Professional Documents
Culture Documents
Responsive Documents - CREW: Department of Education: Regarding For-Profit Education: 8/16/2011 - OUS 11-00026 - 3
Responsive Documents - CREW: Department of Education: Regarding For-Profit Education: 8/16/2011 - OUS 11-00026 - 3
(NNM: APEI )
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
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Page 77
July 31 , 2009
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Page 78
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Page 79
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1.3
sterne
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Page 80
July 31 , 2009
Company Report
sterne
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Education
RA TJNG: NEUTRAL
RscaiYearEndsJun
RATING;
MARGIN
Rating:
Neutral
Price:
$49.18
Price Target:
$38.19-$64.69
52-wk Range:
Market Capitalization (M):
$3,573.5
72.7
Debt/Equity:
1192.1
18.5%
Enterprise Value:
$3,414
Luke Shagets
(214) 702-400 I
abhatia@stemeagee.com
(214) 702-4030
lshagets@stemeagee.com
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
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.
Suite 700
Birmingham. AL 35209
205-949-3500
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.
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Page 82
DeVt-y University offers, among others, the following Degree programs and
services:
Associate Degree Programs
Accounting
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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Page 83
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Page 84
$3,000
$2, 500
~H
'I
$1, 500
$1 ,000
$500
so
n~
~r ..
,..
,..
I"
"~illi--
:.;
University. 69%
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Page 85
July 31 , 2009
DeVry
University, 50%
. _ ,/
Medical and
Healtltcare, 36%
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-
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Page 86
July 31 , 2009
6.5%
21.3%
61.7%
10.5%
6.8%
21.3%
61.4%
10.5%
Sprin~)
5~'o
11%
4%
-2,'o
6%
12%
10%
6%
10%
26%
29%
53%
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
~$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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Under the first 5 methods, first we derived three different values for the
stock using its historical avemge, historical low and historical high
multiples.
Finally, we derived our fair value price by averaging the results from
the met11ods used above.
Page 88
Valuation Analysis
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%
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%
PEG
Fonvard PIE
Relative to
S&P 500
$48
$75
$41
$108
$48
$95
$41
$156
$48
$75
$41
$101
$48
$48
$28
$79
$48
$58
$30
$94
50%
50%
50%
50%
50%
50%
50%
50%
50%
50%
0%
0%
0%
0%
0%
$58
$68
$58
$38
$44
$53
Upside Value
Downside Value
$108
$4]
$156
$41
$101
$4]
$79
$28
$94
$30
$108
$36
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Page 89
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)
~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
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
;:,.,.~~,..._ ,..~~~
..
..,.
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Page 91
July 31 , 2009
D'lt"Ty In<:. {OV)
OV ;i:$169-)10:)
?2t:tc.t
,._~i
CO'flrtlOtt t"Xk.
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
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.
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%
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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
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
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Page 94
July 31 , 2009
r->~\ll)f;-liJ-~~-~-il~l1t~fljf-liJ-~<>liiE!-~i<i-~Eili1E!iii-------------------------------------------------------------------------------------------------------------------------------l
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
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
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
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
-$9,047
58.399
$2,653
$9,941
$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
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
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%
O ther
Tax EOects
~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%
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:~/.,
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Page 95
July 31 , 2009
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
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
(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
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
(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
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Page 96
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
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
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
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
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Page 97
July 31 , 2009
Company Report
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Education
RA TJNG: NEUTRAL
(NNM: CECO)
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.
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
$2,094
90.2
$1 ,385.6
1,518.8
0.2%
Debt/Equity:
Earnin s Summar
2009E
$1,716.6
$13 1.0
2008A
$1,708.1
$73.9
2008A
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
205-949-3500
(NNM: C E C O )
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.
>
>
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.
>
>
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
July 31 , 2009
}>
}>
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
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~
Under21
21 to 30
Over 30
Student Population
h~
20%
46%
34%
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%
As ofDec31 ,08 As or
39%
44%
17%
Dec31, 07
4 1%
44%
15%
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Page 100
(NNM : CECO)
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.
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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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
(NNM : CECO)
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:
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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
July 31 , 2009
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.
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-
---
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%
--
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
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Page 103
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.
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Under tl1e first 5 methods, first we derived tlrree different values for the
stock using its historical avemge, historical low and historical high
multiples.
Finally, we derived our fair value price by averaging the results from
the met11ods used above.
Page 1o4
July 31 , 2009
Valuation Analysis
2 Year
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%
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%
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%
$25
$30
$27
$20
$17
$24
Upside Value
Downside Value
$39
$51
$20
$49
$19
$42
$3 1
$11
$9
$42
$ 15
$17
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Page 105
(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$10:0.
v
-
Jut.l~D1~~e
PtIIOE;.vn!ftt"ttrMRei J~~k'&&.P~C - ~?
.,.
~~
I~V1
~~"" /r \1
1~ ~
'
l y
ll).l)T
""'
U)J
Relative to S&P 500: Relative to the S&P 500 on a NTM PIE basis. CECO has traded at
an aven1ge of l.58x that of the S&P. a high of 2.56x. and a low of 0.99x. The stock is
currently trading at l.2lx tl1at of tl1e S&P.
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Page 106
(NNM : CECO)
July 31 , 2009
U'I -
<:.urrM!h"'$"'
~-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!)
t.:<ln'Wr.ottlkltlo:
~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
(NNM : CECO)
July 31 , 2009
1.1.1& ~51 09
1U365
NASCMQSIXlc!!.lt,~l
C\l:!'l',m~nU>~
Fl?t
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
(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.
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
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%
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.
tluield~Jifio
I 2x
1;a;
ZlOO'
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l).fl):i
fU:J7
12.'07
3,{18
Page 109
(NNM: CECO)
July 31 , 2009
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.
,...
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
$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
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
(NNM : CECO)
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.
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Page 111
July 31 , 2009
[ career-Educ
atlon -cori>~ -auarieii
.Y7ncomes-iatemenT
___________________________________________________________________________________________________________l
(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
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
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%
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%
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
so
($0)
($46)
($46)
30%
so
so
($8)
($8)
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%
38%
17%
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%
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Page 112
July 31 , 2009
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)
( 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
sterne
agee
Page 113
July 31 , 2009
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
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
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
Education
APPENDIX SECTION
IMPORTANT DISCLOSURES:
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.
Sterne, Agee & Leach, Inc. Disclosure Legend as of July 31, 2009:
Company
Applicable Disclosure
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
Education
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.
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
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
(205) 949-3623
(205) 949-3624
(205) 380-1766
David Lee
Chuck Carlisle
(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
(617) 794-7851
(617) 281-6497
(205) 949-3622
(973) 519-1019
(212) 763-8211
James Lee
Jiawen Zhou
Yan Chao
CONSUMER
Mng. Dir.
Analyst
(214) 702-4001
(214) 702-4030
(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
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(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
(615) 760-1472
(615) 760-1470
(212) 338-4704
(212) 338-4706
Restaurants
Lynne Collier
Philip May
(212) 338-4731
(212) 338-4718
ENERGY
Mng. Dir.
Analyst
(212) 763-8238
(212) 338-4732
(212) 338-4749
(212) 338-4748
(212) 338-4753
Mng. Dir.
Analyst
Associate
Associate
(212) 338-4703
(212) 338-4705
(212) 338-4762
(212) 338-4729
(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
A TLANTA
Adam Aspes
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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
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
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Jon Schenk
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Jason Scott
MikoTam
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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
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(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
(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
(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
OTHER LOCATIONS
2 Union Street
Suite 403
Portland, ME 04101
(207) 699-5800
(207) 699-5888 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
Highlights
Our View
Attractive Segments:
Important Trends:
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.
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
A m ember of BMO
Financia l Group
September 2009
Financia l Group
September 2009
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
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%
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
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September 2009
Diversity is an
attractive feature
of investing in
education
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.
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
$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
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
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%
$150
"2
125
:a
100
~
1/1
Ql
75
:::J
50
>
Ql
25
cQl
,.._
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
Financia l Group
September
2009
Recent
resurgence of
education IPOs
Company Name/Ticker
Description
Stock Market
Nov-06
Nov-07
Dec-07
Nov-08
Apr-09
US (NASDAQ)
US(NASDAQ)
US (NYSE)
US (NASDAQ)
US (NYSE)
In addition. there are other potential IPOs currently in registration in the US:
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
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)
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10
September 2009
Recent "going
private"
transactions
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.
Description
Postsecondary school operator
eCollege
Laureate Education
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
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).
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
Financial Group
11
September 2009
company collapsed into receivership (i.e.. bankruptcy) in November 2008. Since then. most
other units have been sold as well.
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.
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.
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
A m ember of BMO
Financia l Group
12
September 2009
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."
Financial Group
13
September 2009
" 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.
A m ember of BMO
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14
September 2009
Exhibit 9. Changes and Proposals Potentially Affecting the Education Industry (2009)
FY2010 Budget
Status
Chlldcare
K-12
Appropriations Comrritlee
Corporate Training
Senate version.
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)
S.abilz.ation Fund.
20 1 ~20 11
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
weU)
Student Aid and Fiscal RHPQnsi>iity Act lnlfocklce<l in House on July 15. 2009
(H.R. 3221 or SAFRA)
Negotiated RulemaU.g
tom fetruary-Apri
employment in a recojJ'Iized
occupation; state authorization as a
15.2009
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
A member of BMO
Financia l Group
15
September 2009
metrics - would likely affect the for-profit sector to a greater extent as we believe they have
been more aggressive users of these tools.
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.
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
Financial Group
16
September 2009
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
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
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
K-12
677.3
24.0
28.1
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
53.9
29.7
32.0
Economic cyclicality,
shift from instructorled to e-learning,
increasing competition from other sectors (i.e. , postsecondary)
$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
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
$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
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
~
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%
A m ember of BMO
Financial Group
21
September 2009
Early Childcare
..
C/1
120,000
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
12,000
"' ~
,c .....0
11,000
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
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
Financia l Group
22
September 2009
Early Childcare
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
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
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.
Introduced
Funding
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
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
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.
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.
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.
Federal (Dept.
of Education)
Title I Preschool
Federal (Dept.
of Education)
Individuals with
Disabilities Education
Aci(IDEA)
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
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)
Will make funds available to states that use Tille I funding to implement local early
childhood education programs
$500million
Federal (Dept of
Education)
$162million
Federal (Dept of
Education)
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
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)
Provides child care support for working parents, with 70% directed to TANF recipients.
$2.9 billion
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
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
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)
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)
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.
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)
$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.
A member of BMO
Financia l Group
27
September
2009
Early Childcare
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
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 ).
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.
A member ofBMO
Financial Group
..
28
September 2009
Early Childcare
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
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
Women with
However, women with young children have significantly increased their presence in tl1e work-
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).
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.
A m ember ofBMO
Financia l Group
29
September 2009
Early Childcare
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.
60%
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
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).
A m ember of BMO
Financia l Group
30
September 2009
Early Childcare
Agree
94%
Disagree
4%
Not Sure
2%
92%
8%
1%
88%
10%
2%
87%
10%
3%
86%
11%
3%
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
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.
A m ember of BMO
Financial Group
31
September 2009
Early Childcare
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
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 % 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
Financia l Group
32
September 2009
Early Childcare
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).
Ownership
Private
Private
Private
Private
Private
Private (non-profit)
Private
Public
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
33
September 2009
Early Childcare
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.
Revenue at maturity
Gross margin at maturity
Average investment
Average ROI
Enrollment risk
Contract term
N.A. - Not Available. Source: Bnght Honzons Family Solutions and BMO Capital Markets
A member of BMO
Financia l Group
34
September 2009
Early Childcare
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).
Financia l Group
35
September 2009
Early Childcare
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
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Society for Human Resource Management and BMO Capital Markets.
A m ember of BMO
Financia l Group
36
September 2009
Early Childcare
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) ..
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
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).
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.
A m ember of BMO
Financia l Group
37
September 2009
Early Childcare
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.
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.
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. .
A member of BMO
Financia l Group
38
September 2009
Early Childcare
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.
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
1:6
5-year-olds
Kindergarten Accreditation Strand
Source: BMO Capital Markets and National Association for the Education of Young Children.
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.
5%
-Y-o-ychanQe
- 1 2 - mo movmg average
- Average y-o-y change
4%
3%
2%
1%
0%
1 %
-2%
-3%
oo
oo
Note: Shaded areas represents recessionary periods. Source: BMO Capital Markets and Bureau of Labor
Statistics
A member of BMO
Financial Group
39
September 2009
Early Childcare
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.
A m ember of BMO
Financia l Group
40
September 2009
Early Childcare
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.
A member of BMO
Fi nancial Group
41
September 2009
Early Childcare
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
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.
A m ember of BMO
Financia l Group
42
September 2009
Early Childcare
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
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
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).
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
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.
A m ember of BMO
Financia l Group
45
September 2009
Early Childcare
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
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
A m ember of BMO
Financi al Group
46
September 2009
Early Childcare
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.
A m ember of BMO
Financia l Group
47
September 2009
K-12 Education
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).
.:
~
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
A m ember of BMO
Financial Group
48
September
2009
K-12 Education
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
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.
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
20%
mstate
O Federal
15%
-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
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
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
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.
Ul
20
~
C)
c:
:cc:
.,
~~
c:
iii
Technology
10
Other Services
Q.
"'
0
2002
2003
2004
2005
2006
2007
2008
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.
3%
;- 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
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
51
September
2009
K-12 Education
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.
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.
Teacher Quality
School
Performance
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-
52
September 2009
K-12 Education
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"
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
53
September 2009
K-12 Education
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
4
5
Comments
. .
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
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
Financial Group
54
September 2009
K-12 Education
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
..
8,800
'g
8, 400
t;;
~
~ 8,000
...
.. ..
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.
FY2004.
A m ember of BMO
lh
55
September 2009
K-12 Education
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
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
$39,696.8
4.2%
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
$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
Financia l Group
56
September 2009
K-12 Education
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
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:
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.
Financial Group
58
~Uld
September
2009
K-12 Education
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
Assessment
Reference Content
Supplemental Content
Basal Content
~ 12
.Q
"'~
c:
a;
0::
2002
2003
2004
2005
2006
2007
2008
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
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 $4.8 billion in 2014 (see
Exhibit 46).
Financial Group
60
September 2009
K-12 Education
.2
..
....
a:
r-
Ill
~
>
r-
r-
-----!-+'~--~v
Re ven ~
r-
""'
~"
- - -- ---
1 /
.....-% y/ychange
($ bil.
L.a.
"' 1\
~ -- - -
-- -
-v
...,..
- --
10%
5%
- -- - - ..
