DeVry, Inc.’s (DV) first-quarter fiscal 2014 adjusted earnings of 22 cents per share missed the Zacks Consensus Estimate of 23 cents by a penny. Earnings also declined 57.7% from the prior-year quarter. Slightly higher operating expenses led to the earnings decline for this for-profit education company which offset the mild top-line improvement in the quarter.
Adjusted earnings exclude restructuring charges (related to workforce reduction and real estate optimization), gain from the sale of assets and an impairment charge related to Advanced Academics.
Revenues and Enrollments
DeVry’s quarterly net sales fell 6.0% year over year to $450.9 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’s revenues. Revenues, however, beat the Zacks Consensus Estimate of $446 million. We believe that the new student enrollment improvement at DeVry University led to the better revenues in the quarter.
Top-line improvement of 15.0% at its growth institutions like Chamberlain, Ross, Becker and DeVry Brasil was partially offset by 16.0% 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 4.4% 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.
Costs Were Flat
Operating costs (excluding restructuring charges) were flat year over year at $431.0 million in the first quarter. Cost savings at transition institutions were overshadowed by increases at growing institutions. While operating costs declined 7.0% at the transition institutions (due to cost reduction initiatives), they increased 17% at the growing institutions. Management had anticipated higher costs in first-quarter 2014 at the fourth-quarter 2013 conference call.
Cost of educational services increased almost 1%, driven by the impact of the Facid acquisition (Jul 2013) and higher costs to support enrollment growth at DeVry Medical International and Chamberlain College of Nursing. Student services and administrative expenses declined 1.0% in the quarter.
Segment Discussion
Business, Technology and Management: This segment includes operations of the company’s largest subsidiary, DeVry University, which offers both graduate and undergraduate courses. The segment recorded revenues of $232.3 million, down 18.4% year over year due to decline in both undergraduate and graduate enrollments.
For the September session, total undergraduate student enrollments, graduate course takers and online course takers (both graduate and undergraduate) declined 16.1%, 18.8% and 14.7%, respectively.
Encouragingly, however, new undergraduate student enrollment improved 0.1% for the September session, much better than management’s expectation of a decline in the mid-teens range. The September starts were also much better than declines of 19.4% and 24.7% for the May and July sessions, respectively.
New scholarship programs and other operational initiatives (like a tuition freeze for 2013–2014, strategic use of scholarships) improved enrollment trends. Moreover, DeVry University introduced a Career Catalyst scholarship of up to $20,000 for eligible students enrolling for the September session which also aided enrollments.
However, management expects the segment to continue to struggle for the next few quarters as the operating environment remains challenging. In fact, new enrollments are expected to decline once again in the November session due to business disruption related to a government shutdown in October.
The segment reported adjusted segment loss of $0.5 million in the quarter, significantly lower than a gain of $25.6 million in the prior-year quarter. Top-line and enrollment declines and higher advertising expenses have led to the disappointing results. The segment is expected to return to profitability in the second quarter. In fiscal 2014, margins in the segment are expected to be in the mid single-digit range.
Medical and Healthcare: 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 $175.9 million, up 11.0% year over year driven by growing demand for medical doctors and veterinarians.
Total enrollments increased 30.0% at the Chamberlain College of Nursing for the September session. They increased 1.0% at the Carrington Colleges Group for the three months ended Sep 30, 2013 and 4% at DeVry Medical International (which includes Ross University and AUC) for the September term.
New student enrollments (online only) increased 47.4% at the Chamberlain College of Nursing for the September session. However, new enrollments declined 19.5% at the Carrington Colleges for the three months ended Sep 30, 2013, but improved 5.7% at DeVry Medical for the September term.
Carrington Colleges’ new enrollments have slowed down in the past two quarters from the double-digit increases seen in the first three quarters of fiscal 2013 as the company has suspended recruitment for some non-core programs as part of its turnaround efforts. Moreover, in the first quarter, the company had one less session start compared to the year ago quarter which hurt enrollments.
The segment operating income improved 4.2% in the quarter to $26.2 million.
International and Professional Education: The segment includes professional exam review and training operations of Becker Professional Review and DeVry Brasil.
The segment recorded revenues of $43.7 million, up 18.3% year over year, largely driven by top-line growth at both DeVry Brasil and Becker. DeVry Brasil grew 36% in the quarter, gaining from the recent acquisitions. Total enrollments grew 11.4% at DeVry Brasil, while student starts declined 9.4%. Becker Professional Education’s revenues increased 3% year over year in the quarter driven primarily by the addition of Falcon.
The segment operating income declined 67.8% to $1.1 billion due to investments related to expansion and growth.
Financial Details
DeVry ended the quarter with cash and cash equivalents of $311.6 million, up from $199.6 million at the end of the fourth quarter of fiscal 2013. The company has no debt. The company generated an operating cash flow of $140.0 million in the quarter.
Fiscal 2014 Outlook
Total scholarships for the company are expected to increase 30% in fiscal 2014 which though expected to boost enrollments, will pressurize revenue per student. Carrington’s revenues will grow in the low single-digit range year over year while expenses are expected to decline in the mid single-digit percentage range. Accordingly, Carrington should deliver positive operating income in fiscal 2014.
The company is following a strict cost-control routine and is particularly looking to combat escalating costs at DeVry University and Carrington Colleges. Management expects costs at the transition institutions to decrease by a further $60 million from fiscal 2013 levels.
The effective income tax rate from operations for fiscal 2014 is expected to be in the 15%–17% range (prior expectation was 13%–16%) in fiscal 2014.
Second-Quarter 2014 Outlook
Revenues are expected to grow at all institutions except DeVry University in the second quarter. While total operating costs are expected to increase slightly year over year, they will decline on a sequential basis.
Other Stocks to Consider
DeVry carries a Zacks Rank #1 (Strong Buy). Some other schools that are doing well and can be considered include Xueda Education Group. (XUE), New Oriental Education & Technology Group Inc. (EDU) and TAL Education Group (XRS). While Xueda and New Oriental carry a Zacks Rank #1, TAL Education carries a Zacks Rank #2 (Buy).
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