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DeVry, Inc.’s (DV - Analyst Report) fourth-quarter fiscal 2013 results were mixed. The company beat earnings but delivered in-line revenues as the flagship DeVry University continues to struggle. Moreover, management expects weak enrollment trends and revenue decline at DeVry University to outweigh further cost savings and growth in other institutions in fiscal 2014 as well.

DeVry’sfourth-quarter fiscal 2013 adjusted earnings of 54 cents per share beat the Zacks Consensus Estimate of 41 cents by 31.7%. Lower operating expenses drove the earnings beat for this for-profit education company despite the soft revenues. Earnings also improved 3.8% from the prior-year quarter.

Adjusted earnings exclude charges for asset impairment and restructuring (related to workforce reduction and real estate consolidations) and a gain from the sale of assets.

Revenues and Enrollments

DeVry’s quarterly net sales fell 4.4% year over year to $480 million as the relatively strong growth in the healthcare and international businesses was offset by continued revenue decline at the flagship DeVry University which accounts for half of the company revenues. Revenues were in line with the Zacks Consensus Estimate of $480 million.

Top-line increase of 18.0% at its growth institutions like Chamberlain, Ross, Becker and DeVry Brasil was partially offset by 15.0% decline in revenues at its transition institutions like DeVry University and Carrington.

The company’s total post-secondary enrollments across all its programs were down 6.0% from the prior-year quarter. DeVry has been witnessing persistent enrollment declines, mainly at its flagship DeVry University, as a result of overall economic downturn and lack of student confidence which has reduced demand. In fact, enrollments have declined across the entire higher education system in 2012 in the U.S.

Costs Going Down

Operating costs (excluding restructuring charges) declined 3.7% year over year to $438.0 million in the fourth quarter, owing to DeVry’s cost saving initiatives. DeVry also reduced volume related variable costs due to lower enrollments.

Segment Discussion

Business, Technology and Management segment: This segment includes operations of the company’s largest subsidiary, DeVry University, which offers both graduate and undergraduate courses. The segment recorded revenues of $248.3 million, down 17.7% year over year due to a decline in both undergraduate and graduate enrollments.

Total undergraduate student enrollments declined 18.7% for the May session and 16.1% for the July session. Enrollments continued to be hurt by cyclical weakness and a continued challenging environment. New undergraduate student enrollment declined 19.4% and 24.7% for the May and July sessions, respectively. The university’s graduate course takers declined 17.1% for the May session and 18.0% for the July session. The online course takers (both graduate and undergraduate) decreased 17.3% for the May session and 2.2% for the July session.

The segment is expected to continue to struggle in fiscal 2014. New student enrollments for the September session are expected to be better than July, though still down in the mid-teens range.

In order to revive enrollment growth at DeVry University, the company is working on its marketing efforts to build brand awareness; building relationships with high schools, community colleges, corporations, and government/military institutions; improving its technology; and improving affordability through scholarships and pricing. As part of its turnaround plan, DeVry has also undertaken cost-saving initiatives like workforce reduction and curbed discretionary spending in order to increase student enrolments. DeVry is also making targeted investments to drive future growth like opening new campuses, diversifying into new high-demand education programs and investing in its faculty.

The segment reported adjusted segment loss of $0.9 million in the quarter, much narrower than a gain of $22.2 million in the prior-year quarter. Top-line and enrollment declines and resulting margin compression have led to the disappointing results.

Medical and Healthcare segment: The segment consists of Ross University Medical and Veterinary Schools, American University of the Caribbean (AUC), Chamberlain College of Nursing and Carrington Colleges.

The segment reported revenues of $171.0 million, up 13.9% year over year driven by growing demand for medical doctors and veterinarians.

Total enrollments increased 24.4% and 16.5% at the Chamberlain College of Nursing for the May and July sessions, respectively. They increased 9.6% at the Carrington Colleges Group for the three months ended Jun 30, and declined 19.4% at DeVry Medical International (which includes Ross University and AUC) for the May term.

New student enrollments (online only) increased 42.1% and 5.9% at the Chamberlain College of Nursing for the May and July session, respectively. However, new enrollments declined 1.5% at the Carrington Colleges for the three months ended Jun 30, and 2.4% at DeVry Medical for the May term.

As expected by management, Carrington Colleges’ new enrollments slowed down from the double-digit increases seen in all the quarters of fiscal 2013 as the company has suspended recruitment for some non-core programs as part of its turnaround efforts. At Chamberlain, continued strong demand and new campus openings drove the strong enrollment growth. Enrollments fell at DeVry Medical because of an operational issue which has been solved and enrollments are expected to pick up in the September session.

Adjusted segment earnings were $28.2 million, up 97.6% year over year, driven by growing profits at Chamberlain and DeVry Medical and narrowing loss at Carrington.

International and Professional Education segment: The segment includes professional exam review and training operations of Becker Professional Review and DeVry Brasil. DeVry has decided to divest its underperforming Advanced Academics business which was reclassified into discontinued operations in the quarter.

The segment recorded revenues of $60.7 million, up 21.6% year over year, largely driven by top-line growth at both DeVry Brasil and Becker. DeVry Brasil grew 55% in the quarter, gaining from acquisitions made in the recent past. Becker Professional Education’s revenues increased 4% in the quarter driven primarily by the addition of Falcon.

The segment operating income improved 25.9% in the quarter to $17.7 million driven by significant operating leverage at DeVry Brasil and Becker.

Annual Results

In fiscal 2013, the company witnessed a 5.2% decline in revenues to $1.96 billion, slightly missing the Zacks Consensus Estimate of $1.98 billion. Adjusted earnings (excluding one-time items) were $2.86 per share, down 14.6% from the prior year. The company achieved more than $100 million in cost savings, beating expectations.

Fiscal 2014 Outlook

In fiscal 2014, revenues are expected to decline year over year as revenue shortfall at DeVry University is expected to offset growth at all other institutions.

The company is following a strict cost-control routine and is particularly looking to combat escalating costs at the DeVry University and Carrington Colleges. Management expects costs at the transition institutions to decrease by a further $60 million from fiscal 2013 levels. However, overall costs are expected to be flat in fiscal 2014 (from 2013 levels) as cost savings at the transition institutions are expected to be offset by cost increases at the growing institutions.

DeVry carries a Zacks Rank #3 (Hold). Other stocks in the education industry that are currently performing well include Capella Education Co. (CPLA - Analyst Report), Grand Canyon Education, Inc. (LOPE - Snapshot Report)and TAL Education Group (XRS - Snapshot Report). While Capella carries a Zacks Rank #1 (Strong Buy), the other two stocks hold a Zacks Rank #2 (Buy).

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