--
--
- 0%
-5%
2003
2004
2005
2006
2007
2008
Cl
.<::
u
:>.
:;,
;fl
-10%
-+- 2002
..
..
-15%
Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.
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.
~~~~!~!!!~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
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
_.
rl\r-
Iii' 5
c:
~ 4
~
Ill
..
;
>
0::
--
--
-- - - -
r-
r-
---
--
---
2
1
--
--
---~V
1\ ....v j
-
10%
;-
,_
8%
6%
4%
---
--
---
&
2%
c:
~
0%
:;..
:;.
-2% <!!
-4%
-6%
-8%
2002
2003
2004
2005
2006
2007
2008
Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.
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
$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
Note: Shaded area represents recessionary period . Source: BMO Capital Markets estimates and
Eduventures.
A member of BMO
63
September
2009
K-12 Education
A list of recent transactions in the educational publishing space can be found in Exlribit 50.
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
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
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
A m ember ofBMO
Financial Group
64
September
2009
K-12 Education
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
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).
$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
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.
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
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
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.
66
September
2009
K-12 Education
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
thereafter through
2014
A m ember of BMO
Financial Group
67
September
2009
K-12 Education
~ 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.
(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
A m ember of BMO
Financial Group
68
September
2009
K-12 Education
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
$6
r-
r-
- ---
-v
'
-~-
...... 1'--.r-
-+- 0/coyyc
I hange
5%
4%
r-
'-
:-'-
--- - -- - ---
-..
2003
C)
2% c:
"'u
.&;
1%
0% ~
-1o/o eft
-2%
li
2002
..
3%
-3%
2004
2005
2006
2007
2008
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
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
f_
) -- --
r-
-...
4%
..
3%
2%
.."'
c:
.:::;
1%
--
- --- - - - --
-1 %
-2%
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
70
September
>-
:>.
0% ~
2009
K-12 Education
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.
l.
Professional development.
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.
'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
71
September
2009
K-12 Education
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).
CA GR through
2014
$5
~ 4
.2
"'~
2 -
c:
..
~
--
a::
r-
--
,__
r-
5%
_._o/c yy
f ch.~ge
r-
-;
I
r-
r-
r-
2%
-- -
- -- - - -- -
2003
Cl
c:
"'
.s;;
1% u
<:-
-f - 0% >;!!
-1%
I+'
2002
4%
3%
-2%
-3%
2004
2005
2006
2007
2008
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
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."
-+-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
University) serve this segment of the market. A list of selected K-12 professional
development providers can be fotmd in Exlubit 59.
Ticker
MHP
TUTR
REVU
RLRN
Scholastic Corporation
SCHL
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
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
74
September
2009
K-12 Education
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).
expected 3.6%
CAGR through
2014
$1.5
25%
iii
c
~ 1.0
~
..
..
Ill
::J
"
30"~
0.5
r-
2003
2004
2005
r-
r-
20%
g,
c
15% ~
u
~t
~~
r-
2006
- --~~~
- ~=4fi-:=4'1,-fk-:""2007
2008
~~
--- - --- - -- - - -
0%
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,
75
September
2009
K-12 Education
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).
2,500
VI
G;
"0
::;:
2,000
-...
Q.
1,500
CD
..0
E 1,000
:::J
500
0
2003
2004
2005
2006
2007
2008
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
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
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)'.
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
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
Outsourced school administration. The past decade has seen an increase in tl1e number of
Financia l Group
77
September
2009
K-12 Education
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
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 $25 bi llion in annual revenues.
...
2.0
c:
1.5
:::1
1.0
.."'
....
c:
>
sourced Scoo
h i Ad m1n.
' Revenues ($ 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
Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.
79
September 2009
K-12 Education
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...
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.
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).
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
80
September 2009
K-12 Education
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
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
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
82
September
2009
K-12 Education
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.
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.
Location
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:
83
September
2009
K-12 Education
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.
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
84
September 2009
K-12 Education
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.
Governance
State education agency (SEA)
Independent non-government
organization with partial state
funding
Special school district
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
Non-government organization
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
Over 11 ,000
6-12
1,808
State appropriations
6-12
7,389
State appropriations
6-12
6,118
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
Other
Fully Online
21%
15%
64%
<1%
100%
Blended
Total
1%
20%
78%
<1%
100%
14%
17%
69%
<1%
100%
We believe there are several reasons to expect continued f:,>rowth of the industry based on
larger educational trends.
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
86
September
2009
K-12 Education
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.
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
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
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%
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)
Nursing services
Both
Administration
Teachers
Students
Professional development
Student-information 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
A m ember of BMO
Financial Group
88
September
2009
K-12 Education
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
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
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
9-1 2
About 6,500
6-1 2
About3,000
11 schools in 10
states
Schools in 6
states
A member ofBMO
Financia l Group
89
September 2009
K-12 Education
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).
90
September
2009
K-12 Education
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.
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.
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
$25
..,
-+-y/y change
if
20
-I
1:
.2
~
Cl
.!:
15
10
"0
1:
::J
u.
---
....--
....--
....--
....--
_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
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
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
12%
9%
6%
3%
0%~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
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:
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
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
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
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
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
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
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
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
A member of BMO
Financial Group
96
September
2009
K-12 Education
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
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
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
$8.0
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
2.3x
NA
NA
NA
NA
NA
NA
NA
NA
14.8x
NA
NA
NA
NA
NA
NA
NA
1.3x
NA
NA
3.1 X
0.4X
3.7X
o.sx
NA
NA
NA
NA
NA
NA
11.7x
NA
NA
NA
NA
NA
NA
NA
NA
1.4X
2.0x
NA
NA
NA
NA
NA
NA
5.6x
1.9x
1.6x
NA
NA
NA
4.8x
NA
NA
NA
A member of BMO
Financial Group
97
September
2009
K-12 Education
A list offinancial and operating metrics for the pubticly held K-12 providers can be found in
Exhibit 79.
Exhibit 79. Trailing 12-Month Operating and Valuation Metrics: Selected Publicly Held
K-12 Companies
Rating
Price Target
Operating Performance
FY End
LTM Qtr. End
Revenue ($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%
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)
A m ember of BMO
Financial Group
98
September 2009
Postsecondary Education
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.
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
NCES projects
postsecondary
enrollment to
grow at 1.1%
projections have
historically been
overly
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
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.
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
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
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
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.
~Total
16%
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
A m ember of BMO
Financia l Group
101
September
2009
Postsecondary Education
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
1.2%
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.
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
A m ember of BMO
Financi al Group
102
September 2009
Postsecondary Education
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.
College degree
has high return
on investment
$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.
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
1-......._____....------
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
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.
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
A member of BMO
Financia l Group
104
September 2009
Postsecondary Education
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%.
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
Source: BMO Capital Markets, US Department of Education National Center for Education Statistics, and US
Census Bureau
A m ember of BMO
Financia l Group
105
September 2009
Postsecondary Education
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
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).
-+-- % 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
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 $529 billion in postsecondary expenditures expected in
that year (see Exhibit 92).
2014
.,.:c
40
:. 30
0)
c:
20
c:
Ql
10
:0
c..
1/)
~!!!!!!!!!!~Fo r-profi t
revenues ($ 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
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
Institutions
Number %of Total
2,003
30.7%
1,810
27.7%
2,712
41.6%
6,525
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
Financia l Group
108
September 2009
Postsecondary Education
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.
Degree granting
Non-degree granting
Total
Institutions
Number %of Total
38.3%
1,038
61 .7%
1 674
100.0%
2,712
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
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
Avg. Size
1,890
377
170
546
Source: BMO Capital Markets and US Department of Education National Center for Education Statistics
(NCES 2009-155).
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
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%
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
Postsecondary Education
Gender
(1)
Age (1)
Race let
hnicity
(1)
Annual
income
(2)
Attenda
nee (1)
For-Profit
Public Not-for-Profit
Private Not-For-Profit
62% female
female
female
63% female
58% female
67% female
white, 21%
white, 9%
white, 16%
unknown/nonresident alien
unknown/nonresident alien
unknown/nonresident alien
unknown/nonresident alien
unknown/nonresident alien
unknown/nonresident alien
36% non-white, 8%
31% non-white, 8%
unknown/nonresident alien
unknown/nonresident alien
unknown/nonresident alien
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%
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%
time
time
time
26% part-time
27% part-time
25% part-time
11% part-time
61% part-time
30% 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
111
September
2009
Postsecondary Education
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
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
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
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).
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
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
113
September
2009
Postsecondary Education
45%
40%
30%
23%
20%
11%
10%
1%
3%
None
Not sure/don't
know
0%
Career college
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
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
114
September 2009
Postsecondary Education
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.
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.
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
Year
Highest
Type
Founded Degree
Public not-for-profrt
1807 Doctoral
Location
Adelphi, MD
Courses
79,651
1991
Mastefs
79,448
3
4
5
6
7
8
9
10
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
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
Community college
Four-year public institution
For-profit institution
Private institution
Undetermined
Where Students
Attend
34%
38%
19%
8%
6%
1%
19%
0%
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.
A member of BMO
Financial Group
116
September
2009
Postsecondary Education
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
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.
A m ember of BMO
Financia l Group
117
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
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
118
September
2009
Postsecondary Education
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
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%
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%
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%
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
Total
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.
A member of BMO
Financial Group
119
September
2009
Postsecondary Education
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).
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
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.
A member of BMO
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120
September 2009
Postsecondary Education
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.
Annual Growth
5%-6%
0%-1%
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
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).
Financia l Group
121
September 2009
Postsecondary Education
'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
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).
Current Recession
I eee. 2007 ??
Year Prior
2007-2008
2.8%
Ylli.Q!
20082009E
NA.
A member of BMO
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122
September 2009
Postsecondary Education
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).
Current Recession
l oec. 2007- ??
Year Prior
2007-2008
11.3%
Year Of
2008-2009E
N.A.
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
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123
September 2009
Postsecondary Education
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
Current Recession
IDee. 2007- ??
Current Recession
IDee. 2007- ??
Current Recession
IDee. 2007 -??
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
Financia l Group
124
September
2009
Postsecondary Education
UTI (12 months ended March 31. 2008)- aH well after tl1e 2001 recession ended and into the
economic recovery.
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)
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.
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
and bottom-line growth even during an economic expansion owing to the many secular
growth attributes cited earlier.
Acyclical Consideratio ns
We have provided a summary of recent enrollment growth statistics for select for-profit
companies, including the following:
A m ember of BMO
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
Ticker
FYE
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
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
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
: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
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.
Definition
Postsecondary "Norms"
For-Profit "Norms"
enrollment
growth (2)
Degree-granting institutions:
13.7%
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
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
Exhibit 116. Select For-Profit Postsecondary School Operators Revenues (FY2000FY2009 To Date)
YTD
YTD
FYE
Company
Ticker
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
STRA
UTI
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
Fiscal years
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
Educatioo Management
Grand canyon Ed.Jcation
LINC
strayer Education
STRA
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)
Auxiliary funds and other income (e.g., businesses mn by schools, such as medical
imaging centers)
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
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%
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%
3.8%
N.A.
&.8%-S.O'A
N.A.
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>
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
A member of BMO
Finan cia l
Group
131
2008 and
September 2009
Postsecondary Education
For-profit tuition ;
most expensive
for shorter
duration
programs
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
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
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.
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
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).
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
133
September
2009
Postsecondary Education
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
Exhibit 123. Funding Sources for For-Profit Institutions (2005-2006 School Year)
Public Not-for-Profit
($ In millions)
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
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%
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.
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
%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
26%
25%
5%
2%
$2,639
3,791
1,893
5,749
40%
30%
6,907
5,109
17%
5,496
Student borrowing:
Federal loans (Title IV)
Private education loan
Credit cards
Other loans
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.
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
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.
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
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
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
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).
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 for-profrt
A m ember of BMO
Financia l Group
138
September 2009
Postsecondary Education
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
g raduating
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%
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
Public 4-Year
Schools
$18,931
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
A m ember of BMO
140
September
2009
Postsecondary Education
Exhibit 131. Types of Federal Financial Aid Available for Postsecondary Students
Total Available (20072008 School Year)
Program
Name
Type of Aid
Other Information
Disbursement
Grant; does
not have to
be repaid
Undergraduates
only
Upto$5,350
Grant; does
not have to
be repaid
Undergraduates
Upto$4,000
only; not a ll schools
can participate
Various
Veterans
Various
loans and
grants
Military/Other
Federal Supplemental
Educational Opportunity
Grant (FSEOG)
Other
Loans/Gra nts
Work Study
Non-Federal
Loans
(Sbil.)
% of total
$14.4
9.3%
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
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%
28.4
18.3%
Unsubsidized Stafford
Loans
Loan; must
be repaid
Borrower is
responsible for
interest for life of
loan
26.5
17.1%
PLUS Loans
Loan; must
be repaid
Borrower is
responsible for
interest for life of
loan
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%
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
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
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%
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).
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
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
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.
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
Ticker
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
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
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
$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
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
0 1999-00
60%
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.
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
147
September 2009
Postsecondary Education
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
:0
.5
~
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
Source: BMO Capital Markets and College Board's Trends in Student Aid.
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
Independent Students
First Year
Second Year
Third Year and Beyond
Graduate or Professional
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)
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
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
14%
-+-%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
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
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%
A member of BMO
Financial Group
152
September
2009
Postsecondary Education
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
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.
..
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.
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
12%
15
10%
8% $
Iii' 12
.s
1:
6/o 0
*'
4% ~
2%
0%
1997-98
1998-99
19992000
200(}.()1
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).
Undergraduate
Enrollment
40%
35%
16%
8%
2%
100%
Private Loan
Borrowers
12%
28%
22%
27%
10%
100%
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
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
Public 2-year
Private for-profit
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
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
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),
A m ember of BMO
158
September 2009
Postsecondary Education
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
Exhibit 152. Select For-Profit Postsecondary School Operators Bad Debt Expense
( FY2000-FY2009 To Date)
ComP"ny
Tlcl<er
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
LOPE
ESI
LINC
Strayer Education
STRA
UTI
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
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.
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%
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
Financia l Group
160
September 2009
Postsecondary Education
.:"'
i0
70%
....
80%
;:
50%
"'
72%
67%
66%
68:.1>
66%
Q.
40%
0
....
0
30%
"'
..
..
!!
20%
c
I!
Q.
10%
0%
Undergraduate 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).
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
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
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
-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%
FY2008 FY2009
(thru
(thru
F3Q)
F3Q)
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.
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
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 Prior
2007..()8
6.4%
2008-09
5.9%
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 Prior
2007..()8
6.6%
2008-09
6.5%
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 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
Source: BMO Capital Markets, College Board's Trends in College Pricing, and National Bureau of Economic Research. N.A. - Not Available.
