 4

-------------------------------------------VVEDBUSH
SECTOR THESIS & KEY TRENDS

We are launching coverage of what we call the Market-Funded Postsecondary Education Sector and are
initiating coverage on Apollo Group, DeVry Inc., Grand Canyon Education, and Strayer Education with BUY
ratings. We believe that the recent approximate 20% pullback in select market-funded postsecondary stock prices
since February could prove an attractive entry point for investors. To be clear, no tangible evidence exists regarding
either a sharp deceleration in enrollment growth rates or rising customer acquisition costs, the two most important
measures we use to evaluate the health of these businesses. Despite the concerns and speculation created from
recent headlines regarding the regulatory environment, rising student cohort default rates, and enrollment practices at
institutions, we see little likelihood of a meaningful downward estimate revision. If anything, we believe that
consensus earnings estimates for most companies are conservative and achievable over the next two years.

We are highly bullish on the prospects for market funded universities given the plethora of benefits arising
from the challenging economic environment. Market funded universities are clearly competing in the sweet spot of
the economic cycle, in our opinion. Enrollments for degrees in acyclical and countercyclical industries could grow by
at least double digits as working adults seek postsecondary degrees to improve their resumes in a challenged labor
market. As well, we expect market funded universities to sustain annual price increases as private non-profit and
state funded universities raise tuitions in response to declining endowments and state tax receipts. On the expense
side, we believe that costs for market funded universities could decline given global deflationary forces. We think the
best scenario for education stocks would be a prolonged L-shaped economic recovery, where the economy is
relatively stable, unemployment remains high, and working adults are jittery regarding their jobs and earnings power.

Valuation appealing from a growth investors' perspective. We acknowledge investors' reluctance in taking
positions in stocks that trade at a price to earnings ratio of more than twice the S&P 500. However, we point out that
we are initiating coverage of companies who on average are growing earnings by about 30% year over year even as
the earnings of the companies in the S&P 500 are expected to decline by at least 30% in 2009. In our view, investors
have some downside protection as market funded postsecondary stocks are growing revenue by at least 20% but are
on average trading at a free cash flow yield of -5%. We also note that on most valuation metrics, market funded
education companies are trading at lows relative to their historic valuation ranges despite seeing an acceleration in
enrollments.

We expect market funded postsecondary institutions to increase share of the total market to 15% over the
next decade from 6% in 2005. We expect market funded institutions to take share by expanding the market rather
than by directly competing for students at state and endowment funded institutions. We note that only 30% of the U.S.
adult population has Bachelor's degrees. The secular shift toward a knowledge based economy will not abate anytime
soon in our view. We expect the United States to achieve at least a 50% penetration rate of Bachelor's degrees
among adults over the next fifty years. We believe it inevitable for market funded institutions to drive this increased
penetration, as these companies are incentivized to redeploy excess profits generated from existing students to sales
and marketing efforts, which in turn results in the enrollment of more students.

We expect revenue growth of at least 20% for publicly traded market funded universities in 2009 and 2010,
driven by a surge in enrollment growth due to the challenging economy. We note the by now somewhat obvious
concept that during a weak labor market fear and uncertainty drives students go back to school to complete degrees
to increase earnings power. Of note, Associate's and Bachelor's degree programs are highly countercyclical, while
Master's and Doctoral degrees are more acyclical to the overall economy. Arguably, the current economic downturn is
a bit different given that the aggregate household net worth in the U.S. has fallen due to stock market and real estate
depreciation in asset value. However, in our view, so long as the government remains committed to providing student
loans to those who seek them, market funded institutions could continue to thrive.

In our opinion, companies that could particularly benefit include those that provide degrees for high-demand
and acyclical careers such as in health care or education. As well, we also expect success for universities that
differentiate through targeting niche verticals or niche segments of the population. As an example, American Public
Education has primarily focused its efforts on military students. Grand Canyon offers a decidedly Christian brand and
orientation in its business, nursing, education and liberal arts offering.

We expect a favorable environment for tuition price increases over the next several years. In recessions and
economic recoveries, institutions typically raise prices due to lower than expected appropriations from states and
investment income from endowments. We note that private and state schools are opting to increase tuitions rather
than significantly cut expenses and pair down program offerings. For example, the University of Massachusetts
trustees are reportedly backing a 15% increase in fees for students next year. A bill in the Florida legislature (HB 403)
proposes an increase in tuition at 11 state universities of up to 15% annually. In this environment, we believe that
market funded universities could maintain a 3-5% annual price increase over the next several years. Even as the
economy recovers and state funded schools receive greater support, endowment and state funded schools could
continue to increase tuition fees to replenish reserve funds (used to finance operations during challenging times) that
could likely be depleted during the current economic downturn.

Ariel Sokol (212) 668-987 4

Education I 3

VVEDBusw---------------------------------------------

Tuition increases have outpaced inflation in the United States for the past thirty years- in our opinion, only a
regulatory or legislative act will change this trend. Like health care, a third-party payer system exists in higher
education where the government enables students to receive grants or take on debt to pay for tuition. However, a
vicious cycle exists as schools increase tuition rather than cut program offerings given that lending guaranteed by the
government exists to pay for programs. In turn, the U.S. government continues to fund rising tuition costs. We note
that Stafford loan limit increases were included in the House version of President Obama's American Recovery and
Reinvestment Plan to stimulate the economy. Although the increases were not later passed, we think it only a matter
of time before Congress once again increases these Stafford loan limits.

We believe that in the current downturn, all market funded universities could benefit from deflationary forces,
which could lower expenses and buoy operating margins. Specifically, we believe that market funded universities
could achieve significant efficiencies relating to general & administrative and sales & marketing expenses. We have
seen some evidence from 4Q08 that universities have renegotiated contracts and extracted pricing concessions from
vendors and contractors.

High barriers to entry exist that prevent meaningful market entry by potential competitors. One of the key
roadblocks for a competitor entering the postsecondary market relates to obtaining accreditation. Accrediting bodies
are essentially an association of self-regulating schools that provide reviews of academic quality. We note that
receiving accreditation is not an easy process. Accreditation remains highly important for a myriad of reasons. For
students to receive access to federal loan and grant programs, schools must receive accreditation by a recognized
accreditor. As well, most corporations require their employees to attend accredited institutions to receive tuition
reimbursements. Most importantly though, degrees from a non-accredited institution aren't considered authentic by
most employers.

The postsecondary education market is free from product obsolescence. One of the reasons why we believe
investors provide the industry higher multiples than others lay in the long-term viability of the product. Higher
education is not a fad. These schools are not subject to product cycles where innovation from an institution starkly
transforms the competitive landscape.

We believe that the highly recurring nature of revenue and earnings visibility of market funded universities
warrants a higher valuation than the overall market. We point out that students at well run universities tend to
remain at the school for longer than a semester, which in turn provides visibility with respect to future financial results.

Market funded universities demonstrate strong cash flow characteristics. Significant operating leverage tends to
exist with these schools. Once a school develops a curriculum and a technological platform, schools generate high
margins on incremental revenue. As schools achieve scale, general & administrative costs are amortized over an
ever increasing revenue base. As well, we note that these schools require neither extensive working capital
requirements nor substantial capital expenditure investments.

Given the wealth destruction following stock market declines and an uncertain labor market, we think that
low-cost providers could increasingly take share over the coming years. The conventional wisdom suggests
that brand, accessibility, and differentiated offerings are more important factors than price. We disagree, and believe
that working adults could become more price sensitive than they have in the past. Some universities suggest that
students equate high tuition rates with academic quality. However, following economic collapse in the United States
we think that students who are unable to pay for the best educational programs could be willing to trade down to more
affordable programs. Beneficiaries of such a change in price consciousness include American Public Education and
Grand Canyon.

4 1Education

Ariel Sokol (212) 668-987 4

-------------------------------------------VVEDBUSH
MARKET & OPERATING ASSUMPTIONS

No significant regulatory changes by the Obama administration. Federal loans can represent more than 70% of
revenue for many of these companies. As such, the fortunes of market funded universities are highly dependent on
federal programs for financial aid to students. President Obama has already proposed the elimination of the Federal
Family Education Loan Program (FFELP), one of the Department of Education programs that provide federally
guaranteed loans through private financial institutions. While this move does not meaningfully impact market funded
universities' earnings potential, the move could serve as a first step to broader scrutiny and oversight into higher
education by the government. In particular, we think that the government could start to pay attention to potentially
rising cohort default rates in several years.

The federal government continues to provide Stafford student loans at the current interest rate and dollar
amount. Our estimates, ratings, and price targets assume that the government does not change its loan policies with
respect to interest rates and actual dollars that are loaned to students. There has been some speculation that the
Obama administration could increase Stafford loan limits, which would benefit those companies that have exposure to
private student loans. We note that such loan limits have been increased twice in the past five years. The Higher
Education Act of 2005 increased Stafford loan limits for freshman, sophomores, and graduate students. The Ensuring
Continued Access to Student Loans Act of 2008 increased annual and aggregate unsubsidized Stafford loan limits for
undergraduate students.

Associate's and Bachelor's degree enrollments are highly countercyclical. Over the past thirty-five years
undergraduate degrees have increased during and following times of increased unemployment. Over the past three
quarters, companies such as Apollo and ITT Educational Services have witnessed accelerating enrollment in their
Associate and Bachelor degree programs. We acknowledge that a prolonged economic contraction could result in
enrollment trends different than those of the past fifty years.

Associate's and Bachelor's degree programs could represent a greater percentage of total enrollments at
most institutions, which in turn could result in lower revenue per enrolled student. We think that one of the
issues that could increasingly face greater scrutiny by investors over the coming years is the potential mix shift for
institutions with graduate degrees representing a declining percentage of revenue. Institutions typically require
undergraduates take more classes but charge less tuition than graduate degree programs. The disparity of pricing for
undergraduate and graduate degree programs could determine if revenue per enrolled students declines or increases.

Costs per student acquisition do not significantly increase over the next several years. The market funded
postsecondary industry generates economic value on the difference between cash flow that a student generates and
the costs to acquire the student. While students are acquired through advertising channels including television, print,
referrals, direct mail, and trade shows, the Internet remains one of the great sources to find qualified leads. Marketing
aggregators typically acquire leads from publishers such as Google or Yahoo and then in turn sell the leads to market
funded postsecondary companies. We are assuming that these lead aggregators do not increase their clout and
dictate increases in cost per acquisition. Over the next several years, we expect academic institutions to acquire
these lead aggregators, and vice versa.

Ariel Sokol (212) 668-987 4

Education I 5

VVEDBusw---------------------------------------------SECTOR RISKS

In our opinion, the biggest risk that market funded universities face over the next several years relates to a
more aggressive regulatory environment. The postsecondary education industry lives and dies by the willingness
of the government to provide financial aid to students. Federally guaranteed student loans represent up to more than
80% of market funded university revenue. As such, speculation regarding changes to student lending regulation
significantly moves these stocks. We advise long-term investors to be resilient in maintaining positions, as we expect
these stocks to trade with great volatility due to the inevitable and periodic headlines regarding possible changes in
regulation. We currently are unaware of lurking transformative legislative acts that would profoundly impact market
funded postsecondary business models.
We do have some concerns that the government could implement
regulatory change in response to what we perceive as inevitable rising cohort default rates. As well, we concede that
if the overall economic situation in the United States deteriorates far worse than even the most pessimistic forecasts,
the government could opt to institute currently unimaginable options, including price controls. We do note that market
funded universities have political advocates among Democrats and Republicans. We note for example that such
schools cater to underserved populations including minority students, and that truly unfavorable legislation against
these schools could become politically unpalatable. Of course, even if legislation has no chance of passing, the
introduction of potentially negative legislation would result in a significant contraction of valuation multiples.

The economy could improve and unemployment could decrease. The fundamentals of the postsecondary
education business have immeasurably improved following the weakening economy. A return to prosperity could
gradually erode enrollment growth and the favorable pricing environment, while increasing the competitiveness of
state and private school offerings.

The economic slowdown in the U.S. could eventually negatively impact enrollment growth. The inability for a
student to receive a job after graduation could deter future students to enter programs. As well, the inability to gain a
job and receive compensation could result in higher default rates among graduates, which in turn could result in a
higher cohort default rate for an institution.

Headline risk exists from operational and financial misconduct of other market funded university operators.
Because the future growth of the market funded post-secondary industry is highly dependent on the federal and state
regulatory environment, negative media attention and the closing of competitor schools could result in a deceleration
of enrollment growth or even a decline of student enrollments. We note that reputable publications such as the New
York Times and Consumer Reports periodically publish articles with negative slants on market funded universities
questioning the value proposition of these institutions.

The failure to comply with regulations could result in lack of access to Title IV programs. Institutions could face
significant consequences if they fail to comply with a myriad of regulatory requirements.

The loss of regional accreditation by an academic institution could result in the lack of access to the
Department of Education Title IV loan programs. To remain accredited institutions must continuously meet
standards relating to performance, governance, institutional integrity, educational quality, faculty, administrative
capability, resources and financial stability. Failure to meet these standards could result in the loss of accreditation.

Increased competition over the next several years could negatively impact operating margins. As more state,
endowment, and market funded universities offer online degrees, institutions could need to increase their marketing
spend to attract students.

Reduction of funding for Title IV programs could impact enrollment, which in turn could reduce the
companies' revenue and operating margins.

Student acquisition costs could increase as companies' broaden their offerings beyond traditional target
markets.

Student loan defaults could result in the loss of eligibility to participate in Title IV programs.

Reliance on Stafford loans could eventually hurt market funded universities, as companies near the 90/10
regulatory threshold. A requirement of the Higher Education Act states that market funded institutions could lose
eligibility to participate in Title IV programs if an institution derives more than 90% of its revenue from Title IV
programs.. We note that there has been some discussion regarding the removal of 90/10 rule from the Higher
Education Act, although we do not anticipate such a move in their near-term.

Service disruptions of online institutions' technology infrastructure, including its learning management
system and student information system, could negatively impact operations. As well, business disruptions to
technology vendors could impact companies' ability to maintain its software.

A change in control can impact companies' state licenses, accreditation, and ability to participate in Title IV
programs. A change of ownership or control could require recertification by the Department of Education,

6 1Education

Ariel Sokol (212) 668-987 4

-------------------------------------------VVEDBUSH
reauthorization by state licensing agencies, or the reevaluation of the accreditation. Under some circumstances, the
Department of Education may continue an institution's participation in the Title IV programs on a temporary provisional
basis pending completion of the change in ownership approval process.

VALUATION REVIEW
In our opinion, education stocks are speculative given the value of growth imbedded in their stock prices, the lack
of hard assets, and the ease with which a regulatory change can significantly impact a company' s financial
results. As such, stock price volatility remains high in the sector.
We acknowledge that for some the term "speculative" has a negative connotation. Our intention is not to suggest that
these stocks are worth less than their current prices. Rather, we think of speculation along the lines of Benjamin Graham,
who in The Intelligent Investor commented that, "an investment operation is one which, upon thorough analysis promises
safety of principal and an adequate return. Operations not meeting these requirements are speculative." We note that
education companies lack physical assets and cash to provide "safety of principal ." For example, industry leader Apollo
trades at more than 10x book value. Emerging market funded postsecondary companies are currently trading between 1018x book value. While we are currently bullish on the sector and valuations from a growth investor's perspective, we
acknowledge the possibility that market funded postsecondary stock prices could decline by more than 50% were the
government to propose and institute a highly negative regulatory change.
That said, market funded postsecondary stocks are beginning to look attractive on a free cash flow basis.
One of the basic maxims regarding valuation states that the value of a firm reflects a stream of free cash flow that a
business generates, discounted back at an appropriate rate to reflect risk. We believe that companies with high free cash
flow yields and dividends provide investors downside protection. To that end, we consider high-growth companies by
definition cheap when valuation largely reflects current rather than future free cash flow generation. Overall, we think that
stocks with free cash flow yields greater than 10% represent the most attractive opportunities for investors.
Education companies tend to generate free cash flow margins that are comparable to those firms' operating margins given
little need for investments in capital expenditures and working capital. Interestingly, negative sentiment for education
shares has resulted in some attractive valuations based on free cash flow. Of the group, Apollo has the most attractive
free cash flow yield of -7.5%. We attribute this to the company's scale, and note that capital expenditures as a percent of
revenue have remained at roughly 3% in their fiscal 2007 and fiscal 2008.
Exhibit 2: Free Cash Flow Yield, 2009 Calendar Year Estimates
~k r-------------------------------------------------------------------------------~
~k r---------------------

6% r--------------------5% +--------------------4% +---------------------

2%

1%

0%

AVGEDJ

APOL

CPlA

DJ

S"IR<I

LOPE

APB

Source: Wedbush and company filings

We are a bit perplexed that investors continue to categorize education stocks as "expensive" even as investors
assign similar valuation multiples to other high growth companies (e.g., on-demand software vendors).
Unlike other sell side-analysts who have covered the education sector for a number of years, we have the luxury of acting
as outsiders peering into the industry given our previous focus on enterprise software stocks. In our opinion, both

Ariel Sokol (212) 668-987 4

Education I 7

VVEDBusw---------------------------------------------industries share very similar characteristics, and unsurprisingly trade at similar valuation multiples. However, whereas
software companies are competing in a challenged IT spending environment, education companies are benefiting from a
number of tailwinds resulting from the weak global economy.
We have compared in the exhibits below the financial metrics of select education and on-demand software vendors. We
note that in 2009 these education and on-demand software stocks are both trading at roughly a 5% free cash flow yield,
which we find interesting given that both types of companies are growing 2009 revenue in excess of 20% year over year.
That said, we note that education stocks in 2009 are less expensive on a PIE and EBITDA ratio despite generating higher
operating margins.
Exhibit 3: Average Valuations of Market Funded Postsecondary Companies vs. On-Demand Software Vendors
Revenue Growth
CY09
CY10
Market Funded
Postsecondary
Companies

On-Demand
Software Vendors

Operating Margin
CY09
CY10

EV/EBITDA
CY09
CY10

CY09

P/E
CY10

PEG
CY09
CY10

FCF Yield
CY09
CY10

23%

20%

21%

22%

12.0X

9.6X

22.4X

17.1X

0.6X

0.6X

4.8%

5.9%

23%

22%

15%

18%

13.6X

9.8X

28.8X

22.2X

1.7X

0.5X

5.3%

NA

Source: Wedbush and thomsononeim.com

Similarities Between Market Funded Postsecondary Operators & On-Demand Software Vendors
Market Funded Education Operator

On-Demand Software Vendor

Yes - future revenue determined by enrollment of

students and retention rates

Yes - future revenue determined by customer

signings and retention rates

Customer
Lock-In

Yes, for 1-4 years

Yes, for at least 3-10 years

Operating
Leverage

Fixed costs for creating a campus/investing in

online technology platform, 50-60% gross margins

Fixed costs for creating technology platform, 8090% gross margins

Free Cash Flow

Generation

Operating margins currently range from 20-40%;

requires some capital investments; trades at -5%
FCF Yield

Operating margins currently range from 10-25%;

requires some capital investments; trades at -5%
FCF Yield

Strong Capital
Structure

Companies generate cash, so balance sheet are

typically all cash unless debt exists to fund an
acquisition

Companies generate cash, so balance sheet are

typically all cash unless debt exists to fund an
acquisition

Customer
Concentration

None

Depends by company-- some have large

enterprise customers

Product Cycle

None

Significant- can lose competitive advantage

without investments in R&D

Countercyclical, impacted by unemployment

Cyclical, impacted by corporate IT spending

Yes, Significant

None

Significant

None

Recurring
Revenue Stream

Economic Cycle
Exposure to
Credit Markets
Regulatory
Environment

I Education

Ariel Sokol (212) 668-987 4

-------------------------------------------VVEDBUSH
Exhibit 4: Valuations of Market Funded Postsecondary Companies vs. On-Demand Software Vendors

COliPANY

SYMBOL

MARKET

PRICEI

CAP

EARNINGS (x)

(USSM)

CYOS

CY09

EVI
PEIGROWTH

EVIEBITDA
IAULTIPLE(x)

SALES (x)

CYIO

CY09

CYIO

CYOS

EV

REVENUE

OPERATING

IOCF

GROWTH

MARGIN

CY09

CYIO

CYOS

CY09

CYIO

CY09

CYIO

CY09

CY10

FREE CASH FLOW

YIELD

CYOS

CY09

CYIO

CYOS

CY09

CY10

Market Funded Postsecondary Companies

American Pl_j)lic Education

APEI

774

43.1

30.9

22.5

0.8

0.6

6.8

4.8

3.6

22.9

16.0

11.7

22.5

15.9

41%

35%

26%

26%

27%

2.6%

2.9%

4.5%

Capella e.-.calion
Slmyer Ed..:alion

CPLA

27.3

20.3

15.9

0.6

0.6

2.6

2.1

1.8

8.8

10.9

20%

16%

19%

5.9%

7.7%

19.0

1.0

0.9

5.8

4.7

3.8

12.7

10.5

19.7

25%

21%

35%

34%

20%
34%

3.5%

22.9

8.9
16.3

20%

28.0

12.5
16.8

9.3

STRA

828
2.418

2.8%

3.8%

4.8%

Grand Canyon

LOPE

738

55.1

26.8

17.6

0.3

0.3

0.4

0.4

0.4

32.1

13.3

8.9

8.1

6.7

1%

8%

1%

3%

4%

0.3%

3.5%

6.4%

ApolloGro'4'

APOL

12,297

22.9

16.9

14.0

0.5

0.7

3.6

3.0

2.5

12.5

9.7

8. 1

14.9

12.6

21%

17%

26%

29%

29%

6. 1%

7.1%

4.3%

DV

3,412

21.7

16.8

13.9

0.6

0.7

2.7

2.1

1.8

16.0

11.3

9.4

13.5

10.9

28%

15%

16%

18%

19"k

4.2%

5.9%

&0%

28.6 22.4 17J

0.6

0.6

3.7

2.9

2.3 18.8 12.0

9.6

23% 20% 20%

2.1~

22%

3.2%

4.8%

5.9"4

Devry

:Average Market Funded

14.9 11.9

On-Demand Software Vendors

Salesforce.com

CRM

4.349

44.5

32.2

NA

0.8

NA

3.2

2.6

2.2

19.6

13.6

NA

15.3

12.9

22%

20%

14%

17%

NA

3.9%

3.6%

NA

Concur Tedvlologies

CNQR

1,026

33.6

27.2

20.3

1.2

0.6

3.6

3.1

2.4

13.4

10.8

NA

11.0

nml

19%

28%

20%

22%

23%

4.9%

4.9%

NA

30.0
11.9

NMF

0.3

2.4

2. 1

1.7

20. 1

16.9

11.0

16.4

11.9

14%

3.0%

3.0%

I7

1.4

1.3

9.1

8.2

6.4

8.1

8.4

22%

6%
10%

10%

NA

20%
10%

7%

0.6
4.2

12%

15%

2.0%

9.5%

NA
NA

0.5

5.3

3.9

2.9

30.8

18.6

11 .9

56.3

33.8

36%

31%

12%

17%

23%

1.7

0.5

3.2

2..6

2.1

18.6 13.6 9.8

12.7 16.(

23%

22:0 12% 15% 18%

l-tinate Solware

Ulll

444

64.3

57.8

Taleo
aillenallealth

TLEO

348
810

17.8

14.3
41.6

Anti

S&P 500 (First Call)

45.7

26.8

35.4 28.8 22_2.

ro-vera.ge SoftWare
GSPC

9.5

12.9

NA

NA

NA

3.5%

5,3".0

N.A

12.6

Source: Wedbush and thomsononeim.com

Investors who focus on the education industry typically use PEG, P/E, and EV/EBITDA ratios as well as
discounted cash flows (DCFs) to assess the value of publicly traded market funded post-secondary companies.

Below we assess the merit of each valuation metric and describe typical valuation ranges that these stocks trade.
PIE and PEG ratios.

Many of the investors that we've spoken with value market funded university companies at a multiple of 1.0x price to
earnings growth (PEG). The PEG ratio in many respects simply serves as a tool for investors to standardize PE ratios
when assessing companies across lifecycle (growth vs. maturity) and across verticals. We believe that no theoretical basis
exists for such a valuation approach, and that companies are not necessarily undervalued simply because their stocks
remains lower than the expected growth rate in EPS. That said, we acknowledge that these stocks have traded at or near
a PEG ratio of 1x during the past decade- that is, when these companies posted year over year earnings growth. In the
exhibit below, we present historical PEG ratios for group bellwethers Apollo, Strayer, and ITT. We were unable to
graphically depict OeVry as the chart would have been incomprehensible, given that OeVry experienced declining earnings
in the earlier part of the decade. As the chart below shows, Apollo posted declining earnings in 2006. To the extent that
this chart tells us anything, we think that during periods of earnings growth an opportunity might exist to take a position in
names that are trading at 0.5x earnings growth.
Exhibit 5: PEG Ratios for APOL, STRA, and ESI 2000-2008

APOL

STRA

ESI I

Source: Wedbush , Baseline, and Reuters

Ariel Sokol (212) 668-987 4

Education I 9

VVEDBusw---------------------------------------------We note that in this current environment, the S&P 500 does not have a positive PEG ratio given declining earnings in 2009
versus 2008. In comparison, market funded universities trade at a PEG ratio of 0.6, on average.
Exhibit 6: Education Group PEG ratio, 2009
1 .~ .----------------------------------------------------------------------------------.
1.0X 1 - - - - - - - - - - - - - - - - -

0.8X

+----------------

0.6X

+------

0.4X

+------

0.~ 1-------

O.OX 1------~
S&P 500

STRA

AVG S:::U

APB

LOfE

ESI

A POl

UTI

Source: Wedbush and company filings

Given the long-term secular growth story, earnings growth, and earnings visibility, education companies are typically
rewarded with PE ratios significantly higher than the overall market. Over the past several years bellwether education
stocks in the aggregate have traded in a range between 1.2-2.2x the overall market. Currently, education companies trade
at roughly 1.8 the overall market.
Exhibit 7: Average PEG Ratios of APOL, DV, STRA and ESI

3.0x

"~v

2.5x
2.0x
1.5x

Exhibit 8: Average P/E Relative to the S&P 500 of APOL, DV,

STRA, and ESI

....

AJ\.

1.0x

.fVV\

O.Sx

,/"",

r-.....

"'v

O.Ox
(O.S)x

"

(1.0)x

..

(1.5)x
1.0x

(2.0)x

Oec-00

Oec-01

Oec-02

Oec-03

Oec-04

Source: Wedbush Baseline and Reuters

10 1 Education

OecOS

Oec-06

Oec-07

Oec-08

-1-----...------.-----......-----...----.......-----......----..-----,-J

Oec-00

Oec-01

Oec-02

Oec-03

Oec-04

Dlc-05

Oec-06

Oec-07

Oec-08

Source: Wedbush Baseline and Reuters

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 9: S&P 500 P/E vs. Education Group
~

lOX

1-------

ISX
lOX

SSP~

AVGED.J

Source: Wedbush and company filings

We believe that a multiple of EV/EBITDA represents a more reasonable valuation metric given its use in valuing
private market companies.
In our opinion, an EV/EBITDA multiple serves as a superior valuation tool than other commonly used methods when
assessing the value of publicly traded market funded post-secondary institutions. Our stance primarily reflects
weaknesses we see with other valuation methods and the use of EV/EBITDA by investors when calculating take-out
valuations for privately held education companies. In our view, investors are somewhat challenged in valuing market
funded post-secondary companies as only a handful of these companies are publicly traded. We believe that the multiples
that investors and companies use to acquire private market funded universities can prove useful for comparison purposes
to the publicly traded group.
We believe that over the past several years investors have bought and sold private market funded universities at a multiple
range of 5.0-15.0x EV/EBITDA. We note that in September 2008 OeVry acquired U.S. Education, a market fundeduniversity with topline growth of 24%, at 11x trailing 12 months EBITDA.
We acknowledge that historically market funded universities have traded at EV/EBITDA multiples much higher than where
they currently do, as the exhibit below suggests. However, given the overall multiple compression that high growth stocks
have endured over the past two years, we believe that investors could be hard pressed to assign an EV/EBITDA multiple in
excess of 20x anytime soon. Consequently, if the group does trade at a multiple of 20x EV/EBITOA in the future, we would
encourage investors to take money off of the table and/or look for short opportunities within the sector.
Exhibit 10: Education Group TTM EV/EBITDA

&+---~---,----,---~--~------~------r------.------.------r----~

12/2611997

1212611998

12/2611999

12/2612000 12/2612001 12/2612002

12/2612003

12/2612004

12/2612005

12/26/2006 12/26/2007

Note: Includes APE/, APOL, 011, ESI, STRA, CECO, COCO & CPLA
Source: Wedbush, Factset, and company filings

Ariel Sokol (212) 668-987 4

Education 1 11

VVEDBusw----------------------------------------------

Exhibit 11: Education Group EV/'09 EBITDA

18X
18X
14X
12X

lOX
8X

8X
4X
2X

ox
AVGEilJ

Source: Wedbush and Reuters

We do not believe that discounted cash flows are particularly useful tools when valuing high growth publicly
traded education companies.

For growth stocks, the majority of the value in the DCF comes from the terminal value, which in itself is nothing more than
a multiple of a future income statement or cash flow items. We point out that investors and even management teams can
rarely accurately forecast financial results a year in the future. As such, we are highly dubious that a valuation
methodology that focuses on projected estimates 5-10 years from now can provide a better insight to valuation than a
multiple applied to expected financial performance a year from now. More importantly, we note that discounted cash flows
require analysts to make numerous assumptions including topline growth, margin expansion, working capital changes,
capital investments, discount rates, and terminal values. Even one faulty, unintended, or intellectually dishonest
assumption could result in a valuation significantly at a premium or discount to where the stock currently trades.
Comparative Valuation Analysis

Running simple linear regressions, we see that there exists a stronger relationship between valuation & operating margins
than valuation & revenue growth. The relationship between 2010 EV/Sales and 2010 operating margins produces a much
higher R2 than that of 2010 EV/Sales and 2010 year-over-year revenue growth.
Exhibit 12: Education Stocks EV/CY10 Sales vs. 2010 Operating
Margin

Exhibit 13: Education Stocks EV/CY10 Sales vs. 10/09 Revenue

Growth

7X,---------------------------------------------,

~ r--------------------------------------------,
y = 5.7669x + 1.0382

y = 11.596l< - 0 .2379

R1 =0.3

R' =0.9076

5J(

5J(

STRA

0
~

2X

coco

1)(

1)(

~+-----~--~----~----~----~----~----~--~
0%

5%

25%

Operating Margin 2010

Source: Wedbush, thomsononeim.oom, and Reuters

12 1Education

30%

35%

40%

+ CEt.4!> llNC

~+---~--------~----~--~----~--~----~--~
0.()%

5.()%

1).()%

-6.0%

20.0%

251)%

30.()%

35.()%

40.()%

45.0%

Revenue Growth 10109

Source: Wedbush, thomsononeim. oom, and Reuters

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH

APOL

$65,32

159.5

ESI

5100. 22

a;co

$20.57
$16.91

38.7
89.8
86.2

coco

1D.421
3,880
1,846
1,458

215
137

$1.35
$3.53

20.9
19.4

16.1
15.2

12.4

0.5

0.4

3.1

2.5

2.2

I ll

497
(25)

$5.54
($0.29)

30.7
32.5

11l9

13.2
13.5

0.6
0.3
0.3

0.8
0.3
0.3

l7
0.8

3.1
0.8
1.1

2.7
0.7
1.0

0.5
0.9
1.5

nrrt

8.8
12.9
7.7
8.6
10.0

5.8
6.0
7.2

nrrt

0.8
1.5

2.1

1.8

14.3

9.2

7.4

Teta! Average

S&P 500 (Fil$1 CaJQ

GSPC

$754

.3

21.7

15.6

8.9

10.9

12.0

0.5

0.5

2.7

11.1
10.7

8.5
8.5
6.4
8.2

7.0
7.4

12.6
13.7

4.9
6.6

7.5
11.9
4.0

10,6

10.3
6.2
9.2
m1

21%
19%

17%
13%

1%
17%

8%
13%

4%

5.5
6.3

11 %

~
11.8

9.9

2A%

19%

25%

26%

26%

32%
5%
6%
1%

34%
1%
10%
4%

35%
11%
12%

9%
13%

9%
15%

10%
IS%

15%

17%

20%

Source: Wedbush and company filings

A basket of market funded education stocks over the past 10 years has outperformed the overall market by a
factor of 5:1.
We do point out that education stocks in aggregate haven't appreciated in value since 2002. Between then and now, these
stocks have had quite volatile runs in value. In the earlier part of the decade, these stocks benefited from the weak
economy and increasing penetration of the Internet. Starting in 2005 though, the economy recovered, with investors
putting capital to work in more cyclical names. A highly sensationalized 60 Minutes expose in 2005 on Career Education
regarding questionable enrollment and operating practices also resulted in deep investor mistrust regarding the entire
sector. Still later, the lending crisis in 2007 resulted in investor concern regarding student access to private loans.
Exhibit 15: Wedbush Index of Market Funded Postsecondary Education Stocks vs. the S&P 500

900

800

700

600

500

400

300

200

100

~~-;~
- .. , -

......,..

...

....;-- - - - - - -

-- --

oL--------------------------------------------------------------------------------------

Oec-96

Oec-97

D:lc-98

D:lc-99

D:lc-00

D:lc-01

- =TOll STOCKS

Oec-02

Oec-03

Oec-04

Oec-05

Oec-06

D:lc-07

D:lc-08

S&P500

Note: Index includes APOL, DV, ES/, STRA, CECO. COCO, CPLA, APE/, LOPE, UTI, LING
Source: Wedbush and company filings

Ariel Sokol (212) 668-987 4

Education 1 13

VVEDBusw----------------------------------------------

A high relationship existed in the past between the unemployment rate and our index of education stock prices.

These stocks over the past 12 years demonstrated a 0.6 correlation with the unemployment rate. It remains to be seen
whether this relationship continues if unemployment exceeds 10%.
Exhibit 16: Unemployment Rate vs. Index of Education Stock Prices, 1996-2008
1000
900
8.0
800
700

~ 7.0

000

0:

16.0
5~

500
400

5.0

300
200
100

3.0
12/31196

12130197

12128/98

12/28/99

12/28/00
!-

12/28/01

12/31102

unemployment Rate -

12/3C/03

12/28/04

Education stock Price lndtx

12/28/06

12/28/06

12/28107

12/31/08

Source: U.S. Census Bureau and Reuters

14 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
INDUSTRY OVERVIEW
Enrollment in postsecondary institutions totaled a record level of approximately 18 million in the fall 2007.

The U.S. Department of Education expects postsecondary enrollment to grow to 20.4 million by fall 2016, representing a
CAGR of 1.4%, with higher growth in the number of students age 25 and over. Interestingly, Apollo's University of
Phoenix, the largest private university in North America, enrolls roughly 2% of students in the United States. The
Department of Education estimates that total expenditures for degree granting post-secondary educational institutions in
2006 were $373 billion, or 2.8% of GOP.
Exhibit 17: Enrollments in Degree-Granting Postsecondary Institutions in the United States, 1992-2006A and 2007-2017E
5%
4%
3%
2%
1%
0%
(1)%
(2)%
1992

1995

1998

1-

2001

2010

2007

2004

2013

Total Students Enrolled--% Change Yr/Yr

2016

Source: Wedbush and Department of Education

Market funded universities market share has increased to 6% in 2005 from 3% in 2000.

We attribute market share gains over the past decade to the increased distribution of market funded university offerings
through the Internet channel. We believe that market funded universities could represent as much as 15% share over the
next decade.
Exhibit 18: Total Postsecondary Enrollments and Market-Funded Postsecondary Company Market Share
20
19

6%

:E

/.

';' 18

~ 17

16

w
~ 15

11

..8

14

~ 13
g_

,I

... 12

4%

3%

1-

2%

..ai ~' ~

11
10

"' ...

1%

...-. . 1!1
1976

1980

5%

'

0%

1984

1-

1988
Total Enrdlment -

1992

2000

1996

Market-Funded Mart<et Share

2004

Source: Wedbush and Department of Education

Ariel Sokol (212) 668-987 4

Education 1 15

VVEDBusw---------------------------------------------Enrollment growth has somewhat matured at both state and private institutions...

Students enrolled at state postsecondary institutions equaled those at private institutions in 1948. However, growth in
enrollments at state institutions sharply accelerated following the passage of the Gl bill and the creation of state school
systems. Currently, close to 70% of postsecondary students attend public institutions. We note that enrollments at these
institutions have grown by low single digits over the past decade.
Exhibit 19: Public Institution Enrollment

Exhibit 20: Private Institution Enrollment

,,

~ ~:.
g
... ".,.

10

1Mtl

~
(5~

1948

1953

1959

19M

1911

1974

l s=-PI.biiC

19&1

193G

1991

1996

!
!

1948

2001

19$.3

~~~

19&}

1~71

1$76

~ -PI'MIC

9bCha'lgeYr1Yr)

19$1

1~1

1$1$6

1W!J

2(101

9bO'Ien9tYI1'rr)

Note: Data includes non-profit & market funded enrollments. Data with just private
non-profit enrollments unavailable. We believe that market funded enrollments
exceeded private non-profit enrollments during the .}!9ars presented.
Source: Wedbush and The College Board

Source: Wedbush and The College Board

... while enrollments at market funded institutions have grown by at least 10% yr/yr for the past decade.

We are highly confident that market funded universities could continue to take share from peers. Market funded
universities reinvest profits to enroll more students, whereas non-profits redeploy capital to invest in research and public
services.
Exhibit 21: Enrollments% Change Year over Year for both Non-Profit and Market-Funded Institutions
70%
60%
50%
40%
30%
20%
10%
0% lr

rl r

I..J"

nlr Ay~

(10)%

J!il

......... m

rl r

c~r

"'

(20)%
19n

1981

1985

1989

1993

1997

2001

2005

Io Non-Profit Enrollments% Change Yr/Yr liil Market-Funded Enrollments% Change Yr/Yr I

Source: Wedbush and Department or Education

16 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Online learning continues to be the key driver in expanding the education market.
Market funded universities tend to focus on the working adult segment of the market, whose populations have different
requirements than the 18-24 student segment. These students typically work full or part time, have dependents, and
require geographic and temporal flexibility when taking classes. Because of work and familial responsibilities, attrition
rates for this segment tend to be higher than for 18-24 traditional students.
We believe that over the next 20 years, full-time online and a hybrid of online & brick-and-mortar programs could
supplant traditional brick-and-mortar instruction as the primary distribution mechanism of higher education.
To be clear, we are not necessarily suggesting a dramatic change in learning among students aged 18-22. Rather, we
believe that as the education market continues to expand new student enrollments could likely come from adult students
taking advantage of the convenience and flexibility that online education affords. The Sloan Consortium, an online
education advocacy group, estimates that 3.9 million students in higher education took at least one online course in 2007,
representing a 12.9% growth rate year-over-year and 21.9% of the total post-secondary student population. Eduventures,
a higher education research and consulting firm, projects 2008 enrollment in fully-online programs could have reached
approximately 2.1 million students, representing a 15% growth rate year-over-year and roughly 12% of the total postsecondary student population. We point out total enrollment growth of online students of a 10-15 compounded annual
growth rate over the next five years implies a doubling of the actual number of enrolled online students.
We do not think that the decelerating enrollment growth as the left-side chart below suggests will continue over the next
several years. In 2006, The Higher Education Reconciliation Act struck down a rule stating that universities providing
education online by more than 50% were not eligible for Title IV loans.
Exhibit 22: Online Enrollment Growth in the United States

Exhibit 23: Online Penetration in Total Post-Secondary

Institutions -Students Enrolled in at Least One Course as a
Percentage of Total Enrollment in the United States

2.5 . . - - - - - - - - - - - - - - - - - - - - - - . . 50%

""' . . - - - - - - - - - - - - - - - - - - - - - - - - ,

45'!4

40%

2.0

35'!4
1.5

30%

(M)

25%
1.0

20%

0.5

15'!4
10%

5%
0%

2002

2003

2004

2005

2006

2007

2008

- O nline EnroUmenl G!'O'Mh -Online EnroUmert G!'O'Mh% Change Yr('(r

Source: Eduventures 2007

Ariel Sokol (212) 668-987 4

2002

2003

2004

2005

2006

2007

Source: Sloan Consortium

Education 1 17

VVEDBusw---------------------------------------------We believe that over the next 100 years, 70-80% of the U.S. population could have Bachelor's degrees versus 30%
today.

Of all the charts in this report, the two below best describe the long-term viability of market funded postsecondary
companies. Simply put, these companies benefit from the secular transformation of society to a knowledge-based
economy that require an educated workforce to effectively function.
At the turn of the 20th century, 6% of high school students graduated, while 3% of persons age 25+ received Bachelor's
degrees. High school graduation rates increased substantially during the first part of the century to -70% of the population
due to school attendance requirements and government investments in K-12. By comparison, requirements for higher
education attainment have been dictated by the labor market.
Exhibit 24: High School Graduation Rates, 1910-2008
90%

70'.4
60%
50%
40%
30%

20'.4
10%

0%
1909-10

1919-20

1939-40

1949-50

1959-60

1 ~70

197~

1~

1999-2000

2007-00

Source: Wedbush and Department of Education and Census Bureau

Exhibit 25: Percentage of Persons age 25+ with a Bachelor's Degree or Higher, 1910-2006
~% ~-----------------------------------------------------------------------------.

30'.4
25%

20'.4
15%

10'.4
5%

0'.4
1909-10

1919-20

1929-30

1939-40

1949-50

1969-70

197~

1989-90

1999-2000

2007-00

Source: Wedbush and Department of Education and Census Bureau

18 1 Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH

Exhibit 26: Highest Level of Education Attained by Persons 25 Years+

Less than High
School
High School
Completion, 31.s+h

Doctor's Degree ,
1.3%

Master's Degree,
7.0'h

Bachelor's De
18.9%

We note that the unemployment rate for adults with a Bachelor's degree in January 2009 reached 4.1%. In comparison,
the unemployment rate reached 12.6% for those with less than a high school degree.
Exhibit 27: Seasonally Adjusted Unemployment Rate, 25 Years & Older, By Degree Attainment, 1999-2008

0 +-----~------~------~----~------~------~----~------~----~
Oec-99

Oec.Q1

Oec-00
-

0ec.()2

Dec.Q3

- Less Than a High School Diploma

Oec-04

Oec-05

0ec.()6

0ec.()7

Dec.Q8

- -High School Graduates, No College

- s ome College or Associate Degree -Bachelor's Degree and Higher

Source: Wedbush and Bureau of Labor Statistics

Ariel Sokol (212) 668-987 4

Education 1 19

VVEDBusw---------------------------------------------We believe that in the long term, a higher demand for skilled employees in a services based economy, an income
premium for advanced degrees, and a failed K-12 educational system in the United States could fuel demand for
academic programs offered by market funded institutions.

The Census Bureau estimates that five of the top ten occupations expected to experience the greatest percentage growth
between 2006 and 2016 could require at least a Bachelor's degree. We also point to Census Bureau data indicating that
those with Doctoral degrees earned an average 60% and 35% income premium over those with only a Bachelor's and
Master's degree, respectively. Those with Master's degree on average earned a 19% premium over those who hold a
Bachelor's degree. Of course, this data supports a rather intuitive notion that an investment in education yields greater
individual earnings power. We believe that the key challenge in the further penetration of advanced degrees among the
U.S. labor force lay in providing access to a quality education in a flexible and affordable manner.
Exhibit 28: 2007 Average Annual Earnings of Workers 25 Years and Older By Education Level
$120,000 . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - .
$95,785

$100,000
$80,000
$60,000
$40,000
$20,000
$0

1-igh School Degree Associate's l:egree

Bachelor's l:egree

Master's Degree

COctoral l:egree

Source: U.S. Census Bureau

We expect market funded institutions to continue to benefit from the growth in online education as most have
already invested in a technology platform. As well, we believe that market funded institutions' focus on fulfilling
customer needs to a greater degree than non-profits.

Along with having developed programs tailored towards the growing number of adult students, the majority of market
funded institutions already have invested in the infrastructure necessary to deliver content to students online. More
importantly, we believe that a rather substantial disconnect regarding customer service exists in higher education between
non-profit institutions and the students that they serve. Endowment and state funded institutions focus on the needs of a
variety of stakeholders, including the communities that they serve (e.g. , hospitals) and faculty (e.g., investments in
research). Market funded postsecondary institutions are not constrained by missions other than that of servicing the
demands of its students.
We expect on average mid- to high teen revenue growth from publicly traded market funded universities.

Following the economic recovery in the mid-2000s, enrollment and revenue growth sharply decelerated. Publicly traded
market funded postsecondary aggregate revenue grew by only 3.3% in 2006. Since then, revenue growth has
successively accelerated. Consensus estimates imply 18% revenue growth year over year in 2009 from 15.1% year over
year revenue growth in 2008. We note that over the past five years Apollo has represented between 28-35% of total
market funded postsecondary revenue, and that the company has driven much of the growth in both enrollment and
revenue trends.

20 1 Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 29: Revenue of Publicly Traded Market Funded Universities

14
12
10
($8) 8

4
2
0
2004

!=Revenue -

% Change Yr/Yr l

Source: Wedbush and company filings

While market growth opportunities still exist in the United States, we also note that worldwide postsecondary
enrollments have accelerated over the past 15 years.

International enrollments have grown by a compounded annual growth rate of 8% over the past five years. While the
opportunity to penetrate international markets remains considerable, it does not come without risks for U.S. based
institutions. We prefer U.S. based operators to establish presence in international geographies through tuck-in acquisitions
that reduce integration risk, at least until institutions gain experience and familiarity with local markets.
Exhibit 30: Worldwide Postsecondary Enrollments
160,000

T- - - - - - - - - - - - - - - - - - - - - --,- 9%

140,000

8%
7%

120,000

6%

100,000

5%

($8) 80,000

4%

60,000

3%

40,000

2%

20,000

1%

0%
1970

1975

1980

1985

1990

ll!a!l!l Wort<Mide Post-Secondary Enrollments -

1995

2000

2005

5 Year CAGR

Source: UNESCO Institute for Statistics

Ariel Sokol (212) 668-987 4

Education 1 21

VVEDBusw---------------------------------------------FINANCIAL REVIEW
On average, publicly traded market funded postsecondary companies are growing revenue by -20% year over
year.
For more mature companies more susceptible to the economic cycle like Apollo, ITI, and DeVry, revenue growth rates
have accelerated over the past two years. Clearly, this acceleration is not sustainable. We suspect that enrollment growth
rates could start to decelerate in the back half of 2009 as the beginning of the U.S. economic downturn anniversaries. On
the pricing side of equation though, we believe that the publicly traded market funded schools can continue to have free
reign in pricing given the overall price increases by state and private funded institutions.
Exhibit 31: Annual Revenue Growth Rates of Market Funded Postsecondary Companies,
70%
60%

50%

1---

40%

r--

30%

1-

20%

1-

10%

r-

r-

0%
APEI

A\er.JQe

LOPE

STRA

CPlA

APOL

rN

mIll IJl

ESI

coco

LI'IC

CECO .

I
m'

Ym

'

(10)%
jo08/07 09108 o 11Y091

Source: Wedbush and ThomsonOnelm.com

Enrollment growth rates for the bellwether education stocks have sharply accelerated over the past four quarters
-we do not expect this trend to continue in the back half of 2009.
As the exhibit below suggests, over the past year enrollment growth rates accelerated at most institutions including Apollo,
ITT, DeVry, and Strayer. The acceleration in growth rates are clearly unsustainable as the enrollment base continues to
increase. We saw significant spikes in Apollo's enrollment growth rates over the past three quarters, from 11% in their
May quarter, to 15.4% in their August quarter, and then to 18.4% in their November quarter. We think that growth starts to
decelerate in May or August 2009, after the anniversary of when enrollment growth started to accelerate.
Exhibit 32: Average Enrollment Growth Rate of Apollo, DeVry, ITT, and Strayer Over The Past
Eight Quarters

20%,---------------------------------------------,

1~%-~---~
/
----l
-~

---------

10% t - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - i

~ +--------------------------------------------4

0% ~----~----~----~----~~----~----~----~

01

02

03

04

0~

06

07

08

Note: We only include DeVry University undergraduate enrollments for this calculation.
Source: Wedbush and ThomsonOnelm.com

22 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
We believe that most institutions still have significant runway for margin expansion so long as the economy
continues to deteriorate and enrollments grow by double digits.

The most obvious opportunity to expand margins resides in a postsecondary company's ability to amortize general and
administrative costs across a growing revenue base. Industry stalwart Apollo has reduced G&A costs down to 7.2% of
revenue in its fiscal 2008, far lower than American Public Education's 19.9% of revenue and Grand Canyon University's
16.6% of revenue. Of course, even the largest of companies can continue to grow margins through scale by extracting
concessions from vendors. In the current downturn, deflation enables clients to renegotiate contracts with vendors.
For companies with brick-and-mortar presences, significant operating leverage exists as utilization of fixed asset facilities
increases. Case in point, DeVry's Universities operating margins increased to 10.4% in 2008 from breakeven in 2005 due
to increasing enrollments. Of course, following the technology bubble margins did contract from 17.5% in 2001 as
enrollments declined.
To be clear, postsecondary institution margin structures are not uniform, and as such there are no hard and fast rules to
describe how margins could expand. We note though that companies operating in the space have vastly different
business models and differentiate on price, offerings, geography, degree level, age, and race. Conventional wisdom
suggests that higher education institutions that operate a purely online model can achieve higher margins than brick-andmortar peers, as online schools do not need to depreciate investments in capital expenditures or incur leases for teaching
facilities. However, the online model in our view could require more sales & marketing investments than brick-and-mortar
peers due to brand creation. We contend that ground campuses provide brands such as Grand Canyon, Strayer, DeVry,
and University of Phoenix legitimacy that remains unquantifiable.
Exhibit 33: Operating Margins of Postsecondary Institutions, Calendar Year 2007-2009
35%

30%

25%

I--=

20%

r-

r-

f-

f--

r---- -

10%

r-

r-

1---

r-

5%

r-

r-

h1

r-

15%

0%

Average

Af'Ol

AFS

LOf'E

f--

CPI.A

l1

ooco

n~
LNC

CECO

UTI

Jo 2001 m2008 o 200e j

Source: Wedbush and ThomsonOnelm.com

Ariel Sokol (212) 668-987 4

Education 1 23

VVEDBusw---------------------------------------------Exhibit 34: Aggregate Margin Expansion of Select Market-Funded Universities

100 bps
Obps
(100) bps - 1 - - - (200) bps - 1 - - - (300) bps - 1 - - - (327) bps
(~0) bps ~------------------------J

2004

2005

2006

2007

2008

2009

2010

Note: Market-Funded Universities include APOL; DV; ESI; STRA; CECO & COCO.
Source: Wedbush and Thomsononelm.com

In the exhibit below we break out Apollo's expenses. We note that no other company in the education space provides this
level of granularity in their financial statements regarding expenses. Regrettably Apollo has opted to discontinue this
disclosure.
Exhibit 35: Composition of Apollo's Expenses, Fiscal 2008

other
General &
Adninistrative
EnlJioyee

lnstrucoonal Costs
EnlJioyee
CoJll)ensaoon
21%

Bad Oett 8<pense

4%

Other lnstrucOOnal
Costs
8%

fnrollrrent
Counselors
CoJlllensaoon
16%

Oassroom Lease
B<pense &
Depreciation
9%

Faculty
CoJll)ensaoon
11%

Source: Wedbush and Apollo company filings

24 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
COUNTERCYCLICALITY
Enrollment data aggregated by the Department of Education over the past thirty five years unsurprisingly suggest
some counter cyclicality with respect to unemployment and enrollments.
As the exhibits below suggest, aggregate fall enrollment year-over-year growth rates are negatively correlated to non-farm
employment year-over-year growth rates. Undergraduate enrollments annual growth has a -0.46 correlation with non-farm
employment annual growth, versus a -0.29 correlation with graduate enrollments.
Exhibit 36: % Change in Total Undergraduate Fall Enrollment
vs. % Change in Non-Farm Employment

Exhibit 37:% Change in Totai2-Year Degree Fall Enrollment

vs. %Change in Non-Farm Employment
16% . . - - - .n- - - - - - - - - - - - - - - - - - - - ,

10%
8%
6%
4%
2%
0%
(2)%
(4)%
1970

1975

1980

1985

1990

1995

2000

2005

Source: Wedbush, Department of Education, and Bureau of Labor Statistics

(4)%
1970

1975

1980

1985

1990

1995

2000

2005

Source: Wedbush, Department of Education. and Bureau of Labor Statistics

Exhibit 38: % Change in Total Graduate Fall Enrollment vs. %

Change in Non-Farm Employment
~ ,------------------------,

Source: Wedbush, Department of Education, and Bureau of Labor Statistics

While the charts above speak to broad overall trends, the benefits of a weak economy are clearly not uniform
across the thousands of postsecondary institutions.
Institutions that focus on career education with verticals that have tight labor demand do very well. At the same time,
institutions that train students in out-of-favor sectors are likely to have challenges. Following the 2000s recession
companies such as DeVry that offered information technology educations fared poorly. In the current downturn companies
like Universal Technical Institute, with its focus on the automotive sector, reported weak student start growth rates in its
fiscal 1009 results.
We believe that in the current downturn all market funded universities will benefit from deflationary forces, which
lower expenses and buoy operating margins.
Specifically, we believe that market funded universities could achieve significant efficiencies relating to sales & marketing
expenses given the deflationary environment. As well, we believe that increasing scale could enable company to extract
pricing concessions from vendors and contractors.

Ariel Sokol (212) 668-987 4

Education 1 25

VVEDBusw---------------------------------------------As the exhibit below suggests, market funded postsecondary companies' earnings growth lagged the S&P 500 during the
economic boom of the mid-2000s. As the economy deteriorated over the past two years and earnings declined for the
S&P 500, earnings growth accelerated for many market funded postsecondary companies.
Exhibit 39: EPS% Change year over year of Market-Funded Universities and S&P 500
40%

/----

30%
20%

10%
0%

"= ...........__/
-.. /
.

xp.

~-

2005

~7

2006

...

'

'

..

20()9

2008

'

(10)%

.
., .

..

2010

(30)% ' - -

I- -Mal1<et.Funded Uni~ersfty Stocks

S&P 500 I

Note: Market-Funded Universities include APOL; DV; ESI; STRA; CECO & COCO.
Source: Wedbush and thomsononeim.com

TUITION REVIEW
Over the past 20 years, tuition price increases at public and private institutions have far outpaced inflation.
We attribute this to the third-party payer system in higher education where the government funds grants and guarantees
student loans regardless of credit. In our opinion, a vicious cycle exists as schools increase tuition given that the federal
government has demonstrated a willingness to lend to students without regard to credit. In turn, the government must
continue to increase lending to students to fund rising tuition costs.
Overall, we do not believe that continued tuition price increases above the rate of inflation are sustainable in the long run.
That said, we acknowledge that we could have articulated that statement ten years ago. We have no evidence that the
current economic collapse could bring about the inflection point where schools no longer increase their prices greater than
inflation.
Exhibit 40: Growth of Undergraduate Tuition and Fees for Full-Time Students in Degree Granting Institutions, 82/83-06/07
600

I
.....

500

400

""'
~

300

___....-=-

200

100

-- -- -

1982-83

1~7

19eo-91
Put:llc lnstutlons Inflation -

1994-95

1998-99

Private nstluticns nftallcn

2002-o:l

CP;j

Source: U.S. Census Bureau

26 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 41: Undergraduate Tuitions at Select Institutions
sw.ooo . --------------------------------------------------------------------------------.
$60,000
$40,000
$20,000
$0
Drexel

Strayer

DeVry

Capella

Flmn State @
l.kliversly Park

l.kliversly

l.kliversly of
A1oenix

Grand Canyon

Ohio State
University

Arreri::an

lkliversty of

f\Jblc

Arizona

6:tucation

Online

Notes: In-state tuitions for state universities. University of Phoenix assumes 2 years atAxia for Associate's degree and completion at University of Phoenix.
Source: Wedbush, company filings , and unilll?rsity websites

While we expect some companies to reduce their corporate tuition reimbursement policies over the next several
years, we believe that most programs could remain intact.
According to market research firm Eduventures 2005 study, more than 85% of U.S. based companies offer tuition
assistance. The conventional wisdom over the past several months has been that tuition reimbursement policies are
highly discretionary and no longer needed. We disagree with this sentiment. Yes, because of tight labor markets in the
mid-2000s, human resource professionals focused on implementing employee retention programs. Yes, we acknowledge
that some firms have reduced this benefit to their employees, and some will likely do so over the next several years.
However, based on our conversations with benefits managers, we think that the vast majority of these programs are likely
to remain intact at most firms. The simple truth is that tuition reimbursement programs are highly popular among
employees. We are finding that firms are much more willing to reduce headcount to rationalize costs than to reduce these
benefits. To that point, Challenger, Gray & Christmas published an economic survey in January 2009 listing various
measures that companies have taken to reduce costs. We note that cutting tuition reimbursements are not particularly
high on the list of cost cutting for organizations.
Exhibit 42: Challenger, Gray & Christmas Survey of Measures Taken by Companies To Reduce Costs, 2008
00%

70%
60%

50%
40%

30%

.---

20%

.---

_D
,..

10%
0%
o'>

e"

~<;

,'<7~"'

~<1:'
<(~

f>.f'

J>~

;'

<1:-Jl

,ti

.,1!!

,_o,

,...:;

?:-...

~"

~0

!P"'
'1~~

...<t"

~.,

..~(f

'1..~...

t-0b

:#""
,0

<J"<l

~J>

v"'

~"
..~<>?;

q}

o'S'

~4.(/j

~v

~"
'1"

iS'~

~>"'

""'
<1:-"'
~-s

i'

'<>

i6-,r.
<o

1>....."'

,s-"'
<1:-"'l!i

&(?

qp"'
"I>
~;

qp"'

?,~

I>

.~

q}

~olf

.._,.!>"'

v~

,.,J>

[] JL
,.

..~

~"

rf"v

~#
..._.,~<f'

({'

......~

...~

t<>~

~0

(1>0

~<>

!b(f-

.fl

Ci

Source: Wedbush and Challenger. Gray & Christmas

Even during a challenging economy, firms still hire and retain quality employees, all the while pairing down
headcount.
We believe that most investors and analysts create a simplistic picture of labor markets without giving credit to the highly
dynamic U.S. economy that creates millions of jobs even during challenging economic times. On a net basis during the
first half of 2008, 763,000 jobs were lost in the United States. However, according to the Bureau of Labor Statistics, on a
gross basis, 14.4 million jobs were created even as 15.2 million jobs were lost. The point here is that firms still need to
attract talent within an organization. Firms still perceive the need to remain competitive with respect to benefits packages.

Ariel Sokol (212) 668-987 4

Education 1 27

VVEDBusw---------------------------------------------STUDENT LOAN REVIEW

On average, federal backed student loans account for roughly 60-80% of total revenue generated by publicly
traded market funded companies.
As a consequence, legislation related to federal loans or speculation regarding changes to existing programs typically
result in sizeable moves to market funded postsecondary company stock prices.

Exhibit 43: %of Revenue from Title IV Loans, Fiscal 2008

90% , - - - - - - - - - - - - - - - - - - - - - - . ,
80%
70%
60%
50%
40%
30%
20%
10%
0%
LINC

COCO

APOl

CPLA

ESI

UTI

WPO

STRA

OV

/>PEl

Note: Data reflects companies' fiscal 2008 fiscal year and not calendar year data
Source: Wedbush and company filings

Stafford loans are the most significant source of U.S. federal student aid and represented 34% of funds to finance
postsecondary education expenses in fiscal 2008.
These loans are low interest federally guaranteed loans which are not based on creditworthiness.
Pell grants are awarded on a need-only basis to undergraduate students who have not earned a Bachelor's or professional
degree. Unlike loans, Pell grants do not have to be repaid.

Exhibit 44: Student Aid and Non-Federal Loans Used to Finance Postsecondary Education Expenses in Fiscal 2008

Other
17%

Federal
Grants
13%

Source: Wedbush and The College Board

28 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Five Types of Loans Students Use to Fund Education
Federal Student Loans (Stafford).
These loans are guaranteed by the federal government, and are need based rather than credit based. Students do not
need to repay these loans while enrolled on a full-time or half-time basis. There are two types of Stafford loans:
subsidized and unsubsidized. With subsidized Stafford Loans, the government pays interest on a loan while a student
remains in school.
These loans are provided to students either directly by the federal government through the Direct Loan program or by
financial institutions through the Federal Family Education Loan Program (FFELP). In the 08/09 school year, these loans
are offered at a 6.8% fixed rate for unsubsidized and Qraduate loans, and 6% for subsidized loans..

Perkins Loans.
Perkins Loans are provided to students with exceptional financial need. These loans are subsidized, with no origination or
default fees.
Loans carry a fixed rate of 5% for the duration of a ten-year repayment period. Loan limits for undergraduates are
$4,000/year, with a maximum value of $20,000.

Parent Student Loans (Parent PLUS).

The federal Parents Loan for Undergraduate Students allows parents to borrow money to pay for costs not covered by
federally backed financial aid.
These loans are offered through the Direct Loan program at a 7.9% fixed rate or through the FFELP financial institutions
at a 8.5% fixed rate.

Graduate Loans (Graduate PLUS).

These loans allow graduate students to borrow money to pay for costs not covered by federally backed financial aid. We
note that applicants cannot have adverse credit based on a review of at least one credit report from a credit reporting
agency.
These loans are offered through the Direct Loan program at a 7.9% fixed rate or through the FFELP financial institutions
at a 8.5% fixed rate. There is a 3.0% origination fee.

Private Student Loans (also known as Alternative Loans).

These loans are taken by students to fund the difference between a program's tuition and a student's financial aid package.
These loans tend to have much higher interest rates than the loans that are offered by the federal government.
These loans are offered by financial institutions. They typically have variable interest rates pegged to LIBOR.
Interest rates on these loans are typically based on a FICO score.

Ariel Sokol (212) 668-987 4

Education 1 29

VVEDBusw---------------------------------------------Exhibit 45: Paying for School - Stafford Loans

Dependent
Undergraduate

Independent
Undergraduate

Graduate
Student

Year1

$5,500
(Only $3,500 of this
amount may be
subsidized)

$9,500
(Only $3,500 of this
amount may be
subsidized

$20,500 per year

(Only $8,500 of this
amount may be
subsidized)

Year2

$6,500
(Only $4,500 of this
amount may be
subsidized)

$10,500
(Only $4,500 of this
amount may be
subsidized)

Year 3 & 4

$7,500
(Only $5,500 of this
amount may be
subsidized)

$12,500
(Only $5,500 of this
amount may be
subsidized)

$31,000

$57,500

$138,500 for
Graduate Students

(Only $23,000 of this

amount may be
subsidized)

(Only $23,000 of this

amount may be
subsidized)

(Only $65,500 of this

amount may be
subsidized)

Maximum
Allowable
Debt at
Graduation

$224,000 for Medical

and Health
Profession Students
(Only $65,500 of this
amount may be
subsidized)
Source: Wachovla.com

Source: Wachovia.com

The private student loan market, which grew by a 20.3% compounded annual growth rate of the past 10 years, is
currently facing extraordinary challenges in extending credit due to the challenged credit environment and
tightened underwriting standards.
The private student loan market grew to $19. 1 billion in fiscal 2008 from $3.0 billion in fiscal 1998. This growth was driven
by increases in tuition prices without a commensurate increase in federal student aid. However, as the economy faltered
over the past two years lenders have been unwilling to lend as they had in the past given declining credit standards. As
well, the collapse of financial institutions and securitized products included the collapse of the student loan asset backed
securitization market (SLABs) for private student loans. In response, the federal government undertook a number of
measures to assist students, including increasing Stafford loan limits both in 2006 (Deficit Reduction Act of 2006) and 2008
(Ensuring Continued Access to Student Loans Act of 2008). As well, in 2006, the government created Graduate PLUS
loans, which enable graduate and professional students to borrow unsubsidized federally guaranteed education loans with
no annual or aggregate limits.

30 1 Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 46: Growth in Private Student Loans ($M), 98/99-07/08

Exhibit 47: % Change year o ver year in Private Student Loans

vs. Federal Loans, 98/99-07/08
~ ----------------------------------------------------,

20.000

16,000

-12.000
fSM)
8,000

4 ,000

(10)% ' - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - '

IPrt.ae Studflt Loam tt. O'IL'Ing& YriYt Total Fec!tiel l oans tt. 0\ange VtiYr

Source: Wedbush and The College Board

Note: Federal Loans include Stafford, PLUS, and Perkins Loans

Source: Wedbush and The College Board

We note that American Public Education, Apollo, Capella, DeVry, Grand Canyon, and Strayer have relatively little
exposure to private student loans given lower price points than their peers.
Exhibit 48: % of Revenue from Private Student Loans, Fiscal 2008
20% .--------------------------------------------------------------------,

16%

12%

8%

4%

0%
ESI

DV

APOL

S1RA

LOPE

CPLA

Note: for ESI, 10% of its revenue was from internal student financing and 8% was from unaffiliated private education Joan programs. We have aggregated ES/'s internal
and external private loan programs to demonstrate the difference between it and DV, APOL, STRA, LOPE, and CPLA.
Source: Wedbush and company filings

Ariel Sokol (212) 668-987 4

Education 1 31

VVEDBusw---------------------------------------------REGULATORY ENVIRONMENT
Postsecondary institutions must comply with significant regulatory requirements from accrediting agencies; the
U.S. Department of Education; and state higher education regulatory bodies.
All postsecondary institutions participating in financial aid programs are governed by the Higher Education Act of 1965.
The Act, which was reauthorized and extended for five years in August 2008, requires each institution to adhere to strict
regulation to maintain eligibility to receive financial aid.
Higher education institutions participating in Title IV programs must be accredited by an accrediting body
recognized by the Department of Education.
The goal of accreditation is to ensure that education provided by institutions meet acceptable levels of quality. These
agencies develop evaluation criteria and conduct peer evaluations to assess whether those criteria are met. Acceptance
of degrees from non-regionally accredited colleges and universities is very low.
To remain eligible to participate in Title IV programs, educational institutions must maintain an appropriate
student Joan cohort default rate.
A cohort default rate is the percentage of a school's borrowers who enter repayment on certain loans during a federal fiscal
year (October 1 to September 30) and default prior to the end of the next two fiscal years. For example, the Department of
Education released 2006 cohort default rates in September 2008. The Department of Education annually reviews each
institution and publishes the rates 12 months following the end of the measuring period. The August 2008 reauthorization
of the Higher Education Act extended by one year the period for which students' defaults on their loans are included in the
calculation of an institution's cohort default rate. That change will be effective with the calculation of institutions' cohort
default rates for federal fiscal year 2009, which are expected to be calculated and issued by the Department of Education
in 2012. As a consequence, we expect cohort default rates to spike significantly in 2012. The revised law also increased
the regulatory threshold for ending an institution's participation in Title IV programs due to non-compliance. Below, we
present the thresholds for cohorts before fiscal 2009 and after.

Cohort Default Rates

Pre-2009 Cohorts
2009 Cohorts

32 1Education

Penalities

Single Year 10%

Single Year 15%

Results in a required 30-day

delay in disbursing loan
proceeds to first year first time
borrowers.

Three Year 25%

Three Year 30%

Title IV ineligibility

Single Year 40%

Single Year 40%

Title IV ineligibility

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
The number of schools sanctioned as a consequence of excess cohort default rates has decreased substantially over the
years. Based on statistics provided by the Department of Education, only one school was sanctioned in 2006. In
comparison, in 1992 642 institutions received sanctions.
Exhibit 49: Schools Subject to Sanctions by the Department of Education for Violating Cohort
Default Rate
700 .--------------------------------------------------------------.
642
600
500
433
402
400
330
300
236
200
138
100
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Wedbush and Department of Education

According to the Department of Education, the 2006 cohort default rate for market funded postsecondary institutions was
9.7% compared to 4.7% and 2.5% for public and private postsecondary institutions, respectively. We will have further data
regarding 2007 cohort default rates in the fall.
Exhibit 50: National Student Loan Cohort Default Rates
25% r - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,
22.4%
21.4%
20%
17.2%

17.8%
15.0%

15%
11.6%
10.7% 10.4%
9.6%

10%

8.8%

6 .9%
5.6% 5.9% 5.4% 5.2%

4.5% 5.1% 4.6% 5.2%

5%

0%
1988 1989 1990 199 1 1992 1993 1994

1995

1996 1997 1998 1999 2000 2001 2002

2003 2004 2005 2006

Source: Wedbush and Department of Education

Ariel Sokol (212) 668-987 4

Education 1 33

VVEDBusw---------------------------------------------Exhibit 51: Average Cohort Default Rate by Institution Type: Public Non-Profit, Private Non-Profit, and
Market-Funded

2004

2005

2006

o Public 1\bn-A"Ofit 111 A'ivate 1\bn-A'ofit o tv'arket Funded

Source: Wedbush and Department of Education

Below we list other regulations that market funded postsecondary institutions must abide by:
90/10 Rule.

Market funded institutions are ineligible to participate in Title IV financial aid programs if over 90% of its revenue is derived
from Title IV funds for two consecutive years. Any institution that has derived over 90% of its revenue for a single year will
consequently be placed on provisional certification and could face sanctions from the Department of Education.
Compensation of Representatives.

As part of Title IV of the Higher Education Act, representatives from postsecondary institutions are prohibited from
receiving additional compensation or incentive payments based on successfully securing enrollments or financial aid. The
Higher Education Act does, however, permit salaries of representatives to be adjusted twice per annum as long as any
adjustment is not based solely on enrollment or financial aid award metrics. Based on our conversations with management
teams, there is a wide interpretation as to what is implied by the term "solely".
Change of Ownership or Control.

A change of ownership or control, depending on the type of change, may have significant regulatory consequences. Such
a change of ownership or control could trigger recertification by the Department of Education, reauthorization by state
licensing agencies, or the reevaluation of the accreditation by The Higher Learning Commission.

34 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
FRAMEWORK FOR ANALYZING EDUCATION COMPANIES FINANCIAL RESULTS:
ERBA (ENROLLMENT GROWTH; RETENTION ; BAD DEBT EXPENSE; ACQUISITION COSTS)
In assessing the health of a market funded postsecondary company, investors typically review enrollment growth, retention
rates, bad debt expense, and marketing acquisition costs in addition to revenue, operating margins, and EPS. Below we
review each metric.
Enrollment Growth.
Companies typically disclose to investors a net total enrollment metric for the quarter. New student enrollment and
changes in retention drive total enrollment growth. Some companies like Apollo and ITT provide a new student enrollment
metric that enables investors to assess the inflow of students in a given quarter. However, companies like American Public
Education or Capella do not provide this level of transparency. We note that most companies break out their student
populations by the type of degree received. Such granular disclosure enables investors to assess the countercylicality of
the overall business. As well, because graduate degree programs tend to have a higher price point than undergraduate
programs, enrollment growth rates by type of degree can influence the extent that a company can expand its margins.
In any given quarter, investors review revenue per enrollment to understand pricing and any mix shifts in degrees that
students pursue. So long as companies benefit from annual tuition price increases, enrollment growth typically trends
slightly below the rate of revenue growth. Annual tuition price increases result in annual increases to revenue per student.
However, because companies provide a range of programs at different price points to students who are pursuing degrees
through both online and ground campuses, mix shifts in student populations could impact revenue per enrolled student.
Retention.
Retention rates reflect both churn from students exiting a program as well as graduation. No company that we follow
provides on a quarterly basis the number of students who exit a program. However, some companies do provide the tools
to calculate a persistence rate. In general, a persistence rate refers to the percentage of students who return for another
semester or year in a program.
Most companies do not provide a persistence rate on a quarterly basis. However, investors to some degree are able to
track persistence for those companies that provide an enrollment and a new student enrollment metric. To calculate
persistence, we first take the previous quarter's enrollment number and then add new students to get a "gross enrollment"
for a quarter. We then subtract the current quarter's enrollment to calculate the number of students who churned in the
quarter. At this point, equations that investors use to calculate a persistence rate diverge a bit. Some investors divide the
number of students who churned in a quarter by the previous quarter's enrollment, while some divide by the average of the
previous quarter and gross enrollments.
Exhibit 52: Example of a Persistence Calculation Using Apollo Q4 2008 Results
Metrics Available

Enrollments
New Oegreed Enrollments

3Q08

4Q08

345,300

362,100
83,100

Gross Enrollments Calculation

3008 Enrollments
+ 4008 New Degreed Enrollments
4Q08 Gross Enrollments

345,300
83,100
428.400

Persistence Calculation
4008 Gross Enrollments
- 4008 Enrollments
4Q08 Persistence

428, 400
362,100
66,300

Persistence Rate Calculation

3008 Enrollments
4008 Gross Enrollments
Average Enrollments in 4008

345,300
428,400
386,850

4008 Persistence
Average Enrollments in 4008
4008 Churn Rate
Persistance Rate = 1- Churn Rate

66,300
386,850

17.1%
82.9%

Source: Wedbush and comeanv filings

Ariel Sokol (212) 668-987 4

Education 1 35

VVEDBusw---------------------------------------------Bad Debt Expense.

Bad debt expense relates to the portion of accounts receivable that is uncollectible and need to be written off. It's not all
that unusual for a university to allow a student to attend classes even though financial aid has not yet been processed or a
student's employer has yet to disburse tuition reimbursement. In such circumstances, schools record revenue for the
period which student attends classes and debit accounts receivable. Because some students eventually drop out of a
program before paying for school, the school will not collect on the total value of these receivables. We note that students
at Strayer who have attended classes through the second week are charged 25% of tuition for a class. We also note that
students at Strayer are working adults. Due to various work/life obligations or rigors of the program that outweigh a
student's ability, students drop out of classes. Based on conversations with endowment, state, and market funded
institutions, schools are hard pressed to collect cash from students who don't pay for their classes, particularly given
potential negative headlines of schools suing their students. To be very clear, a school can easily reduce bad debt
expense by refusing to enroll students who cannot pay upfront fees. However, schools would then forego enrollments from
students who can eventually pay but for understandable reasons do not have the money upfront.

From our perspective, there is nothing inherently problematic about the level of company's bad debt expense, as bad debt
expense is a necessity for companies that provide opportunities for underserved markets. We are much more concerned
with changes in bad debt expense that occur in a given quarter and what they imply about changes in enrollment practices,
mix shifts in enrolled students, and overall demand. In a best case scenario, bad debt expense declines and margins
expand as schools attract better quality students. In a worst case scenario, margins contract as schools enroll students
not suitable for a program who then later drop out without paying for sessions attended. As Strayer CEO Robert Silberman
commented in his company's 4008 results, a "very high correlation among our students [exists] between those students
who are not performing academically and those who don't pay ... Any time we see bad debt expense growing at a
significantly faster rate than our revenue or our enrollment that leads me to have a cultural concern. Are we trying too hard
-are we getting the students who may not belong in the classroom and trying too hard to get them in there."
Acquisition Costs.
Obviously, lower acquisition costs per student boosts margins. The two drivers for acquisition costs include expenditures
for enrollment counselors and advertising.
Enrollment counselors. Companies typically do not disclose the number of enrollment counselors on staff on a quarterly
basis. However, management teams do speak qualitatively regarding hiring needs and the efficiency of counselors. Given
the challenging economic environment, retention of enrollment counselors by universities has increased. As such,
companies benefit from lower acquisition costs as schools employ longer tenured counselors who are more efficient than
inexperienced new hires.
Advertising. Schools advertise through a myriad of channels including television, print, direct mail, trade shows, business
alliances, and the Internet. An increase in advertising expenses per enrolled student does not necessarily reflect an
increased competitive environment, although that likely could be the cause. We note that advertising dollars could
increase due to the launch of a new program offering or entrance into a new geography that perhaps does not generate an
immediate impact in enrolling new students.

Many schools receive their leads through online advertising and specifically from lead aggregators. Lead aggregators are
marketing middlemen who buy leads from affiliates and sell them to universities. Over the past several years, lead
aggregators have aggressively entered the education market following the collapse of the mortgage lead aggregation
business. Overall, prices for leads have stabilized or fallen over the past year or two, but price has increasingly become
less of an issue for education companies than quality of leads, total number of leads from a vendor, and customer service
(e.g., receiving data instantly rather than within a 24 hour period). We believe that market funded universities could
increasingly acquire lead aggregators to reduce costs. We note that both the Washington Post's Kaplan subsidiary and
Apollo acquired lead aggregator firms in 2007.

36 1 Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
APOLLO GROUP (APOL, BUY, PT: $90.00)
Initiating Coverage of Apollo Group: One-Two Punch of Topline Growth and Free Cash Flow
Could Knock Out the Bears' Gloom and Doom

We are initiating coverage of Apollo Group with a BUY rating and 12-month price target of $90. Our target
reflects an -12 EV/EBITDA multiple to our calendar year 2009 EBITDA estimate. Our multiple reflects the company's
strong revenue growth rate and operating leverage opportunities and is in-line with other education stocks with similar
revenue and operating margin characteristics.

Apollo Group operates the University of Phoenix, the largest private university in the United States. The
University of Phoenix, which represents 95% of Apollo's total revenue, enrolls more than 384,900 students in both
brick-and-mortar campuses and online offerings.
Notable alums include former United States Secretary of
Transportation Mary Peters and basketball legend Shaquille O'Neal, who receive his MBA from Phoenix in 2005.

We are hard pressed to find companies like Apollo in the current economic environment that grow revenue by
20% and trade at a free cash flow yield of roughly 7%. Simply put, Apollo is a cash flow generating machine,
which in our view mitigates downside risk with respect to the stock price. The company could generate close to $2
billion of free cash flow over the next two years.

We believe that Apollo could continue to benefit from the challenging macro environment given its exposure
to countercyclical Associate's and Bachelor's degree programs. Back in 2004, Apollo launched the wildly
successful Axia College, which educates students seeking Associate's degrees. The school targets students with little
or any previous college experience and offers small classes of less than 20 students. Associate degree enrollments at
Phoenix have increased by 161 ,800 students, representing a -60% CAGR, over the past three years. We believe that
Associates degreed enrollments can grow over 40% year over year in fiscal 2009, representing a similar growth rate to
that of fiscal 2007 and fiscal 2008. Also, we expect Bachelor's degreed enrollments growth rate to continue to
accelerate over the next quarter or two not only due to the challenging economy but also from increased conversion
rates of Axia College graduates who opt to complete Bachelor's degree programs. We note that no additional sales &
marketing costs exist for Associates students to transfer to the University of Phoenix Bachelor's program, which could
in turn benefit margins.

0.87E
1.04E
1.03E
$3.91E
2008A *
EPS

Q1 Nov
Q2 Feb
Q3May
Q4Aug
Year*
P/E
Change

2009E

ACTUAL

CURR.

$0.83A
0.41A
0 .85A
0 .75A
$2.84A
27.1x

$ 1.12A
0.65E
1.11 E
0 .95E
$3.83E
20.1 x
34.8%

PREV.

2010E
CONS.

0.64
1.10

0.95
$3.82
20.2x
34.4%

CURR.

PREV.

$1 .36E
0.81E
1.36E
1.17E
$4.70E
16.4x
23.0%

CONS.

Company Information
52-Week Range
$37.92-90.00
Shares Outstand.
160.8 million
Insider/Institutional 14.0%/83.8%
Public Float
158.8
Market Cap.
$12.4 billion
$45 /26 million
ST/LT Debt
Debt/Capital
0.6%
54.3%
ROE
Net Cash &
lnv/Share
$4.67
$6.45
Book Value/Share

$ 1.41
0 .74
1.27 1 . . . _ . . , - - - - - - - - - - - - - 1.08

..,,.

$4.59
16.8x
20.1%

*Numbers may not odd up due to rounding. ** EPS nomtalizedfor one-time expenses and tax benefits.

....... H'

...(ft.,..., .....
...._

Jc

,..

_...~_..._

Source: Wedbush and company reports

Ariel Sokol (212) 668-987 4

Source: Nasdaq.com

Education 1 37

VVEDBusw---------------------------------------------

We expect operating margins to expand as sales and marketing costs decline due to the acquisition of
Aptimus. Apollo acquired Aptimus, a lead generation company, back in 1Q08. The rationale behind the acquisition
was to bring in-house sophisticated marketing capabilities and reduce costs per new start, although to date the costs
for newly acquired students has not meaningfully declined. For the first several quarters following the acquisition,
advertising per new enrolled students increased, driven by integration efforts of Aptimus. We note that in 1Q09
advertising per new enrolled students declined year over year. We expect this trend to continue for the rest of 2009.

As well, operating margins could benefit from the challenging economic environment and internal cost
cutting efforts. We expect Apollo to receive concessions from vendors in a deflationary environment. Management
has already commented that the company could receive $50 million of cost savings in fiscal 2009 due to renegotiation
of vendor contracts, particularly in financial aid. We also note that the challenged labor markets could result in
increased employee retention, which in turn could result in higher tenure enrollment counselors who have a greater
degree of efficiency than a new employee.

Significant potential to expand internationally exists given the Apollo Global joint venture with the Carlyle
Group. Recognizing that the U.S. market funded postsecondary market has moved beyond the hyper growth of the
early 2000s, management has focused their efforts on penetrating the nascent international market. We note that
penetration rates of higher education among foreign populations remain significantly lower than that of the United
States. For example, in China access to higher education for 18 to 22 year olds is projected to grow to 20% by 2020
from 3% in 2000. We suspect that local institutions lack Apollo's seasoned marketing prowess.

In our opinion, the stock currently trades at a favorable valuation primarily due to investor concerns
regarding a lawsuit whose allegations include questionable enrollment practices. Because Apollo operates in a
highly regulated industry, it's understandable from our perspective that lawsuits could be initiated against the company
alleging improprieties. The University of Phoenix enrolls more than 2% of the total postsecondary students in the
United States. As such, the company's scale alone introduces risk of mishandled execution when enrolling students.
We concede that we don't know the merits of various allegations thrown against the University of Phoenix. However,
we believe that the stock price already factors in this negative sentiment.

WHERE WE COULD BE WRONG

The Associate new degreed enrollments growth rate could continue to accelerate. Apollo's revenue growth
rates for the past several quarters have outpaced management's expectations that the business would grow at high
single digits. We know that new degreed enrollments accelerated in earnest in 3Q08. We presume that the law of
large numbers eventually will catch up with Apollo. However, we have no assurance whether this happens in the next
quarter or two.

Margin expansion could grow at a lower rate than what we are expecting due to greater than expected
investments in the company's emerging businesses. For example, Apollo's operating margins could have
expanded in fiscal 2008 by an additional 60 bps were it not for investments that the company opted to make in Insight
Schools, the company's online high school business.

Our foreign currency translation estimates could be inaccurate given the volatility in the value of the U.S.
dollar. The formation of Apollo Global to invest internationally and the acquisitions of Universidad de Artes, Ciencias
y Comunicaci6n (UNIACC) and Universidad Latinoamericana, S.C. (ULA) introduced foreign currency exchange risk
to the company's business model. Previously, Apollo primarily operated in the United States. Because management
does not provide granularity regarding revenue and operating profit from geographies from which they operate, we are
unclear regarding the possible impact of foreign currency movements on Apollo's income statement. We note that in
1Q09, Apollo only generated $1.5 million of net "interest income and other", below most analyst models because
Apollo recorded a $2.5 million loss on foreign currency transaction. We are conservatively forecasting additional
foreign currency translation declines in 2009. However, we acknowledge that the lack of transparency regarding
foreign currency translation could result in earnings volatility by several cents.

Apollo, through its Apollo Global subsidiary, could acquire an international postsecondary college or
university which could dilute earnings. In the near-term, acquisitions could dilute EPS. Given that many investors
value these companies on P/E ratios, this could in turn cause the stock to go down.

38 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
INVESTMENT RISKS

A decline in corporate reimbursements could impact new degreed enrollments and persistence rates, which
in turn could negatively impact financial results. To date there are few instances where corporations have
completely eliminated their corporate reimbursement programs. Clearly as the economic situation deteriorates further
a risk exists that such programs could be cut. Historically, companies have opted not to cut these programs in
previous recessions, and as such we can only speculate as to whether this could occur in the next several years.
Management does not currently disclose the percent of students that receive employer tuition assistance. Students
could opt to exit programs without education benefits from their employer. We note that in such a scenario students
would still have access to Title IV loans.

Apollo is currently subject to a number of lawsuits that could result in monetary damages. We cannot quantify
damages were Apollo to lose all of its lawsuits. Most recently, three students filed a class action lawsuit against Apollo
and the University of Phoenix alleging that the University of Phoenix incorrectly returned Title IV loans to the
government despite the students having earned those funds.

100% control of Class B voting stock by John and Peter Sperling, the Executive Chairman of the Board and
Vice Chairman of the Board. Holders of Class A shares do not have the right to vote for the election of directors or
for other actions requiring a vote for shareholders. In the event of John Sperling's passing, control of his shares will
be exercised by a majority of three successor trustees.

Apollo has numerous "related person transactions" listed in the company's 10-K. For example, Yo Pegasus,
an entity controlled by John Sperling, leases an aircraft to Apollo.

APOLLO'S STRATEGY

Maximize value of the domestic post-secondary business. This includes the expansion of current product
offerings, increasing retention rates, improving student success rates, and maximizing the leverage of the existing
infrastructure.

Expand into complementary businesses. This includes Apollo's investments in Insight Schools, a K-12 virtual
school operator which the company acquired in 2006.

Expand into growing markets, particularly internationally. Apollo entered into a joint venture partnership with the
Carlyle Group to create Apollo Global, which Apollo will use to pursue investments in the international education
industry.

Maintain and improve the brand. For example, in 2008, the University of Phoenix published its first Academic
Annual Report for the University of Phoenix with the purpose of providing transparency to both student and
is
available
at
institutional
academic
outcomes.
The
report
http://www.phoenix.edu/doc/about us/AcademicAnnuaiReport-2008.pdf. Also, we note that Apollo obtained the name
and sponsorship rights for the stadium home to the National Football League's Arizona Cardinals.

Ariel Sokol (212) 668-987 4

Education 1 39

VVEDBusw---------------------------------------------ESTIMATES, GUIDANCE & OUTLOOK

Revenue and EPS Estimates for 2009 Conservative, in Our View
Apollo management does not provide forward looking guidance on a quarterly or annual basis. As a consequence, we
expect wide variances between forward estimates and reported results. We note that of the 17 brokers covering the stock,
16 have BUY or OUTPERFORM ratings. In our view, analysts are highly incentivized to create conservative and attainable
estimates for Apollo to exceed every quarter. We still believe that upside exists for 2009 earnings, driven by lower than
expected student acquisition costs and lower than expected instructional costs and services.
Consensus estimates may not reflect $50 million in cost savings in fiscal 2009 that management has previously
pointed to.
In the 4008 conference call, management pointed out that they had successfully renegotiated larger contracts and
expected to save in excess of $50 million in fiscal 2009, with most of these savings related to a new outsourcing contract
with an existing financial aid processor. Despite having grown margins in 1009 by 353 bps due to the very cost savings
previously discussed, the consensus estimate for operating margins in fiscal 2009 still only represents a 254 bps increase.
We believe that these estimates reflect conservatism on the part of analysts.
Q2 margins benefit from a favorable year over year comparison.
According to management, in the prior year quarter Apollo did not optimally spend advertising dollars as the company
transitioned off of its previous ad network platform to the Aptimus platform. As a consequence, we expect a favorable year
over year improvement with respect to advertising costs.

Exhibit 54: WMS vs. Consensus Estimates

2009 Q2

WMS

Consensus

Revenue

EPS

868
$0.65

Operating Margins

19.6%

864
$0.64
19.2%

F2009

WMS

Consensus

Revenue

3,966

3,871

EPS
Operating Margins

$3.83
26.1%

$3.82
26.1%

F2010

WMS

Consensus

Revenue

4,615
$4.70
26.6%

4,491
$4.59
26.7%

EPS
Operating Margins

Guidance

Guidance

Guidance

Source: Wedbush, company filings, and thomsononeim.com

40 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
OVERVIEW OF RECENT FINANCIAL RESULTS
First Quarter 2009 Results Strong on All Measures
Apollo reported strong Q1 fiscal 2009 results, exceeding consensus estimates for revenue, operating margin, and EPS. Of
note, revenue and enrollment growth accelerated in the quarter.

REVENUE grew by 24.4% year over year versus the consensus estimate of 16.9% year over year growth. Q1
revenue of $971.0 million exceeded the consensus estimate of $912.4 million and represented a 24.4% growth rate
over the prior year quarter. Revenue growth was driven by 18% enrollment growth in postsecondary offerings, 3%
growth in tuition, and 3% from growth vehicles Apollo Global and Insight Schools. Management commented that
many of the students enrolled in Associate programs atAxia are enrolling in the University of Phoenix.

OPERATING MARGIN grew by 353 bps. Q1 operating margin of 31 .6% represented a 353 bps improvement over
the prior year quarter of 28.1%. Margin expansion was primarily attributable to lower than expected instructional costs
and services. These costs represented 38.9% of revenue in the quarter, versus 42.7% in the prior year. A primary
contributor to this improvement was savings from lower negotiated contract costs from third party vendors, particularly
in financial aid processing. Processing costs declined 48% year-over-year despite increased volume.

EPS exceeded consensus estimates by $0.14. Q1 EPS of $1 .12 compared to the consensus estimate of $0.98 and
represented a 35.8% growth rate over the prior year quarter.

ENROLLMENT growth year over year accelerated for the third consecutive quarter. Q1 enrollments of 384,900
compares to enrollments of 325,000 in the prior year quarter. Q1 enrollments grew by 18.4% year over year, which
compares to a 15.4% and 11 .0% year over year enrollment growth rates in Q3 and Q4 2008. Specifically, enrollment
growth accelerated in the Associate and Bachelor degree programs - unsurprisingly these are the areas that are
considered to be the most countercyclical.

RETENTION improved both year over year and sequentially. Q1 churn of 15.7% compares to 16.5% in the prior
year quarter and 17.1% in the prior quarter.

BAD DEBT EXPENSE as a percent of revenue decreased year over year. Q1 bad debt expense as a percent of
revenue of 3.6% compares to 4.2% in the prior year quarter and 3.0% in the prior quarter. This was due to improved
student retention rates.

ACQUISITION COSTS grew by 2.9% year over year, at a slower rate than the prior year quarter and previous
quarter. Selling and promotional costs of $2,649 per new enrolled student grew by 2.9% year over year versus
$2,575 in the prior year quarter. Unlike other companies, Apollo provides investors advertising expense on a quarterly
basis. Advertising expense per new enrolled student was $1 ,019, which compares to $1,035 in the prior year quarter
and $1, 108 in the prior quarter.

Ariel Sokol (212) 668-987 4

Education 141

VVEDBusw---------------------------------------------REVENUE ANALYSIS
We forecast total revenue of $3.91 billion and $4.61 billion in fiscal2009 and 2010- up from $2.72 billion in 2005.
The primary driver for the University of Phoenix's revenue growth continues to be the Associate degree program of Axia
College. Apollo grew revenue in fiscal 2007 and 2008 by 10% and 15%, respectively. Excluding revenue from Associate
degree students, Apollo grew revenue by only 0% and 4% in 2007 and 2008. To be fair though, we concede that Axia
could have likely cannibalized enrollment growth at the University of Phoenix Bachelor's degree programs. We expect
Axia College to continue to grow in revenue given the countercyclical nature of the program. However, given the law of
large numbers we expect Axia's revenue growth rate to decelerate over the next several years.

Exhibit 55: University of Phoenix Revenue by Degreed Programs,

Fiscal 2006-2009

Exhibit 56: Revenue Growth by Degreed Programs, Fiscai20072009E

80%

100%
Master's

Master's

Master's

80'4

1-

f--

f--

60%

1-

f--

f-Bacttelor's

40'4

1-

20%

1-

Bachelor's

---

Master's

60%
Bachelor~

-j
40%

Bachelor's

f--

f--

r-

rAssoctaes

Assoda&e's

Assoclclte's

Doctoral

---'

--

--- -Assoeiatcts

___,

20%

Assoetate's - j
Master's

0'.4

0%
2007A

2006A

2008A

o Associale's o Bachelor"s o Mlster"s o

Note: Also includes

Source: Wedbush and company filings

A Bachelor"&
2007

2009E

Ooclon~l

2008A

---

2009E

(20)% -

Source: Wedbush. thomsononeim.com, and Reuters

Below we provide a quick snapshot of some of Apollo's businesses:

University of Phoenix- represented 95% of Apollo's revenue in fiscal 2008.

We acknowledge that the University of Phoenix could represent the majority of Apollo's revenue for the foreseeable
future. However, we note that in fiscal 2008 the University of Phoenix's revenue decelerated whereas Apollo's
revenue accelerated. Our point is that Apollo's other businesses are increasingly representing a greater share of
Apollo's total revenue, and could at some point in the next several years determine if the company achieves or falls
short of investor expectations.

Apollo Global.
Apollo created Apollo Global in 2007 as a joint venture with The Carlyle Group to pursue investments in the
international education services industry. Apollo Global contributed only 1.8% of Apollo's total revenue in 1009,
generating $17.0 million in revenue. In Q4 2008 Apollo Global acquired a 65% stake in the University of
Latinoamericana for $47 million. In Q3 2008, Apollo Global acquired UNIACC, a Chilean-based arts and
communications university, for $44 million.

Insight Schools.
Insight offers curriculum and administrative services to public school to operate full-time online high school programs
serving students in 10 states. Insight Schools, which Apollo acquired in 2006, represented only 0.2% of Apollo's total
revenue in fiscal 2008, or $7.5 million of revenue. However, we believe that Insight could increasingly represent a
greater portion of Apollo's total revenue as the K-12 virtual school market is still in its infancy. We believe that the
market could grow by at least 30% annually over the next several years. Insight opened seven schools in fiscal 2008,
and currently has 11 schools operating in 10 states.

42 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 57: Composition of Apollo Revenue by Business
Se ment

Other Schools Corporate

Insight Schools
O'k

4%

O'k

~~-,---

Apollo Global

Exhibit 58: APOL Revenue F2002-F2010E

5.0

- r - - - - - - - - - - - - - - - - - - - - . 40%

4.5

35'A>

4.0
30%

3.5

O'k

3.0

25%

($8) 2.5

20%

2.0

15%

1.5
IO'A>

1.0
lkllve rslty of
Phoenhc

96%

5%

0.5

0%
2002A

2003A

2004A

2005A

2006A

2007A

2008A

2009E

2010E

IIII!!D R~ue - Re\enue% Olange YrNr I

Source: Wedbush and company filings

Source. Wedbush. thomsononeim.com. and Reuters

EXPENSES ANALYSIS
Given the operating leverage at the University of Phoenix, Apollo's ability to increase its operating margins well
into the 30%+ range depends on whether the company can turn the tide with respect to increasing selling &
promotional expenses, and whether investments into international and K-12 market bear fruit.
Margins contracted by 810 basis points to 23.6% in 2008 from 34.1% in 2005. Current and previous management teams
acknowledged that the company was too short term focused and failed to make necessary investments to ensure longterm growth. Alongside a booming economy, this resulted in weak enrollment growth rates in the mid-2000s and declining
Bachelor's enrollments in 2005, 2006, and 2007. Specifically, we note that selling & promotion expenses as a percent of
revenue increased by 410 bps from 2005 to 2008 as Apollo invested in additional enrollment counselors and advertising
expenses per new leads increased.
In the backdrop of a challenged economy with accelerating enrollments and deflationary pricing for Apollo's expenses, we
believe that Apollo is on the cusp of significant operating margin expansion. We believe that investments for additional
growth areas have blinded investors to the operating margin expansion at the core University of Phoenix business. We
note that while the company posted a slight decline in operating margins in fiscal 2008 to 23.6% from 24.2% in fiscal 2007,
the University of Phoenix expanded 150 basis points.
We believe margins can improve driven by 3 factors:

Efficiencies gained in advertising. We believe that selling & promotional expenses as a percent of revenue could
begin to stabilize and potentially contract. Back in 2007 Apollo acquired Aptimus, an online advertising network. The
intention was to bring in-house the managing and control of its online marketing spend. Since then the company has
made investments in Aptimus including headcount addition. In 2008 Apollo experienced some challenges in
transitioning the company from its pre-existing platform to Aptimus. The fruits of the investments have begun to pay
off in fiscal 2009. We note that in Q1 , Apollo realized a 10 basis point improvement in advertising as a percent of
revenue. Over time, we believe that the use of Aptimus could enable Apollo to lower the cost of acquiring new
customers.

Economies of Scale and Purchasing Power. In the Q3 conference call management commented that they expect
to save in excess of $50 million in fiscal 2009 due to contract renegotiations with vendors. Nonetheless, Apollo
surprised investors in Q1 2009 when instructional costs and services as a percent of revenue declined by 383 basis
points year over year. In the quarter, financial aid processing declined by 48% to $10.2 million from $19.6 million. We
expect the company to continue to benefit from these savings in fiscal 2009. We expect management to achieve
concessions from other vendors over the coming several years as economic collapse and malaise provide Apollo
favorable purchasing power.

Margin Improvements in Insight Schools. We point out that investments in Insight Schools depressed margins by
60 points in fiscal2008. Apollo intends to incur similar losses in fiscal2009. We believe that as Insight continues to
ramp the unit could generate operating profits rather than remain a drag on earnings.

Ariel Sokol (212) 668-987 4

Education 1 43

VVEDBusw---------------------------------------------Exhibit 59: APOL Operating Margins

34%
32%

2002A

2003A

2004A

2005A

2006A

2007A

2008A

2009E

2010E

Source: Wedbush, company ntings, and thomsononeim.com

CASH FLOW & BALANCE SHEET

We expect Apollo to generate free cash flow of $1.8 billion over the next two years.

Free Cash Flow: We are modeling Apollo to generate $817 million and $969 million of free cash flow in 2009 and
2010, respectively. We note that historically Apollo generates more cash flow from operations than net income, a
positive in our view. The company does not require substantial working capital investments, and working capital has
been both a source and use of cash over the past several years.

Capital Expenditures: Capital expenditures as a percent of revenue for the past three years have ranged from 4.5%
in fiscal 2006 to 3.3% in 2008. In our opinion, Apollo does not need to make significant investments to grow the
business. As such, we are modeling capital expenditures as a percent of revenue to be roughly 3% in fiscal 2009 and
2010, respectively.

Share Repurchases: Apollo has $500 million available under its share repurchase authorization as of November 30,
2008. There is no expiration date on repurchases.

Apollo Group has a strong balance sheet, in our opinion, with a large cash position and little debt.

Cash: Apollo has $821 .3 million of cash and marketable securities on its balance sheet as of November 2008. Apollo
has $23 million of auction rate securities, which is listed on the balance sheet as a long-term asset. These securities
represent a small portion of Apollo's cash position. We note though that in 1Q09 Apollo did have to recognize an
unrealized loss of $2.2 million on its income statement.

Debt: Apollo has $45.2 million of debt on its balance sheet as of November 2008. Some of this debt relates to the
assumption of debt from education institutions acquired through Apollo Global.

Credit Facility: Apollo has a $500 million unsecured revolving credit facility which the company intends to use for
general corporate purposes including acquisitions and stock buybacks. The term is for five years and will expire on
January 4, 2013. The facility fee ranges from 12.5 to 17.5 basis points. The fees for money borrowed under the
facility are LIBOR + 50 to 82.5 basis points.

44 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
MANAGEMENT BIOGRAPHIES
Title

Background

Dr. John G. Sperling,

86

Founder and
Executive
Chairman

Dr. Sperling founded Apollo Group in 1973 and has served as Executive
Chairman of the Board since 2008. Dr. Sperling had served as acting Executive
Chairman of the Board since January 2006. Prior, Dr. Sperling served as
Chairman of the Board from the company's inception until June 2004, Chief
Executive Officer until August 2001 , and President until February 1998. Prior to
Apollo, Dr. Sperling held faculty appointments at the University of Maryland, Ohio
State University, Northern Illinois University, and most recently, San Jose State
University, where he served as a professor of Humanities.

Charles B. Edelstein,
48

Director and
Chief
Financial
Officer,
Apollo Group

Mr. Edelstein has served as Director and Chief Executive Officer since August
2008. Prior to Apollo, Mr. Edelstein spent over 20 years with Credit Suisse,
where he most recently served as Managing Director and led the Investment
Banking Division Global Services Group. Prior to Credit Suisse, Mr. Edelstein
served as an auditor and management consultant at Price Waterhouse.

Gregory W. Capelli,
40

Director,
Executive
Vice
President,
Global
Strategy,
Assistant to
the
Executive
Chairman,
and
Chairman,
Apollo
Global

Mr. Capelli has served as Executive Vice President of Global Strategy and
Assistant to the Executive Chairman since April 2007. Mr. Capelli has also
served as a member of the Board of Directors since June 2007 and Chairman of
Apollo Global since its inception in October 2007. Prior to Apollo, Mr. Capelli
spent 10 years at Credit Suisse, where he founded the Credit Suisse Global
Services team and most recently held the titles of Managing Director and Senior
Research Analyst Prior to Credit Suisse, Mr. Capelli served as a Vice President
and Senior Research Analyst with ABN AMRO.

Joseph L. D'Amico,
58

President,
Chief
Financial
Officer and
Treasurer,
Apollo Group

Mr. D'Amico has served as President since October 2008, Executive Vice
President and Chief Financial Officer of Apollo Group since June 2007, and
Treasurer since December 2007. Mr. D'Amico had previously served as Chief
Financial Officer since December 2006 as a consultant Prior to Apollo, Mr.
D'Amico served as Managing Director of FTI Consulting, Inc., and as a partner
with PricewaterhouseCoopers.

Rob Wrubel,

Vice
President of
Marketing,
Apollo Group
and CEO,
Aptimus, Inc.

Mr. Wrubel has served as Vice President of Marketing since June 2008. As well,
Mr. Wrubel holds the role of CEO of Aptimus, Inc., a subsidiary of Apollo Group.
Prior to joining Aptimus in 2005, Mr. Wrubel was co-founder and co-CEO of Yoga
Works. Prior to Yoga Works, Mr. Wrubel served as Entrepreneur-in-residence at
Highland Capital Partners. Mr. Wrubel was the founding Chief Executive Officer
of Ask Jeeves from 1998 to 2001 . Prior to Ask Jeeves, Mr. Wrubel served as
Chief Operating Officer of Knowledge Adventure.

Name

Ariel Sokol (212) 668-987 4

Education 1 45

VVEDBusw---------------------------------------------VALUATION
We are initiating coverage of Apollo Group with a BUY rating and 12-month price target of $90. Our target reflects a
-12x EV/EBITDA multiple to our calendar year 2009 EBITDA estimate. Our multiple reflects the company's strong
revenue growth rate and operating leverage opportunities and is in-line with other education stocks with similar revenue
and operating margin characteristics.

Exhibit 60: Multiples Analysis

August Fisca l Year End
Valuation@
Current Price of $77.08
2008A
2009E
2010E
$77.08
$77.08
$77.08
160.8
160.8
160.8
$12,391.5
$12,391.5
$12,391.5

ValuatlonC!I
t2Month Target Price of$90.00
2008A
2009E
2010E
$90.00
$90.00
$90.00
160.8
160.8
160.8
$14,468.6
$14,468.6
$14,468.6

(750.3)
($4.67)
$11,641 .2
$72.41

(750.3)
($4.67)
$11,641.2
$72.41

(750.3)
($4.67)
$11,641.2
$72.41

(750.3)
($4.67)
$13, 718.3
$85.33

(750.3)
{$4.67}
$13, 718.3
$85.33

$13,718.3
$85.33

$819.7

$1, 112.0

$1,322.7

$819.7

$ 1. 112.0

$1,322.7

EV I EBITDA

14.2x

10.5x

8.8x

16.7x

12.3X

10.4x

EPS, Normalized
%Change

$2.84

$3.83

$ 4.70
23.0%

$2.84

34.8%

$3'. 83
34.8%

$4.70
23.0%

PIE Multiple

27.2x

20.1x

16.4x

31.7x

23.5x

19.1)(

o.sx

0.7x

0.7x

o.sx

$3, 140.9

$3,905.9

$4,614.7

$3,140.9

$3,905.9

$4,6 14.7

3.7x

3.0x

2.5x

4.4x

3.5X

3.0X

$726.0
$4.52

$954.9
$5.94

$1,082.6
56.73

$726.0
$4.52

$954.9
S5.94

$1,082.6
56.73

16.0)(

12.2x

10.8x

18.9x

14,4X

12.7x

$621.1
$3.86

$834.3
S5.19

$962.6
55.99

~21 . 1

$3.86

$834.3
$5.19

$962.6
S5.99

18.7x
5.0%

14.0x
6.7%

12.1x
7.8%

22. 1x
4.3%

16.4x
M%

14.3x
6.7%

Price

Fully Diluted Shares 1009A

Market Capitalization
Less: Net Cash 1Q09A
Nel Cash I Share
Enterprise Value
EV I Share
EBITDA

PEG Ratio
Revenue
EV /Revenue

Operating Cash Flow

Operaling Cash Flow I Share
EV I Operating Cash Flow

Free Cash Flow

Free C ash Flow I Share

EV I Free Cash Flow

Free Cash Flow Yield

(750.3)
($(,67)

Calendar Year End

EBITDA

Valuation@
Current Price of $77.08
2008A
2009E
201 OE
$912.1
$1, 164.7
$1,400.6

Valuation@!
12Month Target Price of $90.00
2008A
2009
201 OE
$912.1
$1, 164.7
$1,400.6

EV/EBITDA

12.8x

10.0x

8.3x

15.0x

11.8X

s.sx

EPS , Normalized
%Change

$3.14

$4.07
29.5%

$5.01

$3.14

$4.07
29.5%

23.2%

PIE Multiple

24.5x

19.0x

15.4x

22.1X

18,0)(

O.Sx

0.7x

O.Sx

0.8x

PEG Ratio

23.2%

28.7x

$5.01

Source: Wedbush and company filings

46 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
VALUATION- HISTORIC
Apollo's PIE ratio has ranged between 20-48x over the past eight years. While seemingly rich, we note that Apollo traded
at roughly a PEG ratio of 1.0x between 2000 and 2005. Since then, a deceleration of earnings growth in 2005 and a
decline in earnings in 2006 resulted in multiple contraction. We believe that the company could be on track to grow
earnings by at least 20% over the next several years, and as such believe that the company could warrant a PIE of at least
20x.
Exhibit 61: Apollo Group Historical Forward P/E Valuation

Exhibit 62: Apollo Group PEG Ratio

SOX ,--------------------------------------------.

4X

3X

2X
1X

./'-....A.

1\

""""\

.f'J_

'--

ox
-1X

-2X

,,,r'_

-3X

1~~--------~--------~--------~--------~--~
JanOO

Jan01

Jan-02

Jan03

Jan-04

Jan05

Jan-06

Jan-07

Jan-08

Jan09

4X
JanOO

Jan01

Jan-02

Jan-03

Jan-04

Jan05

Jan06

Jan07

Source: Wedbush. Baseline, and Reuters

Source: Wedbush. Baseline. and Reuters

As the exhibit below suggests, Apollo has consistently traded up at a premium to the S&P 500, even during the tumultuous
mid-2000s period when margins declined and the company was under investigation by the United States Department of
Justice regarding the backdating of stock option compensation. Given the challenging economy and the company's
margin expansion opportunities, we believe that the company could continue to warrant a premium over the S&P 500 over
the next several years.
Apollo's valuation as a multiple of EBITDA has ranged between 7-33x over the past eight years. Accordingly, Apollo is
trading at the low end range of its historical range. We do not expect this multiple to necessarily expand where the
company previously traded given that the company's days of hyper-growth are behind it. We do note that private
transactions for market funded universities are currently priced at a multiple of 5-15x EBITDA based on operating and
financial metrics. In effect, we are suggesting that barring the emergence of yet another scandal or regulatory change, we
do not expect this multiple to contract much further.
Exhibit 63: Apollo Group Forward P/E Relative to S&P

Exhibit 64: Apollo Group TTM EV/EBITDA

45x , - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,

0.5X +----,-----..-----.-----,----,-----,-----,----,------,J
Jan.OO

Jan-01

Jan-02

Jan.03

Jan.04

Jan -05

Source: Wedbush. Baseline. and Reuters

Ariel Sokol (212) 668-987 4

Jan-06

Jan-07

J an-08

Oec-98

Oec-99

Oe~O

Oe~ 1

Oe~2

Oec-03

Oee-04

Oec-05

Oec-116

Oe~7

Oec-08

Jan.09

Source: Wedbush and Factset

Education 1 47

VVEDBusw---------------------------------------------COMPANY OVERVIEW
Apollo Group is an education company that serves high school, collegiate, and graduate students. Headquartered in
Phoenix AZ and founded in 1973, the company's subsidiaries include The University of Phoenix, the Institute for
Professional Development, The College for Financial Planning Institutes Corporation, Western International University,
Insight Schools, Apollo Global, and Meritus University.

Apollo offers Associate's, Bachelor's, Master's, and Doctoral degree programs in arts and sciences, business and
management, criminal justice, education, human services, health care, technology, and communication at campuses
and learning centers in 39 states and the District of Columbia, Puerto Rico, Canada, Mexico, and the Netherlands.

Apollo held its IPO in 1994.

The company has 384,900 students, with ground campuses in 39 states.

The University of Phoenix is the largest market funded educational institution in the United States, and targets its
offerings primarily to working adults. The school represented 95% of Apollo Group's revenue in fiscal 2008. It has
accreditation by the Higher Learning Commission of the North Central Association of Colleges and Schools. The next
comprehensive evaluation visit by The Higher Learning Commission is scheduled to be conducted in 2012.

The Institute for Professional Development provides program development and management consulting services,
including degree program design, curriculum development, market research, student recruitment, accounting, and
administrative services to private colleges and universities in 21 states.

The College for Financial Planning Institutes Corporation provides financial planning education programs, including
the certified financial planner professional education program certification, and certification programs in retirement,
asset management, and other financial planning areas.

Western International University offers undergraduate and graduate degree programs at Arizona campus locations,
online, and also through various joint educational agreements in China and India.

Insight Schools offers curriculum and administrative services to public schools to operate full-time online high school
programs.

Meritus provides degree programs online to working professionals in Canada and internationally.

Apollo Global a joint venture between Apollo and The Carlyle Group to pursue investments in the international
education services industry. Apollo has agreed to commit up to $801 million in cash or contributed assets and own
80.1% of Apollo Global. Carlyle has agreed to commit up to $199 million and own the remaining 19.9%. As of August
31 , 2008, total cash contributions made to Apollo Global were $61 million. To date, Apollo Global has completed two
acquisitions, Universidad de Artes Ciencias y Communicacion and Universidad Latinoamericana, both in 2008.

48 1 Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 65: Apollo Enrollments
Apollo Croup
Revenue Anatysls
(S lnOOOs except per share data)

2007A

200BA

2009E

2010E

Q1A
Nov '07

2008A
Q2A
QJA
Feb'08
May 'OB

Q4A
Aug '08

Q1A
Nov '08

2009E
Q2E
QJE
Feb'09
1'1\ay' Og

Aug '09

Q1E
Nov '09

1,021,511

1,124,211

Q4E

2010E
Q2E
Q3E
Feb'10
llt'tay'10

Q.SE
Aug'10

Revenue Composition by Degree Students and Other

Degree StekJng Gross Revenue

Z.68M85

...

,,,.

(192,416)

l5'$'1.

;~u...

2,568,037

. ... ~Yd'(f

2S,046

NotHSegree Seek1ng Reveooe

~~Ytf'fl

"""
33,447
~~...

l:Sh

'NetR~

Oft.

130,710

''"'

163,S90

$2~

11'-

233,m

3,t40,931

2007A

2008A

3.906.917

1,009,536

n:.

1,013,555

.....

1,206,001

1,218,340

'""
(85,284)
.....
""'
4,297,:; -.,7:J8.~~3;';~~..,..
"'o"',m.;:
' "'
~-;:789;;:-:l;:1':~""'7;;74,..,7~
;
,u~
" --:901::::-,4;..;::
"''-~7"'97"",408,;
.
ill
""._-9,72,=11~:l:';~-:::...,..-:i~
~""~ --::1-:,,..=.ooo&<
'""
~-,..."'o.'"'6:;~-::1-::,1.,.,49",3"~
r:
,..
9l:'l'-:1"'
,1"33."'o:!.J';:~
ns,.

(50,1102)

(37,353)

3'11'

,,,.

,, ..,.

114"'

~;:.

n,...

nl'

'136'11.

.....

49,682
10.ft
I,,_

268,837

4,614J;;;

2.723,793

848,370

221-..

(42,870)

~9~3";
(3.468)

M4,356

1al

(45,382)

3,149, ; ;

(8,991)

820,130

t4,_.

(30,231)

2,123/:;

Plug

819,445

t:lbll.

(41.463)

l~O'IIo

,.,,.

692,~

t&o.

(35,083)

C2n

'4(1HII~

773.114

1th

(265,071)

,_,...

. ... Crta'~QtVftVI

Reveoue on lnoome Stal:ement

44,256

4,562,107

p't,-.

'lroCf'lllriOeYtM

Net Revenue

, ...

2,9'52. ; : J,&J-I.J<j5n;-

106'11.

Other

3,823,77:1

''~

(152,159)

'II.CI\a'lgl'rfNr
~II Gmt ~IMI'ue
Degree Setldng Net Revenue

3,105,044

104'4

(112,448)

. ,c~vlffl

Less:: OISC04.1\t$ and Other

11:z,t.

134'4

S,038

S,322

or..

106)'11.

Oft

D.n

37,60S

37,429
l7A

~tw.

,_,.

44,832

-'0"

n1'4

12,916
ll .t'

tC...

43,724
280'11o

9,281
84~

71511.

9,580
100'11.

10'1.

60,200
601...

11'4

60,63S
6101.

2:):rJI.

11,188
10-"

''"

'"'

(56,211)

(66,805)

~,,,.

~,,,.

*'

131'l

14,208
tOCM

11'11o

1411.

S8,282

54,655

30"

150'11.

..... -7;;80.~;,o'l:;"~-,

.,.,3.
...64~3'-;;:844,.,..,;
,;~1";~83=1,388.;,
'"'
~ -----,e"'7o"',96,;;
' ~";''-----,867=,683;!;;!1
""._1,04
=1,~:5"'';'~1,m,""~..
~,_

t69<A

196
4,614,741

lAO"

10,171

24&'4

(61,291)

151"-

,,s.,

(9,000)

(81)

700.674

693643

835.217

831 ,307

1Q08A

2Q08A
204,050

JQOSA

4Q08A

248,171

263,220

,.u,

970,987

1$5"

10,209
tO<M
Oft.

69,230
~~~

1$1.

10,538
tO<M
10.

69,730
~~~

(58,6821

II~

12,307
10~
I~

67,02A
I~O'l.

10~

,,._.

62,8S3
I~O'l.
5

--,1-,,1.,47".<39r,;
"'
~-::1,"o"26",9;,;
;!,'-..,1,.,,228=,6~
;!."--::1,-;;,2;;-11",5";~

134'A

ne-.

ta2'llo

,,..,.,

.....

758

(1,807)

(2.419)

244

(431)

447

96S,44 1

1,039,845

1,026.664

1,147.1383

3QOQE

4Q09E

2'5-,.,

18~

15,628

1,026.487 1,229,097

""'
(74)
1,211 ,464

Revenue by Degree Type

Assoc::latet

604,954

Bachelors

1,371,6.07
6$3, 115

Masters

"'c:n-.YrM

1.4.02,980
1~

705,666

09'1&

Doctoral

50,809

.,c,._.Yrttt
Net Revenue

)U~

(03~

"'en..QIYrM

Less: Olsco..ns and other

934,083

'-S'Yo

'li.C~Yrl'fl

$OS

&2,234

:<'t.li'A

225'!1.

200QE

2010E

1,414,583

1,988,452

!Hl~

1,$62,031
II $'!to

n6,046
100'1-

71,113
,.,..

<lO-'Yo

1,663..831

'eo.,

829,291
69!1.

75,533
~~

218,642
7'66,.

360,J2A.
3f"

178.414
~

14,7:14
::.tO.

U;_n

31$.127
I 21'

tS8,649
iA

14,S29
131'!1.

S0:6"J.

36$,960
!PAT!'
18~917
10~

16,307
:-lh.

41.lY,

361,569
.,..

178,686
11 ,_

18,664
111

1009A

2QO;E

327,935
50~

401,633
11~\.

197,800
102"..

16,988
''~

308,055
60n

3$0,713
11~

174,W
10~

10,708
1~0.

37S,235
61:nt

407,286
H31l

208.262
102'.

19,753
11!"

1Q10E

405,3S9
""0'

402,399
1131'

195,08$
i~

18,664
11004

463,831

2010E

3Q10E

432,884

"'A'

"'A'

43.(),149

37$,613

71~

211,883
71'-

18,347
Ill'.

S26,829
AOYo

4Q10E

564,908
~Yo

436.203

426,86$

187,347

znogo

20'6,970

I 111.

I 111.

il~

7111.

17,711
&0.

19,878
&0.

61~

19,S97
,.,._.

----.":68.,;;12,.,,~;;;37;<>----.2(>,;.~;:;s;,;,~:;;S9;t.>----.3.>;<;;;:~;:;:~;;;~;<)----,4z;~~;:;6:?i:~=7il-1) -7~(~:?i:~931;;1'--i~'>:~;,~;;;63l:;:2-~~;;;oz;:~;;:;;><-~17!0~?-.~;;f/~7 --,~!;;4~;,;.~;:;7;J0)'-~:1i<;""7;r:';:;s;;>~'--9:!i(~;;,-;:~83;;3!->-.,!!;:;1:;~,;,91~) -::1-i,~;:;~;z;.~;,;1if~)--ik,~6S.,;::O~S)----,1-i.~s=:!:;z;:~;;1:;:e----,1-i,~,;::;z::~~

106

"'en..QIYrM

Hlioo.

1'\>g

Oegee Seeking Net Revetw.Kt

~oo.

'""

~~~

134'.&.

81
2.568.037

2.952,895

14~

,,,.

n1"

ns"'

Z)~

?Jf"

,.,,.

1e;1

,,1'

IIO'l

90
3.$31,357

4.297.036

738.031

650.892

789.214

n4.748

901,486

797.468

9nt83

960.220

1.(168.000

946.600

1,149.319

1.133.056

4Q09E
1,976

1Q10E
2,108

2010E
1,858

3Q10E
2,076

4Q10E
2,055

Revenue per Degree

Associ...

