With Education Management Corp. expected to go public, I thought I would spend some time reviewing their IPO prospectus to understand the current financing environment for the for-profit sector. These prospectuses can be very valuable in getting background information about the industry, the company, the business model and the competition. Education Management Corp.'s stable of schools include Art Institutes, Argosy University, Brown Mackie Colleges and South University. Here is a more detailed description of their business:
"We are among the largest providers of post-secondary education
in North America, with approximately 110,800 enrolled students
as of October 2008. We offer academic programs to our students
through campus-based and online instruction, or through a
combination of both... Each of our schools
located in the United States is licensed in the state in which
it is located, accredited by a national or regional
accreditation agency and certified by the U.S. Department
of Education, enabling students to access federal student loans,
grants and other forms of public and private financial aid...Our net revenues for fiscal 2009 were
$2,011.5 million."
Describes the historical growth and rationale for continued gains in enrollment at for-profit institutions:
"As a result, we believe that for-profit, post-secondary
education providers continue to have significant opportunities
for growth. According to the National Center of Education
Statistics, the number of students at for-profit,
degree-granting institutions grew at an average annual rate of
13.7% from 1997 to 2007, compared to 2.3% growth for all
degree-granting institutions over the same period. For-profit
providers have continued their strong growth, primarily due to
the higher flexibility of their programmatic offerings and
learning structure, their emphasis on applied content and their
ability to consistently introduce new campuses and academic
programs. Despite rapid growth, the share of the post-secondary
education market that has been captured by for-profit providers
remains relatively small. In 2007, according to the National
Center for Education Statistics, for-profit institutions
accounted for 6.5% of all
degree-granting,
post-secondary enrollments, up from 2.3% in 1997."
Highlights challenges their students face in finding private student loans:
"Due primarily to the current economic climate, there are fewer
providers of private loans to students attending our schools and
the remaining lenders have generally imposed more stringent
eligibility and underwriting standards. As a result, the
percentage of net revenues we indirectly derive from private loans to students attending our schools decreased
substantially during our fiscal year ended June 30, 2009.
We anticipate that this trend will continue in fiscal 2010."
Developed a new student loan program to meet private loan needs of students:
"In
response, we introduced a new student loan program with a
private lender in August 2008, which we refer to as the
Education Finance Loan program, which enables students who have
exhausted all available government-sponsored or other aid and
have been denied a private loan to finance a portion of their
tuition and other educational expenses. During fiscal 2009, our
disbursements under the program were approximately
$19 million. We estimate that additional disbursements
under this program during fiscal 2010 will be approximately
$75 million."
Identifies challenge at certain of their institutions of staying within 90/10 rule:
"We
anticipate that our 90/10 rates will continue to increase in
fiscal 2010 due to recent increases in grants from the Federal
Pell Grant (“Pell”) program and other Title IV
loan limits, coupled with decreases in the availability of state
grants and private loans and the inability of households to pay
cash due to the current economic climate. While our consolidated
90/10 rate for fiscal 2010 is projected to remain under the 90%
threshold, we project
that some of our institutions will exceed the 90% threshold if
we do not continue to successfully implement certain changes to
these institutions during the fiscal year which would decrease
their 90/10 rate, such as increases in international and
military students and certain internal restructuring designed to
achieve additional operational efficiencies."
Relied on Sallie Mae for almost 80% of their private loan program with EMC paying credit enhancement fees:
Approximately 79% of the
private loans in fiscal 2009, or approximately
$206.5 million of private loans, were offered by Sallie Mae
and its affiliates and serviced by its affiliated loan servicer.
During fiscal 2009, adverse market conditions for consumer
student loans have resulted in providers of private loans
reducing the attractiveness
and/or
decreasing the availability of private loans to post-secondary
students, including students with low credit scores who would
not otherwise be eligible for credit-based private loans. In
order to provide student loans to certain of our students who do
not satisfy the new standard underwriting, we pay credit
enhancement fees to certain lenders (including Sallie Mae) based
on the principal balance of each loan disbursed by the lender.