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
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
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.
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.
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
A listing of key tuition and fee melrics can be found in Exhibit 160.
Definition
Postsecondary "Norms"
For-Profit "Norms"
Average annual
tuition and fees (1)
$12,357
4-Year Institutions:
$14,908
$9,396
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%
A member of BMO
Financial Group
168
September 2009
Postsecondary Education
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"
2-Year Institutions:
On-campus:
2-Year Institutions:
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)
4-Year Institutions:
On-campus: $33,029
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
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.
Ticker
FYE
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
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
Ticker
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
LOPE
12
ESI
12
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%
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
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
APEI
APOL
BPI
CECO
COCO
CPLA
12
8
12
12
6
12
Educafioo Management
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
APEI
APOL
BPI
CECO
career Educatioo
cainthi8fl Colleges
Capella EdJcation
DeVry
Education Management
Grand canyon EO.Jcation
ITT E<klcational 5el'\fices
coco
CPLA
Private
LOPE
ESI
LINC
STRA
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%
.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.
For-profits have
relatively lower
instructional
costs than notfor-profits
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
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
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
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.
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)
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
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
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
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 m ember of BMO
Financial Group
175
September 2009
Postsecondary Education
Definition
For-Profit "Norms"
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
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
Company
Ticker
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
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
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
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
Career Education
APEI
APOL
BPI
CECO
Corinthian Colleges
coco
Capella Education
CPLA
EDMC
LOPE
UNC
Strayer Education
STRA
Apollo Group
Bridgepoinl 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
Tlcl<er
FYE
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
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.
Inquiry
Visit
Application
Acceptance
Enrollment
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
Cost per accepted (CPA) - costs for adnlissions, recmiti.ng, and marketing divided by
Show rate ("yield rate") - measures the percentage of those accepted that actually enroll.
Financia l Group
179
September 2009
Postsecondary Education
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
.wi
2004
2005
2006
$578
$651
$714
$880
.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
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
Exhibit 174. Cost per Start for Select For-Profit Providers (FY2000-FY2009 YTD)
Company
Ticker
APEI
APOL
BPI
CECO
AponoGroup
Bridgepoint Education
career Education
COfinthian College-s
Education Management (est).
linc~n
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
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
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
Company
Ticker
APEI
APOL
BPI
CECO
COCO
CPLA
DeV~
DV
Education Management
Grand Canyon Education
lincoln Educational Services
Private
LOPE
LINC
12
12
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
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).
$150
e
~
120
C)
c:
'5
c:
~
..
..
:;
....
90
<II
'i:E
60
"0
30
:E
2003
2004
2005
2006
2007
2008
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
$250
: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
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).
~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
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%
6%
10%
18%
21%
28%
32%
33%
35%
46%
41%
34%
32%
29%
26%
26%
25%
30%
30%
28%
29%
27%
28%
27%
26%
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,(,
Advertising costs
had been
increasing
dramatical/y
earlier this decade
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.
184
September 2009
Postsecondary Education
Some companies
"backward
integrated" by
purchasing leadgeneration
providers
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.
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
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%
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
NON-ADVERTISING EXPENSES
Company
Ticker
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.
LOPE
N.A .
N.A.
NA
10.6
LINC
12
12
NA
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
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
LOPE
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
LOPE
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
Financial Group
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
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
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%
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.
A member of BMO
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188
September
2009
Postsecondary Education
Definition
N.A.
For-profit public
companies most recent
annual average: 23.9%
Lead flow
N.A.
N.A.
N.A.
Cost per applicant (3) Costs for admissions, recruiting and marketing
divided by the number of applications.
$32.50-$112.50 (2)
N.A.
Conversion
rate (4 )
N.A.
Acceptance
rate (4)
N.A.
N.A.
N.A.
N.A.
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.
A member of BMO
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189
September
2009
Postsecondary Education
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
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. ,
A member of BMO
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190
September 2009
Postsecondary Education
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.
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
A m ember of BMO
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191
September 2009
Postsecondary Education
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.
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.
A m ember of BMO
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192
September 2009
Postsecondary Education
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
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
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.
A member of BMO
Financia l Group
193
September
2009
Postsecondary Education
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
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:
In 2002, Carnegie Mellon University established its Silicon Valley location by offering
software engineering programs at Moffett Field, California. the site of NASA research.
Centralized
cu rricula
development:
faster creation
and rollout
A member of BMO
Financia l Group
194
September 2009
Postsecondary Education
Fastest-growing
occupat ions health and
technology
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
Medical assistants
Veterinarians
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
other
Hea~hcare
other
Hea~hcare
Other
Healthcare and social assistance
Hea~hcare
Information technology
Information technology
Other
Healthcare and social assistance
Other
Healthcare and social assistance
Hea~hcare
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
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
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
.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
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
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
Business
Health professions and related
clinical sciences
Public administration and social
services
Engineering
Bachelors
Business
Multi-Interdisciplinary Studies
10
Psychology
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.
Associates
Health professions and related
clinica l sciences
Education
4
5
Bachelors
Masters
Business, management, marketing Business, management, marketing
and related support services
and related support services
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
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%
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.
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
Healt11 informatics.
Computational science (i.e., the use of computer modeling and simulation to advance
other fields).
Financial Group
198
September 2009
Postsecondary Education
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
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.
'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
A member of BMO
Financial Group
199
September 2009
Postsecondary Education
Despite recent
Retention/attrition rates. The first year of student programs is typically when retention rates
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
Ill
'5
:!:::
1ii
..~
76%
58%
75%
57%
0
55%~
73%
54% t;
.!:
: 72%
56%
74%
71%
53% :0
~
52% N
70%
51%
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).
'
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
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).
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
75%
738% 74.0%
73.5% ~
73.2% 73.2%
r-
r-
73.4%
r-
72.2%
ell
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
"higher end"
78%
o 2001
m 2002
o 2003 o 2004
2oos
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
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
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
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
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.
Better tracking of students while they are enrolled to improve identifying "at-risk"
students, (i.e., an "early warning system").
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).
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
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
204
September
2009
Postsecondary Education
Online programs
have lower
persistence rates
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."
.$
~
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
Definition
Retention rate
Public not-for-profit
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
~ 50%
c
0
~
a.
E
0 45%
40% ~~~-++-~+-r+~~~+4~~-+~~+-~~~~~~~~~~+-~~
1964
1971
1978
-
1985
1992
1999
2006
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
55%
50%
...
- 45%
;; 40%
35%
.2
10
30%
~ 25%
~
C)
20%
15%
10%
5%
0% +J....J_,..L...l-.-L..J..,.-'-'-.-1-'
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
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%
.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
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
Exhibit 209. Six-Year Completion and Attrition Rates: For-Profit vs. Not-For-Profit
Institutions (1995-1996 through 2001)
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%
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.,
community colleges), potentially mitigating some of the benefits of additional funding for
the conununity college sector.
community
colleges
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
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.
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
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 ...
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
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
Cil
70
61
.s::.
c0
60
50
..
65
50
Ql
.=IV
40
= 30
IV
Ql
!!!
~ 20
'1J
Ql
10
j::
0
Four 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
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).
Definition
Postsecondary "Norms"
Completion!
graduation
rate (1)
For-Profit "Norms"
NA
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
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
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).
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
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.
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
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
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
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
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
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
20,132
19,632
21,026
11,960
11,960
14,040
31,200
25,688
31,200
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
23,391
23,395
23,314
16,640
16,640
22,000
36,000
36,000
32,510
22,443
26,037
21,064
13,520
18,000
17,680
31,990
41,995
28,000
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
22,504
22,429
22,963
12,000
12,000
16,245
30,196
30,196
26,000
26,806
28,776
26,410
27,360
14,560
14,560
14,560
15,288
43,680
38,064
40,768
43,680
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.
A m ember of BMO
Financia l Group
218
September 2009
Postsecondary Education
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).
Company
Ticker
FYE
1999
2000
2002
2003
2004
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.
Definition
Placement rate
N.A.
Starting salary .3
N.A.
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.
A member of BMO
Financia l Group
219
September 2009
Postsecondary Education
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
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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September 2009
Postsecondary Education
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
Accred~i n g
Allied Health
Bible
Business
Career Schools/Occupational
Chiropractic
C hristian
Continuing Education
Cosmetology
Dance
Dietetics
Healthcare Management
Law
American Bar Association, Council of the Section of Legal Educatio n and Admissrons to the Bar
Uberal Education
Medicine
Midwifery
Montesson
Music
Naturopathic Medicine
Nurse Anesthesia
Nurse-Midwifery
Nursing
Occupational Therapy
American Occupational Therapy Association, Accreditation Council for Occupational Therapy Education
Optometry
Osteopathic Medicine
Other
Pastoral
Pharmacy
PhysiCal Therapy
American Physical Thempy Association, Comm ossio n on Accreditabon in Physical Therapy Education
Podiatry
Psychology
Public Health
Radiologic Technology
Teaching
Theater
Theology
Veterinary Medicine
Accred~ation
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September 2009
Postsecondary Education
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
Company
School
Apollo Group
Bridgepoint Education
BPI
A ccrediting Agency
Higher learning Commission o fth e North Central Assoc. of
Colleges and Schools (HLC)
HLC
HLC
Ashford UnNersity
University oflhe Rockies
Regiona l National
X
X
X
X
X
X
X
X
X
HLC
HLC
Capella EducaUon
HLC
Career Education
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
ESI
LINC
Strayer Education
un
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
HLC
Arizona Slate Board of Education
Associalon of CoUegiale Busness Schools and Programs
(ACBSP)
Comm. on Collegiate Nursing Education (CCNE)
ACICS
ACCSCT
ACICS
NEASC
MSACS
STRA StrayerUniversily
ACCST
ACICS
Accreditilg Council for Continuing Education and Training
(ACCET)
HLC
ACCSCT
ACCSCT
ACCSCT
ACCSCT
W PO
Kaplan University
Other
X
X
X
X
X
X
X
X
X
X
X
X
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Postsecondary Education
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
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223
September 2009
Postsecondary Education
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.
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)
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
.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.
A member of UMO
Financial Group
224
September 2009
Postsecondary Education
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:
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.
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.
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%
A member of UMO
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225
September 2009
Postsecondary Education
CDR
measurement
period to change
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.
A member of UMO
Financial Group
226
September 2009
Postsecondary Education
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
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),
State grants.
Financial Group
227
September 2009
Postsecondary Education
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
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
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
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.
Profit-sharing or bonus
payments
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.
A m ember of BMO
Financial Group
229
September 2009
Postsecondary Education
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 member of UM O
Financial Group
230
September 2009
Postsecondary Education
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.
A member of UM O
Financial Group
231
September 2009
Postsecondary Education
President Obama
wants greater
access to higher
education...
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
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
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:
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
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.
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
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
A member of UMO
Financial Group
236
September 2009
Postsecondary Education
State oversight
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
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
>
~
!3
cr
('t)
...,
0
...,
w
:.::
"'0
Company
Type
IRS Audl
C)
S~tember
2006
March 2007
Phoenix
Issue
Audit. Cove-rs Fiscal years 2(()3..2005, related to improper deductions from stock optJons
8l0
Upd"e
::l
Ongoing
a.
Q)
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$
prQgrM1
fincal.
-<
m
a.
c
Mar-o9
lntemationaJ
Univel"$ity
D11te
'l:j
=
~
School(s)
N.A.
0,...
!1'.
R..,;ew- Program
University of
Phoenb<
February 2009
Per FY3009 100, APOL has not received the final program review.
EO Office oflnsped:or
Gener.ol (OIG) - Audit
AShford Unlversky
May 2008
OIG Audit. The scope of the ;~udit covers administration of Title IV program funds and
compliance y.,(th other program tegulations.
Per September 3, 2009 prMs release. drat\ report from OIG is expected within 30 days.
Findings could indude : compenSirtion policies and practices relating to eoroUment a.cMsor$;
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$enoe.
EDOIG-Audl
ED
Review
Bridgopoint Education
(BPI)
Certifietrion. Awalttng reeert.ifteatton to partldpate In Student Financial Ald. Title IV Funding Per FY3009 100, elig1bflity continues on a montht<:>-month basis until a decision on the
prog~m
application Is final.
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Capella Education
(CPLA)
Gr~nd
Gr.ond Canyon
(LOPE)
OIG
~dit.
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To determine whether CPt.A did nQt proper1y~tculateits retum of Title IV fund$. 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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Recent settlement
could make
accreditors more
"gun-shy"
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.
A member of UMO
Financial Group
240
September 2009
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Education
Management
(PRIVATE)
June 2007
8l0
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th,c~t
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
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Postsecondary Education
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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Comp1ny
tltr
School(s )
V'tnu
Umlltd StMoiAmetJCBex,.l
Urwel$!lyotP~m
c10ma
Apollo Group (A.POL)
AcKIIIOGrouo
Un~Ver&!ty OC Pl'll)fnx
Unlvt;f'SIIyM PllOitlllf
...
Oe$-ll'itt C(!Uit
..,
Sea.va.s- LJlqahOn
Apt11 S,2009!
Unwerssty
-~ Photnll
COhVIl.tSS.iM V UtlNIHSifyd
PIKi&ll,./fJC,
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
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
APollo GroLl!)
unwet'Sity OC PnO&tiiiY
Un!V9r9IY ot Photfll'o
Te&mS.I&ISLOC8161TPIJrtSJOII &
Urwe~tyOCP~lf'
D-9J11ti-Ve11CIJfl9 S.J\tiCU
~Ph0'9nll
U1Yt'&f"5tly~ Ph0enl1
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
P~FY3009 10Q,on~~tCh
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
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Company
TiUe
Venue
Issue/Nature of Case
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.
Superior Court,
San Franci5CO
(CECO)
School(s)
Career Education
(CECO)
Corp.
Career Education
Schustf(. er IIi.
(CECO)
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.
American
lntereontti'IMtal
Unwer$1ty
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
(CECO)
Amenean
lntercontinentill
Putativ~ Class
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)
Career Education
(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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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
ewrecst cone-ge
wyotecn
Corinthian Colleges
(COCO)
Corinthian Colleges
(COCO)
.,
N
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
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$$ misman;~gement . was.te of corporate Uiets, unjus.t enrichment, and
Catiromla Superior vtoJations of the California corporatioM' code.
$etllement.
Court
01
Corinthian Colleges
Shareholder Oerivativ ~ Action. The lawsuits allege vtolation of the s~cui1Ues and E)(change AJ;t Per FY2009 10K, on July 6, 2009 the United States District Coun fort.he Central Oisbict of
of 1934, 'lliolf!tion of the Califomif! CorporJtions Code, unju$t enrichment and rebJm of une;~med Califomla prtlimlnarl~ appro... ed a setUtment of the consolidated actions.
compensation. and bf'ea ch of 1\duci aty duties.