2007A
5,789

2008A
&,376

2009E
0,897

2010E
7,235

1Q08A
1,913

2Q08A
1,684

3QD8A
1,848

1,797

1Q09A
2,027

2QOiii!E
1,78S

3Q09E
1,996

11::'4

10111.

en.

Z"S

~.. .,.

10,,.

ll'J.

sm

so.

eo.

9,889

9,894

10,343

10,626

2,61S

2,310

2,654

2,550

2,73&

2,77:1

Ol'r.

IliA

1,_

l~

.a..,.

2,414

11"'

10.002

1Q.423

11,546

2,666

2,807

2,009

2,834

.,..c,.,...,vO'VI'
BaCileiOI'$
'4~VrNi

Masten
. ,~vltYr
Doctoral

r.o)'

?JL

9,771

1";

R;~:lmerts (After Discount

s,

~C~YJtvt

COS)'r.

11,129

r.-.

'""

10,202

10,.09

1o.529

8,1; ;

8,3~

{04fr>

2n

o1"'

2,6()1

2,368

'""

2,594

2,812

4Q08A

12\.

2.732

2,614

4"-

2,510
'"

2.594

2,976
iOJo

2.812

!OCJ'4

2,..5
.t6'f.

2,798
~

2,732

1:;- --:;2:~;;;;~=-___,1,.,9i;~":;=,''----:;z.-;;.;;;:f--2,:;-1-i;~'i-: --z.-:f~~.;:~'---2,:;-oo~'i;i~=--;Z.~36i;;";f--c:;2ci,;:.i1";'f'

8;4

0211.

~2"1r.

2,.,_.

1,..

(011'11.

11\.

iO'IIo

3'11.

3~

n
2,791
')-"'

2.919
'~

2,614

4~

2,483
')-"'

2,585
~Ot.

2,594

4~

2,829
2~

3,065
~Ot.

2,812

tn~.

2,718
2~

2,882

sO'l

2,732

---:2,;:35i;i
' "'
:;:3----cz.;-;o;;;
';;;=---:2,;:3i;i
' t;,:8'------:2.;:21;:,
' "'
;:.a
OSYo
0:)'4
!03'14
\01J"'

Degreed Enrollment (rounded to hundreds)

Associates

2007A
10..,500

200SA
148.500

2009E
206.100

41!'11.

.oo~

.oo"'

. ,~y.rvr

-""""'
Bachelors
._,...""""'
. ... ~VItV'f

'-Cfla'!QtVtiYI

,_,...""""'

Doctoral
"-~Yl'tVt

,.,.

1QO&A
114,300
!r'" '

....

.,...,

""'
. ...

''""
146,864
'"'"

(1ff'
(9001

(1_.f(Q

,...,

67,000

67,300

""
'""
,.,

...

67,300

67,700

69.800

...

69,680

5,800

6,100

6,500

6,440

'30\.

'37'\.

'"-

'"-

$,200

6,100

~832

7,174

5,600

173"

362,100

116,000

2008A
143.400

404'\

23.ft

110,1100

92,400
~

50\o

48,800

48,400
12\.

$"-

2,800

' O'r.

432,680

510,888

2009E
1$1,2$8
33n.

2010E

240,197
,,...

96,917
4~

53,491
83'&

98,126
~

56,125

3,000

t?~

,,,

~.soo
19:ftlt

2~200
11/A

3,817

v~

3,889

'"

A4ICIOCQtf'(r

- ~~YrM

"'"'

.OO')L

~Yr!Vr

New Oeweed Enrollments

3Q09E
198,020

71,823

~Vf/'rr

. ... ~VIM

2Q09E
171,498

.,.,.

ift.

2007A

.,.c:n-.vrM

1Q09A
161,800

69.,731

137,800

.....

'""'
,.

325,000

New Degreed Enrollments

........

146,50:0

4Q08A

10'"'

1$7.058

ll,xtl

8achetors

JQDSA
1:W,300

67,700

1$1,017

1U"

. ... Crta'~QtVrfVt

..""",,

121,200

(14fl'.

313,700

Assocfates

2Q08A

6$,300

141,800

13ft

-OO!Oo
TotM EnroiJments

274,834

14$,266

138.700

Masters

2010E

~VIM

345,523
199'\

398,337
,,,..,

1QO&A
33.700

136,400

(>!)'<

'""

""''

5,600

191'4

'
''"'

13.1011

137,900

... ...
"'
....,.,

t8<1'.&.

"'
"""

362,100

384,900

'""'

1~,1011

16,100

moo

2Q08A

31,100

21,500

!S3J"

'""l

11,800

.......

..,.
800

'""

....

68,700

2,100

315,300

(35111.

12,400

""'

330,200

3Q08A
37,100

4Q08A
41,5-00

....""' ....""' ..... ....

21,800

146,800

(1.4(QJ

""
""
600
(U . . .

1100)

00,000

,,.

"""

1Q09A

,.n

....

.......

4Q09E
20S,100

11.080

....

1$1,017

...,, ."'''..
....,., ....."" .,..
"'

(t53oll

"'"
""'

.......
...

392,884

2Q09E
42.126

.,,.

432,880

453,800

'"

4&5,0&0

487,898

..

3QUIE
61,140
12,93$

141-"1

22,430

........
.... .......

23,097

27,316

13,851

13,376

841

1,175

,....,
""'
3Q09E

4Q09E

48,202

55,170

,.,..

..,.... ....

...

71,400

1"">
800

83,100

73S

""

1,100

...

37$11.

..

98,300

,.
,...,

'"'..

......

..

,,..

.... .... .......

..
"'

12,742

1,390

l,'IAl

840

.,

1,040

77,522

83,982

"""'

'"

11ho
~.$82

....
....

11~)

~
(194)

.O'l
~

7,070
e~

loU

,...,
'"'
7, 174

'"'

"'

510,888

17"'

27,4$4

(21)'11.

2,~1

71)823

411.~

21,m

..'

...

1.617

72,792

6,826

21,3-66

800

11,511)

72,467
Oto

""

26,100

(134)

....

7,020

27,200

13,1110

154,207
tOOl

6.832

21,1100

,..,
""'

152,529
tOOl

274,834

8,670

1.).570

13,300

20-"0

4Q10E

3,1'(':)

It, lin

l.tO

u~

72.592

lt,O?i

13,600

3Q10E
253,827

!&a.
13,1"

<1,1,.

1:1.100

,""

...

2010E
233,237

68,731

IO.:tCIJ

'"'

220,048

69.992

f.IOO

11,600

1Q10E

.... ....

837

"
"""

1Q10E
54,598

.......,..

2$,278

,.,

2010E

1?,$11

(31111.

14,621

....

97,720

95,490

1U20

ll,ljO

"'"
I

91,824

......
,.,,,

~~

'~
1.100
$~

.,.

13"'
,,

4Q10E

69,762
~A

IOS)'Io
(1.)7J

14,277

,,

0111.

880
'"'
.ill

93.789

112.,235

IAjOI

IA.$16

''"'

.......

Source: Wedbush and company filings

Ariel Sokol (212) 668-987 4

Education 1 49

VVEDBusw---------------------------------------------Exhibit 66: APOLLO Income Statement

m:!imlD.im!li!imi'IIEm.i rE:li!:I.Elili r.iiiJ[IIM!.:P~7ll:f-!.].p.-t.j.f:IMIMIIII::':li!llfrJ !l:l:!l"kiiJI: JEI::H~+Jl!ii:'liHl'lllM. I:':I I!S:i!l:e:IIIIS:'il:I:Jii!S:'!l:':l:i lilIM.
Expenses as a %~ Revenue
tnstruetional Cost-s and Services
Wng& Promotional
General & Actninistr'lllive
ElfeetlveTaxRate
expenses% Change YriYr
artstructional Cos:ts and Serviees.
Sales, Adr'niriW"etive & Other
Genentl & AchiniWatMt
Apollo Group
Normalized Income St<ltement
($In OOOs except per share daf:a)

45.4%
24,2%

6.2'4
37.9%

11.5%
21.()%
33.6%
2007A

.....

Z,7ZJ,793

~Wuctionill Costs and Services

Selling & Promotional
General & Altninis:tredve
TC)(al Opetllllng expenses

Oep-ecWion & Amortization

E811DA
lln'OAMft'lllt\

1.237.491
659,059
167,746

41.0%
25.8%
8 .5%
40.0%

42.7%
22.7%

10.6%

16.9%
26.9%
18.8%

18.2%
16.7%
14.M4

22-2%
33.9%
2008A

1.370,878

806,396

71, 115
730,612

79.728
819,692

739,988

691,097
261,787

Net lncorne, Normalized

429,310
173.603

Pro Forma EBITOA

fellD'.MJ)Vt'l'll.

Pro Fonm q;,ere!Wig ProM

~h!1f9'1.'

Normalized IS co GAAP
Reconciliation

92188

1,893,563
1,192259
299,958
3,385,780
93,786

...

1,322,749
.,..

8 .3%
25.01(.
58.3%

Q1A
Nov '07
780,674

2008A
Q2A
Q3A
Feb '08
flay '08

6.9'14
40,2%
10.7%
29.4%

2.8'14

'iU~

"'"'
""'
327, 723

176,909
51,291
$61,479

201 ,705
56,011
584,439

18,113
237,308

19.398
128,602

347,598
203,644
60,910
612.152

226,58S
58,221
664,102

20.653
209,065

329,762

!U\

"'"
,.

n3,364

1,031,811
417.445
(652)

1,256,981
!<)2,784
(2.200)

470,72:5

61$,018

756,376

160.762

160.762

....

3n,298

..... .....
.... "'".... ,.,..
.....

303,227
(596)

,.....
,.....

223,137
57,490
642.895

"'"

26,000

13.2%
29.2%
13.5%

362266

166,412

219,195

39.9%
23.5%
6 .0%
41 .5%

Q1A
Nov'OB
970,9&7

Q4A
Aug '08

631,:107

333.289

""'"

43.6%
26.8%

109,204

1,228,9&1

12,016

166.870

11 .3%
20.9%
45.9%

7.3%
36.2%

1US

33.388

Nonnallzed IS Pro Forma excluding stock option compensati on

Reconciliation
2G07A
2008A
S.oek Based Compensation

1,602,206
1,021.936
261,992
2,886,122

....,.

...,..

13.1'14
13.8%
44.0'4

24.4%

...
""'

1,019,796

~""'Y~"~'

4 1.6%

38.9%

47..2'34
29.1%
7.9%
40.1%

8.6'14

,..,.

.....

-~

EST
Income Taxes (Beneltt)
Minc:riy lntetesl

2010E

2.064.2516

31,600

2009E

3,140,931

BP$ C:l'la,_.YI'!Yr

Shares CU.stwtclng (RAy OilutecfJ

41 .0%
26.2%
6.7%
40.5%

224,692
2,400,965

OperaHng Income

Mterest Income (Expanse). net

43.6%
25.6%
7.2%
39.2%

22.897

.....

43.5%
29.5%
7.4%

.W.O%
15.3%
27.0'4

16.8'14

8 ,059

3,329

12,351)

1,516

228,845

117,283
47.002

228,394
88.551
(229)

200,762
80,694
(369)

308,381
129,073
(&2)

172,71.

103,729

88.980

70,261

140.072

120,437

180,360

169.289

170.500

183.841

160,118

160,762

Q1A

Q2A

Q3A

otA

Q1A

2,600

69.096
(100)

2010E

04-E
Aug'09
1,02f,&60

"'"'
,.,..

113)'10

Q1E
Nov'09
1,147,8-83

'""

2010E
Q2E
QJE
Feb'10
1'Aay'10
1,02f,497 1;.!29,097
1$~

fl0$)'A

,,.,

431, 199
2n.1oo
66,786
777,18$

447,596
266,262
74,599

788,458

451,659
297,694
66,722
816,06$

23,097
316,333

23, 197

272,676

23,297
382,522

233,829

~'

....

23.397

"'"

Q2E

..

""'

,.""'
485.493

307,274
79,891

2<3.5%
6.5%
40.004

Q4E
Aug'10
U11,460

""'

(141"

""'
509.915
321 ,008

an,6S9

78,745
908,598

23,497
379,935

23,597
326,463

,.,

.,........ .,.,....., ......... ....

....

:U9,479

359,225

210,432

356,438

:102,11118

3,500

4,500

5.500

6,500

7,500

8,500

298,736
118,695
(200)

253,979
101.592
(300)

3&4,ns

216,932

145.890
(400)

86,773
(500)

383,936
145,575
(600)

311,368
12>1.546
(100)

178.242

1$2,688

131).6$9

218,963

187,520

160.762

160.762

160.762

160.762

160.762

160.762

Q3E

Q4E

QtE

Q2E

Q3E

Q4.E

20D9E

2008A

2009E

Z7.0%

4 15,938
259,961
70,709
746,609

.....
_.,

9,650

18.0%
15.8%
14.5'34

19.0%
24.2%
19.6%

110,214

..

16.7%
18.2%
13.0%

19.7%
27.7%
16.1%

..

"-"'

19.6%
16.2%
3.6%

.W.O%

,.""'

22.997

18.6%
16.5%
28.1%

39.0%
23.2%
6.5%

,..,.

193,211

42.004

.W.O%

39.5%
25.0'4
6.5%
4<).0'4

8 .7%

20D9E
02
Q3E
Feb'09
1'1\ay'Og
1,039,845

42.0%

44.0%
29.0%
6.5%
40.0%

40.0%
25.0%
6 .8%
40.0%

.,.,

.....

2010E

54,027

53,570

80, 119

84,000

14,924

20, 106

14 ,421

4 ,119

15,119

22,000

23,000

16,000

21,000

23,000

24,000

784,639

873,262

1, 192,102

1,406,74.9

252.232

148,709

259,048

213,184

344881

336,333

.,,

295,676

398,522

254,829

4<)2,935

360,463

701,424

793.538

1,099.914

1.312.981

234,119

315.236

272.479

375,225

231,432

379.438

.. , . .... .... .,..

.... ....
....
,.

.;

1$~,

, ....

J1(1ti,

.....

237.498

""~"'

..

,.

192.$31

,,.

321,994

.....

190.214

35'l"

2008A

2009E

20UIE

659,497

739,966

1,019, 796

1,226,961

306,966

33.800
625,697

(9,500)
749,466

1,019.795

1,228..981

306.866

Q1A

Q2A

..,.
'~~"'

.. , .. ,...

,.

0:. ...

20D9E

2008A

2007A

. ,...
.,,.
..

Q3A

Q4A

Q1A

Q2E

t7Q.214

2010E

""'

Q3E

Q4E

Q1E

Q2E

QJE

Q4E

293,236

249,4 79

358,225

210,432

366436

:102,866

293,236

249,479

359.2:25

210,432

358,438

302.868

llZieiiiin&:ilf"i"'ilmm.....
ii!E!lm'"ii'i"!lim"i'"'i .,._:.~i.w;+tW!+fr;w,+p:.w l*lll':l+i!ll'~,....il:~:all"~iii/i.i"'ill~mH~iiii"i'lm:,:r::H!fi:wl..i I:':II"~r:~"i'l&*::llll~:~"'iiE!::"~iri"iiE':tn~.iMri
"
""i
Nomllli.tod GAAP EI'S Fully CiloJtod

.... ....

1.,.~-CfltO~~ll'nQ)

$2.80

~CII~YINr

- ~!1'llm.r.II!:PStl'lallf')

PF EPS F.-y lliUod

{a..tt.l:)n~kCMee!C~I)Iffretl

~k,li'IOrm~UtslkfU)

'Atft~YO"''r

GA/4P EPS. Fully Diluted

''""

KeyMtutcs
Enrolments

Cho.m
Bad Debt EllpeMe, % of Reveooe

.Acq.liiiionCosb

...
...

$2.62

$3.03

4.4%
$2,313

$1.70

n ..

3 .3%
$2.458

n ..
432,690

3.5%
$2.608

SUI

$0.85

$0.75

,,....
~6ft

'!!0-'1' 11.

$2.87

362,100

$0.83

$5.21

,,,.

$2.35

313,700

$3.83

510,896
3 .9%
$2,619

so.as

,.,..

SO.A8
(90J'A

$0.91

so.n

12~

($0.19)

.,n,

$1.43

(15671'-

325,000
16.5%
4.2%
$2,33()

3:10,200
16.7114
3 .6%
$2.726

345,300
15.4'%
2.41(,
$2.475

362,100

,.

$0.85

$1.22
,.,~

..

$0.83

....
,.,,.

$1.12

,.,,.

H .1%
3.0'4
$2,336

..

$1.12

384,900
15.7%
3 .6%
$2.318

.....

SU5

1U'IIo

so.n

,..,.

$0.65
(AJ8SI'!I.

392884
16.4%
4 .0'4
$2,879

,.,.
,....

$1.11

$1.24

.,,.

..

$1.11

.,

4 11,546
15.0%
3.0'4
$2.796

.... , .. ,.,,... ,,.... ,,.....

$0,95

,.
,.

....

$1.09

$0.95

.,,,..

432,680
16.6%
3.5%
$2,490

$1.38

$0.81

$1.30

$1.17

$0.94

S1.SO

,.,,.

$1.31

, ...

$1.17

116'A

$1.48

'""
$1.38
?16T!

453,800
15.5%
4.0'4
$2,466

,,.

..

$0.81

,.

465,090
16. 1%
4 .3%
$2.817

$1.36

487,896
14.8%
3.5%
$2,737

,.,,.
""'

510,888
16.4%
"-0%
$2.483

Source: Wedbush and company filings

50 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 67: APOLLO Cash Flow Statement
Apollo Group
Cash Flow St~tenwnt
($In OOOs except per sharedat.11

2007A

200BA

2009E

2010E

QtA
Nov '01

2008A
02A
03A
'08
M.1y'08

2009E
04A
Aug '0!

FE~b

01A
Nov'O!

02E
Feb og

OJE

04E
Aug '09

M~'09

01E
Nov'09

2010E
02E
03E
Feb "10
May'10

04E
Aug '10

opentt.ng ActiVIties
408.810

<476,525

756,.376

139,865

(32,0 39)

Stock Compensi!lion Expense

Excnt Tax Benells From StockSased Comp

54.027

53.570
(18.648)

80.119
(3.950)

84.000

14.924

(13.165)

20,106
(4.509)

OtPfeC:Ialion & Arnortlzlon ~nse

Amolt!Z.atlon ct Deftl'l'ed Gain
~aSh Foreign Cll'l'eneyloss
Amor1inllon o( Mlrketabte Secuties
Bad Debt Expense
Mincdy Interest
Deferred lnt()f'l'le Taxes
01hof

71.115

79,726
(1,786)

'92,188
(391)

93,788

18,113

19,398

2.825
90
104,201
(598)
(6,624)

2~4 67

13&.7'23

36.725
1u.eoe

4 2.192
t-54,111

l'lftln~me

ICbaoooln
W
o"*"' C""''
Cash FloW rrom ttatlons
a:OIShn

(4 .022)
(1 ,7~)

268
120 .6t4
(46.()'0)
(14 .387)

~:2;2
$3.39

llf.CI'IafOtYriYr

lnvesung Adl\'ltJes
c al )(pendHw u
RHitkled Cash
Ffet, Cash FloW'

FCi iSh
%CharveYrf'(r

Purthe:se./S.ale or ST t~stmenls
Prot9eds on Sale ol PPE
Acqtjtltlons
01hof
Cuh Flow rrom lnveding

&...
(104.561)
(58.163)
414,071
$2.79
1'1.7%

Stock tuu~:~n~

Exchange Ra!e tmpad

Net lncreueln Ca.sh

CashMSe~ otYear

Cal:h and at End of Year

(104.879)
(87.686)
&t1.J127
S3.74

....,.

2'5.510

(15.079)
(t3)

~.763)

131,93!

(893)

181 .524
(2.200)

(6$2)
18.7761

21
32.385

13
26.601

(2.665)

(69,312)
168.400
126.135)
1o-1 e3e

-...

(30.886)
1,GIZ 6"02

....

'"'"
"""'

$\.23

(120.646)
(158.607)
f:34,23S

(120.000)

(24. 114)
(2.285)
113,7z.t

30$%

1U..

.....

,.

96Z.601

...

18.360

2:o1nt

su:e

210111

250,991
(251,435)
(454.362)
102 .969
12,149

t$,126
111.564)

229,593

14.421
(213)
21,562
(446)

26
20.269
(229)
2,576
(2.652)
64,614
2S3.,17.4

(31.864)
(60.761)
U J7$S
IO.A1

(24.264)
(1.414)
l34l10

,...,.
$1. 43

$1.018

(4 7.oll)

(22)
(95,000

( 23,247)

$1,432

264,212

5.000

120,0.0.0

...

18,648

3,9$0

13.165

4,509

3-21,040

21 S40

14,013

3"2,114

44f.,1lS

("1)
30,261

309.0158
331,319

(272)
143,176
339.3 19
483,115

18.!33

50.848

(836)

2$,1 75

(610)

(260)

797,843

962,602

zoz.aot

f13:0,1SIJ

483.195
, t8f 038

1.281,038
1,243,C41

339 .319
S4:l,11'8

542.128
411 t70

13~~

991
(726

22.248
5 ,174
701

21388

160

438

(174,191)
411.970

2'37,012

103.729

178.242

152,688

219,235

130,659

218,963

187,520

15.119
(3.950)
22.897
(397)
2,467

20.000

22.000

23.000

16.000

21.000

23.000

2.4,000

2:2.997

23.()97

23,197

23,297

23,397

23,497

23,597

34.8$7
(S2)
(8,716)

34;738
( 100)

31.195
( 200)

35.933
(300)

45,907
(400)

44;139
(500)

4.),018
(600)

4$,459
(700)

138.27$
1107tf

(109.;09)

(60.497)
113,337

74,228
308,741
$1.11l

(36.161)

$ .251
22G,f47
$1A1

170.681)
237,111
$1,48

180,360

.....,.
12.37

(30.646)
(158.607)
S$0,150
12.18
1007%

71,5S4
10,40
125.3)%

.....

$121
(23.7)%

('!MOO)

217,178

.,..,

(30.000)

(30.000)

(30.000)

. , _.,.
....

.,....

16~..!'3~

41 1SS4

(38.11)'4

1.""

217.2'!4

(29.71'!<

(30.000)

..... .,......

237.81~

27.8)!41

19f0M7
$1.23

(32.1)%

22A%

67,711

m,sts
$2,18

13.""

(30.000)

(30.000)

Z07J11U

~0,516

$1.29

.....

28 ...

15.0%

(23 ,461)
95.000

St 73J

4 ,0Z2

(~.50S)

(24.637)
(2!.226)

36.057

42S9H

(437.735)
7.138

4 .119
(701
20,653
(447)
2.820
30
24.946
(369)
62,777
(165.748)
(20 .H4
157,SI4

.,...
.....
,......

(16.565)

1.660

1nst 3

.,...

139,106

250,000
(250,709)
(454.3$2)
1.698
6,975
273

oebtRep~enl

Mhxly l ~erut Conttllutlons

EXtes.s Tax Beneftls From SlockBased comp
0 1""
Cuh Flow rtom Financing

2U%.

46.001

Flnandng AcUV'IIIes
Debt STOW!ngs

Stock Repun::has.e

...,.

61$,018

246,1t3
237.072
483,115

87513

{30,000

300(1(1

30,000

30&00

30,0.0.0

30,000

30,000

41 ~SW

163,137
838.4.5$
1,00!,293

278,746
1.002.293
1.281,03$

237.878
1.281 .038
1,518,917

196,947

1,715,8$4

207,191
1.715,864
1,t23,055

320,S86
1..9'23.055
2.243,141

13 ,126
(11,564)

(2.505)
18.333
3,950

21,340
(836)
313,707
483.195
7fl&,t02

7$6.902
83#.4$0

1.518.917

Source: Wedbush and company filings

Exhibit 68: APOLLO Balance Sheet

Apollo Group
Balante Sheet
(S 1n OOOs except per share data)

C.sh & Csl> Equlvolen,.

Restricted Cash and Equlvalents
Mal1tetabfe Securitie'S
Accoonts ReceNable. net
Deferred Tax Assets
Other Current Assets
Total Current Assets
PP&E
Mart<etabfe Securities

Goo<WI
Intangible'S
Deferred Tax Assets
Other Assets
Total Assets
Uabitities
Accounts Payable
Accrued Uabitli:e$
ST Borrov.ing< & CP of lT Debe
Income Taxes Payable
Student Deposits
Deferred Revenue
Other Currenlliabillies

Total Currenc LjabilitJes

Deferred Revenue
Deferred Tax liablities
Other l T Uabilties

2005A
Q4A
Aug '05
145.607
225,706
224,112
281.615
14,991
23.058
835,089

2006A

339.319
296.469
31,278
190.912
50,885
16.515
925,378

542.128
298.754
30,324
187.551
51. 186
21.124
1,131,067

200BA
Q2A
Feb '08
411.970
454.515
30.879
160.478
47.736
63.564
1,169,142

Aug '06
309.058
238.267
45,978
160.583
32.622
16.424
802,932

288.661
97.350
37.096

328,440
53.692
16.8 91

364,207
22.084
29,633
2,214

376,102
18.017
66.671

389,801
94.014
66,773

35.756
28.993
1,302,945

53.13 1
27,919
1 ,283,005

80.077
28.270
1,449,863

89.016
35.861
1, 716,734

161.890
36.072
1,917,692

40.129
6 1,3 15
18.878
9.740
387.910

61.289
73.513
23.101
47,812
254.130
135,911

80.729
103.651
21 ,093
43.351
3213,008
167,003

44.624
105,418
21 .057
66,416
329.862
159,724

42.299
119,098
20.950

517,972

595,756

743,835

727,101

745,020

862,982

865,609

1,021,025

921.233

9$8,655

1 ,004,197

351

364
82,492

295
71.693

237
123,498

230
286,995

210
253,037

104
2.743
145.791

7
2,139
144.8 31

2,139
144,831

2,139
144.831

2, 139
144.831

2, 139
144.831

678,632

816,023

850,836

1,032,245

1 ,116,229

1,014,247

1,168,002

1 ~068,210

1,115,632

1,151,174

I 1 ,234,;17

6,599

11 .958

11,851

11,651

11 ,851

11,8 51

11 ,851

Q4A

2007A
Q4A

Aug '07

Q1A
Nov '07

Aug'08
483.195
384,155
3.060
221.919
55.434
21.780
1,169,543

Q1A
Nov '08
796.902
442.762
1,397
200.695
51 ,696
26.446
1 ,519,898

2009E
Q2E
Feb '09
838,456
442.762
1,397
212,286
50, 123
26.446
1,571,469

1,002.293
442,762
1.397
254,184
49.155
25.917
1,775,708

2009E
Q4E
Aug '09
1.281 ,038
442.762
1.397
285.184
58,206
22.869
2,091,457

37.035
86.017
21 ,658
161 ,583
27,295
1 ,712,221

439,135
25.204
85.966
23,096
89.499
27,967
1,860,412

442.477
23.001
8 1.757
17.625
102.145
29.691
2,216,594

449.480
23.001
81,757
17.6~$
102, 145
29691
2.2. 5,168

456.383
23.001
81 ,757
17.625
169.662
29.691
2,553,827

463, 186
23.001
81 ,757
17.625
93.974
29.691
2,800,691

I~
3,903,433

46,5 89
121,200
47.228
6 .111
413.302
231 .179

54.796
131, 182
45,178
116,721
455.438
217.710

62.962
13),182
45.178

69.323
131,182
45,178

71,866
131. 182
45.118

64,802
141 .182
45.118

455,438
228.473

455,438

174.210

42.234
116.637
80.808
30,753
386.755
205.795

267.534

455,438
300.533

455,438
380,639

~
1,087,240

388,463

200BA
Q3A
May'08
237.072
455.929
28.366
184.183
46,814
24.683
977,047
421,588

77.748

Q4A

Long Term Debt

Total l iabilities

596,071

Miinority tll erest

Q3E
May'09

Shareholder's Equity

706,874

604,373

633,840

865,898

U5M7

589,393

834,209

1,036.741

1 . 195~107

1,426,344

1.637,665

Total liabilities & SE

1, 302,945

1,283, 005

1,449,863

1,716,734

1,917,692

1,712.221

1,860,412

2,216,594

2,275,168

2,553,827

2,800,691

2010E
Q4E
Aug'10
2.243.64 1
442.762
1.397
390.361
61 .116

~
3,163,289
469.398
23.001
81 ,757
17,625
98.673

2,657,365

3.903,433

Source: Wedbush and company filings

Ariel Sokol (212) 668-987 4

Education 1 51

VVEDBusw---------------------------------------------DEVRY INC. (DV, BUY, PT: $58)

Initiating Coverage of DeVry Inc.: Sure, The Turnaround is Complete, but We Still See
Margin Growth Opportunities

We are initiating coverage of DeVry Inc. with a BUY rating and 12-month price target of $58, reflecting a - 14x
EV/EBITDA multiple to our calendar year 2009 EBITDA estimate. Our multiple reflects the company's strong
revenue growth rate and operating leverage and is in-line with other education stocks with similar revenue and
operating margin characteristics.

DeVry Inc. operates several postsecondary institutions including DeVry University, Ross University, the
Chamberlain College of Nursing, Apollo College, and Western Career College. OeVry offers degrees in
business, technology, and health verticals. Over the past five years management has focused on diversifying the
company's revenue stream after enrollments declined following the tech bubble of the early 2000s. Today, DeVry
University represents only -70% of total revenue, down from 94% from the beginning of the decade.

We believe that DeVry can expand operating margins from 16% to over 20% in the next three years due to
operating leverage. We think that investors are underestimating OeVry's potential peak operating margins during the
current economic downturn. Alongside enrollment growth increases are better utilization rates of OeVry's facilities.
This in turn results in higher margins given the high contribution profit from each additional dollar of revenue per
campus. The extent of this operating leverage was evident back in the early 2000s when margins contracted at OeVry
University to 0% in 2005 from 17.5% in fiscal 2001 as enrollments declined. We are currently modeling operating
margins of 17.5% in 2010, higher than DeVry's peak margins of 17.1% in fiscal2002.

Consensus expectations for the company's fiscal 2010 are conservative, in our view. Consensus estimates
currently reflect a 100 bps operating margin improvement in fiscal 2010, which we believe understates DeVry's
potential to expand margins given the operating leverage inherent in the model. We think that enrollment growth and
cost rationalizations such as the company's real estate optimization plan could enable DeVry to grow margins by 100200 bps in fiscal 2010.

Acquisition of U.S. Education could likely prove more accretive than initial expectations. Management could
not have more perfectly timed its acquisition of U.S. Education back in September 2008, just as the economy started
to significantly deteriorate and enrollments across most market funded institutions significantly accelerated. We note
that U.S. Education offers certificate and Associate degree programs, which we believe could prove highly
countercyclical.

274A
291A
277A
$1 ,092A

370A
390E
371E
$1,434E
31.4%

2008A
EPS

01 Sep

02 Dec

03 Mar
04 Jun
Year

PIE
Change

370
388
371
$1,434
2009E

ACTUAL

CURR.

$0.41A
0.49A
0.53A
0 .34A
$1.79A
28.0x

$0.48A
0.59A
0.67E
0 .49E
$2.23E
22.4x
25.1%

PREV.

2010E
CONS.

CURR.

0.59
0 .67
0.49
$2.23
22.4x
26.2%

$0.70E
0.77E
0 .82E
0.61E
$2.90E
17.2x
30.0%

PREV.

CONS.

0 .75
0.82
0 .60
$2.80
17.9x
25.4%

Company Information
52-Week Range
$39.25- 64.69
Shares Outstand.
72.7 million
Insider/Institutional 12.6% I 88.7%
Public Float
62.2
Market Cap.
$3.6 billion
ST/LT Debt
$0 I 0 million
Debt/Capital
0.0%
15.4%
ROE
Net Cash &
$3.32
lnv/Share
$9.70
Book Value/Share

*N11mbers may not add 11p d11e to ro11nd1ng. ** EPS normalizedfor one-t1me expenses and tax benefits.

.,.-

,.. ""

""'-

Source: Wedbush and company reports

52 1Education

~v

!.~

Source: Nasdaq.com

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH

Diversification of DeVry's revenue streams a strong positive in our view.

Management has done a
commendable job in balancing the company's revenue streams through the acquisitions of Ross University, the
Chamberlain College of Nursing Students, and now U.S. Education. While OeVry University still represents the lion's
share of the company's revenue, we note that the Medical & Healthcare segment could generate up to 40% of the
company's operating income in fiscal 2009.

WHERE WE COULD BE WRONG

Investments in growth could dampen otherwise strong margin expansion. While we think that DeVry could
expand margins by at least 100-200 bps annually over the next several years, we acknowledge that management
could use the challenged economy as an opportunity to accelerate investments into the business.

Future acquisitions could prove accretive or dilutive. Management has clearly demonstrated its willingness to
acquire companies to execute on its strategy. We note that DeVry recently announced its intent to acquire Fanor, a
Brazilian postsecondary school, and that the acquisition could prove accretive in 2010.

Deterioration in professional & training could be worse than what we are expecting. This segment, which
includes CFA and CPA test preparation, has seen a significant deceleration of revenue over the past several quarters
from 30.4% in fiscal 3008 to 1.2% in fiscal 2009. As well, margins in this segment have declined by 560 bps in the
first half of fiscal 2009. We think it possible that revenue could decline by at least single digits for the remainder in
fiscal 2009 and 2010, with a possible rebound in 2011 . Given the deterioration in the financial services industry, the
lack of demand for CFA and CPAs could be far worse than our and investors' models.

Operating margin expansion in 4009 could be lower than consensus expectations. We believe that the Street's
$0.49 consensus estimate for 4009 results is based on improving margins in student services & administrative
expenses. We note that these expenses as a percent of revenue increased by 430 bps in 0408 from 0407 due to
investments to support efforts including online growth acceleration, Chamberlain expansion, increased marketing, and
infrastructure investments. We believe that the company could gain leverage from this line item, but we acknowledge
that our and the Street's expectations could be too high were the company to make additional investments for growth.

INVESTMENT RISKS

DeVry has some exposure to private student loans. Student loans represented near 5% of DeVry's private loans
in fiscal 2008.

DeVry is currently subject to a number of lawsuit.s that could result in monetary damages. We cannot quantify
damages were OeVry to lose all of its lawsuits.

DeVry's programs are concentrated in three areas: technology, healthcare, and business. Changes in demand
in these areas could result in the deterioration of financial results. As well, student demand could diminish were
students unable to procure jobs following graduation.

Acquisition and integration risks could impact margins. Over the past two years DeVry has acquired two
companies, Advanced Academics and U.S. Education Corporation. We expect DeVry to continue acquiring assets
with excess free cash flow. Future acquisitions introduce integration risk, including the departure of key employees.

DeVry is highly dependent on tuition price increases. The inability to raise tuition could impact top-line and bottom-line
growth. We note that DeVry University has increased its undergraduate tuition by 4.5% in 2006 and 2007, as well as
graduate school tuition by 4.5% and 5.0%, in 2006 and 2007, respectively.

Ariel Sokol (212) 668-987 4

Education 1 53

VVEDBusw---------------------------------------------STRATEGY

Achieve full potential at DeVry University. This includes driving margin improvements in the business.
Management will continue to focus efforts on optimizing its real estate, which involves evaluating facilities and
locations to ensure the optimal mix of large and small campuses to meet the demand in each market that the company
serves.

Grow in adjacent vertical curricula. Management wants to expand the capacity of its medical schools across the
board. As well, management wants to expand onsite and online delivery for nursing.

Grow in adjacent horizontal levels.

Associates degrees.

Expand internationally. The focus is principally in Latin America, Brazil, and Mexico, followed by China and India.
Expansion could likely occur through acquisition.

Management wants to focus on a spectrum of education from K-12 to

ESTIMATES, GUIDANCE & OUTLOOK

DeVry management does not provide explicit forward looking guidance on a quarterly or annual basis.
However, we note that management has spoken qualitatively about the growth of revenue relative to operating expenses.
For example, management in its 4Q08 conference call commented that "for fiscal 2009, we would expect to continue to
improve gross margin, but not to the extent we did in fiscal 2008."
Revenue and EPS Estimates for fiscal 2010 Conservative, in Our View
Estimates currently assume only a 100 bps margin improvement year over year. We find this estimate highly inconsistent
with the operating leverage inherent in DeVry's model, and the benefits that the company could receive from strong
enrollments during a challenging economy. As such, we are modeling operating margin expansion of 150 bps in 2010.
2H Fiscal2009 consensus estimates assume margin expansion of 120 bps after a flat 1H.
Entering into fiscal 2009, management commented that operating expenses would exceed revenue growth in the first half
of the year, but be in line with revenue growth over the course of the year. This was due to delayed spending in the first
half of 2008, which resulted in a stronger than typical spending in 2H 2008 and providing an easier comparison for 2H
2009. In Q3 consensus estimate assume a 30 bps margin improvement, but in Q4 margins are expected to expand by 230
bps.
Consensus estimates for 2010 do not yet reflect the recently announced Fanor acquisition or the relocation of
DeVry's corporate headquarters.
Until management reports 3Q09 results, will not know the aggregate impact of these two unrelated events. In March,
management announced that the Fanor deal could prove accretive to fiscal 2010 earnings. However, we note that the
relocation of the company's corporate headquarters could result in $0.02 EPS dilution in fiscal 2010. We also note that
management announced the acquisition and headquarter relocation on the same day. As such, our sense is that the
acquisition could prove accretive by at least $0.02, negating the cost of the headquarter relocation.
Exhibit 70: WMS vs. Consensus Estimates
2009Q3

WMS

Consensus

Revenue

300
$0.67
17.7%

388
$0.67
17.7%

WMS

Consensus

Operating Margins

1,434
$2.23
15.9%

1,434
$2.23
15.8%

F2010

WMS

Consensus

Revenue

1,700
$2.90
17.5%

1,692
$2.80
16.8%

EPS
Operating Margins
F2009
Revenue

EPS

EPS
Operatmg Margins

Guidance

Guidance

Guidance

Source: Wedbush, company filings, and thomsononeim.com

54 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
OVERVIEW OF RECENT FINANCIAL RESULTS
Second Quarter 2009 Results Better Than Expected, but Disappointing to Some Investors Who Wanted Even More
Heading into the Quarter
DeVry reported good Q2 fiscal 2009 results, exceeding consensus estimates for both revenue and EPS (excluding a onetime charge related to auction-rate securities). However, investors were disappointed with results. The company's
operating margin declined by 22 bps year over year. As well, revenue at the company's Professional & Training segment,
which includes contributions from CPA and CFA test preparation, grew by only 1.2%. This segment generates only 6-8%
of total revenue for the company in any given year, but sentiment following results was weak given that a portion of the
company's business is cyclical.

REVENUE grew by 35.0% year over year versus the consensus estimate of 33.0% year over year growth. Q2
revenue of $369.6 million exceeded the consensus estimate of $364.2 million and represented a 33.0% growth rate
over the prior year quarter. Revenue growth was driven by the acquisition of U.S. Education in the previous quarter,
which added $42.5 million of revenue. On an organic basis, the company grew by 19.5% year-over-year.

OPERATING MARGIN declined by 22 bps. Q2 operating margin of 16.9% represented a 22 bps decline over the
prior year quarter of 17.1%. Margin deterioration was attributable to headcount additions and investments. As well,
the decline of professional & training revenue resulted in year-over-year margin decline in that segment by 510 bps.

EPS exceeded consensus estimates by $0.02 excluding a one-time charge. Normalized Q2 EPS of $0.61
excluding a one-time charge compared to the consensus estimate of $0.58 and represented a 22.9% growth rate over
the prior year quarter. U.S. Education benefited earnings by a penny or two. The quarter was impacted by a net
unrealized loss of $1 .7 million pretax related to auction rate securities. Typically, unrealized losses are reflected on
the balance sheet. However, in November DeVry entered into an agreement with UBS with the right to sell auction
rate securities at par beginning in June 2010. The loss should reverse back into income over the next year and a half,
when the auction rate securities are repurchased by UBS.

ENROLLMENT growth year over year continued to accelerate among undergraduate students at DeVry
University. Undergraduate enrollments at fall fiscal 2009 of 52,146 grew by 16.9% from the prior year quarter of
44,594.

PERSISTENCE improved sequentially at DeVry University. Q2 persistence of 86.1% compares to 83.8% in the
prior year quarter and 73.4% in the prior quarter.

BAD DEBT EXPENSE as a percent of revenue was flat year over year. Q2 bad debt expense as a percent of
revenue of 4.9% compares to 4.9% in the prior year quarter and 5.3% in the prior quarter. This was due to improved
student persistence rates.

Advertising costs as a percent of revenue grew 45.2% year over year. Advertising as a percent of revenue grew
to $44.3 million in 02, up from $30.5 million in the prior year quarter and $39.8 million in the previous quarter.

REVENUE ANALYSIS
We forecast total revenue of $1.43 billion and $1.69 billion in fiscal 2009 and 2010- up from $0.78 billion in fiscal
2005.
We think that the DeVry University segment and Medical & Healthcare segment could grow organically by 20% in 2009
and 2010. In particular, we think that the growth rates of the Medical & Healthcare segment could be better than expected
following the rather fortuitous acquisition of U.S. Education Corporation in September 2008. We note that U.S. Education's
schools provide certificate and Associate's degrees, which are highly countercyclical. We acknowledge that OeVry's
Professional & Training unit could drag revenue growth a bit given the potential for slowing and perhaps declining demand
for CPA and CFA review courses.
Nice business turnaround following tepid mid-2000s financial performance.
DeVry has sharply recovered from the challenges that followed from the dot com bust back in the early 2000s. The
management team transitioned DeVry from a technology oriented large campus delivery model to a multi-product multichannel company. To diversify the company's offerings, DeVry bought two companies that provided education in
healthcare: Ross University in 2003 and Deaconess College of Nursing (now named Chamberlain College of Nursing).
Revenue growth has accelerated at DeVry every year since 2005. The turnaround at DeVry was driven by accelerating
enrollment growth rates at the flagship DeVry University.

Ariel Sokol (212) 668-987 4

Education 1 55

VVEDBusw----------------------------------------------

1.8

r--------

1.6
1.4
1.2
1.0
($8)

OeVry

0.8

Univer'Sily

0.6

68%

10%

5%

0.4
0.2
2002A

2003A

2004R

1Source: Wedbush and company filings

2005R

Re"""'e -

2006A

2007A

2008A

R""""'e% Change YriYr

2009E

2010E

Source. Wedbush. thomsononeim.com. and Reuters

DeVry presents three segments in its financial statements:

DeVry University. This segment includes DeVry University and Advanced Academics, a K-12 virtual school company
acquired in October 31 , 2007.
Medical & Healthcare. This segment includes Ross University medical and veterinary schools, Chamberlain College
of Nursing, and the U.S. Education, acquired on September 18, 2008.
Professional & Training. This segment includes Becker CPA Review and Stalla Review for the CFA exams.

Below we review each segment.

DeVry University
The DeVry University segment generated 77% of DeVry's total revenue in fiscal 2008. Following the acquisition of U.S.
Education, we expect DeVry University to contribute 65-70% of total revenue over the next two years. DeVry's revenue
growth rate has accelerated over the past six quarters, as has DeVry undergraduate total enrolled students.
Exhibit 73: DeVry University Undergraduate Enrollments

..

..,~

Exhibit 74: DeVry University Segment Growth Rate Summer

F2006 - Fall F2009

55.000

20.000

18%

19,000

16%

3 50.000

..,"

18,000

14%

i!

1i) 17.000

12".4

(/)

"

{! 45,000

i!

15,000

~
C>

13,000

12.000

..,
.3

Sum

Fall

Spr Sum

m m m

oo

Fall
~

Spr Sum Fall

Spr

oo w w w

lema Undefgraruate Td al Students -

Sum Fall
~

Spr

Sum

Fall

Undefgraruate Td al Students % Olange YriYr

Source: Wedbush and company filings

16.000

..
~

{!

10%
8%

14.000

6%
4%
:ZO,{,

11.000
10.000

0%
.-,, '04

.-,1'05

.-,1'06

JtA '07

Jul '08

EE!il Undergraruate Td al Students - Undetgraruate Td al Students% Olange YriYr

Source: Wedbush, thomsononeim.com, and Reuters

Medical & Healthcare

The Medical & Healthcare segment generated 15.6% of DeVry's total revenue in fiscal 2008. Following the acquisition of
U.S. Education, we expect this segment to contribute 26-30% of total revenue over the next two years. Organically, the
segment grew 29.4% year over year in the first half of fiscal 2009. U.S. Education generated $42.5 million of revenue
representing 25.4% year over year growth in 02 fiscal 2009, the first full quarter where DeVry consolidated U.S. Education
results.
Professional & Training
The Professional & Training segment generated 7.4% of DeVry's total revenue in fiscal 2008. Following the acquisition of
U.S. Education, we expect this segment to contribute 4-6% of total revenue over the next two years. We note that this
segment is the most cyclical part of DeVry's business. Given the contraction of the financial industry, fewer students are
enrolling in courses for CFA and CPA reviews. In the first half of 2009, this segment grew by only 4.6% year over year.

56 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 75: Medical & Healthcare Segment Revenue

Exhibit 76: Professional & Training Segment Revenue

120%

100,000

80%
80.000
60%
40,000

15,000

10,000

40%
5,000

20.000

20%

40%.

(\

20,000

100%

80.000

25,000 r -

140%

v ~I

3()0~

20%

.....

10%

r--.

(10)%

0%
4005A

4006A

E!!!!!!l Medical & Healthcare Segment Re'\oenue -

4007A

4005A

4008A

Medical & Heatthcare Segment Rewnue Growth Rate

Source: Wedbush and company filings

0%

1-

4Q07A

4006A

ProfessiooaJ & Training Segnent Re-.enue -

4Q08A

Professional & Training Segment Re-.enue Growth Rate

Source: Wedbush, thomsononeim.com, and Reuters

EXPENSES ANALYSIS
We believe that operating margins can expand to the low 20s over the next several years through enrollment
growth and operating leverage with existing facilities.
Management need only point to the 11,400 bps improvement in operating margins when describing DeVry's successful
turnaround since 2005. Most of the margin expansion occurred from reducing cost of educational services as a percent of
revenue. Cost of educational services primarily includes the cost of facilities, faculty and the staff, student educationrelated support activities, and bad debt expense. Over the past several years DeVry has amortized facility costs over a
larger number of enrolled students, which results in operating leverage. As well though, the company benefited from a
workforce reduction in 2007 which included the elimination of 150 positions at DeVry University. Over the past several
years the company has pursued an ongoing real estate optimization strategy whose end goal is to maximize capacity
utilization.

Exhibit 77: DeVry Operating Margin

Exhibit 78: DeVry Operating Margin by Segment

Lr-----------------------------------------,
~r----------------------

Source: Wedbush and company filings

Ariel Sokol (212) 668-987 4

Source: Wedbush and company filings

Education 1 57

VVEDBusw---------------------------------------------CASH FLOW & BALANCE SHEET

We expect DeVry to generate free cash flow of approximately $275 million over the next six quarters.

Free Cash Flow: We are modeling DeVry to generate $141 million and $248 million of free cash flow in fiscal 2009
and 2010, respectively. We note that historically DeVry generates more cash flow from operations than net income, a
positive in our view. We note that working capital is a use of cash, with working capital representing 3-6% of revenue
in any year.

Capital Expenditures: Capital expenditures as a percent of revenue for the past three years have ranged from 3.0%
to 6.8%. We are modeling capital expenditures as a percent of revenue to be roughly 4% in fiscal 2009 and 2010,
respectively.

Dividend: Beginning in fiscal 2007, DeVry has issued dividends financed by free cash flow. In fiscal 2008, DeVry
issued dividends of $0.11 per fully diluted share. In November 2008, DeVry's Board of Directors raised the annual
dividend rate from $0.12 to $0.16.

Share Repurchases: DeVry currently has a $50 million share repurchase program through December 31 , 2010, of
which -$45 million remains in the program. In fiscal 2009 02, DeVry repurchased 98,100 shares at a cost of $5.4
million.

DeVry has $155.1 million of debt, which the company used to finance its acquisition of U.S. Education. We note
that much of this debt comes from credit facilities that can be paid down by DeVry's free cash flow generation.

Cash: DeVry has $262.9 million of cash and marketable securities on its balance sheet as of December 2008. DeVry
does hold $59.5 million of student loan auction-rate securities on its balance sheet. Under an agreement between
UBS and various regulatory agencies, DeVry can sell or put its auction rate securities at par value between June 30,
2010 through July 2, 2012. DeVry intends to put these securities back to UBS on June 30, 2010.

Debt: DeVry has $155.1 million of debt on its balance sheet as of December 2008. This debt was used to finance the
acquisition of U.S. Education. Part of this debt includes auction rate securities [need to update this when the 10-Q
comes out].

Credit Facility: DeVry has a $175 million revolving credit facility, with a current capacity of approximately $50 million.
At the request of DeVry, the maximum borrowings and letters of credit can be increased to $275,000,000. Interest
expense related to this credit facility is at LIBOR rate plus 0.50%. As well, DeVry has an annual fee equal to 0.50% of
the undrawn amount of the credit facility.

58 1 Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
MANAGEMENT BIOGRAPHIES
Name

Title

Background

Daniel M.
Hamburger,
44

President
and Chief
Executive
Officer

Mr. Hamburger has served as President since July 2004 and Chief Executive
Officer since November 2006. Prior to his appointment to CEO, Mr. Hamburger
served as Chief Operating Officer since July 2004, after joining DeVry in 2002 as
Executive Vice President responsible for the company's online and Becker
Professional Review operations. Prior to DeVry, Mr. Hamburger served as
Chairman and Chief Executive Officer of lndeliq, a developer of simulation-based
training software.

Dr. Harold T.
Shapiro,
73

Chairman

Dr. Shapiro has served as Chairman of the Board since November 2008 and as a
Director since 2001 . Dr. Shapiro currently also serves as President Emeritus of
Princeton University and professor of economics at the Woodrow Wilson School
of Public Policy. Dr. Shapiro also served as the university's president and
professor of economics and public affairs from 1998 to 2001. Prior to Princeton,
Dr. Shapiro held faculty positions at the University of Michigan since 1964 and
was the university's president from 1980 to 1988.

Richard M. Gunst,
52

Senior Vice
President,
Chief
Financial
Officer, and
Treasurer

Mr. Gunst has served as Senior Vice President, Chief Financial Officer, and
Treasure since joining DeVry in July 2006. Prior to DeVry, Mr. Gunst served as
Senior Vice President and Chief Financial Officer of Sagus International from
2005 to 2006. Mr. Gunst has also held senior finance positions at ConAgra
Refrigerated Foods Group and Quaker Foods and Beverages.

Ariel Sokol (212) 668-987 4

Education 1 59

VVEDBusw---------------------------------------------VALUATION
We are initiating coverage of DeVry with a BUY rating and 12-month price target of $58 . Our target reflects a -14x
EV/EBITDA multiple to our calendar year 2009 EBITDA estimate. Our multiple reflects the company's strong revenue
growth rate and operating leverage opportunities and is in-line with other education stocks with similar revenue and
operating margin characteristics.

Exhibit 79: Multiples Analysis

Fiscal Year June End
Valuation@
Current Price of $50.00
2009E
2010E
2008A
$50.00
$50.00
$50.00
72.7
72.7
72.7
$3,633.1
$3,633.1
$3,633.1

Valuation@
12Month Target Price of $58.00
2008A
2009E
2010E
$58.00
$58.00
$58:00
72.7
72.7
72.7
$4,214.4
$4,2t4.4
$4.214.4

(107.8)
(51.48)
$3,525.3
$48.52

(107,8)
($1.48)
$3,525.3
$48.52

(107.8)
($1.48)
$3,525.3
$48.52

(107.8)
($1 .48)
$4,106.6

$173.3

$239.5

EV /EBITDA

20.3x

EPS, Normalized
%Change
P/E Multiple

Price

Fully Diluted S hares 2Q10E

Market Capitalization
Less: Net Cash 2Q10 E
Net C'ash I Share
Enterprise Value
EV /Share

EBITDA

$56.52

(107.8)
($1.48)
$4,106.6
556.52

(107.8)
($1.48)
$4,106.6
$56.52

$309.2

$173.3

$239.5

$309.2

14.7x

11.4x

23.7)(

17.1x

13.3x

$ 1.79

$2.23
25.1%

$2.90
30.0%

$ 1.79

$2.23
25. 1%

S2.90
30.0%

28.0x

22.4x

17.2x

32.5x

26.0x

20.0)(

o.9x

o.sx

1.ox

0.7x

$1,09 1.8

$1 ,434.2

$ 1,700. 1

$1,091.8

$ 1,434.2

$ 1,700.1

3.2x

2.5x

2. 1x

3.8X

2.9x

2 .4X

$198.6
$2.73

$216.2
$2.98

$327.8
$4.51

$19&.6
$2.73

$216.2
$2.98

$327.8
$4.51

17.7x

16.3x

10.8x

20.7x

19.0x

12.5x

$ 135.8
$1.87

$14 1,0
$1 .94

$247.8
$3.41

$135.8
$1.87

$141 .0
$1.94

$247,8
S3.41

26.0x
3.7%

25.0x
3.9%

14.2x
6.8%

30:2><
3.2%

29.1)(
3.3%

16.6x
5.9%

PEG Ra llo
Revenue
EV / Revenue
Operating Cash Flow
Operllling Cash f low I Share
EV I Operating Cash Flow
Free Cash Flow
Free Cash FION I Share

EV I Free Cash Flow

Free Ca sh Flow Yie ld

Calendar Year End

EBITOA
% Change

Valuation@
Current Price of $50.00
2008A
2009E
2010E
$199.5
$282.3
$34 1.2
41.5%
20.9%

Valuation@
12Month Target Price of $58.00
2008A
2009E
2010E
$ 199,5
$282,3
$341.2
41 .5%
20.9%

EV/ EBITDA

17.0x

12.0x

9.9x

19.9x

14.1)(

11.6l(

EPS, Normalized

$1 .94

S2.64
36.2%

$3.2 1
21.8%

$1 .94

$2.64
36.2%

$3.2 1
2 1.8%

25.8x

18.9x

15.6x

29.9x

22.0X

1B.Ox

0.5x

0.7x

0.6x

0.8x

% Change

PIE Multiple
PEG Ratio

Source: Wedbush and company filings

60 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
VALUATION- HISTORIC
DeVry's PIE ratio has ranged between 19-45x earnings over the past eight years. We can only assess the company's
historic PEG ratio from 2006, as earnings declined from 2003 to 2005. We note that over the past several years the PEG
ratio has traded between 0.5-1 .0x price to earnings. We believe that the company could be on track to grow earnings by at
least 25% over the next several years, and would not be surprised if investors valued the company by a PIE of at least 20x
earnings.

Exhibit 80: DeVry Historical Forward P/E Valuation

Exhibit 81: DeVry PEG Ratio

SOX ,--------------------------------------------.

3X

J~

2X

1X

-J\

OX

1X

1~~--~----~----------------------~--------~
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

2X
Fel>-01

Fel>-02

Fel>-03

..

- -

rf'fC

)',

Fel>-04

Fel>-05

Fel>-06

Fel>-07

Fel>-08

Fel>-09

Jan-09

Source: Wedbush . Baseline, and Reuters

Source: Wedbush , Baseline. and Reuters

As the exhibit below suggests, DeVry has consistently traded up at a premium to the S&P 500, even during the tumultuous
mid-2000s period when margins declined following the demise of the tech bubble. Given the challenging economy and the
company's margin expansion opportunities, we believe that the company could continue to warrant a premium over the
S&P 500 over the next several years.
DeVry's valuation as a multiple of EBITDA has ranged between 6-30x over the past ten years. DeVry currently trades at
slightly below the mid-point of this historical range. We do note that private transactions for market funded universities are
currently priced at a multiple of 5-15x EBITDA. DeVry has traded below 10x EVItrailing EBITDA only as the business
significantly deteriorated. In our view, the company has substantial tailwinds working in the company's favor, and as such
we are hard pressed to see meaningful EBITDA multiple contraction over the next year.

Exhibit 82: DeVry Forward P/E Relative to S&P

Exhibit 83: DeVry TTM EV/EBITDA

30x , - - - . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,

0.5X
Jan-00

Oec-98
Jan-01

Jan-02

Jan-03

Ja n-04

Jan-05

Source: Wedbush . Baseline. and Reuters

Ariel Sokol (212) 668-987 4

Jan-06

Jan-07

Jan-08

Oec-99

Oe~O

Oe~1

Oe~2

Oec-03

Oec-04

Oec-OS

Oe~6

Oec-07

Oec-08

Jan-09

Source. Wedbush and Factset

Education 1 61

VVEDBusw---------------------------------------------COMPANY OVERVIEW
DeVry is a market funded postsecondary education company that primarily serves working adults. Headquartered in
Oakbrook Terrace IL and founded in 1931, DeVry owns and operates DeVry University, Advanced Academics, Ross
University, Chamberlain College of Nursing, Apollo College, and Becker Professional Review. DeVry University is one of
the largest private degree-granting regionally accredited higher education system in North America.

DeVry University offers undergraduate and graduate degree programs in technology, healthcare technology, business,
and management at 91 locations in the United States, Canada, and online.

Held its IPO in 1991 .

DeVry University and the Keller Graduate School of Management have accreditation by the Higher Learning
Commission of the North Central Association of Colleges and Schools, a regional accreditor.

Exhibit 84: DEVRY Income Statement

..Emiellll~~~~~~~~ll~~llllll~m"~llll~f~'31111SFm'llll~i~'IIIIIIIIII~"CIIII~E1~1111~F~IIIII~$~'jiillllll~m"~ll~f~'llll~*~lllll~'~'jiill

~m;zz~!l~miiiiiiiii
Expenses as a% or Revenue
Cost ol Ecb:ation al Servites

62. 1%

46.1%

Student SeMtes & Admin Expemes

38.S%
31.8%

38.7%
26.6%

45.1%
311.0%
29.7%

44.0 114
38.5%
30.0'14

48.3%
36.6%
26.6%

37.6%
28.0%

7.4%
11.1%

3.4%
17.7%

28.S%
32.4%

15.7%

0 .6%
6.8%

2.7%

4.0%

10.4%

21.4'4

Etrecth Tax Rate

Expenses % Change YrfYr
Cost ol Edutalionli Servitu
Student Services & Achin EXpem.es

H.l~

45.0%
37.7%
28.1%

45.3%

OEVRV

48.!1%

46.0%

42.8%
26.!1%

38.6%
28.3%

6.1%
32.1%

28.0%

15.4%

452%
37.9%
30.1%
34.9%
36.0%

2008A

Normalized Income Statement

(SIn OOOs except per share data)

T\ition Revenue

2007A

20D8A

8fl'Z.660

. .. ~'Vtrft
S~OIQI(y~(;t ........ .......,..IIII(!Ql

I.OOI.o29

""'
70,813

Olher Educational Revenue

:n"

'JI.CNnQitVtM
Tota1Re-v~

933,473

"-c!W~Jt tN,

87, 8<)4

'""'

, ...

1,001,833

~-"'

2009E

..

2010E

1.332,606
~

101,550

""'
.....

1.4:).4.,156

' 'CIO!ISIO~'*i

1.600.344

''""
99.m
,.,~

1,700,055

St~ONil~;tf"ql..,.._~~~~qlll

Cost ol Education Services

Student SeMtes & A<trWl Expem-9$

TotaJ operating expenses

'A.~Y!f'fr

486,721

3S3,025
845,746

... ...

6.642
2.050
96,619

AmCHtization

Oeprec:iation
EBITDA
U rTOA.w,rp!!ll

503,133
422,622

92$,7$$

4,926
2.251
173,255

t~C'fo

~~

IP'SCPIVI. . Yr'Yr

openvtng Income

87,727

~~

166,078

646.361
5S3,3SS
1,20$,716

8,635
2.402
239,476

748,029
654,735
1,402,764

9.336
2.600
309.237

QtA
Sep '07

Q2A
Dec '07

,""'...
20,097

250.695

m ..

,.

257.860

,.,.
""'

25.no

18,945

273,737

290,973
,.;.,.

276,805

.....
.....

1<191.
2$4.

121,028

123,887

130,846

12un

91,845
2 12.673

102.917

109.576

226.801

240,422

,,..

""'

1,012

41t
32,372

tt~

10:1'1.

11.1$

J8.1'i

U .1'!1;

l4tllf

lt1llp

$ t $11f

tote,

37,645

46,933

S0,551

30.,949

''.G.\

n~\.

1ui

u~

901 lip

190 b ,_

~21 lip

-~

-~

n~

-~

7,437
(4,764)

10.463
(522)

7,852
(5,647)

8.800
(4,800)

2.407

90,380
28,752

176,019
48,744

230,644
68,468

301,301
90,380

39,831
10,213

g,n7

lneome Tale:es (Benefil)

Nellneome. Norm alized

81,628

129,275

162,178

2 10,911

,,,..

,.""'

..

2A .p

46,812

44.!1%
41 ,5%
30.!1%

12.9%

IS.2%

13.4%

14.9%

14.5')4

16.0%

.....

360.744

atE
Jun '09

350.690

"""
"""
'"" 20.229
29,160

.....

Q1E
Sep '09

Q2E
Dec '09

364.261

,.,..,
, ...

24.497
(04)'
383, 7~,

........ ,....."',. ....

,,,. ,. ..
,

389,904

370,919

...

.;fc;Y.

...

401.902

QJE
Mar '10

423.8 74

,.,.

17~~

IH%

'"'"

26,8$2

28.4 14

2&,753

.52,288

.,.,.

(26~

~~

""'

""'

...

~~~

~~

Q4E

Jun '10

410,307

"'"'

.,,.""

19.9S3

.....

430,268

!;19J"'

""'

172.727
148, 163
32,0,891

166,913
IS3.931
320,845

171,053

188.6SI

145.784
316.838

160,783

169,608

,._,.,

348,434

368.61$

189,317
176,560
367,8n

2.919
568
66,027

Z400
600
72.013

2.400
600
S3,074

2.334
6SO
74,904

2.334
650
82.303

2.334
6SO
86,657

2.334
650
65.373

11"'

sts'l

tc,;~

O:bf

~,

2111 . .

33411f

139.968

'""

62.:;10

..,.,.

69,013

.....

50.074

,,

..

t33bp

199.007

.....

... .,..

ttn

~.n..

Obf

18b,_

79,319

83.,673

,.......

1U'

I'-M

14.1\

:!'nbf

30911f

151tlp

IObp

IOObp

2.000
(1.200)

2,000
(1.200)

2.2<l0
(1.200)

2,200
(1.200)

2.200
(1.200)

2.200
(1.200)

61,3S6
18.491

89,813
20,9<

50,874
15,262

72,920
21,876

80,319
24,096

8-0,873
25,402

63,389
19,017

34,8:10

42,885

8.889

3S,812

51,0<4

56,224

59,271

44,372

72.!;60

72.662

72.662

72.662

72.662

72.662

72662

n ,e62

QJE

Q4E

2,823
(99)

2.341
(104)

2.142
(3S3)

IS,914

S3,275
14,857

33,188
8,620

48,601
13,771

29,818

35,813

38,318

24,568

71.947

72.520

72515

72.540

(98)

22.5%
24.3%

44.0 114
37.5%
30.0%

71,920

I!M lit

2.892

..

>(...

'""'""
:rtllp

(221)

''"'

~.81$

916
634
48,362

1,513

$2,764

81'SChVIfeYrl'tr

..

tl ...

307,075

~~

17~

300, 717

27.571

,.

-~

297,301

37.S%
30.0%

2010E

Q3E
Mar '09

,.,,
""

2~.905

,_,

1,355

.,,..,

44.!1%

37.5'14
30.0%

32.0%
36.2%

342.044

245,8~

lf,J\.

228,..43$

""'
24,590
""'

118.484

568
48,8$6

'!U"4

279.127

Q2A
Dee '08

187. 107

1,048

roo

Q1A
Sep '08

139.613
117,292

5n
38,263

....,,

lntefest Income (Eli'J)enu), net

265.2S3

Q4A
Jun '08

23.042

otttM.I~ ,.,tll'l \

Interest Expense

QJA
Mar '08

IH"'

44.0%

41.5%
30.0%

200QE

..
"'"
,. ..
''""
.....
,..
... ,.,,......,.
,.,.

230.221

45.0%

IC.t'

!nlbt

U'J!'l
bp

1.710
(2.894)

1-#.f'l.

62,38$

Olhe<

E8T

Shares Outstan~g (Fulty Diluted)

71,400

72.406

n .637

Normalized IS to Pro Forma (which ele:cludes srock option compensation)

Recooelllauon
2007A
2008A
2009E
Stock Based Con""pnAtion
Pro Forma E8 1TOA
EetT~MJrgln,.

Opei'~QioUtOIII.

2009E

2008A

2010E

Q1A

Q2A

Q3A

Q4A

Q1A

Q2A

2010E
QJE

Q4E

Q1E

Q2E

5.428

5.724

8.809

10.000

1,514

1,366

1.407

1,437

3.110

1,61!9

2,000

2.000

2.500

2.500

2,500

2,500

102,047

178,979

248.285

319,237

40,777

50,222

54,171

33.809

s1 .n

s1.ns

74,013

55.074

77,404

84,800

89, 167

67,873

62,074

74,420

10,.

Pro forma Operaling Pfolil

n .662

"'

93.155

171,802

1001rt

1St'4

u~

237,248
1t~

188'.

307,301
tt1,_.

39, IS9
1S~

.,,.

48,2i19
116"

186"4

51,958
Jtft

122"4

32.386
111

16~

18~

49,922

64,239

IU~

17<1'

lt:mto

71.013
It~

*"'
IC~

,,~

8 1,819

'''"'

!!It'll

~~

86,173
191,..

1$h

64.889
., , .

cmzmmc~~miiiiiiiiiii..Emiellll~~~~~~~~ll~~llllll~~''~llll~f~?31111SFmIIIII~'~'IIIIIIIIII~Jt~IIII~~*~IIIIS*~IIIII~1I'jiillllll~m"llll~f~'JIII~Fmiiiii~!I'jiilll
N01met~ GMP E~ Fully

Oiuted

(~tWtltrfld~~Ullflllel

$G.88

$1.79

$2.23

$1.87

$2A3

'!I.Cnlt!QitYIIVr

PF EPS Fuly O...ted

(tt.C~ItockbJstQCO!fW'IIJDOII.PNI'Cf-"''JIO(k.

..

$1.01

,.

GAAP EPS. Fully !:*~ted

$1.07

'!I.Cnlt!QitYIIVr

.., ...

$1.73

$3.11

,....

$2.90

$2.23

50.34

SOA8

...... .....

$0).55

$0).47

,,..

$0).52

$0.36

$0.$3

$0).34

$0).48

"",,...

,....

,~

,.,...

$0..9

$0-$3

$0A1

,,,

SOA5

, ....

$0.51

$0.49

,,..

$0).65
111'1.

,,.

..

$0).70

$0.11

, ...

$0).75

$0.&2

$0.49

$0).70

$U7

$0.59

....

$0).72

..

$0.67

$0.53

......

,.

$0.87

$0.6<1

$0.82

$0.81

""'
$0.77

,,..

..

SMI

,,..

, ...
,.,.

Source: Wedbush and comeanr filings

62 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 85: DEVRY Cash Flow Statement
DEVRY
Cash Flow Sh.Wmsnt
($In OOOs oxcept pM soh.vo d~t~)

2007A

200~E

2008A

2010E

QtA
S9p '01

2008A
Q2A
03A
Dec '07
Milt '08

04A
Jun '08

2009E
02A
Q3E
Dec '08
fA.u '09

Q1A
Sep 'OS

Opeuting Activities:
Nfllncom

76,188

125,$32

16l.17'

210,91 1

26,835

35,813

38.,318

24,566

stC)(kCctnpens-atlone:pense
o.ptedatlon
AmOitiZ.VIon

5,428
35,979
8.Q28

5 ,72"
34,808
5,066

t.aoo
20.400
8,704

10.000
2,600
9,336

1,514
8,405
1,081

1,.366
8,858
1,390

1,..01
8,734
1,547

1.437
8.811
1,CM8

3,110
8,825
952

1,699
10,375
2,952

51.240
4,5.92:
(20.462)

51.881
3.110
3.882

72.091
(603)

93.$04

14.725
(6.785)
3.735

13.356
3,1$3
(5)

14.117
(3.248)
30

9.684
9.990
122

15.985
(923)
24

18.071
420
(3'1)
1,718

PrOIAslon torRetlJnds & UnOOiedlli&Attounts

Deferred Income Tailtes
Lou on Disposals d hnd. &.ildings & Equipment
Olhtf

(7)

t i-718

Q4E
Jun '69

'2.000
600

2,000
600

4.;400
19,4915

2,400
18.546

2010E
02E
Q3E
OM '09
Mat "10

Q1E
Sep '09

51,044

56,204

59,271

2,500
650
2,334
21.382

2,500

2,500
650
2,334
24.876

650
2,334

23..5&1

04E
Jun "10

44.372
2.500

650
2.334
23.665

~~~~u;h~~~:w~'~~~=:~i~~~~~~~~~.------------~~~~~;~~,~~~~~f.!~~Z:;~~~--f~~~~,l.:~.~~~~2~;~~;,;.: ~-=~~~::~~(:~~~~!~~~--~~?2~~.~2--~~~~~:~~,~ ~~~5,~~~.~:~~:~,~~~~41~~1~~~~H!~~--~nM~~~~~~1~~~r-~~;~~'~:~:~~~~~:~~4~~~~~~~~~.',~~n~-~~:5:~~~~~~

$1.16

U ,U

41.*$

%Cl1Jrt. . Ytf'fr

U"4

U.G1

U.t1

SO.n

61.6~

11.01

U~

t$o.o9)

UJ.T~

(164.0)"4

,.. ,..

(2:5.At4)

SO.GS

$USI

(C-0.62

$.2,70

tt9Jf',

87..4%

57&.3%

to2.o")).

(14,570)

(25.000)
01,1 01

CO.zT

U ,U

lnvesung AtriV'IUes
C891el e:pendlures

''"euh'IOW

~OillllgtYt(Vr

FCF MJtiJIIl

(38.558)
86, 618

(62.8<16)
13'5t840

.....
,,." ....
.....

311~

t 3'o

$1.1$

S1.2t
%ChnpYrlYr

PurcheseJSele ct ST lrwstmenl.s

Proc;uds on Slit or PPE

36.642

(62.159).
52.571

'Othe<
"""illons

(2'-'03)

(80,000)

(Ht-1-40)

(9,817)

247J 7S9

f1,869

<42_,3(14.

1$7..

""'
""''
16.1~

!37)

....~

247"

(72,738)
38.$28

184.

.....

1U111.

(69.!548)
(27.~)

(9.435)

(10,638)
lf,1_to

2'>03!1

,.,,.

(1111)9'

lO..

.S0.4ol)

$1,11)

'"'""

217,0'1.

3$.1~

(,16A)"

80.862
14,043
(136)

(135)

(13)

(24)

(13)

(286.254)

(246)

(Zts~IIOS)

114,1401

&:3lS7

....

JU,otOJ

)I~

f"C:: ;U: ;hc.:,FI"'o: :w. : n.: ;om=fn..: Yes::U: :n:;z__g_______________,(,:.:1,1:..:1.:.fl__...l:..:00:::,0..::97C!.)_,;:::36'-'1"-7..

:.:L.__l:8:::0,00=.0) ~_,(;::S:Z,:I.:::;0:<.)__,(.:.;100::;,:,11:.;:1L)___:1;:,>,:..:334:.:.,___,(.:;2<.::;1..::12:q)

2!,38S
(3&31'

.....""

(20.000)

(20,000)

,)....

(10,3S'J

17!,$41

2$t)l
$1.36

11f0l"

,,.,.
($o.t7)

SU%

l2~000

(2S.OOO)

,,,_,...

(20,000)

(20.000)

(108)

($0.871

(20.000)

(13,217.

,,,..
.....,

11110 1,..,

sat..

1$<1'1.

(001~

30"
$2.1.

($-1.1$}

to:l.n

(toO.]~

(20,000)

(20,0001

1040~

....... "'""'

($0.00)

1U~

(20,000)

(20,000)

Flnanctng Aethlties

""""""""'"9S

Debt~tfll

Stock Rep.nhau
Stock lsw.Kt

OiviExcess Tax Senelll:s From Stock&sed Comp

40,000

25,000
(26.895)
(24.4G6)
18.72:4

(ISS.OOO)
(10.!534)
t3.873
(3.545)
972

(7,&40)

4.201

Olhlt

756",1fJ7

(101,0$3)
(5.358)
t,3M
(U82)
t,096

(11.500)

25,000
(25.000)
(5.402)
2.576
(3.557)

~.311

165.876

(1,895)
(4.785)
9.316

(10.019)
4.382

2.450

(4.283)
1,656

167

(101.063)
(5.358)

(4.259)
3 .4t8
(4.232)
420

1,336

5.916
(5.500)

(6.000)

1,675

~c~u~h~FI~o~w~n~om~A~nM~tl~nL::=:=========~I1~2~~~~J==]Bng~[7s[::<~S~1,~41~3:::E1~1,~~@[
o ~:](6~,2~16[1:=:!.~~~==:JI~8,t2M~==:]~73~J ~~~~~.~
~==J[a,~S1~01C::J~.~~======~~==~I~j~~O[J====~==:}I6~,o~o~~======~
Net lna-eueln Cuh

(454)

670

2.18~

(80)

407

11.428)

88,044

t,tso

231,210

20,851

(51,0to)

225.249
4f1,S18

129. 155

150.011

1SO,$U
98.912

249.580

15~011

24 t,580

217,1t9

CashMSeglnningotYe

130.583

129.155

217.199

Cal:handatEndofYear

129.1$5

217,1tt

215;24t

(587)

11.012

930
(32,3811

515

1.671

(34,1401
211.199
1U,05t

20,2$7

t2,201

(70.3011

17t-341

183.059

203.~26

295-607
22S.l4t

225.249

203.326

us,co7

(83,2171

11081

544.796
4&1,S18

395.590
3tS,301

30~510

Source: Wedbush and company filings

Exhibit 86: DEVRY Balance Sheet

DEVRY
Balance Sheet
($ m OOOs except per share data)
Cash & Cash Eqlivalents
Marketable Securities
Restricted Cash
Accounts Receivable. net
Deferred Income Taxes

2004A
Q4A

2005A
Q4A

2006A
Q4A

2007A
Q4A

Q1A

2008A
Q2A

Q3A

2008A
Q4A

Q1A

2009E
Q2A

Q3E

2009E
Q4E

2010E
Q4E

Jun '04

Jun '05

Jun '06

Jun '07

Sep '07

Dec '07

Mar '08

Jun '08

Sep '08

Dec '08

Mar'09

Jun '09

Jun'10

98,912
142,144
9,823
76.842
17,938
22,456
142
368.257

249,580
2.345
23JJ77
121.523
17,287
20,698

218.985

150,o1 1
72,745
21,218
75.790
15,491
18.361
113
353,729

259.327
348.033
13.450

232,864
346,987
13,450

234,041
373,970
13,450

3,158
872,482

4,318
844,113

5.510
952.540

50,000
30,681
34,071
34,462
14.685
22,823

60,000
39,677
35,600
27,639
16.584
31,769

34,295
47.093
32,737
14,402
37,348

156,649

186,722

211,269

215,000
17.660
16.566
405,875

175,000
15.949
6 ,352
12.629
396,652

Shareholder's Equily

476,257

Total Uabillties & SE

864,132

Prepaid Expenses and Other

other Current Assets
TotaJ Current Assets

PP&E
Goodwill & lntangbles
Pertc:ins Progrcvn fund, net
Marketable Securities
Other Assets
Total Assets

Liabilities
CPoiOebt
Accounts Payable
Accrued Salaries, Wages. & Benefits
Accrued Expenses
Advanced Tuition Payments
Deferred Tulion Revenue
Other Current llablities
T olal Current Liabilities

Senior NoteS/Revolving Loan

Deferred Income Taxes
Accrued Postemployment Agreements
Deferred Ren1 & Other
Total Liabilities

146,227

161 ,823

130,583

129,156

217,199
2 .308
4,113
55.214
14,975
31,779

183,059
2 ,136
8 ,564
154.654
15,636
28.279

203,326
1.861
31 ,948
137.602
16,312
33.903

. 29$.607
1,861
3 1,948
173.291
16.312
21 ,733

225,249
1,861
31,948
103.033
16,312
33. ~

461,518
1.861
31 ,948
119.518
16,312
35.036

13,457
28,150
7.619
10,141
3,281
208,875

13,935
39.226
17,142
10,048
164
24 2,338

20,632
46,567
13,700
16.458
133
228,073

14,483
43.084
13,915
18.348

286.887
370,743
12,247

286.767
363,007
13.290

272.926
354,875
13.450

434,573

325.588

392,327

424, 952

540,751

411,771

666, 194

6 .614
996.332

222,831
372,530
13,450
57,637
14,871
1,115,892

239.315
370,871
13,450
57,171
11.961
1,018.358

260,648
864,027
13,450
57.128
11,176
1,398.756

264.630
682, 100
13. 450
57.757
11 .798
1.454.887

289, 230
619,100
13.450
57,757
11 ,798
1,592, 686

313,630
677, 300
13. 450
57.757
11 .798
1 ,485.70~

391,030
667,964
13,450
57.757
11.786
1,808,193

5 .380
884,132

4.633
910.035

35,000
27,349
31,041
24,610
16.819
21,830

32,799
35.392
41,491
14.828
122,415

37,029
43,249
31,312
10.804
124,539

36,895
43.049
36,196
21 .405
195,889

70,368
51.300
31,175
16.972
40,877

145.876
81,153
43.786
42,966
19.964
173,953

135.124
40,006

135,124
38.740
46,493

135.124
73,886
55, 404

41 ,470

~1.~70

41 ,470

44.4<3
18 1,616

44,443
264,423

44.4<3
57, 228

135,124
77,581
59,836
41,470
44,443
68,673

165,875

246,925

246,933

333,414

210,692

507,698

497, 758

570,693

407,565

427,127

65,000.0
12.584
5 ,594
13.446
307,875

18.343
4,901
13.028
202,147

8,689
4,661
26.269
286,564

16,053
4,342
25.639
293,167

13.809
4,114
28.158
379,495

22,183
3,893
25.619
262,367

20,000
43.983

20,000
86.497

20.000
68.497

20,000
86.497

20,000
66,497

29.342
601,003

30. 483
614,718

30,463
687,853

30. 483
524, 515

30.463
544,087

513,383

564,607

641, 966

665,976

703,165

736, 397

755,989

797,753

840,169

005, 033

961,191

1,264,106

910,035

872,482

844,113

952.540

996.332

1,115,892

1,018,356

1,398,756

1.454.887

1,592.686

1.485.706

1,808.193

63

54,.200

other

Source: Wedbush and company filmgs

Ariel Sokol (212) 668-987 4

Education 1 63

VVEDBusw---------------------------------------------GRAND CANYON EDUCATION (LOPE, BUY, PT: $20)

Initiating Coverage of Grand Canyon Education: Up, Up, and Away; Former University of
Phoenix Super-Managers Put On Their Capes

We are initiating coverage of Grand Canyon Education with a BUY rating and 12-month price target of $20.
Our target reflects a -18x EVIEBITDA multiple to our calendar year 2009 EBITDA estimate. Our multiple reflects the
company's strong revenue growth rate and operating leverage opportunities and is in-line with other education stocks
with similar revenue and operating margin characteristics.

Based in Phoenix, Arizona, Grand Canyon University operates a postsecondary institution focused on
graduate and undergraduate degree programs in education, business, and health care. The company also
offers ground programs at its campus in Phoenix, Arizona. Enrollments have grown from 3,000 students in 2003 to
24,600 by December 2008.

Grand Canyon's experienced management team remains the company's strongest asset, in our opinion, as
the executives successfully launched and grew Phoenix Online. CEO Brian Mueller previously operated the
University of Phoenix Online beginning in 1997 and eventually rose to the ranks of CEO of Apollo Group. Mr. Mueller
and his team innovated many of the marketing and operating tactics that are now pervasive in the industry.

We believe that Grand Canyon's strong brand and traditional ground campus could prove compelling
differentiators among the array of online offerings available to consumers. Grand Canyon remains unique
among the publicly traded market funded universities in that the company has a traditional ground campus. In our
view, this could prove compelling to potential applicants, as a traditional ground campus with Division II athletic teams
could provide an aura of legitimacy unmatched by other online operators.

Grand Canyon has the best revenue growth profile of any publicly traded education company. We expect the
company to grow enrollments by over 50% and revenue near 60% in 2009. Over the next three to five years,
management anticipates enrollment growth of 20-25% and revenue growth of 25-30%.

Significant operating leverage exists in the model. Given the strong revenue profile of the company, we believe
that Grand Canyon can grow margins by at least 100-200 bps over the next several years. Management has guided
to EPS growth of 35% over the next three to five years.

EPS

Q1 Mar
Q2 Jun
Q3Sep
Q4 Dec

Year*
P/E
Change

ACTUAL

CURR.

$0.10A
(O.OO)A
0 .04A
0 .06A
$0.20A
81 .2x

$0.11 E
0.10E
0.12E
0.23E
$0.56E
29.2x
178.1%

PREV.

CONS.

CURR.

$0.10
0 .10
0.13
0.23
$0.55
29.7x

$0.18E
0 .17E
0 .18E
0 .34E
$0.86E
18.8x
55.1%

Nmf

*Numbers may nor add up due lo round1ng. PS normali=ed for one-rime expenses and rax

PREV.

CONS.

$0.16
0 .14
0 .19
0 .31
$0.85
19.0x
55.9%

Company Information
52-Week Range
$16.50-31 .00
Shares Outstand.
46.7 million
Insider/Institutional 40.9% I 46.6%
Public Float
20.2
Market Cap.
$757.9 million
ST/LT Debt
$1 I 31 million
Debt/Capital
4.3%
ROE
13.4%
Net Cash &
lnv/Share
$0.25
$1.32
Book Value/Share

ben~firs.

""""-

1... ...

.1

,.......... ~

""'

~
. t................
Jt.f.lt

......,...n

'lo(ll.'t ........, . _. .

Source: Nasdaq.com
Source: Wedbush and company reports

64 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH

Grand Canyon's focus on education and health care provides us confidence that the company can achieve
management's aggressive growth targets despite the clear challenges in the weak labor markets. We note that
Grand Canyon's targeted verticals are relatively acyclical to broader economic trends. More importantly, we note that
these professions tend to have mandated pay schedules where advanced degrees mathematically equate to
increased compensation. For example, New York City has a standardized schedule for teacher compensation based
on degrees earned, academic credit, and coursework. A starting teacher with no experience and a Master's degree
can earn $51,425 versus $45,530 for those with a Bachelor's degree.

WHERE WE COULD BE WRONG

Margin expansion in 2010 could be greater than what we are modeling. Significant leverage exists in the online
distance learning business models. Margins expansion is dependent on management's desire to continually invest in
the business. We are conservatively modeling only a 130 bps improvement in 2010. We acknoVv1edge the possibility
that margins could expand further as the company continues to scale given the 50%+ revenue growth rate that the
company could achieve annually over the next two years.

INVESTMENT RISKS

Grand Canyon only has provisional certification by the Department of Education for participation in Title IV
programs. This is due to the change in control that occurred in 2004. Currently, Grand Canyon is on a month-tomonth certification for Title IV programs. Were the Department of Education to decide not to renew certification,
students could lose access to Title IV program funds.

The Office of Inspector General of the Department of Education currently has an investigation of Grand
Canyon, which could result in fines and penalties. Grand Canyon is being investigated as to whether the
company has compensated enrollment counselors in a manner that violated Title IV statutory requirements.

Outstanding lawsuits against Grand Canyon exist.

One lawsuit alleges that Grand Canyon improperly
compensated enrollment counselors. On September 11 , Grand Canyon was served with a qui tam lawsuit, which is a
civil lawsuit brought by one or more individuals on behalf of the federal government for an alleged submission to the
government of a false claim for payment. The complaint alleges that Grand Canyon's compensation practices with
respect to enrollment personnel violated the Title IV law governing compensation.

Grand Canyon has material weaknesses in its internal control over financial reporting.
currently in the process of remediating those internal weaknesses.

The loss of state authorization in Arizona would result in the inability to participate in Title IV programs. The
loss of authorization by the Arizona State Board for Private Postsecondary Education would result in the loss of
eligibility to participate in Title IV programs.

Brent Richardson and Chris Richardson have voting control over 43% of Grand Canyon's voting stock. The
Richardsons could significantly influence the outcome of actions requiring the vote or consent of stockholders.

Lock up period expires on May 19, 2009, which could pressure the stock as additional shares are available in
the public market. As of December 2008, 33.4 million shares or 73.4% of outstanding shares are subject to lock up
agreements.

The company is

GRAND CANYON'S STRATEGY

Build the scope and reputation of the traditional campus in Phoenix. To that end, management intends to bring
high-profile faculty to the school. We note that the company has licensed the right to use the name Ken Blanchard in
connection with the business school through 2016. Considered a leading management expert, Mr. Blanchard
authored the best selling book The One Minute Manager.

Build upon three core verticals of education, health care, and business.

Continue to operate out of a basic framework of a Christian worldview, which according to management "focuses
on employing a strong values-based and highly ethical approach in teaching and operations."

Ariel Sokol (212) 668-987 4

Education 1 65

VVEDBusw---------------------------------------------ESTIMATES, GUIDANCE & OUTLOOK

Revenue and EPS Estimates at mid-point of guidance, a positive in our view as high growth companies tend to
suffer from potential estimate creep.
We are confident that Grand Canyon can achieve expectations for 2008 given revenue and EPS estimates that are at the
mid-point of guidance. Our fear comes from the profile of high growth companies that provide guidance - investors are
well aware that such companies have the luxury of setting conservative guidance and exceeding those expectations.
Analysts typically assume that companies will leapfrog the conservative estimates and place their estimates at the high
end of guidance. Companies then need to operate close to perfection to achieve guidance, which introduces a significant
level of risk. Inevitably, the price of high multiple stocks collapse under the weight of too lofty expectations.
In our opinion, 2010 estimates assume significant deceleration in enrollments and revenue growth which could
prove conservative.
The consensus revenue estimate for 2010 of $345 million make little sense to us, and is perhaps borne by the failure of
analysts to interpret 2009 revenue guidance. Grand Canyon operates in a highly seasonal business with the largest
sequential revenue increase occurring in 04 due to fall enrollments. As well, 02 tends to be the seasonally weakest
quarter. We are a little perplexed by the consensus revenue estimate of $56.7 million, which assumes only a 0.4%
sequential decline in revenue. By comparison, revenue declined by 3.2% and 10.1% sequentially in 2008 and 2007,
respectively. In our opinion, the Street attempted to model quarterly revenue to be at roughly the mid-point of 2009
revenue guidance, but modeled 2009 revenue too high and 4009 revenue too low. This is significant because fall
enrollments in 4009 dictate to some degree revenue for 2010. We have assumed a fairly seasonal2009 and modeled 04
revenue of $80.6 million versus the consensus estimate of $76.7 million.
To be fair, we note that every analyst covering the stock has a BUY rating on Grand Canyon. We concede that estimates
for 2010 may be intentionally low to provide management a low hurdle to exceed expectations.

Exhibit 88: WMS vs. Consensus Estimates

2009 Q1

WMS

Consensus

Revenue

$57

$57

$57

$0.11
15.3%

$0.10
13.4%

$0.08-0.10

Consensus
$252
$0.55
17.3%

Guidance
$250-255
$0.52-0.57

Operating Margins

WMS
$255
$0.56
17.7%

2010

WMS

Consensus

Guidance

Revenue

$357

$345

EPS

$0.86
19.5%

$0.85
19.1%

EPS
Operating Margins
2009

Revenue

EPS

Operating Margins

Guidance

Source: Wedbush, company filings, and thomsononeim.com

66 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
OVERVIEW OF RECENT FINANCIAL RESULTS
Fourth Quarter 2008 Results Strong on All Measures
Grand Canyon reported strong Q4 fiscal 2008 results exceeding consensus estimates for both revenue, operating margin,
and EPS.

REVENUE grew by 67.5% year over year versus the consensus estimate of 56.5% year over year growth. Q4
revenue of $51.7 million exceeded the consensus estimate of $48.3 million and represented a 67.5% growth rate over
the prior year quarter. Revenue growth was driven by an enrollment growth rate of 67%. We note that online
enrollments growth accelerated for the sixth quarter in a row. Revenue per enrollment was roughly flat over the prior
year quarter.

OPERATING MARGIN grew by 47 bps. Q4 operating margin of 7.4% represented a 47 bps improvement over the
prior year quarter of 6.9%. Margin expansion was primarily attributable to a 360 bps improvement in instructional
costs and services and the lack of additional royalty payment to the former owner. General & administrative costs
increased by 430 bps due to expenses incurred related to the I PO. We note that in the quarter management made a
$750,000 contribution to Arizona high school tuition organizations which resulted in a dollar for dollar tax credit for
Grand Canyon's Arizona state income taxes. This amount was expensed in general & administrative, while the tax
rate was 30.9% rather than 44.0% for the quarter.

EPS exceeded consensus estimates by $0.14. Q4 EPS of $0.06 compared to the consensus estimate of $0.01 and
represented a 106.5% growth rate over the prior year quarter.

ENROLLMENT growth year over year accelerated for the sixth consecutive quarter. Q4 enrollments of 24,636
compares to enrollments of 14,754 in the prior year quarter. Q4 enrollments grew by 67.0% year over year, which
compares to a 61 .7% and 62.7% year over year enrollment growth rates in Q2 and Q3 2008. Online enrollment grew
by 75.7% versus ground enrollment of 18.8%. Undergraduate student enrollment grew by 107% year over year while
graduate student enrollment grew by 42% year over year.

RETENTION for the quarter remains unclear as management does not provide any metrics that provides investors
insight into the number.

BAD DEBT EXPENSE as a percent of revenue slightly decreased year over year. Q4 bad debt expense as a
percent of revenue of 6.1% compares to 6.2% in the prior year quarter.

ACQUISITION COSTS for the quarter remains unclear as management does not provide this metric. Management
neither provides the number of new enrolled students entering the university nor advertising expenses per quarter.

REVENUE ANALYSIS
We forecast total revenue of $254.8 million and $356.5 million in 2009 and 2010- up from $51 .8 million in 2005.
Over the next three to five years, management expects revenue to grow annually by 25-30% year over year, which seem
reasonable relative to the growth of other online learning distance universities. Yet, we think that management has higher
ambitions over the next two years than their stated goals. Q4, which includes the bulk of fall enrollments, represent the
company's seasonally strongest quarter and to some degree determine the company's revenue for the full year.
Historically, Q2 revenue tends to decline sequentially followed by a sequential increase in Q3. Assuming similar
seasonality in 2009 as in years past, management's guidance of $250-255 million implies that revenue in 2009 Q4 could
grow by at least 50% year over year. We think that such a growth rate is quite reasonable. The University of Phoenix
Online grew by 50% year over year in 2003 off of a base of $500 million. We acknowledge that since then the market has
become more competitive. However, we note that since then distance learning has become a much more acceptable form
of education, and that Grand Canyon's offering is backed by a brand and lower price point than many of its peers.

Ariel Sokol (212) 668-987 4

Education 1 67

VVEDBusw---------------------------------------------Grand Canyon Education has two primary revenue drivers: the average number of enrolled students at Grand
Canyon University and revenue per enrolled student.
In the near-term, we expect revenue per enrolled student to be flat to slightly down due to a mix shift toward online
students. Online students have lower tuition prices per credit hour and have fewer credit hours per semester than
traditional campus students. This will become less of an issue as online enrollments continue to scale. We are modeling
average enrollments to increase by 53% year-over-year to 37,693, and revenue per average enrollments to grow by 3.3%
year-over-year to $6,765. Below we provide a sensitivity analysis to determine potential fiscal 2009 revenue given
changes in the average price per enrolled student and average enrollment for the year.
Exhibit 89: Revenue Sensitivity-- 2009 Revenue Per Enrolled Student vs. 2009 Average Enrollment
2009 Revenue Per Enrolled Student
5,500

6,000

6,500

6,765

7,000

7,500

8,000

40,193 (63.1% gr. yr/yr)

221

241

261

272

281

301

322

39,693 (61 .1% gr. yr/yr)

218

238

258

269

278

298

318

39,193 (59.1% gr. yr/yr)

216

235

255

265

274

294

31 4

w 38,693 (57.1% gr. yr/yr)

213

232

252

262

271

290

310

38,193 (55.0% gr. yr/yr)

210

229

248

258

267

286

306

37,693 (53.0% gr. Yt/yr)

37,193 (51 .0% gr. yr/yr)

207

226

255

264

283

302

205

223

245
242

252

260

279

298

36,693 (48.9% gr. yr/yr)

36,193 (46.9% gr. yr/yr)

202
199

220
217

239
235

248
245

257
253

275
271

294
290

c:

2c:

..
.."'
~

>

C(

"'
0
0
N

Source: Wedbush, company filings, and thomsononeim.com

Exhibit 90: Grand Canyon Enrolled Students, 2004-2010E

Exhibit 91: Grand Canyon Revenue 2004-2010E

50,000 . - - - - - - - - - - - - - - - - - - - - - - - , - 80%
45,000

120%

70%

300

100%

40.000
60'AI

35,000

250

80'AI

50%

30.000

200

25,000

40%

20.000

30%

15,000
20%

10,000

10%

5.000

60%

($M)

150
40%

100

20%

50

0%
2004A

2005A

2006A

2007A

J11:11 Enrd lment

2008A

2009E

Enrollment %Change Yr!Yr

Source: Wedbush and company filings

Exhibit 92: Enrollment Composition by Degree

2010E

O'Ao

2004A

2005A
111111!111 Re\enue

2007A

2008A

2009E

2010E

Re\enue %Change Yr/Yr I

Source: Wedbush. fhomsononeim.com. and Reuters

Exhibit 93: Enrollment Composition by Online vs. Ground

Qacllate
53%

Lh:lergraduate

Ollire

47%

89%

Source: Wedbush and company filings

68 1Education

Source: Wedbush and company filings

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
EXPENSES ANALYSIS
We expect operating margins to expand by over 1,000 bps in 2009 as the company benefits from substantial
investments incurred in 2008.
In the 2"d half of 2007 and 2008, the company significantly invested in hiring enrollment counselors to handle the expected
influx of enrolled students. In fact, the company doubled the number of enrollment counselors from 250 in 2007 to 500 in
2008. As such, selling & promotional expenses as a% of revenue jumped to 40.6% from 35.4% from the prior year. We
expect a 500 bps improvement in margins as selling & promotion expenses as a percent of revenue decline, down to
roughly 35% in 2009. We also expect a roughly 300 bps margin improvement from lower general & administrative costs as
a percent of revenue, as the company benefits from scale and amortizes expenses among a much greater revenue base.
We expect instructional costs and services to remain roughly flat in 2009 with 2008, as management has stated that the
company underinvested in this area.
We believe that following 2009, operating margins could grow by 100-200 bps annually over the next several
years.
In our opinion, Grand Canyon can deploy a number of cost saving efforts that could lower selling & promotion costs. For
example, we believe that the company does not yet have qualifying centers to improve the process of leads. As well, the
company has yet to deploy the sophisticated software that management had access to at University of Phoenix that
enabled cost savings. Management believes that through scale they can decrease these costs to the high 20s as a
percent of revenue over the next five years. As well, an opportunity exists to decrease general & administrative costs as a
percent of revenue given that bad debt expense represents 6% of total revenue.

Exhibit 94: Grand Canyon Operating Margins

~4 r---------------------------------------------~

30%

10%

( 10)%

(30)%

(50)%

(70)%

.L----------------------------------------------1

Source: Wedbush, company filings, and thomsononeim.com

CASH FLOW & BALANCE SHEET

We expect Grand Canyon to generate free cash flow of $76 million over the next two years.

Free Cash Flow: We are modeling Grand Canyon to generate $26.7 million and $49.4 million of free cash flow in
2009 and 2010, respectively. We note that Grand Canyon has been in hyper growth mode over the past several
years, and as a consequence did not generate meaningful free cash flow.

Capital Expenditures: Capital expenditures as a percent of revenue for the past two years have ranged between 5.27.5%. In our opinion, Grand Canyon does not require significant investments to grow the business. Management
provided guidance for capital expenditures to represent 5% of total revenue in 2009.

Share Repurchases: We do not anticipate Grand Canyon initiating share authorization purchase plans, as the
company went public in late 2008.

Ariel Sokol (212) 668-987 4

Education 1 69

VVEDBusw---------------------------------------------Grand Canyon provided most of the proceeds of its IPO to investors. As a consequence, the company has a
minimal net cash position of $2.8 million. We note though that we expect the company to accumulate cash from
fre-e cash flow in the following quarters.

Cash: Grand Canyon has $35.2 million of cash and cash equivalents on its balance sheet as of December 2008.

Debt: Grand Canyon has $32.3 million of debt on its balance sheet as of December 2008. The company has a capital
lease of $30.5 million and notes payable of $1 .8 million.

MANAGEMENT BIOGRAPHIES
Name

Title

Background

Brent D. Richardson,
46

Executive
Chairman

Mr. Richardson has served as Executive Chairman since July 2008. Mr.
Richardson had previous held the title as Chief Executive Officer from 2004 to
July 2008. From 2000 to 2004, Mr. Richardson served as Chief Executive Officer
of Master's Online, LLC, and prior to 2000, various management positions at
Private Networks. Mr. Richardson possesses over 20 years of experience in the
education industry.

Brian E. Mueller,
55

Chief
Executive
Officer

Mr. Mueller has served as Chief Executive Officer since joining the company in
July 2008. From 1987 to 2008, Mr. Mueller held various management positions
at Apollo Group and its University of Phoenix Online unit. Mr. Mueller's most
recent appointment with Apollo was director and president of the company. Prior
to Apollo, Mr. Mueller was a professor at Concordia University.

Daniel E. Bachus,
38

Chief
Financial
Officer

Mr. Bachus has served as Chief Financial Officer since joining the company in
July 2008. From January 2007 to June 2008, Mr. Bachus served as Chief
Financial Officer for Loreto Bay Company and from 2000 to 2006, as Chief
Accounting Officer and Controller of Apollo Group. Prior to Apollo, Mr. Bachus
served as a senior audit manager at Deloitte & Touche.

W. Stan Meyer,
47

Executive
Vice
President

Mr. Meyer has served as Executive Vice President since joining the company in
July 2008.
From August 2002 to June 2008, Mr. Meyer held various
management positions at Apollo group, most recently serving as the company's
executive vice president of marketing and enrollment. From 1983 to 2002, Mr.
Meyer served various roles at Concordia University, including director for the
school's education network.

70 1Education

Ariel Sokol (212) 668-9874

WEDBUSH
VALUATION
We are initiating coverage of Grand Canyon with a BUY rating and 12-month price target of $20.00. Our target
reflects a -18x EV/EBITDA multiple to our calendar year 2009 EBITDA estimate. Our multiple reflects the company's
strong revenue growth rate and operating leverage opportunities and is in-line with other education stocks with similar
revenue and operating margin characteristics.

Exhibit 95: Multiples Analysis

Valuation@
Current Price of $16.23
2009E
2010E
2008A
Price
Fully Diluted Shares 1Q09E
Market Capitalization
Less: Net Cash 1Q09E

$16.23
46.7
$757.9

$16.23
46.7
$757.9

$16.23
46.7
$757.9

Valuation@
12-Month Tar2et Price of $20.00
2009E
2010E
2008A
$20.00
$20.00
$20.00
46.7
46.7
46.7
$934.0
$934.0
$934.0

(11.4)

(11.4)

(11.4)

(11.4)

(11.4)

(11.4)

~0 .25)

($0.25)

($0.25)

~$0.25)

~$0.25)

~$0.25)

$746.5

$746.5

$746.5

$922.6

$922.6

$922.6

$15.98

$15.98

$15.98

$19.75

$19.75

$19.75

$161 .3

$254.8

$356.5

$161 .3

$254.8

$356.5

4.6x

2.9x

2.1x

'

5.7x

3.6x

2.6x

EBITDA

$17.9

$51.6

$77.4

$17.9

$51.6

$77.4

EV I EBITDA

41 .7x

14.5x

9.7x

51 .6x

17.9x

11 .9x

EPS, Normalized

$0.20

$0.56
178.1%

$0.86
55.1%

$0.20

$0.56
178.1%

$0.86
55.1%

81 .2x

29.2x

18.8x

100.0x

36.0x

23.2x

0.2x

0.3x

0.2x

0.4x

$10.2

$39.7

$63.4

$10.2

$39.7

$63.4

$0.22

$0.85

$1.36

$0.22

$0.85

$1 .36

EV I Operating Cash Flow

73.0x

18.8x

11 .8x

90.2x

23.2x

14.5x

Free Cash Flow

$1.9

$26.7

$49.4

$26.7

$49.4

$0.04

$0.57

$1 .06

$1.9
$0.04

$0.57

$1 .06

401.8x
0.2%

28.0x
3.5%

15.1x
6 .5%

496.5x
0.2%

34.6x
2.9%

18 7x
5 .3%

Net Cash I Share

Enterprise Value
EV I Share

Revenue
EV I Revenue

% Change

PIE Multiple
PEG Ratio
Operating Cash Flow
Operating Cash Flow I Share

I
I
I

i
i

Free Cash Flow I Share

EV I Free Cash Flow

Free Cash Flow Yield

Source: Wedbush and company filings

Ariel Sokol (212) 668-987 4

Education 1 71

VVEDBusw---------------------------------------------VALUATION -- HISTORIC
Since its initial public offering in December 2008, Grand Canyon shares have appreciated by over 33% in value.
Exhibit 96: Grand Canyon Stock Price Since the IPO
$20
$18
$16
$14
$12
$10
N

Source: Wedbush and thomsononeim.com

COMPANY OVERVIEW
Grand Canyon is a market funded postsecondary education company that serves undergraduates and graduates.
Headquartered in Phoenix AZ, Grand Canyon was founded in 1949 as a Baptist-affiliated private non-profit college. In
1997 the university introduced its first distance learning program, and in 2003 offered online programs in business and
education. Investors acquired the school in 2004 and converted it to a market funded institution.

Offers undergraduate and graduate degree programs in education, business, and health care.

Held its IPO on December 11 , 2008. Grand Canyon raised $144.9 million in net proceeds through the sale of 10.5
million shares and an over-allotment of 1.575 million shares of stock at $12/share. The company used $108.7 million
of proceeds to pay a special distribution to shareholders of record as of November 2008.

The company has 24,636 students and a physical campuses in Arizona.

Has accreditation by the Higher Learning Commission of the North Central Association of Colleges and Schools, a
regional collegiate accreditor.

72 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 97: GRAND CANYON Income Statement
[!~miJmmm~mDIIIIII~~~JIII~~~~~~~~~~~~IIIIIIDI~I~I:JIII~f~I~H:JIIIEI~l~H:JIII~i~l~H:IIIIIIIIID!~I~,pJIII~f~l~,pJIIIEI~I~,pJIII~I~I~.ijiiiiiiiiiDI~;~'*IIII~l~;~'*IIIIEI~;~'*IIII~I~l~l~llll
Expenses as a % of Revenue
Instructional Costs and Services

Selling & Promotional

General & Administrattve
E ft'Mtiv~ Tax Rate

39.3%
3S.4%
17,1%
40.0%

33.8 %
40.6%
16.6%
36.6%

33.7%
3S.2%
13.4%
40.0%

33.3%
34.3%
12.9%
40.0%

32.5%
3S.2%
12.7%
38.6%

35.9%
43.1%
18.6%
38.0%

33.0%
47.2%
12.8%
40.2%

33.8 %
37.8%
21.0%
30.9%

33.7%
3S.S%
1S.5%
40.0%

33.7%
38.0%
13.0%
40.0%

33.7%
38.0%
13.0%
40.0%

33.7%
31 .0%
12.5%
40.0%

33.3%
34.S%
15.0%
40.0%

33.3%
37.0%
12.5%
40.0%

33.3%
37.0%
12.5%
40.0%

33,3%
30.0%
12.0%
40.0%

24.8%
74.9%
13.3%

39.4%
86.S%
57,11'1(,

57.7%
36.9%
27.3%

38.3%
36.1%
35.0%

31.4%
109.S%
25.7%

42.5%
82.0%
34.8%

30.0%
83.7%
45.0%

51.5%
79.8%
110.2%

65.5%
6 1.0%
94,11'1(,

50.2%
41.2%
12.0%

60.6%
26.S%
59.6%

56.7%
28. 1%
(7.0)%

43,3%

40.9%
40.3%

41.3%
39.2%
37.S%

38.4%
34.4%
32.7%

34.1%
31.3%
30,3%

Expenses % Change Yrl'fr

tlstructional Costs and Services

Sariet;, Admi'listrative & Other

General & AdministratN"e

Grand Canyon Umverstty

Normalized Income Statement

2008A
2007A

2008A

2009E

2010E

(S 1n OOOs except per share data)

Revenut

2S4,i7$

181,309

":/ ~~

. --.CNDgt.YtNr

"CI'IriQtS!tii.II!!Uitt
~ityl"Of*""U$1~1'Uel"qtrJ

lt.OPE Gu!danst ~SM

Instructional Costs and Services

Seling & Promotional

General & Alinin1strali\le
RoYfll!ty!oFom'I.-Owntr& Mgrnt F. .

Total Operating Expenses

356,500

39,050
3S.148
17,001
3.782
94,981

54,450
6S.SS1
26,82S
1,686
148,$12

85,859
89,744
34,144

118,715
122.178
46,084

209,748

3,300
7,645

5,095
17,892

6,526
51,554

2010E

2009E

Q1A

Q2A

QJA

Q4A

Q1E

Q2E

QJE

CE

Mar

Jun

Sep

Dec

Mar

Jun

Sep

Dec

39,351

51, 683

57,063

55,30$

35,709

......

''"'

'""

138!1

'"~

286,976

11,620
12.586
4,541
1,022
29,769

7,826
77,350

1,135
7,075

U !~

st...ecr.

313"

10""

f)

[Q~~~~
%~~in~~~:::::J
n'~

61,731

I,.

" 80,ii25-

Q2E
Jun

QJE
Sep

82,741

79:os7

85,2$8

109,414

s1.av.

~.ov.

45 0'!4

A3{1'!4

11111.

