For-profit education company, DeVry Inc. (DV) recently announced a disappointing financial outlook for the fourth quarter of 2012. The company also plans to cut 570 jobs. Shares of this provider of diversified academic programs in the fields of business, healthcare and technology plummeted on the announcement.
DeVry expects fourth quarter revenues to lie between $500 million and 510 million, representing both a year-over-year and sequential decline at the mid-point. Preliminary revenues are also below the Zacks Consensus expectation of $515 million. Operating costs are expected to be in the range of $465 million to $475 million.
Earnings are expected in the range of 43 cents to 46 cents, well below the Zacks Consensus Estimate of 79 cents. Management cited lower enrollments, higher scholarships at its largest subsidiary, DeVry University, and higher-than-expected revenue decline in the Advanced Academics segment as the reasons behind the revenue shortfall.
Falling enrollments and higher-than-anticipated operating costs led to the earnings miss. The company announced yet another workforce reduction of 570 positions in response to continued enrollment declines.
Student enrollments continue to fall due to persistent unemployment, overall economic downturn and subsequent decline in student demand (due to hesitancy to take on debt). Management announced that new enrollments at DeVry University for the summer term will decline 15% to 17% year over year.
However, the decline in new enrollment will moderate from the 20% drop witnessed during the spring term. Similarly, the Carrington Colleges group is expected to see a 9% to 21% decline in new summer enrollments, at least better than the 31% decline in the summer term.
In order to combat declining profits and student enrollment, DeVry has undertaken a number of steps. The company is following a strict cost control routine and is particularly looking to cut costs at the DeVry University and Carrington Colleges. The company has reduced its workforce, cut down on discretionary spending, and has pursued many other short-term and long-term cost-saving initiatives to align costs with student enrollments.
DeVry expects these initiatives to bring an additional $50 million in cost savings in fiscal 2013. In fact, operating costs at the DeVry University and Carrington Colleges are expected to be down in the first quarter of fiscal 2013, both on a year-over-year and sequential basis. Costs are anticipated to be down for the full year as well.
Our Recommendation
We currently have a Neutral recommendation on DeVry. The stock carries a Zacks #3 Rank (a short-term Hold rating) near term.
We are disappointed with DeVry’s fourth quarter preliminary results. However, the company is, besides cost control, working on brand building, driving long-term growth through strategic acquisitions and diversifying into in-demand education programs. Despite these efforts, we prefer to stay on the sidelines until we witness significant enrollment recovery, a tall task for most education companies.
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