August 2, 2006:
Federal O$tnct
Court Centtal
District Cilrrfomif!
Col'lnthlan Colleges
(COCO)
August 2, 2006:
Shar~hol der Derivative Action. Accuses eurr~nt and former COCO otr'.em and directors of
Or'iinge county
breach of fidUCiary duty ;~nd unJust ennchment related to opbon grant practices..
Cillifomi;~ Superior
Court
Corinthian Colleges
(COCO)
October 3, 2007:
US District Court
for the Middle
District of Florida
(COCO)
Employee Litigation, Qui Tam. Allege-s CECO violated the hlgh~r EdJeatlon Act r~gat'ding th~
manner in YA'Iidl ;~dmi$$ioni personnel are compen5ated.
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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Title
School(s)
OeVI)'(DV)
Venut.
Issue/Nature of Case
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.
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
Type of Course
T ypical Description
Traditional
1%-29%
Web Facilitated
30%-79%
Blended/Hybrid
80+%
Online
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
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
4,000
3,500
3,000
2,500
2,000
1,500
1,000
0
0
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0
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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
6%
Revenues
25
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15
10
5
o ~~r-~~~~~--~~~--~--~~~~---r~~~~--~~ 0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E2011E2012E2013E 2014E
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
80%
74%
Online headcount
1,200,000
70%
1,000,000
60%
800,000
l!! 50%
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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.
70%
59%
60%
50%
l!!
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"'
40%
Qi
28%
.:.:
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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
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
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.
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
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
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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.
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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
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
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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
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%
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.
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.
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September 2009
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80%
70%
60%
50%
40%
30%
20%
10%
0%
Public not-for-profit
Private not-for-profit
Private for-profit
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
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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
Students (solid online demand). It appears tl1at potential students have become more attracted
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.
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September 2009
Postsecondary Education
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
Employers (mixed response). TI1ere appears to be a mixed response to tl1e quality of online
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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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.
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).
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Postsecondary Education
Ownershlo
Apollo Group
(APOL)
Latest Online
Enrollment
2!..!21!!.
Enrollment
Estimated
Market Share
Online Only
Degree
PrQJUams
DQllfees
Ke Offerlnas
N.A.
N.A.
N.A
American Public
Education (APEI)
53,600
100%
2.4%
97 Programs
Associate's, Bachelo~s .
Mastefs, Certfficate, Diploma
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
The Washington
Post(WPO)
43,600
45%
2.0%
9Verticals/
78 Programs
39,700
43%
1.8%
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 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
Education (LOPE)
26,234
95%
1.2%
4 Verticals/
91 Programs
Education
Management
26,200
23%
1.2%
53 Programs
Everest Online
Corinthian
Colleges (COCO)
15, 157
18%
0 .7%
16Programs
Associate's, Bachek>r's.
Mastefs
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
Private
8,200
100%
0 .4%
Northcentral University
Private
7,760
100%
0.4%
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
Private
N.A.
N.A .
N.A.
5 Verticals
75 Programs
Bachelofs,
Maste~s
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
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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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)
A member of UMO
Financial Group
261
September 2009
Postsecondary Education
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
A member of UMO
Financial Group
262
September 2009
Postsecondary Education
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.
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
A member of UMO
Financial Group
263
September 2009
Postsecondary Education
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.
A surnrnaty of tl1ese factors for a select group of publicly held postsecondary institutions is
shown in Exhibit 254.
A member of UMO
Financial Group
264
September 2009
Postsecondary Education
American
Public
Education
(APEI)
Apollo Group
(APOL)
% of Rev. from
Enroll
FY
mant
12
Associate's ( 13%)
Badhelo(S (61%)
Master's (26%)
14%
N.A.
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
career
Education
(CECO)
12
92.300
(COCO)
capella
University
(CPLA)
OeVry
(DV)
Funding
Job
Placement
Bridgepoint
Education
(BPI)
COiintl1ian
Colleges
T~loiV
Degree Type
12
29.281
64,034
Doctoral (36%).
Master's ( 46%),
Badhelo(s (18%)
Diploma/Cert. (1 1%)
Associate's ( 15%)
Badhelo(s (52%)
Master's ( 17%)
Doctorate (5%)
N.A.
Online
Enrollment/%
of Total
Student Profile
53.600:
100.0'.4
31%(~)
15%(~49)
45.006:
98.9%
Mectan of 7. 7% (range
N.A.
of 1.7%-14.3%)
39,700: 42.6%
81%
Coosolidated Avg. of
13.1% (range of 3.5%- 78.1% (2008)
18.9%)
15,157; 17.6%
75%
N.A.
36%(~9)
27%(~9)
29.281:
100.0'A.
N.A
69.1% (2008)
26,225: 23.3%
N.A.
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%
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)
Lincoln
Educational
SeMces
(LING)
Education
Management
(Private)
60%
Mectan5%
Range 1.2%-11.3%
(Prelim. 2007:
Mectan8. 1%
Range 1.7%-14.4%)
79%
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%
12
S1rayer
Educabon
(STRA)
12
42.516
Universal
Techrical
tnstiMe (UTI)
Wasnngton
Post's Kaplan
Education
(WPO)
Business/Economics/Aocounting (73%),
lnformatioo Systerns(16%). Other (9%)
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.
26.n8: 62.9%
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.
A member of UMO
Financial Group
265
September 2009
Postsecondary Education
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).
Exhibit 255. BMO Capital Markets For-Profit Postsecondary Index vs. S&P 500 (12/31/959/9/09)
1,900
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
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.
A member of UM O
Financial Group
266
September 2009
Postsecondary Education
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-
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
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
As of 9/9/09. 4% premium
All-time median. 49% premium
A member of UMO
Financial Group
267
September 2009
Postsecondary Education
Exhibit 257. Relative PIE: BMO Capital Markets For-Profit Postsecondary Index vs. S&P
500 ( 12/31/95-9/9/09)
--PS Index -
50x
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
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
below its
historical median
A member of BMO
Financial Group
268
September 2009
Postsecondary Education
Exhibit 258. TTM EV/EBITDA: BMO Capital Markets For-Profit Postsecondary Index vs.
S&P 500 (12/31/95-9/9/09)
30
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
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
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.
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Postsecondary Education
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).
Three publicly
held companies
were taken private
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.
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September 2009
Postsecondary Education
Anne.
Date
Aug-09
Aug09
Aug-09
JtA-09
J'-"09
Tarset
Ashwo~
College
Vina del Mar University
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
Mana_gement Bu)IOtJt
ATI Enterprises(Ri-side)
Apollo Group
Apr-09
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
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
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
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
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272
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Postsecondary Education
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.
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>
Nov-re
Apr..Q7
Aug..Q7
Sep..Q7
May-08
Heald College
Touro lnternatKJnal University
Colorado School of Professional
Psychology
Myers Univers~y
Apr-09
Jun..Q9
Jui..Q9
College of Santa Fe
Laureate Education
Date
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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5%-10%
4%-6%
11%
>20%
1-10K
1-2K
4-6 years
1-3 years
Private
Title IV
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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Postsecondary Education
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
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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Postsecondary Education
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).
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
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
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
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).
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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
f inletld
UruiJ~il)'
Belgium
United ~dom
Portugal
france
36
Czech Republic
Barbados
36
Chit&
.!!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
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
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
65
Omon
Algeria
AnbStale.s
China
El Salvador
Tajikistan
Guatemllla
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.
A member of UM O
Financial Group
278
September 2009
Postsecondary Education
Internat ional
postsecondary
market has great
potential
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.
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.
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
Financial Group
279
September 2009
Postsecondary Education
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
September 2009
Postsecondary Education
D low-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
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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281
September 2009
Postsecondary Education
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
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
Financial Group
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September 2009
Postsecondary Education
Policy changes
spurred growth in
postsecondary
enrollment
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.
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
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
I
.l!l
,..c
Ul
'0
New enrollme nt
50%
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
September 2009
Postsecondary Education
.,..~
2,000
:J
"w...
20%
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).
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
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.
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
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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286
September 2009
Postsecondary Education
31% participation rate by 2020. Additionally. we note these scenarios incorporate only one
portion (18-22 year olds) of the adult-learner market.
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
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.
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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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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 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
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
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.
and certifications necessary to pursue careers in China in the areas of accounting, law,
healthcare, construction engineering, infonnation technology, and other industries.
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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
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.
Sizable market
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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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.
10
~
"'c:
45%
"'
"g30%
a.
0
t:
8!
15%
2
0
1999
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
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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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.
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
(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.
~
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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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
following:
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
compelltion from private players in t11e UK higher educallon sector, including "a new genemtion
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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
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.
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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Postsecondary Education
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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Educational ProqramNenture
Country
Educational ProqramNenture
Austrnlia
Panama
Austria
Qatar
Bulgaria
China
Romania
Frnnce
Greece
Hong Kong
Senegal
Singapore
Spain
Slovakia
Switzerland
Taiwan
Thailand
Netherlands
Israel
Un~ed
Japan
India
K ingdom
Vietnam
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
A member of UM O
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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Postsecondary Education
Foreign student s
represent roughly
3.5% of total US
postsecondary
enrollment
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).
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%
~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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September 2009
Postsecondary Education
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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September 2009
Postsecondary Education
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
..
600,000
500,000
400,000
40%
'C
~ 300,000
~
....
200,000
100,000
0%
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
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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.
25%
5%
popular countries
30%
15%
o~~~~~~~~T-
35%
September 2009
0::
(!)
c(
Postsecondary Education
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
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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Postsecondary Education
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
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%
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.
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
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September 2009
Postsecondary Education
China is largest
student exporter:
US sending and
receiving
students at
roughly same rate
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).
II Outbound Students
375,000
+CAGR (1999-2007)
..
J!l 300,000
c
15%
...,
E 225,000
U)
D
0
.....
20%
150,000
10%
5% 0
.- ------------- ~- -------------------------------- 4-
75,000
a:
~
O'k
~malyze
Study abroad
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
e"'
16%
14%
~ 200,000
12%
01
10%
150,000
8%
..
~
U)
::;)
50.000
?ft.
~ 100,000
...,
..
.,g>
6%
I I
4%
2%
0%
2006-2007
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Postsecondary Education
UK most popular
destinat ion for US
students but Italy
and China gaining
share
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).
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
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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September 2009
Postsecondary Education
Proposal t o
i ncrease fundi ng
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.
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).
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
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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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Financial Group
311
September 2009
Postsecondary Education
Tax credit
expansion could
provide small
boost
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
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312
September 2009
Postsecondary Education
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
t echnology
market: 6.3%
CAGR through
2014
2006
2007
Academic Computing
Administrative Computing
Infrastructure Computing
2008
2009E
201 OE
2011 E
2012E
2013E
2014E
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 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
$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)
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
A member of UMO
Financial Group
314
September 2009
Postsecondary Education
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.
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.
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
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Financial Group
315
September 2009
Postsecondary Education
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 :
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).
Administrative Services
15
iii
c
.Q
12
!B.
Cll
Q)
:::1
cQ)
>
Q)
0::
2006
2007
2008
2009E
2010E
2011E
2012E
2013E
2014E
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
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316
September 2009
Postsecondary Education
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)
Other areas of
outsourced
Student/Parents
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
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
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.
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
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.
319
September 2008
Corporate Training
$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).
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
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.
$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).
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
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.
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
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
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.
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
. 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.
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
0 Instructor Led
(Classroom)
S Instructor Led
(Distance
Learning)
0 By Computer (No
Instructor)
OOther
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).
1------------------....,j
""'""".;.;..;..;.;..;.;..;.;.,;.;..;,j
__j
:=::J
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
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
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
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).
$20
30%
c:
:c
15
"'c:
10
'6
c:
tJ)
20%
.g>
15%
-5"'
10%
.<::>.
25%
5%
0
0%
2001
2002
2003
2004
2005
2006
2007
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
Characteristics
Stage 2: Expansion
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
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
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
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).
) skills
30%
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
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
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
A m ember of BMO
Financia l Group
330
September 2009
Corporate Training
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.
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
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-/earning
infrastructure:
projected 8.2%
CAGR through
2014
30%
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
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
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
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
$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
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
$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
A m ember of BMO
Financia l Group
335
September
2009
Corporate Training
(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.
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
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
:0
(/)
16
())
:J
c:
>
())
())
0::
I
I
I
I
I
I
I
I
I
IIIII
24
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0 +---~--r---r---~~--~--~--~--~--~--~---r---r--~--~
Business skills
training: 6.5%
CA GR to $21
billion in 2014
-+-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
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
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%
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
Excellence
80.9% None
70.3%
69.6%
52.7%
44.1%
38.4%
34.6%
27.9%
21.5%
21.0%
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
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
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.
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
$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).
;:
:a
Applications
ID
..
:::>
c:
2000
2001
2002
2003
2004
2005
2006
2007
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.
A member of BMO
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342
September 2009
Corporate Training
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.
Outsourcing
instruction and
custom content
development
most popular
A m ember of BMO
Financia l Group
343
September 2009
Corporate Training
:g
c 50%
:::J
01
40%
:::J
VI
'S 30%
0
VI
Gl
'2 20%
()
10%
0%
Instruction
LMS
administration
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
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).
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.
A member of BMO
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Corporate Training
Cons
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
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
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
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Corporate Training
Indian e/earning
offshoring
industry to grow
at15% CAGR
Organizations still
dissatisfied with
performance
measurement
analytics
A m ember of BMO
Financia l Group
347
September 2009
Corporate Training
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-
A m ember of BMO
Financia l Group
348
September 2009
Corporate Training
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 ...
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
349
September 2009
Corporate Training
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.
Financia l Group
350
September 2009
Corporate Training
A list of recent mergers and acquisition activity in the corporate LTaining sector can be found
in Exhibit327.
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
A member of BMO
Fin a n ci a l G r oup
351
September 2009
Corporate Training
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
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.