XI~

16"

(H)'K

24~

21"'

Q1E
Mar

~~~

..,.,.,.,.

,...
"""
.,.,.

2221<

232"

CE
Dec

"''"

14.887
6,419
466
34,180

12,967
18.582
5,032
124
36,685

17,455
19.S16
10,833
74
47,878

19,230
20,257
8,845

18,638
21.016
7,190

20,820
23.477
8,032

27,171
24.994
10,078

27,553
28,546
12,41 1

26,336
29.262
9,886

28,391
31.S4S
10,657

36,435
32.824
13,130

48,332

46,844

52,329

62,243

68,510

65,484

70,$94

82,389

1,134
1,520

1,4117
4,073

1.419
5,224

1,519
10,250

1,594
10.056

1,669
11,122

1,744
20.127

1,844
16,076

1,919
15,522

1,994
16,658

2,069
29,094

12,408

'II. Chln;t YfNt

Depreciation & Amoftization

EBITOA

11,1"4

1.1"4

f8fTQI\Niaf."4

Operating lncome

4,345

12,797

......,.

O,tnUitltltiiN'11111 ..

l!'lerest Income (Expense), net

EBT
Income Ta.xes (Benefi t)

45,028

,...,.

,,

8PSCh'"a-YrfVr

20.2'4

*""

21.1"4

69,524

18,383

14,232

17.2%

17~

24.1"Jii

t14bfl

1$3b,o

tt20""

1M2""

7t1""

47""

tt)"'

U18"'

80'3"'

1.S.U"'

Ito"'

190..,_

180..,_

tiiObop

(2.257)

(1,600)

(1,600)

10,540
3,855

43,428
17,371

67,924
27,170
40,754

3,304

(80)

1,2$2

2,209

4,998

4,837

5,432

10,790

8,299

47.250

33.849

19.142

30,970

37,488

46.700

46,al0

46,900

47,000

47,100

Eeno-.wron~

4,991

3.900

4,800

22,883

56,454

82,150

'~

4,34S

,,"

~~

17.788

... "

48.928

tolorll)ali<ed GAAP EPS Fully Oilu\e<l

$0.04

$0.20

1676'

]605'

$0.56

$0.29

..

$0.86

$0.03

$0.17
-413~

10'4"

(S73)

(609)

(4110)

(4110)

(400)

(4110)

(400)

(400)

(4110)

(400)

2, 093
841

3,196
987

8,331
3,332

8,062
3,225

9,053
3,621

17,983
7,193

13,832
5,533

13,203
5,281

14,264
5,700

26,625
10,650

7,922

8,S59

15,975

47,200

47,300

47,400

1Q08

2Q08

$0.$6

JQ08

7,075

1,520

4 ,073

S.940

396

2.666

, ...

4Q08

2Q09

3Q09

1Q10

4Q09

2Q10

3Q10

4Q10

900

1.000

1,000

1,000

1.200

1,200

1,200

1,200

10,21S

11, 150

11,056

12,122

21, 127

17,276

16,722

17,858

30,294

9.631

11044

$0.04

10.4S3

.,..

$0.10

1865,..

,, ~

IS.432

240M

$0.12

05130)~

~~

19.383

18W

171"

$0.11

l l65"/

2U,.,

Ill~

9.462

18W

$0.06

,~

1110"

,,~

liiJ,.

8.796

88~

($0.00)

1Q09

4,991

10-4..

'"'
$0.10

2010E

2009E

2008A

~~

14.803

18 ~

l1~

1S.864

18 ~

28.225
25.8~

18SM

..,. .....

50.23

,...,.

$0.18

.....

$0,17

$0.18

$0.34

$0.24

$0.19

$0.18

50.20

50.35

ILOPE Gui dance: so.oe-0.10

I
$0.61

$0.92

"'"'

"ChallgeYrfYt

(SIS)
(129)
(49)

20"'

1181.

ILOPi Gu!daon SQ 62.Q 67

$1QCt.&n~zts:taJ~rJtf)

(S80)
5,380
2,076

n~

74.324

19~

110"

27,025

17.2'%

2, 542
1,016

7,645

14,664

~.870

( 1,803)

Stock Based Compensation

13,603

tU%

15,.n

Normalized IS to Pro Forma (wh1c.h excludes stock ophon compensation and prefe
Recone~habon
2007A
2008A
2009E
2010E

~CNn!II 'YrNr

9,453

1U%

IS,.n

46,850

GAAP EPS. Fully Oiltl:ed

8,462

1t.f"4

I$..3"J(

26,057

PF EPS Ful ty Oi klted

8,731

19.4"4

:tf.o%

1.n.

6,68$

(tcfUc1esgocM~CQrllltfl5aoO'I ~"'II

3,80$

18#1.

e.s~

33.430

~CI'wloeYrNr

2,666

1tA

1.1%

1,$26

,('l(:...nilftftnW & ~mca.c~J

386

1t#1.

1U'"4

3S, 143

Oc$UlQMirQI""

5,940

10.W.

1tSX.

Net Income, Normalized

Pro Forma Operating Profit

1~

........

11.1.,.

Shareo OU1stanclllg (Fulty D.,e<l)

Pro Forma EBITOA

1"""-

$0.15

$0.12

$0.13

50.12

605"

.....

($0.00)

SD.86

2n6"

S0.04

$0.06

$0.11

,., ...

50.10

..

$0.23

$0.12

.,.,.

815-

$0.18

3 1 H~

5?5-

$0.17

...

$0.18

$0.34
48$~

,.,~

824tl.

Source: Wedbush and company filings

Exhibit 98: GRAND CANYON Enrollments

Grand Canyon University
Ervollments

Onine

200&A
2007A

12.497

'A~"Yrffl
'A~"YrNt

14,754

~,.

24,&36

Revenue (SOOOs)
'JI.Ct\1)tYrM

Q4A

Q1E

Q2E

QJE

Q4.E

Q1E

Q2E

Q3E

Q4E

Sep

Dec

Mar

Jun

Sep

Dec

Mar

Jun

Sep

Dec

15,133

14,847

19,287

21 ,955

""'

1,963

48,779

nK

23,502

25,901

32,93<1

3<1,954

40,473

36,779

44,134

4S.n9

17,4U

18,710

106"'!1.

2,670
~b

21,957

7~.,..

2,681
llh

24,636

v~

il~

~~

~K

~~

"~

~~

~~

410'

410\fl.

)4 ~

31~

12.:ua

"#"

~-4-

tm

2.73,

)17il

5.2'7

"2,679

''"

1'.6011

7D:I$

4.019

3,619

('""'

7,355

4-""

8,548

8,894

,.,.

7,308

8,1&9

7,$03

a,n1

8,273

8,318

(27)'1'.

7,816

8,190
~

34

" 326
M

161,308
~~

~~

&4-4'A
~~

'It CNn;JtYtffl

. .. tfl9tYtfff

QJA

Jun

120..

3&,9S4

2010E

Q2A

r.Jtar

2,353

ttft

2009E

Q1A

...0'1,
RevenueJEnrollments

Revenue/Average en.ronmencs

2010E

2.681

Oho

~"YtM

2009E

21,955

48?,

2,257

Gromd
Enrollmenls

2008A

'"

2$4,77$
~b

...
0~

356,500
H~

LOf"E ~nCt"28

'"'
8,881
55'11.

35,709
~,.

8,274

,,.

7,1M

8,087

8,142

5~

34,566
M~

ISO

8,391

(061'J1,

3$,351
$1~

8,008
(20~

(09)'.4

8,874
16'11.

51,683
6?:111.

8,591
(3~

57,053
~.._.

8,541

'"'
8,133
0"

55,3C6
GOO,.

8,400
3~

61,781
67~

....

8,229
~

80.625
66~

8,801

8,549
~~

82,741
~~

1,n1

'"'

'""

8,190

8,430

0~

7~.087
~~

0~

8$,2$8
u~

9,421
21~

10~.414
~~

Source: Wedbush and company filings

Ariel Sokol (212) 668-987 4

Education 1 73

VVEDBusw---------------------------------------------Exhibit 99: GRAND CANYON Cash Flow Statement

Grand Canyon Umvers1ty
Cash Flow Statement
(S 1n OOOs except per share data)

2007 A

2008A

2009E

2010E

Q1A
Mar

2008A
6-Month
Q3A
Jun
Sep

2009E
Q4A
Dec

Q1E
Mar

Q2E
Jun

2010E
QJE
Sep

Q4E

Dec

Q1E
Mar

Q2E
Jun

QJE
Sep

Q4E
Dec

Operating Activities
Net Income

1 .~26

6,685

6 ,257
3.300
(1.656)
19
(2.343
7, 103
4.S%

4,991
(21)
6,485
5.095
(245)
(105)
(14,632)
10,232
44.1%

Share-Based Compensation
Excess Tax Bendts, Stock-Based Cornp
Provision for Bad Debts

Oepreeiadon & Amortization El!Pense

Deferred Income Taxes

OCher
Change-s in Worblq Capb l
Cash Flow from Operations
% Change YrJYr
CFO/Share

S0.20

'llo 0\atige Yrtfr

9.6'!0.

$0.31

51.41Jf.

26,057

40.754

3.224

1.252

4 ,998

4,837

~.432

t0,790

8 .299

7,922

8 ,559

t ~ .97~

12,739
6,526

17,82~

4 .052
2.269
( t86)
( t12)

1,249
1.407
(3,041)
6
18.531

2,853
1,519

2 ,76~

1.594

3,089
1,669

4 ,031
1,744

4,137
1.8 44

3,954
1,9 19

4 ,263
1.994

5.471
2.069

(6,442)
2,764

16,083
26.2&3

(17,773)
(1 ,208)

6.41~

20,695

(7,387)
6,40i
132.7%

19,667
34,4$3

(21 ,670)
1,845
(252.7}%

$0.06

$0.56

($0.03)

$0.A4

(5.622)
39,699
2tU'4
$IUS
176.9'll.

7.826

(2 ,97~)

( t 0 .~11)

63.431
59.8%

(1,264)

19,404

($0.01J

$0.63

$1.34

2.499
11,870

58,4%

74.4'%

su

(t89.1)%

n.,.,.

3t.2%

.$0.14

$0.73

130.7%

30.11Jf.

(26U>'JI

$0.04

(3. ~00)

(3,500)
(1, 655)

Investing Activitie-s

capital Expenditures
Free Cash Flow
% 0\ange

YIN;

FCF Mlrgln (FO:~rut)

FCF I Share
'llo Cbange Yrffr

(7.406)
(303)
(0.3)'4
($0.01)

( 14,000)
49j131

1331.0~

8S.1'1o

1.2%
$0.0$

10.6~

13,.
$1.0S

(8,374)

1.853

nmr

Purchase/Sale of ST lnvescments
Proceeds on S ale- of PPE

(13.000)
26,699

{713.l!%

$4).$7
92SAIJO

(3,983)
(5,247)

(3.150)
8,620

(2.032)
17,372.

(3,250)
23,033

(3,250)

(4,453)

(90.6)'!0.

($0.27)

$0.56

$0.18

($M1)

$0.49

($0.0t)

(96.1flb

83.6...

(57)

(3,250)
(496)

(29)

(21)

4,012

(2,053

(3,500)
17,195

(3. ~00 )

. ..$...

(686.9)%

34,$0.

(62.9)'>

$~37

SO.Of
(681.9)%

......
$0.16

($0.93)
(63.2>'JI

97 ......

2,903

30,983

(149)

Acquisitions

OCher
Cash Flow from Investing _
Financing Activities
Debt Borro~gs

(1.454)
9,009)

2,083
6,348

(13.000

14,000)

6,000
(1.230)
(153)
4 ,684

(8.607)
(6,000)
128,756

(1.969)
(6,000)
3,241

2,484

9,301

( t0 t ,8tt )
12,338

10,728

(4,368)
(2,330)

Net Increase in Cash

Cash at Beginning of Year

7,395
11,535

16.222
18.930

Cash and at End or Year

18,930

3~.1~2

(16,004)
18,930
2,926

15,021
2 .926
22,227

Debt Repa)ment
Stock RepurchaseStock Issu ance-

(3,250

3.250)

3.250

3.250

(3.500)

3,500

3.500

3,500)

8,620
35,152
43,772

(496)
43,772
43.276

23,033
43.276
66,309

(4,458)
66,309
61,851

17,195
61.851
79,046

2.908
79.046
81,955

30,983
81.955
112,937

(1,655)
11 2.937
111,282

(446)

Excess Tax Benefits, Stock-Based Comp

Cash Invested in Escrow Aetount

OCher
Cash Flow from Financing

Exchange Rate Impact

26,699
35, )52
61,851

49.431
61 .851
111,282

3~.1~2

Source: Wedbush and company filmgs

74 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 100: GRAND CANYON Balance Sheet
Grand Canyon University
Balance Sheet

(S In OOOs except per share data)

Gash & Cash Equivale nts
Restrtcted Cash a nd Equivalenls
Accounts Receivable, net
Deferred Income Taxes
Prepaid Expenses and Other
Othe r Current Assets
Total Current Assets

PP&E
Restricted Cash and Investments

Prepaid Royalties
Goodv.ill
Deferred Income Taxes
Deposits and Olher Assets
Total Assets

Liabilities
Accounts Payable
Accrued Lia biltties
Income Taxes Payable
Deferred Revenue

Due to Related Parties

Notes Payable/line of Credtt
capital lease Obligations
Othe r Current Lia bilities
Total Current Llabllhles

200SA
Q4A

23,036

2007A
Q4A
Dec
18,930
4,280
7,114
6,001
4,640
1,349
42,314

29,017
3,074
250
2,941
2,835
79
61 ,232

33,849
3,298
317
2,941
2,806
3,043
88,568

3,18 1
3,044
2,535
6, 133
836
374
949
3,646
20,698

3,434
6,893
241
10,369
1,005
6,646
1, 150
7,428
37,166

26,749

49,239

32,557

38,295

31,463

48,995

35,409

38,832

28,288
1,482

29,675
1,422

29,384
1,459

29,364
1,459

29,384
1,459

29,384
1,459

29,384
1,459

29,384
1,459

56,519

80,336

63,400

69,138

62,306

79,838

66,252

69,675

14,361

4,798
2,984
893

6,930
4,640
2,317
455
21,548

41,924

2008A
Q4A
Dec
35,152
2, 197
9,442
2,603
2,629
1,576
53,599

36,460
3,370
8,409
2,941
5,308
2,512
80,548

38,984
3,391
8,226
2,941
5,553
4,599
105,618

41 ,399
3,403
8,043
2,941
7,404
201
116,990

8,043
2,941
7,404
201
130,580

44 ,786
3,403
8,043
2,941
7,404
201
131,349

4,532
6,582
1,646
10,973
1,472
41 2
1,132

3,733
12,006
4,046
25,583
2,379
392
1,100

5,770
9 ,674
172
14,262
1, 197
357
1, 125

5,770
9,674
172
20,000
1,197
357
1,125

5,770
9,674
172
13,166
1,197
357
1, 125

01A
Mar

2008A
02A
Jun
7,206

Q3A
Sep
22,227
10,097
7,436
2,164

capital l ease Obligations

Notes Payable
other lT Liabilities
Total Liabilities

28,779
2,088

28,078
1,762

51,565

67,006

Convertible

21,390

31,948

32,469

32,739

(11,723)

(10,386)

(8,440)

(7,457)

61.232

88,568

Shareholde~s

Equity

Total Liabilities & SE

80,548

105,618

Q1E
Mar
43,772
2,197
12,681
2,603
2,629
1,576
65,458
43,13Q
~.403

2009E
Q2E
Jun
43,276
2,197
12,290
2,603
2,629
1,576
64,571

Q3E
Sep
66,309
2, 197
13,729
2,603
2,629
1,576
89,043

2009E
Q4E
Dec
61,851
2, 197
17,917
2,603
2,629
1,576
88,773

2010E
Q4E
Dec
111,282
2, 197
24,314
2,603
2,629
1,576
144,601

46,367
3,403
8,043
2,941
7,404
201
157,402

47,873
3,403
8,043
2,941
7,404
201
158,638

54,047
3,403
8,043
2,94 1
7,404
201
220,840

5,770
9,674
172
30,700
1,197
357
1, 125

5,770
9,674
172
17,114
1,197
357
1, 125

5,770
9,674
172
20,537
1,197
357
1,125

53,590

61,442

69,044

77,564

92,385

150,965

116,990

130,680

131,349

157,402

158,638

220,840

Source: Wedbush and company filmgs

Ariel Sokol (212) 668-987 4

Education 1 75

VVEDBusw---------------------------------------------STRAYER EDUCATION (STRA, BUY, PT: $210)

Initiating Coverage of Strayer Education: Fear and Speculation Offer an Attractive Entry
Point

We are initiating coverage of Strayer Education with a BUY rating and 12-month price target of $210. Our
target reflects a -17x EV/EBITDA multiple to our calendar year 2009 EBITDA estimate. Our multiple reflects the
company's strong revenue growth rate and operating leverage and is in-line with other education stocks with similar
revenue and operating margin characteristics.

Based in Arlington, VA, Strayer operates a postsecondary institution focused on undergraduate and graduate
degree programs in business administration, accounting, computer science, public administration, and
education. The company offers ground programs at its campuses to its target segment of working adults.
Enrollments have grown from roughly 27,000 in 2005 to 45,697 by Strayer's 2009 winter session.

Strayer's highly consistent and differentiated strategy provides us confidence in continued market expansion
regardless of the economic cycle. No other market funded postsecondary education company has emulated
Strayer's strategy of permeating a geographic area by setting up campuses within a 15-20 minute commute in major
metropolitan areas. As of December 2008, Strayer operates only 65 physical campuses in 14 states. Given the lack
of competition and a large addressable market of yet to be penetrated states, we think that Strayer can grow revenue
by mid-teen to mid-20% growth rates during good or bad economic times. We note that management has
successfully opened 42 campuses in the mid-Atlantic region since 2003, with eleven new campuses expected to open
this year. For better or worse, management has determined that the most effective manner to open schools while
maintaining academic quality is to hire internal talent to run new schools, which clearly limits upside but drives more
stable growth.

We believe that the 25% collapse in Strayer's stock price over the past three months presents an
unprecedented opportunity to acquire shares in one of the best managed education companies in business.
While we concede that reduced corporate tuition reimbursements could impact retention for some students, we still
expect the company to generate greater than 20% revenue and EPS year over year growth given macro tailwinds
including job insecurity stemming from rising unemployment. While Strayer's target segment of working adults clearly
could feel the impact of a challenged economy, the value proposition after obtaining a degree remains unchanged.
We note that the unemployment rate for those with Bachelor's degrees or higher was 4.1% in February versus 8.3%
for those with only high school degrees.

2008A ~
EPS

04 Mar
02 Jun
03Sep
04 Dec
Year
P/E
Change

2009E

ACTUAL

CURR.

$1 .64A
1.50A
0.81A
1.71A

$1.99E
1.76E
1.06E
2.20E

$5.67A

31 .7x

PREV.

2010E
CONS.

CURR.

$1.97
1 .81
1.02
2.19

$2.42E
2.14E
1.30E
2.68E

PREV.

CONS.

$7.00E

$6.99

$8.54E

$8.63

25.7x
23.3%

25.7x
23.3%

21 .1 x
22.1%

20.9x
23.4%

$2.41
2.25
1.30
2.67

Company Information
52-Week Range
$143.1 6 - 239.99
Shares Outstand.
14.1 million
Insider/Institutional 0.72% INA
Public Float
13.8
Market Cap.
$2.5 Billion
ST/LT Debt
$0 I 0 million
Debt/Capital
0.0%
ROE
44.3%
Net Cash &
$7.59
lnv/Share
$12.45
Book Value/Share

Numbers may nor add up due to roundng. E PS normal~tedfor one-t1me expenses and fax benefits.

.. Source: Wedbush and company reports

76 1Education

Source: Thomson

-----%.;

Gr,oo

...,
"'

, :n

.....

.....

Oii

.. ....
JO.

..

_..,.?of1."'---w

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH

Strayer's strong management team warrants premium valuation. In our opinion, CEO Robert Silberman and his
team have clearly demonstrated a competency in executing on the company's strategy during both favorable and
economically challenging periods. More importantly, we believe that management's discipline in preserving academic
quality at the expense of even greater growth has enabled the company to remain relatively immune from the
controversies and scandals that have plagued other market funded institutions over the past decade.

As well, Strayer's return of excess cash demonstrates management's commitment to its shareholders.
Strayer has returned over $300 million of cash to shareholders over the past five years in the form of share
repurchases and dividends. We know of no other publicly traded company whose cash outflow to shareholders meets
or exceeds free cash flow. As well, we think that management's use of capital speaks to management's confidence in
the current strategy and not of growth through acquisition.

We expect earnings growth over the next several years to be driven by increased enroll ments rather than
through operating leverage. Strayer already has the second highest operating margin (32%) among publicly traded
market funded postsecondary institutions. We see margin expansion as limited given continued investments to open
campuses in existing and new geographic regions. We note that Strayer incurs initial costs of $1 million to open a
new campus in an existing geography and $2.5-3 million to open a campus in a new geography. Enrollments in new
geographies tend to lag enrollments in campuses within existing geographies, as Strayer needs time to establish a
brand.

WHERE WE COULD BE WRONG

Management could sacrifice margin expansion for growth in 2010. We note CEO Robert Silberman who
commented in his 2006 letter to shareholder that "in the future we will gladly suffer lower operating margins in a given
year by investing in more campus openings, if we can do so and still maintain our academic quality." As a
consequence, forecasting margins proves problematic given that investors have little certainty regarding how many
campuses the company could open in 2010. If Strayer opened significantly more campuses in 2010 than 2009,
margins could conceivably contract year over year.

Q2 EPS estimates could be aggressive given investments for an online operation center. Management
commented in the company's Q4 conference call that the opening of its second on-line operation center to serve
demand from the West Coast could negatively impact margins. We believe that operating margins could likely be
down in Q2 year over year due to this investment, although we are not clear as to the magnitude of the decline.

2009 EPS could prove higher than expectations due to share repurchase. Strayer has repurchased shares every
quarter for at least the past sixteen quarters. We note that Strayer's share price has fallen by 30% since its peak in
February, and acknowledge that management could have opportunistically opted to purchase more shares than
typical in Q1 .

INVESTMENT RISKS

Margins could compress if Strayer opens more new campuses than anticipated. Because campuses historically
have generated a 70% return on invested capital, management in our opinion has demonstrated a willingness to
sacrifice short term operating margins even at the risk of reporting results lower than expectations.

The elimination of corporate tuition reimbursements due to challenging economy could limit revenue growth.
20-25% of Strayer's revenue comes from corporation tuition reimbursements. A further deterioration of the U.S.
economy could result in continued expense reduction including corporate tuition reimbursements.

Increased unemployment could result in a corresponding increase in student churn rate.

STRATEGY

Maintain stable enrollments in mature markets. Strayer defines mature campuses as those in operation for more
than three years. The company has 37 mature campuses out of a total number of 65 as of the company's winter term.
Strayer intends to increase revenue from these campuses through tuition increases.

Open new campuses. Since the company's IPO in 1996, Strayer has grown from 8 to 65 campuses. The company
intends to open 11 campuses this year. To date, management has already opened campuses in Augusta GA,
Huntsvill AL, Allenton PA, Charleston WV, and Salt Lake City UT.

Ariel Sokol (212) 668-987 4

Education 1 77

VVEDBusw---------------------------------------------

Expand online. Currently more than 32,000 Strayer students take at least 1 course online, which compares to more
than 22,000 two years ago.

Develop corporate/institutional alliances. Strayer currently has employer agreements or billing arrangements with
corporations including Bank of America, FedEx, Northrop Grumman, SAIC, Sodexho USA, UPS, United States Postal
Service, Verizon Wireless, and Wachovia.

Optimize the use of stockholders' capital.

ESTIMATES, GUIDANCE & OUTLOOK

Consensus EPS Estimates for 2009 Do Not Take Into Account Possible Share Purchases
We do not yet know the magnitude of repurchases throughout the year, but the recently depressed stock price could prove
a very attractive opportunity for the company to accelerate its share repurchase program. The consensus EPS estimate
for the year of $6.99 compares to management's guidance of $6.90-7.00. We believe that consensus estimates do not
reflect share repurchases for the year.
Investments in the opening of a second on-line operation center could result in year over year margin contraction
in 2Q09.
We are conservatively assuming a close to 200 bps year over year decline in 2009 margins compared to the consensus
estimate of a 100 bps decline. While our 2009 EPS estimate of $1.76 remains below the consensus estimate of $1 .81 , we
do not anticipate investors to negatively react if management suggests 2009 EPS could fall below investor expectations so
long as they reaffirm 2009 annual EPS.
According to management, a 1% increase or decrease in enrollment growth equals $0.10 of incremental earnings
in 2009.
This would then imply a 20 bps margin improvement per every 1% increase in enrollments.

Exhibit 102: WMS vs. Consensus Estimates

2009 Q1
Revenue

EPS
Operating Margins

F2009
Revenue

EPS
Operating Margins

F2010
Revenue

WMS

Consensus

Guidance

122
$1 .99
37.0%

123
$1.97
36.8%

$1 .96-1.98

WMS

Consensus
495

Guidance

$6.99
32.2%

$6.90-7.00

WMS

Consensus

Guidance

596

601
$8.63
32.5%

497
$7.00
32.0%

EPS

$8.54

Operating Margins

32.6%

Source: Wedbush, company filings, and thomsononeim.com

78 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
OVERVIEW OF RECENT FINANCIAL RESULTS
Fourth Quarter 2008 Results Strong, but Expectations Heading into the Quarter Were Considerable
Strayer reported a good 04 fiscal 2008 results, slightly exceeding consensus estimates for both revenue and EPS.
However, we note that following out performance by Apollo and ITT, investors expected more than Strayer's roughly in-line
results. As well, investors were disappointed with management's EPS guidance for 1009, as guidance of $ 1.96-1.98 fell
below the consensus EPS estimate of $1 .99.

REVENUE of $114.3 million slightly exceeded the consensus estimate of $113.9M. 04 revenue of $ 114.3 million
exceeded the consensus estimate of $113.9 million and represented a 28.2% growth rate over the prior year quarter.
Revenue growth was driven by a 23.0% enrollment growth in total postsecondary offerings and a 5% tuition price
increase.

OPERATING MARGIN grew by 175 bps. 04 operating margin of 34.5% represented a 175 bps improvement over
the prior year quarter of 28.1 %. Margin expansion was primarily attributable to lower than expected instructional costs
and services. These costs represented 31 .3% of revenue in the quarter versus 33.3% in the prior year.

EPS exceeded consensus estimates by a penny. 04 EPS of $ 1.71 compared to the consensus estimate of $1.70
and management's guidance of $1 .68-1.70, and represented a 27.6% growth rate over the prior year quarter.

ENROLLMENT growth of 22.4% in 4Q08 vs. 16.1% in 4Q07. 04 total enrollments of 45,697 compares to
enrollments of 37,323 in the prior year quarter and 44,564 in the prior quarter. 04 enrollments grew by 22.4% year
over year. Strayer opened 2 campuses in the quarter.

RETENTION rate of 82% in the quarter. The 04 retention rate of 82% was flat with the prior year quarter.

BAD DEBT EXPENSE as a percent of revenue increased year over year. 04 bad debt expense as a percent of
revenue of 3.8% compares to 3.6% in the prior year quarter and 3.7% in the prior quarter. CEO Robert Silberman
commented in the 04 conference call that bad debt expense had "the biggest impact on increase in G&A [which) is
something that I hope is one-time, but I don't know."

ACQUISITION COSTS remain unknown, as management neither discloses advertising expenses nor starts in
a given quarter.

Ariel Sokol (212) 668-987 4

Education 1 79

VVEDBusw---------------------------------------------REVENUE ANALYSIS
We forecast total revenue of $496.8 million and $596.2 million in 2009 and 2010- up from $220.5 million in 2005.
We expect enrollment growth of 22% in 2009 and 20% in 2010 versus 23.5% in 2008 and 15% in 2007. We note that
enrollment growth sharply accelerated in 2008, which we attribute to increasing job insecurity by most professionals given
the dismal recessionary U.S. economy. However, our model does not assume that this will occur again in 2009. We do
note that for the past several years the company's growth rates have included a 5% annual tuition price increase. We
anticipate that the company could continue to increase prices as this growth rate.
Strayer's revenue model- open campuses with expected enrollment of roughly 1,000 students after 8 years.
Strayer opens a number of campuses in a metropolitan area under the theory that working adults seek to attend a brickand-mortar facility within a short commute of their residence. The exhibit below shows the model for student enrollment
increases at new campuses. Enrollments on average are expected to grow by roughly 100-150 students per year until
reaching a level of about 1,000 students at maturity.
Exhibit 103: New Campus Model- Average Student Enrollment
at Year End

Exhibit 104: #of New Campuses Opened

1,200 . , . - - - - - - - - - - - - - - - - - - - - - - - .

12

1,000

10
3

800

600
400
200
0

2001

Y1

Y2

Y3

Y4

Source: Wedbush and company filings

80 1Education

Y5

Y6

Y7

2002

2003

2004

2005

2006

2007

2008

2009E

Y8

Source: Wedbush and company filings

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Corporate tuition reimbursements represent 20-25% of Strayer's revenue - the potential reduction in
these benefits could be the biggest concern related to the stock over the coming years.
Investors over the past several months have questioned the countercyclicality of Strayer's business by pointing to
the percent of Strayer's revenue that derives from corporate tuition reimbursements. Two questions that investors
have asked over the past year include:

Will corporate partners reduce or eliminate their tuition reimbursement program?

Will corporate partners lay off of Strayer students?

While little evidence exists regarding the elimination of these programs by Strayer corporate partners, we
acknowledge that the concern regarding the future viability of these programs by at least at some of Strayer's
corporate partners remains fair, particularly given the potentially unprecedented economic collapse that lies
ahead over the next several quarters.
Of course, few have focused on the potential acceleration in growth from employees at corporations who are
finally taking advantage of their tuition reimbursement benefits package because of the challenged economy. We
do know that in the 4Q08 conference call management asserted that the company experienced a higher rate of
growth among corporate alliance partners than for overall students.
In the exhibit below we list Strayer corporate alliance partners listed on the company's online application. The list
includes a number of financial institutions that are facing extraordinary pressures in the current downturn,
including Bank of America and ABN Amro.

Exhibit 106: Stra

ABN Amro
Acquisition Services Directora
Am sec
Army National Guard
Abbott Labs
Bank of America
Bonney Forge
Booz Allen Hamilton
Boeing
Capital One
Childrens House of Philadelphia
Com cast
Compass Group
Computer Associates
Chicago Board of Trade
Citizens Bank
Colgate Palmolive
DHL
Dresser-rand
Dte Energy Company
EDS
Edassist
Exelon
Federal Bureau of Investigations
Fed ex
Fedex Kinko's
Fedex Ground

Listed on Stra er's Online A plication)

Florida Power and Light
Genworth
H Lee Moffitt Cancer Center
HSBC
Highmark
Home Depot
Hawaiian Telecom Communications
Hospira
ldearc
Indiana - PERF
Intel Corporation
JP Morgan Chase
John Hancock
Kerry Americas
L-3 Communications
Lockheed Martin
Lowe's Companies
Lexmark International
Mantech International
Mcdonald's
Memphis Gas Light & Water
Mayors Office of Workforce Dev
Nasa
National Semi-conductors
Northrop Grumman
National Guard
Phillip Morris

Prudential Financial
Rms
Roche
Reuters
SAIC
Schering Plough
Sierra Pacific Resources
Sodexho
Sra International
Standard Insurance
Starbucks
Texas Childrens Hospital
Tiaa-Cref
Time Warner
US Air Force
US Army
US Coast Guard
US Marines
US Navy
US Postal Service
US General Services Administration
Volvoline
Verizon
Verizon Wireless
Wachovia

Source: 4Q08 Company Presentation

Ariel Sokol (212) 668-987 4

Education 1 81

VVEDBusw---------------------------------------------Exhibit 107: Strayer Revenue 2002-2010E

Exhibit 108: Enrollment Per Year

700

30%.

600

25%

500

70.000

25%

60.000
20%

50.000

400

15%

40,000
. 15%

($M)

300

30,000

100.4

100.4

200

20,000
5%

100

5%

10.000

00.4
2002A

2003A

2004A

2005A

I11:1 Re\etlue

2006A

2007A

2006A

2000E

2010E

0%

2003A

Exhibit 109: Students by Program Level

2005A

2006A

1-A\efage Enrdlment

Re\etlue% Change YrNr J

Source: Wedbush and company filings

2004A

2007A

2008A

2000E

Enrdlment % Change Yr/Yr

2010E

Source: Wedbush and company filings

Exhibit 110: Revenue Per Average Enrollment

2003A

2004A

2005A

2006A

2007A

IE!!!!B Re\<etlue Per A\erage EnroUment -

2008A

2000E

201OE

% O'lange YrNr J

Source: Wedbush. thomsononeim.com, and Reuters

EXPENSES ANALYSIS
Strayer invests up to $1 million in upfront capital costs when opening a new campus.
In the first year of operation. assuming a midyear opening, Strayer incurs operating losses of $1 million including
depreciation related to the upfront capital costs. A new campus is typically expected to begin generating operating income
on a quarterly basis in four to six quarters of operation. which is generally upon reaching an enrollment level of about 300
students.
Has Strayer achieved peak operating margins? Not just yet- we note that the company is investing $16 million in
operating losses from new facilities in 2009.
Next to ITT, Strayer has the second highest operating margins in the industry at 32%. Despite guidance in 2009 of flat
operating margins, we think that a sufficient amount of leverage remains in the model. Strayer opted to open 12 of 17 new
campuses in new geographies in 2007-2008. As noted above. Strayer generates a loss of $1 million for a new campus in
its first year, assuming that the campus is opened in an existing geography. Strayer typically loses $2.5-3 million for a new
campus in a new geography due to lower initial enrollments. as the company needs time to establish a brand within the
new community. The campuses typically take a year to breakeven, and then another year to start generating operating
profits. As such. we expect Strayer to see operating leverage as campuses in these new geographies ramp up
enrollments. We note that in 2009 alone, the company expects to open 11 new campuses and facilities that could result in
$16 million in operating losses. We know that at least five of those campuses are in new geographies. We estimate that
this amount translates to 300 bps of margins or more than a $1.00 of earnings per share of investments.

82 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 111 : Strayer Operating Margins
~% .----------------------------------------------------,
37%

35%
34%
33%
32%
31%
30%
29%

28%
2002A

2003A

2004A

2005A

2006A

2007A

2008A

2009E

2010E

Source: Wedbush, company filings, and thomsononeim.com

The lingering question for us remains whether Strayer's existing markets are saturated, or whether the company has opted
to invest intentionally in new markets to gain a footprint that can later be further penetrated. Adding campuses to current
geographic markets could result in stronger enrollments in the early years of the campuses life due to brand recognition
driven by a referenceable base of customers and pre-existing marketing programs in place. Given data available, we think
that Strayer has opted to go the route of increasing its footprint. We note that only 14 of the 32 metropolitan areas that
Strayer competes in have multiple campuses. In the Baltimore metro area, the company has 3 campuses supporting a
metro population of 2.7 million, representing a population per campus ratio of 890,000. In Atlanta, the company has 6
campuses supporting a metro population of 5.3 million, representing a population per campus ratio of 880,000. In our
opinion, that still leaves expansion opportunities potentially in the Delaware Valley, South Florida, Tampa Bay, Pittsburgh,
Orlando, and other areas. We acknowledge that this calculation clearly doesn't incorporate the geographic vagaries of
each market. Again, Strayer strives to have campuses within a 15-20 minute commute of a certain population size.
In the exhibit below we include the 153 metropolitan areas in the United States with a population in excess of 300,000 - we
note that management in the 2008 annual report commented that the plan is to "eventually operate a nationwide university
through a network of physical campuses in every metropolitan area with an adequate population (roughly 300,000 people).

Ariel Sokol (212) 668-987 4

Education 1 83

VVEDBusw---------------------------------------------Exhibit 11 2: Metropolitan Areas w ith a Pop ulation of at Least 300,000 - Part I

Rank

2007 Pop

Region

New Y011<-NO<them New Jersey-Long IslaM. NYNJ.PAMSA

18,815.988

campuses

Population/C
am pus

'2

9.407,994

2007 Pop

Rank

Region

40

JacksMIIe, Fl MSA

1,300,823

Campuses

Population/C
am pus

1,300,823

Los Angeles-Lcng Beach-Santa Ana. CA MSA

12,875.587

41

Memplis. TNMs.AR MSA

1.2BO.S33

Chica!JO-Naperviii&JdieL I L- I ~W1 MSA

9,524,673

42

LouiS'Iille-Je11erson Coonty, KY-IN MSA

1,233.735

43

Richmcnd, VA MSA

1,212.977

Dallas-Fat Worth-Arlington, TX MSA

6,145.037
l'hiladelphla,Camden-Wilmington. PA-NJ.OE MD
MSA
5,827,962

44

Oklahoma City, OK MSA

1,192,989

Houston-sugar Land-BaytOHn, TX MSA

45

Haflforo-West Hartford-East Haflford. CT MSA

1,189.113

2,706.606

46

Buffalo-Niagara Falls. NY MSA

1,128,183

Miami-Fat Lauderdale--Pompano Beach. FL MSA 5,413,212

Washlngton-Mingtoo-Aiexandria, OC-VAMDWVMSA
5,306,5 65

589.618

47

Birminpm.t-10011er, AL MSA

1. 108,210

1,108,210

AUant&-San<ly Springs-Marietta, GA MSA

5.278.904

879,817

46

Salt lake Oty, UT MSA

1,099.973

1.099.973

10

Boston-Cambridge-Q.Incy, MA-NH MSA

4.482.857

49

Raleigh-Gary, NC MSA

1,047.629

11

Detroit-Wlsren-Uva'ia, Ml MSA

4.467,592

50

Rochester, NY MSA

1,030.496

12
13
14

San Frandsco-Oakland-Fremont. CA MSA

Phoenix-Mesa-Scoltsdale. AZ. MSA
Riverside-San Bemardlno-Ontano, CA MSA

4,203,898
4,179.427
4.081.371

51
52
53

New 0!1eans-Melairte-Kemer. LA MSA

Tucson. AZ. MSA
Tulsa, OK MSA

1,000,363
967.089
905.755

15

Sealtle-Tacoma-Bellewe. WA MSA

3,309,347

54

Honolllu, HI MSA

905,601

16
17

Mlm eapdis-St. Paul-Bloomington, M~WI MSA

San Diego-Cartsbad-San Marcos, CA MSA

3.208,212
2,974,859

55
55

Fresno. CA MSA
Bridgeport-Stamford-Norwalk, CT MSA

899.348
895,015

18

St. Louis, MO-IL MSA

2.808.611

19

Tampa-St. PetetSburg-Oearwaler, Fl MSA

2.723.949

20

Blitimore-Tcmson, MD MSA

2.668.056

21

Denver-Aurora, CO MSA

2,464,866

22

PiltsbU'IJh. PA MSA

2.355.712

23

Por1fand-Vancouver-Beaverton, OR-WA MSA

2.175. 113

24

Cindnnali-Midcletown. OH-KY-IN MSA

2,133,678

25

Cleveland-Elyria-Menta , OH MSA

2.096.471

1,165,592

5.628.101

57

Albany-5dlenectady-Troy. NY MSA

853.358

2.723.949

58

New Ha~r.tlford , CT MSA

845,494

889.352

59

Dayton, OH MSA

835,537

60

Albuquerque, NM MSA

835,120

61

Omaha-Coundl Bluffs. NE-IA MSA

829,890

62

Allent"'-'')oBelNehern-Eastort, PA-NJ MSA

803.844

63

Oxnard-Thousand Qaks-Venltn, CA MSA

798,364

64

Bakersfield, CA MSA

790.710

65

VVorcester, MA MSA

781,352

66

Grand Rapids-Wyoming. Ml MSA

776.742

1, 177,855

26

Sacrarnento-Arden-Arcade-Rose,;ne. CA MSA

2,091 ,120

27

0!1ando-l<lssimmee, FL MSA

2.082.496

28
29

San Antonio, TX MSA

Kansas City, MQ.KS MSA

1,990,675
1.985,429

67
68

Baton Rouge, LA MSA

El Paso. TX MSA

770,037
734.689

30

Las Vegas-Paradise, NV MSA

1.836.333

69

Cdumbia. SC MSA

716,030

31

San JoS&Sunnyvale-5anla O ara. CA MSA

1,803,643

70

McAIIen-Ed n!ltl'g.M1ssion, TX MSA

710,514

32
33

1,754,337
1,696.037

71
72

Akron, OH MSA

899,356
698,497

34
35

CdlOllbUS, OH MSA
Indianapolis-Carmel, IN MSA
lllrgilla. Beech-Norfolk-Newport News, VA-NC
MSA
Olartotte-Gastortia-Ccncord. NC-SC MSA

1,658,754
1.651 ,568

73
74

Bradenton-SaraSOia-Venice. FL MSA
Springfield, MA MSA

687,181
682,657

36

PI'OIIideoce-New Bedford-Fall River. RIMA MSA

1,600.856

75

Knoxville, TN MSA

681.525

37

Austin-Round Rodk, TX MSA

1,598.161

76

Stockton. CA MSA

670.990

38

Milwaukee-Waukesha-West Allis, WI MSA

1,544,398

77

Pougtl<eepsie-Newbll'gh-Middlelown, NY MSA

669.915

78
79

UtUe Rock-North UtUe Rock-Ccnway, AR MSA

Toledo. OH MSA

666,401

NastMIIe-CeviOsoo-~o-FranKhn ,

39
40

MSA
Jacl<sotwflle, FL MSA

2,032.496

3
3

552,918
550.523

Greensboro-Hi~ Point.

NC MSA

640,267
1,233,735

404.326

349.210

803.844

716,030

698,497

681.525

TN

1,521 ,437
1,300,823

1,521,437
1,300,823

650,955

Note: Areas where Strayer competes in yellow

Source: Wedbush and Wikipedia (for metro areas and population data)

84 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 113: Metropolitan Areas w ith a Population of at Least 300,000 - Part II
2007 Pop

Rank

Region

80

645.293

81

Syracuse. NY MSA
Charteston-Ncrth Chartesloo-SummtliVille. SC
MSA

630,100

82

Greenvtlle-Mauldin-Easley. SC MSA

613.828

83

Coloredo Springs. co MSA

84

campus.es

Population/C
am pus

2007 Pop

Rank

Region

120

canton-Massillon. OH MSA

407.180

630.100

121

Mobile, AL MSA

404.406

613,828

122

Asheville. NC MSA

404.320

609,096

123

Santa Salbara-Santa Mana-Goleta. CA MSA

404.197

Wictlita. KS MSA

596.452

124

Manchester-Nashua. NH MSA

402.302

85

cape Coral-Fort Myers. FL MSA

590.564

125

Reading. PA MSA

401.955

86

Boise City-Nampa, ID MSA

587,689

126

Pon St. Lucie. FL MSA

400,121

87

Lakeland-Winter Haven. FL MSA

574.746

127

Shreveport-Bossier City. LA MSA

387.583

88

Youngstown-Warren-BOOfdman. OH-PA MSA

570.704

128

BfownS'Jille-Hartingen. TX MSA

387.210

89

Madison. WI MSA

555.626

129

Salem . OR MSA

386.714

90

Scranlon-Wilkes-Sa!Te, PA MSA

549.430

130

HUnts.ille. AL MSA

386,632

91
92
93

Des Moines-West Des Moines. lA MSA

Palm Bay-Melbourne-TituSVllle. FL MSA
Jackson, MS MSA

546.599
536.161
534.047

131
132
133

Beaumont-Port Arthur. TX MSA

Davenport-Moline-Rock Island. IA~ L MSA
Peoria, IL MSA

376.241
376,160
371,206

94

Harrisburg-Carlisle, PA MSA

528.892

134

Killeen-Temple-Fort Hood, TX MSA

370,008

95
96

Augusta-Richmond eoumy, GASC MSA

Ogden-Clearfield, UT MSA

528,519
518.349

135
136

Montgomery. AL MSA
Trenton-Ewing. NJ MSA

365,962
365.449

97

Chattanooga. TN-GAMSA

514.568

137

Anchorage, AK MSA

362.340

528,519

98

Porttan~outh

513,102

138

Hickory-Lenoir-Morganton, NC MSA

360.471

99

Modeslo, CA MSA

511,263

139

Tallahassee, FL MSA

352,319

100

Deltona-Daytona Bea~ond Beach. FL MSA

500.413

140

Rockford, IL MSA

352.290

101

lancaster, PA MSA

498.465

141

Ann Alber, Ml MSA

350.003

102

Provo-Orem, UT MSA

493,306

142

Evan!MIIe, IN-KY MSA

349,717

103

Dumam, NC MSA

479,624

143

Fayetteville, NC MSA

348,940

Portland-Biddelord, ME MSA

479,624

104

Santa Rosa-Petaluma, CA MSA

464.435

144

Eugene-Springfield, OR MSA

343.591

105

Winston-Salem, NC MSA

463.159

145

Wilmington, NC MSA

339,511

106

lansing-East Lansing, Ml MSA

456.440

146

Savannah, GAMSA

329,329

107
108

Spokane, WA MSA
Pensacola-FelTY Pass-Brent. FL MSA

456,175
453.451

147
146

Ocala, FL MSA
Kalamazoo-Portage. Ml MSA

324,857
323.264

109

Lexington..fayene. KY MSA

447.173

149

South Bend-Mishawaka. IN-MI MSA

316.639

110

Fayetteville-Springdale-Rogers, AR-MO MSA

435.714

150

Naples-Maroc Island, FL MSA

315.839

111
112

Flint, Ml MSA
Visalla-Porter.;lle. CA MSA

434,715
421,553

151
152

Charteston. 1M/ MSA

Kingsport-Srisloi-Sristol. TN-VA MSA

303,950
303.686

113
114

York-Hanover, PA MSA
Springfield, MO MSA

421 .049
420,020

153

Green Say. WI MSA

301,131

115

Corpus Christi. TX MSA

414,376

116

Reno-Spart<s, NV MSA

410.272

117

Fort Wayne, IN MSA

410.070

118
119

Vallejo-Fairfield, CA MSA
Salinas, CA MSA

408.599
407,637

447,173

Campuses

Population/C
am pus

386.632

329,329

303.950

Note: Areas where Strayer competes in yellow

Source: Wedbush and Wikipedia (for metro areas and population data)

Ariel Sokol (212) 668-987 4

Education 1 85

VVEDBusw---------------------------------------------CASH FLOW & BALANCE SHEET

We expect Strayer to generate free cash flow of $156 million over the next two years.

Free Cash Flow: We are modeling Strayer to generate $69 million and $87 million of free cash flow in 2009 and 2010,
respectively. We note that historically Strayer generates more cash flow from operations than net income, a positive
in our view. The company does not require substantial working capital investments, and working capital has been
both a source and use of cash over the past several years.

Capital Expenditures: Capital expenditures as a percent of revenue for the past three years have ranged from 5.0%
to 6.0% over the past several years. As such, we are modeling capital expenditures as a percent of revenue to be
roughly 5% in fiscal2009 and 2010, respectively.

Share Repurchases: Strayer has $70 million remaining on its share repurchase authorization as of December 31 ,
2008. There is no expiration date on repurchases.

Dividends: Strayer has distributed dividends to shareholders on a quarterly basis for the past eight years. On
October 2008, management announced that the company would pay out a dividend of $2.00 per share, up from $1.50
per share. We note that in January 2008, Strayer paid out a special dividend of $2.00 per share.

Exhibit 114: Strayer Share Repurchases 2004-2008

700,000 . , - - - - - - - - - - - - - - - - - - . . . . , . $120M

..

$100M

$80M

ti:

S60M

~ 400,000
~

'0

'It

&.

~ 500,000

:.

..
VI

600,000

VI

300,000

a.

~~

..

&.

$40M <n

200,000

'0

$20M

100,000

SOM

2004A

1-

2005A

2006A

# of Shares Repurchased -

2007A

2008A

Cost of Share Repurchse

Source: Wedbush, company filings, and thomsononeim. com

Strayer has a strong balance sheet, in our opinion, w ith a large cash position and little debt.

Cash: Strayer has $107.3 million of cash and marketable securities on its balance sheet as of December 2008. Most
of the cash is invested in tax-exempt money market funds and a diversified short-term tax-exempt bond fund.

Debt: Strayer has no debt as of December 2008. Strayer has not taken on any debt over the past five years.

Credit Facility: Strayer has two $10 million credit facilities from two banks. Strayer does not pay any fees for these
facilities. Interest on borrowings under either facility accrue at an annual rate not to exceed 0.75% above LIBOR.

86 1 Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
MANAGEMENT BIOGRAPHIES
Title

Background

RobertS. Silberman,
50

Chairman and
Chief
Executive
Officer

Mr. Silberman has served as Chairman of the Board since February 2003 and
Chief Executive Officer since March 2001 . From 1995 to 2000, Mr. Silberman
held various senior management level positions at CaiEnergy Company, and
1993 to 1995, served as Assistant to the Chairman and Chief Executive Officer
for International Paper Company. Prior to International Paper, Mr. Silberman
served U.S. Assistant Secretary of the Army in the Department of Defense under
the first Bush administration.

Karl McDonnell,
41

President and
Chief
Operating
Officer

Mr. McDonnell has served as President and Chief Operating Officer since joining
the company in July 2006. From 2003 to 2005, Mr. McDonnell served as Chief
Operating Officer of lnteliStaf Healthcare, Inc. Prior to lnteliStaf, Mr. McDonnell
served as Vice President of the Investment Banking Division at Goldman Sachs,
as well as various senior management positions with several Fortune 100
companies.

Mark C. Brown,
48

Executive
Vice
President and
Chief
Financial
Officer

Mr. Brown joined Strayer in 2001 and currently serves as Executive Vice
President and Chief Financial Officer. Prior to Strayer, Mr. Brown served as
Chief Financial Officer of the Kantar Group. Prior to Kantar, Mr. Brown spent
nearly 12 years in various management roles at PepsiCo, Inc. Mr. Brown began
his career with PricewaterhouseCoopers.

Name

Lysa A. Hlavinka,
40

Ariel Sokol (212) 668-987 4

Executive
Vice
President and
Chief
Administrative
Officer

Ms. Hlavinka joined Strayer in May 2001 as Vice President of Marketing and
currently holds the titles of Executive Vice President and Chief Administrative
Officer. Prior to Strayer, Ms. Hlavinka served various positions at the University
of Phoenix. As well, Ms. Hlavinka has taught public relations and marketing
courses at both the University of Phoenix and Strayer.

Education 1 87

VVEDBusw---------------------------------------------VALUATION
We are initiating coverage of Strayer with a BUY rating and 12-month price target of $210. Our target reflects a -17x
EV/EBITDA multiple to our calendar year 2009 EBITDA estimate. Our multiple reflects the company's strong revenue
growth rate and operating leverage opportunities and is in-line with other education stocks with similar revenue and
operating margin characteristics.
Exhibit 11 5: Multiples Analysis

Price
Fully Diluted Shares 4Q08A
Market Capitalization
Less: Net Cash 4Q08A

Valuation@
Current Price of $180.00
2008A
2009E
2010E
$180.00
$180.00
$180.00
14.1
14.1
14.1
$2,545.7
$2,545.7
$2,545.7

Valuation@
12.-Month Target Price of $210.00
2008A
2009E
2010E
$210.00
$210.00
$210.00
14.1
14.1
14.1
$2,970.0
$2,970.0
$2,970.0

(107.3)

(107.3)

(1 07.3)

(107,3)

(107,3)

~$7.59)

~$7.59)

~$7.59)

($7.59)

~$7.59)

$2,438.4

$2,438.4

$2,438.4

$2,862.7

$2,862.7

$2,862.7

$172.41

$172.41

$172.41

$202.41

$202.41

$202.41

$126.9

$171.4

$208.3

$126.9

$171.4

$208.3

EV IEBITDA

19.2x

14.2x

11.7x

22.6x

16.7x

13.7x

EPS, Normalized

$5.67

$7.00
23.3%

$8.54
22.1%

$5.67

$7.00
23.3%

$8.54
.22.1%

31.7x

25.7x

21.1x

37.0x

30.0x

24.6x

1.1x

1.0x

1.3x

1.1x

$396.3

$496.8

$596.2

$396.3

$496.8

$596..2

6.2x

4.9x

4.1x

7.2x

5.8X

4.8x

$88.6

$117.1

$146.2

$88.6

$117.1

$146.2

$6.26

$8.28

$10.34

$6.26

$8.28

$10.34

EV I Operating Cash Flow

27.5x

20.8x

16.7x

32.3x

24.4x

19.6x

Free Cash Flow

$67.9

$93.1

$116.2

$67.9

$93.1

$116.2

$4.80

$6.58

$8.22

$4.80

$6.58

$8.22

35.9x
2.7%

26.2x
3.7%

21 .0x
4.6%

42.2x
2.3%

30.8x
3.1%

24.6x
3.9%

Net Cash I Share

Enterprise Value
EV I Share

EBITDA

o/o Change

PIE Multiple
PEG Ratio
Revenue
EV I Revenue
Operating Cash Flow
Operating Cash Flow f Share

Free Cash Flow f Share

EV I Free Cash Flow

Free Cash Flow Yield

(107.3)
~$7.59)

Source: Wedbush and company filings

88 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
VALUATION -- HISTORIC
Strayer's PIE ratio has ranged between 20-48x over the past eight years. While seemingly rich, we note that Strayer has
traded at a PEG ratio of 1.0-2.0x between 2000 and 2008. In 2009, the stock's multiple has compressed both due to
overall decline in the market, concerns regarding the lending environment for student loans, corporate tuition
reimbursements, and lower 1Q09 guidance than consensus We believe that the company could be on track to grow
earnings by at least 20% over the next several years, and as such believe that the company could warrant a PIE of at least
20x.
Exhibit 116: Strayer Historical Forward PIE Valuation

Exhibit 117: Strayer PEG Ratio

lOX~--~----~--~----~--~----~--~----~--~

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan05

Jan-06

Jan-07

Jan-08

~ ~------------------------------------------~
Fel>-01

Fel>-02

Feb-03

Feb-04

Feb-05

Fel>-06

Feb-07

Feb-08

Feb-09

Jan-09

Source: Wedbush . Baseline. and Reuters

Source. Wedbush . Baseline. and Reuters

As the exhibit below suggests, Strayer has consistently traded at a significant premium to the S&P 500. From our
perspective, the key question for investors relates as to the magnitude of the premium. We acknowledge that a large
degree of downside risk exists if the company once again provides guidance lower than expectations, but that even if such
an event occurs the stock could still trade at a higher multiple than the overall market.
Strayer's valuation as a multiple of EBITDA has ranged between 5-30x over the ten years. Since CEO Robert Silberman
has managed the organization and implemented the current strategy, Strayer has typically traded at an EV/TTM EBITDA
multiple of at least 15x. We acknowledge that the stock's multiple could continue to contract more on par with the sector's
multiple of 10x, which would result in significant downside risk to the stock. However, we think that investors are willing to
pay for the consistency of the company's strategy and management team. As well, our impression is that investors who
want to take a position in the higher education sector view Strayer as relatively immune from the scandals that have
plagued other publicly traded market funded postsecondary companies.
Exhibit 118: Strayer Forward P/E Relative to S&P

Exhibit 119: Strayer TTM EV/EBITDA

5x ~--....---....---~--~--~---.----.----.----.----.---~

0.5X f-!.---.-----..----....----.-----..----.-----r----....----.-'
Jan-00 Jan-01 Jan-02 Jan-03 Ja n-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

Source: Wedbush . Baseline. and Reuters

Ariel Sokol (212) 668-987 4

Oec-97

Oec-98

Oec-99

Oe~O

Oec-01

Oe~2

Oec-03

Oe~4

Oe~5

Oe~6

Oec-07

Oe~8

Source. Wedbush and Factset

Education 1 89

VVEDBusw---------------------------------------------COMPANY OVERVIEW
Strayer is a market funded postsecondary education company that serves working adults. Headquartered in Arlington VA
and founded in 1892, Strayer has significantly expanded geographically over the past decade. In 1996, the company
operated eight campuses in one state and Washington D.C. By comparison, the company currently has 65 campuses in
14 states and Washington D.C.

Offers undergraduate and graduate degree programs in education, business administration, accounting, information
technology, and public administration.

Held its IPO in 1996.

The company has 44,000 students as of December 2008 in 65 physical campuses in Alabama, Delaware, Florida,
Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Utah, Virginia,
West Virginia, and Washington, D.C.

Has accreditation by the Middle States Commission on Higher Education, a regional collegiate accreditor.

90 1 Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 120: STRAYER Income Statement
Expense Assumptions

2007A

Expenses as a% or Revenue
Instructional Costs and Sef\lices
Se41ing & Promol:ion
Gener.~~l & Administration

Effective Ta:x Rate

2008A

2009E

1009

2010E

34.2%
19.1%
16.0%
37.6%

33.0%
19 .2%
15.9%
38.5%

32.9%
19 .1%
16.0%
39.0%

32.7%
18.9%
15.8%
39.0%

32.6%
15 .5%
15.2%
37.4%

33.6%
17.1%
15.0%
38.0%

35.1%
28.4%
17.5%
38.6%

31.3%
18.7%
15.5%
39.9%

32.5%
15.5%
15.0%
39.0%

19.5%
16.2%
24.9%

20.2%
25.3%
22.9%

24 .9%
24.8%
27.2%

19.3%
18.7%
18.5%

20.7%
17.2%
21 .6%

23.1%
26.9%
16.5%

16A%
27.2%
22.3%

20.6%
28.4%
30.0%

25.6%
25.6%
24 .2%

2009

3009

4009

16.5%
39.0%

34.5%
26.3%
17.4%
39.0%

31 .0%
18.6%
t5.3'lt.
39.0%

32.3%
15.3%
14.8%
39.0%

33.9%
16.8%
16.3%
39.0%

34.3%
26.1%
17.2%
39.0%

30.8 %
18.4%
15.1%
39.0%

27.0%
24 .9%
38.1%

22.8%
24.4%
24.4%

23.9%
24.4%
23.1%

19.3%
18.5%
18A%

19.3%
18.6%
18.5%

19.3%
19.1%
18.6%

19.2%
18.7%
18A%

34.0%
17.0%

Exp-enses '4 Change YrfYr

Instructional Costs and SeMces

Selling & Promotion
General & Admin;s(r.Jtion

Strayt>r Education
Normalized Income Statement
($ m OOOs except per shilre data)

20D8A
2007A

Reveriue

2008A

2009E

2010E

596,166

396,276

...,.

""ctwoeYtfft

"""'

11. Cha~ SeCMrc~

~ltYl"Of&t\nA!rt'V!IIUeltllct1)

lnsuuctlonal Coscs and Services

Sel ing & Promotion

Gefletat & Mnlnistra~on

Total Operating Expenses

130.836
76,162
62.426
269,424

""'

""'

" Cr.oe YrNr

Operating Income

97, 55 7

~o.

.......

SPSC:Iuti. . YtNr

&1 bp

............,,..oc,

Incom e Taxes (Benell)

Dec

.... .....
....

" 97, 07~

126,852

'lP'</

133bp

163.337
95,021
79.403
337,761

,. ...

194,812
112,833
94.091
401,736

,....

. 97,928

86,993

,..,..

2t ' "'

31,642
15,095
14,778
61,515

"""'

1112~

., ...

194,431

35,559

......

'114,281

""'

30,548
22,985
15.209
68,742

35.737
21,353
17.756
74,846

33,607

18.251

......
,.,.

36.f"

"'"
39.435

39.752
18,958
18,347
r7,057

"'""
45,266

01E

Q2E

QJE

Dec

Mar

Jun

Sep

146.776

"108,741

"''"'

32.909
16,729
14.683
64,321

Q4E

,....

122,313

111.5)'1.

"'"

211~

2010E
QJE
Sep

"'""
10l<

'"'"

,,...

02E
Jun

31491.

""'

.... .....,... .... "'""....

159,005

01E
Mar

41 ,786
20,893
20.278
82,957

37,516
28,599
18.921
85,036

39,942

23.706

,..,.

34.$%
t16tlp

""'

......
''"
"'"

44.284
26,570
21,856
92,710

"'"

.... ,._,......

.,..,.

50,141

47,409
22;157
21 ,723
91,588

'""'
55.188

147,480

......

....

110,490
211...
(115)%

""'

'"'"

49.848
24,777
24.039
98,664

44,758
34,058
22.444
101,260

4&816

29.230

.....

""'
....

19"'

0 4E
Dec

,....

171,422

31<1,.

,..,.
52,798
31.542
25,885
110,224

189'1.

61,197

.... ......
....

~"

6,495

4.527

3,600

2,036

785

905

B01

800

800

BOO

BOO

900

900

900

900

131,379
50.570

162,245
63.275

193,031
77,232

37,595
14,073

34,392
13,069

19,156
7,394

40,236
16.034

46,056
17,962

40.742
15,800

24,506
9,557

50,941
19,867

56,088
21,874

49,716
19.389

30,130
It ,751

62,097
24,218

64,937

80,809

98,969

120,799

23,522

21,323

11,762

24,202

28,094

24,853

14,948

31,074

34,214

30,327

18,379

37,879

14.517

14.242

14 .143

14 .143

14 ,340

14 .248

14,557

14,143

14,143

14.143

14.143

14.143

14.143

14.143

14.143

14.143

Ner Income, Normalized

Normilhzed IS to Pro Forma (Which excludes stock option c ompensation)

2007A
2008A
2009E
2010E
Reconahation

2008A
1008

2008

2009E
3008

4QD8

1009

2009

2010E
3009

40 09

1010

2010

3010

4010

9,834

10.582

11.200

11,600

2,683

2,8 1 I

2,763

2,325

2,800

2,800

2,BOO

2.BOO

2,900

2,900

2,900

2,900

107.391

137.434

182.561

219,947

40.662

38.989

23.743

44.589

50.985

45,771

29,635

56.170

61.417

55,145

35,659

67.726

Stock Based Com pensation

~"

ESIT[)l.MtfVn"

Pro Forma CJ!eratng Profi:

Q.IA

Sep

104,052
39,115

Share< OUIStanclng (F~ty Diluted)

Pro Forma EBITDA

OJA

Jun

I
3.200

lnleresllnoome (Expense), net

EBT

Q2A

Mar

"'"
108,852
60,760
50.843
22M55

2009E

01A

107,391

per-ICingM~tgn.

~~

137,434

~~

~~

$~

170.245
~~

$~

206.031
~w

c1~

38,242
~~

~~

v~

36,41 8

21,014

~~

~~

~"

41 ,760
~~

'"' .,..

48,058
~~

37.21'

42,742

"'*"

27~

26,506
1<14~

393"

52,941
311"'

58,088
-~

Nomoallzed GAAp EPS FUlly ODuled

~'"*-ltti7odt$110ctre}~.,lk>'ft:J)

$5.67

$4.47
23911

"c:Nr!OtYfiY

""'

$7.00

""'

$8.54
221~

$1.64

26."

$1.60

SO.S1

,.,,.

,..,.

$1.71
216'11o /

$1.99

-2JU~

$1.76

11"

.....

$1.06

$2.20

,..,.

lsw Gyd MJst'1 1 w 1 211

PF EPS Futty Diluted

$2.42

""'

V3

51,716
~~

, ...

$2.14

(~\IOt$@d<II~COfiWIIUIIOII.I)fCfl!ll''d

"od<.&Mon'l'el~tai(JW)

$5.15

$6.13

,....

'II. Chln;t YINr

GAAP EPS. Fuly Oiuted

"'"'

$4.47

$5.67

, ...

~Chr9tYifYe

""'

$1.76

$7A8

, ...

$7.00

,,.

201 ..

$8.54

'"~

$1.64

"'"

$1.62

$0.92

$1.81

181~

$1.50

,.,,.

$0.81

,. ...

$1.71
)11!11.

..... .....

$2.11

$1.99
2it~

$1.88

$1.76
1t4'>

$1.18
2f'llo

$1.06

,. ...

$2.32

"'"

,. ...

$2.20

$2.54

''""
$2.42
'""

$2.27
20$11

$2.14

, ...

n~

32,130
~~

$1.30
230!1

,, ...

~~

64,097
3?~

$2.68
219'11o

$1.42

$2.80

$1.30

$2.68

, ...

20.,.

,1.,.

Source: Wedbush and company filings

Exhibit 121: Enrollments

Strayer Educ atton
Enrollments Analys~s

20D8A
2007A

Total EnroiJments
~Chaf~QtYrNr

Average Enrollments
'lloetlll'ol'YrfVI
~IIQI)l(Oo<lt)

Revenue/Average Enro-llments
"CI'IIn;JtYrNI
T..oonPnet~~

2008A

2009E

36,082

54,368

"""
31,499

...,

37,389

117~

IU"
.....53

10.096

10.599

3~
$0~

"'"'
45,723

....,...

10,866

5~

2~

so"

so"

2009E

01A

Q2A

OJA

Mar

Jun

Sep

37,323

37,733

,.,..,.

34,176

44,564

54,979
20311

36,703

37,528

,,.,.

39,370

'"'

4,.. ]1

,.,.
""'

35,955

(1.671

10.844

10,580

10.438

9.678

2010E

65,242
20011

~-

,,,.,.

1SIIY.

ss

,.,.

2010E

01E

02E

QJE

M,u

Jun

Sep

45,697

46,034

41,695

45,131

45,866

43,864

3,416

5,7111

73S

11,611

10,841

Q.IA
Dec

..

"'"'
5~

)" Gulcflnet
". "' ?2!b"~
ISfRA.

,...
2~

""'

10.718
,~

01E
M.u

Q2E

QJE

Q4E

Jun

Sep

Dec

54,368

54,836
2001<

55,241
2001<

50,034
2001<

65,242

, ...

43,031

54,602

,,.,.

55,039
2001<

52,637
2001<

57,638
2001<

(2.0011

18?

6,511

""

11,896

10,752

10,718

Q4E
Dec

,,...

9.916
,~

, ...
""'
2~

~~

0~

(2,4011

9,916
0"

200'1

5.000

11.896
0~

)l

Revenue/Enrollments
~ CNI'Qt '(!(''(f

8,814
~

8,892
0"

9,138
2~

9,138
0~

# or Campuses in Operation
AdoJ,IIcm(OIJitlfl

Students f Campus
&wentsl CWraJt "OIW'Ql' V!Nt

10,404

10,381

10,182

10,258

10,706

1(),679

10,432

10,510

"~

3~

3~

2~

2~

2~

2$%

55

57

60

62

67

69

71

73

679
,.,..

662

570

719

...

682

1111~

10,706
0~

10,679
0~

10.432
0~

10.510
0~

11

681
113l"

719

'"'

.... ....

745

805

""

.... .... ....

667

587

...

745

731
120.

717

""

633

805

""

'"'

Source: Wedbush and company filings

Ariel Sokol (212) 668-987 4

Education 1 91

VVEDBusw---------------------------------------------Exhibit 122: STRAYER Cash Flow Statement

Sfr:ayer Education
Cash Flow Statement
(SIn ooos except per share data)

2008A
Q1A
2006A

2007A

2008A

20D9E

2009E

201CE

1'11ar

Q2A
Jun

QJA
Sep

120,799

23,522

21,322

11,762

Q.SA
Dec

Q1E
Mar

Q2E
Jun

2010E
QJE
Sep

Q4E
Dec

14,948

31,074

Q1E
f,1ar

Q2E
Jun

Q3E
Sep

Q4E
Oec

30,327

18,378

37,879

Operatfng Activities
52.307

Netlnc:ome

AmOtiz-ation of Oererred Rent

190

Amortization o f Gfrin on Sal e or PP&E

Gafl on Sale or Malrltetable Securtie5

(Hprecilbon & Amoftization

Deferred lrKome Taxes
Stock Compenu.tion Expense
Othe<
Chengesin Wo,.lngC.,kal

7.059
(4,034)
7,413
{120)
{1,046)

64,937

80,800

(115)
(148)

(525)
(291)
(785)
10,761
226
t0,561

8.523
{5. 700)
9,834
51
3,371

11$;969

1 2,316

13.916

1f.200

1 t,600

(87)
(71)
(785)
2,420
(1, 318)
2,683

(130)
(70)

(72)

(236)

(70)

(70)

2.571
(741)
2,804

2,729
( 1,499)
2,757

3.041
3.784
2,317

2.929

3.029

3, 129

3.229

3.329

3,429

3,529

3,629

2.800

2,800

2,~0

2,800

2,900

2,900

2,900

2,900

(12,193)
{5,391)
(113)
7,858
(16,507)
3,880
(7424)
871
(3,421)
2.428
(5268)
7,575
(3,824)
2,630
(6,494)
~c~~=.h~F~Iow~t~rGm~~~.~~~7n~.~--------~8el,~
n~.~~~~
.7~~~~8~8.7
5n~~1~17~.~~~.~.~
8.~~~2~~~~~.=n~2--~9~
,27.,.~-7.
19~~~8~7--~2~
~~61~.~~~~~.~894~~2~7~.~~1~~
~~.30~5--~3~1:~8~~~~4~~~o.~8~~3~2.~~~2~~v~~~~=-~3~7.~9~14~
%ChangeYrffr
CFO/Shere
~Ch~YrtYr

lnvesUng Activities
Capital Expendture-s

Free CaSh Flow

.-91Jai-.YitVr
FCF Murg.n IF-CF/R~tr....)

FCF IStl..-.
~Ch$'10tYtfVr

Purc:hneiSale of ST lnve.stmeds:
Proceeds on Sale o f PPE

t2,0%

30.7%

9.7%

~~

24.9'%

$4.2$

$.s..68

$8. 22

$8.~

13~

30S9b

tt~

l.HlJii

249%

(13. 1 ~)

(14,869)
85,l30 .

(24,000~

(30.000)
118,202

4~588

'"'~

(20.657) .
87,91$

" ..

sse~

184%

2079b

SJ.JS

s.-.s

15~

3 S49t

93,094

$0.65

(5.129)
~094

1719b
$4,77

(4 ,904)

874~

345
(800)00

"'""
.,..,

$0.30

u~

Anr

(30.000)

(19.9~

1A%

$1.34

U.81

~.45

3653%

(171}9t-

lni~

(5,300)
14,187.
(404081"

(5,325)
20: 289
130 11~

(6,000)
2U94
( 14,..

366.3%

fl-39

$10.3-4

161%
$0.97

t789tSU3

(40408)ilb

(2$1~

(408)

76,785

(3(), 180)

(20.381)

71,857

(35,094)

(25,681)

(56,297)
3.378
(34. 193)
5,033

(12,709)

(10,291)

(5.362)
6,465

(5.339)

(7,045)
6,536

(4,849)

(15,322)

(30,368)

(30,484)
11 8,866

(21,518)

88,~2

66,868

(10,481)
66.8<l6
58,379

25.816

194.7%

19.6%

U.93

$U6

196~

Z319b

(6,000)

(6,000)

(6.000)

2 ~~2$1

17,~5

26,835

389l'A
t73"'

~so.

$1.60
>11290L

12J),J

('>0)1>

24.3%
12.26
143ltl:!

,,.,.
1S90L

38.4~

20.4%

17,7%

19 .1 ~

$3.40

$2.3-2

$1.94

$2.89

:!844)L

0'0~~

17nll

1P1'!b

(7.500)

(7.500)
30t414
111'*

(7. 500)
40,518

{7,500)
25,332

273'1l

412'0

181~

181lfl:l

176..

.....

11l%

15!141

111%

$1.79

$Ut
1$2'0

$2.15

St.22

$1.8)

15 ...

173111t

18'1%

412'0

19l938
1$2'0

""'

5,754

Ac:CJ.Iistion'5
Purc:hne of Equity Investment
Othe<
Cash Flow from Investing

(43, 1~)

9,115)

5,159

(35,041)
6,596
(15,294)
3,596

{38,094)

15, 178
(19.027)
12,678

(109, 125)
10,633
(51.929)
18,033

(4 0,1~)

29,285)

(21,549)

42,373
52.663
95,036

24,000

(30,000)

(28.400)'

(36.000)

(132,388)

2~00

(36,000)

(82,049)

(38,657)
95,036
56,379

84,894

121,013

80,202
121,073
201,275

11~856

(5,733) ~_,6;:,:::000:.:.~-__>:(6.!:
,0:::
00"---"
(6"',00=0' - - '("'8,"'000::::!i) ~_,17:.z:::50:::0L--"
(7"
,50
:::0:L)__->:.J.50=0)' - - '("1,!.:50:::0:q

Anand ng AetiYfUes
Debt Borrowings
Debt Repeyment
Stoc;k Repurchase
Stoc;k

l ssu ~mc;e

DMdend
Exc;ess: Tax eenef'U. Stoc;kS.sed
OthOf
Cash Flow rrom Frnanclnn

6,947

(29.858)

308

(7,100)

(7,100)

(9,000)

(9,000)

(9.000)

(9.000)

f-..l!.:
(7.100:2.
_,
__!!.(7,_,
,1:::00:t___,;(7Cl.,1!!0"0'-_;(7
e_,L!100""j

(9,000)

(9,000)

(9,000)

(9,000)

(7, 100)

(7,100)

Exchange Rate lmpaet/Other

Net Increase In casn
Cash 11t Be9nn11g of Year
Cash and at End or Ye

74\212
52.,663

56,~79

~. 830

96.036

88,382

21~594

66,379
11,973

14,.161
77,973

10,206

92,134

102,339

92,1~

18,735
102.33$
121,073

31,518
121.073
152,591

18,332
152,591
10 ,923

10,938
168,923
179,8&1

21,414
179,861
201,275

Source: Wedbush and company filmgs

Exhibit 123: STRAYER Balance Sheet

Strayer Education
Balance Sheet

($

10 OOOs

except per share data)

cash & Cas h EquivaleoiS

Marl<eUible Securities
Tuition Receivable
lnc<me Taxes Receivable
01he< CUrrent Assets
Total Current Assets

PP&E
Deferred Income Taxes

Resllicted cash
01her Assets
Total Assets

2006A
Q4A
Dec
52.663
75,763
80.753

2007A
Q4A
Dec
95,036
76,299
100.651

4,653
213,832

4,097
276,083

52,748
3,400
500
364
270,844

57,946
8 ,830

500

419
343,778

5,360
227,692

2008A
Q2A
Jun
88.382
30,066
102.406
1,646
5,648
228,148

Q3A
Sep
86.886
50.222
127,120
458
6,656
251,322

2008A
Q4A
Dec
56.379
50,952
131,458
3,534
7, 175
249,498

58,952
9,951
500
494
297,589

61.481
10,800
500
463
301,412

63,517
12,204
500
483
328,026

66.304
7,799
500
462
324,563

500

500

500

500

462
348,137

462
363,421

462
406,878

17.463
2,620
10.981

13.065
4,458

15.885
4,215

17.099
4.567

19.209
2,882

14.372
4,904

17.474
4,637

Q1A
Mar

118,866

103,466

n.973
50.952
130,367
3.534
7,175
270,001

2009E
Q2E
Jun
92. 134
50,952
128.520
3.534
7, 175
282,314

Q3E
Sop
102.339
50,952
158.900
3,534
7, 175
322,900

2009E
Q4E
Dec
121,073
50,952
164.323
3.534
7, 175
347,057

2010E
Q4E
Doc
201,275
50,952
197.187
3,534
7,175
460,123

69.375
7.799

72.346
7,799

75,217
7,799

77,988
7,799
462
433,806

94,072
7,799
500
462
562,956

18.809
5,024

20.690
5,526

Q1E
Mar

Liabilities

AccouniS Payable
Acaued Expenses
Income Taxes Payable
Dividends Payable
lkleamed Tlllion
01her Current Uabilities
Total Current Liabilities

LT liabilities
Total lia bilities
01he<

10.923
1,830
4.979

91,628

15.682
3,303
4.754
28,853
91,476
281
144,349

281
125,489

9 1.937
281
109,741

7,689
99,317

10.922
155,271

10,764
136,253

10,927
120,688

73.896

94,144

116,020

281
136,401

114,872
281
136,819

112,973
281
135,345

11.822
148,223

11.663
148,482

12,9 17
148,262

110,324

281
129,691

139,224
281
161,615

137,846
281
161,960

165,416
281
191,913

13. 11 2
142,993

14,186
175,801

13.996
175,956

16.795
208,707

Sharehotdefs Equity

171,527

188,507

161,336

180,744

179,803

176,091

199,875

220,428

231,076

257,850

354,249

Total liabilities & SE

270,844

343,778

297,589

301,412

328,026

324,563

348,137

383,421

406,878

433,806

562,956

Source: Wedbush and company filings

92 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
AMERICAN PUBLIC EDUCATION (APEI, HOLD, PT: $42)
Reiterate HOLD: Great Company, But Not Much Upside Right Now Given Already Rich
Valuation

Thesis: We think that APEI has the best long-term prospects among publicly traded for-profits given the
company's low price point and focus on niche verticals. Our chief concern remains the stock's premium
valuation. Following the broad sell-off in education names over the past three weeks, the stock has the highest
valuation among its peers on a P/E and EBITDA multiple basis. Overall, we like the company's strategy and
demonstrated execution, and seek to become more constructive on potential weaknesses in the stock price.
APEI operates one of the leading online universities targeting the military and public service markets. APEI
operates through two universities, American Military University, or AMU, and American Public University, or APU,
which together constitute the American Public University System. The universities share a common faculty and
curriculum, which includes 57 degree programs and 49 certificate programs in disciplines related to national security,
military studies, intelligence, homeland security, criminal justice, technology, business administration and liberal arts.
With over 40,000 enrolled students, APEI has roughly 8-12% share of the overall military market We believe that
APEI can continue to take share against more established competitors in this market, driven by a strengthening brand
and continued penetration into the Navy. We note in early 2008, APEI was accepted into the Navy College Program
Distance Learning Partnership, which could give its universities broader access to Navy bases and greater visibility on
Navy websites.
We favorably view APEI's strategy of offering degrees at a lower price point than its competition, as we
believe that students could increasingly become more sensitive to price as average tuition rates in the United
States continue to increase. Management's commitment to 'tuition affordability' for its students provides us
confidence that the company could continue to take share from competitors. In fact, we would view a price increase at
APEI universities as a negative. According to management, APEI's graduate tuition is 90% lower than that of state
institutions. Pricing could prove an opportunity for APEI, as professionals and families seek to increase credentials
even as they endure job uncertainty and wealth destruction from the plunge in real estate and equities valuations.
Maintain HOLD rating and 12-month price target of $42, reflecting a - 17x EV/2009 EBITDA multiple. Our
multiple reflects the company's strong revenue growth rate and operating leverage and is in-line with other education
stocks with similar revenue and operating margin characteristics.

25.0A
27.4A
31.5A
$107.1A

$214.8

2008A
EPs-

ACTUAL

01 Mar
02 Jun
03Sep
04 Dec
Year*
P/E
Chan e

$0.18A
0.21A
0.20A
0.27A
$0.86A
47.7x

2009E
CURR.

$0.27E
0.28E
0.31E
0.36E
$1.21E
33.8x
41 .1%

PREV.

2010E
CONS.

$0.25
0.27
0.31
0.37
$1.19

CURR.

$0.37E
0.39E
0.43E
0.48E
$1.68E
24.5x
38.1%

PREV.

CONS.

$0.36
0.39
0.44
$1 .71

Company Information
52-Week Range
$27.56- 53.24
Shares Outstand.
18.9 million
Insider/Institutional 54.4% /76.7%
Public Float
13.8 million
Market Cap.
$77 4.2 million
ST/LT Debt
$0 I 0 million
Debt/Capital
0.0%
ROE
NMF
Net Cash &
$2.53
lnv/Share
$2.84
Book Value/Share

....

t'Vr

......
~~

........
~

*Numbers may nol add up due 10 rounding. EPS normalizedfor one-lime expenses and ta.x benefits.
~

H>

J#

..,.:

""'

"

'"'

Source: Wedbush and company reports

Ariel Sokol (212) 668-987 4

.u

t.f

?.\>

L
c;

.....
...

~-

r.

A.-. . . . . .

:~K

""

(!'.,..~":..---.~_..._

Source: Nasdaq.com

Education 1 93

VVEDBusw---------------------------------------------Risks to attainment of our share price target include the loss of regional accreditation, the loss of access to Title IV funding, the
loss of access to the Department of Defense's tuition assistance programs, increasing competition, service disruption's of the
company's technology infrastructure, regulatory changes by federal, state, and accreditation bodies, and financial misconduct of
other for-profit universities which could tarnish APEI's brand.

COMPANY OVERVIEW

94 1Education

Founded in 1991 and began offering courses in 1993. Originally, APEI operated American Military University,
a distance learning graduate level institution focusing on a military studies curriculum for military officers seeking
advanced degrees. In 1996 APEI expanded its offerings to include undergraduate courses. In 2002, APEI
launched American Public University with the intention of creating a brand that could appeal to non-military
markets.

Operates through two universities, American Military University, or AMU, and American Public University,
or APU, which together constitute the American Public University System. The universities share a
common faculty and curriculum , which includes 57 degree programs and 49 certificate programs in disciplines
related to national security, military studies, intelligence, homeland security, criminal justice, technology, business
administration and liberal arts.

In 2006, APEI received accreditation from the Higher Learning Commission of the North Central
Association of Colleges and Schools. Universities depend on accreditation in evaluating transfers of credit and
applications to graduate schools. Employers rely on the accredited status of institutions when evaluating a
candidate's credentials, and tuition reimbursement programs rely on accreditation for assurance that an institution
maintains quality educational standards. Accreditation allows the university to enroll students whose tuition are
funded by Title IV programs.

IPO in 2007. APEI raised $98.3 million in net proceeds through the sale of 5.4 million shares of stock at
$20/share. In December 2008, APEI raised an additional -$550,000 by selling 15,000 shares at $37.50, which
occurred in tandem with 4.2M shares sold by existing investor and venture capital firm ABS Capital Partners.
Before the secondary, ABS Capital Partners had owned 24% of APEI shares.

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 125: Multiples Analysis

Price
Fully Diluted Shares 4Q08A
Market Capitalization
Less: Net Cash 4Q08A
Net Cash I Share
Enterprise Value

Valuation@
Current Price of $41.05
2008A
2009E
2010E
$41.05
$41.05
$41.05
18.9
18.9
18.9
$774.2
$774.2
$774.2
(47.7)

(47.7)

(47.7)

~$2 .53~

~$2 .53~

~$2 .53~

$726.5
$38.52

$726.5
$38.52

EBITDA

$29.9

EV I EBITDA

24.3x

Valuation@
12-Month Target Price of $42.00
2008A
2009E
2010E
$42.00
$42.00
$42.00
18.9
18.9
18.9
$792.2
$792.2
$792.2

$726.5
$38.52

(47.7)
($2.53)
$744.4
$39.47

(47.7)
($2.53)
$744.4
$39.47

(47.7)
($2.53)
$744.4
$39.47

$43.1

$59.2

$29.9

$43.1

$59.2

16.9x

12.3x

24.9x

17.3x

t2.6x

O.Sx

0.6x

O.Sx

0.7x

$0.86

$1 .21
41 .1%

$1 .68
38.1%

$0.86

$1.21
41 .1%

$1.68
38.1%

PIE Multiple

47.7x

33.8x

24.5x

48.8x

34.6x

25.1x

Free Cash Flow

$19.7
$1 .05

$22.8
$1.21

$35.6
$1.89

$19.7
$1.05

$22.8
$1.21

$35.6
$1.89

36.8x
2.6%

31 .9x
2.9%

20.4x
4.6%

37.7x
2.5%

32.7x
2.9%

20.9x
4.5%

$107.1

$151 .3

$204.3

$107.1

$151.3

$204.3

6.8x

4.8x

3.6x

6.9x

4.9x

3.6x

$29.8
$1 .58

$32.8
$1 .74

$46.6
$2.47

$29.8
$1 .58

$32.8
$1.74

$46.6
$2.47

24.4x

22.2x

15.6X

25.0x

22.7x

16.0x

EV / Share

PEG Ratio
EPS, Normalized
% Change

Free Cash Flow I Share

EV I Free Cash Flow

Free Cash Flow Yield
Revenue
EV I Revenue
Operating Cash Flow
Operating Cash Flow / Share

EV I Operating Cash Flow

Source: Wedbush and company filings

Ariel Sokol (212) 668-987 4

Education 1 95

VVEDBusw---------------------------------------------Exhibit 126: AMERICAN PUBLIC EDUCATION Income Statement

..mmEiillll~EiilimliiiilJIIMlH!:t--lJ.i:l- l"f:l-i!tl:fM

~!lml!lri!l!~l!!ll!l!_lll
Expenses as a % of Revenue

Instructional Costs and Services

Selling & Promotional

General & A<mlnlstrative
Effective Tax Rate

. ,.

Instructional Costs and SefVices

Selling & Promocional

General & Administrative

42.6%
9.4%
20.7%
40.2%

42 .1%
10.5%
20.3%
34.1%

38.8%
13.1%
20.4%
40.2%

38.8%
12.6%
18.5%
38.7%

40.0%
12.0%
19.4%
41.0%

40.0%
12.0%
19.4%
41 .0%

40.0%
12.0%
19.4%
41 .0%

40.0%
12.0%
19.4%
41 .0%

39.5%
12.5%
19.0%
40.0%

38.5%
12.5%
19.0%
40.0%

39,5%
12.5%
19.0%
40.0%

64.1%
38.2%
67.6%

4 7.8%
82.7%
38.9%

39.1%
47.4%
38.0%

33.2%
40.2%
32.0%

62.4%
51.3%
48.4%

52.8%
80.3%
32.2%

41.4%

85.0%
51.2%

38.3%
105.6%
27.9%

33.2.,.
81 .9%
33.3%

34.2%
62.5%
35.1%

42.0%
29.3%
34.5%

45.5%
34.8%
47.9%

33.3%
40.6%
32.2%

33.1%
40.1%
31.9%

33.1%
40.1%
31.9%

2008A
2007A

2008A

....

107,147.

. ~Cfu,n. $tQUCI'IIai'V

2009E

2010E

Q3A

<WI

Q1E

Q2E

Q3E

Q4E

Q1E

Q2E

Q3E

Q4E

Sep '08

Dec '08

Mar '09

Jun '09

Sep '09

Dec '09

Mar '10

Jun '10

Sep '10

Dec '10

24,999

...

60,582
18 .2 15
29,4 06
5,408
113,611

38.8 11
7,348
152,378

17,516

29,923

43,107

59,238

80,686
25,534

2010E

2009E

Q2A
Jun '08

111,..

43,561
12,361
21,302
4,235
81,459

19.~
40.~

Q1A
29,241

29,479
6,765
15.335
2,8 25
54.404

39.5,
12.5'

Mar '08

......... ...,.
,....

.,.,.

151,310

SU~fl.tlrtv(t.OIII'flll,j~,na~l

Oepced ation & Amortiz-ation

TotaJ Operating EXpenses

4Q09E

38.5%
12.5%
19.0%
40.0%

"-O~ft/'lt;

General & AMllnis:tratl\te

3Q09E

40.0%
12.0%
19.4%
41 .0%

Total Revenue

lnslrUctional Costs and Services

Selling & Promotional

2Q09E

40.7%
11.5%
19.9%
38.7%

Amencan Public Education

Normalized Income Statement
(S 1n OOOs except per share data)

1Q09E

42.7%
9 .8 %
22.2%
43.8 %

9,912
2,177
4 .803
17,790

10,521
2,613
5.072
1,031
19,237

6,349

6.793

898

27,404

31,503

.... .. ...

~-.

'"'"

29 .

.,....... .... ..,.

..,.. ,,. ,.,,.

33.002

35.249

"-"'

38.640

A1~

44,419

.....
,.,,.

-t~

,....

44,553

"'"
"'"'

.....
..,.
.... ,...,.

47,588

23.1"

52,164

'""

..

59,966

294'

1 3"~20 1

14 ,117

3,960
6,402
1,292
24,856

4,247
6 .854
1,332
26.550

15,475
4,656
7,5 13
1,372
29,016

17.789
5 ,352
8,637
1.412
33.190

5,569
8 ,465
1,537
33,170

18,796
5,948
9,041
1,637
35.423

20,605
6 ,520
9,911
1,737
38.773

23,687

21,201

12,227
3,971
5.841
1,192
23.231

7,317

9,464

9,439

10,031

10,996

12,641

12, 920

13,800

15,127

17,390

10,901
3 ,600
5,586
1.1 14

17,598

7,49
11,394
2,437
45,013

~ChangYrl'l'r

EBITOA
~O'I'!'O~Yrf!r

!t'lf~ Mqlo%

Operat.ing Income
Op~ ~. ll\-'5

BPS CtiJ"'' Yt!Yr

Interest Income (EXPense), net

111~

708'M

:tf,t%

1T.t'l6.

14,691

""'

18,'"

25.668

21.3%

24;G'I.

to6llp

Z71llp

37.699
2U'llo
9~

bf

31-4"-

91~

~"

~~

~~

~~

~7~

~~

~~

3~~K

378"

37~

376<

2't.o%

zr~

1rn

,.-"'

30.o%

1&.t%

2'M~

2U"'o

:ZU-1.

2U '.4

2:$1.0'1.

29-K

"'ZU'

51,890

5.451

5,762

6,203

8,272

8, 147

8.699

9.624

11,229

11,383

12,163

13,390

14,953

'2t.A"

23Rl'.

23.0"4

12-n

:u"

2U11.

t.nr.

UA

25";.3

"21.~

1-5"""'

2'$.nL

'2. ....

49 bf

G5 bf

261bf

232 llp

2tobp

1Z, bf

tflbf

227bp

(98)llp

~bf

n~

~b

868

706

1.600

1.750

242

196

18 1

87

400

400

400

400

41 5

430

445

46(

15,579
6.829

26,394
10.207

39,299
16.112

53,640
21.456

5,693
2.298

5,958
2.033

6,384
2.568

8,359
3.318

8,547'
3,604

9,099
3.731

10,024
4. 110

11,629
4.768

11.798
4 .719

12, 593
5.037

13,835
5.534

15,413

Net Income, Normalized

8.750

16,187

23,186

32,184

3.405

3,925

3,816

5,041

5,043

5,368

5,914

6.861

7.079

7,556

8,301

9,246

Shares ClulstanciO\g (f uly Diluted)

13,801

18.818

19.100

19 .200

18.768

18.792

18.8 51

18,861

19.000

19,067

19,133

19.200

19 ,200

19.200

19 .200

19.20C

EST
Income Taxes (Bene,...)

6 . 16~

cm~m~lm~m!IIIIIIIIII..E!lliill!IIII~~IIEmimiiii~~IIIII~~''CIIII~~CIIII~~>~tlllll~l!tiiii.IIIII~"~IIII~NlJIIIII~x~llllll~>[!jiiiiiiiiiii~IEIIIIII~'~IIIII~J[IIIII~4[1Jill
Nonno1~ed

GAAP EPS F'ully Oi uled

(e..,d~j)ft(e'redlfOCI, &~.'J't~t*)

-CI'I&ngfVtfft

PF EPS fully Oillled

SQ.64
39"

5U~"
:137/

;t

s1.21
-41

1"

$1.68

$0.18

S0-21
138,.

311"

$0.?4

""'

..... 1..,. .....

S0-27

$0.28

$0.31

$0.38

,.,,.

$0.37

$0.45

$0.29

$0.31

$0.34

$0.39

$0.41

.,,.

Ch&n~YriYr

GAAP EPS , f ully Oillled

~CMnQtVrfYr

$0.39

$0.43

$0..4~

$0.43

$0A7

50.52

,. ...

,.,.

AP1 Gulcbnu: $1 16-1 21.1

(exCII.de'tS!XIekD~~IISdbOII _ pr!t!l'lfd

$ll0dc.&nrnshtntlr*l!)

...,.

$0.27

$0.72

""'
50.64
.):)$1'-

So.95
3~9~

SO.S8

"'"'

.....

51.33

$1.21

.,,,.

$1.82

$0.19

$0.23

371"

,.,_

$1.68

$0.22
171"

$0.18

$0.21

$0.20
15l~

37.8~

"'""
$0.27

""""'

$0.27
<UII

.....

$0.28

''""
$0.31
$7?~

113211'

$0.36

''"'

..,.

$0.37

,....

"""
$0.39
3116"'

386'1

So.43

,.,.

,,.

,...

$0.48

Source: Wedbush and company filings

96 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH
Exhibit 127: AMERICAN PUBLIC EDUCATION Cash Flow Statement
2008A

Amencan Pubhc Educahon

Cash Flow Statement
($ 1n OOOs except p-er share data)
Operating Activities

Q1A
2007A

2008A

Net tlcome

8,750

16.187

Provision fof Sad Debts/Doubtful Accounts

121
2,825
1,033
618

152
4,235
1,870
1,295

4,170
17,517

Z917.57

Oepcedation & Amortization Expense

Stock Compensation Expense
Deferred Income Ta_xes

2009E
23,166

Cha nge-s 11 Wortdng Capital

% ChnOt YrfYr
CF"OIShare

6.018

.......
.....

96.2'14

Investing Activities
Capital Expenditures
C'apitalzed C uniculum Development Costs
Free Cash
% Ch.,Qt Yrf'fr

FiOw

FCf Mtrtlfn (FCF.fttVtn!H)

F CFfShWt

% Change YrNr

10.1%

2:2.8%

...,.

(6,827)
(347)
10,690

(10,009)
(896)
19,748

(400)
+22,752

....,.,.

t.CO.O%
15.5%

...,.

18.4%
$Ul6

........

t11.9'Mo

$1#TI

(10,000)

,...,.
16~2%

$1)9
t3.6~

Q1E

Q2E

Q3E

Q4E

Q1E

Q2E

Q3E

Q4E

Dec '08

M.uog

Jun '09

Sep '09

Dec '09

M.v'10

Jun '10

Sep '10

Dec '10

3,816
124
1,114
396
(175)

1, 192
628

2.235
6 979

(1.233)
4,973

2.557
7,832

(OA)%

72.5%

$2..413

$0.37

CUI%

$0.26
(41.2}%

$0.42

-41..4%

16.7%

(11.000)
(800)
35,562

(2,193)
(736)
4,786

(2,437)
263
2.536

(1,917)
91
5,915

4.230
46,562

75.7%

$1.29

% Chnat vrrrr

1.953
32,752

Sep '08

......

56.3%

.....

\7.4%

C.S.6%

3.405
207
898
377
(143)

.,..,.

.....

(t1.8)'1'

109.8%

6,043

5.368

5.914

6.861

7,079

7.556

8 ,301

9.24E

1 ,292
525

1.332
540

1,372

1.412

1,537

1,637

560

580

700

700

1,737
700

2,437
70(

2.459
9,973

(2,011)
4,848

(955)
6 286

5.245
13,091

(326)
8,527

(1.310)
8,583

7.313
18,051

(39<
11,992

230,6%

.....

po.6)%

26A%

, ..,.

~
~31,4)%

(3,462)
(514)
6,511

5.041
(88)

741

.
-

SO.S%

21.6'%

20.7%

SO.t3

$0.31

so.ss

(018)"4

40.7%

20.6%

(181S.9)%

(APEI GIAdnet: $8-10M

Purchase/Sale of ST Investm ents
Proceeds on Sate of PPE
Purchase of Equity Investment
Other
Cash Flow from Investing

7,174

10,905 .

10,400

(295)
710
1.436

11,800

2.174

2.929

1,826

3,976

Financing Aetivltfes

Debt BOCT~ngs
Debl Repayment
Stock Repurchase
Stock l swance
Exce-ss Tax Benefits From Stock-Based Comp
Other
Cash Flow from Flnancfng

(1.973)
(55)

99,938
772
(93,750)
4.930

1,911

15,273
11.678
26.951

20,763
26.951
47,714

22,352
41,714
70.066

(1 .381 )
7.935

,......

.,.....

04,5)%

..... .....

6U%

so.ss

US

$0.94

$0 .6~

24.6%

. ..1%

(16.01'%

62.0%

36.6%

37.4%

10.6~

(2,!;00)
(100)
2,348

(2,500)
(100)
3,786

(2,500)
(100)
10,691

(2.500)
(100)
6,027

(2,750)
(200)
5,185

(2,750)
(200)
5,833

(2.750)
(200)
15,301

(2,75(
(20(
9,242

CS0.9J%

19.3%

79.1%
21.1%

51.1%
12.3%

1.5%
29.3%
S0.90

53.3"

7.1%

10.7%

$0,12

$0.20

(.>1.6)%

47.1"'

so....

(1AI%

t20.8%

.....

13.6"4

11.6%

$0.31

$0.27

76.4'%

C9.1)%

118.6%

40.6~

37.0%

..... .......
.......

322
429

130
203

87
373

(295)
231
431

751

333

460

367

2 600

15.4~

so.1t
r.$,311

2.600

2.600

2.600

2.950

2,950

2.950

2.950

'

Exchange Rale lmpacr.K>ther

Net Increase in Cash
Cash at Be~n ning of Year
Cash and at End of Year

Ae"'lsitlons

2010E

Q4A

(91)
1,031
469
872

7,348
2,800

Jun '08

Mar'08

2009E
Q3A

3.925

32.184

5,408
2.205

Other

Cash Flow from Ooeratfons

2010E

Q2A

34.762
70.086
104.828

4,801
26,951
31,752

3,132
31.752
34.884

6,486
34,884
41,350

6,364
41.350
47,714

2,248
47.714
49.962

3,686
49.962
53.648

10,491
53,648
64.139

5,927
64,139
70,G$6

4,985
70.066
75,051

5,633
75.051
80.664

15.101
80.684
95.786

9,042
95.78f
104,828

Source: Wedbush and company filmgs

Exhibit 128: AMERICAN PU BLIC EDUCATION Balance Sheet

Amencan Public Education
Balance Sheet
(S m OOOs except per share data)
Cash & Gash Equivalents
Accounts Receivable, net
Income Tax Receivable
Prepaid Expenses
Deferred Income Taxes
Olher Current Assets
Total Current Assets

PP&E
Deferred Tax Assets
Total Assets

Liabilities
Accounts P ayable
Accrued Liabilities
Deferred Revenue & Student Deposits
C.-rent Portion or LT Debt
other Current liabilities
Total Current Liabilities

2005A
Q4A
Dec
5,51 1
7,516
1.269

532
175
96
15,()99

2006A
Q4A
Dec
11.678
5,448
679
856
299

33

2007A
Q4A
Dec '07
26,951
4,896
1,089
1,596
309

Q1A
Mar'08
31,752
4,467

1.735
572

2008A
Q2A
Jun '08
34,884
4.365
2.437
1,565
683

Q3A
Sep'08
41 ,350
6,888
2.056
1.690
931

2008A
Q4A
Dec '08
47. 714
6,188
1.308
2,156
640

Q1E
Mar'09
49,962
7.334
1,306
2,156
1:140

2009E
Q2E
Jun '09
53,648
7,833
1,306
2,156

640

Q3E
Sop '09
64.139
8 ,587
1.306
2 ,156
640

2009E
Q4E
Dec '09
70.066
9,871
1,306
2.156
640

2010E
Q4E
Dec'10
104.828
13,326
1.306
2,156
640

18,993

34,841

38,526

43,934

52,915

58,004

61,398

65,583

76,828

84,039

122.256

9,532
1.178
25,809

9,363
394
28,750

13,364
775
48,980

14,659
1.51 1
54,696

16,065
1.2 48
61,247

16,868
1.253
71,036

19,622
1.187
78,813

20,830
1.287
83,515

21,998
1.387
88,968

23,126
1.487
101,441

24, 214
1.587
109,840

27,866
2.387
152.509

1,112
1,820
6.148

1.502
3,157
3.852

2,471
4,323
6,6 14

1,878
3,656
8 ,027

1.600
5,733
7.979

4. 277
6,373
9 .610

4.946
5,250
9,626

2,629
5,250
11.077

2.240
5,250
1 1,01 1

5 .988
5,250
13.262

6.924
5,250
13.284

9.694
5,250
18.199

13,408

910
14,471

15,312

20,260

1,825
21,647

1.825
20,781

1,825
20,326

1 ,825
26,325

1,825
27, 283

1,825
34,968

2,065

2,185

3,168

3,241

3,691

'3.691

3,691

3,691

3,691

3,691

29

278
9,358

8
8,548

1,912

1,437
1,944

Deferred Income Taxes

Long Teon Debt
other lT liabilities
Total Liabilities

11,270

11.929

15,473

16,656

18,480

23,501

25,338

24,472

24,017

30,016

30,974

38,659

Shareholde(s Equity

14,539

16,821

33,507

38,040

42.767

47,535

53,475

59.043

64,951

71,425

78.866

113,850

Total Liabilities & SE

25.809

28.750

48,980

54,696

61,247

71,036

78,813

83,515

88,968

101,441

109,840

152,509

Source: Wedbush and company filings

Ariel Sokol (212) 668-987 4

Education 1 97

VVEDBusw---------------------------------------------CAPELLA EDUCATION (CPLA, BUY, PT: $68)

Reiterate BUY: Valuation Quite Reasonable Given Earnings Upside in 2009

Thesis: We believe that Capella's specialized offerings to graduate students, investments in new academic
offerings, and the recent deployment of a new enterprise resource planning (ERP) system could enable
Capella to generate revenue growth of at least twenty percent annually over the next two years.

Capella operates one of the leading online universities that focus primarily on providing advanced degrees.
84% of Capella's 24,000 students are enrolled in graduate degree programs. We expect the company to face
increasing competition as it seeks to acquire undergraduate students.

Investments in programs and specializations in 2007 could drive revenue growth and operating margin
expansion in 2009. In 2007, Capella introduced six new degree programs and 31 new specializations. Management
has commented that it takes roughly four to six quarters for programs to reach breakeven point

We believe that Capella's results could be relatively insulated from economic challenges in the United States.
We note that two-thirds of Capella's students are enrolled in health and human services and education programs, two
verticals that are relatively acyclical. We acknowledge that 16-18% of students use tuition reimbursements to pay for
their degrees, which could impact results if employers eliminate these programs, although we think that scenario to be
somewhat unlikely.

In our opinion, revenue and EPS consensus estimates are far below what Capella could achieve in 2009.
Management remains one of the few market funded postsecondary companies that actually provides full year revenue
and operating margin guidance. Candidly, we are a bit perplexed and surprised that consensus estimates are at the
mid-point of guidance for both revenue and operating margins. The company continues to benefit from tailwinds
associated with the declining macroeconomic environment We attribute the Street's conservatism to Capella's
challenging 2008, where the company achieved the low-end of 2008 revenue guidance due to problems related to the
implementation of a new ERP system. To be very clear, we believe those problems are far behind them.
Maintain BUY rating and 12-month price target of $68, reflecting a -14x EV/2009 EBITDA multiple. Our multiple
reflects the company's strong revenue growth rate and operating leverage and is in-line with other education stocks
with similar revenue and operating margin characteristics.

78.4
78.6
91 .2
$325.8
2008A
EPS*"

ACTUAL

2010E

2009E
CURR.

PREV.

CONS.

CURR.

0 1 Mar
$0.45
$0.31A
$0.47E
$0.60E
02 Jun
0.37A
0.49E
0.63E
0.49
0.47E
0 .34A
03Sep
0 .60E
0.46
0 .66A
04 Dec
0.83E
0.81
1.05E
Year*
$1.66A
$2.26E
$2.22
$2.87E
P/ E
29.9x
22.0x
17.3x
Change
35.8%
27.2%
*Numbers may not add up due co rounding. ** ePS normalizedfor one-tmw expenses and tax benefits.

PREV.

CONS.
$0.59
0 .62
0 .61
1.04
$2.83

Company Information
52-Week Range
$34.78 - 66.85
Shares Outstand.
17.0 million
Insider/Institutional 23.1% INA
Public Float
14.7
Market Cap.
$0.8 billion
$0 I 0 million
ST/LT Debt
0.0%
Debt/Capital
26.1%
ROE
Net Cash &
$7.27
lnv/Share
$8.28
Book Value/Share

Source: Wedbush and company reports

-s.~

-...,:

~~
....,

Qe.

-~

r.....

..,_

-.Mlfjft'N-*'"'_... ~.,..

98 1Education

Ariel Sokol (212) 668-9874

-------------------------------------------VVEDBUSH

Risks to attainment of our share price target include the loss of regional accreditation, the loss of access to Title IV funding, the
loss of access to the Department of Defense's tuition assistance programs, increasing competition, service disruption's of the
company's technology infrastructure, regulatory changes by federal, state, and accreditation bodies, and financial misconduct of
other for-profit universities which could tarnish Capella's brand.

COMPANY OVERVIEW

Founded in 1991 by current Chairman of the Board Stephen Shank. In 1993 Capella University, then named The
Graduate School of America, offered Master's and Doctoral degrees through distance learning programs in
management, education, human services and interdisciplinary studies. In 1995 the company launched its programs
over the Internet. In 1999, the company changed its name to Capella University. In 2000, Capella began to offer fouryear Bachelor degrees.

IPO in 2006 with a secondary offering in 2007. In November 2006, Capella completed its IPO at an issue price of
$20/share, raising $75.0 million in net proceeds. In May 2007, Capella completed a secondary offering of 3.5 million
shares at $36/share.

In 1997, Capella received accreditation from the Higher Learning Commission of the North Central
Association of Colleges and Schools. Universities depend on accreditation in evaluating transfers of credit and
applications to graduate schools. Employers rely on the accredited status of institutions when evaluating a
candidate's credentials, and tuition reimbursement programs rely on accreditation for assurance that an institution
maintains quality educational standards. Accreditation allows the university to enroll students whose tuition are funded
by Title IV programs.

Ariel Sokol (212) 668-987 4

Education 1 99

VVEDBusw---------------------------------------------Exhibit 130: Multiples Analysis

Price
Fully Diluted Shares 1Q09E
Market Capitalization

Valuation@
Current Price of $49.70
2008A
2009E
2010E
$49.70
$49.70
$49.70
17.0
17.0
17.0
$845.4
$845.4
$845.4

Valuation@
12-Month Target Price of $68.00
2008.A
2009E
2010E
$68.00
$68.00
$68.00
17.0
17.0
17.0
$1,156.7
$1,156.7
$1,156.7

Less: Net Cash 1Q09E

(135.9)

(135.9)

(135.9)

~$7 .99)

~$7.99)

~$7.99)

$709.5
$41.71

$709.5
$41 .71

$709.5
$41 .71

(135.9)
($7.99)
$1,020.8
$60.01

(135.9)
($7.99)
$1,020.8
$60.01

(135.9)
($7.99)
$1,020.8
$60.01

EBITDA

$52.3

$70.8

$73.3

$52.3

$70.8

$73.3

EV IEBITDA

13.6x

10.0x

9.7x

19.5x

14.4x

13.9x

0.6x

0.6x

0.8x

0.9x

$1.66

$2.26
35.8%

$2.87
27.2%

$1.66

$2.26
35.8%

$2.87
27.2%

PI E Multiple (GAAP)

29.9x

22.0x

17.3x

40.9x

30.1x

23.7x

EPS, PF for Stock Options

$1.82

$2.44
34.3%

$3.13
27.9%

$1.82

$2.44
34.3%

$3.13
27.9%

PIE Multiple (Pro Forma for Options)

27.3x

20.3x

15.9x

37Ax

27.8x

21.8x

Free Cash Flow

$30.2
$1.78

$49.9
$2.93

$64.7
$3.81

$30.2
$1.78

$49.9
$2.93

$64.7
$3.81

23.5x
3.6%

14.2x
5.9%

11.0x
7 .7%

33.8x
2.6%

20.5X
4.3%

15.8x
5.6%

$272.3

$327.9

$393.5

$272.3

$327.9

$393.5

2.6x

2.2x

1.8x

3.7x

3Jx

2.6x

$44.6
$2.62

$65.9
$3.87

$80.7
$4.75

$44.6
.$2.62

$65.9
.$3.87

$80.7
$4.75

15.9x

10.8x

8.8x

22.9x

15.5x

12.6x

Net Cash I Share

Enterprise Value
EV I Share

PEG Ratio (GAAP EPS)

EPS, Normalized GAAP
%Change

% Change

Free Cash Flow I Share

EV I Free Cash Flow

Free Cash Flow Yield
Revenue
EV I Revenue
Operating Cash Flow
Operating Cash Flow I Share

EV I Operating Cash Flow

I
I

Source: Wedbush and company filings

100 1 Education

Ariel Sokol (212) 668-987 4

-------------------------------------------VVEDBUSH
Exhibit 131: CAPELLA EDUCATION Income Statement
~~~~~mi~~IIIIII..IE~EIII~~IIII~IIII~Dmllllilml~'~t!:llll~l~'~''l
' IIII~'EHl,llll~'~!tla:iill
Expenses as a % or Revenue
Instructional Costs and SeMces
MarkeOOg & Promotional

General & Admr.istrative

E"e<W Tax Rate

Expenses '4 Change YrNr
.,stnJclional Costs and Setvices

Matkelllg & Promotional

Gen eral & Admi nistrative

44.3%
30.8%
11,7%
34.6%

44.2%
30.4%
10.7%
34.8%

42.5%
29.7%
10.3%
36.0%

42 .0%
292%
10.1%
36.0%

44.5%
32.8 %
11.8%
35.4%

19.7%
23.2%
21.2%

20.2%
18.6%
IDA%

15.9%
17.9%
16.5%

18.6%
18.0%
17. 1%

23.4%
16.8%
292%

46.7%
29.6%
10.5%
34.3%

45.3%
31.9%
10.6%
34.2%

40.6%
27.6%
9 .9%
35.1%

25.4%
16.2%
6 .9%

19.4%
18.5%
0 .6%

13A%
23.0%
7.0%

Capella Educahon
2007A

226,236

2008A

lcpt A Cu ld a ns 1Ml '!i.

100, 129
120,347
69.779
82,733
26.378
29.113
186,286
232,193

~CtllnOtYdfr

Depreciation & Amortization

21 ' "

183"-

12,241
52,343

- eatDA~~~~~

9.772
39,722
17 ,n

Operating Income

29,950

40,102

EBITDA

2009E

>:; 10:

272,295

~h
Instructional Costs and Services
Maltceling & Promotional

9.7%

14.7'1!.
11. 1%

2Q09

1t~

327,943

I
139,474
97.544
33.926
270,944
181"-

13,768
70,767
tt.l"

56,999

.....

11..1%

Optn~ M)fll" "

BPSCt..la'rriYr

2010E

393,531

,.,.

165,401
115,085
39. 719
320,204

40.0%
27.0%
9,8%
36.0%

41.0%
31.5%
11 .0%
36.0%

44.5%
28.8%
10.0%
36.0%

43.5%
30.7%
10,0%
36.0%

15.6%
18.6%
17.2%

18A%
19.2%
17.5%

19.6%
19.2%
20.6%

18,6%
18.1%
17.9%

18.7%
18.0%
16.5%

18.6%
18.1%
17,6%

20D9E
QJA

Q4A

Q1E

Q2E

Q3E

Q4E

Q1E

Q2E

Q3E

Mar

Jun

Sep

Dec

Mar

Jun

Sep

De..:

Mar

Jun

Sep

65,251

6&,048

65,239

75,756

76.670

79,259

79.592

92,422

92,004

9S,111

9$,510

,..,.
,.'"'...

29,016
2 1,393
7.730
58,139

:u~

n~ort

'"'
243,.

(11~

30,844
19,573
6,968
57,385

"'"'
29,569
20,829
6.907
57,303

~"" ; 1Hft
1a

1e"'

1Jft

~~

30,919
20,939
7,508
59.366

31,818
24,534
$,587
64,939

73,327
, , ,..

73,327

..

1U%

,,.

2.765
9,877
16., ,

7,112

3.092
11,756
11,..

8.664

3, 192
11,128
11.1~

7,936

3, 192
19,582
~.f:'

16,390
21.6"

1U'.l

3,292
15.022
n.~

11.730
..SJ%

1,399

1,008

839

825

Income Taxet: (Benefit)

8,501
3.013

9,672
3.314

8,775
2.999

17,215
6,049

Net Income, Normalized

22,784

28,788

38,399

48,849

5,488

6,358

5,776

11,166

7,968

17. 141

17,321

17,010

17,0 10

17.894

17,303

17,077

17,010

17.010

Nonnaltzed IS to Pro Fo rma (whic h excludes stock opbon compensation)

Reconcthahon
2007A
2008A
2009E
2010E

E9T04M~f91'111.

0o~Ot.l)f91'1'1c.

,.,.

181~

35,6 86
23,223
8. 184
67,053

35,0 20
24.833
8 ,118
67,971

36,969
24.954
9.057
70,980

3,392
15,598
tt.1<4

12,206

3.592
25,034

11.620

21,442

..n

n.t"Xo

t4.4%

12,480
4.493

, .,..
, ...
:IO(N

2Q08

20'01>

;DOl<

~ ':10~

,..,.
"~

,.,.

42,324
27,392

41.547
29,322
9 .551
80,418

43.808
29,390
10,536
83,735

14,,.

37. 722
28,981
10.120
76,823

3,692
18,873
.20$'ll.

15,181

......

t20bp

9.51 1
79,227

4Q08

1QD9

,.

18~

181"

3.792
19,675

3 ,892
18,983

10.1%

..."""

.....,...,

.....

15,683

15,091

t:JObp

181'

180'

3,992
31,164
:tf-t"

27,172

750

750

750

750

750

750

22,192
7.989

15,931
5.735

16,633
5.988

15,841
5.703

27,922
10,052

8,292

7,917

14,203

10,196

10,645

10,138

17,870

17 .0 10

17.010

17.010

17,010

17.010

17.010

17.010

20D9E
3QD8

Dec

110,907

12,370
4,453

12,956
4 .684

20D8A
1QD8

3,492
15,112

r.C:;;P;'!L";~..
~':::,.~...
=.,-:,,;.,~;<':~:!'_!$';:.$%:;---";'" ..

ttSbp

3,000

Pro Forma (;Jieratr.g Profit

~~

,.~

18~

76,327
27.478

Pro Fonna EBITOA

14ltl.

211);1

,.3. .

18~

3.000

Stock Based Compensation

,.,,
"'"'

Q4E

lcr1 A r.o lsft!'!G !6-17ft'!

59,999
21.600

Shares Outstanding (Fully Diuted)

2010E

Q2A

44,163
15.375

EST

4Q09

44.0%
31.2%
10.2%
36.0%

Q1A

34,853
12,069

Other Income, net

3Q09

45.0%
29.3%
10.3%
36.0%

20D8A

Normalized Income Statement

(S 1n OOOs exc ept per share data)

General & A.._inlstratlve

Tola1 Operating Expenses

1QD9

2Q09

2010E
3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

3.392

4 .197

4 ,952

6,752

1,042

1,379

838

938

1,088

1. 188

1,288

1.388

1,538

1.638

1.738

1.838

43. 114

56.540

75.719

80,079

10,919

13. 135

11,968

20.520

16,110

16.768

16.400

26.422

,..,.

20.4 11

21 .313

20.721

33.002
2t8'

12.818

13,394

22,830

16,719

"~

33.342
... "'

"'~

44 ,299
183"-

61.951
!89~

,.~

80,079
iO ~

""'
,.,.

8,154

tilt,.

10,043
152~

18~

8,774
1341Y.

,.,.,,.

17,329
21~

liU,.,

~~

188tlo

-~

12,908
182"

"'"'

]U~

182'1.

2:l41~

17.521
184tr.

11'1'"

16.829
!1611.

29.010
282"

lii!B!IB!!I'li!IIIIIIIIIIE~EIII~~IIII~DII~mllllilmi~I~H:JIII~l~I~H']IIII~IEHil'IIII~~~Ha:MIIIIilml~llil:{ll~lGl!il,11llll~l!ilHI,:JIIIII!':l!:H!il:MIIIIilmi~'II''IIEIGiiBiJIIIII:'IIillilIIIII!ii[lllil''l
Nom>olill GAAP EPS Fully Di~tt<l
~$pttlfl'ttl1~1.~l!f$tilcfi0t')

$1.66
l&.O,.,

,. Ctllngtt YrNr

$2.26
3$$"

$2.87

""'

$0.31

""'

$0,37
3??'"

$0.34

""'

$0.68

,..,..

.. ,..

$0,47

$0.47
3?8"

$0. 83

""'

so.so

,,.,.

$0.63

,.,.

SD.69

2$4"'

$D.60

$1.05

$0.66

$1.12

,.,,.

,..

PF EPS Fulty Dilut ed

(~\u:l$$~tk~-(11;11111ti'IWOQI'I. Plt"ftl'-'

~.&llortmlllt'ttt.Ytottl

"' thlngt YrNt

Gt\AP EPS, Fulty Diluted

.,. Chw.;t YrlYr

....

$1.53

$1.33
252'1

$1.82

""'
$1.66
lSO,.,

S2A4
343:"

$2.26
3!.$,.

$3.13

$0.34

$0.42

$0.37

$0.69

'""
$2.87

""'

$0.51
4U"

$0.87

$0.37

$0.34

$0.66

$0.47

$0.53
1GBtl.

SOA9

$0.51
3:81"-

$0.47

"'"

$0.89

'"~
$0.83
1'f2,.

$0.66

$D.60

, ...

2U"'

,.,,.

$D.60

,.,,.

,.~

$1.05
,.~

Source: Wedbush and company filings

Ariel Sokol (212) 668-987 4

Education 1101

VVEDBusw---------------------------------------------Exhibit 132: CAPELLA EDUCATION Cash Flow Statement

Capella Education
Cash Flow Statement
(S m OOOs except p er share data)

Operati:ng Activities
Net Income
Provision for Bad Debts

Depreciation & Amortization Expense

Amclf1izatlon of lnveslment CM<:ouOO'Pretri'ur
Asset Impairment

Gail on Disposal of Assets

Stock C()f11>ensation Expense
Noncash Equity Related Expense
Excess Tax Benefi ts, Stock~Ba sed Cornp
Deferred l n cane Taxes

2003A
Q1A
2006A
13.411
2,855
8,195
(366)

2007A

C..sh Flo.w from CJoerations

%Ch angtYrfYr

CFOIShert
~ChranoeYriYr

Investing Activities
Caplal ExpencMure"S

F'reeCarshflow
'tliCher!oeYrffr

FCF ~.-ptn !FCFIReYef'IJe)

FCF IShwe
tbChtti~Vt/Yt

Purchase of ST "'vestments
Sale of S T Investments
Acquisitions

Othet
Cash Flow from Investing

2009E
Q3A
Sep

Q4E
Dec

Stock Issuance

Othe1

Cash Flow from Financing

2010E
Q3E
Sep

Q4E
Dec

Q1E
Mar

Q2E
Jun

Q3E
Sep

Q4E
Dec

48,8 49

5,488

6,358

5.776

11,166

7,998

8.292

7,917

14.203

10,196

10.645

10,138

17,87(

9 ,8 3S
15.368

1,141

1,328
3,092
496
11
(47)
1,379

1,413
3,192

1,364
3.192

1,533
3,292

1,585
3.392

1.910
3.492

2.218
3.592

2,300
3.692

2,378
3,792

2.388
3.8 92

3.99(

93S

1.088

1, 188

1,288

1.388

1.538

1,638

1,73S

1,83!

1,589
111.046

4 .307
18,914

(6,782
141619

716
16,442

1,785
20,233

5 ,0 60
23,216

18,844

344

(9,087)
2.955

(1,647)
(776)
( 1,600)

(2,452)
28,901

3,362
37,179

(3,0~)

28.6%
$2.17

(~3~

1~2""

(15.354)
13.547

(16,061)
21,118

441628

4 .952

6.752

1,466
65,352

(69)

30,739

'103'1

(14.391)
30.235

(16.000)
49,852

(16.000)
64,139

329b
111tb

.-

1889b

.....

$t.2~

1 ~,768

......
,, ...

.......

93..

$ 1.76
nm1

(181.980)
175,340

(248.275)
230,262

(74 ,707)
62,006

(21,994)

(34,074)

(27,092

(2,666)

( 1)

76.848
79

25.938
9.067

(54,201)
2.681
1,647

172.649)
1,612

35,004

49,373

8,519
13,972
22.491

38,109
22,491
6G,600

(32,339)
60.600
28.261

Stock Repurchase

Excess Tax Benefits. Stock-Based Comp

Change ., Reslncted C.sh

Q2E
Jun

7,247

4 1.&%

$'3.87

$4.76

,. ...
""" ,. ...
OTA

11<9..

16 ...
SUI

$2.$3

18.000)

(16,000

2,765
446
(169)
1.042

33
(9)

838

<m>

(400)
(24 2)

(964)

13
10,084

(2.218)
9,090

60.6%

17.9%

(5,71lfo

10 ~6

10.6>

$0.76

$0,73

<9890>

11201.

"""

39$10

(4 .449)
5,635

(2.609)

(2.833)
i 0,138

(345)

......
.... ,,.......
6,481

( 189)

1,761
1 ,971

, ..

2.372
16,273

3Ul<

61.1%

(4,500
l ,98f
121t
1061t

$0.69

IOA1

.,.. ...

(69.030)
38,010

(3.225)
16,486

(2.452)
7,510

35,469)

10,652

2,225

(18,213)

(31,787)
2.021

(4.201)

10.:17

(1,600)
(2.579)
t 2.431

I!.S9b

10 ...

10~ 1

.-

400
'

964

2,77,

~9

Sl"

13391-

(4,500

Financing Ac tivities

Deb<So""""'gs
Deb< Repayment

Q1E
Mar

3S.~99

33

$t.07

Q2A
Jun

5,246
12.24 1
1,3S1
44
(225)
4 ,197

3,392

,-...
-

Mar

28,788

83

.....

2010E

3,604
9.772

4,179
169
(79)
2.926

to.1)%

2009E

22,784

Othet
Changes i1 Waking Capi:al

2003A

283

(638)
29,440

3.256

(42,560)
60,600
18,040

(9,698)
18.040
8.342

11,938
8 .342
20.280

10~

~89<>

....... "'"

$1.19

46-'tb

171%

2fl1~

2279b

l89C

(4.000)
1 o.&19

(4,000)
14.442

(4.000)
16,238

(4.000)
19.216

(4,()0(
14,84<

331~

111~

288tb

398<.

1579b

171~

85990.

47ttb

1$0..

1S29il

1879b

S0-71

$0.98
47791.

(4,000

4,000)

.....

$1.08
1J39b

(4.000)
14,914

0111"'

(7,631

10.86

$1,1t

(4.000)
12.046

......

26.1%

22.7%
$1.36

(4.000)
12.U3
ttJflq&

I~ I;&

13.3%

4,000

.....

...

to.$2

IOS6

33 19t

177~

,. ...

(4,000)

(4,000)

4,000)

10.. .

660

638
17,175

..... ,....
76.6%

201~

$f.1'

134<

$1,13

10.81

28 ...

39~

(4,000

4,0()(

Exchange Rate mpacl

Net Increase In Cash

cash al Beginnhg of Year
Cash and at End of Year

49,852
28.161
78,113

64,739
78.113
142,852

7,981
20,280
28.261

12,273
28,261
40.534

12.046
40.534
52.580

14,914
52.580
67,494

10,619
67,494
78,113

14,442
78,113
92.555

16,238
92.555
108,793

19,216
108,793
128,009

14,84;
128,00!
142,85<

Source: Wedbush and company filmgs

102 1 Education

Ariel Sokol (212) 668-987 4

-------------------------------------------VVEDBUSH
Exhibit 133: CAPELLA EDUCATION Balance Sheet
2004A
Q4A

Capella Educatton
Balance Sheet

Accounts Receivable. net

Prepaid Expenses and O ther

Deferred Income Taxe-s

2006A
Q4A

2007A
Q4A
Dec

Q1A

2008A
Q2A

Q3A

2008A
Q4A

Restricted C ash

PP&E

Deferred Income Taxes

2009E
Q2E

Q3E

2009E
Q4E

Dec

Mar

Jun

Sep

Mar

Jun

72.133
7.720
4,758
1.243

87.661
7,401
3,703
1.800

143,767
7.557
12.593
1.896

131,853
8 .523
8 ,538
1.877

107,274
8 .852
7,400
1.889

113,816
11 ,318
8 ,267
1.876

123.597
11 ,949
5,184
3.477

135.870
10, 223
5 ,184
3 ,477

147,916
10.568
5 ,184
3.477

162.830
10 ,612
5 ,184
3.477

173.449
12.323
5 ,184
3.477

238,166
14.766
5,184
3 .4 77

60,312

85,854

100,565

165,813

150,791

125.484

135.277

144;207

154.754

167, 145

182.104

194,433

36,665

37,173

37,581

38,213

Dec

Sep

Dec

Dec

391
12,126
7,197

19,559
1,149

28,749

34,462

35,586

35,056

34,105

35,349

36.067

80,026

106,562

129,314

200,275

186,377

160,540

169,382

179,558

190,811

203,810

219,277

232, 014

3,144
12.253
140
6.526
314

4,222
17.223

6 ,089
23,826

3,989
25.990

4,764
18.072

5,451
19.932

5 ,002
18 .926

5 ,724
18 .926

2,338
18 .926

2,455
18.926

6 .476

6.941

7,875

10.900

2 ,227
18.926
150
9.495

4,168
18,926

8,044
2,647

5 ,113
18 .598
214
7,488
5

8,329

9.450

13.080

11 ,394

13.673

22.377

32,136

31,418

36, 391

36,920

30,711

36,283

30,798

31,444

33,378

37,730

32,658

2,366

1,813

1,167
335
5,508

1,247
335
5,210

1,239
335
4,436

1,262
335
4,269

1,321
531
6,009

1,321
531
"6",009

1,321
531
6,009

1,321
531
6,069

1,321
531
6,009

1,321
531
6 ,069

l5,569

43,401

43,712

36,721

42,149

38,719

39,365

41,299

45,651

40,579

14,414

93,745

156,874

142.665

123,819

127,233

140, 837

151,446

162,511

173,626

191,435

256,875

106,562

129,314

200,275

186,377

160,540

169,382

179,556

190,811

203,810

219,277

232,014

---m.s5ii

Othe<
Tolal Assets

2010E
Q4E

Dec

other c .....ent Assets

Total Currenc Assets

Q1E

49.980
5.878
3,056
1.398

($ m OOOs except per share data)

Cash & Cash E<rJival et~ts

2005A
Q4A

Liabililies
Accounts Payable

Accrued Uabilitie-s
Income T axes Payable

Deferred Re~~enue
Notes Payable

Other Current Uabilities

Total Current Liabilities
Deferred Rent

Other LT Uabilities

2,331

Deferred Income Taxes

l ong Term D ebt

Other
Total Uabilities

Othe<

34,502

57,646

57,646

(5)

Shareholder's Equity
Total Li abilities & SE

8
22.385

80.026

.-

Source: Wedbush and company filmgs

Public Companies Mentioned in this Report (priced as of close 3/24/09)

COMPANY
APOLLO GROUP
DEVRY
STRAYER
CAPELLA
AMERICAN PUBLIC EDUCATION
GRAND CANYON
CAREER EDUCATION
CORINTHIAN COLLEGES
UNIVERSAL TECHNICAL
LINCOLN TECHNICAL
ITT TECHNICAL
UBS
CREDIT SUISSE
FTI CONSULTING
CONAGRA
PEPSICO
INTERNATIONAL PAPER
GOLDMAN SACHS

Ariel Sokol (212) 668-987 4

TICKER

RATING

APOL
DV
STRA
CPLA
APE I
LOPE
CECO

BUY
BUY
BUY
BUY
HOLD
BUY
NR
NR
NR
NR
NR
NR
NR
NR
NR
NR
NR
NR

coco
UTI
LINC
ESI
UBS
CET
FTI
CAG
PEP
IP
GS

PRICE
$77.08
$47.65
$171 .65
$49.70
$41.05
$16.23
$22.49
$19.55
$11.41
$17.21
$116.20
$11 .40
$ 12.85
$32.81
$15.42
$51.53
$9.15
$110.33

PRICE TARGET
$90.00
$58
$210
$68.00
$42.00
$20.00
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA

Education 1103

VVEDBusw---------------------------------------------WEDBUSH MORGAN SECURITIES

Wedbush Morgan does and seeks to do business with companies covered in its research reports. Thus,
investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this
report. Investors should consider this report as only a single factor in making their investment decision.
ANALYST CERTIFICATION
I, Ariel Sokol , certify that the views expressed in this report accurately reflect my personal opinion and that I have not
and will not, directly or indirectly, receive compensation or other payments in connection with my specific
recommendations or views contained in this report.

