DeVry's 1Q Better than Expected

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DeVry, Inc. (DV) announced first quarter fiscal 2013 earnings of $0.49 per share, which beat the Zacks Consensus Estimate of $0.31 by 58%. Higher-than-expected cost savings and improving new student enrollments at several institutions drove the earnings beat. Earnings, however, declined 41% from the prior-year quarter due to lower year over year revenue.

Continued progress on its performance improvement plan to align costs, regain enrollment growth and make growth investments, helped the company to deliver a turnaround from the past few weak quarterly results.

In order to combat declining profits and student enrolments, DeVry has undertaken cost-saving initiatives like workforce reduction and curbed discretionary spending. Additionally, 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; and improving its technology. 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.

DeVry’s quarterly net sales fell 7.0% year over year to $482.7 million due to lower year over year enrollment growth. Revenues, however, beat the Zacks Consensus Estimate of $481 million mainly attributable to better than expected new enrollment growth at several institutions.

The company’s total postsecondary enrollments across all its programs were down 6.1% from the prior-year quarter. However, the company witnessed solid new enrollment growth in healthcare institutions like Chamberlain College of Nursing and Carrington Colleges. 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 also been hurting enrollment growth.

Operating costs declined 0.5% year over year and almost 6% sequentially to $439.9 million owing to DeVry’s cost saving initiatives. DeVry is trying to reduce volume related costs to better align them with declining enrollments. Costs of educational services increased 1.8% and student services and administrative expense declined 3.2% in the quarter.

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 revenue of $284.6 million, down 15.7% year over year due to a decline in both undergraduate and graduate enrollments.

Combined, the total undergraduate and graduate enrollment in the September session decreased 9.4%. Enrollments continued to be hurt by adjustments to new regulation and overall economic uncertainty.

Adjusted segment earnings declined 58.3% in the quarter to $25.6 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 revenue of $158.4 million, up 7.4% year over year driven by solid new enrollment growth. DeVry Medical International includes Ross University and AUC.

Overall the medical institutions gained from the company’s efforts to boost enrollment, which resulted in better quality enquiries and improved conversion and retention rates. The Chamberlain College of Nursing benefited from new campus openings in the past two years.

Total enrollments increased 20.2% at the Chamberlain College of Nursing and 2.1% at DeVry Medical International, while they declined 8.3% at the Carrington Colleges Group.

Adjusted segment earnings improved 8.1% to $25.2 million 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 revenue of $39.8 million, up 17% year over year as solid enrollment growth at DeVry Brasil and benefits from the acquisitions were offset by revenue declines at Advanced Academics.

The segment operating loss narrowed in the quarter driven by lower operating loss at Advanced Academics and significant operating leverage at DeVry Brasil and Becker.

Outlook

For fiscal 2013, the company expects total operating costs to increase from 2012 levels, as the company invests in its growing businesses and integrates acquisitions. Cost increases at its growth institutions like Chamberlain, Ross, Becker and DeVry Brasil are expected to more than offset savings at its transition institutions like DeVry University Advanced Academics and Carrington.

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 company’s focus on cost control is expected to result in additional cost savings of $60 million in fiscal 2013, higher than prior expectations of $50 million as it is ahead of its cost saving targets.

In the second quarter, DeVry expects cost to be higher than the first quarter. New student enrollments are expected to be positive at Carrington while those at DeVry University are expected to decline year over year.

The stock carries a Zacks #2 Rank in the near term (‘Buy’ rating). DeVry competes with Apollo Group (APOL).

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