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Medium-Term Opportunities in For-Profit Education Despite Difficult Environment: Wall Street Transcript Interview with Brandon Dobell, Partner and Group Head, Global Services, William Blair & Company

67 WALL STREET, New York - September 12, 2012 - The Wall Street Transcript has just published its Education Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Enrollment and Retention Trends - Regulatory Risks - Chinese Education Growth Catalysts - For-Profit Institutions - Online Content Distribution

Companies include: Apollo Group Inc. (APOL), American Public Education, Inc (APEI), Grand Canyon Education, Inc. (LOPE), DeVry, Inc. (DV), ITT Educational Services Inc. (ESI), Career Education Corp. (CECO) and many others.

In the following excerpt from the Education Report, experienced analyst Brian Dobell discusses the outlook for the sector for investors.

TWST: You mentioned some of the main challenges these companies are facing today. Would you talk a bit more about them, perhaps starting with enrollment trends and how that impacts their revenues and competition among the companies?

Mr. Dobell: A lot of the schools have seen new enrollment and total enrollment declines in the past couple of years. Part of that was driven by the uncertainty around the regulatory environment, but in the last year or so, I think it's been driven more by just a general lack of interest among potential students. It doesn't matter if they're focused on a nonprofit or a for-profit, or in large part even what age group they're in. It's been a lack of interest in going to school or going back to school because of the uncertainty around whether or not there's going to be a job for them after they finish their degree.

You've had a number of schools talk in recent quarters about applications and inquiries trending upward, and people going through the process of thinking about going to school and even applying; and then, when it comes down to it, they don't show up. So these show rates, as the schools call them, have still been quite poor, and we see that in both the ground and online schools.

I also think competition's had a small impact on that. I think it's mostly focused in master's degrees, and more online than it is on ground, but the schools, I think, are challenged from a number of points of view beyond competition just to get people comfortable with the idea that there's going to be employment or a better employment situation once they finish their degree.

The regulatory framework has focused the schools, I think, into a narrower list of programs or a narrower student type, because of the focus from both the government as well as the accreditors on graduation rates, default rates, student churn, a bunch of metrics that we either took for granted for a number of years or that didn't seem too important in the grand scheme of things given the types of students that were in these schools. But with some regulatory changes, some accreditation changes, the schools have had to take a step back and look at what kinds of students they are attracting, look at their propensity to graduate, try to understand what programs are better suited for the students but also the job market. All those things, especially in the context of having a relatively easy 10 or 15 years of growing, have made the businesses a lot tougher to execute recently.

The competition, I think, has two directions. One is within the group. In general, the working adult schools are competing for a narrower pool of students that tend to have more credits to transfer. They tend to be a little older in some cases or have more work experience, so they have a better chance of completing the program. And then, you've got on the edges some competition from traditional schools who are trying to grow their revenue base without having to spend a whole lot of money to do so, and they tend to be focused more on graduate programs, because that's where the responsible, attractive, high-price-point students are for traditional schools.

I'd add to that, you've seen all the factors that I've mentioned - competition, tough job market, regulatory environment, internal changes or internal focus on different students - have in some cases redirected the institutions to focus less on the number of people starting as compared to the number of people continuing. The schools have always had a reputation for starting a lot of students, but not having great completion rates, and that's because a lot of students sign up, and after a course or two, they drop out. In most part, it's not the institutions' fault, and in the vast majority of cases, those students are uneconomic for the school, meaning it costs more to enroll them through all the processes than the profits or even revenues, in some cases, that the schools get back. That's not good for anybody. Either the student leaves with some debt, or the taxpayer's left holding the bag for a grant they got and then didn't complete the program.

So as the schools have shifted from a number of these winds that are pushing them around, they've tended to focus as much as they can on getting the right students in, and making sure those students finish the program. Whatever it is - associate's, bachelor's, master's - finish the program, because everybody is in a better spot. The school has provided a good service. The student has a degree. Yes, they paid for it, but they've got a degree that they can use to get a better job. The taxpayer got a good outcome, because they supported a student who probably otherwise would not have gone to school and gotten a degree.

Everybody ends up in a better position, but the only way you get there is by reducing the number of students who come in with either ill intent - just scamming the financial aid system - or who come in thinking they know they want to go to school, but not understanding the burdens that it's going to place on them and their families.

TWST: What are your favorite names right now, and what do you like about them?

For more from this interview and many others, visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers, and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.