IMPORTANT DISCLOSURES
~rgOni-atng ta oV(rvfiYHC;vr:;-;:
L)-------~
Closing Price Mer 24. 2009 4 7.G5

Wetllush Mo>110n riM(IS for APOL (APOllO GROll' INC)

Oosilg Pl'ice Mol 24, 2()0!1: 77 .08

/fP"

JoA

~~~nll;-t
i.Ag~nt'

;,~<J J

O<:t
2()07
""''
.,. DownOdlt
lntlie ted Jiold .A.Upgde
ln rti~hl:d Sell
Dropped

A-1

0<:1

"201)8

""''

<k>t

0<:1

2009

so

c;;: ln!ti41"Cd 8uy

'Co')s.tQ-tl.W"gtnd

h..ew)()..t.e"

t~.r.J

Oillw~il'clde
lnlti te:d tlold .&.upurde.

I:; 11'1ili4led Bwy

C lt~ iti -ted S_.ll Ia 0 1opped

r-rt~Raii-~sl'ROlfG"'
BUV"'.eoouv<V.U.HO""Lll"-c.s<><eiT
Ll - - - - - - - - - - - - +rrtC""
ha::C:
ng-;-r;:....,R"'.Jti""
o:-;;:
'l"i<:..=-fl'I
:0
STROJH', BUY, BUY. HOl1>. SEL'
' L- - - - - - - - - - - -1
. -

Vl'edi:JUShMorgon tll>ngs torLOPf(ORAND CANYONEDI\IC)

Oo:silg Price tv1or 24, 200 9: 16 23

Wedb!JShhtorgonrotn(IS fa- STRA(STRI'<VER ED IIIIC)

CloS!ngPriceN.or 24. 2009: 171.GS

r..(!\IU~

;,.tQtjl\0.

c::
=

fn rtiol~d

9uv

y Downa"dt

lnlliattel liOIO J/11.. UPQIdt

C lnttfted Sell I! Dro pped

.~

Cbnve ID RJbnO svstem: STRONG BUY: 8UY. HOLD. SELL

INVESTMENT RATINGS
STRONG BUY- The stock is expected to return at least 20% over the next 6-12 months.
BUY - The stock is expected to return at least 15% over the next 6-12 months.
HOLD- The stock is expected to return between -15% and +15% over the next 6-12 months.
SELL -The stock is expected to decline by at least 15% over the next 6-12 months.
DISTRIBUTION OF RATINGS (as of December 31, 2008)
BUY- 36% (1% of this rating category were investment banking clients within the last 12 months).
HOLD- 63% (3% of this rating category were investment banking clients within the last 12 months).
SELL- 1% (0% of this rating category were investment banking clients within the last 12 months).
The analysts responsible for preparing research reports do not receive compensation based on specific investment
banking activity. The analysts receive compensation that is based upon various factors including WWIS' total revenues,
a portion of which are generated by WWIS' investment banking activities.
WWIS makes a market in the securities mentioned herein.
WWIS changed its rating system from (BUY/ HOLD/SELL) to (STRONG BUY/BUY/HOLD/SELL) on January 5, 2006.
Additional information is available upon request by contacting Ellen Kang in the Research Department at (213) 6884529, or by email to ellen .kang@wedbush.com, or the Business Conduct Department at (213) 688-8090.

104 1 Education

Ariel Sokol (212) 668-987 4

-------------------------------------------VVEDBUSH
OTHER DISCLOSURES
RESEARCH DEPT.* (213) 688-4505 * www.wedbush.com
INSTITUTIONAL TRADING Los Angeles (213) 688-4470 I (800) 421-0178 * INSTITUTIONAL SALES Los Angeles (800) 444-8076
CORPORATE HEADQUARTERS (213) 688-8000
The information herein is based on sources that we consider reliable , but its accuracy is not guaranteed. The information contained herein is not a
representation by this corporation, nor is any recommendation made herein based on any privileged information. This information is not intended to
be nor should it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation of an offer to sell or buy any security
mentioned herein. This firm , Wed bush Morgan Securities, its officers, employees, and members of their families, or any one or more of them, and its
discretionary and advisory accounts, may have a position in any security discussed herein or in related securities and may make, from time to time,
purchases or sales thereof in the open market or otherwise. The information and expressions of opinion contained herein are subject to change
without further notice. The herein mentioned securities may be sold to or bought from customers on a principal basis by this firm . Additional
information with respect to the information contained herein may be obtained upon request.

Ariel Sokol (212) 668-987 4

Education 1105

WEDBUSH
RESEARCH DEPARTMENT
(213) 688-4529
DIRECTOR OF RESEARCH
Mark D. Benson (213) 688-4435

INDUSTRIAL MATERIALS AND SERVICES

TECHNOLOGY

Industrial Materials & Services

AI Kaschalk ......................................... (213) 688-4539
Christine Hersey........ .... .. ...... ... .. . ... ... . (213) 688-4311

Communications Equipment
Rohit Chopra ... .. . .. . .. . .. . ... .. . ... .. . ... .. . .. . . (212) 668-9871
Sanjit Singh . .. ... .. . ... .. .. .. .. .... .. .. .. ... .. . ... (212) 938-9922

CONSUMER PRODUCTS AND SERVICES

Communications Technology
Matthew Robison................................ . (415) 263-6659
Leo Choi ........................................... (415) 263-6669

Consumer Products
Rommel T. Dionisio .. . ... .. . .. .... ..... .. . ..
Kurt M. Frederick, CPA ...... ......... . ..

(213) 688-4418
(213) 688-4459

Datacenter Technologies
Kaushik Roy .. ......... .. ..... ... ...... ... ... ....... (415) 274-6873

Consumer & Retail

Mark D. Mandel, CFA ........................... (212) 328-9542

Software: Enterprise Applications I SaaS

Michael B. Nemeroff... . ... .. . ... ... ... .. .. . .. . . (212) 668-9876
David Giesecke......... ..... ... .. . .. . ... .. . .. .... (212) 938-9925

Education
Ariel Sokol .... ......

(212) 668-9874

Entertainment Retail
(213) 688-447 4
Michael Pachter .......... . ..... .. .
(213) 688-4382
Edward Woo, CFA ... . .. ...... .... .. ..... .
Chris White.
.. .. . .... .. . ... ..... ..... .. . (21 3) 688-4423
Footwear & Apparel
Jeff Mintz, CFA... ... ... ... ... .... ... ... ... ... .... (213) 688-4518
David Epstein .. .... .. .. .. .. .. .... ..... . .. . . .. ... (213) 688-6624
Restaurants
Brian Moore ... .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. .. . (213) 688-4319
Specialty Retail: Hardlines
Joan L. Storms, CFA ......... .................. (213) 688-4537
John Garrett............... .. . ... .. . .. . .. . ...... .. . (213) 688-4523
Specialty Retail: Softlines
Betty Chen .. . ... ... ... ...... .. ......... .. . ......... (415) 273-7328
Connie Wong ...................................... (415) 273-7315
Specialty Retail: Sporting Goods
Jeff Mintz, CFA .................................... (213) 688-4518
David Epstein .. . .. . .. .. .. . .. . .. .. .. . .. . .. . .. .. . .. . (213) 688-6624
ENTERTAINMENT AND MEDIA
Advertising & Broadcasting
James Dix, CFA ... ............................... (213) 688-4315
Sken Huang .. .. .. .. .. .. .. .. .. .. .. .. .. .. ... .. ..... (213) 688-4503
Entertainment: Software
Michael Pachter ....... ........... .. ............. (213) 688-4474
Edward Woo, CFA ... ...... .... ...... ...... ..... (213) 688-4382
Chris White........................................ (213) 688-4423
Entertainment: Toys
Chris White . ........ .. . .. ......... .... .. . .......... (213) 688-4423
Edward Woo, CFA .............................. (213) 688-4382

Software: Data Base/Analytics & Internet Optimization

J. Derrick Wood, CFA ........................... (415) 274-6822
Internet: Infrastructure
Kerry Rice, CPA ... ......... ..... .. .. ..

(213) 688-4538

Next Generation Tech

AI Kaschalk............ ... ... ... ....... ... .. . ... ... . (213) 688-4539
Christine Hersey.... .. ... .... .. .. .. .. . ... .. . ... . (213) 688-4311
Semiconductors
Patrick Wang... .................................. (212) 938-9938
Michael Lucarelli.................... .. ........... . (212) 938-9927
Telecommunications Software
Scott P. Sutherland, CFA .. . .. . ... .. . ... ..... . (213) 688-4522
Transaction Processors
Gil B. Luria.......................................... (213) 688-4501
Nick Setyan.. . . .. ...... . ... ... . ... .. . ... ... .. . ... . (213) 688-4519
Wireless Equipment
Scott P. Sutherland, CFA ...... ...... ......... (213) 688-4522
LIFE SCIENCES
Biotechnology I Biopharmaceuticals
Gregory R. Wade, Ph.D ........................ (415) 274-6863
Richard Lau ............. . .. . ................. . .... (415) 274-6851
Kimberly Lee, D.O...
. .. .......... .. .. ... (415) 274-6842
Cardiovascular, Devices & Regenerative
Duane Nash, MD JD MBA .............. ....... (415) 263-6650
Emerging Pharmaceuticals
Liana Moussatos, Ph.D ..

(415) 263-6626

Life Sciences Tools & Diagnostics

Un K Kwon-Casado, M.SC .................... (415) 263-6634
Specialty Pharmaceuticals
Patricia Bank .. . ..... ....... .. ........ .. .. .... .. . . (415) 263-6646

Movies & Entertainment

Chris White . ........ .. . .. .. ......... . .. ...... ... .... (213) 688-4423
Michael Pachter....
.. .... .. . .... .. . .. . (213) 688-447 4
Internet Advertising/Media
Edward Woo, CFA ............. .................. (213) 688-4382
INSTITUTIONAL SALES
Los Angeles
San Francisco
New York
Boston

INSTITUTIONAL TRADING

(213) 688-4470 I (800) 444-8076

(415) 274-6800
(212) 668-9868
(617) 832-3700

Los Angeles
San Francisco
New York
Boston

CORPORATE HEADQUARTERS
1000 Wilshire Blvd., Los Angeles, CA 90017-2465
www.wedbush.com
Tel: (213) 688-8000

(213) 688-4470 I (800) 421-0178

(415) 27 4-6800
(212) 344-2382
(617) 832-3700

N FBR

CAPITAL MARKETS

Proprietary Schools 1 01:

Coverage Initiation

January 14, 2010

Matt Snowling, CFA

703.469.1196
msnowling@fbr.com

Bill Jackson, CFA

703.469.1171
bj ackson@fbr.com

Education Services
FBR Capital Market s

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Important disclosures can be found at the end of this report.

Table of Contents
Investment Thesis ............. ........ ........................ ........ ........................ ........ ........................ ........ ........................ ........ ..........3
Industry Valuation

...............

...............

...............

...............

.......... .4

Industry Overview ................................................................................................................................................................ 5

Enrollment Growth Drivers .......................................................................................................................................... 6

.. 10

Student Value Proposition

Business Model ..................... ........ ............ ........ .... ........ ............ ........ .... ........ ............ ............... ............ ........ .... .......... 11
Federal Student Aid ....................................... .... ........ ................... .... ........ ................... ..... .... ........ ......................... 12
Student Profitabili ty Comparison ........................... .. ......................... .. .............................. .. ................................... .. ... 12
Regulatory Thesis .......................... .. .. .. .......................... .. ......................... .. ......................... .. .............................. .. ............. 14
Key Regulatory Issues ........... .. .............................. .. .............................. .. ......................... .. .............................. .. .. .. .... 16
Risks ........

............................................................................................................................................................ .23

Companies Coveted
Career Education Corporation (CECO)
DeVry lnc. (DV). .. ..................

.. ........... ..

Apollo Group, Tnc. (APOL) ................... ..

......... 25

.. ... .42

.. .... 57

Corinthian Colleges, Inc. (COCO)..................... ............ .................... ............ .................... ...................... ............ ............... 75

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

January 14, 2010

Proprietary Schools 101: Coverage Initiation

Summary and Recommendation
We are initiating coverage of the proprietary school industry-DeVry lnc. (DV- Outperform, $68.00 price target), Apollo
Group. Inc. (APOL- Market Perform. $70.00 price target), Corinthian Colleges. Inc. (COCO- Market Perfonn, $15.00 price
target). and Career Education Corporation (CECO- Underperfonn, $22.00 price target). Although we view ti1e industry as
well positioned over the long term. we expect enrollment growth to track below the long-term rate and to decline on an
absolute basis in certain cases as the macroeconomic environment- and higher federal loan limit-driven surge in enrollment
reverses and as stattJtory limits related to the receipt of Title IV ftmds present challenges for many schools in 2010 and 2011.
As such, we are recommending that investors tmderweight tl1e industry tmtil such a slowdown is fully discounted in ti1e group.

Key Points

C ha llenges to enrollment growth. We believe t11at the surge in enrollment growth experienced by the industry over tile
previous 24 montlls was caused by the combination of rising unemployment and an tmprecedented increase in federal
student aid. As ti1e job market stabilizes and eventually recovers, we expect enrollment levels to decline for those
certificate and associate's degree programs that tend to be rather countercyclical. Additionally, as the higher federal loan
i gher Pelt Grants anniversary, this will make future enrollment comparisons more difficult to achieve. In fact,
limits and h_
after a 27% rise in federal loan volume for proprietary schools in academic year (A Y) 2008-2009, originations actually
declined 8% in the most recent quarter. Although the increase in Pel! Grants likely siphoned loan demand away, we
expect Congress will not be as forthcoming with higher funding for grants in the future, given budgetary constraints.
Perhaps our biggest concern is that many of the schools are approaching statutory limits imposed by the 90-10 Rule and
cohort default rates (CDRs) that will likely require significant changes to how and what types of students are enrolled.

Regulato r-y issues to increase OJlerating costs. It is our view that the Obama Administration, not Congress, will use its
existing authority to impose stTicter controls on the proprietary schools industry. We expect most, if not all, of the safe
harbor provisions related to enrollment-based compensation to be eliminated and stTicter standards for ability-to-benefit
(ATB) students to be imposed. We expect these changes. as well as greater scrutiny regarding the accreditation of online
educational progrdms. to increase operating costs for ti1e industty.

Long-term outlook Looking out over the long tenn, we believe tllfJt demof,>rdphics and the greater acceptance of
proprietary schools among students and employers alike support attractive grow til opportunities for tlle proprietary school
industry. We believe ti1at tl1e winners will be tl1ose schools that can differentiate tl1emselves by using botll bnmd and
products in what is becoming an increasingly cmmnoditized market for online education. Ultimately, the winners must be
able to demonstrdte an ability to deliver an attrdctive value proposition to students and alleviate policy maker concerns
related to student outcomes and the cost of education for students and taxpayers. Considering t11at the lifetime default rdte
for students attending many proprietary schools is upwards of 50%, we tilink ti1at there will be many losers along the way.
We favor those schools t11at consistently demonstrdte higher student completion rates, lower dependence on federal student
aid, and lower student default rdtes. We believe such schools are wmth paying up for-particularly at this point in the
economic cycle and against a backdrop of increasing regulatory tmcertainty.

FBR CAPITAL MARKETS

Institutional Brokerage, Research and Investment Banking

Investment Thesis
We view the long-term demographic outlook for the proprietary education industry as al'tTactive, as
propriel'ary schools are becoming more accepted by nontraditional students and employers aljke.
Additionally, the group' s recent underperfonnance has made many of the stocks attractive from a valuation
perspective. Despite these positive factors. our concerns regarding slowing enrollment related to
macroeconomic factors and a ch~mging regulatory environment keep us from becoming more constmctive on
the space in the near term. We expect regulatory issues. an eventual job market recovery, and concerns over
the " education bubble" to limit upside potential for the group. As such. we are initiating coverage of tl1e forprofit education industry witl1 an Underweight sector recommendation.

FBR Coverage Stock Data

lic ker
APOL
CECO

coco

Com pany
.Apollo Group
Career Education Corp.
Corin1hian Colleges

DV
~Vrylnc.
..
Pncmg as of January 12, 2010.

FBR Rating
Market Perform
Underperfurm
Market Perform
Wperform

Price
Target
$70.00
$22.00
$15.00
$68.00

Price
$59.65
$24.18
$13.65
$56.11

Mk tCap
$9,21 1
$2,092
$1 ,196
$3,985

Avg. Oaily
Volume
3,775,492
1 ,763,418
2,264,906
1,114,345

Short
Intere st%
7.7()0/o
12.89%
27.64%
3.15%

Source: FactSet and FBR Research

FBR Coverage Earnings Estimates

licker
APOL
CECO

coco

Company
Apollo Group
Career Education Corp.
Corin1hian Colleges

~Vrylnc.
DV
..
Pncmg as of January 12, 2010.

FBR Rat ing

Market Perform
Underper10rm
Market Perform
Outperform

FY End
August
December
June
June

FBR Es ti mates
FY09
FY10
FY11
$3.75A
$5.08
$5.86
$0.90
$1 .93
$1 .88
$0.81 A
$1.62
$1 .78
$3.97
$2.28 A
$3.3.3

Cons en sus Esti mates

FY09
FY10
FY11
$3.75A
$5.50
$6.06
$0.87
$1.97
$2.27
$0.81 A
$1 .59
$1.89
$2.28A
$324
$3.95

Source: FactSet and FBR Research

Altl10ugh we view the industry ' s long-tem1 demographic trends as attractive, we l'hink l'11at the indust:Jy faces
a number of challenges in 2010-2011. Specifically, we are concerned about several issues that could limit
growth opportunities or even lead to declines in enrollment levels in the near term despite the fact that longterm growt11 drivers remain in place. Our concerns are as follows:

Countercyclicality. We believe t11atl'11e recent unemployment-led surge in enrollment at for-profit

schools wi_LI reverse as U1e eventual improvement in the job market lures student's back to work. Student
enrollment at the publicly traded schools has spiked more t11an 30% since l'lle end of 2008. Tllis
countercyclicaJity has creal'ed a boom for t11e schools. making year-over-year starts and l'ol'al enrollment
comparisons more difficult. Furt11ennore. we are concerned that the current' economic enviromnent may
have pulled future enrollment demand forward. making growth in 2010-2011 more difficult to achieve.

90-10 Rule. Almost aJl of t11e reported increases in revenues during FY09 were matched increases in
TiUe IV receipts, as Congress raised Pell Gnmt and Stafford loan limits in 2008. The higher Til'le IV
limits allowed most schools to pass on higher tuition mtes while providing the necessary funding to
support higher enrollment levels. Because enrollment growth has been accompanied by increased usage
of Til'le IV funding, many schools have moved closer to the caps imposed by the Department of
Education (ED) regarding how much Title IV funding a school can receive. Tllis limit, known as tl1e 9010 Rule, could hamper many schools' ability to increase enrollment in certain certificate and associate's
degree programs t11at have contributed substantially to enrollment growth across the industry and are
disproportionately dependent on federal financial aid programs.

IncentiV(_'- based compensation. We expect ilie Obama Administration to eliminate safe harbor
provisions regarding incentive-based compensation for enrollment counselors. Proprietal)' schools in
general are very dependent on m~uketing to attmct new stl1dents. When we consider that l'11e peer group
we reviewed spends 27%, on average, of its revenues attracting and enrolling new students-much of

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

which is in t11e fonn of compensation for its enrollment counselors-we see that any restrictions could
result in significantly higher costs per new student, not to mention t11e potential inability to reach certain
prospective students.

Cohor t defau lt r ates. The move to measure schools' CDRs over a three-year period. rather tl1an tl1e
current two-year standard. is likely to put many schools at greater risk of losing eligibility to participate
in federal student aid (FSA) pro!,'Tllms. Although schools have the ability to reduce ti1e default rates by
instituting default prevention progr'd.IDS for alumni/prior students. doing so will require additional
staffing and resources and result in higher operating expenses. Most schools have two more years to
adjust before losing Title IV eligibility, so there is enough time to put such programs in place. but ti1e
difficult job market is likely to push student defaults higher before such programs can become effective.
Although we think it is unlikely that any of the companies we cover will have schools lose eligibility. we
do expect the cost of remaining below regulatory thresholds to manifest itself in slower enrollment
growth and in higher overhead.

Education bub ble. According to the Department of Education, 4 7% of student borrowers attending
two-year proprietary schools are expected to default on their loans-three times the overall student
default rate. To be clear, not all schools are created equal due to the different populations tl1at they
serve, but we question t11e long-tenn viability of a business in which nearly half of its customers are
unable to pay for the product. Currently, taxpayers are subsidizing tl1is e>..'Pense, but as proprietary
schools consume more and more federal dollars, we wottld expect the government to demand better
results.

Commoditization. As proprietary schools continue to offer more courses online, we believe that the
industry will become increasingly commoditized, potentially resulting in increased pricing pressure and
competition. Ultimately, we believe that this trend will favor schools witl1 stronger brand reputations
and those in good standing with accreditors, as new online programs can be rolled out relatively quickly
to meet the changing environment.

Industry Valuation
From a historical standpoint. the group is attractively valued, trading at a 6% premium to the S&P 500,
versus the long-tenn average premium of approximately 60%. We believe this is a result of heightened
investor concern regarding declining enrollment and increased regulatory scrutiny weighed agajnst the stillstrong cash flows t11at many of the companies are generating.

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Historical Forward P/E Multiples Relative to S&P 500

2.4
2.2
2
1.8
1.6
1.4

1.2

0.8
,.._

a)

a)

C>
~

C>

~
~

C>

0
0

e ~ e
~

<')

<')

1/)

1/)

<D

e"" ""~ e ~ e
~

<D
0

,.._

,.._

0.6
a)

a)

C>

e ~ e ~ e
~

C>
0

C\i
~
~

- - A'oprietary School Peer Group Forward A'Evs . S&P500- Based on Consensus Next-12-Months Estirrates

Source: FactSet, First Call, and FBR Research

Industry Overview
Higher education is big business. and business has been good. According to the Department of Education's
most recent data. the approximately 19 million students enrolled in eligible post-secondary institutions spent
nearly $108 billion on just tuition ~md fees alone in FY07. Total enrollment is eA.-pected to increase by 1.4
million students by FY17-and tll.is was before President Obama's call for every American to commit to at
least one year of college or career training. Because most traditional education institutions are already near
capacity, private for-profit (or proprietary) schools are positioned to pick up much of t11e demand. Overal I.
there are approximately 2.800 proprietary schools representing 40% of aU higher education institulions in the
U.S.: tllesc schools are educating 1.5 m:illion students. or less t11an 8% of the total student population.
Despite the smaller student population. compared with traditional coUeges and universities, proprietary
schools captured more t11an 14% of the entire pool of tuition dotlars spent for the most recent year for which
data are available (2007). Altl10ugh the proprietary school industry remains fragmented. industry
consolidation accelerated in t11e 1990s. when the first for-profit schools went public. Today. the seven
biggest publicly traded for-profit schools account for approximately 5% of total postsecondary enrollment
and for 50% of proprietary school enrollment.
By far, the fastest-!,>rowing se!,'lnent of t11e higher education market is de!,>ree-granting for-profit institutions.
While total higher education enrollment has grown at a compotmd annual rate of 2% over the past 10 ye~us,
for-profit schools have increased enrollment at a 14% compotmd annual rate. Traditionally, proprietary
schools have provided mostly vocational and career-oriented education to nontraditional students over the
age of25. The target student population is generally looking to acquire or improve ski lls directly related to
earnings potential rather than to obtain a liberal arts education. This target market of older students accounts
for approximately 37% of overall postsecondary enrollment but represents 66% of enrollment at private forprofit schools. To service litis student population, proprietary schools generally make classes avai lable in a
maru1er more suitable to these students by offering rolling admissions, accelerated programs, night and
weekend classes, and online courses.
Demo!,>rdpll.ic trends witll.in the targeted nontraditional population segment. coupled witl1 capacity constraints
of the lrdditional not-for-profit schools. should support strong demand throughout tl1e neA.1 decade. However,
almost ~my ll.igher education institution' s ability to support enrollment !,JTOWtll is ineA.1ricab1y linked to access

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

to federal student aid, primarily administered via the Title N program. Overall, approximately 73% of all
students enrolled in for-profit institutions receive some fonn of student aid, wiU1 students attending two-year
and diploma-granting programs even more dependent on aid. Title N funding is critical to support tuition
payments and the amount of relatively affordable student aid available plays an important role in dictating
tuition pricing. This is particu.larly true in the proprietaty school sector, as t11e nontraditional students served
by such schools tend to be more dependent on loans ~md grdllts to pay for college than students enrolled in
not-for-profit institutions. Proprietary schools collected more than $22 billion, or 22% of all federal student
aid in academic year (AY) 2008-2009. despite only representing 8% of the student population. As a result. a
school's ability to qualify and remain eligible for the receipt of Title IV aid is parammmt to the institution's
operations. while changes in the level and availability of aid to prospective students are key drivers of
enrollment.
The industry' s dependence on t11e federal government to provide funding for students makes proprietary
schools particularly vulnerable to regulatory risk, in our opinion. With so much public money at stake, issues
such as low graduation and job placement rates, high student loan defaults. open admissions, a11d incentivebased compensation for enrollment counselors are becoming tlashpoints for greater scrutiny in Washington.
Ultimately, the success of any business relies on the value proposition that it offers to its customers, and
proprietary schools are no different. Workers with college educations typically have higher wages and lower
unemployment levels than individuals with less education, which more than supports t11e up-front investment
necessaty to obtain an education. Those statistics, however, typically only apply to students who graduate,
and they ignore those tJ1at fail to complete their programs. Drop-out rates at proprietaty schools tend to nm
much higher than at traditional schools, which leads to higher student default rates, among other factors. at
proprietary schools. The higher drop-out rates suggest that many students at proprietary schools would have
been bet1cr off financially if they had not attended the program at all. Accordingly , alt11ough t11e goal of a
college education for all may be noble, we believe llwt tighter regu.latoty scm tiny of t11e lending process is
necessary to prevent the creation of an unsustainable education bubble.

Enrollment Growth Drivers

In our view, there are multiple factors driving botl1 secular and cyclical enrollment growth in the proprietary
school industry . As a result, our long-tenn expectation of conllnued secular growth is somewhat at odds with
our shorter-tenn view that countercyclical enrollment growth may have peaked.

Secular Growth Drivers

Education pays. At its core, the key value proposition of an education, particularly vocational or skillspecific programs, is ~m improved quality of life, higher wages. and better employment prospects. As the
U.S. continues to drift away from a manufacturing-based economy and toward a service-based economy,
education and/or teclmical training is becoming an even greater necessity than in prior decades. Demand for
skilled labor in the service sector has grown rapidly during the last 20 years, requiring many nontraditional
students to enhance their skill sets to increase employability and earnings power. The strong demand in the
labor matket for skilled, educated workers can be seen by Lhe sharp differential in bot11 wages and
unemployment levels between students wit11 and wit11out. postsecondary degrees.

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Median Weekly Earnings in 2008 by Level of Education Attained (Employed Workers)

$1 ,800
$1,600

$1 ,400
r--

$1 ,200
$1 ,000

r--

$800

$600

r--

$400

r--

$200
$0

Source: Bureau ofLabor Statistics and FBR Research

Recently, the differential in labor conditions fo r workers with and witl1out postsecondary degrees has
expanded dramatically, as evidenced by the unemployment rates of college-educated workers, compared with
those of workers with high school educations onJy. The differential between the unemployment rate of two
segments of the workforce expanded from 2% historically to more than 6%, as the downturn in the economy
hit the unskilled segment significantly harder.
Unemployment Rate Differential between High School and College Graduates
12%
10%
8%
6%
4%
2%
0%
'00

'01

'02

'03

'04

'05

'00

'07

'08

'09

Difference Between the Two

Unemployment rate- 25 years & Over, High School Graduates, No College
Unemployment Rate - 25 years & Over, Bachelor's Degree or Higher
Source: FaccSet, Bureau ojLc1bOr Statistics. and FBR Research

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

The trend in unemployment levels confinns tJ1e value of a degree in securing employment, and the greater
number of unemployed unskilled workers has created a larger pool of unemployed workers without degrees
fTom which proprietal)' schools can auract new students. This dynamic has contributed to the countercyclical
nature of enrollment in diploma and associate's degree programs, in our view.
Convenience. One of the appeals offered by many proprietary schools over more traditional schools is that
of convenience. Most proprietary schools do not require entrance exams such as the SAT or ACT. while
they do offer accelerated programs, night and weekend classes. and courses tailored specifically to the area of
study-all designed to help students complete t11eir educations and reenter the job market as soon as possible.
Local community colleges often offer similar programs that directly compete witl1 proprietary schools but at
lower prices. So, how is it that students choose the more expensive, for-profit product more often tl1an not?
The simple answer is convenience. Technically, a community college may offer similar classes, but if the
capacity is limited or the class is scheduled at a time that is inconvenient for a working adult to attend, a
student may choose a proprietary school instead. From a student's standpoint, the higher cost of attending a
proprietary school can be wortl1 the price, especially when obtaining tl1e degree can increase one's earnings
potential.
Online education. The use of the Jntemet to deliver online classes is an important and growing part of the
business models of many for-profit schools. Online classes are appealing to the institutions for a number of
reasons. not the least being lower costs per student and even greater scalability. Online classes provide
growth opportunities for institutions by elinlinating the need to overcome such barriers as geography and the
building of new campuses. Aside from tl1e obvious benefits of lowering the cost to educate, online classes
are becoming increasingly attractive for students themselves. The ability to "attend" class at anytime of the
day, witl1out the added time and cost of commuting to campus. appeals to many st11dents witl1lifestyles or
work schedules that make attending classes online more attractive than going to a traditional "brick and
mortar" school.
The migration to online education is not without challenges. Drop-out rates for students attending online
classes often run significantly higher than for those attending traditional, on-site classes. Many schools are
finding that a mixture of online and in-person classes can improve student retention. Additionally, the
University of Phoenix is installing student support centers in various locations to provide a physical work
environment for online students. Given the strong correlation between dropouts and student loan defaults, a
mix shift toward more online students can lead to higher school CDRs. Furtl1ermore, a recent report issued
by the Department of Education' s Office of Inspector General raised questions regarding how an
accreditation agency overlooked problems with how an institution measured credit hours and pro!,>Talnlength
of online courses. Tracking student attendance onlirle also has ramifications for revenue recognition and
Title IV refunding issues.
Greater acceptance/legitimacy. Over time, as the hundreds of thousands of students that graduate each year
from these proprietary schools enter the workforce, the acceptance and legitimacy of the programs has
increased. Although the programs' acceptance in t11e workforce is an intangible factor tl1at is hard to
measure, we believe t11at the insbtutions' higher quality standards and increased brand awareness, due in
large part to advertising campajgns, has added to the acceptance of these schools as providers of employees
in the workforce. As these institutions grow in size (University of Phoenix is the largest higher education
institution in the U.S.) and produce more-qualified associate's, tmdergTaduate. and graduate educated
workers, we believe that the acceptance of t11ese schools will continue to gTow.
Skilled labor demand. Based on projections from the Bureau of Labor Statistics, many of t11e jobs "'ritl1 t11e
most favorable growth dynamics require either a general postsecondary degree or a position-oriented
certificate/diploma. Proprietary schools have proven to be more flexible in adjusting t11eir curricula to match
the changing employment landscape than their traditional school competitors. It is no coincidence t11at the
proprietary schools have higher concentrations of programs aimed at employing graduates as nurses, medical
assistants, network systems analysts, education professionals, culinary artists, etc. that are forecasted to have
the highest growt11 in jobs in the coming years.

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Fastest-Growing Occupations and Degree Requirements, 2006-2016E

2006 National Employment Matrix code and tiUe
EmploymentliUe

Employment (OOOs}

Percent Number Median Annual Wages

2016

2006

Change
Most significant source of postsecondary education or training

1 Network sy&ems and data communications analysts

262

402

53%

140 $46,360 and above

Bachelo(s degree

2 Personal and home care aides

767

1,156

51 %

389 $21,220 and below

Short-term on-the-job training

3 Horne health aides

4 Computer software engineers

787
507

1,171

49%
45%

384 $21,220 and below

226 $46,360 and above

Short-term on-th e-job training

Bache lo(s degree

5 Veterinary technologi&s and technicians

733

71

100

41%

29 $21 ,260 k> $30 ,560

Associate's degree

6 Personal financial advisors

176

248

41 %

Bachelo(s degree

7 Makeup artists, theatrical and performance

2
417

40%
35%

72 $46,360 and above

1 $30,630 to $46,300
148 $21,260 lo $30,560

35%

22 $46,360 and above

Fir& professional degree

34%

29 $30,630 k> $46,300

Bachelo(s degree

8 Medical assislants
9 Veterinarians
10 Substance abuse and behavioral diSQ(der counselors

62
83

565
84
112

post-5econdary vocational aVIard

Moderate-term on-the-job training

Source: Bureau ofLabor Statistics and FBR Research

Most New Jobs, 2006-2016E

Employment (OOOs)
2006 National Employment Matrix code and title

1 Registered nu rses
Retail salesper sons

Custorrer service representatives

4 Combined food preparaion and serving 'Mlfkers, including fast food
5 Office clelks, general
Personal and h ome care aides
Home health aides

S Postsecondary teachers
S Jamors and cleaners, except maids and housekeeping cleaners
1C Nursing aides, orderlies, and attendants

Chang:!

2006

2016

2 ,500
4,477
2,202

3,092
5,034
2,747

587

2,503
3,200
767
787

2,955
3 ,604
1,156
1 ,171

452

1,672

2,054
2 ,7'$2

2,387
1,447

1,711

Number

557

545
404
389
384
382

345
234

Percent
23.5
12.4
24.8
18. 1
12.6
::0.6
48.7

22.9
14.5
18.2

Median Annual Wage

Most significant source of postsecondary

edu:ation or training

546,360 and a beNe

Associate's degee

$21,220 and below

$21 ,200to $33,560
$21 ,220 and below

Short-lerm on-lhe-job training

Moderale-term on-the-job training
Short-lerm on-lhe-job training

$21,200 to $33,560
$21,220 and below
$21 ,220 and below

Short-lerm on-lhe-job training

Short-lerm on-lhe-job training
Short-lerm on-lhe-job training

546,360 and a beNe

$21,220 and below
S21 ,200to $33,560

Doctoral degee
Short-term on-lhe-job training
Postsecondary vocational aw.;~rd

Source: Bureau ofLabor Statistics and FBR Research

Cyclical Growth Drivers

Unem1>loyment. Although proprietal)' schools are well positioned to educate workers and improve students'
future employability, the recent surge in student enrollment levels could be difficult to maintain in the near
tenn. An individual's decision to invest in an education is traditionally more countercyclka1 tl1an
procyclical. Said differentJy, in a robust job market. the opportunity costs for workers is higher tJ1an during a
period of high underemployment or unemployment.
When the inevitable reversal of the current job market occurs, we expect enrollment to suffer. Schools can
help to mitigate this risk. however, by expanding both geographically and into tmderserved programs.
Furthenuore, some programs such as bachelor's and master's degrees, along with those in high-demru1d
fields such as healthcare, are less sensitive to an improving job matket. Nevertheless, falling unemployment
will create a headwind as the temporary bump in enrollment rel:lmlS to a sustainable trendline.

FBR CAPITAL MARKETS

Institutional Brokerage, Research and Investment Banking

Publicly Traded Proprietary Schools* Have Seen Enrollment Grow with Unemployment
12%

25%

10%

20%

8%
15%
6%
10%
4%
5%

2%
0%

0%
(0

(0

111

111

(0

(0

(0

Q)

1'-

1'-

1'-

1'-

111

111

--,

1'-

1'-

Q)

~ 9>. 9::J 9a. 9> 9c ~ 9>. 9::J 9a.

:2 :2

--,

(/)

111

"'")

:2 :2

(/)

>
0

co co co co co co

0>

0>

0>

0>

111

:2 :2 --,

(/)

0>

9 ~ 9>. 9 9 9> 9 ~ 9>. 9

9
c
c
a.
a.
::J
::J
111
111

"'")

111

111

:2 :2

--,

Q)

(/)

"'")

111

Q)

Unemployment Rate (Left)

-+- YOYChange in Publicly Traded Proprietary School Enrollment (Right)

Includes APOL, CECO, COCO, DV, ESI, and STRA.

So11rce: Company fllmgs, 811rea11 ofLabor Stahslics, and FBR Research

Student Value Proposition

The long-tenn viability of t11e private for-profit education indust.ry ultimately rests on delivering value that
exceeds the cost to students. This value proposition varies from institution to institution and from student to
student, but generally a student's decision to allend a particular school is based on the cost of attendance,
opportunity costs of lost wages during the time required to complete t11e program, and debt sei\rice costs on
any student loans, compared with the expected increase in salary upon completion. That said, students (not
just those attending proprietary schools) often do not weigh the costs versus benefits when deciding to allend
a program, or t11ey overestimate their ability to complete a given program.
One important measure of tbe value proposition of a school is tbe rate at which its students default on their
education loans. Many factors such as cost of attendance, screening criteria of prospective students, drop-out
levels. job placement rates, and the underlying credit quality of the student borrowers influence default rates.
Nevertheless, student loan defaults are arguably one of the best indicators of whether the student received
value from attending a particular institution, in our opinion. In many cases. students take out loans to enroll
in a program and either drop out, cannot find a job upon program completion, or tJ1e pay of the job is
insufficient to sei\rice the debt load. Regardless of tJ1e reason for the default, one needs to question the value
proposition of a school with a high level of student defaults. Student defaults do not necessarily mean that
the quality of the education or program is lacking; they do illustrate how many students were unable to repay
the student debt load acquired by attending a particular program-indicatjng that t11e costs outweighed tJ1e
benefits for those particular students. Ramifications of student loan defauJts can go beyond students
themselves, as high default rates can cause an institution to become ineligible to receive TitJe IV funds,
effectively shutting down that school (see the " Department of Education Compliance" and " Cohort Default
Rates" sections below).
According to the Department of Education' s most recent report, the national student loan CDR increased
from an all-time low of 4.6% in FY04 to 6.7% during FY07-the most recent data available. Historically,
the CDR as measured by the government had captured only loans that default within the first two years of a
borrower entering repayment. Recent changes in t11e Higher Education Act (REA) have extended the CDR
measurement period by another year to three years. Preliminary three-year default rates recently reported by
the Department of Education indicated tJ1at t11e FY07 rate increased from 6.7% to 11.8% with the inclusion of
another year. This means, on average, that t11e number of loans that default increased by approximately 76%
between year two and year tl1ree. While the three-year CDR is certainly more representative of actual
defaults, it still underreports life-of-loan default rates by more than 30% for all types of student loans and by

10

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

a factor of 2.0x-2.50x for loans issued to students attending proprietary institutions, according to Department
of Education forecasts.
Asi.de fmm the arbitrary two- or three-year period used to measure a school's "official" CDR, \ve believe ti1at
the expected life of a loan, or cmnulative default rate, is more reflective of the student experience. The most
recent Department of Education budget is now forecasting cmnulative defaults of 47% for the FY07 cohort
of students attending two-year proprietary schools. compared with 31.6% for students attending two-year
nonprofit institutions and 15.3% for all student borrowers, regardless of the type of institution. Although
there are many reasons why proprietary schools have such high defaull rates in relation to traditional schools,
including a higher percentage of lower-income, minority. working adults and lower educa6on levels of
students' households, the fact remains that when nearly half of the students attending a particular school are
unable to repay their loans, U1at school may not be delivering on its promise to improve its students '
wellbeing. Arguably, a student ti1at goes into default is often worse off ti1an if he or she had never enrolled in
the program.

Business Model
The goal of increasing production to achieve greater scale efficiencies. thereby lowering the marginal cost of
goods sold. is one held by many businesses across a wide spectrum of industries. The business of for-profit
education is no different In fact. tile relatively high fixed-cost structure involved in operating schools
presents significant operating leverage opportunities. Once the fixed costs of running a campus (facilities.
admissions, faculty. etc.) and developing curriculum are covered. tile margi11al costs of educating a student
are very low and present attractive incremental profit opportunities for schools. The sim.i larity to airlines is
apparent. as both industries have incentives to maximize load factors. Simply put ti1e business model lunges
on a particular school' s ability to attract and retain students to fill seats.
The various publicly traded schools target multiple segments of the education market, with some like
Wyotech and Everest, operated by Corintluan Colleges, focusing more on trade certificates/diplomas and
associate's degrees, while U11.iversity of Phoenix, operated by Apollo Group, serves the undergraduate and
graduate student population and offers associate' s degrees. Although t11e goal of filling seats is the same for
both institutions, the strategy and target customers often differ.
Institutions that provide trade and certificate training. or associate' s degree progrdms. tend to target lowerincome students with less educational background. On average. these schools have larger numbers of lowincome and n1.inority students who have historically been more reliant on Title IV aid to pay for tuition.
compared witl1 traditional schools. partjcularly given tl1e likelihood of such st11dents being eligible for
subsidized Stafford lom1S. Perkins loans, and Pelt Grants. On tl1e otl1er side of tl1e spectrum, proprietary
schools offering undergraduate and graduate programs target working adults that are looking to switch
careers or improve U1eir expertise. As a result popular programs at schools such as University of Phoenix
and DeVry University above the associate level tend to be in the business and management fields. Students
attending ti1ese types of programs tTaditionaJJy rely Jess Title IV because many of them are currently
employed and do not qualify for as much aid and/or because employers (including GI benefits) often partially
subsidize ti1eir tuition.
Most proprietary schools rely heavily on marketing and promotion to attract new students. The cost of
acquiring a new student is a critical metric when detennining the profitability of a given student. The
revenue tl1at a school can expect from a particular student-factoring in the cost of tuition and fees,
discounted for dropouts and bad debt expe115es-is finite . Therefore, ensuring that tl1e cost of acquiring each
student is minimized is essential to maximizing profits. Acquisition costs are composed mostly of direct
advertising via radio, television. and increasingly the Internet, along witl1 payments for student leads from
third-party aggregators and compensation for enrollment officers charged with converting leads into student
enrollment.
Once a student is enrolled, the next step is making sure that the student can pay the tuition. Given the
demographic makeup of many of tl1e nontrdditional students attending proprietary schools, much of the
f1.mding is actually provided by the federal government in the fonn of grdnts or federdl subsidized student
loans. To be eligible to receive federdl aid. schools must adhere to specific accreditation requirements while
limiting tl1e ammmt of Title lV f1.mding received as a percentage of total revenue and limiting st11dent default
rdtes to certain tlrresholds.

11

FBR CAPITAL MARKETS

Institutional Brokerage, Research and Investment Banking

Despite the differences of one school versus another, t11e basic drivers of for-profit schools' business models
are enrollment growth (and related costs) and student access to financial aid to pay attendance costs.
A separate issue that we t11ink is worth noting is the increasing commodi6zation of education as the delivery
of courses moves online. The benefits of creating an online course 311d levera&>ing it across the lntemet are
obvious, but the trade-off is that the internet is conunoditizing the education product When students can
enroll online, then geography is no longer an issue. Once t11e geographic barrier is broken, students are more
likely to comparison shop one program against another. At that point, i11stitutions are likely to differentiate
t11emselves by price and brand appeal. So, as t11e industry makes a bigger push into online delivery of
education, Uris will widen the pool of possible customers but also increase competition-favoring schools
with the strongest brands like DeVry and University of Phoenix, in our opinion.

Federal Student Aid

All higher education institutions are dependent on federa l student aid to various degrees, but proprietary
schools generally rely more heavily on it than t11eir not-for-profit peers. As noted earlier. proprietary schools
collected more than $22 biJJ ion, or 22% of all FSA in AY 2008-2009. despite only representing 8% of the
student poptllation. Additionally. during AY 2008-2009. total disbursements of Title IV aid grew 20% year
over year to $99.6 billion. while disbursements to proprietary schools increased by 29%. continuing a trend
of such schools capturing a growing share of federal aid. Revenues for the peer group of publicly traded
proprietary schools grew by 21% during AY 2008-2009. meaning that the schools are not just accepting
more federal aid dollars but that aid is growing as a percentage of total company revenues.
As the table below shows, the seven largest publicly traded for-profit education companies received
substantial amounts of Title IV disbursements relative to their accrued revenues during AY 2008-2009. In
some cases, the Title IV f1mds exceeded total company revenues, due mostly to tinling differences between
federa l disbursements and revenue recognition for GAAP purposes.
Total Disbursements of Title IV Funds, June 30, 2008, to June 30, 2009 ($in Millions)
Comean~

Name
Apollo Group, Inc.
DeVry, Inc.
Education Management Corp.
Career Education Corp.
Corinthian Colleges, Inc.
liT Educational Services, Inc.
Strayer Education, Inc.
*May exceed 100% of revenues

Title IV
Title IV
Total Title
Grant s
IV Aid
YOY%
Loans
$3,606,412 $663,352 $4,269,764
24.1%
$1 ,368,960 $146,070 $1 ,515,030
51.5%
$1 ,095,772 $152,985 $1,248,757
22.9%
$1 ,046:508 $197.1?6 $1,243,674
12.5%
$769,422 $303,021 $1,072,443
44.3%
ESI
$748,431
$153,705
$902,136
41 .6%
STRA
$391 ,807
$41 ,670
$433,477
1.8%
due to timing difference of disbursements and revenue accrual.
Ticker
APOL
DV
EDMC
CECO

coco

Total
%of
Revenues Revenues*
$3,939,700
108.4%
$1,461,453
103.7%
$2,011,500
62.1%
72.5%
$1 .115 ,600
$1 ,307,825
82.0%
$1,139,273
79.2%
$451,683
96.0%

Source: Department ofEducation and FBR Research

Aside from the fact t11at schools are becoming increasingly dependent on t11e federal government's
willingness to increase Title rv funding to support revenue growth, current law prohibits any proprietal)'
school from receiving more than 90% of its revenue in the fonn offederal aid. Therefore, the recent increase
in Title TV funding has pushed many institutions closer to that cap-potentially restricting the schools' ability
to grow.

Student Profitability Comparison

We have analyzed the economic return on a per-student basis for each of tJ1e four companies in our coverage
universe-DeVry, Corinthian CoUeges, Apollo, and Career Education Corporation-to demonstrate the
inherent leverage in the companies respective business models. Aside from tJ1e obvious costs of educating
students, which averaged 53% of annual revenues, student acquisition costs are tJ1e next largest expense,
averaging 27% of annual revenues. Acquisition costs include direct marketing, advertising, and enrollment
expenses, a large part of which is in t11e fonn of compensation to enrollment counselors. More recently, bad
debt e.ll.-penses have become significant and growing costs for many schools, accounting for approximately
4% of annual revenues.
What becomes clear immediately is t11e importance of increasing enrollment ru1d reducing new student
acquisition costs to drive margins higher. The marginal cost of educating another student is fairly low, as

12

FBR CAPITAL MARKETS

Institutional Brokerage, Research and Investment Banking

most of the costs, such as facilities and faculty , are fixed. Thus, by increasing enrollment, the companies can
leverage fixed costs to expand margins. Also, due to the combination of higher student demand, more
effective marl<eting initiatives-including a greater use ofintemet advertising-and a decline in advertising
rates, the group has been able to reduce per-student acquisition costs, as well
We have analyzed each of the four companies on which we are initiating coverage based on their trailing-12months perfom1ance to calculate expected revenues and related expenses on a per-student basis. taking into
account student attrition levels, to allow for better comparability. By indexing each institution on a perstudent basis. we have attempted to show the variation between tuition rates and the cost (including student
acquisition costs and bad debt expenses) of generating such revenues.
On this basis, De Vl}' collects the most per-student in revenues ($21,591) and genemtes the most profits per
student ($5,344), while Career Education, despite having the second-highest per-student revenues ($17,247),
produces the lowest profit of$1,630 per student. Because DeVry 's student population is more weighted
toward higher-tuition undergraduate, f,Jf'dduate, and medical students, the fact that the average tuition rate is
the highest is not smprising. Apollo, on the other hand, has much lower revenues per sllJdent of $13,843,
which is a function of a larger contribution from associate students that pay lower tuition ~md tend to have
higher attrition rates. However, the cost to educate and to acquire associate students can be significantly
lower than for the higher-priced bachelor's and graduate programs. For tlwt reason, Apollo generates the
second-highest profit per student, despite having one of tl1e lowest revenue-per-student ratios of tl1e group.
We believe that comparing institutions based on profitability per student has limitations and recommend that
investors consider the cost of acquiring a new student in relation to tl1e expected profits, or a return on the
advertising investment, to help gauge growth potential. We estimate that the cost of acquiring a De Vry
student is approximately $6,374, which is substantially higher than peer costs and reduces the e:,.:pected return
on the initial investment made to acquire the student. In this regard, Apollo produces the highest return on its
student acquisition costs-producing $4,223 of profit for each $2,699 spent to acquire a new student.
Overall, investors should consider the costs of acquiring the marginal student in tem1s of advertising and bad
debt expense versus expected revenues. A school's ability to increase enrollment is also a critical factor in
gauging the future profitability of an institution. Though one institution may come up short versus peers
today. if that school has t11e abi lily to increase its enrollment dramatically, then the profitability outlook could
change dranwtically. Accordingly, an understanding of what products (programs) a school offers relative to
student demand is critical to understanding earnings potential.

Per-Student Profitability ($ in Thousands)

APOL

Weighted-Average Life Analysis

CECO

coco

DV

Expected revenues per student

$13,843

$17,247

$12,666

$21 ,591

Expected costs per student

($6,556)

($11 ,065)

($7,490)

($9,284)

Expected income per student

Less: acquisition costs per student
Less bad debt expense per student

$7,286

$6,182

$5,176

$12,307

($2,740)

($4,066)

($2,431)

($6,374)

($584)

($486)

($954)

($589)

$3,962

Profitability per student

145%

Pretax return on investment

$1 ,630
40%

$1 ,792
74%

$5,344
84%

Source: Company filings and FBR Research

Following announcements that Sallie Mae and other loan providers would stop providing private educational
loans to many proprietal}' schools. severd.l institutions such as Corinthian Colleges and Career Education
were forced to make loans directly to students. Understanding that cumulative default rates could top 50%
on many of these loans, investors were concerned about the additional costs these schools would incur. As
t11e table above demonstr'dtes, however, t11e bad debt expense is manageable when we take into account the
potential revenues genemted from each student. For example, although we estimate that Corintluan Colleges
loses approximately $954 per student in bad debt ex-penses, the trade-off is still worthwhile to secure the
$12,666 of expected revenue genemted from each student-of which nearly 90% is funded with Title IV aid.

13

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

The same holds true for incurring relatively high acquisition costs for new students. Our research suggests
that many institutions maintain a relatively high ratio of one enrollment officer for approximately every 50
students enrolled. The cost of supporting such a large enrollment staff is one reason why the publicly traded
for-profit schools spend 27% of revenue, on average, matketing to and enrolling new students. Staying with
the Corinthian Colleges example, the $2,431 of acquisition costs needed to enroll a student, in addition to the
loss of $954 in bad debt, are well worth it to capture the e~:pected $12,666 of revenue. Furthennore,
considering that the marginal cost of educating the ne>.i st11dent will be far below the $7,490 cost per st11dent
based on current enrollment, the company could afford to pay even higher levels of acquisition costs and still
in1prove operating margins.
Tuition increases could a lso substantially change the economics of the business for these schools. However.
because many of the schools have raised tuition rates several times in recent years, we believe that this option
is likely not as viable now as in t11e past for several reasons. First, an increase in prices will have to be
funded by the students. Students w ill typically draw down their maximum Title IV aid first, and because
many of the tuition rates, particularly at t11e associate level, are still below tJ1e maximum Title TV limits, we
would expect any increase in price to be paid for entirely with additional federal a id. This increased use of
federal aid becomes a problem for institutions already dangerously close to exceeding their Title TV limits.
Second, even when a student has already tapped out the maximum aid, the price increase would likely be
funded by private student loans. Private lo~UJS are increasingly scarce for many proprietary students, wluch is
why the for-profit schools have begtm offering loans directly to students. These institutional loans have ~m
expected default rate approaching 50% in m~my cases, so raising t11ition does not result in much of an
increase in net profits. Third, the industry is already being criticized for charging too much to students wlllle
accepting such a large amount of federal aid in the process; therefore, the act of continuously raising prices
could invite additional scmtiny from Washington.

Regulatory Thesis
Tn recent years, the regulatory environr11ent for proprietary institutions has been relatively favorable, as
increased Stafford loan limits and PeU Grants have helped to fund higher enrollment levels. Additionally,
changes to the Higher Education Opportunity Act (HEOA) gave the industry greater breatl1ing room with
regard to tlle 90-10 Rule, and t11e extended phase-in of the t11ree-year CDR calculation delays the risk of
losing Title IV f1.mding due to lugher st11dent loan defaults.
Still, in light of the Obama Administration' s policy agenda and the ongoing negotiated rulemaking process,
we beljeve that tJ1e regulatory oullook for t11e industry has shifted against the proprietary institutions. We
aclmowledge t11at tl1is shift is at odds with President Obama ' s goal of having every high school graduate
attend at least one year of college or job training, which would be a potential bonanza for the industry.
However, almost a year afler l11e President s comment, we note that there is still no discussion of how l11at
goal could be accomplished, let alone funded.
Based on our conversations with various contacts in Waslungton, we do not expect Congress to enact any
legislation that will affect the for-profit school indust:Iy. Rather, we expect that ch<mges will occur tluough
Administration action, via the authority tl1at already exists with the Depmtment of Education. Specifically,
the changes will likely occur through increased regulatory scmtiny of the Title IV progmm and tl1e
institutions that receive federal aid. Any industry dependent on l11e federal govenunent is vulnerable to
changes in t11e political winds. Take, for example, U1e student lending industry that successft1lly provided
billions of do!Jars of loans to millions of students for more than 20 years via the Federal Family Education
Loan Program (FFELP). The Obama Administration, in its first year, has proposed to eliminate the private
sector from the business of originating government loans-all under the guise of saving taxpayer money.
Now that Washington can no longer use the loan industry to e>.iract budgetary savings to increase Pell
Gnmts, the schools could become targets. With the govenm1ent funding an increasing proportion of federal
shtdent loans directly off its balance sheet it bas more of ~m incentive to reduce defaults. With proprietary
schools defaulting at a rate nearly tluee times t11at of public iustit11tions, the risk of the govenm1ent collling
down on lugh-default schools and prognuns and/or schools or pro!,>ranlS witl1low completion mtes is real and
something investors must consider.
Additionally, efforts by the Obama Administration to provide more funding to community colleges could
result in more direct competitors for many proprietary schools. The Department of Education is currently

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considering numerous topics through t11e negotiated rulemaking process: among t11em are the detennination
of satisfactory academic processes, the manner and success witll which incentive compensation limitations
are implemented/enforced, the definition of gainful employment with regard to measuring student outcomes,
the role of state authorization as a component of institutional e ligibility, and the overall level of program
integrity. Included in the process will also be an examination of marketing and compensation practices
across all education sectors. We believe that there is the potential for these rulemaking sessions to bring
about a subst~mtial shift in the regulatory triad (Department of Education, state regulation, and accreditation
agencies), potentially placing greater authority in the hands of ED in detenuining matters ordinarily
outsourced to the accrediting agencies or states.
A possible harbinger of things to come, which underscores our concerns of rising regulatory risk, was the
August 2009 Government Accountability Office's (GAO) report on proprietary schools and recommendation
to increase t11e oversight of proprietary schools to ensure tl1at only eligible students receive federal student
aid. Citing the fact that more than 2,000 proprietary schools received approximately $16 billion of Title IV
loans in 2008 and that students attending such ins6tutions were the most likely to defaull on federal student
loans, the GAO reconunended (1) improved monitoring of skill tests and target schools, (2) revised
regulations to strengthen controls over skills tests, and (3) U1at proprietary schools provide infonnation on
high school diplomas for use in obtaining federal student aid. More specifically, tl1e report cites a weakness
in the Department of Education' s oversight of Title IV aid eligibility requirements-standards desi1:,'1led to
ensure that students receiving aid possess tl1e basic matl1 and English skills necessary to benefit from a
postsecondary education and to reduce defaults and, ultimately, tl1e cost to ta>..'Payers of the student loan
progmm. The report cites several abuses and possible cases of fraud related to the ability-to-benefit test for
those students wifuout high school diplomas. For certain institutions, more-rigid eli!:,>ibility criteria could
result in lower enrollment levels.
Given the substantial and well-known regulatory risks associated with t11e 90-10 Rule, CDRs, ability to
benefit, and accreditation status. we tlunk it makes sense that companies' various risk exposures be reflected
in valuation. For illustrative purposes, we attempt to quantify such risk exposures in the scatter plot below
against a blend of relative valuation metrics on they axis.

Valuation vs. Risk Mat.rix

35%

Expensive Valuation
Low Risk

El<pensive Valuation
High Risk

CECO
30%

ov
:(

25%

coco

>-

><

~
c

APOL

20

;(

.a.,

15%

>

10%

5%

Oleap ValuatiOn
Low Risk

Oleap Valuation
High Risk

0% +------.-----.-----.------~----~-----.-----.-----.
10%
15%
0%
5%
20%
25%
30%
35%
40%
Risk Proxy

Source: FBR Research. company filings, and Department ofEducation

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As the chart above illustrates, we estimate that, of the proprietary schools under coverage, Corinthian
Colleges and Career Education are most exposed to the various risk factors about which we are most
concerned, although t11ese concerns are much more heavily baked into COCO' s and APOL 's current market
valuations t11an into CECO' s.

Key Regulatory Issues

Higher education institutions are overseen by what is referred to as the " regulatory triad," with the
Department of Education, accrediting agencies, and the states in which each school operates all p laying a
role. For the most part, the same regulations apply to for-profit and not-for-profit schools a like. However,
the for-profit industry' s higher reliance on Title TV funds arguably makes it more sensitive to government
regulation.

Accreditation
There are currently 85 distinct accrediting organ:i:z.ations recognized by either the Department of Education or
the Council for Higher Education Accreditation (CHEA). An accreditation by a recognized organization is
required for an institution to become eligible to receive Title IV funds.
Beyond qualifying for student federal student aid, the goal of accreditation is to ensure that education meets
an acceptable level of quality and to ensure that each institution achieves success relative to its mission. As a
result, the accrediting agencies are asked to collect and analyze key data and perfonnance indicators
re1:,'1llarly, including financial information and measures of student success (e.g., completion and placement
rates). The accrediting agencies perronn initial and ongoing inspections of schools on a campus-by-campus
basis, with accreditation subject to review in cycles ranging from every few years to every 10 years.
There have been efforts recently to refonn the accreditation system to incorporate more standardiz.ation and
accountability. Under the Bush Administration, Secretary of Education Margaret Spellings and the
Conmussion on the Future of Higher Education recommended changes that would require standardizalion,
witl1 a greater emphasis on comparability and student achievement.
Re1:,'1llating ti1e accreditation function could present significant risks to ti1e industry for several reasons. Any
requirement to measure student achievement-either tltrough graduation or job placement rates-could
restrict enroll ment, as companies would need to be more selective in admitting new students. Also, by
standardizing accreditation requirements, it may become easier for students to transfer credits from one
school to another. Currently. many schools do not accept transfer credits, which results in lower transfer
rates from for-profit schools. Increased transferabiLity of credit could decrease student retention for some
schools.
To be clear, proposals to regulate accreditation procedures me just that, proposals. Still. the Department of
Education is currently in ti1e process of amending existing institutional eligibility and tlle recognition of
accrediting agencies as required tmder the Higher Education Opporttmity Act, and the interpretation is being
reviewed by a mlemaking conunittee. One area of interpretation is a review of the following : " An
accrediting agency's st~mdard by which it assesses an institution' s success wiili respect to student
achievement in relation to the inst1tution's mission may include different standards for different institutions
or programs, as established by t11e institution including, as appropriate, consideration of State licensing
examinations, course completion, and job placement rates." The mli ng of the conmlittee is expected in early
to nud 2010.
Additionally, on December 17, 2009, tl1e Department of Education Office of Inspector GenerdJ released a
heavily redacted alert memonllldtml pertaining to ti1e decision by the Higher Learning Commission (HLC)
and its accreditation of American InterContinental University (a division of Career Education). Specifically,
tlle Inspector General took issue witi1 the agency's accreditation despite the rnuversity lacking specific
standards for measming credit hours and program length. The Inspector General used unusualJy strong
language in saying that "this action by HLC is not in tl1e best interest of students and calls into question
whether the accrediting decisions made by HLC shouJd be relied upon by ilie Department of Education when
assisting students to obtain quality education tltrough ti1e Title IV programs." We note that this is ti1e tlilld
rebuke of an accrediting agency in recent months by the Department of Education regarding online
educational progrmns. Although each institution and its respective accreditation is different we believe tllat

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the Department of Education is becoming more proactive in policing online programs, a core product for the
proprietary education industry.

State Authorization
Institutions derive the legal authority to open1te in the state in which they are domiciled by obtaining a school
charter or some other certifying document from the state. The relationships between the state regulatory
authorities and ED are limited. although the states are required to notify ED if they revoke a school's
authorization or there is evidence of fraud related to Title IV funds.

Department of Education Compliance

The Department of Educations primary responsibiUty is to ensure tlmt Title IV programs are executed
properly and that federal funds are disbursed and accounted for as designed. Within tl1is context, ED
monitors schools for compliance with laws and department regulations. In addition to submitting audited
fm~mcial statements to ED each year, a school may be selected for federal performa11ce, financial, or qualitycontrol audits if ED has doubts about the school's administration of Title IV programs.
Several key federal regulatory issues related to schools could have an impact on the industry-particularly
schools' ability to meet financial obligations, tJ1e 90-10 Rule, CDRs, enrollment-based compensation, abilityto-benefit criteria, and ability to prepare students for gainful employment in a recognized occupation-and
investors should be cognizant of tJ1ese factors when making investment decisions.

Financial Standards
To participate in FSA programs, schools must demonstrate that they are capable of providing tl1e services
advertised in official documents, administering tl1e FSA prognmlS properly, ~md meeting all of the FSA
prognmlS' financial obligations. Proprietary schools must maintain a composite financial health score of 1.5
or better, meet refund reserve standards by havil1g a sufficient amount of cash on hand, meet all financial
obligatiotlS, and remain current on debt payments.

The 90-10 Rule

The 90-10 Rule states that proprietal)' schools may derive no more than 90% of tl1eir revenue from Title N
funding. The rule was initially implemented as part of the 1992 Higher Education Act Amendments as t11e
85-15 Rule and was later changed to 90-10 by the 1998 HEA Amendments. The rule is designed to ensure
that students have at least some level offinancial participation in attending school and as a safeguard against
schools expanding enrollment supported almost entirely by federal aid. If an institution violates tl1e 90-10
Rule. it will be placed on a provisional status for receiving Title IV funds for two years so tl1at it c~ become
compli~t during tl1e provisional period.
The passage of the Ensuring Continued Access to Student Loans Act (ECASLA) in May 2008 and,
specifically, the $2,000 increase in student loan borrowing limits, tlueatened to push some proprietary
schools over the 90% threshold, as students could borrow more Title IV funds. Instead, the higher loan limits
associated with ECASLA actually help schools to lower the percentage of revenue derived from Title IV
funds. The $2,000 increase in unsubsidized Stafford loan limits can be counted as non-Title IV revenues
f'fom July L, 2008, to July 1, 2011.
Under the 90-10 Rule, revenue includes only funds generated by tuition, fees, and itlStitutional charges
related to programs tl1at are elig ible for Title IV aid, with a few exceptiotlS allowed following tl1e passage of
HEOA. Non-Title IV revenues may be included in tl1e calculation if tl1ey are paid for by tl1e student or
anotl1er party. if the prognun is licensed by a state agency, ~md if the prognuu is accredited or provides an
industry-recognized certification.
Generally, proprietary schools' revenues must be recob'llized on a cash basis, alilioughHEOA altered tl1e
treatment of institutional loans (private lorulS made from schools to students) and now allows such loans
made on or after July 1, 2008, and before July 1, 2012, to be accotmted for on an accntal basis, with tl1e net
present value of tile loans contributing to non-Title IV revenues during a given period.
For institutional loans made after July 1, 2012, only t11e amount of the loan repaid during a given period may
be included in the calculation of revenues.

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Unless the temporal)' exemptions put in place under HEOA are extended, we anllcipate that t11e 90-10 Rule
will become an issue for those schools receiving high levels of Title IV funding, as l11e $2,000 increase in
student loan borrowing is included in the numerator (beginning in July 20 11) and only the cash received,
instead of revenue accrued, from the institutional loans will be included in the denominator (beginning in
July 20 12) when calculating l11e 90-10 formula.

90-10 Calculations
FY06

FY07

FY08

FY09

64.0%

69.0%

82.0%

Career Education*

59.3%

Corinthian Colleges

75.3%

62.7%
75.2%

69.2%
81 .0%

86.0%
80.0%

DeVry**

62.0%

65.0%

71.0%

88.9%
80.0%

65.2%

68.0%

75.8%

83.7%

Apollo Group

Average

*CECO s 90-10 calculation IS year to date as of September 30, 2009.

**DeVry's 90-10 calculation is for undergraduate students only. The FY09 figure is an estimate.

Soul'ce: FBR Research and company filings

Cohort Default Rates

Through the FY08 cohort, a school's CDR will be calculated by dividing tl1e number of students entering
repayment in a given fisca l year and defaulting by t11e end of the subsequent fiscal year by the total number
of borrowers entering repayment during that fiscal year. Under this calculation, a school will become
ineligible, or " not administratively capable," to receive Title IV nmds if its two-year CDR is 25% or greater
in each of tl1e three most recent years or is 40% or greater in the most recent year .

Old Calculation-Two-Year Default Window

FY07
FY08

Enter Repayment
10/1/2006-9/30/2007
10/1/2007-9/30/2008

Default by
9/30/2008
9/30/2009

Cohort Default Release Date

9/15/2009
9/15/2010

Source: Department ofEducation and FBR Research

Be!,>inning with FY09, the CDR is now calculated by dividing the number of borrowers entering repayment
in a given fiscal year and defaulting over the next two fiscal years by the number of borrowers t11at entered
repay ment in the given fiscal year. A school is considered "not adtn.inistratively capable" if its CDR for
FFELP or direct lending loans exceeds 30% in the past three consecutive fiscal years or is 40% or greater in
the most recent year. The HEOA a lso provides for a transition period during which no institutional sanctions
will be taken based on the new CDR rate until after there have been three consecullve cohort years of such
rates calculated, essentially meaning tJ1at a school cannot trip t11e CDR threshold until 2013 (released in
2014) under the new methodology (but can still exceed l11e threshold using the ho-year CDR).

New Calculation, Post-HEOA-Three-Year Default Window

FY09
FY10
FY11

Enter Repayment
10/1/2008-9/30/2009
10/1/2009-9/30/2010
10/1/2010-9/30/2011

Default b~
9/30/2011
9/30/2012
9/30/2013

Cohort Default Release Date

9/15/2012
9/15/2013
9/15/2014

So11rce: Department o[Ed11cation and FBR Research

For many institutions, the move to a three-year CDR presents significant issues that, if not addressed, could
result in the loss of Title IV funding. While not completely obvious, two-year CDRs dramatically
underreport true default rates for a muuber of reasons. The fact that most students default shortly after
leaving school should not be a surprise, but tl1ere is a surprising jump in defaults ber.;veen years two and three
of repayment particularly at proprietary schools. Much of this phenomenon can be explained by tl1e fact that
a federal student loan is not considered to be in default tmtil 270 days after a pay ment is missed.
Additionally, tlte lender tlten has up to 90 days to ftle a default claim witl1 the Department of Education. In a
case where a borrower fails to make a single pay ment, it may take up to 360 days for ED to record the
default. Ftuthermore, many borrowers are granted six to 12 months of forbeardllce if they are stmggling to

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Institutional Brokerage, Research and Investment Banking

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make payments while looking for a job, but t11ey are still considered to be "in repayment" for measurement
purposes. For that reason, many of the loans do not show up as official defaults until year three.
In addition to these structural reasons why three-year default rates may be surprisingly higher than two-year
default rates, proprietary instittJtions have a vested interest in managing their default rates to avoid costly
penalties and public scrutiny. As a result, companies allocate resources to ensure t11at their students are fully
aware of all t11eir repayment options and often reach out to students to make sure that they make payments on
their loans during the first two years of repayment. Not surprisingly. tJ1e data available show that in the
FY05-FY07 cohorts, proprietary schools reported more dramatic increases in defaults than their not-forprofit peers. More specifically. in ll1e most recent cohort available, FY07, the percentage of proprietary
schools nearing the statt1ary threshold increases from 2.6% to 14.7% when the measurement period is
e:\1ended from two years to three. The change for nonprofit schools is much less dramatic, increasing fmm
0.6% to 1.9%. which suggests t11at proprietary schools are subject to higher defaults in year three than in
years one and two.
Three-Year CDR Measurement Puts More Proprietary Schools Near Thresholds

2005

2006

2007

0% of Proprietary Schools with 2-yr CDRs > 25%

o% of Nonprofit Schools with 2-yr CDRs > 25%
0% of Proprietary Schools with 3-yr C DRs > 30%
8% of Nonprofit Schools with 3-yr CDRs > 30%

Source: Department of Education and FBR Research

Among the companies under coverage, we view Corinthian Colleges as most exposed to the issue of high
student loan defaults, as we calculate that t11e companys Everest-branded universities had a consolidated
three-year FY07 CDR in excess of 30%. In the table below, we consolidate the available data for each
company 's major brands to give a general sense ofCDRs by company and brand. We note, however, that
institutions can manage CDRs at t11e school level by shifting programs between campuses, among other
methods.

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Consolidated Two-Year and Three-Year CDR Rates by Company and Brand

FY05
DeVry
U.S. Education
DeVry University
Ross University
Chamberlain College
Total

2-year
7.6%
6.0%
0.1%
0.6%
5.9%

Corinthian Colleges
Everest
Wyotech
Total

2-year
10.5%
9.0%
10.3%

Career Education Corp.

AIU
CTU
Le Cordon Bleu
Sanford-Brown
IADT
Gibbs
Total

2-year
10.1%
9.6%
8.8%
12.5%
7.7%
14.2%
10.3%

Apollo Group
UPX
WIU
Total

2-year
7.4%
11.4%
7.5%

FYOS
3-year
20.6%
11 .8%
0.3%
3.3%
12.3%

2-year
8.5%
6.4%
0.2%
1.9%
6.4%

3-year
24.1%
17.6%
23.4%

2-year
13.1%
8.6%
12.6%

3-year
21 .1%
21.3%
17.1%
23.3%
15.2%
27.0%
20.6%

2-year
8.6%
11.2%
6.0%
7.6%
5.1%
10.6%
8.2%

3-year
11 .5%
28.8%
12.0%

2-year
7.2%
27.5%
10.9%

FY05

FY07
3-year
23.1%
12.0%
0.3%
5.0%
13.0%

2-year
8.6%
8.0%
0.2%
3.0%
7.8%

3-year
28.1%
18.5%
27.0%

2-year
15.2%
10.2%
14.7%

3-year
16.2%
23.9%
15.1%
20.3%
13.0%
23.7%
17.9%

2-year
10.6%
11.0%
6.1%
8.5%
5.5%
12.7%
9.2%

3-year
10.4%
37.0%
15.2%

2-year
9.3%
18.5%
10.9%

FYOS

FY05

FY07

FYOS

FY05

3-year
22.3%
15.0%
0.5%
4.1%
15.8%

3-year
30.5%
19.9%
29.3%
FY07

FYOS

3-year
19.7%
22.4%
13.8%
22.1%
14.6%
28.5%
19.6%
FY07
3-year
16.0%
26.5%
17.8%

Source: FBR Research and Department ofEducation

Practically speaking, the new three-year CDR mle will not become an issue until2014, following a phase-in
period. Nonetheless. we expect many additional campuses to exceed or approach the 30% threshold,
necessitating corrective action by the institutions. This trend will only be exacerbated by the challenging job
market and the e>.'J)losion of new students that should continue to pressure CDRs for some time. The good
news for schools is that they have time to adjust and options at their disposal to avoid tripping the limits.
Simply raising enrollment standards should improve student retention and, ultimately, default rates.
Additionally, schools can invest in more robust job placement programs and default prevention initiatives for
former students. The trade-offs, though, are higher costs and possibly lower enrollment.
Aside from the teclmicalities of CDR calculations, we think it is impmtant to consider the geneml policy
in1plications of the high default rdtes, regardless of how they are measured, at many proptietat)' institutions.
With the government now budgeting for life-of-loan default rates of 47% for students attending two-year
proprietruy schools, compared with the national avemge of 15%, it is reasonable to expect increased
goverrunent scmtiny. The high default rates could become an even greater issue as the Obatna
Administmtion moves to take control of the entire federal shtdent lmm prognun and is then responsible for
100% of the costs, rather th~m sharing the risk with private lenders, as it does currently with FFELP.

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Institutional Brokerage, Research and Investment Banking

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Government Budget Forecasts Expect Proprietary School Lifetime Default Rates of Nearly 50%
50%
2007 Cohort Budget Lifetime

45%

Defau~ Rate

40%
35%
30%
25%

20%
I

15%

"l

All Schools

10%
5%
0%
2-year Nonprom
lnsmutions

2-year Proprietary
Institutions

4-year Freshmen &

Sophomores

4-year Juniors &

Seniors

Graduate Students

Source: Departmem ofEducation and FBR Research

The single biggest driver of student loan defaults is college drop-out rates. The Department of Education has
reported that 76% of borrowers defaulting on federal student loans failed to graduate. The combination of
student debt and a lack of a college degree needed to service that debt drives many borrowers to default.
Making matters worse is the tight job market for all workers-college educated or not.

Enrollment-Based Compensation
To be eligible to receive Title TV funds, "schools may not provide commissions, bonus. or other incentive
payment based either directly, or indirectly, on securing enrollment or financial aid to any individual or entity
engaged in recruitment or admission activities or in making decisions regarding the award ofFSA program
funds." This prohibition was established to prevent admission officers and recruiters from targeting
unqualified students simply to increase enrollment f1mded by federal aid. Despite the general prohibition, the
Bush Administration established several safe hrubor provisions that allow incentive compensation in limited
circumstances. The safe harbors establish conditions under which an institution may adjust compensation in
such a way that would not be considered an incentive pay ment and attempt to clarify sih1ations in which
payment could be construed as violating the prohibition.
As part of the 2009-2010 negotiated mlemaking process, rule makers have been asked to consider whetl1er
the safe harbors should be maintained, amended, or eliminated in whole or in part. Following tl1e November
rulemaking meetings, the Department of Education announced that the committee had decided tl1at t11e
language in t11e statute is clear and that the clarify ing safe harbors shottld be eliminated. As a result, ED has
proposed draft regulatory language that would remove the safe harbors from the statute. At the December
rulemaking session, ED reiterated this view, which suggests that U1e proposal is likely to be accepted.
Key Incentive Com 11ensation Safe Harbors and R ulemaking Committee Reasons for E limination

Safe harbor. A school can make up to two adjustJnents to an admissions/recruit1nent professional' s

salary witlun any 12-month period, provided that enrollment levels are not the primary variable in
detennining compensation adjustments.

Reason for elimination. Compensation structures may consider factors other than enrollment when
adjusting compensation within a 12-month period, but the committee detemlined that, in fact, the
weight of evidence suggests that other factors are not truly being considered. Therefore, the
comnuttee is recommending eliminating the ability of an institlJtion to adjust a recmitment
professional' s salary twice within a 12-month period.

Safe harbor. Managers and supervisors are exempt from the compensation adjustment prohibition as
long as they do not directly manage or supervise recruitment personnel.

Reason for elim ination. Managers and supervisors drive organization and operational culture and
can create pressure from the top for recmiters to secure increasing enrollment figures.

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FBR CAPITAL MARKETS

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Safe harbor. Profit sharing or bonus payments are pennissible, as long as they are paid to substantially
all employees ~md not based solely on enrollment.

Reason for elimination. Tlris safe hazbor is unnecessary. as there is not a statutoty limitation on
profit sharing or bonus plans: however. if eit11er is based upon securing enroiJments. it is not
pennitted.

Safe harbor. Compensation may be based on students' completion of one year of study or of an entire
pro!,'Talll, wlrichever is shorter.
Reason for elimination. There is t11e potential for this safe harbor to encourage schools to create
shorter and shorter programs and for recruiters to recommend such programs so as to be eligible to
receive compensation sooner.

S<tfe harbor. Compensation is penuitted for Internet-based recruitment activities and admission
activities.

Reason for elimination. Tlris fonu of recnritment is not exempt from the statutoI)' ban.
Teclmological advancements since this safe hazbor was adopted and increased usage of the Internet
to recntit students create concern that the exemption it is not witlrin the spirit of the statute.

Critics argue that the establislm1ent of these safe harbors has allowed schools to circumvent the spirit of the
regulations by effectively allowing enough flexibility to create enrollment-based compensation systems at
some institutions. Many schools are increasingly relying on the Internet to drive enrollment, and payment for
Internet-based leads is pennissible under the safe harbors as established. The ability to adjust admission
officers' or recruiters' compensation twice yearly presents a gray area that invites abuse, according to some
critics. In response to such concerns. the HEOA required that the GAO conduct a study on the results and
effectiveness of ED's enforcement of the incentive compensation provisions included in the HEA. Tllis
report is due to Congress on Febmary 14, 2010.
lmJ>Iications. In our view, the elimination of the safe harbors is a likely outcome of t11e negotiated
rulema.king process. Such elimination will make it more difficult for schools to be confident that U1ey are
operating within U1e confines of the statute, increasing the likelihood of a potential violation while requiring
schools to err on the side of conseiVatism witl1 regard to the rule. Additionally, ED's language justifying the
elimination of the safe hazbors makes it clear tl1at the department views actions previously allowed by the
safe harbors to be inconsistent witl1 the rule fotbidding incentive compensation. As a result, we think that the
Obama Admirtistration is interpreting the statute in a manner that will ultin1ately require significant changes
to how schools source new students, wlrich will likely result in slower enrollment &>rowth or necessitate
higher recmitment costs.

Ability to Benefit
For a student to be eligible to receive federal student aid, he or she must have a high school diploma or a
recognized equivalent unless that student meets certain ability-to-benefit criteria. A prospective student can
demonstrate an ability to benefit by passing a Department ofEducation-approved ATB test, ty pically
administered by a certified third party. Schools are required to make available programs to assist such
students in obtaining high school diploma equivalents but are not required to verify that students are enrolled
in the programs or to monitor students' progress in such programs. According to ED 's Inspector General,
students enrolled via ATB qualification accounted for II% of financial aid recipients, or approximately $11
billion of aid.
Critics argue that schools can abuse tl1e ATB exception to increase enrollment, essentially packing schools
full of unqualified students. Supporters advocate that a lack of a high school diploma should not be a factor
in denying individuals t11e opportunity to improve their skills/education. The ATB tests are more of an issue
for schools seiVicing low-income students and for tl1ose offering basic trades and/or certificate training to
populations Umt traditionally have higher levels of non-high school graduates attending.
Implications. Following the December negotiated rulemaking session, we believe that the Department of
Education is going to tighten its regulation of tl1e A TB process and potentially implement changes that make
it more difficult for students to qualify under the ATB criteria. As a result, we expect that some schools
could see a modest decline in enrollment, but we do not e>.'peCt a drdlUatic change. The issue is more of a
problem for schools witl1 higher concentrations of certificate and associate' s degree pro&>ranlS.

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Gainful Employment in a Recognized Occupation

Certain progrcliDs' and institutions' eligibility to receive Title IV f1:mds is based on the fact that tl1ey prepare
students for gainful employment in a recognized occupation. Programs that fall under this category include
any certificate. diploma, or degree pro!,'f'am offered by a for-profit school tllat is not explicitly classified as
" liberal arts." Altllough it is relatively clear iliat tllis standard intends to measme schools' success in training
students for entrance into a specific occupational field. the standard has not llistorically defined "gainful
employment."
As part of l11e ongoing negotiated ruJemaking process, the rules committee is tak:i ng a closer look at this
to detennine whetl1er ED should require schools to link occupation names specifically witb trauling
programs to define recognized occupations more closely. Additionally, the conmlittee is supposed to
consider to wheilier the department should more clearly define "gainful employment" by establislling a
relationsllip between tuition and fees (and/or loan debt) and ex'])ected earnings.
st~mdard

In response to the first question. the rules conmlit1ee bas proposed the use of the Standard Occupation
Classification (SOC) code established by t11e Department of Labor to classify recognized occupations. Other
occupations may be deemed " recognized" as detemlined by the Secretal)' of Education in consultation with
the Secretary of Labor.
With regard to the more difficult question of detennining " gainful employment," ED proposed two options to
ilie rulemaking committee. The fust attempts to establish a reasonable relationship between ilie cost of ilie
program and the expected earnings in a recognized occupation of students who have completed the program.
If the cost/earnings relationship is unreasonable, tl1en ilie program would lose eligibility for Title IV aid.
Although the conunittee has not yet proposed regulatory language for this issue, it noted U1at if " the cost of
the program is less than three times (or some otJ1er multiple) the value added," the relationship would be
considered unreasonable. To detemline the amount of value added by the program, the department could use
Bureau of Labor Statistics wage data for high school graduates relative to persons completing the vocational
program. The differential would be the 'value added."
The second option attempts to consider ilie debt incurred to participate in tl1e program. In tllis approach, tl1e
Department of Education would look at whetl1er a student's starting ~umua1 income upon completion is
projected to be sufficient to repay tl1e average debt service obligation of tl1e prognun. In t11e example
provided by tl1e conuruttee. the average debt of a student completing a certificate pro!,Jfaln is $9.000. and tl1e
st11dent's annual loan repayments would total $1.250. For a debt-to-i11come ratio of 5%. the 111inimum
qualifying projected starting income would need to be at least $25,000 to satisfy a " gainful employment"
standard.

Im1>lications. Because ofilie sweeping implications of this proposal for the for-profit education industry, the
proposal crumot be ignored even tllough ilie there was some outspoken sentilnent runong the negotiators at
ilie December rulemaking session that tl1e proposal was eitl1er unworkable, il1appropriate, or beyond tl1e
scope of ilie statute. The Department of Education and consumer advocates seemed very interested in
finding a workable solution, heightening tl1e risk tllat this proposal will likely be put into formal language for
ilie next negotiated rulemaking session and tl1at further debate will ensue. In essence, this proposal would
require ilie proprietary schools to justify ilie existence of ilieir programs in terms of not only job placement
but also wage attainment relative to the cost of ilie program. In1plementing such a nue could cause some
programs to be disqualified from Title IV eligibility and/or lead to pricing controls detennined by entry-level
wages in the occupations targeted by each program.

Risks
Regulatory risk and dC!lendence on federal student aid. Proprietary schools often derive the majority of
ilieir revenues from federal student aid. The companies' ability to continue receiving such aid depends on
ilieir compliance wiili numerous regulatory stru1dards and operating rules. Specifically. schools must comply
witl1 ilie Higher Education Act of 1965, as runended, ru1d tl1e regulations issued theretmder by ilie Department
of Education. wllich collectively govem ilie companies' participation in Title IV financial aid programs.
Additionally, legislative action or changes in ilie Department of Education's interpretation of existing rules
may significantly affect ilie companies' business models.

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FBR CAPITAL MARKETS

Dependence on private loans. Many U.S. schools derive a material percentage of revenues from private
student loans. The availability of private loans originated by third-party lenders has contracted and might not
return in the foreseeable future. As a result, many companies have begun funding such loans themselves.
Under the current structure, the companies retain all credit risk on loans originated.
Litigation risk In the ordinary conduct of business, proprietary schools are subject to lawsuits; demands in
arbitration: investigations; and other claims, including lawsuits and claims involving current and fonner
students, employment-related matters. business disputes, and regulatory demands.

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Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Career Education Corporation (CECO- $24.18)

Hoffman Estates, IL

Price Target: $22.00

January 14, 2010

Coverage Initiated

STOCK DATA
$17.95-$28.87

52-Week Range
Shares Outstanding (mil)
Float (est mil shs)
Average Daily Volume
Market Cap~alization (mil)
Fiscal Year-End

86.5
85.9
1,763,418
$2,092

Docelltler

EARNINGS DATA
Adjusted Earrings per Share
2008A
3Q
1Q
2Q
$018
$014
ro.oo
2009E
1Q
ro.26A

4Q
ro32

FY
$0.67

3Q
2Q
ro.o7A $0.25A

4Q
ro.33

FY
$0.90

2Q
$031

3Q

4Q

ro.49

ro.68

FY
$1.93

2Q
$0 30

3Q

ro.45

4Q
ro.re

FY
$1.88

fo1~
1Q
$0.46
2011E
1Q
$0.47

OPERATING DATA
Reverue

yov Growth

200&\

$1,7C6

1.8%

200SE

$1,829

201~

$2,004

7.3%
9.6%

$2,063

2.9%

FY Dec

2011E

Underperform

Most Likely to Be Held Back

Summary and Recommendation
We are initiating coverage of Career Education Corporation (CECO) with an
Underperfonn rating and a 12-rnonth price target of $22 per share. Although
management has accomplished much, the turnaround story is beginning to stall. We
believe that CECO faces challenges from proposed changes to enroll ment-based
compensation rules, statutory limits related to Title TV funds, elevated student loan
defaults, and restrictions imposed by accrediting agencies, which. combined, will
likely restrict enrollment growth or raise operating costs. Arguably, with CECO
trading at S.Ox EV/EBITDA, the market is discounting much of the risk. Our bigger
concern is Career Education 's relative market positioning that is concentrated on
countercyclical programs and faces increased competition from the commoditized
online education marketplace. Due to the aforementioned issues, we are forecasting
declines in both enrollment and earnings for 2011, and although the company's cash
flows ~md balance sheet should provide some support to the stock, we believe that the
shares are likely to underperform their peer group.

Key Points

Turnaround has benefited from cyclical tailwind. In our opinion. Career

Education is a turnaround story that has benefited from an unsustainably favorable
operating environment since new management was brought in back in 2007. The
path to growth is likely to become more difficult, as an eventually improving job
market reduces student demand and as t11e company deals with accreditation
issues at American InterContinental University that are currently precluding
expansion opporttinities. Furthermore. expanding its culinary arts and art and
design programs wiU require Career Education to e.\.1end more loss-leading private
loans to its students, pressuring margins as a result.

Less efficient brand strategy. Relative to its peers, Career Education has done
less to consolidate seemingly redundant brands to achieve advertising and real
estate synergies. Although the company has made progress in this area, it
continues to operate 13 domestic bra11ds in a competitive environment where we
believe commoditization is making brand strengtJ1 an increasingly important
factor in attracting new students.

Univesity segment fighting up hill battle. Career Education earns its greatest
profit per student and enjoys its widest margins in the university segment,
primarily due to its online population. With the company unable to introduce new
prognuus at American InterContinental University due to accreditation issues, we
tllink Career Education will find it increasingly difficult to compete with betterbrdllded peers able to roll out new prognuns in response to customer demand.

Valuation. Our price target of $22 reflects our e:'l..-pectation t11at tlte market will
continue to assign a lower relative valuation to CECO shares based on slowing
enrollment growth caused by botl1 an improving job market and ret:,'lllatory issues,
along with rising costs associated with acquiring new students. Our target
represents 11.3x om CY 10 EPS estimate and 4.5x CY l OE EV/EBITDA.

FINANCIAL DATA
FY 20C9A
Studert EITollment

114,200

Long-Tenn Debt (miQ

$3.11

Operating Margin

7.02%

$in millions unless othen11ise indicated.

Pricing as ofJanuary 12. 2010.

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Investment Thesis
We are initiating coverage of Career Education Corporation (CECO) with an Underperfonn rating and a $22
price target. We continue to view the company as something of a turnaround story. and although
management has accomplished a lot, there is still a long way to go. Issues such as enrollment limitations
imposed by the 90-10 Rule, possible changes to incentive compensation. rising cohort default rates. fulfi lling
gainful employment requirements for stl1dents, and concerns pertaining to accreditation at one of the
company's schools are clouding the stock currently. We believe many of these issues will either restrict
enrollment growth or raise operdting costs in the future. altl1ough. arguably. at 5.lx EBITDA. such issues
may be priced into the stock. Our bigger concem is Career Education's market positioning. which is focused
on countercyclical progrdillS within an increasingly commoditized online education delivery model. We
expect earnings growth to begin to stall heading into 2011 due to the impact of stabilizing (if not improving)
employment trends. progrdill expansion limitations due to accreditation issues, and Title IV aid limitations.
Altl1ough the company's cash flows and strong balance sheet should provide support to the stock. we believe
CECO shares are likely to underperfonu tlle peer group.

Valuation
CECO currently trades at l2.5x our CYlO EPS estimate of $1.93 and at l2.9x our CY 11 EPS estimate of
$1.88, compared with 14.9x and 11.2x at which the peer group currently trades. On an enterprise basis,
CECO trades at just 5.lx our 2010 EBITDA estimate, compared with 6.4x for the peer group. Our 12-montll
price target of $22 reflects our expectation t11at the market will continue to assign a lower relative valuation
to CECO shares based on slowing enrollment f,'Towth caused by botl1 an improving job market and re!:,'lllatory
issues, along with rising costs associated witl1 acquiring new st11dents. Our price target represents ll.3x our
CYlO EPS estimate and 4.5x EV to projected CY 10 EBITDA. Although tl1e company 's cash flows and
strong balance sheet should provide support to the stock, we believe that CECO is likely to underperfonu the
!,'TO Up.

Risks to Our Call

Valuation. W ith CECO trading at 5.lx our2010 EBTTDA forecast, a lot of bad news is arguably priced into
the stock. Generally, t11e stock could be positioned to respond more to any positive news flow than it would
to any negative news at this point. With $474 million in cash and securities and less than $4 mmion of debt
outstanding, the company' s balance sheet and cash flows from operations could attract a higher valuation
from investors once some of the overhangs clear. To some degree, we believe such an outcome is likely, but
our rating more closely reflects our view of CECO having less relative upside potential than its peers.
Enrollment growth. If unemployment stalls around the I oYo level, this could create an environment for
better-than-expected enrollment growth. Furthennore, secular trends toward online education could also
provide enrollment upside potential. Additionally, trading at a discount to the group, CECO shares cou.ld
outpcrfonn if the market sees a sustainable growth opportunity for the company.

Regu latory risk. Proposals to eliminate safe haroors related to incentive compensation for enrolhnent
officers and proposals to meet a gainful employment test could. at the least, increase the cost of enrolling
new students and. at worst, prevent Career Education from enrolling large segments of the stl1dent population
and/or requiring tuition cuts. A lack of movement on proposed regulation-notably, gainful employment
standards-could serve as a positive catalyst for the stock. Additionally, a favorable outcome from the
Department of Education investigation related to its accreditor would likely serve as a significant catalyst for
t11e stock.

Company Overview
Career Education Corporation opemtes more than 75 can1puses in four broad segments throughout the U.S.,
with additional locations in France, Italy, and the U.K . In addition to offering on-site courses, tl1e company
offers classes via the h1temet. with 38% of its students enrolled in online courses. Career Education is
organized as a portfolio of independently operated schools connected by shared services provided at the
corporate level. Its school poxtfolio includes key br.mds such as American InterContinental University,

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Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Colorado Technical University, Intemational Academy of Design and Teclmology, Le Cordon Bleu
Academy, and Sanford-Brown Colleges. The company built its school portfolio between 1997 and 2003
through several acquisitions. Because of operational issues at t11e company, t11e Department of Education
prohibited Career Education from acquiring any new schools between June 2005 and January 2007. Now,
under a new management team, the company has shirted from an acquisition-driven strategy to one focused
on improving the performance of its existing school assets, exiting unprofitable lines, and generating orgmuc
growth.
Since undertaking this turnaround initiative in 2007, management has accomplished the following:

Completed teaching out 10 unprofitable Katherine Gibbs College campuses, wlule converted another
four to health and education programs under the Sanford-Brown College brand.

Exited 600,000 square feet of real estate.

Consolidated from 20 to 13 domestic brands.

Lowered student acquisition costs from more than $3,000 per student to less than $2,000 per student.

Business Segments
Univer sity. The company's largest segment by enrollment (47%), university includes the American
InterContinental University (AIU), Colorado Technical University (CTU). and Briarcli.ffe College brands.
Approximately 79% of Career Education students witlun the university segment are enrolled in an online
program either through AIU or CTU and account for almost all of the company's online-based students. The
university segment offers career-oriented programs such as business. visual communications and design
technologies. health education, infonnation technology. and crimi11al justice both online and at 12 campuses.
The university segment generates approximately 45% of Career Education's total revenue and traditionally
reports the highest operating margin of all the segments at 20% to 21%. According to our forecast,
university was on track to grow enrollment by 20%, revenue by 15%, and earnings by 36% during 2009.
Although we view this growth as healtl1y, Career Education has lagged many of its peers seiVing sinlilar
markets during the unemployment-led enrollment surge seen industrywide. We believe tlus
underperfonnance is a function of accreditation and operational issues. AIU recently switched accreditors to
the Higher Learning ConUlussion of the North Central Association of Colleges and Schools (HLC) from the
Southem Association of Colleges and Schools (SACS) after a two-year stint on probation. As a result of still
having to fulfil l certain obligations associated w ith its new accreditation by HLC, the school currently CaJUlot
introduce new programs or materially alter existing progra1ns, wluch have limited growth opportunities. A
recent report by the Department of Education's Inspector General regarding HLC's accreditation of the
company 's American InterContinental University introduces another level of risk. More specifically, the
Inspector General took issue with HLC's decision to accredit AJU despite tlte university lacking specific
st~mdards for measuring credit hours and progr.un length.
Separately. we believe that Career Education is at somewhat of a relative disadvantage in this marketplace.
Many of its peers have successfully leveraged their wide networks of branch campuses to attract students
both online and on site. With only 12 campuses in the university segment. the company needs to compete for
most of its students entirely online. Arguably. an online program is more commodity-like. differentiated by
price and brand reputation. In any case. the company faces intense competition within this marketplace.

Culinary. Career Education's culinary segment includes Le Cordon Bleu (LCB), Kitchen Academy schools,
Califonua Culinary Academy, Califonua School of Culinary AI1s, Pennsylvania Culinary Institute,
Scottsdale Culinary Institute, Texas Culinary Academy, The Cooking and Hospitality Institute of Chicago,
and Western Culinary ll1Stitute. These schools provide career training programs in culinary arts, baking and
pastry arts, and hotel and restaurant management in both classrooms and kitchen teaching facilities . Culinary
accounts for approximately 11% of total enrollment but for approximately 18% of revenue, .~:,riven these
progran1S' higher lltition rates, compared with other Career Education schools.
On August 4, 2009, Career Education acquired the Le Cordon B leu brand in the U.S. and Canadian markets
for approximately $135 million ($25 nullion in cash. 3 null ion shares of CECO stock. and a 30-month earnout payment). Prior to tlus transaction. tl1e company paid licensing fees to use tl1e brand. The company
expects the purchase to save $15 n1illion to $20 million annually in licensing fees. Additionally. Career

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Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Education has begun to rebrand its non-LCB culinary schools under the LCB brand, helping to create
advertising and other brand-driven synergies.
Academic programs within t11e culinary segment are substantially more expensive than at Career Education' s
other schools. illustrated by the si1:,'1lificantly higher arumal revenue per student ($29,312) earned in the
segment. Given the gap between gross tuition costs, which can be as low as $15,000 at the
certificate/diploma level and as high as $46,000 at the associate level, and Title N aid limits, culinary
students are more dependent on gap funding than students in the company 's other programs. As a result, l11e
culinary segment has been affected to a greater degree by tJ1e contraction in private student loan availability.
making t11e segment tJ1e primary recipient of Career Education' s internal lending program and institutional
grant aid. Management's decision to fund an additional $50 million of private loans in 2010 on top of the
$34 million originated in 2009 is largely based on the need to provide gap funding for many culinary school
students.
Additionally, in January 2009, tl1e company began to offer 21-montll programs rather than lS-montl1
programs to allow enrolled students to receive an additional academic year of Title IV funds.
Health education. This segment consists primarily of tJ1e Sanford-Brown Colleges, which offer healt11
education programs, as well as programs in business studies, visual and design technologies, and infom1ation
technolo!,>y, in classrooms and laboratories. Although tlris segment currently accounts for only 20% of
Career Education' s overall enrollment and contributed 17% of 3Q09 revenue, it has been a point of emphasis
for t11e company for several years. dating back to Career Education's acquisition of Missouri College, Inc. in
2002 and Whitman Education Group, wlrich included Sanford-Brown and Colorado Teclmical University. in
2003. The company has grown and intends to grow the health education segment via geograplric expansion
and selective acquisitions. During the course of 2009. Career Education opened seven new health education
campuses and in the process converted four " transitional" campuses to health education campuses. As a
result offavon1ble demographic and market demand trends, as well as geographic e::.:pansion, healtl1
education enrollment grew 33% year over year in 3Q09. wlrile new starts were up 26%.
Art & design. This segment includes t11e Brooks Instjtute, Brown College, Collins College, Harrington
College of Design, and 1J1e International Academy of Design and Teclmology. Art & design accounts for
12% of Career Education' s enrollment and for 14% of revenue. T hese schools offer programs in fashion
design, game design, graphic design, interior design, film and video production, photography, and visual
conununications in classrooms, laboratories, and online.
Enrollment within art & design remains stagnant at approximately 14,000, as mid-single-digit new starts
growth has been offset by similar attrition levels. AJthough t11e weak job market has increased the pool of
prospective students, the weak demand for such graduates is likely hurting enrollment. We expect this
segment to continue to struggle during 2010.
International. Career Education owns and operates INSEEC Group and Instituto Marangoni located in
France, Italy, and tl1e U.K. These schools offer prognuus in business stl1dies, health education, fashion and
design, visual conuuuuication, and teclmology on 11 cmupuses. International, which is subject to significant
seasonality, accounts for approximately 9.5% of tl1e company' s enrollment ~md 6% of revenue on an
annualized basis.
T.-ansitional. Career Education has either completed or nearly completed teaching out 10 schools classified
in t11e transitional segment. These were unprofitable schools. and existing students need to complete their
programs. or be " taught out." before tl1e schools can be closed.

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Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Career Education U.S. Campus Locations

Art & Design

University

.Health
0 Culinary
Source: FBR Research. company filings, and Department ofEducation

Revenue Contribution by Segment: $1.77 Billion Total from 3Q08 to 3Q09

T ransitional Schools

11%

University
47%

Iutemational

10%

Source: FBR Research and company filings

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FBR CAPITAL MARKETS

Institutional Brokerage, Research and Investment Banking

Enrollment by Segment: 114,200 Students As of October 31,2009

TransiliontU
Schools

Art&Dcsign
15%

University
44%

CuUnary Arts
18%

H ealth Education
16%
6%

Source: FBR Research and company filings

Year-over-Year 3Q09 Growth in Student Population and Starts by Business Segment

60% .---------------------------------------------------------50%

+-----------------

40% +-----------------

30%

+-----------------

20% +-------------l

0% +--==
Art & Design
-10%

Culinary Arts

Health Education

International

Uni\rsity

~---------------------------------------------------------

Io YOY Population mYOY New Starts I

Source: FBR Research and company filings

Federal Student Aid

As with most higher education institutions, the ability of Career Education's student population to obtain
federal aid is essential to support enrollment growth. Federal student aid (FSA), primarily through Title IV
Pell Grants and federal student loans, is a critical source of funding for the company's students, although less
so than for some proprietary school peers. For perspective, Career Education's students received $1 .24
billion of total FSA in the 2009 academic school year-a $139 million, or 12.5%, increase over tl1e prior
year. Considering that Career Education reported almost flat revenue growth during the same period, the
$139 mi Ilion increase in federal aid underscores tJ1e essential nature of such funding for the company. Still,
the 12.5% increase in FSA was considerably less tJ1an the 20% increase received by higher education
institutjons overall. Nevertheless, federal aid accounted for 73% of the company' s total revenue in academic

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Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

year (A Y) 2009 and is running at approximately 80% of revenue currently. Therefore, the company's abi lily
to grow is lied. in part. to t11e goverlU11ent's wi llingness to increase Title IV funding. We are not suggesting
Career Education is at risk of losing this aid, only highJighting the dependency.
Composition of Title IV Program Funding, AY09 (73% of Total Revenues)

Gran ts

16%

Loans
84%

Source: Department ofEducation

Cost/Benefit
The long-term growt11 prospects of Career Education, or any school, depend on its ability to provide value to
prospective students relative to t11e costs (direct and opportunity) of attending t11e program. Students must
consider numerous factors when weighing the costs versus benefits of a particular program, including
graduation rates, job placement rates, attendance costs, forgone wages, student loan debt, and expected
salaries.
Tf students' total costs exceed t11eir ex'Pected returns, we would expect a school's enrollment growth or
margins to deteriorate as students choose less expensive alternatives. Conversely, to t11e extent that
graduates ' future earnings exceed t11e economic cost of attendance, t11en demand should remain robust.
Altl10ugh every student situation differs, we attempted to approximate the cost/benefit trade-off by
comparing several of Career Education's most popular programs with the projected salaries in t11e
corresponding career fields relative to our estimation of the total economic cost of attendance.

Below. we review the expected cost/benefit scenarios related to three of Career Education's most popular
career-oriented programs. First, we considered the case of a student attending one of the school's allied
health certificate programs with the expectation of obtaining a job as a medical/clinical assistant. The
median salary for a medical assistant, according to the Bureau of Labor Statistics, is $28,300, an increase of
$13,220 over tJ1e expected salary of an employee earning t11e minimum wage. We estimate tJ1at t11e total cost
of completing this program (after accounting for tuition and books, grant aid, opportunity cost of lost wages,
and tJ1e present value of debt service cost) is approximately $27.219. At these levels, we estimate that the
student will break even on his/her investment in 2.06 years, assuming no taxes and a 10-year payback period
for the student loans. On the same basis, we estjmate the recovery period to be approximately 2.98 years for
a student graduating f1"om a culinary arts program and 4.34 years for a student completing AID's online
bachelor's degree in business.

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FBR CAPITAL MARKETS

Institutional Brokerage, Research and Investment Banking

Cost/Benefit Analysis of Various Degrees and Estimated Years to Investment Recovery

Projected Annual Salary

Less: Existing Salary Expectations
Expected Benefit
Cost of attendance
Average Federal I State Grants
Net Cost of Attendance
Opportunity Costs (Lost Wages)
Present Value of Debt Service Costs
Total Adjusted Cost of Attendance

Medical
Assistant
(Allied Health)
$28,288
($15,080)
$13,208

Chef/Head
Cook
(Culinary)
$38,771
($15,080)
$23,691

AIU- Online
Bachelor in
Business
$64,720
($30,732)
$33,988

$13,275
($2,414)
$10,861
$12,567
$3,792

$37,883
($1 ,385)
$36,499
$21 ,380
$12,742

$53,110
($12,200)
$40,910
$92,196
$14,282

$27,219

$70,621

$147,388

2.06

2.98

4.34

Years to Recover

*Medical assistant and chef existing salary expectations use minimum wage; bachelor's in business uses expected wages
of a high school graduate.

Source: Bureau ofLabor Statistics, Department ofEducation, and FBR Research

These examples above are useful only to a point. The exercise assumes t11at (1) t11e student completes the
program; (2) an opportunity cost is assigned for the time necessary to complete the program; (3) the student
can obtain employment at t11e median salary of t11at particular trade upon graduation; (4) the student receives
no employer tuition assistance; and (5) aJI other factors, such as tax rate, living expenses, and salary, remain
static. The reality often is much different. Many limes, the burden of making such a significant financial
investment up-front with only the prospects of higher future earnings is too much for students to bear, and
many drop out. On t11e ot11er hand, a return on investment ofjust a few years that puts someone on a career
pat11 to dramatically increase his or her lifetime earnings is a small price to pay.
Completion rates are among the most important factors in detennining whether or not a student will benefit
from enrolling in a particular program. Assume that the cost (or partial cost) of attending a program but
failing to complete it leaves the student with debt to pay and with no degree to increase his or her earnings
potential. This is a particular issue for students attending online programs at AIU and CTU, which report
lower retention and completion rates Ulan Career Education's healtl1 education and culinary arts programs.

Student Defaults
We believe the rate at which students default on their loans reflects the value proposition an institution offers.
Although a particular student may default for myriad reasons. an elevated default rate at a school suggests
that a high level of its students did not benefit from auending the program. That is not to say the quality of
the education or program is lacking, just that the student was unabl.e to repay the student debt load acquired
attending a particular program. Ramifications of student loan defaults can go beyond students t11emselves. as
high default rates can cause an institution to become ineligible to receive Title IV funds. effectively shutting
down that school.
According to the Department of Education' s most recent report, the national student loan cohort default rate
(CDR) increased from an all-time low of 4.6% in FY04 to 6.7% during FY07 (the most recent year
available). Historically, the CDR rate as measured by the goverrunent captures only loans that default within
the first two years upon the borrower entering repayment Recent changes in the Higher Education Act
extend t11e measurement period another year to three years. Preliminary three-year default rates were
recently reported for FY07, with the nationwide rate increasing from 6.7% to 11.8% with the inclusion of
another year. This means, on average, that t11e number of loans t11at default increase by approximately 76%
between year two and year tluee. Although the three-year CDR is certainly more representative of actual
defaults. it st) II underreports life-of-loan default rates by more than 30% for all types of student loans and by
a factor of2.0x to 2.50x for loans issued at proprietary instjtutions, according to Department of Education
forecasts.
Setting aside the actual lifetime default rdtes for students, a school's official two-year (and now tlrree-year)
CDR is important as it pertains to eligibility to receive Title IV funds. Under current regulations, any
institution tl1at reports a two-year CDR that exceeds 25% for three consecutive years becomes ineligible to
receive Title IV funds. Using tl1at metl10dology. we calculate that Career Education' s institution-wide CDR

32

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

was 9.2% in FY07-approximately 1.4x higher than t11e national rate but well below the 25% threshold. The
company 's cuHnary schools have t11e lowest consolidated 2007 two-year CDR of t11e company ' s major
brands at 6.1 %. Career Education' s Gibbs-branded campuses posted the highest default rate at 12.7%. As a
reminder, the company is currently in the process of teaching out1 0 of these campuses while converting four
to health education campuses. We estimate that Career Education's two largest brands, American
InterContinental University and Colorado Technical Institute, have CDRs of 10.6% and 11.0%. respectively,
in line with the overall CDR of the proptietary school group.

FY07 CDR by Brand

I 2-yeru: CDR

3-year CDR

*IADT includes all art and design schools.

**Le Cordon Bleu includes all culinary arts schools.
So11rce: Department o[Ed11catian and FBR Research

The regulatory change requiring a three-year CDR increases allowable limits from 25% to 30% for tlwee
consecutive years and to 40% for any one academic year. Using the new three-year methodology, we
calculate tl1at Career Education's overall CDR more than doubled from its two-year CDR of 9.2% to 19.6%.
Again, however, the rdte remained well below the 30% limit ln tenus of individual schools, Sanford-Brown
jmnped from 8.5% to 22.1 %, pushed by the inclusion of several Gibbs Colleges. American InterContinental
University and Colorado Tecluucal Institute reported three-year CDRs of 19.7% and 22.4%, respectively.
Although on an institution-wide basis and in tenus of the individual campuses. Career Education remains
below the 30% threshold, several schools are close enough to necessitate increased attention from
management, given that macro credit trends are likely to worsen.
Even in the worst-case scenario, it would be late 2013 at the earliest before Career Education would lose
eligibility. With t11at much lead time, schools can make adjustments, and as such, we expect the company
will not exceed tl1e tlmshold. The more likely scenario \Vould be that Career Education would have to
tighten admission standards. reduce emollment in higher-risk progrruns. and increase default prevention
pro!,'l<Uns-all of which will likely either reduce overall emollment or increase operating costs.
Beyond the Title IV implications of student loan default rates, the two- and three-year CDRs suggest tJ1at the
cumulative lifetime defaults for all of Career Education's students is approximately 50o/o-tlle company' s
current policy is to reseiVe 48% for its private loans.

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Institutional Brokerage, Research and Investment Banking

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Student Profitability Analysis

In an effort to gauge the leverage inherent in Career Education's business model, we analyzed tlte company' s
economics on a per-student basis to demonstrate the importance of increasing enrollment. Taking into
account the enrolled student population and attrition rates (including dropouts and graduation), we calcttlate
that the average student produces approximately $17,247 in revenue during ltis or her tenure at the school.
Career Education's cost of providing education services, including corporate overhead, totals approximately
$11 ,065 during the same period, leaving a pretax margin of $6,182 per student. The company' s cost to
acquire a student, including all the marketing, recruitment, and direct admission expenses, mns about $4,066
per new student. After accounting for t11e $486 of lost revenue related to bad debt expense, the pretax return
per student is approximately $1,630, a return of 40% on the student acquisition costs.

Weighted-Average Life Analysis

E::pected revenues per student

$17,247

Expected costs per student

($11,065)

Expected income per student

$6,182

Less: acquisition costs per student

($4,066)

Less: bad debt per sntdent

($486)

Profitability pet student

$1,630

Re!Jtm 011 acquisition costs

40%
Source: Company filings and FBR Research

Through a combination of lower student attrition. increased operating efficiencies. and lower acquisition
costs. Career Education's profitability per student has increased by 41% during the past year, according to
our calculations. Although tuition and operatjng efficiency certainly are important. student attrition rates are
critical to the business model's profitability. Once the company has made the investment to attract a student,
its ability to retain that tuition-paying student, and hence leverage more of t11e school's fixed costs. is
essential. The average student remains enrolled in a Career Education program for approximately one year,
so any extension by either improved retention or by offering longer programs would likely result in a boost to
profitability.

Funding Sources
With caps on federaL loans for students, the 90-10 Rule limiting the amount of Title IV funding a school can
accept. and mmual tuition rates across Career Education' s programs approaching $14.000, access to private
or alternative loaJ1S for the student population has become increasingly necessary. particularly in culinary and
art & design programs. Private loans accotmted for 10% of cash receipts for Career Education in 2008.
However, tighter credit supply ru1d the recent increases in federal loan limits and Pell Grant awards reduced
the private loan contribution to just 2.3% of cash receipts during the first three quarters of 2009. The tradeoff is that now Career Education receives almost 80% of its revenues from Title IV ftmding, up from 69% in
2008. Future tuition increases would likely require more private loan borrowing by students who have
aLready reached federal aid caps.
Traditionally, private student loan funding came f1'om third parties such as Sallie Mac. In February 2008,
however, facing an increasingly difficult funding enviromnent and concerns regarding its credit exposure to
" nontraditional" schools, Sallie Mae notified Career Education that it would no longer provide any recourse
private student loans and would dramatically curtail the funding of nonrecourse loans to its students. This
lack of private loan availability threatened students who needed to fund the gap between federa l aid and the
cost of attending Career Education progrMns.
The government provided some relief with the passage ofH.R. 5715 in April 2008. which increased Ute
amount students could borrow under tlte federal loan program by $2.000 and subsequently exempted such
borrowings from the 90-10 calculation in the reauthorization of the Higher Education Act until July 2011.
Additionally. Career Education now provides much of the gap funding to students. mostly through e.\.iended
payment plans. At the end of 3Q09. t11e company reported tltat it had originated $34 million of private loans
directly to its students. and management now expects that origi11ations will add another $30 million to $50

34

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

million in 2010. The increase in private loan originations, which is helping to fuel enrollment growth, was a
conscious effort by management to loosen credit standards to accommodate more students. As a result,
management expects t11at defaults on these loans will approach 48%.
The e>.-pected loss rate makes these " loans" unprofitable from tlte start. However, we view this rate more as a
discount to revenues than as a true loss. This discount is necessary to not only help students fund their tuition
payments but also to help Career Education comply with the 90-10 Rule. Changes to the Higher Education
Act in 2008 effectively allowed schools to include " institutional loans" in tile calculation of revenues
pertaining to Ute 90-10 Rule. Tll.is more favorable treatment of institutional loans is set to expire in July
2012.

Policy/Regulatory Risks
In addition to receiving 80% of its revenue from federal student aid, Career Education's entire business
model hinges on its approval by accreditation agencies ~md the Department of Education. As a result, the
comp~my faces a signific:mt amotmt of regulatory and policy risk. Our discussions with Washington
policymakers suggest that Congress is unlikely to use legislation to make any direct changes to the industry.
Rather, we expect tile Obama Administration to exercise its regulatory authority that currently resides wiili
tl1e Department of Education in an effmt to scmtinize proprietary schools more closely in several ways.
Ability to benefit. For a student (and hence a school) to be eligible to receive federal student aid, he or she
must have a high school diploma or a reco!,'llized equivalent unless tl1at shtdent meets certain ability-tobenefit (ATB) criteria. A prospective student can demonstrate ATB by passing a Department of Educationapproved ATB test, typically offered by a certified iliird-party administrator. Schools are required to make
available programs to assist such students in obtaining a high school diploma equivalent but are not required
to verify that students are enrolled in the programs or monitor students' progress in such programs.
An August 2009 GAO report on proprietary schools reconm1ended increased oversight of proprietary schools
and ATB test providers to ensure that only eligible students receive federal student aid. eliciting criticism
from Congress and calls for oversight. Specifically, the report cites a weakness in the Department of
Education's oversight eligibility requirements-standards designed to ensure students' basic math and
English proficiency to reduce defaults and, ultimately, the student loan program' s cost to taxpayers. The
report cites several abuses and possible cases offraud related to t11e ATB test for students lacking high school
diplomas.
The end resull will likely be more-rigid eligibility criteria, which will decrease enrollment growth at schools
dependent on ATB qualification for a significant portion of enrollment. Career Education does not disclose
its exposure to students qualify ing via tile ATB process.
Enrollment-based compensation. Another hot-button issue in Wasll.ington is incentive compensation for
admissions representatives based on enrollment. According to tl1e Federal Sh1dent Aid handbook, in order to
be eli!,>ible to receive federal student aid, " schools may not provide collllUissions, bonus, or other incentive
payment based either directly, or indirectly, on securing enrollment or financial aid to any individual or entity
engaged in recruitment or admission activities or in making decisions reganiing the award of FSA progmm
fcmds." Despite the general prohibition, tlle Bush Administration established several safe hatbor provisions
that allow for incentive compensation in limited circun1stances.
The Department of Education is cturently reviewing these safe hrubors as part of a negotiated mlemaking
conunittee, and we believe some changes are likely that will restrict compensation prdctices for the industry.
Considering t11at Career Education spends 27% of its revenues on marketing and adtnissions, a large amount
of which is for recmitment-related compensation, such changes could make enrollment growth more difficult
for tlte compru1y.
Gainful em1>loyment. Many programs and institutions are eligible to receive Title IV funds based on Ute
fact that Utey prepare students for " gainful employ ment in a recognized occupation." For proprietary
schools, all certificate, diploma, or degree programs that are not defined narrowly as " liberal arts" are
governed by ti1is " gainful employment" mandate to be c lassified as an eligible institution by the Department
of Education. There is no standard, however, for what constitutes "gainful employment."

35

Institutional Brokerage, Research and Investment Banking

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As part of t11e ongoing negotiated mlemaking process, the rules committee is considering codifying tJ1e
definition of gainful employment to caJculate the " value added by tJ1e program." First, t11e conmuttee has
recommended using Bureau of Labor Statistics Standard Occupational Classification (SOC) codes to link
educational program to defined occupations. The cost of the program would be compared to the annual
income increase of someone eanung in the first decile of the appropriate SOC code. A cost-to-earnings ratio
of no more than3x would be considered acceptable. The conmlittee is also considering whether the
Department of Education should establish a mawmun debt-to-income mtio of 5%.
The repercussions of this issue are significant., as it could effectively set tuition caps for schools to remain
Title IV eligible. Furthennore, the uncertainty that such requirements would bring would also be significant.
Schools would have to detennine tile appropriate SOC codes relevant to U1eir programs, while U1eir tuition
rates would be linked to Bureau of Labor Statistics occupation surveys that may or may not reflect tile true
wages eamed by graduates.
Despite what we consider to be a serious headline risk to Career Education and the possibility that the
committee will move to propose regulatory language at the end of its tenure in early 2010, we believe that the
Department of Education will not actually implement such proposals for now. TI1e significance and
complexity of implementing this mle have caused considerable concem among institutions, both proprietary
and nonprofits alike, which are worried about a slippery slope toward price controls across aJI of higher
education. Additionally, an issue this important likely wi II gain t11e attention of Congress, wluch may want
t11e final say on constructing the definition of " gainful employment," as the concept was originally
established by legislation. Although we expect no material changes to t11e gainful employment regulation
next year, the desire by the Administration (and some in Congress) to make changes appears to be present. so
the issue could resurface, perhaps during the next reautJ1orization of the Higher Education Act.
90-10 Rule. The 90-10 Rule states that a proprietary school may derive no more than 90% of its revenue
from Title IV funding. The rule is desii:,'lled to ensure that students have at least some level of financial
participation in choosing to attend a particular school and as a safeguard against schools expanding
emollment supported almost entirely by fedeml aid. Any institution that violates the 90-10 Rule is placed on
a provisional status to receive Title IV funds for two years so t11at it can become compliant during tl1at
period.
The higher Stafford loan limits and Pel! Grant increases that Congress authorized in 2008 increased the
amount of Title IV ftmding that many schools receive as a percentage of their overdll revenues, potentially
pushing schools above the 90% tllreshold. To avoid tllls result, Congress temporarily exempted the $2,000
increase in Stafford loan borrowers from tl1e Title lV amount until July 2011. Additionally, Congress
changed the treatment of institutional loans (private loans made from schools to stlJdents) and allowed such
loans to be accotmted for on an accrual basis, with the net present value of the loans contributing to non-Title
lV revenues until July l , 2012.
Although the 80% of U.S. revenue U1at the company has reported as coming from Title IV sources year to
date through 3Q09 is below the 90% threshold, Career Education' s level offlexibiJity is limited. To avoid
tripping the limit, the company could be forced to limit enrollment growth in Ute future. Rapid enrollment
growth in such a weak economy means a higher percentage of students paying tuition witl1 tJ1e maximum
aJlowable Title IV aid. This trend, if continued, could push total cash receipts c loser to the 90% U1reshold.
Clearly, the company has time to adjust to avoid tripping the threshold. Corrective measures would likely
mean raising tuition, witi1 the goal of hav ing students ftmd the increase out of their own pockets. or
deemphasizing certain progmms that traditionally attract students who rely heav ily on federal student aid.
These approaches are problematic, as both could result in lower enrollment, but may be necessary if tl1e 9010 Rule comes into play in tl1e upconling years.

Advertising. Advertising is anot11er area of interest in Washington. Many critics argue institutions tl1at can
receive more t11an 90% of revenue direclly from the federal govenunent should not be allowed to use those
revenues on advertising to attract new students. Instead, the money should be spent on educating those
students. Career Education spends approximately $270 million-16% of revenue-on advertising each year.
Alti10ugh it is unclear how, if at all, regulators or Congress can restrict a company ' s ability to advertise, any
limitations would further restrict Career Education's ability to increase enrollment.

Accreditation-related completion :wd .iob J>lacement rates. As part of their task of measuring acadenuc
standards and the quality of student outcomes, accreditation agencies require schools to meet certain

36

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

standards of student completion and placement rates. Although the required rates vary by accreditor, Career
Education's three primary accrediting agencies-the Accrediting Conm1ission of Career Schools and
Colleges of Technology (ACCSCT), the Accrediting Council for Independent Colleges and Schools
(ACICS), and tl1e Higher Learning Commission (HLC) of the North Central Association of Colleges and
Schools-currently require student completion rates of between 60% and 70% and job placement rates of
between 65% and 70% for certificate and diploma pro!:,'l<ll11S. Longer degree progrdll1S are subject to lower
required completion rates but similar job placement rates. Although placement rdtes are not publicly
available through the Department of Education, we can see completion rate data that measure completers
within 150% of the regular ~unount of time by U1Stitution. Our analysis of the latest available Department of
Education data shows that, in aggregate, Career Education' s schools have an average completion rate within
150% of the normal time of 57%.
On December 17, 2009, t11e Department of Education' s Office oflnspector General released a heavily
redacted alert memorandum pertaining to the decision by HLC to accredit the company ' s American
InterContinental University. Specifically. t11e Inspector General took issue with the fact that HLC was
accredited despite the university lacking specific standards for measuring credit hours and program IengtJ1.
The Inspector General used unusually strong language in saying tl1at " tlus action by HLC is not in t11e best
interest of students and calls into question whether the accrediting decisions made by HLC should be relied
upon by the Department of Education when assistillg students to obtain quality education through the Title
IV programs."
Without accreditation from a Department ofEducation-recognized agency, a school cannot be deemed
eligible to receive Title N funds. Short of tl1is " nuclear" option of losing accreditation, we believe this news
will, at a minimum, further delay any approval to introduce new programs at AJU.
Ongoing program reviews. As part of its administr<ltion of Title IV. the Department of Education conducts
re1:,'lllar program review of participati11g institutim1S. Although we stress that these reviews are part of doing
busilless with the department, they have, in the past, led to adverse findings related to the administration of
Title IV funds and compliance with other regulatory issues. Currently. Career Education has program
reviews pending for Briarcliffe College; Gibbs College- Livingston, New Jersey; Katharine Gibbs SchoolNew York; and the Cooking and Hospitality Institute of Chicago. In addition, ill October 2009, the
Department of Education notified American InterContinental University tl1at it would conduct a program
review, which began in November 2009.

Ongoing Litigation
The company' s schools are currently defendants in several lawsuits. most of which relate to fraudulent
practices and misrepresentation during ti1e recruiting process.

Amador et al. v. California Culinary Academy and Career Education Corporation. Allison Amador and 36
other current and former students of California Culinary Academy filed a complaint in a putative class action
suit that alleges fraud, constructive fr<lud, violation of California Unfair Competition Law, and violation of
the Califomia Consumer Legal Remedies Act. A t the heart of the case is tl1e plaintiff's claim t11at the school
misrepresented the benefits of attendillg the school. The plaintiffs' class is defined as students who enrolled
in the four years prior to the filing of the initial complaint in the Le Cordon Bien Culinary program and/or the
baking ~md pastry program.
Atlams et al. v. California Culinary Academy and Career Education Corporation. The Ada1ns case was
ftled on April 3, 2008. Styled after the Amador class-action suit, it is based on the same underlying
accusations. The two cases are deemed to be related and are being handled by t11e same judge.
The parties have conducted discovery on class certification issues ill the Amador action, but no court date has
been set. Career Education has engaged in settlement discussions with the two parties.

Lilley et al. v. Career Education Corporation et al. is a class action lawsuit filed on February 11. 2008.
against the Career Education Corporation and S~mford-Brown College. The five plaintiffs are current and
former students of the school that allegedly attended a medical assist~mt program at Sanford-Brown College
in Collinsville, Illinois. The suit clailns unfair conduct and deceptive conduct, as well as common law claims
of fraudulent misrepresentation and fraudulent omission. The complaint states t11at the school made
misrepresentations and key omissi011S with regard to the quality of education, quantity of fmancial aid, fLxed
tuition, graduate employability, and salaries and clinical eA1en1Ships.

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Institutional Brokerage, Research and Investment Banking

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Schuster eta/. v. Western Culinary Institute Ltd. and Career Education Corporation. In this suit,
originally fi led on March 5, 2008, t11e plaintiffs allege t11at Western Cu.linary Institute made numerous
misrepresentations related to the school' s placement statistics, students' employment prospects upon
graduation, and the value and quality of education from the school, as well as the cost of the education from
t11e school versus t11e wages students can expect to earn upon completion. The plaintiffs filed for class
certification on August 31, 2009, and the school filed its opposition on September 30, 2009, to which the
plaintiffs filed their reply on October 23, 2009. Oml argument on the motion was heard on October 29, 2009.
Otl1er outstanding cases include t11e following:

Diallo v. American InterContinental University, Inc. and Career Education Corporation;

Blake v. Career Education Corporation; and

Vasquez et al. v. California School of Culinary Arts. Inc. and Career Education Corporation.

Key Management1
Gar y E. McCullough, presiden t and ch ief execu tive officer. Mr. McCullough joined Career Education in
March 2007 as its president and CEO, as well as a member of the board of directors. Prior to joining the
comp<my, Mr. McCullough served as president of Abbott Laboratories' (NYSE) Ross products division.
Before joining Abbott, Mr. McCullough served as senior vice president, Americas, for the Chicago-based
Wm. Wrigley Jr. Company (NYSE), where he oversaw 3,300 employees and a $1.2 billion product portfolio.
Mr. McCul lough serves on t11e board of The Shemrin Williams Company and was named one of Black
Enterprise magazine' s 75 most powerful African-Americans in business. Mr. McCullough holds a B.S. in
business from Wright State University and an M.B.A. from Northwestern University ' s J.L. Kellogg Graduate
School of Management. He also served five years in the U .S. Anny, achieving the rank of captain. Among
other achievements, he was awarded the Meritorious Service Medal.
Michael J . G r ah am, executive vice president and chief financial officer. Mr. Gral1am joined Career
Education in September 2007 as its chief fmancial officer. Prior to joining Career Educatiot~ he had been
chief financial officer of Terlato Wine Group since July 2006. From May 2005 to July 2006, Mr. Gral1atn
served as senior vice president cu1d controller of RR Donnelley and Sons. Before that, he was chief fmancial
officer of Aegis Cotmmmications Group. Inc. from 2000 to 2003. Mr. Graham holds an M.B.A. from the
University of Chicago Graduate School of Business and a B.S. C. in accounting from DePaul U Diversity. He
is a certified public accountant.
Jeffrey D. Ayers, senior vice p resident, gener al cou nsel, iwd corpor ate seuetary. Mr. Ayers joined
Career Education in his current capacity in December 2007. Prior to joining the comp:my, he was senior vice
president, general cmmsel, and corporate secretary of NovaStar Financial beginning in February 2005. Prior
to NovaS tar, Mr. Ayers was vice president and associate general cotmsel at GE Insurance Solutions. Mr.
Ayers earned his J.D. and M.B.A. from the University of Iowa and received his B.S. from Graceland
University.

Risks
Price tuget. Risks to our rating and price target include the potential for our earnings estimates to prove too
conservative if enrollment trends are better than expected or if the economic environment proves exceedingly
favorable for such trends. Additionally, favorable outcomes related to numerous regulatory issues could
create upside risk to our price target as the market assigns higher valuations to reflect reduced regulatory risk.
Regulatory risk and dependence on fede1al student aid. Career Education derives the majority of its
revenues from federal student aid. T he company' s ability to continue receiving such aid depends on its
compliance with numerous regulatory standards and operating rules. Specifically, Career Education must
comply with t11e Higher Education Act of 1965, as amended, and t11e regulations issued thereunder by tlte
Department of Education, which collectively govem the company's participation in Title IV financial aid

Source: FactSet, company filings, and Reuters

38

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

programs. Additionally, legislative action or changes in the Department ofEducation' s interpretation of

existing rules may significantly affect the company' s business model.
Dependence on private loans. Career Education' s U.S. schools derived approximately 2.3% of tlteir
revenues from private student loans during the first nine months of 2009. The availability of private loans
ori!,>inated by third-party lenders has contracted and might not return in the foreseeable future. As a result,
the company has begun funding such loans itself. Under the current structure, the company retains all credit
risk on loans originated.
Litigation risk. In the ordinary conduct of its business, Career Education and its subsidiaries are subject to
lawsuits, demands in atbitration, investigations, and other claims, including lawsuits and claims involving
current and former students, employment-related matters, business disputes, and regulatory demands.

Company Profile
Career Education Corporation is a global education company serving a diverse population of students
through its various subsidiaries. In total, the company runs more than 75 on-ground campuses throughout the
U.S. and in France, Italy, and tile U.K. and tlrree fully online academic platfonns. The company's key school
brands include American Intercontinental University. Colorado Technical University, Le Cordon Bleu
Academy, Sanford-Brown Schools. and the Intemational Academy of Design and Technology.

39

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Financials
Income Statement
Career Education Corporation (CECO)
($in Millions)
.....w

CoMOiidaed I~ St,.temMtt

2007

{ftt1MJLs)

Actual
2008

Y.., 1~
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2010

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2011

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"'""~

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~.OOJo

20.5%

3009
21.0%

4.}1,4

440.7

IQ09

4Q<lS

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QQ

y. y
-IQ09

3011

ClriiiiJ!f"

Cluu,.ee

459.9

.#,.It)

1.}.4 %

15-1.8

P?.~)

(fUJi''*)

154-8

H&S

OIJP

(1</<i/yo)

./4.9%

6.11%
(;RJ.6f)

4.3

J/.7%
43.8

79.1

j,.ff;
(9.Z'<)
18./1%

!Z,I.M
50-6
$1,'1'97
100.0

$.l; tNJ

/.Zf.

1&1
# , J67
50.J

50.9

53.0

54.3

;<Z;IU!
52.7

$1.111()

$1,006

~S:JJ

~871

100.4

100.~

106.7

U.J ~~

1~1

254.0
16.;

~-''I
6;.$'-,

.(4.:J.

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12.2
243.7

256.7

16.2

16.5

16.7

246.4
16.9

ll.l
2AS.6
112

2A.I.J

(J-1.5%)

101.5
U.2
246.8
17.0

258.9

(J.;J)

11.8
239.1
16.4

$1,74()
102.2
1.2

17.4

17.J

2.5
<027.6

(tiSI.)

J.;]';

44J,4

424..)

441,4

429.3

426.3

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4119.6

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t,674.9

TotAl Rewrenoet

1,705.4

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7.J~~

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s.o~

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( tU"<.)

p.o<,)

668.9

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u.r
~

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JJ.IJ%
314.7

(11."9

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314.7

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4181.6

4$7.5

SOO.J

181.2

156.0

JJ,ffl
S7.2
#,JP!

t6l.O
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71.1
;rz, JU

17.}.6
JM'4

181.5

J7.'/1;

J7.7'- '

15-1.1
J/.6%
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Proprietmy to FBR Capita/ Markets JamtaJy 14. 2010

Matt Snowling. CFA . 703.469.1196 . msnowling@fbr.com
Source: Company reports and FIJR Research

40

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Balance Sheet
Career Education Corporation (CECO)
($in Millions)
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819.~

29&.24
J78.J7
178.70
27.53
11,702.3

o.oo

o.oo

48.45-

4S.94
76.60
26.18
11.74

0.00
-46.3!1
72.5 ..
28.78
19.56
68SI
213.05
8.58
-457...
3.11
95.11

0.00
47.55
74.43
23.46
27.15
62.03
190.26
7.72
432.6
3.11

J.ll
96.0S

