After delivering solid results in the first two quarters of fiscal 2013, DeVry, Inc.’s (DV - Analyst Report) third-quarter results were somewhat disappointing. The company beat earnings but missed on revenues as the improving new enrolment trends seen in the past two quarters could not be sustained. However, the company did increase its cost savings target.
DeVry’s third-quarter fiscal 2013 adjusted earnings of 90 cents per share beat the Zacks Consensus Estimate of 83 cents by 8.3%. Lower operating expenses drove the earnings beat for this for-profit education company despite the top-line decline. Earnings, however, declined 10% from the prior-year quarter due to lower year-over-year revenues. Adjusted earnings exclude charges for restructuring related to severance and real estate consolidation.
Revenues and Enrollments
DeVry’s quarterly net sales fell 5.9% year over year to $509 million largely due to poor enrollment results at its flagship DeVry University. Revenues also missed the Zacks Consensus Estimate of $517 million.
Top-line increase of 15.5% at its growth institutions like Chamberlain, Ross, Becker and DeVry Brasil was partially offset by 14.5% revenue decline at its transition institutions like DeVry University, Advanced Academics and Carrington.
The company’s total post-secondary enrollments across all its programs were down 6.7% 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. In fact, enrollments have declined across the entire higher education system in 2012 in the U.S. New enrollments also declined 6.4% in the quarter, much weaker than positive growth of 5.6% in the second quarter.
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; 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 combat declining profits and 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.
Costs Going Down
Operating costs (excluding restructuring charges) declined 2.7% year over year to $433.1 million in the third quarter, owing to DeVry’s cost saving initiatives. DeVry also reduced volume related variable costs due to lower enrollments.
Cost of educational services decreased 1.3% and student services and administrative expense declined 4.5% in the quarter. While operating costs declined 9.7% at the transition institutions (due to cost reduction initiatives), it increased 13% at the growing institutions.
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 $283.5 million, down 16.3% year over year due to a decline in both undergraduate and graduate enrollments.
The university’s graduate course takers declined 18.4% for the March session. Total undergraduate student enrollments declined 16.5% for the March session. Enrollments continued to be hurt by cyclical weakness and a continued challenging environment. New undergraduate student enrollment declined 21.2% for the March session, which was worse than that for the November and January sessions. The online course takers (both graduate and undergraduate) decreased 10.6% for the March session.
Adjusted segment earnings declined 45.2% in the quarter to $35.4 million due to top-line and enrollment declines and resulting margin compression.
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 $175.1 million, up 9.1% year over year driven by solid new enrollment growth in all the segments. Enrollments for DeVry Medical International, which includes Ross University and AUC, were not discussed.
Overall, the medical institutions gained from the higher demand for medical doctors and veterinarians as well as the company’s efforts to boost enrollment, which resulted in better quality enquiries and improved conversion and retention rates.
Total enrollments increased 17.0% at the Chamberlain College of Nursing and 8.8% at the Carrington Colleges Group.
New student enrollments increased 17.5% at the Carrington Colleges Group and 15.9% at the Chamberlain College of Nursing. Carrington Colleges’ new enrollments have shown double-digit increases in all the quarters of fiscal 2013 after witnessing declines during the downturn. The impressive enrollment growth at Carrington Colleges was achieved due to higher quality enquiries and conversion rates at the college, which resulted from improved recruitment efforts and new branding initiatives. Importantly, management does not expect large enrollment growth at Carrington in the upcoming quarters. Enrollment growth is expected to be positive but increase only modestly as year-ago comparisons become stronger.
The enrollment growth rates discussed above are for the March term for the Chamberlain College of Nursing and for the 3 months ending Mar 31 for Carrington Colleges group.
Adjusted segment earnings were $35.7 million, up 37.4% year over year, driven by revenue growth and cost savings from turnaround efforts.
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 $51.2 million, up 23.3% year over year largely driven by 60.5% revenue growth at DeVry Brasil. DeVry Brasil gained from acquisitions made in the recent past. Total enrollments grew 7.2% and new student starts increased 2.0% at DeVry Brasil for the March term.
The segment operating income improved 19.0% in the quarter to $8.6 million driven by significant operating leverage at DeVry Brasil and Becker.
Fiscal 2013 Outlook
Total operating costs are expected to decline in the range of 1%-2% year over year in fiscal 2013, 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 these institutions are expected to result in additional cost savings of $100 million in fiscal 2013, higher than prior expectations of $80 million. In fact, the cost savings target has now been increased for three consecutive quarters.
For fourth-quarter 2013, DeVry expects costs to be down year over year but up sequentially due to increased costs related to new campus openings. Moreover, costs will decline only modestly in the transition institutions on a sequential basis.
DeVry carries a Zacks Rank #2 (Buy). Other stocks in the education industry that are currently performing well and have a bright outlook include Xueda Education Group - Zacks Rank #1 (Strong Buy), ChinaEdu Corporation (LINC - Snapshot Report) - Zacks Rank #2 (Buy) and New Oriental Education & Technology Group (EDU - Snapshot Report) - Zacks Rank #2 (Buy).