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
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
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
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
A member of BMO
Financia l Group
354
September 2009
Corporate Training
A m ember of BMO
Financia l Group
355
September 2009
Corporate Training
A m ember of BMO
Financia l Group
356
September 2009
Corporate Training
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%
A member of BMO
Financial Group
357
September 2009
Corporate Training
Gener a l Disclaime1
The information and opinions in this report were prepared by BMO Capital Markets Corp. BMO Capital Markets Corp. is an affiliate of
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
client objectives it should not be construed as advice designed to meet the particular investment needs of any investor. This material is for
information purposes only and is not an otTer or solicitation with respect to the purchase or sale of any securi ty. The reader should assume
that BMO Capital Markets Corp., BMO Nesbitt B urns, BMO Capital Markets Ltd., or their affi liates may have a conflict of interest and
should not rely solel y on this report in evaluating whether or not to buy or sell securities of issuers discussed herein. The opinions.
estimates, and projections contained in this report are those ofBMO Capital Markets Corp. as or the date of this report and are subject to
change without notice. BMO Capital Markets Corp. endeavors to ensure that the contents have been compiled or derived from sources that
we believe arc reliable and contain infom1ation and opinions that are accurate and complete. However, BMO Capital Markets Corp. makes
no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein,
and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be
available to BMO Capital Markets Corp., BMO Nesbitt B urns, BMO Capital Markets Ltd., or its affiliates that is not reilected in this
report. This report is not to be construed as an offer or solicitation to buy or sell any security. BMO Capital Markets Corp., BMO Nesbitt
B urns, BMO Capital Markets Ltd., or their af(iliates will buy from or sell to customers the securities o[ issuers mentioned in this report on
a principal basis. BMO Capital Markets Corp., BMO Nesbitt Bums, and BMO Capital Markets Ltd. are subsidiaries of Bank of Montreal.
Addit ional Matters
To Canadian Residents: BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltec/Ltd., affiliates ofBMO Capital Markets Corp., furnish this
report to Canadian residents and accept responsibility for the contents herein subject to the terms set out above. Any Canadian person
wishing to effect transactions in any of the securities included in this report should do so through BMO Nesbitt Burns Inc. and/or BMO
Nesbitt Burns Ltee/Ltd. This research is not prepared subject to Canadian disclosure requirements applicable to BMO Nesbitt Burns Inc.
To UK residents: The contents hereof are intended solel y for the use of, and may only be issued or passed on to, (i) persons who have
professional experience in matters relating to investments falling within article 19( 5) o[ the Fi nancial Services and Markets Act 2000
(Financial Promotion) Order 2005 (the "Order") or (ii) high net worth entities falling within Article 49(2)(a) to (d) of the Order (all such
persons together being referred to as "relevant persons"). The contents hereof are not intended [or the use of, and may not be issued or
passed on to, retail clients.
A member of BMO
A member of BMO
Financial Group
Financial Gtoup
358
September 2009
BMO
Capital Markets
Education/Staffing
Jeffrey M. Silber
Paul Condra
212-885-4063
212-885-4176
Marketing Services
Daniel Salmon
212-885-4029
Banks
Lana Chan
Peter Winter
Jonathan Katz
Virginia Chiarello
Capital Goods
Diversified Industrials
Charles D. Brady
Tom Brinkmann
617-960-2363
617-960-2366
212-885-4094
Consumer
Apparel Retail
John D. Morris
Edward Plank
Jennifer Redding
212-885-4016
212-885-4053
212-885-4072
Broadline Retail
Wayne Hood
Tam my Gonzalez
Philip Juhan
404-926-1 590
404-926-1 592
404-926-1591
212-885-4109
212-885-4108
212-885-4066
212-885-4119
212-885-4170
212-885-4180
212-885-4197
212-885-4172
Specialty Finance
David Chiaverini, CFA
212-885-4115
Healthcare
Biotechnology
Jason Zhang, Ph.D.
Alex Arfaei
212-885-4179
212-885-4033
212-885-4146
212-885-4059
212-885-4017
212-885-4132
Food Retail
Karen Short
Megan O'Hara
212-885-4123
212-885-4124
Medical Technology
Joanne K. Wuensch
Matthew Taylor
212-883-5115
212-885-4037
Interactive Entertainment/Leisure
Edward S. Williams
Thomas F. Andrews
212-885-4054
212-885-4106
Pharmaceuticals
Robert Hazlett
James Tumbrink
212-885-4091
212-885-4195
212-885-4004
212-885-4160
212-885-4070
Toys
Gerrick L. Johnson
212-883-5192
Media/Entertainment
Energy
Electric Utilities & Independent Power
MichaelS. Worms
Barbara Coletti
Harsh Acharya, CFA
212-885-4031
203-746-9312
212-885-4012
713-546-9756
303-436-1117
303-436-1125
303-436-1127
Advertising Agencies
Daniel Salmon
212-885-4029
Entertainment/Gaming
Jeffrey B. Logsdon
Jeffrey Hoskins, CFA
Kara Stevenson
213-228-2234
213-228-2405
213-228-2407
Technologyffelecommunications
Communications Equipment
Tim Long
Kevin Manning
Ari Klein
212-885-4101
212-885-4102
212-885-4103
212-885-4010
212-885-4026
213-228-2546
212-885-4149
A member of BMO
Financial Group
WED BUSH
(I)
0
z
tn
::s
'C
-c:
Equity
Research
Education
March 25, 2009
Ariel Sokol
(212) 668-9874
ariel.sokol@wedbush.com
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%
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
15
Financial Review.................................................................................................. 22
Countercyclicality. .. ...... ...... ......... ... ...... ...... ......... ... ...... ...... ............ ..................... 25
Tuition
Review.....................................................................................................
Student Loan
Review..........................................................................................
26
28
32
35
Apollo
37
93
Capella Education................................................................................................ 98
2 I Ed ucation
-------------------------------------------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.
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
-------------------------------------------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.
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
-------------------------------------------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---------------------
2%
1%
0%
AVGEDJ
APOL
CPlA
DJ
S"IR<I
LOPE
APB
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
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
Similarities Between Market Funded Postsecondary Operators & On-Demand Software Vendors
Market Funded Education Operator
Customer
Lock-In
Operating
Leverage
Strong Capital
Structure
Customer
Concentration
None
Product Cycle
None
Yes, Significant
None
Significant
None
Recurring
Revenue Stream
Economic Cycle
Exposure to
Credit Markets
Regulatory
Environment
I Education
-------------------------------------------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
CYOS
CY09
CYIO
CYOS
CY09
CY10
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%
0.6
0.6
3.7
2.9
9.6
2.1~
22%
3.2%
4.8%
5.9"4
Devry
14.9 11.9
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
12.7 16.(
23%
l-tinate Solware
Ulll
444
64.3
57.8
Taleo
aillenallealth
TLEO
348
810
17.8
14.3
41.6
Anti
45.7
26.8
ro-vera.ge SoftWare
GSPC
9.5
12.9
NA
NA
NA
3.5%
5,3".0
N.A
12.6
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
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
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
....
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
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
-------------------------------------------VVEDBUSH
Exhibit 9: S&P 500 P/E vs. Education Group
~
lOX
1-------
ISX
lOX
SSP~
AVGED.J
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
12/2612003
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
Education 1 11
VVEDBusw----------------------------------------------
lOX
8X
8X
4X
2X
ox
AVGEilJ
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
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%
12 1Education
30%
35%
40%
+ CEt.4!> llNC
~+---~--------~----~--~----~--~----~--~
0.()%
5.()%
1).()%
-6.0%
20.0%
251)%
30.()%
35.()%
40.()%
45.0%
-------------------------------------------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
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%
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
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
12/28/06
12/28/06
12/28107
12/31/08
14 1Education
-------------------------------------------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
2016
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
2004
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
,,
~ ~:.
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
... 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
16 1Education
-------------------------------------------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
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
2002
2003
2004
2005
2006
2007
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
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
18 1 Education
-------------------------------------------VVEDBUSH
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
Oec-04
Oec-05
0ec.()6
0ec.()7
Dec.Q8
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
Bachelor's l:egree
Master's Degree
COctoral l:egree
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
-------------------------------------------VVEDBUSH
Exhibit 29: Revenue of Publicly Traded Market Funded Universities
14
12
10
($8) 8
4
2
0
2004
!=Revenue -
% Change Yr/Yr l
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
1995
2000
2005
5 Year CAGR
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
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
-------------------------------------------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
Education 1 23
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%
Other lnstrucOOnal
Costs
8%
fnrollrrent
Counselors
CoJlllensaoon
16%
Oassroom Lease
B<pense &
Depreciation
9%
Faculty
CoJll)ensaoon
11%
24 1Education
-------------------------------------------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
10%
8%
6%
4%
2%
0%
(2)%
(4)%
1970
1975
1980
1985
1990
1995
2000
2005
(4)%
1970
1975
1980
1985
1990
1995
2000
2005
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.
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)% ' - -
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
2002-o:l
CP;j
26 1Education
-------------------------------------------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%
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Ci
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.
Education 1 27
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%
28 1Education
-------------------------------------------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.
Education 1 29
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
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
Maximum
Allowable
Debt at
Graduation
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
-------------------------------------------VVEDBUSH
Exhibit 46: Growth in Private Student Loans ($M), 98/99-07/08
20.000
16,000
-12.000
fSM)
8,000
4 ,000
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
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.
32 1Education
Penalities
Title IV ineligibility
Title IV ineligibility
-------------------------------------------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%
5%
0%
1988 1989 1990 199 1 1992 1993 1994
1995
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
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
-------------------------------------------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
345,300
83,100
428.400
Persistence Calculation
4008 Gross Enrollments
- 4008 Enrollments
4Q08 Persistence
428, 400
362,100
66,300
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%
Education 1 35
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
-------------------------------------------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: 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.
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
-------------------------------------------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.
Education 1 39
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
40 1Education
-------------------------------------------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.
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.
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
A Bachelor"&
2007
2009E
Ooclon~l
2008A
---
2009E
(20)% -
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
-------------------------------------------VVEDBUSH
Exhibit 57: Composition of Apollo Revenue by Business
Se ment
Insight Schools
O'k
4%
O'k
~~-,---
Apollo Global
- 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
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.
Education 1 43
2002A
2003A
2004A
2005A
2006A
2007A
2008A
2009E
2010E
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
-------------------------------------------VVEDBUSH
MANAGEMENT BIOGRAPHIES
Title
Background
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
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.
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
PEG Ratio
Revenue
EV /Revenue
(750.3)
($(,67)
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
46 1Education
-------------------------------------------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
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
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
0.5X +----,-----..-----.-----,----,-----,-----,----,------,J
Jan.OO
Jan-01
Jan-02
Jan.03
Jan.04
Jan -05
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
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.
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
-------------------------------------------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
Z.68M85
...
,,,.
(192,416)
l5'$'1.
;~u...
2,568,037
. ... ~Yd'(f
2S,046
"""
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
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
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
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
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
,.,._.
"'en..QIYrM
Hlioo.
1'\>g
~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
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";
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
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"'
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
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
........
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
''"'
.......
Education 1 49
45.4%
24,2%
6.2'4
37.9%
11.5%
21.()%
33.6%
2007A
.....
Z,7ZJ,793
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
429,310
173.603
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
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
41 .0%
26.2%
6.7%
40.5%
224,692
2,400,965
OperaHng Income
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')
~k,li'IOrm~UtslkfU)
'Atft~YO"''r
''""
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
50 1Education
-------------------------------------------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)
54.027
53.570
(18.648)
80.119
(3.950)
84.000
14.924
(13.165)
20,106
(4.509)
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~
(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
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
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
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
596,071
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
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
Education 1 51
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.
.,.-
,.. ""
""'-
52 1Education
~v
!.~
Source: Nasdaq.com
-------------------------------------------VVEDBUSH
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.
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.
Expand internationally. The focus is principally in Latin America, Brazil, and Mexico, followed by China and India.
Expansion could likely occur through acquisition.
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
54 1Education
-------------------------------------------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.
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
2005R
Re"""'e -
2006A
2007A
2008A
2009E
2010E
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.
..
..,~
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
oo w w w
Sum Fall
~
Spr
Sum
Fall
16.000
..
~
{!
10%
8%
14.000
6%
4%
:ZO,{,
11.000
10.000
0%
.-,, '04
.-,1'05
.-,1'06
JtA '07
Jul '08
56 1Education
-------------------------------------------VVEDBUSH
Exhibit 75: Medical & Healthcare 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
4007A
4005A
4008A
0%
1-
4Q07A
4006A
4Q08A
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.
Lr-----------------------------------------,
~r----------------------
Education 1 57
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
-------------------------------------------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.
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.
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
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
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
60 1Education
-------------------------------------------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.
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
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.
0.5X
Jan-00
Oec-98
Jan-01
Jan-02
Jan-03
Ja n-04
Jan-05
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
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.
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.
..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%
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
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
T\ition Revenue
2007A
20D8A
8fl'Z.660
. .. ~'Vtrft
S~OIQI(y~(;t ........ .......,..IIII(!Ql
I.OOI.o29
""'
70,813
:n"
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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
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
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%
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26,8$2
28.4 14
2&,753
.52,288
.,.,.
(26~
~~
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Q4E
Jun '10
410,307
"'"'
.,,.""
19.9S3
.....
430,268
!;19J"'
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172.727
148, 163
32,0,891
166,913
IS3.931
320,845
171,053
188.6SI
145.784
316.838
160,783
169,608
,._,.,
348,434
368.61$
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
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2111 . .
33411f
139.968
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62.:;10
..,.,.
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.....
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ttn
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18b,_
79,319
83.,673
,.......
1U'
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14.1\
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30911f
151tlp
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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
..
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'""'""
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(221)
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916
634
48,362
1,513
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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$6
'!U"4
279.127
Q2A
Dee '08
187. 107
1,048
roo
Q1A
Sep '08
139.613
117,292
5n
38,263
....,,
265.2S3
Q4A
Jun '08
23.042
otttM.I~ ,.,tll'l \
Interest Expense
QJA
Mar '08
IH"'
44.0%
41.5%
30.0%
200QE
..
"'"
,. ..
''""
.....
,..
... ,.,,......,.
,.,.
230.221
45.0%
IC.t'
!nlbt
U'J!'l
bp
1.710
(2.894)
1-#.f'l.
62,38$
Olhe<
E8T
71,400
72.406
n .637
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,.
n .662
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93.155
171,802
1001rt
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u~
237,248
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307,301
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186"4
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, ...
$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
""'
$0.77
,,..
..
SMI
,,..
, ...
,.,.
62 1Education
-------------------------------------------VVEDBUSH
Exhibit 85: DEVRY Cash Flow Statement
DEVRY
Cash Flow Sh.Wmsnt
($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$3
(5)
14.117
(3.248)
30
9.684
9.990
122
15.985
(923)
24
18.071
420
(3'1)
1,718
(7)
t i-718
Q4E
Jun '69
'2.000
600
2,000
600
4.;400
19,4915
2,400
18.546
2010E
02E
Q3E
OM '09
Mat "10
Q1E
Sep '09
51,044
56,204
59,271
2,500
650
2,334
21.382
2,500
2,500
650
2,334
24.876
650
2,334
23..5&1
04E
Jun "10
44.372
2.500
650
2.334
23.665
U ,U
41.*$
%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
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)
....~
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(72,738)
38.$28
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.....