149.)0
6.2$
391A
.H I
95.33

t&) .LS\

{6i..J6':

9$.94

4QII

JOlt

7~83

25.20
18.1J.
71.61
16l.7S
6.9~
408.~

72.3~

6~0

0.00

su.s

rtl11
48.5.-4

"~"!:..

~: .:.:~

.'Qe ,.~'

~4.SJ:

479.2

47~U

46-4.)

463.0

462.S

461.0

462.2

t.S2

1.52

1.52

1.~2

1.52

1.52

1.52

1.52

1.S2

1,0975

1,0S5.7

t.,10U

1, 138.3

1,1SS.J

1.220.6

1.23S:Z

1,268.7

1.315.6

~.;)

ProprietaJy to FBR Capital Markets Janumy 14. 2010

Matt Snowling, CFA . 703.469.1196. msnowling@!jbr.com
Source: Company reports and FBR Research

41

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

DeVry Inc. (DV- $56.11)

Outperform

Oakbrook Terrace, IL

Price Target : $68.00

January 14, 2010

Coverage Initiated

STOCK DATA
Sll. 19. $64.69
71.1
69. 1
1,1 14,345
$3,985

52-Week Rooge
Sh<resOutstooding (miQ
Float (est mil shs)
Averag: Daly Volume
M<rket Capitalizaion (miQ
Fiscal Ye<rEnd

June

EARNINGS DATA
Adjusted Earri ng; per Share
2009A
3Q
1Q
2Q

$0.48

$0.59

$0.70

$0.51

FY
$2.28

4Q
$0.76

FY
$3.33

3Q

4Q

$1.14

$0.89

FY
S3.97

4Q

2010E
2Q

3Q

'i/J .76A
2011E
1Q

$084

$0.00

$0.94

$1.01

1Q

2Q

FY Jun

Revenue

1461.5
1955.8
2322.7

Summary and Recommendation

We are initiating coverage ofDeVty Inc. (DV) with an Outperfonn rating and a 12month price target of$68. Although the shares trade at a premium to the company' s
proprietaty school peers, De Vty is better positioned, in our view, in tenns of its
student body. its bmnd, its product, and its use of a co-location and onsite/online
hybrid education delivel)' model to sustain enrollment growth long tenn. Furthennore,
we believe DeVry is less exposed to regulatory changes and Title TV restrictions that
could hamper peers' ability to add new students. As such, we believe DV is the best
positioned of the proprietary schools under our coverage to outperfonn its peers and
maintain a premium valuation in U1e market.

Key Points

OPERATING DATA
2009A
2010E
2011E

Most Likely to Succeed

YOYGrowU1

33.9%
33.8%
18.8%

FINANCIAL DATA
FY 2009A
Studert ErTollment
Long-Term Debt (miQ
Op! rating M<rgin

96,022
$104.80
18.40%

$in millions unless othen VIse indicated.

Pricing as o[Janua1y 12. 2010.

Susta ina bility of student enrollment. The composition ofDeVry's student

population. with its higher concentrations of bachelor's. master' s. and doctorate
students, should make it less vulnemble to the inevitable improvement in the jobs
market that could siphon off enrollment demand, in our opinion. Additionally,
most of the company's associate' s degree students, which tend to be more
countercyclical. are enrolled in one of its healthcare programs, for which we
believe the ongoing demand for such trained workers will sustain enrollment.
Bette1 1>ositioned in an unce11ain regulatory envi1ooment. We view DeVry as
best positioned from both a regulatory standpoint and in tenns of Title IV
eligibility. Although we expect regt1latory changes to enrollment-based
compensation rules to increase student acquisition costs for both De Vty and the
industry, we believe the company is less vulnemble in areas related to
accreditation and ability to benefit U1at are currently being scrutinized in
Washington. More importantly, DeVry' s lower contribution from Title IV
funding and low cohort default mtes provide it much more flexibility th~m peers in
attracting new students, raising tuition. and expanding online programs witJ10ut
mnning up against statutory limits.
Strength of b1and a nd JHograms. Through its various brands, including De Vty,
Keller School of Business, Ross University, Chamberlain College of Nursing, and
Becker, we believe the company has compi led a diversified group of educational
products that have strong reputations. We view this strength of brand and
diversification of products as helping DeVty to continue to attract students over
the long tenn while maintaining pricing power in what we believe is an
increasingly commoditized marketplace. Additionally, DV's relatively low
default rates suppot1 our view that its students are receiving an attractive value
proposition.
Valuation. Our $68 price target represents 18.4x and 15.9x our CYIO and CYll
EPS estimates, respectively. and an enterprise value of9.7x our 2010 EBITDA
estimate. This represents a premium to peers, which trade at 14.9x, 11.2x, and
6.5x, respec6vely. However, we believe this pre1nium is warranted and
sustainable, given De Vty' s market positioning, lower regulatOI)' exposure, less
dependence on TitJe TV fw1ding, and a less countercyclical student body compared
with peers.

42

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Investment Thesis
We are initiating coverage of DeVry Inc. (DV) witl1 an Outperfonn rating and a 12-month price target of
$68. Although its shares trade at a pre1nium to its proprietary school peers, DeVry is among the better
positioned companies in the g-roup, in our view, and should be able to deliver both top- and bottom-line
growth regardless of macroeconomic developments or changes in the regulatory environment.
As a result ofDeVry ' s high concentra6on of bachelor' s and graduate degree students, as well as the fact that
most of its associate's degree candidates are enrolled in heaJlh education programs, we expect the company
to be relatively insulated from a cyclical upturn in the labor market, particularly when compared with peers.
NonetJ1eless, De VI)' has certainly benefited f-rom countercyclical growtJ1 during the past two years, and
certain segments of its business will likely weaken when economic conditions improve. Consequently, when
that recovery does occur, we expect softer enrollment in U.S. Education and Keller School of Business
programs. Under such a scenario, however, we believe the company ' s core DeVry undergraduate programs
and tJ1e medical and veteri:J1al)' programs at Ross University would remain stable, as we believe the overall
job market does not drive enrollment in tJ1ese prog-rams. Furthennore, still-strong secular demand for
Chamberlain School of Nursing graduates and a potential cyclical rebound in demand for Becker CPA and
CF A exam prepara6on services should help offset the impact of sofler enrollment demand elsewhere in the
company.
Importantly, we view DeVry' s exposure to regulatory issues ranging from the 90-10 Rule. ability-to-benefit
exemption, cohort default rates. and gainful employment requirements as more manageable tJ1an peers.
Changes to the incentive-based compensation rules, however. would likely hamper the company' s ability to
attract new students, as it would for other proprietary schools.
With a strong and respectable brand in many of its educational product categories, DeYry can continue to
expand in tenns of geo!:,'Taphy and online, in our view, as well as through diverse course offerings to
associate's. bachelor's, ~md !:,rraduate students alike. We view the strength of the company' s DeVry and
Keller brands as a competitive advantage in delivering education in the fast-growing but increasingly
commoditized market of online education.
Tn the past 12 montJ1s, DeVry 's total enrollment has grown 21% (including graduate course takers), revenues
have increased nearly 42%. and operating income has jumped 70%. Clearly, operating margin has benefited
from increased enrollment and better expense discipline, much of which has come from the company's real
estate optimization strdtegy of co-locating multiple school brands. We e>.'Pect continued enrollment growth,
albeit at a more moderate pace. to support operdting m<ugins of 18% to 19% in FYlO with potential for slight
upside. Looking ahead, however, we view DeVry as less of an operating nuugin story tlum as a steady,
reliable cash generator that is attrdctively priced in this stage of the cycle. Although numagement could
attempt to squeeze out higher margins, we expect continued investment in educational progrdlUS and the
fnmchise to put a ceiling on margin potential. Nonetheless, such investment is likely to serve the company
well and allow for sustained enrollment and earnings growth.
AltllOugh we expect enrollment growth to slow because of the combination of an improving labor market and
a more burdensome regulatory environment, we still expect De Vry to generate EPS growth of 46% in FYI 0,
followed by a still-attractive 20% growtJl rate in FYll. Looking at tJ1e company' s $279 m.illion of available
cash, just $105 million of debt, and an estimated $448 million of EBTTDA over t11e next 12 montlls. we are
also attracted to De Vry's strong financial position. The strong balance sheet and cash flow should enable the
company to mitigate an eventual slowdown in its core opera6ons via accretive acquisitjons (for which we
~mticipate many opporhmities) and share buybacks.
Tn light of its sustainable model, collection of improving school brands, and strong financial position and
cash flows, we believe DeVry can support an 18.4x forward PIE muWple and an EV/EBITDA multiple of
9.7x, fonning the basis for our 12-montJ1 price target of $68. In our view, the shares are over-discounting
the risk of a slowdown in t11e company 's growtll result)ng from botll an improved job market and potential
regulatory changes.

43

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Valuation
DV currently trades at 15.2x ourCY10 estimate of$3.71 per share and at 13.1x ourCY1 1. estimate of$4.31
per share, compared with 14.9x and 11.2x at which the peer group currently trades. To take into account the
company 's cash and debt levels, we prefer to value the company on an enterprise basis. Based on our
forecasts, we calculate the company is valued at 8.2x on an EV to 2010 EBTTDA basis. compared with 6.5x
for the peer group. Whether valued on a PIE or an enterprise basis. DV trades at a premium to most of its
publicly traded peers. Given our expectations for compound annual growth of approximately 32% in both
EPS and EBITD A during the neA1 two years. however. we think such a premium is a relatively small price to
pay. Furthermore, DeYry's more balanced. less countercyclical student population should insulate the
company more than its peers in the event of an improving job market.
Our 12-mont11 price target of $68 reflects our expectation that De Vry can support an 18.4x forward PIE
multiple and an EV/EBTTDA multiple of 9.7x once some of the uncertainties dissipate regarding possible
regulatory changes and the impact of an improving job market on enrollment.

Risk to Our Call

We view the main risks to our Outperfonu rating as follows:
Enrollment growth. Despite DeVry's student enrollment being less countercyclical than many of its peers,
an improving job market could siphon off more prospective students than we expect. Given the high
opemting levemge of adding the mar&rin student, lower-than-expected enrollment growth could result in the
company missing our financial targets.
Regu latory risk. Proposals to ebminate safe harbors related to incentive compensation for its enrollment
officers and proposals to meet a gainful employment test could, at the least, increase the cost of enrolling
new students and, worst case, prevent the company from enrolling large segments of the student population
and/or requiting tuition cuts. Other regulatory issues regarding Title IV funding, such as the 90-10 Rule,
cohort default rates, and ability to benefit, appear to affect De Vry less than tl1ey do several of its peers.
Valuation. Our $68 price target assumes the market is willing to assign a higher valuation to the company
once the uncertainty regarding regulatory risk and the job market clears. That uncertainty could persist for
some time, and there is no guarantee the market will ultimately revalue the company even if it does.

Company Overview
Like many of its peers. DeVry Inc. is a compilation of multiple school brands targeting various segments of
the higher education marketplace. Although each school brand is positioned differently. part of
management's goal to improve operating efficiencies is to leverage its real estate and other assets through colocation. By co-locating multiple schools at one campus, each institution can operate more efficiently by
leverdging not only tl1e real estate expenses but also the career services ~md teclmology resources at each
location. One intangible benefit of co-location is that it increases the number of students on campus at any
given time. which may assist in convincing prospective students to attend one of DeVry 's prognuns.
Although not part of tl1e comp~my 's stn1tegy currently. co-location opens up the possibility of consolidating
more brands in the future to drive even greater efficiencies.

School Brands
DeVry University. The company operdtes five career-oriented educational programs under its flagship
De VI)' brand, with the College of Business & Management and tl1e College of Engineering & Infonnation
being the most popular by far. Media arts and technology, libeml arts & sciences, and healtl1 sciences round
out the remaining programs offered to DeVry students. The company offers most of its programs at tl1e
undergmduate and graduate levels, altl10ugh it also has some popular associate's progmms such as
accmmting and network systems administration. Many courses are offered online, allowing students to

44

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

choose to attend classes onsite, online, or a combination-providing students with flexibility to meet their
schedules.
Student enrollment for traditional undergraduate programs such as t11ose offered at DeVry tends to be less
countercyclical than ti1e certificate/associate's and graduate programs. Although DeVry University may have
less enrollment growth potential in this period of high unemployment compared with some of the company's
other brands. t11e school offers a more stable source of students. To be clear. De Vry U n:iversity has enjoyed
healthy growth, although not as much as the more countercyclical programs offered by ot11er De Vry brands
and competitors. In fact, De Vry University reported a 22% rise in enrollment in the past 12 months through
efforts to increase student retentjon, expand programs, and improve bra11d awareness.
Keller Graduate School of Management. Operating under DeYry University's College of Business &
Management, the Keller Graduate School of Management serves graduate degree seekers. Keller offers a
master's in business and administration. as well as numerous specialized programs such as a master's in
accounting and financial management, master's in infonnation systems management, and master's of public
administration, to name a few. As withDeYry University, many courses are available online.
KeLler attracts many working professionals looking to improve their employability who lack the time to
attend a traditional school. Furthennore. it serves as a logical extension for many students graduating from
one ofDeVry University' s undergraduate programs.
Ross University. Ross University operates the School of Medicine and the School of Veterinary Medicine,
which combined have 4,448 students currently enrolled and reported more than 7,000 graduates of the
doctorate of medicine and 2,300 graduates of t11e doctorate of veterinary medicine programs. Ross operates
its two medical school campuses on the Caribbean islands of the Bahamas and Dominica, while the
veterinary school is in St. Kilts.
Ross offers pro!,>rams similar to those found at U.S. medical schools. but with three semesters per year,
students can complete their academic training in a shorter period. Most Ross students are U.S. citizens that
were wait-listed at an American program. The school now places more of its graduates into residencies in
ti1e U.S. than any other medical school, and its graduates reported fust-time pass rates of 93.3%. sinular to
the 94% overall pass rate for students taking tile United States Medical Licensing Exam (USMLE).
Similarly, Ross supplies more veterinarians in the U.S. than any other school, wit11 its students reporting a
90% pass rate on the North American Veterinary Licensing Exam (NA VLE).
More than any of DeVry' s oti1er schools, Ross is the least sensitive to macroeconomic conditions. Simply
put, students do not suddenly decide to attend medical or veterinary school because of a weak job market.
Aside fTom the quality of Ross' programs iliemselves, arguably enrollment at Ross is assisted by the lack of
capacity at competing programs in tile U.S. Longer tenn, t11e movement by many U.S.-based schools to
exp<md capacity could undercut enrollment opportunities at Ross from boili a quality-of-student perspective
and with respect to the school's ability to place its graduates in one of ti1e limited munber of residency slots
at a U.S. teaching hospital.
Chamberlain College. Established in 1889 as Deaconess College of Nursing, Chamberlain College was
acquired by DeVry in March 2005. Chamberlain offers Associate of Science in nursing (ASN) and Bachelor
of Science in nursing (BSN) degrees for its pre-licensure programs. while offering post-licensure and degree
completion progmms such as RN to BSN and RN to Master of Science in nursing. All of t11e pre-licensure
courses are taught in one of its five campuses. but the RN to BSN program is offered online, as these
completion courses require no clinical classwork. Chamberlain graduates reported a pass rate for the 2009
National Council Licensure Examination (required by each state nursing board to become a licensed nurse)
of 95%, compared with the national average of 89%.
Witl1 demographic trends creating a shortage of nurses at all experience levels-resulting in high placement
rates and attractive starting salaries-the demand for nursing graduates presents a growth opporttmity for
many years to come. Given Chamberlain's solid reputation and track record in the industry, DeVry is well
positioned to benefit. T he biggest hurdle for the company is opening new campuses fast enough to take
advantage. Despite the demand, Chamberlain currently operates just five campuses and reports 4,601
students. Obtaining regulatory approval and accreditation from the state licensing boards is typically a
lengt11y process and limits near-tem1 growth opporttmities. Witl1 this in mind, DeVry plans to open
approximately two new campuses a year. However, the recently offered RN to BSN online program is

45

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

designed to leverage t11e Chamberlain brand while targeting a segment of the market traditionally left to
competitors.
U.S. Education. DeVty acquired U.S. Education, the holding company of Apollo College a11d Western
Career College, in 2008. Founded in 1998, U.S. Education offers certificate, associate' s, and bachelor's
degree programs in the medical and healthcare segment. Combined, Apollo and Western career College
operate 18 campuses and currently report 10,644 students enrolled in one of its 32 different programs,
although 97% of students are enrolled in healthcare-related programs. U.S. Education 's most popular
programs are core healtllcare (57%; primarily medical assisting). nursing (14%). and dental (14%).
Although operdt:ing tmder separate brands, Apollo and Western Career Colleges complement DeVry's
medical and healthcare offerings by serving entry-level students with their certificate and associate' s degree
programs. As part of the company's overall strate!,')', many of the Apollo and Western Career Colleges are
co-located with a DeVry campus in order to leverage real estate, career services, and general non-healthcarespecific course offerings.
As a primary provider of certificate and associate' s degree programs, U .S. Education is more cotmtercyclical
than the rest ofDeVty 's schools and, as such. has benefited greatly from the weaker job market. The fact
that much of t11e enroltment growth at U.S. Education came from students seeking career training after being
tmable to find jobs presents an obvious issue once the labor market improves. So, the challenge will be to
produce growth in the event of that eventual recovery. DeVry is planning to e}..'Pand geographically (its U.S.
Education campuses are located prin1arily on the West Coast) and to expand beyond health education.
Becl<er Professional Education. Originally founded in 1957 as the Becker CPA Review and acquired by
De Vry in 1996, Becker Professional Education has expanded into test preparation for tl1e Charter Financial
Analyst (CF A; under tl1e well-known Stalla test preparation brand) and Project Management Professional
(PMP) certification examinations. Becker is looking to e:-.'Pand into test preparation in the healthcare field, as
well as continuing education and project management services.
U.S. Campus Locations

0 Chambetlain College
U.S . .Education

DeVry UniversHy

Source: FBR Research and Department ofEducation

Federal Student Aid
As witJ1most highereducalion institutions, the ability ofDeVty' s student population to obtain federal aid is
an essentiaJ driver of enrollment and student access. The use of federal student aid (FSA)-primarily Title
rv Pell Grants and federal student loans-is a critical source of funding for the company's students. The

46

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

students' dependency, and thus DeVI)'' s dependency, on government assistance has only grown as the supply
of private loans has dried up. To put this in perspective. De VI)' students received $1.52 billion offederal
student aid in the 2009 academic year according to Department of Education data. Tlris represented an
increase of $515 million, or 52%, over the prior year. Total federal aid disbursements to all higher education
institutions increased by 20% during the same period.
The fact that DeVI)' 's FSA funding increased by $515 million while its revenue grew $370 million during the
same period only reinforces the linkage between the company' s ability to grow and t11e availabil ity of student
aid. We also note that FSA represented approximately 104% ofDeVI)''s total revenue during FY09.
Altl10ugh t11e timing between federal aid disbursements and revenue recognition by the company can differ,
the linkage is clear.
Considering that nearly all ofDeVry 's revenue !,>rowth was funded with federal student aid, the company' s
ability to !,>row is tied to the government's appetite to fcmd an ever-increasing Title IV prognun. We are not
suggesting the company is at risk of losing tllis aid, but just highlighting the dependency.

Total Federal Financial Aid Disbursements for the 200H9 Academic Year: $1.5 Billion

Grants
10%

$1,369 million

Federal
Student Loans
90%

Source: Department ofEducation and FBR Research

Cost/Benefit
T11e long-tenn growth prospects of De VI)', or any school for that matter, depend on its ability to provide
value to prospective students relative to the costs (direct and opportunity) of attending t11e program. Students
must consider numerous factors when weighing a program' s costs and benefits, including graduation and job
placement rates, cost of attendance, forgone wages, student loan debt, and expected salaries.

If students' total costs exceeded their e:.\.'Pected return, we would expect enrollment growth or margins to
deteriorate as students either choose cheaper options with higher expected returns or schools succmnb to
pricing pressure. Conversely, to the e}.1ent gmduates' future earnings exceed the cost of attendance,
theoretically demand should remain robust. Although evel)' student situation is different, we attempted to
approxinlate the cost/benefit trade-off by comparing several of De VI)'' s most popular programs with the
projected salaries in the corresponding career fields relative to our estimation of the total economic cost of
attendance.
We evaluated tl1e expected cost/benefit scenarios of two of DeYry' s more popular programs. First, we
considered the case of a student enrolled in a bachelor' s of business, management, mruketing, ~md supporting
services program, graduates of which represented 39% of both undergraduate ru1d graduate student
completions from the company' s flagship De VI)' University institution in the 2007-08 academic year.
According to the Bureau of Labor Statistics, the median salruy for an employee in tl1e genercJ.l business and
fmancial occupations categol)' is $64,720, $33,988 above the median annual income for someone with just a

47

FBR CAPITAL MARKETS

Institutional Brokerage, Research and Investment Banking

high school diploma. A student must incur several costs to obtain t11at degree. The cost of tuition and books
of $61,807 during the entire program is the most obvious, but after accounting for the present value of debt
service cost, the opportunity costs of lost wages while attending the program, adjusted for expected grant aid,
we estimate t11e total economic cost of attending the program is $133.589. We thus estimate that a graduate
breaks even on his or her investment in 3.93 years in economic terms, assuming a 10-year loan repayment
and no tax impact.
Second, we considered the case of a student at one of the company's nursing programs with t11e expectation
of becoming a registered nurse. Someone who completes a Bachelor of Science in nursing (BSN) at
Chamberlain College of Nursing and passes tJ1e state licensing exams could expect to become a registered
nurse earning $62,450, according to the Bureau of Labor Statistics. That salary represents a $31 ,718 increase
over the annual salary for someone witJ1 just a high school diploma. Taking into account the total cost of
attendance and opportunity costs of lost wages, we estimate t11e total economic cost to the student is
$124,800 over the three years necessary to complete t11e program. At t11ese levels, a graduate could expect to
break even on the investment in 3.93 years-coincidentally, t11e same as a business student
Program CosUBenefit

Projected Annual Salary

Less: Avg. Salary of High School Graduate
Expected Annual Benefit

Registered
Nurse
$62,450
($30,732)
$31,718

Business
Degree
$64,720
($30,732)
$33,988

$45,912
($4,660)
$41 ,252
$69,147
$14,401

$61,807
($14,040)
$47,767
$69,147
$16,675

$124 ,800

$133,589

3.93

3.93

Cost of attendance
Average Federal/ State Grants
Net Cost of Attendance
Opportunity Costs (Lost Wages)
Present Value of Debt Service Costs
Total Adjusted Cost of Attendance

Years to Recover

Source: FBR Research. Bureau ofLabor Statistics. and company reports

The examples above are useful only to a point. The exercise asstunes that (1) tJ1e student completes the
program; (2) an opportunity cost is assig11ed for the time necessary to complete the program; (3) t11e student
can obtain employment at the median salary of that particular trade upon graduation: (4) the student receives
no employer tuition assistance; and (5) aJI other factors-tax rate, living expense. salary, etc.-remain static.
The reality is often much different. Many times. tJ1e burden of making such a significant financial
investment up front with only the prospect of higher future earnings is too much for students to bear. and
many drop out. On the other hand, a return on investment of just a few years that puts someone on a career
path to dnunatically increase his or her lifetime earnings is a small price to pay.
DeVry ' s focus on bachelor' s degree programs in high-demand fields such as healthcare, IT, and business
generally attracts students more likely to complete the program than those attending certificate and
associate's degree programs. This results in better completion and job placement rates, which are critical in
detenninjng whether a student ultimately benefits from enrolling in a particular program. Tn a case where a
student fails to complete the program, he or she must pay off student loan debt wit11out t11e degree necessary
to increase his or her income potential.

Student Defaults
We believe the rate at which students default on their loans reflects, at least partially. the value proposition an
institution offers. Although a particular student may default for myriad reasons, an elevated default rate at a
school suggests that a high percentage of its students did not benefit from attending the prognun. That is not
to say the quality of the education or program is lacking, just that the student was unable to financially repay
the student debt load acquired attending a particular program. Ramifications of student lo~m defaults can go
beyond the students themselves. as high default rates can make an institution ineligible to receive Title IV
funds.

48

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

According to the Department of Education' s most recent report, tJ1e national student loan cohort defauJt rate
(CDR) increased from an all-time low of 4.6% in FY04 to 6.7% during FY07-tl1e most recent year
available. Historically, the CDR as measured by the govemment captures only loans that default within the
first two years upon the borrower entering repayment. Recent changes in tJ1e Higher Education Act extend
the measurement period another year to three years when measuring a school' s CDR. The Department of
Education recently released the preliminary three-year default mtes for FY07, which increased from 6.7% to
11.8% witl1 the inclusion of the additional year. Tllis means that, on average, the number of lmUlS tllltt
default increased approximately 76% between Year 2 and Year 3. Although tile three-year CDR is certainly
more representative of actual defaults, it still underreports life-of-loan default rdtes by more than 30% for all
types of student loans and by a factor of 2.0x to 2.50x for loans issued at proprietary instihttions. according to
Department of Education forecasts.
A school's official two-year (and now three-year) CDR is important, as it affects the school 's e ligibility to
receive Title IV funds. Under current regulations, any institution that reports a two-year CDR above 25% for
three consecutive years becomes ineligible to receive Title TV funds. Using t11at methodology, we calculate
DeVI)' 's institution-wide CDR at 7 .8o/~a level below t11e proprietary school average and only modestly
above t11e national average for all types of institutions. In tenns of brand. t11e U.S. Education schools
reported tlte highest CDR of 8.6%, while Ross came in lowest at 0.2%.
The regulatoty change requiring a three-year CDR increases allowable limits from 25% to 30<Yo for three
consecutive years fTom 30% to 40% for any one academic year. Using Ute new three-year met11odology, we
calculate that DeVty 's overall CDR doubled fTom its two-year rate of7.8% to JS.8<Y~nonetJ1eless well
below the 30% tJ1reshold. In terms of school brands, U.S. Education averaged 22.3%, while De VI)' reported
a 17.1% rate and Ross, Chamberlain, and Keller Graduate a ll reported default rates below 5%.
Beyond the Title IV implications, we believe tl1e relatively low default mtes across DeVty' s portfolio of
schools demonstmtes the fact that the students are completing tlte program and ultimately finding
employment-a sign that DeYty's product is sustainable beyond any temporary surge from economic
conditions.

DeVry Cohort Default Rates (Two-Year and Three-Year) by School Brand, 2005-07
2005

2006

2007

25%

20%

15%

10%

u.s.
Education

D:wry

Ross Charrberlain U.S.

Education

Devry

Ross Charrberlain U.S.

Education

Dev ry

Ross Charrberlain

2:yr CDR 3yr CDR

Source: Department ofEducation andFBR Research

49

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Student Profitability Analysis

To gauge the leverage inherent in DeVry' s business model, we analyzed l11e company's economics on a perstudent basis to demonstrate l11e importance of increasing student enrollment. Taking into account the
enrolled student population and our estimate of attrition rates (including dropouts and graduation), we
calculate the average student produces approximately $21 ,591 in revenue during his or her tenure. This
amount is signifi.cantly higher than most ofDeVry 's peers and can be explained by l11e company's
concentration of students attending higher-cost, longer-duration bachelor' s and graduate programs. We
estimated the cost of providing those education services. including corporate overhead, totals approximately
$9,284, leaving a pretax margin of $12,307 per student. To acquire such students, De VI)' spends
significantly more than its peers at $6,374 per student, including all marketing, recmitment, and direct
admjssions expenses. After accounting for the $589 of lost revenue related to bad debt expense, DeVry 's
prerdx return per student is approximately $5,344-a reh1m of 84% on the student acquisition costs.

Per-Student Profitability: Return on Marketing Investment

WeiglJted Ayg. Life Analysis:

Expected revenues per student

$21,591

E xeected costs eec student

~$9,284~

E xpected income per student

$12,307

Less: acquisition costs per student

($6,374)

Less: bad debt Eec student

~$589~

Profitability per student

$5,344

Return on marke6ng investment

84%
Source: FBR Research and companyfilings

We estimate that DeVl)' 's profitability per student has declined approximately 23% from a year ago.
However, U1is decrease appears to be related to a shift toward lo"ver-revenue-producing students due to the
company's efforts to increase enrollment in associate' s programs in health education, as well as higher
student acquisition costs. T hese associate's students may generate lower profits on a per capita basis, but the
size and growU1 of the market, in addition to U1e benefits realized by leveraging real estate tJrrough colocation while reducing acquisition costs, make such students an attractive opportunity for DeVry. Even
though profitability per student has decreased, De Vry's level is significantly higher than that of its peers,
allowing the company to reinvest in improving the quality and brand positioning of its educational product
and, thus, maintain sustainable student enrollment.

Funding Sources
With caps on federal sh1dent loans, the 90-10 Rule limiting the amount of Title IV ftmding a school can
accept. and rumual htition rdtes at many of DeVry' s programs exceeding $17,000, access to private (or
alternative) loans is necessary for many students unable to fund tl1eir htition out of pocket. However, De Vry
shtdents rely on private shtdent loans much less than sh1dents attending prognmlS at many of the company's
peers. In fact private student loans represented only 5% of revenues in FY08, with tl1e majority of the loans
provided by third-party lenders rc1ther tl1<m funded directly by tl1e compru1y itself. Ftmding from students,
employers, private scholarships, and/or mi Iita!)' assistance accounted for 21% of total cash receipts at the
company last year, which is a main reason why the private-loan contribution is so low.
Because DeVry 's students generally depend less on private loans than sh1dents at peer schools, tl1e company
has not needed to step in to fund private loans for its customers, thereby assuming the risk of default.
De VI)'' s sh1dent funding mix is an important distinction because of tl1e Department of Education's mle
limiting the amotmt of Title IV funding <m institution can receive to 90% of cash revenue. As a whole,
De Vry reported tl1at Title IV funding represented just 7 1% of revenue in FY08, meaning the company has
considerable flexibility witl1 regrud to accepting more federal aid in the fuhtre without risking a violation of

50

Institutional Brokerage, Research and Investment Banking

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the 90-10 limitation. Although data for FY09 are not yet available, we expect an increase to approximately
80% of revenues due to changes in t11e student mix during t11e year.

Title IV Funding by School and Overall Funding Mix

Funding Sources:

FY2007

FY2008

DeVey Undergraduate

70%

75%

Graduate

65%

75%

Ross University

80%

81 %

Chamberlin College of N ursing

70%

62%

Apollo College

76%

79%

61%

77%

6.';%

71%

Private Loru1s

6%

5%

State grants

3%

3%

26%

2l %

100%

100%

Western Caree r College

Total Title I V- ca.<;b ba.<;is

Student payment, scholarships,

employer/military assistru1ce

Source: FBR Research and companyfilings

Policy and Regulatory Risks

Because t11e federal government f11nds a majority ofDeVry' s revenues, and the school requires approvaJ by
accreditation agencies and the Department of Education to operate, it faces a significant amount of reguJatory
and policy risks. Although we view DeVry as one oftJ1e least e:-.rposed in the industry to such risks, it is not
entirely immune. Our discussions with Washington policy makers suggest that Congress is unJikely to use
legislation to make any direct changes to the industry. Rather, we expect the current Administration to
exercise its regulatory authority that currently resides witl1 the Department of Education in a n effort to more
closely scrutinize proprietary schools in several ways.
Ability to benefit. To be eligible to receive (and hence for a school to accept) FSA. a student must have a
high school diploma or a recognized equivalent unJess that student meets certain ability-to-benefit (ATB)
criteria. A prospective student can demonstrate ability to benefit by passing a Department of Educationapproved ATB test, typically ad1ninistered by a certified third party. Schools must make available programs
to assist such students in obtaining a high school diploma equivalent but are not required to verify tJmt a
student is enrolled or monitor students' progress in such a program.
An August 2009 GAO report on proprietary schools, which recommended increased oversight of proprietary
schools and ATB test providers to ensure that only eligible students receive federal student aid, has elicited
criticism of the industry from Congress and caJls for oversight. More specificaJly, the report cites a weakness
in the Department of Education 's oversight eligibility requirements-standards designed to ensure basic
math and English proficiency to reduce defaults and uJtimate ly the cost to taxpayers of the student loan
program. T he report cites several abuses and possible cases offraud related to the ATB test for those
students without a high school diploma.
The end resuJt will likely be more-rigid eligibility criteria. which will decrease enrollment growth for lowerlevel certificate and associate' s degree programs. With much ofDeVry's student popuJation attending a
bachelor's or graduate program. we anticipate that changes to tlle ATB mle would not have much of an
impact on the company.
Enrollment-based compensation. AnotJ1er hot-button issue in Washington is incentive compensation for
admissions representatives based on enrollment. Officially, to be eligible to receive FSA, "schools may not
provide commissions, bonus, or other incentive payment based either direcUy, or indirectly, on securing
enrollment or financial aid to any individual or entity engaged in recruitment or admission activities or in
making decisions regarding the award ofFSA program funds." Despite the general prohibition, several safe

51

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

hatbor provisions were established by the previous Administration that allow for incentive compensation in
limited circumstances.
The Department of Education is currently reviewing these safe hatbors as part of a negotiated ntlemaking
conunittee, and we believe the majority, if not all, of the safe haroors will be eliminated. Considering tl1at
De Vry spends more than 35% of its revenues on marketing and admissions- a large amount of which is
eannarked for admissions and enrollment professional compensation-such changes could make enrollment
growth more difficult.
Gainful emtlloymcnt. Many programs and institutions are eligible to receive Title IV funds based on the
fact that they prepare students for " gainful employment in a recognized occupation." For the proprietary
schools, all certificate, diploma, or degree programs except those few classified as " liberal arts" are governed
by this "gainful employment" mandate. No standard exists, however, for what constitutes " gainful
employment."
As part of the 2009 negotiated rulemaking process, the Department of Educations rules committee is
considering codifying t11e definition of gainful employment to calculate the " value added by the program."
First, the c01mnittee has recommended using Bureau of Labor Statistics Standard Occupational Classification
(SOC) codes to link educational programs to defined occupations. A program' s cost would be compared
witl1 the annual income increase of someone eaming in the first decile of the appropriate SOC code. A
cost/eamings mtio of no more tl1an 3x would be considered acceptable. The conunittee is also considering
whether the Depart:Inent of Education should establish a maximtml debt/income ratio of 5%.
The repercussions of this issue are significant, as it could effectively set tuition caps on programs based on
the projected or realized salaries of entry-level workers in t11e positions linked to a given program.
Furtl1em1ore, the uncertainty that such requirements would bring would also be significant. Schools would
have to detennine the appropriate SOC codes, while tuition rates would be linked to Bureau of Labor
Statistics occupation surveys that may or may not renect graduates' true wages.
Despite what we consider to be a serious headline risk to DeVry and tl1e possibility that tlle committee will
move to propose regulatory language at the end of its tenure in early 2010. we believe that the Department of
Education will not implement such proposals for now. The significance and complexity of implementing tllis
mle has caused considerable concerns among institutions, botl1 proprietary and non-profits alike. that are
worried about a slippery slope toward price controls across higher education. Additionally. an issue this
important would likely gain the attention of Congress, which may want the final say on constructing the
definition of gainful employment since it was originally established by legislation. Although we expect no
material changes to the gainful employment regulation next year, the desire by the Administration (and some
in Congress) to make changes appears to exist. so the issue could resurface, perhaps during the next
reautl1orization of t11e Higher Education Act.
90-10 Rule. The 90-10 Rule states that a proprietary school may derive no more tlmn 90% of its revenue
from Title 1V ftmding. The rule is desif,'lled to ensure that students have at least some level of financial
participation in choosing to attend a particular school and as a safef,'Uard against schools expanding
enrollment supported almost entirely by federal aid. A violation of the 90-10 mle results in the institution
being placed on a provisional status to receive Title IV f1:mds for two years in an effort to become compliant
during the provision period.
The higher Stafford loan limits and Pell Grant increases that Congress auiliorized in 2008 increased the
amount of Title N funding many schools receive as a percentage of overall revenues, potentially pushing
schools above tl1e 90% tlueshold. To avoid tllis result, Congress temporarily exempted the $2.000 increase
in Stafford loan borrowers from tl1e Title IV amotlllt Ulltil July 2011. Additionally. Congress changed tl1e
treatment of institlJtionalloans (private loans made from schools to students) and allowed such loans to be
accounted for on an accmal basis, wiili tl1e net present value of the loans contributing to non-Title IV
revenues druing a given period until July 1, 2012.
Some ofDeVry's institutions receive a higher portion of Title IV fund ing than others. Ross University
(81 %), Apollo College (79%), and Western Career College (77%) had the highest percentage of revenue
derived from Title IV funds, based on FY08 data. Overall, the company received just 71% of its revenues
f1"om federa l sources in FY08 (FY09 data is not yet available). This means DeVry is Jess exposed to tripping

52

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

the 90% t11reshold than most of its peers and, in fact, has some llexibility in setting prices without fear of
violating the 90-10 limitation.

Cohort default rates. The move from a two-year to three-year measurement period for cohort default rates
(CDRs) will result in significantly higher reported defaults for most institutions. This occurs because student
loan defaults are genemlly front loaded. Because the measurement period has been extended by one year, the
allowable loss threshold increased as well. Under the new calculation. a campus with a three-year CDR in
excess of 30% in Ute three most recent years or greater tl1an 40% in t11e latest year will lose TiUe N
eligibility. Based on the most recent CDRs. we believe none ofDeVry 's schools is at risk of either losing
Title IV altogether or having to change enrollment pmctices to manage future default rates. Due to its
relatively low default rate, De Vty has flexibility to increase enrollment without risking pushing defaults
beyond the required CDR tltresholds.
Advertising. Advertising is yet another bot-button issue in Waslungton. Many critics argue institutions that
can receive more than 90% of their revenues directly from the fedef"cll govenunent should not be allowed to
use those Ievenues on advertising to attract new students-particularly when such funds allow institutions to
advertise significantly more aggressively than nonprofit competitors, such as conununity colleges. As the
theory goes, the money should be spent on educating those students and improving student outcomes. DeVry
spent $179 nullion, or 12% of revenues, on advertising in FY09. Aliliough it is unclear how, if at all,
regulators or Congress could restrict a company 's ability to advertise, any limitations would likely slow t11e
company 's enrollment growth.

Accreditation. As part of their task of measuring academic standards and the quality of student outcomes,
accreditation agencies require schools to remain within certain standards of student completion and
placement mtes. DeVry 's primary accrediting agency is the Nortl1 Centml Association of Colleges and
Schools, The Higher Learning Commission (HLC). HLC has recently come tmder fire from the Education
Department's Office of Inspector Generdl (OIG) for its accreditation of American InterContinental
University, a division of Career Education Corpomtion (CECO), in regards to measuring online credit hours
and progmm length standards. Although the OIG is not critical of De Vry 's programs specifically, the
concern is that any penalty imposed on HLC could spill over to all its accredited institutions.

Key Management2
Daniel Hamburger, president and CEO, DcVI'y Inc. Mr. Hamburger joined DeVry as executive vice
president in 2002, responsible for the company' s online opemtions and Becker Professional. In 2004, he
became chief operating officer and was promoted to chief executive officer in 2006. Prior to jouung DeVry,
Mr. Hamburger was chairman and chief executive officer of Indeliq and served as division president of WW
Grainger's Internet Commerce Division. Prior to joining WW Gminger. he started the Internet services
group for RR Donnelley's Metromail division.
Mr. Hamburger graduated with bachelor' s and master's degrees in industrial engineering from the University
of Michigan in 1986 and earned an M.B.A. from Harvard Business School in 1990.

Richard M. Gunst, senior vice Jlresidcnt, CFO, and treasurer, DcVI'y Inc. Mr. Gunst joined DeVry in
2006 as senior vice president, CFO, and treasurer and is responsible for all of the financial functions
companywide. Prior to joining De Vry, he was CFO of Sagus International, a manufacturer of school
furniture. Prior to Sagus, he was senior vice president and senior financial officer for t11e refrigerated foods
division of ConAgra Foods.
Mr. Gunst gmduated from Tulane University in 1978 with a B.S. in economics and business management and
received his M.B.A. in finance from the U1uversity of Chicago in 1980.

David Pauldine, t>resident, DeVr-y University. Mr. Pauldingjoined DeVry in 2005 as executive vice
president of De Vry Inc., overseeing marketing and recruiting for De VI}' University. He became president of
De Vry University in July 2006. Mr. Paul dine has more t11an 30 years of experience in tile for-profit
education industry, having spent 16 years at Education Management COiporation, where his most recent
2

Source: Companyfilings, FactSet, and Reuters

53

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

position was president of The Art Institutes system of schools. He also served as chief market officer at
Education Management
Mr. Paul dine received a bachelor' s degree from the University of Dayton in 1979 and earned his Master of
Arts in leadership from the McGregor School at Antioch University in 1997.
Sharon T homas Par rott, senior vice president, government and regu lator-y affairs, a nd chief
compliance officer. Ms. Thomas Parrot joined DeYry lnc. in 1982 to establish student financial aid
compliance programs for the company. Inl989, she was appointed vice president of government relations
and student finance, and she became chief compliance officer in 2004. Prior to DeVry, Ms. Thomas Parrott
worked in the student financial aid office of the Department of Education in Chicago, as well as directing
national training programs for the department in Washington. D .C.
Ms. Thomas Parrott received her bachelor' s and master's degrees in history from U1e University of Illinois.

Risks
Price target. Risks to our rating and price target include the potential for our earnings estimates to prove too
conservative if enrollment trends are better tlum expected or the economic environment proves exceedingly
favorable for such trends. Additionally, favorable outcomes related to numerous regulatory issues could
create upside risk to our price target as the market assigns higher valuations to reflect reduced regulatory risk.
Alternatively, a sharp recovery in the economy or an unexpected degradation ofDeVry 's key brands could
result in an w1foreseen drop in enrollment In such an event, our earnings estimates would likely prove too
high, creating downside risk to our rating and price target.
Regula tory risk and dependence on fedeaal student aid. De V ry derives the majority of its revenues from
federal student aid. The company 's ability to continue receiving such aid depends on its complia11ce with
numerous regulatory standards and operating rules. Specifically, DeVry's U.S. schools must comply with
the Higher Education Act of 1965, as amended. and tl1e regulations issued thereunder by the Department of
Education, \vhich collectively govern the company's participation in Title IV fmancial aid programs.
Additionally, le!:,>islative action or changes in the Department of Education's interpretation of existing mles
may significantly affect the company 's business model.
Dependence on p rivate loans. De Vry' s U.S. schools derived approximately 5% of tl1eir revenues from
private student loans during FY08. The avai lability of private loans originated by third-party lenders has
contracted and might not reh1rn in the foreseeable future. As a result, the company has begun funding such
loans itself. Under the current struchtre, tl1e company retains all credit risk on loans originated.
Litigation risk. ln tlte ordinary conduct of its business. DeYI)' and its subsidiaries are subject to lawsuits,
demands in arbitration, investigations, and other claims, including, but not limited to, lawsuits and c laims
involving current and fonner students, employment-related matters. business disputes, and regulatory
demands.

Company Profile
Through its wholly owned subsidiaries, DeVl}' lnc. owns and operates De VI)' University, Ross University,
Chamberlain College of Nursing, U.S. Educatiol.\ Becker Professional Education, and Advanced Academics.
ln addition, De VI)' owns an 82.3% majority stake in Fanor, an affiliate located in Brazil. The company's
core business is providing education programs and products to students seeking associate's, bachelor's, and
);,>raduate degrees in tl1e technology, business, and medical and health fields.

54

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Financials
Income Statement
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($in Millions)
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IMme Suruna'IJJ

llittwlfii.'Ut

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ProprietaJy to FBR Capital Markets Janumy 14. 2010

Mall Snowling, CFA . 703.469.1196. msnowling@fbr.com
Source: Company reports and FBR Research

55

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Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Apollo Group, Inc. (APOL- $59.65)

Market Perform

Phoenix, AZ

Price Target: $70.00

January 14, 2010

Coverage Initiated

STOCK DATA
52-Week R<r~ge
Shares Outstanding (mil)
Float (est mil shs)
Avera~ Daily Volume
Marllet Cap~alization (mil)
Fiscal Year-End

$52.79-$9000

154.7
128.1

3,775,492
$9,21 1
August

EARNINGS DATA
Adjusted Earnings per Share
2009A
1Q
2Q
3Q
$1 .12 $0.77
$1 .26

FY
$3.75

.(.)
~.fe

201~

1Q
$1.54A
2011E
1Q

$1.84

2Q

3Q
$1.43

$0.88

Big Man on Campus

FY
$5.08

.(.)

$1 .22

2Q

3Q

.(.)

$1.03

$1 .63

$135

FY
$5.86

Summary and Recommendation

We are initiating coverage of Apollo Group, Inc. (APOL) with a Market Perfonn
rating and a 12-montll price target of $70. Altl1ough we believe t11atthe company's
University of Phoenix (UPX) brand and products position t11e school to benefit long
tenn, we expect slowing enrollment growth due to structural limitations related to Title
IV, coupled with ongoing industry regulatory issues, to limit near-tenn upside
potential In particular, we expect associate's degree enrolhnent-U1e company's majn
growth driver over t11e past 24 months-to begin to stall. The effects of an eventually
improving job ma rket will also present meaningful headwinds that will further
challenge growth. Nevert11eless, we view Apollo's market positioning among online
and t11e higher-level bachelor' s and master' s programs, a long with the company's
strong financial position, as attractive relative to other proprietary school peers in the
long run. As such, we look for a more attractive entry point into APOL.

OPERATING DATA
FYAug
2009A.

Revenue
$3,974
$4,737
$5,235

201CE
2011E

YOYGrowlh
26.5%
19.2"k
10.5%

Key Points

Slowing enrollment. We expect enrollment growth-particularly among

associate's degree students, which have accounted for 70% of the company's total
enrollment and 61% of revenue growth over U1e past 24 months-to begin to
slow. Specifically, UPX is nearing the statutory cap that limits the amount of
federal aid a school can receive to 90% of its revenues. which, along with rising
cohort default rates (CDRs). will require the school to raise admission standards,
resulting in lower enrollment and restricting its ability to raise tuition.
Additionally. associate' s degree seekers now represent 45% of Apollo's total
students, making enrollment levels more vulnerable in an improving job market.

Changing egulatoy envionme nt. We believe tl1at the Obama Administration

is moving to increase oversight of the industry through the Department of
Education's existing authority and t11at addilional scmtiny will result in higher
operating costs and in fewer enroiJ.ment opportunities. Specifically, we expect the
elimination of enrollment-based compensation safe hatbors to change the way in
which Apollo sources new students, thereby increasing student acquisition costs.
We also expect the regulatory focus on student outcomes, accreditation, and
marketing practices to intensify, as Apollo consumes a disproportionally large
piece of the Title IV pie.

Long-term i>Ositioning attractive. Despite our near-tenn concerns regarding

increased regulatory issues, slowing enrollmen~ and rising operating costs, we
believe Apollo is well positioned long term. The strenb>th of the UPX brand in the
minds of prospective students and employers should provide a competitive
advantage in a market that we believe is becoming increasingly commoditized.

Valuation. Our $70 price target represents l3.0x ~md 11.7x our CY10 and CYll
EPS estimates, respectively. and an enterprise value of 6.7x our 2010 EBITDA
forecast-roughly in line with the peer group. which trades at 14.9x, 11. 7x. and
6.5x, respectively. Although we believe APOL deserves a premium, we think the
market is unwilling to assign a higher valuation due to ongoing regulatory issues.
including ~m SEC investigation, and slowing enrollment.

FINANCIAL DATA
FY ~OOA
Sb.Jdert Errollment

4ffi,OOO

Long-Term Debt (miQ

$127.77

Operating Margin

ll.90'k

$in millions unless othenvise Indicated.

Pricing as ofJanuary 12, 2010.

57

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Investment Thesis
We are initiating coverage of Apollo Group, Tnc. with a Market Perfonn rating and a $70 price target. We
view t11e company's University of Phoenix brand as becoming increasingly mainstream and accepted among
prospective students and employers alike. We believe that the brand' s strength provides Apollo with a
competitive advantage in what is becoming an increasingly commoditized industry, particularly in the online
segment. Furthermore, tl1e company's $712 million of cash. net of debt. and strong recurring cash flows
provide support to tl1e stock.
We lack the conviction necessary to support a higher stock rating bec<tuse we think that structural constraints
related to federal student aid (FSA) receipt limitations under t11e 90-10 Rule-and, to a lesser extent, loan
default rates-will :force Apollo to begin limiting enrollment in an effort to attract a different student mix.
Apollo will focus these efforts mostly on its associate's degree programs, which have been responsible for
74% of its overall enrollment growth during the past 24 months. Additionally, we believe tl1at regulatory
constraints restrict the companys ability to raise tuition, making it more difficult to overcome a slowing
enrollment outlook. Apollo a lso faces the strong possibility that an improving job market will reduce overall
demand for career-oriented education as prospective students find jobs easier to obtain.
We also believe tllat as the industl)' bellwetller, APOL shares will have limited upside tmtil the market
obtains more clarity regarding tl1e Obama Adrninistration' s proposed regulatory changes. Although we do
not subscribe completely to the bearish thesis t11at the Administration is targeting the industry, we do tl1ink
that the elimination of safe harbors for incentive-based compensation exposes Apollo to risk of
noncompliance and will necessitate a dramatic and expensive change in how the company sources new
students. However, we do not expect t11e Administration to adopt the more punitive proposal establishing a
" gainful employment" definition that effectively would create price controls for proprietary schools.
As such. we would look for a lower entl)' point into the name, as we believe tl1e stock's ctment valuation
does not fully reflect the prospect of lower enrollment growili and higher operating costs.

Risks to Our Call

The fact that 55% ofUPX students are enrolled in a bachelor' s, master' s, or doctoral program should
make Apollo less countercyclical tl1an its peers, which have heavier concentrations in certificate and
associate's degree programs.

Shares of APOL have declined 19% since the company announced that it was under investigation by the
SEC. A positive outcome either in the SEC investigation or from the Department of Education' s
negotiated rulemaking session in January could serve as a positive catalyst

The company ' s efforts to improve student outcomes could result in lower-tJ1an-expected new student
starts. Lower-than-expected enrollment would likely pressure APOL' s premium valuation.

Valuation
Shares of APOL cmrently trade at ll.lx om CY 10 EPS estimate and at 9.9x our CY 11 estimate, compared
with 14.8x and ll.4x at which the peer group currently trades. On an enterprise value basis, APOL trades at
5.7x om CYIO EBITDA forecast, versus tl1e group at 6.5x. Our 12-month price of$70 represents 13.0x and
ll.7x our CYIO and CY ll earnings estimates, respectively. and an enterprise value of 6.7x om CYlO
EBITDA forecast. Om implied price target valuation reflects om expectation that the company' s strongest
growili engine during the past few years-students enrolled in associate 's degree progmms-will begin to
stall. Based on this declining enrollment, combined with regulatory constraints imposed by the 90-10 Rule
that could limit tuition increases and t11e ability to expand certain programs, as well as our expectation t11at
the cost of sourcing new students will rise with t11e Department of Education' s likely elimination of
incentive-based-compensation safe harbors, we believe tJ1at t11e market will be unwilling to assign a higJ1er
value to tlle stock.

58

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Company Overview
Apollo Group, Inc. is not only t11e largest publicly traded education company by market capitalization.
revenues, and attendance but also the largest provider of postsecondary education in t11e U.S. The company
provides education programs and services tltrough its flagship University of Phoenix brand. as well as several
auxiliary brands and its 86.1 o/o-owned Apollo Global subsidiary. In total. Apollo has approximately 455.600
students enrolled in one of its more than 100 education programs offering associate 's, bachelor' s. master's.
and doctoral diploma-gr.mting progrclills in numerous areas of study.
UPX was founded by Dr. John Sperling in 1976 on the idea that the design of traditional education programs
offered an insufficient delivery mechanism for nontraditional, working adult students. Dr. Sperling sought to
provide ncxible class schedules to working adults, hoping to increase their knowledge base or help them
complete previously abandoned degrees. This system for delivering education to nontraditional students has
become a model used across the higher education spectrum by proprietary and nonprofit schools alike. In
recent years, UPX has expanded its reach beyond degree-completion candidates to a rapidly growing pool of
associate's degree seekers with few or no prior credit hours.

School Brands
Unive1-sity of Phoenix. UPX accounts for 95% of Apollo' s consolidated revenues and for all of the
company 's reported degreed enrollment. Through its 73 campuses and online programs, UPX offers
programs from t11e associate's level up to t11e master' s level. Historically, most students enroll in one of its
business, computer and information services, education, or health service bachelor' s program. UPX has
expanded its programs to include more-traditional liberal arts and sciences degree offerings. as well as
courses in psychology. public administration, and security seiVices. UPX offers associate-level programs
through Axia College, a 100% online division ofUPX, which is playing an increasingly important role as a
feeder channel for UPX bachelor's degree c~mdidates. At the graduate and doctoral levels, UPX offers
degrees across these same topical areas, with the most popular degrees being the Master of Business
Administmtion and nursing and education degrees.
UPX is accredited by the Higher Learning Commission of t11e North Central Association of Colleges and
Schools and holds other program-specific accreditations where necessary. UPX is approved by higher
education commissions to operate in 43 states, although it currently operates in only 39. Addit)onally. after
being on month-to-month status since June 2007, UPX was recertified for continued participation in FSA
progmms in November 2009.
Expanding UPX remains Apollo's top priority, as the school generates the highest returns on the company 's
capital relative to other intemal investment opportunities.
Apollo Global. In October 2007, the company fonued Apollo Global as a joint venture with the Carlyle
Group to pursue investments in the intemational education services industry. As of August 31, 2009, total
cash contnbutions made to Apollo Global were $511.8 million, $440.5 million of which came from Apollo
Group, resulting in Apollo Group owning 86.1% of Apollo Global. Apollo Global represented less than 2%
of tl1e company 's revenues in FY09 and thus far has yet to turn a profit.
Apollo Global has completed three major acquisitions and is consolidated into Apollo Group's financia ls.

UNJACC, accredited by the Chi lean Council of Higher Education, is an arts and communications
university offering bachelor' s and master' s programs on campuses in Chile and online. Apollo Global
acquired the company in March 2008.

Universidad Latinoamericana (ULA) is authorized by the Ministry of Public Education in Mexico and
t11e Ministry of Education of the State ofMorelos for the operation of high school, undergraduate
psychology, law, medicine, and nutrition progran1s. ULA operates on four campuses in Mexico. Apollo
Global acquired a 65% interest in the company in August 2008 and the remaining 35% in July 2009.

BPP P rofessional Education, headquartered in London. England, offers degree pro!,'f31ns through its
College of Professional Studies and provides education and training to professionals in legal and finance
industries through its professional education division. Apollo Global acquired BPP in July 2009.

59

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Western International Univesity (WIU). WID offers undergraduate and graduate degree programs on
eight campuses (including two international), as well as through online programs via WTU Interactive. In
2005, the company began transitioning associate' s degree students to Axia College under the UPX brand.
We estimate that Will now accounts for approximately 2% of Apollo's total enrollment and contributes a
relal'ively immaterial amount of operating profit. Will is accredited by t11e Higher Learning Commission of
the North Central Association of Colleges and Schools. Western's certification to participate in Title IV
progr<mlS e>rpired on June 30, 2009, and the school's eligibility continues on a month-to-month basis until the
U.S. Department of Education completes its review.
Insight Schools. Apollo acquired Insight Schools in October 2006 to offer curriculum and administrative
services to public schools to operate fully online high school programs. Currently, Insight offers 120 courses
to students seeking an allema6ve or supplement to traditional high school classes. In October 2009, Apollo
announced its intention to sell Insight.
Institute for Professional Dcvelollmcot (IPD). A progmm development and consulting business marketed
to private colleges and universities, 1PD helps schools establish and expand program offerings targeted to
working adults. It provides curriculum development, market research, student recruitment, accounting, ~md
administrative services. Its clients pay 1PD based on five- to 10-year contracts that stipulate a certain
percentage of revenues generated from t11ese progra111S. TPD currently has client schools in 21 states.
College fo r Financial P la n ning Institutes Co lllOration (CFP). CFP offers fmancial planning educational
prognmlS. including a Master of Science in three majors; the Certified Financial Planner Professional
Education Prognun Cettification: and certification progranlS in retirement, asset management, and other
fm~mcial planning areas. It offers courses online and through its campus in Colorado. CFP is accredited by
The Higher Learning Commission of the North Centrdl Association of Colleges and Schools.
Meritus University. Meritus is Apollo' s online Canadian university, which received degree-granting status
fTom the New Brunswick Department ofPost-Secondal}' Education, Training, and Labour in 2008. T he
school offers online programs to working professionals tltroughout Canada.
U.S. Campus Locations

Western International University

University of Phoenix

Source: Department ofEducation and FBR Research

60

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Contribution to Revenues ($ in Millions)

Total Revenues
Business Segment
UPX
Apollo Global
Insight Schools
WIU, IPD, CFP, Meritus
Corporate

Contribution

FY09

FYOS

FY07

FY06

FY09

FYOS

FY07

FY06

$3,767
$67
$21
$117
$3
$3,974

$2,988
$13
$8
$123
$10
$3,141

$2,538
$0
$2
$183
$1
$2,724

$2,074
$0
$0
$402
$1
$2,478

94.8%
1.7%
0 .5%
2.9%
0.1%
100.0%

95.1%
0.4%
0 .2%
3.9%
0.3%
100.0%

93.2%
0 .0%
0 .1%
6 .7%
0.1%
100.0%

83.7%
0.0%
0 .0%
16.2%
0 .0%
100.0%

Source: Companyfilings and FBR Research

Degreed Enrollment
Traditionally, UPX has targeted working adults seeking to augment their skills or complete previously
abandoned degrees. Although that strategy continues, much of the compa11y's recent growth has come from
(l) less e:,.,:perienced students and workers via its expanded associate's degree program and (2) enrollment in
graduate programs, to a lesser degree. As a result, UPX's student body profile and revenue mix by degree
type has changed considerably during t11e last three years, with the most dramatic shift coming from the
explosion in associate 's degree growtll. Revenue from associate's degree seekers rose from $108.7 million,
or 17.4% of revenue, in F4Q06 to $447.2 million, or 40.2% of revenue, in FlQlO. During t11e same period,
associate 's degree seekers grew to 45% of total enrollment fTom 26%. Coinciding with the growt11in
associate 's degree students was tJ1e company's decision to gTow its associate 's degree program via its UPX
Axia College subsidiary rat11er than wru. which traditionally offered such programs. We view iliis decision
as having been driven by the appeal of applying the UPX brand to t11e arguably more commoditized online
degree market, as well as creating a natural feeder channel for bachelor's candidates for UPX.

Oegreed Enrollment Indexed to 1Q06 100

450
400
350
300
250
200

- .. - - - - - -- - - -

150
100

50

- -Associate's

Bachelor's - - Master's - - Docto ral

Total

Source: Company filings and FBR Research

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F1 Q10 Enrollment by Degree Sought (455,600)

1\Aaster's

Doctoral
2%

Associate's
44%

Source: Company filings and FBR Research

Contribution to Tuition Revenue, F1Q09-F1Q10 ($3.9 Billion)

Doctoral
20A>

Associate's
37%

42%

Source: Company filings and FBR Research

Federal Student Aid

As with most higher education institutions, the ability of Apollo's student population to obtain federal aid is
essential to support enrollment. The use of FSA, primarily Title IV Pell Grants and federally guamnteed
student loans, is critical for Apollo, as UPX is the largest recipient of both Pell Gmnts and federally
guanmteed student loans in the U.S. In the most recent academic year, $4.3 billion ofFSA-$3.6 billion in
loans and $0.7 billion in Pell Gnmts-was disbmsed to Apollo Group institutions (UPX and WIU). Tllis
$4.3 billion reflects 108% of the $3 .9 billion of total revenue that Apollo reported in FY09. (Note that often
there are timing differences between aid disbursements by the government and revenue recognized by the
company.) For purposes of complying with the 90-10 Rule established by the Department of Education,
Apollo reported that UPX derived 86% of its cash basis revenues from Title TV sources.
Regardless of bow or when the revenues are recorded, the importance of Title IV funding cannot be
overstated. The amount of federal aid disbursed to UPX students in the 2008-2009 academic year (AY)
increased by nearly $829 million. or 24%, from AY 2007-2008, which compares to the $833 million increase
in total revenues that Apollo recorded in FY09. So, the link between revenue growth and Title IV funding is
strong. Like almost every higher education institution, Apollo's ability to grow is ine>.1ricably tied to the

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government's appetite to fund ever-increasing Tille TV programs. We are not suggesting l11at the company is
at risk of losing this aid, only highlig hting its dependency.

AY 2008-2009 Receipts of Federal Student Aid ($4.3 Billion)

GranIS
To.al Loans
84%

l6%

Source: Department ofEducation and FBR Research

We note t11at aside from Apollo 's obvious dependence on FSA to fund student tuition, the company is by far
the largest recipient of such ftmds. Rightly or wrongly, the company is often scmtinized by the media and
public officials as a bellwether for the for-profit education industry.

Top 10 Recipients of Federal Student Loan and Grant Aid, 2008-2009 Academic Year: All Schools($ in Millions)
$4 ,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1 ,000

$5~~

-1-'--'-r-'--'-r--'--'-....-'--'--r-'--'-r---'--''--r-'---'--r-Q _ Q _ D _ _ ,

Source: Departmem ofEducation and FBR Research

Cost/Benefit
The long-tenn growll1 prospects for Apollo Group. or any school, depend on its abiJity to deliver an attractive
value proposition to prospective students. Although student outcomes can vary widely, we believe l11at a
school's ultimate success is not onJy a function of marketing and financ ia l aid availability but a lso a function
of the tangible benefits a student receives relative to the cost of attendance.
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Students must consider numerous factors when weighing the costs and benefits of a particular program,
including graduation and job placement rates, cost ofat1endance. forgone wages, student loan debt, and
e>.'Pected salaries. If students' total costs exceed their expected return, we would expect enrollment growth
or company margins eventually to deteriorate, as students either choose less expensive alternatives or
companies respond with price cuts. Conversely, to the extent that graduates' future earnings exceed the cost
of attendance. demand theoretically should remain robust. Although every student situation is different. we
attempted to approximate the cost/benefit tn1de-offby comparing severcll of Apollo's most popular programs
with projected salruies in the corresponding career fields relative to our estimate of the total economic cost of
attendance.
One ofUPX' s most popular programs (by number of degrees granted) is its bachelor's degree in business and
management. According to the Bureau of Labor Statistics (BLS), the median salary for someone employed
in the general business and financial occupations category is $64,720-$33,988 above the median aru1uaJ
income for someone witJ1 a high school diploma only. A student must incur several costs to obtain tJ1at
degree. Tuition costs for this 120-credit-hour program of approximately $52,200 are the most significant, but
after including the present value of the debt-service cost and tJ1e opportunity costs of lost wages, less
expected grant aid. we estimate tJ1at tl1e total economic cost of attending tJ1e program is $144,421. At this
level, we estimate that a graduate breaks even on his or her investment in economic terms, in 4.3 years
assmning a 10-year loan repayment and no impact of taxes.
We also consider the case of a student enrolled in the Axia Colleges online Associate of Arts in healthcare
administration- medical records. This 60-credit program costs approximately $22,100 in tuition and
$44,927 in total economic costs after including opportunity costs, debt service costs, and grant aid, according
to our analysis. With an expected median salary of someone employed as a medical records teclmician of
$30,597, the expected time to break even is approximately 2.9 years, assuming tl1at tl1e student wonld
otJ1erwise be earning at the federal minimum wage.
Program Cost/Benefit Analysis

Annual Salary
Less: Average Salary of High School Graduate
Expected Benefit

Allied Health
Assistant
$30,597
($15,080)
$15,517

Business
Degree
$64,720
($30,732)
$33,988

$22,100
($3,470)
$18,630
$19,793
$6,504

$52,200
($4,946)
$47,254
$80,672
$16,496

$44,927

$144,421

2.90

4.25

Cost of attendance
Average Federal/ State Grants
Net Cost of Attendance
Opportunity Costs (Lost Wages)
Present Value of Debt Service Costs
Total Adjusted Cost of Attendance

Years to Recover

Source: FBR Research and BLS

These exrunples are useful only to a point. The exercise assmnes that (1) the student completes the program;
(2) an opportunity cost is assigned for tJ1e time necessary to complete the program; 3) the student is able to
obtain employment at the median salary of that particular trade upon graduation; (4) tl1e student receives no
employer or tnilitruy tuition assistance; and (5) all other factors, such as ta~ rate, living expenses, and salruy,
remain static. The reality is often much different.
Apollo' s concentration on higher-level bachelors' degree programs generally attracts students who are more
likely to complete the programs than those attending certificate and associate's degree programs. This focus
results in better completion and job placement rates, which are critical in detennining whether a student
ultimately benefits from enrolLing in a par6cular program. However, drop-out rates among associate' s
degree-seeking students tends to run much higher. So, Apollo's growth in associate' s degree enrollment
over the past few years could come at the cost of lower student quality. Wlten students fail to complete tJ1e
program, they must pay off student loan debt without the degree necessary to increase llteir income potential.

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Student Loan Defaults

We believe that the rate at which students default on their loans reflects, to some degree, the value
proposition an institution provides. A1tl1ough an individual student may default for a myriad of reasons, an
elevated institutional default rate suggests that a significant number of a company's students did not benefit
fTom attending the program. That is not to say the quality of the education or program is lacking, only that
the student was unable to repay the debt acquired in exchange for attending a particular program.
Ramifications of student loan defaulls can go beyond students themselves, as high default rates can cause an
institution to become ineligible to receive Title IV funds, which would effectively shut down the school.
We also believe that programs or degrees that tend to produce high percentages of loan defaults will have a
more difficult time sustaining enrollment growth. particularly if the Department of Education continues its
efforts to increase transparency of student outcomes in certain programs.
According to the Department of Education's most recent report, the national student loru1 cohort default rdte
(CDR) increased from an all-time low of 4.6% in FY04 to 6.7% during FY07 (the most recent year
available). Historically, the CDR as measured by the government captures only loans that default within the
flrst two years upon a bonower entering repayment. Recent changes in the Higher Education Act extended
the CDR measurement period another year to three years. Preliminary three-year default rates were recently
reported for FY07, with the nationwide rdte increasing from 6.7% to 11.8% with the inclusion of another
year. This means that, on average. the munber of loans that default increased by approximately 76% between
year two and year three. Although the three-year CDR certainly is more representative of act11al defaults, it
stillunderreports Life-of-loan default rates by more t11an 30% for all types of student loans and by a factor of
2.0x to 2.50x for loans issued at proprietary institutions, according to Department of Education forecasts.
Setting aside lifetime default rates for students. a school's official two-year (and now three-year) CDR is
important because it pertains to t11e instit11tion's eligibility to receive Title IV funds. Under current
regulations, any instit11tion tliat reports a two-year CDR exceeding 25% for tllree consecutive years becomes
ineligible to receive Title IV ftmds. Using that metl1odology, we calculate Apollo ' s institution-wide CDR at
10.9% in FY07-approximately l.6x higher than the national rate but well below the 25% tlmshold. A
closer look at the school brdl1ds reveals a two-year CDR of9.3%for UPX and 18.5%for WIU forFY07.
Although WIU' s CDR is significantly higher than UPX' s. it remains well below the 25% tlmshold.
The regulatory change reqlliring a three-year CDR increases allowable limits from 25% to 30% for three
consecutive years and from 30% to 40% for any one academic year. Using the new three-year methodology,
we caJcuiate that Apollo' s overall CDR jumps to 17.8%--again, well below the 30% limit. On a schoolbrand basis, UPXs preliminary CDR increases to 16.0%, whi le WIU jumps to 26.5%. AH11ough WIU is
approaching the 30% threshold, we note that that limit would have to be exceeded for tluee consecutive years
before Apollo faces losing eligibility . Nevertheless, a deteriorating job market is likely to push futllre CDRs
higher from the FY07 level.
Even in the worst-case scenario. Apollo would not lose eligibility until late 2013 at tl1e earliest. Wit11 tl1a1
much lead time. schools can make adjustments. As such. we e>..'J)ect that t11e company will not exceed tJ1e
threshold. The more likely scenario is that the company wollld have to tighten admission standards, reduce
enrollment in higher-risk programs. and increase default prevention programs-all of which would either
reduce overall enrollment or increase operating costs.

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Two-Year and Three-Year CDRs by Institution

2005

40%

2006

2007

35%
30%
25%

20%
15%
10%

II

II

5%
0%
UPX

WIU

National

UPX

WIU

National

UPX

WIU

National

2-year CDR 3-year CDR

Source: Department ofducation. company filings, and FBR Research

Student Profitability Analysis

To better measure Apollo' s operating leverage associated with new enrollment. we have analyzed the
company's economics on a per-student basis. Taking into account the enrolled student population and
attrition rates (including dropouts and graduation). we calculate that the average Apollo student produces
approximately $13,843 in revenues. The cost of providing those education services. including corpomte
overhead, totals approximately $6,556 for the same period. leaving a pretax margin of $7,286 per student.
Apollo' s acquisition costs per student, which include marketing, recruitment, and direct admissions expenses,
are running at $2.7 40 per new student. After accounting for the $584 of lost revenue related to bad debt
expense. the pretax return per student is approximately $3.962-a return of 145% on the student acquisition
costs.
Per-Student Analysis
Weighted A vg. Life Analysis:
E xpected revenues per student
E~pec ted costs
E:~."Pected

per student

income per studen t

Less: acquisitio n costs pe r s tudent

$13,843
($6,556)
$7,286
($2,740)

Less: bad debt per student

($584)

Pro fitabili ty per student

$3,962

Re tum o n m :u:ke ting investJu en t

145%
Source: Company filings and FBR Research

Apollo' s model is driven in large part by persistence and acquisition costs. The longer a particular student
remains enrolled, or the greater tJ1e persistence rate, the more revenue the company earns and the lower the
bad debt expense becomes. One way to improve student retention (wlri le increasing graduation rates) is to
raise enrollment standards. However, increasing admission standards eil11er lowers enrollment or raises the
cost of acquiring students. Therefore, the goal of improving student persistence must be weighed against
student acquisition costs. In the above analysis, we estimate tJ1at a decline ofjust 1% in the student attrition
rate results in approximately $100 of additional profit per student-or approximately a 2.4% rise in
profitability per student.
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Around 75% of Apollo's overall student body turns over in a given year, meaning that the company must
enroll more than 341 ,700 new students over tl1e next12 montJ1sjustto maintain its current student body. For
that reason, the company spends more tl1an $1 bi llion per year in selling and promotional costs in an effort
not only to replace t11e students lost each year but a lso to grow overall enrollment. We calculate that through
a combination oftuitlon increases, lower student acquisition costs, and improved retention rates, Apollo
improved its per-student profitability by 22% in FY09 relative to the prior-year petiod.
In an effort to build on its enrollment success. Apollo has aggressively expanded its enrollment counselor
staffing during the last several years, adding 600 new counselors in FY07 and 550 more in FY08.
Additionally. in FY07, t11e company purchased an online marketing agency, Aptimus, for $48 million in an
effort to bring its onJine marketing spend in-house and better manage its brand. Selling and promotional
expenses grew by 21%, 22.2%, and 19% in FY07, FY08, and FY09 respectively, whil.e average annual
enrollment grew 10%, 12%, and 21%. New starts. however. grew 19%, 11%, and 24%. respectively.

Funding Sources
With the cost of tuition and books alone ranging from $11,000 to $17.500 per year for many of Apollo' s
most popular programs. a student's ability to fund his or her education is essential to the company 's business
model. Most Apollo students rely on :federal aid in the fonn of federally guaranteed Stafford loans and Pel!
Grants to fund tl1eir attendance. In fact. Title IV funding accounted for 86% of Apollo' s cash revenue in
FY09. an increase from 65% in t11e prior year. The company reports that private student loans account for
approximately 1.% of revenue. leaving 13% paid directly by students. private scholarships. or employer or
miJjtary tuition assistance. Nonetheless. Apollo' s ability to increase enrollment and/or implement additional
tuition increases is contingent on limiting the amount of its revenues from TitJe IV sources to less than 90%.
Note tllat the 90-10 calculation does not include funding for military personnel under t11e GI Bill.
Considering UPX's aggressive targeting of military persoru1el, we believe tl1at the company derives well over
90% of its revenues from the federal goverruuent in one form or another.

Program Costs and Title IV Limits

Freshman
Sophomore
Junior
Senior

Subsidized
Stafford
$3,500
$4,500
$5,500
$5,500

Additional
Unsubsidized
$6,000
$6,000
$7,000
$7,000

Maximum
Stafford Loans
$9,500
$10,500
$12,500
$12,500

Maximum
Pell Grant
$5,350
$5,350
$5,350
$5,350

Total Title IV
Aid
$14,850
$15,850
$17,850
$17,850

Hypothetical Cost of Business &

Degree
Mgmt. Education
Level
(100% online)
Associate
$11 ,050
Associate
$11 ,050
Bachelor
$16,750
Bachelor
$16,750

Source: UPX and FBR Research

The preceding table compares tlle maximum Title TV funding available to a qualified student with the
reported tuition charged by UPX. Because UPX already derives 86% of its revenues from Title IV sources.
we believe t11at its ability to raise prices is limited. On the surface, the fact that tuition rates are below tlle
TitJe TV funding levels suggests t11at the company has ample room to hike tuition. However, students
enrolled in associate's degree programs depend more heavily on Title IV funds than do those enrolled in
bachelor's and master's degree programs. Without a greater contribution from private student loans or
military assistance. ~my increase in tuition rates for associate's degree prognuus would simply result in
students drdwing down more Title IV funding, pushing Apollo's overall Title IV contribution closerto the
90% threshold. We believe that tl1e company has more flexibility to raise pricing in bachelor's ~md graduate
pro!,'l<Uns because many of tl1ese students do not qt1alify for as much Title IV aid. Students' ability to obtain
private student loans is somewhat limited in today's environment. however. so such a move could be
cotmterproductive.

Military Discounts and Gl Bill

Although not disclosed by Apollo, military-related financial aid, which is excluded from the 90-10
calculation. is an important source of non-Title IV revenue for UPX, in our view. The company provides
special discounts to active duty, reserve, and National Guard service members, as well as to their spouses, in
an effort to target this student population. For example, eligible students enrolled in the Associate of Arts
program atAxia pay $250 per credit hour, versus nonmilitary students paying $345. Over the course of a 60-

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credit-hour associate' s degree program, the cost differential is $5,700. Similarly, military bachelor's degree
candidates pay an even steeper discount of $250 per credit, versus regular students paying $530.
Why the discountjng? Under the new GI Bill, active duty and reservist students can receive tuition and fee
reimbursements not to exceed the highest undergraduate tuition and fee rates at a state-operated college or
tmiversity in the state at which the institution is located, plus a $1,000 rumual stipend for books and supplies,
as well as a monthly housing allowance, where applicable. For example, in Arizona, the maximum amount
covered by the post-9/11 GI Bill is $657 per credit hour, or $15,000.49 per term. Based on tiris data, military
personnel serving in active duty for as few as 90 days and as much as 36 months qualify for between 40%
and 100% of t11e entitlement amount. In the case of a student with the minimum amount of eligibility (90
days of qualified service), the military would pay $262.80 (40% x $657) per credit hour. UPX appears to
have set its military tuition rate at $250 per credit hour, which allows eligible students to pay 100% of t11eir
tuition with GT Bill funds.

Apollo Growth Prospects

With Apollo facing structum1 constraints related to the 90-10 limitations and, to a lesser degree, to CDRs,
combined with a naturdl decelemtion in cyclical demand from people returning to school, we expect the
company 's enrollment growth to begin to slow. Furthenuore, as we discussed earlier, we believe that the
company has little flexibility to raise tuition levels without pushing its contribution from TitJe rv funding
dangerously close to the 90% limit.
ln addition to ti1e mathematical limitation that the 90-10 Rule is likely to put on the company's growth
trajectory, we think the shift in ti1e reb>ulatory environment associated with the Obanm Administration may
have an equally significant impact on Apollo' s b>rowth prospects. Reb'lJlatory scmtiny of the industry 's
compliance with a "gainful employment" requirement and the proposed elimination of safe harbors related to
incentive-based compensation will force changes in how the industry opemtes. in our opinion. Supporting
our view was nmnagement's assertion in a recent conference call that it had undertaken a companywide
initiative " to ensure that only students who have a reas011able chance to succeed enroll in our universities."
Apollo has long emphasized retention and genemting returns for students. but we believe that the current
reb>ulatory environment, combined with Apollo' s increased dependency on Title IV funding caused by the
surge in student population, is driving such changes. 1n any case, increased screening of prospective students
wi ll increase costs and reduce enrollment prospects.

We e:-.-pect most of the company's efforts to focus on improving student outcomes witlun its rapidly
associate' s degree prognuu. Therefore, the slowdown will likely occur within this prognun.. which
accotmted for 70% of Apollo' s total enrollment growtl1 during tl1e past 24 months.
exp~mded

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Associate's Degree Enrollment Has Driven Apollo's Student Population Growth

60,000

50,000

40,000

30,000

20,000

10,000

New Associate's (Right)

New Bachelor's (Right)

- -Associate's% of Total New Starts (Left)

Source: Company filings and FBR Research

Policy and Regulatory Risks

SEC investigation. On October 27, 2009. Apollo ctisclosed that the SEC' s enforcement division had
launched an infonual review of its revenue-recognition prdctices. The announcement followed a letter from
the SEC's corporate finance ctivision in February 2009. Although Apollo has ctisclosed few specifics of this
investigation, we note that reftmd policies regarding Title IV aid are set by the Department of Education. So,
the SEC investigation may be about the fuuing of Apollo' s revenues rather than a challenge that the company
in1properly collected ftmds. As such, an investigation would likely be initiated by the Department of
Education.
En rollment-based compensation. A major issue under debate in Washington is incentive compensation for
admissions representatives based on enrollment Officially, to be eligible to receive federal student aid
(FSA), "schools may not provide commissions, bonus, or other incentive payment based eitl1er directly, or
indirectly, on securing enrollment or financial aid to any inctividual or entity engaged in recmitment or
admission activities or in making decisions regarding the award of FSA program funds. " Despite tl1e general
prohibition, severdl safe harbor provisions were established by tl1e Bush Administration that allow incentive
compensation in limited circmnstances.
The Department of Education is currently reviewing safe hatbors related to enrollment-based compensation
practices as part of a negotiated ru.lemaking commillee. It is our belief that the Department of Education will
eliminate the majority. if not all, of tJ1e safe hatbors. In FY08, the last time Apollo disclosed such details, the
company compensated its enrollment counselors $386 million, far more t11an t11e $273 million that it paid to
its faculty during t11e same period. Eliminating the safe harbor provision would create significant operating
uncertainties. It would become unclear how the company could compensate its employees and would raise
questions about whether a school could pay for leads via lntemet consolidators, a common prdctice today.
In 2003, two U1en-current employees filed a qui tam lawsuit on behalf of t11emselves and U1e federal
government under the False Claims Act. The suit alleges that UPX entered into a false claim by submitbng
program participation agreements to the Department of Education under Title TV because U1e company did
not intend to comply witJ1 employee compensation requirements consistent witl1 such participation. During
F4Q09, the company reserved $80.5 million in anticipation of a successful out-of-court settlement with the
plaintiffs. which would eliminate the risk of having potentially to return billions of dollars of revenue to tJ1e
Department of Education. The settJement \vas finalized on December 14, 2009. Under tJ1e agreement.
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Apollo paid $67.5 million to the U .S. and $11 million in attorneys' fees to the plaintiffs under the False
Claims Act. The remainder of t11e $80.5 million represents the company 's estimate of future legal costs.
Gainful em1>loyment. Many programs and institutions are eligible to receive Title TV funds based on the
fact that they prepare students for " gainful employment in a recognized occupation." For the proprietary
schools, all certificate, diploma, or degree progrclllls except those few classified as " liberdl arts" are govemed
by this "gainful employment" mandate. No standard exists, however, for what constitutes " gainful
employment."
As part of tl1e 2009 negotiated mlemaking process, the Department of Education's rules committee is
considering codifying the definition of gainful employment to calculate the "value added by the program."
First, tl1e c01runittee has rec01mnended using Bureau of Labor Statistics Standard Occupational Classification
(SOC) codes to link educational program to defmed occupations. The cost of the proe,rram would be
compared with the annual income increase of someone earning in the fust decile of the appropriate SOC
code. A cost/earnings mtio of no more than 3x would be considered acceptable. The committee is also
considering whether the Department of Education should establish a maximum debt/income mtio of 5%.
The repercussions of this issue are significant. as it could effectively set tuition caps on progTams based on
the projected or realized salaries of entry-level workers in t11e posit]ons linked to a given program.
Furtl1ennore, the uncertainty that such requirements would bring would also be significant. Schools would
have to detennine the appropriate SOC codes, while the tuition mtes would be linked to BLS occupation
surveys that may or may not reflect gr<lduates' true wages.
Despite what we consider to be a serious headline risk for Apollo and the possibility that the cormnittee wi ll
move to propose regulatory language at the end of its tenure in early 2010, we believe that the Department of
Educat]on will not implement such proposals for now. The significance and complexity of implementing tllis
rule has caused considerable concerns among institutions, both proprietary and nonprofits alike, that are
worried about a slippery slope toward price controls across all of higher educatJon. Additionally, an issue
this important would likely gain the attention of Congress, which may want to have t11e final say on
constructing the definition of " gainful employment" because it was originally established by legislation.
Altl10ugh we expect no material changes to the gainf11l employment regulation next year, the desire by the
Administration (and some in Congress) to make changes appears to exist, so t11e issue could resurface,
perhaps during the nex't reauthorization of the Higher Education Act.
90-10 Rule. The 90-10 Rule states that a proprietary school may derive no more than 90% of its revenues
from Title IV f1111ding. The rule is designed to ensure that students have at least some level of financial
participation in choosing to attend a particular school and as a safeguard against schools e>:panding
enrollment supported almost entirely by federal a id. A violation of the 90-10 Rule would result in t11e
inst]tution being placed on a provisional status to receive Title IV funds for two years so that it could become
compliant during the provision period.
The lligher Stafford loan limits and Pel! Gnmt increases tl1at Congress authorized in 2008 served to increase
the amoU11t of Title IV funding tl1at many schools receive as a percentage of overall revenues, potentially
pushing schools above the 90% threshold. To avoid tlus result, Congress temporarily exempted the $2,000
increase in Stafford loan borrowers from the Title IV amotmt tmtil July 2011. Additionally, Congress
changed the treatment of institutional loans (private loans made from schools to students) and allowed such
loans to be accoU11ted for on an accrual basis, with the net present value of the loans contributing to non-Title
IV revenues during a given period Ul1til July I, 2012.
As we discussed earlier, UPX derived 86% of its cash revenues from Title IV ftrnding in FY09. With more
of its growth coming from students enrolled in associate's degree progmms, who typically rely more on
fmancial aid. we expect Apollo's Title IV levels to creep toward tl1e 90% cap.
Cohort default rates. The move from a two-year to three-year measurement period for CDRs will result in
significantly higher reported defaults for most institutJons. This occurs because student loan defaults are
generally front loaded. Because the measurement period has been extended by one year, the allowable loss
threshold has been increased, as well . Under the new calculation, a campus with a three-year CDR in excess
of 30% in the three most recent years, or greater tl1an 40% in l11e latest year, will lose T ille IV eligibility.
Based on the preliminary three-year CDR for FY09, UPX"s 16% rate remains well below the cap, but WID' s
26.5% rate is within t11e risk zone and couJd become an issue as the economy pushes more Fonner students
into default in the coming years.

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Ability to benefit. For a student to be eligible (and hence a school able) to receive FSA, he or she must have
a high school diploma or a recognized equivalent unless that student meets certain ability-to-benefit (ATB)
criteria. A prospective student can demonstrnte an "ability to benefit" by passing a Department of
Education-approved ATB test, typically administered by a certified third party. Schools must make
available programs to assist such students in obtaining high school diploma equivalents but are not required
to verify that the students are enrolled in the programs or monitor students' pro!:,>ress in such progrdlus.
An August 2009 Govemment Accountability Office (GAO) report on proprietary schools. which
recommended increased oversight of proprietaty schools and ATB test providers to ensure t11at only eligible
students receive federal student aid, has elicited criticism from Congress and c-alls for stronger oversight from
the Department of Education's Inspector General. More specifically, t11e report cites a weakness in the
Department of Education's oversight of eligibility requirements-standards designed to ensure basic math
and English proficiency to reduce defaults and, ultimately, the cost to taxpayers of tJ1e student loan program.
The report cites several abuses and possible cases of fraud related to the ATB test for students without high
school diplomas.
The end result will likely be more-rigid eligibility criteria, which will result in lower enrollment growth for
lower-level certificate and associate's degree pro);,>rams. Because most of the ATB waivers occur in shorterterm certificate programs, we believe that Apo!Jo does not face significant risk regarding tl1is issue.
Advertising. Advertising is another hot-button issue in Washington. Many critics argue that institutions that
can receive more than of 90% of total revenue directly from the feder'al government should not be using
those revenues on advertising to attract new students. instead, tl1e money should be spent on educating those
students. In FY08, Apollo spent $323 million on direct advertising-again, more than it spent on faculty .
Although the dmmbeat of criticism grows louder. it is unclear how-if at all-regulators or Congress can
restrict a company' s ability to advertise.
Accred itation. As part of their task of measuring academic standards and tJ1e quality of student outcomes,
accreditation agencies require schools to remain within certain standards of student completion and
placement rates. Apollo' s primary accrediting agency is the North Central Association of Colleges and
Schools, The Higher Learning Commission (HLC). HLC has recently come tmder fire from tJ1e Department
of Education's Office oflnspector General for its accreditation of American Intercontinental University, a
division of Career Education Corporation. Although we anticipate no significant problems related to HLC,
the risk remains that the Department of Education could take an unexpectedly strong-anned approach toward
the accreditation agency.

Key ManagementJ
J ohn G. S1>erling, execut i\re chairma n of the board. Dr. Sperling is t11e founder of Apollo Group. He has
served as the appointed executive chainnan of the board since 2008 and had been acting executive chair since
2006. Dr. Sperling was chaim1an of the board from the company 's inception until June 2004. He was
president of Apollo Group until Febmaty 1998 and chief executive officer of Apollo Group until August
2001. Dr. Sperling received a Ph.D. from Cambridge University , an M.A. from t11e University of California
at Berkeley. a11d a B.A. from Reed College.
C ha rles " C bas" B. E delstein, director, co-chief executive officer. Mr. Edelstein has been co-chief
executive officer and a member of the board of directors since August 2008. Before joining Apollo Group,
he spent more tl1an 20 years at Credit Suisse, most recently as managing director and head of t11e g lobal
seivices investment banking division. Mr. Edelstein holds a B.A. fTom the University of Dlinois and an
M.B.A. from the Harvard Business School, where he graduated as a Baker Scholar.
Gregory W. Catlllelli, director; co-chief executive office, Apollo Groutl Inc.; and chairman, Atlollo
G loba l, Inc. Mr. Cappelli has served as co-chief executive officer since April 2009, as chainuan of Apollo
Global since its inception in October 2007, and as a member oftl1e board of directors since June 2007. He
joined Apollo Group from Credit Suisse, where worked as a sell-side research analyst for lO years covering

Source: Companyfilings and Reuters

71

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

the global senrices sector. Mr. Cappelli holds a B .A. in economics from Indiana University and an M.B.A.
fTom the Brennan School of Business at Dominican University.

Joseph L. D'Amico, president and chief operating officer. Mr. D ' Amico has been president since June
2008 and chief operating officer since March 2009. He previously served as chief fmancial officer. treasurer,
and interim chief financial officer of Apollo Global. Prior to joining Apollo Group, he was senior managing
directorofFTT Palladium Partners, a division ofFTI Consulting, Inc. Mr. D ' Amico received a B.S. in
accountancy from the University of Illinois and an M.B.A. from the University of Chicago.

Risks
Price target. Risks to our rating and ptice target include the potential for our earnings estimates to prove too
consenrative if enrollment trends are better than expected or if the economic environment proves exceedingly
favorable for such trends. Additionally, favorable outcomes related to numerous regulatory issues could
create upside risk to our price target as the market assigns higher valuations to reflect reduced re!,>ulatory risk.
Alternatively, a sharp recovery in the economy or an unexpected degradation of Apollo's key bmnds could
result in an tmforeseen drop in enrollment In such an event our earnings estimates would likely prove too
high, creating downside risk to our price target.

Regulatory risk and de)>endence on federal student <lid. Apollo Group derives the majority of its
revenues from federal student aid. The company' s ability to continue receiving such aid depends on its
compliance with numerous re!,'Ulatory standards and operating rules. Specifically, Apollo's University of
Phoenix and Western International University must comply with Higher Education Act of 1965, as amended,
~md the regulations issued thereunder by the Department of Education, which collectively govern the
company 's participation in Title IV fmancial aid programs. Additionally, legislative action or changes in tl1e
Department of Education's interpretation of existing mles may significantly affect tl1e company's business
model.
Dependence on private loans. Apollo's U.S. schools derived approximately 1% of revenues from private
student loans during FY09. The availability of private loans originated by third-party lenders has contracted
and might not return in the foreseeable future. As a result, tl1e company has begun funding such loans itself.
Under the current structure, the company retains all credit risk on loans originated.
Litigation risk In the ordinary conduct of its business, Apollo Group and its subsidiaries are subject to
lawsuits, demands in arbitration, investigations, and other claims, including lawsuits and c laims involving
current and fonner students, employment-related matters, business disputes, and regulatory demands .

Company Profile
Apollo Group, Inc. is one of the world' s largest private education providers and has been in the education
business for more than 35 years. The company offers educational progmms ~md services botl1 online and on
campus at the undergmduate. gmduate, and doctoral levels tlu-ough its wholly owned subsidiaries: The
University ofPhoeni'\:. Western International University, Institute for Professional Development. The
College for Financial Planning Institutes Corpomtion, and Me titus University. Apollo is tl1e majority owner
of a joint venture with the Carlyle Group called Apollo Global, which was formed to pursue investments in
the international education services industry.

72

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Financials
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Proprieta~y

Source: Compuny reports and FIJR r<esearch

73

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Balance Sheet
Apollo Group, Inc. (APOL)
-- ---

Cootolicbtcd Bal.-nee She-es:

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Propriet01y to FBR Capital Markets January 14, 2010

Mall Snowling, CFA . 703.469.1196 . msnowling@fbr. com
Source: Company repolls and l'BR Research

74

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Corinthian Colleges, Inc. (COCO - $13.65)

Market Perform

Santa Ana, CA

Price Target: $15.00

January 14, 2010

Coverage Initiated

STOCK DATA
$1264-$21.73
87.6
76.78li1
2,264,936
$1, 196

52-Week Ra1ge
Sh:nsOutstanding (miQ
Float (est mil shs)
Average Dai ly Volume
M<Wket Capitaliz<iion (miQ
Fiscal Ye<W-End

.ble

EARNINGS DATA
Adjusted Earrings per Share
2009A
3Q
10
20

$0.06

S0.29

S0.28

FY
$0.81

20

3Q

$040

$0.49

4Q
$0.36

51.62

$0.18

4Q

2010E
10
SO .'J!A
2011E
10

$042

20

3Q

4Q

$044

S0.52

S0.39

FY

FY
$1.78

Most Likely to Get Detention

Summary and Recommendation
We are initiating coverage of Corinthian Colleges, Inc. (COCO) with a Matket Perfonn
rating and a 12-montll price target of $15. Altl1ough we view Corinthian 's valuation as
relatively attractive, our cautious investment rating stems from our expectation of
decelerating enroll ment growtJ1 and regulatory changes that likely willlim:it near-tem1
upside potential Specifically, we are concerned about elevated student defaults and
Title IV receipts approach:ing statutory limits that will likely cause enrollment levels to
drop going fonvard. Over lime, we expect that the company 's strong cash flows will
support enough investment in growth initiatives to compensate for what we expect to
be a more difficult and e:-..rpensive operating environment in the future. Meanwhi le, we
recommend waiting for either a better entry point in t11e name or more c larity regarding
potential regulatory changes.

OPERATING DATA
FY Jun
2009A

Revenue

YOYGrowlh

1307.8
1666.9
1968.3

2010E
2011E

22.4%
27.5%
18.1%

Key Points

Valuation reflects challenging growth outlook Corinthian's student body,

which consists mostly of d:iploma and associate' s degree candidates, has swelled
as a result of the weakened job market. As such. we believe the company is
vulnerable to an improvement in the labor market In add:ition to economic
factors. Corinthian is challenged by the fact that nearly 75% of its schoolsaccounting for more than 70% of revenues-are at or near statutory cohort default
rates, a problem that will require in:itiatives tl1at will be both ehlJensive and likely
to reduce enrollment. Furtl1ennore. the company is nearing the limit for Title IV
funds of 90% of cash revenues, limiting growtl1 opportun:ities going forward. in
our opinion.

Regulatory changes on t he ho rizon. Although not unique to CorintJuan, the

company is exposed to various regulatory changes being d:iscussed by tlle
Department of Education. Specifically, our expectation for tighter ability-tobenefit rules-under which 24% of the school' s students are admitted-could
impact Corinthian particularly hard. Expected changes to enrollment-based
compensation and risk around industry gainful employment requirements will
likely cloud the stock for a while, as well.

Brand consolidation, acqu isit ions helping offset growt h decline. Corintluan is
at tl1e tail end of a five-year restructuring effort in wluch it closed dozens of
unprofitable campuses, consolidated multiple school brands into just two,
refocused marketing efforts in the I11temet channel, and streamlined overall
operations. Notwithstanding our view for declining enrollment, we expect these
actions to offset rising acquisition costs, resulting in relatively stable margins.

Valuation. Our 12-month price target of $15 represents 8.8x a nd 8.6x our CY 10
and CYll EPS estimates. respectively, and ~m EV/EBlTDA multiple of 4.6x. We
expect the market to continue assigning relatively low valuation multiples until
such a time that we see more clarity on some of the uncertainties regarding
possible regulatory changes and the effects on enrollment of ( l) addressing student
lo~m default rates, (2) obtaining non-Title IV funds for students. and (3) an
improving jobs market.

FINANCIAL DATA
FY 2009A

93,493
$8.40
Op!rating M<Wgin
13.93%
$ in millions unless otherwise indicated
Studert ErTollment

Long-Term Debt (miQ

Pricing as ofJamtal)d 2. 2010.

75

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Investment Thesis
We are initiating coverage of Corinthian Colleges, Inc. (COCO) with a Market Perfonn rating and a 12month price target of $15. Although we view Corinthian's valuation as atLTactive, our caution stems from our
ex-pectation of decelerating enrollment growth and regulatory changes that likely will limit near-tenn upside
potential. Over time, we expect U1at the compru1y's strong cash flows should support enough investment in
growth initiatives to compensate for what we expect to be a more difficult and e:-..-pensive operdting
envirorunent in the future. Meanwhile. we recommend waiting for either a better entry point in the nrune or
more clarity regarding potential regulatory changes.
Corinthian is at U1e tail end of a five-year restructuring effort in which it closed dozens of unprofitable
campuses, consolidated multiple school brands into two, refocused its marketing efforts on the more efficient
Internet channel, and streamJined overall operations. In the past year or so, the benefits of this restructuring
initlative have become evident, while at the same time, the deteriorating macroeconomjc environment created
a surge in enroUment-driven revenues as the population of students looking to improve their job skills
increased dramatically. As a result, a 20% increase in student enroUment has led to a 130%jwnp in
Corinthians EBTTDA over the past 12 months, demonstrating tlle business model 's inherent operating
leverage. T he question for investors is, can this growth continue or is Corinthian simply benefiting f-rom the
current weak employment market?
We believe that tile benefits from Corinthian's structural changes, such as lower student acquisition costs, a
focus on high school students for lead generat1on, and efficiencies in delivering education services, are
mostly sustainable. We are less confident, however, in tile sustainability of student enrollment levels. We
believe Corinthian is in somewhat of a " sweet spot" because of the macroeconomic environment. The weak
job market clearly supports a higher level of enrollment than one would expect in a more robust economy. In
the event of further deterioration in the job market, however. we would expect the relationship between
unemployment and enrollment to begin decoupling, as the cost of attendance no l.onger would be justifiable if
students have little prospect of obtaining jobs upon completion. Said differently, we would expect
enrollment to suffer at Corinthian Colleges if the unemployment rate worsens meaningfully above today's
10% level and/or if the market improves rapidly.
We are encouraged by management's actions to address this inevitable slowdown in enrollment with the
acquisition of Heald College, fmaJized on January 5, 2010, and plans to begin opening new campuses in
underserved markets. We expect Corinthian to begin making a bigger push into the two-year associates
de!,>ree marl<et, using mostly online offerings under the acquired Heald College brand, while expending
Everest campuses in select markets in an effort to build a base for future growth even with tl1e inevitable
improvement in the job market. The push into online associate programs may provide another source of
growth, but we note this is an increasingly commoditized product in which tl1e competition is better
positioned, in our opinion.
Aside from any job-market-related effects on enrollment, our main concem about Corintluan is one of
regulatory risk. Beyond any potential chm1ge in regulation, the company is currently operating near
regulatory linuts imposed by the 90-10 mle, cohort default rate (CDR) limits. and job placement rates
required for accreditation. SpecificalJy. we believe Corinthian cannot continue to grow on its current
tnijectory without exceeding the Department of Education threshold that limits an institution's receipt of
Title IV funding to 90% or less of revenues as it currently receives 88.9% from such sources. Furthenuore,
nearly three out of four Corintluan students, by our estimate, are enrolled at campuses at risk of exceeding
the CDR limits set by the Department of Education. presenting another challenge to the school 's future
growth. This will require extensive default prevention efforts and, if not successful. would likely require the
schools to tighten enrollment standards and possibly shut down troubled campuses. Finally. CorintJtian
reports that nearly 24% of its student population does not have a high school diploma but qualifies for federal
aid under an ability -to-benefit exemption. a program for which we expect the Ad1ninistration to increase
oversight.
Investors also should consider that political winds in Washington, D.C.. appear to be shifting, as Congress
~md the Administration have signaled an increased interest in tl1e proprietary school industry. The
Department of Education has established an ongoing Negotiated Rule making Committee to review industry

76

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

practices such as a safe harbor provision related to incentive compensation, t11e use of ability-to-benefit
exemptions for students lacking high school diplomas, gainful employment requirements for students, and
misrepresentation in advertising, among ot11er issues. Separately, the Department of Education 's Inspector
General has raised issues regarding how Everest' s accreditation agency measured credit hours and program
lengtl1 in its review of anot11er institution.
Although we expect the government will not take too drastic of a stance against the industry and risk
eliminating tJ1e only source of higher education to millions of students attending proprietary schools in this
country. we do believe the collective changes will result in higher operating costs brought about by t11e need
for these schools to increase spending on financial aid counseling, default prevention, student retention,
attendance measurement, and job placement Beyond the incrementa l cost of compliance, we believe
regulatory changes that focus on outcomes could cause schools to tighten enrollme nt standards, resulting in
slower enrollment growth.
As a result of some of the regulatory restriction already in place, coupled with an eventual improvement in
the job markets, we expect enrollment to begin to decline by lHll-albeit from a higher nm-mte.
Nevertheless, Corinthian should be able to continue generating approximately $300 million ofEBITDA
during that " slowdown." So, with COCO shares trading at an enterprise value to EBITDA ratio (adjusted for
ilie Heald acquisition) of 4.3x and a price-to-earnings multiple of 8.0x based on our CY1 0 EPS estimate. we
believe that much of the risks to t11e story are a lready discounted in the stock price.

Valuation
Shares of COCO currently trade at 8.0x our CY 10 estimate of$1.71 per share ~md at 7 .9x our CYll estimate
of $1.74 per share, compared with 14.9x and ll.2x at which the peer group currently tmdes. To take into
account the company' s cash and debt levels, we prefer to value the comp~my on an enterprise basis. Based
on our forecasts, we value Corinthian at 4.3x on an EV/EBITDA basis, compared with 6.5x for tl1e peer
group. Whetl1er valued on a PIE or an enterprise basis, COCO trades at a discount to most of its publicly
traded peers because of what we believe are regulatory and macroeconomic issues that bring enrollment
sustainability into question. Considering Corinthian' s exposure to more-countercyclical associate's pro1:,>ratus
~md sensitivity to re!,>ulatory changes, we believe the stock should trade at a discount to peers. Still, a strong
balance sheet and cash flows from opemtions should provide S1lpport to the battered stock.
Our 12-montll price target of$15 represents 8.8x our CYlO EPS estimate and equates to an EV to CYlO
EBITDA multiple of 4.6x. We expect the market to continue assigning relatively low valuation multiples
tmtil such a time that some of tl1e uncertainties regarding possible regulatory ch<mges and the effect of an
improving jobs market on enrollment become clearer.

Risks to Our Call

Valuation. Trading at 4.3x our 2010 EBITDA forecast, COCO shmes ar1:,>uably have a lot of bad news
priced in. With $225 million in cash and $8 million of debt outst:mding, the comp<my 's balance sheet and
cash flows fTom operations could attract a higher valuation from investors once some of the overhangs clear.
Enrollment growth. If une mployment stalls. enrollment growth could be stronger than we anticipate.
Furthennore. secular trends toward online education could also create upside potential to our enrotlment
expectations. And. trading at the low end of tl1e range, COCO shares could outperform if the market sees a
sustainable growth opportunity for the company.
Regu latory risk. Proposals to eliminate safe harbors related to incentive compensation for enrollment
officers and proposals to include a gainful employment test to detennine programmatic eligibility for Title IV
funding could, at tl1e least, increase the cost of enrolling new slt1dents and, at worst, prevent Corinthian from
enrolling large segments of tl1e student population it current serves and/or require it to cut tuition. A lack of
movement on proposed re!,>ulation-notably, gainful employment standards-could serve as a positive
catalyst for the stock. Additionally, a favorable outcome from the Department of Education investigation
related to the Higher Learning Commission (one of Corinthian' s accreditors) would likely serve as a positive
catalyst for the stock. Conversely, alt11ough we believe much of the bad news is priced in, a negative
outcome on any of the regulatory issues would likely drive the stock price lower.

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School Brands
After consolidating multiple brand names, Corinthian now operates two national school brands: Everest and
WyoTech. By consolidating, the company now can better leverage its brands using a more consistent
national advertising campaign. Given the importance of the cost of acquiring new students, advertising
efficiency gains are significant. Converting the Florida Metropolitan University campuses, which were t11e
target of an investigation by the Florida attorney general, he lps reposition Corinthian' s schools more
favorably in those markets.

Everest Corinthian created and now operates 100 of its 117 schools (including 17 in Canada) under the
Everest brand. Although Everest offers a munber of different programs and various levels of de1:,rrees,
student enrollment is concentrated heavily in associate' s dei:,'Tee progmms in the allied health field and, to a
lesser extent. massage therapy. Business, criminal justice. and infonnation technology (IT) programs
account for much of the remaining student population. Allied health programs include medical assisting,
medical insurance billing and coding, pharmacy technician, and dialysis technician, among others.
According to the Department of Education, healtJ1care-related degrees and certificates accounted for more
than 70% of completions at Corinthian institutions in the 2007 cohort, with approximately 34% under the
allied health umbrella.
The company also operates an online degree program under the Everestonline.com bnmd, which offers m:my
of the same programs as its brick-and-mortar campuses. During FY09, ofthe total 86,088 students enrolled
at Corinthian schools, 15,157 (18%) studied exclusively online.
WyoTccb. Corinthian currently operates six campuses under the WyoTech name. a long-established brand
within automotive mechanics programs. WyoTech mainly offers specialized automotive repair programs.
including diesel, marine. auto body. and precision systems maintenance. WyoTech also offers HVAC,
plumbing. and electrical programs on select campuses. In terms of de1:,rrees gr.mted. the Department of
Education reports that Corinthian gmnts 17% of its total degrees and certificates to students in the automotive
repair. construction. and mechanics fields.
Heald College. On October 20, 2009, Corinthian announced an agreement to acquire Heald College. The
acquisition, which closed on January 5, 2010, adds 11 campuses in California, Hawaii, and Oregon;
approximately L2,900 students; and regional accreditation. Heald offers healt11care, business, legal, and IT
programs at its campuses and was recently approved to begin offering fully online degrees. This online
platfonn will serve as a launching pad for Corinthian to penetrate the online associate s degree marketplace
and expand its offerings in business and management.

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U.S. Campus Locations

.~~-=.~~-----S~-t

Everest
W'yotech

<> Heald
So11rce: Department ojEd11cation and FBR Research

Federal Student Aid

As with nearly all higher education instillltions, Corinthian's student population's ability to obtain federal aid
is an essential driver of enrollment ~md student access. Federal student aid (FSA), primarily Title IV Pell
Grants and federal shtdent loans, provides a critical source of funding for Corintltian's students. In the 200809 academic year, students received and paid $1.07 billion of federal shtdent aid to Corinthian,
approximately 84% of the company 's revenues during the period, according to Department of Education
data. The amount offedenll aid the company received rose more than $325 million from the 2007-08
academic year, a 44% increase, whereas total aid increased 20% for higher education instit11tions overall.
Clearly, Corintltian benefited disproportionately from the f,rrowing pie of fedeml aid. Tlris dependence on
government assistance is growing because of changes in student mix and increased difficulty in students
obtaining private loans.
Considering that nearly all of the company 's revenue growth was funded with federal shtdent aid,
Corintlrian's ability to grow is tied to tlte government's appetite to fund an ever-increasing Title IV prognun.
We are not suggesting the company is at risk of losing tlris aid, only highlighting tl1e dependency.

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Receipts of Federal Student Aid $1.072 Billion (84% of Total Revenue)

Grants
28%

$76!> millon
Federal Srudeut
Loans
72%

So11rce: Department ojEd11cation and FBR Research

Cost/Benefit
The long-term growth prospects of Corinthian. or any school, for tl1at matter, depend on its ability to provide
value to students relative to the costs (direct and opportunity) of attending the pro);.'T3.Ill. Students must
consider numerous factors when weighing a particular program's costs and benefits, including gn1duation
rates, job placement rates, cost of attendance, forgone wages, student loan debt, and expected salaries.

If students' total costs exceed t11eir e-''J)ected rett1ms, we would expect a school' s enrollment growth or
margins to deteriornte. as students choose less expensive alternatives or as schools succumb to pricing
pressure. Conversely, to the e:.-.1ent graduates' future earnings exceed the economic cost of attendance, tl1en
demand should remain robust. Although every student situation is different, we attempt to approximate the
cost-benefit tradeoff by comparing several of the company's most popular progrdlllS \vith projected salaries
in tl1e corresponding career fields relative to our estimation of the total economic cost of attendance.
We evaluated the expected cost/benefit scenarios of two of Corinthian's most popular programs. First, we
considered the case of a student attending one of the company 's popular allied health progrnms (which
accounted for 31% of completion in the 2007-08 academic year) with tl1e e:-.'J)ectation of obtaining a job as a
medical/clinical assistance. The median salal)' for a medical assistant, according to tJ1e Bureau of Labor
Statistics, is $28,288, or $13,208 more than the expected salary of a minimum-wage employee. After
accounting for the cost of attendance, less possible grant aid, we estimate the economic cost of attending the
program is $27,789. At these levels, we estimate U1at in economic tem1s, a graduate breaks even on his or
her investment in 2.1 years (subject to loan terms, availability of grant aid, ~md taxes), altllOugh it may take
substantially longer to pay down the associated student loan debt.
With respect to WyoTech graduates, the most common completion is at the certificate/associate level in
automobile mechanics (note that a ltl1ough tlus program accounts for L8% of completions at WyoTech, it
represent just 3% of completions overall for Corintl1ian). An auto mechanic' s median salary is $35, 110. or
$20.030 more t11an the expected salary of a minimum-wage employee. After accounting for the cost of
attendance, t11e present value of debt service cost. t11e opportunity costs of lost wages whiJe attending the
program, less grant aid. we estimate U1e cost of attending the program is $43,991. At these levels, we
estimate the student will break even on Ius or her investment in 2.2 years. assuming no taxes and a 10-year
payback period for the student loans.

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Cost/Benefit Analysis of Attending Programs

Annual Salary
Less: Salary at Minimum Wage
Expected Benefit
Cost of Attendance
AveraQe Federal/ State Grants
Net Cost of Attendance
Opportunity Costs (Lost Wages)
Present Value of Debt Service Costs
Total Adjusted Cost of Attendance

Years to Recover

Allied Health
Assistant
$28,288
($15,080)
$13,208

Auto Mechanic
$35,110
($15,080)
$20,030

$14,595
($1 ,634)
$12,960
$10,305
$4,524

$24,479
($1 ,419)
$23,060
$12,881
$8,050

$27,789

$43,991

2.10

2.20

Source: FBR Research. Bureau ofLabor S1atistics, and Departmem ofEducation

The examples above are useful only to a point. The exercise assumes that (1) the student completes the
program; (2) an opportunity cost is assigned for the time necessary to complete the program; (3) the student
can obtain employment at the median salary of that pruticular trade upon graduation; (4) the student receives
no employer tuition assistance; at1d (5) all other factors, such as tax rate, living expense, salary, etc., remain
static. The reality often is much different. Many limes, the burden of making such a significant financial
investment up front with only the prospect of higher future earnings is too much for students to bear, and
many drop out. On t11e ot11er hand, a retum on investment ofjust a few years that puts someone on a career
patl1 to dramatically increase his or her lifetime earnings is a small price to pay.
Completion rates are one of the most important factors in determining whether or not a student will benefit
from enrolling in a pruticular program. We assume that the cost of attending a progrd1ll but failing to
complete it leaves the student with debt to pay but no degree to increase his or her earnings potential. This
issue is of particular concem for students attending online programs that report lower completion rates than
auto mechanics programs, for example.

Student Defaults
We believe the rate at which students default on tl1eir loat1s reflects the value proposition an institution offers.
Altl1ough a pmticular student may default for myriad reasons, an elevated default rate at a school suggests
that a high percentage of its students did not benefit from attending the progrmn. That is not to say tl1e
quality of tl1e education or program is lacking, only that the student was unable to repay the st11dent debt load
acquired attending a particular progrrun. Rantifications of student loan defaults can go beyond students
themselves, as high default rates can cause an institution to become ineligible to receive Title IV funds.
effectively shutting down that school.
According to the Department of Education' s most recent report, the national student loan CDR increased
from an all-tin1e low of 4.6% in FY04 to 6.7% during FY07 (the most recent year available). Historically,
the CDR as measured by tl1e govemment captures only loans that default within the first two years upon the
borrower entering repayment. Recent changes in tl1e Higher Education Act extend the measurement period
at1other year to three years. Preliminary three-year CDRs were recently reported for tlte FY07 cohott, and
the national rate increased from 6.7% to 11.8% with the inclusion of another year. This means, on average,
the muuber of loat1s that default increased by approximately 76% ben;veen Year 2 and Year 3. Although the
three-year CDR is cettainly more representative of actual defaults, it still underreports life-of-loan default
rates by more tl1an 30% for all types of student loans and by a factor of 2.0x to 2.5x for loans issued at
proprietary institutions, according to Department of Education forecasts.
Setting aside the actual lifetime default rates for students, a school 's officia l two-year (and now three-year)
CDR is importat1t as it pertains to eligibility to receive Title IV funds. Under current regulations, all)'
institution that reports a two-year CDR above 25% for three consecutive years becomes ineligible to receive
Title IV funds. Under tl1at metl1odology. we calculate Corinthian College' s institution-wide CDR as 14.7%

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in FY07-approximately 2.2x higher tl1an the national rate but well below t11e 25% threshold. By brand,
Everest reported a two-year CDR of 15.2% during FY07, while WyoTech reported 10.2%.
The regulatory change requiring a three-year CDR increases allowable limits from 25% to 30% for three
consecutive years from 30% to 40% for any one academic year. Using the new three-year methodology, we
calculate that Corinthian College' s overall CDR doubled from its two-year rate of 14.7% to 29.3o/<rdangerously close to the new 30% limit. In tenns of school brands, Everest' s three-year CDR averaged
30.5% (over the limit) while WyoTech's averaged 19.9%. Our analysis of school data reveals that out of the
41 Office of Postsecondary Education ID (OPEID) school codes tl1e company reports to the Department of
Education, 24 Everest campuses exceeded the 30% threshold, with anot11er five Everest campuses and one
WyoTech campus in the 25% to 30% range for the 2007 cohort. So, nearly 75% of tl1e company's schools
are eit11er above the threshold or dangerously close for t11e most recent cohort. We estimate that these
schools account for more t11an 70% of Corinthian's revenues and enrollment, so t11e issue of student defaults
is significant for the company.

Corinthian CDRs (Two-Year and Three-Year) by School Brand, 2005-07

35.0%

2005

2006

2007

30.0%
25.0%
20.0%
15.0%
10.0%

Everest Wyotech National

Everest Wyotech National

Avg.

Everest Wyotech National

Avg.
2-year CDR

3-year CDR

Avg.

I
Source: Department of Education and FBR Research

Based on the three-year measurement period, a school' s CDR would have to exceed 30% for three
consecutive years, or 40% in any single year, before t11e institution would lose Title IV eligibility. With the
exception of Corinthi~m's Everest San Antonio, Texas campus, which has a preliminary CDR of 42.8%, it
would be late 2013 at the earliest before the company would lose eligibility for the remaining at-risk schools.
With that much lead time, schools can make adjustments, and as such, we expect that Corinthian will not
exceed the threshold for three consecutive years. The more likely scenario would be that it has to tighten
admissions standards, reduce enrollment in higher-risk pro!,>ra.ms, and increase default prevention
programs-all of which either reduce overall enrollment or increase operating costs. Still, because of the
deteriordting economy, the recent federdl student loan delinquency and default trends suggest that loan
performance is likely to deteriorate further, which could put even more schools at risk before the company
can adjust.
Beyond the Tille IV implications of student loan default rates, the two- and tlrree-year CDRs suggest the
cumulative lifetime defaults for all Corinlluan students exceed 60%. A default rate of tl1is magnitude does
not reflect a prognun that is providing value to a majority of its customers. Over time, in order for
Corinthian' s business model to prosper, the company must address its high level of student defaults, in our
opinion.

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Student Profitability Analysis

To gauge the leverage inl1erent in Corinthian's business model, we analyzed the company' s economics on a
per-student basis to demonstrate the importance of growing student enrollment. Taking into account the
enrolled student population and the attrition rate (including drop-outs and graduation), we calculate the
average student produces approximately $12,666 in revenue during his or her tenure. The cost of providing
those education services, including corporate overhead, totals approximately $7,490 for the same period,
leaving a pretax margin of $5,176 per student. The cost to acquire a student, including marketing,
recruitment, and direct admission ex-penses, runs at $2,431 per new student. After accounting for the $954 of
lost revenue related to bad debt expense, the pretax return per student is approximately $1,792, a return of
74% on the student acquisition costs.

Weighted-Average Life Analysis

E xpected revenues p er studcnt

$12,666

E xpected co sts p er student

($7,490)

E xpected income p er student

$5,176

Less: acquisitio n costs per student

($2,431)

Less: bad debt per student

($954)

Pro fitability per student

$1,792

Return on marketing investment

74%

Source: FBR Research and company filings

We calculate tl1at by increasing student retention, raising tuition rates, lowering acquisition costs, and
growing the number of students enrolled in online programs, Corintl1ian has increased the profitability per
student from $677 in the 12-month period ending September 30, 2008, to $1 ,792 in the 12-month period
ending September 30, 2009. This increase comes despite the significant increase in the discount rate the
company uses on its internally originated private student loans-to 57% from 50%-as well as higher bad
debt e~;pense on tuition receivables. Although tuition and operating efficiency are certainly important,
student attrition rates are critical to the business model's profitability. Once a school has made the
investment to attract a student, the ability to retain that tuition-paying student and thus leverage more of the
school's fixed cost is essential. The average student enrolls in a Corinthian program for only 0.77 years, so
any extension by eitl1er improved retention or by offering longer programs through Heald likely will result in
a boost to profitability. Furthennore, a growing enrollment base goes a long way to lifting overall margins.
as the cost to educate the next stl1dent is relatively minimal-similar to selling empty seats on a flight. We
estimate that tl1e increment.:'ll margins at Corinthian run approximately 25% to 30%, nearly twice as high as
the company' s reported margin today. There is a lot of variance in the comp:my 's operating margin, with
decisions to invest in bnmd, program quality, and new courses all affecting profits in the short nm.

Funding Sources
With caps on federal loans for stltdents, the 90-10 mle limiting the mnount of Title IV funding a school can
accept, and average tuition rates across Corinthian's progralllS exceeding $15,000, access to private or
alternative loans has become increasingly important. In 2007. private loans represented 13% of Corinthian's
total revenues, with Sallie Mae providing approximately 90% of such loans to the company' s U.S.-based
stltdents. In early 2008, facing an increasingly difficult funding enviromnent and concerns regarding its
credit exposure to " nontr'dditional" schools, Sallie Mae notified Corinthian that it would no longer provide
private stltdent loans to its stltdents. This lack of private loan availability threatened students ability to fund
the gap between federal aid limits and the cost of attendance.
The government provided some relief with tJ1e passage ofH.R. 5715 in April 2008, which increased by
$2,000 the amount students could borrow under the federal loan program and subsequently exempted such
borrowings fTom the 90-10 calculation in the reauthorization of tJ1e Higher Education Act until July 2011.
Additionally, "institutional loans" made by schools to students, which historically have been recognized only
on a cash basis with regard to the 90-l0 calculation, will be treated on an accmal basis for 90-10 calculation
purposes. As a result, Cminthim1may include the net present value of the institutional loans made during a

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Institutional Brokerage, Research and Investment Banking

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given a period as part of non-Title TV revenue. For FY10 (ending June 30, 2010), t11e company expects to
originate approximately $140 million of such loans.
Without a functioning secondary market in which to sell tJ1e loans, along with an extremely high cumulative
default experience of such loans in the past, Corinthian expects to discount these loans at 56% to 58% of par.
The company thus will effectively record $80 million in lower revenues as a result of assuming its students'
credit risk plus any additional adjustments for uncollectable receivables in subsequent periods. We view the
$80 million as more of a " discount" to revenues rather than a true loss. This d iscount is necessary not only to
help students fund their tuition payments but also to help Corinthian comply wit11 tJ1e 90-10 rule.
Nonetheless, the favorable treatment of institutional loans under the revised 90-10 calculation is due to expire
in July 2012. If the treatment is not extended, the company will be dangerously close to deriving more t11an
90% of its revenues from Title IV funds. In facl, Corinthian has disclosed t11at it derives 81.3% of its
revenues from Title IV funding under the current modified 90-10 rule but that tl1e percentage would increase
to 88.9% using the post-July 2012 meU10dology. This would likely require a change in enrollment strategy to
focus on students more willing and/or able to pay for greater levels of tuition on t11eir own-ultimately
meaning tl1at enrollment growth would slow.

Policy/Regulatory Risks
In addition to receiving the vast majority of its revenue from federal student aid, Corinthian' s entire business
model hinges on its approval by accreditation agencies and tJ1e Department of Education. As a result, the
company faces a significant amount of regulatory and policy risk. Our discussions with Washington
policymakers suggest tl1at Congress is unlikely to use legislation to make any direct changes to the industry.
Rather, we expect the current Administration to exercise its regulatory authority that currently resides with
the Department of Education in an effort to more closely scrutinize proprietary schools in several ways.
Ability to benefit. For a student (and hence a school) to be eligible to receive federdl student aid, he or she
must have a high school diploma or a recognized equivalent unless that student meets certain ability to
benefit (ATB) criteria. A prospective student can demonstrate ATB by passing a Department of Educationapproved ATB test, typically offered by a certified third-party administrator. Schools are required to make
available progrdms to assist such students in obtaining a high school diploma equivalent but are not required
to verify that a shtdent is enrolled or monitor students' progress in such a program.
An August 2009 GAO repoxt on proprietary schools recoxmnended increased oversight of proprietary schools
and ATB test providers to ensure that only eligible students receive federal shtdent aid. eliciting criticism
from Congress and calls for oversight. Specifically, the report cites a weakness in the Department of
Education's oversight of eligibility requirements-standards designed to ensure shtdents' basic math and
English proficiency to reduce defaults and ultimately the student loan prognun's cost to taxpayers. The
report cites several abuses and possible cases offmud related to the ATB test for students lacking a high
school diploma.

The end resull will likely be more-rigid eligibility criteria, which will decrease enrollment growth. As of
June 30, 2009, Corinthian reported t11at 23 .8% of its students qualified for enrollment via ATB testing.
Enrollment-based compensation. Another hot-button issue in Wash.in.~:,>ton is incentive compensation for
admissions representatives based on enrollment. According to the Higher Education Act, in order to be
eligible to receive federal student aid, "schools may not provide commissions, bonus, or other incentive
payment based eit11er directly, or indirectly, on securing enrollment or financial aid to any individual or entity
engaged in recruitment or admission act)vities or in making decisions regarding the award ofFSA program
funds." Despite the general prohibition, the previous Administration established several safe harbor
provisions tl1at allow for incentive compensation in limited circumstances.
The Department of Education is currently reviewing tl1ese safe harbors as part of a Negotiated Rulernaking
Committee, and we believe some changes are likely tl1at will restrict compensation practices for tl1e industry.
Considering tl1at Corinthian spends 20% to 23% of its revenues on marketing and admissions, a large amotmt
of which is for recruitment-related compensation, such changes could make enrollment growth more
d.iffi cult.

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90-10 rule. The 90-10 mle states that a proprietary school may derive no more t11an 90% of its revenues
fTom Title TV funding. The rule is designed to ensure students have at least some level of financial
participation in choosing to attend a particular school and as a safeguard against schools expanding
enrollment supported almost entirely by federal aid. Any institution that violates the 90-10 ru.le is placed on
a provisional status to receive TiUe IV funds for two years in an effort to become compliant during that
period.
The higher Stafford loan limits and Pell Grant increases that Congress authorized in 2008 increased tJ1e
amount of Title TV funding many schools receive as a percentage of t11eir overall revenues, potentially
pushing schools above the 90% threshold. To avoid this result, Congress temporarily exempted the $2,000
increase in Stafford loan borrowers from the Title IV amount until July 2011. Additionally, Congress
changed the treatment of institutional loans (private loans made from schools to students) and allowed such
loans to be accounted for on an accrual basis, wit11 ll1e net present value of the loans contributing to non-Title
IV revenues until July I, 2012.
Under the revised 90-10 calculation, Corinthian derived 81.3% of its net revenue from Title IV sources for
FY09- short of the 90% threshold. However, the company actually received 88.9% of its cash revenue from
Title IV funding. Therefore, unless Congress moves to eA1end the exemptions to higher loan limits and
institutional loans in 2011 and 2012, respectively, Corinthian will be dangerously close to tripping that
threshold and losing funding. Clearly, the company has lime to adjust to avoid tripping the threshold.
Corrective measures would likely mean raising tuition, wit11 t11e goal of having students fund t11e increase out
of pocket, or de-emphasizing certain programs that traditionally attract students who rely heavily on federal
student aid. Bot11 approaches could decrease enrollment but may be necessary if the 90- 10 rule comes into
play in 2012. Furt11ennore, raising tuition may not necessarily result in much additional non-TitJe IV
funding, given t11at the expected default rate on Corintltian's institutional loans are close to 60% and likely to
rise in this environment.
Cohort default rates. Despite the overall institution remaining safely tmder t11e 25% CDR caps, we believe
a mm1ber of Corinthian' s campuses are at risk. As part of the renewal of t11e Higher Education Act in 2008,
Congress eA1ended the measurement period required to calculate the CDR from two years to three years.
Because student loan defaults are generally front-end loaded, this recalculation will have a disproportionate
impact on a school' s CDR. With the measurement period extended by one year. the allowable loss threshold
has increased as well. Under the new calculation, a campus with a three-year CDR in excess of 30% in the
three most recent years. or greater than 40% in the latest year, will lose Title IV eligibility.
Using the new tl1ree-year metllOdolob'Y, we calculate that Corinthian College' s overall CDR doubled from its
two-year rate of 14.7% to 29.3o/o-dangerously close to the new 30% limit. ln terms of school brdllds.
Everest's three-year mte averaged 30.5% (over the limit) willie WyoTech's averaged 19.9%. Our analysis of
school data reveals tl1at out of the 41 OPEID school codes the company reports to the Department of
Education, 24 Everest can1puses exceeded the 30% threshold, with another five Everest campuses and one
WyoTech campus in the 25% to 30% rdllge for the 2007 cohort. So, nearly 75% oftl1e company 's schools
are either above the ilireshold or dangerously close for the most recent cohort. We estimate tl1at these
schools account for more tl1at1 70% of revenues and enrollment, so the issue of student defaults is significat1t
for t11e compru1y. Given the furtl1er deterioration in the job market since the 2008 and 2009 cohorts entered
repayment, we expect t11e school's CDR to rise, possibly putting more campuses at risk of losing Title IV
eligtbilit:y.

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Institutional Brokerage, Research and Investment Banking

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At-Risk Campuses from Change in CDR Calculation

School

City

3-Year Cohort Default Rate

Estimated%

Estimated%

State

Enrollment

Revenues

FY05

FY06

FY07

FY07 Cohort >30%

Everest

Phoenix

ftZ

1.5%

2.5%

23.6%

26.4%

30.2%

Ev erest

Alhambra

CA

0.7%

1.2%

30.9%

32.1%

36.1%

Everest

Anaheim

CA

1.2%

0.9%

31 .6%

33.1%

37.1%

Everest

Hayward

CA

2.3%

0.6%

26.5%

30.2%

30.0%

Ev erest

Ontario

CA

2.1%

3.1%

26.4%

29.2%

32.3%

Everest

Reseda

CA

0.8%

1.9%

27.8%

32.6%

30.3%

Ev erest

San Bernadino

CA

3.5%

1.0%

30.9%

35.4%

32.3%

Everest

San Francisco

CA

3.0%

2.4%

23.7%

30.7%

31 .7%

Everest

Colorado Springs

1.0%

0.8%

22.9%

26.8%

32.6%

Everest

Thorton

co
co

2.6%

2.2%

28.1%

33.6%

36.2%

Everest

Largo

FL

3.2%

3.6%

21 .3%

26.7%

34.8%

Everest

Miami

FL

2.1%

1]%

21 .5%

29.3%

36.7%

Everest

Miami

FL

2.5%

2.0%

20.1%

30.2%

34.1%

Everest

Southfield

Ml

6.2%

5.4%

29.8%

35.6%

36.9%

Ev erest

SprinQfield

MO

1.5%

1.8%

27.2%

32.0%

33.3%

Everest

Las Vegas

NV

0.7%

0.7%

27.0%

31 .8%

31 .1%

Ev erest

Rochester

NY

2.6%

2.6%

33.9%

35.2%

37.2%

Everest

Portland

OR

3.2%

2.7%

28.9%

30.5%

35.0%

Ev erest

Pittsburgh

PA

0.9%

0.9%

26.3%

31.1%

32.0%

Everest

San Antonio

TX

4.5%

3.2%

32.5%

42.9%

42.8%

Everest

Salt Lake City

UT

1.4%

1.2%

28.4%

29.8%

31 .5%

Everest

Newport News

VA

1.5%

1.5%

29.0%

31.6%

30.4%

Everest

Renton

WA

2.3%

2.1 %

17.1%

26.4%

33.3%

Everest

Cross Lakes

wv

2.3%

0:5%

29.5%

28.9%

31.9%

53.7%

46.5%

26.9%

31.3%

33.7%

Sub-total I Average
FY07 Cohort 25%-30%
WyoTec h

Long Beach

CA

0.3%

3.5%

19.0%

26.4%

29.4%

Everest

Gardena

CA

1.4%

1.6%

25.2%

29.5%

29.4%

Everest

Orlando

FL

6.1%

8.3%

18.9%

20.3%

26.4%

Everest

Tampa

FL

6.6%

9.7%

23.7%

23.1%

26.2%

Ev erest

Brighton

MA

1.4%

2.5%

27.7%

26.6%

27.1%

Everest

Grand Rapids

Ml

3.4%

2.2%

19.0%

24.5%

26.5%

Sub-total I Average

19.2%

27.8%

22.3%

25.1%

27.5%

Total

72.9%

74.3%

25.9%

30.1%

32.5%

Source: FBR Research and Department ofEducation

86

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Despite the fact that the default trajectories of many of these campuses are on paths to exceed CDR limits,
we expect these campuses wilJ not lose Title rv funding. With t11e exception of the Everest San Antonio,
Texas campus, which has a preliminary CDR of 42.8%, it would take until late 2013 at the earliest before the
company would lose eligibility for the remaining at-risk schools. Corinthian can clearly adjust enrollment
practices for the at-risk campuses to safeguard Title IV eligibi)jty. Rather than the company letting a campus
lose Title IV eligibility, effectively shutting it down, we expect those individual campuses will move to
tighten enrollment standards, increase retention efforts, increase job placement resources, and institute moreproactive outreach prognuns for borrowers. Such prognuns will educate aid recipients about options such as
loan defennent and forbeamnce, as well as the newly available income-based repayment prognun designed to
lower monthly payments for struggling borrowers. As a result, we believe Corinthian has several remedies at
its disposal to overcome the challenges associated with elevated CDRs at several of its can1puses. Using
these remedies will likely result in higher expenses ~md/or slower enrollment, but these options are
considembly more appealing tlllm having to close schools.
Adveriising. Advertising is another hot-button issue in Washington. Many critics argue that institutions U1at
can receive upwards of 90% of revenue directly from the fedeml government should not be allowed to use
those revenues on advertising to new students. As tile theory goes, the money should be spent on educating
those students and improving student outcomes. Corinthian spent $150 million, or 11% of revenue, on
advertising in FY09. Although it is tmclear how, if at all, reb>ulators or Congress c~m restrict a company 's
ability to advertise, any limitations would likely result in slower enrollment growth.
Accreditation-related completion and job l>lacement rates. As part of their task of measuring academic
standards and the quality of student outcomes, accreditation agencies require schools to meet certain
standards of student completion and placement rates. Although the required rates vary by accreditor,
Corinthian' s four primary accrediting agencies-t11e Accrediting Commission of Career Schools and
Colleges (ACCSC), t11e Accrediting Council for Independent Colleges and Schools (ACTCS), U1e Accredit)ng
Council for Continuing Education and Training (ACCET), and the Higher Learning Com.1nission (HLC) of
the North Central Association of Colleges and Schools-typically require completion rates of between 60%
