Continuing with the momentum of the first quarter, DeVry, Inc.’s (DV - Analyst Report) second quarter fiscal 2013 adjusted earnings of 87 cents per share significantly beat the Zacks Consensus Estimate of 57 cents by 53%. Lower operating expenses and positive new student enrollment growth drove the earnings beat for this for-profit education company. Earnings, however, declined 5% from the prior-year quarter due to lower year-over-year revenue. Adjusted earnings exclude charges for restructuring and impairment.
Continued progress on its performance improvement plan to align costs, regain enrollment growth and make growth investments, has helped the company beat expectations in both the quarters of fiscal 2013; a turnaround from weak quarterly results in fiscal 2012.
In order to combat declining profits and student enrolments, DeVry has undertaken cost-saving initiatives like workforce reduction and curbed discretionary spending. Additionally, in order to revive enrollment growth, the company is working on its marketing efforts to build brand awareness; building relationships with high schools, community colleges, corporations, and government/military institutions; and improving its technology. 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.
DeVry’s quarterly net sales fell 3.6% year over year to $505 million due to lower year- over-year enrollment growth. Revenues, however, beat the Zacks Consensus Estimate of $497 million once again, attributable to solid new and total student enrollment growth at its healthcare institutions.
The company’s total post secondary enrollments across all its programs were down 5.4% from the prior-year quarter. DeVry has been witnessing persistent enrollment declines as a result of overall economic downturn and lack of student confidence. Further, modifications made to the business to comply with new regulations have been hurting enrollment growth.
However, the company witnessed solid new enrollment growth of 5.6%, largely driven by its healthcare institutions like Chamberlain College of Nursing and Carrington Colleges.
Operating costs (excluding restructuring charges) declined 1.0% year over year to $430.0 million, owing to DeVry’s cost saving initiatives. DeVry is trying to reduce volume related costs to better align them with declining enrollments. Cost of educational services increased 1.0% and student services and administrative expense declined 3.9% in the quarter.
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 $280.2 million, down 13.9% year over year due to a decline in both undergraduate and graduate enrollments.
The university’s graduate course takers declined 16.0% and 12.1% for the November and January terms, respectively. Total undergraduate student enrollments declined 17.6% for the November session and 14.9% for the January session. Enrollments continued to be hurt by cyclical weakness in addition to adjustments following workforce reductions, and Hurricane Sandy. New undergraduate student enrollment declined 15.5% for the November session, which encouragingly narrowed to a much lower shortfall of 4.7% for the January session. The online course takers decreased 11.7% in the November session and 9.9% in the January session.
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 $167.7 million, up 9.3% year over year driven by solid new enrollment growth in all the segments. DeVry Medical International includes Ross University and AUC.
Overall the medical institutions gained from the higher demand as well as company’s efforts to boost enrollment, which resulted in better quality enquiries and improved conversion and retention rates.
Total enrollments increased 26.0% at the Chamberlain College of Nursing, 4.9% at DeVry Medical International, and 0.4% at the Carrington Colleges Group. Importantly, Carrington Colleges total enrollments returned to positive growth after witnessing declines during the downturn; in line with management’s expectations. The impressive enrollment growth at Carrington Colleges was achieved due to solid progress in the company’s turnaround performance improvement plan. Management expects Carrington to continue to achieve positive new enrollment growth in the second half of the year.
New student enrollments increased 0.3% at DeVry Medical International, 12.7% at the Carrington Colleges Group and 87.8% at the Chamberlain College of Nursing.
The enrollment growth rates discussed above are for January term for the Chamberlain College of Nursing and DeVry Medical International and for the 3 months ending Dec 30 for Carrington Colleges group.
K-12 and Professional Education segment: The segment includes professional exam review and training operations of Becker Professional Review, DeVry Brasil and Advanced Academics.
The segment recorded revenues of $57.3 million, up 27.4% year over year driven by 69% revenue growth at DeVry Brasil and 6% growth at Becker. Both DeVry Brasil and Becker gained from acquisitions made in the recent past.
Fiscal 2012 was a tough year for DeVry. However, the company looks forward to attractive earnings growth in the period 2014–2016 and considers 2013 as a transition period.
Total operating costs are expected to decline year over year in fiscal 2013, better than prior expectations of an increase, due to significant cost management at its transition institutions like DeVry University and Carrington Colleges.
The company is following a strict cost-control routine and is particularly looking to combat escalating costs at the DeVry University and Carrington Colleges. Cost controls at DeVry University and Carrington are expected to result in additional cost savings of $80 million in fiscal 2013, higher than prior expectations of $60 million.
Third Quarter Outlook
For the third quarter 2013, DeVry expects costs to be higher sequentially by about 3%–4% due to increased costs related to new campus openings and realization of deferred expenses like advertising from the first half.
DeVry carries a Zacks Rank #4 (Sell). We, however, cannot rule out a rank upgrade in the near future, following the company’s solid results this quarter. Another education company that beat Zacks Consensus expectations for both earnings and revenues this quarter was Apollo Group, Inc. (APOL - Analyst Report). Apollo reported in mid Jan 2013.
Other stocks in the education industry that are currently performing well and have a bright outlook include American Public Education, Inc. (APEI - Analyst Report) - Zacks Rank #1 (Strong Buy), and Grand Canyon Education, Inc. (LOPE - Snapshot Report) - Zacks Rank #2 (Buy).