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(69.!548)
(27.~)
(9.435)
(10,638)
lf,1_to
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,.,,.
(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~
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
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$7
t2,201
(70.3011
17t-341
183.059
203.~26
295-607
22S.l4t
225.249
203.326
us,co7
(83,2171
11081
544.796
4&1,S18
395.590
3tS,301
30~510
2004A
Q4A
2005A
Q4A
2006A
Q4A
2007A
Q4A
Q1A
2008A
Q2A
Q3A
2008A
Q4A
Q1A
2009E
Q2A
Q3E
2009E
Q4E
2010E
Q4E
Jun '04
Jun '05
Jun '06
Jun '07
Sep '07
Dec '07
Mar '08
Jun '08
Sep '08
Dec '08
Mar'09
Jun '09
Jun'10
98,912
142,144
9,823
76.842
17,938
22,456
142
368.257
249,580
2.345
23JJ77
121.523
17,287
20,698
218.985
150,o1 1
72,745
21,218
75.790
15,491
18.361
113
353,729
259.327
348.033
13.450
232,864
346,987
13,450
234,041
373,970
13,450
3,158
872,482
4,318
844,113
5.510
952.540
50,000
30,681
34,071
34,462
14.685
22,823
60,000
39,677
35,600
27,639
16.584
31,769
34,295
47.093
32,737
14,402
37,348
156,649
186,722
211,269
215,000
17.660
16.566
405,875
175,000
15.949
6 ,352
12.629
396,652
Shareholder's Equily
476,257
864,132
PP&E
Goodwill & lntangbles
Pertc:ins Progrcvn fund, net
Marketable Securities
Other Assets
Total Assets
Liabilities
CPoiOebt
Accounts Payable
Accrued Salaries, Wages. & Benefits
Accrued Expenses
Advanced Tuition Payments
Deferred Tulion Revenue
Other Current llablities
T olal Current Liabilities
146,227
161 ,823
130,583
129,156
217,199
2 .308
4,113
55.214
14,975
31,779
183,059
2 ,136
8 ,564
154.654
15,636
28.279
203,326
1.861
31 ,948
137.602
16,312
33.903
. 29$.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
Education 1 63
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
-------------------------------------------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.
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.
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
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."
Education 1 65
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
66 1Education
-------------------------------------------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.
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 $6,765. Below we provide a sensitivity analysis to determine potential fiscal 2009 revenue given
changes in the average price per enrolled student and average enrollment for the year.
Exhibit 89: Revenue Sensitivity-- 2009 Revenue Per Enrolled Student vs. 2009 Average Enrollment
2009 Revenue Per Enrolled Student
5,500
6,000
6,500
6,765
7,000
7,500
8,000
221
241
261
272
281
301
322
218
238
258
269
278
298
318
216
235
255
265
274
294
31 4
213
232
252
262
271
290
310
210
229
248
258
267
286
306
207
226
255
264
283
302
205
223
245
242
252
260
279
298
202
199
220
217
239
235
248
245
257
253
275
271
294
290
c:
2c:
..
.."'
~
>
C(
"'
0
0
N
50,000 . - - - - - - - - - - - - - - - - - - - - - - - , - 80%
45,000
120%
70%
300
100%
40.000
60'AI
35,000
250
80'AI
50%
30.000
200
25,000
40%
20.000
30%
15,000
20%
10,000
10%
5.000
60%
($M)
150
40%
100
20%
50
0%
2004A
2005A
2006A
2007A
2008A
2009E
2010E
O'Ao
2004A
2005A
111111!111 Re\enue
2007A
2008A
2009E
2010E
Qacllate
53%
Lh:lergraduate
Ollire
47%
89%
68 1Education
-------------------------------------------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.
30%
10%
( 10)%
(30)%
(50)%
(70)%
.L----------------------------------------------1
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.
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
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.
$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
73.0x
18.8x
11 .8x
90.2x
23.2x
14.5x
$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%
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
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
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 $108.7 million
of proceeds to pay a special distribution to shareholders of record as of November 2008.
Has accreditation by the Higher Learning Commission of the North Central Association of Colleges and Schools, a
regional collegiate accreditor.
72 1Education
-------------------------------------------VVEDBUSH
Exhibit 97: GRAND CANYON Income Statement
[!~miJmmm~mDIIIIII~~~JIII~~~~~~~~~~~~IIIIIIDI~I~I:JIII~f~I~H:JIIIEI~l~H:JIII~i~l~H:IIIIIIIIID!~I~,pJIII~f~l~,pJIIIEI~I~,pJIII~I~I~.ijiiiiiiiiiDI~;~'*IIII~l~;~'*IIIIEI~;~'*IIII~I~l~l~llll
Expenses as a % of Revenue
Instructional Costs and Services
39.3%
3S.4%
17,1%
40.0%
33.8 %
40.6%
16.6%
36.6%
33.7%
3S.2%
13.4%
40.0%
33.3%
34.3%
12.9%
40.0%
32.5%
3S.2%
12.7%
38.6%
35.9%
43.1%
18.6%
38.0%
33.0%
47.2%
12.8%
40.2%
33.8 %
37.8%
21.0%
30.9%
33.7%
3S.S%
1S.5%
40.0%
33.7%
38.0%
13.0%
40.0%
33.7%
38.0%
13.0%
40.0%
33.7%
31 .0%
12.5%
40.0%
33.3%
34.S%
15.0%
40.0%
33.3%
37.0%
12.5%
40.0%
33.3%
37.0%
12.5%
40.0%
33,3%
30.0%
12.0%
40.0%
24.8%
74.9%
13.3%
39.4%
86.S%
57,11'1(,
57.7%
36.9%
27.3%
38.3%
36.1%
35.0%
31.4%
109.S%
25.7%
42.5%
82.0%
34.8%
30.0%
83.7%
45.0%
51.5%
79.8%
110.2%
65.5%
6 1.0%
94,11'1(,
50.2%
41.2%
12.0%
60.6%
26.S%
59.6%
56.7%
28. 1%
(7.0)%
43,3%
40.9%
40.3%
41.3%
39.2%
37.S%
38.4%
34.4%
32.7%
34.1%
31.3%
30,3%
2008A
2007A
2008A
2009E
2010E
Revenut
2S4,i7$
181,309
":/ ~~
. --.CNDgt.YtNr
"CI'IriQtS!tii.II!!Uitt
~ityl"Of*""U$1~1'Uel"qtrJ
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
EBITOA
11,1"4
1.1"4
f8fTQI\Niaf."4
Operating lncome
4,345
12,797
......,.
O,tnUitltltiiN'11111 ..
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
$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
I
$0.61
$0.92
"'"'
"ChallgeYrfYt
(SIS)
(129)
(49)
20"'
1181.
$1QCt.&n~zts:taJ~rJtf)
(S80)
5,380
2,076
n~
74.324
19~
110"
27,025
17.2'%
2, 542
1,016
7,645
14,664
~.870
( 1,803)
13,603
tU%
15,.n
Normalized IS to Pro Forma (wh1c.h excludes stock ophon compensation and prefe
Recone~habon
2007A
2008A
2009E
2010E
~CNn!II 'YrNr
9,453
1U%
IS,.n
46,850
8,462
1t.f"4
I$..3"J(
26,057
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,$26
386
1t#1.
1U'"4
3S, 143
Oc$UlQMirQI""
5,940
10.W.
1tSX.
1~
........
11.1.,.
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.
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
~~
Education 1 73
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
OCher
Change-s in Worblq Capb l
Cash Flow from Operations
% Change YrJYr
CFO/Share
S0.20
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;
(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)
7,395
11,535
16.222
18.930
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)
OCher
Cash Flow from Financing
49.431
61 .851
111,282
3~.1~2
74 1Education
-------------------------------------------VVEDBUSH
Exhibit 100: GRAND CANYON Balance Sheet
Grand Canyon University
Balance Sheet
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
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
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
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
Education 1 75
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.
76 1Education
Source: Thomson
-----%.;
Gr,oo
...,
"'
, :n
.....
.....
Oii
.. ....
JO.
..
_..,.?of1."'---w
-------------------------------------------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.
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.
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.
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.
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%
78 1Education
-------------------------------------------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.
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
1,200 . , . - - - - - - - - - - - - - - - - - - - - - - - .
12
1,000
10
3
800
600
400
200
0
2001
Y1
Y2
Y3
Y4
80 1Education
Y5
Y6
Y7
2002
2003
2004
2005
2006
2007
2008
2009E
Y8
-------------------------------------------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:
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.
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
Education 1 81
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
2005A
2006A
1-A\efage Enrdlment
2004A
2007A
2008A
2000E
2010E
2003A
2004A
2005A
2006A
2007A
2008A
2000E
201OE
% O'lange YrNr J
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
-------------------------------------------VVEDBUSH
Exhibit 111 : Strayer Operating Margins
~% .----------------------------------------------------,
37%
35%
34%
33%
32%
31%
30%
29%
28%
2002A
2003A
2004A
2005A
2006A
2007A
2008A
2009E
2010E
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).
Education 1 83
2007 Pop
Region
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
12,875.587
41
1.2BO.S33
9,524,673
42
1,233.735
43
Richmcnd, VA MSA
1,212.977
44
1,192,989
45
1,189.113
2,706.606
46
1,128,183
589.618
47
Birminpm.t-10011er, AL MSA
1. 108,210
1,108,210
5.278.904
879,817
46
1,099.973
1.099.973
10
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
4,203,898
4,179.427
4.081.371
51
52
53
1,000,363
967.089
905.755
15
Sealtle-Tacoma-Bellewe. WA MSA
3,309,347
54
Honolllu, HI MSA
905,601
16
17
3.208,212
2,974,859
55
55
Fresno. CA MSA
Bridgeport-Stamford-Norwalk, CT MSA
899.348
895,015
18
2.808.611
19
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
2.175. 113
24
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
845,494
889.352
59
Dayton, OH MSA
835,537
60
Albuquerque, NM MSA
835,120
61
829,890
62
803.844
63
798,364
64
Bakersfield, CA MSA
790.710
65
VVorcester, MA MSA
781,352
66
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
1,990,675
1.985,429
67
68
770,037
734.689
30
1.836.333
69
Cdumbia. SC MSA
716,030
31
1,803,643
70
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
1,600.856
75
Knoxville, TN MSA
681.525
37
1,598.161
76
Stockton. CA MSA
670.990
38
1,544,398
77
Pougtl<eepsie-Newbll'gh-Middlelown, NY MSA
669.915
78
79
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
84 1Education
-------------------------------------------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
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
404.197
Wictlita. KS MSA
596.452
124
Manchester-Nashua. NH MSA
402.302
85
590.564
125
Reading. PA MSA
401.955
86
587,689
126
400,121
87
574.746
127
387.583
88
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
546.599
536.161
534.047
131
132
133
376.241
376,160
371,206
94
Harrisburg-Carlisle, PA MSA
528.892
134
370,008
95
96
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
500.413
140
Rockford, IL MSA
352.290
101
lancaster, PA MSA
498.465
141
350.003
102
Provo-Orem, UT MSA
493,306
142
349,717
103
Dumam, NC MSA
479,624
143
Fayetteville, NC MSA
348,940
Portland-Biddelord, ME MSA
479,624
104
464.435
144
Eugene-Springfield, OR MSA
343.591
105
Winston-Salem, NC MSA
463.159
145
Wilmington, NC MSA
339,511
106
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
316.639
110
435.714
150
315.839
111
112
Flint, Ml MSA
Visalla-Porter.;lle. CA MSA
434,715
421,553
151
152
303,950
303.686
113
114
York-Hanover, PA MSA
Springfield, MO MSA
421 .049
420,020
153
301,131
115
414,376
116
Reno-Spart<s, NV MSA
410.272
117
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
Education 1 85
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.
..
$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
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
-------------------------------------------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
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
27.5x
20.8x
16.7x
32.3x
24.4x
19.6x
$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%
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
(107.3)
~$7.59)
88 1Education
-------------------------------------------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
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
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
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
Oec-97
Oec-98
Oec-99
Oe~O
Oec-01
Oe~2
Oec-03
Oe~4
Oe~5
Oe~6
Oec-07
Oe~8
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.
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
-------------------------------------------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
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%
Strayt>r Education
Normalized Income Statement
($ m OOOs except per shilre data)
20D8A
2007A
Reveriue
2008A
2009E
2010E
596,166
396,276
...,.
""ctwoeYtfft
"""'
130.836
76,162
62.426
269,424
""'
""'
Operating Income
97, 55 7
~o.
.......
SPSC:Iuti. . YtNr
&1 bp
............,,..oc,
Dec
.... .....
....
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
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
~"
ESIT[)l.MtfVn"
Q.IA
Sep
104,052
39,115
OJA
Jun
I
3.200
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
-~
$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
,..,.
$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
,....
"'"'
$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.,.
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
""
587
...
745
731
120.
717
""
633
805
""
'"'
Education 1 91
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
190
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$;969
1 2,316
13.916
1f.200
1 t,600
(87)
(71)
(785)
2,420
(1, 318)
2,683
(130)
(70)
(72)
(236)
(70)
(70)
2.571
(741)
2,804
2,729
( 1,499)
2,757
3.041
3.784
2,317
2.929
3.029
3, 129
3.229
3.329
3,429
3,529
3,629
2.800
2,800
2,~0
2,800
2,900
2,900
2,900
2,900
(12,193)
{5,391)
(113)
7,858
(16,507)
3,880
(7424)
871
(3,421)
2.428
(5268)
7,575
(3,824)
2,630
(6,494)
~c~~=.h~F~Iow~t~rGm~~~.~~~7n~.~--------~8el,~
n~.~~~~
.7~~~~8~8.7
5n~~1~17~.~~~.~.~
8.~~~2~~~~~.=n~2--~9~
,27.,.~-7.
19~~~8~7--~2~
~~61~.~~~~~.~894~~2~7~.~~1~~
~~.30~5--~3~1:~8~~~~4~~~o.~8~~3~2.~~~2~~v~~~~=-~3~7.~9~14~
%ChangeYrffr
CFO/Shere
~Ch~YrtYr
lnvesUng Activities
Capital Expendture-s
.-91Jai-.YitVr
FCF Murg.n IF-CF/R~tr....)
FCF IStl..-.