An agreement we entered into with Sallie Mae to provide loans to
certain students who received a private loan from Sallie Mae
prior to April 17, 2008 and are continuing their education
but who do not satisfy Sallie Mae’s current standard
underwriting criteria expires in June 2010.
In response to the lack of availability of private credit, developed their own internal Education Finance Loan program, which is expected to hit volumes of $75 million in 2010 (here is an earlier post about this trend in the for-profit sector):
"In August 2008, we introduced the Education Finance Loan
program, which enables students who have exhausted all available
government-sponsored
or other aid and have been denied a private loan to borrow a
portion of their tuition and other educational expenses at our
schools not covered by other financial aid sources if they or a
co-borrower meet certain eligibility and underwriting criteria.
During fiscal 2009, approximately 1.0% of our net revenues were
derived from loans under the
Education Finance Loan program. We estimate that additional
disbursements under this program during fiscal 2010 will be
approximately $75 million."
Increase in federal loan limits have decreased demand for private student loans from 24% of their student population in fiscal 2008 to 14% in fiscal 2009 (NPSAS survey results had put the percentage at 40% overall for the for-profit sector in 2007-08):
"The reliance by students attending our schools on private loans
decreased substantially during fiscal 2009 due to the increased
availability of federal aid, including the $2,000 increase in
Stafford loan availability for undergraduate students as of
July 1, 2008, and certain operating initiatives we
implemented over the past 18 months. Excluding activity
under our Education Finance Loan program, approximately 14% of
the students attending our schools received a private loan in
fiscal 2009 as compared to approximately 24% in fiscal 2008. We
anticipate that the net revenues we receive from private loans
and the number of students receiving private loans will further
decrease in fiscal 2010."
Identifies significant growth in admissions representatives over the past three years:
"As of June 30, 2009, we employed
approximately 2,600 admissions representatives throughout our
schools, representing a 180% increase since June 30, 2006."
Describes various marketing activities to drive enrollment growth (note that over 20% of revenue is spent on sales and marketing activities):
"Our marketing personnel employ an integrated marketing approach
that utilizes a variety of lead sources to identify prospective
students. These lead generation sources include web-based
advertising, which generates the majority of our leads, and
further include purchasing leads from aggregators, television
and print media advertising, radio, local newspaper, telephone
campaigns and direct mail campaigns. In addition, referrals from
current students, alumni and employers are important sources of
new students. We also employ approximately
250 representatives who present at high schools. These
representatives also participate in college fairs and other
inquiry-generating activities. In fiscal 2009, our marketing
efforts generated inquiries from approximately 3.5 million
prospective students as compared to approximately
2.4 million inquiries in fiscal 2008. Marketing and
admissions expense represented approximately 21.9% and 21.0% of
net revenues in fiscal 2009 and fiscal 2008, respectively."
Uses net persistence as measure to evaluate its programs with online students dragging down the overall percentage in 2009:
"Our net annual
persistence rate, which measures the number of students who are
enrolled during a fiscal year and either graduate or advance to
the next fiscal year, for all of our students was approximately
66% in fiscal 2009 as compared to approximately 68% in fiscal
2008 due primarily to the increase in fully online students
during fiscal 2009."
Noted placement rates of 87% within six months of graduation:
"Based on information collected by us from graduating students
and employers, we believe that, of the approximately 16,000
undergraduate students who graduated from our schools during the
calendar year ended December 31, 2008, approximately 87% of
the available graduates obtained employment in their fields of
study, or in related fields of study, within six months of
graduation."
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Their IPO may be quite popular given the track record of two recent education sector companies.
As Seeking Alpha notes, two of the best performing IPOs in the past year have been education sector companies:
"Two recent IPOs from this sector, Grand Canyon Education (LOPE) and Bridgepoint Education (BPI), are among the top IPO performers over the last 12 months, up 45% and 52%, respectively."
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