and 67% and job placement rates of between 65% and 70%. Altl1ough placement rates are not publicly
available through the Department of Education, we are able to see completion rate data t11at measure
completers within 150% of the regular amount of time by institution. Our analysis of Department of
Education data shows t11at, in aggregate, Corintluan 's schools have an average completion rate witirin 150%
of the nonnaltime of 62%.
On December 17, the Department of Education Office of Inspector General released a heavily redacted alert
memorandwn pertaining to HLC's decision to accredit a competitor's school (Career Education
Corporation' s American InterContinental University). Specifically, the Inspector General took issue with
HLCs accrediting American InterContinental despite t11e university lacking specific standards for measuring
credit hours and program Iengti1. The Inspector General used unusually strong language in saying " iliis
action by HLC is not in ll1e best interest of students and c-alls into question whether the accrediting decisions
made by HLC should be relied upon by the Department of Education when assisting students to obtain
quality education through the Title IV programs."
With respect to Corintluan, HLC is the accreditor of two Everest schools located in Arizona, including its
online school. Everest-Phoenix is already on probation with HLC, and the fact the agency is itself under
scrutiny could further complicate matters. WitllOut accreditation from a Department of Educationrecognized agency, a school cannot receive Tille IV funds.
Gainful em1>loyment. Many programs and institutions are eligible to receive Title IV funds based on the
fact that they prepare students for " gainful employment in a recognized occupation." For proprietary
schools. all certificate, diploma, or degree progrcllUs that are not defined narrowly as "liberal arts" are
governed by tlus " gainful employment" mandate to be classified as an eligible institution by the Department
of Education. There is no standard, however, for what constitutes "gainful employment."
As part of the 2009 negotiated rulemaking process, U1e Department of Education's rules committee is
considering codifying the definition of gainful employment to calculate the " value added by the program."
First, the comnuttee has recommended using Bureau of Labor Statistics Standard Occupational Classification
(SOC) codes to link educational program to defined occupations. The cost of the program would be
compared with the annual income increase of someone earning in the first decile of the appropriate SOC

87

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

code. A cost-to-earnings ratio of no more tJ1an 3x would be considered acceptable. The committee is also
considering whether the Department of Education should establish a maximum debt-to-income ratio of 5%.
The repercussions of this issue are significant, as it could effectively set tuition caps for schools to remain
Title IV eligible. Furthennore, the uncertainty that such requirements would bring would also be significant.
Schools would have to determine the appropriate SOC codes relevant to ti1eir programs, while ti1eir tuition
rates would be linked to Bureau of Labor Statistics occupation surveys that may or may not reflect the true
wages earned by graduates.
Despite what we consider to be a serious headline risk to Corinthian and ti1e possibility that the c01mnittee
will move to propose ref:,'Ulatory lanf,'llage at the end of its tenure in early 20 l 0, we believe ti1at ti1e
Department of Education will not actually implement such proposals for now. The significance and
complexity of implementing this mle have caused considerable concem among institutions, both proprietary
and nonprofits alike, which are worried about a slippery slope toward price controls across all of higher
education. Additionally, an issue this important likely will gain tile attention of Congress, which may want
ti1e fmal say on constmcting the definition of gainful employment. Although we expect no material changes
to the gainful employment ref,'Ulation nex1 year, the desire by the Ad1ninistration (and some in Congress) to
make changes appears to be present, so the issue could resmface, perhaps during the nex1 reauti10rization of
the Higher Education Act.

Key Management4
Jack D. Massimino, executive chairman. Mr. Massimino has been executive chainnan of the board of
Corinthian since July 2009. He served as chief executive officer from November 2004 through J nne 2009.
In addition, he was chainnan of ti1e board from August 2008 through June 2009. Mr. Massimino was first
appointed to Corinthian' s board in 1999, having served as boti1 chair of the audit committee and as a member
of the compensation c01ruuittee. He joined Corinthian after serving as president and CEO of Talbert Medical
Management Corporation, a physician practice management company, from 1995 to 1997. Prior to Talbert,
Massimino held various senior executive positions witi1 FHP International Corporation, a publicly traded
HMO.

Pete C. Waller, chief executive officer. Mr. Waller has been CEO of Corinthian since July 1, 2009. Prior
to becoming CEO, he served as president and chief operating officer from February 2006 to June 30, 2009.
Prior to joining the company, Mr. Waller served as ~Ul executive partner at Three Sixty Sourcing Inc., which
he joined in 2001. Before ti1at, he served as president of Taco Bell Corp. , which he joined inl996 as chief
marketing officer. Prior to Taco Bell, Mr. Waller spent 20 years in various positions with consumer products
comp~mies such as Procter and Gamble. Gillette, and Pepsico. In addition to serving as a director of
Corinthian, Mr. Waller serves on the board of directors of Websense. Inc.

Matthew A. Oimet, )>resident and chief operating officer. Mr. Oimet has been president and COO of
Corinthian since July 2009, after joining the company as executive vice president of operations in January
2009. Prior to Corintluan, Mr. Oimet was a president in the hotel group at Starwood Hotels & Resorts
Worldwide. Before Starwood, he held numerous positions at Walt Disney Parks and Resorts from 1989 to
2006. From 1998 to 2006. Mr. Oimet held executive positions at Disney Cruise Line and Disneyland Resort.
Kenneth S. Ord, executive vice president and chief financial officer. Mr. Ord, who currently serves as
chief financial officer, joined Corinthian in February 2005. Prior to joining the company, he was executive
vice president and cluef financial officer of Alliance Imaging, Inc. Prior to that, Mr. Ord served as executive
vice president and chief financial officer of Talbert Medical Management. Before Talbert, he was senior v ice
president and CFO ofFHP International.
William B. Buchanan, executive vice president, marketing. Mr. Buchan~m has served as Corinthian's
executive vice president, marketing since joining the company in July 2004. Prior to joining Corinthian, Mr.
Buchanan was employed by GreenPoint Mortgage, \"Vhere he directed all retail marketing witl1 responsibility
for direct marketing, Internet m~uketing, advextising, and branch marketing. Prior to GreenPoint, he was

Source: FactSet, Reuters, and company filings

88

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

with Providian Financial Corporation, a credit card issuer witl1 approximately 10 million customer accounts,
where he served as senior vice president of platinum marketing, senior vice president of new account
business, and executive vice president of new channel & product development.
Marl< L. Pelesh, executive vice president, legislative and regulatory affairs. Mr. Pelesh has served as
Corinthian' s executive vice president for legislative and re1:,'1llatory affairs since September 2003. Prior to
joining Corinthian, Mr. Pelesh was a partner in t11e Washington, D .C. law fin11 of Drinker Biddle & Reath
LLP from 1997 to September 2003, where he founded and led the fim1 's education law group. His work with
Drinker Biddle & Reath encompassed dealing with Congress, t11e U.S. Department of Education, and many
state aut11orities, as well as representation of accrediting agencies. He also served as a participant in t11e
Department of Education's negotiated rulemaking procedures.

Risks
Price target. Risks to our rating and price target include the potential for our earnings estimates to prove too
conservative if enrolhuent trends are better than expected or the economic envirotmlent proves exceedingly
favorable for such trends. Additionally, favorable outcomes related to numerous regulatory issues could
create upside risk to our price target as the market assigns higher valuations to reflect reduced re!:_,>ulatory risk.
Alternatively, a sharp recovery in the economy or an unexpected degradation of Corinthian' s key brands
could result in an unforeseen drop in enrollment. In such an event, our earnings estimates would likely prove
too high, creating downside risk to our price target.
Regulatory risl< and dc11endence on federal student aid. Corinthian Colleges derives the majority of its
revenues from federal student aid. Its ability to continue receiving such aid depends on its compliance with
numerous regulatol)' standards and operating mles. Specifically, Corinthian must comply with Higher
Education Act of 1965, as amended. and the regulations issued thereunder by the Department of Education,
which collectively govern the company' s participation in Title IV fmancial aid progr<uns. Additionally,
legislative action or changes in tl1e Department of Education's interpretation of existing mles may
significantly affect the company' s business model.
Dependence on private loans. The availability of private loans originated by tJ1ird-party lenders has
contracted and might not return in the foreseeable future. As a result, the company has begun funding such
loans itself, in conjunction with a lending party. Under t11e current structure, the company retains all credit
risk on loans originated
Litigation risk In the ordinary conduct of its business, Corintluan Colleges and its subsidiaries are subject
to lawsuits, demands in arbitration, investiga6ons, and other claims. including, but not limited to, lawsuits
and claims involving current and fonner students. employment-related matters, business disputes. and
regulatory demands.

Company Profile
Corinthian Colleges, Inc. operates 117 schools in the U.S. and Canada. focusing primarily on short-tenn
diploma/certificate and degree progrclllls. The company's courses of study are designed to be practical and
career-oriented, with 63% ~md 32% of students enrolled in diploma ~md associate progrdlUS, respectively. As
of September 30, 2009, 59% of students were enrolled in healthcare-related fields, 16% in criminal justice.
13% in business, and 9% in mechanical trade progrdlns.

89

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Financials
Income Statement
Corinthian Colleges, Inc. (COCO)
($ 1n Millions)
Contolu:lateditu:omC"SUtemeftt1
(JJff~WiHMJ

Net Rew:nues

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S93l.2

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Matt Snowling, CFA. 703.469.1196 . msnowling@jbr.com

Source: f'ompany reporrs and F'BR Research

90

Institutional Brokerage, Research and Investment Banking

FBR CAPITAL MARKETS

Balance Sheet
Corinthian Colleges, Inc. (COCO)
... .... . ....

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Source: Company reports and FBR Research

91

*Closing price of last business day immediately prior to the date of this publication.

IMPORTANT INFORMATION
FBR Capital Markets (FBRCM) is the global brand for FBR Capital Markets Corporation and its subsidiaries.
This report has been prepared by FBR Capital Markets & Co. (FBRC) andfor its affiliate Friedman, Billings, Ramsey International, Ltd. (FBRIL), both of
which are subsidiaries of FBR Capital Markets.
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(SIPC). FBRIL is Authorised and regulated by the Financial Services Authority and registered under Firm Reference Number 184881 on the FSA
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For up-to-date company disclosures including price charts, please click on the following link or paste URL in a web browser:
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Market Perform (MP) - FBRCM expects that the subject company's stock price will be in a trading range neither outperforming nor underperforming
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Rating

FBRCM Research Distribution1

FBRCM Banking Services in the past 12 months1

BUY [Outperform]
HOLD [Market Perform]
SELL [Underperform]

44.2%
49.2%
6.6%

10.9%
7.4%
3.4%

( 1) As of midnight on the business day immediately prior to the date of this publication.
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Copyright 2010 FBR Capital Markets Corporation

Rating and Price Target History for: Apollo Group, Inc. (APOL) as of 01-13-2010

105
90
75
60
45
Q1

2007

Q2

Q3

Q1

2008

Q2

Q3

Q1

2009

Q2

QfO

Q3

2010

Create<l by BlueMatrix

Rating and Price Target History for: Career Education Corporation (CECO) as of 01-13-2010

r------------------------,-------------------------r------------------------,-----~40

r---~Q~1~--~Q~2----~Q~3~---1----~Q~1----~Q~2~--~Q~3----~----~Q~1~--~Q~2----~Q~3~--~r---~Q~

2007

2009

2008

2010

Created by BlueMatrix

Rating and Price Target History for: Corinthian Colleges, Inc. (COCO) as of 01-13-2010

24
20
16
12
8

Q1

2007

Q2

Q3

Q1
2008

Q2

Q3

Q1

2009

Q2

Q14

Q3
2010

Created by BlueMatrix

Rating and Price Target History for: Devry Inc. (OV) as of 01-13-2010

70
60
1>0
40
30
Q1
2007

Q2

Q3

Q1
2008

Q2

Q1

Q3
2009

Q2

oi0

Q3
2010

Created by BlueMatrix

From:
Sent:
To:

Subject:

Miller, Tony
Thursday, April 01, 201 o 9:00 AM
Kanter, Martha; Private- Duncan , Arne ; Yuan , Georgia ; Rose, Charlie ; Cunningham, Peter;
Shireman , Bob; Dannenberg , Michael; Plotkin, Hal; Dann-Messier, Brenda
RE: For-profits vs. community colleges, report due out tomorrow

From: Kanter, Martha

Sent: Thursday, April 01, 2010 12:55 AM

To: Private - Duncan, Arne; Miller, Tony; Yuan, Georgia; Rose, Charlie; Cunningham, Peter; Shireman, Bob; Dannenberg,
Michael; Plotkin, Hal; Dann-Messier, Brenda
Subject: FYI: For-profits vs. community colleges, report due out tomorrow

Martha Kanter
Under Secretary
U.S. Department ofEducation
"The future belongs to those who believe in the beauty of their dreams!"
--Eleanor Roosevelt
Begin forwarded message:

F rom: GEORGE BOGGS <gboggs@aacc.nche.edu>

Date: March 31 , 2010 1:53:19 PM PDT
To: GEORGE BOGGS <gboggs@aacc.nche.edu>
Subject: For-profits vs. community colleges, report due out tomorrow

FYI.

George

George R. Boggs
President and CEO
American Association of Community Colleges

One Dupont Circle, NW, Suite 410

Washington, DC 20036

202.728.0200, ext. 235

qboqgs@aacc. nche.edu

AACC: The Voice of America's Community Colleges

www.aacc.nche.edu

FYI. We will surely be dealing with this tomorrow.

FYI. The Washington Post is reporting below that a report paid for by Corinthian
Colleges will be released tomorrow showing "for-profit colleges do a better job
educating students than community colleges, even while serving a more at-risk
population, and does so for a comparable sum of money." Of course, no one should be
surprised when a report says nice things about the sector that paid for the report. The
post notes that the contractor that wrote the report has done work for the NYC and
Chicago public schools, but not that most of its work is for for-profit companies,
including for-profit schools and payday lenders. (The blog posting also discloses that
the Wash Post owns Kaplan, but describes Kaplan as "a test-preparation company that
also offers distance higher education," even though its revenues from higher education
swamp the revenues from test-prep.)
For-profits vs. community colleges
http://voices. washingtonpost.com/college-inc/201 0/03/forprofits vs community colle.html

A new study, scheduled for release Thursday, suggests that for-profit colleges do a
better job educating students than community colleges, even while serving a more atrisk population, and does so for a comparable sum of money.
Commissioned by Corinthian Colleges, a major player in the for-profit sector, the study
was conducted by the Parthenon Group, a Boston consultancy that has done education
research for the New York and Chicago public schools.
2

Leaders of Corinthian Colleges ordered the study "in response to the hyperbole, the
insinuations that we are not delivering value," said Mark Pelesh, executive vice
president for legislative and regulatory affairs. The fast-growing sector has a reputation-undeserved, the colleges say-- for charging students too much, over-selling the
market value of their services and leaving students deep in debt.
(Note: The Washington Post Co. is a player in the for-profit college industry because it
owns Kaplan, Inc., a test-preparation company that also offers distance higher
education.)
The study examines U.S. Department of Education survey data on input and output and
reaches the following conclusions:
1. For-profit colleges are adding capacity at a rate of 6 percent, investing $800 million to
$900 million a year, compared with a 1-percent annual growth rate among two-year
public institutions, whose growth is hindered by dwindling state funds.
2. For-profit colleges serve a larger proportion of high-risk students (meaning at risk of
dropping out) than community colleges. Fifty-four percent of for-profit students meet
three or more "risk factors" as defined by the federal government, including parenthood,
delayed enrollment and lack of a high school diploma. Thirty-six percent of community
college students are considered at high risk.
3. For-profits have-- arguably-- a higher success rate than community colleges. Sixtynine percent of students surveyed by the federal government attained the degree or
certificate they sought or transferred elsewhere within five years of enrollment in a forprofit college. The comparable rate in commun ity colleges is 62 percent. Community
college students are far more likely to transfer to other schools, whereas for-profit
students are more likely to attain certificates and then conclude their studies.
4. For-profit colleges receive $26,700 in funding, on average, for every student who
successfully completes study or transfers. Community colleges receive $25,300 per
student. The funding sources, of course, look entirely different: the for-profits receive
most of their funding in tuition and fees paid by students, whereas community colleges
get most of their funds from state and local government.
5. For-profit students start out with a lower income than community college students but
yield a greater earnings gain through their studies. For-profit students earn $14,700, on
average, when they begin their studies, and see an income boost of $7,900, or 54
percent, when they leave. Community college students earn an average $20,300 when
they start, and see a boost of $7,300, or 36 percent, when they finish .
6. For-profit students are less likely than commun ity college students to report that they
were surprised by how much they owed at the end of their studies. More than half of forprofit students report they were told how much they would have to borrow by their
institution, according to a survey of students by the Parthenon Group. By comparison,
about 40 percent of community college students said their institution provided
information on debt.

Please follow College Inc. all day, every day at washingtonpost.comlcollege-inc.

3

And for all our college news, campus reports and admissions advice, please see our
new Higher Education page at washinqtonpost.comlhiqher-ed. Bookmark it!

This email has been scanned for all viruses by the MessageLabs Email
Security System.

From:
Sent:
To:
Subject:

Kanter, Martha
Thursday, April 01, 201 o 12:55 AM
James R. Kvaal; Cecilia E. Rouse
FYI : For-profits vs. community colleges , report due out tomorrow

Here we go...
Martha Kanter
Under Secretary
U.S. Department ofEducation
"The future belongs to those who believe in the beauty of their dreams!"
--Eleanor Roosevelt
Begin forwarded message:

From: GEORGE BOGGS <gboggs@aacc.nche.edu>

Date: March 31, 2010 1:53 :19 PM PDT
To: GEORGE BOGGS <gboggs@aacc.nche.edu>
Subject: For-profits vs. community colleges, report due out tomorrow

FYI.

George

George R. Boggs
President and CEO
American Association of Community Colleges
One Dupont Circle, NW, Suite 410
Washington, DC 20036

202.728.0200, ext. 235

qboqqs@aacc. nche.edu

AACC: The Voice of America's Community Colleges

www.aacc.nche.edu

FYI. We will su rely be dealing w ith this tomorrow.

FYI. The Washington Post is reporting below that a report paid for by Corinthian
Colleges will be released tomorrow showing "for-profit colleges do a better job
educating students than commun ity colleges, even while serving a more at-risk
population, and does so for a comparable sum of money." Of course, no one should be
surprised when a report says nice things about the sector that paid for the report. The
post notes that the contractor that wrote the report has done work for the NYC and
Chicago public schools, but not that most of its work is for for-profit compan ies,
including for-profit schools and payday lenders. (The blog posting also discloses that
the Wash Post owns Kaplan, but describes Kaplan as "a test-preparation company that
also offers distance higher education," even though its revenues from higher education
swamp the revenues from test-prep.)
For-profits vs. community colleges
http://voices. washingtonpost.com/college-inc/201 0/03/forprofits vs community colle.html

A new study, scheduled for release Thursday, suggests that for-profit colleges do a
better job educating students than community colleges, even while serving a more atrisk population, and does so for a comparable sum of money.
Comm issioned by Corinthian Colleges, a major player in the for-profit sector, the study
was conducted by the Parthenon Group, a Boston consultancy that has done education
research for the New York and Chicago public schools.
Leaders of Corinthian Colleges ordered the study "in response to the hyperbole, the
insinuations that we are not delivering value," said Mark Pelesh, executive vice
president for legislative and regulatory affairs. The fast-growing sector has a reputation-undeserved, the colleges say-- for charging students too much, over-selling the
market value of their services and leaving students deep in debt.
(Note: The Washington Post Co. is a player in the for-profit college industry because it
owns Kaplan, Inc., a test-preparation company that also offers distance higher
education.)

The study examines U.S. Department of Education survey data on input and output and
reaches the following conclusions:
1. For-profit colleges are adding capacity at a rate of 6 percent, investing $800 million to
$900 million a year, compared with a 1-percent annual growth rate among two-year
public institutions, whose growth is hindered by dwindling state funds.
2. For-profit colleges serve a larger proportion of high-risk students (meaning at risk of
dropping out) than community colleges. Fifty-four percent of for-profit students meet
three or more "risk factors" as defined by the federal government, including parenthood,
delayed enrollment and lack of a high school diploma. Thirty-six percent of community
college students are considered at high risk.
3. For-profits have-- arguably-- a higher success rate than community colleges. Sixtynine percent of students surveyed by the federal government attained the degree or
certificate they sought or transferred elsewhere within five years of enrollment in a forprofit college. The comparable rate in community colleges is 62 percent. Community
college students are far more likely to transfer to other schools, whereas for-profit
students are more likely to attain certificates and then conclude their studies.
4. For-profit colleges receive $26,700 in funding, on average, for every student who
successfully completes study or transfers. Community colleges receive $25,300 per
student. The funding sources, of course, look entirely different: the for-profits receive
most of their funding in tuition and fees paid by students, whereas community colleges
get most of their funds from state and local government.
5. For-profit students start out with a lower income than community college students but
yield a greater earnings gain through their studies. For-profit students earn $14,700, on
average, when they begin their studies, and see an income boost of $7,900, or 54
percent, when they leave. Community college students earn an average $20,300 when
they start, and see a boost of $7,300, or 36 percent, when they finish .
6. For-profit students are less likely than community college students to report that they
were surprised by how much they owed at the end of their studies. More than half of forprofit students report they were told how much they would have to borrow by their
institution, according to a survey of students by the Parthenon Group. By comparison,
about 40 percent of community college students said their institution provided
information on debt.

Please follow College Inc. all day, every day at washingtonpost.comlcollege-inc.

And for all our college news, campus reports and admissions advice, please see our
new Higher Education page at washingtonpost.comlhigher-ed. Bookmark it!

This email has been scanned for all viruses by the MessageLabs Email
Security System.

From:
Sent:
To:
Subject:

Arsenault, Leigh
Wednesday, March 31, 2010 8:22PM
Ferguson, Keith
RE: numbers requested in last week's meeting with Tony Miller

KeithJ could you send me the initial email that Martha is responding to and the data that was
provided to her? Thanks .
Leigh
Office of the Under Secretary
u.s. Department of Education
leigh.arsenault@ed.gov
-----Original Message----From: FergusonJ Keith
Sent: WednesdayJ March 31J 2010 8:18 PM
To: Estrella - LemusJ Angela
Cc: ArsenaultJ Leigh
Subject: RE: numbers requested in last week's meeting with Tony Miller
AngelaJ
Below is Martha's response to the numbers you put together last Friday.

Let me know if you have questions. Thanks.

Keith
-----Original Message----From: KanterJ Martha
Sent: WednesdayJ March 31J 2010 3:24AM
To: FergusonJ Keith
Subject: Re: numbers requested in last week's meeting with Tony Miller
Show this to Leigh
Thanks.
Martha Kanter
Under Secretary
U.S. Department of Education
"The future belongs to those who believe in the beauty of their dreams!"
-- Eleanor Roosevelt
9

From:
Sent:
To:

Cc:
Subject:
Attachments:

Deanne Loonin [dloonin@nclc.org]

Tuesday, March 30 , 2010 5:49PM
Pauline Abernathy; ljasher@ticas.org ; Steve Burd ; Margaret.Reiter123@gmail.com
Shireman , Bob; Arsenault, Leigh
DISCLOSURES ARE NOT A SUBSTITUTE FOR AGE STANDARD
signature.JPG

I hope the title of this e-mail is kind of catchy. I'm not sending this to the larger group for now, but I wanted to pass on a
summary of my conversation with Tom Babel from Devry. He said that Bob suggested I call him and he said that Bob
is/was open to the idea that disclosures and/or counseling could be proposed instead of a gainful employment standard.
I'm not assuming he portrayed Bob's views accurately, but I want to pass on what I told him. It's great if they want to give
students more info . and counseling, but it is definitely not a substitute in our view for a gainful employment standard . He
said that the prop. schools are coming up with a proposal that has a list of additional disclosures that would be given as
well as some counseling requirements that would kick in if e.g . a student is in debt trouble. Seems like good ideas that
they should implement, but not in lieu of a substantive standard .

N C l. C. Deanne
Loon in
NATIONAL CONSUMER LAW CENTER
1'.1\TTO:-..,\L 7 Winthrop Square, 4th Floor
aJ~ U'-tl.ll Boston, MA 02110-1245
- :.
(617) 542-8010
I '\ W
dloonin@nclc.org
\ l: N r l R" www.studentloanborrowerassistance.org

10

From:
Sent:
To:
Subject:
Attachments:

Manheimer, Ann
Tuesday, March 30 , 2010 3:36PM
Arsenault, Leigh
FW: Borrower Complaint Follow-up from NCLC
image001 .jpg

Forwarding- in case you could not access the links as a cc to my last message to Deanne. - ann
From: Deanne Loonin [mailto:dloonin@nclc.org]

Sent: Thursday, March 25, 2010 3:55 PM

To: Manheimer, Ann
Subject: RE: Borrower Complaint Follow-up

ok, thx. I will send you my summaries next week. Should I also be sending you summaries from other advocates and
investigators or tell them to contact you directly?

From: Manheimer, Ann [mailto:Ann.Manheimer@ed.gov]

Sent: Wednesday, March 24, 2010 4:55 PM

To: Deanne Loon in
Subject: RE: Borrower Complaint Follow-up

Thanks so much- I have not forgotten - Ann

From: Deanne Loonin [mailto:dloonin@nclc.org]

Sent: Wednesday, March 24, 2010 10:02 AM

To: Manheimer, Ann
Subject: Borrower Complaint Follow-up

Thanks for getting in touch last week. I can send you some borrower complaint summaries, but was waiting to get from
you a copy of the table you are using to input the info. I can also get similar info. from others if you are interested . Please
let me know.
In the meantime, here are some borrower complaint sites on-line to review : Some of these go back for several years, but
it looked like many were still being updated , with the more recent pages towards the bottom of the page.
http://www.complaintsboard.com/complaints/educational-loans-incorrect-charges-c290972 .html- Complaint about Devry,
with links to several more complaints. Reader comments are at the bottom of some of these pages.
http://www.consumeraffairs.com/education/devrv.html - Several pages of Devry Complaints
http://www.rateitall.com/i-5875-devrv-institute-of-technology.aspx- Reviews of Devry
http://www.complaintsboard.com/bycompany/university-of-phoenix-a8989.html- University of Phoenix Complaints
http://www.ripoffreport.com/colleges-and-universities/university-of-phoeni/university-of-phoenix-witheld-Sbqdb.htm - a
slightly different complaint about University of Phoenix
http://university-of-phoenix.pissedconsumer.com/- A number of University of Phoenix Complaints
http://hubpages.com/hub/University-of-Phoenix-Fraud--Huge-Scam - more University of Phoenix
http://www.complaintsboard.com/complaints/itt-technical-institute-c70827.html- ITT Complaints
11

http://www. ripo ffreport. com/Ad u It-Career-Contin ui ng-Ed u cation/ITT-Tech n ica I-I nstitlitt-tech n ica 1- institute-ri poff-c754 j. htm more on ITT
http://itt-technical-institute.pissedconsumer.com/- another ITT page , with links to more complaints towards the bottom of
the page
http://www.complaintsboard.com/complaints/wyotech-c190900.html- Wyotech, one of the Corinthian schools
http://www.jalopyjoumal.com/forum/archive/index.php/t-34803.html - more on Wyotech
http://www.complaintsboard.com/bycompany/everest-college-a63130.html- Everest College, another Corinthian School
http://www.consumeraffairs.com/education/everest.html - More on Everest
http://www.viewpoints.com/Everest-College-review-3dac- Everest Reviews

N C L C Deanne Loon in

NATIONAL CONSUMER LAW CENTER

"ATlONAl 7 Winthrop Square, 4th Floor

C\.}fo.~l1Mll\ Boston, MA 02110-1245

'

(617) 542-8010

t AW
dloonin@nclc.org
C f :X 1 l tt www.studentloanborrowerassistance.org

12

Location:

4:00-5:00 DeVry Meeting w/Don Graham, Harold Shapiro, Tony Miller, Bob Shireman or Dan
Madzelan
Arne's Office

Start:
End:
Show Time As :

Tue 4/6/2010 4 :00 PM

Tue 4/6/2010 5:00PM
Tentative

Recurrence:

(none)

Meeting Status:

Not yet responded

Organizer:
Required Attendees:

Duncan, Arne
Myers, Sam; Shelton , Betsy; Miller, Tony; Shireman , Bob; Fine, Stephanie; Arsenault, Leigh;
Madzelan , Dan ; Salk, Sam; Duran , Maribel

Subject:

Internal Staff Attending:

Tony M iller
Bob Shireman or Dan Madzelan
External Attendees:
Don Graham
Harold Shapiro

POC:
Bill Strong 312.573.5474
Briefing Materials - Bob Shireman 247.6651 or Dan Madzelan
Scheduling- Tia Borders 205.4595

13

Babel , Tom [Tbabel@devry.com)

Wednesday, March 17,2010 11 :08 AM
Arsenault, Leigh
FW: Gainful Employment recommendations
image001 .png

From:
Sent:
To:
Subject:
Attachments:

Hi Leigh,
I want to make sure that Bob has seen this. Can you confirm? Thanks,

Tom
Thomas Babel
Vice President
Student Finance Policy and Industry Relations
DeVry Inc.
3005 Highland Parkway
Downers Grove, IL 60515
p: 630 .515 .3133
m: 630 .776.4614
f: 630.353.9903
e: tbabel@devry.com
www.devry.edu

From : Babel, Tom

Sent: Saturday, March 13, 2010 9:29AM

To: Shireman, Bob
Cc: McKernan, John; Guida, Anthony; tim.foster@vti.edu
Subject: Gainful Employment recommendations
Bob,
On behalf of Jock McKernan, Tony Guida, Tim Foster, Heather Podesta and Eric Rosen, I want to thank you again
for your time on March 3 and the opportunity to discuss the Department's concerns and objectives as they relate
to the proposed regulations for Gainful Employment. Since that time, we have engaged in a number of
conversations and analyses with peers in the private sector on your concept of regulations consisting of additional
disclosure and an eligibility threshold at an "outer boundary". We have agreed the followings items would
improve student's ability to make informed decisions when considering enrollment at any institution or in any
program of study:

A "packaging" of currently required disclosure items, including program cost, completion

rates and historical tuition increases into a single document or website, plus:

14

1. A link to the Bureau of Labor Statistics earnings data so that prospective and current
students can have a sense of the salary and wage levels that are typical for the
professions and careers they might be interested in,

2. The average borrower indebtedness level from the most recent year's graduates at
each education level (i.e., diploma, associate degree, bachelor's degree, etc.) offered
by the institution, and
3. The monthly repayment amounts for an average borrower using the 10-year
standard and 20-year extended repayment plans, and
4. A loan repayment calculator that enables prospective and current students the ability
to model loan repayments using the average borrower indebtedness or their own
projected indebtedness for all of repayment options.
As we explored other disclosure elements and an eligibility threshold, more questions than solutions were raised.
The questions prevented us from making much additional progress. As a result, we would like to recommend
that we convene a small working group with Department policy staff and a representative group from the private
sector to further develop the "disclosure plus outer boundary" concept. We suggest that this be a substantive
working discussion with the personnel involved capable of testing the appropriateness of any recommendation.
We are willing to commit the time necessary to fully evaluate any alternative. We will work with the associations
to identify appropriate representatives and will be prepared to meet with you within a week of acceptance of this
recommendation.
Thank you for the opportunity to provide input and your consideration,

Tom
Thomas Babel
Vice President
Student Finance Policy and Industry Relations
DeVry Inc.
3005 Highland Parkway
Downers Grove, IL 60515
p: 630.515 .3133
m: 630.776.4614
f: 630.353.9903
e: tbabel@devry.com
www.devry.edu

15

Subject:

Babel , Tom [Tbabel@devry.com)

Friday, March 26, 2010 9:31 AM
Shireman , Bob
McKernan, John; Guida, Anthony; Arsenault, Leigh
RE: Gainful Employment recommendations

Importance:

High

From:
Sent:
To:

Cc:

Bob~

Can we schedule time next week for Tony and I to come in and present our recommendations to
you? Thanks~
Tom
Thomas Babel
Vice President
Student Finance Policy and Industry Relations
DeVry Inc.
3005 Highland Parkway
Downers Grove~ IL 60515
p: 630 . 515.3133
m: 630.776.4614
f:
630.353.9903
e: tbabel@devry.com
www.devry.edu

- - - - -Original Message----From: Shireman~ Bob [mailto:Bob.Shireman@ed.gov]

Sent: Tuesday~ March 23~ 2010 5:41 PM
To: Babel~ Tom
Cc: McKernan~ John; Guida~ Anthony; tim.foster@yti.edu
Subject: RE: Gainful Employment recommendations
Tom:
I think it wou l d certainly be useful if a group were to get together and develop some
recommendations~ especially if the group included representatives from legal aid or consumer
groups. I haven't had time to review this with our lawyers~ but I'm pretty sure that if the
Department were to establish such a group~ it would be covered by the Federal Advisory
Committee Act and would need to have public meetings~ notices in the Federal Register~ etc.
Not that I don't like to hold public meetings~ but we don't have the staffing in the short
term to pull that off. So I think it is a useful idea and we wou ld be interested in knowing
how it is progressing and of course any outcome. And of course we remain interested in any
ideas you may have either before or after the proposed ru l e is finalized.
- Bob
Robert Shireman
Deputy Undersecretary
U.S. Department of Education
(202) 260-0101
16

From: Babel> Tom [Tbabel@devry.com]

Sent: Saturday> March 13> 2010 10:28 AM
To: Shireman> Bob
Cc: McKernan> John; Guida> Anthony; tim.foster@yti.edu
Subject: Gainful Employment recommendations
Bob>
On behalf of Jock McKernan> Tony Guida> Tim Foster> Heather Podesta and Eric Rosen> I want to
thank you again for your time on March 3 and the opportunity to discuss the Department's
concerns and objectives as they relate to the proposed regulations for Gainful Employment.
Since that time> we have engaged in a number of conversations and analyses with peers in the
private sector on your concept of regulations consisting of additional disclosure and an
eligibility threshold at an "outer boundary". We have agreed the followings items would
improve student's ability to make informed decisions when considering enrollment at any
institution or in any program of study:
A "packaging" of currently required disclosure items> including program cost>
completion rates and historical tuition increases into a single document or website> plus:
1.
A link to the Bureau of Labor Statistics earnings data so that prospective and
current students can have a sense of the salary and wage levels that are typical for the
professions and careers they might be interested in>
2.
The average borrower indebtedness level from the most recent year's graduates at each
education level (i.e.> diploma> associate degree> bachelor's degree> etc.) offered by the
institution> and
3.
The monthly repayment amounts for an average borrower using the 10-year standard and
20-year extended repayment plans> and
4.
A loan repayment calculator that enables prospective and current students the ability
to model loan repayments using the average borrower indebtedness or their own projected
indebtedness for all of repayment options.
As we explored other disclosure elements and an eligibility threshold> more questions than
solutions were raised. The questions prevented us from making much additional progress. As
a result> we would like to recommend that we convene a small working group with Department
policy staff and a representative group from the private sector to further develop the
"disclosure plus outer boundary'' concept. We suggest that this be a substantive working
discussion with the personnel involved capable of testing the appropriateness of any
recommendation. We are willing to commit the time necessary to fully evaluate any
alternative. We will work with the associations to identify appropriate representatives and
will be prepared to meet with you within a week of acceptance of this recommendation.
Thank you for the opportunity to provide input and your consideration>
Tom
Thomas Babel
Vice President
Student Finance Policy and Industry Relations
DeVry Inc.
3005 Highland Parkway
Downers Grove> IL 60515
17

p: 630.515.3133
m: 630.776.4614
f:
630.353.9903

e: tbabel@devry.com<mailto:tbabel@devry.com>
www.devry.edu<http://www.devry.com/>
[cid:image001.png@01CAC1DC.97429710]

18

From:
Sent:
To:

Cc:
Subject:
Attachments:

Arsenault, Leigh on behalf of Shireman , Bob

Monday, March 22, 2010 10:52 AM
Yale, Matt; Shireman , Bob
Borders, Tia
RE: Meeting with Arne
image001 .jpg

Hey MattAll of those dates/times work for Bob.

-Leigh
Office of the Under Secretary
U.S. Department of Education
leigh.arsenault@ed.gov

From: Yale, Matt

Sent: Monday, March 22, 2010 10:30 AM
To: Shireman, Bob
Cc: Borders, Tia
Subject: FW: Meeting with Arne
Are you available at these times?

From: Borders, Tia

Sent: Friday, March 19, 2010 12:34 PM

To: Yale, Matt
Subject: RE: Meeting with Arne
Hi Matt,
April 2nd works if Arne's still okay with coming into the office. (spring break)
April 5 1h works if Arne's okay with it (it'll be his first day back in the office)
April 6 1h 11:00-11:30 am or 11:30-12:00 pm works
Tia
...---- - - - - - - - - - ,

lia Borders

U.S.DeparbnentofEducation
Director of Scheduling
{202) .tJO 1-:3043 ":ork
tla.borders~ed.gov

-1CTO Maryland Ave., SW

Washington, DC 20202

www.ed.gov

From: Yale, Matt

Sent: Friday, March 19, 2010 12:26 PM

To: Borders, Tia
Subject: Fw: Meeting with Arne
28

Any of these dates work?

From : Bill Strong <bill_strong@jtpr.com>

To: Yale, Matt
Sent: Fri Mar 19 11:05:34 2010
c ......~ftl'f.

Do Mootj no wjtb Arnp

So if we could possibly secure one of the three times below, that would be most appreciated and I hope
productive for all concerned.
Thanks again f or your help.
-Bill

WILLIAM C. STRONG
Executive Vice President/Managing Director
Jasculca(Terman and Associates, Inc.
730 N. Franklin Street, Suite 510
Chicago, Illinois 60654
P : : 312.573.5474 F : : 312. 337.8189
c :: 312 .543.0063
bj!l@jtpr com
Strategic Communications :: Public Affa irs : : Events :: Design :: Digital

From: "Yale, Matt" <Matt.Yale@ed.gov>

Date: Thu, 18 Mar 2010 14:46:50 -osoo
To: Bill Strong <bill strong@jtpr.com>
Subject: RE: Meeting with Arne

From: Bill Strong [mailto:bill strong@jtpr.com]

Sent: Thursday, March 18, 2010 3:34 PM

To: Yale, Matt
29

Subject: Re: Meeting with Arne

Matt, here are times that work for both Washington Post Co. CEO Don Graham and Harold Shapiro of
DeVry Inc.
4/2- anytime after 2:00p.m.
4/5-9:30 a.m. to 12 noon
4/6-9:30 a.m. to 12 noon, and again beginning at 4:00p.m.

Gov. Kean's schedule it too complicated to try to mesh with everybody else.

Thanks for helping with this.

-Bill

WILLIAM C. STRONG
Executive Vice Presiden t/Managing Director
Jasculca/Terman and Associates, Inc.
730 N. Franklin Street, Suite 510
Chicago, Illinois 60654
P :: 312.573 .5474 F :: 312. 337.8189
c :: 312. 543.0063
bj!l@jtpr com
Strategic Communications :: Public Affairs : : Events : : Design :: Digital

From: "Yale, Matt" <Matt.Yale@ed.gQY>

Date: Wed, 17 Mar 2010 18:40:10 -osoo
To: Bill Strong <bill_strong@jtP-r.com>
Subject: Re: Meeting with Arne

Let me know when you get another date and we will do what we can to make it work

From : Bill Strong <bill strong@itpr.com>

To: Yale, Matt
Sent: Wed Mar 17 17:42:07 2010
Subject: Re: Meeting with Arne
Matt, turns out that date does not work on our end after all. I will get back to you with other options.
Thanks again for your help -

and patience.

-Bill
30

WILLIAM C. STRONG
Executive Vice Presiden t/Managing Director
Jasculca(Terman and Associates, Inc.
730 N. Franklin Street, Suite 510
Chicago, Illinois 60654
P : : 312.573 .5474 F : : 312. 337.8189
c :: 312 .543.0063
bill@jtpr .com
Strategic Communications :: Public Affairs : : Events :: Design :: Digital

From: "Yale, Matt" <Matt.Yale@ed_.gov>

Date: Wed, 17 Mar 2010 13:50:22 -osoo

To: Bill Strong <bill strong@jtpr.com>
Subject: RE: Meeting with Arne
I will find out

From: Bill Strong [mailto:bill strong@jtpr.com]

Sent: Wednesday/ March 17 2010 2:37PM

1

To: Yale/ Matt

Subject: Meeting with Arne

Matt, I'm sorry to besiege you with requests at the moment, but I'm following up on another issue that
you, Rick and I were emailing about last week: a meeting with Arne for Washington Post Co. CEO Don
Graham (they own Kaplan), former NJ Governor Tom Kean, who heads an investment group involved in
higher education, and Harold Shapiro, DeVry Board Chairman and former president of Princeton and U of
Michigan.
The one date that we believe works for all three is Tuesday, March 30 (and believe me, this is no mean feat
to schedule).
Does Arne have availability that day? As we discussed, given the "heft" of this group, it would seem to be
in everybody's interests for Arne to be there at least for awhile. If he then turns it over to Jim Shelton or
whomever, that would work.
The general goal here is to talk with Arne about the shared goal of ensuring program integrity and student
success across ALL sectors of higher ed- private-sector, public and not-for-profit independents. We want
to find ways to work together to make sure, above all else, we are doing what is best for students and for
economic recovery and long-term growth.
As always, appreciate your help, Matt.
-Bill
WILLIAM C. STRONG
Ex ecutive Vice Presiden t/Managing Director
Jasculca(Terman and Associates, Inc.
730 N. Franklin Street, Suite 510
Chicago, Illinois 60654
P :: 312.573 .5474 F : : 312. 337.8189
c :: 312 .543.0063
bill@jtpr.com
Strategic Communications :: Public Affairs :: Events :: Design :: Digital

31

From:
Sent:
To:

Cc:
Subject:

Shireman , Bob
Friday, March 12, 2010 2:24PM
Darnieder, Greg ; Hammond , Peirce; Cummings, Glenn
Arsenault, Leigh
RE: Ken Smith - Parthenon Report

I have let them know that I am happy to meet.

From: Darnieder, Greg

Sent : Friday, March 12, 2010 2:16PM

To: Hammond, Peirce; Cummings, Glenn; Shireman, Bob
Subject: Re: Ken Smith - Parthenon Report

Bob, do you think we should move ahead with a meeting?

Sent using BlackBerry

From : Hammond, Peirce

To: Cummings, Glenn; Shireman, Bob; Darnieder, Greg
Sent: Fri Mar 12 13:10:36 2010
Subject: RE: Ken Smith - Parthenon Report

Hope this helps. Peirce

From: Cummings, Glenn

Sent: Thursday, March 11, 2010 5:45 PM

To: Shireman, Bob; Darnieder, Greg; Hammond, Peirce
Subject: Re: Ken Smith - Parthenon Report

Sent using BlackBerry

32

From : Shireman, Bob

To: Darnieder, Greg; Cummings, Glenn

Sent: Thu Mar 11 10:22:28 2010

Subject: RE: Ken Smith - Parthenon Report

From : Darnieder, Greg

Sent: Thursday, March 11, 2010 10:30 AM

To: Shireman, Bob; Cummings, Glenn

Subject: FW: Ken Smith- Parthenon Report

Have you guys been in touch with Ken Smith on Corinthian Colleges? Not sure this meeting should be with me thanks
From: Melinda Giesler [mailto:Melinda.Giesler@sp21c.com]

Sent: Thursday, March 11, 2010 10:22 AM

To: Darnieder, Greg

Subject: Ken Smith - Parthenon Report

Hello Greg,
I hope all is well.
Ken Smith asked me to be in touch to schedule a meeting with you and Mark Pelesh. Mark Pelesh is the
Executive Vice President of Legislative and Regulatory Affairs for Corinthian Colleges, and the purpose of the
meeting wi!J be to discuss the Parthenon Report.
Please let me know if you are available during any ofthe following times:
Wednesday, March 17th at 11 :30 a.m. Eastem (working lunch option)
Thursday, March 181h between 11:30 a.m. and 2:00p.m. Eastern
Thursday, March 25th between 9:00a.m. and 11:00 a.m . Eastern

I look forward to hearing from you soon.

Best wishes,
ML
Melinda L. Giesler
E xecutive Assistant to Kenneth M. Sntitlt
Strategic Partnerships, LLC
1729 King Street, Suite 100
Alexandtia, VA 22314
Office: 703-684-8400
Direct: 703-706-9643
Melinda. Giesler@SP2LC.com

33

From:
Sent:
To:

Cc:
Subject:
Attachments:

Melinda Giesler [Melinda.Giesler@sp21c.com]

Thursday, March 11 ,2010 2:09PM
Shireman , Bob
Arsenault, Leigh
RE: Ken Smith - Parthenon Report
Parthenon Report Jan 201 O.pdf; Corinthian Colleges Jan 201 O.pdf

Hello Bob,
Apologies, I did not have an electronic file and had to scan in a black & white copy. The Parthenon Report, as well as a
Corinthian Colleges presentation, is attached.
Please let me know if you are in fact the individual we need to schedule with and I will continue to work with Leigh.
Please feel free to contact me if you have any other concems.
Best wishes,
ML
Melinda L. Giesler
Executive Assistant to Ketmeth M. Smith
Strate!,>ic Partnerships, LLC
1729 King Street, Suite 100
Alexandria, VA 22314
Office: 703-684-8400
Direct 703-706-9643
Melinda.Giesler{a),SP2LC.com

From: Shireman, Bob [mailto:Bob.Shireman@ed.gov]

Sent : Thursday, March 11, 2010 1:47PM
To: Melinda Giesler
Cc: Arsenault, Leigh
Subject: RE: Ken Smith - Parthenon Report

Melinda:
Greg forwarded your note to me as the likely appropriate person (although I admit I don't know what the Parthenon
Report is). Perhaps you can provide a bit more information, and then if Ken and/or Mark want to meet with me please
work it out through Leigh (copied).
-Bob
Robert Shireman, Deputy Undersecretary
U.S. Department of Education
400 Maryland Ave., S.W.
Room 7E310
Washington, D.C. 20202
(202) 260-0101
Fax: 202-205-0063
bob.shireman@ed.gov

34

From: Melinda Giesler [mailto:Melinda.Giesler@sp21c.com]

Sent: Thursday, March 11, 2010 10:22 AM

To: Darnieder, Greg

Subject: Ken Smith - Parthenon Report

Hello Greg,
I hope all is well.
Ken Smith asked me to be in touch to schedule a meeting with you and Mark Pelesh. Mark Pelesh is the Executive Vice
President of Legislative and Regulatory Affairs for Corinthian Colleges, and the purpose of the meeting will be to discuss
the Parthenon Report.
Please Jet me know if you are available during any of the following times:
Wednesday, March 17th at 11:30 a.m. Eastern (working lunch option)
Thursday, March 18th between 11:30 a.m. and 2:00p.m. Eastern
Thursday, March 251h between 9:00a.m. and 11:00 a.m . Eastern
I look forward to hearing from you soon.

Best wishes,

ML
Melinda L. Giesler
Executive Assistant to Kenneth M. Smith
Strategic Partnerships. LLC
1729 King Street, Suite 100
Alexandria, VA 22314
Office:703-684-8400
Direct: 703-706-9643
Melinda.Giesler@.SP2LC.com

35

:~

. Jm~

How Do Students and Society Benefit 11

~
_
froinTPri:VtateJSec
.tor :I-Edu-c.a.-t i-ori?- JL'iillll]l
.~~~"muiJ!rl.l'h~~
~
.
o. ~~
--
~...-_I
1

~--

----

-- ~

. . .

--"-----

-~~~

Parthenon Perspectives on Value

PropE>si.tiofls in Postsecondary Education
Robert Lytle, Roger Brinner, Chrts Ross

January 12, 20 J0

L .

____,

Key Questions:
How well do private sector schools serve students?
How does tine job market value the degrees granted by private sector schools?

'

As a part of the solution to expand college attainment in the U.S., what role should the private sector play?

Government Data Sources Forming the Basis of Analysis:

BPS
Beginning Postsecondary Survey
Longitudinal study of 19,000
students
Students followed for five years and
data collected on hundreds of
variables
Student outcomes, employment
status and income data all available
for students at both public and
private sector schools

--~~-

___

IPEDS
Integrated Postsecondary
Education Data System
Survey of 7,000 colleges,
universities, technical and vocational
postsecondary institutions in the
United States
Participating schools report statistics
(e.g. enrollment, completions,
revenue, expenditures) on an annual
basis

~-

NPSAS
National Postsecondary
Student Aid Study
Collection of student financial aid
data from 114,000 students from
1,600 postsecondary schools plus
data from institutional records and
government databases for the 20072008 school year
Database examines the
characteristics of students in
postsecondary education, with
special focus on how they finance
their education

.....~ --

----

fJ.

-----~

--

-~-

The Private Sector Continues to Invest in the

Infrastructure Required to Reach President Obama's 2020
College Attainment Goals

NON

Estimated Private Sector Capital Expenditures, 2006-2008

$1 ,OOOMM,
$869MM
r-

$800MM~

$804MM
$748MM

-{:{+
'-"

Other

Ul

Q)

!.....

:J

"'0

Other

Other

$600MM

c:

GStrayer

Q)

r Lincoln

0.
X

$400MM

ro

--.-..

--------

I I
$0MM

DeVrv
UTI
CEC

0.

$200MM

CAGR
('06-'08)
8%

-~ll,

Apollo
2006

[ Source: CaplQ; NCES IPEDS; Parthenon Analysis

'

. . . ..,.- .

Apollo
2007

The private sector is on

pace to invest -$58 over the
next five years and play a
critical role in achieving
President Obama's goal of
having the highest
proportion of college
g raduates in the world

]
2008

The Private Sector Is Providing Increased Capacity for

P.ostsecondary Education, Outpacing Public School
Expansion

I
THE

OOi~NoN

Annual FTE Enrollment Growth in 2-Years

and Less Institutions by Type, 2005-2008

8%
...........

co

0
0
NI

l!)

6.2%

6%

0
0
N

0::

(!)

<(

- 4%1
(.)

..

.c

'

0
......
(!)

ro
:J
c:
c:

<(

1J 1: .~}

..
1

. .l
I

1~

-~~ I

"'

'"

1j I

The private sector is

opening its doors to those
seeking a college degree

2%

Q)
C)

Q)

~
0%

I
1

Note: Title IV eligible institutions only

Source: NCES IPEDS database

Public

Private Sector

~rivate
l

Sector Schools Are Expanding Educational Access

for Minority St udents
.
_
, - - T-HE~-. I(fill3
- .- I- )W
- NO-N ----:t
1

Student Mix by
Ethnicity, 2004
100%

n=7,400

n=2,130

80%

~
0

1-

60%

The private sector also

serves a higher percentage
of inner city, low income,
and students whose parents
did not attend college

0
Q)

0>

Cl3

c:

25 40%

L..

Q)

a_

White
20%

White

0% .__.__________._____
Public/lndependent
Private Sector

~--------~--

Note: Demographics exclude 4-year schools

Source: NCES BPS 2004-2006

I-

-,
Private Sector Schools Are Also Expanding Educational
Access for Underrepresented Students

T HE 'ffimjljWNON

Student Mix Measured by

" Persistence Risk", 2004
n=7,400

100%1

n=2,130

Dept. of Education's
Risk Factors
High Risk = 3 or More of
the Following Factors:

80% ~

Delayed enrollment

ro

+-J

1- 60%

No high school diploma

faCJ)

Part-time enrollment

ro

+-'

Financially independent

OJ

40%

Have dependents

OJ

a..

Low Risk
20%-l

The private sector is willing

to serve a more challenging
student population than the
public sector

Single parent status

Low Risk

Working-full time while

enrolled

0%.__.________~-----L----------~
Public/Independent
Private Sector
1.. % High Risk

36%

Note: Demographics exclude 4-year schools

Source: NCES BPS 2004-2006

54%

-H
I
6

Despite Higher Risk Students, the Private Sector Delivers

Graduation Rates -50o/o Higher than Public Schools
--------------------------------------~-----T_
HE~~NON
Student Outcomes at 2-Years and Less
Institutions, 2001 (5 Years Post..Enrollment)

100%

n=860

n=1,250

Dropped out

80%

Dropped out

Transferred

~
0

(l)

Even counting all transfers

as 'successful outcomes',
the private sector achieves
better students results by
almost ten percentage
points

C>

ro

Transferred

c:

(l)

Public

"

Private Sector

Graduation Rate*:
Overall Population

44%

65%

Minority

36%

64%

With Transfers

62%

69%

Note: overall/Minority grad rate = grads I (grads+ dropou ts); With Transfers grad rate= (grads+ transfers) I (grads + transfers+ drops)

Source: NCES BPS 1996-2001; Parthenon Analysis

--------------------------

The Private Sector Spends Comparable Funds in

Generating Positive Student Outcomes

_THE oo~_
N_
ON_

__,

Funding Per Completion/Transfer, 2-Years and Less Institutions, 2007

$40K

~
L ..

~
(/)

$30K

t:
c

$25.3K

$26.7K

Private sector funding per

positive outcome, defined
as a completion or transfer,
is on par with community
colleges

Q)

a.
E

$20K

0
()

L..

Q)

ll.
0>

.5

$1 0K

'0

:J

LL

$OK ...~....-.-__,

Public

Private Sector

$35.0MM

$5.4MM

1,382

200

Averages Per School

Funding
Completions and
Transfers

Note: oata Is normalized for degree mix (i.e. private sector funding grossed up to match public sector mix of Associate's degrees and csrtlficatesi
Source: NCES !PEDS database: NCES BPS 1996-2001; Parthenon Analysis

----~----------------

--------------~

, .The Average Student Loan Debt Burden of Private Sector

L__!t.~dents Is Well Below the FinAid Recommended Level

THE tMHi~NON

Student Loan Debt Payment to Income Ratio, 2007-2008

Includes Only Students Who Have Loans

20%

0~ ~ ---------------------- ----- ---------------------------------- - ------

1
.-...

FinAid Maximum Recommended

Student Loan Payment to Income Ratio

'#.
.._..
c::
Q)

"E

:J

co

10%

......

.0
Q)

5%

4.8%
3.9%

The average private sector

student faces very modest
monthly loan payments on
their total student debt

';;;;:;

0%

Less Than 2-Year

2-Year

Average Monthly
Income

$1,834

$1,979

Average Loan
Amount

$6,500

$8,500

$72

$94

Monthly
Payments

Note: Debt burden calculated using a 10-year repayment window and 6% fixed interest rate; Includes all types of financial aid; Income data based r n 2005 BPS figures
Source: US Department or Education, NCES NPSAS 2007- 2008; NCES BPS 2004-2006

O
1

-------------------------

------------ - - --

Summary of Findings

The Obama administration announced a $128 investment with the aim "to help an additional five
million Americans earn degrees and certificates in the next decade"
- The private sector is on pace to invest a comparable sum over the next decade to expand access to
postsecondary education

This builds upon the solid industry growth over the last decade, which saw the private sector
grow its share of Certificates and Associate's Degrees to 30o/o of the total awards granted

The students served by private sector schools are a riskier population (more minority, single
parents, etc.), and are most in need of education in order to improve their life circumstances
- Private sector enrollment has grown at 6/o per year since 2005, expanding access to these
underrepresented students

Even with this more challenging student population, the private sector generates superior
educational outcomes as evidenced by a 65% graduation rate (compared to only a 44%
graduation rate at community colleges)

The cost of these positive outcomes to society is also less expensive when served through the
private sector

For students, the private sector delivers an $8K income gain and a very modest loan to income
ratio of only 5o/o
..

11

Parthenon Background and Contact Info

NON

About The Parthenon Group

The Parthenon Group is a leading advisory firm focused on strategy consulting with offices in Boston, London, Mumbai,
and San Francisco. Since Its inception in 1991, the firm has embraced a unique approach to strategic advisory services;
long-term client relationships, a willingness to share risk with our clients, an entrepreneurial spirit, and customized
insights are the hallmarks for which The Parthenon Group has become recognized in the industry. This unique approach
has established the firm as the strategic advisor of choice for CEOs and business leaders of Global 1000 corporations,
high-potential growth companies, private equity firms, educational institutions, and healthcare organizations.

About The Parthenon Group Education Center of Excellence

Parthenon has served as an advisor to the education sector since our Inception in 1991. Our Education Center of
Excellence (ECE) - the first of its kind across management consulting firms - has an explicit mission and vision to be the
leading strategy advisor to the global education industry. To achieve this, we invest significantly in dedicated
management and team resources to ensure that our global expertise extends across public sector and non-profit
education providers, foundations, for-profit companies and service providers, and investors.

Roger Brinner, PhD

Partner and Chief Economist
Rogerb@parthenon. com
617-478-4690

Robert Lytle
Partner
Robertl@parthenon.com
617-478-7096

Chris Ross
Partner
Chrisr@parthenon. com
617-478-4679

12

-...-

()()

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r- 0

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h""

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0
0
tD
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0
::L

::J

:T
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to

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5"
p

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.....

rn~

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-..c

z>

nz

-- ----

----

Corinthian Profile
Established 1995; IPO 1999
Over 100,000 students
Q1 FY 10 revenue of $388.5 million
117 campuses in U.S. and Canada
Short-term diploma and degree programs
Practical, career-oriented curriculum
Market for core programs large and growing

-,;!!!!!.-

GETTING RESULTS

l!

CCI

117 Schools

I (]

~
~lc

{)---- 1
......

GETTING RESULTS
------------------------~--

wCCi

Well Positioned in a Growing Industry

$460B post-secondary market; conferrals
growing at 2/o - 3/o annually
Career colleges have 15/o of conferral
market, growing at 5/o- 7/o annually

c:_

I
I

JC Ci

r-'---------,

Corinthian positioned for above-average

growth
Associates & diploma programs among fastest
growing education categories
Programs geared to careers with above-average
employment opportunities
Campuses located in geographies with aboveaverage growth
Source: IPEDS. NCES "First Look''
4

---

GEITIJYG RESULTS ~

CCi

Student Population by
Program Type and Level
I

Program Type

In

Level

As of September 30, 2009

Mechanical & Trades

9/o

Diploma 63/~
Criminal Justice

Master's 1/o
Bachelor's 4/o

16o/o

Misc. 3/o

Business 13%

Healthcare 59o/o

GETTING RESULTS

'!f ( ( i

Student Profile
I
I
25 years or
older
Less than
$20Kincome
0
/o
Independent
o/o M inority
'----

For-Profit PSE Providers

< 2 Year

II

2+ Year

I Not For-Profit
I PSE Providers

45/o

61/o

37/o

62o/o

44/o

25/o

CCi Core Student

~Older
~
}

Greater financial
need

79/o

69/o

47/o

~ Independent

46/o

40/o

30/o

~ Racially

diverse

Note: Not-for-profit demographics include both public and private institutions

Source: NCES Digest of Education Statistics

- -

lr CCI.

GEITING RESULTS
- - -

------

--------

Value to Students -

Earnings Differential
Alumni Median Income:
Pre-Enrollment vs. Current<1>
$30
$25
/
~

en

"0
t:
~

en

::s

I +27/o- l

Alumni Median Monthly Loan

Payments vs. Monthly Income<2>
$3,000
$2,500

/
I

:1

$20
$20

$2,000

..c=
~
......

$1,000

$10

6o/o of
tncome
$150

$0 k:"j

PreEnrollment
Income

~
Current
Income

$oldMonthly
c?.
Loan
Payments

lb

Current
Monthly
Income

1: Data includes all Corinthian alumni where pre-enrollment nnd current income data were reported

2: Data includes all Corinthian alumni where curreut income and monthly loan payment data were reported
:>U~VCY Ui aJ.JJ.Jl Uh OJUU
..._,uu.u.u, J i.lllUd.lY

.;)UUH; c; J.DC .l: <UUJCUUU UlUUtJ - WCU

~V.&.V

Gffi'IN6 RESULTS

lf' CCI.

~-

Value to Students Career Placement

79.4/o
/

83.7o/o

78.1/o

2004

84.0/o

82.0/o

2005

-r

2007

2006

2008

GEITIPIG RESULTS
------

---

--------

--

lf CCi

Summary
Growing and investing in our
schools and students
Serving under-served segment
of society
Focused on student outcomes,
including completion and
placement
Creating value for graduates
through increased earnings
MJ\f?..,t =1

GEITING RESULTS

"-lf

CCI.

From:
Sent:
To:
Subject :
Attachments:

GEORGE BOGGS [gboggs@aacc.nche.edu]

Tuesday, February 23, 201 o 7:41 AM
GEORGE BOGGS
From Today's CHE
image001 .gif

February 22, 2010, 04:00 PM ET

Community Colleges Explore National Collaboration to Fight For-Profit

Marketing Machine
By Marc

Parry

Fort Worth - Individual community colleges can't match the marketing budgets of for-profit institutions that

plaster their regions wit h advertisements. So they're exploring ways t o fight back by going national, pooling t heir
efforts to promote online programs in a new marketing collaboration that was announced Sunday at a distanceeducation conference here.
The discussions, led by the American Association of Community Colleges, represent a fresh spin on an older
strength-in-numbers distance-learning vision called the International Community College, which failed to get off the
ground after four years of planning.
The distance-education landscape has changed drastically since that telecourse woject. Both for-profits and an
increasingly aggressive group of traditional four-year colleges now often recruit by purchasing "leads" on potential
students that are parcelled out by online portals - a game community colleges have generally not joined.
The new national collaboration might look at how community colleges could exploit that tactic, perhaps by putting
up a lead-generation Web site, said Pamela K. Quinn, an association board member who is provost of the distancelearning arm of the Dallas County Community College District.
Planning is at an early stage, she said, but one outcome could be an online clearinghouse that could showcase
programs that train workers for particular jobs- say, veterinary technician. The project would cost "millions/' Ms.
Qt1inn said in an interview Stmday at an e-1earning conference put on by the Instructional Technology Council, an
affiliat e of t he national community-college umbrella group.
Institutions participating in the talks include the Dallas district, Foothill-DeAnza Community College, Rio Salado
College, and Northern Virginia Community College.
For-profit institutions have chased community-college students for years, and the financial power they bring to t he
competition is daunting. For the three-month period ending November 30, 2009, the Apollo Group, parent of the
University of Phoenix, spent $275-million on "selling and promotional" expenses, or about 20 percent of its total net
revenue of $1.3-billion for that quarter, according to a report the company submitted to the government. To put that
4

in perspective, the Dallas district's distance-learning marketing budget is about $15o,ooo.

Ms. Quinn sees how that lopsided competition plays out locally- for example, in the case of her husband's barber.
He got sold on a for-profit co1lege without exploring cheaper local online options.
"He just didn't even know what was available five miles from him, and yet he knew what's available on the national
scene," she said. "I don't think anybody who wants to be active in the future can afford to not pay attention to how
successful some of the for-profits are becoming."
She added, "We want to make sure students understand their options and aren't going into debt to get a degree.
There are probably a lot of people out there that don't know what their options are, and they've been very impressed
with some of the very fancy glitzy advertising that's ont there."

E-mail

Print

Comment (5)

Share

Comments
1. selfg -

February22, 2010 at 05:34pm

That list of community colleges that are "participating in the talks" is pretty impressive. 1 hope they remember to invite
small, rural community colleges to also join this project. However, they will have to permit us to participate at a rate that
is relative to our size. My entire annual budget, other than salaries, is only about $15K, I could not possibly put up the
same cash as a Rio Salado in order to get in on this eff01t. lfthis group does not involve the smaller community colleges,
then they are simply setting up yet another national educational organization to compete for my few students.
2. paievoli - February 22, 2010 at 05:38pm
As I have told you a bunch in the last couple of months - you wouldn't have to resort to this if you would simply realize

that there are alternative revenue streams available to you that do not compromise the mission of academia.
All HE has got to realize this before it is too late and the for-profits take over a large percentage of the marketplace.
Pooling together is a good idea but it only works so much. You need to create a self-sustaining model that colleges can
use for promotional efforts.
patrickaievoli. wordpress.com
3 11180655 - February 22, 2010 at o6:o2pm
Community colleges aren't going to ~'~n students from private career co11eges by marketing better. The CC model of
education is mired in inefficiency, waste and an open door policy that allows a good number of students to spend
taxpayer funds on programs that they \~ll not succeed in. Look at the numbers of students that complete programs.
5

Many CCs have graduation rates tmder 10% (take a look at their rates with African-American students!!). Many of the
graduates they do have are in liberal arts, not skills training fields. CC Week's own rankings (see top 100 on their web
site) on numbers of graduates in skills fields are dominated by private colleges, whose curriculum is driven by
employers, not faculty. Bow aggressive are CCs in helping the few that graduate get a job? And how long does it take to
get into a program, then get all the needed courses?
The best marketing is referrals. The reason private career colleges are getting students is because most of their students
graduate and get a job, period. Successful students create the demand.
4. stevefoerster- February 22, 2010 at 06:41pm
"An open door policy that allows a good number of students to spend taxpayer funds on programs that they \vill not

succeed in" describes many of the for-profits as well. The difference is that community colleges don't saddle their failed
students with forty grand in student loans in the process.
5 vdolgopolov- February 22, 2010 at 07:55 pm
Yes, of course, community colleges don't saddle their failed students with forty grand in student loans. They saddle the
taxpayers with a lot more, especially given that the community colleges' cost of educating students tends to be
considerably higher than for-profits - and it's the taxpayers who pick up the cost of these failures.
Community colleges' graduation rates, especially for colleges that serve socioeconomically diverse populations similar to
for-profit institutions, tends to be absolutely dismal. For some (see CUNY's CCs), graduation rates are as low or less than
1%, per data provided to the New York State Education Department. For-profits outperform them by a nifty multiple.

George R. Boggs
President and CEO
American Association of Community Colleges
One Dupont Circle, NW, Suite 410
Washington, DC
Phone: 202.728.0200, ext. 235
Fax: 202.452.1461
http://www.aacc.nche.edu/
The Voice of America's Community Colleges

This email has been scanned for all viruses by the MessageLabs Email
Security System.

From:
Sent:
To:
Subject:
Attachments:

Kanter, Martha
Wednesday, February 24 , 2010 12:24 AM
Shireman , Bob; Plotkin, Hal; Dannenberg , Michael
FYI : From Today's CHE
image001 .gif

From: GEORGE BOGGS [gboggs@aacc.nche.edu]

Sent: TuesdayJ February 23J 2010 7:41 AM
To: GEORGE BOGGS
Subject: From Today's CHE
February 22J 2010J 04:00 PM ET
Community Colleges Explore National Collaboration to Fight For-Profit Marketing Machine By
Marc Parry<http://chronicle.com/blogAuthor/Wired-Campus/5/Marc-Parry/89/>
Fort Worth - Individual community colleges canJt match the marketing budgets of for-profit
institutions that plaster their regions with advertisements. So theyJre exploring ways to
fight back by going nationalJ pooling their efforts to promote online programs in a new
marketing collaboration that was announced Sunday at a distance -education conference here.
The discussionsJ led by the American Association of Community CollegesJ represent a fresh
spin on an older strength - in -numbers distance -learning vision called the International
Community CollegeJ which failed to get off the ground after four years of planning.
The distance-education landscape has changed drastically since that telecourse project. Both
for-profits and an increasingly aggressive group of traditional four-year colleges now often
recruit by purchasing "leads on potential students that are parcelled out by online portals
- a game community colleges have generally not joined.
The new national collaboration might look at how community colleges could exploit that
tacticJ perhaps by putting up a lead-generation Web siteJ said Pamela K. QuinnJ an
association board member who is provost of the distance-learning arm of the Dallas County
Community College District.
Planning is at an early stageJ she saidJ but one outcome could be an online clearinghouse
that could showcase programs that train workers for particular jobs - sayJ veterinary
technician. The project would cost "millionsJ" Ms. Quinn said in an interview Sunday at an e learning conference<http://www.itcnetwork.org/mod/resource/view.php?id=141> put on by the
Instructional Technology CouncilJ an affiliate of the national community-college umbrella
group.
Institutions participating in the talks include the Dallas districtJ Foothill-De Anza
Community CollegeJ Rio Salado CollegeJ and Northern Virginia Community College.
For-profit institutions have chased community-college
students<http://chronicle.com/article/How- For- Profit - Institutions/22306/> for yearsJ and the
financial power they bring to the competition is daunting. For the three-month period ending
November 30J 2009J the Apollo GroupJ parent of the University of PhoenixJ spent $275-million
on "selling and promotional" expensesJ or about 20 percent of its total net revenue of $1.3 billion for that quarterJ according to a report the company submitted to the government. To
put that in perspectiveJ the Dallas districtJs distance - learning marketing budget is about
$150J000.
Ms. Quinn sees how that lopsided competition plays out locally - for exampleJ in the case of
her husbandJs barber. He got sold on a for-profit college without exploring cheaper local
online options.
7

aHe just didnJt even know what was available five miles from himJ and yet he knew whatJs
available on the national sceneJ she said. ai donJt think anybody who wants to be active in
the future can afford to not pay attention to how successful some of the for-profits are
becoming.
She addedJ awe want to make sure students understand their options and arenJt going into debt
to get a degree. There are probably a lot of people out there that donJt know what their
options areJ and theyJve been very impressed with some of the very fancy glitzy advertising
thatJs out there.
Email<http://chronicle.com/myaccount/login?msg=emailfriend&goto=%2FblogPost%2FCommunityColleges-Explore%2F21392%2F>
Print<javascript:void(0)>
Comment (5)<http://chronicle.com/blogPost/Community-Colleges Explore/21392/#comments>
Share<http://chronicle.com/blogPost/Community-CollegesExplore/21392/?sid=at&utm_source=at&utm_medium=en>
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Comments
1. selfg - February 22J 2010 at 05:34 pm That list of community colleges that are
"participating in the talks" is pretty impressive. I hope they remember to invite smallJ
rural community colleges to also join this project. HoweverJ they will have to permit us to
participate at a rate that is relative to our size. My entire annual budgetJ other than
salariesJ is only about $15KJ I could not possibly put up the same cash as a Rio Salado in
order to get in on this effort. If this group does not involve the smaller community
collegesJ then they are simply setting up yet another national educational organization to
compete for my few students.
2. paievoli - February 22J 2010 at 05:38 pm As I have told you a bunch in the last couple of
months - you wouldn't have to resort to this if you would simply realize that there are
alternative revenue streams available to you that do not compromise the mission of academia.
All HE has got to realize this before it is too late and the for-profits take over a large
percentage of the marketplace. Pooling together is a good idea but it only works so much. You
need to create a self- sustaining model that colleges can use for promotional efforts.
patrickaievoli.wordpress . com
3. 11180655 - February 22J 2010 at 06:02 pm Community colleges aren't going to win students
from private career colleges by marketing better. The CC model of education is mired in
inefficiencyJ waste and an open door policy that allows a good number of students to spend
taxpayer funds on programs that they will not succeed in. Look at the numbers of students
that complete programs. Many CCs have graduation rates under 10% (take a look at their rates
with African -American students!!). Many of the graduates they do have are in liberal artsJ
not skills training fields. CC Week's own rankings (see top 100 on their web site) on numbers
of graduates in skills fields are dominated by private collegesJ whose curriculum is driven
by employersJ not faculty. How aggressive are CCs in helping the few that graduate get a job?
And how long does it take to get into a programJ then get all the needed courses?

The best marketing is referrals. The reason private career colleges are getting students is
because most of their students graduate and get a jobJ period. Successful students create the
demand.
4. stevefoerster - February 22J 2010 at 06:41 pm "An open door policy that allows a good
number of students to spend taxpayer funds on programs that they will not succeed in"
describes many of the for-profits as well. The difference is that community colleges don't
saddle their failed students with forty grand in student loans in the process.
5. vdolgopolov - February 22J 2010 at 07:55 pm YesJ of course) community colleges don't
saddle their failed students with forty grand in student loans. They saddle the taxpayers
with a lot moreJ especially given that the community colleges' cost of educating students
tends to be considerably higher than for-profits - and it's the taxpayers who pick up the
cost of these failures.
Community colleges' graduation ratesJ especially for colleges that serve socioeconomically
diverse populations similar to for - profit institutions) tends to be absolutely dismal. For
some (see CUNY's CCs)J graduation rates are as low or less than 1%J per data provided to the
New York State Education Department. For- profits outperform them by a nifty multiple.
George R. Boggs
President and CEO
American Association of Community Colleges One Dupont Circle) NWJ Suite 410 Washington) DC
Phone: 202.728.0200) ext. 235
Fax: 202.452.1461
http://www.aacc.nche.edu/
The Voice of America's Community Colleges

This email has been scanned for all viruses by the MessageLabs Email Security System.

From:
Sent:
To:

Cc:
Subject:

Dannenberg, Michael
Wednesday, February 24 , 2010 9:17AM
Kanter, Martha; Shireman , Bob; Plotkin , Hal
Ceja, Alejandra
RE: From Today's CHE

Buried lede: "The Apollo Group, parent of the University of Phoenix, spent $275-million on
"selling and promotional" expenses, or about 20 percent of its total net revenue of $1.3
billion [last] quarter. To put that in perspective, the Dallas [County Community College]
district,s distance-learning marketing budget is about $150,000."

Michael
-----Original Message----From: Kanter, Martha
Sent: Wednesday, February 24, 2010 12:24 AM
To: Shireman, Bob; Plotkin, Hal; Dannenberg, Michael
Subject: FYI: From Today's CHE

From: GEORGE BOGGS [gboggs@aacc.nche.edu]

Sent: Tuesday, February 23, 2010 7:41 AM
To: GEORGE BOGGS
Subject: From Today's CHE
February 22, 2010, 04:00 PM ET
Community Colleges Explore National Collaboration to Fight For-Profit Marketing Machine By
Marc Parry<http://chronicle.com/blogAuthor/Wired-Campus/5/Marc-Parry/89/>
Fort Worth - Individual community colleges can,t match the marketing budgets of for-profit
institutions that plaster their regions with advertisements. So they,re exploring ways to
fight back by going national, pooling their efforts to promote online programs in a new
marketing collaboration that was announced Sunday at a distance-education conference here.
The discussions, led by the American Association of Community Colleges, represent a fresh
spin on an older strength-in-numbers distance-learning vision called the International
Community College, which failed to get off the ground after four years of planning.
The distance-education landscape has changed drastically since that telecourse project. Both
for-profits and an increasingly aggressive group of traditional four-year colleges now often
recruit by purchasing "leads on potential students that are parcelled out by online portals
- a game community colleges have generally not joined.
10

The new national collaboration might look at how community colleges could exploit that
tactic, perhaps by putting up a lead-generation Web site, said Pamela K. Quinn, an
association board member who is provost of the distance-learning arm of the Dallas County
Community College District.
Planning is at an early stage, she said, but one outcome could be an online clearinghouse
that could showcase programs that train workers for particular jobs - say, veterinary
technician. The project would cost "millions, Ms. Quinn said in an interview Sunday at an e learning conference<http://www.itcnetwork.org/mod/resource/view.php?id=141> put on by the
Instructional Technology Council, an affiliate of the national community-college umbrella
group.
Institutions participating in the talks include the Dallas district, Foothill-De Anza
Community College, Rio Salado College, and Northern Virginia Community College.
For-profit institutions have chased community- college
students<http://chronicle.com/article/How- For- Profit - Institutions/22306/> for years, and the
financial power they bring to the competition is daunting. For the three-month period ending
November 30, 2009, the Apollo Group, parent of the University of Phoenix, spent $275-million
on "selling and promotional" expenses, or about 20 percent of its total net revenue of $1.3billion for that quarter, according to a report the company submitted to the government. To
put that in perspective, the Dallas district,s distance - learning marketing budget is about
$150,000.
Ms. Quinn sees how that lopsided competition plays out locally - for example, in the case of
her husband,s barber. He got sold on a for-profit college without exploring cheaper local
online options.
"He just didn,t even know what was available five miles from him, and yet he knew what,s
available on the national scene, she said. "I don,t think anybody who wants to be active in
the future can afford to not pay attention to how successful some of the for-profits are
becoming.
She added, "We want to make sure students understand their options and aren,t going into debt
to get a degree. There are probably a lot of people out there that don,t know what their
options are, and they,ve been very impressed with some of the very fancy glitzy advertising
that,s out there.
Email<http://chronicle.com/myaccount/login?msg=emailfriend&goto=%2FblogPost%2FCommunityColleges - Explore%2F21392%2F>
Print<javascript:void(0)>
Comment (5)<http://chronicle.com/blogPost/Community-Colleges Explore/21392/#comments>
Share<http://chronicle.com/blogPost/Community-CollegesExplore/21392/?sid=at&utm_source=at&utm_medium=en>
Share
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Yahoo Buzz<http://buzz.yahoo.com/>
Comments
1. selfg - February 22, 2010 at 05:34 pm That list of community colleges that are
"participating in the talks" is pretty impressive. I hope they remember to invite small,
rural community colleges to also join this project. However, they will have to permit us to
11

participate at a rate that is relative to our size. My entire annual budgetJ other than
salariesJ is only about $15KJ I could not possibly put up the same cash as a Rio Salado in
order to get in on this effort. If this group does not involve the smaller community
collegesJ then they are simply setting up yet another national educational organization to
compete for my few students.
2. paievoli - February 22J 2010 at 05:38 pm As I have told you a bunch in the last couple of
months - you wouldn't have to resort to this if you would simply realize that there are
alternative revenue streams available to you that do not compromise the mission of academia.
All HE has got to realize this before it is too late and the for-profits take over a large
percentage of the marketplace. Pooling together is a good idea but it only works so much. You
need to create a self-sustaining model that colleges can use for promotional efforts.
patrickaievoli.wordpress.com
3. 11180655 - February 22J 2010 at 06:02 pm Community colleges aren't going to win students
from private career colleges by marketing better. The CC model of education is mired in
inefficiencyJ waste and an open door policy that allows a good number of students to spend
taxpayer funds on programs that they will not succeed in. Look at the numbers of students
that complete programs. Many CCs have graduation rates under 10% (take a look at their rates
with African-American students!!). Many of the graduates they do have are in liberal artsJ
not skills training fields. CC Week's own rankings (see top 100 on their web site) on numbers
of graduates in skills fields are dominated by private collegesJ whose curriculum is driven
by employersJ not faculty. How aggressive are CCs in helping the few that graduate get a job?
And how long does it take to get into a programJ then get all the needed courses?
The best marketing is referrals. The reason private career colleges are getting students is
because most of their students graduate and get a jobJ period. Successful students create the
demand.
4. stevefoerster - February 22J 2010 at 06:41 pm "An open door policy that allows a good
number of students to spend taxpayer funds on programs that they will not succeed in"
describes many of the for-profits as well. The difference is that community colleges don't
saddle their failed students with forty grand in student loans in the process.
5. vdolgopolov - February 22J 2010 at 07:55 pm YesJ of courseJ community colleges don't
saddle their failed students with forty grand in student loans. They saddle the taxpayers
with a lot moreJ especially given that the community colleges' cost of educating students
tends to be considerably higher than for-profits - and it's the taxpayers who pick up the
cost of these failures.
Community colleges' graduation ratesJ especially for colleges that serve socioeconomically
diverse populations similar to for-profit institutionsJ tends to be absolutely dismal. For
some (see CUNY's CCs)J graduation rates are as low or less than 1%J per data provided to the
New York State Education Department. For- profits outperform them by a nifty multiple.
George R. Boggs
President and CEO
American Association of Community Colleges One Dupont CircleJ NWJ Suite 410 WashingtonJ DC
Phone: 202.728.0200J ext. 235
Fax: 202.452.1461
http://www . aacc.nche.edu/
The Voice of America's Community Colleges

This email has been scanned for all viruses by the MessageLabs Email Security System.

12

From:
Sent:

To:
Cc:
Subject:

Shireman , Bob
Wednesday, February 24 , 201 o 9:52 AM
Dannenberg, Michael ; Kanter, Martha; Plotkin, Hal; Manheimer, Ann
Ceja, Alejandra
RE: From Today's CHE

Robert Shireman
Deputy Undersecretary
U.S. Department of Education
(202) 260-0101
From: DannenbergJ Michael
Sent: WednesdayJ February 24J 2010 9:17AM
To: KanterJ Martha; ShiremanJ Bob; PlotkinJ Hal
Cc: CejaJ Alejandra
Subject: RE: From Today's CHE
Buried lede: "The Apollo GroupJ parent of the University of PhoenixJ spent $275-million on
"selling and promotional" expensesJ or about 20 percent of its total net revenue of $1.3
billion [last] quarter. To put that in perspectiveJ the Dallas [County Community College]
districtJs distance-learning marketing budget is about $150J000."

Michael
-----Original Message----From: KanterJ Martha
Sent: WednesdayJ February 24J 2010 12:24 AM
To: ShiremanJ Bob; PlotkinJ Hal; DannenbergJ Michael
Subject: FYI: From Today's CHE

From: GEORGE BOGGS [gboggs@aacc.nche.edu]

Sent: TuesdayJ February 23J 2010 7:41 AM
To: GEORGE BOGGS
Subject: From Today's CHE
February 22J 2010J 04:00 PM ET
13

Community Colleges Explore National Collaboration to Fight For-Profit Marketing Machine By

Marc Parry<http://chronicle.com/blogAuthor/Wired-Campus/5/Marc-Parry/89/>
Fort Worth - Individual community colleges can~t match the marketing budgets of for-profit
institutions that plaster their regions with advertisements. So they~re exploring ways to
fight back by going national~ pooling their efforts to promote online programs in a new
marketing collaboration that was announced Sunday at a distance-education conference here .
The discussions~ led by the American Association of Community Colleges~ represent a fresh
spin on an older strength - in -numbers distance - learning vision called the International
Community College~ which failed to get off the ground after four years of planning.
The distance-education landscape has changed drastically since that telecourse project. Both
for-profits and an increasingly aggressive group of traditional four-year colleges now often
recruit by purchasing "leads on potential students that are parcelled out by online portals
- a game community colleges have generally not joined.
The new national collaboration might look at how community colleges could exploit that
tactic~ perhaps by putting up a lead-generation Web site~ said Pamela K. Quinn~ an
association board member who is provost of the distance-learning arm of the Dallas County
Community College District.
Planning is at an early stage~ she said~ but one outcome could be an online clearinghouse
that could showcase programs that train workers for particular jobs - say~ veterinary
technician. The project would cost "millions~ Ms. Quinn said in an interview Sunday at an e learning conference<http://www.itcnetwork.org/mod/resource/view.php?id=141> put on by the
Instructional Technology Council~ an affiliate of the national community-college umbrella
group.
Institutions participating in the talks include the Dallas district~ Foothill-De Anza
Community College~ Rio Salado College~ and Northern Virginia Community College.
For-profit institutions have chased community-college
students<http://chronicle . com/article/How- For- Profit - Institutions/22306/> for years~ and the
financial power they bring to the competition is daunting. For the three-month period ending
November 30~ 2009~ the Apollo Group~ parent of the University of Phoenix~ spent $275-million
on "selling and promotional" expenses~ or about 20 percent of its total net revenue of $1.3 billion for that quarter~ according to a report the company submitted to the government. To
put that in perspective~ the Dallas district~s distance - learning marketing budget is about
$150~000.

Ms. Quinn sees how that lopsided competition plays out locally - for example~ in the case of
her husband~s barber. He got sold on a for-profit college without exploring cheaper local
online options.
"He just didn~t even know what was available five miles f r om him~ and yet he knew what~s
available on the national scene~ she said. "I don~t think anybody who wants to be active in
the future can afford to not pay attention to how successful some of the for-profits are
becoming.
She added~ "We want to make sure students understand thei r options and aren~t going into debt
to get a degree. There are probably a lot of people out there that don~t know what their
options are~ and they~ve been very impressed with some of the very fancy glitzy advertising
that~s out there.
Email<http://chronicle.com/myaccount/login?msg=emailfriend&goto=%2FblogPost%2FCommunityColleges - Explore%2F21392%2F>
Print<javascript:void(0)>
Comment (5)<http://chronicle.com/blogPost/Community-CollegesExplore/21392/#comments>
14

Share<http://chronicle.com/blogPost/Community-CollegesExplore/21392/?sid=at&utm_source=at&utm_medium=en>
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Twitter<https://twitter.com/login>
Yahoo Buzz<http://buzz.yahoo.com/>
Comments
1. selfg - February 22~ 2010 at 05:34 pm That list of community colleges that are
"participating in the talks" is pretty impressive. I hope they remember to invite small~
rural community colleges to also join this project. However~ they will have to permit us to
participate at a rate that is relative to our size. My entire annual budget~ other than
salaries~ is only about $15K~ I could not possibly put up the same cash as a Rio Salado in
order to get in on this effort. If this group does not involve the smaller community
colleges~ then they are simply setting up yet another national educational organization to
compete for my few students.
2. paievoli - February 22~ 2010 at 05:38 pm As I have told you a bunch in the last couple of
months - you wouldn't have to resort to this if you would simply realize that there are
alternative revenue streams available to you that do not compromise the mission of academia.
All HE has got to realize this before it is too late and the for -profits take over a large
percentage of the marketplace. Pooling together is a good idea but it only works so much. You
need to create a self- sustaining model that colleges can use for promotional efforts.
patrickaievoli.wordpress.com
3. 11180655 - February 22~ 2010 at 06:02 pm Community colleges aren't going to win students
from private career colleges by marketing better. The CC model of education is mired in
inefficiency~ waste and an open door policy that allows a good number of students to spend
taxpayer funds on programs that they will not succeed in. Look at the numbers of students
that complete programs. Many CCs have graduation rates under 10% (take a look at their rates
with African-American students!!). Many of the graduates they do have are in liberal arts~
not skills training fields. CC Week's own rankings (see top 100 on their web site) on numbers
of graduates in skills fields are dominated by private colleges~ whose curriculum is driven
by employers~ not faculty. How aggressive are CCs in helping the few that graduate get a job?
And how long does it take to get into a program~ then get all the needed courses?
The best marketing is referrals. The reason private career colleges are getting students is
because most of their students graduate and get a job~ period. Successful students create the
demand.
4. stevefoerster - February 22~ 2010 at 06:41 pm "An open door policy that allows a good
number of students to spend taxpayer funds on programs that they will not succeed in"
describes many of the for -profits as well. The difference is that community colleges don't
saddle their failed students with forty grand in student loans in the process.
5. vdolgopolov - February 22~ 2010 at 07:55 pm Yes~ of course~ community colleges don't
saddle their failed students with forty grand in student loans. They saddle the taxpayers
with a lot more~ especially given that the community colleges' cost of educating students
tends to be considerably higher than for - profits - and it's the taxpayers who pick up the
cost of these failures.
Community colleges' graduation rates~ especially for colleges that serve socioeconomically
diverse populations similar to for-profit institutions~ tends to be absolutely dismal. For
some (see CUNY's CCs)~ graduation rates are as low or less than 1%~ per data provided to the
New York State Education Department. For- profits outperform them by a nifty multiple.
15

George R. Boggs
President and CEO
American Association of Community Colleges One Dupont CircleJ NWJ Suite 410 WashingtonJ DC
Phone: 202.728.0200J ext. 235
Fax: 202.452.1461
http://www.aacc.nche.edu/
The Voice of America's Community Colleges

This email has been scanned for all viruses by the Messagelabs Email Security System.

16

From:
Sent:
To:

Cc:
Subject:

David Hawkins [dhawkins@nacacnet.org]

Friday, February 19,2010 10:47 AM
Gomez, Gabriella
Shireman, Bob
FW: Fraud Alert in Federal Student Aid Programs

Gaby and Bob,

We sent this through our legislative communication system. We don't have a way of getting this to administration officials,
so I'm sending to you via separate email.
Dave
David Hawkins
Director of Public Policy and Research
National Association for College Admission Counseling
1050 North Highland Street, Suite 400
Arlington, VA 22201
Ph. (703) 836-2222 x1 09
Fax (703) 373-2369
NACAC on the Web: www.nacacnet.org

From: Amanda Madar

Sent: Friday, February 19, 2010 10:23 AM
To: nacac_list@mailmanager.net
Subject: Fraud Alert in Federal Student Aid Programs

For the last several years, the National Association for College Admission Counseling (NACAC) has provided
Congressional staff with reports of potential fraud and abuse in federal student aid programs. In late 2009 and
early 2010, the Department of Education held Negotiated Rulemaking sessions for program integrity issues of
federal student aid programs with the intent of closing loopholes and tightening regulations that have potentially
facilitated fraud and abuse in the for-profit sector of postsecondary education.
NACAC wi ll continue to share reports of potential waste, fraud, and abuse among REA's Title IV programs.
This first in a series of communications from NACAC features reports of interest from ProPublica and
American Public Media's Marketplace:
To read/listen to the stories, click on the titles below:
At University of Phoenix, Allegations of Enrollment Abuses Persist, ProPublica, November 3, 2009
Allegations Against U of Phoenix Persist, Marketplace, November 3, 2009
Examining U of Phoenix Recruitment, Marketplace, November 4, 2009
Quotes ofNote:
"Last fiscal year, 86 percent of its revenue came from the federal government. That's more than $3
billion."

"[Prospective students have] been hounded by enrollment counselors from for-profit colleges. Anyone
familiar with the sales profession will recognize some of their hard-sell tactics."
Former enrollment counselor: "One thing we would be told to do is call up a student who was on the fence and
say, all right, I've only got one seat left. I need to know right now if you need me to save this for you. Well, that
wasn't true.... We were told to lie."
"Enrollment counselors do get paid based at least in part on how many students they sign up. And how long
those students keep coming to class."
Education and Labor Committee Chairman George Miller in 2009 hearing: "I'm a little worried that we're
developing a process here that looks a lot like sort of subprime student loans. And knowing that these
people don't have the capacity to pay it back, knowing that they may not have the ability to benefit from this
education, we go ahead and extend them the credit..."
"Advocates welcome the investment in higher ed. But they also want change ... [W]ithout it, the system will
continue to benefit for-profit companies more than the students they're supposed to help."
We believe it is important to safeguard the integrity of federal student aid programs, particularly as demands on
personal and government finances are strained to capacity. For more information, contact us at
egirtive@nacacnet. org.

From:
Sent:
To:
Subject:

Wolff, Russell
Friday, February 12,2010 3:24PM
Woodward , Jennifer
FW: Meeting on Feb. 16 with Apollo/University of Phoenix

FYI.
From: Jenkins, Harold

Sent: Friday, February 12, 2010 3:21 PM

To: Shelton, Jim
Cc: Shireman, Bob; Yuan, Georgia; Knight, Phyllis; Asare, Kwasi; Wolff, Russell
Subject: RE: Meeting on Feb. 16 with Apollo/University of Phoenix

The University of Phoenix is the largest institutional recipient by far of Federal Student Aid (FSA)
funds; it receives well over $1 billion per year from the Department under those programs. It has also
had a history of significant violations of FSA program requirements, which has resulted in a number of
litigation matters. (As you may have heard, for example, in December the University agreed to pay

about $80 million in settlement of a
artici ation in the FSA ro rams.

Please let me know if you have any comments or questions about these suggestions. Thanks.
Harold Jenkins
401-6283
From: Jenkins, Harold

Sent: Friday, February 05, 2010 8:54AM

To: Shelton, Jim
Cc: Shireman, Bob; Yuan, Georgia; Knight, Phyllis
Subject: RE: Meeting on Feb. 16 with Jim Shelton

Thanks, Jim.
From: Shelton, Jim

Sent: Thursday, February 04, 2010 6:43 PM

To: Jenkins, Harold
Cc: Shireman, Bob; Yuan, Georgia; Knight, Phyllis
Subject: RE: Meeting on Feb. 16 with Jim Shelton
4w317 unless you hear otherwise from Phyllis
Just one of you or a bunch?

From: Jenkins, Harold

Sent: Thursday, February 04, 2010 11:30 AM

To: Shelton, Jim
Cc: Shireman, Bob; Yuan, Georgia
Subject: RE: Meeting on Feb. 16 with Jim Shelton

Thanks, Jim. It's not essential to have a pre-meeting, but maybe we will just send you some
comments by email in advance.
Could you let us know the room number for the meeting?
From: Shelton, Jim

Sent: Wednesday, February 03, 2010 6:20 PM

To: Jenkins, Harold
Cc: Shireman, Bob; Yuan, Georgia
Subject: RE: Meeting on Feb. 16 with Jim Shelton

. . . . . . _ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ' The meeting is

about their model for course design and the underlying technology

From: Jenkins, Harold

Sent: Wednesday, February 03, 2010 3:36PM

To: Shelton, Jim
Cc: Shireman, Bob; Yuan, Georgia
Subject: FW: Meeting on Feb. 16 with Jim Shelton
Importance: High

Jim-As you can see below Bob forwarded to me a messaae from Julie Shrover about vour meetina
with Apollo on Feb. 16.1COXJ>
IQ>~~'

Thanks very much.

Harold Jenkins
Assistant General Counsel for Postsecondary Education
4

401-6283
From: Shireman, Bob

Sent: Wednesday, February 03, 2010 2:18 PM

To: Jenkins, Harold
Subject: FW: Meeting on Feb. 16 with Jim Shelton
Importance: High
FYI

From: Julie Shroyer [mailto:jshroyer@wheatgr.com]

Sent: Wednesday, February 03, 2010 10:41 AM

To: Manheimer, Ann
Cc: Shireman, Bob; Arsenault, Leigh; Joanna Acocella; Terri Bishop
Subject: Meeting on Feb. 16 with Jim Shelton
Importance: High
Dear Ann,
Thanks again for participating in our recent meeting on January 22 with Bob Shireman and representatives from Apollo.
You will recall that Joe D'Amico, President of Apollo mentioned an upcoming meeting with Jim Shelton. My sense from
our discussion was that you may be interested in participating. I wanted to forward the details in the event that you are
able to attend.
Meeting date: Feb. 16
Meeting time: Meeting Time: 2:30p-4:00p EST
Meeting location: US Department of Education, 400 Maryland Ave, SW, Washington DC 20202.
Meeting Participants:
Joe D'Amico- Apollo President & COO
Michael White-Apollo VP Product Strategy
Joanna Acocella- Apollo VP, Apollo Fed Regulations
Sandy Speicher -IDEO, Heads Design for Learning
Jim Shelton - DOE, Assistant Deputy Secretary for Innovation and Improvement
Kwasi Asare- DOE, Special assistant to Jim Shelton- drives strategy and policy for learning technology programs
Karen Cator-DOE, Director of the Office of Education Technology
Purpose: The University of Phoenix I Apollo Group and IDEO will be sharing some recent work on their online learning
platform and data systems. They would also like to discuss the work, where Apollo is headed and changing, and discuss
potential collaborations with the Dept of Ed.
Thanks again for your interest and please let me know if I can provide additional information.
Best,
Julie
Julie E. Shroyer
Senior Vice President
Wheat Government Relations
1201 S. Eads Street, Suite Two
Arlington, VA 22202
(703) 271-8760
5

jshroyer@wheatgr.com

From:
Sent:
To:
Subject:

Wolff, Russell
Friday, February 12,2010 6:04PM
Woodward, Jennifer
FW: Meeting on Feb. 16 with Apollo/University of Phoen ix

Great H message.

From: Jenkins, Harold

Sent: Friday, February 12, 2010 5:16PM
To: Shelton, Jim

Cc: Shireman, Bob; Yuan, Georgia; Knight, Phyllis; Asare, Kwasi; Wolff, Russell
Subject: RE: Meeting on Feb. 16 with Apollo/University of Phoen ix

Jim-As a matter of fact, in December, Federal Student Aid issued a program review report to
Phoenix, about which Phoenix provided the following comments in its January filing with the
Securities and Exchange Commission:
University of Phoenix Program Review Report. On December 31, 2009, University of Phoenix received the
U.S. Department of Education's Prog ram Review Report associated with a program review conducted in
February 2009. The report is preliminary and we have until March 31, 2010 to submit a response to the
findings. After the U.S . Department of Education receives our response, it will issue a Final Program Review
Determination letter that will specify any required corrective action or amounts owed to the U.S. Department of
Education. We believe that our liability resulting from the findings will be approximately $1.5 million, which
has been accrued in our November 30, 2009 financial statements. In addition, we may be required to post a
letter of credit of approximately $125 million by January 30, 2010 to be maintained until at least September 30,
2011 based on the preliminary findings of the report, absent relief from such requirement. We are reviewing the
report in detail and we expect to submit a timely response to the U.S . Department of Education. Refer to Note
14, Commitments and Contingencies, in Item 1, Financial Statements, for additional information.

From: Shelton, Jim

Sent: Friday, February 12, 2010 3:37PM

To: Jenkins, Harold
Cc: Shireman, Bob; Yuan, Georgia; Knight, Phyllis; Asare, Kwasi; Wolff, Russell
Subject: Re: Meeting on Feb. 16 with Apollo/University of Phoenix
Please draft the dsclaimer about my role. I will send it ahead of the meeting.
Are there additional litgation or fines pending?
Sent using BlackBerry

From: Jenkins, Harold

To: Shelton, Jim
Cc: Shireman, Bob; Yuan, Georgia; Knight, Phyllis; Asare, Kwasi; Wolff, Russell
Sent: Fri Feb 12 14:21:08 2010
Subject: RE: Meeting on Feb. 16 with Apollo/University of Phoenix

The University of Phoenix is the largest institutional recipient by far of Federal Student Aid (FSA)
funds; it receives well over $1 billion per year from the Department under those programs. It has also
had a history of significant violations of FSA program requirements, which has resulted in a number of
litigation matters. (As you may have heard, for example, in December the University agreed to pay
about $80 million in settlement of a False Claim Act lawsuit brought against it respecting its
participation in the FSA programs. )ftb~'.

Please let me know if you have any comments or questions about these suggestions. Thanks.
Harold Jenkins
401-6283

From: Jenkins, Harold

Sent: Friday, February 05, 2010 8:54AM

To: Shelton, Jim
Cc: Shireman, Bob; Yuan, Georgia; Knight, Phyllis

Subject: RE: Meeting on Feb. 16 with Jim Shelton

Thanks, Jim.

~-----------------------------------------------------------------

From: Shelton, Jim

Sent: Thursday, February 04, 2010 6:43 PM

To: Jenkins, Harold
Cc: Shireman, Bob; Yuan, Georgia; Knight, Phyllis

Subject: RE: Meeting on Feb. 16 with Jim Shelton

4w317 unless you hear otherwise from Phyllis
Just one of you or a bunch?
From: Jenkins, Harold

Sent: Thursday, February 04, 2010 11:30 AM

To: Shelton, Jim
Cc: Shireman, Bob; Yuan, Georgia

Subject: RE: Meeting on Feb. 16 with Jim Shelton

Thanks, Jim. It's not essential to have a pre-meeting, but maybe we will just send you some
comments by email in advance.
Could you let us know the room number for the meeting?
From: Shelton, Jim

Sent: Wednesday, February 03, 2010 6:20 PM

To: Jenkins, Harold
Cc: Shireman, Bob; Yuan, Georgia

Subject: RE: Meeting on Feb. 16 with Jim Shelton

L. .about
. o.~---------'---------.
. .o:. o'-------------------------'
their model for course design and the underlying technology
From: Jenkins, Harold

Sent: Wednesday, February 03, 2010 3:36PM

To: Shelton, Jim
Cc: Shireman, Bob; Yuan, Georgia

Subject: FW: Meeting on Feb. 16 with Jim Shelton

Importance: High

I
The meeting is

Thanks very much.

Harold Jenkins
Assistant General Counsel for Postsecondary Education
401-6283
From: Shireman, Bob

Sent: Wednesday, February 03, 2010 2:18 PM

To: Jenkins, Harold
Subject: FW: Meeting on Feb. 16 with Jim Shelton
Importance: High
FYI

From: Julie Shroyer [mailto:jshroyer@wheatgr.com]

Sent: Wednesday, February 03, 2010 10:41 AM

To: Manheimer, Ann
Cc: Shireman, Bob; Arsenault, Leigh; Joanna Acocella; Terri Bishop
Subject: Meeting on Feb. 16 with Jim Shelton
Importance: High
Dear Ann,
Thanks again for participating in our recent meeting on January 22 with Bob Shireman and representatives from Apollo.
You will recall that Joe D'Amico, President of Apollo mentioned an upcoming meeting with Jim Shelton. My sense from
our discussion was that you may be interested in participating. I wanted to forward the details in the event that you are
able to attend.
Meeting date: Feb. 16
Meeting time: Meeting Time : 2:30p-4:00p EST
Meeting location: US Department of Education, 400 Maryland Ave, SW, Washington DC 20202.
Meeting Participants:
Joe D'Amico- Apollo President & COO
Michael White-Apollo VP Product Strategy
Joanna Acocella- Apollo VP, Apollo Fed Regulations
Sandy Speicher -I DEO, Heads Design for Learning
Jim Shelton -DOE, Assistant Deputy Secretary for Innovation and Improvement
Kwasi Asare- DOE, Special assistant to Jim Shelton- drives strategy and policy for learning tech nology programs
Karen Cator-DOE, Director of the Office of Education Tech nology
Purpose: The University of Phoenix I Apollo Group and IDEO will be sharing some recent work on their online learning
platform and data systems. They would also like to discuss the work, where Apollo is headed and changing, and discuss
potential collaborations with the Dept of Ed.
Thanks again for your interest and please let me know if I can provide additional information.
Best,
10

Julie
Julie E. Shroyer
Senior Vice President
Wheat Government Relations
1201 S. Eads Street, Suite Two
Arlington, VA 22202
(703) 271-8760
jshroyer@wheatgr.com

11

Subject:

Julie Shroyer Ushroyer@wheatgr.com]

Wednesday, February 03 , 201 o 10:41 AM
Manheimer, Ann
Shireman , Bob; Arsenault, Leigh; Joanna Acocella; Terri Bishop
Meeting on Feb. 16 with Jim Shelton

Importance:

High

From:
Sent:
To:

Cc:

Dear Ann,
Thanks again for participating in our recent meeting on January 22 with Bob Shireman and representatives from Apollo.
You will recall that Joe D'Amico, President of Apollo mentioned an upcoming meeting with Jim Shelton. My sense from
our discussion was that you may be interested in participating. I wanted to forward the details in the event that you are
able to attend.
Meeting date: Feb. 16
Meeting time: Meeting Time: 2:30p-4:00p EST
Meeting location: US Department of Education, 400 Maryland Ave, SW, Washington DC 20202.
Meeting Participants:
Joe D'Amico- Apollo President & COO
Michael White-Apollo VP Product Strategy
Joanna Acocella- Apollo VP, Apollo Fed Regulations
Sandy Speicher - IDEO, Heads Design for Learning
Jim Shelton -DOE, Assistant Deputy Secretary for Innovation and Improvement
Kwasi Asare- DOE, Special assistant to Jim Shelton- drives strategy and policy for learning technology programs
Karen Cator-DOE, Director of the Office of Education Technology
Purpose: The University of Phoenix I Apollo Group and IDEO will be sharing some recent work on their online learning
platform and data systems. They would also like to discuss the work, where Apollo is headed and changing, and discuss
potential collaborations with the Dept of Ed.
Thanks again for your interest and please let me know if I can provide additional information.
Best,
Julie
Julie E. Shroyer
Senior Vice President
Wheat Government Relations
1201 S. Eads Street, Suite Two
Arlington, VA 22202
{703) 271-8760
jshroyer@wheatgr .com

12

Subject:

Jenkins, Harold
Wednesday, February 03 , 201 o 3:36 PM
Shelton , Jim
Shireman , Bob; Yuan, Georgia
FW: Meeting on Feb. 16 with Jim Shelton

Importance:

High

From:
Sent:
To:

Cc:

Thanks very much.

Harold Jenkins
Assistant General Counsel for Postsecondary Education
401-6283
From: Shireman, Bob

Sent: Wednesday, February 03, 2010 2:18PM

To: Jenkins, Harold
Subject: FW: Meeting on Feb. 16 with Jim Shelton
Importance: High
FYI

From: Julie Shroyer fmailto:jshrover@wheatgr.coml

Sent: Wednesday, February 03, 2010 10:41 AM

To: Manheimer, Ann
Cc: Shireman, Bob; Arsenault, Leigh; Joanna Acocella; Terri Bishop
Subject: Meeting on Feb. 16 with Jim Shelton
Importance: High
Dear Ann,
Thanks again for participating in our recent meeting on January 22 with Bob Shireman and representatives from Apollo.
You will recall that Joe D'Amico, President of Apollo mentioned an upcoming meeting with Jim Shelton. My sense from
our discussion was that you may be interested in participating. I wanted to forward the details in the event that you are
able to attend.
Meeting date: Feb. 16
Meeting time: Meeting Time: 2:30p-4:00p EST
Meeting location: US Department of Education, 400 Maryland Ave, SW, Washington DC 20202.

13

Meeting Participants:
Joe D'Amico- Apollo President & COO
Michael White-Apollo VP Product Strategy
Joanna Acocella- Apollo VP, Apollo Fed Regulations
Sandy Speicher -IDEO, Heads Design for Learning
Jim Shelton -DOE, Assistant Deputy Secretary for Innovation and Improvement
Kwasi Asare- DOE, Special assistant to Jim Shelton- drives strategy and policy for learning technology programs
Karen Cator-DOE, Director of the Office of Education Technology
Purpose: The University of Phoenix I Apollo Group and IDEO will be sharing some recent work on their online learning
platform and data systems. They would also like to discuss the work, where Apollo is headed and changing, and discuss
potential collaborations with the Dept of Ed.
Thanks again for your interest and please let me know if I can provide additional information.
Best,
Julie
Julie E. Shroyer
Senior Vice President
Wheat Government Relations
1201 S. Eads Street, Suite Two
Arlington, VA 22202
{703} 271-8760
jshroyer@wheatgr.com

14

From:
Sent:
To:
Subject:

Yuan , Georgia
Wednesday, February 03, 201 o 3:52 PM
Canada, June
FW: Meeting on Feb. 16 with Jim Shelton

Importance:

High

Please calendar with "tentative" on it

From: Jenkins, Harold

Sent: Wednesday, February 03, 2010 3:36PM

To: Shelton, Jim
Cc: Shireman, Bob; Yuan, Georgia
Subject: FW: Meeting on Feb. 16 with Jim Shelton
Importance: High

Jim-As you can see below Bob forwarded to me a message from Julie Shroyer about your meeting
with Apollo on Feb. 16 Jt~X~l

Thanks very much.

Harold Jenkins
Assistant General Counsel for Postsecondary Education

401-6283
From: Shireman, Bob

Sent: Wednesday, February 03, 2010 2:18PM

To: Jenkins, Harold
Subject: FW: Meeting on Feb. 16 with Jim Shelton
Importance: High

FYI
From: Julie Shroyer [mailto:jshroyer@wheatgr.coml

Sent: Wednesday, February 03, 2010 10:41 AM

To: Manheimer, Ann
Cc: Shireman, Bob; Arsenault, Leigh; Joanna Acocella; Terri Bishop
Subject: Meeting on Feb. 16 with Jim Shelton
Importance: High
Dear Ann,
Thanks again for participating in our recent meeting on January 22 with Bob Shireman and representatives from Apollo.
15

You will recall that Joe D'Amico, President of Apollo mentioned an upcoming meeting with Jim Shelton. My sense from
our discussion was that you may be interested in participating. I wanted to forward the details in the event that you are
able to attend.
Meeting date: Feb. 16
Meeting time: Meeting Time: 2:30p-4:00p EST
Meeting location: US Department of Education, 400 Maryland Ave, SW, Washington DC 20202.
Meeting Participants:
Joe D'Amico- Apollo President & COO
Michael White-Apollo VP Product Strategy
Joanna Acocella- Apollo VP, Apollo Fed Regulations
Sandy Speicher - IDEO, Heads Design for Learning
Jim Shelton -DOE, Assistant Deputy Secretary for Innovation and Improvement
Kwasi Asare- DOE, Special assistant to Jim Shelton- drives strategy and policy for learning technology programs
Karen Cator-DOE, Director of the Office of Education Technology
Purpose: The University of Phoenix I Apollo Group and IDEO will be sharing some recent work on their online learning
platform and data systems. They would also like to discuss the work, where Apollo is headed and changing, and discuss
potential collaborations with t he Dept of Ed.
Thanks again for your interest and please let me know if I can provide additional information.
Best,
Julie
Julie E. Shroyer
Senior Vice President
Wheat Government Relations
1201 S. Eads Street, Suite Two
Arlington, VA 22202
(703) 271-8760
jshroyer@wheatgr.com

16

From:
Sent:
To:

Cc:
Subject:

Shelton. Jim
Wednesday, February 03, 201 o 6:20 PM
Jenkins, Harold
Shireman. Bob; Yuan, Georgia
RE: Meeting on Feb. 16 with Jim Shelton

Thanks for reminding me

~;r;r...---------------------------------' The meeting is

about their model for course design and the underlying technology

From: Jenkins, Harold

Sent: Wednesday, February 03, 2010 3:36PM

To: Shelton, Jim

Cc: Shireman, Bob; Yuan, Georgia

Subject: FW: Meeting on Feb. 16 with Jim Shelton

Importance: High
J i m--Asyoucanseeb.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~---

with Apollo on Feb. 16.

Thanks very much.

Harold Jenkins
Assistant General Counsel for Postsecondary Education
401-6283
From: Shireman, Bob

Sent: Wednesday, February 03, 2010 2:18PM

To: Jenkins, Harold

Subject: FW: Meeting on Feb. 16 with Jim Shelton

Importance: High
FYI

From: Julie Shroyer [mailto:jshroyer@wheatqr.coml

Sent: Wednesday, February 03, 2010 10:41 AM

To: Manheimer, Ann

Cc: Shireman, Bob; Arsenault, Leigh; Joanna Acocella; Terri Bishop

Subject: Meeting on Feb. 16 with Jim Shelton

Importance: High
Dear Ann,

17

Thanks again for participating in our recent meeting on January 22 with Bob Shireman and representatives from Apollo.
You will recall that Joe D'Amico, President of Apollo mentioned an upcoming meeting with Jim Shelton. My sense from
our discussion was that you may be interested in participating. I wanted to forward the details in the event that you are
able to attend.
Meeting date: Feb. 16
Meeting time: Meeting Time: 2:30p-4:00p EST
Meeting location: US Department of Education, 400 Maryland Ave, SW, Washington DC 20202.
Meeting Participants:
Joe D'Amico- Apollo President & COO
Michael White-Apollo VP Product Strategy
Joanna Acocella- Apollo VP, Apollo Fed Regulations
Sandy Speicher -IDEO, Heads Design for Learning
Jim Shelton -DOE, Assistant Deputy Secretary for Innovation and Improvement
Kwasi Asare- DOE, Special assistant to Jim Shelton- drives strategy and policy for learning technology programs
Karen Cator-DOE, Director of the Office of Education Technology
Purpose: The University of Phoenix I Apollo Group and IDEO will be sharing some recent work on their online learning
platform and data systems. They would also like to discuss the work, where Apollo is headed and changing, and discuss
potential collaborations with the Dept of Ed.
Thanks again for your interest and please let me know if I can provide additional information.
Best,
Julie
Julie E. Shroyer
Senior Vice President
Wheat Government Relations
1201 S. Eads Street, Suite Two
Arlington, VA 22202
{703) 271-8760
jshroyer@wheatgr .com

18

From:
Sent:

To:
Cc:
Subject:

Jenkins, Harold
Friday, February 05, 201 o8:54AM
Shelton, Jim
Shireman, Bob; Yuan, Georgia; Knight, Phyllis
RE: Meeting on Feb. 16 with Jim Shelton

Thanks, Jim.
From: Shelton, Jim

Sent: Thursday, February 04, 2010 6:43 PM

To: Jenkins, Harold
Cc: Shireman, Bob; Yuan, Georgia; Knight, Phyllis
Subject: RE: Meeting on Feb. 16 with Jim Shelton
4w317 unless you hear otherwise from Phyllis
Just one of you or a bunch?

From: Jenkins, Harold

Sent: Thursday, February 04, 2010 11:30 AM

To: Shelton, Jim
Cc: Shireman, Bob; Yuan, Georgia
Subject: RE: Meeting on Feb. 16 with Jim Shelton

Thanks, Jim. It's not essential to have a pre-meeting, but maybe we will just send you some
comments by email in advance.
Could you let us know the room number for the meeting?
From: Shelton, Jim

Sent: Wednesday, February 03, 2010 6:20PM

To: Jenkins, Harold
Cc: Shireman, Bob; Yuan, Georgia
Subject: RE: Meeting on Feb. 16 with Jim Shelton

about their model for course design and the underlying technology

From: Jenkins, Harold

Sent: Wednesday, February 03, 2010 3:36PM

To: Shelton, Jim
Cc: Shireman, Bob; Yuan, Georgia
Subject: FW: Meeting on Feb. 16 with Jim Shelton
Importance: High

Jim-As you can see below, Bob forwarded to me a message from Julie Shroyer about your meeting
with Apollo on Feb. 16. We in OGC believe that is desirable for someone from our office to be
present at any meeting involving high level Apollo management with ED. This view is based both on
Apollo's status as the largest recipient (by far) of Federal Student Aid funds and its history of
significant program compliance issues.
19

Would it be ok for us to attend your meeting on Feb. 16? If so, I'd appreciate your sending me the
meeting information, including a room number. In addition, could we meet with you for 20 minutes or
so some time during the morning of Feb. 16 to prepare for the meeting with Apollo?
Thanks very much.
Harold Jenkins
Assistant General Counsel for Postsecondary Education
401-6283
From: Shireman, Bob

Sent: Wednesday, February 03, 2010 2:18PM

To: Jenkins, Harold
Subject: FW: Meeting on Feb. 16 with Jim Shelton
Importance: High
FYI

From: Julie Shroyer [mailto:jshroyer@wheatgr.coml

Sent: Wednesday, February 03, 2010 10:41 AM

To: Manheimer, Ann
Cc: Shireman, Bob; Arsenault, Leigh; Joanna Acocella; Terri Bishop
Subject: Meeting on Feb. 16 with Jim Shelton
Importance: High
Dear Ann,
Thanks again for participating in our recent meeting on January 22 with Bob Shireman and representatives from Apollo.
You will recall that Joe D'Amico, President of Apollo mentioned an upcoming meeting with Jim Shelton. My sense from
our discussion was that you may be interested in participating. I wanted to forward the details in the event that you are
able to attend.
Meeting date: Feb. 16
Meeting time: Meeting Time: 2:30p-4:00p EST
Meeting location: US Department of Education, 400 Maryland Ave, SW, Washington DC 20202.
Meeting Participants:
Joe D'Amico- Apollo President & COO
Michael White-Apollo VP Product Strategy
Joanna Acocella- Apollo VP, Apollo Fed Regulations
Sandy Speicher - IDEO, Heads Design for Learning
Jim Shelton -DOE, Assistant Deputy Secretary for Innovation and Improvement
Kwasi Asare- DOE, Special assistant to Jim Shelton- drives strategy and policy for learning technology programs
Karen Cator-DOE, Director of the Office of Education Technology
Purpose: The University of Phoenix I Apollo Group and IDEO will be sharing some recent work on their online learning
platform and data systems. They would also like to discuss the work, where Apollo is headed and changing, and discuss
potential collaborations with the Dept of Ed.
Thanks again for your interest and please let me know if I can provide additional information.

20

Best,
Julie
Julie E. Shroyer
Senior Vice President
Wheat Government Relations
1201 S. Eads Street, Suite Two
Arlington, VA 22202
(703) 271-8760
jshroyer@wheatgr.com

21

From:
Sent:
To:
Subject:

Jenkins, Harold
Thursday, February 11,2010 7:56PM
Woodward , Jennifer
RE: Meeting on Feb. 16 with Jim Shelton

I can ask

ThanksJ Jennifer.
Russ if he can goJ or go myself.
From: WoodwardJ Jennifer
Sent: ThursdayJ February 11J 2010 4:20PM
To: JenkinsJ Harold
Subject: RE: Meeting on Feb. 16 with Jim Shelton

From: WoodwardJ Jennifer

Sent: ThursdayJ February 11J 2010 4:38 PM
To: JenkinsJ Harold
Subject: RE: Meeting on Feb. 16 with Jim Shelton
HiJ HaroldJ

.I

I' 11 let you know ASAP whether that can be

arranged.
Jennifer
From: JenkinsJ Harold
Sent: ThursdayJ February 11J 2010 9:55AM
To: WoodwardJ Jennifer
Subject: FW: Meeting on Feb. 16 with Jim Shelton
HiJ Jennifer--! hope you're enjoying the snow! Please see the message chain below. Could
you attend the Feb . 16 meetin with UoP? If so I can ive ou a little more info tomorrow
(Fri.).
s.
Harold
From: SheltonJ Jim
Sent: ThursdayJ February 04J 2010 5:42 PM
To: JenkinsJ Harold
Cc: ShiremanJ Bob; YuanJ Georgia; KnightJ Phyllis
Subject: RE: Meeting on Feb. 16 with Jim Shelton
22

4w317 unless you hear otherwise from Phyllis Just one of you or a bunch?
From: Jenkins~ Harold
Sent: Thursday~ February 04~ 2010 11:30 AM
To: Shelton~ Jim
Cc: Shireman~ Bob; Yuan~ Georgia
Subject: RE: Meeting on Feb. 16 with Jim Shelton
Jim. It~s not essential to have a
comments by email in advance.

Thanks~

pre-meeting~

but maybe we will just send you some

Could you let us know the room number for the meeting?
From: Shelton~ Jim
Sent: Wednesday~ February 03~ 2010 6:20 PM
To: Jenkins~ Harold
Cc: Shireman~ Bob; Yuan~ Georgia
Subject: RE: Meeting on Feb. 16 with Jim Shelton
for remindin
The meeting is about their model for course design and the
underlying technology
From: Jenkins~ Harold
Sent: Wednesday~ February 03~ 2010 3:36 PM
To: Shelton~ Jim
Cc: Shireman~ Bob; Yuan~ Georgia
Subject: FW: Meeting on Feb. 16 with Jim Shelton
Importance: High
Jim-As you can see
a no 11 o on 1= Ph

wit-h

below~ Bob
1 t; llU~)

forwarded to me a message from Julie Shroyer about your meeting

Thanks very much.

Harold Jenkins
Assistant General Counsel for Postsecondary Education
401-6283
From: Shireman~ Bob
Sent: Wednesday~ February 03~ 2010 2:18 PM
To: Jenkins~ Harold
Subject: FW: Meeting on Feb. 16 with Jim Shelton
Importance: High
FYI
From: Julie Shroyer [mailto:jshroyer@wheatgr.com]
23

Sent: Wednesday> February 03> 2010 10:41 AM

To: Manheimer> Ann
Cc: Shireman> Bob; Arsenault> Leigh; Joanna Acocella; Terri Bishop
Subject: Meeting on Feb. 16 with Jim Shelton
Importance: High
Dear Ann>
Thanks again for participating in our recent meeting on January 22 with Bob Shireman and
representatives from Apollo. You will recall that Joe D>Amico> President of Apollo mentioned
an upcoming meeting with Jim Shelton. My sense from our discussion was that you may be
interested in participating. I wanted to forward the details in the event that you are able
to attend.
Meeting date: Feb. 16
Meeting time: Meeting Time: 2:30p-4:00p EST Meeting location:
400 Maryland Ave> SW> Washington DC 20202.

US Department of Education>

Meeting Participants:
Joe D>Amico - Apollo President & COO
Michael White-Apollo VP Product Strategy Joanna Acocella - Apollo VP> Apollo Fed Regulations
Sandy Speicher -IDEO> Heads Design for Learning Jim Shelton -DOE> Assistant Deputy Secretary
for Innovation and Improvement Kwasi Asare - DOE> Special assistant to Jim Shelton- drives
strategy and policy for learning technology programs Karen Cator-DOE> Director of the Office
of Education Technology
Purpose: The University of Phoenix I Apollo Group and IDEO will be sharing some recent work
on their online learning platform and data systems. They would also like to discuss the
work> where Apollo is headed and changing> and discuss potential collaborations with the Dept
of Ed.
Thanks again for your interest and please let me know if I can provide additional
information.

Julie
Julie E. Shroyer
Senior Vice President
Wheat Government Relations
1201 S. Eads Street> Suite Two
Arlington> VA 22202
(703) 271-8760
jshroyer@wheatgr.com

24

From:
Sent:
To:
Subject:

Jenkins, Harold
Friday, February 12,2010 3:40PM
Woodward , Jennifer
RE: Meeting on Feb. 16 with Jim Shelton

Jennifer - -I asked Russ to cover this.

Thanks.

Harold
- - - - -Original Message----From: Jenkins, Harold
Sent: Thursday, February 11, 2010 7:56 PM
To: Woodward, Jennifer
Subject: RE: Meeting on Feb. 16 with Jim Shelton
Thanks, Jennifer.
I can ask
Russ if he can go,~--------~~------------------------------------------~
or go myself.
From: Woodward, Jennifer
Sent: Thursday, February 11, 2010 4:20PM
To: Jenkins, Harold
Subject: RE: Meeting on Feb. 16 with Jim Shelton
Jennifer
From: Woodward, Jennifer
Sent: Thursday, February 11, 2010 4:38 PM
To: Jenkins, Harold
Subject: RE: Meeting on Feb. 16 with Jim Shelton

I'll let you know ASAP whether that can be

arranged.
Jennifer
From: Jenkins, Harold
Sent: Thursday, February 11, 2010 9:55AM
To: Woodward, Jennifer
Subject: FW: Meeting on Feb. 16 with Jim Shelton
Hi, Jennifer--I hope you're enjoying the snow! Please see the message chain below. Could
you attend the Feb . 16 meeting with UoP? If so, I can give you a little more info tomorrow
25

Thanks.
Harold
From: Shelton, Jim
Sent: Thursday, February 04, 2010 5:42 PM
To: Jenkins, Harold
Cc: Shireman, Bob; Yuan, Georgia; Knight, Phyllis
Subject: RE: Meeting on Feb. 16 with Jim Shelton
4w317 unless you hear otherwise from Phyllis Just one of you or a bunch?
From: Jenkins, Harold
Sent: Thursday, February 04, 2010 11:30 AM
To: Shelton, Jim
Cc: Shireman, Bob; Yuan, Georgia
Subject: RE: Meeting on Feb. 16 with Jim Shelton
Thanks, Jim. It's not essential to have a pre-meeting, but maybe we will just send you some
comments by email in advance.
Could you let us know the room number for the meeting?
From: Shelton, Jim
Sent: Wednesday, February 03, 2010 6:20PM
To: Jenkins, Harold
Cc: Shireman, Bob; Yuan, Georgia
Subject: RE: Meeting on Feb. 16 with Jim Shelton

The meeting is about their model for course design and the
underlying technology
From: Jenkins, Harold
Sent: Wednesday, February 03, 2010 3:36 PM
To: Shelton, Jim
Cc: Shireman, Bob; Yuan, Georgia
Subject: FW: Meeting on Feb. 16 with Jim Shelton
Importance: High
Jim-As you can see below, Bob forwarded to me a message from Julie Shroyer about your meeting
with Apollo on Feb . 16. ~~~

Thanks very much .

Harold Jenkins
Assistant Genera l Counsel for Postsecondary Education
26

401-6283
From: Shireman~ Bob
Sent: Wednesday~ February 03~ 2010 2:18 PM
To: Jenkins~ Harold
Subject: FW: Meeting on Feb. 16 with Jim Shelton
Importance: High
FYI
From: Julie Shroyer [mailto:jshroyer@wheatgr.com]
Sent: Wednesday~ February 03~ 2010 10:41 AM
To: Manheimer~ Ann
Cc: Shireman~ Bob; Arsenault~ Leigh; Joanna Acocella; Terri Bishop
Subject: Meeting on Feb. 16 with Jim Shelton
Importance: High
Dear

Ann~

Thanks again for participating in our recent meeting on January 22 with Bob Shireman and
representatives from Apollo. You will recall that Joe D~Amico~ President of Apollo mentioned
an upcoming meeting with Jim Shelton. My sense from our discussion was that you may be
interested in participating. I wanted to forward the details in the event that you are able
to attend.
Meeting date: Feb. 16
Meeting time: Meeting Time: 2:30p-4:00p EST Meeting location:
400 Maryland Ave~ SW~ Washington DC 20202.

US Department of

Education~

Meeting Participants:
Joe D~Amico- Apollo President & COO
Michael White-Apollo VP Product Strategy Joanna Acocella - Apollo VP~ Apollo Fed Regulations
Sandy Speicher -IDEO~ Heads Design for Learning Jim Shelton -DOE~ Assistant Deputy Secretary
for Innovation and Improvement Kwasi Asare - DOE~ Special assistant to Jim Shelton- drives
strategy and policy for learning technology programs Karen Cator-DOE~ Director of the Office
of Education Technology
Purpose: The University of Phoenix I Apollo Group and IDEO will be sharing some recent work
on their online learning platform and data systems. They would also like to discuss the
work~ where Apollo is headed and changing~ and discuss potential collaborations with the Dept
of Ed.
Thanks again for your interest and please let me know if I can provide additional
information.

Julie
Julie E. Shroyer
Senior Vice President
Wheat Government Relations
1201 S. Eads Street~ Suite Two
Arlington~ VA 22202
(703) 271-8760
jshroyer@wheatgr.com
27

From:
Sent:
To:
Subject:

Shelton. Jim
Wednesday, February 03, 201 o 6:21 PM
Plotkin, Hal
FW: Meeting on Feb. 16 with Jim Shelton

Importance:

High

Fyi- ignore the rest but it reminded me I have a meeting scheduled with IDEO and Apollo on their course design and
tech nology if you' d like to come

From: Jenkins, Harold

Sent: Wednesday, February 03, 2010 3:36 PM

To: Shelton, Jim
Cc: Shireman, Bob; Yuan, Georgia
Subject: FW: Meeting on Feb. 16 with Jim Shelton
Importance: High

Jim--Asyoucanseeb~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

with Apollo on Feb. 16.

Thanks very much.

Harold Jenkins
Assistant General Counsel for Postsecondary Education
401-6283
From: Shireman, Bob

Sent: Wednesday, February 03, 2010 2:18 PM

To: Jenkins, Harold
Subject: FW: Meeting on Feb. 16 with Jim Shelton
Importance: High
FYI

From: Julie Shroyer [mailto:jshroyer@wheatgr.com]

Sent: Wednesday, February 03, 2010 10:41 AM

To: Manheimer, Ann
Cc: Shireman, Bob; Arsenault, Leigh; Joanna Acocella; Terri Bishop
Subject: Meeting on Feb. 16 with Jim Shelton
Importance: High
Dear Ann,

28

Thanks again for participating in our recent meeting on January 22 with Bob Shireman and representatives from Apollo.
You will recall that Joe D'Amico, President of Apollo mentioned an upcoming meeting with Jim Shelton. My sense from
our discussion was that you may be interested in participating. I wanted to forward the details in the event that you are
able to attend.
Meeting date: Feb. 16
Meeting time: Meeting Time: 2:30p-4:00p EST
Meeting location: US Department of Education, 400 Maryland Ave, SW, Washington DC 20202.
Meeting Participants:
Joe D'Amico- Apollo President & COO
Michael White-Apollo VP Product Strategy
Joanna Acocella- Apollo VP, Apollo Fed Regulations
Sandy Speicher -IDEO, Heads Design for Learning
Jim Shelton -DOE, Assistant Deputy Secretary for Innovation and Improvement
Kwasi Asare- DOE, Special assistant to Jim Shelton- drives strategy and policy for learning technology programs
Karen Cator-DOE, Director of the Office of Education Technology
Purpose: The University of Phoenix I Apollo Group and IDEO will be sharing some recent work on their online learning
platform and data systems. They would also like to discuss the work, where Apollo is headed and changing, and discuss
potential collaborations with the Dept of Ed.
Thanks again for your interest and please let me know if I can provide additional information.
Best,
Julie
Julie E. Shroyer
Senior Vice President
Wheat Government Relations
1201 S. Eads Street, Suite Two
Arlington, VA 22202
{703) 271-8760
jshroyer@wheatgr .com

29

From:
Sent:
To:
Subject:

Manheimer, Ann
Friday, February 05, 2010 8:45AM
Julie Shroyer
RE: Meeting on Feb. 16 with Jim Shelton

Thanks -I plan to attend, but may have to leave a bit early - Ann

From: Julie Shroyer [mailto:jshroyer@wheatgr.com]

Sent: Wednesday, February 03, 2010 10:41 AM
To: Manheimer, Ann
Cc: Shireman, Bob; Arsenault, Leigh; Joanna Acocella; Terri Bishop
Subject: Meeting on Feb. 16 with Jim Shelton
Importance: High
Dear Ann,
Thanks again for participating in our recent meeting on January 22 with Bob Shireman and representatives from Apollo.
You will recall that Joe D'Amico, President of Apollo mentioned an upcoming meeting with Jim Shelton. My sense from
our discussion was that you may be interested in participating. I wanted to forward the details in the event that you are
able to attend.
Meeting date: Feb. 16
Meeting time: Meeting Time: 2:30p-4:00p EST
Meeting location: US Department of Education, 400 Maryland Ave, SW, Washington DC 20202.
Meeting Participants:
Joe D'Amico- Apollo President & COO
Michael White-Apollo VP Product Strategy
Joanna Acocella- Apollo VP, Apollo Fed Regulations
Sandy Speicher -IDEO, Heads Design for Learning
Jim Shelton -DOE, Assistant Deputy Secretary for Innovation and Improvement
Kwasi Asare- DOE, Special assistant to Jim Shelton- drives strategy and policy for learning technology programs
Karen Cator-DOE, Director of the Office of Education Technology
Purpose: The University of Phoenix I Apollo Group and IDEO will be sharing some recent work on their online learning
platform and data systems. They would also like to discuss the work, where Apollo is headed and changing, and discuss
potential collaborations with the Dept of Ed.
Thanks again for your interest and please let me know if I can provide additional information.
Best,
Julie
Julie E. Shroyer
Senior Vice President
Wheat Government Relations
1201 S. Eads Street, Suite Two
Arlington, VA 22202
(703) 271-8760

30

jshroyer@wheatgr.com

31

From:
Sent:
To:
Subject:

Kanter, Martha
Tuesday, February 09, 201 o 9:12 PM
Dannenberg, Michael
RE: Kaplan MOU with CA Community Colleges

From: Dannenberg~ Michael

Sent : Tuesday~ February 09~ 2010 7:37 PM
To : Kanter~ Martha; Shireman~ Bob
Subject: Re: Kaplan MOU with CA Community Colleges
I flagged this t o Hal this morning.

Should've sent it to you both as well.

----- Original Message ----From: Kanter~ Martha

To: Shireman~ Bob; Dan nenberg~ Michael
Sent : Tue Feb 09 17:17:16 2010
Subject: FW: Kaplan MOU with CA Community Col leges

From: Rebecca Campoverde [ Rebecca.Campoverde@kaplan.com]

Sent : T uesday~ February 09~ 2010 4:03 PM
To: Kanter~ Martha
Cc: Plotki n ~ Hal; O'Bergh~ Jon; Arsenault ~ Leigh
Subject: RE: Kaplan MOU with CA Community Colleges
The cost~ including textbooks~ would be as follows:
$215 per Credit:
$1~075 - 5 Credit Course
$1~290 - 6 Credit Course
Becky
From: Kanter~ Martha [Martha.Kanter@ed.gov]
Sent: T uesday~ February 09~ 2010 3:33 PM
To: Rebecca Campoverde
Cc : Plotkin~ Hal; O'Bergh~ Jon; Arsenault~ Leigh
Subject: RE: Kaplan MOU wit h CA Community Colleges
Thanks for letting us know. On
r eduction?

average~

how much would a course cost with your tuition

From: Rebecca Campoverde [ Rebecca.Campoverde@kaplan.com]

Sent: Tuesday~ February 09~ 2010 1:39 PM
To: Kanter~ Martha
Cc : P lotki n ~ Ha l ; O'Bergh ~ Jon; Arsenault~ Leigh
Subject: Kaplan MOU with CA Community Colleges
32

Secretary KanterJ
It was good to see you at the celebration for JoAnn Ryan. I hope you and your staff are
((weathering" our challenging winter. This is unlike anything DC has seen in decadesJ and
hopefully) next winter will be more what we are used to.
I thought you and your staff would be interested in coverage of Kaplan UniversityJs
memorandum of understanding with the CA community colleges. We are proud to be able to help
students who would otherwise face significant) and perhaps insurmountable) challenges in
completing their coursework. Below FYI are the items from both Inside Higher Ed and the
Chronicle of Higher Education.
Inside Higher Ed
California Community Colleges and Kaplan Collaborate Kaplan University and the California
Community Colleges system have entered into an arrangement that will allow students at the
two -year institutions to take individual online courses through Kaplan at a steep discount to
help them finish their associate degrees. Under the dealJ which is designed in part to help
students at the two -year colleges deal with reduced course availability because of budget
cutsJ Kaplan will offer individual courses at a 42 percent discount from what they would
normally cost as part of a degree program. Students will receive textbooks and other
instructional materials at no charge.
Chronicle of Higher Education
California Community-College Students May Take Online Kaplan Courses for Credit Communitycollege students California will be able to fulfill some of their associate-degree
requirements by taking single online courses from Kaplan University under an agreement
announced
today.<http://www.businesswire.com/portal/site/home/permalink/?ndmViewid=news_view&newsid=201
00208005324&newslang=en> Local community colleges will determine which online Kaplan courses
meet their requirements. The state's 110 community colleges have been
hurt<http://chronicle.com/article/Californias-Budget-Problem/34143/> by steep cuts in state
supportJ<http://chronicle . com/article/At -Transfer- Time-Thousands/48678/> and they have been
unable to accommodate the huge demand for college courses generated by the recession. Forprofit colleges have stepped in<http://chronicle.com/article/In -a -Booming-California/64013/>
to fill in some of the gaps.
Becky
Becky Campoverde
Vice President) Government Relations
KaplanJ Inc.
202- 334- 6684 (0)
Rebecca.Campoverde@kaplan.com<mailto:Rebecca.Campoverde@kaplan.com>
This transmission may contain information that is pr ivileged) confidential and exempt from
disclosure under applicable law. If you receive this transmission in errorJ do not readJ use
or copy it. Please immediately contact the sender and destroy the material in its entiretyJ
whether in electronic or hard copy format. Thank you.

33

From:
Sent:
To:
Subject:

Plotkin , Hal
Friday, February 12,2010 3:20PM
Arsenault, Leigh
Re: Kaplan MOU with CA Community Colleges

Thanks!
----- Original Message
From: Arsenault~ Leigh
To: Kanter~ Martha
Cc: Plotkin~ Hal; O'Bergh~ Jon
Sent: Fri Feb 12 14:15:05 2010
Subject: RE: Kaplan MOU with CA Community Colleges
An interesting take on this ...
http://views.ticas.org/
- - - - -Original Message - - - - From: Rebecca Campoverde [mailto:Rebecca.Campoverde@kaplan.com]
Sent: Tuesday~ February 09~ 2010 4:04 PM
To: Kanter~ Martha
Cc: Plotkin~ Hal; O'Bergh~ Jon; Arsenault~ Leigh
Subject: RE: Kaplan MOU with CA Community Colleges
The cost~ including textbooks~ would be as follows:
$215 per Credit:
$1~075 - 5 Credit Course
$1~290 - 6 Credit Course
Becky
From: Kanter~ Martha [Martha.Kanter@ed.gov]
Sent: Tuesday~ February 09~ 2010 3:33 PM
To: Rebecca Campoverde
Cc: Plotkin~ Hal; O'Bergh~ Jon; Arsenault~ Leigh
Subject: RE: Kaplan MOU with CA Community Colleges
Thanks for letting us know. On
reduction?

average~

how much would a course cost with your tuition

From: Rebecca Campoverde [Rebecca.Campoverde@kaplan.com]

Sent: Tuesday~ February 09~ 2010 1:39 PM
To: Kanter~ Martha
Cc: Plotkin~ Hal; O'Bergh~ Jon; Arsenault~ Leigh
Subject: Kaplan MOU with CA Community Colleges
Secretary Kanter~
It was good to see you at the celebration for JoAnn Ryan. I hope you and your staff are
((weathering" our challenging winter. This is unlike anything DC has seen in decades~ and
hopefully~ next winter wil l be more what we are used to.
I thought you and your staff would be interested in coverage of Kaplan University~s
memorandum of understanding with the CA community col l eges. We are proud to be able to help
students who would otherwise face significant~ and perhaps insurmountable~ challenges in
34

completing their coursework. Below FYI are the items from both Inside Higher Ed and the
Chronicle of Higher Education.
Inside Higher Ed
California Community Colleges and Kaplan Collaborate Kaplan University and the California
Community Colleges system have entered into an arrangement that will allow students at the
two-year institutions to take individual online courses through Kaplan at a steep discount to
help them finish their associate degrees. Under the deal~ which is designed in part to help
students at the two -year colleges deal with reduced course availability because of budget
cuts~ Kaplan will offer individual courses at a 42 percent discount from what they would
normally cost as part of a degree program. Students will receive textbooks and other
instructional materials at no charge.
Chronicle of Higher Education
California Community-College Students May Take Online Kaplan Courses for Credit Communitycollege students California will be able to fulfill some of their associate -degree
requirements by taking single online courses from Kaplan University under an agreement
announced
today.<http://www.businesswire.com/portal/site/home/permalink/?ndmViewid=news view&newsid=201
00208005324&newslang=en> Local community colleges will determine which online Kaplan courses
meet their requirements. The state's 110 community colleges have been
hurt<http://chronicle.com/article/Californias-Budget-Problem/34143/> by steep cuts in state
support~<http://chronicle.com/article/At - Transfer - Time - Thousands/48678/> and they have been
unable to accommodate the huge demand for college courses generated by the recession. Forprofit colleges have stepped in<http://chronicle.com/article/In-a-Booming-California/64013/>
to fill in some of the gaps.
Becky
Becky Campoverde
Vice President~ Government Relations
Kaplan~ Inc.
202-334-6684 (0)
Rebecca.Campoverde@kaplan.com<mailto:Rebecca.Campoverde@kaplan.com>
This transmission may contain information that is privileged~ confidential and exempt from
disclosure under applicable law. If you receive this transmission in error~ do not read~ use
or copy it. Please immediately contact the sender and destroy the material in its entirety~
whether in electronic or hard copy format. Thank you.

35

From:
Sent:
To:

Cc:
Subject:

Plotkin , Hal
Tuesday, February 09, 201 o 9:42AM
Dannenberg, Michael
Shireman, Bob; Kanter, Martha
Re: CA community colleges

From: Dannenberg, Michael

To: Plotkin, Hal
Sent: Tue Feb 09 08:27:29 2010
Subject: CA community colleges

I assume you saw this, but just in case.

California Community Colleges and Kaplan Collaborate

Kaplan University and the California Community Colleges system have entered into an arrangement that will
all ow students at the two-year institutions to take individual online courses through Kaplan at a steep discount
to help them finish their associate degrees. Under the deal, which is designed in part to help students at the twoyear colleges deal with reduced course availability because of budget cuts, Kaplan will offer individual courses
at a 42 percent discount from what they would normally cost as part of a degree program. Students will receive
textbooks and other instructional materials at no charge.

36

From:
Sent:
To:
Subject:

Shireman, Bob
Monday, January 25, 2010 12:49 PM
Madzelan, Dan
Re : Exclusion of living expenses from cost of attendance

Still jurying, but may be done later today. Let's do our 5 pm by phone or tomorrow?

From: Madzelan, Dan

To: Shireman, Bob

Sent: Mon Jan 25 11:41:09 2010

Subject: RE: Exclusion of living expenses from cost of attendance

Are you back in the office today?

From: Shireman, Bob

Sent: Monday, January 25, 2010 11:55 AM

To: Madzelan, Dan

Subject: Fw: Exclusion of living expenses from cost of attendance

Dan:
-Bob

From: Jenkins, Harold

To: Shireman, Bob

Cc: Marinucci, Fred; Wanner, Sarah; Yuan, Georgia

Sent: Mon Jan 25 10:51 :29 2010

Subject: Exclusion of living expenses from cost of attendance

Harold
37

From: Wanner, Sarah

Sent: Monday, January 25, 2010 10:28 AM

To: Finley, Steve; Jenkins, Harold; Siegel, Brian; Marinucci, Fred; Sann, Ronald

20 USC 108711 , in defining cost of attendance, provides as follows:

(5) for a student engaged in a program of study by correspondence, only tuition and fees and, if required,
books and supplies, travel, and room and board costs incurred specifically in fulfilling a required period of
residential training;
(10) for a student receiving all or part of the student's instruction by means of telecommunications
technology, no distinction shall be made with respect to the mode of instruction in determining costs;

38

From:
Sent:
To:
Cc:
Subject:

Jenkins, Harold
Friday, February 05,201012:41 PM
Shireman , Bob
Marinucci , Fred; Wanner, Sarah ; Yuan, Georgia
RE: Exclusion of living expenses from cost of attendance

Bob- f~X~

Harold
-----Original Message----From: Shireman~ Bob
Sent: Friday~ January 29~ 2010 2:26 PM
To: Jenkins~ Harold
Cc: Marinucci~ Fred; Wanner~ Sarah; Yuan~ Georgia
Subject: RE: Exclusion of living expenses from cost of attendance

39

Attached is a

re late d~

boring article I wrote.

-Bob
- - - - -Original Message----From: Jenkins~ Harold
Sent: Wednesday~ January 27~ 2010 12:45 PM
To: Shireman~ Bob
Cc : Marinucci~ Fred; Wanner~ Sarah; Yuan~ Georgia
Subject: RE: Exclusion of living expenses from cost of attendance

-----Original Message----From: Jenkins~ Harold

Sent: Wednesday~ January 27~ 2010 11:51 AM
To: Shireman~ Bob
Cc : Marinucci~ Fred; Wanner~ Sarah; Yuan~ Georgia
Subject: RE: Exclusion of living expenses from cost of attendance
Under section 472(3)~ "cost of attendance" includes "an allowance (as determined by the
institution) for room and board costs incurred by the student . .

-----Original Message----From: Shireman~ Bob

Sent: Monday~ January 25~ 2010 10:24 PM
To: Jenkins~ Harold
Cc : Marinucci, Fred; Wanner, Sarah; Yuan~ Georgia
Subject: RE: Exclusion of living expenses from cost of attendance
Thanks.

Let me rephrase.

-Bob
Robert Shireman
Deputy Undersecretary
U.S. Department of Education
(202) 260-0101
From: Jenkins, Harold
Sent: Monday, January 25, 2010 11:51 AM
To: Shireman, Bob
Cc: Marinucci~ Fred; Wanner~ Sarah; Yuan~ Georgia
Subject: Exclusion of living expenses from cost of attendance

41

Harold
From: Wanner~ Sarah
Sent: Monday~ January 25~ 2010 10:28 AM
To: Finley~ Steve; Jenkins~ Harold; Siegel~ Brian;
20 USC 108711

in defining cost of

attendance~

Marinucci~

Fred;

Sann~

Ronald

provides as follows:

(5) for a student engaged in a program of study by correspondence~ only tuition and fees and~
if required~ books and supplies~ travel~ and room and board costs incurred specifically in
fulfilling a required period of residential training; . . .
(10) for a student receiving all or part of the student's instruction by means of
telecommunications technology~ no distinction shall be made with respect to the mode of
instruction in determining costs;

42

Subject:
Location:

Meeting with Julie Shroyer re consumer protection

Bob's office

Start:
End:
Show Time As:

Fri 1/22/2010 9:00AM

Fri 1/22/2010 9:30AM
Tentative

Recurrence:

(none)

Meeting Status:

Not yet responded

Organizer:
Required Attendees:

Shireman , Bob
Jenkins, Harold; Manheimer, Ann

Harold, please let me know if you can attend this meeting or if there is someone else we should invite. Thanks!
Meeting Participants:

Gregory Cappelli, Co-Chief Executive Officer

Joseph D'Amico, President
Terri Bishop, Executive Vice President
Julie Shroyer, Sr VP, Wheat GR {Consultant to Apollo/University of Phoenix)
Purpose:
To discuss ideas for implementing various student/consumer protections (e.g., related to borrowing practices,
disclosures, etc.) and the technology that Apollo is developing to support compliance and academic quality and
innovation.
When:
Preferably as soon as possible or within the next few weeks.

43

From:
Sent:
To:
Subject:

Arsenault, Leigh
Monday, January 11, 2010 7 :51 PM
Shireman , Bob
Fw: Hello and Meeting Request

FYI , I'll reschedule with Julie.

Sent using BlackBerry

From: Julie Shroyer <jshroyer@wheatgr.com>

To: Arsenault, Leigh
Sent: Mon Jan 1117:02:54 2010
Subject: Re: Hello and Meeting Request
Dear Leigh,
I am terribly sorry to do this. I just got a call and as it turns out the Apollo representatives cannot make it to Washington
on Jan. 14. They have asked me to go back to Jan. 22 at 9 am. They could also do Jan. 19 or 21 if for any reason those
times are better for Bob.
I also wanted to confirm that your office is located at 400 Maryland Ave SW
Room 7E300
Washington, DC 20202
(202) 401- 8187

Thanks so much for your patience.

Julie

On 1/11/10 5:09 PM, "Arsenault, Leigh" <Leigh.Arsenault@ed.gov> wrote:

Thanks Julie. Actually, you will need an escort into the building so if you arrive and provide the receptionist with my
name then I will escort you upstairs. It's a quick process so you will probably only need 5-10min of lead time.
And feeling much better, thanks!
Best,
Leigh

Office of the Under Secretary

U.S. Department of Education
leigh.arsenault@ed.gov <mailto:Bryce.McKibben@ed.gov>

From: Julie Shroyer [mailto:jshroyer@wheatgr.com)

Sent: Monday, January 11, 2010 11:34 AM
To: Arsenault, Leigh
Subject: Re: Hello and Meeting Request
44

Leigh,
Thanks so much. Can you tell me your exact location (address & room num ber, phone number)? Also, what time do you
recommend that we arrive on the 14th in terms of getting through security? I really appreciate your assistance and will
ask for you when we arrive. I will also be back to you shortly with f inal list of participants. You can reach me at my
__....
office (703) 271-8770 or my eel

_____

Best,
Julie
PSI hope you're feeling better today.

On 1/11/10 11:28 AM, "Arsenault, Leigh" <Leigh.Arsenault@ed.gov> wrote:

Yes, I just added the original t ime to his calendar now. thanks so much Julie. Please give the receptionist my name upon
arrival and I will greet you downstairs.
Leigh

Office of the Under Secretary

U.S. Department of Education
leigh .arsenault@ed .gov <mailto:Bryce.McKibben@ed.gov>

From: Julie Shroyer [mailto:jshroyer@wheatgr.com]

Sent: Monday, January 11, 2010 11:24 AM
To: Arsenault, Leigh
Subject: Re: Hello and Meeting Request
Hi Leigh,
Thanks so much for your follow-up. Bob originally offered us Jan. 14 at 3:00pm. Is that time still available? I just
learned this morning that Jan. 14 will now work better than Jan. 22.
Thanks,
Julie

On 1/11/10 8:53AM, "Arsenault, Leigh" <Leigh.Arsenault@ed.gov> wrote:

Hi Ju lie:
Bob is available the following times (assuming he is not picked for jury duty):
9am

lOam
lpm
2pm
Please let me know if any of these times work for you. Thanks!
Leigh

45

Office of the Under Secretary

U.S. Department of Education
leigh.arsenault@ed.gov <mailto:Bryce.McKibben@ed.gov>

From: Shireman, Bob

Sent: Friday, January 08, 2010 4:44 PM
To: 'jshroyer@wheatgr.com <jshroyer@wheatgr.com> <jshroyer@wheatgr.com> '
Cc: Arsenault, leigh
Subject: Re: Hello and Meeting Request

Jan 22? (as long as I don't get picked for jury duty on the 20th). You can follow up with leigh but she's out sick today.

From: Julie Shroyer <jshroyer@wheatgr.com>

To: Shireman, Bob
Cc: Arsenault, leigh
Sent: Fri Jan 08 15:19:35 2010
Subject: Re: Hello and Meeting Request
Bob,
~
Do you have any time available the following week Jan.
19 or later? If not , we will make the 14th work. I'm happy to arrange logistics and specifics through your assistant if
preferred.

~--~--~~------~~~~----~--~~~------~

Thanks for you kind consideration.

Julie

On 1/8/10 1:02 PM, "Shireman, Bob" <Bob.Shireman@ed.gov> wrote:

Hi JulieHow about next Thursday afternoon the 14th, 3 or 4 pm?
-Bob

From: Julie Shroyer [mailto:jshroyer@wheatgr.com]

Sent: Thursday, January 07, 2010 12:54 PM
To: Shireman, Bob
Subject: Hello and Meeting Request
Importance: High
Dear Bob,
I hope the new year is treating you well. Just left you a voice mail message but realize it may be easier to send you a
note via email. Would love to tell you about my family's visit to our friends the Kim/Paterson family in the Netherlands
(Dec. 26-Jan. 1). Feel free to have Lucinda call me too because she may be even more interested. All of us should figure
out how to do time overseas.
As I indicated in my voice mail, I would also like to submit a formal meeting request for Apollo. We are hoping that you
46

may have time in your schedule sometime over the next few weeks. Here are the specifics:
Meeting Participants:
Greg Cappelli, CEO, Apollo
Terri Bishop, Director/Vice President External Affairs, Apollo
Julie Shroyer, Sr VP, Wheat Government Relations {consultant to Apollo/University of Phoenix)
Purpose:
To discuss ideas for implementing various student/consumer protections {e.g., related to borrowing practices,
disclosures, etc.) and the technology t hat Apollo is developing to support compliance and academic quality and
innovation.
When:
Preferably as soon as possible or within the next few weeks.
Thank you so much for your consideration of the request. I look forward to hearing from you and seeing you soon.
Best,
Julie
Julie E. Shroyer
SeniorVP
Wheat Government Relations
1201 S. Eads Street, Suite Two
Arlington, VA 22202
{703) 271-8760
jshroyer@wheatgr.com

47

From:
Sent:
To:
Subject:

Julie Shroyer Ushroyer@wheatgr.com]

Wednesday, January 20, 2010 7 :03AM
Arsenault, Leigh
Re: Hello and Meeting Request

Hi Leigh,
Can you please confirm that we have the correct address below:
Bob Shireman
Deputy Under Secretary, Office of the Under Secretary
400 Maryland Ave SW
Room 7E300
Washington, DC 20202
Also, what is your correct phone number so that we can call you from downstairs?
Thanks,
Julie

On 1/13/10 12:34 PM, "Arsenault, Leigh" <Leigh.Arsenault@ed.gov> wrote:

Hi Julie: We are on. The meeting is scheduled f or 30 minutes. Thanks again. We look forward to seeing you next week.
