DeVry Education Group, Inc. (DV) turned around from a weak first quarter by beating the Zacks Consensus Estimate for both revenues and earnings in the second quarter of fiscal 2014. Enrollments improved and costs declined from the first quarter levels.
Adjusted earnings of 75 cents per share at this for-profit education provider beat the Zacks Consensus Estimate of 80 cents by 6.3%. Earnings, however, declined 9.0% from the prior-year quarter due to lower revenues.
Adjusted earnings exclude restructuring charges (related to workforce reduction and real estate optimization) and an impairment charge related to the divesture of Advanced Academics.
Revenues and Enrollments
DeVry’s quarterly net sales fell 1.9% year over year to $491.3 million as the relatively strong growth in the healthcare, professional 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 $477 million which, we believe, was due to strong sales at the growth institutions like Chamberlain, Ross, Becker and DeVry Brasil. Top-line improvement of 16.0% at its growth institutions was partially offset by 12.0% 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 2.6%. 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. However, the enrollment decline was narrower than 4.4% reported in the first quarter.
Costs Increased Slightly
Operating costs (excluding restructuring charges) increased slightly year over year to $428.0 million in the second quarter. However, costs declined sequentially which pushed up profits. Operating costs declined 6.0% at the transition institutions (due to cost reduction initiatives), but increased 17.7% at the growing institutions due to costs incurred for new programs, campus expansions and acquisitions in Brazil.
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 these transition institutions to decrease by a further $75 million from fiscal 2013 levels, higher than prior expectations of $60 million.
Segment Discussion
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 $239.9 million, down 14.4% year over year, due to lower enrollments and lower revenue per student.
Higher use of scholarships to lure students is lowering the revenue per student.
For the November session, total undergraduate student enrollments, graduate course takers (Keller College) and online course takers (both graduate and undergraduate) declined 11.7%, 14.1% and 9.0%, respectively. For the January session, the same declined 15.1%, 18.0% and 5.2%, respectively.
New undergraduate student enrollment declined 12.0% for the November session and 7.9% for the January session. In addition to these industry-wide headwinds, enrollments in the November session were hurt by business disruption related to the government shutdown in Oct 2013.
However, though enrollments have been declining at DeVry University since the past few quarters, the rate of decline is narrowing due to management’s turnaround plan that includes new scholarship programs and other operational initiatives (like a tuition freeze for 2013–2014 and strategic use of scholarships.
Though the November starts were weaker than the 0.1% improvement seen in Sep 2013, they were much better than declines of 19.4% and 24.7% in the May and July sessions, respectively. In fact, starts also improved in the January session compared with November. Management is expecting a sequential improvement in new student enrollments in the March session helped by the career catalyst campaign “Call to Action”. However, total enrollments will continue to decline year over year.
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 $190.4 million, up 13.5% year over year, driven by growing demand for medical doctors, nurses and veterinarians.
Revenues grew 26.2% at Chamberlain College helped by growing demand for nurses, new program launches and campus expansions. At Carrington, revenues grew 3.4% in the quarter, helped by the turnaround plan. Under the plan, the company is focusing more on its core healthcare programs, building brand awareness, optimizing marketing approach and improving recruiting process through its new student contact center. At DMI, management turnover at Ross University hurt results in the second quarter.
International and Professional Education segment: The segment includes professional exam review and training operations of Becker Professional Review and DeVry Brasil.
The segment recorded revenues of $61.4 million, up 16.6% year over year, largely driven by top-line growth at both DeVry Brasil and Becker. DeVry Brasil revenues grew 29% in the quarter, gaining from the recent acquisition of Facid. Becker Professional Education’s revenues increased 5% year over year in the quarter driven by higher sales of its CPA exam preparation program.
Third-Quarter 2014 Outlook
Revenues are expected to grow at all institutions, except DeVry University, in the third quarter. Total operating costs are expected to increase on a sequential basis due to investments in the growth institutions and higher seasonal spending to support two session starts at DeVry University Keller and Chamberlain.
Other Stocks to Consider
DeVry carries a Zacks Rank #4 (Sell). Better-ranked schools include New Oriental Education & Technology Group Inc. (EDU), Apollo Education Group, Inc. (APOL) and TAL Education Group (XRS). While New Oriental sports a Zacks Rank #1 (Strong Buy), TAL Education and Apollo Education carry a Zacks Rank #2 (Buy).
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