~Ch$'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$2'0
""'
5,754
Ac:CJ.Iistion'5
Purc:hne of Equity Investment
Othe<
Cash Flow from Investing
(43, 1~)
9,115)
5,159
(35,041)
6,596
(15,294)
3,596
{38,094)
15, 178
(19.027)
12,678
(109, 125)
10,633
(51.929)
18,033
(4 0,1~)
29,285)
(21,549)
42,373
52.663
95,036
24,000
(30,000)
(28.400)'
(36.000)
(132,388)
2~00
(36,000)
(82,049)
(38,657)
95,036
56,379
84,894
121,013
80,202
121,073
201,275
11~856
(5,733) ~_,6;:,:::000:.:.~-__>:(6.!:
,0:::
00"---"
(6"',00=0' - - '("'8,"'000::::!i) ~_,17:.z:::50:::0L--"
(7"
,50
:::0:L)__->:.J.50=0)' - - '("1,!.:50:::0:q
Anand ng AetiYfUes
Debt Borrowings
Debt Repeyment
Stoc;k Repurchase
Stoc;k
l ssu ~mc;e
DMdend
Exc;ess: Tax eenef'U. Stoc;kS.sed
OthOf
Cash Flow rrom Frnanclnn
6,947
(29.858)
308
(7,100)
(7,100)
(9,000)
(9,000)
(9.000)
(9.000)
f-..l!.:
(7.100:2.
_,
__!!.(7,_,
,1:::00:t___,;(7Cl.,1!!0"0'-_;(7
e_,L!100""j
(9,000)
(9,000)
(9,000)
(9,000)
(7, 100)
(7,100)
74\212
52.,663
56,~79
~. 830
96.036
88,382
21~594
66,379
11,973
14,.161
77,973
10,206
92,134
102,339
92,1~
18,735
102.33$
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
($
10 OOOs
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
270,844
343,778
297,589
301,412
328,026
324,563
348,137
383,421
406,878
433,806
562,956
92 1Education
-------------------------------------------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#
..,.:
""'
"
'"'
.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.
-------------------------------------------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
$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
Education 1 95
..mmEiillll~EiilimliiiilJIIMlH!:t--lJ.i:l- l"f:l-i!tl:fM
~!lml!lri!l!~l!!ll!l!_lll
Expenses as a % of Revenue
. ,.
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
4Q09E
38.5%
12.5%
19.0%
40.0%
"-O~ft/'lt;
3Q09E
40.0%
12.0%
19.4%
41 .0%
Total Revenue
2Q09E
40.7%
11.5%
19.9%
38.7%
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
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
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
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
(e..,d~j)ft(e'redlfOCI, &~.'J't~t*)
-CI'I&ngfVtfft
SQ.64
39"
5U~"
:137/
;t
s1.21
-41
1"
$1.68
$0.18
S0-21
138,.
311"
$0.?4
""'
$0.28
$0.31
$0.38
,.,,.
$0.37
$0.45
$0.29
$0.31
$0.34
$0.39
$0.41
.,,.
Ch&n~YriYr
$0.39
$0.43
$0..4~
$0.43
$0A7
50.52
,. ...
,.,.
(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
96 1Education
-------------------------------------------VVEDBUSH
Exhibit 127: AMERICAN PUBLIC EDUCATION Cash Flow Statement
2008A
Q1A
2007A
2008A
Net tlcome
8,750
16.187
121
2,825
1,033
618
152
4,235
1,870
1,295
4,170
17,517
Z917.57
2009E
23,166
% 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
% 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)%
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
'
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
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
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
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
25.809
28.750
48,980
54,696
61,247
71,036
78,813
83,515
88,968
101,441
109,840
152,509
Education 1 97
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
-s.~
-...,:
~~
....,
Qe.
-~
r.....
..,_
-.Mlfjft'N-*'"'_... ~.,..
98 1Education
-------------------------------------------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.
Education 1 99
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
(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
$1.82
$2.44
34.3%
$3.13
27.9%
$1.82
$2.44
34.3%
$3.13
27.9%
27.3x
20.3x
15.9x
37Ax
27.8x
21.8x
$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
$4.75
15.9x
10.8x
8.8x
22.9x
15.5x
12.6x
Enterprise Value
EV I Share
% Change
I
I
100 1 Education
-------------------------------------------VVEDBUSH
Exhibit 131: CAPELLA EDUCATION Income Statement
~~~~~mi~~IIIIII..IE~EIII~~IIII~IIII~Dmllllilml~'~t!:llll~l~'~''l
' IIII~'EHl,llll~'~!tla:iill
Expenses as a % or Revenue
Instructional Costs and SeMces
MarkeOOg & Promotional
44.3%
30.8%
11,7%
34.6%
44.2%
30.4%
10.7%
34.8%
42.5%
29.7%
10.3%
36.0%
42 .0%
292%
10.1%
36.0%
44.5%
32.8 %
11.8%
35.4%
19.7%
23.2%
21.2%
20.2%
18.6%
IDA%
15.9%
17.9%
16.5%
18.6%
18.0%
17. 1%
23.4%
16.8%
292%
46.7%
29.6%
10.5%
34.3%
45.3%
31.9%
10.6%
34.2%
40.6%
27.6%
9 .9%
35.1%
25.4%
16.2%
6 .9%
19.4%
18.5%
0 .6%
13A%
23.0%
7.0%
Capella Educahon
2007A
226,236
2008A
~CtllnOtYdfr
21 ' "
183"-
12,241
52,343
- eatDA~~~~~
9.772
39,722
17 ,n
Operating Income
29,950
40,102
EBITDA
2009E
>:; 10:
272,295
~h
Instructional Costs and Services
Maltceling & Promotional
9.7%
14.7'1!.
11. 1%
2Q09
1t~
327,943
I
139,474
97.544
33.926
270,944
181"-
13,768
70,767
tt.l"
56,999
.....
11..1%
BPSCt..la'rriYr
2010E
393,531
,.,.
165,401
115,085
39. 719
320,204
40.0%
27.0%
9,8%
36.0%
41.0%
31.5%
11 .0%
36.0%
44.5%
28.8%
10.0%
36.0%
43.5%
30.7%
10,0%
36.0%
15.6%
18.6%
17.2%
18A%
19.2%
17.5%
19.6%
19.2%
20.6%
18,6%
18.1%
17.9%
18.7%
18.0%
16.5%
18.6%
18.1%
17,6%
20D9E
QJA
Q4A
Q1E
Q2E
Q3E
Q4E
Q1E
Q2E
Q3E
Mar
Jun
Sep
Dec
Mar
Jun
Sep
De..:
Mar
Jun
Sep
65,251
6&,048
65,239
75,756
76.670
79,259
79.592
92,422
92,004
9S,111
9$,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
$,587
64,939
73,327
, , ,..
73,327
..
1U%
,,.
2.765
9,877
16., ,
7,112
3.092
11,756
11,..
8.664
3, 192
11,128
11.1~
7,936
3, 192
19,582
~.f:'
16,390
21.6"
1U'.l
3,292
15.022
n.~
11.730
..SJ%
1,399
1,008
839
825
8,501
3.013
9,672
3.314
8,775
2.999
17,215
6,049
22,784
28,788
38,399
48,849
5,488
6,358
5,776
11,166
7,968
17. 141
17,321
17,010
17,0 10
17.894
17,303
17,077
17,010
17.010
E9T04M~f91'111.
0o~Ot.l)f91'1'1c.
,.,.
181~
35,6 86
23,223
8. 184
67,053
35,0 20
24.833
8 ,118
67,971
36,969
24.954
9.057
70,980
3,392
15,598
tt.1<4
12,206
3.592
25,034
11.620
21,442
..n
n.t"Xo
t4.4%
12,480
4.493
, .,..
, ...
:IO(N
2Q08
20'01>
;DOl<
~ ':10~
,..,.
"~
,.,.
42,324
27,392
41.547
29,322
9 .551
80,418
43.808
29,390
10,536
83,735
14,,.
37. 722
28,981
10.120
76,823
3,692
18,873
.20$'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
~~
,.~
18~
76,327
27.478
14ltl.
211);1
,.3. .
18~
3.000
,.,,
"'"'
Q4E
59,999
21.600
2010E
Q2A
44,163
15.375
EST
4Q09
44.0%
31.2%
10.2%
36.0%
Q1A
34,853
12,069
3Q09
45.0%
29.3%
10.3%
36.0%
20D8A
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
,.,,.
,..
~.&llortmlllt'ttt.Ytottl
....
$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
,.~
Education 1101
Operati:ng Activities
Net Income
Provision for Bad Debts
2003A
Q1A
2006A
13.411
2,855
8,195
(366)
2007A
CFOIShert
~ChranoeYriYr
Investing Activities
Caplal ExpencMure"S
F'reeCarshflow
'tliCher!oeYrffr
Purchase of ST "'vestments
Sale of S T Investments
Acquisitions
Othet
Cash Flow from Investing
2009E
Q3A
Sep
Q4E
Dec
Stock Issuance
Othe1
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
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()(
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<
102 1 Education
-------------------------------------------VVEDBUSH
Exhibit 133: CAPELLA EDUCATION Balance Sheet
2004A
Q4A
Capella Educatton
Balance Sheet
2006A
Q4A
2007A
Q4A
Dec
Q1A
2008A
Q2A
Q3A
2008A
Q4A
Restricted C ash
PP&E
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
Q1E
49.980
5.878
3,056
1.398
2005A
Q4A
Liabililies
Accounts Payable
Accrued Uabilitie-s
Income T axes Payable
Deferred Re~~enue
Notes Payable
Other LT Uabilities
2,331
Other
Total Uabilities
Othe<
34,502
57,646
57,646
(5)
Shareholder's Equity
Total Li abilities & SE
8
22.385
80.026
.-
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
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
IMPORTANT DISCLOSURES
~rgOni-atng ta oV(rvfiYHC;vr:;-;:
L)-------~
Closing Price Mer 24. 2009 4 7.G5
/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
'Co')s.tQ-tl.W"gtnd
h..ew)()..t.e"
t~.r.J
Oillw~il'clde
lnlti te:d tlold .&.upurde.
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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
-------------------------------------------VVEDBUSH
OTHER DISCLOSURES
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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.
Education 1105
WEDBUSH
RESEARCH DEPARTMENT
(213) 688-4529
DIRECTOR OF RESEARCH
Mark D. Benson (213) 688-4435
TECHNOLOGY
Communications Equipment
Rohit Chopra ... .. . .. . .. . .. . ... .. . ... .. . ... .. . .. . . (212) 668-9871
Sanjit Singh . .. ... .. . ... .. .. .. .. .... .. .. .. ... .. . ... (212) 938-9922
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
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
(213) 688-4538
(415) 263-6626
INSTITUTIONAL TRADING
Los Angeles
San Francisco
New York
Boston
CORPORATE HEADQUARTERS
1000 Wilshire Blvd., Los Angeles, CA 90017-2465
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Tel: (213) 688-8000
N FBR
CAPITAL MARKETS
Education Services
FBR Capital Market s
Table of Contents
Investment Thesis ............. ........ ........................ ........ ........................ ........ ........................ ........ ........................ ........ ..........3
Industry Valuation
...............
...............
...............
...............
.......... .4
.. 10
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). .. ..................
.. ........... ..
......... 25
.. ... .42
.. .... 57
Corinthian Colleges, Inc. (COCO)..................... ............ .................... ............ .................... ...................... ............ ............... 75
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.
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.
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%
coco
Company
Apollo Group
Career Education Corp.
Corin1hian Colleges
~Vrylnc.
DV
..
Pncmg as of January 12, 2010.
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
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:
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
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.
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- - A'oprietary School Peer Group Forward A'Evs . S&P500- Based on Consensus Next-12-Months Estirrates
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
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.
$1 ,400
r--
$1 ,200
$1 ,000
r--
$800
$600
r--
$400
r--
$200
$0
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
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.
Employment (OOOs}
2016
2006
Change
Most significant source of postsecondary education or training
262
402
53%
Bachelo(s degree
767
1,156
51 %
787
507
1,171
49%
45%
733
71
100
41%
Associate's degree
176
248
41 %
Bachelo(s degree
2
417
40%
35%
35%
34%
Bachelo(s degree
8 Medical assislants
9 Veterinarians
10 Substance abuse and behavioral diSQ(der counselors
62
83
565
84
112
1 Registered nu rses
Retail salesper sons
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
Associate's degee
$21,200 to $33,560
$21,220 and below
$21 ,220 and below
Doctoral degee
Short-term on-lhe-job training
Postsecondary vocational aw.;~rd
Publicly Traded Proprietary Schools* Have Seen Enrollment Grow with Unemployment
12%
25%
10%
20%
8%
15%
6%
10%
4%
5%
2%
0%
0%
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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
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.
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%
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.
12
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.
CECO
coco
DV
$13,843
$17,247
$12,666
$21 ,591
($6,556)
($11 ,065)
($7,490)
($9,284)
$7,286
$6,182
$5,176
$12,307
($2,740)
($4,066)
($2,431)
($6,374)
($584)
($486)
($954)
($589)
$3,962
145%
$1 ,630
40%
$1 ,792
74%
$5,344
84%
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
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
14
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.
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
15
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.
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
16
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.
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.
17
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
Enter Repayment
10/1/2006-9/30/2007
10/1/2007-9/30/2008
Default by
9/30/2008
9/30/2009
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).
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
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
18
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
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.
19
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%
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%
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.
20
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
Graduate Students
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
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.
21
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.
22
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.
23
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.
24
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
Key Points
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
$3.11
Operating Margin
7.02%
25
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.
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,
26
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.
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
27
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.
28
.Health
0 Culinary
Source: FBR Research. company filings, and Department ofEducation
11%
University
47%
Iutemational
10%
29
Art&Dcsign
15%
University
44%
CuUnary Arts
18%
H ealth Education
16%
6%
+-----------------
40% +-----------------
30%
+-----------------
20% +-------------l
0% +--==
Art & Design
-10%
Culinary Arts
Health Education
International
Uni\rsity
~---------------------------------------------------------
30
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%
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.
31
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.
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
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.
I 2-yeru: CDR
3-year CDR
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.
33
$17,247
($11,065)
$6,182
($4,066)
($486)
$1,630
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
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
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
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.
37
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:
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
38
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
Financials
Income Statement
Career Education Corporation (CECO)
($in Millions)
.....w
CoMOiidaed I~ St,.temMtt
2007
{ftt1MJLs)
Actual
2008
Y.., 1~
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2009
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Eltunattd
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2011
Cltifn.e-e
......
"'""~
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"""'~
~.OOJo
20.5%
3009
21.0%
4.}1,4
440.7
IQ09
4Q<lS
2Q09
y. y
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3011
ClriiiiJ!f"
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459.9
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(1</<i/yo)
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6.11%
(;RJ.6f)
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43.8
79.1
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50.9
53.0
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100.4
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256.7
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246.4
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f.,(>,~lt(lf<i
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40
Balance Sheet
Career Education Corporation (CECO)
($in Millions)
Coruolu:b.:ecl BsiM'Icc. Sbcct
{li~i~l)
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Actual
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2008
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5(lll.7
97.6
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41
Outperform
Oakbrook Terrace, IL
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
Key Points
OPERATING DATA
2009A
2010E
2011E
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%
42
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
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.