Best,
Leigh

Office of the Under Secretary

U.S. Department of Education
leigh.arsenault@ed.gov <mailto:Bryce.McKibben@ed.gov>

From: Julie Shroyer (mailto:jshroyer@wheatgr.com]

Sent: Tuesday, January 12, 2010 8:54 PM

To: Arsenault, leigh

Subject: Re: Hello and Meeting Request

I just got the final OK to confirm the meeting on Jan. 22 @ 9 am for the individuals listed below from Apollo Group. Can
you tell me how much time we should allow for our meeting? We were hoping for between 30 minutes to one hour
depending on Bob's schedule. Please let us know so they can use the time wisely.

Gregory Cappelli, Co-Chief Executive Officer

Joseph D'Amico, President
Terri Bishop, Executive Vice President
Julie Shroyer, Sr VP, Wheat GR (Consultant to Apollo/University of Phoenix)
Thanks again,

48

Julie

On 1/12/10 6:12PM, "Arsenault, Leigh" <Leigh.Arsenault@ed.gov> wrote:

Hi Julie, I did receive your email. Thanks. Let's do 9am on Jan 22nd if that still works for you. Please let me know.
Best,
Leigh

Office of the Under Secretary

U.S. Department of Education
leigh.arsenault@ed.gov <mailto:Bryce.McK ibben@ed.gov>

From: Julie Shroyer [mailto:jshroyer@wheatgr.com]

Sent: Tuesday, January 12, 2010 3:25 PM
To: Arsenault, Leigh
Subject: FW: Hello and Meeting Request
Hi Leigh,
I wanted to be sure that you received my email below from yesterday. I regret that we are unable to do the meeting on
Jan. 14. I'm hoping we're still able to find an alternative time next week. I look forward to hearing from you and
appreciate your ongoing assistance.
Julie

------ Forwarded Message

From: Julie Shroyer <jshroyer@wheatgr. com>
Date: Mon, 11 Jan 2010 18:02:54 -0500
To: "Arsenault, Leigh" <Leigh.Arsenault@ed.gov>
Conversation: Hello and Meeting Request
Subject: Re: Hello and Meeting Request
Dear Leigh,
I am terribly sorry to do this. I just got a call and as it turns out the Apollo representatives cannot make it to Washington
on Jan. 14. They have asked me to go back to Jan. 22 at 9 am. They could also do Jan. 19 or 21 if for any reason those
times are better for Bob.
I also wanted to confirm that your office is located at 400 Maryland Ave sw
Room 7E300
Washington, DC 20202
(202) 401-8187
Thanks so much for your patience.
Julie

On 1/11/10 5:09PM, "Arsenault, Leigh" <Leigh.Arsenault@ed.gov> wrote:

Thanks Julie. Actually, you will need an escort into the building so if you arrive and provide the receptionist with my
49

name then I will escort you upstairs. It's a quick process so you will probably only need 5- lOmin of lead time.
And feeling much better, thanks!
Best,
Leigh

Office of the Under Secretary

U.S. Department of Education
leigh.arsenault@ed.gov <mailto:Bryce.McKibben@ed.gov>

From: Julie Shroyer [mailto:jshroyer@wheatgr.com]

Sent: Monday, January 11, 2010 11:34 AM

To: Arsenault, Leigh

Subject: Re: Hello and Meeting Request

Leigh,
Thanks so much. Can you tell me your exact location {address & room number, phone number)? Also, what time do you
recommend that we arrive on the 14th in terms of getting through security? I really appreciate your assistance and wil l
ask for you when we arrive. I will also be back to you shortly with final list of participants. You can reach me at my
office (703) 271-8770 or my cell (202) 549-6862.
Best,
Julie
PSI hope you're feeling better today.

On 1/11/10 11:28 AM, "Arsenault, Leigh" <Leigh.Arsenault@ed.gov> wrote:

Yes, I just added the original time to his calendar now. thanks so much Julie. Please give the receptionist my name upon
arrival and I will greet you downstairs.
Leigh

Office of the Under Secretary

U.S. Department of Education
leigh.arsenault@ed.gov <mailto:Bryce.McKibben@ed.gov>

From: Julie Shroyer [mailto:jshroyer@wheatgr.com]

Sent: Monday, January 11, 2010 11:24 AM

To: Arsenault, Leigh

Subject: Re: Hello and Meeting Request

Hi Leigh,
Thanks so much for your follow-up. Bob originally offered us Jan. 14 at 3:00pm. Is that time still available? I just
learned this morning that Jan. 14 will now work better than Jan. 22.
50

Thanks,
Julie

On 1/11/10 8:53AM, "Arsenau lt, Leigh" <Leigh.Arsenault@ed.gov> wrote:

Hi Julie:
Bob is available the following times (assuming he is not picked for jury duty):
9am

lOam
lpm
2pm
Please let me know if any of these times work for you. Thanks!
Leigh

Office of the Under Secretary

U.S. Department of Education
leigh.arsenault@ed.gov <mailto:Bryce.McKibben@ed.gov>

From: Shireman, Bob

Sent: Friday, January 08, 2010 4:44 PM
To: ' jshroyer@wheatgr.com <jshroyer@wheatgr.com> <jshroyer@wheatgr.com> <jshroyer@wheatgr.com>
<jshroyer@wheatgr.com> '
Cc: Arsenault, leigh
Subject: Re: Hello and Meeting Request

Jan 22? (as long as I don't get picked for jury duty on the 20th). You can follow up w ith leigh but she's out sick today.

From: Julie Shroyer < jshroyer@wheatgr.com>

To: Shireman, Bob
Cc: Arsenault, leigh
Sent: Fri Jan 08 15:19:35 2010
Subject: Re: Hello and Meeting Request

Bob,
.....__ _ _ _ _...;.;;.;._ _ _ _ _....;.o;.;.__..._ _ _ _ _ _ _ _ _-'-..., Do you have any time available the following week Jan.

19 or later? If not, we will make the 14th work. I'm happy to arrange logistics and specifics through your assistant if
preferred.
Thanks for you kind consideration.
Julie

51

On 1/8/10 1:02 PM, "Shireman, Bob" <Bob.Shireman@ed.gov> wrote:

Hi JulieHow about next Thursday afternoon the 14th, 3 or 4 pm?
-Bob

From: Julie Shroyer [mailto:jshroyer@wheatgr.com]

Sent: Thursday, January 07, 2010 12:54 PM
To: Shireman, Bob
Subject: Hello and Meeting Request
Importance: High

Dear Bob,
I hope the new year is treating you well. Just left you a voice mail message but realize it may be easier to send you a
note via email. Would love to tell you about my family's visit to our friends the Kim/Paterson family in the Netherlands
(Dec. 26-Jan. 1). Feel free to have Lucinda call me too because she may be even more interested. All of us should figure
out how to do time overseas.
As I indicated in my voice mail, I would also like to submit a formal meeting request for Apollo. We are hoping that you
may have t ime in your schedule sometime over the next few weeks. Here are the specifics:
Meeting Participants:
Greg Cappelli, CEO, Apollo
Terri Bishop, Director/Vice President External Affairs, Apollo
Julie Shroyer, Sr VP, Wheat Government Relations (consultant to Apollo/University of Phoenix)
Purpose:
To discuss ideas for implementing various student/consumer protections (e.g., related to borrowing practices,
disclosures, etc.) and the technology that Apollo is developing to support compliance and academic quality and
innovation.
When :
Preferably as soon as possible or within the next few weeks.
Thank you so much for your consideration of the request. I look forward to hearing from you and seeing you soon.
Best,
Julie
Julie E. Shroyer
Senior VP
Wheat Government Relations
1201 S. Eads Street, Suite Two
Arlington, VA 22202
(703) 271-8760
jshroyer@wheatgr .com

------ End of Forwarded Message

52

From:
Sent:

To:
Cc:
Subject:

Shireman, Bob
Monday, January 11, 2010 5:22 PM
Woodward, Jennifer
Wolff, Russell
RE: Articles on UOP PRR

Thanks for the heads up. They've just arranged a meeting with me this Thursday; I've invited Harold so y'all can decide
who to send. Or whom.

From: Woodward, Jennifer

Sent: Monday, January 11, 2010 3:02 PM
To: Shireman, Bob
Cc: Wolff, Russell
Subject: Articles on UOP PRR
Bob:
FYI, the link to the Reuters item below says that UOP said that it may be required to post an LOC as large as $125 million
UNLESS it is granted relief from regulator re uirements b the De artment and that it lans to talk with the
Department regard ing the regulations.

Jennifer

Apollo Repaid Education Aid Late, Gave Lax Counseling (Update3)

January 08, 2010, 04:43PM EST
By John Lauerman
Jan. 8 (Bloomberg)-- Apollo Group Inc., owner of the largest for-profit university in the U.S. , was late repaying
federal financial aid money and should better inform students about the costs, requirements and details of its
programs, according to a government report cited by the company.
The findings by the Department of Education will cost Apollo about $1.5 million, the Phoenix-based company
said yesterday in a statement. Apol lo fell $3.44 or 5.4 percent, to $60.50 at 4:30p.m. in Nasdaq Stock Market
composite trading today, the biggest drop since Oct. 28.
Colleges are required to return at least some of the federal financial aid, called Title N funds, when students
fail to complete enough of a course paid for with the money . A preliminary report from the Education
Department provided to Apollo on Dec. 31 cited " untimely return of unearned Title IV funds" for more than 10
percent of sampled students, the company ' s statement said.
The Education Department report also " expressed a concern that some students enroll and begin attending
classes before completely understanding the implications of enrollment, including their eligibility for student
financial aid," Apollo said in a filing yesterday with the Securities and Exchange Commission.

53

Students should be advised more extensively before they commit to a degree program, the Education
Department said, according to the filing. The department suggested counseling should cover the costs students
will incur, the transferability of academic credits to other institutions, how many credits they' ll need to
complete their program of study, and the availability of additional financial aid for each year of their degree
program, the filing said.
Tighter Rules

" I think the stock fell due to investor concerns over the program-review findings and the concern that was
expressed in the report," Trace Urdan, an analyst at Signal Hill Capital Group in San Francisco said yesterday in
a telephone interview. He said market reaction was overblown. Urdan recommends investors buy Apollo shares
and doesn ' t own them .
Jeffrey Silber, an analyst at BMO Capital Markets in New York, cut his rating on Apollo to " market perform"
from "outperform."
San Diego-based Bridgepoint Education Inc., a for-profit provider of college classes, fell 15 cents, or less than a
percent, to $15.42. Grand Canyon Education Inc., based in Phoenix, declined 16 cents, or less than a percent, to
$19.43. Corinthian Colleges Inc., based in Santa Ana, California, fell 16 cents, or 1.2 percent, to $13.78. Strayer
Education Inc., based in Arlington, Virginia, declined $3 .34, or 1.5 percent, to $215.98.
The U.S. government is considering tighter rules against paying recruiters for enrollments and giving
misleading information to prospective students, and may require for-profit schools to show how much their
programs increase graduates ' earnings, according to department documents published as part of a process to
develop new rules for colleges.
It is also examining institutions that increasingly rely on federal financial aid, deputy undersecretary Robert
Shireman said in a September interview. Apollo operates the University ofPhoenix, which has an enrollment of
about 455,600 students. Phoenix derived 86 percent of its $3.77 billion in revenue in fiscal 2009 from Education
Department grants and loans to students, up from 48 percent in 2001, according to its annual 10-K filing Oct.
27.
Late Payments

The governrnent review said the company repaid government money late, not that it failed to repay the funds,
said Charles Edelstein, Apollo' s co-chief executive officer, on a conference call yesterday with investors and
analysts.
He said the company has introduced a pilot assessment program of potential students' skills to best determine
which are most likely to succeed in its programs. Apollo has also introduced a student debt calculator to help
potential enrollees understand what they can safely borrow, the company said.
The university ' s average annual tuition is about $10,000 to $15,000, depending on courses taken and location,
according to the Phoenix Web site.
The Education Department conducted its review of the University of Phoenix in February, Apollo said in the
statement.
If an audit or program review concludes an institution made late refunds of financial aid money to 5 percent or
more of the students in the sample, the institution must submit an irrevocable letter of credit equal to 25 percent
of the total dollar amount of Title IV refunds paid by the institution in the previous fiscal year, according to the
54

Education Department. For Apollo, this would amount to about $125 million, which would be posted by Jan.
30, the company said.
Related News and Information: For education news: {NI EDU BN <GO>} Stories on U .S. stocks: {NI USS
<GO>} Top stories on stocks: {TOP STK <GO>} Global market map: {M:M.AP <GO>}
--With assistance from Daniel Golden in Boston. Editors: Jonathan Kaufman, Robin D. Schatz
To contact the reporter on this story: John Lauerman in Boston at+ 1-617-210-4630 or
jlauerman@bloomberg.net.
To contact the editor responsible for this story: Jonathan Kaufman at + 1-617-210-4638 or
Jkaufmanl7@bloomberg.net.
Related articles:

Wall Street Journal: Apollo Group Profit Up; Rev Policy Questioned Anew
Reuters: Apollo Shares Down on Federal Review Report

55

From:
Sent:
To:

Cc:
Subject:
Attachments:

Babyak, Stephanie
Monday, August 31 , 2009 5:1oPM
Smith , Zakiya; Shireman, Bob
Glickman, Jane
FW: University of Phoenix
Univerisity of Phoenix Funding.xls

FYI The University of Phoenix is the largest recipient of Title IV Federal Student Aid.

56

Title IV Program Funding by Award Year

School Participation Team: San Francisco/Seattle (09-10)
School: University of Phoenix (OPEID: 02098800)
City/State: Phoenix, AZ
Funding by Awa rd '
Title IV Program
Federal Pell Grant
Academic Competitiveness Grant
SMART Grant
FFELP Stafford Subsidized
FFELP Stafford Unsubsidized
FFELP PLUS
FFELP Grad Professional PLUS

2oo1-2oo8

2oo6-2oo1

2005-2006

398,259,817
114,446

244,806 ,795
54,250

133,674,219
0

3,483,171

4,054 ,193

1 ,253,064,556
871 ,704,204
1 ,532,033,981 1'129,633,395
16,514,040
13,057,636
7,003,996
2,401 ,476

731 ,221 '143

951,279,707
9,240,379

FDLP Stafford Subsidized

0
0

FDLP Stafford Unsubsidized

FDLP PLUS
FDLP Grad Professional PLUS

0
0
0

0
0

0
0

217,500
4,381 ,477

311 ,644
4,819,044

170,693
5,935,635

Federal Perkins Loans

Federal Supplemental Educational Opportunity Grant
Federal Work Study
Total Title IV

3,215,072,984 2,270,842,637 1,831,521,776

Source: Annual Funding Summaries as the January following the end of each awa,

Year

2004-2005

128,688,956
0
0
713,917,617
933,874,527
6,927,453
0
0
0

2003-2004

108,139,179
0
0
581,886,361
770,200,872
2,973,957
0
0
0

0
0
0
0
560,732
632,736
4,506,273
3,691 ,507
0
0
1,788,475,558 1,467,524,612

rd year.

From:
Sent:
To:
Subject:

Kanter, Martha
Monday, December 14, 2009 6:38AM
Shireman , Bob
University of Phoenix

Mart ha Kanter
Under Secretary
U.S. Department of Education
"The future belongs to those who believe in the beauty of their dreams!"
-- Eleanor Roosevelt

From:
Sent:
To:
Subject:
Attachments:

Smith, Zakiya
Wednesday, December 02, 2009 4:39 PM
Arsenault, Leigh ; Martin, Phil
Fw: Letter from 29 organizations on private student loans and the CFPA
Coalition Letter to Sens Dodd and Shelby- Final_12-2-09.pdf

FYI

From: Pauline Abernathy <pabernat~ticas.org>

_ _
who.eop.gov J j
l@who.eop.gov>; Madzelan, Dan; Shireman, Bob; Smith, Zakiya;
Gomez, Gabriella; Gordon, Robert M.
@omb.eop.gov>; Eric.Stein@do.treas.gov
< Eric.Stein@do. treas.gov>; Michael. Barr@do.treas.gov <Michael. Barr@do. treas.gov>; Peggy.Twohig@do. treas.gov
<Peggy.Twohig@do.treas.gov>
Cc: Connie Jameson <connie.jameson@nelsonmullins.com>; Lauren Asher <LAsher@ticas.org>; Luke Klipp
< lklipp@ticas.org >
Sent: Wed Dec 02 14:48:18 2009
Subject: FW: Letter from 29 organizations on private student loans and the CFPA

To:

FYI--Attached and below is the coalition letter sent to Dodd and Shelby praising the draft Senate bill
for including all private student loans under the CFPA's authority.

From: Luke Klipp

Sent: Wednesday, December 02, 2009 3:29PM

To: Luke Klipp

Cc: Pauline Abernathy; 'Connie Jameson'; Lauren Asher

Subject: Letter from 29 organizations on private student loans and the CFPA
Attached and below is a letter to Senate Banking Chairman Chris Dodd and Ranking Member Richard Shelby from 29
organizations, representing consumers, civil rights organizations, students, colleges and taxpayers, applauding the
inclusion of all private student loans under the CFPA's authority in the Chairman's draft bill. It is critically important that
the CFPA retain full authority over all private student loans, regardless of the institution offering the loan. Thank you for
your attention to this important issue.
All members of the Senate Banking Committee are cc'd on this letter.

December 2, 2009
The Honorable Christopher Dodd, Chairman
Committee on Banking, Housing and Urban Affairs
United States Senate
Washington, DC 20510
The Honorable Richard Shelby, Ranking Member
Committee on Banking, Housing and Urban Affairs
United States Senate
Washington, DC 20510
Dear Chairman Dodd and Ranking Member Shelby:
2

As advocates for consumers, students, higher education, civil rights and taxpayers, we applaud the Chairman' s
inclusion of all private student loans under the jurisdiction of the Consumer Financial Protection Agency
(CFPA). As legislation establishing the CFPA moves forward, it is critically important that the CFPA retain
full authority over all private student loans.
Private student loans are one of the riskiest ways to pay for college, yet a large number of students have private
student loans as well as, or instead of, federa1 student loans. Private student loans are expensive, mostly
variable-rate loans that cost more for those who can least afford them . They lack the fixed rates, consumer
protections and flexible repayment options of federal student loans, and are not financial aid any more than a
credit card is when used to pay for textbooks or tuition. Witnesses before the Senate Banking Committee have
described the private student loan market as "the wild west" of student lending, and this market has still not
received the attention needed to adequately protect consumers.
At for-profit colleges, which are attended disproport.ionately by African-American and Latino students, 42
percent of undergraduate students took out private loans in 2007-08. Several large for-profit colleges, including
Corinthian Colleges, Inc., ITT Educational Services Inc., and Career Education Corporation, make private loans
directly to their students. Corinthian Colleges has told investors that it plans to make $130 million in loans to
its students this year alone, even though it expects 56 to 58 percent of these borrowers to default. The company
considers these loans good investments because they will increase enrollment and with it a profitable flow of
federal grant and loan dollars that outweighs the planned write-offs. Severa] for-profit colleges, such as DeVry
University, also offer high-interest open-end credit to their students.
Unlike other retail businesses, large for-profit colleges can receive up to 90 percent of their revenues from
federal grants and loans. Therefore, while other businesses decrease their lending when defaults rise, some forprofit colleges have increased their lending despite double-digit default rates.
To effectively protect consumers, the CFPA must have full authority over private student loans regardless of the
institution offering them . For consumers, a private student loan can pose the same serious risks whether issued
by a financial institution or by a school. For this reason, the CFPA needs to apply and enforce standards based
upon the product and not the issuing institution.
We are grateful for the Chairman' s clear placement of a11 private student loans within the CFPA ' s authority, and
urge you to ensure it retains this authority. Thank you for your leadership and consideration of our views.
Links to additional information about private student loans, including loans by for-profit colleges, are provided
below. Should you or your staff have any questions, please contact Pauline Abernathy with the Institute for
College Access & Success at 510-559-9509.
Sincerely,
American Association of Collegiate Registrars and Admissions Officers
American Association of Community Colleges
American Association of State Colleges and Universities
American Association of University Women
American Federation of Teachers
Americans for Fairness in Lending
Campus Progress Action
Center for Responsible Lending
Consumer Action
Consumer Federation of America
Consumer Watchdog
Demos: A Network for Ideas & Action
3

The Greenlining Institute

Institute for College Access & Success and the Project on Student Debt
NAACP
National Association for Equal Opportunity in Higher Education
National Association of College Admission Counseling
National Association of Consumer Advocates
National Association of Consumer Bankruptcy Attorneys
National Center for Public Policy and Higher Education
National Consumer Law Center (on behalf of its low income clients)
National Consumers League
National Council ofLa Raza
National Education Association
New York Public Interest Resource Group (NYPIRG)
U.S. Public Interest Resource Group (U.S. PIRG)
United States Student Association
USAction
Woodstock Institute
cc: Members of the Senate Committee on Banking, Housing and Urban Affairs

Fmther information about loans made by for-profit colleges and private loans:
" An Education in Student Loans," by David A. Graham, Newsweek, November 20, 2009:
http://www.newsweek.com/id/223727

"Leveraging Up to Learn," by Bill Alpert, Barron 's, November 9, 2009:

http://online.barrons.com/article/SB 125755384448934953 .html #articleTabs panel article%3D 1
"The Subprime Student Loan Racket," by Stephen Burd, Washington Monthly , November/December 2009:
http://www.washingtonmonthly.com/features/2009/0911 .burd.html
"Stimulus Wreckage: Despite having been accused of decepti ve business practices by the attorney general,
former students, and ex-employees, Corinthian Colleges are getting millions in federal stimulus dollars," SF
Weekly, September 30, 2009: http://www.sfweekly.com/2009-09-30/news/stimulus-wreckage/
Testimony of Michael Calhoun, President of Center for Responsible Lending, before House Committee on
Financial Services, September 30, 2009: http://www.responsiblelending.org/mortgage-lending/policylegislation/congress/cfpa-calhoun-testimony.pdf
Testimony ofLauren Asher, President of The Institute for College Access & Success before the House
Judiciary Committee Subcommittee on Commercial and Administrative Law, September 23, 2009:
http://judiciary.house.gov/hearings/pdf/ Asher090923. pdf
"For-Profit Colleges' Increased Lending Prompts Concerns," by Justin Pope, The Associated Press, August 15,
2009: http://www.usatoday.com/news/education/2009-08-15-profit-college-lending N.htm
" Private Loans: Facts and Trends," The Institute for College Access & Success, August 2009:
http://projectonstudentdebt.org/files/pub/private loan facts trends 09.pdf
"Corinthian Colleges, Inc. F4Q09 (Qtr End 06/30/09) Earnings Call Transcript:"
http://seekingalpha.com/article/ 158257-corinthian-colleges-inc-f4g09-qtr-end-06-30-09-eamings-calltranscript?source=bnet

Luke H. Klipp
Policy Analyst
The Institute for College Access & Success
2054 University Avenue, Suite 500
Berkeley, CA 94704
Phone : (510) 559-9509, ext. 316
Fax: (510) 845-4112
LKiipp@ticas.org

December 2, 2009

The Honorable Christopher Dodd, Chairman

Committee on Banking, Housing and Urban Mfairs
United States Senate
Washington, DC 20510
The Honorable Richard Shelby, Ranking Member
Committee on Banking, Housing and Urban Mfairs
United States Senate
Washington, DC 20510

Dear Chairman Dodd and Ranking Member Shelby:

As advocates for consumers, students, higher education, civil rights and taxpayers, we applaud
the Chairman' s inclusion of all private student loans under the jurisdiction of the Consumer
Financial Protection Agency (CFPA). As legislation establishing the CFPA moves forward, it is
critically important that the CFPA retain full authority over all private student loans.
Private student loans are one of the riskiest ways to pay for college, yet a large number of
students have private student loans as well as, or instead of, federal student loans. Private
student loans are expensive, mostly variable-rate loans that cost more for those who can least
afford them. They Jack the fixed rates, consumer protections and flexible repayment options of
federal student loans, and are not financial aid any more than a credit card is when used to pay
for textbooks or tuition. Witnesses before the Senate Banking Committee have described the
private student loan market as " the wild west" of student lending, and this market has st111 not
received the attention needed to adequately protect consumers.
At for-profit colleges, which are attended disproportionately by African-American and Latino
students, 42 percent of undergraduate students took out private loans in 2007-08. Several large
for-profit colleges, including Corinthian Colleges, Inc., ITT Educational Services Inc., and
Career Education Corporation, make private loans directly to their students. Corinthian Colleges
has told investors that it plans to make $130 million in loans to its students this year alone, even
though it expects 56 to 58 percent of these borrowers to default. The company considers these
loans good investments because they will increase enrollment and with it a profitable flow of
federal grant and loan dollars that outweighs the planned write-offs. Several for-profit colleges,
such as DeVry University, also offer high-interest open-end credit to their students.
Unlike other retail businesses, large for-profit colleges can receive up to 90 percent of their
revenues from federal grants and loans. Therefore, while other businesses decrease their lending
when defaults rise, some for-profit colleges have increased their lending despite double-digit
default rates.

To effectively protect consumers, the CFPA must have full authority over private student loans
regardless of the institution offering them. For consumers, a private student loan can pose the
same serious risks whether issued by a financial institution or by a school. For this reason, the
CFPA needs to apply and enforce standards based upon the product and not the issuing
institution.
We are grateful for the Chairman's clear placement of all private student loans within the
CFPA ' s authority, and urge you to ensure it retains this authority. Thank you for your leadership
and consideration of our views. Links to additional information about private student loans,
including loans by for-profit colleges, are provided below. Should you or your staff have any
questions, please contact Pauline Abernathy with the Institute for College Access & Success at
510-559-9509.
Sincerely,
American Association of Collegiate Registrars and Admissions Officers
American Association of Community Colleges
American Association of State Colleges and Universities
American Association ofUniversity Women
American Federation of Teachers
Americans for Fairness in Lending
Campus Progress Action
Center for Responsible Lending
Consumer Action
Consumer Federation of America
Consumer Watchdog
Demos: A Network for Ideas & Action
The Greenlining Institute
Institute for College Access & Success and the Project on Student Debt
NAACP
National Association for Equal Opportunity in Higher Education
National Association of College Admission Counseling
National Association of Consumer Advocates
National Association of Consumer Bankruptcy Attorneys
National Center for Public Policy and Higher Education
National Consumer Law Center (on behalf of its low income clients)
National Consumers League
National Council of La Raza
National Education Association
New York Public Interest Resource Group (NYPIRG)
U.S. Public Interest Resource Group (U.S. PIRG)
United States Student Association
US Action
Woodstock Institute
cc: Members of the Senate Committee on Banking, Housing and Urban Affairs

Further information about loans made by for-profit colleges and private loans:
" An Education in Student Loans," by David A. Graham, Newsweek, November 20, 2009:
http://www.newsweek.com/id/223727

"Leveraging Up to Learn," by Bill Alpert, Barron 's, November 9, 2009:

http://online.barrons.com/article/SB 125755384448934953.html#articleTabs panel article%3D1
" The Subprime Student Loan Racket," by Stephen Burd, Washington Monthly,
November/December 2009: http://www.washingtonmonthly.com/features/2009/09ll .burd.html
" Stimulus Wreckage: Despite having been accused of deceptive business practices by the
attorney general, former students, and ex-employees, Corinthian Colleges are getting millions in
federal stimulus dollars," SF Weekly, September 30, 2009: http://www.sfweekly.com/2009-0930/news/stimulus-wreckage/
Testimony of Michael Calhoun, President of Center for Responsible Lending, before House
Committee on Financial Services, September 30, 2009:
http://www.responsiblelending.org/mortgage-lending/policy-legislation/congress/cfpa-calhountestimony.pdf
Testimony ofLauren Asher, President of The Institute for College Access & Success before the
House Judiciary Committee Subcommittee on Commercial and Administrati ve Law, September
23, 2009: http://judiciary.house.gov/hearings/pdf/Asher090923 .pdf
"For-Profit Colleges' Increased Lending Prompts Concerns," by Justin Pope, The Associated
Press, August 15, 2009: http://www.usatoday.com/news/education/2009-08-15-profit-collegelending N.htm
"Private Loans: Facts and Trends," The Institute for College Access & Success, August 2009:
http://projectonstudentdebt.org/files/pub/private loan facts trends 09.pdf
" Corinthian Colleges, Inc. F4Q09 (Qtr End 06/30/09) Earnings Call Transcript:"
http :1I seekingalpha.com/arti cle/15 825 7-corinthian-coli eges-inc-f4q09-qtr -end-06-3 0-09earni ngs-call-transcri pt? source=bnet

From:
Sent:

To:
Subject:

Kanter, Martha
Wednesday, November 18, 2009 11 :28 AM
Rogers, Ma rgot; Miller, Tony; Peter Cunningham
Fwd : University of Phoen ix full-page ad in today's Wash. Post

Martha Kanter
Under Secretary
U.S. Department of Education
"The future belongs to those who beli eve in the beauty of thei r dreams!"
--Eleanor Roosevelt
Begin forwarded message:

From: "Shireman, Bob" <Bob.Shireman@ed.gov>

Date: November 18, 2009 10:51:00 AM EST
To: "Jenkins, Harold" <Harold.Jenkins@ed.gov>, "Rose, Charlie" <Charlie.Rose@ed.gov>
Cc: "Kanter, Martha" <Martha.Kanter@ed.gov>
Subject: RE: University of Phoenix full-page ad in today's Wash. Post
Yesterday the ad was on the back of the front section of the NY Times. ~~XOJ.

From: Jenkins, Harold

Sent: Wednesday, November 18, 2009 10:26 AM

To: Rose, Charlie; Shireman, Bob

Subject: University of Phoenix full-page ad in today's Wash. Post

Although you probably see news clips regularly, I wanted to call your attention to the
University of Phoenix's full-page ad on page A-11 of today's Post. Although nominally
addressed to Phoenix students and employees, its actual intended audience appears to
be members of Congress and other government officials. The thrust of the ad is to
describe the school's critics as people who fear change.

From:
Sent:
To:

Cc:
Subject:

Bell, Sherrie
Tuesday, October 27, 2009 2:47PM
Hillard, Dale
Wittman , Donna
RE: Neg Reg Issue #4: Incentive Compensation

-----Original Message----From: Hillard~ Dale

Sent: Tuesday~ October 27~ 2009 2:41 PM
To: Bell~ Sherrie
Cc: Wittman~ Donna
Subject: Neg Reg Issue #4: Incentive Compensation
Sherrie~

Dale Hillard
-----Original Message----From: Bell~ Sherrie
Sent: Tuesday~ October 27~ 2009 11:25 AM
To: Hillard~ Dale
Subject: RE: Incentive Compensation - Information Provided by Current Enrollment Counselors
Thanks! It may be difficult to read lengthy e-mails if I get a lot of them but I will try my
best to provide the information to the negotiators.
-----Original Message----From: Hillard~ Dale
Sent: Tuesday~ October 27~ 2009 2:17 PM
To: Bell~ Sherrie
Subject: FW: Incentive Compensation - I nformation Provided by Current Enrollment Counselors
Hi

Sherrie~

I am forwarding a couple of emails that were sent before

Dale Hillard for

SPT--San Francisco/Seattle
-----Original Message----2

From: Hillard> Dale

Sent: Tuesday> October 13> 2009 1:32 PM
To: Madzelan> Dan; Shireman> Bob; Baker> Jeff; Wolff> Russell
Cc: Henderson> Linda; Toney> Dyon; Minor> Robin; Woodward> Jennifer
Subject: FW: Incentive Compensation - Information Provided by Current Enrollment Counselors

I received the following email from Derek Hoggett. Mr. Hoggett and another University of
Phoenix employee> Mike Reid> provided information on the abuses of incentive compensation
practices at the University of Phoenix in June of this year (Information attached above).
is writing now to let the Department know that the University's practices are continuing.
am forwarding the information as I understand that there may be hearings taking place in
Congress on the subject of incentive compensation and hope that information on what is
currently taking place might be useful.

He
I

Dale Hillard
School Participation Team--San Francisco/Seattle
From Derek Hoggett on 10/13/2009:
The violations my colleague Mike Reid and I previously reported to the Dept of Education and
other regulatory bodies continue. I request that the Department of order the University of
Phoenix to abandon its enrollment performance matrix based primarily on enrollments
Counselors are still pressured to enrol students and punished if they do not meet their
enrollment targets. These punishments include decreases in salary> removal of tuition
reimbursement and termination. One of those recently terminated for supposedly not meeting
enrollment targets is Mike Reid.
The Director of my campus in Austin told me recently that the University is not going to
abandon "what has worked for us for twenty years" referring to the University's enrollment
and counselor remuneration policies. The same Director said that our current enrolment
performance model is and has always been based on "getting people in the door".
The Director of Academic Affairs at the Austin campus recently told me of a high level
conference he addressed over the University's policy of pressuring faculty not to fail
students.
The University presents a smokescreen to the authorities when assuring them it is changing
its high pressure enrollment practices. Discussion Memos> Written Warnings> and terminations
all clearly indicate this charade.
The University has done nothing to refund the hundreds of millions of dollars in ill-gotten
gains - from tuition fees gained from tens of thousands of failed students it illegally
pressured into school. The University prefers to pay its lobbyists a lot less rather than
than do the honorable thing for the students it has hurt.
The University has retaliated in numerous ways against Mike and myself for reporting these
violations.
I can corroborate all of the above testimony.
The greed of Wall Street is infecting education. America deserves better.
Thank you.
3

Derek Hoggett
512 662 7835
-----Original Message----From: Hillard~ Dale
Sent: Monday~ June 08~ 2009 9:28 AM
To: Madzelan~ Dan; Shireman~ Bob; Wolff~ Russell; Baker~ Jeff
Cc: Henderson~ Linda; Toney~ Dyon; Wittman~ Donna; Shepard~ Nan; Woodward~ Jennifer; Laine~
Douglas; Greene~ Chris; Minor~ Robin
Subject: Incentive Compensation - Information Provided by Current Enrollment Counselors
Dear

Dan~

Bob~

Russ~

and

Jeff~

The attached complaint was referred to the SPT- San Francisco/Seattle by the Dallas OIG
office. It is a well-organized document that provides an excellent description and examples
of the abusive practices at the University of Phoenix. The OIG is not able to take any
action regarding the allegations because the abuses are regulatory rather than criminal.
For SEC to address the issue of incentive compensation with the University of Phoenix as a
regulatory violation would require an national commitment and cross-Team resources. As we
have seen~ and as the document points out~ despite a 9.8 million dollar fine levied by the
Department previously on the issue~ the University has continued the same practices and has
gotten more adept at disguising them.
We are sharing this information with you because we understand that incentive compensation is
an issue that is being reviewed currently and we feel that the most effective remedy to
stopping the abuses would be to eliminate the "Safe Harbors" that were put into place in 2002
and adhere to the original intent of Congress to eliminate incentive compensation as
recruitment tool for postsecondary institutions using Department of Education funds.
Dale Hillard for
SPT-San Francisco/Seattle
- - - - -Original Message - - - - From: BRENDAN.PUEYO@ED .GOV (mailto:brendan.pueyo@ed.gov]
Sent: Monday~ June 08~ 2009 8:58 AM
To: Hillard~ Dale
Subject:
Please open the attached document. This document was digitally sent to you using an HP
Digital Sending device.
To view this document you need to use the Adobe Acrobat Reader. For more information on the
HP MFP Digital Sending Software or a free copy of the Acrobat reader please visit:
http://www.hp . com/go/HP_Digital_Sender_Module.com

O'Bergh, Jon
Monday, October 05, 2009 11 :04 AM
Shireman , Bob
Smith, Zakiya
FW: Higher Ed Press 1o 06 09 -- Corinthian Colleges article
Higher Ed Press 10 06 09.doc

From:
Sent:
To:

Cc:
Subject:
Attachments:

Bob,

Jon O'Bergh
Special Assistant to the Under Secretary
U.S. Department of Education

202-260-8568

From: Smith/ Zakiya

Sent: Monday/ October 05 2009 9:58AM
To:
who.eop.gov);
"==""----~-:--"'- who.eo . ov
1

ovp.eop.gov);
omb.eop.gov);
who.eop.gov); Annino/
Angelica; Arsenault1 Leigh; Babyak1 Stephanie; Barrett1 Tarik; Ceja 1 Alejandra; Cummings/ Glenn; Cunningham/ Peter;
Darnieder/ Greg; Glickman/ Jane; Hamilton/ Justin; Kanter/ Martha; Laitinen, Amy; Manheimer, Ann; Miller/ Tony;
Montoya Tansey/ Hallie; O'Bergh, Jon; Pacchetti1 Edward; Plotkin/ Hal; Rogers/ Margot; Rose, Charlie; Sepulveda/ Juan;
Shireman/ Bob; Singiser/ Dana E.; Star/ Sari; Steenen/ Paul; Wilson, John; Young, Nicole; Gomez, Gabriella; Martin/
Carmel; Taggart1 Bill; Madzelan1 Dan; Dann-Messier1 Brenda
Subject: Higher Ed Press 10 06 09
""-"'~----"'"_who.eop.gov);

Today's clips include reports of the conference call with comm unity college presidents held on Friday, two articles on
responses to stimulus funding, including opinions institutional opportunities and problems with funding, and
perspectives on the utility of 529 savings plans, among other relevant news. See attachment for more detail.

Mutual Back Scratching Inside Higher Ed

Stimulus Money Slow To Reach Colleges Diverse
Stimulus Wreckage (San Francisco Chronicle)
ED: Iowa Student Loan Broke Law. Des Moines Register
Study Argues that Federal Asset Treatment Reduces College Savings
The Impact of College Financial Aid Rules on Household Portfolio Choice

Tweaks Suggested for 529 Plans Wall Street Journal

5

Vets Get Emergency G.l. Bill Benefits Washington Post

Additional Media Coverage
They line up early for Gl Bill emergency cash Houston Chronicle
Prepaid College Plans May Not Cover All College Costs. New York Times
Large Universities Changing Freshman Experience. AP
(Opin ion) Cracks in the Future: Herbert Warns Of Impact Of University Budget Cuts. New York Times
Catholic Colleges Work to Maintain Access as Their Profiles Rise The Chronicle of Higher Education
Recruiter Lawsuit May Get Closure: University of Phoen ix Recruiter Lawsuit May Be Settled. Arizona Republic

Zakiya Smith
Policy Advisor

Office of the Under Secret ary

U. S. Department of Education
(202) 205-9891
Zakiya.Smith@ed.gov

From:
Sent:
To:
Subject:

O'Bergh, Jon
Monday, October 05, 2009 12:03 PM
Shireman, Bob
RE: Higher Ed Press 10 06 09 -- Corinthian Colleges article

Bob,

Jon O'Bergh
Special Assistant to the Under Secretary
U.S. Department of Education
202-260-8568

From: Shireman, Bob

Sent: Monday, October 05, 2009 11:45 AM

To: O'Bergh, Jon

Cc: Smith, Zakiya

Subject: Re: Higher Ed Press 10 06 09 --Corinthian Colleges article

From: O'Bergh, Jon

To: Shireman, Bob

Cc: Smith, Zakiya

Sent: Mon Oct OS 10:03:39 2009

Subject: FW: Higher Ed Press 10 06 09 --Corinthian Colleges article
Bob,

Jon O'Bergh
Special Assistant to the Under Secretary
U.S. Department of Edu cation
202-260-8568

From: Smith, Zakiya

Sent: Monday, October 05,2009 9:58 r.r.

A:n
M.....,....._ _ _ ____,
.IB;)lli~~~J@l.Q.eop.gov); -""""='=---~=

~~===c.~:::i::::-:--..J.:::'who.eo.::;.
P~g~
ov:;L.)!l
; ~~=~~
liioiolii......__ _ _ _t<='who.eop.gov); ""'-"".........__ _ _ _.. -

~~...;.;,__ _ _ _-"F'ovp.eop.gov);
..._.-....-._ _ _ _....._~ who.eop.gov); Annino,

Angelica; Arsenault, Leigh; Babyak, Stephanie; Barrett, Tarik; Ceja, Alejandra; Cummings, Glenn; Cunningham, Peter;
Darnieder, Greg; Glickman, Jane; Hamilton, Justin; Kanter, Martha; Laitinen, Amy; Manheimer, Ann; Miller, Tony;
Montoya Tansey, Hallie; O'Bergh, Jon; Pacchetti, Edward; Plotkin, Hal; Rogers, Margot ; Rose, Charlie; Sepulveda, Juan;
Shireman, Bob; Singiser, Dana E.; Star, Sari; Steenen, Paul; Wilson, John; Young, Nicole; Gomez, Gabriella; Martin,
Carmel; Taggart, Bill; Madzelan, Dan; Dann-Messier, Brenda
Subject: Higher Ed Press 10 06 09
Today's clips include reports of the conference call with community college presidents held on Friday, two articles on
responses to stimulus funding, including opinions institutional opportunities and problems with funding, and
perspectives on the utility of 529 savings plans, among other relevant news. See attachment for more det ail.

Mutual Back Scratching Inside Higher Ed

Stimulus Money Slow To Reach Colleges Diverse
Stimulus W reckage {San Francisco Chronicle)
ED: Iowa Student Loan Broke Law . Des Moines Register
Study Argues that Federal Asset Treatment Reduces College Savings
The Impact of College Financial Aid Rules on Household Portfolio Choice

Twea ks Suggested for 529 Plans Wall St reet Journal

Vets Get Emergency G.l. Bill Benefits Washington Post
Additional M edia Coverage
They line up early for Gl Bill emergency cash Houston Chronicle

Prepaid College Plans May Not Cover All College Costs. New York Times
Large Universities Changing Freshman Experience. AP
(Opinion) Cracks in the Future: Herbert Warns Of Impact Of University Budget Cuts. New York Times
Catholic Colleges Work to Maintain Access as Their Profiles Rise The Chronicle of Higher Education
Recruiter Lawsuit M ay Get Closure: University of Phoenix Recruiter Lawsuit M ay Be Settled. Arizona Republic

Zakiya Smith
Policy Advisor
Office of the Under Secretary
U.S. Department of Education
(202) 205-9891
8

Zakiya.Smith @ed.gov

Mutual Back Scratching (Inside Higher Ed)

"Part pep rally, part support group-- and part lobbying effort. All of those elements were present Friday as
a team of Obama administration officials-- including the White House's special guest star for any and all
community college events, Jill Biden -- held a conference call with about 80 two-year college leaders,
which they characterized as a listening session," Inside Higher Ed reports. "But the session and the
stroking also had a subtle but plainly evident ulterior motive : letting an important constituency know that
the administration very much needs its help as the White House pushes Congress to pass legislation to
carry out a massive restructuring of the student aid programs that would, not coincidentally, pour $1 o
billion into community colleges. At several points in the call, administration officials let the two-year
college presidents know that priorities they favor are dependent on Congress passing the Student Aid
and Fiscal Responsibility Act (and the community college focused American Graduation Initiative that is
part of it) this fall."
You can read the complete Oct. 5, 2009 Inside Higher Ed article on-line.

Stimulus Money Slow To Reach Colleges (Diverse)

"President Barack Obama's $787 billion stimulus spending package was supposed to move 'shovel-ready'
construction projects, including campus facilities, toward completion . However, stimulus spending so far
has been focused on financial aid and tax credits, less so on speeding up brick-and-mortar projects on
college campuses," Diverse reports. "The recovery spending also has been hamstrung by delays; only
about 14 percent of the money approved in the American Recovery and Reinvestment Act (ARRA) has
been spent since it was approved in February, according to press accounts. Even so, a major portion of
the funding is about to hit the higher-education community, says Robert Helland, government services
adviser at the Washington, D.C., office of the international law firm Reed Smith. 'The opportunities are
going to go fast and furious, including for historically Black colleges and universities,' he says. About half
of some $32.6 billion in stimulus funds earmarked to stabilize schools should be reaching states whose
governors will then dole out money to save college teachers' jobs and prevent layoffs caused by the
recession, says Helland, noting that discretionary state stimulus spending could benefit public HBCUs."
You can read the complete Oct. 2, 2009 Diverse article on-line.

Stimulus Wreckage (San Francisco Chronicle)

Despite having been accused of deceptive business practices by the attorney general,
former students, and ex-employees, Corinthian Colleges are getting millions in federal
stimulus dollars.
http://www .sfweekly. com/2009-09-30/news/stimulus-wreckage/1

ED: Iowa Student Loan Broke Law.

The Des Moines Register (10/5, Jacobs)

reports, "Iowa Student Loan Liquidity Corp. has been ordered to repay money to the federal
government because the nonprofit used illegal cash inducements to drum up more loan
business. A review by [ED] found that Iowa Student Loan paid the illegal fees to the Iowa State
University Alumni Association to induce it to steer business to Iowa Student Loan. However, the
board chairman of Iowa Student Loan- a private nonprofit company, not a government agencydenies the organization did anything wrong , believes that the repayment amount is incorrect,
and says it intends to appeal the findings. "

Study Argues that Federal Asset Treatment Reduces College Savings

Researchers at the University of Missouri-Columbia have published a study that examines the effect of
asset exclusions from the Federal Methodology for computing financial aid eligibility on household
investment portfolios.
The study, The Impact of College Financial Aid Rules on Household Portfolio Choice , found that families
may escape implicit financial aid taxation by reducing their liquid savings and maximizing their
contributions to retirement assets and increasing home equity. It also found that values of retirement
assets and home equity, which are exempt from financial aid taxation, are significantly correlated with
marginal financial aid ''tax" rates.
The authors argue that their findings validate concerns that the Federal Methodology for computing
financial aid eligibility is at odds with incentives offered to households to maintain high levels of savings,
and produces inequitable distribution of need-based student aid.
The study will be published in the December issue of the National Tax Journal.

Tweaks Suggested for 529 Plans (The Wall Street Journal)

"Generous federal and state tax benefits have made 529 college-savings plans popular with affluent
investors, but the federal government would like to see these plans do more for low- and middle-income
families," The Wall Street Journal reports. "The Obama administration has focused attention on the
savings plans as part of its effort to increase college attendance and affordability. And that attention could
lead to changes that would affect all families using 529 plans. In a report released last month , the
Treasury Department called for greater use of low-cost index funds by 529 plans, to reduce investors'
expenses. It also suggested, among other things, a per-beneficiary cap on contributions , without
specifying a dollar amount. The aim is to limit the maximum benefit to a single family so that more federal
money is available to help more families pay for college."
You can read the complete Oct. 5, 2009 Wall Street Journal article on-line.

Vets Get Emergency G.l. Bill Benefits (The Washington Post)

"Some 6 ,619 student veterans had received emergency checks at the Department of Veterans Affairs' 57
regional offices by 3 p.m. Friday, the first day the aid became available for students across the country
who have yet to receive tuition, books and housing payments under the Post-9/11 Gl Bill," The
Washington Post reports. "Another 6,752 veterans had applied for the aid -- a maximum $3,000 advance
against benefits-- online. As of last week, fewer than 10 percent of the 251 ,000 veterans who had applied
for Gl Bill benefits had actually received checks, forcing thousands to use savings or take out personal
loans to make ends meet. At the agency's regional office in the District, about 300 veterans waited at
noon in chairs and on the floor for a chance to apply for and receive the checks, which were announced a
week ago by Veterans Affairs Secretary Eric Shinseki."
You can read the complete Oct. 3, 2009 Washington Post article on-line.
Additional Media Coverage

They line up early for Gl Bill emergency cash Houston Chronicle

Prepaid College Plans May Not Cover All College Costs.

The New York

Times (10/5, A10, Hamill) reports, "In the last two decades, more than a million families around
the country have invested in state funds that pledged to cover the cost of attending their state's
public colleges and universities, regardless of how much tuition increased. But in the last year,

the stock market slump and rising college costs have combined to drive all but two of the
nation's 18 such funds, known as prepaid college savings plans, into the red, jeopardizing those
pledges." According to the Times, "Even with stock market gains since March, the losses have
forced some programs, like Pennsylvania's and Washington's, to impose new and higher fees
that could amount to thousands of dollars a year in additional costs to parents."

Large Universities Changing Freshman Experience.

The AP (10/3, Zagier)

reported , " The freshman experience at large state universities can still resemble a failed social
experiment more than the start of a four-year journey to enlightenment. Overwhelmed freshmen
in many places still sit anonymously in large lecture halls, surrounded by hundreds of peers
whose names the professor couldn't possibly remember." According to the AP, these "cattle-call
approaches to higher education are increasingly out of fashion. At the University of Missouri and
many other schools, from large public universities to selective liberal arts colleges, first-year
students increasingly live and learn in small groups with those who share similar interests everything from environmental activism to budding cyber entrepreneurs. At Missouri, there's
even a group for aspiring storm chasers."

(Opinion) Cracks in the Futu re: Herbert Warns Of Impact Of

University Budget Cuts. In his New York Times (10/3, A23, 1.09M) column , Bob
Herbert writes, "It's dismaying to realize that the grandeur" of UC Berkeley, "and the remarkable
success of the University of California system, of which Berkeley is the flagship, " is being
"jeopardized by shortsighted politicians and California's colossally dysfunctional budget
processes." Berkeley "is aggressively pursuing alternative funding sources. The danger is that
as public support for the school declines, it will lose more and more of its public character. "
Colleges and universities "across the country - public and private - are struggling because of the
prolonged economic crisis and the pressure on state budgets. It will say a great deal about what
kind of nation we've become if we let these most valuable assets slip into a period of decline."

Catholic Colleges Work to Maintain Access as Their Profiles Rise (The Chronicle
of Higher Education)
"Catholic higher education has a long history of providing access and opportunity to disadvantaged and
underserved students. But that commitment becomes harder to maintain when a college sees its profile
begin to rise," The Chronicle of Higher Education reports. "How do Catholic colleges stay true to their
mission of access in the face of market realities? That question provided the framework for a symposium
of Catholic college leaders [in Chicago] last week. The meeting , 'Balancing Market and Mission :
Enrollment Management Strategies in Catholic Higher Education ,' was sponsored by DePaul University's
Center for Access and Attainment. It brought together enrollment management, marketing, and mission
officers from about a dozen Catholic colleges for what the organizers believe was the first meeting of its
kind."
You can read the complete Oct. 5, 2009 The Chronicle of Higher Education article on-line.

Recruiter Lawsuit May Get Closure: University of Phoenix Recruiter

Lawsuit May Be Settled. The Arizona Republic (10/4, Gilbertson) reported , "Six years
ago, two University of Phoenix enrollment counselors filed a lawsuit accusing the for-profit
school of illegally rewarding them with fat raises and prizes based on the number of students
they enrolled .. .. A costly end appears to be in sight:" University of Phoenix parent Apollo Group
Inc. "announced Wednesday that it was in settlement talks to resolve the litigation before the

scheduled March trial. The Phoenix company did not disclose potential terms , but one Wall
Street analyst estimates a settlement could run as high as $250 million."

Kane, John
Thursday, September 24, 2009 12:58 PM
Graham, William; Shireman, Bob
FW: Request

From:
Sent:

To:
Subject:

See table below for phone call with Luke.

From: Kane/ John

Sent: Friday/ September 18 2009 2:49PM

1

To: 'Swarthout/ Luke (HELP Committee)'

Cc: Hammond, Cynthia; Graham1 William; Siegwarth 1 Kirk
Subject: RE: Request
Sounds good. Just let us know what time.

From: Swarthout/ Luke (HELP Committee) l.![m.....,a...,_i,_,lto"4f.._

f!_
~_~_ _ _...Jl~'>'@:::..o.h!.>:e~lo:..:.:s..,.e"""na...,t.,.e!.!:l.g""-ov~l

Sent: Friday/ September 18 2009 2:48PM

1

To: Kane/ John

Cc: Hammond, Cynthia; Graham1 William; Siegwarth, Kirk
Subject: RE: Request
Thanks John-these are helpfu l. Vd love to chat about what these tables assess next Monday.

From: Kane/ John [mailto:John.Kane@ed.govl

Sent: Friday/ September 18 2009 2:47PM

1

To: Swarthout/ Luke (HELP Committee)

Cc: Hammond 1 Cynthia; Graham/ William; Siegwarth 1 Kirk
Subject: FW: Request
I'm not sure if this is what you want, but below are our estimated lifetime rates for each cohort of loans. These rates are
based on our FY 2010 President Budget technical assumptions; they would change whenever we update those
assumptions, which we typically do at least every couple of years.

From: Siegwarth Kirk

1

Sent: Friday, September 18 2009 2:33 PM

1

To: Kane1 John

Subject: RE: Request
John,
Here's a default rate table:

Lifetime Estimated Default Rates by Risk Category--Stafford Subsidized Loans--Direct Loans and FFE
PB 2010
Cohort
Risk Category
2YR-NPFT
2YR-PROP
4YR-FRSO

1999

2000

2001

2002

2003

2004

2005

2006

2007

200~

29.0%
40.8%
18.0%

26.5%
39.1%
16.9%

26.2%
37.8%
16.8%

26.4%
37.8%
16.8%

27.0%
39.2%
17.4%

27.4%
38.0%
17.1%

27.2%
37.6%
16.4%

26.9%
40.5%
15.6%

24.7%
37.2%
14.8%

23.5%
34.1 Ofc
14.4%

4YR-JRSR
GRAD-STU
Total

9.6%
4.4%
12.4%

9.1%
4.1%
11.6%

8.5%
3.7%
11.2%

8.2%
3.6%
11.2%

8.3%
3.8%
11.6%

8.4%
4.2%
11.7%

9.2%
4.8%
12.0%

9.4%
5.1%
12.1%

8.8%
4.8%
11 .8%

Kirk

From: Kane, John

Sen~Jiursa~e1tember 17, 2009 1:50PM

To:
@help.senate.gov'
Cc: Graham, William; Adams, Kristen; Hammond, Cynthia; Siegwarth, Kirk

Subject: RE: Request

Luke, when you say St afford Loan, do you mean Stafford and Unsubsidized Stafford or just the subsidized loans? Also,
am I right that you are looking for lifetime default rates by risk group? If so, a couple of points you should keep in mind:

These rates significantly overstate default costs, since they don't take into account collections and we collect
almost all the principal back over time.
The rates for some sectors, primarily proprietary and 2-year schools, are quite high, in some cases approaching
30 percent, so basing a fee on them could be problematic.
The rates, particularly for recent cohorts, are estimates that could change substantially over time.
The risk categories are not always intuitive- for example, for-profit degree-granting schools like t he University
of Phoenix are counted under the 4-yr risk groups rather than under proprietary schools.

From: Hammond, Cynthia

Sent: Thursday, September 17, 2009 9:32AM

To:
help.senate.gov'
Cc: Kane, John; Graham, William; Adams, Kristen

Subject: Re: Request

Yes. You should know I am out sick today, so please cc Gaby and/or kristen.
Sent using BlackBerry

From: Swarthout, Luke (HELP Committee) ~L(6

0:..,.Kt
.............,......,......_.~:;p:@~h~e::!Jip~.~se=.!.n!.!:!a~te:.:.:.a~o~v>
To: Hammond, Cynthia

Sent: Thu Sep 17 08:18:53 2009

Subject: Request
Can you ask t he budget service folks for a table with the Department's "risk classifications for institutions in the Stafford
loan program?" There should be 5 categories and I'd love to see that data over the last 10 years. Thanks,
Luke

8.4%
4.6%
11 .6%

From:
Sent:
To:
Subject:

Jenkins, Harold
Wednesday, September 02, 2009 12:47 PM
Marinucci, Fred ; Finley, Steve
FW: 90-1 o food for thought

-----Original Message----From: Shireman) Bob

Sent: SundayJ August 23J 2009 11:41 PM
To: Madze lanJ Dan
Cc: Jenkins) Harold
Subject: 90-10 f ood for thought

From: Kantrowitz) Mark [Mark.Kantrowitz@Monster.com]

Sent: SundayJ August 23J 2009 11:16 PM
To: Shireman) Bob
Cc: Kantrowitz) Mark
Subject: RE: additional unsub from ECASLA
It probably does have a bell curve distribution with both extrema minimizing percentage Title
IVJ but do you know of any for-profit colleges that charge that little? Maybe the community
colleges could provide some insight into this (sayJ a NPSAS query with a cut by COA or
tuition bands vs total aid for public 2-year institutions). But given how many of for - profit
colleges serve low income students who are Pell eligible) that might lead to 100% Title IV.
(I wonder how public and nonprofit colleges would fare under 90/10 restrictions?)

There's also a student fraud risk with low tuition schools. There are perpetual students who
deliberately choose low tuition schools in order maximize the amount of the disbursement they
can cash out f rom the loans and grants after tuition is subtracted. They never graduate
(constant in-school deferment) and when they are about to hit the maximum timeframe they
enroll at another college. When they hit the aggregate limitsJ they default. (The new Pell
Grant semester limits will limit this somewhat.) A lot of the OIG cases are at low cost
community colleges for similar reasons.
Here's an interesting thought off the top of my head:
loan limits and waiving 90/10 at low cost schools? It
provide an incentive to rein in costs. Though I doubt
would be interested) as they wouldn't make as much of

Perhaps allow flexibility in reducing

would help deal with the fraud and
any of the publicly traded for-profits
a profit with lower costs.

I met with Tony Gunia of EDMC last week. (He's the one who is on ACSFA and wanted to
brainstorm policy ideas. EDMC is based in Pittsburgh.) He's pushing the idea of treating each
for-profit college as a single unit for 90/10 purposes instead of applying 90/10 for each OPE
!D. EDMC overall is at 65%J but one of their schools is at 84%J which is why he's pushing
that idea. University of Phoenix wouldn't benefit because they have only one OPE ID and it's
just under 90% this year. He liked the idea of distinguishing between Pell Grant recipients
and non-recipients for 90/10 and Cohort Default Rates (i.e.J don't penalize for-profit
colleges for disproportionately serving low income students)) an idea I gave to Harris Miller
of CCA but which apparently has gone nowhere.
3

Another idea I gave to Harris Miller that went nowhere was to waive 90/10 for any school with
tuition and fees below the average for the nonprofit sector. He also shared with me a copy of
a survey CCA did that purports to show that 100% of schools that hit 90% used tuition
increases to get under 90%.
What's needed is an objective measure of institutional quality that doesn't use finances as a
proxy for quality. But I can't think of one that is measurable and which can't be gamed.
Retention and graduation rates would lead to grade inflation. Placement rates for jobs and
other advanced degrees might workJ but it is more difficult to measure and verify. A test of
knowledge akin to GREs/APs would lead to teaching to the test and would meet with a lot of
opposition from people who don't want NCLB in postsecondary education.
Mark
-----Original Message----From: ShiremanJ Bob [mailto:Bob.Shireman@ed.gov]
Sent: SundayJ August 23J 2009 10:47 PM
To: KantrowitzJ Mark
Subject: RE: additional unsub from ECASLA
Thanks Mark. I recently had a school owner tell me that the reason the schools charge a
similar high amount is 90-10. Your explanation makes sense assuming it causes enough of them
to pay more with non-Title IV funds. But shouldn't it work in the other directionJ too? A
school chargingJ sayJ $4J000J should be able to find a number of students who can pay the
whole amount without borrowing at allJ which of course addresses 90-10 too. Thoughts?
From: KantrowitzJ Mark [Mark.Kantrowitz@Monster.com]
Sent: FridayJ August 21J 2009 4:25 PM
To: ShiremanJ Bob
Cc: KantrowitzJ Mark
Subject: additional unsub from ECASLA
What percentage of borrowers of the unsubsidized Stafford loan in
2008-09 took advantage of the $2J000 higher loan limits from ECASLA?
What percentage borrowed to the max? What if the data is limited to just students who
borrowed in both 2007-08 and 2008-09? Any differences by level and control of institution or
COA?
My modeling suggests that between 1/6 and 1/3 took advantage of the increased ECASLA limits.
It also looks like all colleges would benefit more from an ac ross -the-board unsub Stafford
limit increaseJ but that the benefit is much larger percentage wise (greater percentage of
students using it) at proprietary colleges. So I'm wondering if last year's data confirms
this.
It would also be interesting to evaluate the extent to which loans exceed institutional
charges. I ran a NPSAS 2007-08 question comparing a
CENTILE>0 of SNEED2 against SECTOR1 and CONTROLJ which doesn't really
get at this since it calculates COA-EFC-Aid (gapping)J not the extent to which loans exceed
institutional charges. The smallest percentage non-gapped was at proprietary schools (28.1%)J
compared with 52.7% public and 49.8% nonprofit. Among the students who were gappedJ the
distribution was similar at for-profit and non-profitJ both about twice publics. If I compare
average NETCST9 (tuition and fees minus grants) and average TOTLOAN2 vs CONTROLJ limiting the
data to those who borrowedJ I get averages that show average borrowing $104 more than tuition
and fees minus grants at proprietary schools. The big surprise is at public colleges where
average borrowing is $2J896 more than tuition + fees - grants. (See attached spreadsheet with
4

difference column added.) Nonprofits have borrowing that is $548 less than tuition and fees
minus grants. Maybe a variable could be added to NPSAS to measure borrowing above
institutional charges?
I'm also looking at what the various for-profit colleges are likely to do about 90/10~ since
many of them are really close to the 90% threshold even with the temporary fixes. University
of Phoenix has buried the link to the FAFSA on its web site (try to find it!). They are
encouraging more students to apply for third party scholarships. But ultimately I think most
of the colleges will simply increase tuition since that's the easiest way to get percentage
Title IV under the threshold. Some portion of the students will use non-Title IV to pay for
the higher tuition~ especially if tuition exceeds Pell+Stafford. It's perverse~ but it's what
they've done in the past. I'm probably going to write a policy analysis paper about this as
an interesting twist on the debate about increases in student aid triggering increases in
tuition. The more I think about it~ the more I think colleges need to be able to set lower
limits on a per-program or per-major basis even if it means limiting students to
institutional charges~ since increasing tuition has the same effect. This doesn't just affect
for-profits; I recently answered a reader question for the SF Chronicle where the student had
borrowed $80~000 in DTC private student loans at NYU for a degree in art (and she wants to go
back to get a masters in the same field~ even though she can't get a job other than
waitressing). There needs to be some sort of sanity check built into the system.
Mark
Mark Kantrowitz
Publisher of FinAid.org and FastWeb.com
Author~ FastWeb College Gold
FinAid Page LLC
PO Box 2056
Cranberry Township~ PA 16066-1056
Tel: 1- 724- 538-4500
Fax: 1- 724- 538-4502
Email: mkant@finaid.org~ mkant@fastweb.com www.fastweb.com www.finaid.org www.collegegold.com
NOTICE:
This message~ and any attachments~ contain(s) information that may be confidential or
protected by privilege from disclosure and is intended only for the individual or entity
named above. No one else may disclose~ copy~ distribute or use the contents of this message
for any purpose.
Its unauthorized use~ dissemination or duplication is strictly prohibited and may be
unlawful. If you receive this message in error or you otherwise are not an authorized
recipient~ please immediately delete the message and any attachments and notify the sender.

From:
Sent:
To:
Subject:

Kanter, Martha
Thursday, August 27, 2009 7:54AM
Shireman , Bob
Re: your Kaplan question

Sent using BlackBerry

From: Shireman, Bob

To: Kanter, Martha; Plotkin, Hal; Smith, Marshall

Cc: Whitman, David

Sent: Wed Aug 26 12:05:52 2009
Subject: your Kaplan question

All of Phoenix online's students are reported as full time, and the school reports that 51% of its entering students are
first-time and therefore counted in the graduation rate statistics I mentioned (4 to 6% consistently over several
cohorts). The campus of Kaplan University that appears to be its online campus reports that only 3% of its entering
students are first-time full-time. Of those, the reported graduation rate is 75% --but obviously it is measuring a very
small part of the entering cohort.
Of all "entering" students, Kaplan reports that 75% of its full time students returned the for the second academic year
(but only 29% of part time students) and Phoenix reports that they retain 28%.
These are public snapshots from collegenavigator.gov but obviously not complete pictures.

From:
Sent:
To:

Cc:
Subject:
Attachments:

Kantrowitz, Mark [Mark.Kantrowitz@Monster.com]

Friday, August 21 , 2009 4:26PM
Shireman , Bob
Kantrowitz, Mark
additional unsub from ECASLA
2007-08 borrowing more than institution charges.xls

What percentage of borrowers of the unsubsidized Stafford loan in

2008-09 took advantage of the $2,000 higher loan limits from ECASLA?
What percentage borrowed to the max? What if the data is limited to just students who
borrowed in both 2007-08 and 2008-09? Any differences by level and control of institution or
COA?
My modeling suggests that between 1/6 and 1/3 took advantage of the increased ECASLA limits.
It also looks like all colleges would benefit more from an across-the-board unsub Stafford
limit increase, but that the benefit is much larger percentage wise (greater percentage of
students using it) at proprietary colleges. So I'm wondering if last year's data confirms
this.
It would also be interesting to evaluate the extent to which loans exceed institutional
charges. I ran a NPSAS 2007-08 question comparing a
CENTILE>0 of SNEED2 against SECTOR1 and CONTROL, which doesn't really
get at this since it calculates COA-EFC-Aid (gapping), not the extent to which loans exceed
institutional charges. The smallest percentage non-gapped was at proprietary schools (28.1%),
compared with 52.7% public and 49.8% nonprofit. Among the students who were gapped, the
distribution was similar at for-profit and non - profit, both about twice publics. If I compare
average NETCST9 (tuition and fees minus grants) and average TOTLOAN2 vs CONTROL, limiting the
data to those who borrowed, I get averages that show average borrowing $104 more than tuition
and fees minus grants at proprietary schools. The big surprise is at public colleges where
average borrowing is $2,896 more than tuition + fees - grants. (See attached spreadsheet with
difference column added.) Nonprofits have borrowing that is $548 less than tuition and fees
minus grants. Maybe a variable could be added to NPSAS to measure borrowing above
institutional charges?
I'm also looking at what the various for-profit colleges are li kely to do about 90/10, since
many of them are really close to the 90% threshold even with the temporary fixes. University
of Phoenix has buried the link to the FAFSA on its web site (try to find it!). They are
encouraging more students to apply for third party scholarships. But ultimately I think most
of the colleges will simply increase tuition since that's the easiest way to get percentage
Title IV under the threshold. Some portion of the students will use non -Title IV to pay for
the higher tuition, especially if tuition exceeds Pell+Stafford. It's perverse, but it's what
they've done in the past. I'm probably going to write a policy analysis paper about this as
an interesting twist on the debate about increases in student aid triggering increases in
tuition. The more I think about it, the more I think colleges need to be able to set lower
limits on a per-program or per -major basis even if it means limiting students to
institutional charges, since increasing tuition has the same effect. This doesn't just affect
for-profits; I recently answered a reader question for the SF Chronicle where the student had
borrowed $80,000 in DTC pr ivate student loans at NYU fo r a degree in art (and she wants to go
back to get a masters in the same field, even though she can't get a job other than
waitressing). There needs to be some sort of sanity check built into the system.
Mark
7

Mark Kantrowitz
Publisher of FinAid.org and FastWeb.com

Author~

FastWeb College Gold

FinAid Page LLC

PO Box 2056
Cranberry Township~ PA 16066-1056
Tel: 1-724-538-4500
Fax: 1- 724-538-4502
Email: mkant@finaid.org~ mkant@fastweb.com www.fastweb.com www.finaid.org www.collegegold.com
NOTICE:
This message~ and any attachments~ contain(s) information that may be confidential or
protected by privilege from disclosure and is intended only for the individual or entity
named above. No one else may disclose~ copy~ distribute or use the contents of this message
for any purpose. Its unauthorized use~ dissemination or duplication is strictly prohibited
and may be unlawful. If you receive this message in error or you otherwise are not an
authorized recipient ~ please immediately delete the message and any attachments and notify
the sender.

From:
Sent:
To:

Cc:
Subject:

Kantrowitz, Mark [Mark.Kantrowitz@Monster.com]

Sunday, August 23, 2009 11:17 PM
Shireman , Bob
Kantrowitz, Mark
RE: additional unsub from ECASLA

It probably does have a bell curve distribution with both extrema minimizing percentage Title
IVJ but do you know of any for - profit colleges that charge that little? Maybe the community
colleges could provide some insight into this (sayJ a NPSAS query with a cut by COA or
tuition bands vs total aid for public 2-year institutions). But given how many of for - profit
colleges serve low income students who are Pell eligibleJ that might lead to 100% Title IV.
(I wonder how public and nonprofit colleges would fare under 90/10 restrictions?)
There's also a student fraud risk with low tuition schools. There are perpetual students who
deliberately choose low tuition schools in order maximize the amount of the disbursement they
can cash out from the loans and grants after tuition is subtracted. They never graduate
(constant in-school deferment) and when they are about to hit the maximum timeframe they
enroll at another college. When they hit the aggregate limitsJ they default. (The new Pell
Grant semester limits will limit this somewhat.) A lot of the OIG cases are at low cost
community colleges for similar reasons.
Here's an interesting thought off the top of my head:
loan limits and waiving 90/10 at low cost schools? It
provide an incentive to rein in costs. Though I doubt
would be interestedJ as they wouldn't make as much of

Perhaps allow flexibility in reducing

would help deal with the fraud and
any of the publicly traded for-profits
a profit with lower costs.

I met with Tony Gunia of EDMC last week. (He's the one who is on ACSFA and wanted to
brainstorm policy ideas. EDMC is based in Pittsburgh.) He's pushing the idea of treating each
for-profit college as a single unit for 90/10 purposes instead of applying 90/10 for each OPE
ID. EDMC overall is at 65%J but one of their schools is at 84%J which is why he's pushing
that idea. University of Phoenix wouldn't benefit because they have only one OPE ID and it's
just under 90% this year. He liked the idea of distinguishing between Pell Grant recipients
and non-recipients for 90/10 and Cohort Default Rates (i.e.J don't penalize for - profit
colleges for disproportionately serving low income students)J an idea I gave to Harris Miller
of CCA but which apparently has gone nowhere.
Another idea I gave to Harris Miller that went nowhere was to waive 90/10 for any school with
tuition and fees below the average for the nonprofit sector. He also shared with me a copy of
a survey CCA did that purports to show that 100% of schools that hit 90% used tuition
increases to get under 90%.
What's needed is an objective measure of institutional quality that doesn't use finances as a
proxy for quality. But I can't think of one that is measurable and which can't be gamed.
Retention and graduation rates would lead to grade inflation. Placement rates for jobs and
other advanced degrees might workJ but it is more difficult to measure and verify. A test of
knowledge akin to GREs/APs would lead to teaching to the test and would meet with a lot of
opposition from people who don't want NCLB in postsecondary education.
Mark
-----Original Message----From: ShiremanJ Bob [mailto:Bob.Shireman@ed.gov]
Sent: SundayJ August 23J 2009 10:47 PM
To: KantrowitzJ Mark
9

Subject: RE: additional unsub from ECASLA

Thanks Mark. I recently had a school owner tell me that the reason the schools charge a
similar high amount is 90-10. Your explanation makes sense assuming it causes enough of them
to pay more with non-Title IV funds. But shouldn't it work in the other direction~ too? A
school charging~ say~ $4~000~ should be able to find a number of students who can pay the
whole amount without borrowing at all~ which of course addresses 90-10 too. Thoughts?
From: Kantrowitz~ Mark [Mark.Kantrowitz@Monster.com]
Sent: Friday~ August 21~ 2009 4:25 PM
To: Shireman~ Bob
Cc: Kantrowitz~ Mark
Subject: additional unsub from ECASLA
What percentage of borrowers of the unsubsidized Stafford loan in
2008-09 took advantage of the $2~000 higher loan limits from ECASLA?
What percentage borrowed to the max? What if the data is limited to just students who
borrowed in both 2007-08 and 2008-09? Any differences by level and control of institution or
COA?
My modeling suggests that between 1/6 and 1/3 took advantage of the increased ECASLA limits.
It also looks like all colleges would benefit more from an across-the-board unsub Stafford
limit increase~ but that the benefit is much larger percentage wise (greater percentage of
students using it) at proprietary colleges. So I'm wondering if last year's data confirms
this.
It would also be interesting to evaluate the extent to which loans exceed institutional
charges. I ran a NPSAS 2007-08 question comparing a
CENTILE>0 of SNEED2 against SECTOR1 and CONTROLJ which doesn't really
get at this since it calculates COA-EFC-Aid (gapping)J not the extent to which loans exceed
institutional charges. The smallest percentage non -gapped was at proprietary schools (28.1%)J
compared with 52.7% public and 49.8% nonprofit. Among the students who were gappedJ the
distribution was similar at for-profit and non-profitJ both about twice publics. If I compare
average NETCST9 (tuition and fees minus grants) and average TOTLOAN2 vs CONTROLJ limiting the
data to those who borrowedJ I get averages that show average borrowing $104 more than tuition
and fees minus grants at proprietary schools. The big surprise is at public colleges where
average borrowing is $2J896 more than tuition + fees - grants. (See attached spreadsheet with
difference column added.) Nonprofits have borrowing that is $548 less than tuition and fees
minus grants. Maybe a variable could be added to NPSAS to measure borrowing above
institutional charges?
I'm also looking at what the various for - profit colleges are likely to do about 90/10~ since
many of them are really close to the 90% threshold even with the temporary fixes. University
of Phoenix has buried the link to the FAFSA on its web site (try to find it!). They are
encouraging more students to apply for third party scholarships. But ultimately I think most
of the colleges will simply increase tuition since that's the easiest way to get percentage
Title IV under the threshold. Some portion of the students will use non -Title IV to pay for
the higher tuitionJ especially if tuition exceeds Pell+Stafford. It's perverseJ but it's what
they've done in the past. I'm probably going to write a policy analysis paper about this as
an interesting twist on the debate about increases in student aid triggering increases in
tuition. The more I think about itJ the more I think colleges need to be able to set lower
limits on a per-program or per-major basis even if it means limiting students to
institutional chargesJ since increasing tuition has the same effect. This doesn't just affect
for-profitsj I recently answered a reader question for the SF Chronicle where the student had
borrowed $80J000 in DTC private student loans at NYU for a degree in art (and she wants to go
10

back to get a masters in the same field, even though she can't get a job other than
waitressing). There needs to be some sort of sanity check built into the system.
Mark
Mark Kantrowitz
Publisher of FinAid.org and FastWeb.com
Author, FastWeb College Gold
FinAid Page LLC
PO Box 2056
Cranberry Township, PA 16066-1056
Tel: 1- 724-538-4500
Fax: 1- 724- 538-4502
Email: mkant@finaid.org, mkant@fastweb.com www.fastweb.com www.finaid.org www . collegegold.com
NOTICE:
This message, and any attachments, contain(s) information that may be confidential or
protected by privilege from disclosure and is intended only for the individual or entity
named above. No one else may disclose, copy, distribute or use the contents of this message
for any purpose .
Its unauthorized use, dissemination or duplication is strictly prohibited and may be
unlawful. If you receive this message in error or you otherwise are not an authorized
recipient, please immediately delete the message and any attachments and notify the sender.

11

11111111 Cllllr llr EdUCIIIII SIIIISIICS

Computation by DAS-T Online Version 5.0 on 8/21/2009

dd
Variance estimation method: BRR
And Filters
Total loans (including Parent PLUS)

=X >

0.5

Tuition and
Tuition and
fees minus all fees minus all
qrants
qrants
(%>0.5)
(Avg>O)

Total loans
(including
Parent PLUS)
(%>0.5)

Estimates
Total
NPSAS institution control
Public
Private not-for-profit
Private for-p rofit
Institution type
Public 4-year
Public 2-year
Public less-than-2-year
Private not-for-profit 4-year
Private not-for-profit 2-year
Private
Private
Private
Private

not-for-profit less-than-2-year
for-profit 4-year
for-profit 2-year
for-profit less-than-2-year

81.4

7/068.90

100

70.8
90.3
97

3/890.70
11A33.50
8/520.10

100
100
100

74
62.4
88.3
90.2
94.2

4/662.60
1/523.10
3/807.30
11/535.70
7/150.80

100
100
100
100
100

96.2
96.3
98.4
96.9

7/598.00
8/376.80
8/995.20
8/181.70

100
100
100
100

0.34

167.2

0.52
0.54
0.36

59.7
210.3
528.5

0
0
0

0.43
1.48
6.1
0.56
1.45

55
32.8
612.2
214.3
921

0
0
0
0
0

3.83
0.65
0.48

2/031.50
857.6
837.5

0
0
0

Standard Error (BRR)

Total
NPSAS institution control
Public
Private not-for-profit
Private for-p rofit
Institution type
Public 4-year
Public 2-year
Public less-than-2-year
Private not-for-profit 4-year
Private not-for-profit 2-year
Private not-for-profit less-than-2-year
Private for-profit 4-year
Private for-profit 2-year

Private for-profit less-than-2-year

0.78

474.9

7,347.00

5,976.80

8,099.20

3,969.80
1,652.40
1,724.80

2,812.20
1,491.40
1,673.20

4,474.10
1,793.10
1,832.00

2,852.50
1,101.40
15.9
1,614.50
26.4

2,110.60
687.6
14.1
1,455.50
24.8

3,142.40
1,315.00
16.8
1,752.60
28.8

11.5
894
497.7
333.1

11.1
860.7
489.6
322.8

11.7
967.8
518.1
346.1

Weighted Sample sizes(n/1,000s)

Total
NPSAS institution control
Public
Private not-for-profit
Private for-profit
Institution type
Public 4-year
Public 2-year
Public less-than-2-year
Private not-for-profit 4-year
Private not-for-profit 2-year
Private
Private
Private
Private

not-for-profit less-than-2-year
for-profit 4-year
for-profit 2-year
for-profit less-than-2-year

Source: U.S. Department of Education, National Center for Education Statistics, 2007- 1
(NPSAS:08)
NOTE: Data users who plan to compare student loan estimates from NPSAS: 08 with pri
Stafford loans are currently only directly comparable with NPSAS:04. For more informa

Total loans
(including
Parent PLUS)
(Avg>O)

Difference

8,109. 70

1,040.80

6,786.50
10,885.40
8,624.20

2,895.80
-548.10
104.10

7,755.40
4,484.30
5,759.90
10,956.20
8,054.10

3,092.80
2,961.20
1,952.60
-579.50
903.30

7,251.30
9,222.20
8,538.60
7,080.20

-346.70
845.40
-456.60
-1,101.50

61.7
49.7
165.4
145.4
65.4
116.5
451.3
166.3
655.5
1,380.30
310
498.7

198.4

8,099.20

4,474.10
1,793.10
1,832.00
3,142.40
1,315.00
16.8
1,752.60
28.8
11.7
967.8
518.1
346.1

08 National Postsecondary Student Aid Study

or years should be aware that the data on
tion, visit http://nces.ed.gov/das .

From:
Sent:
To:
Subject:
Attachments:

Rebecca Campoverde [Rebecca.Campoverde@kaplan.com)

Monday, August 03 , 2009 6:05 PM
Arsenault, Leigh
Aug. 6 Meeting with Sec. Kanter
Fact-Kaplan Inc 8-03-09.doc; Rosen Bio 2009.doc

Leigh,
Andy Rosen looks forward to meeting Under Secretary Kanter on Thursday at 11 a.m. We plan to arrive at the
Department at 10:45 a.m. so that we can be in your suite in time for the meeting. I will be accompanying Andy, along
with Melissa Mack, a Senior VP of Kaplan who also heads up our foundation.
As you know, Andy would like to introduce Sec. Kanter to Kaplan and begin a dialogue regarding the role of private, nontraditional institutions like ours in helping to meet the President's postsecondary goals for our Nation. Attached are:
A one-page overview of Kaplan, Inc., and
Andy Rosen's bio.
Please let me know if there is anything else you may need. We look forward to meeting with Sec. Kanter on Thursday
and very much appreciate your help.
Becky

Becky Campoverde
Vice President, Government Relations
Kaplan, Inc.
202-334-6684 (0)
703-629-8532 (C)
Rebecca.Campoverde@kaplan. com
This transmission may contain infonnation that is privileged, confidential and exempt from disclosure under applicable law. If you
receive this transmission in error, do not read, use or copy it. Please inunediately contact the sender and destroy the material in its
entirety, whether in electronic or hard copy fonnat. Thank you.

FACT SHEET
Kaplan , Inc., a subsidiary of The Washington Post Company (NYSE: WPO) , is a leading global
provider of educational and career services for individuals, schools and businesses. Kaplan
serves students of all ages through a wide array of offerings including higher education, test
preparation, professional training and programs for children and schools.
Kaplan has four areas of focus:
Higher Education
Kaplan includes more than 70 campuses in the U.S. and abroad, and provides online programs
through Kaplan University and Concord Law School. Kaplan offers its students career-oriented
master's, bachelor's, and associate's degrees as well as certificates and diplomas. Students
gain the skills necessary to qualify them for employment in a variety of fields, including criminal
justice, health care, business, education, financial planning, information technology, legal
studies, fashion and design. Individual schools in the U.S. are separately accredited by one of
several national or regional accrediting agencies approved by the U.S. Department of
Education.

Kaplan also offers higher education programs in the U.K., Ireland, Asia and Australia , ranging
from pre-university foundation programs to undergraduate and postgraduate degree programs.
Professional Education
Kaplan provides students with training to obtain and maintain professional licenses and
designations in the fields of securities, insurance, financial services, compliance solutions, real
estate and information technology. Through educational tools such as on-site training and
classroom instruction to online courses and programs, Kaplan provides individuals with the
certification and continuing education training they need to maintain licenses and comply with
regulatory mandates, as well as advance their careers.
Test Prep
Kaplan is the world leader in test preparation and has served millions of students for over 70
years. With classroom locations worldwide, a comprehensive menu of online offerings and a
complete array of books and software, Kaplan offers preparation for more than 90 standardized
tests, including entrance exams for secondary school, college, and graduate school as well as
English language and professional licensing exams. Kaplan also offers private tutoring and
college and graduate admissions consulting services.
Kids and Schools
Kaplan partners with schools and districts nationwide to provide educational services and
programs designed to increase literacy and numeracy skills, help students build skills aligned to
statewide standards, and increase performance on standardized tests.

For more information, please visit www.kaplan.com.

~APLA,Y
Andrew S. Rosen
Chairman and Chief Executive Officer, Kaplan, Inc.
Andrew s. Rosen is Chairman and Chief Executive Officer of Kaplan , Inc., one of the world's
leading providers of educational services. Rosen joined Kaplan in 1992 and was named
Chairman and CEO in November 2008. Kaplan is a diversified education company and the
largest subsidiary of The Washington Post Company (NYSE: WPO) .
Throughout his career, Rosen has embraced an outcomes-based approach to education,
focusing on student achievement and success. As CEO of the company's largest business,
Kaplan Higher Education (KHE) , Rosen redefined the higher education landscape, bringing online
and campus-based learning opportunities to working adults. Under his leadership, KHE has
grown to become Kaplan's largest component and today provides postsecondary education to
more than 100,000 students across the globe.
Rosen is a pioneer in the burgeoning online education market. As President of Kaplan University,
Rosen led the school's growth from 34 students in 2001 to more than 48,000 online students
today. He also oversaw Concord Law School, the nation's first fully online law school, and
Kaplan Virtual Education, a leader in virtual high school instruction and online content and
curriculum development.
Rosen came to The Washington Post Company in 1986 as a staff attorney for The Washington
Post newspaper and moved to Newsweek as Assistant Counsel in 1988. When he moved to
Kaplan , he served as Center Administrator, Regional Director, and Vice President for Field
Management prior to assuming the role of Chief Operating Officer in 1997. He was named
President of Kaplan , Inc. in 2002 and assumed leadership for Kaplan's higher education
operations in 2004.
Before joining The Washington Post Company, Rosen served as law clerk to the Hon. Levin H.
Campbell, Chief Judge for the U.S. Court of Appeals for the First Circuit, in Boston . He holds an
A.B. degree from Duke University and a J.D. from Yale Law School. Rosen currently serves on
the boards of Enterprise Florida, the Broward Workshop, the Broward Alliance and the Council for
Educational Change.

From:
Sent:
To:
Subject:

Mike and Martha,

Kvaal, James R.!'-:-::~:--::-~':"":"'"--'=who . eop.gov]

Friday, July 10, 2009 6:54PM
Smith, Marshall; Kanter, Martha
hewlitt

From:
Sent:
To:
Subject:

Smith , Marshall
Friday, July 10, 2009 6:58PM
~~----c:>who.eop.gov';

Re : hewlitt

From: Kvaal, James R. "'"=='=====o:=:!J~@~w!.!.h.!.!=o!.:.!.e::l:o!l=p!..:!:O~Oa..V>

To: Smith, Marshall; Kanter, Martha
Sent: Fri Jul 10 17:54:02 2009
Subject: hewlitt

Mike and Martha,

Kanter, Martha

From:
Sent:
To:
Subject:
Attachments:

Manheimer, Ann
Wednesday, July 01, 2009 11 :39 AM
Kanter, Martha; Shireman , Bob
FW: Weekly Write-Up-- Univ Phoenix Indictments
Halton USAO Press Release.pdf

Forwarding Info and attachment regarding the Univ of Phoenix Indictments

From: Howard, Pat

Sent: Thursday, June 25, 2009 4:19PM

To: Manheimer, Ann
Subject: FW: Weekly Write-Up

Ann, I thought you would be interested in this press release from the U.S. Attorney's Office. Parts of this scheme relate
to agenda items for the fall neg/reg session. Also, I wanted to let you know that I and Bill Hamel, AlGA, plan on
compiling information from audits and investigations over the next 2 months that deal with the neg/reg agenda and
summarize that info to help support the Dept in neg/reg. We will be meeting with some of our auditors and
investigators the week after next to outline a summary report approach.
Pat
From: Hamel, William

Sent: Thursday, June 25, 2009 1:19PM

To: Howard, Pat
Subject: FW: Weekly Write-Up

William D. Hamel
Assistant Inspector General
for Investigations
Office of Inspector General
U.S. Department of Education

(202) 245-6922
From: Forbort, Natalie

Sent: Thursday, June 25, 2009 12:38 PM

To: Grant, Catherine; Hamel, William; Deshields, Michael; Aspling, David; Egan, Richard
Subject: Fw: Weekly Write-Up

Natalie Forbort
Special Agent in Charge

From: Shanedling, Adam

To: Forbort, Natalie
Sent: Thu Jun 25 11:36:01 2009
Subject: Weekly Write-Up

A federal grand jury in Arizona has handed down a 130-count indictment against Trenda Halton and
64 others in connection with a conspiracy to defraud the government out of approximately $538,932
in Stafford loans and Pell grants. From July 4, 2006 through Oct. 30, 2007, Halton recruited people to
3

act as "straw students" and apply for federal financial aid in the form of Stafford loans and Pell grants,
with her assistance at Rio Salado Community College. The applicants were neither active students at
Rio Salado nor did they intend to become active students. Halton worked with four people to recruit
additional individuals to fraudulently apply for, and receive, student financial aid through Rio Salado.
Those four people each recru ited at least three additional straw students as well as acting as straw
students themselves. Halton completed and submitted Rio Salado admission and financial aid
applications containing forged and false statements for at least 64 financial aid applicants. Halton
charged a "fee" to multiple straw students in amounts ranging from $500 to $1 ,500. Halton also
accessed Rio Salado online classes, assum ing the identity of the various straw students, in order to
generate records of the straw students' "participation" in online classes and cause Rio Salado to
authorize financial aid payments to the straw students. The investigation started with a referral from
the Rio Salado Financial A id Office, which advised ED OIG that documentation submitted in support
of certain loan applications appeared to have been doctored or forged because the applicants were
all enrolled in the same online courses, the applicants all lived in the same general area, and the
writing on the financial aid applications and supporting documents appeared similar. Halton was
arrested without incident the day after the indictment based on an arrest warrant for charges on
conspiracy, mail fraud, financial aid fraud and making false statements. Arrest warrants and
summonses will be issued for the remainder of the "straw students" based on their level of
participation in the fraud scheme and current physical location. The US Attorney's Office held a press
conference to announce the indictment where SAC Forbort provided a statement and answered
questions from the media. (Forbort, Shanedling)
http://www.kpho. com/m oney/19847790/detail. htm I
http://hosted.ap.org/dynamic/stories/U/US STUDENT AID FRAUD AZOL?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT
http://www.foxnews.com/story/0,2933,529000,00.html
http://www.washingtonpost.com/wpdyn/contentlarticle/2009/06/24/AR2009062402577.htm l?nav=rss business
http://www.azcentral. com/news/articles/2009/06/24/200906241oanfraud0624-0N.htm I

Thanks again for the support and kind words.

RegardsAdam

Office of the United States Attorney

District of Arizona
For lnfonnation Coniacl Public Affairs

WYN HORNBUCKLE

Wednesday, June 24, 2009

Telephone: (602) 514-7 573

Cell: (602) 740-2422

65 INDIVIDUALS CHARGED IN FEDERAL FINANCIAL AID

FRAUD RESULTING IN THE LOSS OF OVER $530,000
PHOENIX- A federal grand jury in Phoenix returned a 130-count indictment on Tuesday
against Trenda Lynne Halton, 37, ofPeoria, Ariz, and 64 co-defendants for various offenses related to
a conspiracy to defraud the U.S . Government out of more than a half-million dollars in student loans.
The charges include Conspiracy; Mail Fraud; Financial Aid Fraud; and False Statements in Connection
With Financial Aid. Each of the 65 defendants and their respective charges are identified in the
attached table.
Diane J. Humetewa, U.S. Attorney for the District of Arizona, stated, "Federal funds for higher
education are a limited resource. The theft of these funds for personal gain may deny truly deserving
students the opportunity to obtain a valuable education. The hardworking investigators of the U. S.
Postal Inspection Service and U.S. Department of Education, Office oflnspector General , along with
the Rio Salado Community College Office ofFinancial Aid, were all instrumental in assuring that so
many people would not get away with such an extensive scheme."
Mary Mitchelson, Acting Inspector General ofU. S. Department ofEducation, stated, "Today' s
indictment alleges that the defendants defrauded the students and taxpayers of Arizona in a deliberate,
methodical, and significant way . I am proud of the work of the Office oflnspector General' s Special
Agents, our colleagues in the U. S. Postal Inspection Service and the U.S. Attorney' s Office for their
dogged pursuit ofthese individuals."
NatalieForbort, Special Agent in Charge of the U.S. Department ofEducation OIG' s Western
Regional Office, added that the OIG " will continue to aggressively pursue those who seek to defraud
Federal education programs and protect these vital funds from this type of calculated plunder-- not
only for our nation's students, but for America's taxpayers as well."
The indictment alleges that from July 4, 2006 through October 30, 2007, Halton recruited
indi viduals to act as "straw students" and apply for federal financial aid, in the form of Stafford Loans
and Pell Grants, with her assistance at Rio Salado Community College. The applicants were neither
acti ve students at Rio Salado nor did they intend to become active students. Halton worked with
Crystal MarieDiaz, Claude Willis Fletcher, LatisshaLavern Johnson and Evelynn Castaneda Tripp to
recruit additional individuals to fraudulently apply for, and receive, student financial aid through Rio
Salado. Diaz, Fletcher, Johnson and Tripp each recruited at least three additional straw students as well
as acting as straw students themselves. A total of 60 additional straw students were also charged as
a result of the scheme.
In furtherance ofthe conspiracy and scheme to defraud, Halton maintained a system of records,
containing various handwritten and printed documents, concerning the personal information for
-MORE-

2
approximately 136 straw students and potential straw students incl uding, but not limited to, dates of
birth, social security numbers, driver's license numbers, wage tax statements- both fictitious and valid,
tax returns, tax transcripts, high school diplomas- both fictitious and valid, and Rio Salado Financial
Aid applications. While extensive, the records for multiple straw students and potential straw students
were not complete. Halton completed and submitted Rio Salado admission and financial aid
applications containing forged and false statements for at least 64 financial aid applicants.
Halton charged a "fee" to multiple straw students in amounts ranging from $500 to $1,500.
Halton also accessed Rio Salado online classes, assuming the identity of the various straw students, in
order to generate records of the straw students ' " participation" in online classes and cause Rio Salado
to authorize financial aid payments to the straw students.
During the period of the conspiracy and scheme, Halton and her 64 co-defendants unlawfully
caused federally insured loans and grants to be disbursed to unqualified straw students totaling
approximately $538,932.
In an affidavit for a search warrant for Halton 's residence, a Postal Inspector noted the fraud
was initially reported to the U.S . Department of Education by Rio Salado's Financial Aid Office. In
particular, the Office advised that documentation submitted in support of certain loan applications
appeared to have been doctored or forged because the applicants were all enrolled in the same online
courses; the applicants all lived in the same general area; and the writing on the financial aid
applications and supporting documents appeared similar.
" It is a common misconception that the Internet provides anonymity to those who commit
fraud," said Phoenix Division Acting Inspector in Charge Christopher White of the U.S . Postal
Inspection Service. " Often, they use the U.S. Mail to send correspondence or receive financial aid
checks, in furtherance of the scheme. The Postal Inspection Service will aggressively investigate
those who use the mail to commit such criminal acts."
Each conviction for Conspiracy or Financial Aid Fraud carries a maximum penalty of five
years, a $250,000 fine or both. Each conviction for False Statements in Connection With Financial
Aid carries a maximum penalty of one year, $100,000 fine or both. Each conviction for Mail Fraud
carries a maximum penalty of20 years, a $250,000 fine or both. In determining an actual sentence,
U.S. District Court Judge Neil V. Wake will consult the U.S. Sentencing Guidelines, which provide
appropriate sentencing ranges. The judge, however, is not bound by those guidelines in
determining a sentence.
An indictment is simply the method by which a person is charged with criminal activity and
raises no inference of guilt. An individual is presumed innocent until competent evidence is
presented to a jury that establishes guilt beyond a reasonable doubt.

The investigation preceding the indictment was conducted by the U.S . Postal Inspection
Service and U.S. Department of Education, Office of Inspector General with assistance from the
Surprise Police Department. The prosecution is being handled by Frederick A. Battista and Charles
W. Galbraith, Assistant U.S. Attorneys, District of Arizona, Phoenix.
RELEASE NUMBER:

2009-2ll(Halton, et al.)
-MORE-

CASE NUMBER:

CR-09-737-PHX-NVW
###

For more infonnation on the U.S. Attomey's Office, District of Arizona, visit http://www.usdoj.gov/usao/az/

From:
Sent:
To:

Cc:
Subject:
Attachments:

Ritsch, Massie
Wednesday, June 17, 2009 7:07PM
Cunningham, Peter; Rogers , Margot; Shireman, Bob; Hamilton , Justin
Madzelan , Dan ; Bergeron , David ; Smith , Zakiya ; Macias, Wendy
Wall Street calms down re : for profits
ATT55567.gif; image001.jpg

Folks,

Thanks,
Massie
Massie Ritsch
Deputy Assistant Secretary for External Affairs & Outreach
U.S. Department of Education
(202) 260-2671
massie.ritsch@ed.gov

=DJ Education Sha r es Up On Broad Mkt Weakness , Federal Overtures

By Brendan Conway
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones) - -Shares o f major education companies rose Wednesday , two
days a f ter fede r a l officials sought to reassure the f or-profit education
industry ami d specul ation of a regul atory c r ackdown .
Apol lo Group I nc . (APOL) , which owns the Uni versity of Phoenix , was up over 4 %
to $66 .4 0 as tradi ng closed . DeVry Inc . (DV) was up over 5 % to 48 . 81 . Strayer
Education Inc . {STRA} was nearly 4% higher at $212 . 87 . Career Education Corp .
(CECO) was u p over 4% to $21 . 55 . Corinthian Col l eges I nc . (COCO) rose nea r ly 6 %
to $ 1 6 . 34 .
Other p ubl icly traded education firms a l so traded in ranges about 4 % to 6 %
higher than thei r opening on a day when investors watched the market stall, and
doubts a b out t he recovery grow .
Apol lo , Strayer and other top f i rms stil l trade well under their 52-week
h i ghs . Ap ol l o top ped out at $90 in January as inves t ors sought cover i n
countercycl i cal f or-profit educati on stocks . St r aye r' s high of $239 . 99 was
reached in November .

The stalling of the overall market sent some investors hurrying for education
stocks this week , said Trace Urdan , an analyst at Signal Hill Group .
But investors were also reassured when a federal official told an audience at
the Career Colleges Association ' s annual conference Monday that the department
is "agnostic" about for-profit or nonprofit management structures when it
designs federal rules , Urdan said .
The official , acting Assistant Secretary for Postsecondary Education Dan
Madzel an , coul dn ' t be reached immediately .
"Our consistent message is that qual ity is what matters - that students get
what they pay for, and that taxpayers are well-served ," Massie Ritsch , Education
Department deputy assistant secretary for external affairs & outreach , told Dow
Jones Newswires. "They can be 4-year , 2-year , Ivy League or night school ...
It ' s just a question of whether Wall Street hears it ."
Bob Cohen , president and CEO of the Career Col lege Association , said in an
interview that some investors had sought to sow fear that the Obama
administration would deliberate l y target profi t-making education firms . " Some
folks don ' t understand how Washington works, and others were just making things
up ," he said .
Investors were also reassured by the dullness of a federal Education
Department public hearing on higher-education rulemaking in Denver , Urdan said .
Some had expected student complaints against for-profit education firms . " It was
a major yawn ."
Public hearings are s l ated in the coming week for Phil adelphia and Littl e
Rock, Ark .

From: Reba Raffaelli [mailto:rebar@career.org]

Sent: Wednesday, June 17, 2009 6:33PM

To: Ritsch, Massie
Subject: FW: Business & Education Services: Education Industry Conference Confirms Net Positive Industry
Fundamentals and Amenable Regulatory Environment- ALERT
Massie,
I just wanted you to know that Dan Madzelan was a big hit at our Annual Convention. He was asked about Ed's position
on for-profit schools and if recently announced Neg Reg was aimed at our sector. He answered that in his 31 years at ED
no one in the policy area had ever said they wanted to go after the for-profits and that the focus of the department was
on what was best for students and taxpayers, across all sectors of education. I have paraphrased the question and
answer, but you get the gist of his comments. Below is just one of the many analysts response to his statements, so he
clearly made a difference.
When you finally have a staff in place, let me know so we can make an appointment to meet everyone.
Reba

From: Andrew C. Steinerman [mailto:andrew.steinerman@jpmresearchmail.com]

Sent: Tuesday, June 16, 2009 5:38PM
To: Reba Raffaelli
Subject: Business & Education Services: Education Industry Conference Confirms Net Positive Industry Fundamentals
and Amenable Regulatory Environment- ALERT
TO OUR FELLOW BUSINESS & EDUCATION SERVICES OBSERVERS,

Here are our most recent thoughts:

Also see attached pdf at the bottom of the email.

J.P. Morgan

North America Equity Research

Business & Education Services: Education Industry Conference

Confirms Net Positive Industry Fundamentals and Amenable
Regulatory Environment -ALERT
Conversations with education industry professionals underline our net positive v iew of t he sector. This week we
attended an annual Career Colleges Association conference in Orlando, FL. We observed overall positive fundamentals
of the for-profit educational services (4P ES) sector. School operators and vendors indicated that enrollment growth
continues to be strong, government student loans have been accessible, pricing increases are sticking, and corporate
reimbursements are intact. Although we recognize sector growth will eventually decelerate due to tougher comps and a
prospective economic recovery, this trend had not yet been seen by the private school operators at the conference.
Despite lingering uncertainty, Education Department (ED) official states t hat for-profit s are not being specifically
targeted. Daniel Madzelan, a 30-year ED veteran who currently serves as acting assistant secretary for postsecondary
education, clearly stated that the ED is not changing its objective stance with for-profit schools but is broadly focused
on what is best for students and taxpayers across all types of schools. We note that education stocks have been
pressured in recent months by the uncertainty related to the current administration's view of the for-profit sector and
the newly begun negotiated regulatory process (which has so far been benign). While we expect the ED to remain
balanced in its treatment of the different groups of schools (public, nonprofits, for-profits), we also think that the
effective use of federal dollars will likely be one of the ED' s main themes. In addition, compliance with already existing
postsecondary and consumer protection regulations will likely be strictly enforced.
Operators are less concerned about the regulatory environment than the investment community. We found that school
operators seem to be less concerned with the ongoing regulatory debate as long as the resulting changes to the
regulations (if any) are clearly defined. Within the current negotiated regulatory process, the main subject of interest to
the for-profits is incentive compensation of enrollment officers. Many operators would welcome a quantification of the
current safe harbor related to incentive compensation, and even a tightening of this safe harbor should be manageable.
Higher quality of academics is good business. While conference topics spanned a wide range, one of the main themes
was focused on student outcomes (especially retention). We think that while favorable academic outcomes have been
highlighted by the new administration, institutions have long recognized that achieving solid academic outcomes also
leads to "good business." Many operators cited system upgrades and process changes as key initiatives in their efforts
to analyze and improve outcome metrics.
Enrollments are strong, and operat ors are getting more sophisticated in marketing. Our conversations with marketing
specialists suggest that lead flow remains abundant, as does prospective student demand. Importantly, larger
institutions are taking a higher- quality approach to lead acquisition and conversion. As a result, marketing efficiencies
have been an important recent source of margin expansion in the 4PES sector.
Click here for the full Alert and disclaimers.
Andrew C. Steinerman

(1 - 212) 622- 2527

andrew.steinerman@jpmorgan.com

Jeffrey Y. Volshteyn

(1-212) 622-2940
jvolshteyn@jpmorgan.com

William W. Lee

(1-212) 622-2596
wlee2@jpmorgan.com

www.morganmarkets.com

If you no longer wish to receive these e- mails then click here to unsubscribe

Analyst certification: I certify that: ( 1) all of the views expressed in this research accurately reflect my personal views about any and all of
the subject securities or issuers; and (2) no part of my compensation was, is, or will be directly or indirectly related to the specific
recommendations or views expressed herein. Important disclosures, including price charts, related to the companies recommended in this
report are available in the PDF attachment, through the search function on J.P. Morgan's website
https:// mmjpmorgan.com/disclosures/ company, or by calling this toll free number ( 1- 80D-477-Q406).
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of t his report. Invest ors should consider this report as only a single
factor in making their investment decision.
Confidentiality and Security Notice: This transmission may contain information that is privileged, confidential, legally privileged, and/ or
exempt from disclosure under applicable law. If you are not t he intended recipient, you are hereby notified that any disclosure, copying,
distribution, or use of the information contained herein (including any reliance thereon) is STRICTLY PROHIBITED. Although this
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transmission in error, please immediately contact the sender and destroy the material in its entirety, whether in electronic or hard copy
format .

From:
Sent:
To:
Subject:
Attachments:

Rogers, Margot
Wednesday, June 17, 2009~ PM
Miller, Tony; Rose, Charlie;
f
i @gmail.com'; 'arnekrc@ed.gov'
Fw: Wall Street calms down re: for profits
ATT55567.gif; image001.jpg

Fyi

From: Ritsch, Massie

To: Cunningham, Peter; Rogers, Margot; Shireman, Bob; Hamilton, Justin
Cc: Madzelan, Dan; Bergeron, David; Smith, Zakiya; Macias, Wendy
Sent: Wed Jun 17 18:07:06 2009
Subject: Wall Street calms down re: for profits

Folks,
Wall Street seems to finally be getting our message. Between ED's Dan Madzelan's appearance at the Career College
Assn's conference in Orlando this week and David Bergeron at the Denver hearing M onday/Tuesday on higher ed
regulations- a "major yawn," one Wall Street analyst bemoaned (exactly what we wanted!) -the tone of the coverage
has changed. See below for a Dow Jones Newswire story that moved this afternoon, a grateful e-mail from CCA and a
research report by JP Morgan on CCA's Orlando conference.
We'll continue to monitor this, but this has been a good week. This coming Monday/Tuesday is the Philadelphia hearing,
which will attract a lot of analysts and the DC crowd, almost certainly. We'll need to stay on the message as articulated
this week by Dan and David and continue to avoid sidebar conversations in Philly with persistent analysts seeking scoop.
Thanks,
Massie
Massie Ritsch
Deputy Assistant Secretary for External Affairs & Outreach
U.S. Department of Education

(202) 260-2671
massie.ritsch@ed.gov

=DJ Education Shares Up On Broad Mkt Weakness , Federal Overtures

By Brendan Conway
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones) -- Shares of major education companies rose Wednesday, two
days after federal officials sought to reassure the for-profit education
industry amid speculation of a regulatory crackdown .
Apol lo Group Inc. (APOL) , which owns the University of Phoenix, was up over 4 %
to $66 .4 0 as trading closed . DeVry Inc. (DV) was up over 5 % to 48.81. Strayer
Education Inc . (STRA) was nearly 4% higher at $212 . 87 . Career Education Corp .
(CECO) was up over 4% to $21 . 55 . Corinthian Col l eges Inc. (COCO) rose nearly 6 %
to $16 . 34 .
5

Other p ubl icly traded education firms a l so traded in ranges about 4 % to 6 %

h i gher than thei r opening on a day when investors watched the market stall, and
doubts a b out the recovery grow .
Apol lo , Strayer and other top f i rms stil l trade well under their 52-week
highs . Ap ollo topped out at $90 in January as investors sought cover i n
countercyclical for-profit education stocks . Strayer ' s high of $239 . 99 was
reached in November .
The stal l i ng of the overal l market sent some i nvestors hurrying for education
stocks thi s week , said Trace Urdan , an analyst at Si gnal Hi l l Group .
But investors were also reassured when a fede r al official told an audi ence at
the Career Col leges Associ ation ' s annual conference Monday that the department
is "agnostic " about for-profit or nonprofi t management structures when it
des i gns federal rules , Urdan sai d .
The official, acting Assistant Secretary for Postsecondary Education Dan
Madzel an , coul dn ' t be reached immediatel y .
"Our cons i stent message is that qual ity is what matters - that students get
what they pay for , and that taxpayers are well -served ," Massie Ritsch , Educati on
Dep artment deputy assistant secretary for external affairs & outreach , tol d Dow
Jones Newswi res . "They can be 4-year , 2-year , Ivy League or n i ght school ...
It ' s just a questi on of whether Wall Street hears it ."
Bob Cohen , president and CEO of the Career Col lege Association , said in an
interview that some investors had sought to sow fear that the Obama
admini strati on would del iberatel y target profit-making education firms . " Some
folks don ' t understand how Washi ngton works , and others were j ust maki ng thi ngs
up ," he said .
Investors were also reassured by the dul lness of a federa l Educati on
Department publ i c hearing on higher-education rulemaki ng i n Denver , Urdan said .
Some had expected student complaints against for-profit education firms . " It was
a major yawn ."
Publ ic heari ngs are s l ated i n the coming week for Phi l adelphia and Littl e
Rock , Ark .

From: Reba Raffaelli [mailto:rebar@career.org]

Sent: Wednesday, June 17, 2009 6:33 PM

To: Ritsch, Massie
Subject: FW: Business & Education Services : Education Industry Conference Confirms Net Positive Industry
Fundamentals and Amenable Regulatory Environment- ALERT
Massie,
I just wanted you to know that Dan Madzelan was a big hit at our Annual Convention. He was asked about Ed's position
on for-profit schools and if recently announced Neg Reg was aimed at our sector. He answered that in his 31 years at ED
no one in the policy area had ever said they wanted to go after the for-profits and that the focus of the department was
on what was best for students and taxpayers, across all sectors of education. I have paraphrased the question and
answer, but you get t he gist of his comments. Below is just one of the many analysts response to his statements, so he
clearly made a difference.
6

When you finally have a staff in place, let me know so we can make an appointment to meet everyone.
Reba

From: Andrew C. Steinerman [mailto:andrew.steinerman@jpmresearchmail.com]

Sent: Tuesday, June 16, 2009 5:38PM
To: Reba Raffaelli
Subject: Business & Education Services: Education Industry Conference Confirms Net Positive Industry Fundamentals
and Amenable Regulatory Environment- ALERT
TO OUR FELLOW BUSINESS & EDUCATION SERVICES OBSERVERS,

Here are our most recent thoughts:

Also see attached pdf at the bottom of the email.

J.P. Morgan

North America Equity Research

Business & Education Services: Education Industry Conference

Confirms Net Positive Industry Fundamentals and Amenable
Regulatory Environment -ALERT
Conversations with education industry professionals underline our net positive view of the sector. This week we
attended an annual Career Colleges Association conference in Orlando, FL. We observed overall positive fundamentals
of the for- profit educational services (4PES) sector. School operators and vendors indicated that enrollment growth
continues to be strong, government student loans have been accessible, pricing increases are sticking, and corporate
reimbursements are intact. Although we recognize sector growth will eventually decelerate due to tougher comps and a
prospective economic recovery, this trend had not yet been seen by the private school operators at the conference.
Despite lingering uncertainty, Education Department (ED) official states that for-profits are not being specifically
targeted. Daniel Madzelan, a 30-year ED veteran who currently serves as acting assistant secretary for postsecondary
education, clearly stated that the ED is not changing its objective stance with for-profit schools but is broadly focused
on what is best for students and taxpayers across all types of schools. We note that education stocks have been
pressured in recent months by the uncertainty related to the current administration's view of the for-profit sector and
the newly begun negotiated regulatory process (which has so far been benign). While we expect the ED to remain
balanced in its treatment of the different groups of schools (public, nonprofits, for-profits), we also think that the
effective use of federal dollars will likely be one of the ED' s main themes. In addition, compliance with already existing
postsecondary and consumer protection regulations will likely be strictly enforced.
Operators are less concerned about the regulatory environment than the investment community. We found that school
operators seem to be less concerned with the ongoing regulatory debate as long as the resulting changes to the
regulations (if any) are clearly defined. Within the current negotiated regulatory process, the main subject of interest to
the for-profits is incentive compensation of enrollment officers. Many operators would welcome a quantification of the
current safe harbor related to incentive compensation, and even a tightening of this safe harbor should be manageable.
Higher quality of academics is good business. While conference topics spanned a wide range, one of the main themes
was focused on student outcomes (especially retention). We think that while favorable academic outcomes have been
highlighted by the new administration, institutions have long recognized that achieving solid academic outcomes also
leads to "good business." Many operators cited system upgrades and process changes as key initiatives in their efforts
to analyze and improve outcome metrics.
Enrollments are strong, and operators are getting more sophisticated in marketing. Our conversations with marketing
specialists suggest that lead flow remains abundant, as does prospective student demand. Importantly, larger
7

institutions are taking a higher-quality approach to lead acquisition and conversion. As a result, marketing efficiencies
have been an important recent source of margin expansion in the 4PES sector.
Click here for the full Alert and disclaimers.
Andrew C. Steinerman
(1-212) 622-2527
andrew.steinerman@jpmorgan.com

Jeffrey Y. Volshteyn
(1-212) 622-2940
jvolshteyn@jpmorgan.com
William W. Lee
(1-212) 622- 2596

wlee2@jpmorgan.com
www.morganmarkets.com

If you no longer wish to receive these e- mails then click here to unsubscribe

Analyst certification: I certify that: (1) all of the views expressed in this research accurately reflect my personal views about any and all of
the subject securities or issuers; and (2) no part of my compensation was, is, or will be directly or indirectly related to the specific
recommendations or views expressed herein. Important disclosures, including price charts, related to the companies recommended in this
report are available in the PDF attachment, through the search function on J.P. Morgan's website
https://mmjpmorgan.com/ disclosures/ company, or by calling this toll free number (1-80Q-477-Q406).
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
Confidentiality and Security Notice: This transmission may contain information that is privileged, confidential, legally privileged, and/ or
exempt from disclosure under applicable law. If you are not the intended recipient, you are hereby notified that any disclosure, copying,
distribution, or use of the information contained herein (including any reliance thereon) is STRICTLY PROHIBITED. Although this
transmission and any attachments are believed to be free of any virus or other defect that might affect any computer system into which it
is received and opened, it is the responsibility of the recipient to ensure that it is virus free and no responsibility is accepted by JPMorgan
Chase & Co., its subsidiaries and affiliates, as applicable, for any loss or damage arising in any way from its use. If you received this
transmission in error, please immediately contact the sender and destroy the material in its entirety, whether in electronic or hard copy
format.

From:
Sent:
To:

Cc:
Subject:
Attachments:

Bergeron, David
Wednesday, June 17, 2009 10:49 PM
Ritsch, Massie; Cunningham, Peter; Rogers, Margot; Shireman , Bob; Hamilton, Justin
Madzelan , Dan ; Smith, Zakiya; Macias, Wendy
Re: Wall Street calms down re: for profits
ATT55567.gif; image001 .jpg

Sent using BlackBerry

From: Ritsch, Massie

To: Cunn ingham, Peter; Rogers, Margot; Shireman, Bob; Hamilton, Justin
Cc: Madzelan, Dan; Bergeron, David; Smith, Zakiya; Macias, Wendy
Sent: Wed Jun 17 18:07:06 2009
Subject: Wall Street calms down re: for profits

Folks,

Thanks,
Massie
Massie Ritsch
Deputy Assistant Secretary for External Affairs & Outreach
U.S. Department of Education
(202) 260-2671
massie.ritsch@ed.gov

=DJ Education Shares Up On Broad Mkt Weakness, Federal Overtures

By Brendan Conway
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Shares of major education companies rose Wednesday , two
days after federal officials sought to reassure the for-profit education
9

industry amid speculation of a regulatory crackdown .

Apol lo Group Inc . (APOL) , which owns the Uni versity of Phoenix, was up over 4 %
to $66 . 40 as trading closed . DeVry Inc . (DV) was up over 5 % to 48 . 81 . Strayer
Education Inc . (STRA) was nearly 4% higher at $212 . 87 . Career Education Corp .
(CECO) was up over 4% to $21 . 55 . Corinthian Col l eges Inc . (COCO) rose nearly 6%
to $16 . 34 .
Other publicly traded education firms a l so traded in ranges about 4 % to 6 %
higher than their opening on a day when investors watched the market stall, and
doubts about the recovery grow.
Apol lo , Strayer and other top firms stil l trade well under their 52-week
highs . Apollo topped out at $90 in January as investors sought cove r in
countercyclical for-profit education stocks . Strayer ' s high of $239 . 99 was
reached in November .
The stalling of the overall market sent some i nvestors hurrying for education
stocks this week , said Trace Urdan , an analyst at Signal Hill Group .
But investors were also reassured when a federal official told an audience at
the Career Col leges Association ' s annual conference Monday that the department
is "agnostic " about for-profit or nonprofit management structures when it
designs federal rules , Urdan said .
The official , acting Assistant Secretary for Postsecondary Education Dan
Madzelan , couldn ' t be reached immediately .
"Our consistent message is that qual ity is what matters - that students get
what they pay for, and that taxpayers are well -served ," Massie Ritsch , Education
Department deputy ass i stant secretary for external affai rs & outreach , told Dow
Jones Newswires . "They can be 4-year , 2-year, Ivy League or night school . . .
It ' s just a question of whether Wall Street hears it . "
Bob Cohen , president and CEO of the Career Co l lege Association , said in an
interview that some investors had sought to sow fear that the Obama
administration would del iberately target profit-making education firms . " Some
folks don ' t understand how Washington works , and others were just making things
up ," he said .
Investors were also reassured by the dullness of a federal Education
Department publ i c hearing on higher-education rulemaking in Denver , Urdan said .
Some had expected student complaints against for-profit education firms . "It was
a major yawn ."
Public hearings are slated in the coming week for Philadelphia and Little
Rock, Ark .

From: Reba Raffaelli [mailto:rebar@career.org]

Sent: Wednesday, June 17, 2009 6:33PM
To: Ritsch, Massie
Subject: FW: Business & Education Services : Education Industry Conference Confirms Net Positive Industry
Fundamentals and Amenable Regulatory Environment- ALERT

Massie,

10

I just wanted you to know t hat Dan Madzelan was a big hit at our Annual Convention. He was asked about Ed's position
on for-profit schools and if recently announced Neg Reg was aimed at our sector. He answered that in his 31 years at ED
no one in the policy area had ever said they wanted to go after the for-profits and that the focus of the department was
on what was best for students and taxpayers, across all sectors of education. I have paraphrased the question and
answer, but you get the gist of his comments. Below is just one of the many analysts response to his statements, so he
clearly made a difference.
When you finally have a staff in place, let me know so we can make an appointment to meet everyone.
Reba

From: Andrew C. Steinerman [mailto:andrew.steinerman@jpmresearchmail.com]

Sent: Tuesday, June 16, 2009 5:38PM
To: Reba Raffaelli
Subject: Business & Education Services: Education I ndustry Conference Confirms Net Positive I ndustry Fundamentals
and Amenable Regulatory Environment- ALERT
TO OUR FELLOW BUSINESS & EDUCATION SERVICES OBSERVERS,

Here are our most recent thoughts:

Also see attached pdf at the bottom of the email.

J.P. Morgan

North America Equity Research

Business & Education Services: Education Industry Conference

Confirms Net Positive Industry Fundamentals and Amenable
Regulatory Environment -ALERT
Conversations with education industry professionals underline our net positive view of t he sector. This week we
attended an annual Career Colleges Association conference in Orlando, FL. We observed overall positive fundamentals
of the for- profit educational services (4PES) sector. School operators and vendors indicated that enrollment growth
continues to be strong, government student loans have been accessible, pricing increases are sticking, and corporate
reimbursements are intact. Although we recognize sector growth will eventually decelerate due to tougher comps and a
prospective economic recovery, this trend had not yet been seen by the private school operators at the conference.
Despite lingering uncertainty, Education Department (EO) official states that for-profits are not being specifically
targeted. Daniel Madzelan. a 30- year ED veteran who currently serves as acting assistant secretary for postsecondary
education. clearly stated that the ED is not changing its objective stance with for- profit schools but is broadly focused
on what is best for students and taxpayers across all types of schools. We note that education stocks have been
pressured in recent months by the uncertainty related to the current administration's view of the for- profit sector and
the newly begun negotiated regulatory process (which has so far been benign). While we expect the ED to remain
balanced in its treatment of the different groups of schools (public. nonprofits. for-profits). we also think that the
effective use of federal dollars will likely be one of the ED ' s main themes. In addition, compliance with already existing
postsecondary and consumer protection regulations will likely be strictly enforced.
Operators are less concerned about the regulatory environment t han the investment community. We found that school
operators seem to be less concerned with the ongoing regulatory debate as long as the resulting changes to the
regulations (if any) are clearly defined. Within the current negotiated regulatory process, the main subject of interest to
the for-profits is incentive compensation of enrollment officers. Many operators would welcome a quantification of the
11

current safe harbor related to incentive compensation, and even a tightening of this safe harbor should be manageable.
Higher quality of academics is good business. While conference topics spanned a wide range, one of the main themes
was focused on student outcomes (especially retention). We think that while favorable academic outcomes have been
highlighted by the new administration, institutions have long recognized that achieving solid academic outcomes also
leads to "good business." Many operators cited system upgrades and process changes as key initiatives in their efforts
to analyze and improve outcome metrics.
Enrollments are strong, and operators are getting more sophisticated in marketing. Our conversations with marketing
specialists suggest that lead flow remains abundant, as does prospective student demand. Importantly, larger
institutions are taking a higher-quality approach to lead acquisition and conversion. As a result, marketing efficiencies
have been an important recent source of margin expansion in the 4PES sector.
Click here for the full Alert and disclaimers.

Andrew C. Steinerman
(1-212) 622-2527
andrew.steinerman@jpmorgan.com
Jeffrey

Y.

Volshteyn

(1-212) 622-2940
jvolshteyn@jpmorgan.com
William W. Lee
(1-212) 622- 2596
wlee2@jpmorgan.com
If you no longer wish to receive these e-mails then click here to unsubscribe

www.m organmarkets.com

Analyst certification: I certify that (1 ) all of the views expressed in this research accurately reflect my personal views about any and all of
the subject securities or issuers; and (2) no part of my compensation was, is, or will be directly or indirectly related to the specific
recommendations or views expressed herein. Important disclosures, including price charts, related to the companies recommended in this
report are available in the PDF attachment, through the search function on J.P. Morgan's website
https://mmjpmorgan.com/ disclosures/ company, or by calling this toll free number ( 1-80Q-477-Q406).
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
Confidentiality and Security Notice: This transmission may contain information that is privileged, confidential, legally privileged, and/ or
exempt from disclosure under applicable law. If you are not the intended recipient, you are hereby notified that any disclosure, copying,
distribution, or use of the information contained herein (including any reliance thereon) is STRICTLY PROHIBITED. Although this
transmission and any attachments are believed to be free of any virus or other defect that might affect any computer system into which it
is received and opened, it is the responsibility of the recipient to ensure that it is virus free and no responsibility is accepted by JPMorgan
Chase & Co., its subsidiaries and affiliates, as applicable, for any loss or damage arising in any way from its use. If you received this
transmission in error, please immediately contact the sender and destroy the material in its entirety, whether in electronic or hard copy
format.

12

From:
Sent:
To:

Cc:
Subject:
Attachments:

ThP

~)(~~

Hillard, Dale
Monday, June 08, 2009 12:28 PM
Madzelan , Dan ; Shireman, Bob; Wolff, Russell; Baker, Jeff
Henderson, Linda ; Toney, Dyon ; Wittman , Donna ; Shepard , Nan; Woodward , Jennifer; Laine,
Douglas; Greene, Chris; Minor, Robin
Incentive Compensation - Information Provided by Current Enrollment Counselors
Document. pdf

~tt~rhPrl romnl~i nt w~~ ~lL \(~

b)~(S~)~--------------------------------------I1 --~

Dale Hillard for

SPT-San Francisco/Seattle
-----Original Message----From: BRENDAN.PUEYO@ED.GOV [mailto:brendan.pueyo@ed.gov ]
Sent: MondayJ June 08J 2009 8:58 AM
To: HillardJ Dale
Subject:
Please open the attached document. This document was digitally sent t o you using an HP
Digital Sending device.
To view this document you need to use the Adobe Acrobat Reader. For more information on the
HP MFP Digital Sending Software or a free copy of the Acrobat reader please visit:
http://www.hp.com/go/HP Digital Sender Module.com

From:
Sent:
To:
Subject:

Rose, Charlie
Monday, June 08, 2009 2:1 4PM
Shireman , Bob
RE: Incentive Compensation - Information Provided by Current Enrollment Counselors

Thank you.
-----Original Message----From: Shireman~ Bob
Sent: Monday~ June 08~ 2009 1:55 PM
To: Rose~ Charlie
Subject: FW: Incentive Compensation - I nformation Provided by Current Enrollment Counselors
Charlie:
FYI~ these are the types of concerns I'm hearing from inside and outside the department.
-Bob
- - - - -Original Message----From: Hillard~ Dale
Sent: Monday~ June 08~ 2009 12:28 PM
To: Madzelan~ Dan; Shireman~ Bob; Wolff~ Russell; Baker~ Jeff
Cc: Henderson~ Linda; To ney~ Dyon; Wittman~ Donna; Shepard~ Nan; Woodward~ Jennifer; Laine~
Douglas; Greene~ Chris; Minor~ Robin
Subject: Incentive Compensation - Information Provided by Current Enrollment Counselors

The attached complaint was referred to the l(b)(5)

Dale Hillard for

SPT- San Francisco/Seattle
- - - - -Original Message----From: BRENDAN.PUEYO@ED .GOV [mailto:brendan.pueyo@ed.gov]
Sent: Monday~ June 08~ 2009 8:58 AM
To: Hillard~ Dale
Subject:

Please open the attached document. This document was digitally sent to you using an HP
Digital Sending device.
To view this document you need to use the Adobe Acrobat Reader. For more information on the
HP MFP Digital Sending Software or a free copy of the Acrobat reader please visit:
http://www.hp.com/go/HP Digital Sender Module.com

From:
Sent:
To:
Subject:

Hillard, Dale
Monday, June 08, 2009 4 :39 PM
Shepard, Nan
RE: Incentive Compensation - Information Provided by Current Enrollment Counselors

-----Origi nal Message----From: Shepard~ Nan

Sent: Monday~ June 08~ 2009 1:30 PM
To: Hill ard~ Dale
Subject: FW: Incentive Compensation - Information Provided by Current Enrollment Counselors
(D~J

- - - - -Original Message----From: Wolff~ Russell

Sent: Monday~ June 08~ 2009 1:27 PM
To: Shepard~ Nan
Subject: RE: Incentive Compensation - Information Provided by Current Enrollment Counselors

-----Original Message----From: Hillard~ Dale

Sent: Monday~ June 08~ 2009 9:28 AM
To: Madzela n~ Dan; Shireman~ Bob; Wolff~ Russell; Baker~ Jeff
Cc: Henderson~ Linda; Toney~ Dyon; Wittman~ Donna; Shepard~ Nan; Woodward~ Jennifer; Laine~
Douglas; Greene~ Chris; Mi nor~ Robin
Subject: Incentive Compensat ion - I nformation Provided by Current Enrollment Counselors

The attached complaint ~~~i

l(b)(5)
4

Dale Hillard f or
SPT-San Francisco/Seattle
-----Original Message----From: BRENDAN.PUEYO@ED.GOV [mailto:brendan.ouevo@ed.gov]
Sent : Monday~ June 08~ 2009 8:58AM
To : Hil lard~ Dale
Subject:
Please open the attached document. This document was digitally sent to you using an HP
Digital Sending device.
To view this document you need to use the Adobe Acrobat Reader. For more information on the
HP MFP Digital Sending Software or a free copy of the Acrobat reader please visit:
http://www. hp .com/go/HP Digital Sender Module.com

UNITED STATES DEPARTMENT OF EDUCATION

OFFICE OF INSPECTOR GENERAL
INV~STrGATIOJ\

Cbicago Office
500 W. Madison Street. Suite l-114
Chicago, lL 60661..4544
Phone (312) 73()..1630
Fax(~l2) 730-1550

SERVICES

Dlllhls Oftice

1999 Brvan Street. Suite 1440

Dalla<:. ix 7520 J-6817
Phonc{Z14)661-9530
Fa'l: (214) 6619589

June

3~

K;tno;as City Office

89.30 WarJ Parky..-ay. Suite 2401
Kansas City, M064114-J3(12
Phonc(Sl6)268-~S30
Fax{Sl6)26S~526

2009

MEMORANDUM
TO:

Patrick Kennedy
Area Case Director
Fcderal Student Aid

FROM:

Neil E. Sanchez
Assistant Special Agent in Charge

SUBJECT:

University of Phoenix
Austin, TX

The United States Department of Education, Office of Inspector General has concluded its
inquiry into a complaint concerning the University of Phoenix (UoP), Austin, TX, received by
our office on March 30>2009. The complainants alleged UoP administrators continue to violate
enrollment and retention practices that have previously been defined by the US Department of
Education as predatory, unethical and illegaL The complainants, both veteran UoP em-ollment
counselors. have detailed their allegations in the attached complaint.
Our initial inquiry was tmable to prove or disprove the complainants' allegations. As this
complaint references a prior regulatory action against UoP by the US Department -of Education,
we are referring it to your office for any acbon you deem appropriate. If evidence of fraudulent
activity is noted during your review, please notify our office. If you have any questions
concerning this referral, please contact Special Agent Susan Sc.hmidt at (214) 661-9557 or me at
(214) 661 -9546.

NES/sas
Attachments

cc:

Larry Warder, Acting Chief Operating Officer, FSA

file

The Department of Education's mission is to promote student acttie' ement ami preparation lbr global oompctiti\cnc..~ by f0$1ering educational
excellcn..:e and t:tiSurlng equal access.

February 3rc, 2009

U.S. Department of Education
Office of Inspector General
400 Maryland Avenue, SW
Washington, DC 20202-1500

lSl

Ul-.>

Inspector General,
We request the Department of Education investigate and stop the i!Jegal and unethi<:al

enrollment practices of the University of Phoenix.

This ongoing misconduct injures tens of thousands of students each year- and wastes
hundreds of millions of dollars of taxpayer money. Many of the victimized students are
from low income families.
We a re veteran enrollment counselors employed at the Austin campus of the University.
We have witnessed firsthand these illegal practicies.
Attached is our detailed complaint
Thank you.

Mike Reid
10306 Morado Cove #234
Austin, Texas 78759
979-229-9046

cc:
Federal Bureau of Investigation
9420 Research Blvd.
Echelon II Bldg. Suite
400 Austin, Texas 78759-6539

cc:
The Higher Learning Commission
30 North LaSalle
Suite 2400
Chicago, IL 60602

Derek Haggett
7812 Elkhorn Mountain Trl
Au.stin, Texas 78729
512 662-5845

Executive Summary of a Complaint Against The University of

Phoenix
We are asking the regulatory authorities to order the University of Phoenix to end its illegal
remuneration of its enrollment counselors based on the number of students they each enroll. The
University has so far shown it is unwilling to stop these highly profitable practices, which result in the
abuse of tens of thousands of new students each year - and the plundering of hundreds of millions of
dollars annually from the taxpayer.
We are two veteran enrollment counselors at the University's Austin campus. We previously filed a
complaint in July, 2008 that these practices were continuing despite government fines, numerous
complaints to the education regulators, and lawsuits by employees and students. The University has
made numerous promises to regulators and employees to change its ways, but has so far failed to do so.
Instead, it has moved to mask its activities from further discovery. Since the July, 2008 complaint, the
University has retaliated against us, t.,e authors of that complaint.

The Problem
The University of Phoenix continues to earn large profits from practices which violate federal and state
regulations regarding the enrollment of college students The University pressures thousands of
students into enrolling before they are either ready or financially able or both. The result is that more
than half of all new University students drop before beginning their fifth dass, and many more drop
long before graduating. The majority of University students leave with thousands of dollars of debt and
no degree. They feel humiliated, deceived and dejected. Many of these students are from low education
and or low-income families.
The University of Phoenix has enjoyed billions of dollars of ill-gotten profits from years of continuing
these predatory practices. Recently, the Apollo Group, owner of the University of Phoenix, reported a
29% jump in first quarter profits on an 18% rise fn enrollments, and cash holdings in excess of a billion
dollars. Most of this money has come directly from Title IV funding of its students. Title IV funding is the
primary source of financing used by University students; the University is the largest beneficiary of Title
IV funding.

What This Complaint Covers

In this complaint, we show how the University hires, recruits and trains its enrollment counselors to
perform iliegaf and unethical acts. We give evidence that the University has not changed its practices.
We provide evidence that it continues to pressure its counselors to pressure students, encourages the

Mike Reid- Derek Haggett

-1 -

february 2, 2009

Regulatory Complaint Against University of Phoenix

falsification of student records, misleads students, violates academic standards, and wastes the
taxpayers' money.

End of Executive Summary

Table of Contents
Executive Summary of a Complaint Against The University of Phoenix ............................... .............. .... .... 1
The Problem ........ ... ..... .... ......... ........... .. ...... .... .......... ...... ...... ... ........ .. ..................................................... 1
The Complaint ....... ........ ..... ..... ........................ ....... ... ... ... ..... ............. .. ....... .............. .......... ........ ... .. .. .. .. .. 3
University of Phoenix Continues to Ignore Regulations and Regulators ...... ....... ................. .. .................... 3
University Compliance Investigation .......... ..... ......... ... ... ..... .. .. .................... .. ... ................................... ..... 3
Illegal Pressure on Enrollment Counselors to Pressure Students .. .......... .............. ......... ..... ............ ......... .4
Individual Weekly Budgets .. .... ...... .. ............ .. ....................... ......... .. .. ... ...... ..................................... ......... 5
Predatory Practices ...................................... .. .................. .. ..... ........ ......................... ................... ............. S
Falsification of Student Records ............ ........... .. ..................... .... ......... ........ ..... ........................ ......... ...... 7
Pressuring students to start dass early ............................................................... ..................................... 7
Misleading prospective students ....... .. ...................................... ...................... ....... .. .......... ...................... 9
Financial Aid Misconduct ................................................. ..................... ............ ....... ................ .............. 10
Prospective Student Harassment ........ ...................................... .. .... .. ............... ... ......... ........... ... ........ .... 12
Compensation Violations ............ .... ............... ............................... .. .. ...... ........ .... ........ ........... ...... .......... 13
Punishment and Humiliation of Counselors .............................................................. ............................. 14
Academic Violations .... .......... .. .... ... ... ........ ........................................ ... ............................... .... .............. 15
The Cost to Students and Taxpayers ...... .... .......... .. ... .... ............ .............. ................. .. .. ...... ...... ............ .. 19
Inadequate Regulatory Oversight.... .... .......... ................ .... .............. ...... ......................... .... ...... .............. 20
Other Regulatory Violations ............ ... ................................................. ........... .. .... ....... ..... ............... ....... 21
Conclusion ............................................................................................................................................. 22

Mike Reid- Derek Haggett

- 2-

February 2, 2009

Regulatory Complaint Against University of Phoenix

The Complaint
like Wall Street, self regulation has failed. The University of Phoenix refuses to end it s corrupt
enrollment practices. It has paid only lip service to making the changes it has promised for many years,
preferring to disguise rather than end these practkes. The lure of continued huge profits from its
enrollment practices is too great.
Given the ever increasing size of the abuse, it is only a matter of time before the general public becomes
aware of the University's unethicat and predatory enrollment practices. When that happens, the large
investments made by hundreds of thousands of students will be damaged beyond repair. The
University's reputation may never recover.
The end of enrollment remuneration based on the number of srudents recruited, in any form disguised
or otherwise, will dramatically improve the quality of students being enrolled at our University. The
retention rate wilt rise dramatically from its current abysmal level. The improved reputation of the
University will protect the large investment already made by close to half a million graduates.
Enrollment counselors at the University of Phoen ix can become the trusted counselors that students
deserve.
Ultimately, we belfeve these changes will result in the Apollo Group earning bigger and more legitimate
profits.

University of Phoenix Continues to Ignore Regulations and Regulators

The University is fully aware that these practices are illegal and unethical.
o

The Department of Education fined the University $9.8 million in 2004 for the same illegal
enrollment practices. The Department of Education found at the time that the University of
Phoenix violated the Higher Education Act.

A lawsuit set for trial in California in September accuses the University of fraudulently

We reported to government regulators in Juty 2008 that these abusive practices were

misrepresenting compliance with this Act in order to continue receiving Titfe IV funds .
continuing. We are two of the Austin campus' longest serving enrollment counselors. Our
complaints to the University's senior management were ignored.

University Compliance Investigation

following our July 2008 report, the University conducted an extensive internal investigation of the
Austin campus enrollment department. It interviewed management, support staff, and numerous
enrollment counselors. High ranking officials of the University, including the Apollo President, visited
Mike Reid- Derek Haggett

-3 ~

February 2, 2009

Regulatory Complaint Against University of Phoenix

the campus, promising to change enrollment tactics and to be a 'kinder, more compassionate'
employer. However, despite the rhetoric, no real changes have been made. The Director of Enrollment
was dismissed though the reason was never given. All the other managers cited in our complaint are still
in their managerial positions. The same predatory enrollment practices continue unabated.

As authors of the Juiy 2008 complaint, we have suffered retaliation and discrimination. We have been
threatened with termination for not enrolling unattainable numbers of students and our ability to
perform our jobs has been compromised. Management has interfered with our enrollment of students,
including significantly reducing the number of leads allocated to us. We have had our salaries cut, in one
case to below that of the new trainees. We have been verbally abused numerous times.
Since the July 2008 report, enrollment counselors have been ordered not to tall< to each other regarding
concerns over enrollment practices, or to outside parties, including regulators, at the risk of
termination .

Illegal Pressure on Enrollment Counselors to Pressure Students

The University of Phoenix's predatory enrollment practices stem from the method it has long used to
hire, train, and reward its enrollment counselors. Ths method is based in reality solely on the number
of students enrolled. Counselors are praised and financially rewarded for meeting or exceeding the
target number of students enrolled. The more students they enroll, the more money they are paid.
Counselors are punished and fired for not meeting their target recruitment numbers. This policy is
described below in more detaiL
Enrollment counselors are constantly re minded that their job is a performance based sales position, and
if they won't accept that they should leave. Performance is based in reality solely on the total number of
students they enroll. Enrollment counselors are told almost daily of their need to meet their student
enrollment monthly targets. Excuses for not hitting enrollment quotas are not tolerated. Enrollment
counselors are warned often that they must meet their targets each month in order to avoid disciplinary
actions, including termination.
Enrollment counselors are set daily targets of a minimum of 90 outbound calls and 4 hours of talk time
with students and potential students . They have t o meet these targets in addition to numerous other
tasks, including training and counseling of their existing students. This r~sults in students being
inadequately counseled.
lndivfdua/ enrollment counselor targets are set 48% higher than the campus enrollmen~ targets for the
fiscal year. The University recognizes that the number of students wanting to start school fluctuates on
a monthly basis. The enrollment budget for the campus is adjusted based on historical trends.

Mike Reid - Derek Hoggett

-4-

february 2, 2009

Regulatory Complaint Against University of Phoenix

However, the individual budgets are static, and counselors have targets set as high as enrolling a
minimum of 8 students a month. These near impossible targets are met by very few counselors, and
then not all of the time. For this fiscal year only 15% of counselors are hitting their budget.
Weekly enrollment targets are even more unattainable. Counselors are judged in four main categories
each week: student applications collected, time spent talking with students, the number of outbound
calls made, and the number of referrals collected from students. Individual counselors almost never hit
budget rn any of these categories. Since the beginning of the fiscal year that started in September 2008,
only one of the nearfy forty counselors has hit their weekly budget in aU categories, and then only for
one week in five months.
The pressure to meet unattainable targets results in pressure on students. Prospective students are
harassed and their explicit requests not to be contacted often ignored. Most counselors quit within a
year. The high turnover results in counselors remaining that lack both the experience and the time to
advise students properly and ethically.

Talk Time

Expectation of 4 hours a day

spent on the phone with
potential students

5% meet the weekly goal

Student Referrals

Expectation of 3 student
referrals a week

14% of counselors meet the

weekly goal

Enrollment counselors are encouraged to "Do Whatever it Takes"- the title of a campus meeting last
year- and to misrepresent or omit relevant facts to prospective students, even to the point of outright
lying. Enroilment counselors are often unaware of regulatory or program requirements and under so
much pressure that they will often make up information rather than find out. After enrolling and
starting dass, students are very often ignored, or hurt by mistakes in scheduling or financial aid; many
are left with si2able d~bt to the University or government.

Predatory Practices
Mike Reid- Derek Haggett

- 5-

February 2, 2009

Regulatory Complaint Against University of Phoenix

The University has created an environment that Is clearly predatory. Students are routinely treated in
ways inconsistent with the stated aims of the University. Enrollment counselors are instructed by
managers to use extremely aggressive and emotionally manipulative sales techniques, and taught to
hide such practices to internal compliance officers and to education regulators.
The core sales training used at the Austin Campus is called uDrive Tneory" . It is in the official call script
for the campus. It is taught to all new enrollment counselors.
The Drive Theory technique trains enrollment counselors to probe prospective students for personal
information that can be used to "pound'' students Into going to the University of Phoenix. Counselors
are instructed to manipulate students' emotions, and are disciplined ifthey fail to do so. The official
training manual teaches new e11rotlment counselors to make prospective students feel pain- "MAKE
THEM SIT IN THEIR PAIN."

.....

~i;WI)Jl.II)J"h~l"h~!1"'":
i} ~fZam'"t }~ati!ln (Pam): u-.;~i~atoot.sSt.-!ng_ me deg~e:~< ~? Will~~~

if ycu do11.0~ JJ> ~?

--

. t."& THE.~ SE<..~ lttJl ~~t..\K. 1'?.\t sn IN '.l'HEl.~Jl'A!N. nt-\.NK. THEM FOR s~.ARING ~\.'l!H vou 1:
, ......,....
... ....;......, ............... ~ ..__
.,...~ ....
. -~ - ..

--.

......

Austin Campus Call Script AMMIAPIN

Drive Theory instructs enrollment counselors to ask students how they see themselves without a
degree, and then use that information against them. For example, when students respond by saying
they would feel like a failure, counselors are trained to try to 'close' the student by asking them "how
soon would you like to stop feeling like a failure?" Since most prospective students come from
responding to banner ads or solicitation emails, they are unprepared for this level of pressure.
Counselors will use the student's own words against them if they express concerns about starting.

Whyuow
HOw soon would you ll.lro to stop-.f~ling lUre_.? OR How suon '{~uid

you like to start feeling like? OR How soGD would y~u like t1) be
(fill in with motivation). - You are looking for an ASAP 8ru>'Wer.

Austin Campus Emollment Success Guide

One Austin campus enrollment manager uses the expression (l"tears equals apps (student
applications}". Austin enrollment counselors joke about students whom they 'brought to tears', while
managers giving high fives or say they need to record the conversations so other counselors can heu.
These practices continue to today, and are still part the official policy.

Mike Reid- Derek Haggett

- 6-

February 2, 2009

Regulatory Complaint Against University of Phoenix

Falsification of Student Records

EnroUment counselors are told not to include evidence of these unethical and illegal practices in the
conversation notes on the student's record, or to put in the record any conversations that would alarm
the regulators. Education regulators use student records to heip evaluate the University .
o

One student who wanted to postpone his start date by a month was berated by his enrollment
counselor for almost half an hour. The cDunselor's enrollment manager then joined the call and
berated the student, saying he would 1'go from one losing job to another" . None of these
conversations were put in the official record. The student involved subsequently threatened to
sue the university.
One student was insulted by a manager who openly questioned his sex. Nothing of the
conversation was noted in the official record.

Both managers in these examples retain their positions today.

:lll.<:aai i~Ji.t~lr-3 ~Q2t'$~e ~~~MtO<~A &ltJti~~r.i l>!~i!e1

. C<>&:'f.f! m t!:~~r~ l!l Ca.la.~y.D<t n~.~~~ ;1J<>et ol~ nat~, r.ut

gilf~4fur-tllf<1 pliji<i ~t~~ ft.n~n.sfuk ~~~ ~W~~ !-n the.:nlil~~~.

s~it1hl5 H~ ~p!i:W;m im~ ~~~ly. ~iru:.t: tllis i:1J1ili:f ~~~: ,

