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DeVry's 4Q Falls on Weak Enrollments

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For-profit education company, DeVry Inc. announced fourth quarter 2012 earnings of 47 cents per share, down 56% from the prior-year quarter and marginally above the company’s guidance range of 43 cents to 46 cents.Lower enrollments and higher operating costs led to the earnings shortfall. Earnings were however in line with the Zacks Consensus Estimate of 47 cents.

DeVry’s quarterly net sales fell 7.5% year over year to $505.9 million due to lower enrollments. It also missed the Zacks Sales Estimate of $510 million. Revenues were within the company’s guidance range of $500 million to $510 million.

In late July 2012, DeVry had announced a disappointing financial outlook for the fourth quarter of 2012. It warned that its revenue and earnings would fall short on both year-on-year and sequential basis. Finally, the reported results were almost in line with the lowered guidance.

The company’s total postsecondary enrollments across all its programs (including DeVry Brasil acquired in April 2012) were down 3.4% over the prior-year quarter. DeVry has been witnessing persistent enrollment declines due to a weak macroeconomic environment and subsequent decline in student demand (due to the hesitancy over taking a loan). Further, modifications made to the business to comply with new regulations, have also been hurting enrollment growth.

Other than enrollment declines, DeVry fell short of expectations due to heavy investments in scholarships to support students who are facing the brunt of recent changes to the Pell Grant program. Scholarships jumped to $42.5 million in fiscal 2012 from $29 million in 2011. In fiscal 2013, the company expects its scholarships to remain in the mid-$40 million range. Lower-than-expected revenue at its subsidiary, Advanced Academics, also dented the quarter’s revenues.

Operating costs expanded 27% to $483 million in the quarter due to increased costs for acquisitions and new campus openings, higher employee costs and higher costs at Advanced Academics. Costs of educational services increased 7% and student services and administrative expense expanded 5% in the quarter.

Segment Discussion

Business, Technology and Management: This segment includes operations of the company’s largest subsidiary, DeVryUniversity, which offers both graduate and undergraduate courses. The segment recorded revenue of $301.6 million, down 15.7% year over year largely due to decline in total undergraduate enrollments.

Total undergraduate student enrollments declined 14.7% for the May term and 15.8% for the July term. New undergraduate student enrollment declined 14.3% for the May term and 16.6% for the July term.

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 revenue of $150.5 million, up 9% year over year as revenue growth at DeVry Medical International and Chamberlain College of Nursing were offset by decline at Carrington Colleges Group. DeVry Medical International includes Ross University and AUC.

Total enrollments increased 15.7% at the Chamberlain College of Nursing and 1% at DeVry Medical International, while they declined 25.7% at the Carrington Colleges Group.

K-12 and Professional Education: The segment includes professional exam review and training operations of Becker Professional Review, DeVry Brasil and Advanced Academics. The segment recorded revenue of $53.8 million, up 3.5% year over year, as solid enrollment growth at DeVry Brasil and benefits from the acquisition of Faculdade Boa Viagem (February 2012) were offset by revenue declines at Advanced Academics.


For fiscal 2013, the company expects total operating costs to be up slightly from 2012 levels. The company is following a strict cost control routine and is particularly looking to combat escalating costs at the DeVry University and Carrington Colleges. The measures to chop down costs include a workforce reduction of 570 positions. The company’s focus on cost control is expected to result in additional cost savings of $50 million in fiscal 2013.

DeVry also aims to improve enrollment trends by building brand awareness in fiscal 2013. To achieve this goal, DeVry is shifting mix to higher quality inquiry sources, has sponsored some of its student athletes at the Olympics, creating awareness among potential students through innovative advertising, and investing in its people to deliver better quality services and education to its students. Moreover, the company is also trying to improve the persistence rate of its students and is diversifying into new locations and also to new high demand education programs to boost enrollments.

DeVry expects the effective tax rate and income from operations for fiscal year 2013 to be in the 29% range. Capital expenditure is expected to be approximately $150 million, representing a year over year increase due to capacity expansions and new campus openings.

Long Term Outlook

DeVry is expecting attractive earnings growth for the period 2014-2016 once the macroeconomic conditions improve. The company is expecting DeVry University to generate modest new enrollment growth in the second half of 2013. Carrington Colleges are expected to return to positive enrollment and revenue growth in fiscal 2013 and gradually grow its enrollments to 2011 levels. All other institutions are expected to maintain their growth momentum for the 2014-2016 period, which the company defines as the recovery phase.

Annual Results

In fiscal 2012, the company witnessed a 4.2% decline in revenue to $2.09 billion, slightly missing the Zacks Consensus Estimate of $2.1 billion. Adjusted earnings (excluding one time items) were $3.22 per share, which was slightly above the Zacks Consensus Estimate of $3.21. Earnings however declined 31% from the prior year.

Our Recommendation

The stock carries a Zacks #5 Rank in the near term (‘Strong Sell’ rating) following the weak fourth quarter results.

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