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
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
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
46
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%
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
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
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
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
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
Devry
Dev ry
Ross Charrberlain
49
$21,591
~$9,284~
$12,307
($6,374)
~$589~
$5,344
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
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.
FY2007
FY2008
DeVey Undergraduate
70%
75%
Graduate
65%
75%
Ross University
80%
81 %
70%
62%
Apollo College
76%
79%
61%
77%
6.';%
71%
Private Loru1s
6%
5%
State grants
3%
3%
26%
2l %
100%
100%
51
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
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
53
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
Financials
Income Statement
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Market Perform
Phoenix, AZ
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
FY
$5.08
.(.)
$1 .22
2Q
3Q
.(.)
$1.03
$1 .63
$135
FY
$5.86
OPERATING DATA
FYAug
2009A.
Revenue
$3,974
$4,737
$5,235
201CE
2011E
YOYGrowlh
26.5%
19.2"k
10.5%
Key Points
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
$127.77
Operating Margin
ll.90'k
57
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.
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
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
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
60
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%
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 $447.2 million, or 40.2% of revenue, in FlQlO. During t11e same period,
associate 's degree seekers grew to 45% of total enrollment fTom 26%. Coinciding with the growt11in
associate 's degree students was tJ1e company's decision to gTow its associate 's degree program via its UPX
Axia College subsidiary rat11er than wru. which traditionally offered such programs. We view iliis decision
as having been driven by the appeal of applying the UPX brand to t11e arguably more commoditized online
degree market, as well as creating a natural feeder channel for bachelor's candidates for UPX.
- .. - - - - - -- - - -
150
100
50
- -Associate's
Total
61
Doctoral
2%
Associate's
44%
Associate's
37%
42%
62
government's appetite to fund ever-increasing Tille TV programs. We are not suggesting l11at the company is
at risk of losing this aid, only highlig hting its dependency.
GranIS
To.al Loans
84%
l6%
We note t11at aside from Apollo 's obvious dependence on FSA to fund student tuition, the company is by far
the largest recipient of such ftmds. Rightly or wrongly, the company is often scmtinized by the media and
public officials as a bellwether for the for-profit education industry.
Top 10 Recipients of Federal Student Loan and Grant Aid, 2008-2009 Academic Year: All Schools($ 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 _ _ ,
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.
63
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
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.
64
65
40%
2006
2007
35%
30%
25%
20%
15%
10%
II
II
5%
0%
UPX
WIU
National
UPX
WIU
National
UPX
WIU
National
per student
$13,843
($6,556)
$7,286
($2,740)
($584)
$3,962
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.
66
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.
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
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.
67
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.
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
68
50,000
40,000
30,000
20,000
10,000
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.
70
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
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
Financials
Income Statement
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73
Balance Sheet
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74
Market Perform
Santa Ana, CA
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
OPERATING DATA
FY Jun
2009A
Revenue
YOYGrowlh
1307.8
1666.9
1968.3
2010E
2011E
22.4%
27.5%
18.1%
Key Points
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
75
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
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.
77
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.
78
.~~-=.~~-----S~-t
Everest
W'yotech
<> Heald
So11rce: Department ojEd11cation and FBR Research
79
$76!> millon
Federal Srudeut
Loans
72%
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.
80
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
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%
81
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.
2005
2006
2007
30.0%
25.0%
20.0%
15.0%
10.0%
Avg.
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.
82
$12,666
($7,490)
$5,176
($2,431)
($954)
$1,792
74%
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
83
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.
84
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.
85
School
City
Estimated%
Estimated%
State
Enrollment
Revenues
FY05
FY06
FY07
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
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%
86
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
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
88
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
Financials
Income Statement
Corinthian Colleges, Inc. (COCO)
($ 1n Millions)
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Balance Sheet
Corinthian Colleges, Inc. (COCO)
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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
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:
FYI.
George
George R. Boggs
President and CEO
American Association of Community Colleges
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.
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:
FYI.
George
George R. Boggs
President and CEO
American Association of Community Colleges
One Dupont Circle, NW, Suite 410
Washington, DC 20036
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.
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.
From:
Sent:
To:
Cc:
Subject:
Attachments:
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]
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?
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
'
(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 :
Recurrence:
(none)
Meeting Status:
Organizer:
Required Attendees:
Duncan, Arne
Myers, Sam; Shelton , Betsy; Miller, Tony; Shireman , Bob; Fine, Stephanie; Arsenault, Leigh;
Madzelan , Dan ; Salk, Sam; Duran , Maribel
Subject:
POC:
Bill Strong 312.573.5474
Briefing Materials - Bob Shireman 247.6651 or Dan Madzelan
Scheduling- Tia Borders 205.4595
13
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
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:
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
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:
lia Borders
U.S.DeparbnentofEducation
Director of Scheduling
{202) .tJO 1-:3043 ":ork
tla.borders~ed.gov
www.ed.gov
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
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.
-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
Let me know when you get another date and we will do what we can to make it work
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
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
32
33
From:
Sent:
To:
Cc:
Subject:
Attachments:
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
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
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~
~--
----
-- ~
. . .
--"-----
-~~~
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?
--~~-
___
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.
-----~
--
-~-
NON
$800MM~
$804MM
$748MM
-{:{+
'-"
Other
Ul
Q)
!.....
:J
"'0
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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
'
. . . ..,.- .
Apollo
2007
]
2008
I
THE
OOi~NoN
8%
...........
co
0
0
NI
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6.2%
6%
0
0
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I
1
Public
Private Sector
~rivate
l
Student Mix by
Ethnicity, 2004
100%
n=7,400
n=2,130
80%
~
0
1-
60%
0
Q)
0>
Cl3
c:
25 40%
L..
Q)
a_
White
20%
White
0% .__.__________._____
Public/lndependent
Private Sector
~--------~--
I-
-,
Private Sector Schools Are Also Expanding Educational
Access for Underrepresented Students
T HE 'ffimjljWNON
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%
faCJ)
Part-time enrollment
ro
+-'
Financially independent
OJ
40%
Have dependents
OJ
a..
Low Risk
20%-l
Low Risk
0%.__.________~-----L----------~
Public/Independent
Private Sector
1.. % High Risk
36%
54%
-H
I
6
100%
n=860
n=1,250
Dropped out
80%
Dropped out
Transferred
~
0
(l)
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)
--------------------------
_THE oo~_
N_
ON_
__,
~
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$30K
t:
c
$25.3K
$26.7K
Q)
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0
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ll.
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.5
$1 0K
'0
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LL
$OK ...~....-.-__,
Public
Private Sector
$35.0MM
$5.4MM
1,382
200
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 tMHi~NON
20%
1
.-...
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c::
Q)
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:J
co
10%
......
.0
Q)
5%
4.8%
3.9%
';;;;:;
0%
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
NON
Robert Lytle
Partner
Robertl@parthenon.com
617-478-7096
Chris Ross
Partner
Chrisr@parthenon. com
617-478-4679
12
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-- ----
----
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
c:_
I
I
JC Ci
r-'---------,
---
GEITIJYG RESULTS ~
CCi
Student Population by
Program Type and Level
I
Program Type
In
Level
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
'----
< 2 Year
II
2+ Year
I Not For-Profit
I PSE Providers
45/o
61/o
37/o
62o/o
44/o
25/o
~Older
~
}
Greater financial
need
79/o
69/o
47/o
~ Independent
46/o
40/o
30/o
~ Racially
diverse
- -
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
/
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
~V.&.V
Gffi'IN6 RESULTS
lf' CCI.
~-
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:
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
Comment (5)
Share
Comments
1. selfg -
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
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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
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.
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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
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>
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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
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>
Share
[cid:image001.gif@01CAB4SB.959CDF30]
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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
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:
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
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
Thanks, Jim.
From: Shelton, Jim
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
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>~~'
401-6283
From: Shireman, Bob
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.
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.
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
Thanks, Jim.
~-----------------------------------------------------------------
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
L. .about
. o.~---------'---------.
. .o:. o'-------------------------'
their model for course design and the underlying technology
From: Jenkins, Harold
I
The meeting is
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:
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:
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
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
401-6283
From: Shireman, Bob
FYI
From: Julie Shroyer [mailto:jshroyer@wheatgr.coml
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
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
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
about their model for course design and the underlying technology
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
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
.I
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~
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~)
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
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
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. ~~~
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
Jim--Asyoucanseeb~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
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
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
average~
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~
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
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?
Harold
37
(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~
-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
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:
Start:
End:
Show Time As:
Recurrence:
(none)
Meeting Status:
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:
43
From:
Sent:
To:
Subject:
Arsenault, Leigh
Monday, January 11, 2010 7 :51 PM
Shireman , Bob
Fw: Hello and Meeting Request
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.
lOam
lpm
2pm
Please let me know if any of these times work for you. Thanks!
Leigh
45
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.
~--~--~~------~~~~----~--~~~------~
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:
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
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.
48
Julie
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
Thanks,
Julie
lOam
lpm
2pm
Please let me know if any of these times work for you. Thanks!
Leigh
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.
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
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
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.
Jennifer
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
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
0
0
0
0
0
0
0
0
0
217,500
4,381 ,477
311 ,644
4,819,044
170,693
5,935,635
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
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.
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
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
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
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
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:
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
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 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
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.
Zakiya Smith
Policy Advisor
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
Jon O'Bergh
Special Assistant to the Under Secretary
U.S. Department of Edu cation
202-260-8568
~~===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.
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
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.
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."
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.
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:
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
To:
@help.senate.gov'
Cc: Graham, William; Adams, Kristen; Hammond, Cynthia; Siegwarth, Kirk
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.
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
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
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
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Subject:
Kanter, Martha
Thursday, August 27, 2009 7:54AM
Shireman , Bob
Re: 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.
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Cc:
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Attachments:
Mark Kantrowitz
Publisher of FinAid.org and FastWeb.com
Author~
From:
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Cc:
Subject:
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
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
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:
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recipient, please immediately delete the message and any attachments and notify the sender.
11
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
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
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
From:
Sent:
To:
Subject:
Attachments:
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.
~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:
From:
Sent:
To:
Subject:
Smith , Marshall
Friday, July 10, 2009 6:58PM
~~----c:>who.eop.gov';
Re : hewlitt
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
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
William D. Hamel
Assistant Inspector General
for Investigations
Office of Inspector General
U.S. Department of Education
(202) 245-6922
From: Forbort, Natalie
Natalie Forbort
Special Agent in Charge
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
WYN HORNBUCKLE
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:
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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
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 .
J.P. Morgan
Jeffrey Y. Volshteyn
(1-212) 622-2940
jvolshteyn@jpmorgan.com
William W. Lee
(1-212) 622-2596
wlee2@jpmorgan.com
www.morganmarkets.com
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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
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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
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
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
When you finally have a staff in place, let me know so we can make an appointment to meet everyone.
Reba
J.P. Morgan
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
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Confidentiality and Security Notice: This transmission may contain information that is privileged, confidential, legally privileged, and/ or
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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:
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
Folks,
Thanks,
Massie
Massie Ritsch
Deputy Assistant Secretary for External Affairs & Outreach
U.S. Department of Education
(202) 260-2671
massie.ritsch@ed.gov
NEW YORK (Dow Jones)--Shares of major education companies rose Wednesday , two
days after federal officials sought to reassure the for-profit education
9
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
J.P. Morgan
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
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
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
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
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Cbicago Office
500 W. Madison Street. Suite l-114
Chicago, lL 60661..4544
Phone (312) 73()..1630
Fax(~l2) 730-1550
SERVICES
Dlllhls Oftice
June
3~
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:
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.
lSl
Ul-.>
Inspector General,
We request the Department of Education investigate and stop the i!Jegal and unethi<:al
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
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.
-1 -
february 2, 2009
falsification of student records, misleads students, violates academic standards, and wastes the
taxpayers' money.
- 2-
February 2, 2009
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.
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.
-3 ~
February 2, 2009
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 .
-4-
february 2, 2009
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
Student Referrals
Expectation of 3 student
referrals a week
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
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~~~
--
. 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:
, ......,....
... ....;......, ............... ~ ..__
.,...~ ....
. -~ - ..
--.
......
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.
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.
- 6-
February 2, 2009
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.
.: e
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.
- 7
february 2, 2009
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 :
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.
February 2, 2009
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.
pr~gram tequii~ents.
....
,..-.
__.
......
.. -
~~ -
__,._.., ..
--
-9-
February 2, 2009
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..
.
----~
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 ."'
..
~.
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
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~
P.HOEN!X,
!JU1 ~
Date:
AZ 85034
Parit .
Receipt:
..._ ... u'' ''"i" -.A4 ,
=[
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
- 11 -
February 2, 2009
.
.
.
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:
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:
?~~"'-~~ ~o<tl ~~
to 4'Mr~
)(0'r~f~~~ ~:1!1
- 12-
February 2, 2009
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.
-13-
february 2, 2009
Enrolment Month 1
Total
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-
i
moo
- 14-
February 2, 2009
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
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
~'
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:
- 16 -
February 2, 2009
"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."
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~~
.
.
.
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.
.
'
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 . "
. 17 -
February 2, 2009
~ete~tioJ! $au Ac;:ad~'! -'\Jf~~~~ ~~Jln~l ~~f: M-ed-ynt': a*iJtO\~-l~F~l~Y DA-r\s ~~&
"With a show ~fb~-d.Sit wa1;,!eu:nd
_ ,....., _
. .
----
~eot srte diu r.rot;~tfibu~, !he :mcutly n~mbe~:raspo~~ ~\as that:they (file
team} shotl:fP:t)av~ r:esGlved:ttlis issu.e;; the nen41.Qn~uting.!Studentis often
Q1Ven...creditfot.wod(
not
done;= .. : : : ....
...
. ..
. .. ..
~.
------'
Philadelphia Audit
These examples are from only one year of audits at seven of the University's 68 campuses. The audits
do not cover students taking online degrees; here the retention and graduating rates are much lower,
so abusive incidents are likely to be more egregious and frequent This widespread misconduct from
- 18-
February 2, 2009
such a small sampling of audits suggests that a thorough review of all of the University's internal
documents needs to be undertaken by external authorities.
>,'}clil
1.6''1.
9:1CS
s:~f.~
I'IOIAvl!f,~
11,'9Sa
I C.~
Nots.AsOe<!
8,4>2
6.7$%.
..
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.
- 19 -
February 2, 2009
-20-
February 2, 2009
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.
11
. 21 .
February 2, 2009
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.
22-
February 2, 2009