~~~e..'y ~a ~--~n(n.~s \'ti* t~ !etth.ddik.

.: e

Enrolfment Meeting Minutes Ol-<l7-08

Enrollment staff is instructed to hide these sales practices from educational regulators during campus
audfts. Before a recent visit by before a audit by education regulators, Counselo rs were told to hide all
posters relating to Drive Theory, and any enrollment awards for student recruitment, that are usually
posted in work cubes . Enrollment staff is also instructed in "the right way" to describe sales activities if
asked by a regulator.

Pressuring students to start class early

University of Phoenix enrollment departments operate on a monthly budget. Enrollment staff is
instructed to pressure students to start class before the end of the budget month. EnroUment staff is
taught there are "no valid reasons" why students cannot start dass right away. As a result, many
students are unprepared for class, and therefore are set up for failure . They usually leave the University
within the first year, many thousands of dollars in debt and without a degree.
The University of Phoenix reinforces this mentality by tying leads to how quickly students are pressured
into class. The University has strict guidelines on who will receive the majority of the {{hot transfer"
leads- students contacted by the call center in Phoenix- which are the highest quality leads. To be
eligible to receive these hot leads, a counselor must "convert" a potential student within two months. If
Mike Reid- Derek Haggett

- 7

february 2, 2009

Regulatory Complaint Against University of Phoenix

counselors enroll a student that they have been working with for more than two months, it counts
towards the counselors' individual budgets, but is not counted in determining lead flow. tf you can get
students to start quickly, you will be rewarded with new leads.

~Stu<kuti

fulve 'itr~llS r-eft'.ions net ta:~ri tll~il.: pi.j~;:am i1'l;~ 'f!iir~i.cW.l11' &tt-a-. Hc.,~.~v~. tll~ systm'!s

Se~ms ti:l pU-;li oomi5~()r..$ attvisi.ll-$:ro ellCoi~l~p&.~i~ 5h1dei:tt~ tc ~wfrigf;1tn~~- !'hi..s is:4irecttt

1~te~ w:t.l1_e.; n~ed '~~l!l~~ ~~t- ttlQttihly btld>~t(.,.,: iunda-sfu.l~d th~t, ~.._..,~,,~r~ ~~ reputati~n .,.;rtile
Ufl~vernty O~.'I:H,E C,!~lVfPUS:<"a!l ~.~ff'ect~d ?~ ~f:l-~n~~~p~:> ~~y tilllt "(!(J'p hs a ~ag apptl).."\Cb
~\le~'l~t:g tb~tit PQ.~h~ .P~i~~~ ~v ~~"ft;4ringr 1;C~jf~ A~~ '
Enrollment Opinion SUrvey 2004

One student was told she had to speak to a manager to get permission to move her start date, despite
the fact that the student's father had just passed away and she needed to plan his funeral. The manager
asked the student if her father would not want her to be educated; she was so upset that her relatives
told her to hang up the phone. She called back 15 minutes later in t ears. All the student wanted was to
postpone her start date, but the manager said this was not an option as "she has to stick, we are too
close to budget".
One student wanted to delay her start date until after her wedding. The manager said her request was
unacceptable, and to tell the student she had to start on her original start date. The student dropped
out soon after she returned. the Director of Enrollment later admitted it was a mistake to force the
student to start her before her wedding.

Getting mar tied \'tillbt a spe.da[ei'\<' i-ut y~Hl; <tttd l'~efi:ingy~&r degl"rewill ht alloth.er.speclai :

day;s~ s~~.~~ y~tll~~n~-e~t r,~~~~iu~(~tra~ ~t, ~-~gure:oaflro~~v~ean:~~e them ~

tiiippelL .

..

Austin Campus Enrollment Success Guide - convfndng students to start before a wedding

The counselor of one student, who was unable to qualify as an independent student until after her
birthday in two weeks, was told by the enrollment manager to start the student before, within the
budget month. The premature start caused the student to pay an extra $3,000 in out of pod<et
expenses; waiting two weeks to enter the new financial aid year would have avoided this cost. When
asked how this was in the best interest of the student, the manager replied "We!!1 you need to hit
budget. The manager emphasized the point with an Emeril-Hke "BAM!"
Students are often started in an online degree program before they have arranged for home access to
the internet. Students are told to go to the library or use a computer at the campus. This is an
extremely unrealistic expectation set for these students as dotng classes online can be extremely time
consuming. Such students rarely graduate.

Mike Reid - Derek Haggett

February 2, 2009

Regulatory Complaint Against university of Phoenix

Enrollment counselors are routinely told one thing in group meetings and the opposite in individual
meetings with managers. In a recent campus meeting, academic and finance staff, and faculty expressed
concern at the caliber of many students being enrolled at the University. They complained o7 students
who were unprepared for the rigors of the degree program. However, enrollment managers make it
very dear in individual meetings with enrollment counselors that they are to continue to pressure
students into enrolling, unless there is "somebody to replace him or her" . One enrollment said that
getting a student to fill out his financial aid was where the Enrollment Department's responsibility
ended.

Misleading prospective students

Enrollment counselors are routinely instructed to He or mislead students. Management uses the phrase
"don't let the students get in the way of themselves with too much information". enrollment managers
instruct counselors to hide the fact the University starts new online classes every week and campus
classes every month to avoid giving students the option of starting the next month. Students start with
the assumption that the University uses the semester system for new classes.
Enrollment counselors are instructed to mislead students as to the courses contained in a specific
degree program, or about the job prospects that relate to that degree. This is done to make the
student's degree interest align with a program the counselor is able to enroll for. For example,
Enrollment counselors are instructed to tell students who eventually want to teach high school that
they will need a bachelor's degr~e. While it is true that such students will need a bachelor's degree,
enrollment counselors often never mention the other requirements, such as having a certain number of
credits in the area they wish to teach. They do so to avoid transferring the student to a counselor
approved to enroll in these areas. "losing" the student to another counselor would hurt the counselor's
ability to meet his or her monthly budget; instead, the counselor will push a degree program he or she is
certified to enroll for.

Fmdhi&: Entoilnlott and .ttademtc:tpuhsclots we found Eo b~ not kn-owledg,e<tb.le in.

lll81s ~d:y "a 'l~ling ~the .academic affairs.depa:mitent iu:httt
ttaini:ng them. S.ncli ttainings..lioutd: heregwarly scheduled and t:epea~f!d . There is not
tnummoxe d.angtt()US.1Mll~C'5"~d AC:nvho ~~ poo.dy iu:fonn~~. :md otdy ae1:d~i~
atTai:rs has the ability to pr-0"1de the kliowtedge they tte~d.

pr~gram tequii~ents.

Maryland Campus Audit

THEN:- YC>l.J CH<)()SE THE PROGR-\.\1 FOR THE1v1 ... make

~1Jfc you ask the 1ight_questions then ddivcr a prognun.
__ ....,.._ - - 1
...

....

,..-.

__.

......

.. -

~~ -

__,._.., ..

--

Austin Campus Enrollment Success Guide

Mike Reid - Derek Haggett

-9-

February 2, 2009

Regulatory Complaint Against University of Phoenix

C. Swdents 't.~e ver.~r J'('.Smt~ut of: being told ~hey caa:id ~ampl~~ fheir prog.r.ams
if,3. ~ne locati.m:J. an.cl ~en ,~at!!:.t' b~in:g tQl~ that thy: wuutq .il~~. ~., g.o t\'l aQ;otb..er
locatiop t~.c~mP,fete. At~~st ~e stu~ S1;ated tlutth.e-h.ad b~en.li~d t~ ab~u.t
the pr~gr:nn:hv
..
.
. the enro1hrienf C:Ou.n:Sdor..
.
----~

Boston Campus Audit

When students ask to postpone start dates or to drop from school, enrollment counselors are trained to
either exaggerate the steps involved In the process, or tell students they are locked in, even if they have
yet to start their degree. One training document for academic counselors instructs them to place the
student on hold, find whatever "buddy" is available, have them represent themselves as a manager, and
use them to "help the student realize it may not be so easy to 'just drop ."'

Financial Aid Misconduct

The majority of students enrolled at the University of Phoenix use financial aid. Helping students apply
for this aid is part of the enrollment counselor's job. The pressure to hit monthly enroHment budgets
has resulted in students being misled as to what financial aid entails, or being improperly pressured to
obtain this funding.
Enrollment counselors have been ordered to tell students that they have to apply for financial aid. One
enrollment manager at the Austin campus told an enrollment counselor to tell his student, whose
education voucher from her employer had been delayed, that she had to use her federal student aid;
the manager told the counselor that "we need to meet our monthly budget". The same tnanager told a
student who had access to the Gl Bill that he had to fill out financial aid, as a "courtesy".
Enrollment counselors have misled students wtth regard to financial aid expectations. One Austin
enrollment counselor recently told a prospective student: "You don't have to start repayment on the
loan until after you graduate, by which time you will have that over $100,000 a year job that you will get
with the degree".

0rJ-the-topic.pffinan6atgt~idaflC'es onestUtlent~that. ?~ .. it)\~S. like aifthey

wanttado:is-~ ~ ro~hi ttledr:- Th.ey- 9i~tt:'Uellme ~outth-esh~w$1, qr
~ op;im:rstbpay: 1 had to:findtnatout ~ywtf."' firtolhetstLu:f~ntstated that

~!:~~~~~:~~-ooutdn~t~~l -nim ~~~~~:he nee~dttt.pay to-c~mplete his_ ~

~

..

~.

Virgima Audit

--

The University of Phoenix's financial aid application website is supposed to explain the expectations for
students that use financial aid aod educate them on the costs of the University1 s degree programs.
Mike Reid- Derek Haggett

-10-

February 2, 2009

Regulatory Complaint Against University of Phoenix

However, enrollment staff routinely encourages students to skip major portions of this site, to navigate
through the application as quickly as possible, and avoid reading the information before proceeding. For
example, students are asked to open the "Financial Options Guide" document that lays out the
student's options for paying fo r school. It is common to hear counselors tell students to open the guide
document and immediately close it in order to progress to the next stage of the application process.
Financial aid misrepresentation is under-reported to regulators and government agencies because many
students drop out in the first class, before financial aid is certified, so the fees owed are transferred to
the university's intemal collection apparatus, and thus not induded in the university's official default
rate.

The University has improperly kept scholarship money belonging to a student that did '"lOt start dass.
One of us was contacted by a student that was enrolled, but never started class. The student later
received a tax form in the mail from the scholarship foundation, showing that her scholarship had been
used. Upon investigation, it was discovered that the University had received the scholarship monies in
April 2008, and retained the funds after the student did not start. Scholarship money is supposed to be
returned if the individual does not begin classes.

. .:.:

~University of

Page:

-.

1.}

1 of l

~.~Phoerux>Y

!.~l~

COt.LEGE. OF ONIVaP..Sr!'Y OF ?!iO

3157 E: ELWOOD S'l'REE!'

P.HOEN!X,

!JU1 ~

Date:

AZ 85034

.: :~:: ~:.:. ----

Parit .

Receipt:
..._ ... u'' ''"i" -.A4 ,

=[

HILL CO'ON'l'RY COMt40N!'rY FOQU>A:J.'

ro 'SOX. 84 8
S~"STT I

~-lunber:

TX 76Gll

900,00

Total Receipt
ReceJ.ved by

Appli~d :

..... ___

~o.oo
~...,_,.

....

__
.., _
Tota1 Unapplied Receipt: ________
. $900.GO
.
Total

~counci~g Depa~tment

~~unt

Received:

$900.00

Tne urwersity kept scholaMp funds for a student that did not start das.s

Mike Reid - Derek Haggett

- 11 -

February 2, 2009

Regulatory Complaint Against University of Phoenix

Prospective Student Harassment

The University is overly aggressive in the way it contacts potential students. Counselors are instructed to
call a new lead between five and twenty-one times in the first week, send three emails, and leave 3
voicemails on both home and business numbers.
Enrollment counselors are pressured to make a large number of calls each and every day. To meet these
quotas, counseiors are required to call students on "Blitz Usts". Blitz lists are lists of student names and
phone numbers, usually of other enrollment counselors; students who have yet to enroll at the
University. Blitz lists are designed to allow enrollment counselors to bypass the student's contact
record. Students are contacted repeatedly by different counselors. Counselors are instructed not to
waste time looking up the student's history before trying to contact them. Students are therefore
contacted even if they have previously told the University they are not interested in enrolling, or want to
be contacted only after a specific date, or have previously demanded that the Universi~ stop calling
them. Enrollment counselors, under pressure to meet their daily call quotas, rarely update the student's
record with the student's latest comments, requests, and complaints.
''.;

.
.
.
li''t~~.dol!t ~Saelly reqUffi it, '\..-e sho'Uld.s{ change it tC? 'NF."7 (Sfu~ !hey only sai<i tlt~y \l.~t~ going to
..\C"...;.:} l \l'Ollldllt giv< it t.:nh.I~Ul- rh~ tJa.\~ lo \\',;tr}: ll;mft~r 1han th.~1;!
..

--

- - --~'""'-'

The re;llv to a request that a student oe removed from the calling list ;;fter they stated that they were crttending anothe:

&hool and not interesb!d

The Untversity pressures counselors to generate their own leads through referrals from current or
perspective students. To meet referral targets, counselors will enter in virtually anybody they can get
contact information for- regardless of their interest in the University. These leads are aggressively
worked: they routinely appear on blitz lists where they will be called numerous times by multiple
counselors.
The Austin campus is expected to generate over 400 referrals each month; each counselor has a
monthly budget of 10. Only 14% of counselors hit their weekly budget.
ThM\I.Vt(>!t ~<1 """~~ M .!.l.J:gt {G<J~;ul"tt>'!'(:li:~~'i <;n 1't'f\f.n~!~ r..:>t~h ~ (l~~.

f.c:

;~~ mal<a-;.un\ yO<.: ;~r~t- :~s.t<!'l.~~~r:i<: ;.;._~~lon~.

?~~"'-~~ ~o<tl ~~

to 4'Mr~

)(0'r~f~~~ ~:1!1

Dally Referrals Report

Mike Reid- Derek Haggett

- 12-

February 2, 2009

Regulatory Complaint Against University of Phoenix

The University's lead contact policy states that the only way a student may not be contacted is if the
student has specifically requested placement on the Do Not Call list. Statements by students that they
are attending another school, or have no interest in attending the University of Phoenix, is not regarded
as sufficient reason to be removed from the contact lists. If a spouse or parent of a prospective student
asks the University not to call, counselors are instructed to ignore them and to continue to attempt
contact-a violation offederal Do Not Calt legislation.
Counselors are ordered in official policy to call prospective students at iea.st 20 times in one week until
they establish voice contact. Conversion percentages and enrollment numbers determine how many
student leads an enrollment counselor will receive. With the constant pressu re to hit budget targets
that less than 25% of counselors are able to meet, the drive to win these leads is immense.

Compensation Violations
Federal law prohibits tying the salaries of enrollment staff directly to student enrollments. Despite being
fined by the Department of Education for doing this, the University continues to reward and discipline
enrollment counselors solely on the number of students they enroll. Reward comes in the form of extra
leads, increases in sala ries, and Job promotions . Punishment comes in the way of ;educed leads,
reductions in salaries, job demotions, and job termination.
The University's hiring and training of its enrollment counselors blatantly breaches federal and state
education laws. Federal Law prohibits enrollment counselors to be paid solely based on the number of
students they enroll, or on the amount of financial aid received. The University was fined by the
Department of Education for breaching this law in 2004, The University is currently the defendant in a
lawsuit in CaHfornia over these illegal practices. Despite numerous public denials by the University that
these illegal practices have been discontinued, in actuality they continue unabated and unchanged.
All new enrollment counselor hires come via an employment agency. While campuses are forbidden by
law from tying salaries to enrollment, the Austin campus breaks the law by doing precisely that with its
agency hires. The Austin campus publishes a 'new hire matrix' which it gives to agency h ires and which
shows dearly how each new hire's salary increases solely on the number of stu dents the y enroll.
Furthermore, all agency hires are told explicitly that permanent empioyment at the University depends
entirely on how many students they enroll . tf they exceed the minimum number of enrollments within a
fixed period, they are promised a raise. If they do not meet the mrnimum number of enrollments, they
are told they will be let go. Not only is this matrix strictly against stated corporate policy, its use is
dearly illegal. Enrollment counselors are ordered by managers never to show this 'matrix' to anyone
outside of the company, especially to regulatory inspectors. Enrollment counselors are given extensive
training on how to describe the hiring process ''the right way" to any compliance or regutatory officer.

Mike Reid- Derek Haggett

-13-

february 2, 2009

Regulatory Complaint Against University of Phoenix

Enrolment Month 1

Enroilment Mont." '2

Enroflnti!Ut Mo,ttl: 3"'

Total

Base Salary increase

89

S3,0JO

10+

$4000-S6000

~m

<\

I
'2

10

S2,000

'2

14+

S3,000-S4000

'2

8-9

no pa.y change

:1.

'2

B.ttweett 4-6

no pay change-

Ifthe last =th ofthe agency period generates 2

~ques: an
";,;,

less Mf'<'lllm~nn., 'th~oe may be no pay increase an<!' we may

I month ofi -"-

i
moo

Jfan agmeY bi.re pto<iuce, bchvctn 4-6 dllnng

their ageneYP
A.'-'D til~Yhave been :ru:ctin!"
-.. exPc:ctatioi!S in
the majority of1he soft skills, ~em.cat may request up 14 two additional months of ped'ormance. A total of eiglu
er.roilmelll$ will ncoo to be genet1!1ed duriog ~ additional two month period w be brought on penuar.er:tly.

Punishment and Humiliation of Counselors

Since the Department of Education fine, the University has circumvented the law by pretending to rate
counselors on 23 categories of performance, including numeric enrollments and other "soft skills." This
'perform matrix' is in reality a thinly veiled scheme to mask the fact that it continues to reward
counselors based solely on the number of students they enrolL Enrollment managers focus only on
enroflment numbers in meetings with counselors. Salaries and salary projections are always given only
in terms of the number of enrollments. Enrollment counselors are able to project their salary at any
point by consulting a table with salary adjustments listed by number of enrollments versus their
monthly budget.

Mike Reid -Derek Hoggett

- 14-

February 2, 2009

Regulatory Complaint Against University of Phoenix

There is a widespread belief that the performance reviews given to counselors at six mcnth intervals is a
sham. Counselors are supposedly evaluated on numeric scores from enrollments and a series of "soft
skills." However, it seems obvious that this is not the case, and that salary adjustments are based
entirely on enrollments. One enrollment counselor was given a 'mock review' after his review period
ended, yet received wildly different scores during his actual review in order to fit the salary adjustment
management wanted to make based solely on the number of students he enrolled.
Since the University is prohibited by !aw from openly rewarding performance solely on the number of
students enrolled, the Austin campus uses subterfuge to circumvent the law by punishing "nonproducers~~ for non-related inddents. To enforce this 'performance' enrollment numbers-only driven
culture, the University has a disciplinary system in place to 'correct' enrollment counselors that fail to
meet their monthly ctUota. In the Austin campus fewer than 20% of counselors meet their monthly
quota. The first stage in the disciplinary process is the "Discussion Memo", which outlines performance
issues of an enrollment counselor who has not hit his or her enrollment budget. In these Discussion
Memos, enrollment counselors are warned explicitly that they ne~d to enroll a certain number of
students each month to avoid further punishment, or to avoid getting their pay cut. The following
excerpt come from one such Discussion Memo:
:For~ ~\'ll~':l~ c-<~tin5lr ~...~l"f)'Our ~~~~w!-.:ru-~t~gfC:f ~ llii!tin.~unxo:fs ~lV~Ill~l~~tcarod ~ lllOO"Iil, Thw
~runbe-1s sigi::ifii.:ntty Itt'-~ ib~ tft~ ro~t'i e~~tion ofyoo_;f>ut,VJfl iflc~Y ~U.to 'k<i.~~or;net,im(t ftrr itaU!ifii a~ .
.de-~"~Z:topl':n.tm.. -we ~cl dili. dllles~.enN~tb&.}1ing i~ <1 ~l~ i::Y~~~#~1;3Ji b~:Yl.rurru.tlli"il ,..,J~1'<l>~ensai~i l'"zu1o: t8_1i~
:ady~':\~ 9fit..

.ww

\tJ"hil~.t-u~'!f\g t~M~\ ~~"'t&!cn -of }'AAt'joo,~ts.""w't~c .~u~~:~tin<i!Y v.~<J:ps..,, it &:-~ ~~m!?n lhll:t xocr revie'i'!
:Mt ~ ~~\'l!l:J' ~p>~:by a r~~(l~>::-u "ifl }~tg petfu~:a.1~- ~!you: wa:t~10 ac!tl~"'<!' ts ?re;rJ!r~ ~mpr-CN~1"' r,v~".
,}1}~ .WU{.-sfi1t ~lill't;~ In a fs. i 0% ~<::r~~ifl )~Ur pay. Y Oc:t 1""...\{!:WJ.S lV.eiG\l >.)!J )<'fJii!.:>~Ol'e~ Un),; c.J;te'gQ1i41-$ lnc.'-'ud.fu~
J~~~brm~ee; camm~!<:~-ttiolt;Jl.d~ll~tt, c~ultt .$e;"'1.e, p~f~s.si0)1M d~,..~~~l!'m, nnti. \\mk~ n!tli~IORshi~.

The second stage in the disciplinary process is called a "Written Warning". It is the first formal step in
the termination process. We have both received Written Warnings since filing our July 2008 complaint,
based in reality entirely on enrollment numbers. One Written Warning contained performance aver a
three month period in which only 8% of counselors hit their budget. This Warning was given despite the
counselor meeting or exceeding every other performance criteria but one, and that was for nonenrollment related skill that counselors only hit 5% of the time . The Written Warnings end by stating
that non-improvement will lead to further disciplinary steps, induding termination. Nearly every
Written Warning that we have seen counselors get in the past two years has been triggered by the
counselor not meeting student enrollment numbers.
The final stage in the disdplinary process, the last step before act>..Jal employee termination, is called
"Decision Making Leave." Again, the "soft skills" charade is employed, when in reality only student
enrollments are considered. One non-performing enrollment counselor with excellent ;md proven ''soft
skills" was recently placed on Decision Making leave, leaving no doubt that her warning was based
Mike Reid- Derek Haggett

- 15.

February 2, 2009

Regulatory Complaint Against University of Phoenix

so~ ely

on her failure to meet her student enrollment quota . There was no written documentation to
support the fabricated "areas of opportunity" presented to her: in fact those 'areas' directly
contradicted previously written and recent performance reviews from her manager.

;My fin>t ar~ Of(;oncer.n is the woLding Jri para.grilph.one oftlie Decisi~u ~~~ili)ng !,~a.~ <l()C:Il1';).eD't that
:sl:~te.s" sinee your prior~{,~,~r;Jjnary adion."l, jo.ur wotk pe.ribm1<m~ has .:.t<t :suJ~ta.i:n#:d i.mJ>~lOVe"Jncr~t
1 ~wry~ di.&a~ee l<..-idJ.thiu:tdte~nt. h~ &.et~ l oolfuve ib~ ~osite ~ {n:~ 1}(~1 ~1 r~~dll<U::k tlut.tl
b.&...e. r.eceiw.~ticm l.UJ" tr.n.ng>eL~ ill t:ha.past tw~ mot!.th.s sup~$Hii.s cl.af.:>t tall~ <ltta~b:iag aH
the Neekl~ l <IU l.f~ ~ha.t:I h.aVf!;!"~~ed frtJmmj 1Mnager. To ci~ the- r~~c.ro-e<:e"f'>~tl 0)}
Mn/~s. \.yo\~ a.~ed~]n"".the .rjgtlt ~hiags ts) gd j'o.ttr i".nmUm!!~ts .ltp..~' Tliis w~ ili ~~pt>nse u):n.
_month.?fnothitt:Jn? RifG ~al$. ~m.a ~ny ~\<l'Wtge~ ~!00g"lllftOO"th\U,t was <tl:r3dy 'Wonung t.OWax>d$11

I.
f

~'

.s~teog~.c plnn tQ t>:rmg-1tp alt &tre.<ts t>f pt:!rfurman~ 1Mludw..g~~l~e.nts,

:~ince-the\Vritten W~<Tniag ~n ~/~9/(}S., I h;rvl;! wurkecl-vt:t-y-dc:~seh~ with:l'nJ'.m&m~~-r to .Mpl':l'>~~~ aU

,,~eai of mj perl?Mm.l:l~;.:..~lj.~~\td.m ~~,:ou~~etl#~!'eteniioil; -~~.ierr;ili; ~nd tr~i}ing. ~N'h~e roy

~~roU...-ueot$ ro Mar.ch ~nd April did n<>t. .Rl~et n~ golll. my 1-:ent:ntl.o.F...to~: .Ap>lt artd M.ey t~ e-u11-ently at
: l~i,. .My en.~Umeilt 1'~tmh~s. in 1\~:y <?.~t~d:tllY gc-~L . t h~\>-e rotl.~-.iiti:n{l_y $ubn~ted i-efen-?Js t<)
:~e qa 'tne.k.to lne.c.t e::pect.ati()uS- fu.r.m)-: ne:xt l"~~k:w. My: dial~ a..>td.~tlStOl:ri~r :~eric~ :th.~ h2.\"e .
:~~ed ~~ns~ten~ ~ meet~;~)~ewtti<lnS :e;l.Cl:i month. l am also 'actaihlng~y- Ttlttu:Ptoil~ti.~it)
:Re~t~ V"Atkh mitlh~e:$ ~Y. w~kly prh~<;ti v\t~.
Amanda Gutman Decision Making Leave Response

The Austin campus enrollment managers constantly abuse counselors for accepting any excuses for why
a student cannot or will not enroll. To enforce this 'no excuse' policy, counselors are publicly humiliated,
as a team or individually, for their lack of enrollments. In a weekly one on one performance meeting
with my manager, he instructed me to do "whatever it takes" to enroll students for the week, to "pound
them" into dass, and that if I was unsuccessful that he would have management "skin me alive.''

Academic Violations
The University of Phoenix continues to mislead consumers, shareholders {by repeatedly stating it has
ended the foHowing practices), and the Department of Education. University faculty is pressured to
violate academic policy and government requirements in an effort to keep students in class, and
therefore paying their tuition fees. Students are passed that by any standard should be failed. Students
are awarded grades for student work not completed, and are allowed time to complete assignments
long after the deadline. student plagiarism is often ignored. These violations devalue the degree earned
at the University, and thus harm the investments made by both students and the government, and
therefore the taxpayer.
The following internal corporate audit reports show the contradiction in the University's stated
positions on academic issues:

Mike Reid- Derek Hoggett

- 16 -

February 2, 2009

Regulatory Complaint Against University of Phoenix

"We were told they were not "good team members" since they did not realize retention was the
goal and would not do "whatever was needed" to accomplish that goal. This apparently Included
working after a course was completed with a failed student to allow for work to be done after the
course to perhaps allow the student to pass. Faculty told us they feit press ure from the

operational staff, as a matter of campus policy, to not fall s-~udents. It was apparent academic
rigor and quality measures were se<:ondary issues in tile view of many of the staff. The academic
affairs staff echoed, to a lesser degree, a frustration with similar issues of focus."

Ove:n~w.aad .DAA Co1nn.euis

l twas cl:i~-ieus to th.team.:that. the an~ had.p!aced coo.sid~raille: df~lt into preparation

-fur tit~ ~~se$ment~ ;an(f.ronte. ~!tif.~ts iatoU~t~d ~ere rea<illy ~:viliable, A11 itCUi.~t
~ff~petron~~

wm eag~ to :\istt ,v~~h:dn~ team.:

.
.
.
r!iec~~ i~u~. I~"e~er~ d~~U:Sti<rtethda~ofd$t.y ~1-Ii,~h.u ~cademi~. 4-o~s ~
~~.-o.f a cimf_)n~ stru<:t~.lre. ~V~ .~-&e tcldt.h:ey~v('.fe.not ~~d team.men~-crs" sinte
t.heydid .riot.rea!b:e tetclltio-n. \"tyas rhegca1. a:n~y.-~ti.ldnot do "wh~te..~n?;"as needed.: t.o
a:~o?m:PfHh; ~la:t:z~al. 1hls a,pp,~~ltlyin~u-ded vz~~king aft~t: a. coune ~~s completed
~i.th .a:fiilM stlldMt. to <illow. f.o.r:~w:u:k't~ be don<! aft~r theoomse t-o p<erhaps ~~~ the
sta.4~n(r.~ p~s.:'f~t;.-: ~~d.~ ~~t:i:~t.~~~~ ..fr9,m. th.e ~~ati~i~: s:~~ as ~:n~aue: o(
ca.n~s
polkv~
to--:not:fa:ii stu'dotti>.
Wn~t.er thltt is tru,e.o.r n~t . if fa-Culty
i~ fe.ding sudt
a
. . ..
?'
..

.
,pte~. e-Gl,!'ect~<m -o( som~ S;OO:)s n~~. kw.as ~ppare-nt ~cadem.i:c rigO.t< :md~~
.m~~- '>Y~e ~oo~axy ~~ in ~h~~i~v ofmany-o.f the staii.'1b-eaa.deJ?.ic a,fWI'S:
S.~ffedwed..; to s lesser d~~e , ll.. f'rttsiruimt with siwil:tt -issu.es of fo~s.. $.)me ef:t.btt. t.o
~~ttea ruth' niisp~~ii~:ns, :is:probib~y ~ :ot"det.
.

'

Maryland campus Audlt

From the minutes of Directors of Academic Affair teleconferences:

~'tf,

however, we ever try to evaluate a CCC's performance based on retention, we run afoul of

HlC.... big time. Faculty may never be pressured to retain for retention's sake. tt is a clear
conflict with what we hire them to do (evaluate student achievement .... objectively). I truly am
enthused about establishing a goal for academics to have responsibility for ''student success" (
and seeking words to do that), but as Bill said dearly in the meeting in December, we do not want
the accrediting body ever seeing a faculty goal of "retaining" students; it is a conflict with
academic rigor and will not fly . "

Mike Reid - Derek Haggett

. 17 -

February 2, 2009

Regulatory Complaint Against University of Phoenix

~ete~tioJ! $au Ac;:ad~'! -'\Jf~~~~ ~~Jln~l ~~f: M-ed-ynt': a*iJtO\~-l~F~l~Y DA-r\s ~~&
"With a show ~fb~-d.Sit wa1;,!eu:nd

ret(llti~n ~- ~pn of thcir ~rulo~a.f ~notmi.ttce..g.t:tais,.

that:apJJt:o~iniatcly {) t{f 3 DAA~ ~ad th~ l~W.t a~

put otth~t: pcrto~~~ne. g~al$.

MO.t1ne~~fia{ ~tt~have.ret~tioil. as a grisl.f~~ a_ny DAAorehmi~ a dire~: conflia.

~mt*~:w.ith c:~r ,fiLC:-at;s-edita~oo~~~~- : B~~C'!W .{.<;. ~~~c~-:from -D r. Emil! . .

_P!ice.; A;ss~!eV:-?: :f~~~ad~ Op~~cns:g~g ~O:re:d~ ~ruents r~din~r

this. R~s: ~<m1n1ciit is ;direcled~.OW:~d th.~ Campus :(;ollegectraas,i :but ;at~o- mdu4es th-e
p~~ >V:~~'l ~:S~:t~t:h.~~:.l:n ~r ~~~~~.em~ .
'

_ ,....., _

October DAA Teleconference

tf.;nnwevef~ we e\rerey to eva:lu~~ a CCC':spBrtom1ance base~ en retention,we

runatoufot Hl.C..;Jjg time., Faculty may neverbe presstlredto retain

for:ietenfiorfs sake, ltis a cl~ar conntdwifh wfla{we hiret.n~rri to do (evaluate

studentachte.\tet11ent. ..objetthlety} f kuty am ehthused abol:lfestabtlshing:a goal
for academtcs-to havet~spoosilli!llvfor "stud~nt success." (and seeking words to
qo-tryat}~ i?ut a,s-t}~lJ ~~tq ~eartY ;nth~:ffiB~ttfl:tJ:in Qet.empeJ:, \if~ do J:l:Of'~"~nttoo
atcreooing body ever seein~l a facu!~goai of"tta1ning'"sruoonts; it is a cbnflict
~iiuh.aeaa~iiuciig~aw.hwt n9tJJY..

. .

October OAA Teleconference

Fmdmg:'l?bparlsin:cas-e:s- At tlit~DAAJ~'-"cl t()tah:&t'hredas:ty.car/ Sucli nu.mben iud'ill:at.t:

a:.s$gW:fircandaq.: 9: ~~~ti~~~ ~.(' ~l:l~t~: ?~fty :<f..nnh!etu .going "t~<nc~t:e<f. A <:a~p~~
t~<?$_iie of M~n:y1~4 ~h~uld :e.~-pe~en~. l~ t~~ t~atnnnlb~f' ~asecl. o~. tJahecity
~~l!tieu=ce . F~~: ~ug .iS: :s:-w;cty .in QTA..
Maryland Campus Audit

----

Finding: Studan~:ep.~d that 1~ tne:icJk:tan instructorthat-a stuctent\\~s

narpui.J.ittg his ortt.erweight;ttrey:weri:toltfto:Rxit -tl'temsetves 6t~s: ~. team
,issue)~. ifttteydiQ)i9t ind~ a:te~mma~s. name on :t?~.~gqment be~use

~eot srte diu r.rot;~tfibu~, !he :mcutly n~mbe~:raspo~~ ~\as that:they (file
team} shotl:fP:t)av~ r:esGlved:ttlis issu.e;; the nen41.Qn~uting.!Studentis often
Q1Ven...creditfot.wod(
not
done;= .. : : : ....
...
. ..
. .. ..
~.

------'

Philadelphia Audit

These examples are from only one year of audits at seven of the University's 68 campuses. The audits
do not cover students taking online degrees; here the retention and graduating rates are much lower,
so abusive incidents are likely to be more egregious and frequent This widespread misconduct from

Mike Reid -Derek Haggett

- 18-

February 2, 2009

Regulatory Compiaint Against University of Phoenix

such a small sampling of audits suggests that a thorough review of all of the University's internal
documents needs to be undertaken by external authorities.

The Cost to Students and Taxpayers

A direct result of these unethical and illegal enrollment practices is that a large percentage of new
students at the University of Phoenix are either unprepared or unqualified for school or both. A huge
majority of University of Phoenix students- some flgures estimate the number in excess of 80% -do not
finish their degrees, and leave the University with thousands of dollars of student debt. The exact
percentages are never disclosed, but one published estimate says that only 16% of University of Phoenix
students graduate. One University of Phoenix student exit survey of approximately 112,000 students
over a three-year period found that 28%, or almost 32,000 students of those poHed, said they dropped
out of the University of Phoenix because of enrollment issues, finandaf or financial aid issues, or
problems with the University that they would not say.

>,'}clil

1.6''1.

9:1CS

s:~f.~

I'IOIAvl!f,~

11,'9Sa

I C.~

Nots.AsOe<!

8,4>2

6.7$%.

..

Many student concerns emerge at the very beginning of their program. According to a September 2007,
Houston Campus student retention report, only 38% of online students and 60% of campus students
even reach the fifth class. Retention numbers for the associate degree program are not published, but
are widely known to be much worse.

Mike Reid - Derek Haggett

- 19 -

February 2, 2009

Regulatory Complaint Agalnst University of Phoenix

Inadequate Regulatory Oversight

The University of Phoenix has avoided serious external investigation of its enrollment practices due to
policies that encourage the hiding of evidence from the regulators and due to the fragmented nature of
higher education regulation. Oversight is split between the various regulatory agencies and between the
states and the federal government. The University's accreditation is overseen by the Higher Learning
Commission, some of its practices are monitored by the Department of Education, its financial reporting
ls monitored by the Securities and Exchange Commission, etc.
Inspections nearly always focus on faculty and not enrollment. In the most recent inspection of the
Austin campus, the Texas state regulators seemingly never entered the enrollment department offices
or interviewed the counselors. They missed the wall charts showing the weekly number of students
enrolled by each counselor. They were unaware that management had ordered enrollment counselors
to take down their individual awards for student enrollments- at least untif after the regulators had
left. Before visits by regulators, enrollment counselors are trained on how to answer questions "the
right way" if they are ever questioned by internal corporate officers or regulators.
The University encourages staff not to fully document issues or conversations with students that could
prove embarrassing or non-compliant. Counselors and other staff are routinely warned about the
content left In the official student records, as students have a right to see their flies at any time.
Students are often wrongly scheduled based on misunderstandings, or misinformed on the number of
transferred credits coming into their programs. Online counselors are the worst offenders because of
their heavy student toads. With incomplete or deceptive notes, students are in danger of not being fully
advised on the issues affecting their further education. Once a student is out of attendance, it is almost
impossible for them to get a callback from a University employee or gain access to their records.
Staff is routinety told "lf it's not in Galaxy, it didn't happen." Galaxy is the student record database
system where dtfferent departments have access the student's record. However, much of the
documentation required in student files is absent. During the enrollment cycle, most conversations
Mike Reid -Derek Hoggett

-20-

February 2, 2009

Regulatory Complaint Against University of Phoenix

regarding financial aid, program outcomes, or academic progression are not documented. To my
knowledge, a major investigation of these records has never been made. Any such systematic attempt
for former students to have their records evaluated would show these gaps. The University would
therefore likely be unable to contradict student daims of ill-advisement, making program and tuition
write-offs likely.

Other Regulatory Violations

The university does an inadequate Job of securing student information. Staff is instructed to keep
student files locked at all times that they are away from their desks. However, many counselors do not
do so on a consistent basis Some counselors do not have the means to lock their student records. One
counselor has asked for a key four times in writing and numerous times verbally over tne course of
several months and never received a response.
The Univef'Sity of Phoenix's risk of its accreditation is heightened by the fact that many of the records
documenting activities and student advisement are incomplete. Many required conversations are never
documented, including about finandal aid and program requirements. While counselors are advised on
how to document conversations, few do on a consistent and thorough basis. In the majority of
complaints investigated, it is my belief that the University would not be able to accurately document
some part of the enrollment of academic advisement.
The University would have difficulty meeting many of its academic and regulatory requirements. A
consistent theme in the campus audits that I have seen is that academic or faculty records were missing
or were very incomplete.
From campus audits:
"Until last summer, the campus had never had a lead facuity contract in place. This would have
been an HLC concern. The reason given was the previous campus director mandated that her
fiance be hired as an Area Chair, an assignment with which academic affairs had great
disagreement. No fiance, no leads, was the policy, hence no leads were hired.
The faculty files are not in one place and are incomplete. The files examined do not show updated
AQA reviews and do not represent all active faculty members. Files are currently housed in three
different locations around the state. The files should be in one location and should contain the
standard pieces of faculty information. Those files examined did not."
"The campus is not in compliance with HlC requirements for faculty governance. There are no
Area Chairs at the campus. We are required by accreditation to have Area Chairs covering 14
areas of content.

11

Mike Reid- Derek Hoggett

. 21 .

February 2, 2009

Regulatory Complaint Against Untversity of Phoenix

Conclusion
The University of Phoenix has shown it is unwilling to stop these highly profitable but illegal and
unethical practices. These practices continue unabated, with the result that tens of thousands of new
students each year will be injured. They will incur thousand of dollars of debt with nothing to show for

it, and will feel demoralized. Many will feel they are the reasons they have failed, when in truth they will

have been pressured Into starting school before they were either ready or able.
The only way this abuse of thousands of people- many are tow income and the plunder of hundreds of

millions of dollars - if not billions- of public funds will end is for the authorities to step in and order the
University to end these illegal enrollment practices.

We are asking the regutatory authorities to order the University to cease rewarding its counselors based
in any way on the number of students they enroll. This will stop the abuse of tens of thousands of more
students, and the plundering of hundreds of millions of dotJars annually from the taxpayer. Only when
this happens can enrollment counselors at the University of phoenix become the trusted counselors that
students deserve.
The end of enrollment remuneration, in any form disguised or otherwise, will dramatkafly improve the

quality of students being enrolled at our University. The retention rate will rise dramatically from its
current abysmal fevel. The improved reputation of the Untversity will protect the large investment
already made by dose to half a million graduates. Ultimately, we believe these changes wiil results in
the Apollo Group earning bigger and more legitimate profits.

Mike Reid -Derek Haggett

22-

February 2, 2009